Wondwossen's Note: Apparently,
this unclassified cable, labeled April 9, 2009, was released on the same day I
published my first assessment of the situation in Ethiopia's coffee sector: " Coffee Brews Feud, Drowns Out Voices".
Since then, I have published multiple commentaries on the Ethiopia Commodity
Exchange (ECX) and the state of the coffee sector. Those commentaries,
including updates and news articles from other sources, can be accessed through
the standalone page dedicated in this blog and named "ECX Watch".
This
cable also puts to rest the points of contention addressed in "Straightening
out coffee facts for the record", which was a rebuttal of the
arguments of Dr. Eleni Gabre-Madhin, CEO of the ECX.
The contents
of the cable can be summarized in the following broad categories:
1.
The Government of
Ethiopia (GoE) passed the coffee law in order to control the domestic coffee
sector
2.
ECX had a limited
capacity and market breadth when tasked by the GoE to manage the price and flow
of exported coffee
3.
Domestic market often
pays prices well above world prices
4.
Coffee buyers can now be
assured of more supply consistency and volume of coffee slated for the export
market
5.
The GoE has not
addressed specific treatment for specialty' or 'organic' coffee
6.
It's uncertain if the
Government will allow the provision in the law for farmers and producers to
export directly to the global markets to work
7.
The GoE's public clamp
down on coffee exporters may have signaled its move to capture a larger share
of the lucrative market
8.
The state-owned
Ethiopian Grain Trade Enterprise entered the coffee trade the bulk of which was
so far controlled by private companies
I will
discuss these and the other relevant sections in a future article.
===
Viewing cable 09ADDISABABA780,
COFFEE EXPORTS FALL AS GOE TIGHTENS GRIP ON MARKET
Reference ID
|
Created
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Released
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Classification
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Origin
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VZCZCXRO1326
PP RUEHROV
DE RUEHDS #0780/01 0970903
ZNR UUUUU ZZH
P 070903Z APR 09
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 4299
INFO RUEPADJ/CJTF HOA PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEKDIA/DIA WASHINGTON DC PRIORITY
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
PRIORITY
RUEWMFD/HQ USAFRICOM STUTTGART GE
PRIORITY
RUEKJCS/JOINT STAFF WASHINGTON DC
PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE
CORP PRIORITY
RUCNIAD/IGAD COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON
DC
RUEATRS/DEPT OF TREASURY WASHINGTON
DC
UNCLAS SECTION 01 OF 04 ADDIS ABABA
000780
SIPDIS
SENSITIVE
DEPARTMENT FOR EEB/IFD/OMA -
JWINKLER AND EEB/CBA - DWINSTEAD
DEPARTMENT PASS TO U.S. PATENT AND
TRADEMARK OFFICE - AMY COTTON
USTR FOR PATRICK COLEMAN, CECILIA
KLEIN, AND BARBARA GRYNIEWWICZ
DEPT OF COMMERCE WASHDC FOR ITA
BECKY ERKUL
DEPT OF TREASURY WASHDC FOR REBECCA
KLEIN
E.O. 12958: N/A
SUBJECT: COFFEE EXPORTS FALL AS GOE
TIGHTENS GRIP ON MARKET
REF: 2008 ADDIS ABABA 02569
ADDIS ABAB 00000780 001.2 OF 004
SENSITIVE BUT UNCLASSIFIED; BUSINESS
PROPREITARY INFORMATION; NOT
FOR INTERNET DISTRIBUTION
-------
SUMMARY
-------
¶1. (SBU) The government
of Ethiopia (GoE) established a new coffee quality control and marketing law
(amended August 25, 2008) in order to enhance its control of the domestic
coffee sector and carve out a
new strategy for increasing coffee
exports. However, over the last eight
months, the new law has been met with stiff resistance from private coffee
exporters and has also coincided with a marked decline in the value and volume of
exported Ethiopian coffee. It appears
that opposition to the new law by coffee exporters coupled with persistent
backwards farming methods, opaque trading practices, unfavorable climatic conditions
during the last harvest and finally softening global demand continue to stifle
the GoE's export-led strategy and ability to earn critically needed foreign
exchange earnings (Reftel).
