ARBA MINCH UNIVERSITY

COLLEGE OF ARICULTURAL SCIENCES

DEPARTMENT OF AGRICULTURAL ECONOMICS
SEMINAR PAPER ON REVIEW FACTOR AFFECTING COFFEE
MARKETING AND ITS PRODUCT PRICE IN ETHIOPIA

BY: GETACHEW MOLLA

ID.NO: RAS/177/10 ADVISOR: BELETE PETROS(MSC)

JANUARY, 2020

ARBAMINCH ,ETHIOPIA

I
TABLE CONTENT

Contents
TABLE CONTENT .................................................................................................................. II

ACKNOWLEDGMENT..........................................................................................................IV

List of Tables ............................................................................................................................ V

LIST OF ABBREVIATIONS ..................................................................................................VI

1. INTRODUCTION ............................................................................................................ - 1 -

1.1. Background of seminar .............................................................................................. - 1 -

1.2 Statement of problem .................................................................................................. - 2 -

1.3. Objectives of the seminar ........................................................................................... - 3 -

1.3.1. General objective ................................................................................................. - 3 -

1.3.2. Specific objectives ............................................................................................... - 3 -

1.4 Significance of the seminar ......................................................................................... - 3 -

2. LITRATURE REVIEW .................................................................................................... - 4 -

2.1 Theoretical Review ..................................................................................................... - 4 -

2.1.1 Coffee production ................................................................................................. - 4 -

2.1.2 Marketing Concepts .............................................................................................. - 4 -

2.1.3 Coffee marketing .................................................................................................. - 4 -

2.2 Empirical Review ........................................................................................................ - 5 -

2.2.1 Coffee production in Ethiopia .............................................................................. - 5 -

2.2.2 Factors Causing Low Coffee Production in Ethiopia ........................................... - 6 -

2.2.3. Coffee Production Potential of Ethiopia .............................................................. - 7 -

2.2.4 Coffee Production Opportunity in Ethiopia.......................................................... - 9 -

2.3. Coffee Supply in Ethiopia ............................................. Error! Bookmark not defined.

2.3.1. Sources of Supply ................................................... Error! Bookmark not defined.

2.3.2. Overall Production Supply ..................................... Error! Bookmark not defined.

2.3.3. Coffee Supplied by Type, Standards and Grades ... Error! Bookmark not defined.

II
 2.3.4 Problems Encountered in Coffee Supply................. Error! Bookmark not defined.

2.3.3.1. Problems Related with Quality ........................ Error! Bookmark not defined.

2.4 Coffee Marketing in Ethiopia .................................................................................... - 10 -

2.5 Coffee Export ............................................................................................................ - 10 -

2.5.1 Trends in World Volume of Coffee Exports and its Price ................................. - 12 -

2.6 Problems Encountered in Coffee Market .................................................................. - 12 -

2.6.1 Domestic Market. ............................................................................................... - 12 -

2.6.2. Problems in Ethiopian Coffee Export Market ................................................... - 13 -

3. CONCLUSION ............................................................................................................... - 14 -

4. REFERENCES ............................................................................................................... - 15 -

III
ACKNOWLEDGMENT
First of all, I would like to give the priority and thanks to ALLAH that helps me to do and
finish this senior seminar paper. Secondly I would like to extend my thanks and appreciation
to my advisor Sead Aliyi. For his support and assistance to me in all steps of my work
without any payment and with full of openness. Then I would like to extend my appreciation
to all my friends (classmate friends), ICT workers and library workers or their support in all
steps of working this senior seminar paper.

