Nurturing the agro-commodities market in East Africa
Agriculture is always cited as Africa’s ticket to growth and development, but in a world of smallholder farmers and large-scale weather events, risk can often outweigh profit. Africa Exchange Holdings Ltd (AFEX), founded in 2012, is working to diminish this risk and achieve food security not through aid, but increased market competitiveness. AFEX’s two exchanges, East Africa Exchange (EAX) in Rwanda and AFEX Commodities Exchange in Nigeria, are designed to use structured trading, warehousing, and agricultural financing to integrate the market and create value for participants. Currently, AFEX has the whole corner of the market—the exchange has exclusive rights to operate in Rwanda, and gained support of the presidents of Kenya, Rwanda, and Uganda as a regional exchange; it also holds a license from the Nigerian Securities Exchange Commission (SEC) as the country’s first and only private sector commodity exchange. According to Dr.Jendayi Frazer, Managing Partner of AFEX and former US Assistant Secretary of State for African Affairs, AFEX now has over 200,000 participating small-scale farmers and 12 partnered financial institutions.
What benefits do farmers have from getting involved with the exchange?
Commodity exchanges address multiple challenges at once and at scale. First, we are a central market place where buyers and sellers come together to trade, often in contracts of underlying commodities, under set rules and regulations. This ensures that no particular actors in the value chain can influence prices, thus providing price transparency and a discovery and information platform. AFEX has further invested in priced issemination mechanisms that inform farmers of running-average prices at the exchange for each commodity traded. This increases their bargaining power and incomes as opposed to fragmented markets where collusion is often at the farmer’s expense. Our quantity and quality guarantee has attracted large off-takers, creating a vibrant spot market that ensures a market for farmers. AFEX started trading forward contracts in 2017and will introduce futures contracts in 2018 so end users, lenders and investors [speculators] can manage their commodity-based exposures and hedge against price risks. Government and regional food reserve agencies will also be able to hold their strategic food reserve in forward/futures contracts, and call on them only when there is a need to do so. These services will deepen the market to the benefit of farmers, and increase the flow of capital to agribusiness in our countries of operation. Second, the commodity exchange’s warehouses offer storage to reduce post-harvest losses, and provide value-added services, like drying, fumigating and grading. We operate warehouses in major trade hubs and production clusters, continuously working with farmer groups to encourage aggregation. This reduces carrying costs while the inventory serves to bridge the gap between physical supply and demand, lending to food security. AFEX has deployed the only electronic Warehouse Receipt System [e-WRS] on the continent outside of South Africa. The e-WRS gives farmers the freedom of action to decide when to hold versus sell in the spot market, and thereby reap increased value for their labour. Third, and importantly, the collateralized product contracts or warehouse receipts de-risk bank loans to smallholder farmers. Our established bank partnerships mean they accept thee-WRS as collateral, allowing agricultural clients to use their commodity as collateral to secure financing.
How do you manage the inherent risks of working with agricultural products as assets?
Agriculture in Sub Saharan Africa is such a complex business, especially considering the level of fragmentation in the sector, the lack of supporting infrastructure to ease aggregation and logistics, and often weak policy regimes and judicial systems to drive global competitive trade. However, these gaps create an opportunity for a player to unlock value which the continent is best situated to create in the future, with an endowment of over 60 per cent of the world’s uncultivated arable land and an available labour force. Consequently, the AFEX group has been deliberate in employing patient capital not only in developing a trading platform, but also supporting the ancillary infrastructure critical to the success of an exchange. Through our team of industry experts, partnership switch the best companies in the field, and our commitment to deliver on our promise, we have upheld integrity of trade without defaults. We provide a quality and quantity guarantee for product in our warehouses and we’ve deployed a real-time online inventory management system hosted and audited by PricewaterhouseCoopers against which e-WRSs are issued. Through our partnerships and operations, we reduce counter party risk by becoming the central counter party to each trade. Agricultural markets in the East Africa region and beyond will benefit from AFEX’s guarantee of each trade