CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Formerly, agriculture was a major source of food production, raw materials, employment generation and medium through which government was generating substantial income prior to oil boom in 1950s. As a result of the discovery of oil in the Niger Delta region of the country in the late 1950s, this gradually pushed the contribution of non-oil export commodities to the background (www.NigeriaBusinessinfo.com).

This is shown by the available statistics, which highlight a drastic fall in the year 2000, from 3.41% in 1998 to 1.19% in 1999 and to an all time low 0.52% in 2000. Nigeria’s transformation into mainly a mono-product exporting nation is now a common knowledge, a development that has severally been attributed to the discovery of crude oil in 1950s (Nkamnebe, 2004:95). He added that as a result, economic development has continued to elude us.

Also, available evidence is showing that apart from crude petroleum, Nigeria effort at establishing vibrant diversified exporting has continued to amount to mere political rhetoric (Ibeh, 2003:281-286; 2002: 286-303; Anyanwu and Nkamnebe, 2003). This equally has led to a situation where non-oil export marketing research is to say the least narrow and minuscule (Nkamnebe, 2004:95). This is most worrisome, given the fact that export market research is a known correlate of export development (Czinkota and Johnston, 1983:147-53).

However, the study of economic history provides us with ample evidence that an agricultural revolution is a fundamental pre-condition for economic development (Eicher and Witt, 1964:239; Oluwasanmi, 1966:7-15; Jones and Woolf, 1969:123). The agricultural sector has the potential to be the industrial and economic springboard from which a country’s development can take off (Ogen, 2007:184). Indeed, more often than not, agricultural activities are usually concentrated in the less-developed rural areas where there

xii

is a critical need for rural transformation, redistribution, poverty alleviation and socio-economic development (Stewart, 2000:1).

More so, a strong and an efficient agricultural sector would enable a country to feed its growing population, generate employment, earn foreign exchange and provide raw materials for industries (Ogen, 2007:184). She further echoed that the agricultural sector has a multiplier effect on any nation’s socio-economic and industrial fabric because of the multifunctional nature of agriculture. Furthermore, supply theory in economics holds that the higher price of a commodity, the greater its supply (www.fissecurities ltd.com). However, agricultural products suffer from supply price inelasticity, where an increase in price does not translate to increase in supply as production is subject to seasonal fluctuations and vagaries of weather.

Consequently, farm-gate prices are relatively unstable and carry a price risk which the farmers are ill-equipped to manage. To address the problem of price instability, successive governments had intervened through state trading agencies-the Commodity Marketing Boards- which were marketing monopolies that fixed prices for produce which they purchased from farmers and sold to processors in developed economies (www.fissecurities ltd.com).They were established as early as 1947, when the colonial administration established the Cocoa Marketing Board and subsequently the Palm Produce. In addition, Groundnut and Cotton Marketing Boards were established in 1949. The primary objectives of these boards were to manage and co-ordinate agricultural exports.

The magnitude of structural distortions in the economy led to the deregulation of commodity trade and made the 1986 Structural Adjustment Program (SAP) inevitable (www.fissecurities ltd.com). SAP, patently addressed the ‘Marketing Boards’ inadequacies through Trade Liberalization with particular emphasis on promotion and the adoption of measures to strengthen the productive base of the economy.

The productive sectors initially responded positively to the SAP policies available evidence showed that the Naira value of most agricultural exports increased appreciably, while the world market price for the same products were almost stagnant. Also, with the abolition of the Marketing Boards, many local merchants in collaboration with their foreign partners

xiii

were engaged directly in the export of primary products. These merchants reaped gains from the price increase than the real producers.

More so, Commodity Market was however characterized by sharp practices as a large number of inexperienced merchants entered produce trading, thereby bastardizing laid down quality procedures and engaging in the export of poor quality products (www.fissecurities ltd.com).

Most importantly, farmers became completely exposed to the trends in world commodity prices with their attendant volatilities. To manage the price risks associated with market fluctuation, the Federal Government acting under the advice of the Central Bank of Nigeria (CBN), directed the Ministry of Commerce to set up an Inter-Ministerial Technical Committee in 1989, to work out modalities for setting up a Commodity Exchange in Nigeria. The report of this committee was not implemented until 2001, when yet another committee charged with ensuring the conversion of the Abuja Stock Exchange (ASE) to a Commodity Exchange was set up.

However, government as part of Millennium Development Goals (MDGs) formulated a policy strategy (NEEDS) that gives recognition to the potentials of agriculture in solving some economic problems. Thus, according to the development policy of the former president Obasanjo’s Administration (2003-2007) NEEDS – National Economic Empowerment and Development Strategy (2004): agriculture is a key element in the development process. In a similar vein, according to a NEEDS document, “the priority to agriculture (especially to improve productivity of peasant farmers) is a key element of the poverty eradication strategy”.

More so, with reference to the same document, in spite of the dominant role of the petroleum sector as the major foreign exchange earner, “agriculture remains the largest employer of labour and a key contributor to wealth creation and poverty alleviation … (2004:76).

Recently, almost half a decade after the Nigerian government perceived that demand increase in agricultural production and productivity for economic development can only occur and be sustained when there is effective and efficient marketing of agricultural commodities. This is because agriculture supplies the needed raw materials for local

xiv

manufacturing and food processing firms, for the development of the industrial market in agriculture. As a result of this, government came up with the incorporated Commodity Exchange in Nigerian agricultural market in 2003 (www.fissecuritiesltd.com). In essence, Commodity Exchange is an exchange for buying and selling commodities for spot and future deliveries (www.the freedictionary.com).

