1.1 Background of the Study

CHAPTER ONE

INTRODUCTION

Attempts to formalise produce marketing in Nigeria can be traced to the 1930s. Then the European companies such as United African Company (UAC), John Holt, Societe Commercial Occidental Agency (SCOA) and Paterson Zochonis (PZ) were involved in direct purchases and export of Nigeria’s major agricultural commodities as essential raw materials for overseas industries (Osuala, 2006). However, government involvement in organised 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 Nigerian Produce 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 cotton marketing boards. Following the constitutional development in 1954 which resulted in the creation of regions, the four commodity board were replaced by the four all-purpose regional marketing boards in Lagos to handle the export of the commodities.

Meanwhile, in 1977 the government reverted to the post Second World War commodity board system. This saw the creation of seven commodity boards, which operated along expanded commodities line under national mandates. They included, Cocoa Board (Ibadan), Groundnut Board (Kano), Grain Board (Minna), Cotton Board (Funtua), Palm Produce Board (Calabar), Rubber Board (Benin), and Roots and Tuber Board (Makurdi). (SEC, 2006) The boards were charged with the following functions:

i) To secure the most favourable arrangement for the purchase and sale of the relevant commodities

ii) To stabilise producers’ prices

iii) To promote development and rehabilitation of produce areas and ensure that adequate supply of inputs such as fertilisers, sprayers, chemicals, etc were made available to farmers in order to enhance their exclusive responsibility for any commodity meant for export trade

The magnitude of structural distortion in the economy led to the deregulation of commodity trade and made the 1986 Structural Adjustment Programme (SAP) inevitable. The introduction of Structural Adjustment Programme (SAP) ended the Nigerian government’s direct involvement in agricultural commodity marketing. One of the main objectives of SAP in 1986 was to restructure and diversify the productive base of the economy which was heavily skewed 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, thus, included price and income stabilisation for farmers and efficient distribution of agricultural produce.

SAP patently addressed the marketing board inadequacies through trade liberalisation with particular emphasis on export promotion and the adoption of measures to strengthen the productive base of the economy. The productive sector 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 (SEC, 2006). However, after this time, it became clear to the Nigerian authorities that neither the low interest rate on agricultural loan nor other forms of subvention could encourage agricultural activities in the Country. Fair and stable prices of agricultural commodities were the only factors that could positively motivate farmers leading to enhancement in 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 consumer of the commodities. As a prelude to establishing a commodity exchange, the commodity board system was abolished in 1988 to allow producers deal directly with overseas buyers, enhanced the prices 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, many local merchants in collaboration with their foreign partners were engaged directly in the export of primary products. These merchants reaped more gains from the price increases than the real producers.

However, as observed by SEC (2006), Osuala (2006) in line with Garba (1989) and Onoh (2002), a new development that the authorities had not reckoned with, began to unfold. The commodity market was however characterised by sharp practices as a large number of inexperienced merchants entered produce trading, thereby bastardising 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 price risks associated with market fluctuations and to ensure that the qualities of the commodity met with international standards, the Federal Government acting through the Central Bank of Nigeria (CBN), directed the Federal 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 (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. Price Instability: Supply theory in economics holds that the higher the price of a 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 fluctuations vagaries of weather. Consequently, farm-gate prices are relatively unstable and carry a price risk which farmers are 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.

2. Poor Market Information/Intelligence: The present commodity marketing system does not guarantee timely and free flow price and trade information dissemination. Farmers have no information on commodity prices at different markets within the same geographical zone and therefore, do not know whether it will benefit them to sell in a market close to them, or travel some distance to sell the same commodity at better prices than they would have received.

3. Weak Infrastructures: Inadequate infrastructures are another problematic issue in the export of primary commodities in Nigeria. In terms of transport, the road and rail are in a dilapidated condition and a significant proportion of investment made in road networks in 1960s and 1970s 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

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climate due to moisture migration and condensation. Also, local loading points are currently inefficient and needs to be upgraded to international standard.

1. Unsatisfactory quality of primary commodities: When commodity board system was abolished in 1988 to allow producers deal directly with overseas buyers, the commodity market was however characterised by sharp practices as large number of inexperienced merchants entered produce trading, thereby violating laid down quality procedures and engaging in the export of poor commodities, as a result, the country was brought into disrepute.

It was also 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 internationalisation and standardisation 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 exchange will equally be of immense benefits to farmers, agro- commodity processors and merchants, as it will serve as a veritable platform for them to mitigate the inherent risks in agricultural production and marketing.

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 sine the 1950s. The problems are well studied; high revenues tend to distort fiscal responsibility and monetary policy, and encourage rampant corruption, while a slump in price can lead to reduction in government and producers revenues, unemployment and a decline in government spending on education and health. While developed country producers are supported by subsidies and social safety nets, developing countries and smallholder producers feel the effects of commodity price instability much more directly.

In developing countries, commodity markets have remained unstable. Over the period of 1983 to 1998, prices of commodity fluctuated from below 50 per cent to above 150 per cent of the average prices (World Bank, 1999). In Africa, commodity exports account for about three quarters of total merchandise export. In many of these countries including Nigeria, commodity production and trade impact the livelihood of millions 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 earnings from commodity exports which influence their capacity to import while at the same time being affected by rapid increases in prices of imported commodities.

Price instabilities have continued to be a characteristic common to almost all commodity markets, and if anything, the amplitude of the fluctuations appears to have increased. Other characteristics include; poor market information; inadequate infrastructure; unsatisfactory quality of primary commodities.

1.3 Objectives of the Study

This study is aimed at examining the major impacts of commodity exchange on export of primary commodities in Nigeria. Specifically, it aims to;

1) Find out the effect price instability on export of primary commodities in Nigeria,

2) Find out the extent of measures taken by the exchange in tackling price instability,

3) Find out the level of effectiveness of the Exchange in promoting export of primary commodities.

1.4 Research Questions

1) To what extent has price instability affected volume of primary commodity export?

2) What are measures taken by the Exchange in tackling price instability of the commodities?

3) How effective has the Exchange been in promoting export of primary commodities?

1.5 Research Hypotheses

The research hypotheses are stated in their null below:

1) Export price instability does not have any effect on the volume of primary commodity export in Nigeria

2) Measures taken by the Exchange are not effective in tackling price instability of primary commodities

3) The Exchange has not been effective in promoting export of primary commodities

1.6 Scope of the Study

The scope of this study covers only the Abuja Securities and Commodity Exchange (ASCE) with particular interest on its impact on the exportation of primary commodities in Nigeria for the period 2004 to 2008.

1.7 Limitations of the Study

One of the major limitations of this study is lack of substantial local materials on commodity exchange as it related to export of primary commodities and it is expected to pose a threat to the quality of this work. As a result, foreign theoretical and empirical studies constituted the volume of materials used in literature review.

The second limitation is associated with funding. Abuja Securities and Commodity Exchange (ASCE) is located in Abuja, the capital territory of the Federal Republic of Nigeria and it is where the primary investigation was conducted. Therefore, it required huge capital outlay to cover the transportation costs and other logistics.