Editor’s note: This article first appeared in Roast Magazine, and is reprinted here with permission. The original article can be viewed and downloaded here, graciously provided courtesy Roast Magazine.
Exchange is the Only Constant
The Evolution of Ethiopia’s Commodity Marketplace
Words by Chris Kornman | Photos by Evan Gilman
Ethiopia’s Commodity Exchange, the ECX, celebrated its tenth anniversary with a number of important changes in 2017. The country, with a deeply embedded history in coffee, has much to teach us regarding its forays into state-run auctions. After ten years of evolution of the ECX, it’s worth our time to examine how the past has shaped the present and to analyze what the current system can offer to farmers, traders, and roasters.
The former Kingdom of Kaffa in what is now western Ethiopia, along with South Sudan’s Boma Plateau, are almost certainly the home to the first arabica coffee trees. The region still boasts the greatest naturally occurring genetic diversity of the species. Yet arabica’s homeland has not always been a center of coffee cultivation; Ethiopia’s Oromo people rejected commercialization of the tree, as it was seen as an insult; coffee was a gift from the creator-deity Waqa.
Ethiopia’s indigenous coffee consumption practices predate written history, yet its ventures into the commoditization of the crop occurred relatively late. The fragmented civilizations and societies that occupied Ethiopia are diverse, and—until the country unified under Emperor Menelik II a little before the turn of the 20th century—were not producing recognized quantities of exportable coffee.
Wild coffee trees grew and plantations emerged across the country, but the general sentiment among the Christianized peoples of the southern and western regions was that coffee and its consumption were guilty by association with the Muslim population of Harar. That city, in the east, flourished as a trade and religious epicenter, reaching its cultural apex in the 15th and 16th centuries. It was likely here that coffee was first sipped by a Sufi from Yemen, and thereafter blossomed across the rest of the world beginning around the 15th century.
Through Harar a small amount of coffee would be traded internationally, yet much of Ethiopia’s coffee, even into the first decades of the 20th century, would transship through Yemen re-exported as “Mocha,” a European misappropriation. Hardly a coffee growing region, Mocha (or Mokka) is merely the port through which the crop was predominantly exported in the 16th and 17th centuries, yet it quickly be came a metonym for the emergent commodity.
Commercial coffee cultivation in the Abyssinian south likely began in earnest under Sahle Selassie in the early 19th century as the independent kingdom of Shewa rose to power. His grandson, Sahle Maryam—known to the world as Emperor Menelik II—was by many accounts the first architect of the modern state of Ethiopia. Menelik II and his armies, via political clout or by brute force, unified (or suppressed and eliminated) the peoples of Abyssinia in the late 1880s, and in 1896 successfully drove out Italian occupiers.
At this point in history, agriculture in the Ethiopian Empire was highly varied regionally. In the north, smallholders clung to hereditary land rights, while in the west, land was considered more or less communal. In the south, where resistance to Menelik II’s unification was the strongest, the emergent empire’s military strongmen became de facto landlords.
Coffee became increasingly important as an export crop during the later years of Menelik II’s reign. This can be attributed, in part, to increased logistic ease in the wake of railroad installation and the opening of the port in Djibouti by the second decade of the 20th century. A second major factor in coffee’s rising economic importance in Africa at the turn of the century was the faltering supply of arabica from the Pacific in the wake of the coffee leaf rust epidemic that began on Ceylon (now Sri Lanka) in 1869.
Public auctions had begun in Ethiopia by the turn of the 20th century, run by the government. One-tenth of the harvest was a common tax for producers (which the government would resell at auction), and the export tax was literally the entire difference between farm-gate pricing and FOB (i.e., “free on board,” or the price paid for delivery on board the export vessel). Excessive taxation encouraged a black market for Ethiopian coffees exported under the name of a neighboring country. However, to a large extent, Menelik II laid the foundations for the formation of an emergent coffee empire—one that was dependent on its production for both the livelihood of its smallholders and the wealth and infrastructure of the state.
