Dessalew Zelalem

[Type the document title]
ADDIS ABABA UNIVERSITY

COLLEGE OF GRADUATE STUDIES
SCHOOL OF BUSINESS AND PUBLIC ADMINISTRATIONS
MBA PROGRAM IN FINANCE
Jan. 5
A written Research for inpartial Fulfillment of the Requirement for the

Degree of Masters of Business Administration in Finance
A research work on
“Challenges and Prospects of Commodity Exchange in Ethiopia. In the case of

Ethiopian Commodity Exchange (ECX)”
BY: Dessalew Zelalem
1
Thesis Advisor Ato. Abebe Yitayew (Asst. Professor)
DATE June/06/2011
Declaration
I the undersigned, declare that this thesis is my original work and has not been presented for a
degree in any other university, and that all source of material used for the thesis have been duly
acknowledged.
Declared by:
Name _______________________________________
Signature ____________________________________
Date ________________________________________
Confirmed by Advisor:
Name _____________________________________
Signature __________________________________
Date ______________________________________
Place and date of submission: Addis Ababa, June 2011.

Acknowledgements
The assistance many individuals have made this study possible. First of all, I would like to
acknowledge my thesis advisor Ato Abebe Yitayew (Assistant Professor), for his professional
guidance, constructive ideas, and comments.
My great thanks also go to the staffs, treading members and officers of Ethiopian commodity
exchange for providing me the necessary and available materials I need.
Finally, I want to express my deepest thanks for my families and friends who encouraged me by
providing material and financial support.
I
TABLE OF CONTENTS
ACKNOWLEDGMENTS............................................................................................................. i
TABLE OF CONTENTS ............................................................................................................ ii
LIST OF TABLES...................................................................................................................... vii
LIST OF FIGURES ................................................................................................................... vii
LIST OF APPENDICES .......................................................................................................... viii
ACRONYMS.................................................................................................................................ix
ABSTRACT...................................................................................................................................xi
CHAPTER ONE ...........................................................................................................................1
Background of the study..................................................................................................................1
1.1 Introduction of the study.........................................................................................................1
1.2 Statement of the problem........................................................................................................3
1.3 Objective of the study ............................................................................................................5
1.4 Significance of the Study…………………………………………………………………...6
1.5 Research Questions………………………………………………………………………….6
1.6 Scope of the study.................................................................................................................. 7
1.7 Limitation of the Study………...............................................................................................7
1.8 Organization of the Paper ...................................................................................................... 8
CHAPTER TWO.......................................................................................................................... 9
REVIEW OF THE RELATED LITERATURE..............................................................................9
2.1 Definition............................................................................................................................... 9
2.2 Functions and Possible Benefits of Commodity................................................................... 10
II
2.3 History of commodity exchange……………………………………………………………..10
2.4 How Does an Exchange Work? ............................................................................................. 14
2.4.1 A system that creates integrity and trust........................................................ ………….15
2.4.2 A system that generates market information………………………………………17
2.4.3 A system linked to warehouse receipts…………………….……………………….18
2.5 Experiences in commodity exchange in
neighboring East African countries………………………………………………………....20
2.5.1 Kenyan Experience in commodity exchange……………………………………...21
2.5.2 Ugandan experience in commodity exchange…………………………………………23
2.6 Overview of commodity exchanges in Ethiopia……………………………………………25
2.6.1. The Post-Reform Market Challenges…………………………………………………..25
2.7 The Problem of Economic Order…………………………………………….. …………….30
2.8 Ethiopia Commodity Exchange (ECX)…………………………………………...................32
2.9 Why an Exchange for Ethiopia? …………………………………………………………….33
Chapter Three…………………………………………………………………………………35
3.1 ECX and its modalities………………………………………………………....................35
3.2 ECX governance……………………………………………………………………..............37
3.3 Membership………………………………………………………………………………….38
3.4 Trading procedure…………………………………………………………………………...41
3.4.1 Warehouses…………………………………………………………………………..41
3.4.2 The Exchange Central Depository…………………………………………………...41
3.4.3 ECX Trading System………………………………………………………………. 42
III
3.4.4 Warehouse Receipt Financing………………………………………………..........43
3.5 Direct Specialty Trade…………………………………………………………………….44
Chapter Four……………………………………………………………………….................46
4.1 Methodology of the Study……………………………………………………..............46
4.1.1 Sampling Design………………………………………………………………………46
4.1.2 Data Collection Techniques/ Instruments……………………………………………47
4.1.2.1 Primary sources……………………………………………………………..47
4.1.2.2 Secondary Sources…………………………………………………………..48
4.1.3 Data Analysis Technique……………………………………………………………..…48
3.3 Administration of Data Gathering Instruments…………………………………………….................49
3.4 Anticipated Ethical Issues …………………………………………………………..............49
Chapter Five………………………………………………………………………………........50
Analysis the Major Findings……………………………………………………………………50
5.1 Respondents’ Background…………………………………………………………............50
5.1.1 Respondent's age & sex Background…………………………………………............51
5.1.2 Respondent's Academic Background…………………………………………………52
5.2 Surveyed challenges of Ethiopian commodity exchange………………………………....52
5.2.1 Infrastructure Development……………………………………………………………55
5.2.1.1 Physical infrastructure…………………………………………………………….56
5.2.2.2 Legal and regulatory infrastructure………………………………………………..58
5.2.3 Warehousing facilities…………………………………………………………………61
IV
5.2.4 Financial Market environment……………………………………………….............62
5.2.5 Macroeconomic stability………………………………………………………………65
5.2.6 Political tolerance to cereal price movements………………………………….66
5.2.7 Farm size and production organizations………………………………………………67
5.3 Prospects and outlooks of Ethiopian commodity exchange……………………………….68
5.3.1 Policy Rationale……………………………………………………………………...68
5.3.2 A large Domestic Market…………………………………………………………….68
5.3.3 Growth of new cooperatives……………………………………………………………. 70
5.3.4 Increase in commercial farms……………………………………………………….70
5.3.5 Increasing agro-processing linkages………………………………………………...70
5.3.6 Emergence of exporter firms………………………………………………………..70
5.4 Future Outlooks of Ethiopian Commodity Exchange……………………………………….71
5.4.1 The five Year Growth and Transformation Plan ……………………………………...71
Chapter Six……………………………………………………………………………………...75
6.1 Conclusion and Recommendation…………………………………………………………...75
6.1.1 Conclusion …………………………………………………………………………...75
6.1.2 Recommendation…………………………………………………………………….78
References ……………………………………………………………………………………....81
V
Appendix……………………………………………………………………………………….86
VI
List of Tables and Figures
Tables Page
Table 1 Respondent’s response………. ...........................................................................53
Table 2 Respondent’s response………………………………………………………….54
Table 5 Indicators of communications and transportation infrastructure…………….. 56
Table 6 Indicators of Contract Enforcement Capacity...............................….................59
Table 9 Table 4: Indicators of financial market development ……………...………….63
Table 10 Respondent’s response…………………………………………………………65
Table 11 Selected GTP targets ……….………………………………………………….71
Figures
Figure 1: Commodity Exchange functions and benefit ....................................................10
Figure 2: Age and Sex summary of respondents ...............................................................51
Figure 3: Academic background of respondents ...............................................................52
VII
List of Appendices
Appendix………………………………………………………………………………….86
Appendix 1: questionnaire for ECX officers (English).....................................................87
Appendix 2: questionnaire for members (Amharic).................................................. …..93
Appendix 3: Interview schedule with ‘ECX’ officers and member..................................99
Appendix 4: Organizational Structure ………………………………………………….100
Appendix 5: Selected GTP Targets……………………………………………………..101
VIII
Abbreviations and Acronyms
ACE Area Cooperative Enterprise
AMC Agricultural Marketing Corporation
ECX Ethiopian commodity exchange
ECEA Ethiopian commodity exchange Authority
GHA/EA Greater Horn Africa/ East Africa
UNCTAD United Nations Conference on Trade and Development
CBOT Chicago Board of Trade
OECD Organization for Economic Cooperation and Development
UNDP United Nation Development Program
EDRI Ethiopian Development Research Institute
IX
EGTE Ethiopian Grain Trade Enterprise
EOPEC Ethiopian Oil Seeds and Pulses Export Corporation
EWR Electronic Warehouse Receipt
USAID United State of American International Development
CIDA Canadian International Development Agency
USD United State Dollar
SMS Short Message System
IVR Interactive Voice Response
NEAA National Exchange Actors Association
TM Trading Member
IM Intermediary Member
CBE Commercial Bank of Ethiopia
IFC International Finance Corporation
WHR Warehouse Receipt
DST Direct Specialty Trade
GTP Growth and Transformation Plan
KACE Kenyan Agricultural Commodity Exchange
X
PACDEX Pan-African Commodities and Derivatives Exchange
RECOTIS Regional Commodity Trade and Information System
NCPB National Cereals Produce Board
EAGC Eastern African Grain Council
KCPT Kenya Coffee Planters and Traders
UCE Uganda Commodity Exchange
XI
ABSTRACT
The general objective of this study was to assess the current commodity exchange practices in
Ethiopia, in the case of Ethiopian commodity exchange. It also aimed to examine the existing
prospects to commodity exchange and to explore the challenges faced by the Ethiopian
commodity exchange. In order to meet these objectives, the study used qualitative research
methods to explore the current commodity exchange practices in the study area. Consequently,
stratified random sampling was used to select the informants of the study. The findings showed
that the development of commodity exchanges in the country is impeded by the relatively small
size of domestic commodity markets, weak physical and communication infrastructure, a lack of
legal and regulatory environments, and the likelihood of policy interventions, particularly in the
market for staple cereals. Meanwhile, the demand for a domestic commodity exchange for export
crops may be limited due to the availability of well-established exchanges. The paper also
highlights major prospects and future outlooks an exchange in the specific context of Ethiopia.
Finally, The paper also recommend: the goals of risk management and reduced transaction costs
in the Ethiopian commodity exchange might be achieved more effectively through investments
in transportation, warehousing, information services, or other financial institutions which could
support future establishment of a commodities exchange.
XII
Chapter One
Background of the study
1.1 Introduction
„Agriculture is a vital development tool for achieving the Millennium Development Goal
that calls for halving by 2015 the share of people suffering from poverty and
hunger…Three out of every four poor people in developing countries live in rural areas,
and most of them depend directly or indirectly on agriculture for their livelihoods… In
much of Sub-Saharan Africa, agriculture is a strong option for spurring growth,
overcoming poverty, and enhancing food security…Today, rapidly expanding domestic
and global markets; institutional innovation in markets and collective action…offer
exciting opportunities to use agriculture to promote development…‟ (Robert B. Zoellick,
President of the World Bank Group, World Bank 2007: foreword)
Linking small producers to markets is widely recognized as a valuable development
trajectory. It is for this reason that the DGIS-WUR partnership "Globalization and
Sustainable Rural Development" comprises a thematic research program "Value Chains
for Pro-poor Development" related to value chains in the context of sustainable
development and poverty reduction. One of the targets of the program is to contribute
towards a more efficient agriculture product value chain with a focus on how to improve
livelihoods for all chain partners. An important element in making value chains more
1
efficient is to reduce transaction costs and risks. In this regard, the Ethiopia Commodity
Exchange (ECX) is expected to play an important role as platform for transparent and
cost effective marketing.
The Ethiopian Commodity Exchange (ECX) is a public-private partnership initiative
firm; establishment was founded on Proclamation No. 550/2007. This proclamation
mandates ECX to develop its own rules for the governance of its various operations.
Further, the Ethiopia Commodity Exchange Authority (ECEA) a regulatory body of the
ECX was established by Proclamation 551/2007, launched in Addis Ababa, Ethiopia, on
April 24, 2007. ECX‟s mission is:
"To establish a Commodity Exchange in Ethiopia of the highest integrity, available to
Ethiopian as well as regional and international traders, based upon an open free market
system for the mutual benefit of sellers and buyers, and to facilitate the procurement and
marketing of any commodity provided or desired by any consenting parties through the
auspices of the Commodity Exchange."
ECX has the following three goals:
 To serve as a market for sellers and buyers, exporters and importers of
agricultural commodities in Ethiopian, regional and world markets.
 To provide reliable commodity market information on supply, demand, prices
and their trends in domestic, regional and world markets.
2
 To establish fair commodity market prices for both sellers and buyers through a
system of competitive and transparent trading on the floor of the Exchange, i.e.,
price discovery.
Since its establishment, ECX has set up a trading floor at the Mexico sub-city Show
Grounds in Addis Ababa, where trading of commodities is conducted. The floor is open
for trading limited types of agricultural commodities: crops such as coffee, sesame,
Haricot bean, Maize and Wheat. However, the performance of ECX since its launch a
four year ago has been less than impressive. This research addresses some of the factors
that explain this under-performance, and explores the potential and opportunities for
overcoming them.
1.2 Statement of the Problem
Governments in the Greater Horn of Africa and Eastern Africa (GHA/EA) region have
individually set targets for industrialization of the economies by the year 2020. Since the
economies are depended upon the agricultural sector, Industrializations of this sector is a
prerequisite for the industrialization of the other sectors in the economy. Improved
agricultural marketing and trade will contribute immensely to the industrialization of the
agricultural sector. (Adrian W. Mukhebi, 2004)
In Ethiopia at present, the presence of high transaction costs, related to the lack of
sufficient market coordination between buyers and sellers, the lack of market
information, the lack of trust among market actors, the lack of contract enforcement, and
3
the lack of grades and standards, implies that buyers and sellers operate within narrow
market channels, that is, only those channels for which they can obtain information and in
which they have a few trusted trading partners. Despite market liberalization in the early
1990s, the persistence of high transaction costs and contract risk have resulted in limited
arbitrage and weak investments by private traders, leading to limited market volumes,
weak responsiveness to price signals and high price volatility, all of which have a
negative impact on smallholder producer livelihoods.
The initiative to establish the Ethiopian Commodity Exchange was based on this concept.
If markets function as to reward quality, reduce transaction costs of market participation
thus increasing returns to market activity, enable quick capital turnaround thus increasing
market volumes, and reduce risk of market participation, then markets will serve the
needs of buyers and sellers and contribute to the well-being of all who participate in the
market economy (ECX, 2006). Thus, it is anticipated that ECX will reward quality to
producers; reduce transaction costs of market participation thus increasing returns to
market activity; enable quick capital turnaround thus increasing market volumes, and
reduce risk related to counterparty default and prices, thus increasing market
participation; increase information and transparency for all market actors, thus
empowering smallholders and other disadvantaged actors.
The program was started in the year 2007. Through the program has been in place for the
last four years, there is a hardily any study on the prospects of the program has contribute
economic development and in what ways. In addition, there is no study made on the
4
determents/challenges of the program. Therefore, this study attempts to fill this gap and
contributes to the literature on the commodity exchange aspects of projects in Ethiopia.
Hence, this paper wants to answer the following research questions; is there exists a
significant challenge that affects the key market actors in ECX with respect to-
infrastructure development, macroeconomic stability, government policies, commercial
and financial sectors development, farm size and production organizations. Finally, the
paper will answer there exists a significant opportunities that encourage the key market
actors in ECX with respect to- economic growth, government policies and infrastructure
development of the country.
Against this backdrop, the objective of this research is to highlight and analyze the
prospects and challenges of Ethiopian Commodity Exchange.
1.3 Objectives of the Study
The prime objective of the study is to explore the prospects and challenges of commodity
exchange in Ethiopia. To this end, the study attempts to address the following specific
objectives,
 Assess the challenges that affect the key market actors in the ECX
 Review the opportunity prevailing in operating commodity exchange in
Ethiopia.
 To identify the main bottleneck and potential solutions of the ECX.
 To provide recommended solutions to help the program implemented
successfully.
5
1.4 Significance of the Study
There is a need to address the issue a marketplace where buyers and sellers can come
together to freely trade and are assured of quality, delivery and payment. This study
focuses on commodity exchange, a strategy designed new marketplace that serves all
market actors, from farmers to traders to processors to exporters to consumers.
Accordingly, the study is going to assess the scenario of the program and identify
determents of Ethiopian commodity exchange. Therefore, the finding of this study will be
useful to help policy makers and Ethiopian commodity exchange to make clued-up
decisions regarding their service deliverance mechanisms for better. And also the study
will contribute to the literature of the country on the subject. Moreover, the study
indicates the boulevard interested researchers to carry out more extensive studies for
further research work.
1.5 Research Questions
The objective of this study is to carry out the prospects and challenges of commodity
exchange in the country to achieve the state objectives of the study, the following
research questions are formulated;
1. Is there exists a significant challenge that affects the key market actors in ECX with
respect to-
 Infrastructure Development
 Physical infrastructure
 Legal and regulatory infrastructure

