AGRICULTURAL COMMERCILIZATION IN ETHIOPIA

commodities; and agro-processors can enter intorepurchase agreements with banks or forward contractsusing a standardized Warehouse Receipt (WR) asapproved collateral.Despite various proclamations and extensive investmentin the exchange, the WRS has still not truly taken off inEthiopia. The lack of participation by producers, tradersand financial institutions is evident when looking atthe actual utilization of the WRS: To date only sesameand pea beans have been financed using the WRS,and only during 2011 and 2012. The success of WRSelsewhere, such as in South Africa and Malawi, lies intheir expansion of warehouse operations to all potentialactors—including primary cooperatives, cooperativeunions, private sector actors such as malt plants andfeed lots, traders, aid organizations and investors.Increased participation brings about economies ofscope and scale, making insurance, finance and storagecosts more affordable.Following an extensive review of the issues andchallenges, this study proposes the adoption of a multitiered WRS for Ethiopia—starting from producers atground level, followed by primary organizations (POs),then farmer cooperative unions (FCU), and eventuallyend users, such as traders, exporters, governmentagencies and aid organizations. The ACCs alreadyembrace all of these levels, and hence a formalizedand extended WRS will contribute to the objectives ofthe ACCs. However, building capacity will be crucialfor the successful roll out of the WRS. Prerequisiteskills include warehouse management, financingor marketing, grading of commodities and qualityassurance. Financiers will require capacity in carryingout collateral inspections and should be encouragedto increase liquidity between the different levels. Thecomplexity of products offered should gradually evolvefrom the producer- to end-market level: Insurancecompanies can offer different types of insuranceinstruments appropriate to the level of the system;and costly fidelity insurance becomes feasible if therisk is spread across the entire system. Ownership ofthe system at each level should reflect the primaryusers at that particular level. The PO should become amarket ‘one-stop-shop’ for producers to receive marketinformation, store produce, purchase inputs and accessloans. Cohesion throughout the entire system shouldbe brought about by a robust warehouse managementoversight enterprise made up of all the market actors.Once the EACWSE reunites with the ECX it should bea priority of the Exchange to reconsider the WRS. Thefollowing recommendations are made:1. SCOPEExpand the focus of the WRS from exported crops tomaize, wheat, tef and barley. Include all market actorsin the WRS. Expand warehouse operators to includeprivate companies and cooperative unionsInvestigate a potential sliding scale for the ETB 1million of capital requirement for warehouse operators,and publish clear directives for registration ofcooperatives as warehouse operators2. CAPACITYConduct a capacity audit of all market actors, followedby capacity building plan with ongoing training andsensitization at all levels. Publication of a simplestorage operator handbook accessible to all levels3. GRADINGAlign grade standards for all traded commoditiesacross all sectors, tiers, ACCs4. INVESTMENTCreate a Storage Investment Plan alongside the ATA’splanned National Storage Strategy to first analyzeconstraints and thereafter mobilize investment.Provide incentives for WRS investment such as taxbreaks and rebates for WR trade volumes. Addressfinancing constraints such as commercial bank bondpurchase requirement5. OVERSIGHTInclude members of all tiers in the WRS managementand oversight body / Ethiopian CommoditiesExchange Authority (ECEA). Review existing legislationwith the objective of creating a robust regulatoryorgan that can restore the integrity of the WRS6. ICTSeek evolution of the national telecommunicationsprovider to include services such as mobilemoney. Promote infrastructure investment oftelecommunications to increase rural accessibility.Agricultural Commercialization in Ethiopia: A Review of Warehouse Receipts in the Maize, Wheat, Sorghum and Tef Value Chainsvi

