By Diane Bennett and Laura Freschi
We had really intended this would be a feel-good story of success:
This month, while the G8 continued their vague pledges of billions in food aid, Eleni Gabre-Madhin was busy bringing a market-based solution to the problem of food security in Ethiopia, as the CEO of the Ethiopia Commodities Exchange (ECX). After years of studying Ethiopia’s agricultural markets, Gabre-Madhin hit upon a central commodities market as a way to end the country’s deadly boom and bust cycle, which has seen overproduction and low food prices one year and famine the next.
The ECX has been running for a little over a year now, and lists five commodities traded on its website—coffee, sesame, beans, maize and grains. With a central trading pit in Addis Ababa, eight warehouses throughout the country, and market data being transmitted through a network of electronic display tickers, text messages, TV, internet and radio, the ECX is designed to reduce the burden of high transaction costs and excessive risk on farmers and traders, and increase access to information for small-scale farmers in remote areas.
In 2008 when the ECX was launched, the Economist called it a “bold experiment to improve the efficiency of agricultural marketing,” and Eleni Gabre-Madhin herself has been lauded as a visionary and a pioneer. (Gabre-Madhin is being profiled tonight on the PBS program Wide Angle in an episode called “The Market Maker”—watch the preview here.)
Unfortunately, it’s not quite that simple.
From the start, the FT alluded to the potential difficulties of a market-based solution in Meles Zenawi’s aid-dependent Ethiopia, “one of Africa’s most state-dominated economies.” The Economist noted that 6 out of the 11 seats on the ECX board would be filled by government officials, which is a massive PR problem in a place where there is precious little trust in the government.
A quick trip down the rabbit hole of the Ethiopian (English-language) blogosphere unearths plenty of cynicism from bloggers distrustful of what they have come to see as a government scheme to get their hands into the farmers’ pockets. The government did little to quell these fears when they accused 6 major coffee exporters of “hoarding,” revoked their licenses, and grabbed 170,000 tons of coffee to sell off at auction to boost Ethiopia’s lagging forex supplies.
The ECX seemed like a great idea. But in the real world of complex politics and conflicting viewpoints, we really are at a loss to say whether ECX has already been a success, or whether it will succeed in the future. Unfortunately, there are a lot more development case studies that are in this category than in the well-trod “inspirational success” or “illustrious failure” genres.
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Update: This post has been changed to correct a mistake in the second paragraph: “high food prices” was changed to “low food prices.”
18 Comments
Should that read “overproduction and *low* food prices one year…”?
Why would it matter whether arabica is “traded” in NY or in Addis, or not at all via an exchange ?
Do you really think that when locally based traders form Ecom or Volcafe want to sell 1000tons of premium coffee to Starbucks or Nestlé, that they have to do that contract via an exchange to get the best price?
@Tom Davies,
Yes absolutely, thanks for the catch!
Laura
GREEN SHHOTS? STEP ON THEM!
Actually there are numerous success stories from development radio activities, many documented in the book I co-authored. Unfortunately they all go back to the 1970s and 80s, were resounding successes by any measure – many formally evaluated – whether in educational supplements to primary and secondary schools, adult education, extension of all types: agriculture, health, business; and, yes even as a tool to reduce civil strife. So what happened ? They became ripe to be crushed by the development community both local and international who were abundantly jealous of something that works. It’s not supposed to.
SS
Note: For actual examples from the book go to University Press of America and type in “radio” in their search engine. Any proceeds will be donated.
I think Yilma Bekele has put the case about ECX excellently http://www.abbaymedia.com/News/?p=2300
ECX is fine in principle, but only goes so far (even in ideal sense). Another key issue is improving farm gate prices & value chains for smallholder producers, whereas benefits/profits from ECX trading more likely to accrue to the major agri traders in Eth, already making/taking upto 400% markup on farm gate prices.
@ misterz
“Another key issue is improving farm gate prices & value chains for smallholder producers, ”
We’ve been talking about improving farm gate prices and the value chain for the last 50 years. It is time to start talking about something else.
SS
Two points:
1. The ECX never really traded those 5 commodities as planned. It was realized later that the capacity was enough only for coffee, which has been traded there since December 08. (Sesame trade started recently.)
