Not as transformative as its founders hoped
ON THE walls of the Ethiopia Commodity Exchange (ECX) in Addis Ababa, the capital, hang glossy black-and-white photographs of provincial market towns and rustic life. For the merchants and brokers striding across its high-tech trading floor they serve as a reminder that the ECX, sub-Saharan Africa’s most modern commodity exchange outside Johannesburg, exists for a simple, practical purpose: to transform Ethiopian agriculture.
It has some way to go. By connecting smallholder farmers to global markets, the exchange, launched with a fanfare in 2008, was supposed to help reduce hunger. The hope was it would reduce price volatility and incentivise farmers to plant crops. But staple foods such as haricot beans today account for less than 10% of its trade. Its annual turnover—worth about $1bn—is dominated instead by two export crops, coffee and sesame seeds. In 2015, despite a dire drought, Ethiopia did avoid famine, but the ECX played little role: its maize and wheat contracts had lapsed by then because of concerns that exports would jeopardise domestic food supplies. Cutting out middlemen seems not to have done much for smallholders: studies suggest that the share of international prices received by coffee farmers has barely budged over the past decade. Exporters complain about government price-meddling.
The ECX’s founder, Eleni Gabre-Madhin, who left the exchange in 2012, worries that momentum has been lost. The exchange remains restricted to simple spot-trading. Futures contracts, which help traders manage price fluctuations, were supposed to be introduced within five years, but are still some way off.
In July 2015 the ECX did, however, introduce electronic transactions, now used for almost all trades. Bespoke software is built in-house by Ethiopian engineers. Payments the day after purchase are guaranteed. The ECX can also boast never to have seen a default, in a country known for suicides by indebted farmers whose buyers have welshed. Ethiopia has shown that it is possible for an exchange to prompt the physical infrastructure of commodities markets: the ECX oversaw a burst in warehouse construction.
Fledgling exchanges dotted around Africa often visit Addis Ababa to study the ECX. But experts doubt it is a helpful model. The government made it viable by mandating that almost all trade in coffee and some other commodities go through the exchange. This might not be possible elsewhere. A monopoly imposed by fiat makes it more like a state marketing board than an exchange, says Thomas Jayne, an economist at Michigan State University.
Another model might be the Agricultural Commodity Exchange for Africa in Malawi, which was set up privately in 2006 at the request of an association of smallholder farmers. But its volumes remain low. And its concentration on staple foods such as maize and soya leaves it vulnerable to the sort of government interventions that can sink exchanges. Trading in staples tends to be politically sensitive in times of food scarcity.
Setting up national exchanges may be the wrong approach. The Johannesburg Stock Exchange plans to introduce a regional contract for Zambian white maize later this year. For lucrative export crops like coffee, well-established offshore exchanges may make more sense than starting from scratch at home. Better a functioning exchange somewhere else than a disappointing one on the doorstep.