Coffee Politics

Exchange Not Exacting Enough with Its Coffee for English

2009-12-05T15:00:00.000-08:00

Browse along the coffee shelves in a British supermarket and one finds that buying their favourite beans is no longer a simple matter of the taste and price. These days, the importers and roasters are likely to tell more about the ethics of their business than the flavour of their products, ELIZABETH BLUNT, SPECIAL TO FORTUNE, reports from London.

Addis Fortune

November 30, 2009

This is true across the whole range of price and quality, from top-of-the-range specialist coffees to mass-market brands like Lyons and Nestlé. With just a little help from Nescafé and its partners, a community of farmers in a coffee-growing region in Ethiopia have been working to improve their own lives, and the lives of their children.”

Supermarket brands are no different. Sainsbury’s packaging for its Ethiopian coffee promises a “FairTrade” guarantee that its farmers in Sidamo receive a fair price for the coffee they grow, while Waitrose claims on the packaging of its Mocha Sidamo that, “While the quality of our coffee is important, the welfare of the people growing it for us is equally so.”

Some of this concentration on ethical marketing has certainly been forced by “FairTrade” campaigners. Philip Schluter, who represents Schluter Ltd in the UK, told Fortune that Oxfam’s campaigns and the film “Black Gold” had had a clear effect, and the message had hit home particularly forcefully in the case of coffee.

“There is such a stark and obvious contrast between the price the customer pays for a single cup in a fashionable coffee bar, and the price that is paid to the farmers,” he said.

As a trader, he points out that Oxfam tends to understate the cost of all the processes which lie between the farm and the cup, but concedes that selling coffee to customers is not just about the taste, it is also a lot about the “story” behind the beans.

From the point of view of producers like Ethiopia, this emphasis on responsible sourcing and a fair price can only be welcome, but it does mean that modern British coffee companies can be fussy customers, needing to know not just where their coffee comes from, but who grows it, how it is grown and exactly how much the farmers are paid.

And this is where some importers at least have been running into problems with Ethiopia’s new marketing system which, they say, just does not give them enough information. The customers who are not happy with the Ethiopian Commodities Exchange (ECX) form a relatively small, but very profitable segment of the British market, according to one regular buyer of Ethiopian coffees.

The majority of the volume of coffee coming into Britain – 80pc or more – was never really traceable all the way to the farmer anyway, so for those buyers nothing has changed. Their only problems might have been temporary ones if the exporters they normally bought from were among those who had their licences revoked last year.

And some importers buy direct from cooperatives, and that is still allowed. Those who are having problems are those who want the very best coffee and who want it to be traceable, and who have previously relied on exporters who work directly with the farmers. They can still buy good coffee through the ECX, but they no longer have the same “story” about the farmers it comes from. Perhaps only 10pc of buyers are having these problems, but they are the cream; they pay a big premium to get the beans they want.

Ethiopia is an important source of “certified” coffees. There is already evidence that one buyer for a large quantity of certified organic coffee has switched away from Ethiopia and is buying instead from another African country.

Most buyers, however, seem to be biding their time, waiting to see whether promised improvements will allow them to work within the new system. This is particularly the case with the blenders, for whom changing the composition of their blend is a major thing, especially when they have been using a coffee like Sidamo, which has a very distinctive taste.

One thing which is clear is that coffee companies in the UK place a high value on Ethiopian beans.

“Ethiopian coffee is popular and it is a very important to us, so distinctive, and with a wonderful floral flavour and citrus notes coming through,” Steven Macatonia, of Union Hand-Roasted coffee, told Fortune.

And again the “Story” is important.

“Ethiopia is the place that coffee originally comes from, and enthusiasts understand and appreciate that."

Union Hand-Roasted has until now been buying its coffee directly from groups of farmers in the Yirgacheffe area, with whom it has built up a direct relationship, and this means it has not, so far, been affected by the operations of the commodity exchange.

But, says Macatonia, the ECX rules have hugely affected the traceability of individual lots, making it much harder to know where exactly the coffee comes from. And he says he has not heard from anyone what the benefit of the new system is - at least as far as producers and buyers are concerned. He would like to broaden the range of Ethiopian coffees that Union sells, but he does not think he can source them through the ECX, even if they offer high quality beans.

“In effect these are anonymous coffees, and we would not ever buy anonymous coffee,” he said.

ECX announced its trading of Specialty coffee for the first time

2009-11-28T23:58:00.000-08:00

The article below is good news and a positive sign that ECX is attempting to accommodate Specialty coffee trading on its platform. It should be noted, however, that the change that is publicized in the news article only addresses the quality aspect of the Specialty coffee trade requirements. Meaning, the coffees traded as Specialty coffee are termed as such only because the beans had met the minimum quality criteria set by the SCAA. Currently, single origin coffee trade is not supported by ECX's system as ECX is not ready to ensure traceability of coffee beans to origins. Officials at ECX mentioned that they are still working on what is termed "the second window" which will accomodate the trading of all Specialty coffees.

Another observation in the news article is that it does not mention whether ECX's trading of the Specialty coffee had fetched premium prices to the country, exporters, or coffee growers. Were the closing prices for the Specialty coffee higher than those for the other export-grade coffee stocks? This is worth looking into in light of the impending question of whether the trading of Specialty coffees on a commodity exchange platform is a move forward or backward.
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Ethiopia launches first ever specialty coffee trading

APA-Addis Ababa (Ethiopia)

November 26, 2009

The Ethiopia Commodity Exchange (ECX) announced on Thursday in Addis Ababa the launching of specialty coffee trading in the country.

The ECX specialty trading system relies on “Q”grading, an internationally recognized specialty classification developed by the Specialty Coffee Association of America (SCAA).

Accordingly, ECX becomes the only commodity exchange in the world to trade specialty grade coffees, also making Ethiopia the first coffee producing country to create a system to grade arrival (or domestic) coffees using the Q system, and doing so in regions of origin.

“Today a large number of excited buyers and suppliers were present to witness the historic occasion, as 16,200kgs of Arrival Q1 and Q2 grade coffees from Sidama region, graded and stored in the ECX Hawassa regional centre, were sold on the first day,” said ECX.

Coffee is Ethiopia’s main foreign earning, generating over US$ 500 million annually since the past few years.

“Today, we have put Ethiopia on the map as having one of the most refined domestic specialty coffee classification and discovery systems in the world,” Dr. Eleni Gabre-Madhin, Chief Executive Officer of ECX.

The ECX specialty handling is designed to benefit the millions of small-scale producers who have little knowledge of the value of the premium beans.

Ethiopia, known as the birth place of coffee, is Africa’s top exporter of coffee to the international market.

Ethiopia takes coffee trademark to intellectual property court

2009-11-14T09:38:00.000-08:00

After all, the Ethiopia coffee trademark initiative is alive although the project appears to have run out of steam due mainly to bureaucracy and lack of leadership from the government's side. I am one of the strong proponents of the idea of utilizing Intellectual Property resources as a leverage to demand for a fair share from the retail prices of the finest coffee brands. I want and hope to see Ethiopia's impoverished coffee farmers start benefiting from the world renowned brands, which are the results of the farmers' hard work. This dream was recently overshadowed by the unexpected twist of events that happened in the country following the establishment of the ECX. For one, it has been difficult to comprehend how the country can pursue a forward-looking brilliant marketing strategies while looking backwards and resort to bundling brand name coffee lots with commodities. To me, the very idea of capitalizing on the coffee IP resources is essentially a departure from the status-quo, i.e. the trading of these coffee brands as commodities.

The government has never explained its positions on the coffee trademarking initiative when it abruptly decided last year to trade all of the country's coffees at the commodity exchange. This ambiguity is, I believe, what led many people to perceive that Ethiopia might have abandoned the coffee trademarking idea. Apparently, it has not, so we will try to explore the current status of the project in conjunction to the merits or implications of ECX to the coffee trademarking project.
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The Mainichi Daily News

November 14, 2009

An ongoing spat between the Ethiopian government and the All Japan Coffee Association has made it to the courts over the branding of two varieties of coffee in Japan.

Lawyers for the northeast African nation have argued that the names of the Sidamo and Yirgacheffe coffee varieties are trademarked in Europe and the U.S. during a first hearing at the Intellectual Property High Court on Thursday.

The trademark battle began in March, when the Japan Patent Office refused to allow the trademarking of Sidamo, also the name of a former province in southern Ethiopia, and Yirgacheffe, the name of a town in the same region, saying monopoly use of the words would not be in the public's interest.

The Ethiopian government filed suit in August, arguing that as place names they had no significance in Japan and that they should be considered brand names.

"There are almost no consumers out there who would recognize them as two Ethiopian coffee varieties," says the association. "If they are trademarked and prices rise, there are doubts that buyers will follow."

Straightening out coffee facts for the record

2009-11-04T12:36:00.000-08:00

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

November 4, 2009

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 never 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 seats (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 seat 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] http://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

ECX needs to restructure strategy to handle specialty coffee trade

2009-10-31T23:15:00.000-07:00

The Ethiopian Reporter

October 31, 2009

Since April, the representatives of the Ethiopian Commodity Exchange (ECX) and the Specialty Coffee Association of America (SCAA) have been holding talks on how ECX will launch and handle specialty coffee trading. Following these talks, the Exchange held the "first ever" specialty coffee event in the country last week where key players in the global specialty coffee industry including the Executive Director and Incoming President of SCAA, Ric Rhinehart, attended the event. Rhinehart briefly spoke with The Reporter's Hayal Alemayehu about U.S. buyers' and consumers' interest in Ethiopia's specialty coffees and the need for ECX to restructure its strategy in order to handle the transaction of Ethiopia's specialty coffees. Excerpts:

Ethiopia is the birth place of coffee while the United States is one of the big consumers of the beverage. How much do U.S. buyers and consumers know about Ethiopian coffee and that the country is actually the birth place of the beans?

U.S. buyers are very well aware of Ethiopian coffees. They are very well aware of the differences and flavor profiles and characteristics of the variety of coffees that grow in the different regions across the country. But the consumers are less aware than the traders. However, in the U.S. specialty market the traders are sort of leading the consumers. So the consumers are more likely to buy what the coffee marketing companies put out as best quality coffees.

But reports show that the growing trend, especially in the U.S., indicates that consumers are more interested in companies that pursue ethical practices in relation to their workers and the environment and the knowledge of consumers about a given company is one of the determinant factors for the company's success or failure. Consumers in the U.S. are starting to pressure big companies like Starbucks and Cadbury not to solely focus on their profit. Therefore the knowledge of consumers about companies' products is becoming very important and crucial in the U.S. market and if consumers out there have no knowledge of Ethiopian coffee...

Well, the way the consumers gain awareness though is through the efforts of coffee roasters in the case of the specialty coffee market in the U.S. And roasters in the U.S. and elsewhere have a special focus on Ethiopia because the country grows great coffees.

Is the volume of coffee Ethiopia exports to the U.S. that significant?

I think the U.S. currently buys about seven percent of Ethiopia's coffee destined for the export market.

How about the specialty coffee, is the export that considerable?

There is more and more coffee market than the specialty coffee in the U.S., particularly in the certified, organic and fair trade coffees and Ethiopia's coffees have a great potential in the U.S. market than what is currently exported.

So what is a specialty coffee?

It is the term commonly used to refer to "gourmet" or "premium" coffee. Specialty coffees are coffees with a special cup quality and unique characteristics that take you back to the origin where they are produced from.

According to the SCAA, a coffee which scores eight points or above on a 100-point scale is graded "specialty". Specialty coffees are grown in special and ideal climates, and are distinctive because of their full-cup taste and little to none defects. The unique flavors and tastes are a result of the special characteristics and composition of the soils in which they are produced and it could be further augmented by certification programs in organic or fair trade coffee.

When are you supposed to start buying Ethiopia's specialty coffee via the Ethiopian commodity Exchange (ECX)?

We hope that the ECX will start transacting specialty coffee in the coming coffee season. But prior to that we will have to put the challenges of trading the specialty coffee on the table with the ECX and sort them out before the specialty coffee move to the ECX.

