SCAA Industry Brief: Ethiopian Commodity Exchange

Introduction

SCAA was invited by the Ethiopian Commodity Exchange (ECX) to attend a working session to enumerate and discuss proposed strategies for specialty coffee trading through the ECX. The meeting was held in Addis Ababa on October 22 and 23 and included representatives from SCAA, CQI, ECX, the Ethiopian coffee trade, and other stakeholders representing a broad cross section of the international specialty coffee trade. This is a brief to cover the main outcomes for this meeting as well as some proposed work that is yet to be finished.
Background

Approximately one year ago, ECX was established with the stated purpose of improving transparency and efficiency in Ethiopian commodity markets. As a commodity-focused system, the ECX presents unique opportunities and challenges for the specialty coffee industry. The SCAA began interacting directly with ECX last April to address the needs of our sector with the goal of including Specialty Coffee standards and practices into the ECX and the Ethiopian Coffee market in general. Specifically, SCAA aimed to increase the integrity of quality evaluation in Ethiopia and introduce traceability into the ECX system. Our purpose is twofold: to encourage the production and availability of high quality specialty coffee, and to work to ensure that the maximum possible value for this coffee gets back to the coffee producer.
One current area of debate around the introduction of the ECX was the concurrent passing and subsequent enforcement of an Ethiopian law effectively banning vertical integration between the coffee collector (akrabi) and exporter. Under this law, direct exports by farmers and farmer groups are allowable. This law is clear and will not change in the near term. This is not an ECX regulation, and it must work within the law of the land. While the SCAA has concerns about the efficacy of this law since we believe that both quality and value can be created and preserved with akrabi/exporter vertical integration, we recognize that the changing of that law is not within the scope of SCAA/ECX negotiations. The ECX/SCAA working group therefore sought to find ways to work within the law to maximize quality discovery and traceability.
Current System

The current ECX system collects coffee in its regional receiving warehouses for inclusion into their export system. Coffee is assigned one of 10 regional indications for washed coffee or 11 for natural, and given a grade of 1-9, or UG (under grade) based on physical grading and basic cup evaluation. This creates 110 possible categories for unwashed coffees or 100 categories of washed coffee. Categorized coffee is then traded via the ECX’s electronic coffee exchange. The infrastructure to achieve the transportation and warehousing of this coffee exists and is developing.
There are a number of advantages and challenges to this system; and we identified quality analysis and traceability as the two primary areas of focus.

Training and Concordance

In April 2009, ECX agreed to a conceptual outline of incorporating SCAA green grading standards and cupping protocols into their quality evaluation system. Since then, CQI has engaged in a number of successful interventions to train and integrate these protocols. As a result of their work, there are 27 Certified Q graders working within the ECX system and a plan to have 72 Certified Q Graders within ECX by the end of 2009. In addition, a concordance project established the compatibility of the ECX and SCAA quality standards and grading practices. As a result, all stakeholders have a high degree of confidence in the abilities of these cuppers to identify specialty coffees within this system, creating the framework for a more specific proposal around quality identification and separation (outlined below).
The Proposals

In brief, the specific proposals and work going forward are the following:
Specialty Grading in the ECX: Unwashed and washed coffees that receive an initial grade of 1, 2, or 3 within the initial basic ECX grading will go through a secondary, full SCAA cupping and grading process by a panel of three (3) Certified Q Graders. Coffees that receive a score of 85 and above will receive a “Specialty Grade 1” classification and coffees that receive a score of 80 and above will receive a “Specialty Grade 2” classification. These classes will be traded in the ECX under those grades. This adds an additional level of quality assurance for these two grades of coffee and ensures specialty coffees are identified and separated from the commercial grade coffees. These grade classifications will accompany the regional and origin classifications (geographic indications).
Modification of Geographic Indications for Specialty Coffees: There are currently 15 washed and 12 unwashed region and origin classifications, creating a total of 168 standard ECX classifications and now 54 specialty classifications for an overall total of 222. There is a proposal for an enhanced level of geographic specificity, increasing the number of classifications for Sidama from 3 to 5 and from 2 to 4 for Limmu as well as investigations into the possibility of further classifications based on district and cup profile assessment.
Direct Specialty Trade (DST) Platform: The ECX will also establish a 2nd window within its system, to allow for traceability and direct exchange. Within this system, any farmer or cooperative may submit their coffee to the ECX for quality evaluation and grading, and the coffee will be available for sampling to registered buyers. The ECX will then make available a venue for price discovery via an auction. ECX only facilitates the transaction, and is not a party to the transaction. A resulting FOB contract will be made directly between the overseas buyer and the farmer or farmer group, with the inclusion of a farmer-elected Services Provider, who may provide services to the farmer such as milling and exportation. The ECX will assist in the transaction by providing guidance on contracting and fee structure.
Notes: According to law, buyers in the DST may not export the coffee, so registered buyers must be foreign entities (for example roasters) or their agents. The DST is a completely voluntary trading platform provided as a service to the coffee community, farmers and farmer groups and foreign buyers may still enter into contracts independent of and apart from the DST. Therefore, the DST serves as a meeting place and price discovery venue for farmers and buyers.
There is another principle that was extensively discussed, and this is the idea of a “Service Provider”. The idea is that farmers or farmer groups may wish to contract the services of a provider of services who performs specific roles such as exportation assistance, sales agreement negotiation, processing, LC opening, etc. etc. Service providers would be able to assist farmers and farmer groups and buyers, and facilitate direct coffee sales either through the DST platform or outside the system. ECX has agreed to act as an advisor in developing standards for this role in the Ethiopian context. This role is key to the DST platform’s success, and is integral to its design.
Timeline

We do not yet have a timetable for all of these proposals and ECX is careful to emphasize these plans are in proposal stage and may be modified after further evaluation and application, but they have committed to an aggressive timeline to integrate the ECX Specialty Grades for the coming season. Geographic Indications Modifications and the introduction of the DST platform could occur as early as December.
Summary

This is the first market mechanism to fully employ SCAA standards for coffees upon arrival and represents a significant change in how coffees get to market. This system has the potential to be a model for improved identification of specialty coffees at source. We regard these proposals as an important step forward toward accomplishing our original objectives and while they may not address the entirety of the industry’s needs, we have achieved a level of collaboration with ECX that should allow for further advancement of our interests.