Ethiopian coffee and the ECX

So I got asked to write an article by Fresh Cup Magazine (a US coffee publication) on Ethiopian coffee and the ECX. It was in last months edition, so I thought that I would share it with you here now, I hope you enjoy

How Ethiopia is stonewalling specialty buyers by Stephen Leighton

Ethiopia is one of the finest producers of specialty coffee in the world, and it’s the original, natural home of the coffee plant. But while the country is steeped in history, it has lately also become steeped in controversy and red tape.
Coffee continues to be one of Ethiopia’s top exports, but its significance is now at an all-time low. In a contradictory development, coffee exports reached the highest-ever level in monetary terms in 2009 ($528 million), while at the same time falling to the lowest-ever share in Ethiopia’s total exports, at just 26 percent. This shows Ethiopia as the developing nation that it is, weaning itself from the dependency of coffee it has had for most of its recent history. It’s an understandable desire from the country, but the country’s move to better organize itself is having a dangerous repercussion: It’s essentially alienating the very buyers who most appreciate the country’s wondrous selection of beans.

Change for the better?
In recent years, Ethiopia’s government has done many things to try to formalize the way its exports and commodities are handled, and it has done so with items such as wheat, maize and sesame. It was only a matter of time until the country’s coffee industry jumped on board, and regulations came down in 2008.
The Ethiopian Commodity Exchange (the ECX) launched around that time to benefit and modernize the way Ethiopia was trading this valuable asset. The claim was that Ethiopia needed a change from the traditional means of trading to better support the needs of all those involved in the trading and production of coffee.
For Ethiopian coffee, 2008 was a very interesting time for a number of reasons. Firstly, there was the emergence of some very special coffees that were getting an awful lot of attention. The much-loved Idido Misty Valley and Beloya coffees, for example, both rose to prominence that year.
There was also a lot of noise made about intellectual property of coffee regions. It looked like Ethiopia and the ECX were trying to position themselves for a fight—but it turned out they had disappointing motives. Soon enough, the country started putting distance between great coffees and the specialty industry, choosing to work mainly with bigger roasters instead.

The ECX model
Here’s the layman’s version of the ECX process: A single farmer or akrabi (someone who buys coffee from small producers) is only allowed to sell his coffee through the exchange. Navigating around this system is impossible unless you are a formalized cooperative union.
Once the coffee is delivered to the ECX warehouse, the coffee is stripped of its provenance, graded by government workers using the Q System, and given a region and a marking grade. This is where things get a bit tough to follow. Washed coffees are classified Grade 1, Grade 2 or Grade 3. Naturally processed coffees (those dried with the fruit still on) are marked Grade 4 and Grade 5. This classification system gets even more complicated thanks to the fact that you can have a Grade 1 or 2 natural from southern parts of Ethiopia.
The grade relates to the cup’s profile, and because coffees are stripped of their provenance, this can lead to misleading categorizations. For example, if a Sidamo has the floral, lemon-like acidity typically found in a Yirgacheffe, it will be graded a Yirgacheffe. In general, the grade relates to quality—a Grade 1 is meant to be the best, but I have found some stunning coffees classified Grade 3.
The officials at the warehouse are the only people allowed to taste the coffee until it is bought and paid for (more about that in a moment). The details about each coffee are entered into a computer system, and shortly thereafter the coffee is offered on a trading floor that is essentially a smaller version of what you might see on Wall Street. The buyer knows if he’s buying a (supposed) Yirgacheffe or a Djimma, and he knows the grade the coffee’s been assigned by Q Grader government officials. Then he has to agree on a price for this coffee with the seller on the trading floor. Buyers can only enter the trading floor if they prove they have an account with enough money in it to buy the coffee. Once they agree on a deal, the money is transferred by the ECX from the buyer’s account to the seller’s within 48 hours.

