Sunday, September 11, 2011

Good coffee or consistent coffee

Here is a great example of why the world needs to take a more system-wide perspective when dealing with important economic development.  The Ethiopian coffee market is my topic of today.

There are really two markets for Ethiopian coffee.  The bulk is sold to companies like Kraft to make Maxwell House in bulk that you would never know came from Ethiopian Arabica beans.  These are blended to create a consistent, mild flavor.  Then there is a small market for the highest quality beans that are branded not just for taste, but with an accompanying story – the name of the grower, fair trade wages, eco-friendly agriculture, etc.  This is a very small part of the total volume, but serves two important goals.  It creates a brand image for Ethiopian coffee and it sets a high peak price that anchors the bulk market where the rest of the beans are sold.

But the Ethiopian government, in the interest of increasing efficiency, has passed new regulations that all coffee has to go through the centralized Ethiopian Commodities Exchange.  This is because the high volume trading this provides makes the whole system more efficient.  It leads to higher volume of coffee demand, and therefore a need for foreign investment in infrastructure like roads and ports.  It makes farming more efficient overall.  But if they lose the high end boutique market, it could reduce prices to the point where they lose all the benefits of the efficiency.

One proposal is a bar-coding system that enables both.  All of the coffee transfers through the Exchange, but some of it is blended into consistent tasting Maxwell House and others are maintained as boutique beans.  The bar coding makes sure they don’t get mixed up, so they can keep them straight and the boutique cafes are confident enough that they are willing to pay the higher price.  That is what is missing in the current plan.

Economists and traders are good at making efficient exchanges.  Marketers are good at branding and creating higher priced exclusive products.  But only IEs can achieve both in the same market.