1.
Private Sector Investment in Market-
Supporting Institutions: The case of the
Agricultural Commodity Exchange in Malawi
Wageningen University, Netherlands
AAEA Meetings, July 27th, 2015
Dr. Domenico Dentoni, Dr. Liesbeth Dries

2.
Commodity Exchanges (CE) in Africa
2
Farmers
Middlemen
Traders/Processors
Manufacturers/Retail
ers/Consumers
Input Suppliers Banks
Commodity Exchange:
1) Vertical coordination;
2) Storage contracts;
3) Financial instruments Governmen
t
In theory,
advantages are:
-More storage
capacity
-Less marketing
risks for farmers
-Less supplying
uncertainty for
traders
More efficient
trade, more food
security
Donors

3.
Commodity Exchanges (CE) in Africa
3
In practice, wide range of
failures (Sitko & Jayne
2012; Jayne et al. 2014):
-Low banks investments
-Small trade volumes
-High quality inconsistency
and contract breaking
-High risks of conflict of
interest members vs traders
-High fixed operational costs
High costs, low benefits
Recently, Malawi case was
mentioned as possible
exception:
-Efficient vertical coordination,
storage and financial services
-Market information &
knowledge programs to support
trade
-Increased benefits from trade

4.
Two broad research questions
4
1. Does the ACE model work? How do ACE market-
supporting institutions lead to market performance?
2.Why does the private sector invest in ACE? (And
why not in other African commodity exchanges?)
ACE market
performance
Private sector
investment in ACE
ACE organization and
services 12
Implications for private investors and farmers
ACE = Agricultural Commodity Exchange in Malawi

5.
Inductive method: case, samples, data
5
DATA
THEORY
Expert interviews for USAID
project “institutional and policy
constraints to innovation in Malawi
commodity markets”
• Grains and legume sectors
Commodity exchange (CE)
history and literature
• What works and
doesn’t in CEs in AfricaInterviews to ACE managers;
Secondary data: ACE business
plan, corporate reports, web
sources
• ACE history and performance
Interviews to private sector
actors investing and participating
in ACE: traders/processors, input
suppliers, banks
• ACE governance and
incentives
Market-supporting
Institutions (Grief 2008;
McMillan 2008)
• “Rules of the game”
that make markets
more efficient
Institutional Entrepreneurship
• “Mobilizing resources for
institutional change
(Pacheco et al. 2010)
• Data-theory iteration
• Purposive sample selection
• Longitudinal study
(Eisenhardt 1989; Suddaby 2006;
Yin 2014).

6.
0
10
20
30
40
50
60
70
80
2006 2007 2008 2009 2010 2011 2012 2013 2014
Findings (I): ACE market-support institutions
6
Overall ‘000 MT of
maize and legumes
(soybean and pigeon
pea) traded
2010: ACE introduces
“Bid Volume Only”
mechanism: the buyer
sets the volume, the
sellers compete on price
2011: “Warehouse receipt
system”: ACE certified and
insured storage services; stored
maize can act as collateral
upon seller’s request
2010-2013: Market
information system: ACE
reaches out farmers via
SMS (for free) to provide
market price info
2013-2016: ACE register of transactions and
internal resolution of disputes becomes more
effective as disincentive to contract default as
trade increases
2013-2016: ACE
invests in farmers’
knowledge programs
and expanding
regional trade
2006: Founded and
managed by national
farmers’ associations.
Only normal auctions
(spot market)
2013: Forward
contracts

7.
0
10
20
30
40
50
60
70
80
2006 2007 2008 2009 2010 2011 2012 2013 2014
Findings (I): ACE market-support institutions
7
Overall ‘000 MT of
maize and legumes
(soybean and pigeon
pea) traded
2010: ACE introduces
“Bid Volume Only”
mechanism: the buyer
sets the volume, the
sellers compete on price
2011: “Warehouse receipt
system”: ACE certified and
insured storage services; stored
maize can act as collateral
upon seller’s request
2010-2013: Market
information system: ACE
reaches out farmers via
SMS (for free) to provide
market price info
2013-2016: ACE register of transactions and
internal resolution of disputes becomes more
effective as disincentive to contract default as
trade increases
2013-2016: ACE
invests in farmers’
knowledge programs
and expanding
regional trade
2006: Founded and
managed by national
farmers’ associations.
Only normal auctions
(spot market)
 Heavy investment in services supporting
market transactions;  Significant increase in
trade volumes
2013: Forward
contracts

