HARAMAYA UNIVERSITY
SCHOOL OF AGRICULTURAL ECONOMICS AND
AGRIBUSINESS
IMPACT OF THE ETHIOPIAN COMMODITY
EXCHANGE ON COFFEE MARKETING:
A CASE OF EASTERN ETHIOPIA
Gemoraw Adinew
A Case Study to Supplement the OER Materials of the AgShare Pilot
Project
November 2011
1
The Case Study
The main purpose of the case studies is to supplement OER materials prepared for
the Agricultural Economics MSc program by elaborating key practical issues
reflecting the problems and context of agricultural marketing system of Ethiopia. The
study was financed by the Bill and-Melinda Gates Foundation (BMGF) through
AgShare pilot project. The project is implemented by School of Agricultural
Economics and Agribusiness of Haramaya University in collaboration with OER
Africa/SAIDE, Michigan State University (MSU), four member faculties of the
Collaborative Masters in Applied and Agricultural Economics (CMAAE) network. The
findings, interpretations, and conclusions expressed in this case study are entirely
those of the authors. They do not necessarily represent the view of the above
mentioned institutions. The case studies and other OER materials will be available
online.
Acknowledgements
The author is grateful to the AgShare Pilot Project for financing this study. Thanks
also go to the AgShare project team of the School of Agricultural Economics and
Agribusiness (Mr. Fekadu Gelaw, Dr. Jema Haji and Dr. Getachew Abebe) for the
useful discussion and valuable comments provided.
i
TABLE OF CONTENTS
1. INTRODUCTION ......................................................................................... 1
1.1. Project Background ............................................................................... 1
1.2. Rationale and Objectives of the Study ................................................... 3
1.3. Methodology .......................................................................................... 4
2. COMMODITY EXCHANGE AND THE ECX ................................................ 6
2.1. Economic Theories for Commodity Exchange ....................................... 6
2.1.1. The neoclassical theories ................................................................ 6
2.1.2. The institutional theories.................................................................. 6
2.1.3. Organization theory ......................................................................... 7
2.2. Expected Benefits/ Impacts of Commodity Exchange ........................... 7
2.2.1. Price discovery ................................................................................ 8
2.2.2. Risk management ........................................................................... 9
2.2.3. Facilitation of commodity trade ...................................................... 10
2.3. The ECX Platforms (ECX Functions and Modalities) ........................... 11
2.3.1. Ownership and governance ........................................................... 12
2.3.2. Membership ................................................................................... 13
2.3.3. ECX operations ............................................................................. 15
2.3.3.1. Warehousing and grading ....................................................... 15
2.3.3.2. Trading and contracts ............................................................. 17
2.3.3.3. Clearing and settlement .......................................................... 18
2.3.3.4. Market surveillance ................................................................. 18
2.3.3.5. Market data dissemination ...................................................... 18
3. COFFEE PRODUCTION AND MARKETING IN ETHIOPIA ...................... 20
3.1. Ethiopian Coffee Production and Processing - A brief look ................. 20
3.1.1. Production ..................................................................................... 21
3.1.2. Processing..................................................................................... 22
3.2. Major Institutional and Regulatory Reforms Before and After ECX- An
Overview..................................................................................................... 23
3.2.1. Before the ECX (1991-2008) ......................................................... 23
3.2.2. After the ECX (Since 2008) ........................................................... 25
3.3. Coffee Marketing System Before and After ECX ................................. 26
3.3.1. Key actors and institutions............................................................. 26
3.3.2. Coffee marketing structure-before and after ECX ......................... 27
3.3.2.1. Before ECX ............................................................................. 27
3.3.2.2. After ECX ................................................................................ 33
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4. MAJOR IMPACTS OF ECX ON COFFEE MARKETING ........................... 37
4.1. Impact on Coffee Marketing Chain ...................................................... 37
4.2. Major Impacts on Key Actors ............................................................... 40
4.2.1. Price discovery .............................................................................. 41
4.2.2. Price risk management .................................................................. 42
4.2.3. Market development ...................................................................... 42
5. REFERENCES .......................................................................................... 44
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1. INTRODUCTION
This study has been prepared as one of the case studies that would be used
as supplemental materials for the module on the MSc course 'Agricultural
Marketing and Price Analysis' which is offered at the School of Agricultural
Economics and Agri-Business Management in Haramaya University. This
course module is one of the outputs that have been prepared as part of the
project initiated by the staff of the School of Agricultural Economics and Agribusiness Management in collaboration with many institutions from Africa and
America (Michigan State University). To have a clear understanding of the
project as well as this specific study, the introduction part briefly describes the
background of the project, its rationale, the objectives of the study and the
methodology followed.
1.1. Project Background
The Michigan State University and OER Africa initiated a program known as
‘the AgShare initiative’ to collaborate with African universities to help them
strengthen their MSc curricula in the agricultural sciences through the
creation, utilization, and management of open educational resources (OER).
This initiative aims to demonstrate that cooperation between universities,
community organizations, and content providers can help generate OER that
is used by MSc agricultural faculties in Africa and around the world to
strengthen their academic programs and their relevance to local communities.
The Collaborative Masters Program in Agricultural and Applied Economics in
Eastern, Central and Southern Africa (CMAAE), a consortium of 15
universities in 12 African countries, is one of the four pilot projects selected
under this initiative. The overall objective of the CMAAE is to strengthen MSc
programs being offered by African Universities by preparing a contextualized
teaching and learning materials. The following statement underpins the very
purpose [ought to be] of the MSc programs.
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“to equip professionals with knowledge and skills essential for transforming
the currently underdeveloped agro-food sectors and rural economies of
Africa to perform well in an environmentally sustainable fashion. Its
underlying premise is that such highly trained local professionals must
address the challenges posed by far-reaching changes in global and local
economies, technology, and marketing by adapting their advanced
knowledge and methods to the particular institutional, political, and
economic circumstances of the region."
The idea is the teaching-learning approaches in the MSc programs of most
African universities have some serious limitations. Generally, it can be
described as: entirely theoretical (with no or little practical aspect); chalk-andtalk (with no supplementary teaching materials); and most of all, it is textbookbased and uses books that are published in the context of Western
Developed countries. Such teaching apparently will help little in meeting the
very purpose of the MSc programs and puts them under question. Thus, the
purpose of the CMAAE project is to produce contextual modules and other
teaching materials that can supplement such modules. In addition, it is also an
attempt to create feedback loops with the communities in which students
learn.
Two members of CMAAE, Haramaya University in Ethiopia and Moi University
in Kenya, are now participating in this project to produce OER modules that
will be available to the entire CMAAE membership in East, Central and
Southern Africa. They selected an elective course on “agricultural marketing
and price analysis” as the one for which they would develop OER modules.
While Haramaya University decided to approach this course through a case
study on coffee, Moi University selected to focus on maize.
The School of Agricultural Economics and Agri-Business Management in
Haramaya University, on the behalf of the university, is actively involved in the
project both in its initiation and in the preparation of the expected outputs. In
this regard, therefore, the following outputs have been produced by the staff
of this school: a module for one of the MSc courses, ‘Agricultural Marketing
2
and Price Analysis’; a video film and photos on Coffee Marketing in Ethiopia
which demonstrate the context in terms of the functions, channels, agents,
activities etc of Ethiopian coffee markets. Currently, under the supplementary
phase, the school wants to strengthen the module further by preparing case
studies that would be served as supplementary materials for the course
module.
1.2. Rationale and Objectives of the Study
Coffee is one of the most important agricultural commodities in Ethiopia due
to its historical economic, social and cultural importance in the country.
Presently, coffee is the most important commodity in the country in many
respects. It accounts for about 25% of the GNP, 40% of the total export and
10% of total government revenue (MoARD, 2007). It is also responsible for
the livelihoods of an estimated 1.3 million producers and 15 million people i.e.
producers, wage workers, transporters and their families (Petit, 2007). Due to
this, Ethiopian governments since the imperial era have tended to focus more
on the coffee sector than the other agricultural sub-sectors.
