Price variability and volatility is very high within Africa for most agricultural commodities that are domestically traded
Price variability and volatility is very high within Africa for most agricultural commodities that are domestically traded. Governments are particularly concerned about price volatility of staple food commodities, as they constitute a significant share of the budget of poor rural and urban inhabitants. They have instituted a variety of policies to mitigate this price volatility, such as a variety of price interventions and price controls, border measures, stabilization stocks, etc. In order, however, for any of these policies to work, a necessary prerequisite is an understanding of the functioning of staple food markets. The structure, however, of such markets in sub-Saharan Africa is such that it merits considerable analysis before interventions are envisaged. Similarly price risk management in Africa must take into account the structure of the various markets.
In this context the following points can be made.
First, while price risks are several and large for African smallholders, for most of them they involve a small part of their marketed farm products. Hence, while smallholders maybe willing to pay something for price risk management, it may not be the paramount objective in their overall welfare enhancement strategies. Farmers with larger marketed surpluses are more exposed and hence more interested in price risk management options. As productive surpluses for any commodity with an unstable price develop, demand for price risk management options will increase.
Second, the paramount constraint of smallholders in Africa seems to be a credit and liquidity one. Hence any price risk management system must provide some way of dealing with this constraint.
Third, due to the smallness of operations of most smallholders, a price risk management system will need to be implemented via some type of market intermediary that can “retail” or “transmit” risk management services to smallholders. Such intermediaries could be farmer groups or cooperative, large traders, processors, and other downstream market agents.
Fourth, contracting and Warehouse Receipt Systems seem to be viable ways to start developing price risk management systems in Africa, as they do not deal only with the price risks, but also with the liquidity constraint of farmers. While both institutions are hampered by various institutional weaknesses, they can be promoted by supporting related farmer groups in regions with substantial marketed surpluses of commodities, with large national and possibly regional and international markets.
Fifth, futures and options markets are very sophisticated institutions that may take time to develop in Africa. A more efficient way to promote market development in low income African countries maybe to support the development of organized spot markets first.
Contact:
Alexandros Sarris
University of Athens
Dome 4, Athens 10556
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