Price Controls on Export Commodities Do Not Work

By Trilok Jhala, Himatsing International P. Ltd, Singapore

Humera-SesameDecember 19, 2019 (Ezega.com) -- The following article was written in response to an article posted on Ezega.com on October 21, 2019, titled: “Ethiopia Introduces New Directive to Halt Fraud in Export Business.”

The present article is written to express concerns with some of the contents contained in that article.

With the highest respect and utmost regard for the Honorable State Minister of Trade and Industry, Ato Misganu Arega, it is vital to point out that an important angle or two may have been missed and, therefore, not taken into consideration in the article.

To begin, let me introduce that I am the Managing Director of a well-established commodity trading company based in Singapore with roots dating back to 1959. Our trading in Ethiopian produce goes back to the past 30 years but more actively in the last 19 years or so.  In the earlier days, we used to trade with Ethiopian Oilseeds Pulses Corporation as well as a few private trading houses like Omer Awad & Baobed, etc.    

Coming back to the subject at hand and to express the matter collectively, your attention is requested to the news published by Addis Fortune on June 15, 2019 [ VOL 20, NO 998] titled "Trade Ministry scolds exporters for under-invoicing," which is co-related to the above subject.

Under-invoicing is a term used when both the exporters and importers are culpable of the act and is generally at the request of an importer, largely to evade import duties on mostly on capital or luxury goods, etc.  Therefore, here, it is not the case of under-invoicing here but rather OVER-PAYING by the exporter at the source of supply.   

The reasons for over-paying may be blind speculation, the urgent need to buy the goods for want of exports within a deadline, or simply due to eagerness to buy the goods at any cost which has definitely created the one part of the issue.  

Having visited the Ethiopian Commodity Exchange when it first opened a few years back, it seems that an ECX member can be registered either as a seller or buyer, but not both, which is not the case in most, if not all, countries in the world. Elsewhere, an exchange member can be a seller at one moment and a buyer at the next and changing his position as many times as his position requires him during trading hours as he likes without any restriction. Hence, prices tend to fluctuate throughout the trading session but WITHIN realistic levels settling at a nominal value so to speak. However, in the case of ECX, in the first instance, it is glaringly clear as to how many buyers and sellers there are at any one time and therefore creating a knee-jerk or lop-sided price reactions. That was my first and last visit to ECX even though I continued to make frequent trips to Addis Ababa almost on a yearly basis. Therefore, I stand to be corrected if the situation has indeed changed at ECX since my last visit there.

If the intention of the Ministry is not to allow the exporters to sell less than what they have paid at the ECX, then three things can happen. In the first case, exporters may pay MORE and get the goods but not able to export it since international markets will not pay for more than what is necessary, resulting in the loss of precious foreign exchange.  Second, the exporters pay in accordance with the international market which most likely means VERY MUCH LESS to the selling community but Ethiopia still obtaining foreign exchange levels more or less as in the pre-directive days. In the third case, exporters may sell first in the international market and, if successful, then cover in the ECX provided if they can get a price lower or at least equivalent to their prices. Looking at the world economy, we do not see any strengthening of commodity prices in the near future. Therefore, ultimately it is the farmers who will bear the brunt of it and the consequences could be disastrous especially if Ethiopia is serious in expanding its exports.  In the post directive years, fewer returns may mean farmers or middlemen being discouraged to bring cargo into ECX, resulting in fewer exports and less foreign exchange earnings. If the chain of line is not going to get good prices, they may not plant exportable produce in next year's season but rather abandon or plant other produce altogether, which are generally used locally or banned for exports, like lentil, etc.  The new directive may have unintended consequences.  

The other interesting matter is the misconception among some Ethiopians that they are getting much less price for their produce than they are entitled to. Let me expand on this a little bit.  Each commodity derives its value based on its quality vs international produce. The comparison, of course, starts locally. For example, Ethiopia produces various grades of sesame and the Humera sesame commands a premium whereas the Wollega sesame is sold at a discount. There will always be a buyer for any commodity at an acceptable price in relation to its quality. Ethiopian produce is not an exception. Hence to say that exporters are selling their commodities for lower prices than the average global prices is far from the truth considering that Humera sesame seeds command one of the highest prices in the world.

However, if Ethiopia expects to sell only at higher price levels, then the only option is not to sell as commodities are always subject to demand and supply laws.  The value of exports has fallen only because the prices of the individual commodities have fallen. For example, in 2008, the prices of Humera sesame and Niger seeds used to command USD 2850 and USD 1450 per Ton FOB, respectively. Where are the levels of these two commodities today?  They are way lower. As a reference, in the year 2001, the prices were as follows: Humera Sesame USD 400, Niger USD 360 per Ton FOB.

