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ECX takes Ethiopia's Agri-market to a New Leap

ECX takes Ethiopia's Agri-market to a New Leap

Hana Behailu  10-25-15

This month the Ethiopia Commodity Exchange embarked on a new course with its inauguration of eTRADE platform, the first of its kind in the country. The platform is expected to break the physical and time barrier of the current trading arrangement and economies-of-scale for further expansion to trade in additional new commodities.

The new system is said to be a groundbreaking system that has the capacity to exponentially increase transactions 500 times more than the current capacity, as it will enable buyers and sellers to trade electronically from anywhere. “The new e-TRADE platform will change Ethiopia’s agricultural products market forever. All agricultural products traded in traditional form can potentially come to eTRADE platform including cotton and teff,” according to the officials of ECX.

Indeed, ECX has already made huge impact on the agricultural market of Ethiopia. In the past, agricultural markets in Ethiopia had been characterized by high costs and high risks of transacting, forcing much of Ethiopia into global isolation. With only one third of output reaching the market, commodity buyers and sellers tended to trade only with those they knew, to avoid the risk of being cheated or default.

Trade was confined to visual inspection because there was no assurance of product quality or quantity, this drove up market costs, leading to high consumer prices. For their part, small-scale farmers, who produce 95 percent of Ethiopia’s output, came to market with little information and are at the mercy of merchants in the nearest and only market they know, unable to negotiate better prices or reduce their market risk.

The problem was similar in the rest of Africa. However, the neoliberals' prescriptions to fix the market had only made it worse. In the 1990s, the international organizations insisted to Africa that markets must be liberalized, that economies must be structurally adjusted. That meant that governments were to remove themselves from the business of buying and selling, rather inefficiently, and let the private market do its magic.

However, the outcome was to the contrary. The neo-liberal prescriptions failed to solve the structural deficiencies of the market which needs a proactive role of the government. The problem with African agricultural markets cannot be fixed by "liberalizing". The obstacle was not state role rather the high costs and high risks of transacting, forcing much of the continent into global isolation, weak road and telecommunications infrastructure, market information systems, product grading and certification, and ways to reliably connect buyers and sellers.

It is no wonder that in Africa in general, in Ethiopia in particular, a minor portion of the agricultural output actually reaches the market, as the market suffers from a virtual absence of necessary market institutions. For the reason that, commodity buyers and sellers reduce their risk and costs by trading only with those they know. Trade is done based on visual inspection because there is no assurance of product quality or quantity, which drives up marketing costs, leading to high consumer prices. For their part, small-scale farmers, who produce the bulk of agricultural output, come to market with little information and are at the mercy of merchants in the nearest and only market they know, unable to negotiate better prices or reduce their market risk.

The effect on the general national growth was seen several times in Ethiopia. In the 1990s and 2000s, even if the government gave due focus on agricultural development the growth rate fluctuated highly as the market failed to reward the farmers satisfactorily. Furthermore, the progress achieved in the agriculture did not benefit the overall economy as much it could have.

Indeed, as Eleni Gebremedhin noted, the variation of prices for maize from one year to the next is in the order of 50 percent. This kind of market risk has direct implications for both the incentives of farmers to invest in achieving higher productivity as well as for food security for the country.

Between 2001 and 2002, Ethiopian maize farmers had successfully produced two years of bumper harvests. This led to a collapse of prices by up to 80 percent. In the grain belt of the country, prices fell so low that some farmers did not even harvest some 300,000 tons of grain from the field, because it was not profitable.  Less than six months later, that very same year, when the rains failed in other parts of the country, Ethiopia announced a major food crisis and the need for emergency food to avert starvation for 14 million people.

At the same time, farmers who had been hit by the collapse in prices reduced their fertilizer use by 27 percent for the following year. This is an example of “arrested development”, or a budding Green Revolution stopped in its tracks. And this is not unique to Ethiopia, but happens over and over again all over Africa.

These were also recognized in the policy framework for Rural and Agricultural development designed in 2000s. The policy document observed that:

Our agricultural production can achieve rapid and sustainable growth if it is based on producing more than the producers’ own consumption and supplying the difference to the market. The life of the farmer can be continuously improved if he is able to produce at this level, sell his products and purchase ever-increasing volumes and types of commodities and services....

