Bassani, Giorgio - Hinter der Tür

Table of Contents

ACKNOWLEDGEMENT

Table of Contents

ABSTRACT

1. CHAPTER ONE
1.1 Introduction
1.2 Project Track
1.3 Problem statement
1.4 The Goals and objectives of the study:
1.5 Specific objectives:

2. CHAPTER TWO
2.1 Literature Review
2.2 Current Situation Regarding COVID-19 Pandemic
2.3 Current Coffee Market concerning COVID-19 and forecast
2.4 Coffee Export Market in Ethiopia
2.4.1 Export and local consumption
2.4.2 Pricing
2.5 The expected investor's behaviour and new market characteristics caused by COVID-19
2.6 Price Volatility of the coffee market
2.7 The relevance of this research as compared with other research (Empirical Evidences)
2.8 Competitors Analysis in Ethiopian coffee market
2.8.1 STRENGTHS:
2.8.2 WEAKNESSES:
2.8.3 OPPORTUNITIES:
2.8.4 THREATS:

3. CHAPTER THREE
3.1 Method

4. CHAPTER FOUR
4.1 Data Analysis and Interpretation
4.1.1 Introduction
4.1.2 Data interpretation and analysis
4.1.3 Application of econometrics tools
4.1.4 Data interpretation and analysis
4.1.5 Summary of results analysis and recommendation
4.2 LINEAR REGRESSION.
4.2.1 Data visualization and regression analysis
4.2.2 Analysis and Interpretation
4.3 PAIRED T-TEST
4.3.1 Hypothesis Testing
4.3.2 Analysis and Interpretation of the result
4.2.1. Correlation
4.2.2. Data analysis and interpretation Seaborn Correlation Heatmap:
4.2.3. Seaborn Pairplot
4.2.4. Matplotlib Correlation Heatmap

5. CHAPTER FIVE
5.1 CONCLUSION
5.2 RECOMMENDATIONS:

6. BIBLIOGRAPHY

ACKNOWLEDGEMENT

We want to use this opportunity to say a big thank you to our Advisor Prof. Tiberiu Stoica for the support and encouragement throughout this capstone project period as well as to the Student Support team and the entire administration for their love and support throughout this program in Financial Engineering at the World Quant University. We are grateful to WQU for this wonderful opportunity given to us to study with them and build new skills in the world of finance. We truly appreciate your continuous support and guidance throughout our studies here with you. God Bless the WQU Team.

ABSTRACT

Following the recent world crisis as a result of COVID-19 pandemic, the world has suffered tremendous losses in almost all market sectors that form the global economy. In this light, the researchers have decided to carry out a market research in one of the sectors of the global economy which is the commodity market that has a booming characteristic which is specifically the Ethiopian coffee export market to be the project point of focus since it has a very good market for coffee which is heavily consumed both home and abroad. The capstone project focuses on analysing 30 years data and the current year before and after the covid-19 pandemic, as well as during the period it has existed. The research used a couple of modern day tools to gather and analyse the data which has been collected from the Ethiopian Coffee Authorities. Tools such as Python and excel have been used to develop model for prediction and to test the hypothesis such as the ARIMA, Simple Linear Regression as well as the Paired T-test. Correlation and Covariance analyses have been carried out to test the relationship between the Ethiopian coffee market and the global economy participants such as the US and China to evaluate the degree of relationship and to find out whether or not the covid-19 Pandemic has any effects on the coffee market in Ethiopia. The research result shows that the Ethiopian coffee export market will double its revenue for the coming 10 years. The project find out COVID-19 has a significant negative relationship with the coffee market but as compared with other countries disasters, the coffee export market in Ethiopia has been slightly impacted, there was still significant growth in the market during this period due to governmental policies put in place to protect the market from crashing or suffering from very heavy losses over time. It can be considered as role model for other world countries in combating the pandemic to protect the market.

Keywords: Ethiopian Coffee Export Market, COVID-19 and Prediction

1. CHAPTER ONE

1.1 Introduction

Ethiopia is the homeland of the coffee plantation in Africa and the world's 5th coffee exporting country in the world market.

