Commodity trading history can be traced to the agricultural revolution of 8500BC during which farmers and traders fashioned a means to secure prices of commodities against price fluctuation caused by weather, conflict, and supply and demand gap. Trading evolution, excess supply and the quest of merchants to raise money while commodity was in storage formed the basis for futures agreement. The first recorded commodity futures trades occurred in the 17th century in Japan, although there is some evidence that rice may have been traded some 6,000 years ago in China.

The first contract for a future price was created in the early 1800s in the US. This forward contract allowed a buyer to pay for the commodity in advance of taking delivery of it. The Chicago Board of Trade (CBOT) was set up in 1848; trading in contracts that were standardized in terms of quantity, quality and delivery. The CBOT added soybeans contract in 1936 and has since merged with the Chicago Mercantile Exchange to form the CME Group.

Exchanges added cotton and lard contracts in the 1940s while livestock was added in the 1950s. Contracts for precious metals such as silver started trading during the 1960s. By the 1970s, when global currencies were delinked from gold prices, currency value fluctuated based on supply and demand, and financial futures became a tradable “commodity”. With that, it became possible for cash settlements of trades instead of the traditional physical “delivery” of commodities. In the 1980s and 90s, stock indices such as the S&P 500 and government debt instruments were introduced.

Technology brought considerable innovation to the market including online trading which has heightened interest in commodities and futures trading as buyers and sellers could from the comfort of their homes and offices, place trade orders through electronic trading systems and online brokerage houses.

Apart from providing hedging instruments for commodities, the futures market has become an important hedging mechanism against possible losses in financial instruments such as stocks and bonds. However, it is important to state that interest in futures trading is not only to hedge the price of a commodity against an adverse price movement but it can also be used as a speculative instrument to profit from a desired price movement which could be up or down.

Commodity Exchanges in Africa

In 1861, the Egyptian Cotton Exchange was established in Alexandra and became one of the earliest commodity exchanges in the world. It played a key role in global trade, attracting users from the international community including Africa, Asia and the Americas. The exchange closed 100 years later in 1961 with the entry of the government as a player in the cotton trade.

African governments’ quest to deregulate their economies and open up the financial markets in the 1990s triggered their withdrawal from commodity trading and led to the establishment of commodity exchanges in a number of African countries with varying degree of success. Uganda, Zambia, Zimbabwe, South Africa, Kenya all established commodities exchange in the 1990s. The African Union Abuja Treaty of 1991, identified the need for an African Commodity Exchange and might have provided some awareness and push for the set – up of commodity exchanges in the continent, at the time. The concept of an African Commodity Exchange became one of the “instruments of integration” of the African Union (AU). In West Africa, there was also an attempt to create a regional exchange for food products following the adoption of the UEMOA Agricultural Policy paper by UEMOA heads of state in December 2001.

The South African Futures Exchange has been one of the most successful Exchanges in Africa and remains operational to this day. Established in 1995 it was acquired by the Johannesburg Stock Exchange (JSE) in 2001 and now is its subsidiary. The Zambian and Zimbabwe exchanges initially thrived but successive government intervention and commodities price volatility led to their failure. The Kenyan and Ugandan Commodity Exchanges experienced similar fate as both exchanges could not garner sufficient trade volume to survive. The Uganda Exchange subsequently transformed to the government regulator of warehouses while Kenya Exchange became a prices data disseminator.

A new wave to establish functional Commodity Exchanges arose in the 2000s and saw Nigeria set up the Abuja Securities and Commodities Exchange (ASCE), now known as the Nigerian Commodity Exchange (NCX), the African Commodities Exchange (ACE) in Malawi as well as the East African Exchange in Rwanda. Another attempt to set up a commodity exchange was made by Zambia through its Agricultural Commodity Exchange (ZAMACE). The Ethiopian Commodities Exchange (ECX) that was established in 2008 is today often seen as a model for other African countries as it is considered as one of the most successful in Africa. Based on a model of standardized warehouse receipts, it initially experienced low trade volumes as trading was then limited to maize, beans and wheat. However, its operations soured when the exchange introduced export commodities in December 2008. Furthermore, trading volume significantly rose on the back of government policies that mandated export trades such as coffee be carried only through the Exchange.

