ETHIOPIAN COFFEE FARMERS TRAPPED IN A CYCLE OF

UNCLAS SECTION 01 OF 04 ADDIS ABABA 002006 SIPDIS SIPDIS DEPARTMENT FOR AF AND AF/E STATE PASS TO USTR: W.JACKSON LONDON, PARIS, ROME FOR AFRICA WATCHER CJTF-HOA AND USCENTCOM FOR POLAD E.O. 12958: N/A TAGS: EAGR ECON BEXP SOCI ET SUBJECT: ETHIOPIAN COFFEE FARMERS TRAPPED IN A CYCLE OF POVERTY ADDIS ABAB 00002006 001.2 OF 004 ¶1. SUMMARY. Ethiopia is often referred to as the birthplace of coffee, and Ethiopians are proud to say that coffee is named after the Kaffa region (currently Oromiya Region), where it was first discovered over 1,000 years ago. Today, Ethiopia produces 300,000 tons of coffee per year. Further, approximately 15 million (or about 20 percent) of Ethiopians are involved in the coffee industry, from farming to transportation to marketing. It is estimated that 500,000 hectares of land are occupied by coffee farmers. Coffee is still the leading foreign exchange export item, constituting about 35 percent of the country's value of merchandise exports. In 2006, Ethiopia exported 165,000 tons of coffee, the largest in the export history of Ethiopia. However, the USD 365 million obtained from the sale of the coffee could have been greater: the price per ton ranged from USD 2,100 to 3,300, depending on the quality of the coffee. Today, 95 percent of Ethiopian coffee is produced by small, private farmers, and the remaining five percent is grown by cooperatives or government-owned farms. As a result, the majority of Ethiopian coffee farmers own only small plots of land and cannot afford basic necessities such as food and clothing for their children. Coffee growers in Ethiopia face a variety of challenges, from lack of technology to distance from the market. Initiatives to improve the welfare of coffee farmers are moving forward. However, with issues vast and solutions limited, farmers will continue to live in poverty for the foreseeable future. END SUMMARY. -------------- --- TRADITIONAL FARMER-TO-MARKET CHAIN OF PRODUCTION -------------- --- ¶2. Traditionally, coffee farmers sell their coffee to small traders or collectors (sebsabies) who travel from farm to farm and usually, in turn, sell the product to suppliers (akrabis). The supplier then sells the coffee at the daily coffee auction in Addis Ababa and Dire Dawa to exporters, who sell the coffee to the international markets. The auction is the pinnacle of the coffee trade in Ethiopia, as all coffee is sold through the auction, with the exception of coffee from the cooperative unions, government-owned farms, and private farms. These exceptions sell directly to the international market. With regard to the auction, the "blocked account payment system" was developed by coffee exporter Abdullah Bagersh of S.A. Bagersh PLC to ensure that buyers bidding at the auction have funds to pay the sellers. ¶3. There are several downsides to the traditional farmer-collector-supplier-auction-exporter- international market system, including the fact that the collectors and suppliers act as middle men, taking their share of the profit, therefore decreasing the profit of the farmer. Second, the collector can act as a destructive component of the process, collecting small volumes of coffee from each farmer and mixing the various yields. Thus, if one farmer produces high quality coffee, it is often mixed with coffee of lower quality, lowering the profit the high quality coffee farmer receives and lessening the incentive to produce a high quality product. -------------- COFFEE COOPERATIVES AND COOPERATIVE UNIONS -------------- ¶4. Following the 2001 crash of coffee prices to 39 cents per pound, the Ethiopian government started the primary cooperatives and cooperative unions as an alternative to collectors. There are six major coffee cooperative unions in Ethiopia: the Oromia Coffee Farmers Cooperative Union (with 101 primary cooperatives) is the oldest and most well organized. Other cooperative unions include Sidama (46 primary cooperatives),Yirgacheffe (22 primary cooperatives), Kaffa (26 primary cooperatives),Benchmaggi (about 20 primary cooperatives) and Tepi (six primary cooperatives). The benefit of primary cooperatives and unions is that the coffee farmer can sell the coffee directly to the primary coffee cooperative at the current market price. The primary ADDIS ABAB 00002006 002.2 OF 004 cooperatives are registered and process the coffee they purchase from farmers before selling the processed coffee, usually to coffee cooperative unions but also at the auction, if the primary cooperative opts to work without the cooperative union network. The cooperative unions then work directly with buyers in the international market to export their coffee, bypassing the coffee auctions in Dire Dawa and Addis Ababa. ¶5. Typically, the cooperative union retains 30 percent of revenue from coffee, the primary cooperative keeps 30 percent, and 40 percent is returned to the