Grain Marketing Research Project, Ministry of Economic Development and Cooperation, Addis Ababafood security, food policy, Ethiopia, food aid, Food Security and Poverty, Q18,

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Research Papers in Economics

Grain Marketing Research Project, Ministry of Economic Development and Cooperation, Addis Ababa
MARKET ANALYSIS NOTE #4
Grain Market Research Project
Ministry of Economic Development and Cooperation
March 1997
Meeting Food Aid and Price Support Objectives Through Local 
Grain Purchase:  A Review of the 1996 Experience in Ethiopia   
1
Problem Statement
Ethiopia has been a food deficit country for many problem, the Government arranged with donors
years.  Since 1994, however, grain production to  procure food aid in 1996 from domestic
has increased steadily, with the largest crop on markets through purchases from local traders.
record  reported  in  1995/96.    The  apparent The objective of the program has been to buy
transition  to  food  self-sufficiency  is  welcomed, grain locally to fulfill domestic food aid
yet it brings with it new development challenges. requirements. However, local purchase programs
Concerns have arisen that depressed cereal prices objectives,  including  stabilizing  market  prices
may reverse the recent gains made in promoting during  supply  gluts  and  encouraging  the
use of fertilizer and improved seeds by development  of  an  efficient  grain  marketing
smallholder farmers.  In fact, teff and maize system.    Supporting  cereal prices was an explicit
prices throughout 1996 and so far in 1997 have policy objective of the Government of Ethiopia in
been 20 to 40 percent lower than their 12-year 1996.   In 1996 the Ethiopian Grain Trade
inflation-adjusted averages.  Also, national food Enterprise (EGTE) offered farmers a minimum
self-sufficiency has not overcome the chronic support price for maize and wheat.
food insecurity problem faced by many
households.  Despite increased production and The purpose of this paper is to identify factors
lower grain prices, a large segment of the rural that  can  improve  the  ability  of  future  local
population continues to be unable to secure an purchase activities to achieve a range of national
adequate food supply.   The current situation is food  policy  objectives  including  price
therefore  one  of  food  abundance  co-existing  with stabilization for farmers, promoting the
widespread food insecurity. development of a competitive and low-cost food
Therefore, while there remains a clear need for resources  in  a  cost-effective  manner.    The
continued  food  assistance  for  vulnerable  groups, analysis of the 1996 Ethiopia experience
the typical method of importing food aid from provides potentially valuable lessons for the
donor countries was viewed as likely to design of future local purchase programs
exacerbate the country’s existing supply glut and throughout Africa.
further depress cereal prices to the detriment of
agricultural production growth.  To address this
can also be designed to support other policy
marketing system, and procuring food aidMarket Analysis Note #4
Grain Marketing Research Project, Ministry of Economic Development and Cooperation, Addis Ababa
2
Table 1:  Specifics of tenders issued by the EU for grain purchase in Ethiopia in 1996
Delivery site and Wheat Maize Sorghum Total
month of issue
------------------------------------------ metric tons ---------------------------------------------
Kombolcha
 March (6,000) (6,000)
 May 24,000 15,000 6,000 45,000
Dire Dawa -
 March 3,000
 May 6,000 9,000
Shashemene - -
 May 9,000 9,000
Mekele -
 February (33,000)
 March 12,000 (33,000)
 May 33,000
1 45,000
Source:  European Union, Addis Ababa, Ethiopia, 1996.
Note:   Number in parentheses are tenders that were canceled.   Contracted to EuronAid
1
Background to the Local Purchase Program
In 1996 the European Union (EU) implemented Forty-three traders submitted bids to the EU of
the first phase of a local purchase program in which 14 traders won bids.  Of these, 27 were
Ethiopia.  Tenders for 108,000 tons of grain surveyed, 10 winners and 17 losers.
(24,000 tons of wheat, 42,000 tons of maize, and
42,000 tons of sorghum) were issued in February
and March 1996 for delivery in June and July to
specified locations (Table 1).  Nearly 100,000
tons  of  grain  were  actually  delivered  at  an The main findings of the report and options for
average cost of $251 per ton.  The second  phase further consideration to improve the cost-
of the local purchase program  was implemented effectiveness of local purchase programs in the
in December 1996 for a total of 15,103 tons of future are summarized as follows:
grain in 500 ton lots. 
