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Commodity Revenue Management: Coffee and Cotton in Uganda

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Commodity Revenue
Management:
Coffee and Cotton in Uganda

Moses Masiga
Alice Ruhweza
YOMA Consultants

May 2007
© 2007 International Institute for Sustainable Development (IISD)

Published by the International Institute for Sustainable Development

The International Institute for Sustainable Development contributes to sustainable

development by advancing policy recommendations on international trade and
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and share knowledge gained through collaborative projects with global partners, resulting
in more rigorous research, capacity building in developing countries and better dialogue
between North and South.

IISD’s vision is better living for all—sustainably; its mission is to champion innovation,
enabling societies to live sustainably. IISD is registered as a charitable organization in
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Tackling Commodity Price Volatility

This paper is published as part of a larger project, sponsored by the Norwegian
Government, on policy options to tackle the problem of commodity price volatility.
More research and papers can be found at http://www.iisd.org/trade/commodities/price.asp
Contents

Abbreviations and Acronyms............................................................................................ ii

Summary ........................................................................................................................... iii
1.0 Introduction ........................................................................................................... 1
1.1 History of coffee marketing in Uganda..................................................................1
1.2 History of cotton marketing in Uganda .................................................................4
2.0 Genesis of Commodity Revenue Risk ................................................................. 6
2.1 Commodity dependence and a history of political and economic turmoil..............6
2.1.1. Coffee...............................................................................................................6
2.1.2 Cotton ...............................................................................................................7
2.2 Trends in coffee and cotton prices and their impacts livelihoods...........................7
2.2.1 Coffee................................................................................................................7
2.2.2 Cotton ...............................................................................................................8
3.0 Approaches to Managing Commodity Revenues ............................................. 11
3.1 Commodity marketing boards.........................................................................11
3.2 Farmers’ cooperatives, futures and option markets.......................................11
3.3 Liberalization of commodity trade..................................................................12
3.4 Diversification...................................................................................................12
3.5 Alternative market channels ............................................................................12
3.6 Vertical integration and emerging market opportunities..............................13
3.7 Strategic Export Programme: Government subsidies for export supply
chains 13
3.8 Compensatory financing..................................................................................14
3.9 International agreements................................................................................14
3.10 Warehouse receipts systems ............................................................................14
3.11 Commodity exchange ......................................................................................15
4.0 Recommendations............................................................................................... 16
References........................................................................................................................ 18

List of Figures
Figure 1: Map of Uganda showing geographical boundaries of districts…………………......2
Figure 2: Coffee trade structure before liberalization.....................................................................3
Figure 3: Coffee trade structure post liberalization.........................................................................4
Figure 4: Price and production trends of coffee between 1970–71 and 2005–06......................8
Figure 5: Price and production trends of cotton between 1970–71 and 2005–06 .....................9

List of Tables
Table 1: Coffee and cotton export values and per cent of total exports, 1986–2006................7
Table 2: Export of coffee and cotton 2001–02 to 2005–06 ........................................................10

i
Abbreviations and Acronyms

ACP Africa Caribbean and Pacific countries

AGOA African Growth and Opportunity Act
BOU Bank of Uganda
CDO Cotton Development Organization
CMB Coffee Marketing Board
CSDP Cotton Sub-sector Development Project
ERP Economic Reform Programme
EU European Union
ICO International Coffee Organization
IDA International Development Agency
IFAD International Fund for Agricultural Development
IISD International Institute for Sustainable Development
IMF International Monetary Fund
LMB Lint Marketing Board
MAAIF Ministry of Agriculture, Animal Industry and Fisheries
MFPED Ministry of Finance Planning and Economic Development
NARO National Agricultural Research Organisation
NYBOT New York Board of Trade
PAF Poverty Action Fund
PEAP Poverty Eradication Action Plan
PMA Plan for Modernisation of Agriculture
SAPs structural adjustment plans
SCRP Smallholders Cotton Rehabilitation Project
UCA Uganda Cooperative Alliance
UCDA Uganda Coffee Development Authority
UCE Uganda Commodity Exchange
UCFA Uganda Commercial Farmers Association
UCGEA Uganda Cotton Ginners and Exporters Association
UCTF Uganda Coffee Traders Federation
UNFFE Uganda National Farmers Federation
USAID United States Agency for International Development

ii
Summary

From the 1960s to the 1990s, commodity price volatility presented a key challenge to the
economic growth of Uganda due to the fact that in the years following independence,
nearly all export earnings were derived from coffee and cotton, and later coffee alone.
During this time, both commodities depended on national marketing boards for
distribution and supply control: for coffee, the Coffee Marketing Board (CMB), and for
cotton, the Lint Marketing Board (LMB). Both boards struggled through the political and
economic turmoil of the 1970s and early 1980s; Uganda went from producing 400,000
bales of cotton in 1969–70 to 14,000 bales in 1977, while the Coffee Marketing Board
became an inefficient institution for managing coffee trade.

