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

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

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

Figure 2: 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

-10

-5

0

5

10

15

20

25

30Annual GDP growth in Ethiopia

GDP per capita (constant 2000 US$)GDP per capita, PPP (constant 2005 inter-national $)

Source: 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

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 30 major wholesale mar-

kets

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

Increasingly commercial deals done over the mobile phone

Percentage

Answers Yes No

No chang

e Total"In your opinion, compared to the period just before mobile phones were introduced, for an average now…”"… He contacts/is contacted by more sellers before he does a deal" 97 0 3 100"… He contacts/is contacted by more buyers before he does a deal" 96 3 1 100"… He contacts more transport brokers before he does a deal" 96 1 3 100"… He transacts more at sellers/buyers/his location instead of wholesale market” 94 6 0 100"… He bypasses the Addis wholesale market more" 61 21 17 100

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

IV. Temporal price behavior

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

1

2

3

4

5

6 Real cereal prices in Addis

Teff (mixed) Wheat (white)

Sorghum (white) Maize

Real prices over time

•Prices of teff highest and of maize lowest•Differences by type of cereal, but very

strong correlations between movements of the different cereals

•No uniform changes over cities; matters where you are

Seasonality• One harvest a year in general• 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

V. 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

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-100

0

100

200

300

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

MekelleLinear (Mekelle)Linear (Mekelle)Nekemt

Bir

r/quin

tal in

2011 p

rice

s

7. 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)

8. 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;

8. 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 – because of structural changes?

8. Conclusions• Suggestions for further research:1. Determine exact impact of changes in roads,

mobile phones, cooperatives on price differentials between wholesale markets;

2. Better understand reasons for decline of retail and milling margins;

3. Cut-off for structural change in the middle of the decade because of mostly gradual changes; allow for flexibility in cut-off date;

4. Rely on focus group information: a/ composition issues; b/ recall error; better to collect more information on top of prices in these markets.