Developing viable commodity markets in Africa is fraught with failures and disappointments. AFEX, a private commodity trading enterprise based in Nigeria has shown that there are many opportunities in the sector. Food Business Africa had a conversation with the firm's CEO, Ayodeji Balogun on his company and the opportunities in the sector.
Authorities across Africa have failed at attempts to establish and streamline the warehousing receipt systems that would lead to organized, working and transparent commodity exchange systems that eventually lead to food security and improved trade in the Continent. Despite several attempts and vast sums of money, not many have succeeded or made significant impact.
Established in 2014, AFEX was the first private sector commodities exchange to be licensed by the Securities and Exchange Commission (SEC) of Nigeria.
With a bold mission of supporting Nigeria’s food security while promoting a fair exchange of value among players in agricultural value chains, AFEX has developed and introduced an array of securitized financial instruments backed by commodities that can serve as alternative investment products for investors in the agricultural value chain in Nigeria.
“There has been an indication that income growth generated by agriculture is up to four times more effective in reducing poverty than growth in other sectors. Although earlier analyses viewed agriculture as a traditional low productivity sector that had to provide labour and other resources to fast-growing modern sectors, no country has been able to achieve a transition out of poverty without a dynamic agricultural and food sector,” Ayodeji Balogun, the Chief Executive Officer at the Lagos, Nigeria-based company informs Food Business Africa.
“If the proper investments are made in the agricultural sector, the current contributions being made to the economy by this sector can be doubled or even tripled because Nigeria and indeed Africa, has both human and natural resources to achieve this potential,” he counsels, adding that the commodity trading sector has immense potential to contribute to the growth of African economies, if well structured.
“Smallholder farmers often have limited access to markets and fair prices for their produce. A commodity market provides smallholder farmers with much-needed access to useful, timely, and transparent market and price information that allows them to efficiently sell more products and be adequately remunerated for their work and investments. Without a commodity market, the ability of the smallholder farmers to earn decent incomes from their produce is limited, and this will impact their level of productivity in subsequent seasons.”
Ayodeji believes that one key advantage of commodities exchanges such as AFEX is to unlock financing for agriculture, since agriculture is perceived as a high-risk endeavour; a view that dissuades the flow of capital into the sector. “To unlock finance, the first fundamental is to ensure that the risk profile is low and manageable.
With systems for price discovery and transparency that is provided by a commodities exchange, it becomes easier to monitor the flow of money in and out of the sector, and by extension measure and manage risk, increasing the amount of finance that is made available to value chain efforts over time,” the CEO articulates.
It is this dream that led the Ayodeji to transition from studying engineering to trading consumer goods, from an analyst role with an impact investing team to building supply chains in agriculture, and now building tech-enabled agricultural asset-backed financial instruments for trade on a commodities exchange.
Leading a team of experts with an over-aching ambition to grow AFEX across West Africa, the team is looking to provide unique solutions to over 1 million under-served farmers, while growing the business by a multiple of ten over five years – hence proving that the future of the commodities exchange in Africa lies squarely with the private sector.
Growing the idea from scratch
Starting off with the goal of making the commodity sector to be more accessible to the average person and to redirect the sector to focus on smaller players and local markets in Nigeria and the region – having seen a surge of interest in commodities and commodity trading – AFEX was established from an earlier project where Ayodeji was part of the impact investment team at Heirs Holdings that was evaluating what turned out later to be AFEX.
“When the deal was made, I felt this is what I want to be involved with. It brought in both my interest in technology, my capacity in finance and also, the commodities trader in me. It brought all of them together. I am lucky to have been part of the ground zero team – investment phase, investment appraisal, deal structuring, deal close, pre-business plan, business plan 1, business plan 2, business plan 3,” he mentions, with excitement all over his face. “For me, commodity trading is something of a self-identity.
It is that thing that I don’t need to think about or prepare for. I go into a deal and negotiate, trade, and make calls. When you add that with the incredible impact that we make while running the business, my inspiration to continue with the journey is just endless.”
AFEX executes on its vision to be the reference point for commodities in Africa through three main business units that spearhead activities and programs in each focus area. AFEX Commodities Exchange is a capital market operator that enables effective trade and settlement on commodity transactions by supporting securitization and structured trade finance for commodities, which allows investors to diversify their portfolios with innovative commodity-backed products.