Menelik died in 1913, after an incapacitating stroke in 1909, during which time his third wife Taytul Betul reigned in his stead. Fearing unrest, he was buried in secret. Menelik’s nominated heir, Iyasu, presided as ruler but remained uncrowned, and the country’s ministers eventually replaced him with Menelik’s oldest daughter, Empress Zewditu, in 1916. The first female to lead the Solomonic dynasty since the Queen of Sheba, she took the official title Queen of Kings yet her reign would be undermined by her cousin, appointed regent and heir by the country’s ministers. His name was Ras Tafari Makonnen, and he would claim the title of Emperor and take the name Haile Selassie in 1930.
Agriculture, Coffee and Politics Leading to the Modern Era
Emperor Haile Selassie I engaged in a slow march to modernization and consolidation of power that enveloped the entire country, the coffee industry included, further accelerating coffee production upon his return from exile and the expulsion of the Italians (again) in 1941.
Consolidation of Power and Coffee
Selassie’s vision of government was one with him as the supreme head, and he went about reducing the political and military efficacy of regional landholders by granting them large tracts of arable land in exchange for centralizing the military force and installing regional bureaucratic administrators. Poor smallholders, however, were squeezed by virtue of the unchecked economic rivalry of large estates, and nomadic peoples were forced from their traditional regions or into servitude. Instead, the wealthy landowners flourished, and Ethiopia grew into a coffee-producing powerhouse. During the 1930s and 40s, Ethiopia’s annual production volume averaged between 9,300 – 17,700 metric tons. By the last five years of the 1950s, that figure had swelled to over 50,000 mt.
The country ascended steadily in its global export ranking under Menelik II and especially Selassie, and is now consistently among the world’s top 10 producers annually, though its place as an exporter is stifled by a strong domestic consumption rate—something like 50 percent of the crop remains inside the country. That figure is relatively difficult to pin down, however, as many rural smallholder farmers are consuming the coffee before any official accounting can be made.
Tragically, under Selassie’s monarchy, the shift of land rights toward the wealthy destabilized the already tenuous livelihoods of the nation’s poorest denizens. The growing inequality reached critical mass in 1973, when the Wollo famine, largely ignored and covered up by the government and Haile Selassie (who that year spent $35 million on his 80th birthday party), claimed 300,000 lives. While drought sparked a modest food shortage, most sources now concur with ideas popularized by economist and philosopher Amartya Sen’s theories in Development as Freedom. He asserts that the root cause of the mass hunger epidemic was insufficient purchasing power amongst the poor combined with inadequate infrastructure to move surplus food to areas of need, all the result of an oppressive authoritarian regime.
The Fall of Selassie and The Derg
Inaction in the face of a food crisis catalyzed a Communist revolution, and the following year would be Selassie’s final as King of Kings, an empire spanning seven centuries. (Historian Teshale Tibebu describes him as “the last Christian monarch of the oldest Christian monarchy in the world” in an article entitled “Ethiopia: Land, Agriculture, Politics, 1941-1974,” which appears in The Encyclopedia of African History Vol III.) The Derg, a council of 120 elected military officials, toppled the crown and ruled for the next 15 years, until the next major famine precipitated the end of Ethiopia’s communist Civil War period.
The Derg was critical in reshaping the agricultural landscape by redistributing much of the large estate land to smallholders, to the extent that today 95 percent of the nation’s coffee is grown on privately owned plots of 2 hectares or less. Much land in Ethiopia is still viewed as communal—the government “owns” the land while citizens “lease” it for use.
The Derg’s chairman, Mengistu Haile Mariam, formally abolished the organization in 1987, but its leaders generally remained in place, including Mengistu, as president of the new republic. However, by 1991, Mengistu had been ousted by the Ethiopian People’s Revolutionary Democratic Front after years of bloody uprisings, which included the secession of Eritrea, numerous regional rebellions and a number of politically motivated genocides. Mengistu sought asylum in Robert Mugabe’s Zimbabwe.
Post-dictatorial Ethiopia in the 1990s was characterized by attempts to rectify a century of highly consolidated authoritarian rule, in part by following International Monetary Fund and World Bank recommendations for liberalized markets and improved pricing for farmers.
