The Zambian Commodity Exchange (ZAMACE) has signed a partnership agreement with the Johannesburg Stock Exchange (JSE) futures market to boost liquidity in the Zambian agricultural commodity market.
A futures market is a central financial exchange where people can trade standardized futures contracts. These are contracts to buy specific quantities of a commodity such as maize or wheat or a financial instrument at a specified price with delivery set at a specified time in the future. These types of contracts are also called “derivatives” because the values of these instruments are derived from another asset class such as a commodity or a company’s share price.
Having a futures market allows both producers such as farmers and consumers such as milling companies to hedge their exposure. This is similar to buying crop insurance for farmers. A well-regulated exchange also enhances price transparency and in general promotes the growth of the market, providing more job opportunities and increased wealth.
The South African Futures Exchange (Safex) was formed in 1990 as an independent exchange to trade financial derivatives and experienced steady growth over the following decade. In 1995 a separate agricultural markets division was formed for trading of agricultural derivatives. In 2001 the exchange was acquired by the JSE with the JSE agreeing to keep the Safex branding.
The reason why the JSE is interested in tying up with ZAMACE is that they believe that Zambia has the potential to triple its agricultural production as it has a better climate and more rainfall than South Africa.
“It is true that we require consistent government policy to build a futures market, but the opportunity for Zambia to go from a 3 to 4 million ton grain producing nation to a 10 million ton grain production country will be the true test to decide whether we have succeeded in building the sector. The world needs food and Zambia has the potential to make it happen,” said Chris Sturgess, Director Commodities & Key Client Management, Johannesburg Stock Exchange.
“This is a very exciting time for the Zambian agricultural community and the opportunities to market and manage price risk of grain have been expanded for all. I trust we are finally in a position to offer the Zambian community a full range of exchange products,” he added.
ZAMACE executive director Jacob Mwale said the agro-commodity market exchange is this year expected to start the warehouse receipt system that will revolve around trading, grading and standards, arbitration, and issuance of warehouse receipts.
Ideally, farmers will deposit grain at certified storage sites, which is linked to ZAMACE, supported by Lusaka Stock Exchange and a receipt will be issued after the grains are graded, standardised and kept in the warehouse.
The receipt will also act as collateral that can be redeemed for cash at the bank, then the market or millers can buy the receipt and get the grain.
In addition to enhancing trading of commodities, the warehouse receipt system will also enable farmers to obtain credit from financial institutions based on their grain held in one of the certified warehouses as collateral.