Coffee production for the Ethiopian economy has a very crucial place. It is assumed that coffee is cultivated by over 5 million farmers in the country and makes up an important source of income for more than 15 million people, many of whom are often-poor coffee producers(Smallholder farmers produce nearly 95% of Ethiopian coffee). Coffee is one of the major export crops that has been generating foreign currency which constitutes 25% of the export earnings, but when it is compared with the total production capacity, a significant part of it has been consumed locally(Seneshaw Tamru, Ermias Engida, 2020).

Coffee is familiar to drink and about 2 billion cups are being consumed per day in the world. Even though Ethiopia is the motherland for Coffee, it has now spread all over the world and other countries have been taking their economic advantage. Its cultivation started a long time ago and has now spread to other cultures of the world. Nowadays Brazil accounts for 20% of the global export market (AnimationChannel, 2020).

Our world is in the state of emergency caused by COVID-19. It has been affecting every aspect of life, especially the entertainment and social gathering and the surrounding business. Coffee is one of the commodity markets that has shown a decline in its export market value.

It is evidenced by the fact that world coffee exports for July 2020 declined by 11% as compared with the same month in 2019 which 11.92 million bags was making a higher percentage (ICO, 2020c).

There was an unusual happening here in the Ethiopian Coffee export market, different from this COVID-19 world. As per different media reports and research, the coronavirus pandemic lockdown which has been changing the business environment, and has been affecting millions of people in the world; did not show any significant impact on Ethiopian coffee export in mid-May(ICO, 2020a). What is the reason for this unique market behaviour? And what happened after this report? These questions will be addressed by this project's findings.

The main purpose of this research is to investigate the impacts of COVID-19 on the Ethiopian coffee export market from the period its outbreak up to September 10, 2020.

This project proposal has three parts: introduction, literature review, and methodology. It is the road map for quantitative analysis to complete our journey at World Quant University.

1.2 Project Track

We have selected a research track for the project in which we shall investigate the coffee export market and its reaction to the COVID-19 pandemic and predictively assess the future of the coffee market in Ethiopia.

1.3 Problem statement

Covid-19 is affecting the world market, especially the global coffee market, which has been seriously impacted by the pandemic. According to ICO in its monthly trade statistic report, the following results have been registered, showing the following statistics; “Export of coffee Arabica fell from 7.6% to 6.648 million 60 kg bags. Shipments of other Mild’s were sharply decreases (-19%) to 2.239 million bags. Colombian Mild’s declined by 1.4% to 1.207 million bags, while Brazilian Naturals were virtually flat at 3.202 million bags”(ICO, 2020a).

As per the report announcement by the General Manager of the Ethiopian Coffee Association, we see that even though the number of covid 19 cases rose drastically, the Ethiopian coffee market faced no decline until about 15th May, 2020 owing to the fact that the government put in place strict measures to fight the pandemic.

The country has exported its coffee Arabica bags without any interruption to countries such as Germany, Japan, the UK, Saudi Arabia, and the USA.

He added that its speciality coffee export which accounts 20% of Ethiopian’s coffee export, has suffered a lot to continue as pre COVID-19 time.

He also emphasised his worry about the continued lockdown period which will have unfavourable consequences on both the sales and production of coffee in Ethiopia. He said “….We donot know what will happen after one or two months here in Ethiopia and around the world as the behaviour of the virus transmission not well known. If COVID-19 related restrictions stay until August and September, this will severly affect not only our coffee export but also its productivity...” Comunicaffe, 2020.

The main concern of this project is to show the impact of COVID-19 on the Coffee market in Ethiopia as the manager warned that there is doubt about what has been happening as the number of COVID cases dramatically increased in the country after the mid-May which was 4500 cases and exponentially increased to 62,126 on September 12, 2020, the country has a global rank of 48th in COVID -19 cases (Worldometer, 2020).

To continue in the business, it is necessary to understand the dynamics of economic, market, technological, and social happenings that can help investors to make informed decisions.

