Project Background
The AgShare initiative, launched by Michigan State University in collaboration with OER Africa, aims to enhance MSc curricula in agricultural sciences at African universities through the creation and management of open educational resources (OER) This program highlights the importance of collaboration among universities, community organizations, and content providers to produce OER that enriches academic programs and increases their relevance to local communities in Africa and beyond.
The Collaborative Masters Program in Agricultural and Applied Economics (CMAAE) is a joint initiative involving 15 universities across 12 African countries, aimed at enhancing MSc programs in the region Its primary goal is to develop tailored teaching and learning materials that reflect the unique contexts of African universities, thereby improving the quality of education in agricultural and applied economics.
The goal is to empower professionals with the necessary knowledge and skills to enhance the underdeveloped agro-food sectors and rural economies in Africa sustainably This initiative recognizes that well-trained local experts are crucial for tackling the challenges presented by significant shifts in global and local economies, technology, and marketing By tailoring their advanced knowledge and methods to the specific institutional, political, and economic contexts of the region, these professionals can drive meaningful transformation.
Many MSc programs at African universities face significant challenges due to their predominantly theoretical teaching approach, which often lacks practical application and relies heavily on outdated textbooks from Western countries This conventional "chalk-and-talk" method, devoid of supplementary materials, undermines the effectiveness of these programs and raises questions about their relevance To address these issues, the CMAAE project aims to develop contextualized modules and additional teaching resources, while also fostering a feedback loop with the community to enhance the educational experience.
Haramaya University from Ethiopia and Moi University from Kenya are collaborating on a project to create Open Educational Resource (OER) modules for the CMAAE membership across East, Central, and Southern Africa They have chosen to develop these modules based on an elective course in "agricultural marketing and price analysis." Haramaya University will focus on a case study related to coffee, while Moi University will concentrate on maize.
The School of Agricultural Economics and Agri-Business Management at Haramaya University is actively engaged in a project focused on enhancing educational outputs The faculty has developed a module for the MSc course 'Agricultural Marketing and Price Analysis' and produced a video and photographs highlighting coffee marketing in Ethiopia, showcasing its context, functions, channels, and activities To further enrich the course, the school is now working on supplementary case studies, with this study serving as one of those additional resources.
Rationale and Objectives of the Study
Coffee holds significant economic, social, and cultural value in Ethiopia, making it a crucial agricultural commodity Currently, it contributes approximately 25% of the country's Gross National Product (GNP), 40% of total exports, and 10% of government revenue The coffee sector supports the livelihoods of around 1.3 million producers and impacts an estimated 15 million people, including wage workers and transporters Consequently, Ethiopian governments have historically prioritized the coffee sector over other agricultural sub-sectors.
Since coming to power in 1991, the Ethiopian government has implemented significant institutional and regulatory reforms in the coffee sector, beginning with market reforms in 1992 A pivotal moment occurred in December 2008 with the introduction of the Coffee Quality Control and Marketing Proclamation No 602/2008, which abolished the previous National Auction system and aligned coffee marketing with the Ethiopia Commodity Exchange (ECX) This law mandates that all Ethiopian coffee be traded through the ECX, aiming not only to enhance coffee marketing but also to revolutionize the entire agricultural sector through a more dynamic and efficient marketing system.
The new coffee marketing law implemented by the government introduces regulations that define the roles of various actors and institutions in coffee trading, resulting in significant changes to the previous marketing structure For example, local collectors (sebsabies), previously recognized, are now restricted from participating in the current system, while new actors are allowed to engage This shift aims to enhance the overall coffee marketing landscape, particularly under the Ethiopian Commodity Exchange (ECX), by providing key stakeholders—such as farmers, suppliers, and exporters—with benefits like improved pricing and better access to market information.
This study aims to provide firsthand insights into the changes in the coffee marketing structure and the significant benefits and losses experienced by key stakeholders since the establishment of the Ethiopian Commodity Exchange (ECX) for the coffee sector By focusing on coffee marketing in Eastern Ethiopia, the research explores these critical issues and their implications for the industry.
The specific objectives of the study are:
To review the operations of ECX;
To describe the Ethiopian coffee marketing system before and after the creation of
To asses the major impacts of introducing ECX in the coffee sector on coffee marketing structure as well as on its main actors in Eastern Ethiopia
Methodology
This study focuses on the Eastern and Western Harergie zones in the Oromia region of Ethiopia, which are renowned for their production of Harar coffee.
The study utilized both primary and secondary data sources, with secondary data primarily drawn from documents and information bulletins of the Ethiopian Commodity Exchange (ECX) and relevant United Nations Conference on Trade and Development (UNCTAD) materials focused on commodity exchange Additionally, a review of journal articles, case studies, and reports related to commodity exchanges and derivative trading was conducted.
Primary data was gathered through semi-structured interviews with key stakeholders in the coffee supply chain, including government agencies, various private intermediaries, and private sector organizations within the study area The snowball sampling technique was utilized to effectively reach the desired sample.
The method followed throughout this study is qualitative and descriptive in nature.
