The Ethiopia Commodity Exchange has succeeded, where countless other commodity exchanges in the African continent failed, because of a focus on securing reliable supply chains, according to Edward George.
Mr George, head of group research at the pan-African banking group Ecobank, has been studying the agricultural commodity exchange as a model for supply chain management in Africa.
From its launch in 2008, the ECX now captures a large market share in coffee, of which Ethiopia is a major producer, but also handles contracts in pules, and grains.
Since the launch of the ECX, the take-up by farmers has been rapid, with some 60% of the country's coffee output now going through the exchange.
"Farmers' incomes are up 60%, and many of the middle men are out of business," Mr George said.
A fragmented sector
Insecure and unreliable supply chains have long been the bane of investors into African agriculture.
"The whole problem is the supply chain is disjointed, the marketing infrastructure is poor… most of the sector is very fragmented," Mr George noted.
And the distance, both physically and in terms of communication, between farmers and their markets hits farmer incomes.
"It's essentially a lot of farmers getting ripped off by middle men," Mr George said.
In fact, with about 50% of African crops going to waste at some point between field and kitchen, simple improvements in supply chain management can massively increase the agricultural sector's output.
"The key effort is cutting wastage," said Mr George. "If you invest in better storage, you've massively increased your yield."
"In Ethiopia 15-20% of coffee is damaged. That's hundreds of millions of dollars of lost output. Cutting spoilage will give an easy win."
So Mr George sees the ECX as an example to other exchanges, in that it put warehouses and supply chains at the core of its development.
"They created a network of warehouses… then they set up a trading floor to trade these contracts in Addis Ababa.
This means farmers can deliver their coffee to a local warehouse, have it graded and certified, and then immediately receive an instrument they can sell on the exchange.
"They have live prices from the trading floor in Addis, sent in texts to farmers or displayed on ticker boards across the agricultural zone," Mr George said.
"They made it very easy for farmers to know what's going on in the market."
Mr George sees the other key element of ECX's success being the extent to which is tailored to the local situation.
"Ethiopia is unique as a country. It's pretty much always been independent [barring a short-lived Italian occupation]," Mr George said. "They have a strong vein of self-sufficiency."
This culture of self-sufficiency was carried through to the creation of the ECX.
"The exchange was totally self-built, they didn't get anything off the shelf. There's a strong sense of local ownership. In other countries people just imported a model.""
And this self-created nature was key to the exchanges success.
"In Africa, it's one size fits one," Mr George said. "If you come in with a model from another country, even a neighbouring country, you will rarely succeed."
"If you just hand it over to management consultants, you'll fail."
Mr George said the ECX was delivering "a generation of Ethiopians trading their own coffee".
And with the way that the ECX tracks the movement of beans through the business, it delivers traceability, which is essential for selling under some certificates, such as Fairtrade and Rainforest Alliance.
Mr George said this ability to use the ECX to market specific origin coffee would allow farmers to market their own supplies online, in a way that could help attract the younger generation back into agriculture.
"You can sell to youth that it's not agriculture, its agribusiness," he said.
Edward George will be presenting a case study De-risking the Value Chain, at Day 1 of the Agri Risk forum. For more information please see www.agririskforum.com
By William Clarke