Nowadays, our world has been in social, economic, and market crises which are unique as compared to other past economic crises in its causes, duration, and impact. According to a study launched by Cambridge University, for the coming 5 years, COVID -19 will seriously affect the world's economy. The study presents its result in two scenarios such as

1. The worst scenario; it will affect the economy from a loss of 82 trillion dollars.
2. In the best scenario; with speed recovery, it will cause a loss of 3.3 trillion dollars (www.weforum.org/agenda/2020/05).

In both scenarios, the recent world crisis will affect every aspect of citizens in the world.

The coronavirus may never go away, the executive director of the World Health Organization's emergency programmer Mike Ryan warned on Wednesday (May 13, 2020). He said the virus "may just become another endemic virus in our communities", adding that there is a "long, long way to go” before normality returns(WHO, 2020).

According to a report by Mathieu Fava from "The Economist," the COVID-19 pandemic has brought about a kind of a power tussle between America and China, about who will be the world's global financial leader. This tussle between America (which now has a huge number of unemployed citizens) and China is posing a great threat to the stability of the global economy(Economist, 2020).

According to the world bank's financial, welfare, and macroeconomic outlooks for sub- Saharan Africa, “the Covid-19 pandemic has caused the region's 1st recession within 25years and the economy is projected to decline to within -2.1 to -5.1% from the 2.4% in 2019. The crisis is expected to cost the Sub-Saharan region amounts ranging between $37 billion and $79 billion worth of countries’ GDP losses with in the year”. Albert Zeufack, Chief Economist for Africa at World Bank said “... Due to deteriorating fiscal positions and increased public debt, government in the region do not have much room for wiggle in deploying fiscal policy to address the COVID-19 crisis”.

In South Africa, all companies listed on JSE have been negatively influenced across multiple sectors. Companies like Coronation Fund Managers Limited, PSG Group limited, Old Mutual Ltd, Standard Bank Group Limited, Capitec Bank Holdings limited among others have all been affected.

As a result, most of the businessmen and other people have been developing new ways of life and looking for markets that can go with the situation.

What would happen next? It is an unaddressed issue and has been creating a great doubt for investors in different markets. So, our project will try to contribute its insight into the market behavior evidenced by secondary data which will be collated from conveniently selected Ethiopian Coffee Export Market that can be impacted by COVID-19.

Even though some studies have already been taking place, more analysis into this is required since the pandemic is still materializing since its impact can be depicted by market behavior. The exchange of goods and services is impacted and yet the main transmission of Covid-19 is through the exchange of goods and services.

The prevention measures of this pandemic mean blocking the direct contact of people in the market which has been negatively affecting those products and services which need direct interaction but on the contrary, it will allow those which do not require the direct contact or communication of people.

So, our research will analyse and provide insights into the following problems:

- How the coffee export market of Ethiopia has seriously been affected by the pandemic?
- Does Covid-19 bring new market opportunities through innovation and creativity to avert the Crisis for Ethiopian Coffee Market?
- What Ethiopia Coffee markets have been experiencing before and during this crisis?
- What will be the new Ethiopian Coffee Export market strategy to mitigate the risk from the lesson will have been given from the existing market?

The problem statement of this research is mainly focused on how to show the statistical characteristics of a conveniently selected commodity market, which is the coffee Export Market of Ethiopia concerning COVID -19.

It is a burning issue for our global coffee market and Ethiopian coffee markets in particular.

As per the report, CBI Ministry of Foreign Affairs on April 15, 2020, the COVID-19 crisis has affected every corner of the coffee sector. Because of lockdown, out of –home consumption in Europe and other consuming markets has quickly declined At-home consumptions and E-Commerce have kept alive (CBI, 2020).

There is a quest for relevant and reliable information about its impact and recent development. It has been part of our day-to-day responsibility. It becomes a matter of survival of any entity and eager to see the world after the coronavirus.

So, providing any relevant Commodity Market information during this time is a great initiative to see a better business world.

This project’s initiative is to indicate the effects of the Coronavirus on consumption goods like coffee which have been affected during the pandemic.

The insights of our study will focus on the statistical characteristics of the market behaviour concerning this new world phenomenon and giving valuable information about markets. It is also part of the solution to the problem.

