Africa is home to both Arabica and Robusta coffee varieties and globally recognized for high quality beans (by flavor), earning around $2.5billion (Statista, 2021) yearly from coffee beans export. Top producing countries include Ethiopia, Kenya, Uganda and Tanzania(AfDB). Millions of smallholder farmers form the upstream part of the value chain and depend heavily on the crop for their livelihoods. However, highly competitive global market conditions and unfavorable prices due to aggressive production and export from Brazil and Asia over the years are lowering African farmers’ interest in the crop as they look to invest in more economically valuable cash crops like Avocados. Also, direct access to global markets is limited due to the highly fragmented nature of production, low value addition, and absence of business structure and facilities, hence smallholders are dependent on the services of middlemen for immediate offtake and payments. The midstream section of the value chain takes an informal mode of transaction and involves rural agents/aggregators, merchants, small and medium scale processors, who may export or sell semi processed beans to exporters.
With the global market projected to exceed $200billion at a CAGR of 4.47% driven by increasing product innovation in developed countries, rising consumption by younger generations, growing global population, increasing interest/changing taste on the African continent and increasing consumer awareness and demand for traceability with many consumers willing to pay a premium for coffee that is grown in an environmentally friendly and socially responsible way (FAO), small holder farmers and other value chain actors can scale up production to meet demand, earn better income and improve their livelihoods as well as contribute to national economic growth. However, systemic challenges in rural Africa, particularly poorly developed physical and digital infrastructure limit the continent’s ability to take advantage of these opportunities.
In this article, we explore the evolution of cross border payments used in the coffee trade industry between Africa and the US, including the current challenges faced by exporters and importers as well as possible future innovation/disruption.
History Of Trade Between Africa and The U.S
Although, Coffee trade dates to as far back as the 14th century, the African coffee export industry is said to have gained momentum in the 19th century which led to the establishment of large coffee plantations in East Africa. As a cash crop, production was export focused with the majority of raw coffee beans being exported to USA, Germany, Belgium, France, Japan etc.
Coffee trade between Africa and the United States of America dates back to the late 19th century when coffee was first introduced to the United States from Africa. Over the years, trade between the two continents has grown and evolved, with Africa becoming a major supplier of coffee to the United States leveraging its unique cultural heritage of specialty coffee and sustainable coffee production, making African coffee more appealing to U.S. consumers interested in unique flavors and aromas and concerned about the environmental impact of coffee production.
However, despite the growth of the coffee trade between Africa and the United States, the coffee sector in Africa remains vulnerable to a number of challenges. For example, coffee production in Africa is often limited by massive rural poverty, political instability, and a lack of investment in coffee production and processing. Additionally, African coffee producers often face significant systemic infrastructural obstacles relating to accessing markets, reaching international buyers, and receiving cross border payments.
From Barter trade payment systems, cash became the standard, followed by cheques payments. By the end of the 19th century, the rise of the internet and mobile technologies began to enable wireless cross border money transfers, requiring a period of days, sometimes weeks to complete. Gradually, in the 2000s foreign owned and indigenous banks and telecommunications companies launched and expanded across Africa, these developments brought ease for seamless and safer money transfers. However, as competition from other producing regions began to grow and price wars became pronounced, more flexible terms were needed to ensure African coffee maintained a substantial share of the market.
Generally, the nature of payment terms and mode of payment differs per transaction and is influenced by price per ton, beans quality, volume and duration of transaction, exporter’s company size, transaction history and financial records, internal company policies of importers and exporters, and national regulations.
More recently, global supply chain disruptions, local logistics challenges, adverse climate change effects and adoption of digital payments in rural communities are shaping the relationship between value chain actors and modifying business models.
Major widespread challenges limiting effective cross border payments for coffee exports in practice include;
- Lack of trust: Historical records and personal experiences of sabotage have festered into a lack of trust between buyers, exporters and the intermediaries involved in cross-border transactions, issues such as supply of low quality/immature beans by farmers in a bid to meet demand surge from exporters and global markets, has resulted in difficulties in arriving at favorable terms for both parties as well as establishing and maintaining long-term relationships.
- Irregular and unpredictable currency fluctuations: The high volatility nature of African currencies against the US dollar and other major currencies, makes it difficult for exporters to adequately plan and predict their earnings.
- Poorly developed infrastructure: Most Coffee producing countries lack advanced financial infrastructure to facilitate swift and seamless cross-border payments, such as modern banking systems and electronic payment systems.
