Impacts of ECX on Coffee Marketing

HARAMAYA UNIVERSITY SCHOOL OF AGRICULTURAL ECONOMICS AND AGRIBUSINESS THE IMPACTS OF THE ETHIOPIAN COMMODITY EXCHANGE ON COFFEE MARKETING A case of Eastern Ethiopia Gemoraw Adinew A case study report to supplement OER materials of AgShare pilot project November 2011 The Case Study The main purpose of the case studies is to supplement OER materials prepared for Agricultural Economics MSc program by elaborating key practical issues reflecting the problem and context of agricultural marketing system of Ethiopia The study was financed by Bill-Melinda Gates Foundation (BMGF) through AgShare pilot project The project is implemented by School of Agricultural Economics and Agribusiness of Haramaya University in collaboration with OER Africa/SAIDE, Michigan State University (MSU), four faculties of members of Collaborative Masters in Applied and Agricultural Economics (CMAAE) network The findings, interpretations, and conclusions expressed in this case study are entirely those of the authors They not necessarily represent the view of the above mentioned institutions The case studies and other OER materials will be available online soon Acknowledgements The author is grateful to the AgShare Pilot Project for financing this study Thanks also go to AgShare project team of AgShare pilot project of the School of Agricultural Economics and Agribusiness for useful discussion and valuable comments provided i Table of Contents INTRODUCTION .1 1.1 Project Background 1.2 Rationale and Objectives of the Study .3 1.3 Methodology .4 COMMODITY EXCHANGE AND ECX 2.1 Economic Theories for Commodity Exchange 2.2 Expected Benefits\ Impacts of Commodity Exchange 2.3 The ECX platforms (ECX functions and modalities) 10 2.3.1 Ownerships and Governance 11 2.3.2 Memberships 12 2.3.3 ECX Operations 13 COFFEE PRODUCTION AND MARKETING IN ETHIOPIA .18 1.4 Ethiopian Coffee Production and Processing- A Brief 18 1.5 Major Institutional and Regulatory Reforms before and after ECX- An Overview .20 1.6 Coffee Marketing System Before and After ECX 23 3.3.1 Key Actors and Institutions 23 3.3.2 Coffee Marketing Structure- Before and After ECX .24 MAJOR IMPACTS OF ECX ON COFFEE MARKETING 32 1.7 Impact on coffee marketing Chain 32 1.8 Major Impacts on Key Actors 35 REFERENCES 37 ii INTRODUCTION This study has been prepared as one of the case studies that would be used as supplemental materials for the module on the MSc course 'Agricultural Marketing and Price Analysis' which is prepared by the staffs of the School of Agricultural Economics and Agri-Business Management in Haramaya University This course module is one of the out put that has been prepared as part of the project initiated by staffs of the School of Agricultural Economics and Agri-Business Management in collaboration with many institutions from Africa and America (Michigan State University) For the sake getting a clear understanding on the project as well as on this specific study, therefore, this introduction part will brief describes the background of the project, the rationale and the objectives of the study, and the methodology followed 1.1 Project Background The Michigan State University and open educational resources (OER) Africa initiate a program known as ‘the AgShare initiative’ to collaborates with African universities to help them strengthen their MSc curricula in the agricultural sciences through the creation, utilization, and management of open educational resources (OER) This initiative aims to demonstrate that cooperation between universities, community organizations, and content providers can help generate OER that is used by MSc agricultural faculties in Africa and around the world to strengthen their academic programs and their relevance to local communities The Collaborative Masters Program in Agricultural and Applied Economics in Eastern, Central and Southern Africa (CMAAE), a consortium of 15 universities in 12 African countries, is one of the four pilot projects selected under this initiative The overall objective of the CMAAE is to strengthen MSc programs being offered by African Universities by preparing a contextualized teaching and learning materials The following statement underpins the very purpose [ought to be] of the MSc programs “to equip professionals with knowledge and skills essential for transforming the currently underdeveloped agro-food sectors and rural economies of Africa to perform well in an environmentally sustainable fashion Its underlying premise is that such highly trained local professionals must address the challenges posed by far1 reaching changes in global and local economies, technology, and marketing by adapting their advanced knowledge and methods to the particular institutional, political, and economic circumstances of the region." The idea is the teaching-learning approach in the MSc programs of most African universities has some serious limitations Generally, it can be described as: entirely theoretical (with no or little practical aspect); chalk-and-talk (with no supplementary teaching materials); and most of all, it is textbook-based that uses books that are published in