Commodities Exchanges as Paths to Diversification

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Goddy Egene writes that well-functioning commodities exchanges are needed to boost the diversification of the nation’s economy

It is now very obvious and imperative that the Nigerian economy needs urgent diversification. Past governments have harped on the need for the nation’s economy to be diversified from its reliance on oil as the mainstay. While Nigeria is blessed with other numerous mineral resources and fertile land for agriculture, little had been done to tap those potential. However, with the declining price of oil, which has affected the revenue of the government, efforts are being intensified to ensure that the sectors are developed to contribute to the revenue.

Agricultural produces, solid minerals and other commodities are attracting the attention of the government. But it is believed that for government to fully realised the huge potential of other sectors, functional commodities exchanges are necessary. There are two commodities exchanges in the country-Nigerian Commodities Exchange and Afex Commodities Exchange- which are promoting the trading of commodities. But given the importance role they will play the diversification programme, more is needed to be done to ensure they function very well.

Apparently aware of the foregoing, a London-based firm, INTL FCStone Limited, in partnership with Afex Commodities Exchange Limited organised a training seminar on commodity trading and risk management in Abuja.

The forum brought together a team of leading practitioners in the world’s major commodity markets and capacity-building specialists with experience in African financial markets who focused on building skills in commodity trading, hedging and risk management.
The Director General of the Securities and Exchange Commission (SEC), Mounir Gwarzo, who was the chairman of the seminar disclosed that considering the important role commodities exchanges will play in advancing Nigeria’s economic diversification goals, they in the capital market community had taken steps to prepare the stage for vibrant commodities exchanges to emerge in the country.

Economic transformation
Gwarzo noted that as Nigeria pursues policies aimed at diversifying the economy, creating jobs and hastening socioeconomic development, it is becoming increasingly clear that commodities exchanges can play a crucial role in actualising these lofty objectives.
According to him, a detailed empirical study by the United Nation’s Conference on Trade and Development (UNCTAD) analysed the impact of commodities exchanges on development in emerging markets.
He explained that countries that were part of the study are also emerging countries with the most vibrant commodities markets such as India, Brazil, China, Malaysia and South Africa.

He said among the many insights in study’s report is the fact that commodities exchanges play a central role in facilitating economic development especially by helping farmers to enhance their marketing and risk management capacity such as reducing their exposure to price and other production risks.
“For Nigeria, developing the commodities market could prove even more critical. With the policy thrust of the federal government to encourage investments in the agricultural and solid minerals sectors, now more than ever all hands must be on deck to develop a commodities market that can support these policy objectives,” he said.

The SEC boss noted that Nigeria ranks number one in global export rankings for commodities such as kolanut, shea nuts and shea butter, cassava, and yams.
“We also feature in top exporters for other commodities such as cocoa, rubber, oil palm, cashew and sesame seed. Our ginger is reputed to possess the best aroma in the international markets. Export opportunities also exist for a wide variety of other agricultural commodities. This simply magnifies the potential of our agricultural sector to contribute significantly to economic growth and development,” he said.

10-year master plan
Gwarzo said the 10-year capital market master plan, which is the blueprint for the growth and development of the market that is being implemented, acknowledges commodities exchanges as critical for enabling investment diversification, risk management, price discovery and transactional efficiency.
“In fact, within the master plan the capital market community expresses strong belief that to boost Nigeria’s competitiveness, we must develop a thriving commodities trading ecosystem,” he said.

According to him, this can be achieved by implementing some strategic initiatives. The initiatives include building a supporting and functional ecosystem for commodities trading providing legal framework and appropriate legislation for commodities trading.
“We are reviewing the Warehouse Receipt Bill after which we will actively advocate its passage,” he said.

The SEC DG said part of the initiatives also is to build centres of excellence in areas of comparative advantage such as for oil and gas, cocoa.
He said: “We will develop efficient commodities exchanges and trading platforms sponsor legislation to ensure Nigeria’s crude oil sales are traded on local exchanges, build capacity in commodities trading at the SEC and among market operators. I give you my personal commitment that all areas of the master plan will be implemented to the fullest, particularly aspects that have to do with building the commodities market. We are prepared to support the establishment of a vibrant commodities market, with regulatory oversight and the passage of rules guiding the activities of all market participants.”

Empowering farmers
Country Manager, Afex Commodities Exchange, Ayodele Balogun said their approach is to create a commodities market that includes the small local farmers, saying they are not providing an exchange for the financial market alone.
“That means that we have to look for ways to educate the market in a way that they understand what the phenomenon is broadly, but also how we have tried to hatch it out into the realities of the sub- Saharan Africa and the Nigerian agricultural sector,” he said.

Balogun explained that one of the key elements of the entire capital market master plan is to create the interactability of the capital market so that players in the market, be it a stock broking firm or other players in the market will be able to trade across multiple platform as you know, there is FMDQ OTC market, equities, NASD OTC market as well. “So with the commodities also being available, I think that is one of the things that will place Nigeria ahead of other African countries when it comes to interfacing with both the international commodities and financial investment public. There will be cross collaboration. It won’t be farmers or the financial market alone,” he said.

Challenges facing commodities exchanges
Speaking on some of the challenges facing commodities exchanges, Balogun said some think-tanks of the industry will put it that there are four Ps(products, purpose, participants, policy) you need to put in place when you are setting up a commodities exchange.

“So you need a product and have a definition of what your product will be, you have to have a purpose, in our case, one of our purposes is inclusiveness, so we want to have the entire markets both from the high level sophisticated financial banking institutions all the way to the small local farmer with one or two bags of maize included in the entire market. You have to have the participants which are the players on the market and then you have a policy framework for the market. If you look at all these, our strategy means that we have to have a very robust approach to cater for the different tiers of the market but we have found very innovative ways to manage that and I think we are doing very well. On the policy part, the warehouse receipt bill for instance is very crucial to the development of the capital market and we have seen this play out in many African and the Middle Eastern and Asian Countries,” he said.

According to there has been a warehouse receipt bills that had been created which actually worked against the market developments.
“So there is a need for a very inclusive and very robust approach to the development and I am very happy that the SEC as well as the Ministries of Agriculture, trade and investment and other financial market players are approaching this so that we have a broader view, create a bill that is inclusive and unlock the opportunities we could have with the commodities exchange,” Balogun said.