Our Path to Development: The Real Sector Transformation.
Nigerians believe that the country has the highest level of sophistication in Sub-Sahara Africa, however, the basics seem to somehow somewhat elude them. Just a couple of weeks ago, the country launch her first Futures for Foreign Exchange Market. This decision should have been made so many years earlier, but like it is said, better late than never. This again makes Nigeria more aligned towards the free market principles of Classical Economics. This advancement in the market system opens further doors. There are indeed other items that can be traded on the Exchange which includes Crude Oil, Crops, Precious Metals, Animal, Milk, etc. In this part of the world, their forte has always been in Shares, Bonds, Bills, and lately the Currencies. The opportunity here is vast.
For the purpose of this essay, I will focus on the Agricultural Sector. In Nigeria, the current governments (both Federal and Local) have been resonating the newly found desire for Agriculture. This call in 2016 is good, however, there is no guarantee that what led to the previous collapse of the sector will not hamper this new revolution. Efforts from all angles, private and public is focused around improving production, however, little or nothing is done about distribution or the market. The more interesting thing about this is that the solution is already out there. In fairness, one of the past government in 1998 launched the Abuja Securities and Commodity Exchange, but for many reasons, it did not work. The Advanced Countries of the world today have had commodity exchanges since the late 19th century. Every major Agricultural Exporting country today have a vibrant Commodity Exchange. In Nigeria, we aim to be a Major Exporter, but the commodity market is as unstructured as they come. With the recent Naira crisis, it is clear what can happen to a product/item (in this case the naira) when the market is unstructured. Like a typical market, there will be regulators, however, these regulators are not to be hindrances (as they often are). There are also infrastructures like Warehouses, Trading Systems, etc to make this work. In Nigeria, it will not be out of place to have multiple markets because there are actually alot of commodities that can be traded, and as new starters, there may not be sufficient capacity to trade in too many items. The United States alone has 13, trading all manner, from Currencies to Meat to Grain to Milk to Financials to Precious Metal and even Emissions!
Farmers in Nigeria face a myriad of challenges in marketing their produce. They lack proper storage facilities, which makes them incur heavy post-harvest losses. Most farming areas are inaccessible due to poor road infrastructure, which translates to high transaction costs as they pay heavily to transport their goods. This is the current reality. Farmers need every support that will provide a centralised market place where they can sell their commodities to manufacturers and consumers to make profit. This is the Commodity Market. The uniqueness of the Nigerian situation makes me more interested in the Agricultural Futures Market. The focus should be around Futures contract. What the futures contract mean is a contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity at a pre-determined price in the future. So, in simple term, I offer to sell 100T of Corn by Jan 2017 at NGN190,000. A buyer would offer to buy same come Jan 2017 from me. The price is guaranteed and I can start planting and/or sourcing for my January supply knowing the price I am going to sell in Jan 2017. This insulates the farmer from a price crash and also the buyer from a price increase. From both the supply and demand side, there is enough stability of such a crucial variable for planning.
Many may think it will not work, but in truth, it works in all parts of the world, and also here in Africa. One of the most prominent examples in Africa is The Ethiopian Commodities Exchange (ECX) set up in 2008. The commodities exchange trades coffee, beans, maize, wheat, sesame and a few other crops. Ethiopia Commodities Exchange experiment has helped farmers to sell their commodities at a profit with agricultural mechanisms such as crop insurance and warehousing. The value of the ECX rose 368 percent between 2010 and 2011 to reach US$1.1 billion. It also works in South Africa.
Nigeria is one of the largest producers of agro commodities in West Africa and they are lagging behind in such market infrastructure. There is clearly merit in having a functioning Commodity Exchange. I am of the opinion we need to relook at the 1998 model and make improvements and provide adequate support where necessary. The world is leaving us behind!
This essay seem to focus on majorly Agriculture. The reasoning for me is simple, Agriculture and Crude Oil accounts for big chunk of raw materials needed in the Manufacturing sector (another big part of the Real Sector). I am of the opinion that once the raw materials are available, the Manufacturing Base starts to expand. Little wonder that before the Industrial Revolution was the Agricultural Revolution.
Olamide Eyinla’s thought from Lagos, Nigeria.
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Originally published at https://www.linkedin.com on July 6, 2016.