Private Sector Investment in Market-Supporting Institutions: The case of the Agricultural Commodity...

Private Sector Investment in Market-Supporting Institutions: The case of the Agricultural Commodity Exchange in Malawi

Wageningen University, Netherlands

AAEA Meetings, July 27th, 2015

Dr. Domenico Dentoni, Dr. Liesbeth Dries

Commodity Exchanges (CE) in Africa

2

Farmers

Middlemen

Traders/Processors

Manufacturers/Retailers/Consumers

Input Suppliers Banks

Commodity Exchange:1) Vertical coordination;

2) Storage contracts;3) Financial instruments Governmen

t

In theory, advantages are:-More storage capacity-Less marketing risks for farmers-Less supplying uncertainty for tradersMore efficient trade, more food security

Donors

Commodity Exchanges (CE) in Africa

3

In practice, wide range of failures (Sitko & Jayne 2012; Jayne et al. 2014):-Low banks investments-Small trade volumes-High quality inconsistency and contract breaking-High risks of conflict of interest members vs traders-High fixed operational costsHigh costs, low benefits

Recently, Malawi case was mentioned as possible exception:

-Efficient vertical coordination, storage and financial services-Market information & knowledge programs to support trade-Increased benefits from trade

Two broad research questions

4

1. Does the ACE model work? How do ACE market-supporting institutions lead to market performance?

2.Why does the private sector invest in ACE? (And why not in other African commodity exchanges?)

ACE market performance

Private sector investment in ACE

ACE organization and services 12

Implications for private investors and farmers

ACE = Agricultural Commodity Exchange in Malawi

Inductive method: case, samples, data

5

DATA THEORYExpert interviews for USAID project “institutional and policy constraints to innovation in Malawi commodity markets” • Grains and legume sectors

Commodity exchange (CE) history and literature• What works and

doesn’t in CEs in AfricaInterviews to ACE managers; Secondary data: ACE business plan, corporate reports, web sources• ACE history and performance

Interviews to private sector actors investing and participating in ACE: traders/processors, input suppliers, banks• ACE governance and

incentives

Market-supporting Institutions (Grief 2008; McMillan 2008)• “Rules of the game”

that make markets more efficient

Institutional Entrepreneurship• “Mobilizing resources for

institutional change (Pacheco et al. 2010)

• Data-theory iteration• Purposive sample selection• Longitudinal study(Eisenhardt 1989; Suddaby 2006; Yin 2014).

2006 2007 2008 2009 2010 2011 2012 2013 20140

10

20

30

40

50

60

70

80

Findings (I): ACE market-support institutions

6

Overall ‘000 MT of maize and legumes (soybean and pigeon pea) traded

2010: ACE introduces “Bid Volume Only” mechanism: the buyer sets the volume, the sellers compete on price

2011: “Warehouse receipt system”: ACE certified and insured storage services; stored maize can act as collateral upon seller’s request

2010-2013: Market information system: ACE reaches out farmers via SMS (for free) to provide market price info

2013-2016: ACE register of transactions and internal resolution of disputes becomes more effective as disincentive to contract default as trade increases

2013-2016: ACE invests in farmers’ knowledge programs and expanding regional trade

2006: Founded and managed by national farmers’ associations. Only normal auctions (spot market)

2013: Forward contracts

2006 2007 2008 2009 2010 2011 2012 2013 20140

10

20

30

40

50

60

70

80

Findings (I): ACE market-support institutions

7


2010: ACE introduces “Bid Volume Only” mechanism: the buyer sets the volume, the sellers compete on price

2011: “Warehouse receipt system”: ACE certified and insured storage services; stored maize can act as collateral upon seller’s request

2010-2013: Market information system: ACE reaches out farmers via SMS (for free) to provide market price info

2013-2016: ACE register of transactions and internal resolution of disputes becomes more effective as disincentive to contract default as trade increases

2013-2016: ACE invests in farmers’ knowledge programs and expanding regional trade

2006: Founded and managed by national farmers’ associations. Only normal auctions (spot market)

Heavy investment in services supporting market transactions; Significant increase in trade volumes

2013: Forward contracts

2006 2007 2008 2009 2010 2011 2012 2013 20140

10

20

30

40

50

60

70

80

Findings (II): ACE performance: trade figures

8

2006: Founded and managed by national farmers’ associations with USAID funding (0.5 Million USD)


2011: 70% trade is purchased by World Food Program “Purchase for Progress”; 30% by private traders


2014: 5% of traded maize and 11% of traded soybean in Malawi is sold through ACE

2010-2013: 1.1 Million USD from donors (EU and AGRA) for setting up 1) market information system; 2) financial services; 3) auction mechanisms

2013-2016: 0.4 Million USD from donors (USAID) for promoting farmers’ market linkages

2006 2007 2008 2009 2010 2011 2012 2013 20140

10

20

30

40

50

60

70

80

Findings (II): ACE performance: trade figures

9

2006: Founded and managed by national farmers’ associations with USAID funding (0.5 Million USD)




2014: 5% of traded maize and 11% of traded soybean in Malawi is sold through ACE

2010-2013: 1.1 Million USD from donors (EU and AGRA) for setting up 1) market information system; 2) financial services; 3) auction mechanisms

2013-2016: 0.4 Million USD from donors (USAID) for promoting farmers’ market linkages

Moderate growth of trade volumes; More trade among privates (farmer to trader, or trader to trader)

2006 2007 2008 2009 2010 2011 2012 2013 20140

10

20

30

40

50

60

70

80

Findings (II): ACE performance: who gains?

