Commodity trading: The market is the message
The new Ethiopia Commodity Exchange is already the continent’s second largest, but its rise raises questions about its sustainability and development impact
The first man in a green coat to slap the hand of the man in khaki gets the deal. It is the trading floor of one of Africa’s newest exchanges, which is already transforming agriculture in the world’s third fastest-growing big economy. The Ethiopia Commodity Exchange (ECX), launched in 2008, is the arena for the country’s trading in coffee, sesame and white pea beans.
The ECX trading floor is upstairs in an office block in Addis Ababa. Khaki coats are for buyers, while sellers wear green. All is still spot trading for cash settlement and based on sacks of graded produce sitting in warehouses. Marshals watch, bells grab attention and within a few seconds of a trade, prices are disseminated through real-time ticker feeds, onto giant boards in the building and to 31 locations across the country, as well as through mobile phone messages, the internet and data feeds.
Commodity exchanges have been sprouting up all over Africa, seeded in the idea of liberalising markets and fertilised by resources spent on farming to boost productivity, food security and rural incomes. They appeal because they could be good for a range of stakeholders, including smallholders hoping to cut out the middlemen and seeking better access to market prices, big traders who aim to continue dominance, banks and financial intermediaries, governments and donors.
“Despite its novelty, the ECX aims for top standards. CEO Eleni Gabre-Madhin told The Africa Report that the ECX had traded $1bn worth of commodities without a single default: “We created a model and proved its viability. That gives us a lot of leverage to expand and scale it up. It gives it a lot of credibility.”
Agriculture is a mainstay of Ethiopia’s economy and its largest employer, although services have pushed it into second place measured by economic contribution. In the year to June 2010, coffee exports reached a record $528m, with 172,210tn of coffee exported, but other major soft commodities include oil seeds ($358m) and pulses ($130m). In 2010, the ECX traded 2.7m bags of coffee, up 61% in volume and 148% in value on the previous year and more than three times the combined annual export volume of Kenya, Rwanda and Tanzania, according to figures from the International Coffee Organization.
“The national development policy targets small farmers, who make up an overwhelming majority of the population of 82 million people. Previously they faced a battle against a long chain of buyers, low prices and frequent problems in enforcing contracts. Agricultural cooperatives account for 12% of the ECX’s activities, representing 2.4m small-scale farmers, says Gabre-Madhin.
Policy-makers ask whether commodity exchanges are the quickest route to reach development goals. Former commodity trader and author Peter Robbins argues that donors should prioritise agricultural extension, farmers’ associations and marketing before supporting expensive exchanges that may never prove self-financing: “Although these programmes were introduced only a comparatively short time ago, it is clear that they are all going in the wrong direction to ever meet their theoretical objectives.”
Gabre-Madhin counters that a commodity exchange should be part of a holistic approach to achieve development goals. Another booster, Ed Heinemann, author of the UN International Fund for Agricultural Development’s 2011 Rural Poverty Report, says that, as a result of commodity exchanges and better dissemination of information, “what we are seeing is less price variation, higher prices, putting power into the hands of farmers. They have more information in a situation where they’ve had historically less. Certainly it’s meant that farmers are getting higher incomes.”?
Zambia Agricultural Commodity Exchange (ZAMACE) CEO Brian Tembo tells The Africa Report: “The challenge is to bring the exchange to the smaller farmers. ZAMACE has developed a model which encourages community-level aggregation through community sheds for throughput into ZAMACE-certified district warehouses. The pilot for this started in 2009 and rolled out in 2010 into three regions of the country with the support of the World Food Programme (WFP) and the USAID Competitiveness and Trade Extension Program (COMPETE). Smallholder farmers have been trained on quality, storage and handling of grain. It is still early days. The farmers’ union has accessed support from the EU to construct agricultural service centres which will have storage infrastructure certified by ZAMACE and labs and weigh bridges operated by ZAMACE. The Ministry of Agriculture, through its Cooperatives Office, is actively interested in our work with communities on this front.”
The ECX, jointly owned by the government and the exchange’s members, has set up a national network of warehouses where stock is graded and secure documentation issued as electronic warehouse receipts, which can be used to raise finance at the banks. The government regulator, the Ethiopian Commodity Exchange Authority, helps it enforce rules on product quality, trading, warehousing, handling, payments and delivery. The ECX’s clearing house has forced banks, most of which were still using manual cheque settlements, to use an electronic system where payments are cleared and settled within one day of trade.
