Agricultural Commodity Exchange for Africa
By: Cynthia Kazembe and Giorgia Prizzon
Providing smallholder farmers access to markets and price information is key to improving agricultural productivity and growth, along with food and nutrition security. In line with this, the Agricultural Commodity Exchange for Africa (ACE) has operated a Market Information System (MIS) and a Warehouse Receipt System (WRS) since 2011. The MIS provides farmers, traders and other market participants with access to regular updates on the prices of the commodities they trade via SMS and email, along with its online trading platforms. ACE also has 14 Rural Marketing Advisors working throughout Malawi who are able to provide farmers with daily updates on Market Information. The WRS allows farmers, traders, processors and exporters to use receipts issued from commodities stored at certified warehouses as collateral to secure loans from banks or other financial institutions.
To disseminate the findings of two IFPRI Malawi led research studies assessing the impact of these systems, ACE organized a dissemination event on December 5, 2019 in Lilongwe. The event was attended by more than 70 participants from academia, civil society, the development partners, NGOs, government, and the private sector.
Opening the event Bob Baulch, IFPRI Malawi Program Leader, provided the background to the two studies, which involved: (1) a detailed statistical analysis of transaction level data from ACE’s WRS between 2011 and 2018; and, (2) an action research experiment that provided farmer organizations and small traders in four districts in central Malawi with regular price updates via SMS. In addition, field staff used monthly meetings to collect data from the farmers on the sales they have made during the month.
One of IFPRI Malawi’s Research Analysts, Jack Thunde, then presented the analysis on ACE’s WRS. His presentation focused on the profitability of the system since its establishment in 2011. The analysis used data from 710 warehouse receipts (WRs) issued between 2011 and 2018 to analyze the volume of WRs issued, WR user characteristics, and the patterns of profits and losses made for the three main commodities (maize, pigeon peas and soybeans) traded on ACE.
ACE’s WR are used by a range of clients, including farmers, farmer associations/groups, small traders, medium traders, and large traders/processors. Clients take advantage of ACE to buy early in the season at lower prices and to then defer sales in order to obtain higher prices for their commodities later in the season. The warehouse receipts make it possible for ACE clients to access finance, through banks, using their commodity as collateral.
Results from the WR profitability calculations showed that between 2011–2018 storage of maize and soybeans with WR financing resulted in profits for 54 and 63 percent of ACE clients, respectively. However, storage of pigeon peas using ACE WR, with or without financing, and storage of maize and soybeans without financing resulted in losses for the majority of WR clients. These losses may be attributed to both the long duration of storage, especially for pigeon peas, and the high cost of financing in Malawi.
Kristian Schach Moller, ACE Chief Executive Officer, then provided comments on the IFPRI study, noting the complex nature of ACE’s WRS, which has evolved in the light of market developments. He noted that most of the WR losses found in the IFPRI study were made for maize and pigeon peas stored in 2013 and 2016. The 2013 maize losses can be attributed to a sharp drop in the maize prices when ADMARC started selling maize at half the market price, while the 2016 pigeon pea receipt losses can be attributed to the fact that India stopped importing pigeon peas after a good domestic harvest the previous year. In addition, the maize export ban had led to low market prices following a good harvest in 2017.
Schach Moller concluded his presentation by stating that ACE’s WRS is a mirror image of the market in Malawi, which is vulnerable to systematic risks and discretionary policy interventions. He recommended addressing such risks by designing and implementing appropriate risk mitigation and management tools at the regional level.
IFPRI Malawi’s Associate Research Fellow Dennis Ochieng then presented on the ‘Market information system and farmers access to structured markets.’ This study analyzed the impact of providing regular information on maize and soybean prices via ACE’s MIS to smallholder farmers and small traders in four districts in central Malawi. The study examined the impact of better price information on farmers’ (1) awareness of commodity exchanges; (2) sales of maize and soybean; (3) sales prices of maize and soybean; (4) sales through structured markets; and, (5) level of commercialization. The study was conducted with selected farmer organizations and small traders in Mchinji, Kasungu, Dowa, and Ntchisi districts, with half of the organizations and traders being provided with price information by ACE through SMS, while the other half operated as they usually did. The baseline sample for the study in March this year surveyed 416 farmers and 78 traders, while the endline sample in September included 399 farmers and 68 traders.
Preliminary findings from this study show that providing farmers with market information increased their awareness of commodity exchanges and significantly decreased maize sales. While there was no significant effect on maize prices, sales prices for soybeans increased significantly over the prices received by control farmers. However, this was not associated with increased use of commodity exchanges or other types of structured markets by farmers. Further research is needed to analyze the impacts of the intervention on small traders and the impacts of the intervention on sales prices and use of structured markets.
The event concluded with a presentation by Paul Cleary, ACE Senior Programmes Manager, who outlined ways to increase adoption of ACE services. He explained how market information was only one part of the services that ACE offered, which also include the ACE marketing school and trade facilitation. Paul agreed with the results from the IFPRI study that the MIS had limited impact on farmers’ sales and the prices they received but also noted that the MIS on its own is not enough. He highlighted the need to strengthen farmers capacity through the ACE marketing school, as well as greater use of the ACE’s WRS and trade facilitation services.
Cynthia Kazembe is a research assistant in IFPRI's Malawi Office and Giorgia Prizzon is a Project Manager at Agricultural Commodity Exchange for Africa, Lilongwe. This piece was originally posted on the IFPRI-Malawi blog. All presentations from the event are available on slideshare and below the original post.