nazret.com Merkato Blog

Ethiopia - Straightening out coffee facts for the record

By Wondwossen Mezlekia

Posted on November 5, 2009

"You are entitled to your opinions, but you are not entitled to your own facts." - Late Senator Daniel Patrick Moynihan

The recent article by Dr. Eleni Gabre-Madhin, founder and CEO of the Ethiopia Commodity Exchange (ECX), titled “Will The Real Poor Farmer Rise” and first posted on nazret.com is a praiseworthy contribution to a serious public dialogue on matters of national interest. It is also courageous for a prominent figure who supports the government of Ethiopia to opt to engage in civil dialogue about complex issues in the public domain. This being a new phenomenon in Ethiopia, inability to draw a line between a personal capacity and an official capacity is totally understandable; although, the bar might be higher for individuals who grew up in a society where public dialogues and opinions are at the central core of democracy and who are rather expected to be models of democratic and civil communication, the lack of which has left the whole Africa incapacitated. It is crucial for all of us to learn to involve in intellectual discussions setting aside personal feelings and egos and rather focusing on the substantive issues at stake, in this case the problems brewing in Ethiopia’s coffee sector.

The conversation about ECX and the problems in Ethiopia's coffee sector - a topic that provoked Dr. Eleni to weigh in - has been running for weeks now, the recent development being the secretly planned event that was held in Addis Ababa, October 21 - 24, 2009, between ECX, the Specialty Coffee Association of America (SCAA), and others. Throughout, many questions have been raised, including the government's use of ECX to secure its interests, the merits of the country's property right laws, the government's responsibilities in protecting farmers from exploitation, the risks of commoditizing the country’s finest coffee brands, ECX's distraction from its initial noble mission, which is to help eliminate famine by creating an efficient domestic agricultural commodity market, and more[1]. The reason why ECX is particularly scrutinized in relation to its coffee trade is because the stakes in that crop are high, too high to be left for a trial and error. Well informed industry observers warn that the government's handling of the coffee sector could be destructive to the development of domestic private sector in general and the untapped coffee resources in particular. But, ECX seems to be maintaining its positions that all is well, as if nothing had happened. At best, the take away from reading the above article is that the problems at hand need to be spelled out in a clear and undistorted manner so that everyone who claims to have a stake in Ethiopia can have the same understanding and view from anywhere in the globe. Therefore, it will be necessary to pause the discussion about the gravity of the impending consequences of the sticky situation that ECX and the coffee sector found themselves in and first set the records straight. To that effect, the following paragraphs trail on Dr. Eleni's main points cited in the above article for the sake of clarity and to fill the gap in ECX's understanding of what had just happened in Ethiopia.

"Coffee trading in ECX was a hastily conceived, ill-prepared affair by people who knew nothing about the complexity of the coffee market"

The credentials of ECX's officers has never been a point of contention throughout the discussions as there is no reason to believe that Ethiopia is short of able experts in the coffee sector. Doing so would amount to disrespecting the people who preserved the sector through three consecutive regimes. This, however, does not exempt the poor handling of the media frenzy that followed the interruption of the Specialty coffee trade because neither the government nor ECX displayed wisdom or competence in dealing with the situation. That being said, there are ample evidences to show that ECX was not prepared to trade coffee and that the project plans that led up to the realization of ECX anticipated a coffee exchange at this early stage. ECX was established as a domestic exchange for grain, not for coffee trade. The first evidence for this is found nowhere but in the Policy Working Paper prepared by Eleni Z. Gabre-Madhin and Ian Goggin, Chief Executive, Africa Commodity Exchange (Malawi) and former President, Zimbabwe Agricultural Commodity Exchange. The document dated November 2005 and titled "Does Ethiopia Need a Commodity Exchange?: An Integrated Approach to Market Development" does not mention the coffee crop anywhere in the 24 pages - not even once.

Also, ECX's lack of experience and resources were central factors that have contributed to the coffee trade problem. The then eight-month old ECX had hardly established its own institutional capabilities, much less gaining the experience in trading agricultural commodities, when it was surprised by the government with the unexpected task of trading the global crop. Although Dr. Eleni now denies it, ECX's understandable frustrations are documented in the PBS/Market Maker film that featured Dr. Eleni. Here is a portion of the transcript taken from pertinent segments of the film:

Narrator (Aeron Brown): "Eleni's strategy for building the ECX is so to start to walk before you run; start with a few commodities, work out the kinks, take on more, slowly when you know the system works. … Coffee is to Ethiopia what oil is to Saudi Arabia. The coffee crash [summer of 2008] threatened the entire economy. At the highest levels of government, the question was raised: what if the ECX with its open market, efficient pricing, took up coffee now? Not years from now, but right now? Could the downturn be avoided? For Eleni, for her team, for the ECX, this is both an extraordinary opportunity and an extraordinary risk."

