Domestic Factors, Constraints, and Unique Opportunities
A series that assesses Ethiopia’s coffee sector to understand the root causes of its problems and to point out remedial solutions. This series discusses the scholarly paper, “Ethiopia’s Coffee Sector: A Bitter or Better Future?” by Nicolas Petit.
In Part III, we’ve discussed the characteristic features of the coffee sector and the significance of coffee to the national economy.
The current part discusses the domestic coffee market reforms Ethiopia has undergone at the backdrop of the coffee crisis and their impacts. Also, constraints and prospects will be discussed in detail.
-----------------------
Ethiopia is one of the countries adversely affected by the coffee crisis. In fact, Petit notes, “Exports earnings have fallen dramatically and the price shocks absorbed by coffee producers in Ethiopia have been enormous.”
According to a UNDP estimate referenced in the study, the loss of income in 2003 amounted to about US$200 per household. Most strikingly, the study reveals that for every $2 in aid received by Ethiopia in 2003, $1 was lost through lower coffee prices. Of course, Petit stresses, not all of the coffee farmers suffered to the same extent from the crisis in world coffee prices. Some of them were severely impacted while others have managed to cope with the shock.
The crisis in the world coffee prices coincided with a period when the country was emerging out from one of its own internal political crisis. The economic reforms imposed by the World Bank and IMF also had a tremendous impact on the domestic market. Petit notes:
“The end of the Derg military regime and the arrival in government of the Ethiopian People’s Revolutionary Democratic Front (EPRDF) in 1991 led to a number of political and economic reforms, mostly in line with the neo-liberal prescriptions of the IMF and World Bank. These reforms have had effects for all sectors of the economy, including the coffee chain. Coffee market reforms began in 1992 primarily as a means to increase prices received by farmers in order to promote production and reduce the incidence of coffee smuggling to neighbouring countries (LMC 2000).“
Petit analyzed some of the changes in terms of marketing, pricing, taxation, regulation and quality control and summarized his observations as follows:
“Firstly, the coffee market reforms in Ethiopia have been a gradual process of change carried out in phases. Secondly, the process of liberalization has been only partial. Although many changes have loosened government involvement in the sector (such as the removal of the former state monopoly and the increasing involvement of the private sector, the ending of price controls or the abolition of the quota system), strict government controls remain in several areas. In addition to maintaining the auction, the level of vertical integration is limited through licensing rules and only coffee deemed unsuitable for export can be sold for domestic consumption. Moreover, Ethiopia does not allow multinational companies (MNCs) to register as exporters. Daviron and Ponte suggest that ‘as a result of the absence of MNC competition at the auction level, the industry is much more locally controlled than elsewhere in Africa’ (2005, 108).”
According to the study, the partial liberalization in Ethiopia “does not seem to have had a negative impact on quality …[but has resulted] in a dramatic reduction of government revenues (following tax reforms), with detrimental effects on the government’s ability to provide necessary services to the public.”
After analyzing the global coffee crisis, the domestic market reforms in coffee producing countries including Ethiopia, Petit concludes:
“The ‘commodity problem’ of declining terms of trade and increased price volatility, combined with shifts in the structure of world markets and ‘governance’ of the global commodity chain, in the past 20 years mean that many farmers and governments receive poorer returns from coffee exports. A greater proportion of value added is captured outside the producing countries; technical changes mean that some farmers and some producing countries are no longer competitive; and long term prospects on the world coffee market are poor.”
What can be done? Any prospects for Ethiopia?
Petit says, “Identifying the best ways to maximize Ethiopia’s export earnings or the prices received by coffee farmers is not an easy task, and policy makers are faced by a number of dilemmas with different routes available.”
