News Column

Is GMB Still Relevant?

June 18, 2014

The Ministry of Agriculture's second crop assessment report projected that the country is likely to harvest more than 1,6 million tonnes of maize this year.

However, the excitement was quickly dampened by the fact that the Grain Marketing Board currently does not have the funds to pay farmers for the new crop and has also not paid some of the farmers that delivered their maize in the previous season.

This recent development has prompted Agriculture Deputy Minister, Paddy Zhanda to encourage farmers to sell their produce to private buyers who unfortunately are offering lower prices of between $280 and $310 per tonne, against the Government gazetted producer price of $390 per tonne.

Compared to tobacco which has an efficient and functional marketing system, it is clear that the maize marketing system in the country is a mess, with the ultimate victim of this chaos at the end of the day, being the farmer.

GMB was founded in 1931 as the Maize Control Board, in response to the world depression which seriously undermined the financial viability of the maize industry.

However, GMB as we know it today only came about in 1950 when the then maize Control Act was repealed and replaced by the Grain Marketing Act which eventually allowed the Government to set prices for most cereal crops, effectively providing a guaranteed market for farmers.

The creation of agricultural parastatals such as GMB, Dairy Marketing Board and Cotton Marketing Board were meant to promote particular national or sectional interests, and were not required to make profits but merely to provide a public service in order to "facilitate and earn profits for other sectors of the economy" (Mlambo, 1996).

Furthermore, these parastatals made possible the establishment of an agrarian middle class that was at that time, the envy of its counterparts all over the world. After independence, the new Government set out a system to redress colonial imbalances, through further expanding GMB's coverage to encompass small holder farmers in communal areas, with their main objective being that every maize farmer should be within a 45 kilometre radius of a GMB depot.

This expansion, of course, came at a huge cost and as the costs of subsidising farmers became dearer, the Government in 90s decided to commercialize all marketing boards, a move which was expected to ease Government's budgetary pressures, but in reality meant that farmers were going to brace themselves for tougher times.

In the absence of adequate central Government support, the now larger GMB, despite being a monopoly was faced with serious financial, logistical, and planning challenges.

Public enterprise reforms in Zimbabwe as envisioned in the Economic Structural Adjustment Programme sought to improve operational viability in the public enterprise sector through a multitude of measures ranging from operational, organisational, and managerial restructuring.

In addition, the process also entailed the relaxing of Government direct controls on the operations of public enterprises, thus giving more autonomy to parastatal boards and management in micro decision making such as price setting, investment, hiring and firing.

This in essence meant exposing state companies to competitive commercial discipline. On paper, these new policies looked foolproof, but in reality as acknowledged by the Zimbabwe Programme for Economic and Social Transformation, the overall performance of major public enterprises deteriorated significantly during the reform period.

Losses incurred amounted to Z$2 billion or 3,3 percent of GDP in the 1993/94 fiscal year and by the 1994/95 fiscal year, these losses had risen to Z$4,18 billion partly because the Government continued to borrow extensively from the domestic market to finance its deficit and because most of the public enterprises continued with "management inefficiency" and "poor restructuring" practices.

Furthermore, it also became prohibitively expensive to borrow during this era, as commercial bank rates had risen sharply from 13 percent to above 33 percent at the beginning of 1995.

By 1996, combined losses of public enterprises in the 1995/96 fiscal year amounted to $6,5 billion and in addition, most public enterprises failed to honour their loans guaranteed by the state, resulting in an additional burden on the fiscus of about Z$2 billion over the same period.

According to our research, there are two main arguments regarding the relevance of the GMB. Firstly what we will call the Government backed marketing system model which is being spearheaded by David Chiweza in his book "Out of the Rabble", while the second argument supports the establishment of a private sector run commodity exchange which operates based on market forces of demand and supply.

The Government backed marketing system model argument which was spearheaded by David Chiweza, is based on his research on the rise of China as a global economic superpower, and primarily looks at the role played by the five factors of production especially markets, which he termed the fifth factor of production.

Chiweza argued that the economic reforms in the 1990s actually disassembled the vibrant structure of the economy, rendering it dysfunctional as the country's primary, secondary, manufacturing and commerce systems were left derailed.

He argued that during the first decade after independence, the Zimbabwean economy operated in a Chinese style closed economy which nurtured and protected the then fragile economy, allowing it to expand its productive sectors and fully exploit its factors of production.

In his opinion, the liberalisation of the Zimbabwean economy during the 1990s was not a good idea, because the country was not yet strong enough to compete resulting in the world's best products entering into the country's markets and destroying its industrial and creative base in the process.

Chiweza emphasises the importance market systems that are supported by the Government, highlighting the need for a functional agricultural marketing system that is able to provide a reliable, consistent, and efficient market for farmers, as was case with GMB prior to 1992.

A guaranteed market for a farmer means that they can plan their production accordingly and enables financiers to structure different funding products for farmers around the marketing system. This is probably the main reason why farmers are currently switching to cash crops such as tobacco, because they have a reliable marketing system.

The Bankers Association of Zimbabwe also recently highlighted this constraint, stating that, banks were finding it very difficult to fund farmers engaged in the production of food crops that did not have a reliable market, as is currently the case with maize.

