By Wondwossen Mezlekia

In the past few weeks, too many readers asked me to share my views on the Ethiopian Commodity Exchange (ECX) and wanted to know what I think about its effects on the Ethiopian coffee sector in general, and the Specialty coffee industry in particular. I was also asked similar questions by producers of the PBS Wide Angle program that released this documentary program featuring Eleni Gebre-Medhin, founder of the ECX.

While I continue to respond to as many of your emails as I can, I also thought it might be useful to post my comments here on the blog for everyone else to see. So, in the coming couple of days, I will post my views on the most frequently asked questions: What’s your view on the ECX in general; What do you think are the effect of trading through the ECX on specialty coffee exporters and buyers; Is ECX good for coffee growers?

Today, I share my views on the ECX in general as an introduction and to clarify my stance before I raise issues that may easily confuse readers although, to my knowledge, none of the problems I will discuss here are related to or the makings of ECX or Eleni – the person that I admire most and is being celebrated by the PBS documentary on July 22, 2009.

My views on the ECX in general

I think the establishment of the ECX is significant and of a historic proportion.

As I jokingly tell friends, in Ethiopia, major development breakthroughs happen on a periodic cycle of time spanning either 20 or 100 years on average. For example, I listed below a non-exhaustive timeline for Ethiopia’s introduction of the major communication technologies and platforms:

1894 – Postal service started on March 9, 1984 (In 1908, Ethiopia became member of the Universal Postal Union and the first Ethiopian stamps were also printed and sold around this time; in 1936, the General Post Office and two branch offices were established in Addis Ababa as well as thirty-six post offices throughout the country.)

1917 – The first train services from the coast to the capital were inaugurated only in 1917 (A concession for the construction of a railway from the Ethiopian capital to the French Somali port of Djibouti was granted by Menelik as early as March 1894)

1984 – The first extensive open-wire line telecommunication system laid out linking the capital with all the important administrative cities of the country (the Imperial Telecommunications Board of Ethiopia was established by Proclamation 131/53 in 1953)

2008 – The first commodity exchange market established. The person credited for this triumph, Eleni Gebre-Medhin, is featured on this documentary film.

Based on this snapshot of historic timeline, some historians may be tempted to draw conclusions that the establishment of the ECX was overdue by about 4 years because the latest major breakthrough was recorded in 1984 – 24 years prior to the ECX’ formation. I lean towards supporting the argument that it was overdue by over a hundred years.

So, it is my belief and hope that Ethiopians will be grateful for and appreciative of the work done by Eleni and her colleagues for the next many years.

The ECX can play important roles in elevating the agricultural sector’s efficiency, the country’s competitiveness in the global market, and thereby helping the people dig themselves out of the vicious circle of poverty that we are shamefully plagued in.

A transparent and efficient exchange market system nurtures competition and benefits everyone in the value chain. The ECX can help Ethiopia by:

• modernizing the way people do business and improving the marketing channels,
• disseminating market and price information, and
• providing a marketplace where buyers and sellers can come together to trade and be assured of quality, delivery, and payment.

These will have a ripple effect of benefiting everyone in the value chain. Obviously, this cannot be achieved overnight. Transforming a century old gloomy trading system takes time.

I think, the first year of trading coffee through ECX was marred by problems and confusion. While the efforts made by ECX to take on a crop of global importance shortly after its launch is admirable, the strategies it went by to integrate the trade were far from being flawless. From the outset, ECX declared that it aims at creating a national standard commodity coffee classification system; it eliminated direct trade and traceability; and enticed the government to controlling the value chain from farm gate to the border. These changes have had remarkable effects on coffee exporters, buyers, growers, and the coffee sector at large.

I. Homogeneous National Coffee Brand

For a country with millions of poor people, the temptation of utilizing the high paying fewer coffee brands to drive sales and increase the value of the country’s overall coffee production is high. That very thought has played a role in ECX’ decision to homogenize all coffees grown in the same region through a standard commodity classification system.

This is clearly stated in the whitepaper released in April 2009 by the ECX titled: What is in a Bean? ECX and the Specialty Coffee Market. It reads, “We take the strong view that a significant majority of Ethiopian coffees have the potential to be considered fine coffees, and can be sold in the domestic market as such, with appropriate certification. The ECX model not only promotes the specialty coffee segment but also do so in such a way as to benefit the small farmer as well.”

The document does not indicate how ECX’ new system will benefit the small farmers but it stands firm by the assumptions and subsequent conclusions.

