Policy Paper - Financializing Commodity Markets: Consequences, Advantages and African Case Study

The financialization of commodities was introduced to the world as early as the 19th century and has been controversial in terms of the results it has yielded and the additional inflation fueled. [...] Moreover, the literature points to a difference between the disruption resulting in financial markets from commodity financialization, leading to an association between the financialization and amplification of soaring commodities prices, and the lack of fundamentality in the behavior of commodities on financial markets. [...] The need for financial traders and hedges to mitigate and control risk can emerge, and it becomes necessary to reduce risk exposure in the futures markets when the risk-bearing capacity of these agents is limited, due to the spillover of events outside the commodity market. [...] The Relevancy of Commodity Financialization for the African Continent Among the arguments in favor of commodity financialization for the African continent is the diversity of commodities exported, as highlighted in figure 1, as well as their critical role in today’s geopolitical dynamics. [...] Case Studies of African Commodities: Evidence from the Ethiopia Commodity Exchange (ECX), the Johannesburg Stock Exchange and the Ethiopian Stock Exchange The Ethiopian Experience As part of Ethiopia’s agricultural action plan in 2003, one of the key action points was to explore the feasibility of establishing a commodity exchange.