grower in the form of a dividend. The Oromia Coffee Farmers Cooperative Union has had great success; however, the Sidama Union has faced major difficulties, with a loss of 21 million Ethiopian birr (approximately USD 2.3 million) in 2006 and its leadership in jail on charges of embezzlement. Ethiopians in the coffee industry believe that this incident occurred because of an uncontrolled system and lack of regulatory structure. -------------- ETHIOPIAN GOVERNMENT ROLE -------------- ¶6. In the last 15 years, the number of exporters has increased exponentially to no less than 100 exporters today. Following the end of the Communist Derg regime in 1991, individuals could obtain export licenses more easily. The regulatory body of the coffee and tea industry, the Coffee and Tea Authority (CTA) was disbanded in 2001. The body that regulates the industry is now a department under the Ministry of Agriculture. The department handles regulatory issues and policies, provides training, and attempts to improve quality to increase private investment and foreign exchange. ¶7. One way that the government exerts control over the coffee industry is by controlling dates of harvest. For instance, the harvest for washed coffee begins in September/October. When the government declares the season "open," washing stations can begin buying coffee cherries and bringing to cherries to auction. By imposing these regulations, the government attempts to control quality by avoiding trade of an unripe cherry. This process continues for three to four months, until the government declares the washed coffee trade "closed." After one to two weeks, the government reopens trade for dried cherries, which continues for the rest of the year. Ethiopian farmers produce about 75 percent natural (sundried) coffee and about 25 percent wet processed (washed) coffee. -------------- STARBUCKS -------------- ¶8. Seattle-based coffee company Starbucks and Ethiopian coffee growers were involved in a dispute over trade names and trademark issues related to three Ethiopian coffee names: Harar, Sidamo, and Yirgacheffe. Starbucks had opposed Ethiopia's efforts to trademark the names, seeking instead to help Ethiopian officials establish a system for geographic certification of beans from those areas. International NGOs, such as Oxfam International, asserted that Starbucks' actions kept 15 million Ethiopians (who derive their means of livelihood from the coffee sub-sector) from reaping another USD 100 million annually. In late June 2007, the GOE and Starbucks jointly announced a licensing, distribution, and marketing agreement that recognizes the importance of integrity of Ethiopia's specialty coffee names but that also allows Starbucks to market coffee using those names. ¶9. Several prominent individuals in the Ethiopian coffee industry, including Abdullah Bagersh of S.A. Bagersh PLC and Mr. Yanni Georgalis of Moplaco Trading Co. Ltd., commented that Ethiopia could not blame Starbucks or its own government for the poverty that prevails among Ethiopian coffee farmers. Bagersh noted that companies like Starbucks sell a "quality of life," rather than a cup of coffee. Further, the coffee ADDIS ABAB 00002006 003.2 OF 004 beverages sold at Starbucks is a different product than the beans sold via cooperatives or exporters to Starbucks. -------------- CHALLENGES FACING COFFEE FARMERS -------------- ¶10. COMMENT AND ANALYSIS. Several factors affect the profitability of Ethiopia's small-scale coffee farmers: -- INFLATION: In 1973, coffee cost 37 cents per pound, and coffee farmers were rich. Now, in 2007, coffee sells at about 89 cents per pound, only about three times the price 34 years ago, whereas other products are selling for 20 times the price they sold for in 1973. Coffee has clearly not kept up with inflation over the years, contributing to the poverty of coffee farmers. The market is currently monopolized by five trading houses and seven roasters worldwide. -- SMALL PLOTS OF LAND: The majority of farmers in Ethiopia have less then one hectare of land to grow crops. These are some of the smallest farms in the world. In addition, 95 percent of farmers have less than 10 hectares of land. In the densely populated areas of Sidama and Yirgacheffe, most farmers have one hectare of land or less. As long as the Ethiopian government maintains ownership and control of land, farmers will continue to struggle to support themselves with small plots of land. The coffee industry in Ethiopia is a small but expanding industry, with 85 percent of coffee grown organically and 15 percent produced using a small amount of fertilizer. -- MIDDLE MEN: Some believe that collectors, washing stations, suppliers, exporters, cooperatives and unions act as middle men. Because coffee farmers are spread over a large geographical area, middle men will continue to exist, as it is a farmer's only means of getting the product to market. For