How to make Pfumvudza concept work

PFUMVUDZA, the locally conceived farming-based disruptive innovation, has a huge potential in terms of contributing towards economic growth that positively impacts the whole spectrum of low-income to middle-income earners.

The Brett Chulu Column

As a disruptive innovation, Pfumvudza is initially a low-cost solution that enables masses of poor or non-producers to engage in meaningful production. Disruptive innovation can be viewed from a developmental economics perspective. Recent research has shown that disruptive innovations were the primary drivers behind the development of many geographical economic regions, spanning towns and cities.

Disruptive innovations pull in infrastructure into a place in order to support the massive production and consumption spawned by it. This infrastructure pull concept is different from the push model where infrastructure has to be first provided in order to attract investment.

The pull mechanism inherent in disruptive innovations is extremely powerful in that no one knows in advance what sort of infrastructure, production and support networks will be needed.

This article discusses two specific supporting infrastructural developments that are begging to be pulled in by Pfumvudza.It is the warehouse receipting system and commodity exchange.

Warehouse receipting

An agricultural warehouse receipting system is a network of warehouses for the storage and trading of commodities where producers send their harvest of crops that do not perish quickly such as grains and legumes for storage. It is more than a storage facility.

Warehouses under the warehouse receipting system use scientific methods for storage of harvests so that post-harvest losses are minimised.

In Africa, it is estimated that 35% of harvests are lost due to poor handling and storage. The warehouse receipting system is also a financial innovation — farmers receive negotiable warehouse receipts that become a financial instrument that is tradable and can be used as collateral for borrowing from financial institutions.

Currently, warehouse receipting is done electronically with the possibility of a warehouse receipting database being linked to financial institutions, farmers, tax authorities and commodity exchanges. Warehouses are located near the farms. These warehouses can be run by private entities regulated by a state body. This is in line with the thrust of private sector led economic growth.

The Grain Marketing Board can be reorganised to become the regulatory authority for the warehouse receipting system responsible for licensing warehouses. The envisaged increase in grain and oilseed production under Pfumvudza would be best handled by a warehouse receipting system.

Clearing houses will be needed to support warehouse receipting. This is another service sector spawned. This system, evidently, will result in substantial investment that will add to economic growth.

In addition, privately-owned warehouse systems located in rural areas speak to the rural industrialisation goal of the recently launched Agriculture and Food Systems Transformation Strategy (2020-2025). It also ties in with the devolution policy.

More importantly, it will help to disperse benefits of economic growth to the majority of Zimbabwean citizens who happen to live in rural areas. Economic growth can easily be enjoyed by a privileged few but disruptive innovation such as Pfumvudza is a powerful engine to democratise the benefits of economic growth.

Commodity exchange

A commodity exchange needs to be established to work hand-in-glove with the warehouse receipting system. A commodity exchange is an organised market where commodities are sold by licensed members.

The commodity exchange can be privately-owned. Government would need to set up a regulatory authority to oversee the operations of the commodity exchange. The question could be: how will the millions of Pfumvudza farmers participate in the commodity exchange? There are two alternatives.

First, the farmers can form marketing co-operatives that will register as members of the commodity exchange. This will enable farmers to get a seat on the board of the commodity exchange. The alternative is to nominate registered warehouses that are members of the commodity exchange to sell on their behalf.

In Ethiopia, 3,5 million small-scale farmers sell their produce through the Ethiopia Commodity Exchange (ECX). It is possible for Zimbabwe to form a similar commodity exchange. It must be noted that a warehouse receipting system can also function as a market for commodities without a commodity exchange.

For Zimbabwe, both the warehouse receipting system and a commodity exchange are recommended. The introduction can be sequenced, beginning with the establishment of an electronic warehouse receipting system issuing negotiable warehouse receipts.

The electronic warehouse receipting electronically linked to a commodity exchange has several advantages. It allows for a transparent price discovery for farmers’ produce as many sellers and buyers are involved on either side of a trade. A farmer can initiate the sale of produce from a mobile phone.

Farmers can also receive real-time information on prices. Farmers do not have to be forced to sell as they can wait for an opportune time to sell, knowing fully well that their electronic warehouse receipts guarantee they will sell anytime they wish to.

The system also greatly reduces counterparty risk (risk that either buyer or seller will not receive what is due to them) as clearing houses will ensure payment and delivery are done. Settlement is also relatively quick such as T+1 (payment done a day after a trade is done). This greatly improves the liquidity of farmers as opposed to buyers with high bargaining power imposing long payment cycles. The greedy middlemen is also eliminated.

Traceability is another advantage especially for export purposes where strict rules-of-origin are required by blocs such as the EU. Commodities can be electronically tagged and tracked as they move through the warehouse receipting system.

Land bank fit

Government has approved the setting up of a land bank to support mainly the previously disadvantaged small scale farmers and other farmers who find it difficult to access finance from financial institutions due to lack of collateral.

The warehouse receipting system has the potential to make the land bank profitably lend to small-scale farmers. The land bank will lend based on negotiable warehouse receipts.

This financial instrument will reduce the administrative costs for the land bank to deal with potentially tens of thousands or hundreds of thousands of small loans, a challenge faced by the Agricultural Finance Corporation post-Independence.

The negotiable warehouse receipt will be a good quality asset with an almost nil default risk. This means farmers will get loans at very competitive rates. Competition by banks to book this quality asset will further ensure that loans based on the electronic warehouse receipts stay very competitive.

This submission has demonstrated that Pfumvudza should not be myopically seen as an agricultural technique — it is much more than that — it is a developmental economy driver with huge macroeconomic implications.

The warehouse receipting and commodity exchange begging to be pulled in by Pfumvudza are just two examples of the potential pull-in effect of Pfumvudza as a disruptive innovation.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.

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