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1.1 Background of the Study
Marketing in Nigeria can be traced to the 1930s. then, the European companies such as United African Company (UAC) John holt, societe commercials occidental (SCOA) and Paterson Zochonis (P2) were involved in direct purchase and export of Nigerian’s major agricultural commodities as essential raw materials for overseas industries (Osuala, 2006). However government involvement in organized commodity marketing and exportation dates back to 1947 (SEC, 2006, Osuala 2006). When a commodity board system was first introduced to market cocoa, palm produce, groundnut and cotton. The arrangement led to the incorporation of the Nigeria produced marketing company (NPMC) in England in 1947 the company served as the overseas selling agent for the four marketing boards, viz cocoa, palm produce, groundnut and cocoa marketing broads.
Following the constitutional development in 1954 which resulted in the creation of regions, the four commodity boards were replaced by the four all purpose regional marketing boards in Lagos to handle the export of the commodity. Meanwhile in 1977 the government reverted to the post second world war commodity board system this saw the creation of seven
commodity boards, which operate along expanded commodities fine under
national mandates they included coca, board (Ibadan), groundnut board
(Kano) grains board (Minna), cotton board (Funtua), palm produce board
(Calabor), robber board (Benin) and roots and tuber board (Makurdi) (Sec,
2006) the boards were charged with the following functions
1) To stabilize produces prices
2) To secure the most favourable arrangements for the purchase and sale of the relevant commodities
3) To promote development and rehabilitation of produced areas and ensure that adequate supply of inputs such as fertilizers, sprayers,
chemicals etc were made available to farmers in order to enhance their exclusive responsibility for away commodity meant for export trade.
The magnitude of structural distortion in the economy led to the deregulation
of commodity trade and made the 1956 Structure Adjustment Program
(SAP) inevitable. The introduction of Structural Adjustment Programme
(SAP) ended the Nigeria government direct involvement in agriculture
commodity marketing. One of the main objective of (SAP) in 1986 was to
restructure and diversify the productive base of the Economy which was
heavily stewed to the oil sector and to imports. Besides, it was also intended
to introduce a system whereby the market was free, fair and
competitive and controlled by market forces without government interference. Government’s policy objectives this, included price and income stabilization for farmers and efficient distribution of agricultural produced. SAP patently addressed the marketing board inadequacies through trade liberalization with particular emphases on export promotion and the adoption of measures to strengthen the productive base of the economy the productive sector initially response 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 (Sec. 2006) However after this time, it became clear to the Nigerian authorities that weather the low interest on agricultural loan nor other forms of subvention could encourage agricultural activities in the country. Fair and stable price of agricultural commodities were the only factor that could positively motivate farmers leading to enhanced agricultural production.
The establishment of the commodity exchange was considered the most appropriate way to protect farmers (producers) from the unfair pricing tactics of both the middlemen and the final continue of the commodities. As a prelude to establishing a commodity exchanges the commodity board system was abolished in 1988 to allow producers deal directly with overseas buyers, enhanced the price of agricultural commodities and created the
incentive that the farmers had hitherto looked forward to (Osuala, 2006) also, with the abolition of the marketing boards may merchants in collaboration with the foreign purchase were engaged directly in the export of primary products. These merchants reaped more gains from the price increase then the real producers.
However, as observed by Sec. (2006) Osuala (2006) in line with Garbal (1989) and Onoh (2002) a new development that the authorities had not reckoned with began to unflood the commodity market was however characterized by sharp practices as a large member of in experienced merchants entered produced trading thereby bastardizing laid down quality procedures and engaging in the export of poor quality products. Most importantly, farmers became completely exposed to the trends in world commodity prices with their attendant volatilities. To manage the prices risks associated with international standards. The federal government ailing through the Central Bank of Nigerian (CBN) directed the federal ministry of commerce to set up an inter-ministerial technical committee in 1989, to work on modalities for setting up a commodity exchanges in Nigerian. 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 (SEC, 2002).
