The trade of coffee is a crucial step in the global supply chain. However, in many cases (specifically for smallholder farmers) coffee producers are “price takers” rather than negotiators.

In recent years, we’ve seen the growth of the direct trade model in specialty coffee. This is where producers trade directly with buyers without the need for intermediaries. Unfortunately, this is not always easy to negotiate, and accessing it can be difficult for producers. 

To learn more, I spoke with three African coffee experts to get a clearer grasp of direct trade in East Africa, and why it is experiencing a slower rise here than in other major coffee producing regions around the world. Read on to learn more.

You may also like our guide to buying organic coffee.

How is coffee traded in East Africa?

The coffee trade in East Africa is broad and complex, with models generally varying from country to country. However, direct trade is far less common than other systems.

Mette-Marie Hansen is the Managing Director for Kenyacof (Sucafina Kenya). She says that direct trade is largely a self-explanatory concept: it refers to the direct trade of coffee between buyers in coffee consuming markets (roasters) and producers, without intervening factors or intermediaries.

However, the use of intermediaries is by far the more common approach in East Africa. While this model does face criticism, Mette-Marie explains that these intermediaries can and often do add value and expertise to the trade process. 

She says: “[Intermediaries oversee] the financing of growers throughout the crop cycle, agronomic advice based on observation and measurements, all the export preparations, packaging, quality control, documentation, and overall execution of shipments.”

She adds that this does not necessarily mean that the relationship between the grower and roaster is any less direct. 

“They are just outsourcing some of the details needed to ship and land the product,” she says.

Ethiopia

Ethiopia has two distinct coffee trading methods: the Ethiopian Commodity Exchange (ECX) and the vertical integration system.

The ECX was established in 2008 to facilitate the trade of various different commodities, including coffee. While it has both supporters and detractors, the system is functional and popular for the trade of commercial-grade coffee.

The platform brings the government, market actors, and ECX members together in one place, where they are able to do business with the backing of a price floor, price transparency, and the benefit of instant, electronic payments.

For farmers, there is less risk of contract defaults, while for buyers, there is the guarantee of consistent supply. The ECX even provides warehousing and transport for coffee, significantly easing the financial burden on producers.

Vertical integration, meanwhile, is the country’s approach to direct trade. It was legitimised by the ECX back in 2017 following pressure from specialty coffee exporters. Because they are allowed to handle their own product and oversee quality control and grading, buyers who use the model often have fewer concerns, while farmers are empowered to agree prices beforehand.

There is one catch, however: vertical integration does not benefit from the prompt payment system enabled by the ECX, meaning farmers can still end up waiting a while for their money to come in.

Burundi

For many years, Burundi’s coffee exports were under the total control of the government. It was only in 1991 that the system switched to auctions, where the government continued to set the floor price.

However, in 2008 direct trade became possible and producers and exporters finally gained more control over the process. Today, buyers can still choose to buy through government-facilitated auctions, or to trade directly.

Some obstacles still exist for direct trade. For example, producers continue to struggle with a lack of infrastructure, and transport issues means it is not always easy for buyers to travel to farms.

Kenya

In Kenya there are two distinct systems for the trade of coffee: the auction system and the “Second Window”.

Although the auction system is sometimes criticised for its impact on farmer livelihoods, it still accounts for over 94% of total coffee sales in the country. If well run and managed, this system guarantees that coffee will be sold at the highest price possible, but this is not always the case.

The second method, called the “Second Window”, is effectively Kenya’s direct trade system. It was established in 2006 following years of pressure from farmers and co-operatives. Direct trade between farmers and international buyers has become more popular in the last 15 yars, but this method is still underutilised. 

Farmers and co-operatives often cite their lack of knowledge and high initial costs as the main issues for direct trade.

Tanzania

In Tanzania, there is an established auction system with various auction centres in cities such as Mbeya, Mbinga, and Moshi. 

Similar to Kenya, the auction system makes up the bulk of coffee sales in the country, while direct trade is less established. 

Uganda

In Uganda, trade is liberalised. This means that anyone can buy and sell coffee in any form or quantity. Individual growers, co-operatives, or farm and estate growers are free to sell their produce to anyone at negotiated prices. 

As far as exports are concerned, anyone with an export license can export coffee, roasted or green. Buyers can purchase coffee as cherry, dry cherry, parchment, or milled green coffee. The coffee is sold through “private treaties” with no restrictions on the volume traded.

Rwanda

As in Tanzania, direct trade is also possible in Rwanda. This usually covers higher-grade coffee, with lower grades reserved for the local market. Co-operatives have an established presence in Rwanda, and they have relationships with various direct buyers. 