IV
List of Tables
Table Page

Table 1. Comparison of Coffee Production Supply of some selected countries 11

Table 2. Annual Coffee Production Trends 12

V
LIST OF ABBREVIATIONS

AMA American Marketing Association

CSA Central Statistical Agency

GDP Gross Domestic Products

FAO Food and Agriculture Organization
ICO International coffee organization
IFOAM, International Federation of Organic Agriculture
Movements
ITC International Trade Centre
ECEA Ethiopian Commodity Exchange Authority
ECX Ethiopian Commodity Exchange
NCBE National Coffee Broad of Ethiopia
SCFCU Sidama Coffee Farmer Cooperative Union

USDA United State Department of Agriculture

RELMA Regional Land Management Unit

USAID United States Agency for International Development

MT Metric Tone

VI
1. INTRODUCTION
1.1. Background of seminar
Currently coffee is one of the most important agricultural commodities in the world .In
addition to its generation of foreign exchange and creation of social value, the coffee sector is
the major source of employment in most rural areas, especially for women for a large
segment of the population is engaged in the coffee industry. Coffee production by its nature is
more labour-intensive activity than alternative activities. Thus it directly or indirectly
supports many people in their livelihoods. For example in Brazil alone, more than 5 million
people are employed in the cultivation and harvesting of over 3 billion coffee plants (FAO
1987).

Coffee (Coffee Arabica), originated in Ethiopia, is the second major traded commodity
following to oil (Bekeko, 2013; Gracountries y et al., 2013) and thus plays a vital role in the
balancing of trade between developed and developing. About 33 million people in 25 African
countries derive their livelihoods by growing coffee on their subsistence farms and
particularly, in Ethiopia 15 million people directly or indirectly deriving their livelihoods
from coffee system (Gray et al., 2013).

Ethiopia is the home and cradle of biodiversity of Arabica coffee seeds. More genetically
diverse strains of C. Arabica exist in Ethiopia than anywhere else in the world, which has
lead botanists and scientists to agree that Ethiopia is the centre for origin, diversification and
dissemination of the coffee plant (Fernie, 1966; Bayetta, 2001).

Ethiopia's economy is based on agriculture. Currently agricultural activities represent 45% of

the GDP, 85% of employment, and 90% of foreign exchange earnings (RELMA). Coffee is
the major agricultural export crop, providing currently 35% of Ethiopia’s foreign exchange
earnings, down from 65% a decade ago because of the slump in coffee prices since the mid-
1990‘s. In a country where about 44% of the population is under poverty, coffee cultivation
plays a vital role both in the cultural and socio-economic life of the nation. About 25% (15
million) of the Ethiopian population depend, directly or indirectly, on coffee production,
processing and marketing. The total area covered by Arabica and other types of coffee is
about 400,000 hectares. Total coffee production is about 200,000 tons of clean coffee per
year (Woods, 2003)

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Coffee still grows wild in Ethiopia's mountain forests. Ethiopian farmers cultivate coffee in
four different systems, which include forest coffee, semi-forest coffee, garden coffee and
plantation coffee. There are variations in genotypes, eco-physiology and the biosphere of
coffee under different production systems. Plantation coffee can be regarded as an intensively
technician system. The small scale farmers are the major producers, whereby about 140 local
coffee land races known to grow as garden with owing on average 0.5 ha of coffee farming
systems (Demel et al., 1998).

In the past five decades, the global crises in coffee production (prices) have had dramatic
consequences both at micro- and macro-economic levels across the world. Coffee growing
regions from Central America to Africa (an estimated 125 million people) have been affected
by the collapse of world coffee prices (Fritsch, 2002). Ethiopia is the biggest looser. In total,
revenue from coffee dropped with the fall in amounting to 42% within a year (Raworth&
Wilson, 2002).

Organic coffee production is based on the use of renewable resources and clearly aims to
sustain management of natural resources (soil, biodiversity, water, nutrients, energy etc.)
(IFOAM, 1998; Demeter, 1986). It has long been competitive to meet consumers demand,
but it has failed to fully develop from conventional coffee production systems, that advocate
undesired agrochemical inputs as practiced in some countries like Brazil and Vietnam. For
the organic coffee sector, quality control through inspection and certification is compulsory
(Kotschi & Adelhel, 1984). In Ethiopia, onset of certified organic farming arises from a
market deficit of the conventional coffee farming, but there is little information documented
about such important segment of coffee production.

