By Wondwossen Mezlekia
July 05, 2012
Ethiopia's coffee export continues
to plummet due to chaotic government controls and enforcement of bad policies.
The downward trending export that began falling in 2008/09 following the government's
tightening of its grip on the sector continues to nose-dive in the face of
favorable international prices that hit a 13-year high in 2010 and a 29%
increase in total production.
According to the International
Coffee Organization (ICO), Ethiopia's production during the current crop year was
549,745 tons and domestic consumption is estimated at 223,747 tons.
Based on available cumulative data, the
current year's export is forecast to be about 143,442 tons - a decline by about
30% from last year's 199,871 tons. 1
In
the four years since Ethiopia Commodity Exchange (ECX) began trading coffee
(2008/09-2011/12), the country's net export has declined by about 9% to an
average of 164,735 tons per year from the previous four years' average of
180,195 tons per year (2004/05-2007/08).
The average exported percent of production during the four years post ECX has
dropped to 37% from an average of 51% during the four years pre ECX. This
number is expected to hit an all time low of about 26% in the current crop
year. Assuming an estimated 41% domestic consumption, about 33% of the
production is expected to be unaccounted for this year alone.
Such a significant drop of export
(relative to production and consumption) was seen only twice in the last 22
years. The first was between 1990/91 and 1992/93, when the country did not have
a functioning government during the power transition. At that time, the annual
export was only 37% of production on average and domestic consumption was more
than 50% of production. Then in year 2000, during the international phenomenon
dubbed "Coffee Crisis" when international prices hit historic lows,
Ethiopia's export was 45% of production and 65% of the production was sold for
domestic consumption (the volume that was available for market was boosted up by stocks rolled over from previous year's harvest). In all other years, export has been at par or slightly
higher than domestic consumption and steadily increasing with production.
It is noteworthy that the country's export
is shrinking during “normal” times in spite of the fact that international
market situations favor producing countries. The current decline is entirely attributed
to the government's new strategy of increasing exports by enhancing its control of the coffee sector. The then new ECX was tasked
in December 2008 with the responsibility of managing the pricing and flow of
coffee exports. But, as the
strategy failed and the control backfired, export plummeted, illicit trade has
risen, the country lost its competitive advantage in the Specialty coffee niche market.
Rising illicit trade
As export and domestic consumption
get constrained by overbearing and dogmatic management, illicit trade is rising
within and across the borders as the preferred outlet to absorb the excess
production. Traditionally, the strong domestic consumption has been the only
alternative market that served as an outlet for the excess production. The
demand in domestic market is so high that inferior quality coffee is often sold
at prices that are 150-175% of the price for the finest coffee reserved for
export. Obviously, coffee farmers and traders would generally be better off
selling their coffee stocks in local markets, but doing so is illegal. Selling
coffee outside of ECX's coffee trading centers is punishable by a 20-year
prison term and up to 50,000 Birr fine. Granted, it's nearly impossible to
monitor the flow of coffee from smallholder
farmers to ECX's coffee trading centers, but once the coffee gets to the
trading center, ECX's Warehouse Receipt System makes it easier to monitor and track
the stock until it is delivered to exporters and ensure that it isn't sold in the
domestic market.
Because the government has tightened
its noose around exporters and has made it harder for importers to buy, export
is lagging behind production. With more coffee entering into the marketing
system than what is discharged out to export markets, the coffee chain inevitably
had to rupture at its weakest link: between farm gate and ECX's coffee trading
centers. As a result, more coffee is now "smuggled" out to domestic
markets and neighboring countries at a rate faster than exports.
The questions of "freedom to
choose" and "individuals' right to sell and buy” aside, the
government's controlling system is flawed and unsustainable even in the
simplest technical sense. The controls and regulations that were meant to
ensure increasing outflow of export have created an unnecessary bottleneck. A
series of misguided and overbearing policies and dogmatic management only
exacerbates the coffee trade and will capsize ECX itself.
