Markets

Commodities Exchange Markets, an Incentive for Production

Published

7 years ago

February 22, 2018

Commodities Exchange Markets, an Incentive for Production

Nigeria has enviable relative advantage in the areas of agriculture and solid minerals. Although we constantly create platforms for discussions on how to modernise our farming methods (be it farming for food crops, minerals and other products), not much is said about how to upgrade our trading methods from the extant spot methods.

At least 60 per cent of the population engages in one form of agricultural activity or the other, albeit mostly on a subsistence level. A nation like the United States, produces her vast agricultural wealth with less than 10 per cent of her population ploughing the fields because of the advantages of mechanised farming. Nigeria, on the other hand, still largely deploys stone-age tools for both production, storage and marketing of primary produce and consequently loses revenue to post-harvest challenges.

Mechanisation, which gives leverage to commercial farming, may not be achieved overnight in Nigeria due to its capital intensive nature, States and local governments can facilitate, in conjunction with private sector stakeholders, the emergence of standardised markets to absorb surplus harvests from farmers using tributary methods to reduce losses and encourage primary production activities, among other benefits. There is a roaring need for the emergence of more sophisticated trading systems for local commodities that make farmers confident that they can sell their produce and manufacturers confident about the quality, availability and consistency of locally sourced feedstock.

For example, 2014 figures showed that Nigeria spent about N630m (this must have doubled or tripled by now due to inflated foreign exchange rates) on importation of wheat alone. Wheat is an important crop applicable in the production of bread, pasta and pastries, in livestock feeds production and so on. The national demand for wheat continues to rise whereas indigenous production is only able to supply about 7.6 per cent of national wheat need; although this is an improvement on previous years when cultivation of wheat nearly went into extinction due to poor patronage. At the time, the millers had claimed that the quality of Nigerian wheat was inferior to the imported ones.

Today, the high cost of foreign exchange has triggered a recent acceptance of locally grown wheat by millers who now buy up whole harvests; leading to a rise in the cultivation of this emerging area of cache. The incentive is that farmers can sell what they produce. This development provides ample proof that beyond the provision of capital, inputs and other supports, market outlets are critical incentives for production. This is where the need for a commodities exchange market becomes pressing; in order to sustain the rising tide in wheat. This will also be work for our solid minerals subsector.

A commodities exchange market provides a standardised outlet for commodities, be they agricultural, solid minerals and so on. In the market, goods are graded and priced tagged such that the need for on spot trading is reduced. You do not have to see the goods and haggle before you can buy. Thus, industries can buy feedstock according to their specifications through those markets; making it easier for both the farmers and the manufacturers to remain in business. In 2014, to salvage discouragement occasioned by a period of glut when millers refused to buy, the government had to mop up wheat harvests in Zamfara State by over 100 per cent of their market value whereas the products are in demand in other parts of the country. Viable commodities bourses, with their attendant Market Information Systems, would have aided in channelling the excess produce to other parts of the country where they were needed.

An upshot of these standardised exchanges would be the emergence of derivative products that can be traded, as is done in other climes, to provide liquidity and stabilise the real sector. Thus, apart from trading in agricultural and mineral produce, contracts based on them like spot prices, forwards, futures and options on futures are traded. For example, a farmer raising wheat can sell a future contract on his produce several months ahead of the harvest time and a milling company could buy the contract ahead to ensure that the price remains the same when delivered. This protects the farmer from price drops and the buyer from price rise. Speculators and investors also trade on the futures contracts for profit ;very much like the way stocks and shares are traded in the capital market.

The importance of a commodities exchange and how it will benefit the solid minerals subsector was well captured in the aspirations of the botched 2002 National Assembly bill for the establishment of a Solid Minerals Development Commission: “The Commission shall operate Joint Venture arrangements with the Organised Private Sector, to establish a private sector-led world class Solid Minerals Commodities Exchange to pave way for the entrance of big time operators into Nigeria’s solid minerals sector in promoting quality control as well as deriving benefits for the nation, which include membership of well-established international commodities exchanges.”