1.2 Statement of problem

The structure and organization of central coffee markets themselves for the organic coffee
sector, quality control through inspection and certification is compulsory. In Ethiopia, on set
of certified organic farming arises from a market deficit of the conventional coffee farming,
but there is little information documented about such important segment of coffee production
and the country’s economy. The supply of Ethiopian coffee (both wet-processed and sun-
dried) to local and international market faces some basic quality problems. This quality
problem makes the Ethiopian coffee unable to adequately compete in the international coffee
market and earn reasonable price .As well as being the only auction centres available in the

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country, however, it has been many times criticized that coffee marketing to be highly
centralized and located far apart from the major producing areas. (Kotschi&Adelhelm, 1984)

The inspection, grading and auction sale of coffee is located vary from the supply centres at
only two central places. The central market is entirely auction based which have several
drawbacks. Some of these are warehousing problems, improper sampling and quality
inspection, problems associated with brokers and suppliers, poor processing, high
transportation cost, inadequate coffee market financing and unfair distribution of marketing
margins. Even if there is high demand for Ethiopian coffee in the international market, most
of the suppliers do not want to sell their coffee for export at the auction. Also are not without
problem. In addition to, its lack of capacity to regulate the coffee market, there are several
problems that hamper it from realizing efficient modern marketing system in Ethiopia. So
that this seminar paper reviews the condition of coffee production, coffee supply and
marketing problems in Ethiopia and put things to be needed to minimize this
problem(Kotschi& Adelhelm, 1984 )

1.3. Objectives of the seminar

1.3.1. General objective
 The general objective of this seminar paper was to review the production, supply and
marketing issue of coffee in Ethiopia.
1.3.2. Specific objectives
• To review coffee production, potential, challenges and opportunities in Ethiopia

• To review problems encountered in coffee market in Ethiopia

1.4 Significance of the seminar

The main purpose of this seminar paper was reviewing the status of coffee production,
potential and marketing issue in the country in different ways. First this paper generate basic
information on the production of coffee, supply and marketing issues in Ethiopia, secondly it
provide the problems encountered coffee supply and coffee marketing in Ethiopia to solve
coffee production, supply and marketing problems. Finally the seminar would have been used
as source of information to many research organizations who want to conduct further study in
the country.

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2. LITRATURE REVIEW
2.1 Theoretical Review
2.1.1 Coffee production
Coffee is produced in more than 50 developing countries providing income for
approximately 25 million smallholder producers and employing an estimated 100
million people .World coffee production in 2006/2007 is forecasted and 7416000metric tons
and world coffee export is forecasted at 5568000 metric tons. In 2005/2006, 52 percent of
world production was accounted by the three main coffee producers (Brazil, Colombia and
Vietnam), Brazil currently supplying about a third of total production (ICO 2006).
The top five consumers of coffee are (in order) the USA, Brazil, Germany, Japan and France,
while the Nordic countries have the world’s highest coffee consumption per capita. World
consumption in 2006 is estimated at around 117 million bags. About 65 per cent of
the world supply of coffee is Arabica, while Robusta currently makes up around 35
percent, compared to 25 percent 20 years ago (Scholer 2004).
Ethiopia is probably the oldest exporter of coffee in the world (ITC 2002). In 2005 it was the
sixth largest coffee producer after Brazil, Colombia, Vietnam, Indonesia and India, and the
seventh largest exporter worldwide. It is the largest coffee producer and exporter in Africa.
Exports in 2010 were 174285metric tons, a share of 2.82 percent of world trade in coffee
beans.

2.1.2 Marketing Concepts

Market may be defined as “a particular group of people, an institution, a mechanism for
facilitating exchange Link the market concepts have to the degree of communication among
buyers and sellers and the degree of substitutability among goods. The concept of perfect
market, for example, is an abstraction used by economists as a benchmark for evaluating the
performance of market situations that deviate from its specifications, (Solomon, 2002).

Marketing is the process of planning production, pricing, promotion, and distribution of

ideas, goods, and services to create exchanges that satisfy individual and organizational
goals (AMA (1995), cited in Kolter, 2003).

