Commodities and futures trading as survival option
THERE IS NO AR GUMENT that Covid-19 pandemic has altered ways of doing things at domestic and official level. Companies globally, have been exposed to higher risks and investors are more likely to hedge risk than in a normal period. This probably explains why investment in commodities trading becomes more expedient. Data from the portal of World Federation of Exchanges (WFE) on the growing clamour for commodities trading is revealing. The data indicates that in 2020, 9.3 billion commodity derivatives exchanged hands, an increase of 35.3 percent over the corresponding year. Of the volume, futures trading alone accounted for 96 percent while the remaining 4 percent was options. The underlying commodities cut across Agriculture, Energy, including emissions , ethanol and methanol, precious and non-precious metal, and index commodity derivatives. Let me quicky state that it is not the physical commodities that are traded on the commodities exchanges but electronic receipt of the underlying assets. Direct trading of the physical products through warehouses is simply a spot market which exists everywhere.
The data through WEF’s portal further revealed by underlying assets, agriculture and energy contracts accounted for the largest share in 2020, accounting for 36 and 31 respectively while precious metals, non-precious metals and other commodities accounted for 8 percent, 9 percent, and 17 percent, respectively. The scenario has brought into fore the essence of leveraging agricultural derivatives to createemployment, enhance food production and grow a country’s Gross Domestic Product (GDP) on sustainable basis. The time is ripe for Nigeria to build conversation around the economics of commodities exchanges, the organized market where electronic receipts are traded under rules and regulations.
Nigeria started as a purely agrarian economy but lost focus when Petro Naira took the centre stage. Today, external shocks characterize the international oil market and Nigeriacan no longer depend on income from crude oil to finance its economy. Ironically, the country is sitting on the goldmine of agricultural products but exploiting the opportunities in this space remains a hurdle to cross. Agriculture remains a springboard on which accelerated economic transformation can be erected. Successive administrations in Nigeria since 1960 have initiated various agricultural policies and established many institutions to boost income through agricultural sector. For instance, the country had witnessed Operation Feed the Nation (OFN), Green Revolution Programme (GR), Agricultural Development Programmes(ADP), National Agricultural Land Development
Authority(NALDA), River Basing Development Authority (RBDA) and Directorate of Food and Road and Rural Infrastructure (DFRRI). These lofty initiatives had progressively suffered from issues such as top-down approach to design and implementation, policy inconsistencies and bureaucratic bottlenecks.
The Administration of President Muhammadu , like his predecessors in the state house, has in its portfolio many initiatives aimed at transforming the agricultural sector. There is Livelihood Improvement Family Enterprises (LIFE), Anchor Borrowers Programme (ABP), Agricultural Equipment Hiring Enterprise (AEHE), Presidential Fertilizer Initiative (PFI) etc. Bank of Agriculture (BOA) and Bank of industry (BoI) have been strengthened for optimal performance. Despite the huge cost of the initiatives, food inflation is hovering at 18.17 percent as of March, the highest in four years. The high cost of food is attributed to farmers’ storage problem due to lack of warehouse, poor road network and conflicts between farmers and herders. The way to go to for Nigeria at this critical moment is commodities exchange.
In Agricultural Journal, O RENJUS puts into perspective the justification for establishment of a commodities exchange : “…Commodities exchanges are regarded as an integral part of the market environment. It is because they contribute to the formation of objective market prices and increase the liquidity of the market and reduce risks connected with off-exchange transactions.”
Globally, transactions worth trillion Dollars are traded daily on commodities exchanges. Those who have myopic knowledge of the market wrongly assume that Nigeria is not ripe for commodities exchanges . The exchanges are the nerve centre of activities for the following institutions and individuals in the value chain: Dealing member houses, Depository for clearing and settlement, warehouses, logistics companies, issuing houses, insurance companies, trustees, rating agencies, credit bureau, traders, certification agents, aggregators, collateral managers, and solicitors. Commodities exchange is a novel business enterprise in Nigeria and the role of SEC as the apex regulatory body of commodities exchanges seems misunderstood. But the Investment and securities Act (ISA) and Companies and Allied Matter Act among others have sufficient sections on the role of SEC in the administration of commodities exchanges. The Commission has already registered five commodities exchanges. It is obliged to ensure that the exchanges keep to the rules of the game. A proper has strong commodities exchange has strong potential to transform the economy. This is where the Commission should be encouraged by the government through creation of enabling environment for these exchanges to thrive.