Nairametrics is committed to helping our audience understand commodities trading as an investment option by looking at available products, trading dynamics, etc. To this end, we spoke to Ms Zara Dogo, the Head of Market Growth at AFEX Commodities Exchange Limited.
Enjoy the conversation.
NAIRAMETRICS: What is AFEX to an Investor?
Zara Dogo: For an investor, whether new or old, AFEX presents an opportunity to build wealth while contributing to the growth of the agriculture sector in Nigeria. We provide what are known as alternative investment opportunities, which allow investors to diversify their portfolios with a mix of commodity-backed instruments that generate per or above-market returns. Having our type of regulated and structured marketplace for investment securities that are built on one of the most resilient and beneficial sectors of the economy is incredibly important.
NAIRAMETRICS: AFEX is one of the Commodities Exchanges in Nigeria; to an investor, what are the benefits of trading or investing in commodities through a Regulated Exchange?
Zara Dogo: The simple answer is the protection that investing in commodities provides against inflation. It is necessary to remember also that being successful at investing is not about avoiding risk but rather about managing it, and one of the best ways to manage risk is through diversification both within and among different asset classes. When this is taken alongside the fact that commodities tend to behave differently from stocks and bonds, investors see an unending benefit of being able to better manage the uncertainties of the market.
The fact of being a regulated Exchange is also very important as investor safety and education are highly prioritized and enforced by a regulator, and so the investor is protected as they explore the market.
NAIRAMETRICS: Specifically what are the commodity products/assets available on the AFEX platform for investing/trading and likely yield?
Zara Dogo: Our spot trading products are investment products where the investor buys directly into commodities to benefit from price fluctuations in the market. The spot contracts are an exciting way to earn, allowing investors to enter when the price is low, watch the market, and determine for themselves when to sell. Yields on this product are not fixed.
Another exciting investment product that we have are Exchange Traded Commodities, which are commodity baskets that have a mix of commodity contracts within them, and whose returns are determined by the collective performance of the commodity mix. In 2022, the Fair Trade ETC product – FETC1 – which we launched, returned 30.5%.
Finally, we have fixed income products, which quite a lot of investors are used to which are essentially short-term notes issued with a fixed return amount to be redeemed at a fixed time. Our fixed-income products have historically returned between 15 – 20% on average.
Our data at AFEX points to a 4-year cycle of commodity returns where you have a period of high returns followed by three periods of moderate returns i.e., between 15 and 30 per cent with just passive investment i.e., taking a position at the beginning of the season and exiting at the peak of the season.
NAIRAMETRICS: How can one invest in any of them?
Zara Dogo: All of these product classes are easily accessible through our ComX app, which is available on the Play Store or App Store and can also be accessed on the web at comx.afexnigeria.com
NAIRAMETRICS: One of your products/contracts; “Input Note” is not tied to any particular commodity, unlike spot, forward, ETC contracts, what is this “Input Note”? Are there any different inherent risks?
Zara Dogo: The input note is an investment instrument targeted at providing financing for smallholder farmers to obtain quality inputs. The notes are effectively low-risk investments, offering competitive returns to investors after a nine-month duration. The risks that are inherent in the input note are around credit and market risks, but a combination of crop insurance policies and equity contribution by producers helps to limit these risks.
NAIRAMETRICS: We understand you have fixed-income products, what are the yields on these products? Are they affected by interest rates just like conventional bonds?
Zara Dogo: Historically our fixed-income products have returned between 15 – 20% on average, and indeed they are impacted by interest rates like the bond market, So, the value of some of the instruments with fixed returns have dropped because as interest rate increases, the security prices fall.
NAIRAMETRICS: Last year AFEX signed an agreement with NG Clearing Limited in respect of Commodity futures, what is the scorecard now and the outlook?
Zara Dogo: We are very excited by the opportunity to establish a commodity derivatives market and our partnership with NG Clearing was a necessary first step. In the next few months, we are looking to achieve full technological integration with the Clearing House (NG Clearing), carry out a set of market consultations and roadshows with critical stakeholders across the value chain and begin comprehensive training/market education around the use of commodity derivatives as price risk management instruments.
Engagement is also ongoing with the Securities and Exchange Commission (SEC) to approve our Commodity Derivatives Rules and the contracts. We anticipate launching our derivatives (futures) product suite by Q4 2023.
NAIRAMETRICS: How has the CBN cash policy impacted the commodities market and the larger financial markets?
Zara Dogo: For the commodities market, we should look first at the impact on a physical trade level, and one effect that we have seen is a drop in prices of commodities by farmers by as much as 30% in some locations as they prize survival and a need for cash above profit. Demand has also reduced to an extent, and of course, these market interactions do affect the commodity-backed securities market. It is important to note, however, that the financial market in Nigeria has a strong digitalized infrastructure that continues to underlie transactions and make the settlement of trades quite seamless.
NAIRAMETRICS: We understand trading on commodities is online and in real-time. How secure and robust is your backbone FinTech infrastructure to mitigate failures?
Zara Dogo: We have designed our system in such a way that coming onboard is as seamless as possible, but we still have security in mind alongside that simplicity. When you bring your funds in, it is seamless, but when you take your funds out, we have a robust process that ensures that checks and balances are carried out on the system. We have a wallet system designed on the app that ensures your values are always visible and available to you.
NAIRAMETRICS: Generally, what are to be considered for investors to make informed investment decisions?
The first consideration, I believe, is for investors to understand their risk appetite. This is fundamental in them deciding the product that is a right fit for them. When this is out of the way, the key things to understand to play in the commodities market are data and insights around demand and supply in the local and international commodities market; a slight understanding of planting and harvest seasons to know the best times to enter and exit the market and of course, an understanding of the product makeup so that it is easy to understand performance.
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