No venturer wants to plough where he is not sure to reap and this has been the bane of Nigeria’s agriculture and solid minerals sectors since the excision of the marketing boards of yesteryears. Entrepreneurs, with government support, need to explore this niche area across the country to facilitate the distribution of goods, risks and profits.

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Samed Olukoya

Is the CEO and Founder of Investors King Limited. He is a seasoned foreign exchange research analyst and a published author on Yahoo Finance, Business Insider, Nasdaq, Entrepreneur.com, Investorplace, and other prominent platforms. With over two decades of experience in global financial markets, Olukoya is well-recognized in the industry.

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Energy

Tinubu’s Government to Convert Fuel Stations to CNG Outlets for Cheaper, Cleaner Energy

Published

5 hours ago

October 24, 2024

Bassey Marshall

The Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo, has revealed President Bola Tinubu’s plans to convert fuel stations into Compressed Natural Gas (CNG) outlets to provide Nigerians with an affordable alternative to petrol.

In a statement on Wednesday, while addressing State House correspondents after the Federal Executive Council (FEC) meeting, Ekpo confirmed that the President intends to expand the use of CNG across the country.

The minister emphasized that CNG is here to stay and urged Nigerians to embrace the initiative, adding that it is safe, cheaper, and environmentally friendly.

He said, “We are well aware that the President set up a Presidential Committee on the CNG to drive the CNG project. It is left for us to inform the general public that CNG has come to stay, and we have to follow that route because CNG is safe, cheaper, and protects the environment.

“It is important to note that when you are using CNG, you save a lot of money, a litre of fuel can go for N1000, but you get CNG at N200 per litre, which saves you N800.

“With the passion of Mr President, the push that he has given to us, we’ll try to drive the CNG programme to reach the nooks and crannies of this country.

“We have to take advantage of the natural resources, gas, that God has endowed us with.

“What we produce in our country is more than enough for us to use for CNG; and of course, you know, we are exporting to so many other countries.”

This development follows a recent CNG vehicle explosion at the NIPCO CNG station on Eyean, Auchi Road, Edo State, which resulted in multiple injuries and damage to vehicles in the vicinity.

Fortunately, no deaths were recorded.

Crude Oil

Large US Crude Inventories Weaken Oil Prices

Published

13 hours ago

October 24, 2024

Iyanuoluwa Martins

Oil prices fell on Wednesday after data showed that US crude inventories rose as traders continued to consider the conflict in the Middle East.

Brent crude oil, against which Nigerian oil is priced, shed $1.08, or 1.42 per cent to settle at $74.96 per barrel while the US West Texas Intermediate (WTI) crude oil dipped by 97 cents, or 1.35 per cent to $70.77.

The US Energy Information Administration (EIA) reported an inventory increase of 5.5 million barrels for the week to October 18.

The inventory change followed an American Petroleum Institute (API) estimate of a build totalling 1.64 million barrels for the reported period. It also compared with a draw of 2.2 million barrels for the previous week, as reported by the EIA last Thursday.

In petrol, the American authority estimated an inventory build of 900,000 barrels for the week to October 18, with production averaging 10 million barrels daily.

This compared with an inventory decline of 2.2 million barrels for the previous week when petrol production averaged 9.3 million barrels daily.

Market analysts noted that the crude inventory build is due to the recent hurricane in the US which curtailed production in the largest oil producer in the world.

Pressure also came as the US dollar index rose to its highest point in late July.

A strong US Dollar can hurt demand for oil, which is priced in the American currency, as it makes it more expensive for holders of other currencies.

The market also continued to monitor developments and concerns over potential oil supply risk from conflict in the Middle East.

On Wednesday, there was no tangible outcome from the US Secretary of State Antony Blinken’s latest visit to Israel.

Israel continues to pound both Gaza and Lebanon, and most recently it killed the next in line to the top spot at Hezbollah, Hashem Safieddine, sparking expectations of retaliation.