Its sister company AFEX Fair Trade Limited works for better food systems in Africa by offering solutions that enhance smallholder productivity, enable storage as a service and power trade within Africa and with the rest of the World. The third business unit, AFEX Investment Limited, unlocks funds from capital market players for commodity value chains in Africa, with its activities enabling the flow of funds to solve big problems with effects that reach the bottom of the pyramid.
One of the core mandates that made Ayodeji and his team to set up AFEX was to provide scalable solutions that can unlock capital at the right cost and structure for smallholder farmers, and support their livelihoods and income-generating capacity. He explains that this was important to the team because smallholder farmers in Africa and Nigeria specifically were severely underserved, straggling the poverty line and unable to make significant investments into their operations. This has meant that the agricultural sector in Nigeria has historically been fragmented and very near subsistence levels.
“The challenge for us when we set up the Exchange in Nigeria was therefore to improve farmer productivity, unlock credit or finance for them and also give them access to markets.” In addition to developing commodity-backed instruments, AFEX is also strongly engaged with capital market operators and other financial institutions to offer commodity trading as an alternative asset class to investors.
AFEX operates over 60 warehouses in Nigeria’s key grain-producing areas and accounts for more than 100,000 metric tonnes of total Nigerian storage capacity. The exchange has reached over 160,000 farmers and traded 200,000 metric tonnes of commodities with a total turnover of USD47.6 million (NGN17.1 billion) since 2014.
According to Ayodeji, during these formative 5 years, the company has been focusing on building the ancillary infrastructure necessary to support trade and manage risk in the sector, and is at this time focused on offering up its infrastructure as a service to various players to enable the larger capital market to tap into the activities in the African commodities market with ease.
“Essentially we are building a technology-driven capital market infrastructure, which will unlock alternative investment capital to finance tradable low-risk agriculture and other commodity types.”
The company currently operates in Nigeria but Ghana and Cote D’ivoire are of interest in the near future, reveals the CEO. The main commodities at the Exchange include maize, paddy rice and soya beans, while members are from diverse organisations and interest groups, including farmers, dealers, market regulators, market makers, investors, brokers and other interested participants.
He adds that members of AFEX gain access to one of Africa’s leading and largest commodities exchanges by receiving data and intelligence, including access to data on past finance transactions, trend reports, region and sector briefs and they also access an online deal and matchmaking platform for investors and those seeking capital to connect on finance deals.
To reach its ambitious targets, AFEX has deployed its technology stack – WorkBench and ComX – as a service to its participants and the broader agriculture value chain service providers in Nigeria. ComX, the award winning trading and investment platform, unlocks needed financing for commodity value chains, while WorkBench software helps build a reliable databank for agriculture, and also helps with timely assessment and management of operational risk.
“Our commodity trading platform ComX was awarded the AppsAfrica Award in the Agritech & FoodTech category. The award celebrates the innovation and technological prowess shaping our ecosystems and was a nod to the potential of ComX to orchestrate a massive step forward in the commodities market in Nigeria, by attracting significant investments to the sector and introducing innovations that will create a new world of financial products, market education, operational risks, and wealth opportunities for everyone.”
He discloses that ComX is a simple yet innovative platform designed specifically for trading in assets backed by commodities. It allows investors to gain exposure to commodities as an alternative investment class by providing features that help in buying and selling commodity-backed instruments while analyzing and managing their portfolios.
The platform also helps lower some of the barriers that prevented investors from investing in commodities, including market education, transaction costs, operational risks, and product availability. He adds that all products traded on ComX – including spots, ETCs, forwards, and asset-backed commercial paper (ABCP) – are physically backed, thereby reducing the risk exposure of the investors.
Ayodeji is proud that AFEX was the first-ever listed commodities index in Nigeria and the impact that the company has created as it partnered with capital market players to structure debt securities to finance over 200,000 smallholder farmers in Nigeria.
The company is proud of its many firsts. In 2016, they launched the Grain Bank and Commodity Exchange project with the West Africa Food Market, targeting 100,000 farmers in Nigeria. It also debuted the first structured grain-for-fertilizer program in the country and issued a £350,000 repo bond that was fully subscribed by the DFID. In 2017, the company commenced its trading platform, which is powered by NASDAQ, and at the same time launched its agribooster product in partnership with the fertilizer major, OCP Africa, targeting 5,000 farmers. The company also took part for the first time in the Central Bank of Nigeria’s Anchor Borrowers Program as an aggregator of commodities.