The present Ethiopian government, like its predecessors, has also
implemented a series institutional and regulatory reforms on the coffee sector
since it came to power in 1991. Since 1992, the time where coffee market
reforms began by the current government (LMC, 2000), many substantial
institutional and regulatory reforms have taken place within the Ethiopian
coffee sector. Following such reforms, the government came up with a new
law, i.e. the Coffee Quality Control and Marketing Proclamation, Proclamation
No. 602/2008 in December 2008 which marked a new chapter in the coffee
sector in general and it’s marketing aspect in particular. The Government
decision, according to this law, is to abolish the previous National Auction
system and to harmonize coffee marketing with the organizational work of the
Ethiopia Commodity Exchange (ECX). The major agenda behind this new law
is that all of Ethiopia’s coffee should be traded through the ECX. The aim of
establishing the ECX, in fact, is not confined only to the coffee sector, but
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rather to revolutionize Ethiopian agriculture through a dynamic, efficient, and
orderly agricultural marketing system.
This government new coffee marketing law has put different regulations on
the types of actors and institutions that are allowed to be involved in coffee
trading as well as in their respective duties and functions. For instance, some
actors like local collectors (referred to as Sebsabies) who were legally
recognized in the previous marketing system, are now legally restricted from
being involved under the current system. New actors and institutions, which
were not there before are now permitted to be involved under the current
marketing system. Such regulations, therefore, have made some major
changes in the overall coffee marketing structure that existed prior to the
implementation of ECX for coffee marketing. In addition, the rationale behind
the current ECX marketing system is that such a system provides a number of
benefits for key actors (like farmers, suppliers, exporters) such as improving
the prices they receive, increased access to market information and so on.
This study, therefore, is conducted to give firsthand information on the
changes observed in the overall performance of coffee marketing system as
well as the major benefits and/or loses that the key actors have experienced
since the creation of the ECX for the coffee sector. This case study uses
coffee marketing in Eastern Ethiopia to explore these issues.
The specific objectives of the study are:
 To review the operations of the ECX;
 To describe the Ethiopian coffee marketing system before and after the
creation of the ECX; and
 To assess the major impacts of introducing ECX in the coffee sector on the
coffee marketing structure as well as on its main actors in Eastern Ethiopia.
1.3. Methodology
The study area used for this study includes the two coffee producing zones in
the Oromia region namely Eastern and Western Hararghe zones, located in
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the eastern part of Ethiopia. These two zones are known for the production of
Harar coffee.
The study has relied both on primarily and secondary data sources. The
secondary sources of data are mainly from Ethiopian Commodity Exchange
(ECX) documents and Information Bulletins, as well as the United Nations
Council for Trade and Development (UNCTAD) documents focusing on
commodity exchange issues.
Journal articles, case studies and reports
available on commodity exchanges and commodity derivative trading are also
reviewed.
The primary data was collected using semi-structured interviews from a
variety of key actors in the coffee chain, (including government institutions,
different kinds of private intermediaries, and private sector organizations) in
the study area. The snowballing sampling technique was employed to get the
target sample. The method followed throughout this study is qualitative and
descriptive in nature.
The remaining part of this study is structured as follows.
After briefly
introducing the important existing economic theories for the justification of a
commodity exchange and the hypothetical (or theoretical) benefits of the
commodity exchange, section two will describe the meaning of the ECX, its
main purposes and the details of its operations. Section three presents the
comparison of the overall Ethiopian coffee marketing structure before and
after the creation of the ECX. The major regulatory and institutional coffee
sector reforms that have been implemented in these two periods are also
summarized. In section four, the major impacts that the creation of ECX has
been brought on various aspects of the coffee marketing system in eastern
Ethiopia, which is the main part of the study will be presented.
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2. COMMODITY EXCHANGE AND THE ECX
2.1. Economic Theories for Commodity Exchange
Different economic theories provide several explanations for the existence of
commodity exchange markets. These theories fall into three broad categories:
(1) the neoclassical theories, (2) institutional theories, and (3) organization
theory.
2.1.1. The neoclassical theories
According to neoclassical theory, the market refers to any domain of
economic interaction, where prices are responsive to supply and demand.
Unless impeded by nonmarket forces, all markets have a natural and
spontaneous inclination to evolve into a perfectly self-regulating one, where
resources are distributed efficiently, if not justly (Smith, 1776). To ensure both
the evolution of markets toward a perfect version and the market setting its
prices freely, neoclassical researchers argue that nonmarket forces should
not intervene in the delicate balance of supply and demand.
Neoclassical economics analyses the situation of the market from the point of
view of an agent. In this school of thought, a firm is assumed to act rationally,
thus it chooses the best option to trade. These researchers’ perception of the
market as a natural balance of the forces of supply and demand has
contributed to the making of markets by informing the construction of various
options markets, ranging from agricultural commodities exchange markets to
securities.
2.1.2. The institutional theories
Institutionalists have diverged from neoclassical researchers by arguing that
all free markets require an institutional structure to mediate the convergence
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of market forces. Moreover, spontaneous development of markets could be
stalled by nonmarket factors such as the state. From this perspective,
institutions directly affect economic outcomes, and the agents of markets use
them to reach their individual ends (Williamson, 1985; North, 1990).
In this school of thought, market is perceived as the set of institutions which
mainly includes the following: formal and informal contracts between
individuals or groups; trading practices, codes of conduct, and social norms,
such as repeated interaction, trust, and reciprocity; formal commercial laws
and regulations that govern market relations; and institutional arrangements
between actors such as vertically or horizontally integrated supply chains.
2.1.3. Organization theory
The recent approach advocated under this school of thought and related with
the issue of commodity exchange is the global commodity chain analysis
(GCC)
approach.
This
approach,
like
institutional
theory,
explicitly
acknowledges the importance of human relations within marketing chains.
This approach emphasizes the shifting bases of power exercised by leading
firms in globalized chains linking producers, processors, distributors, and
consumers and the impact of the governance structure on shaping outcomes
for the market. Its main focus is on the linkages and coordination between
economic agents and the outcome for the whole chain.
2.2. Expected Benefits/ Impacts of Commodity Exchange
In addition to the different theories mentioned in section 2.1 for the justification
of a commodity exchange, the hypothetical (or theoretical) benefits that
expected from a commodity exchange are also provided by various studies
(e.g, UNCTAD, 2009). In this sub-section, the major expected benefits of a
commodity exchange, particularly those from UNCTAD (2009), will be briefly
summarized.
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Generally, benefits that commodity exchanges are intended to offer can be
classified into three major categories: price discovery, risk management
and facilitation of commodity trade. There are also a further set of specific
benefits under each category.
2.2.1. Price discovery
Price discovery refers to the mechanism through which prices come to reflect
known information about the market.
Commodity exchange provides a
mechanism for price discovery which simplifies transactions with standard
contracts, and transmits information about prices and volumes. In other
words, the price level established on the open market can therefore represent
an accurate depiction of the prevailing supply/demand situation in the
underlying commodity markets.
The benefits of price discovery can be categorized as those arising from a
more efficient price formation process, and those arising from the wider
supply of more – and more accurate – market information. The former refers
to those benefits arising from the proper alignment of supply and demand,
ensuring that the market pricing signal triggers efficient production,
purchasing and investment decisions by participants in the sector. The latter
refers to those benefits arising from the publication and dissemination of
market information, with the resulting price transparency providing a readily
available, authoritative and neutral price reference to sector participants.
