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Farouk gumel - Importance of Commodity Exchange

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Farouk gumel - Importance of Commodity Exchange

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Farouk gumel - Importance of Commodity Exchange

Farouk gumel - A Commodity Exchange or Comex is a regulated market allowing the purchase and sale of contracts backed by commodities such as gold, silver, crude oil and so on. Such an exchange serves as the central location for trading the commodities. Some of the major commodity exchanges in the world are Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), Carbon Trade Exchange (CTX), New York Mercantile Exchange (NYMEX), London Metals Exchange (LME), Tokyo Commodity Exchange (TOCOM) and more.

In its simplistic form, the purpose of exchanges is to provide a centralized marketplace where producers can sell their commodities to those who want to use them for processing or consumption. In its simplistic form, exchanges connect buyers to sellers. The sales could be for products that exist today or those that would be produced at a “future date”. For the “future” transaction, the exchange enables the farmer to lock in the price and offtake of his/her crop months before harvest. 

Commodity exchanges operate on a contract basis, such as spot prices, forward prices, future contracts as well as options on future contracts. These contracts offer farmers stability and consistency of prices for their produce while protecting them against drops in prices. Spot prices means today’s transaction. Future or forward prices/contracts means the transaction terms are agreed today but actual execution (payment and delivery) is made at a future date. 

Commodity exchanges mostly trade in primary products rather than manufactured products. This means in continents like Africa where primary production thrives, the existence of Commodity Exchanges will be a critical link between the producers and processors (both within and outside the continent). It is important to note that most of the commodities traded on the main international exchanges, such as Coffee, wheat, maize, sugar, oil and cocoa, are products that are prevalent on the African continent. It therefore makes sense for this trade, or at least part of it, to be executed within the continent. 

Where Would We Be Without Commodity Exchanges? 

Without commodity exchanges, it would be difficult—if not impossible—to establish a standardized price for a commodity. Those in the commodity industry would be personally responsible for finding individual buyers and sellers (local and foreign). Prices would be determined by access. There would be a higher possibility of defaults and bankruptcy as there would be no platform that vets the transactional parties. 

Benefits of Commodity Exchanges for Africa?

Engender perfect knowledge of the agricultural produce markets

Bring about proper price discovery leading to the proper pricing of agro-produce  

Reduce the cost of farming operations and improve quality of agro-produce through the adoption of best practice procedures

Reduce or eliminate price differentials in adjacent markets

Improve aggregation (bulking) of commodity volumes

Effectively mobilize agricultural produce from surplus to deficit areas

Minimize waste in agricultural produce marketing and consumption

Improve output and post-harvest handling of agricultural crops for better pricing

Improve income and standard of living.

Standardize weights and measures for commodity trading to facilitate uniform pricing

Eliminate the need for farmers to sell produce at harvest period when the price is poorest

Provide a hedging facility as an instrument against falling produce price

Improve access to loans as farming will become more lucrative

     To the African Economy

Arrest rural-urban drift

Create employment and generate wealth

Improve Internally Generated Revenue and its collection as commodity markets will become more organized

Increase the supply of raw materials for agro-processing companies

Encourage research into the processing of African agro-produce

Increase the earnings of operators such as banks, insurance companies, investment fund managers, transporters, warehouse operators, etc

Attract Direct Foreign Investment in agro-related economic sectors

Provide access to world markets for African agricultural produce

Improve the contribution of the agricultural sector to national GDP

Farouk Gumel, an Executive Director at TGI Group, a pan African conglomerate says Africa is the dominant producer for many agricultural commodities so it’s imperative to have an organized and efficient commodities market to spur growth and competitiveness. Farouk Gumel states having control of a sizable chunk of the commodity ecosystem will assist in moderating consumer prices, promote the attractiveness of agribusiness, foster financial inclusion and improve industrial output and profitability as well as government revenue. It will also enhance the wellbeing of the farming community and help reduce rural-urban drift.

Farouk Gumel concludes that the journey for many developed nations to prosperity started with having a vibrant and balanced commodity exchange that encourages production through the provision of offtake assurance. The same could happen in Africa if such commodity exchanges are embraced. 

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Farouk Gumel - Why is the Indian farmer protest important for Africa’s agricultural policy? 

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Farouk Gumel - Why is the Indian farmer protest important for Africa’s agricultural policy? 

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Farouk Gumel - Why is the Indian farmer protest important for Africa’s agricultural policy?

Recently, the media has been reporting about massive farmer protests in India against the implementation of certain agricultural reforms in Nigeria. The protest started on 9th August 2020 and most of the protesting farmers are from India’s two largest agricultural producing states (Punjab and Haryana). It is reported that these States are the largest beneficiaries of the Indian Government’s Green Revolution reforms. 

