Wednesday 4th May, 2016
PANGAEA SECURITIES AND MUSIKA PARTNER TO DEVELOP INNOVATIVE FINANCING MECHANISM TO INCREASE LIQUIDITY IN THE ZAMBIAN AGRICULTURAL SECTOR
With the vast majority of Zambian crops being harvested by smallholder and commercial farmers within the space of a few months a year, it is very important that there is enough money in the agricultural sector during this time to allow the effective participation of a large number of private buyers, which in turn leads to competition in the market and fairer prices for farmers, traders and processors alike.
In the Zambian market, accessing such high levels of cash from traditional financial institutions can be a challenge and the high cost of borrowing is passed on to market players, adding to the cost of Zambian commodities in both the domestic and regional markets.
In a bid to mitigate these challenges and facilitate access by agricultural market players to high levels of liquidity at and beyond harvest time, Pangaea Securities, a local financial services company, has partnered with Musika, a Zambian non-profit company supporting private investment in the agricultural market, to develop a ‘Grain Fund’. With a planned launch date of late 2016, the Grain Fund will be a Special Purpose Vehicle (SPV) and is anticipated to be listed on the Lusaka Stock Exchange (LuSE) with the intention of attracting local and international investors, including the Zambian pension and insurance funds, to participate in the Zambian agricultural markets. Currently, with their strict investment rules that require robust regulatory oversight and security, there are very few opportunities for these institutions to invest their high levels of kwacha liquidity into agriculture, but the Grain Fund, with the layers of security provided by the structures of LuSE and the regulatory oversight of the Securities and Exchange Commission will be able to offer such an opportunity. Preliminary discussions are underway with the LuSE and SEC regarding the relevant approvals.
Players in the agricultural commodities trading sector will be able to access finance through the Grain Fund, using ZAMACE warehouse receipts as security against their borrowing. A warehouse receipt is a document of title issued by a storage operator certified by ZAMACE for grain of specific quality and quantity deposited in the certified warehouse that can be used as collateral for financing.
If commodity buyers are able to access higher levels of lower cost finance through the Fund, they will be incentivised to utilise the warehouse receipting system in order to create the securities required to access the Fund. This in turn will stimulate the development of the certified storage industry (and increase competition in storage costs), and encourage wider utilisation of the ZAMACE agricultural commodities exchange and its spot and futures trading opportunities. These structured market 'reforms' will increase price discovery, transparency and security of trade for all market participants.
An innovation that benefits the Zambian grain market inevitably impacts the smallholder sector since it is the primary producer of maize, the major traded commodity in Zambia, and large volumes of other crops are also traded out of the smallholder sector. Lower cost of finance and greater access to kwacha liquidity increases private participation in the maize market and the greater the number of buyers active in this market, the greater opportunities there are for buoyant farm-gate prices, and competition between buyers based not only on price but also other 'market services' such as aggregation, transport, immediate payment and extension and price information outreach.
As well as delivering benefits to the agricultural market, the Fund will also deepen and diversify Zambia’s capital markets by allowing institutional investors an opportunity to participate in the agricultural sector. It will also encourage more players (buyers and issuers) to begin to participate in the capital markets which develops increased confidence and allows for a free flow of funds to move throughout the economy which has a large impact on economic growth and job creation.
Notes for Editors
About Pangaea Securities Ltd
As a member of the LuSE and regulated by the Securities and Exchange Commission, Pangaea is a leading full-service financial advisor and stockbroker in Zambia. Pangaea specialises in advising on both domestic and complex cross-border transactions and in completing transactions for its clients with legal global or regional counterparties. The firm specialises in various sectors, namely (i) agri-business; (ii) financial services; (iii) FMCG; (iv) Energy; and (v) Real Estate; and (vi) Telecoms.
Contact: Derek Haake - Head of Debt Capital Markets
+260 (211) 220 707
Musika is a Zambian non-profit company supported by the Swedish Embassy in Zambia and the UK Government’s DFID which stimulates private investment in the smallholder market.
Musika works across the country and in all aspects of the agricultural sector, providing technical advisory services and business support to agribusinesses that that are committed to engaging smallholder farmers in strong and mutually beneficial commercial relationships as their clients, suppliers and consumers.
Musika’s approach to reducing poverty and creating wealth in rural Zambia involves stimulating business relationships between the corporate sector and smallholder farmers that provide not just market opportunities but also the knowledge and confidence for farmers to invest in and grow their businesses.
Musika is working with over 60 clients which, in turn, work through over 2,000 small business intermediaries delivering improved market services to over 320,000 farmers across the country.
Contact: Pamela Hamasaka – Corporate Affairs Manager
+260 211 251371 / 0977475323
About ZAMACE Ltd
ZAMACE is a private limited liability company incorporated in 2007 which operates Zambia’s sole commodities exchange. ZAMACE is also the Authorised Agency under the Agricultural Credits Act 35 of 2010, effectively assigning it statutory powers to create, manage and enforce a warehouse receipts system. Following the passage of this enabling legislation, ZAMACE has now positioned itself to offer multiple, inter-related services to the Zambian agricultural market:
- A warehouse certification process backed by an electronic warehouse receipts system. Currently 300,000t of storage space has been certified in seven locations across the country
- A spot trading platform for the sale and purchase of commodities held under receipt to ensure guaranteed delivery and settlement which will be functioning in time for the agricultural marketing season of 2016.
- An agricultural futures market for Zambian commodities in association with the Johannesburg Stock Exchange, underpinned by warehouse receipts, providing the agricultural market with price risk mitigation and future price discovery mechanisms
- A set of industry-recognised grades and standards for the main traded commodities
- A market information platform that provides the local and regional market with accurate, independent and verifiable information on commodity stock levels, imports, exports, production forecasts, etc. that will allow market players to make informed decisions on pricing, procurement, etc. and increase the transparency in the market that will benefit all players.
Contact: Jacob Mwale – Executive Director
+260 977 988 897