Coffee economics

An exchange for the better: Coffee on the Ethiopia Commodities Exchange (ECX)

Story by Daniel Howden Something remarkable is happening in the storied coffee forests of Keffa. Green undefined

shoots are sprouting in the hills to the southwest of the capital Addis Ababa where it's traditionally thought that our first encounter with coffee occurred. As the story goes, it was on these slopes in the ninth century that Kaldi, an Ethiopian goat-herder first noticed his animals chewing red berries that seemed to make them jump and dance.

More recently, record exports from Africa's largest coffee producer and sustained high prices are giving their own boost to the country's patchwork of highland growers. Trade figures for 2010/11 showed a record return from Ethiopia's coffee exports of US$879 million, which translates to a 59 per cent surge in revenue on the previous year.

At the centre of the export success story is the country's commodity exchange, the ECX, set up in 2008 to replace an auction system that critics said was unreliable and murky. In its first three years the exchange has centralised the trading of coffee, maize, sesame and beans on a modern trading floor where screens flash up prices for coffee from New York and sesame from India, West Africa and neighbouring Sudan. The bourse has already been credited with aiding Ethiopia's relatively robust management of this year's devastating drought and famine. And since its introduction, total coffee production has leapt from 5 million bags to close to 7.5 million with output of export grade coffee more than doubling.

The main architect of the exchange is Eleni Gabre-Madhin, a former World Bank Economist and expert on managing grain resources, who was drafted by the government from the International Food Policy Research Institute (IFPRI) to mastermind an overhaul of its agricultural trade. As CEO of the exchange, she has championed producers' right to a fair price on the open market as an incentive to increase production.

“The ECX provides transparency in pricing and quality and is empowering our small farmers to increase their share of the final export price from a meagre 30 per cent to above 70 per cent in recent years,” she says. “Bringing value back to producers is ultimately what transforms lives, develops our coffee sector and grows our economy.”

The evidence that this is working came with a leap in Ethiopia's overall export earnings in the last financial year of US$1 billion – absolutely vital to an economy that is experiencing high growth but is working from a low GDP per capita base of only US$150. The importance of coffee to this performance cannot be overstated, officials say. The industry is by some margin the country's largest employer with up to 16 million out of a population of 82 million reliant on coffee for their livelihood.

The ECX boss was named “Ethiopian of the Year” last year in recognition of the results.

The world's seventh largest producer has undoubtedly benefited from movements in the global market where high commodity prices have come just as production has dipped in traditional giants and demand is increasing  in developing countries.

Ethiopia is reaching the end of the second term of a five-year plan to raise production from 300,000 tonnes to 700,000. Getu Bekele Gedefa, coordinator at the National Coffee Research Project, describes Arabica as the “gift of the country” and remains confident that improvements to the quality of output could raise another US$90 million annually. The project's researchers have also identified 662,000 hectares of viable land for production and point out that of this, only 496,000 hectares are currently under cultivation.

Moreover, the country's diversity of geography and climate means it has an unmatched genetic stock to call upon, along with apocryphal tales of ninth century herders. The project presented its regional taste map earlier this year at the East African Fine Coffees Association Conference in Tanzania, showing production areas broken down into “spicy fruity”, along with “floral”, “winy”, “mocha” and a new undefined “discovery” area in the east.

“The country is endowed with immense biodiversity and diverse agro-ecologies,” says Bekele Gedefa. “Ethiopia is the centre of origin and diversity of Arabica coffee.”

Ethiopia Commodities ExchangeThe research unit regards itself as the “safeguard” of the world's coffee industry and puts the economic value of the county's wild coffee gene pool for breeding purposes at up to US$1.46 billion. The two historic coffee forests in the southwest at Yayu and Keffa have been named as UNESCO biosphere reserves.

However, not everyone in the industry is convinced that the country is poised to tap its genetic promise and put the remaining uncultivated land into production in accord with the official timetable.

Hailu Gebrehiwot, an exporter and former head of the Ethiopian Coffee Exporters Association, believes that too much credit has been given to the exchange in Addis, as high international prices have been the main factor in delivering an export boost. The modern exchange, he says, has sped up clearing and payment systems, but these benefits pale in comparison with the impact of international prices.

“There are a number of factors that went into the increase in production and exports,” he says. “But price is the main factor for farmers, merchants and exporters.”

