Ethiopia’s Coffee Sector: A Bitter or Better Future?Coffee, Ethiopia’s largest export crop, is the backbone of the Ethiopian economy. The Ethiopian coffee sector is highly dependent on internationalprices and affected by the structure and workings of the world coffee market In this context, this paper seeks to identify what can be done in Ethiopia to improve the performance of the sector so as to yield benefits for the government and the estimated 15 million people dependent on coffee in the country. The paper argues that despite a limited room for manoeuvre, Ethiopia has not yet fully exploited its position as the producer of some of the best coffees in the world. A number of competitive advantages may still be seized if quality and consistency are guaranteed. In order to maximize this potential, and on the basis of a critical analysis of government policies and donor interventions in the sector, a number of recommendations are made. Keywords: coffee, Ethiopia, world market, coffee policiesINTRODUCTIONConcern about the development and poverty implications of dependence on primary, and especially agricultural, commodity exports was dramatized in 2002 when coffee prices collapsed to their lowest point in real terms for 100 years (NRI 2006). Although the ‘coffee crisis’ is hardly visible from cafes like Starbucks in developed countries where the coffee business is booming, this dramatic decline in prices caused immense hardship in countries where coffee is a key source of export earnings and of farmers’ incomes (Osorio 2002).The world coffee market has changed dramatically in the last two decades. Changes in the international policy environment, new arrangements in supply and demand, technological changes and/or the asymmetrical character of power in the ‘coffee value chain’, have increasingly narrowed the opportunities for vulnerable economies to secure the benefits from coffee trade needed for economic development and poverty reduction. This paper seeks to address some Nicolas Petit, 75, Avenue de l’université,
1050 Bruxelles, Belgique. e-mail: [email protected] This article is based on a dissertation submitted at the School of Oriental and African Studies,
Department of Development Studies, in September 2006. I am grateful to Sergio Giorgi for his support and Surendra Kotecha for his encouragement, insight and
depth literature on Ethiopia’s coffee sector is very scarce, if not non-existent, except for a few consultancy reports for donor-funded projects.The objective of this paper is to identify what can be done to improve theperformance/competitiveness of Ethiopia’s coffee sector so as to offer a better future (if any) for the national economy and those who depend on coffee for their livelihoods. I suggest that despite an adverse international setting (and the rhetoric of diversification out of coffee), interventions in the coffee sector remain of critical importance, and opportunities still exist at a national level to improve its performance. To exploit this potential effectively, a number of policy recommendations are made.The first part of the article identifies key international constraints presented by the structure and workings of the world coffee market. The second part provides an overview of coffee production, processing and marketing in Ethiopia, and notes some of their distinctive features. The third then considers the impact of the coffee crisis and domestic coffee market reforms in Ethiopia.The last part focuses on Ethiopia’s prospects in an apparently bitter future: what is being done and what could be done? After identifying constraints and opportunities at the national level, I present a critical analysis of current government policies and donor interventions. Finally, some policy recommendations are proposed.THE WORLD COFFEE MARKETCoffee is produced in more than 50 developing countries providing income for approximately 25 million smallholder producers (DFID 2004; Oxfam 2002b), and employing an estimated 100 million people (NRI 2006). World coffee production in 2006/2007 is forecast at 123.6 million bags and world coffee export is forecast at 92.8 million bags (USDA 2006). In 2005/2006, 52 per cent of world production was accounted by the three main coffee producers (Brazil, Colombia and Vietnam), Brazil currently supplying about a third of total production (ICO statistical database). The top five consumers are (in order) the USA, Brazil, Germany, Japan and France, while the Nordic countries have the world’s highest1
trade in the long run were originally advanced in 1950 by Prebisch and Singer and then repeatedly tested and found valid (DFID 2004).3
As a result, structuralists questioned the wisdom of concentrating efforts on the production of primary commodities for export, and import-substitution strategies became a major component of development strategies until the rise of neo-liberalism in the early 1980s.4
