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USAID Hub analyzes potential for commodity futures on the NSE

Published on July 01, 2019

On June 25, the USAID Hub and the Nairobi Securities Exchange (NSE) held a validation workshop for a feasibility study on listing a maize futures contract at the NSE. The study, validated by 35 stakeholders, found the listing to be feasible and confirmed that there is an appetite for such a listing at the NSE. Now, with the study’s recommendations, the NSE has the option to proceed with pursuing the listing. The NSE has invested heavily to prepare the market to manage derivatives contracts and is due to launch financial derivatives contracts trading on July 4, 2019. Investments made in strengthening the NSE’s institutional, human capital and trading infrastructure will enable the market to add agricultural derivatives trading with relative ease.   

A maize futures contract would allow traders to purchase maize at a set price for a specific date in the future. There are several benefits to this, including:

  • Efficient price discovery and risk management;
  • Transparent trade through an electronic trading platform;
  • Guaranteed transactions through the derivatives clearing structure;
  • Guaranteed procurement through approved storage operators; and
  • Funding for producers who hedge their price risk, which encourages sustainable production.

Farmers and consumers stand to gain from stabilized maize prices. In the current boom and bust cycle, farmers lose money when the price of maize drops. Yet consumers lose when the price rises and pushes up costs for staple foods like ugali. Having a more predictable price would contribute to farmers’ and consumers’ resiliency, allowing families to better plan around incomes and expenses.

While commodity exchanges are not new, commodity derivatives have yet to enter the EAC. The NSE has successfully completed a trial of select stock and index derivatives, demonstrating that it has the capacity to serve as a pilot in the region. Challenges to listing remain, however, as detailed in the Hub-supported study.

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