the context of Western Developed countries Such teaching apparently will help little in meeting the very purpose of the MSc programs and puts them under question Thus, the purpose of the CMAAE project is to produce contextual modules and other teaching materials that supplement module In addition, it also attempt to create feedback loop with the community Two members of CMAAE, Haramaya University from Ethiopia and Moi University from Kenya, , are now participating in this project to produce OER modules that will be available to the entire CMAAE membership—in East, Central, and Southern Africa They selected an elective course on “agricultural marketing and price analysis” as the one on which they would OER modules While Haramaya University decided to approach this course through a case study on coffee, Moi University selected maize The School of Agricultural Economics and Agri-Business Management in Haramaya University, on the behalf of the university, is actively involved in the project both in the initiation of the project and in the preparation of the expected outputs In this regard, therefore, the following outputs have been produced by the staffs of this school - a module is written on one of the MSc courses, 'Agricultural Marketing and Price Analysis', and Video film and photos are produced on Coffee Marketing in Ethiopia which demonstrates the context - functions, channels, agents, activities, etc of coffee markets Currently, under the supplementary phase, the school wants to strengthen the module further by preparing case studies that would be served as supplementary materials for the course module This piece of study is, therefore, on one of the topics selected to be examined and served as one of the supplemental case studies 1.2 Rationale and Objectives of the Study Coffee is one of the most important agricultural commodities in Ethiopia due its historical economic, social and cultural importance in the country even presently, coffee is the most important commodity in the country in many respects It accounts for about 25% of the GNP, 40% of the total export and 10% of total government revenue (MoARD, 2007) It is also responsible for the livelihoods of an estimated 1.3 million producers and 15 million people between producers, wage workers, transporters and their families (Petit 2007) Due to this, Ethiopian governments since the imperial era had been given a due emphasis on coffee sector than other agricultural sub-sectors The present Ethiopian government, like its predecessors, has been also implemented a series institutional and regulatory reforms on the coffee sector since it came to the power in 1991.) Since the time that Coffee market reforms began by the current government in 1992 (LMC, 2000), many substantial institutional and regulatory reforms have been taken place on the Ethiopian coffee sector Following such reforms until 2008, the government came up with a new law, i.e., Coffee Quality Control and Marketing Proclamation, Proclamation No 602/2008 in December 2008 which marked a new chapter in the coffee sector in general and its marketing aspect in particular The Government decision, according to this law, is to abolish the previous National Auction system and to harmonize coffee marketing with the organizational work of the Ethiopia Commodity Exchange (ECX) The major agenda behind this new law is that all of Ethiopia’s coffee should be traded through the ECX The aim of establishing the ECX, in fact, is not confined only to the coffee sector, but rather to revolutionize Ethiopian agriculture through a dynamic, efficient, and orderly agricultural marketing system This government new coffee marketing law has put different regulations on the types of actors and institutions which are allowed to involve in the coffee trading as well as in their respective duties and functions For instances, some actors like local collectors (sebsabies), who were legally recognized in the previous marketing system, are now legally restricted to be involved under the current system New types of actors and institutions, which were not there before, are also permitted to involve under the current marketing system Such type of regulations, therefore, have made some major changes on the overall coffee marketing structure existed prior to the implementation of ECX for coffee marketing In addition, the rationale behind the current ECX marketing system is that such system provides a number of benefits for key actors (like farmers, suppliers, exporters) like improving in the price they received, increased in access to the required market information and so on This study, therefore, is conducted to give a first hand information on the type of changes observed on the overall coffee marketing structure as well as the major benefits and\or looses that the key actors obtained since the creation of ECX for coffee sector The study used the coffee marketing in Eastern Ethiopia as case study to explore these issues 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 ECX; and  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 1.3 Methodology The study area for this study includes the two coffee