Session II Understanding Constraints to Value Addition in Agricultural Exports: Insights from the Coffee Sector

Trade, FDI & Regional Value Chains Workshop Kampala, Uganda 12 th December 216 Session II Understanding Constraints to Value Addition in Agricultural Exports: Insights from the Coffee Sector Ameet Morjaria Assistant Professor of Managerial Economics & Decision Sciences Kellogg School of Management Northwestern University

Outline 1. Big picture: why should we care? 2. Uganda s Coffee Sector: diagnostic on challenges & opportunities with insights from experience in Rwanda 3. Rwanda s Coffee Sector: lessons from an IGC project 4. Ethiopia s Coffee Sector: new project, early observations

Poverty reduction in Africa lags other regions Percent of Population living in Poverty (<$ 1.9 /day) 1 9 8 7 6 5 4 3 2 1 199 1992 1994 1996 1998 2 22 24 26 28 21 212 Sub-Saharan Africa South Asia Latin America & Caribbean East Asia & Pacific Europe & Central Asia Low & middle income Source: WDI 216

Within Africa Percent of people living in Extreme Poverty ($1.9/day) 1 9 8 7 6 5 4 3 2 1 1973 1976 1979 1982 1985 1988 1991 1994 1997 2 23 26 29 212 215 1 9 8 7 6 5 4 3 2 1 Share of coffee export price received by farmer (%) Source: WDI 216 Coffee export price received by farmer (%) Sub-Saharan Africa Uganda

Within Africa: Uganda impressive progress Percent of people living in Extreme Poverty ($1.9/day) 1 9 8 7 6 5 4 3 2 1 1973 1976 1979 1982 1985 1988 1991 1994 1997 2 23 26 29 212 215 1 9 8 7 6 5 4 3 2 1 Share of coffee export price received by farmer (%) Source: WDI 216 Coffee export price received by farmer (%) Sub-Saharan Africa Uganda

Within Africa: Uganda impressive progress, benefits of 199s agricultural reform 1 1 Percent of people living in Extreme Poverty ($1.9/day) 9 8 7 6 5 4 3 2 1 9 8 7 6 5 4 3 2 1 Share of coffee export price received by farmer (%) 1973 1976 1979 1982 1985 1988 1991 1994 1997 2 23 26 29 212 215 Coffee export price received by farmer (%) Sub-Saharan Africa Uganda Source: WDI 216, Bibangambah (1996), Akiyama (21), authors calculations on UCDA reports (various), Bank of Uganda

Uganda: coffee sector o o o o 1.7 million coffee households, 18% of the world s coffee farmers in Uganda Average small holder small (<.25 ha), and getting smaller 2% contributor to export earnings, after tourism and remittances Number of exporters: Pre-reform: 1, Board Post-reform: 55 Current active: 29 (circa)

Uganda: coffee export statistics 14, Quantity ' of 6 Kg Bags 12, 1, 8, 6, 4, 2, Source: UCDA Statistics

Uganda: coffee export statistics last 5 years 14, Quantity ' of 6 Kg Bags 12, 1, 8, 6, 4, 2, Source: UCDA Statistics

Uganda: coffee export statistics last 5 years 14, Quantity ' of 6 Kg Bags 12, 1, 8, 6, 4, 2, 2,755 Source: UCDA Statistics

Uganda: coffee export statistics last 5 years 14, Quantity ' of 6 Kg Bags 12, 1, 8, 6, 4, 2, 2,755 3,289 Source: UCDA Statistics

Uganda: coffee export statistics 5 year plan 14, 12, Quantity ' of 6 Kg Bags 1, 8, 6, 4, 2, 2,755 3,289 5,282 219/2 Source: UCDA Statistics, Uganda National Coffee Strategy 24 Plan for 215/16 219/2, June 215

Uganda: coffee export statistics 25 year plan 14, Quantity ' of 6 Kg Bags 12, 1, 8, 6, 4, 2, 2,755 3,289 5,282 219/2 12,7 239/4 Source: UCDA Statistics, Uganda National Coffee Strategy 24 Plan for 215/16 219/2, June 215

Uganda: coffee export statistics Vision 22 Kisanja Hakuna Mchezo? 14, Quantity ' of 6 Kg Bags 12, 1, 8, 6, 4, 2, 2,755 3,289 5,282 219/2 12,7 239/4 Source: UCDA Statistics, Uganda National Coffee Strategy 24 Plan for 215/16 219/2, June 215

Uganda: recent acceleration in government support Amount UGX (billion) 5 4 3 2 1 GoU Cess Total 43.792 22.186 27.912 21.136 15.743 9.29 7.912 7.912 1.151 2.913 211/12 212/13 213/14 214/15 215/16 Source: Coffee 22 Strategy, Revised 216

It has happened before 6, 5, Quantity ' of 6 Kg Bags 4, 3, 2, 1, 199 1995 2 25 21 215 Brazil (A/R) Vietnam (R/A) Ethiopia (A) Uganda (R/A) Kenya (A) Tanzania (A/R) Rwanda (A) Burundi (A) Source: International Coffee Organization, 216

It has happened before 3, Quantity ' of 6 Kg Bags 2, 1, 199 1995 2 25 21 215 Vietnam (R/A) Ethiopia (A) Uganda (R/A) Kenya (A) Tanzania (A/R) Rwanda (A) Burundi (A) Source: International Coffee Organization, 216

Uganda production has remained stagnant, why?

