(Mian Ridge)

Ethiopia, Africa’s biggest coffee producer, will benefit from unusually dry weather in Brazil that has lowered the output and helped lift the price of Arabica beans. Arabica prices surged to a three-year high – to over 200 US cents per pound – in October, which is expected to lift Ethiopia’s coffee export earnings by 25 per cent to $900m this year.

But Ethiopia is missing an opportunity to make a lot more money from arabica, which originated in the country’s highlands, and is considered the superior of two main varieties of coffee bean (the other, robusta, is more bitter and tends to be used to make instant coffee).

A note from Ecobank said that:

Ethiopia could position itself as a low-cost Arabica naturals producer, but it faces constraints, notably an inefficient supply chain and the low productivity of smallholder coffee farmers.

Ethiopia dominates east Africa’s coffee production (see chart). After the sector was liberalised in the 1990s its coffee output increased, surging 139 per cent between 2004 and 2013.

And yet Uganda, not Ethiopia, is Africa’s biggest exporter. The reasons for this are manifold.

In Ethiopia, where coffee drinking ceremonies are an important part of culture, local consumption swallows half the national output (and perhaps more in future as coffee shops boom)

And output is lower than it should be. Most of Ethiopia’s coffee is grown by smallholder farmers, on farms of less than two hectares where yields are low: around 300 kg per hectare, around a third of the typical yield in Colombia and a quarter of that in Costa Rica. Only 5 per cent of Ethiopia’s coffee is grown on plantations, where the yields are higher.

Output is likely to go up, however. In September, Saudi billionaire Mohamed al-Amoudi bought 18,000 hectares (44,479 acres) of coffee plantation land from the Ethiopian government for $80m last year. Ecobank said his investment would bear fruit in three to five years’ time.

Another problem was inefficient supply chains, said Ecobank, which reduce farmers’ share of the export price, meaning they under-invest in their plots. That made Ethiopia less competitive than its East African rivals, said Ecobank, which noted that:

Ethiopia’s Natural Arabicas have the highest sourcing costs in East Africa, around 40% of the average 2012/13 international price of US$1.29/lb, limiting the farmers’ share to 60% of the export price. This compares with 70% for Kenya’s Washed Arabicas and 72% for Uganda’s Natural Arabicas.

The establishment of the Ethiopia Commodity Exchange (ECX) which sells 85 per cent to local and international markets, was not entirely positive, said the report, because it lacked flexibility. The ECX sold most of the country’s coffee as bulk and only 5 per cent of specialty, and this:

has led to complaints from specialty roasters about the difficulty of accessing single-origin beans in Ethiopia, which are now only available via unions or plantations. Specialty roasters have also raised concerns that ECX grading is opaque

All in all, said Ecobank, Ethiopia’s coffee sector performs below potential.

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*Originally published on Financial Times on Oct 24, 2014