Wondwossen’s
Note:
The
following report on Ethiopia Commodity Exchange (ECX) and warehouse receipting
initiatives in Ethiopia is an output of a cross-country review of agricultural
warehouse receipt systems in Eastern African countries and their role in
facilitating the development of commodity exchanges. The review is funded by
the Common Fund for Commodities (CFC) and carried out by the University of
Greenwich Natural Resources Institute (NRI), UK.
The
Ethiopia case study was conducted between February and June 2012 by J. Coulter
Consulting Ltd., based in Bromley, UK, working under contract to University of
Greenwich. It attempts to make a before-and-after-ECX comparison and assesses
the experience of ECX/WRS in terms of: 1) enabling environment, 2) strategic
coherence, and 3) operational arrangements, and makes certain recommendations.
“Due to
the short duration of the assignment and limited availability of information,
some important questions remain to be answered,” says the author, Jonathan
Coulter, in the report, adding “Nevertheless I believe that it throws some
light on a subject about which there has so far been little in the way of
independent research.”
Below is
the summary section of the report. The entire document may be accessed through
the link provided at the bottom of this post.
What are
your thoughts? Please use the comment box or send emails to poorfarmer@gmail.com.
The author
may be reached at jcoulter01@yahoo.com.
-------
by Jonathan Coulter
J. Coulter Consulting Ltd., Bromley, UK
Ethiopia’s agricultural sector has grown rapidly over the last decade,
but the country still has major pockets of chronic and transitory food
insecurity. The Government of Ethiopia
(GoE) has embarked on an ambitious Growth
and Transformation Plan (GTP) 2011-15, with a view to doubling production
of key crops and reducing the number
of safety net beneficiaries from 7.8 to 1.8 million households. Ethiopia has for long been Africa’s leading
coffee producer with approximately half of the crop going for domestic
consumption and the remainder for export.
Over the last decade, the country has experienced rapid growth in its
agricultural exports, with sesame seed and pulses approaching coffee as the
leading items in volume terms.
GoE is also engaged in a massive programme of infrastructure investment,
and is financing much of this and the GTP by requiring the banks to purchase
low-interest bonds. Government banks,
notably the Commercial Bank of Ethiopia (CBE), dominate the banking sector and
take a leading role in this, and stringent requirements have now been placed on
private banks.
Lending against the security of warehoused commodities is not new in
Ethiopia, since have for long provided traders and Government
enterprises with merchandise loans. The banks carry out their own surveillance and do not employ independent collateral managers as do banks
elsewhere in Africa. There have been few
problems with these loans and repayment levels are reported at around 99%. From 2001, GoE attempted to develop a formal
warehouse receipt system (WRS) by establishing a system of open access (or public) warehousing to help farmers gain
from seasonal arbitrage, with support of CFC.
In 2003, it passed a Warehouse Receipts System Law (Proclamation) and went on to establish a regulatory unit at the
Ministry of Agriculture and Rural Development (MoARD). This subsequently licensed eight warehouses
belonging to the parastatal Ethiopian Grain Trade Enterprise (EGTE), and attempted
to persuade cooperatives, commercial farmers and others to deposit wheat and
maize, but the response was negligible.
This
MoARD-regulated initiative ended in 2007 with the establishment of the
Ethiopian Commodity Exchange (ECX) which then became GoE’s preferred instrument
for implementing the WRS. Little
information is available on the earlier initiative, so the most meaningful way
to appraise the added value of the warehouse receipts systems in Ethiopia is to
make a before-and-after-ECX
comparison. The author has proceeded on
this basis.
ECX is an
unusual exchange in that it is fully Government-owned, while at the same time
having a mainly private membership, including
trading members who can trade on
their own account, and intermediary
members who can also trade on account of others (as brokers). It has also enjoyed very substantial donor
funding (estimates range to more than US$ 40 million), including the payment of
salaries for staff with extensive international experience in the financial
sector.
ECX
started as a cash (i.e. spot)
exchange with a number of delivery
locations (i.e. warehousing sites with weighbridges, testing laboratories and
offices) located around the country where sellers would deposit all goods, and
have them graded, prior to sale across the exchange floor. It was entitled both to operate its own
warehouses and to certify third party warehouse operators, though so far it has
only done the former. All stocks are
stored on a commingled basis, by grade,
which is a departure from international practice which typically allows the
lots of high value commodities (like Arabica coffee) to be segregated or identity preserved by depositor. Title is transferred to buyers using electronic
warehouse receipts (e-WRs) that ECX itself issues and holds in its central depository, and ECX has
established a system of performance guarantees including a settlement guarantee
fund of over Birr 100 million (about US$ 5.8 million), made with member
contributions.
