Home | Comment & Analysis    Wednesday 24 March 2010

The African commodity exchange

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By Professor Ali Abdalla Ali

March 14, 2010 — In the beautiful and cozy environment of Addis Ababa, the capital of the Republic of Ethiopia, a two day conference was held on February 24-25, 2010. The conference was called for jointly by the UN Development Programme and the Ethiopian Commodity Exchange (ECX). Under the theme ’Knowledge Forum on African Commodity Exchanges’, the experiences of African commodity exchanges were discussed.

The first day covered, in addition to opening speeches, a session on global learning in which an interesting paper was presented by the Managing Director, National Commodities and Derivatives Exchange (NCDEX) of India which reflected on the experience of India. A second presentation on the South African experience was delivered by the delegation representing the Agricultural Markets Division of the Johannesburg Stock Exchange; the third was by the Ethiopia Commodity Exchange ("The ECX Edge," presented by the CEO). Another session was on "The Making of A Market; What does it take?" In that session a representative of the Ministry of Agriculture and Rural Development of Ethiopia presented some reflections on policy perspectives and the Director General of Ethiopia Commodity Exchange Authority (ECEA) made some interesting reflections regulator perspectives and exporters who are members of ECX.

The third session was on lessons for the continent. The Head of Commodity Exchange Group, UNCTAD and the Securities and Exchange of Ghana all reflected on their experiences.

The second day’s meeting was held at the ECX headquarters, attended by the representatives of a number of established commodity exchanges, securities and exchange commissions as well as representatives from countries which are in the process of establishing a commodity exchange (e.g. Sudan and Ghana). In that second meeting an intensive discussion took place on the issue of forming an African Commodity Exchange Association. Such an association would be intended to help in the promotion of commodity exchange in Africa, in addition to being a forum where knowledge and experiences could be exchanged among these trading institutions.

During the first day, very intensive discussion took place on the experiences of India, South Africa and ECX. The Indian experience had shown how such a commodity exchange had developed into a more sophisticated arrangement and the contribution that it had made to the economy and those producers engaged in agriculture. The South African representative was very practical by giving those present ten most crucial steps which are very necessary when contemplating seriously the establishment of a commodity exchange. Such steps and requirements include: a very clear objective; a common need; an enabling environment; market support; an applicable and good trading system; very clear rules and consistency to maintain integrity; the need for correct products; constant educational policies especially education of the media; a staff that is qualified, knowledgeable, and committed; the readiness to stay in touch and learn from mistakes and be adaptable and be relevant; add value without which there would be no need for an exchange; and be prepared for the unexpected.

The third presentation was by the CEO of ECX which seemed to be a very recent and interesting experience especially the rationale and wisdom of giving the establishment of a commodity exchange a priority over the establishment of a securities based exchange, which had been the prevalent practice in most of the African countries. Ethiopia’s decision to establish a commodity exchange before all else reflected concern about the agricultural sector which is the major activity of the majority of the Ethiopian population (like in most African countries).

It seems that it was a most logical priority through which Ethiopia intended to strengthen the production structure of agriculture before entering into the search for oil. The excellent record and achievement in creating a transparent, technology-oriented market had brought considerable common sense to marketing of Ethiopia’s major exports starting with contracts for maize, wheat and beans followed by coffee and recently sesame.

Coffee, which is one of the major exports of Ethiopia, had to be given careful attention due to its importance and complexity. Historically, the coffee market used to be based on the auction system through a marketing board. However, the establishment of ECX has proved successful in a relatively record time to raise the quality and the marketing level nearer to a level which is supposed to play an effective role in bringing fairness to the stakeholders especially the producers who for decades never got their worth of what they produced because they were not in a strong bargaining position to attain from buyers and exporters the fair and just value of their efforts. In fact their lack of knowledge of the international prices and their ignorance of it was greatly exploited by other stakeholders. That is also why exporters became relatively wealthy and comfortable while the producers remained largely below the poverty line! ECX became the just and fair intermediary between producers and buyers. Not only this but it was able to relieve the producers from their previous agonies and headaches to transport and store their produce as well as their previous inability to promptly obtain in a specified time fair value. The development of the exchange definitely appeased the farmers and created a positive incentive not only to produce but to produce with considerable care, efficiency and quality. They became confident that ECX would not tolerate any inefficient production.

