Ermias Eshetu

In the Next Five Years, Farmers will Transact Using Mobile Phones.

Ermias Eshetu has been the CEO of Ethiopia Commodity Exchange (ECX) since January 2015. Before joining ECX, he was vice president for marketing and corporate services at Zemen Bank. He had previously worked with multi-national organizations such as IBM, Alcatel, Orange and Micro Strategy.
Ermias has a master’s degree in international business and a bachelor’s degree in computation from the University of Manchester. In connection with the soon to be celebrated ten years anniversary of the Exchange, EBR sat down with Ermias to discuss about the performance of the Exchange and the challenges it faced while working to modernise Ethiopia’s traditional agricultural commodity trading.

What are the main benefits of modernizing Ethiopia’s traditional market?
The consumer wants guarantee for quality and continuous supply of products with rational price. For instance, in Ethiopia some sellers mix butter with banana in order to earn unjust profit. Such practice, which is common in many other products affects not only market but also the health of the population. So, modernizing a given market helps consumers to get quality products in sustainable manner.
When it comes to price, in Ethiopia we see the price of some products jumping dramatically out of the blue. For instance, the price of tomato reached around ETB40 per kilogram recently. This happened not because the country is unable to produce enough tomato rather; it is because the supply chain of tomato remains functioning in traditional way. As a result, few suppliers in the middle use the system as they pleased. Many major products like beans and Teff are also under such traditional systems. So, modernizing the traditional market means having quality products in a sustainable manner and with the right price.

How do you evaluate ECX’s success towards modernizing the country’s?
ECX has just started with few products and much is left to be done. It is not simple to detach producers, sellers and buyers from the traditional way of trading they are accustomed to. They cannot simply leave what they have been practices for many years.
The aim of ECX since its establishment is to insure that the consumer gets commodities on time with quality and reasonable price. We started with few products and the effort of modernizing the whole market system will take longer time in the future. We cannot do it rapidly because it affects many stakeholders operating in the traditional market system; this drags ECX’s efforts.

How much of ECX’s objectives are met since its establishment?
Compared to similar institutions operating in developed countries, there is so much to be done by ECX. However, ECX managed to meet many of its objectives and achieved so much although some of our achievements cannot be quantified so far. For instance, if you take the coffee sector close to 15 million people are involved, both directly and indirectly. ECX provides market information for all these people. Coffee farmers do not know the price of processed coffee before. But now, they can get every information through SMS. Farmers used to take coffee to market and allow the buyer to decide the price. Now, they know the price before they go to market, so they can decide the selling price. The same goes to buyers and exporters. Although it is difficult to quantify the change in this kind of knowledge and decision making capacity, this is one of ECX’s achievements.
ECX also grades products to ensure standardization. When we do this it means we are adding value to the product. Because both the farmer and supplier know they have to meet ECX’s quality standards the buyer receives products confidently, because it is known that the product passes through ECX’s grading system.
Another unquantifiable achievement of ECX is its contribution in supporting the government in its tax collection effort. Before ECX, all transactions were based on the principles of the traditional market, which hinders government to know the exact amount and value of transactions. But now, every transaction in ECX’s floor is recorded and the government is using it to know the exact amount of transactions and levy the tax accordingly.
There are also quantifiable achievements of ECX. For instance, the value of our transaction in a single day reached ETB254 million last month. This is a record since ECX was established. This figure was around ETB5 million at the beginning.

What are the procedures ECX follow when it plans to add a product to its floor?
It starts from conducting feasibility study, which – shows the amount of production and its liquidity level as well as number of consumers or its level of demand. The quality of the product and the way of standardizing the product will also be covered in the feasibility study. Next, activities like contract formation and location of buyers follow. Checking whether there are institutions that verify the product’s quality as well as binding laws that govern the product transaction are also parts of the procedures.
ECX prepares blue prints for each of the grades of the product and contracts will be made based on the codes given for the blue prints. After the board of the ECX approves all this, the Ethiopian Commodity Exchange Authority, to which the ECX is responsible, places the legal framework. Finally, the new product enters ECX’s floor.

