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ETHIOPIAN DEVELOPMENT
  RESEARCH INSTITUTE




Spatial Integration of Cereal markets in
                Ethiopia

                          Seneshaw Tamru

                            EDRI/IFPRI
           (Ethiopia Strategy Support Program, ESSP-II)

                           Addis Ababa




                                                          1
1. OBJECTIVES
Research Objectives:

• Study whether regional cereal markets are integrated with
  with the central (Addis Ababa) market.

• Check the level and speed of price transmission, if they are
  integrated.
2. INTRODUCTION
Knowledge of price patterns and market integration is
useful to make:

• Better production decisions

• Better marketing decisions as
   – When to buy?
   – How long to store?
   – When to sell?

• Better forecasts

• Food security interventions as existence and extent of
  malnutrition and famine in market economies is closely
  linked to market integration
3. BACKGROUND
According to CSA’s 2010/11 Agricultural Sample Survey:

oCereals constitute 82% of the total grain crop area
   • Teff - 23%
   • Maize - 17%
   • Sorghum - 16%
   • Wheat - 13%

oContributed 87 % of the grain production.
   • Teff - 17%
   • Maize - 24%
   • Sorghum - 19%
   • Wheat - 14 %
3.1. Production

    Trends in Annual Production (2003/04-2011/12): Meher season peasant holdings
   60,000

                                                                                                         49,861
   50,000
            ('000 quintals)




   40,000                                                                                       39,325
                                                                                                         34,835
                                                        33,368
   30,000                     25,430
                                                                                                         28,557
                                                        21,756                   23,145
   20,000
                               16,773
   10,000
                                                 Teff       Maize        Wheat        Sorghum
       -
                         2003-04       2004-05    2005-06      2006-07      2007-08      2008-09     2010-11

• Significant growth in production (2003/04- 2010/11)
    – Teff (108%) and sorghum (127%) has more than doubled over the last seven years
    – Maize nearly doubled (96%)
    – Wheat also grew by about 77%
3.2. Grain Utilization
                                      HH Consump.                 Seed                 Sale                 Others
                   80                                                                         74.4            73
                   70                     65.3
                        61.5
                                                                         57.7
                   60
Percent utilized




                                                        51.7
                   50

                   40
                                                               28.6
                   30
                               20.2                                             19.6
                   20                            16.2
                                                                                                     11.4            10.8
                   10

                   0
                          Grain            Cereals         Teff           Wheat                 Maize        Sorghum


 • The biggest share of production is auto-consumed
 • Teff and wheat have better marketable surplus (cash crops)
3.3. Demand for cereals
 Share of major cereals and enset in total food expenditure by region, 2004/05
                                        Share in total food expenditure (%)
                                              Total                                  Other
 Region              Teff Wheat Maize Sorghum cereals                   Enset        foods
 Tigray               10.2       13.1     2.7       13.7         50.4         0.0      49.6
 Afar                 9.6        10.0     6.3        1.4         35.8         0.0      64.2
 Amhara               12.8       10.4     5.3        9.6         49.3         0.0      50.7
 Oromiya              8.2        9.6     10.8        7.9         45.0         4.9      59.9
 Somale                 1.0      9.7      7.0        8.1         37.4         0.0      62.6
 B/Gumuz                5.2      0.9      8.4       21.9         44.1          0.0     55.9
 SNNP                   4.0      5.5     11.9        5.7         33.1         12.1     79.0
 Harari                 6.0      7.0      1.9        9.4         37.6          0.0     62.4
 Addis Ababa          19.6       3.4      0.5        0.1         41.2         0.1      58.9
 Dire Dawa              5.8      7.4      0.7        9.2         45.3         0.0      54.7
 Source: Berhane et al. (2011)




