The Interplay of Public Policy and Grain Market Behavior in Ethiopia Briefing note prepared for the DFID funded study “Understanding the constraints to continued rapid growth in Ethiopia: the role of agriculture”. 1 The views expressed in this note are those of the author and are not necessarily representative of DFID. Shahidur Rashid Senior Research Fellow, International Food Policy Research Institute, Ethiopia ([email protected]) Paul Dorosh Senior Research Fellow and Program Leader of the Ethiopia Strategy Support Program II, International Food Policy Research Institute, Ethiopia ([email protected]) Background Ethiopia’s economic growth strategy, Agricultural Development Led Industrialization (ADLI), and its poverty reduction strategies, the Sustainable Development and Poverty Reduction Plan (SDPRP) and Poverty Alleviation and Sustainable Development to End Poverty (PASDEP), all make agriculture a top priority for economic development. Within agriculture, these strategies place heavy emphasis on the cereal sector, which accounts for a large share of agricultural GDP and an even a larger share of rural employment. As part of these strategies, the Government of Ethiopia (GoE) has undertaken substantial market reforms, accelerated investments in road and communication networks, and adopted major programs to increase cereal production through large scale demonstrations of the benefits of modern seeds and greater fertilizer use. These investments have paid off in terms of increased cereal production and improved food security. Although these policies have resulted in substantial gains in agricultural production, much remains to be done in terms of market development. Substantial price instability in domestic cereal markets has had adverse consequences for producers (e.g. the collapse of the maize market in 2002/03) and consumers (nominal and real price surges in 2008). The factors behind these price movements are not confined to agricultural policy, however. Large shocks, including droughts, the recent increases in international prices 1
Study coordinated by a team consisting of Stefan Dercon, University of Oxford ([email protected]), Ruth Vargas Hill, International Food Policy Research Institute ([email protected]), and Andrew Zeitlin, University of Oxford ([email protected]). Understanding the constraints to continued rapid growth in Ethiopia: the role of agriculture November 2008 of fuel and fertilizer, shortages of foreign exchange and macro‐inflation, have greatly influenced both agricultural policies and markets. This note explores these recent developments in Ethiopian cereal markets, highlighting the role of policy changes both within and outside of the agricultural sector. 1. From Surplus to Famine Warning (2001/02 to 2002/03) Within agriculture, the central focus of ADLI was on raising cereal productivity. The Participatory Demonstration and Training Extension System (PADETS), instituted in the mid‐1990s, was designed to increase cereal production through demonstration of seed‐fertilizer technology packaged with credit and extension supports. The strategy quickly started to pay off, at least in areas with high agricultural potential. In 1997, Ethiopia exported 40,000 tons maize though its food marketing parastatal, the Ethiopian Grain Trading Enterprise (EGTE). Convinced with the potential of increasing cereal production, the government began substantial reforms of the grain markets. In 1999 and 2000, three separate proclamations were passed to redefine EGTE’s roles in grain markets.2 The 1999 proclamation mandated EGTE to gradually move away from price stabilization and focus on export promotion. The other two proclamations required EGTE to play facilitating roles in the administration of Strategic Food Security Reserve and national disaster prevention and preparedness program. In the meantime, with favorable weather and increasing adoption of the new technology, Ethiopia enjoyed two consecutive years of bumper crops in 2000/01 and 2001/02. But the blessings of the technology and good weather did not translate into improvements in farm households’ well‐being. The farm gate price of maize declined by an unprecedented 80 percent in early 2002, making maize farming highly unprofitable— so much so that some farmers allegedly did not find it worthwhile harvesting their maize crops. The ratio of input prices to producers’ prices increased from 1.7 in 2000 to about 9.0 in 2002 and the fertilizer application declined by 22 percent in the next cropping year. Although price stabilization was no longer in its mandate, EGTE was directed to buy maize in order to boost farmers’ confidence. The EGTE procured 18 thousand tons of maize, of which 11 thousand metric tons were exported. The situation took a turn for the worse in mid‐2002, however. The rains did not come on time for the main cropping (mehrer) season, farmers reduced modern input applications, and it became evident that cereal production would be significantly lower than the previous year. Production forecasts for maize were revised downward by as much as 52 percent, making both government and its development partners nervous about a looming food security crisis, with the potentials of about 15 million people facing starvation. The crisis was eventually averted with generous donor support that included more than one million tons of food aid. 2. The Puzzle of Increased Production with Rising Real Cereal Prices (2004/05 to 2006/07) 2
The proclamation are 58/1999, 67/2000, and 212/2000. Understanding the constraints to continued rapid growth in Ethiopia: the role of agriculture November 2008 With the return of good rains for the 2003/04 meher season, cereal production recovered. In spite of steady increases in production of cereals, however, both the nominal and real prices of major cereals rose at an increasing rate between 2003/04 and 2006/07. Over this period, official data show that, despite 45 percent growth in cumulative production, the average real price of the four major cereals (teff, wheat, maize and sorghum) rose by 12 percent3 (Figure 1). 200
180
160
140
120
100
Cereals (mehrer)
Total Cereals
2007/08
2006/07
2005/06
2004/05
2003/04
2002/03
2001/02
80
Real Price Index (2000/01 = 100)
16
14
12
10
8
6
4
2
2000/01
Production (mn tons)
Figure 1: Cereal Production and Real Prices in Ethiopia, 2000/01 to 2007/08 Real Price Index