Against this background, the argument for the re-establishment and recapitalisation of marketing boards becomes very compelling, as they provide a guaranteed market for farmers and also a guaranteed source of raw materials for industry.

However, although this argument is valid in all respects, restoring the likes of the Grain Marketing Board to their past glory will be a very expensive exercise for the currently cash strapped Government. Furthermore, there would also be a serious need to restructure the parastatal's business models to make them more efficient and self-sustaining, so as to reduce their burden on the fiscus once they are recapitalised.

The governance structures at such parastatals would also have to be strengthened to make them more accountable and also to reduce the level of corruption which is a cancer that is now synonymous with parastatals.

The commodity exchange argument is premised on the fact that since the 1990s economic reforms the idea of setting up a commodity has always been a topical issue as the Government sought to develop a new sustainable agricultural marketing system.

In 1992, at an Agricultural Sector Policy and Pricing Conference it was decided that a commodity exchange marketing system be implemented on an experimental basis as an alternative market for decontrolled commodities.

This decision gave birth to the Zimbabwe Agriculture Commodity Exchange which effectively started operating in March 1994 through a private sector joint venture between the Commercial Farmer's Union and Edwards and Company, a local firm of stockbrokers.

At its peak ZIMACE handled commodities worth Z$1,4 billion in the 1999/2000 marketing year, which was almost double the Z$717 million recorded in prior year. ZIMACE, however, ceased in 2001 after Government felt it was interfering with the operations of the Grain Marketing Board, which by statute was the sole body that was supposed to deal in agricultural commodities.

An agricultural commodity exchange such as ZIMACE can benefit smallholders who are now the dominant farmers through, providing farmers with a transparent pricing system based on supply and demand. The system also enables farmers to plan their production based on market price trends and the commodity exchange also provides prompt payments to farmers.

Forward contracting is also available for crops like wheat, maize and soya beans and farmers can get part payment before delivery. The system also provides access to regional and international prices, giving opportunities of higher prices to farmers.

However, the system also has drawbacks such as, trading costs in the form of broker's fees that farmers would have to incur in order to sell their produce. Minimum tonnages may also exclude certain smallholder farmers therefore they may have to form clubs to pool their produce.

Transport logistics to the market is also another problem smallholder farmers in remote areas may face. In the absence of agreed floor prices for commodities traded on the exchange, farmers will in certain cases be forced to accept uneconomical prices for their produce.

Another challenge that smallholder farmers face is to do with packaging and grading, resulting in most of their produce obtaining lower grade and thereby fetching lower prices on the market. In addition, some unscrupulous brokers may also take advantage of farmers who may be unaware of certain technical issues to do with the commodities exchange.

Applying these two compelling schools of thought to dollarised Zimbabwe presents a lot of serious challenges for Government. On one hand, recapitalisation of the country's marketing boards such as GMB would be very expensive and what will be even more challenging for Government would be to come up with a new functional model for the parastatal that will ensure they remain viable and are not going to put undue budgetary pressure on the fiscus going forward.

Furthermore, because the country is now dollarised, Government no longer has the luxury of borrowing excessively from the domestic market, as was the case during the 1990s, therefore whatever capital is raised to recapitalise the parastatals, must be used sparingly and wisely.

However, the model does provide a guaranteed market for smallholder farmer, and therefore Government can benefit through taxing the rising disposable incomes of smallholder farmers who will be selling their produce through GMB, and also from the industries that will become more profitable from the affordable raw materials that would have been availed by the revamped GMB.

On the other hand, the establishment of a commodities exchange as the dominant means of marketing agricultural produce in the country also has its shortfalls with the major problem being increased price volatility as a result of commodity prices being determined by market forces.

Therefore in such case Government would have to intervene at a predetermined floor price to cushion smallholder farmers in times of weak prices.

Putting the marketing of crucial agricultural commodities in the hands of the private sector would also be a concern for Government as speculative activities, as is the case in all markets, may threaten the country's food security situation which is unacceptable for any Government.

Therefore if ever the country was to consider setting up commodity exchange, the Government through the GMB would also have to be a key player in this market, so as to protect the interests of farmers as a buyer of last resort, among other roles.

A commodity exchange would ease pressure on the Government from a budgetary perspective as it would only have to intervene on very limited occasions. Furthermore it also provides a guaranteed market for farmers without Government being too directly involved in the buying and selling of agricultural commodities.

Overall based on our analysis it is clear that the Grain Marketing Board may still have a role to play in the marketing of agricultural commodities in both models that we have reviewed. The decision on which model Government must adopt for the marketing of agricultural commodities will probably be a function of which of the two models gels well with ZimAsset.

In our opinion, in light of Government's current fiscal constraints, the adoption of a commodities exchange with Government as a key player would be the best option at this juncture, as the full recapitalisation of GMB or any other marketing board would be too expensive.

However, as highlighted by Chiweza, the country still needs functional market systems to restore its productive capacity, therefore regardless of which model Government adopts, it is the functionality of the model that matters the most.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: AllAfrica


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters