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AFRICAN COFFEE SECTORaddressing national investment agendas on a continental scale

Ethiopia Case Study

1

SEPTEMBER 16AFRICAN COFFEE SECTOR: ADDRESSING NATIONAL INVESTMENT AGENDAS ON A CONTINENTAL SCALE

Sector study conducted by Agri-Logic and Valued Chain by assignment of the Global Coffee PlatformContact: [email protected]

mailto:[email protected]

CHALLENGE:

• Currently Africa only supplies 10% of global

coffee volumes, while coffee was first

discovered in Ethiopia.

• In most African origins, yields are low, quality

is inconsistent, and supply chains are

inefficient.

OPPORTUNITIES:

• Buyers value certain coffees from Africa for

their quality, and there is a potential to

increase volumes to meet growing demand.

• Coffee may contribute to sustainable

development in Africa’s rural areas.

2

INTRODUCING NATIONAL COFFEE INVESTMENT AGENDAS FOR AFRICA

INVESTMENT AGENDAS:

• Greater understanding of challenges and

opportunities in mainstreaming sustainable

coffee production.

• Insight into required funding, return on

investment, and possible public and private

contributions.

• Insight into impact of investment based on

quantitative research and stakeholder

consultation. Benchmarks and analysis are

based on 2015 data.

• Full reports available on the GCP website for

Angola, Burundi, Cameroon, Côte d’Ivoire,

Ethiopia, Kenya, Rwanda, Tanzania and

Uganda.


• Executive summary

• Positioning of coffee from origin

• Production areas in origin

• Supply & demand trend and

• Market interest in sustainability

• Value chain structure

• Farm level production systems

• Supply chain efficiency

• Differential competitiveness

3

CONTENT OF THIS REPORT

• Cost of production

• Current farmer business case

• Production and price effects of investments

• Impact, cost and return per intervention

• Effect on farmer business case

• National sector business case

• Proposed public and private contributions

• Conclusion

INVESTMENT OPPORTUNITIES ANALYSIS

• The following slides describe the required investment (cost) and expected returns (revenue), as well

as the expected impact on price, volume, quality and livelihoods.

• Investments are analysed on a sector level: total increased revenue in relation to total additional cost.

On a sector level, all of these opportunities present a positive return on investment.

• Cost and benefits may not be attributed to the same actor in the value chain (e.g. government and

buyers pay for farmer training, while the farmer gains most of the additional revenue from yield

increase).

• Also, specific interventions may not lead to additional value creation, but to a redistribution of value

within the chain (e.g. farmer grouping can lead to higher farm gate price, while export price and GDP

contribution is not affected).

• Investment contributions are indicative based on stakeholder input. Investments and conditions to be

negotiated within national public private platforms taking into account amongst others international

competitiveness, governance, transparency and accountability assurance.

4


INVESTMENT AGENDA FOR ETHIOPIAN COFFEE SECTOR – EXECUTIVE SUMMARY• Ethiopia is recognized as the birthplace of coffee, and represents 4.3% of global coffee production.

Arabica quality is valued and production costs are competitive.

• The production is largely characterised by small farms of on average 0.67 ha, and many below 0.5

ha. With low to moderate yields, incomes are low for an estimated 1.2 million coffee farmers. The

small farm sizes make it nearly impossible for a coffee farming family to surpass the

international poverty line from coffee alone. Farmers have significant other income sources in

addition to coffee.

• About half of exports are to markets with high and medium interest in sustainability. Coffee sold

through the Ethiopia Commodity Exchange (ECX) is currently not traceable to the farmer and as

such does not comply with certification requirements. ECX has piloted bag tagging, and conclusions

are pending.

• Even though an increase in farm gate prices as share of the FOB price has been reported in recent

years, farmers currently receive an approximate 61% of FOB price, indicating supply chain

inefficiencies.

5


• There is significant potential to increase the coffee sector value in Ethiopia through selective investment

in farmer training, farm rejuvenation, use of inputs, certification and farmer group development. Over

a period of 10 years a cumulative investment of ~564 million USD can lift farmers above the

poverty line and double the coffee GDP for the country.

