On the 1st of July 2011, the East African Community (EAC) Secretary General, Dr. Richard Sezibera, and the Nicolas Berggruen Institute Senior Advisor, Ms. Jendayi Frazer, held discussions at the EAC Secretariat headquarters in Arusha, Tanzania, concerning the establishment of a regional commodities market. The proposed regional commodity exchange would be actualized within the overall framework of a Public-Private Partnership arrangement, while also riding on the framework of the EAC Food Security Action Plan and the EAC Climate Change Policy agreed to by EAC Heads of State at their last Summit in April this year.⁽²⁾

The project would take the form of a regulated market in which multiple buyers and sellers traded commodity-linked contracts (goods) with a pre-approved set of market agents and commonly agreed trade procedures. The market would, in effect, act as a center of information, a quality and market discovery mechanism, as well as a broadcaster of local and world prices, supply and demand data, weather, and relevant government actions. It would also ultimately centralize a number of trading places unto one trading platform, invariably assuming the role of a regional platform for trade.

The causes of food insecurity in East Africa

At a time when international food prices are volatile and spiking alarmingly for the second time in three years, such an initiative represents a timely boost and positive step towards addressing food insecurity in the region. Indeed, as families across Somalia, Ethiopia and Kenya are struggling to find anything to eat or drink since rains have failed for successive seasons and hundreds of thousands of livestock have died, the region has seen a humanitarian crisis that has left more than 12 million people facing desperate food shortages, following the worst drought in 60 years. The UN has actually officially declared a famine in parts of Somalia.

In fact, East Africa is frequently affected by food shortages even though the region, as a whole, has a huge potential and capacity to produce enough food for regional consumption and a large surplus for export to the world market. Among the factors leading to such a state of affairs are the issues of inadequate food exchange/trade between times and/or places of abundant harvest on the one hand, and those with deficit on the other, while high variability in production is caused by high variability of weather, which is becoming worse due to climate change.⁽³⁾

Moreover, the problem is not limited to the East African region. The agriculture is central to most of Africa’s rural population as it is not just a major source of food supply, but also of household income - eighty percent of the population is currently employed in the agriculture sector. However, the production is done predominantly by smallholders, often cultivating less than 2 ha and is largely rain-fed. Indeed, in these agriculture-based economies, smallholder farming accounts for about seventy-five percent of agricultural production and over seventy-five percent of employment. To be sure, contributions of smallholder farming, and agriculture in general, to the region’s recent rapid growth during the period of 2005 to 2008 have remained limited.⁽⁴⁾

A consequence of such a configuration is the very marginal use of productivity-enhancing inputs like fertilizer, while yields are low and highly variable from year to year. Investment in expanding the productive capacity of smallholder farmers in East Africa is therefore a vital component in building sustainable development in the context of food security. However, there are a multitude of factors that are prohibiting growth in the sector, the main being the inadequate infrastructure. Storage and transport infrastructure in food markets is poor, and access to commodity finance is limited. Traders face a great deal of risk because of unstable selling margins, risk of theft and storage losses, difficulty in enforcing contracts, and uncertainty concerning government policy.

They also lack institutions and instruments to manage prices and other risks. Systems of standard grades and measures are poorly developed, except for a few export crops, making it difficult for more efficient trade to develop. As markets lack transparent systems of price discovery, the subsequent marketing uncertainty, faced especially by smallholders, dampens production incentives, thus contributing to stagnation in agricultural output and productivity. Indeed, traders are often poorly informed. Buyers have limited information about inventories held by rural producers and smallholders lack access to price information from local or regional markets, and are often unable to process complex price-sensitive information when it is available.

And while agricultural markets are faced with imperfect information and incomplete markets, they are also constrained by high transaction costs. These are high in the rural trade because of the cost of assembling produce, and uncertainty about the quality and quantity attributes of goods being exchanged – a consequence of the absence of effective systems of standard grades and measures. This increases the risk of cheating on weights and quality, and makes physical sampling imperative. Incidentally, formal contract enforcement mechanisms are also weak. Hence, the rural trade thrives where trust has been developed on the basis of repeat transactions or informal relationships, creating a significant barrier to entry in large-scale food trade and limiting participation by smallholders in the evolving modern marketing system or in the sub-regional commodity trade.

These factors limit access to finance for consumption smoothing and contribute to an acute lack of liquidity in the rural economy, forcing most small farmers to sell their produce during the immediate post-harvest period. Rural traders are also undercapitalized and have very limited capacity to absorb the surplus output on the market during this period, leading to a glut which depresses farm-gate prices, erodes the purchasing power of poor households, and exposes them to food insecurity during the lean season. That is why a commodities exchange market, such as the one envisaged by the EAC and the Nicolas Berggruen Institute, would go a long way in addressing the above mentioned challenges regarding agriculture productivity and food security in the region.

The advantages of an East African commodity market

A regional commodity market could help solve the problem of thin markets by creating much needed mass and by concentrating supply and demand in the EAC. ⁽⁵⁾ Such an exchange could also help address issues of price manipulation, often a problem in developing countries, increasing farmers’ incomes, and can also help in the development of other innovative financing tools for agriculture in particular and infrastructure in general. Moreover, a regional commodity exchange could also add liquidity to the market by virtue of the larger number of sellers and buyers of commodities which it pulls together.

