Soaring cost of farm outputs, less forex retention displeases exporters

When the Ethiopian Commodity Exchange (ECX) exclusively began trading green mung beans on its floor four years ago, less than 3,000 birr was enough to buy a quintal of the pulse. A few knew about the profitability of trading the green gold at the time when the Exchange opened its doors for buyers and sellers to trade the pulse.

As the attention of exporters and suppliers shifted to green mung beans, which is demonstrated by the one billion birr transaction made in the last fiscal year at the ECX, the price of the commodity tripled to almost 9,000 birr per quintal.

It may not be surprising to witness an upsurge in prices in Ethiopia, a country where the inflationary pressure went through the roof, with general inflation at a national level reaching 35.1 percent.

However, when every commodity shows a drastic increase, it indicates towards things not going smoothly. Even though consumers would finally bear the brunt of the surge in prices, it also affects businesses involved in the sector. Exporters are not immune to the myriad of challenges caused by a sudden price increase of every commodity that brings in a huge forex for the country.

Alemayehu Abebe, import and export department manager of Albar Trading, a company involved in the export of green mung beans and oilseeds, is among industry insiders, who have witnessed the impacts of the jump in price in the export business.??

According to Alemayehu, when the export prices of agricultural commodities surge; it means more losses for exporters due to the negative profit margin they secure from shipments of goods.

If exporting farm outputs bring no profits, it is normal to ask why the number of exporters is increasing year-after-year. This is due to the forex crunch, which forced many businesses to involve in the export business to secure foreign currency, in order to import items and sell it at a higher profit margin in the local market.?

“Exporters get profit after using the forex they secured from exports for imports of goods, which has a positive rate of return,” said Alemayehu.

But when the local price for commodities increases, it means a higher amount of loss and a lesser profit margin for exporters, even if they use their forex for imports of goods. Exporters of coffee are among the businesses hit hard by the surge in local prices of the commodity.

The cost of cherry – unprocessed coffee – shot-up by more than two folds to 60 birr per kilogram, which is added to the expense incurred for washing, milling and processing the cherry to get the coffee bean.

“The soar in price of cherry, coupled with the increase in our cost of production, has impacted our operation and prevented us from utilizing the growing demand in coffee in the international market,” said Wondafrash Abebe, general manager of DW, adding this was made worse by the lack of finance to cover expenses for processing the commodity.?

Farmers justify the increase in price of primary goods to the rise in the cost of fertilizer, pesticides and seeds, adding to the rise in fees charged by daily laborers for their services during the harvesting process. Though this seems reasonable considering the soar in prices of inputs, industry insiders find it perplexing when suppliers make unreasonable adjustments, even higher than the change in price of the primary good.

“In case of soya bean, for instance, suppliers collect the output from farm-gate soon after harvesting, but they hoard it until the price increases in the local market, particularly at the ECX, a situation which has forced exporters to miss the peak season for the crop in the international market,” said Anwar Ahmed, a consultant with 18 years of experience in providing advisory services for exporters and importers.

Against a backdrop of sudden price increases of agricultural export items, the latest report by the Ministry of Trade & Regional Integration indicated that exports of farm outputs reached USD 1.3 billion in the first half of the existing fiscal year. It increased by 32 percent from last year’s same reporting period, while surpassing the target set to be achieved during the reporting period.

Coffee is the highest performer of all agricultural commodities. It brought in a historic-high export proceeds of USD 578 million in the first half of this fiscal year. It is twice the figure registered during last year’s same period, and is an achievement attributed to the vertical integration trading system introduced four years ago, but became popular since last year.

Though officials boast that the increase is the result of the reform they have introduced, insiders say the upsurge does not necessarily guarantee the country is getting the right amount of forex it should get from agricultural commodities like coffee.

“The market is recently flooded by exporters with no genuine interest to involve in exports of goods since their major objective is to get the forex to import goods. Since their primary interest is getting a short-term gain, they would leave the sector as their profit margin narrows, like what is happening now, particularly due to the rising cost of agricultural commodities in the local market,” said a supplier with a seat at the ECX.

It is a sentiment shared by many in the export market, considering the low appetite observed following the new forex retention directive enacted by the central bank. The directive lowered the percentage of foreign currency retained by exporters from as high as 40 percent to 20 percent. In fact, such a measure did not only discourage new entrants to the business. Veteran players in the market have also lost the appetite to export their outputs due to the stringent rule introduced by the central bank.

“We are waiting until the government amends the retention rate because our profit margin won’t be enough to cover our loss from exports of agricultural commodities. We can’t bear it with 20 percent forex retention, no matter what we imports to offset the loss,” said Alemayehu.

With hope yet to materialize, it is obvious that a further soar in price of agricultural commodities will continue to be a cause of concern for exporters for months to come, as it pushes cost of their production to a new height.

Nonetheless, for the World Bank, which recently released its latest growth projection for economies across the world, the rising cost of primary goods across the world, including in Ethiopia, will be a blessing in disguise. Time will tell whether Ethiopian exporters take advantage of the opportunity available or fall through the cracks.