It is not yet known whether the government will oppose forward trading, as they did previously with futures Intent on setting up a contract farming facilitation department at the Ethiopia Commodity Exchange (ECX), the Agricultural Transformation Agency (ATA) is seeking approval to do so from the Ministry of Trade (MoT). It is also currently looking for the financing. The department, to be set up at an estimated cost of seven million Birr, is expected to enforce contract farming between two parties and provide price information.
The ATA, which is the current entity tasked with facilitating contract farming agreements in the country, is hoping that the department at the ECX will take over its responsibilities. The Agency has asked for an audience with Yakob Yala, state minister for Trade, to discuss this issue, and will start identifying potential donors in the coming weeks, according to Nega Woubneh, senior director of Value Chain Programmes at the ATA.
In contract farming, a specific product is cultivated after an agreement is made between a farmer and a buyer. The farmer must deliver the product in the agreed upon quality, quantity and time.
The buyer in turn must commit to purchasing the cultivated product. In some cases buyers also provide farming inputs, such as seeds and fertiliser, prepare land and advise on technical matters.
Usually, as prices are determined when the contract is signed, contract farming takes the form of forwards trading.
InEthiopia, such farming agreements have been cropping up recently. Examples include - Diageo (Meta Abo Beer)'s agreement with farmers' cooperatives in the Oromia region; the World Food Program's purchase of maize from cooperatives in four regions and Mama Fresh Injera's deal with farmers to produce and deliver teff. All of these projects have, until now, been facilitated by the ATA, which connects buyers and sellers, facilitates financing and oversees implementation of the contract.
However, as facilitation also requires providing accurate price information and enforcing the contracts, the Agency started looking for other institutions that had the capability of providing these services.
"The ATA felt that the ECX, which has good experience with market information systems and has an arbitration court enforcing contracts, was well placed to handle the project," Nega told Fortune.
The ATA then hired McKinsey, a global management consulting firm, to assess the ECX's capabilities and come up with a design on how they could facilitate contract farming.
McKinsey concluded the study last July, confirming that the ECX could handle contract farming. A detailed design on the skill-set and technical capacity needed to set up a contract farming department within ECX was also submitted.
Tentatively, the ATA expects the department to be set up within a year. ECX, however, is hesitant to give a firm assurance about the realisation of the department.
"This is a policy issue that the government must first decide upon," Anteneh Assefa, CEO of the ECX, told Fortune. "We are not in a position to decide to implement this by ourselves."
So far, the ECX only conducts spot trading on its floor, where buyers purchase commodities based on the current prices of the day. An attempt to introduce futures trading by former CEO Eleni G. Medhin met with resistance from the government. In futures, a contract that includes price agreements is signed at present for a commodity to be harvested and delivered in the future.
The purchaser of the commodity can sell this contract to another person for a higher price, if the agreed price is less than the predicted prices of the commodity for the future.
Government officials felt this leads to speculation, when banning futures trading. Forward trading is deemed to be less speculative, because contracts cannot be sold to a third party, officials from the ATA argue. Whether this is supported by the government will be seen when the ATA conducts its meeting with the MoT.