6
 Warehousing facilities
 Macroeconomic stability
 Farm size and production organizations
 Commercial and Financial Sectors Development
2. Is there exists a significant outlook that encourage the key market actors in ECX
with respect to-
 Economic growth of the country
 Government Policies
 Infrastructure Development
1.6 Scope of the Study
In this study, the researcher only evaluated the challenges of commodity exchange with
respect to infrastructure Development, Macroeconomic stability, Government Policies
and Commercial and Financial Sectors Development, challenges like political instability,
social and environmental factors that could affect the performance of commodity
exchange was not considered.
1.7 Limitation of the Study
Though the study presents a comprehensive theme over the succeeding chapters, it is not
free from limitations. There was a confront in conducting the study due to the limited
time frame and the limited access information, when the researcher inquires respondents,
they were hesitating of the purpose of the study and show the sort of reluctant to offer
7
the correct information. To the managements and directors of ECX as they are usually
busy, and some of these bodies were not willing provide information that they think is
confidential. It was also difficult to gather sufficient information for the study due to the
limited number of related prior research works regarding the commodity exchange
Practices in Ethiopian context.
1.8 Organization of the Paper
The study is organized in to six chapters. The first chapter deals with the background of
the study, statement of the problem, objectives of the study, the research questions, the
significance of the study, and Scope of the study. The second chapter discusses Review
literature of the study. The third chapter summarizes the overall functions and Modalities
of ECX. The fourth chapter deals with methodology of the study. Chapter five focuses on
the analysis the major findings. Finally, chapter six encapsulates the major issues raised
in the study and provides conclusion as well as recommendations.
8
Chapter Two
Review Literature
The review of the related literature deals with definition of key concepts and terms,
History of commodity exchange, how does an Exchange Work, Experiences in
commodity exchange in neighboring East African countries, Overview of commodity
exchanges in Ethiopia, The Problem of Economic order, Ethiopia Commodity Exchange
(ECX), why an exchange for Ethiopia, The issues well be discussed in this chapter are
relevant for the analysis of the study.
2.1 Definition of key Concepts and Terms
 Commodity Exchange is an exchange where various commodities and
derivatives products are traded. Most commodity markets across the world trade
in agricultural products and other raw materials (like wheat, barley, sugar, maize,
cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts
based on them. These contracts can include spot prices, forwards, futures and
options on futures(UNCTAD report,2009)
 DGIS-WUR Wageningen UR Partnership Programme on „Globalisation and
Sustainable Rural Development‟ (Synthesizing Workshop December 9, 2010)
9
 Spot: Contracts to buy and sell the physical commodity resulting in (near-)
immediate physical delivery (UNCTAD report, 2009).
 Futures: Contracts more commonly used as financial instruments for hedging,
speculation and arbitrage, which may result in the future delivery of commodities.
 Membership Seat is a permanent and transferable right to trade on the Exchange.
Members can be any individual, company, public enterprise, or cooperative that
meets the membership requirements (www.ecx.com.et)
 Clearing house Receipt a document certifying possession of a commodity in a
licensed warehouse that is recognized for delivery purposes by a commodity
futures exchange (Gideon Onumah, 2010).
2.2 Functions and Possible Benefits of Commodity Exchange
Functions Possible Benefits Arising

Price Discovery More efficient price formation
Price risk Effective transfer of price risk

