Boosting Economy through Commodities Exchange

As the Lagos Commodities and Futures Exchange prepares to commence operations, top securities dealers have advised the federal government to leverage the platform to create jobs and grow the country’s foreign exchange earnings, writes Goddy Egene

It has become very obvious that the COVID-19 pandemic will impact negatively on many sectors of the economy, a development that has made it imperative for the government to enhance the growth and development of commodities exchanges as alternative sources of revenue.

And one of the areas that is believed has great potential to boost growth of the economy is agriculture. Apart from putting relevant structures that will enhance the growth of local industries to boost agriculture, encouraging commodities exchanges will equally bring many benefits.
Securities dealers in the Nigerian capital market are already upbeat in that regard, saying the Lagos Commodities and Futures Exchange (LCFE), which is their brain child, will play a major role in the diversification of economy and promote alternative source of revenue.

In his opinion, the Chairman, Association of Securities Dealing Houses of Nigeria (ASHON), Chief Onyenwechukwu Ezeagu, explained that the negative impacts of COVID-19 pandemic on most sectors of the economy had made it imperative for the government to enhance the growth and development of commodities exchanges as alternative sources of revenue.

He said: “The need to encourage the establishment and growth of commodities exchanges in Nigeria cannot be over-emphasised in the wake of the crippling impact of oil glut and the COVID-19 pandemic. If Nigeria is serious about diversification of her economy and forex earnings, the route to take is via functional commodities exchanges where all asset classes: agricultural, hydrocarbon and solid minerals, etc are tradable in a most efficient and transparent manner and the quality of tradable commodities are guaranteed.

“This is even more so for local industries that need to be assured of regular and uninterrupted raw materials supply as their production input. The farmers, miners etc would benefit from an efficient commodities exchange platform as they have opportunity for prices discovery and an assurance of off takers of their output.”
According to him, the economy would be better off as economic activities are catalysed and sustained, noting that any serious minded government cannot but be conscious of the importance of viable commodities exchanges and use them as catalysts for economic development and sustenance.

“This informed part of the reason why ASHON and other progressive minded Nigerians floated the LCFE so that through its establishment, we can assist the government of the day in not only doing all the above, but also in helping to create employment for our teeming youths in this country,” said Ezeagu.
Also speaking, Chief Executive Officer, Global Asset Management, Mr. Babatunde Shobamowo, noted that government all over the world utilise commodities as a veritable means to hold value in bearish period or when the currency is facing imminent depreciation.

“Nigeria is blessed with untapped and adequate natural resources but the market needs to be developed to reach its potentials .Some of the products that can be traded in an exchange are crude oil, Natural Gas, Gold, Silver, Cocoa and Cotton, Beni seed. A commodity is an economic good that has full or substantial fungibility. Commodities over time tend to provide return that differ from stocks and bonds In addition, there are other inherent advantages that may accrue to the Government if well developed,” Shobamowo said.
To the Chief Executive Officer, Wyoming Capital and Partners, Mr. Tajudeen Olayinka, price discovery is a major driving force in an organised market as it provides a mechanism through which prices come to reflect known information about the market.

He said: “There are numerous benefits to an economy, especially, a developing one like Nigeria as it provides appropriate support to the orderly functioning of a Commodity Exchange in the country. Commodity Exchange facilitates trading of agricultural produce, metals, and mineral resources in standardised contracts, whether on spot or cash basis, or for future delivery, at prices that have been agreed upon by parties to the contract. This therefore suggests that activities in the market are largely driven by publicly available information around demand and supply of commodities, which should ordinarily arouse government interest.

“The presence of an organised commodity exchange facilitates trade and investments in an economy. It makes it possible for small-holder farmers who are not so literate to deal directly on the Exchange, and who may not have capacity to meet trade size requirements of an organized Exchange. They can come together as an association, or take advantage of warehouse receipt financing available in the system, to scale up their capacity for bigger contract delivery. This way, the small-holder farmers become an integral part of the commodity value chains, with job creation opportunities for unemployed youths and adults,” said Olayinka.

In same vein, the Chief Executive Officer, Highcap Securities Limited, Mr. David Adonri, explained that commodities exchanges formalise commodities business, facilitate de-risk agro lending, enhance quality of agricultural produce, facilitate export and enhance tax revenue to government.

“The positives are too numerous to cover. The Development of the Commodity Exchange space needs maximum support from government and banks to maximize its benefits,” Adonri said.
The Managing Director and Chief Executive Officer, LCFE, Mr. Akin Akeredolu– Ale, who said the exchange would soon commence trading on agricultural commodities, solid minerals, currencies and oil and gas, stressed that a credible option for Nigeria’s accelerated economic revival would be for the government to put in place structures to promote agriculture and commodities exchanges.

According to him, the direction of the exchange underlined its uniqueness as commodities exchange that will trade on fungible assets rather than pre-occupy itself with warehouse operations.
He added: “Our business model is to trade fungible assets. We have carefully selected globally acceptable operators in various fields. Our core business is to trade electronic receipts. The receipts must be signed off by relevant agents before trading. We are not out to operate warehouses. We have certification agents for warehouses to ensure global best practices. Our focus is on aggregators that already have certified warehouses. We shall engage with all members in the ecosystem.”

Preparatory to expected commencement of the operations, the LCFE in partnership with the Chartered Institute of Stockbrokers (CIS), had exposed stockbrokers and other securities dealers to the fundamentals of commodities trading.
Akeredolu-Ale, noted that the partnership between LCFE and CIS was informed by the statutory position of the Institute as the only body recognised by law in Nigeria to train and certify dealers for commodities trading.

He said: “From the inception, the strategic documents of the commodities exchange laid down two things: The issue of capacity building in personnel and the issue of certification and standardisation. We have gone past registration by the regulators. We are moving into products development. And for us to generate the products and the contract that are going to be tradable on the floor of the commodities exchange, we have to start building capacity.

“There has to be certification by a credible institution, recognised by law to train and certify operators in the capital market. So, we decided to partner the CIS to activate the capacity of stockbrokers in products development, understanding the commodities market and how to trade in the commodities market.”
He explained that the training exposed participants to tradable products on the commodities and futures exchange and the four asset classes scheduled for commencement of trading. He listed the assets as oil and gas, agricultural commodities, solid minerals and currency aspects of the trade.

Speaking on the paper titled: “Introduction to Commodities Market and Trading,” the CIS Registrar/ Chief Executive, Mr. Adedeji Ajadi stated that commodities exchange had become imperative in order to deepen the Nigeria’s capital market.
Ajadi, who also spoke on the derivatives products, explained its concept, nature and purpose, risk management, basic forms of derivatives instruments, growth in the global derivatives, characteristics of derivatives, participants in the derivatives market, plain vanilla and exotic derivatives and trading platforms.
He emphasised the importance of commodity derivatives such as futures contract, swaps, exchange-traded commodities as becoming globally traded instruments in the commodities market and therefore urged LCFE to leverage its unique products towards deepening the Nigerian capital market.