In 2021, we launched a first-of-its-kind product for the Nigerian market. It was a moment when we truly started to embody our winning model as a commodities exchange while still holding true to our core fundamentals of impact and inclusion. Our Asset-Backed Commercial Paper (ABCP) was the first commodity-backed commercial paper launched on a commodities exchange in Nigeria. It was unique both on a structure and on an access level.

Put concisely, we structured a financial product that utilizes commodities as collateral to underlie a debt instrument, through AFEX-issued warehouse receipts. More importantly, the financing vehicle could then provide low-cost financing to agriculture commodity processors (agro-processors) who are unable to raise funding directly from conventional commercial paper markets; providing an incredibly important lifeline of funding to our food systems in the country.

The Importance of the AFEX ABCP

Food is important to us at AFEX. Specifically, food security and the steady, consistent work required to achieve it on the continent is a puzzle that we are committed to solving. Several key puzzle pieces can be found in the poultry, animal feed, and food and beverage segments of the food value chain in Nigeria. The ABCP was created for these players, and the ripple effects of their ability to access working capital financing are felt far and wide.

With the ABCP, pre-qualified agro-processors get working capital support that allows them to purchase their commodity requirements at an agreed price. For an agro-processor, this could mean the superpower of managing price volatility in their business, but for you and I who are final consumers, it can translate to more price stability on the goods we love, so that costs are not here today and up tomorrow.

The product also delivers social impact by indirectly creating a market for farmers to sell to, while also dropping post-harvest loss numbers as commodities are safely stored in AFEX warehouses with top-of-the-line collateral management services.

Developing the market system

A product like the ABCP is vitally important for Nigeria’s food security future, but it was years in the making. As Nigeria’s first private sector licensed commodities exchange, AFEX spent the better part of our first five years developing and deploying the infrastructure to connect the financial market to the commodities market. This infrastructure is two-pronged.

First, there was the physical infrastructure set up in the form of warehouses operating close to farmers, ensuring that we were able to build up over time a mechanism to guarantee the quantity and quality of commodities and a significant supply chain capacity. Then came the technology infrastructure layered on this initial infrastructure to strengthen transparency and transaction efficiency. Two of our key technology platforms are relevant here: our value chain management platform and our trading platform.

The ABCP comes to life

We announced a three-year ABCP program, 7 years after entering the market in Nigeria. The program takes advantage of our warehouse receipt system and collateral management infrastructure; enabling a smooth transition from commodities to financial assets and back again.

AFEX lists the ABCP on its Exchange, then engages capital market operators for subscriptions for a period of time called the “listing period”. Funds raised are accessed by pre-qualified agro-processors as working capital support to enable them to purchase commodities required for their production processes at an agreed price. All of these activities involve arrangers, custodians, and other parties.

Basically, following the fundraise for the program series, borrowers are able to access funds to buy grains, after which they obtain warehouse receipts. The warehouse receipts are transferred from commodities to financial asset, which is then listed under the borrowers’ portfolio on our trading platform. The commodities are also linked through the warehouse receipt system to financiers allowing them to value and mark the price of the commodities to market on a real-time basis.

AFEX’s ABCP has completed two successful series, driving needed financing to manage the high cost of procurement incurred by domestic agro-processors, while providing a hedge against supply shortfalls and price volatility. Now in the final year of the program, it continues to solve an important challenge with an innovative structure. At the onset, the goal of the product was to bridge the funding gap between lenders and borrowers in the Nigerian agriculture sector. The ABCP has done this with the required regulatory oversight, an investment grade rating for its successive issuances, and an eye on the prize of the overall benefit of food security in Nigeria.