The ‘Coffee Crisis’ Concerns about economic development prospects and the poverty implications of dependence on primary commodities for export came to the centre stage, once again, during the recent so-called ‘coffee crisis’. In 2002, Néstor Osorio, ICO’s executive director, observed that coffee prices on world markets that year reached their lowest point in real terms for a century. The fall in prices since 1997 has been dramatic (Figure 1), with prices in some cases insufficient to cover production costs (Osorio 2002).2
According to Baffes (2003), coffee prices are among the most volatile of commodity prices.3
The outcome of these reforms continues to be debated, but some common trends noted in the literatureinclude: a higher proportion of the export price paid to farmers; increasing price volatility following the abolition of price stabilization mechanisms; much more constrained access to credit for farmers and traders; more involvement of the private sector and a loss of market share for cooperatives and former parastatals.Finally, coffee market reforms have also often led to deteriorating coffee quality (Ponte 2002). Nonetheless, Ponte suggests that ‘market liberalization may be the best option for some countries, and that highly regulated markets may be the best for others, even within the framework of the same commodity’ (2002, 270).Third, in addition to the changing policy environment, coffee has witnessed structural changes in global supply and demand. One major area of change is the dramatic expansion of Robusta production in Vietnam during the 1990s and Arabica production in Brazil where innovative low-cost production systems have been developed.6
The increase in both the quantity and quality of Brazilian and Vietnamese coffees has resulted in a strengthening of their domination of different market segments, which in turn is increasingly marginalizing other5
According to the World Bank and its hegemonic position within development discourse, inefficient parastatal organizations, rent seeking behaviour and ‘heavy taxation’ of export agriculture necessitated market ‘reform’ (Baffes et al. 2003).6
buyers’ requirements are focusing on higher quality and consistency (same quality for repeat delivery); traceability of origin as well as economic, social and environmental ‘transparency’; and capacity for direct long-term partnerships between producer and roaster (NRI 2006).Technological changes in roasting and grinding also have important implications, allowing for more flexibility in blending and greater use of Robusta coffees. Roasters adapted to changes with new roasting technologies such as steaming, and found new ways of reducing the acidity of Robusta coffees. In addition, Scholer (2004) argues that flavoured coffees can use cheaper (lower-grade) beans as well as coffee drinks such as cappuccino or café latte in which coffee is only one of the several ingredients. In his view, ‘market trends and new technologies are in many instances working against producers’ interests’ (2004, 10) with some new technologies clearly driving down quality.Fourth, other analyses of the world coffee market have focused on the shift of power in the global commodity chain, whereby value disproportionately accrues to actors downstream such as traders, roasters and retailers at the expense of coffee producers (NRI 2006). In particular, so-called ‘global value chain’(GVC) analyses of coffee have blossomed in recent years, with an emphasis onchain governance structure and the distribution of power along chains (Ponte 2002; Daviron and Ponte 2005).7
The loss of market power of coffee producing countries, and the loss of market share by some of them, in the reconfigured global coffee value chain is closely related to changes in the policy environment (market ‘reform’). The abolition of marketing boards has further reduced the capacity of farmers to raise their share of value-chain rents (Fitter and Kaplinsky 2001). According to Ponte (2002), the post-ICA regime can be labelled as a ‘roaster-driven’ chain, where producing countries’ governments have lost most of their bargaining power and the roaster and trading segments of the chain are increasingly concentrated.According to Scholer (2004), five international coffee trading houses have captured an increasing share of the coffee trade, covering about 40 per cent of the total volume of green coffee imports worldwide. In a similar fashion, ten roasters account for 60–65 per cent of all sales of processed coffee, most of which is sold under brand names.8
There has also been a dramatic increase of retail coffee shop groups such as Starbucks in recent years.The unequal distribution of total incomes, reflecting this asymmetrical character of power in the coffee value chain, is clear. At the end of the 1980s and part of the 1990s, coffee producing countries received around US$10–12 billion See for example Talbot
(1997), Fitter and Kaplinsky (2001) and Ponte (2002). For a detailed critical discussion of GVC analysis see Bernstein and Campling (2006a, 2006b).