Management
The Commodity Improved investment

Investment environment
futures exchange Venue
Generates accurate & transparent

Facilitation of
spot reference prices
Physical trade
Facilitation of
Financing Enable bank lending and other
methods
Market
Development Education and capacity-building
Figure -1- Exchange functions and benefits (source: UNCTAD, 2009)
10
2.3 History of commodity exchange
Exchange trading emerged in the 1840s, when Chicago became a commercial centre
with railroad and telegraph lines connecting it with the East of the United States of
America. Prior to that, grain traders in Japan had experimented with the idea in 1730.
Chicago attracted Midwest farmers hoping to sell their wheat for a good price. In 1848, a
central place was opened where farmers and dealers could meet to deal in "spot" grain -
that is, to exchange cash for immediate delivery of grains such as wheat. The Chicago
Board of Trade (CBOT) was launched in 1864 and followed in 1877 by the London
Metal Exchange. Though there were early initiatives in India and Argentina to promote
commodity exchanges, it was only in the 1990s that the number located outside of the
OECD countries grew very rapidly (Rashid et al. 2008).
A commodity exchange is an institutional response, at a basic level, to the fundamental
problem of achieving self-coordinating market order in the trade of agricultural products,
which by their nature, are risky. One of the world‟s largest and oldest commodity
exchanges, the Chicago Board of Trade, was established in 1848 by 82 grain traders in
what was then a small Midwestern town, in conditions not too different from that of
Ethiopian agriculture today, in response to a bumper harvest when farmers who went to
Chicago and could not find buyers had to dump their unsold cereal in Lake Michigan.
This strikes a hauntingly familiar chord for those who recall that Ethiopian farmers left
grain to rot in the fields in 2002 as prices collapsed. The challenges that US markets
11
faced 150 years ago were not much different from what they face today, or what
Ethiopian markets face today: to coordinate the exchange of grains and livestock
produced across dispersed locations and dispersed producers to major markets hundreds
of miles away (Tafara, 2005).
A brief history of the development of the Chicago market reveals that, while responding
to the initial problem of coordinating exchange in a low-cost manner, the market system
itself evolved as the sophistication of the market increased and as economic growth
progressed. In other words, the Chicago exchange did not start as the sophisticated
market it is today. In the 1840s, as grain production increased in response to
technological innovations in the American Midwest, farmers used to come to Chicago to
sell their grain to traders, who would ship it all over the country. When farmers came to
the market, they came without prior knowledge of market prices and the city had few
storage facilities and no established procedures for weighing and grading the grain,
leaving the farmer at the mercy of the trader. In 1848, the Chicago Board of Trade
(CBOT) opened as a central place where farmers and traders could meet to exchange cash
for immediate delivery of wheat, but with certain established mechanisms by the Board
for grading and weighing the wheat, for storing it if no trade occurred, for bidding on its
price, and for resolving disputes that occurred. As both producers and buyers experienced
the advantages of this system, it was a matter of a few years before farmers and traders
evolved the practice of forward contracts in 1851. Thus, a farmer would agree with the
12
trader on a price to deliver a certain quantity of grain at a future time. The deal was
advantageous to both parties in that the farmer knew in advance his market price and the
trader knew his costs. As these contracts common, they began to be used as collateral
against bank loans and began to exchange hands before the physical delivery itself. Thus,
a farmer might pass on his obligation to deliver to another farmer, with the price going up
or down depending on what was happening in the market. As these “forward contracts”
became common over a 15 year period, CBOT introduced in 1865 a standard contract
known as a “futures contract” with a pre-specified delivery date and a margin
requirement to act as a performance bond. This innovation reduced the risks and costs
associated with negotiating forward contracts on an individual basis (stiglitz, J.E., 1974).
Alongside these developments, CBOT was chartered officially by the state in 1859 (a
decade after first opening), and therefore mandated to set standards of quality, product
uniformity, and undertake routine inspections of the grain traded in the exchange, in
order to maintain the integrity of the market. It was not until 1922, some 74 years after
the Chicago market first opened, that the government established the Grain Futures
Administration, as a regulatory body to oversee the expanding grain market. It was not
until 1967 that CBOT began the electronic display of market prices, reducing the price
reporting time to seconds. What is salient from this quick historical overview is that the
Chicago market was established and evolved to resolve the real problems of transaction
costs and risks faced by farmers in the market and the need to coordinate the exchange of
13
agricultural goods across actors, across space and time. It is also important to note that
state regulation, increasing in scope as the market grew, followed the market rather than
led it (UNCTAD Report, 2009).
Following the sweep of market liberalization across the globe, emerging exchanges are
rapidly growing in developing or transition countries to fill the gap left by marketing
boards and fixed price systems. There are currently more than 100 of these exchanges
across developing countries: 28 in Latin America (15 of them in Brazil), more than 20 in
Asia, 3 in Africa, 4 in Eastern Europe, and several in Russia (UNDP Report, 2006). Most
of these exchanges have been created since 1992.
2.4 How Does an Exchange Work?
Most exchanges, even when they have a virtual or electronic trading system, operate in a
physical place, with an exchange “floor” on which trading occurs. The exchange floor is
typically organized by commodity. A common misperception is that a commodity
exchange determines or establishes the prices of traded commodities. This is incorrect.
Prices are determined solely by supply and demand conditions. If there are more buyers
than sellers, prices will be forced up. If there are more sellers than buyers, prices will be
forced down. Thus, buy and sell orders, which are channeled to the exchange floor for
execution, are what actually determine prices. The orders to buy or sell are done by
public outcry, rather than by private negotiation, and the prices at which transactions are
14
made are recorded and released publicly by the exchange as soon as possible, generating
market transparency. In comparison to an auction where the emphasis is on selling,
trading on a commodity exchange is like a continuous two-way auction, in which bids to
buy are going on simultaneously with offers to sell. This is possible because the graded
product needs no description with a standardized contract and because there is sufficient
volume of both buy and sell orders. The exchange itself does not operate for profit, but
merely provide an organized market place for buyers and sellers.
Clearly, the key to a successful exchange is to bring about the needed highest possible
concentration of buyers and sellers into a single market mechanism in an efficient, low-
cost, and manner. To do so requires that the market operate with certain basic rules and
with certain types of actors. These characteristics or operating modalities are precisely
what distinguish what is known as a commodity exchange from a typical central
wholesale or terminal market (Ethiopian Development Research Institute, 2005)
2.4.1 A system that creates integrity and trust
A commodity exchange operates with a certain set of rules or conventions that are widely
known. These rules pertain to four key dimensions of the market: the product, its price
determination, the actors, and the contractual relations that bind them. These rules and
modalities together create much needed integrity and trust in the system. To begin, goods
traded on an exchange must be standardized according to known standards of quality and
quantity. The grading and certification of grade must be done by licensed inspectors that
15
are qualified and regulated. Grading can by do through a laboratory based at the
exchange on a sample basis or by other parties, such as the state or private actors. What is
critical is that the product grades are widely accepted by the market and are developed
with the participation of all market actors, including farmers, traders, processors, and
consumers. The certification must be considered by all to be fair and neutral. Thus,
whether the grading is done by the exchange or not, a key function of the exchange is to
ensure that goods are brought to the market properly graded.
Second, an exchange operates a given system of price bidding that is aimed at publicly
displaying buy and sell offers in a transparent and low-cost manner. Some exchanges
operate on the basis of an “open outcry” system in which market actors in on the
exchange floor cry out their bids and orders in a public fashion. Alternatively, an
exchange may operate with an actual or a virtual “bulletin board” on which bids and
offers are posted publicly. The key is that the price bidding is done openly rather than
privately.
Third, in order to ensure that the rules are followed, exchanges operate with membership-
based trading, where membership is based on the ability to comply with the rules of the
exchange and to meet certain standards. Moreover, since chaos would quickly result if
membership were continuously open to increasing numbers, membership in an exchange
is fixed. In addition to an annual fee, the actual seat or membership on an exchange floor
is paid for with an initial price, much like a share, and can be bought or sold on the
16
market. This ensures that members have a stake in the performance of the market and
thus uphold its trust and integrity.
How then can large numbers of buyers and sellers be integrated into the market if the
members who trade on the exchange are limited? Brokers are the key set of actors on an
exchange who, as members of the exchange, trade on behalf of an unlimited number of
buyer and seller clients. The function of brokers, whose duty it is to advise their clients,
whether buying or selling, as to the best market opportunities and when and where these
are likely to occur, provides significant empowerment to market participants. However,
because of their central role, brokers must be specifically licensed and inspected in their
function. The integrity of brokers is at the core of the integrity of the exchange itself.
Exchanges are essentially self-regulatory systems which prescribe rules and codes of
ethics to which all market actors that are registered with them need to strictly adhere to
(Ethiopian Development Research Institute, 2005)
2.4.2 A system that generates market information
 A core attribute of an exchange, implied within the four dimensions noted above,
is that it enhances market transparency through generating and disseminating
information. Through its own functioning, the exchange creates market
information about the underlying supply and demand conditions in the economy.
Thus, contrary to popular perception, a commodity exchange does not require an
17
external market information system as a pre-requisite to its proper functioning. An
exchange becomes the market information system as it undertakes its function of
price discovery based on the public posting of buy and sells orders. When the
volumes of trade on the exchange are sufficiently large to justify that price
discovery according to true market fundamentals is occurring, then the
dissemination of that information of market prices provides a great service to the
market, and the wider economy. This fact alone is a compelling reason to justify
an exchange(Eleni Z. Gabre-Madhin and Ian Goggin, 2005)
2.4.3 A system linked to warehouse receipts
By storing their goods in a reliable warehouse, farmers can use the warehouse receipt that
is issued as loan collateral and thus access finance without selling their goods. A common
misperception is that a warehouse receipts system is primarily a price stabilization
system. First and foremost, it is a system of financing, which is its primary purpose.
However, it can have positive impacts on price stability by encouraging storage just after
harvest, but this is not guaranteed. However, while the receipt is an important mechanism
for farmers to reduce their cash constraint, it must be considered that it also entails
speculative activity by farmers, with high risk implications, because farmers who are
receipt holders are thus taking a position in the market with some judgment about the
future direction of prices. This factor alone has led to the demise of many inventory credit
schemes over the past few years across sub-Saharan Africa. To overcome this risk to
18
farmers, warehouse receipts can be made transferable, so that farmers can transfer the
speculative risk through sale of the receipt. Thus, through linking a receipt program to a
commodity exchange, receipts can be traded on the exchange and enable the transfer of
risk in an organized fashion. The chances of success for a warehouse receipts system are
considerably higher if it is linked to a functioning exchange on which receipts can be
traded.
The viability of a warehouse receipts system depends on the extent to which there is
discipline and trust in the warehouse, like the commodity exchange, integrity is key. In
addition, the viability depends on the economies of scale to save costs of oversight and
administration, the reduction of costs of financing that are passed on to farmers, finding
the correct balance of regulatory oversight by state, and the bond and insurance
requirements against default, loss or theft. For a transferable receipts system to be viable,
there needs to be specific licensing of warehouse operators, a tracking system to register
every change of ownership (to ensure only one party has legal title), and the
establishment of clear legal rights for receipt bearers and of receipts as documents of title
(mortgageable).
Clearly, a transferable warehouse system is highly complementary to the functions of the
exchange. The receipts system goes hand in hand with a commodity exchange in that:
 Grades and standards are essential to warehouse operations as well as to a
commodity exchange with standardized contracts;
19
 Price transparency is achieved because receipts indicate a specific grade, which
generates price information that can also be used on the exchange;
 Risk is transferred by selling receipts on the exchange; and,
 Integrity and order: the legal enforcement of quality and of the transferability of
the receipt is vital for both the warehouse receipts system (Eleni Z. Gabre-Madhin
and Ian Goggin, 2005).
2.5 Experiences in commodity exchange in neighboring East African countries
The gradual liberalization of agricultural trade combined with the reduction of
government support to agricultural producers outside the OECD, heightened the interest
in the use of risk management and other modern financial instruments, including
commodity exchanges, in the developing world (UNCTAD, 2006). In recent years, there
is substantial growth in emerging commodity markets driven by the continued growth of
existing exchanges, particularly those in China and India, and also by the rise of other
exchanges situated in emerging markets.
In Africa, the Pan-African Commodities and Derivatives Exchange (PACDEX) initiative
has stimulated the development of national exchanges in a number of countries, including
Nigeria, Ethiopia, Kenya and Uganda (its establishment has been strongly supported by
the African Union). The PACDEX model comprises a hub in Botswana managing a
common exchange, as well as a back-office platform that links together various national
exchanges and warehouses to facilitate regional trade in contracts across the agricultural,
20
metals, energy and currency sectors. The experiences with the commodity exchange in
Kenya and Uganda are reviewed below
2.5.1 Kenyan Experience in commodity exchange
Currently, Kenya has three commodity exchanges: The Nairobi Coffee Exchanges
dealing with coffee, the Tea Auction in Mombasa, and the Kenya Agriculture
Commodity Exchange (KACE), a spot exchange that deals with a variety of commodities
but mostly maize and beans.
The Kenya Agricultural Commodity Exchange (KACE) is a private sector firm that has
been in operation in Kenya since 1994. KACE has been an important private sector
initiative that has made significant contributions to agricultural marketing in the country,
and to smallholder farmers in particular in two ways: linking producers and buyers of
agricultural commodities, and provision of market information for commercial actors
within the subsector.
However, KACE faces several challenges among which the following two are the most
important: (i) the poor quality of produce that farmers deliver combined with the fact that
most small-scale farmers find it difficult to deliver in bulk which is ideal for an exchange;
and (ii) most of the commodities in Kenya are heavily regulated by boards and are grown
and marketed in an environment of struggling cooperatives, which are inefficient,
mismanaged and have cumbersome internal bureaucracies. (Mukhebi, 2004).
21
To overcome the stated challenges, KACE is supporting smallholder farmers to organize
themselves into marketing associations in order to cost-effectively access market and
information services provided by the exchange. This allows them to consolidate supplies
of marketable quality commodities for offer through the exchange, and purchasing of
inputs in volumes to achieve economies of scale. In addition, KACE‟s electronic market
information system, the Regional Commodity Trade and Information System
(RECOTIS), is providing market information throughout the eastern and central Africa
region to promote regional trade.
In general, faced with fragmented markets, government intervention and significant
infrastructural deficiencies, trade through KACE has always been minimal. Instead, focus
has been on information dissemination with KACE acting as a provider of paid-for price
information, a business model supported by private sector partnerships and aid donor
funding.
For June 2010, the Nairobi bourse plans to launch a commodities exchange by a joint
effort of the National Cereals Produce Board (NCPB), the Kenya Agricultural
Commodities Exchange (KACE), Eastern African Grain Council (EAGC) and Nairobi
Stock Exchange. It will consist of a platform where futures can be traded. The market
will initially trade major grains produced in East Africa, including maize, wheat, rice and
beans but will ultimately trade other agricultural commodities, including inputs such as
fertilizers and seeds.
22
The plans have met with some criticism. Kenya Coffee Planters and Traders (KCPT), the
association that runs Nairobi Coffee Exchange, said the country has not established the
fundamentals for a credible commodities exchange. Experts reckon that for a
commodities exchange to work in Kenya, the government needs to back the initiative
with sound legal and regulatory frameworks such as enacting a Commodities Exchange
Act and a Warehouse Receipts Act. The system also requires major improvements in road
networks connecting farms and a substantial investment in NCPB facilities to fit them
with modern equipment like sievers and driers to enable hold grains for longer periods
(Omondi 2010).
2.5.2 Ugandan experience in commodity exchange
Uganda Commodity Exchange Limited (UCE) is a corporate entity registered in 1998
through the initiative of private sector players with four founding shareholders namely,
the Ugandan Cooperative Alliance, Ugandan Coffee Trade Federation, National Farmers
Association and Commercial Farmers Association. The UCE became operational in 2002.
The commodities currently traded at the exchange are coffee, sesame, maize, beans, soya
beans, and rice with quantity specification of minimum 10 tons per lot for every
commodity (UNCTAD, 2006).
UCE aims to serve several objectives. One objective is to help link producers and buyers
easily and cheaply and to make the process of price discovery more transparent. A second
objective is to ensure that only standard commodities are traded. The commodity
exchange is linked to the Warehouse Receipt System and UCE has been delegated the
23
regulatory function of warehouse receipts. Standards are being developed to ensure that
farmers produce what the market requires to avoid wastage that currently characterizes
production of rural producers. Once standard commodities are available in the rural areas,
exporters will be assured of supply and farmers will get good prices through the exchange
(Dawit Alemu & Gerdien Meijerink, 2010).
There have been a few auctions on the floor of the exchange with encouraging results, but
operations had to be suspended to improve the system with the assistance of the European
Union. There are several initiatives aiming at enabling farmers to access markets and
have better bargaining power through bulking. One of these initiatives includes the
formation of Area Cooperative Enterprises (ACEs). These ACEs are formed by primary
societies to handle input distribution, bulking of farmers agricultural commodities, which
they sell to most the competitive buyer. In order to ensure predictable quality, some have
started value addition. It has been mainly the ACEs that have utilized the services of both
the UCE and WRS so far.
A quick survey between 18 May and 8 June 2010 of the UCE shows the level of activity
of the UCE. The UCE appears to trade only in maize. On 18 May 2010, the total amount
of maize open for sale was around 1.620 tonnes of maize (32 bids) with an average price
of 562 USh. One week later, the total amount for sale was 465 tonnes with an average
price of 433 (21 bids). Finally on June 8th, the total amount for sale was 1.335 tonnes
24
with an average price of 473 USH (32 bids). So it seems that the UCE is active, but that
is trading activities are limited (Omondi 2010).
2.6 Overview of commodity exchanges in Ethiopia
2.6.1. The Post-Reform Market Challenges
Like many other countries in sub-Saharan Africa, the Ethiopian grain economy
underwent a dramatic market reform in the early 1990s with the nearly complete
liberalization of the grain market. Prior to these reforms, for sixteen years until 1990, the
Dergue government tightly controlled trade, through cooperatives and its parastatal
agency, the Agricultural Marketing Corporation (AMC), initially set up in 1976 with
World Bank support for the purpose of purchasing grain and distributing it to consumers
(Lirenso, 1993). In this period, policies included fixed pan-territorial grain prices,
restricted private inter-regional grain movements, limited private sector participation, and
a producer grain quota (Fisseha, 1994; Lirenso, 1987; Franzel, Colburn, and Degu, 1989).
Farmer quotas to the AMC amounted to 10 to 50 percent of the harvest at fixed AMC
prices that were consistently below market prices, which had the effect of depressing
rural incomes and production (Dercon, 1995).
In March 1990, a dramatic market reform lifted, overnight, all restrictions on private
trade and eliminated official prices and quotas. Subsequently, in 1992, the Transitional
Government continued reforms through eliminating wheat consumer subsidies and
25
