COFFEE EXPORTS FALL AS GOE TIGHTENS GRIP ON MARKET

UNCLAS SECTION 01 OF 04 ADDIS ABABA 000780

SIPDIS
SENSITIVE

DEPARTMENT FOR EEB/IFD/OMA - JWINKLER AND EEB/CBA - DWINSTEAD
DEPARTMENT PASS TO U.S. PATENT AND TRADEMARK OFFICE - AMY COTTON
USTR FOR PATRICK COLEMAN, CECILIA KLEIN, AND BARBARA GRYNIEWWICZ
DEPT OF COMMERCE WASHDC FOR ITA BECKY ERKUL
DEPT OF TREASURY WASHDC FOR REBECCA KLEIN

E.O. 12958: N/A
TAGS: BEXP ECON EFIN ETRD EINV EAGR ET
SUBJECT: COFFEE EXPORTS FALL AS GOE TIGHTENS GRIP ON MARKET

REF: 2008 ADDIS ABABA 02569

ADDIS ABAB 00000780 001.2 OF 004


SENSITIVE BUT UNCLASSIFIED; BUSINESS PROPREITARY INFORMATION; NOT
FOR INTERNET DISTRIBUTION

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SUMMARY
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1. (SBU) The government of Ethiopia (GoE) established a new coffee
quality control and marketing law (amended August 25, 2008) in order
to enhance its control of the domestic coffee sector and carve out a
new strategy for increasing coffee exports. However, over the last
eight months, the new law has been met with stiff resistance from
private coffee exporters and has also coincided with a marked
decline in the value and volume of exported Ethiopian coffee. It
appears that opposition to the new law by coffee exporters coupled
with persistent backwards farming methods, opaque trading practices,
unfavorable climatic conditions during the last harvest and finally
softening global demand continue to stifle the GoE's export-led
strategy and ability to earn critically needed foreign exchange
earnings (Reftel).


2. (SBU) As authorized by the recently amended coffee law, the GoE
tasked the less than one-year-old Ethiopian Commodity Exchange (ECX)
with the primary responsibility for managing the pricing and flow of
exported Ethiopian coffee. However, since its inception, the ECX
has drawn the ire of coffee exporters for contributing to delays and
inefficiencies in their transaction and product delivery systems.
While the GoE has taken a more active role in managing the coffee
sector, it is unclear at this stage how effectively it can enforce
the law and how the coffee market, which includes a long list of
middle-men and disgruntled exporters, can rationalize the role of
the ECX and the GoE's long-term goals for the sector. END SUMMARY.

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BACKGROUND
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3. (U) The amended coffee law and the ECX's establishment have
modernized the coffee trade in Ethiopia and have leveled the playing
field across the supply chain. A modernized ECX now has a clear
mandate by the GoE to rationalize a fractured coffee market prone to
pricing asymmetries and a declining volume of product slated for the
export market. Close to 50 percent of coffee produced in Ethiopia
gets sold to the domestic market often at prices well above world
prices. The GoE hopes to enhance the effectiveness of the coffee
supply chain, which should increase the value and volume of its
coffee exports and hopefully improve earnings parity among
stakeholders along the supply chain. The GoE has taken the
fractured coffee sector supply chain head-on because coffee is the
backbone of the GoE's export-led growth strategy. Coffee
contributes 35 percent (USD 525 million) of the country's annual
export receipts and is also the mainstay of close to 15-20 million
coffee sector farmers, traders and exporters. Smallholder farmers
produce over ninety-five percent of the total coffee production
while the remaining is produced by government and private commercial
farms. (Note: The GoE has also included a provision in the amended
law for farmers and producers to export directly to the global
markets, essentially bypassing the ECX. However, it's uncertain if
the GoE will ultimately allow this provision to work since many
farmer co-ops are still waiting for their licenses).

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COFFEE TRADE: A HISTORY OF NEGLET
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4. (U) The GoE has only recently begun to pay close attention to the
mechanics and potential of its coffee crop. In the past, the coffee
trade seemingly functioned amid a dizzying array of middlemen,
disparate farms and an ill-prepared and organized government
regulatory body. In the last decade, the coffee sector has been
shifted from varying government agencies and primary responsibility
for the sector has not always landed in the places with the best
technical capacity or resources to manage the industry. Over the
last several years, the Ethiopian Intellectual Property Office has

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had the responsibility of managing the coffee sector budget and
intellectual property trademarks for Ethiopia's specialty coffee
market. There is currently no governing office for the coffee
sector within the Ministry of Agriculture and Rural Development.
Although the established trademarks for Ethiopian coffee (Sidamo,
Yiragchefe and Harar coffees) have been a victory for the GoE and
the coffee sector in Ethiopia, unfortunately, the major budgeting
and regulatory functions for the coffee sector have been underfunded
and ill-managed. In addition, the coffee sector suffered from
severe information asymmetries among farmers, suppliers and
exporters, resulting in poor pricing schemes and limited
profitability for farmers along the supply chain.

