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. 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, and ECX has fallen prey to the government.
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, the
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 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 of 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, AtoAntenehAssefa 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 tradingmay be
heartbreaking to some, but it was clearly headed in that direction. For
example, Prime Minister MelesZenawi
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 bans 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.” 2Except
in the written Constitution.
The Ethiopian government just needs to live by its own written
Constitution.
—- 1
Estimate based on actual data available through May 31, 2012
