2017 turned out to be an unforgettable year for players in the coffee industry. An action praised by observers in the international market, the industry saw the introduction of rules that changed a trend that existed for over a decade.
A proclamation ended the monopoly the Ethiopian Commodity Exchange (ECX) enjoyed in the coffee market, with exporters given the permit to buy coffee directly from farmers without the involvement of the Exchange.
Industry insiders called the arrangement a vertical integration, a system that has gained popularity in the last two years, though few new of its existence after it was introduced in the first three years.
It appears the industry is now reaping the fruits of the reforms that was first challenged by not only the leaders of the ECX but also its members (intermediaries and exporters). These have paid a hefty sum of money to get seats at the Exchange, in order to trade on the floor of the Exchange.
Partly to the credit of officials who have paid a price to make the system a reality, coffee exports reached new heights this year. Announced by Oumer Hussien, Minister of Agriculture, coffee exporters generated USD one billion in the last 10 months. The figure is higher than the total proceeds made from the whole year in 2021.
Perhaps, the record-high performance is a rare achievement in the public sector, which is characterized by overambitious plans that are usually unmet, as it is designed without considering the reality on the ground.
Officials at the Ethiopian Coffee and Tea Authority bucked the trend, achieving over 100 percent of the target, a rare achievement in the export sector.
“The reforms are bearing fruit,” said Shafi Umer, deputy director of the Authority.
Coffee accounts for over a third of Ethiopia’s exports, valued at USD three billion, in the last 10 months. It brings more foreign currency than aggregate proceeds made from gold, flower, sesame and khat exports, which are the other four major exports of the country.
It is also a source of livelihood for over 7.7 million Ethiopian farmers or 35 million households. They have produced 5.8 million quintals of coffee during the last harvest season, a seven percent jump from the same period in the preceding year.
Almost half of coffee produced locally is used for local consumption, even though the cash crop has always been the number one export item for the Horn of African country. This, however, does not mean the volume of exports is not growing, which has witnessed an increase of over 40 percent since last year.
Like the officials, exporters also attribute the uptake with the surge in number of exporters shifting to vertical integration. The Authority says it accounts for over 90 percent of the coffee transacted.
South Coffee Growers Association is among the entities that supports the system. Its president, Zerihun Kamiso, said the introduction of vertical integration as an alternative to trading at the ECX, encouraged exporters to buy more.
“The long supply chain has discouraged many from using business as usual approaches. And exporters found buying directly from farmers is more convenient than bidding at the ECX, an approach that boosted their exports,” said Zerihun.
But this comes with a cost.
The price of coffee skyrocketed in the last two years, with a kilogram of unwashed coffee bean costing 60 birr, three times higher than the price registered in 2020. Had not the exporters offset this by boosting their shipments, it would have made the business unappealing in the eyes of industry players.
“I take the price surge as a blessing since it indicates farmers are earning more, which was a luxury before the reforms were implemented,” added Zerihun.
Not only is vertical integration credited for the success achieved in the industry but also the National Bank of Ethiopia, for its rules placed instructing commercial banks to disburse 12 billion birr in loans from their reserves to avert liquidity shortages faced by growers.
The regulatory body introduced a price floor to discourage exporters from trying to make a profit by selling the cash crop for a small amount of money. Officials believe this undermines the efforts of the country to become a price setter in the market.
As of last week, the price floor, updated in a weekly basis, has reached USD 5.5 a kilo.
“The introduction of a minimum price has contributed a lot in reducing malpractices in the market as some were exporting coffee at a very low price just to generate forex for the sake of importing goods and make a profit by selling at a higher price,” said Zerihun, calling such a practice a madness.
For him, such a practice needs to be discouraged further, going as far as calling for a complete surrender of forex generated from commodities like coffee to the central bank.
“I don’t think genuine exporters won’t be discouraged if the surrender requirement was increased from the current 70 percent,” said Zerihun, adding, “Doing so would push exporters to bargain for a better profit in the international market.”
Many exporters disagree.
A case in point is the reaction of exporters soon after the new surrender rule was put in place by the end of last year. Many were hoarding, while some temporarily stopped buying items from farmers, an action that was followed by authorities’ issuing stern warnings.
The Ministry of Trade threatened disgruntled exporters with confiscation or suspensions, if they are caught hoarding commodities or involving in similar activities.