Highs and lows
Because the ECX is often criticized, let’s highlight some of its good points. First, farmers get their money quickly. In other coffee-buying situations, unscrupulous exporters have been known to take their time to pay or sometimes don’t pay at all, giving the beginning of the chain a bum deal. Also, poor-quality coffees are sold as poor quality through the ECX, and those lower quality beans are sold for use inside Ethiopia only. That setup means the international market will not be flooded with cheap coffee that could damage the name of Ethiopia.
Finally, because all transactions go through the exchange, it’s impossible for traders to lie on export documentation about quality and prices paid. That means the government receives the proper amount of money from each transaction, which I think is important for a developing nation trying to improve the life of its people.
But the negative aspects of the ECX are severely weighing down the country’s industry. I understand that removing a coffee’s provenance helps it sell at the ECX (by helping to remove some manipulation of prices), but keeping that information secret once it’s purchased seems nonsensical to me. Separating buyers from cupping lots and forcing them to rely on the government’s Q Graders takes away one of the key elements of buying coffee: actually tasting it.
What’s more, the system adds unnecessary red tape, forms, paper and a whole heap of extra work for exporters, producers and the officials themselves. The insistence that specialty coffee is such a small part of the buying market that its needs don’t matter seems very shortsighted and almost petulant of Ethiopia. I think the road they have begun going down is pushing specialty buyers away from Ethiopia’s amazing coffees. In so doing, the country is in danger of becoming reliant on the huge firms that have controlled the New York commodity-trading market for many years—it’s these companies that have typically kept prices just above the cost of coffee production.
The anti-specialty trend has continued with the recent announcement that the country will stop using jute bags in favor of “bladders” inside containers. The bladders are essentially composed of four large bags inside a box, with the coffee blown into the bags in the container. Traditionally, these have only been used in the playground of bigger commodity buyers, and it’s another signal that Ethiopia doesn’t want exporters to sell to the specialty market. Because of their size (40,000 pounds), bladders are only practical when shipping generic mixed lots. The average micro-roaster likely cannot buy that much coffee and certainly can’t store it.
The no-jute policy was announced the week I was in Ethiopia on a buying trip. When one of the exporters told the news to my colleagues and me, we were shocked. The exporter theorized that it was a move by the government to crush the private exporter and give more power to the cooperative unions. There is a general feeling among exporters I spoke to on that trip that the main strategy of the government and ECX is to cut those private players out of the coffee chain. The government ultimately decided to withdraw the rule because of pressure from exporters, but I won’t be surprised if we see officials try to implement it again.

Survival tips
Despite all the difficulties standing in front of small buyers who want great Ehtiopian coffee, there are some ways for you to get around ECX issues such as loss of provenance and still buy effectively. Here are some tricks:
— It’s vital that you work with an importer/exporter who has people on the ground. While the provenance will still be removed, it will often possible for a savvy exporter to find out more about the coffee based on when was entered into the auction. Buyers and sellers know each other, and most local buyers know when certain washing stations delivered their goods to the ECX—it doesn’t take much sleuthing for them to then deduce some key info such as varietal, process and cup profile.
— Cooperative union coffees maintain lots of the provenance but will still be sold as a Grade 2 Yirgacheffe or a Grade 1 Sidamo. Ask whether there is any more information to be had.
— Grade 1 coffees come with more localized information and sub-region names; the government decided more details could be given out about Grade 1 coffees, even though the washing station info is stripped from them. Either way, this extra dose of info has led to an explosion of previously unheralded names like Guji, Shakiso and Borana.
As always, the cup profile remains the most important part of this process, and we can all agree the potential of Ethiopia in the flavor arena is greater than that of anywhere else. I just hope they find the desire to achieve that potential.

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  1. This is a really interesting and balanced article on the ECX and its potential implications for the speciality market.

    I have been reading about this topic in various publications, and I think the concerns are similar, that the knock on effect is going to be counter productive, as speciality and micro roasters are forced out of the buying process either because they cannot afford to import such large lots, or they become dissillusioned with not being able to taste a range of coffees before purchase, nor trace them after they commit to buying.

    I was just thinking how wine producers in the likes of Spain, Portugal, and Hungary have come a long way in promoting their regions and indigenous grape varieties to buyers, and as a result these producing areas are now firmly on the map and fetching higher prices than ever before.

    I can’t imagine long term benefits for the Spanish wine industry if for example, an up and coming winery in Navarra who market their unique wine to speciality importers, and consistently receive a high export price for its distinct flavour, is instead decided by government tasters to have similar traits to neighbouring Rioja, and as this region is more widely recognised to mean quality, will now be exported to the world with this label. In doing this it could be lumped into a vast pool of competition, and maybe given a grading and price that doesn’t reflect the true qualities of a wine that was not intended, nor actually tastes like a middle of the road Rioja if you asked its once loyal speciality buyers.

    As taste is such a personal thing then I worry that this policy could mean we are likely to miss out on many excellent coffee lots from Ethiopia which may not be to the designated Q graders preference. If we where only to buy the top 5 rated coffees in each years COE competitions then many amazing coffees would never make it to consuming countries, and we loose the gems that where maybe placed 24th, but where purchased by a shrewd roaster and end up appealing to thousands of taste buds elsewhere.

