Grain Marketing Research Project, Ministry of Economic Development and Cooperation, Addis Ababafood security, food policy, Ethiopia, cereal markets, Crop Production/Industries, Marketing, Q18,

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Research Papers in Economics

Grain Marketing Research Project, Ministry of Economic Development and Cooperation, Addis Ababa
MARKET ANALYSIS NOTE #2
Grain Market Research Project
Ministry of Economic Development and Cooperation
January 1997
THE RESPONSE OF ETHIOPIAN CEREAL MARKETS
TO LIBERALIZATION
1
This Note assesses how liberalization of Ethiopia’s grain marketing system in March 1990 has affected
the level and volatility of wholesale prices and price spreads between major regional cereal markets.  The
paper also identifies issues and problems needing attention to guide future policy decisions with the aim
of reducing marketing costs in the food system and thereby promoting the welfare of grain producers and
consumers in Ethiopia.
The study focuses on three cereals (maize, white teff, and white wheat) and eight markets:  Addis Ababa,
Dire Dawa, Mekele, Bako, Shashemene, Jimma, Bahir Dar, and Hosaenna.  Markets are chosen based on
the availability of continuous time series price data covering at least three years before and after market
liberalization.
2
The major findings of the report are as follows:
& Cereal price spreads (the difference in wholesale prices) for major regional markets have generally
declined since liberalization in 1990.  In 24 market pairs covering maize, white teff, and white wheat,
average price spreads declined in 23 cases after liberalization (Tables 1 and 2).  Prices in the major
surplus-producing areas for which data are available have risen by 12% to 48%, while prices in
deficit regions have declined by 6% to 36% in eight of nine cases.
& The volatility of wholesale cereal prices has declined since liberalization in 11 of 16 cases for which
data was available (Table 1).  The volatility of cereal price spreads between different markets has
also declined since liberalization in 23 of the 24 cases examined (Table 2).   These  declines are
measured in terms of changes between the two periods in the standard deviations of monthly  prices
and price spreads.
& The general decline in the level of cereal price spreads is due not only to rainfall, seasonality, or other
exogenous factors.  Econometric results, which hold these factors constant, indicate that liberalization
was associated with a decline in cereal price spreads in 16 of 19 cases, with the effect being
statistically significant in 10 cases.
& The extent to which increased average wholesale prices in surplus areas have been passed along to
farmers in the form of higher producer prices continues to be a major unknown.  This is the subject
of on-going analysis at GMRP.  Yet  to the extent that higher prices at wholesale level have been
transmitted to producers, liberalization has positively affected cereal production growth and
incentives to use fertilizer and other productivity-enhancing inputs.
& The correlation between wholesale market prices (extent to which price changes in one market areMarket Analysis Note #2
Grain Marketing Research Project, Ministry of Economic Development and Cooperation, Addis Ababa
2
associated with price changes in other markets) has risen in 17 of the 24 market pairs examined since
liberalization in 1990.  These results indicate that changes in wholesale grain prices in one market
are transmitted to other markets more rapidly and to a greater extent since liberalization.
& Despite these tangible gains resulting from cereal market liberalization, there appears to be
substantial opportunity to further reduce costs in the grain marketing system.  One of the most
prominent sources of potential cost reduction is the tariffs imposed on grain at road checkpoints
(“kellas”).  The conventional wisdom in Ethiopia is that these tariffs constitute a tax on traders.
However, the magnitude of these checkpoint charges and their effects on prices received by producers
and prices paid by consumers (i.e., who ultimately pays the tax) has been very unclear.  To overcome
this information gap, enumerators were hired to ride on trucks carrying grain across five major cereal
trade routes: Addis to Harar; Addis to Mekele; Nekempt to Addis; Shashemene to Addis, and Jimma
to Addis.  Enumerators rode on five different trucks on each trade route during August 1996, and
recorded information on the number of checkpoints encountered, time spent at each checkpoint, and
the tariff charges incurred, both official (with receipts) and unofficial (without receipts).
3
Results of the survey are as follows:  The number of checkpoints observed on each grain trading
route varied from 8 to 18.  At each checkpoint, transporters were delayed on average for about ten
minutes. The total time taken for all checkpoint inspections from departure to destination varied from
