Improving Agricultural Market Performance:
Creation and Development of Market Institutions
40
2.5.1 Commodities Exchanges
“Commodity exchanges are highly efficient platforms for buyers and sellers to meet; primarily
to manage their price risks better, but also to improve the marketing of their physical
products. They have significant, well-documented development benefits, making economies
more inclusive, boosting the links between agriculture and finance, and making the commodity
sector more efficient and competitive. Derivatives and commodities exchange markets can
help deliver an improved market transparency, financing of commodity chain and financial
market participants, hedging, and risk management…As a secondary effect, derivatives and
exchanges can result in job creation and enhanced cross-border economic integration by
offering venues for the mitigation of key financial and trade risks.”77
Many African countries have launched commodities exchanges, including OIC members
Nigeria, and Uganda. They have all failed or underperformed except for South Africa’s, which is
the only exchange that does not depend on Government support. They all “suffered from the
same flaw: a top-down approach that’s better at attracting foreign aid than at improving
farming practices and developing transportation and communications networks.”78
These failures all “suffered from the same flaw: a top-down approach that’s better at attracting
foreign aid than at improving farming practices and developing transportation and
communications networks.”79
According to the International Food Policy Research Institute in Washington, “Under the right
circumstances, exchanges can make sense. But the problem is that conditions for success, such
as large trading volumes, a strong financial sector, and a commitment to transparency, don’t
yet exist in most countries.”80
Many countries, in Africa and elsewhere, lack the financial sector strength or the critical mass
of potential users and transactions needed to support an exchange. Even in South Africa, which
has highly developed financial markets, “the agricultural futures market in South Africa
remains narrow – in 2009, SAFEX [the South African Futures Exchange, part of the
Johannesburg Stock Exchange] reported a total of 12,000 clients for its agricultural platform.
As of 2009, it was estimated that hedgers accounted for 60% of open positions– with as largest
users commercial farmers and processors. Speculators and arbitrageurs accounted for the
remainder; this is a very low percentage, compared to global commodity futures markets.”81
Speculators and arbitrageurs, who try to profit from discrepancies between spot market and
futures prices or between options premiums and theoretical options prices, can play a crucial
role in maintaining market liquidity and price discovery. In countries with less-developed
financial markets, few funds or individual investors are likely to fill this function.
77 African Development Bank (2013), Guidebook on African Commodity and Derivatives Exchanges, pp. 85-91, Tunis: African
Development Bank.
78 Bjerga, A. & Davison, W. (2015), “Trading Floors Can’t Feed Africa: Exchanges aren’t helping farmers as foreign backers
hoped,” Bloomberg Business Week, available a
Accessed June 2017].
79 Ibid
80 Ibid
81 African Development Bank (2013), Guidebook on African Commodity and Derivatives Exchanges, pp. 85-91, Tunis: African
Development Bank.