After the last fiscal year’s poor performance, last week’s Second International Ethiopian Coffee Conference came against the backdrop of low international prices and a wide range of concerns. With Coffee making up 19.5pc of the governments lofty 5.6 billion dollar export revenue target, many improvements are required if one of Ethiopia’s proudest sectors is to thrive, reports BINYAM ALEMAYEHU, FORTUNE STAFF WRITER.
Coffee – reputed to be the second most sought after commodity, after petroleum – has become a 100 billion-dollar plus commodity worldwide. Nevertheless, the past two and half years have seen a sustained downward trend in prices. Producers worldwide complain of not being able to cover the cost of production. Total production in 2012/13 was around 145 million bags. Consumption growth in traditional importing countries, however, has slowed to around one percent.
The challenge has been felt by Ethiopia – the fifth largest coffee producer country in the world. During the 2012/13 fiscal year, revenue from coffee dropped to 746.4 million dollars – a decrease of 10.4pc from the previous year. This was in spite of the 17.7pc increase in export volume, to 199,104tns, as data from the Ministry of Trade (MoT) indicates.
After jumping up to 3.4 dollars a kilogram in the year 2010, from 2.6 dollars per kilogram in 2009, coffee prices continued to rise significantly, even reaching 5.5 dollars the next year. Its drop to 3.8 dollars a kilogram in 2012 was the beginning of a downward spiral. Thus, in October 2013, it stood at a mere 2.4 dollars – its lowest in five years.
The volume of coffee exported stood at 199,104tns in 2012/13. This is lower than figures for the two previous years.
It was against the backdrop of these worrying trends that the capital of one of the top coffee producers in the world and the origin of coffee saw a gathering of 250 traders, exporters, roasters, policymakers and regulatory institutions, on November 4 and 5, 2013, at the Sheraton Addis.
The event – the Second International Ethiopian Coffee Conference, jointly organised by the Ethiopian Coffee Exporters Association (ECEA) and USAID – was designed for local exporters to expand their network within the international market. This is with the aim of ‘Building a Sustainable Coffee Future’ for the country.
“Issues relevant to Ethiopia’s drive to secure its legitimate place in the international market will be addressed,” Hussein Argaw, board director of the ECEA said in his opening address.
Making his first appearance at the event, Robério Oliveira Silva, the executive director of the International Coffee Organisation (ICO), discussed the importance of market transparency and the underlying causes of market imbalance, which he identified as unfair competition. Risk management and economic sustainability are the remedies, he said.
“We will endeavour to continue with our daily, monthly and quarterly monitoring of prices, along with statistical data to provide useful information to the market,” he told participants.
The problems facing the export of Ethiopian coffee, however, elicited the most debate when tabled for discussion during the last session of the Conference.
All eyes were fixed on the podium of the ballroom of the hotel during the session, which was devoted to hammering out issues related to procedures and logistics in the export of coffee. Top-level officials from the Ethiopia Commodity Exchange (ECX), the Ministry of Transport (MoT) and the Ethiopian Shipping Lines & Logistics Service Enterprise (ESLSE) were faced with questions and concerns from participants on the anomalies in the export of coffee.
During the 2012/13 fiscal year, Ethiopia traded its coffee with differentials against the New York market. The prices for different varieties of coffee, which take up most of the space on the ECX trading floor, have recently been generating frustration from exporters, who say it does not reflect international market conditions.
“We are price-takers,” said Abdullah Bagersh, owner and general manager of SA Bagersh Plc. “But the price discrepancy is causing us to sell less.”
Some exporters, like Abdullah, attribute this to the illegal transfer of coffee to the local market.
“You should install stricter controlling methods,” suggested another one.
These concerns have previously been echoed by officials who talked to Fortune. This includes Anteneh Temesgen, director of the agricultural commodities marketing, and control directorate at the MoT, who said that contraband sales have mushroomed in Mercato and regional towns.
Some buyers are willing to pay premium price for export-quality coffee, leading exporters to offer higher prices at the ECX, since they are serving a different market than the mandated international one, according to him.
Abenet Bekele, chief strategy officer (CSO) of the ECX, argues that the Exchange is only a formal trading floor and that it does not intervene in price determinations.
“We cannot interject ourselves into the market and determine prices to offer,” he said.
The ECX would take some risk management measures, if prices were to show a dramatic variation, he underscored.
The suggestion from some international experts was that the ECX has to make the trading floor more transparent.
Producers and exporters have to actively engage in dialogue with the authorities to work out solutions, said Maja Wallengren, a Danish reporter covering the coffee industry.