• Several actors show a willingness to invest, with high private sector sustainability interest in Europe

and North America, Ethiopian government investments, and much interest from the donor

community.

6


INVESTMENT AGENDA FOR ETHIOPIAN COFFEE SECTOR – EXECUTIVE SUMMARY

ETHIOPIAFocus on yields, resilience and supply chain efficiency

7

SEPTEMBER 16AFRICAN COFFEE SECTOR: addressing national investment agendas on a continental scale

POSITIONING OF ETHIOPIA

Item Value

Total volume (3 year average) 386,400 Mt

% of global production 4.33%

% Arabica – Robusta 100% Arabica

% natural – washed 70% - 30%

Compound Annual Growth Rate of coffee production (2000-2015)

3.9%

Main export markets Germany, Saudi Arabia, United States, Japan

Market segments Arabica coffee valued for its quality

GDP 145.4 billion USD

GDP – agriculture 21.4 billion USD

GDP – coffee (based on current prices) 1.1 billion USD

8


9

ETHIOPIA COFFEE PRODUCTION AREAS BY ZONE, TYPE AND SUPPLY LEVELS

• All coffee is Arabica, but different zones each bring

their own distinctive cup profiles.

• About 30% is washed coffee.

• Coffees in Ethiopia are given a geographical

designation and a grade. For example, coffee can

be designated Jimma (region) A (subregion)

grade 4.

• Coffee graded 1 or 2 is considered “specialty.”

Coffee graded 3 through 9 is graded as

“commercial.” Grades depend on visual

inspection for defects and on cup quality.

• Ethiopia filed trademark registration globally for a

number of geographical designations (including

Harar, Sidamo and Yirgacheffe), and signed

licenses with several large buyers.


Sources: USAID, IFPRI, interviews, TNS, AL and VC analysis

10

STABILIZING VOLUMES FOR BOTH EXPORT AND DOMESTIC MARKET

• Ethiopia has seen consistently growing volumes over time. Volume growth is a policy objective for the government, both by increasing yields and preparing new land for coffee. In the federal government Growth and Transformation Plan II (GTP II), coffee production is targeted at 1 million metric tons in 2020. Forecasts by different actors vary.

• Even though further volume growth was targeted and expected by many, volumes have stabilized since 2012/13. Where some volume growth has been realized in certain areas, other regions have struggled with weather conditions and pests and diseases.

• Exports are just above domestic consumption. Ethiopian coffee is in constant demand, and a strong local coffee culture contributes to the sector.


Sources: USDA, GTP-II, interviews, AL and VC analysis

0

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Vo

lum

e (

'00

0 M

t)

Production, exports and consumption (Mt)

Production Exports Domestic consumption

11

AFRICA LAGGING IN SHARE OF CERTIFIED SUSTAINABLE SUPPLY


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

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Vo

lum

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'00

0 b

ag

s o

f 6

0k

g)

Year

Global supply (‘000 bags)

Volume certified Volume conventional

Total volume

Sources: USDA, CTA, AL and VC analysis

0% 20% 40% 60% 80%

Africa

Latin america

Asia

Share of total supply and certified supply

Share of certified and verified supply Share of global supply

HIGH DEMAND BUT LOW AVAILABILITY OF CERTIFIED COFFEE

• Certified exports are estimated to be below average for Africa and globally.

• There is demand for certified Ethiopian coffee, but traceability and credibility have been a challenge.

• Only cooperatives and estates are allowed to sell traceable coffee without ECX involvement, limiting the use of certification to about 10% of supply. ECX has since last year piloted bag tagging to ensure traceability through the auction, but results have not yet been made available. Industry responses are mixed.

• The only standard that makes available detailed supply and demand data is UTZ. In 2015 26% of UTZ certified supply from Ethiopia was sold as such. If we apply that ratio to total estimated certified supply, that would result in around 2.6% of supply sold as certified.

• Premiums are paid for certified coffee, about one third of the value reaches the farmer, which is a ratio similar to other origins.

