allAfrica.com: Zambia: Exchange Leads Way On Food Front (Page 1 of 1)

Zambia's new commodities exchange is breaking new ground.

THE Zambian government's maize export ban has not clipped the wings of the new Zambia Agricultural Commodities Exchange (Zamace), which started trading in October last year.

The exchange, the country's first centralised marketplace, is breaking new ground in this food-producing country and hopes to change the way food is bought and sold in Zambia -- part of a broader move under way in the region, mostly driven by donors.

Executive director Brian K Tembo, who moved to Zamace from the Lusaka Stock Exchange, says trades have been good so far, with turnover of $8m involving 20000 tons of commodities in just a few months of trading. The make or break situation for the exchange will be during the high season of agricultural marketing, running from May to September.

Zambia has the benefit of fairly strong sector organisations such as the Millers Association of Zambia, the Grain Traders Association of Zambia and the National Farmers Union of Zambia, all of which participate in the trading arena in one form or another.

The Zambia National Farmers Union, the Millers Association and Bankers Association of Zambia all have seats on the Zamace board.

Tembo says the exchange does not have a set minimum amount of any commodity that can be traded, but in effect a figure of 30 tons is about the minimum to trade to make the practice cost effective due to high transport costs. This, he maintains, is an incentive for producers to start thinking about more large-scale production.

The exchange also guarantees security of transactions and has an arbitration system in place, should grey areas emerge. It also has the country's first market driven laboratory for independent standards testing of Zamace standards.

Tembo says a key challenge is to get smallholder farmers to accept a new way of trading their goods and to accept transparency in pricing. The situation where small farmers sell without really knowing if they are getting fair prices for their goods beyond their immediate locale has been the norm in the country until now. For all the upsides of transparency and price discovery, it may take time to change this.

The exchange trades in agricultural commodities but also in non-food products such as cement and fertiliser. So far, the biggest demand has been for maize, wheat and soya. Cassava is not yet traded as there are concerns about sufficient production. But the demand is there, says Tembo, particularly from the stock feed industry.

However, the trading of commodities is being constrained by the government's ban on the export of maize, Zambia's most traded crop. The ban was announced in May after food estimates showed that this year's expected production -- 1,2-million tons, a drop of 11,3% from last season -- would only just cover local consumption.

Even in the absence of outright export bans, the government still uses permits to control exports and imports of staple crops.

The parastatal Food Reserve Agency, the guardian of Zambia's food security, is another hindrance in commodities trading. Last year, despite record production, the agency bought a massive 400000 tons. Although this year it is reducing its purchases in the market by 75% with a planned purchase volume of 120000 tons, it distorts the market by setting prices.

Commodity traders in the region say that shortages are being created by the fact that many African food producers are now prioritising their own food security needs over foreign exchange through international trade.

Zamace is linked to the regional Agricultural Commodities Exchange (ACE), established in October 2006 and based in Malawi, which gives local participants a linkage into regional markets. But is still relatively inactive.

The South African Futures Exchange (Safex) has shown an interest in Zamace and earlier this year officials visited Zambia to meet storage owners, banks and the exchange. Due to the unliberalised nature of the Zambian agricultural commodities market, Zamace has not encouraged cross-border trading in commodities. But with the estimated soya deficit of around 20000 tons, this may change -- at least for this commodity.

Zamace hopes to get the main food aid donors such as the World Food Programme, which accounts for a large slice of grain trading in the region, to procure through the exchange. The WFP is the region's largest net buyer of grain. Last year it bought 270000 tons of food from the region, including 58000 tons from Zambia (up from 12000 tons five years before).

One of the drivers of Zamace's formation was USAid through the Profit programme, as part of its programme to establish an effective warehouse receipt system to make food supply more financially viable. The receipt system allows farmers to store grain against receipts for their goods, against which they can raise finance for replanting. It also allows them to keep their products to ensure better prices outside peak seasons.

The concept has been around in Zambia for a long time but it has yet to get off the ground. The commercial bank sector seems to still be getting over its traditional investment in government securities and still considers the agricultural sector to be risky after several banks had their fingers burned.

Tembo says a successful warehouse certification process will reduce risk by providing collateral in a system backed by credible operators. "We are trying to change the way banks look at the sector."

He says there is no law currently in place to allow for such receipts to be used as tradable instruments and this is hampering support from the banks. However, the issue is on the table and a review of the Securities Act is currently taking place under the Financial Sector Development Plan.

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