In this regard, the Commodity Exchange is set up to market agricultural produce such as cocoa, sugar, cereals, cotton rubber and even non ferrous metals. A Commodity Exchange itself depends on a number of linked institutions, which are critical to its functioning (Gabre-Madhin and Goggin, 2005:22). These core institutions are: a market information system: a system of product grading; and certificate; a regulatory framework and appropriate legislation; an arbitration mechanism; and producers and trade associations.

In addition, a warehouse receipts system is a very important related institution. A Commodity Exchange also depends on the functioning of “allied” sectors such as banking, insurance, transport, IT service, and even inspection services. These institutions appear tailormade to address the stumbling block to an effective marketing of agricultural commodities in a way that promotes raw materials availability for local industries and possible supplies for export. Therefore, Commodity Exchange is the center of focus for this study based on its functionalities and operations in Nigeria for agricultural marketing and industrial market development nationally, regionally and internationally.

Nigeria stands to gain from the Exchange if properly regulated and incorporated with a suitable model just like other countries around the world like United State of America (Chicago Board of Trade) 1848, United Kingdom (London Metal Exchange) 1877, Brazil (The Bolsa de Mercadonias de sao Paulo) 1917, Kenya (Kenya Agricultural Commodity Exchange Ltd) 1997, South Africa (South African Futures Exchange) 1995, Zimbabwe (Zimbabwe Agricultural Commodity Exchange) 1994, Malawi (Malawi Agricultural Commodity Exchange) 1990s, among others) who have adopted Commodity Exchange model for rural/urban integration of the economy on one hand and national/international economic integration on the other hand. And as it is to be expected in all human

xv

institutions, environmental and situational imperatives determine the national brands of the Commodity Exchange.

1.1.1 Historical Background of Abuja Commodities Exchange in Nigeria

According to www. Nigeria Business Info.Com, historically early attempts to formalize product marketing in Nigeria can be traced to the 1930s when the European companies such as United African Company (UAC), John Holt, Societe Commercial Occidental Agency (SCOA) and Peterson Zochonis (PZ) were involved in direct purchases and export of Nigeria’s major Agricultural Commodities considered as essential raw materials for overseas industries.

However, government involvement in organized commodity marketing dates back to the Second World War, when the West African produce control Board was established to stabilize commodity prices. Thus, produce marketing in Nigeria falls into two broad categories, domestic trade in food items that has always been handled mainly by private operators, and the marketing of cash crops, which until 1986 was handled by Commodity Boards which were monopoly public institutions.

While the prices of food items were freely determined in the market by the forces of supply and demand, government fixed those of cash crops under the Commodity Boards. The Commodity Boards were noted for paying farmers prices that were lower than the world prices and sometimes even lower than their production costs. This difference represented implicit taxation of farm incomes and served as a disincentive to domestic production.

However, the recent conversion of the short-lived and controversial Abuja Stock Exchange (ASE) to a Commodity Exchange is a much – expected filling in the promotion of non-oil exports. Originally, Abuja Stock Exchange was set-up sequel to the report of the Denis Odife led panel that reviewed the Nigeria capital market and suggested the idea of multiple exchange. Though, a Federal commission headed by Dr.Pius Okigbo had in 1976 recommended a single National Stock Exchange (NSE), which led to the conversion of the Lagos Stock Exchange (LSE) by Act of 1977 to the Nigerian Stock Exchange.

xvi

Conversely, it is pertinent to note the merit of the Odife recommendation, which led to the creation of Abuja Stock Exchange. It was meant to deal with the seemingly monopolist tendencies in the market. The controversy was thus ignited when the Security and Exchange Commission (SEC) relying on clause 69 of the Odife paper subsequently directed the NSE to revert to its old name, LSE. This move was strongly, opposed by key players in the Nigerian economic terrain, argument against the establishment of the ASE was hinged on the fact that the existing NSE is not yet deep enough to fully serve its purposes within the economy, so why establish a rival exchange. With intense pressure from interested groups and persons both within the NSE and outside, the Federal Government converted the ASE to a Commodity Exchange in

2003, which is primarily involved in trading of Agricultural Commodities such as maize, sorghum and millet, a decision that was widely lauded by industry experts. However, the idea was first mooted in 1989 but was not implemented until 2001 when a committee was set up to ensure the conversion of Abuja Stock Exchange to a Commodity Exchange.

Furthermore, the new Commodity Exchange is expected to assist the Federal Government in its drive to expand the horizon and contribution of Nigeria’s non-oil exports to the national purse. This, it will do through the internationalization and standardization of Nigeria’s tradable commodities such as cocoa, sugar, cereals, cotton, rubber and even non ferrous metals. The direct implication of this is the further integration of Nigeria into the Global Commodities Market and more freedom within the local market. The country in the late 1950s gradually pushed the contribution of non-oil export commodities to the background. This is shown by a recent statistics, which highlights a drastic fall, from 3.41% in 1988 to 1.19% in 1999 and to an all time low 0.52% in 2000 of non-oil export. The spirited moves by the promoters of first African Commodity Exchange limited (FACOMEX) to take-over facilities of the ASE from inception was influenced by the need to incorporate the operation of the global market in line with the private sector requirements and government sponsored Commodity Exchange.

Thus, the government is challenged to undertake massive enlightenment and educational campaign on the objectives and role of the Abuja Stock Exchange, considering the unwholesome experience of the defunct Commodity Boards. It must be transparent in its

xvii

dealings and carrying along individual producers of tradable commodities, prospective investors and other participants in the emergent market. Abuja Stock Exchange must endeavour to learn from the mistakes of the more established Commodity Exchange in other countries a case in point is the Bourse Du Calao ET DU Café – BCC otherwise known as the Ivorien Cocoa and Coffee Exchange.