ASSESSMENT OF MARKET VALUE CHAIN BENEFIT TO THE SMALLHOLDER

COFFEE FARMERS IN ETHIOPIA WITH SPECIAL REFERENCE TO THE

ETHIOPIA COMMODITY EXCHANGE (ECX) COFFEE TRADING

By: Henok Mezgebe

Adama, Ethiopia
Dec, 2022
ASSESSMENT OF FACTORS INFLUENCING ADOPTION OF AGENCY
BANKING IN ETHIOPIA: WITH EMPHASIS TO SELECTED
COMMERCIAL BANKS

By: Henok Mezgebe

A THESIS SUBMITTED TO THE DEPARTMENT OF LEADERSHIP, YARDSTICK

INTERNATIONAL COLLEGE, ADDIS ABABA

IN PARTIAL FULFILLMENT FOR THE REQUIREMENT OF DEGREE OF

MASTER IN LEADERSHIP

Adama, Ethiopia
Dec, 2022
 DECLARATION
I hereby declare that the research entitled ‘‘Assessment of Factors Influencing
Adoption of Agency Banking: With Emphasis to Selected Commercial Banks in Adama
City’’ is my own work. I have carried out the study independently with the guidance and
support of my Advisor Berihu Muchie (PhD)

To the extent of my knowledge, the study has not been submitted for award of any Degree
or Diploma program in any other institution.

Declared by: Henok Mezgebe

Date: _____________________
Signature: ___________________
 CERTIFICATION

Here with, I certify that Henok Mezgebe has been carried out his research work on the
topic entitled “Assessment of Factors Influencing Adoption of Agency Banking: With
Emphasis to Selected Commercial Banks in Adama City’’ under my supervision as an
advisor.

Confirmed by: - Berihun Muchie (PhD)

TABLE OF CONTENTS
Declaration ………………………………………………………………………….. 3
Approval Sheet ……………………………………………………………………… 4
List of Figures ……………………………………………………………………….. 6
Acronyms ………………………………………………………………………….… 7
CHAPTER ONE
Introduction
1.1 Background of the study ............................................................................................. 9
1.2 Statement of the problem........................................................................................... 10
1.3 Objective of the study..........................................................................................11
1.4 Research Question ....................................................................................................12
1.5 Significance of the study...........................................................................................12
1.6 Scope of the study......................................................................................................12
1.7 Limitations of the Study............................................................................................12
1.8 Organization of the Thesis..............................................................................12
CHAPTER TWO
Literature review
2.1 Introduction .................................................................................................... 13
2.2 Theoretical Literature ..................................................................................................... 14
2.3 Empirical Literature……………………………………………………………………..18
2.4 Research Gap ……………………………………………………………………….…..22
2.5 Conceptual framework................................................................................................... 23
CHAPTER THREE

Research Methodology
3.1 Introduction............................................................................................. 25
3.2 Description of the Study Area.................................................................... 25
3.3 Research Design and Approach............................................................................ 26
3.4 Types and Sources of Data..........................................................................26
3.5 Sample size and sample technique.................................................................... 27
3.6 Data Collection Tools.................................................................................... 27
3.7 Pre test ..................................................................................................... 28
3.8 Data Processing and Analysis...................................................................... 29
3.9 Reference........................................................................................................... 30
List of Figures
Figure 1, Ethiopian Coffee Value Chain

Figure 2.SERVQUAL Model

Acronyms

AAU ----- Addis Ababa University

CEO ----- Chief Executive Officer

CLU ----- Coffee Liquoring Unit

DST ----- Direct Specialty Trade

ECEA ----- Ethiopian Coffee Exporters Association

ECGPEA ----- Ethiopian Coffee Growers, Producers and Exporters Association

ECX ----- Ethiopian Commodity Exchange

EGTE ----- Ethiopian Grain Trade Enterprise

FAO ----- Food Aid Organization

FDRE ----- Federal Democratic Republic Of Ethiopia

FOB ----- Free On Board

GCC ----- Global Commodity Chain

GDP ----- Gross Domestic Product

GNP ----- Gross National Product

GPN ----- Global Production Network

HQ ----- Head Quarters

ICT ----- Information Communication Technology

IFPRI ----- International Food Policy Research Institute

IM ----- Intermediary Member

MoARD ----- Ministry of Agriculture and Rural Development

NEAA ----- National Exchange Actors Association

NIE ----- New Institutional Economics

OCFCU ----- Oromia Coffee Farmers Cooperative Union

PRA ----- Participatory Rural Appraisal

SERVQUAL ----- Service Quality Measurement Tool

SPSS ----- Statistical Package for Social Sciences

SCAA ----- Specialty Coffees Association of America

TED ----- Technology Entertainment Display

TM ----- Trading Member

UNCTAD ----- United Nations Conference on Trade and Development

UNDP ----- United Nations Development Program

USAID ----- United States Agency for International Development

USD ----- United States Dollar

WBR ----- World Bank Report

CHAPTER ONE
INTRODUCTION
1.1 Back ground of the study
Market value chain is a supply chain consisting of the input suppliers, producers, processors
and buyers that bring a product from its conception to its end use. A value chain approach to
development seeks to address the major constraints at each level of the supply chain, rather
than concentrating on just one group (e.g., producers) or on one geographical location.
Constraints often include a lack of technical, business or financial support services, a difficult
regulatory framework, poor public infrastructure (roads, telecommunications, electricity,
etc.), a lack of information about or weak connections to end markets, and/or inadequate
coordination between farmers. Taking a value-chain approach is often essential to successful
economic development since micro and small enterprises and smallholder farmers will only
benefit over the long term, if the industry as a whole is competitive. Jim Dempsey & Ruth
Campbell,(2011) A Value-Chain Approach to Coffee Production.
Ethiopia is well-known as origin of Arabica coffee that is produced largely in the country.
Coffee plays crucial role in generating significant amount of foreign currency to the country
at large level. Ethiopia’s coffee has its own peculiar quality which is produced in different
parts of the country. It is produced in different ways such as forest, semi-forest, garden and
plantation systems that made the coffee unique from other producing countries. In Ethiopia,
coffee is the most important backbone of the Ethiopian economy, which accounts for an
average of 8% of the annual GDP, 41.4 % of the total agricultural production and over 83%
of export earnings. Research Gate.(2022) retrieved from https://researchgate.net

