17 July 2014

Tanzania: Structured Grain Trading Needs Conducive Policy Environment

AS more of Africa's smallholder famers become active players in value chains, one needs to develop the institutions that enable them, traders, warehouse managers and processors to produce, trade and market products efficiently and cost-effectively.

Sophisticated trading systems already exist for export commodities such as coffee and cut flowers. But for staple commodities, such systems are still in their infancy in most African countries.

According to the 2013 structured grain systems in Africa report, structured trading is a way of organising, regulating and financing trade in a commodity.

The grain is graded according to a set of agreed standards, and it is stored safely in a trusted warehouse. These two things make it possible for the owner to use the grain as collateral for a loan before it is sold. Moreover, the grain can be sold without having to move it out of the warehouse.

And it can be traded on a commodity exchange, where buyers and sellers can agree on a deal without having to physically inspect the grain.

"This has huge advantages for everyone involved. Farmers have a more assured market, and can sell the grain when the price is right.

For traders, buying and selling is easier, less risky, and more efficient. Buyers have a more reliable supply, assured quality, and a broader range of potential suppliers.

Costs and wastage are lower; income for everyone involved can be higher," the report read in part. To succeed, structured grain trading needs a conducive policy environment that levels the playing field and allows the market forces of supply and demand to support a transparent process of price determination.

That means halting bans on exports and imports, and avoiding interventions in prices, procurement and distribution. By explaining how structured trade works in a clear manner, this manual should help those involved in setting policies to avoid unpredictable interventions that disrupt the smooth and efficient working of markets.

It will also support them to put in place a policy framework that is conducive to developing the institutions needed for structured trade. Currently in Nairobi, Kenya agriculturists, value chain partners, ICT developers, financiers, Central Bank governors and the media are meeting for four days to explore new tools, mechanisms and approaches on how agriculture can be revolutionised to ensure smallholder farmers get access to finance.

Stanbic Bank Uganda's Head of Agriculture, Richard Wangwe said in a presentation warehouse receipt financing as a means of financing the agricultural value chain that despite being one of the oldest lending products, warehouse receipt funding has been a "no-no" for banks.

"Warehousing in East Africa has multiple dimensions namely post harvest liquidity and better price realisation for farmers, a sine-qua-non for efficient commercial trade in agro commodities as well as backbone to commodity exchange, these aspects need to be put into consideration," he said.

Mr Wangwe while pressing for African countries to adopt warehousing receipt systems also advocated for the adoption of a new concept of Collateral Management Services (CMS) and how they will benefit the banking sector being the major enabler to agriculture finance.

Collateral as understood in Indian banking parlance is secondary source of payment obligations while in the present context is an asset / 3rd party commitment accepted by the Collateral Taker (Bank) to secure an obligation of the Collateral Provider. Collateral Management (CM) involves managing the collateral on behalf of the collateral taker. CM transactions are intended to protect against performance risk of counter party.

Banks have traditionally been assets based lenders -with hardly any knowledge of asset financed. Banks, private and public are under pressure to expand agri credit portfolio, sound collateral management therefore is becoming a major enabler. At the same conference Tanzania's warehousing receipt system won accolades for helping in the development of agricultural produce.

Agricultural Market and Post-Harvest Economics Specialist, Mr Jonathan Coulter, speaking on warehousing receipt systems and collateral management, said Tanzania comes second in Africa after South Africa in efficient agriculture regulatory systems. However, the specialist warned that "while Tanzania has managed to have the regulatory system in place, unlike other countries on the continent, without making the body autonomous with its own funds, the desired results will hardly be achieved."

Mr Coulter said it was only through making it autonomous that public accountability can be accrued, warning that as long as the body doesn't keep going back to the government, the chances of it interfering in the price setup will be avoided. Citing an example from Brazil in the 1990s, he explained that during that period it was found out that many senators actually owned many of the warehouses and that it gave rise to crops being of low quality and mass corruption.

"So what I am saying is that the regulatory body needs to be able to close the warehouse if the assets of the farmers are in danger of being compromised and this should be done without the fear of stepping on some big toes," he said.

In a study prepared by Mr Coulter on appropriate warehousing and collateral management systems to promote access to finance through warehouse receipt finance in Sub Saharan Africa and Madagascar found that in the majority of the subject countries (Tanzania excluded) there is little or no regulation of warehouses, operators and collateral managers.

Other findings showed that concerns of implications of a Central Bank registration requirements, the extent of a secured financier's rights to enforce a pledge over goods by private sale of those goods and also that there was inefficiency of court enforcement procedures. Commercial storage is an important part of structured trade. Unlike on- farm, village or cooperative stores where farmers store grains for themselves, commercial storage providers have no direct interest in the grain other than the handling and storage charges.

This puts them in a position where they can act as collateral managers. In this position, they can guarantee the quality and quantity of the grain in the store and can hold grain on behalf of a financier or buyer.

Plus, they offer professional services. Keeping grain in a commercial warehouse minimizes the risk for commodity financiers and buyers, and puts warehouse operators in a unique position in structured trade systems.

Such warehouses make it possible for farmers, traders and buyers to transfer ownership of the grain without having to move it. This makes warehouse receipt systems and commodity exchanges possible.

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