Commodity exchange good news to farmers

COTTON is among the agricultural produce to be traded through the envisaged commodity exchange market.Smallholder farmers in the country face a multiplicity of challenges associated with production and marketing of their produce. 

Farmers lack proper storage facilities hence incur heavy post-harvest losses due to damage to their harvests that are caused by weevils, rodents and at times fungal infestation.

Most farming areas are inaccessible due to poor road infrastructure, the situation which is translated to high transaction costs as the few transporters available charge high prices on account of using poor roads. Commodity exchange market is viewed as on the most efficient instrument which could bring about transformation and revolution of agro-based business in the country due to its multiplicity of benefits particularly to the smallholder farmers.

The major aim of the commodity exchange market is to provide a centralised market place where commodity producers (commercials) can sell their commodities to those who wish to use them for manufacturing or consumption. President Jakaya Kikwete, the pioneer of the commodity market, said recently that the exchange would provide a market place where buyers and sellers can meet to trade and be assured of quality, timely delivery and payment.

The envisaged commodity exchange aims at providing centralised market place where producers and consumers can conveniently meet. Apart from bringing together multiple buyers and seller, commodity exchange market forms trade commodity-linked contracts on the basis of rules and procedures laid down by the exchange, such exchanges typically act as a platform for trade in futures contracts or for standardised contracts for future delivery.

The contracts will cover, quality, quantity, passing of ownership and risk, price, payment terms, inspection, transport, delivery and weight, packaging, force majeure, demurrage, interest and arbitration. In other parts of the developing world, a commodity exchange may act in a broader range of ways, in order to stimulate trade in the commodity sector.

There is an efficient price discovery mechanism since a commodity exchange is ideally bringing in large number of buyers and sellers. In order to equip Tanzania farmers, the government has reached an advanced stage towards the establishment of the commodity exchange market, which is scheduled to take off soon.

The Deputy Minister of Agriculture, Food Security and Cooperatives, Mr Adam Malima, speaking in an interview with the ‘Daily News’, said: “The process to establish the commodity exchange market is progressing well and hopefully it will start operating in less than a year.”

He said a government formed special committee met in Dodoma under its chairperson who is also the permanent secretary in the Prime Minister’s Office to fast track the matter. The committee was expected to come up with strategies to speed up the establishment of the market, said Mr Malima.

Four agricultural produce - cashew nut, coffee, cotton and rice - are expected to the first products to trade on the exchange. The Bank of Tanzania (BoT) last year invited bids from consultants to provide legal and regulatory framework and design a robust trading system.

The central bank said the successful bidders had to review the present legal and regulatory framework for warehouse receipt system, cooperative and crop bodies as well as commodity trading.

President Jakaya Kikwete, the pioneer of the commodity market, said recently that the exchange would provide a market place where buyers and sellers can meet to trade and be assured of quality, timely delivery and payment. The envisaged commodity exchange aims at providing centralised market place where producers and consumers can conveniently meet.

Experts in agro-business have it that the exchange will liberate farmers from poverty through exposure to reliable domestic and export markets. Liberalisation has its benefits mainly attributed to price determination as a result of market forces of demand and supply. However, lack of marketing information, however, renders the marketing process non-transparent with no protection to the large number of smallholder farmers.

Market liberalisation has resulted in layers upon layers of dubious dealings without any consideration of quantity, description, quality and price. The futures trading allow producers and buyers to offset the effects of adverse future price movements through transparent, standardised and efficient hedging of agricultural commodity prices. One of the primary functions of a commodity exchange is price discovery.

Price discovery refers to the mechanism through which prices come to reflect known information about the market. The price level established on the open market can therefore represent an accurate depiction of the prevailing supply/demand situation in the underlying commodity markets, whether in the spot market for current deliveries or in the forwards/futures markets for deliveries at specified time and place.

Farmers are more likely to find a market for crops when true level of demand is reflected in the price signals. Farmers become more informed about market and pricing information. There is improved received price from intermediaries because of authoritative and accurate reference price. Cropping based on futures rather than spot price increases likely returns and facilitates crop diversification where farmers can better appreciate price, and ultimately income differentials.

It reduces intra-seasonal spot price volatility, increases returns to farmers as better enables them to hold until price level is good and empowers farmers as they can take more marketing decisions into their own hands.

The futures also take a price risk management function as it helps farmers to avoid serious losses when prices fall. It enables farmers to receive a guaranteed price from a purchaser or intermediary and facilitates more effective planning and investment because of greater income predictability Despite the above obvious advantages there are barriers that will hinder smallholder farmers from participating in a commodity exchange.

These include contract sizes that may far exceed the annual quantity of production those smallholder farmers are capable of; lack of knowledge, resources and capacity; infrastructure deficiencies and cumbersome process of execution that may be beyond the farmer’s capacity. Farmers may be able to break these barriers by participating through commodity associations or farmers’ associations who aggregate the hedging needs of several small-scale farmers and execute the trade on the exchange.

The association or farmers’ union can manage the positions in the market and liquidate the contract at an appropriate time The use of warehouse receipts system allows for farmers as individuals or groups to deposit their produce in registered warehouses thereby reducing post harvest storage losses and solving lack of storage challenges.

Warehouse receipts can be negotiable or transferable and used as collateral by smallholder farmers thereby improved access to finance. Farmers are well informed of movements in the markets and are able to access markets rapidly, so they can wait to sell at the right time for the best price. Market information and knowledge improves bargaining position for the farmers, create production incentives and stimulate competition among the traders and matches supply and demand.

Agricultural products produced by farmers in terms of real value and reach of the market available to the extent of the state support policies in the agricultural sector due to reduced financial burden to undertake.
Source: The Daily News, reported from Dar es Salaam
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