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Is Ethiopian Commodity Exchange Good for Coffee Growers?

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08/03/09

  11:35:55 pm, by admin, 1562 words  
Categories: Ethiopia

Is Ethiopian Commodity Exchange Good for Coffee Growers?

Ethiopian Commodity Exchange headquarter in Addis Ababa

Is Ethiopian Commodity Exchange Good for Coffee Growers?

By Wondwossen Mezlekia
poorfarmer@gmail.com

August 3, 2009

The Ethiopian Commodity Exchange (ECX) was established with an ambitious goal of eliminating food shortages and hunger in Ethiopia by creating an efficient marketing system for agricultural commodities. Barely two months after its launch, the highly praised exchange platform found itself caught in the midst of the complex global coffee trade, an undertaking that is entirely different and farther from its original vision of "revolutionizing" the inefficient domestic commodity market.

In August 2008, the government enacted a new law that forces the trading of all of the country's coffees through ECX and ECX welcomed the decision. Since then, the government confiscated stocks of coffee from exporters and revoked licenses, filled in the vacuum with the Ethiopian Grain Trade Enterprise (EGTE), and sold Specialty coffees at commodity grade coffee prices.

Following its first rough encounter, ECX is now engaged in talks with Specialty coffee buyers and faced with challenges of wining the hearts and minds of traders locally. But, the effect of ECX on coffee growers is yet to be noticed. This piece attempts to reveal the pitfalls of trading coffee through ECX and its impact on small-scale farmers.

Learning coffee on the fly

As it has now become apparent, ECX was not ready to accommodate trading operations of a complex global commodity when it embarked on coffee export. This partly explains why ECX has had to run into problems as soon as it started its coffee trade.

ECX was initially established to create a trading platform for domestic agricultural commodities, mainly grain. The ECX was created with primary purposes of eliminating the archaic marketing system whose inefficiency, according to ECX's founder, Eleni Gebre-Medhin, are in part responsible for the recurring food shortages and hunger in parts of Ethiopia, and increasing the value of the domestic grain. Dr. Eleni described her vision in June 2007 at TED Talk as:

"Ethiopia's domestic market is about $1 billion of value and we feel over the next five years, if Ethiopia can capture even 40%, just 40% of the domestic market and add jut 25% value to that market, the value of the market doubles. ECX, moreover, can become a trading platform for the Pan-African market in agricultural commodity. Ethiopia's agricultural market is 30% higher than South Africa's grain production; and, in fact, Ethiopia is the second largest maize producer in Africa."

This ambition is founded on plausible assumptions about domestic grain trade but it did not take into consideration the state of coffee trade. Because the market system was designed to bring about changes in the grains trade – not in the coffee sector – ECX ended up further complicating the problems facing coffee growers when it suddenly decided to take on coffee trade.

Mandatory exchange

By requiring 100% of coffee trade be conducted through ECX, the government eliminated direct trades. The government says that was necessary in order to improve the sector and prices. This is frivolous.

Unlike grains, coffee trade is characterized by unregulated supply, market monopoly by a few multinational companies, and stiff competitions among producing countries. Coffee is a global commodity. It is the world’s second most traded commodity next to oil with its prices determined at the New York exchange market. The trade is largely controlled by the world's biggest coffee buyers. Five multinational companies, Nestlé, Philip Morris, Procter and Gamble, Sara Lee, and Kraft Foods buy about 70% of the world’s coffee and play pivotal roles in setting world coffee prices. Coffee growing nations do not have a say in this unregulated global market.

To mitigate the burden, other coffee growing countries are resorting to creating differentiations and to find a place in the Specialty niche market. The direct trade relationship with Specialty coffee buyers gives these nations a relative stability, premium prices, and incentives to increasing quality standards.

ECX, on the other hand, adopted a strategy of forced bulk trading through a warehouse receipt system and eliminated direct trade. Still, it hopes to improve prices and the sector.

Underestimating Specialty coffee

The global coffee industry is increasingly moving towards greater transparency of coffee origins and differentiation but the ECX system is heading in the opposite direction. Ethiopia is naturally endowed with the variety of coffees demanded by the Specialty coffee buyers. 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. Ironically, instead of capitalizing on these unique attributes, ECX aims at bundling all of the coffees into commodity grades.

