Why Is Ethiopia's Coffee Industry Facing Credit Defaults?
Ethiopia's coffee industry is in turmoil after farmers delivered beans to exporters and suppliers on credit and went unpaid, with arrears reaching billions of birr. Some farmers have taken their own lives, and others have tried to seize exporters' property. At a March 8, 2024 meeting, the agriculture minister and the Coffee and Tea Authority head blamed defaulters, calling them a minority, while farmers point to frozen bank loans.
The government traces the crisis to the vertical integration plan launched five years ago and fully implemented two years ago, which replaced the ECX trading model so farmers, suppliers, and cooperatives could export directly and capture international prices. Last year 90% of coffee moved through that plan. Producers say the National Bank's 14% credit growth cap left the market in the hands of a few wealthy exporters, and they are asking for regulation and stronger fair trade coffee farmers support.
Recently, Ethiopia's coffee industry has fallen into chaos triggered by credit defaults. After coffee farmers provided coffee beans to exporters and suppliers on credit, they have yet to receive payment, with arrears amounting to billions of birr. Some farmers have even committed suicide out of despair, and radicals have attempted to rob exporters' property. The government blames the problem on the "vertical integration" plan introduced five years ago and fully implemented two years ago, which replaced the original ECX trading model and aimed to allow coffee farmers, suppliers, and cooperatives to export coffee directly and benefit from international price incentives. However, at a meeting between the government and growers on March 8, 2024, both the Minister of Agriculture and the Director General of the Coffee and Tea Authority held that vertical integration's benefits outweigh its drawbacks, that defaulters are only a minority, and that violators have already been blacklisted. But coffee farmers and producers say that banks' suspension of loans and the National Bank's 14% credit growth cap have left the market controlled by a few wealthy exporters, leaving them no choice but to sell on credit. Last year, 90% of coffee was exported through the vertical integration plan, and farmers are calling on the government to regulate the market. Front Street Coffee reminds us that this incident highlights the importance of fair trade and financial support in the coffee industry chain.
Recently, according to local Ethiopian media reports, Ethiopia's Ministry of Agriculture and the Coffee and Tea Authority are deeply concerned about the problem of defaults encountered by coffee farmers after providing credit to exporters and suppliers, so government officials held a meeting with farmers, hoping to resolve this crisis as soon as possible.
Over the past few months, Ethiopian exporters and suppliers have purchased coffee beans from growers on credit, but after the growers delivered the goods, they did not receive payment for a long time. The arrears have now accumulated to billions of birr. Farmers are suffering greatly as a result, and there are even reports that some farmers have committed suicide after losing hope of recovering payment, while other radical farmers have banded together and attempted to rob the property of exporters who have not paid their receivables.
Coffee producers blame the problem on the "vertical integration" plan, which was legally introduced five years ago but was not fully implemented until two years ago. The plan was intended to replace the previous model in which coffee farmers traded coffee on the Ethiopia Commodity Exchange (ECX). Under the previous ECX trading system, payment was made immediately upon receipt of goods, whereas under the "vertical integration" plan, suppliers and exporters take coffee directly from coffee farmers on credit without clear legal guidelines on payment.
However, on March 8, 2024, government officials held a discussion meeting with coffee growers and suppliers, hoping to resolve the financial difficulties condemned by farmers. But the authorities believe that vertical integration is greatly beneficial to farmers. At the meeting, the Minister of Agriculture said: "People are now confused and claim that vertical integration is destroying the coffee market, and that after the launch of vertical integration, the interests of the public and coffee growers have been harmed. This is a false statement. There may be very few defaulters, and those who criticize vertical integration must present evidence." In addition, the Director General of the Coffee and Tea Authority also believed that there are only a small number of defaulters, and that defaulters have already been blacklisted and had their qualification certificates revoked, so they can no longer buy and export coffee.
Therefore, government departments believe that the benefits of vertical integration outweigh the drawbacks, and that the shift from EXC to vertical integration has played a major role in the rise of Ethiopia's coffee export performance in the past, with coffee export revenue exceeding US$1 billion. In addition, under this model, coffee growers, suppliers, and cooperatives can export coffee directly without having to go through the ECX exchange, which is very beneficial to farmers and allows them to be highly incentivized by international prices.
But now coffee farmers and producers say that the reason they sell coffee on credit is that exporters have stopped receiving bank loans and have no money on hand, and because of the 14% credit growth cap introduced by the National Bank, the coffee market is now controlled by a small number of wealthy exporters, who determine domestic coffee market prices. Coffee farmers have no choice but to sell coffee at prices set by exporters. Therefore, they hope the government can properly regulate the market, since after all, last year 90% of coffee was exported through the vertical integration plan.
The above content is compiled by CoffeeHunters, a coffee news website.