The major specific benefits expected under this category are that:
 All marketing actors, farmers and others involved in a commodity market, will
become more informed about market and pricing information
 All marketing actors, farmers and others involved in a commodity market, will
get improved prices because of an authoritative reference price
 The marketing chains will be reduced due to squeezing out rent-seeking
intermediaries from the chain
 Increased returns to farmers as it enables them to hold back on selling until
the price level is good
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 Farmers are empowered as they can take more marketing decisions into their
own hands
 Both intra - seasonal and inter- seasonal spot price volatility will be reduced
2.2.2. Risk management
A commodity exchange can provide risk management solutions by offering
trade in commodity futures and spot contracts. A commodity exchange adds
value to the market by addressing two types of risk namely contract
performance risk and market risk. Market risk is the risk of adverse
unforeseen price movements or changes in supply and demand in the future.
The way that a commodity exchange addresses the problem of contract
performance risk is by ensuring that products that are traded are as
standardized as possible, the products are receipted and certified, that market
information is disseminated to all, and payment and delivery are guaranteed
to both parties of the transaction (buyer and seller) through a clearing and
settlement system (Gabre-Madhin and Goggin, 2005). With regard to market
risk, the way that a Commodity Exchange addresses the problem of the
uncertainty brought about by time is by enabling market actors to lock in or
hedge the value of their trading positions. Hedging is a way to eliminate the
market risk and involves the notion of offsetting which actually involves two
transactions. Offsetting means that in order to hedge the market risk, a
market actor will balance one transaction (such as a purchase or a sale) in the
spot market followed by another transaction in the opposite direction in the
futures market.
The specific benefits expected due to the risk-management function of a
commodity exchange are to:
 Avoid serious losses that farmers face when prices fall
 Enable farmers to receive a guaranteed price from a purchaser or
intermediary
 Reduce transaction costs for managing risk compared with other methods.
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2.2.3. Facilitation of commodity trade
The usefulness of a commodity exchange lies in its institutional capacity to
remove or reduce the high transaction costs often faced by entities along
commodity supply chains in developing countries. A commodity exchange
reduces transaction costs by offering services at a lower cost than that which
participants in the commodity sectors would incur if they were acting outside
an institutional framework. These can include but are not limited to the costs
associated with finding a suitable buyer or seller, negotiating the terms and
conditions of a contract, securing finance to fund the transaction, managing
credit, cash and product transfers, as well as arbitrating disputes between
contractual counterparties. Therefore, by reducing the costs incurred by the
parties to a potential transaction, a commodity exchange can stimulate trade.
In addition to reducing transaction costs, the other specific benefits that would
be expected under this category are that:
 Through enhancing storage and logistic infrastructures, farmers’ need for
distress sales will be reduced and they can access more distant markets
 Quality standards will be upgraded through enhancing scientific storage and
reducing the diversity of quality standards in the market
 Expands export opportunities
A commodity exchange, through the above major benefits of price discovery,
risk management, facilitation of commodity trade can therefore help in the
establishment of efficient agricultural markets. It also expected to offer the
following other major specific benefits:
 Due to the assurance of a stable supply of quality produce at predictable
prices, it will encourage investment in agro-processing as well as in
agricultural marketing.
 The exchange represents a transparent and often reliable means by which
lenders can liquidate collateralized commodities in the event of default by the
borrower. Therefore, it facilitates access to commodity finance.
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 Properly functioning commodity exchanges can promote more efficient
production, storage, marketing and agro-processing operations, and improved
overall agriculture sector performance.
2.3. The ECX Platforms (ECX Functions and Modalities)
In response to the longstanding problems of the Ethiopian agricultural sector
and ultimately the need to develop the sector by revolutionizing the
agricultural market, the Ethiopian government and various international
donors approved the establishment of the Ethiopia Commodity Exchange
(ECX) in 2006. The vision driving the ECX is to revolutionize Ethiopian
agriculture through a dynamic, efficient, and orderly marketing system that
serves all. After its establishment in 2006, ECX commenced its trading
operations in April 2008 with maize and wheat. Following the enactment of the
new coffee proclamation in August 2008, the ECX started trading of coffee as
of December 2008 and subsequently opened trade for processed and
unprocessed peas, beans and sesame seed.
ECX is designed to be a market place where buyers and sellers can come
together to trade and be assured of quality, delivery, and payment. It is a
national multi commodity exchange with the aim of providing market integrity,
by guaranteeing the product grade and quantity. ECX’s model is the first of its
kind in Africa with its end-to-end integrated system of central trading,
warehousing, product grade certification, clearing, settlement, delivery, and
market information dissemination (MoFED, 2009).
The ECX is entrusted with the broad objective of modernizing the Ethiopian
agricultural
market
and
thereby
attaining
overall
economic
growth.
Specifically, the ECX was established for the following main purposes. To:
 Provide a centralized marketing mechanism in which transactions are carried
out publicly through a physical trading floor or electronic system or both.
 Create an efficient, transparent, and orderly marketing system which
addresses the interest of all stakeholders including buyers, sellers and
intermediaries and small scale producers.
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 Gather and monitor and disseminate timely information concerning the market
and exchange transactions to the general public.
 Conduct trading based on product grade certificates, warehouse receipts, and
standardized and grade specific contracts.
 Facilitate the clearing and settling of transactions of the Exchange itself to
minimize default risks.
 Provide a dispute settlement forum; undertake market surveillance activities to
maintain the integrity of the market and of the members, and avoid contingent
risks by employing modern risk management tools.
2.3.1. Ownership and governance
The ECX was established as a public enterprise in which buyers and sellers
come together to trade and to be assured of quantity, quality, delivery and
payment. However, it is “uniquely structured as a private-public partnership
commercial enterprise. The Government of Ethiopia is the owner of the ECX,
while the ECX offers the sale of Membership seats, which are privately
owned, permanently and freely transferable rights to the stream of earnings
from trading on the Exchange. ECX is established as a demutualised
corporate entity with clear separation of ownership, membership, and
management. Thus, owners cannot have trading stake. The management can
be neither drawn from the owners nor from the members” (Gabre-Madhin and
Goggin, 2005).
ECX is governed by the following three bodies:
i. The Ethiopian Commodity Exchange Authority (ECEA) as a state regulatory
body. This is a public institution, which approves and regulates contracts,
membership, trading, clearing, and other ECX rules.
ii. A joint Board of Directors drawn from relevant public institutions (state) and
ECX members (private), and
iii. The National Exchange Actors Association (NEAA), an institution
established by ECX members and their Authorized Representatives and
Associates.
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2.3.2. Membership
ECX works on the basis of membership that gives one the permanent and
transferable right to trade on the exchange. Only members can trade on the
exchange which means that non-members use the services of a member to
conduct trading. Members purchase permanent and freely transferable trading
rights known as seats. By owning a seat, members become core stakeholders
maintaining the integrity of the commodity exchange market place. They also
bear the liability for all transactions that they conduct on the ECX.
Membership conditions
Any individual, company, public enterprise, or cooperative that meets the
requirements as an exchange actor and that is recognized by the Ethiopian
Commodity Exchange Authority is eligible for ECX membership. Members are
those who use the market regularly and frequently either as producers,
intermediaries, or buyers. The memberships that ECX offers are broadly
classified into two types: (i) Full membership, and (ii) Limited memberships.
Full members are allowed to trade in any commodity while limited members
(usually smaller actors) can trade only for limited periods, in specific
commodities and in limited capacities as buyers or sellers. In addition, each
type of member can be a Trading Member (TM), trading in his or her own
account, or an Intermediary Member (IM), trading for him or herself or on
behalf of clients.
(i) Full membership
Under this type of memberships, members are allowed to buying or selling
any commodity. Members in this category can be two types: Trading
members and intermediary members.
 Trading members are those members who are allowed to buy or sell any
commodity but only on their own account.