For them, market power is not simply about controlling market share, but also about the ability to define the ‘identity’ of a coffee or ‘the ability to set the language and the reference values that determine production norms and quality standards’ (2005, xvii). Using a theoretical framework combining ‘historical political economy’, GVC analysis and Convention Theory (CT), they argue that the ‘coffee paradox’ reflects the growing difference between coffee sold on international markets as a ‘commodity’ (that is, defined by its physical characteristics) and coffee sold as a final product to consumers.Farmers and producing countries sell coffee for its ‘material quality’ attributes, while consuming country operators downstream create and appropriate value by selling the ‘symbolic’ and ‘in-person service’ attributes of coffee. Therefore, while producers can improve value added to a certain degree by improving the ‘material’ quality of coffee, they have much less control over other (‘symbolic’ and ‘in-service’) attributes dominated by actors downstream and where most value is added in the chain (NRI 2006).COFFEE IN ETHIOPIAEthiopia is one of the poorest countries in the world.10
About 45 per cent of itspopulation live below the poverty line of US$1 per day. Social indicators such as infant mortality rate, illiteracy rates or school enrolment rates are considered some of the worst in the world (FAO 2006). The causes of poverty include low levels of agricultural technology and rural infrastructure. Recurrent droughts and the degradation of the natural resource base, combined with a highly unstable recent political history, also contribute to the persistence of poverty. In the past three years, Ethiopia’s economy has shown a mixed performance with a negative real GDP growth rate of 3.8 per cent in 2002/2003 as a result of drought, followed by unprecedented growth of 11.3 per cent in 2003/2004 and 8.9 per cent in 2004/2005. In general, the variability of growth is mostly a result of the variability in the performance of the agricultural sector (FAO 2006). Agriculture represents about 42 per cent of GDP, with industry and services respectively 11 per cent and 47 per cent. Agriculture is estimated to employ 85 per cent of the economicallyA ‘paradox within this paradox is that the international coffee market is awash in coffee of “low quality” while there is a dire shortage of “high quality” coffee – and it is the latter that is generating sales growth’ (Daviron and Ponte 2005, xvi).In 2005, Ethiopia ranked 170th out of 177 countries in the Human Development Index (UNDP 2005). With an estimated 75 million people in 2006, Ethiopia is the second most populous country in Sub-Saharan Africa after Nigeria (FAO 2006).Nicolas Petit
The vast majority of coffee is exported in green bean form for roasting in consuming countries. Although the total share of its coffee exports in world trade is small, Ethiopia plays an important role in the ‘global value chain’ because of the fine quality of its coffees (Daviron and Ponte 2005). Historically coffee accounted for over 60 per cent of Ethiopia’s total export revenues (LMC
2000). While this proportion has dipped significantly in recent years with a revival in the prices of major Ethiopian exports in the international market (Figure 2), total coffee export earnings registered substantial growth in 2003/4 and 2004/5 due to increased export volumes (Table 1). Coffee has also long been an important source of tax revenue to the government (Love 2002).Agrisystems (2001) estimates the number of coffee farmers at 1.3 million. With an assumed family size of six to seven people, the numbers of Ethiopians associated with coffee growing can be as large as 7–8 million. Moreover, coffee is labour intensive during harvesting and processing, and provides an importantsource of income from casual labour for many poor rural people. Addingthose employed in transporting coffee and ancillary activities, LMC (2000, 2003)estimates that 15 million people are dependent on coffee for at least a significantpart of their livelihoods.Outline of ProductionTwo coffee species are currently used for commercial purposes:Coffea arabicaandCoffea canephora(also known as Robusta). Ethiopia only produces Arabicacoffee, which is widely believed to have originated there. Arabica coffee stillgrows wild in the forests of the south-western part of the country, whichremains an important source of genetic resources for the world coffee industry(Gole 2003). Coffee farming systems in Ethiopia are conventionally divided into11
outer layer of the cherries are removed by hulling and the green bean obtainedis ready for marketing. For washed coffee (wet processed coffee), once the cherriesare harvested they are pulped, fermented in tanks and then finally washed inclean water. The wet parchment coffee obtained is then dried in the sun on raisedtables and sorted at 11.5 per cent moisture content (IFPRI 2003).Currently there are more than 1000 coffee cherry processing plants in thecountry, with approximately 492 hulleries and 601 washing stations. The coffeewashing stations are owned by private individuals, farmers’ cooperatives or stateenterprises, and have an estimated total processing of around 80,000 tons ofwashed coffee per annum (FDRE 2003a). Historically, over 90 per cent of Ethiopiancoffee was sun-dried. However, since washed coffee sells at significant premiumsover sun-dried coffee, the government has encouraged cooperatives andtraders to invest in machinery to raise the output of washed coffee (LMC 2003).12