downsizing the AMC, through closing all eight zonal offices, reducing its branch offices
from 27 to 11 and its grain purchase centers from 2013 to 80. It was renamed the
Ethiopian Grain Trade Enterprise (EGTE) with a new mandate of stabilizing prices and
maintaining buffer stocks. Unlike most post-reform African states where marketing
boards continued to dominate trade, the EGTE plays a relatively minor role, with only a 2
to 5 percent share of the domestic market (Jayne, Negassa, and Myers, 1998). In 1999,
further reforms involved merging EGTE with the Ethiopian Oil Seeds and Pulses Export
Corporation (EOPEC) and re-establishing it as a public enterprise, no longer required to
stabilize grain prices, with the major objective of operating for commercial profitability
by focusing on exportable grains (Bekele, 2002). Because market reforms resulted in the
nearly total withdrawal of government intervention from the market, it was considered by
an MSU study in 1998 that the reforms enacted in Ethiopia constituted a particularly
important test of the hypothesis by the international community that the liberalization of
markets would reduce costs and catalyze growth in production (Jayne, Negassa, and
Myers, 1998).
What then were the impacts of these market reforms? Numerous studies have
documented the effects of these policies (Dadi, Negassa, and Franzel, 1992; Lirenso,
1993; Dercon, 1995; Negassa and Jayne, 1997; Dessalegn, Jayne, and Shaffer, 1998;
Gabre-Madhin, 2001, Gabre-Madhin et al, 2003). As predicted, these analyses revealed
that liberalization did indeed result in a significant re-engagement of the private sector in
26
grain trade, improved market integration, and the reduction of marketing margins.
However, very importantly, these studies also pointed out the reforms did not have the
envisaged impact on agricultural growth and poverty reduction. Why? First, despite the
narrowing of price spreads or margins, market reforms did not reduce the volatility of
grain prices and may have indeed exacerbated it. Linked to this, significant constraints to
market performance remained which led to the persistence of “thin” markets, defined as
markets in which there are few purchases and sales. Thus, because these market
constraints limit the scale and Scope of market activity, they ultimately limit the potential
of the market to catalyze Production, growth and boost rural incomes in the country.
What are these constraints to market performance? Major constraints can be identified as
either linked to weak infrastructure or to missing institutions. In terms of infrastructure,
major concerns are the weak access of smallholder farmers to roads, as well as limited
telecommunications and storage infrastructure. These weaknesses contribute to the high
cost of transport as well as of other physical marketing costs, such as storage, handling,
etc. Thus, marketing costs amount to some 40 to 60 percent of the final price, of which
some 70 percent is due to transport. However, beyond the infrastructural issues, studies
also point to the significance of “transaction costs” which are equally or more
constraining to trade. These costs, distinct from physical marketing costs, are costs
related to conducting or coordinating market transactions between actors, such as the
costs of searching for and screening a trading partner, the costs of obtaining information
27
on prices, qualities and quantities of goods, the costs of negotiating a contract, the costs
of monitoring contract performance, and the costs of enforcing contracts. Because these
costs are difficult to identify and to measure, they are often overlooked, yet they offer
powerful explanations of the persistence of missing markets or of market failures.
In fact, these transaction costs also influence the extent of the physical, more observable,
marketing costs. For example, handling costs in Ethiopian grain markets are roughly 25
percent of the margin, which is far above the norm in sophisticated markets. These costs
are particularly high in Ethiopia because the lack of grade and standards and the problem
of contract enforceability forces buyers of grain at every transfer of ownership in the
chain to off-load the shipment and re-sack every bag of grain. Similarly, because there is
little coordination in the transport sector and thus no information regarding whether
trucks can load shipment on the return trip, or “backhaul,” this results in very high
transport rates.
In the Ethiopian context, the presence of prohibitively high transaction costs, evidenced
by the lack of sufficient market coordination between buyers and sellers, the lack of
market information, the lack of trust among market actors, the lack of contract
enforcement, and the lack of grades and standards, implies that buyers and sellers operate
within narrow market channels, that is, only those channels for which they can obtain
information and in which they have a few trusted trading partners. Extensive empirical
analyses of Ethiopian market behavior thus reveals that market actors conduct business
28
across short distances, with few partners, in few markets, and with limited storage,
implying that opportunities for expanding market activity, otherwise known as arbitrage
across space (transporting significant distances to market goods) and across time (storing
for significant periods), are limited (Gabre-Madhin et al, 2003). This limited arbitrage in
turn reduces the responsiveness of the market to changes in supply and demand. The
weakness of the market was most starkly highlighted in the food crisis of 2002-2003,
when a significant surplus of grain in 2002 led to the collapse of market prices,
significantly compromising rural incomes and leading to disincentives to further
technology adoption by farmers.
The persistence of these market constraints in Ethiopia points to the fact that market
reforms alone, defined as the removal of policy distortions, are necessary but not
sufficient to enhance market performance. This suggests that the new development
agenda, not only in Ethiopia but throughout post-reform Africa, is to move beyond
market reform to market development. In addition to policy incentives, key interventions
are required to develop appropriate market institutions and build needed infrastructure,
defined together as the “3 I‟s of market development” (Gabre-Madhin, 2005). In
recognition of this, the Government of Ethiopia restructured the Ministry of Agriculture
and Rural Development and established a state ministry on agricultural input and output
markets in 2004. At present, both the government and its international partners are
29
engaged in dialogue on a concerted set of interventions to enhance the performance of
agricultural markets.
2.7 The Problem of Economic Order
A fundamental concern of all societies is how the economy is organized, how market
exchange is coordinated. Merchants emerge to buy goods from sellers and sell them to
buyers; factories emerge to buy labor services and other factors of production and sell
output to buyers. It is often said that (Nobel-laureate Ronald Coase 1937) started a quiet
revolution in economics when he asked one of the most celebrated questions in modern
economics: Why does the firm emerge in the market economy? To extend this question:
Why do we observe vertically integrated firms for some goods and services and bazaar-
type markets for others? Why do supply chains based on long-term relationships emerge
in some arenas in contrast to anonymous, non-repeated transactions in others? Coase‟s
answer was that there are costs of using the market mechanism, which may be reduced or
eliminated by certain types of coordination in the market. Coase pointed to two kinds of
costs: the costs of discovering what the relevant prices are and the cost that may be saved
by making a single long-term contract for the supply of goods and services instead of
short-term successive contracts.
At its core, then, the problem of economic order can be conceived as essentially a
coordination problem, depending integrally on both information and on the nature of
30
contracts. This fundamental concern for economic order has led to major historical
debates, extending to the present in different guises, on the role of central planning versus
the free market economy. In the early twentieth century, while advocates of central
planning had long cited the complexity of economic activity as an argument against what
Karl Marx described as the "anarchy of the marketplace," the Austrian economist Ludwig
Nobel-laureate Friedrich Hayek 1945 argued forcefully that it was precisely the
complexity of the economy that rendered it beyond human comprehension and therefore
unable to be perfectly planned, arguing that only by the competitive forces of the free-
market regime could the decentralized elements of the economy be appropriately utilized.
Thus, price signals and the pursuit of profit lead the vast and varied lines of activity to be
self-coordinating. In more recent times, with the emergence of market fundamentalism,
(Robert Heilbroner 1990) declared, "It turns out, of course, that Hayek was right."
How then to achieve this “self-coordinating” market order? On the one hand, in form
action seems to be at the heart of the institutional problem of order. That is, the
transmission of information on prices, quantities supplied, quantities demanded, actors
and their actions, product quality and attributes, and processes is the key to market
coordination. An important body of economic literature has focused on the problems of
imperfect, asymmetric, or incomplete information, which in turn lead to decision-making
with “bounded rationality” (Herbert Simon, 1982), missing markets and risk (Stiglitz,
1982; Akerlof, 1970), and high transaction costs (Williamoson, 1981).
31
On the other hand, contracts and the costs associated with negotiating and enforcing
contracts are also at the heart of the problem of economic order. Fundamentally, as Hicks
(1969) noted, even the simplest exchange involves a form of contract, where each party is
abandoning rights over the things that he sells in order to acquire rights over the things he
buys. Thus, all exchange is trading in promises, which is futile unless there is some
reasonable assurance that the promises will be kept. Extending this concept, Nobel-
laureate Douglass North (1990) has forcefully argued that “the inability of societies to
develop effective, low-cost enforcement of contracts is the most important source of both
historical stagnation and contemporary under development in the third world.”
To summarize, then, the heart of the problem of economic order facing Ethiopia today is
the central question of how market exchange can be coordinated efficiently, at minimum
transaction costs, among the myriad of actors in the rural economy, the diverse and
spatially dispersed producers and consumers, in such a way as to enhance livelihoods and
lead to the optimal allocation of resources. In the post-reform era, rather than take the
central planning route, the problem confronting policymakers is how to bring about a
“self-coordinating” market order. In order to do so, two core aspects must be addressed:
the transmission of vitally needed market information and the low-cost enforcement of
contracts among market participants (Ethiopian Development Research Institute, 2005).
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2.8 Ethiopia Commodity Exchange (ECX)
The Ethiopia Commodity Exchange (ECX) is the most recent Spot/Cash exchange in
Africa, which was launched in 2007. It is owned by the Government of Ethiopia, which
funded the initial capitalization of about US$20 million, with some contribution by
external partners. Government also underwrites all performance risks. However, ECX is
run by a board representing farmer cooperatives, the state-owned grain trading enterprise
and trading members. The trading platform involves the use of open outcry but an
electronic trading system is being developed and is expected to be launched in the near
future. Coffee is the main commodity traded by ECX but Maize, Wheat, Sesame and
Beans are also listed for trading. The standard lot size is five (5) tones – tailored to
current average load per small trucks in rural Ethiopia and to ensure broad participation,
including small-scale market players. Clearing and settlement are handled by seven (7)
partner settlement banks and the contracts are for immediate delivery of the physical
commodities. The ECX owns and operates a network of 10 warehouses in the main
production areas in Ethiopia as well as additional 20 remote terminal centers in major
market centers. It also operates an electronic warehouse receipt (EWR) system controlled
by the Exchange Central Depository. The EWR represents legal title and is transferable
and negotiable on the exchange. It may be used for purposes of securing collateralized
finance and may, upon request, be materialized into a paper receipt (UNCTAD report,
2008).
33
2.9 Why an Exchange for Ethiopia?
The clear benefits of an exchange are that:
 An exchange reduces transaction costs by:
 Facilitating contact between buyers and sellers
 Enabling centralized grading of products
 Ensuring that contracts are enforceable
 Providing mechanism for price discovery
 Simplifying transactions with standard contracts
 Transmitting information about prices and volumes
 An exchange provides a mechanism for increasing market liquidity
 An exchange enables transfer of price risk, and
 An exchange creates trust, order, and integrity in the market (Eleni Z. Gabre-
Madhin and Ian Goggin, 2005)
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Chapter Three
3.1 ECX and its modalities
The Ethiopian Commodity Exchange (ECX) is designed to be a marketplace where
buyers and sellers meet to trade, assured of quality, delivery and payment. The ECX is a
national multi-commodity exchange with the aim of providing market integrity, by
guaranteeing the product grade and quantity. It will manage a system of daily clearing
and settling of contracts. It will enhance market efficiency by operating a trading system
where buyers and sellers use standardized contracts. Market transparency will be
achieved by disseminating market information in real time to all market players. Finally,
the ECX will facilitate risk management by offering contracts for future delivery,
providing sellers and buyers a way to hedge against price risk. However, contracts for
future delivery will only be implemented after the ECX spot market trading has shown to
be successful. After its establishment in 2006, The Ethiopia Commodity Exchange (ECX)
commenced trading operations in April 2007. And subsequently opened trade for white
and mixed maize, hard and soft wheat, processed and unprocessed pea beans, coffee and
sesame. The establishment of the ECX was funded by a consortium of financing partners
including UNDP, the World Bank, American development agency USAID, Canadian
Development Agency CIDA and the World Food Program and is co-financed by the
Government of Ethiopia. Since 2006, UNDP has financed more than USD 3.5 million of
the total USD 24 million needed to establish the exchange. In addition, UNDP support
35
included initial project start-up, capacity building, and technical advisory services over
four years (ECX Website). UNDP would like to replicate the experience in other African
countries. Among these, Tanzania, Kenya, Zambia and Uganda are considering
replicating, customizing and scaling up the ECX model. On 24 February 2010 UNDP
helped organize and supported ECX in organizing a forum "The Making of a Market:
Global Learning from Commodity Exchange Experiences" with over 300 representatives
including Africa- and India-based exchanges as well as the international and donor
community, federal and regional government officials, and private traders. The Forum
has resulted in the establishment of the African Commodity Exchange Association
(UNDP, 2010).
The World Bank has dedicated about seven million dollars to set up the ECX while
supporting and modernizing its operations through the Rural Capacity Building Project.
The information dissemination system is part of the Bank's funded projects and includes
software to introduce the Short Message System (SMS) and an Interactive Voice
Response (IVR). It further includes 200 Price Tickers or electronic display boards, in
major market places across the country, which will provide farmers and traders with real-
time prices of commodities as transacted at the central exchange place. In June 2009 the
ECX installed about 12 Price Tickers in major towns and in May 2010, the ECX reported
to have 12 price tickers (ECX Website). Finally, the World Bank will finance the
development of new IT systems to make the current home-made IT system more
36
sophisticated in order to support future trading whereas currently it supports real-time
trading prices (Wendifraw 2009).
3.2 ECX governance
There are three bodies governing the ECX:
1. The Ethiopian Commodity Exchange Authority (ECEA) as a state regulatory body,
3. The Exchange, and
4. The national association of market actors.
The ECEA is a public institution, which approves and regulates contracts, membership,
trading, clearing, and other ECX rules. It safeguards the interests of society. Its specific
objectives are to promote innovation, access to market information by all market
participants and fair competition among markets and market participants; to deter and
prevent price manipulation or any other disruption of market integrity; to ensure the
financial integrity of all transactions and the avoidance of systemic risk; and to protect all
market participants from fraudulent or other abusive trading practices and misuses of
customer assets. The ECEA is accountable to the Prime Minister. Moreover, in a unique
governance structure, the ECEA is governed by a Board comprised of a Chairman, and a
member from each of the following relevant government bodies: Ministry of Finance and
Economic Development, Ministry of Trade and Industry, Ministry of Agriculture and
Rural Development, and the National Bank of Ethiopia. The operations of the ECEA are
executed by a Director General, who is also an ex-officio member of the Board.
37
The ECX is designed as a Public-Private Partnership enterprise. The Government of
Ethiopia is the owner of the ECX, while the ECX offers the sale of Membership seats,
which are privately owned, permanently and freely transferable rights to the stream of
earnings from trading on the Exchange. ECX is established as a demutualized corporate
entity with clear separation of Ownership, Membership, and Management. Thus, owners
cannot have trading stake, members cannot have ownership stake, and the management
can be neither drawn from the owners nor from the members. There is a joint Board of
Directors drawn from relevant public institutions state) and ECX members (private).
The National Exchange Actors Association (NEAA) is an institution established by
members and their Authorized Representatives and Associates, is recognized by the
ECEA for the purpose of upholding and maintaining the standards of integrity,
professionalism, and skills of all exchange actors. It is expected to maintain a database of
Exchange Actors. The NEAA became active only at the end of 2009.
3.3 Membership
ECX Members are the core actors of the market. Membership is acquired through the
purchase of a Membership Seat, provided other requirements are met. A Membership
Seat is a permanent and transferable right to trade on the Exchange. Members are
required to follow the rules of the Exchange and thus maintain the integrity of the ECX
marketplace. Members are liable for the transactions they conduct through ECX.
ECX offers two classes of Membership:
38
1. Trading Member (TM) trades only on his or her own account
2. An Intermediary Member (IM) trades either on his or her own account or on behalf of
Clients
Every Member is required to hold two settlement accounts (Pay-In and Pay-Out) with an
ECX designated settlement Commercial Bank of Ethiopia (CBE), Bank of Abyssinia,
Awash Bank, Wegagan Bank and the Dashen Bank, Nib bank, united bank, partners of
ECX. Buyers should deposit a certain amount of money before the trading day and sellers
are required to deploy commodities at the ECX store. Every member is also required to
authorize power of attorney to the ECX Clearing House to issue Pay-In transfer
instructions on his or her behalf. An Intermediary Member is required to hold separate
settlement accounts for client trading and is expected to maintain a system for reporting
on payment to clients.
There are various requirements for both classes of Membership. The financial
requirements include:
 Payment of Membership Seat price Birr 50,000
 Net Worth: an audited financial statement (by an authority-approved
auditor) should certify the maintenance of minimum Net Worth
requirement according to membership category. i.e. Birr 500,000 for a
trading member and Birr 1,000,000 for an intermediary member
 Provision of a refundable security deposit in the ECX Settlement
Guarantee Fund for the duration of membership, according to
39
membership category i.e. Birr 200,000 for trading Member and Birr
300,000 for intermediary Member
After the first year, payment of annual Membership maintenance fee: Birr 5,000. The
financial requirements are necessary to ensure that all trade through the ECX can be paid
for and that payments are cleared immediately. Other requirements include the
recognition by the Ethiopian Commodity Exchange Authority (ECEA) as an Exchange
Actor. Members should have a tax registration and maintenance of tax clearance
according to Ethiopian law, where applicable. For different entities (individual, private
limited company, cooperative, public enterprise etc) there are different requirements.
Members are required to successfully complete an Authority-approved ECX Certification
examination. Finally a personal interview with the Exchange, and in the case of Share
Company, with all authorized signatories is held.
The ECX started selling 150 membership seats in September 2009 at its annual member's
forum. The initial price was set at 50,000 Birr for a seat. Initially, there was not much
interest and the first 100 members needed a lot of convincing to join the ECX at this
price. However, the membership value significantly increased since then. For instance,
the Oromia Coffee Farmers Cooperative Union Ltd bought a seat for 200.000 birr and
one businessman in the coffee business was reported to have paid 3.3 million Birr by the
end of 2009. The 150 members include 69 suppliers, 45 exporters, 24 local traders and 12
cooperatives and commercial farmers.
40
Currently, ECX membership is made up of 9 cooperative unions, representing a total of
826,000 farmers, ten processing firms, including flour and food processing factories, five
commercial farmers, four public enterprise and 73 private exporters and domestic
companies, mainly Plcs.
3.4 Trading procedure
3.4.1 Warehouses
Commodities are deposited in warehouses operated by ECX in major surplus regions of
the country. At the ECX warehouses, commodities are sampled, weighed, graded and
certified. The ECX guarantees the grading of the commodities and maintains a central
registry of warehouse receipts. ECX warehouses issue an Electronic Goods Received
Note and provide the depositor or his/her representative with a signed print copy. The
depositor has to get an Electronic Warehouse Receipt issued by the ECX Central
Depository in order to establish legal title to the deposited commodity. ECX warehouses
are insured at maximum coverage to protect against loss and damage of deposits.
The ECX provides standardized ECX commodity-based contracts, which specify grade,
delivery location, lot size, and other contract terms. The contracts can be either for