“The recent policy decision to include trading of all coffees within the Exchange is based on the strategic thinking that the [following] set of assumptions [is] correct:

1) A significant majority of washed Sidama and Yirgachefe and unwashed Harar could be considered specialty-plus in that they are branded and trademarked and have the potential to meet the fine coffee standards;
2) A significant majority of all Ethiopian coffees have the potential to be considered organic and obtain certification;
3) A significant portion of unwashed coffee can be promoted as forest coffee and/or bird friendly.”

Although these assumptions are based on indisputable facts, they are not exhaustive enough to justify the conclusions drawn by the ECX. The fact that Ethiopia has the potential to increase its coffee qualities to the standards preferred by the global Specialty coffee industry does not give good reason for an immediate homogenization and an automatic upgrade of the classes of the whole coffee production. Ethiopia’s coffee cannot be sold as Specialty coffees only because the country wanted or decided to. In a buyers’ market, such as in the global Specialty coffee trade, unfortunately, the final say is not that of producers’ but the buyers’. Specialty coffee buyers and roasters decide which plot to invest in and which crop to buy.

The alternative is for the country to invest in quality, branding, and slick marketing of its products to set itself apart from the competition and convince buyers. That way, Ethiopia could create the demand and subsequently the market for the coffee brands it wishes to create. This is, however, a daunting task and an expensive venture for Ethiopia, the poorest country in the world. In the absence of these endeavors, countries like Ethiopia are bound to the terms of the global coffee trade, at least for the foreseeable future.

The measures taken by the government to force sell all coffees through the ECX platform and ECX’ decision to standardize the coffee grades into a national brand while, in ECX’ estimation, only about 3.7% of the country’s coffee production qualifies to be branded as a Specialty coffee, may cost the nation dearly. The farmers that are already producing the finest coffees will be the immediate victims of the new system as they are forced to give up the premium prices they are paid by buyers for their exceptional produce. Because, as soon as their coffees are blended with other coffees grown in the same region (in order to boost up the wholesale price for good of the country), these farmers lose their entitlement to the premium status their produce commands. This is unfair to the poor farmers.

Unless the ECX system of trading coffee as a commodity is corrected promptly, in the long term, the strategy risks watering-down the nation’s coffee brands. Such a strategy undermines the superior standards some of the brands earned over the years and the result will be commoditizing the country’s valuable crop.

II. No Direct Trade, No Traceability

Specialty coffee buyers and roasters are puzzled and in panic over the ECX system. The biggest issue for these buyers is the loss of transparency and traceability. They need assurances that the bundle they want is the bundle they will get. The new system does not allow direct trade for single-origin coffee because it promotes the traditional trade relations model where commodity coffee sales is brokered in bulk, thus no traceability. The new system basically lumps together bundles of coffees into a generic class-type-grade combo.

Independent millers who used to buy coffee from farmers, mill it, escort it through the former auction systems, and export it are no longer allowed to do so. They are now required to sell the beans to the ECX, where its origin is lost. The possibility of tracing a bag of coffee to its origins is eliminated in this process. The ECX promises a secure inventory management and a guaranteed warehouse receipts system that ensures “zero delivery default and reduces mixing of coffee origins” during the marketing process. But, as far as buyers are concerned, traceability is lost because there is no way of proving whether the plot they will receive is the one they wanted.

This is remarkable because while the global coffee industry is increasingly moving towards greater transparency of coffee origins, tracing back all the way to individual plots of land, the Ethiopian system is heading in the opposite direction.

III. Government’s Hands in the Bag

The third effect on the exporters and farmers has to do with the government’s intervention.

While it is good that the new exchange system replaced the murky auction centers, unfortunately, it also tempted the government to enter into the market as a major player. Some private businesses are now effectively locked out of the market and, in an unprecedented move, the government has emerged with a strong control over the coffee sector.

In what played out early this year as a reaction to some of the major exporters’ hesitance to sell their coffee stocks at the prevailing prices if sold through the ECX, the government confiscated coffee beans from the exporters and also tasked the state owned profit-making enterprise called Ethiopian Grain Trade Enterprise (EGTE) with exporting coffee. This crack down on the exporters had a devastating impact on some roasters and their relationship with the country as the country failed to fulfill its contractual agreements during the last harvest season. Also, it raised the question of what else would the government do in the future.

The ECX is currently negotiating with representatives of the Specialty Coffee Association of America (SCAA) and others to resolve this one problem. In the mean time, as the next harvest season approaches, the EGTE appears to be very well positioned to claim the biggest market share in the country’s coffee export.

Domestically, this level of engagement by the government in exporting beans produced by smallholder families is alarming because of the imbalance of power and the obvious conflicts of interest. The government has its influences in almost everything from policy making, distribution of farm inputs, capital, to the land. This is the farthest one can get away from a free market system.

All these affect farmers as their sales volume is directly dependent on the volume sold by exporters.

(The writer can be reached at [email protected])