“Improving investment and stimulating agricultural growth to achieve food security in East Africa: Linking small-farmers to local and regional market”

“Improving investment and stimulating agricultural growth to achieve food security in East Africa:

Linking small-farmers to local and regional market”

A Regional briefing Organised by CTA

In Entebbe Uganda 12 and 13th November, 2010

"Market Influences and Problems/Barriers in Agricultural Marketing”

A presentation by Ian Goggin Structured Trade Specialist

CTA Regional Briefing Entebbe November, 2010

A thought!

Risks can be managed with foresight.

Damage can be controlled with hindsight.

Your choice.

Coopers and Lybrand, L.P.

Advertisement in The Wall Street Journal, December 7, 1995


The Unknown

As we know,There are known’s.

There are things we know we know.We also know

There are unknowns.That is to say,

We know there are some things we do not know.

But there are also unknown unknowns,The ones we don’t know

We don’t know.Donald Rumsfeld, February 2002, Department of Defence news briefing


.

Contents

- What influences markets

- Characteristics of African Markets

- Major constraints in African Markets

- Possible actions

- Financial tools (New initiatives)

- Risk Mitigation tools

- CTA Regional Briefing Entebbe November, 2010


Market influences 1st Group

• Demand/buying power/income of buyers

• Supply• Quality and Presentation• Quantities• Information• Communication• Transport• Producer knowledge of

the market• Organisation of

production and marketing

• Production pattern/timing in relation to contracts

• Performance risk• Laws/regulations• Competition• Value added capacity• International price trends• Socio-cultural influences• Political decisions• Technology


Market influences 2nd Group

• Demand• Supply• Quality• Access to produce by

buyer• Packaging/presentation• Promotion• Infrastructure- roads,

storage, energy….• Use of technology

• Farmer organisation• Climate• Quantities available• Price• Corruption• Policies/regulations• Political support for

markets• Market access by sellers.


Market Influences 3rd Group

• Quality• Price• Demand)• Supply) Seasonality• Transportation • Taxation policy• Geographical location• Exchange rates• Traditional/cultural

practices• Yield-production methods

varieties

• Understanding commodities and markets

• Capacity to perform on contracts

• Political climate• Packaging presentation• Promotion• Processing• Storage• Market information• Weather patterns


Characteristics of African Markets Group 1

• Poor market information.

• Poor market intelligence.

• Lack of identifiable markets.

• Poor Access to markets

• Lack of competition.

• No quality standards.

• Poor communication.

• No enforceable contracts/dispute resolution mechanism.

• Lack of transparency

• Low production

• Limited commercial production

• Very poor infrastructure


Characteristics of African Markets Group 2

• Not well established markets• Poor/low prices• Breakdown/poor in

communication• Prices are set by the buyer • No proper linkages• No consistency in

production- seasonal variations

• Production oriented • High production costs• Weak rules and regulations

on marketing, e.g. uncontrolled vending

• Poor quality • Mixed grades • No network to share market

information • Poor infrastructure• Poor market information

system• Lack of technology• Poor storage of perishables • Little emphasis on

processing• Subsidies influence

• CTA Regional Briefing Entebbe November, 2010

Characteristics of African markets Group 3

• Unorganised• Low quality• Difficulty in supplying

required amounts• Difficult to predict market

behaviour• Less organised farmer groups• Lack of market research • Lack of market knowledge

and information• Price fluctuation = high

margins for traders• Climatic specialisation• Large trader sector versus

producers.

• Poor regulatory environment

• Monopoly of market players

• High trader margins• Risky; lack of insurance• Corruption• Less effective spatial and

temporal price arbitration• Poor/expensive transport• Infrastructure• Market access• Political interference• Poor grading – little price

incentive to grade.CTA Regional Briefing Entebbe November, 2010

What would you say are the 3 biggest constraintsAfrica faces in agricultural marketing?

• Infrastructure /Transport/Storage (1)• Low level/effectiveness of farmer organisation (2)• Knowledge about markets/planning for market/agriculture as a

business/access to markets (4)• Market instability• Financing/ unsustainable Government support for markets (3)• Lack of political will / poor policy (3)• Illiteracy/ low application of technology • Corruption (5)• Poverty• Access to market /price information (4)• Quality (5)• Consistency of production/seasonality in relation to market demand (4)• Poor contract environment• Low level of processing• Means of and high cost of advertising• Production costs/limited production• Product presentation and packaging• International competition/competitiveness of African producers


Possible actions:

• Institution- and capacity-building, including for farmers’ associations and domestic banks;

• Supportive policies, laws and regulations including with respect to currency controls; and

• Support to the development local and regional risk management markets


How can African farmers obtainAccess to risk management markets?

Individually, they are generally too small (making it not worthwhile for them to learn about the markets, and not profitable for brokers on risk management markets to work with them). Their risk management needs therefore need to be accumulated by an "intermediary".

There are several possible “intermediation mechanisms” – the major ones are farmers’ associations, banks, local commodity exchanges, processors and traders.

The more structured is the farmers’ relation with the organized marketplace, the easier is it to achieve their access to a risk management market.


Farmers’ price risk exposure

In the past, government intervention isolated many farmers from world market price volatility. The mechanisms used were marketing boards, which paid an administratively-determined price to farmers; and stabilization funds, which were meant to smooth out prices in good and bad years.