immediate delivery or at a pre-specified date in the future.
3.4.2 The Exchange Central Depository
ECX maintains an Exchange Central Depository or Registry of warehouse receipts. It
issues Warehouse Receipts, prints copies of receipts, transfers legal titles (transferring
41
Electronic Warehouse Receipts between holders), and cancels receipts. It also maintains
separate accounts for every depositor. ECX is currently working towards introducing the
use of Electronic Warehouse Receipts for the purposes of securing collateral finance or
also known as inventory financing in the near future.
3.4.3 ECX Trading System
The ECX trading system includes a physical trading floor located in Addis Ababa, where
buyers and sellers may participate in “open outcry” bidding for commodities. During
regular business hours, the ECX trading floor holds various sessions for transacting
different commodity contracts. Trades are made on the trading floor by bidding or
offering a price and quantity of contracts, by using a physical representation of a trader's
intentions with his hands. Market prices can thus change throughout trading hours. These
prices are transmitted in real time to producers and consumers by electronic price tickers
located in 21 locations around the country, although the ECX plans to increase these to
200. The prices are also shown on the ECX website (http://www.ecx.com.et) and can be
obtained through a mobile phone service.
Once a transaction has been made, the transaction orders are recorded on Order Tickets in
standard lot sizes of standardized commodity grades (referred to as contracts). The ECX
automated back office system ensures the existence and validity of the Warehouse
Receipt backing the sale, the availability of buyer funds in a deposit account, and where
42
applicable the validity of the Member-Client agreement. This automated reconciliation
takes just minutes.
The ECX guarantees payment against delivery through an internal system for clearing
and settlement of contracts, in collaboration with partner banks. Every trading day, ECX
clears the net obligations of all of the market participants and transmits orders to partner
banks and warehouses to settle transactions through transferring funds in one direction
and warehouse receipts in the other direction.
The ECX provides additional layers of security through the Arbitration Tribunal that has
licensed arbitrators who assure the speedy and professional resolution of any commercial
disputes that may arise. Additionally, the ECX maintains a system of market surveillance
where experts monitor the behavior of market actors to protect the market from
manipulation, excessive speculation, fraud, or other malpractice.
3.4.4 Warehouse Receipt Financing
At the end of 2009, the Ethiopian Commodity Exchange (ECX) and its partner
organization, the International Finance Corporation (IFC), which is a member of the
World Bank Group, was preparing to introduce Warehouse Receipt (WHR) financing for
producers and traders to access bank loans (Abiye 2009). This allows producers and
traders to access bank loans by pledging their Warehouse Receipts issued by the ECX for
commodities held in ECX warehouses.
43
3.5 Direct Specialty Trade
In February 2010 the ECX launched Direct Specialty Trade (DST), a new platform in
which producers of specialty coffee can transact directly with international buyers
seeking to purchase premium beans on a fully traceable basis. The DST facility was
established because the normal trading procedures of the ECX cannot take into account
various specialty coffees (that there are 256 to 781 coffee variety grades). Coffee exports
fell as a result.
DST is established as a monthly bidding session in which small farmer cooperatives and
commercial growers deposit specialty grade coffees in advance in ECX warehouses.
International buyers pre-register for the DST session and are able to order samples and to
participate in a cupping session prior to the bidding. A condition for participation in DST
is that farmers will receive a minimum of 85 per cent of the final export price, which is
higher than the price received normally, which is below 40 per cent (Daily Ethiopia
2010).
The ECX (ECX 2010) defines specialty as: "coffee, from a known geographic origin, that
ahs a vale premium above commercial grade coffee due to its high quality in the cup and
to particular attributes that it possesses". This definition imbeds four major concepts. The
first is geographic origin of production which is important for quality differentiation,
social and community identification, environmental aspects and market branding. The
second is the value premium in the market price above the standard of commercial grade.
44
The third is high quality using recognized industry standards. The fourth is that in
addition to high quality, there can be identifiable and measurable or certifiable attributes
that are the basis of the value premium. These attributes can be environmental, health-
related or social and are often used in fair trade produce.
A prerequisite is a traceability system linked to certification. This can be done by
recognized and accredited third-party certification entities who can partner with the
Exchange to obtain this traceability information and to ensure its consistency and
integrity. The DST is, however, not suitable for high value markets in for instance Europe
that require produce (e.g. sesame) to adhere to Global Gap requirements (Mheen-Sluijer).
The second DST Session (April 29, 2010) included 432 tones of specialty coffee (58 lots)
of which only 15% was sold to various international buyers by May 18th, 2010. The
reasons for low sales are not clear.
45
Chapter Four
4.1 Methodology of the Study
This study mainly employed qualitative research methods. However, some quantifiable
secondary data were gathered and analyzed to complement and elaborate the qualitative
data. These data were gathered from of the World Bank, Doing Business.org, accessed,
2010; data come from World Development Indicators and other related documents. More
specifically, closed-ended questioners, semi-structured interviews based on open-ended
questions were used. Interviews allow person-to-person discussion was also used.
4.1.1 Sampling Design
Sampling design is the selection of a part of population or a material to represent the
whole population. The objective of sampling is to make correct inference about the
aggregate and is only justified if the selected part-the sample population –is a true
representative of the main population.
Among the different sampling techniques, the researcher will employ stratified random
sampling and simple random sampling. Stratified random sampling is a sample obtained
by separating the population into non-overlapping groups, called strata and then selecting
a simple random sample from each stratum. The possible respondents of the researcher
will be trading Member/the main membership, An Intermediary Member/limited
membership and the officers of Ethiopian commodity exchange. But due to the rationale
46
of the study the researcher were consider treading member and officers ECX in the
sampling frame.
Thus, the researcher using the basics of this system was taken 110; from this sample
frame 100 were selected from 223 treading members of Ethiopian commodity exchange
scheme as a sampling frame. And 10 officers of ECX embraced as a sampling frame.
Finally two groups have been formed.
4.1.2 Data Collection Techniques/ Instruments
The data inputs for the study were gathering from both primary and secondary sources.
4.1.2.1 Primary sources
Primary data were gathered through field survey by employing different methods. The
researcher was conducted questionnaire with multiple choices (closed –ended) and semi-
structured interviews based on open-ended questions. In addition a structured interview
with officials of the concerned department heads and members (participants) of ECX was
conducted. Moreover, they were asked to elaborate on the problems and achievements of
the program and to forward their professional and subjective opinions to be used as an
input to the commodity exchange. For interviews, face-to-face interviews were conducted
with written confirmation from the concerned office holders and members of ECX.
47
4.1.2.2 Secondary Sources
In order to augment the reliability of the data collect by the questionnaire and interview
survey and to supplement the data missing in the questionnaire survey, information were
acquire from previous works and from different publications was used. In addition,
official but unpublished reports and summaries of the ECX were used as sources of
secondary data.
4.1.3 Data Analysis Techniques
The data gathered from primary and secondary sources were have been analyzed through
statistical (both descriptive and inferential) techniques survey questionnaires were tally.
A level challenges in Ethiopian commodity exchange, the researcher decided to pursue a
semi-comparative research strategy. The researcher approach was decretive and unit of
analysis is Organization for Economic Cooperation and Development at particular
African countries thus have commodity exchange and the five year growth and
transformation plan.
Data used in this study are from Compiled from the WDI of the World Bank, Doing
Business.org, accessed, 2010 and data come from World Development Indicators.
A variety statistics such as percentages and frequencies was used as method of analyzing
data. Moreover, other methods of data analysis such as tables and charts were utilizing in
the study.
48
4.3 Administration of Data Gathering Instruments
The researcher selected 3 data enumerators to effectively collect data from the sample
respondents through questionnaires. The researcher performed observation, reviewed
documents from secondary sources, interviewed respondents, coordinated the data
gathering process and supervised data enumerators in the field.
4.4 Anticipated Ethical Issues
Ethical issues are very important in research these days. Ethical emerged from value
conflicts. In research, these conflicts are expressed in many ways: individual‟s rights to
privacy versus the undesirability of manipulation, openness and replication versus
confidentiality, future welfare versus immediate relief, and others. Each decision made in
research involves a potential compromise of one value for another. Researchers must try
to minimize risks to participants, colleagues and society while attempting to maximize
the quality of information they produce (David F. Gillespie, 1989).
In favor of this study the researcher were familiar with the ethical issues of research.
Thus, the researcher will observe the principles of ethical issues like confidentially and
dignity of the participants, integrity, on no account plagiarism, and never fabricating and
destroying data.
49
Chapter Five
Analysis the Major Findings
In this part of the paper detail discussion and analysis of the study finding are presented.
The challenges that affect the performance of Ethiopian commodity exchange are
obtained by closed-ended and semi-structured interviews based on open-ended
questionnaire; interview question was conducted with the officers and treading members
(participants) of the ECX and by thoroughly analyzing their challenges with respect to
the Organization for Economic Cooperation and Development at particular African
countries thus have commodity exchange.
5.1 Respondents’ Background
Though data was mainly gathered for the analysis through interview, questionnaires were
also distributed to 110 respondents from ECX. The following paragraphs discuss on the
background of survey respondents.
The chart below shows sex composition, age structure, educational level of both of the
questionnaires and interview participants. The total number of participants in the study
was 110, of who were eighty nine males and twenty one were females. When we look at
the age structure, fifty two respondents and interviewers fall under the age ranges of 30-
40 and twenty one drop under age range of 20-30 whereas the remaining thirty seven
were 40 and more. Regarding the educational level, 41.6%, 27%, 22.9%, 8.3%
50
participants in the study were grade 12 and below, diploma, degree and master and above
holders respectively.
Detail profiles of the study participants are shown in the chart below.
5.1.1 Respondent's age & sex Background
Frequency
60
50
40
30 Age
Sex
20
10
0
20-30 30-40 40 and above
Age and Sex
Figure 1: Age and Sex summary of respondents (Source: Owen Survey)
As can be deduced from the graph, more males than females were addressed on the
survey. Moreover, more respondents lie with in an age category of 30-40 and 40-50.
From the respondents, about 90% are members in ECX, 10% are officers in ECX.
51
5.1.2 Respondent's Academic Background
Respondents also have diversity in their academic backgrounds, as shown here below in
the chart, strengthening the idea that people from different academic backgrounds
participate in ECX.
Education
27%
Diploma
41.6% Bachelor
Master and Above
Grade 12 and Below
22.9%
8.3%
Figure 2: Academic Background of Respondents (Source: Owen Survey)
5.2 Surveyed challenges of Ethiopian commodity exchange
In relation to this, respondents were asked some questions to investigate challenges and
prospects of ECX and their responses are summarized and analyzed as follows.
52
Table 1
№ Items Respondents
Yes No
№ % № %
Do you think that the introduction of commodity 97 88.2% 13 11.8%
exchange in Ethiopia is necessary?
Source: Owen Survey
The issues related to the necessity of commodity exchange in Ethiopia (item-one),
97(88.2%) percent of respondents reply that it is necessary to Ethiopia. On the other
hand, 13(11.8%) of officers documented that it is not necessary.
Interview responses from officers of ECX showed that, Ethiopia is the biggest grain
producer in Africa; its traditional markets are small because of narrow networks of trust
among buyers and sellers. Most farmers trade within 12 kilometers of their farms and
only with people they know. They said more than two-thirds of farmers have faced
contract defaults, and only 4 percent have received legal enforcement of contracts. In the
traditional trading system, grain changes hands four to five times between producer and
consumer. With each change, the grain is put into new sacks. This system enables
buyers to know what they are getting in terms of quality and quantity, as the contents are
inspected and weighed, but it is vulnerable to price shocks. This is because commodity
exchange is so essential to Ethiopian market.
53
Table 2
Yes No
№ % № %
Do you think that Ethiopian commodity exchange is 86 78.2% 24 21.8%
successful enough in the commodity exchange
process?
Source: Owen Survey
Regarding the successful of Ethiopian commodity exchange, 86(78.2%) of respondents
were documented that it is successful enough where as 24(21.8%) of respondents were
respond it not successful enough.
Moreover, interview responses from officers of the ECX explained that, The ECX has
been operating for three years and it is moving on. In this operating period the exchange
has traded more than 1 billion dollars of commodity value, involving the grading,
handling, storing, trading, and delivery of 4.6 million bags, participation by 450 members
and their 6000 clients, and 20,000 market information phone inquiries a day. In these
1000 days, we have not had a single system down day, a single trading order error, a
single payment delay, or a single payment default. This is what the successes of the
Ethiopian commodity exchange in the four years of operation.
54
Table 3
Yes No
№ % № %
Are there any challenges facing the EXC? 102 92.7% 8 7.3%
Source: Owen Survey
As presented in table 3 (Item 3), 102(92.7%) percent of respondents responded that there
are challenges facing the ECX, which affect the day to day activities of the exchanging
process. Whereas 8(7.3%) of respondents were documented no challenge facing in its
four years of operation.
5.2.1 Infrastructure Development
Table 4
Yes No
№ % № %
Do you think that the current infrastructure 7 6.5% 101 91.8%
development have comparative advantage to
ECX?
Source: Owen Survey
55
Regarding current infrastructure development to ECX, 101 (91.8%) percent of officers
responded that the current infrastructure development is poor. Whereas 7(6.5%) of
respondents said that there are good infrastructure development.
Moreover, interview responses from executive of the ECX explained that, the first key
challenges of Ethiopian commodity exchange is lack of adequate Physical infrastructure
and Inadequate Warehousing facilities and Legal and regulatory infrastructure.
5.2.1.1 Physical infrastructure
Communications and transportation infrastructure is critical to a functioning exchange.
First, trade at a futures exchange requires a communications network that can provide
traders with spot market information in order to estimate the basis. A commodity
exchange also needs to be supported by a reliable system for transportation and
distribution, so that delivery location can be credibly specified in the contract. Moreover,
the transactions costs must be stable enough for traders to evaluate the spread between
the spot and futures contract prices.
Table 5: Indicators of communications and transportation infrastructure
Countries Road Density % of paved Ground line & Internet users
(Km/Km sq roads Mobile Phone per 1000 people
land area) subscribers per
1,000 people
56
Ethiopia 0.064 13 10 2
Ghana 0.21 18 93 17
Kenya 0.11 12 85 45
Malawi 0.3 19 25 3
Nigeria 0.21 31 79 14
Zambia 0.12 22 34 20
Uganda 0.35 13 44 8
South Africa 0.3 20 473 78
Source: Compiled from the WDI of the World Bank. The numbers are for 2009 or recent
years.
Communications and transportation infrastructure in selected countries is presented in
table 5. African countries are included here for comparison to conditions in Ethiopian
commodity exchange. These data reveal wide variation in conditions across African
countries which can be compared to South Africa, better communication and
transportation infrastructure, 0.3 of road density, 20 of paved roads, 473 of ground line &
mobile phone subscriber‟s users per 1,000 people and 78 of internet users per 1000
people. In terms of the Road Density (Km/Km sq land area) most of the African countries
except Ethiopia in the sample are almost similar to the researcher benchmark south
Africa. On the other respect Kenya, Ethiopia and Uganda countries‟s where a percentage
of paved roads are lowest compared to the benchmark South Africa. As for Ground
line & Mobile Phone subscribers per 1,000 people and Internet users per 1000
57
people, Ethiopia is quite low. The above table shows how much Ethiopia have far more
developed communications and/or transportation infrastructure than others.
Infrastructure must not only support the exchange, but it must also link various spot
markets if the exchange is to function. Ideally, the physical and communications
infrastructure will ensure information on product quality, quantity, form, and price in all
relevant markets is available across various spot markets. In the absence of this
information, price discovery in the spot markets may be erratic and price risk will not be
manageable in a futures exchange. Available data suggest that the lack of physical
infrastructure is a constraining factor in Ethiopian commodity exchange. Countries with
successful exchanges have far more developed communications and/or transportation
infrastructure than others see (Table 5). Public investment in both transportation and
information infrastructure may be needed for the development of a successful commodity
exchange in countries where they do not exist. This is because infrastructure development
is one of the hub points of commodity exchange.
5.2.2.2 Legal and regulatory infrastructure
A commodity exchange must be supported by appropriate legal infrastructure,
particularly (i) a system of grades and standards, (ii) a credible system of contract
enforcement, and (iii) governance in spot markets. In most African cereals markets such a
system of grades and standards is not likely to evolve without government involvement.
58
However, the real challenge in African markets will not be the development of grades but
the enforcement of contracts that use them. The legal system must ensure contract
enforcement and a regulatory system must ensure that warehouses do not issue multiple
receipts for a single lot. For futures contracts, participants must have confidence that
contracts will be recognized by the legal system and that contract obligations will be
enforced.
Table 6: Indicators of Contract Enforcement Capacity
Indicators
Countries Number of procedures Days to process Cost as a % of debt
recovered
Ethiopia 30 690 14.8
Ghana 22 730 12.7
Kenya 25 360 41.3
Malawi 40 337 136.5
Zambia 21 404 28.7
Uganda 19 484 35.2
South Africa 26 600 11.5
OECD countries 22 351 11.20
Source: Doing Business.org, accessed, 2009. The numbers are for 2009 or most
recent years
59
Information on enforcing contracts in selected countries is presented in table 6. African
countries and the OECD are included here for comparison to conditions in Ethiopian
commodity exchange. These data reveal wide variation in conditions across African
countries which can be compared to OECD countries, where contract enforcement
requires an average of 22 procedures over 351 days, costing 11.2 percent of the debt to be
recovered. In terms of the number of procedures, most of the African countries except
Malawi and Ethiopia in the sample are similar to the OECD standards. Ethiopia stands
out as high, but not as high as Malawi. Ghana, Ethiopia and South Africa, stand out for
the length of time resolution requires. As for total cost, however, South Africa and Ghana
is quite low, almost at the OECD average. In this respect Ethiopian commodity exchange
is also relatively low cost, while costs in Malawi appear to make efforts at contract
enforcement futile. The wide dispersion of costs among African countries and the
favorable comparison between many of them, where exchanges are functioning suggest
that some African countries including Ethiopia may have enforcement abilities that are
sufficient to support an exchange. In this admiration the comparison of Ethiopia
commodity exchange is encouraging.
60
5.2.3 Warehousing facilities
Table 7
Yes No
№ % № %
8 Do you think the current Warehousing 16 14.9% 91 82.7%
facilities are sufficient in amount to ECX?
Source: own survey
As per the response of respondent‟s, 91(82.7%) of them responded that Warehousing
facilities is the other key challenges of ECX the other16 (14.9%) responded that it is not
the problem of ECX.
Moreover, interview responses from officers of the ECX clarified that, Warehousing
facilities are one major impediment to the growth of commodity markets in Ethiopia.
Though Government organization, Ethiopian commodity trade enterprise, plays a vital
role in storage of commodities; the infrastructure does not support future trading
adequately. The entire current warehouse of ECX is rented from Ethiopian commodity
trade enterprise. For the commodity futures to work effectively, the seller must deposit
the deposit the commodity traded in a warehouse and the buyer should take physical
delivery of the commodity in a warehouse at a location of his choice. However, at
present, only a few warehouses can handle such kind of delivery requests and that too for
specific commodities in the exchange treaded. Because of lack of adequate warehousing
61
facilities that can ensure the quality standards of the commodities traded, traders and
farmers still prefer local rural markets for trading the commodities. This factor is
hindering the emergence of nation-wide commodity market in Ethiopia.
5.2.4 Financial Market environment
Table 8
Yes No
№ % № %
Do you think that the existing financial 15 13.8% 93 84.5%

