Akinyinka Akintunde is the Vice President, Financial Markets of AFEX Commodities Exchange Limited. In this interview by NURUDEEN ALIMI, he speaks on how agro-commodities market is creating alternative investment opportunities for Nigerians, among other issues.
CAN you tell us what AFEX Commodities Exchange Limited is all about?
AFEX Commodities Exchange Limited (AFEX) enables the transition from production to transaction for agricultural commodities. Since its founding in 2014, AFEX has developed and deployed a viable commodities exchange model for the West African market; building a strong supply chain infrastructure to support the securitization of agricultural products. AFEX operates 45 warehouses in Nigeria’s key grain-producing areas and accounts for over 100,000 MT of total national storage capacity.
Since 2014, the Exchange has reached over 106,000 farmers and traded over 135,000 MT of commodities with a total turnover of $41.5milliion (NGN14.9billion). The Exchange’s mission is to support Nigeria’s food security while promoting a fair exchange of value among players in agricultural value chains. To achieve this goal, AFEX looks to introduce products that de-risk the sector, drive financial inclusion for rural communities, develop technology for data collection and market access and enable the deployment of capital.
With several investment vehicles out there, how is an investment commodity different and what opportunities are there for an average investor?
If you look at the financial market in Nigeria, you will discover that although we have innovative products out there, there are very few markets for you to trade in structured products. On one hand, you have the equities market; on the other hand, we have the fixed income market, which to a large extent is referred to as the traditional asset classes that people can invest in.
At AFEX, we are creating a new class of products, which provide an alternative investment asset class for the investing public. Retail investors and institutional investors will be able to participate in the commodities ecosystem through a structured market that enables them earn returns on commodity investments.
The key opportunity, of course, is that commodities act in a different way than the traditional asset classes previously mentioned; with a relationship that is almost inversely proportional to stocks and bonds. So, trading or investing in commodities enhances an investor’s portfolio, helping them hedge whatever risk that may arise from other asset classes.
What is the percentage profit of an average investment in the commodity market?
It depends and this is where active portfolio management comes into play. It leverages the seasonal nature of commodities. 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.
In the high season, you could see gains of up to 90 per cent for some cases. Now, if you have an active commodities management strategy, you stand to be able to typically gain in a season like 20 to 30 percent.
Does the recession have an impact on the commodity sector and should investors be worried?
The commodities market is one of the few markets that are mostly counter-cyclical to most economic cycles. How do I mean? Commodities by their nature have natural hedging ability inherent in the seasonality of the product. This means by the time you harvest a commodity today, nine or ten months for you to go to plant and cultivate your commodities again. And you do this year in, year out. This means every time you go to the market, there is a natural reset on prices based on the current economic realities of that environment which is very different from equities securities, fixed income securities, even real estate to some extent.
Inflation and recession are two of the key factors that economist place their monetary policy around to ensure that the economy is going in the right direction. When you have commodities investment, which is directly hedging against inflation and you have more people going into it, you will see recession declining.
For example, In Nigeria where productivity in the sector is very low, in the period of recession, if you direct enough capital to this sector in a structured, transparent, and viable manner, you will see more people going into that sector. When people are employed, money goes into that economy. Commodities in and of themselves are not a guide against recession but in Nigeria, it is one of those tools we could use to take the country from a recession economy to one that is booming by providing more employment and directing capital to the sector.
Who can invest in the commodity sector and what is the minimum requirement to start?
When we started designing products at AFEX and listing them on ComX, we took learnings from what was currently obtainable in the capital market. One of the key learnings was that there are very minimal retail participants in the current capital market, meaning that very few people do invest in equities and fixed income products by their nature have even fewer people investing in them. Understanding that on one side and market access on the other hand, when we were designing this product (the Fair Trade ETC) and our other products, our aim was to design a product that anybody can use as a store of value. This would mean that everyone from students in school to corp members to young graduates to sophisticated investors could access the market, buying into their preferred product type that fits their investment appetite or means.
The first thing we did was with as little as 10,000 naira, you can come onboard into the market and start investing. With as much as a billion, the market is also there for you. We designed the product to be able to accept capital from any player that is willing to come on board. The process is as usual seamless and encourages all key participants to come on board.
How safe is trading on the commodity exchange?
It is very safe. We have the system designed in such a way that coming onboard is as seamless as possible. We designed it with simplicity in mind. We designed it with security in mind; meaning we have two-factor authentication for you to log in.
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 the wallet system designed on the app that ensures your values are always visible and available to you at all times.
Most commodities exchange sit on their hardware locally. They call it on prim servers. But because we value security both in the physical space and on the software we use, we engaged two of the top cloud storage platforms in the world and that’s where we are hosting this application which guarantees securityand 99.9 percent up time for the server.
With the launch of the AFEX Fair Trade ETC, how does this benefit the average Nigerian looking to diversify his or her investment?
When we launched fair trade ETC we looked at how we could put multiple commodities in a basket and then create a single basket for an investor to buy into, which is as cheap as possible and would give them the upside they would have gained in individual commodities as well without the need to have a really in-depth knowledge on the commodities market and commodities investing at a whole. So, this takes a lot of the work off the investors and allows them to put money in and watch its value appreciate over time as the commodities that make up the basket react to the market.
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