Starbucks Rivals Avoid Ethiopian Coffee as Beans Lose Cachet

By Alan Bjerga and Leslie Patton –  Bloomberg

The mouthful of coffee makes a high- pitched ting as Stephen Vick spits into a metal urn. “Ethiopian coffees are really special,” says Vick, quality control manager for Intelligentsia Coffee & Tea. At the company’s “cupping” lab in Chicago, he samples delicately flavored batches from the birthplace of coffee before deciding what to ship to Intelligentsia’s six cafes and 1,000 retailers.

The Ethiopia taste tests occur far less often than before, says Vick. “We don’t want to buy anonymous coffee,” says Geoff Watts, an Intelligentsia vice president. The no-name beans he is referring to trade on the Ethiopia Commodity Exchange, an effort to improve farm markets that also poses a serious problem for U.S. coffee dealers who seek out coffee the way Manhattan wine merchants track down the best Bordeaux, Bloomberg Businessweek reports in its Sept. 5 issue.

While the United Nations estimates that 3.2 million people face starvation in bordering Somalia, Ethiopia is expanding its commodities exchange to improve its own food-distribution system. Public trading of crop contracts, which Americans have through the Chicago Board of Trade, creates transparent, regulated markets that guarantee payment and encourage farmers to earn more income from coffee and food crops. Successful farming spurs the development of roads and communications networks that will help Ethiopia feed itself and its famine- prone region. The exchange fits into a much larger plan to develop large-scale agriculture.

Modern Bourse

In its first three years the Ethiopia Commodity Exchange has centralized the trading of coffee, sesame and navy beans in a modern bourse where traders in colored jackets buy and sell as screens flash prices for coffee from New York, wheat and corn from Chicago, and sesame from Nigeria, India and Sudan.

Trading volume in the last fiscal year more than doubled to 504,000 tons. The exchange also is spurring farmers to grow better-quality coffee, says Gashaw Kinfe Desta, who employs up to 250 workers during the harvest on his Ethiopian farm.

Yet the changes have complicated the supply relationships with merchants such as Intelligentsia and Stumptown Coffee Roasters in Portland, Oregon, that rely on “single-origin” and “direct trade” coffee to sell to the most discerning consumers. Ethiopia, the world’s seventh-biggest coffee exporter, has always had a premium story to pitch: Legend holds that a ninth-century goat herder first saw the wake-up potential of the Coffea arabica plant when his charges grew frisky after nibbling on the fruit.

Coffee’s Clout

Because coffee is such an important crop, the government wants almost all of Ethiopia’s traded on its commodity exchange, which would have neither the volume nor the clout to thrive if coffee were excluded. The sensitivities of boutique Western buyers are less of a concern, though Eleni Gabre-Madhin, chief executive officer of the exchange, says she warned Prime Minister Meles Zenawi, the country’s leader for the past 20 years, that “people are going to be screaming about this.”

The passage of what’s known as the Coffee Law bolstered the ECX’s influence by requiring that most coffee sales go through it or a government-approved cooperative. The law gave the exchange authority to grade all Ethiopian coffee by quality and trade it accordingly. In the process it curbed foreigners’ access to hundreds of small stations that had been processing coffee cherries.

Without a Trace

These stations had sold to buyers from abroad who once roamed the countryside, acquiring knowledge of their products so intimate that “it added a considerable amount of value to the coffee,” says Intelligentsia’s Watts. Now under the exchange system “there’s a lot of mixing going on.” At that point, “traceability“ — the ability to guarantee that certain beans came from one farm — is lost, he says.

That isn’t an issue for mass-market buyers, such as Northfield, Illinois-based Kraft Foods Inc. (KFT) and J.M. Smucker Co. of Orrville, Ohio. The beans in a can of Kraft’s Maxwell House coffee, for example, are identified on the label as a “South Pacific Blend,” not from a particular farm or even country. Starbucks Corp. (SBUX), the world’s biggest specialty coffee company, buys through the exchange, and its Ethiopia Sidamo blend hails from the country’s sprawling southernmost region.

For buyers in the rarefied single-origin niche, a bean’s terroir (the special characteristics conferred by the local soil and climate) offers a marketing edge in the battle against Starbucks. The branding power of such coffee is undermined by Ethiopia’s soured relationship with artisan coffee companies, say boutique chains. John Riopka, a principal owner of Discovery Coffee in Victoria, B.C., says he dropped Ethiopia from his menu of single-origin blends after the exchange opened.

Paying Farmers

Specialty buyers aren’t just worried about traceability. The exchange makes it tougher for them to ensure growers are getting paid, says Vick, of Intelligentsia. “Farmers who grew the coffee aren’t being rewarded,” he says. “That’s sort of one of the bottom lines of our business — rewarding the people who grew the coffee for their hard work.”

Gabre-Madhin says she’s focused on boosting the quality and sales of all Ethiopian coffees. While boutique buyers are a tiny fraction of the market, treating them well is “very important from a symbolic standpoint because they make a lot of noise,” she says. The ECX developed a grading system with help from the Specialty Coffee Association of America that allows for certification of coffee as organic, fair trade and rainforest arabica. Gabre-Madhin says Starbucks has been testing a bar- coding system developed with the exchange to make bags of beans traceable to individual farms.

Trading-Pit Fans

The exchange has plenty of fans. Dinku Sileshi, general manager of Chefa Dira General Business in Addis Ababa, has been selling to exporters for 17 years. He used to make his transactions at auctions or in private contracts with buyers who would sometimes default on payments or be slow in fulfilling their end of a deal.

Now he’s a floor trader, punctuating his bids with high- fives to signal a deal has been made. He calls the ECX a “seismic change.” Before, “we had to chase the exporters to get our check,” he says. “Now we can buy and get the money tomorrow.”

Gabre-Madhin doesn’t want to ignore single-origin coffee. It’s about 1 percent of exports, she says, but it could be much more. “It pulls up the price of everything,” she says. “It’s like the $500 bottle of wine.”

By mixing beans, though, the exchange instead is creating the equivalent of a French vat of blended grapes, says Stefan Hersh, co-owner of Buzz: Killer Espresso coffee shop in Chicago. Says Hersh: “It’s a big, nasty cuvée.”

To contact the reporters on this story: Alan Bjerga in Washington at abjerga@bloomberg.net; Leslie Patton in Chicago at lpatton5@bloomberg.net.

To contact the editor responsible for this story: Robert Blau in Washington at rblau1@bloomberg.net.