Since coffee is highly labor-intensive, a significant part of the country’s population

derives its livelihood from coffee, there by playing a significant part on the socioeconomic
life of the people and the economic development of the country. With this fact of its crucial
importance, the Ethiopia Commodity Exchange (ECX) has included coffee as one of the
commodities to be traded on the platform. The ECX is Ethiopia’s latest attempt to enhance
the performance of agricultural markets. Conceived as a meeting point for buyers and sellers
of grains (sesame, haricot beans, maize, wheat) and coffee, This study will attempt to
examine how the ECX market value chain benefit the smallholder coffee farmers.
1.2 Statement of the problem
As in most countries that implemented trade liberalization, export performance and
diversification in Africa remained low. The effects of liberalization have been particularly
severe in the agriculture sector, where productivity has notoriously fallen as a result of the
extraction by the state, which has negatively affected public investment in agricultural
research, extension services, education and infrastructure. African countries,
which have historically been the most affected by falling commodity prices, depend on
agricultural commodities for approximately 50% of their export earnings. According to
UNCTAD (2015), Africa’s market share has dropped from 6 per cent of world exports in
1980 to about 3 per cent in 2012. Within Africa, Sub-Saharan countries are among the most
dependent on agriculture for exports. Moreover, because many of these countries are also
heavily indebted, their governments are forced to adopt extreme austerity policies, which
often reduce expenditure on health, education and infrastructural development – thus
perpetuating adverse conditions for participation in overall trade.

In the context of commodity exchange on market operation, this market operation has
become an increasingly popular tool in development countries to face ‘the commodity
problem’. UNCTAD (2019) defines commodity exchange as “a market in which multiple
buyers and sellers trade commodity-linked contracts on the basis of rules and procedures laid
down by the exchange” (UNCTAD 2019). The wide range of development impacts they may
have on developing countries in terms of ‘price discovery, risk management, investment,
development of commodity markets and finance, industrial development, market
internationalization and use of IT services’. Nonetheless, the specific outcomes may vary
depending on the needs they are designed to fulfill and the combination of organizations,
institutions and regulatory frameworks found in each particular context.

With the context of market value chain on Ethiopia coffee trade, even though coffee has
economic and social importance for the Ethiopian economy, the market value chain on the
coffee sector has remained unsatisfactory especially for smallholders coffee growers. This is
because there is no significant change in the form of production and processing for several
decades. Regarding from the coffee market, International competitiveness in market of coffee
commodity exports has a major challenges for Ethiopia, competitiveness is important because
export of coffee is the major source of foreign exchange and thus account more than half of
the value of total export. Producers of coffee commodity, however, have faced long term
downward trend in prices as global supply outpaced demand. The discouraged coffee market
value result in polices regulating the market, and the low base of market infrastructure, lack
of adequate marketing information system, high seasonal price variability, and the
unorganized sector, high transaction cost, which is mainly caused inadequate transport
infrastructure and services in rural areas push up marketing costs, undermining local markets
and exports. Trader surveys in Ethiopia find that costs account for 50%-60% of the total
marketing costs, poor performance of the state and public institution and inadequate training
and education (WBR, 2013).

Coffee is more or less entirely produced in developing countries and mainly consumed in the
developed world. According to Worako et al (2012), the world coffee market has been
considerable short-term fluctuations in prices, both at the level of international markets as
well as markets relevant for coffee producers. Analysis of the world coffee market is difficult,

it only has begun rise price since the last four years. This is to describe that coffee price in
producing countries has a trend towards lower price that has a negative impact on living
standards of millions of people for countries which is mainly the country’s economy engaged
on coffee export markets like Ethiopia. This study will attempt to assess how the ECX market
value chain benefit the smallholder coffee farmers.

1.3 Objective of the study

1.3.1 General Objective of the study
The general objective of this study is to assess how the ECX market value chain benefit the
smallholder coffee farmers.

1.3.2 Specific Objectives of the study

 Identify the marketing services provided by the ECX that is benefiting smallholder
coffee farmers.
 Identify the contribution of smallholder coffee farmers in the ECX market value
chain.
 Assess the level of satisfaction that the smallholder coffee farmers are enjoying with
the existence of the ECX market value chain.
1.4 Research questions
Attempts will be made in this study to find answers for the following key questions.

1) What are the different marketing services provided by ECX to the smallholders coffee
farmers?

2) What has been the performance of the smallholders coffee farmers in the ECX coffee
market value chain?

3) To what extent have the smallholders coffee farmers into ECX market value chain have
satisfied?

1.5 Significance of the study

This study will contribute to the understanding of the major problems and constraints on the
coffee market value chain especially to smallholder farmers.

1.6 Scope of the study

This research paper intends to study the Ethiopian smallholder coffee farmers in light of the
benefits that Ethiopia Commodity Exchange’s (ECX) market value chain is providing with
reference to Gololcha Town smallholders Coffee farmers.