2. About farm gate prices: One of the main reasons for low farm gate coffee prices in Ethiopia is the long value chain and the discovery of “quality” far away from farmers. New reforms eliminated one step, but the information problem is still there. However, there are plans to do quality control in the coffee regions (as opposed to only in Addis in Dire Dawa) and to improve the technology to better disseminate price information to farmers. How effective these policies will be is anyone’s guess…
1. The ECX never really traded those 5 commodities as planned. It was realized later that the capacity was enough only for coffee, which has been traded there since December 08. (Sesame trade started recently.)
2. About farm gate prices: One of the main reasons for low farm gate coffee prices in Ethiopia is the long value chain and the discovery of “quality” far away from farmers along the value chain. New reforms eliminated one step, but the information problem is still there. However, there are plans to do quality control in the coffee regions (as opposed to only in Addis in Dire Dawa) and to improve the technology to better disseminate price information to farmers. How effective these policies will be is anyone’s guess…
Daviron and Ponte published a book called ‘The Coffee Paradox’ in which they pointed out that the high value parts of the chain were outside the control of local producers, as Aslihan Arslan has pointed out.
Then the problem in Ethiopia is that the coffee export market is not liberalized.
Farmgate prices on the coffee market in Uganda for instance move in tune with the NY or London prices,
and margins for traders & middle men are very thin ( of the 130+ exporters ten years ago, around 15 survived – the biggest 5 owned by multinationals softly lending cash when things go wrong, the rest is on life support).
Kenya did not liberalise the coffee market and farmer prices are much lower, therefore there’s a lot of kenyan coffee carried to the other side of mount elgon.
@Ashlihan Arslan: The value chain for washed arabica is the same everywhere in the world, so if Colombian, Ugandan & Rwandan farmers get much more cash for the same than yours, you’ll have to look at something else to blame.
By the way, it takes a trader less than 5 minutes to check the quality of coffee (parchment, cherries it takes one look) that farmers bring.
Most likely farmers are not adequately rewarded for the extra effort they put in. If they get a much better price for much better quality, you will be surprised how fast it goes.
I find it highly disturbing that on this blog dissenting opinions and criticism get removed.
I am still convinced that the posters of the above blog post have no idea what commodity trading involves or how it could improve a farmers’ life, let alone that they can detect flaws in it.
The common argument presented by western academia and Ethiopian dissidents, mainly around the theme of “Ethiopia’s government owned economy” only makes sense from (1) a pure (theoretical) academic angle and (2) geo-political motivations.
In expanding on #1, western academia mainly does not have practical experience not a real stake in trying to understand African (in this case Ethiopian) trade including little or no understanding of historical information, social impacts, and political implications. However, an academic can make a blanket statement on the lines of how Ethiopia’s economy is not liberal enough. This argument becomes increasingly challenged as one continues to factor in real life multipliers such as country history, geography, current political standings, religion etc.
#2 is pretty straight forward because this group is only interested in advancing their own political agenda and this could be a fair target to promote this agenda.
Bottom line is that in third world countries, the disparity between the rich and the poor is so vast that it would be virtually impossible for the poor to ‘catch-up’ with the rich, unless the government governs with a heavy hand, almost ‘controlling’ agro-businesses etc. This is needed to (1) protect the producers (farmers) from things such as price fluctuation (2) balance production surplus and defect across the land to diminish the inevitable effects of draughts (move crops from one location to another depending on need etc) (3) manage the export of a cashcow crop like coffee in order to tax it accordingly, protect its integrity and decrease the margin of “third parties” so that the profit is more at the hands of the producers.
The common argument presented by western academia and Ethiopian dissidents, mainly around the theme of “Ethiopia’s government owned economy” only makes sense from (1) a pure (theoretical) academic angle and (2) geo-political motivations.
In expanding on #1, western academia mainly does not have practical experience not a real stake in trying to understand African (in this case Ethiopian) trade including little or no understanding of historical information, social impacts, and political implications. However, an academic can make a blanket statement on the lines of how Ethiopia’s economy is not liberal enough. This argument becomes increasingly challenged as one continues to factor in real life multipliers such as country history, geography, current political standings, religion etc.