¶2. (SBU) As authorized
by the recently amended coffee law, the GoE tasked the less than one-year-old
Ethiopian Commodity Exchange (ECX) with the primary responsibility for managing
the pricing and flow of
exported Ethiopian coffee. However, since its inception, the ECX has
drawn the ire of coffee exporters for contributing to delays and inefficiencies
in their transaction and product delivery systems. While the GoE has taken a
more active role in managing the coffee sector, it is unclear at this stage how
effectively it can enforce the law and how the coffee market, which includes a
long list of middle-men and disgruntled exporters, can rationalize the role of the
ECX and the GoE's long-term goals for the sector. END SUMMARY.
----------
BACKGROUND
----------
¶3. (U) The amended
coffee law and the ECX's establishment have modernized the coffee trade in
Ethiopia and have leveled the playing field across the supply chain. A modernized ECX now has a clear mandate by the GoE to rationalize a
fractured coffee market prone to pricing asymmetries and a declining volume of
product slated for the export market.
Close to 50 percent of coffee produced in Ethiopia gets sold to the domestic market
often at prices well above world prices.
The GoE hopes to enhance the effectiveness of the coffee supply chain,
which should increase the value and volume of its coffee exports and hopefully
improve earnings parity among stakeholders along the supply chain. The GoE has taken the fractured coffee sector
supply chain head-on because coffee is the backbone of the GoE's export-led
growth strategy. Coffee contributes 35
percent (USD 525 million) of the country's annual export receipts and is also
the mainstay of close to 15-20 million coffee sector farmers, traders and
exporters. Smallholder farmers produce
over ninety-five percent of the total coffee production while the remaining is
produced by government and private commercial farms. (Note: The GoE has also included a provision
in the amended law for farmers and producers to export directly to the global markets,
essentially bypassing the ECX. However,
it's uncertain if the GoE will ultimately allow this provision to work since
many farmer co-ops are still waiting for their licenses).
---------------------------------
COFFEE TRADE: A HISTORY OF NEGLET
---------------------------------
¶4. (U) The GoE has only
recently begun to pay close attention to the mechanics and potential of its
coffee crop. In the past, the coffee trade
seemingly functioned amid a dizzying array of middlemen, disparate farms and an ill-prepared
and organized government regulatory body.
In the last decade, the coffee sector has been shifted from varying
government agencies and primary responsibility for the sector has not always
landed in the places with the best technical capacity or resources to manage
the industry. Over the last several
years, the Ethiopian Intellectual Property Office has
ADDIS ABAB 00000780 002.2 OF 004
had the responsibility of managing
the coffee sector budget and intellectual property trademarks for Ethiopia's
specialty coffee market. There is
currently no governing office for the coffee sector within the Ministry of
Agriculture and Rural Development. Although the established trademarks for
Ethiopian coffee (Sidamo, Yiragchefe and Harar coffees) have been a victory for
the GoE and the coffee sector in Ethiopia, unfortunately, the major budgeting and
regulatory functions for the coffee sector have been underfunded and
ill-managed. In addition, the coffee
sector suffered from severe information asymmetries among farmers, suppliers
and exporters, resulting in poor pricing schemes and limited profitability for
farmers along the supply chain.
----------------------------------
GOE TIGHTENS GRIP ON COFFEE MARKET
----------------------------------
¶5. (U) Over the past
year, the GoE has tightened its hold on a coffee market that, in spite of its
leading role as the primary foreign exchange earner, has failed to live up to
its potential. In August 2008, the
Ethiopian Parliament passed a new Coffee Quality Control and Marketing law
(Proclamation No 602/2008), 64 years after the first coffee law took effect, in
order to fix the fractures in the current market. Implementing a key provision of the law in early
December 2008, the GoE halted the old and inefficient coffee auction markets
and appropriated primary auction responsibilities to the newly established
ECX. ECX, a modern trading operation,
which relies on standard coffee contracts and new automated systems, seeks to
establish standard parameters for coffee grades, transaction size, payment,
delivery, trading and order matching while preserving distinctive coffee
origins and types. ECX, unlike the
previous auction market system, is high-tech and much more concerned with quality
control and inspection of coffee products slated for the export market. Coffee is now traded as washed or unwashed
and bears a label of its region of origin and grade. It may also include a 'type' or new
categorization denoting a sub-region in a specific coffee growing area. The ECX will now require that all trades be based
on warehouse receipts issued to depositors rather than on a sample basis as was
done in the past. Coffee buyers can then
take delivery of their coffee product at
ECX warehouses with their ECX-issued warehouse receipts.
