Challenges facing Zambia Agricultural Commodities Exchange

Food Security  research  project
Download Food and research project
A few phrases from the report
"While the institutional structures for addressing issues of contract compliance and shirking
are in place at ZAMACE, they are under-utilized, inefficient, and fail to address some of the
pressing needs of Zambian agricultural markets. Understanding how and why limited contract
enforcement and underdeveloped settlement guarantee can limit participation and trade
volumes on an exchange case is critical for assessing the feasibility of developing sustainable
commodity exchanges in the region"
 The limited use of ZAMACE by commercial farmers and medium-scale wholesalers must be
understood as the outcome of the risk mitigation strategies they deploy to protect against
contract default and payment failure in the highly volatile market conditions that prevail in
Zambia.
 The development of futures options, particularly for wheat and soy, may provide an
opportunity to encourage greater trade volumes on ZAMACE, enroll more speculators onto
the exchange, and thus bring the exchange much needed liquidity. However, the frequency
with which the government intervenes in the regulation of food imports and exports raises
the basis risk— the risk associated with differences between spot market and future market
prices—to levels that may be intolerable to many hedgers, speculators, and other financial
institutions. Furthermore, the weak legal framework for enforcing contracts, as well as the
certification and regulation of secure storage undermine the potential for a futures market to
develop.
 Commodity exchanges like ZAMACE are physical exchanges built primarily around trade in
cereal crops. As a result, the feasibility of developing the exchange is tied to the availability
of high quality storage facilities capable of continuously supplying grains to the market.
While few respondents interviewed for this report cited a lack of appropriate storage facilities
as a factor limiting their use of ZAMACE, many suggested that there are a number of
disincentives in the market that limit their willingness to store grain.
 A settlement guarantee facility, coupled with effective and timely arbitration, can serve to
transform Zambia’s agricultural marketing structure. The importance of cultivating
interpersonal relationship between buyers and sellers in Zambia is, in part, a response to weak
and costly contract enforcement.
 Commercial farmers and traders regularly use the ZAMACE reference price when
negotiating sales of their commodities, yet very few use ZAMACE as a sales platform. While
much of their reluctance to use the exchange results from the potentially high transaction
costs associated with contract shirking on the exchange, at least part of their limited use of
the exchange may be attributable to their lack of knowledge of the exchange.
Despite these potential advantages, the participation of commercial farmers and
medium-scale wholesalers on ZAMACE has thus far been limited by the perception of high
transaction costs and risks of using the exchange compared to traditional trading systems.
It is particularly revealing that according to the report fully 68% of all trades recorded by ZAMACE are still "registered" trades conducted off the floor between brokers and traders on a single-bidder basis without open competition.
ZAMACE charges a fee of 2% for such registered trades, while assessing both buyers and sellers each 1.5% (total cost of 3% once a trade is complete) for trades conducted on the exchange floor. This is a clear disincentive to enter into an open bidding situation if agreement can be reached between two parties off the floor.ZAMACE charges a monthly membership fee (recently raised by 25% due to low trading volumes and resulting shortfalls in collection of the per trade fees alluded to above), which is unrelated to the amount of trading the member conducts either on the floor or through "registered" contracts.

I think the restructuring of the incentive structure would help greatly.Also use of commodity derivatives would allow for commodity price hedging and create a platform for food security while carefully not exploiting farmers. It will also allow for greater diversity.