At a national level, Ethiopia’s coffee sector has numerous constraints, according to the study:
“The Ethiopian coffee commodity chain faces its own complex set of problems, including various constraints on production, processing and marketing. The constraints most commonly referred to include:
1) The high incidence of Coffee Berry Disease (CBD), with an estimated 50–60 per cent of production potentially at risk;
2) The shortage of improved cultivars adapted to different localities; poor harvest and post-harvest practices reducing coffee quality;
3) Weak linkages between research, extension services and producers;
4) The lack of accurate and topical data considerably reduces the scope for informed analysis, the diverse taste profiles of Ethiopian coffees are not fully reflected in the current national classification system;
5) There are various shortcomings in the marketing system and in the organizational structure at government level (FDRE 2003a; Westlake 1998; Scanagri 2005);19
6) Not least, environmental degradation is a serious concern, with rates of deforestation estimated at 10,000 ha/year in the coffee growing areas of the South Western parts of Ethiopia, threatening its coffee genetic resources (Gole 2003).High levels of river pollution are also a major problem near coffee pulping and washing stations (Agrisystems 2001).”
On the positive side, Ethiopia has a competitive advantage over its competitors and enjoys a unique place in the world market provided some of the limitations are addressed. Petit summarizes the opportunities available at a national level as follows:
“With regards to the potential for product differentiation, Scanagri argues that ‘given its wealth of genetic resources and large areas with exceptionally good growing conditions, Ethiopia has the potential to produce large amounts of differentiated high-quality green coffee’ (2005, 49). For example, as noted above, in specialty/gourmet segments of the international coffee market, Ethiopia occupies a unique place with an impressive selection of distinctive coffee profiles.
"For Westlake (1998), there is considerable potential to increase the proportion of specialty coffee exports (used in premium blends or sold as single origins) if quality and consistency are guaranteed.20
"Increasing the quantity of washed coffee has also been proposed by many analysts as it sells at significant premiums over unwashed coffee (FDRE 2003a). More recently, it has been found that Ethiopian semi-washed coffees and good quality unwashed coffees also present significant potential on world markets.21
"Some specialty coffees are starting to be sold to consumers with specific indication of geographical origin (IGO), similar to wines. For Daviron and Ponte (2005), even though IGO systems are imperfect, they can be designed to benefit coffee producers by allowing them a share in marketing symbolic quality attributes normally controlled by actors downstream in the global commodity chain.
“The potential of sustainable coffees in Ethiopia also deserves particular attention because of their increasing popularity. For example, Ethiopia has a natural advantage in markets for organic coffee as more than 90 per cent of production is de facto organic (Mekuria et al. 2004). Furthermore, it is the only country that produces natural forest Arabica coffee, providing scope for the sale of shade-grown coffees, for example, through the Rainforest Alliance certification system.22
“However, sustainable coffees present a number of limitations. Firstly, the markets for these products remain small, accounting for a tiny proportion of the global coffee market.23 Secondly, although they tend to offer higher prices to producers, this is not always the case. Except where covered by fair trade schemes, premiums are not guaranteed but are a function of market demand. Moreover, if premiums are offered they are likely to diminish as more farmers and buyers get involved (NRI 2006). Entering such markets is also a significant challenge for most producers. For example, fair trade certification is only available to small farmer groups, organizations and cooperatives which generally consist of better-off farmers, who are more likely to benefit (Daviron and Ponte 2005).
“Finally, entry into the sustainable coffee market requires careful assessment, as the price premium obtainable may not cover the additional marketing, certification or inspection costs (NRI 2006). Nonetheless, Lewin et al. (2004) argue that these markets are important because of their current growth rates and their potential to provide better social, economic or environmental benefits for farmers. Organic, fair trade or shade-grown initiatives present a number of positive externalities in the field such as organizational development, better natural resource management, biodiversity conservation and so on (Lewin et al. 2004). Finally, although there are opportunities for product differentiation, Daviron and Ponte (2005) also argue that certification and labels do not necessarily promote different trading relations from those in mainstream trade, as such schemes can provide the means for larger specialty roasters and retailers to outsource troubleshooting (‘low-cost conscience cleansing’) while not necessarily leading to better conditions for farmers.
