Transcript Goggin-2003

“Improving investment and stimulating agricultural
growth to achieve food security in East Africa:
Linking small-farmers to local and regional market”
A Regional briefing Organised by CTA
In Entebbe Uganda 12 and 13th November, 2010
"Market Influences and Problems/Barriers in
Agricultural Marketing”
A presentation by Ian Goggin Structured Trade Specialist
CTA Regional Briefing Entebbe November, 2010
A thought!
Risks can be managed with foresight.
Damage can be controlled with hindsight.
Your choice.
Coopers and Lybrand, L.P.
Advertisement in The Wall Street Journal, December 7, 1995
CTA Regional Briefing Entebbe November, 2010
The Unknown
As we know,
There are known’s.
There are things we know we know.
We also know
There are unknowns.
That is to say,
We know there are some things
we do not know.
But there are also unknown unknowns,
The ones we don’t know
We don’t know.
Donald Rumsfeld, February 2002, Department of Defence news briefing
CTA Regional Briefing Entebbe November, 2010
Contents
-
What influences markets
-
Characteristics of African Markets
-
Major constraints in African Markets
-
Possible actions
-
Financial tools (New initiatives)
-
Risk Mitigation tools
-
CTA Regional Briefing Entebbe November, 2010
Market influences 1st
Group
•
•
•
•
•
•
•
•
•
Demand/buying
power/income of buyers
Supply
Quality and Presentation
Quantities
Information
Communication
Transport
Producer knowledge of
the market
Organisation of
production and marketing
•
•
•
•
•
•
•
•
•
Production pattern/timing
in relation to contracts
Performance risk
Laws/regulations
Competition
Value added capacity
International price trends
Socio-cultural influences
Political decisions
Technology
CTA Regional Briefing Entebbe November, 2010
Market influences 2nd
Group
•
•
•
•
•
•
•
•
Demand
Supply
Quality
Access to produce by
buyer
Packaging/presentation
Promotion
Infrastructure- roads,
storage, energy….
Use of technology
•
•
•
•
•
•
•
•
Farmer organisation
Climate
Quantities available
Price
Corruption
Policies/regulations
Political support for
markets
Market access by sellers.
CTA Regional Briefing Entebbe November, 2010
Market Influences
Group
•
•
•
•
•
•
•
•
•
•
Quality
Price
Demand)
Supply) Seasonality
Transportation
Taxation policy
Geographical location
Exchange rates
Traditional/cultural
practices
Yield-production methods
varieties
rd
3
•
•
•
•
•
•
•
•
•
Understanding
commodities and markets
Capacity to perform on
contracts
Political climate
Packaging presentation
Promotion
Processing
Storage
Market information
Weather patterns
CTA Regional Briefing Entebbe November, 2010
Characteristics of African
Markets Group 1
•
Poor market information.
•
Poor market intelligence.
•
Lack of identifiable
markets.
•
Poor Access to markets
•
Lack of competition.
•
No quality standards.
•
Poor communication.
•
No enforceable
contracts/dispute
resolution mechanism.
•
Lack of transparency
•
Low production
•
Limited commercial
production
•
Very poor infrastructure
CTA Regional Briefing Entebbe November, 2010
Characteristics of African
Markets Group 2
•
•
•
•
•
•
•
•
•
Not well established markets
Poor/low prices
Breakdown/poor in
communication
Prices are set by the buyer
No proper linkages
No consistency in
production- seasonal
variations
Production oriented
High production costs
Weak rules and regulations
on marketing, e.g.
uncontrolled vending
•
•
•
•
•
•
•
•
•
Poor quality
Mixed grades
No network to share market
information
Poor infrastructure
Poor market information
system
Lack of technology
Poor storage of perishables
Little emphasis on
processing
Subsidies influence
•
CTA Regional Briefing Entebbe November, 2010
Characteristics of African
markets Group 3
•
•
•
•
•
•
•
•
•
•
Unorganised
Low quality
Difficulty in supplying
required amounts
Difficult to predict market
behaviour
Less organised farmer
groups
Lack of market research
Lack of market knowledge
and information
Price fluctuation = high
margins for traders
Climatic specialisation
Large trader sector versus
producers.
