By Wondwossen Mezlekia

The recent article by Dr. Eleni Gabre-Madhin, founder and CEO of the Ethiopia Commodity Exchange (ECX), titled “Will The Real Poor Farmer Rise” is a praiseworthy contribution to a serious public dialogue on matters of national interest. It is also courageous for a prominent figure who supports the government of Ethiopia to opt to engage in civil dialogue about complex issues in the public domain. This being a new phenomenon in Ethiopia, inability to draw a line between a personal capacity and an official capacity is totally understandable; although, the bar might be higher for individuals who grew up in a society where public dialogues and opinions are at the central core of democracy and who are rather expected to be models of democratic and civil communication, the lack of which has left the whole Africa incapacitated. It is crucial for all of us to learn to involve in intellectual discussions setting aside personal feelings and egos and rather focusing on the substantive issues at stake, in this case the problems brewing in Ethiopia’s coffee sector.

The conversation about ECX and the problems in Ethiopia’s coffee sector – a topic that provoked Dr. Eleni to weigh in — has been running for weeks now, the recent development being the secretly planned event that was held in Addis Ababa, October 21 – 24, 2009, between ECX, the Specialty Coffee Association of America (SCAA), and others. Throughout, many questions have been raised, including the government’s use of ECX to secure its interests, the merits of the country’s property right laws, the government’s responsibilities in protecting farmers from exploitation, the risks of commoditizing the country’s finest coffee brands, ECX’s distraction from its initial noble mission, which is to help eliminate famine by creating an efficient domestic agricultural commodity market, and more. The reason why ECX is particularly scrutinized in relation to its coffee trade is because the stakes in that crop are high, too high to be left for a trial and error. Well informed industry observers warn that the government’s handling of the coffee sector could be destructive to the development of domestic private sector in general and the untapped coffee resources in particular. But, ECX seems to be maintaining its positions that all is well, as if nothing had happened. At best, the take away from reading the above article is that the problems at hand need to be spelled out in a clear and undistorted manner so that everyone who claims to have a stake in Ethiopia can have the same understanding and view from anywhere in the globe. Therefore, it will be necessary to pause the discussion about the gravity of the impending consequences of the sticky situation that ECX and the coffee sector found themselves in and first set the records straight. To that effect, the following paragraphs trail on Dr. Eleni’s main points cited in the above article for the sake of clarity and to fill the gap in ECX’s understanding of what had just happened in Ethiopia.

“Coffee trading in ECX was a hastily conceived, ill-prepared affair by people who knew nothing about the complexity of the coffee market”

The credentials of ECX’s officers has never been a point of contention throughout the discussions as there is no reason to believe that Ethiopia is short of able experts in the coffee sector. Doing so would amount to disrespecting the people who preserved the sector through three consecutive regimes. This, however, does not exempt the poor handling of the media frenzy that followed the interruption of the Specialty coffee trade because neither the government nor ECX displayed wisdom or competence in dealing with the situation. That being said, there are ample evidences to show that ECX was not prepared to trade coffee and that the project plans that led up to the realization of ECX anticipated a coffee exchange at this early stage. ECX was established as a domestic exchange for grain, not for coffee trade. The first evidence for this is found nowhere but in the Policy Working Paper prepared by Eleni Z. Gabre-Madhin and Ian Goggin, Chief Executive, Africa Commodity Exchange (Malawi) and former President, Zimbabwe Agricultural Commodity Exchange. The document dated November 2005 and titled “Does Ethiopia Need a Commodity Exchange?: An Integrated Approach to Market Development” does not mention the coffee crop anywhere in the 24 pages – not even once.

Also, ECX’s lack of experience and resources were central factors that have contributed to the coffee trade problem. The then eight-month old ECX had hardly established its own institutional capabilities, much less gaining the experience in trading agricultural commodities, when it was surprised by the government with the unexpected task of trading the global crop. Although Dr. Eleni now denies it, ECX’s understandable frustrations are documented in the PBS/Market Maker film that featured Dr. Eleni. Here is a portion of the transcript taken from pertinent segments of the film:

Narrator (Aeron Brown): “Eleni’s strategy for building the ECX is so to start to walk before you run; start with a few commodities, work out the kinks, take on more, slowly when you know the system works. … Coffee is to Ethiopia what oil is to Saudi Arabia. The coffee crash [summer of 2008] threatened the entire economy. At the highest levels of government, the question was raised: what if the ECX with its open market, efficient pricing, took up coffee now? Not years from now, but right now? Could the downturn be avoided? For Eleni, for her team, for the ECX, this is both an extraordinary opportunity and an extraordinary risk.”