1.7 Limitation of the study

Due to lack of available and reliable data, lack of prior studies done in the past and the
researcher’s access to data has a limitation to the study and its final analysis.

1.8 Organization of the Thesis

The report of this study will be organized in three chapters. The first chapter presents
introductory part of the study which contains, Background of the study, Statement of the
Problem, Research questions, Objectives of the study, Significance of the study, Scope of the
study, limitations of the study, Definition of key terms and Organization of the paper.
Chapter two presents review of the related literature and conceptual framework. Third
chapter deals with the methodology of the study; specifically on the research design, sources
of data, sample and sampling techniques, data collection instrument, method of data analysis,
and pre-test.
CHAPTER TWO

LITERATURE REVIEW
2.1 Introduction
As in most countries that implemented trade liberalization, export performance and
diversification in Africa remained low. The effects of liberalization have been particularly
severe in the agriculture sector, where productivity has notoriously fallen as a result of the
extraction by the state, which has negatively affected public investment in agricultural
research, extension services, education and infrastructure. African countries,
which have historically been the most affected by falling commodity prices, depend on
agricultural commodities for approximately 50% of their export earnings. According to
UNCTAD (2015), Africa’s market share has dropped from 6 per cent of world exports in
1980 to about 3 per cent in 2012. Within Africa, Sub-Saharan countries are among the most
dependent on agriculture for exports. Moreover, because many of these countries are also
heavily indebted, their governments are forced to adopt extreme austerity policies, which
often reduce expenditure on health, education and infrastructural development – thus
perpetuating adverse conditions for participation in overall trade.

Markets are good for efficiency, and much progress has been made in market development,
especially under private sector leadership (WBR, 2012). However further efficiency gains
will need public sector support to bring the necessary public goods, foster institutional
innovation, and secure competitiveness. With this fact, the ECX market operation do not
always secure socially desirable outcomes, complementary polices are often needed to ensure
smallholder participation. (Alemu &Meijerink, 2010)A huge need remains to improve the
performance of the marketing systems in smallholder sector. Public investments to expand
access to rural infrastructure and services- such as rural roads and transport services, physical
markets, telecommunications, and electricity- will be essential to reducing transaction costs
and physical losses and to enhancing transparency and competitiveness in traditional markets.
Technical and institutional innovations that reduce transaction costs and risks also show
promise, especially the wider use of information technologies (mobile phones, the internet,
and commodity exchanges) and vertical coordination arrangements with individual farmers or
producer or organizations(WBR,2012).
2.2 Theoretical Literature
The theoretical approaches of this study are: production theory, institutional (organizational)
theory, and marketing functional theory. In production theory, the rate of output is argued to
depend on three factors: the state of technology, the quantities and types of resources put into
the production process and the efficiency at which those resources are utilized. In institutional
approach, it intends a list of some of the specialized people who do marketing tasks. Those
involved in handling the commodities and in pricing are often referred to as “middlemen,”
regardless of their gender. Middlemen have classifications such as retailers, wholesalers,
brokers, commission agents and order buyers. Functional approach, it emphasizes the
functions performed in marketing. In other words, it focuses on specialized activities within
the marketing process.

2.2.1 The concept of value chain

Every enterprise is positioned in a value chain (United Nations International Labor

Organization). The value chain describes the full range of activities which are required to
bring a product or service from conception, through the different phases of production
(involving a combination of physical transformation and the input of various producer
services), delivery to final consumers, and final disposal after use (Kaplinsky and Morris,
2010). As opposed to the traditional exclusive focus on production, the concept stresses the
importance of value addition at each stage, thereby treating production as just one of several
value-adding components of the chain (United Nations Industrial Development Organization,
2009). Value chains can be restricted to local markets, but do also expand globally. This is
just as true for small and medium-sized enterprises in developing countries as it is for
enterprises in Europe and North America (United Nations International Labor Organization).

With the concept of value chain, enterprises are no more treated as a single entity but as a
part of an integrated chain of economic functions and linkages across geographic
boundaries (Gudmundsson, Asche, & Nielsen, 2012). In any value chain, one member is the
buyer of the previous individual and the supplier for the later member.

As passing through the chain, the product gains some value. The chain of activities as a
whole gives the product more added value than the sum of independent activities. The value
chain exists if and only if all members in the chain cooperate to deliver maximum value at the
least possible total cost to the end customer. That is what value chain is about. It is important
not to mix the value generated with the costs incurred by the activities. Diamond cutting can
be employed to distinguish between costs and value. The cutting activity may incur a low
cost, but such activity adds much value to the end product, since a rough diamond is
significantly less valuable than a cut diamond.

In the real world, the value chain tend to be more complex to involve numerous
interlinked activities performed by multiple types of firms located in different regions of one
country, or even located in various countries around the globe. The value chain could be even
more sophisticated since intermediary producers in a particular chain can be members of a
number of different value chains. (Asche and Nielsen (2012)

In order to generate improvements in the supply or quality of any product, one needs to
consider all aspects in the chain of events from production to consumption, including both
opportunities and constraints, and the demand and supply of necessary products and services.
Taking a value chain approach to economic development and poverty reduction to developing
countries like Ethiopia involves addressing the major constraints and opportunities faced by
the smallholders coffee farmers, cooperatives unions, processors, exporters and other coffee
agents at several levels and points along a coffee market value chain. This will inevitably
include a wide range of activities such as ensuring access to the full range of necessary
inputs, facilitating access to cheaper or better inputs, strengthening the delivery of business
and financial services, enabling the flow of information, facilitating improved market access,
or increasing access to higher-value markets or value-added products (RIU, 2011).