one to three hours.  The average checkpoint tax paid by transporters was 7.2 birr per quintal.  There
was substantial variation in the magnitude of checkpoint taxes along different routes, being as low
as 3.8 birr per quintal from Shashemene to Addis, and as high as 15.0 birr per quintal from Addis
to Harar (including both official and unofficial charges).  The checkpoint charges accounted for 20%
to 33% of the average price spread observed on these major grain trading routes.  The checkpoint
charges are also considerable in terms of the prices received by farmers, accounting for roughly 10%
of the producer price of maize in Shashamene, and about 5% and 6% of the producer price of white
teff and white wheat in Dejene and Hosaenna, respectively, for the months of July and August 1996.
& Based on preliminary findings from the 1996 GMRP/CSA Rural Household Survey, the estimated
marketed cereal output from the 1995/96 meher harvest is as follows:  maize: 506,439 tons, or
approximately 30% of total maize production; teff: 409,799 tons, or approximately 31% of total teff
production; wheat: 233,904 tons, or approximately 28% of total wheat production; total cereals:
1,634,440 tons, or approximately 26% of total cereal production.  These volumes and percentages
clearly fluctuate from one year to the next as production fluctuates.  However, these estimates
provide an order of magnitude estimate of marketed cereal output in a good harvest year in Ethiopia.
This information may be useful in deciding appropriate quantities of cereal to be purchased through
support price operations, local purchase programs, and/or food aid releases to help stabilize prices
at desired levels.
& The volume of imported food aid wheat since the mid-1980s has significantly affected cereal prices
for wheat and teff in some areas, especially those where substantial food aid has been distributed
(e.g., Mekele).  The volume of imported food aid wheat has ranged from 0.3 to over 1.1 million tons
annually since 1985, accounting for an estimated 20 to 50 percent of the national marketed cereal
supply over the past decade.  Econometric results indicate that food aid released in a particular region
was associated with a decline in white teff and white wheat prices in six of 10 markets examined.
In these cases, wholesale prices in a given region and a given month declined by 2 to 5 birr per
quintal for every additional 3,000 tons of food aid released within that region over the prior three-
month period.  In some cases such as Tigray, the volume of food aid has at times been large enoughMarket Analysis Note #2
Grain Marketing Research Project, Ministry of Economic Development and Cooperation, Addis Ababa
3
to depress wholesale prices of wheat and teff by 15% to 25%.  By contrast,  the importation of food
aid wheat has not significantly affected maize prices in any of the markets examined, presumably due
to less substitutability in consumption between maize and wheat.  The welfare effects of lower grain
prices (due to food aid) on food production incentives, input use, and 
Table 1. Summary statistics of real prices of cereals for selected markets in Ethiopia
*
Markets liberalization  liberalization   Change between
Before market    After market   
  (Jan 85 - Mar 90)    (Apr 90 - Jun 96) the two periods 
Mean SD Mean SD Mean SD
Maize
Surplus areas:
Bako 61.18 20.79 90.14 31.95 28.96 11.16
Shashamane 66.29 13.89 97.79 22.17 31.50 8.28
Jimma 85.43 37.19 95.65 28.69 10.22 -8.50
Deficit areas: 
Addis 120.23 48.89 113.55 24.66 -6.68 -24.23
Dire Dawa 145.08 50.13 154.63 30.74 9.55 -19.40
Mekele 218.28 63.01 149.75 17.55 -68.53 -45.46
White Teff
Surplus
areas:Bako 142.34 22.10 173.82 25.55 31.48 3.45
Hosanna 155.34 22.97 189.65 23.93 33.94 0.96
Bahir Dar 158.16 15.77 207.63 25.55 49.47 9.78
Deficit areas: 
Addis 281.90 64.05 238.62 20.29 -43.28 -43.76
Dire Dawa 330.97 68.42 285.23 26.38 -45.74 -42.04
Mekele 422.32 73.26 270.94 15.12 -151.40 -58.14
White Wheat
Surplus areas:
Hosanna 110.96 20.40 136.07 16.18 25.11 -4.22
Deficit areas: 
Addis 183.49 55.40 169.21 20.68 -14.28 -34.72
Dire Dawa 238.97 49.34 225.70 22.60 -13.27 -26.74
Mekele 270.30 46.06 197.59 29.05 -72.71 -17.01
Levels are reported in birr per quintal (100 kgs) in constant 1995 birr.
*  
rural livelihoods are complex and clearly differ among different types of rural households.  A large
percentage of rural households are net buyers of cereal on an annual basis (in 1995/96 this percentage wasMarket Analysis Note #2
Grain Marketing Research Project, Ministry of Economic Development and Cooperation, Addis Ababa
4
almost 50% nationwide); these households directly benefit from lower staple food prices (Daniel and Jayne
1996).  However, lower prices due to food aid may impede input use and cereal production by rural
households who grow certain cereals as a cash crop.  Also, the potentially destabilizing effect of food aid
on market prices may introduce additional risks and costs for private traders, who are likely to pass these
costs onward to producers and consumers.
 