The success of ECX has been attributed largely to the support of the Ethiopian government. Coffee export in Ethiopia is said to have increased from $529 million in 2007/2008 to $797 million in 2011/2012. More recently, it has been recognized that this success has come at a price. The main beneficiaries of the exchange have been the traders and not the coffee farmers as hoped. Further, again because of Government intervention in standardization, the marvelous specialist varieties of coffee had all to be sold as ‘Robusta’. This did away with any hope of a premium price for quality. Within the last 18 months, this has been recognized in Ethiopia and the policies are changing in the hope of reducing the large black market in specialist coffees which has arisen as a result of simplistic policies of standardization

In Ghana, the Cocoa Board ensures transparency and guarantees prices to farmers directly, which negates the need for such intermediaries. Today, the Ghana Commodity Exchange is in an advanced stage of becoming operational. Tanzania and Kenya coffee auctions also provide efficient differentiation and traceability. Ghana is currently in the process of setting up a commodity exchange.

It is important that to build a thriving commodity exchanges in Africa, the experience of other countries needs to be taken cognizance of in order to avoid pitfalls and gain maximum advantage.

History of Commodities Trading in Nigeria

Some of the modern day agricultural marketing challenges such as access to market and produce funding were also present in the colonial era and responsible for the setting up of the Produce Marketing Boards by the colonial administration. The boards were to link the peasant farmers to market at stable prices. The Marketing Boards were set up in the three existing regions between 1947 and 1963 before the Western Region was spilt into Western and Mid-Western Regions. Cocoa Marketing Board was established in 1947 in the Western Region while Cotton and Groundnut Marketing Boards were set up in the Northern Region and Palm Produce Marketing Board in the Eastern Region in 1949.

The Boards were set up not only for price stabilization but also to serve as a source of funds for the economic development of the regions as well as to carry out research and development principally in cocoa, cotton, groundnuts, palm products and rubber.

The commodity boards subsequently set up “gazetted markets” across the country where the commodities were subjected to quality checks before they were bought from the Licensed Buying Agents (LBAs). The LBAs had produce buyers accredited to buy on their behalf. The produce buyers in the process went to different villages and farmsteads to buy the produce based on weight, physical appearance of the produce and allowance for possible quality defects from the farmers. They paid the farmers on the spot or sometimes at a later date depending on the relationship between them and the farmers. This arrangement largely promoted quality assurance right from the farm gates where the produce were inspected for quality prior to payment of farmers.

It was this quality assurance and the adherence to best agronomic practices by farmers that enhanced agricultural production and exports, and financed development projects in the regions. For storage of their produce, the regional governments built warehouses, many of which were large warehouses around the port area for their export commodities.

Warehouses start usually as storage device set up by commodity owners during seasons when harvest exceeds consumption. It is therefore reasonable to assume that in Nigeria, farmers started storage facilities to keep seasonal harvest of the crops. With increased communal interactions in the early years, trading activities also increased, eliciting different forms of storage arrangement. By the time the European traders came into the scene, the first set of structured warehouses or stores were built. These were essentially owner-operated or subsidiary warehouses as they were operated by the owners or by subsidiary companies, which were wholly owned and controlled by their parent companies based locally or overseas.

Colonial trading giants like John Holt, GB Ollivant and United African Company (UAC) owned the oldest of warehouses in Nigeria. The warehouses were used to store mainly export produce and imports from their parent companies.

The companies simply establish their own warehouse standards, which were adopted from their parent company or home country. There were no national standards or agencies until the introduction of the Federal Produce Inspection Service (FPIS) and State Produce Inspection Service (SPIS) in 1954.

The developmental impact of the marketing boards cannot be overemphasized as that period witnessed the establishment by the regional governments of some academic citadels such as the University College Ibadan (now University of Ibadan), University of Ife, University of Nigeria and Ahmadu Bello University. Funding of these institutions came from revenue from commodity exports. Besides these institutions, other landmark projects and policies were executed/implemented through revenue from the activities of the marketing boards. They included the establishment of the first television station in Africa, the Cocoa House, which was the tallest building in Nigeria at that time and the free primary education programme by the Western Regional Government, which was funded by proceeds from cocoa.

