News & CommentaryArchive
Mar 05, 2008
Ethiopian Exchange Looks Promising
Mention Ethiopia and most Westerners will instantly think of famine and Live Aid. Few would believe that Ethiopia in fact has a productive agricultural sector, one which is responsible for growing more than ten percent of all cereals produced in sub-Saharan Africa. Most Ethiopian farmers have always sold their goods directly after harvest to the first local bidder, however. This dynamic comes as a consequence of limited telecommunications infrastructure, poor road systems, limited storage facilities and nonexistent access to world markets. Not surprisingly, those farmers are often paid less than the crop is worth. Worse, in bumper years they watch prices plummet and their crops rot in sacks because there is too much product available and too little information on where it can be diverted.
These same forces plagued developed world agriculture in the first half of the 20th century and led to the creation of national and international commodities trading markets and farm subsidies. Yet despite the fact that nearly 100 years have passed since the creation of the Chicago Mercantile Exchange and its brethren around the world, most developing world farmers still don’t have access to market infrastructure that would allow them to make sound decisions. In Ethiopia that changed last week. A group of donors including the Ethiopian government, the World Bank and a few countries, such as the US, have funded the creation of a grain exchange in Addis Ababa. The exchange will allow local growers—including individuals, co-ops and commercial farms—to compare prices from the world’s exchanges and local bidders to make informed decisions on whether to sell goods now and to whom, or whether to store them for future sale. Part of the exchange project includes the building of storage facilities so that farmers can store harvested crops for future sale. The exchange will provide incentive for farmers to invest in increasing productivity, potentially lessening the devastating cyclical famines Ethiopia suffers, without fear of being wiped out from a sudden dip in prices at harvest time. Given the current impact the biofuels boom and increasing food demand from China and India are having on global food crop prices it may well also launch an enormous earnings boost for the 85 percent of Ethiopians who work in the agricultural sector.
An initiative such as this one is also interesting for the way in which it allows for concrete observation of the impact of transparency on price stability and food security. Most African farmers, Ethiopians included, do not receive any agricultural subsidies to protect them from price fluctuations—this in comparison to the $43 billion that US farmer receive. US supporters of subsidies argue that they are necessary to protect farmers—and consumers—from dramatic fluctuations in price and availability. Yet it is clear from the current inflation of world corn, wheat and soy prices that subsidies are in fact contributing to price discontinuities, not preventing them. Time will show whether Ethiopia’s exchange can substantively reduce food insecurity in the country, while also contributing much needed income. If so, it can provide a clear counter-argument to the US obsession with allowing agri-businesses to get their money directly from the government instead of earning it from the market.
On a related note, a recent New York Times Op-Ed written by a US-American organic vegetable farmer exposes further the illogic behind the American system of commodities subsidies. The piece describes how a fruit and vegetable farmer leased land from a corn farmer to expand his produce production to address increased demand from local farmer’s markets. The corn farmer was then slapped with a fine and a warning from the local government authority because commodities farmers are forbidden from growing produce on their acreage (the reason for this, as was explained to me by Daryl Ray of the University of Tennessee, is that the comparably small size of, say, the spinach market, would result in the total collapse of the price of spinach should even a minor shift of corn acreage take place). The end result was that the corn farmer passed the fine on to the veggie farmer through his lease price, and the veggie farmer passed that along to the consumer. Nobody wins in a dynamic where everyone could have—the corn farmer for leasing land he wasn’t going to use anyway, the veggie farmer for increasing his production, the consumer for getting more fresh local produce, and, possibly, the environment. Food for thought.