Commodities Exchange Markets, an Incentive for Production

• 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.