However, it has been amply demonstrated that the costs of these mechanisms have been very high, and most countries have now abolished them.

While this has generally led to farmers receiving a larger part of market prices, it has also led to them being more exposed to the high volatility of world market prices.


Financing farmers’ investment in a rice (paddy) processing plant

Paddy farmers approached their bank, asking for a loan to set up a paddy processing plant. The economics of the proposal were good, but the farmers had no credit standing, and were not eligible for longer-term loans.

But the bank designed an innovative financing approach: a joint venture with the farmers, in which only the bank paid up its share, and the farmers paid up later through deductions from their paddy deliveries. The bank put professional management in place.

And in the next few years, the farmers bought out the bank’s share through further deductions from their paddy deliveries…


To a large extent, successful schemes have To a large extent, successful schemes have relied on the private sector, with governments relied on the private sector, with governments in a supportive role and occasionally as a in a supportive role and occasionally as a catalyst; and sometimes, donor agencies’ catalyst; and sometimes, donor agencies’ involvement. involvement.

The minimum role of the government is that The minimum role of the government is that it should provide a supportive legal and it should provide a supportive legal and regulatory environment.regulatory environment.


New commodity financing schemes: New commodity financing schemes: pre-requisitespre-requisites

The majority of the new modes approach the The majority of the new modes approach the borrower (whether a producer, farmers’ borrower (whether a producer, farmers’ association, processor or a trader) as association, processor or a trader) as part of part of the commodity supply chainthe commodity supply chain

Credits are based on the performance of the Credits are based on the performance of the borrower in the chain, rather than just on the borrower in the chain, rather than just on the borrower’s risk. This is often called structured borrower’s risk. This is often called structured finance.finance.

Characteristics of the new modes of Characteristics of the new modes of financingfinancing

Micro-finance:

Loans based on social links

Structured finance:

Loans based on economic links

Traditional finance:

Loans based on client risk assessment

There are new opportunities for worldwide commodity producers.

But to meet the demands from clients, suppliers may need to invest. And finance is scarce and expensive.

But with innovative financing mechanisms, one can upgrade the full supply chain, and even reach those now excluded from the formal financing system.

This can contribute significantly to meeting the Millennium Development Goals.


Conclusions - financeConclusions - finance

Simple Risk Mitigation Tools

Warehouse receipts


Warehouse Receipts

What is a warehouse receipt?

1. Document of title (ownership) of the goods described on the receipt at the location at which they were deposited.

2. Negotiable document (can be bought and sold).

3. Makes financing easier by using the receipt and the underlying commodity as collateral.

4. A document certifying possession of a commodity in a licensed warehouse that is recognized for delivery purposes by an exchange.

Regional Staple Foods Workshop Entebbe, Uganda 8th November, 2010

What is a warehouse receipt?

7. A receipt of commodities deposited in a warehouse, identifying the commodities deposited.

8. Document guaranteeing the existence and availability of a given quantity and quality of a commodity in storage; commonly used as the instrument of transfer of ownership in both cash and futures transactions.


Immediate Rationale

• Regional integrated warehouse receipts

• Economies of scale

• Liquidity

• Easy access to all regional produce

• Unified markets

• Increased regional trade


Requirements for successful receipts system

For viable WRS: -Build discipline and trust in the warehouse- integrity is key;-Economies of scale to save costs of oversight and

administration;-Cut costs of financing that are passed on to farmer;-Find correct balance of regulatory oversight by state;-Bond and insurance requirements against default, loss or theft.

For viable negotiable receipts: -Specific licensing of warehouse operators for WR;-Establish tracking system for WR to register every change of

ownership (to ensure only one party has legal title);-Establish clear legal rights for receipt bearers and legally establish receipts as documents of title.

Regional Staple Foods Workshop Entebbe, Uganda 8th November, 2010

Risk Mitigation Collateral Management

• Buyer can choose different degrees of protection. A collateral management company may be contracted to do:• Stock verification• Quantity and Quality verification• Guard stock at location• Oversee loading and transport• Off loading verification

Other Risk Mitigation Tools

• Commodity Exchanges

• Storage

• Contracts

• Dispute resolution


Market Risks

Markets are very dynamic – what was true yesterday might not be true today.

Always moving!


I can never really get into trouble in relation to things

I know

I can get into some trouble in relation to things I dont

know

But I can really get into serious trouble with things I am 100% certain of, but it turn out it just ain’t so...

Market Information – Key

• Availability • Price

• elasticity• Labour

• Demand/Supply• Information • Commodity specifications• Transportation cost

• Quality• Quantity• Packaging• Market access• Storage• Market trends• Communication • Location• Contract availability


Some Final Thoughts

If we don’t understand we will continue to do things the hard way…

Can the African

Agricultural sector

truly transform and

develop African

economy? Not

unless we “change

the wheels”.

Change is long-overdue !In agriculture

The world we have created is a product of our thinking; it cannot be changed without

changing our thinking.

Albert EinsteinCTA Regional Briefing Entebbe November, 2010

Asian tiger

Where once all the talk

was about the Asian tigers…

…. In the future talk

may be about

the African LIONS!!

Documents

“Improving investment and stimulating agricultural growth to achieve food security in East Africa: Linking small-farmers to local and regional market”