2.1.3 Coffee marketing

As (Alemseged & Getaneh, 2012/13) coffee season stated that the marketable coffee supply
is forecasted by the Ministry of Trade to reach 343,352 metric ton, of which 288,000 metric

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ton is planned for the export market generating over 1.2 billion US dollars. Of the total
marketable supply, 211,000 metric ton will come from Oromia Regional State, 122,678
metric ton from Southern Nations and Nationalities Peoples Region, 9,297 metric ton from
Gambela Region and 377 metric ton from Benshanigul and Gumuz Region. (Workafes and
Kassu, 2000) sited (Anwar, 2010), the coffee types that are distinguished for such unique
characteristics include Sidamo, Yirgachefe, Hararge, Gimbi and Limu types. However, coffee
produced in some parts of Ethiopia, especially from Harrar, and Yirgachefe, is always sold at
a premium price both at domestic and international coffee markets because of its distinctive
fine quality (Chifra et al., 1998; ITC, 2002) and appropriate processing approach as cited
(Anwar,2010).

2.2 Empirical Review

2.2.1 Coffee production in Ethiopia

A markets emerging, many coffee-dependent developing countries such as Ethiopia are
struggling with production and marketing of their coffee. In the early 2000s, a historic world
market price slump hit millions of coffee farmers hard, especially smallholder producers in
Africa and Latin America (Ponte, 2002). Therefore, the Ethiopian farmers at the time were
take a measure to resist the market price fall by reducing coffee plantation replacing chat
plantation in place of coffee. Settled agriculture began in Ethiopia some 2000 years ago, and
as long as anyone can remember Coffee Arabica has been grown in the wild forests of the
south-western massive highlands in the district of Kaffa. Coffees said to have taken the name
of Kaffa, the region where it first discovered. Export began to Yemen, and was from there
introduced to Indonesia, India, The Netherlands, Colombia and Brazil. Coffee in Ethiopia is
not only an important export good but it is a part of the culture; about 50 % of the produced
coffee is consumed domestically and there is even a cultural ceremony connected to it.
According to (USAID, 2010) Coffee production systems in Ethiopia generally categorized
into four areas i.e. forest coffee, semi - forest coffee, garden coffee, and plantation coffee.
Forest coffee is a wild coffee grown under the shade of natural forest trees and it does not
have a defined owner. Semi-forest coffee farming is a system where farmers thin and select
forest trees to let sufficient sunlight to the coffee trees and to provide adequate shade. A
farmer who prunes and weeds the forest area once a year claims to be the owner of the semi
forest coffee. Garden coffee normally found in the vicinity (near) of a farmer’s residence. It
normally fertilized with organic material and usually inter-cropped with other crops. The

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government or private investors for export purposes plant Plantation coffee. Fertilizers and
herbicides usually used in the coffee plantation farming system.

According to (Taye, 2013) the forest coffee production accounts 8-10%, semi-forest coffee
accounts 30-35%, garden coffee accounts 50-55% and Plantation coffee accounts 5-8% of its
total production respectively. Ethiopia Small-scale holdings equal to or greater than 95% of
total coffee production. According to (Alemseged &Getaneh, 2013) Ethiopia is the world’s
fifth largest coffee producer and Africa’s top producer, with estimated coffee production of
more than 450,000 tons and marketable supply of 334,000 metric tons in farm year 2012/13.
Half of the coffee produced consumed locally and the country leads the African Continent in
domestic consumption. It has been used income generation for that about 20 percent of the
populations, directly or indirectly, depend for a living on coffee production and trading. As
(Anwar, 2010) coffee is the most important crop in the national economy of Ethiopia and the
leading export commodity. Ethiopia is well known not only for being the home of Arabica
coffee, but also for it is very fine quality coffee acclaimed for its aroma and flavor
characteristics. Ethiopia encompasses a potential opportunity to increase coffee production. It
is endowed with suitable elevation, temperature, and soil fertility, indigenous quality planting
materials, and sufficient rainfall in coffee growing belts of the country. Coffee is a shade-
loving tree. Forest coffee yield is low as considered to garden and semi-forest coffee because
resource ownerity belongs to communal and poor management. As explained Ethiopian
coffee annual report 2013, average per hectare yield remains very low at 0.72 MT per
hectare.

