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Window dressing of Ethiopia's coffee exchange

By Wondwossen Mezlekia

October 12, 2009

The next few days are full of activity for the executives of the Ethiopia Commodity Exchange (ECX) and the government as they get ready for the big day - the day they hope will earn the exchange the much needed acceptance by the Specialty Coffee Association of America (SCAA) and favorable media coverage for the government. This confidentially held event is, according to a document that briefly appeared on ECX's website and removed early last week, currently scheduled for October 20 - 24, 2009. ECX, the government run company that touts transparency, is tightlipped, for no apparent reason, thus this scrutiny of its negotiations with SCAA, the changes it made to address concerns of the specialty coffee trade, and its roles in the corrupt control of the coffee sector.

Early this year, when ECX's system was hastily utilized by the government to take control of the coffee trade, the problems of the commodity trading mechanism caught the attention of the international media. The government scrambled in vain to contain the unexpected shift in the media’s position from praising ECX to criticizing it. ECX's leader, Dr. Eleni Gebre-Medhin, even went to as far as risking a futile face-off with the Seattle Times business reporter, Melissa Allison in an attempt to defuse the hostile criticism without realizing the driving forces behind the media frenzy.1 ECX didn't comprehend the complexity of the coffee trade and the powers of the international stakeholders until it encountered the Specialty coffee importers at SCAA's 21st annual exposition held in Atlanta, GA in April, 2009.

The issue with ECX was one of the sideline agenda at the SCAA conference. On April 15, 2009, Ethiopia’s delegation led by Dr. Eleni, Phillip Schluter, and Tadesse Meskela held an information delivery session regarding ECX and the new coffee trading system to a group of importers. A heated engagement erupted between participants and the presenters as soon as they presented the last slides about the implications of the system. The intense dialogue continued next day at a roundtable meeting between the parties. One of the attendees of the discussions described the situation in an email to this writer as:

"The roundtable today was intense. So much complexity. Dr. Eleni is assuring SCAA and buyers [that] she is here to listen and gather information to bring back and devise a way for a "second window". Currently there is none (except coops). Buyers are very upset. They have so much invested - and so do farmers! This season is pretty much done, very few got the coffee. Next season... maybe. Everyone needs to work together."

At the end of the exposition, Dr. Eleni wrote an open letter to SCAA and buyers summarizing her experience at the event and a proposal to establish a joint working group formed by SCAA and ECX to resolve the problems. SCAA, the most influential body in the market, had already written a letter to Prime Minister Meles Zenawi expressing its concerns and demanding immediate solutions.

The joint working group was formed and has been at work for the past six months under strict confidentiality. The ECX event scheduled for later this month hints the culmination of the dialogue. ECX is expected to announce some changes to its trading mechanism but the detail is withheld from the public to this day. The only word from ECX is what Dr. Eleni casually mentioned last month during her appearance on Tefera Gedamu's show Meet ETV on the Ethiopian Television. She stated that SCAA and ECX had reached an agreement and they will publicize late in October the changes that ECX made to its coffee grading system.

SCAA is more transparent and accessible than ECX. In an email response to this writer, Ric Rhinehart, Executive Director of SCAA said, "We have been actively engaged since April of this year with the ECX in addressing the concerns of the specialty market and how the commodity trading mechanism has impacted our access to coffees." Mr. Rhinehart, along with other members of SCAA, is traveling to Ethiopia to attend the event. He said, he can't give details of the matter at this time but, "I can say that we have had input from virtually every part of the trade and feel that we have a good grasp on what success will look like...We have assembled a working group from the specialty trade that has defined the objectives from the consumer perspective and that is committed to working with the ECX and the Ethiopian trade to develop viable solutions to meeting those objectives."

After all, SCAA may get what it wants. Mr. Rhinehart said, "I am very pleased to say that we have had an excellent working relationship with ECX and that together we continue to pursue solutions that will meet the needs of the specialty coffee sector but more importantly deliver the highest and most sustainable value back through the supply chain to the working coffee farmers of Ethiopia." The details of the said change including whether it satisfies SCAA and its members, and whether it alleviates the burden on the farmers will be known shortly. Regardless, ECX's gesture in addressing SCAA’s concerns is a step in the right direction.

In the mean time, as we prepare to embrace another wave of media stunt from ECX and the government, it is necessary to be aware of the root causes of the coffee controversy and define what success looks like from Ethiopia's perspective. If delivering the value to the farmers "through the supply chain" means disenfranchising individual farmers, it is unacceptable. If the new system addresses only one end of the equation (without allowing direct contact between buyers and farmers), such a change is nothing more than window dressing the current coffee exchange. At a larger scale, if the market doesn't accommodate the needs of all participants in the value chain, including private businesses and benefits only the government and the parastatals, sustainability of the sector will be in jeopardy. This view is shared by many in the coffee sector.

