Improving Agricultural Commodity Markets: UNCTAD's Actions

1. UNCTAD’s Actions to Improve the Functioning of Agricultural Commodity Markets - All ACP Agricultural Commodities Programme UNCTAD, Special Unit on Commodities UNCTAD Virtual Institute Presentation Geneva, October 2011

2. Structure of the Presentation I. Overview of the AAACP II. UNCTAD’s thematic working areas under the AAACP and main achievements • Market Information Service • Agricultural Commodity Finance • Commodity Exchanges • Market Access: Sustainability Claims Portal III. Post-AAACP: The way forward

3. Overview of the AAACP: General Information • Funding institution: European Union • Budget: 45 million euros (15 million earmarked for cotton) • Term: Five years (Sep. 2007 – Dec. 2011) • Overall objective: To improve incomes and livelihoods for ACP producers of traditional and other agricultural commodities, and to reduce income vulnerability at both producer and macro levels. • Implementing organizations: UNCTAD, FAO, ITC, World Bank, CFC

4. Overview of the AAACP: Innovative Approaches • Utilize the expertise of five international organizations already active in the area of agricultural commodity development and promote collaboration among IOs to jointly implement the AAACP; • A participatory process involving main commodity value chain stakeholders to develop commodity strategies; • A commodity value chain approach for sectoral diagnosis and strategy development.

5. UNCTAD’s Thematic Working Areas under the AAACP 1. Market Information Service • Infocomm: http://www.unctad.info/infocomm • Infoshare : http://infoshare.unctad.org 2. Agricultural Commodity Finance (e.g. warehouse receipt system) 3. Commodity Exchanges 4. Market Access: Sustainability Claims Portal • http://www.unctad.org/scp

6. Market Information Service

7. Role of Market Information Service • Reduce asymmetry in access to key commodity information and encourage more efficient arbitrage; • Enable farmers to negotiate better prices, and contribute to improve the fairness of market price formation and equitable distribution of trade benefits; • Enable policy makers to judge the performance of agricultural commodity markets, detect any marketing inefficiencies along the supply-chain and to make better policy decisions; • Enhance food security by stimulating intra-regional trade and response to dramatic food shortages.

8. Market Information Service: INFOCOMMhttp://www.unctad.info/infocomm • INFOCOMM is a multilingual electronic portal on information and factors influencing commodity markets. It is organized under 10 headings ranging from product characteristics and crop value to export markets and prices. It also includes links to major product organizations, international research groups and universities. • INFOCOMM aims to provide accessible, reliable and updated commodity market information, in particular in response to the scarcity of commodity information in low-income commodity producing countries.

9. Market Information Service: INFOSHAREhttp://infoshare.unctad.org • Infoshare is a tailor-made information database conceived to adapt to the national commodity supply chains and to the local telecommunications set-up. It enables partners to collect, analyse and disseminate information on prices, costs, quantities sold, quality standards, and so on.

10. Main Achievements under AAACP - INFOCOMM • Officially launched in August 2011; • Portal was transferred to a new web platform and upgraded with a new design; • Portal is adapted for a wider audience, especially producers and policy makers in ACP countries; • A special focus is given to the agricultural commodities which are of great interest of ACP countries:10 additional commodity profiles important for the economic development of AAACP countries were added to INFOCOMM.

11. Main Achievements under AAACP - INFOSHARE • Pilot project for the cocoa and coffee sectors launched in Cameroon in collaboration with the National Cocoa and Coffee Board (NCCB); • Developed INFOSHARE system in other countries and regions (Caribbean and Pacific) by drawing lessons learned in the implementation of INFOSHARE in Cameroon; • Strengthened the capacities of beneficiaries of INFOSHARE to understand, analyze and use commodity market information in order to improve the efficiency of their operations.

12. Agricultural Commodity Finance

13. Agricultural Commodity Finance: Rationale Impact of the liberalization of agricultural sectors 1980s and 1990s: • Withdrawal of government from many agricultural marketing functions and drastic reduction of the financial resources; • Agricultural value chain operators, in particular les small producers and SMEs are facing many challenges in access to agricultural finance; Emerging trends in International Trade since 1990s: • With increasing competition among sellers, there is trend toward unsecured transactions based on open account terms; • The globalization of supply chains and the integration of SMEs and small producers into these chains provide new opportunities for the development of alternative financing tools.