This study is organized into several key sections It begins with an overview of significant economic theories that support commodity exchanges and outlines the theoretical benefits of such exchanges The second section focuses on the Ethiopian Commodity Exchange (ECX), detailing its purpose and operational framework The third section compares the Ethiopian coffee marketing structure before and after the establishment of ECX, highlighting major regulatory and institutional reforms in the coffee sector during these periods The fourth section presents the significant impacts of ECX on the coffee marketing system in eastern Ethiopia, which constitutes the core of this research Additionally, a glossary defining key terms and concepts used throughout the study is provided in the appendix.
Economic Theories for Commodity Exchange
Different economic theories provide several explanations of the existence of commodity exchange markets These theories falls into three broad categories: (1) the neoclassical theories, (2) institutional theories, and (3) organization theory.
Neoclassical researchers define the market as a realm of economic interaction where prices fluctuate based on supply and demand They believe that, in the absence of nonmarket forces, markets naturally tend toward a self-regulating state, promoting efficient resource distribution To facilitate this ideal evolution and allow prices to be set freely, it is essential to avoid interference from nonmarket forces that could disrupt the balance of supply and demand.
Neo-classical economics examines market dynamics through the lens of individual agents, assuming that firms act rationally to select optimal trading options This perspective views the market as a natural equilibrium of supply and demand forces, significantly influencing the development of various options markets, including those for agricultural commodities and securities.
Institutionalists contend that free markets necessitate an institutional framework to facilitate the interaction of market forces, differing from neoclassical economists They argue that the organic growth of markets can be hindered by nonmarket influences, particularly governmental intervention Consequently, institutions play a crucial role in shaping economic results, as market participants rely on these structures to achieve their personal objectives (Williamson 1985; North 1990).
In this school of thought, market is perceived as the set of institutions which mainly includes the followings: formal and informal contracts between individuals or groups;
Effective trading practices are shaped by codes of conduct and social norms, including trust, reciprocity, and repeated interactions These elements, combined with formal commercial laws and regulations, create a framework that governs market relationships Additionally, institutional arrangements, such as vertically or horizontally integrated supply chains, play a crucial role in facilitating interactions among market participants.
The global commodity chain (GCC) analysis approach highlights the significance of human relations within marketing chains, similar to institutional theory It examines the evolving power dynamics among lead firms in globalized networks that connect producers, processors, distributors, and consumers This approach focuses on how governance structures influence market outcomes and emphasizes the coordination and linkages between economic agents throughout the entire chain.
Expected Benefits\ Impacts of Commodity Exchange
Various studies, including those by Rahman (1994) and UNCTAD (2009), outline the theoretical benefits of a commodity exchange This section will summarize the key expected advantages of a commodity exchange, particularly highlighting insights from UNCTAD (2009).
Commodity exchanges primarily provide three key benefits: price discovery, risk management, and the facilitation of commodity trade Each of these categories encompasses additional specific advantages that enhance market efficiency and stability.
Price discovery is the process that allows market prices to reflect available information Commodity exchanges facilitate this process by standardizing contracts, which streamlines transactions and conveys essential data about prices and trading volumes Consequently, the prices established in these open markets accurately represent the current supply and demand dynamics of the underlying commodities.
Price discovery offers significant advantages by enhancing the efficiency of price formation and broadening access to accurate market information Efficient price formation aligns supply and demand, enabling market participants to make informed production, purchasing, and investment decisions Additionally, the dissemination of market information fosters price transparency, providing sector participants with a reliable and impartial price reference that supports informed decision-making.
The major specific benefits expected under this category are:
All marketing actors, Farmers and others involved in a commodity market, become more informed about market and pricing information
All marketing actors, Farmers and others involved in a commodity market, will get improved price because of & authoritative reference price
the marketing chains will be reduced due to squeezing out rent – seeking intermediaries from the chain
Increases returns to farmers as better enables them to hold until price level is good
Empowers farmers as they can take more marketing decisions into their own hands
Both intra - seasonal and inter- seasonal spot price volatility will be reduced
A commodity exchange offers essential risk management solutions by facilitating trade in commodity futures and spot contracts, effectively addressing contract performance risk and market risk Market risk arises from unpredictable price fluctuations and changes in supply and demand, while contract performance risk is mitigated through standardized products, certified receipts, widespread market information, and guaranteed payment and delivery via a clearing and settlement system To combat market risk, a commodity exchange allows market participants to hedge their trading positions, enabling them to lock in values through offsetting transactions that balance purchases or sales in the spot market with corresponding transactions in the futures market.
The specific benefits expected due to the risk-management function of a commodity exchange are:
Avoid serious losses that farmers faced when prices fall
Enables farmers to receive a guaranteed price from a purchaser or intermediary
Reduces transaction costs for managing risk compared with other methods
A commodity exchange plays a crucial role in lowering transaction costs for participants in developing countries' commodity supply chains By providing services at a lower cost than what individuals would face outside an institutional framework, it alleviates expenses related to finding buyers or sellers, negotiating contracts, securing financing, managing credit and product transfers, and resolving disputes Consequently, by minimizing these costs, a commodity exchange effectively stimulates trade and enhances market efficiency.
