Viewpoints | Jul 17,2022
On a rainy afternoon last week, a coffee processing facility in the capital's Akaki-Qality District was abuzz with activities.
The three-storey processing plant lies in an expansive compound not far from Bole Lemi Industrial Park. The ground floor is used for storage, where raw and processed coffee bags are piled high. Nearly a dozen workers were busy lifting the heavy sacks and carrying them to the floor above.
Fregenet Bekele, operations manager at the facility, stood nearby, closely watching the loading and unloading. She looked weary.
"We've been really busy, especially since March," she told Fortune.
The workers heave the sacks to the second floor, where the latest coffee processing machinery manufactured by Cimbria, a company headquartered in Denmark, is installed. The Danish firm is a leading global supplier of equipment for the processing, handling, and storing of grains and seeds. Two workers dump the contents of the sacks into a de-stoner machine that removes pebbles and clods from the coffee beans.
It is the first of a five-step process to turn the beans into a high-quality and high-value global commodity.
The next step involves a cylindrical grader - a machine that separates the beans based on size. From there, the coffee enters a gravity separator and an optical sorter, designed to detect defects by identifying the beans' size, weight, and colour.
Sentayehu Gulelat, 45, is a senior machinery operator at the facility. He was posted by the dust chamber, a machine to reduce the particles released into the air during the processing.
"I'm happy to be working here," said Sentayehu, who earns a gross salary of 19,000 Br.
At this point, the machinery ceases to be a part of the process as the beans are hand sorted. A dozen women seated in a long row are entrusted with the task.
"Hand-sorting is a vital part of producing speciality coffee,” said Fregenet.
The facility belongs to Testi Trading Plc, one of the leading exporters of Ethiopia's most valuable commodity for the international market. Incorporated with Faysel Abdosh and his wife as shareholders with an initial capital of two million Birr, Testi has been in the coffee industry for 13 years. The facility in Qality is one of 20 the company operates across the country. They are part of the 100 or so coffee processing plants busy refining over 262,000tn of the cash crop for export this year.
Sacks of raw coffee beans are piled high inside a processing facility in the capital's Akaki-Qality District, belonging to Tetsi Trading Plc. The company runs 20 of the 100 or so similar facilities across the country.
It brought the highest in foreign currency the country ever generated.
Sentayehu has seen the ups and downs of the coffee industry during his career as a machinery operator for 16 years. He has rarely seen it this busy.
Export revenues exceeded 1.2 billion dollars over the first 11 months of the year, according to data obtained from the Coffee & Tea Authority. It is over a third higher than what exporters brought last year and smashes the record of 987 million dollars five years ago. The bonanza has led the authorities to review their export targets. They hope to see nearly 290,000tn of coffee exported before the year is out and generate 1.3 billion dollars in revenues.
It is a piece of rare but welcome news for an economy battered by political instability, resurgent insurgency and civil war fueling inflation, foreign currency crunch, and loss of federal revenues. However, experts and industry insiders differ on the factors that led to the record-breaking performance. They see a global supply deficit brought on by droughts in Brazil, the world's largest coffee producer, profoundly affecting the Ethiopian coffee industry.
The impact of the drought in the South American nation was quick and compounded by global trade disruptions due to restrictions and lockdowns imposed to fight the pandemic. With more people forced to stay indoors and limit their activities, the global coffee industry began transforming in 2020. Global consumption last year, mainly of Arabica and Robusta varieties, was 11 million tonnes. There was a shortfall in supplies.
"The shortage pushed prices up in the international market," observed Faysel, general manager of Testi Trading.
Brazil accounts for a third of the world's coffee trade, with Vietnam and Colombia accounting for another third. Over 200,000hct of coffee farms in Brazil were hit with four rounds of frost, decimating harvests. It was the worst disaster to befall the country's coffee growers in four decades. Brazil's coffee harvest dropped by over a quarter to a little more than three million tonnes – its lowest in the last decade.
Brazilian officials estimate another 660,000tn will be lost this year due to the environmental calamity. It is over by 100,000tns the US Department of Agriculture forecasted in December last year. Low harvests in Vietnam, Colombia, and Honduras added to the supply deficit.
The shortage spurred global prices for Arabica to new heights. They rose by over 40pc to 2.8 dollars a kilo last year, according to the International Coffee Organisation (ICO), whose composite price is used as a benchmark. By January this year, a kilo was selling for four dollars.
Testi Trading sold for between 3.2 and 4.5 dollars a kilo, though some of the beans went for much higher. Premium coffee from Ethiopia fetched as high as 10 dollars a kilo this year, three times higher than its regular beans traded in New York. Half of all speciality coffee was sold at an auction in the world's financial capital; the regular beans were sold through negotiations as Faysel's company did.
Not only is the coffee supply forecasted to drop, but Russia's war in Ukraine caused a shortage of aluminium needed for packaging. Logistical hurdles caused by Russia's war in Ukraine continue to push prices up for the world's most popular agricultural commodity.
Coffee exporters from Ethiopia have been quick to respond to the situation. They shipped 270,000tn last year and earned a quarter of the country's total export revenues of 3.6 billion dollars. Encouraged by the proceeds, exporters repeated the performance over the first three quarters of this year, generating 910 million dollars.
