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Market changes and food prices

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International Food Policy Research Institute (IFPRI) and Ethiopian Development Research Institute (EDRI). Conference on "Towards what works in Rural Development in Ethiopia: Evidence on the Impact of Investments and Policies". December 13, 2013. Hilton Hotel, Addis Ababa.

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Market changes and food prices

  1. 1. ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE Market changes and food prices Bart Minten, David Stifel, Seneshaw Tamiru IFPRI ESSP-II December 13, 2013 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. Four drivers for structural transformation in cereal markets 1. 2. 3. 4. Economic and income growth Urbanization and increase in commercial surplus Roads and transportation costs Access to mobile phones 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; World Development Indicators) 4 2 0 -2 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -4 5
  6. 6. Impact of economic growth on food markets 2 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 road infrastructure and transportation costs 1. Big investments by government in road infrastructure Time required (hours) to travel by truck from Addis to 30 major wholesale markets 16.00 14.00 12.00 Average 10.00 Hossana 8.00 Bahir Dar Dire Dawa 6.00 Bedele 4.00 2.00 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 8
  9. 9. 2. Change in type of trucks being used Importance of different types of trucks arriving on wholesale markets (100% = all trucks) 2011 2010 2009 2008 year 2007 ISUZU (5-6 tons) FSR (7-8 tons) 2006 Trailer (20 tons) 2005 2004 2003 2002 2001 0 10 20 30 40 50 60 70 80 90 100 % 9
  10. 10. 3. Change in transportation costs 160 Real transportation costs between cereal wholesale markets (2011 prices; birr/quintal) 140 120 100 80 mean 60 median 40 20 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 10
  11. 11. 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 wholesale markets (Cumulative percentage over markets) 100 % of markets covered 90 50% of traders use mobile 80 100% of traders use mobile % of markets 70 50% of brokers use mobile 60 100% of brokers use mobile 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 11
  12. 12. Increasingly commercial deals done over the mobile phone Use of phone by traders (% of traders) "… inform/transmit prices" " Are mobile phones used to…"? 86 "… agree on prices (plus quantity/quality) with sellers" "… request a show-up (quantity requested but without price agreements) with sellers" 36 "… agree deals (prices and quantity) with transporters" 40 "… agree on prices (plus quantity/quality) with buyers" "… follow-up payments with buyers/sellers" 46 81 38 12
  13. 13. Possible impact of changes in these drivers on cereal price behavior • Income growth and urbanization: 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; 13
  14. 14. IV. Spatial price margins 1. 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 3. Price variation between markets is declining over the last decade: Difference between highest and lowest coefficient declined by 11%, 27%,28%, and 22% (exception is sorghum). 14
  15. 15. However, variability of ratios Real prices differences of maize between the wholesale markets of Addis compared to Mekelle and Nekempt 300 100 2011 2010 2009 2008 2006 2005 2004 2003 2002 0 2001 Birr/quintal in 2011 prices 200 -100 Mekelle -200 Nekemt -300 15
  16. 16. V. Retail and milling margins • Retail and milling margins declining over time 18 16 14 12 10 8 6 4 2 0 Real milling costs over time (costs of milling 100 kgs of cereals; CSA data) 16
  17. 17. VI. Conclusions Important structural changes in cereal economy in Ethiopia in last decade: 1/ Fast economic growth, leading to demand changes; 2/ Urbanization and increase in commercial surplus; 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); 17
  18. 18. VI. 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 18

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