environment have relative benefit to ECX?
Source: Owen Survey
As it can be seen from table 6, (item 6), 93(84.5%) percent of respondents responded
that, the current financial environment is the discouraging to ECX on the other
hand 15(13.8%) percent documented that the current financial environment is
encouraging.
Furthermore, interview responses from officers of the ECX elucidated that; a limited
financial sector with few commercial agents will have a reduced capacity to support a
futures exchange process. An exchange must have access to a clearing house with
sufficient capital to serve as a guarantor of all transactions. These requirements imply a
generally well functioning financial sector. However, the current Commercial and
financial sectors environment development of Ethiopia is disappointing. For this reason,
62
inadequate amount of financial sector in the economy is other challenge faced Ethiopian
commodity exchange.
Available indicators suggest that financial sectors in most countries in Africa including
Ethiopia are either shallow or constrained by repressive regulations. Table 5 presents
indicators for the same set of countries examined in Table 9. Low or negative real interest
rates indicate repressed financial systems in all countries except South Africa.
Furthermore, South Africa had considerably lower spreads between deposit and lending
rates, suggesting more efficient and liquid financial markets. The stock of credit in these
economies is consistent with the real interest rate data, with low volumes of domestic
credit relative to GDP in countries with repressed interest rates. Under these
circumstances, it is likely to be difficult to finance the activities of an exchange.
Table 4: Indicators of financial market development
Indicators Ethiopi Ghan Keny Mala Nigeri Zambi South
a a a wi a a Africa
Real interest rate deposits -8.1 - 4.3 -4.74 -3.89 -2.62 -6.03 2.56
(%)
Real interest rate lending (%) -4.6 -- 2.33 15.31 3.91 8.35 6.99
Real interest rate spread (%) 3.5 -- 7.07 19.21 6.53 14.38 4.43
Financial Information -- -- 3.5 -- 1.0 1.5 6.0
63
infrastructure index
Net Dom Credit (% GDP) 52.9 25.05 38.82 16.78 9.00 22.28 84.31
Domestic credit provided by 57.8 30.49 41.12 22.38 9.01 22.3 84.37
banking sector (% of GDP)
Domestic credit to private 25.3 13.08 27.03 10.52 14.93 7.56 146.81
sector (% of GDP)
Inflation rate (% change cpi) 11.60 15.12 10.31 15.41 13.51 18.32 3.4
Note: data come from World Development Indicators; Real interest rates are calculated using the
consumer price index. Financial information infrastructure index is based on 10 factors; of which 6 cover
the scope, quality, and availability of credit reporting data (in private and public registries) and the
existence of a basic legal framework for credit reporting. The other 4 factors cover the availability of public
registry data for collateral (fixed and moveable) and corporate registries and court records. The index is
from 0 to 10, with higher values indicating greater financial infrastructure.
A final measure of the strength and development of the financial sector is the financial
information infrastructure index which reflects the scope, quality and availability of
credit reporting, the legal framework for reporting, and the availability of relevant court
records and registries. All of this information is useful for supporting a commodity
exchange. This index is scaled from 1 to 10, with 10 indicating the maximum availability
of financial information. The table reveals that countries with functioning exchanges have
far greater financial information infrastructure than those with failed exchanges. On this
measure, conditions in Ethiopia commodity exchange appear inhospitable to its
exchange.
5.2.5 Macroeconomic stability
64
Table 10
Yes No
№ % № %
7 Do you think that the recent Macroeconomic 18 16.5% 88 80%
stability of the country suitable with ECX?
Source: Owen Survey
As presented in the above table (item 7), 88(80%) percent of respondents replied that, the
recent Macroeconomic stability of the country is not fitting with ECX while 18(16.5%)
percent documented that it is suitable with ECX.
In addition to this, interview responses from officers of the ECX indicated that, a
commodity exchange, particularly futures trade, cannot be developed and sustained in
absence of sound policies for monetary management and foreign trade. In particular,
macro-economic policy needs to maintain stable and reasonably undistorted real interest
rates, exchange rates and inflation rates. Clearly, macro policies have broader
implications, but they can be critical for a commodity exchange. For example, even after
the government of Ethiopia dismantled the coffee auction floor and required all Ethiopian
coffee to be exported through the ECX, preferred to hold the commodity rather than to
sell. One explanation for this behavior is that the Ethiopian Birr was highly overvalued
and there was a rumor that there would be devaluation of 20-30 percent. Under those
circumstances, holding stocks made perfect sense to the exporters, as devaluation would
65
generate larger profits for them. Meanwhile, the general expectation of devaluation
tended to depress exports broadly and exacerbated a balance of payment crisis, when
government desperately needed foreign exchange. This exchange crisis may have
contributed to the government‟s decision to confiscate 17,000 tons of coffee from 80
exporters who had been reluctant to sell. In any case, the Ethiopian experience clearly
demonstrates the relevance of a sound macroeconomic environment and stable exchange
rates in developing and sustaining an exchange. In similar manner efforts to maintain
unsustainable interest rates affect behavior Ethiopian commodity exchange and volatile
inflation rates also depress the activities of the exchange.
5.2.6 Political tolerance to cereal price movements
Since almost all commodity market in Africa is dominantly join agriculture products
which are politically sensitive in low income countries and are susceptible to
unpredictable policy intervention. The likelihood of intervention adds another layer of
risk which can limit the success of an exchange and its contracts. Officers of the ECX
indicated that, governments have intervened in cereal markets to stabilize prices,
especially when sudden price spikes threaten consumer welfare. In Ethiopian commodity
exchange the government of Ethiopia, important cereals and food crops are excluded
from commodity exchanges.
Commodity exchanges cannot guarantee that prices will remain within the range that is
acceptable to the governments. Analyses of historical data suggest that futures prices are
66
slightly less variable than spot prices (Tomek and Gray, 1970). Extending this idea
further, Gilbert (1996) argues that although commodity futures can help market
participants and the producing governments to manage risks associated with variability
over an annual time horizon, it should not be equated with price stabilization. If prices
spike, government will tend to intervene and if the intervention is large, it can create
uncertainties, shatter confidence in the system, and reduce the likelihood of a successful
exchange.
5.2.7 Farm size and production organizations
According to the interview responses of officers of ECX, in Ethiopia agriculture
commodity is dominated by smallholders. But, it is well recognized that smallholders do
not access commodity futures markets directly. They may lack know how, have
insufficient collateral for margins, and may have difficulty monitoring prices (Larson, et
al., 1998). In the case of Ethiopia commodity exchange, additional institutional
mechanisms are needed to link smallholders to centralized exchanges. For instance,
producers‟ organizations could be used to complete product assembly and conduct
transactions. In the absence of such institutional innovation, a centralized agricultural
commodity exchange is not likely to develop in Ethiopia, which is a smallholder
dominated country.
5.3 Prospects and outlooks of Ethiopian commodity exchange
67
Based on interview responses from officers and members of ECX and open ended
questionnaires there are also prospects and outlooks to Ethiopian commodity exchange.
The prospects and outlooks of Ethiopian commodity exchange are:
5.3.1 Policy Rationale
The Ethiopian Rural Development Strategy of 2001 states:
“Our agricultural production can achieve rapid and sustainable growth if it is based on
producing more than the producers‟ own consumption and supplying the difference to the
market. The life of the farmer can be continuously improved if he is able to produce at
this level, sell his products and purchase ever-increasing volumes and types of
commodities and services.”
A very important emphasis the policy direction is to achieve growth through the
expansion of commercial farms. This policy thrust thus constitutes an important push for
efforts to establish a commodity exchange which can expand the scope and reach of
markets.
5.3.2 Growth of new cooperatives
Another important factor in justifying a push for a commodity exchange is the recent
initiative to establish voluntary, market-oriented cooperative unions around the country.
If these cooperatives operate with a business orientation, they can stand to greatly benefit
from the existence of a well-organized national market. At present, interviews with
68
certain unions reveal a deep mistrust of the market and a desire to “cut out the
middleman” through directly contracting between cooperative unions and processors or
exporters. However, the experiences of the last two years have revealed the shortcomings
of this orientation to the unions themselves. In attempting to engage in forward contracts
without reference to a well-functioning national market in which products are graded and
priced in a neutral fashion, the contracts are fraught with enforcement problems, as either
party has shown a bias in the grading, or has reneged when the market changed.
Interviews with the unions reveal a frustration on their part in not being able to work with
the market itself, rather than in alternative single channel arrangements, which ultimately
increases, rather than decreases their market vulnerability.
It is also been noted that, with these contractual arrangements, it is not clear how
sustainable or scalable this orientation is, with the limited number of processors available.
Nor is it clear that they necessarily receive better prices, if one believes the basic maxim
that “you can‟t beat the market.” On the positive side, the organization of smallholders
into market-oriented cooperative societies and unions implies that they have a structure or
platform from which to participate in a national commodity exchange. More experienced
unions may wish to become members of the exchange and trade directly on the floor,
while others may work through brokers. The experience of the Zimbabwe Agricultural
Commodity Exchange, ZIMACE, was that the majority of trade on the exchange was
directly done by smallholders organized into marketing associations.
5.3.4 Increase in commercial farms
69
Another positive development is the emergence of large-scale commercial farmers in the
grain sector. At present, the commercial farmers association of Ethiopia boasts
membership of some 200 farmers who represent some 2 percent of the domestic market.
These are actors who would keenly benefit from an organized market where products
would be graded and be channeled into domestic or export markets.
5.3.5 Increasing agro-processing linkages
The Ethiopian economy is evolving in the direction of increased domestic and foreign
investment in agro-processing industries, particularly private investment. These industries
stand to benefit greatly from, and therefore demand, an organized market which can
deliver adequate and regular supplies of products at the required quality, which is critical
to maximizing the utilization of industrial capacity and product extraction ratios. Thus,
the rise of industrial demand is an important prospect on the domestic market.
5.3.6 Emergence of exporter firms
As exports of oilseeds, pulses, and cereals grow, there is increasing demand by exporters
facing international markets for an organized domestic market. Thus, export firms are
absorbing an increasing share of the domestic market. However, these firms‟ competitive
edge depends on the availability of supply in proper grades and in adequate supply in a
timely manner. Export firms can maximize profit and increase market share with “just in
time” delivery, minimizing their storage and inventory costs. This is only achievable with
an organized domestic market which can provide accurate information on available
supplies, and enable them to contract forward at low cost.
70
5.4 Future Outlooks of Ethiopian Commodity Exchange
5.4.1 The five Year Growth and Transformation Plan
Availability of affordable and quality infrastructural development such as transportation,
communication and power supply and their contribution to commodity exchange is vital/
crucial. At the side of this Growth and Transformation Plan envisages huge investment in
infrastructure to strengthen the foundation for long-term sustained growth and
development. Thus, Road, Railway, Energy, Telecommunication, are the major area
given by GTP.
Table 11: selected GTP targets
Sector/Indicator Baseline Plan Target
2009/10 2014/15
Infrastructure Development
Roads:
Road network 49,000 136,000
Average Time taken to all-weather road (hours) 3.7 1.7
Road density (km/1000 km2) 44.5 123.7
Road density (km/1000 population) 0.64 1.54
Roads in acceptable condition (%) 81 86.7
Proportion of Area further than 5 km from all weather roads (%) 64 29
71
Rail way
Rail way network - 2000
Power:
Electricity coverage 41 75
Power generating capacity(mg wt) 2,000 8,000
Telecom:
Mobile density (per 100) 1.5 8.5
Telephone service coverage with in 5km (%) 49.3 90
Fixed telephone subscribers (in millions) 1.2 8.6
Mobile Telephone subscribers (in millions) 7.6 64.4
Internet service subscribers(in millions) 0.20 7.17
Source: Growth and Transformation Plan (GTP), 2010
Road
Based up on the above table, the Road Sector Development Program consists of the
following road components: road network will be increase from 49,000 - 136,000, Road
density (km/1000 km2) from 44.5 -123.7, Road density (km/1000 population) from 0.64 -
1.54, and finally, 2000 km Railway, which is a very effective, low-cost and time saving
mode of transportation which helps to transport produces and inputs in bulk.
Communication
72
The main strategy in the communication sub-sector includes: mobile density (per 100)
will be increase from 1.5-8.5, telephone service coverage with in 5km (%) from 49.3 -90,
fixed telephone subscribers (in millions) from 1.2 - 8.6, mobile telephone subscribers (in
millions) from 7.6 - 64.4 and to end with, internet service subscribers (in millions) will be
increase from the current 0.20 - 7.17.
GTP is successfully implemented by the end of the five year plan; Ethiopian commodity
exchange will experience Future growth and better outlooks. Large scale roads and
communications have positive impact on development of commodity exchange in the
economy. At the same time the objectives of the plan were to improve access to road
particularly to rural population. By then the small-scale farmers are able to farm
sustainably and facilitate agricultural trade in the exchange.
The proposed new strategies for GTP, if implemented, would be expected to increase the
efficiency of commodity exchange and enhance national food security with various
benefits to farmers and the national and regional economies:
 Farmers would increase their incomes by selling their produce at fair prices, first
because of the effective communication of their produce for quality; second
because of better transportation they keep direct access to the Ethiopian
commodity exchange trading floor and other services.
73
 Farmers, buyers and government policy makers would have access to more
reliable market information for better and more informed decision making
because of better communication facility.
 Farmers would have the opportunity to invest in their farm operations by using
their higher incomes. As a result, they purchase improved farm inputs, thereby
increasing agricultural production and enhancing food security.
 Commodity traders from world markets would be able to access Ethiopia readily
and efficiently, thereby increasing agricultural exports from the countries of the
region.
 ECX would increase the volume of trade through the exchange, and can develop
the exchange to further promote and facilitate commodity trade in domestic,
regional and world markets.
 Farmers, Processors and traders would increase their profits through accessing
better quality raw materials more cost-effectively.
74
Chapter Six
6.1 Conclusion and Recommendation
6.1.1 Conclusion
Establishment of commodity exchanges has been considered as a potential market-based
mechanism for commodity price risk management. While such initiatives have been
successful in some emerging countries like Ethiopia, they have frequently failed or had
limited success in Ethiopia. This paper reviewed the prospects and challenges of setting
up successful commodity exchanges in Ethiopia. It is clear that the success of commodity
exchanges depends on conditions which are absent in Ethiopian contexts. For Ethiopian
commodity exchange, the binding constraints to success appear to be small market size
compounded by weak infrastructure and underdeveloped financial sectors, and lack of
supportive legal and regulatory frameworks.
Financial sectors and government regulations that are favorable to futures trading were
almost prerequisites for successful local futures exchanges. Meeting these preconditions,
a contract that is significantly different from existing ones or with a large basis risk
backed by a large physical market was an essential element for a new exchange to attract
a viable level of liquidity. Even with all these set and subset of conditions (sic), a market
could fail if well developed financial intermediaries were not present. Financial
75
intermediaries are the distribution channels of futures markets, and when these channels
are blocked, the market extension was hard to accomplish.
Evidence in the literature clearly indicates that the risks of failure are very high if an
exchange is launched in a thin market. While a critical minimum is not clearly defined,
market sizes in Ethiopia appear to be very small compared to the countries that have
active commodity exchanges in Africa. Under-developed financial markets may also
make it difficult for hedgers and speculators to actively participate in these exchanges.
Within countries, cereal crops have the largest markets, but cereal prices remain
politically sensitive and likely targets for government control or other interventions,
especially during periods of rapid food price inflation. Commodities that are likely to
draw a sufficient scale of trade to insure needed liquidity in a commodity exchange are
likely to be the very goods that are subject to political interference or can be traded
effectively on existing exchanges abroad. Even when a government is committed to
allowing an exchange to function without price controls or interference, a track record of
policy reversals and scape-goating private traders for market abnormalities could still
inhibit an exchange.
Going further into the Ethiopian reality, the paper has identified major prospects and
outlooks an exchange in the specific context of Ethiopia. The major prospects are those to
do with the policy context, Growth of new cooperatives, Increase in commercial farms,
increasing agro-processing linkages, Emergence of exporter firms. The major future
outlooks of Ethiopian commodity exchange are lies in line with growth and
76
transformation plan. If GTP is successfully implemented by the end of the five year plan;
Ethiopian commodity exchange will experience future growth and better outlooks.
In general, the enabling conditions for development of commodity exchanges are also
fundamental to market development. Good physical infrastructure reduces transaction
costs and promotes trade; a successful market information system can address
information asymmetry; establishing warehouse receipts can mitigate liquidity constraints
of the farmers and traders; and well-designed farmers organizations can facilitate product
aggregation and smallholders‟ linkage to the market added investment. These
investments are now increasingly feasible and could generate large social benefits,
irrespective of whether they are part of establishing commodity exchanges.
77
6.1.2 Recommendation
For Governments:
 Ensuring an overarching regulatory framework that upholds the transparency and
integrity of commodity markets, protects market participants from unscrupulous
practices, and effectively manages the risks that arise from market operations;
 Developing elements of physical infrastructure that support commodity exchange
and market development – including information and communications
technology, electricity, storage and logistics;
 Aligning other elements of commodity policy to support the extension of the
positive benefits arising from commodity exchanges across agricultural sectors,
including to small-scale farmers, for example by integrating an understanding of
market functions into smallholder commercialization and corporatization
programmes;
 Promoting the integration of the commodity and financial sectors, by removing
undue restrictions on participation by financial institutions in markets and on
support for market development;
 Signaling support for the market, thereby providing confidence for other entities
to participate in the exchange. One strong signal could be to channel the
Government‟s own food security policies through exchange mechanisms. Another
strong signal could be to mandate State organizations to hedge exposure to price
volatility using the exchange‟s price-risk management mechanisms.
78
For the private sector:
 For trading houses, financial institutions and entrepreneurs in general, recognizing
the potentially great opportunity – both commercial and developmental – from
providing small scale commodity producers with access to exchange-traded
instruments, and from developing effective instruments and delivery channels to
enable their advantageous usage.
For ECX:
 Partnering with other entities that are well placed both to deliver exchange
services to market users and also to enhance impact on market users, especially
rural communities. Such entities may include farmer cooperatives/associations,
government agencies, research institutes, extension agencies, financial and
microfinance institutions, and civil society organizations;
 Deepening and broadening the exchange‟s development impact through the
innovative application of products, services, technologies and capacity-building
programmes;
 Sharing experiences and best practices with other commodity exchanges in the
commodity exchange in neighboring countries;
 Supporting further research into the role and the benefits of commodity
exchanges.
79
For farmers’ cooperatives/associations in commodity exchange:
 Exploring the feasibility of intermediating between exchanges and farmers, in
particular to aggregate small-scale farmers‟ requirements and to execute through
the exchange;
80
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Exchange (ECX) An overview.
 Dercon, S. (1995) “On market integration and liberalization: Method and application
to Ethiopia,” Journal of Development Studies, 32(1): 112-143.
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Performance: Constraints of performance of Ethiopian Grain Markets,” Working
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 Diao, X. et al. (2005) “Growth options and poverty reduction in Ethiopia: a spatial,
economy-wide model analysis for 2004-2015,” DSGD Discussion Paper 20,
International Food Policy Research Institute (IFPRI); Washington, D.C.
 ECX. 2010. ECX Direct Specialty Trade (DST). Addis Abeba: Ethiopan Commodity
Exchange, January 4.
 Fafchamps, M., E. Gabre-Madhin, B. Minten (2005) “Increasing returns and market
efficiency in agricultural trade” Journal of Development Economics 78(2): 406-442.
 Fisseha, T. (1994) “Grain markets: Government intervention and liberalization,”
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 Franzel, S., F. Colburn and G. Degu (1989) “Grain marketing regulations: Impact on
peasant production in Ethiopia,” Food Policy 14: 347-358.
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 Gabre-Madhin, E. Z. (2001) “Market Institutions, Transaction Costs, and Social
Capital inthe Ethiopian Grain Market,” International Food Policy Research
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 Gabre-Madhin, E. Z. et al. (2003) “Institutions for Market Exchange: Defining a
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 Gideon Onumah, 2010, “Implementing Warehouse Receipt Systems in Africa
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85
Appendix
ADDIS ABABA
COLLEGE OF GRADUATE STUDIES
SCHOOL OF BUSINESS AND PUBLIC ADMINISTRATIONS
MBA PROGRAM IN FINANCE
Survey questionnaire for a Study on prospects and challenges of commodity exchange in
Ethiopia. In the case of ECX
To The Respondents:
This questionnaire is prepared to assess the prospects and challenges of commodity
exchange particularly in ECX. It intends to look into the current policies and guidelines,
actual performance of exchange transaction and its implication towards facilitates
exchange. The result of this questionnaire will be used for academic purpose only. It is
hoped that the outcome of this research will contribute to the improvement of commodity
exchange practice in the country. Therefore, you are kindly requested to provide genuine
response to the questions that follow.
Dessalew Zelalem
“Thank you in advance for your Cooperation
86
Appendix 1
Questionnaires for officers of the ECX
Dear participants:
You are being asked to participate in a survey that intends to assess prospects and
challenges of commodity exchange in Ethiopia especially in ECX. The purposes of the
study are to: describe commodity exchange practice in Ethiopia, identify the current and
future prospects and challenges for either the adoption or treatment and recommendation.
I respectfully request your kind cooperation in answering the questions that follow as
clearly and frankly as possible and your response will be highly confidential.
Dessalew Zelalem
Thank you in advance for your kind cooperation
Personal Information questions
Please answer by putting a thick (√) in one of the blank spaces corresponding to each
item.
1. Age group (in year):
A. 20-30 C. 40-50
87
B. 30-40 B. 50+
2. Sex: Male
Female
3. Level of education:
A. Below 12 grade D. Bachelor degree
B. Certificate F. Masters and above
C. Diploma
1. Your status/position in the business__________________________
2. Year of experience in the specific office/units__________________
Survey questions
Select an appropriate answer from the given alternatives and put a think (√), for other
questions please provide your answers on your own words.
1. Do you think that the introduction of commodity exchange in Ethiopia is necessary?
A) Yes B) No C) I have no idea
2. If your answer for Q #1 is yes, what is the rationale behind saying this?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
88
3. Do you think that Ethiopian commodity exchange is successful enough in the
commodity exchange process?
A. yes B. No C. I have no idea
4. If your answer for Q # 3 is No, what is /are the principal reason (s) for this?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
5. Are there any challenges facing the EXC?
A. Yes B. NO C. I have no idea
3. If the answer for Q #5 is yes, can you mention the existing challenges?
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
4. If the answer for Q #5 is yes, do you think the ECX have a responsibility to play in
this regard?
A. Yes B. No C. I have no idea
5. If the answer for Q #7 is yes, what do you think the responsibility they have to play?
89
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
6. Do you think that the government policy suitable with your company?
A. Yes B. No C. I have no idea
7. If your answer for Q #9 is „A‟ or „B‟ what do you think of the reasons?
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
8. Do you think that the current infrastructure development have comparative
advantage to ECX?
A. yes B. NO C. little
9. If your answer for question #11 is „B‟ or „C‟ what do you think of the reasons?
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
10. Do you think that the current financial environment have relative benefit to ECX?
A. Yes B. No C. little
11. Do you think that the current Macroeconomic stability of the country suitable with
ECX?
90
A. Yes B. No C. little
12. What major benefits have you recognized from the establishment and operate of
ECX?
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
13. Would you summarize the potential of commodity exchange in Ethiopia?
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
14. Would you summarize outlook of commodity exchange in Ethiopia?
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
15. Would you summarize the potential and existing challenges to Ethiopian commodity
exchange?
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
16. Any extra information you want to suggest that will help ECX become a more useful
actor in our economy:
91
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
92
Appendix 2
መጠይቅ ሇኢትዮጵያ ምርት ገ በያ
በአዲስ አበባ ዩ ን ቨርሲቲ
ቢዝነ ስና ኢኮኖሚክስ ፋክሉት
የ ፋይና ን ስ ዲፓርትመን ት
ይህ መጠይቅ የ ተዘ ጋጀው በኢትዮጵያ ምርት ገ በያ ስሊ ለ የ ወዯፊት ተስፋዎችና ችግሮች
ሇማወቅና ሇመረዳት የ ተዘ ጋጀ ነ ው፡ ፡ በዚህ መጠይቅ የ ሚገ ኝ መረጃ በግላ ጠብቄ ሇትምህርት
የ ምጠቀምበት መሆኑን ቃሌ በመግባት ነ ው፡ ፡
ስ ሇሆነ ም በዚህ መጠይቅ ሇቀረቡት ጥያ ቄዎች ተገ ቢዉን ምሊ ሽ በቅን ነ ትና በታማኝነ ት
እን ዲሰጡኝ በትህትና እን ጠይቃሇን ፡ ፡
እባክዎን ጥያ ቄዎቹን ሇመረዳት ያ ን ብባቸዉና ሇቀረቡት ጥያ ቄዎች አጭር መሌስ
ሇሚያ ስፇሌጋቸዉ አጭር ምሊ ሽ ይስጡ፡ ፡
ማስ ታወሻ
ይህ መጠይቅ በዯረስዎት በሁሇት ቀና ት ውስጥ ሞሌተው እን ዲያ ጠና ቅቁ ከወዲሁ
እን ይቃሇሁ፡ ፡
93
የ ግሌ ሁኔ ታ መጠይቅ
1) ዕ ድሜዎ በየ ትኛው የ እድሜ ክሌሌ ውስጥ ይጠቃሇሊ ሌ፡ ፡
ሀ) 20-30 ሐ) 40-50
+
ሇ) 30-40 መ) 50
2) ፆ ታ ወን ድ
ሴት
3) የ ትምህርት ዯረጃዎ
ሀ) ያ ሇተማረ መ) ዲፕልማ
ሇ) ከ12ኛ ክፍሌ በታች ሰ) ዲግሪ
ሐ) ሰርተፍኬት ር) ሁሇተኛ ዲግሪና ከዚያ በሊ ይ
ስሇምርት ገ ቢያ ው መጠይቅ
1) የ ኢትዮጵያ ምርት ገ በያ መቋቋም ተገ ቢ ነ ው ይሊ ለ?
ሀ. አዎ ሇ . ተገ ቢ አይዯሇም ሐ. አሊ ውቅም
2) እን ዯ ኢትዮጵያ ምርት ገ በያ አባሌነ ትዎ፣ እርሶ ዎና የ እርሶ ተቋም ከምርት ገ ቢያ ዉ
ህግና ዯን ብ በዯን ብ ያ ውቁታሌ?
ሀ. አዉቃዋሇሁ ሇ. አሊ ዉቀዉም ሐ. በትን ሹ አዉቀዋሇሁ
94
3) የ ምርት ገ ቢያ ዉን የ ስራ አፇፃ ፀ ም እን ዴት ይገ መግሙታሌ?
ሀ. ተስፋ ሰጭ
ሇ. ተስፋ አስቆራጭ
ሐ. መሌስ የ ሇኝም
4) በግብይትዎ ወቅት የ ሚገ ጠምዉ ችግር አሇ ይሊ ለ?
ሀ. አዎ አሇ
ሇ. የ ሇም
ሐ. መሌስ የ ሇኝም
5) ሇመጠይቅ ተ.ቁ. 4 መሌስዎ አዎ አሇ ካለ እባክዎ ችግሮችን ይጥቀሱሌኝ?
__________________________________________________
__________________________________________________
__________________________________________________
6) የ መን ግስት ፖሉሲ ሇኢትዮጵያ ምርት ገ በያ ትስማሚ ነ ው ይሊ ለ?
ሀ. አዎ ሐ. መሌስ የ ሇኝም
ሇ. አይዯሇም
7) የ ኢትዮጵያ ምርት ገ ቢያ መሰረታዊ ችግር ምን ድነ ዉ ይሊ ለ?
__________________________________________________
__________________________________________________
__________________________________________________
95
8) ሇመጠይቅ ተ.ቁ 7 መሌስዎ አዎ ከሆነ እን ዴት ነ ው ተስማሚ የ ሆነ ው?
__________________________________________________
__________________________________________________
__________________________________________________
9) ወቅታዊ የ ሀገ ሪቱ የ ኢኮኖሚ ሁኔ ታ ሇምርት ገ በያ ው ተፅ ዕ ኖ አሇው ይሊ ለ ?
10) ሇመጠይቅ ተ.ቁ 9 መሌስዎ አዎ ከሆነ እባክዎን ተፅ ዕ ኖውን ያ ብራሩሌኝ?
__________________________________________________
__________________________________________________
__________________________________________________
11) የ ሐገ ሪቱ የ መሰረተ ሌማት ሇምርት ገ ቢያ ው ተፅ እኖ አሇ ይሊ ለ?
96
12) ሇመጠይቅ ተ.ቁ 11 መሌስዎ አዎ ከሆነ እባክዎን ተፅ ዕ ኖውን ያ ብራሩሌኝ?
______________________________________________________
_______________________________________________________
_______________________________________________________
13) አሁን በስራ ያ ለ መጋዘ ኖች በቂ ና ቸው ይሊ ለ
14) በፍጥነ ት መፍትሔ ያ ሻቸዋሌ የ ሚለት ችግር አሇ?
ሀ. አለ ለ. የለም ሐ መልስ የለኝም
15) ሇመጠሇቅ ተ.ቁ.8 መሌስዎ አሇ ከሆነ እባክዎን ችግሮቹን ያ ብራሩሌኝ
__________________________________________________
__________________________________________________
__________________________________________________
16) ሇመጠይቅ ተ.ቁ.8 መሌሶ ዎ አሇ ከሆነ \ የ ችግሮቹ መፍትሔ ምን ይሆና ሌ?
ይላሉ?
97
__________________________________________________
__________________________________________________
__________________________________________________
17) የ ኢትዮጵያ ምርት ገ ቢያ የ ወዯፊት ዕ ጣ ፇን ታው ምን ይሆና ሌ ይሊ ለ?
ሀ. ብሩህ ለ. የማይሻሻል ሐ.ውድቀት
18) ሇመጠይቅ 11 መሌስዎ ብሩህ ነ ዉ ካለ ሇምን ድን ነ ው ይህን ያ ለት?
__________________________________________________
__________________________________________________
__________________________________________________
19) የወቅቱ የኢትዮጵያ ምርት ገቢያ ጥንካሬ ምንድን ነዉ ይላሉ?
_______________________________________________________
_______________________________________________________
______________________________________________________
20) የ ምርት ገ ቢያ ዉን ዯካማ ጎ ን ሉጠቅሱሌኝ ይችሊ ለ?
1. ________________________________________________
2. ________________________________________________
3. ________________________________________________
4. ________________________________________________
98
21) በተጨማሪ ስሇምርት ገ ቢያ ዉ የ ሚና ገ ሩት ነ ገ ር ካሇ?
__________________________________________________
__________________________________________________
__________________________________________________
ስሇትብብርዎ አመሰግና ሇሁ!
Appendix 3
Interview Questions for officers of the ECX
1. How many clients do you have under your business in ECX?
2. What special benefits do your clients enjoy while working with your company?
3. How do you define the current infrastructure development which is the foremost
point for commodity exchange?
4. What were the major problems ECX encountered in the previous three years of
operation?
5. What other challenges that you faced about products?
6. There is a rumor as exporters are in convenient with ECX. How far is this true?
7. What challenges that you faced about infrastructure of commodity exchange?
8. What is the outlook of ECX?
99
Appendix 4: Organizational
CEO
Structure
External Affairs Assistant