In addition to reducing transaction costs, the other specific benefits that would be expected under this category are:
Through enhancing storage and logistic infrastructures, farmers need for distress sales will be reduced and they can access more distant markets
Upgrades quality standards through enhancing scientific storages and
Reducing diversity of quality standards in the market
A commodity exchange, through the above major benefits (price discovery, risk management, facilitation of commodity trade), therefore, can help in the establishment of efficient agricultural markets
It also expected to offer the following other major specific benefits:
Due to The assurance of stable supply of quality produce at predictable prices, it will encourage investment in agro-processing as well as in agricultural marketing
The exchange serves as a transparent and dependable method for lenders to liquidate collateralized commodities when a borrower defaults, thereby enhancing access to commodity finance.
Properly functioning commodity exchanges can promote more efficient production, storage, marketing and agro-processing operations, and improved overall agriculture sector performance.
The ECX platforms (ECX functions and modalities)
Ownerships and Governance
ECX is established as a public enterprise in which buyers and sellers come together to trade and to assure of quantity, quality, delivery and payment However, it is
The Ethiopian Commodity Exchange (ECX) operates as a unique private-public partnership, owned by the Government of Ethiopia It provides membership seats that are privately owned and transferable, granting rights to earn from trading activities As a demutualised corporate entity, the ECX maintains a clear distinction between ownership, membership, and management, ensuring that owners do not have trading stakes and that management is independent of both owners and members.
The Ethiopian Commodity Exchange (ECX) operates under the oversight of three main bodies, including the Ethiopian Commodity Exchange Authority (ECEA), which serves as a public regulatory institution responsible for approving and regulating contracts, membership, trading, clearing, and other operational rules of the ECX Additionally, a joint Board of Directors, composed of representatives from relevant public institutions, plays a crucial role in the governance of the exchange.
ECX members (private),and iii)The National Exchange Actors Association (NEAA)- is an institution established by ECX members and their Authorized Representatives and Associates
Memberships
ECX operates on a membership seat system, granting permanent and transferable trading rights exclusively to its members Non-members must rely on members to facilitate their trading activities By acquiring these seats, members not only gain core stakeholder status, ensuring the integrity of the commodity exchange market, but also assume liability for all transactions conducted on ECX.
Eligibility for membership in the Ethiopian Commodity Exchange (ECX) is open to individuals, companies, public enterprises, or cooperatives recognized by the Ethiopian Commodity Exchange Authority Members, categorized as either producers, intermediaries, or buyers, engage regularly in the market ECX offers two main types of memberships: full membership, which permits trading in any commodity, and limited membership, typically for smaller actors, allowing trade in specific commodities and for restricted periods Additionally, members can operate as Trading Members (TM), trading on their own account, or as Intermediary Members (IM), trading on behalf of clients.
Under this type of memberships, members are allowed to buying or selling any commodity Member s in this category can be two types: Trading Members, and
Trading Members - are those members who allowed buying or selling any commodity but only their own account.
Intermediary Members are individuals or entities authorized to buy or sell commodities on their own behalf or on behalf of clients They must maintain separate settlement accounts for client transactions and are expected to implement a reporting system to ensure timely payments to clients.
The membership is designed for individuals who engage exclusively as buyers or sellers of a specific product, particularly in the coffee trading sector This membership is categorized into two types: Limited Trading Members and Limited Members.
Limited Trading Members are individuals who can exclusively trade for their own accounts They enjoy full access to the trading floor but are restricted from trading on behalf of clients This membership allows them to trade in only one commodity and is valid for a duration of one year.
Limited Intermediary Member- is one who participates only as a seller for his own account or on behalf of clients.
To become a member of the Ethiopian Commodity Exchange (ECX), individuals must meet specific financial and regulatory requirements Trading members are required to pay an annual membership fee of 50,000 Birr and deposit a refundable security amount of 200,000 Birr into the ECX Settlement Guarantee Fund, while intermediate members pay 5,000 Birr and must deposit 300,000 Birr Limited trading members need to deposit 50,000 Birr, and intermediate limited members must deposit 100,000 Birr Additionally, trading members must demonstrate a minimum net worth of 500,000 Birr, and intermediate members must have a net worth of 1,000,000 Birr to ensure contract payments Other requirements include recognition by the Ethiopian Commodity Exchange Authority, proof of commercial activities in exchange-traded commodities, and compliance with tax registration and clearance as per Ethiopian law.
ECX Operations
While most global exchanges primarily focus on offering a single, efficient trading platform for buyers and sellers, ECX distinguishes itself by providing a comprehensive suite of essential services These include warehousing, trading, clearing and settlement, market surveillance, and market data dissemination This article will provide a brief overview of the key services currently available at ECX.
Figure 2.1: Overview on ECX Operations
Source: PPT presentation on the Story of ECX and Ethiopian Coffee
ECX provides a comprehensive Physical Delivery Management System that ensures the receipt and delivery of commodities according to industry standards Sellers must deposit their agricultural products in one of ECX's seven warehouses located in Addis Ababa, Diredewa, Adama, Shashemene, Nekempte, Bure, and Humera At these warehouses, commodities undergo sampling, weighing, and grading, with each product labeled by type and origin, particularly for coffee Coffee is graded on a scale from 1 to 10, with grade 1 being the highest quality The unique combination of labels, known as a symbol, identifies the product, such as WSDB3 for washed coffee from Sidama B region grade 3, or ULK8 for unwashed coffee from Lekempti region grade 8.