By the late 1980s, it was clear that reforms were required. For cotton, the LMB had gone
bankrupt, and for coffee, Ugandan farmers were earning only one-fifth of the free on
rail/truck price for their crop. The collapse of the international coffee agreement further
exposed the lack of competitiveness Uganda’s coffee sub-sector possessed when
compared to other producer countries. While the coffee boom of 1994–95 briefly
resuscitated hope for a revival of the sector, the subsequent price collapse in 1996
emphasized Uganda’s excessive dependence on the crop in the national economy. To
make up for shortfalls in export earnings, Uganda had to rely in part on compensatory
financing from the European Union, funding made available through the Stabex
mechanism. Uganda also began diversifying into other crops such as maize, fish, beans,
vanilla, flowers, and fruits and vegetables for its export earnings. As the diversification
drive took shape, alternate marketing channels such as organic, fair trade and other
specialty criteria (Utz Kapeh, shade-grown coffee, etc.) also picked up, as did vertical
integration activities for the commodity value chains. By February 2007, Uganda had
begun exporting organic cotton clothing produced and processed in the country under
the African Growth and Opportunity Act (AGOA).

After the initial failure of the Uganda Commodity Exchange to take off in 1998, the
Warehouse and Commodity Exchange Bill was passed by the Ugandan Parliament in
2006. Pilot projects for warehousing and for commodity exchanges for coffee and cotton
were then initiated. As with these, many of Uganda’s commodity revenue management
initiatives are in their early stages, and should they show signs of success, the scale of the
initiatives will have to be expanded to cover more farmer associations, while new
cooperatives may have to be formed. Some cooperatives are already using futures and
options markets based on the London Stock Exchange, and many Ugandans are
receiving market information via both mobile phone and the Internet. Beyond
commodity revenue management, other macroeconomic initiatives, such as controlling
the high population growth rate and improving soil productivity, can also contribute to
overall economic growth for the commodities sector.

iii
1.0 Introduction

Commodity price volatility has been on the international development agenda since the
1950s. The problems are well studied; high revenues tend to distort fiscal responsibility
and monetary policy, and encourage rampant corruption, while a slump in prices can lead
to a reduction in government and producer revenues, unemployment and a decline in
government spending on education and health. While developed country producers are
supported by subsidies and social safety nets, developing countries and smallholder
producers feel the effects of commodity price volatility much more directly (Brown and
Gibson, 2006). These effects, and the mechanisms employed by the Ugandan
government and people to address them, are the central focus of this paper.

In the first section of this report, we will discuss the history of coffee and cotton
marketing in Uganda. We will then examine commodity revenue and price volatility risk
for these two commodities, and some of the approaches taken to manage this risk. The
fourth and final section presents our recommendations for coffee and cotton revenue
management in Uganda.

1.1 History of coffee marketing in Uganda

Uganda produces two types of coffee: Arabica coffee (Coffea arabica), which comprises
about 70 per cent of the world’s coffee production but only 10 per cent of Uganda’s
coffee production; and Robusta coffee (Coffea canephora), which comprises about 30 per
cent of the world’s production and 90 per cent of Uganda’s production.

Robusta coffee is indigenous to Uganda in the central parts of the country, while Arabica
coffee was introduced by the British colonial authorities at the turn of the twentieth
century. Robusta is grown in the central part of Uganda in the Lake Victoria crescent,
and across the west, south-west, and east of the country. Arabica beans1 are grown at
higher altitude, in the areas of Mount Elgon along Uganda’s western border with Kenya
and in south-western Uganda along the Rwenzori mountain range. This widespread
cultivation places Uganda among the top 10 coffee-producing countries in the world and
second only to Ethiopia among the Africa, Caribbean and Pacific (ACP) countries (CTA,
2006).

Ugandan Robusta beans are uncharacteristically hard, giving them good roasting qualities.
The beans are typically grown in the absence of chemical fertilizers by rooted cuttings
and elite seeds. They have a mild, soft, sweet and neutral taste, and have high frothing
properties suitable for popular drinks such as espressos. Uganda’s Arabica also has
strong market qualities; it is wet processed (washed) to produce a mild coffee more
popular with most consumers.

1 Robustas have the advantage that they have higher yields (2,300–4,000 kg/ha) than Arabica (1,500–3,000

kg/ha) but the disadvantage is they fetch little more than half the price (CTA, 2006)

1
Figure 1: Map of Uganda showing geographical boundaries of districts

Source: MFPED (2005)

Between 1969 and 1991, the roles of stakeholders in the coffee supply chain were clearly
segregated and defined (Figure 2). Farmers produced, harvested, and dried coffee, and
sold it to primary cooperative societies 2 or private stores. Primary societies sold their
coffee to cooperative unions, while the private stores sold the beans either to hullery
operators or the cooperative unions who, after hulling, sold the coffee to the Coffee
Marketing Board (CMB). The CMB in turn reprocessed the coffee and exported it. The
coffee reprocessing consisted of sorting, grading and blending followed by bulking and
bagging of the coffee beans for export. 3 The coffee reprocessing was carried out
mechanically with the supervision of a quality controller. The prices paid at each level
were pre-determined by the national budget and remained fixed irrespective of the
movements in the international coffee market.

2 Primary cooperative societies were associations of farmers engaged in the production and collectively
marketing of agricultural produce.
3 Coffee beans were sorted, graded and blended based on its quality, origin and type, and market

requirements.

