With restrictions and lockdowns following the outbreak of the Coronavirus pandemic, ensuring there is little or no disruption to food supply, an essential part of human existence has been top on the agenda. AYODEJI BALOGUN, country manager for AFEX Commodities Exchange Limited in a skype interview with CALEB OJEWALE, spoke on expectations in the commodities market, also giving insights into ComX, a novel trading platform recently launched. Excerpts:
The coronavirus is on the lips of everyone so I have to start with this. How exactly is this pandemic affecting the commodities market?
The prices of commodities are still stable. We have not had an impact on prices (in Nigeria). Demand has been bearish, so I think a number of buyers are sceptical about how things will look like and how foreign prices may decline and transmitted to us here. We also understand that demand is high and increasing; we expect that a number of millers would (soon) be out of stock and will be coming to the market to start buying.
Our expectation is that by early April prices will start climbing up because when people start buying will coincide with when farmers want to also sell to start buying fertilizer and prepare for the new season. So we expect that demand and Supply will balance out over the next four to six weeks.
Does this mean the outlook for the year remains the same?
It remains the same, except for a slight but moderate increase in price in the next four to six weeks. This is expected to be led by maize and paddy rice with price increments between five and seven percent.
Since the coronavirus is not doing any damage in the market for now, can you summarize what the major expectations are for this year?
Generally, from our market outlook, we estimated a fairly stable outlook. We expected about 13 to 15 percent price-increase across the staple crops. We projected higher ones for the export crops, which we have seen.
The export crops may have a higher than forecasted increase because of some speculations that are trying to hedge against the dollar, this may increase the demand for certain export crops being targeted at that market and that may swell up demand to the extent that dollar remains stable till the end of the year. On the staples I think the market will stay within the normal range; demand and supply are balancing out.
With the restriction on movement of people to and from some countries, don’t you think it will be a matter of time before this affects the movement of goods like commodities in the end?
Nigeria is self-sufficient for a lot of our products particularly the staple crops, so we don’t see a major issue there. We are deficit on soybeans so there may be a spike in soybeans somewhere in Q3, based on demand exceeding supply.
What of wheat, which is about the largest agro-commodity imported every year?
While we understand that the flights have been restricted, there is no indication that Shipping Lines have been restricted as of now.
Coming to your new offering, the comX that was recently launched, what exactly is it about?
What the ComX platform does is bringing ease of trade in the commodities space. On one hand, it allows fair, transparent transactions between processors and producers and allows price discovery because people can compete to buy and sell. It means farmers can deliver at our warehouses and other partner-accredited warehouses across the country and then these trades can be marched with buyers wherever they are and settlements happen seamlessly.
On the other hand, it also allows retail and institutional investors to come in and transact by investing against fixed-income products that are listed on the platform towards either financing the producer or the processor. It also allows them to invest against the asset-backed products so they are investing against the products and as the prices change they gain from capital appreciation of the underlying products.
If we are able to mainstream ComX as the core commodities trading platform for the country, we will be able to plan and understand the demand-and-supply dynamics. We will be able to have fixed prices for our food products and export products. Then we will be able to plan accordingly as a country.
Can you break down how this could work?
The asset-backed commercial paper allows issuers that are agricultural companies such as processors that may not meet standard commercial paper issue to be able to still issue Triple A-plus commercial papers. This is because through ComX, when they issue the instrument it is backed by the warehouse receipt representing what they are purchasing. This gives the issue a higher rating and through our warehouse receipt system, they are able to protect the integrity of the underlying assets that will give the investors confidence.
We think it is investors that can drive financing for agriculture and create agricultural instruments that will meet pension fund investment grade.
What would a typical example look like?
Let us say a rice company in Ogun state, for instance, wants to buy rice of a thousand tons. Now, they need 1 billion naira to buy that one thousand tons. Remember, the Rice Mill, most of the time when they buy these products, they are not going to use it immediately. It is about nine months before they use it but they want to buy it when the prices are best and to assure that they are secured to produce for the year.
They would then get this warehouse receipts and that would be lent against the borrower, serving as guarantee for the investor that is investing against the assets. Therefore, in our warehouse system, besides the company’s repayment capacity, you also have the custody of the product you are financing but the issue will still be rated by standard rating agencies. They would be approved by SEC and then they would go through the normal process.
One key thing here, you mentioned the warehouse receipts a lot, with the warehouse receipts bill yet to become law, is there any impact?
Even though it was passed by the last assembly, it was rejected by the presidency on the grounds that there shouldn’t be a need for a new regulator. The investment and securities act already assigns the regulatory power for warehouse receipts to the Security and Exchange Commission. This was also mentioned at the international conference for commodities exchange, where the Securities and Exchange Commission said they are working on a draft policy document that would regulate the operations of warehouse receipt system in the country.
If you look at South Africa which has the most developed commodity exchanged system in the continent, it actually does not have a warehouse receipt law. What is of importance is the existence of a contract law that covers transactions in the first place and secondly, having a regulator that regulates how actors in the market play and who has a right to play. So we actually do have more than enough protection.
Can individuals trade?
You could go on ComX today and you could buy Maize or Soya Bean on the spot market. When you buy those products you buy it at a price. The prices change daily based on demand and supply. So, in three months time, you sell that product. When you sell it, you then make or lose money based on the price changes. That works exactly like the stock market.