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Commodities | |
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Friday,
July 19, 2019 /01:42PM / By SEC Nigeria / Header Image Credit:Wikimedia
The commodities Trading ecosystem in
Nigeria has been one to watch for the past couple of years, with the
Federal Government intensified efforts towards diversifying the economy and
reducing overdependence on crude oil, a lot of investments have been channeled
towards the commodities space especially the agricultural commodity market
space. Numerous programmes such as the CBN Anchor Borrowers Programme as well
as the NEXIM Bank Export stimulation Fund are to mention some of the few
deliberate efforts of Government to ensure food stability and sufficiency in
the country.
There are other efforts put in place by
the TSecurities and Exchange Commission through the activities of the Technical
Committee (TC) on Commodities Trading Ecosystem which draws members from
various stakeholders in the commodities ecosystem including the Central Bank of
Nigeria, Financial Markets Dealers Quotations (FMDQ), Nigeria Stock Exchange
(NSE), Standards Organization of Nigeria (SON), Bank of Agriculture (BOA), The
Nigeria Incentive-Based Risk Sharing System (NIRSAL), Financial Systems
Strategy (FSS 2020), AFEX Commodities Exchange Ltd and the Nigerian Commodity
Exchange (NCX). The report of the TC is being implemented and its expected to
make the much desired impact.
Commodities Trading Ecosystem is an
organized environment within which commodities trading takes place and directly
or indirectly, affects activities and development of the commodities market and
the exchanges. It is comprised of various elements, which are integral to the
architecture of the market and vital to the smooth and efficient functioning of
a commodity market or exchange.
It encompasses all spheres of the
commodity trading environment that includes, commodity exchanges, farmers,
merchants, aggregators, processors/producers, commodity market operators,
warehouse operators, collateral managers, banks, insurance companies, clearing
houses, and logistic companies. The commodities ecosystem will not function
properly nor achieve its value from its existence if any of the above elements
are absent, inefficient or underdeveloped.
It is imperative therefore, to have an
organized and efficient commodities market to spur growth and
competitiveness and to play the strong role of enabling food security,
employment generation and economic diversification. The ecosystem will assist
in moderating consumer prices, promote attractiveness of agribusiness, foster
financial inclusion and improve industrial output and profitability as well as
government revenue. It will also enhance the wellbeing of the farming community
and help reduce rural - urban drift.
Benefits of the ecosystem include:
Create economic diversification and growth
Create employment and raise the living
standard of the farming and mining communities
Foster financial inclusion of small holder
farmers and miners
Make investment in commodities more
attractive.
Create liquidity and facilitate price
discovery, which further encourages commodity trading.
Provide oppor tunities for investment in
the commodities value chain such as warehousing, assaying services, brokerage
and logistics
Promote the development of derivative
markets as derivative instruments with commodities as the underlying
instruments
Provide reliable price benchmarks for
non-exchange traded markets such as the Over -The -Counter (OTC) market
Ensure exported commodities meet minimum
quality and standard through traceability.
What is the position of the ecosystem
now?
The Commodities Trading Ecosystem in
Nigeria is at its nascent stage with a lot of work required to be put in by
stakeholders. There is a knowledge and information deficit which trickles down
to the players in the ecosystem, the requisite policies and infrastructure
required are either in a comatose stage or non-existent. A complete circle of
engagement with all stakeholders will be required to get the Ecosystem up and
running using a hands on approach that not only rejuvenates the ecosystem but
also sustains it
What Needs To Be Done
1. Good Enabling Business
Environment
The business environment in the
agricultural and solid mineral sectors should be attractive enough to encourage
participation across the value chain. This means that constraints to the
development of the sectors should be regularly assessed by relevant Government
agencies and efforts should be made to remove identified constraints. Existing
impediments should be eliminated, new policies with potentials to facilitate
agricultural and solid mineral development should be introduced periodically
2. Macroeconomic Policy
Government should ensure that its
macroeconomic policies are sound and stable; promoting private sector
investment. The policies should be consistently favourable to the development
of the agricultural and solid mineral sectors. While a commodity exchange can
promote the growth of the agricultural sector, if appropriate agricultural
policies are non-existent, it would stunt the development of the sector
3. Strategic Purchases through the
Exchanges
Government should procure grains into the
strategic grains reserve through the exchanges and mandate all of its agencies
such as NEMA to procure their grains through the commodity exchanges. This will
ensure quality, price transparency, and foster the development of the
exchanges. International agencies operating in Nigeria such as the World Food
Programme (WFP) should be encouraged to buy their agricultural commodity
requirements through the Exchanges.
4. Price Information
The Exchanges serves as a platform for
obtaining price information. Prices of commodities traded on the exchange
should constantly be made available to the public through various channels
including electronic media and print. These prices serve as a guide to
investors in making investment decisions.