The Eastern Regional government did the same by implementing free primary education programme in 1957 from Palm Produce and Rubber exports while the Northern Region also undertook development projects from such export proceeds. The surplus that accrued to the regional governments from commodity exports arose from the difference between producer prices as fixed by the government of each of the regions and the prices at which the produce were sold overseas by the Nigerian Marketing Company established for this purpose by the Federal Government. The marketing boards later became Commodity Boards with the creation of states in 1967.

Under the marketing board arrangement, the farmers gradually felt short changed by what they received and formed a pressure group to protect their interest. One remedy they sought was an increase in producer prices approved by the boards. There are arguments today, as to the success of the marketing boards. For instance, Iweze argued that the marketing boards only succeeded to some extent in stabilizing seasonal producers’ price, but achieved little in stabilizing producers’ income.

The commodity boards were scrapped following the liberalization of the economy under the Structural Adjustment Programme (SAP) in 1986. Ironically, commodity exporters to date, still buy cash crops on the basis of the framework developed by the commodity boards.

However, unlike the era of commodity boards when farmers knew the buying price of all commodities under each board’s control, farmers nowadays suffer from price information asymmetry as they don’t know what the price of what they are selling goes for in the next village or the next rural market. It is these and other challenges that reinforce the need for the establishment of commodities exchanges as alternative marketing platform for commodities.

The Central Bank of Nigeria noticed the vacuum created by the abolition of Commodity Boards in 1986 and advised the Federal government to establish a Commodities Exchange. There was no gainsaying that the abolition of the commodity boards affected the standards and quality of commodities particularly, export produce, as there was no strong quality control and grading agency to ensure standards of the commodities. The private sector perhaps saw a business opportunity in the newly liberalized commodities business and paid little attention to quality. As a result, substandard commodities became wide spread. This defect was to impact negatively on the reputation of Nigeria’s export commodities.

The intervention by the Central Bank was therefore, an attempt to address the resultant effect of scrapping the marketing boards. The thinking was that a commodities exchange would provide standards and grading and assume that function of the commodities board and invariably promote produce quality, particularly of exports. Obviously, while this was a major concern for the CBN, it also recognized the wider benefits of having a thriving commodity exchange in the country.

An Inter-Ministerial Technical Committee was consequently set-up in 1989 to examine the possibility of setting up a commodities exchange in the country. The committee submitted its report a year later supporting the establishment of a commodity exchange. However, there was no evidence that concrete action was taken by government to do so. Nonetheless, an unsuccessful attempt was made by FALCOMEX, a private sector initiative, to establish a commodity exchange. Other than these efforts, no other attempt either by government or the private sector is known to have been made until August 8, 2001 when the Federal Government directed the conversion of the then Abuja Stock Exchange to a Commodities Exchange vesting the Ministry of Finance with the responsibility of midwifing the conversion process.

The SEC was part of the Inter-ministerial Committee constituted to examine the gap that arose after abolition of the marketing boards. Following the conversion of Abuja Stock Exchange to a commodities exchange, the SEC developed regulatory framework for supervision of the commodities exchange and engaged both the Bureau of Public Enterprises (BPE) and the Exchange to kick-start trading.

In 2014, SEC developed a 10-year capital market master plan to transform the Nigerian capital market. Mindful of the need to have an organized commodities market, one of the recommendations of the master plan is to develop a thriving commodities trading ecosystem. To achieve this mandate, the SEC set up a committee consisting of major stakeholders to review and come up with recommendations and road map for implementation. These efforts are key to the development of the commodities market.

The Nigerian Commodity Exchange (NCX)

As stated earlier, the Federal Government in 2001 directed that the Abuja Stock Exchange be converted to a commodities exchange. The conversion process however, started 3 years later in 2004 when an Inter-Ministerial Committee was constituted by the Federal Ministry of Commerce and Industry for that purpose. The report of this committee gave rise to another committee, a Steering Committee that was chaired by the Deputy Governor (FSS), Central Bank of Nigeria. The Steering Committee concluded its work in 2005 and trading commenced on the Exchange in June 2006.