8.
0
10
20
30
40
50
60
70
80
2006 2007 2008 2009 2010 2011 2012 2013 2014
Findings (II): ACE performance: trade figures
8
2006: Founded and
managed by national
farmers’ associations
with USAID funding (0.5
Million USD)
Overall ‘000 MT of
maize and legumes
(soybean and pigeon
pea) traded
2011: 70% trade is
purchased by World
Food Program
“Purchase for
Progress”; 30% by
private traders
2013: 30% trade is
purchased by World
Food Program
“Purchase for
Progress”; 70% by
private traders
2014: 5% of traded
maize and 11% of
traded soybean in
Malawi is sold
through ACE
2010-2013: 1.1 Million
USD from donors (EU
and AGRA) for setting
up 1) market
information system; 2)
financial services; 3)
auction mechanisms
2013-2016: 0.4
Million USD from
donors (USAID) for
promoting farmers’
market linkages

9.
0
10
20
30
40
50
60
70
80
2006 2007 2008 2009 2010 2011 2012 2013 2014
Findings (II): ACE performance: trade figures
9
2006: Founded and
managed by national
farmers’ associations
with USAID funding (0.5
Million USD)
Overall ‘000 MT of
maize and legumes
(soybean and pigeon
pea) traded
2011: 70% trade is
purchased by World
Food Program
“Purchase for
Progress”; 30% by
private traders
2013: 30% trade is
purchased by World
Food Program
“Purchase for
Progress”; 70% by
private traders
2014: 5% of traded
maize and 11% of
traded soybean in
Malawi is sold
through ACE
2010-2013: 1.1 Million
USD from donors (EU
and AGRA) for setting
up 1) market
information system; 2)
financial services; 3)
auction mechanisms
2013-2016: 0.4
Million USD from
donors (USAID) for
promoting farmers’
market linkages
 Moderate growth of trade volumes;
 More trade among privates (farmer to
trader, or trader to trader)

10.
0
10
20
30
40
50
60
70
80
2006 2007 2008 2009 2010 2011 2012 2013 2014
Findings (II): ACE performance: who gains?
10
Overall ‘000 MT of
maize and legumes
(soybean and pigeon
pea) traded
2013/2014 Year:
0.264 Million revenue
from trade;
Still 1.1 Million USD/year
in public grants (0.7M) &
private investments (0.4M)
to support operating
expenses
2011-2012: example of revenue for a seller (trader or
farmer) from transactions with warehouse receipt
system of white maize (non-GMO):
• Maize value at deposit: 132,000 USD for 740 MT
• Maize value at sale: 210,000 USD for 740 MT
• Costs of transaction: 43,000 USD for 740 MT
• Profit from transaction: 35,000 USD for 740MT
Value capturing out of depositor revenue:
• Seller (trader or farmer) : 44%;
• Storage operator (trader, input supplier
or farmers’ association): 26%;
• Banks: 27%;
• ACE: 3%.
2006-2013: ACE receives
approx. 0.7 Million
USD/year in grants to
support operating expenses

11.
0
10
20
30
40
50
60
70
80
2006 2007 2008 2009 2010 2011 2012 2013 2014
Findings (II): ACE performance: who gains?
11
Overall ‘000 MT of
maize and legumes
(soybean and pigeon
pea) traded
2011-2012: example of revenue for a seller (trader or
farmer) from transactions with warehouse receipt
system of white maize (non-GMO):
• Maize value at deposit: 132,000 USD for 740 MT
• Maize value at sale: 210,000 USD for 740 MT
• Costs of transaction: 43,000 USD for 740 MT
• Profit from transaction: 35,000 USD for 740MT
Value capturing out of depositor revenue:
• Seller (trader or farmer) : 44%;
• Storage operator (trader, input supplier
or farmers’ association): 26%;
• Banks: 27%;
• ACE: 3%.
2006-2013: ACE receives
approx. 0.7 Million
USD/year in grants to
support operating expenses
 ACE is still far from self-sufficiency, but revenue
from trade is increasing.  Farmers, traders and
bankers still gain with government and donor support
2013/2014 Year:
0.264 Million revenue
from trade;
Still 1.1 Million USD/year
in public grants (0.7M) &
private investments (0.4M)
to support operating
expenses