Table 2. Summary statistics of monthly cereal price spreads between different markets
*
Pair of markets liberalization   liberalization    Change between
Before market      After market   
  (Jan 85 - Mar 90)    (Apr 90 - Jun 96) the two periods 
Mean SD Mean SD Mean SD
Maize
Addis-Bako
Addis-Dire Dawa 40.57 20.22 23.40 15.80 -17.17 -4.42
Addis-Jimma 35.05 32.46 41.08 22.33 6.03 -10.13
Addis-mekele 18.62 26.87 17.90 14.64 -0.72 -12.23
Addis-Shashamane 100.60 51.18 40.34 23.61 -60.26 -27.57
Dire Dawa-Bako 31.92 14.36 15.76 11.48 -16.16 -2.88
Dire Dawa-Jimma 76.19 44.17 64.49 23.51 -11.70 -20.66
Dire Dawa-Shashamane 54.82 34.75 58.98 28.39 4.16 -6.36
White Teff
Addis-Bako
Addis-Bahir Dar 116.46 41.16 65.40 19.98 -51.06 -21.18
Addis-Dire Dawa 93.93 22.23 28.33 18.07 -65.60 -4.16
Addis-Hosanna 59.01 32.13 47.72 18.57 -11.29 -13.56
Addis-Mekele 96.26 36.67 48.97 17.36 -47.29 -19.31
Dire Dawa-Bako 116.56 58.67 36.71 22.33 -79.85 -36.34
Dire Dawa-Bahir Dar 175.12 58.34 111.52 27.65 -63.60 -30.69
Dire Dawa-Hosanna 144.64 33.94 74.23 21.15 -70.41 -12.79
Mekele-Bako 146.60 36.19 95.68 25.52 -50.92 -10.67
Mekele-Bahir Dar 227.03 74.47 98.17 32.70 -128.86 -41.77
Mekele-Hosanna 224.23 45.29 63.38 32.23 -160.85 -13.06
White Wheat
Addis-Hosanna
Addis-Dire Dawa 51.96 47.54 29.13 12.63 -22.83 -34.91
Addis-Mekele 71.62 35.79 56.49 26.01 -15.13 -9.78
Dire Dawa-Hosanna 87.17 75.13 33.12 32.56 -54.05 -42.57
Mekele-Hosanna 114.90 36.65 87.75 24.31 -27.15 -12.34
58.37 19.29 56.84 23.25 -1.53 3.96
239.00 44.04 83.03 28.08 -155.97 -15.96
150.10 164.93 62.67 27.54 -87.43 -137.39
Levels are reported in birr per quintal (100 kgs) in constant 1995 birr.
*  Market Analysis Note #2
Grain Marketing Research Project, Ministry of Economic Development and Cooperation, Addis Ababa
5
In general, the performance of Ethiopia’s grain marketing system has improved since liberalization.
Wholesale prices in the major surplus-producing areas have risen while prices in the consumer markets
have declined.  Grain price spreads for the major wholesale markets in Ethiopia have generally declined
since liberalization.  The volatility of wholesale grain prices and price spreads also generally declined.  The
correlations between wholesale market prices has risen for most pairs of markets examined, providing an
initial but very rough indication that grain markets have become more spatially integrated since
liberalization. These findings provide some support to the notion that the removal of constraints on the
private grain trade can bring tangible and broad-based benefits to both producers and consumers by
reducing the wedge between the prices consumers pay for grain and the prices that producers receive.
These price effects may also indirectly affect incentives to use productivity-enhancing inputs and nutritional
status among poor households dependent on the market to procure food.
Policy Issues for Further Consideration
Despite the tangible gains resulting from grain market liberalization in Ethiopia, there remain major
opportunities to further reduce costs in the grain marketing system:
& Increased investment in market infrastructure.  Between 40-60% of the retail cost of staple food in
Ethiopia is accounted for by marketing costs.  A substantial portion of these costs are transport costs.
Investment in market infrastructure reduces costs and risks across a broad range of commodities and
inputs in contrast to expenditures confined to particular crops (e.g., support prices on maize). One
of the reasons for the differential effects of market liberalization in different areas could be variations
in the development of marketing infrastructure between surplus and deficit areas.  The econometric
results indicate that the benefits of liberalization to producers  have been relatively lower in the more
remote areas with poor roads and market infrastructure.  Moreover, a considerable part of the food
price instability problem in Ethiopia is related to the high cost of transportation, which creates a large
wedge between import and export prices.  For example, when areas of Southern Ethiopia are in grain
surplus, prices are depressed by high transport costs that limit grain export opportunities.  When
these areas are in grain deficit, prices are driven upward by the high cost of transporting grain to
these areas from other regions.   Government and donor support for improved road infrastructure and
lower transport costs (both within Ethiopia and between Ethiopia and its regional neighbors) would
benefit both producers and consumers and further increase the benefits of market liberalization.
& Removal of taxes on grain at regional road checkpoints:  While taxes on the movement of grain
support fiscal objectives of the regional governments, they increase grain marketing costs and work
against government efforts to stimulate incentives to use productivity-enhancing farm technology.
Other research has shown the value-cost ratio of fertilizer use on maize could be increased by 8%