There are criticisms that in some cases, too many actors are involved in the trade, processing, and transport of Rwandan coffee, and this can make the price farmers are paid unsustainable. In many cases, the younger workforce in the country can be dissuaded by this.

However, there are examples of Rwandan coffee producers innovating in the market. For instance, some stakeholders have started trading coffee on Alibaba’s Tmall platform, which opens producers up to the Chinese ecommerce brand’s huge network of buyers.

Why is direct trade often less prominent?

William Peters is a coffee trader based in Tanzania. According to him, the main reasons why direct trade is less established in East Africa are a lack of investment and an overreliance on coffee to pay off existing debts.

“You will find that most farmers have loan advances and pending debts from the co-operatives that need to be repaid,” he says. “They therefore are ‘stuck’ to the co-op, and they have to wait to be paid for their coffee to pay off these loans.”

In addition, logistics can be incredibly expensive, and William says the agricultural marketing co-op societies (AMCOS) simply cannot afford to finance it on behalf of farmers. Only once the importers have paid for the coffee can the crop be moved.

In Tanzania, farmers also typically get paid within seven days of selling their coffee. Unlike with direct trade, where they may wait for a considerable amount of time before being paid, the auction system guarantees faster payment. However, prices can be lower.

Robert Nsibirwa is a Ugandan coffee expert and CEO of Africa Coffee Academy. He explains that large roasters tend to aggregate their purchases to ensure constant supply, and that it is just a simple question of scale.

“If Nestlé needs 30 million kilograms of coffee, it will be too hard to work with 2.8 million smallholder farmers who will supply the required amount,” he says.

It is for this exact reason that major commercial roasters choose to work with importers instead of dealing directly with farmers. 

The importer will also be able to deal with any supply issues. For instance, if a roaster requires one million bags, and only 500,000 are available, it’s up to the importer to source the deficit, rather than them.

If this were the case with individual farmers or small co-operatives, the contract might have to be cancelled, resulting in serious financial consequences.

“It’s the economy of scale with the roasters and certainty of supply,” Robert explains. “This is why many importers prefer to go to the exporter, who will hustle for a container from maybe 1,000 farmers.”

Other barriers for direct trade

For many supply chain actors in East Africa, the status quo and existing trade models are simply too profitable to consider a switch to direct trade. But are there any other specific reasons that direct trade is less established?

Well, local laws may require in some cases that when sold directly, coffee must be sold at a higher price than at auction. This makes direct trade much less competitive.

William says: “This works against the producer because clients will prefer to go to the auction or exporters who will offer the same coffee at a cheaper price.” 

Growing specialty coffee also often requires training about the importance of cup quality and unique sensory attributes; it may even require the support of an agronomist.

This means that only a small percentage of coffee can achieve the quality that specialty coffee roasters will pay premiums for. Accessing this knowledge and training in East Africa is difficult without the support of a larger entity such as a major exporter or importer.

Another issue is a widespread lack of certifications. These (often for environmental or ethical sustainability) are often sought after by individual green coffee buyers looking to practise direct trade.

While many coffee farms in the region may already be meeting minimum standards for these certifications, the cost (in terms of both time and money) to actually become certified is another barrier. 

How are things changing?

Robert says: “When co-ops or estates sell directly, they [often] get higher prices than coffee sold locally, because they sell to the specialty market, which is able to pay premiums over and above the regular market price.

“Through corporate social responsibility and direct relationships, the farmers that have direct buyers [often] enjoy grants and assistance. [We are seeing more] organisations such as the Fairtrade Labelling Organisation (FLO) help by strengthening these farmer groups and even building communal projects such as water points.”

Mette-Marie agrees that direct trade is beneficial to East African producers, especially as it usually means repeat business for them. However, she says that because most coffee is of commercial quality, most buyers see more benefits from the auction system.

“[Auctions provide] perfect quality discovery for the buyers, because we get to see the auction samples and cup them a week in advance of the auction,” she says.

Specialty coffee, on the other hand, is much more suited to direct trade, and she doesn’t see any reason why the two systems can’t be complementary.

“The best growers can fetch great premiums for the quality coffee they produce directly for overseas buyers,” she explains. “Overall, I don’t see this affecting the auction system in any way.”

Around the world, coffee producers are often price takers rather than negotiators. However, direct trade has shown that it is possible to shorten the distance between roaster and grower, and give both more agency and control in the process.

While auctions, traders, and commodity exchanges remain integral to the global coffee supply chain, direct trade does offer something different: the chance to communicate more closely with the buyer and often receive a higher price for their crop. 

Unfortunately, the success of this system is by no means guaranteed and it faces plenty of obstacles in East Africa. Whether or not this will change in the years to come, however, remains to be seen.

Enjoyed this? Then read our article on tackling the challenges of trading coffee in East Africa.

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