Waiting for agricultural futures commodities exchange
Nigeria as a major supplier of agro commodities around the world has demonstrated potential for continued growth in the agricultural sector. One facility that will place it in the community of leading producing nations is a functional futures commodities exchange. This is still a dream project despite recent accomplishments, DANIEL ESSIET reports.
Since the 60s, Nigeria has been a major exporter of cocoa, cashew, soybeans and grains. Factors driving this include expansion of the arable land base, large investments in production technologies to develop crop and forage varieties, and improved sanitary controls.
Given that Nigeria has the largest domestic market, however, increase in foreign trade flows, analysts believe, will help the country’s economic specialisation and long-term growth. Stakeholders see trade and supply in agro commodities as key determinants of its economy.
Nigeria is among Africa’s top agricultural exporting countries. Cocoa is one of its key exports but local exporters often suffer as their selling prices are usually fixed and can be lower than the global prices on delivery day.
Analysts believe a functional commodity exchange would help local firms overcome such difficulty and hedge the changes of the prices on the delivery. An agro commodities exchange is a platform where various crops such as wheat, barley, sugar, maize, cotton, cocoa and coffee are traded.
Trading includes various types of derivatives contracts based on the commodities, such as forwards, futures and options, as well as spot trades.
Globally, futures prices are always transparent and it is difficult to manipulate trading. Also, futures of agricultural products put up for trading are also linked to global prices.
Nevertheless, not much has been achieved on the establishment of a functional agro commodities exchange.
A futures contract provides that an agreed quantity and quality of the commodity will be delivered at some agreed future date. A farmer raising cotton can sell a futures contract on his cotton, which will not be harvested for several months, and gets a guarantee of the price he will be paid when he delivers. The producer buys the contract and gets a guarantee that the price will not go up when it is delivered. This protects the farmer from price drops and the buyer from price rises. Indeed, the existence of a futures market will enable farmers, growers, and producers to minimise the price risk and avoid a supply glut.
Agri-commodities futures markets allow price discovery and better price risk management. Aside ensuring price risk mitigation and remunerative returns, analysts posit that futures markets also contribute to scaling down the downside risks associated with agricultural lending thereby, facilitating the flow of credit to agriculture. Across the country, producers are prone to risks such as price, crop and weather/climatic variations, and a number of other natural disasters, which could affect their anticipated income very badly and could have negative effects on the standard of living, ability to build capital, and facility to access credit and repay debts.
The uncertainty of commodity prices, they noted, leaves a farmer open to the risk of receiving a price lower than the expected price for his yield. Most times, the price farmers get for their produce at the marketplace does not even cover their investment in farming operations. On the other hand, big farmers are affected equally badly when prices are not attractive or there is a crash at the marketplace.
Hence, a way out of this vicious cycle must be found and that is where the commodity markets come in.
Globally, futures produce exchange bring a large number of buyers and sellers on the same platform for spot price discovery and to make sure that the commodity bought and sold on the exchange is delivered on time without risks to the traders. Although Nigeria has a long history of trade in commodity derivatives, this sector has remained underdeveloped. Today, there are commodity exchanges, focusing on agricultural commodities. Though the government has an act to provide for regulation of agricultural produce markets, not much have been done to establish well-functioning agro commodities markets to drive growth, employment, and economic prosperity in rural areas of the country.
Currently, there are no providers offering the hedging and price discovery functions of future markets which globally promote more efficient production, storage, marketing, and agro-processing operations.
The prospect of a functional agro commodities exchange in Nigeria is one of the more significant developments analysts expect to emerge.
Director General, African Centre for Supply Chain, Dr. Obiora Madu, believes agricultural commodities may be the priority for government and development partners.
When there is a fully-developed exchange, Madu noted, buyers can be guaranteed delivery from farmers. He believes it would also correct the currently dysfunctional system that governs trade in some of the nation’s most important staples.
So far, there are no commodities handling spot and futures transactions in a range of agricultural commodities. If this exists, commodities contracts will be able to be bought and sold based on international prices and information, which for farmers and traders means the ability to operate under a fair auction system and hedge prices over the long term.
Agric consultant Grace Abia supports the establishment of agri-commodities futures markets. A few investments have been for the development of post-harvest and cold chain infrastructure nearer to farmers’ production belt in the North. In places such as Kenya, farmers can present warehouse receipts as collaterals to access agricultural credit. While ensuring price risk mitigation and remunerative returns, such markets also contribute to scaling down the risks associated with agricultural lending and, thereby, facilitate the flow of credit to agriculture.
Abia said though agricultural commodities futures are market-based instruments for managing risks that help in orderly establishment of efficient agricultural markets, lack of trust has made it difficult for such projects to be successful across the country.
She is among stakeholders who believe agro commodities exchange holds the key to not only reinvigorating spot markets but also triggering the diversified growth of agriculture by streamlining the supply chain. For her, Nigeria has a sufficiently large agricultural base to allow the successful operation of an agro commodities exchange.
A futures exchange would allow farmers and their service providers to operate in the typically risky environment of a free market place without having to rely on government guarantees or subsidies. In all, a viable agricultural futures exchange will help Nigeria realise its potential as a major produce exporter.
Globally, there are Chicago Mercantile Exchange (CME), Tokyo Commodity Exchange (TOCOM) and London Metal Exchange (LME).