One possible explanation for this absurd strategy is ECX's underestimation of the importance of Specialty grade coffees. “The “specialty-plus” market segment is only 3.7% of the total coffees exported, with the remainder to be considered as commodity coffee," says ECX in its whitepaper titled What is in a Bean?

This unsubstantiated analysis has led ECX to a mistaken conclusion, thus its decision to neglect the Specialty market and focus on aggregate coffee production. ECX's estimation is flawed and can be proved wrong by the following cursory appraisal of empirical evidences.

In 2008, Starbucks, the world's largest Specialty coffee buyer, bought 192,500 tons of Specialty coffee, of which 5-10% was directly sourced from East Africa (the company’s official numbers always fall within this range). (The major coffee growers in East Africa are Ethiopia, Kenya, Tanzania, and Rwanda.) Since Ethiopia is the largest exporter of Specialty coffee in Africa, and, given Starbucks' long history of close relationship with coffee growers in the country, it is reasonable to assume around 3% of Starbucks' purchase (or about 60% of its East African purchase) comes from Ethiopia. Meaning, around 5,775 tons of Starbucks’ 2008 purchases is practically from Ethiopia. Since Ethiopia’s export during that year was 170,888 tons, Starbucks’ purchase only represents 3.4% of Ethiopia’s export.

So, if at least 3.4% of Ethiopia's Specialty grade was directly sold to Starbucks, one can imagine how the number can easily jump to a range of upper teens to twenties when the quantity that Starbucks bought through Germany (Starbucks buys most of its coffee from Germany which is also one of Ethiopia's major export markets) and the coffees directly sold to other small buyers through direct trade.

It is thus extraordinary that ECX diminishes the share of Specialty coffee in Ethiopia. Furthermore, it is unbelievable that ECX failed to see the fact that Specialty coffees drive the global coffee trade.

Marketing experts agree that the prestigious coffees such as Sidama, Yirgacheffe, and Harar serve marketers as ingredient brands. The prominent Oxford Professor Douglas Holt defines ingredient brands as: “brands that are used as one component “ingredient” of another branded product or service. Gore waterproof fabric and Intel computer chips are classic examples."

Dr. Holt argues, “Consumers view the ingredient’s inclusion as a distinctive and valuable addition to the offer. The ingredient is revealed to end-consumers through some sort of distinctive mark (name, logo, etc.) so that the inclusion of the ingredient increases the perceived value of the offering."

By undermining the roles played by Specialty coffees in promoting Ethiopia's aggregate coffee export, ECX's bulk trading system poses a threat of commoditizing some of the distinct coffees in the world. Farmers that grow some of these finest beans expect their produce to fetch them a price better than that of the run-of-the-mill beans. The lack of incentive for their hard work may also have adverse effect on the country's Specialty coffee production. As quality deteriorates, the country’s prestigious brands water down as well.

Unfair competition

When responding to criticisms about its position on direct trade, ECX cites as an example the cooperatives and commercial farms that are directly selling Specialty coffee outside of the ECX system. This is true but the problem is, by allowing selected group of growers to have access to the Specialty market, ECX leaves out the smallholder families that are not organized in cooperatives. This practice deprives farmers of the privilege of establishing business relationship with external buyers.

In addition, the current ECX system also subjects small-scale farmers to a potential market monopoly by a few exporters. Farmers are not represented in the ECX Board of Directors, a body that currently comprises three major coffee exporters, including the General Manager of EGTE, Berhane Hailu, and seven other government officials. This degree of power imbalance puts farmers at a disadvantage.

Coffee trade under current ECX system is far from being a level playing field. It is difficult to imagine a marketplace that is fair to farmers in a setting where the government owned enterprise, EGTE, working to maximize profit and ensure uninterrupted inflow of foreign exchange also directs ECX.

As far as small-scale coffee growers are concerned, ECX has so far not been “fair, independent, and free.”