The EU announced tenders in national Earlier in the Season:  Farmers may benefit by
newspapers and in regional newsletters of the changing the timing of tender issuing, contract
Southern,  Amhara,  Oromiya,  and  Tigray awards, and delivery dates to occur earlier in the
Regions.  Once tenders were received in the marketing  season.
regions, the lowest price bidder in each region
and for each lot of  3,000 tons was awarded a In 1996, most contracts were generally awarded in
contract. March and April.  Delivery dates were specified
To review the local purchase program, the Grain delivery typically occurred later.  From this, it
Market Research Project conducted a survey of appears likely that much of the grain purchased
over half of the participating traders, both winners
and losers during August and September, 1996.
Options for Consideration to Improve the
Effectiveness of Local Purchase Activities
1. Implement Local Purchase Activities
for May and June in most cases, but actualMarket Analysis Note #4
Grain Marketing Research Project, Ministry of Economic Development and Cooperation, Addis Ababa
3
by participating traders occurred in the April- 2. Reduce the Contract Lot Size:  The cost-
June period after most farmers already sold their effectiveness of local purchase can be improved in
grain.    According  to  the  10  bid  winners the future by designing the program so that a
interviewed, more than 50% of the grain they greater number of traders are able to bid on local
purchased to meet the terms of the local purchase purchase contracts.  Perhaps the most important
contracts were from other traders.  Many traders means to increase the number of bidders is to
attributed their failure to deliver grain by the offer contract lots of lower volume to enable
specified delivery date to difficulties in sourcing smaller traders to enter bids. 
grain at this time. 
Data from nationally representative household mobilize enough working capital to procure 3,000
surveys in 1996 indicate that between November tons.  A random survey of 219 wholesale grain
and May, about 90% of farmer grain sales from traders  interviewed  in  September  1996
the larger meher harvest  have already occurred (Gebremeskel and Shaffer, 1997) indicated  that
(GMRP 1996).  In fact, it is likely that most less than 10%  of the traders purchased more than
rural households participating in the market 3,000 tons of maize during the entire 1995/96
during  the  May-September  period  are  purchasing marketing year.  The 10% of the traders
grain.  Since grain is typically most plentiful on purchasing the most maize during 1996 averaged
local markets during the several months directly only 521 tons purchased per trader.  The trader
after the harvest, it would appear that grain could deciles purchasing the most wheat and sorghum
be purchased at lowest cost by setting delivery during 1996 averaged only 978 tons and 567 tons
dates not long after the period of greatest farm purchased per trader, respectively.  These results
grain sales. suggest that in order to participate in the program,
It is likely that moving the auction process access  to  much  more  credit  and/or  working  capital
forward in the marketing season will also result than they currently utilize.
in reduced bid prices, other factors held constant.
It is noted that tenders for the second phase of the Indeed, it was found that traders submitting bids
EU local purchase activities were already under the local purchase program in 1996
launched in December 1996, several months appeared to differ in some important respects
ahead of when they were launched for the first from the broader cross-section of Ethiopian grain
phase. traders. This provides an insight to potential entry
Observing the seasonality in grain prices can
assist in determining the most appropriate timing For example, over 70% of the bid winners and
of local purchase activities.  In Ethiopia, there is 50% of the bid losers owned trucks, compared
a strong seasonal trend in grain prices.  In with only 15% of the wider sample of grain
general, prices are at their lowest right after the traders  (Table 2).   Also, those firms submitting
larger, meher harvest, and then rise steadily until bids tended to be larger and more diversified in
the smaller, belg harvest where prices fall, but their activities than those not participating in the
rise again to a high before the next meher.  local purchase bid process. Almost 85% of the bid
Historical grain price trends also reveal that
prices are lowest from October through
December for maize; lowest in December for
white wheat; and lowest in November for
sorghum.
