ECX Direct Specialty Trade (DST)

ECX Direct Specialty Trade (DST) January 4, 2010

Specialty coffee is a growing global phenomenon and a strategically critical market segment for the Ethiopian coffee industry. For this reason, the Ethiopia Commodity Exchange (ECX) has made rapid concerted efforts to ensure that the national trading platform is not only cognizant of global market trends, but is a catalyst enabling Ethiopia s coffee exports and Ethiopia s coffee producers to capture the potential gains from the specialty market. The objective of this paper is to outline the strategy that the Ethiopia Commodity Exchange has aggressively pursued, in consultation with numerous industry stakeholders over a period of eight months, to introduce a new and highly innovative approach to taking Ethiopian coffee to the next level. 1 We begin by reviewing the specialty market trends and the importance of the concepts of certification and traceability. We next discuss the potential for Ethiopia and the stakes at hand. We then introduce ECX Direct Specialty Trade, a market innovation intended to enable the benefits of this rising global market opportunity to be captured in a systematic and sustainable domestic marketing system. Defining Specialty *** Because no clear definition of specialty coffee has been adopted during the last two decades of rapid changes in this evolving global industry, defining specialty coffee is the first challenge in designing an appropriate trading system. A working definition developed by ECX is that Specialty coffee is defined as coffee, from a known geographic origin, that has a value premium above commercial grade coffee due to its high quality in the cup and to particular attributes that it possesses. This definition imbeds four major concepts. The first is the importance of geographic origin, also known as the concept of terroir (linked to the French term, terre, meaning earth). Where the coffee is produced matters for a number of reasons: quality differentiation, social and community identification, environmental aspects, and market branding. In and of itself, geographic indicator is a rapidly growing area of branding and market specialization. The second important concept is that of a value premium in the market price above the standard or commercial grade. Thus, geographic indication alone 1 It takes a global village to raise an idea. The Ethiopia Commodity Exchange gratefully acknowledges the support and engagement of the Ethiopian Coffee Exporters Association, the Ethiopian Commercial Coffee Growers and Exporters Association, the Specialty Coffee Association of America, the Coffee Quality Institute (USA), TechnoServe Specialty Coffee Initiative (Rwanda, Ethiopia), and in particular the key contributions of the following individuals across the global community: Abdullah Bagersh, Tesfaye Tekle Haimanot, Dr. Ashenafi Mamo, Peter Giuliano, Richard Rhinehart, Chris Jourdan, Chris von Zastrow, Biniyam Workshet, Alessio Colucci, Philip Schluter, KC O Keefe, Tracy Ging, and David Roche. 1 P a g e

is not enough to define specialty without a clear indication of higher market value. The third key concept is that the coffee must be high quality using recognized industry standards and thus must have passed a quality threshold to be consideredd as specialty. Finally, the fourth concept is that, in addition to quality, there may be identifiable and measurable or certifiable attributes that are the basis of the value premium. These attributes, which are often seen as the basis of the concept of Sustainability, can be grouped into the three categories shown in the figure below: Environment, Health, and Social. Figure 1. Sustainability Attributes Environment Health Social Source: Nespresso, 2009 2 P a g e

Traceability and Certification The concept of traceability is fundamental when considering the full implications of the above definition. Clearly, geographic origin and the sustainability attributes are closely tied to traceability. But the concept of traceability must itself also be carefully defined in order to be meaningful. Let us consider that traceability is the ability to identify the origin of the coffee to the most relevant level of aggregation along the supply chain. Traceability exists across an entire spectrum, from the single plot within a farmer s landholding to a single farm household to the collective of farmers to the processing station to the supplier to the national market. Traceability can be understood essentially as information. Information has a market value. Thus, what is important and not always clear is which information is valuable to who in the market and how that information is to be validated and used. Given the complexity of this information, spanning across environment, health, and social factors, a meaningful approach to trading on the basis of traceable attributes requires a system of tracking and identification that is a fundamental element of creating a viable and self-sustaining market system. For this, the efforts of the market itself must be complimented by recognized and accredited third-party certification entities who can partner with the Exchange to obtain this traceability information and to ensure its consistency and integrity. For the market to engage meaningfully with these partners requires that these third party certifications are those that actually have a quantifiable value impact in the market and that are thus recognized by the market through a system of accreditation by the industry. Thus, a meaningful approach to traceability cannot be separated from certification. Moreover, traceability need not only refer to information tracing backwards in the supply chain to the production and processing in the supply country. Traceability can also extend forward from the domestic market to the various stages of roasting and retail marketing all the way to the end consumer. Traceability thus provides information that is not only valuable to the importing industry but also to the exporting industry. We now turn to a review of global market trends for specialty coffee. 3 P a g e