Accordingly, the establishment of ECX has drawn unusual attention from the other African countries as well as institutions inside and outside Ethiopia such as the World Bank.

The establishment of the ECX did not go without obstacles and serious objections on the part of some Ethiopian traditional exporters. A very informed source told the writer that the Prime Minister of Ethiopia had twice warned the traditional exporters not to tamper with the noble objectives of ECX and not to create obstacles in its way. Exporters did not heed the warning, being confident that they held long-established relations with importers of coffee, and as a result the government had to withdraw the licenses of the major six exporting companies. This reflected the importance of will and determination on the part of the government concerned with the status and welfare of producers, but without neglecting the legitimate rights of exporters who had usually developed over time their own buyers. This fairness for all is actually secured by the growing significance of ECX as an institution, which is fair and just towards all, seeking for the rights of all to prosper, but not for one to prosper at the expense of the other as was the case previously.

On the question of establishing an association for African Commodity Exchanges which was the subject of the second day, a meeting was held in the headquarters of ECX in order to discuss the possibility of establishing an association for African Commodity Exchanges which would continue with the noble objectives of commodity exchanges in African countries as elaborated during the first day sessions.

Some were not at ease with idea of an association because of the apparent unsuccessful experiences of similar associations in the Continent. It was thought by some that the spirit of what had been discussed and intended required not an association — which could become cumbersome — but a body where knowledge and experiences as well as common objectives and a noble cause, i.e. caring for the majority on a dynamic and sustainable basis, needed a different form of organization to which the title of a "Forum" would be most suitable rather than "Association". In the end the idea of an African Commodity Exchanges Forum (ACEF) was approved by the representatives of the commodity exchanges. The membership of the ACEF was to be in three forms: full membership for established and operating exchanges; associate membership for those exchanges which are in the process of being established; and observer status for those donors and institutions interested in the promotion of African Commodity Exchanges.

The meeting also endorsed the ECX as represented by its dynamic CEO Dr. Eleni Gebre-Madhin to be the first Chairwoman of the ACEF for the first two years starting February 2010. The Chairwoman was requested to carry on the rest of the procedures to establish ACEF. Such procedures will include composing a memorandum of understanding to which African exchanges will commit themselves for the operation of ACEF.

Looking at the overall two days of deliberations, one comes to the conclusion that there is a serious need to prioritize which exchange should be started first in African countries. Such important instruments of policy should actually be established most times in order to change and improve on the lives of the majority as well as the economic activity of that majority. With a quick look at many African countries, one would immediately observe that the priority is usually given to the establishment of securities based exchanges rather than commodity exchanges whose function is to serve as an honest transparent intermediary between African farmers and producers and those who need to acquire their products. This is so because many African farmers and producers are often at a disadvantage especially in regards of their production, transportation, storage and most important their inability to get a fair value of their production at a specific time.

The marketing boards that were established during the colonial period in West Africa played a role in taking care of the marketing of export crops. But even such boards were not adequately fair to the agricultural producers in West Africa. In a way, they were not free from exploiting the farmers. The Gezira Board in Sudan is another example where Sudan’s cotton used to be marketed through auction by the Board. Buyers used to come to Sudan and see for themselves the annual production of cotton and its quality status. The sharing of the proceeds used to be 40% for the government for financing the operations, 40 % for the cotton farmers for their efforts, and 20% for the social services in the Gezira Scheme. Even here there was no proper marketing as usually happens when there is a proper commodity exchange, and therefore one cannot exclude near exploitation of cotton farmers as far as the international prices are concerned, nor that farmers used to get their real worth of their production. However, cotton produced by private estates used to be marketed through companies working in Sudan which were mostly owned and run by branches of foreign companies which were mainly British and some foreign nationals living in Sudan.

When nationalization took place in 1970, almost all foreign companies and bank branches, foreign nationals’ companies as well as some private Sudanese companies were nationalized. Since then and with the loss of marketing experience, exports of cotton as well other cash crops started to face severe and real marketing difficulties especially in the absence of the foreign companies that had been able to develop a marketing network — as well as the absence of a commodity exchange. Sudan until today unfortunately has suffered from loss of such expertise.