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GOE TIGHTENS GRIP ON COFFEE MARKET
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5. (U) Over the past year, the GoE has tightened its hold on a
coffee market that, in spite of its leading role as the primary
foreign exchange earner, has failed to live up to its potential. In
August 2008, the Ethiopian Parliament passed a new Coffee Quality
Control and Marketing law (Proclamation No 602/2008),64 years after
the first coffee law took effect, in order to fix the fractures in
the current market. Implementing a key provision of the law in
early December 2008, the GoE halted the old and inefficient coffee
auction markets and appropriated primary auction responsibilities to
the newly established ECX. ECX, a modern trading operation, which
relies on standard coffee contracts and new automated systems, seeks
to establish standard parameters for coffee grades, transaction
size, payment, delivery, trading and order matching while preserving
distinctive coffee origins and types. ECX, unlike the previous
auction market system, is high-tech and much more concerned with
quality control and inspection of coffee products slated for the
export market. Coffee is now traded as washed or unwashed and bears
a label of its region of origin and grade. It may also include a
'type' or new categorization denoting a sub-region in a specific
coffee growing area. The ECX will now require that all trades be
based on warehouse receipts issued to depositors rather than on a
sample basis as was done in the past. Coffee buyers can then take
delivery of their coffee product at ECX warehouses with their
ECX-issued warehouse receipts.

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NEW COFFEE LAW LEVELS PLAYING FIELD?
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6. (U) In a market where profits are not shared evenly across
farmers, traders and exporters, the GoE's updated coffee law is an
attempt to level the playing field throughout the supply chain in
the highly profitable coffee business. The law levels the playing
field in the coffee sector by providing transparent price discovery,
enhanced supply and regulated storage of coffee products via the
ECX. Now coffee farmers and suppliers can be assured of stable and
transparent prices through the ECX's primary auction center in Addis
Ababa. The ECX allows buyers and sellers to negotiate prices openly
while New York global mercantile coffee prices flash on the many
monitors of the auction floor. The updated law closes the
information gap between the largely uneducated small holder farmers
and the wealthier urban traders and exporters. Farmers now have
access to updated coffee prices through the ECX's main auction
center and via several pricing clocks which have been set up by the
ECX around the country. Also, the ECX has taken on the role of
warehousing the coffee stock provided by suppliers in order to
improve storage standards and supply consistency in the market.
Coffee buyers can now be assured of more supply consistency and
volume of coffee slated for the export market. Once a trade has
been completed at the ECX, buyers can pick up their appropriate
stocks of coffee at the various ECX bonded warehouses.


7. (U) The GoE also hopes to deter traders and coffee sector
participants from skirting the new law and role of the ECX by
assessing heavy fines and threats of imprisonment. Stakeholders
involved in the domestic coffee business will now face much stricter
penalties than in the past, such as up to ten years of imprisonment
and USD 10,000 in fines for not abiding with the new regulations.
Mr. Abdellah Bagersh, Manager of a very well established, Addis

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Ababa-based coffee company, Bagersh Coffee PLC, noted that the law's
focus on the elimination of illicit coffee trade practices and
punitive measures are appropriate for the health and viability of
the market. According to Bagersh, the law addresses the preceding
law's inability to facilitate a more open and transparent market
over the last seventeen years. Bagersh is optimistic that the law
will help Ethiopia to maximize foreign exchange earnings from the
sector while protecting the interests of small-holder farmers.

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GOE PENALIZES KEY COFFEE EXPORTERS
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8. (U) On March 25, 2009, local media outlets reported that the
Ministry of Agriculture and Rural Development suspended trading
licenses of 94 coffee exporters including top export earners, which
include Mulege Private Limited Company, Kemal Abdela International,

S. Sara coffee exporter, Legese Sherefa Ltd., Said Yassin Ali
exporter and Ershere Ltd. This group of six top exporters made up
the lion's share of Ethiopia's coffee export activities (70 percent
of the total export) in 2008. With the GoE desperate for hard
currency, the Ministry cracked down on exporters who were delaying
exports by holding stock until world coffee prices increase. The
GoE action follows a stern warning issued March 3, 2009, from
Agriculture Minister Tefera Derbew that all coffee exporters needed
to sell their existing coffee stocks to the export market by March
10, 2009 or face significant penalties such as fines, licensing bans
and imprisonment. Apparently, exporters have only exported roughly
28 percent of the stock purchased via the ECX and are holding the
remaining stock until world prices rise. As recently as April 5,
2009, local media reported that the state-owned Ethiopian Grain
Trade Enterprise set plans to begin exporting the seized coffee
stocks within a week of the announcement in order to fill the
current supply gap. The GoE has not indicated how long the Grain
Trade Enterprise will attempt to fill this gap or how much
additional share of the export market they will try to capture over
time. To date, private companies have controlled the bulk of the
coffee trade, while the government has taken a backseat.

