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West African economies are large commodity producers and many of them are top suppliers worldwide. Côte d’Ivoire and Ghana alone account for about 60% of the world’s cocoa production; Guinea-Bissau together with Côte d’Ivoire, Nigeria and Senegal account for 40% of world cashew production, not to mention the importance of oil production in Nigeria alone.
Yet, commodity prices are often quoted in distant places. Africans are essentially price-takers as exchanges in the US and Europe determine the price for the commodities that amount to much of their exports, and are deprived of many of the instruments used elsewhere to finance, and manage the risks related to trading these commodities.
In a recent publication by the African Development Bank led by Cédric Mbeng Mezui and Lamon Rutten to which I contributed (the Guidebook on African Commodity and Derivatives Exchanges), commodity exchanges are presented as part of the solution to improve efficiency in commodity trading, but also as a way to improve value-addition and bring price-control closer to the source. There have in the past been many attempts and failures to implement exchanges in the continent. Looking back, the guidebook points out that those failures had much to do with the size of each economy (oftentimes too small to support a viable volume of trade), the underlying market environment (shortfalls in production organization) and infrastructure (lack of warehousing, port congestion etc.), as well as business models put in place (heavy reliance on government intervention to keep the exchange afloat).
One of the main benefits of commodity exchanges lies in their price discovery function: through its platform, demand and supply developments are reflected in price levels and made readily available. This way, farmers can make cropping decisions when the right demand is reflected in price signals, thus reducing inter-seasonal volatility characterizing agricultural production, and smoothing producers’ incomes over time.
In the case of Cocoa in Ghana and Côte d’Ivoire, this role has historically been played by the marketing boards which made use of forward sales in international markets. When the Ivorian board was dismantled in 1999 in an effort to liberalise the market, cocoa trade reverted to a spot market with led to increased volatility. What is more, the move to spot market led to a sales concentration over the few months toward the end of harvest resulting in a buyer’s rush and a decline in quality of beans for exports (Losch, 2002).
In addition, the introduction of commodity exchanges could for instance help farmers better manage cropping decisions which is likely to improve their access to finance. Information asymmetries could be reduced and potential rent-seeking intermediaries squeezed out. At the same time, the grading and certification infrastructure connected to exchanges can help streamlining quality of products to gain value for international markets.
West Africa is however lagging behind in such market infrastructure. Southern Africa is home a functioning exchange in South-Africa (SAFEX), as is seeing several initiatives taking off (Botswana hosts two pan-African exchange initiatives, PACDEX and Bourse Africa and has developed a sound regulatory infrastructure in that respect). In East Africa, Ethiopia’s ECX trade value reached USD 1.2 billion and counts 450 Members, 7800 clients, of which 12% farmer cooperative unions with over 2.4 million small farmers reached.
Amongst West African countries, some initiatives are taking place. Yet, these are mostly done in isolation, and the question of market size is not dealt with. Of course, some of the largest West African countries could justify investments in commodity exchanges and related infrastructure, but the opportunity cost of leaving out neighbours can be great.
For instance Nigeria kick-started in 2006 an intensive effort to get com¬modity trading off the ground through the ASCE. Although much work was done, the government felt the exchange was operating below potential. In 2012/13, relabeling the ASCE to “Nigeria Commodity Exchange”, a roadmap was adopted to put in place a fully functional electronic ware¬house receipt system, with some 16 com¬modities selected for trading.
In Côte d’Ivoire, recent reports indicated that the African Capacity Building Foundation jointly with the International Cocoa Organization began studies regarding the establishment of a cocoa commodity exchange in Côte d’Ivoire.
While these are moves in the right direction, it may be worth thinking about regional solutions as advocated in the Guidebook on African Commodity and Derivatives Exchanges to ensure economies of scale, but also, that no small country is left behind to deal with such issues on its own. Just as the West African Monetary Union has put in place the Abidjan-based BMVR stock exchange, similar solutions could be advocated regarding commodity exchanges.
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