•
•
•
•
•
•
•
•
•
•
•
Poor regulatory
environment
Monopoly of market
players
High trader margins
Risky; lack of insurance
Corruption
Less effective spatial and
temporal price arbitration
Poor/expensive transport
Infrastructure
Market access
Political interference
Poor grading – little price
incentive to grade.
CTA Regional Briefing Entebbe November, 2010
What would you say are the 3 biggest constraints
Africa faces in agricultural marketing?
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Infrastructure /Transport/Storage (1)
Low level/effectiveness of farmer organisation (2)
Knowledge about markets/planning for market/agriculture as a
business/access to markets (4)
Market instability
Financing/ unsustainable Government support for markets (3)
Lack of political will / poor policy (3)
Illiteracy/ low application of technology
Corruption (5)
Poverty
Access to market /price information (4)
Quality (5)
Consistency of production/seasonality in relation to market demand (4)
Poor contract environment
Low level of processing
Means of and high cost of advertising
Production costs/limited production
Product presentation and packaging
International competition/competitiveness of African producers
CTA Regional Briefing Entebbe November, 2010
Possible actions:
• Institution- and capacity-building, including for
farmers’ associations and domestic banks;
• Supportive policies, laws and regulations including
with respect to currency controls; and
• Support to the development local and regional risk
management markets
CTA Regional Briefing Entebbe November, 2010
How can African farmers obtain
Access to risk management markets?
Individually, they are generally too small (making it not
worthwhile for them to learn about the markets, and not
profitable for brokers on risk management markets to work
with them). Their risk management needs therefore need to
be accumulated by an "intermediary".
There are several possible “intermediation mechanisms” –
the major ones are farmers’ associations, banks, local
commodity exchanges, processors and traders.
The more structured is the farmers’ relation with the
organized marketplace, the easier is it to achieve their access
to a risk management market.
CTA Regional Briefing Entebbe November, 2010
Farmers’ price risk exposure
In the past, government intervention isolated many farmers from
world market price volatility. The mechanisms used were
marketing boards, which paid an administratively-determined
price to farmers; and stabilization funds, which were meant to
smooth out prices in good and bad years.
However, it has been amply demonstrated that the costs of these
mechanisms have been very high, and most countries have now
abolished them.
While this has generally led to farmers receiving a larger part of
market prices, it has also led to them being more exposed to the
high volatility of world market prices.
CTA Regional Briefing Entebbe November, 2010
Financing farmers’ investment in a
rice (paddy) processing plant
Paddy farmers approached their bank, asking for a loan to set
up a paddy processing plant. The economics of the proposal
were good, but the farmers had no credit standing, and were
not eligible for longer-term loans.
But the bank designed an innovative financing approach: a
joint venture with the farmers, in which only the bank paid up
its share, and the farmers paid up later through deductions
from their paddy deliveries. The bank put professional
management in place.
And in the next few years, the farmers bought out the bank’s
share through further deductions from their paddy deliveries…
CTA Regional Briefing Entebbe November, 2010
New commodity financing schemes:
pre-requisites
To a large extent, successful schemes have
relied on the private sector, with governments
in a supportive role and occasionally as a
catalyst; and sometimes, donor agencies’
involvement.
The minimum role of the government is that
it should provide a supportive legal and
regulatory environment.
CTA Regional Briefing Entebbe November, 2010
Characteristics of the new modes of
financing
The majority of the new modes approach the borrower
(whether a producer, farmers’ association, processor
or a trader) as part of the commodity supply chain
 Credits are based on the performance of the
borrower in the chain, rather than just on the
borrower’s risk. This is often called structured finance.