1. INTRODUCTIONEthiopia’s agricultural sector has reported considerablegrowth rates over the past decade as the result ofan estimated doubling in the use of modern farminputs, rapid expansion of arable land, increasedlabor productivity, government investments in theextension system and an improved road network. Thesecond phase of Ethiopia’s Growth and TransformationPlan (GTP II) aims to maintain current high levels ofagricultural GDP growth over the 2015–2020 period.Several of the Agricultural Transformation AgendaDeliverables for the commercial orientation pillar of GTPII are directly addressed or strengthened through anefficient Warehouse Receipt System (WRS), includingprovision of market services and infrastructure,promoting aggregation and storage use and availability,and fostering agro-processing, value addition andexports.It is expected that the Transformation AgendaDeliverables be operationalized in the Governmentof Ethiopia’s Agricultural Commercialization Clusters(ACCs), which provide a strategic and commerciallyviable platform for the development of priorityagricultural commodity value chains through ageographically focused approach. The platformsenable the implementation of multiple priorityinterventions for agricultural transformation-led growthand rural transformation. The primary goal of the ACCsis the commercialization of smallholder agriculture andagro-industrial development, offering a strategic entrypoint for private sector engagement.The proposed restructuring of the Ethiopia CommodityExchange (ECX) provides an ideal opportunity totake stock and revisit the question of whether theWarehouse Receipt System (WRS) linked to WarehouseReceipt Finance (WRF) can expedite agriculturalcommercialization in Ethiopia, specifically in thecontext of the establishment of four AgriculturalCommercialization Clusters (ACCs) and the AgriculturalTransformation Agency’s (ATA) Cooperative StoragePlan (CSP). This study assesses whether the WRS—through the provision of credit, the reduction of postharvest losses, and by linking producers, cooperativesand traders to agricultural value chains—can contributeto the fast-tracking of agricultural commercializationand transformation in the sector, as envisioned underthe second Growth and Transformation Plan (GTP II).The analysis focuses on tef, maize, wheat and barleyvalue chains, of which the latter three commodities arecurrently eligible for warehouse receipting on the ECX.Specific questions to be addressed inthis study are:a) Which of the ACC focus commodities are physicallysuitable for medium term storage?b) Is the historical seasonal price curve of thesecommodities favorable for medium term finance?c) Are there financial institutions with an appetite forWRF of these specific commodities?d) What are the alternatives to increase access toagricultural trade finance?A warehouse receipt (WR) is a document that providesproof of ownership of a specific volume of a commodity,with specific characteristics, that is stored in a specificwarehouse (Varangis and Larson, 1996). The commodityis graded by an accredited authority and then storedaccording to the standards, rules and regulations ofthe warehousing authority in order to maintain qualityand minimize post-harvest losses. Once issued, a WRcan be used as collateral for accessing loans or fordelivery against financial instruments such as forwardcontracts or futures contracts (Jayne et al. 2014). A wellfunctioning WRS can: (i) reduce post-harvest losses; (ii)reduce transaction costs; (iii) create awareness of and/or raise quality standards; (iv) permit the aggregationof commodities; (v) empower value chain agents tonegotiate for better prices; and (vi) facilitate access tocredit for all value chain actors, allowing them to buildup a credit history.Various studies have identified lack of access to creditas a major constraint to agricultural productivity inEthiopia and elsewhere. For example, Tilahun, D. (2015)found that two-thirds of Ethiopian rural households arecredit constrained. Despite rapid growth in the bankingsector and Micro Finance Institutions (MFIs), demandfar outweighs the supply of credit. Although agricultureaccounted for almost 17.3 % of bank lending in the2014/15 financial year (NBE annual report 2014/15),the majority of the finance is raised against fixedAgricultural Commercialization in Ethiopia: A Review of Warehouse Receipts in the Maize, Wheat, Sorghum and Tef Value Chains1

assets, which means many smallholders are excluded.Furthermore, the majority of the agricultural lending isdirected towards export facilities rather than domesticproduction and distribution (Agrifinfacility, 2012). Bynot exploiting the use of agricultural commodities ascollateral, the sector is possibly missing out on a majoropportunity to address its credit constraints.Warehouse Receipt Finance can empower and benefitmany actors in agricultural value chains: By storing andaccessing credit, producers can avoid forced sellingof commodities shortly after harvest when pricestend to be suppressed; commodity traders engagingin temporal arbitrage can access finance to coveroperational, storage and other costs—in addition toovercoming the problem of large opportunity costsassociated with financial capital locked up in storedcommodities; and agro-processors can enter intorepurchase agreements with banks or forward contractsusing standardized WR as approved collateral (asexplained in detail later in this study).There are three important prerequisites to thesuccess of a WRS and WRF. First, the storability of theunderlying commodity should be of a high standardso as to ensure that the all parties h

ECEA Ethiopian Commodities Exchange Authority ECX WRS Ethiopia Commodity Exchange Warehouse Receipts System ECX Ethiopia Commodity Exchange EDRI Ethiopian Development Research Institute . Ethiopia Commodity Exchange (ECX) was established in 2008 and was assigned the responsibility of managing the WRS. By insuring against operational risks the