Mr Blinken pushed on Wednesday for a halt to fighting between Israel and militant groups Hamas and Hezbollah, but heavy air strikes carried out by Israel on a Lebanese port city Tyre showed that there is no calm in sight.

Market participants expect the conflict to go on longer and have taken advantage of the events unfolding to price longer.

Gold

Gold Continues Gains Amid Political Uncertainty in the US

Published

1 day ago

October 23, 2024

Samed Olukoya

Written by Samer Hasn, Senior Market Analyst at XS

Gold continues to reap historic gains today, touching $2,758 per ounce for the first time.

Gold’s rise comes amid heightened political uncertainty, driven by the approaching U.S. presidential election and the tightening poll results between the candidates. The absence of any near prospect for a ceasefire on any of the Middle East’s raging fronts also keeps the yellow metal’s appeal high.

While gold’s continued rise despite the strength of the US dollar and rising Treasury yields seems to reinforce the hypothesis that this rise is driven by increasing uncertainty rather than hope for lower interest rates.

With less than two weeks to go until the presidential election, we see no clear lead for either candidate over the other. Meanwhile, Kamala Harris is 1.7 percentage points ahead of Republican candidate Donald Trump in the average of the polls, according to FiveThirtyEight.

This closeness in the polls may reduce bets on risky assets, which may be volatile sharply after the results are announced, and at the same time, it may boost demand for safe assets.

During the previous two sessions, the largest physical gold exchange-traded fund, SPDR Gold Trust (GLD), attracted net positive inflows of about $580 million, while the iShares Gold Trust (IAU) recorded about $82 million in inflows during the same period.

However, Wall Street does not seem to share the same views. The Wall Street Journal talked about the increasing bets by hedge funds on the possibility of a Donald Trump victory. Some are betting on further strengthening of the dollar as Trump imposes tariffs and reignites trade wars.

This will fuel inflation, which in turn is reflected in the rise in long-term Treasury yields, which reflect expectations of future interest rate hikes.

This in turn may be a negative factor that pressures gold to curb its gains, but in contrast, the International Monetary Fund sees high uncertainty about the future. The trade war and tariffs would disrupt global supply chains and hinder growth in the medium term.

Further, in the Middle East, we have seen increasing talk from the US administration about pushing for a ceasefire, especially with Secretary of State Antony Blinken’s visit to Israel. However, I do not believe that this will lead to any tangible progress towards stopping the war on any of the regional fronts.

Egypt has presented a small proposal for a temporary ceasefire in Gaza. However, this proposal does not seem to lead to anything, especially since the far-right ministers in Israel are opposing it, according to what Israeli officials told Axios earlier this week.

This is regarding a temporary ceasefire, while reaching an agreement for a permanent ceasefire and ending the war will be even more difficult. Hamas also may not accept the return of the hostages unless the war stops, according to The New York Times.

As for Lebanon, Israel has sent to US the conditions for ending its war there, which are believed to be unacceptable to Lebanon because they constitute a violation of sovereignty, according to Axios as well. The conditions include granting Israel the freedom to carry out military operations inside Lebanon.

In addition, Nicholas Kristof says in an opinion piece in The New York Times that he is skeptical about capitalizing on the “opportunity” to stop the war after the killing of Hamas leader Yahya Sinwar due to the lack of significant pressure from the US administration on Israel. He also believes that the momentum around this opportunity may fade in the coming days as the escalation worsens if Israel attacks Iran, prompting the latter to carry out a counter-response.

Instead of seeking to reach an agreement to stop the war, we see growing momentum inside Israel for the idea of resettling the Gaza Strip, which contradicts any peace efforts. The Wall Street Journal mentioned further promote for this idea by members of Prime Minister Benjamin Netanyahu’s Likud party, which describes itself as liberal, and this comes in conjunction with the escalating rhetoric of the extreme religious right about resettlement.

Accordingly, I believe that the increasing talk about the hope that a calm is approaching in this regional war is exaggerated and it will diminish with the coming rounds of escalation.