Emebet Taffesse Kidanemariam, Vice President of the Ethiopian Coffee Exporters Association recently told the Ethiopian Reporter that "the sector is not benefiting the country at its current level," and called up on authorities to work together with the private sector. She said, "Many exporters are returning their licenses. We, the remaining ones, are in trouble too." Emebet is not opposed to ECX as a market. In fact, she says, "I am [one] of those who strongly appreciate the importance of such a market. ... But what I notice here is that when exporters are not able to enjoy a fair benefit, they shift their businesses to some other area." She added, "Previously, when the New York market fluctuated, our prices also fluctuated. But now, this is history. You are expected to buy on the basis of the daily high selling price."2

Likewise, coffee farmers say the burden is unbearable. Last month, Addis Fortune quoted Alemayehu Teshome, coffee and tea development team leader at the ministry of Agriculture and Rural Development saying: "farmers in areas that have access to transport are dropping coffee in favour of khat, which is contributing to reducing the total coffee harvest the country expects."3 The article also sites Abdulkadir Mohammed, a former coffee farmer who said: "I used to grow coffee previously, [but] when the price declined, I cleared the coffee plantation and substituted khat plants." Fortune noted, "He [Abdulkadir] is not only making more money from the khat, but he is also a two time winner for best farmer in the Harari regional state. Abdulkadir makes 300 to 500 Br per kilogram of export quality khat, for which the consumers pay up to 1,000 Br. When he grew coffee, he said that export quality coffee only brought him 25 to 35 Br."

Yet, the government is all about controlling the trade. The state owned Ethiopian Grain Trade Enterprise (EGTE) is planning to supply 10,000 tons of coffee for local and foreign markets during the current year, according to Birhane Hailu, General Manger and a member of ECX's Board of Directors.4 Guna Trading, PLC, a member of the largest conglomerate EFFORT, which is reportedly owned by leaders of the TPLF (Tigrian People Liberation Front), had already announced its plans to export 10,000 tons of coffee and 30,000 tons of sesame this year. Guna is joining the coffee export trade club for the first time after "it stopped the business (coffee export) for five years."5

Ethiopia produces an average of 330,000 tons of coffee per year and about half the amount is exported; the rest consumed locally. During the last fiscal year (July 2008 - June, 2009), the country exported 134,000 tons, sharply down from 170,888 tons exported in the previous year. The government wants to increase the volume of exported coffee but it plans to do so by controlling the marketing chain and forcefully routing coffee stocks to ECX. Any attempt by coffee growers and traders to shop around for better prices outside of the government controlled channel is illegal. Walta Information Center (WIC) recently reported the establishment of 37 coffee trading centers in Jimma zone to control "illegal coffee trading and alleviating wastage of coffee produce."6 WIC quoted Nezif Abachebsa, Jimma zone Agriculture and Rural Development Office Deputy Head, saying "individuals found dealing coffee out of the centers will receive a 20 year prison term and up to 50,000 birr fine."

The total annual production in the country is not commensurate with the needs of the government and the coffee drinking public. Because of the imbalance of supply and demand, local prices are generally higher than export prices. When the government imposes mandatory exports, it never considers the idea of compensating farmers, suppliers, or exporters, for the price differential between domestic and export markets. The government wants to generate foreign exchange without investing a dime to earn it. This practice is perpetuating the vicious cycle of low quality, low productivity, and low production on one hand and low selling prices, insignificant or no profit margins, and shortage of foreign exchange earnings on the other. The root causes of the problems in Ethiopia's coffee sector are complex but the major ones include: low productivity (less than a quarter of the average productivity in the world), lack of incentives for quality production, inexistent access to capital and infrastructures including roads and coffee washing facilities, and lack of institutional capabilities. These systemic problems cannot be resolved by introducing superficial and cosmetic changes in the marketing platform.

In the short and medium term, the government's policies and donors' funds are best directed at increasing productivity by spending on research, and at enticing quality production by compensating farmers and traders for exporting coffee at the petty international prices. The government's continued engagement in micromanaging the coffee trade will only exasperate the sector. By the same token, ECX also had better focus on building a principled marketing system, and stick to its stated goals of helping eliminate famine and increasing the value of domestic commodity grain trade rather than facilitating for such short-sighted government policies that legalize coffee exploitation.

[1] ‘Who's getting coffee from Ethiopia right now?‘April 1, 2009, Seattle Times
[2] 'W e work on putting women in the forefront in their business life,' October 3, 2009, Ethiopian Reporter
[3] 'Coffee Remains the Darling Despite All Odds,' September 27, 2009, Addis Fortune
[4] 'EGTE to buy 100,000 quintals coffee for local, foreign markets,' October 03, 2009, ENA
[5] 'Guna Envisages exporting 63 Million USD worth Agricultural Products This Year,' July 18, 2009, www.guna-trading.com
[6] 'Some 37 coffee trading centers go operational,' September 27, 2009, WIC

wondwossen.mezlekia@gmail.com