Trading floors can’t feed Africa

Mondelez International’s February announcement that it would increase production of coffee from Ethiopian beans 50 percent in two years was good news for the Ethiopia Commodity Exchange, started in 2008 with the help of foreign donors to improve food distribution in a country where millions often went hungry. By government decree, almost all buying and selling of coffee, sesame seeds, and navy beans for export must take place on the exchange.

The ECX , which got funding from the U.S. and the United Nations among others, is one of at least eight commodity exchanges started in sub-Saharan Africa over the past two decades with the aim of improving food security for local populations. Many have failed, and only South Africa’s is thriving without government support.

Exchanges are a distraction from other initiatives that would better serve poor farmers, says Nicholas Sitko, a Michigan State University agricultural economist who’s based in Zambia, where a commodity exchange closed in 2012.

“We’ve learned that no amount of money pumped into them and no amount of government effort to get them off the ground can force them to work,” he says.

With its buyers and sellers in colored jackets and open-outcry trading floor displaying real-time market data from around the world, the ECX has been a prime example of what an exchange can and can’t do.

The government ordered export coffee trading onto the exchange shortly after it opened, hoping it would jump-start activity and help attract other business. That didn’t work: Small amounts of corn and wheat are traded, but coffee and sesame seeds account for about 90 percent of exchange volume.

Eleni Gabre-Madhin, who founded the ECX and served as its first director, says one obstacle for the exchange was that the state didn’t build enough warehouses to store bulky items such as cereals. During the government’s next five-year growth plan starting in July, the ECX will “restrategize from the bottom up” so it can handle staple foods, says ECX Chief Executive Officer Ermias Eshetu. He says the ECX is now allowed to license private warehouse operators to expand storage capacity.

Ethiopia’s fragmented, barter-based agricultural economy will have to modernize before it can benefit from a Western-style commodity exchange, according to Fekade Mamo, general manager of Mochaland Import and Export and a former ECX board member. “The objective was to bring about an equitable food supply system” in the country, Fekade says. (Ethiopians are known by their first name.) “That has completely failed.”

Trading floors have flopped in Zambia, Uganda, Nigeria, Zimbabwe, and Kenya. Each one, analysts say, suffered from the same flaw: a top-down approach that’s better at attracting foreign aid than at improving farming practices and developing transportation and communications networks.

Donors like exchanges because they look like institutions in their own countries, says Peter Robbins, a former commodities trader in London who’s studied African exchanges. And “African leaders like to show off trading floors to show how modern their countries have become,” he says.

Commodity exchanges can encourage a consistently higher crop quality, a key condition for global trade, says Gary Robbins (no relation to Peter), chief of the economic growth and transformation office at the U.S. Agency for International Development in Addis Ababa, Ethiopia’s capital. ECX founder Eleni says farmers who use the exchange have seen benefits: Posting prices publicly has boosted their income, and centralized trading means buyers don’t default on contracts.

The concept continues to appeal to outsiders. Since leaving the ECX in 2012, Eleni has been working with investors, including International Finance Corp.—an arm of the World Bank—and Bob Geldof’s 8 Miles private equity fund, to establish an exchange in Ghana. Next she hopes to help set up one in Cameroon.

Under the right circumstances, exchanges can make sense, says Shahidur Rashid, a food-security analyst with the International Food Policy Research Institute in Washington. The problem is that conditions for success, such as large trading volumes, a strong financial sector, and a commitment to transparency, don’t yet exist in most countries, he says.

“A new institution should add value, and I struggle to find that value,” Rashid says. “Every country does not need an exchange. Nor is it any good to establish them in places where they will fail.”