2
Figure 2: Coffee trade structure before liberalization

Coffee farmers

Primary 
Private 
societies  
buyers/stores

Cooperative  Private 
unions  hullers 
Coffee 
Marketing Board 
(CMB) 

Export

Source: Waggwa-Nsibirwa in UCDA (1999)

After liberalization efforts in the late 1980s and 1990s, nearly all exporters became
vertically integrated (Figure 3). The supply chain for exported coffee was dominated by
coffee processing and trading companies. Their business included the procurement of
coffee from farmers and primary cooperatives, hulling and processing the coffee into the
exportable grades and blends, and in many cases exporting the coffee as well. Alongside
the main supply chain were private traders and the old cooperative trading system, which
gradually lost ground to private exporters. 4 In recent years an alternative channel for
exporting coffee has emerged. The increased opening-up of the coffee sub-sector
encouraged foreign direct investment (FDI) and brought in multinational coffee
companies such as IBERO, a Ugandan affiliate of Neumann Kaffee Gruppe of
Germany. The multinationals have both a central coffee estate and out-growers. In
addition, the multinationals have a vertically integrated channel from production to
export. Sometimes Uganda’s multinational coffee companies sell their coffee outside
their principal marketing/supply channel through private exporters. Coffee farmers’
share of the free on rail or truck (FOR/T) price of coffee surged from 20 per cent before
liberalization to as high as 85 per cent at the peak of the competition, before falling back
to about 70 per cent as traders and exporters competed for a larger market share—which
remained the control of a single government owned monopoly (You and Bolwig, 2003).

4
Indeed, Union Exporters (UNEX), the coffee exporting company that existed within the framework of
the CMB, now operates as a private exporter alongside several others.

3
Figure 3: Coffee trade structure post liberalization

Smallholder 
Large coffee 
and medium 
estates 
scale coffee 
farmers 

Primary  Coffee
cooperatives  processing
and/or private  and trading
coffee buyers 
companies

Private 
District  exporters 
cooperative  including 
union and/or  UNEX
private hullers 

Exports 

Source: adapted from Waggwa-Nsibirwa in UCDA (1999)

1.2 History of cotton marketing in Uganda

Until 1994, ginning and marketing of cotton in Uganda was regulated under the revised
Cotton Act (1964) and the Lint Marketing Board (LMB) Act (1959, amended 1976). The
LMB held a monopoly on both the domestic and international trade of cotton lint and
seed, with ginning and marketing functions vested in the cooperative unions, much the
same way as with coffee. However after the cotton sub-sector virtually collapsed due to
the political upheavals of the 1970s and 1980s, the Uganda government liberalized the
ginning and marketing of cotton in 1991 in an effort to revive the sub-sector. This was
done through the passing of the Cotton Development Organization Act of 1991, an act
which provided for the entry of private enterprises into cotton ginning and marketing. In
addition, the new Cotton Development Organization (CDO) was created to carry out
monitoring, promotion and regulation of the cotton sub-sector on behalf of government.

Two projects followed the 1991 liberalization: the Smallholders Cotton Rehabilitation
Project (SCRP, from 1993 to 1996) and the Cotton Sub-sector Development Project
(CSDP, 1994 to 2001). The SCRP project, funded by the International Fund for
Agricultural Development (IFAD), was intended to re-establish research and seed

4
multiplication, and to develop animal traction in the sub-sector. The CSDP project, also
funded by IFAD along with the World Bank (through the International Development
Agency) and the government of Uganda, was aimed at improving the regulatory
environment and promotion of cotton policy coordination between the work of the
Ministry of Agriculture, Animal Industry and Fisheries (MAAIF), research managed by
the National Research Organization (NARO), and credit provision managed by the Bank
of Uganda (BOU). By the end of the two projects, Uganda’s cotton exports had
increased by about 10 per cent per year between 1994 and 2000 (RATES, 2003;
COMPETE, 2002).

5
2.0 Genesis of Commodity Revenue Risk

2.1 Commodity dependence and a history of political and economic turmoil

From independence in 1962, Uganda inherited an economy based on agriculture,

consisting of smallholder agricultural exports centred on coffee and cotton (Fagernas and
Roberts, 2004). During the 1970s, the presidency of Idi Amin was characterized by
several fiscal and monetary policy distortions; with taxes on transactions and exports
escalating, the country’s export base shrank. Inflationary pressures increased, as did
deficits, and the Ugandan shilling became grossly over valued; price controls were soon
introduced to try to contain the inflation. More political instability followed the
overthrow of Amin in 1979, culminating in two military coups, the first in 1985 to
remove Dr. Milton Obote, and the second in 1986 to bring to power current President
Yoweri Museveni.

In 1987, Uganda embarked on the Economic Recovery Programme (ERP), which aimed
to strengthen Uganda’s export competitiveness, reform the national agriculture policy,
attract foreign direct investment (FDI), and improve the effectiveness of fiscal and
monetary policy. The recovery and growth strategies have been decidedly pro-poor, with
the head count index5 of total poverty declining from 56 per cent in 1992–93 to 34 per
cent in 1999–20006. Much of this progress has been felt outside of the cities: the rural
poverty headcount declined from 60 per cent in 1992 to 37 per cent in 2000, before
rising to 42 per cent in 2003 (Okidi et al., 2005).

