A commodity is a basic good that is interchangeable with other goods. Commodities can be grouped into four broad categories: Metals, Energy, Agricultural products, and Currencies. They are frequently used as inputs in the manufacturing of other goods and services.
Commodities are known to be risky investment options because of their volatile nature i.e., their supply and demand are impacted by uncertainties difficult to predict. Commodity derivative products have been created to hedge against these price volatilities providing a safer investment option in commodities. In addition to known traditional securities like stocks and bonds, commodities will help investors diversify their investments. They could be traded as futures contracts, exchange traded funds (ETFs) and options on Commodities Exchanges.
A commodities exchange is a structured electronic platform where commodities are traded through dematerialized contracts of existing commodities. They are also Self- Regulatory Organizations established to implement the rules governing the trading of standardized commodity contracts and related investment items.
Categories of Commodities
Agriculture: Agricultural commodities are staple crops and animals planted or raised on farms or plantations. Most agricultural commodities such as grains, livestock and diary serve as a source of nutrition for people across the world. They include corn, soyabeans, wheat, rice, cocoa, coffee, cotton, and sugar etc. These ensure that Agricultural commodities are always in demand “as people must eat”.
The agricultural sector is a vast sector that has varying phases along its value chain with multiple stakeholders. The various aspects of the Agricultural value chain include production or farming stage, aggregation, processing, packaging, storage, logistics, certification, export, import and technology involvement. These allows for multiple stakeholders such as seed experts, scientists, farmers, aggregators, certification agents, sorters, graders, warehouse managers, logistics managers, silo managers, soil scientists, millers, and technology providers to mention a few. These stakeholders currently work in isolation showing minimal growth in each aspect of the sector. The Commodities Exchanges provide an opportunity for these stakeholders to work together through an enabled ecosystem to see substantial growth and development in the entire ecosystem.
Energy: Energy commodities include crude oil, Natural Gas, and its byproducts. Energy prices affect the cost of almost everything including groceries, electronic devices, and fuel for vehicles. They determine the costs of heating and cooling industries, factories, homes, hospitals etc. Although the world is gradually evaluating renewable sources of energy, fossil energy is still in high demand and use. This sector is another sector with varying aspects like that of agriculture. They include production, refining, haulage, movement, storage, and trading of oil there are many stakeholders playing varying roles within this sector. These stakeholders include drilling companies, refineries, marketers, certification agents, tank farm and other storage facility managers, insurance companies, logistics companies, regulatory bodies and many more. Commodities Exchanges like Lagos Commodities and Futures Exchange, the first energy exchange in Nigeria is important for structure, price discovery and data collation of Oil and Gas commodities produced and traded under the radar within the country.
Metal/ Solid Minerals: Metals are elements, compounds, or alloys that are typically hard when present in a solid-state. Metal commodities include gold, silver, platinum, copper etc. Metals are used in the manufacturing sector to make Jewelry electronics, cutlery, factory equipment etc. They are used in power and storage industries and to build bridges, homes etc. This sector in Nigeria is heavily informal and illegal as mining is done majorly by artisanal miners who do not report their findings (Solid Minerals Mined) to the government for data collation. This ensures that the Solid mineral mined cannot be traced to a specifical source making it difficult to have these metals accepted on the global stage. The Commodities Exchanges provide an opportunity to align all the stakeholders for responsible sourcing, data collation, certification, and standardization of the metals.
It is critical to have a well-organized and productive commodities exchanges to promote growth and competition as well as play a significant role in ensuring food security, job creation, and economic diversification. Consumer prices will be moderated, agribusiness will be more appealing, foster financial inclusion, industrial production, and profitability, as well as government revenue, will all benefit from the ecosystem.
What should be done to ensure development of the Nigerian Commodities Ecosystem?
Written by Ogochukwu Nebeolisa, Edited by Nkechi Obi