After the grading process, sellers receive an electronic goods received note, which is sent to the ECX central depository to create and securely store the electronic warehouse receipt This central depository maintains an automated registry of all warehouse receipts, allowing for seamless transactions on the ECX trading floor This innovative system mitigates the risks of fraud and loss associated with paper receipts, enables sellers to sell partial amounts of their commodities, and enhances the efficiency of physical delivery Upon sale, the central depository debits the seller’s account, transfers ownership of the commodity to the buyer, and issues a delivery notice for the release of the commodity.
Figure 2.2: ECX open outcry trading floor (Left) & traders signing a transaction (Right) Trading and contracts
The Ethiopian Commodity Exchange (ECX) offers essential services, primarily focused on trading operations and trading contracts Initially established as a physical trading floor in Addis Ababa, ECX has evolved into an electronic trading platform The trading process began with "open outcry" price bidding, where buyers and sellers negotiate verbally during trading hours Transactions are organized by commodity class based on grades assigned by ECX warehouses, with orders communicated via telephone and recorded on order tickets Once a deal is made, the order ticket is quickly entered and reconciled in the ECX automated back office system, ensuring the validity of warehouse receipts, the availability of buyer funds, and the integrity of member-client agreements This rapid automated reconciliation process enhances market confidence for all participants.
The Ethiopian Commodity Exchange (ECX) facilitates both spot and future contract trading, with each contract detailing essential parameters such as grade, lot size, payment terms, and dispute resolution Buyers and sellers primarily need to agree on price and quantity, with a standard lot size set at 50 quintals (5 tons) to accommodate rural Ethiopia's small truck transport conditions ECX aims to establish a national marketplace for determining reference prices, with all contracts quoted as "arrived Addis Ababa." A location differential, based on transport tariffs from Addis Ababa to the delivery site, is applied at transaction settlement, and ECX regularly updates this information to ensure transparency.
To mitigate the risks of contract defaults, all transactions are processed through the ECX internal clearing house in partnership with major Ethiopian banks, ensuring secure payment transfers between traders' accounts ECX acts as an intermediary by collecting payments from buyers and distributing these funds to sellers, while also managing the transfer of Warehouse Receipts from sellers to buyers.
The ECX Clearing House collaborates with the central depository and approved settlement banks, requiring all members to maintain pay-in and pay-out accounts in these institutions Each trading day, the Clearing House assesses the net obligations of active members to facilitate necessary fund transfers between their accounts and the ECX settlement account Pay-in transfers occur on the same day as transactions, while payout transfers are processed the following morning Additionally, the central depository transfers warehouse receipts to buyers the day after the seller's pay-in is completed.
ECX provides essential market surveillance services to monitor market participants and identify unusual behaviors that could trigger investigations and potential expulsion from the market To safeguard against manipulation, excessive speculation, fraud, and other malpractices, ECX experts consistently analyze market trends and perform audits and investigations on market operations.
The Ethiopian Commodity Exchange (ECX) revolutionizes traditional agricultural marketing by delivering accurate, reliable, and timely data to all market participants The market data department at ECX interprets current trends and shares essential market information, including opening prices, highest and lowest prices, last traded prices, and trade volumes This data is continuously transmitted via electronic networking to price display boards in public areas of Addis Ababa and other key market centers across the country, ensuring transparency for every commodity grade traded on the Trading Floor.
COFFEE PRODUCTION AND MARKETING IN ETHIOPIA
To understand the role of the Ethiopian Commodity Exchange (ECX) in the coffee sector and its influence on coffee marketing, it is crucial to examine the significant reforms in the Ethiopian coffee industry before and after the establishment of the ECX This article provides an overview of these changes, focusing on institutional and regulatory aspects, key actors, and the overall structure of the coffee chain The findings draw from interviews with various stakeholders and secondary resources, with Petit (2007) serving as a primary reference for comparison The first subsection outlines the current production and processing landscape of the coffee sector, while the second subsection discusses major reforms in institutional and regulatory frameworks Finally, the third subsection presents a comparative analysis of the coffee chain and its main actors before and after the introduction of the ECX.
Ethiopian Coffee Production and Processing- A Brief
Coffee is the second most traded commodity in the world market after petroleum and more than 80 developing countries produce and export it to the world market (Girma,
2008) Currently, studies show that there exist more than 100 coffee species Out of these, only three, i.e., Coffea Arabica, Coffea Canephora (Robusta) and Coffea
Coffea Arabica dominates the global coffee market, representing approximately 80% of trade, while Coffea Canephora contributes the remaining 20% In contrast, Coffea Liberica holds limited economic significance, primarily being of minor local importance in certain regions of Western Africa.
Ethiopia is widely regarded as the center of origin and genetic diversity for Arabica coffee, with many researchers supporting this view (Girma, 2008) While some argue that South Arabia is the birthplace of coffee (Foek, 2008), evidence shows that Arabica coffee, despite its name, originates from Ethiopia, where wild populations thrive in the undergrowth of the high Abyssinian plateaus (Cambrony, 1992) Additionally, Ethiopia is one of the oldest countries to engage in coffee trade (ECX, 2008), leading to the belief that it is the oldest producer, consumer, and exporter of coffee globally.
Coffee remains a vital commodity in the country, contributing approximately 25% to the Gross National Product (GNP), 40% of total exports, and 10% of government revenue It supports the livelihoods of around 1.3 million producers and impacts the lives of 15 million individuals, including wage workers, transporters, and their families.