2.1.1. Coffee

The Ugandan coffee sub-sector has a large geographic and socio-economic foot print.
Coffee is said to have contributed an average of US$245 million per year for the last 25
years to Uganda’s national foreign exchange earnings (Kasozi, 2006). Approximately
500,000 smallholder families are engaged directly in its production, with over seven
million people depending on the crop for their livelihoods—representing more than one-
quarter of Uganda’s population (Lewin et al.., 2004). Despite coffee’s continued
importance to a number of Ugandans, the country’s dependence on it as the main source
of its export income has declined over time, from a high of over 95 per cent in the 1980s
to just 20 per cent by 2006 (Table 1). Non-traditional exports have filled this gap, with 60
per cent of the export revenues. However, the poverty effects of non-traditional
agricultural exports were very limited given that they engage only a small segment of the
population: about five per cent for fisheries, less than one per cent in the horticulture
sub-sector and while maize and beans are grown by about 20 per cent of the population,
only a small fraction (US$10 million) is exported (Keizire, 2004; MFPED, 2006; UBOS,
2006). Deninger and Okidi (2003) suggested that had coffee prices been 10 per cent
higher during the 1990s there would have been an additional six per cent decline in
poverty by 1999/2000 (Okidi et al., 2005).

5 The head count measure of poverty gives the proportion of households whose per capita income falls

below an established poverty line.

6 Poverty subsequently increased to 38 per cent in 2002/03 (Okidi et al., 2005).

6
Table 1: Coffee and cotton export values and per cent of total exports, 1986–2006
1986 1988 1990 1992 1995 1998 2000 2002 2005
Coffee value 394.2 265.3 140.4 95.4 382.9 295.2 125.3 96.6 173.4
(US$000,000)
Coffee per 96.9 97.6 79.0 63.1 75.0 56.5 31.2 20.7 20.5
cent of total
exports
Cotton value 4.9 2.97 5.8 8.2 3.6 7.7 22.1 9.5 12.9
(US$000,000)
Cotton per 1.3 1.1 3.3 5.4 0.7 1.5 5.5 2.0 1.5
cent of total
exports
Source: Warnock and Cornway (1999); BOU (2001, 2005)

2.1.2 Cotton

At its peak production period from 1965 to 1970, the cotton sector was responsible for
40 per cent of Uganda’s export earnings. Since then, it has maintained a low economic
profile. Over the 1970s and 1980s, the land area under cotton cultivation declined from
300,000 ha to just 70,000 ha by 1993–94; domestic demand for cotton, which had
reached a peak of 65,000 bales in 1973–74, declined to 15,000 bales in 1987–88 and to
2,800 bales in 1994 (RATES, 2003). Between 1991 and 2005, cotton’s contribution to
national foreign exchange earnings fluctuated between three and five per cent (Table 2),
reaching a high of 6.6 per cent in 2003–04 (UBOS, 2006). This increase in production
occurred on the back of the boost to the sector through increased seed and price control
by the government as part of the African Growth and Opportunity Act (AGOA)
initiative (MFPED, 2006). Although playing a smaller role in the national economy,
nearly 300,000 smallholder families continue to grow cotton, and the crop provides cash
income to 10 per cent of Uganda’s population. This makes it the second most important
poverty alleviation crop after coffee (COMPETE, 2002). However low prices continue
to plague the sector, widening the regional welfare gap that exists between the poorer
northern region and the rest of the country. Liberalization efforts have not yet succeeded
in turning this situation around, as low incentives persist for the private sector to supply
seeds or to invest in revamping the country’s cotton ginneries (Okidi et al., 2005).

2.2 Trends in coffee and cotton prices and their impacts livelihoods

2.2.1 Coffee

In 1986 and 1987 there was a perceived shortage in coffee due to a drought in Brazil, the
world’s largest producer. As a result, international prices boomed. But in 1989, they
slumped again with the dramatic collapse of the quota system of the International Coffee
Organization (ICO) (Gabriele and Vanzetti, 2005). The market stayed depressed for four
years, until prices recovered due to a general reduction in overall supply and a 1994 frost
in Brazil. Supply rebounded, however, and led to a new slump in 1996, and since then—
with the exception of a short-lived spike in 1997 due to the El Niño phenomenon—
world coffee prices steadily declined until 2002. In 2001–02, world coffee prices were less
than half their level in 1995–96 (UCDA, 2004).

In Uganda, a significant rise in the price of coffee towards the middle of the 1990s led to
an increase in the volume of coffee exported, surpassing four million bags in 1994–95

7
(Figure 4). However as farmers increased production to take advantage of the higher
prices, those prices in turn reacted to an increase in supply and began to drop. This
excess supply helped set off a steady decline in prices from 1996 to 2002 (Baffes, 2006).
While prices have begun to recover, coffee wilt disease has held Ugandan production
back: the disease caused a 45 per cent reduction of country’s crop. First appearing in
1993, coffee wilt eventually spread to all Robusta producing districts in the country,
killing an estimated 14 million trees in Uganda (Lewis et al., 2003).