14. Transaction based Looking to the flow of the goods Focus on borrower’s perfomance capacity Possible lower financing costs even with high country risk Innovative loan security (commodities or future proceeds) Balance-sheet based Looking to the flow of funds Focus on borrower’s creditworthiness Financing costs closely linked with country risk Traditional loan security (savings, physical assets, third party guarantee) Structured Finance vs. Traditional Finance

15. UNCTAD’s Working Approach on Agricultural Commodity Finance under the AAACP

16. Main Achievements under AAACP Supported the development of structured commodity financing tools to improve small producers and SMEs finance in ACP countries: • Warehouse receipt financing and inventory credit (or warrantage); • Factoring/receivable discounting

17. A warehouse receipts financing scheme(public warehouse) 4. Provide credit 3.Lodges receipts with bank Producer/ PO Bank 1. Deposits goods Warehouse Guarantee, insurance 2.Issues receipts Guarantee agencies 7. Trader delivers receipt; warehouse makes delivery Approves Warehouse Government regulator Trader 6. Reimburses credit; in return, bank transfers receipts 5.Signs sales contract

18. Benefits of Warehouse Receipt Systems • Availability of eligible collateral; • Possibility of access to credit with lower interest rates; • Lack of credit track records for small farmers is no longer a major constraint; • Reduce distress sales and potentially contribute to smoothing seasonal price movements; • WRS provides a mechanism for delivery against exchange contracts.

19. Warrantage scheme Magasin of PO 1.Deposit goods 2.Issue Receipts 4.Provides credits Producer or small group Microfinance Institution 8.Transfers receipt & takes goods in the presence of MFI 3.Lodge receipts with MFI 5.Negotiate sales contract in consultation with MFI 7. MFI transfers receipts 6. Payment to the account of PO Trader

20. Main Achievements under AAACP-WRS/Warrantage • Best practice sharing and capacity building on WRS/warrantage: • Review of Warehouse Receipt System and Inventory Credit Initiatives in Eastern & Southern Africa, and a sub-regional capacity building workshop in 2009 in Lusaka; • Review of Experiences in Warehouse Receipt Systems and Warrantage for the Financing of Agriculture in West Africa, and a sub-regional capacity building workshop in 2010 in Accra. 2. Developing WRS/warrantage for a specific agricultural commodity in a country: • Gum Arabic in Mali • Coffee & cocoa in Cameroon.

21. Factoring/Receivable Discounting US definition on factoring " a continuing arrangement between a factoring concern and the seller of goods or services on open account, pursuant to which the factor performs the following services with respect to the accounts receivable…" • Purchases all accounts receivable for immediate cash; • Maintains the ledgers and performs other book-keeping duties; • Collects the accounts receivable; • Assumes losses which may arise from the customer’s non-payment.

22. Domestic factoring flowchart Seller Buyer ① ② ④ ⑤ ⑦⑥ Factor • Seller submits the request to the Factor. • Factor considers Buyer’s creditworthiness and approves financing limit. Factor and Seller sign factoring agreement. • Seller delivers the goods to Buyer and issues the invoices. • Seller assigns the invoices to Factor and informs Factor of any special payment arrangements. • Factor finances the value of the invoices at the previously agreed rate. • Factor collects receivables at the end of the credit period. • Factor remits to Seller the balance in excess of the finance cost. ③ ③ ③ ③ ③ ③ ③ ③ ③ ③ ③ ③ ③

23. Key points on Factoring • Short-term, working capital financing • Serve SMEs with large number of transactions • Finances only post-invoice contractual obligations • Factor needs confidence that Buyer accepts goods • There needs to be absence of continuing obligations by Seller after delivery of goods

24. Main Achievements under AAACP - Factoring Caribbean Regional Capacity Building Workshop on Factoring/Receivable Discounting in November 2009 in Barbados Main findings of the workshop: • Factoring/receivable discounting can be potentially a financing instrument to improve agribusiness finance in the Caribbean. • Main challenges to be addressed: the capacity of local financial institution to design and develop the appropriate product; market conditions; the education of potential clients (producers and SMEs), the establishment of credit information of buyers. • Concerted efforts are required from development banks, farmers and SMEs, policy-makers, regional bank and institution and development partners.

25. Commodity Exchanges

26. Commodity Exchanges: Definition “A market in which multiple buyers and sellers trade commodities, and/or commodity -linked contracts on the basis of rules and procedures laid down by the exchange.” This includes: Spot trade for immediate delivery of the commodity, forward contracts, warehouse receipts trading, commodity-based futures and options contracts, and trade facilitation services.

27. Role of Commodity Exchanges in developing countries • Price discovery; • Price risk management; • Investment venue; • Facilitation of physical trade; • Facilitation of financing; • Market development.