Uganda production has remained stagnant, why? 5 46 Robusta Yield (Bags/Ha) 4 3 2 1 3 11 Vietnam Brazil Uganda Source: discussions with stakeholders

Uganda production has remained stagnant, why? 5 46 Robusta Arabica Yield (Bags/Ha) 4 3 2 1 3 11 22 19 14 14 9 9 8 Vietnam Brazil Uganda Brazil Costa Rica Colombia Honduras Guatemala Peru Uganda Source: discussions with stakeholders

Uganda production has remained stagnant, why? 1 Wilt disease o destroys robusta trees o diagnosis took some time o however not as intense as the potato taste defect e.g. in Rwanda, Burundi 2 Urbanization o Good coffee growing areas encroached by urban sprawl e.g. Jinja, Mukono, Kampala

Uganda production has remained stagnant, why? 3 Challenges in maintaining and investing in coffee trees o Operation Wealth Creation (OWC) has helped with scaling up o but even under OWC limited success in distribution and survival of seedlings e.g. between Sept 215 May 216: 64.5 million seedlings generated, 54.59 million were "received however only 23.19 million seedlings survived survival rate of 36%; cost of this loss at least UShs 12 billion ( US$ 3.4 million)

Uganda production has remained stagnant, why? 3 Challenges in maintaining and investing in coffee trees 18, Generated Planted Actual 158,192 15, Coffee Seedlings 12, 9, 71,26 11,526 86,522 131,337 91,936 6, 44,57 64,95 6,565 3, 28,62 13,523 12,682 18,117 19,319 45,465 211/12 212/13 213/14 214/15 215/16

Uganda production has remained stagnant, why? 3 Challenges in maintaining and investing in coffee trees o why low survival rate? recall aim to generate 3 million coffee seedlings, distribute and plant and at the same time apply inputs to 19, ha o investment in sector largely focused on seedling distribution o seedlings distributed might not be disease resistant

Uganda production has remained stagnant, why? 4 Access and knowledge of input usage o o low usage of fertilizers and pesticides learnt recently that OWC is also procuring fertilizer, need to be careful to obtain the appropriate fertilizer, is this a long term viable solution? (recall Malawi s maize fertilizer experience) o in neighboring Rwanda, yield is also low, 1 bags/ha 214: fertilizer & distribution via Coffee Board (1% levy on exports) 215: procurement & distribution fund moved to CEPAR under an MOU application rate improved: 35% in 215, 59% in 216 challenges remain: reports of leakage, adequate warehouse facility, adequate reporting from districts, quantity of fertilizer procurement remains suboptimal

Uganda production has remained stagnant, why? 5 Farmers incentives o substantial FOB share, what about actual level of FOB, competitive? o other cash crops might be more rewarding (e.g. previous vanilla boom, maize)

Uganda production has remained stagnant, why? Is Robusta competitively priced? 5 Farmers incentives Price paid to robusta growers in exporting countries (US cents/lb) 1 8 6 4 2 211 212 213 214 215 World average Uganda Source: International Coffee Organization 216

Uganda production has remained stagnant, why? Farmers are getting a discounted price 5 Farmers incentives Price paid to robusta growers in exporting countries (in US cents/lb) 1 8 6 4 2 199 1993 1996 1999 22 25 28 211 214 Brazil Vietnam Indonesia Uganda Tanzania

Uganda production has remained stagnant, why? Is Arabica competitively priced? 5 Farmers incentives Prices paid to arabica growers in exporting countries (US cents/lb) 2 15 1 5 211 212 213 214 215 World average Uganda Source: International Coffee Organization 216

Uganda production has remained stagnant, why? Arabica trading at a discount 5 Farmers incentives Prices paid to Arabica growers in exporting countries (in US cents/lb) 25 2 15 1 5 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 Colombian Milds Other Milds (washed) Uganda Brazilian Naturals (unwashed) Source: International Coffee Organization 216

Uganda production has remained stagnant, why? 1 Wilt disease 2 Urbanization 3 Challenges in maintaining and investing in coffee trees 4 Access and knowledge of input usage 5 Farmers incentives

Ugandan Arabica an opportunity? Volumes are larger than you think Arabica exports by country (Kgs, 215) Tanzania Kenya Uganda Ethiopia - 1,, 2,, Source: Reuters

Ugandan Arabica an opportunity? Over 2% of exports Arabica, and growing 4, 16% 22% 27% 21% 3% 22% 22% 21% 27% 38%* 3,5 Export (' 6 Kg Bags) 3, 2,5 2, 1,5 1, 5 27/8 28/9 29/1 21/11 211/12 212/13 213/14 214/15 215/16 216/17 Arabica Robusta