producing zones in Oromia region, Eastern and Western Harergie zones, located in the eastern part of Ethiopia These two zones are known for the production of Harar coffee The study has relied both on primarily and secondary data sources The secondary sources of data are mainly from the Ethiopian Commodity Exchange (ECX) documents and Information Bulletins, and United Nations Council for Trade and Development (UNCTAD) documents focusing on commodity exchange issues Journal articles, case studies and reports available on commodity exchanges and commodity derivative trading are also reviewed The primary data was collected using semi-structured interviews from a variety of key actors in the coffee chain, (including government institutions, different kinds of private intermediaries, and private sector organizations) in the study area The snowballing sampling technique was employed to get the target sample The method followed throughout this study is qualitative and descriptive in nature The remaining part of this study is structured as follows After briefly introducing the important existing economic theories for the justification of a commodity exchange and the hypothetical (or theoretical) benefits of the commodity exchange, section two will describe the meaning of ECX, its main purposes, and the details on its operations Section three describes the details on the comparison of the overall Ethiopian coffee marketing structure before and after the creation of ECX The major regulatory and institutional coffee sector reforms that have been implemented in these two periods are also summarized In section four, , the major impacts that the creation of ECX has been brought on various aspects the coffee marketing system in eastern Ethiopia, which is the main part of the study , will be presented The glossary on the definition of key terms and concepts used in this study is also presented in the appendix COMMODITY EXCHANGE AND ECX 2.1 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 The neoclassical theories According to neoclassical researchers, the market refers to any domain of economic interaction, where prices are responsive to supply and demand Unless impeded by nonmarket forces, all markets have a natural and spontaneous inclination to evolve into a perfectly self- regulating one, where resources are distributed efficiently, if not justly To ensure both the evolution of markets toward a perfect version and the market setting its prices freely, neoclassical researchers argue that nonmarket forces should not intervene in the delicate balance of supply and demand Neo –classical economics analyzes the situation of the market from the point of view of an agent In this school of thought, a firm is assumed to act rational, thus it chooses the best option to trade These researchers’ perception of the market as a natural balance of the forces of supply and demand has contributed to the making of markets by informing the construction of various options markets, ranging from agricultural commodities exchange markets to securities The institutional theories Institutionalists have diverged from neoclassical researchers by arguing that all free markets require an institutional structure to mediate the convergence of market forces Moreover, spontaneous development of markets could be stalled by nonmarket factors such as the state From this perspective, institutions directly affect economic outcomes, and the agents of markets use them to reach their individual ends (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; trading practices, codes of conduct, and social norms, such as repeated interaction, trust, and reciprocity; formal commercial laws and regulations that govern market be involved in such markets, together with their duties and obligations, are also specified ii) Other than Primary Transaction Centers , the only place that all coffee transactions shall take place is at the ECX in accordance with the rules of the Exchange iii) The primary collectors, formerly legally recognized as an independent actor operating between the producer and the supplier, are legally restricted to involve in the coffee trade iv) The set up of the warehousing system where all coffee should be stored until sold at the ECX v) Establishment of the ‘Coffee Quality Liquoring and Inspection Center’, “an institution at the federal and regional level, that inspects, liquors, and issues certificates for coffee locally supplied from production areas, export coffee, and coffee by-product delivered to consumer areas On the other hand, certain regulations remain unchanged, such as the need to obtain a quality certification prior to export and the prohibition to sell export-quality coffee in the domestic market Coffee exporters, domestic consumption wholesalers and coffee roasters still require licenses to operate; suppliers are said to require a competence certificate from the corresponding executive body in order to collect, process, store or transport coffee 1.6 Coffee Marketing System Before and After ECX As mentioned in section 3.2, the Government’s decision to handle all of the Ethiopia’s coffee trade through the