Global Specialty Trends 2 As shown in the table below, global trends in the specialty market, broken down by region, demonstrate the relative importance of the US consumption of specialty coffee, where nearly one fifth of total consumption is specialty and is growing rapidly, representing nearly 60 percent of global demand for specialty. However, other regions also show important growth trends, and it is important to note that growth in non-japan Asia is significantly high. Table 1. Global Specialty Coffee Demand Trends, 2008 Country Specialty Coffee 1 Bags (60kg) % of Total Consumption Growth Rate USA 4,700,000 15-20% 10% of which Starbucks 2,800,000 Europe 1,600,000 5% 5% of which Nespresso 600,000 Asia 800,000 8% 10% of which Japan 450,000 Other 900,000 5% TOTAL SPECIALTY 8,000,000 2 8.64% Source: TechnoServe, 2009 1 Defined as top quality coffee sold at high premium, US$0.25 differential above New York C, but not due to certification 2 Out of total annual Arabica trade of 61 million bags in 2008. Looking further at the US market, the figures below show that, in retail value terms rather than the volume figures provided above, the share of specialty in the total retail value has actually overtaken non-specialty over the past decade. Thus, in 2006 and 2007, the retail value of specialty has risen above 50% of the total value of coffee sold, which is a very important trend. This can be largely attributed to what is referred to as the Starbucks phenomenon with an explosive growth in the number of stores over the past decade, as the gourmet coffee culture has become popularized. In very recent years, other retail outlets for the gourmet market have emerged such as McDonalds and Dunkin Donuts. 2 ECX gratefully acknowledges extensive data used in this background section obtained from TechnoServe. 4 P a g e

Figure 2. Source: Specialty Coffee Association of America (SCAA) Figure 3. The Starbucks Phenomenon 18,000 16,000 No. of stores 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 90 92 94 96 98 00 02 04 06 08 Source: Specialty Coffee Association of America (SCAA) 5 P a g e

Overall, industry trends suggest that the global specialty market is growing rapidly, and that specialty coffee is becoming mainstream as the gourmet coffee culture, particularly among the younger demographics and in emerging economies where coffee is a status symbol, continues to expand. As shown in the figure below, it is expected that at current growth rates, the market for specialty coffee will more than double in the coming decade to 18 million bags of consumption, n, even with a moderate assumption of 7.5% growth rate. Figure 4. Global Specialty Market Growth, 1992-2019 Source: TechnoServe, 2009 It is estimated that, at present, global demand for specialty actually outstrips the supply available. A very significant underlying trend, within the overall picture presented above, is the rapid growth in the share of coffees sold under particular certifications. The major certifications of importance in the market are: Fair Trade (also Trans Fair), Rainforest Alliance, Utz, Certified Organic, and Starbucks C.A.F.E.. As shown in the figure below, it is estimated that sales of certified coffee are growing at an astounding rate of 32% annually in the global market. Also, as shown below, of the various certifications, Starbucks C.A.F.E, a private certification, and Certified Organic represented nearly 50% of the total certified coffees sold in 2008. 6 P a g e

Figure 5. Certified Coffee Sales Growth, 1998-2008 Source: TechnoServe Figure 6. Sales of Certified Coffees by Type of Certification in 2008 1,800 1,600 1,400 1,200 000 bags 1,000 800 600 400 200 0 Nespresso AAA Rainforest Alliance Utz Certified Fair-Trade Certified Organic Starbucks C.A.F.E Source: TechnoServe 7 P a g e

