Feature from Ethiopia: Commodity Exchanges

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Commodity Exchanges

Ethiopian markets are very risky with extremely volatile prices and high costs of market participation. It is difficult to find reliable partners, to transport goods to market, and to negotiate and enforce contracts due to poor infrastructure and missing information on prices and products.

Women in the market. © Apollo Habtamu / International Food Policy Research Institute

Because of a long and inefficient market chain, the price received by farmers is often just one third of the final price paid by consumers. All of these problems reduce the responsiveness of markets to changes in supply and demand, which can lead to price collapses in years of good crops or to a lack of supply to needy regions in years of drought.

Improving markets is a pressing policy agenda in Ethiopia. Hence, IFPRI is working with the government on a major innovation for Ethiopia�s rural economy: setting up the first ever Ethiopia Commodity Exchange. The exchange, due to be launched in one year, is designed to enable farmers, traders, consumers, and processors to trade reliably, to transfer risk, and to access the market at low cost.

A commodity exchange is not a new idea. Some 150 years ago, the world�s first and largest organized market, the Chicago Board of Trade, was born out of the need of farmers in the American midwest. When their grain could not be sold due to the lack of reliable buyers, they ended up dumping their produce in Lake Michigan. To reduce risk and costs, a system of standardized contracts was organized. It had standard and transparent grades of grain and a way to lock in prices by selling grain for future delivery.

No longer the domain of industrialized countries, exchanges are emerging around the world and growing rapidly in developing regions such as Asia. To ensure trustworthiness, the exchange imposes membership rules and punishes those who do not comply.

The fastest growing commodity exchanges in the world today are in China and

It�s vital to design an exchange system that works for Ethiopia--and this can only be done through continuous listening and learning.

India. In India, low-cost communications technology is enabling the rural poor to participate directly in the exchanges. With information technology, markets can reach the rural poor in ways that they could not just a decade ago. Smallholder farmers benefit from greater price transparency, can negotiate higher prices, can use futures prices to inform their planting decisions, and can even sell before they actually do any planting!

Committed to bringing these global lessons to light, we recently organized a study tour for Ethiopian policy makers and private sector actors to visit India and learn from the Indian experience.

At the same time, it�s vital to design an exchange system that works for Ethiopia. And this can only be done through continuous listening and learning. Or, as Ingida puts it, �before, we did not have the experience or the know-how to connect to markets. We had not reached that level yet. But now, we are learning!�

See this link for more information about IFPRI�s program in Ethiopia.

Dr. Eleni Gabre-Madhin
Senior Research Fellow and Program Leader
Ethiopia Strategy Support Program
International Food Policy Research Institute

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Page 1 - Research That Listens
Page 2 - Listening to Local Voices
Page 3 - Open Market Challenges
Page 4 - Trading with Trust
Page 5 - Commodity Exchanges

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