The first important point to note is the farmers protesting outside New Delhi are among the wealthier farmers in the country who are the major beneficiaries of Government interventions including the Minimum Support Price (MSP), the India government’s grain procurement program which provides offtake assurance through government regulated physical markets. So the views of these large players may not be a fair representation of the millions of smallholder farmers in India. 

The reforms proposed by the Indian Government comes are covered in three (3) new laws and, according to the Government, are meant to create a more level playing field by developing a framework for private traders to purchase crops directly from the farmers and bypass government marketing boards. Below are some of the issues the protestors are raising;

1. The first law, The Farmers’ Produce Trade and Commerce (FPTC) Act, offers farmers a greater choice in selling their produce. Under the act, farmers now have the option to sell outside the government-regulated physical markets, Agricultural Produce Marketing Committees (APMCs), to private channels, integrators, or cooperatives. They can now do this through a physical market or on an electronic platform, directly on their farm, or anywhere else, not just at designated APMCs. Essentially, the law provides more options to small farmers without compromising the avenues already available. 

2. The second law, the Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services (AFPS) Act, is a simplified and improved version of the Contract Farming Act that has already been adopted by 20 Indian states. Contract farming acts as a form of price assurance as whatever price was agreed in a contract must be honoured after harvest. The new law is intended to insulate farmers against the market and price risks so that they can cultivate high-value crops without worrying about market fluctuations that could lower prices in the harvest season.

3. The third law, the Essential Commodities (Amendment) Act, is a modification of the Essential Commodities Act that lays down transparent criteria for the price triggers behind government decisions to regulate the supply of essential commodities under extraordinary circumstances.

From the above, it looks like the reforms are meant to make life easier. The Indian government argues that the deregulations will increase efficiency, allow farmers greater freedom and let farmers negotiate better prices for their crops. Under the old arrangements, there were middlemen in the system who would buy grain from farmers, keep a healthy margin for themselves, and then sell it at inflated prices to retail markets and consumers. Some have claimed that these middlemen, who will lose out from the changes, are actually behind the protests, rather than farmers who stand to benefit.

But the protesting farmers say these reforms will devastate their earnings as it will end the MSP program, a safety net that assures farmers that they will be paid a certain price without regard to market conditions. So a balance needs to be struck. 

The Indian government is in talks with all stakeholders on this matter. 

Farouk Gumel, an Executive Director at TGI Group, a pan African conglomerate has been monitoring these negotiations closely. Farouk Gumel, whose company owns and manages food production facilities, explains TGI’s factories are constantly exposed to price and volumetric volatilities in their raw material supply chain. In the last 3 years of the existence of TGI’s rice mill, Farouk Gumel says they have seen huge swings in paddy prices and availability which is raising concerns when it comes to planning for future investments. Such swings, according to Farouk Gumel, “can only be eliminated with strong, reliable and consistent raw material supply with predictable pricing”. 

Farouk Gumel concludes that the Indian case study should be monitored closely by African nations. He states “Many African countries have or are in the process of introducing MSP programs. Many African food companies use outgrowers, under contract farming arrangements, to meet their input supplies. Many countries and marketing boards are looking to set up pricing models for essential commodities”. Farouk Gumel remains confident that a balance will be struck between the Government and Market driven agricultural forcesors which African leaders can replicate to meet their food security needs. 

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Farouk Gumel – The minimum support price in agriculture – what is it important

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Farouk Gumel – The minimum support price in agriculture – what is it important

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Farouk Gumel - The minimum support price in agriculture - what is it important

Farouk Gumel - Most governments intervene in their agricultural markets although the extent of these interventions depend in large part on the wealth of the country. In the last century or so, the most common of these interventions is the Minimum Support Price (MSP) mechanism. In this paper, I hope to explain in simple terms, what the MSP is and how it works.

MSP is the price at which the government commits to purchase crops from the farmers. This acts as a ‘minimum floor price’ farmers will get for their produce thereby shielding them from adverse market conditions because of price drop. Furthermore, in the event of a bumper harvest where there is excess stock, farmers still have a guaranteed buyer as the government, through its agencies, will buy the entire stock offered by the farmers at the MSP. 

The prices of agricultural commodities often vary due to various factors. If a crop has seen a good harvest season during a particular year, it may see a sharp fall in its prices. This will lead to farmers withdrawing from sowing the crop in the next year which will affect the supply. To counter this, MSP is fixed by the government which is supposed to encourage higher investments and production of crops. Furthermore, by buying the excess crops, governments build strategic reserves that can be used to augment any food shortages in future years. 

