The Sunday Mail
Dr John Basera
GOVERNMENT has adopted a structured liberalised marketing arrangement for strategic commodities and is currently reviewing all statutory instruments (SI) controlling marketing of agricultural goods, for example, SI 145 of 2019. Cabinet approved floor producer prices for maize, traditional grains, soya bean, sunflower and wheat.
These are now obligatory prices only for commodities being purchased by the Grain Marketing Board (GMB) and financed by Government.
Self-financed farmers will sell to the best advantage on the market or to GMB.
All private contractors are obligated to buy back contracted crops at market prices.
This new arrangement requires a transparent price discovery mechanism.
This is why Government partnered with the private sector to establish the Zimbabwe Mercantile Exchange (ZMX).
Establishment of ZMX
Government, through our ministry, partnered with the private sector to establish and operationalise ZMX to provide three key functions, namely, a warehouse receipt system (WRS), spot market and forward market.
These broad functions are instrumental in getting rid of challenges such as limited market access for small-scale producers, price volatility, price discovery challenges, post-harvest losses, agricultural funding challenges because of lack of collateral security and other market-related issues.
The ultimate aim of ZMX is to improve the livelihoods of over 70 percent of Zimbabweans, whose source of income depends on agriculture.
The platform seeks to introduce efficient market systems, market predictability and a transparent market price-discovery mechanism.
Ultimately, it provides for improved access to finance and credit facilities for farmers, as well as addressing post-harvest storage losses and forward market systems.
The whole idea is to allow ZMX to cause development of value chains by enhancing access to commodities on a free market platform by value chain players.
Overview and modalities of ZMX
ZMX is structured as a public-private partnership entity, with Government holding 20 percent while the private sector variously holds 80 percent.
True to its word, Government is promoting transformation that is private sector-led and public sector-facilitated.
ZMX operates an Electronic Warehouse Receipt System and a Commodities Trading Platform to facilitate safe, secure and convenient commodity handling, storage, trading and financing.
The purpose of the commodity exchange is to provide local farmers with access to markets and to reduce the logistical load of acquiring agricultural commodities encountered by various manufacturers, processors and enterprises. In simple terms, the exchange functions as follows:
On crop harvest, the farmer will order delivery or collection of their commodity using simple mobile phone short codes
The selected warehouse (closest to the farmer) will arrange collection of receipt of the commodity
On receipt, the warehouse operator will weigh and grade the commodity and issue a goods delivery note showing the grade
Once the farmer accepts the grade, volume and quantity as calculated by the warehouse, a warehouse receipt is issued in favour of the farmer, stating the commodity, quantity, grade and market value
The electronic warehouse receipt is then issued into the farmer’s mobile account, backed by the physical receipt held in trust by the custodian bank appointed by ZMX
With the warehouse receipt in their mobile gadget, the farmer can choose to sell the commodity immediately or hold on for prices to improve, and, in the meantime, use the receipt to access finance from banks or access inputs on credit
The farmer can opt to sell all or part of the commodity on their warehouse receipt. They can transfer ownership to anyone of their choice or can withdraw some of the commodity on the receipt for their private consumption.
Legal framework for ZMX
ZMX’s activities are anchored in a robust legal framework, including the Warehouse Receipt Act (Chapter 18:25) and the Warehouse Receipt (General) Regulations Statutory Instrument 224 of 2020.
Further, trading activities of ZMX are governed by the Agricultural Marketing Act (Chapter 18:24) and the Zimbabwe Mercantile Exchange Rules SI 184 of 2021.
The legal framework for a commodity exchange in Zimbabwe is designed to promote transparency, security, fairness and efficiency in handling, financing and trading of commodities, while protecting the interests of all stakeholders.
Warehouse receipt system
The WRS is essentially a network of certified warehouses which take commodity deposits and issue warehouse receipts (WR) that serve as proof of title to a specified quantity and quality of a commodity.
The WR is recognised as a financial security in terms of the Securities Act.
A financial security is a tradable financial asset. As a security, a WR acts as an asset that can be included on the balance sheet of the holder.
The WR is an attractive asset as it is backed by a physical commodity sitting in a certified warehouse and whose value is transparently determined on the commodity exchange based on demand and supply factors.
The WR instrument has proven worldwide to be one of the most essential tools in the opening of commodities markets and gradual liberalisation of trade by reducing uncertainty and improving efficiency.
As such, the WRS ensures proper storage of goods by protecting parties from the danger of receiving the incorrect quantity, quality or delivery location.
To meet the needs of numerous commodities traded and financed on the exchange, ZMX maintains a network of certified warehouses throughout Zimbabwe that serve as distribution hubs for the platform.