------------------------------------
NEW COFFEE LAW LEVELS PLAYING FIELD?
------------------------------------
¶6. (U) In a market
where profits are not shared evenly across farmers, traders and exporters, the
GoE's updated coffee law is an attempt to level the playing field throughout
the supply chain in the highly profitable coffee business. The law levels the playing field in the
coffee sector by providing transparent price discovery, enhanced supply and
regulated storage of coffee products via the ECX. Now coffee farmers and suppliers can be
assured of stable and transparent prices through the ECX's primary auction
center in Addis Ababa. The ECX allows
buyers and sellers to negotiate prices openly while New York global mercantile
coffee prices flash on the many monitors of the auction floor. The updated law closes the information gap
between the largely uneducated small holder farmers and the wealthier urban
traders and exporters. Farmers now have access
to updated coffee prices through the ECX's main auction center and via several pricing
clocks which have been set up by the ECX around the country. Also, the ECX has taken on the role of warehousing
the coffee stock provided by suppliers in order to improve storage standards
and supply consistency in the market. Coffee buyers can now be assured of more
supply consistency and volume of coffee slated for the export market. Once a trade has been completed at the ECX,
buyers can pick up their appropriate stocks of coffee at the various ECX bonded
warehouses.
¶7. (U) The GoE also
hopes to deter traders and coffee sector participants from skirting the new law
and role of the ECX by assessing heavy fines and threats of imprisonment. Stakeholders involved in the domestic coffee
business will now face much stricter penalties than in the past, such as up to
ten years of imprisonment and USD 10,000 in fines for not abiding with the new
regulations. Mr. Abdellah Bagersh, Manager of a very well established, Addis
ADDIS ABAB 00000780 003.2 OF 004
Ababa-based coffee company, Bagersh
Coffee PLC, noted that the law's focus on the elimination of illicit coffee
trade practices and punitive measures are appropriate for the health and
viability of the market. According to
Bagersh, the law addresses the preceding law's inability to facilitate a more
open and transparent market over the last seventeen years. Bagersh is optimistic that the law will help
Ethiopia to maximize foreign exchange earnings from the sector while protecting
the interests of small-holder farmers.
----------------------------------
GOE PENALIZES KEY COFFEE EXPORTERS
----------------------------------
¶8. (U) On March 25,
2009, local media outlets reported that the Ministry of Agriculture and Rural
Development suspended trading licenses of 94 coffee exporters including top
export earners, which
include Mulege Private Limited
Company, Kemal Abdela International,
¶S. Sara coffee
exporter, Legese Sherefa Ltd., Said Yassin Ali exporter and Ershere Ltd. This group of six top exporters made up the
lion's share of Ethiopia's coffee export activities (70 percent of the total
export) in 2008. With the GoE desperate
for hard currency, the Ministry cracked down on exporters who were delaying exports
by holding stock until world coffee prices increase. The GoE action follows a stern warning issued
March 3, 2009, from Agriculture Minister Tefera Derbew that all coffee
exporters needed to sell their existing coffee stocks
to the export market by March 10, 2009 or face significant penalties such as
fines, licensing bans and imprisonment.
Apparently, exporters have only exported roughly 28 percent of the stock purchased
via the ECX and are holding the remaining stock until world prices rise. As recently as April 5, 2009, local media
reported that the state-owned Ethiopian Grain Trade Enterprise set plans to
begin exporting the seized coffee stocks within a week of the announcement in
order to fill the current supply gap.
The GoE has not indicated how long the Grain Trade Enterprise will
attempt to fill this gap or how much additional share of the export market they
will try to capture over time. To date,
private companies have controlled the bulk of the coffee trade, while the
government has taken a backseat.
-------------------------------------------
ECX AND WEAK DEMAND TO BLAME, SAY
EXPORTERS
-------------------------------------------
¶9. (U) Exporters point
to the ECX's inefficiency and the falling global demand and prices as the major
culprits behind the real declines in coffee exports from Ethiopia. Critics contend that the GoE has come down
too hard on exporters for allegedly hoarding coffee. Penalized exporters and coffee sector experts
claim that the recent government action to ban the licenses of several large coffee
exporters from trading may destroy the business of these banned exporters and
ultimately will exacerbate the acute supply gap
in the coffee market. They say that the new coffee legislation does
not explicitly address the roles and responsibilities of critical stakeholders
in the coffee market and has left major supply gaps in the market. Although optimistic about the law, coffee
exporter Abdellah Bagaresh noted the absence of any awareness or educational campaigns
by the GoE on the precepts and goals of the law in either its previous or amended form. Bagaresh suggested that coffee stakeholder
training and workshops should have been developed in tandem with the passage of
the amended coffee law. Moreover, important coffee sector participants
were not given adequate time to provide feedback to the GoE on the proposed
amendments to the 60 year old coffee law.