12


Sources: IFPRI, interviews, AL and VC analysis

13

ABOUT HALF OF EXPORTS TO MARKETS WITH

HIGH AND MEDIUM SUSTAINABILITY INTEREST

• About half of Ethiopian exports (49%) are to tier 1 and 2 markets, assuming no re-exports from first destination.

• Exports represent just above half of the Ethiopian coffee volume, but the domestic market is not specifically concerned with sustainability. Market interest for sustainability would therefore represent about 25% of production volume.

• Reinforcing the certification interest of specific geographies, the coffee quality also enables certification: with higher price and margins it is easier to absorb certification cost.

• Coffee sold through ECX is currently not traceable to the farmer and as such does not comply with certification requirements. Because of this, the demand for certified coffee from Ethiopia is currently not met.


Sources: OEC, VC and AL analysis

36%

13%

51%

Ethiopia exports (% of total) and market interest to invest in

sustainability in destinations

Export to countries with high interest/investment insustainability (USA, UK, Switzerland, Germany,Netherlands)Export to countries with medium interest/investment insustainability (France, Belgium, Italy, Spain, Scandinavia)

Export to countries with low/no interest/investment insustainability (other markets)

14

90% OF COFFEE SOLD THROUGH ECX, COLLECTORS ACTIVE AT FARM GATE

• The Ethiopia Commodity Exchange was introduced in

2008. All export grades are traded through ECX. All

lower grades can be traded at the domestic market.

• Market price for domestic and export are largely

aligned. Formally, export grades are not allowed to be

sold locally, but some smuggling is reported.

• Plantations and cooperatives are allowed to export

directly, but plantations often do not have the

capacity to do so and choose to sell through ECX.

Cooperatives sell mostly sustainably certified coffee to

the international market, often via unions.

• Farm gate price has been reported to have improved

slightly due to better access to price information.


Sources: USAID, Grantham, ECX, interviews, AL and VC analysis

0.0 0.2 0.4 0.6 0.8 1.0

0

20

40

60

80

100

120

140

160

180

Pri

ce (

US

Dct

/lb

)

Share of supply in value chain segment

Value chain structure Ethiopia Arabica 2015

Farm gate price Auction price Market price

Farmers –Stations / Akrabies -

Domestic market

Farmers –Stations / Akrabies -

Auction –Export market

Farm

ers

-C

oo

pe

rativ

es

-U

nio

ns

-Ex

po

rt

Pla

nta

tion

s -

Au

ctio

n -

Exp

ort

ma

rke

t

0% 20% 40% 60% 80% 100%

Nr of farmers

Acreage (ha)

Nr of farmers and acreage distribution

Small farmers( <0.5 ha) Medium farmers (>0.5<3 ha)

Large farmers (>3<10 ha) Very large farmers (>10 ha)

Plantations

15

SECTOR CONSISTS PREDOMINANTLY OF SMALL-

SIZED FARMS

• Average coffee farm size is estimated at 0.67 ha and the number of smallholders at 1.2 million.

• Many studies have been done, but findings vary widely between regions and between survey samples. Average acreage findings range from 0.5 ha to 0.9 ha. There is consensus that farms are very small.

• About 200 plantations produce ~7% of total coffee volume.

• About 10% of smallholders are organized in cooperatives and unions. Even though cooperatives are widely available even in remote villages, and farmer organization is promoted by government, many farmer choose to sell through akrabies and not cooperatives. Report issues include timing of payment and services offered.


Sources: USAID, PSD, IFRPI, FAO, interviews, AL and VC analysis

16

CURRENT PRODUCTIVITY LEVELS ARE LOW- TO

MID-LEVEL AND COULD GROW FURTHER

• Many studies have been done, but findings vary

widely between regions and between survey

samples. Average yield findings range from 260

kg/ha to 700 kg/ha.

• We follow the ESSP producer survey that puts

yields at 378 kg/ha (GCE).

• This puts yields behind major Arabica producers

such as Brazil and Colombia.

• Even though the ESSP producer survey conducted

in 2014 shows significant improvement in coffee

management practices, average yield per ha has

remained stagnant over time. Yields increased

slightly in Sidama, Yirgachefe, and Jimma, but

they decreased dramatically in Harar and

Nekemte.