ECX in December of 2008 has created many significant changes in the types of actors and institutions involved in the coffee marketing system as well as in their respective duties and functions This new government decision has also made major change in the overall coffee marketing structure (channel) In this section, therefore, we summarize the key actors and institutions involved in the current Ethiopian coffee marketing system and the coffee marketing structure both before and after the creation of ECX 3.3.1 Key Actors and Institutions The key stakeholders (actors and institutions) involved in the current Coffee Marketing System as well as their respective duties and functions are described in table To make the description simple and clear, the key stakeholders in the coffee 23 marketing system are grouped into six categories: regulatory government institutions, parastatals, coffee producers, private intermediaries, cooperatives, and sector associations From table 1, several observations can be made Firstly, many new actors and institutions are emerging since the implementation of ECX for coffee trade The new participants are Ethiopia Commodity Exchange Authority (ECEA), Ethiopia Commodity Exchange (ECX), Coffee Processing and Warehouse Enterprise, and National Exchange Actors Association (NEAA) Secondly, many of the previous actors and institutions are modified with new duties and responsibilities 3.3.2 Coffee Marketing Structure- Before and After ECX Before ECX Prior to ECX operation in coffee sector, the Ethiopian domestic coffee marketing system was mainly characterized by an auction system with auction centers in Addis Ababa and Dire Dawa Legally, all Ethiopian coffee should pass through these two auction centers All coffee had to be physically brought to one of these centers, where it was graded and then sold either domestically or for export, depending on the grade However, since 2001, cooperative unions have been granted permission to by-pass coffee auctions, opening the way for direct export sales (Dempsey 2006) Figure illustrates the recent national domestic coffee marketing chain before ECX began as described by Petit (2007) In this period, as described in figure1, coffee can be distributed from farm gate to export\domestic buyers through two main channels: a) cooperatives channel, and b) private or conventional channel Distribution under cooperatives channel is simple and straightforward In the cooperative pattern, the smallholders coffee farmers will bring either red cherries or dry cherries to the primary society After washing or hulling the cherries 1, the primary society will then sell the bean to their Cooperative Unions who directly export the coffee to the international buyers In some cases, those primary societies who need cash now and are not able to wait for the dividends brought their coffee to the auction centers In such cases, coffee utilizes elements of the conventional channel Table 1: Main Functions and Responsibilities of Key Actors and Institutions 24 Key Actors and Institutions Main Functions and Responsibilities GOVERNMENT INSTITUTIONS Issues certificate of competence to persons engaged in coffee trade; establishes central coffee liquoring and inspection center; inspects and issues certificate of quality and letter of release to coffee for MoRAD export and domestic consumption Establish and regulate the primary transaction centers; issue or revoke certificate of competence & trade licenses for different Regional Bodies coffee traders except for coffee exporters Coffee Quality Control & Responsible for liquoring washed & unwashed coffee prior to Liquoring Unit (CLU) export Ethiopia Commodity Oversee the implementation of the ECX rules, extend licenses to its Exchange Authority(ECEA) members and audit its performance PARASTATALS Ethiopia Commodity Offer warehousing, grading, market information and a trading Exchange (ECX) system with settlements and clearance of contracts Coffee Plantation and Development Enterprise Government institution responsible for 5% of coffee production Ethiopian Grain Trade Serving the public in stabilizing coffee price by Engaging in coffee Enterprise (EGTE) purchases, local wholesale and export businesses Coffee Processing and State processing plant providing processing services for public and Warehouse Enterprise private actors COFFEE PRODUCERS Small-Scale Producers Responsible for 90% of total coffee production Commercial Growers Responsible for 5% of total coffee production PRIVATE INTERMEDIARIES Collect coffee from producers or from their own farm for delivery at Suppliers\Akrabies ECX Not allowed to export on their account Private Exporters Purchase coffee from ECX for exporting Licensed traders who purchase non- export coffee from ECX and Domestic Wholesalers sale for domestic consumption Licensed traders who purchase non export coffee from ECX and Coffee Roasters either export or sale domestically after roasting and grinding COOPERATIVES Service Cooperatives\ Primary Farmers Societies Cooperative Unions Made up of different peasant associations who purchase coffee from coffee farmers and sell to cooperative unions