Proposal to Establish a Povertyfighting Wine Industry
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Proposal to Establish a PovertyFighting Wine Industry within Ethiopia Report Prepared by: Global Feasibility Study Team, Goizueta Business School, Emory University For: Stephen Satterfied, International SoCiety of AfriCans in Wine (ISAW) Circulation Draft* October, 2010 If you have any comments or suggestions, or would like to offer support for this important project, please contact Peter Roberts ([email protected]) or Stephen Satterfield ([email protected]). 1 Background With 85% of its employees working in the farming sector and an estimated $900 of GDP per capita, Ethiopia is one of the poorest countries in the world. 1 As a result, 70% of Ethiopians earn less than $2 per day, while almost 50% survive on less than $1 per day. This project was conceived following discussions during which Prime Minister Meles Zenawi expressed an interest in the creation of an economically and socially beneficial wine industry within Ethiopia; one that might expand upon its recent successes with high‐quality coffee. At the request of the International Society of Africans in Wine (ISAW), a 501(c)3 based in Atlanta, a team of six students and one professor from Emory University’s Goizueta Business School (see Appendix A) traveled to Ethiopia to analyze the feasibility of encouraging the development of a commercial wine industry in and around Addis Ababa. The specific charge was to assess the prospects of developing an economically‐viable and socially‐responsible wine cluster and then provide specific recommendations.2 The team travelled to Ethiopia in August, 2010 and met with government and industry leaders and visited different farming regions along with the recently‐planted Castel Vineyard. In particular, we met with His Excellency, President Girma Woldegiorgis, to discuss his vision for wine production within Ethiopia. We also met with Dr. Abera Deressa and Mr. Haileselassie Tekie, the Minister of Agriculture and Director General of Horticulture, respectively, to discuss historical land surveys and the prospect of obtaining government land to plant vineyards. Another set of meetings was with Mr. Tadesse Meskela, the General Manager of the Oromia Coffee cooperative. As the largest and most successful coffee cooperative in Ethiopia, we were able to draw parallels between the successes that he had achieved with coffee and potential economic successes in the wine industry. This report documents the viability of a quality‐oriented anti‐poverty initiative for Ethiopia in the wine industry. It outlines the considerable potential and the various impediments before proposing an interconnected set of programs that will collectively address these obstacles. 1 See The World Fact Book, CIA, 2004. 2 The expressed priorities of our target audiences include: (a) building sustainable communities through viticulture (ISAW); (b) promoting market‐led agriculture, private enterprise, increased productivity, food security, foreign direct investment, and overall development (Ethiopian government); (c) transforming cooperatives into dynamic agribusiness enterprises with shareholder members exercising their ownership rights to take control of their economic future (USAID); and (d) eradicating poverty and providing opportunities for reinvestment in Ethiopia (Diaspora community). 2 The success of the proposed endeavors is linked to the potential to create a quality‐based identity for Ethiopia in the wine market. At the same time, a key point of differentiation for Ethiopia (at least initially) relates to the strong social mission of this project. To our knowledge, this represents the first attempt to develop a wine‐producing region with the primary aim of reducing poverty. By paying careful attention to the design of this wine industry cluster, many of the ensuing economic benefits should flow directly to Ethiopian farmers and their families. We therefore make a strong business case for the centrality of a clear and strong anti‐poverty mission for this project. More specifically, we outline a number of specific market ‘subsidies’ that follow such a commitment; i.e., examples of the financial, knowledge and market‐access support that might be expected. 