“Ethiopia Needs a Strategy to Enter the Global Processed Coffee Industry.”

Adugna Debela (PhD) took the role of Director General at the Ethiopian Coffee and Tea Authority three years ago, at a time when the coffee value chain was misplaced and badly affecting quality and export volumes. He immediately managed to implement the vertical marketing strategy which enabled coffee growers and suppliers to export directly. This, and other undertakings in the coffee sphere, enabled it to gather record foreign currency earnings—USD927 million. The price of Ethiopian specialty coffee also grew over the last two years by 35Pct.

Meaningfully exporting processed coffee is the next hurdle to overcome. This is a much tougher task requiring upsetting the global status-quo and engaging multinationals to roast in Ethiopia.
Primarily, Adugna has been a university lecturer especially at Jimma University. He got his doctoral degree in Crop Eco-Physiology at Wageningen University and Research in the Netherlands. He is well published with various research pieces in international journals.

What contributed to the remarkable coffee performance of this year?
The major bottleneck to Ethiopia’s coffee sector is very low productivity. Secondly, the market chain is very complex, involving layers of suppliers and brokers. Under the previous Ethiopian Commodity Exchange (ECX) model, farmers could not sell their coffee directly from the farms. Now, they can promptly export their coffee under the new policy which has allowed vertical marketing.

For the first time, a record-high volume of 248,000 tons was exported this year. The price of our coffee also grew by 35Pct in the period as quality also improved. For the first time, Ethiopia’s coffee generated USD927 million, as a result of our reforms in production and straightening of the market chain.

This year, over 300,000 hectares of old coffee plants have been removed and replaced by new seedlings. This will generate even more coffee in three years’ time.

What is the current productivity of coffee farms and how much land is cultivated with the crop?
Two years ago, productivity was six quintals per hectare. After reforms were enacted, it has reached 7.5 quintals per hectare. Coffee is capital intensive.
Currently, close to 900,000 hectares of land is covered and actively yielding coffee production. However, in total, 1.2 million hectares land is planted with the bean. This year, the total harvest from the 900,000 hectares, was 600,000 tons.

Out of the total production, on average 48 to 50Pct is consumed locally. The high local consumption is advantageous, as whenever international prices fall, we are not forced to export at a loss. We expect a growth in productivity and production in the next three years.

The majority of specialty coffee varieties are from Oromia, Sidama, and South regions. Are there plans to make these areas prioritize coffee over other crops?
Most Ethiopian farmers own less than 1.5 hectares. Even this is mostly in Oromia. South and Sidama regions are densely populated so farmers have less than 0.5 hectares. So, households use their small piece of land to grow more critical foods, rather than coffee. Other regions do not grow coffee. We are planning to attract large investments, including FDI, into commercial coffee farming.

Farmers do not prioritize coffee unless they earn high prices and incentives from coffee. This was the major objective of the Cup of Excellence (CoE) intervention.

What has been the impact of vertical marketing thus far?
Now, we only have the supplier and exporter in the market chain. Firstly, coffee is reaching exporters very quickly. Secondly, we simply now know where every coffee is grown that is supplied to exporters. Thirdly, there is no quality issue now. In all, the vertical market has solved prior problems encountered with ECX.

One major problem with ECX was the variance present between sampling and bulk orders. The exporter is given high grade samples, but after confirming and buying bulk, low grade coffee is dispatched. This discrepancy created a bad image for Ethiopia with international buyers. The quality coffee is smuggled out from ECX warehouses.

Now grading is done through the Ethiopian Coffee and Tea Authority (ECTA), without ECX intervention. Over 90Pct of Ethiopian coffee exported this year was processed through the vertical marketing model, without passing through ECX.

As a result of this marketing model, Ethiopian coffee is fetching higher prices in the international market. This year, Ethiopian coffee was sold for USD4,000 per ton, on average. Compare this to the price of USD2,800 of last year. We are now moving the whole of Ethiopian coffee exports towards specialty coffee.

Which modality is better in terms of fetching higher prices?
Under the ECX model, suppliers give their coffee to ECX after which point the supplier has no clue where the coffee is, which exporter bought it, and to which country it was exported to. The supplier does not even know how much his/ her coffee was sold for. Only the transaction facilitators at ECX know.

But under vertical marketing, the exporter and the international buyer meet directly. They negotiate on how much the buyer can add on the minimum price which we set weekly—not lower by more than 5Pct. This garners a better price. Plus, under the modality, the exporter has no cost of loading and unloading. Under ECX’s model you pay for loading, unloading, warehouse rent, and commission for transaction facilitators. Prices are high through ECX, yet neither the supplier nor exporter benefits. Coffee growers are now getting better prices, which is highly encouraging for them.

Has the vertical market model fully replaced ECX’s role?
Completely. ECX is only an option now. If there is a supplier who wants to transact through ECX, it can do so. And if there is an exporter who wants to buy coffee from ECX, it is possible. But this year, the transaction of exported coffee has totally been shifted from ECX to the vertical market.