or through ECX purchase coffee from service cooperatives and either they can directly export or sell through ECX Existed\New after ECX Existed but with new roles Existed but with new roles Existed but with modified role New New Existed Existed but with new roles New Existed Existed Existed Existed Not known Not known Existed Existed SECTOR ASSOCIATIONS Ethiopian Coffee Exporters Association (ECEA) Private organization with objective of promoting coffee exports through providing coffee trade information, lobbies on policies and technical support to its members National Exchange Actors Association (NEAA) Ethiopian Coffee Growers, Producers & Exporters Associations (ECPEA) Group of all trading members of ECX formed in 2009 and provide trade information and training to its members 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 New Existed Source: Petit (2007), legal theses (2010) and interviews The private or conventional channel totally follows the auction system Under this pattern, legally licensed local coffee collectors (sebesabies) assemble cherries from coffee farmers and then sell to suppliers (Akrabies) In some cases, the suppliers 25 themselves collect directly from the farmers The suppliers, after hulling or washing, bring all their coffee bean to the auction centers in Addis Ababa and Dire Dawa At these auction centers, all coffee brought to their compound are consigned separately according to the different localities or regions they came from, and then graded and tested for quality on a sample basis by the Coffee and Tea Quality Control and Liquoring Unit (CLU) After grading standards are set, the samples of the graded coffee are displayed to the bidders in the halls an hour before the beginning of the auction proceedings and then the bidders bid the lots one by one in a “Dutch type ascending price bidding system.” The bidding process is taken place between suppliers (or through their agents) as “sellers” and private exporters (or through their agents) as “buyers” for export standard coffee, and between the suppliers (or through their agents) as “sellers” and private domestic traders (or through their agents) as “sellers” for rejected coffee redirected for domestic market Coffee from plantations (State Farms & Commercial Growers) are also flows trough the private or conventional channel After washing\ hulling the cherries, coffee plantations bring all of their coffee bean to the auction and utilized all elements of the conventional channel 26 Private consumption Coffee Farmers Service Cooperatives State Farms & Commercial Growers Collectors (sebesabies) Suppliers (Akrabies) Washing\Hu lling Cooperative Unions Washing\Hulling Auction centers (Addis Ababa & Diredewa) Washing\Hu lling Private Domestic Distributers (Rejected Coffee) Private Exporters Direct Export Export Domestic Buyers Figure 1- National Coffee Marketing Chain: Before ECX After ECX Since December of 2008, as mentioned in section 3.2, many significant changes have been made on the operation of the national coffee marketing system For instances, in addition to the decision that all Ethiopian coffee trade should pass through the ECX, some new actors and institutions are emerged as new participants while some 27 previously existed one are legally prohibited to involve in the coffee marketing system Moreover, in addition to the cooperative unions, commercial growers now have granted permission to by-pass the ECX and sell directly to foreign buyers Such changes, therefore, can alter the way coffee flows from farm gate to export\ domestic consumers To show how the domestic coffee marketing chain prior to ECX changed, the present domestic coffee marketing chain is illustrated in figure As it is described in figure 2, coffee in the current system can be traded through three main channels: a) cooperatives channel, b) private traders channel, and c) large-scale farmers’ channel a) Cooperatives channel Under cooperative channel, the smallholders will bring either red cherries or dry cherries to the primary society, who will pay the producer the going farm gate price Depending on the size of the primary society it may have wet or dry processing facilities of its own The primary society will then sell the bean either as parchment or hulled green bean to their Cooperative Union who pays a price that is similar to the going ECX rate for the type of coffee provided The Cooperative Union then has two choices\options: selling directly to foreign buyers at an agreed upon price by passing the ECX, or selling through ECX However, since all coffee must be graded by ECX, under the former option the Cooperative Unions should also bring their coffee to the ECX warehouses so that ECX staffs take samples from the trucks and an initial grading and give coffee a visual grading of 1-9 based only on number of defects only, but not on cup quality Then after, the sample of their coffee taken to CLU to be tested using the cup quality test and also to get an official letter that their coffee is an export quality 28 Private consumption Coffee Farmers Primary Transaction Centers Service Cooperatives State Farms & Commercial Growers