In order to improve our position within  the global economy, eliminate dependency and more readily partake of the gains from global economic growth, we  must  ensure  rapid  and  sustainable  national  growth;  constantly  improving  the  level  of  technology  and  capital  formation  within  the  country.  Furthermore,  in  the  process  of  national  economic  growth,  the  domestic  economy  should be consolidated and a large domestic market created. This would allow us to withstand external shocks that  occur  due  to  variable  conditions  in  the  international  economy  that  are  outside  of  our  control.

Subsequently, the government launched various efforts to attain that policy objective. Focus was given to the expansion of infrastructure, cooperatives, zonal market centers, etc. At that juncture, the founder and former CEO of ECX, Gebre-Madhin, came up with an innovative idea.

As she explained during an interview with the Guardian, "there were consecutive bumper harvests in 2000 and 2001, and Ethiopia was doing really well. Then six months later prices collapsed almost to zero, and farmers could not sell the grain. Six months later, in mid-2002, Ethiopia went to the world for emergency food aid for 14 million people at risk of starvation. I was so shocked. By that time, I had my PhD and I knew this was what I wanted to work on. I had the idea of a commodity exchange – I'd written about it in my dissertation. I did my PhD at Stanford, which is really specialized on commodity markets."

The government warmly welcomed her innovative idea and made possible the formation of the first national multi-commodity exchange system that provides low-cost, secure marketplace services by providing a legal framework and setting up a regulatory agency. Consequently, ECX was launched in April 2008 to change transform the traditional means of trading to a marketing system that coordinates better, that links faster, and that protects the interests of both sides of the trade.

According to its documents, the ECX design is unique in that it integrates the entire "eco-system" related to the market, spanning the central trading system, warehouse delivery centers, product grade certification, clearing banks, an arbitration tribunal, a market information system linking rural sites, remote electronic trading centers, and a secure data center to manage membership and market information.

The system is simple and intuitive. The exchange is typically organized by commodity. Prices are determined solely by supply and demand conditions. If there are more buyers than sellers, prices will be forced up. If there are more sellers than buyers, prices will be forced down. Thus, buy and sell orders, which are channeled to the exchange floor for execution, are what actually determine prices. The orders to buy or sell are done by public outcry, rather than by private negotiation, and the prices at which transactions are made are recorded and released publicly by the exchange as soon as possible, generating market transparency.

In comparison to an auction where the emphasis is on selling, trading on a commodity exchange is like a continuous two-way auction, in which offers to buy are going on simultaneously with offers to sell. This is possible because the graded product needs no description with a standardized contract and because there is sufficient volume of both buy and sell orders. The exchange itself does not operate for profit, but merely provides an organized marketplace for buyers and sellers.

Obviously, the key to a successful exchange is to bring about the needed highest possible concentration of buyers and sellers into a single market mechanism in an efficient, low-cost, manner. To do so requires that the market operate with certain basic rules and with certain types of actors. These characteristics or operating modalities are precisely what distinguish what is known as a commodity exchange from a typical central wholesale or terminal market.

Soon after its establishment, ECX was making huge impacts. It boosted exports, improved conditions for producers and is now inspiring other countries in resource-rich Africa to set up their own exchanges to ensure they are the main beneficiaries of commodity exports. It allowed price discovery for farmers that previously producers had little knowledge of international market prices and could only rely on middlemen who pocketed hefty profits by selling on heavily marked up goods.

Between 2008 2013, the value of trade rose from just 2.7 billion birr to 20 billion birr. Traders transacted some 20 billion birr worth of commodities on ECX trade floor. The total volume of traded commodities, which include coffee, sesame and haricot white beans, reached 552 thousand metric tons. Coffee made up 45% of the total volume of trade, sesame 40% and haricot white beans 15%. The Exchange's revenue from its services, including warehousing, reached 193 million birr. Its membership reached 358, who work with some 12,000 people nationwide, including farmers and warehouse managers.

The benefit that accrued to the farmers is immense. Previously, only a third of the price of products sold went to the farmer, but those who sell through ECX take as much of 80 percent of the sale price home. Evidently, the impact extends to the buyers as well. Better varieties are available at a lower cost due to competitive selling and can be sourced in one place.

ECX has also received commendations form several African countries, who are sending delegations to learn and emulate the model. The latest one was the Bolsa de Mercadorias de Mozambique (BMM), a government led exchange from Mozambique, that is modeling ECX in its establishment.

