After 20 years the Ethiopian Government Returns to Heavy-Handed Interference in the Coffee Market

News Report: Ethiopian State Plans Coffee Exports to Ease Currency Shortage
Bloomberg, April 2, 2009: "[Ethiopia] said it would start exporting coffee via the state-owned Ethiopian Grain Trade Enterprise in a bid to improve the situation. 'Ethiopian Grain Trade Enterprise knows that it has the capacity to do this and it has a very good opportunity to fill this export gap,' said Berhane Hailu, the company's general manager, by phone from Addis Ababa today."

The EGTE - A Derg Era Institution

Eleni Zaude Gebremedhin (PhD), Chief Executive Officer of ECX told Capital that last week the exchange accepted the enterprise’s [EGTE] entry into its coffee trading system. "Months earlier the enterprise told us about their intention to be involved in the coffee trading business and last week they came with their coffee trading license, so we allowed them to participate," said Dr. Eleni.
- Capital, Mar 30, 2009

There have been many consultations with producers and exporters on how to launch coffee trading in the Ethiopian Commodity Exchange, she said, further indicating that the government will be handling the directive.

"Over time, the existing auction system in the coffee trading will be transferred to commodity exchange. After a transition period the government will issue a public directive on what would be happening to the coffee trade and it will be transitioned to the ECX," Dr. Eleni said.
- Walta, undated.

The Ethiopian Grain Trade Enterprise [EGTE] is the successor to Mengistu's Agricultural Marketing Corporation (AMC). The AMC distorted Ethiopia's agricultural system by imposing fixed prices and quotas on farmers and traders. The purpose was to ensure low-cost food supply to the army and to urban areas. The AMC also operated ration shops. In 1990, Mengistu became desperate enough to finally abandon this inefficient, coercive system and liberalized the grain markets. Prices rose immediately (benefiting farmers), obviously a spur to higher production.

Another big distortion - particularly affecting coffee - was the overvalued exchange rate. This meant that coffee farmers were underpaid for the value of their coffee. Smuggling to neighboring countries was the result, along with low production.

The TPLF renamed the AMC as the EGTE and kept Mengistu's 1990 reforms - the EGTE became just one player in the agricultural marketing system. Also the exchange rate was semi-liberalized. The result is the large increase in coffee exports.

Foreign Currency Shortage

The Government believes many suppliers and exporters were engaged in collaborative market distorting tactics before the new electronic trading system was introduced late last year. Now, as the new system has blocked these practices, MoARD says the exporters have resorted to stockpiling while they wait for prices to appreciate.
- Capital, Mar 30, 2009

The devaluation of birr against dollar, the variation in the global and local coffee price and the chemical contamination of coffee sacks have resulted in the current coffee hoarding, Dr. Eleni said. "Considering these facts people engaged in the coffee business should actively participate in the coffee trading by becoming members of the ECX" she said.

Concerning the rumors moving around about the missing of 10,000 tons of coffee from the warehouses, Dr. Eleni said that the stated volume of coffee was lost before the establishment of ECX. Therefore, the public should be clear with the issue, she added.
- Walta, Jan 29, 2009

Ethiopia has exported record amounts of coffee in the past few years. Thus it is not clear what is the root of the TPLF's displeasure with the coffee traders. Scroll down to the APPENDIX for a different perspective on the problems of the ECX, the government interference, and the potential negative effects...

The severe consequences of the TPLF-created inflation economy of 2005-08 are becoming clear today. Huge expansions in the domestic currency (Birr) have not been matched by commensurate increases in hard-currency dollars available to the economy. In a free exchange rate system, the Birr would automatically devalue to balance supply and demand. But the TPLF is preventing this. The overvalued Birr serves as a tax - a transfer of wealth from the people to the government. The TPLF is underpaying for hard-currency remittances, foreign aid, and coffee exports. This gives it extra resources - its like a 20% or 30% hidden tax depending on how overvalued the Birr is.

For coffee farmers (and traders) this means they are getting paid much less than they should. The TPLF is keeping most of the profit. The situation is so out of balance that the local market price is higher than the international price calculated at the official exchange rate. That's part of the reason why the export volumes have been dropping.

Obviously the exchange rate is inappropriate. The TPLF should devalue the birr. But it can't do so easily. Ethiopia is suffering from very high inflation rates, thanks to the wildly irresponsible TPLF monetary policies of 2005-08. Devaluing the Birr would pour fuel on this fire as the price of imported commodities would soar.