Executive Assistant
Chief Economist
General Legal Counsel
Comptroller, operations
CFO CSO CCO CRO CBO CCSO CMDO CIO
Surveill Clearing Market

Strategy Rules
Finance ance house Data
Business
Compliance Risk
Human Dev’t Central
mangt. Dissemi
Resource depositor
Research Discipline nation
y
Settlement
General
corporate Guarantee Info
Service Arbitration
comm. Fund center
Tribunal Mangt.
Warehouse
operations Architecture
Business
Quality Application
control
Treading IT operation
operation
100
Appendix 5: Selected GTP Targets
Sector/Indicator Baseline Plan
2009/10 Target
2014/15
The Macro Economy:
Real GDP growth rate (%) 11 11.2
Per Capita GDP at Current Market Prices(USD) 401 698
Total Consumption Expenditure (PFCE) as % of GDP 90.9 85.0
Gross Domestic Saving as % of GDP 9.4 15.0
Gross Domestic Capital Formation as % of DGP 23.7 30
Export of Goods and Non-Factor Services as % of GDP 10.5 31.2
Imports of Goods and Non-Factor Services as % of GDP 27.3 45.7
Resource Balance as % of GDP 16.8 14.5
Domestic revenue and Grants as % of GDP 16.8 19.7
Domestic revenue as % of GDP 12.9 17.3
Tax revenue as % of GDP 9.7 15.3
Total poverty-oriented expenditure as % of GDP 12.5 15.7
Capital Expenditure as % of GDP 10 13.0
Recurrent Expenditure as % of GDP 8.5 8.6
Overall Balance Including Grants as % of GDP 1.6 2.0
101
GTP…………….con’d
External (Net) as % of GDP 0.8 0.6
Domestic (Net) as % of GDP 0.7 1.3
Poverty & Welfare
Total poverty Head Count (%) 29.2 22.2
Food Poverty Head Count (%) 28.2 21.2
Key Sectors:
Agriculture and allied activities 6.4 7.3
Agriculture value added (in billion Birr) 58.4 86.2
Number of extension service beneficiaries (thousands ) 5,090 14,640
Coffee export (Ton) 319,647 600,970
Meat Export (000 Metric Ton) 10 111
Number of household participating productive Safety net 7.8 1.3
program(million)
Graduates from Safety net program 730 -
Industry 13.7 21.4
Sugar product(000 ton) 17,712 42,516
Growth Rate of Industry Value Added (%) 13.3 19.1
Textile and garment industry export (in million birr) 21.8 100
Total capacity to produce cement (million ton) 2.7 27
102
Metal consumption per capita (kg) 12 34.7
Infrastructure Development
Roads:
Road network 49,000 136,000
Average Time taken to all-weather road (hours) 3.7 1.7
Road density (km/1000 km2) 44.5 123.7
Road density (km/1000 population) 0.64 1.54
Roads in acceptable condition (%) 81 86.7
Proportion of Area further than 5 km from all weather roads 64 29
(%)
Rail way
Rail way network - 2000
Power:
Electricity coverage 41 75
Power generating capacity(mg wt) 2000 8000
Water
Potable water coverage (%) 68.5 98.5
Urban potable water coverage ( within 0.5km) 91.5 100
Rural potable water coverage (within 1.5km) 65.8 98
103
Developed irrigable land (%) 2.5 15.6
Telecom:
Mobile density (per 100) 1.5 8.5
Telephone service coverage with in 5km (%) 49.3 90
Fixed telephone subscribers (in millions) 1.2 8.6
Mobile Telephone subscribers (in millions) 7.6 64.4
Internet service subscribers(in millions) 0.20 7.17
Urban Development & Housing
Reduce urban unemployment rate in towns under integrated 176 400
housing development (000)
Provision of housing and basic services (Number of Housing 213,000 700,000
Units)
Reduction of slum areas (%) 40(2000) 20
Education
Gross Primary Enrollment Ratio (1 to 8) (%) 94.2 100
Primary school ratio of girls to boys 0.93:1 1:1
Primary Pupil: text book ratio 1.25:1 1:1
Primary Net enrollment ratio 87.9 97
Secondary school gross enrollment ratio 38.1 75
104
Government higher institution intake capacity (under 185,788 467,000
graduate)
TVET intake capacity 430,562 1,127,330
Adult literacy rate (%) 36 95
Health
Primary Health Services Coverage (%) 89(2008/09) 100.0
Under Five Mortality Rate (per 1000 101 67
Maternal mortality rate (per 100,000) 590 267
Contraceptive Prevalence Rate (CPR) (%) 55 80
Proportion of Births Attended by Skilled Health Personnel 25 60
(%)
DPT 3 vaccination coverage (%) 81.9 90
Percentage of Households in Malaria Prone Areas with 100 100
ITNs(%)
Source: Growth and Transformation Plan (GTP), 2010
105