Major buyers like Starbucks are complaining that trading coffee through the ECX will actually prevent them from tracing the origins of coffee they buy from Ethiopia than streamline the transaction. What do you have to say about that?

Well, it is very true that the Exchange, in its current form, stops traceability at the point of entry to the Exchange and that is by design. For specialty market, traceability is very important and part of the purpose of the meeting we had with Exchange authorities is to find a way to re-establish traceability for that coffee that is designed to enter the specialty market.

Why is traceability so critical in the specialty coffee market?

Traceability is very important for specialty coffee consumers because it will connect the cup in their hands to a farmer who produced it. Traceability is also critical because when specialty coffee buyers buy a certified coffee, they want have faith that that is what they are truly buying and, depending on the certifying agency, they will have access to trace the coffee back to its origin.

Time to Stop the "Self-appointed Coffee Tsar in Seattle"

2009-10-29T22:49:00.000-07:00

In her latest article posted on nazret.com, Dr. Eleni Gabre-Madhin, CEO, ECX, called Coffee Politics' blogger (Wondwossen) a "self-appointed coffee tsar," "patronizing," and "ill-informed," who tells "myths."

This is an ill-advised public statement but what is interesting is that the article, supposedly an expose of the "myths," avoided the central issues discussed on this blog or, where they are pointed out, addressed few of them in a self-serving and disingenuous manner.

Read my response: Straightening out coffee facts for the record
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Will The Real Poor Farmer Rise

By Eleni Z. Gabre-Madhin*

nazret.com

A self-appointed coffee tsar in Seattle speaks, rather patronizingly, on behalf of the poor coffee farmer in Ethiopia. In the comfortable latte-infused cafés in which he may post his blogs, things may seem rather different than the reality half a world away in the homeland, where millions of our country men and women fight daily to live a life of dignity. They would likely agree it is time to stop the distortions from Seattle which, while perhaps entertaining for some, actually do a great disservice to these coffee producers who deserve better.

A few days back, I had a rare and wonderful opportunity to spend time talking to coffee farmers in Yirgachefe, where about two hundred had gathered to greet ECX as we visited a coffee washing station owned by a prominent coffee exporter. As I stood taking in the absolute beauty of the sun starting to set over the terraced hillside where row after row of coffee drying tables loaded with beans in their golden parchment were aligned nearly perfectly, framed by dense coffee trees, while the wet mill processor creaked in the background, Ato Tadele came to greet me. We bowed to each other. He said he was a farmer who sold his red cherry to this private mill owner. I asked him how things were going. He said okay, but that he wished he could get higher prices. I laughed and said any farmer worth his salt would say the same, anywhere in the world. Then I asked what today’s price was. He said the farmers had negotiated a price of 4.35 Birr per kilogram from the miller’s starting offer of 3.50. I asked how they came up with that price. By now, we were surrounded by about 50 farmers all wanting to chip in. They said they had heard that prices in the city were getting higher. I asked them how they knew. They said they had heard on the radio. I asked them where those prices came from. A small pause. Somebody hesitantly said, the new coffee market in Addis? I said yes, breathing an inward sigh of relief. Just to make sure, I asked what time they listened to the ECX daily price broadcast. Ato Tadele brightened and said, at 8 pm. Some said, 7 am, and others, 1 pm. Now I really felt good. Then I asked if the broadcast was easy to understand. Then a lot of discussion came up, about too many prices, too fast reading, not very easy to understand. Okay, I said, let me introduce Ahadu, our market data officer, standing right here next to me, he wants to hear you on this and it is his job to get it just the way you need it. And so it went.

The point is that Tadele, and many more like him, take their red cherry or dry beans to the nearest market outlets, with just the faintest idea of what their coffee is worth or what the world out there, or even the national market, looks like. Our challenge is that we need to figure out, as a country and as a national marketing system, how to empower Tadele and others like him to make meaningful choices of where to sell, when to sell, at what price to sell, and to whom to sell, so that he can maximize his returns and improve the quality of his life, send his children to school, make sure they get health care, and break the vicious cycle of poverty in which he is trapped.

Here are some of the Seattle myths that are not helping Tadele rise to the better life he deserves. First, there is an impression that coffee trading in ECX was a hastily conceived, ill-prepared affair by people who knew nothing about the complexity of the coffee market. Fair enough, I cannot expect the coffee tsar to know that as far back as 1992, I was a commodity trading expert in the United Nations in Geneva, in charge of designing a training program on international coffee, sugar, and other commodity markets which I then delivered to many, many exporters from various developing countries, including coffee exporters. Nor could he know that in 2001, while a researcher for the International Food Policy Research Institute in Washington, I led a project for the World Bank on coffee price risk management, covering Uganda, Tanzania, and Ethiopia, or that in 2002, under a Dutch-funded project, I conducted an extensive household survey, interviewing hundreds of coffee producers in Ethiopia. Nor would he know that in 2003, I conducted a major study titled “Getting Markets Right in Ethiopia: An Analysis of Coffee and Grain Marketing” financed by IFAD (Rome), for which I led a team of 8 top-notch consultants, including Ethiopis Tafara, now director of international affairs at the U.S. Securities and Exchanges Commission, and a well-known and highly respected coffee expert, John Schluter (uncle and business partner of Philip Schluter, mentioned in a recent blog posting by the Seattle coffee tsar), as well as the then secretary general of the Ethiopian exporters association. The coffee chapter of the 2003 study, based on extensive consultations in Ethiopia with coffee exporters and suppliers, specifically recommended that coffee be traded through a commodity exchange where improved competition and forward contracting would be beneficial to the industry. That 2003 study was the basis for the decision adopted by the government of Ethiopia to implement a commodity exchange in late 2005. In 2006, I led a national Task Force to conceive the initial design of the exchange. The 2006 Task Force report identified coffee as one of the commodities that should be included in the new exchange, but also stated the need to address an emerging market trend of specialty coffee which would require special attention. So, while nothing is ever fully known in its entire complexity, we are where we are because of more than a decade of careful thinking about how this market works, from Tadele at the beginning of the chain to the latte at the retail end of the value chain.

The coffee tsar may not have known all this, but, then again, he could have asked.

A second myth is that the inclusion of coffee in ECX was for the purpose of government control and to monopolize the coffee market. Here I believe the coffee tsar is on thin ice. Not only did a neutral market study done by an outside international organization relying on private sector coffee experts identify the need to improve the coffee trading system via an exchange, but the structure and legal framework that established ECX simply does not allow such monopoly power or government interference. The opening article of the law states that ECX is established as a demutualized entity, with separation of ownership, membership, and management. The law is explicit that the Exchange cannot be managed by the government, nor can the management of the exchange be politically appointed or part of the civil service, but must be professional. The law states unequivocally that the Exchange cannot engage itself in the buying or selling of any commodity. This is followed by Article 18 which is explicit that ECX is managed and operated as an autonomous entity, with a management that is overseen by a joint public-private Board of directors. The composition of the Board is explicit in the law with six government and five privately appointed directors, which has always been maintained (contrary to a flawed recent blog posting by the coffee tsar). The law is even further explicit that certain key management decisions cannot be made by simple majority but by two-thirds majority, preventing the government side to override by its slight majority number. One of such key decisions is the decision when to recommend the sharing of ownership of the Exchange with the private sector, which is stated as an objective in the preamble of the law. So the idea that the government aims to permanently own the Exchange or to act as a monopoly trading entity or that the Exchange is an arm of government is simply false, both as a matter of law and in practice.

A third myth is that ECX was an instrument to take action against private exporters. Let’s face it. The world is not simple and nothing is black and white, even if it might seem that way in far-away Seattle. In the same year that we designed and launched coffee trading through our Exchange, the world faced the worst financial crisis imaginable, international coffee prices fell by thirty to forty percent, twenty percent of our coffee exports (to the Japan market) collapsed due to a chemical residue scandal, rainfall patterns in parts of the country led to a fifteen percent decline of coffee production, and regulatory actions were taken against some of the major exporters of the country, largely prompted by the foreign exchange crisis brought on by the global recession. It should be clear by now and has been stated officially that the regulatory actions taken had nothing to do with ECX but were based on illegal behavior discovered outside of ECX, which the exporters have also acknowledged. In fact, these export companies continue to be members of ECX and interact with us regularly. They have continued to sell their supply coffees through ECX, although they cannot buy export coffees unless their export licenses are re-instated based on the court’s ruling.

Finally, a fourth myth is that somehow the Exchange had simply not thought about specialty coffee trading until forced to by international coffee buyers in 2009. There is nothing further from the truth. The Exchange was in fact at the forefront of discussions about specialty in early 2008 and argued for the need to create a specific means to handle specialty during the stakeholder consultations on the proposed new coffee law passed in July 2008, which is silent on specialty. This position led to a separate legislation, passed in November 2008, providing ECX the mandate to separately or concurrently handle specialty coffee as it deemed necessary. Based on this, our objective to design a specialty trading system within the first year of our coffee operation was of course explained in detail to our domestic coffee market actors in late 2008, and our attendance at the international specialty coffee event in Atlanta in 2009 was part of the effort to design a well-thought out and appropriate specialty mechanism. Far from the “window dressing” described by the ill-informed Seattle coffee tsar, our recently announced proposal to handle specialty coffee has now been recognized by the international specialty industry as one of the most systematic and far-reaching efforts by any specialty coffee producing country. In its own words, the Specialty Coffee Association of America has recently issued a statement that “this is the first market mechanism to fully employ SCAA standards for coffees upon arrival and represents a significant change in how coffees get to market. This system has the potential to be a model for improved identification of specialty coffees at source.” I think Tadele would be proud to hear these words.

Let me tell you why. What we have designed is a system in which Tadele can bring his coffee directly to a nearby ECX warehouse and find out what the quality of his coffee is. If his coffee is graded as a specialty coffee, which we are now able to do for the first time in Ethiopia, then he is going to know it and he is going to get to sell it as a specialty coffee and get the premium he deserves. Tadele now has three choices how and where and to whom to sell. He can sell it directly to an international buyer, because the law allows him to. But this won’t be easy and his cooperative will need support to build their knowledge and capacity. But it can be done and in fact, with the exception of Ethiopia, most specialty buyers buy coffees directly from small farmer coops in all other producing countries. Tadele can also sell his coffee to an exporter through ECX, which is what he used to do before, but now he knows what the grade of his coffee is and can negotiate a better price. Or he can sell it to a local supplier outside of ECX who will then sell it through ECX to an exporter, but now Tadele knows what the going supplier selling price is on ECX so he is armed with better information to negotiate a better price for his trade. With the old system of vertical integration, which the new coffee law explicitly prohibits, Tadele would sell to the exporter, not knowing whether his coffee had a specialty premium, and the exporter would sell it abroad, at a price unknown to Tadele. If things worked out for Tadele, he may get a share of the premium. But nobody knew for sure. Now we have a system that makes it explicit. This is called transparency. And the best part is that, Tadele gets paid for his coffee the next day after the sale through the ECX clearing system which transfers payment from the buyer to the seller, instead of waiting weeks or months hoping to get his due payment.

But our system is not just for Tadele. Exporters benefit too, a lot, because now they don’t have to incur the risk of getting the wrong quality or quantity of the coffee they have paid for, with an ECX delivery system that guarantees that Tadele’s coffee will get to the exporter-buyer on time, in the right quantity and quality. That is why we are closely working with our exporters association to ensure that their needs are met too. International buyers also gain because we now have a way to discover specialty coffees at origin, saving them a great deal of time and effort, with a system that enables them to trace the coffees to the geographic source and even to the grower that sold it. This means that consumers who pay a premium to buy Ethiopia’s specialty coffees that claim to be purchased directly from farmers at a fair price will now be certain of this through the ECX system. Transparency is a good thing for both sides of the Atlantic and for both the farmer and the consumer. And transparency is what ECX is fundamentally about.

