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Repositioning Commodity Exchange Market For Economic Gains

Posted: Dec 9, 2015 at 10:45 am   /   by   /   comments (0)

Stakeholders in the Nigerian economy have stepped up campaign on the need to prioritise the country’s commodity exchange, Chris Ugwu reports

Over the years, the agricultural sector has suffered untold neglect in the hands of various administrations of the three tiers of government. The sector, which is capable of earning the much desired revenue for the country, has suffered from mismanagement, inconsistent and poorly conceived government policies as well as lack of basic infrastructures to see it through.

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 so for long until resources and earnings from oil and gas turned logic upside down, leading to the complete abandonment of the once revered entity that laid the golden egg.

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 the National Bureau of Statistics (NBS), the trend in the share of agriculture to 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 the negative impact of oil boom were also important factors responsible for the decline in its contributions. Currently the reverse is, however, becoming the case as the decline in the oil prices is currently affecting the economy and government is looking for a way to boost non-oil revenue in the country. Decline in oil prices ytd, according to analysts at FBN Capital, was put in the region of 24 per cent and this broadly mirrors the decline in the Nigerian stock market.

The market is reflective of the economy, and the economy towards the end of last year faced significant shots from crude oil prices and that has impacted the foreign exchange rate, and created uncertainties in the market place. This is the reason it has become expedient to boost revenue from the non-oil sectors of the economy, one of which is reviving the commodity exchange to encourage agriculture and also offer investors opportunities not only in the equity side but across the various asset classes. This will also enable investors to diversify their portfolios across different assets classes to mitigate risks.

Benefits of commodity exchange market

Commodity investing was initially well received by a few sectors. It was first restricted to the trade and exchange of commodities meant for regular and day to day use. However, the awareness in the subsequent stages has brought all sectors into the manifold of the market system, and has enabled speedy movements, transfer and transaction of goods and services in most of the advanced countries.

Explaining the objectives of commodities exchange, the Managing Director, Crane Securities Limited, Mr. Mike Eze, said that besides deepening the activities of the capital market with the introduction of new products, it also increases the earnings of the producers by reducing the effects or price volatility, providing a basis for risk management and serving as 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 commodities Exchange, which are 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. Another benefit of the commodity exchange, as enumerated by Eze, is that just as in banks and stock markets, the commodity exchange is essentially an institution for mobilising investment through the activities of hedges and speculators.

“The speculators in commodity exchange risk their capital in the expectation of making profit. By supplying the capital, the speculators help to create liquidity in the market,” he said. According to the Chief Executive Officer, Modus Market Concepts Limited, Mr. Brian Ojukwu, “as an investor, your chances of risks are very less if you choose to invest in commodity.

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.”

Ojukwu 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 is a prerequisite that the assets in the commodity market should not be correlated with the stock and bond market.

Need for commodity exchange

The Managing Director and Chief Executive Officer (CEO) of the Nigerian Commodity Exchange, Mrs. Zaheera Baba-Ari, while speaking at a forum recently, said that currently, commodity exchange operates sub-optimally as the conversion from stock to commodity exchange was done without the required structural and institutional infrastructure.

Baba-Ari said that the exchange lacked adequate warehousing capacity; adequate physical infrastructure (communications, transportation); and appropriate legal and regulatory infrastructure in terms of a system of grades and standards, and a credible system of contract enforcement and governance in spot markets.

Other drawbacks of the exchange, according to her, are lack of supportive public policies and institutional infrastructure such as producers’ organisations as most African countries are characterised by smallholder farmers. Stating why the current administration should reposition the exchange, Baba-Ari pointed out that the exchange was a key vehicle through which government can realise its objectives of employment generation through agriculture. She stated that the exchange platform, if repositioned, would encourage increased production of agro-commodities as farmers would have ready access to an efficient market.

The CEO further stated that the exchange would enable food processors to have ready supply of traceable, quality certified inventories; be assured of timely delivery of supply, freeing them from the expense of stockpiling; and price products appropriately owing to improved operational efficiency.

“Agribusiness data collection and analysis would be enhanced for the benefit of national economic planning agencies,” she added. The CEO suggested that all the operators in the commodity market should be mandated to participate actively in the buying and selling of their commodities on the floor of the exchange to deepen the commodity segment of the capital market and enhance liquidity as well as increase market capitalisation.

To the Chairman, Association of Stockbroking Houses of Nigeria (ASHON), Mr. Emeka Madubuike, “Policies that would promote marketability of agricultural products should be enunciated and implemented to boost operations of the commodities exchanges. Also, governments at the highest level must continue to make positive statements and assurances that will engender investor confidence.

Efforts of regulator

The Securities and Exchange Commission (SEC) is taking steps to address the issue of commodity exchange in the country. The Director General of SEC, Mr. Mounir Gwarzo, emphasised the need to revitalise the commodities exchange at the just concluded third quarter of 2015 Capital Market Committee meeting in Lagos.

He said that SEC was complementing the government in the area of agriculture strengthening commodity exchange to enable farmers have value for their products. He said that the committee mandated to chart ways to revive the Exchange had come up with a report, which implementation would soon commence.

Conclusion

To have a viable commodity exchange is particularly critical now, given the increasing emphasis on agriculture and with the sustainable bearish run, which have cost many investors fortune.

-newtelegraph