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June 13, 2012

A second wave of formal commodities trading takes hold in Africa

African countries are often urged to open up their agricultural markets by their 'development partners', but this is not as straightforward as it must seem to those dispensing this advice. Particularly for key 'political' food security crops like maize, there are times when there are very strong pressures for governments to be involved in their pricing and marketing.

In the 1990s, when the religion of 'structural adjustment' as defined by the International Monetary Fund reigned, many African countries established commodity exchanges. Among the positives they were designed to deliver were greater market information, more transparency in pricing and better prices and terms for farmers.

Almost none of the countries that seriously tried to have functioning commodity exchanges then still do. The reasons for the experiment not working quite as intended are many and varied, and depend on who you ask. The result is that there are sectoral auctions held (e.g. tea at Mombasa, Kenya or tobacco in Harare, Zimbabwe) but almost no countries with all-encompassing commodity exchanges. In particular, government price controls on maize are the norm rather than the exception.

Ethiopia is a recent exception to the rule. For a few years it has run a much-hyped commodity exchange. The  positive hype seems to mainly emanate from the exchange itself, so it is difficult to say whether it will in the long-run avoid the problems previous efforts in other countries have encountered.

But for now, other African countries are impressed and several seem eager to apply the Ethiopian example to their own circumstances.          

That is what 'Africa takes a second shot at commodities trading' in the Financial Times (UK) is about.

Writes Eleanor Whitehead, 'The ECX has been credited with giving farmers access to real time pricing information, improving profits and productivity, reducing market segmentation and boosting export quality. The stabilisation of domestic supply chains is also supporting agro-processors and exporters, diminishing concerns about once rampant contract default. All since its launch in 2008.'

Tanzania is just one country that has gone to the ECX to learn its secrets. others said to be in talks to have the Ethiopians help them set up their own exchanges are Ghana, Mozambique, Rwanda and Nigeria.

The article says 'Hopes for greater success this time around are higher because – unlike before – countries are learning from an African success rather than trying to transplant exchange models wholesale from more sophisticated Western economies.'

Eleni Gabre-Madhin, CEO of the ECX, is quoted as already excitedly looking at the possibilities of collaboration with other African exchanges.

“If more African countries build commodity markets we can start to cross-list and create regional indices: an African coffee index, a West African cocoa index, an East African coffee index, a cotton market – and
develop an African presence in global markets,” Eleni Gabre-Madhin says.

It sounds good but caution is required. Cross-border exchanges are an excellent idea given African countries' small and scattered production of many agricultural commodities, but it it is not difficult to foresee some of the structural problems that would prove daunting, as well as the political ones. Certainly there are a lot of in-country marketing problems that national exchanges could play a big role in helping ameliorate.

However, African governments are very unlikely to completely leave political food security crops like maize (or rice, even though most is imported, and mostly by private players) to the vagaries of the market.  And even in Ethiopia, if there is global glut of its economically key coffee crop, don't expect the government to just shrug and say, ''Oh well, the depressed prices for our main export crop is just a symptom of how the market works.'' Expect strong attempts by government to interfere with production/pricing to try to firm up those prices, ECX or no ECX.

Whitehead points out that one British purchaser of coffee through the ECX has cautioned its customers that it cannot vouch for the exact origins of the coffee (traceability). So clearly there is a lot of work still to be done for purchase through the ECX to be considered a seal of approval, but it is fairly early days yet.

African Agriculture

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