In 1980/1, washed coffee was only 9.1 per cent of total coffee exports; by 2004/5, it amounted to 32.7 per cent (FDRE 2006).Glimpses of DifferentiationLiterature on coffee in Ethiopia – whether from government sources or withinthe coffee industry, or in reports from NGOs like Oxfam or donor agencies likeUNDP – typically gives the impression that Ethiopian coffee ‘smallholders’ area homogeneous group of farmers (who are thus similarly affected by the ‘coffeecrisis’). While there are no systematic studies or data of rural differentiation,some useful glimpses are available from an unlikely source, namely an unusuallyprecise ‘livelihood’ analysis in SNNPR conducted for the United States Agencyfor International Development (USAID 2005). Figure 3 and Table 2 summarizethe results for three ‘livelihood zones’ dependent on coffee. The Gedeo zoneincludes parts of Wenago, Yirgacheffe and Kochereworedas. This is a food securearea that produces some of the highest quality coffee in Ethiopia, and is relativelywealthy, with some poor households earning more cash than better-off householdsin some other parts of SNNPR. The Sidama zone covers parts of Dara,Aleta Wendo, Dale, Shebedino, Awassa, Hulla, Bensa and Aroresaworedas.12
The government is also considering the introduction of hand-operated coffee pulpers at farmlevel to produce semi-washed coffee (‘pulped natural’ coffee), which has a lower level of defects andimproved liquor compared to sun-dried coffee (LMC 2003).236Nicolas Petit
The Wolayita zonedata presented here cover just oneworeda, namely Boloso Sore, characterized bychronic poverty and food insecurity and where coffee and ginger are the maincash crops.These illustrations clearly show that ‘coffee farmers’ should be seen as differentiatedin various ways. For example, relative wealth is determined primarilyby the area of land owned/cultivated and the number of livestock that householdsown. In the Wolayita coffee and ginger zone, better-off householdscultivate on average six times the area cultivated by very poor households andonly the middle and better-off households own livestock. Accordingly, better-offhouseholds have an average annual income four times that of very poor households(3000–4000 ETB and 750–850 ETB, respectively). Moreover, there arealso critical differences in income sources. While the major source of incomefor middle and better-off groups are crop sales and livestock sales, Figure 3illustrates the central importance of casual labour for very poor and poor households.Casual employment represents around 65 per cent of income for the very13
labour in the pulping stations during the coffee harvest season. Finally, theresponse strategies to hazards also vary depending on wealth groups. The mainhazards affecting these zones are shortage of rain and drought, hail and frost,coffee berry disease and coffee wilt disease, livestock diseases, fluctuating internationalcoffee prices or increased staple food prices. In bad years, livestock salesexpand for wealthier households, while very poor and poor households do morelocal casual work and petty trade (with daily wages lower in bad years) ormigrate outside the livelihood zone in search of employment (USAID 2005). Inshort, differentiation means that farmers are affected differently and deploy differentcoping strategies in response to falling coffee incomes, whether occasioned bydeclining international prices or other factors. Evidently this has implications forthe consideration of policies such as upgrading, typically conceived as applicableto a notional ‘average’ small farmer household.The Contemporary Domestic Marketing Chain: From Growers to ExportFigure 4 illustrates the present domestic coffee marketing chain from farmgate to export. Market participants are numerous and include smallholdercoffee farmers or state farms, primary collectors (‘sebsabies’), suppliers (‘akrabies’),processors, service cooperatives, unions, exporters and various governmentinstitutions (see Table 3 for details). Many participants are required to havespecific licences for their respective functions; for example,sebsabieshave to selltoakrabies,akrabiesdeliver their coffee to the auction but are not permitted toexport it, and exporters are only permitted to buy coffee from the auction (LMC2003). Normally, all Ethiopian coffee should pass through auction centres.However, since 2001, cooperatives and to a lesser extent private investors havebeen granted permission to by-pass coffee auctions, opening the way for directexport sales (Dempsey 2006).On arrival in the Addis Ababa or Dire Dawa auction centres, all beans aretaken to the auction compound where their provenance and quality is tested ona sample basis by the Coffee and Tea Quality Control and Liquoring Unit(CLU). Grading standards are set according to the number of defects and the