1.4 The Goals and objectives of the study:

The pandemic will bring opportunities for some markets and threats for others; our project goal is to show the impact of COVID-19 on coffee export markets in Ethiopia. This project will dig deep into the statistical characteristics of some selected coffee market in Ethiopia and use statistical analysis tools to prove the deviations within the Ethiopian Coffee Export market for the pandemic and use this information to predict the future coffee market trends.

1.5 Specific objectives:

The specific objectives of the study are to;

- Describe the Coffee export market characteristics during the pandemic.
- Show the coffee market opportunities and threats by studying the statistical characteristics of the coffee market in Ethiopia during the pandemic.
- Identify the statistical market characteristics before, during, and post COVID-19 using the descriptive and predictive method of analysis using machine learning in python.
- Predict the future coffee export market in Ethiopia and give information to investors and policymakers.
- Developing the new risk averting strategy from the lesson found from these findings.

2. CHAPTER TWO

2.1 Literature Review

The COVID-19 pandemic has been affecting everything in the world. It has become a day-to-day issue for the past eight months. It will be very difficult to address every aspectof its outcomes. This review will highlight the effects of Corona Virus disease on the Ethiopian Coffee Export Market, which has been showing relatively unaffected since mid-May, but there is a lack of researched information after May 2020(ICO, 2020a).

2.2 Current Situation Regarding COVID-19 Pandemic

The fast spread of thecoronavirus has dramatic effects on the commodity as well as financial markets all over the global community. It has created an unprecedented level of risk, causing investors to suffer a significant loss in a short period and the total consequences are not very well identified.

This pandemic was identified as a new coronavirus (sever acute respiratory syndrome coronavirus 2, or SARS-Cov-2), and was later on renamed as Coronavirus Disease-19 or COVID-19(JohnsHopkinsUniversty, 2020)

According to the WHO report in January 2020, COVID-19 originated in the city of Wuhan in the Hubei province of China, it has exponentially spread across the world, giving rise to huge human tragedy and tremendous economic damage all over the world. By 14 September 2020, statistics show that there have been over 29 million cases of COVID-19 globally, with 928,857 deaths. what will happen next? It is the dark walk period (Worldometer, 2020).

Because of this reason, countries across the World have adopted several emergency measures in public health services to prevent the spread, though awareness creation about the disease to maintain social distancing and using face mask.

To implement social distancing, government organization, businesses, schools, community centres and nongovernmental organizations (NGOs) have be required to close down, mass gatherings have been prohibited, and lockdown measures have been imposed in many countries, allowing travellers only for essential needs and some countries like Ethiopia has implemented 14 days quarantine rules for all new comers from abroad which help the economy to stay alive.

The main objectives of these measures are to see that countries will be able to “flatten the curve”, i.e. reduce the number of new cases related to coronavirus pandemic from day one to the next to halt exponential growth and hence reduce pressure on medical services (John Hopkins University, 2020a).

This pandemic is expected to result in a considerable slowdown of economic activities all over the world as it is the current event.

Some international institution like IMF evidenced that the global economy would contract by about 3% in 2020 and this economic recession is presumed to be of far greater magnitude than that of the 2008-2009 Global Financial Crisis (IMF, 2020).

2.3 Current Coffee Market concerning COVID-19 and forecast

The coffee market was evaluated to a tune of over US $25 million in 2018 and has been estimated to grow at a rate of 5.6% by 2027. This projection was anticipated without a thought of COVID-19 which has drastically caused a lag within the market.

The pandemic has been unprecedented and has caused a health crisis that has seen various markets struggle. The world has been impacted socially and more critically financially across various sectors. This is eminent on the various stock exchange markets with deeps noted within the months of March to June. Considering the fact that we live in a global market with great interdependency, all corners of the world would not be spared.

The coffee sector has not been spared according to the International Coffee Organization (ICO) reports of April 2020.

The report proved that the COVID-19 pandemic is likely to have a profound impact on the global coffee sector, including production, consumption, and international trade. The report analysis covers the top 20 countries in coffee consumption and the findings show that for every one percentage point drop in GDP growth, there is an associated decline in demand of 0.95 percent for coffee. This is further accelerated by social distancing measures that different governments have imposed to cut down on the wide spread of the virus (ICO, 2020b).

