THE ETHIOPIA COMMODITY EXCHANGE: A ROUGH GUIDE TO THE ETHIOPIAN COFFEE EXPORT SYSTEM
The way in which the coffee supply chain operates within each country of origin varies significantly. In this article, I am going to focus on how coffee is bought and sold in Ethiopia, with focus placed on the Ethiopia Commodity Exchange (ECX), which trades around 60% of Ethiopia’s coffee production (Coffee and Cocoa International January 2015 edition).
In the crop year 2012-13, Ethiopia produced 8.1 million bags of coffee, 3.4 million of which were consumed internally. Brazil and Indonesia were the only producing countries where domestic consumption (20.3m & 3.7m respectively) was greater (data comes from the ICO).
Ethiopia is one of the most important (& oldest) coffee producing countries in the world and is the largest exporter of Arabica coffee in Africa. Not only is Ethiopia important due to its size, it produces what many consider to be some of the best coffees in the world, and it is the only country which Arabica coffee is indigenous to.
So, how is coffee bought and sold in this special coffee origin? All smallholder and co-operative coffee that doesn’t come from co-operative unions or private estates must go through the ECX. To begin with, I’ll outline how coffee is bought and sold through the Exchange and then I’ll go on to discuss how private estates and co-operative unions work.
The ECX was established in April 2008 with the aim to ‘…make an efficient market work for everybody…’ (Eleni Gabre-Madhin, founder of the ECX and former economist for the World Bank). This includes not only sellers, but also buyers and intermediaries. It is an exchange which handles other commodities such as sesame and wheat, to name but a few, however the focus of this article will obviously be on coffee.
Prior to the establishment of the ECX, there were numerous factors which distorted the market, with those most negatively affected, tending to be smallholders, who produce over 95% of Ethiopia’s coffee. Many of these smallholders live in very remote places with little or no access to infrastructure, communication or information, so the potential for middle men to exploit this was rife. If a buyer proposed a price, the smallholder would have no chance of knowing whether this was a fair price or not, and thus often just had to accept it at face value without any negotiation. Also, there were no guarantees that they would be paid in full, and on time. The establishment of the ECX has helped to prevent these types of situations arising.
To say that this is the only benefit of the ECX, though, would do it a disservice. In general, it guarantees security over the whole supply chain and does protect both buyers and sellers. The ECX defines itself as ‘…a marketplace, where buyers and sellers come together to trade, assured of quality, delivery and payment.’ How so?
The Exchange is based on a membership system whereby players buy a membership seat, using this to trade on behalf of themselves, or to represent their clients – be they farmers, exporters, millers, roasters or any other party in the supply chain. It begins with sellers bringing coffee to the ECX warehouse where it will be graded and analysed by the Exchange’s official liquorers (coffee cuppers).
40% of the value of the final score comes from the quality of the green bean (defect count etc.) and the remaining 60% is attributed to the cup profile (how well the coffee cups). After both aspects have been scrutinised, the coffee is given a score. This score, together with the way the coffee is processed – i.e. washed or natural, will determine its grade. This grade and the name of the region where the coffee comes from are the only pieces of information that the buyer will get.
The transportation of coffee to the Exchange warehouse and the evaluation that follows guarantee two things; security to the buyer that the coffee will be delivered promptly after the sale and a guarantee that the coffee will be of a certain quality. If you would like more information on how the grades are defined and what factors are taken into account, you can consult the ECX coffee contract.
Once the coffee has been delivered to the Exchange and graded, what next? The buyers place their funds in a pre-trade cash account that is used to bid for coffee. They meet with sellers and once they have agreed upon a price, the Exchange’s clearing house will transfer the funds from the buyer’s trade account and transfer it to the seller the next day (known as ‘T+1’ clearing and settlement system). Guaranteeing next day payment is one of the biggest benefits that the Exchange brings to the sellers.
In short, for the buyer, the ECX ensures the quality of the coffee, its quantity, and its delivery. For the seller, the ECX provides a way of trading (open outcry pit) which, like many of the futures markets of old, gives them the best price that a buyer is willing to bid for at that moment in time. The seller’s access to the most up-to-date information on pricing gives them the best possible opportunity to judge what is a fair price (creating a market with less price imperfections than before) to then pass this back to the producers of the coffee. This system eradicates the potential for contract default, where a seller doesn’t have coffee, or the buyer can’t pay.
Seems like the perfect system right? Well, the ECX is not problem free. While it may have revolutionised the way coffee is bought and sold in Ethiopia, it has also created difficulties that are especially pertinent in the specialty side of the coffee industry, particularly around the lack of traceability.
An exporter selling, for example, Yirgacheffe Grade 2, bought through the ECX will not be able to provide any information about the provenance of the coffee, apart from the fact it comes from a certain region, in this case Yirgacheffe. Consumers of specialty coffee tend to want more traceability i.e. information on where the coffee is produced and by whom. This absence of information with coffees from the ECX effectively makes the coffee anonymous and less desirable for some roasters in the specialty side of the industry, who prefer more information, regardless of how good the cup profile of the coffee might be.
However, there is a way of getting around this potential obstacle. As mentioned previously, coffee that comes from co-operative unions (multiple co-operatives united together to export) or private estates can bypass the ECX. This gives the buyer full traceability on where the coffee has been produced and the opportunity to visit where the coffee is grown in person. As the demand for traceability increases, visits to origin are becoming more and more common place as buyers seek to develop long term relationships with the people who are selling to them. Coffee that is sold via co-operatives unions and private estates is graded in the same way as coffees that trade on the ECX so in theory, a Yirgacheffe Grade 2 should have a similar cup profile, regardless of where it is bought.
As outlined above, the ECX has proved a valuable tool in improving both the flow of information & finance and farmers’ livelihoods with better processes, faster payments and a secure trading platform. However, could these benefits be overlooked by the international community who favour traceability above all else?
The very system that was created to benefit the producer, could through its opaqueness regarding provenance, end up harming the industry.
Saying that, change might be afoot. Organisers of the ECX have held high-level talks with many international stakeholders over the highlighted traceability issues. Bar coding and bag tagging could be a solution that has previously been muted. Recently, the ECX announced it has enlisted the services of a US tech company, Frequentz to design a system that can solve the traceability issues aforementioned. For now, however, the status quo presides.
I hope you found this article on Ethiopian coffee useful. If you like this article, you may be interested in reading an article on the different types of green coffee bags.