2.2.2 Factors Causing Low Coffee Production in Ethiopia

 Khat (Cata edulis) is increasingly competing with coffee for farmlands. Khat is a
crop with relatively high resistance to drought, disease, and pests. It be harvested
three or four times a year and generates better income for farmers than other cash
crops including coffee. Several small-scale farmers in the Hararge region have
switched from coffee production to Khat production. The fact that coffee farms
being changed into Khat farms has offset newly planted coffee farms in other
regions resulting in a very marginal increase in overall size of area planted to
coffee.

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  Ethiopian farm management systems, the agronomic practices are traditional.
Moreover, extension services provided to smallholder farmers are inadequate.
 Government organization does not have a specialized institution that provides
extension support for coffee production. (Alemseged, 2013).

According to Jose D. (2012) the challenges that faced coffee production in Ethiopia are :

 Structural challenges: lack of competitiveness (low yields & productivity); poor

access to market & long supply chain; lack of infrastructure; inadequate access to
service (particularly financial service, risk management etc.); low value addition and
inadequate technology transfer & research (coffee genome, conservation, biodiversity
etc.
 Policy environment challenge: low level of public investment in agriculture;
disengagement of the state in production & marketing activities;
liberalisttio1n/agricultural reforms historically poorly executed; weak institutional
framework.
 Sustainability challenge: adaptation and mitigation to climate change (and other
adverse weather events) conservation of biodiversity to social sustainability.

2.2.3. Coffee Production Potential of Ethiopia

Studies indicate that thanks to the country’s favourable ecological factors such as suitable
altitude, ample rainfall and optimum temperatures, appropriate planting materials, and fertile
soil. Ethiopian coffee is known for its unique characteristics, aroma and flavour. This shows
that there is very high coffee production and export potential in Ethiopia and earn premium
prices. The country has also become of particular interest to the world for its inherent quality
and coffee production potential due to its Arabica coffee (as its origin) (Fernie L. M. (1966)).

Coffee grows in Ethiopia in several places at various altitudes ranging from 550 -2750 meters
above sea level. More than any other country, Ethiopia has a broad genetic diversity among
its coffee varieties. It is the centre of origin and source of genetic diversity of the Arabica
coffee plant for the world. Nine different bean varieties are cultivated in the four growing
areas of Ethiopia, all with distinctive tastes, sizes, shapes and colours (IFOAM, 1998;
Demeter, 1986).

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All the coffee-growing regions have fertile, favourable, loamy soils. For this reason, aroma
and flavour are among the unique characteristics found in Ethiopian coffee. The variability of
coffee Arabica character is very wide in Ethiopia. This made possible coffee planting
materials, which are disease-resistant, high-yielding and top quality. Many agree that, this is a
gift of nature to Ethiopia in particular, and to the world in general which require special care
and proper utilization. Shade, which combines with these ecological factors, is another factor
that plays an important role in coffee production potential of the country (Bayetta B. (2001)).

Another promising potential of Ethiopian coffee is its diversity of variety and quality.
Ethiopia has the most diversified coffee types (Luxner’s report (2001)).

The major five of these are:-

Harare:

Harer is famous for two things: its history as a major holy city in Islam and its naturally
processed coffee. As early as the 16th century, Harare was famous for its coffee, and by the
1800s it had become a major trade centre for coffee and other goods. Like in other areas of
Ethiopia, many residents of the Harare region practice the Ethiopian coffee ceremony and are
entrenched in Ethiopian coffee culture.

Wollega (Nekemt):

Wellega is the highland area in the South-western part of Ethiopia with more rainfall than in
the dry Northern and Eastern areas of Ethiopia. In the province Wellega live the Oromo’s, the
largest tribe of Ethiopia. The majority of the Oromo people are farmers. Income is mainly
gained from agriculture, cattle and coffee.

Originally, Lekempti is a sun-dried natural bean produced in western Ethiopia. The coffee is
known for its large bean size, and the flavour can have a pronounced perfume-like aftertaste.
Coffee processing styles in Wellega have traditionally been sun-dried natural.In the near
future we can expect that the offerings of washed processing styles will be expanded through
the washed coffee processing stations built. Nekempti and Wellega coffee export
designations include: KelemWollega, East Wollega and Gimbi.

