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How commodity exchange can boost agric - THE NATION

JUNE 12, 2018

By: DANIEL ESSIET 



Without a functional commodity exchange to protect farmers from price fluctuations and wastage, the Federal Government may have put the wrong foot forward in its ongoing economic diversification agenda anchored on the agric sector. Operators and experts lament that lack of a commodity exchange where agro produce can be traded, and an efficient warehouse receipt system are hurting efforts to reposition the sector. They are calling for the strengthening of the commodity exchange system which they believe will push immense possibilities into farmers’ hands, generate more revenue and create jobs, reports DANIEL ESSIET.

From his vantage position as a farmer and Lagos State Chairman, All Farmers Association of Nigeria (AFAN), Otunba Femi Oke, knows what is required to reposition the agric sector to deliver immense benefits to various stakeholders. To him, a functional commodity exchange is one sure way to enhance the efficiency and competitiveness of agro commodity marketing in Nigeria.

For a start, Oke said a vibrant commodity exchange would help stabilise agro commodity prices and protect farmers from price fluctuations and losses arising from storage wastages. This, according to him, has become imperative in view of the need to give more impetus to the Federal Government’s ongoing economic diversification campaign anchored on the agric sector.

A commodity exchange works like the stock exchange market, providing the much-needed platform for commodity marketing. It is the platform where sellers and buyers of agricultural commodities meet and transact business. It also acts as a source of market information.

A commodity exchange is designed to help mitigate farmers’ risks and ensure that payments are made through reliable financial service providers. The exchange involves the use of warehouses with modern facilities where farmers and traders can take their produce to minimise wastages and exploitation by middlemen.

Farmers deposit their agro commodities in certified warehouses and are issued receipts, which are recognised by financial institutions in the country. A farmer can use the receipt as collateral to procure loans or other financial services.

That is not all. Farmers can also sell the receipt on the commodity exchange market without transferring their agro commodities from the warehouse. With this, farmers need not worry about price fluctuations and they can keep their commodities in the warehouse until prices stabilise.

But without a full-fledged commodity exchange, farmers cannot transact business on their agro products using the receipts, let alone approach banks for facilities. And this is why operators and experts including Oke are clamouring for the exchange to be in place.

The AFAN Chairman put the desirability of a functional commodity exchange for Nigeria in context when he said at this time when the economy’s exit from recession remains fragile, requiring strategic policy options to put it on a sustainable basis, Nigeria can no longer ignore the need for a commodity exchange.

He maintained that it will help to stabilise prices and assist farmers who are often hit by constant price fluctuations both in the local and the international export markets. He added that with agric still underdeveloped, requiring efforts to transform it from the subsistence level to a modern, commercial business, a commodity exchange is certainly a win-win for all stakeholders.

The obvious benefits of putting in place a functional commodity exchange for Nigeria is also not lost on Agri-business Specialist with the United Nations Development Programme (UNDP), Dr. Nelson Abila. He said, for instance, that a commodity exchange will encourage increased productivity in the agric sector.

He also said farmers and consumer will be in a better position to concentrate their efforts on managing production risks associated with variables such as weather conditions.

 

State of commodity marketing

in Nigeria

According to an expert, Nigeria has the potential to achieve self-sufficiency in food production and consumption. The country holds the record of one of largest agricultural land areas in West Africa.

With about 180 million inhabitants, Nigeria is also one of the most populous countries in the world. Around 85 per cent of its population live in rural areas that boast of expansive land mass for agric.

Sadly, however, agricultural productivity has remained low, due partly to inability of the authorities in the sector to empower farmers to produce more food.

Factors such as worsening environmental degradation, low technology usage, farmers’ lack of access to credit, and more importantly, an underdeveloped marketing system, among others, have continued to raise the risk of food shortage.

This must have been why the Federal Government, in collaboration with some development partners,  commenced the review of the performance and developments in the agric sector between 2010 and 2016.

This, according to Minister of Agriculture and Rural Development, Audu Ogbeh, was  to assess the progress made in the area of policy implementation in the sector.

