AFEX positions ETCs as innovative opportunity for commodities market

Onome Amuge

In the lead-up to the 2024 local harvest season, AFEX, Africa’s leading commodities player, has reinforced its belief in the significant role of innovative structured trade finance solutions, particularly exchange-traded commodities (ETCs), in fueling investments in the agriculture sector.

According to AFEX, these commodity-based instruments will serve as pivotal drivers for promoting growth and stability within the industry, ultimately benefiting all stakeholders, from farmers and investors to the wider African economy.

Nigerian capital market operators and financial market executives recently met at a CEO breakfast to discuss the vital issue of driving investment in agriculture through innovative commodity-based instruments.

The session, which centred around exchange-traded commodities as a promising alternative investment class, emphasised the significance of developing financial instruments, particularly structured trade finance solutions, to boost investment in the agriculture sector.

Exchange traded commodities, which are the commodities-focused derivatives of financial market exchange traded funds (ETFs), offer investors a unique opportunity to diversify their portfolios and reap the rewards of various commodities within a single instrument. 

Unlike traditional commodities investing, which typically involves investing in one commodity at a time, ETCs allow investors to access a basket of diverse commodities, spreading risk and maximising potential returns.

For the agriculture sector, ETCs serve as powerful tools in driving investment, fostering sustainable growth, and supporting the long-term health of the industry. By providing a transparent and efficient method of investing in agricultural commodities, ETCs open the door for a broader spectrum of investors, including institutional investors, hedge funds, and individual investors, to participate in the sector.

This influx of investment, according to experts, serves to improve market liquidity, ensuring the smoother operation of the sector, while also reducing price volatility, enhancing stability, and supporting the development of innovative solutions for agricultural challenges.

Oluwafunto Olasemo, chief operating officer of AFEX Commodities Exchange, underlined the importance of alternative investment vehicles such as ETCs, noting that although Nigeria’s economy is growing at an average rate of two percent annually, the year-on-year growth for agricultural productivity is just about one percent.

According to Olasemo, the primary objective of the exchange is to facilitate investment in the commodities ecosystem by creating risk-adjusted instruments that allow players to contribute to the growth of the agriculture sector and, by extension, drive economic growth and wealth creation for investors.

In her view, investing in ETCs serves a dual purpose, enabling investors to capitalise on the potential growth of the agriculture sector while simultaneously supporting the development and growth of this vital industry.

The AFEX COO stated further, “The current government relief policy for the food security crisis is temporary, revolving around importation to close the gap but, we cannot import ourselves out of food insecurity because the gap is huge.

“The task at hand is to increase productivity and meet growing demand. One of the viable solutions is the need to unlock capital and encourage private investment for the agricultural sector through tailored products such as the ETC.”

Ayodeji Balogun, group chief executive officer of AFEX Commodities Exchange, elaborated on the company’s evolution in the commodities ecosystem, highlighting the crucial role that AFEX’s unique blend of expertise in both agriculture and finance has played. 

“Our experience, and moving from that, success, in creating innovative financial instruments is rooted in a deep understanding of both the agricultural and financial sectors. 

“By leveraging our expertise and leveraging the latest technologies, we have been able to develop products that meet the specific needs of investors while also contributing to the overall development of the Nigerian economy. 

“This is perhaps the first step of that journey, as we require continuous partnerships with key stakeholders, including financial institutions, regulatory bodies, and agricultural cooperatives,” Balogun stated.

AFEX Commodities Exchange, with a rich history spanning over a decade in the commodities market, reinforced its dedication to enhancing food security on the African continent at the CEO breakfast.

Looking forward, the AFEX team revealed plans to incorporate non-agricultural assets, such as metals, into the ETCs. This strategy aims to broaden the scope of the commodities portfolio, creating a diversified mix of agricultural and non-agricultural assets that will support year-round investments in the commodities market, countering the current seasonality of agricultural ETCs.