Local value-addition in developing countries is often aimed at for upgrading of agricultural
value chains, since it is assumed that doing so will make farmers better off. However, transmission
of the added value through the value chain and constraints to adoption of value-adding
activities by farmers are not well understood. We look at this issue in the case of coffee
in Ethiopia–the country’s most important export product–and value-addition in the coffee
value-chain through ‘washing’ coffee, which is done in wet mills. Washed coffee is sold internationally
with a significant premium compared to ‘natural’ coffee but the share of washed
coffee in Ethiopia’s coffee exports has stagnated. Relying on a unique primary large-scale
dataset and a combination of qualitative and quantitative methods, we examine the reasons
for this puzzle. The reasons seemingly are twofold. First, labor productivity in producing red
cherries, which wet mills require, is lower than for natural coffee, reducing incentives for
adoption, especially for those farmers with higher opportunity costs of labor. Second, only
impatient, often smaller, farmers sell red cherries, as more patient farmers use the storable
dried coffee cherries as a rewarding savings instrument, given the negative real deposit
rates in formal savings institutions.