The successful implementation of MSPs however depends on how wealthy the country is as the government requires huge budgetary allocations for procurement and strong value chains for management of the inventory acquired. In many poor countries, these programs fail due to lack of funding and poor technical capacity to manage the grains procured from the farmers. This leads to lack of confidence in governments and destruction of grains. This subjects countries to very volatile swings in their food security status – from surplus to famine within a few years.

Africa is one continent where countries have seen such volatile swings. Although the policies exist in many nations, the implementation has not been very impactful due to low funding and technical knowledge. Despite Africa’s huge arable land and high population of farmers, food shortages and high food prices still occur. Typically, many African nations create and grant state marketing boards a legal monopoly to buy agricultural products from farmers and to resell them to domestic consumers or export markets. There have been cases where such boards pay farmers only a third to half of the domestic consumer price or the export price. The result, according to the World Bank, is that after growing 0.2% per annum in the 1960s, per capita food production in sub-Saharan Africa fell to 0.9% per annum from the 1970s into the early 1980s.

As the global “free trade” movement continues to gain momentum, many agricultural jobs in Africa will be lost as food imports from stronger and more prosperous nations creep in. African farmers need the MSP protection to continue production for our strategic reserves to be filled. 

Farouk Gumel is an Executive Director at TGI Group, a pan African conglomerate with investments across key agricultural value chains. Farouk Gumel argues that the MSP is not a luxury but an absolute necessity for Africa’s agricultural revolution. Farouk Gumel, whose company owns and manages food production facilities, explains TGI’s factories are constantly exposed to price and volumetric volatilities in their raw material supplies. In the last 3 years of the existence of TGI’s rice mill, Farouk Gumel says they have seen huge swings in paddy prices and availability which is raising concerns when it comes to planning for future investments. Such swings, according to Farouk Gumel, “can only be eliminated with a strong, reliable and consistent MSP program”. 

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Farouk Gumel - Africa’s Agriculture exports and the need for more processing locally

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Farouk Gumel - Africa’s Agriculture exports and the need for more processing locally

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Farouk Gumel - Africa’s Agriculture exports and the need for more processing locally

Farouk Gumel - Despite long standing recognition of the benefits of trade and the importance of improving competitiveness, Africa is performing beneath its potential in global and regional agricultural markets. Recent export growth has been offset by even larger growth in imports, caused by a booming population. More than 60 percent of the population of sub-Saharan Africa are smallholder farmers, and about 23 percent of sub-Saharan Africa’s GDP comes from agriculture. Yet, Africa’s full agricultural potential remains untapped. This has led to a deterioration of Africa’s trade balance. Intraregional trade, on the other hand, is growing, but remains significantly below the levels seen in other parts of the world.

Africa still has strong comparative advantages in many products which include traditional cash crops like coffee, cocoa and tea, as well as new products like legumes, pulses and sesame seeds. Some of these products are becoming the main staples of many African countries, including those classified as least developed countries (LDC). Many nations have started positioning themselves as specialist/centers of excellence in the production of exportable commodities. For example, Ghana and Ivory Coast are focusing on Cocoa, Comoros is focusing on spices and essential oils; Burundi and Rwanda on coffee and tea and many more. 

To prove this, I have summarised Africa’s global leadership position on Tea, Cocoa, Cashew and Sesame for now. Below are some statistics.

Tea - Kenya has remained the leading African tea producer and boasted an output of over 440,000 tons of tea. Combined with other East and Central African nations, Africa is now the second-biggest grower of tea in the world, producing tea of high quality and good bright colors which are used for blending all over the world. In 2018, African tea exports accounted for 23% of the world’s internationally traded teas.  

Cocoa - Some 70 percent of the world's cocoa beans comes from four West African countries Ivory Coast, Ghana, Nigeria and Cameroon. The Ivory Coast and Ghana are by far the two largest producers of cocoa, accounting for more than 50 percent of the world's cocoa production. 

Cashew - African farmers currently grow 48% of the world’s cashews annually. Ivory Coast, Tanzania, Guinea Bissau and Nigeria contribute much to it. Africa is now the largest producer of raw nuts with more than one million tons production. 

Sesame - 59.4% of the world’s sesame is produced in Africa. As a region, Africa has quickly risen as the top producer and exporter passing India. Growth in production is mainly from Tanzania and Ethiopia. 