In 1992, a Sudan Capital Market (SCM) was envisioned to adopt economic reform and liberalization. It was meant to include three markets: one for foreign exchange; the second a securities-based exchange; and the third a commodity market to take care of cotton, gum arabic, oil seeds and other exports. The foreign exchange was sabotaged by those dealing in the ’Black Market’. They feared that such an exchange might militate against their lucrative black market business. The commodity exchange, which was intended to raise the level of marketing of agricultural products and secure a fair income for the Sudanese farmers, was also subtly sabotaged by the exporting companies. The cotton company rejected the idea of cotton coming under an official commodity exchange, giving the lame reason that marketing of cotton is already organized internationally (!!) and that cotton does need to come under the umbrella of a commodity exchange.

What remained of the three intended markets was called the Khartoum Stock Exchange (KSE) which is a securities-based exchange. KSE is now in its 15th year. Although KSE has achieved considerable success especially by creating awareness internally and also externally in the Gulf countries and although Sudan was able to attract considerable foreign flows into financial assets, yet in looking at the 57 listed companies in KSE one finds that there are no more than three production companies whose economic impact is very little or none. Most trading is concentrated in Sudan Telecommunication Company (Sudatel) whose capital base started with about US $65 million and is now at US $893 million. Listing Sudatel in the Gulf exchanges has also brought in considerable inflows into the Sudanese banking system and expanded its capital base.

In August 1999, Sudan started to export oil for the first time in its history. Since then the agricultural production got less attention. Oil revenues were not directed to revitalize agriculture and funds had to go into other directions especially the financial commitments of the Comprehensive Peace Agreement (CPA) which ended in January 2005 a civil war that was ongoing in Sudan since August 1983. Therefore, non-oil exports declined sharply. When the international financial crisis occurred and the oil prices crashed and food prices gained momentum, the policymakers started to rethink the role of oil and decided to go back to agriculture trying hard to resurrect a much neglected human activity. If the policymakers had taken up the project of establishing commodity exchange from 1992, when the SCM was established and until the exportation of oil in August 1999, then Sudan’s export products would have been cemented and the farmers and other stakeholders protected by a well conceived commodity exchange.

However, it is never too late. Sudan’s desire at the moment is to establish a commodity exchange which if properly conceived and given real official support, will obviously help in giving hope to farmers that they will obtain their fair share of the value of their crops and remain well above the poverty line. Moreover, the establishment of a commodity exchange which will be fair, honest and transparent will greatly serve as a new incentive for Sudanese farmers. That is why African countries which are primarily agricultural countries should give priority to establishing vibrant and dynamic commodity exchanges because they are a relevant vehicle that will insure that the farmers shall obtain a fair value for their efforts to produce cash crops, thereby improving their lives away from poverty. Ethiopia made the right decision to start with ECX, which gave a sort of ‘Midas touch’ to a situation which was highly uncoordinated and in disarray and in which farmers were not getting the real worth of their efforts because of lack of knowledge of the international marketing arrangements and also because they were always on the weaker side of the spectrum. That is why they remained exploited. Yet ever since ECX came to stay and is now on a solid basis — thanks to it highly dynamic leadership, staff and solid government support — the official authorities may start thinking seriously about establishing a securities-based exchange. Such an exchange will greatly help Ethiopia to attract funds locally and externally which themselves will give an indirect boost if they are directed towards the major economic activity of the Ethiopian population.

To conclude, the best illustration behind the wisdom of establishing commodity exchanges in Africa can be seen in a statement made by a coffee grower in Ethiopia to the CEO of ECX. Ato Bekele Bekete, manager of Adado Coffee Farmers Cooperative, sold his organic certified coffee for $4.02 per pound in the first Direct Specialty Trade Session and the price was more than twice what the conventional market would have offered.

He reacted saying "Today I saw my coffee sold to a foreign buyer for the first time in my life and I am not a young man. Today I realized what my coffee is worth. Today the hard work of the farmers in my co-op was repaid. Today our dream for a better life started to come true."

The CEO of ECX commenting on this statement said that "Hope is not a commodity. It is the basis for change. We have the will. We have the coffee. Now we have the system. It can be done!"

Professor Ali Abdalla Ali of Ahlia Omdurman University is Economic Advisor to the Khartoum Stock Exchange. The views expressed do not necessarily reflect those of the Khartoum Stock Exchange. The writer can be reached at aliabdalla.abd@gmail.com



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