Food For Thought: Back in the saddle of Agricultural Commodity Exchange (ZMX)

    By Yona Menon

    The recently launched Zimbabwe Mercantile Exchange (ZMX) has been hailed as a game-changer in the ongoing efforts to boost development in the agricultural sector. The event marks the return of a commodity-based exchange since the Zimbabwe Agricultural Commodity Exchange (ZIMACE), which operated from 1994 to 2001. Reportedly, the bourse has already seen trading activity, with 77,862kgs of Grade-A white sorghum and 2,058kgs of Grade-A sorghum sold.

    The operations of the ZMX will be spearheaded by Finsec in partnership with the government through the Agricultural Marketing Authority (AMA). Listed agro-industrial holding TSL Limited and financial services group CBZ Holdings are the other key players in the operation. The regulatory framework for the exchange is detailed under Statutory Instrument 184 of 2021.

    Essentially, the bourse will provide a digital platform for trading in agricultural commodities which will act as a centralized and transparent pricing mechanism for agricultural markets. According to Finsec, 18 agricultural commodities will trade on the market including barley, coffee, groundnuts, macadamia nuts, mhunga, oats, pecan nuts, rapoko, rice, sorghum, sugar bean, sunflower seeds, tea, wheat, cow-peas and, jugo beans/round nuts. However, strategic grains such as maize will not be immediately traded on the market. In addition, the provision of warehouse receipting services has been outlined as a key feature of the initiative. The service is expected to play an important role in improving liquidity for participating producers.

    In the information available it is clear that significant efforts have been made in addressing the details of the exchange’s functional operations. A fairly clear framework appears to be in place for participating brokers and service providers for the exchange. Less clear is the framework for producer participation beyond the basic understanding that they will be able to deliver their output for storage at warehouses and receive receipts that can be used as collateral or traded on the market.

    The comments about the ZMX from the authorities involved have been quick to talk up the potential of the exchange without any real context. Providing a fair pricing system and improving access to liquidity are unquestionably “good” objectives and a centralized market structure is an approach that can be taken to achieve them. But the question is, does this approach align with the current context of Zimbabwe’s agricultural sector? The practical planning and technical coordination might be sound but the long-term viability of the initiative rests on its appropriateness to the context.  

    The industry of agriculture can be viewed as a chain of interlinked activities – from farm to factory to fork. Each piece in the chain is linked by marketing, which intermediates the transfer of output from one node of the chain to the other. Like any piece in a chain, it has to be the right fit at both ends. A commodity exchange generally serves as a market for large-scale buyers involved in the trading or processing of agricultural products. The previous incarnation of a centralized market for agricultural commodities in Zimbabwe achieved moderate success over its brief lifetime.

    Trading volumes of the ZIMACE reached 224,531 tonnes during the 1997/1998 agricultural marketing season and was viewed as an increasingly important player in the regional and international markets. The market folded in 2001 after escalating food prices prompted the government to implement price controls that made operations unviable. During the same period, Zimbabwe undertook a mass land redistribution program, which significantly altered the structure of the agricultural sector. Previously dominated by large-scale commercial agriculture, between 2000 and 2009 the agricultural land holdings of large-scale commercial farmers declined from 11.7 million ha to 3.4 million ha. The process created a new dominant class of agricultural producers comprising small to medium-scale farmers holding 7.4 million ha of the country’s agricultural lands.

    Arguably, the transition has been a turbulent one, with agricultural production still significantly below its pre-land redistribution levels. The productivity of the emerging farmer class has been hampered by several factors. A key one is the issue of property rights, specifically the absence of bankable land tenures that limit the borrowing capacity of the farmers. Other challenges have revolved around a lack of expertise, limited access to markets and, underdeveloped supporting infrastructure, which have limited the scope for diversification into more specialized high-value agricultural production.

    Perhaps as a result of the highlighted challenges, Zimbabwe’s agricultural production is presently dominated by cash crops, with maize and tobacco collectively accounting for 46% of the country’s agricultural GDP on average between 2012-2016. A key feature of both commodities is that farmer support schemes are highly prevalent in their production and established marketing channels exist in both instances. Large-scale tobacco processors and traders contract suitable producers while the government regularly extends input subsidy schemes to maize producers.

    Comparatively, more specialized crop production activities contribute a small share of the agricultural GDP, with horticulture making up 6.6%, sugar cane production 6.6%, groundnuts 2.4% and wheat 1.8%. The trade statistics are consistent, with tobacco on average accounting for 76% of the country’s agricultural export earnings between 2009 and 2020 while horticultural exports accounted for 3%. The production and marketing systems of these commodities are generally less structured, with small to medium scale producers tasked with independently establishing direct market linkages or selling to middlemen or traders.

    The effect of the structural changes at the producer level has had significant implications for downstream activities in the agricultural industry. Over the years, the low productivity and lack of diversity at the primary level have led to the closure of several food processing companies.

    Those that have survived are reliant on imports for raw materials or have vertically integrated their operations to control the production of their input requirements. The high costs associated with vertical integration favors large scale, which is a part of why the local processed foods industry is increasingly concentrated. Cases of start-up agro-processors are prevalent but they tend to be small-scale ventures geared towards serving emerging niche markets.  
    Under this context, the question arises of if the ZMX can sustainably draw business from a geographically scattered class of poorly resourced farmers producing relatively low quantities of a small variety of agricultural commodities. Achieving a diverse market with large trade volumes is a critical to the viability of commodity exchanges given the capital needed to set up warehouses and other supporting infrastructure. Arguably, the ZMX has to be an attractive alternative marketing system for small to medium-scale farmers. This makes it necessary to strike a balance between the financial viability of the ZMX and the capacity of small to medium-scale farmers to participate.  

    On the buy-side, the question is if the market can provide a sufficiently competitive environment for participating producers to market their output despite the market concentration in the agro-processing sector. Large-scale agro-processors that have invested in vertical integration arrangements might not be immediately drawn to the ZMX. In that case, the exchange has to support growth in the emerging agro-processing industries. Consequently, it has to cater for small scale and medium scale agro-processors and agricultural commodity traders – either directly or through the registered brokers. This is a critical issue that the ZMX needs to get right to succeed as a developmental tool. Providing an efficient and accessible centralized market for emerging agro-processors to connect with small and medium-scale producers could be a driving force for the development of the agricultural sector. 

    Overall, the overriding sense is that greater time and effort could have been allocated towards building a more stable foundation for an agricultural commodities exchange to be established.

    For instance, more initiatives geared towards capacity building in medium to small scale producers in tandem with the ongoing infrastructure development efforts. Existing government-related organizations such as ARDA and Agritex could have been effectively utilized in the process. As it stands, if the ZMX project is to be financially sustainable and make a meaningful impact on the development of the agricultural sector, it has to overcome several systematic obstacles. These challenges are not insurmountable, but the absence of a comprehensively outlined strategic approach for the ZMX does not inspire confidence for its long-term prospects.
    The writer, Yona Menon, is a Financial Analyst and Agricultural Economist at Ethos Capital Partners. For feedback mail him on:

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