Suppliers (Akrabies) Key Washing\Hul ling Cooperative Unions Washing\Hu lling Washing\Hulling ECX Grading\Warehousing Normal Optional Commercial Growers ECX Trading Floor Private Exporters & EGTE CLU Direct Export Wholesalers\Roaste rs (Rejected Coffee) CLU CLU Export Direct Export Domestic Buyers Figure 2- National Coffee Marketing Chain: After ECX Selling through ECX will be the options for the unions when they not get enough buyers for the volume of coffee held by them In such cases, their coffee, like any other commodity coffee, will be taken to an ECX warehouse, graded both by visual grading and cup quality, and will be sold at ECX trading floor at Addis Ababa In some cases the primary societies will also sell their coffee directly through ECX 29 rather than selling to the cooperative unions These happens when the primary societies are no member of the cooperative unions, or when they need immediate cash, or when if the Union knows that ECX is currently selling the producers’ type of coffee at higher prices than the Union is able to get from its direct buyers, or if the quality of the primary society’s coffee is not high enough to meet Union standards b) Private traders channel The private channel is still the dominant one in the present domestic coffee chain Under this channel, suppliers (Akrabies) buy red or dry cherries from coffee farmers either at their own farm or at Primary Transaction Centers\ local coffee markets Then, after washing or hulling (usually at their own processing plants) and graded by the regional coffee and liquoring units on sample basis, suppliers will bring all of their coffee beans to one of the nine ECX’s warehouses to get a warehouse receipt2 At ECX warehouses, in addition getting a warehouse receipt, a grading standard from 1-9 will also given for the suppliers’ coffee beans after grading the samples from the trucks based on visual (on number of defects) and cup quality test method The 1-9 grading standard includes three types of coffee categories: specialty coffee (grade 13), export standard coffee (grade & 5), and domestic consumption coffee (grade 69) Then after, the suppliers ( or through their agents) trade their coffee with buyers at the Addis Ababa ECX trading floor through an ‘open outcry’ system based on electronically transmitted information Once the coffee trade takes place at the ECX trading floor, the buyers take the coffee they bought from ECX warehouses The buyers at ECX trading floor are only private exporters & EGTE for export standard coffee, and only Wholesalers & Roasters for domestic consumption coffee The private exporters & EGTE then take the coffee from ECX warehouses to their own warehouses\ processing plants and make further processing to get more export quality beans But before they export, like cooperative unions, they should bring the sample to the CLU at Addis Ababa or Diredewa stations to be further tested using the cup quality test and to get an official letter that their coffee is an export quality While wholesalers are required to sell their coffee only to the domestic market, roasters (after roasting and/or grinding) can sell their coffee either for export or domestic consumption c) Large-scale Farmers’ Channel 30 This channel represents the options that large-scale farmers or commercial growers have to distribute their coffee It looks like the cooperative channel After hulling\ washing usually in their own processing plant, coffee commercial growers can sell their beans directly to foreign buyers (by-passing the ECX) or through ECX They choose the ECX marketing system if they don not get foreign buyers or if the on going ECX coffee price is higher than the price from its direct foreign buyers In such cases, just like the suppliers, they bring their coffee beans to one of the ECX warehouses and trade in the ECX trading floor at Addis Ababa If they decide to make a direct export, they first bring the beans to one of the ECX’s warehouses so that their coffee beans tested and get the usual standard grade of 1-9, and then they make further processing in their own plants Finally, before they export, they bring their sample beans to the CLU at Addis Ababa or Diredewa stations for further testing and grading as well as for getting an official letter as that they can export their coffee 31 MAJOR IMPACTS OF ECX ON COFFEE MARKETING In this section, we will see the major changes that the creation of ECX has been brought on various aspects the coffee marketing system in eastern Ethiopia Particularly, we will see the following two major issues In the first sub-section, we will see what major changes have been observed with respect to the types of actors involved and the way they are structured by presenting the current coffee marketing chain in the study area In the second sub-section, we will discuss the major benefits and\or looses that the key actors (like farmers, suppliers, exporters) obtained from the current marketing system The results described in this section are all from what obtained the stakeholders interview and the researcher’s observations during the field study 1.7 Impact on coffee marketing Chain As it is