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Eleni Gabre-Madhin on the value of the exchange

From the March 2015 issue.

The founder and creator of the Ethiopia Commodity Exchange talks to GCR Magazine about how her creation has been changing lives in Ethiopia, and what she will do differently next time.

In 2008, Eleni Gabre-Madhin made history by establishing the Ethiopia Commodity Exchange (ECX).

The first institution of its kind in Africa, the ECX is designed to connect Ethiopia’s farmers with central markets, alleviating the country’s distribution problems and empowering small producers by giving them a transparent path to the broader market. The ECX also enshrined a zero default system, where all payments were made directly th150rough the exchange, and the money and goods are delivered to each party the following day.

Almost seven years on and the exchange is now viewed as a model that other African nations are hoping to emulate.

As the architect and founder of the ECX, economist Gabre-Madhin is now in demand across the continent, working in Kenya, Ghana, Cameroon and Tanzania to establish similar exchanges in those nations.

While there were many challenges associated with the establishment of the ECX, Gabre-Madhin says that she is pleased with how the system has stood up over time.

“The system that was built has, above all, demonstrated its resilience,” Gabre-Madhin tells GCR Magazine.

“Despite the changing context, it is operating in such a way that as the price swings in the global market, policy changes and changes in management, the system that operates the zero default market is still there and every day it still delivers a market that functions, that people are clearing settlements on a T+1 basis (next day payment),” she says.

Agricultural commodities are of major importance to the Ethiopian economy, contributing some 45 per cent of the country’s GDP and providing employment for more than 70 per cent of the country’s labour force, according to the World Bank.

As the home of the coffee plant, and producer of some of the most interesting and prized strains of coffee in the world, Ethiopia is of particular interest to the international coffee industry. And with coffee accounting for about 25 per cent of the value of all exports out of the country, according to the International Food Policy Research Institute, the international coffee industry is of particular interest to Ethiopia.

“Coffee is considered the green gold,” says the current CEO of the ECX, Ermias Eshetu. “For as long as we can remember, coffee has been the key cash crop for the nation that has generated the foreign currency that we have needed for everything – it affects the livelihood of all Ethiopians.”

Gabre-Madhin was first inspired to develop the ECX due to the inefficiencies in trading and distribution of food in Ethiopia that had seen some parts of the country succumb to devastating famine at the same time as other parts of the nation had surplus crops.

The ECX now trades five key commodities – coffee, sesame, haricot beans, maize and wheat. Of those, it is the first three that are the country’s major cash crops and it is those three that the exchange has focused on primarily in its first six years of operation. Currently the ECX handles about 80 per cent of the coffee, sesame and haricot beans traded in Ethiopia.

However the institution is still facing logistical challenges that have slowed its ability to expand into trading other commodities.

“What I think happened is we saw very rapid growth and very dramatic innovation in the first three years,” Gabre-Madhin says. “And then I think the exchange has kind of been on an even course, a little bit sitting on its laurels, and now it is getting ready to rev up again and introduce more innovation, such as remote, electronic trading instead of the open outcry floors and devolving the warehouse operations and futures contracting.”

Handling the logistical operations is a key ongoing challenge for the ECX, Gabre-Madhin says, adding that handling both the trading as well as the warehousing and distribution side of operations has presented problems for the organisation.

“Some things that I think still need to be done and perhaps were not done as fast as they should have been are devolving the warehousing to third party operators so that they get more efficient, and adding more products and services to what is already there,” she says.

However, in its initial phase it was not the operational challenges that took Gabre-Madhin by surprise, but the more personal ones she faced in convincing people that the exchange was going to work in their best interests.

“The biggest unanticipated challenge was managing the fear factor. People felt that this was a new way of doing things that would harm them and that they could not work with,” she tells GCR Magazine. “There needed to be an enormous amount of hand holding that we had not factored in.”

This made the initial uptake from industry actors much slower than she had expected.

“I was so sure that if you just told people about this zero default market where you don’t have to worry about who you’re trading with, and you will be assured of payment and delivery the next day, it would be a win-win,” she says. “I thought, theoretically that could not be seen as anything but a major attraction for people, so it was really surprising how much resistance there was and how much the system was tested by that.”