As the sun set in the lovely countryside in the famous coffee area known as Kochere in the heart of Yirgachefe, Tadele smiled gently as we parted ways after our little chat. Impulsively I gave him my white baseball cap with the ECX logo, which he immediately put on. He said, I hope I can do better this year. And I said, it is my job to make sure you do.
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The author is Stanford educated economist and founder and CEO of Ethiopian Commodity Exchange.
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Read my response here: Straightening out coffee facts for the record

Guna, Owned by Ethiopian Ruling Party, Eyes Coffee-Export Share

2009-10-27T18:44:00.000-07:00

By Jason McLure
Bloomberg

October 27, 2009

Guna Trading House Plc, owned by Ethiopia’s ruling party, said it plans to become one of the nation’s biggest coffee exporters, raising concern among industry observers that private industry may get crowded out.

The company began shipping the beans in July and aims to export at least 12,000 metric tons of coffee in the year through June, Mulualem Berhane, general manager of Guna, said in an interview on Oct. 22 in the capital, Addis Ababa.

“We are intending to export to Europe, the U.S. and China,” he said, adding that Guna is among at least four other companies owned by the state or Prime Minister Meles Zenawi’s ruling party intend to expand in the industry.

Ethiopia, where arabica coffee originated, is Africa’s biggest producer of the crop, which accounts for 26 percent of the nation’s export revenue. The Horn of Africa country shipped 133,993 tons of beans worth $375.8 million last year, according to Trade Ministry data.

Only three exporters shipped more than 10,000 tons in the fiscal year ending July 7, 2008, according to data from the Ethiopian Coffee Exporters Association. Those three, who together accounted for more than a third of the nation’s shipments, were closed in March after the government accused them and other exporters of illegally stockpiling coffee.

In April, the state-run Ethiopian Grain Trade Enterprise began operating a coffee-export business. Earlier this month, the company said it would purchase about 10,000 tons of beans in the current year, according to Walta Information Center, a ruling party-owned news service.

‘Unfair Advantages’

Bulcha Demeksa, a lawmaker from the opposition Oromo Federalist Democratic Movement, said parastatals operating in the coffee industry benefit from unfair advantages and will take market share away from private operators.

“They are literally government,” Bulcha said in a phone interview on Oct. 22 from Addis Ababa. “They have so many advantages. The small exporters will be driven out of business.”

Hussein Aregaw, president of the Ethiopian Coffee Exporters Association, declined to comment.

Guna is owned by the Endowment Fund for the Rehabilitation of Tigray, or Effort, a group of at least a dozen companies founded by former rebels from Meles’ ethnic Tigray People’s Liberation Front in the 1980s and 1990s. The TPLF ousted Ethiopia’s former Communist Derg government in 1991, and has since run the country in an alliance with other pro-Meles parties known as the Ethiopian People’s Revolutionary Democratic Front.

‘Favorable Regulation’

Effort’s chief executive officer is Abadi Zemu, a senior official in the TPLF. Its deputy CEO is Azeb Mesfin, who is the wife of the prime minister and a lawmaker from Ethiopia’s northern Tigray region. Calls to Abadi’s office phone weren’t answered and calls to Azeb’s office line didn’t connect when Bloomberg News called them today seeking comment.

Eyesus Work Zafu, president of the Ethiopian Chamber of Commerce and Sectoral Association, the nation’s largest business lobby group, said government companies have better access to credit and enjoy favorable regulation and opportunities.

“Government has been a preponderant economic actor in our country,” he said in a phone interview. “When private sector businesses are engaged in similar activities as public enterprises such as in banking and insurance, preference is given to government companies. The playing field is not level.”

A 2009 report on investment in Ethiopia by the World Bank said that “there is an impression that endowment and state-owned enterprises benefit from privileged access to policymakers and resources and are consequently able to compete on unfair terms.”

Business Ethics

Mulualem said the presence of government and parastatal companies in the market will improve the business ethics of Ethiopia’s coffee traders.

“If we and Ethiopian Grain Trade Enterprise enter into the market everything will be legal, because we follow all the rules and regulations of the country,” he said. Guna and other parastatals don’t enjoy favored treatment, and criticism of them is politically motivated, he added.

The government also denied that the entry of parastatals into the industry was part of an effort to increase control over the industry.

“There is no crowding out of private business by anybody,” said Bereket Simon, Ethiopia’s communications minister, in an Oct. 23 phone interview. “This is a country increasingly becoming ruled by competition, by efficiency and price. I think the First Lady will not be guided by rent-seeking practices.”

Berhane Hailu, general manager of the Ethiopian Grain Trade Enterprise, was unavailable for comment when Bloomberg News rang his office today seeking comment.
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To contact the reporter on this story: Jason McLure in Addis Ababa via Johannesburg at pmrichardson@bloomberg.net.

SCAA Industry Brief: Ethiopian Commodity Exchange

2009-10-26T09:43:00.000-07:00

October 26, 2009, Long Beach CA

Introduction

SCAA was invited by the Ethiopian Commodity Exchange (ECX) to attend a working session to enumerate and discuss proposed strategies for specialty coffee trading through the ECX. The meeting was held in Addis Ababa on October 22 and 23 and included representatives from SCAA, CQI, ECX, the Ethiopian coffee trade, and other stakeholders representing a broad cross section of the international specialty coffee trade. This is a brief to cover the main outcomes for this meeting as well as some proposed work that is yet to be finished.

Background

Approximately one year ago, ECX was established with the stated purpose of improving transparency and efficiency in Ethiopian commodity markets. As a commodity-focused system, the ECX presents unique opportunities and challenges for the specialty coffee industry. The SCAA began interacting directly with ECX last April to address the needs of our sector with the goal of including Specialty Coffee standards and practices into the ECX and the Ethiopian Coffee market in general. Specifically, SCAA aimed to increase the integrity of quality evaluation in Ethiopia and introduce traceability into the ECX system. Our purpose is twofold: to encourage the production and availability of high quality specialty coffee, and to work to ensure that the maximum possible value for this coffee gets back to the coffee producer.

One current area of debate around the introduction of the ECX was the concurrent passing and subsequent enforcement of an Ethiopian law effectively banning vertical integration between the coffee collector (akrabi) and exporter. Under this law, direct exports by farmers and farmer groups are allowable. This law is clear and will not change in the near term. This is not an ECX regulation, and it must work within the law of the land. While the SCAA has concerns about the efficacy of this law since we believe that both quality and value can be created and preserved with akrabi/exporter vertical integration, we recognize that the changing of that law is not within the scope of SCAA/ECX negotiations. The ECX/SCAA working group therefore sought to find ways to work within the law to maximize quality discovery and traceability.

Current System

The current ECX system collects coffee in its regional receiving warehouses for inclusion into their export system. Coffee is assigned one of 10 regional indications for washed coffee or 11 for natural, and given a grade of 1-9, or UG (under grade) based on physical grading and basic cup evaluation. This creates 110 possible categories for unwashed coffees or 100 categories of washed coffee. Categorized coffee is then traded via the ECX’s electronic coffee exchange. The infrastructure to achieve the transportation and warehousing of this coffee exists and is developing.

There are a number of advantages and challenges to this system; and we identified quality analysis and traceability as the two primary areas of focus.

Training and Concordance

In April 2009, ECX agreed to a conceptual outline of incorporating SCAA green grading standards and cupping protocols into their quality evaluation system. Since then, CQI has engaged in a number of successful interventions to train and integrate these protocols. As a result of their work, there are 27 Certified Q graders working within the ECX system and a plan to have 72 Certified Q Graders within ECX by the end of 2009. In addition, a concordance project established the compatibility of the ECX and SCAA quality standards and grading practices. As a result, all stakeholders have a high degree of confidence in the abilities of these cuppers to identify specialty coffees within this system, creating the framework for a more specific proposal around quality identification and separation (outlined below).

The Proposals

In brief, the specific proposals and work going forward are the following:

Specialty Grading in the ECX: Unwashed and washed coffees that receive an initial grade of 1, 2, or 3 within the initial basic ECX grading will go through a secondary, full SCAA cupping and grading process by a panel of three (3) Certified Q Graders. Coffees that receive a score of 85 and above will receive a “Specialty Grade 1” classification and coffees that receive a score of 80 and above will receive a “Specialty Grade 2” classification. These classes will be traded in the ECX under those grades. This adds an additional level of quality assurance for these two grades of coffee and ensures specialty coffees are identified and separated from the commercial grade coffees. These grade classifications will accompany the regional and origin classifications (geographic indications).

Modification of Geographic Indications for Specialty Coffees: There are currently 15 washed and 12 unwashed region and origin classifications, creating a total of 168 standard ECX classifications and now 54 specialty classifications for an overall total of 222. There is a proposal for an enhanced level of geographic specificity, increasing the number of classifications for Sidama from 3 to 5 and from 2 to 4 for Limmu as well as investigations into the possibility of further classifications based on district and cup profile assessment.

Direct Specialty Trade (DST) Platform: The ECX will also establish a 2nd window within its system, to allow for traceability and direct exchange. Within this system, any farmer or cooperative may submit their coffee to the ECX for quality evaluation and grading, and the coffee will be available for sampling to registered buyers. The ECX will then make available a venue for price discovery via an auction. ECX only facilitates the transaction, and is not a party to the transaction. A resulting FOB contract will be made directly between the overseas buyer and the farmer or farmer group, with the inclusion of a farmer-elected Services Provider, who may provide services to the farmer such as milling and exportation. The ECX will assist in the transaction by providing guidance on contracting and fee structure.

Notes: According to law, buyers in the DST may not export the coffee, so registered buyers must be foreign entities (for example roasters) or their agents. The DST is a completely voluntary trading platform provided as a service to the coffee community, farmers and farmer groups and foreign buyers may still enter into contracts independent of and apart from the DST. Therefore, the DST serves as a meeting place and price discovery venue for farmers and buyers.

There is another principle that was extensively discussed, and this is the idea of a “Service Provider”. The idea is that farmers or farmer groups may wish to contract the services of a provider of services who performs specific roles such as exportation assistance, sales agreement negotiation, processing, LC opening, etc. etc. Service providers would be able to assist farmers and farmer groups and buyers, and facilitate direct coffee sales either through the DST platform or outside the system. ECX has agreed to act as an advisor in developing standards for this role in the Ethiopian context. This role is key to the DST platform’s success, and is integral to its design.

Timeline

We do not yet have a timetable for all of these proposals and ECX is careful to emphasize these plans are in proposal stage and may be modified after further evaluation and application, but they have committed to an aggressive timeline to integrate the ECX Specialty Grades for the coming season. Geographic Indications Modifications and the introduction of the DST platform could occur as early as December.

Summary

This is the first market mechanism to fully employ SCAA standards for coffees upon arrival and represents a significant change in how coffees get to market. This system has the potential to be a model for improved identification of specialty coffees at source. We regard these proposals as an important step forward toward accomplishing our original objectives and while they may not address the entirety of the industry’s needs, we have achieved a level of collaboration with ECX that should allow for further advancement of our interests.

Ethiopian Exchange Says Traders Tampering With Coffee

2009-10-23T21:01:00.000-07:00

By Jason McLure
Bloomberg

October 23, 2009

The Ethiopia Commodity Exchange said it’s taking measures to prevent exporters from tampering with coffee beans in order to sell them on the domestic market, where prices are higher than some types of export coffee.

“We’ve seen people try to get their coffee under-graded as local,” Eleni Gabre-Madhin, chief executive officer of the Addis Ababa-based exchange, said in a telephone interview on Oct. 22. “We’ve seen export coffee come in with purposely mixed in impurities.”

In one case earlier this year, 30 truckloads of export- grade coffee had low-grade beans dumped into them, she said. Sanctions imposed by the exchange include suspending traders’ membership, while some graders at the exchange have been fired, she said.

Ethiopia, Africa’s largest coffee producer, grows about 300,000 metric tons of the beans annually and consumes about half that amount domestically. Government regulations require that the highest-quality beans be exported to generate foreign currency.

