Coffee in Ethiopia: Direct From the Source

The Increasing Sophistication of Coffee Drinkers is Good for Producers

From The Economist print edition
April 17, 2008 ADDIS ABABA


COFFEE prices are the highest they have been for a decade. As consumers in India and China develop a taste for the drink, prices are likely to keep rising. Meanwhile something new is happening in developed markets. Europeans, Americans and Japanese are switching to higher-quality coffee. Discerning consumers now demand authenticity: they want stories about where their coffee beans come from. So the best coffees will increasingly be differentiated, like fine wines and spirits, and sold at previously unthinkable prices.

The move from instant-coffee powder to luxury beans is in some ways reminiscent of what happened when the Scotch-whisky industry shifted from cheap blends to expensive single malts, each with its own story. But where the whisky revolution was masterminded by distillers, the coffee revolution is a messier insurgency. Gourmets and specialist roasters have pushed up expectations. Governments, activists and “ethical” coffee suppliers have worked to get higher prices.

All this is good news for coffee farmers in east Africa. Altitude, climate, soil and genetic diversity give the region an inherent advantage in quality. With lower-grade Latin American coffee dominating the market, there is scope for the best coffees from Ethiopia, Kenya, Tanzania and Rwanda to establish themselves.

Ethiopia is the largest African producer. Its coffee sales last year were $425m, representing 36% of export earnings. It has a story to tell: an Ethiopian goatherd, Kaldi, is said to have discovered coffee's stimulating properties in the 9th century. Already, 40% of its production is premium coffee. Until recently, however, that did not yield higher prices for farmers. When the commodity price was low, villages starved.

An agreement signed last year between Starbucks, the world's biggest coffee chain, and the Ethiopian government has been touted as a big step forward. Starbucks had objected to the government's plan to trademark the names of three local coffee varieties. The firm worried that having to license these trademarks would introduce legal complexities that might deter it and others from buying trademarked beans, thereby hurting farmers. Critics think the numbers used by activists to shame Starbucks were shaky. Others argue that farmers would gain a lot more if African governments were bullied into cutting bureaucracy and building infrastructure.

What is beyond doubt is that the three varieties in question—Harar, Yegarcheffe, and Sidamo—are among the finest beans in the world. The hope is that trademarking these regional varieties will establish them as brand names and enable farmers to demand higher prices. Might geographical indicators, like the appellation contrôlée system in French wine, have been a better option? The head of the Ethiopian Intellectual Property Office, Getachew Mengistie, thinks not. The coffee varieties were not strictly regional, he explains, so a wine-style designation would have made no sense. Nor was the money or time available to pursue a complicated certification process. Instead, Ethiopia has quickly licensed its brands to 70 suppliers worldwide, including Starbucks.

Licensees agree to use the brand names and to educate consumers about the characteristics of the different varieties. By allowing licensees to use the trademarks without paying royalties, Ethiopia is, in effect, trading their use for free marketing. (Colombia, for example, runs advertisements in rich countries to promote its coffees, which Ethiopia cannot afford.)

Rick Peyser of Green Mountain Coffee Roasters, an American supplier which counts Yegarcheffe among its premium coffees, thinks it will be only a matter of time before the trademarks start to improve the lives of farmers. Ethiopia is now planning to extend the trademark approach into new areas, such as traditional medicines and certain types of teff, the country's usefully gluten-free staple cereal crop. But coffee, an unparalleled genetic resource, with over 5,000 varieties, will remain the biggest earner.

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Yirgacheffe Has Starbucks' Number in Coffee Brand Row

Fog rolls over the hills in Yirgacheffe on Dec. 7, 2007. Photographer: Michael Tsegaye/ Bloomberg News

By Marianne Stigset
Bloomberg

April 17, 2008

Wearing a gray jacket and white cap to ward off the early morning chill, Bedhane Gambarso plucks ripe, red coffee berries from the trees on his 1.5-hectare (3.7- acre) farm in the hills of Ethiopia's Yirgacheffe region.

Gambarso, a 44-year-old former soldier, earned 4,000 birr ($421) last year from his crop, which had to support his wife and eight children until the next harvest. At night, the family shares its one-room hut with two cows and three sheep.

Ethiopia, where coffee originated, is trying to boost the incomes of farmers like Gambarso by trademarking its beans, prized for their rich, fruity flavor. Producing nations such as Colombia have followed suit as growers struggle to grab more of the $25 billion consumers spend on premium varieties each year.

Success may mean higher prices for lattes and cut profits for companies such as Starbucks Corp. The world's biggest coffee chain paid farmers an average of $1.42 a pound in 2006. It sells some specialty Ethiopian beans for as much as $26 a pound.

``Businessmen don't want to increase the price of coffee; they try to keep it depressed,'' Gambarso says. ``The people of Yirgacheffe are praying to God to solve this problem.''

Starbucks initially opposed Ethiopia's efforts to trademark its specialty beans. While Yirgacheffe won a U.S. trademark in August 2006, a first for a foreign coffee producer, applications for the Harrar and Sidamo regions were delayed. Starbucks withdrew its objections last June. Sidamo won a U.S. trademark in February, and a decision on Harrar is pending.

The three beans are now trademarked in at least 30 countries, and Ethiopia has signed licensing agreements with more than 60 companies, including Starbucks.

Producer Leverage

The strategy reveals a growing effort by producing countries to leverage the value of agricultural commodities as food costs rise worldwide. Prices for generic arabica beans, preferred over the more bitter robusta for lattes and cappuccinos, have risen 23 percent in the past year in New York as investors buy commodities instead of slumping stocks and bonds.

Coffee growers' share of the market value of their crop has dropped to less than 13 percent, or $10 billion, from 33 percent in 15 years, according to the International Coffee Organization.

