Ethiopia Operation ‘Bulk Coffee’ busted

By Wondwossen Mezlekia

Last month, coffee buyers across the globe had a rare glimpse into Ethiopians’ day-to-day experience, where haphazard policymaking is used by the government to interfere in and control people’s business whenever it feels like it. A new directive requiring the shipment of coffee in bulk container (a process of filling coffee in ‘dry containers’ fitted with a liner, as opposed to loading coffee packed in 60-kilogram jute-bags) suddenly surfaced in mid November and shocked the market.[read here] It was revoked thirty days later because of pressures from foreign diplomats, plummeting sales, and a cloud of fear of losing coffee buyers for good.

It’s not clear how it all began, but it appears some genius one day figured out the quickest way to “modernize the country’s export packaging and shipment standards” and the government decided to begin shipping coffee in bulk containers within two years. And, sometime during the 2010/11 fiscal year, an anonymous “investor” was granted a permit to import coffee blowers (machines equipped with a fan to generate a controlled pressure air current that throws coffee into containers, and a suction system to remove the dust created by the process.) Then, the operation began rolling out:

November 14, 2011 – the Ministry of Trade (MoT) concluded that “the conditions necessary for shipping coffee in loose container load are in place”. Therefore, Yakob Yala, State Minister of Trade, wrote a letter directing the Ministry of Agriculture to make sure that all coffee exports are shipped in bulk loads, unless exempted by his office, effective November 11, 2011. The letter described the initiative as a win-win-win proposition benefiting the country, exporters, and international buyers, thus the need to impose a restriction.

* The directive was not publicized nor published on the websites of the Ministries of Trade, Agriculture, or the Ethiopia Commodity Exchange (ECX).

November 30, 2011 – a coffee importer who was in Ethiopia at the time twitted a message which later landed on a Specialty coffee blog and beyond. The news stirred confusion and a rush of complaints from green beans buyers, distributors, and small to medium-scale roasters and retailers. The first breaking news blog post read:

“40,000 lbs in one big bladder or nothing out of Ethiopia is the word…coops are not exempt, this is wild. Lot separation in Ethiopia may now be illegal if this is true.”

December 3, 2011 – Ethiopian Coffee Exporters Association (ECEA) submitted a protest letter to Yakob Yala’s office demanding a revision of the directive to lift the broad restriction of bulk shipping. The board members of ECEA and ECX also held a joint meeting to discuss the concerns raised by ECEA.

December 8, 2011 – Yakob Yala convened with a group of coffee exporters to assess the progress of coffee export, which has been lagging behind the government’s ambitious plan of earning more than $1.1 billion in the current fiscal year. He complained that the quantity of coffee exported during the first four months of the year was short of the planned 66,400 tons by about 22,371 tons.

The exporters warned that the export may further decline and their customers may resort to other coffee growing nations unless the bulk shipment restriction is lifted promptly. They said, most of their buyers had already refused to accept the coffee in bulk containers and implored the authorities to consider a demand-based, progressive approach that ensures a smooth transition to bulk shipment. The State Minister won’t budge. He urged the exporters to speak in unison in support of the directive and tell their buyers to live with it. He assured them that, if any, the buyers abandoning Ethiopia’s coffee due to the restriction won’t be more than 5-10 percent – “a gap which can be easily filled.” “Tell them that we are doing all this for their own sakes,” he insisted.

Yakob Yala says the directive was issued after raising awareness among stakeholders. But, according to Reporter, only one of the 15 exporters who attended the meeting said his company didn’t have a problem with bulk shipping; the other 14 exporters strongly opposed the restriction. Haile Berhe Kinfe, Guna Trading’s head of the Agricultural Products Marketing Department tipped Reporter that bulk coffee shipping is a relief for large-volume exporters.

More than a dozen international coffee buyers submitted written complaints directly to MoT and, through diplomatic channels, to other authorities.

December 14, 2011 – According to The Reporter, members of the ECEA convened and concluded that “the directive was completely impossible to work with” and demanded that authorities revise the regulation. They also decided to explore fall-back plans, including submitting a petition letter to Prime Minister’s office. Separately, the ECX CEO Dr. Eleni Gabre-Madhin and Board Director, Ambassador Addisalem Balema confided with Yakob Yala’s boss, Kebede Techane, Minister of Trade.

December 15, 2011 – Kebede Techane called ECEA’s board members and told them that “the directive has been made null and void”. Again, the news was not published on the websites of the Ministries of Trade, Agriculture, or the ECX. The government’s two major developmental news agencies, Walta Information Center and Ethiopian News Agency did not cover the story either.

With that, a shocker came and gone, leaving the public with many questions to ponder.

In retrospect, the now defunct bulk coffee directive had fundamental flaws that make the very intentions behind the government’s decisions appear very suspicious, hence this public scrutiny of the defective policy to help inform the public of the sources of the eternal problems facing the nation.

A sound government policymaking process involves at least three major stages: problem definition & analysis, formulation, and implementation. This directive fails the test in almost all of these categories.