Figure 4: Price and production trends of coffee between 1970–71 and 2005–06
4.50

4.00
Coffee: (million tonnes); price (US$/kg) S$/kg)

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00
19 1

19 3

19 5

19 7

19 9

19 1

19 3

19 5

19 7

19 9

19 1

19 3

19 5

19 7

20 1
20 9

20 3

5
/7

/7

/7

/7

/7

/8

/8

/8

/8

/8

/9

/9

/9

/9

/0
/9

/0

/0
70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04
19

Period (years)
Coffee Total production million tons Coffee Price US$

Source: Adapted from UCDA (2004); BOU (2006); Abdallah and Egesa (2005)

2.2.2 Cotton

Uganda’s cotton production fell dramatically in the early 1970s and stayed low
throughout the political and economic instability of the following two decades. The
country attempted to spur growth in 1994 with the passing of a series of much-needed
reforms; however these reforms were timed with a peak in the price of cotton
(US$0.43/kg in 1994) (Table 2). Since then, prices have fallen steadily, reaching a low of
US$0.20/kg in 2001. Despite this, production levels in the country have increased, and
recent upturns in the price—to US$0.24/kg in 2002 and US$0.26/kg in 2004–05—bode
well for Ugandan farmers (BOU, 2006). Liberalization of the sector provided extra
incentives for growers, who can now keep over 60 per cent of the market value of their
cotton, compared to as little as 12 per cent under the nationalized system in 1983 (You
and Chamberlain, 2004).

8
 Figure 5: Price and production trends of cotton between 1970–71 and 2005–06

7
Cotton ('0 000 tonnes); price US$/bale)

0
1

5
/7

/7

/7

/7

/7

/8

/8

/8

/8

/8

/9

/9

/9

/9

/9

/0

/0

/0
70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20
Period (years)
Cotton total production ten tons Cotton Price US$

Source: Adapted from UCDA (2004); BOU (2006); Abdallah and Egesa (2005)

Cotton has been integrated into the country’s crop rotation cycles (i.e., the Cotton-
Cereals-Cotton-Legumes-Fallow cycle). Cotton crop is planted first on new grounds, so
that its tap root system breaks the soil into finer well-aerated soil granules. A cereal crop
such as millet follows, then cotton again for the second season’s rains. By the time the
legume crop—usually groundnut—is planted, the granulated soils ensure a good harvest.
The legume fixes nitrogen into the soil which, in addition to a short fallow, enhances the
soil fertility and breaks the pest cycle of the soil just in time for the next cotton crop. The
crop cycle is the basis for food security and income for several smallholder households in
northern and eastern Uganda (You and Bolwig, 2003). When the country experienced a
severe drought in the 2005–06 (Table 2, Figure 5) cotton production fell from over 30 to
18.5 tonnes (BOU, 2006). The decline in production was then compounded by low farm
gate prices (MFPED, 2006). Cotton’s share of total exports also declined from 6.4 per
cent in 2003–04 to 3.5 per cent in 2004–05 (Table 3) and further to 1.5 per cent in 2005–
06 (BOU, 2006).

9
Table 2: Export of coffee and cotton 2001–02 to 2005–06
2001–02 2002–03 2003–04 2004–05 2005–06
Total US$000,000 474.04 507.91 647.18 786.32 889.84
exports
Coffee Volume (’000 60-kg 3.156 2.993 2.552 2.520 2.102
bags)
US$000,000 85.25 105.47 114.13 144.53 173.37
Cotton Volume (tonnes)7 12.32 16.76 29.293 30.403 18.50
US$000,000 18.00 16.88 42.84 41.34 12.86
Source: BOU (2005); BOU (2006)

7 A Ugandan bale of cotton weighs approximately 185 kg (Lundbaek, 2003).

10
3.0 Approaches to Managing Commodity Revenues

Given the historical and current importance of coffee and cotton, there has been a series
of approaches for managing commodity revenue. Prior to liberalization, commodity
revenue management was in the hands of the government through commodity marketing
boards, who employed a sub-sector-wide revenue management regime. After
liberalization, commodity revenue management became a shared responsibility involving
several stakeholders and employing several approaches, ranging from managing the
individual to value chain and government initiatives.

3.1 Commodity marketing boards

Until 1994, ginning and marketing of cotton in Uganda was regulated under the revised
Cotton Act (1964) and the Lint Marketing Board (LMB) Act (1959, amended 1976).
However by the late 1980s, the state-run LMB had gone bankrupt due to political
instability and poor management. Cotton production had virtually collapsed, and the only
option left for the government seemed to be structural reform (Baffes, 2004). Uganda’s
coffee marketing board met with a similar end. In 1969, the Uganda Coffee Marketing
Act (1969) gave the Coffee Marketing Board (CMB) a complete monopoly on the export
and regulation of coffee. Under the CMB, farmer revenues from the crop were very low,
hovering at around 20 per cent of the market price. This led to a high level of head count
poverty among coffee farmers (56 per cent in 1992) in a country highly dependent upon
the crop for its export earnings - which in certain years exceeded 90 per cent of all export
revenues (Okidi et al., 2005). Over time, the CMB grew into a large bureaucracy
hampered by mismanagement and high administration costs, and several cooperatives
registered financial losses. Moreover, the collapse of the International Coffee Agreement
in 1989 led to an increase in world production, especially of Robusta coffee from
Vietnam. This led to an oversupply unmatched by consumption growth, which ranged
from low to stable at about one per cent (You and Bolwig, 2003). For Uganda, reforms
in the sub-sector were needed (UCDA, 1996).