In a value chain marketing system, farmers are linked to consumers' needs, working closely
with suppliers and processors to produce the specific goods consumers demand. Likewise,
through flows of information and products, consumers are linked to the needs of farmers.
Under this approach, and through continuous innovation, the returns to farmers can be
increased and livelihoods improved. Rather than focusing on profits on one or two links,
players at all levels of the value chain can benefit (RIU innovation, 2011).

An integral component of the value chain is the agricultural supply chain, and in the (RIU
innovation, 2011) literature these terms value chain and supply chain may at times be used
interchangeably, or are at least closely related.

2.2.2 Defining commodity

A lot has been written about commodities, their connection with trade and development and
the organization of their production processes, yet there does not seem to be a clear consensus
regarding what a commodity actually is. A commodity could be simply defined as any kind of
good produced to be exchanged in the market rather than for personal use. Daviron and
Ponte (2005) define commodities as “goods with a world market where most participants and
transactors use the same global quality standard to discover the same measurable quality
attributes”. Bernstein (2006) notes that Daviron and Ponte’s elaborations on the features of
commodities deal more with the symbolic value of the highly differentiated products that
reach the consumerist society and less with producer and intermediate goods.

2.2.3 Commodity exchange

Commodity exchanges are organized market venues where buyers and sellers of a commodity
meet to trade it or its derivatives. They are designed to help mitigate counter party risk and
ensure that payments are made through reliable financial service providers. Exchanges
provide a framework for market actors, financial institutions, and commodity operators to
interact based on rules that provide legal protections. UNCTAD Report, (Development
Impact of Commodity Exchanges in EM, 2009)

Exchanges further reduce information asymmetry. This encourages competition among

buyers and sellers by allowing them to discover the real value of commodities in the market.
Commodity exchanges in emerging markets typically trade with spot contracts that offer
immediate delivery of the traded good, while those in more advanced economies tend to trade
in futures and options contracts. Commodity exchanges are adaptable and can remedy several
risk factors in emerging markets, including price risks, poor price discovery, and a lack of
market transparency. UNCTAD Report, (Development Impact of Commodity Exchanges in
EM, 2009)

2.2.4 Service Quality vs. Customer Satisfaction

Understanding satisfaction is vital in the sense that dissatisfied customers hardly ever
complain, but rather simply purchase from another service provider (Mueller, Palmer, Mack,
& McMullan, 2012). Satisfaction is most commonly described in terms of the
disconfirmation approach, which describes it as the difference between a customer’s pre
purchase expectations and post-purchase perceptions of the concrete service performed
(Chang, 2009).The general thought is that satisfaction mediates the relationship among
perceived service quality and firm performance (Babikas, Bienstock, & Van Scotter, 2008).

However, some researches propose that satisfaction is a sign of service quality. According to
Millan and Esteban (2012) finding, service quality and satisfaction have frequently been used
interchangeably. Their differences is only satisfaction is a post- experience decision customer
experience while quality is not; in the satisfaction literature expectations reflect anticipated
performance made by customers about levels of performance during their contact (Burns,
2008).The distinction between perceived service quality and satisfaction is important because
higher officials need to know whether their purpose is to present the maximum level of
perceived service quality or to have satisfied customers. The standard of contrast in forming
satisfaction is predictive expectations, or what the consumers consider will happen. Perceived
service quality is the consequence of a comparison of performance and what the consumer
senses a firm should provide.

Burns, (2008), explains negative disconfirmation as a happening when performance is less

than expectations. Positive disconfirmation is obvious when performance is greater than
expectations. Customer satisfaction results in the disconfirmation of prior expectation that is
if the service provider meets or exceeds expectations then the customer is more likely to be
pleased (Laroche, Ueltschy, Shuzo, & Cleveland, 2014). Satisfaction is related to size and
direction of non-confirmatory: experience defined by the difference between initial
expectations of the individual and the real outcome resulted. While expectations are the needs
or desires of the consumer, based on what the consumer senses should be delivered prior to
receiving it. Perceptions are the viewpoints of the consumer relative to the service received.
The consumer’s judgment of satisfaction or dissatisfaction relay on how the consumer
perceives the real result obtained relative to what was anticipated (Bakr, Mustafa, & al-Din,
2015).

According to Babikas, Bienstock, & Van Scotter, (2004), a great deal of the attention given to
service quality is motivated by the foundation that it will increase customer satisfaction and
ultimately lead to better financial performance. The quality of products and services has also
been associated to external indicators of customer satisfaction like warranty, complaints,
litigation and market share.

2.2.4.1 The SERVQUAL model

According to Parasuraman, Berry, & Zeithaml (1985), first identified ten overlapping
dimensions of service quality which consumers use to assess the quality of a service. The
dimensions were: - responsiveness, reliability, competence, courtesy, communication, access,
credibility, understanding, security and tangibles. In their 1988 work, it reduced to five
dimensions with 22 items in 1991: reliability, tangibles, responsiveness, remained the same,
but the other seven components merged into two aggregate dimensions called empathy and
assurance.

