"To leave market participants with no
freedom of choice really just replaces previous single channel marketing
systems with a new one. The ECX is certainly not an agricultural commodity exchange in the true
sense of the word as it is effectively a single channel marketing system for a
number of commodities."
This is an excerpt from an independent study
carried out for COMPETE, a program funded by
the United States Agency for International Development under the East Africa
region. The draft copy of the report titled COMMODITY
EXCHANGES IN AFRICA BEST PRACTICES was filed on the COMPETE AFRICA
website on December 6, 2011.
Source:
COMPETE
AFRICA
Whilst there is evidence that the ECX has been
successful in terms of the volumes and values traded, this needs to be put into
perspective as the Government of Ethiopia has legislated that all coffee and
sesame trades have to be conducted across the exchange floor, the only
exception being producers who can sell into the local or export markets
directly.
The following quotes were received from market
participants over the last six to twelve months:
1.
The ECX would have
collapsed if the Government had not legislated that coffee MUST be traded
across the Ethiopian Commodity Exchange Floor.
2.
It is an “absolute
disaster”, which has undermined the coffee trade in Ethiopia and impacted negatively
on exports.
3.
Under the auction
system, the auction floor had samples ready for inspection by 1pm. Buyers, exporters
and others could view samples and place bids on them. The trucks with the whole
parcel were waiting outside, so there was no double handling and the commodity
was kept in a better condition as a result. By 7pm, buyers could have twelve or
more trucks delivering the commodity to their warehouses for processing. Any
dispute as to weight or quality was sorted out by the auction floor, even after
delivery.
4.
Farmers have not and do
not benefit from the new marketing system, despite claims to the contrary.
5.
The coffee is owned by
the traders, who buy it fro m the washing stations
(no change from the previous system), who now HAVE to sell it across the ECX.
6.
The coffee is sold
sight unseen and often both the quality and quantity paid for differs from what
is subsequently collected.
7.
Collection is from one
of three ECX run warehouses in Addis Ababa and can take up to four days to
collect due to the number of trucks in the queue.
8.
A flat 2% commission is
charged by ECX for every contract.
9.
The general feeling is
that rather than enhance transparency, the ECX has made the coffee market much
less transparent.
10.
The price has increased
on ECX, not due to demand or the fact that farmers are getting more, but due to the system. The Exchange has set a price band for coffee to be
traded, which does not take into account that 20% of the
weight of the bean is in the parchment), thus making the coffee much more
expensive. The levels set are also at the top end of the range for coffee, which
usually only occur when there are shortages elsewhere.
11.
The lack of
traceability has also impacted on exports as buyers look for coffee from a particular
area, or even specific farms. Owing to the fact that the coffee sold on ECX is
more of a generic nature, this is not possible any longer.
12.
Whilst discussing the
ECX with a cooperative representative in Livingstone earlier this year, the
indication was that they do not use the Exchange other than for the lowest
grades as they are able to achieve higher prices by selling directly into niche
markets.
13. Earlier this month, we met a trader who uses the Exchange who indicated
that he was now
growing his own coffee in order to meet the demands of
the niche market, which he has been unable to do when buying lots through the
Exchange.The ECX is certainly not an agricultural commodity exchange in the
true sense of the word as it is effectively a single channel marketing system
for a number of commodities. At the recent Convening of African Commodity Exchanges
in Ethiopia, indications were given that the list of commodities to be
legislated for mandatory trade across the Exchange was likely to be increased,
to incorporate most of the commodities produced.
Perhaps the most significant fact to emerge from all of
this is that despite the volumes and value of trades conducted on ECX and the
commissions charged by them, it is still not self sustainable.
Finally, the quotations below are from traders and other
buyers who responded to questions put to them during an independent study
carried out for USAID/COMPETE to
identify which market segment(s) provide the greatest opportunity to grow the
value and volume of Eastern Africa coffee exports as well as define specific
opportunities for the region to strengthen its position in the global coffee
market and was completed in May, 2010.
Whilst not referring to the ECX specifically, some of
these quotes do lend weight to observations made above. They also represent
independent views on trade in coffee from Ethiopia.
A high
percentage of respondents (27.8%) purchase a significant volume of coffee from
Ethiopia (41-60%) and about half report paying USD$1.00 or more above market
while another 37.3% reported paying $0.51 to $1.00 more.
While
quality marks were good, 32.7% disagreed with the statement “It is easy to do
business in this region” and a similarly high number (28.8%) disagreed with the
statement “I am able to get sufficient information about the area or region
where my coffee is grown”.
When
asked about the most positive aspects of buying coffee from Ethiopia, nearly
all of the responses were around unique and varied flavor profiles.
“Character, all
across the board. The different regions and prep give us an entire array of flavors,
aromas, and body.”
Challenges
noted included inconsistency in product, price, traceability, transit times,
and instability of business systems (including reliability of partners and
recent changes).
(Response
to greatest challenges with buying from Ethiopia): “Timely shipping,
traceability, transparency, lack of direct relationships with growers”.
“The supply lines
from the growing areas all the way to Djibouti port need to be totally overhauled.
Shipments are regularly late by 2-3 months or even more”.