 Intermediary members are those members who allowed buying or selling
any commodity either on their own account, or on behalf of their clients. They
13
are required to hold separate settlement accounts for client trading and are
expected to maintain a system for reporting on payment to clients
(ii) Limited membership
It is a membership given for those who participate only as a buyer or seller of
a single specified product and is given to those who participate in coffee
trading. This type of membership again can be either of two types: Limited
trading members, and limited intermediary members.
 Limited trading members who can only trade for their own account, have full
access to the trading floor, cannot trade for clients, can trade on one
commodity only, and membership is valid for only one year.
 Limited intermediary members can participate only as sellers for their own
accounts or on behalf of clients.
In order to be a member of the Ethiopian commodity exchange one has to
fulfil certain requirements. Financial requirements members are required to
pay annual membership fees and put a refundable security deposit in the ECX
Settlement Guarantee Fund for the duration of their membership. These
criteria vary depending on the type of member. The annual membership fees
currently are 50,000.00 Birr for trading members, and 5,000.00 Birr for
intermediate members and for both types of limited members. The expected
refundable security deposit is an amount of 200,000 Birr for trading members,
300,000 Birr for intermediate members, 50,000 Birr for limited trading
Members and 100,000 Birr for intermediate limited members. In addition, a
minimum net worth of 500,000 Birr is expected of trading members and
1,000,000 Birr for intermediate members in order to ensure immediate
payment of the contracts. The other requirements are; recognition by the
Ethiopian Commodity Exchange Authority as an exchange actor, evidence of
commercial activities in exchange-traded commodities either on one’s own
account or on behalf of others, tax registration and maintenance of tax
clearance according to Ethiopian law.
14
2.3.3. ECX operations
Most exchanges around the world have focused on providing a single service;
a well-functioning trading platform through which sellers and buyers can meet,
discover prices and trade. The ECX also operates in an environment where
there are important related services, such as warehousing, trading, clearing
and settlement, market surveillance, market data dissemination, and others
(see Figure 2.1). In the following sub-section, a short overview of the major
services currently offered by ECX will be presented.
Figure 2.1: Overview on ECX operations
Source: PPT presentation on the Story of ECX and Ethiopian Coffee
2.3.3.1. Warehousing and grading
ECX offers an integrated Physical Delivery Management System from the
receipt of commodities on the basis of industry accepted grades and
standards for each traded commodity by type to the ultimate deliver. To sell
agricultural products through ECX, sellers are required to deposit their goods
in the ECX warehouses. Currently, ECX has seven warehouses in Addis
15
Ababa, Dire Dawa, Adama, Shashemene, Nekempte, Bure, and Humera. At
the ECX warehouses, commodities are sampled, weighed, and graded. The
goods are labelled by type and origin (in the case of coffee) and are given a
quality grade according to a standardized set of measurements. For coffee,
grade 1 is highest and best grade and grade 10 is the lowest. These
combinations of labels (called a symbol) together identify the type of product
that is being sold, e.g. WSDB3 for washed coffee from the Sidama B region of
grade 3 or ULK8 for unwashed coffee from the Lekempt region of grade 8.
Once the grading process is completed, the sellers who deposited the
commodities are issued an electronic goods received note, which is
electronically transmitted to the ECX central depository, where the electronic
warehouse receipt is created and securely kept. The central depository
possess a central automated registry of warehouse receipts of all depositors,
similar to any asset-holding account, which can be debited in decrements
when sales are made on the ECX trading floor. This system avoids the risk of
fraud or loss of paper receipts, provides flexibility in selling partial amounts of
the deposited commodity, and increases the efficiency of physical delivery. At
sale, the ECX central depository debits the seller’s account and automatically
transfers title of the commodity to the buyer and issues a delivery notice, on
the basis of which the commodity can be released to the buyer.
Figure 2.2: ECX open outcry trading floor (left) and traders signing a
transaction (right)
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2.3.3.2. Trading and contracts
Among the major services offered by the ECX are trading operations and
trading contracts.
The ECX trading system initially started as a physical
trading floor located in Addis Ababa and now has transitioned to an electronic
trading platform over time. The trading floor uses “open outcry” price bidding
where all interested sellers and buyers verbally negotiate simultaneously
during trading hours (Figure 2.2). Trading is conducted for each commodity
class based on the grade given for the specific class of commodity by the
ECX warehouses. The transaction orders for sales and purchases are
transmitted to ECX members using telephones and are recorded on order
tickets. Once an order is executed, meaning a deal is made; the order ticket is
electronically entered and reconciled in the ECX automated back office
system to ensure the existence and validity of the warehouse receipt backing
the sale, the availability of buyer funds in a deposit account, and the validity of
the member-client agreement. This automated reconciliation takes just
minutes and is key to giving all market players confidence in the market.
To date ECX undertakes contracts for both spot and future contract
trading. Each contract specifies the grade, lot size, payment terms, price
quotation (currency and unit), tolerance, dispute settlement, and other
parameters for any commodity. Thus buyers and sellers only have to agree on
the price and quantity. The standard lot size of an ECX contract is 50 quintals
or 5 tons for all commodities, tailored to the current conditions of small truck
transport in rural Ethiopia. ECX contracts are designed to create a national
marketplace where all buyers and sellers meet to determine the national
reference price. Thus, all ECX contracts are quoted as “arrived Addis Ababa”
and a location differential is applied (based on the transport tariff from Addis
Ababa to the delivery location) at the settlement of the transaction depending
on the actual location of the physical commodity at delivery. ECX regularly
updates the transport differential and makes this information known in
advance.
17
2.3.3.3. Clearing and settlement
In order to eliminate risks of contract defaults, all payments have been cleared
and settled through the ECX internal clearing house in collaboration with the
major banks in Ethiopia to be able to issue transfers between the accounts of
traders. In other words, the ECX takes the role of receiving payments for all
transactions from buyers and transferring these funds to all sellers of
commodities, and receiving all Warehouse Receipts from all sellers of
commodities and transferring them to all buyers.
The ECX Clearing House works closely with the central depository and with
ECX approved settlement banks. The ECX requires that all members maintain
both a pay-in and a pay-out account in these banks where ECX also
maintains a settlement account. At the end of every trading day, the ECX
Clearing House calculates the net obligations of all its active members to
determine whether funds need to be transferred from the members’ pay-in
account to the ECX settlement account or vice-versa to the members’ pay-out
account. All pay-in transfers to ECX are made on the same day as the
transaction and all payout transfers are made on the following morning.
Similarly, all transfers of warehouse receipts to the buyer are made by the
central depository the following day after pay-in has been made to the seller.
2.3.3.4. Market surveillance
Market surveillance is also one of the major services offered by ECX to keep
track of market actors to discover different types of extraordinary behaviour,
which may initiate further investigation and possibly lead to expelling the
trader from further access to the market. In this regard, ECX experts regularly
conduct surveillance on market trends as well as conduct audit and
investigations on market operations to protect the market from manipulation,
excessive speculation, fraud, or other malpractice.
2.3.3.5. Market data dissemination
18
One of the major benefits of the ECX in transforming an age-old traditional
agricultural marketing system is through providing accurate, reliable, and
timely data on a continuous basis to all market players. The ECX market data
department handles the tasks of interpreting current market trends and
disseminating market information to the different groups. Data on opening
price, highest price, lowest price, last traded or current price, and volume of
trade are transmitted continuously using electronic networking to electronic
price display boards located in public sites in Addis Ababa and other major
market centres around the country for every commodity grade traded on the
Trading Floor.
19
3. COFFEE PRODUCTION AND MARKETING IN ETHIOPIA
In order to have a good understanding of the role of ECX in the coffee sector
and its impact on coffee marketing, it is important to interrogate the major
reforms\changes that have been occurred in the Ethiopian coffee sector
before and after introducing the ECX for coffee trading. This section,
therefore, will provide an overview of such changes with respect to the
institutional and regulatory aspects in the coffee chain, as well as the main
actors and institutions involved in the chain and its structure. The findings
presented in this section are based on interviews of various stakeholders
involved in the coffee chain as well as from various secondary resources. The
research conducted by Petit (2007) in particular, constitutes the most
important basis to compare the current situation with regard to the situation
before the ECX. After briefly describing the current production and processing
aspects of the coffee sector in the first sub-section, issues regarding its major
reforms in institutional and regulatory frameworks will be presented in the
second-sub section. The third sub-section will look at the before and after
scenario in the country’s coffee chain as well as the main actors involved in it.