Turning to the supply side of the global market trends, the table below shows that, among coffee producing countries grouped by region, Central and South America dominate the market, with Colombia, Guatemala, and Costa Rica accounting for 63% of total supply. In Africa, Ethiopia is the largest specialty supplier, with 40% of African supply. However, as a share of its total exports, specialty represents 20%, while specialty is far more important in neighboring Kenya where specialty represents 40% of total export volume. The figures provided suggest that Africa has untapped potential in the specialty market and that, in particular, Ethiopia, with its natural advantage due to it genetic diversity, has tremendous growth opportunities. Table 2. Specialty Coffee Supply by Region, 2008 Specialty Volume (60 kg bags) % Specialty (of Production) CENTRAL AMERICA Mexico 300,000 10% Guatemala 2,000,000 60% El Salvador 300,000 25% Honduras 92,500 4% Nicaragua 400,000 40% Costa Rica 850,000 70% Panama 50,000 50% Dominican 10,000 30% Sub-Total 4,002,500 33% SOUTH AMERICA Brazil 1,000,000 2% Colombia 3,450,000 33% Peru 250,000 10% Sub-Total 4,650,000 8% AFRICA Kenya 350,000 40% Tanzania 50,000 10% Ethiopia 400,000 20% Uganda 40,000 5% Rwanda 40,000 12% Burundi 15,000 5% Others 200,000 12% Sub-Total 1,095,000 16% ASIA Indonesia 250,000 25% GLOBAL TOTAL 10,047,500 Source: TechnoServe 8 P a g e

Looking further at the role of certifications by major specialty supplying country in Central and South America, the figure below demonstrates the diversity of strategies within the specialty market among countries. Thus, Brazil is dominated by Utz certified, Rainforest, and quality-based gourmet sales, while Colombia and Guatemala are largely focused on quality. In contrast, Peru has a very high share of organic certified compared to other producers. Figure 7. Certifications by Supply Country, 2006/07 Moreover, the trend toward increased exports of certified coffee is a rising phenomenon in these Central and South American countries, as shown in the figure below comparing trends of certified coffee in exports between 2002/03 and 2006/07. Thus, major specialty coffee exporters such as Colombia have quadrupled certified coffee exports from below 5% to 20%, while El Salvador has gone from 1% to 28% of exports. Guatemala is the largest specialty exporter from Central America, with 60% of production sold as specialty, with 35% of exports sold as certified coffee. 9 P a g e

Figure 8. Certified coffee sold as a share of total exports, 2002/03 and 2006/07 The above trends point to a significant shift in the global coffee landscape. Traditional exports of commodity coffee are shifting to a differentiated product approach, with increasing niche market segments. The trends also indicate a complexity of niche markets, themselves overlapping, based on certifications increasingly recognized at a global level. In the following section, we focus on opportunities presented for Ethiopia s coffee sector. 10 P a g e

Ethiopia s Challenge is Ethiopia s Opportunity Ethiopia is endowed naturally with tremendous indigenous coffee varieties, numbering in the thousands, bred over millennia of natural and human cultivation. This makes Ethiopia the recognized home of specialty coffee, where it can be argued that more potential for market differentiation exists than possibly anywhere on the planet. It can thus be said that Ethiopia is endowed with a specialty advantage. In spite of this, Ethiopia is yet far from realizing its potential in harnessing value from the emerging trends described above. Despite the close comparability between Ethiopian washed and Colombian Mild Arabicas, Ethiopia lags far behind Colombia in consumer recognition in the US, as shown below. Figure 9. US Coffee Consumers Perception of Ethiopia Source: NCA Drinking Trends 2009 In light of the market trends highlighted above and its production volume, Ethiopia may have the potential to achieve the ranking of major players on par with Guatemala, Costa Rica, and Colombia, with significant volumes driven by a significant specialty share out of total exports. The strategic questions of the day are: 1. What are the revenue gains from an increased specialty thrust for Ethiopia? 2. Can Ethiopia rapidly move significant volumes into specialty coffeee exports? 11 P a g e

3. What needs to be done? As shown below, an estimation of value premiums above the New York average C price, with a minimum threshold of USD 1.48/lb and above to qualify as specialty, enables Ethiopia to add USD 25 million to export earnings with an estimated volume of 50,000 tons considered specialty out of a total production of 285,000 tons in 2007/08. Figure 10. Estimated Additional Export Revenue from 20% Specialty Share Source: TechnoServe More importantly, estimates of the potential to increase the volume of specialty coffee suggest that up to two-thirds of Ethiopian coffee can be qualified as specialty. An identified critical factor to unlocking the specialty advantage is through increasing washing stations and thus increasing the share of washed coffee exports. Technical experts have estimated that the share of washed coffee can increase from one third to two-thirds of total production. Moreover, with the newly introduced Arrival Q grading system in the ECX, the market provides incentives to capture the Q premium in the domestic market. Thus, the amount of top grade coffees has already tripled in the first month of Q grading in December 2009, compared to the previous December. 12 P a g e

