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Monday, January 16, 2012

Markets and malnutrition

In 1985, the rock star Bob Geldof organised Live Aid to raise money to combat famine in northern Ethiopia. Some 8 million persons suffered sever famine of whom 1 million died. What wasn’t known at the time was that in southern Ethiopia, there was ample food. So great was the glut that prices fell by 80% and subsequently, almost 300,000 tonnes of maize was left to rot in the fields.  The co-existence of food shortages and food gluts comes down to a failure of markets and during this period and for decades afterwards, the Washington suits of the World Bank and IMF were adamant that governments stay away from price support and agricultural subsidies. Leave it all to the markets was the theory. That happily has now been abandoned and there is a clear recognition that markets only work when the proper infrastructure exists.

African agriculture has a long way to go to make real progress. Only 7% of arabale land in Africa is irrigated compared to 45% in Asia. Road density is 6 times greater in Asia than Africa and fertilizer use is 7 times higher in Asia. Food production per capita has stagnated in Africa and fertilizer use, a useful measure of the confidence  farmers have in agriculture, has fallen. The food import bill for Africa is now double what it was  2 decades ago.

African farmers tend to think locally when it comes to taking their crops to market and typically they trade only with a radius of 8 to 10 km of their farm. They trade with dealers they know and trust. However, they are always left with the same problem. They have no idea what price they are likely to receicve for their crops. They cannot know that, for example, this year many farmers have decided to grow some crop such that when they turn up at the market, the price is rock bottom. Last week the price might have been much higher but they have no way of knowing these important issues. Farmers may even take a pig to he market to find no buyer. Food commodities change hands four times on average before they reach the end user and, apparently, each time the food is re-branded by being put into the buyers sacks! Of course at each trading occasion there is a level of risk because just as the local farmer has no market knowledge, that also appies up the line.

Eleni Gabre-Madhin gave up her job as a senior economist at the World Bank to return to Ethiopia to build Africa’s first commodity exchange. This blog builds on her TED presentation[1].  The Ethiopian Commodity Exchange (ECEX) is housed in a spanking new building in Addis Ababa. It has created a highly integrated system to bring buyer and seller together. For the buyer, the system provides complete confidence that the material being purchased is of the grade and standard that is being paid for. For the seller, the system provides a knowledge of the commodity price in real time. This is achieved by using mobile telephony as well as the use of purpose-built internet cafes. ECEX has for the first time in Ethiopia, introduce a grades and standards sysytem so that farmers can see the advantage of inward invstment in their enterprise to attain a higher grade and thus earn a premium price. Farmers can lock in prices through forward contracts and use future prices for planting decisions and for inward investment in their farms. Farmers can now sell across time and distance and buyers dont need to see the product since it is certified in one of the 20 ECEX warehouses dotted around the main areas of agricultural output.  Ethiopia produces more grain than South Africa and is the second largest producer in Africa. The establishment of ECEX takes the risk out of trading because it imparts detailed and instant knowledge to buyer and seller. With the growth and integration of such commodity exchanges south of the equator, the day when the northern hemisphere dictates price to the south will disappear.

Will another Live Aid concert be needed? Well, while Africa learns to help itself, it will continue to need aid to combat malaria and HIV and to ensure that the commodities grown in this highly fertile land are available to its citizens at optimum levels, when and where they are needed. Slowly, Africa is learning to help itself.

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