If ECX were to be of any benefit to the poor farmers, it should create an environment where the bulk trading system functions alongside a direct trading of Specialty coffees and other certifications such as Bird Friendly, forest, and organic coffees. This is a lifeline for many smallholder farmers and that is where they have comparative advantage over competitors.

----
poorfarmer@gmail.com


The views expressed in this article do not necessarily represent the views of nazret.com. The views are solely that of the author.
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Tags: ecx

23 comments

Comment from: EthioMan [Visitor]
EthioMan

Wow… here is not giving a chance and time to see how ECX is going to fairout. Frankly this is too much criticism too soon. ECX has just started and if dude has seen the PBS special on it, he would know it is a great idea for the future. It may not be so great now but in a few years, it is going to function very well and those small farnmers are going to get what they are worth.

I say hose down the negativity, wait and see if things improve or not… give or take a few years.

08/04/09 @ 00:48
Comment from: not-so-unfixable [Visitor]
not-so-unfixable

I think one of the characteristics of EPRDF is changing when they have to like arresting Politicians for life then releasing them. i have full confidence that especially Eleni is permissive to correction assuming what you said is valid and sound.

08/04/09 @ 03:54
Comment from: katikala [Visitor]
katikala

Summary-

“the current ECX system subjects small-scale farmers to a potential market monopoly by a few exporters. Farmers are not represented in the ECX Board of Directors, a body that currently comprises three major coffee exporters, including the General Manager of EGTE, Berhane Hailu, and seven other government officials. This degree of power imbalance puts farmers at a disadvantage”

08/04/09 @ 05:38
Comment from: BeDula Hintsa [Visitor]
BeDula Hintsa

Ye Ethiopia mirt gebeya..My favor dr Eleni Gebermedhn is now back the only woyans exportres.17% of Addis Abeba ppl have Aids desis had been there a very well back.
there is no people in Ethiopia but growth eko…….

08/04/09 @ 05:41
Comment from: bekri [Visitor]
bekri

The answer to you question is an ASSERTIVE YESSSSSSSSSSSSS

08/04/09 @ 07:33
Comment from: teshome [Visitor]
teshome

The main problem in Ethiopia is there is no interaction between experts and the government. The government always takes decision spontaneously without any forethought and caution. There is disconnection between experts in the real world and the officials in the government. The establishment of ECX may be a good idea. But, its mandate and responsibility must be realistic. It is always wise to start small to grow large.

08/04/09 @ 08:37
Comment from: extraterrestrial [Member]  
extraterrestrial

Leave the Ethiopian Commodity Exchange for Dr. Eleni and come up with some idea of yours. Be crative instead of destrying the crative onec.

In the old time i used to hear when some one in Ethiopia have a new idea and show crative mind used to be killed by poison. To day it is articles like this one defaming an an attempt to kill the creative one like Dr. Eleni.

Most probably the reason why Ethiopians suffer more than any one else is becuause of their evil heart towards their fellow brother and sister.

Ethiopians have energy and time when it comes to destroy other fellow Ethiopian but you will never see then when it comes to do the good.

08/04/09 @ 09:53
Comment from: Berhan [Visitor]
Berhan

=>SALAM, YOU CAN SEE THE FULL ELENI/ECX DOCUMENTARY AT THIS SITE
http://video.pbs.org/video/1197888947/program/1154691044

OR A PREVIEW AT YOUTUBE
http://www.youtube.com/watch?v=3F03WHcR36w

Ethiopia to a great future! peace.

08/04/09 @ 10:17
Comment from: visitor [Visitor]
visitor

No, it will not help any farmer in Ethiopia. The purpose of all this is to control the trading system so that only tplf supporters and its firms can buy and sell. That is why the comission is deliberately led by a tigrean. My fellow Ethiopians, all what tplf does is to control our life. That is why tplf strictly avodes even its allies (OPDO and the Amhara Movement)on all business matters. For tplf, it is the economy that matters and they strongly beleive in the idea that “if you control that you will control everything both in the short and long term". That is what the tplf people are doing day and night. That is why all tigreans support tplf. The royal ethnic group is in the making. All other ethnic groups specially the Amhara and the Oromos you will see the humilations that are being designed for you. Period.