With regard to the production aspect, almost all Ethiopia’s coffee is harvested during the Meher season (harvested between September and February) (Promar Consulting, 2010).
Ethiopian coffee production systems are typically classified into four categories: forest coffee, semi-forest coffee, garden coffee, and plantation coffee (Petit, 2007) However, Wiersum et al (2008) expand this classification to five categories by introducing modern smallholdings Although specific statistics on coffee yields for each production type are lacking, Wiersum et al estimate that semi-forest and garden coffee each account for approximately 35% of production, while plantations and modern smallholdings contribute around 20%, and forest coffee represents about 10%.
Ethiopia's coffee production is predominantly concentrated in two major regions: Oromia, which accounts for 26%, and the Southern Nations, Nationalities, and Peoples' Region (SSNP), contributing 76% Only 1% of the coffee is cultivated in the Amhara region According to Promar Consulting (2010), Ethiopian coffee is classified into several main types based on the specific local areas within these primary growing regions, including Sidamo, Yiregacheffe, Teppi/Bebeka, Harar, Ginmbi/Lekemeti, and Limu/Jimma.
Ethiopian coffee production is predominantly attributed to small-scale farmers, who contribute approximately 95% of the total output, as reported by Petit (2007) In contrast, state-owned plantations account for only 4.4%, while private investor plantations make up a mere 0.6% However, since the establishment of the Ethiopian Commodity Exchange (ECX), these market shares may have shifted, with the Ethiopian Coffee Growers, Producers, and Exporters Association (ECGPEA) indicating a significant rise in large-scale plantations, which now represent about 10% of total production, equally divided between state and commercial farms (Kidan 2009).
Ethiopian coffee processing remains traditional, utilizing sun-dry and wet processing methods post-harvest In the sun-dry method, un-pulped coffee cherries are sun-dried on mats or concrete until reaching a moisture content of about 11.5%, after which the outer layer is hulled to produce green beans for market Conversely, the wet processing method involves sorting ripe cherries, pulping them, and allowing the resulting wet parchment coffee to ferment in tanks After fermentation, the coffee is washed with clean water and then sun-dried on raised tables until achieving the desired moisture content of 11.5%.
Since the establishment of the Ethiopian Commodity Exchange (ECX), significant changes have occurred in coffee processing methods The proportion of washed coffee has increased from approximately 10% before ECX to 20-30% currently Additionally, numerous coffee processing enterprises have emerged post-ECX, offering processing services to both public and private sectors.
Major Institutional and Regulatory Reforms before and after ECX- An Overview
Over the past two decades, market liberalization has been a key aspect of economic reforms in Ethiopia, particularly since the liberalization process began in 1991 The Ethiopian government has implemented a series of reforms impacting various sectors, including the coffee industry Notably, coffee market reforms commenced in 1992, leading to significant institutional and regulatory changes both directly and indirectly related to the coffee sector This section highlights the critical reforms undertaken before and after the establishment of the Ethiopian Commodity Exchange (ECX).
Between 1991 and 2008, significant institutional and regulatory reforms transformed Ethiopia's coffee sector In 1992, the Ethiopian Coffee Marketing Corporation was divided into two entities: the Ethiopian Coffee Purchase and Sales Enterprise and the Ethiopian Coffee Export Enterprise, each with distinct roles The establishment of the Coffee Technology Development and Engineering Enterprise and the Coffee Plantation Development Enterprise in 1993 aimed to enhance coffee production and technology That same year, the government reduced the licensing fees for coffee export and supply, making them more accessible In 1994, the Coffee Processing and Warehouse Enterprise was created to provide essential processing and storage services The formation of the Coffee and Tea Authority in 1995 marked the establishment of an autonomous body focused on improving coffee production, quality, and trade By 1998, a unified tax structure was introduced, consolidating various taxes into a single rate of 6.5% of the f.o.b price, and in 2002, the export coffee tax was suspended, further easing the financial burden on exporters.
Since 2001, significant changes have been implemented in the coffee export sector, including the abolition of the previous quota system and relaxations to the total auction system, allowing for direct export sales by cooperative unions and, to a lesser extent, private investors Additionally, in response to persistently low international prices, the National Coffee Authority established a floor price for exports in 2002 to help stabilize the market.
Since 2003, the Bank of Ethiopia (NBE) has phased out the Ethiopian Coffee Purchase and Sales and the Ethiopian Coffee Export Enterprise, enabling greater participation of the private sector in the coffee market, particularly in washed coffee.
Recent research by Petit (2007) highlights that the coffee market reforms prior to the establishment of the Ethiopian Commodity Exchange (ECX) were only partially effective, as they combined private sector participation with stringent government controls These reforms were implemented gradually and primarily involved the dismantling of the state monopoly on trade and marketing, the elimination of price controls, the removal of the quota system for traders, and the abolishment of the export coffee tax However, significant state control persisted through mechanisms such as the mandatory National Auction, strict licensing requirements for collectors, suppliers, and exporters, the policy of reserving non-export quality coffee for domestic use, and the prohibition of Multinational Corporations (MNCs) from registering as exporters.