- High transaction fees: High commission rates of cross-border transactions due to technological inefficiencies and difficult business environments in Africa make it difficult for small and medium-sized suppliers to compete in the global market.
- Limited access to credit: Most African coffee farmers and exporters have limited access to favorable credit facilities, making it difficult for them to sustainably finance their operations, fulfill orders and grow their businesses.
- Political instability & Regulatory challenges: Political unrest, insecurity and rigid regulations in different regions of African countries can be difficult to navigate, cause delays, lead to additional/hidden costs and may even result in loss of payment.
Overcoming these new challenges requires innovative financial agreements that ensure quality for the buyer and timely payment to the exporters.
Case Study
Ethiopia is considered to be the birthplace of Coffee globally and Africa’s leading producer. Coffee is the country’s major export product, making up about 34% to its total export revenue. The country accounts for over 300,000 tons and earned over $1 billion export revenue in 2022 (Ethiopian Coffee and Tea Authority, 2022), in contrast with other regional producers, approximately half of all yearly sales are from local demand as Ethiopia has a strong domestic Coffee market. Known specifically for uniquely flavored, high quality Arabica Coffee beans, the country’s production is concentrated in regions like Sidamo, Yirgacheffe, Harar etc. Though dominated by a large number of smallholder farmers, government interventions through credit input schemes, cooperatives, traceability programs and commodity boards have helped to structure the sector considerably. Lack of coordination and transparency have stalled the industry’s development locally but indigenous organizations and cooperatives like the Ethiopia Commodity Exchange, Moplaco, Oromia Coffee farmers cooperative Union, Sidama Coffee farmers cooperative union etc are major exporters of the country’s coffee.
The trade between Ethiopia and the US is estimated to be worth $127 million as at 2020, with the US being the third largest buyer with a 14% share of Ethiopia’s annual coffee production, after Saudi Arabia and Germany (OEC, 2020).
(HS Code: 0901) (USD)
Insights from conversations with Coffee producers and exporters on the top challenges faced with current payment terms include;
- Lack of transparency between the sellers and buyers,
- Fluctuations in currency exchange rate and
- Lack of flexibility to accommodate more currencies from the major producing nations.
According to Israel, president at Kerchanshe trading PLC, over the last decade, the payment mechanism used per transaction depends on the agreed contract terms between the buyer and the seller with Letter of Credit (LC), Cash against document (CAD) and Cash in advance being the top three. However, current challenges faced by exporters arise from government intervention. All payments are made in USD to a government account linked to the supplier for reconciliation. Upon reconciliation for the specific coffee consignment, the government pays the producer in local currency less the fees and taxes which are up to 30% of the initial USD payments. E.g if a producer/exporter receives $10,000 for a coffee consignment, about $3000 of that in USD will be deducted as government fees and taxes with the supplier receiving $7000 in Ethiopian Birr.
For buyers, the payment procedures for importing Ethiopian coffee has been considered to be complex and time-consuming, involving multiple intermediaries and documentation requirements. Buyers need to work with banks, freight forwarders, and other intermediaries to facilitate payments, which adds to the cost and time required to complete transactions. Also, the banking infrastructure in Ethiopia is not as well-developed as in some other producing countries like Brazil or Vietnam. In particular, limited options for electronic payment methods make transactions more difficult to execute and track. Economic instability in the East African region, rapid and unpredictable currency exchange rates create uncertainties and disrupt supply chains worsening the trade experience for buyers.
Despite its unique cultural heritage and desirable specialty qualities, Ethiopian Coffee export trade may sustain low prices and experience slowed growth in export revenue stalling the achievement of it’s desired $2 billion export revenue milestone in 2023, a projected increase of about 43% from 2021/22 fiscal year, if innovative cross border payment solutions do not receive sufficient public and private sector attention and investments.
However, leveraging advancements in internet technology, exporters and importers are optimistic of a harmonized future payment ecosystem enabling producers to directly access global markets for coffee of all origins and transact seamlessly with buyers regardless of currency used.
At AGnimble, we offer seamless, simplified cross border payment for agricultural procurement between all parties with our end-to-end digital solution. We facilitate connection of sellers to buyers and enable buyers to purchase quality food and agricultural commodities for their business needs, removing frictions in the supply process by using technology to integrate different functions of the supply chain.