There
was a strong sentiment of frustration about price not being commensurate with
quality.
“....pricing tend to
push them out of a lot of blends and I feel often the pricing is going to middlemen
that provide little or no value in the chain. If I knew the farmer was getting
most of the money, I probably wouldn't mind paying as much”
“Price. Sometimes the
price is not worth the taste. Also consisting in processing (washed or natural)”.
“...price and better
sorting out of defects”.
Government Driven Exchange
The
Ethiopian Commodity Exchange (ECX) was established as a demutualized corporate
entity with a clear separation of Ownership, Membership, and Management. Thus,
owners cannot have a trading take, members cannot have any ownership stake, and
the management can be neither drawn from the owners nor from the members. ECX
is designed as a public-private partnership enterprise, in a unique
institutional innovation for Ethiopia. At its inception, ECX is promoted by the
Government of Ethiopia and this still applies to date. The corporate governance
of ECX maintains a healthy balance of
owner and member interests. Thus, the Management Board is composed of
Owner representatives and 5 Member representatives. As Owner, the Government of
Ethiopia underwrites all performance risk of the Exchange related to the
Exchange operated or appointed warehousing and grading of product, trading
system, market information dissemination, and clearing and settlement. Members,
for their part, are liable for contract performance on their own trades as well
as of their Associates and Authorized Representatives.
There
are obvious advantages to an exchange set up and operated with a large stake
and interest from the Government, including the volumes of trade conducted
across the Exchange and the “price discovery" that goes with that.
However, there are also some disadvantages, including the question of price
discovery as, where you have a single marketing channel, which it is compulsory
to use one has to ask if this constitutes the best price opportunity or not, as
the market has not really been tested.
To
leave market participants with no freedom of choice really just replaces
previous single channel marketing systems with a new one. The whole idea of a
free market is that it is exactly what it says it is by providing participants
with the freedom to choose when, where and how they want to buy or sell their
commodities. In the case of Ethiopia, it has been legislated that anyone dealing
in coffee (with a few listed exceptions) is required to become a member of the
Ethiopian Commodity Exchange and to conduct all their business through the
Exchange. Failure to do so would mean that they can no longer trade in coffee.
Latest indications are that this requirement will be extended to include other
agricultural commodities as well.
Arguments
have been put forward that ensuring that all transactions are conducted through
a single organisation, in this case the ECX; more order is brought to the
market. Whilst this might be true, it can be argued that exchanges operating in
countries elsewhere in the world, including India, the USA, Europe and South
Africa for example, achieve the same result without having to make trade across
them compulsory for all. These exchanges all operate on the basis of willing buyer
and willing seller, who have the right to choose whether or not to do business
through an exchange.
Aside
from the lack of freedom of choice by market participants, the questions has to
be asked as to whether or not the ECX provides real market transparency or not?
Again, there seem to be two diverging opinions on this with the yes and no
camps equally vocal in their views. Perhaps the real test of this will be
whether or not international buyers will use the services of the Exchange in
the longer run, although it is an open secret that buyers in the grain market
are reluctant to do so in the current circumstances.
There
remains an argument that the lack of freedom of choice by market participants
to use the Exchange or not is a barrier to the free market. There is equally a
valid argument regarding the transparency of the operations, compared to other
exchanges elsewhere, as well as the lack of competition and the fact that
effectively, for the moment at least, the ECX represents a form of single
channel marketing. The question of the Exchange’s ability to supply the quality
specified in the contract has also been questioned, but perhaps this can be put
down to the fact that although the ECX is running and administering warehouses
at the moment this is not, by their own admission, their core business but has
become necessary due to the lack of expertise in the country.
That
the ECX has made great strides in a short period of time cannot be denied. That
this has been achieved largely by “home grown” talent is commendable indeed and
all involved are to be congratulated on their achievements. At the end of the
day though it will not matter what people say in reports such as these or what
individuals choose to think about the ECX, but it will depend on the perception
of the international trading communities as to how successful it will be. At
the moment the ECX is on the crest of a wave but it is still early days and the
next five years are likely to be crucial to the further development of the
Ethiopian Commodity Exchange.
A
recent development, which was highlighted at the Convening of African Exchanges
in Addis Ababa, when it was disclosed that moves are afoot to legislate that a
wider range of commodities be traded across the ECX, to capture those
commodities produced in high volumes that are currently excluded. However, this
needs to be put into context as one of the major coffee traders, who is on the
board of the ECX, indicated that he is now growing his own coffee as farmers
are exempt from having to use the Exchange and he wants to get back the niche
markets that were lost when the Exchange commenced operations. Add to this the
fact that despite all the volumes traded, the ECX is still not self sustainable
and it will indeed be an interesting few years ahead for this Exchange.
Again,
an exchange set up and operated through government legislation requiring that
all trades, with a few exceptions, have to be conducted through the exchange is
not ideal. Transparency is compromised, true market values are probably not
realised by producers and quality issues are likely to arise, as has happened
in Ethiopia. Volumes are likely to be high, as there are no alternatives, but
neither is there likely to be much incentive to increase production if there is
only one market to sell through.
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The draft report is here:http://www.competeafrica.org/Files/Commodity_Exchanges_Best_Practices.pdf