Dr. Eleni: "We had a nine-hour meeting over two days with very senior people in the government, very intense, and finally the Deputy Prime Minister looked at me and said: if we said, let's have all that come, [sic] can you handle it? And, I looked at him and said "yes." ... I was very scared. It was a very, very funny moment. I came out of that meeting and called my management team and said, ‘we are going to be trading all of Ethiopia's coffee. This will change everything.’ ..Much better for us in the longer term but ‘can we do it?’ is what I don't know. ... Coffee is just an overwhelming situation; doing too much with too little staff, too little equipment, too little time."

That's it. That is what it took for the government to decide to route the coffee trading to the commodity exchange platform. The point is, the decision to trade coffee on ECX is completely a political decision driven by the government's needs to control and enhance the flow of coffee exports.

"The inclusion of coffee in ECX was for the purpose of government control and to monopolize the coffee market"

The law that established ECX clearly states that ECX's Board of Directors should be composed of six government and five privately appointed directors. Despite, the current Board is dominated by directors with vested interests in promoting the government's business. Of the eleven directors, only three sits (27%) are occupied by the private sector. To argue that somehow Ethiopian Grain Trade Enterprise (EGTE) and Kality Food factory (whose managers are incumbent directors) are privately appointed is deceiving. Plain and simple. These enterprises are owned by the government and report to - through their respective Board of Directors - to the Privatization and Public Enterprises Supervisory Agency, a government body also with a sit on the ECX Board.

EGTE is now, for the first time in its history, the major player in the coffee trade as is GUNA Trading House PLC, an endowment which, according to Bloomberg, is owned by the ruling political party.[2] GUNA has publicly announced its plans to tap into the coffee trade after five years of abandoning the sector. Independent institutions, such as the World Bank have voiced public concerns that these enterprises benefit from privileged access to policymakers and resources which gives them unfair leverage in the marketplace. If this is not a sign to monopolize the market, what is?

"ECX was an instrument to take action against private exporters"

This dimension of the problem is exhaustively discussed by many writers within the context of the country’s legal and political situation.

"The Exchange had simply not thought about specialty coffee trading until forced to by international coffee buyers in 2009"

Regardless of what ECX might have had privately thought about Specialty coffee trading, what is known for sure is that ECX's system has effectively disrupted the export of Specialty coffee trade and all coffees are sold at commodity prices and market to this day, with the exception of some stocks sold by cooperatives and commercial farms. There is no “single origin” Specialty coffee leaving the country until ECX finds a solution because the system eliminates "traceability". Two questions arise here: 1) If the legislation that was passed in November 2008 provided ECX the mandate to separately or concurrently handle Specialty coffee as it deemed necessary and ECX decided to trade the Specialty coffees as commodities until it finds a solution, doesn't it also mean that ECX is solely responsible for the disruption of the trade? 2) Why didn't ECX allow the Specialty coffee transactions to continue as is until a new system is put in place?

The bigger problem is that because ECX was of the notion that only about 3.7% of the country's coffee production qualifies to be branded as a Specialty coffee, its focus has been on the bulk coffee trading. [3] It was only after the 2009 SCAA event in Atlanta that SCAA and ECX formed a joint working group to find a solution for the problems. The working group reported its proposal to SCAA at the ECX Specialty coffee event held late October in Ethiopia. Here is where we are now.

What's next?

The coffee exchange strategy should look beyond the commodity market. The global coffee trade is controlled by a hand-full of multi-national corporations and international prices for commodity coffee are mostly determined by these multinationals. The daily fluctuations in price are mainly driven by the buyers’ bargaining power and speculations about coffee supply, which in turn is dependent on factors affecting coffee growing regions in the world. The competition between the biggest coffee producers, including Brazil, Colombia, Indonesia, Vietnam, Mexico, often helps multinationals as increases in supply result in a decline in prices. The compound effect on coffee dependent economies, such as Ethiopia, is that they have no say whatsoever in influencing commodity coffee export prices. Therefore, it is incumbent upon ECX to adopt cutting-edge marketing strategies that will enable Ethiopia beat the competition by making the best use of the wealth of coffee resources. The unique attributes of Ethiopia's coffee are the strengths that the country can exploit as leverage in the fast growing Specialty coffee niche market. At this juncture, and in the short term, the best that ECX can do to help the country is to devise a system that will be conducive to the Specialty coffee trade and provide incentives to the farmers. To that end, there are impending issues and outstanding questions that need the immediate attention of the government and ECX. Hopefully, ECX will continue to lead a forward-looking dialogue by sharing the outcome(s) of the recent meetings with SCAA and the agreement the parties have reached.

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[1] www.poorfarmer.blogspot.com
[2] “Guna, Owned by Ethiopian Ruling Party, Eyes Coffee-Export Share,” October 27, 2009, Bloomberg
[3] “What is in a Bean: ECX and the Specialty Coffee Market” December 2008, ECX

The writer, Wondwossen Mezlekia, can be reached at wondwossen.mezlekia@gmail.com