Nigeria may soon witness the commencement of trading in future contracts for major local commodities such as cocoa, maize, paddy rice and soybean among others. The development of exchange-based trading for commodities futures and other derivatives is expected to boost capital formation for the development of the Nigerian agricultural sector and to deepen the depth of the Nigerian capital market.
Currently, trading on commodities such as cocoa, maize, paddy rice, and others are limited to the spot and over-the-counter (OTC) markets. The spot and OTC markets expose participants to frequent price movements and counterparty risk. With the futures market, participants can lock in prices and positions of various commodities ahead of time without facing the risk of default by counterparty.
In furtherance of the commodity futures market, AFEX Commodities Exchange and NG Clearing Limited have signed an agreement to develop the infrastructure that facilitates trading and central clearing of futures contracts for agricultural commodities. AFEX Commodity Exchange will serve as the trading venue while NG Clearing will serve as the central counterparty that guarantees the settlement of trades. A central counterparty is a critical financial market infrastructure that facilitates the clearing and settlement of derivatives and other securities as well as the management of counterparty credit risk.
Chief Executive Officer, AFEX Commodity Exchange, Mr Ayodeji Balogun said the agreement was part of AFEX’s mission of being a reference point for commodities in Africa. According to him, the collaboration with NG Clearing is a new leap for the financial market as it further opens opportunities for generating shared prosperity through the commodity market.
He said AFEX shares a drive with market regulators and other players in Nigeria’s capital market to deepen the market and unlock financing options and alternative investment classes for players in the commodities ecosystem. “We believe that this would further position the country as a preferred capital destination with a viable path of effectively managing risks in key sectors of the economy,” Balogun said.
Chief Executive Officer, NG Clearing, Mr. Tapas Das, said the partnership with AFEX will usher in a new phase in the development of Nigeria’s financial and agricultural sectors. “As the central counterparty, we bring confidence and trust to the market as we will be guaranteeing the execution of the trades through our resilient collateral management processes,” Das said. He said the collaboration would unlock the untapped potential of commodity derivatives in Nigeria.
The agreement between AFEX and NG Clearing comes at a time when unlocking value in Nigeria’s agricultural sector is at the front burner of government initiatives. The AFEX market turnover currently stands at N123.72 billion while NG Clearing earlier facilitated the introduction of equity index derivatives in April 2022, serving as a central counterparty to the NGX Exchange.
Meanwhile, the country’s manufacturing sector continues to slide on a slippery slope due to the lingering forex crisis currently having ripple negative effects on key economic fundamentals. Corroborating the situation, the Manufacturers Association of Nigeria (MAN) said that the challenges of inadequate foreign exchange and energy crisis have dropped the manufacturing output growth from 5.8 per cent in the first quarter of 2022, to 3.0 per cent in the second quarter. The Director-General of MAN, Mr Segun Ajayi-Kadir made this public recently. The MAN boss, who spoke at the annual workshop/awards organised by the Commerce and Industry Correspondents Association of Nigeria (CICAN) in Lagos, with the theme, ‘Manufacturing: Despite FX and Energy Crisis’ impressed on the federal government and monetary authorities the need to address the twin evils of foreign exchange and energy crises largely responsible for the lull in the economy, especially in the manufacturing subsector.
“The frontline challenges of inadequate foreign exchange and energy crisis dipped the manufacturing output from 5.8 per cent in the first quarter of 2022 to 3.0 per cent in the second quarter. These challenges massively affected manufacturers that were already confronted by inclement operating environment compounded by the COVID-19 pandemic and the current Russian Ukrainian war,” Mr Ajayi-Kadir said.
Manufacturing indicators, Ajayi-Kadir explained, negatively affected capacity utilisation and contribution to real Gross Domestic Product (GDP). As a result, investment; employment; cost of production among others were also negatively impacted. “Increase in cost of energy pushed up global inflation which affected the cost of importation across the world including Nigeria. With the limited foreign exchange inflow from crude oil sales, foreign exchange demand pushed over the bounds of supply and contributed to the depreciation in Naira value,” he said.