But there is also another reason: the hidden tax benefits that the TPLF is reaping. If the birr is devalued, the farmers and exporters would have much more money in their pockets. This is the "hidden tax" money the TPLF has been collecting for itself.

The coffee crop in Ethiopia is small this year due to a variety of factors. What could the government do to stimulate production?

One fundamental thing all countries can do is the exchange rate adjustment. In Ethiopia, most of the fruit juice in the market is imported either from South Africa or the Gulf. Juice can't be too difficult to produce. Ethiopia can produce lots of good fruit. And yet, Ethiopian business people are finding it easier to import than produce it because the exchange rate makes it cheaper to import it.

But if exchange rates are adjusted and imports become much more expensive, some people will begin to say, "Why don't we produce it here?" That's how you stimulate domestic production. And at the moment, when I see simple things like fruit juice being imported, I feel quite sure that the exchange rate is not right.

Ken Ohashi - World Bank representative in Ethiopia Eventually, it is healthy for Ethiopia to institute a system to determine the exchange rate purely by the market - Reporter, Mar 21, 2009.

TPLF Clumsy Interference and Outright Government Control

The problems of coffee trading and the ECX have not been clearly explained to the public. There is no transparency. What are the real aims of the government? Why did the government have to take such a controlling role in forcing to traders to use the ECX. What was so bad about the previous auction system? What is so bad about free enterprise in Ethiopia's coffee marketing sector? Why is the Derg-created EGTE entering this private market which functioned to export record volumes of coffee in recent years?

In other countries, farmers, traders, buyers --- the people --- set up their own systems of trade that evolve and become more and more efficient over time. In Ethiopia, the TPLF has to control everything.

Conclusion

The TPLF's neo-Derg policies will not be successful. Coffee production will decrease. Smuggling will increase. Farmers will switch to crops that have less TPLF interference. It is sad that the leaders of Ethiopia - Mengistu and then Meles - simply refuse to learn, and think control and force is the solution to any problem.

Thus it is appropriate to refer to the Ethiopian government as the TPLF.

APPENDIX: A knowledgeable foreign observer comments on the ECX and its problems with coffee trading - March 2009

One thing is clear, that the crop is small in all areas. And the new Coffee Exchange that replaces the Auctions, called the ECX, has everyone confused. (http://www.ecx.com.et/)

I am not even going to try to explain it here, but the consequence is that the entire coffee supply chain is constipated. Nothing is moving; co-operatives and private mills aren't delivering coffee, the Addis Ababa dry mills are not running, and nothing is shipping. That's not good for the coffee either, to sit in parchment when it is ready for hulling, sorting, and export. So we'll see how it plays out in the next couple weeks, which are critical.

The exchange was designed for grains more than Specialty coffee. In fact, the ECX directors claimed that Specialty levels of coffee make up only 2% of Ethiopia coffee exports and did not merit their own trading system. But that is improbable; 2%? It's at least 20%, perhaps more toward 40%. Their basis is dead wrong in my opinion.

What was wrong with the old auction system? Well, it was full of tacit agreements between bidders that, if a coffee lot "belonged" to a particular exporter, others would not bid. But most often, this meant that the exporter was working directly with a source, had made investments on the farm level, or in the least had a long relationship with the producer, was probably helping with wet-milling, was transporting the coffee in their own trucks, and was probably dry-milling the coffee at their own facility. So they had a "right" to ownership.

If these illicit non-compete "agreements" were an issue, they should have been formalized by the new system with an above-the-table mechanism to pass coffee around the auction. With the new system, only co-operative Unions and direct farm-to-client sales can bypass the auction, leaving all these new hybrid private mills / private co-ops and all the aforementioned "exporters who source at or near farm level" screwed.

These are the people who are transforming the landscape of Ethiopian coffee exports by allowing buyers to form solid direct relationships with growers, to have new transparent pricing schemes, to work toward new levels of quality improvement with repeatable results year to year.

The ECX benefits old-style exporters who simply trade coffee, who buy and sell container-load lots and don't ever need to leave Addis to do their business. That is "coffee as commodity" and no matter how you dress it up, it does not suit the way most quality-oriented coffee buyers do business these days.

So for now we are crossing our fingers that there is some way for private mills and others to bypass the Exchange, and quickly, or all our projects in Ethiopia coffee (including the Choma raised-beds in Harar) are doomed to be.