``Historically, countries of the south have not branded their goods to try to sell them to the north,'' says Douglas Holt, a marketing professor at Oxford University's Said Business School. ``That is a new strategy and it has great potential.''

Brand Recognition

Coupled with licensing agreements, trademarks give producing countries control of their commodities in the same way Coca-Cola Co. decides how its product is marketed. The goal is to boost brand recognition, market share and price.

``The overall aim in trademarking our coffee is to create a distinction between generic coffee and specialty coffee, so the retail prices and the export price are somehow aligned,'' says Getachew Mengistie, director general of the Ethiopian Intellectual Property Office in the capital, Addis Ababa.

The strategy has begun to pay off. Yirgacheffe growers are receiving as much as $2.20 a pound, Mengistie says. That compares with an average $1.27 for arabica over the past 12 months.

Starbucks raised prices by an average of 9 cents a cup in July, the second increase in a year. Trademarks may accelerate that trend, says Pauline Tiffen, director of strategic planning at Light Years IP, a Washington-based group that helps developing countries get intellectual property rights.

``They were going to have to pay more anyways with the increase in consumption of fine and premium coffee,'' Tiffen says. ``The Ethiopia case will make an impact.''

Jamaican Blue Mountain

Ethiopian growers have benefited from publicity surrounding the licensing agreement with Starbucks, the chain's chairman, Howard Schultz, said on a visit to Addis Ababa in November.

``It is the Starbucks effect,'' Schultz said. ``Starbucks has created a halo and a spotlight on Ethiopian coffees.''

Ethiopian producers still receive less than 10 percent of the retail price for premium beans, according to Light Years.

By comparison, growers of Jamaican Blue Mountain Coffee get 45 percent of the retail price. The U.S. Patent and Trademark Office granted Jamaica a ``geographical indication,'' similar to a trademark, in 1986. While such certification guarantees the point of origin of a product, no single entity owns the brand.

Ethiopia's strategy may backfire, because roasters can simply turn to other suppliers, according to some observers.

``When consumers go to buy coffee they like variety,'' says Mick Wheeler, executive director of the Specialty Coffee Association of Europe based in Chelmsford, England. ``They might buy Ethiopian today, Colombian tomorrow, Guatemalan the day after. Very few have total allegiance to one origin.''

Smokey Flavor

Alice Waugh, an editor at The Drawbridge newspaper in London, says Ethiopian varieties have a ``nice smokiness.''

``I would be willing to pay more for it, if it's Fair Trade and it's going back to the farmers, so people can send their children to school rather than have them work on the coffee plantations,'' says Waugh, 27. ``That's important.''

Andrea Illy, chief executive officer of Illycaffe SpA, says Ethiopia should focus on quality rather than trademarks, which will only garner higher prices from roasters who sell pure origin beans, less than 10 percent of the market. Illy, Italy's second- biggest coffee company, buys Sidamo, Harrar and Yirgacheffe.

``Ethiopia 10 years ago was successfully selling its coffee at a much higher premium,'' Illy says. ``There has since been a price deflation because of mismanagement.''

Coffee is Ethiopia's largest foreign exchange earner. It exported 176,390 metric tons valued at $421 million last season. Specialty beans accounted for about a third of the shipments.

Oxfam, an Oxford, England-based anti-poverty campaigner, estimates trademarks may boost revenue by 20 percent.

Quality Drive

Mengistie says his country is also working to improve quality. Government-backed initiatives include training farmers in new processing techniques and increasing the number of washing units to limit damage during transportation.

``Enhancing specialty coffee doesn't exclude trademarking,'' he says. ``The two can't be seen separately.''

The beverage is believed to have originated in Ethiopia's Kaffa region more than 1,000 years ago. According to folk lore, the stimulant qualities were discovered by a goatherd who noticed his flock was unusually lively after eating the berries.

Globally, growers have struggled to boost prices since they failed to renew the International Coffee Agreement in 1989. The accord between producing and consuming nations imposed production quotas to restrict supply and stabilize prices.

After the agreement collapsed, production jumped 38 percent in 10 years. Prices on the New York Board of Trade tumbled from a high of $1.66 a pound in 1989 to 81.35 cents in 1999.

Growing Khat

Plunging prices prompted many Ethiopian farmers to abandon coffee in favor of khat, a mild narcotic used in Africa and the Middle East. Khat is drought-resistant and produces several crops a year, delivering more reliable income. Khat was Ethiopia's second-biggest foreign exchange earner in 2004.

Zerihun Obse, a farmer from a village south of Yirgacheffe town, says he made 800 birr last year from a quarter hectare of khat, compared with 2,000 birr from a half hectare of coffee.

``Many farmers have pulled up coffee to plant khat,'' says Obse, 19. ``Six years ago it used to be all coffee.''

The government views khat as a health hazard and hopes to reverse the trend by increasing coffee prices, Mengistie says.

Tiffen says producing nations have ``inundated'' Light Years with requests for help since Ethiopia won its trademarks.

Companies Squeezed

In September, the National Federation of Coffee Growers of Colombia became the first non-European producer to receive geographical indication from the European Union, which guarantees the methods of production and the origin of the beans.

``You're seeing increasing activism in these producing countries,'' says Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe in London. ``Companies are now being squeezed at both ends.''

In Yirgacheffe, Gambarso expects his income to increase 25 percent to $5,000 birr this year. He plans to build a shelter for his animals, buy a cow and pay his children's school expenses with the additional money.

He remains concerned prices will fall again.

``The name Yirgacheffe is known all over the world, but we are the poorest of the poor,'' Gambarso says.

To contact the reporter on this story: Marianne Stigset in London at mstigset@bloomberg.net.

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