Dr. Eleni: “We had a nine-hour meeting over two days with very senior people in the government, very intense, and finally the Deputy Prime Minister looked at me and said: if we said, let’s have all that come, [sic] can you handle it? And, I looked at him and said “yes.” … I was very scared. It was a very, very funny moment. I came out of that meeting and called my management team and said, ‘we are going to be trading all of Ethiopia’s coffee. This will change everything.’ ..Much better for us in the longer term but ‘can we do it?’ is what I don’t know. … Coffee is just an overwhelming situation; doing too much with too little staff, too little equipment, too little time.”

That’s it. That is what it took for the government to decide to route the coffee trading to the commodity exchange platform. The point is, the decision to trade coffee on ECX is completely a political decision driven by the government’s needs to control and enhance the flow of coffee exports.

“The inclusion of coffee in ECX was for the purpose of government control and to monopolize the coffee market”

The law that established ECX clearly states that ECX’s Board of Directors should be composed of six government and five privately appointed directors. Despite, the current Board is dominated by directors with vested interests in promoting the government’s business. Of the eleven directors, only three sits (27%) are occupied by the private sector. To argue that somehow Ethiopian Grain Trade Enterprise (EGTE) and Kality Food factory (whose managers are incumbent directors) are privately appointed is deceiving. Plain and simple. These enterprises are owned by the government and report to – through their respective Board of Directors – to the Privatization and Public Enterprises Supervisory Agency, a government body also with a sit on the ECX Board.

EGTE is now, for the first time in its history, the major player in the coffee trade as is GUNA Trading House PLC, an endowment which, according to Bloomberg, is owned by the ruling political party. GUNA has publicly announced its plans to tap into the coffee trade after five years of abandoning the sector. Independent institutions, such as the World Bank have voiced public concerns that these enterprises benefit from privileged access to policymakers and resources which gives them unfair leverage in the marketplace. If this is not a sign to monopolize the market, what is?

“ECX was an instrument to take action against private exporters”

This dimension of the problem is exhaustively discussed by many writers within the context of the country’s legal and political situation.

“The Exchange had simply not thought about specialty coffee trading until forced to by international coffee buyers in 2009”

Regardless of what ECX might have had privately thought about Specialty coffee trading, what is known for sure is that ECX’s system has effectively disrupted the export of Specialty coffee trade and all coffees are sold at commodity prices and market to this day, with the exception of some stocks sold by cooperatives and commercial farms. There is no “single origin” Specialty coffee leaving the country until ECX finds a solution because the system eliminates “traceability”. Two questions arise here: 1) If the legislation that was passed in November 2008 provided ECX the mandate to separately or concurrently handle Specialty coffee as it deemed necessary and ECX decided to trade the Specialty coffees as commodities until it finds a solution, doesn’t it also mean that ECX is solely responsible for the disruption of the trade? 2) Why didn’t ECX allow the Specialty coffee transactions to continue as is until a new system is put in place?

The bigger problem is that because ECX was of the notion that only about 3.7% of the country’s coffee production qualifies to be branded as a Specialty coffee, its focus has been on the bulk coffee trading. [3] It was only after the 2009 SCAA event in Atlanta that SCAA and ECX formed a joint working group to find a solution for the problems. The working group reported its proposal to SCAA at the ECX Specialty coffee event held late October in Ethiopia. Here is where we are now.

What’s next?

The coffee exchange strategy should look beyond the commodity market. The global coffee trade is controlled by a hand-full of multi-national corporations and international prices for commodity coffee are mostly determined by these multinationals. The daily fluctuations in price are mainly driven by the buyers’ bargaining power and speculations about coffee supply, which in turn is dependent on factors affecting coffee growing regions in the world. The competition between the biggest coffee producers, including Brazil, Colombia, Indonesia, Vietnam, Mexico, often helps multinationals as increases in supply result in a decline in prices. The compound effect on coffee dependent economies, such as Ethiopia, is that they have no say whatsoever in influencing commodity coffee export prices. Therefore, it is incumbent upon ECX to adopt cutting-edge marketing strategies that will enable Ethiopia beat the competition by making the best use of the wealth of coffee resources. The unique attributes of Ethiopia’s coffee are the strengths that the country can exploit as leverage in the fast growing Specialty coffee niche market. At this juncture, and in the short term, the best that ECX can do to help the country is to devise a system that will be conducive to the Specialty coffee trade and provide incentives to the farmers. To that end, there are impending issues and outstanding questions that need the immediate attention of the government and ECX. Hopefully, ECX will continue to lead a forward-looking dialogue by sharing the outcome(s) of the recent meetings with SCAA and the agreement the parties have reached.