As shown in the figure below, if the share of washed coffee increases, there is potential for two-thirds of Ethiopian coffee exports to be considered specialty. To this, one can also add the possibility of certification as organic or rainforest for top quality sundried coffee, and thus capture up to 80% of exports as specialty. At 2007/08 production levels of roughly 300,000 tons, 60% or 180,000 tons of which are exported, a share of 80% of exports would represent 144,000 tons. This would place Ethiopia in the range of 2 million bags of specialty, similar to Guatemala, and position Ethiopia as among the global leaders in the specialty market. Figure 11. Ethiopia s potential to double washed coffee volume Source: TechnoServe The financial impact, even at the same production levels, is significant. In value terms, as shown in the table below, moving from 20% to 50% specialty share, which may be achievable even with the current number of washing stations, represents an increase of 11% above 2007/08 value of exports. Moving to 80% specialty increases export revenue by 21%, while a modest 10% increase in export volume (either through increasing 13 P a g e

production or through moving more production into exports) increases export earnings by 34% above 2007/08 value, as shown in the table below. Table 3. Export revenue (USD) with different specialty shares, using base 2007/08 20% share Specialty 50% share Specialty 80% share Specialty 80% share and 10% export increase Commercial coffee 391,248,000 244,530,000 97,812,000 107,593,200 export earnings (assumed USD 1.3/lb) Specialty coffee 135,432,000 338,580,000 541,728,000 595,900,800 export earnings (assumed USD 1.8/lb) Total export revenue 526,680,000 583,110,000 639,540,000 703,494,000 % change 11% 21% 34% Source: computed. What is required to put Ethiopia into the 2 million bag specialty bracket? In addition to creating incentives to invest in washing stations and to improve the quality of all Ethiopian coffee across the board in the post-harvest processing stages, the Ethiopia Commodity Exchange creates a platform for discovering quality and other attributes of specialty coffee and capturing the associated market value through a mechanism that enables direct or traceable trade between specialty coffee producers and the international market. This platform, titled ECX Direct Specialty Trade, is described in the following section. 14 P a g e

A New Platform: Direct Specialty Trade The introduction of the Direct Specialty Trade (DST) platform is a response to the emerging important trends in the international coffee market. As noted above, tracing the coffee to given attributes is an important means of adding value in the market. These attributes can be: identity of the grower, social/community, economic, or environmental factors. DST is a mechanism to provide the benefits of the organized ECX marketplace -- where the integrity of the product, the integrity of the transaction, and the integrity of the actors are maintained-- while enabling traceability to market-desired attributes. Ethiopian laws governing the trade of coffee allow producers to directly export the coffee produced on their own farm without having to sell it to suppliers who then sell it to exporters. However, due to the small scale and weak capacity of most Ethiopian coffee producers and their geographic dispersion, there is a coordination failure in the market in that it is costly and risky for small farmers and international buyers to find each other and directly transact. The ECX Direct Specialty Trade addresses this problem. Producers may use the platform as a way to grade and store specialty coffees they intend to offer directly to the international market. The difference with the existing ECX system is that the identity of the producer is maintained throughout the transaction, while providing the usual services of quality certification and inventory management. The other difference is that the actual sales contract is not executed as part of DST, because the transaction between producer and buyer is an international trade conducted in dollar, not Birr. Thus, beyond quality control and inventory management, ECX would conduct a DST bidding session where sellers (producers) and international buyers meet to bid on prices. However, once a price is agreed, the international sales contract is concluded bilaterally, registered with the appropriate authorities (National Bank of Ethiopia) and executed outside of ECX. The role of ECX would thus be to coordinate the price discovery without engaging in the payment and clearing, as is the case in the existing ECX system. Finally, ECX market data dissemination would enable all market players to be informed about the prices and qualities discovered in the DST bidding session. Thus, although different in significant aspects from the existing ECX model, the DST represents an important value addition to the market in that it redresses a coordination and information failure. It creates an incentive for buyers interested in traceable and thus certified coffees to source supply directly from Ethiopian farmers. As shown above, this is likely to be a rapidly growing market segment and one in which Ethiopia has the potential to be a global market leader. For producers, DST is a means to empower themselves by 15 P a g e