He credits the authorities with cracking down on contraband and says that the amounts that used to disappear across the border have dropped. However, there are downsides to the government's tough management of the coffee sector and not enough is being done to make five-year plans take shape on the ground, he believes, where there is a three to four year lag between price signals, planting and harvesting of a mature crop.

“For the coffee harvest to increase we have to encourage farmers to plant, to make more land available for coffee production,” says Gebrehiwot. “This is going on but only in a small way.”
While this is going on, Ethiopia's own population is growing and with it the domestic demand for coffee. The government's need to balance what remains a tiny economy – in global terms – means that all export grade coffee must be sold abroad in order to bring in much needed foreign currency. This necessity has created huge tensions over the country's main cash crop as Ethiopia is also the continent's largest coffee consumer. During periods of relatively low prices on the international market this has meant domestic producers have been forced to export beans that they could have sold at home for more. Only low grade coffee is officially released onto the local market, hence past problems with smuggling and alleged hoarding by some merchants. While recent high prices such as Sidamo beans fetching over $5 and up from nearer $2, have eased some of the pressure, some  frustrations remain.

“Who wouldn't be frustrated if you're not allowed to get local coffee?” asks the former head of the exporters association. “People believe it's our own crop and we are just as interested in quality as customers abroad.”

“We all realise we have to export as much as we can but nature has favoured us over any other growing country and we should exploit these advantages to satisfy both markets,” says Gebrehiwot.

The most obvious route to marrying these objectives – and one of the fastest growing sectors of the world coffee industry in profit terms – is specialty coffee. With its gene pool advantages, this is where many experts see big future gains coming for the home of coffee.

But, this is also the area where the ECX has faced its loudest critics. US-based Ethiopian Economist Wondwossen Mezlekia believes the exchange has been over-hyped and that government controls may be strangling the potential of the specialty market.

“The only thing the authorities, including the ECX, have succeeded in, is in suppressing domestic consumption and local businesses in order to export coffee,” he says.

Mezlekia points to historical data from the International Coffee Organisation showing that total production in 2010/11 has increased by 7.5 per cent over the previous year and exportable grade production has seen an increase of 9.3 per cent, whereas domestic consumption was up by only 5 per cent. This shows the coffee market is being run for “the benefit of the government and a few in power,” Wondwossen argues.

“The current practice benefits the commodity coffee industry as most of Ethiopia's coffee is now sold at commodity prices. The country's role in the specialty coffee sub-sector is diminishing quickly.”

Under Ethiopian law, the exchange was given authority to grade all Ethiopian coffee by quality and trade it centrally. But, the new process has curbed outsiders' access to the hundreds of small stations that had been processing coffee cherries and allowing the traceability that the boutique buyers – particularly from the US – had been looking for. This is not a problem for the bulk commercial buyers, but the grading process is too rough and ready for the direct-trade, single-origin coffee buyers abroad. Stefan Hersh, co-owner of Buzz: Killer Espresso coffee shop, likened the Ethiopian exchange's mixing of beans in a recent interview to a vat of blended grapes, telling Business Week that it was “a big nasty cuvee”.

The ECX responds that it is not ignoring traceability and has a number of new schemes in the pipeline to meet the needs of high-end importers. Gebrehiwot says the exchange needs to “fine tune” its approach and is still at the “learning stage” after only three years.

“Specialty coffee is getting lost in the system, it needs the how, where from and by whom,” he says. “So buyers can trace the exact altitude, place and producer.”

Some well-connected Ethiopian exporters are getting licenses to export directly, but 90 per cent are still left out. For now the specialty sub-sector only amounts to 1 per cent of Ethiopia's exports, so the priority remains raising the overall quality and quantity for sale.

In a recent statement the ECX denied that it was neglecting the sub-sector and pointed to its Direct Specialty Trade auction last year which it said attracted participation from a wide range of specialty coffee roasters, including Stumptown, Intelligentsia, and Royal Coffee, “who purchased 100 per cent traceable premium beans directly from Ethiopia’s coffee cooperatives and growers, and have continued to do so”.

Gabre-Madhin fired back at critics in September insisting that “single-origin, fully traceable coffee is alive and well in our market.” 

Pictures courtesy Pete Lewis/Department for International Development

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