How Africa’s First Commodity Exchange Revolutionized Ethiopia’s Economy

You have talked about a disconnect between buyers and sellers – how does a commodity exchange address that and hold both parties accountable?

Basically it’s a membership-based system. So we have members of the exchange that buy a membership seat, just like Charles Schwab and Merill Lynch are seat holders on the New York stock exchange or Cargill is a member on the Chicago Board of Trade.

When you buy a membership seat, then you use that seat to trade either on behalf of yourself or clients, who you may sign up. We have members of the exchange who trade on behalf of farmers, who themselves are farmers, and members who are buyers like industrial processors, flour millers, exporters, roasters, etc.

The members of the exchange follow the rules of the exchange in the sense that they will bring commodity to our warehouse, get it graded, certified, weighed and essentially stored in a warehouse that we are operating. This means that now we have a guarantee that we know what the quality is, we know what the quantity is and we know that it will be delivered at sale.

On the buying side we have a clearinghouse that takes the buyer’s funds into a pre-trade cash account that is used for exchange trading purposes. The exchange has no involvement besides providing the platform for the buyer and seller to physically or virtually meet, and once they’ve agreed on the terms of what the price is and what the quantity is, then our clearinghouse will take the funds from the buyer from that pre-trade cash account and transfer it to the seller the next day. The same next day we will take the warehouse receipt from the seller and transfer the ownership to the buyer. So the exchange is the third-party guarantor of the transaction, and that’s the key point.

By being a guarantor for the transaction it means you didn’t need relatives or special connections. You don’t have to go beg people to pay you or chase after them. You don’t have to go check if the quality is really grade one. The exchange is guaranteeing the quality, the quantity, the payment and the delivery. That’s a very big value-add proposition to the market – that if you trade through the exchange, you will receive your payment the next morning.

That means we are a T + 1 clearing and settlement system. The day of trade being “T” and T + 1 is tomorrow morning you’re paid. Even stock exchanges that have been around for 20 years are still taking two days after trade or three days after trade to effect payment. We’re settling the next day. This is a financial revolution in Ethiopia – that somebody who sold is guaranteed payment the next day, especially when you imagine how many people have committed suicide or spend a large part of their time getting paid.

This is a very big change in our market – that people can go to market saying, ‘I’m going to sell at whatever price I want, and I will get paid’. Same thing for the buyers: ‘I will get my delivery, I will get my commodity when I want it, not months later’.

There are exporters that used to default on their export contracts because the supplier had not yet met their contract. Or processors, like millers, that would get a delivery but it would be full of sand or stones. They’d put it in their machines, and their machines would break down. All of these problems are not going away because of our system.

The smallholder farmer was the theme of the African Green Revolution Forum. Are they able to access the commodity exchange easily?

Twelve percent of the members of our exchange are farmer cooperatives that are representing 2.4 million small farmers in Ethiopia. That’s a massive number in just four short years and relative to the amount of investment. Millions and millions are being spent on linking farmers to markets, and here with less than U.S.$10 million we’ve accessed 2.4 million farmers in four years.

More importantly, even if they don’t trade directly through the exchange, because of the transparency around the pricing, all the farmers in the country are now using the ECX price as the reference price. In the case of coffee, there are 15 million coffee farmers in Ethiopia, and they are referencing their local market sales off of the ECX price. This basically means that the margin between the local price and the ECX price has narrowed almost by half. So if a trader knows what the central market price is, but the farmer doesn’t know, the trader will try to bring it down. So even if the prices are going up, the trader is buying at the lowest possible price to get a big margin – that margin has now shrunk down to half of what it used to be because of the transparency of the system and because everybody’s using the same system.

We’re getting 1.2 million calls a month for market prices off of the market data server, of which 70 percent come from the rural areas.

When Tanzanian President Jakaya Kikwete came to ECX in May 2012 he asked a trader who was part of our meeting, how do you negotiate with the farmers? How do you set prices with the farmers? And she looked at him and said, ‘Mr. president, even if I wanted to cheat farmers I can’t, because they know the prices before I do’.

 

By; Brian Hatyoka