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East Africa Exchange (EAX) is a commodity exchange

Category: Market Data

Nurturing the agro-commodities market

Rwanda. Sun 11 Dec 2016, 12:00 am

Agriculture is always cited asAfrica’s ticket to growth and development, but in a world of smallholder farmers and large-scale weather events, risk can often out weigh profit. Africa Exchange Holdings Ltd (AFEX), founded in 2012,is working to diminish this risk and achieve food security not through aid,but increased market competitiveness.AFEX’s two exchanges, East Africa Exchange (EAX) in Rwanda and AFEXCommodities Exchange in Nigeria, are designed to use structured trading,warehousing, and agricultural financingto integrate the market and create value for participants.Currently, AFEX has the whole corner of the market—the exchange has exclusive rights to operate in Rwanda,and gained support of the presidents of Kenya, Rwanda, and Uganda asa regional exchange; it also holds alicence from the Nigerian Securities Exchange Commission (SEC) as thecountry’s first and only private sector commodity exchange. According to Dr.Jendayi Frazer, Managing Partner of AFEX and former US Assistant Secretaryof State for African Affairs, AFEXnow has over 200,000 participating small-scale farmers and 12 partnered financial institutions.

What are the benefits to farmers of getting involved with the exchange?

Commodity exchanges address multiple challenges at once and at scale. First, we are a central market place where buyers and sellers come together to trade, often in contracts of underlying commodities,under set rules and regulations. This ensures that no particular actors inthe value chain can influence prices,thus providing price transparency anda discovery and information platform.AFEX has further invested in priced issemination mechanisms that informfarmers of running-average prices atthe exchange for each commoditytraded. This increases their bargaining power and incomes as opposed to fragmented markets where collusionis often at the farmer’s expense.Our quantity and quality guarantee has attracted large off-takers, creatinga vibrant spot market that ensures amarket for farmers. AFEX started trading forward contracts in 2017and will introduce futures contractsin 2018 so end users, lenders andinvestors [speculators] can managetheir commodity-based exposures andhedge against price risks. Government and regional food reserve agencies willalso be able to hold their strategic foodreserve in forward/futures contracts,and call on them only when there isa need to do so. These services willdeepen the market to the benefit offarmers, and increase the flow ofcapital to agribusiness in our countriesof operation.Second, the commodity exchange’swarehouses offer storage to reducepost-harvest losses, and providevalue-added services, like drying,fumigating and grading. We operatewarehouses in major trade hubs andproduction clusters, continuouslyworking with farmer groups toencourage aggregation. This reducescarrying costs while the inventoryserves to bridge the gap betweenphysical supply and demand, lendingto food security.AFEX has deployed the onlyelectronic Warehouse Receipt System[e-WRS] on the continent outside ofSouth Africa. The e-WRS gives farmersthe freedom of action to decide whento hold versus sell in the spot market,and thereby reap increased value fortheir labour.Third, and importantly, thecollateralised product contracts orwarehouse receipts de-risk bank loansto smallholder farmers. Our establishedbank partnerships mean they accept thee-WRS as collateral, allowing agriculturalclients to use their commodity ascollateral to secure financing.

How do you manage the inherent risks of working with agricultural products as assets?

Agriculture in Sub Saharan Africa issuch a complex business, especially considering the level of fragmentation in the sector, the lack of supporting  infrastructure to ease aggregation and logistics, and often weak policy regimesand judicial systems to drive global competitive trade. However, these gaps create an opportunity for a player tounlock value which the continent is best situated to create in the future, with an endowment of over 60 per cent of theworld’s uncultivated arable land and anavailable labour force.Consequently, the AFEX group has been deliberate in employing patient capital not only in developing a trading platform, but also supporting the ancillary infrastructure critical to the success of an exchange. Through our team of industry experts, partnership swith the best companies in the field,and our commitment to deliver on ourpromise, we have upheld integrity oftrade without defaults.We provide a quality and quantityguarantee for product in our warehouses and we’ve deployed a real-time onlineinventory management system hostedand audited by PricewaterhouseCoopers against which e-WRSs are issued.Through our partnerships and operations, we reduce counter party riskby becoming the central counter party to each trade. Agricultural marketsin the East Africa region and beyond will benefit from AFEX’s guarantee ofeach trade

Published By: Bonaventure Twagirimana

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Bonaventure Twagirimana About the Author / Bonaventure Twagirimana

EAX, Head of ICT and Research

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