3.1. Ethiopian Coffee Production and Processing - A brief look
Coffee is the second most traded commodity in the world market after
petroleum and more than 80 developing countries produce and export it to the
world market (Girma et al., 2008). Currently, studies show that more than 100
coffee species exist. Out of these, only three, i.e., Coffea Arabica, Coffea
Canephora (Robusta) and Coffea Liberica have economic importance and
only the first two types are traded in the world market (Solomon, 2008). While
Coffea Arabica accounts for about 80% of the world coffee market and the
remaining 20% comes from Coffea Canephora , Coffea Liberica has only
minor local importance in some parts of Western Africa (Girma et al., 2008).
20
Currently, many believe that Ethiopia is the centre of origin and genetic
diversity for Arabica coffee (Girma et al., 2008). Even if there are some
groups who argue that South Arabia is the birth place of coffee (Foek, 2008),
it is now held that Arabica coffee, despite its name, comes from Ethiopia and
is still found in wild populations in the undergrowth of the high Abyssinian
plateaux (Cambrony,1992). Ethiopia is also one of the oldest countries which
used to trade coffee (ECX, 2008) and many even believe that Ethiopia is the
oldest coffee producer, consumer and exporter in the world (Girma et al.,
2008). Even presently, coffee is the most important commodity in the country
in many respects. It accounts for about 25% of the GNP, 40% of the total
export and 10% of total government revenue (MoARD, 2007). It is also
responsible for the livelihoods of an estimated 1.3 million producers and 15
million people between producers, wageworkers, transporters and their
families (Petit, 2007).
3.1.1. Production
With regard to the production aspect, almost all Ethiopia’s coffee is harvested
during the Meher season (between September and February) (Promar
Consulting, 2010).
While many resources divide the Ethiopian coffee production systems into
four categories: forest coffee, semi-forest coffee, garden coffee and plantation
coffee (Petit, 2007), the paper by Endalamaw (2009) divides the production
system into five categories by adding one category referred to as modern
smallholdings. Moreover, while there are no statistics on how much coffee is
yielded from each production type (Endalamaw, 2009), it is estimated that
semi-forest is roughly accounts 35% of production, followed by garden coffee
(35%), plantations and modern smallholdings (20%) and forest (10%).
Geographically, the vast majority (99%) of Ethiopia’s coffee is grown within
two large areas/regions – Oromia (26%) and the Southern Nations,
Nationalities and People’s Region SNNPR (76%), and the remaining 1% is
21
grown in Amhara region (Promar Consulting, 2010). Moreover, according to
this paper, based on the name of the local area where coffee specifically
grown within the above two major growing regions, coffee in Ethiopia is
classified as the following main types: Sidamo, Yiregacheffe, Teppi\Bebeka,
Harar, Gimbi\Lekemeti, and Limu\Jimma.
Most literature on Ethiopian coffee attributes at least 95% of total coffee
production to small-scale farmers. The paper by Petit (2007) reported that
smallholders produced about 95% of total production in Ethiopia, against
4.4% of state-owned plantation and 0.6% private investor plantations. While
these figures show the recent market shares in the period before the ECX,
evidence from the field and other sources suggests these shares may have
changed after the ECX was started. Although there are no recent official
surveys, Ethiopian Coffee Growers, Producers & Exporters’ Association
(ECGPEA) claims that large-scale plantations have grown considerably over
the past years and account for approximately 10% of total production, divided
in roughly equal parts between the state and commercial farms (Kidan, 2009).
3.1.2. Processing
Currently, coffee in Ethiopia is processed using the same methods used in the
period before the ECX. After harvesting, coffee is processed by two widely
applied methods: sun-dry processing and wet processing. In the sun-dry (unwashed) method, the un-pulped coffee cherries are dried in the sun on mats,
concrete, or cement floors immediately after they have been picked. After
drying to a moisture content of about 11.5%, the outer layer of the cherries is
removed by hulling and the green bean obtained is ready for marketing.
Under the wet (wash) method, after sorting the carefully picked fully ripe
cherries and removing the unsuitable ones, the final sorted and clean cherries
are pulped. The pulped wet parchment coffee is put into different fermentation
tanks to ferment naturally, and then the fermented coffee is washed with clean
running water. Finally, the wet parchment coffee is dried in the sun on raised
drying tables and sorted when it has attained 11.5% moisture levels.
22
While the coffee processing methods remain the same, the following two
major changes have been observed. Firstly, the amount of washed coffee,
which accounted for only about 10% of Ethiopian coffee during the period
before the ECX, is currently now about 20-30% (Promar Consulting, 2010).
Secondly, according to many interviewed actors, many coffee processing
enterprises have emerged in the period since the ECX was launched and
provide processing services for public and private actors.
3.2. Major Institutional and Regulatory Reforms Before and After ECXAn Overview
Over the past 20 years, as in most developing countries, market liberalization
has been a dominant feature of economic reforms in Ethiopia. In line with this
trend, continuous reforms have been carried out in Ethiopia. Starting in 1991,
when the liberalization process started in Ethiopia, the government
implemented a series of reforms which have had effects for all sectors of the
economy, including the coffee sector. Coffee market reforms began in 1992
(LMC, 2000). Since then many substantial institutional and regulatory reforms,
directly or indirectly related with the coffee sector, have been carried out. In
this section, we summarize some of these reforms both before, and after the
establishment of the ECX.
3.2.1. Before the ECX (1991-2008)
According to different available studies (IFPRI 2003; Petit, 2007), some of the
major institutional and regulatory reforms implemented in the 1991-2008
period were:
i.In1992, the former Ethiopian Coffee Marketing Corporation (ECMC), which is
totally responsible for all marketing aspects of coffee, split into two public
companies: the Ethiopian Coffee Purchase and Sales Enterprise (ECPSE)
and the Ethiopian Coffee Export Enterprise (ECEE) with each carrying out
different roles and responsibilities.
23
ii. In 1993, two other enterprises were established: The Coffee Technology
Development and Engineering Enterprise concerned with the construction,
importation, distribution and repair, etc. of coffee pulping and drying machines
and the Coffee Plantation Development Enterprise with its objective of coffee
production and managing some state coffee farms.
iii. An amendment relating to coffee trade issuance and renewal fees was
implemented in 1993. The previous license issuance fee of Birr 20,000 for
coffee export and Birr 10,000 for coffee supply was reduced to Birr 200 and
Birr 150 respectively.
iv. In 1994, another enterprise called the Coffee Processing and Warehouse
Enterprise was established to render coffee processing and warehousing
services.
v. In 1995, a new autonomous public institution called the Coffee and Tea
Authority was formed to deal with issues like enhancing the production and
quality of coffee, promoting coffee trade and encouraging the processing of
coffee and controlling its quality.
vi. In 1998, various existing taxes and duties were consolidated into a single
tax set at 6.5% of the free on board (f.o.b.) price and in 2002, the export
coffee tax was suspended (amended to zero) in response to persistently low
international prices.
vii. Since 2001, in addition to abolishing the previous Quota system, some
regulations relating to the total auction system was relaxed for example, the
insistence that all coffee must be sold through auction centres. This practice
was changed, and since 2001, cooperative unions and to a lesser extent,
private investors are now permitted to facilitate export sales.
viii. In 2002, the export price control of the export floor price by the National
Bank of Ethiopia (NBE) came to an end.
