Promoting African commodity exchanges
In April 2008, Ethiopia’s first commodity exchange was established in a country where only a third of the agricultural produce reached the market.
The Ethiopia Commodity Exchange (ECX) was created to provide security and visibility for the country’s commodity traders.
Jointly owned by its members and the Ethiopian government, ECX now provides a secure, low-cost platform for farmers to trade agricultural goods (such as coffee, sesame, haricot beans, maize) in an otherwise tradition-bound system suffering from unusually high transaction risks and costs.
The exchange guarantees the integrity of the products traded, quickly and reliably disseminating market price movements to all traders.
In addition to creating a physical and electronic trading platform and market information system, ECX performs warehouse management and quality certification. It also guarantees payment against delivery, solving any commercial disputes through a fair and professional arbitration system.
The exchange has handled transactions worth USD 240 million since December 2008, amounting to over 160,000 tons of coffee beans. An estimated 850,000 small-holding farmers (mostly producers of coffee, sesame and other cash crops) - around 12 per cent of the national total – are now involved in the ECX system.
Replicating the Ethiopia experience
Having helped to develop a commodity exchange for Ethiopia, UNDP is now looking into the possibility of replicating the experience in other African countries. Among these, Tanzania, Kenya, Zambia and Uganda are considering replicating, customizing and scaling up the ECX model.
UNDP’s support towards this initiative in Ethiopia has received a major boost from the strong interest of the UNDP Regional Director for Africa, Tegegnework Gettu, as well as the UNDP Administrator, Helen Clark. During her visit to ECX on June 17, 2009 Helen Clark said “there will be a lot of interest in other developing countries in this kind of exchange.” “It gives a lot of transparency to the small farmer about what they are going to get. It also helps set standards for what they need to produce in order to command the best price,” she added.
On 24 February, in a creative example of South-South cooperation, UNDP helped organize and supported ECX for a sharing of knowledge and experiences with more than 300 representatives including Africa- and India-based exchanges as well as the international and donor community, federal and regional government officials, and private traders.
Titled “The Making of a Market: Global Learning from Commodity Exchange Experiences”, the forum discussed the ECX experience and its relevance to other African countries, as well as the possibility of using it to foster regional integration and trade between African countries.
The Forum has resulted in the establishment of the African Commodity Exchange Association, which will foster the growth of commodity exchanges in the rest of the region.
A Commodity Exchange Community of Practice is expected to be launched shortly, helping experts to share experiences on how to establish similar mechanisms in their own countries.
According to Sam Nyambi, the UNDP Resident Representative in Ethiopia, “the ECX approach could capture regional interest and will serve as a potential model for other countries in Africa”.
ECX was made possible by a consortium of financing partners including UNDP, the World Bank, American development agency USAID, Canadian Development Agency CIDA and the World Food Programme and is co-financed by the Government of Ethiopia.
Since 2006, UNDP has financed more than USD 3.5 million of the total USD 24 million needed to establish the exchange. In addition, UNDP support included initial project start-up, capacity building, and technical advisory services over four years.
In its first year, the exchange faced a number of challenges, including fears that Ethiopia’s world- class coffees would be lost, as high and low quality beans were mixed together on the trading floor.
ECX has overcome these challenges with the creation of a classification system that differentiates between different types of coffee beans. In response to local pressures, the exchange has started to market specialty coffee and has even expanded from covering spot transactions for immediate sale and delivery, to include trade in coffee futures.