“In short, while some of the options outlined present opportunities that may be taken up by different actors along the chain (or by governments in producer countries), they also present limitations. Diversification out of coffee is difficult, differentiated coffees are not an answer for all farmers, and only a partial answer at best in considering the near future. Other answers are needed (Lewin et al. 2004). Westlake (1998) argues that even though there is potential for selling coffee as ‘forest’, ‘organic’ and expanding sales through the specialty market, the majority of exports in the near future will comprise non-differentiated coffees, and this is probably where the greatest benefits could be obtained. According to Lewin et al. (2004), industry surveys indicate that quality and consistency are among the most important factors to be competitive in today’s markets. Kotecha (1999) further argues that there is no deficit in demand for the best qualities of Ethiopian coffee even in times of global surplus. The primary need, therefore, is to raise the quality (of both differentiated and non-differentiated coffees) rather than quantity, as higher quality levels fetch significant premiums. Moreover, it is essential to ensure that their investment in higher quality benefits producers, requiring farm gate payments that incorporate incentives for quality.”
With these opportunities in mind, the next posting will discuss parts of the study where Petit evaluates what is being done in Ethiopia.
----------------------
The definitive version of the paper is available at www.blackwell-synergy.com. Should you need a copy of the paper for use according to Journal and Blackwell Publishing’s Terms & Conditions, you may contact me at poorfarmer@gmail.com.
-----------------------
Source: Journal of Agrarian Change, Vol. 7 No. 2, April 2007, pp. 225–263.© 2007 The Author.
Journal compilation © 2007 Blackwell Publishing Ltd, Henry Bernstein and Terence J. Byres.
Nicolas Petit, 75, Avenue de l’université, 1050 Bruxelles, Belgique. e-mail: npetit13@hotmail.com
This article is based on a dissertation submitted at the School of Oriental and African Studies, Department of Development Studies, in September 2006. I am grateful to Sergio Giorgi for his support and Surendra Kotecha for his encouragement, insight and constructive criticism during work on the dissertation. Henry Bernstein gave detailed comments on various drafts of this paper, which were extremely helpful in revising it. The usual caveats apply.
A series that assesses Ethiopia’s coffee sector to understand the root causes of its problems and to point out remedial solutions. This series discusses the scholarly paper, “Ethiopia’s Coffee Sector: A Bitter or Better Future?” by Nicolas Petit.
In Part III, we’ve discussed the characteristic features of the coffee sector and the significance of coffee to the national economy.
The current part discusses the domestic coffee market reforms Ethiopia has undergone at the backdrop of the coffee crisis and their impacts. Also, constraints and prospects will be discussed in detail.
-----------------------
Ethiopia is one of the countries adversely affected by the coffee crisis. In fact, Petit notes, “Exports earnings have fallen dramatically and the price shocks absorbed by coffee producers in Ethiopia have been enormous.”
According to a UNDP estimate referenced in the study, the loss of income in 2003 amounted to about US$200 per household. Most strikingly, the study reveals that for every $2 in aid received by Ethiopia in 2003, $1 was lost through lower coffee prices. Of course, Petit stresses, not all of the coffee farmers suffered to the same extent from the crisis in world coffee prices. Some of them were severely impacted while others have managed to cope with the shock.
The crisis in the world coffee prices coincided with a period when the country was emerging out from one of its own internal political crisis. The economic reforms imposed by the World Bank and IMF also had a tremendous impact on the domestic market. Petit notes:
“The end of the Derg military regime and the arrival in government of the Ethiopian People’s Revolutionary Democratic Front (EPRDF) in 1991 led to a number of political and economic reforms, mostly in line with the neo-liberal prescriptions of the IMF and World Bank. These reforms have had effects for all sectors of the economy, including the coffee chain. Coffee market reforms began in 1992 primarily as a means to increase prices received by farmers in order to promote production and reduce the incidence of coffee smuggling to neighbouring countries (LMC 2000).“
Petit analyzed some of the changes in terms of marketing, pricing, taxation, regulation and quality control and summarized his observations as follows:
“Firstly, the coffee market reforms in Ethiopia have been a gradual process of change carried out in phases. Secondly, the process of liberalization has been only partial. Although many changes have loosened government involvement in the sector (such as the removal of the former state monopoly and the increasing involvement of the private sector, the ending of price controls or the abolition of the quota system), strict government controls remain in several areas. In addition to maintaining the auction, the level of vertical integration is limited through licensing rules and only coffee deemed unsuitable for export can be sold for domestic consumption. Moreover, Ethiopia does not allow multinational companies (MNCs) to register as exporters. Daviron and Ponte suggest that ‘as a result of the absence of MNC competition at the auction level, the industry is much more locally controlled than elsewhere in Africa’ (2005, 108).”