The new commodity exchange was expected to tackle the following setbacks being faced by producers in exportation of primary commodities. These include
(1) Poor market information/intelligence: the present commodity marketing system does not guarantee timely and free flow of price and trade information on commodity price at different markets with in the same geographical zone and therefore do not known whether it will benefit them to select in a market close to them or travel some distance to sell the same commodity at better prices than they would have received.
(2) Price Instability: supply theory in economics holds that the higher to price of commodity the greater its supply. However, agricultural commodities suffer from supply price inelasticity, where an increase in price does not translate to increase in supply as production is subject to seasonal fluctuation vagaries of weather. Consequently, frame cycle prices are relatively unstable and carry a price risk which farmers and ill equipped to manage exportation of primary commodities in the country is faced with lots of problems because of the lack of cushioning effects of price fluctuations.
(3) Weak infrastructures: inadequate infrastructures are another problematic issue in the export of primary commodities in Nigeria. In terms of transport, the roads and rail are in a dilapidated condition and a significant proportion of investment made in road net works in 1960’s has disappeared because of lack of maintenance. Storage is equally problematic because of lack of enough storage facilities for grains, vegetables, fruits and other perishable commodities. For instance the use of metal silos instead of concrete bins in storing grains often result in spoilage in humid climate due to moisture migration and condensation. Also local loading points are currently inefficient and needs to be upgraded to international standard.
(4) Unsatisfactory quality of primary commodities: when commodity board system was abolished in 1988 to allow produces deal directly with overseas buyers the commodity market was however characterize by sharp practices as large numbers of inexperience merchants entered produced trading thereby violating laid down quality food procedures and engaging in the export of poor quality commodities as a result, the country was brought into disrepute.
It was also expected to assist federal government in its drive to expand the horizon and contribution of Nigeria’s non-oil export to the national purse. This it will do through the internationalism and standardization of Nigeria’s traded commodities such as cocoa, sugar, cereals, colon, rubber and seven non-ferrous metals. The direct implication of this is further integration of Nigeria into the global commodities market and more freedom with in the local market the exchange will equally be of immense benefits to farmers, agro-commodity processors and merchants, as it will serve as a variable platform for them to mitigate the inherent risks in agricultural production and it is on this background that the research is based, to examine the activities of the exchange, and its impact on the export of primary commodities.
1.2 Statement of the Problem
Commodity price instability has been on the international development agenda since the 1950s the problems are well studies, high revenue trend to distort fiscal responsibility and monetary policy and encourage rampart corruption while a slump in price can lead to reduction in government and producer revenue, unemployment and a decline in government spending on education and health while developed country
producers are supplied by subsides and social safety nets developing countries and small holder producers feel the effects of commodity price instability much more directly. In developing countries, commodity markets have remained unstable over the period of 1983-1998 prices of commodity fluctuated from below 50 percent to above 150 per cost of the average prices (World Bank 1999). In Africa commodity export amount for about three quarters to total merchandize export. In many of these countries including Nigeria commodity production and trade impact the livelihood of million of people and also impact heavily on poverty, employment, production choices and on such macro-economic indices as government revenue, public expenditure, the balance of trade and foreign reserves.
Many commodity dependent countries are economically vulnerable and have to deal with the risk of falls in foreign exchange earning from commodity export which influences their capacity to import while at the same time being affected to rapid increase in prices of imported commodities
Price instabilities have continued to be a characteristic common to almost all commodity markets, and of anything then the amplitude of the fluctuations appears to have increased. Other characteristic include, poor
market information, inadequate infrastructure and unsatisfactory quality of primary commodity.
1.3 Objectives of the Study
The study is aimed at examining the major effects of commodity exchange on export of primary commodities in Nigeria. Specifically the study strives to:
1. Find out the level of price instability and its effect on export of primary commodities in Nigeria.
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