When the tomato crop in Zimbabwe reached its peak season in August 2021, Ednah Muzawazi (45), a small-holder farmer in the Mutasa district in the country’s east, was forced to sell her produce for a pittance to recoup her investment after companies that had promised to buy her tomatoes failed to show up.
Many around this area resorted to smuggling tomatoes into neighboring Mozambique which usually depends on Zimbabwe for its winter crop requirement.
However, this was a difficult route to consider, as it entailed incurring extra distribution costs, including bribing border patrol personnel for smooth passage yet there were no guarantees that the crop would sell at a fair price once it got to the other side.
“I struggled to meet my production costs from the sale of my tomatoes but what options did I have? Farming is my only hope for survival so I just have to be smarter with my timing this time around,” Muzawazi told 263Chat.
At the time, she says the price for a bucket of tomatoes had dropped so low that it was trading at an average of US$ 3 against highs of between US$ 5 and US$6 during off-season.
“Many of my tomatoes rotted in the fields, making it difficult to generate sales to restart production,” added Muzawazi.
She says farming perishable crops is a high risk operation which can however be very lucrative only if the market conditions are right.
Lack of dependable markets and financing are a perennial headache for most small holder farmers in the country as the cost of borrowing has soared above 80 percent. The commercial banks are hesitant to lend farmers.
On the other hand, agricultural markets in Zimbabwe are largely centralized and many a times, a commodity can flood the market in a particular province leading to drastic decline in prices yet in other parts of the country the same commodity will be high on demand.
Fortunately, the country’s capital markets are gradually constructing footpaths through innovative solutions that facilitate capital raisings and guaranteed markets for producers of commodities, mainly in productive sectors such as agriculture.
This year, alternative trading platform, Finsec has brought a new innovation, the Derivatives Market which will guarantee farmers of ready markets and pre-financing of farmers by off takers.
Derivatives are financial markets whose value is derived from the value of underlying assets such as indices, currencies and commodities. Finsec will however limit its scope to just two instruments of the derivatives market, the Options and Futures contracts.
An Option Contract is a derivative contract which gives the buyer (the owner or holder of the option) the right, but not the obligation, to buy or sell an underlying. For owning this right, the option holder pays a price (called ‘option premium’) to the seller of this right who may use that money for buying inputs.
Then a futures contract is an agreement to buy or sell a specific quantity of a commodity (which currently is probably in the field) at a specified price on a particular date in the future.
For farmers such as Muzawazi, the derivatives market minimizes risks by offering assurances from off takers.
“What we are doing is we are starting off with the financial instrument to get the market to be well acquainted with the concept,” said Finsec chief executive officer, Collen Tapfumanei.
“A farmer who is forward thinking then comes into the derivatives market through two options. If they are a small scale farmer, Options Contracts are for them because the person who wants to come in, such as the processors and other buyers, they have a small fee that they can outlay to the farmer to get commitment that the farmer will sell to them. The farmer benefits by having that initial amount which they can use for their inputs, then they commit to deliver once the crop is ripe,”
“Then for the Futures contract, when I am a large scale commercial farmer, I have the means, I put in a deposit and say I don’t want to be bound to one processor. I want to just place on the exchange that I’m entering a Futures contract to supply so many tonnes of grain or tomatoes on such a date and I don’t care who is on the other side. When that day comes I am going to supply and for me to convince the market I’m going to put in a margin,” said Tapfumaneyi.
Derivatives markets are a success story in many agrarian economies world over in countries such as the US, South Africa and India.
The South African Futures Exchange (Safex) is the futures exchange subsidiary of Johannesburg Stock Exchange (JSE). It consists of two divisions; a financial markets division for trading of equity derivatives and an agricultural markets division (AMD) for trading of agricultural derivatives.
Still on the capital markets, the Zimbabwe Stock Exchange (ZSE) also recently set up an agriculture index on its main dashboard which tracks the performance of companies in the agricultural sector following the Global Industry Classification Standard (GICS) adoption in the classification of listed companies.
The Agriculture Index provided the market with better performance apparatus, and will assist in choosing sector-based investing strategies.
The ZSE Agriculture Index gained a marginal 0.39 percent in its first month in April.
“This is a good initiative that acts as a barometer of how the agriculture sector is performing on the ZSE. Right now most of our stocks in the agriculture sector such as Tanganda, Innscor, BAT and so forth are doing well and this means investors can easily track this and pour more money into these companies and its good for our agriculture,” said financial analyst, Victor Bhoroma weighed in.
Last year, the country launched a commodities market better known as the Zimbabwe Mercantile Exchange (ZMX) that operates through a warehousing system which safely stores the farmers’ commodities, then trades the warehouse receipts on an automated system and establish market driven prices.
With the ZMX operating under a warehousing system, analysts say this will help curb the perennial problem of post-harvest losses synonymous with most small scale farmers.
According to the University of Zimbabwe’s Department of Soil Science and Agricultural Engineering, Zimbabwe is experiencing an average post-harvest maize loss of between 18, 5 percent and 30 percent.
With such new innovations taking place, these are exciting times for the country’s agriculture sector which has for the greater part since the agrarian reform at the turn of the millennium has under-performed.