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Cablegate: Ethiopian Coffee Farmers Trapped in a Cycle Of

VZCZCXRO6721
RR RUEHROV
DE RUEHDS #2006/01 1780622
ZNR UUUUU ZZH
R 270622Z JUN 07
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 6774
INFO RUCNIAD/IGAD COLLECTIVE
RUEAUSA/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHNSC/NSC WASHDC
RHMFISS/CJTF HOA
RUEAIIA/CIA WASHINGTON DC
RUEKDIA/DIA WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0034

UNCLAS SECTION 01 OF 04 ADDIS ABABA 002006

SIPDIS

SIPDIS

DEPARTMENT FOR AF AND AF/E
STATE PASS TO USTR: W.JACKSON
LONDON, PARIS, ROME FOR AFRICA WATCHER
CJTF-HOA AND USCENTCOM FOR POLAD

E.O. 12958: N/A
TAGS: EAGR ECON BEXP SOCI ET
SUBJECT: ETHIOPIAN COFFEE FARMERS TRAPPED IN A CYCLE OF
POVERTY


ADDIS ABAB 00002006 001.2 OF 004


1. SUMMARY. Ethiopia is often referred to as the birthplace
of coffee, and Ethiopians are proud to say that coffee is
named after the Kaffa region (currently Oromiya Region),
where it was first discovered over 1,000 years ago. Today,
Ethiopia produces 300,000 tons of coffee per year. Further,
approximately 15 million (or about 20 percent) of Ethiopians
are involved in the coffee industry, from farming to
transportation to marketing. It is estimated that 500,000
hectares of land are occupied by coffee farmers. Coffee is
still the leading foreign exchange export item, constituting
about 35 percent of the country's value of merchandise
exports. In 2006, Ethiopia exported 165,000 tons of coffee,
the largest in the export history of Ethiopia. However, the
USD 365 million obtained from the sale of the coffee could
have been greater: the price per ton ranged from USD 2,100 to
3,300, depending on the quality of the coffee. Today, 95
percent of Ethiopian coffee is produced by small, private
farmers, and the remaining five percent is grown by
cooperatives or government-owned farms. As a result, the
majority of Ethiopian coffee farmers own only small plots of
land and cannot afford basic necessities such as food and
clothing for their children. Coffee growers in Ethiopia face
a variety of challenges, from lack of technology to distance
from the market. Initiatives to improve the welfare of
coffee farmers are moving forward. However, with issues vast
and solutions limited, farmers will continue to live in
poverty for the foreseeable future. END SUMMARY.

--------------------------------------------- ---
TRADITIONAL FARMER-TO-MARKET CHAIN OF PRODUCTION
--------------------------------------------- ---

2. Traditionally, coffee farmers sell their coffee to small
traders or collectors (sebsabies) who travel from farm to
farm and usually, in turn, sell the product to suppliers
(akrabis). The supplier then sells the coffee at the daily
coffee auction in Addis Ababa and Dire Dawa to exporters, who
sell the coffee to the international markets. The auction is
the pinnacle of the coffee trade in Ethiopia, as all coffee
is sold through the auction, with the exception of coffee
from the cooperative unions, government-owned farms, and
private farms. These exceptions sell directly to the
international market. With regard to the auction, the
"blocked account payment system" was developed by coffee
exporter Abdullah Bagersh of S.A. Bagersh PLC to ensure that
buyers bidding at the auction have funds to pay the sellers.

3. There are several downsides to the traditional
farmer-collector-supplier-auction-exporter- international
market system, including the fact that the collectors and
suppliers act as middle men, taking their share of the
profit, therefore decreasing the profit of the farmer.
Second, the collector can act as a destructive component of
the process, collecting small volumes of coffee from each
farmer and mixing the various yields. Thus, if one farmer
produces high quality coffee, it is often mixed with coffee
of lower quality, lowering the profit the high quality coffee
farmer receives and lessening the incentive to produce a high
quality product.

------------------------------------------
COFFEE COOPERATIVES AND COOPERATIVE UNIONS
------------------------------------------

4. Following the 2001 crash of coffee prices to 39 cents per
pound, the Ethiopian government started the primary
cooperatives and cooperative unions as an alternative to
collectors. There are six major coffee cooperative unions in
Ethiopia: the Oromia Coffee Farmers Cooperative Union (with
101 primary cooperatives) is the oldest and most well
organized. Other cooperative unions include Sidama (46
primary cooperatives), Yirgacheffe (22 primary cooperatives),
Kaffa (26 primary cooperatives), Benchmaggi (about 20 primary
cooperatives) and Tepi (six primary cooperatives). The
benefit of primary cooperatives and unions is that the coffee
farmer can sell the coffee directly to the primary coffee
cooperative at the current market price. The primary

ADDIS ABAB 00002006 002.2 OF 004


cooperatives are registered and process the coffee they
purchase from farmers before selling the processed coffee,
usually to coffee cooperative unions but also at the auction,
if the primary cooperative opts to work without the
cooperative union network. The cooperative unions then work
directly with buyers in the international market to export
their coffee, bypassing the coffee auctions in Dire Dawa and
Addis Ababa.