3 Executive Summary With several coordinated efforts and some targeted external support that seems promising given the antipoverty mission of the project, Ethiopian farmers should be able to earn (by year 6) roughly ETB 12,000 per year from a ¼heCtare plot, Compared to the roughly ETB 2,500 earned by planting other crops. At the request of the International Society of Africans in Wine (ISAW), a team of six students and one professor from Emory University’s Goizueta Business School traveled to Ethiopia. Their specific goal was to assess the prospects of developing an economically‐viable and socially‐responsible wine industry cluster in and around Addis Ababa. It seems plausible that Ethiopians might profitably produce high‐quality grapes and wines. Ethiopia has an appropriate climate, some experience with winemaking, demonstrated interest from the government and from the private sector, several small‐scale vineyard experiments underway, potentially‐interested winery investors in the growing middle and upper classes, and growing levels of local wine consumption. Preliminary financial analysis affirms that grape growing can be economically attractive for farmers living in specific regions within Ethiopia. With conservative assumptions about yields, grape and wine prices and discount rates, and accounting for up‐front investment that will bear no fruit during the first two years, we estimate that ¼‐hectare planted to quality wine grapes has a net present value of more than ETB 40,000 over a 20‐year period.3 This compares quite favorably to roughly ETB 17,000 if that same land is left planted to teff (a cereal crop grown primarily in Ethiopia). The return is even higher (i.e., almost ETB 60,000) when farmers also receive a 5% “social premium” from the downstream profits associated with making and selling wine from just 40% of their grape output. However, various impediments – limited financing, lack of industry knowledge, concerns about market access and problematic infrastructure – must be overcome to achieve this potential. Several of these impediments can be overcome by establishing Vineyard Cooperatives. Cooperative arrangements have allowed Ethiopian coffee growers to penetrate higher‐quality segments of that industry and to benefit financially from their investments and commitments. Working with the support of the founder of the Oromia Coffee Cooperative (Oromia), one can leverage this success in the global wine industry. These cooperatives provide the means to lower each farmer’s personal investment in vineyards while achieving sufficient overall scale. Small initial plantings also allow farmers to grow food and other cash crops on the remainder of their land holdings. Our proposal calls for the initial establishment of two Vineyard Cooperatives of 40 families each, with each family initially planting ¼ hectare to vines. An estimated investment of less than ETB 15,000 per farmer (spread over two years) will create two 10‐hectare cooperative vineyards, which will initially produce almost 12,000 cases of wine per year. There are documented concerns about the ability of cooperatives to consistently produce high‐ quality grapes and wines. However, our cooperatives will also serve as vehicles to attract valuable industry knowledge from established viticulture programs in other countries. Our proposal calls for two related programs – a Vineyard Planting Program and a Vineyard Monitoring Program – that will 3 One US dollar is currently equal to roughly 17 Ethiopian birr. 4 ensure that best vineyard practices are learned and applied in the two cooperatives. Critical inputs to these two programs are trained viticulture faculty and students from established wine‐producing regions. Many of these individuals are attracted to the social mission of this project. Our proposal leverages this interest in two programs that will bring these global experts to Ethiopia in order to supervise vineyard plantings and then monitor vineyard progress. This will enhance our farmers’ ability to produce high‐quality grapes and will also allow selected Ethiopians to develop valuable industry skills in parallel ‘train the trainer’ initiatives. Investments in vineyards are only viable if we are able to encourage the development of wineries within Ethiopia. Preliminary analysis indicates that after promising vineyards are established, investments in wineries also become viable. For example, a roughly $250,000 investment in a 2,000 case winery produces (again under conservative assumptions) a positive net present value at discount rates of more than 18%. This estimate again incorporates the 5% social premium paid to the cooperative grape growers. Targeting interested social investors, we will encourage investment in one or more wineries that will each vinify a fraction of the cooperatives’ output. Finally, this proposal depends on finding an interested audience for high‐quality Ethiopian wines once they are produced. Our Market Access Program will emphasize three natural market segments: wine shops, restaurants and hotels within Ethiopia, Ethiopian Diaspora, and socially‐conscious wine consumers in the US and Europe who will be attracted to our project’s joint commitment to quality and poverty alleviation within Ethiopia. Given the anti‐poverty emphasis of this project, cooperative farmers and their affiliated winery owners will