Sources: IFPRI, USDA, FAO, interviews, AL and VC analysis

0.00 0.50 1.00 1.50 2.00

Ethiopia

Brazil

Colombia

India

Average productivity (Mt/ha)

Arabica productivity (Mt/ha)

17

INEFFICIENT SUPPLY CHAIN ALTHOUGH FARM GATE SHARE OF PRICE IMPROVES

• Farm gate price as % of FOB price is low at 61%, indicating an inefficient supply chain.

• Farm gate prices are approximately 10% higher for coffee sold through cooperatives and exported through unions.

• Small farms, large distances and imperfect infrastructure commonly explain low farm gate prices. Following variation in these factors, farm gate prices also vary.

• Recent research by the Grantham Research Institute shows however that price dispersion has decreased in areas where ECX has opened warehouses, mainly following increased price transparency. This is confirmed by ESSP research indicating farmers have better access to price information. If the trend continues, farm gate prices are expected to increase.

• Export taxes have been waived since 2002.


Sources: Interviews, TNS, USAID, ESSP, Grantham, AL and VC analysis

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ethiopia Brazil Colombia India

Value distribution Arabica (% of FOB price)

Farm gate Supply chain costs Export tax/Cess

18

ETHIOPIAN COFFEE TRADED AT PREMIUM,

VALUED YET COMPETITIVE

• Differentials have varied over time. Since 2000,

Ethiopian coffee has consistently been traded at a

premium, currently around 5 USDct/lb.

• Ethiopian coffee is in high demand for its cup

profile and reputation.

• Differentials vary for washed/unwashed coffee

and based on production region.

• Ethiopian coffee is valued for its quality over large

volume producer Brazil, and is competitive in its

price compared to other major Arabica origins.


Sources: USDA, IFPRI, interviews, AL and VC analysis

Ethiopia

Colombia

India

Brazil

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7

-20

-15

-10

-5

0

5

10

15

20

Dif

fere

nti

al (

US

Dct

/lb

)

Share of global supply

Arabica differentials (USDct/lb over ICE) and share of supply (%)

19

COST OF PRODUCTION IS LOW, WHILE COST IN BRAZIL IS INCREASING


• Ethiopia production costs are lower than Brazil, and are increasing at a lower pace. This is an opportunity for Ethiopia

to gain market share. Historically, low-cost producers have gained dominance (e.g. Brazil and Vietnam).

• Supply chain trade and processing cost are however high, and most margins appear to be absorbed in the supply

chain and do not benefit farmers.

Sources: Interviews, USAID, TNS, AL and VC analysis

0

50

100

150

2008 2015 2008 2015

Ethiopia Brazil

Va

lue

(U

SD

ct/l

b)

Arabica cost breakdown (USDct/lb)

Arabica trade export cost

Arabica export processing cost

Arabica farm processing cost

Arabica labor cost

Arabica planting cost

Arabica fertiliser cost

0

20

40

60

80

100

120

140

160

2008 2009 2010 2011 2012 2013 2014 2015

Va

lue

(U

SD

ct/l

b)

Arabica cost of production (USDct/lb, ex household labour)

Ethiopia Brazil

2% 4%

93%

Farmers' access to credit

Share of farmers bank loan

Share of farmers cooperative loan

No access to credit

20

LITTLE ACCESS TO CREDIT, SEVERAL INITIATIVES FOR COOPERATIVES

• Very few smallholder farmers have access to credit. Bank loans are mostly available via MFIs, whereas lending through cooperatives has grown slightly via IFC and other investment and support programmes.

• Most smallholders are unorganized and do not meet investor criteria. Only about 10% of smallholders is a member of a cooperative.

• Interest rates are reasonable at around 11% annually.

• Loans are short term, mainly to finance labour and inputs. The main investment need for farmers would be to finance replanting cost, however no multi-year financial products are available.

• Recent research shows that better access to finance does lead to adoption of new technologies, more for cooperative finance than for MFIs.


Sources: World Bank, AEMFI, IFC, GIZ, IFPRI, AL and VC analysis

21

COFFEE FARMERS HAVE SIGNIFICANT OTHER INCOME SOURCES

• Based on coffee alone, farming households of on average 6 members are far below the international poverty line.

