Coffee Export Success Story Overrated – Ethiopian Business Review

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Ethiopia has historically produced some of the best-reviewed single-origin premium coffee beans and boasts the status as the birthplace of coffee. Ethiopian coffees are well renowned for their complexity—strong, wine-like flavor and a very wild acidity. The cash crop remains the nation’s major export item covering over 30Pct of the country’s total export earnings. Various administrations have attempted to fully tap into the country’s full potential for coffee and other agricultural products. The launching of the Ethiopian Commodity Exchange (ECX) was one such attempt, seeking to secure a larger and fairer share for Ethiopian farmers. Recently, coffee exporters, particularly from the State of Oromia, have walked away from ECX to join the vertical scheme where farmers can export or sell directly to exporters or suppliers. With authorities crediting this move for burgeoning exports, there are more complexities at play, writes Selome Getachew.

The rich, dark liquid that travels worldwide and lubricates our economies should be credited to Kaldi, an Ethiopian goatherd. And like oil, it is one of the most traded commodities. Every day, more than two billion cups of the beverage are consumed, and for many people, daily life would be impossible without it. There are between 6,000 and 10,000 different types of this magical bean, which are typically differentiated by their geography, altitude, and cupping score rather than by type. Being the birthplace of this magical bean is more than a blessing for a nation.

“I remember when cabinet members in the previous administration opened champagne to celebrate Ethiopia’s total export revenue surpassing USD1 billion,” Abiy Ahmed (PhD), Prime Minister, shares his pride with Parliament. “Now, just our coffee export revenue has surpassed a billion dollars.”

Ethiopia exported 300,000 metric tons of coffee during 2021/22 FY, eventually generating USD1.4 billion in revenue, Oumer Hussien, Minister of Agriculture, tweeted on July 10, 2022. According to him, compared with recent yearly coffee export earnings, the country generated an additional USD500 million during the last concluded fiscal year. As per him and other officials, this is due to both an increase in price as well as quantity.

Feysel, Owner and Founder of Testis Coffee, has been in the coffee business for the past three decades. After spending around 20 years as a coffee supplier, he went on to become a specialty coffee exporter. In the previous fiscal year, his performance garnered him USD24 million, a 50Pct increase from the preceding period’s USD16 million. However, volumes haven’t increased as much as he explained to EBR, pointing out that coffee prices have doubled worldwide in 2022. Many experts suggest this was due to pervasive drought that afflicted Brazil’s coffee arabica heartlands. The South American nation is the world’s leading grower and exporter of the cash crop.

In 2020/21FY, Ethiopia exported 248,000 metric tons of coffee—around 50,000 tons less than this fiscal year. This slight increment points to higher values being the reason for the revenue jump, and less to do with larger volumes. Quantities grew by 20.54Pct while revenue grew by 53.8Pct.

The United States Department of Agriculture’s (USDA) global coffee report, released on December 20, 2021, estimates Brazilian Arabica and Robusta production at 35 and 21.3 million bags respectively for 2021/22 FY. This brings the aggregate estimated Brazilian production to 56.3 million bags for 2021/22—a decline of 13.6 million bags or 19.5Pct from a record-high crop in the previous season. Resultantly, prices rose steeply at the beginning of the 2021/22 season, further influenced by frosts in certain Brazilian growing areas. It is worth mentioning that arabica quotations were already in an upward trend at that moment because of 2021/22FY’s lower production, due to the negative biennial cycle and dry weather in 2021.

These prevailing global conditions were lost on government authorities, however, as they related the increase in the value of exports to the vertical scheme they recently introduced through which farmers are encouraged to sell their produce directly to exporters, cutting the usual path of the Ethiopian Commodity Exchange (ECX).

ECX paved the way for producers to directly deliver export products to nearby warehouses and later take the competitive exchange floor selling price of the exchange. The ECX floor has benefited producers in terms of securing a competitive price and risk-free payment.

Feysel also confers that the increase in export revenue also had little to do with the diminished role of ECX.

“The introduction of ECX brought a sense of comfort to exporters and traders,” he told EBR. “ECX created a path of confidence for both the farmer and the exporter to get payment and quality products on time.” However, he also recognizes that ECX had been deteriorating through time. “Someone who auctioned and paid for Grade 1 high-quality coffee might receive 3rd grade and even sometimes less.  ECX continues to kill itself, for no reason.”

To overcome the issues facing ECX, in early 2021 the Ethiopian Coffee and Tea Authority (ECTA) introduced vertical integration—a scheme that connected exporters directly with suppliers or farmers, rather than through the ECX-facilitated platform, as an alternative to trading coffee export. This suddenly drained out coffee produce being supplied to the electronic trading platform of ECX with coffees from the State of Oromia almost completely stopping.