    I can see the move from being over reliant on any one commodity as a positive step, but to turn away the growth markets (speciality coffee) for the commodities your country produces seems economically questionable, and you are then subject to relying on loyalty from a smaller pool of larger companies.

    The no jute policy effectively means micro roasters can no longer purchase direct from Ethiopia, and at a time when other countries are changing their business models to accomodate buying of smaller lots, this again takes eyes and money elsewehere.

    As I absolutely love Ethiopian coffee, this is a real shame, and very worrying!

  2. So I’ve heard a whole lot of complaining about the ECX for many years now, and I appreciate the effort you put into stating your case plainly, but I really don’t understand how the Direct Specialty Trade (DST) section doesn’t exactly fit the role you’re looking for. I’m sure you’ve already examined it, and there’s probably some reason it doesn’t work for you or any other specialty importer I know of, but it really looks like a good deal to me. You can even go to the website they have setup at and it looks good.

    Anyway, I’d love to hear why the DST doesn’t work, or what could make it better.


  3. Thanks David I hope that its not a long term strategy, and things change.

    Daniel you raise a very important point about the DST’s, and its with good reason I didn’t really touch on it in the article. I couldn’t learn so much about them. I’m not sure how its really meant to work for the small speciality roaster I think it is more a tool of the larger few (and names spring to mind who do great work and buy amazing coffee in good quantities) or importer. As a small buyer I rely very much on exporters to help me maintain the relationship, and exporters are cut out of the DST model.

    What I did find out that its an awful lot of administration all around, and maybe out of reach of the small scale producer and the smaller scaled roaster.

    But what DST does show is their is at least some willingness to concede ground, but I am not sure how this would work with the bulk container packing, so it feel often with decisions with ECX one cancels out the other.

  4. Stephen – congrats on a nicely written article! Nice job.

    @David – very good points!

    @Daniel – the DST approach is redundant in that it duplicates the efforts by coops and commercial growers. As the website correctly points out, DST relies on quality certification of coffees produced by primary coops, coop unions (an umbrella entity comprised of multiple primary coops), or commercial growers. All of these growers are exempted by the absurd coffee law to bypass ECX and are allowed to directly deal with buyers/importers/roasters. Therefore, DST would be of little or no value as long as the coops and commercial growers manage to reach out to buyers/roasters.

  5. DL – You’re confusing the ECX Q grading system with the CLU’s export standards. The ECX Q grading system assigns grades 1 to 9 to an arrival coffee, based on the assessment of its Q graders, while the numbering system you’ve described is used by the CLU. The CLU is independent of ECX and has the mandate to inspect and approve or reject the grades of all coffee destined for export, no matter who is exporting the coffee (could be a co-op, a private exporter or a commercial grower). The CLU’s grading system has been around much longer than ECX has been alive.

  6. Comment was for Stephen, not DL.

  7. Hi Bruck

    Not sure what you mean I do say that they are striped of province information and q graded and given there classification upon arrival at the ECX station.

    Not sure what CLU is but was never talked about during the week at the ECX.

    The grades are more provincial and processing than anything to do with cup quality.

  8. The CLU is the Coffee Liquoring Unit of the Ministry of Agriculture. ECX handles the domestic trade, but all export related quality control and grading is done by the CLU.

    Exporters buy coffee via ECX from local traders or coops or commercial farmers. Coops and commercial farmers have the option to bypass ECX but they still have to get their coffee inspected/graded by the CLU before export.

    This describes ECX’s coffee contracts and grading system: As you can see, the grading system numbering goes from 1 to 9.

  9. Ahh ok yes they did talk about this but this is mainly (so I was informed) to decide if its export quality or not.

    I was not talking about the Q graders doing that, it just followed on for its classification for the grade it would be sold at the ECX.

    I am sure you can agree its tough to understand all the facets of the Ethiopian market and get this into the tight 1500 words. But this just backs up the argument that the market is over complicated and set up against the smaller buyer. Its a shame as Ethiopia has some amazing coffees that it seems determined to not share with the world.