To continue with its innovations journey, in 2018, the firm began on-boarding non-bank financial institutions on the Exchange for farmer financing, while in 2019, it introduced Nigeria’s first ever commodities index – the AFEX Commodities Index – that tracks price changes for three key commodities: maize, soya beans and paddy rice. It also introduced EdEx – the market education platform for commodities.
He reiterates that as much as they have done ground breaking work, their work is cut out for them, as they have huge ambitions. “We have created the largest network with 60 warehouses across 15 states in Nigeria, which also serve as hubs for smallholder farmers and traders to transact and make payments with each other. We also have the largest database of credible farmer data, complete with bank verification number and land coordinates.
Still on a platform level, we have introduced to the market the first-ever education platform for the commodities market as well as the first digital trading platform for commodities in Nigeria (ComX) with an increasing array of innovative commodity-backed securities.”
As the organization evolves, he informs us that they are putting forward, for Africa, a market infrastructure that will promote a transparent, data-driven, tech-enabled commodities ecosystem, where risks are efficiently measured, managed, and priced. This we will get done through innovative finance, inclusive agriculture, and technology; thereby helping the firm unlock capital for producers and processors across the value chains across the markets where they will operate.
However, along the way, the company has faced a number of setbacks on the journey to delivering on its mandate. “Perhaps the most significant setback we have faced was our initial investment in technology. We had initially invested over 70% of our initial capital raise on a world class technology, which proved to be too futuristic, considering the significant infrastructure deficit in Africa. We very quickly realized that what we had assumed would be a FinTech venture needed to be a supply chain solution working with rural smallholder farmers, and aggregating very small lots of grains and matching those to buyers,” he divulges.
“The business at that time needed more investments in storage and logistics, and the team configuration needed to change. With this understanding and the adaptation of the model to fit, opportunities began to open up to build the business we now have.”
Investing for the future
Over the years, AFEX has invested significantly to enable the creation of a viable commodities exchange in Nigeria, says the CEO. “In the past few years, our investments have been focused on infrastructure, talent and technology. We have built on existing logistics systems by revamping idle storage solutions in the largest grain producing states in Northern Nigeria and making them available for all market players – producers, merchants, and processors. Our infrastructure is then managed by a diverse pool of talent from trained collateral management professionals and field staff to tech, finance and marketing talent in our corporate office.”
He adds that over the last two years, AFEX has also invested extensively in technology that supports traceability: covering activities all the way from the financial inclusion of producers, through the outreach operations, and it’s warehouse receipt system, to a trading platform that fosters shared prosperity between producers, processors and investors.
He says that since inception of operations, they have seen the opportunity in having firsthand contact with farmers, while bringing technology right to their doorstep by providing services such as access to warehouse receipt systems, financial inclusion and access to credit and micro-insurance. “On top of that we have now built a platform that facilitates effective trading and settlement of commodity transactions, helping to structure and formalize the commodities markets. Now, with the largest supply chain infrastructure, a large network of farmers and proven platforms for securitization and trade, we are working to scale our business and impact by 10 times over the next five years.”
He discloses that the adoption of the right technology has been important to the firm’s revolution of the commodities market, especially when you zero in on how technology can be an enabler to improving the trading processes and boosting efficiencies in the entire value chain. “Technology can enable an increased capacity to unlock capital for production, trade, and processing by making activities transparent and traceable. Technology also plays a leading role in terms of being able to converge financial capital with commodities and the transmission of both. The other part is the data: technology allows us to gather data and analyze it a lot more efficiently to create knowledge and insight.”
Building a sustainable future
The CEO enlightens us that over the next few years, AFEX will focus on three principles in its operations: establishing a viable trade infrastructure that supports both quality and quantity of commodities, ensuring an inclusive market that accommodates producers through structures that strengthen financial inclusion and livelihoods and limits post-harvest loss or waste, and innovating around market data and product development, giving rise to Nigeria’s first commodity index and laying the ground work for commodity derivatives products in Nigeria.
He further notes that the company will be seeking to further grow its capacity and capability in Nigeria, and that to fund the planned growth, they are currently fundraising. The firm’s Series A raise in 2019 was fully subscribed to by Consonance Investment Managers, a Sub-Saharan Africa focused early-stage and growth investment firm for an undisclosed amount, he reveals.
“Our work at AFEX contributes to SDGs 1, 2, 5, 8 and 12; no poverty, zero hunger, gender equality, decent work and economic growth and responsible production and consumption. With such outcomes as safe and healthy food, higher yields, household savings and resilience, reduced food waste and year-round supply, our operations impact a number of sustainability concerns.”