How is the price set then? Many complain about the pricing system, which they say depends on the international price indices.
This is a mistake. We do not refer the international price. Rather we look at local prices. ECX creates a floor where traders sell and buy based on the domestic price movement. There is a market price for products used for local consumption. We provide daily market price information as a reference. So, if the buyer is an exporter, he takes that reference as a benchmark, calculate his profit considering the processing and logistic costs, and offer his own price.
So can we say that the local price of export products can be above or below the international price?
Yes. Especially, the price of coffee at international market rises and falls fast, next to fuel. In Ethiopia, there are various types of coffee. But at the international market, for instance, in New York, it is traded just as a single commodity and it has only one index. We benchmark that single index for the various types of coffee that exist in Ethiopia, because it has to be integrated. But ECX has placed lower and upper price limitations, so that the price does not go outside that range and affect the farmer as well as the exporter.

What are the criteria for the upper and lower price limits?
In developed countries, there is the notion known as price maker, which serves as a start-up for the market and motivate the buyer and seller to transact. In Ethiopia, however, the market does not function like this. Instead, based on the daily price at international market that we provide them, the seller decides his selling price by himself. Similarly, considering the exporting cost and the amount of coffee available in the market in a given day, the purchaser decides his buying price. So, both have equal bargaining power.

ECX was first established to modernize the domestic market system. However, until now, only export products are being traded through its floor while important agricultural products like Teff are not included in ECX’s list. Why is that?
Teff is not a single product because it has too many varieties. It is difficult to manage the contract of such items with various types. We have to categorize it to three or four groups, in order to have a simplified contract. But if you include all of the types of Teff into one product in to ECX list, it is difficult to manage based on the grade given for each variety of Teff.

Some of graded products especially coffee ends up in the local market although they were meant for export. Is there any mechanism that allows ECX to curve this problem?
ECX’s main task is facilitating the transaction. We do not work on controlling contraband but we have the record of every transaction facilitated through ECX and destined for export. Our task end when the payment for the seller is settled. But, based on the transaction record, responsible government institution can take action.

Recently, a single seat in ECX floor fetched ETB2.5 million. What is the rationale behind the high price offerings for ECX intermediary seats?
I do not believe it is a big price. The highest price ECX has sold a seat for is ETB50,000. The highest price you know is the one sold by the members themselves. I think the reason is because there are limited seats at the ECX. Our role in this regard is bringing the seat seller and buyer together. People try to get the seat in order to get direct access to the central wholesale market of ECX. The higher prices shows traders confidence in ECX and is a symbol of free economy.

But, don’t you think it discourages new comers?
Yes, we are careful not to discourage new entrants. So we give priority for cooperatives and unions. The reason we are opening regional satellite centres is partly to solve this and increase the coverage and access to ECX floor.

ECX was established based on Public Private Partnership mechanism. How the ECX balances its responsibilities for the government and the market?
ECX is established based on proclamation ratified by the parliament, which gives more freedom and responsibility for the management and the board. It is owned by the government yet it is a free enterprise that depends on its own revenues and expenses. It is free enterprise because it operates based on its own strategies. Half of the board members are from private sector while the rest are from the government.

Few years back, it was said that ECX was working to start forward market. What is the progress like in this regard?
We have conducted studies to start forward market. It is in the process. Even after the studies are conducted, it often takes time to start. Many supportive products like innovative insurance policies, changing the society’s perception towards forward market and transfer of knowledge are needed. But we are working on them.

What are the innovations you have introduced in ECX after taking your position two years ago?
We have introduced three main changes. The first is changing the open outcry trading system to electronic trading system. We deployed it last year. Now, sellers and buyers can transact through computer platform, rather than the former face to face trading on the trading floor. The e-trading has brought many changes. Formerly, buyers and sellers enter the floor after negotiating outside, which affects the free pricing system.
The second is establishing regional market floors. The construction of trading facilities, which are similar to the trading floor in Addis Ababa, is already finalized in Hawassa, Nekemt and Humera. So, people will not be required to come to Addis Ababa to trade at ECX’s floor. Construction of additional facilities at Adama, Jimma, Gonder and Kombolcha has reached over 50Pct. ECX will have ten satellite market centres, in the near future. These centres will play crucial roles in training, capacity building, bringing in new market players and new products. For instance, the satellite centre at Humera will look for new players and products from the area.
The third thing we have introduced is traceability system, which includes putting bar codes that can show every characteristics of the product including the exact time of transaction and type of product. However, many things are left to be done to ensure the traceability of products.

What are ECX’s main targets for the near future?
The first is enabling the farmer to transact using mobile phone, within the next five years. Implementing and strengthening product traceability system is the next priority. Introducing additional products for the domestic market as well as export is also in the list. EBR

5th Year • June 2017 • No. 51

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