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End of Seminar Project

:

Designing the Ethiopian Commodity Market(ECX)

Bement Asayehegn

AMBA 640 Section 1143

Dr. Mittal

December 13, 2009
Table of Contents

Executive Summary---------------------------------------------------------------3

Introduction--------------------------------------------------------------------------4

Ethiopian Commodity Exchange-----------------------------------------------5

Knowing the market---------------------------------------------------------------6

Infrastructure requirements of ECX--------------------------------------------7

ECX planning stage----------------------------------------------------------------8

Obstacles to solve for ECX Market Information delivery------------------9

Technical Issues---------------------------------------------------------------------9

Requirements for ECX-------------------------------------------------------------10

Information Systems Design------------------------------------------------------11

Conclusion-----------------------------------------------------------------------------12

Executive Summary
The objective of this research paper is finding the best strategy for overcoming the

challenges of developing a commodity market and a market information system for the

functioning of the Ethiopian Commodity Market or ECX using Information Systems

technology. Even though the idea of a commodities market goes back to the 1848,

when 82 grain merchants and farmers established the Chicago Commodity Exchange

built at the junctions of the Illinois River and Lake Michigan, setting up the Ethiopian

commodities market (ECX) was a trying ordeal for a former World Bank senior

economist Eleni Gebre madhin. In this effort, the goal is a design for a Commodities

Exchange Market that uniquely serves an African country and its small farmers, and

comprises of all the elements of the ideal commodities exchange. In planning ECX IT

infrastructure, I have reviewed the option of having the dial-up connection through the

internet Service Provider (ISP), which is monopolized by the Ethiopian government. The

telecommunications company is called ETC (Ethiopian Telecommunication Corporation.

Similarly, Electricity is the basis of any meaningful development in any country,

especially, the development of networking technology. The next step is achieving the

goal for information and communications technology (ICT) plan of ECX is to make the

market accessible to the smaller farmer, thereby improving the overall market efficiency

and lowering the transaction costs to all the stakeholders. Some of the obstacles to

solve in the planned ECX Market Information Delivery system include the need to solve

lack up-to- date market information and technical skills for the farmers. Finally, I will

discuss the proposed Information systems design to accommodate the Ethiopian

Commodity Market (ECX).

Introduction
My subject for this research is a design for a Commodities Exchange Market that

uniquely serves an African country and its small farmers, and comprises of all the

elements of the ideal commodities exchange. As such, it shall have warehouses around

the country, grading and warehouse receipts, an in-house clearing system, a regulatory

infrastructure and legal framework, and electronic display systems with real time market

information. Even though the idea of a commodities market goes back to the 1848,

when 82 grain merchants and farmers established the Chicago Commodity Exchange

built at the junctions of the Illinois River and Lake Michigan, setting up the Ethiopian

commodities market (ECX) was a trying ordeal for a former World Bank senior

economist. In comparing the two commodity exchanges, there are stark similarities

between the basic players of the trade, the buyer and the sellers. Similarly, the supply

and demand factors of the market persuaded farmers to get the lowest prices when

supply was high and better prices when supply was low. In addition to the Chicago

commodities exchange, “new powerhouses such as the Indian Commodity Exchange,

with growth rate of 250% in the last years between 1990-2000, and the Chinese

Exchange have taken the number two spot from the first known commodity exchange in

modern times”(Gebre-madhin, 2007).Another element of commodity markets is the

futures trading capabilities. Davies (2009) reiterates this point as “the basis of

commodity trading activity is the buying and selling of futures contracts for a whole

range of commodities .” He added, “while the nickel or cocoa producer will use

commodity futures contracts to hedge their future sales, commercial end users will also

use these contracts to hedging against sudden spikes in prices” (p.1).

I want to formulate a strategy for overcoming the challenges of developing a commodity

market and a market information system for the functioning of this commodity market or
ECX using Information Systems technology. Advances in information technology and

commerce since the advent of the Chicago Commodities Exchange require this

economist, Dr. Eleni Gebre madhin and her team, to bring different sets of skills and

knowledge in order to innovate in the face of the realities of the ancient market in

Ethiopia.

ETHIOPIAN COMMODITY EXCHANGE

In the last few decades, there have been efforts to liberalize the markets in Africa

through government policy suitable for free markets. This approach has not worked

much subsistence farmers in Ethiopia. Ethiopia is the second most populous country in

Africa, and the fifteenth most populous nation in the world. Out of the total population,

85% of those people live in the rural areas, and most of them are farmers. In order to

change the inefficient and backward nature of the Ethiopian market, a new initiative is

necessary. Apparently, there is a need to forge a public –private relationship in order to

tackle the old marketing system with a more modern commodity exchange system.

