sesame conundrum

Seasame Conundrum

Why Ethiopian sesame designaTed for export costs more locally than the international price

The price of sesame on the local market is ballooning. As accessing foreign currency becomes challenging for importers, many are turning to the export business as a way to retain some foreign currency and continue their work. This, coupled with other speculation, resulted in the price of sesame on the local market rising as high as USD230 a quintal, USD70 higher than the international price. Although the central bank enacted a directive that bans exporting at a loss beyond five percent, many are shipping the commodity despite making losses as high 60Pct of the original price of the product. EBR’s Ashenafi Endale explores.

On April 19, 2019, the trading floor of the Ethiopian Commodity Exchange (ECX), located around Mexico Square, in Lideta district, was the site of an extraordinary trade. A quintal of sesame was traded for ETB7,277 (USD269), the highest price since sesame started to be traded at ECX six years ago. What was more surprising was that the price of sesame on the international market was USD160 per quintal, up to USD200 lower than the ECX trading floor price.

The price of sesame has been steadily increasing, especially since the 2018 Chinese New Year, during which the demand for Ethiopian sesame skyrocketed. However, the price kept rising even after the holiday. Even after a mild decline after its peak, the price of sesame is still high. The average price of sesame at ECX is currently ETB6,500 (USD220), and the international price is USD170.

Despite the huge price difference between the domestic and international markets, businesses in Ethiopia offer a higher price in the local market and export the commodity for lower prices. Since the current international price forecast is the same for the next three months, the loss is expected to sustain at least up to December unless the local price drops dramatically.

“We are shipping sesame at losses of up to 60Pct,” says Mustafa Ahmed, an exporter who buys sesame on behalf of others engaged in similar lines of business. “We are desperate to get hard currency, so we buy sesame at any price locally and export it at a loss. The exporters I represent do not care about the price on the domestic market. They just tell us to buy the available sesame at any cost as their target is getting forex no matter the price.”

Although this raises questions about the soundness of the trading system, offering an inflated price is common practice on the ECX floor. But in recent years, as shortages of foreign currency became critical, exporters started to offer prices that are insensible in terms of returns. Since it is simple to wash, pack and transport sesame within few days, exporters find it easy to trade sesame at a higher price, hoping that they will recoup their losses by importing goods with the foreign currency they generate.

“Exporting a quintal of sesame brings better earnings than from a shipment of 30 quintal of mung beans, soya beans or coffee,” explains Begashaw Abebe, an exporter. “Sesame is ideal for generating more hard currency in a shorter time.”

According to a National Bank of Ethiopia (NBE) directive, exporters in Ethiopia are allowed to retain 30Pct of forex they generate. In addition, they are entitled to use 70Pct of the foreign currency they generate for 29 days before surrendering it to the central bank. Since businesses find it difficult to get hard currency from banks, they are forced into unfair trade practices by spending an exaggerated amount to buy agricultural goods from producers and suppliers, and export them. This gives them access to at least some hard currency and to continue their operation.

“Irrespective of the situation in other countries, whether there is a currency surplus or shortage, our exporters buy sesame at a higher price because their end goal is getting foreign currency,” says Dereje Atnafu, export department manager at Belayneh Kinde Import Export, which accounts for 10Pct of annual sesame exports in Ethiopia.

Netsanet Tesfaye, communications manager at ECX agrees with this. “Most of the current exporters of agricultural commodities are also importers. They become exporters by chance, in order to generate hard currency and stay in the import business.”

The number of exporters has significantly increased, fueling local demand for sesame, according to Netsanet. Yinager Dessie, the governor of the National Bank of Ethiopia, presented a nine-month report to Parliament two months ago, and disclosed that the national hard currency reserve has been depleted and can only cover the import of medicine and fuel, exacerbating the scramble for sesame.

Yet, Samuel Melkie, research and market information officer at the Ethiopian Pulses, Oilseeds and Spices Processors Exporters Association, says this is only part of the story. “Speculation is the main reason for the upsurge in sesame prices,” he argues. “Many were hoping that sesame would appreciate on the international market, and they would be able to retain huge amounts of foreign currency. But it didn’t happen like that. “

Samuel’s argument is supported by an incident at the beginning of this fiscal year. In September 2019, a fake news item started circulating, alleging that sesame production in India had declined, resulting in the price of the commodity rising in Ethiopia. “After the news went viral, people rushed to buy sesame, hoping to reap huge profits and foreign currency,” recalls Samuel.