directly accessing the international market and negotiating better prices for specialty coffee that has a recognized value premium. The role of ECX is thus to enable value creation in the market. DST is a flexible platform in that, in addition to specialty quality certification currently developed using the international Q cupping standard, ECX may also recognize internationally accredited certifications such as RainForest Alliance, Organic, FairTrade, Utz, and other certifications, as part of the DST platform. This enables the capturing of significant value back directly to Ethiopian small farmers, within an organized and regulated marketplace, which is transparent and freely accessible to all producers and all buyers. Finally, the DST model also introduces the concept of an Export Service Provider to address the concern that weak or non-existent capacity of small scale producers (or cooperatives) may prevent them from actually carrying out the full export operation. Global best practice suggests a role for an export service provider, which is an entity licensed and experienced in exporting, to provide export services on a fee basis to help the producers actually do the exporting. Thus, while the owner and exporter is legally the producer, the export service provider has an important role to play in coordinating the various activities involved in export processing and preparation, freight handling and logistics, etc, in addition to providing credibility to the buyer. To protect the integrity of the DST, ECX would require the use of a standard ECX designed Export Service Provider Agreement which would be registered with the Exchange as part of the qualification to participate in DST. This Agreement is intended to protect the sellers, or producers, in their relationship with the export service provider, as well as to ensure transparency to the buyer on the various actors involved in the DST and their various roles and liabilities. Design of the Direct Specialty Trade (DST) Platform With the DST platform, ECX would undertake the following operations: 1. Quality certification of coffees produced by primary cooperatives, cooperative unions, or commercial growers, using the ECX Specialty Q Arrival form with actual Q scoring. 2. Issuance of DST warehouse receipt and identity-preserved inventory management of these coffees. 3. Price Discovery facilitation with a monthly DST bidding session between preregistered growers (with Arrival Q certificate and warehouse receipt) and preregistered international buyers at pre-announced times and dates; 4. Delivery of deposited coffees back to the producer or legal representative after bidding session; and, 16 P a g e

5. Dissemination of prices discovered in the DST session. Deposit and Delivery of Specialty Coffee under DST To participate in DST, an interested producer, either a cooperative society, a cooperative union, or a commercial grower, would bring the coffee to the Exchange and is required to obtain a specialty grade as either pre-export processed or export ready coffee. The producer would deposit the coffee at the designated warehouse and obtain a DST Warehouse Receipt. There would be a minimum lot size for deposit of 30 bags, or as specified by the Exchange. The Exchange DST warehouse receipt specifies the quality, producer identity and other special attributes of the commodity, such as various certifications obtained from a recognized third party that has established a partnership with the Exchange. The DST inventory management would be based on the identity of the producer and the actual lot. Direct Specialty Trade Bidding Session The Exchange shall conduct a Direct Specialty Trade bidding session between specialty producers and international buyers on a regular basis, at a pre-announced frequency. The producer must designate a third party as an Export Service Provider and must register an Export Service Agreement with the Exchange. The Exchange would publicly pre-announce the available lots of specialty commodity of qualified producers for the Direct Specialty Trade bidding session, along with information on the lot number, producer identity, commodity origin, quantity, specialty grade, other special attributes, and the designated export service provider. Following the session announcement, the Exchange would pre-register international buyers willing to participate in the Direct Specialty Trade session. Buyers would be required to provide company information and to indicate the identity of the agent, if any, along with agency agreement, if they wish to designate a representative to the bidding session, and agree to adhere to the terms and conditions of DST. The Exchange would send samples of the commodity on a request basis and sold on behalf of the producer to interested buyers and would allow on-site inspection of the commodity and cupping prior to the Direct Specialty Trade bidding session. Only qualified producers and pre-registered buyers, and/or their designated agents, would be allowed to participate in the Direct Specialty Trade bidding session. The bidding session would be conducted by the Exchange on a lot by lot basis using open outcry method with both buyer and seller participation, or their designated agents. At the conclusion of each lot bidding, the Exchange would record the identities of the counterparties and the agreed upon price and quantity and produce a final Direct Specialty 17 P a g e