Before being licensed for the storage and processing of goods, each of these ZMX-approved warehouses had to satisfy stringent standards.
The requirements of certification include insurance for the goods housed, frequent fumigation, stock management, risk management, auditing and guaranteed, dependable security around the warehouse, all of which are intended to provide farmers and stakeholders with peace of mind and confidence of the system.
Spot market
ZMX provides a centralised, rule-based marketplace where buyers and sellers of various commodities and commodity-linked contracts can interact.
Potential buyers and sellers utilise the internet to gain access to services.
The platform provides transparent price discovery for all listed commodities, and traders are assured of receiving the best price at a given time.
Potential buyers and sellers place their orders directly on the platform and the automated trading system matches them instantly.
Also, ZMX gives access to both real-time and historical market information through digital platforms (USSD, mobile apps and web portal) and daily market reports distributed through email and ZMX website articles. ZMX has made this information available to all registered users of the site, regardless of whether or not they trade on the platform, as a way of reducing market information asymmetries.
This feature brings all market participants to the same level of market knowledge.
Some of the data provided by the platform include:
Daily market reports showing a summary of the market activity, product by product.
Real-time bid price, bid volume, ask price, ask volume, turnover, volume weighted average, price, et cetera, for each product listed on the platform.
A real-time calculation of the account’s portfolio value and the breakdown.
Real-time calculation of an account’s daily gain and loss.
Forward market
The ministry is also promoting commercial value chain financing through contract farming as a method to bring the much-needed agricultural inputs to farmers, and allowing off-takers to lock their product requirements.
Forward contracts are commonly used in commodity trading as a tool for managing price risks.
A forward contract is an agreement between two parties, where one side agrees to buy a commodity from the other at a specified price and at a specified future date.
The price and delivery date are agreed upon at the time the contract is made.
For example, a farmer who is growing maize may be concerned about the price of the cereal falling between the time the crop is harvested and the time it is sold.
To manage this risk, the farmer can enter into a forward contract with a buyer, such as a food processing company or a grain trader.
The forward contract would specify the price at which the buyer will purchase maize and the date on which the transaction will occur. By entering into a forward contract, both parties are able to hedge their price risks.
The farmer is able to lock in a price for their crop, reducing the risk of a price decline, while the buyer is able to secure a supply of maize at a known price.
Forward contracts are particularly useful for commodities that are subject to price volatility, such as agricultural products.
Use of forward contracts in commodity trading can provide benefits for both buyers and sellers by reducing price risk and providing greater certainty in the transaction.
Forward contracts are normally bilateral and tailor-made for specific counterparties to the agreement.
The establishment of ZMX will lead to standardisation of forward contracts and introduce futures contracts that are exchange-traded.
The development will promote our agricultural markets to world-class standards.
Commodities currently listed and trading
Trading is available for the following 12 commodities: maize, red sorghum, white sorghum, millets, soya beans, wheat, barley, sunflower, groundnuts, sugar beans, cow peas and roundnuts (Bambara nuts).
The exchange will be listing 37 other agricultural commodities in future, inclusive of horticulture and livestock products.
Warehouse receipt financing
Government is also working around the clock to bring much-needed market-based expanded inclusive economic opportunities to access agricultural funding for sector-wide value chain development.
The ZMX supports warehouse receipt financing. Warehouse receipt financing is a common form of financing in the agriculture sector, where farmers and other producers often need short-term financing to bridge the gap between the time they harvest their crops and when they sell the produce.
By using their produce as collateral, they can obtain financing at a lower cost than other types of financing, such as unsecured loans or credit lines.
Warehouse receipt financing is not limited to bank loans.
It widens the option for farmers to access financing from other sources as well.
The ZMX model accommodates various financiers that include banks, microfinance institutions and input suppliers.
Once any of these providers of funding and inputs are on-boarded on ZMX, farmers have the choice of using their warehouse receipts to not only obtain cash loans, but also acquire inputs, implements, services, household goods and groceries on credit terms secured by the warehouse receipt. The warehouse receipt has the potential to massively empower farmers by widening their financing options.
Benefits of warehouse receipt financing include lower interest rates, longer repayment terms and ability to access financing, even with a limited credit history.
Additionally, warehouse receipt financing can help reduce the risk of fraud or default, as the lender has a direct claim on the produce in case the borrower fails to repay the loan.
ZMX is indeed a transformative innovation and a big game changer that has been piloted on a good scale since its soft launch by the Ministry of Finance and Economic Development in 2021.
It is expected to be fully operationalised starting this 2022/2023 marketing season. Awareness campaigns will be conducted soon in all provinces.
Dr Basera is the Permanent Secretary in the Ministry of Lands, Agriculture, Fisheries, Water and Rural Development
