zamace - institutional changes and persistent challenges - dec 2011
TRANSCRIPT
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ZAMBIAN AGRICULTURAL COMMODITYEXCHANGE: INSTITUTIONAL CHANGESAND PERSISTENT CHALLENGES
Nicholas Sitko and T.S. JayneIndaba Agricultural Policy Research Institute (IAPRI)
Presented at the Agricultural Cooperating Partners MeetingLusaka, December 13th, 2011
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Objectives of Presentation
1) Why commodity exchanges would be beneficial toAfrican food markets
2) Institutional challenges impeding ZAMACEs
development
3) Recent restructuring at the exchange
4) Persistent policy challenges
5) Conclusion
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Institutional solutions to Africas food
market challenges? In developed agricultural markets, commodity exchanges
serve to:
Manage risk
Reduce costs Provide transparent price discovery
Increase market activity and decrease price volatility
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Yet they remain under-utilized
Total value of trade onZAMACE $US 72million (2008-2010)
Estimated annualvalue of wheat trade inZambia $60 million
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Why has it failed to develop?
Institutional Challenges
1) Limited capacity to enforce contracts;
2) Insufficient incentives to develop competitive brokerage
services;3) Costs of operating the exchange exceed the benefits of
using it for many potential participants;
4) Exchanges perceived as vehicles for manipulating
markets, rather than as forums to achieve pricediscovery
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Market environmentcharacterized by highrisk of contract default
Perception that theexchange is unable to
protect against
contract shirking andopportunistic behavior
Perception thatexchange can attractrisky trading partners
Raises the potentialtransaction costs ofusing the exchangerelative to traditional
trading
Limited participation incommodity exchanges
Risk mitigation intraditional tradinginvolvesinvestments in long-term relationshipwith a knownbuyer/seller, whichare not well-suit toan anonymous andtransparentexchange
Constraint #1:Contractenforcement
challenges
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Thinly tradedexchange
traditional tradingmargins exceed
brokeragecommisssions
Limited incentivesto invest in
brokerageservices
Exchange enrollsexisting market
actors
Exchange brokerswear two hats:broker/traders
Potential conflict
of interest
Opting out bypotential
participants andlimited outreachby brokers
Constraint #2: Limitedincentives forbrokerage services
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Thinly tradedmarkets increases
unit cost ofoperating an
exchange
Increasedmembership fees
Increased relianceon donor funds tocover operating
costs
Costs ofparticipation
exceed benefitsderived from the
exchange
Potentialparticipants opt
out of the
exchange
Raises questionof sustainability
Constraint #3: Costsexceed benefits
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Small spotmarket/thinly
tradedexchange
Potential for
pricecollusion
Potentialparticipants
remain on thesideline
Deprivesexchange of
possible tradevolume
Existingmembers opt
out ofexchange
Exacerbated by highnumber ofregistered trades:
68% of all tradesbetween 2008-2010
Constraint #4:perception thatexchange is used tomanipulate markets
not for fostering pricediscovery
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Restructuring at the Exchange
July 2011: Members given a choice to relinquish theirseats or to continue as members Four members remained (Cargill, CHC, Quality and Afgri)
Their future contributions will be converted to an equity share once
an equity partner is found August 2011: trade suspended on the exchange as
restructuring began
ZAMACE is negotiating ownership arrangement withLuSE Seeking to address perceived conflict of interest in ownership
structure
What the investment will look like is not yet finalized: majorityshareholding, a share swap or even a full absorption of ZAMACEinto LuSE.
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Restructuring at the Exchange
Streamlined it arbitration procedures: Set scale onduration, costs, and is developing a group of ZAMACErecognized arbitrators.
Nominated as the warehousing authority under theagricultural credit act: Pave the way for WHR?
ZAMACE CEO is in high level discussions with GRZ,WFP, and ZNFU
HOWEVER
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Policy Unpredictability Remains a Binding Constraint
Unpredictability:Imposition of import/exportrestrictions, changes in tariffrates, variations in marketing
board procurement, andrelease of government stocksat discretionary prices
Disincentive to speculationDraws maize away from theexchangeDisincentive to store grainDisincentive to enrollingfinancialinstitutions
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Lusaka Maize Retail Prices
0
100
200
300
400
500
1996 1998 2000 2002 2004 2006 2008
Lusaka retail
c.i.f. from
South Africa
nominalUS$perme
tricton
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Conclusion
ZAMACE is undergoing significant beneficial restructuring
However, we must temper our expectations:
By their very nature commodity exchanges are designed toenhance the efficiency of already functional food markets.They cannot create functional markets in dysfunctional
policy environments.
For those interest our report is available at:
http://www.aec.msu.edu/fs2/zambia/wp53_revised.pdf
http://www.aec.msu.edu/fs2/zambia/wp53_revised.pdfhttp://www.aec.msu.edu/fs2/zambia/wp53_revised.pdfhttp://www.aec.msu.edu/fs2/zambia/wp53_revised.pdf -
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THANK YOU