Limu:

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Limu coffee grows in the southwest of Ethiopia between 3,600 and 6,200 feet. Limu coffee
(all washed) generally has a milder acidity than Sidama and Yirgacheffe; the flavors
generally characterized by a balanced and clean cup.

Sidamo:

Sidama Coffee Farmers’ Cooperative Union (SCFCU) was founded in 2001 to represent
coffee producing cooperatives located throughout the Sidama Zone of southern Ethiopia.
Originally, the Union consisted of 47 cooperatives societies which represented over 70,000
farmers.

Yirgacheffe:

The best unwashed coffees from Yirgacheffe often retain a high degree of acidity, with softer
fruit flavours and sometimes berry characteristics.

Coffee production is important to the Ethiopian economy with about 15 million people
directly or indirectly deriving their livelihoods from coffee. Coffee is also a major Ethiopian
export commodity generating about 25% of Ethiopia’s total export earnings. Ethiopia is the
largest producer of coffee in Sub-Saharan Africa and is the fifth largest coffee producer in the
world next to Brazil, Vietnam, Colombia, and Indonesia, contributing about 7 to 10% of total
world coffee production. Ethiopia is the birthplace of Arabica coffee and produces mostly
Arabica coffee. Coffee has economic, environmental as well as social significance to the
country.

2.2.4 Coffee Production Opportunity in Ethiopia

 The Ethiopian coffee sector has bright prospects: the country has suitable attitude,
ample rainfall, optimum temperature, appropriate planting materials, low labour cost
and fertile soil. The country can sustainably produce and supply fine specialty coffee,
with potential of producing all coffee type of the various world coffee growing
origins.
 Grounds for optimism: strong potential to increase supply capacity/yields (transfer
of technology) promote value addition differentiation through brand awareness
(e.g.Yirgacheffe, Sidamo etc.)

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  Create an enabling policy environment: support agricultural research and
development improve access price risk management tools sustainable development
promotes a strong institutional framework to better coordinate policy. Macroeconomic
policy exchange rate of Ethiopian birr to US$ monthly averages Ethiopian birr/US
dollar.
 Stimulate local consumption: Ethiopia is not only the birth place, an important
producer, and a leading exporter of Arabica coffee, but also heavy consumer.
Ethiopians are the highest coffee consumer in Africa. Coffee is strongly ingrained in
Ethiopian culture (coffee ceremony) Jose D, (2012)

2.4 Coffee Marketing in Ethiopia

Ethiopia is the oldest exporter of coffee as a commodity .Coffee classification; grading,
licensing and certification were begun after the establishment of the National Coffee Board of
Ethiopia (NCBE) in 1957. The aims of NCBE were to regulate coffee marketing in the
country and improve the quality of Ethiopian coffee for export supply. In 1960, Ethiopia
became a member of the inter-African Coffee Organization, and the International Coffee
Organization and allocated a 2.5% share of the global market. The NCBE had established an
organized central coffee market in Addis Ababa and Dire Dawa with its own operational
rules, regulations, and modalities in which the supply chain consists of producers (small
holders/ cooperatives/ commercial farms), intermediary traders (small and large product
collectors/ cooperatives), suppliers (those who deliver coffee to auction centres) and
exporters and processors (Gebremeskel, D.T.S Jayne et al 1998

2.3 Structure of the coffee markets in Ethiopia

The present domestic coffee marketing structure of Ethiopia comprises individual farmers
and former state coffee farm (now organized under coffee plantation development enterprises
CPDE) on the production side and by service cooperatives, primarily coffee collector and
wholesale coffee suppliers, the coffee purchase and sale enterprise (now called the Ethiopia
coffee export Enterprise- ECEE) and the huller operator on the processing and marketing side
to the most recent world market price for Ethiopian coffee (Mulugeta, 2008).

