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Wednesday, 4 June 2008

Exchanging towards agricultural prosperity...

Business Day has a fascinating report on the new Zambia Agricultural Commodity Exchange (ZAMACE) which is breaking new ground in terms of how food is bought and sold in Zambia.

Alongside the usual substantial gains that trade in commodities bring, ZAMACE would contribute towards the development of fair, orderly, and efficient marketing systems, and; moves us towards more efficient and reliable supply chains, thereby helping smallholder Zambian farmers to produce more for the market. This will all contribute towards a growing and competivitive domestic agricultural industry and in turn lead to enhancement of Zambia ’s export competitiveness. There many ways in which it does this, but I have fingered out two specifically . First, it increases transparency and price discovery. That's critical because for many small farmers, the lack of information on alternative offers certainly prevents them from realising tradeable opportunities. Secondly, as ZAMACE grows it should increase the level of trading activity and thereby provide more certainty to farmers atleast at the aggregate level. Partly this stems from increased trading opportunities with international buyers who may distribute demand shocks more evenly (the point here being that trading with several people distributes the risks of "bad times" better than trading with a single person), and also through providing a mechanism efficient and reliable transactions.


Of course that is not say ZAMACE is panacea for agriculture growth or ending poverty. Contrary to recent disgraceful claims of UNECA, no free trade of any kind can ever be a panacea for ending poverty. Similarly, although ZAMACE can contribute towards better long term alignment of supply and demand and provide better regulation of market conduct (through encouraging better trading standards), it will not solve other agricultural challenges we have discussed many times on this blog e.g. the urban poor and food insecurity. So government priority must focus on a duo strategy of tackling the issues I raised in the securing our food blog and supporting private initiatives like ZAMACE that provide solutions to market conduct and encourage transparency and price discovery.

Which brings us to the monster in the room. The Business Day article rightly pinpoints the parastatal Food Reserve Agency (FRA) as a significant distortion on trading due to its monopsony power. Clearly one of the advantages of the FRA is that it goes some way to providing the level of certainty in demand that farmers need. Perhaps one way to preserve these advantages (assuming they are substantial), whilst retaining the strategic food security role of the FRA, is to encourage FRA to buy a proportion of its food through ZAMACE. What do others think?

Update: By the way if you are interested in knowing more about ZAMACE you can contact Executive Director Brian Tembo directly.

9 comments:

  1. This is great, because I think a lot of poverty can be prevented if farmers receive market prices for their goods, instead having to sell to middlemen.

    With the current attention to world food prices, including from the United Nations, it will be much easier to find funds for agricultural schemes.

    There is a lot of money to be made in agriculture, especially because of the huge amount of unused arable land. It should be made available to subistence farmers, and be held in title by themselves.

    There is an excellent article on the connection between land reform and economic output in The Herald.

    Ideally, Zambia would have a developed roads network, linking up hundreds of thousands of medium sized commercial (organic) farms, allowing the maximum of wealth retention and job creation in the countryside, while lowering the price of food for everyone.

    There are such huge opportunities in water management, which can make agriculture a year around activity, instead of something dependent on recent rainfall.

    The government should have a holistic plan to develop agriculture and infrastructure, and use taxes from the mining industry to finance it all. This is a fantastic opportunity, where high copper prices can actually benefit the country. This is our opportunity to finance real development in the form of the development of a large, people based commercial agricultural industry that will benefit the country and society for many centuries to come.

    Secondly, better investment in education and research. We need to create better educational institution that supports farmers.

    Every district should have it's own agricultural college or farm school. It isn't just about producing graduates, but to deliver appliable curriculum that farmers can use to step up their activities and start earning real incomes. Also, these schools could produce the human infrastructure for farm boards, marketing boards, farmers unions, local councils, and other institutions that deal with the interests of farmers. Such schools could also produce services for farmers to find land, farm equipment, loans, etc.

    Finally, there is a case for reforming existing institutions such as the Food Reserve Agency (FRA), epecially in relation to how it deals with small scale farmers. The National Association and Small Scale Farmers of Zambia Associate have previously complained that the FRA sets the price too low and thereby discourages small scale farmers from going into maize farming. To make it worse, the FRA apparently rarely pays the farmers on time.

    I don't understand why the FRA doesn't pay farmers on delivery?

    If they don't have the money to pay farmers when they deliver their products, why would farmers believe they would somehow come up with the money down the line?

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  2. "I don't understand why the FRA doesn't pay farmers on delivery?"

    The President reckons its the high wages FRA pays itself.

