Highlight in this excerpt:
- Three exchanges (SAFEX, ECX, and MACE) remain operational but only SAFEX is clearly sustainable and thriving based on the voluntary participation of all relevant market participants, and without significant external donor funding to sustain its operations.
- While it is
sometimes argued that the ECX has promoted the welfare of coffee farmers
as the value of exports has increased from $529 million in 2007 when the
exchange was established to $797 million in 2012, others indicate that
this rise can be almost totally explained by the increase in international
coffee prices over this period. Moreover, recent analysis of ECX data
indicate that the farmers’ share of the international coffee prices has
not risen compared to pre-ECX farmer shares. [footnote 14: For example, data from the International Coffee Organization
indicates that farmers took home 51.6% of the export price of their
product for the year ended September 2012, down from 57.1% in the year
ended September 2007, before the exchange was established.] ECX has
apparently been unwilling to publicly share its data on prices received by
farmers until quite recently, and has not accepted invitations by IFPRI
and Oxford to carry out impact assessments on the ECX’s activities.
Clearly more detailed assessments are necessary to understand how the ECX
has affected the welfare of Ethiopian coffee producers.
-----
Agricultural Commodity Exchanges and
the Development of Grain Markets and Trade in Africa: A Review of Recent
Experience
By T.S.
Jayne, Chris Sturgess, Ron Kopicki, and Nicholas Sitko
Indaba
Agricultural Policy Research Institute (IAPRI)
October
2014
Executive Summary
Vibrant
agricultural commodity exchanges will greatly enhance the performance of
Africa’s agricultural sectors and contribute to overall economic development.
Yet specific conditions in grain markets are required for agricultural
commodity exchanges to develop.1 The absence or short-lived nature
of many of these conditions explains why commodity exchanges for staple grains
have remained stunted in Sub-Saharan Africa despite strong interest in their
development by the international donor community and by most elements of the
private sector. This study identifies these preconditions and assesses the
scope for development organizations to support the sustainable development of
commodity exchanges in eastern and southern Africa.
Six
main factors impede trading on agricultural commodity exchanges in the region.
They are: (1) limited success in attracting financial institutions’ commitment
to commodity exchanges, both as agents who are able to complete the transfer of
payments from buyer to seller and as lenders to exchange participants; (2) the
failure of exchanges to offer contracts that respond to unmet trader needs,
especially those seeking mechanisms for hedging quality, price and delivery
risk; (3) the inability of commodity exchanges to reduce the transaction costs
of exchange, which is one of the major theoretical benefits of a commodity
exchange.
The
anonymous nature of trading on a commodity exchange can exacerbate trading
risks rather than reduce them when contract safeguards are missing and contract
compliance is only weakly enforced; (4) the potential for conflict of interest
among brokers who also act as off-market traders; (5) the potential for market
manipulation, which occurs when markets become thinly traded, for example when
marketing boards purchase a significant portion of the national marketed output
or when risks associated with trading on an exchange are asymmetric between
buyers and sellers; and (6) actors trading in thin markets are forced to absorb
high fixed costs when limited trading volumes do not allow costs to be
amortized over a large volume base of transactions. Exacerbating all these
factors is the unpredictability of government intervention in commodity
markets.
Factors
that signal a hospitable environment for the introduction of grain commodity exchanges
include (1) a readiness of financial and banking firms to fulfil commodity exchange
transactions and to lend to actors in the grain sector based on a perception
that it is profitable for them to do so; (2) a strong demand and willingness to
pay among actors in the grain industry for risk-shifting instruments; (3) a
management entity that is perceived to be trustworthy, even-handed, and yet
decisive in its approach to resolving contract disputes between market
participants, based on clearly defined rules of behavior for participating on the
exchange; (4) transparent rules governing the behavior of brokers; (5) a
commitment from governments to adopt transparent and predictable rules for
direct state operations in grain markets, including trade policies; and (6)
vibrant spot markets with large trade volumes are already in place.
It is
not necessary for all of these factors to be in place before donor
organizations can meaningfully support the development of agricultural
commodity exchanges. The important point is to conceive of support for
commodity exchanges holistically, recognizing that all commodity exchanges
operate within a system, and that support for overcoming weak aspects of the
grain marketing system will be needed as part of a comprehensive program to
support the development of agricultural commodity exchanges. Development
partners can play a catalytic role in supporting the development of
agricultural commodity exchanges as long as there is sufficient commitment,
first from actors in the financial and commodity sectors, and secondly from
governments to ensure stable and predictable commodity marketing and trade policies.
Development partners could assess, on the case by case basis, the degree to
which this commitment exists. In the more favorable countries, donors could
provide interim support for basic nuts and bolts strengthening of the grain
marketing system (e.g., warehouse certification services, collateral management
and settlement services, contract dispute resolution processes, investments in
transportation infrastructure), while also nurturing the status of the six
conditions specified above.
Fortunately,
there are signs of increasing commitment to the development of commodity exchanges
by some governments in the region. Detailed consultations are needed to ensure that
governments understand how commitment to the development of commodity exchanges
would circumscribe their behaviour and policy choices. In particular, prospects
for the sustained development of commodity exchanges are highest where
governments are prepared to accept a more limited and predictable approach to
intervening in grain markets and to trade policy. To date, most governments
have considered such commitments to impose unacceptable constraints on their
mandate to ensure national food security.