Viv. Since 2003, the Ethiopian Coffee Purchase and Sales and the Ethiopian
Coffee Export Enterprise were brought to an end and the private sector was
allowed to increasingly engage in the coffee market including washed coffee.
While several studies commented on the coffee market reforms in the period
before the ECX, according to the paper by Petit (2007), the reforms were only
partial, as policies to promote the participation of the private sector were
combined with strict government controls in certain areas. According to Petit
24
(2007), the reforms were introduced gradually over the years and consisted
mainly of the abolition of: the former state monopoly for trade and marketing
in favour of private exporting firms, price controls, the quota system for traders
and the export coffee tax. State control remained firm through: the mandatory
National Auction; the strict licensing requirements for collectors, suppliers and
exporters; the policy to keep only non-export quality coffee for domestic
consumption; and the prohibition of Multinational Corporations (MNCs) from
registering as exporters (ibid).
3.2.2. After the ECX (Since 2008)
Following a period of reorganization of the powers and duties of the
institutions involved in the coffee sector until 2008, the government came up
with a new law, i.e. the Coffee Quality Control and Marketing Proclamation,
(Proclamation No. 602/2008) in December 2008 which marked a new chapter
in the coffee sector in general and its marketing aspect in particular. The
Government decision, according to this law, was to abolish the National
Auction system and to harmonize coffee marketing through the organizational
work of the Ethiopia Commodity Exchange (ECX). The major agenda behind
this new law was that all of Ethiopia’s coffee should be traded through the
ECX.
Some of the important new regulations introduced in this new Proclamation
are the following:
i. Establishment of new type markets called Primary Transaction Centres or
local coffee markets are permitted to take place. The types of actors allowed
to be involved in such markets, together with their duties and obligations, are
also specified.
ii. Other than Primary Transaction Centres, the only place that all coffee
transactions shall take place is at the ECX in accordance with the rules of the
Exchange.
25
iii. The primary collectors, formerly legally recognized as independent actors
operating between the producer and the supplier, are now legally restricted
from being involved in the coffee trade.
iv. The setup of the warehousing system where all coffee should be stored
until sold at the ECX.
v. Establishment of the Coffee Quality Liquoring and Inspection Centre. This
is an institution at the federal and regional level, that inspects, liquors, and
issues certificates for coffee locally supplied from production areas, export
coffee, and coffee by-products delivered to consumer areas.
On the other hand, certain regulations remain unchanged, such as the need
to obtain a quality certification prior to export and the prohibition to sell exportquality
coffee
in
the
domestic
market.
Coffee
exporters, domestic
consumption wholesalers and coffee roasters still require licenses to operate;
suppliers are also said to require a competence certificate from the
corresponding executive body in order to collect, process, store or transport
coffee.
3.3. Coffee Marketing System Before and After ECX
As mentioned in section 3.2, the Government’s decision to handle all of the
Ethiopia’s coffee trade through the ECX in December of 2008 has created
many significant changes in the types of actors and institutions involved in the
coffee marketing system as well as in their respective duties and functions.
This new government decision has also resulted in major changes in the
overall coffee marketing structure (channels). In this section, therefore, we
summarize the key actors and institutions involved in the current Ethiopian
coffee marketing system and the coffee marketing structure both before and
after the creation of the ECX.
3.3.1. Key actors and institutions
The key stakeholders (actors and institutions) involved in the current Coffee
Marketing System as well as their respective duties and functions are
26
described in Table 1. To make the description simple and clear, the key
stakeholders in the coffee marketing system are grouped into six categories:
regulatory government institutions, parastatals, coffee producers, private
intermediaries, cooperatives, and sector associations.
From Table 1 below, several observations can be made. Firstly, many new
actors and institutions are emerging since the implementation of ECX for
coffee trade. The new participants are the Ethiopia Commodity Exchange
Authority (ECEA), the Ethiopia Commodity Exchange (ECX), the Coffee
Processing and Warehouse Enterprise, and the National Exchange Actors
Association (NEAA). Secondly, many of the previous actors and institutions
are modified with new roles and responsibilities.
3.3.2. Coffee marketing structure-before and after ECX
3.3.2.1. Before ECX
Prior to ECX operation in coffee sector, the Ethiopian domestic coffee
marketing system was mainly characterized by an auction system with auction
centres in Addis Ababa and Dire Dawa. Legally, all Ethiopian coffee was
supposed to pass through these two auction centres. All coffee had to be
physically brought to one of these centres, where it was graded and then sold
either domestically or for export, depending on the grade. However, since
2001, cooperative unions have been granted permission to by-pass coffee
auctions, opening the way for direct export sales (Dempsey, 2006). Figure 1
illustrates the recent national domestic coffee marketing chain before the ECX
began as described by Petit (2007). In this period, (see figure1), coffee can be
distributed from the farm gate to export\domestic buyers through two main
channels: a) cooperatives channel, and b) private or conventional channel.
Distribution under cooperatives is simple and straightforward and the
smallholders coffee farmers bring either red cherries or dry cherries to the
primary society. After washing or hulling the cherries1, the primary society
then sells the beans to their Cooperative Unions who directly export the coffee
27
to international buyers. In some cases, those primary societies who need
cash now and are not able to wait for the dividends bring their coffee to the
auction centres. In such cases, coffee utilizes elements of the conventional
channel.
28
Table 1: Main functions and responsibilities of key actors and institutions
Key Actors and
Institutions
Existed\New
Main Functions and Responsibilities
after ECX
GOVERNMENT INSTITUTIONS
Issues certificate of competence to
persons
engaged
in
coffee
trade;
establishes central coffee liquoring and
inspection centre; inspects and issues
certificate of quality and letter of release Existed
to coffee for export and domestic with
MoRAD
consumption
but
new
roles
Establish and regulate the primary
transaction centres; issue or revoke
certificate
of
competence
&
trade Existed
licenses for different coffee traders with
Regional Bodies
except for coffee exporters.
Coffee
Quality
Control
&
Liquoring
but
new
roles
Existed
but
Unit Responsible for liquoring washed and with modified
(CLU)
unwashed coffee prior to export
role
Ethiopia
Commodity
Oversee the implementation of the ECX
Exchange
rules, extend licenses to its members
Authority(ECEA)
and audit its performance
New
PARASTATALS
Ethiopia
Offer
warehousing,
grading,
market
Commodity
information and a trading system with
Exchange (ECX)
settlements and clearance of contracts
New
Coffee Plantation
and
Development
Government institution responsible for
Enterprise
5% of coffee production
29
Existed
Ethiopian
Grain Serving the public in stabilizing coffee Existed
Trade Enterprise price by Engaging in coffee purchases, with
(EGTE)
local wholesale and export businesses
but
new
roles
Coffee
Processing
and State
processing
Warehouse
processing
Enterprise
private actors
plant
services
for
providing
public
and
New
COFFEE PRODUCERS
Small-Scale
Responsible for 90% of total coffee
Producers
production
Commercial
Responsible for 5% of total coffee
Growers
production
Existed
Existed
PRIVATE INTERMEDIARIES
Collect coffee from producers or from
Suppliers\Akrabi
their own farm for delivery at ECX. Not
es
allowed to export on their account
Existed
Private Exporters Purchase coffee from ECX for exporting
Existed
Licensed traders who purchase nonDomestic
export coffee from ECX and sale for
Wholesalers
domestic consumption
Not known
Licensed traders who purchase non
export coffee from ECX and either export
or sale domestically after roasting and
Coffee Roasters
grinding
Not known
COOPERATIVES
Service
Made
up
of
different
peasant
Cooperatives\
associations who purchase coffee from
Primary Farmers coffee farmers and sell to cooperative
Societies
unions or through ECX
Purchase
coffee
Existed
from
service
Cooperative
cooperatives and either they can directly
Unions
export or sell through ECX
SECTOR ASSOCIATIONS
30
Existed
Private organization with objective of
Ethiopian Coffee promoting
coffee
coffee
exports
trade
through
Exporters
providing
information,
Association
lobbies on policies and technical support
(ECEA)
to its members
Existed
National
Exchange Actors Group of all trading members of ECX
Association
formed in 2009 and provide trade
(NEAA)
information and training to its members
New
Ethiopian Coffee
Growers,
Producers
With the main aim of promoting large
and scale coffee sector in Ethiopia and
Exporters
support
members
to
produce
Associations
sustainable, traceable and quality coffee
(ECPEA)
for specialty markets
Existed
Source: Petit (2007) and interviews
The private or conventional channel totally follows the auction system. Under
this pattern, legally licensed local coffee collectors (Sebsabies) assemble
cherries from coffee farmers and then sell to suppliers (Akrabies). In some
cases, the suppliers themselves collect directly from the farmers. The
suppliers, after hulling or washing, bring all their coffee beans to the auction
centres in Addis Ababa and Dire Dawa. At these auction centres, all coffee
brought to the compound is consigned separately according to the different
localities or regions it came from, and then is graded and tested for quality on
a sample basis by the Coffee and Tea Quality Control and Liquoring Unit
(CLU). After grading standards are set, the samples of the graded coffee are
displayed to the bidders in the halls an hour before the beginning of the
auction proceedings and then the bidders bid the lots one by one in a “Dutch
type ascending price bidding system.” The bidding process takes place
between suppliers (or their agents) as “sellers” and private exporters (or their
agents) as “buyers” for export standard coffee, and between the suppliers (or
31
their agents) as “sellers” and private domestic traders (or their agents) as
“sellers” for rejected coffee redirected for the domestic market.