In December 2008, the Ethiopian government enacted the Coffee Quality Control and Marketing Proclamation No 602/2008, signaling a significant shift in the coffee sector, particularly in marketing This law abolished the National Auction system and aligned coffee marketing with the operations of the Ethiopia Commodity Exchange (ECX) The primary objective of this legislation is to ensure that all coffee produced in Ethiopia is traded exclusively through the ECX, thereby streamlining the marketing process.
The recent Proclamation introduces significant regulations, including the establishment of Primary Transaction Centers, which are local coffee markets that allow specified actors to participate with defined duties and obligations Additionally, it mandates that all other coffee transactions must occur at the Ethiopian Commodity Exchange (ECX), adhering to established rules.
The primary collectors, previously recognized as independent entities in the coffee trade, now face legal restrictions on their involvement Additionally, a warehousing system has been established, requiring all coffee to be stored at the Ethiopian Commodity Exchange (ECX) until sold Furthermore, the 'Coffee Quality Liquoring and Inspection Center' has been created at both federal and regional levels to inspect, liquors, and issue certificates for locally supplied coffee, export coffee, and coffee by-products delivered to consumer areas.
Certain regulations in the coffee export industry remain consistent, including the necessity of obtaining quality certification before exporting and the ban on selling export-quality coffee domestically Coffee exporters, wholesalers for domestic consumption, and coffee roasters must still possess operational licenses Additionally, suppliers are required to obtain a competence certificate from the relevant executive authority to collect, process, store, or transport coffee.
Coffee Marketing System Before and After ECX
Key Actors and Institutions
The current Coffee Marketing System involves various key stakeholders, each with specific roles and responsibilities, as outlined in Table 1 These stakeholders are categorized into six groups for clarity: regulatory government institutions, parastatals, coffee producers, private intermediaries, cooperatives, and sector associations.
The implementation of the Ethiopia Commodity Exchange (ECX) for coffee trade has led to the emergence of several new actors and institutions, including the Ethiopia Commodity Exchange Authority (ECEA), Coffee Processing and Warehouse Enterprise, and the National Exchange Actors Association (NEAA) Additionally, many existing participants have undergone modifications, taking on new duties and responsibilities in the evolving coffee trade landscape.
Coffee Marketing Structure- Before and After ECX
Before the Ethiopian Commodity Exchange (ECX) began operations in the coffee sector, the domestic marketing system relied heavily on an auction system centered in Addis Ababa and Dire Dawa, where all coffee must be graded and sold However, since 2001, cooperative unions have been allowed to bypass these auctions, enabling direct export sales This shift transformed the national coffee marketing chain, allowing distribution through two primary channels: cooperatives and private or conventional buyers.
The distribution process through cooperatives is efficient and uncomplicated Smallholder coffee farmers deliver red or dry cherries to the primary society, which then processes the cherries through washing or hulling The primary society sells the processed beans to Cooperative Unions, who handle direct exports to international buyers In situations where primary societies require immediate cash and cannot wait for dividends, they may opt to sell their coffee at auction centers, thereby incorporating aspects of the conventional distribution channel.
Table 1: Main Functions and Responsibilities of Key Actors and Institutions
Institutions Main Functions and Responsibilities
Existed\New after ECX GOVERNMENT INSTITUTIONS
The organization issues certificates of competence for individuals involved in the coffee trade and has established a central coffee liquoring and inspection center It conducts inspections and provides quality certificates and release letters for coffee intended for both export and domestic consumption, now with enhanced responsibilities.
Establish and regulate the primary transaction centers; issue or revoke certificate of competence & trade licenses for different coffee traders except for coffee exporters.
Existed but with new roles Coffee Quality Control &
Liquoring Unit (CLU) Responsible for liquoring washed & unwashed coffee prior to export
Existed but with modified role Ethiopia Commodity
Exchange Authority(ECEA) Oversee the implementation of the ECX rules, extend licenses to its members and audit its performance New
Offer warehousing, grading, market information and a trading system with settlements and clearance of contracts New Coffee Plantation and
Development Enterprise Government institution responsible for 5% of coffee production Existed
Enterprise (EGTE) Serving the public in stabilizing coffee price by Engaging in coffee purchases, local wholesale and export businesses Existed but with new roles Coffee Processing and
State processing plant providing processing services for public and private actors New
Small-Scale Producers Responsible for 90% of total coffee production Existed
Commercial Growers Responsible for 5% of total coffee production Existed
Suppliers\Akrabies Collect coffee from producers or from their own farm for delivery at
ECX Not allowed to export on their account Existed
Private Exporters Purchase coffee from ECX for exporting Existed
Domestic Wholesalers Licensed traders who purchase non- export coffee from ECX and sale for domestic consumption Not known
Licensed traders who purchase non export coffee from ECX and either export or sale domestically after roasting and grinding Not known
Primary Farmers' Societies consist of various peasant associations that buy coffee from farmers and sell it to cooperative unions or through the Ethiopian Commodity Exchange (ECX) Cooperative unions acquire coffee from service cooperatives and have the option to either export it directly or sell it through the ECX.
