An internal feud between Ethiopian private exporters and the government caught the media spotlight recently but, as usual, limited journalism coverage derailed the attention off the fundamental issues.
On March 25, 2009, the government seized 17,000 tons of coffee beans from six exporters, and revoked their licenses. The government is now considering selling the seized stocks itself on the international market. The licenses of additional 88 independent traders had also been cancelled for failing to heed the authorities.
This happened after Prime Minister Meles Zenawi accused some coffee exporters in January of having been reluctant to sell stocks through the Ethiopian Commodity Exchange (ECX). He warned them of conspiring and disturbing the integrity of the ECX system by supplying and then buying back their own coffees to sell coffee meant for export on the domestic market, threatening to “cut off one of their hands” if they did not behave.
The exporters deny these accusations.
When the media picked and wagged a thread, the news spilled over to global markets and sent a shockwave across the specialty coffee community. Some importers of specialty coffees got worried that the new coffee law may put an end to direct sourcing of beans and severely impacted the already scant traceability of Ethiopia’s coffee beans.
In all this, the farmers’ voice is drowned out and their concerns left unnoticed.
As it happens, the recent development in Ethiopia’s coffee sector has more ramifications to the national economy than on the specialty coffee industry. Importers and roasters interviewed for this report confirmed that their sourcing is unaffected while the feud continues.
To understand the underlying reasons for the private exporters’ frustrations and the government’s heavy-handed actions, one needs to look at the history of coffee in Ethiopia and what changed in recent years.
Ethiopia, the birthplace of coffee, is the sixth largest coffee producer and the seventh largest exporter worldwide. It is the largest coffee producer and exporter in Africa. Exports between March 2008 and February 2009 were 2,679,155 bags of coffee beans, a share of 2.73 percent in global coffee trade.
The fine quality of its coffees and the distinctive features of the sector, including its genetic resources, abundance of wild coffee trees, and the organic coffee production, earned Ethiopia a unique place in the global coffee marketplace.
Coffee is the backbone of Ethiopia’s economy. In the 2007/2008, coffee export fetched more than 525 million dollars, accounting for about 60 percent of the country’s hard currency earnings. Moreover, coffee provides an important source of income for a large portion of the population and is an important source of tax revenue to the government.
Coffee holds a strong political significance in Ethiopia because of its tremendous importance in the economy and its political purposes for the regime. The ruling party ensures the centralized collection and controlling of foreign currency in order to stay in power.
Currently, the government is strapped; its foreign currency reserve is at its lowest level of $850 million, enough to cover only a month’s imports. The foreign exchange shortage was exacerbated by declines in global coffee prices, poor harvest, and contraction of sales following the loss of Japan’s market due to the ban imposed in May 2008 by Japan after finding “abnormally high” pesticide residues in a shipment of the beans.
Under these circumstances, coffee can be extremely appealing to the government.
The Ethiopian Commodity Exchange (ECX)
The Ethiopian Commodity Exchange (ECX), a government owned central trading system, meant primarily for grains, began trading coffee in December 2008. Launched in May 2008, the trading platform was set up to replace the murky auction system often abused by market participants.
During the ECX rollout, which happened to coincide with the global economic turmoil where domestic and global prices were sharply rising, there was severe shortage of grains flowing through the exchange.
Although it is authorized to trade in both spot and futures contracts, ECX announced in April 2008 that it intends to start off with only spot contracts for immediate delivery (as a strategic driver of the ultimate futures trading) and impose compulsory delivery of grains.
In August 2008, the government swiftly enacted a new coffee law in order to provide ECX with the necessary legal framework that would enable it, among others, to impose compulsory delivery of coffees. This law requires all coffees to be traded through the ECX – the only outlet to international markets.
The New Coffee Law
The new coffee law, as some call it, is believed to be what sparked the outcry among private exporters in Ethiopia and the specialty coffee community. Outside Ethiopia, there is confusion on whether or not the law prohibits direct sourcing of single origin coffees.
The law, formally known as the Coffee Quality Control and Marketing Proclamation (No. 602/2008*, declares all coffee trade “shall take place in lawful coffee transaction centers.”
More specifically, Article 10(1) reads:
“Any person involved in the roasting and grinding of coffee for selling shall purchase the coffee for such purpose only from auction centers, the Ethiopia Commodity Exchange or wholesalers.”
But Article 11 appears to be leaving room for direct sourcing:
“Any coffee producer shall: 1/ without prejudice to Article 6(1) of this Proclamation, have the right to directly export coffee from his own farm, only after submitting the same to the coffee quality liquoring and inspection center for grading before and after processing for export; and 2/ sell coffee by product in auction centers or the Ethiopia Commodity Exchange only upon examination and approval of the coffee quality liquoring and inspection center.”