2.3.1 Domestic Prices of Coffee

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Wholesale prices, in the year 2005-2010 coffee analysis; correspond to two sets of prices,
both related to Jemma coffee. The first set of prices, from 2005 to 2007, corresponds to
independent traders’ prices in Addis-Ababa. These important traders bought coffee from
semi-wholesalers based in producing areas or directly from producers through collectors.
They would then sell the coffee to exporters. The second set of prices, from 2008 to 2012,
corresponds to the auction market price, also in Addis-Ababa. Since 2008, the government
has implemented the ECX system, which has absorbed the biggest share of coffee trade in
Ethiopia.

2.4. Review of Grain Marketing Studies in Ethiopia

To review the marketing margins of farmers and traders in Chilalo, Ada, and Addis Ababa.
Their review revealed that the returns to trade were lower than other businesses due to the
risks of transporting grain over space and storing it over time. inter market grain flow is
coordinated mainly by the brokers in Addis Ababa, who specialize by route and coordinate
grain buying, selling, transporting, and pricing activities. Grain flow between regional
markets without reaching the central market is a new phenomenon of grain marketing in
Ethiopia. The integration of market and price variations was also reviewed by (Mulat etal,
2006).
Brokers facilitate long-distance trade by enabling traders to minimize the risk of commitment
failure in a market with little public information, non-standardized grain, no official
inspection, and limited legal enforcement. Despite the efforts made by the government to
reform the sector, grain marketing systems in Ethiopia are characterized by a lack of
modernization, a limited number of large interregional traders with adequate storage and
working capital, high handling costs, an inadequate market information system, weak
bargaining power, and an underdeveloped processing industrial sector ( Tadele etal , 200).

2.4.1. Spatial Price Relationships

Spatial price relationships generally refer to the factors that cause prices in one area to change
in relation to those in another. This variable may be shifts in demand or supply or changes in
the pattern of trade or transfer costs. It is, however, postulated that under competitive market
structure, spatial price relationships are largely determined by transfer costs consisting of

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transportation, handling, fixed costs, and unmeasured transaction costs (e.g., the costs of time
spent in identifying and negotiating transactions, risks associated with opportunistic behavior
of trading partners, contract monitoring, enforcement, etc.). The principle is that under
competitive market conditions and in the absence of any trade barrier, the price differential
that could prevail between trading areas is equal to transfer costs (Mulugeta,
2008).

The basis for this assumption is that, if regional price differences substantially exceed transfer
costs, buyers would be motivated to buy and transport grain from low price areas to those
with high price and this will eventually cause price in the supplying areas to increase and
those in the importing areas to decrease to a level at which price differences no more exceed
transfer costs (mulugeta 2008). However, the comparison of costs and actual margins is
difficult because of the unmeasured and perhaps “transaction cost” portion of marketing
costs.

2.5 Coffee Export

2.5.1 Trends in World Volume of Coffee Exports and its Price

Coffee export or trade from Ethiopia with the Middle East started five hundred years earlier.
Evidences show that world consumption of coffee is increasing in the past. World projections of
coffee consumptions confirm this fact, too (Harris (1844)).Currently Ethiopia has become first in
Africa and fifth in the world next to Brazil, Viet Nam, Colombia, and Indonesia. Almost all countries
use coffee for domestic consumption or processing it into export product addition to raw exports. In
this case gain Brazil took the lion share or the first place, which is total world domestic use. That is
Brazil exports also the lion share of processed coffee (Harris (1844).

2.6 Problems Encountered in Coffee Market

2.6.1 Domestic Market.
Currently, there are only two auction centres in Ethiopia: one in Addis Ababa and another in
Dire Dawa. In the history of agricultural commodity market in Ethiopia, this Coffee Auction
Centre was the only standard commodity market available. The sellers and their coffee-
loaded trucks come to the auction centres, where samples are taken and visual inspections of
the coffee are made before the auction takes place. After the highest bidder acquires a “lot,”
the truck is driven to the warehouse, where the coffee is unloaded, weighted and paid for

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against the price agreed at the auction. According to the regulations, export is prohibited
unless the coffee grade and cleanliness standards sets are met up on testing by the centre (J.D.
Shafter et al 1998).

