Commodity exchanges in Africa: Lessons from Ethiopia

The trading floor of the Ethiopia Commodity Exchange

The trading floor of the Ethiopia Commodity Exchange

The Ethiopia Commodity Exchange (ECX) began operations in 2008 bringing together buyers and sellers to trade produce such as coffee and sesame seeds, while assuring both parties timely delivery of payments and produce. The ECX was established with support from the Ethiopian government and donor organisations, including USAID.

It has been hailed as a success, helping fix challenges such as unreliable market information, contract defaults, lack of quality standardisation, limited access to markets, and other inefficiencies along the value chain.

Engineer Solomon Edossa is one of six professionals who founded the ECX. As chief information officer of the exchange his responsibility was to build the electronic trading platform and oversee all things technology. He held that position until about 18 months ago. Edossa now offers technical advisory services to the ECX through his consultancy company DESS Inc.

Edossa talks to How we made it in Africa about the benefits and weaknesses of commodity exchanges, and what innovation means in the context of a developing country like Ethiopia.

The ECX is seen as a success by many, but one of the criticisms levelled in the past was the lack of traceability. Recently the ECX launched a US$4.5m national traceability system. What value does this bring to the exchange and Ethiopia’s coffee farmers?

Consumers are demanding more information about where their coffee is coming from. Through this traceability system, every bag of coffee processed in Ethiopia through the exchange will have an identity and a story. It will tell you which primary market it has been purchased from, which processing mills were involved, which farm areas is it sourced from and the profile of the farmers in those areas.

Providing such rich, traceable information will have rippling effects, and it is going to benefit the farmers and everyone in the chain. Traceability also provides tremendous opportunity for operational efficiencies. You are able to track every movement of your coffee bag, you will understand your supply chain bottlenecks and have clear visibility in terms of your inventory so you can respond to bottlenecks.

So it arms the exchange with valuable information to help streamline its operations. Imagine during the peak season, the first time you know you have 100 delivery trucks outside your delivery centre is when they arrive. With traceability you will know when they are on the way, or you could even schedule the arrival so you don’t have trucks parked outside for two to three days before they are serviced.

In Ethiopia this is vital because there are not even enough trucks for moving goods. So efficiency in how you service the trucks as they arrive and you free them up improves operations at ECX but also improves the transportation system throughout the country.

A number of other African countries have set up exchanges, perhaps inspired by the success of ECX. But some have not been as successful. How come?

In the past seven years I have learnt a great deal about the challenges and difficulties, but at the same time the promise that having the right kind of exchange could do to help transform the agricultural marketing system. I think in Ethiopia the model was effective because the key support [from government] has been there. To build such an exchange you need to have a capable leadership team, properly design and architect the right exchange for the country, and have the will to make it happen.

When I came, my area of responsibility was to build the electronic trading platform, and everything technology-related was under my purview. At the time there was no central payment system in the banking sector. There was no clearing house. Power used to go out every other day and randomly. Broadband was not available, so the only option was actually a dial-up. There was no commercial warehouse operator to take on the warehouse operations. At that time we had an option to pack up and go back where we have come from.

But we chose to leverage the best of what the country has, however limited, and built it and pushed for change. Seven years later this exchange is trading roughly $1.5bn annually. It has never canceled a single day’s trade since it started operations, even while power was going out randomly. Was it perfect? No, but we have it refined over time. The important thing is that we made progress. We can’t make progress if we look at what we don’t have and wait until everything in place.

Today the environment has improved. We have broadband, the power situation has been greatly improved, and now the exchange is doing online trading. Previously it was floor-based trading. More than 20 countries have visited the exchange. And, yes it is good to visit, learn, have meetings and do studies – but at the end of the day you have to be willing to act and leverage existing resources.

Do you think other African countries should be setting up exchanges?

Yes. Look at the current market in Africa where contract default is rampant, where there is limited access to market information. You have to address these issues because it affects the livelihoods of especially those who produce. I am not saying it has to be just like the ECX.

It has to be tailored to a particular market and its circumstances. I think having an exchange is of tremendous value to every country.

Many places in Africa have bad roads, limited power and poor communication networks. How does a western-style commodity exchange fit into such environments?

I am not saying we should build the Chicago Mercantile Exchange [because] that is not possible at the moment. We don’t have to build exactly what developed nations have. I don’t think that is the way to go because of the challenges you brought up. But within the limitations of the particular countries there can be an appropriately designed exchange, or form of an exchange that facilitates better trade, [and] improves or modernises the current system.

Maybe we look at regional systems – modernising by region. There are different ways of doing it, but not doing it until all the power exists and all the roads exist – is not the way. For instance, with the traceability initiative, if you are trying to tag each bag of coffee from the thousands of dry and wet mills in the country – do you think there is power and reliable telecoms in all those areas? No, not necessarily.

But you can charge the phone and use it for eight hours and perhaps you move to an area where there is connectivity to push the data. Now, is that efficient or ideal? No, but you start somewhere. You create an innovative way of taking advantage of technology where you can, or [you] just [use] pencil and paper.

But not doing anything is not the right thing to do. There has to be innovation – not the way you may understand innovation in developed countries – but leveraging what a developing country has, to build capacity and build institutions, while at the same time pushing to get to the level of developed countries.

Will technology help fix challenges in Ethiopia’s agricultural sector?

I am very much excited about the promise that technology, especially in the mobile space, brings to the country. When I came to Ethiopia seven years ago (after living in the US for about 30 years) there were roughly two million people owning mobile phones. Today it is about 25 million with projections the number will reach 50 million in four years out of the 97 million people. This has a viral effect. When people have these devices and you have connectivity, then the ability to push information becomes even easier.

For traceability, for instance, the ECX is leveraging a mobile app to capture the entire supply chain event for coffee – and in the future all commodities – traded on the exchange. The impact it is going to have is huge. Mobile technology will definitely make a tremendous difference in transforming the agricultural market in the country. I think the promise is limitless.