Thursday, April 24, 2014

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Ethiopia's Commodities Exchange - an End to Famine?

Eleni Gabre-Madhin tells Think Africa Press of her belief that the national commodities market will help both farmers and consumers.
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Eleni Gabre-Madhin visits an Ethiopian market

Despite boasting some of the most fertile lands in Africa, Ethiopia has been blighted by some of the cruellest famines of the last century. Eleni Gabre-Madhin, a former World Bank researcher, is trying to resolve the paradox.

Gabre-Madhin has long argued that Ethiopia's famines are caused by the lack of a national commodity market: its 28 million farmers sell their crops in informal local markets where they fail to gain the right price for their products. The result is a lack of incentives for maximising land use and the prevention of crops being efficiently displaced from the fertile south to the poorer north.

Gabre-Madhin finally succeeded in launching the Ethiopia Commodity Exchange (ECX) in spring 2008. In the 1,000 days since then, it has established itself as the gateway to the world for Ethiopian coffee. However, in order to really affect change, Gabre-Madhin, the CEO of the ECX, will need to make it a viable market for Ethiopian cereal production. Her success will depend on her ability to involve Ethiopian small farmers. So far, most have shied away from the ECX -  only 5% of Ethiopia's 28 million farmers are directly involved - but the time has come to bring them in.

1,000 days, $1 billion of trade

“We have shown that our system can handle big volumes and many actors without any contract default,” says Gabre-Madhin from her office in Addis-Ababa. In its first 1,000 days, the ECX traded more than $1 billion of commodities, mainly coffee - it accounted for 99% of all exchange trades in 2009. Membership fees have increased its capital to $29 million from the initial $9.2 million provided mainly by international donors.

The from scratch market chain has proved to be reliable: coffee crops are stored in 16 warehouses spread across the country where their quality is assessed and certified. Meanwhile, traders gather on Addis-Ababa's trading floors and strike deals. To ease the impact of financial speculation, prices are not allowed to change by more than 5% up or down over a ten-day period.

“Now that we've got to a stage where we are comfortable with coffee, we can trade other commodities,” says Gabre-Madhin. And the government has set the scene for a change. It granted the ECX the exclusive trade of sesame and white pea beans last November.  As a consequence, Gabre-Madhin expects coffee's share of trades to fall to 50% in 2011.

Still a market for few

In spite of its first achievements, the ECX has fallen short of its social ambitions. Its mission statement read: “The commercialisation of smallholder agriculture is a core pillar of poverty reduction strategy.” In other words, linking small farmers to a reliable market was claimed to be a way to give them stable incentives to put their land to work and thus enable them to escape poverty through the commercialisation of their crops. However, the quota of farmers directly involved in the market does not exceed 5%, and farmers co-operative make up just 12% of market memberships.

“The participation of the small farmers has been inferior to what was expected for several reasons," says Gian Nicola Francesconi, a senior researcher at the International Food Project Research Institute.  "Many were prevented from leaving traditional “tax-free” informal markets. Others simply mistrusted a new and unknown system. Moreover, co-operatives, an important link between the ECX and small farmers, were often not ready to play their role.” What was supposed to become “a marketplace for all” still plays a marginal role in rural Ethiopia.

But Gabre-Madhin believes the tide will turn: “We have shown that the problems that have blighted the market before - too many defaults, too many inefficiencies - have had solutions. Now our target is to reach 20% of Ethiopian farmers in the next five years.”

Empower the people

To achieve this both the sets of commodities traded and the number of warehouses spread across the country will need to increase. The ECX will also bring more information to where it is needed. “We have plans to put up 150 electronic price display boards in rural markets,” says Gabre-Madhin. “Currently we have 36 and have finished buying all the remaining equipment, and are installing 80 by end of the year and the remaining ones in 2012." Price information is supposed to give farmers more bargaining power: if they know the official price of what they are selling, they are less vulnerable to traders' greed.

There is also a plan to partner with the World Bank's International Finance Corporation to introduce the possibility of using warehouse proceeds as collateral for loans. The marketplace will also be upgraded thanks to the introduction of future and forward contracts and of an electronic trading system.

While there have been claims of a government plan to set up 100,000 so-called primary markets to make it easier for small farmers to reach the formal market and cut out the thousands of traders who buy crops at farm-gates to bring them to ECX warehouses, Gabre-Madhin says: “There has never been such a plan.”

Is the government using the ECX as window dressing?

Outside attention will inevitably be drawn to the links between the ECX and a political establishment which some argue prioritises economic growth above all else. Prime Minister Meles Zenawi has been ruling the country since 1991 and his party holds a 99.6% majority in the parliament. “The government not only supports the idea, it has taken it over,”claimed a 2010 paper by Peter Robbins, a former commodity trader turned consultant for the United Nations.“Prime Minister Meles Zenawi is using the ECX as a cover to control the commodity market and transfer a big portion of that market to his regional party-owned and controlled parastatals,” says Seid Hassan, an Ethiopian professor of economics based at Murray State University. “The level of corruption, the lack of media outlets that could bring info to the poor peasants, and lack of independence indicate that the ECX would be unable to 'transform the Ethiopian economy by becoming a global commodity market of choice', as once claimed on the ECX’s main web page.” 

Gabre-Madhin does not hesitate to rebut this. “The management of the exchange is purely professional," she says. "We also have protection from the law in terms of not having interference that would prevent the exchange from being a free market. And the exchange has a very big incentive to put things in order: if we lose someone's commodity we are liable. If we do not pay, we are liable. Yes, there is always room for fraud. But so far claims made against the exchange have been very small and we have not suffered from any default.”

Land leasing

That people may perceive the government to be playing both sides is understandable: with one hand, it is trying to empower small farmers through the commodity exchange, with the other it is leasing large amounts of land to international investors, taking it out of the hands of locals. Gabre-Madhin does not see any conflict between the two policies: “Only 13% of arable land in Ethiopia is under cultivation. There are vast areas that are not farmed by anybody. And there has always been a big push by the international community to say: 'Why not also have commercial agriculture?' So recently it was decided that while we promote small-scale agriculture, we can also promote large-scale cultivations because both of them can benefit the country."

However, the social benefits of a land leasing scheme are under dispute. “The risks associated with such investments are immense,” the World Bank stated recently. Nonetheless, commercial farmers could contribute to the ECX's growth. “An Indian company sold its crop to the ECX for the first time,” says Gabre-Madhin. “It is as useful for commercial farmers to have a reliable market as it is for small farmers.”

Commercial farmers and the new trading framework will pose real challenges to the ECX. However,  Gabre-Madhin’s ambitions will not be fulfilled until small farmers are involved. Then the ECX will have the opportunity to transform financial value into social value.

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