Developing Agribusiness

Despite much publicized alleged scandals in Kenya's agricultural sector and with the current global economic woes being attributed largely to U.S. mortgage based instruments. I'll take the risk of seeming off-sync with events.

The situation in many emerging markets is that agricultural players are not able to concentrate on their core business of farming due to a host of challenges. How to get their produce to the markets, how to secure markets and prices for their products, etc etc. Basically agricultural players need mechanisms that will enable them to manage their business operations more effectively. There is a need for the corporate world to embrace the field of agriculture by being actively engaged in agricultural activities. Enter derivatives.

Derivatives are essentially financial instruments that obtain their value from the value of other items. Forwards, futures, swaps and options are the main types of derivatives.

Derivatives would result in financial institutions taking a closer look at the business that is agriculture with a view to aiding streamline the operations. As is true in many developing countries, financial institutions seem to have neglected the business of agriculture, only courting only big well run institutions such as Del Monte for their banking deposits. However, the pie could be made much greater than that.

With derivatives, financial institutions would be able to trade and make commissions on the derivatives products while empowering the locals through the development of the real economy.

In the case of forwards, participants (farmers) would easily be in a position to gauge potential returns before they plant the season's crop and as such take informed decisions by possibly locking in some of the potential returns. What a difference that would make to the current state of events of plant now, the returns will be market dictated much after your commitment.

The argument for derivatives is just but one of the numerous avenues for development and growth in agribusiness, however, the point is that, increased business involvement in agricultural activities is critical if food stability is to be achieved; GM foods are unlikely to be the answer if their farming and marketing is done in the very same way as that of the indigenous breeds. In many areas the land is so fertile that the crop is left to rot on the farm due to the poor distribution and poor market access.

Derivatives have their issues, but they might be the much needed catalyst we need.