Gizat Worku, a coffee exporter and general manager of the Ethiopian Coffee Exporters' Association, saw demand for coffee from Ethiopia surging in the international market.
“Although we shipped low-quality coffee compared to others, the country earned more,” he said.
Industry insiders say businesses previously in sesame export are turning to the coffee market. Accessing the oilseed from the war-damaged and conflict-prone areas in the northweet remains a challenge for many exporters. The Tigray and Amhara regional states, embroiled in the civil war, account for 90pc of sesame production, causing revenues to drop by over a quarter from the 450 million dollars recorded five years ago.
Coffee exporters have seen their ranks swell, tripling to 1,500 over the past two years.
Shafi Omer, deputy director of the Coffee & Tea Authority, contends the record earnings result from the high export volumes. He attributed the record-high export earnings to the authorities setting minimum price thresholds. Production growth has also been a factor, according to him.
“Although there is a supply shortage, it's not soaring prices that contributed to the success,” said the Deputy Director.
Most of Ethiopia's coffee grows in the country's southern belt, such as in Kaffa Zone, which lends its name to the bean. A little more than two million smallholder farmers joined coffee cultivation last year, bringing the total number of households dependent on the crop to 7.7 million. Coffee is a source of income for about a quarter of the country's population – engaged in production, processing, distribution, and export. The cash crop covered nearly 850,000hct of land last year, a 12pc expansion from the previous years. Output rose to a little less than 600,000tn last year, up by a fifth.
Experts attribute the growth to increased domestic consumption, where half of the coffee produced is consumed. And it is on the rise.
Inflation is pushing domestic prices up, with a kilo of coffee retailing for as much as 450 Br. Prices for the beans and a cup of coffee at a cafe or eatery have doubled over the last half year.
Gizat has a different outlook.
“Restrictions on the locally-traded coffee contributed to the price increase,” he said.
A kilo of export-standard coffee sells for about six dollars in the local markets. This, however, has improved the share farmers receive, which has historically been a fraction of the retail value. Last year, Testi Trading bought a kilo from farmers at 25 Br. The price has ballooned to 55 Br this year.
Shafi attributed improved farmers' earnings to the vertical integration scheme, which he says has simplified the coffee supply chain. It allows exporters to buy the beans directly from farmers, cooperatives, and unions instead of the Ethiopian Commodity Exchange (ECX). Although the Authority introduced the system in 2017, it began taking off two years ago as a growing number of exporters prefer to source their beans through vertical integration.
Industry players say the scheme is not a panacea.
“There's still the involvement of brokers and intermediaries in vertical integration,” said Gizat. “There's no marketplace that connects exporters and farmers.”
The scheme has also been diminishing the central role the ECX has played in the coffee export business since its establishment 14 years ago. Exporters shy away from accessing the beans through ECX’s platform due to increasing complaints from clients about quality, Gizat says. Industry players say the mandates of the ECX and the Authority overlap. Suppliers and exporters are caught in a feud between the Exchange and the Authority. According to people familiar with the disagreement, the brawl has made it to the Office of the Prime Minister.
“ECX’s platform can be an instrument to facilitate transactions under the vertical integration approach," said Gizat, urging the two federal agencies to collaborate instead of tormenting one another.
Despite squabbles between its officials, Ethiopia captures a small share of the value of the coffee business in the international market. The downstream segment of the coffee value chain and opportunities to transform green coffee domestically remains largely unexplored, according to Sewale Abate (PhD), an assistant professor of finance and investment at Addis Abeba University.
The bulk of coffee produced in Ethiopia is exported without much value addition. Local roasters face fierce competition from their international counterparts, who buy green coffee from Ethiopia at lower prices, according to Menelik Habte, chairperson of the Ethiopian Coffee Roasters Association.
However, their number is on the rise, climbing to 200 from a mere 14 over the past four years. A quarter of roasters are geared to export. A lack of financial capacity to embrace the latest coffee processing technologies impedes domestic roasters from taking advantage of the opportunity presented by the growing demand for organic coffee.
Although roasted coffee exports grow, albeit slowly, they represent only a tiny fraction of the revenues generated.
Emerging markets present opportunities as well.
China, traditionally a tea-drinking country, has grown an appetite for coffee in recent years. It ranked 33 on the list of the largest importers of Ethiopia's coffee last year. It moved up to eighth this year, with close to 7,000tns shipped to the world's second-largest economy, bringing in 50 million dollars.
Prospects for the coffee industry look promising. Taka Insights, a firm specialising in commodity intelligence, forecasts coffee prices will continue to rise, reaching 6.5 dollars a kilo in three years.
Officials, too, are upbeat. They target 1.5 billion dollars in revenues next year. Fregenet and the workers she supervises at Testi Trading are bound to be swamped by work in the months ahead.
PUBLISHED ON Jul 02,2022 [ VOL 23 , NO 1157]
Viewpoints | Jul 17,2022
Fortune News | Sep 27,2020
Radar | Jul 17,2022
My Opinion | Jul 17,2022
Radar | Jan 07,2022
Agenda | May 23,2021
Fortune News | Jun 20,2020
Featured | Apr 22,2022
Fortune News | Jun 18,2022
Fortune News | Jul 09,2022
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