According to Yakob Yala’s letter to the Ministry of Agriculture, the directive was meant, in part, to modernize the packaging standards, reduce costs, maintain the quality of the coffee, and minimize theft.

In other words, the government defined the problem (modernize the packaging standards, opportunities for cost cutting, and need to minimize theft) and identified the solution (bulk shipment) and issued a broad directive with ambiguous enforcement instruments.

To begin with, the policy being sought here is merely a response to perceived problems and their consequences (backward packaging and theft, for example), rather than directly addressing the underlying causes of the real problems facing the coffee sector. By definition, this is bad policymaking.

It is true that bulk coffee shipment has a number of benefits and is, in fact, enjoying a growing popularity by large coffee shippers and producing nations, such as Brazil. The popularity is holding steady because, among many other advantages, of direct cost savings due to increased payload of almost 17% (a container can hold at least 3 more tons of coffee when loaded in bulk) and reduced inland transport movement (although the MoT letter erroneously states that it increases inland transport). So, the reason the policy failed so prematurely is not because bulk shipping is not appealing to shippers; it is rather because of the shallow analysis, lack of stakeholders’ involvement, and amateurish implementation of the policy. This can easily be revealed by deconstructing the directive into its hollow components.

First, the directive requires all coffee shipments, unless exempted by the MoT, to be shipped in bulk container, but does not disclose the criteria or procedures for requesting or making such an exemption.

Second, the directive disregards the fact that most of the ultimate buyers of Ethiopia’s coffee need their coffees packaged in small bags.

A considerable portion of the global coffee trade is conducted through distributors (companies who purchase coffee in full container lots and sell it in bags to roasters and retailers). It is estimated that only less than 30% of the world coffee is directly purchased by ultimate roasters. The rest of the coffee is purchased by independent importers for redistribution to small and medium-sized roasters directly or via local subsidiaries in consuming countries. Among the group that buy small lots directly or indirectly (from independent distributors) are the Specialty coffee buyers and roasters, whose numbers in North America alone ranges approximately between 3,700 and 4,500. Since most of these businesses often purchase small quantities of distinct microlots (small lots of fine coffees that buyers or roasters select in a given harvest season) to feature to their customers, it is vital that their coffees are packaged at origin in small bags so as to preserve lot separation when shipped in the same container with other lots.

At the other end of the spectrum are the large-scale buyers who often buy multiple full container lots at a time. These buyers are not concerned about lot separation as much as they care about maximizing profit by increasing payload and reducing inland fleet at the receiving end. Obviously, these companies do not need to be told by the MoT when and how to make use of ingenious shipping techniques, such as bulk containers.

Third, the far-reaching directive mostly impacts international buyers and importers whom the government has no control over. It didn’t cross the policymakers’ minds that, Ethiopia, a country with the least bargaining power in the world trade, is not in a position to dictate how its customers should ship their coffee. That the commodity coffee market is a buyers’ market where sellers compete among each other to attract more buyers, not the other way around.

Fourth, selecting the type(s) of bulk liners (big coffee bags usually made from virgin polyethylene in a size that is equivalent to the inner space of a container) is a matter of choice for importers and regulators in consuming countries, not shippers or exporters. Due to variations in the brands of liners that are licensed and recommended by consuming countries, the selection of bulk liners is exclusively reserved for the buyers. Ethiopia does not have the rights to override consuming countries’ regulations pertaining to the selection of these liners. It is for this reason that industry experts recommend that coffee exporters and shippers in exporting countries must first get the buyers’ consent before planning to ship in bulk.

Fifth, despite MoT’s claim otherwise, most of the stakeholders in the coffee sector have not been engaged during policy formulation. Only 1 out of the15 major exporters was excited about the directive. This indicates the extent to which the government attempted to involve the stakeholders – even the ones that are based in Addis Ababa – and considered their needs.

Sixth, the directive does not specify its enforcement mechanism. It does not spell out the measures that will be taken in an event some or all in the coffee sector ignore the regulation.

Finally, there was no apparent reason for making this a retroactive policy. By making the effective date of the restriction three days prior (Nov 11, 2011) to its enactment (Nov 14, 2011), the directive automatically changed the terms of trade for all the transactions that were in the pipeline. In so doing, the directive changes the legal consequences of not shipping in bulk container even for the trade deals closed under a jute-bag shipping agreement.

Bottom line, the directive was doomed to fail although it could have had a devastating effect, had it not been yanked, primarily on the smallholder family farmers that are organized under coops. Following a similar misguided policy that enabled ECX to control the coffee sector, only commercial farms and farmers organized under coops are permitted to engage in direct trade with buyers – the only marketing channel that ensures lot separation. The rest of the farmers (approximately 90%) have been deprived of their rights to engage in direct trade with ultimate buyers, and forcing their high-value coffees to be routed to ECX to be sold at commodity prices to buyers who are familiar with the recognizable geographic origins and also demand lot separation.

The question, now begging for an explanation is, what is the real motive behind the bulk coffee policy? Was this supposed to be another part – next to ECX – of a bigger plot?

(The writer can be reached at [email protected])