2.4 Coffee Export Market in Ethiopia

Ethiopian principal exports are gold(21% of total export) and coffee accounts for 19% which is the second-largest export in the country's economy(TradingEconomy, 2020).

The COVID-19 pandemic has caused disastrous effects on all sectors within Ethiopia. This is inevitable due to the various restrictions to movement after the Ethiopian government declared the pandemic a state of emergency. The government undertook various precautionary measures to curtail free movement and great socialisation so that the spread of the virus can be controlled. Any impact to free movement of both people and goods and socialisation of people has an adverse impact to the economy of the country. Various economies like transport, accommodation, various industries were all impacted. Agriculture was not spared by the impact of the pandemic. The agriculture value chain was greatly impacted since the free flow market could not seamlessly continue due to the high in transportation costs both locally and internationally. The local coffee transport costs were reported to have increased by over 15% and international frights hiking by 70%. The effects would further be accelerated with low supply chain on fertilisers and other required chemicals for coffee production in Ethiopia (Beyene et al., 2020).

2.4.1 Export and local consumption

Due to the pandemic, there’s an increased reduction in demand for both local and exported coffee. It can be seen that locally within Ethiopia, the confinements on social gatherings are reducing the demand internally for local consumption within homes as well within coffee shops. At the International level, the International Coffee Organization (ICO) estimates that for every 1% drop in global GDP, there is a 0.95% drop in coffee consumption. Following this announcement by ICO, It is without a doubt that the global GDP growth will continue to be affected by the COVID-19 crisis and therefore a serious ripple effect on coffee value chain production and consumption.

Estimates show that commodity-grade coffee may not be seriously affected during lockdowns meanwhile, specialty coffee will most likely see such a huge decline in consumption. As a result of these reduced demands both locally and internationally, there has been a reduction in export prices and trading activity in Ethiopia. (Seneshaw Tamru, Ermias Engida, 2020).

2.4.2 Pricing

For some time, the Coffee prices in the Ethiopian markets have not been in unison with international prices and this is attributed to various reasons. This is attributed to the exchange rate policies and foreign exchange deficits and the lack of liquidity at banks at the beginning of the year among others. The figure below shows the prices of the Brazilian coffee prices against those in Ethiopia between 2018 and 2020. The Brazilian prices are normally bench marked.

Figure: Coffee prices (2018-2020) Abbildung in dieser Leseprobe nicht enthalten

Source: data ECX and ICO

The Figure below further confirms this disparity in prices between Brazilian coffee prices and those in Ethiopia. The comparison is made between Brazil and Ethiopia since the coffee is very in quality and taste. This disparity may simply be explained by the increase in logistical costs caused by the pandemic. (Seneshaw Tamru, Ermias Engida, 2020).

Figure: Coffee prices (February 2020 - April 2020)

Abbildung in dieser Leseprobe nicht enthalten

Source: data ECX

It is very essential to note the months from March to May are also peak months for the transaction of dehydrated cherries by coffee farmers and by doing this, the farmers were expecting good prices, similar to those seen for the red cherries period. Unfortunately, farm-gate prices are down. Based on 9price observations from different coffee-producing areas, prices were down by nearly 10% compared to the same period last year and by almost 20% compared toa month ago and this season, traders are unwilling to buy given significant volatility and a downturn in the international market. At a primary exchange centres in a coffee- producing area, less coffee is seemingly marketed as gatherings over 4 people is banned by the government emergency law and as a result of this the farmers are hesitant to travel to these markets, postponing their supply to later period(Seneshaw Tamru, Ermias Engida, 2020).

So, this project will try to fill the gap by finding out the current market behaviour concerning the pandemic and apply contemporary data science software like R and Python for its hypothesis test and prediction. The above ECX data has time limitations mainly focus on April and March 2020, and its research method used only descriptive statistics, there is no inferential analysis seen and a lack of standardizing scientific research approach.

