VZCZCXRO1326
PP RUEHROV
DE RUEHDS #0780/01 0970903
ZNR UUUUU ZZH
P 070903Z APR 09
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 4299
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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. 
 
---------- 
BACKGROUND 
---------- 
 
¶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). 
 
--------------------------------- 
COFFEE TRADE: A HISTORY OF NEGLET 
--------------------------------- 
 
¶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 
 
ADDIS ABAB 00000780  002.2 OF 004 
 
 
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. 
 
---------------------------------- 
GOE TIGHTENS GRIP ON COFFEE MARKET 
---------------------------------- 
 
¶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. 
 
------------------------------------ 
NEW COFFEE LAW LEVELS PLAYING FIELD? 
------------------------------------ 
 
¶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 
 
ADDIS ABAB 00000780  003.2 OF 004 
 
 
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. 
 
---------------------------------- 
GOE PENALIZES KEY COFFEE EXPORTERS 
---------------------------------- 
 
¶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. 
 
------------------------------------------- 
ECX AND WEAK DEMAND TO BLAME, SAY EXPORTERS 
------------------------------------------- 
 
¶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 
 
ADDIS ABAB 00000780  004.2 OF 004 
 
 
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). 
 
------------------------------------- 
SPECIALTY COFFEE NOT ADDRESSED IN LAW 
------------------------------------- 
 
¶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