• Maize and sorghum have a considerably lower share in Addis Ababa
4. DATA
4.1. Data:
   – Weekly wholesale price of the Ethiopian Grain Trade
     Enterprise (EGTE) from July 2001 –November 2011
4.2. Market Selection:
   – Markets in the top producing zones together with the
     most populous towns are selected and their level and
     speed of integration with Addis Ababa is examined.
   – Teff :
      • White (20 regional markets)
      • Mixed (19 regional markets)
      • Red (17 regional markets)
   – White wheat (12 regional markets)
   – Maize (16 regional markets)
   – White sorghum (10 regional markets)
4.3. Most important cereal producing zones
5. METHODOLOGY
 5.1. The TAR Model


       out dt 1   t : dt 1  
      
dt   in dt 1   t :    dt 1  
        d 
            out t 1   t : d t 1  


 • Ө estimated by a grid search
 • Assumes constant threshold/transaction cost (Ө )
 • TCs (Ө ) could vary depending on season, direction of trade,
   quality of roads and fuel prices
The TAR Model….
  • Following Van Campenhout (2007)
  • The thresholds and adjustment parameters to vary with
    time, t.


       out dt 1   .t.dt 1   t : dt 1  t
                         '
                         out
      
dt   t                      :  t  dt 1  t
        d   ' .t.d  
          out t 1   out  t 1    t  : dt 1            t
Interpretation
• If ρout = -1 perfect integration (100 % deviation transferred)
   o adjustment is instant

• If ρout =0 no integration
   o No adjustment in the near future

• The closer ρ is to -1
  o the higher degree of integration and
  o the lower the speed of adjustment

• If ρ is positive,
   o markets are drifting apart
   o not integrated
6. RESULTS
• Teff: Mixed teff
Table: Spatial Integration of Mixed Teff Markets in Ethiopia (2001-2011)
                                                                                        Estimated transaction
                                ρout (Speed of adjustment)          Half life             cost (θ) as %ge of
                                                                                            average price
         Market Pairs
                                 July 2001 November
                                    (t1)       2011 (t504)            t1         t504          t1         t504
Addis Ababa-Nazreth                    -0.271         -0.271      2.19          2.19        5.7          10.3
                                  (0.002)*** (0.002)***
Addis Ababa-Ambo                       -0.264         -0.264      2.26          2.26        9.0           4.2
                                  (0.000)*** (0.000)***
Addis Ababa-Bahirdar                     -0.02        -0.524     34.31          0.93       16.2           3.7
                                       -0.663(0.002)***
Addis Ababa-Dessie                       -0.07        -0.574      9.55          0.81        2.4           1.7
                                       -0.167(0.001)***
Addis Ababa-Mekelle                    -0.167         -0.671      3.79          0.62        9.1           4.8
                                     (0.071)*       (0.088)*
Addis Ababa-Diredawa                   -0.022         -0.022     31.16          31.16       5.4          14.9
                                         -0.33(0.000)***

• Considerable improvement over the last decade
• Addis Ababa seems to be more integrated with high demand areas
Summary of all the markets
Summary of Comparison of degree of cereal Integration between 2001 and 2011
                                                                                          White
                       White teff   Mixed teff  Red Teff    White wheat        Maize    sorghum
                       2001 2011 2001 2011 2001 2011 2001 2011                2001 2011 2001 2011
Total pairs              20      20   19     19  17      17    12    12         16   16   10    10
Percent integrated       65      85   68     84  71      94    67    75         63   94   70    70
 Improved speed of
 adjustment during
 2011 (among
 integrated) - %               41          25           31            44              27          29
 Same speed adjust.
 during 2011
 (among integrated)
 -%                            59          75           69            56              67          57
 Reduced/deteriorat
 ed speed of adjust.
 during 2011
 (among integrated)
 -%                             0           0            0             0               7          14
Half life (weeks)        14    10    11     6      9     5      9      6         7     4    15    13
Average speed of
adjustment (among
integrated)            -0.16 -0.31 -0.14 -0.24 -0.10 -0.25 -0.17 -0.11        -0.16 -0.28 -0.08 -0.26
Threshold (as %ge of
average price)           15    12    13    12     13    11     22     13        25    13    17    39
Summary of the six most important markets
Summary of Comparison of degree of cereal Integration between 2001 and 2011
                                                                    White                     White
                          White teff Mixed teff        Red Teff    wheat        Maize        sorghum
                            2001 2011 2001      2011 2001 2011 2001 2011 2001 2011 2001 2011
Total pairs                    6     6     6       6     6     6     6     6     6      6      4       4
Percent integrated            50    83    50     100    50   100    67    83    50   100      50   50

