Structural transformation in ethiopia evidence from cereal market

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Ethiopian Development Research Institute and International Food Policy Research Institute (IFPRI/EDRI), Tenth International Conference on Ethiopian Economy, July 19-21, 2012. EEA Conference Hall

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Structural transformation in ethiopia evidence from cereal market

  1. 1. ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTEStructural transformation in Ethiopia: Evidence from cereal markets Bart Minten, David Stifel, Seneshaw Tamiru IFPRI ESSP-II Ethiopian Economic Association Conference July 19-21, 2012 Addis Ababa 1
  2. 2. 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 2
  3. 3. II. Data and methodology• Price data: Use monthly data from the Ethiopian Grain Trading Enterprise (EGTE);• 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 3
  4. 4. III. Five drivers for structural transformation in cereal markets1. Economic and income growth2. Urbanization and increase in commercial surplus3. Roads and transportation costs4. Access to mobile phones5. Cooperatives 4
  5. 5. Driver 1: Economic growth• Ethiopia one of the fastest growing economies in the world (remarkable for Africa as no oil) Figure 4: Annual GDP growth in Ethiopia 16 14 12 10 8 GDP at constant market prices (Govt. of Ethiopia) 6 % GDP per capita, PPP (constant 2005 international $) (World Bank; 4 World Development Indicators) 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -2 -4 5
  6. 6. 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 6
  7. 7. 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 7
  8. 8. Driver 3: Change in transportation costs Real transportation costs between cereal wholesale160 markets (2011 prices; birr/quintal)140120100 80 mean 60 median 40 20 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 8
  9. 9. Driver 4: Access to mobile phones• Increasing access to mobile phones by traders and brokers Start-up year of mobile phone use by brokers and traders on 100 wholesale markets (Cumulative percentage over markets) % of markets covered 90 50% of traders use mobile 80 100% of traders use mobile 70 50% of brokers use mobile 60 % of markets 100% of brokers use mobile 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 9
  10. 10. Increasingly commercial deals done over the mobile phone " Are mobile "Were fixed phones used phones usedUse of phone by traders (% of traders; mean) to…"? to…"?"… inform/transmit prices" 86 47"… agree on prices (plus quantity/quality) with sellers" 36 14"… request a show-up (quantity requested but withoutprice 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 10
  11. 11. Driver 5: Cooperatives• Agricultural cooperatives important strategy by government but relatively less important in cereal output markets; over the top now? Average share of the cereals sold by cooperatives on cereal wholesale markets (as reported by traders focus groups) 10 8 teff (25 markets) barley (5 markets) 6 wheat (16 markets) % sorghum (5 markets) 4 maize (20 markets) 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 11
  12. 12. Possible impact of changes in these 4 drivers on cereal price behavior • Income growth, urbanization, and 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 12
  13. 13. Price behavior:- Run regressions of the form:Log(real price of cereal i) = f(year*month, marketlocation, quality, grain/flour, retail/wholesale)- Test for structural change by comparing size ofcoefficients in the period 2001-2005 versus 2006-2011 13
  14. 14. IV. 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) 14
  15. 15. 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% (exception is sorghum). 15
  16. 16. However, variability of ratios Real prices differences of maize between the wholesale 300 markets of Addis compared to Mekelle and Nekemt 200Birr/quintal in 2011 prices 100 0 2001 2002 2003 2004 2005 2006 2008 2009 2010 2011 -100 Mekelle -200 Nekemt -300 16
  17. 17. V. 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) 17
  18. 18. • 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 Real milling costs over time (costs of milling 100 kgs of cereals; CSA data) 18 16 14 12 10 8 6 4 2 0 18
  19. 19. VI. Conclusions• Important structural changes in cereal economy in Ethiopia in last decade (fast economic growth; urbanization; drop transportation costs; universal access to mobile phones)• Impact on performance indicator, as measured by prices (No changes in quality premiums but significant declines in retail, milling and spatial margins) 19
  20. 20. Conclusions• Room for improvement: 1/ Despite road improvements, Ethiopia has one of the lowest road densities in the world 2/ Even with roads available, transport costs still relatively high and more competition would help push transport prices down 3/ 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 20

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