Ethiopia lost its competitive advantage
A commodity exchange is for
run-of-the-mill commodities, not for gourmet foods, and definitely not for
“Specialty Coffee” trade. The fast growing market for single-origin Specialty
Coffee follows a different model than that of commodity coffees. Specialty
Coffee is about stories behind the coffee as much as it is about its high-end taste.
The human connection between buyers and farmers is as essential as the quality
of the bean. ECX's Warehouse Receipt System breaks this relationship and the
ability to trace the bean to its origin. As a result, Ethiopia has lost its
long held competitive advantage and commanding reputable place in the Specialty
Coffee niche market, and thereby has given up its market share in the
single-origin coffee market. Many small sized Specialty Coffee importers and
buyers have since resorted to Kenya, Tanzania, Rwanda, Costa Rica, and other
coffee growing countries. Today, Ethiopia's famous brands, such as "Sidamo,"
"Harar," and "Yirgacheffe" are nowhere to be seen, for
example, in the omnipresent stores of Starbucks.
In short, the decision to move the
coffee trade to ECX was not based on sound economic policy.
Worst place to do coffee business
The aggressive government
intervention and bad policymaking has made Ethiopia the worst place on earth
for coffee trade.
In March 2009, the government accused
88 exporters of "hoarding" coffee stocks in anticipation of prices
going up and confiscated 17,000
tons of coffee and revoked their licenses. In doing so, it frightened other
exporters from taking similar risks in the future. Most importantly, the
business relationships that the exporters had established with hundreds of
buyers and ultimate importers were lost overnight.
In October 2011, Ministry
of Trade banned 55 more traders from the exchange, accusing them of failing to
comply with the "Coffee Export Regulatory Directive" which limits the stock sizes that exporters can hold at a time. This action has deterred other traders
from taking risks of buying and storing coffee for delivery when they find a
buyer. They now buy coffee after they have signed an agreement with buyers and
only when they are certain to secure a signed shipment agreement soon after.
This leaves no room for exporters to take advantage of prices going up or down
due to international market volatility.
Then there is the November 11, 2011 directive issued by
Ministry of Trade requiring the shipment of coffee in bulk containers (filling
coffee in 'dry
containers' fitted with a liner, as opposed to loading coffee packed in
60-kilogram jute-bags). This one went too far
even by Ethiopia's standards. It took aim at not only exporters but also
foreign buyers and imposed restrictions on how Ethiopia's coffee should be
shipped regardless of international standards, buyers' preferences, and
regulations in consuming countries. The directive was yanked thirty days later
because of pressures from foreign diplomats and industry lobbying groups.
These and much other ridiculous interferences have made it
difficult for the remainder of exporters and many more importers to do business in - and with - Ethiopia.
ECX not
allowed to live up to its name
While the Ministry of Trade continues to bully exporters,
other top government officials, whose focus remains to be the maintenance of an
authoritarian state, are bent on making sure that ECX won't be able to create
an autonomous island for price speculation within its domain. ECX's own blunder
would make things even worse.
In the short time of its existence,
the exchange was able to introduce new technologies and processes that have
improved standardization, expedited payments & delivery, expanded
information dissemination, and played a catalytic role of enhancing the banking
system. But the actual trading platform has been - and still is - stalled at
its initial stage.
ECX
was established as a spot-trading platform (a
form of trading that involves buying or selling of a commodity on the spot date
and immediate delivery of physical commodities) with
plans to immediately include futures trading (buying or selling of a commodity that will be
delivered and paid for at a specified future date at a price agreed today).
The most important difference between spot trade and futures trade is that the
latter provides a price guarantee that will be paid to the farmer when a
commodity, such as corn or sesame seed, is delivered when it is harvested
several months in the future. A futures contract protects a farmer from price
drops. A buyer of such a commodity is also guaranteed that prices will not go
up when the produce is delivered.
