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Two countries — Egypt and Nigeria— account for one-third of Africa’s total agricultural output, according to McKinsey. No other country among the continent’s top ten has this much influence. Yet, somehow, Nigeria’s agricultural sector is highly underexplored. When we flip the script to measure agriculture’s contribution to each economy, Nigeria ranks 19th.
Nigeria has a proven ability to churn out agro-products. But it has been slower than most in turning this into an optimised value chain. For instance, Nigeria is the largest cassava producer globally, accounting for about one-fifth (21%) of the world’s output. However, only 20% gets processed into higher-value products.
“Less than 2% of Nigeria’s annual budget goes into financing its value chain,” Oluwafunto Olasemo, Vice-President, Financial Markets at AFEX, told Ventures Africa in an interview. For context, members of the African Union agreed in 2003 through the Maputo Declaration to allocate at least 10% of their budgets to developing value chains for agriculture. But the governments are not the only ones holding back. “The two biggest spenders of the economy —the government and the banks— are not paying much attention to this value chain. Agriculture makes up less than 5% of banks’ portfolios,” she said. So the problem is not simply negligence, but more likely, risk aversion.
Agriculture is one of Nigeria’s most vital sectors but also one of the most vulnerable to risks. In 2022, floods destroyed over 100,000 hectares of farmland. This event, coupled with inflation and the country’s insecurity problems, exposed over 25 million Nigeriansto food insecurity. And those are only macroeconomic risks. Problems with market structure and logistics are the reason Nigeria loses and wastes 40% of its food production annually. “People just haven’t found a way to de-risk the sector,” Olasemo said. “And it is that perceived risk that keeps investors at bay.”
People often attribute Nigeria’s high volumes of food waste to poor preservation. But that is not the only reason. A large portion of food losses happens during transportation. So there is an obvious disconnect between sellers and buyers.
Are commodity exchanges the answer?
In 2002, a famine hit Ethiopia after two years of bumper crops. As a result, the country had to seek emergency food aid for 14 million people at risk of starvation. The underlying problem, however, was not food production but distribution. Many farmers could not sell their produce when they had them in abundance. So their crops became wasted. This scenario prompted the creation of Africa’s first commodity exchange: the Ethiopia Commodity Exchange (ECX), in 2008. Four years later, over 2 million farmers gained access to the markets through this exchange. Now, Ethiopia ranks third among African countries in terms of agriculture’s contribution to national GDP.
Today, a similar script is playing out in Nigeria. The country is experiencing its worst food crisis in decades. Then this year, AFEX, the country’s first private-licensed commodities bourse, became Africa’s fastest-growing company. “Agriculture has consistently contributed approximately 22 to 25% to Nigeria’s GDP. So it’s not right for the country to not feed itself,” Olasemo said. “One of the best ways to ensure that is to create an efficient marketplace for producers and users of commodities.”
A commodity exchange is a marketplace where buyers and sellers can trade physical commodities, ranging from agricultural produce to natural resources, through contracts. That means the exchange provides a platform for these buyers and sellers to meet and agree on prices while helping them hedge against price risks. This way, both parties don’t need to wait for middlemen. “Most producers are smallholder farmers, and they need access to off-takers,” Olasemo explained. “The off-takers (or processors) also need the ability to aggregate as much value as they can from a central location. This way, you can reduce post-harvest losses. Also, these smallholder farmers are not part of an integrated value chain. So it is usually difficult for them to price their commodities appropriately. But an exchange helps them with price discovery. Thirdly, it ensures standardisation and grading of [commodity] contracts.”
A perfect market?
Ethiopia’s success story spurred many other African countries to launch commodity exchanges. But not all of them were successful. For example, the Zambia Agricultural Commodity Exchange (ZAMACE) closed down in 2012 after struggling to impact the markets. As of 2015, only South Africa’s commodity exchange was thriving without government support. So even though commodity exchanges have plenty of prospects for agriculture, the markets are imperfect.
One of the challenges African commodity exchanges face is generating trade volume. “Exchanges need a lot of volume. But the larger portion of farmers carry out smallholder operations. That means you need an enormous number of farmers. After getting the farmers, how do you coordinate them into clusters that are meaningful and can satisfy market demand?” Olasemo explained.
Also, markets thrive when the prices favour both buyers and sellers. However, commodity prices are often volatile. Soybean, for instance, has doubled in price since 2020 in the global market. “Globally, commodity prices are volatile. Now, layer that on the fact that in Africa, there is a constant deficit between demand and supply. We have even more volatile prices,” she said.
However, AFEX is innovating its way through some of these challenges. “Farmers used to operate in silos and had trust issues on how they would benefit from being part of an integrated value chain. But we (AFEX) rolled out initiatives like input financing to provide credit access to the farmers and through this, we have Through our input programs, which enable inputs to reach producers in a timely manner backed by extension support, yields increase from 0.6 MT/ha to 2.5 MT/ha,” Olasemo said. “We are able to look at the fungibility of commodities and create innovative products around them. That way, we unlock value for the production, processing and aggregation sides of the value chain. Our ability to gather, interpret and distribute data also gives us leverage.”
Policymakers are also becoming more active in the commodities market. Recently, Nigeria’s Presidency stated that it will create and support a National Commodity Board to review and continuously assess food prices. “We’ve noticed regulatory interest in this sector,” Olasemo affirmed. “In the long run, our commodities market is likely to move towards what we currently have in advanced markets.”