2.5 The expected investor's behaviour and new market characteristics caused by COVID-19

As a result of the COVID 19 pandemic, there is a lot of doubt and anxiety among all human beings about the aftermath of this crisis. It has and will by default affect the decision making in buying and selling goods and services. The change in behaviour will also determine the type, amount, and frequency of spending money on different products.

Due to the very high rate of spread of the corona virus disease, as well as the excessive deaths it has caused and is still causing around the world, it can be seen that it has put the world in a total state of panic and psychological trauma and has brought about a lot of economic burdens on families and businesses around the world have suffered huge financial losses. The appearance of this covid 19 pandemic has brought about a kind of life stratification among different classes of people all over the world.(Dubey et al, 2020)

Because of this recent phenomenon, there are some markets like the game industry, film-like Netflix online entertainment that will be flourishing. While the consumption of coffee has drastically diminished because of social distance measures and restrictions in a social gathering which have negatively affected the GO-OUT product and services as compared with STH (Stay at Home) goods and services. The global food processing industry is one of the major industries facing serious disruptions such as factories shut down, supply chain breaks, technology events cancellation and office, bars, restaurants shutdowns because of this outbreak have undoubtedly affected the growth of the coffee market (ReportLinker, 2020).

2.6 Price Volatility of the coffee market

Following a joint report published by both ICO and IFPRI in May of 2020, it shows that the Covid 19 pandemic has caused huge spikes as well as very volatile prices in the coffee market sector as opposed to the prices of other staple foods across the world. Furthermore, while some experts in the field tried to attribute the high fluctuations in coffee prices to supply tied factors, they later realised that the Covid 19 pandemic has also made the situation worse. This pandemic has brought about an unforeseen challenge to both the supply and demand of coffee at a global level, making it difficult for the growers as well as the farmers and downstream workers on the value chain. These effects on the coffee market will be felt at very different points in time, making market uncertainties worse as well as the volatility of prices. It is estimated that this pandemic will bring about a lot of food scarcity together with poverty to the over 25 million coffee producers most of whom hold on to very little income paying jobs especially in Ethiopia and who by default are not prepared to handle the shocks caused by this pandemic in the public health sector (Hernandez et al, 2020)

The variability of coffee prices in the international market has a lot of causes, but the main determinants can be summarized in between the interaction of demand and supply curves.

The price of coffee is volatile when the demand and supply are inelastic in response to a price change in the short run and when there are unexpected fluctuations in the conditions of demand and supply.

With this regard, an adverse supply shock can cause a market price to rise when the price elasticity of demand is low or inelastic.

When the supply curve shifts to the left because of the adverse supply shocks such as drought, crop disease, flood, and other external factors like political and social(COVID-19), while the demand is inelastic, there would be a significant increase in price.

Because of this scenario, it would be very difficult to increase the price by producing more bags of coffee when the elasticity of demand is low On the other side of the price determinants, when the demand curve shifts to the right and the supply is low or inelastic, there will be a significant increase in the price of coffee assuming other things remain constant.

Abbildung in dieser Leseprobe nicht enthalten

Sources:https://www.tutor2u.net/economics/reference/price-volatility-in-the-coffee-market

Statistics hold it that Coffee is the most traded commodity at the global level as well as the most complex product to handle in accordance with the product complexity index (Geoff Riley, 2018).

It is important to note that the International Coffee Council put in place a number of rules, guiding the pricing of coffee at the international market level. Following these laid down procedures, the statistics committee concluded that the prices should be calculated based on world market standards after carrying out some studies between 2015- 2018. At a convention held in March 2019, the council accepted amended market shares between the different market groups of coffee (US and EU) together with their market weights as basis for the calculation of their price indicators(ICC, 2019).

Statistics holds it that coffee is being grown in over 60 countries around the world and they have been supplying the world market in both raw and processed beans form of the coffee beans which stands to be the most traded good in the world with a consumption of approximately half a trillion cups drunk in a year. The two main commercially cultivated coffee are Arabica and Robusta and they account for up to 70% of the world’s market coffee (Geoff Riley, 2018)

According to the world atlas report in the year 2019, Brazil is the leading coffee exporter while Ethiopia ranks the world 5th major exporter in the coffee market(WorldAtlas, 2019)

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