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Organised Commodity Markets SLBoado
Organised Commodity Markets SLBoado
Organised Commodity Markets SLBoado
Leonela Santana-Boado, Co-ordinator, Commodity Exchanges, Special Unit on Commodity, UNCTAD Leonela Santana-Boado@unctad-org
Virtual Institute Study Tour, University of Dar-es-Salaam Geneva, 17 February 2010
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Outline of presentation
The Commodity Economy and the need for Organized Commodity Markets Commodity exchanges: What are they? UNCTADs role in the area
The commodities economy and poverty: There is a strong link between them
"75 per cent of the 1.2 billion people living on less than $1 a day live and work in rural areas. Moreover, about half of the world's hungry people are from smallholder farming communities, another 20 per cent are rural landless and about 10 per cent live in communities whose livelihoods depend on herding, fishing or forest resources."
Commodity Exchanges
Over time, virtually all developed country exchanges moved towards futures trade (a mechanism for risk transfer), as their services in physical trade (spot and forward) became superfluous (most of the exchanges that were not able to make this change disappeared; the rare exceptions include the Dutch flower auction and a cheese exchange in the USA
Rank
1 2 3 4 5 6 7 8
Rank
600m
450m
300m
150m
0m CME Group Agriculture Metals Energy 200 86 339 DCE 313 SHFE 93 126 62 ZCE 223 ICE Futures 64 153 LME 113 MCX 4 70 21 TOCOM 6 29 6 NCDEX 18 5 1 NYSE Euronext 13 TGE 8 TAIFEX 5 KCBT 4 NMCE BMD 3 BM&F Bovespa 3 C-COM 0 0 3 JSE/SAF EX 3 MGEX 1 -
MCX
WCE KCBT
SAFEX BMD
MGEX
BM&F C-COM
CME 500m
Number of contracts (futures & options)
NCDEX NYBOT
100m
DCE
0m 1
10
20
30
40
50
DC E
so yb ea n
40m
so yb ea n m ea l
37m
CB OT CB OT NC DE X gu ar se ed st ro n g gl ut en wh ea t ga r so yb ea ns co rn
28m 20m
ZC E
19m
TG E No nGM O su
NY BO T 11
17m 13m
ZC E
so yb ea ns co tt o n
11m
no .1
11m
rice, corn, soyabeans corn, soyabeans wheat, rice wheat cereals (maize) wheat, barley rice corn, soyabeans red beans wheat, corns wheat wheat, barley maize, wheat, soyabeans corn, soyabeans wheat, corn, soyabeans
Commodity Exchanges
In the developing world, a commodity exchange may act in a broader range of ways to stimulate trade in the commodity sector. This may be through the use of instruments other than futures, such as the cash or 'spot' trade for immediate delivery, forward contracts on the basis of warehouse receipts or the trade of farmers' repurchase agreements, or 'repos'. Alternatively, it may be through focusing on facilitative activities rather than on the trade itself, as in Turkey where exchanges have served as a centre for registering transactions for tax purposes.
EXCHANGES IN AFRICA:
The SAFEX Agricultural Products Division of the JSE Exchange, South Africa is the continents only commodity futures exchange, and the only commodity exchange in Africa that has truly withstood the test of time.
OTHER EXCHANGES IN AFRICA
MACE (Malawi); The Malawi Agricultural Commodity Exchange KACE (Kenya); The Kenya Agricultural Commodity Exchange UCE (Uganda); The Ugandan Commodities Exchange ECEX (Ethiopia); Ethiopia Commodity Exchange ZAMACE (Zambia); The Zambia Agricultural Commodity Exchange ASCE (Nigeria); Abuja Securities and Commodity Exchange Ghanaian Commodities Exchange- in project ACE (regional, based in Malawi); Bourse Africa (Regional)
Bourse Africa
AACP: An introduction
The All ACP Agricultural Commodities Programme (AACP) is a joint project involving:
the European Union (EU) the African, Caribbean and Pacific secretariat (ACP) five international organisations (IOs): UNCTAD, CFC, ITC, FAO and the World Bank
A budget of 45 million has been set aside for actions by the IOs to address ACP stakeholders needs The Programmes actions will be demand-driven, arising from participatory consultative processes to ensure ownership by ACP stakeholders (national and regional)
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Market creation
Stimulating regional integration & South-South trade Price discovery
Market access
Facilitate provision of finance Price transparency
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Caveat: Benefits do not automatically flow from the establishment of a commodity exchange
A domestic commodity exchange is not necessarily an appropriate policy instrument for all markets and all commodities.