Despite authorities claiming the increased revenue, exporters including Feysel do not see much improvement in the quantity and quality of deliveries from sites. “I usually prepare my coffee from my 20 washing stations. But for additional supply, I am forced to enter vertical scheme agreements. The quality is shocking most of the time. Coffee export, as a whole, could be endangered if the trend continues.”

Adugna Debele, Director General of ECTA and a Scientist on coffee production, said that “the major success for the sector may not be related with the volume, but with the cutting-out of irrelevant market processes.”

He added that the authority has been giving prudent attention over the past two years to the export of specialty coffee, which has extraordinary value over commercial coffee. “In the previous fiscal year, specialty coffee contributed 35Pct. This expanded to 60Pct in the just closed 2021/22 FY. We will continue on this strategy to generate more revenue from the sector.”

Temesgen Cherkos, Export Manager of Hadeed Trading, the third top coffee exporter this year, prefers the vertical integration scheme over ECX. Around 75Pct of the company’s export was commercial coffee. In similar fashion, his company’s exports blossomed to reach USD75 million in 2021/22—a doubling from the previous USD38 million. Like Feysel, Temesgen claims that this rise in value did not occur because they exported larger volumes but rather because of increased prices of coffee at the New York Stock Exchange. Though the two exporters agree on this point, they do differ in their preference for marketing modality—with Temesgen preferring the vertical system over ECX, in contrast to Feysel.

Unaccounted-for commission payments in this system are another feature that make the vertical scheme challenging. These payments are neither recognized from the exporter’s side nor accounted as income for the middlemen.

“Most, if not all middlemen take their commission under the table with no tax deducted from their payment,” Dagmawi Yimam, CEO at KANYA Business, told EBR. It is only three years since they joined the coffee export business but the supply-chain of coffee in the current market with such irregularities is dampening their hopes for the sector.

“Unaccounted commissions are becoming a huge problem for our company because we have to pay the 30Pct tax that is required by law to account for the commissions as expenses. They are becoming a huge amount in value,” Dagmawi told EBR, noting that it is being paid out to middlemen who have minimal impact on the system and are practically exempted from paying tax as their income is not recognized.

Dagmawi adds further problems including the lack of standardized quality and the fact that suppliers demand money before the coffee is physically transferred to the exporters’ name. The vertical scheme is full of disputes. A government official on the condition of anonymity told EBR of the piling disputes that have been received by his office over the past year. The disputes filled between exporters and suppliers operating on the vertical scheme are increasing from day to day so much so that authorities simply advise the parties to resolve their qualms through negotiation.

Dagmawi testifies that that problem was one of the reasons for the rejection of ECX by stakeholders, i.e., incongruent quality. Yet, this same problem is increasingly featuring during vertical marketing. His company once bought a truckload of Grade 3 coffee but, upon arrival, turned out to be Grade 7. “We went to the Coffee Quality Inspection and Certification Center for a second tasting and the result proved us right. However, because the supplier did not agree with both results, we went on to ECTA. To our disbelief, the authority requested us to come to a negotiated agreement instead of giving judgement based on the findings that were from a government institution. Because of such situations, many exporters have lost faith in the system.”

It is not only the exporter who is weeping from the unmonitored system, as some would classify the vertical scheme. Suppliers are also sharing the pain. Girma Duka, a 76-year-old coffee Trader who has spent almost five decades in the field, feels the hurt. His entire family, including grandchildren, depend on his coffee washing station. He delivered washed coffee worth ETB20 million for a well-known exporter but received only ETB5 million one week after delivering.

“Every 15 days I visit him to beg for my own money, but with no success,” Girma told EBR. “The bank will foreclose my washing station if this continues for an additional month. This will shatter our entire family life.” One benefit of ECX was the effectiveness of its payment system.

In the next 15 years, the government has plans to export to USD4.6 billion of coffee, increase farmers’ income to USD3.5 billion, and generate employment opportunities for 2.7 million people while exporting 1.26 million metric tons.

Yet, 2021/22 FY was also recorded as the highest for contraband coffee sales. Market insiders point out that vertical signed coffee goes directly to Merkato for local market consumption which is illegal but offers higher returns.

Deteriorating supply chain problems, failure of quality control, and uninformed players in the system create reasons to not be fully proud of USD1.4 billion of coffee exports in a year. Further, for a country that runs consistent trade deficits due to the inefficient production of exportable goods and logistical difficulties, it is unwise to not give added attention to the number one export commodity that contributes to the livelihoods of more than six million smallholder farmers. The government and stakeholders should not rest on their laurels but look to continuously better coffee export performances. EBR


10th Year • Sep 2022 • No. 110

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