  Percent improved speed
  of adjustment during
  2011 (among integrated)           40            67          33          40            50         50
  Percent remained same
  during 2011 (among
  integrated)                       60            33          67          60            50         50
  Percent deteriorated
  during 2011 (among
  integrated)                        0             0           0           0            0              0
Half life (weeks)              4     3    12       6     9     7    11     6     6      4     28   25
Average speed of
adjustment (among
integrated)                 -0.09 -0.27 -0.12   -0.39 -0.06 -0.24 -0.05 -0.06 -0.06 -0.34 -0.19 -0.19
Threshold (as %ge of
average price)                 9     8     8       7    15     8    33    16    45      17    19   27
7. CONCLUSION AND IMPLICATIONS
7.1. Conclusion
• Markets functioning much better at the end than
in the beginning of the decade
• Possibly linked to structural changes over the last
ten years (e.g. improvements in roads, mobile
phone      availability,   income      growth,     and
urbanization)
• A puzzle why the sorghum market does not show
improvements over time; Possibly linked to the low
share of sorghum in the consumption basket of
consumers in Addis (i.e. the tested market pairs
only reflect thin markets and little effective flows).
7.2. Implications

• The general improvement is good news for
  Ethiopia
• However, continuous investments to
  improve market integration even further are
  desired given the important benefits of
  having integrated markets for producers and
  consumers alike.

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Spatial Integration of Cereal markets in Ethiopia

