Wednesday, 30 March 2011

The Ethiopian Commodity Exchange: transforming the way coffee is traded

Buyers and sellers make deals (Credit: John Humphrey)
By John Humphrey

Earlier this year I visited the Ethiopian Commodity Exchange (ECX). The ECX was set up by the Ethiopian Government in April 2008 as a private-public partnership – about 45% of the members of its Board of Directors are traders working within the exchange, and the other 55% are Government representatives.

The Exchange provides spot trading for five commodities, with coffee being the most important. Trading itself is relatively straightforward. It is spot market only, no future or forward contracts. This may change, but the Exchange decided at the beginning to start simple and instil the necessary discipline and understanding of standard trading terms before embarking on more complex derivatives contract trading.

Trading is open outcry in a pit. There are sequential 10 minute sessions devoted to different commodities. But the really interesting action is invisible. Behind the bustle of the Exchange floor lies a series of innovations that make it all possible:

  1. Classification. A new domestic grading system, backed up by certification and labs, means that coffee can be classified into different internationally accepted grades.
  2. The development of a warehouse receipt system. There are currently 16 warehouses with a storage capacity of 16 million bags. Coffee is taken to these warehouses and electronic receipts issued. This gives buyers' confidence about the existence of the coffee they are being offered and independent verification of its quality grade. 
  3. The trading floor itself. Traders buy seats on the Exchange. Some are professional coffee traders, others from cooperatives. The green and brown jackets represent the two categories: buyers and sellers. Sellers can only sell coffee for which they have a warehouse receipt. Buyers can only buy up to the limits of cash balances which they have deposited with the Exchange. 
  4. Settlement. Like many other developing countries, Ethiopia has no national clearing system. The Exchange wanted settlement within 24 hours. The government passed a law allowing the Exchange the exceptional right to use electronic signatures and so trades are reconciled overnight.
  5. Information technology. The price information shown on the screens around the trading floor is transmitted within 2 seconds to 31 electronic display boards in rural locations. It’s also displayed on the Exchange’s website. An automated telephone system provides prices for different products and grades, and 156,000 subscribers receive real time data via SMS text messaging.
  6. Regulatory powers. The Exchange is the only self-regulating agency in Ethiopia. It can discipline members and has applied civil penalties for offences such as attempted price-fixing and collusion.
More deals are made (Credit: John Humphrey)

These policy innovations make the spot market possible. Products have to be homogenised to enable trade (hence grades and standards). Buyers need assurances about sellers, and the warehouse system is one way of doing this. Sellers need assurances about buyers, and the cash balances held by the Exchange provide this.

In doing all this, the Exchange seems to have produced gains for farmers. A long succession of transactions between traders at various locations between the farmer and exporter has been replaced by a simple grower-warehouse-exchange model. Farmers and cooperatives have an easier and more transparent route to market, and the wide availability of price information allows the Exchange prices to act as reference prices throughout the country. The Exchange shows how much work goes into building markets.

3 comments :

Anna said...

Thanks for sharing!

Rosaleen Cunningham said...

Hi John,
last week I went to visit Indonesia's first coffee warehouse receipt system in Aceh to write a feature for the World Bank's Multi donor Fund. There was great excitment at the potential for the 33,000 coffee farmers in the district. People were mainly just relieved that the middlemen, the local agents, would be eliminated from the supply chain. Though the farmers were keen to know that at last fair trade was actually going to mean something to them, they were more relieved to know that now the quality of their produce would be maintained throughout the supply chain as it has been devastating for them to learn that traders didnt think their quality was good. They realised that local agents at differnt stages had been mixing the bean quality. When the warehouse receipt system is combined with the auction market, this problem will hopefully be eliminated.
regards
Rosaleen

Professor Ali Abdalla Ali said...

Thanks for sending me this interesting media.In fact I have been familiar with this Ethiopian Commodity Exchange since its early days.I am in fact responsible for the file of establishing a similar exchange in Sudan with Khartoum Stock Exchange until a SEC law is passed.I have been following the very impressive effort carried out at ECX under the dynamic leadership of Dr.Eleni Gebre Madhin who ended her term last year.ECX has greatly improved the life of Coffee grwoers in Ethiopia and was able to make farmers sleep in peace after a long days's work.I have been in Addis more than three times visiting this model exchange.We even had a cooperation agreement w3ith ECX.We are trying to apply the same model starting with Gum Arabic.The Gum Arabic zone sustains more than 13 million Sudanese and it marketing is the major weakness since the producers who toil really hard do not get more than 10% of the export price per ton during the whole season.Moreover, the production of this important commodity is facing the danger of decline because more farmers and producers specially from Western Sudan are involving themselves in a Gold rush never witnessed before in Sudan.In fact most of agricultural activities are gradually facing the same fate.The expected commodity exchange wille aSudanese public company in the same way as ECX.At the same time try to obtain Indian technology as well as introducing the element of Gold which is fast becoming an important foreign exchange earner(US $ 2 billion in 2012).However the basic attention will be for Gum Arabic and then Gold.I must admit that we were greatly influenced by the Ethiopian experience.It is definitly a reliable machinery for alleviating poverty by enhancing the condition of farmers.Thansk.
Professor Ali Abdalla Ali,
Omdurman Ahlia University,
SUDAN
Email; aliabdalla.ali@gmail.com,