mentioned in section 2, one of the major impacts expected from implementing a commodity exchange is reducing the long chain of channels exhibited in a traditional agricultural commodities market In this sub-section, therefore, we will try to investigate whether this expected impact is actually realized through ECX by describing the current coffee marketing system in the study area (figure 3) and comparing with the one existed before ECX is implemented The coffee marketing chain presented in figure shows how coffee currently flows from farm gate to export in eastern Ethiopia As it is illustrated in figure 3, the important features of the current coffee chain in the study area, as compared to the one existed before ECX, can be summarized using the following points: Just like the period before ECX implemented, coffee in the study is still distributed from farm gate to export\domestic buyers through two main channels: cooperatives channel, and private channel With regard to cooperative channel, the current channel is almost the same as the ones existed before ECX both in the way coffee flows and the types of actors involved in the only change between them is that while the cooperative union (OCFCU in this case) in the present system permitted to sell its coffee through ECX in addition to directly to foreign buyers, the only option of the 32 union in the previous (before ECX) system is to sell directly to foreign buyers but not allowed to sell through auction centers Many changes, however, are observed in the current private channel as compared the ones existed before ECX Since the current private channel in this specific study area is just similar to one presented in figure for the national case and the significance changes between the present ECX marketing system and the previous auction system are already described in section 3.3, only the notable changes peculiar to the study area are presented in this sub-section The notable changes observed in this regard, therefore, are the following i Even if one of the major ECX’s intentions is to take out the coffee collectors (sebsabies)-who were legally recognized agents between farmers and suppliers in the previous system- from the system, they are still involved in the current marketing system and perform their usual duties either by them selves or as employees of suppliers This is, according to most interviewed actors, are due to the followings two major reasons:  First, the effort of establishing the Primary Transaction Centers (or local coffee markets), with the aim of linking farmers directly to suppliers, not succeeded in the study area while the concerned government bodies provide the necessities required for the operation of such markets, the major factor for the failer is that farmers not avail on this market because either it require for them to go long distance to reach such markets, or they not get higher prices than they usually get from the local primary society, or some have hesitations about such markets  Second, the necessary activities required to promote the primary collectors to suppliers are not take place For example, collectors not get credit access to fill their capital gap to be suppliers ii In addition, a wide array of local shops, which were not existed before, has emerged as new type of actors in coffee marketing system since the creation of the ECX These actors buy coffee from farmers and sell either to local market or to suppliers According to most of the suppliers’ responses, the emergence of such actors has huge negative implications in coffee quality issues since these bodies usually mix coffees with different qualities 33 In summary, we can generalized that the effort of reducing the numbers\types of actors involved in coffee marketing through ECX system can be realized in this particular study area What we actually observed is that the actors involved in the coffee marketing system in the study area are increased both in number types since the creation of ECX Private consumption Coffee Farmers Service Cooperatives Collectors (Sebesabies) Local Shops Suppliers (Akrabies) Key Washing\Hulling Washing\Hulling Normal Optional Cooperative Unions (OCFCU) ECX Grading\Warehousing ECX Trading Floor Wholesalers\Roasters (Rejected Coffee) Private Exporters CLU Direct Export CLU Export Figure 3: Current Coffee marketing Chain in Eastern Ethiopia 34 Domestic Buyers 1.8 Major Impacts on Key Actors For the ease of understanding and description, will be described following the same categories used for describing the major expected of commodity exchange in section As described in section, the impacts that are expected from the commodity exchange like ECX can be grouped under the following five categories : Price discovery, Price risk management, market development, venue for investment, and facilitation financing Since the impacts expected under the last two categories are those that can be observed at the industry (macro) level, our discussions will focus on the major impacts that are expected under the first three categories Price Discovery 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 With regard to the price