According to the study, the partial liberalization in Ethiopia “does not seem to have had a negative impact on quality …[but has resulted] in a dramatic reduction of government revenues (following tax reforms), with detrimental effects on the government’s ability to provide necessary services to the public.”
After analyzing the global coffee crisis, the domestic market reforms in coffee producing countries including Ethiopia, Petit concludes:
“The ‘commodity problem’ of declining terms of trade and increased price volatility, combined with shifts in the structure of world markets and ‘governance’ of the global commodity chain, in the past 20 years mean that many farmers and governments receive poorer returns from coffee exports. A greater proportion of value added is captured outside the producing countries; technical changes mean that some farmers and some producing countries are no longer competitive; and long term prospects on the world coffee market are poor.”
What can be done? Any prospects for Ethiopia?
Petit says, “Identifying the best ways to maximize Ethiopia’s export earnings or the prices received by coffee farmers is not an easy task, and policy makers are faced by a number of dilemmas with different routes available.”
At a national level, Ethiopia’s coffee sector has numerous constraints, according to the study:
“The Ethiopian coffee commodity chain faces its own complex set of problems, including various constraints on production, processing and marketing. The constraints most commonly referred to include:
1) The high incidence of Coffee Berry Disease (CBD), with an estimated 50–60 per cent of production potentially at risk;
2) The shortage of improved cultivars adapted to different localities; poor harvest and post-harvest practices reducing coffee quality;
3) Weak linkages between research, extension services and producers;
4) The lack of accurate and topical data considerably reduces the scope for informed analysis, the diverse taste profiles of Ethiopian coffees are not fully reflected in the current national classification system;
5) There are various shortcomings in the marketing system and in the organizational structure at government level (FDRE 2003a; Westlake 1998; Scanagri 2005);19
6) Not least, environmental degradation is a serious concern, with rates of deforestation estimated at 10,000 ha/year in the coffee growing areas of the South Western parts of Ethiopia, threatening its coffee genetic resources (Gole 2003).High levels of river pollution are also a major problem near coffee pulping and washing stations (Agrisystems 2001).”
On the positive side, Ethiopia has a competitive advantage over its competitors and enjoys a unique place in the world market provided some of the limitations are addressed. Petit summarizes the opportunities available at a national level as follows:
“With regards to the potential for product differentiation, Scanagri argues that ‘given its wealth of genetic resources and large areas with exceptionally good growing conditions, Ethiopia has the potential to produce large amounts of differentiated high-quality green coffee’ (2005, 49). For example, as noted above, in specialty/gourmet segments of the international coffee market, Ethiopia occupies a unique place with an impressive selection of distinctive coffee profiles.
"For Westlake (1998), there is considerable potential to increase the proportion of specialty coffee exports (used in premium blends or sold as single origins) if quality and consistency are guaranteed.20
"Increasing the quantity of washed coffee has also been proposed by many analysts as it sells at significant premiums over unwashed coffee (FDRE 2003a). More recently, it has been found that Ethiopian semi-washed coffees and good quality unwashed coffees also present significant potential on world markets.21
"Some specialty coffees are starting to be sold to consumers with specific indication of geographical origin (IGO), similar to wines. For Daviron and Ponte (2005), even though IGO systems are imperfect, they can be designed to benefit coffee producers by allowing them a share in marketing symbolic quality attributes normally controlled by actors downstream in the global commodity chain.