Responsiveness: It is the willingness of the firm’s staff to help customers and to provide
them with prompt service. Readiness’s to provide the service; timeliness; setting up
appointments promptly are the symptoms of responsiveness.
Reliability: Consistency of performance and dependability; performs service right at the first
time; honors its promises; keeps accurate records, corrects billing, and performs services at
the designated times are the parameters of reliability.
Assurance: Knowledge, competence and courtesy of employees; trust and confidence;
required skills and knowledge; politeness, respectfulness, considerate, friendliness;
trustworthiness, believability, honesty are signs of assurance.
Empathy: Caring; individualized attention, approachability, easiness of contact; effort in
understanding the customers’ needs are signs of empathy.
Tangibles: Physical evidence of the service; physical facilities, tools and equipment’s;
appearance of providers; appearance of other customers in the service facility are the
tangibles

2.3 Empirical Literature

Ranking eighth in the world and first in Africa, Ethiopia’s annual coffee production is
approximately 282,000 metric tons (MT), almost half of which is consumed domestically,
often in the culturally rich traditional coffee ceremony. Most coffee is produced by
smallholder farmers with 1-2 hectares of land, earning less than a dollar per day. With prices
of approximately $1.54 to $1.57 per pound for washed coffee, the specialty market is an
avenue for Ethiopian farmers to significantly increase their incomes and improve the quality
of their lives.

Increasing farmer incomes through the development of smallholder cooperatives linked to

markets is the main objective of ECX. Since its inception in 2007, the ECX has transformed
over 775 primary cooperatives in the Oromia, Amhara, Tigray and Southern Nations regions
from largely dysfunctional organizations into open, private, democratic associations
supplying inputs and marketing services to their more than 750,000 members. Of the total
farmers assisted by ECX, close to 180,000 are small-scale coffee producers, members of 154
cooperatives federated into four coffee unions: Sidama, Yirgacheffe, Oromia and Kafa. (Jim
Dempsey & Ruth Campbell)
At the start of the ECX, the challenges to the coffee industry seemed overwhelming: poor
processing resulted in low and inconsistent coffee quality; export sales were regulated
through a national auction which mixed coffees from different locations into a single lot and
prohibited cupping prior to sales; loan funds for marketing and for investments in production
and processing were unavailable; coffee cooperatives were institutionally and technically
weak; and a lack of understanding of international market demand resulted in a concentration
on quantity rather than quality. (Jim Dempsey & Ruth Campbell)

A breakthrough occurred in 2001, however, when the government of Ethiopia removed the
requirement for cooperatives to sell all coffee through the national auction, opening the way
for direct export sales. Coffee producer cooperatives in major coffee production areas such as
Sidama, Yirgacheffe, Oromia and Kafa recognized the importance of this policy change, as
well as the inability of the coffee cooperatives to take advantage of the reform, and developed
and applied a value-chain approach.(ECX, 2011).
Within this overall approach, a particular emphasis was placed on strengthening the
cooperation between small-scale producers, as well as establishing secondary cooperatives or
“unions” to achieve the economies of scale needed to reach international markets. In
summary, the goal of ECX’s coffee component was a competitive Ethiopian coffee industry
that maximized returns to smallholder producers. (ECX, 2011).

2.3.1 Turning Comparative Advantage into Market Competitiveness

Ethiopia’s range of coffee varieties and unique flavors, its long and deep cultural appreciation
of good-quality coffee, and its traditional organic, shade-grown and bird-friendly production
by small-scale farmers provide Ethiopia with a comparative advantage in the international
specialty coffee market. But to achieve global competitiveness, the industry required
improvements in three areas: efficiency, product differentiation and response to specialized
market demand. (Jim Dempsey & Ruth Campbell)

2.3.1.1 Efficiency

Ethiopia is a relatively low-cost producer of coffee. Prior to ECX involvement in the sector,
Ethiopian smallholder coffee passed through multiple intermediaries before being exported.
Furthermore, the rigid procedures of the national auction system through which most
exporters must still purchase their coffee create marketing inefficiency, thereby undermining
all of the advantages of low-cost production. (Jim Dempsey & Ruth Campbell) By facilitating
direct exports of smallholder specialty coffee through the establishment of unions for
economies of scale, facilitation of marketing linkages though union participation in the
Specialty Coffee Association of America’s annual exhibitions, and technical assistance in
production, processing and export procedures, ECX helped develop a new, highly efficient
market channel. Direct exports of specialty coffee by small-scale producers’ unions have
increased from $0.25 million in 2001 to $31.9 million in 2011. (ECX,2011).

2.3.1.2 Product Differentiation

Improving from year to year, the quality and consistency taste of coffee defined by its
regional origin, such as Sidamo and Yirgacheffe resulted in price increases of $0.15-0.20 per
pound which promises a large return to farmers. ECX also promotes careful sun drying on
raised drying beds, which can produce extremely flavorful, highly rated coffee. In the
Ethiopian Cooperative Coffee Competition supported by ACDI/VOCA (Agricultural
Cooperative Development International/ Volunteers in Overseas Cooperative Assistance) in
2005, the highest-rated coffee was a sun-dried coffee, Jimma 5, which received a $0.20 per
pound premium. A recent coffee that was featured as a Starbucks Black Apron Exclusive™
was a sun-dried coffee from Ethiopia’s Ferro Cooperative. This coffee sold in Starbucks retail
shops in the U.S. at close to $25 per pound. (ACDI/VOCA)

Source: Jim Dempsey & Ruth Campbell

Figure 1, Ethiopian Coffee Value Chain

2.3.1.3 Specialized Market Demand

Many coffee cooperatives have invested in certification programs 24 are registered Fair
Trade, and over 70 are certified organic in order to obtain additional price premiums. For
example, during the depths of the coffee crisis from 2001 through late 2003, the Fair Trade
certification guaranteeing a minimum floor price in return for assurances that profits will be
used to benefit the producers’ communities almost doubled the value of smallholder coffee.
(Jim Dempsey & Ruth Campbell) Similarly, organic certification generally adds
approximately 10 percent to the price received by farmers. (Jim Dempsey & Ruth Campbell)
Several cooperatives are selling to Starbucks Coffee Company and have conformed to their
Coffee and Farmer Equity (C.A.F.E.) Practices verification program. Other smallholder
coffee is marketed as “relationship coffee,” which is based on developing the consumer’s
understanding of the producers’ culture, living conditions, and economic situation and so on
in order to develop a sense of connection between producer and consumer. (Jim Dempsey &
Ruth Campbell)