An exchange is only one part of the policy framework it is not a panacea and it does not stand alone from other commodity policy interventions
An exchange which is badly-structured or poorly-managed is unlikely to deliver enhancements to underlying commodity sectors. The extent to which prospective enhancements are delivered in large part depend on the services offered and the strategic priorities pursued by the exchange. A well-functioning commodity exchange is predicated upon a robust legal-regulatory
framework
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To assess the relevance of existing commodity exchanges initiatives and identify if it could be an appropriate solution and how to make them more efficient and useful for farmers To scan and analyze the conditions depending on the type of Commodity Exchange (physical commodity exchange, commodity futures exchanges, etc.); Creating a new commodity exchange is no easy matter how is it to be organized, what contracts are to be traded (UNCTAD has done several feasibility studies), what are the possibilities with respect to trading platforms, how does one target potential users, what types of regulation are required.
UNCTAD is ideally placed to overcome the trust gap that often still exists between the public and private sectors in developing countries and which hinders investments in trade-related institutions.
Identify the components of the legal-regulatory frameworks required for the functioning of different types of services provided by a commodity exchange (rules, taxation)
Organize Capacity building and training programmes that addresses the needs of the various stakeholders; Visit to sucessfull Exchanges both inside and outside the region;
UNCTAD Analysis, 2009 A Study of Development Impacts of Commodity Exchanges in Developing Countries
Aim: To identify, analyse and assess the impacts made by commodity futures exchanges in developing countries on economic growth, development and poverty reduction, with particular focus on agriculture
Study undertaken in collaboration with leading exchanges in Brazil, China, India, Malaysia and South Africa
Verified 66 positive impacts that commodity exchanges have made in the following areas: price discovery, price risk management, venue for investment, facilitation of physical trade, facilitation of finance and general market development
Also identified versatility of exchanges across different contexts and in response to different challenges existing and emerging including in a context of smallholder farming
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Scope
Commodity futures exchanges have been selected as the focus of the study because they tend to be the most sophisticated adaptation of a commodity exchange The array of impacts generated is potentially the broadest A commodity exchange that offers other services but not futures trading is likely to generate impacts that feature only a sub-set of those generated by commodity futures exchanges
However, this selection does not imply:_ that a commodity futures exchange is always the appropriate form of exchange to be established in every market or for every commodity that every commodity futures market always in reality generates a wider array of impacts than other forms of commodity exchange that a commodity futures exchange will always generate the same range of impacts as those identified in this study
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Approach
Country case studies - a comparative review of agricultural futures exchanges in five key developing economies:
Under what conditions they have emerged The factors that have driven their ongoing development
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Participants
A study group comprising the leading agricultural futures exchange by volume in each developing region, with a focus on two commodities traded at each: Region Africa Country South Africa Exchange JSE/SAFEX Featured contracts White Maize Wheat Coffee Live Cattle Soybean Maize Cardamom Mentha Oil Crude Palm Oil
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Latin America
Brazil
Bolsa de Mercadorias & Futuros (BM&F) Dalian Commodity Exchange (DCE) Multi Commodity Exchange (MCX) Bursa Malaysia
East Asia
China
South Asia
India
Malaysia
Price discovery
Investment venue
Benefits arising
14 hypotheses
8 hypotheses
14 hypotheses
1 Impact hypotheses are further split into potential impacts specifically or mainly for farmers (37) and potential impacts for the wider commodity sector or the overall economy (44); and potentially positive impacts (76) and potentially negative impacts (5). The full list of impacts can be found in the working paper version of the study, available at: www.unctad.org/commodities
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Benefits arising
Improved spot reference price generation Reinforce cash market transactions Enhances storage & logistics infrastructure Upgrades quality standards
Education & capacitybuilding International trade facilitation Technology upgrade & promotion
Industry growth
18 hypotheses
9 hypotheses
18 hypotheses
1 Impact hypotheses are further split into potential impacts specifically or mainly for farmers (37) and potential impacts for the wider commodity sector or the overall economy (44); and potentially positive impacts (76) and potentially negative impacts (5). The full list of impacts can be found in the working paper version of the study, available at: www.unctad.org/commodities
