A lesson from the Ethiopian Commodities Exchange

Images by Petterik Wiggers

Four years before his death, former Ethiopian Prime Minister Meles Zenawi was asked in a magazine interview why Ethiopia, whose economy is highly dependent on agriculture, did not have a stock exchange.

“We don’t think the securities market is as critical to Ethiopia’s development as a commodities market. That is why we have launched the commodity market first,” he said.

He was right. It is agriculture that lifted millions of Ethiopians out of poverty. Three years on, there is still no stock exchange in Ethiopia but the country has grown at an average of 10% per year in the last decade. Ethiopia is consolidating the gains made through agriculture with the Ethiopian Commodity Exchange (ECX) and its impressive success is inspiring similar models across Africa.

In Ethiopia, agriculture accounts for more than 46% of gross domestic product, over 60% of exports, and 80% of total employment. However, the sector has been undermined by periodic drought and soil degradation. The 1984 famine in the country, which claimed about 1-million lives, was caused not by lack of rainfall but by market failure. While there was shortage in northern Ethiopia, western Ethiopia had a grain surplus.

The region that needed grain could not get it and the region with a surplus could not sell. The constraints identified were lack of transportation, infrastructure, logistics, information and connectivity between the buyers and sellers; issues a commodity exchange is supposed to solve.

With the problem not addressed in 1984, a similar situation arose in 2002 despite consecutive bumper harvests in 2000 and 2001. Six months later, prices collapsed to nearly zero. In another six months, Ethiopia was at the world’s mercy for emergency food aid to save 14-million people from starvation.

Stanford-educated Ethiopian economist Eleni Gabre-Madhin, who did a PhD on grain markets in Ethiopia and who had been doing research on grain markets and other agriculture markets in Africa, identified the problems. They were in the supply chain. Her solution was the ECX.

Gabre-Madhin had always been passionate about bringing an end to food wastage, which was fast becoming a norm in her native Ethiopia due to the distribution gap. Her solution, presented in 2012, was welcomed by then-prime minister Zenawi, whose government invited her to return home to turn theory into practice. Her plan was a resounding success. After building a sustainable exchange in four years, Gabre-Madhin passed the baton. These days, she moves from one emerging economy to another, building commodity exchanges.

Anteneh Assefa, a former bank chief, took over from the founder of the ECX. However, he resigned after serving for only 20 months. He was believed to have chickened out of leading ECX due to incessant warehousing issues. This problem informed the choice of the current CEO, Ermias Eshetu, whose perceived close relationship with the business community, due to his banking background, is expected to solve the existing problems and maintain a healthy exchange. He has succeeded so far. During peak seasons, the exchange now trades up to US$20-million per day.

“More commodities are being introduced and it shall soon be able to transact over 100 000 contracts per hour via its electronic trading platforms,” says Eshetu. He adds that several online trading hubs are being constructed at key “agro-centre” locations across Ethiopia, which will be connected to the HQ trading platform over the coming years.

Today, the ECX not only creates efficiency in Ethiopia’s agricultural commodities market, it is also a food security tool in the country. Although Ethiopia has committed to policies to enhance productivity of smallholder farmers, the UN’s Food and Agriculture Organization notes that farmers are vulnerable to food insecurity not simply because they do not produce enough, but because they hold little in reserve.

Hence the creation of the ECX, which has given farmers access to real-time price information - ensuring substantial margins for them - and has reduced the inefficiencies of agricultural marketing, is assuring Ethiopians access to sufficient, safe and nutritious food.

The major produce being traded on the exchange is coffee, Ethiopia’s most important crop. More than a quarter of Ethiopia’s population depends on the coffee economy. In its first five years, ECX traded commodities with a combined value of $5-billion. With demand rising due to an improved value chain, farmers are encouraged to produce more. Demand has risen for some varieties that had no real market value pre-ECX.

According to Ethiopian lawyer Yohannes Assefa, one of the people who helped set up the ECX, Ethiopia’s impressive economic growth over the past decade is due to improvements in its agricultural sector. But ECX’s price discovery, multiple channels of price information dissemination and quality certification system have enabled the market (especially in the crops traded on ECX) to grow in a sustainable manner.

Ethiopia’s 15-million coffee farmers now use the ECX price as the reference price. Some of them trade directly on the exchange, using co-operatives representing over 2-million farmers. They all get the latest crop prices from 100 electronic tickers in rural markets or on their mobile phones, empowering them to reduce loss to middlemen and increase their share of the final price of their produce from about 38% to over 65%.