5. Improved Infrastructure
Infrastructural development is important
in agricultural and solid mineral development and a well-functioning
commodities market. Improvement of existing roads/railways and development of
new ones are important to the investment and development of the agricultural
value chain as they link farmers to the markets, reduce post-harvest losses and
facilitate the movement of people and goods including agricultural input at
lower transportation cost. Improved rural infrastructure can potentially expose
rural farmers to fertilizers and better farming technology thereby raising
productivity. The provision of efficient and good network of infrastructure can
have significant multiplier effect on the economy and the commodity exchanges.
6. Access to Finance
Improving agricultural production requires
funds to acquire farm inputs/inplants, increase the capacity of farmers and
capacity across the value chain. Improved access to finance will also ensure
that farmers undertake post-harvest activities more efficiently, access
markets, and improve agricultural practices, among others. Small-holders
farmers' access to capital for increased output is very much a challenge. This
is in spite of the fact that agriculture contributes almost 30% to real GDP and
is a major employer of labour in the country.
7. Development of Warehouses
An investor will be willing to trade
commodity on the exchange if he is assured that the commodity will be available
whenever he wishes to exercise his secured right. An important requirement in
giving such assurance is the dependability of the warehouse in which the
commodity is held. To ensure dependability, warehouses for storing exchange
traded commodities must satisfy standard conditions to hold and keep the quality
of specified commodities. The warehouses have to be license by the Exchanges
registered by the SEC and controlled by a party (collateral manager)
independent of either the seller or buyer of the commodity. A well-developed
warehousing system would foster the development of warehouse receipt trading.
8. Grading and Certification
Grading and certification are critical for
enshrining standards and for the integrity of commodities traded. This is core
to the operations. The grading and certification function of the exchanges
ensures quality of commodities traded in the market and promotes trust and
confidence. As the agency responsible for establishing and approving standards
in Nigeria, the SON should continuously collaborate closely with the SEC,
through interactions with the Commodities Trading Ecosystem Implementation
Committee, the exchanges and other stakeholders to develop standards for the
commodities traded over the exchange.
9. Provision of Improved Extension
Services
Provision of high quality farm inputs at
more affordable price to smallholder farmers will significantly reduce their
burden and boost production. Establishment of more seeds centers across the
Federation for better access to improved seeds by smallholder farmers is
important. Government agencies and the private sector should be encouraged to
invest in mechanized farm implements to service the needs of smallholder
farmers in clusters. Such implements should be available for lease by the
farmers during farming season at affordable rate.
10. Discounted Payment to Farmers on
Insurance
This is one of the programs of Nigerian
Agricultural Insurance Corporation (NAIC) whereby the government subsidizes
premiums paid by farmers to NAIC for agricultural insurance. Government should
support the liberalization of agriculture insurance by allowing private sector
owned insurance companies participate in intervention schemes such as the CBN
Anchor Borrowers Scheme. This will expand insurance coverage to include more
farmers and farmer cooperatives. Currently, provision of insurance cover to
farmers in intervention schemes is done only by NAIC. Besides, insurance
capacity generally in agriculture should be developed as there seems not to be
enough capacity in agriculture insurance.
11.Education and Enlightenment Programs
Educational and enlightenment programs on
the role of commodity exchanges and auxiliary institutions should be targeted
towards the general populace and specifically to policy makers to educate and
encourage them to make policies that will promote the development of the
Commodities Trading Ecosystem and enlighten farmers on the benefits the
commodity exchange offers in terms of price transparency and value addition.
Stakeholders such as the aggregators,
exporters and processors should be educated on the benefits of a commodity
exchange, the entire value chain and how it can address most of the challenges
facing the commodities market ecosystem. While the general public should be
enlightened on investment opportunities available on the commodity exchange
market value chain, such as warehousing , collateral management and
transportation.
SEC’s Efforts Towards The Development Of
The Commodities Trading Ecosystem
The SEC in collaboration with stakeholders
in the capital market, is taking necessary strides towards implementing the
initiatives of the Capital Market Master Plan (2015- 2025) which aims primarily
at developing the Nigeria Capital Market.
As part of the implementation, the
Commission constituted a market wide Technical Committee to develop a roadmap
for reviving the Commodities Trading Ecosystem. The Committee submitted its
report which has over 40 recommendations to be implemented in four phases
between 2018 and 2025.
To coordinate the implementation of the TC
Report, the SEC constituted an institutional members' committee to direct the
implementation of the recommendations. The SEC has a representative on the
Committee while the secretariat is resident with the Commission to effectively
drive the process. The Implementation Committee has commenced implementation of
some of these initiatives.
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