October 30, 2020

What Is The Ethiopian Commodity Exchange?

The Ethiopian Commodity Exchange (ECX) is a national multi-commodity exchange in Ethiopia through which most of the country’s coffee is traded. Since it was established in 2008, it has been the subject of both praise and criticism from across the coffee industry.

While adjustments to how the ECX operates have been made, opinions remain mixed across the sector. For many outside of Ethiopia, it is unclear who benefits, and precisely what the role of the ECX is.

To learn more about the exchange, I spoke to an exporter, a buyer, and a specialty roaster all from or based in Ethiopia. They provided me with some insights on its structure, its benefits, and how it could be further improved to trade coffee. Read on to learn more.

Lee este artículo en español ¿Qué es la Bolsa de Comercio de Etiopía?

Ethiopian producer, ECX

Exploring The ECX

In 2007, economist Eleni Gabre-Mahin appeared in a famous TED talk where she outlined her ambitious vision to found the first commodities market in Ethiopia. Her plan, she said, would create wealth, minimise risk for farmers and turn one of the world’s poorest countries into one of its fastest-growing economies. She became CEO of the new Ethiopian Commodity Exchange in 2008, helping to launch the only functioning commodity exchange in Africa at the time. 

Today, Malawi, Rwanda, and Ghana also operate commodity exchanges, but the Ethiopian exchange was the first of its kind. It has largely been considered to have successfully modernised the country’s economy, linked smallholder farmers to markets, and enhanced food security. 

The ECX is a partnership between market actors, the members of the exchange, and the Government of Ethiopia. Its mission is to “bring integrity, security, and efficiency to the market, creating opportunities for unparalleled growth in the commodity sector”. 

However, coffee does not fit quite so well in the broader category of commodities. The differentiation of quality in the coffee sector (including the commercial, premium, and specialty markets) makes buying coffee more complex.

This requires more skill on the part of both producers and traders, which the popular commodity marketplace may not be equipped to adequately cover. 

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Ethiopian women ranking green coffee beans, ECX

How Has The ECX Benefited Producers And Buyers?

Before the ECX was established, many Ethiopian coffee producers had little to no access to sufficient credit, market information, and goods transportation among many other vital resources. For many Ethiopian farmers, coffee producers included, the ECX came as a way forward after years of struggle and hardship.

Price Transparency

Samuel Demisse is the owner of Keffa Coffee in Baltimore, which he tells me imports a lot of Ethiopian specialty coffee. 

“I was born and raised in Ethiopia,” Samuel explains. “My dad was a coffee farmer. Back then, there was no technology. The only way you heard about the coffee price was through the radio, once a day, if you were lucky. The farmers had no idea about the coffee price. it was really tough.”

However, when the ECX was introduced, it regularly posted the NYSE coffee price on monitors across coffee-producing areas. All of a sudden, farmers knew what was happening with the global price of the product they were trading. They could also use futures prices to inform their planting decisions. 

This was a revolution in transparency that allowed Ethiopian producers to have more agency over their selling price and business strategy.

Insurance & Stability For Producers

Samuel tells me that the “most important thing” about the ECX “is that farmers get their money right away”. 

Exporters who want to trade through the ECX have to transfer money to their ECX account upfront. This provides the guarantee that washing stations or any farmers selling their coffee will get their money the next day. 

“Before that, they had to wait to get their money – sometimes for up to three or six months. There was no security or guarantee,” he says.

Payments through the ECX are also electronic, meaning that producers no longer need to wait for a check or wire transfer to come through. Instead, the funds automatically debited from the exporter’s ECX account.

Furthermore, standardised contracts also incentivise better quality and, to some extent, eliminate the risk of a contract default or unreliable supply. The ECX model also has a “price flooring” scheme, which limits the value of coffee from dropping past a certain point and affecting producers too heavily.

Although producers are still affected by global coffee market price fluctuations, they are now much more protected and less exposed to risks than they used to be.

Security & Consistency For Buyers

When using the ECX, buyers are guaranteed that their coffee will be delivered promptly. Furthermore, the ECX’s regulations make sure that the commodities traded meet a minimum level of quality. 

While this has been the subject of some criticism as higher grade coffees are reportedly not always correctly graded, it is a system that seems to work effectively for commercial coffees. 

The centralised system also makes it easier for foreign buyers, as communication is simple, well-regulated, and often automated.

Coffee Transport & Market Access

Samuel tells me that before the ECX, farmers had to bring their coffee from the rural areas all the way to the Addis Ababa, where auctions would take place. 