During the signing of the MoU, the CEO of the Mozambique BMM said, “We are impressed by what ECX accomplished during the past few years and its vision for the future. ECX is exceptional in its unique design, business model and use of Information Technology. It is shaping the way forward for many African exchanges as a modern and dynamic market platform”.

Indeed, a delegation of eleven senior officials from Bolsa de Mercadorias de Moçambique (BMM) is currently undertaking a one week long training on “Foundations on Commodity Exchange” at the ECX Training and Certification Institute as part of the agreement signed between the two.

Now, ECX plans to broaden the range of crops it trades and wants to introduce stocks and bonds under a five-year expansion plan. The market plans to move from coffee and sesame seeds, which account for more than 90 percent of volumes and are the two biggest generators of foreign exchange in Ethiopia, to sugar and grains such as corn. Equities, government debt, power and metals might also be added on the bourse, which traded 26.2 billion birr ($1.3 billion) worth of goods last year.

Indeed, the prospects are promising.

As the second most populous country in sub-Saharan Africa and with a population that spends the bulk of its expenditures on food items, there is a large and growing domestic market for staples. The great majority of rural households, some 90 percent, spend more than 70 percent of total income on food and for most of these households, more than 50 percent of total expenditures and more than 70 percent of food expenditures is spent on staples, such cereals, roots, pulses and oilseeds.

Even with one-third of total production reaching the market, the marketed surplus amounts to a domestic market of some 3 to 4 million metric tons annually. The Ethiopian market is thus one and one-half times the size of total production in the East African community.

Because of the geographic dispersion of surplus and deficit areas of the country and the radial configuration of the road infrastructure, Addis Ababa is a logical hub or clearing point for the domestic grain market. Thus, Addis Ababa constitutes the primary reference market for the country, as the focal point in which buyers from deficit areas meet sellers from surplus areas. Of course, Addis Ababa is not the only hub in the marketing system, but other terminal markets such as Shashamene, Nazareth, and Bahir Dar have considerably less volumes.

Another important factor in justifying a push for a commodity exchange is the on-going initiative to establish voluntary, market-oriented cooperative unions around the country.  If these cooperatives operate with a business orientation, they can stand to greatly benefit from the existence of a well-organized national market. At present, interviews with certain unions reveal a deep mistrust of the market and a desire to “cut out the middleman” through directly contracting between cooperative unions and processors or exporters.

Another positive development is the emergence of large-scale commercial farmers in the grain sector, defined as holding more than 100 hectares. At present, the commercial farmers association of Ethiopia boasts membership of some 200 farmers who represent some 2 percent of the domestic market. These are actors who would keenly benefit from an organized market where products would be graded and be channeled into domestic or export markets.

A major thrust of the development strategy that Ethiopia is embarked upon is the focus on export markets to lead growth. Thus, the country seeks to position itself on global markets as a future exporter of agricultural goods, including oilseeds, pulses, and also cereals. The maize and wheat markets in nearby regional markets constitute an untapped export potential. Ethiopia is the second largest maize and wheat producer in Africa, with domestic production more than double the volumes jointly produced in the three members of the East African Community (Kenya, Tanzania, and Uganda) in 2004-05. It is also considered the lowest cost producer in the region. On the demand side, there is between one-half to one million tons of grain deficit in the EAC community and nearly 3 million tons deficit annually in the COMESA region for maize.  In addition to maize, there is a growing demand for wheat in this region.

Now, ECX is pursuing the next major phase to realize its ultimate potential. That is the launch of eTrade. The newly launched platform, when it starts operating at full capacity, will revolutionize the exchange like never before. The system has the capacity to trade 500 times more transactions than the current capacity, with buyers and sellers trading electronically from everyplace.

Indeed, Ethiopia Commodity Exchange has become a reliable partner of Ethiopia's farmers and traders in general. It has now become an idea inspiring other African countries to follow suit. Its role in transforming Ethiopia's market is rising immensely despite its short life span.

Indeed, challenges remain. Scarcity of warehouse to store goods and constraints of infrastructure restrict ECX's capacity to inform farmers, engage traders, and ensure adequate supply of commodities.

Nevertheless, Ethiopia's Commodity Exchange market, which is Africa's first commodity exchange, remains leading the way in pioneering the modernization of Africa's market with its launch of eTrade.


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