ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE

ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE Quality and the coffee value chain: Recent evidence from coffee production and exports in Ethiopia Bart Minten (IFPRI) Tadesse Kuma (EDRI) MekdimDereje (EDRI) Ermias Engeda (EDRI) Annual Ethiopian Coffee Exporters Association Coffee Conference Addis Ababa – Hilton November 6-7th, 2014

1. Introduction • Important changes internationally in the coffee sector: • 1/ increasing willingness to pay for coffee • 2/ specialty coffee on the rise • 3/ increasing market differentiation and segmentation • 4/ increased demand for Voluntary Sustainability Standards (VSS) • Important changes locally: ECX, primary marketing centers, and emergence of cooperatives • Changes have important implications on issue of quality in the coffee value chain

1. Introduction • Coffee very important in Ethiopia: • 1/ Source of income for over 4 million farmers • 2/ The most important export crop (in value) • However, lack of good updated representative information on the local situation; purpose of our study: improve the information database as to improve investments and policies • Study part of third phase of Ethiopia Strategy Support Program (ESSP), a joint program of the International Food Policy Research Institute (IFPRI) and the Ethiopian Development Research Institute (EDRI)

2. Data • Producer survey: Focus on the major 12 coffee producing zones; total of 1,600 coffee farmers and 206 processors randomly sampled; 320 farmers for each strata: Sidama, Yirgachefe, Jimma, Nekemte and Harar; survey fielded in February 2014 • Export transaction census: July 2006 until June 2014; shared by the Ministry of Trade; information on date of export, price, weight, quality indicators (of CLU grade), quantity, and certification of Organic or Fair Trade coffee

3. Production practices • Changes in management practices (recall questions): improvements over time

3. Production practices • Modern input use: very low; however, increasing improved seedling adoption

3. Production practices • Improvement in access to extension agents as well as in perceived quality of extension advice

3. Production practices • Despite adoption of improved practices and access to advice, we see few changes in yields (and strong declines in Nekemte and Harar)

3. Production practices • Less than expected impact on yields: Might be due to issues with diseases and climate change

3. Production practices • Improvements in harvest and drying methods

4. Marketing producers • Major policy changes at the marketing level: 1/ the set-up of primary market centers • All coffee should be traded on these primary marketing centers 2/ the set-up of a modern commodity exchange (the Ethiopian Commodity Exchange – ECX) • All coffee trade by private traders has to go through ECX

4. Marketing producers • Uneven implementation of policy of primary market centers: differences by regions and coffee type

4. Marketing producers • Large changes in market outlets and role of regular markets; however, village trader still important

4. Marketing producers • Farmers have improved choice for trade and have more options to sell to cooperatives as well

4. Marketing producers • Price information has improved; however, price information does not lead to quality premiums

5. Export markets • Three major indicators of quality in Ethiopia’s export markets: 1/ VSS certification; 2/ Washing/grades; 3/ Geographical indications of origin • 1. Certification of Voluntary Sustainable Standards (VSS): • By guaranteeing origin, fair prices to the producer, ethical standards, etc., consumers are willing to pay a premium; Major certification schemes in Ethiopia Fair Trade and Organic Coffee

5. Export markets VSS rapidly taking off in the world(VSS made up globally 4% in 2005, now it is almost 20%) However, low and slow in Ethiopia Average VSS export premium was 14 USc/lb between 2005 and 2013(1/3rd to producer)

5. Export markets • 2. Washing and grading of coffee • Washing: Quality of coffee increased by washing (processing red berries in wet mills immediately after harvest); Preserves intrinsic quality of the bean better; more homogenous product; fewer defective beans • Sundried/natural: Cherries dried on mats, concrete or cement floors; after drying, outer layer of cherries removed by hulling in “dry mills”

5. Export markets • Share of washed coffee in exports 30%; no important changes over time (between 2005 and 2013) • Washed coffee sold at an average premium of 20% over the period 2005 to 2013 • However, premiums varies strongly because of high volatility in international prices; also strong variation by grade level

5. Export markets Quality premiums for grades/washing (%, 2005 to 2013, compared to grade 2 – washed coffee)

5. Export markets • 3. Geographical indications • Major geographical indications (Kufa, 2012): • Sidama: spicy • Wollega/Nekempt: fruity • Harar: Mocha • Yirgacheffe: floral • Limu: winy • Even if some coffees are produced outside some of these geographical areas, they might still be given that name because of taste similarities (e.g. Borena and Yirgacheffe)

5. Export markets Quality premiums for geographic origin (%, 2005 to 2013, compared to coffee originating from Sidama)

6. Conclusions • Important improvements in harvesting and drying methods in last 10 years; however, majority of farmers feel that there are few rewards for the production of quality • Differentiation in export prices of Ethiopia’s coffee due to quality differentiation • Major indicators of quality premiums at the export level: • 1/ Washing/grades • 2/ Geographical indicators of origin • 3/ VSS certification

6. Conclusions • Possible improvements towards higher quality premiums: • Increased washing; possibility of growth in this area; however, widespread adoption of eco-pulpers needed to reduce water demand/environmental issues • Increase in the sales of speciality coffee; 20% to 30% could presumably be sold as speciality coffee in Ethiopia • VSS certification; significant quality premiums at the export level, leading to additional export income of 2 million USD per year; If more, higher export earnings • Important to maintain geographical indicators of origin and avoid adulterations of coffee to keep quality premium

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