The Ethiopian government has issued a directive to set minimum prices of coffee. This has resulted in a significant surge in coffee prices and rattled the industry. Coffee prices in the same period last year ranged from $2.40 to $4.00 USD/lb. This year prices start at $3.70 and go up to as high as $5.00 USD/lb.
Economic challenges in Ethiopia
Ethiopia has one of the fastest growing economies in the world. However, this rapidly surging economy faces some serious challenges, one of which is extreme shortage of foreign currency. Ethiopia suffers from a trade deficit of about $14 billion, and the Ethiopian Birr (ETB) is not a convertible currency. This means that all imports and payment of foreign debt must be made in U.S dollars. The desperate demand for foreign currency has ignited a habit of under invoicing among Ethiopian export companies. Export companies sell their products at a loss in order to earn foreign currency and use that to import a different product they can sell at much greater margins. The majority of Ethiopia’s export products are agricultural, so this practice by exporters trying to raise USD distorts market price of agricultural products. This mainly affects farmers who are mostly leading a subsistence level of life. So this is an overwhelming challenge in the Ethiopian economy.
Wave of economic reforms
Ethiopia recently elected a new prime minister who is committed to reform. Several months ago the Prime Minister’s Office released the “Home Grown Economic Reform Plan”. This plan attempts to address the challenges faced by the Ethiopian economy, including the issue of the trade deficit. As of October 29, 2019, the Ministry of Trade and Industry has a regulatory directive to set minimum prices in exportable products. These minimum prices have already been implemented in different agricultural products like oil seeds, cereals, and pulses. However the directive was only recently applied to coffee.
Coffee export reforms
As of February 28, 2020, the Coffee and Tea Authority, coordinating with the National Bank of Ethiopia, will dictate a minimum export price for coffee which will be set daily, depending on a global weighted average prices given to different grades of coffee from different regions. The directive is called the “Export Coffee Contract Administration”.
According to the directive, exporters must report the volume and quality (grade) of all deals, within 24 hours of confirming negotiations. Once the contract is concluded, the exporter must deposit the value of the merchandise in the National Bank. The merchandise is then expected to ship out within ninety days.
Failure to comply with the directive is a punishable offense. First time offenders receive a written warning. For the second offense the company is banned from any coffee related business activities for one year. Punishment for the third offense is a complete ban on conducting business along with criminal charges for the owners.
How does the new directive affect farmers?
This directive is not intended to put more money in their pockets. In fact, the directive may make the coffee business less attractive for exporters, which means there will be lower demand for coffee. Farmers might be forced to lower their prices as a result. Alternatively, if buyers are understanding and exporters can continue to sell coffee at the new, higher prices, then the situation for farmers won’t change. For this harvest, most exporters had purchased cherries from farmers before the directive came into effect, so we won’t see the full impact until next harvest season.
How does it affect you?
There are various ways this might impact your Ethiopia buying this year. Firstly, expect prices to be higher than previous years. Secondly, be aware your contracts will be rejected if the agreed upon price is even $0.01 USD less than the minimum price set for the day (we speak from experience). That means there is little room to plan or conduct due diligence between negotiations and closing contracts.
The minimum price is set daily so it is hard to predict what it will look like in the future. We advise booking coffees as soon as possible to avoid any surprises.
Will this reform be effective?
Will these reforms on export trade actually bring positive outcomes? The minimum price was already implemented on other products in the first quarter of the 2019/2020 fiscal year, and in this period export trade has increased by about $95 million in comparison to the same period of the previous year. It is not clear whether this increase is directly related to the new directive, or whether it will result in a similar increase in coffee sales.