3.2 Farmers’ cooperatives, futures and option markets

Most individual coffee and cotton producers generate only small amounts of their crops,
making intermediary institutions vital for ensuring that they—in cooperation with other
farmers—can achieve economies of scale. One area for which this is important is the
provision of risk management tools and instruments to smallholders. In Uganda, farmer
associations are stepping in to fill this gap. Two cooperative cotton unions, the North
Bukedi Cotton Company and the Lango Cooperative Union, 8 are using futures and
options markets to promote predictable incomes. The first used its access to risk
management markets to guarantee minimum prices to its farmers (CTA/Spore, 2005).
However, the major exchange for futures and options products for cotton is the New
York Board of Trade (NYBOT), which is not an effective hedging mechanism for
Ugandans because cotton traded outside the U.S. does not follow the NYBOT price
closely (Nsibirwa and Tiffen, 2003). At first the two unions, as well as several others,
invested in Reuters screens but later information became available through the Internet.
The two unions use currency forward rates to convert the international futures prices

8North Bukedi Cotton Company and Lango Cooperative Union are members of Uganda Cotton Ginners
and Exporters Association (UGCEA).

11
into local ones, to facilitate its price negotiations in forward sales, and also use fixed-price
forward sales to manage their price risk exposure, although generally only for two
months ahead (UNCTAD, 2002). Government support to the cotton sub-sector is
directed through the Cotton Development Organisation (CDO) and is channeled
through the Plan for Modernisation of Agriculture. However, direct interventions in the
sub-sector are left to the Uganda Cotton Ginners and Exporters Association (UCGEA),
which was formed in 1997, and the Cotton Farmers Association (CFA) formed in the
1999–2000 season.

3.3 Liberalization of commodity trade

Between 1990 and 1993, the government successfully liberalized commodity trading in
Uganda. And while the LMB lost its monopoly on the buying and exporting of cotton, it
was not until 1996 that there was a supply response to the reforms in the cotton sub-
sector. After years of decline, production eventually recovered, at first slowly in 1995–96
and 1996–97, and from 1999–2000 season onwards stabilized and reached 20,000 tonnes
(Baffes, 2004). Prices received by farmers rose from 55 to 65 per cent of world prices—
still low, but higher than before the reforms (World Bank, 2000). The revival of cotton in
1994 under the Cotton Sector Development Programme led to an increase in income for
15 per cent of the rural population and to poverty alleviation (You and Bolwig, 2003).
Similar benefits flowed to coffee farmers; reforms were completed within a year, and
smallholder revenues increased from 20 per cent of the free on rail/truck price to over
70 per cent (Akiyama et al., 2003).

3.4 Diversification

The collapse of coffee prices in the mid-1990s decreased Uganda’s national revenues and
exposed its dependence on the crop. Recognizing the need, Uganda embarked on a
diversification drive. As a result, coffee’s contribution to national foreign exchange
revenues declined from over 50 per cent to just over 20 per cent (UBOS, 2006). Non-
traditional exports (NTEs) such as fish and fish products, maize and beans and
horticultural products now contribute approximately 60 per cent of the export revenues,
although coffee remains the single most important export commodity (BOU, 2006).

3.5 Alternative market channels

In 1996, several non-traditional marketing channels emerged for coffee, including organic,
fair trade and shade-grown. All were aimed at improving the stability of incomes received
by farmers. A survey conducted on coffee certification in Uganda showed that premiums
at the export level were in the range of 25–35 per cent (Table 4) depending on the type
of coffee. At farm level the premiums were in the range of 22–35 per cent (Ponte, 2006).
As a result of these benefits, export volumes began to expand immediately, growing from
1,200 bags of specialty coffee in 1995–96 to 7,692 bags in 2003–04. And yet while
alternative market channels such as organic represented a growth opportunity, Uganda’s
pace was far less than that of its global rivals: in 2003–04, only 0.21 per cent of Uganda’s
coffee was exported as organic, much less than the 6–8 per cent world average (Baffes,
2006).

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3.6 Vertical integration and emerging market opportunities

Uganda exports most of its cotton crop in its raw form as lint, with only 5–10 per cent of
production used domestically. This did not initially change under the African Growth
and Opportunity Act (AGOA), founded in 2000 as part of U.S. efforts to its improve
trade relations with sub-Saharan African countries. Cotton clothing exported by Uganda
was typically manufactured from fabric imported from Asia because Ugandan textiles
were deemed to be of a lower quality. Two ventures have tried to reverse this trend by
taking advantage of AGOA. The first, a joint private-public company called Tri-star
Apparels, collapsed under mismanagement in 2006. The Ugandan government has since
turned to Phenix Logistics, a national manufacturer specializing in clothing made from
locally produced organic cotton, to exploit the U.S. AGOA market; a first consignment
worth US$125,000 has already been exported (New Vision, 2007; Daily Monitor, 2007).
By exporting finished goods and not simply raw materials, Ugandans are able to improve
both their revenues and their manufacturing capacity.

Such vertical integration will be crucial for both sectors. On the coffee side, a typical
grower in Uganda gets only US$0.14/kg for beans delivered to the roaster’s factory gates
for US$1.64/kg while the average price of soluble coffee in the U.K. is US$26.40/kg
(Oxfam, 2003). To improve this situation and to add value to Ugandan coffee before it is
exported, the private sector is currently working to develop coffee products that are
ready for the supermarkets of Europe. They have already achieved some success, with
the branded Good African Coffee product now on the shelves of supermarkets in the
United Kingdom.