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Impact results
Of 81 impact hypotheses, evidence was found to support the occurrence of 69 of these in at least one of the featured markets2
31 related to farmers, 38 to the wider commodity sector or overall economy 66 positive impacts, 3 negative impacts
The study suggests that farmers do not need to directly use the exchange to realise benefits from it:
Indirect usage via aggregators (e.g. cooperatives, purchasers, financiers) Benefits arising from transparent dissemination of market information
The study also suggests that many impacts particularly those related to facilitation of the physical market - can be realised without the exchange needing to offer trade in futures
2 The performance in each exchange for 81 impact hypotheses, along with documentation of evidence, can be found in the working paper version of the study, available at: www.unctad.org/commodities 34
Key achievements
Providing services that have supported the commercialization of the agro-economy e.g. enabling flow of capital into the sector; enhancing efficiency and transparency of government support; integrating the domestic physical market; facilitating export markets
Development impacts
Relevance to smallholders
Distributed across core and wider functions BM&F mechanisms used by Government to support smallholders schemes e.g. auctions to Hedging and price discovery are prominent support government procurement; channeling The BM&F subsidiary, Brazilian Commodity Exchange has integrated national cash markets finance to smallholders and providing a secondary market and enables financing and export promotion possibilities for agro-participants
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Development impacts
Focused primarily on core price discovery and price risk management functions Important emphasis also on capacity-building for farmers to use market information Financing functionalities are nascent but have strong growth potential
Relevance to smallholders
Major training and capacity-building execerise by DCE to help smallholders improve cropping and marketing decisions with market information DCE encourages downstream partners to pass on hedging benefits to smallholders
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Key achievement
Catalyzing development of the wider commodity ecosystem i.e. as well as price risk management, has also improved the flow of information, facilitated physical infrastructure development, established reliable quality standards
Development impacts
Relevance to smallholders
High expectation for direct farmer participation Distributed across core and wider functions Price discovery and dissemination a key impact Current usage is low, but high impacts from information & physical market development Impacts arising from facilitation of physical Indirect participation of small farmers via comarket and market development have been operatives high Regulatory obstacles
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India can lead the way in integrating farmers into national and international market places using modern information and communications technologies
Bursa Malaysia
Context Key achievement
Established in 1980 on the back of a well Bringing pricing power to Malaysia for its key developed and strongly-regulated physical export commodity market for crude palm oil i.e. unique in establishing a benchmark The consummation of the Governments exchange in the developing world, ensuring diversification strategy, originating in the early pricing power for its key export commodity on 1960s the world market.
Development impacts
Mainly arising from core functions Price discovery and price risk management for world palm oil industry
Relevance to smallholders
No observed smallholder focus - development impact has been elsewhere Many smallholders operates within government support schemes
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Key achievement
Filling the void left by sudden government deregulation of the markets i.e. has become a core institution in the deregulated South African grain markets, for the conduct of hedging, financing and cash transactions
Development impacts
Distributed across core and wider functions Price discovery and risk management key in supporting sector performance despite high levels of price and production volatility High impact in enabling financing and facilitating physical market development
Relevance to smallholders
JSE/SAFEX supports smallholder capacitybuilding programmes in partnership with other agencies Indirect usage of the exchange's market information has been encouraged.
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Conclusions
Exchanges are versatile instruments, capable of upgrading commodity sector performance in a range of situations and addressing emerging challenges as they arise
In general, exchange services are relevant for smallholders
however, price risk management is not always an important - or even relevant service - for smallholders compared with price information and physical market services
The exchange is not a panacea, and has depended on an appropriate regulatory environment and other complimentary policies and mechanisms
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