Brazilian Drought Brewing Ethiopian Coffee Resurgence

Lema Edito & Sons Coffee Producer & Exporter S.C owns a 128.5ha plot of land in Limu Genet in the Jima zone of Oromia, on which it cultivates coffee. The company has been in the coffee business since 2000, according to Wondessen Lema, its general manager. The share company harvests 10qt to 12qts of coffee a hectare once a year from its farm. In its 14 years of existence, the company has had its ups and downs triggered by various factors beyond the control of the company.

Bad weather and market slumps have left their marks on the history of the Company. But the past few weeks have brought nothing but good news for the coffee exporter. In the second week of March, the Company, which exports its products mainly to the European and American markets, was able to sign an agreement with a buyer from Europe to supply coffee in its stock, for a mouth-watering 3.2 dollars a pound (lb) – around 0.45kg.

“The buyer is an old customer and we signed the deal for the amount we have in stock,” Wondessen told Fortune.

Just a month and half earlier, a pound of exportable washed coffee was traded on the Ethiopian Commodity Exchange (ECX) floor – the sole marketing venue for major coffee trading in the fifth biggest coffee producer in the world – for 1.15 dollars a pound. At the same time, at the end of January, a pound of coffee was sold for only 1.25 dollars on the New York Intercontinental Exchange (ICE) – the international price index.

The sudden surge in international coffee price, which began in mid February, was triggered by reports of drought in Brazil – the biggest producer of coffee Arabica, accounting for 29pc of the global coffee output.

Following the drought in the coffee producing belt of Brazil, the price of coffee in the futures market has shown an increment of 32.5pc in a matter of 20 days, according to the ICE. The export coffee market is a futures trade, where deals are made now for coffee shipments in months to come. Coffee, the second most sought after commodity, next to oil, has become a 100 billion dollar commodity, with 70pc of the global production being coffee Arabica.

This drought – which is being labelled as historic by the Brazilian media and has forced more than 140 cities in Brazil to ration water – has increased the price of not only coffee, but also sugar and soya bean. Brazil is the source of more than one-fifth of the world’s sugar output and about one-third of soybean production, according to the consulting firm Safras & Mercado.

Even before the drought began, there were concerns that there would be a global coffee deficit. At the beginning of the year, a closely-watched report by a commodities trading firm, Transworld Futures LLC, noted that the global coffee market could face a shortage for the first time in three years.  The report predicted that coffee supplies will be about five million bags lower than consumption for the 2014/15 season.

The sudden price boom is not making everyone happy though.

Mormora Coffee Plantation signed a deal with its foreign partner for the supply of coffee before the start of the price surge – a benefit it will miss.

“We signed our agreement on June 6, 2013, for 2.4 dollars a pound, to supply for a year and we have to honour the agreement,” Hailesellasie Taddele, general manager of the company, told Fortune.

The plantation owns a 200ha coffee farm in Odo Shakiso, in Guji zone of the Oromia region.

But Hailesselasie believes some of his counterparts abroad would not have acted similarly under such situations.

“We have incurred huge losses in the past because of contractual breach,” Hailesselasie remembers. “There is no level ground for buyers and sellers, and the Ministry of Trade (MoT) is powerless to change this.”

He was recalling a deal he had two years ago with a customer in Panama.

Ethiopian exporters normally stick to their contract obligations, but the importers in the recipient countries may not respect their contract and refuse to open a Letter of Credit (LC), according to Wondessen. An exporter Wondessen knows in Limu Genet had to go through a similar ordeal when a buyer from Australia declined to make the purchase  after signing an agreement when prices went down from 2.4 dollars to 1.7 dollars in 2013.

“We respect international trade laws and work to dismantle trade barriers for our exporters,” Amakele Yimam, public relation and communication head at the MoT, told Fortune.

Importers, especially those from the Middle East, are known for this kind of behaviour, according to an exporter who talked to Fortune on condition of anonymity.

Yet this is a rare incident, according to Yilma Gebrekidan, general manager of the Ethiopian Coffee Growers Association(EEA).

“Most of the importers that buy Ethiopian coffee are respected partners,” he said. “There are some dealers that want to take advantage of any gap in the market, yet these are very small in number.”

And such problems are better dealt with at the national level and through trade negotiations, rather than at the individual company level, says Seid Nuru, (PhD) Macroeconomic division head at the Ethiopian Economic Association.

“It all depends on the terms of trade and, with limited bargaining power, the terms may not be satisfactory for Ethiopian exporters,” he argued.

The Ministry is aware of the problem and hopes it will change in the future, as the country’s influence increases and with it its negotiation capacity, according to Amakele. But, for now, it has to settle for providing information to exporters.

The MoT, the governmental body designated to spearhead the growth in the export performance of the country and increase the size of foreign exchange that the country earns through trade – vital for financing major infrastructural projects in the country – has reported a dismal performance in its first six month report of the year.

The Ministry achieved only 65.49pc of its target of two billion dollars from the export sector in the first half of this fiscal year.  The target for coffee during the same period was 333.2 million dollars, but the performance was only 222.5 million.

Following this result, the MoT has set up a command post to facilitate the achievement of the target export value, according to officials at the Ministry.

“We have enough product, but traders were not incentivised enough to bring their produce to the market,” Amakele said. “But now, the current price surge is expected to change the trend.”

The hopes of the ministry seems to be becoming reality, at least partially. Following the price increment, the volume of unwashed coffee traded on the ECX floor has increased by 500pc, in the last three months alone.

But the trend of volume sold in the normal washed and specialty coffee category does not show the same trend.

“There is always a lag witnessed in the increment on the volume of supply on such kind of products, due to the effects of prior contracts and the seasonal character of the product that takes time before the product is ready for market,” the macro economist explains.

An economy based on commodity exports, especially an agricultural export product is always volatile, according to Seid.

“Countries that depend on earnings from commodity exports, unless they are strategic minerals, will always stay at a disadvantage,” he said. “This has been clearly shown in the volatile coffee export of the country.”

Since there are limited barriers to entry, countries with no substantial background and technological base can become major competitors in the market in a relatively short period of time. Vietnam was able to take a prominent place in the international coffee market and Ethiopia did the same in the floricultural market, with limited experience very quickly.

Ethiopian exports of coffee, under the Harari and Abyssinian brands, started in the 1920s. Currently, up to twenty percent of the Ethiopian population, directly or indirectly, depends on coffee production and coffee trading for a living. The product earned close to 25pc of the foreign exchange that the country earned in 2012/13 and accounts for two percent of the country’s GDP, according to the ECEA.

The country’s coffee production has increased over the last five years from 230,000tns in 2008/09 to 400,000tns in the 2012/13 crop year, with an annual average growth rate of 11.3pc. Half of that is assumed to be consumed locally. And with the per capita consumption of 2.3kg, the country leads the continent in domestic consumption.

Though there is a marginal increment in the export of value added products like roasted and branded coffees, still it accounts for a very small portion of the total export, with nearly 70pc accounted for by sundried coffee and nearly 30pc by wet-processed (washed and semi-dried) coffee, according to the Association.

The government plans to increase the earning that the country gets from coffee to over two billion dollars by the end of the GTP and increase the volume of export to 800,000tns. It has managed to reach only around 1.1 billion dollars in the 2011/12 fiscal year – to date the biggest amount.


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