Coffee from plantations (State Farms and Commercial Growers) also flows
through the private or conventional channel. After washing\hulling the
cherries, coffee plantations bring all of their coffee beans to the auction
centres where they go through all the various processes until they are sold.
Private
consumption
Coffee Farmers
Service
Cooperatives
State Farms & Commercial
Growers
Collectors
(Sebsabies)
Suppliers
(Akrabies)
Washing\Hulling
Cooperative
Unions
Washing\Hulling
Auction Centres
(Addis Ababa & Dire
Dawa)
Washing\Hulling
Private Domestic
Distributers
(Rejected Coffee)
Private Exporters
Direct
Export
Export
Domestic Buyers
32
Figure 1: The National Coffee Marketing Chain: Before ECX
3.3.2.2. After ECX
Since December of 2008, as mentioned earlier, many significant changes
have been made on the operation of the national coffee marketing system.
For instance, in addition to the decision that all Ethiopian coffee trade should
pass through the ECX, some new actors and institutions have emerged as
new participants while some previously existing ones are now legally
prohibited from involvement in the coffee marketing system. Moreover, in
addition to the cooperative unions, commercial growers now have been
granted permission to by-pass the ECX and sell directly to foreign buyers.
Such changes therefore, can alter the way coffee flows from farm gate to
export/domestic consumers. To show how the domestic coffee marketing
chain prior to ECX changed, the present domestic coffee marketing chain is
illustrated in Figure 2.
As it is described in Figure 2, coffee in the current system can be traded
through three main channels: a) cooperatives channel, b) private traders
channel, and c) large-scale farmers’ channel.
a) Cooperatives channel
Under the cooperative channel, the smallholders will bring either red cherries
or dry cherries to the primary society, who will pay the producer the going
farm gate price. Depending on the size of the primary society it may have wet
or dry processing facilities of its own. The primary society will then sell the
beans either as parchment or hulled green beans to their Cooperative Union
that pays a price that is similar to the going ECX rate for the type of coffee
provided. The Cooperative Union then has two choices/options: selling
directly to foreign buyers at an agreed upon price bypassing the ECX, or
selling through the ECX. However, since all coffee must be graded by the
ECX, under the former option the Cooperative Unions should also bring their
33
coffee to the ECX warehouses so that the ECX staff take samples from the
trucks and do an initial grading and give the coffee a visual grading of 1-9
based only on the number of defects only, but not on cup quality. Then after,
the sample of the coffee is taken to the Coffee Liquoring Unit (CLU) to be
tested using the cup quality test and also to get an official letter that their
coffee is an export quality.
Private
consumption
Coffee Farmers
Primary Transaction
Centres
Service
Cooperatives
State Farms &
Commercial Growers
Suppliers (Akrabies)
Key
Washing\Hulling
Cooperative
Unions
Washing\Hulling
Washing\Hulling
Normal
Optional
ECX
Grading\Warehousing
Commercial
Growers
ECX Trading Floor
Private Exporters
& EGTE
CLU
Direct Export
CLU
Wholesalers\Roast
ers (Rejected
Coffee)
CLU
Export
Direct Export
34
Domestic Buyers
Figure 2: The National Coffee Marketing Chain: After ECX
Selling through the ECX is the options for the cooperative unions when they
do not get enough buyers for the volume of coffee held by them. In such
cases, their coffee, like any other commodity coffee, will be taken to an ECX
warehouse, graded both by visual grading and cup quality, and will be sold
on the ECX trading floor at Addis Ababa. In some cases the primary societies
will also sell their coffee directly through the ECX rather than selling to the
cooperative unions. These happens when the primary societies are not
members of the cooperative unions, or when they need immediate cash, or
when the union knows that the ECX is currently selling the producers’ type of
coffee at higher prices than the Union is able to get from its direct buyers, or if
the quality of the primary society’s coffee is not high enough to meet Union
standards.
b) Private traders channel
The private channel is still the dominant one in the present domestic coffee
chain. Under this channel, suppliers (Akrabies) buy red or dry cherries from
coffee farmers either at their own farm or at Primary Transaction Centres\
local coffee markets. Then, after washing or hulling (usually at their own
processing plants) and grading by the regional coffee and liquoring units on
sample basis, suppliers will bring all of their coffee beans to one of the nine
ECX’s warehouses to get a warehouse receipt2.
At ECX warehouses, in
addition to getting a warehouse receipt, a grading standard from 1-9 will also
be given to the suppliers of coffee beans after grading the samples from the
trucks based on visual (number of defects) and cup quality tests. The 1-9
grading standard includes three types of coffee categories: specialty coffee
(grades 1-3), export standard coffee (grades 4 & 5), and domestic
consumption coffee (grades 6-9). Then after, the suppliers (or their agents)
trade their coffee with buyers at the Addis Ababa ECX trading floor through an
‘open outcry’ system based on electronically transmitted information.
35
Once the coffee trade takes place at the ECX trading floor, the buyers take
the coffee they bought from the ECX warehouses. The buyers at the ECX
trading floor are only private exporters and EGTE for export standard coffee,
and only Wholesalers and Roasters for domestic consumption coffee. The
private exporters and EGTE then take the coffee from ECX warehouses to
their own warehouses\ processing plants and make further processing to get
more export quality beans. But before they export, like cooperative unions,
they should bring the sample to the CLU at Addis Ababa or Dire Dawa
stations to be further tested using the cup quality test and to get an official
letter that their coffee is of export quality. While wholesalers are required to
sell their coffee only to the domestic market, roasters (after roasting and/or
grinding) can sell their coffee either for export or domestic consumption.
c) Large-scale farmers’ channel
This channel represents the options that large-scale farmers or commercial
growers have to distribute their coffee. It is similar to the cooperative channel.