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

By Wondwossen Mezlekia

The Economist magazine describes the Ethiopian government as “one of the most economically illiterate in the modern world.”i This portrayal, albeit contentious, is not without truth. But, the government’s recent meddling in the coffee trade has to do more with the government’s socialist-inspired economic policies than economics per se. As if to prove this, Venezuela’s Chavez, another diehard socialist, just took actions similar to what Prime Minister Meles Zenawi did earlier this year. Last week, President Hugo Chavez accused the country’s largest coffee producers, Fama de America and Cafe Madrid, of smuggling coffee out of Venezuela to circumvent government coffee controls and vowed to nationalize they refuse to heed. Chavez was quoted as saying “if they give me an excuse, I’ll nationalize them.”ii

This must be why some critics questioned the viability of a free commodity exchange in Ethiopia. But, technically, commodity exchanges can exist as viable institutions even under tyrannical governments. In fact, the only successful cash commodity exchange with spot delivery in Africa was the one in Zimbabwe. Studies show, Zimbabwe Agricultural Commodity Exchange (ZACE) was a viable exchange, until it closed in 2003 due to monetary instability, and operated successfully with its total costs covered by member subscriptions of brokers. The former coffee auction system in Ethiopia is another example. So, what went wrong with the USAID funded Ethiopia Commodity Exchange (ECX)?

Dr. Eleni Gebre-Medhin says the exchange is a response to the paradox of “bumper harvest one year and severe shortages the next, or surpluses in one region and famine in another.” If so, what’s coffee got to do with famine? Is ECX delivering on its promises?

The bumper harvest-famine paradigm

Ethiopians who watched the state owned Ethiopian Television programs in years 1995 through 1997 vividly recall the infomercials about Sasakawa Global 2000 (SG2000) and the video clips of Meles Zenawi and the former US President, Jimmy Carter visiting certain corn fields.

SG 2000, a joint program of Sasakawa Africa Association (SAA) and the Carter Center’s Global 2000, is an agricultural growth program that promotes the potential of improved food crop technologies through field demonstration. SG2000’s success stories in other countries were so appealing that the government adopted it right away. Increasing food production was a top priority for the government, so it was anxious to see SG2000 do its magic. The massive campaign to convince farmers to use fertilizers and improved seeds paid off pretty quickly and many farmers were provided with the inputs on a credit basis to be repaid at the first harvest. During the following season (1996/97), food growing regions saw a record high production due to the favorable rains and use of improved farm inputs. But, the excitement lasted for barely a few weeks as prices plummeted with supply surpassing domestic demand. Many farmers, deep in debt, defaulted on their credits. On the other hand, the rest of the country was in dire need of food and millions of people starved during the same year.

It turns out, ones bumper harvest won’t mean food to the other if the people cannot afford to pay for it. In Ethiopia, millions die of hunger not because they didn’t know where to buy food, but because they didn’t have the means to buy with. In any case, these are the historical events that Dr. Eleni talks about when selling the idea of a commodity exchange.

According to her, ECX will help eradicate famine by facilitating the distribution of commodities in an efficient manner. She argues, event at times like during 1996/1997, grain traders are unwilling to transport stocks to drought stricken regions because of lack of price information and/or the inherent high risk of doing so; those traders who braved to defy all the odds have realized net losses. In brief, by reducing marketing risks and providing merchants with real time price information, ECX can help facilitate ease of transaction and enhance competition. By so doing, commodities can be distributed across regions, reaching a larger consumer base at competitive prices. Further, says Dr. Eleni, ECX can double the value of the domestic market over five years assuming it captures 40% of the domestic market that is estimated at $l billion in value and adds a mere 25% value to it.

ECX came into existence in May, 2008 with able experts in the field and an aim to trade more than 25 agricultural commodities, mainly grain and pulse. The exchange was off to a rough start, as its commencement coincided with an unexpected sharp rise in domestic and global prices for commodities. There was a shortage of grains flowing through the exchange. The shortage persists to date.

After a series of interesting events, in December 2008, ECX evolved into a coffee exchange, no explanation given. Today, the most traded commodity at ECX is coffee, not grain. ECX has replaced the old coffee auction center, not to conduct a forward trade which would have been an improvement, but to do the same old spot auction with an electronic warehouse receipt system.

ECX, there’s a slave in my coffee bag!

With ECX taking over the coffee auction, the government emerged out as the main player in the market for the first time in the history of the coffee sector. All of the successive governments (the imperial, the military regime, and the current one) depended on coffee for export but only the current government dared to control the marketing system for coffee. This arbitrary move exposes the dark side of coffee trade in Ethiopia and ECX’s role as a facilitator.