Ugandan Arabica an opportunity? 45% washed Arabica, 55% natural Arabica (unwashed)

Ugandan Arabica an opportunity? Several single origin coffees to develop, constraints to developing Drugar 9, Arabica exports by grade (6 kg bags, 21 215) 8, 7, 6, 5, 4, Single origin grades 3, 2, 1, Unwashed Drugar 21/11 211/12 212/13 213/14 214/15 Drugar Bugisu AA Wugar Bugisu AB Other Arabica Elgon A Organic Bugisu Bugisu A Organic Okoro Bugisu CPB Other Arabica

Ugandan Arabica an opportunity? Sustainable Coffee o EU leading off-taker 62% of exports o under Sustainable Coffee Program: coffee roasters goal to procure sustainable sales from 8% to 25% o challenge for UG, only 2% of its coffee export sales is certified o core challenge: certification is costly for smallholder farmers (who are increasingly getting smaller), farmers are not getting the premiums to incentivize. Will need to think about farmers associations, not cooperatives! o in fact Rwanda s early success (1999) was NGO (USAID-PEARL) support of Abahuzamugambi Cooperative o Need to tread carefully, consumers are not yet fully aware of mass balance versus controlled blending. As awareness raises serious reputation risk associated with marketing

Building Ugandan Brand before sustainability? Google Searches 12 Search terms as percentage of overall search activity worldwide 1 8 6 4 2 Ethiopian Coffee Kenya Coffee Ugandan Coffee Rwandan Coffee Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Source: authors calculation on Google Trends, accessed Dec 12, 216

Building Ugandan Brand before sustainability? Marketing o Kenya s AA o Colombia s Juan Valdez o Rwanda has made some progress with Second Sunrise managed by NAEB

Building Ugandan Brand before sustainability? Google Searches 12 Search terms as percentage of overall search activity worldwide 1 8 6 4 2 Ethiopian Coffee Kenya Coffee Ugandan Coffee Rwandan Coffee Dec-7 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Source: authors calculation on Google Trends, accessed Dec 12, 216

Beyond marketing Appellation o geographical indication, whereby a product s given quality or reputation is linked to a geographical origin o e.g. appellation in wine and cheese o Ethiopia s experience (Sidamo, Harrar, Yiragacheffe), long road, recall the UN arbitration (GoE vs. Starbucks). Appropriate infrastructure and capacity is needed: GIS data, office of intellectual property, policy & enforcement, awareness at all levels of chain, monitoring and follow-up mechanism

Rwanda s Coffee Sector Successful turnaround o In 22 low quality-low volume cycle. o New GoR targeted coffee as a priority sector: strategic realignment driven by detailed action guidelines and investment options developed by coffee working group and adopted by Cabinet o Liberalization of the coffee sector. Assisted cooperative formation with support from USAID (PEARL and SPREAD projects) o Focus on quality: Cup of Excellence competitions since 28 o Pre-22: quantity as only measure of performance, GoR controlled, vulnerable to price movement o Post-22: quality only criterion for remuneration, rise of private sector (4% of mills), potential for Rwandan coffee to become single-origin o Fully washed (Arabica) exports: 1% in 22; 21% in 21 and 5% in 215

Rwanda s Coffee Sector Transformation within a decade 215

Rwanda s Coffee Sector Farmers revenues 2 Average prices received by farmers for coffee cherries $/kg 1.5 1.5 2 21 22 23 24 25 26 27 Burundi Kenya Rwanda Tanzania Uganda Source: Rwanda National Coffee Strategy, Impact 23-29, 29

Rwanda s Coffee Sector Explosion in entry of Coffee Washing Stations Number of Coffee Washing Stations (CWS) 125 12 1 75 7 86 119 73 While the 22 strategy recommended 17 washing stations by 21, private investors own 12 spread all across the country at the end of 28 5 44 58 25 23 43 31 2 6 12 22 23 24 25 26 27 28 Projected CWS Actual CWS Source: Rwanda National Coffee Strategy, Impact 23-29, 29

Rwanda s Coffee Sector IGC supported & funded: What is the effect of competition between mills on relationships between mills and farmers? [Joint project R. Macchiavello, LSE]

Rwanda s Coffee Sector IGC supported & funded: What is the effect of Competition between mills on relationship between mills and farmers? [Joint project R. Macchiavello, LSE] o explosion in entry of coffee washing stations, implies potentially excessive competition to purchase cherries o this can potentially destroy ongoing working relationships that were highly efficient between washing stations and farmers o in fact excessive competition between mills forced farmers to process coffee at home (unwashed, low value, but storable) as trust weakened and anticipated opportunistic behavior started to take place o caution on race for quality managing industrial policy on entry of mills is equally important o competition in environments where there are other market imperfections can lead to other harmful effects o policy response has been to introduce appropriate zones for sourcing

Ethiopia s Coffee Sector New project, early observations Source: Authors calculations on Ethiopia Coffee Bulletin (various)

Thank You Ameet Morjaria a.morjaria@kellogg.northwestern.edu