However, with more than 2 million Ethiopian farmers now engaged in the exchange, and more  than US$1.4 billion worth of goods traded through the system in 2012, the system is now an important element of the Ethiopian economy.

More than just acting as a platform for trading goods, the ECX also plays an important role as a disseminator of market information.

The exchange transmits price and trade data in real time to 100 electronic tickers in rural markets, to 1.1 million callers monthly on its automated hotline, and to 800,000 subscribers on mobile SMS.

It is this role that current CEO Eshetu believes is having a truly transformative effect on Ethiopia’s agricultural sector and the livelihoods of its farmers.

“[Before the ECX] the smallholder farmer would typically take all of their stock to the local market and once they got there, there really is no going back, there is only one option – to sell, regardless of what the price is at the time,” he says.

“Having access to this information has transformed the mind-set of the farmers. They’re no longer intimidated by what the middle man has to say, they are able to see what is fetching more or less money and make their decisions according to that.”

The approach appears to be working. According to statistics presented by Gabre-Madhin’s company, Eleni Exchanges, the information disseminated by the ECX has allowed 15 million coffee farmers to increase their share of the final price from 38 per cent to 65 per cent, as the margins to middlemen have narrowed.

Eshetu says that under his leadership he will seek to expand the reach and depth of that information to further enrich the lives of farmers.

“Going forward we plan to put all of this information into a fantastic mobile application available in a range of local languages where a farmer can see prices, identify potential customers, get updates about weather conditions and so forth.”

For this to be possible, the country must first improve its telecommunications infrastructure, but Eshetu says that a project to roll out 4G technology across the country is already underway.

“I am very confident that in the next couple of years the 4G connectivity will have a huge impact for us in terms of using it as a channel to communicate with farmers,” he says.

While the people behind the ECX are extremely encouraged by the impact it is having on the nation’s agricultural sector, there are some within the international coffee industry who believe the system is impeding trade in specialty coffee.

Specific issues raised by roasters such as Australia’s Proud Mary’s and the ITC Trading Group are that the institution has an overly complicated grading system and makes it difficult for roasters to connect directly with farmers.

Gabre-Madhin says that the problem stems from a misunderstanding of the system, rather than a problem with the system itself.

“I think that’s an unfortunate and unfounded criticism,” she says. “The law explicitly states that the farmer may sell either directly to the international market or through the ECX.”

“The rationale for that particular provision in the coffee proclamation was to say that if you want traceability and you want to buy the coffee direct from the farmer, we want the farmers to sell it to you,” she says. “But if you want traceability and you buy it from an exporter who is vertically integrated with a farmer, then we’re not sure that the farmer’s actually going to be getting the benefits of that specialty trade.”

The ECX, Gabre-Madhin says, was built in part to address that problem.

“I also think that the exporters in Ethiopia have really created this sense that it’s all gloom and doom, because they’re the ones being cut out of all of this,” she says. “There is a lot of fear and apprehension being created by the export community to say don’t go to the farmers, come buy from us, and that contradicts the spirit of the law.”

Eshetu says that he is aware of the criticisms, and is looking at ways of addressing them while remaining true to the intention of the exchange.

“ECX as an institution is taking a very holistic approach to this problem and once we have the capability and scale to be able to assess niche market requirements, I think those issues will be resolved,” he says. “We are working on a traceability project. For us this is really an issue of inventory control – the ECX must have a clear, traceable trail of information for all of its commodities. Once that comes to fruition all of these issues will be addressed because the information will be visible to the buyer.”

But, he says, the remit of the ECX is far broader than just catering to specialty coffee roasters.

“We are not about specialty coffee alone, we are about all commodities across the economy,” he says. “We have been commissioned to create full transparency in order to enhance the value from the farmer’s side and to create transparency for the nation’s tax framework and to bring together our commodities to enhance the nation’s food security.”

And with the system about to enter its seventh year, Eshetu says the ECX is here to stay: “There is no going back now – the farmer is much more aware of the broader workings of the market and it has forever changed the mind-set of the people on the ground.” GCR

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