5. Typically, the cooperative union retains 30 percent of
revenue from coffee, the primary cooperative keeps 30
percent, and 40 percent is returned to the grower in the form
of a dividend. The Oromia Coffee Farmers Cooperative Union
has had great success; however, the Sidama Union has faced
major difficulties, with a loss of 21 million Ethiopian birr
(approximately USD 2.3 million) in 2006 and its leadership in
jail on charges of embezzlement. Ethiopians in the coffee
industry believe that this incident occurred because of an
uncontrolled system and lack of regulatory structure.

-------------------------
ETHIOPIAN GOVERNMENT ROLE
-------------------------

6. In the last 15 years, the number of exporters has
increased exponentially to no less than 100 exporters today.
Following the end of the Communist Derg regime in 1991,
individuals could obtain export licenses more easily. The
regulatory body of the coffee and tea industry, the Coffee
and Tea Authority (CTA) was disbanded in 2001. The body that
regulates the industry is now a department under the Ministry
of Agriculture. The department handles regulatory issues and
policies, provides training, and attempts to improve quality
to increase private investment and foreign exchange.

7. One way that the government exerts control over the coffee
industry is by controlling dates of harvest. For instance,
the harvest for washed coffee begins in September/October.
When the government declares the season "open," washing
stations can begin buying coffee cherries and bringing to
cherries to auction. By imposing these regulations, the
government attempts to control quality by avoiding trade of
an unripe cherry. This process continues for three to four
months, until the government declares the washed coffee trade
"closed." After one to two weeks, the government reopens
trade for dried cherries, which continues for the rest of the
year. Ethiopian farmers produce about 75 percent natural
(sundried) coffee and about 25 percent wet processed (washed)
coffee.

---------
STARBUCKS
---------

8. Seattle-based coffee company Starbucks and Ethiopian
coffee growers were involved in a dispute over trade names
and trademark issues related to three Ethiopian coffee names:
Harar, Sidamo, and Yirgacheffe. Starbucks had opposed
Ethiopia's efforts to trademark the names, seeking instead to
help Ethiopian officials establish a system for geographic
certification of beans from those areas. International NGOs,
such as Oxfam International, asserted that Starbucks' actions
kept 15 million Ethiopians (who derive their means of
livelihood from the coffee sub-sector) from reaping another
USD 100 million annually. In late June 2007, the GOE and
Starbucks jointly announced a licensing, distribution, and
marketing agreement that recognizes the importance of
integrity of Ethiopia's specialty coffee names but that also
allows Starbucks to market coffee using those names.

9. Several prominent individuals in the Ethiopian coffee
industry, including Abdullah Bagersh of S.A. Bagersh PLC and
Mr. Yanni Georgalis of Moplaco Trading Co. Ltd., commented
that Ethiopia could not blame Starbucks or its own government
for the poverty that prevails among Ethiopian coffee farmers.
Bagersh noted that companies like Starbucks sell a "quality
of life," rather than a cup of coffee. Further, the coffee

ADDIS ABAB 00002006 003.2 OF 004


beverages sold at Starbucks is a different product than the
beans sold via cooperatives or exporters to Starbucks.

--------------------------------
CHALLENGES FACING COFFEE FARMERS
--------------------------------

10. COMMENT AND ANALYSIS. Several factors affect the
profitability of Ethiopia's small-scale coffee farmers:

-- INFLATION: In 1973, coffee cost 37 cents per pound, and
coffee farmers were rich. Now, in 2007, coffee sells at
about 89 cents per pound, only about three times the price 34
years ago, whereas other products are selling for 20 times
the price they sold for in 1973. Coffee has clearly not kept
up with inflation over the years, contributing to the poverty
of coffee farmers. The market is currently monopolized by
five trading houses and seven roasters worldwide.

-- SMALL PLOTS OF LAND: The majority of farmers in Ethiopia
have less then one hectare of land to grow crops. These are
some of the smallest farms in the world. In addition, 95
percent of farmers have less than 10 hectares of land. In
the densely populated areas of Sidama and Yirgacheffe, most
farmers have one hectare of land or less. As long as the
Ethiopian government maintains ownership and control of land,
farmers will continue to struggle to support themselves with
small plots of land. The coffee industry in Ethiopia is a
small but expanding industry, with 85 percent of coffee grown
organically and 15 percent produced using a small amount of
fertilizer.