#2 is pretty straight forward because this group is only interested in advancing their own political agenda and this could be a fair target to promote this agenda.
Bottom line is that in third world countries, the disparity between the rich and the poor is so vast that it would be virtually impossible for the poor to ‘catch-up’ with the rich, unless the government governs with a heavy hand, almost ‘controlling’ agro-businesses etc. This is needed to (1) protect the producers (farmers) from things such as price fluctuation (2) balance production surplus and defect across the land to diminish the inevitable effects of draughts (move crops from one location to another depending on need etc) (3) manage the export of a cashcow crop like coffee in order to tax it accordingly, protect its integrity and decrease the margin of “third parties” so that the profit is more at the hands of the producers.
By the way, it takes a trader less than 5 minutes to check the quality of coffee (parchment, cherries it takes one look) that farmers bring.
That is because he only has the knowledge to make a cursory check. Checks must be made at each stage in the process of handling, as the bean may deteriorate at any stage, and as far as taste goes you need expert tasters. The importer will buy based on the reputation of the seller, and where you have wide varieties in quality, as seems to be the case in East Africa, then the price will be discounted.
The point is that the longer the value chain the less transparent the information as to quality control is. Add to that the fact that most coffee producing countries are not coffee consuming countries and you have an informational assymetry that works to the detriment of the producer.
@Stephen Jones: nice theory, but you seem to have no idea about how farmers view their products. And you are underestimating them badly.
Do you think poor people are per definition ignorant and stupid?
What makes you think that there are no “expert tasters” in coffee producing countries countries?
Poor people haven’t got any taste buds or what?
Farmers will “adulterate” good coffee if they have a price incentive to do so, but they will pick out all defects and handle the coffee extremely well, if the incentive goes the other way.
They know precisely the quality of what they sell, because they know what they harvested & pulped & how they handled it (fermenting, washing, drying,…).
With minimal extra inputs, farmers can produce gourmet coffees and they know it. It’s not rocket science, and all aspects are visible to the naked eye – unless you’re colour blind.
As recent as three years ago, Bugisu washed arabica was average quality mass produce. Now a significant share of the market is gourmet coffee, and thousands of (new) farmers are lining up to deliver the stuff.
Needless to say that this arrangement is highly profitable both for farmers & traders, without any aid money, government or “exchange” being involved.
People react to incentives. That’s all.
Because there isn’t a coffee drinking culture similar to that of the importing countries.
What you need to do is compare coffee with wine. When I buy a bottle of wine I often know the exact vineyard it came from. When I buy coffee it’s only at the high end of the market that you even know what country it came from (the only ‘Appellation d’origine contrôlée’ we have in coffee is Blue Mountain).
Once again, I suggest you read Daviron and Ponte’s The Coffee Paradox. The authors have spent decades studying agricultural commodities.
The vast amount of coffee sold in Italy is sold by brand (Lavassa, Illy, for example) rather than as single origin coffee. The green beans are imported and it is the roaster who has the control and the knowledge.
OK, you read a book. Congratulations.
The “expert tasters” I know personally, because I worked with them, simply don’t exist in real life because they don’t appear in your book?
What about people who spent decades trading (not “studying”) commodities, their opinion doesn’t count for you, unless they write a book?
You’re still avoiding the fact that the farmgate price of coffee is between 4-7% of the price of the packet of coffee beans you buy in the supermarket. This is true from the lowest quality Robusta to the highest quality Arabica (in fact the proportion going to the farmer is higher for the lower quality coffee because the price differential at the farmgate is less than the differential at the retailer).
The roaster makes nearly all the profit, pocketing 60-70% of the retail price. This is unheard of in most other agricultural products.
Now I’ll listen to you when you can explain this fact, because it’s what distinguishes the coffee trade from trade in other commodities or for example from wine which is a clear example of a differentiated product whose value chain is closely tied to the producer.
With regard to your expert tasters if they are capable of even knowing the blends the roasters use for each segment of the market I’ll take my words back. Each country has its own preferences with regard to blend and roast and that information is not in the hands of the producing country.