One thing that is common amongst the 4 commodities above is most of the exports are in raw form. Little or no processing happens within Africa. This means as Africa exports the raw materials, the continent is also exporting all the jobs associated with processing, manufacturing, and packaging. Raw cashew nuts for example are sold to Asian countries where significant value addition takes place before exporting the premium product to the US and European market at higher rates. Of course, Asian nations also want to create jobs. But there is a need for a balance. Africa’s population rate is growing at a faster rate than the jobs we are creating. Unless a proper balance is struck, we will end up in a vicious circle of insecurity, hopelessness, and poverty. 

Farouk Gumel said “TGI’s projects try to strike this balance where we aim to create jobs in both the producer and consumer nations”. Farouk Gumel adds that “as our business operations are located in both Asia and Africa, we are able to maintain an equilibrium that creates a win-win”. TGI’s investments focus on driving inclusivity and value addition using locally sourced raw materials, state-of-the-art manufacturing facilities and a highly skilled workforce to produce world class products. Farouk Gumel added, “TGI for example splits its cashew operations between Benin Republic, Nigeria and India. We have identified ways of meeting consumer needs while maximizing our impact within the producer nations. The key now is for the political leaders to also find ways of enhancing collaboration to ensure this win-win is sustained”. 

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Farouk Gumel - Nigeria’s Fertiliser Revolution – a story of job creation and higher yields

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Farouk Gumel - Nigeria’s Fertiliser Revolution – a story of job creation and higher yields

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Farouk Gumel - Nigeria’s Fertiliser Revolution – a story of job creation and higher yields

Farouk Gumel - Agriculture accounts for 70% of the entire workforce in Nigeria and therefore, remains the sector that can massively lift Nigerian’s out of poverty in an inclusive and sustainable way. It is reported that Nigeria has 60 million hectares of arable land which is grossly underutilized. Our yields remain low and post-harvest losses are extremely high. For decades, Nigeria has relied on importation to meet its food security needs. 

In the last 5 years, the Nigerian authorities have designed and implemented various trade, fiscal and monetary policies to support local food production and reduce post-harvest losses.  One of these policies is the Presidential Fertiliser Initiative (PFI) which was launched by President Muhammadu Buhari in 2016. The program’s motive was simple. To locally produce fertiliser in an affordable manner. Nigeria has a lot of the key ingredients to make fertiliser locally but in the past, has been importing most of its needs and thus, ignoring the locally available resources. The PFI focused on optimising the use of local ingredients and thus, only import those items that were not available at home. 

For the imported raw materials, the Government of Nigeria entered into bulk purchase agreements with Phosphate and Potash suppliers from Morocco and Russia. For the locally available ingredients, similar bulk purchase agreements were signed with local suppliers of fillers and Urea. These ingredients used for producing NPK fertilisers, were distributed to local blending plants across the country. As local blending capacity expanded, policies (fiscal, trade and monetary) were introduced to restrict importation of NPK fertilisers. 

As a result of this favourable setting, the number of operating blending plants in Nigeria increased from less than 10 in 2015 to over 40 in 2020. This has led to increased fertiliser availability across the country, thousands of jobs created across the value chain (blending, logistics and retail) and higher yields for farmers. It is fair to say that this program has led to a boom in Nigeria’s rural economy. 

For Nigeria to continue to move away from its reliance on oil, more focus is needed on increasing food production and supporting the agricultural value chain. New PFI type programs in other value chain areas such as seed, agrochemicals and other inputs are needed. As evident in fertiliser, such policies result in investments and thus, job creation and ultimately, prosperity. 

TGI, the parent company of WACOT Limited, invested in the rehabilitation of Edo Fertilizer and Chemical Company Limited, Auchi, which has the capacity to produce about 60,000 metric tonnes of NPK fertilizer per annum. The factory, which has been abandoned for decades, is now running on 3 shifts a day. The economy of Auchi, a town in the northern part of Edo State has been transformed as many direct and indirect jobs have been created.

Farouk Gumel, TGI’s Group Executive Director said, “our presence in Auchi has positively impacted the community”.  “Our made in Auchi fertiliser is sold all over the country. We have truck drivers from everywhere coming to Auchi to lift the product. The business of the local food sellers, mechanics and other service providers in Auchi is booming as a result of these visitors” says Farouk Gumel.  Furthermore, Farouk Gumel adds “we are also seeing an increase in the number of wholesalers and distributors looking to offtake our products. This also means more jobs in the retails and distribution aspect of the value chain”. 

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Farouk Gumel | Pushing Nigeria’s Biggest sector to its limits - Agriculture

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Farouk Gumel - A case for why oil should not be Nigeria’s No.1 Focus