Ogbeh, who spoke in Abuja, through the Ministry’s Director, Planning and Policy Coordination, Mr. Auwal Mai-Dabino, explained that the assessment was geared toward highlighting the successes and challenges faced in the sector over the years, with a view to tackling them to sustain the current growth rate in the sector.

According to Ogbeh, the review will help to reposition the sector for better performance. In line with the review, Chief Ogbe said the Federal Government had articulated 10 key areas to double productivity and improve access to export markets in line with the Economic Recovery and Growth Plan (ERGP).

He listed some of the key priority areas to include comprehensive livestock development, input transformation, produce and commodity storage systems, expansion support project and nutrition among others.

“This will help in sectoral planning process to achieve national goals and targets, assess how well state and non-state actors have implemented pledges and commitments for overall development of the sector,’’ Ogbeh said.

While the review and subsequent identification of priority areas was seen by not a few operators and stakeholders in the agric sector as a welcome development, Prof. Olomola Aderibigbe from the Nigerian Institute of Social and Economic Research (NISER), emphasised the need to transform the agric marketing system.

Aderibigbe, who identified poor market strategy as a major challenge in the agric sector, noted that the sector experienced slow growth within the period under review.

He said: “As much as we put emphasis on boosting production and promoting export and investment in agriculture, we should not lose sight of the marketing aspect. There is need for transformation in agric marketing so that we can have better prosperity to share for the farmers.”

Prof. Aderibigbe insisted that at present, farmers find it difficult to sell their produce. He added: “Nigeria has been lagging behind in the area of marketing and without market transformation, growth in the sector will not be sustained.’’

 

Clamour for commodity

exchange takes centre stage

Former Vice-Chancellor, Federal University of Technology, Akure, Ondo State, Prof. Adebiyi Daramola, recalled that in the 80s, commodities production and distribution was done by farmers, Commodity Boards were responsible for inspecting and buying smallholders’commodities.

The existence of such boards, according to him, provided the mechanism for money to flow down the value chain to smallholders. He said at that time, farmers knew they will receive a specified price for their produce. “This incentivises quality production and gives farmers a stable, predictable and timely income,” he said.

Daramola also said the arrangement enabled farmers to increase production, improve yield and the overall country’s cocoa production growth particularly. He, therefore, said it has become imperative to establish a functional commodity exchange to empower farmers and boost their productivity.

Why warehouses are key

to a stronger commodity exchange

As the clamour for a commodity exchange gathers momentum, the African Centre for Supply Chain (ACSC) Director-General, Dr. Obiora Madu, said warehouses and logistics are key factors for the success of a commodity exchange.

According to him, a combination of trading platform, warehouses and logistics with high credit reputation would strengthen the commodity exchange.

He said the Ethiopian Commodity Exchange (ECX) was a success story because of a functional warehouse structure that improves its accessibility for farmers across the country, particularly around major agricultural hubs.

Madu added that a trade can only take place on an exchange if both parties (buyer and seller) are confident of the availability of the commodity in a warehouse at a particular place and time.

Indeed, according to experts, certified and regulated warehouses are key to the success of the entire trading process, as they ensure that the commodity’s quantity and quality are guaranteed and maintained in the storage until delivery takes place.

Apart from ensuring the integrity of the commodity, certified and regulated warehouses ensure that commodities are stored according to specific conditions required for export such as temperature and humidity.

To achieve this, Obiora said the warehouse must be run by capable, certified, and insured warehouse service providers.

Madu said commodity exchanges have proven to be effective institutional mechanisms for enhancing the efficiency and competitiveness of agricultural markets.

The expert wondered why a country like Ethiopia will run an efficient and successful   commodity exchange and Nigeria was yet to do same, despite boasting large human and natural resources.

 

How warehouse receipt works

Under a warehouse receipt system, farmers or traders who subscribe to the platform are granted a receipt covering their goods after depositing them at the various warehouses set up by the exchange. The receipt can then be presented to banks to serve as collateral in the event that holders want to access loans.

With warehouse receipt finance, a farmer or trader delivers his produce to a warehouse that has been approved by a bank or other lenders. The warehouse or collateral management company in charge of it then issues a receipt vouching for the quantity and quality of produce being stored.