The price and product discovery function of the commodity exchange market would also help private sector importers have better product information and a better sense of market capacity when making production decisions. By reducing costs of transactions and enhancing information flows, an exchange market could improve returns to market agents while reducing short term price variability and spatial price dispersion. The exchange market would also provide valuable information on the availability of different commodities at specific points in time.

Furthermore, they would play an important role in connecting rural areas to the urban centers as well as linking small farmers to major buyers and thus take better advantage of opportunities such as the ones offered by the World Food Programme (WFP) and its Purchase for Progress (P4P) initiative in particular. In 2010, WFP bought US$1.25 billion worth of food commodities from mainly developing countries. WFP buys locally in developing countries when its criteria of price, quality and quantity can be met. P4P is a logical continuation of this local procurement with the intent to achieve a higher developmental gain with WFP’s procurement footprint by buying increasingly in a smallholder-friendly way. Through P4P, WFP’s demand provides smallholder farmers in 21 pilot countries with a greater incentive to invest in their production, as they have the possibility to sell to a reliable buyer and receive a fair price for their crops.⁽⁶⁾

The road ahead

The idea of a regional commodity exchange within the EAC has come amidst a renewed emphasis on the development of agricultural sectors within the region. In July of this year, the Board of Directors of the African Development Bank approved a US$ 64 million loan to support agricultural marketing infrastructure programmes in Tanzania; particularly for the construction or rehabilitation of markets which will become centres of commercial and social interactions, and growth centres around which other activities and enterprises will emerge.⁽⁷⁾ Furthermore, Tanzania’s Minister for Agriculture, Food and Cooperatives, Prof. Jumane Maghembe, also announced in late August that the government had set aside over US$ 30 million this financial year for the rehabilitation and maintenance of agriculture infrastructure and capacity building in various forms to agricultural research institutions.⁽⁸⁾

Elsewhere, the Rwandese Ministry of Agriculture and Animal husbandry started a campaign in late August to increase maize production countrywide,⁽⁹⁾ while farmers in Gatsibo District gathered on 24 August 2011 to celebrate their bumper harvests. They attributed the record yields to the huge investments made by the Land Husbandry, Water Harvesting and Hillside Irrigation (LWH) project and the Ministry of Agriculture and Animal husbandry. On the other hand, the outgoing UN Food and Agriculture Organisation director general, Jacques Diouf, said after a one-day visit to Kampala on 23 August that Uganda needed to commit at least ten percent of its annual budget to agriculture to ensure food security, boost land utilisation with irrigation and water harvesting, and improve storage of harvested crops and access to agricultural inputs.⁽¹⁰⁾

However, for the region and the continent to truly progress on this crucial matter, it will need to implement other, more extensive, measures. For instance, these would consist of increasing the ease of access to land, training to enhance skills and technological adoption and innovation. International trade barriers would also need to be addressed on both regional and global levels. To be sure, rising world food prices present both challenges, in the form of serious food insecurity, and opportunities with regards to trade. In February 2011, the World Bank Food Price Index reached its 2008 peak, after rising by 47 percent since June 2010, while the World Bank Agriculture Price Index was 17 percent higher.⁽¹¹⁾ According to the World Bank’s Food Price Watch, the food index in March 2011 remained 36% above its level a year earlier, while global maize prices were 17% higher in the first quarter of 2011 compared to the last quarter of 2010.⁽¹²⁾ This and the prolonged drought and subsequent food crisis in East Africa have thus given impetus and relevance towards the search and development of much needed progressive agricultural initiatives such as a regional commodities market.

NOTES:

(1) Contact Edgar Cizero Ntasano through Consultancy Africa Intelligence’s Finance and Economy Unit (finance.economy@consultancyafrica.com).
(2) East African Communtiy. ‘EAC Mulls Regional Commodity Exchange’ in EAC News, 1 July, 2011, http://www.eac.int.
(3) East African Communtiy. EAC Food and Security Plan (2011-2015), Arusha, EAC Secretariat, February 2011.
(4) UNEP-UNCTAD. Organic Agriculture and Food Security in Africa, Geneva, United Nations Publications, 2008.
(5) Akiyama, T., J. Baffes, D., F. Larson, & P. Varangis. ‘Commodity Market Reform in Africa: Some Recent Experience’ in World Bank Policy Research Working Paper, Number 2995, March 2003.
(6) World Food Programme. Purchase for Progress, http://www.wfp.org/purchase-progress.
(7) Mbalamwezi, J. ‘AfDB gives $64m for Tz agriculture’ in East African Business Week, July 18-24, 2011.
(8) Semwaza, F. ‘Tz sets $30m for agriculture’ in East African Business Week, July 18-24, 2011.
(9) Rwembeho, S. ‘Govt moves to increase maize production’ in The New Times, 30 August, 2011, http://newtimes.co.rw.
(10) Baguma, R. ‘Govt Urged to Invest More in Agriculture’ in The New Vision, 24 August, 2011, http://allafrica.com.
(11) The World Bank, Food Price Watch, February 2011, http://www.worldbank.org.
(12) The World Bank, Food Price Watch, April 2011, http://www.worldbank.org.

Written by Edgar Cizero Ntasano ⁽¹⁾