Most commodity exchanges
allow, among others, spot, forward, and futures trade. These options are at
the heart of a well-functioning commodity market and ECX leaders have been
hoping that the authorities would allow the introduction of forward and futures
trading soon after spot trading commenced. The government also appeared to have
accepted the idea of investing on the technical capability to perform futures
trading.
In 2009, the government diverted part
of the credit it received from the International Development Association (IDA) towards the acquisition of “a comprehensive
commodity exchange solution to enable end‐to‐end
secure and web‐based Spot, Forwards
and Futures trading operations." The procurement failed to materialize due
to alleged fraud and corruption during the bidding process.
Late that year, ECX
floated an international Invitation for Bids (IFB) and awarded the contract to
the Sri Lanka based Millennium IT on November 12, 2010. However, in early
December 2010, the World Bank rejected the contract award proposal after it was
tipped by one of the bidders of a suspected shenanigan. ECX’s leaders were summoned to the Prime
Minister's office later that year, but no formal investigation was initiated. This
was a sad failure on ECX's part and one that may have even given the
authorities an excuse to delay ECX's expansion. In mid 2011, ECX's Board and the CEO worked out a
transition plan to relieve the officers of their duties by recruiting
replacements including a new CEO. The timing coincides with the end of the
five-year project agreement with UNDP and USAID (the two development agencies
that cover the salary packages for the CEO and the other officers,
respectively). Although the contract is coming to an end, securing funds for an
extension of the contract is not out of reach. However, it is unclear whether
the alleged fraud and corruption was a factor. In any case, the acquisition of
the software has been abandoned since.
According to Reuters, Dr. Eleni Gebre-Medhin told the media on June 21, 2012 during
the joint press conference where the incoming CEO, Ato Anteneh Assefa was
announced that, "the policy dialogue (on future trading) was a bit stalled
partly because of the various crises that keep occurring in the broader market
globally and over fears that the design would have to really be cautious here
in Ethiopia. For the moment that project is on hold."
In
plain English, the suspense game and empty hope of implementing ECX's futures
trading had ended. The rest of "cautious design" and "global
crisis" jargons are simply nonsensical excuses.
Land of no freedom to choose
The news about the government’s
decision on futures trading may be heartbreaking to some, but it was
clearly headed in that direction. For example, Prime Minister Meles Zenawi was
unequivocally clear in March 2009 when he promised to cut off the hands of
anyone who dares to speculate on prices, a practice that is central to futures
trading. His words later became law when Ministry of Trade issued the Coffee Export Regulatory
Directive which states in part that exporters would be banned from ECX for
three months if found storing 500 tons of coffee without legal shipment
contract signed for it, and banned for two months if the stored amount is
between 54 and 500 tons.
How can one trade on future
contracts when one doesn’t even have the basic right to secure ownership of
coffee stocks and then shop around for better prices? Speculation plays an
important role in futures trading; therefore, by making it illegal to
speculate, the government is essentially banning futures trading altogether.
Some countries ban futures trading in certain commodities under various
circumstances, but no other country has ever banned the practice of futures trading
itself. All governments regulate markets and wrongdoings, but in Ethiopia’s
case, the government oversteps its bounds - it is excessive, haphazard,
oppressive, and unjust.
The
stories behind the past four years' downward spiraling trend of coffee exports
and the manner in which the government has consolidated its control of ECX
collectively represent the trend and government practices in every realm of
the country. All
Ethiopians, those supporting the ruling party and opposing it alike, share Dr.
Eleni's dream of making Ethiopia the Bhutan of Africa. According to the
sentiment that the many writers and commentators expressed on Ethiopian blogs, the
two sides differ mainly on whether or not there is "freedom to choose" in Ethiopia. The experiences of
the coffee sector and ECX now deliver the verdict, and both sides may agree,
that there is no freedom of choice, whether
it is " where to live, what
to do, what to buy, what to sell, from whom, to whom, when, and how." 2 Except in the written Constitution.
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1 Estimate based on actual data available through May 31, 2012
More information: http://poorfarmer.blogspot.com/p/ecx-watch_15.html
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