• Small farms and low yield bring a revenue of 452 USD annually, with cost of production high in relation to revenue.

• Recent ESSP research shows that coffee only represents around 40% of total household revenue, with significant other income sources on and off farm. Common other sources of income include grains, maize and qat, as well as off farm labour.


Sources: Interviews, ESSP, IFPRI, AL and VC analysis

1591

452292

730

1,022

0

200

400

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800

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1,200

1,400

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200

400

600

800

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1,200

Po

ve

rty

lin

e (

US

D/h

ou

seh

old

)

US

D/y

ea

r

Average farmer business case for Arabica in comparison to poverty

line

Cost Value Poverty line (USD1.9/day)

• Modelling investment opportunities:

• Farmer training

• Rejuvenation/replanting

• Increasing input application

• Certification

• Farmer organisation building

• Access to credit for farmer organisations

• A combination of training, rejuvenation and inputs application could double national production volumes.

• The respective investments are mutually reinforcing, implementing one without doing the others will result in lower return on investment.

22

MODELLING INVESTMENT OPPORTUNITIES – PRODUCTION EFFECTS


0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

2017 2019 2021 2023 2025

Vo

lum

e (

Mt)

Production effect of investment opportunities

Local processing capacity - net production impact

Increase inputs application - net production impact

Rejuvenation/replanting - net production impact

Farmer training - net production impact

Base level

• Assuming weighed average base price stable over time.

• Increasing membership and capture rate of farmer organizations, combined with certification, has an effect on farm gate price.

• Given the large market interest in certification, a similar effect can be seen on export price.

• It is however uncertain to what extent these price effects are sustainable, with current trend of declining certification premiums.

23

MODELLING INVESTMENT OPPORTUNITIES – PRICE EFFECTS


2,800

3,000

3,200

2017 2019 2021 2023 2025

Va

lue

(U

SD

/Mt)

Export price effect of investment opportunities

Certification/assurance - net price impact

Local processing capacity - net price impact

Base level

1,750

1,800

1,850

2017 2019 2021 2023 2025

Va

lue

(U

SD

/Mt)

Farm gate price effect of investment opportunities

Access to credit - farm gate price impact

Farmer organisation building - farm gate price impact

Certification/assurance - farm gate price impact

Local processing capacity - farm gate price impact

Base level

24

LARGE SCALE FARMER TRAINING CAN GROW CURRENT SUPPLY


0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2017 2019 2021 2023 2025

Nu

mb

er

of

farm

ers

Number of farmers enrolled in training program

Annual nr farmers in training programme

Cumulative nr farmers trained -

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2017 2019 2021 2023 2025

Ad

dit

ion

al s

up

ply

(M

t)

Additional supply from farmer training programme (Mt)

• For training on Good Agricultural Practices to be effective it needs to be participatory, intensive and should run for at least 4 years. This is common practice for experienced implementers in Ethiopia and elsewhere.

• Current training programs report cost between $40 and $100 per farmer per year.

• Large scale programs from experienced implementers working through cooperatives have reported an even lower investment need.

• Farmer training is a requirement for other impact investments including rejuvenation and increasing inputs use.

25

TRAINING INVESTMENT HAS A POSITIVE BUSINESS CASE

Indicator Value (10 years)

Cumulative nr of farmers reached 960,000

Additional volume coffee per annum in steady state (Mt)

83,470

Total investment $ 192,000,000

Total return $ 2,089,521,870

NPV (10%) $ 1,061,880,867

NPV (20%) $ 657,812,317

Investment per farmer $ 200


26

REJUVENATION INVESTMENT TAKES A WHILE TO SHOW EFFECTS...


-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2017 2019 2021 2023 2025

Ad

dit

ion

al s

up

ply

(M

t)

Additional supply from rejuvenation (Mt)

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2017 2019 2021 2023 2025

Vla

ue

(h

a)

Acreage rejuvenated (ha)

• Replanting will bring yield increase, and increased resilience against climate change and pests and diseases.