Auctions Give Way to Liberalization & Cooperative Unions
For most of the 20th century, daily auctions were common both in Addis Ababa (accounting for about 80 percent of the auctioned coffee) and in Dire Dawa, close to Harar, where “twenty bowls with several kilograms of each coffee batch up for sale [were] displayed in the auction room with information on the growing area,” according to a 2000 report by Joackim Mutua, a young professional officer of the United Nationals Foreign Agricultural Office.
I corresponded recently with an agronomic researcher at London’s prestigious SOAS—Florian Schäfer, Ph.D.—whose thesis was written on agrarian change and agricultural commercialization in the Ethiopian coffee and floricultural sectors. He pointed out, “The prior auctions in Addis Ababa and Dire Dawa were highly corrupted, and it was common for traders to buy their own coffee. While this opened up a lot of space for price manipulation, it did allow for fully traceable coffee.”
This doesn’t make a whole lot of sense, unless you look at it from a trader’s perspective. Let’s say a trader buys coffee directly from a farmer, and wants to export it. To export the coffee, by law it must pass through the auction (to be taxed), so the trader enters their coffee into the system and then bids on it to repossess it. In this scenario, the cost of the coffee at auction doesn’t matter – the trader is simply paying herself for her own coffee. Sure, another agent could try to outbid, but as long as the trader has enough money to pay the tax, the final price has no significance other than a benchmark to be taxed against. Thus, undervalued coffee became a norm to avoid high taxes on high priced coffee, and the mechanism for accurate discovery of a coffee’s true market value at the auctions became broken. All that remained was a convoluted, but transparent, supply chain.
Numerous regulation changes occurred over the years, and complicated, high taxation rates during Selassie’s reign and Derg authority resulted in heavy smuggling through various other countries. The liberalized market in the 1990s dissolved the Ethiopian Coffee Marketing Corporation—which had previously controlled more than 80 percent of the country’s coffee trade—into two public companies, both of which eventually disbanded and were replaced by private export companies that bid for coffee at auction. Other reforms included abolishing quotas, and reducing and consolidating tax codes to discourage smuggling.
Traditionally, smallholders would sell their harvest to locally licensed collectors (“sebsabies”) who in turn would sell to licensed warehousing suppliers (“akrabies”), who brought the coffee to the auction to be graded physically and sold to exporters. In the late 1990s and early 2000s, Ethiopia began to tinker with direct trade for the first time, allowing private sales directly from farms and cooperatives to the akrabies, and occasionally to private exporters.
Around this same time, Ethiopia’s well-known cooperative unions began to form. Oromia led the charge in 1999, followed by Sidama, Yirgacheffe and Kaffa. To the degree that cooperatives and their umbrella unions are able to process their members’ coffees, they have the added benefit of clipping some of the collectors and suppliers from the supply chain, potentially providing higher prices to farmers. Sebsabies remained important to deliver cherry, however, though they were not directly responsible for purchasing coffee from smallholders. Rather, cooperative leverage for negotiations and local agronomic support for smallholder-produced coffee became realities under the emerging systems.
Still, the nation’s smallholders and private traders remained out of the loop in the broader international market. Price discovery mechanisms functioned poorly, logistics were both risky and difficult, and a convoluted exchange system remained in place with minimal entry points for farmers into international markets.
Reforming Trade with the ECX
After about a decade of experimenting with free market options, Ethiopia doubled down on the auction platform in 2008 with the launch of the Ethiopia Commodity Exchange (ECX).
One of the ECX’s primary architects and its first CEO, economist Eleni Gabre-Madhin, Ph.D., left a prominent position at the World Bank and offered to systematize the commodity exchange with the stated purpose to “build the needed institutions from the ground up for grading and certifying quality, issuing warehouse receipts, trading, relaying market information to all actors, enforcing contracts, and ensuring payment and delivery.” The scope of the project was ambitious, to say the least.
