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Exporting is one of the most important channels through which developing countries can link with the world economy (World Bank, 2001). Exporting allows firms in developing countries to enlarge their markets and benefit from economies of scale. Additionally, several scholars have pointed out the importance of exporting as a channel of technology transfer (Pack, 1993). Thus, for better performance of a developing country, it is vital to identify the major determinants of its export supply. In order to formulate trade and industrial policies aimed at stimulating exports, it is important to understand which factors stimulate or deter firms from entering foreign markets.
Redding and Venable (2004), investigate the relative contribution towards export performance. They find that internal components related to supply capacity such as internal geography and institutional quality played a significant role in explaining the observed differential in export performance. According to Redding and Venables (2004), the relative export performance of the African and Middle Eastern countries tended to deteriorate over 1980s and 1990s. This was driven by relatively poor performance in supply capacity. However, since the late 90s, East Asian and Pacific countries in particular have been among the main beneficiaries of foreign market access which coincides with their successful diversification efforts. Real exchange rate which reflects the underlying relative movement of prices at home and abroad is proved to have a significant effect on the export performance of the lowest performers.
One of the world’s most widely traded commodities is coffee. Coffee beans when roasted produce a flavorful, aromatic and caffeine filled drink that is popular all over the world, with over 600 billion cups sold each year (ICO, 2014). Two botanically different trees can produce coffee. Arabica coffee trees produce coffee beans that are more labor intensive in its cultivation and are grown at higher altitudes. This coffee is milder, more aromatic and more complex than its Robusta counterpart (ICE, 2014). For many countries, over 50% of their total export earnings can be accounted for by coffee exports. In fact, the top 10 Arabica coffee exporting countries in the world are considered developing. The UCDA estimates that approximately 77 million 60 Kilogram bags were exported from the top 10 coffee exporting countries in 2011-2012.
Coffee is one of the most significant exported commodities by Brazil Colombia, Guatemala and Honduras, and as previously noted, these are among the top exporting countries of Arabica coffee. Naturally, coffee plays a significant role in the composition of the Gross Domestic Product and Agricultural Gross Domestic Product of these countries, Coffee makes up the highest percentage of both GDP and AGDP for Honduras with 7.37% and 48.17 %, respectively. Honduras is similarly followed by Guatemala with 2.49% and 21.08%; Colombia with 0.86% and 12.53%; and finally Brazil with 0.35% and 6.41%, (ICE, 2014).
For most low developed economies in Sub-Sahara Africa (SSA), agriculture has been the main source of livelihood both in terms contributing 34% to Gross Domestic Product (GDP) and 64% to employment, either directly or indirectly, Dependence on agricultural commodities like coffee for exports has been accompanied by a high degree of price risk in terms of both volatile and declining prices, a phenomenon which has not only affected the way households allocate their resources but also affected their welfare in terms of consumption and export volume to the world market.
Uganda’s export sector is dominated by primary products (about 74.1 %), (Roberta, 2004). These include agricultural products; mainly coffee, cotton, flowers, simsim, fish; unprocessed minerals such as gold; live animals, hides and skins among others. At independence time (1962), Uganda’s traditional exports constituted agricultural commodities and unprocessed minerals. By the end of the 1970s, coffee was the largest foreign exchange earner accounting for about 51 percent leaving cotton, copper, tea and tobacco sharing the other portion of the earnings (Musinguzi, 2002).
Coffee continues to play a leading role in the economy of Uganda, contributing 18% of the export earnings between 2000 and 2010, despite the vigorous efforts by Government to diversify the economy. Though large scale coffee producers are gradually emerging, the coffee sub-sector is almost entirely dependent on about 500 000 smallholder farmers, 90 percent of whose average farm size ranges from less than 0.5 to 2.5 hectares (UCDA, 2012). The coffee industry employs over 3.5 million families through coffee related activities. Though large scale coffee producers are gradually emerging, the coffee sub-sector is almost entirely dependent on about 500000 smallholder farmers, Domestic consumption of the commodity in Uganda is relatively small ranging from 4-10% of production. As such, coffee is primarily an export crop, between 2005 and 2010, (Sayer, 2002).
Coffee has continued to play a leading role in the economy of Uganda (UBOS 2011). It contributes between 20-30 percent of the foreign exchange earnings (Uganda Coffee Development Authority, 2009). In 1995, the National Union of Coffee Agribusinesses and Farm Enterprises (NUCAFE), this has led to the coming up of some large scale coffee farmers. Though large scale coffee producers are gradually emerging, the coffee sub-sector is almost entirely dependent on about 500,000 smallholder farmers, 90 percent of whose average farm size ranges from 0.5 to 2.5 hectares. The coffee industry employs over 3.5 million family members through coffee related activities. From the 1920s, coffee was grown for export and in the 1950s an extensive coffee production programme was launched. In 1972, coffee production reached 4.2 million bags of 60Kgs each. Thereafter, coffee production declined tremendously because of civil strife, poor marketing systems, and low producer prices arising from government monopoly and controls (Rudaherenwa, et al 2003).