¶10. (U) In addition to
waning global demand for Ethiopian coffee, allegations of theft along the
supply chain remain rampant. Although now proven to be unfounded, local
Ethiopian press reported on January 25, 2009 that up to
10,000 tons of coffee (worth about USD 20 million) set for the export market
had vanished recently from the ECX's bonded warehouses. Ethiopia exports roughly 150,000 tons of
coffee per year. The allegation of
missing coffee set the Prime Minister on a collision course with coffee
exporters and the ECX. In response to this loss, the Prime Minister said the
GoE would "cut the hands of those committing grave
crimes against the country as of January 9, 2009." However, the head of the ECX, Eleni
Gebre-Medhin, has consistently maintained that the allegations of lost coffee
and
ADDIS ABAB 00000780 004.2 OF 004
exporter complaints of delays at the
ECX have been untrue and completely unfounded.
Dr. Eleni attributes the recent flurry of negative reports in the media
regarding the ECX's role in the coffee market to manipulation of the media
by exporters spreading false rumors.
Eleni alleges that exporters have been unwilling to comply with the new
ECX system and remain angry over the increased trading costs such as the doubling of
storage fees to 11 cents per bag per day at ECX warehouses for coffee purchased
at the ECX. (Note: In order to improve
transparency in the ECX's auction market, the GoE has required the ECX to warehouse
all coffee stocks provided by local suppliers before sale and delivery to
exporters).
-------------------------------------
SPECIALTY COFFEE NOT ADDRESSED IN
LAW
-------------------------------------
¶11. (U) The GoE has not
addressed specific treatment for the small but important share of export coffee
known as 'specialty' or 'organic' coffee at the ECX. Currently, the ECX only accommodates roughly
nine of the dozens of specialty coffee types at its auction center and does not
distinguish between specific coffee growers. Also, despite numerous efforts to
market (per increasing international demand) bird-friendly, forest-grown,
specialty and organic coffees from Ethiopia, there is no legislative framework that explicitly recognizes or
regulates this segment of coffee in terms of certification, accreditation or
monitoring. While organic coffee is
attached to some legislation, it has yet to have a publicly recognized
certification system via the ECX. Both
organic and specialty coffees lack a public/private third party certification body to source
officially information on market trends and volumes. Acting Director General of the Ethiopian
Intellectual Property Office (EIPO), Alemu Abebe, shared with EconOff that challenges persist in the specialty
coffee branding and marketing arena, such as reaping additional profits from
international buyers of trademarked Ethiopian coffee and ensuring consistent
quality along the supply chain. Ethiopia
enjoys a comparative advantage in the specialty coffee arena, particularly
because exporters can fetch much higher prices in the world markets. To date, Ethiopian coffee makes up a modest two percent of the
world coffee market.
-------
COMMENT
-------
¶12. (SBU) The new
coffee law is a major step forward by the GoE to improve the supply chain,
price scheme and earning potential of exported coffee. As a result, the ECX now manages the major
distribution and pricing functions
of coffee trade and tries to address the decades of GoE inattention to the
sector and severe technological and information gaps along the supply
chain. Although the law is a step in the
right direction, the GoE should continue to encourage overall market
efficiency, and provide additional financial support to the ECX for increased
product differentiation and targeted responses to specialized global coffee
market demands. The ECX does not provide, as of yet, a full suite of coffee varieties, grades and a high level
of product differentiation. Incidentally, international buyers continue to lament
the lack of specialized coffee varieties and the inability of the ECX to identify
desired coffee product from favored growers.
The newly amended coffee law does not significantly address the ECX's
limited capacity and market breadth, and certainly does not deal with the external
impediments to the coffee sector such as declining world demand for coffee and
deleterious climatic patterns. Lastly,
the GoE's recent and public clamp down
on coffee exporters for allegedly hoarding stock has imperiled the sector's
already fragile supply chain and may have signaled the GoE's move to capture a
larger share
of the lucrative market. END COMMENT.
YAMAMOTO