Crude oil used to be sold USD 150 per barrel in the year 2008. Today, it is USD 56-60 per barrel.  Is OPEC making similar claims being made by Ethiopia? No. The reason is that they know it is basically about supply and demand.

Another confusion converges with the claim that importers are paying higher prices than necessary. It is not easy to comprehend if this makes any logic. Paying an inflated price for the imported commodity equates to the requirement of more foreign exchange than necessary and, hence, resulting in longer times to open a Letter of Credit (LC), paying higher import duty, etc. Exporters may have been paying high prices for their purchases at ECX due to reasons given above, where they have to compete in an open atmosphere. On the other hand, when an Ethiopian buys to import, he negotiates individually in a "closed-door " atmosphere for the best possible deal with the seller. The overall imports are usually large because Ethiopian importers cater to a huge population as well as various industries that provide employment locally.  Many countries have a large deficit for almost the same reason. And it is not because they are paying higher than necessary. The solution is to increase EXPORTS.

As I said earlier, we have been dealing with Ethiopia for the last 35 years, but more so in the last 19 years or so, because that's when Ethiopia partly opened its exports. Exports increased multiple times since then, especially when the country made exporting easier by doing away with registrations around 2005. Purchases and sales are done on the basis of individual needs. Sometimes an overseas buyer has an urgent need, so he/she may pay a little higher but that does not shift the market one way or another significantly. Similarly, if an Ethiopian seller needs the money, he may be induced to lower his expectation and that too does not take the overall market one way or another significantly.  Naturally, the markets fluctuate almost daily, if not hourly. Each buyer and seller have their own situation if and when to buy or sell.

A stockist may have bought earlier when say the ECX was lower and another when the market was higher, and vice versa. All of these can take place in a matter of a day or two. Just like in the case of the Ethiopian government buying wheat via competitive bidding tenders, there is no fixed price to buy or sell. Participants have their own situations, which may put them at an advantage or disadvantage or in between, as the case may be. Each trader will trade depending not only when he bought the cargo but also how he views the market in the next few days or weeks, etc. That is what commodity trading is partly made of.  A trader with the intention to do volume will buy and sell for the least margin while a profit-oriented trader will buy little and sell little.

If the intention of the government is to make sure that exporters always sell at higher prices than what they have bought for, then what will happen when the international market takes a dip? As per the new directive, exporters will not be able to sell their commodities. In the meantime, the interest and warehouse costs will keep running while the country is being deprived of its daily foreign exchange needs.  And if the international prices do not reverse or, even worse, if the market keeps dropping, then the exporter may not be able to sell and cut his losses, facing almost complete wipeout.  

Last year, a neighboring country to Ethiopia had a sudden and strong urge to control exports and their prices. Not surprisingly, the measure backfired completely. The country had similar thoughts that it was not getting a fair numeration for its commodities and hence it imposed a minimum price for its raw cashew nuts at a price level which it deemed appropriate at the time.  The international trading community urged the government to cancel the controls and allow the exporters a free hand to trade. The exporting country had a misguided thinking: "where will the international buyers go?"  The issue went on back and forth until, finally, after 8 months of failure, the government realized that it was not in its interest to attempt a stranglehold on export markets. The cargoes were sold at hefty losses, not counting interest, warehousing, deterioration of quality or weights.

Another issue I would like to raise is regarding contract defaults. We have had numerous contract defaults in the last 19 years or so. If foreign exchange is indeed important to Ethiopia, why have our numerous complaints of contract defaults by Ethiopian exporters not taken seriously? After every visit to the Ministry of Trade, I was always assured that something would be done to ensure that exporters fulfill their part of the contract.  Not a single issue has been resolved so far.  Last year we have had a serious case of quality issue where simply no cleaning was carried out with one whole load of container resulting in a loss of almost USD 20,000.  This year alone we have had exporters defaulting on soya beans and Niger seeds.    

A quick look around the world reveals that the so-called successful countries are those that have free export rules and do not impose any strangles on exports. These countries are also by extension countries that are highly rated internationally in indexes such as Ease of Doing Business Index. It is important that the Ministry of Trade of Ethiopia continues to engage with the exporters and other players alike to liberalize and streamline its operations and bring about a better and brighter future for Ethiopia.

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