Source: Calculated from Central Statistical Authority (CSA) production data and EGTE wholesale price data for Addis Ababa. Rapidly increasing domestic demand explains most of this puzzle. Over this period, trend production growth rates of the teff, wheat and sorghum ranged from 14 to 17 percent. However, net availability of these cereals grew from 11 to 14 percent, as both food aid and commercial imports had declined during the same period. Estimated demand also grew sharply by about 9 percent for each of the three crops due to population growth (2.8 percent) and per capita income growth (7.1 percent). Thus, estimated shifts in demand for cereals were close in magnitude to official estimates of growth in production and net availability. Since real prices of cereals increased over this period, however, growth in demand should have outpaced growth in supply. Among the possible explanations for this remaining apparent discrepancy between the estimations of demand relative to supply and observed movements in real prices are over‐estimates of production growth and changes in market structure, including growing urbanization (leading to increased sales of grain and a shift in consumer demand structure) and greater participation of cooperatives in cereal markets. Nonetheless, the sharp rise in nominal prices had important implications for Ethiopia’s food security programs. Local grain procurement by the WFP and EGTE, generally used for strategic reserves and emergency operations, fell to almost zero, posing significant risks of increased vulnerability for poor 3
The real price index reported here is a 2007‐08 production weighted average of the four major cereals. Understanding the constraints to continued rapid growth in Ethiopia: the role of agriculture November 2008 households. Moreover, while many rural households had access to the large‐scale Productive Safety Net Program (PSNP), urban households lacked access to similar programs. Therefore, rising nominal prices in the main urban centers became a major concern and the government quickly announced instituting an urban food rationing program in April 2007. Actual distribution of wheat under this program began in Addis Ababa in June 2008 and 11 other urban centers were added by August 2008. Between June 2007 and June 2008, the program distributed about 249 thousand tons of wheat at a subsidized rate of 1800 Birr (or about US$180) per metric ton, which was 89 to 306 percent lower than the whole sale price in Addis Ababa market.4 Other measures included imposition of 10 percent surtax to partly offset the costs of urban rationing and suspension of the value‐added‐tax (VAT) on food items. 3. Macro‐Inflation and the 2007/08 Surge in Cereal Prices Beginning in 2006/07, macro‐economic inflation began to accelerate in Ethiopia, with significant increases in the nominal prices of both food and non‐food items. Between January 2007 and March 2008, the overall CPI rose by 35 percent; food prices rose by 47 percent and non‐food prices rose by 18 percent. Then in early 2008, Ethiopia faced increasingly severe foreign exchange shortages due in part to higher fuel import bills, along with an appreciating real exchange rate and strong import demand related to continued increases in public and private investment. Tighter controls on foreign exchange limited imports and ultimately raised prices of increasingly scarce imported goods. Annualized rates of general inflation accelerated from 29 percent in March to 64 percent in July 2008; and food inflation jumped from 39 percent to 97 percent during the same period. Both nominal and real cereal prices also rose sharply. This was in part due to the failure of belg season crop, which in a normal year accounts for about 15 percent of maize production.5 Nominal wholesale prices of teff, maize and sorghum all rose by more than 90 percent between March and August 2008; real prices of these commodities rose by 30 to 40 percent. By contrast, the wheat price rise (65 percent in nominal terms and 15 percent real terms) was lower, as it was the primary commodity for the government’s direct distribution and subsidized sales programs. Because of the increase in international prices of wheat in 2007, domestic wheat prices, which had been near import parity levels in 2005 and 2006, were significantly below import parity from 2007 through early 2008, eliminating incentives for private sector imports of ordinary wheat. The sharp increases in nominal prices of cereals in 2008 made private sector imports potentially profitable again from May 2008 onwards, but restrictions on foreign exchange for imports made these imports infeasible. Moreover, there was significant uncertainty regarding future government grain market policy. In the mean time, distribution of wheat for the urban rationing program led to a significant decline in the 4
Because of the high price differentials, urban food rationing served as an income transfer program. According to data from an urban household survey administered by the WFP in June and July 2008, about 93 percent of recipient households immediately sold their ration on the open market, either to buy other cereals or to meet other consumption expenditure. 5
Although belg production is significant for maize, its share in total annual cereal production is only about 10 percent. Understanding the constraints to continued rapid growth in Ethiopia: the role of agriculture November 2008 government’s strategic grain reserves. Stocks fell from the target level of 400 thousand metric tons to only 60 thousand metric tons in April 2008. With no real possibility of private sector imports, and very low strategic food reserves, the government announced plans for importation of 150 thousand tons of wheat from South Africa. Subsequently, in July 2008, plans for another 150 thousand tons of imports were announced. Most of the wheat from the first consignment was used for market price stabilization in August and September 2008. Since the urban rationing program had been halted in July, the major channels for distribution of the imported wheat were flour mills (69 percent), consumers’ associations and retailers (27 percent), and wholesale traders (4 percent) at a common price of 3500 Birr (equivalent to US$350) per metric ton. 4. Conclusion Ethiopia has successfully raised domestic production of cereals in recent years as part of its overall development strategy. Surges in domestic production in the early 2000’s led to sharp falls in market prices, especially for maize, but after the drought of 2003, steady production growth has not led to sharp declines in real prices. Moreover, the government has continued investments in road infrastructure and price incentives for fertilizer use have been maintained. Yet, the sharp increases in nominal and real cereal prices since early 2007 due to both internal and external factors have caused serious concern. This recent experience suggests the need for further market development in Ethiopia, balancing government market interventions (including effective safety net programs), long‐term investments in infrastructure, and consistent and transparent policy signals to encourage private sector trade. Understa
anding the con
nstraints to co
ontinued rapid
d growth in Eth
hiopia: the role of agricultu
ure Novvember 2008
Appendiix: Import an
nd Export Paarity The follo
owing graphss depict the import and export paritty bounds on
n maize and wheat price
es in Addis in
n constantt 2005 US$ frrom Januaryy 1998 to Auggust 2008.