This year, domestic prices for some grades of coffee have risen above those of lower-quality beans for shipment abroad. Export prices in Ethiopia often move in tandem with arabica prices on ICE Futures U.S. in New York, while domestic prices are influenced by local factors.

In trading yesterday on the Ethiopian exchange, so-called Local Use By Product Grade 3 coffee for the domestic market closed at $2,248.45 per ton, while Unwashed Forest Under Grade beans, an export coffee, closed at $2,117.83 per ton.

Coffee is Ethiopia’s largest export. Earnings from the crop fell 28 percent to $376 million in the year to July 7 due to a drought in southern Ethiopia and lower world prices.

Arabica-coffee futures for December delivery rose 2.5 cents, or 1.8 percent, to $1.443 a pound on ICE Futures yesterday, the highest settlement since Sept. 4, 2008.
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To contact the reporter on this story: Jason McLure in Addis Ababa via Johannesburg at pmrichardson@bloomberg.net.

ECX Specialty Coffee Event 2009

2009-10-20T21:07:00.000-07:00

The much anticipated ECX event, termed "ECX Specialty Coffee Event 2009" opened at 9 O'clock local time on October 21, 2009 (October 20, at 11:00 p.m. Pacific time) at the luxurious Sheraton Addis, in the capital city of Ethiopia.

According to the program of activities flyer obtained today, the event lasts for four days (Oct 21-24) and includes speeches; plenary discussions; sessions to hear and discuss the findings of the ECX-SCAA Working Group; and visits to ECX trading floor, coffee washing stations, the coffee growing region of Yirgachefe, where ECX inaugurates a regional laboratory located in Dilla, and more.

"The purpose of our Event is to highlight how we at ECX think Ethiopia’s producers, traders, and export community can work best with our international buyers to offer our best to the global market," reads ECX's invitation to the attendees.

The most valued guests of the event are members of the Specialty Coffee Association of America (SCAA). Ric Rhinehart, President of the SCAA is one of the speakers at the opening ceremony whereas Tefera Deribew, Minister of Agriculture and Rural Development, delivers the keynote speech.

Analysis of the findings of the Working Group and the outcome of this highly confidential event will be made public soon.

Farmers get a sit on ECX Board of Directors

2009-10-18T18:11:00.000-07:00

The government controlled Ethiopia Commodity Exchange (ECX) has just added for the first time a representative from a farmers' cooperative to its Board of Directors. The organization's website was updated early last week to include Yehualashet Aschenaki, General Manager of Southern Region Farmers Cooperative Federation as the 11th Director. The following is the complete list of ECX's Board of Directors (Source: ECX's website):

1. H.E. MEKONNEN MANYAZEWAL, CHAIRMAN and State Minister, Ministry of Finance and Economic Development
2. H.E. ATO AHMED TUSSA, State Minister, Ministry of Trade and Industry
3. BEKALU ZELEKE, President, Commercial Bank of Ethiopia (CBE)
4. BEYENE G/MESKEL, Director General, Privatization and Public Enterprises Supervisory Agency
5. MESFIN LEMMA, Head, Legal Affairs Bureau Prime Minister Office
6. ABDELLA BAGERSH, General Manager, S.A. BAGRESH PLC
7. BERHANE HAILU, General Manager, Ethiopia Grain Trade Enterprise
8. CAPTAIN FEKADE MAMO, General Manager, Challenge Coffee Traders PLC
9. GETU KEBEDE, General Manager, Kality Food Share Co.
10. DEBRETSION T/MICHAEL, Director General , Ethiopia Information and Communication Development Agency (EICTDA)
11. YEHUALASHET ASCHENAKI, General Manager, Southern Region Farmers Cooperative Federation

The addition of Yehualashet brings the total number of private sector representatives to three, which includes Abdella Bagersh and Captain Fekade Mamo. This is a good first step but more needs to be done. Still, ECX is controlled by the government as eight of the eleven or 73% of the Board of Directors entirely represent the interests of the government.

Such an imbalance of power in any organization is a recipe for corruption and monopoly.

The unfettered power given in ECX to the government owned Ethiopia Grain Trade Enterprise (EGTE), which is the major supplier of coffee to domestic and export markets, highlights an egregious violation of ECX's own market conduct rules concerning conflict of interest. It also subjects the public to exploitation and the market to a dysfunctional bureaucracy.

In a market where export prices are set by international markets, enterprises, such as EGTE, maximize their profits mainly by pushing down on their purchase prices and by forcing competitors out of the business. The ultimate losers of such unchecked market monopoly and corruption are the powerless coffee farmers, private businesses, and, eventually, the coffee sector at large.

To be able to function as a viable marketplace for all, ECX needs the voluntary active participation and fair representation of the private businesses and farmers in addition to government policymakers. It is obvious that the government owned enterprises function within the policy framework developed by policymakers (listed above from 1 to 5). Since EGTE and Kality Food Share Co. are directly answerable to the Privatization and Public Enterprises Supervisory Agency, the representation in ECX Board of the General Managers of these enterprises is redundant. Therefore, in order to create a reasonable balance between public and private sectors, the government should allot these two sits to additional representatives from farmers.

In a country where 85% of the population lives in rural areas and depends on agriculture, it is only fair and sensible that farmers are given the chance to have a say in the agricultural commodity market.

Window dressing of Ethiopia's coffee exchange

2009-10-12T10:33:00.000-07:00

Update ~

Since this write-up appeared on Ethiopian related websites early this week, I received many comments from readers with a spectrum of views. I appreciate those who took the time to write as well as those of you all who read my blog. Whenever possible, I try to reach out to readers especially with differing opinions as I respond to direct emails. The following comment is what I posted on Nazret Blog in response to multiple readers that commented with a specific question directed towards me: "What is your point?" I reposted my response here to validate the post that bears my name:

Hi all,

Thanks for taking the time to read and comment on the piece. Asking intelligent questions and listening to others with varying views is important and should be encouraged. That's why I'm compelled to respond to those of you who asked me to clarify my point.

My points in this particular article are:

1. The change that ECX is going make to the way Specialty coffee is traded at its platform will not benefit Ethiopia and the coffee growers if it does not accommodate a direct trade system where growers work directly with the ultimate buyers. The direct trade system helps farmers earn better prices and also benefit from the transfer of soft skills regarding produce handling (during coffee harvest, transport, washing/drying) etc. ECX needs to take the farmers' needs into consideration while it is engaged in addressing SCAA's concerns.

2. Forcing 100% of the country's coffee to be traded through ECX will have an undesirable impact on the country's coffee sector and this will eventually hurt farmers, the country, and the government. ECX should not be used as a platform to control the trading of this global crop as it should not have been engaged in coffee trading in the first place.

3. The government should not be micromanaging (read nationalizing) the coffee sector. Coffee trade is best left for the private sector. The government could play important supplemental roles such as helping farmers increase their productivity and quality production.

4. Coffee farmers and traders in Ethiopia are always obliged to sell export-grade coffee at international prices that are generally less than prices at Merkato Buna Tera [the central open market in Addis Ababa]. This has been the practice for decades but, as we see it now, the result is that we have a deteriorating sector and farmers living at abject poverty. It is time for Ethiopians to think differently. When the government needs to export the crop, it should pay for it. A government should not take advantage of poor farmers; it should compensate them for the differences between local and international prices. This is not only fair but also encourages farmers to grow more coffee to satisfy the demands of local market and the export. Right there is a win-win situation, I think.

I hope this helps.

Respectfully,

Wondwossen Mezlekia
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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.

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[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, http://www.guna-trading.com/
[6] 'Some 37 coffee trading centers go operational,' September 27, 2009, WIC

Ethiopian Coffee Exporters Association VP recounts stories of coffee sector

2009-10-06T21:30:00.000-07:00

"Many exporters are returning their licenses. We, the remaining ones, are in trouble too. The local price is higher than the international price. Ethiopia's share in the global market share is not more than 3 percent; we cannot influence the international market. The price that we quote is unacceptable to some customers. We are unable to go along with the market fluctuation. ... 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." - Emebet Taffesse Kidanemariam, vice-president of the Ethiopian Women Exporters Association (EWEA) and the Ethiopian Coffee Exporters Association

On the other hand:

On October 03, 2009, the Ethiopian Grain Trade Enterprise (EGTE) said it plans to purchase 10,000 tons of coffee "for local and foreign markets during the current fiscal year." - Ethiopia News Agency, October 03, 2009

Guna Trading had already announced in July, 2009 its plans to "ship for the first time 10,000 tons of coffee valued at 23 million US dollars to the global market after it stopped the business (coffee export) for five years." - http://www.guna-trading.com/

Whereas:

"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 Alemayehu Teshome, coffee and tea development team leader at the ministry of Agriculture and rural development, said." - Addis Fortune, Sept 27, 2009

Stay tuned for a report on the recent developments in Ethiopia's coffee sector and the Ethiopia[n] Commodity Exchange (ECX).
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We work on putting women in the forefront in their business life

Ethiopian Reporter

October 03, 2009

Emebet Taffesse Kidanemariam is vice-president of the Ethiopian Women Exporters Association (EWEA) and the Ethiopian Coffee Exporters Association. She is also general manager of Zebad General Import and Export Plc. She has worked for about 20 years in different government and private institutions in the fields of finance and management. In EWEA, she heads the coffee exporters section.

Emebet spoke to The Reporter’s Birhanu Fikade on the issues related to women exporters and the coffee export business. Excerpts:

Why was it necessary to found Ethiopian Women Exporters Association (EWEA)? Is it because of male dominance in the sector or…?

In any economic sector, the actors of the economy can form associations depending on their center of interest. This could be on the basis of the gender, profession or something else. EWEA was formed by women who are engaged in the export sector. As we know, the sector requires a great deal of resource and experience. It is full of challenges that require support.

The Ethiopian export sector is not well developed at a country level. On top of that, women’s participation is minimal. Hence, the question is: how should we enhance women’s participation? As women, how should we overcome business challenges when we are faced with them? These were some of the motives behind the establishment of the association.

What are the major challenges women exporters face in this country?

First and foremost is women's educational background. Cultural influences compound the problem, even if women are educated. If you look at rural areas, it is men who [possess] land. Women depend on their husbands' income. This is true in urban areas too. This should change.

Some challenges are related to household matters. Once, in a women's forum meeting in Kenya, there was an issue I remember where some women who were getting successful in their businesses mentioned that their marriage suffered as a result because their husbands were not happy with their success.

If I am not mistaken, statistical data shows 52 percent of the population in Ethiopia are women. This means women are the majority. But when we come to the reality, what most women do and achieve is not positively considered. This association has the job of changing this situation. We have been unable to have our own place to learn and have exposure. But now, the association provides prompt support to businesswomen. We are working with the youth so that they become our associate members in business- related areas. We organize forums and discuss matters that need to be addressed. We work on putting women in the forefront in their business life. We help young newcomers on their entrepreneurial and business ideas. They, at least, should enjoy technical support; the system and culture we had gone through must no more be a challenge for them.

Though EWEA was founded nine years ago it currently has only 36 members. Do you feel you are successful? How do you evaluate yourself?

There is no denying that we have to have many members. On the one hand, EWEA has traveled a long way. It is working with the East African Women Association, the Indian Women Association, the Egyptian Women Association and others. On the domestic front, EWEA has done and is still doing a lot. But one of the reasons why the association has a few members might be fact that the number of women engaged in the export sector is small. We need women to play an active role in the sector. We are aiming to change and deepen our objectives. We are planning to work with women traders as they are the major resource holders.

We have tried to contact women exporters personally to become members. Some of them have a vague understanding of what membership entails. I presume culture prevents women from getting involved in and having the courage to participate in such associations. I personally like my association because I have benefited a lot from it. When I started my business, the association gave me office facilities and communication tools. It offers trainings to members.

One of your association's stated objectives is to promote women exporters in order to influence the policy environment. Would you elaborate this?

