Coffee Changes Brewing

Sani Redi, the first Director General of ECTDMA

Coffee and Tea Authority to implement major reform starting in March

Massive changes are coming to the coffee sector this March as the Ethiopian Coffee and Tea Development and Marketing Authority (ECTDMA) disclosed that it will implement reform to alleviate the frustration of coffee traders. This will involve further policy and proclamation restructuring.

The government has initiated many policy changes regarding coffee which has led the country’s export revenue for the past 70 years, yet coffee still experiences countless challenges.

In the past few years the coffee business has experienced serious setbacks, in addition to lower prices on the international market. Experts in the sector stated that problems in the coffee market have continued over the past years because of lack of clear policy and government attention.

During the latest meeting organized by the Ethiopian Commodity Exchange Authority (ECEA) traders at the Ethiopian Commodity Exchange (ECX), suppliers and exporters people said that the sector is still struggling to survive. Quality, quantity and local prices were talked about as challenges in the business, according to traders who attended the meeting.

According to experts, in the past few years coffee had been forgotten when the government dissolved the Coffee and Tea Authority, but the authority was reestablished a year ago when different studies like the Agrer Consortium recommended its revival.

Sani Redi, the first Director General of ECTDMA, said that in the past year the authority undertook intensive preparation to restructure the coffee business.

He said that the authority held many discussions with coffee stakeholders and assessed the previous proclamation, policy and strategies and then developed a new one. These new structures are attempting to boost coffee’s revenue, which accounts for 25 percent of Ethiopia’s livelihood.

Problems in the coffee sector also contribute to missing GDP II targets.

For instance 85,385 tons of coffee were shipped out in the first half of the current fiscal year. The exported coffee fetched some 313.3 million USD during the same period. Both the export value and the volume have slid from the targets. Some 98.5 thousand tons were expected to be exported to generate USD 385 million.

One year operation

On the other hand, experts in coffee stated that some exporters are frustrated about the market’s unpredictable behavior. A representative of coffee exporters, who attended the exchange authority meeting held on February 18 at Elili Hotel, stated that they conducted a study on marketing coffee that they will submit to the relevant government bodies for examination.

Sani stated that after talking with stakeholders the authority is taking steps to solve problems.

“Since the business is underway we have to implement a short term strategy in the initial stage and then we will take new actions,” he told Capital.

He said that some changes will be implemented without restructuring the policy and strategy.

Based on that the authority is in the process of applying new marketing strategies as of the beginning of the coming month and some of the changes are already occurring.

Two weeks ago ECX reintroduced the auction margin forcing traders at ECX  to trade the bean at five percent higher or lower than the value of the average price the day before.

According to the Director General, the authority is working to achieve the goals it targeted to attain in the coming years.

The authority disclosed that they were preparing over the past year and conducted a study on organizational structure.

The formation of similar organizational structures in regional administrations was also implemented. Currently a similar authority has been formed in Oromia and SNNP, while the establishment of at least a support office in Amhara, Benshangul Gumuz and Gambela regions will take place.

The authority is developing a modern system to improve production volume and quality of coffee, tea and spice products.

Modernizing the marketing system will accommodate the quality and the mass production and improve the value addition sector.

To achieve these goals the authority has been focused on evaluating past experience and packages for the three sectors, according to Sani.

“In the evaluation we assessed the coffee and spice business. These sectors have packages but tea does not have one,” he said.

For the coffee sector the authority evaluated the strength and weakness of the coffee package and developed a new extension package based on the experience of Brazil and Colombia. The spice sector will have a new package based on the experience of India.

“For coffee we have already conducted the training up to the lower level in Oromia and SNNP to achieve a quality extension operation,” Sani added.

Market

In terms of coffee marketing there is a sophisticated problem that should be significantly changed. The marketing process has to be accomplished within a short period, there is a short market chain, low cost and an equal profit margin.

Currently the coffee marketing scheme is held on a long chain, there is unfair revenue, and lack of trust between actors. There is also a claim that the coffee business is very costly, making the country uncompetitive on the international market.

“To identify the challenges we met separately with people in the coffee business last April and July at Hawassa, Dila, Dire Dawa, Jimma, Addis Ababa, Bonga, and Gimbi,” Sani said.

In these meetings farmers, suppliers, exporters, intermediate actors at ECX, investor farmers, processers and exporters, and local agents of the international buyers were included. A general meeting with all stakeholders sitting at a single table was also held recently to finalize the pre condition to implement the program by this March.

The authority disclosed that the meetings have helped it to identify the problems ranging from farming to export. “The meeting gave clues to identify which areas need a policy change, and the restructuring and the amendment of a new proclamation, directive, practical trend and ethical codes,” the authority head explained.

“We are working to change the old process of identification but we have to also give a fast response to issues that require  an immediate solution,” he added.

At the latest meeting the authority tabled a new directive that will be implemented as of March to provide a short term solution.

New solutions

Before the formation of ECX, which stared coffee trading in 2008, suppliers accessed their bag packaging material after the auction.

Suppliers claimed that the cost for their bags (packaging) has to be compensated or calculated based on the gross weight of the coffee price, while exporters said that they are also exporting the bean without the bag.