Trade session report that shall be made publicly available. The prices and quantities agreed upon at the Direct Specialty Trade bidding session shall be considered binding by both parties. Within twenty-four hours of the Direct Specialty Trade bidding session, the producer or his Export Service Provider is required to provide to the Exchange a copy of the international sales contract registered with the National Bank of Ethiopia. If the price, quantity, or delivery terms of the registered sales contract have changed from the agreed upon terms in the Direct Specialty Trade bidding session, the Exchange shall consider this a false bid and make this publicly known. The DST Export Service Provider Agreement The Export Service Provider Agreement, shown as Appendix A, is an attempt to provide clear guidelines on the roles and liabilities of the export service provider. The Agreement is intended to protect all three sides of the DST transaction, the producer, the service provider, and the international buyer. Thus, the Agreement outlines that the liability of the producer ends with regard to the commodity once delivery is made from the ECX warehouse (where the seller stores commodity up to the DST bidding session) to the export service provider s warehouse where export processing is done. The export service provider thus takes responsibility up to the loading of the consignment at the point of sale (port of Djibouti, or other). The export service provider is paid on a pre-agreed fee (commission) basis as well as on the basis of invoices for allowable expenses listed in the Agreement, such as transportation, milling, bagging, etc. The roles and liabilities of the Export Service Provider outlined in the Agreement include: 1. Providing evidence to the Exchange of the registered FOB Port sales contract within twenty-four hours following the Direct Specialty Trade bidding session conducted by the Exchange. 2. Providing pick-up notification on behalf of the Coffee Producer to the Exchange within twenty-four hours following the Direct Specialty Trade bidding session, regarding the date and time of requested delivery of the coffee from the Exchange warehouse. 3. Arranging transportation for the delivery of the coffee from the Exchange warehouse to the Export Service Provider s warehouse within three working days following the Direct Specialty Trade bidding session and clear all fees and charges by the Exchange. A legal representative of the Coffee Producer shall accompany the consignment for delivery to the Export Service Provider s warehouse. If there is any weight difference between the weight measurements at the Exchange warehouse and the Export Service Provider s warehouse, the Export Service Provider s measurement will control. 4. If pre-export processed coffee, export processing and preparation, including but not limited to milling, hand picking, bagging, labeling and marking bags, within ten working days following delivery of coffee to the Export Service Provider s warehouse. 18 P a g e

5. Arranging export certification inspection and obtaining inspection certificate from the relevant authority. 6. Arranging transportation of coffee to the port and customs clearing and forwarding within three working days following completion of export processing and preparation, and paying all related expenses on behalf of the Coffee Producer. 7. Opening letter of credit in the name of and on behalf of the Coffee Producer. 8. Ensuring the proceeds are credited to the Coffee Producer s account at the respective Bank. 9. Accepting responsibility from the delivery of the coffee to the Export Service Provider s warehouse to the point of sale (FOB Port) for: (1) loss, (2) fire, (3) misplacement, (4) quality deterioration; (5) loss of weight; (6) change of the coffee; and (7) theft. 10. In case of a pre-shipment weight loss, notifying the buyer of the weight loss. 11. Accepting responsibility to clear the Coffee Producer s obligation at the National Bank of Ethiopia by presenting the appropriate documents including the credit advice. 12. At all time, using best effort to communicate and cooperate with the Coffee Producer and the buyer to facilitate the efficient and expedient conclusion of the transaction. DST Operational Agreement (Annex to International Sales Contract) The key elements of the Export Service Provider Agreement, namely the identity and liabilities of the export service provider, would be required to be annexed as a DST Operational Agreement, provided as Appendix B, in the international sales contract signed between producer and buyer after the DST bidding session, which makes the export service provider agreement terms legally binding as part of the international contract. Traceability and Transparency on Returns to Farmers Clearly, a core objective of DST is to allow traceability based trading through ECX. However, in addition, DST can also offer transparency in the pricing and returns to growers, which is also of interest to the market. However, because transparency also comes at the cost of losing valuable business information to the seller, and may enable the raising of the final price to the consumer, there is an additional premium that should be priced into the sale when such financial disclosure is made. Thus, the DST Operational Agreement annexed to the international sales contract also contains an optional Transparency Clause, in which the fee paid to the service provider and the average price of the cherry offered to the specific farmers would be disclosed. This 19 P a g e