2.3.2 The new commodity exchange-based market reform process

In the 1990s ‘liberalized’ system, the marketing board was to disappear and typical small-
scale producers were to sell (as they have done for the last thirty years or so) to small-scale
traders (known as collectors in Ethiopia). The collectors then sell to large traders (known,
confusingly, as ‘suppliers’ in Ethiopian nomenclature). In practice, many collectors borrow
cash from suppliers to purchase coffee at the farm gate and so act as a kind of agent for them.
It is common practice for collectors to advance loans to farmers for repayment at harvest
time, and for collectors to collude with each other to pay the same low price to all the farmers
they deal with.(Peter Robbins)

It is self-evident that it is much easier to assist a few individuals and institutions that are
already in a position to help them-selves’ rather to help tens of millions of typically small-
scale actors. In the case we are discussing here, it is certain that large firms of traders and
brokers, large commercial farmers and large farmers’ associations, are very few in number.
They are able to converse fluently in local and national language, can keep proper records
and accounting books, and have access to the most up-to-date electronic communication
systems. Indeed, it is also clear that if they had felt they needed a commodity exchange or a
warehouse receipt system they could easily have afforded to establish one for them-selves’.

In the new Ethiopian commodity exchange-based system, collectors and larger traders are
required to store their coffee in registered warehouses, where it can be identified by type and
quality. If it is to be exported, it must then be traded through the new commodity exchange
which now has the monopoly for all export coffee sales. (Vertically integrated producers of
specialty coffee, who have their own foreign outlets, are exempt from this control.) (Peter
Robbins)

As might be expected, the huge and important Ethiopian coffee market has, for many years,
been operated relatively efficiently. A greater proportion of producers of coffee are organized
into farmers’ associations than producers of other good; specialist warehouses are operating
throughout the coffee growing areas and there are armies of experts available to help in all
stages of production, testing and tasting. (Peter Robbins)

The price for each type of coffee is determined by a form of ‘open outcry’ bidding between
the main traders, including the trading arms of large producers’ co-ops, on the one hand, and
the exporters, including agents for the world’s large coffee brands, on the other. Exchange
rules have certain features built into them to reduce price volatility. Prices are not allowed to
change by more than 5 per cent up or down over a ten-day period, after which a new price
can be set which is, again, not allowed to move beyond a 5 per cent limit for another ten days.
Although there are no explicit rules to prevent collusion among buyers or sellers or transfer
pricing abuse, the exchange regularly compares the prices agreed on its trading floor with
those traded on other major coffee markets around the world, giving them a good indication
of any price manipulation taking place. In addition, the government maintains the right to
confiscate what it believes to be ‘hoarded’ stocks. (Peter Robbins)

2.4 Research Gaps

Due to the case of skills and knowledge gaps by coffee producers, processors and exporters;
most of the times coffee quality was not started at producers level during harvesting red rip
cheers and processing at the dry and wet meal stations. Because of this reasons the supply of
quality coffee will be reduced. In addition, poor harvesting, handling and processing
techniques and higher consumption in the local market lead to waste and reducing the supply
of coffee. International markets are quality coffee oriented, due to this reasons the export
performance of coffee has decreased. This problem is a great pillar for the performance for
coffee export. However, coffee marketing requires promotion in different international coffee
exhibition. And timely and reliable market information is widely accepted service. Due to
this reason coffee market efficiency and its performance was gradually reduced. International
coffee market price volatility was reported by some of officers as another constraint for
coffee exported. Deresa, (2015) also confirmed that price volatility has significant
consequences for those who depend on coffee for their livelihood, making it difficult for
growers to predict their income for the coming season and budget for their household and
farming needs. When prices are low, farmers have neither the incentive nor resources to
invest in good maintenance of their farms by applying fertilizers and pesticides or replacing
old trees.

2.5 Conceptual Framework

In order to generate improvements in the supply or quality of any product, one needs to
consider all aspects in the chain of events from production to consumption, including both
opportunities and constraints, and the demand and supply of necessary products and services.

Taking a value chain approach to economic development and poverty reduction to poor
countries like Ethiopia involves addressing the major constraints and opportunities faced by
the smallholders coffee farmers, cooperatives unions, processors, exporters and other coffee
agents at several levels and points along a coffee market value chain. This will inevitably
include a wide range of activities such as ensuring access to the full range of necessary
inputs, facilitating access to cheaper or better inputs, strengthening the delivery of business
and financial services, enabling the flow of information, facilitating improved market access,
or increasing access to higher-value markets or value-added products (RIU, 2011).

An integral component of the value chain is the agricultural supply chain, and in the (RIU
innovation, 2010) literature these terms value chain and supply chain may at times be used
interchangeably, or are at least closely related.