Traditional finance:
Micro-finance:
Structured finance:
Loans based on client
risk assessment
Loans based
on social links
Loans based
on economic links
Conclusions - finance
There are new opportunities for worldwide commodity
producers.
But to meet the demands from clients, suppliers may need to
invest. And finance is scarce and expensive.
But with innovative financing mechanisms, one can upgrade
the full supply chain, and even reach those now excluded
from the formal financing system.
This can contribute significantly to meeting the Millennium
Development Goals.
CTA Regional Briefing Entebbe November, 2010
Simple Risk Mitigation
Tools
Warehouse receipts
CTA Regional Briefing Entebbe November, 2010
Warehouse Receipts
What is a warehouse receipt?
1.
2.
3.
4.
Document of title (ownership) of the goods described on
the receipt at the location at which they were deposited.
Negotiable document (can be bought and sold).
Makes financing easier by using the receipt and the
underlying commodity as collateral.
A document certifying possession of a commodity in a
licensed warehouse that is recognized for delivery
purposes by an exchange.
Regional Staple Foods Workshop Entebbe, Uganda 8th November, 2010
What is a warehouse
receipt?
7. A receipt of commodities deposited in a
warehouse, identifying the commodities
deposited.
8. Document guaranteeing the existence and
availability of a given quantity and quality
of a commodity in storage; commonly used
as the instrument of transfer of ownership
in both cash and futures transactions.
CTA Regional Briefing Entebbe November, 2010
Immediate Rationale
•
Regional integrated warehouse receipts
•
Economies of scale
•
Liquidity
•
•
Easy access to all regional produce
•
Unified markets
Increased regional trade
•
CTA Regional Briefing Entebbe November, 2010
Requirements for successful receipts system
For viable WRS:
-Build discipline and trust in the warehouse- integrity is key;
-Economies of scale to save costs of oversight and
administration;
-Cut costs of financing that are passed on to farmer;
-Find correct balance of regulatory oversight by state;
-Bond and insurance requirements against default, loss or theft.
For viable negotiable receipts:
-Specific licensing of warehouse operators for WR;
-Establish tracking system for WR to register every change of
ownership (to ensure only one party has legal title);
-Establish clear legal rights for receipt bearers and legally
establish receipts as documents of title.
Regional Staple Foods Workshop Entebbe, Uganda 8th November, 2010
Risk Mitigation Collateral
Management
•
Buyer can choose different degrees of protection.
A collateral management company may be
contracted to do:
• Stock verification
• Quantity and Quality verification
• Guard stock at location
• Oversee loading and transport
• Off loading verification
Other Risk Mitigation
Tools
•
Commodity Exchanges
•
Storage
•
Contracts
•
Dispute resolution
•
CTA Regional Briefing Entebbe November, 2010
Market Risks
I can never really get into
trouble in relation to things
I know
I can get into some trouble
in relation to things I dont
know
Markets are very dynamic
– what was true yesterday
might not be true today.
Always moving!
But I can really get into
serious trouble with things I
am 100% certain of, but it
turn out it just ain’t so...
CTA Regional Briefing Entebbe November, 2010
Market Information – Key
•
Availability
•
Quality
•
Price
•
Quantity
•
elasticity
•
Packaging
•
Labour
•
Market access
•
Demand/Supply
•
Storage
•
Information
•
Market trends
•
Commodity specifications
•
Communication
•
Transportation cost
•
Location
•
Contract availability
CTA Regional Briefing Entebbe November, 2010
Some Final Thoughts
If we don’t understand we will continue to do
things the hard way…
Can the African
Agricultural sector
truly transform and
develop African
economy? Not
unless we “change
the wheels”.
Change is long-overdue !
In agriculture
The world we have created is a product of our
thinking; it cannot be changed without
changing our thinking.
Albert Einstein
CTA Regional Briefing Entebbe November, 2010
Where once all
the talk was
about the
Asian tigers…
Asian tiger
…. In the future
talk may be
about
the African
LIONS!!