Once producers arrived, there was a seven-day period during which the coffee could stay on their truck to be auctioned off. If it didn’t sell, farmers had to rent a warehouse to store it and a hotel room to live in until it would sell. In some cases, this could take up to eight months, Samuel says.

However, today, the ECX ensures the transport of the seller’s coffee, which is stored at the ECX warehouse in Addis Ababa. The centralised marketplace also increases market access for producers, allowing them to access national and international markets more easily. 

Finally, a recent move to online auctions across the exchange has further improved logistics. It has even meant that many Ethiopian producers have been more resilient than most to the effects of the Covid-19 pandemic.

What Is “Vertical Integration”, And Why Has The ECX Recently Allowed It?

In this context, vertical integration is when an agreement is reached between exporter and producer to allow direct trade without the use of the ECX transaction platform.

Kenean Dukamo is the Export Manager at Daye Bensa Coffee. He explains that the ECX only remains involved only for quality control purposes and to enforce its price flooring scheme.

Until recently, however, vertical integration was effectively banned, and it was mandatory for all Ethiopian coffee to be traded through the ECX. However, in recent years, both the SCAA and specialty coffee buyers expressed concerns about unreliable grading, poor quality control, and a lack of traceability. 

In response, the Ethiopian Coffee and Tea Authority loosened the rules and allowed vertical integration in 2017. Exporters can now establish their own warehouses, consequently giving them more control over the sampling, scoring, and overall quality of the coffees they bring in. This enables a dialogue with the producer and increases traceability. It is widely recognised as a good option for premium and specialty coffee buyers.

Kenean explains that producers also benefit from vertical integration, as they can agree a predetermined price with a buyer for their crop. This is a guarantee that the ECX platform does not offer, as coffee is auctioned from crop to crop with the risk that it will not sell. 

As the coffee price can be volatile, confirmed sales and certainty are important. Samuel says: “My father had a stroke because of the volatility of the coffee price. You might make money this year, but next year, you don’t know. Uncertainty can kill you.” By loosening the rules somewhat and introducing vertical integration, the ECX has given producers a solution to some extent.

However, with vertical integration, payments are no longer centralised, meaning the prompt payment guarantee that the ECX offers is lost. Furthermore, contracts are no longer standardised, increasing the risk of default from both parties. 

Kenean says: “The ECX is a better platform for commercial coffees, and vertical integration is better for premium and specialty coffees, but still, there is no perfect system yet.”

How Can The ECX Better Serve Specialty Coffee?

There is a general consensus that the ECX has been successful in improving the lives of coffee farmers and contributing to the Ethiopian economy. However, many stakeholders agree that there are still ways in which it could be further improved.

Better Traceability

Kenean notes that while traceability has improved through vertical integration, it is still not perfect.

He says that with better organisation at sampling and warehouse levels, as well as digitising records and procedures, it could be improved, providing buyers with easier access to information about crops and farms.

Quality Control & Cupping Capacity 

Sara Yirga is the founder of YA Coffee Roasters in Addis Ababa. She says: “As a roaster, and as a specialty coffee actor, my only concern is grading capacity. Are the skills of ECX cuppers really up to standard?”

The ECX has a big responsibility when it comes to the quality control. All coffee traded in Ethiopia – through their platform or not – must pass through their grading system. However, both Sara and Kenean raise concerns about the ECX grading system, and the capacity of their cuppers. 

They tell me that discrepancies are frequent, especially when it comes to specialty coffee, which can be a problem when it comes to managing buyer expectations. Sara believes that improving capacity, as well as establishing a neutral, government-owned cupping laboratory for specialty coffees, could help to alleviate this problem.

Better International Market Access

Finally, Samuel adds that while the ECX has helped many producers to access the national market, it needs to focus on international market access going forward.

“The ECX needs to unite all its exporters to leverage power and international market access,” he says. “Ethiopian exporters are still too divided, which weakens the position of Ethiopian coffee [on the global market].”

The ECX changed the lives of Ethiopian farmers when it was first introduced, by providing them with more security and protection. It has also played a big part in boosting what is now the fastest-growing economy in East Africa. 

However, while the ECX has driven some success, it is not a perfect system. As coffee is Ethiopia’s number-one export (making up almost a quarter of all exported goods) it seems that making tweaks to an already successful platform would be worthwhile.

Today, the ECX is a great marketplace for commodities, including commercial coffee. However, through modernisation and continued collaboration, it could become a profitable platform for higher-quality and specialty coffees. We have already seen a huge step in this direction with the introduction of vertical integration – only time will tell if it will continue.

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Photo credits: Meklit Mersha, Daye Bensa Coffee 

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