this reason, the farmers living furthest afield will sell their coffee for the lowest prices. Others argue that the aforementioned services are a necessity, given the long distances and lack of connections between the grower and coffee markets. -- CONNECTION TO MARKET: Farmers are generally located in remote areas, are poverty-stricken, and cannot bring their coffee crop to market directly. Coffee farmers must therefore rely on middle men (such as collectors, suppliers, and cooperatives) to connect the farmer to the marketplace. Further, in order to sell coffee to the international market, the grower must obtain certifications accrediting his crop. -- COOPERATIVES AND COOPERATIVE UNIONS: Primary cooperatives and cooperative unions do not have adequate cash reserves and often run out of money to buy coffee offered from farmers at the peak of the harvest season. Since 2003, no price controls have existed. Therefore, the unions can sell coffee to buyers at any price, and no checks and balances exist to ensure that the union is selling at the best price possible for the benefit of the farmer. Also, the cooperative unions can drive the coffee prices down at the auction, if they are selling to the international market at a low price. Private exporters believe that to have a truly free market, the cooperative unions must compete in the auctions. -- LACK OF TECHNOLOGY AND KNOWLEDGE ABOUT COFFEE FARMING BEST PRACTICES: In Ethiopia, the yield of coffee per hectare is the lowest in the world. Because farms are small, the farmers do not know how to manage their input. The do not weed, fertilize, or pick their crops at appropriate times. If weeded one to two times per month, both quality and quantity of coffee produced is increased. On average, one hectare of land yields one ton of coffee. However, small farmers in Ethiopia only produce about a half ton of coffee per hectare. -------------- MEANS OF IMPROVING FARMERS' QUALITY OF LIFE ADDIS ABAB 00002006 004.2 OF 004 -------------- ¶11. Means of improving coffee farmers' quality of life include: -- COOPERATIVES AND COOPERATIVE UNIONS: Becoming a part of cooperative unions could help individual coffee farmers improve their lives. Cooperative unions not only pay growers the market price, but also provide the grower with a dividend following the sale of the coffee to the international market. In addition, the cooperatives and cooperative unions often invest in the farming communities, building schools or improving infrastructure. Problems still exist in that the cooperatives and cooperative unions need better organization, training, and checks and balances to ensure that upper management of cooperatives act in the best interest of the growers. -- NGOS/TRAINING/EQUIPMENT: NGOS, to include USAID working with FINTRAC, continue to work with farmers by providing training to improve quality and ultimately to increase the farmer's yield. NGO assistance clearly aids the farmers; however, some in the coffee industry argue that growers would benefit more from the provision of equipment, such as washing tables, to improve their yield. -- FINANCIAL SERVICES: Rural coffee farmers often have between 8-10 children whom they have to school and feed. With the coffee crop providing little revenue, the farmers turn to collectors who offer loans, usually with 100 percent interest over one year. Farmers cannot repay the loan with this high interest rate, and the collector seizes the farm. Thus, provision of financial services (such as opening rural banks or microfinance institutions that would offer loans at fair rates),or providing other forms of credit for rural populations, would improve the quality of life of farmers. -- PRODUCTION DECREASE: Some believe that the situation with impoverished coffee farmers in Ethiopia is irreversible. One of the leading coffee exporters, Mr. Yanni Georgalis of Moplaco Trading Co. Ltd., believes in the value of supply and demand, advocating that farmers decrease their production of coffee to increase demand and thus, prices. ¶12. CONCLUSION. The coffee growers of Ethiopia continue to face multiple challenges and struggle to feed their families. Circumstances have improved with the assistance of NGOs; however, this aid only touches a small amount of the 15 million Ethiopians involved in the coffee industry. Improving rural infrastructure, provision of rural financial services such as microfinance mechanisms, and empowering farmers by training them in best practices (agricultural or commercial),would undoubtedly improve their livelihoods. There is currently no single entity, to include Starbucks, that is capable of significantly improving the lives of coffee farmers. As noted above, relieving the Ethiopian coffee farmers of their plight would require significant changes to current methods of production and marketing, including land reform and improving market access. END COMMENT AND ANALYSIS. YAMAMOTO