As the humble mung beans began trading on the Ethiopian Commodity Exchange (ECX) in January, it has signaled the growing importance of financial vehicles in Africa's commodities sector and highlighted the hope that millions of African farmers could be lifted out of poverty.
Launched in 2008, the ECX has been a massive success story with 329 members that reach almost three million farmers in the country. The ECX has 17 delivery centers, 57 warehouses and traded volumes of 601,000 million tons of commodities such as coffee, sesame, maize, wheat and pea beans in 2012, compared to 47,734 million tons in its first year of operation. It has traded commodities with a combined value of USD 5 billion in its first five years.
"Before ECX was established, agricultural markets in Ethiopia had been characterized by high costs and high risks of transacting, forcing much of Ethiopia into global isolation. With only one third of output reaching the market, commodity buyers and sellers tended to trade only with those they knew, to avoid the risk of being cheated or [defaulted]," said a company statement.
Before ECX, trade was based on visual inspection, which drove up costs. Meanwhile, price discovery was difficult for farmers and they were unable to negotiate a fair price.
The exchange, built at a cost of USD 50 million, has emerged as a fair and robust mechanism to help determine market prices and assist farmers secure better rates for their produce.
A COMMODITIES PLATFORM
Africa is a major producer and exporter of cocoa, fruits, vegetables and a range of soft commodities that the world relies on.
The value of traditional African export commodities such as cocoa, coffee and cotton is forecast to reach USD 10.5 billion by 2030. Meanwhile, the value of high-value exports such as flowers, fruits and vegetables is set to increase to USD 10 billion. In addition, the African urban market for food was expected to grow to USD 150 billion during that period.
The abundance of agriculture produce needs to be leveraged with financial engineering and a platform to help secure better prices, ensure more reliability and empower farmers, traders and merchants to build their agriculture business.
The United Nations Conference for Trade and Development (UNCTAD) notes that commodity exchanges can provide efficiencies in commodity supply-chains by providing a platform for transparent sales.
"They also promote institutional developments; encourage adherence to standards, and support the development of innovative financing models, such as warehouse receipt systems," UNCTAD said. "Reliable product grades and negotiable receipts help producers access finance, thereby fostering increased productivity and rural incomes."
FEW SUCCESSES
While the ECX is a success story and South Africa has a strong Futures Exchange, other experiments in Africa have had varying degrees of success, and most have failed to gain traction. Some have been criticized for being ill-conceived or premature, while others have failed to gain momentum in the absence of strong regulatory frameworks.
Still others like the cotton exchange in Alexandria, Egypt, failed to keep up with the changing trade patterns and shuttered operations by the 1960s - after a storied history which spanned a century.
More than 28 countries (see table) are working on national or regional exchanges in various stages of planning.
To refresh the idea of a regional exchange, 13 African exchanges from Ethiopia, Ghana, Kenya, Malawi, Nigeria, Uganda, South Africa, Sudan, Tanzania, Zambia, Zimbabwe, apart from UNCTAD, USAID and a few other multilateral agencies initiated the African Commodity Exchange Forum in 2010 to "foster the establishment and growth of commodity exchanges in Africa."
The African Development Bank notes that after the success of commodities exchanges in South Africa in 1995, ECX in 2008, the continent is embarking on its third wave of African exchange development.
"More than ever before, African countries are initiating commodity exchange projects, and many millions of dollars are currently spent each year on commodity exchange development in the continent," said the African Development Bank in a new report on the prospects of commodity exchanges in the continent.
"The level of ambition has risen: most national projects envisage modern exchanges that meet global standards - something that comes at a cost of at least USD 10 million - which is a far cry from the shoestring budgets on which some of the past exchange promoters had to develop their projects (e.g. Malawi, Zambia, Zimbabwe's first exchange ZIMACE)."
A PAN-AFRICAN EXCHANGE
But instead of creating a spate of smaller exchanges, perhaps there is a need for more a regional exchange.
"The opportunity for Africa to achieve its development potential is unprecedented, and the international environment has changed, and continues to change, in ways that open up new possibilities, new potential and new paths to progress for our continent. The big question is whether Africa is to do this as 54 separate countries or as Africa," said Festus Mogae, former president of Botswana and chairman of the Bourse Africa Advisory Board.
The AfDB believes that the availability of technology may make the concept of a pan-African exchange platform possible.
"Africa is the world's current frontier for commodity exchange development, attracting the interest of domestic investors as well as some large international commodity exchange groups. With the competitive global business environment, it is now time for African countries to put in place viable exchanges that offer the services demanded by the continent's economies," AfDB said.
The development of a pan-regional exchange is more advisable, as it would reach a wider audience and will be able to leverage a wider set of commodities and volumes that could help rival other commodity exchanges.
The exchanges will help farmers, create new employment opportunities, reduce subsidized farming and allow farmers to access financing. The rampant use of mobile phones across Africa also means that farmers can access the exchange without trekking to financial centers.
The feature was produced by alifarabia.com exclusively for zawya.com.
© Zawya 2014
