Dr. Eleni Gabre-Madhin is founder and CEO of the Ethiopian Commodity Exchange.
A self-appointed coffee tsar in Seattle speaks, rather patronizingly, on behalf of the poor coffee farmer in Ethiopia. In the comfortable latte-infused cafés in which he may post his blogs, things may seem rather different than the reality half a world away in the homeland, where millions of our country men and women fight daily to live a life of dignity. They would likely agree it is time to stop the distortions from Seattle which, while perhaps entertaining for some, actually do a great disservice to these coffee producers who deserve better.
A few days back, I had a rare and wonderful opportunity to spend time talking to coffee farmers in Yirgachefe, where about two hundred had gathered to greet ECX as we visited a coffee washing station owned by a prominent coffee exporter. As I stood taking in the absolute beauty of the sun starting to set over the terraced hillside where row after row of coffee drying tables loaded with beans in their golden parchment were aligned nearly perfectly, framed by dense coffee trees, while the wet mill processor creaked in the background, Ato Tadele came to greet me. We bowed to each other. He said he was a farmer who sold his red cherry to this private mill owner. I asked him how things were going. He said okay, but that he wished he could get higher prices. I laughed and said any farmer worth his salt would say the same, anywhere in the world.
Then I asked what today’s price was. He said the farmers had negotiated a price of 4.35 Birr per kilogram from the miller’s starting offer of 3.50. I asked how they came up with that price. By now, we were surrounded by about 50 farmers all wanting to chip in. They said they had heard that prices in the city were getting higher. I asked them how they knew. They said they had heard on the radio. I asked them where those prices came from. A small pause. Somebody hesitantly said, the new coffee market in Addis? I said yes, breathing an inward sigh of relief. Just to make sure, I asked what time they listened to the ECX daily price broadcast. Ato Tadele brightened and said, at 8 pm. Some said, 7 am, and others, 1 pm. Now I really felt good. Then I asked if the broadcast was easy to understand. Then a lot of discussion came up, about too many prices, too fast reading, not very easy to understand. Okay, I said, let me introduce Ahadu, our market data officer, standing right here next to me, he wants to hear you on this and it is his job to get it just the way you need it. And so it went.
The point is that Tadele, and many more like him, take their red cherry or dry beans to the nearest market outlets, with just the faintest idea of what their coffee is worth or what the world out there, or even the national market, looks like. Our challenge is that we need to figure out, as a country and as a national marketing system, how to empower Tadele and others like him to make meaningful choices of where to sell, when to sell, at what price to sell, and to whom to sell, so that he can maximize his returns and improve the quality of his life, send his children to school, make sure they get health care, and break the vicious cycle of poverty in which he is trapped.
Here are some of the Seattle myths that are not helping Tadele rise to the better life he deserves.
First, there is an impression that coffee trading in ECX was a hastily conceived, ill-prepared affair by people who knew nothing about the complexity of the coffee market. Fair enough, I cannot expect the coffee tsar to know that as far back as 1992, I was a commodity trading expert in the United Nations in Geneva, in charge of designing a training program on international coffee, sugar, and other commodity markets which I then delivered to many, many exporters from various developing countries, including coffee exporters. Nor could he know that in 2001, while a researcher for the International Food Policy Research Institute in Washington, I led a project for the World Bank on coffee price risk management, covering Uganda, Tanzania, and Ethiopia, or that in 2002, under a Dutch-funded project, I conducted an extensive household survey, interviewing hundreds of coffee producers in Ethiopia. Nor would he know that in 2003, I conducted a major study titled “Getting Markets Right in Ethiopia: An Analysis of Coffee and Grain Marketing” financed by IFAD (Rome), for which I led a team of 8 top-notch consultants, including Ethiopis Tafara, now director of international affairs at the U.S. Securities and Exchanges Commission, and a well-known and highly respected coffee expert, John Schluter (uncle and business partner of Philip Schluter, mentioned in a recent blog posting by the Seattle coffee tsar), as well as the then secretary general of the Ethiopian exporters association.
The coffee chapter of the 2003 study, based on extensive consultations in Ethiopia with coffee exporters and suppliers, specifically recommended that coffee be traded through a commodity exchange where improved competition and forward contracting would be beneficial to the industry. That 2003 study was the basis for the decision adopted by the government of Ethiopia to implement a commodity exchange in late 2005. In 2006, I led a national Task Force to conceive the initial design of the exchange. The 2006 Task Force report identified coffee as one of the commodities that should be included in the new exchange, but also stated the need to address an emerging market trend of specialty coffee which would require special attention. So, while nothing is ever fully known in its entire complexity, we are where we are because of more than a decade of careful thinking about how this market works, from Tadele at the beginning of the chain to the latte at the retail end of the value chain. The coffee tsar may not have known all this, but, then again, he could have asked.
A second myth is that the inclusion of coffee in ECX was for the purpose of government control and to monopolize the coffee market. Here I believe the coffee tsar is on thin ice. Not only did a neutral market study done by an outside international organization relying on private sector coffee experts identify the need to improve the coffee trading system via an exchange, but the structure and legal framework that established ECX simply does not allow such monopoly power or government interference. The opening article of the law states that ECX is established as a demutualized entity, with separation of ownership, membership, and management. The law is explicit that the Exchange cannot be managed by the government, nor can the management of the exchange be politically appointed or part of the civil service, but must be professional. The law states unequivocally that the Exchange cannot engage itself in the buying or selling of any commodity. This is followed by Article 18 which is explicit that ECX is managed and operated as an autonomous entity, with a management that is overseen by a joint public-private Board of directors. The composition of the Board is explicit in the law with six government and five privately appointed directors, which has always been maintained (contrary to a flawed recent blog posting by the coffee tsar). The law is even further explicit that certain key management decisions cannot be made by simple majority but by two-thirds majority, preventing the government side to override by its slight majority number. One of such key decisions is the decision when to recommend the sharing of ownership of the Exchange with the private sector, which is stated as an objective in the preamble of the law. So the idea that the government aims to permanently own the Exchange or to act as a monopoly trading entity or that the Exchange is an arm of government is simply false, both as a matter of law and in practice.