• Low cost of labour and high local availability of and capacity to produce seedlings makes the investment per ha very low compared to other origins. Family labour will be sufficient to rejuvenate small farms.

• Currently, government also distributes seedlings at very low cost. This may be partly subsidized. Government budget to subsidize these seedlings is not known and not included in this budget. Wild varieties are also use to produce seedlings.

• With these low rejuvenation cost and its significant effect on yields the return on investment is very good.

• In addition, replanting protects from further volume losses.

27

...BUT RETURN ON INVESTMENT IS GOOD, AND PREVENTS YIELD LOSS



Cumulative acreage replanted (ha)

128,640


60,650


Total return $ 1,005,724,240

NPV (10%) $ 487,349,989

NPV (20%) $ 259,516,965

Investment per ha $ 60

28

INPUT SUPPLY INVESTMENT CAN HAVE A WIDE REACH


-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2017 2019 2021 2023 2025

vla

ue

(h

a)

Acreage with enhanced input use (ha)

-

50,000

100,000

150,000

200,000

250,000

300,000

2017 2019 2021 2023 2025

Ad

dit

ion

al s

up

ply

(M

t)

Additional supply from input use (Mt)

• Increasing inputs use has a positive business case and will increase farmer revenues significantly.

• Promotion of inputs use is a policy decision that should also consider organic premiums and traceability at the ECX.

• Small-scale farmers tend to be risk averse as one failed crop is enough to undermine their living conditions.

• Only farmers that are part of the training programme should make use of the additional input supply investment to ensure optimal use.

29

INPUT USE CAN INCREASE VOLUMES, BUT FARMER UNLIKELY TO BEAR FULL COST



Acreage using additional inputs in steady state (ha)

385,920


246,454


Total return $ 5,679,596,381

NPV (10%) $ 2,945,430,158

NPV (20%) $ 1,778,509,751

Investment per ha per year $ 100

0

50,000

100,000

Certified volume produced and sold

Annual volume certified production

Annual volume certified to market

30

CERTIFICATION CAN BE USED TO INVOLVE PRIVATE SECTOR


• Given high market interest in certification for

Ethiopia, we assume a higher marketability rate

and higher premiums compared to other origins.

• Certification can be implemented through farmer

cooperatives as is the current requirement for

traceability in Ethiopia.

• Using certification is expected to trigger private

sector investments in training, rejuvenation and

inputs. This benefits the farmer with yield increase

and a small price premium.

• It is uncertain to what extent these price effects are

sustainable, with current trend of declining

certification premiums.


Volume of certified coffee produced per annum in steady state (Mt)

77,700

Volume of certified coffee marketed per annum in steady state (Mt)

31,080

Additional value of certification premiums per annum in steady state

$ 465,969


Total return $ 11,649,228

NPV (10%) $ 1,630,432

NPV (20%) $ 307,006

2026

31

EXISTING COOPERATIVES CAN BE

STRENGTHENED AND GROWN


-

100,000

200,000

300,000

400,000

500,000

600,000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Nu

mb

er

of

farm

ers

in p

rog

ram

Nu

mb

er

of

farm

ers

org

an

ize

d

Number of farmers in farmer organisations

Cumulative nr of farmers in organisation buildingprogramme

Baseline membership base

Annual nr of farmers in organisation building programme

0%

10%

20%

30%

40%

50%

60%

0

50,000

100,000

150,000

200,000

250,000

Fa

rme

rs'

sup

ply

ra

te (

%)

Vo

lum

e (

Mt)

Volume marketed through farmer organisations (Mt) and farmers'

supply rate (%)

Annual volume marketed through farmer organisations

Baseline volume farmer organisations

Share of farmers' supply exported through farmerorganisations

2026

32

GROUPING NOT COMMERCIALLY VIABLE, BUT

WITH SIGNIFICANT IMPACT ON FARMERS



Number of farmers in improved farmer organizations in steady state

480,000

Volume of coffee through farmer organizations in steady state (Mt)

194,665

Additional farm gate value per annum in steady state

$ 3,116,296


Total value redistribution $ 18,394,132

NPV (10%) $ -17,105,872

NPV (20%) $ -14,370,612

• Cooperatives are encouraged by government and exist widely, although many farmers choose not be a member and/or not to sell through the cooperative. Common issues include payment, management and lack of service.