We work to promote women’s political, economic and social interests. To achieve this we need resources and facilities. The Addis Ababa Women Traders Association, EWEA and other women's associations are faced with basic problems in this regard. They don’t have their own offices. Ethiopian businesswomen lack a place to get together and display what they have produced. Until recently, we were unable to have our own office. We are working to obtain facilities for our members. The Addis Ababa City Administration, the Mayor's Office, the Ministry of Trade and Industry and other concerned bodies should think about it. In every decision passed, we need to promote the interests of women. But it is not going the way we want it to.

We closely work with the Ministry of Trade and Industry (Women's Affairs Office) and the ILO on the MDGs. But this is not enough. Those working on women's issues must do their level best. The Ministry of Women Affairs is not working with or supporting us as it should. Other governmental bodies are supporting us, though not. If they are not helping us, then I don’t see their relevance. We have asked them to visit us and wrote them letters, but they have not given us an encouraging response. If they fail to encourage and support women entrepreneurs, I doubt whether they can be fruitful. Other countries provide vital courage and support to women. Women there are able to cast their ballots to elect their leaders, to put in office the person whom they are really looking for.

You are involved in coffee exports. What does women’s role in it resemble?

Women do have a vast role in the coffee business. They are extensively present in the overall supply chain process. From cultivating and collecting, to the marketing process, they are involved. They play a significant role in quality control. But in the case of the export business, they are very few, I can even say practically non-existent. If I recall correctly, only two women are members of the Ethiopian Women Traders Association and women coffee exporters probably number not more than 10. This demonstrates that women exporters lack support and strength.

Sometime this year, the government took measures against coffee exporters. Were any women exporters affected?

No woman was affected. The wives of those exporters who were penalized presumably might have been subjected to the penalty, but I am not sure.

A few weeks ago, the export promotion office of the Ministry of Agriculture and Rural Development organized a discussion and training forum with coffee growers and producers. A grower and an exporter lady in SNNP Region raised a problem she encountered in relation to land. She said some people in the area are taking over the land she has obtained through lease. Are your familiar with this case?

There are two forms of associations in the coffee sector. One is the Coffee Growers and Producers Association. The second one is our association. The woman you mentioned is also a coffee exporter. I believe she is facing difficult challenges. But I feel that the growers association is handling the matter. Hence, I can't say much on it.

But in general, investment enhancing policies shouldn't be paper tigers. Such policies should be implemented properly. As a vice-president of the coffee exporters association, I can say that if we thoroughly assess the coffee business, there are many things we lack. The sector is not benefiting the country at its current level. Hence, it is necessary to work together. Associations need to work actively; they need to have facilities and appropriate services.

It amazes me when I see some offices acting as if they are there to say “no.” It seems that they are established to deny services. I feel so sad when I confront this. They tell you the word “no” every time you request their service as if “yes” does not exist in their vocabulary.

It is a reflection of the high prevalence of corruption and a weak human capacity aside to the implementation and rapid change of policies. We need to test even bad polices a bit longer rather than change them overnight. That will give us the experience to formulate a better policy.

What's your take on the claim that the fluctuation in the price of coffee at the local and international markets is a problem for the coffee export business?

This is one of the fundamental and biggest problem in the business. We Ethiopians are big coffee consumers. This has its own benefit as we don’t import coffee for consumption purpose. But the problems outnumber the benefits. Illegal coffee trade is one such problem that causes price variation. If the price of coffee in cross-border trade price is higher than on the central market, the supply will be directed to there. The other big challenge is the international price. Our coffee is expensive on the global market due to the high cost of production. We need to enhance our productivity and scale up our economy. That way we can do better off in the global coffee trade.

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. If you look at coffee importers, there are only few countries or large companies that purchase it. We need to promote our organic coffee widely in the global market.

Unnecessary market channels should be cut off if we are to reduce cost and maximize earnings. Growers and exporters can perform better than before thanks to the existence of the Ethiopia Commodity Exchange (ECX).

Here, the exporter needs support as the coffee business is volatile. What you have in stock today might have a lower price tomorrow on the global market. The international market [frequently] fluctuates and is unpredictable.

In order to play a active role in the export business, financial clout unquestionably is indispensable. Accessibility to financing is a tough challenge that hinders the smooth flow of the business process.

Furthermore, it's a curse for exporters when they are saddled with low quality coffee.

Many exporters are returning their licenses. We, the remaining ones, are in trouble too. The local price is higher than the international price. Ethiopia's share in the global market share is not more than 3 percent; we cannot influence the international market. The price that we quote is unacceptable to some customers. We are unable to go along with the market fluctuation.

It is a harvest season now and more coffee is coming to the market. So, there must be an encouraging environment for the private sector.

Are you saying that the Ethiopia Commodity Exchange (ECX) market has no value in exporters’ business? Or …?

What I am saying is the market channel should be limited in order to minimize cost. The mediators have very little or no value added to the market.

ECX is playing a great role in the market. I am of those who strongly appreciate the importance of such a market. But as a newly emerging party, as a beginner, problems are bound to occur. The commodity market lacks some things as it introduces a new modern market to the country. It is new for the actors of the market. Anyhow, we are discussing on the different aspects and issues that we feel are shortcomings of the business.

There are reporters that the number of international coffee buyers is decreasing from time to time and that the volume the likes of Starbucks purchase is declining, following the establishment of ECX. Do you agree with this?

When we say the number of buyers is declining, it means our export volume is plummeting.

Why did the export volume decline? As I said earlier, the price of our coffee is high. The ECX, in its trading floor, indicates the global price of coffee at one side and the local price on another. The price at which we offer to buy coffee from suppliers is based on the lower and upper range.

What I have noticed in the market is that there prevails a problem of timeliness in delivery and even unavailability of coffee. The suppliers are not willing to provide us until the last range is announced. Consequently, we can’t get coffee and we don’t know what amount to purchase. That affects our export commitment. Export deals and commitments must be fulfilled within two months. But I can’t know definitely whether the amount of coffee I need is in stock.

We have repeatedly entreated the commodity market to make the information on stock information easily accessible. Suppliers have 90 days to keep coffee in stock. As an exporter, I have to discharge my obligations based on internationally binding agreements with my customers. Unfortunately, here, I can’t get it at the exact time which is suitable for shipment.

As a business dealer, it limits my speculation of the market. The price I paid might be way off the future global price due to delay.

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.

What I would like to stress here is that there is a shortage in coffee supply. I will be very sad if there appears a stock carry over. There is a market, there is demand for it. Getting and supplying it on time is crucial. Otherwise, the cost could be unbearable.

If coffee is not exported due to high prices, customers will shift to other competitors who offer a competitive price. Globally, there are 57 countries which sell coffee. Last year’s local price of coffee has almost doubled but the international market is not witnessing a significant hike in price.

This is a new harvest season, a new crop year. We have to solve these critical bottlenecks. We have to balance the supply and demand side of the market. Failure to do so might cost us a lot. Its national impact can be very high. Therefore, we have to address and promptly act on the bottlenecks and unhealthy activities.

Government tightens control over coffee trade

2009-09-27T20:04:00.000-07:00

The government of Ethiopia is tightening its grip on the coffee sector. In a latest development in the saga of the Ethiopia Commodity Exchange (ECX) and what appears to be the government's well orchestrated plan to control the sector, a government official warns, "individuals found dealing coffee out of the [newly established coffee trading] centers will receive a 20 year prison term and up to 50,000 birr fine."

This new development explicitly reveals the government's interests in the exchange from the get go.

The ECX, a trading system meant primarily for grains and pulse, commenced trading operation in May, 2008. In August 2008, the government passed the new coffee law that requires all coffee trade to be conducted at the ECX. The exchange, which claims to be independent and a free marketing system established to help eliminate famine, began trading coffee in December 2008. On March 25, 2009, the government confiscated 17,000 tons of coffee beans from private exporters and revoked the licenses of 88 traders, who altogether commanded the lion's share of the market by exporting more than 80% of the country's coffee. On April 19, 2009 (soon after ECX announced that it had "accepted" the licensing application by the Ethiopian Grain Trade Enterprise (EGTE) as an exporter of coffee,) EGTE signed an agreement with a German company to export 1,200 tons of coffee successfully entering the market for the first time in its history. This state owned enterprise also enjoys a role on ECX's Board of Directors, a body where only 2 of the 11 directors come from the private sector. The general manager of EGTE is one of the 9 ECX Board of Directors that represent the government's interests.

In the past several months, private businesses and coffee growers accused ECX of playing a role of facilitating for an unprecedented government control that amounts to nationalizing the coffee sector.

Dr. Eleni Gebre-Medhin, CEO of ECX, brushes off such criticisms. She says, ECX's role is limited to enhancing the domestic trade system and has nothing to do with the government's actions in relation to the trade. In one of her interviews on the Voice of America's Amharic Service, she said, a free market, in her view, is a market system where people are free to sell their produce whenever, wherever, and to whomever they want at whatever price they please; in that sense, she declared, "the coffee trade in Ethiopia is free."

In today's Ethiopia, however, it is illegal to sell export grade coffee beans in local markets; only inferior quality bean is sold domestically. Meanwhile, export prices for this globally traded commodity are determined at the New York Mercantile Exchange (NYMEX) and are generally less than the average price for the inferior quality beans sold in domestic markets. Coffee traders would profit more if they were allowed to sell some or all of their stocks at existing market prices but that is unthinkable. This deterrent forces local collectors and suppliers (akrabis) to sell sacks of beans outside the normal chain of coffee trade (farmer-collector-washer/supplier-exporter.) The lack of incentive for farmers, among other factors, is also contributing to the deterioration of quality at coffee plots. Therefore, it is remarkable that Dr. Eleni observes Ethiopia's coffee trade as free and claims that ECX is there to benefit farmers.

And, now that the government has further expanded the coffee trading centers to the remote districts (as noted in the news article by the government affiliated Walta Information Center on September 27, 2009) where it can control the sources and dictate farmers on where to sell their produce giving them practically no choice as to whom to sell it to, it will be curious to know what Dr. Eleni will have to say about ECX's roles as a facilitator of government control of the sector.

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Some 37 coffee trading centers go operational

Walta Information Center

September 27, 2009

Some 37 coffee trading centers established in Jimma zone with a view to controlling illegal coffee trading and alleviating wastage of coffee produce have begun rendering service, zone agriculture and rural development office said.

Office Deputy Head Nezif Abachebsa told WIC the centers are significantly contributing towards improving quality of coffee, preventing illegal coffee trading as well as alleviating wastage.

He said the centers went operational in 14 coffee growing woredas of the zone.

According to Nezif, the zone would take strong measure on coffee trading that takes place out of the centers.

Accordingly, individuals found dealing coffee out of the centers will receive a 20 year prison term and up to 50,000 birr fine, he indicated.

What's wrong with Ethiopia's exchange

2009-09-21T11:08:00.000-07:00

By Wondwossen Mezlekia

September 21, 2009

The Economist magazine describes the Ethiopian government as "one of the most economically illiterate in the modern world." This portrayal, albeit contentious, is not without truth. But, the government's recent meddling in the coffee trade has to do more with the government's socialist-inspired economic policies than economics per se. As if to prove this, Venezuela's Chavez, another diehard socialist, just took actions similar to what Prime Minister Meles Zenawi did earlier this year. Last week, President Hugo Chavez accused the country's largest coffee producers, Fama de America and Cafe Madrid, of smuggling coffee out of Venezuela to circumvent government coffee controls and vowed to nationalize they refuse to heed. Chavez was quoted as saying "if they give me an excuse, I'll nationalize them."

This must be why some critics questioned the viability of a free commodity exchange in Ethiopia. But, technically, commodity exchanges can exist as viable institutions even under tyrannical governments. In fact, the only successful cash commodity exchange with spot delivery in Africa was the one in Zimbabwe. Studies show, Zimbabwe Agricultural Commodity Exchange (ZACE) was a viable exchange, until it closed in 2003 due to monetary instability, and operated successfully with its total costs covered by member subscriptions of brokers. The former coffee auction system in Ethiopia is another example. So, what went wrong with the USAID funded Ethiopia Commodity Exchange (ECX)?