So, ECX is gradually fading from the coffee market and its seats will be cheaper now?
Yes, unless it reforms its system. As a technology-oriented platform, ECX is important. But its service quality, trustworthiness, and flexibility must be reconfigured and reformed. The vertical market model was designed after ECX failed. It has solved the suffering of many coffee suppliers and exporters.
There are still sesame and beans being traded on the platform.

How do you reconcile the difference in specialty coffee prices sold in the international market and those seen at the Cup of Excellence (COE) competition? Do you think the pricing system in the international coffee market is justifiable?
In the New York commercial market, coffee from many countries is traded. Ethiopian coffee is high quality while Brazil and Vietnam have lower quality. But they produce in bulk and export. International coffee processors need and use Ethiopian coffee to compensate for the poor quality of such coffees.

Ethiopian coffee is used like spice. The global processors buy ten quintals of Brazilian coffee, one quintal of Ethiopian coffee, and blend it at a determined ratio. This means Ethiopia cannot export large volumes. Unless Ethiopian coffee is identified in the global market, it will remain just an ingredient for other coffee brands. We have already introduced national trademarks for Ethiopian coffee, to make it Ethiopia’s property. This helps in avoiding the mixing of Ethiopian coffee with lower grade coffees from elsewhere. We are trying to register our trademarks in various countries and this will help towards the protection of our property rights.

What was the objective of CoE? How will it continue in years forward?
Major objectives of CoE include the promotion of Ethiopian specialty coffee and linking of our growers directly with international buyers. Previously, only some five countries were buying Ethiopian coffee. Through this competition, however, 33 countries purchased our beans. This year, bulk specialty coffee exports fetched USD70,000 per ton on average. Yes, only small volumes are sold through the contest, but the impact on regular exports is immense.

CoE began in Ethiopia in 2020 by USAID’s Feed the Future program. They covered all expenses for the last two episodes with 2021’s edition being their last. Organizing this competition is expensive, especially the tasting equipment. However, USAID will donate the equipment which can be used for the next fifteen years and we will cover only the running costs. Banks and other companies and institutions are willing to sponsor the running costs. Government can also allocate additional budgeting.

We have currently unified the six coffee associations in Ethiopia that were previously split up into exporters, roasters, and others. The newly established Ethiopian Coffee Association will take over CoE through a public-private partnership.

It has been observed that exporters lower prices to secure buyers. What is the authority doing to stop this?
This year, there were 850 active exporters out of the total of over 1,500 licensed coffee exporters.
Most of them engage just to access foreign currency for their import businesses. So, they sell coffee at prices much lower than what Ethiopian coffee deserves. It is even common for them to export at lower prices than their sourcing costs. It is dumping, not exporting.

Therefore, we set minimum prices for each grade as of last year. No exporter can now sell below that threshold. Prices have been set for 400 coffee stocks. As a result, our export values have grown by 35Pct since last year. This was accomplished without much change in quality or volume. The standardization of the floor price also boosted the bargaining power of our exporters.
We revise these prices weekly and send updates to the central bank and customs.

How much does Ethiopia lose to coffee contraband?
We use software applications placed onto officers’ tablets to track all happenings and details in the coffee chain in real time. We trace the transportation between the growing areas to warehouses in Addis Ababa. When a truck departs with coffee from any corner of the country, its movement is controlled by our software. When trucks reach the numerous control stations, officers check the details and truck drivers sign off. Size and type of the coffee, details of the driver, and particulars of the exporter and warehouse are all recorded. The time required between two control points is well known and if there is a stoppage or change in direction, we react immediately.

Once the truck unloads the coffee at the exporter’s warehouse, we know how much coffee the exporter has to ship, which should match the contract for export. Before this technology, we used to count coffee packs at every station.

We are working with customs and the PM Office regarding contraband. We usually apprehend coffee being smuggled.

Can Ethiopia manage to begin exporting meaningful amounts of value-added coffee? What challenges inhibit the penetration of the monopolized international processed coffee market?
We have already ratified a policy and proclamation for local value addition. The environment has already been staged but facilitating investments is progressing. The Coffee Roasters Association has been established and is working on this.

But we cannot compete with international processors like Starbucks. They only buy raw Ethiopian beans, not processed coffee. They buy raw and mix with other countries’ coffees to create their own recipes.

Ethiopia needs a strategy to enter the global processed coffee market. Until the CoE competition came to Ethiopia, there weren’t any global consumers who directly bought and consumed Ethiopian coffee. These people access Ethiopian coffee from global processors like Starbucks who market it by mixing with other coffees.

We are working on joint ventures with foreign investors to establish high-tech coffee processing plants in Ethiopia. Chinese investors are working with local coffee processors, to this end. We can then directly enter the Chinese market with our own processed coffee brands. Thus far, we have managed to export processed coffee worth only USD3 million per year.

What is the current status of investments coming into the processed coffee sector?
Chinese investors have already taken shades in Jimma Industrial Park to collect coffee form the area, process, and export. Other investors have also began working inside Yirgalem Integrated Agro Industry Park.

What is 2021/22 fiscal year’s export plan?
We plan to export 280,000 tons of coffee and generate USD1.1 billion. In July 2021 alone, we planned 31,000 tons and USD71 million. We achieved it just three weeks. There is sufficient production. EBR

9th Year • September 2021 • No. 100


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