Right now, there are more than 10 registered commodities exchanges in Africa. They are Ghana Commodity Exchange (GCX), Accra, Ghana; Africa Mercantile Exchange (AfMX) Nairobi, Kenya; Egyptian Commodities Exchange (EGYCOMEX) Cairo, Egypt; Nairobi Coffee Exchange (NCE) Nairobi, Kenya; Ethiopia Commodity Exchange (ECX), Addis Ababa, Ethiopia; Agricultural Mercantile Exchange of Madagascar [(MEX), Antananarivo, Madagascar; East Africa Exchange (EAX), Kigali, Rwanda; Agricultural Commodity Exchange for Africa (ACE), Lilongwe, Malawi; Auction Holding Commodity Exchange (AHCX) Lilongwe, Malawi; Bourse Africa, Ebene City, Mauritius; South African Futures Exchange (part of JSE Limited) JSE, Sandston, South Africa; Nigeria Commodity Exchange (NCX), Abuja, Lagos Commodities and Futures Exchange (LCFE); AFEX Commodities Exchange Limited (AFEX), Abuja and ZMX, Harare, Zimbabwe.
In 2020, Agricultural Commodity Exchange for Africa received a licence to establish a thriving exchange in Malawi.
Over the years, it has implemented many development projects focusing on integrating rural farmers and traders to formal markets, building infrastructure, improve services and ensuring better prices. Ethiopia and Kenya have established commodity exchanges which support the development of a viable warehouse receipt system. In other places, Central Banks permit banks to finance goods on presentation of receipts coming from accredited warehouses. They also opened discount windows for loans that use warehouse receipts.
For analysts, however, commodities exchange offering electronic spot and futures market, together, improve realisations and risk management for farmers and industrial users.
Nevertheless, analysts said US exchanges were still a major force in the global commodity futures and options market. While trading has expanded in recent years on these exchanges, African platforms don’t offer commodity futures and options. There are few platforms in Africa providing a unified electronic spot market for agri commodities.
Nigeria lacks the presence of a derivatives market which is of utmost importance for farmers and commodity users to shield them from price risks. Not much has been done towards activating the mechanism for agricultural commodity derivatives and spot markets.
Analysts are of the view that efforts need to be made to increase activity and participation in agri commodity futures and options. This can help serve as a powerful tool for helping price discovery in the spot market.
Nigeria Commodity Exchange (NCX)
Nigeria Commodity Exchange (NCX), which started electronic security trading in May 2001 and was converted to a commodity exchange on August 8, 2001, has not achieved the status and capacities of a futures exchange for agricultural commodities.
According to analysts, NCX has remained grossly inefficient due to a number of factors, including inadequate funding, poor financial performance, as well as deficiency in physical infrastructures such as warehouses, laboratories and grading capability. The Commodity Exchange claimed that 20 licensed warehouses have been secured in six geopolitical zones, specifically in Zamfara, Kano, Kaduna, Nasarawa, Benue, Bauchi, Plateau, Ebony, Ekiti, and Kogi and additional ones being emplaced in Adamawa, Globe, Taraba, Jigawa, Edo, Cross River and Ondo states. Last year, NCX Managing Director, Mrs Zaheera Baba-Ari, declared in Abuja y that the exchange had been positioned to facilitate efficient export of commodities, as the African Continental Free Trade Agreement (AfCFTA) took off on January 1, 2021. She said 20 licensed delivery warehouses across major production areas in the six zones would help in the efficient receipt, storage and onward delivery of agro-commodities to be traded on the exchange. The warehouses have a combined capacity to store 50 trillion tonnes of goods, she said, and the exchange had established fully equipped quality assurance laboratories in each of the delivery warehouses to test the quality of commodities, such as paddy rice, cocoa, sesame seed, soya beans, maize, sorghum and cashew nuts that would be traded on the exchange.
“The NCX has acquired robust Trading Application System for seamless buying and selling of commodity to ensure market integrity, price transparency and the facilitation of cross border trades.
“It has also acquired a Warehouse Management System that assures efficient management of warehouse inventories.
“We have perfected Memorandum of Understanding with relevant foreign and Nigerian Commodity Associations like the Ethiopia Commodity Exchange and the Export Merchants Association of Sudan to trade in selected agro-commodities,” she said.
Under AfCFTA trading, tariffs on various commodities where rules of origin have been agreed will be drastically reduced and traders would have access to a much bigger market than before. It is therefore expected that the injection of funds into the system would boost local production, storage and external trading of such commodities. Indeed, a fully functioning derivatives and commodity exchange market will be pivotal in improving competitiveness, facilitating both domestic and international trade and integration of the continent to the global economy.
The National President, Federation of Agricultural Commodity Association of Nigeria (FACAN), Dr. Victor Iyama, believes efficient commodity exchange markets are critical for economic growth but that there are no sufficient infrastructures to support hedging and risk management.
The African Development Bank has been on the campaign to promote innovative ideas and discourse on best practices on derivatives and commodity markets development. In 2012, the bank, in cooperation with Bourse Africa Limited and with the support of Botswana Investment and Trade Centre (BITC) held an Pan-African Workshop for Regulators of Derivatives and Commodity Exchanges in Gaborone, Botswana.
The Minister of Industry, Trade and Investment, Niyi Adebayo sees commodity exchanges as better deal for farmers. He had inaugurated an Inter-Ministerial Standing Committee to oversee the implementation of a memo on the “Promotion of Agri-Business in Nigeria through Right Farm Gate Pricing and Ban of Foreigners from Purchasing Agricultural Commodities at the Farm Gates.”
Adebayo explained that the move was part of the government’s efforts to provide the enabling environment for the commodity sub-sector to thrive.