“There are some advantages to a commodity exchange to counteract falling prices in the region, but I think it won’t absorb the problems of fluctuating commodity prices internationally. What I think we’ll actually see in the future, particularly in the agricultural sector, is a significant upturn in demand from the Gulf States,” JLT Specialty head of credit and political risk analysis Elizabeth Stephens told CNBC Africa on Thursday.
“We’re already seeing a number of states like Saudi Arabia and the UAE looking to invest and, in some cases, buy millions of hectares of land in East African countries to develop their own agricultural production.”
Establishing a commodities exchange has been seen as a means of reducing market inadequacies as well as bringing down transaction costs. Currently, soft commodities in East Africa are under pressure due to an extended rainy period, which is hurting tea and coffee crops.
“It depends a lot on the commodity but transparency of pricing, where a supplier, producer or certainly a bank has access to price information relevant to a specific commodity, as opposed to using a derived price from a European or North American market,” said Jeffrey Midzuk from structured trade and commodities finance at Standard Bank.
“The ability to hedge the product, to sell or purchase forward, gives certain comfort to the banks and traders.”
A commodities exchange however hinges on the extent to which the actual agricultural sector is formalised enough to take advantage of the exchange. Small-scale farmers will have to start playing a more integral role in the formalised framework in the same way large-scale farmers are.
“We’re starting to see an increase in the formalisation of the sector, and also we’re starting to see a trend of products and services being delivered to the rural small scale farmer to bring them into the formal sector,” said Ravinder Sikand, director at Deloitte East Africa.
“An East African exchange in agriculture just opened up in Rwanda , Ethiopia has a fairly substantial one that has been operational for a while.”
Sikand explained that another trend was that of the increase in infrastructure investment, where resources are being spent on ports, roads and rail improvements.
The infrastructural investment is expected to improve access to markets for imports and exports and allow farmers to get their products to the market easier and more efficiently.
“The development of infrastructure is key for the success of East Africa both in soft commodities and in hard commodities. The region has tremendous potential at the moment to develop effective commodities trading across a number of different commodities,” added Stephens.