08/04/09 @ 10:20
Comment from: Mored [Visitor]
Mored

Very good article, clearly explaining the weakness of ECX and how it might improve. I think the government rushed the ECX to trade coffee, If you have seen the film “The Market Maker” on the PBS program it was monster melesse who ordered Dr. Elani to start trading coffee. I hope ECX realize the importance of specialty coffee and come up with a way to trade specialty grade along bulk as the author suggested. And include farmers to be on the board since they are stakeholders.

08/04/09 @ 10:22
Comment from: ethiopian kid [Visitor]
ethiopian kid

I am against what the TPLF is doing to our country.But I am very pleased with what the lady who started Ethiopian Commodity Exchange.

Instead of being critics why not do something original. Give her dues bros.

08/04/09 @ 10:37
Comment from: Jordan [Visitor]
Jordan

Extraterrestrial

I will second your thought. We are bunch of idiot a do nothing big mouth MF!!

08/04/09 @ 11:31
Comment from: layebye [Visitor]
layebye

another woyane scheme to steal hard currenct by controling few hard currenct earning commodities like gold and coffe.they are stealing the hard currency the country suposed to get from the sale of gold with their crime partener shiek Alamudin for years,and we know how much an ounce of gold sale now a days, $1000 an ounce.now woyanes,particularly the Melese gang, are trying to exculusivly control the coffe export.

08/04/09 @ 14:04
Comment from: Eskender [Visitor]
Eskender

People, learn how to take criticisms and make use of them. Look at what our tendency of supporting/opposing blindly got us to. Only because ECX is great for grain trade does not mean it is as great for coffee trade. This is a great analysis assuming it is based on facts. If you believe the article is baseless, then get your facts straight and share your counter-argument before opposing the author’s views so blindly. Like any project, ECX is not perfect and criticisms like this will go a long way in helping the authorities improve the market. ECX cannot be perfected without diverse views and input.

08/04/09 @ 14:13
Comment from: Ajerew [Visitor]
Ajerew

I am sorry but i do commodity exchange for living here in the US and studied Finance.

I dont know how you relate unfair market and say coffee producers can sell outside the market. this commodity market will not affect the coffee from being SPECIALITY.

Well i just read it and see it as a biased and lack of industry expertise.

08/04/09 @ 14:23
Comment from: visitor [Visitor]
visitor

In 2010 EFFORT will be the biggest Coffee exporter in the country and Tigray will the biggest coffee producing region.&#59;) Thanks to ECX!

08/04/09 @ 16:21
Comment from: Observer (the original not some copycat) [Visitor]
Observer (the original not some copycat)

Why don’t they start with few comodities and see how that goes and then add more. They are trying to go from horese and buggy to Airplane bypassing automobile. If coffee don’t have to be on the exchange until they figure out how to handel it then that is what they should do.

08/04/09 @ 17:09
Comment from: observer [Visitor]
observer

People are missing the point when they argue here. The issue is not whether Ethiopia should modernize the commodity exchange process or not the issue here is what was said about the objective of the new commodity exchange entity and where it end up doing things.

Few developments to remember.

The story of the lady was sold as an educated Ethiopian to help her people to get rid off food shortages to make food available easily to the needy and to benefit growers too.

Then comes the government shutting dawn the existing coffee export business confiscating their commodity, the warehouse, their license, their property and allow the new ECX to take care of the export of other people’s commodity.

If government and this lady decided to do this which they did it should have been done legally and officially hey the way to go should be this way. This require compensation for former owners and many adjustments rather it was done like robery.

Remember the following headlines.

1) So many tones of coffee ready to be exported disappeared.

2) Ethiopian coffee exporters hide coffee.
3} Ethiopian coffee exporters shipped coffee to some where unknown

Those headlines were deliberate PR campaign against those exporters who happen to export coffee for many many years. If the lady and government were in the process of shutting dawn why was all that bullshit necessary?

The PBS didn’t arrive by accident but they want to use the PR to the highest level possible to sell their stories.

The bravado of shutting dawn of business by TPLF soldiers a telephone call from government to the lady to tell the news and those unnecessary hoopla was not necessary at all.