• Cooperatives currently obtain 25-30% higher export prices, but pay a farm gate price only 10% above average.

• Current cooperatives export about 10% of volume, and likely have a larger share of farmers as a membership base. A capacity building programme is 5 years, after which cooperatives are expected to function well for an increased membership base and with an increased capture rate. Grouping farmers in cooperatives enables certification and training.

• For farmers, the effects can be significant. Donors that do not seek a commercial return on their investment are required for this type of intervention.

33

ACCESS TO TRADE FINANCE FOR FARMER

ORGANISATIONS CAN FURTHER ENHANCE

FARM GATE PRICES AND SUPPLY RATES


• Once farmer organisations are strengthened,

short term pre-financing for trade activities can

help to redistribute more value to farmers.

Following larger volume marketed through

cooperatives, average farm gate prices will

increase.

• Government policy largely impacts liquidity and

profitability of banking. Organization capacity

building is critical to manage risk appetite of

banks.

• This investment does not create new value, but

rather facilitates redistribution from downstream

segments of the value chain to farm level.

• This could be of interest to impact investors that

want a commercial and social return on

investment.

0

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20,000

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40,000

50,000

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70,000

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90,000

0

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40

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120

2017 2019 2021 2023 2025

Co

ffe

e v

olu

me

(M

t)

Va

lue

(U

SD

)

Coffee volume financed (Mt) and farm gate price effect (USD/Mt)

Farm gate price effect of financing

Farm gate price effect of farmer organsiation building

Baseline farm gate price

Volume prefinanced

34

PROVIDING TRADE FINANCE TO WELL-RUN

FARMER ORGANISATIONS CAN BE AN

ATTRACTIVE PROPOSITION FOR BANKS



Volume of coffee pre-financedp.a. in steady-state (Mt)

77,907

Loan size in steady-state p.a. $ 38,953,698

Total investment (cost of capital for banks) over 10 years

$ 8,662,078

Total return $ 14,436,797

NPV (10%) $ 7,458,800

NPV (20%) $ 4,243,905

• Current pre-finance interest rates in Ethiopia are relatively low, but with the large involvement of the state in banking, so is the cost of capital for banks. This provides a positive NPV.

• Furthermore, pre-finance will enable farmers to improve their livelihoods via adoption of new technologies. This effect has been observed by IFPRI.

0

10

20

30

40

50

0

1

2

3

2017 2019 2021 2023 2025 Loa

n v

alu

e (

mill

ion

s U

SD

)

Co

st a

nd

re

ve

nu

e (

mill

ion

s U

SD

)

Trade finance value (USD)

Investment (cost of capital banks)

Revenue (interest paid by farmer organisations)

Net cash flow at bank

Loan value

• Significant positive impact on farmer income, both

from improved farm gate price and increased

volumes.

• The combination of these interventions can lift

farmers out of poverty, and develop healthy

smallholder farming systems based on coffee and

one or more other crops.

• If combined with investments in other crops,

further wealth can be created in farmer

communities.

35

SIGNIFICANT POSITIVE IMPACT ON FARMERS, JUST ABOVE POVERTY LINE


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Va

lue

(U

SD

/ye

ar)

Improved farmer business case for Arabica in comparison to poverty

line

Income

Cost

Series1

Poverty line (USD1.9/day/person, PPP adjusted)

• Investment in coffee can significantly increase the

sector value for all actors in the value chain.

• The majority of value flows into the rural economy.

• As productivity improves, local supply chains

benefit, primarily from additional supply.

36

RETURN ON INVESTMENT IS GOOD, WITH SIGNIFICANT IMPACT


Summary USD over 10 years

Total investment $ 564.075.197

Total return $ 9.093.461.511

NPV (10%) $ 4.625.453.164

NPV (20%) $ 2.768.118.360

0

500

1,000

1,500

2,000

2,500

3,000

Baseline sector value Target sector value

Va

lue

(m

illio

n U

SD

)

Impact of investment on national sector value in steady state (M$)

Farmers Local supply chain Government tax revenue

• Private sector is willing to invest in sustainability in Ethiopia.

