ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE

Structure, Performance, and Challenges of Coffee Trading through the Ethiopia

Commodity Exchange (ECX)Mehari H. Abay Endris Negus Bart MintenESSP/EDRI ECX Authority ESSP/IFPRI

Ethiopia’s coffee value chain: Evidence towards improved investments and policiesAddis Ababa HiltonSeptember 15, 2015Addis Ababa

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1. Background to ECX

• The ECX model designed to assure that few intermediary members will serve many clients

• Members buy seats that entitle them to permanently trade using ECX; non-members can trade by paying a commission to intermediary trader to a max. of 2% of the transaction value

• ECX had 349 active members with a permanent seat that could directly trade in ECX for close to 13,000 clients (March 2014)

• The ECX does not trade for itself but provides the facilities/ground rules to trade for standardized commodity-based contracts

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1. Background to ECX• Before ECX, trading between suppliers and buyers

conducted at two auction centers (Addis Ababa and Dire Dawa); mutual trust was the basis for trading among trading parties

• Conceptual idea of ECX dates back to November 2002

• Establishment of ECX by the end of 2005• Effective start ECX on April 24, 2008 • The introduction of coffee in ECX changed, among

others, the mechanism of grading/trading of coffee

1. Background to ECX

• Since its start, ECX facilitated trade in six commodities: coffee, sesame, haricot bean, maize, wheat and green mung bean

• An average of 414,000 Mt of commodities estimated at a value of about Birr 15 billion transacted annually

• Not all types of commodities equal contributions: Coffee and sesame are the two most important commodities contributing for 89% and 97% of total trade in terms of volume and value, respectively

1. Background to ECX

• Coffee alone accounts for 49% and 67% of total traded volume and value, respectively

• ECX contributes about 85% of the total coffee export of the country

• Other channels include direct exports from commercial farms and farmers associations and their unions.

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2. Objective, data and methodology

• The study aims to understand the structure, performance, and challenges of the exchange in coffee trading.

• Use ECX’s daily coffee transaction data from April 2009 to December 2014.

• To examine the structure and performance of the

exchange, we implement both descriptive and econometric analysis.

3. Structure of coffee trading through ECX3.1. Characteristics of transactions and traders

Descriptive statistics Unit MeanStandard Deviation

Transaction Volume Metric tons 7.3 4.8Price US cents/lb 138 47Value USD 22,300 16,100SellersNumber of sellers per year 3,515 521Sales volume by single seller per year Metric tons 65 129Sales value by single seller per year USD 195,500 367,300BuyersNumber of buyers per year 454 78Purchase volume by single buyer per year Metric tons

532 1,497

Purchase value by single buyer per year USD 1,565,200 4,661,900

Coffee origin % of transactionsHarar 9Wollega/Lekemte 12Sidama 22Yiregachefe 6Jimma 38Other 13Washed/unwashed coffeeWashed 26Unwashed 74Coffee gradesExport specialty 3Export commercial 77Local 20

3.2 Concentration of coffee traders in ECX

Figure 1: Concentration ratio of sellers (CR4 & CR8) The concentration ratio

or market share of the biggest 4 sellers (CR4 ) below 10% over the study period.

The CR8 also below 15% over this period.

Figure 2: Concentration ratio of buyers (CR4 & CR8) Market share of the biggest

4 and 8 coffee buyers was below 30% and 40%, respectively. Coffee trading on ECX not dominated by a small number of large businesses

Coffee trading in ECX is seemingly characterized by competitive market structure (because of large number of sellers/buyers).

4. Performance of Coffee Trading through ECX4.1 Volume and value of coffee trade

Figure 3: Trends of volume and value of coffee, 2009-2014

171.95

380.60

267.70

686.23

177.16

761.90

249.96

841.35

211.84

556.98

244.23

799.59

020

040

060

080

01,

000

2009 2010 2011 2012 2013 2014

B. volume and value

Volume in thousend metric tons Value in million USD

Value of coffee traded increased from 381 million USD in 2009 to 800 in 2014

Volume of coffee traded increased from 171,990 Mt in 2009 to 244,230 Mt in 2014

4.2 Quality premiums for coffee on ECX• Export specialty coffee 7% and 59% premium value

over export commercial coffee and local coffee, respectively

• Washed coffee 16 % premium over unwashed; magnitude of premium for washing decreased from 32 % in 2009 to 10% in 2013 and 2014

• Jimma coffee is the lowest priced coffee; prices of Harar and Yirgachefe are 48 % and 18 % higher than that of Jimma

5. Challenges

• As a result of its engagement in the sector, ECX challenged by a number of compounding factors

• Major challenge is to harmonizing the conflicting interests of buyers and sellers

• Infrastructure related problems and misconduct of some employees/traders all constrain the effectiveness and efficiency of the operation and the price discovery mechanisms

• Weak correlation between international and ECX coffee prices, especially when international prices fall dramatically

5. Challenges

Issue of Traceability• ECX has about 428 grades out of which 365 constitute an

export grade • Within the export grade, 110 grades are specialty grades,

representing 55 origins of coffee production area• Despite this, there is a growing pressure from external

buyers for further de-commoditization of the coffee and further traceability requirements

5. Challenges

Growth/Sustainability Issues

• ECX has a motto of “becoming a global commodity market by choice.”

• In the absence of equal level playing field, the chance of success of attracting trade based on “choice” could be challenged for a number reasons.

6. Conclusion• The exchange provided trading for more than 170,000

metric tons of coffee each year over the period 2009 to 2014

• Coffee is the single commodity that accounts for over 65% of ECX revenue

• The current model of ECX enhances transparency in the trading system

• Coffee trading in ECX characterized by competitive structure with relatively low concentration of sellers and buyers in the exchange

• But number of issues need to be addressed by policy makers

6. Conclusion

Two major issues:• Addressing the issues of traceability on the one hand and

ensuring the existence of transparent, fair and efficient price discovery mechanisms and zero contract default, on the other hand

• Addressing the underlying causes of price disparity between domestic prices of coffee and the international price of export grade coffee

6. Conclusion

• Provide innovative value adding services to its users to make the exchange “a global commodity market by choice”

• Make necessary preparations to implement futures trading (might involve working with universities to fill the current knowledge and human resource gap)

• Seek ways to attract international warehouse operators• Further build the confidence of traders and stakeholders in

the system• Revise the membership criteria of intermediary members in

a way that will impose strict professionalism and risk bearing capacity

Thank You!