Established in 2008, the ECX is generally seen as a great African success story. Before the ECX, Ethiopia’s market for agricultural commodities was characterised by high costs and high risk of transacting. Sellers were struggling to find buyers and vice versa. Commodity buyers and sellers traded only with those they knew, to avoid the risk of being cheated. Enforcing contracts was also a challenge. Only one third of output reached the market. Trade was done on the basis of visual inspection because there was no assurance of product quality or quantity, which drove up market costs, leading to high consumer prices. For their part, small-scale farmers, who produce 95% of Ethiopia’s output, came to market with little information and were at the mercy of middlemen, unable to negotiate better prices for their crops.
The idea behind the ECX was to bring buyers and sellers of agricultural commodities, such as coffee and sesame, together in an open and transparent way. These days Ethiopian farmers can receive the latest crop prices on their mobile phones, or from electronic boards situated across the country. This information explosion has allowed 15 million coffee farmers to increase their share of the final price from 38% to 65%, as the margins to middlemen have narrowed.
The main reason for the success of the ECX is that it was tailored specifically for the Ethiopian market, catering for small farmers and traders. In addition to just providing a trading platform, the ECX built an entire ecosystem of services that includes the warehousing and quality grading of commodities.
A new chapter
Gabre-Madhin is now, however, aiming for bigger things: to build commodity exchanges across Africa and other frontier markets. Last year she stepped down from her position at the ECX to form Eleni LLC. The company has already attracted investment from the likes of Morgan Stanley and rock star activist Bob Geldof’s 8 Miles private equity fund.
The company is betting that after seeing the success of the ECX, other African countries now also want their own commodity exchanges. “Commodity exchanges throughout the world have emerged when buyers and sellers needed to connect in an efficient, reliable and transparent way. If you look at a global map of commodity exchanges around the world, you would see a glaring blank over most of Africa,” she says.
Gabre-Madhin believes that one of the biggest challenges facing farmers in Africa is finding markets for their produce. She says that improved farming techniques mean little if farmers can’t sell their crops.
“It is a green revolution arrested in its tracks if you can’t figure out how to market [farmers’ crops]. Every conference you go to, when they talk about agriculture, they end up saying access to markets is the big problem. It is the thing that nobody thought about when everyone was rushing to talk about production and productivity and better inputs and water and all those other things.”
One of the ways the ECX generates revenue is through trading fees – it takes a percentage on each transaction. There are also fees for things such as warehousing and laboratory certification. The ECX broke even in its second year of operations, and by the third year the exchange was profitable.
Gabre-Madhin believes that a commodity exchange needs to offer farmers and traders a compelling reason to use its platform. It needs to enable people to run their businesses better. “At the end of the day, if an exchange is not adding value to people’s lives – if it is not easier to use the exchange than not to – then an exchange cannot survive, cannot sustain itself. The value proposition at the core is efficiency, reliability, transparency.”
She is however not planning to merely replicate the ECX model in other countries. “There are still more innovations for us to discover as we go. Eleni, as a company, is not interested in replicating the Ethiopian model elsewhere, just as we were not interested in replicating the Chicago or South African [commodity exchanges] for Ethiopia… What we are doing – and what we are good at – is finding the sweet spot of innovation that will bring the highest impact.”
Gabre-Madhin says there is likely to be an announcement of a new exchange in the coming months, although she remains tight-lipped on exactly where this will be.
Africa should follow its own development model
Born in the Ethiopian capital Addis Ababa, Gabre-Madhin has held senior roles at the World Bank and the International Food Policy Research Institute in Washington, before taking up the ECX job.
She is a firm believer that Africa should follow its own growth path, and not blindly imitate Western or Asian development models.
“Africa can realise its full potential when it decides to not emulate any other region and to realise that Africa is actually forging a whole new history. The force of the youth, the power of mobile technology – the trends we are seeing in Africa – are actually going to make Africa have its own unique historical path…”
By: Jaco Maritz