Transformation

30 years

Making trade work for Africa's smallholders

In many parts of Africa, farmers are not producing nearly as much of the staple food crops as they could and should. Take, for example, the situation in Kenya. "Every soul in this country consumes around 90 kg of maize each year, which amounts to 40 million bags," says Gerald Masila, director of the Eastern Africa Grain Council (EAGC). "But our farmers are only producing around 29 million bags." There is an even greater shortfall for wheat, with the country importing some 60% of its needs.

There are a number of reasons why farmers, here and elsewhere on the continent, are failing to fulfil their potential. Most obviously, poor farming practices and declining soil fertility mean that many struggle to produce decent yields. While yields of staple crops have risen four-fold in East Asia over the past four decades, they have scarcely risen over much of sub-Saharan Africa.

Furthermore, the transaction costs involved in buying and selling grain are relatively high in many African countries. This relates, in part, to a range of problems that affect both farmers and traders. These include poor post-harvest handling, pressure on farmers to sell crops immediately after they have been harvested – for example, to raise money to buy food or pay school fees – and the difficulties in sourcing grain from large numbers of scattered farmers.

Fortunately, there is a tried and tested solution to these marketing problems. Structured trading systems already play a key role in organising, regulating and financing trade in commodities in the developed world, and structured trading is now expanding in Africa. Since 2008, CTA has conducted a number of activities whose purpose has been to introduce the principles of structured trade to parts of the African continent where it has yet to take off.

Structured trade connects farmers to finance by establishing warehouse receipt systems. Farmers lodge their grain with a warehouse owned by a third party and they can use the receipt as a form of collateral to raise credit with banks, usually 60-80% of the value of the crop. This means they are not forced to sell their grain immediately after harvest, when there is often a glut and prices are at their lowest. At a later date, when prices will hopefully be higher, they can sell their grain. They can then repay their loans, pay the warehousing fees and possibly invest some of their savings.

Spreading knowledge from South to West

In 2008, CTA and the Agence française de développement (AFD) funded a two-week study tour of warehouse receipt systems and agricultural commodity exchanges in South Africa and Tanzania. Organised by the Natural Resources Institute, the tour provided 23 individuals from West and Central Africa – policymakers and representatives of agricultural producers' organisations, the banking sector and NGOs – with the opportunity to increase their knowledge about the challenges involved in setting up and running warehouse receipt systems and commodity exchanges.

South Africa has a particularly well-developed commodity trade and finance system, managed by the Agricultural Division of the Johannesburg Stock Exchange. Its silo certificate system enables farmers to sign forward contracts to sell fixed volumes of crops at the beginning of the planting season. This, in turn, enables the farmers to access finance from the banks. The system helps to reduce the cost of sourcing produce for traders and processors, while lowering the cost of accessing markets, especially for premium quality produce, for farmers.

From South Africa the tour moved on to Tanzania, where participants had the opportunity to study the benefits that small-scale agricultural producers gain from a regulated warehouse receipt system. "The tour proved very successful in achieving its main objectives," says Vincent Fautrel, CTA's senior programme coordinator on trade and value chain development. "It exposed participants to the benefits and critical requirements of developing warehouse receipt systems and commodity exchanges which are sustainable and accessible to smallholder farmers."

The study tour contributed to discussions and debates in West and Central Africa on how to develop similar systems. The West African Economic and Monetary Union (UEMOA) and Economic Community Of West African States (ECOWAS) commissioned various studies as a result of these discussions. In Central Africa, Cameroon's National Coffee and Cocoa Board, together with the commodities division of the United Nations Conference on Trade and Development (UNCTAD), worked on the setting up of a warehouse receipt system for coffee and cocoa. UNCTAD also used the report and video of the tour as background material for regional workshops in Africa.

A step-by-step guide to structured trade

During recent years, the Eastern African Grain Council has become a powerful advocate of structured trade. "We believe that structured trading of grains, similar to the arrangements which already exist in this part of Africa for tea and coffee, could improve the way grain crops are marketed, with benefits to both producers and buyers," says Gerald Masila. With support from CTA, EAGC organised a 'writeshop' to develop a training manual for structured trade in Arusha, Tanzania, in July 2012.

EAGC

This was CTA's first writeshop. "It was a very interesting and valuable experience," says Vincent Fautrel. "We brought together a group of experts and organisations involved in agriculture and the grain trade, and during the course of an intensive four-day period we were able to produce a draft for a new manual on structured trade."

Written in plain, jargon-free English, Structured Grain Trading Systems in Africa, which was published in 2013, is divided into eight chapters, covering topics such as grades and standards, post-harvest handling and warehouse receipts. "It's a great piece of work," says Gerald Masila, "and it's an output that we will use a lot in the future." The manual has been circulated widely and is now used by the Eastern Africa Grain Institute (EAGI), which has offices at the headquarters of EAGC in Nairobi, to provide farmers, traders, millers and bankers with a thorough introduction on how to establish efficient structured trading systems.

Write shop discussions

At present, just a tiny fraction of grain in East Africa goes through a structured trading system. However, EAGC believes that the number of farmers taking advantage of these arrangements could rise rapidly in the coming years. As these systems help to improve farmers' access to finance and inputs like fertilisers, they offer a promising avenue for improving agricultural productivity, rural incomes and food security.

Additional Resources

The 2013 Special Issue of Spore 'Structured trading systems: A new vision for trade'

CTA has a range of publications addressing the area of trade:
Structured grain trading systems in Africa

Trading up: Building cooperation between farmers and traders in Africa

Policy Pointers: Making the connection – Value chains for transforming smallholder

Guidelines for value chain development

Visit Agritrade the essential resource website for ACP-EU agriculture and fisheries trade

2014 International Conference 'Fin4Ag' addresses the need to revolutionise financing for agricultural value chains

'Making the connection' was a 2012 International Conference organised by CTA and its partners. It considered agricultural value chain development