An Inside Look at High Rates in Ethiopia

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The initial spike occurred in June & July 2021 when the frost in Brazil led the New York (NY) C market price to rise rapidly. Since then, speculation, liquidity issues and changes in foreign currency rules have exacerbated the issue. These price increases will likely translate into more Natural-processed coffees and strong competition for coffee from Ethiopia’s internal market, as well as higher prices for roasters.

New Rules in Foreign Currency

A change in foreign currency rules will affect coffee prices this year. The amount of foreign currency exporters are allowed to hold onto has decreased from 40% to 20%. This means that for any business they conduct, they must exchange 80% of their foreign earnings into local Ethiopian Birr (ETB) at the official rate.

This change impacts who will be exporting coffee and how much coffee costs. In Ethiopia, many business owners export coffee purely as a side business rather than as their main business. Through exporting coffee, these business owners secure access to US Dollars (USD) (coffee export business is always conducted in USD), which they can then use to purchase goods for their import businesses (since a lot of international commerce is also conducted in USD). In these cases, the import business is actually the main revenue-generating tool, and coffee exporting (often done at or near cost) is simply a means of generating the funds to run that business.

The new foreign currency rules suddenly mean that it’s not advantageous for exporters in this category to continue exporting coffee at or near cost. For the currency that exporters cannot retain, the value of the USD is different depending on where they exchange their currency. With these rules, exporters must exchange their currency through the Central Bank. With the Central Bank, exporters can get 50 Birr per USD, but if they were able to go through the unofficial market, they could get 66 Birr per USD. Thus, it’s even less profitable to export coffee as a means to generate USD. “Exporters have to treat coffee as coffee now, not as a USD-generating method,” says James Dargan, Head of APAC Arabica for Sucafina.

This, in turn, means that in order to generate enough foreign currency to run their import business (again, their primary revenue generator), these exporters have to raise their prices significantly.  “Exporters will try to offset the reduced foreign currency retention mandated by the National Bank of Ethiopia (NBE) directive by either increasing their prices or the volume of coffee they trade," Emanuel says. As a result, “we have seen exporters increase their prices about 8% to 10% since the new rule came into effect.”

Liquidity Issues Are a Struggle

Liquidity issues among both banks and shippers have also been a common struggle this year. A recent change in banking laws means that all banks must store 4 billion Birr (about 80 million USD) in the national bank over the next 4 years. This has affected many banks’ liquidity, as they struggle to generate enough cash to meet the requirement. “This new requirement may force some smaller commercial banks to merge to meet this requirement,” Emanuel says. This, combined with lower deposits and higher withdrawal from citizens due to a confluence of factors including inflation, war, and the pandemic has caused significant liquidity issues for banks. Simply put: There’s a cash shortage.

Liquidity concerns for banks, in turn, translate into liquidity issues for exporters and other companies. “When it comes down to it, the banks just don’t have the cash to supply exporters with the financing they need to conduct business,” Emanuel explains.

Limited cash access is impacting washing stations and farmers as well. As prices rise, many washing stations are struggling to secure the cash needed to meet high prices for cherry. As a result, many more farmers are deciding to dry cherry at home on patios. These farmers will then sell Natural, home-dried cherry at competitive prices to collectors or directly to exporters. It’s still too early to determine quality for these coffees but these conditions will, at the very least, result in reduced availability of Fully washed coffees (and, most likely, higher prices for those coffees).

Internal Consumption to Impact Prices

As many know, Ethiopia is a unique producing origin in that it consumes internally nearly 45% of the coffee produced there. “We’re already seeing high prices of coffee on local markets. It’s hard to say definitively, but overall internal coffee consumption may decline due to higher prices, especially considering that inflation in September of 2021 reached an all-time high of 34.8% and the buying power of average Ethiopians has decreased,” Emanuel says.

At the same time, the increase in internal coffee prices may actually drive more coffee traders and shippers to sell coffee internally. With high internal prices, the financial incentive to sell internally may win out over the difficulty and expense of exporting coffee. In other words: why go through the hassle of exporting coffee when it’s so lucrative to sell it internally? An increase in the amount of coffee sold internally may, in turn, bring down coffee prices slightly. This dynamic that draws coffee to the internal market may lead to less coffee available for export, which we anticipate may cause a further increase in export prices.

On a positive note, price increases are also translating into higher prices for farmers. “Higher prices for farmers translate into longer-term benefits for them and their families. With higher prices, farmers can invest in their farms, their families and their communities,” Emanuel says. Since prices are consistently higher than they were this time last year, the government set the floor buying price for cherry higher than usual. “Normally the floor price would kick off in the 15 to 20 birr per kilogram range, depending on the region. This year, they started at 21, 25 and even 28 birr (42 to 56 US cents per kilogram) in some areas.” This is just the minimum, and many producers are receiving well above this price for their cherry, especially since the competition for cherry and parchment is fierce. At the same time, it’s unclear how long these increased prices will be sustained, as liquidity issues (mentioned above) impact cash flow for many washing stations. 

Crop Estimates for 2021/2022

As should be clear from the above report, many uncertainties remain. It is clear, however, that coffees from Ethiopia will be more expensive this year than in recent years. We know that this is difficult news for roasters, especially as increased C market prices and freight rates continue to impact roasters significantly. We will see more Natural coffees and may have stronger competition for coffee from Ethiopia’s internal market, but we’ll continue working with our supply chain partners to deliver high-quality coffees at the most accessible prices we can. We recommend that roasters plan ahead as much as possible, and please don’t hesitate to get in touch with any questions or concerns you may have.

This article is now available as an audio article. Check it out!