Experienced smaller traders may not be able to
almost all Ethiopian grain traders would require
barriers to participation in the 1996 Program.
winners and 90%  of the bid losers were involved
in other business activities.   By contrast, only
46% of the 219 randomly sampled grain traders Market Analysis Note #4
Grain Marketing Research Project, Ministry of Economic Development and Cooperation, Addis Ababa
4
Table 2:  Distribution of assets between EU participants and traders that did not
 participate in the local purchase program (percent)
Assets (n=27) wholesalers  (n=219)
Traders that submitted bids Randomly sampled grain
1
winners (n=10)          losers (n=17)
2
Own other businesses 85 90 46
Own trucks  71 50 15
Own storage warehouse  50 55 58
Access to back credit 67 59 61
Source:  GMRP survey data, 1996.    Surveyed in August 1996;   Surveyed in September 1996.
1 2
were engaged in other businesses. This difference million birr (US$3.16 million) by simply buying
may have been primarily due to the 3,000-ton lot the contracted 108,000 tons of grain in the local
size  in  the  1996  Program,  which  probably market of the delivery location at the specified
constituted a barrier to participation for most time of delivery.  This would have reduced
grain traders. Program expenditures on local grain purchase by
There are particular attributes that influence the roughly 11% more food to be procured for relief
likelihood that a trader is able to submit a bid to efforts with the given amount of funds provided
the  Program.    However,  there  are  very  few for the Program by EU).  In addition to reducing
differences in the attributes examined between contract lot sizes, options to promote greater
the bid winners and bid losers.  For those traders competition  in  the  bid  process  are  presented
that submitted bids, there seemed to be no below.
distinguishing characteristics that increased or
lowered his or her  probability of winning a While not an explicitly stated objective of the
contract.    1996 local purchase program in Ethiopia,
In response to this concern, the second phase of prices is important for maximizing the benefits of
the EU local purchase program is specified in local purchase for a given bundle of resources
terms of 500 ton lots.  According to our trader devoted to the program.   Procurement costs
survey results, this is expected to increase the above  market  prices  are  likely  to  (a)  pass
total number of bids received, other factors windfall  profits  to  grain  traders  without  passing
constant, and possibly reduce the number of very any benefits along to farmers; and (b) expend
large traders submitting bids. scarce resources that otherwise could have been
3. Redesign the bid process to encourage
greater competition:  The average contracted 4. Holding one national-level auction rather
prices of wheat and sorghum under the 1996 than a set of localized auctions can increase
Program were far above the prevailing market competition: The evidence indicates that the
prices at the specified local delivery markets. regionalization of the auction process constrained
This suggests, but does not prove, a lack of competition in the bid process and increases the
competition in the bidding process in 1996.    average bid price received under the Program.
Detailed information (presented in the Working submitting lower-priced bids than other traders
Paper) shows that the 1996 Program could have that did win bids (for comparable grain types, 
reduced its costs of grain procurement by 20
11.6% (or alternatively would have allowed
procuring grain from traders at least-cost market
used to create other benefits.
As a result, some traders did not win bids despiteMarket Analysis Note #4
Grain Marketing Research Project, Ministry of Economic Development and Cooperation, Addis Ababa
5
Table 3: Relative value of purchases by separate and combined lots (000' birr)
Grain Type Destination Value of bids actually Value of bids if one
point won auction was held
(000 birr) (000 birr) (000 birr)
1
Potential Savings
A. B. D. E. F.
wheat Kombolcha 40,109.4 38,787.3 1,322.1
maize Kombolcha 16,522.5 16,360.5 162.0
maize Shashemene 8,786.9 8,484.3 302.6
maize Dire Dawa 7,302.0 same 0
maize Mekele 14,062.0 14,058.3 3.7
sorghum Kombolcha 10,645.2 same 0
sorghum Dire Dawa 3,882.0 same 0
sorghum Mekele 70,828.6 55,733.0 15,095.0
Total 172,137.6 155,252.3 16,885.0
Source: European Union, Addis Ababa, Ethiopia, 1996.
