Unlocking commodities exchange potential in Nigeria

All over the world, commodities exchanges are established to open up the economy through investment in solid minerals and agriculture, as well as serve as platform for investors to lessen risks in agricultural production and marketing.Commodities, under these exchanges, referred to as primary products, are raw materials extracted from the earth, undergoing little or no manufacturing or refining process.

They include fuels, agricultural products, minerals, ores, and metals, and are traded on the commodities market. They are expectedly the mainstay of emerging economies, especially African countries.A commodities exchange is a platform or market, where various commodities are traded. Most commodity markets around the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, and metals).

A commodity exchange, brings together buyers and sellers of commodity price risk, permitting those who wish to reduce their exposure to price movements to transfer it to those who are looking for such exposure. Thus, it contributes to unlocking finance to the commodity sector through price risk management, as well as providing access to capital markets.Most commodity markets across the world trade in agricultural products and other raw materials. Commodities exchange usually trades in future contracts on commodities.

For instance, a farmer cultivating corn can sell a future contract on the corn, which will not be harvested for several months, and guarantee the price he will be paid when he delivers. Similarly, a breakfast cereal producer, who buys the contract, is guaranteed that the price will not go up when it is delivered.

This protects the farmer and the buyer from price rise and drop in each case. Speculators and investors also buy and sell the future contracts in attempts to make profit and provide liquidity to the system.Commodity exchanges began to emerge in Africa in the 1990s. Uganda, Zimbabwe, Kenya, Zambia and South Africa were pioneers in launching commodity exchanges. One of the most prominent examples is the Ethiopian Commodities Exchange (ECX) set up in 2008.

Regrettably, the Nigerian Commodities Exchange (NCX) is not yet repositioned to unlock the potentials inherent in this segment of the market. At present, only two commodity exchanges are registered by the Securities and Exchange Commission (SEC) in Nigeria. Whereas the privately-owned AFEX Commodity Exchange, registered in 2014, is running against all odds, the much older government-owned NCX is still struggling to find its feat due to several challenges.

Indeed, there is an urgent need for Nigeria to have a functional commodity exchange capable of attracting investors into the agriculture value chain and enhancing job creation cannot be overstressed.To break the jinx, experts that gathered at the one day Roundtable conference on Nigerian Commodities Trading Ecosystem organised by the SEC, at the weekend, linked failure to create a vibrant commodities exchange in Nigeria to non-alignment of the activities of various participants in the entire ecosystem.

The participants include farmers, merchants, aggregators, processors/producers, commodity market operators, warehouse operators, collateral managers, banks, insurance companies, clearing houses, and logistic companies.The experts maintained that there is need for collaboration among various stakeholders in the commodities trading value chain, if the nation must unlock potential in the commodities exchange ecosystem.

According to them, hitherto, the participants in the entire ecosystem have been working in silos with a lot of disjointed approach, situation which has led to sub-optimal performance, despite the exchange’s potentials to transform the economy.The Managing Director of Nigerian Incentive–Based Risk Sharing System for Agricultural Lending (NIRSAL), Aliyu Abdulhameed,categorically stated that every single player is a member of the ecosystem.

“One of the key players is the government as the enabler and the creator of enabling environment through policy decisions, the producers of the commodities, the trader of the commodities, and the consumers of the commodities. “You cannot do commodities trading ecosystem without the commodities, because the trading system relies on security of supply, certainty of supply, quality of parameters and delivery of parameters and you can only do this when you have the commodities in the first place.

“So, what we did today was to push the conversation back from the beginning, how do you ensure that you organise the millions of farmers so that they are inclusive in the ecosystem, whereby as the system makes money, they also make money. “NIRSAL has to take it step back to organise the farmers, link them to formal finance, link them to formal market, make them produce at profit too, that way, we can rely on them to continuously supply the kind of quality we need, this is the parameter we approached it,” he said.

The Managing Director of Lagos Commodities and Futures, Exchange, Akinsola Akeredolu-Ale, said the ecosystem is being activated currently to become more functional.“If you have a good look into the ecosystem, that means you have to look from the primary upstream, that is the primary producers to the processors to the certification agencies, to the export people to the banks, to the insurance sector

“SEC has started filling in the various gaps in the ecosystem that can make it work and by filling it up, what we can see is a situation whereby the ecosystem is being activated now to become functional. “For instance, NIRSAL said they have signed up with banks that are ready to support the agric sector with about N114 billion, it is a lot, that means that for the capital market, there is a space for refinancing of N114 billion.

“This is because banks will definitely do short term due to the CBN requirement and the capital market will now do the refinancing for the medium terms to the long term. It is a welcome development for the market.”The Acting Director-General of the SEC, Mary Uduk, said the nation’s potential is grossly underutilised in the area of commodities currently.

“There is, therefore, the need for these commodities to be efficiently harnessed to the benefits of our consumers, industries and governments.“We believe that if we can develop a vibrant commodities trading ecosystem in Nigeria, we can substantially address problems such as lack of storage, poor pricing, non-standardisation as well as low forex contribution affecting our commodities sub-sectors”, she said.

She noted that the roles of commodity exchanges are critical to economic growth, especially in the areas of price transparency and value addition to farmers, ensuring quality products for buyers and providing investment opportunities across the value chain.Uduk said the nation still has the challenging task of transiting from a grossly informal commodity trading system to one consummated on the platforms of commodity exchanges. “Currently, the transactions through commodity exchanges are insignificant compared to what take places in the informal markets, even among industrial commodities users.

“In laying down the foundations of our formal commodities market therefore, we have to ensure that the spot commodity market is efficient as we move into the futures market.“No doubt, this will entail a robust education and enlightenment process, continuous engagement and cooperation among key stakeholders, favorable government policies and strengthening of legal and regulatory frameworks,” she added.