It was a challenge to convert the exchange, which had operated solely as a stock exchange to be suddenly re-calibrated in all respect to a commodity exchange. The sudden transformation meant that the trading platform had to changed, operations had to be modified, new membership types had to be created, new products admitted for trading and new capacity developed, amongst others challenges. These changes required funds, capacity, products and new participants.

Unfortunately, the exchange lacked proper funding to carry out its functions and could not even mobilize sufficient funds to enable it enter into technical collaboration for capacity building and knowledge transfer which it needed badly with established commodity exchanges. In addition to these challenges, the exchange faced weak supply, lack of interest by operators in the securities market to open commodities trading subsidiaries, low understanding of the workings of the Exchange and the absence of supportive infrastructure and institutional arrangements that could strengthen the supply side of the market.

There was also the non – existence of vibrant farmers’ co-operatives that could bulk the produce of their members for wholesale marketing on the floor of the Exchange. Equally lacking were commodity grades and standards as well as farmers’ credit system based on Warehouse Receipts.

At the time, it was thought that giving the exchange a dual license to trade both commodities and securities, and thereafter privatising it would solve some of the challenges it was facing. Thus in 2003, in preparation for privatization, which unfortunately never materialised, the Bureau of Public Enterprises (BPE) directed the Exchange to change its name from Abuja Commodity Exchange (ACE) to Abuja Securities and Commodity Exchange (ASCE). This was to enable it acquire a composite trading license that would allow it trade commodities as well as securities such as stocks and bonds.

The perceived advantage of a dual license then was to attract enterprises for privatization. In the bid to spur activities, the exchange organized sensitization programmes for various stakeholder groups and pursued the introduction of a Warehouse Receipt System (WRS) in Nigeria. This has yielded some result with an executive bill on the subject matter sent to the National Assembly in 2017. The bill, as at the time of preparing this report, had been passed by the Senate and awaiting the concurrence of the lower house.

Believing that the enactment of a law on commodities exchange in Nigeria was necessary to get adequate funding from government and legal support for its operations, the Exchange in 2010 sponsored a Bill for an Act to establish Nigeria Commodity Exchange and Other Allied Matters, which is yet to be passed into law by the National Assembly. The Bill is said to be at the Committee stage of the House of Assembly. The NCX has also been involved in an initiative to develop the Market Information System (MIS) and a National Grading System (NGS) for agricultural produce in the country that is yet to be exposed to commodity market participants for comments by the Standards Organisation of Nigeria.

In terms of improving its operational efficiency, the NCX plans to acquire and install a non- proprietary electronic trading system to provide a trading platform for Warehouse Receipts. Based on the size of Nigeria and the relative robustness of its telecommunications and financial system, the Exchange intends to deploy a decentralized electronic trading system for standardized spot contracts that would facilitate a T+1 trading cycle with six (6) Remote Access Sites (RAS) one in each geo-political zone.

The RAS, which it said will be located in areas where particular commodities are grown, will provide facilities for electronic floor-based trading and would be electronically linked to the Exchange’s central trading engine at head office for the clearing and settlement of all trades. The sites are to be located in; Kano (North West), Gombe (North East), Jos (North Central), Akure (South-West), Abakaliki (South East) and Calabar (South South).

Each RAS shall be linked to NCX head office for effective management and service delivery. The Exchange stated that all commodity warehouses under its purview will be linked to the central depository to facilitate trading in electronic warehouse receipts WR issued by the Depository.

NCX hopes to develop a robust and efficient real-time Market Information System (MIS) that will provide producers, processors, industrialists and traders with objective up-to-date market information analysis, market outlook, and other references to assist in marketing decisions. As a result, the Exchange intends to set up three Market Information Centres (MICs) in each geo political zone of the country. The information provided by the MICs is expected to play a key role in effective pricing and help in eliminating artificial trade barriers that may be created by middlemen in the value chain. The market information centres will engender perfect knowledge of the markets among various players in the agricultural produce markets. It is important to point out that the privatization of NCX is still in progress with the planned investment of the Nigerian Sovereign Investment Authority (NSIA). Of course, any new investor may review the aforementioned planned initiatives of the Exchange.

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