 Notes:  Computed by taking the lowest priced bids offered across all bidders for specific grain and
1
destination points.
delivery points, and delivery months) simply million birr for other developmental purposes,
because they were bidding in different regions.  amounting to 9.8% of the total grain procurement
Segmenting  the  auction  process  into  regions costs under the program (Table 3).
serves to reduce the number of competing bids in
an auction, and does not appear to be compatible In 1996, traders could bid for multiple lots within
with the goals of promoting a competitive and one region and for the same destination. For
integrated grain market environment. some contracts (lots), as many as 17 traders
Survey  results  also  indicate  that  the  regional bids were received from the same region and for
segmentation of the auction created additional the same grain and delivery point.  As a result,
transaction costs for the traders of registering in some traders were awarded contracts whose bid
numerous auctions and limited the number of price was higher than other traders who lost bids
traders  submitting  bids.    As  a  result,  the for the same grain and delivery point in the same
segmentation process did not always result in the regional auction.
lowest-priced contract (to a specified location for
a  specified  cereal  and  delivery  date)  being Traders had an advantage if they knew to submit
accepted. as many bids as possible. Traders who submit
5. Do not segment bids by contract:  were competing with only a few other traders had
Combining bids across all lots of 3,000 tons an  advantage over traders that competed against
specifying the same grain and delivery point many other traders. In addition, the likelihood
(rather than segmenting the tenders by lot) is that they win a bid improves if they bid in one lot
expected to  increase competition in the bid that  has  few  competitors.
process and thus reduce the average bid price. In
1996 this would have saved the program 16.8
submitted bids.  For other lots, as few as two
multiple bids and win a contract in which theyMarket Analysis Note #4
Grain Marketing Research Project, Ministry of Economic Development and Cooperation, Addis Ababa
6
1.   This Note is an abridged version  of a Working Paper by the Grain Market Research Project: Julie Stepanek,
Wolday Amha,  Asfaw Negassa, and T.S. Jayne (1997),  “Meeting Food Aid and Price Support Objectives Through
Local Grain Purchase:  A Review of the 1996 Experience in Ethiopia,” Working Paper #7, Grain Market Research
Project, Ministry of Economic Development and Cooperation, Addis Ababa.  Readers interested in details as to
method and results of  the analysis are  referred to this paper.
The Grain Market Research Project is a joint collaboration between the Ministry of Economic Development and
Cooperation, Michigan State University, and USAID/Ethiopia.  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: GMRP@TELECOM.NET.ET
Conclusion
The EU local purchase program has been clearly
successful in meeting its primary objective: Local  purchase  programs  are  likely  to  become
building up emergency food reserves.  Almost more prevalent as countries such as Ethiopia
100,000 tons of grain were procured under the experience a transitition from food deficit to food
program in 1996, at an average cost of $251 per self-sufficiency.  As government, donors, and
ton.  This cost was slightly below the landed analysts learn more from experience with local
import cost of comparable quality grain at most purchase programs, and are able to modify the
of  the  specified  delivery  sites. design of the programs accordingly, it is
It is difficult to estimate the effect of the program achieve  important  benefits,  both  in  terms  of
on cereal prices in 1996 and subsequent farm procuring food aid for targeting purposes and for
production incentives in 1996/97.  Grain prices increasing  investment  and  competition  in
generally remained atypically flat through most Ethiopia's  grain  production  and  marketing
of the 1995/1996 marketing year.  However, it is system.
likely that producer prices would have been even
lower than they were without EU’s intervention.
The local purchase of 108,000 tons of grain in
1996 amounted to about 5.4% of the marketed
grain output from the 1995/96 meher season.
Program purchases of maize, wheat, and
sorghum are estimated at about 8.3%, 10.3%,
and 18.4% of the total volumes marketed of these
three commodities.
anticipated that local purchase programs can
References
Gebremeskel Dessalegn and James D. Shaffer, 1997.  “Constraints on Grain Market Performance in Ethiopia,”
Working Paper #8, Grain Market Research Project, Ministry of Economic Development and Cooperation,
Addis Ababa.
GMRP (Grain Marketing Research Project), 1996. Food Security Household Data Set, Ministry of Economic
Development and Cooperation, Addis Ababa, Ethiopia.
Notes

Meeting Food Aid and Price Support Objectives through Local Grain Purchase: A Review of the 1996 Experience in Ethiopia

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