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ECX AND WEAK DEMAND TO BLAME, SAY EXPORTERS
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9. (U) Exporters point to the ECX's inefficiency and the falling
global demand and prices as the major culprits behind the real
declines in coffee exports from Ethiopia. Critics contend that the
GoE has come down too hard on exporters for allegedly hoarding
coffee. Penalized exporters and coffee sector experts claim that
the recent government action to ban the licenses of several large
coffee exporters from trading may destroy the business of these
banned exporters and ultimately will exacerbate the acute supply gap
in the coffee market. They say that the new coffee legislation does
not explicitly address the roles and responsibilities of critical
stakeholders in the coffee market and has left major supply gaps in
the market. Although optimistic about the law, coffee exporter
Abdellah Bagaresh noted the absence of any awareness or educational
campaigns by the GoE on the precepts and goals of the law in either
its previous or amended form. Bagaresh suggested that coffee
stakeholder training and workshops should have been developed in
tandem with the passage of the amended coffee law. Moreover,
important coffee sector participants were not given adequate time to
provide feedback to the GoE on the proposed amendments to the 60
year old coffee law.


10. (U) In addition to waning global demand for Ethiopian coffee,
allegations of theft along the supply chain remain rampant.
Although now proven to be unfounded, local Ethiopian press reported
on January 25, 2009 that up to 10,000 tons of coffee (worth about
USD 20 million) set for the export market had vanished recently from
the ECX's bonded warehouses. Ethiopia exports roughly 150,000 tons
of coffee per year. The allegation of missing coffee set the Prime
Minister on a collision course with coffee exporters and the ECX.
In response to this loss, the Prime Minister said the GoE would "cut
the hands of those committing grave crimes against the country as of
January 9, 2009." However, the head of the ECX, Eleni Gebre-Medhin,
has consistently maintained that the allegations of lost coffee and

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exporter complaints of delays at the ECX have been untrue and
completely unfounded. Dr. Eleni attributes the recent flurry of
negative reports in the media regarding the ECX's role in the coffee
market to manipulation of the media by exporters spreading false
rumors. Eleni alleges that exporters have been unwilling to comply
with the new ECX system and remain angry over the increased trading
costs such as the doubling of storage fees to 11 cents per bag per
day at ECX warehouses for coffee purchased at the ECX. (Note: In
order to improve transparency in the ECX's auction market, the GoE
has required the ECX to warehouse all coffee stocks provided by
local suppliers before sale and delivery to exporters).

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SPECIALTY COFFEE NOT ADDRESSED IN LAW
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11. (U) The GoE has not addressed specific treatment for the small
but important share of export coffee known as 'specialty' or
'organic' coffee at the ECX. Currently, the ECX only accommodates
roughly nine of the dozens of specialty coffee types at its auction
center and does not distinguish between specific coffee growers.
Also, despite numerous efforts to market (per increasing
international demand) bird-friendly, forest-grown, specialty and
organic coffees from Ethiopia, there is no legislative framework
that explicitly recognizes or regulates this segment of coffee in
terms of certification, accreditation or monitoring. While organic
coffee is attached to some legislation, it has yet to have a
publicly recognized certification system via the ECX. Both organic
and specialty coffees lack a public/private third party
certification body to source officially information on market trends
and volumes. Acting Director General of the Ethiopian Intellectual
Property Office (EIPO),Alemu Abebe, shared with EconOff that
challenges persist in the specialty coffee branding and marketing
arena, such as reaping additional profits from international buyers
of trademarked Ethiopian coffee and ensuring consistent quality
along the supply chain. Ethiopia enjoys a comparative advantage in
the specialty coffee arena, particularly because exporters can fetch
much higher prices in the world markets. To date, Ethiopian coffee
makes up a modest two percent of the world coffee market.

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COMMENT
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12. (SBU) The new coffee law is a major step forward by the GoE to
improve the supply chain, price scheme and earning potential of
exported coffee. As a result, the ECX now manages the major
distribution and pricing functions of coffee trade and tries to
address the decades of GoE inattention to the sector and severe
technological and information gaps along the supply chain. Although
the law is a step in the right direction, the GoE should continue to
encourage overall market efficiency, and provide additional
financial support to the ECX for increased product differentiation
and targeted responses to specialized global coffee market demands.
The ECX does not provide, as of yet, a full suite of coffee
varieties, grades and a high level of product differentiation.
Incidentally, international buyers continue to lament the lack of
specialized coffee varieties and the inability of the ECX to
identify desired coffee product from favored growers. The newly
amended coffee law does not significantly address the ECX's limited
capacity and market breadth, and certainly does not deal with the
external impediments to the coffee sector such as declining world
demand for coffee and deleterious climatic patterns. Lastly, the
GoE's recent and public clamp down on coffee exporters for allegedly
hoarding stock has imperiled the sector's already fragile supply
chain and may have signaled the GoE's move to capture a larger share
of the lucrative market. END COMMENT.

YAMAMOTO