Gabre-Madhin’s ECX conceptualization was strongly influenced by New Institutional Economics. This school of thought holds to a fundamental tenet that economic efficiency is rooted in well-structured systems and regulations, the implication being, in Schäfer’s words, “that institutions can be created to solve informational asymmetries and reduce transaction and contracting costs.”
As a country frequently beset by droughts that sparked mass famine, a major contributing factor to disaster involved non-integrated, highly localized trade markets that restricted the availability and flow of necessary goods. The ECX seemingly offered a concise solution to this complex problem in Ethiopia by providing systems facilitating the trade and movement of foodstuffs like grains and sesame. This was its primary purpose, at least at first.
However, New Institutionalism tends to “overlook the crucial role that power plays in market transactions,” Schäfer explains. “The price that a farmer receives for her coffee will depend not only on whether that farmer knows what prices are being paid in other cities, but also on power relations between buyer and seller (e.g., how desperate the farmer is). Someone who needs money for medicine for a sick family member will be forced to sell coffee for credit at a bad price. The ECX could not, and did not, change this.”
The ECX did not initially integrate coffee into its systems when it launched in May 2008. Those dealing in sesame and grains, whose trade the ECX had been designed to facilitate, were distrustful or ignorant of the sophisticated new system in place and put it to limited use. Coffee, per a government issued mandate, was forced into the exchange, effectively saving the ECX from collapse in December of that year.
A name familiar to many in the specialty coffee industry, Aman Adinew was courted away from his executive role at DHL in January 2009 to be the ECX’s chief of operations. Adinew worked to prevent the ECX from imploding under its own weight, fully overseeing and restructuring warehousing, quality evaluation and inventory management. It was largely his behind-the-scenes work that established the ongoing success of the auction platform, dramatically increasing the efficiency of logistics and growing the staff from 53 employees to more than 700.
Participation on the floor of the exchange is restricted to members, who pay a fee, at varying rates depending on level of involvement in market moves and when they became involved. The initial 100 founding members paid $5,000 to participate, while in 2009 the high bid from an exporter to join the ECX trading floor was $310,000.
In the field, akarabies (suppliers) will deliver their coffee to the local ECX warehouse, rather than to Addis or Dire Dawa, as it was under the old auction system. They are guaranteed a rate based on real-time trading on the ECX auction floor in Addis. It is then the risk and responsibility of the exporter to move the coffee from the local warehouse through processing in Addis and to port after sale. Payment is now frequently delivered electronically via mobile phone.
All trading for the first decade of the ECX was spot—that is, the ECX dealt entirely in physical product, with no futures trades or hedging. However, in June 2017, the country’s parliament approved a measure to establish a legal framework for futures trading. It is not clear at this time when that change will be implemented.
Two key critiques of the exchange arose immediately from specialty coffee buyers. The first was that coffee sold at the ECX, while graded for both sensory and physical quality by ECX agents, could not be tasted by potential buyers prior to bidding.
The second was related to loss of traceability. The ECX, far more concerned with efficiency than with the elevation, variety and farmer name of a particular lot of coffee, blends deliveries regionally by grade. The local ECX warehouses broke the supply chain between suppliers and exporters, such that it was no longer possible to guarantee coffee from a particular micro-region, estate, or washing station. To a degree, the old corruption in the supply chain had been stymied, but the cost was homogenization.
Royal Coffee CEO Max Nicholas-Fulmer sums the impact succinctly on the company’s blog:
The long and short of the ECX was that it greatly improved price transparency and has led to higher cherry prices for farmers, particularly over the past few seasons, but all at the expense of traceability. The ECX made it technically illegal for an exporter to be both involved at the farm or mill level and involved in the exporting of coffee. Abdullah Bagersh’s famous Misty Valley mill (now called Aricha), had to be sold. Countless ground-level projects … were essentially scrapped as exporter involvement and crucial funding dried up. … In truth, the only coffees we’ve been able to buy from Ethiopia with any semblance of traceability below the high-level regional distinctions of Yirgacheffe, Sidama, etc., have had to come through the quasi-governmental [c]ooperative [u]nions, or been the result of cloak and dagger tactics by certain less-than-entirely-above-board exporters willing to “shepherd” the coffee through the ECX warehouses.