12.
0
10
20
30
40
50
60
70
80
2006 2007 2008 2009 2010 2011 2012 2013 2014
Findings (III): ACE governance: who decides?
12
Overall ‘000 MT of
maize and legumes
(soybean and pigeon
pea) traded
2006-2015: ACE founded
and managed by ACE Trust:
• President
• NASFAM (farmer ass.)
• FUM (farmer ass.)
• Independent third-party
Grants to NASFAM and FUM
for approx. 0.7 Million
USD/year
2010-2015: ACE Ltd., i.e. “ACE
commercial arm” is introduced:
• Bankers’ Association of Malawi
• Input Suppliers
• Traders
• Independent third-party
From 2010, private sector invested
approx. 0.4 Million USD/year
2006-2015: Government is NOT
represented in ACE Trust and ACE Ltd. It
“only” influences ACE through:
• Funding to NASFAM and FUM
• Domestic and export trade policies
 ACE structure guarantees balance between farmer
associations’ (ACE Trust) & traders/bankers/input
suppliers’ interests (ACE Ltd.)

13.
Discussion
13
1. Does the ACE model work? How do ACE market-
supporting institutions lead to market performance?
ACE PERFORMANCE
Now (2011-2015) works better than before (2006-2010);
Not financially sustainable but adopting a credible trade growth
strategy; yet, Government may play limiting outside influence
ACE ORGANIZATION AND SERVICES
Market-supporting institutions (2010-2014) play a vital role:
 Auctions; warehouse receipts; certified storage; insurance;
financial mechanisms; register of transacting parties; resolution
of disputes.

14.
Discussion
14
2. Why does private sector invest in ACE? (And why doesn’t in
other African commodity exchanges?)
ACE ORGANIZATION AND SERVICES  ACE PERFORMANCE
Private sector (traders, banks, input suppliers) invested capital in ACE Ltd.,
the “commercial arm” of ACE
 Private benefits from trade (commodity market, storage market,
credit/insurance market) need to be higher than private costs
(operating costs & transaction costs of participating in ACE)
Open questions still are:
 Is private sector willing to grow trade to make ACE fully self-
sustainable? Or will ACE remain supported by public grants to
guarantee benefits to farmers’ associations and their members?
• Two different business logics in ACE (“trade”
vs. “aid”) still seek/struggle to co-exist

15.
CE model of institutional entrepreneurship
15
D profits from commodity
markets (e.g. maize, legumes)
D profits from interlinked
markets (e.g., credit,
insurance, storage)
D profits from markets
(TOTAL)
 Proposition (tentative!): private sector actors invest in a Commodity Exchange (CE)
governance and operating expenses if: D (profits from markets) > Private costs of CE
Y: decision
to invest in
CE
X: Expected
costs vs.
benefits

16.
CE model of institutional entrepreneurship
16
Costs from Commodity
Exchange (TOTAL)
 Proposition (tentative!): private sector actors invest in a Commodity Exchange (CE)
governance and operating expenses if: D (Profits from market) > Private costs of CE
Transaction costs from
governing CE (e.g. time costs,
legal & consulting expenses)
Operating costs (e.g. capital)
needed to support CE staff &
services
Y: decision
to invest in
CE
X: Expected
costs vs.
benefits

17.
CE model of institutional entrepreneurship
17
D profits from markets
(TOTAL)
Costs from Commodity
Exchange (TOTAL)
 Proposition (tentative!): private sector actors invest in a Commodity Exchange (CE)
governance and operating expenses if: D (Profits from market) > Private costs of CE
Y: decision
to invest in
CE
X: Expected
costs vs.
benefits
NO INVEST
INVEST
MALAWIAN ACE

18.
Thank you! Questions?
18
Dr. Domenico Dentoni - domenico.dentoni@wur.nl