allows the buyer to impute the returns to the grower out of the final FOB price. To avail this information, the buyer would be required to add a fixed transparency premium established in advance by the Exchange, to the agreed bid price. With or without this transparency clause, ECX is also committed to ensuring that DST assures a fair return to the farmers who produced the specialty coffee. Thus, ECX commits to all sides of the market that it will ensure, through reviewing the fees specified in the Agreement and through auditing from time to time, that a minimum farmer share of 85% of final FOB price is maintained. This is a major branding of the DST initiative if a national marketing system can make such a commitment and ensure that this principle is maintained. Terms and Conditions of DST Bidding that must be agreed to by sellers and buyers Only pre-registered buyers and qualified producers may participate in the DST bidding session. All prices in the Direct Specialty Trade bidding session shall be on a FOB Port, prompt shipment basis. The Exchange shall require a minimum return of 85 percent of the final FOB price to the producer (as may be audited by the Exchange from time to time). Prices and quantities quoted in any international sales contracts resulting from Direct Specialty Trade bidding sessions shall be tracked and announced publicly by the Exchange. The Exchange shall require that all Direct Specialty Trade producers enter into an Exchange-approved Export Service Provider agreement, in which all responsibilities and liabilities up to delivery to the international buyer are specified, unless the producer is specifically exempted in writing by the Exchange. All international sales contracts resulting from a Direct Specialty Trade bidding session shall require reference to an Operational Agreement entered into between the producer and the Export Service Provider, in which the identity and roles and liabilities of the Export Service Provider are indicated. Buyers may indicate at pre-registration their willingness to engage in a Direct Specialty Trade Transparency Clause in the Operational Agreement, in which the payment to the farmers and the fees paid to the Export Service Provider are disclosed. If this is the case, the buyer shall pay a fixed transparency premium in addition to the agreed price in the Direct Specialty Trade bidding session. The Exchange shall determine and preannounce the transparency premium from time to time. 20 P a g e

Timeline of Monthly DST Bidding Session The DST bidding session is expected to occur on a monthly basis. The first DST bidding session is envisaged for February 2010. The timeline of activities is specified below to ensure the smooth running of the DST platform. Table 4. DST Schedule Activity Timeline (days) relative to DST Monthly Bidding Session (S) Publishing a catalog of available lots for sale on ECX S 21 website and via email announcement to buyers Cutoff of buyer sample request S 14 Sending/receiving samples (on fee basis) S 14 to S 7 Cupping in ECX laboratory and lot inspection S-2 Cutoff buyer pre-registration S-1 Seller and buyer DST bidding session S Last Thursday 11 AM Negotiation of sales contract (after session) S Registration of sales contract with ECX S+1 Posting of Session Report by ECX S+2 Delivery from ECX to export service provider S+4 Export preparation completed by service provider S+14 Transportation to port S+17 Note: Activities in italics are outside the scope of ECX Fees of DST Participation The DST fees and charges by ECX would follow the normal ECX fee structure: Table 5. ECX DST Fees Category Sample charge Transaction fee Sampling/Certification/Handling Charge Fees and Charges $10/ 250 gm sample (buyer, to seller) + shipping costs (to ECX) 0.2% of transaction value (seller and buyer each to ECX) 1 4.80 / bag (seller (to ECX) Storage charge 0.16 /bag/day (seller to ECX) 1 Buyer fees payment to ECX payable in manner to be determined. Both buyer and seller total fees payment required in order to release consignment out of ECX warehouse. 21 P a g e

Summary The winds of change are here. Global market trends point to an exciting future for Ethiopian coffee, perhaps like no other coffee producing country. Can Ethiopia reach its tremendous potential? Can the Ethiopia Commodity Exchange catalyze a new direction and enable Ethiopian coffee to reach the next level? The ECX Direct Specialty Trade is an innovation intended to create opportunities that did not exist, to flexibly capture market value embedded in traceability information in a way that is directly beneficial to the farmers themselves. Direct Specialty Trade (DST) combines the advantages of the organized marketplace with traceability and the ability to recognize existing third-party certifications that raise the market value. DST is about empowerment and sustainability, about a new kind of business, based on transparency, partnership, and reliability. The power of DST is that it combines traceability to the smallest unit of production, the Ethiopian smallholder coffee farmer, to the big business of the global supply chain where reliability and quality and certification are the key drivers. DST offers a win-win-win in three dimensions: a win for farmers who can reach the marketplace directly, a win for buyers who seek sustainable ways to source high-quality supply, and a win for the market, where integrity of the product and the transaction is maintained. It can be done. 22 P a g e