• Reinstalling an export tax of 4.5% which will be fully allocated to the program would allow to fund this in the interest of farmers. Of course, the national contribution could also be financed from other sources.

• Grants are needed as initial seed funding to fill the funding gap and allow investment in farmer organisation building. Current annual budget of donor programs is estimated between 5-10 million USD, and more coordination between programs based on a sector strategy can largely address the grants requirement.

37

… WILLINGNESS TO INVEST IN THE INTEREST OF FARMERS


Summary Value

ACF revolving fund size $ 36,866,087

Required grant funding $ 86,768,479

Required grant funding % 15%

Required national budget (% export tax) 90%

0

10

20

30

40

50

60

70

80

90

100

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Vla

ue

(mill

ion

s U

SD

)

Public and private programme contributions

Required seed funding grants

Export tax earmarked for programme

Private sector investment

Farmer investment via fund

Annual programme cost

Required cumulative grants

Required total revolving fund

Co

ntr

ibu

tion

s a

re in

dic

ativ

e b

ase

d o

n s

take

ho

lde

r in

pu

t. In

vest

me

nts

an

d c

on

diti

on

s to

be

n

eg

otia

ted

with

in n

atio

na

l pu

blic

priv

ate

pla

tfo

rms

taki

ng

into

acc

ou

nt a

mo

ng

st o

the

rs

inte

rna

tion

al c

om

pe

titiv

en

ess

, go

vern

an

ce, t

ran

spa

ren

cy a

nd

acc

ou

nta

bili

ty a

ssu

ran

ce.

CONCLUSIONS

• Ethiopia is recognized as the birthplace of coffee, and represents 4.3% of global coffee production. Arabica quality

is valued and production costs are competitive. The production is largely characterised by small farms of on

average 0.67 ha, and many below 0.5 ha. With low to moderate yields, incomes are low for an estimated 1.2 million

coffee farmers. Farmers have significant other incomes sources in addition to coffee. Even though an increase in farm

gate prices as share of FOB has been reported in recent years, farmers currently receive an approximate 61% of

FOB price, indicating supply chain inefficiencies.

• There is significant potential to increase the coffee sector value in Ethiopia through selective investment in farmer

training, farm rejuvenation, use of inputs, certification and farmer group development. Over a period of 10 years a

cumulative investment of ~564 million USD can lift farmers above the poverty line and double the coffee GDP

for the country.

• Several actors show a willingness to invest, with high private sector sustainability interest in Europe and North

America, Ethiopian government investments, and much interest from the donor community.

38


39

SEPTEMBER 16AFRICAN COFFEE SECTOR: addressing national investment agendas on a continental scale

SourcesGlobal Coffee Platform, Volcafe, Olam, Technoserve, IFPRI, Hanns R. Neumann Stiftung, Café Africa, Nestle

DataUS Department of Agriculture, Food and Agriculture Organisation, International Coffee Organisation, ECX, OEC, Technoserve, USAID, 4C Association, UTZ Certified, Agri-Logic

About the Global Coffee PlatformThe GCP is a collaboration between the 4C Association and the Sustainable Coffee Program of IDH – The Sustainable Trade Initiative. The Global Coffee Platform is an inclusive multi-stakeholder sustainability platform aligning the activities of a diverse network of stakeholders to set into action the global commitments made through Vision 2020 and create a thriving and sustainable coffee sector.

About Agri-LogicAgri-Logic – management, consultancy and research - operates where agricultural production, development, international trade and consumer markets intersect. We combine a thorough understanding of farm level reality and commodity trade with scientific research skills and a track record in sustainability strategy design and implementation, to help clients deal with sustainability challenges and market requirements.

About Valued ChainValued Chain is an independent consultancy. We support organizations in understanding their value chain and stakeholders, identification and mitigation of risks, and realization of opportunities. We believe in integrating commercial objectives with sustainability of the business and its stakeholders. Working from Amsterdam and Lagos, we connect Europe and Africa.

african coffee sector - the global coffee platform coffee sector addressing national investment...

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