The conceptual perspective in this study has the multi-dimensional in content. But the key
approaches are: institutional (organizational) theory, SERVQUAL model and marketing
functional theory. In institutional approach, it intends a list of some of the specialized people
who do marketing tasks. Those involved in handling the commodities and in pricing are often
referred to as “middlemen,” regardless of their gender. Middlemen have classifications such
as retailers, wholesalers, brokers, commission agents, and order buyers. Marketing functional
theory, it emphasizes the functions performed in marketing. In other words, it focuses on
specialized activities within the marketing process. The service quality dimensions
(SERVQUAL Model) developed by Parasuraman, Berry, & Zeithaml (1985), which are
Tangible, Reliability, Responsiveness, Empathy and Assurance; with the objective of
assessing the ECX market value chain and identifying their effect on customer satisfaction
which is dependent variables. Generally, in the absence of the technological advance, the
 growth of total output can be explained in terms of growth in total factor inputs. (Jim
Dempsey & Ruth Campbell)

Tangible

Reliability

ECX market and warehouses’

systems (integrated
Responsiveness warehousing system and Smallholder farmers’
ticketing system) satisfaction

Assurance

Empathy

Source: Adapted from extensive literature review by the researcher

Figure 2.SERVQUAL Model

CHAPTER THREE
RESEARCH METHODOLOGY

3.1 Introduction
Coffee is backbone of the Ethiopian economy. But, Ethiopia has not yet fully exploited its
position as the producer of some of the best coffees in the world. Coffee production in
Ethiopia is constrained by lack of competitiveness, poor access to market, lack of
infrastructure, inadequate access to services, low value addition, and in adequate technology
transfer and research (Jose, 2012). Coffee sector is highly dependent on international prices
and affected by the structure and workings of the world coffee market. Ethiopia is one of the
countries mostly affected by the crisis in world coffee prices (Nicolas, 2007).
Notwithstanding the severe price shocks that have been shacking its value chain, coffee
remains a fundamental component of the Ethiopian economy and export. Nevertheless, the
prolonged price decline has substantially weakened its production basis and prospects so that
appropriate financial services are urgently needed to sustain rural communities (Bastin,
Matteucci, 2007).

Oromia is one of the largest region in Ethiopia that shares largest area coverage of the
country. It is known for high production of coffee and, 489799.36 ha of land were allocated
and 3101927.33 quintals was produced with average yield of 6.33 quintals ha in 2017/18
meher season (CSA, 2018). From top 25 coffee producing districts in Ethiopia, Oromia
dominates with 18 coffee producing districts and the remaining top coffee producing districts
are located in SNNP. Arsi zone is one of the Oromia region’s zones which has potential of
coffee production. In 2016/17 meher season, 6606.55 ha of land were allocated for coffee
production (CSA, 2017). Gololcha district is found on the 14th from top 18 coffee producing
districts in Oromia (James et al., 2015).

3.2 Description of the study area

The study will be conducted in Gololcha district. It is one of the districts in Arsi zone with
potential of coffee production. Gololcha is located at about 281 km from Addis Ababa, the
capital city of Ethiopia and 206 km from Asella, which is the capital town of Arsi
zone. It is bordered by Aseko district in the north, Amigna district in the south, Shenan Kolu
district in the east and Chole district in the west. The district has 23 rural kebeles and from
this 20 kebeles are coffee producers. The altitude of the district ranges from 1400 to 2500
m.a.s.l. Generally, the district has a total area of 178102 hectares and is classified into two
agro-ecologies, the midland and the lowland with a share of 25% and 75%, respectively. The
average temperature of the district is 350c and the average rainfall is 900 mm/year. Total
population of the district is about 201,247, of which 102,502 were males and 98,745 were
females. The main rainy season of the district is in April, May, June, July, August and
September. Major crops produced in the district are coffee, maize, sorghum, teff and
groundnut (GDOoANR, 2021).

3.3 Research Design and Approach

The methodology which will be employed in this research is both qualitative and quantitative
research method. The qualitative approach mainly the case study method is used to undertake
the specific research under consideration because it is characterized by an emphasis on
describing, understanding, explaining complex phenomena by using multiple sources of
evidence for holistic in depth investigation. Specially to find good, full multi-dimensional,
dynamic picture on this study the qualitative research approach is important which enables to
understand the strained aspects between ECX and small holder coffee producers by this
triangulated research method. In order to undertake these activities, to explain and meet the
research objective case study method will be employed. This approach has the potential to
deal with simple and complex situations. It enables the researcher to answer “how” and
“why” type questions, while taking into consideration how a phenomenon is influenced by
the context within which it is situated. For the researcher a case study is an excellent
opportunity to gain tremendous insight into cases and it enables to gather data from a variety
of sources. According to (Yin 2003), the case study will follow in about decisions, programs,
implementation process and market change. That is why this method is chosen in this study.

3.4 Types and Sources of Data

The information required for this research project will be collected from three sources: a)
publication from the ECX and other studies in Ethiopia; b) official statistics gathered from
coffee producing farmers and mimeographs found in the libraries at Addis Ababa University
(AAU), official statistics gathered from coffee exporters found at the national bank of
Ethiopia, and c) various information that was brought from documents of the local, and
district cooperative unions in Gololcha, the Oromia Regional state of the country. For all, the
aim of collecting documented data from the above sources is to understand events that have
been occurring within the coffee sub-sector.
Primary data will be collected from the field in Gololcha District and ECX headquarters in
Addis Ababa. In this context, Participatory Rural Appraisal (PRA) tools will be utilized
particularly for the coffee producers communities in the rural field: a) semi-structured/key
informant interviews based on a checklist of points are useful to understand insights of
various stakeholders on coffee issues; b) problem/solution analyses will be used to know
what people perceived as the main problem in relation to coffee producing and marketing,
root causes and their effects) They will also be asked to mention what they view as solutions.