This provision makes it easier for coffee farmers’ cooperatives and marketing unions to transact with importers directly. Some of the cooperatives and unions that are reasonably equipped and well positioned to handle export orders will hopefully reap the benefits of direct marketing.
Meanwhile, farmers that are not organized in cooperatives, which constitute the majority of the farming community, are disadvantaged, as dealing with importers from thousands of miles away would be challenging, if not impossible. However, importers do have the option and abilities to initiate and enter into contracts with all producers and access their favorite coffee origins by establishing direct relationships with producers. This approach helps the poor farmers dig themselves out of the traps of poverty and eternal exploitation.
The law abolishes the old practices by some exporters of handholding coffee bags from farm gate to export. Now, they will have to compete with other exporters if they need to buy specific bag of cherries supplied by suppliers or “akrabis.”
In this respect, the Coffee Quality Control and Marketing Proclamation and ECX call for segregation of duty at all levels of the value chain. It appears, though, the government is now in violation of this noble code of ethics.
Conflict of Interest
The present-day domestic marketing chain in Ethiopia is as old as the export trade itself. The bean passes through numerous market participants before arriving at the central auction centers: collectors or “sebsabis” collect the beans at local stations from rural merchants or farmers and sell it to suppliers or “akrabis”; akrabis deliver the coffee en masse to the auction centers; private exporters or local distributors buy from auction centers. Suppliers and exporters are not allowed to bypass the auctions and exchange directly.
With the introduction of the new exchange system the auction centers are replaced by the ECX, while all other participants continue to function as is, but with one fundamental change: transparency. The previous auction system was marred with loopholes that seem to have allowed some exporters holding dual licenses to purchase back their own coffee in the auctions, thereby enjoying too much control over coffee prices. Supposedly, ECX’ introduction of rules of trading, warehousing, payments and delivery, and business conduct principles will seal off those loopholes. This seems to have upset a few exporters and fired back at by the government accusing them of engaging in conflict of interest.
But the government’s reactions were even more troubling. It not only confiscated coffee beans from the exporters but also tasked the state owned Ethiopian Grain Trade Enterprise (EGTE) with exporting of coffee.
This measure throws privatization and domestic market liberalization out in the window.
Ethiopia’s coffee market has always been a relatively private business, with the exception of limited government interventions to enforce quality standards, etc. This was true even during the days of the communist regime that “nationalized” almost every sector in the nation.
EGTE’s slated assignment marks a detrimental precedence in the nation’s history. The government’s engagement in exporting beans produced by smallholder families while it controls almost all means of production in the country, including the distribution of farm inputs, capital, and the land, is inconsistent with principles of a free market system.
Drowned Out Voices
As usual, when those up in the value chain fight, in this case the government and private exporters, it is the farmers that suffer most. In Ethiopia, smallholder farmers produce about 95 per cent of the nation’s total coffee production and these farmers rely on the sale of their cherries for their families’ mere survival.
For generations, Ethiopian coffee farmers have been at the mercy of their marauders. In the long and inefficient marketing chain, each participant marks up their prices weighing down the burden on the farmers’ shoulders. Ethiopian farmers receive barely a small fraction of the value their produce is worth, currently around 40 percent of export prices, much less than the 70 percent that their counterparts in Central and South America receive.
A transparent and efficient exchange market system nurtures competition and benefits everyone in the value chain, from bean to cup. Farmers producing the finest quality coffee can get rewarded for their hard work as well as suppliers and exporters whose innovation and smart marketing skills pay off.
But, if given the choice, farmers in Ethiopia would choose direct marketing over a chain of licensees that add little value to the product. To that effect, ECX would be more beneficial to the farmers if its processes support and facilitate for more farmer-importer relationships.
The role of a centralized modern commodity exchange is indispensable for developing economies, such as Ethiopia.
The country’s coffee sector is highly dependent on international prices and the export is affected by the structure and workings of the world coffee market. The market participants need to understand that Ethiopia is competing with countries that have the abilities and the will to easily adopt innovative low-cost production and marketing systems.
The current bickering and prejudice will only affect coffee quality, weaken the country’s brands, deter potential importers, and put the sector at risk. The government needs to exercise restraint, listen to and address the concerns of all participants, from farmers to importers. Its obligation to protect the farmers from exploitation includes itself as well. Replacing private exporters by EGTE won’t lessen the burden on poor farmers.
The interests of all participants can be better served if the market functions, in the words from ECX’ mission statement, “based on continuous learning, fairness, and commitment to excellence.”