  10. Commercial growers and coops, who have the certified coffees, have the option to bypass ECX and sell direct to international buyers. I’ve seen ‘official’ figures saying that about 12% of exports come from commercial growers and coops. I have no idea how much of that 12% is sold direct or piped through ECX, and how much ends up with “smaller buyers.” It’s likely that a significant amount of it ends up with specialty buyers/roasters, especially because the ‘certified’ coffees from coops and commercial growers sell at a premium. I don’t think anyone knows how much ends up with the “smaller buyer.”

    Not sure what you mean by “determined not to share with the world.” Most of the ‘export grade’ coffee ends up on the world market. Whether it’s ending up with buyers who could pay the most for it is something that doesn’t have an easy answer. If it’s the case–as many suspect–that most of Ethiopia’s coffees could fetch higher prices with better designed market rules, the current state is a loss for everyone, from growers all the way to roasters.

    I agree that things are complicated. One approach to understanding the complications better is to expand on your essay and look at the issues at different levels.

  11. I agree about coops approach and there are lots of opportunities here. Who has been cut out are the exporters, some who were very bad for Ethiopian coffee and should be cut out, but some who have helped develop the market and share Ethiopia’s amazing coffees with the world.

    Exporters who spent lots of money on mills and equipment to attain the quality required by the specialty market now lying idle or rented out to coops for a few weeks a year.I personally saw three mills in Yirgacheffe like this and it was very sad.

    My not wanting to share with the world is the bureaucracy, and the crazy ideas (like the bladders in containers) the removing of provenience and the weak position they have left many exporters in.

    I by no means know all the answers very far from it. I spent a 8 days talking to all parties and have tried to learn as much as I possibly can. I have much more to learn, but I think we can both agree the system is far far from perfect, and could be so much easier, while achieving the goals we all want which is producers to be paid better and there to be better quality coffee available from Ethiopia

  12. You raise many good points. It would be interesting to look into:

    1. What the new rules have meant for exporters, and especially for those exporters who made investments in infrastructure but never captured the returns on those investments. 88% of exports (last year, I believe) were still through coffee exporters, but with purchases coming via ECX.

    2. How else the industry overall has been affected by these developments, beyond the exporters who suffered the consequences of the new rules.

    3. Whether the current path will result in outcomes desirable to market participants in a way that lifts up the industry from both a quality and price perspective.

  13. Hi Stephen,

    I spoke to some ECX cuppers today and what you wrote in your article under the section “The ECX Model”, especially the second paragraph in that section describing the ECX grading system is not correct.

    They don’t grade all coffees arriving from the growing areas using the Q. Apparently they have a standard grading system slightly different from the one used by the CLU and only those coffees scoring 1 and 2 (and some scoring 3 but with ‘above average cup’) are put through the Q system for a second round of grading using the Q protocol. The possible scores on the initial cupping/grading ranges from 1(very good) to 9 (close to UG).

  14. … so the assignment of grades 1 and 2 for washed coffees, 4 and 5 for naturals happens after the exporter buys the coffee from ECX and processes it for export. The exporter essentially prepares the coffee for export, keeping in mind that the CLU has to ‘approve’ it.

    I haven’t yet seen any explanation of how the ECX grading system maps onto the CLU’s system. How exporters manage the translation from the ECX system to the CLU’s requirements is not something that is clearly specified by the concerned parties.

    The system used by the CLU comes up for review/modification by a committee at the Quality and Standards Authority of Ethiopia (QSAE). I haven’t yet seen any public discussion/scrutiny of ECX’s system. The CQI/SCAA folks involved in advising/designing the ECX’s system maintain that Ethiopia is the only country in the world for which Q data exists for arrival coffees. They often forget to mention that currently Ethiopia is also the only country in the world where exporters buy coffee without getting a chance to examine/cup it themselves.

  15. … and of course there’s the issue of UG (under grade) coffee destined for the domestic market. Domestic wholesalers buy UG coffees from ECX and distribute throughout the country. This is a subject waiting to be scrutinized by an enterprising graduate student with a conscience…

  16. Hi Bruck

    Well at the Sidamo receiving station this was how it was done. Q grading was done from the start. This is maybe the problem that each receiving station is doing there own thing. I can only comment on what I saw, and I do admit this is the only station I visited.

    Agreed much of the export grading is done by exporters. I saw one situation where they took a grade tidied it up and made it a better grade by resubmitting and the left overs became forest grade for the local market.

    Its great to have Q data if you think its useful. For me I think it is a great tool for commodity coffee, but lacks in its ability to show true specialty. This is a personal view, and I know some colleagues in the industry disagree with me, but there are enough who I respect who agree also.

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