Eleanor Whitehead is a reporter at This is Africa, focusing on business, policy and development across the continent.
A handful of African countries are setting up commodity exchanges in an effort to develop agricultural markets and improve food security. Are they the key to Africa’s agricultural growth?
When Ethiopia set up its now famous commodity exchange in 2008, few foresaw the ripple effect it would generate – least of all its founders. But in five years, the Ethiopian Commodity Exchange (ECX) has convinced stakeholders that bourses can improve food security in Africa, and has catalysed global dialogue about the development of agricultural marketplaces across the continent. Other countries are now looking to set up their own exchanges.
The ECX, whose trading volumes hit $1.4bn in 2012, up from $1bn in 2011, has given farmers access to real time pricing information, improved profits and productivity, reduced market segmentation and boosted export quality, advocates say. The stabilisation of domestic supply chains is also supporting agro-processors and exporters, diminishing concerns about once rampant contract default. Ethiopian coffee exports increased to $797m in 2011/12 from $529m in 2007/8, when the exchange was established, according to the International Coffee Organisation (ICO).
First to follow in Ethiopia’s footsteps has been Rwanda. Its East Africa Exchange (EAX), unveiled in January, has recently appointed a management team and will start trading agricultural and mineral commodities this summer. The EAX is being run by Africa Exchange Holdings, a company co-founded by investors including the Nigerian Heirs Holdings and New York-based Berggruen Holdings, whose aim is to develop a network of commodity exchanges across Africa.
Africa Exchange Holdings thinks that bourses can help develop agricultural markets by helping farmers sell at the right price. “We want to set up commodity exchanges across Africa because the continent is largely an agrarian economy – agriculture is the largest contributor to GDP as a whole and also the largest employer on the continent,” explains Sam Nwanze, chief executive of Heirs Holdings.
“But one of the problems that we see in the agriculture value chain is that the price discovery mechanism is not efficient: farmers will grow crops and sell them at a price based on how desperate they are for cash at the time – they do not play a role in determining the price even if their product commanded a premium on the international markets,” he says.
“One of the things that we think will develop the agricultural economy is if we could fix the issue of price discovery through commodity exchanges. That would also solve financing issues for the farmer, because he could take his products to a warehouse and get a receipt issued to him which becomes a financial instrument to gain capital to finance another cycle.”
The group hopes to position the EAX as a regional hub. “There is already a lot of intra-regional activity going on in east Africa, and we expect the EAX to serve the region. An exchange will help to enhance and put greater transparency on a lot of the activities taking place,” Mr Nwanze explains.
Nigeria is following suit. In May, the country’s National Council on Privatisation approved the privatisation of the beleaguered Abuja Securities & Commodity Exchange. The Nigerian government is currently developing the national storage infrastructure to facilitate the operation of a better-functioning, private-run exchange, after more than a decade of lacklustre public performance. “We expect that the first investment in the commodity exchange will kick off this year,” says the country’s agriculture minister Akinwumi Adesina.
“In Nigeria, the [new] commodity exchange will allow farmers to have access to markets on a more regular basis; it will improve price discovery in the marketplace, because you know the prices of all commodities in different areas; and it will improve the transparency and
efficiency of market dealings, because the farmers will know who they are selling to and there will be formal delivery contracts – so I think that the exchange will also help ensure quality of produce especially for international markets,” he says.
Africa Exchange Holdings will also be involved in the running of this new bourse, according to Mr Nwanze. Like Rwanda’s exchange, it has regional ambitions: “We expect that exchange to serve west Africa,” he says.
But other private investors have shown interest as well and the size of the market in Africa’s second biggest economy could warrant the development of other domestic exchanges, Mr Adesina says: “We need more than one exchange in Nigeria.”
Other countries are jumping on the bandwagon. In June, Kenya’s cabinet approved laws to establish a futures market for commodities trading, paving the way for an exchange that the government hopes will help farmers manage price risk. Africa Exchange Holdings is eyeing that market. “We are in discussions in Kenya, Tanzania and Uganda,” Mr Nwanze claims.
Competing with that group is Eleni Gabre-Madhin, founder and former CEO of the ECX, who this January launched a company to replicate her Addis Ababa successes elsewhere. “During my tenure at ECX 18 countries came to visit and expressed incredible interest in setting up exchanges. The company has been set up to help them do it,” she says.
While she declines to name countries, Ms Gabre-Madhin is hoping that by 2020 her company, eleni LLC, will have built up to 10 exchanges in Africa. Unlike the private African Exchange Holdings, eleni LLC will use a public private partnership model for her exchanges.
The company has received seed capital of $5m from Morgan Stanley, the International Finance Corporation, and 8 Miles, Bob Geldof’s pan-African private equity fund. It runs a two tiered investment model, meaning that those financiers will become core investors for each of the $20-$50m exchange projects the company implements, equating to a buy-in by those groups to the development of exchanges across the continent.
“We have gone from every major investment bank saying five years ago that there was nothing they could do in Africa, to everybody trying to figure out what their niche could be,” says Sara Menker, founder of Gro Ventures, and a former commodities trader at Morgan Stanley. “It is a very strategic move for Morgan Stanley to try to develop those agricultural markets, because once they are developed then they are positioned as big players there.”
