Wednesday, Feb 20, 2019
Finance | Agriculture | Africa | Ethiopia

Ethiopia Commodity Exchange

x-Pioneering ECX revolutionizes agriculture


3 years ago

Ermias Eshetu, CEO of the Ethiopia Commodity Exchange (ECX)
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Ermias Eshetu

CEO of the Ethiopia Commodity Exchange (ECX)

Africa’s first commodity exchange has revolutionized Ethiopia’s economy and its mainstay – agriculture – and is providing inspiration for change in other countries. Ermias Eshetu, CEO of the Ethiopia Commodity Exchange (ECX), explains the extent of the impact it has had on farmers, commodity traders and the quality of Ethiopian produce, its plans to further expand access with more trading centers, and how technology can physically place its services into the hands of rural farmers.

 

What would you say are the milestones the ECX has achieved in its seven years of existence, how did it impact the backbone of Ethiopia’s economy - agriculture - in terms of efficiency, security and even integrity, and how is it inspiring Africa?

In order to get to the backbone of Ethiopia’s economy, it is very important to understand the structure of the value chain within the economy. The value chain at the bottom is very broad. It is represented not only in terms of foreign currency or in terms of coffee or sesame, but in terms of daily subsistence. 80% of our people are dependent on agriculture. Our population is nearing 100 million – that is nearly 80 million people. In terms of understanding the backbone of the economy, we have 80 million people depending on agriculture and they are unfortunately very fragmented. It is important to understand the way farming is done in Ethiopia, especially because farmlands have been split into smaller portions from generation to generation.

The current generation owns the smallest lot of farming space. Yet, these farmers have families to take care of. The farming plots are getting smaller and that means that the farmers are further away from the primary market. It is very important to take into consideration that Ethiopia’s infrastructure developments, such as railways and roads, are fairly new. The roads are 10-15 years old. That means that infrastructure in rural areas lacks connectivity. You have a highly defragmented market at the bottom with the least infrastructure.

How do we close this gap and provide access to the market for farmers? This is key. In the context of the commercialization of farming, what we have done with ECX’s system is we have created aggregators. We call them cooperatives and unions and they act as commercial size farms. In the West, this is not a problem as every farmer is a commercial farmer. But in Ethiopia, we had to carve out a way to smallholders as participants in the economy. This is because a significant part of our economy is dependent on farming.

In order to make farmers active players of the economy, we organized farms into cooperatives or unions. Farmers can come directly to ECX’s warehouses. We organized various mechanisms of aggregating their production. ECX is not just a market, as we have also created a Quality Assurance Mechanism and a Standardization Process. When crops or agricultural commodities come to ECX-managed warehouses, the quality is measured upon arrival.

At the moment we manage 65 warehouses. Everything that arrives at the warehouse is sampled, tested and certified. There is a huge amount of work when you look at the overall volume of commodities that we manage. Upon verification and certification, we issue what is called warehouse receipts. The warehouse receipt is a legally binding receipt between ECX and the suppliers.

Over the past seven years, we have been able to accommodate seven commodities. We are trading coffee, sesame, haricot beans, maize, wheat and a few more. We are not covering the whole 80% just yet. Teff, which is gluten-free, is a major crop and we eat it every day. There is also cotton and various vegetables. The farming practice across Ethiopia is very broad. There are an estimated 20 million farmers across Ethiopia. We currently reach 3.2 million of them. We have identified around 16,000 aggregators that have an agreement with ECX at the moment. They deliver their crops from the farms straight to the ECX warehouses. We issue them with official receipts that they can bring to the open outcry trade platform at ECX and use them to trade with buyers.

In the old days, the big buyers/exporters used to access the primary markets directly. Nowadays there is a physical barrier to transport something from A to B. It is very important to understand the psychology of a farmer who treks to the market by foot every morning. He might also have a wife, a child and a donkey and they all make their way to the market early in the morning. They might be fighting the hyenas or any other animals out there in the forest on the way to their destination. It is physically exhausting. They do not have a watch so they use the sun to guide themselves. Ethiopia is a big country and it might take three hours to get to the primary market. Once they are at the market and the sun is at the center, this is when they need to start heading back home. Imagine if the person at the top of the pyramid who is in a negotiating position does not turn up until noon. In Ethiopia, it gets very hot past noon. By then, the farmer is psychologically defeated in terms of negotiation, as he needs to start trekking home. If it gets dark he risks all kinds of things. One really needs to understand what happens on the ground.

