Making Nigeria’s commodity exchange work

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The commodity market remains an untapped source of revenue for the government, however, it is one place that the government does not seem to care about in spite of its famed talk of diversifying the economy; BENJAMIN UMUTEME writes.

At the primary level, a commodity exchange connects buyers and sellers of physical commodities, a role that is particularly useful in enhancing market efficiency by helping to match supply and demand of commodities across time and geographic distances.

In its sophisticated form, 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 by providing access to capital markets. Indeed, the 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.

It will help support the non-oil sector, diversify the country’s export base and make the economy less vulnerable to external shocks.

Through the provision of price transparency including better access to market, the income of farmers and their living standards will be enhanced. Agribusiness will become more attractive creating investment and employment opportunities in the commodities value chain with positive multiplier effect on the nation’s economy.

Commodity exchanges

At present, only two commodity exchanges are registered by the Securities and Exchange Commission in Nigeria. Whereas the privately-owned AFEX Commodity Exchange, registered in 2014, is running against all odds, the much older government-owned Nigeria Commodity Exchange (NCX) is still struggling to find its feat due, in part, to inadequate funding.

The NCX was originally incorporated as a Stock Exchange in June 1998 but was converted to a commodity Exchange in August 2001.

The conversion was informed by ‘the need for an alternative institutional arrangement that would manage the effect of price fluctuations in the marketing of agricultural produce which had adversely affected the earnings of farmers following the abolishment of commodity Boards in 1986’.

The sub-optimal performance of NCX, despite its potential to transform the agriculture sector, has been blamed on several factors including the fact that the conversion from a stock exchange to commodity exchange was done without due regard to the availability of the necessary conditions.

The requisite infrastructure for physical trade including warehouses and grading laboratories is deficient. There is also the lack of supportive government policies and institutional infrastructure. The NCX has not acquired the required traction to take off owing to weak legal and regulatory regimes especially in terms of the absence of rules that enable an efficient delivery mechanism through warehouse receipts.

It goes without saying that agriculture remains poorly organized with unsophisticated small holder farmers. All these were not taken into consideration before the conversion was done. So, it was a case of putting the cart before the horse.

NCX still struggling

The experience of many European and Central Asian (ECA) countries, including some in Africa,   seems to suggest that the government should take the lead in the development of a National commodity exchange because if there is no full government buy-in, the potentials of the Exchange may never be fully unlocked.

For instance, beyond the planned investment by the Nigerian Sovereign Investment Authority (NSIA) in the NCX, government contractors can be encouraged to buy minimum quantities of designated commodities from the Nigeria Commodity Exchange.

In this regard, the Ethiopian model recommends itself. In terms of trade value, the Ethiopian Commodity Exchange (ECX) can be considered as one of the success stories in Africa and this could not have been the case without government intervention.

In late 2008, the government, therefore, passed a proclamation requiring all coffee and other export crops grown in Ethiopia to be exported through the ECX. At one point in late 2008, the government had to confiscate 17,000 tons of coffee from 80 exporters attempting to bypass the ECX.

 This measure was positive for the ECX as it was able to generate over $1 billion in revenue in 2012, sufficient to defray the cost of its own operations.

Changing the narrative

To address this seeming anomaly, the technical committee on commodities trading ecosystem set up by the Nigerian SEC should be given serious consideration.

Among the recommendation by the committee is that “government should as a matter of policy, procure grains into the strategic grains reserve through the exchanges and mandate all of its agencies such as NEMA to procure their grains through the commodity exchanges. This will ensure quality, price transparency, and foster the development of the exchanges. International agencies operating in Nigeria such as the WFP should be encouraged to buy their agricultural commodity requirements through the Exchanges.”

Some other recommendations of the technical committee include “conducting awareness-raising campaigns among key stakeholders in target areas to improve understanding of the commodities market and encourage participation, enacting the warehouse receipt bill into law which will go a long way in ensuring that farmers have easy access to credit; bringing on board smallholder farmers through well-organised cooperatives to improve liquidity as well as encouraging investment in all the requisite supportive infrastructure such as warehouses and storage facilities by the NCX and the private sector.”

Recommendations enough?

To deliver in all these dimensions, it is best to regard the commodity exchange as a public-private partnership, with the public responsibility being to act as a catalyst and where necessary provide a supportive framework.

 A study by the FAO/World Bank Cooperative Programme revealed that commodity exchanges performed better when they are organised as public-private entities. 

To this end, the government, through the Federal Ministry of Agriculture and Rural Development, should channel every effort, in partnership with the private sector, to unlock the potentials of the Nigeria Commodity Exchange, including putting in place adequate funding arrangements. This is in addition to jettisoning the reported plan to re-introduce marketing boards for some designated commodities.

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