According to Eleni, the present system is a very backward system with high transacting

costs and high risks. She noted that, “ a commodity market institution of this kind in

Ethiopia is necessary because it will be an instrument for mitigating the risk in grain

price fluctuations for small farmers that at times reach 80%"( Gebre-madhin, 2007). The

idea of commercializing the small farmer is also supported by the agricultural policy of

Ethiopia, and is included in its Rural development policy. The prime minister of Ethiopia,

Meles Zenawi, stated “The agricultural sector remains our Achilles heel and source of
vulnerability …Nonetheless, we remain convinced that agricultural based development

remains the only source of hope for Ethiopia. (Devereux et al,2005).

A commodity market in Ethiopia will have a value added advantage for the small

farmer because those farmers will get better market information. In turn, this will allow

the small farmers to get premium price for their produce. In addition, farmers will not be

restricted to local markets, moreover, they will also be able to sell at the national market

level. Similarly, the commodity market’s vision entails providing a low cost medium for

all trade transactions. In return, it charges pennies per hundred kilogram bag of

commodities for service charge. In return, the stakeholders will get assurance of the

integrity of products that they trade at the exchange. The way the trading works is

through a warehouse receipts system that documents the delivering person, vehicle

information, and grade and weight of the product received. This process where the

traders make the first contact with the exchange guarantees the integrity and

certification of products.

Knowing the market

In any commerce related activity, the first criteria for people to engage in this activity

is to buy or to sell. Since most people do not own the means of production, they have to

get almost everything from another source, but they do have the power to get what they

needed provided they can pay for it. The need to have a medium for this activity creates

a market, which also needs people that know where and how to access this market. The

main component of the market system, or the price of commodities, is usually set by

the location, as well as, the capability of the customers to pay. But any market needs
some means to inform the stakeholders about prices if those people are going to trade

there. Some of the traditional means of market information include word of mouth,

newspapers and radio, and more recently, the internet.

Infrastructure requirements for ECX

In planning ECX IT infrastructure, I have reviewed the option of having the dial-up

connection through the internet Service Provider (ISP), which is monopolized by the

Ethiopian government. The telecommunications company is called ETC(Ethiopian

Telecommunication Corporation). This corporation was established back in 1894.

According to information I gathered from the ETC website, this corporation started to

give internet service in 1989, and mobile services in 1991. In addition, ETC has added

the capability to offer several wide area network connectivity options, thereby, enabling

governmental and non-governmental bodies to communicate amongst their various

offices in different parts of the country(ETC, 2004). Moreover, “telecommunication

services in any business entity are to some extent a low cost substitute for information

handling labor and has very low substitutability with other traditional inputs such as

capital, production, labor and materials” (Nandi, 2002). Some of the options that ETC

offers for connectivity are: Dial up network; Integrated services Digital Network(ISDN);

Digital Data Network(DDN); AND Broadband Multimedia.

Electricity Infrastructure

Electricity is the basis of any meaningful development in any country, especially, the

development of networking technology. As such the Ethiopian Electric Power
Corporation(EEPCO), the government owned and operated, is responsible for power

supply to the country. In its strategy to expand coverage for smaller cities, the

corporation plans to expand electric power distribution to 6000 towns through the year

2012(EEPCo, 2007). In recent months, this corporation has inaugurated one hydro

power project, the Tekezze Project, which will boost the total supply by about 30%.

ECX Planning Stage

The goal for information and communications technology(ICT) plan of ECX is to

make the market accessible to the smaller farmer , thereby improving the overall market

efficiency and lowering the transaction costs to all the stakeholders. Consequently, the

selection of the right Market Information System and the design and implementation of

this system are very important tasks for a building a successful system under the ICT

plan.

ECX wants to disseminate market information from its main trading floor in Addis

Ababa to its 200 sites which are situated throughout the country. The information

transmitted from the trading floor will be real –time price information on the

commodities being traded. Additionally, ECX wants to place plasma screens in close

proximity to major rural market locations. Apart from the price ticker displays, ECX

wants to have 20 remote electronic trading centers. These trading centers are going to

be connected through high speed internet and computers, which will enable the farmers

or their brokers to get market information.

Obstacles to solve for the ECX Market Information Delivery
Up-to date market information

The traditional way farmers get their information is through word of mouth way of

communication. This is normally done through inquires made from people who know

other people who live in major cities, or who have travelled to those cities personally.

The information that farmers get through this method might be too old or lack accuracy.

The other methods are radio and television broadcasts that relay general information on

the price of commodities, and again, the information might not be specific enough for

the farmers. On top of that, the timing of the radio or television broadcast times might be

inconvenient for the farmers.