Banks such as Standard Chartered Bank and Stanbic Bank, based in Uganda, do not lend
to farmers directly, but offer loans indirectly through the ginners and exporters by
funding trading and ginning activities. The beneficiary cooperatives and private cotton
ginners and exporters include: North Bukedi Cotton Co., South Base Agro Industries,
Bugema Cotton Co. ltd, Lango cooperative Union and Nyakatonzi Cooperative Union
among others for Standard Chartered; and Muddu Awulira Enterprises, Olam and Bon
Holding for Stanbic bank (Nsibirwa and Tiffen, 2003).

3.7 Strategic Export Programme: Government subsidies for export supply

chains

In 2001, the Ugandan government embarked on the Strategic Exports Programme (SEP),
whose aim was both to stimulate value-adding investments in selected areas to spur
economic growth, and to remove impediments to the private sector’s ability to trade
competitively. Over 70 billion Uganda shillings (about US$40 million) were invested in
strategic export sectors between 2001 and 2004 (MFPED, 2006b).

To enhance the value of coffee, 16 wet-processing facilities have been imported and were
expected to have been operational by 2005–06—which had not happened by early 2007
(MFPED, 2006b). Wet processing coffee consists of a four-stage process: picking only
the ripe cherries; pulping by squeezing wet beans out of the cherries and removing the
mucilage around the beans through fermentation; washing the beans; and drying the wet
beans from a moisture content of 50–60 per cent to about 12 per cent. Drying, the
alternative to wet processing, consists only of harvesting of ripe cherries and drying them
(UCDA, 2006). For the cotton sub-sector, de-linting and grading machines have been
procured, as have tractors for ploughing services (MFPED, 2006b). Early results indicate

13
that exports have grown under the SEP, and for the first time were expected to exceed
the US$1 billion in 2005–06 (MFPED, 2006). In the end, they fell just short total exports
for 2006 were valued at US$962 million (East African Business Week, 2007)

3.8 Compensatory financing

Introduced with the Lomé Convention, an aid and trade agreement between the EU and
the ACP countries signed in 1975, the Stabex (Stabilization of Export Earnings)
compensatory finance scheme was designed to help ACP countries stabilize their export
earnings. Uganda has benefited under this scheme, with Stabex payments totaling €175
million transferred in 1990, 1991, 1993, 1995 and 1999 (MFPED, 2002). These funds
were made available to compensate for export losses in the coffee, tea and—to a lesser
extent—hides and skins sectors.

In 1990–91, the EU found itself committed to disburse €1.38 billion to eligible applicants,
three times more than had been reserved for this purpose (DFID and ODI, 2004). Such
over-demand eventually led to a re-evaluation of the program; replacing Stabex in 2000,
the FLEX (Fluctuations in Export Earnings) scheme introduced more stringent eligibility
criteria and lower levels of real compensation for ACP countries. As such, FLEX came
under considerable criticism from ACP countries as not being helpful since the chances
of eligibility were very low. Indeed, Uganda has not yet qualified for FLEX
compensatory financing (EU/MFPED, 2006).

3.9 International agreements

From 1962 until its collapse in 1989, the International Coffee Organization (ICO) sought
to balance supply and demand to achieve stable prices. The ICO used export quotas,
allocated to each producing member country, as a market intervention system to
“manage” the international coffee market. The quotas were set to keep prices above an
agreed minimum (US$1.20 per pound during much of the quota period) and below an
agreed maximum (US$1.40 per pound). The system was more successful at protecting
the price floor than its ceiling. In case of a shortage, usually the result of a climatic
problem in a major producing country, even the total suspension of quotas could not
prevent prices from increasing far beyond the agreed ceiling. Under these pressures and
those exerted by producing countries outside of the agreement (such as Vietnam), the
ICO quota system was discontinued in 1989.

In October 2002, Resolution 407 of the International Coffee Council came into force.
The resolution made specific quality requirements for all coffee in the global market. The
strict quality requirements were expected to lead to a reduction of 15 per cent in the
global coffee supply. This mechanism was meant to reward quality coffee producers by
guaranteeing them a market. Uganda is said to produce the world’s best Robusta coffee
(Baffes, 2006), and in a system that rewards quality over volume, it is expected that the
country’s share of the Robusta coffee market may edge upwards as the country’s high
quality coffee volumes grow.

3.10 Warehouse receipts systems

The Warehouse Receipts System (WRS) Bill was passed by the Parliament on April 5,
2006. The passing of the WRS ensures the establishment of a framework for regulating
warehouses and warehouse operators, who can issue authorized Warehouse Receipts.

14
The WRS is being used in the development of a system for commodity trade and
financing based on inventory collateralization as a means of trade financing. The WRS
allows farmers to obtain market information and quality assurance, and its certification
system enables farmers and traders to obtain financing from financial institutions using
their produce as collateral (Akiyama et al., 2003). The warehouse receipt system, or
warehouse inventory credit, achieves two important purposes: first, as a facilitator of
credit delivery for inventory or products held in storage; and second, as a means of
improving the bargaining position of the depositor (UCDA, 2006). Under a WRS pilot
project, nearly 100,000 kg of seed cotton was deposited by farmers from Kasese and
Bushenyi district into warehouses. For coffee, the WRS Project had forecasted deposits
of 100 tonnes for the first pilot, but only 35 tonnes were received under the system. The
main impediments were persistent wet weather which hampered coffee harvests and
drying, and the stiff competition from the local traders.