    The PAC have not yet looked at this. But this problem is common among parastatals.

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  3. I think a lot of poverty can be prevented if farmers receive market prices for their goods, instead having to sell to middlemen

    Two things:

    - In theory, "middlemen" actually play an important intermediary role. Farmers may not be willing to get involved in all the stages between the moment they harvest and the delivery of the product to the "market". Not only this involves transport, marketing, price discovery but also quite often financial services (farmers may want to be paid earlier than latter). So the middlemen "fee" actually covers all that and farmers may not be better off if they got rid of the middlemen.
    - In practice, we know middlemen enjoy a great deal of market power and take advantage of assimetrical knowledge. Obviously we would all agree that reducing the latter would be done (and is being done) by improving education and the access to information (through telecoms). The former however is a bit more complicated. Improving competition between middlemen seems to the goal but how that can be achieved depends on the roots of that market power. Liberalization (lowering the entrance bareers) or regulation (enforcing anti-oligopoly measures) or both may be required.


    The President reckons its the high wages FRA pays itself.

    Are the FRA sale price or subsidy (i don't know how it works) adequate ?

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  4. Cho,

    "I don't understand why the FRA doesn't pay farmers on delivery?"

    The President reckons its the high wages FRA pays itself.

    The PAC have not yet looked at this. But this problem is common among parastatals.


    Maybe some kind of escrow account would be in order, using a bank as a go between, so farmers are payed when they deliver their produce. Then if they don't pay on time, the bank can use it's resources to go after the FRA in court, which is something farmers most likely don't have the resources to do.

    But it is a serious issue that for the FRA, paying farmers on time somehow isn't a priority.

    It would also be a good thing if the state had a it's own transportation company, that could move produce from remote areas to the cities. That too would increase the availability of food in the major population centers, and would remove another headache for the farmers.

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  5. " In theory, "middlemen" actually play an important intermediary role. Farmers may not be willing to get involved in all the stages between the moment they harvest and the delivery of the product to the "market". Not only this involves transport, marketing, price discovery but also quite often financial services (farmers may want to be paid earlier than latter). So the middlemen "fee" actually covers all that and farmers may not be better off if they got rid of the middlemen." - Random

    Also they may help minimise risk. As you say later, the issue is competition among "middle men" to allow a better return for farmers - though competition could introduce other "risks".

    "Are the FRA sale price or subsidy (i don't know how it works) adequate ?" - Random

    You are not the only one! It’s a complicated scenario. I am only currently researching in the workings of the FRA myself! What happens is that the FRA buys the grain from farmers, normally quite late because of issues related to moisture and so forth (MrK probably would explain this one better). They set the floor price. When they buy the grain they then sell it to millers. Millers then turn it into maize. The public observes only the maize price, farmers observe the grain price. Add also "private buyers" in the mix, who try and get there before the FRA does. The government regards these "private buyers" as bullies because they take advantage of "defenceless farmers" eager for a quick buck before the bureaucratic arm of the FRA turns up. Anyway, between the millers and the FRA someone is making the profit. You can write a whole book on this, but I think its quite clear that FRA is both a monopsony buyer of grain from farmers and a monopoly supplier of grain to millers! Why don't the millers buy grain directly from farmers? I suspect they do during period of high output. I have probably not answered your question, but in terms of FRA funding there are two sources - from government and in recent memory by using future grain as collateral they have secured bank loans. But we have to remember that FRA is a strategic reserve. It buys enough to ensure food security and then sells it back in times of high demand to millers to ensure maize is always available or prices are kept within range. So the scope for profit making is significant. And anyway, it does not control maize prices because that is done by the millers. All very complicated!

    "But it is a serious issue that for the FRA, paying farmers on time somehow isn't a priority." - Mrk

    May be they should split into 9 companies for 9 provinces. That way each province will have its own food reserve and pay its own farmers? It may provide better incentives.

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  6. The FRA has a website here and a page on their statistics, which shows.

    On their website, a lot of attention is paid to the restoring of storage facilities (they have 2 million, but only 1.1 million is operational).


    http://www.fra.org.zm/about_functions.php

    The main function of the Food Reserve Agency is Securing National Food Reserves for the country. In executing this function, the Agency purchases crops from small scale farmers in rural Zambia. The Agency’s crop purchase programme encourages farmers to produce more thereby facilitating sustained food security at both national and household levels. The Agency’s programme contributes towards improvement of household food security.