Dr. Eleni Gebre-Medhin, CEO says the exchange is a response to the paradox of "bumper harvest one year and severe shortages the next, or surpluses in one region and famine in another." If so, what's coffee got to do with famine? Is ECX delivering on its promises?

The bumper harvest-famine paradigm

Ethiopians who watched the state owned Ethiopian Television programs in years 1995 through 1997 vividly recall the infomercials about Sasakawa Global 2000 (SG2000) and the video clips of Meles Zenawi and the former US President, Jimmy Carter visiting certain corn fields.

SG 2000, a joint program of Sasakawa Africa Association (SAA) and the Carter Center's Global 2000, is an agricultural growth program that promotes the potential of improved food crop technologies through field demonstration. SG2000's success stories in other countries were so appealing that the government adopted it right away. Increasing food production was a top priority for the government, so it was anxious to see SG2000 do its magic. The massive campaign to convince farmers to use fertilizers and improved seeds paid off pretty quickly and many farmers were provided with the inputs on a credit basis to be repaid at the first harvest. During the following season (1996/97), food growing regions saw a record high production due to the favorable rains and use of improved farm inputs. But, the excitement lasted for barely a few weeks as prices plummeted with supply surpassing domestic demand. Many farmers, deep in debt, defaulted on their credits. On the other hand, the rest of the country was in dire need of food and millions of people starved during the same year.

It turns out, ones bumper harvest won't mean food to the other if the people cannot afford to pay for it. In Ethiopia, millions die of hunger not because they didn't know where to buy food, but because they didn't have the means to buy with. In any case, these are the historical events that Dr. Eleni talks about when selling the idea of a commodity exchange.

According to her, ECX will help eradicate famine by facilitating the distribution of commodities in an efficient manner. She argues, event at times like during 1996/1997, grain traders are unwilling to transport stocks to drought stricken regions because of lack of price information and/or the inherent high risk of doing so; those traders who braved to defy all the odds have realized net losses. In brief, by reducing marketing risks and providing merchants with real time price information, ECX can help facilitate ease of transaction and enhance competition. By so doing, commodities can be distributed across regions, reaching a larger consumer base at competitive prices. Further, says Dr. Eleni, ECX can double the value of the domestic market over five years assuming it captures 40% of the domestic market that is estimated at $l billion in value and adds a mere 25% value to it.

ECX came into existence in May, 2008 with able experts in the field and an aim to trade more than 25 agricultural commodities, mainly grain and pulse. The exchange was off to a rough start, as its commencement coincided with an unexpected sharp rise in domestic and global prices for commodities. There was a shortage of grains flowing through the exchange. The shortage persists to date.

After a series of interesting events, in December 2008, ECX evolved into a coffee exchange, no explanation given. Today, the most traded commodity at ECX is coffee, not grain. ECX has replaced the old coffee auction center, not to conduct a forward trade which would have been an improvement, but to do the same old spot auction with an electronic warehouse receipt system.

ECX, there's a slave in my coffee bag!

With ECX taking over the coffee auction, the government emerged out as the main player in the market for the first time in the history of the coffee sector. All of the successive governments (the imperial, the military regime, and the current one) depended on coffee for export but only the current government dared to control the marketing system for coffee. This arbitrary move exposes the dark side of coffee trade in Ethiopia and ECX's role as a facilitator.

For so long, the government has been oblivious to the fact that coffee farmers are hurting because of the mandatory export. In Ethiopia, it is illegal to sell export grade coffee beans in local markets; only second and third grade coffees are sold locally. Global prices for export grade coffee are determined at the New York Mercantile Exchange (NYMEX) and are generally less than domestic prices. For example, last week (Sept 19), a pound of coffee was sold at Merkato Buna Tera, the central coffee market in Addis Ababa, for 27 Birr or roughly $2.20 whereas the same volume of export grade coffee was traded at ECX for an average of 18 Birr or roughly $1.47. Coffee farmers and traders would better off selling their coffee stocks in domestic markets. The difference between local and export prices (in the above example, a difference of 15 Birr or $.73 per pound) is an obligatory duty imposed on participants. The governments (past and present) have never felt obliged to compensate farmers or traders for the benefit they forgo due to this export regulation.

In one of her interview on Voice of America's Amharic Service, Dr. Eleni said, a market is deemed free if people can sell their produce whenever, where ever, and to whomever they want at whatever price they please. In that sense, she said, the coffee trade in Ethiopia is free. If so, since it is now known that the government is actually dictating the coffee trade, shouldn't it compensate exporters and farmers for the money they lost due to the mandatory export? That is exactly what the governments of Colombia and Brazil did in 2007 . These governments subsidized coffee growers for the price differential when the rally in the local currency eroded export profits. After all, why should citizens be responsible for the government's inability to create favorable sources of foreign exchange or limit its needs for it? This legal exploitation of poor farmers is exacerbated by ECX's new system because the system eliminates direct trade - the only system that pays farmers extra pennies for their hard work - and gives the government more power and means to control the value chain.

In recent years, the increased demand for Specialty coffee opened up opportunities for farmers that grow the finest coffees. Importers sourcing single origin coffee often pay farmers premium prices over NYMEX prices for the highest quality. Specialty coffee importers make direct contacts with growers to ensure the highest possible level of quality and integrity for the coffee beans they want to buy. The introduction of ECX's hasty coffee trade system, however all but eliminates this direct trade between importers and farmers. The only farmers that are allowed to bypass the exchange are cooperatives and commercial farms. Since only less than 10% of the farmers are organized in cooperatives, the new system subjects the individual farmers to adverse competition. These farmers are now allowed to sell their produce at the NYMEX commodity prices only.

On top of this, the government commands the majority sit in ECX's Board of Directors. Currently, only 18% (2 out of 11) of the directors are private business owners; the rest represent government interests. The parastatals, Guna Trading and Ethiopian Grain Trade Enterprise are now the most influential forces in the market as they enjoy preferential policy treatment over their competitors. Granted, these parastatals will use their leverage to lower their purchasing prices in order to maximize their profits.

Under these circumstances, it is difficult to see how ECX maintains synergy and serve as a fair and free marketplace to all.

Commodity exchange for coffee

The former coffee auction system has been functioning very well and successfully operated in three successive governments. It would have been wise to enhance the existing system rather than starting one from the scratch. For that matter, the auction was prepared to make gradual upgrades to an electronic warehouse receipt system and eventually to a forward trade. The decision to replace the auction by ECX was completely political and not in the best interest of the sector. The government's allegation that some of the suppliers and exporters had diverted coffee beans meant for export to local markets or that they hoarded coffee stocks in search of better prices is an excuse. Smuggling will continue to be a problem as long as there exists price disparity between local and export markets. Replacing the auction centers by ECX won't solve the root causes of the problem.

In countries where coffee is traded in a commodity exchange, coffee trade is conducted separate from other agricultural commodities. In Uganda, the operation of electronic warehouse receipt system and coffee exchange are supported by a two independent institutions: the Uganda Commodity Exchange (UCE) and Uganda Coffee Development Authority (UCDA). These institutions work together to promote a fair and transparent exchange. In Kenya, the coffee exchange is an independent operation that is managed by an association of direct stakeholders. The Kenya Coffee Producers and Traders Association (KCPTA) owns and manages the Nairobi Coffee Exchange (NCE). Another unique feature of the NCE is that it has a separate and smooth direct sale operation for Specialty coffee where marketing agents directly negotiate with foreign buyers. This system, also known as the "Second Window" is separate from bulk commodity trading.

To fix the problems with ECX, first, the coffee exchange needs to be separated from ECX's broader functions as an agricultural commodity exchange and it should allow full participation of the stakeholders (from farmers to exporters.) Second, to take advantage of the price differential for Specialty coffees, and until most of the farmers are organized in cooperatives, the exchange ought to allow individual farmers to transact freely and directly with ultimate buyers who will enter into agreements with farmers and limit ECX's role as a third-party certifier to coffee stocks that are not associated with such a direct buyer. Lastly, to do away with the problems associated with coffee smuggling and to encourage the production of high quality coffee, the government ban on domestic trade that requires selling export grade coffee at a loss should be lifted or accompanied by monetary incentives from the government.

The Controversy In Ethiopia's New Coffee Market

2009-09-08T16:10:00.000-07:00

An advocate for poor coffee growers debates with a government official the quality of specialty coffees and the freedom of Ethiopia's free market

Photo: Courtesy of the VOA

Note: The debate was aired in three parts on Aug 21, Aug 28, and Sept 4, 2009. The audio may be accessed from the VOA program audio archive located here. For the convenience of many of this blog's readers, I will try to translate and post the transcript here very soon.

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By Alula Kebede
Voice of America

September 04, 2009

Washington, DC - In a three-part Crossfire, Ethiopian coffee advocates debate whether the market for Ethiopia's specialty coffees is deteriorating and how the Ethiopian Commodities Exchange represent the government's attempt to promote the new market while at the same time tries to control it.

The debate on these and other related issues is taken up by Eyob Tekalegn, the head of finance & business affairs section at the Ethiopian embassy in Washington, D.C. and Wondwossen Mezlekia, a frequent advocate of the Ethiopian beans in the U.S. market. Wondwossen posts a blog in Seattle called the Poor Farmer. He says the poor farmers won't be represented fairly in the new market if most of the 11 members of the exchange's board of directors are government officials.

Eyob on the other hand claims some of these officials are represented as stake holders not as government officials as some of them are market players themselves. VOA Amharic's Crossfire host Alula Kebede moderated the debate.

Ethiopia Coffee Exports May Rebound This Year, Exchange Says

2009-08-31T10:49:00.000-07:00

By Jason McLure
Bloomberg

August 31, 2009

Coffee exports from Ethiopia, Africa’s largest producer of the beans, are expected to rebound to about 171,000 metric tons this year after shipments fell to their lowest level in six years last year, an official with the Ethiopian Commodity Exchange said.

“Early assessments indicate a very good potential for a bumper harvest of coffee,” said Eleni Gabre-Madhin, chief executive officer of the Addis Ababa-based exchange, in an interview on Aug. 29. “We are expecting at least 2007/2008 tonnage.”

Shipments fell from 170,888 tons in 2007/2008 to 133,993 last year after a drought cut production and Japanese importers largely stopped buying Ethiopian coffee after finding high levels of pesticide residues in shipments.

Better rains this year in the main coffee-growing areas will lead to more production during the country’s October to December harvest. Ethiopian coffee trees will also produce more due to their cyclical nature, in which harvests peak every second year, she said.

Prices for premium Arabica beans, though heavily dependent on the world price of coffee, may be higher this year because of a new grading system in Ethiopia introduced in conjunction with the Specialty Coffee Association of America, she said. The system will bring Ethiopia’s grading methods in line with those used by the SCAA.

“Hopefully it will encourage farmers to produce more of these top quality grades,” she said.

The exchange will also begin providing a new direct-buying service for coffee roasters that seek specialty coffee from specific farmers, she said.

U.S.-based specialty coffee roasters complained last year that Ethiopia’s move to trading beans on a commodity exchange made it difficult to trace coffee to specific growers, a desirable marketing feature for specialty roasters.

Ethiopia, which claims to be the home of the coffee tree, has hundreds of native varieties of coffee.

To contact the reporter on this story: Jason McLure in Addis Ababa via Johannesburg on pmrichardson@bloomberg.net.

ECX's coffee trade adventure: illogical or off-track move?

2009-08-29T01:06:00.000-07:00

Eleni Gabre-Medhin: 'If we can distribute what we have, I think we are further along in reaching food security.'

So far, I have been reluctant to conclude that ECX's coffee trade adventure was not only illogical but also off target. I am now tending to believing that what I had feared all along is actually happening: ECX is derailed off track.