A major
conclusion from this study is that commodity exchanges should not be viewed as panaceas
for rectifying the many challenges facing African agricultural markets. The development
of a commodity exchange is not an end in itself, but is rather an important component
in the process of developing efficient marketing and trading systems that
promote social welfare. While commodity exchanges can improve the efficiency of
markets in the region, they cannot be expected to impose order on dysfunctional
markets. Only once the major grain markets of the region are able to achieve
minimum threshold levels of policy stability will investment in commodity
exchanges begin to contribute meaningfully to market performance and to
advancing national food and agricultural policy objectives.
Ethiopia (page 17)
In
their efforts to promote national markets for agricultural products, the
pioneers who organized ECX had to overcome several daunting challenges. In the
months following ECX’s launch, maize, wheat, and beans were the primary traded
commodities.13 However, at this time a food price crisis swept
across Ethiopia. Domestic grain prices both on and off the exchange spiked amid
rumors grew that exchange trading would cause further hikes. Trading on the ECX
was nearly brought to a halt. This crisis in food grain trading accelerated
ECX’s push to introduce new commodities with more assured market liquidity and
price stability.
The
exchange turned to coffee, an export commodity, which the exchange’s management
had planned to introduce in a later phase in any case, as well as to sesame
seed, another important export commodity in Ethiopia. After intensive policy
discussions on coffee, in July 2008 a law was passed to replace the
legislation, which had governed Ethiopia’s coffee auction since the 1960s.
Henceforth, all Ethiopian coffee not directly exported by farmers would be
traded not in the old auction, but rather on the Ethiopia Commodity Exchange.
It was
not until 2010, that EXC returned to trading food grains in any significant
volume when it negotiated an agreement with the World Food Programmed to buy
maize through the exchange. The WFP is a major food buyer in Africa that
normally dictates the terms of its purchases. However, the WFP had to bend its
procurement policies in order to accommodate the non-tendered, open and
transparent process of buying on an exchange-trading floor. In 2010 it made a
promising restart with 6,000 tons of maize purchases.
Each
decision to launch a new contract and thus enter a new commodity market is a
strategic one, which affects the exchange in fundamental ways: in its revenues,
in its political support, in its donor support and in the reputation and
professional standing of its management. Vested interests in each new market needed to
be dealt with explicitly.
According
to a report by Whitehead (2013), “Critics argue that markets in Ethiopia are
still heavily disjointed, and that smallholder farmers cannot access the
exchange. The model prevents traceability and is a poor market for highly
differentiated products like coffee, which risk being standardized, they say.
In London, the high-end coffee company Monmouth Coffee last year flagged up a
concern with its Ethiopian offering: ‘As this coffee was bought and sold
through the ECX, its traceability is limited… and full credit for the growing
and preparation of the coffee cannot be given,’ it said in a promotional flyer.
‘We hope that at some stage in the future the Ethiopian coffee board will
reconsider its current strategy and permit all coffees in Ethiopia to be traded
directly.’
“Exchanges
may make markets more efficient, but there is no differentiation, there is no sampling
of the product, and the products traded are just not traceable,” argues Dirk Sickmuller,
managing director of Taylor Winch Ltd, one of east Africa’s largest coffee brokers.
“In this day and age the consumer wants to know what they are buying and where
it has come from. In Kenya and Tanzania the coffees are fully traceable and we
know exactly who is producing what, where, and when.” Whitehead (2013).
While
it is sometimes argued that the ECX has promoted the welfare of coffee farmers
as the value of exports has increased from $529 million in 2007 when the
exchange was established to $797 million in 2012, others indicate that this
rise can be almost totally explained by the increase in international coffee
prices over this period. Moreover, recent analysis of ECX data indicate that
the farmers’ share of the international coffee prices has not risen compared to
pre-ECX farmer shares.14 ECX has apparently been unwilling to
publicly share its data on prices received by farmers until quite recently, and
has not accepted invitations by IFPRI and Oxford to carry out impact
assessments on the ECX’s activities. Clearly more detailed assessments are
necessary to understand how the ECX has affected the welfare of Ethiopian coffee
producers.
In
summary, Table 2 presents the status of all of the major commodity exchanges
initiated in Sub-Saharan Africa in the past several decades and their current
status. Three exchanges (SAFEX, ECX, and MACE) remain operational but only
SAFEX is clearly sustainable and thriving based on the voluntary participation
of all relevant market participants, and without significant external donor
funding to sustain its operations. SAFEX’s unique situation is due in large
part to its being able to satisfy the conditions all of the preconditions
specified in Section 3.
-------
1 For an explanation of technical terms relevant to
Commodity Exchanges, See Appendix 1 at page 27
13 Gabre-Madhin (2011)
14 For example, data from the International Coffee
Organization indicates that farmers took home 51.6% of the export price of their
product for the year ended September 2012, down from 57.1% in the year ended
September 2007, before the exchange was established.
------
FUNDING: The Indaba Agricultural Policy
Research Institute is a non-profit company limited by guarantee and
collaboratively works with public and private stakeholders. IAPRI exists to carry
out agricultural policy research and outreach, serving the agricultural sector
in Zambia so as to contribute to sustainable pro-poor agricultural development.
This report was commissioned by FoodTrade
East and Southern Africa www.foodtradeesa.com, a 5-year trade enhancement and
promotion programme focusing on staple food crops, funded by the UK Government.
This report has been funded by UK Aid from the UK government; however the views
expressed do not necessarily reflect the UK government's official policies.
-----
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