October 07, 2007

Ethiopia to exchange famine for food

By Barney Jopson

Published: October 7 2007

The government of Ethiopia, which has one of Africa’s most state-dominated economies, is stepping into uncharted territory by launching a commodity exchange to help alleviate food shortages and encourage the commercialisation of agriculture.

The Ethiopia Commodity Exchange (ECEX), which is due to open in December, will sit at the hub of new price dissemination and quality control systems designed to improve liquidity and transparency and reduce transaction risk.

The plan shows how a buzz around fast-growing commodity exchanges has reached Africa from Asia – particularly India and China – which is now home to six of the world’s top 10 commodities futures markets by volume.

But given the myriad weaknesses of Ethiopia’s agriculture sector and the government’s insistence on maintaining a tight grip on ECEX, there are doubts about how much and how quickly it will make a difference.

It was food shortages in 2002 – not the famous famine of 1984-85 – that led in government circles to the idea of a commodity exchange. The 1980s’ famine was caused in part by the Derg regime’s denial of food to areas loyal to anti-government rebels, who toppled it in 1991 and remain in power today.

Eleni Gabre-Madhin, who is leading the exchange project, said the 2002 shortages were purely the result of “market failure”.

The country had consecutive bumper maize harvests in 2001 and 2002. However, they triggered an 80 per cent price collapse and led to 300,000 tonnes of grain being left to rot in fields because it was not profitable to harvest. In July 2002 Ethiopia made an international appeal for emergency food aid for millions of people.

At the time Ms Gabre-Madhin was studying how to use the expected surplus. “It was like: ‘What happened?’ You can’t have huge surpluses, prices collapsing, then the grain disappearing,” she says.

ECEX and the nationwide infrastructure to be built around it, she says, should prevent a repeat of 2002 for maize as well as wheat and teff – two other staples – for which the combined domestic market is estimated at $1bn (€715m, £500m).

The exchange will create a pool of liquidity and reference prices that reflect the amalgamation of demand from across the country, thereby reducing the price volatility caused by the existence of multiple fragmented markets.

Price tickers at 200 rural sites will give farmers independent access to price information from Addis Ababa, enabling them to negotiate a fairer deal with middle-men and giving them incentives to produce.

Traders, meanwhile, will be able to profit from arbitrage opportunities by buying cheap grain in areas of surplus and selling it at higher prices closer to areas where there are shortages, which will itself facilitate food distribution.

Ms Gabre-Madhin hopes the exchange will drive a belated surge in productivity by creating a more stable environment where farmers will be able to invest in fertiliser, machinery, irrigation and new crop varieties.

In turn that should provide a more solid foundation for exports, as will a network of 10 exchange-run warehouses where produce will be independently weighed, graded and certified. The exchange will trade three cash crops: coffee, sesame seeds and haricot beans.

The government’s close involvement in ECEX is part of its agriculture-led development strategy, well-suited to a country where farming accounts for 47 per cent of gross domestic product and has helped lift economic growth by close to or beyond 10 per cent in each of the past four years.

But just as the government is suspicious of unfettered markets – it took Ms Gabre-Madhin a year to persuade ministers to allow futures contracts – traders are likely to be suspicious of the government’s 100 per cent ownership of the exchange.

“It’s a very government-driven project,” says Assefa Admassie, director of the Ethiopian Economic Association. “The private sector has to internalise the whole idea.”

Market participants who profit from price opacity will have other incentives to keep trading off the exchange. And the success of the network of price tickers will depend on the country’s telecoms infrastructure – which is unusually bad, even for Africa, and run by a state-owned monopoly.

Adam Gross, of the United Nations Conference on Trade and Development in Geneva, says that while commodity exchanges should not be seen as a panacea for agriculture, the Asian successes have “enlarged the bounds of the possible”.

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