Structural transformation in Ethiopia: Evidence from cereal markets

Structural transformation in Ethiopia: Evidence from cereal marketsBart Minten, IFPRIDavid Stifel, Lafayette CollegeSeneshaw Tamiru, ESSP

I. Introduction

•Food prices and market functioning of large interest in developing countries, especially since global food crisis

•Look in this paper at cereal market transformation and cereal prices in Ethiopia

•Important topic: 1/ cereals about three-quarters of area planted in Ethiopia and half of consumer expenditures; 2/ Explicit purpose of government to stimulate market transformation

II. Data and methodology

•Price data: Use monthly data from the Ethiopian Grain Trading Enterprise (EGTE); gathers prices on wholesale markets

•Wholesale market survey: Conducted on the biggest wholesale markets in the country (31). Focus groups of transporters as well as for specific cereal crops (teff, sorghum, wheat, maize, barley): 71 focus groups in total

Wholesale markets surveyed

III. Background

•Cereal consumption: 150 kgs of cereals per person per year

•In quantity, maize most important; then sorghum, wheat, and teff; barley least important

•Strong differences between urban and rural areas: More maize and sorghum consumption in rural areas; high consumption of teff in urban areas

III. Background

•Policy background (in last ten years): - 1/ Intervention by the Ethiopian Grain

Trading Enterprise (EGTE) in markets as well as food aid by e.g. WFP for emergencies

- 2/ Issues of price inflation and efforts of the government to control this: a/ export bans; b/urban food rationing cards; c/ government imports; d/ price controls

-40

-20

0

20

40

60

80

100

Inflation (using year-to-year changes in %)

General

Food

Non-Food

IV. Five drivers for structural transformation in cereal markets

1. Economic and income growth2. Urbanization and increase in

commercial surplus3. Roads and transportation costs4. Access to mobile phones5. Cooperatives

Driver 1: Economic growth

•Ethiopia one of the fastest growing economies in the world (remarkable for Africa as no oil)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-4

-2

0

2

4

6

8

10

12

14

16Figure 4: Annual GDP growth in Ethiopia

GDP at constant market prices (Govt. of Ethiopia)

GDP per capita, PPP (constant 2005 international $) (World Bank; World Development Indicators)

%

Impact of economic growth on food markets2 factors matter:1. Extent to which incomes of people grow and for

which type of people (urban/rural): Some evidence of this (15% consumption growth between 2004/05 and 2000/01; poverty reduction from 38% to 29% between 2004/2005 and 2010/2011 (HICES, CSA))

2. How do consumers change consumption with increasing income? Demand analysis shows that people shift to high-value crops but also to superior cereals, such as teff; lower demand elasticities for sorghum and maize

Driver 2: Urbanization and increasing commercial surplus•Over 10 years: growth of urban population of

44% or 3.7 million people; using reasonable assumptions, leading to 500,000 tons of extra shipment of cereals to urban areas, or 65,000 truck loads of 7.5 tons (FSR truck), or 650 additional cereal trucks per year (assuming 100 complete cycles a year)

• Increasing commercial surplus of cereals confirmed by national statistics (from CSA): increased by 117% over the last ten years

Share of large and medium-scale commercial farms in cereal production and marketed surplus (CSA; 2010/2011)

% share in Teff Barley Wheat Maize Sor-ghum

5 cereals

Production 0.4 0.2 5.0 5.4 3.6 3.5

Commercial surplus

1.3 1.9 21.1 33.3 25.9 17.9

Changes on the production side: Emergence of commer. producer class?

•Increase of share of “investors”: land leases given out by government to commercial farms

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

200

400

600

800

1000

1200

1400

Commercial surplus of maize in East Wol-lega

(in 1000 quintals per year)Investors

Private peasant holders

Driver 3: Roads and transportation costs1. Big investments by government in road

infrastructure

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Time required (hours) to travel by truck from Addis to major wholesale markets

AverageHossanaBahir DarDire DawaBedele

2. Change in type of trucks being used

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0 10 20 30 40 50 60 70 80 90 100

Importance of different types of trucks arriving on wholesale markets (100% =

all trucks)

ISUZU (5-6 tons)FSR (7-8 tons)Trailer (20 tons)

%

year

3. Change in transportation costs

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

20

40

60

80

100

120

140

160

Real transportation costs between cereal wholesale markets (2011 prices; birr/

quintal)

mean

median

Driver 4: Access to mobile phones•Increasing access to mobile phones by

traders and brokers

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

10

20

30

40

50

60

70

80

90

100

Start-up year of mobile phone use by brokers and traders on wholesale markets (Cumulative per-

centage over markets)% of markets covered

50% of traders use mobile

100% of traders use mobile

50% of brokers use mobile

100% of brokers use mobile

% o

f m

ark

ets

Increasingly commercial deals done over the mobile phone

Use of phone by traders (% of traders; mean)

" Are mobile phones

used to…"?

"Were fixed

phones used to…"?

