Commodity Exchange - A Lifeline For The Ghanaian Farmer
When the Ghana Stock Exchange (GSE) was established sometime in November 1989, there were moves for the establishment of a commodity market or exchange to help farmers market their commodities more scientifically.
These discussions went on to such an extent that an office was set up directly opposite the Bus Stop Restaurant on the Ring Road Central in Accra by some private sector actors.
Various workshops and seminars were conducted for various stakeholders including the media and it sounded as though the exchange was going to be in the 1990s. Unfortunately, this never happened.
The issue of Ghana getting a commodity exchange has once again been resuscitated with the Ministry of Trade and Industry taking a lead role this time round, as against the Ministry of Finance and Economic Planning, which mooted the idea of the exchange during the late 1980s.
A commodity exchange is nothing more than an exchange where various commodities and derivatives products on commodities are traded. It is similar to an equity market, but instead of buying or selling shares one buys or sells commodities. Commodity exchange is one of the oldest prevailing markets in human history.
Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals such as gold silver, nickel, aluminum, copper, etc.) and contracts based on them. These contracts can include spot prices, forwards, futures and options on futures. This means that world-over one will find that a market exists for almost all the commodities known to us.
A farmer raising corn can sell a future contract on his corn, which will not be harvested for several months, and guarantee the price he will be paid when he delivers; a breakfast cereal producer buys the contract now and guarantees the price will not go up when it is delivered. This protects the farmer from price drops and the buyer from price rises. There is therefore a guaranteed price for both the producer and the consumer of the agricultural produce.
The farmer can use this guaranteed price as a collateral to take a facility from a bank to improve upon its yields through the purchase of agricultural inputs.
In Africa, there are only two known commodity markets — Africa Mercantile Exchange (AfMX) based in Nairobi, Kenya which deals in agricultural, equity and energy products and the Ethiopia Commodity Exchange (ECX) based in Addis Ababa and deals in agricultural products.
In America and Europe, there are various types of commodity exchanges and the notable ones are the Chicago Board of Trade which was set up in 1848, New York Mercantile Exchange, the London Metal Exchange and in Asia, there is the Singapore Mercantile Exchange.In India, there are 25 recognised futures exchanges, of which there are three national level multi-commodity exchanges. Most of these exchanges operate as profit-oriented companies and are self regulatory.
Commodity markets ensure the development of an efficient modern trading system that protects the rights and benefits of sellers, buyers, intermediaries, and the general public. Commodity exchange system not only helps reduce inefficiencies in the market place and replace them with systems that benefit the producer, it can equally be said that it has the power to help national efforts at poverty reduction.
The sensitisation workshop held in Accra by the Ministry of Trade and Industry last week with assistance from the Ethiopia Commodity Exchange and the United Nations Development Programme (UNDP) brings alive the belief that the trade ministry is bent on the establishment of the exchange.
If this project takes off in December as promised by the Minister, Ms Hannah Tetteh, the seasonal glut and scarcity of some commodities during certain periods of the year will be a thing of the past. Farmers will be certain of the demand for their commodities and adequately prepare to produce them, since they would have a guaranteed market and price.
The market will not only benefit farmers but will equally generate value chain activities, thereby creating more employment. For example, the physical presence of the ECX consists of 11 warehouses, two of which are located in Addis Ababa. All these warehouses are manned by variouis calibre of personnel. There is also a trading floor in the same city, which handles 200 spot contracts in such commodities as coffee, sesame, haricot beans, maize and wheat.
The system also creates incentives for improving quality as producers now have a better knowledge of the premium paid for a higher quality commodity and thus take steps to improve the grade of their products. For the first two years of ECX’s operation, Ethiopia witnessed a tripling in the volume of top three coffee grades coming into the market.
The AfMX since 2005 has constantly evolved with the adoption of technology such as the introduction of computer-based systems, hand held devices and the Internet. In 2005, AfMX implemented an automated system for the dissemination of information online and in real-time, through a wide network of computer terminals.
At the end of 2007, AfMX had also developed a system of secure storage and online services for brokerage firms. Currently, the AfMX is a fully integrated electronic exchange. This clearly shows how far commodity exchange has reached.
The establishment of the Ghana Stock Exchange has generated a lot of specialised services within the industry. This can be seen through the number of investment bankers, stock brokering firms and the upsurge of financial news within the local media.
The creation of a credible commodity exchange will equally deepen the scope of the financial market and create more valued added jobs for Ghanaians.
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