3.11 Commodity exchange

Supported by the government through the Plan for Modernisation of Agriculture (PMA),
the first Uganda Commodity Exchange (UCE) was initiated in 1998. The UCE was
registered by four founding shareholders: the Uganda Cooperative Alliance (UCA); the
Uganda Coffee Traders Federation (UCTF); the Uganda National Farmers Federation
(UNFFE); and the Uganda Commercial Farmers Association (UCFA). After two years of
operation, several financial institutions and insurers lost enthusiasm for the exchange due
to the absence of a legal and regulatory framework for the UCE and the warehouse
receipts scheme (RATES, 2006). The UCE does, however, hold the potential to provide
a robust trading system that assures delivery of and payment for commodities sold. The
process allows financial institutions to liquidate collateralized stocks through transparent
means. In addition, exporters are able to get access to certified quality produce of known
a quantity and premium quality (Akiyama et al., 2003).

15
4.0 Recommendations

The recommendations below are geared towards enabling policy-makers to integrate

identified commodity revenue management options into the current set of price risk
tools, particularly for the coffee and cotton sub-sectors in Uganda. There is considerable
evidence that price responsiveness, market integration and financing mechanisms have
already been used in Uganda, however there is still considerable room for improvement
or even a change of focus.

The alternative trade networks in organic and fair trade and the opportunities for
strengthening the brand of Ugandan products all offer farmers an opportunity for price
premiums, which can in turn help producers weather declines in international prices.
Uganda’s Robusta coffee already enjoys a strong reputation built on higher quality beans,
ensuring that it earns a premium price. Further efforts should be put into both ensuring
that the Ugandan Robusta brand continues to lead in both quality and price, and that the
country increase its output of organic and fair trade products to match the global average.

The horizontal diversification of exports in Uganda has thus far proved to be successful.
However, the production of the traditional exports seems to have waned as a result. The
immense economic value that coffee and cotton bring to smallholders must not be lost
on policy-makers. There may be a need to revisit the current coffee replanting
programmes to make sure that they are effective, as the current arrangements seem to
have had a negligible impact. The impact of the coffee wilt disease is enormous. UCDA
estimated a loss equivalent to 61,200 tonnes (1.02 million bags) of coffee, which is
around 40 per cent of the output in recent years. This corresponds to US$42.8 million in
export revenue loss per annum at 2003–04 prices (Ushs 1,090/kg). In the current
program coffee plantlets are distributed to farmers in the major growing districts,
however, only a few districts have reported a substantial response from farmers. The
number of coffee trees and coffee continues to decline due to the coffee wilt disease
despite of the replanting effort.

The vertical diversification efforts of Phenix Logistics in the cotton sub-sector are said to
have added US$3,200 per tonne to the value of Uganda’s lint. Similarly, Ugandan coffee
processed within the country is now sold in U.K. supermarkets under the label Good
Quality Coffee. The Uganda Coffee Development Authority (UCDA) is already engaged in
building capacity for local roasters and farmers to gauge quality through training, and is
investing in de-pulping units and coffee dryers. By continuing to make such investments,
Uganda will improve its ability to capture the higher returns which derive from value-
added exports. In doing so, they can reduce their exposure to the volatile prices typically
associated with raw commodities.

There has been a lot of effort in recent years to promote markets for smallholder
products from Africa. The adjusted EU/ACP agreements, the African Growth and
Opportunities Act (AGOA), and Uganda’s coffee shops in China are some successful
examples. There should be greater efforts in this direction. To help, Uganda should
invest to increase its capacity for trading and participating in international negotiations.

There is growing recognition of the importance of farmer cooperatives as a means of

advancing marketing tools to farmers. However, because the primary cooperatives that
existed as part of the controlled coffee and cotton boards have largely collapsed, new

16
ones will have to be created. The incentive to do so in a liberalized environment has
unfortunately decreased as progressive farmers have already created their own networks.
Instead value-chain approaches where farmers are linked to a specific exporter are
emerging as the most adaptable form of cooperation practiced in Uganda’s export trade.

Even with the Warehouse Receipt Systems and Uganda Commodity Exchange, there is
still limited financing in the commodity sector. There are several programs that seem to
operate independently of each other; for example, the Wealth-for-All program (Bonnna
Bagagawale, Uganda’s newest microfinance scheme) seems to be operating outside the
other financing mechanisms. Development institutions, banks and insurers need to
develop further initiatives that improve the access of commodity producers to financing,
for which the WRS and the UCE have laid a sound foundation.

Although, there has been an increase in market information flow through mobile phones,
radios and the prominent use of futures and option markets, a large segment of the
population does not have access to these. Once access is improved, investments will have
to be made in training programmes on the use of market information, credit
arrangements, cooperatives and diversification, to allow commodity farmers to make
better, more informed decisions about their crops.

If commodity prices are stable and the commodity revenue management initiatives are
adequate, farmers, traders and other commodity supply chain stakeholders would have a
significant incentive to boost production. With enhanced commodity revenue
management interventions for all stakeholders, national development goals such as
poverty alleviation and economic growth would also be achieved.

17
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