    Cho,

    May be they should split into 9 companies for 9 provinces. That way each province will have its own food reserve and pay its own farmers? It may provide better incentives.

    They could even trade maize with eachother. As long as there are no price agreements, that would be competition.

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  7. Ok, here are the questions:

    - Has the FRA any kind of mandate making them a first buyer from the farmers ? How is the buying price set (relative to "market prices") ? Do farmers have the option to not sell to FRA ?

    - Does the FRA have a formal monopoly on their sale to millers ? How is the selling price (to millers) relative to the buying price (to farmers) ? Does that margin cover FRA's operating costs or is the government subsidy needed to do so ?


    I'm asking these questions because their mission statement is ambiguous. Creating national food reserves can be done in a bunch of different ways. And the issue of whether a crop purchase programme encourages farmers to produce more depends more on the kind of price incentives put in place.

    You can guarantee food security by paying above market rates and using the reserve to smooth out prices (or guarantee access to the poor), both of which have a cost to the general taxpayer and none to the farmers. (that's what develloped countries usually do)

    Or you can guarantee food security for cheap for the taxpayer by forcing sales below market rates or banning exports or using the reserves to smooth out prices at purchase for farmers, which is more risky and can depress production.

    And of course, their mission includes other elements that have more to do with the provision of infrastructure and means to smooth out the market itself but these may not have the right impact without a good price structure.

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  8. Another thing:

    FRA's website says:

    The Agency’s programme also protects farmers from some socially insensitive traders who offer very low prices which work against sustained production and food security.

    Cho says:

    The government regards these "private buyers" as bullies because they take advantage of "defenceless farmers" eager for a quick buck before the bureaucratic arm of the FRA turns up.
    Cho says:

    The National Association and Small Scale Farmers of Zambia Associate have previously complained that the FRA sets the price too low and thereby discourages small scale farmers from going into maize farming. To make it worse, the FRA apparently rarely pays the farmers on time


    So if I understand correctly:
    - FRA claims that it protects farmers from private traders who offer low prices.
    - The farmer themselves say FRA pays low prices and pays late.
    - Cho thinks the farmers go to private buyers because they either pay faster or more.

    This is extremely confusing.
    First of all, the price thing is crucial and needs to be clarified.
    Second, how predictable is the late payment thing ? In short, what prevents FRA from setting its payment date later ? And Mr K is right, some kind escrow system should be put in place and banks could purchase FRA tenders or the FRA could devellop an accounting system which diverts payment to lenders. The latter may actually be safer since the FRA could keep an eye on the lending transactions and prevent farmers from being ripped.

    But all of this is really relevant only if FRA doesn't rip farmers at the price setting stag

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  9. Random,

    Subject to MrK superior agricultural knowledge:

    ”- Has the FRA any kind of mandate making them a first buyer from the farmers ? How is the buying price set (relative to "market prices") ? Do farmers have the option to not sell to FRA ?”

    The farmers can sell to whoever they like. FRA is not a marketing board. We used to have NAMBOARD a while back, but SAP took all that away!

    I say “whoever”, well in theory. Zambia also uses export restrictions – though permits. So they can sell to anyone in Zambia, but government through export restriction in times of low harvest or when FRA has not bought enough, forces the market to maintain the produce in Zambia.

    ”- Does the FRA have a formal monopoly on their sale to millers ? How is the selling price (to millers) relative to the buying price (to farmers) ? Does that margin cover FRA's operating costs or is the government subsidy needed to do so ? “

    I refer to the last answer. Its not a statutory monopoly, but a de-facto one! In terms of the “profit gap”. Its not transparent. I mean FRA exports produce as well, when it reaches its reserve limit. I think the model is based on breaking even (including credit payments and so forth). The government certainly believes that an efficient FRA would not need money in terms of subsidies…it can simply borrow from the credit markets.

    ”how predictable is the late payment thing ?” In short, what prevents FRA from setting its payment date later ?

    I read somewhere that it is do with having the right moisture in the grain! Lol!
    The FRA waits until the maize is dry or something like that…that in turn depend on the rains and the season..all very confusing I am afraid…

    ”But all of this is really relevant only if FRA doesn't rip farmers at the price setting stag”
    That is actually difficult to determine. The FRA offers farmers lower AVERAGE prices than the market, but it builds LARGER volumes and strikes LONG TERM deals….there’s a lot of advantage in dealing with the FRA, as long as you accept that you are getting lower price per tonne……
    The point is that no private buyer can buy the volumes that FRA buys…

    off to dig more!!

    ReplyDelete

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