Private organization with objective of promoting coffee exports through providing coffee trade information, lobbies on policies and technical support to its members Existed
Association (NEAA) Group of all trading members of ECX formed in 2009 and provide trade information and training to its members New Ethiopian Coffee Growers,
With the main aim of promoting large scale coffee sector in Ethiopia and support members to produce sustainable, traceable and quality coffee for specialty markets Existed
Source: Petit (2007), legal theses (2010) and interviews
The conventional auction system for coffee involves legally licensed local collectors, known as sebesabies, who gather cherries from farmers and sell them to suppliers, or Akrabies Suppliers may also collect directly from farmers, and after processing the coffee beans, they transport them to auction centers in Addis Ababa and Dire Dawa At these centers, coffee is sorted by region, graded, and tested for quality by the Coffee and Tea Quality Control and Liquoring Unit (CLU) Samples of the graded coffee are displayed to bidders prior to the auction, which employs a Dutch-type ascending price bidding system The auction facilitates transactions between suppliers, acting as sellers, and private exporters or domestic traders, serving as buyers for export-quality coffee.
“sellers” for rejected coffee redirected for domestic market.
Coffee from state farms and commercial growers is processed through both private and conventional channels After washing and hulling the cherries, these plantations send their coffee beans to auctions, effectively utilizing all aspects of the conventional distribution system.
Figure 1- National Coffee Marketing Chain: Before ECX
Since December 2008, the national coffee marketing system in Ethiopia has undergone substantial changes, including the mandate that all coffee trade must go through the Ethiopian Commodity Exchange (ECX) This shift has led to the emergence of new participants and institutions in the coffee sector.
Private Domestic Distributers (Rejected Coffee)
Domestic buyers, previously restricted from participating in the coffee marketing system, can now engage in direct sales Additionally, commercial growers have been authorized to bypass the Ethiopian Commodity Exchange (ECX) and sell directly to foreign buyers These changes significantly impact the flow of coffee from farms to domestic consumers and exports The evolution of the domestic coffee marketing chain before the establishment of the ECX is depicted in Figure 2.
Coffee can be traded through three primary channels: cooperatives, private traders, and large-scale farmers The cooperatives channel plays a significant role in facilitating trade within the coffee market.
In the cooperative channel, smallholders deliver red or dry cherries to the primary society, which compensates them at the prevailing farm gate price Depending on its size, the primary society may have its own wet or dry processing facilities and subsequently sells the processed beans, either as parchment or hulled green beans, to their Cooperative Union at a price comparable to the current ECX rate The Cooperative Union then faces two options: selling directly to foreign buyers at a negotiated price, bypassing the ECX, or selling through the ECX For the direct sale option, the coffee must first be brought to ECX warehouses for initial grading based solely on defects, receiving a visual grade of 1-9 Following this, samples are sent to CLU for a cup quality test to obtain an official certification confirming the coffee's export quality.
Figure 2- National Coffee Marketing Chain: After ECX
Unions lacking sufficient buyers for their coffee volume can opt to sell through the Ethiopian Commodity Exchange (ECX) In this process, their coffee is transported to an ECX warehouse, where it undergoes both visual grading and cup quality assessment The graded coffee is then sold at the ECX trading floor in Addis Ababa Additionally, some primary societies may choose to sell their coffee directly through ECX.
Wholesalers\Roaste rs (Rejected Coffee)
Domestic Buyers ECX Trading Floor
Primary societies may opt to sell their coffee directly to private traders instead of cooperative unions for several reasons This occurs when the societies are not affiliated with the unions, require immediate cash, or when the unions are unable to match the higher prices offered by the Ethiopian Commodity Exchange (ECX) Additionally, if the quality of the coffee does not meet the union's standards, primary societies may choose private traders as a more viable option for selling their products.
The private channel remains the leading segment in the current domestic coffee chain, where suppliers, known as Akrabies, purchase red or dry cherries directly from coffee farmers at their farms or local coffee markets After processing, which typically occurs at their own facilities, the suppliers grade the coffee beans through regional coffee and liquoring units based on sample evaluations Subsequently, all coffee beans are transported to one of the nine ECX warehouses, where they receive a warehouse receipt and a grading standard ranging from 1 to 9 This grading process involves assessing the beans for defects and cup quality, categorizing them into three types, including specialty coffee (grade 1).
3), export standard coffee (grade 4 & 5), and domestic consumption coffee (grade 6-
Suppliers and their agents trade coffee with buyers at the Addis Ababa ECX trading floor using an 'open outcry' system, which relies on electronically transmitted information.
At the ECX trading floor, coffee buyers, consisting of private exporters and EGTE for export-standard coffee, as well as wholesalers and roasters for domestic coffee, purchase their products from ECX warehouses After acquiring the coffee, private exporters and EGTE transport it to their own facilities for further processing to enhance the quality for export Before exporting, they must submit a sample to the CLU in Addis Ababa or Diredewa for a cup quality test and obtain an official certification confirming the export quality of their coffee In contrast, wholesalers are restricted to selling their coffee in the domestic market, while roasters have the flexibility to sell their roasted or ground coffee for both export and domestic consumption.
Impact on coffee marketing Chain
The implementation of a commodity exchange, as discussed in section 2, aims to streamline the lengthy channels typical of traditional agricultural markets This sub-section will examine whether the Ethiopian Commodity Exchange (ECX) has achieved this goal by analyzing the current coffee marketing system in the study area (see figure 3) and contrasting it with the previous system prior to the ECX's establishment.
