The crucial role of auction markets and vertical integration in enhancing coffee production and empowering smallholders has become the cardinal concern of the government and actors in the coffee sector to curve illicit trade and thereby benefit the producers in Ethiopia.
Coffee is not merely a beverage; it is a commodity that plays a significant role in the economic and social fabric of many countries including Ethiopia. As the birthplace of coffee, Ethiopia boasts a rich coffee heritage and is renowned for producing high-quality Arabica beans. In recent years, the Ethiopian coffee industry has witnessed the emergence of auction markets and vertical integration, which have proven instrumental in bolstering coffee production, supporting smallholders, and promoting traceability. This article explores the importance of auction markets and vertical integration in Ethiopia’s coffee sector, particularly in relation to smallholder empowerment and traceability.
Auction markets have emerged as vital platforms for coffee trade in Ethiopia. The most prominent auction market is the Ethiopian Commodity Exchange (ECX), which was established in 2008. The ECX acts as an intermediary between coffee producers, exporters, and international buyers, providing a transparent and efficient mechanism for price discovery and trade.
The auction system allows coffee to be traded on a standardized basis, ensuring fair prices and reducing information asymmetry in the market. By facilitating direct engagement between buyers and sellers, auction markets contribute to increased income for smallholder farmers and incentivize quality improvement.
Smallholder farmers form the backbone of Ethiopia’s coffee industry, comprising approximately 95% of the coffee-growing population. Auction markets have played a pivotal role in empowering these farmers by providing them with equal opportunities to access the market. In traditional coffee marketing systems, smallholders often faced challenges such as limited bargaining power, price manipulation, and lack of market information. Auction markets have mitigated these issues by ensuring fair competition, enabling smallholders to sell their produce at competitive prices. This, in turn, has led to improved livelihoods, increased investment in productivity enhancement, and greater economic stability for smallholder communities.
Vertical integration refers to the coordination and consolidation of various stages of coffee production, from farm to cup. It involves the integration of activities such as cultivation, processing, branding, and retailing, resulting in enhanced quality control, efficiency, and traceability. In Ethiopia, vertical integration has gained momentum, particularly in the realm of traceability coffee. Traceability refers to the ability to track coffee beans’ journey from the farm to the consumer, providing information about its origin, processing methods, and social and environmental sustainability. By embracing vertical integration and traceability, Ethiopia has been able to establish itself as a producer of specialty coffees, commanding premium prices in the global market.
Vertical integration allows for greater control over the entire production process, ensuring consistent quality standards. Traceability further enhances quality assurance by enabling producers to implement sustainable farming practices, maintain product integrity, and respond to consumer demands for ethically sourced coffee.
With traceability, Ethiopian coffee can distinguish itself in the global market by highlighting its unique flavors, cultural significance, and sustainable production methods. This differentiation creates a competitive advantage, attracting discerning consumers who are willing to pay a premium for high-quality, traceable coffee.
Vertical integration facilitates direct relationships between coffee producers and buyers, fostering trust, collaboration, and long-term partnerships. This direct engagement benefits smallholders by providing market access, knowledge transfer, and increased visibility, leading to improved incomes and better livelihoods.
Traceability coffee assures consumers that their purchase supports ethical and sustainable practices, such as fair trade, organic farming, and environmental conservation. This transparency fosters consumer trust, loyalty, and a sense of social responsibility. Ethiopian Coffee and Tea Authority (ECTA) disclosed that the vertical coffee market linkage is benefiting farmers, export associations, and coffee suppliers thereby avoiding manipulators.
Authority Director General Adugna Debela (PhD) told The Ethiopian Press Agency (EPA) that the Authority is working on alternative approaches to legal coffee producers and suppliers in order to benefit them and the country sustainably as well.
Accordingly, he said, the Authority is establishing a platform of vertical integration system in which the farmers directly provide their coffee product to the international market, creating close relation amongst farmers and coffee suppliers, facilitating an environment for suppliers to involve as producers, and widening the benefit of women through “Women in Coffee” schemes.
The Authority secured 620 million USD from coffee export of the planned 1.75 billion USD to be achieved this fiscal year, he said, adding that the Authority is striving to achieve its target taking advantage of the suitable season. He further stated that 80% of the coffee pruning that has been carrying out on 500,000 hectares is achieved.
Adugna expressed that the pruning is significantly helpful to increase the productivity and production of coffee by three folds whereas improving the quality by 30% to 40%. The effort has paid off as the international coffee market was reduced last year by 32% while the quality of Ethiopian coffee increased by 18%.
He remembered that the vertical coffee market linkage was commenced three years ago and gained merely 700 million USD whilst the authority secured 1.42 billion USD from exported 300,000 tons of coffee in 2022.
Nowadays, the vertical coffee market reaches 80% up to 90% coverage compared with the ECX system. Besides, the coffee plant coverage increased from 600,000 hectares to 1.2 million hectares at present following the direct market linkage approaches.
“The persistence of a long market chain (complexity), bureaucratic red tape, and illicit trade are among the serious challenges that hindered to ensure quality coffee product to the international market and traceability is under question over the past many years,” he noted.
Ethiopian Coffee Exporters’ Association President, Desalegn Jena, for his part said that the international standard for specialty coffee requires scoring over 85% qualities. Therefore, encouraging the vertical market and stakeholders’ integration should be done to get adequate benefit from coffee sector.
Zerihun Kamiso, Sidama State Coffee Providers’ Association President agreed with the integration process and said that encouraging scientific coffee market system, ensuring competitive advantages, and providing world standard coffee should be a priority issues to benefit the country from its popular cash crop.
In Ethiopia, there are over 600 coffee exporters applying the vertical scheme and supply their product to the international market while they are expected to be led by knowledge and research to get adequate benefit from coffee product and be competent internationally, it was learnt.
The Ethiopian coffee industry has witnessed remarkable advancements in recent years, driven by the establishment of auction markets and the adoption of vertical integration practices. Auction markets have empowered smallholders, ensuring fair competition and improved incomes, while vertical integration and traceability have positioned Ethiopian coffee as a premium product in the global market. By continuing to invest in auction markets and promoting vertical integration, Ethiopia can sustainably enhance its coffee sector, benefiting both smallholders and the country’s rich coffee heritage.
BY LAKACHEW ATINAFU
THE ETHIOPIAN HERALD TUESDAY 12 MARCH 2024