"… inform/transmit prices" 86 47

"… agree on prices (plus quantity/quality) with sellers" 36 14

"… request a show-up (quantity requested but without price agreements) with sellers" 38 16

"… agree deals (prices and quantity) with transporters" 40 6

"… agree on prices (plus quantity/quality) with buyers" 46 19"… follow-up payments with buyers/sellers" 81 31

Driver 5: Cooperatives•Agricultural cooperatives important

strategy by government but relatively less important in cereal output markets; over the top now?

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

2

4

6

8

10

Average share of the cereals sold by cooperatives on cereal wholesale markets (as reported by traders'

focus groups)

teff (25 markets)barley (5 markets)wheat (16 markets)sorghum (5 markets)maize (20 markets)

%

Possible impact of changes in these 5 drivers on cereal price behavior

• Income growth, urbanization, cooperatives: larger quantities traded, economies of scale, possibly leading to lower margins (for same distances traveled);

•Mobile phones and transport costs changes: more efficient marketing system, leading to lower margins;

•Changes in preferences because of income growth: possible effect on quality premiums, if supply changes slower than demand changes

Six characteristics of price behavior:- Regressions of the form:Log(real price of cereal i) = f(year*month, market location, quality, grain/flour, retail/wholesale)Discuss all of these results for different grains:• Temporal: seasonality and yearly movements• Spatial margins• Quality premiums• Retail and processing margins- Test for structural change by comparing size of coefficients in the period 2001-2005 versus 2006-2011

V. Seasonality• One harvest a year in general• Price seasonality varies between 25% for maize

and 10% for wheat (lowest; probably because of smoothening of imports); Few changes in price seasonality over time

• Large seasonality in commercial quantities being shipped: number of trucks half in off-season compared to harvest period; But seasonality in aid, coming in the lean period (usually April – July); seemingly partial shift from commercial flows to aid flows over seasons

Seasonality in cereal arrivals per market

S-N 2010 D-F 2011 M-M 2011 J-A 2011 S-N 20110

20

40

60

80

100

120

140

Seasonality in arrivals of cereals on 31 wholesale markets

(average tons per week) Barley Maize

Sorghum Teff

Wheat

Tons

per

week

VI. Spatial price variation

•Ethiopia very diverse agro-ecologies; spatial specialization

•Broad generalization: Major commercial cereal production areas in West and South of country (maize/wheat/barley); cereal deficit areas in North (Tigray/Mekelle) and East (e.g. Dire Dawa)

• Because of central location of Addis, quite some products go through it

Regression results1. Addis biggest city but not highest price;

mostly found in Eastern and Northern part of the country, i.e. the food deficit areas;

2. Price differences between markets are declining, especially so between receiving markets (Dire Dawa/Mekelle) and Addis (9 out of 10 tests significant)

3. Price variation between markets is declining over time: Difference between highest and lowest coefficient declined by 11%, 27%,28%, and 22%.

However, variability of ratios

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-300

-200

-100

0

100

200

300

Real prices differences of maize between the wholesale markets of Addis compared to Mekelle

and Nekemt

Mekelle

Linear (Mekelle)

Bir

r/quin

tal in

2011 p

rice

s

Share of transportation costs (by truck) in final wholesale price

J F M A M J J A S O N D0

100

200

300

400

500

600

700

Transport costs from Nekemt to Mekelle and wholesale maize price in Mekelle over the year

2011 Transport costs FSR

Transport costs trailer

Mekelle

VII. Margins

•Quality premiums are significant (white cereals usually preferred over mixed ones; price premiums of about 8-15%) and higher in Addis than in rest of country; but little changes are seen over time;

•Retail margins declining (7 out of 10 tests show significant decline; all significant in Addis)

•Milling margins significantly declining over time; dropped in half in 2010 versus 2001

•6 out of 8 tests show significant decline of flour/grain ratio; all significant in Addis

2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

2

4

6

8

10

12

14

16

18

Real milling costs over time (costs of milling 100 kgs of cereals; CSA data)

VIII. Conclusions• Important structural changes in cereal economy in

Ethiopia in last decade: 1/ Fast economic growth, leading to demand changes;2/ Urbanization (+44%) and increase in commercial surplus (+117%); 3/ improved roads and drop in transportation costs (dropped to half the costs ten years ago); 4/ universal access to mobile phones by traders and brokers (but there was fixed phone access before); 5/ Cooperative marketing took off but might be over the top;

Conclusions• Impact on performance indicator, as measured

by prices:1/ No changes in seasonality;2/ No changes in quality premiums;3/ Significant declines in margins (retail, milling, spatial);4/ Price levels determined by international markets but differential effects for different regions: price rises less in food deficit – and vulnerable areas – possibly because of structural changes

Conclusions• Room for improvement:1/ Despite road improvements, Ethiopia has one of the lowest road densities in the world2/ Even with roads available, transport costs still relatively high and more competition would help push transport prices down3/ Access to cellphone widespread for traders and brokers, but penetration with farmers still relatively small 4/Price volatility an issue, sometimes linked with ad hoc policy decisions