10


2013/2014 Year:0.264 Million revenue from trade;Still 1.1 Million USD/year in public grants (0.7M) & private investments (0.4M) to support operating expenses

2011-2012: example of revenue for a seller (trader or farmer) from transactions with warehouse receipt system of white maize (non-GMO):• Maize value at deposit: 132,000 USD for 740 MT• Maize value at sale: 210,000 USD for 740 MT• Costs of transaction: 43,000 USD for 740 MT• Profit from transaction: 35,000 USD for 740MT

Value capturing out of depositor revenue:• Seller (trader or farmer) : 44%; • Storage operator (trader, input supplier

or farmers’ association): 26%;• Banks: 27%; • ACE: 3%.

2006-2013: ACE receives approx. 0.7 Million USD/year in grants to support operating expenses

2006 2007 2008 2009 2010 2011 2012 2013 20140

10

20

30

40

50

60

70

80

Findings (II): ACE performance: who gains?

11


2011-2012: example of revenue for a seller (trader or farmer) from transactions with warehouse receipt system of white maize (non-GMO):• Maize value at deposit: 132,000 USD for 740 MT• Maize value at sale: 210,000 USD for 740 MT• Costs of transaction: 43,000 USD for 740 MT• Profit from transaction: 35,000 USD for 740MT

Value capturing out of depositor revenue:• Seller (trader or farmer) : 44%; • Storage operator (trader, input supplier

or farmers’ association): 26%;• Banks: 27%; • ACE: 3%.

2006-2013: ACE receives approx. 0.7 Million USD/year in grants to support operating expenses

ACE is still far from self-sufficiency, but revenue from trade is increasing. Farmers, traders and bankers still gain with government and donor support

2013/2014 Year:0.264 Million revenue from trade;Still 1.1 Million USD/year in public grants (0.7M) & private investments (0.4M) to support operating expenses

2006 2007 2008 2009 2010 2011 2012 2013 20140

10

20

30

40

50

60

70

80

Findings (III): ACE governance: who decides?

12


2006-2015: ACE founded and managed by ACE Trust:• President• NASFAM (farmer ass.)• FUM (farmer ass.)• Independent third-partyGrants to NASFAM and FUM for approx. 0.7 Million USD/year

2010-2015: ACE Ltd., i.e. “ACE commercial arm” is introduced:• Bankers’ Association of Malawi• Input Suppliers• Traders• Independent third-partyFrom 2010, private sector invested approx. 0.4 Million USD/year

2006-2015: Government is NOT represented in ACE Trust and ACE Ltd. It “only” influences ACE through:• Funding to NASFAM and FUM• Domestic and export trade policies

ACE structure guarantees balance between farmer associations’ (ACE Trust) & traders/bankers/input suppliers’ interests (ACE Ltd.)

Discussion

13

1. Does the ACE model work? How do ACE market-supporting institutions lead to market performance?

ACE PERFORMANCENow (2011-2015) works better than before (2006-2010);Not financially sustainable but adopting a credible trade growth

strategy; yet, Government may play limiting outside influence

ACE ORGANIZATION AND SERVICESMarket-supporting institutions (2010-2014) play a vital role:

Auctions; warehouse receipts; certified storage; insurance; financial mechanisms; register of transacting parties; resolution of disputes.

Discussion

14

2. Why does private sector invest in ACE? (And why doesn’t in other African commodity exchanges?)

ACE ORGANIZATION AND SERVICES ACE PERFORMANCE

Private sector (traders, banks, input suppliers) invested capital in ACE Ltd., the “commercial arm” of ACE

Private benefits from trade (commodity market, storage market, credit/insurance market) need to be higher than private costs (operating costs & transaction costs of participating in ACE)

Open questions still are: Is private sector willing to grow trade to make ACE fully self-

sustainable? Or will ACE remain supported by public grants to guarantee benefits to farmers’ associations and their members?

• Two different business logics in ACE (“trade” vs. “aid”) still seek/struggle to co-exist

CE model of institutional entrepreneurship

15

D profits from commodity markets (e.g. maize, legumes)

D profits from interlinked markets (e.g., credit, insurance, storage)

D profits from markets (TOTAL)

Proposition (tentative!): private sector actors invest in a Commodity Exchange (CE) governance and operating expenses if: D (profits from markets) > Private costs of CE

Y: decision to invest in CE

X: Expected costs vs. benefits


16

Costs from Commodity Exchange (TOTAL)

Proposition (tentative!): private sector actors invest in a Commodity Exchange (CE) governance and operating expenses if: D (Profits from market) > Private costs of CE

Transaction costs from governing CE (e.g. time costs, legal & consulting expenses)

Operating costs (e.g. capital) needed to support CE staff & services




17

D profits from markets (TOTAL)

Costs from Commodity Exchange (TOTAL)

Proposition (tentative!): private sector actors invest in a Commodity Exchange (CE) governance and operating expenses if: D (Profits from market) > Private costs of CE



NO INVEST

INVEST

MALAWIAN ACE

Thank you! Questions?

18

Dr. Domenico Dentoni - [email protected]

mailto:[email protected]

Private Sector Investment in Market-Supporting Institutions: The case of the Agricultural Commodity...

Small Business & Entrepreneurship

Transcript of Private Sector Investment in Market-Supporting Institutions: The case of the Agricultural Commodity...