Even Chinese buyers, who had firsthand information about the production of sesame and the trading price at ECX, went to Humera, a major sesame producing area in Ethiopia, to forecast production and fix future buying prices.

Sesame price at international market has been on the rise over the past five years. The price hit a record high on the international market after China, which used to be the world’s largest producer, became a net importer when its farmers switched to producing profitable vegetables. China, which is the destination of 70Pct of Ethiopia’s sesame exports, is the top global sesame buyer, even though the world’s largest sesame industries reside in South Korea and Japan. On top of growth in China’s sesame imports, a production decline in India, the current top sesame producer, contributed to the 70pct surge in international sesame prices in the last five years. These factors gave east African countries the opportunity to dominate the global sesame market, and determine prices.

Due to the losses caused by ballooning domestic prices, genuine exporters are leaving the market, according to Dereje. “A few months ago, we stopped exporting sesame after the losses went beyond USD100 per quintal. Up to that point, our foreign buyers imported our products for an equal price as we offered at ECX. But they were unwilling to do the same afterwards.”

Dereje says new entrants are responsible for the price upsurge. “The sesame market has become a playground where any newcomer can disturb and push others to leave,” he says. “The increasing imbalance in the volume of sesame export and earnings proves this.”

For instance, during April 2019 alone, a total of 19,436 tons of sesame were traded for ETB 1.03 billion. The trade volume and value of sesame has increased by 80.64Pct and 140Pct, respectively, from the same month of previous year. A total of 192,000 metric tons of sesame worth ETB8.9 billion was traded at the ECX during the last nine months of the current financial year. This is twice what was traded in the same period last year.

Ethiopia’s top sesame destinations were China, Israel, Vietnam, UAE, Turkey, USA, Saudi Arabia, Singapore, and Yemeni, and the nation was able to get over a quarter of a billion dollars from the exports of 1.6 million quintals of the commodity, accounting for 65Pct of the current annual production of the country.

The growth in sesame production and the export volume is also disproportional. Sesame production increased from 1.8 million quintals in 2012/13 to 2.4 million quintals in 2017/18. But it fell back to 2.45 million quintals in 2018/9. However, with an average five million quintals in carry forward, between two million quintals and 3.2 million quintals was available on the market over the last decade. “Price fluctuates based on production, and production fluctuates based on forecasts in other countries,” says Samuel.

The exported amount is also lower than the volume traded at ECX, because some companies export after adding value. For instance, an Israeli joint venture company in Ethiopia, Krotaj, processes tahini from 3,700 metric tons of sesame. On the other hand, the volume traded at ECX is lower than the country’s actual production because of contraband and traditional edible oil processing. “Contraband takes a significant portion of the available sesame. For instance, Kenya processes and exports smuggled Ethiopian sesame packed as ‘made in Kenya’ and export it to other countries,” says Netsanet.

Despite this, international sesame prices are forecasted to grow by 4.2Pct annually until 2024. Yet many are uncertain that Ethiopia would benefit from this opportunity as the price war continues on a large scale. “The government chooses to say nothing on the matter. For instance, the central bank warned people to stop exporting commodities at a loss above five percent of the price, but nobody follows that rule,” argues Mustafa.

It seems like only farmers and middle men are gaining from the increasing local prices. Farmers sell sesame for no less than ETB4,500 a quintal, even though the price was no more than ETB1,800 two year ago. “The farmer and suppliers think exporters buy sesame at inflated prices because it is profitable. Therefore, they are not willing to negotiate for less than the current, inflated prices,” says Netsanet.
ECX has the mandate to undertake market surveillance and cut out artificial price volatility, which adversely impacts the country’s economy, according to Netsanet. “We will start the surveillance. However, the other responsible government institutions such as the central bank also need to do their jobs.”

8th Year • Jun.16 – July.15 2019 • No. 75


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