Now all Ethiopian gold mining or export is transferred into one Sadi guy now the coffee and sesame export is in the hand of the lady or the minority government who happen to deal with business too. What is next? Land is being sold to Saudis and China. These are the issues.

Where is the commodity trade thing on food sufficiency and distribution with fare price to help the society? The story begins with helping the people in providing food and end up owning money maker business for the country in the hands of the few.
That is the issue.

If the issue was genuine not a scam it would have been done differently.

The lady could have helped the existing exporters with new methods exactly what she was talking and modernize the way they do the business. She can also create new method and compete with the existing once without affecting their right to do their business. It was not done that way.

What was done was spread bullshit lies, arrest them, confiscate, take all their properties and license then do exactly the same thing export it.

Modernizing is one thing but robbing is another. Competing is one thing but shutting dawn others business is another. Building warehouse and stalking commodity is one thing but taking away other peoples commodity and ware house is another.

Will Ethiopia benefit from this scam new business of coffee and sesame export? It depends how you see it. If Ethiopia means all the people I am sure this dog will not hunt. If it means benefiting few cronies wealth yes you bet it will.

That is the issue.

08/04/09 @ 22:15
Comment from: brook [Visitor]
brook

people pls “be the change you want to see in the world” Gandi

08/05/09 @ 02:38
Comment from: gemechu [Visitor]
gemechu

Concerning the FM radiostation.
Ethiopia have been occupied by the Italians. for 5 years.
Never mind now the young fools are mentaly colonaized by the foolish of all fools generation who forgot what to do and beat each other kill each other for so called arsenal manchester united. Ethioia will be free by the KOLO TEMARIE who knows exactly what they are dooing not by the so confussed who stay abroad and consume the council money many with out working. The big contributer is FM the MENGESTU hilemariam clicks who were celeberating when the young kids were killed by the redterror.Please come to your sense and don’t sell ethiopia.

08/05/09 @ 05:42
Comment from: gemechu [Visitor]  
gemechu

Please don’t cap your hand for some thing you don’t know. Ethiopia will be free by the KOLO temarie who knows exactly what to do not by the bole useless vagabonds who are useless.
FM is the instrument paid by the brits to mentaly colonize the eth. people.
Enjoying council money with out working TURUMBA NEFIE good by

08/05/09 @ 05:50
Comment from: ekebede [Visitor]
ekebede

Dear Mr Commodity Trader: Ajerew

The hold purpose of having an exchange is to have a centralized place to get into future contract, not to eliminated brokers and middle (Ye Hel Negade). An exchange is used to manage risk. I don’t want to get to technical ,but should be a market place that help producers anticipate price fluctuation, so that they are able to buy the option to sell and buy. The same the coffee buyer gets to purchase the option to buy. An exchange where buyers and sells meet and price is determined, which you need a good legal system, where to in force a contract. I don’t that is the in Ethiopia.
An exchange is good medium if is established by the business themselves, by no means it should be own or run by a government, as it the case in Ethiopia. The government role should all be as a regulatory.
As of the good old lady concerned, she is only theoretician, and I hope she know what is getting into.

As the case in Ethiopia farmer and business association can’t get outside financing. Therefore, to establish the ECX the ministry of agriculture that was able to obtain $1 million grant from USAID, and all those expatriate that you see on the PBS documentary are paid by UNDP. Thus, under the current law in Ethiopian and governance, it is impossible for the private business to get external financing to establish and independent exchange, with out government interference.
At the moment the exchange has been used to control coffee export rather than facilitate risk and protect small farmer. As it case all over the world except Brazil, no grower drive the price off coffee. Therefore, the only argument that says the Ethiopian farmer can as for better price is grown. Unless ECX stakeholder are misleading us.

08/06/09 @ 00:21
Comment from: Melt [Visitor]
Melt

While the benefit of ECX maybe early to tell, with the ongoing active participation of the government people in the marketplace, it is highly unlikely the ultimate beneficiaries to be, the small farmers but operators of large farms. In addition to stifling competition, this scheme probably will give rise to some version of monopoly, to those who operate or would operate large farms in a form of commercial farming.

08/06/09 @ 10:02

rebtel

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