“The potential of sustainable coffees in Ethiopia also deserves particular attention because of their increasing popularity. For example, Ethiopia has a natural advantage in markets for organic coffee as more than 90 per cent of production is de facto organic (Mekuria et al. 2004). Furthermore, it is the only country that produces natural forest Arabica coffee, providing scope for the sale of shade-grown coffees, for example, through the Rainforest Alliance certification system.22
“However, sustainable coffees present a number of limitations. Firstly, the markets for these products remain small, accounting for a tiny proportion of the global coffee market.23 Secondly, although they tend to offer higher prices to producers, this is not always the case. Except where covered by fair trade schemes, premiums are not guaranteed but are a function of market demand. Moreover, if premiums are offered they are likely to diminish as more farmers and buyers get involved (NRI 2006). Entering such markets is also a significant challenge for most producers. For example, fair trade certification is only available to small farmer groups, organizations and cooperatives which generally consist of better-off farmers, who are more likely to benefit (Daviron and Ponte 2005).
“Finally, entry into the sustainable coffee market requires careful assessment, as the price premium obtainable may not cover the additional marketing, certification or inspection costs (NRI 2006). Nonetheless, Lewin et al. (2004) argue that these markets are important because of their current growth rates and their potential to provide better social, economic or environmental benefits for farmers. Organic, fair trade or shade-grown initiatives present a number of positive externalities in the field such as organizational development, better natural resource management, biodiversity conservation and so on (Lewin et al. 2004). Finally, although there are opportunities for product differentiation, Daviron and Ponte (2005) also argue that certification and labels do not necessarily promote different trading relations from those in mainstream trade, as such schemes can provide the means for larger specialty roasters and retailers to outsource troubleshooting (‘low-cost conscience cleansing’) while not necessarily leading to better conditions for farmers.
“In short, while some of the options outlined present opportunities that may be taken up by different actors along the chain (or by governments in producer countries), they also present limitations. Diversification out of coffee is difficult, differentiated coffees are not an answer for all farmers, and only a partial answer at best in considering the near future. Other answers are needed (Lewin et al. 2004). Westlake (1998) argues that even though there is potential for selling coffee as ‘forest’, ‘organic’ and expanding sales through the specialty market, the majority of exports in the near future will comprise non-differentiated coffees, and this is probably where the greatest benefits could be obtained. According to Lewin et al. (2004), industry surveys indicate that quality and consistency are among the most important factors to be competitive in today’s markets. Kotecha (1999) further argues that there is no deficit in demand for the best qualities of Ethiopian coffee even in times of global surplus. The primary need, therefore, is to raise the quality (of both differentiated and non-differentiated coffees) rather than quantity, as higher quality levels fetch significant premiums. Moreover, it is essential to ensure that their investment in higher quality benefits producers, requiring farm gate payments that incorporate incentives for quality.”
With these opportunities in mind, the next posting will discuss parts of the study where Petit evaluates what is being done in Ethiopia.
----------------------
The definitive version of the paper is available at www.blackwell-synergy.com. Should you need a copy of the paper for use according to Journal and Blackwell Publishing’s Terms & Conditions, you may contact me at poorfarmer@gmail.com.
-----------------------
Source: Journal of Agrarian Change, Vol. 7 No. 2, April 2007, pp. 225–263.© 2007 The Author.
Journal compilation © 2007 Blackwell Publishing Ltd, Henry Bernstein and Terence J. Byres.
Nicolas Petit, 75, Avenue de l’université, 1050 Bruxelles, Belgique. e-mail: npetit13@hotmail.com
This article is based on a dissertation submitted at the School of Oriental and African Studies, Department of Development Studies, in September 2006. I am grateful to Sergio Giorgi for his support and Surendra Kotecha for his encouragement, insight and constructive criticism during work on the dissertation. Henry Bernstein gave detailed comments on various drafts of this paper, which were extremely helpful in revising it. The usual caveats apply.
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