Improving Agricultural Market Performance:
Creation and Development of Market Institutions
41
SAFEX has proven successful, however, for several reasons:
1. Most of the large-scale cereals producers use the exchange because the commercial
lenders require them to hedge their price risk.
2. SAFEX widely disseminates its market data, and the SAFEX price is widely used as the
reference price in forward contracts, including for grain trade in other countries in
Southern Africa. “In 2005, this enabled Malawi’s government to use SAFEX options to
protect itself against the risk of future price increases of its maize imports [and] after
this, [when] Malawi became a maize exporter, it used options to protect its export
prices. Also, using related financial instruments, it replicated a maize buffer stock,”82
which made it unnecessary to maintain physical buffer stocks.
3. SAFEX, which was created in 1988 as a currency-trading platform, introduced
agricultural futures in anticipation of liberalization of agricultural markets and
commodity prices. When agricultural futures trade started in South Africa, there were
no applicable laws and regulations, and the exchange essentially operated as a self-
regulating organization. This enabled procedures and rules to evolve to meet the
needs of the exchange’s users.
4. From its inception, SAFEX accompanied its futures trading platform with a strong
system for delivery of physical commodities, using transferable silo receipts. It
subsequently integrated auctions of physical commodities into its trading platform and
later introduced a mechanism that enables buyers to bid for grain deliveries at specific
silo locations, thus reducing transaction and transport costs. Together, these
innovations created a favorable environment for both spot and futures trades.
Zambia Agricultural Commodity Exchange
The Zambia Agricultural Commodity Exchange (ZAMACE), was started in 2007 by a group of
15 grain traders and brokers. It failed to take off, however, because:
1. “It had a limited capacity to enforce contracts. In the high-risk trading environment in
Zambia, market participants had invested in long-term relationships as a way to
manage market risk. The exchange had to be able to offer at least the same perceived
level of risk mitigation,” by screening market participants and enforcing contracts
entered into on the exchange, but it was unable to do this.
2. All the brokers on the exchange were also traders in the physical commodity, causing a
potential conflict of interest, while “the visibly low volumes on the exchange”
discouraged third parties such as banks and brokerages from offering commodity
brokerage service .
3. “The costs of operating on the exchange exceeded the benefits for many potential
participants.” An exchange typically has high fixed costs and low variable costs.
Because of the low transaction volume, and because ZAMACE had to recover its costs,
82 African Development Bank (2013), Guidebook on African Commodity and Derivatives Exchanges, pp. 85-91, Tunis: African
Development Bank.