The IPS (Inter Press Service News Agency) interview with Dr. Eleni Gebre-Medhin (below) sheds light on some interesting aspects of ECX including the disconnect between its goals and vision and between ECX's metrics for measuring its performance and the publics' expectations. While reading the excerpts of the interview, the first problem that popped ou at me is that ECX's stated goals are not aligned to its vision (which is also different from the one on ECX's website). Just below is an outline of what I made out of the interview followed by a list of my questions:

Objectives of ECX:
"Grant smallholder farmers information about and access to national - even international markets - enabling them to negotiate better returns for their produce, and confidently make planting decisions based on futures prices" - IPS

Goal:
"To turn Ethiopia - the biggest recipient of food aid in the world - into a regional food basket" - IPS

"In 2003 when there were places in Ethiopia with such a surplus that prices have collapsed by 80 percent in parts of Arsi and Bale (major wheat and maize producing areas in southwest Ethiopia) and yet a few months later there was an emergency food aid appeal for 14 million people in the eastern and northern parts of the country. ... If we can distribute what we have, I think we are further along in reaching food security." - Dr. Eleni

Vision:
"Our vision is to become a global commodity market of choice for Arabica coffee and sesame." - Dr. Eleni

How will ECX benefit farmers (not to confuse with institutions, plantations, and suppliers/exporters):
"Currently 12 to 14 percent of the members are farmers represented either by their own cooperative unions or some form of collective groups. ... The path ahead of us is to get more clients and members and more institutional engagement." - Dr. Eleni

Scorecard:
"In relation to coffee, we are much further along. With other commodities, we are pushing further for more engagement." - Dr. Eleni

Challenges:
"1) The change resistant attitude among the public, 2) the poor state of the infrastructure in the telecom and finance; 3)finding the right balance between the public and private sectors." - Dr. Eleni

My questions:
1. How will ECX help eradicate hunger and famine from Ethiopia by trading mainly coffee and sesame?
2. How can ECX measure its progress towards its goals when its metrics track non-essential commodities such as coffee?
3. How can ECX claim to be a "commodity market of choice" when its participants are forced to come to its platform by diktat and government sanctions?

I hope ECX or Dr. Eleni Gebre-Medhin will come forth and help answer these questions. Till then, enjoy the interview by IPS ...
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Changing Mindset Over Markets

Omer Redi Ahmed interviews Eleni Gabre-Madhin, chief executive officer of the Ethiopia Commodity Exchange

IPS

August 28, 2009

ADDIS ABABA (IPS) - In 2001/2002, Ethiopia enjoyed a bumper maize harvest - so good in fact, that prices tumbled, and many farmers simply left the grain in the fields. When the rains failed the next season, famine loomed.

Eleni Gabre-Madhin, a former senior economist at the World Bank and author of a book on market reforms and structural transformation in Africa, was one of many disturbed observers.

She put her doctorate in economics and 15 years of experience in agricultural markets in Africa to use in founding the Ethiopia Commodity Exchange (ECX).

The exchange is intended to grant smallholder farmers information about and access to national - even international markets - enabling them to negotiate better returns for their produce, and confidently make planting decisions based on futures prices.

She spoke to IPS in Addis Ababa; excerpts of the interview follow.

IPS: Through the Ethiopia Commodity Exchange, you want to turn Ethiopia - the biggest recipient of food aid in the world - into a regional food basket. Do you think hunger and famine are just about poor marketing systems?

Eleni Gabre-Madhin [EG]: It is not just about poor marketing systems. But I think when we talk about hunger and famine the often neglected piece is marketing. We often immediately think of production as a major element. While that is true, the other element is distribution.

We have many instances - the most famous I think being the 1984 famine - where we didn't realise until several years later that there were pockets of surplus in Ethiopia.

The same story was repeated in 2003 when there were places in Ethiopia with such a surplus that prices have collapsed by 80 percent in parts of Arsi and Bale (major wheat and maize producing areas in southwest Ethiopia) and yet a few months later there was an emergency food aid appeal for 14 million people in the eastern and northern parts of the country.

So we have distribution problems. If we can distribute what we have, I think we are further along in reaching food security.

It is not by coincidence that the World Food Programme (WFP) now sources a big part of its relief and food aid operations with local procurement. It is increasing the share of its food aid from local procurement.

If the WFP can buy it from one part of Ethiopia and distribute in another, or buy from Ethiopia and distribute in Kenya, then we can do the same as a marketing system.

ECX is the channel for this and even WFP is now buying through ECX.

IPS: But how does this work for the people at the bottom: when big institutions like the WFP or private exporters or local traders buy through ECX, it is just from suppliers on the ECX trading floor. These are not actually the producers, these are not the farmers. Do your farmers themselves transact through the Exchange?

EG: ECX is not exclusive to any particular party. The very first transaction in the case of maize was made by farmers.

Currently 12 to 14 percent of the members are farmers. The farmers are represented either by their own cooperative unions or some form of collective groups, because it is very difficult for a small-scale farmer to have the means to be at the exchange.

In our case, because land is so fragmented, it is a must to group farmers in the trading. To come to the market with two or three bags at a time, a farmer has no market power and it is costly per bag to travel long distance to sell the product.

Farmers can be members in two ways: either they become members as individuals and through cooperatives, or they can be clients of the members. Right now, we have 496 members and those members have about 2,000 clients.

IPS: This number is a small figure compared to the number of farmers in Ethiopia.

EG: Absolutely. The path ahead of us is to get more clients and members and more institutional engagement. In relation to coffee, we are much further along. With other commodities, we are pushing further for more engagement.

IPS: You are planning to expand the reach of the ECX across Ethiopia by installing about 200 price tickers around the country in the next two years. Considering the high illiteracy rate among farmers and their very limited knowledge about what the system is, how is that going to be any help to them?

EG: I have never found illiteracy to be a problem when people are trying to make money, because we all find a means to accommodate our constraints in our own interests. So if you tell a farmer that there is a way that the product he and his family have worked for several months to produce can earn more to reward his time and effort, he will figure it out.

IPS: You are also considering expanding to other African markets. Can you explain?

EG: I think the potential is there. There are many economies in Africa that don't have sufficient volume to support a national exchange. If you look at East Africa, Ethiopia's production of maize is twice the total volume of Uganda, Tanzania and Kenya combined. So it would make more sense for these countries to engage with our platform because they are structurally deficit countries for maize and Ethiopia has a structural surplus.

So it would make sense for us to try to link because whenever Kenyans have deficit, they buy it from South Africa or Argentina while we have surplus right next door. This is something that I have had a personal vision of for the last two decades.

IPS: Where do you see the ECX in 20 years?

EG: Our vision is to become a global commodity market of choice for Arabica coffee and sesame.

We believe ECX has the potential to be like Kuala Lumpur for rubber or DaLian Commodity Exchange in China for soya bean or the South African Exchange for maize.

Both Arabica coffee and sesame are commodities in which Ethiopia has dominance, and it can become a hub for Africa. Ethiopia is the second or third-largest sesame producer. There is no organised global market for sesame. So ECX can become a reference for these commodities.

IPS: What are the major challenges you face in realising your vision?

EG: The major challenge is the mindset of the public. We are seriously challenged in trying to change the marketing system that people have been using for millennia.

The poor state of the infrastructure in the telecom and finance sectors are two other serious and big challenges.

In addition to the change resistant attitude among the public, finding the right balance between the public and private sectors is another challenge.

(END/2009)

Colombia discounts plan to buy Starbucks shares for now

2009-08-27T22:02:00.000-07:00

New Colombia coffee czar sees no Starbucks deal for now

By Luis Jaime Acosta
Reuters via Forbes

August 27, 2009

BOGOTA (Reuters) - Colombian's new coffee chief Thursday said the national federation had no plans for now to purchase shares in U.S. chain Starbucks Corp. as a way to better its distribution to the major U.S. market.

Previous director Gabriel Silva had said Colombia, the world's No. 3 exporter, and other coffee-growing associations in Brazil and Central America were considering purchasing a share in Starbucks to improve their distribution network.

"For now, the subject of buying shares is a closed subject," National Federation of Coffee Growers director Luis Genaro Munoz told reporters after he was elected into the post by the group's regional committees on Thursday.

Munoz, a federation veteran who says he will follow Silva's policy line, was competing against Luis Guillermo Echeverri, a Colombian representative to the InterAmerican Development Bank, and Juan Guillermo Angel, a central government advisor for San Andres island in the Caribbean.

"It will be my responsibility to ensure the continuity of policies that guarantee equality in the support from the federation to each and everyone of the coffee regions," Munoz said after winning the post.

Munoz won backing of 11 of the 15 coffee-producing regions who vote in the election. But he failed to win support from the provinces of Antioquia, Caldas, Cundinamarca, and Quindio, which account for 38 percent of the national production.

The new director must follow the success of Silva, praised for modernizing federation management while supporting growth of the Juan Valdez coffee chain brand, a crop renovation program and promotion of specialty coffees.

Colombia, the world's top exporter of high-quality soft arabicas, has seen its production slide due to bad weather and the crop program which replaces aging trees. Those factors have pushed up premiums for the country's beans.

(Writing by Patrick Markey in Bogota; Editing by David Gregorio)

Copyright 2009 Reuters

Is Yirgacheffe a Coffee or a Brand?

2009-08-26T18:19:00.000-07:00

By Zach Dyer in Drink Drank Drunk, Java Enabled

August 26, 2009

Like Champagne and Parmigiano-Reggiano cheese, Ethiopia's Yirgacheffe coffee takes its name from the region where it's grown. Sweet, fruity and well-balanced Yirgacheffe has become a household name among coffee aficionados. Now, due to changes in how Ethiopia regulates its coffee market, Yirgacheffe has grown much bigger.

Ethiopia trademarked the Yirgacheffe name in 2006 in an attempt to capitalize on the region's reputation. Then, in December 2008, the Ethiopian government mandated that all coffee be sold through a national coffee board, known as the Ethiopian Coffee Exchange (EXC). While the mechanics of all these political and business maneuvers might sound obtuse to the average coffee drinker, they could have a serious impact on whether your coffee truly originates where it claims to originate.

Why bother with a national exchange in the first place? The global coffee industry is plagued by unscrupulous middlemen who buy small farmers' coffee cheap and then sell it high to exporters. The ECX aims in part to regulate the price of coffee to insure that market prices are paid. In addition, the ECX promises to regulate the coffee coming into the exchange to maintain a certain level of quality.

Good intentions aside, some importers are still on the fence about the exchange. "There's a lot of fear about government involvement in the coffee trade. They don't have a very good track record," said Jake Elster, co-owner of Crop to Cup, a single-origin coffee importer. "But the system has the potential to raise values for the average farmer, and they're the ones that need it most."

While the average coffee grower might be able to get more for their coffee thanks to the Yirgacheffe name, some in the specialty-coffee industry in the U.S. worry about the new system. This industry is no stranger to paying a little more for a good product: Fair trade, bird-friendly and organic are well-known tags on the side of coffee bags. However, the one thing that holds the system of specialty and ethical coffees together is the one thing that the ECX doesn't currently address: traceability.

Specialty coffee is increasingly about single-origin and micro-lot coffees, which take terroir, climate and consistency of quality into strict consideration. The ECX funnels coffee from all over the region -- and maybe outside the region -- into the exchange under the umbrella Yirgacheffe brand. Without a reliable way to assure buyers their coffee is coming from the right place, a cloud of doubt shadows the ECX.

Single-origin coffee and direct trade relationships with importers can be the key to breaking cycles of poverty in coffee-producing countries. (A previous post I wrote about Jake Elster and Crop to Cup explores this topic further.) By working with specific importers and roasters, farmers can establish lucrative relationships that last as long as the farmer can produce a quality product.

But there is still the question of what to do with those farmers who make a living off coffee as a bulk commodity. "It's not so much about the brand as it is about moving coffee. People come in and buy the top coffees but you're still left with all the rest," says Elster. "When 90 percent of your coffee isn't bought by the specialty-coffee industry, there's less push to accommodate single-origin importers."

Elster told me that the ECX is starting to allow some exceptions to allow for direct sourcing of coffee, but the opportunity is still limited: "I think it's still too early to say too much about it. Everyone's watching and waiting to see if they do what they say they will."

