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
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)
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)
Overall ‘000 MT of maize and legumes (soybean and pigeon pea) traded
2011: 70% trade is purchased by World Food Program “Purchase for Progress”; 30% by private traders
2013: 30% trade is purchased by World Food Program “Purchase for Progress”; 70% 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)
Overall ‘000 MT of maize and legumes (soybean and pigeon pea) traded
2011: 70% trade is purchased by World Food Program “Purchase for Progress”; 30% by private traders
2013: 30% trade is purchased by World Food Program “Purchase for Progress”; 70% 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
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
Overall ‘000 MT of maize and legumes (soybean and pigeon pea) traded
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
Overall ‘000 MT of maize and legumes (soybean and pigeon pea) traded
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
Overall ‘000 MT of maize and legumes (soybean and pigeon pea) traded
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
CE model of institutional entrepreneurship
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
Y: decision to invest in CE
X: Expected costs vs. benefits
CE model of institutional entrepreneurship
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
Y: decision to invest in CE
X: Expected costs vs. benefits
NO INVEST
INVEST
MALAWIAN ACE
Top Related