they obtained, all interviewed actors (farmers, suppliers, and exporters) agreed that the price they received for their coffee has significantly increased after the introduction of ECX For example, farmers get the average price that farmers received increased from the price of 35-40 per Kg to Birr 65-70 per Kg (or about 75% to 85%) after the introduction of ECX Similar increases are also observed in the average prices that both suppliers and exporters received since ECX is operated With regard to access to market information, both interviewed suppliers and exporters acknowledge that have improved access to updated information regarding market fluctuations and price differentials based on quality after the creation of ECX For instance, as it is pointed by some suppliers and exporters, it is a matter of dialing 998 to here the daily price or to call to individuals who participate at ECX trading floor in Addis Ababa to get the pertinent marketing information However, from the farmer’s standpoint, the interviewees confirmed that there is no any change on the way farmers get access the relevant coffee market information Most farmers even not have any information about ECX as well as the various services it renders fro coffee marketing In addition, the interviewees agreed that the gap between price in the spot or local market and central or foreign market is significantly reduced after ECX operations For instances, when the price quoted at ECX trading floor is immediately transmitted 35 to local market, (i,e, when the price increases in ECX, the price paid to the farmers in local market are also increases) Price risk management One of the notable motioned impacts expected from the commodity exchange like ECX `is reducing the transaction costs involved in selling coffee for both farmers and other traders In this regard, different responses are reported by farmers, suppliers and exporters From farmers’ point of view, almost all interviewed farmers revealed that no change have been observed in the transaction costs they incurred to sell their coffee since the period ECX is started This happens because farmers still sells their coffee either to suppliers\collectors at their farm gate or to the farmers’ primary societies which are located in their surrounding just like the case in the period before ECX is implemented However, while all suppliers agreed that their transaction costs have been significantly reduced after the operation of ECX, most of the interviewed exporters reported an increase in their transaction costs in this period The major reason cited by both suppliers and exporters for such type of oppose trend in their transaction costs is that taking the coffee from the auction centers to the exporters warehouses, once the coffee trade takes place at the auction centers, are now shifted to the exporters to take the coffee from ECX warehouses to their warehouses once the trade take placed ECX trading floor Market Development The major expected impacts of ECX under this category are improvement in coffee quality and increased actors’ awareness on commodity exchanges and their impacts While the responses from suppliers and exporters revealed that they have good awareness on the operations of ECX in the coffee sector and their impact on the coffee marketing system, most of the interviewed farmers confirmed that they not have good knowledge on the ECX operations in the coffee sector as well as its significant contributions 36 REFERENCES Anton Foek, Trademarking Coffee: Starbucks Cuts Ethiopia Deal (May 8th, 2007), Available on http://CorpWatch Trademarking Coffee Starbucks cuts Ethiopia deal.mht Girma Adugna ET Al (ed.), Coffee Diversity and Knowledge: Proceedings of a National Workshop Four Decades of Coffee Research and Development in Ethiopia, 14-17 August 2007 (2008, Ethiopian Institute of Agricultural Research, Addis Ababa) H.R Cambrony, “Coffee Growing,” The Tropical Agriculturalist, Macmillan Press Ltd, Hongkong, (1992) Kidan, Y., 2009 The Expansion of Modern Private Coffee Farms and the Formation of Ethiopian Coffee Growers, Producers and Exporters' Association Bunna Magazine, 1(1), Ministry of Agriculture and Rural Development (herein after “The MoARD”), Agricultural Marketing Sector, Coffee: the Gift of Ethiopia to the World, (2007), p Solomon Balami, Genetic Diversity Analysis of the Wild Coffee Arabica L Populations from Harenna Forest, Bale Mountains of Ethiopia, Using Inter Simple Sequence Repeats (ISSR) Marker, ( July 2007, Unpublished, Library, Faculty of Science, AAU) 37 ... operations of ECX;  To describe the Ethiopian coffee marketing system before and after the creation of ECX; and  To asses the major impacts of introducing ECX in the coffee sector on coffee marketing. .. National Coffee Marketing Chain: Before ECX After ECX Since December of 2008, as mentioned in section 3.2, many significant changes have been made on the operation of the national coffee marketing. .. awareness on the operations of ECX in the coffee sector and their impact on the coffee marketing system, most of the interviewed farmers confirmed that they not have good knowledge on the ECX operations