After an
unsuccessful attempt to attract cereals trade, ECX switched its attention to
coffee, assisted by GoE which mandated
the entire coffee crop (for export and domestic consumption) to be traded
through the ECX trading floor, in place of auctions in Addis Ababa and Dire
Dawa. However, cooperative unions and
large commercial farms have a special derogation that entitles them to export
direct. The volume of trade grew
vertiginously, and in September 2010 two other export commodities (sesame and
pea beans) were similarly mandated.
There are now 17 delivery locations and about 55 warehouses. By the third year of operations (FY 2010/11),
the volumes of commodities traded had reached 509 thousand tons, of which 51%
was coffee, 41% sesame, 7% pea beans and 1% maize, the latter being the only
non-mandated commodity. Net earnings
were reported at Birr 50 million (about $3 million), and the return on capital
employed at 55%. During 2011/12, there
was a fall in the world coffee market and a crisis in the Ethiopian industry,
resulting in the retention of stocks and a very large drop of sales through
ECX.
More or
less coincidentally with the establishment of ECX, GoE has required that
farmers sell these mandated crops
through primary transaction centres in
each Kabele (lowest administrative unit), so that they can be purchased by
rural traders (suppliers,
colloquially known as acrabis) and
cooperatives for delivery to ECX warehouses.
In
September 2010 ECX started a warehouse receipt financing pilot with sesame and
pea beans, with technical support and capacity building from the International
Finance Corporation (IFC). However this
has been strictly an adjunct to ECX’s trading floor and due to the short expiry
date on the warehouse receipts (30-90 days depending on the crop) does not
allow for intra-seasonal or long-term storage.
Since February 2011, the Government-owned Commercial Bank of Ethiopia
(CBE) has advanced about $1.50 million to 42 borrowers against stocks of sesame
and pea beans in three separate storage locations. Over 90% of borrowers have so far been suppliers, though ECX believes there is
also major potential with the cooperative unions. This start has been made despite the NBE Bills Directive requiring the
private banks to buy Government bonds, and which means that only GoE-owned banks
can afford to give WR loans.
Notwithstanding, the WRS pilot is well regarded by private banks that
see the warehouses as highly secure and because the scheme allows them to
access a clientele they cannot reach with conventional merchandise loans. One potential snag with the WRS for cash
crops is the lack of a clear seasonal carry
structure (increasing price trend), which increases the risk that borrowers
will experience financial losses. In
view of this, they need better market intelligence to manage the speculative
risks involved.
ECX has
had difficulty in gaining traction with food commodities, and this is
attributed to lower than expected production, lack of on-site cleaning
facilities, a high percentage of reject, a Government export ban and traders’
fear that a formal system like ECX will bring them under the purview of the tax
authorities. Despite this, Government
plans to mandate the trading of maize and wheat through the primary transaction
centres and ECX, in 2012/13, and intends to progressively extend the system to
other crops.
In
examining ECX, and the WRS which it has ushered in, the author identified a
range of pluses and minuses. However, on
a short study of this kind and given the availability of information, it was
not feasible to attempt an overall quantification benefits to farmers, of
economic gains or the cost-effectiveness of the system. For this reason, he limited himself to a
more modest assessment, against the criteria of enabling environment, strategic
coherence and operational arrangements, and a few recommendations which flow
from this analysis.
1.
Re the
enabling environment, there is mixed picture. GoE has provided very determined support for
the development of ECX and its warehousing system, backed up by the willingness
to enforce compliance with applicable law and regulations. GoE has moreover been quick to pass enabling
legislation for warehouse receipts, giving banks full confidence in the instrument. However, in some respects GoE’s approach
appears to have been too determined,
taking insufficient account of strategic issues (see below), and with current
plans to mandate more than 1 million tons of maize and wheat, an action likely
to prove problematic in view of; (a) the difficulty of policing flows of basic
foods, and; (b) the expected overload on ECX’s already over-stretched delivery
system. The development of reliable
power supplies and internet connectivity lags behind the expansion of ECX’s
delivery structure, resulting in major delays in unloading and loading
commodities in certain locations, while some aspects of the enabling
environment (notably the discouragement of differential trading) increase the
price risk that exporters face and make it more difficult for them to access
bank financing. At the same time, the
GoE requirement that higher grades of coffee be exported is the source of a
large-scale black-market, whereby exportable grades are diverted for domestic
consumption, by-passing ECX.
2.