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ADDIS ABABA UNIVERSITY

SCHOOL OF BUSINESS AND PUBLIC ADMINISTRATIONS

MBA PROGRAM IN FINANCE

A written Research for inpartial Fulfillment of the Requirement for the

“Challenges and Prospects of Commodity Exchange in Ethiopia. In the case of

BY: Dessalew Zelalem

Place and date of submission: Addis Ababa, June 2011.

guidance, constructive ideas, and comments.

exchange for providing me the necessary and available materials I need.

providing material and financial support.

TABLE OF CONTENTS ............................................................................................................ ii

LIST OF TABLES...................................................................................................................... vii

LIST OF FIGURES ................................................................................................................... vii

LIST OF APPENDICES .......................................................................................................... viii

CHAPTER ONE ...........................................................................................................................1

Background of the study..................................................................................................................1

1.1 Introduction of the study.........................................................................................................1

1.2 Statement of the problem........................................................................................................3

1.3 Objective of the study ............................................................................................................5

1.4 Significance of the Study…………………………………………………………………...6

1.5 Research Questions………………………………………………………………………….6

1.6 Scope of the study.................................................................................................................. 7

1.7 Limitation of the Study………...............................................................................................7

1.8 Organization of the Paper ...................................................................................................... 8

REVIEW OF THE RELATED LITERATURE..............................................................................9

2.2 Functions and Possible Benefits of Commodity................................................................... 10

2.4 How Does an Exchange Work? ............................................................................................. 14

2.4.1 A system that creates integrity and trust........................................................ ………….15

2.4.2 A system that generates market information………………………………………17

2.4.3 A system linked to warehouse receipts…………………….……………………….18

2.5 Experiences in commodity exchange in

neighboring East African countries………………………………………………………....20

2.5.1 Kenyan Experience in commodity exchange……………………………………...21

2.5.2 Ugandan experience in commodity exchange…………………………………………23

2.6 Overview of commodity exchanges in Ethiopia……………………………………………25

2.6.1. The Post-Reform Market Challenges…………………………………………………..25

2.7 The Problem of Economic Order…………………………………………….. …………….30

2.8 Ethiopia Commodity Exchange (ECX)…………………………………………...................32

2.9 Why an Exchange for Ethiopia? …………………………………………………………….33

3.1 ECX and its modalities………………………………………………………....................35

3.2 ECX governance……………………………………………………………………..............37

3.4 Trading procedure…………………………………………………………………………...41

3.4.2 The Exchange Central Depository…………………………………………………...41

3.4.3 ECX Trading System………………………………………………………………. 42

3.5 Direct Specialty Trade…………………………………………………………………….44

4.1 Methodology of the Study……………………………………………………..............46

4.1.1 Sampling Design………………………………………………………………………46

4.1.2 Data Collection Techniques/ Instruments……………………………………………47

4.1.2.1 Primary sources……………………………………………………………..47

4.1.2.2 Secondary Sources…………………………………………………………..48

4.1.3 Data Analysis Technique……………………………………………………………..…48

3.3 Administration of Data Gathering Instruments…………………………………………….................49

3.4 Anticipated Ethical Issues …………………………………………………………..............49

Analysis the Major Findings……………………………………………………………………50

5.1 Respondents’ Background…………………………………………………………............50

5.1.1 Respondent's age & sex Background…………………………………………............51

5.1.2 Respondent's Academic Background…………………………………………………52

5.2 Surveyed challenges of Ethiopian commodity exchange………………………………....52

5.2.1 Infrastructure Development……………………………………………………………55