type of processing. The main export grades are grade 2 for washed coffee andgrade 4 and 5 for unwashed coffee (LMC 2003). For example, washed coffeesupplies are usually dominated by Sidamo 2, Limu 2 or Yirgacheffe 2, while themost common unwashed coffees are Jima 5, Sidamo 4 or Harar 5. At the auctions,there is an emphasis on keeping consignments from different regions separate inorder to maintain the distinctive flavour of the different regions (LMC 2003).1414
growing areas which inhibit the development of alternatives, including agroecologicalconstraints, limited access to markets for other commodities, the perennialnature of coffee plants (and the investment they represent), strong culturalattachment to coffee or ‘adding-up’ problems (if different countries diversify intothe same products). Moreover, alternative crops may not be more attractive interms of price and returns to labour (Gibbon 2003; Daviron and Ponte 2005).Regarding the options ‘within coffee’, benefits could be obtained, in theory, ina number of ways, such as increasing the quantity of national productionthrough extensification (new plantings) and/or intensification (higher productivity),improving quality, increasing the proportion of coffees selling at significantpremiums (such as washed coffee, semi-washed coffee or differentiated coffees),18
the markets for these products remain small, accounting for a tiny proportion ofthe global coffee market.23 Secondly, although they tend to offer higher pricesto producers, this is not always the case. Except where covered by fair tradeschemes, premiums are not guaranteed but are a function of market demand.Moreover, if premiums are offered they are likely to diminish as more farmersand buyers get involved (NRI 2006). Entering such markets is also a significantchallenge for most producers. For example, fair trade certification is only availableto small farmer groups, organizations and cooperatives which generally consistof better-off farmers, who are more likely to benefit (Daviron and Ponte 2005).Finally, entry into the sustainable coffee market requires careful assessment, as theprice premium obtainable may not cover the additional marketing, certificationor inspection costs (NRI 2006). Nonetheless, Lewin et al. (2004) argue that thesemarkets are important because of their current growth rates and their potentialto provide better social, economic or environmental benefits for farmers.Organic, fair trade or shade-grown initiatives present a number of positive externalitiesin the field such as organizational development, better natural resourcemanagement, biodiversity conservation and so on (Lewin et al. 2004). Finally,although there are opportunities for product differentiation, Daviron and Ponte(2005) also argue that certification and labels do not necessarily promote differenttrading relations from those in mainstream trade, as such schemes can providethe means for larger specialty roasters and retailers to outsource troubleshooting(‘low-cost conscience cleansing’) while not necessarily leading to better conditionsfor farmers.In short, while some of the options outlined present opportunities that maybe taken up by different actors along the chain (or by governments in producercountries), they also present limitations. Diversification out of coffee is difficult,differentiated coffees are not an answer for all farmers, and only a partial answerat best in considering the near future. Other answers are needed (Lewin et al.2004). Westlake (1998) argues that even though there is potential for sellingcoffee as ‘forest’, ‘organic’ and expanding sales through the specialty market, themajority of exports in the near future will comprise non-differentiated coffees,and this is probably where the greatest benefits could be obtained. According toLewin et al. (2004), industry surveys indicate that quality and consistency areamong the most important factors to be competitive in today’s markets. Kotecha(1999) further argues that there is no deficit in demand for the best qualities ofEthiopian coffee even in times of global surplus. The primary need, therefore,is to raise the quality (of both differentiated and non-differentiated coffees) rather22 According to the Rainforest Alliance website (http://www.rainforest-alliance.org), since April2006 Ethiopia represents their first coffee partnership outside Latin America as 678 family farms fromMana woredas (Jima Zone, Oromiya Region) received certification from Rainforest Alliance with
