The Development Challenge

In recent years, the improvement of commodity markets has become an urgent necessity in the development of African economies. For decades, weak marketing systems have been a major constraint to African agricultural growth and its potential to reduce poverty. Commodity markets, in turn, are generally restricted by limited market infrastructure, ineffective market institutions and disabling elements in the policy environment.

 

The development of markets for agricultural inputs and outputs can enable smallholder farmers to escape from poverty. A combination of marketing improvements – covering the “3 I’s”, namely Incentives, which are influenced by policy, Infrastructure, and Institutions – can enhance farmers’ returns and, over time, allow them to realize major increases in yield. Appropriate market institutions are particularly vital. They include:

• transparent systems for assessing the quality of produce traded;
• accurate and readily-available information;
• credible contracts and enforcement mechanisms; and
• effective forms of collateral for obtaining loans and insurance.

Our Programme

Since the early 1990s, the Natural Resources Institute has played a leading role in helping to develop commodity market systems in sub-Saharan Africa, in collaboration with local partners. Key activities have included work in the following areas.

 

Working together on warehouse receipt systems © University of Greenwich

Development of warehouse receipt systems in East and Southern Africa

 

NRI has considerable experience in the development of warehousing and inventory credit systems, working mainly in East and Southern Africa, and is a leading authority in this area. Of particular significance is the establishment of a warehouse receipt system in Zambia (see under ‘Outcomes’, below). NRI is currently undertaking a major programme of work in Uganda, Tanzania and Zimbabwe that seeks to improve the efficiency and performance of marketing systems for cotton and coffee in these countries.

 

Establishment of all-inclusive financial products for smallholder farmers

 

NRI is working with the Commodity Risk Management Group of the World Bank to develop financial products for smallholder farmers. These include a weather-indexed crop insurance product, linked to the provision of production finance and crop marketing through a functional warehouse receipt system. The system will be piloted in Zambia during the 2005/6 season.

 

Standardization of grades for grains and other commodities

 

NRI has developed good-practice procedures on the role of public and private sector players in establishing and enforcing trade-friendly standards, particularly for cereals, pulses and oilseeds, but also for roots and tubers, and fruit and vegetables.

 

Market information systems

 

Working particularly with partners in Uganda – IITA, the Foodnet project, and various radio stations – NRI has been assessing local needs and testing information-delivery models for farming communities, mainly through decentralized market information services and the use of FM radio.

 

Development of commodity exchanges

 

In sub-Saharan Africa, scale factors limit the scope for trading through exchanges, particularly the development of futures and options markets. However, there are opportunities to develop physical (cash) exchanges, particularly in conjunction with warehouse receipt systems. It is also possible for African traders to make greater use of international futures and options exchanges, and over-the-counter hedging systems. NRI staff have advised on exchange development programmes in Mozambique and Uganda, and are able to provide impartial advice to countries considering ventures in this area.

 

Food aid procurement

 

In some African countries, notably in Ethiopia and Uganda, food aid agencies are now the leading buyers of food-grains, which they supply to people affected by wars and natural calamities, or to those who for other reasons are chronically food-insecure. Through their procurement activities, these agencies are in a position to help African countries develop marketing institutions that will serve them when they no longer require food aid. For this reason, it is particularly significant that NRI is presently carrying out a review of the World Food Programme’s local procurement mechanisms in the above-mentioned countries.

Outcome and Implications

NRI’s work on the development of commodity market systems has potentially significant implications for sub-Saharan Africa. For example, effective warehouse receipt systems can enhance the efficiency of entire marketing systems from the farm to the consumer, and can likewise assist the development of input markets. Work on warehouse receipt systems has been particularly successful in Zambia because of the lead role played by the private sector, with the government providing a supportive legal and policy environment. As a result, a widely-accessible warehouse receipt system, regulated by an arms-length non-governmental certification and inspection agency, was established. Following pilot-phase success, four major warehouse operators, including an international inspection company, were certified to issue warehouse receipts during the 2004-5 season. Available certified storage space rose from 8000 to 105,000 tonnes, and about 66,000 tonnes of maize were deposited in the certified warehouses. Commercial farmers have predominated among the ‘early adopters’ of this system, but smallholders are already getting involved, depositing some 5800 tonnes of grain.

Our Publications

NRI has produced numerous papers and conference presentations on this subject (see our list of selected publications on enterprise, trade and finance).