Re
strategic coherence, there is widespread consensus that the new
system has made the internal market more transparent and improved enforcement
of contracts between suppliers and exporters.
However the new market structure is adding further logistical steps (at
the level of primary transaction centres and exchange warehouses) creating new
costs in the value-chain. At the same
time, coffee exporters are finding it difficult to cover their short positions,
and this is contributing to problems of contractual default at the export level.
ECX is at odds with the current trend in the international coffee market, as the mandatory market structure diminishes traceability and thereby reduces the premiums that Ethiopia can earn for its coffee, at a cost which may be upwards of US$26 million per annum. A fresh approach focusing on increased agricultural productivity, adoption of the most efficient pulping technology and maximizing quality premiums in the international market could potentially earn Ethiopia much larger sums, in the hundreds of millions of dollars per annum.
ECX is at odds with the current trend in the international coffee market, as the mandatory market structure diminishes traceability and thereby reduces the premiums that Ethiopia can earn for its coffee, at a cost which may be upwards of US$26 million per annum. A fresh approach focusing on increased agricultural productivity, adoption of the most efficient pulping technology and maximizing quality premiums in the international market could potentially earn Ethiopia much larger sums, in the hundreds of millions of dollars per annum.
3.
As regards warehouse receipting, the
Tanzanian experience with coffee offers some useful pointers to Ethiopia. It is a voluntary system whereby Government
or its nominee licenses privately owned dry mills to act as one-stop-shops, and carry out a range of
activities (storage, financing, dry milling, classification and grading) in
single locations. The system is
logistically efficient and allows for traceability, with origin coffee being handled
on an identity-preserved basis.
4.
The plan to mandate the trading of maize and wheat through primary transaction
centres and ECX is highly questionable given the capacity limitations and
congestion that already exists at ECX delivery points, and the difficult in
policing the system. The easiest way to
develop exchange trading and warehouse receipting for cereals is by using demand-side stimulation, as described
above, but without mandating the system on private players. As is suggested in the case of coffee, ECX
would not need to run the warehouses, but simply accredit suitable companies to
carry out this function and ensure their compliance with the relevant
regulations. Unlike the present
arrangements, warehouses should be one-stop-shops with primary processing
facilities (notably cleaning), and with sufficient capacity for seasonal
storage (i.e. upwards of six months).
Indeed it probably makes logistical sense for ECX to move towards
one-stop-shop warehouses for all commodities, whereby the commodities are
cleaned, dried or otherwise processed to standards required by end-users and
export markets. Government could also
develop the grain trading side of ECX through supply-side stimulation, in this case using ECX to auction off
stocks of imported wheat (such as it imported in 2010/11) and other
commodities.
5.
Re
operational effectiveness, ECX’s greatest strength lies in the
operational arrangements of its trading system and delivery locations. Moreover, its warehouse receipts inspire
confidence among the banks, avoiding the distrust which has held back
warehousing initiatives in some other countries. Running warehouses has provided ECX with a
wealth of experience it could put to good use by establishing an accreditation
and inspection service for private warehouses. At the same time, it has
significant logistical problems resulting from a mixture of internet and power
failures, and shortage of physical capacity (warehouses and weighbridges). This makes it difficult to handle large
volumes of mandated crops, and results in large tailbacks at certain sites; in
the worst cases lorries queue for over 10 days.
The planned mandating of grain crops can only exacerbate these problems.
There is moreover
widespread distrust of ECX among the trade, regarding grading and underweight,
and a perception that the authorised channels of complaint and redress are not
fully effective. This study did not
provide either a brief or the scope to investigate this, but it is suggested
that confidence might be enhanced if those supporting ECX periodically contract
an international company to carry out a thorough operational audit.
The
establishment of ECX is a very significant achievement; it involves by far the
largest formal commodity trading mechanism in Sub-Saharan Africa outside of the
Republic of South Africa, and provides a credible basis for developing a strong
WRS. However, its approach is largely
experimental, involving a much higher level of State involvement than is
normally in the case with such entities.
For this reason, there is a need to stand back, study its performance
and draw lessons for the future development of this or similar
initiatives. There also needs to be much
more open discussion and debate, in Ethiopia, about ECX and related
policies.
------
The review is conducted by J. Coulter
Consulting Ltd., Bromley, UK working under contract to University of Greenwich,
UK and funded by the Common Fund for Commodities
Access the study here: http://www.scribd.com/doc/181195547/Review-of-Agricultural-Warehouse-Receipting-Initiatives-in-Ethiopia
Contact the author at jcoulter01@yahoo.com