Government Policies II: The Coffee Development and Marketing PlanIn accordance with the ADLI strategy, a series of ‘comprehensive’ developmentand marketing plans were prepared for different crops under the supervision ofthe MoARD in 2003–2004. These plans aim at transforming household farmingfrom ‘subsistence’ to ‘market-oriented’ (commodity) production, stimulatingproductivity, growth and international competitiveness (FDRE 2003b).27 Thecoffee development and marketing plan is to be implemented over a period offive to six years in the major and medium coffee growing woredas. The plan callsfor increased production and productivity, and improvement in coffee qualityand processing, and envisages a major shift to washed coffee to realize significantpremiums prices in the world market. Plans are also proposed to improve theefficiency of the current marketing system together with activities to enhanceinternational promotion of Ethiopian coffees (FDRE 2003a). The ambitioustargets – new coffee plantings on 463,021 ha, and average annual production of70,000 tons of organic coffee, 200,000 tons of sun-dried coffee and 150,000 tonsof washed coffee – contrast with the rhetoric of diversification found in thedifferent PRSPs in what seems like a recipe for incoherence and confusion.Although the plan displays a good understanding of constraints and opportunities,it is wishful thinking to believe that all the activities proposed could beimplemented given pressures on scarce financial resources currently available for
programmes and projects. This is potentially detrimental, as many projectsconcern the same type of activities. For example, many donors involved invarious product differentiation strategies (in particular, organic or fair tradecoffees) are increasingly working with the popular coffee unions with very similaractivities.30
structural changes (UNCTAD 1998).Responding to various constraints may also require an enhanced role for thestate in contrast to the neo-liberal mantra of deregulatory and market-basedapproaches. We noted the importance of regulation with regard to maintaining– and improving – coffee quality, and regulation for environmental protection isalso urgently needed. State support is similarly required to improve infrastructure,extension services, access to finance and credit, and research, all of which areurgently needed. At the same time, the government needs to prioritize activitiesin accordance with the scarce resources available and identify a cost-effectivecoffee sector ‘policy’ based on ‘what the (export) market wants’. This suggestsa clear focus on quality rather than quantity as the priority. A coherent (anddurable) government structure for regulating and promoting the coffee sectorwould be beneficial. In particular, such a coherent structure would connect andalign much more effectively the activities of the coffee development and marketingdepartments of the MoARD.Donors would do well to shed their typically ‘one size fits all’ approach,especially as it is informed by the standard simplistic dichotomy of (efficient)market/(inefficient) state. Donors need to plan and coordinate their projects witheach other and with the government, and might consider funding an EthiopianCoffee Network led by government and with the participation of representatives offarmers, cooperative unions, traders, exporters, NGOs, donors and universities.This could provide a cheap and effective way to exchange information and ideas,research findings and so on.31
Finally, further research is needed on a number of initiatives. A closer examinationis required of sustainable coffees (especially organic and shade-growncoffee), and of cooperatives/unions and their role in raising the prices receivedby farmers. Are such initiatives available only for a minority? Who benefits:poor or better-off farmers? Is there a role for a national certification agency?What kinds of positive externalities might be created or exploited? And so on.Daviron and Ponte (2005) propose establishing IGO systems in coffee producingcountries; in Ethiopia, IGO systems are still in their infancy and it is not yetknown if they could provide producers with higher prices for their productsand/or wider developmental impacts. Last but not least, more research is neededon the domestic market and the promotion of domestic consumption, as Ethiopiais one of the few producing countries with a strong domestic coffee culture tobuild upon.31 Subgroups might be later created in accordance with the main issues of concern, for example,conservation of coffee genetic resources, sustainable coffees or quality improvement initiatives. TheEthiopian Coffee Network could be linked to a website and/or regular newsletters to serve as ameans of promoting the uniqueness of Ethiopian coffees internationally, as well as disseminatinginformation to participants in the country’s coffee industry.
UNCTAD, 1998. Trade and Development Report, 1998. Geneva: United Nations Conferenceon Trade and Development.UNDP, 2005. Human Development Report 2005: International Cooperation at a Crossroads.Aid, Trade and Security in an Unequal World. New York: United Nations DevelopmentProgramme.USAID, 2005. Southern Nations, Nationalities and Peoples’ Regional State Livelihood Profiles.Addis Ababa: USAID FEWS NET Project.USDA, 2006. Tropical Products: World Markets and Trade. Washington: United StatesDepartment of Agriculture, Foreign Agricultural Service. Circular Series FTROP 2-06.Westlake, M., 1998. Strategy for the Development of the Coffee Sector. Project Report PA-6.Addis Ababa: Decentralization Support Activity Project, Ministry of Finance andEconomic Planning.World Bank, 2004. Opportunities and Challenges for Developing High Value AgriculturalExports in Ethiopia. Background Report, Draft. Poverty Reduction and EconomicManagement, Country Department for Ethiopia, Africa Region. Washington: WorldBank.
