Introducing Commodity Exchange policy

THE introduction of the Commodity Exchange policy will create an appropriate marketing channel that promotes the orderly trading of agricultural commodities in a transparent and low-cost manner for the mutual benefit of all stakeholders, Acting President John Landa Nkomo has said. He said this in a speech read on his behalf by the Minister of State in the President's Office, Didymus Mutasa, at the launch of the Commodity Exchange in Zimbabwe (Comez) in Harare yesterday.

The commodity exchange is a market where various commodities and derivative products are traded.
Most commodities' markets across the world trade in such agricultural products as wheat, barley, sugar, maize, cotton, among many others with contracts based on them. These contracts can include spot prices, forwards, futures and options on futures.

Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts.

Acting President Nkomo said the efficiency of the Commodity Exchange concept had been proven in many countries.

Its launch in Zimbabwe, he said, was expected to promote sustainable agricultural and other commodities' production.

"The launch comes at an opportune moment when the country's agricultural sector has literally been yearning for a practical solution to a number of challenges that have adversely affected its growth and development.

"Our producers particularly the communal, resettlement and smallholder farmers have over the years suffered heavily from post-harvest losses associated with poor warehousing or storage facilities, and the absence of a ready market for the disposal of their produce at reasonable prices," he said.

The initiative to set up Comez will effectively stimulate productivity and act as a stimulus for the production of surplus for use as industrial raw materials while creating surplus for trade as well.

"Comez comes as a public-private sector partnership for the mutual benefit of all stakeholders and I call on all Zimbabweans to support this great initiative as its strength lies in our collective effort and the synergies of our public and private sectors," Acting President Nkomo said.

Meanwhile, Comez interim chairman Mr Wilson Nyabonda said they would bring a new era where various commodities and derivative products are traded.

Said Mr Nyabonda: "Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, coffee, cattle milk products, pork bellies, oils and many others) and contracts are based on them.

"For the first time we are going to have the warehouse receipts system (WRS), which are part of a framework of 'modern market institutions' that countries adopt to develop their agri-cultural sectors and render markets more efficient and effective in delivering benefits to consumers and producers."

Farmers can use the warehouse receipts as collateral to access loans from banks.

COMEZ will also enable farmers to cover the price risk of agricultural produce by entering into a futures contract that would lock-in the price of the farmers' produce while the futures price will give them an advance forecast of the likely prices at a future point in time.

Mr Nyabonda said COMEZ would eliminate the need to use title deeds as security for financing grain production as it enabled depositors to sell their grain when market conditions and prices are favourable.

"The other advantages include eliminating payment delays, improving quality and grading of produce while improving food security at the same time.

"Exporters can also enter into commitment for delivery at a future date and any increase of the price underlying commodity in the intervening period could impact their margins. They can therefore hedge against an increase in the price at the time of meeting export commitments," he said.

Stockists can also use the futures contracts to hedge against the decline in the value of inventory, Mr Nyabonda added.

COMEZ will be dealing with cereals and grains for a start and will include other agricultural products later.

Commodities exchange usually trade in futures contracts on commodities, such as trading contracts to receive something, say corn, in a certain month.

A farmer raising corn can sell a future contract on his corn, which will not be harvested for several months, and guarantee the price he will be paid when he delivers; a breakfast cereal producer buys the contract now and guarantees the price will not go up when it is delivered.

This protects the farmer from price drops and the buyer from price rises.

Speculators and investors also buy and sell the futures contracts in an attempt to make a profit and provide liquidity to the system.

However, due to the leverage provided by the exchange to traders those participating in commodity futures trading face substantial amounts of speculative risk.