Adapting Ethiopia’s coffee sector to climate change through value addition

Ethiopia is considered the birthplace of coffee and is currently the fifth-largest in the world. While the country is known for producing some of the world’s highest-quality Arabica coffee beans, these specific types of coffee beans are also known to be very sensitive to changes in environmental conditions and, by extension, climate change. 

Even the slightest changes in climatic and environmental conditions (particularly of temperature) are estimated to impact coffee production and quality. For instance, it can lead to bitter or poorly flavoured beans. More than 95% of Ethiopian coffee is produced in areas vulnerable to climate change and by small-scale coffee farmers, most of whom contend with poor financing, low endowment, insufficient access to extension services, and limited knowledge to make appropriate mitigating planting and production plans if faced with changing weather patterns. 

Declining productivity of Ethiopia’s coffee crop 

Amid the ever-growing global demand for coffee, over 50% is consumed locally. Despite this, coffee remains by far Ethiopia’s single most important export, accounting for 35% of merchandise exports in 2022.  Coffee cultivation also provides a livelihood for more than 15-20 million Ethiopians. Between 2011-2022, coffee cultivation area and production grew by 60% and 45%, respectively, indicating an  8% decline in yield. While this yield decline is often primarily attributed to the lack of pruning and stumping of old trees, production irregularities and the prevalence of pests and diseases linked to climate change are also major contributing factors. 

Mitigation and adaptation mechanisms available for coffee farmers

To address and minimise the potential impact of climate change and production irregularities of coffee, researchers suggest several adaptation and mitigation mechanisms.

For the short- to medium-term adaptation solutions, mulching, pruning, stumping, and value addition are recommended. For the medium- to long-term, recommended strategies include using shade trees, developing and distributing improved and resilient varieties of coffee beans, and migration to higher altitude areas.

Focus on value addition can complement climate change adaptation 

International coffee prices primarily depend on processing type (wet or dry processing), speciality grades (1 or 2), and adherence to voluntary sustainable standards (such as organic coffee farming). 

Figure 1 shows the price premium difference between wet processed (washed) coffee and dry processed (unwashed) coffee. Washed coffee commands a 30% higher premium internationally (Figure 1a). Despite this large premium and concerted government and key stakeholder efforts to increase the share of washed coffee in the country, upstream value chain actors are hesitant. This is primarily due to poor incentive structures at the farm level (for selling in red berry form) and weak vertical integration between export and production, where farmers only get a small proportion of the premium. 

Figure 1: Ethiopia might be missing out on premiums attached to selling washed coffee
(a) Premiums over time 2005-2022 (b) Trends in share of washed coffee 2005-2022

Farmers face higher costs for selling red berries, as washed coffee requires selective picking of fully-ripen coffee berries and delivery to washing stations. These activities are more labour-intensive than producing unwashed coffee. It also reduces farmers' bargaining power compared to selling dry berries, which can be stored and sold at their convenience. In addition, at the processors’ level, coffee washing involves relatively higher sunk costs, care, and management challenges that small-scale processors may struggle to afford. 

As a result, the share of washed coffee remains below 35% nationally (Figure 1b), leading to a forgone benefit of over USD 250 million annually. Hence, the focus needs to be 1) on reducing the economic costs of obtaining these premiums and 2) improving incentives for washing coffee. Without understanding the incentives for agents to address these economic considerations, the benefits are unlikely to be realised. 

Figure 2 illustrates the price premium for Grades 1 and 2 (hereafter ‘speciality coffee’). As shown in Figure 2a, speciality coffee commands about 40% more premium on the international market than the next commercial grades. Specialty coffee incurs higher production costs due to the meticulous care required at production, from harvesting (such as single origin with distinctive attributes, fully ripened cherries); to seed profiling (including free of primary defects, little to no defects, complex flavour profile.

Figure 2: Overall share of speciality coffee is growing but share of Grade 2 is declining
(a) Premium for grades: 2005-2022 (b) Trends in share of specialty coffee: 2005-2022

Ethiopia has done a remarkable job of increasing its overall share of speciality coffee over time - from less than 40% in 2005 to more than 55% in 2023. However, despite the rapid rise in the share of Grade 1 and the share of Grade 2, the largest contributor to speciality coffee has not kept pace. Given the substantial premium for speciality coffee, Ethiopia needs to investigate the decline in the share of Grade 2 and strive to increase its overall share of speciality coffee exports. Trying to raise the share of speciality coffee while facing higher production costs, the cost-benefit of production and how actors across the value chain, including farming families, can better profit from it remains understudied in Ethiopia.

A recent development in international coffee markets is also that consumers in high-income countries are willing to pay an extra premium for coffees produced with Voluntary Sustainable Standards (VSS). Organic coffee, for instance, sells for over 26% higher on the international market compared to its non-organic counterparts (Figure 3a, also see Berihun, 2024). Despite this considerable premium gap, the potential for organic coffee in Ethiopia remains untapped, with its share around only 4% (Figure 3b).

Interestingly,  while 95% of smallholder coffee farmers in Ethiopia practice organic farming, few are formally certified with far more organically produced coffee that. In addition, Jena et al. (2012) and Minten et al. (2018) also found that the use of synthetic pesticides and fertilisers is almost non-existent among Ethiopian smallholder coffee farmers, except for occasional organic pesticide use. Berihun (2024) confirms both these observations for the Sidama region. Minten et al. (2018) provide evidence highlighting that high certification and compliance costs, coupled with low incremental benefits, deter farmers and cooperatives from VSS participation.

Figure 3: Potential gains from shifting to organic coffee production in Ethiopia

Policy implications

Climate change-induced spread of diseases and pests is already affecting coffee production and threatening the livelihood of millions of smallholder farmers and their families. Coffee-growing economies and their smallholder farmers face considerable adaptation and mitigation challenges. Given long lead times in tree crops, further research and stakeholder engagement on adaptation and mitigation mechanisms is crucial, prioritising improving access to finance for climate change adjustment. Thorough research is needed on barriers to adaptation, especially at the farm level, as adaptation requires investment. In the short- to medium-term, policymakers and key stakeholders can focus on leveraging price premiums from washed coffee, producing speciality coffee, and promoting organic coffee production as adaptation strategies against climate change threats.