For so long, the government has been oblivious to the fact that coffee farmers are hurting because of the mandatory export. In Ethiopia, it is illegal to sell export grade coffee beans in local markets; only second and third grade coffees are sold locally. Global prices for export grade coffee are determined at the New York Mercantile Exchange (NYMEX) and are generally less than domestic prices. For example, last week (Sept 19), a pound of coffee was sold at Merkato Buna Tera, the central coffee market in Addis Ababa, for 27 Birr or roughly $2.20 whereas the same volume of export grade coffee was traded at ECX for an average of 18 Birr or roughly $1.47. Coffee farmers and traders would better off selling their coffee stocks in domestic markets. The difference between local and export prices (in the above example, a difference of 15 Birr or $.73 per pound) is an obligatory duty imposed on participants. The governments (past and present) have never felt obliged to compensate farmers or traders for the benefit they forgo due to this export regulation.

In one of her interview on Voice of America’s Amharic Service, Dr. Eleni said, a market is deemed free if people can sell their produce whenever, where ever, and to whomever they want at whatever price they please. In that sense, she said, the coffee trade in Ethiopia is free. If so, since it is now known that the government is actually dictating the coffee trade, shouldn’t it compensate exporters and farmers for the money they lost due to the mandatory export? That is exactly what the governments of Colombia and Brazil did in 2007iii. These governments subsidized coffee growers for the price differential when the rally in the local currency eroded export profits. After all, why should citizens be responsible for the government’s inability to create favorable sources of foreign exchange or limit its needs for it? This legal exploitation of poor farmers is exacerbated by ECX’s new system because the system eliminates direct trade – the only system that pays farmers extra pennies for their hard work – and gives the government more power and means to control the value chain.

In recent years, the increased demand for Specialty coffee opened up opportunities for farmers that grow the finest coffees. Importers sourcing single origin coffee often pay farmers premium prices over NYMEX prices for the highest quality. Specialty coffee importers make direct contacts with growers to ensure the highest possible level of quality and integrity for the coffee beans they want to buy. The introduction of ECX’s hasty coffee trade system, however all but eliminates this direct trade between importers and farmers. The only farmers that are allowed to bypass the exchange are cooperatives and commercial farms. Since only less than 10% of the farmers are organized in cooperatives, the new system subjects the individual farmers to adverse competition. These farmers are now allowed to sell their produce at the NYMEX commodity prices only.

On top of this, the government commands the majority sit in ECX’s Board of Directors. Currently, only 18% (2 out of 11) of the directors are private business owners; the rest represent government interests. The parastatals, Guna Trading and Ethiopian Grain Trade Enterprise, are now the most influential forces in the market as they enjoy preferential policy treatment over their competitors. Granted, these parastatals will use their leverage to lower their purchasing prices in order to maximize their profits.

Under these circumstances, it is difficult to see how ECX maintains synergy and serve as a fair and free marketplace to all.
Commodity exchange for coffee

The former coffee auction system has been functioning very well and successfully operated in three successive governments. It would have been wise to enhance the existing system rather than starting one from the scratch. For that matter, the auction was prepared to make gradual upgrades to an electronic warehouse receipt system and eventually to a forward trade. The decision to replace the auction by ECX was completely political and not in the best interest of the sector. The government’s allegation that some of the suppliers and exporters had diverted coffee beans meant for export to local markets or that they hoarded coffee stocks in search of better prices is an excuse. Smuggling will continue to be a problem as long as there exists price disparity between local and export markets. Replacing the auction centers by ECX won’t solve the root causes of the problem.

In countries where coffee is traded in a commodity exchange, coffee trade is conducted separate from other agricultural commodities. In Uganda, the operation of electronic warehouse receipt system and coffee exchange are supported by a two independent institutions: the Uganda Commodity Exchange (UCE) and Uganda Coffee Development Authority (UCDA). These institutions work together to promote a fair and transparent exchange. In Kenya, the coffee exchange is an independent operation that is managed by an association of direct stakeholders. The Kenya Coffee Producers and Traders Association (KCPTA) owns and manages the Nairobi Coffee Exchange (NCE). Another unique feature of the NCE is that it has a separate and smooth direct sale operation for Specialty coffee where marketing agents directly negotiate with foreign buyers. This system, also known as the “Second Window” is separate from bulk commodity trading.

To fix the problems with ECX, first, the coffee exchange needs to be separated from ECX’s broader functions as an agricultural commodity exchange and it should allow full participation of the stakeholders (from farmers to exporters.) Second, to take advantage of the price differential for Specialty coffees, and until most of the farmers are organized in cooperatives, the exchange ought to allow individual farmers to transact freely and directly with ultimate buyers who will enter into agreements with farmers and limit ECX’s role as a third-party certifier to coffee stocks that are not associated with such a direct buyer. Lastly, to do away with the problems associated with coffee smuggling and to encourage the production of high quality coffee, the government ban on domestic trade that requires selling export grade coffee at a loss should be lifted or accompanied by monetary incentives from the government.

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