Opinions of Tue, 11 Sep 20180
Solving an ancient problem of price stability and food security
Improving food security, stabilizing prices and creating opportunities for the secondary market to make some money whiles the value chain gets improved are a some major benefits associated with a commodities market. What is a commodities exchange, what is in it for the citizens and how does its business model help improve the livelihood of the average farmer are questions that linger in the minds of anyone who reads the first sentence of this article.
A commodities exchange is a financial structure that connects farmers, warehouses, a stock exchange, investors and the consuming market. The Securities Industry Act 2016 (Act 929) defines a commodity to include a livestock, fishery, forestry, mining product, energy product, financial instrument, and/or index. Ghana is starting with an agriculture based exchange which will trade corn, cocoa, coffee, wheat among others.
Farmers will be required to produce a specified quality of agricultural product which will be stored and kept in a warehouse. The warehouse being the official storage for these items will give farmers tickets as a representation of their holdings in units and value while payment is made as and when standardized contracts of their products have been sold on an official exchange.
The goods presented to the warehouse are certified and hence listed as commodities trading on an exchange. The brokers, dealers, exchange and investors battle it out with their demand and supply factors to make some money by participating in the risk of the commodities.
This structure allows the farmers to be guaranteed of revenue from the proceeds of their work since a certified system confirms their produce. Just as construction payment certificates gets discounted by finance houses for gains, farmers can also present their warehouse ticks either as collaterals for loans or early cash at a discounted value.
If a farmers has goods worth GHC 100,000 as a ticket, he can use the ticket money as a collateral for loan since most financial institutions like collateral that can be easily converted into cash unlike land and other properties which are very difficult to convert into cash or he will see a financial institution to receive his GHC 90000 today whiles the financial institution receives GHC 100,000 in six months’ time.
Market queens and other people who usually exploit farmers by providing farmers ready market for their goods are likely to lose their business since we now have a central institution with standard prices for farm products of the farmer. This means more income for farmers and their families and likely improvement in standard of living of the rural areas where most of these farm produce are cultivated. With known warehouses in all districts, farmers have a ready market to supply such staples with standardized and fair pricing.
Investors through brokers will buy or sell standardized commodities contracts on an exchange to partake in the market risk and make or lose some money based on how market sentiments goes. This invariable provide and addition investment avenue to invest personal savings, pension funds, mutual funds and other pool of funds to make good returns for the future.
This market structure will to a large extent be successful if the prices on the exchange reflects on daily market activities. The average Ghanaian who knows one contract of Corn (a bag of corn) can be bought at GHC 400 on the Ghana Commodities Exchange will not buy the same goods for GHC 500 on the open market. Prices of traded exchange goods will be standardized on the open market whiles ensuring high quality agricultural items are used in preparing the day to day foods we consume hence food security.
The success of this market very much dependent on the acceptance by the citizenry as a whole. The parties to this value creation market need to understand their roles as well as the how and the why the structures in place in the long term help improve our livelihood as citizens. The idea is great but I implore stakeholders to implement all structures and systems to the later to replicate the success of Kenya, Nigeria and other African countries in Ghana.