The coffee marketing chain in eastern Ethiopia, depicted in Figure 3, illustrates the current flow of coffee from farm gate to export Key features of this contemporary coffee chain, in contrast to the previous system before the establishment of the Ethiopian Commodity Exchange (ECX), can be summarized in the following points.
Before the implementation of the Ethiopian Commodity Exchange (ECX), coffee distribution in the study area continued through two primary channels: cooperatives and private buyers, facilitating the movement of coffee from farm gate to both export and domestic markets.
The cooperative channel for coffee has remained largely unchanged since the establishment of the Ethiopian Commodity Exchange (ECX), with similar coffee flow and participant types The primary difference is that under the current system, the Oromia Coffee Farmers Cooperative Union (OCFCU) can now sell its coffee through ECX as well as directly to foreign buyers, whereas previously, it was restricted to direct sales to foreign buyers without the option to utilize auction centers.
The current private channel in the study area shows significant changes compared to the previous system before the Ethiopian Commodity Exchange (ECX), mirroring the national case outlined in figure 2 While the ECX aimed to eliminate coffee collectors (sebsabies) who previously acted as intermediaries between farmers and suppliers, these agents continue to play a role in the current marketing system, either independently or as employees of suppliers This persistence can be attributed to two main reasons identified by most interviewed stakeholders.
The initiative to establish Primary Transaction Centers, aimed at connecting farmers directly with suppliers, has not succeeded in the study area Despite government support for these markets, farmers are reluctant to participate due to the long distances required to access them, the lack of higher prices compared to local primary societies, and general hesitations about the new market system.
The promotion of primary coffee collectors to suppliers is hindered by a lack of necessary activities, such as access to credit, which limits their ability to bridge capital gaps Additionally, the establishment of numerous local shops following the creation of the Ethiopian Commodity Exchange (ECX) has introduced new participants in the coffee marketing system These shops purchase coffee from farmers and sell it to either the local market or suppliers However, suppliers have reported that the presence of these new actors negatively impacts coffee quality, as they often mix coffees of varying qualities.
In conclusion, this study indicates that the implementation of the ECX system has not led to a reduction in the number and types of actors involved in coffee marketing in the area Instead, there has been an increase in both the number and diversity of participants in the coffee marketing system since the establishment of ECX.
Figure 3: Current Coffee marketing Chain in Eastern Ethiopia
Domestic Buyers ECX Trading Floor
Major Impacts on Key Actors
To enhance understanding, this article will categorize the expected impacts of commodity exchanges, similar to the framework outlined in section 2 The anticipated effects of exchanges like the ECX can be classified into five key areas: price discovery, price risk management, market development, investment opportunities, and financing facilitation However, this discussion will concentrate primarily on the significant impacts associated with the first three categories, as the latter two are more observable at the macro level within the industry.
The two major impacts expected from ECX operations under the category are improved price for all intermediaries and their improved access with accurate, market information.
Since the introduction of the Ethiopian Commodity Exchange (ECX), all interviewed stakeholders, including farmers, suppliers, and exporters, have reported a significant increase in coffee prices Farmers' average prices rose from Birr 35-40 per kilogram to Birr 65-70 per kilogram, reflecting an increase of approximately 75% to 85% Similarly, suppliers and exporters have also experienced notable price increases, demonstrating the positive impact of ECX on the coffee market.
Since the establishment of the Ethiopian Commodity Exchange (ECX), suppliers and exporters have reported improved access to updated market information, including daily price fluctuations and quality-based price differentials They can easily obtain this information by dialing 998 or contacting individuals on the ECX trading floor in Addis Ababa However, farmers remain largely uninformed about these developments, as there has been no significant change in how they access coffee market information Many farmers are unaware of the ECX and the services it offers for coffee marketing.
The implementation of ECX operations has notably narrowed the price disparity between local markets and central or foreign markets Interviewees highlighted that when prices on the ECX trading floor rise, this increase is promptly reflected in local market prices, ensuring that farmers receive higher payments in alignment with the market trends.
The Ethiopian Commodity Exchange (ECX) aims to lower transaction costs for coffee sales, benefiting both farmers and traders Various stakeholders, including farmers, suppliers, and exporters, have reported differing reactions to this initiative.
Farmers reported that there has been no change in the transaction costs associated with selling their coffee since the implementation of the Ethiopian Commodity Exchange (ECX) They continue to sell their coffee primarily to local suppliers or collectors at their farm gate, or to nearby primary societies, maintaining the same practices as before the ECX was introduced.
While suppliers noted a significant reduction in transaction costs following the establishment of the Ethiopian Commodity Exchange (ECX), many exporters experienced an increase in their costs during the same period Both groups attributed this opposing trend to the shift in responsibility for transporting coffee; exporters are now required to move coffee from ECX warehouses to their own facilities after the trade occurs at the ECX trading floor, rather than the previous arrangement where suppliers handled this transportation.
The major expected impacts of ECX under this category are improvement in coffee quality and increased actors’ awareness on commodity exchanges and their impacts.
Suppliers and exporters demonstrate a strong understanding of the Ethiopian Commodity Exchange (ECX) and its influence on the coffee marketing system In contrast, many farmers lack adequate knowledge about ECX operations and their substantial contributions to the coffee sector.