However this has not been applied since the exchange become modern, while suppliers claimed that it is a significant expense for them.

For this problem the authority implemented a solution that suppliers and exporters should share the packaging material expense equally.

Now the authority has decided that the exporter and supplier must share the cost of the bag equally.

The other issue that suppliers claim is the challenge of the long wait at the Ethiopian Agricultural Commodities Warehouse Services Enterprise. This affects the weight and moisture of the product. The authority said that fast operation will take place in the near future as per the agreement with the enterprise.

Lack of a percentage of starting price margins has made the trading unpredictable making the suppliers reluctant to supply the product on the trading floor of ECX.

“They argued that they cannot supply the product as per the price a day before as they did previously,” the authority head said. Previously the trading floor applied a five percent price range up or down on the closing price of a day before, but it was lifted four years ago when high demand pressured the local market to increase the price,” he said.

The exporters also claimed that the price on the local market does not consider the international market.

The international market pays a better price for Ethiopian coffee but it is still not competitive on the international market and exporters claim that they are not getting adequate value for their export.

Sani argued that the problem comes from the exporters themselves since they applied unfair price competition to buy the bean.

Exporters on the other hand claimed that the market is affected by illegal exporters. “A business actor engaged on the hit and run calculation manipulated the export business and is crushing us,” Kassahun Bekele, president of National Exchange Actors Association said. He strongly requested that the government give priority attention to the agriculture export sector at the ECEA meeting chaired by Yinager Dessie (PhD), commissioner of the National Planning Commission and board chairman of ECEA.

Sani also said that local consumption has grown significantly since the economy changed. “The local consumer is paying a better price to get quality product,” he explained.

He said that even though the growing local demand is a good opportunity for the coffee sector as a whole, it is affects exports via the illegal market.

According to him, another reason coffee is more  expensive locally in comparison with the international market is the long and costly processes to supply the product to the international market.

To alleviate the claim from coffee suppliers the exchange body reintroduced the average price margin on the trading floor two weeks ago. “Predictable prices will be implemented since the price margin was implemented,” Sani said.

“For the export sector we are assessing the claim that there are illegal exporters who are working in the export business to get the hard currency for their imports. But NBE has cut this practice to those that use the preferential benefit to get the hard currency that they generated, while it will be assessed further,” he added.

The other reason for the price hike is the illegal trading actors and exporters who are working to supply the product locally.

“Some exporters are buying the product at a higher price on the ECX trading floor but they supply the coffee to Merkato,” he explained.

To solve this problem the authority has audited the eight year export performance and identified 57 exporters who supply the product to the local market instead of exports.  “Furthermore to cut the price hike currently we are evaluating the export certification and licensing process to identify genuine coffee exporters,” he added.

The illegal business is not only limited in the local market but smuggling via borders is the other problem that needs collaboration from all actors, according the head.

The authority also stated that the cost that contributes to make the bean expensive will be solved by  the new strategy arranged by the authority.

As an optional solution capable suppliers will be encouraged to get involved in exports in conglomeration with the farmers. This is also expected to smash the illegal smuggling of the product.

When coffee is traded on the exchange floor it will be supplied as cheaply as possible.

Implementing a law allowing investors to outsource growers is also expected to minimize cost and illegal trade.

High transportation costs also make coffee more expensive locally. The authority disclosed that it is developing a strategy to transport coffee on heavy trucks instead of medium vehicles. “This will be applied discussions with stakeholders,” Sani said. The railway should also tackle the cost. Railway is the major hope for cutting the logistics cost and using containers instead of bags, while heavy trucks will be used to supply coffee to the central market place.

Quality and quantity

The sector is competitive in the international market, forcing the local actors to focus on quality, reducing cost, competitive pricing and quality service to entertain the global business.

“To change the problem we have to work on quality, cost including logistics, and contract agreements,” Sani explained.

Quality assurance will be applied from the primary level. This year the authority has given trainings to coffee processers.

Export processors are also signing an agreement to process the product based on quality, which is a new trend that the authority applied.

To expand the product latest studies recommended expanding the production in new regions besides Oromia and SNNP. Amhara, Benshangul Gumuz and Gambella regions have been selected in the strategy to expand the cultivation of the coffee bush in new production areas. The regions are expected to commence practical work in the coming year.

The Agrer Consortium study recommended that a meaningful and effective strategy involve increasing quantity, quality, sustainability, and consistency of supply and the geographic identity of Arabica coffee.

New laws

There will also be new proclamations to improve coffee’s performance.

For instance exporters who roast and grind the bean are not allowed to buy the export product for the value addition. They are using the product supplied for the local market. “Based on this practice they would not be competitive in the international market so it needs some changes,” Sani said.

The authority is working to develop new laws or drafting a new proclamation on the coffee trading and export.

One of the new drafted laws aims to include capable suppliers to export the bean directly to the international market instead of supplying the product to the trading floor. The authority is looking to apply this law keeping the export expansion in collaboration with the farmers. It is also expected to keep the sustainable and quality supply. “It can also create a traceable market for international buyers,” Sani said. In the new proclamation that is already drafted the authority has also proposed to include coffee investors to use out growers to expand their export market.

“We will also consider the incentive for the coffee sector on the new policy and strategy that we developed,” the Director General concludes.