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Price controls could stymie commodity exchange

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ZIMBABWE’S proposed commodity exchange initiative could be hampered by a thin market for agricultural produce after the government placed key crops on a list of controlled commodities, a local securities firm has said.

RONALD MUCHENJE
Besides grappling with a thin market, the government also has to guarantee the success of the initiative by ensuring that, among other requirements, it has in place a pre-existing spot market, potential to achieve sufficient volume traded across the exchange to cover fixed costs and modes of institutional governance.

In December 2020, the government launched an agricultural commodity exchange meant to ensure that farmers get market-determined prices for their produce.

Previously, the state-run Grain Marketing Board (GMB) had a monopoly on maize and wheat.
Launching the system, Finance minister Mthuli Ncube said the commodity exchange, which will be supported by a warehousing receipt system, implying the government will no longer fix prices of agricultural commodities.

For the 2020/21 agricultural season, the government announced that the cotton floor producer price will be US$1 per kilogramme or the Zimbabwean  dollar equivalent using the prevailing interbank rate and this month soya beans was also made a controlled crop. 

Already, prices of food crops including maize and wheat are controlled by the government. 

In the same context, Fbc Securities in its economic commentary, said the government is planning to establish a commodity exchange and a warehouse receipt system. 

“The major challenge facing this commodity exchange initiative is a thin market for agricultural crops after the exclusion of the controlled crops. These controlled crops dominate the cumulative agricultural production in the country leaving thin scope for the commodity exchange. Zimbabwe previously had a Commodity Exchange (ZIMACE), which was closed when the government gave the monopoly to buy and sell maize and wheat to the GMB in 2001. Commodity exchanges are unlikely to bring about major reductions in input costs or improvements in the availability of new farmer technologies,” said Fbc Securities.

The firm noted that a well-functioning commodity exchange could reduce transaction costs and risks of exchange, thereby shrinking the wedge between prices received by farmers and prices paid by consumers. 

“However, for this commodity exchange to succeed the following should be in place: a pre-existing spot market, potential to achieve sufficient volume traded across the exchange to cover fixed costs, modes of institutional governance and appropriate incentives to motivate rapid learning on the part of the exchange management and government commitment,” Fbc Securities said.

The government believes the exchange will encourage the formalisation of small-scale farmers, thereby ensuring sustainability of farming activities, access to credit facilities through collateralisation of agricultural produce and enhance farmers’ contribution to employment creation.

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