Progress Update – FAQ
What is a commodities exchange all about by way of definition and operations in brief?
A Commodity Exchange is defined as an institution that determines and enforces rules and procedures for the trading of commodities and related investments, such as commodity futures. Commodities exchange also refers to the physical center where trading takes place. Modern commodity markets began with the trading of agricultural products since 1848, when the Chicago Board of Trade was established. The purposes served by a commodities exchange depend in part on the nature of the specific contracts that are traded. By simply centralizing trade in a certain commodity, an exchange can facilitate title transfer, market transparency, and price discovery. Transaction costs are reduced because coordination through a centralized exchange can reduce costs associated with identifying market outlets, physically inspecting product quality, and finding buyers or sellers.
Give the Nation a progress update on the Commodity Exchange thus far?
We have now moved to our state of the art building situated along the M1 road behind Maula Puma Service Station (the old Metro Supermarket) in Lilongwe. The operations is in full swing, with members being recruited on a daily basis since launching in November 2012, due to the overwhelming demand registration for membership will close on 15 February to allow for client (farmer) registration to happen prior to the harvest season. The identified warehouses situated across the country where farmers will deposit their commodity have been upgraded and retrofitted as per international standards to ensure commodity quality is maintained. Our IT system for the trading platform is the best modern in system in Africa and arguably in the world as the development process was done by international experts. At the moment we are at all systems go. Massive awareness campaign will roll out soon along side the client farmer registration.
What are the benefits of trading through a commodities exchange?
As stated by numerous government officials including the minister of agriculture the AHL Commodity exchange will ensure greater transparency in price determination as participants from across the country will trade on a single common platform. Also the display of the prices and quantities of various commodities traded will allow the farmers to price their produce correctly. It will thus provide a price discovery mechanism to farmers and ensure better price realization. Transparency of transaction would help governments in addressing the problem of evasion of taxes. A Commodity exchange can overtime bring about the contraction of the long chain of intermediaries by generating greater awareness among farmers. The obvious result will be integration of local markets and greater market access for the farmer. It goes without saying that this will not happen unless the supporting marketing infrastructure is improved.
The Commodity exchange will promote quality standardization as grading and assaying will be one of the eligibility requirements for trading on the platform. Banks will be less reluctant to lend to farmers when there is quality standardization and the provision of a ready credible exit route for disposal of pledged commodities in the event of credit default.
Inlight of the current economic recovery reform agenda; What are the benefits of a commodities exchange to the economy?
Benefits that the AHCX will bring to the Country:
- Organized Market with access to Buyers
- Traceable and Visible Transactions of Foreign Exchange
- Quality Standardization and Guarantee
- Price Discovery and Market direction
- Contract -Risk Management
- Indirect benefit of the Commodity Exchange:
- Storage infrastructures
- Value Addition and Processing infrastructure
- Cleaning, grading and packaging infrastructure
- Market information system (MIS)
- Financial Inclusion and Access to Finance