WEDF 2012 Session summary: Parallel Session II-3

The session was moderated by Ms Destry Damayanti, Chief Economist, PT Bank Mandiri, Indonesia, who noted that commodities account for 22% of Indonesia’s GDP and 66% of its exports. The country accounts for half of the world’s crude palm oil (CPO) production; it is the second biggest producer of rubber and the third largest producer of copper. The aim of the session was to discuss how to organize commodity markets effectively and identify key success factors.

The main conclusions of the discussion were:

• Cooperation between small traders, larger traders and producers is important for the healthy growth of commodity markets, especially in a commodity-based developing country like Indonesia.
• Creating an effective commodity exchange is the challenge for the future.
• The issue of domestic vs. international price setting also remains a challenge.
• Price volatility and uncertainty are also problems, particularly for small farmers, and it is commodity exchanges that allow for price transparency and for rapid exchanges to be facilitated.

Mr Megain Widjaja, CEO of the Indonesian Commodity and Derivatives Exchange, said the main functions of a commodity exchange are, first, price discovery, or providing benchmark buy and sell prices for the commodity and transparency in pricing that did not exist before. The second function is to provide a mechanism for hedging against risks such as falling prices, rising costs of raw material, currency shifts and operational risks. Having an exchange also makes it possible to manage these risks. Other economic functions of exchanges include providing long-term price signals to help buyers and producers in their planning, and governments in policymaking. The commodity exchange also encourages the establishment of modern agriculture systems, with uniform quality standards.

Dr Eleni Gabre-Madhin, founder and former CEO of the Ethiopia Commodity Exchange, said that their vision had been to build a world-class institution that would signal Ethiopia’s entry into the modern global market. The experiences of a number of countries were examined, but since Ethiopia was dominated by small farmers and traders, the founders wanted the exchange to be tailored to their needs and to involve the informal sector. One early decision was to forego online trading and instead opt for the old system of an open trading floor. A core objective of the project was to introduce integrity into a trading system in which contract default had been common and there had been a lack of commitment to quality. The exchange has grown rapidly, trading 608,000 tons of commodities to some 11,000 clients. Dr Gabre-Madhin identified three key success factors: understanding the needs of market actors, securing the political will and commitment of the government; and identifying the right solution to meet the identified needs.

Mr Derom Bangun, Vice Chairman of the Indonesian Palm Oil Board, described the market situation in Indonesia for palm oil. He said that both small producers and large corporations are involved in production, and the board expects continuing growth in the next five years, though perhaps at a slower rate. There are likely to be improvements in yield and an expansion of downstream industries, improvements in infrastructure and more active participation in the commodity exchange. Large corporations are already active on the exchange, but one challenge they face is uncertainty over export tax rates and also lack of facilities for physical delivery.

The lively debate that followed the opening presentations raised questions regarding the role of financial institutions in the Indonesian commodity exchange, the issue of whether African countries should move towards national or regional exchanges, and the need for a mechanism to stabilize prices in the palm oil market.