The investor returns could be significant. Africa Exchange Holdings says it expects to generate double digit profits from its projects. And packaged as part of a broader reform agenda in more ambitious countries like Nigeria, there are high hopes for developmental success. “I have no doubt that in countries where agriculture is being taken seriously that commodity exchanges enable agricultural policies and translate into benefits for the livelihoods of millions of farmers,” Ms Gabre-Madhin says.
As good as it sounds?
But the exchange approach faces criticism, and careful analysis shows that even the ECX’s success may have been more tempered than its advocates suggest. With coffee prices rising, the absolute value that Ethiopian farmers are paid for their produced increased 79 percent to 115 cents/pound between 2007 and 2012. However, data from the ICO contest claims that farmers are receiving a higher proportion of the final price of their commodity in the market. In fact, farmers took home 51.6 percent of the export price of their product for the year ended September 2012, down from 57.1 percent in the year ended September 2007, before the exchange was established, the numbers reveal.
Critics argue that markets in Ethiopia are still heavily disjointed, and that smallholder farmers cannot access the exchange. The model prevents traceability and is a poor market for highly differentiated products like coffee, which risk being standardised, they say.
In London, the high-end coffee company Monmouth Coffee last year flagged up a concern with its Ethiopian offering: “As this coffee was bought and sold through the ECX, its traceability is limited… and full credit for the growing and preparation of the coffee cannot be given,” it said in a promotional flyer. “We hope that at some stage in the future the Ethiopian coffee board will reconsider its current strategy and permit all coffees in Ethiopia to be traded directly.”
Some countries have compelling alternatives in place. Ghana’s Cocoa Board already provides price transparency and guarantees to farmers, and has succeeded in cutting middlemen out of the value chains. In Tanzania and Kenya, traders claim that coffee auctions allow for greater differentiation and traceability than bourses.
“Exchanges may make markets more efficient, but there is no differentiation, there is no sampling of the product, and the products traded are just not traceable,” argues Dirk Sickmuller, managing director of Taylor Winch Ltd, one of east Africa’s largest coffee brokers. “In this day and age the consumer wants to know what they are buying and where it has come from. In Kenya and Tanzania the coffees are fully traceable and we know exactly who is producing what, where and when.”
New exchanges may be able to implement traceability measures – the ECX is already trying – but other factors may make its scale harder to replicate in other bourses. Chief among them are Ethiopia’s unique political and economic conditions, under which the state-run exchange is mandated, meaning that exporters can only procure products through the bourse. That model is unlikely to be repeated in African free markets. “Ethiopia is unique in that it has a very centralised view of the way things are run, and when you have those forces in your favour then the speed at which the exchange develops is a lot higher. When you don’t have that centralised control there will have to be something else that drives its success,” Ms Menker explains.
More broadly, concerns are mounting that commodity exchanges are being churned out without due consideration of enabling conditions. The failure of bourses in Zambia and Uganda show how important it is to have the right infrastructure in place from the start. Zambia’s bourse halted trading in July 2011 and has postponed its reopening pending legislation to certify warehouses. Uganda’s has not traded grain since a failed trade early in its history.
“A lot of these new exchanges are being entered into prematurely for many of the wrong reasons,” says one Malawi-based structured trade expert, who asked not to be named. “I can’t help but think that this is an idea that donors and investors are buying into, but without having done research on the need for an exchange within every given community.”
“The idea of having 54 different exchanges in 54 different countries, with 54 different policies and laws, is a disaster waiting to happen because it will just create an artificial price arbitrage that can be taken advantage of by traders who have enough capital,” Ms Menker argues. “What we need is for exchanges to create economies of scale and liquidity.”
Questions are being raised over the value of Rwanda’s new bourse. “From an agricultural perspective, Rwanda is not a big producer of much, so you have to question the rationale,” the Malawi-based expert says. “The infrastructure is poor, storage structures are not up to standard, the sanctity of grain within storage leaves a lot to be desired. The political situation is also uncertain, and nobody within it wants too much transparency. I can’t imagine there will be much success there.”
To create the necessary scale, one answer would be to develop regional exchanges – and Rwanda and Nigeria’s new bourses do mean to serve as hubs. eleni LLC, meanwhile, hopes to create regional indices for critical African produce. “If we get it right and set up exchanges across the continent we can link them up to create a solid, critical world reference price, especially for commodities where there are common interests like cotton or cocoa in west Africa, or coffee in east Africa. The world would use those to discover prices for African commodities,” Ms Gabre-Madhin says. “That cannot do anything but good for Africa’s production and for Africa’s economies.”
But creating regional exchanges will be a political as well as commercial endeavour, and poor infrastructure and political bickering are likely hamper imminent efforts.
In the meantime, countries should be paying heed to bigger market questions, the structured trade expert claims: “There are a number of issues that need to be taken into account in order to have a successful exchange: Is the market ready for it, from the farming as well as buying perspective? Is government on board and are they prepared to provide an environment that allows that exchange to function efficiently? Can you get the message across to people in rural areas? Are the banks, the government, private sector, producers, traders, processors on board? Is legislation consistent in agricultural policy, financial policy, trade policy?”
With many of those questions still unanswered across sub-Saharan countries, the new exchanges are likely to experience mixed success: “It is a proven mechanism but will work better in some countries than others, because it requires certain infrastructures to be in place – roads, warehousing, private sector participants,” says Tenbite Ermias, a partner a the Boston Consulting Group.
