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ANALYSIS OF COFFEE EXPORTS IN UGANDA (1991–2010)

CHAPTER ONE

1.0 Introduction

This chapter outlines the study’s background, problem statement, objectives, research questions, scope, significance, and key term definitions.

1.1 Background of the Study

Exporting serves as a critical link between developing economies and the global market (World Bank, 2001). It enables firms in these economies to expand their market reach and benefit from economies of scale. Additionally, scholars such as Pack (1993) highlight exports as a key channel for technology transfer. Therefore, identifying the primary drivers of export supply is essential for enhancing a developing nation’s economic performance. Understanding the factors that encourage or discourage firms from entering foreign markets is crucial for formulating effective trade and industrial policies.

Redding and Venables (2004) examined the factors influencing export performance and found that internal supply-side elements—such as geographic conditions and institutional quality—significantly affected export outcomes. Their study revealed that African and Middle Eastern countries experienced declining export performance during the 1980s and 1990s due to weak supply capacity. In contrast, East Asian and Pacific nations benefited from improved foreign market access, coinciding with their successful economic diversification. The study also noted that real exchange rates, reflecting relative price movements between domestic and international markets, significantly impacted export performance, particularly in low-performing economies.

Coffee is one of the most traded commodities globally. According to the International Coffee Organization (ICO, 2014), over 600 billion cups of coffee are consumed annually. Coffee is derived from two main botanical varieties: Arabica and Robusta. Arabica, grown at higher altitudes, is more labor-intensive but yields a milder, more aromatic brew compared to Robusta (ICE, 2014). For many developing nations, coffee exports account for over 50% of total export earnings. The top Arabica-exporting countries are predominantly developing economies, with approximately 77 million 60-kilogram bags exported globally in 2011–2012 (UCDA).

In countries like Brazil, Colombia, Guatemala, and Honduras, coffee significantly contributes to both Gross Domestic Product (GDP) and Agricultural GDP (AGDP). For instance, Honduras derives 7.37% of its GDP and 48.17% of its AGDP from coffee, followed by Guatemala (2.49% and 21.08%), Colombia (0.86% and 12.53%), and Brazil (0.35% and 6.41%) (ICE, 2014).

In Sub-Saharan Africa (SSA), agriculture remains a primary livelihood source, contributing 34% to GDP and 64% to employment. However, reliance on agricultural exports like coffee exposes these economies to price volatility, affecting household welfare and export volumes.

Uganda’s export sector is heavily reliant on primary products (74.1%), including coffee, cotton, flowers, fish, and unprocessed minerals (Roberta, 2004). At independence (1962), agricultural commodities and minerals dominated exports. By the 1970s, coffee emerged as the leading foreign exchange earner, accounting for 51% of export revenues, followed by cotton, copper, tea, and tobacco (Musinguzi, 2002).

Despite government efforts to diversify the economy, coffee remains a key export, contributing 18% of Uganda’s export earnings between 2000 and 2010. The sector relies on approximately 500,000 smallholder farmers, with 90% cultivating plots of 0.5–2.5 hectares (UCDA, 2012). Coffee-related activities employ over 3.5 million households. Domestic coffee consumption is minimal (4–10% of production), making it primarily an export crop (Sayer, 2002).

Uganda ranks fourth globally in coffee export dependency (after Burundi, Ethiopia, and Honduras), with coffee contributing an average of 18% to export earnings from 2000–2010 (ICO, 2012). However, export volumes have fluctuated, declining from 200,640 tons in 2008 to 159,433 tons in 2010 (Figure 1). Earnings dropped from $400millionannuallyinthemid-1990sto$280 million in 2010 (MAAIF, 2011). Despite this, coffee remains Uganda’s top foreign exchange earner, accounting for 17.5% of total exports in 2010.

The European Union is Uganda’s largest coffee market (70% of exports), followed by Sudan (10%) and the USA (3%) (UCDA, 2011). The export sector is dominated by 29 companies, with the top ten controlling 85% of the market. Ugacof (U) Ltd leads with a 15% market share.

Robusta coffee thrives in Uganda’s low-altitude regions (Central, Eastern, Western, and South-Eastern), while Arabica is cultivated in high-altitude areas like Mount Elgon, the Ruwenzori Mountains, and West Nile (Sayer, 2002).

1.2 Problem Statement

Uganda’s coffee exports have shown instability from 1991–2010, peaking at 200,640 tons in 2008 before dropping to 159,433 tons in 2010 (Figure 1). Despite government interventions, export volumes have declined since 1998. Earnings fell from $400millioninthemid-1990sto$280 million in 2010 (MAAIF, 2011). This volatility raises concerns, necessitating an analysis of Uganda’s coffee export trends during this period.

1.3 Objectives of the Study

1.3.1 General Objective

To analyze coffee export volumes in Uganda between 1991 and 2010.

1.3.2 Specific Objectives

1. To examine the impact of real exchange rates on coffee exports.
2. To assess the influence of coffee prices on export volumes.
3. To evaluate the effect of coffee quality on exports.

1.4 Hypotheses

1. Real exchange rates significantly affect Uganda’s coffee exports.
2. Coffee prices influence export volumes.
3. Coffee quality impacts export performance.

1.5 Scope of the Study

1.5.1 Content Scope

The study focuses on:

• The effects of real exchange rates on coffee exports.
• The relationship between coffee prices and export volumes.
• The role of coffee quality in export performance.

1.5.2 Time Scope

The research will be conducted from February to October 2017.

1.6 Significance of the Study

The findings will:

1. Provide academic insights into how real exchange rates affect coffee exports.
2. Inform researchers on the impact of coffee prices on export trends.
3. Contribute to existing literature on coffee quality and export performance.