Agriculture Minister Joseph Made

Peter Gambara

THE establishment of a Warehouse Receipt System (WRS) and a complimentary Commodity Exchange Market can be the panacea we need to overcome the collateral security problems that are being faced by local farmers.
Since the advent of the Land Reform Programme, both A1 and A2 farmers have never had title deeds over their land holdings and can therefore not use the land as collateral when they intend to borrow from banks.
Government promised to provide permits for A1 farmers and give 99-year leases to A2 farmers. However, this has not yet materialised and farmers are faced with a situation where they cannot use the land as collateral.
By establishing a WRS, farmers will have the opportunity to deposit their grain into a warehouse receipt system where it will be cleaned, graded according to established standards and they are then issued with a transferable warehouse receipt that they can then use as collateral at the bank.
Under a WRS, warehouse receipts are issued by a warehouse operator as evidence that specified commodities of stated quantity and quality have been deposited at particular locations by named depositors.
The warehouse operator will hold the stored commodity under safe custody. In the case of a grain warehouse operator, the operator grades and fumigates the product before accepting it for storage.
A warehouse receipt that is “transferable” is then issued to the farmer. This receipt can be transferred to another party, for example, in exchange for a loan. The receipt entitles the holder to take delivery of the stored commodity. The receipt can also be used as collateral at the bank, where a loan equivalent to between 50 to 80 percent of the receipt value can be advanced to the farmer.
Over the last few seasons farmers have not been able to get their monies on time after selling their grain to the Grain Marketing Board (GMB) and those who have tried to sell to private buyers have received very low prices that make it unviable to grow maize and wheat.
Traditionally grain prices also fall immediately after harvest and firm as the next season approaches.
By depositing their crops into a warehouse, farmers have the option to hold onto their grain until they are satisfied with the prevailing market prices at which point they can then sell their grain.
For best results, the warehouses can be linked to a Commodity Exchange Market that is able to pass on information to farmers through a simple system like a cell phone SMS system.
By linking a WRS system to a commodity exchange, receipts can be traded on the commodity exchange to enable the transfer of risk in an organised fashion.
Farmers have the option to build their own warehouses or they can rent space from GMB, which has over 84 depots throughout the country. GMB has an existing infrastructure, grading and fumigation system for grain, which can be used for this purpose.
However, they have not been able to use this infrastructure due to lack of maintenance over several years and they have indicated that they are willing to rent it out to any interested party.
The use of GMB depots is also likely to make it easier to link the warehouses to the Commodity Exchange Market as well as use electronic warehouse receipts that can be acceptable to banks.
GMB has been mooting the establishment of a warehouse receipt system for quite a while now, but this has taken time to materialise.
A previous commodity exchange, namely the Zimbabwe Agricultural Commodity Exchange (ZIMACE), was established in March 1994 as an initiative of Commercial Farmers Union and Edwards and Co. (now Imara Stockbrokers).
It provided a low cost, secure market place for producers, in response to the liberalisation of the economy under Economic Structural Adjustment Programme, but ceased operations when government re-regulated the marketing of maize and wheat in 2001 following the gazetting of Statutory Instrument 235A on 16 July 2001, which gave GMB back its monopoly as the sole buyer of maize and wheat grain.
The establishment of a warehouse receipt system and a complimentary commodity exchange will go a long way in resolving some of the marketing challenges that have prevailed locally.
Whereas government has always said GMB is a buyer of last resort, the fact that GMB offers the highest price locally and combined with the fact that private buyers offer ridiculously low prices, makes GMB a preferred buyer by local farmers.
However, GMB has tended to pay farmers late as they have to wait for money from Treasury.
With a functioning warehouse receipt system, GMB becomes a buyer, just like any other local buyer. At the same time farmers can still deposit their grain into the warehouse system run by either GMB or any other operator.
Last year, we had a case of farmers from Matabeleland who demanded that GMB returns their maize after a year because they had not been paid and were now suffering from the effects of a drought.
Under the warehouse receipt system, as long as GMB has not yet paid for the grain, the farmers can still present their warehouse receipt and withdraw their grain or trade their receipt to another trader.
This will therefore increase the bargaining powers of local farmers, since there would be many competing traders. GMB would not be able to claim ownership of the grain until they have actually paid for it.
The presence of storage infrastructure (particularly the GMB silos) in the country is good justification for the establishment of a warehouse receipt system and a complimentary commodity exchange; so is the presence of brokers, who have previous experience in running ZIMACE.
The WRS will benefit both farmers and traders in the sense that it will provide a mechanism to clear local markets before imports are allowed, which have been problematic over the past few years as well as price discovery.
Local millers have always tended to prefer importing maize, arguing that GMB’s floor price is too high. With the commodity exchange, the right price will be set by the trading system.
There are, however, challenges that come with re-introducing the commodity exchange, such as the task of mobilising and educating, particularly the spatially dispersed communal farmers with membership spread over four farmer unions.
In 2010, government acknowledged that it wanted to re-establish the commodity exchange, but some bickering by ministries controlled by ministers from different political parties, under the Government of National Unity, meant the idea was never carried to fruition.
The Ministry of Industry and Commerce brought together staff from the farmer unions, banks, ministries of Agriculture, Justice and Legal Affairs as well as the Ministry of Finance and Economic Planning, who worked tirelessly to put together the necessary framework for the re-establishment of the commodity exchange.
However, the Ministry of Agriculture decided to withdraw its staff at the last minute when the exchange was being launched. Now that government is made up of ministers from one party, maybe it can now be safely re-established without any tug of war.
Before experiencing the current economic challenges, Zimbabwe was the bread basket of the Southern African Development Community (SADC) region as the country was renowned for its quality cotton, tobacco and cereals that met international quality standards.
That potential is not all gone yet, because it only needs to be reactivated. That is possible with the warehouse receipt system, which will grade and fumigate the local grain.
We have had incidents before where maize imported from Zambia brought the weevil, larger grain borer with it, thereby threatening local seed.
There is still great optimism that Zimbabwe will weather the storm and succeed in getting out of the current slump, and that it will benefit significantly from exporting into the expanded Common Market for Eastern and Southern Africa Customs Union, SADC and the East African Community regional markets where, currently there are huge grain deficits.
There is still scope for getting the local grain market into order, through a well-organised, well-functioning and efficient domestic market. A warehouse receipt system and a complimentary commodity exchange have the potential to do just that and revolutionise and modernise Zimbabwe’s agriculture thereby making easy its integration into the regional and global markets.
Most importantly, it would act as the panacea to the issue of collateral security that local farmers continue to face as they would use their warehouse receipts as collateral security when seeking to borrow from local banks.

Peter Gambara is n agricultural economist/consultant based in Harare.