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November 28, 2010

Coffee export sacks in short supply in Ethiopia

by Zekarias Haddush

A while back, Hailu Gebrehiwot, a coffee exporter, bought 10,000 fibre sacks and stored then. They came in handy over the past few months when a huge shortage of the fibre sacks occurred.

Unlike other exporters, now he does not have to queue and wait to buy them from G-Seven Trading and Industry Plc, the biggest and only supplier of the sacks, which are mainly used for coffee. Coffee exporters must use fibre sacks to export their goods in, to avoid chemical contaminations.

“Although we produce and supply 10 million sacks annually, we are unable to meet the demand for them,” said Nuredin Awel, managing director of G-Seven.

In light of the recent increase in demand, and the limited supply of sacks, many exporters are complaining. Dominating the top spot on exported items, coffee earned 528 million dollars last year.

The export destinations of coffee have reached 45 countries, showing a reduction in dependency on a single market, according to research conducted by Access Capital.

A shift also occurred in major markets, putting Germany at the top of the list after it purchased 174.8 million dollars worth of coffee from Ethiopia. By comparison, Saudi Arabia bought 92 million dollars worth of coffee, and the United States (US) imported coffee to the value of 47 million dollars.

With this kind of demand for coffee, and not enough fibre sacks to go around, G-Seven, which was established in 2005 with a registered capital of 7.2 million Br, is giving priority to exporters which have orders placed by requesting to be shown a sales agreement before they sell customers sacks. Those who do not have orders waiting, have to wait months before they can buy sacks.

A coffee exporter, who wished to remain anonymous, as the issue was sensitive, and who has been involved in the business for the last 20 years, has been waiting for seven months to buy sacks. He has never before seen a shortage of sacks like this, he claimed.

“Now, I have to show my sales contract first,” he said. “Even then, I can only buy enough for the amount I have on order.”

To meet the demands from exporters, G-Seven, which currently has 34.4 million Br capital, has increased the number of its 2,160 employees’ operating shifts from two to three, according to Nuredin.

Although the sacks are mainly used for packaging coffee, they are sometimes used for maize and wheat.

The factory is selling the sacks to those who have an order at hand and gives priority to those whose delivery date is fast approaching, according to Nuredin, who is trying to manage the shortage.

Major commodities exported in the 2009/10 fiscal year include coffee, oilseeds, pulses, and spices. This pie chart shows, in percentage, the earnings of 528 million, 358 million, 130 million, and 18 million dollars from these exports, respectively.

“Regular interruptions in power supply contribute to the shortage of sacks because even if the raw material is ready, there is nothing we can do,” he said.

In addition to electricity shortages, the increasing cost of importing raw material from which to manufacture the sacks is another factor contributing to the short supply of sacks, according to the managing director.

Two years ago, the price of one tonne of fibre cost around 300 dollars. The price has since increased to 1,100 dollars per tone. Although locally produced fibre is sold at 13 Br per kilogramme, the volume of the available fibre is not adequate to close the gap between demand and supply, Nuredin explained.

To meet the demand, 12,000 tonnes of fibre must be produced locally on an annual basis, which the company plans to start doing once construction of its factory in Benishangul Regio on 5,000sqm is finished, according to Nuredin.

The company has started producing the ingredients used for the treatment of the fibre which it used to import from the United Kingdom (UK) and Germany.

Exporters have to rebag the coffee to be exported, depending on where it is exported to.

The coffee is brought to the Ethiopian Commodity Exchange (ECX) in 100kg sacks. If the coffee is exported to Saudi Arabia, the sack has to be 50kg, and to other countries the sack has to be 60kg.

In the 2008/09 fiscal year, 647 tonnes of coffee was exported. The volume of coffee exports is expected to increase by 88pc over the next five years, according to the government’s draft Growth and Transformation Plan (GTP).

Last year, the total revenues earned from exports, reached two billion dollars, a 37pc increase from that of 2008/09. The country’s export earnings contributed 10.5pc to the nominal growth domestic product (GDP) in 2009.

It is expected to reach an estimated 13.1pc this year and 15.4pc in 2011, according to a survey report prepared by the International Monetary Fund (IMF).

Although the government allows exporters to import sacks duty free from abroad to alleviate the shortage, some who have tried it are not happy with the price. Most of the exporters, who, like Hailu, have stocked up on sacks, prefer to use those. Yet, the worst is not over yet. Although coffee is traded year-round, November and December are peak times.

It is strictly prohibited to import sacks for local usage because the imported sacks require careful testing of the chemicals used while producing the sack, said an agricultural expert at the Ministry of Agriculture (MoA) who wished to remain anonymous as he is not authorised to comment on the issue.

The ones which are imported and then used for export are controlled by a regulatory body within the MoA and only well-known providers from Bangladesh are used, according to the expert.

To alleviate the shortage, the government is motivating exporters to export in bulk containers to avoid the sack shortage problem. Exporting using bulk containers began in 2003. Bulk exporting does not require rebagging and restocking and ensures efficient loading at ports.

However, the bags which are used in bulk exportation can be used several times. Charges decrease as a result of weight difference as well, according to people in the industry.

The government is studying ways of modernising and completely moving coffee exportation systems from sack to bulk containers to avoid the sack shortage problem. The bulk shipment will be more convenient for exporters as it will allow them to ship up to 20tn compared to the sack which can only ship 300 sacks in one container, according to the expert.

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