Enrico Pausilli, country coordinator for the WFP’s Purchase for Progress (P4P) programme, outlined developments since a 2010 agreement to buy on the ECX: “WFP has successfully bought approximately 5,000 metric tonnes of maize. The system has been flawless, including payment and settlement. WFP now hopes that its constant presence at the ECX will attract additional buyers and sellers and thus make the ECX an effective trading platform for larger volumes of cereals and pulses. As part of the P4P programme, WFP Ethiopia is also strengthening the warehousing capacity, in addition to the management and marketing capacities, of some selected cooperative unions.”
There were many doubters when the first trading bell rang on 24 April 2008, after 20 months of project design and preparation led by the International Food Policy Research Institute’s Ethiopia office. A consortium of donors – the World Bank, Canadian International Development Agency, USAID, the UN Development Programme and the WFP – gave the exchange a $24m capital injection to purchase technology, equipment, laboratories and technical advisory services. But operational revenues from trading and warehousing fees entirely cover operational costs, and it has turned a profit in its second year.
Trading across the continent
Africa’s biggest commodity exchange is the South African Futures Exchange (SAFEX), the commodities and futures arm of the Johannesburg Stock Exchange. It is the only one trading options and futures, offering grains, metals and a crude oil derivative, and working well with international commodity and futures exchanges. Trading in 2010 totalled 2.1m derivative contracts, up 12% on 2009 but still behind the 2.5m contracts of 2008.
The Agricultural Commodity Exchange (ACE) for Africa was set up in Malawi in 2006, with members in four countries. It uses an internet trading platform and aims to help smaller farmers. It is growing, partly because of backing from USAID and WFP. It recently introduced a link with ZAMACE so that brokers on each market could compete for business.
Nigeria’s Abuja Securities and Commodities Exchange (ASCE) started trading commodities in 2006, and was restructured into the current form in 2008. The website lists prices for groundnuts, soya beans, millet, sorghum and maize. There is not yet infrastructure such as warehouses, although a law has been drafted on warehouse receipts. Trading is reported to be low.
The Global Board of Trade in Mauritius (GBOT) was launched in November 2010 and so far concentrates on currency pairs and metals.
Kenya ACE (KACE) is a private firm, established and launched in 1997 to support efficient trading and up-to-date information. It has cut back activities due to reduced donor funding and concentrates on disseminating prices.
Malawi ACE is aimed at the domestic market. The exchange is owned by the same shareholders as KACE and has also cut back market activities to concentrate on price dissemination.
The Uganda Commodity Exchange (UCE) was set up in 1998 and got off to a good start, but trading has been suspended, and it is concentrating on introducing a warehouse receipt scheme.
The Zambia Agricultural Commodity Exchange (ZAMACE) was established in May 2007. Fifteen members own it, including Cargill, Dunavant, Afgri, Olam and Seaboard, and the Food Reserve Agency joined in October 2010. Since its first trade in October 2007 it has traded $75m of commodities, including maize, wheat, soya beans and sunflower, inputs such as fertiliser, and other commodities such as maize meal, pulses, bran and cement
More recent support comes from the International Finance Corporation, which gave $1.7m to build banks’ capacity to finance warehouse receipts, and the European Union, which provided $7.2m to help farmers.
In the early years, resistance came from those who had long controlled coffee exports. In the ensuing squabbles, the government revoked the export licences of six firms. The ECX also had to show flexibility, adapting its commoditising and standardising rules to accommodate the highly differentiated trading for Ethiopia’s speciality coffees.
The ECX is gaining acceptance fast, as shown by the demand for trading seats. They can either be for permanent full membership (currently closed) or limited membership (a year of trading in one commodity on either buy or sell side), both subdivided into members who trade on their own behalf and intermediary members who also transact for others. When it launched, the first 100 full members’ seats were hard to sell, but the last action brought a fourfold rise in the average seat price from a year before.
The ECX director says the next two years could be even more challenging: “We will introduce some form of price-risk management through deferred delivery. So far we have been 100% spot and we will start introducing different forms of futures and forward trading. We also want to move towards an online trading platform.”?
The IMF forecasts that Ethiopia will be the world’s third fastest-growing economy for 2011-2015, with GDP growth of 8.1% per year. It needs capital to fuel its growth, and Prime Minister Meles Zenawi has talked about the potential for corporate bonds and capital market development. The success of the ECX and its regulator can be the foundation stones for a more liquid capital market.
Prices for food commodities may soar in 2011, but that is not all bad news. The effects of climbing prices and better price information can already be seen in some rural areas. Prices are also becoming more volatile, according to a report by the UN’s Food and Agriculture Organization, which can affect low-income countries more. The recommended response for governments is coherent and coordinated policy and measures such as strategic reserve stocks and good storage. Commodity exchanges will not stop market prices climbing, but they can help reduce volatility.
This article was first published in the March 2011 edition of The Africa Report.