Being the only auction centres available in the country, however, it has been many times
criticized that coffee marketing to be highly centralized and located far apart from the major
producing areas. The structure and organization of central coffee markets themselves also are
not without problem. The central market is entirely auction based which have several
drawbacks. In addition to, its lack of capacity to regulate the coffee market, there are several
problems that hamper it from realizing efficient modern marketing system in Ethiopia
including the following (Gebremeskel, D.T.S Jayne et al 1998):

2.6.2. Problems in Ethiopian Coffee Export Market

The level of development of the economy, resource endowments, policies and development
strategies pursued are some of the determining factors of the export structure of a country.
Regarding coffee, even if there is high demand for Ethiopian coffee in the international
market, most of the suppliers do not want to sell their coffee for export at the auction for
reasons (Gebremeskel, D.T.S Jayne etal1998).

Generally, Ethiopia coffee export is constrained by the following major problems:

Unfavourable coffee international prices: Usually better local prices than international prices.

Relatively high transaction cost: high freight rates, high port charges, inefficient operation.
Lack of sufficient, well equipped and spatially distributed coffee export processing and
handling facilities throughout the marketing channel.

Lack of adequate international standard quality supply: Centralized coffee quality inspection
and grading system. Export sales were regulated through a national auction in which mixed
coffees from different locations concentrated into a single lot and prohibited cupping prior to
sales.

Market power of international buyers due to monopoly tendency on the buyer side against
sellers or supplying countries, Lack of export marketing skills and market promotion schemes
(Insufficient promotional supports); inadequate trained manpower in international marketing
intelligence and Lack of understanding of international market demand resulted in
concentration on quantity rather than quality, Inconsistency in coffee quality.

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3. CONCLUSION

This seminar was able to explain the coffee production, supply and marketing issues, and the
actual and potential problems encountered in supply and marketing of Ethiopia’s coffee.
Accordingly, from this review, the following facts have become apparent.
From the literature review, it is observed that Coffee production systems in Ethiopia
generally categorized into four areas i.e. forest coffee, semi - forest coffee, garden coffee, and
plantation coffee. Forest coffee is a wild coffee grown under the shade of natural forest trees
and it does not have a defined owner. Semi-forest coffee farming is a system where farmers
thin and select forest trees to let sufficient sunlight to the coffee trees and to provide adequate
shade. A farmer who prunes and weeds the forest area once a year claims to be the owner of
the semi forest coffee. Garden coffee normally found in the vicinity (near) of a farmer’s
residence. It normally fertilized with organic material and usually inter-cropped with other
crops. The government or private investors for export purposes plant Plantation coffee.
Fertilizers and herbicides usually used in the coffee plantation farming system.

Due to the relatively low price of coffee paid to farmers, many coffee producers have shifted
to high value cash crops such as chat for comparative advantage. Thus if there is no adequate
reward to the coffee farmers, particularly those who supply forest coffee, there is a potential
danger apparent that such farmers may replace this with relatively high value crops. This can
be explained as the problems of maintaining the sustainability of coffee production supply in
Ethiopia. This again is a potential danger to the economy as whole. Ethiopia is one of the top
ten competing suppliers of coffee to the world market. Coffee production supply in the
country is now increasing. Thus, Ethiopia has adequate and potentially expandable coffee
production supply and many actors in the supply chain. In the past Ethiopia has maintained
its past trends; despite the urgent need (given its foreign exchange generation potential),
compared to other countries such as Viet Nam, Ethiopia is very slow in expanding and
diversifying (in quality and form) its coffee exports.

Export supply in Ethiopia has been more affected by world coffee price movements. Quality
of coffee affects exports price rewards. Organic, well-processed and handled coffee gets the

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best quality coffee getting the best price. The coffee auction and inspection system is one of
the oldest and have undergone little improvements, which is very centralized with in adequate
warehouses and capacity, less transparent and efficient operations. Even though, Ethiopia’s
coffee is the best in the world, quality problems due to handling from harvest to the final
point of sale is still unresolved. For this reason the major portion of coffee, which is dry-
processed, falls in the lowest grades

4. REFERENCES

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