With ECX, we have eliminated that tiresome journey to the primary market. They can only come to ECX. We have armed these farmers with market knowledge. This is the greatest achievement of ECX. The Malawian President who was here a few months ago was really excited about it and wanted to replicate our system. He understands that the system is tailored to Ethiopian problems. It is not copied and pasted from the West. Normally farmers would have to sell anything at the price made by the middlemen. Farmers would have to surrender all their hard work as they would have no choice. They can’t take their produce back home and there is no safe place to store it. They are at the weakest position in negotiation. We have fantastic fresh food but the quality is deteriorating very quickly due to the heat. And so, the farmers have to agree on any price offered to them. It is not only about the fair price but about the quality of food. We have put a barrier so that exporters and larger central market players buy it from the ECX. The moment the transaction takes place – the receipt is issued.

We have approximately 1,000 certified traders sharing 350 membership seats who buy on behalf of their clients. The membership is owned either by the private sector or the cooperatives. Not a single Government entity owns a seat, but ECX is part-owned by the Government. We drive our own policies, same as Ethiopian Airlines does. The Government’s intervention is critical as we are still in the forming stage. But in the long run the Government has no interest in ECX.

ECX is only seven years old and yet we have been effective as we are giving knowledge to the farmers. We reach them via SMS and IVR (interactive voice response). SMS/IVR is being shared among the farming community in Ethiopia. There are approximately 3 million farmers that are accessing that data.

 

An informed farmer is a more productive farmer.

Absolutely – an informed, educated farmer. Before going to the primary market they are already informed about the market prices. They can decide whether they want to take two bags or three bags and keep 10 bags for the next time when the market picks up. They have the assurance that they will monitor the daily market price trends using this data. This is the impact. It is an intangible impact.

We were able to affect nearly 3.2 million farmers. We will now introduce an E-Trade platform that is going to allow us to exit from our open outcry or ‘spot’ trading platform with physical barriers and limitations to nearly 5,000 times more transaction capacity. We will be able to transact more commodities, such as teff, cotton, sugar and so forth. The sky is the limit. This is only the formation phase but the idea is to accommodate as many other commodities as possible.

The implication on other African countries is very interesting. We get at least two visitors every week: from universities in Europe and the United States to African presidents. Tanzania and Rwanda are interested in our system and the President of Kenya came for a visit recently. We have an arrangement with Sudan. The whole range of countries in Africa are looking at us and saying, “How did it work?” We explain that we tailored it to the real problems on the ground and it affected the backbone of the economy.

The monetary value is yet to come. What we have brought is intelligence and knowledge transfer. We now have the ability to form and regulate a structured market. We have the ability to certify traders. We have the ability to form policies and hold people accountable. With traceability, we can now deliver some of the best quality Ethiopian coffee to the world in a way that is compliant to the international expectations of traceability, sustainability and so forth.

 

As we are experiencing a downturn in commodities, focusing on specialty product for which buyers are willing to pay a premium for quality is key. Thus, the ECX invested in an innovative tracking system in order to allow the buyers to track commodities from the farm to the final destination. What is the response you are expecting from the sector?

About three years ago we were very hurt by one incident. One of the bags containing a very good quality coffee that was destined for Japan turned out to have small traces of fertilizer. The Japanese Government stopped trading and buying Ethiopian coffee. That really affected us as we did not have a match code system to identify where in the food chain it happened. We used to have a medieval type of inventory control with no mechanism to specify, identify and eliminate that particular problem. The whole stock of Ethiopian coffee was lost due to that and that really affected our international competitiveness.

We now have implemented an inventory control system that can virtually track the coffee from the farm level to ECX warehouse and on to the exporter. We can identify where it is exactly at any particular time. The knowledge within that is immense. We can compare last year’s production to this year’s production, literally tracking it back to farm level. Any time we are able to make an informed judgment to identify training needs, calibration needs and much more. Going forward, we can identify which exporter buys which type of coffee.

This helps us monitor and support international buyers. It is going to provide us with humongous data and an ability to analyze information beyond just tracking. Now we can also focus on sustainability of coffee. Everything that we consume has to be sustainable. We can now certify a particular coffee as organic and we can prove it. This ability is going to empower us and enable farmers to gain more premium value for their coffee. This will allow us to diversify. Importers buying cotton would want to know that it is sustainable. We are able to prove it now.

We are still at an early stage but it is going well. The reaction has been amazing. For the first time, the farmers can identify with each bag of coffee and they keep asking for more bags with barcodes. The results have exceeded our expectations. We are going to continue to invest and diversify and include all other commodities beyond coffee.