A Decade of Exchange Evolution
From its outset, the coffee trade at the ECX has been beset by a fundamental disconnect from its highest-paying, most quality-conscious customer base. This has much to do with outstanding trade deficit and currency devaluation in the country, as the ECX’s primary concern has always been bulk commodity and not specialty microlot.
However, to the credit of the ECX, it has proven fluid in its ability to adapt to the requests of the specialty sector since its inception. After a negative reception at the Specialty Coffee Association of America (SACC) Expo in 2009, the SCAA engaged with the ECX to talk about green grading and traceability. In 2010, the exchange launched a well-meaning but poorly received program called Direct Specialty Trade (DST) to allow for the trading of the exchange’s so-called “certified specialty coffee” using the ECX “to coordinate the price discovery without engaging in the payment and clearing,” according to a program document published by the ECX.
In essence, a select number of licenses were allotted to privately held estates of 35 hectares or more to allow them to trade directly, along with allowances for the cooperative unions to engage in direct trade as well. This enabled a level of specificity and traceability for which buyers had been clamoring. Yet in mid-November of 2011, State Minister of Trade E.H. Yakob Yala initiated a directive to eliminate standard 60kg bags and instead bulk load all containersleading to a month-long crisis that shone a spotlight on ongoing misunderstanding of the market needs.
Two major advances occurred in 2015. First, ECX made an entry into electronic trading. However, the platform exists onsite on the trading floor to augment the traditional “open outcry” auction style, so in some ways relatively little has changed in procedure other than logging trades digitally starting at the bid.
The other, supported by IBM, was the creation of a new geotagging program for many of the commodities traded. Coffee was selected as the pilot, and information included in a cloud-based platform was linked to more than 2,500 washing and milling stations to provide a history of the coffee’s processing. However useful this information might be, the ability to taste a coffee before bidding remains impossible, so the link between sensory quality and traceability is incomplete.
Most recently, a major amendment passed in the summer of 2017 that reshaped the ECX in likely its most dramatic form. Building on the traceability program initiated in 2015 with geotagging, a system called the Preserved Coffee Trading System was implemented, providing traceability to the local cooperative or private mill, whose coffee previously would have been blended regionally. Additionally, the waiting period for sale has been reduced from 20 days to three in a “bonded yard,” and the ECX is establishing a mechanism for futures trading and for commodities outside of agriculture.
Yet one of the most important changes for specialty buyers is likely the export recognition for farmers or groups that can produce 20 or more quintals of coffee (Ethiopian quintals are 100-kilogram units, so this is equal to about 4,400 pounds). Independent non-ECX members and cooperatives may now engage in trade directly.
As an example of how this has changed the landscape for smallholder farmers, consider one of Royal Coffee’s long standing single-farmer projects with Bedhatu Jebicho in Gedeb. For years, Royal purchased Jebicho’s coffee through her local cooperative in a one-of-a-kind agreement that gave the company access to single-farmer lots. Now, having saved the revenue generated from these sales, she and her family have established an export business and banded together with a small group of farmers to sell directly and independently. It’s an example of the evolution of coffee trading in Ethiopia at its most successful, and it hints at the ongoing evolution of the ECX. With direct supply chains to small farmers now a legal possibility, access to traceable microlot coffees is a reality for roasters, and better profit margins within grasp for farmers previously beholden to the commodity exchange market.
As the newly ratified changes begin to take hold, the coffee drinking world waits. Ethiopia and the ECX’s importance in the global coffee marketplace is still developing. Recent political reform in the country under Prime Minister Abiy Ahmed, Africa’s youngest political leader, and President Sahle-Work Zewde, the continent’s only female head of state, hint at the likelihood of ongoing transformation. Yet the country’s iconic place in both modern coffee auction history and ancient coffee trade and discovery have enshrined its relevance in any conversation related to the buying and selling of its coveted native flora.
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damn, what an article.