28. Some important points • Exchanges are versatile instruments, capable of upgrading commodity sector performance in a range of situations and addressing emerging challenges as they arise. • The extent to which the exchange can enhance the development of underlying commodity sectors in large part depend on the services offered and the strategic priorities pursued by the exchange. • The exchange is not a panacea, and depends on an appropriate regulatory environment and other complimentary policies and mechanisms. • In general, exchange services are relevant for smallholders, in particular in the areas of price information and physical market services.

29. Requisites for the creation of Commodity Exchanges in ACP countries • Commodity traded must be easy to compare, with grades widely accepted by commercial parties; • Local market prices must be sufficiently volatile to create large price movements; • Need the building blocks of trade facilitation - good roads, transport companies, weigh bridges, warehousing, collateral management services, communications; • Minimal government intervention on pricing; • Strong commercial interest on all sides of the trade - producers, consumers, traders, banks, & speculators; • Large numbers of physical buyers & sellers and high volumes of physical trade; • Physical buyers & sellers are doing enough business with each other that they have high levels of credit risk; • Potential users of the exchange are using the exchange price as the reference for physical trading.

30. Main Achievements under AAACP - ESA The Establishment of the African Commodity Exchange Forum (ACEF) in February 2010 in Addis Ababa, as the outcome of an ESA regional capacity building workshop on “Improving the Functioning of Commodity Markets in Eastern and Southern Africa through Warehouse Receipt Systems and Market-based Interventions” held in 2009 in Lusaka. Overall objective of the ACEF: • To foster the establishment and growth of commodity exchanges in Africa. Specific objectives of the ACEF: • Promote mutual learning and knowledge sharing; • Enhance capacity building; • Engage in policy advocacy.

31. Main Achievements under AAACP - Caribbean • Assisted in the upgrade of the existing commodity exchange in the Dominican Republic (Bolsagro) from a manual to an electronic platform; • Promoted greater participation by farmers in Bolsagro by hosting a multi-stakeholder workshop; • Raised awareness in the Caribbean regarding commodity exchanges as tools to increase marketing efficiency; • Established a road map for the creation of electronic linkages between commodity exchanges in the region.

32. Sustainability Claims Portal

33. What are Sustainability Claims ? Sustainability Claims are defined as distinctive symbols or “labels” borne by products which authenticate that the product’s life cycle (from the production phase to the consumer), complies with sustainable agricultural practices and socially responsible principles; Sustainability Claims include; • organic standards; • fair-trade standards; • environmental/ecological standards; • geographical indications.

34. Sustainability Claims Portal: Definition A web based information tool to: • Enhance accountability, increase transparency on trade in agricultural commodities marketed under sustainability claims/labels; • Define requirements for organic production, fair-trade, environmental and social accountability schemes. It Provides ACP producers and EU consumers with: • a central access point to existing sustainability schemes; • a clear presentation of relevant minimum requirements to small producers and cooperatives which may be different from current sectoral standards; • provide objective and broad advice on sustainability schemes available to ACP producers and the potential benefits and constraints of participating in certification schemes.

35. Main Achievements under AAACP • Developed and launched the online Sustainability Claims Portal with following information uploaded: • Information on sustainability claims; • Certifier requirements; • Contact details for sustainability label providers; • General information on sustainability issues; • Other useful documents for users. 2. The portal is available in English and French. 3. Enhanced awareness on certification standards through capacity-building workshops and portal launches in the Pacific (March 2010), the Caribbean (February 2011) and the West Africa (May 2011).

36. Post-AAACP: The Way Forward (1) • To continue follow-up activities under the four components of UNCTAD’s work MIS:Further promotion of the INFOCOMM at the national level; Support the development of additional national market information systems, based on INFOSHARE technology. Finance:Build on the existing achievements and continue to provide technical assistance for the implementation of follow-up activities. Commodity Exchanges:Continue to support commodity exchanges development in ACP countries through direct technical assistance and advice, and awareness raising. SCP:Improve the portal based on the feedbacks received from capacity building workshops and provide more information specific to the region and by commodity.

37. Post-AAACP: The Way Forward (2) • By drawing the experience gained from the AAACP to further enhance the cooperation and synergies with other four IOs in future activities of UNCTAD; • To enhance the research work on commodity market information, agricultural commodity finance, commodity exchanges and standards and market access, based on the field information obtained through the implementation of the AAACP. • At the request of commodity-dependent developing countries, to provide tailored technical assistance under the four thematic working areas of SUC.

38. For more information on UNCTAD’s work under AAACP:http://www.unctad.info/en/Special-Unit-on-Commodities/Events-and-Meetings/All-EU-ACP-For Technical Cooperation:Mr. Samuel Gayi, Head, Special Unit on Commoditiessamuel.gayi@unctad.org

39. Thank you www.unctad.org