 

Speaking about coffee, it is Ethiopia’s gift to the world. According to World Bank figures, in 2014 the coffee sector made up almost half of Ethiopia’s gross domestic product and 84% of exports. According to the Ministry of Trade coffee exports will increase 45% to over 260,000 tons this year. What is your assessment on this statement and how will the ECX work in order to achieve this goal?

In the past, our trading policies were quite informal. If farmers were using different venues to sell their coffee and we had no control over it. We have porous borders and Ethiopian coffee could go to Sudan or Djibouti and we would have no way of knowing. Now, we have introduced a technology laid control mechanism and we have more control over the yield. More and more farmers are going into farming coffee and there will be a significant growth in the coffee practice in the coming years. The Government is paying more attention to this area and so we will work on the objectives to meet those goals.

 

How did the ECX impact related industries, especially banking and financial services?

For the first time, the value chain makes sense to us. We no longer think about exporting green beans alone as we have aggregators, traders and compliance officers. A new professional practice is now in play as we have certified E-traders in the market. There are many more opportunities available to us. We have the ability to roast or to ground coffee, maybe even capsule it, and then brand it and demonstrate the traceability of that coffee to the authority. We have a fantastic 100% pure organic Ethiopian coffee. What we need to do is demonstrate that it indeed has been organically grown and nurtured through the years.

Once we do that, the farmers can start making more money. These farmers can later become consumers. The industrial output shall be consumed by what we referred to as the backbone of the economy. They will start buying industrial outputs, tractors or motorcycles, and they will become more efficient. The whole value chain will become an active participant of the future economy of Ethiopia.

 

You have introduced an e-Trading system that has the capacity to increase trade transactions immensely. Steve Jobs once said: Innovation is what distinguishes between a leader and his followers. How important is innovation for the ECX?

For instance, in Europe, you can be driving in the alley way or on the motorway. That is the difference. Once you have a very well regulated market, everybody can start driving in fifth gear. This is where innovation comes into place. You can regulate the market better and you can interfere when necessary as it allows you to monitor the process.

For ECX, innovation is a game changer, especially with agriculture being the backbone of the Ethiopian economy. It is affecting millions and millions of Ethiopians. We have nailed it as we now know how the access to markets works. We know how to connect the farmer to the central market. This trade can only speed up from here and we can start changing gears to higher ones. In other words, we can enhance our capacity to trade.

In addition to the e-Trade platform, we are building satellite trading centers in regional towns. In the next five years, we are going to have 10 trading centers across the country so that we are closer to the farmers and the cooperatives.

After those five years, we are going to go mobile. We are already working on a mobile app that allows us to connect to the individual farmer. These are important bridges to cross because when you go from ‘open outcry’ or ‘spot’ trading to e-Trade, you are building certain key capacities that we never knew about. How do you assure compliance on electronic data analysis as opposed to a physical observation of the trade on the open trade platform? This is a leap of cultural mindset as you have new performers and new players who are trading under a monitoring open trade. They are now sitting behind computers and looking at scenario analysis and at the pricing analysis.

This is a “leap-of-the-technology” kind of innovation. This is not about ECX being ahead of everyone – the whole ecosystem should follow. We have to equip them, we have to enable them, and we have to form relationships. We had consultants from Europe coming here to certify our compliance people and transfer knowledge. Now we need to cross bridges to be closer to the regional people. We need to disseminate this knowledge to reach them. Past that we will leverage enough momentum to jump into mobile trading.

 

You have lived in the UK for 20 years. What opportunities do you want to highlight to UK’s private sector?

I think for British investors, Ethiopia is truly comparative to the undiscovered jewel. Most people have misconceptions, as Ethiopia has been associated with war and famine for decades. There is a change in the mindset because now there is a growing interest both locally and internationally. Ethiopian culture is unique. Ethiopia doesn’t conform to World Bank or IMF expectations. We want to make sure that it works for us. The growth and the transformation plans, the millennium development goals reflect that. I know that there are smart British business people and at the very least I would like to invite them to come and discover this jewel.

 

What do you feel personally about leading an institution that is touching so many farmers' lives in Ethiopia?

I was 16 when I moved to the UK and I learned a lot of the British values, such as humanity and equality. I took advantage of their education system and learned a lot in the industry. I continued to learn, as there are many good things to learn from British culture. I think over the years we have not been able to breach that knowledge transfer. Giving back and at least sustaining this trade on a day-to-day basis is the greatest fulfillment.

Every day trade matters to us – we cannot interrupt our trade for a single hour. The sustained trade of this market is the most important and most fulfilling thing to me. We have to sustain it and make it robust in order to continue impacting more and more people. The farmers are going to become consumers and the consumers are going to consume industrial outputs – this is the ecosystem of our future. 



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