Developing standardised markets to boost comparative advantage

Jennifer Abraham

Agriculture and solid minerals have been identified as alternative sources of revenue that Nigeria can exploit to create new wealth to complement its oil resources. At least 60 per cent of the population engages in one form of agricultural activity or the other, albeit mostly on a subsistence level. A nation like the United States of America produces its vast agricultural wealth with less than 10 per cent of its population; ploughing the fields because of the advantages of mechanised farming. Nigeria, on the other hand, still largely deploys stone-age tools for production, storage and marketing of primary produce, and consequently loses revenue to post-harvest challenges.

Mechanisation, which gives leverage to commercial farming, may not be achieved overnight in Nigeria due to its capital intensive nature. States and local governments can facilitate, in conjunction with private sector stakeholders, the emergence of standardised markets to absorb surplus harvests from farmers using tributary methods to reduce losses, and encourage primary production activities, among other benefits. There is a roaring need for the emergence of more sophisticated trading systems for local commodities that make manufacturers confident about the quality, availability and consistency of locally sourced feedstock.

For example, 2014 figures showed that Nigeria spent about N630m (this must have doubled or tripled by now due to inflated foreign exchange rates) on importation of wheat alone. Wheat is an important crop applicable in the production of bread, pasta and pastries, in livestock feeds production and so on. Although bread and confectioneries could be made using other grains and cereals like soyabeans and maize, Nigerians prefer wheat. Even the 20 per cent cassava inclusion which FIIRO has been perspiring to popularise is yet to be fully adopted. So, the national demand for wheat continues to rise. Currently, indigenous production is only able to supply about 7.6 per cent of national wheat need; this is an improvement on previous years when cultivation of wheat nearly went into extinction due to poor patronage. At the time, the millers had claimed that the quality of Nigerian wheat was inferior to the imported ones.

Today, the extant high cost of foreign exchange has triggered the millers’ recent acceptance of locally grown wheat and whole harvests are now bought up, leading to a rise in the cultivation of this emerging area of cache. The incentive is that farmers can sell what they produce. This development provides ample proof that beyond the provision of capital, inputs and other supports, market outlets are critical incentives for production. This is where the need for a commodities exchange market becomes pressing, in order to sustain the rising tide in wheat cultivation and other primary production activities.

Commodities exchange market would provide standardised outlets for locally produced commodities such as agricultural, solid minerals and so on. In the market, goods are graded and price tagged such that the need for on spot-trading is reduced. You do not have to see the goods and haggle before you can buy. Thus, industries can make purchases according to their specifications through those markets; making it easier for both the farmers and the manufacturers to remain in business. In 2014, the government had to buy up wheat harvests in Zamfara State by over 100 per cent of the market value to encourage farmers not to abandon their farms; whereas, the products were in demand in other parts of the country. Viable commodities bourses, with their attendant market information systems, would aid the channelling of goods from the areas of surplus to where they are needed.

No venturer wants to plough where he is not sure to reap, and this has been the bane of Nigeria’s agriculture and solid minerals sectors since the excision of the marketing boards of yesteryears. Government needs to urgently facilitate the emergence and strengthening of standardised markets across the country to facilitate the distribution of goods, risks and profits.

An upshot of these standardised exchanges would be the emergence of derivative products that can be traded, as it is done in other climes, to provide liquidity and stabilise the real sector. Thus, apart from trading in agricultural and mineral produce, contracts based on them like spot prices, forwards, futures and options on futures are traded. For example, a farmer raising wheat can sell a future contract on his produce several months ahead of the harvest time and a milling company could buy the contract ahead to ensure that the price remains the same when delivered. This protects the farmer from price drops and the buyer from price rises. Speculators and investors also trade on the futures contracts for profit; very much like the way stocks and shares are traded in the capital market.

The import of a commodity exchange and how it will benefit the solid minerals sub-sector was well captured in the aspirations of the botched 2002 National Assembly bill for the establishment of a solid minerals development commission. It reads, “The commission shall operate joint venture arrangements with the organised private sector, to establish a private sector-led world class solid minerals commodities exchange to pave way for the entrance of big time operators into Nigeria’s solid minerals sector, in promoting quality control as well as deriving benefits for the nation, which include membership of well-established international commodities exchanges.”

Commodities exchange will, therefore, be the welcome relief and the realistic incentive needed by emerging agricultural and mining entrepreneurs.

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