Uganda ranks fourth after Burundi, Ethiopia and Honduras in terms of contribution of coffee exports in total export earnings in the period 2000-2010 with an average share of 18% during this period (ICO, 2012). The post-1997 coffee price decline has had a negative effect on production and exports (Baffes, 2006). However, production kept declining even when prices recovered until 2006 and has recently been declining.
Although coffee contributed as much as $400 million annually to total merchandise exports during the mid-1990s, it currently (2010) contributes about $280 million (MAAIF, 2011). Understandably, the sector’s poor performance raised concerns among policy makers. However, despite the declining foreign earnings compared to the mid-1990s, coffee remained the main foreign exchange earner for the country. Its share in total export earnings declined marginally from 17.9 percent in 2009 to 17.5 percent in 2010.
Despite a significant decline in quantity exported coffee export earnings in 2010 increased by 13.1 percent as a result of higher global prices although there was an overall 14.3 percent decline in the quantity of coffee produced in 2010. Coffee exports in 2010/11 were 156,000 MT valued at US$ 338 million. European Union is the main market for Uganda coffee export accounting for over 70% of total exports followed by Sudan importing over 10% of Ugandan coffee and USA with 3% of coffee exports of Uganda (Figure 3) (UCDA, 2011). However, the export market of Uganda is quite diverse with a total of 16 importing countries. The export market is controlled by 29 national and multi-national companies with ten companies controlling about 85% of the export market. The leading company Ugacof (U), Ltd) controlled 15% of the coffee export in 2011 (UCDA, 2011). The top ten importing companies held a market share of 73.4% in 2011.
Uganda’s export sector is dominated by primary products (about 74.1 %), (Roberta, 2004). These include agricultural products; mainly coffee, cotton, flowers, simsim, fish; unprocessed minerals such as gold; live animals, hides and skins among others. At independence time (1962), Uganda’s traditional exports constituted agricultural commodities and unprocessed minerals. By the end of the 1970s, coffee was the largest foreign exchange earner accounting for about 51 percent leaving cotton, copper, tea and tobacco sharing the other portion of the earnings (Musinguzi, 2002).
In Uganda, Robusta Coffee is mainly grown in the low altitude areas of Central, Eastern, Western and South Eastern Uganda up to 1,200 meters above sea level. Arabica coffee requires cool, moist and higher altitude. It is mainly grown on Uganda’s mountain fringes, on Mount Elgon in the east (notably in Bugisu, on the western slopes of Mount Elgon in Mbale district) and on the Ruwenzori’s and West Nile (Nebbi and Okoro districts) on the border with Congo. Some Arabica is also grown in Mbarara district in Western Uganda (Sayer, 2002).
Figure 1: Graph showing the changes in the quantity of coffee exported by Uganda since 1991-2010
The figure 1 above shows that Uganda’s exports of coffee in 1994 increased 1000,000 Kgs and Uganda exported the largest amount of coffee in 1996 which was above 4,000,000 Kgs , this figure also indicates that the export of Uganda coffee has been fluctuating over the years and by 2010 there was a great general decline of the coffee exports as compared to other years like 1996, 1998, 2000, 2002 this volatility in exports therefore indicates that Uganda’s coffee faces various challenges in its export of coffee to the world markets. From 1991 to 1998, coffee exports increased mainly due to fair prices on the international market. Thereafter, coffee exports declined
almost every subsequent year. This is mainly due to adverse prices on the international market, and there exists a huge value gap between the global revenues generated from coffee and what producing countries earn, due to a long supply chain with very many participants. For instance, in the year 2006/2007, the global coffee revenues were US$90 billion but farmers in producing countries all combined including Brazil earned only US$9 billion which is 10 percent of the global value share (UCDA, 2009). Basing on this background, this study therefore intends to investigate into the determinants of coffee exports in Uganda from 1991-2010.
1.2 Problem statement
Uganda ranks fourth after Burundi, Ethiopia and Honduras in terms of contribution of coffee exports in total export earnings in the period 2000-2010 with an average share of 18% during this period (ICO, 2012). According to figure 1 above there has been unstable export volume of coffee in Uganda from 1991 up to 2010, this is also shown by the fact that there was a rise in coffee export to the world market from 159,983 tons in 2004 up to 200,640 tons in 2008 however the coffee exports generally declined from 200,640 tons in 2008 to 159, 433 tons in 2010. Coffee exports have been declining since 1998 (refer to fig 1) despite the measures undertaken by the government to boost the sector.
Although coffee contributed as much as $400 million annually to total merchandise exports during the mid-1990s, it currently (2010) contributes about $280 million (MAAIF, 2011). Understandably, the sector’s poor performance raised concerns among policy makers. However, despite the declining foreign earnings compared to the mid-1990s, coffee remained the main foreign exchange earner for the country. Its share in total export earnings declined marginally from 17.9 percent in 2009 to 17.5 percent in 2010. This volatility in coffee exports has been a matter of concern to the government of Uganda. This study therefore intends to investigate into the determinants of coffee exports in Uganda from 1991-2010.