A third myth is that ECX was an instrument to take action against private exporters. Let’s face it. The world is not simple and nothing is black and white, even if it might seem that way in far-away Seattle. In the same year that we designed and launched coffee trading through our Exchange, the world faced the worst financial crisis imaginable, international coffee prices fell by thirty to forty percent, twenty percent of our coffee exports (to the Japan market) collapsed due to a chemical residue scandal, rainfall patterns in parts of the country led to a fifteen percent decline of coffee production, and regulatory actions were taken against some of the major exporters of the country, largely prompted by the foreign exchange crisis brought on by the global recession.
It should be clear by now and has been stated officially that the regulatory actions taken had nothing to do with ECX but were based on illegal behavior discovered outside of ECX, which the exporters have also acknowledged. In fact, these export companies continue to be members of ECX and interact with us regularly. They have continued to sell their supply coffees through ECX, although they cannot buy export coffees unless their export licenses are re-instated based on the court’s ruling.
Finally, a fourth myth is that somehow the Exchange had simply not thought about specialty coffee trading until forced to by international coffee buyers in 2009. There is nothing further from the truth. The Exchange was in fact at the forefront of discussions about specialty in early 2008 and argued for the need to create a specific means to handle specialty during the stakeholder consultations on the proposed new coffee law passed in July 2008, which is silent on specialty. This position led to a separate legislation, passed in November 2008, providing ECX the mandate to separately or concurrently handle specialty coffee as it deemed necessary. Based on this, our objective to design a specialty trading system within the first year of our coffee operation was of course explained in detail to our domestic coffee market actors in late 2008, and our attendance at the international specialty coffee event in Atlanta in 2009 was part of the effort to design a well-thought out and appropriate specialty mechanism. Far from the “window dressing” described by the ill-informed Seattle coffee tsar, our recently announced proposal to handle specialty coffee has now been recognized by the international specialty industry as one of the most systematic and far-reaching efforts by any specialty coffee producing country. In its own words, the Specialty Coffee Association of America has recently issued a statement that “this is the first market mechanism to fully employ SCAA standards for coffees upon arrival and represents a significant change in how coffees get to market. This system has the potential to be a model for improved identification of specialty coffees at source.” I think Tadele would be proud to hear these words.
Let me tell you why. What we have designed is a system in which Tadele can bring his coffee directly to a nearby ECX warehouse and find out what the quality of his coffee is. If his coffee is graded as a specialty coffee, which we are now able to do for the first time in Ethiopia, then he is going to know it and he is going to get to sell it as a specialty coffee and get the premium he deserves. Tadele now has three choices how and where and to whom to sell. He can sell it directly to an international buyer, because the law allows him to. But this won’t be easy and his cooperative will need support to build their knowledge and capacity. But it can be done and in fact, with the exception of Ethiopia, most specialty buyers buy coffees directly from small farmer coops in all other producing countries. Tadele can also sell his coffee to an exporter through ECX, which is what he used to do before, but now he knows what the grade of his coffee is and can negotiate a better price. Or he can sell it to a local supplier outside of ECX who will then sell it through ECX to an exporter, but now Tadele knows what the going supplier selling price is on ECX so he is armed with better information to negotiate a better price for his trade. With the old system of vertical integration, which the new coffee law explicitly prohibits, Tadele would sell to the exporter, not knowing whether his coffee had a specialty premium, and the exporter would sell it abroad, at a price unknown to Tadele. If things worked out for Tadele, he may get a share of the premium. But nobody knew for sure. Now we have a system that makes it explicit. This is called transparency. And the best part is that, Tadele gets paid for his coffee the next day after the sale through the ECX clearing system which transfers payment from the buyer to the seller, instead of waiting weeks or months hoping to get his due payment.
But our system is not just for Tadele. Exporters benefit too, a lot, because now they don’t have to incur the risk of getting the wrong quality or quantity of the coffee they have paid for, with an ECX delivery system that guarantees that Tadele’s coffee will get to the exporter-buyer on time, in the right quantity and quality. That is why we are closely working with our exporters association to ensure that their needs are met too. International buyers also gain because we now have a way to discover specialty coffees at origin, saving them a great deal of time and effort, with a system that enables them to trace the coffees to the geographic source and even to the grower that sold it. This means that consumers who pay a premium to buy Ethiopia’s specialty coffees that claim to be purchased directly from farmers at a fair price will now be certain of this through the ECX system. Transparency is a good thing for both sides of the Atlantic and for both the farmer and the consumer. And transparency is what ECX is fundamentally about.
As the sun set in the lovely countryside in the famous coffee area known as Kochere in the heart of Yirgachefe, Tadele smiled gently as we parted ways after our little chat. Impulsively I gave him my white baseball cap with the ECX logo, which he immediately put on. He said, I hope I can do better this year. And I said, it is my job to make sure you do.
