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November 19, 2008

Coffee exports to be affected by global financial crisis

by Elias Biryabarema

Uganda’s coffee exports will be adversely affected by the ongoing economic meltdown in the West as commodity markets across the globe slump, cooled by decelerating demand.

The Managing Director of Uganda of Coffee Development Authority, Mr Henry Ngabirano said coffee was the most traded commodity in the world after oil and that there was no way it would not be impacted by the economic lethargy spreading across Europe and US, the world’s biggest coffee consuming regions.

“The fate of coffee will be same like that of all other commodities and we’ll certainly be affected,” he said. Analysts across the globe have forecast a contraction in commodity markets as consumers in the west slip into financial doldrums. Oil prices have already fallen by half in the last three months from their high of $147 a barrel to $60 on Friday last week. Most other commodities like metals and cereals are also expected to drop.

Mr Ngabirano said coffee had in fact already started to succumb to the crisis with a tonne which was trading at $2,400 dropping to $1,700 in November.

“The financial crisis is in the biggest coffee consuming countries where 90 per cent of the global consumption is. In the last four months the prices have gone down by 30 per cent.”

If coffee is profoundly impacted, Uganda could be sucked into considerable instability. Although Finance Minister, Dr Ezra Suruma and BoU governor Mr Tumusiime Mutebile have said Uganda’s economy will only sustain minor damage, recent developments appear to contradict that view.

With dollar inflows slowing down on account of a sudden cutback in remittances of Ugandan foreign workers, the nation’s currency has lately come under pressure, plunging at one time to Shs2,200 to a dollar. That is expected to affect import business and possibly spark off an inflationary bubble.

Mr Ngabirano however said the strengthening dollar was in fact providing a saving grace for the coffee exporters because a stronger dollars was apparently compensating for the loss in prices.

Full Interview:

Is Uganda making any efforts to enter new and lucrative markets like the US as Rwanda is doing?

In the past ten years, we have been trying to add value using two approaches; at farm level and manufacturing level. Value added at farm level directly benefits the farmer and this has been done through development and promotion of Relationship Coffees especially organic coffee, gourmet coffee and Utz Kapeh where farmers who use good agricultural practices and produce top quality coffees earn premiums ranging from 20 to 200 per cent more than the conventional coffee.

This has been achieved through organisation of farmer to produce such coffees especially in Mt. Elgon area where the Gumutindo Cooperative Society, One Café, Kyagalanyi Coffee and Kawacom are involved in production of these relationship coffees.

These groups have been producing special qualities for the speciality roasters like Café Direct, Thanksgiving Coffee, Starbucks, Crop-to-Cup and One Café- Lars. Other certification systems that add value are being developed in Kisoro and Mt. Rwenzori areas.

The other effort taken to move downstream with a view of adding value is the concept of promoting roast and ground coffee which we in 2001 started in Beijing and later 2003 moved to Copenhagen and Cairo.

Uganda was the first coffee producing country to come with an approach where a brand occupying shelf space in the consuming countries is owned by the origin. The concept is being rolled into other cities and especially in the US where the Minister of Agriculture Bright Rwamirama officiated at launching of the first ever Ugandan coffee brand in one of the biggest retailers in the US.

UCDA in partnership with Coffee Legends (roaster in Little Rock), Heifer International and BJ’s launched Uganda Mountain Coffee brand at BJ’s Corporate Headquarters ‘in Natick Massachusetts.

The unique feature in this is that the farmers who supply the coffee have a stake in the brand.

Uganda doesn’t seem to be as aggressive in marketing her coffee, be it domestically or internationally. Why?

Because we still export coffee as a raw material. The buying of coffee is quite concentrated in that five coffee buying companies account for about 60 per cent of the global trade and more so these five companies participate in the internal trade in Uganda.

So in this situation we focused on direct marketing to the existing ones and the ones we want to attract. On the domestic market we also do direct marketing targeting the institutions involved in the roasting and serving coffee especially hotels, restaurants and catering schools.
Improvement of quality and handling technologies and standards, improvement of coffee knowledge, brewing methods and espresso preparation and positive health benefits linked to coffee drinking are what we have been focusing on. Once we have streamlined these we shall indeed be heard when we talk to the public.

How is Uganda fairing in terms coffee production and export?

The coffee industry in Uganda has had some difficult and good times related to the international scene and others specific to us. We can look at production and export from two perspectives- volume and value. Exports reached the low level of two million bags in 2005 which are levels we saw in 1990-1993 at the start of liberalisation of the coffee industry.

The drop in 2005 was the impact of the coffee wilt disease which was compounded by the low world market that we saw in 2003-2004. The industry is doing much better now both in volume of exports and revenue generated. Since 2005 the volume of exports has gone up by 60 per cent and value has more than doubled where we see an increase of 130 per cent. Uganda is now competitive on the international scene in terms of quality, value and volume where we are in the top eight coffee producers in the world.

We understand that there are long running efforts to start exporting instant coffee. How are those efforts fairing?

The local coffee companies who seem to have interest [in adding value] seem to be incapacitated by the fact that they do not have the necessary capacity to invest in the manufacturing of coffee as a finished product. Roasting and manufacturing of soluble coffee requires heavy capital investment by our standards. There are not many coffee companies that have enough collateral to borrow about $20million that might be required to set a soluble coffee plant.

On the other hand value addition to coffee has not been attractive for foreign investment [because most of them] already have capacity in their countries. They easily get coffee as a raw material and domestic consumption is not good enough to attract investment. Domestic consumption cannot be improved in a short time. It is therefore logical that public funds should be committed to establish such a factory and when the private sector is able to take over the factory they do so through the normal channels.

We are making good progress however, with the partnership between the governments of Libya and Uganda where a factory is being established at Namanve Industrial Park in Kampala and I understand Tata Group of Companies will soon start on their plant in Jinja.

Given the coffee consumption trends both locally and globally, focus should be put on micro and specialty roasters. The likes of Starcafe, Zigoti, Bugisu Cooperative Union (Elgonia), One café, MTL and in shop roasting for the cafes in Kampala will be a major route for the development of the roasting industry. Spain, France, Italy and now the US all have thousands of micro roasters.

Commodities markets worldwide are expected to slump in the wake of the financial crisis battering the west. What’s the fate of coffee?

Coffee being a major commodity actually, the second most traded commodity after oil in the world, will feel the impact of the financial crisis. The financial crisis is in the biggest coffee consuming countries where 90 per cent of the global consumption is.

We are already seeing the impact on the prices where in the last four months the prices have gone down by 30 per cent. The situation could be worse if it affects consumption levels where the number of cups drunk per day might have to reduce. Hopefully this will not be the case since the commodity price might be low also.

Are there any other issues that are important for the coffee industry to know?

The stakeholders need to be encouraged that the challenges coffee faces are always temporary and therefore should continue to grow and do coffee business.

In fact the best strategic time to invest in coffee in growing is when there are challenges because the weak ones will drop out. Coffee has proven that it is one of the most sustainable crops given the fact that coffee which was planted more than 50 years ago is still doing well. Let’s not be diverted by temporary challenges and the short lived fancy crops.

The Monitor

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