The Response of Ethiopian Grain Markets to Liberalization



THE RESPONSE OF ETHIOPIAN GRAIN MARKETS
TO LIBERALIZATION

Asfaw Negassa and T.S. Jayne

EXECUTIVE SUMMARY

The objective of this paper is to determine 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 costs in the food system and thereby
promoting the welfare of grain producers and consumers in Ethiopia.

The major findings of the report are as follows:

• Cereal price spreads (the difference between wholesale prices in major regional markets)
in Ethiopia have generally declined since liberalization in 1990. In 24 market pairs
covering maize, white teff, and white wheat, average price spreads declined in 22 cases
after liberalization. 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 for which data were available.

• The volatility of wholesale cereal prices has generally declined since liberalization. The
volatility of cereal price spreads between different markets has also declined since
liberalization in 23 of the 24 cases for which data are available.

• The general decline in cereal price spreads is not due 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.

• Despite these gains, there remains substantial opportunity to further reduce costs within
the grain marketing system. Grain checkpoint (“kella”) tariffs between five major grain
trading routes surveyed in August 1996 ranged from 20% to 33% of the price spreads
observed between regional markets and from 5% to 11% of the prices received by
producers for these cereals. While these taxes are a source of fiscal revenue for
government, they impede grain production, incentives to use productivity-enhancing
inputs, and household food security in Ethiopia.

• The correlation between wholesale market prices (extent to which price changes in one
market are associated with price changes in other markets) has risen in 17 of 24 market
pairs examined since liberalization in 1990. While correlation coefficient are an
imperfect indicator of market integration, the 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. The degree of market integration between producer prices and
wholesale prices is still a major unknown. Information on price transmission from



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