After hulling\ washing usually in their own processing plant, coffee commercial
growers can sell their beans directly to foreign buyers (by-passing the ECX) or
through ECX. They choose the ECX marketing system if they do not manage
to get foreign buyers or if the ongoing ECX coffee price is higher than the
price from its direct foreign buyers. In such cases, just like the suppliers, they
bring their coffee beans to one of the ECX warehouses and trade in the ECX
trading floor at Addis Ababa. If they decide to make a direct export, they first
bring the beans to one of the ECX’s warehouses so that their coffee beans
are tested and get the usual standard grade of 1-9, and then they proceed
with further processing in their own plants. Finally, before they export, they
bring their sample beans to the CLU at Addis Ababa or Dire Dawa stations for
further testing and grading as well as for getting an official letter giving them
permission to export their coffee.
36
4. MAJOR IMPACTS OF ECX ON COFFEE MARKETING
In this section, we will see the major changes that the creation of ECX has
been brought on various aspects of the coffee marketing system in eastern
Ethiopia. Particularly, we will deal with two major issues. In the first subsection, we will see what major changes have been observed with respect to
the types of actors involved and the way they are structured by presenting the
current coffee marketing chain in the study area. In the second sub-section,
we will discuss the major benefits and\or loses that the key actors (like
farmers, suppliers, exporters) experienced in the current marketing system.
The results described in this section derive from a stakeholder’s interview and
the researcher’s observations during the field study.
4.1. Impact on Coffee Marketing Chain
As it is mentioned in section 2, one of the major impacts expected from
implementing a commodity exchange is reducing the length of the long chain
of channels exhibited in a traditional agricultural commodities market. In this
sub-section, therefore, we will try to investigate whether this expected impact
is actually realized through the ECX by describing the current coffee
marketing system in the study area (see Figure 3 below) and comparing it
with the one that existed before ECX is implemented.
The coffee marketing chain presented in Figure 3 shows how coffee currently
flows from farm gate to export in eastern Ethiopia. As it is illustrated in Figure
3, the important features of the current coffee chain in the study area, as
compared to the one that existed before the ECX can be summarized using
the following points:
1. Just like the period before the ECX was implemented, coffee in the study is
still distributed from farm gate to export\domestic buyers through two main
channels: the cooperative and private channels.
2. With regard to the cooperative channel, the current channel is almost the
same as the ones that existed before the ECX both in the way coffee flows
37
and the types of actors involved in it. The only change between them is that
while the cooperative union (Oromia Coffee Farmers Cooperative Union
(OCFCU) in this case) in the present system is permitted to sell its coffee
through the ECX and in addition directly to foreign buyers, the only option of
the union prior to formation of the ECX system was to sell directly to foreign
buyers but was not allowed to sell through auction centres.
3. Many changes, however, are observed in the current private channel as
compared to the ones that existed before the ECX. The notable changes
peculiar to the study area are presented in the following sub-section and
include:
i. One of the major intentions of the ECX was to remove the coffee collectors
(Sebsabies) who were originally legally recognized agents between farmers
and suppliers in the previous system. However these individuals are still
involved in the current marketing system and perform their usual duties either
by themselves or as employees of suppliers.
This is, according to most
interviewed actors, due to the following two reasons:
 Firstly, the effort of establishing the Primary Transaction Centres (or local
coffee markets), with the aim of linking farmers directly to suppliers, did not
succeed in the study area. While the concerned government bodies provide
the necessities required for the operation of such markets, the major factor for
the failure is that farmers do not avail themselves of this market facility
because either it requires them to go long distances to reach such markets, or
they do not get higher prices than they usually get from the local primary
society. Some are also hesitant to use such markets.
 Secondly, the necessary activities required to promote the primary collectors
to suppliers are not taking place. For example, collectors do not get credit
access to fill the capital gap that would enable them to be suppliers.
ii. In addition, a wide array of local shops, which were not in existence before,
have emerged as new type of actors in the coffee marketing system since the
creation of the ECX. These actors buy coffee from farmers and sell either to
38
local markets or to suppliers. According to most of the suppliers’ responses,
the emergence of such actors has had huge negative implications in terms of
coffee quality since these bodies usually mix coffees with different qualities.
In summary, we can generally say that the effort of reducing the number\types
of actors involved in coffee marketing through ECX system was not realized in
this particular study area. What we actually observed is that the actors
involved in the coffee marketing system in the study area are increased both
in number and types since the creation of ECX.
39
Private consumption
Coffee Farmers
Service
Cooperatives
Collectors
(Sebesabies)
Local Shops
Suppliers (Akrabies)
Key
Washing\Hulling
Normal
Washing\Hulling
Optional
Cooperative Unions
(OCFCU)
ECX
Grading\Warehousing
ECX Trading Floor
Wholesalers\Roasters
(Rejected Coffee)
Private Exporters
CLU
CLU
Direct Export
Export
Domestic Buyers
Figure 3: Current Coffee marketing Chain in Eastern Ethiopia
4.2. Major Impacts on Key Actors
For the ease of understanding and description, these impacts will be
described using the same categories used for describing the major expected
40
activities/outputs of the commodity exchange in section 2. As described in the
section, the impacts that are expected from the commodity exchange like the
ECX can be grouped under the following five categories: Price discovery,
Price risk management, market development, venue for investment, and
facilitation financing. Since the impacts expected under the last two
categories are those that can be observed at the industry (macro) level, our
discussions will focus on the major impacts that are expected under the first
three categories.
4.2.1. Price discovery
The two major impacts expected from the ECX operations under the category
are an improved price for all intermediaries and their improved access to
accurate, market information.
With regard to the price they obtained, all interviewed actors (farmers,
suppliers, and exporters) agreed that the price they received for their coffee
has significantly increased after the introduction of the ECX. For example,
farmers indicated that the average price that they received increased from the
price of 35-40 per kg to Birr 65-70 per kg (a 75% to 85% increase) after the
introduction of the ECX. Similar increases were also observed in the average
prices that both suppliers and exporters received since the ECX started
operating.
With regard to access to market information, both interviewed suppliers and
exporters acknowledge that they have improved access to updated
information regarding market fluctuations and price differentials based on
quality after the creation of the ECX. For instance, as it was pointed out by
some suppliers and exporters, it is a matter of dialling 998 to hear the daily
price or to call to individuals who participate at the ECX trading floor in Addis
Ababa to get the pertinent marketing information. However, from the farmer’s
standpoint, the interviewees confirmed that there is no change in the way
farmers get access to the relevant coffee market information. Most farmers
41
even do not have any information about the ECX as well as the various
services it renders for coffee marketing.
In addition, the interviewees agreed that the gap between price in the spot or
local market and central or foreign market has been significantly reduced after
the ECX started operating. For instance, when the price quoted at ECX
trading floor is immediately transmitted to local market, i.e. when the price
increases in ECX, the price paid to the farmers in local market are also
increases.
4.2.2. Price risk management
One of the notable motioned impacts expected from the commodity exchange
like ECX is a reduction in the transaction costs involved in selling coffee for
both farmers and other traders. In this regard, different responses were
reported by farmers, suppliers and exporters.
From the farmers’ point of view, almost all interviewed farmers revealed that
no change had been observed in the transaction costs they incurred to sell
their coffee since the ECX started. This is because farmers still sell their
coffee either to suppliers\collectors at their farm gate or to the farmers’
primary societies which are located in their surroundings just like they did
before the ECX started.
However, while all suppliers agreed that their transaction costs had been
significantly reduced after the ECX started operations, most of the interviewed
exporters reported an increase in their transaction costs in this period. The
major reason cited by both suppliers and exporters for these opposite trends
in their transaction costs is that there are extra costs involved in taking the
coffee from the ECX warehouses to the exporters’ warehouses after a trade
transaction has been completed.
4.2.3. Market development
42
The major expected impacts of ECX under this category are an improvement
in the quality of coffee and an increased actors’ awareness about commodity
exchanges and their impacts.
While the responses from suppliers and exporters revealed that they have
good awareness of the operations of ECX in the coffee sector and their
impact on the coffee marketing system, most of the interviewed farmers
confirmed that they do not have good knowledge of the ECX operations in the
coffee sector as well as its significant contributions.
43
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