3.5 Sample Size and Sample Technique

The sample for the study will be taken from the members of local coffee producers’
cooperatives and non-members. According to the Oromia Coffee Farmers Cooperative
Union’s information, currently there are 120 local small holder farmers and 18 local ECX
staff and 62 other coffee agents with a total population of 200 in the area, in which the
researcher will use as a population for this case study. Thus, a sample of 116 using random
sampling, which is about 58 per cent of the total number, will be taken for the questionnaire
survey to be administered for the study. The sample size is believed to be a representative of
the population as large sample size (58 per cent) will be taken from the total population.

Accordingly, respondents will be selected through simple random sampling method for it is
very useful to distribute the questionnaire to the respondents with the equal chance of being
selected as the respondents with the help of personnel managers of the local cooperatives for
administering the questionnaires. In addition, an interview will be conducted with
purposively from three selected key official informants of ECX. Hence, it is easy to get an in
depth information on the issue. Moreover, it helps to get information from those who have
depth know how and long experiences on the issues under discussion.

3.6 Data Collection Tool

Primary data will be collected from the field in Gololcha and ECX headquarters in Addis
Ababa. In this context, Participatory Rural Appraisal (PRA) tools will be utilized particularly
for the coffee producers communities in the rural field: a) semi-structured/key informant
interviews based on a checklist of points are useful to understand insights of various
stakeholders on coffee issues; b) problem/solution analyses will be used to know what people
perceived as the main problem in relation to coffee producing and marketing, root causes and
their effects) .They will also be asked to mention what they view as solutions.
In the process of gathering primary data questionnaire, interviews, Participatory Rural
Appraisal (PRA) and field observations will be in use. The secondary data will be gathered
from available official documents and reports related to ECX operation.

3.7 Pre- Test

3.7.1 Validity and Reliability

In order to assure data quality, the questionnaire and interview questions prepared for this
study will be validated and tested at pilot level for its reliability before distributed for sample
respondents and used as data collection instrument.

Primary, the validity of the instruments will be tested by the research advisor to judge the
items on their appropriateness and clarity of the contents. Based on the comments forwarded
by the expert, amendment will be made on data collection instruments. Then, the reliability of
the instruments will be tested through the pilot study.

The pilot testing will be carried out at three coffee producer micro enterprises found in the
study area. In doing this, the questionnaire will be distributed to 32 randomly selected
members of the enterprises. Then, to measure the reliability of the questionnaire, Cronbach’s
alpha coefficient will be calculated for all parts the questionnaire.

Concerning the acceptability level of Cronbach’s alpha results most authors suggested 0.67 or
above. According to Cohen, et al (2007:506), the reliability level is acceptable if it is 0.67 or
above. And also suggested that, Cronbach’s alpha results can be used on the basis of the
following guidelines: > 0.90 = high reliable; 0.80–0.89 =fairly reliable; 0.70–0.79= reliable;
0.60–0.69=marginally reliable; 0.59–0.50 = Poor and <0.50 = unacceptable. These rules will
be considered during the pilot test of the questionnaire.

Cronbach’s alpha Reliability level justification

0.9 ≥ Excellent/ Highly reliable

0.80–0.89 Good/ Fairly reliable

0.70–0.79 Acceptable/ Reliable
0.60–0.69 Questionable/ Marginally reliable
0.59–0.50 Poor
< 0.50 Unacceptable
Source: Retrieved from Wikipedia
Table 1: Cronbach’s alpha reliability test acceptable guideline

3.8 Data Processing and Analysis

The data collected for this study will be checked and organized with respect to basic research
questions and objectives of the study. Then it be analyzed quantitatively and qualitatively. At
the beginning the data collected from sample respondents through the questionnaire, will be
checked and organized for tabulation. The tabulation of the data will be made using
Statistical Package for Social Science (SPSS-V20) and Microsoft Excel software.

Then, the tabulated data will be analyzed and interpreted using descriptive statistics; like
percentage, standard deviation, and range. SERVQUAL model and gap analysis will also be
used to assess service delivery quality and farmers’ satisfaction level. The results of
quantitative data will be organized and illustrated using tables, charts and graphs. Moreover,
elaboration will be made to determine the relationship between ECX marketing services and
satisfaction of the small holder coffee farmers on the service of the ECX in the study area.

Furthermore, description and presentation of the data will be taken place following each
tables and graphs. On the other hand, the information obtained from interview and PRA will
be analyzed qualitatively descriptive analysis.

3.8 REFERENCE
Alemu, D. and G. Meijerink (2010) 'The Ethiopian Commodity Exchange: An Overview',
Ethiopian Pulses, Oilseeds and Spices Processors Exporters Association’
Wageningen, Netherland: Wageningen University.

Amanor, K.S. (2009) 'Global Food Chains, African Smallholders and World Bank
Governance', Journal of Agrarian Change 9(2): 247.

Aspers, P. (2007) 'Focus on Economic Sociology Theory, Reality, and Performing in

Markets' The American Journal of Economics and Sociology 66(2): 379-0.

Bair, J. (2008) 'Analysing Global Economic Organization: Embedded Networks and Global
Chains Compared', Economy and Society 37(3): 339.

Bernstein, H. and L. Campling (2006) 'Commodity Studies and Commodity Fetishism I:

Trading Down', Journal of Agrarian Change 6(2): 239.

Bernstein, H. and L. Campling (2006) 'Review Essay', Journal of Agrarian Change 6(3): 414.

Bevan, P. and A. Pankhurst (2007) 'Power Structures and Agency in Rural Ethiopia:
Development Lessons from Four Community Case Studies’ retrieved from
www.wed-ethiopia.org