Elster adds, "The big question is whether or not the specialty-coffee market will keep buying."
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Zach Dyer is a writer living in Saint Louis. He did his thesis research on coffee farmers in Southern Mexico. Since then, he has visited coffee plantations in Costa Rica and Mexico as well as roasters and cafés across the U.S. He blogs about coffee for Gut Check every Wednesday.

Starbucks Spent $130K Lobbying in 2Q

2009-08-18T19:21:00.000-07:00

Photo: Courtesy of Andrew Harrer/Bloomberg News

The Associated Press

August 17, 2009

WASHINGTON - Starbucks Corp. spent $130,000 in the second quarter to lobby on import tariffs, food labeling and other issues, according to a recent disclosure report.

The ubiquitous gourmet coffee chain also lobbied the federal government on legislation related to trade, taxes on foreign income, health reform, employee retirement, union organization measures and environmental matters.

In the April-June period, the Seattle-based merchant lobbied Congress, the Commerce Department, State Department and the U.S. Trade Representative, according to the report filed July 17 with the House clerk's office.

Copyright 2009 The Associated Press. All rights reserved.

First-ever Specialty Coffee & Tea Convention for the Middle East

2009-08-15T13:32:00.000-07:00

SCAA co-hosts first-ever Specialty coffee & tea convention for the Middle East

International Conference and Exhibition Set for Dubai, the Gateway to the Middle East’s Coffee and Tea Industry

Press Release

August 12, 2009

The first-ever Specialty Coffee & Tea Convention for the Middle East takes place Nov. 10 – 12, 2009 in Dubai, United Arab Emirates (UAE). The conference is co-organized by the Specialty Coffee Association of America, the world’s largest coffee trade association, and International Conferences & Exhibitions LLC, one of the Middle East’s pioneering and well respected convention management firms.

The Specialty Coffee & Tea Convention is expected to draw the largest gathering of coffee and tea traders from the Middle East and other international markets. The program features in-depth educational lectures and workshops, a focused coffee and tea exhibition, and a wide range of opportunities for networking, business sourcing and market intelligence.

The three-day convention also features the final round of the 1st National UAE Barista Championship, a highly anticipated competition for baristas from the Middle East. The winner, representing the UAE, moves on to the June 2010 World Barista Championship in London.

The Specialty Coffee & Tea Convention demonstrates the significant growth of the beverage market of the Middle East, particularly in the UAE. With thousands of specialty beverage outlets scattered across the country, the UAE has emerged as an important coffee and tea market and consequently a highly attractive destination for major investments in this sector.

Regional Coffee & Tea Facts

---A network of over 4,000 specialty beverage shops has helped strengthen the UAE’s position as the largest re-exporter and importer of roasted and soluble coffee beans in the region, according to the Journal of the Emirates Industrial Bank.

---The UAE has been ranked among the 15 largest re-exporting countries by the International Coffee Organization, a key figure indicating that the UAE serves as a vital link in the international coffee trade.

---According to Dubai Trade Statistics, the UAE’s specialty beverage shops account for up to 50 percent of the country’s coffee and tea demand, providing an important distribution and sales channel for trading activities of tea and coffee products.

---Tea imports in Dubai have been increasing steadily over the years to touch 96.6 million kilos in 2007, per recent statistics issued by the Dubai Tea Trading Centre.

---Coffee has been a highly valuable commodity in the country with the UAE being listed as the 15th largest re-exporter in the world by ICO.

Dubai, one of the most exciting and cosmopolitan destinations, is a strategic location for the convention because of its easy accessibility and solid background in the coffee and tea trade. The event is set for the Al Bustan Rotana Hotel in Dubai.

Complete conference details are available at www.coffeeandteaconvention.com. For a copy of the conference brochure, e-mail info@icedxb.com.

ICO sees steady coffee output in 2009/10

2009-08-13T09:59:00.000-07:00

A worker selects arabica coffee beans at Conquista farm in Alfenas in Brazil, July 7, 2008.
Courtesy: REUTERS/Paulo Whitaker

By Sharon Lindores
Reuters

August 13, 2009

LONDON (Reuters) - Total global coffee output in 2009/10 is forecast to stand at around 127 million bags, against 127.288 million in 2008/09, the International Coffee Organization (ICO) said in its latest monthly report on Thursday.

"There has been good export performance by Brazil, and Vietnam, while Colombian availability has continued to be below average due to weather conditions," the report said.

"Some reduction in exports has also been observed from Africa and Central America."

The arabica crop for 2009/10 in Brazil is 70 percent harvested and is expected to produce 39.1 million bags, down from 35.5 million bags in the previous year. This is due to the biennial cycle.

The estimated production of robustas in Brazil for 2009/10 rose to 10.8 million bags from 10.5 million bags in the previous year, with increased production expected in Africa, Asia and Central America, the report said.

"The world economic crisis has not affected general coffee consumption, although reports have been received of changes in patterns of consumption, particularly a shift to more in-home drinking," the report said.

Growth in global consumption is seen slowing this year to 129 million bags, up slightly from the 2008 estimate of 128.5 million bags. In 2007 consumption was 127 million bags.

ECX and its Effect on the Coffee Sector - Part III

2009-08-02T21:03:00.001-07:00

Part I
Part II

Is ECX Good for Coffee Growers?

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 multinationals 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% (the company’s official numbers always fall within this range) was directly sourced from East Africa. (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 roles 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 to promote the sale of Ethiopia's aggregate coffee export, ECX's bulk trading system poses a threat to commoditizing some of the distinct coffees in the world. Farmers that grow some 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 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 Berhane Hailu, General Manager of EGTE, and seven 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 system for 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.

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Also read:
Part I
Part II

ECX and its Effect on the Coffee Sector - Part II

2009-07-23T08:13:00.000-07:00

For Part I, click here

For Part III, click here

The Effects of ECX on Specialty Coffee Exporters and Buyers

I think, the first year of trading coffee through ECX was marred by problems and confusion. While the efforts made by ECX to take on a crop of global importance shortly after its launch is admirable, the strategies it went by to integrate the trade were far from being flawless. From the outset, ECX declared that it aims at creating a national standard commodity coffee classification system; it eliminated direct trade and traceability; and enticed the government to controlling the value chain from farm gate to the border. These changes have had remarkable effects on coffee exporters, buyers, growers, and the coffee sector at large.

I. Homogeneous National Coffee Brand

For a country with millions of poor people, the temptation of utilizing the high paying fewer coffee brands to drive sales and increase the value of the country's overall coffee production is high. That very thought has played a role in ECX' decision to homogenize all coffees grown in the same region through a standard commodity classification system.

This is clearly stated in the whitepaper released in April 2009 by the ECX titled: What is in a Bean? ECX and the Specialty Coffee Market. It reads, "We take the strong view that a significant majority of Ethiopian coffees have the potential to be considered fine coffees, and can be sold in the domestic market as such, with appropriate certification. The ECX model not only promotes the specialty coffee segment but also do so in such a way as to benefit the small farmer as well."

The document does not indicate how ECX' new system will benefit the small farmers but it stands firm by the assumptions and subsequent conclusions.

"The recent policy decision to include trading of all coffees within the Exchange is based on the strategic thinking that the [following] set of assumptions [is] correct:

1) A significant majority of washed Sidama and Yirgachefe and unwashed Harar could be considered specialty-plus in that they are branded and trademarked and have the potential to meet the fine coffee standards;
2) A significant majority of all Ethiopian coffees have the potential to be considered organic and obtain certification;
3) A significant portion of unwashed coffee can be promoted as forest coffee and/or bird friendly."

Although these assumptions are based on indisputable facts, they are not exhaustive enough to justify the conclusions drawn by the ECX. The fact that Ethiopia has the potential to increase its coffee qualities to the standards preferred by the global Specialty coffee industry does not give good reason for an immediate homogenization and an automatic upgrade of the classes of the whole coffee production. Ethiopia's coffee cannot be sold as Specialty coffees only because the country wanted or decided to. In a buyers' market, such as in the global Specialty coffee trade, unfortunately, the final say is not that of producers' but the buyers'. Specialty coffee buyers and roasters decide which plot to invest in and which crop to buy.

The alternative is for the country to invest in quality, branding, and slick marketing of its products to set itself apart from the competition and convince buyers. That way, Ethiopia could create the demand and subsequently the market for the coffee brands it wishes to create. This is, however, a daunting task and an expensive venture for Ethiopia, the poorest country in the world. In the absence of these endeavors, countries like Ethiopia are bound to the terms of the global coffee trade, at least for the foreseeable future.

The measures taken by the government to force sell all coffees through the ECX platform and ECX' decision to standardize the coffee grades into a national brand while, in ECX' estimation, only about 3.7% of the country's coffee production qualifies to be branded as a Specialty coffee, may cost the nation dearly. The farmers that are already producing the finest coffees will be the immediate victims of the new system as they are forced to give up the premium prices they are paid by buyers for their exceptional produce. Because, as soon as their coffees are blended with other coffees grown in the same region (in order to boost up the wholesale price for good of the country), these farmers lose their entitlement to the premium status their produce commands. This is unfair to the poor farmers.

Unless the ECX system of trading coffee as a commodity is corrected promptly, in the long term, the strategy risks watering-down the nation's coffee brands. Such a strategy undermines the superior standards some of the brands earned over the years and the result will be commoditizing the country’s valuable crop.

II. No Direct Trade, No Traceability

Specialty coffee buyers and roasters are puzzled and in panic over the ECX system. The biggest issue for these buyers is the loss of transparency and traceability. They need assurances that the bundle they want is the bundle they will get. The new system does not allow direct trade for single-origin coffee because it promotes the traditional trade relations model where commodity coffee sales is brokered in bulk, thus no traceability. The new system basically lumps together bundles of coffees into a generic class-type-grade combo.

Independent millers who used to buy coffee from farmers, mill it, escort it through the former auction systems, and export it are no longer allowed to do so. They are now required to sell the beans to the ECX, where its origin is lost. The possibility of tracing a bag of coffee to its origins is eliminated in this process. The ECX promises a secure inventory management and a guaranteed warehouse receipts system that ensures "zero delivery default and reduces mixing of coffee origins" during the marketing process. But, as far as buyers are concerned, traceability is lost because there is no way of proving whether the plot they will receive is the one they wanted.

This is remarkable because while the global coffee industry is increasingly moving towards greater transparency of coffee origins, tracing back all the way to individual plots of land, the Ethiopian system is heading in the opposite direction.

III. Government's Hands in the Bag

The third effect on the exporters and farmers has to do with the government's intervention.

While it is good, though not a necessity, that the new exchange system replaced the auction centers with an electronic trading system, unfortunately, ECX also tempted the government to enter into the market as a major player. Some private businesses are now effectively locked out of the market and, in an unprecedented move, the government has emerged with a strong control over the coffee sector.

In what played out early this year as a reaction to some of the major exporters' hesitance to sell their coffee stocks at the prevailing prices if sold through the ECX, the government confiscated coffee beans from the exporters and also tasked the state owned profit-making enterprise called Ethiopian Grain Trade Enterprise (EGTE) with exporting coffee. This crack down on the exporters had a devastating impact on some roasters and their relationship with the country as the country failed to fulfill its contractual agreements during the last harvest season. Also, it raised the question of what else would the government do in the future.

The ECX is currently negotiating with representatives of the Specialty Coffee Association of America (SCAA) and others to resolve this one problem. In the mean time, as the next harvest season approaches, the EGTE appears to be very well positioned to claim the biggest market share in the country's coffee export.

Domestically, this level of engagement by the government in exporting beans produced by smallholder families is alarming because of the imbalance of power and the obvious conflicts of interest. The government has its influences in almost everything from policy making, distribution of farm inputs, capital, to the land. This is the farthest one can get away from a free market system.

All these affect farmers as their sales volume is directly dependent on the volume sold by exporters.
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Next post: Part III - Is ECX good for coffee growers? To read, click here