With the sustainable bearish run that has caused many investors fortune in the nation’s capital market, stakeholders in the Nigerian economy have stepped up a campaign for diversification of the exchange to accommodate commodities.
A commodity is a product, which trades on an exchange. This includes cocoa, rubber, palm kernel, palm oil, coffee, hides and skin, gold wheat, cotton, rice, corn, grain, sorghum, butter, eggs, potatoes, wool tops, fats and oil (including lard, tallow meal, groundnut oil, soya bean meal oil, and all other fats and oils), livestock products and oranges, solid minerals and all other tangible goods and articles, except services, rights and interest in which contracts for future delivery are presently being dealt with.
The need for vibrant commodity exchanges market has become necessary as agriculture, which is supposed to be the mainstay of the Nigerian economy, has suffered from years of neglect, inconsistency, poorly conceived government policies and lack of basic infrastructures.
In the 1960s, the agricultural sector was the most important in terms of contributions to domestic production, employment and foreign exchange earnings. The situation remained almost the same three decades later even though it was no longer the principal foreign exchange earner, a role now being played by oil and gas.
The sector remained stagnant during the oil boom decade of the 1970s, and this accounted largely for the declining share of its contributions.
According to National Bureau of Statistics (NBS), the trend in the share of agriculture in the GDP shows a substantial variation and long-term decline from 60 per cent in the early 1960s through 48.8 per cent in the 1970s and 22.2 per cent in the 1980s.
Unstable and often inappropriate economic policies (of pricing, trade and exchange rate), the relative neglect of the sector and impact of oil boom were also important factors responsible for the decline in its contributions.
However, currently, the reverse is almost becoming the case as the decline in crude oil prices is currently affecting the economy and the government is looking for a way to boost non-oil revenue.
This is the more reason to boost non- oil revenues, one of which is reviving the country’s commodity exchange to encourage agriculture and also offer investors opportunities not only in the equity side but across the various asset classes.
Since the capital market is reflective of the economy, both the Federal Government and other economic stakeholders have said that in order to complement government in the area of agriculture, there is need to strengthen commodity exchange in the country to enable farmers to have value for their products, lift agriculture from despondency and improve forex earnings.
Commodity exchange for revenue boost
The Federal Government recently stressed the need for the development of a vibrant commodity trading ecosystem in order to diversify the economy from crude oil for improved government revenue and foreign exchange earnings.
This was stated by Vice President Yemi Osinbajo at a Roundtable on Nigerian CommodityTrading Ecosystem held by the Securities and Exchange Commission, SEC, in Lagos.
Represented by Dr Yemi Dipeolu, Special Adviser to the President on Economic Matters, Osinbajo said the Commodity Trading Ecosystem is of paramount interest because Nigeria has an abundance of natural resources and accordingly a comparative advantage in agriculture, solid minerals and oil and gas, hence emphasis in the immediate term is the agricultural sector.
Osinbajo said the Federal Government attached great importance to an active and vibrant capital market which will contribute to national growth and development.
He said in order to achieve this objective, the capital market had to operate at an optimum level, which is why the implementation of the 10-year Capital Market Master Plan remains a key priority.
According to the vice president, “agriculture, accordingly, occupies a pride of place in Federal Government policy, as stated on numerous occasions by the president and as articulated in the Economic Recovery and Growth Plan. The importance of agriculture was underscored during the last recession as its growth then of about three to four per-cent prevented a steeper decline. Agriculture is also important for food security and as a means of generating a quick production response.
“The agricultural sector is also important for job creation and employment and for producing the raw materials that go into agro-processing. Indeed, the subsisting Agriculture Promotion Policy specifically aims to ‘integrate agricultural commodity value chains into the broader supply chain of Nigerian and global industry,” he noted.
Osinbajo added that a vibrant commodity trading ecosystem is, therefore, essential to underpin agricultural transformation in Nigeria as organising production in the agricultural sector would ensure that every part of the value chain contributes to its growth.
Collaboration to achieving thriving commodity trading
Acting Director-General of SEC, Ms Mary Uduk, said the Commission was collaborating with all relevant stakeholders to implement the 10-year Capital Market Master Plan with the aim of making Nigeria’s capital market one of the world’s deepest and most liquid as well as the largest in Africa by 2025.
One of the crucial initiatives of the plan, she said, was to develop a thriving commodity trading ecosystem. Nigeria is well endowed in agricultural, metals and energy commodities.
“Currently, our potential as a nation is grossly underutilised in the area of commodities. 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 and institutionalise a vibrant commodity trading ecosystem in Nigeria, we can substantially address problems such as lack of storage, poor pricing, non-standardization as well as low foreign exchange contribution affecting our agriculture and other commodities sub-sectors”.
In achieving this, Uduk said the roles of commodity exchange were very critical as they bring price transparency and value addition to farmers; they ensure quality products for buyers, provide investment opportunities across the value chain, provide additional class of asset for investors and help diversify the nation’s economy in line with the current administration’s agenda.
Uduk said the nation still had the challenging task of transitioning 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, favourable government policies and strengthening of legal and regulatory frameworks,” she added.
Managing Director, Crane Securities Limited, Mr Mike Eze, who described the efforts of the regulator as a welcome development, said “as an investor, your chances of risks are very less if you choose to invest in commodities trading.
“Therefore the gains from commodity investing will be helpful for you to balance other losses due to other financial instruments in your portfolio. The chances of risks are lower because commodity investing primarily deals with diverse items. Moreover, when the contracts are entered for a future date at the current time you can exercise reasonable care and see to it that the chances of risks are reduced or nil.”
Eze noted that the performance of commodity market could be monitored by analysing the performance of bond and share market because in most cases a commodity market will perform well when the others don’t perform and vice versa.
He said it was possible to easily predict the prices and make the contracts by considering the ups and downs in other markets which according to him, a prerequisite for this is that the assets in the commodity market should not be correlated with the stock and bond market.
Explaining the importance of commodity exchange, aside helping to deepen the activities of the capital market with the introduction of new products, Eze said that it will increase the earnings of the producers by reducing the effects or price volatility, provide a basis for risk management and serve as a mechanism for effective pricing.
“The benefits of a commodity exchange include market price discovery as well as access to information concerning commodities traded on the commodity exchange, which is available to brokers in advance of trading i.e. quality, location and time of delivery, thus facilitating pricing.
“The futures markets help to determine the best current prices. All bids and offers are aggregated and the prices at which the trades are executed, determine the best, current market price. In addition, the prices are publicly disseminated and therefore provide an easy way to determine a product or instrument’s fair price,” he said.
To have a viable commodity exchange system is particularly critical now, given the increasing emphasis on agriculture, which is expected to enhance non-oil revenue for the country.