The bank then takes the receipt and provides financing to the farmer or trader – typically up to 70 per cent of its current market value – against it. The receipt acts as collateral for the bank, giving it the right to take ownership of the stored produce if the loan is not repaid.

Because of this, efficient warehouse receipt system is seen as a key mechanism in translating agriculture into tangible benefits for farmers. Madu argued that the creation of warehouse-receipt system and commodity exchange will improve the performance of the nation’s agricultural sector.

The consensus is that a commodity exchange, complemented by an electronic or e-warehouse receipt system, allows farmers to easily access finance. The commodity exchange will come with an e-warehousing registry that can manage warehouse receipts issued across the country just as equities traded in the stock market.

According to experts, an e-registry, which provides transparency and tracking of commodities in every single warehouse in the country, will go a long way in giving comfort to the banks, and this could be the game changer for the industry.

The registry will keep record of goods deposited with the warehouse and removed from the warehouse. Banks will finance farmers against warehouse receipts of agricultural commodities issued by certified warehouses and collateral managers.

 

Challenges

The joy of commodity exchanges, just like stock exchanges for securities, is that they give confidence to those buying produce that  actually exists, and that it belongs to the person selling it. They also ensure that the produce to be traded meets specified standards.

However, for a commodity exchange and its complementary warehousing receipt system to work, experts say they must be founded on solid legal and institutional framework. Besides, there must be high level of awareness among stakeholders.

But at the moment, the framework establishing the commodity exchange in Nigeria is weak and inadequate to sustain the operations of a modern warehousing receipt system.

Madu said  the sector needs a mechanism for certification of warehouses and a regulatory and institutional framework. Other requirements, he said, are standards for a warehouse receipt and a central registry where users can confirm the validity of issued receipts.

Experts, however, say the system cannot work if the framework doesn’t provide for the negotiation and transfer of receipts, rights and obligations of transferors and transferees, among others.

 

Private sector intervention

A private sector operator, Integrated Produce City Limited, based in Benin, Edo State, is said to have established an agricultural commodity exchange for cocoa growers, palm oil, rubber and cassava.

The firm said the concept of exchange market was to enable the farmer to fully dispose of his produce instead of losing 80 per cent of his output that rots before it reaches the market.

The firm, it was learnt, will have storage facilities, including refrigerated warehouses and host processing plants on its 100-hectare (247-acre) site in the state’s Ugbokun village when it starts operating by the end of this year.

The firm said the company has invested abourt 20 per cent of the required $135 million for the project and was in talks with lenders and investors from South Africa, China and Australia for additional capital.

According to the firm, the company plans to offer daily auctions as well as an industrial park for manufacturers.

Fed Govt also involved

The National Sovereign Investment Authority (NSIA) has also moved to revitalise the Nigeria Commodity Exchange (NCX) in Abuja.

NCX, formerly known as the Abuja Commodities and Securities Exchange, was originally incorporated as a Stock Exchange on June 17, 1998. It commenced electronic trading in securities in May 2001 and was converted to a commodity exchange on August 8, 2001.

The conversion was premised on the need for an alternative institutional arrangement that would manage the effects of price fluctuations in the marketing of agricultural produce, which adversely affect farmers’ earnings since the abolishment of Commodity Boards in 1986.

However, its Managing Director/CEO, Mr. Uche Orji, said in Lagos, recently, that his organisation was holding discussions with the Bureau of Public Enterprises (BPE), Ministry of Finance and the Central Bank of Nigeria (CBN) for possible takeover of the exchange.

He said the on-going negotiation for the takeover of the exchange, when concluded, hopefully before Q4 2018, would position it to create an agric sector that would guarantee optimum earnings for farmers. “We have conveyed our proposal. I’m hoping that we will receive necessary approval,” he said.

According to him, the authority will  invest in   NCX to  enable it develop the infrastructure to carry out its business effectively in facilitating trade and developing settlement instruments and platforms in agricultural produce and basic minerals.

He expressed hope that the commodity exchange will be able to improve farmers’ access to markets and   improve their earnings. But its success, according to Orji and other stakeholders, is hinged on effective regulation that will clearly spell out the roles of the private and public sectors.

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