-- MIDDLE MEN: Some believe that collectors, washing
stations, suppliers, exporters, cooperatives and unions act
as middle men. Because coffee farmers are spread over a
large geographical area, middle men will continue to exist,
as it is a farmer's only means of getting the product to
market. For this reason, the farmers living furthest afield
will sell their coffee for the lowest prices. Others argue
that the aforementioned services are a necessity, given the
long distances and lack of connections between the grower and
coffee markets.

-- CONNECTION TO MARKET: Farmers are generally located in
remote areas, are poverty-stricken, and cannot bring their
coffee crop to market directly. Coffee farmers must
therefore rely on middle men (such as collectors, suppliers,
and cooperatives) to connect the farmer to the marketplace.
Further, in order to sell coffee to the international market,
the grower must obtain certifications accrediting his crop.

-- COOPERATIVES AND COOPERATIVE UNIONS: Primary cooperatives
and cooperative unions do not have adequate cash reserves and
often run out of money to buy coffee offered from farmers at
the peak of the harvest season. Since 2003, no price
controls have existed. Therefore, the unions can sell coffee
to buyers at any price, and no checks and balances exist to
ensure that the union is selling at the best price possible
for the benefit of the farmer. Also, the cooperative unions
can drive the coffee prices down at the auction, if they are
selling to the international market at a low price. Private
exporters believe that to have a truly free market, the
cooperative unions must compete in the auctions.

-- LACK OF TECHNOLOGY AND KNOWLEDGE ABOUT COFFEE FARMING BEST
PRACTICES: In Ethiopia, the yield of coffee per hectare is
the lowest in the world. Because farms are small, the
farmers do not know how to manage their input. The do not
weed, fertilize, or pick their crops at appropriate times.
If weeded one to two times per month, both quality and
quantity of coffee produced is increased. On average, one
hectare of land yields one ton of coffee. However, small
farmers in Ethiopia only produce about a half ton of coffee
per hectare.

-------------------------------------------
MEANS OF IMPROVING FARMERS' QUALITY OF LIFE

ADDIS ABAB 00002006 004.2 OF 004


-------------------------------------------

11. Means of improving coffee farmers' quality of life
include:

-- COOPERATIVES AND COOPERATIVE UNIONS: Becoming a part of
cooperative unions could help individual coffee farmers
improve their lives. Cooperative unions not only pay growers
the market price, but also provide the grower with a dividend
following the sale of the coffee to the international market.
In addition, the cooperatives and cooperative unions often
invest in the farming communities, building schools or
improving infrastructure. Problems still exist in that the
cooperatives and cooperative unions need better organization,
training, and checks and balances to ensure that upper
management of cooperatives act in the best interest of the
growers.

-- NGOS/TRAINING/EQUIPMENT: NGOS, to include USAID working
with FINTRAC, continue to work with farmers by providing
training to improve quality and ultimately to increase the
farmer's yield. NGO assistance clearly aids the farmers;
however, some in the coffee industry argue that growers would
benefit more from the provision of equipment, such as washing
tables, to improve their yield.

-- FINANCIAL SERVICES: Rural coffee farmers often have
between 8-10 children whom they have to school and feed.
With the coffee crop providing little revenue, the farmers
turn to collectors who offer loans, usually with 100 percent
interest over one year. Farmers cannot repay the loan with
this high interest rate, and the collector seizes the farm.
Thus, provision of financial services (such as opening rural
banks or microfinance institutions that would offer loans at
fair rates), or providing other forms of credit for rural
populations, would improve the quality of life of farmers.

-- PRODUCTION DECREASE: Some believe that the situation with
impoverished coffee farmers in Ethiopia is irreversible. One
of the leading coffee exporters, Mr. Yanni Georgalis of
Moplaco Trading Co. Ltd., believes in the value of supply and
demand, advocating that farmers decrease their production of
coffee to increase demand and thus, prices.

12. CONCLUSION. The coffee growers of Ethiopia continue to
face multiple challenges and struggle to feed their families.
Circumstances have improved with the assistance of NGOs;
however, this aid only touches a small amount of the 15
million Ethiopians involved in the coffee industry.
Improving rural infrastructure, provision of rural financial
services such as microfinance mechanisms, and empowering
farmers by training them in best practices (agricultural or
commercial), would undoubtedly improve their livelihoods.
There is currently no single entity, to include Starbucks,
that is capable of significantly improving the lives of
coffee farmers. As noted above, relieving the Ethiopian
coffee farmers of their plight would require significant
changes to current methods of production and marketing,
including land reform and improving market access. END
COMMENT AND ANALYSIS.
YAMAMOTO

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