Such an exchange serves as the central location for trading the commodities. Some of the major commodity exchanges in the world are Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), Carbon Trade Exchange (CTX), New York Mercantile Exchange (NYMEX), London Metals Exchange (LME), Tokyo Commodity Exchange (TOCOM) and more.
In its simplistic form, the purpose of exchanges is to provide a centralized marketplace where producers can sell their commodities to those who want to use them for processing or consumption. In its simplistic form, exchanges connect buyers to sellers. The sales could be for products that exist today or those that would be produced at a “future date”. For the “future” transaction, the exchange enables the farmer to lock in the price and offtake of his/her crop months before harvest.

Commodity exchanges operate on a contract basis, such as spot prices, forward prices, future contracts as well as options on futures contracts. These contracts offer farmers stability and consistency of prices for their produce while protecting them against drops in prices. Spot prices mean today’s transaction. Future or forward prices/contracts mean the transaction terms are agreed today but actual execution (payment and delivery) is made at a future date.

Commodity exchanges mostly trade in primary products rather than manufactured products. This means in continents like Africa where primary production thrives, the existence of Commodity Exchanges will be a critical link between the producers and processors (both within and outside the continent). It is important to note that most of the commodities traded on the main international exchanges, such as Coffee, wheat, maize, sugar, oil and cocoa, are products that are prevalent on the African continent. It, therefore, makes sense for this trade, or at least part of it, to be executed within the continent.
Where Would We Be Without Commodity Exchanges?
Without commodity exchanges, it would be difficult—if not impossible—to establish a standardized price for a commodity. Those in the commodity industry would be personally responsible for finding individual buyers and sellers (local and foreign). Prices would be determined by access. There would be a higher possibility of defaults and bankruptcy as there would be no platform that vets the transactional parties.

Benefits of Commodity Exchanges for Africa?

To Farmers/Producers
1. Engender perfect knowledge of the agricultural produce markets
2. Bring about proper price discovery leading to the proper pricing of agro-produce
3. Reduce the cost of farming operations and improve quality of agro-produce through the adoption of best practice procedures
4. Reduce or eliminate price differentials in adjacent markets
5. Improve aggregation (bulking) of commodity volumes
6. Effectively mobilize agricultural produce from surplus to deficit areas7.
7. Minimize waste in agricultural produce marketing and consumption
8. Improve output and post-harvest handling of agricultural crops for better pricing
9. Improve income and standard of living.
10. Standardize weights and measures for commodity trading to facilitate uniform pricing
11. Eliminate the need for farmers to sell produce at harvest period when the price is poorest
12. Provide a hedging facility as an instrument against falling produce price
13. Improve access to loans as farming will become more lucrative

To the African Economy
1. Arrest rural-urban drift
2. Create employment and generate wealth
3. Improve Internally Generated Revenue and its collection as commodity markets will become more organized
4. Increase the supply of raw materials for agro-processing companies
5. Encourage research into the processing of African agro-produce
6. Increase the earnings of operators such as banks, insurance companies, investment fund managers, transporters, warehouse operators, etc
7. Attract Direct Foreign Investment in agro-related economic sectors
8. Provide access to world markets for African agricultural produce
9. improve the contribution of the agricultural sector to national GDP

Farouk Gumel, an Executive Director at TGI Group, a pan-African conglomerate says Africa is the dominant producer for many agricultural commodities so it’s imperative to have an organized and efficient commodities market to spur growth and competitiveness. Farouk Gumel states having control of a sizable chunk of the commodity ecosystem will assist in moderating consumer prices, promote the attractiveness of agribusiness, foster financial inclusion, and improve industrial output and profitability as well as government revenue. It will also enhance the well-being of the farming community and help reduce rural-urban drift.

Farouk Gumel concludes that the journey for many developed nations to prosperity started with having a vibrant and balanced commodity exchange that encourages production through the provision of offtake assurance. The same could happen in Africa if such commodity exchanges are embraced.