in key producing regions if the elimination of  checkpoint tariffs were half passed on to producer
prices (Mulat, Ali, and Jayne 1996).  Also, since the poor spend a comparatively large proportion
of their income on food, the taxation of grain is likely to be regressive.  As this note goes to print,
it is noted that some regions (e.g., SNNPR) have recently reduced the number of checkpoints within
their jurisdiction and other regions have announced intentions to do so.
& Improved public market information systems to accelerate both private and public response to supply
gluts and shortages, and to identify potential regional export/import opportunities.  In many cases,
profitable trading opportunities such as the case of maize export to Kenya in 1996/97 depend on
rapid assessment and response before market conditions change, highlighting the importance of timely
and accurate market information, both in Ethiopia and throughout the region.Market Analysis Note #2
Grain Marketing Research Project, Ministry of Economic Development and Cooperation, Addis Ababa
6
1.  This Note is a synthesis of a Working Paper by the Grain Market Research Project: Asfaw Negassa and T.S.
Jayne, 1997.  “The Response of Ethiopian Grain Markets to Liberalization,” Working Paper #6, Grain Market
Research Project, Ministry of Economic Development and Cooperation, Addis Ababa.  Readers interested in details
as to method, model specification, and results are referred to this paper.
2.  Results pertain to inflation-adjusted prices (deflated by the non-food consumer price index) in the private
trading system.  The private trade accounted for about 60-65% of total marketed cereal supply prior to
liberalization in the 1980s, and about 90-95% in the post-liberalization period.  This analysis does not address the
effects of liberalization on changes in prices within the controlled marketing channel.  Details as to the nature of
the policy changes adopted as part of grain market liberalization in 1990 are contained in the main report (see
footnote 1).
3.  For earlier work on the problem of grain checkpoints, see Howard et al. 1995.
& Other research on the behavior of wholesale traders (Eleni, forthcoming) indicates the scope for
reducing handling and transaction costs if improvements in cereal grading and standards could be
achieved.  For example, inadequate grading procedures cause grain to be un-bagged and re-bagged
for quality inspection each time grain changes hands.  These findings are indicative of an emerging
body of empirical evidence on policy reform in Africa suggesting that, while some reforms have been
critical to promote economic growth, they are insufficient by themselves to generate leaps in
productivity growth and require associated improvements in key market institutions, contract
enforcement, and broader nurturing of civil society.
Thus, while liberalization has reduced marketing costs related to policy restrictions, there may be
substantial scope to further reduce costs in the cereal marketing system through strengthening of market
institutions.  This implies an important positive role for government.  In a country such as Ethiopia, where
many households are impoverished and live on the brink of subsistence, the effects of policy and
institutional constraints that inflate costs in the food system are most likely to hurt them the most and
exacerbate the country’s food insecurity problem.
Notes
Selected References
Daniel Molla and Jayne, T.S. (1996) The Role of Food Aid in Ethiopia: Stabilization Objectives and Access to
Food by Vulnerable Households, Note Presented to the First Discussion Forum of the Grain Market Research
Project of the Ministry of Economic Development and Cooperation, 8 & 9 November 1996, Sodere.
Eleni Gebremedhin (forthcoming) Grain Market Performance and Transaction Costs in Ethiopia, Ph.D. Thesis,
Stanford University, Palo Alto.
Julie Howard, Ali Said, Daniel Molla, Patrick Diskin, Seifu Bogale (1995) “Toward Increased Cereals Production
in Ethiopia,” Food Security Research Project Working Paper #3, Ministry of Economic Development and
Cooperation, Addis Ababa.
Mulat Demeke, Ali Said, and Jayne, T.S. (1996) Interactions between Input Market and Grain Market
Performance, Food Security Research Project Working Paper #5, Ministry of Economic Development and
Cooperation, Addis Ababa.
The Grain Market Research Project (formerly known as Food Security Research Project) is a joint collaboration between the
Ministry of Economic Development and Cooperation, USAID/Ethiopia, and Michigan State University.  Please direct all
inquiries to the In-Country Coordinator, Grain Market Research Project, Ministry of Economic Development and
Cooperation, P.O. Box 1037, Addis Ababa, Ethiopia; Tel. 12-89-73; Fax 55-01-18; Internet: GRMP@DAI.COM.

Seifu Bogale

The Role of Food Aid in Ethiopia: Stabilization Objectives and Access to Food by Vulnerable Households, Note Presented to the First Discussion Forum of the

The Response of Ethiopian Cereal Markets to Liberalization

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