The Ministry of Trade (MoT) has identified some 32 illegal traders during the last Ethiopian fiscal year and is taking measures. But exporters have to be more forthcoming, in terms of taking initiative, rather than just expecting solutions from authorities, argued the Ministry.
“Why do you exporters pay these high prices?” Assefa Mulugeta, advisor to the state minister of trade, Yacob Yala, asked. “It starts from there.”
The ECX is reducing the expiration date of warehouse receipts issued for coffee, which will go down to 20 days from the previous 30, as of May 9, 2013.
This is one of four changes introduced by the ECX and approved by its supervising body, the Ethiopian Commodity Exchange Authority (ECEA). Changes introduced include moisture adjustment, the amount that should be contained in a bag and the cost of handling goods.
The issue of warehouses, nevertheless, proved to be another point of frustration for exporters. Some suggested outright removal of the warehouse and logistics system.
“Why don’t we just remove the logistics system of the ECX, because it is so inefficient?” suggested a frustrated exporter. “There is weight loss at the ECX and they are not in control. We have been nagging them for a solution for five years, but to no avail.”
For Abenet, the CSO of the ECX, the problem lies in the fact that no single body has so far taken the initiative to manage the warehouse and logistics system.
“If anyone comes to handle it, the ECX would happily hand over the management of the warehouses and logistics system,” he said.
While these challenges remain, experts who made presentations see hope for Ethiopia. They commended that in the last five years small producers have been renovating old trees by pruning and replanting. The coming of new farming areas into the coffee business will also contribute to increased production.
“Ethiopia has tremendous potential and is in the process of increasing its production,” Maja says.
Changes in several coffee producing countries are bound to open up more opportunities for Ethiopia. South American and some Asian coffee producers are depending less on coffee production, she said, since remittance from the US, migration and the sprouting of infrastructure projects are generating more attractive jobs.
“This same scenario does not exist in Ethiopia to the same extent,” she argued in the presentation of her paper – “Market Outlook for 2013-14: Opportunities for the Ethiopian Coffee Sector.”
Other studies presented at the Conference predicted that coffee consumption for the next 10 years will continue to witness healthy growth rates. They pointed to an increase in demand.
The situation is not altogether promising, however. The Ethiopian government has ambitious plans to earn 5.6 billion dollars in exports in the 2013/14 fiscal year, with 1.09 billion dollars coming from coffee alone – 19.5pc of the total. This could prove tougher based on the World Bank’s (WB) projection that the decline in international commodity prices observed over the past three years could continue for the foreseeable future.
The Bank’s biannual Africa’s Pulse report released in early October warned that benign aspects of the economic environment, such as high commodity prices and large capital inflows, which benefitted the countries on the continent, including Ethiopia, will most likely not apply this decade.
The report presaged possible challenges, including prolonged recession in developed countries, a sustained drop in commodity prices and a slowdown in the growth of the BRICS countries – Brazil, Russia, India, China and South Africa. This could lead to a decrease in demand for the exports of African countries.
In fact, Arabica coffee prices – the bean that Ethiopia exports – have been on a steep decline, from their high of 3.04 dollars a pound in April 2011 to the current 1.29 dollars a pound, as recorded by the ICO. The lower quality Robusta bean – produced primarily by Brazil and Vietnam – on the other hand, has not plummeted as much during that same period, only reducing from 1.26 dollars a pound in May 2011 to the current 0.90 dollars a pound.
Ethiopian authorities see increased volumes as a way out to compensate for the slowdown of the market following the global economic crisis.
“The fall in price, however, was compensated by increasing the volume of exports and creating a market linkage with a few selected countries,” Yakob Yala, state minister of Trade, said. “Trade links have also been strengthened to address coffee export in Asian countries like Japan, South Korea and China.”
The Ministry lamented over contract defaults from the buyers’ side, which it said was a challenge that came in tandem with the fall in price of coffee over time.
“The volume of coffee exports will be increased this Ethiopian year, regardless of the fall in the international price,” Yakob said.
Some long-time exporters in Ethiopia agree with the remedies. Geoffrey Wetherell, chairman of the Ambessa Enterprises Plc – one of the 17 exporters who received awards for contributing to diversifying the Ethiopian coffee export market at the event from the new Ethiopian President, Mulatu Teshome (PhD) – agreed with the strategy.
“We have to increase production and supply abundantly so that coffee will regain its status in the international market,” he said.
For a macroeconomist, who has taught at the Addis Abeba University (AAU) for more than 10 years, authorities need to work on the weak negotiating capacity of exporters and poor product quality.
“These two factors need to be resolved if the government’s plan to generate more revenue from coffee is to be met,” he suggests.
Exporters could increase their income, he added, if they add more value to their products.
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