Technical Issues

On the technical difficulties that farmers face in operating technological equipment,

they would fare much better using short wave radio, which is an accessible and easy to

use medium. But there are more than four major languages which are commonly

spoken in Ethiopia, and this can create a difficulty for the local farmer in the case of

understanding the message on the radio. Similarly, most of Ethiopia’s farming

communities would not know how to operate a computer, and this also puts the usage

of this medium out of their reach. Therefore, ECX would have to train and send people

who can help with the delivery of its Market Information Systems that are transmitted

through the above medium.

Requirements for ECX

The information systems at ECX should be able to support all the business

applications and also satisfy the management challenges of the organization. In the
context of aligning strategy and information systems, Prahalad & Krishnan(2002) stated

that “ the goal of the system should be to provide ease of change the business-

component and interface levels and deliver ‘economies of change’”(p.27). The types of

Market Information Systems that ECX could potentially utilize include: Mass Media ;

Mobile Short Message Service; Interactive Voice Response; Plasma Display- based

Systems; Word of Mouth.

Strengths and weaknesses of utilized systems

In order to diseminate market information, ECX can use mass media including radio,

TV, and newspapers. The advantage of using these mediums is the coverage area of

the short wave radio, and the popularity of television and some newspaper respectively.

The disadvantages of using these media are that real time information is not

transmitted.

The second option that ECX should utilize is the Mobile Short Message Service(SMS).

This method of relaying real time information has been used by other commodity

Markets and is effective. To this effect, ECX has actually adopted and implemented.

According to a news report by the African News agency, “the Ethiopian Commodity

Exchange (ECX) has awarded the project for the development of software to introduce

the Short Message Service(SMS) and Interactive Voice Response(IVR) TO Apposite

LLC, a local branch of a US based IT company”( Ethiopia, 2009).

The third option, the IVR system, has been adopted by ECX as per the report above.

The advantages of this system are the simplicity by which a person with a regular
telephone connection can access market information by calling into the voice operated

database system. This is similar to how credit card companies accommodate customers

by using the telephone to pass account information to customers from the companies’

databases or vice versa, without any human contact. Furthermore, the system makes

information available any time of the day, and in more than one language. In this regard,

this option needs more focus for disseminating market information .

The fourth option is the plasma display boards for price information. ECX has also

practically adopted this method , and according to Africa News service, “the ECX has

already installed about 12 Price Tickers in major towns”( Ethiopia, 2009).

Information systems design

The proposed information systems plan will combine all the above elements with a

varying degree of usage. The main elements of the design are as follows:

Software requirements

The two major software components are: Desktop application and the Voice

Response Unit.This is the data entry point for ECX database administrators input

market Information and capture data. The Voice Response Unit serves as the interface

that connects the data accessing user and the ECX database. Within the database, one

set of data stored is a vocabulary file. Therefore, all user needs to communicate with

the database is a touchtone phone that will enable them to press a menu of their choice.
Conclusion

In order to increase the flow of market information towards the small farmers, and to

increase the efficiency of ECX, there is a need for better information system. Armed

with real time prices of commodities nationally, farmers can negotiate better prices for

their commodities. This negotiating platform has been the mandate of the establishment

of ECX. Furthermore, the right technology platforms and infrastructure has to be built so

farmers and traders get real time information when they need it.

The current state of market information delivery mechanisms to the farmer is very poor,

and in the CEO of ECX’S words, “ the farmer gets less than 10% of the value of its

produce”. In the same token, these conditions have a disastrous effect on the majority

of the population of Ethiopia. In order to solve this problem, ECX will utilize a

combination of Market information dissemination previously explained in detail. The

methods used are, in order of importance: Interactive Voice Response; Short Message

Service(SMS); plasma display based systems; word of Mouth.

References

Davies, W. (2009). How commodity trading and commodity markets are changing. Retrieved

Dec 08, 2009, from http://www.tradecurrencies.com/currency-trading/11411/how-
commodity-trading- and-co.

Ethiopia:ECX to update communication technology. (29 June, 2009). Africa News. Retrieved

Dec 10, 2009, from Lexis-Nexis Databases.
EEPCo. (2007, May). Ethiopian Electric Power Corporation – Organizational Background and

Profile. 50th Golden Jubilee , pp. 33-43.

ETC. (2004, February 02). History of ETC: Ethiopian Telecommunication Corporation. Retrieved

Dec 09, 2009, from Ethiopian Telecommunication Corporation: http://www.ethionet.et.

Gebre Madhin, E. (2070). Eleni-Gebre-Madhin on Ethiopia Economics. Retrieved Dec 08,

2009, fromhttp://www.ted.com/talks/elene_gabre_madhin_on_ethiopian_economics.html

Nandi, L. (2002). Direct effects of telecommunications on economic development. Retrieved

On Dec 09, 2009, from http://cbdd.wsu.edu/kewlcontent/cdoutput/TR501/page66.htm

Prahalad, C. K. & Krishnan, M.S. (2002). The dynamic synchronization of strategy and

information technology: MIT Sloan Management Review.