*This op-ed was written by Dr. Bob Baulch, Program Leader for IFPRI Malawi, Lilongwe.
When I first came back to Malawi, two-and-a-half years ago, I had barely heard the term ‘structured markets’─ despite having spent most of the previous 25 years working on agricultural marketing issues in over 20 developing countries. When I asked my IFPRI colleagues to define structured markets, I got various responses ranging from, ‘auctions floors,’ ‘commodity exchanges and warehouse receipts,’ to ‘orderly marketing arrangements,’‘vertically integrated supply chains,’ and even ‘contract farming.’
When I asked about the benefits of structured markets, I got similarly diverse responses, such as, ‘improved grading and quality’ and ‘price discovery’ to ‘aggregation,’ ‘improved storage,’ and ‘access to credit and export markets.’ Many in Malawi believe that if structured markets were implemented here, the greater competition and more transparent marketing systems that would be promoted would result in improved prices for smallholder farmers. Sounds great, I thought, but I now realize that the reality of structured markets is somewhat different from the rhetoric: structured markets have both advantages and disadvantages.
The advantages of structured markets are hard to object to in the abstract, but are also quite amorphous. By helping farmers grade and store their crops, structured markets (specifically warehouse receipt schemes, which are often linked to a commodity exchange) can help farmers obtain better prices by avoiding crop sales immediately after harvest when prices are usually the lowest. Similarly, well-functioning auctions—or other more sophisticated types of commodity exchanges—can assist in price discovery, making farmers, traders, and other market participants more aware of ruling market prices. For example, the 'G-Soko' platform in Kenya links village centers for aggregation and bulking grains with certified warehouses and a virtual trading platform. When promoted using an export mandate (an arrangement where exporters are required to sell certain crops through a single marketing channel, typically a commodity exchange), structured markets can help reduce and prevent the practice of transfer pricing, a method some large traders use to under-report the export values of their commodities. The Ethiopian Commodity Exchange, for example, had export mandates on coffee and sesame (Ethiopia's two main export crops) until quite recently.
In the context of a small, landlocked country like Malawi, structured markets also have some significant disadvantages. First, as the history of commodity marketing boards in Africa in the 1970s and 1980s shows, structured marketing arrangements may lead to serious inefficiencies in agricultural marketing, which lower the prices farmers receive for their crops while increasing ‘rent seeking’ by well-connected individuals.[1] Second, there is a danger that export mandates on certain crops may inadvertently increase, rather than decrease, informal exports, as they are intended to do. Malawi is a long, narrow country with highly porous borders, so it is almost impossible to prevent informal, cross-border trade with neighboring countries. I recently heard about a visitor to Chitipa who was told about the informal maize export ‘licenses’ that police and customs officials sell to traders at a price of MWK5,000 per flat-bed (3 MT) truck. Third, smallholder farmers often prefer to sell to small traders in their villages even if they are paid lower prices as a result. A recent IFRPI survey of smallholder farmers throughout Malawi found that almost three-fifths of farmers who sold their crops did so locally. And not one of the 2,627 farmers interviewed had directly sold their crops directly to a commodity exchange. Finally, as the history of commodity trading in America and Europe shows, commodity exchanges that are thinly traded tend to be vulnerable to large traders cornering or manipulating the market for particular commodities.[2] If a commodity exchange is thinly traded, as both of Malawi’s commodity exchanges certainly are, this type of market manipulation behavior might increase the price volatility of certain crops.
So ultimately, whether structured markets can deliver higher prices to farmers is an empirical one which will be determined by (i) what we mean by structured markets; (ii) the crop (or other commodities) concerned; and, (iii) the country and regional context. As the old Latin adages say: caveat emptor, caveat venditor (buyer beware, seller beware).
- AfDB et al. 2018. Africa’s Commodity Exchanges, Warehouse Receipts Systems and New Standards. Abijan: African Development Bank.
- East Africa Grain Council. 2013. Structured Grain Trading Systems in Africa. East Africa Grain Council. Nairobi, Kenya.
- Gondwe & Baulch, B. 2017. The Case for Structured Markets in Malawi’ Policy Note 29, IFPRI Malawi
- Rashid, S. (2015). Commodity exchanges and market development: What have we learned? Presented at International Association of Agricultural Economist (IAAE) conference, Milan, 2015.
[1] See, for example, Bates, R. (1981) Markets and States in Tropical Africa: The Political Basis of Agricultural Policies. Berkeley: University of California Press.
[2] These include, inter alia, tulip bulbs in Amsterdam in the early 17th century, onions in Chicago in the 1950s, potatoes in Idaho in the 1960s, the Hunts silver case in New York in the late 1970s, Volkswagen shares in 2008, and the European cocoa market in 2010. See https://en.wikipedia.org/wiki/Cornering_the_market and https://www.investopedia.com/features/crashes/ for more on these (and other) infamous market corners and crashes.