  • 1. ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE Spatial Integration of Cereal markets in Ethiopia Seneshaw Tamru EDRI/IFPRI (Ethiopia Strategy Support Program, ESSP-II) Addis Ababa 1
  • 2. 1. OBJECTIVES Research Objectives: • Study whether regional cereal markets are integrated with with the central (Addis Ababa) market. • Check the level and speed of price transmission, if they are integrated.
  • 3. 2. INTRODUCTION Knowledge of price patterns and market integration is useful to make: • Better production decisions • Better marketing decisions as – When to buy? – How long to store? – When to sell? • Better forecasts • Food security interventions as existence and extent of malnutrition and famine in market economies is closely linked to market integration
  • 4. 3. BACKGROUND According to CSA’s 2010/11 Agricultural Sample Survey: oCereals constitute 82% of the total grain crop area • Teff - 23% • Maize - 17% • Sorghum - 16% • Wheat - 13% oContributed 87 % of the grain production. • Teff - 17% • Maize - 24% • Sorghum - 19% • Wheat - 14 %
  • 5. 3.1. Production Trends in Annual Production (2003/04-2011/12): Meher season peasant holdings 60,000 49,861 50,000 ('000 quintals) 40,000 39,325 34,835 33,368 30,000 25,430 28,557 21,756 23,145 20,000 16,773 10,000 Teff Maize Wheat Sorghum - 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2010-11 • Significant growth in production (2003/04- 2010/11) – Teff (108%) and sorghum (127%) has more than doubled over the last seven years – Maize nearly doubled (96%) – Wheat also grew by about 77%
  • 6. 3.2. Grain Utilization HH Consump. Seed Sale Others 80 74.4 73 70 65.3 61.5 57.7 60 Percent utilized 51.7 50 40 28.6 30 20.2 19.6 20 16.2 11.4 10.8 10 0 Grain Cereals Teff Wheat Maize Sorghum • The biggest share of production is auto-consumed • Teff and wheat have better marketable surplus (cash crops)
  • 7. 3.3. Demand for cereals Share of major cereals and enset in total food expenditure by region, 2004/05 Share in total food expenditure (%) Total Other Region Teff Wheat Maize Sorghum cereals Enset foods Tigray 10.2 13.1 2.7 13.7 50.4 0.0 49.6 Afar 9.6 10.0 6.3 1.4 35.8 0.0 64.2 Amhara 12.8 10.4 5.3 9.6 49.3 0.0 50.7 Oromiya 8.2 9.6 10.8 7.9 45.0 4.9 59.9 Somale 1.0 9.7 7.0 8.1 37.4 0.0 62.6 B/Gumuz 5.2 0.9 8.4 21.9 44.1 0.0 55.9 SNNP 4.0 5.5 11.9 5.7 33.1 12.1 79.0 Harari 6.0 7.0 1.9 9.4 37.6 0.0 62.4 Addis Ababa 19.6 3.4 0.5 0.1 41.2 0.1 58.9 Dire Dawa 5.8 7.4 0.7 9.2 45.3 0.0 54.7 Source: Berhane et al. (2011) • Maize and sorghum have a considerably lower share in Addis Ababa
  • 8. 4. DATA 4.1. Data: – Weekly wholesale price of the Ethiopian Grain Trade Enterprise (EGTE) from July 2001 –November 2011 4.2. Market Selection: – Markets in the top producing zones together with the most populous towns are selected and their level and speed of integration with Addis Ababa is examined. – Teff : • White (20 regional markets) • Mixed (19 regional markets) • Red (17 regional markets) – White wheat (12 regional markets) – Maize (16 regional markets) – White sorghum (10 regional markets)
  • 9. 4.3. Most important cereal producing zones
  • 10. 5. METHODOLOGY 5.1. The TAR Model  out dt 1   t : dt 1    dt   in dt 1   t :    dt 1     d   out t 1 t : d t 1   • Ө estimated by a grid search • Assumes constant threshold/transaction cost (Ө ) • TCs (Ө ) could vary depending on season, direction of trade, quality of roads and fuel prices
  • 11. The TAR Model…. • Following Van Campenhout (2007) • The thresholds and adjustment parameters to vary with time, t.  out dt 1   .t.dt 1   t : dt 1  t ' out  dt   t :  t  dt 1  t   d   ' .t.d    out t 1 out t 1 t : dt 1   t
  • 12. Interpretation • If ρout = -1 perfect integration (100 % deviation transferred) o adjustment is instant • If ρout =0 no integration o No adjustment in the near future • The closer ρ is to -1 o the higher degree of integration and o the lower the speed of adjustment • If ρ is positive, o markets are drifting apart o not integrated
  • 13. 6. RESULTS • Teff: Mixed teff Table: Spatial Integration of Mixed Teff Markets in Ethiopia (2001-2011) Estimated transaction ρout (Speed of adjustment) Half life cost (θ) as %ge of average price Market Pairs July 2001 November (t1) 2011 (t504) t1 t504 t1 t504 Addis Ababa-Nazreth -0.271 -0.271 2.19 2.19 5.7 10.3 (0.002)*** (0.002)*** Addis Ababa-Ambo -0.264 -0.264 2.26 2.26 9.0 4.2 (0.000)*** (0.000)*** Addis Ababa-Bahirdar -0.02 -0.524 34.31 0.93 16.2 3.7 -0.663(0.002)*** Addis Ababa-Dessie -0.07 -0.574 9.55 0.81 2.4 1.7 -0.167(0.001)*** Addis Ababa-Mekelle -0.167 -0.671 3.79 0.62 9.1 4.8 (0.071)* (0.088)* Addis Ababa-Diredawa -0.022 -0.022 31.16 31.16 5.4 14.9 -0.33(0.000)*** • Considerable improvement over the last decade • Addis Ababa seems to be more integrated with high demand areas
  • 14. Summary of all the markets Summary of Comparison of degree of cereal Integration between 2001 and 2011 White White teff Mixed teff Red Teff White wheat Maize sorghum 2001 2011 2001 2011 2001 2011 2001 2011 2001 2011 2001 2011 Total pairs 20 20 19 19 17 17 12 12 16 16 10 10 Percent integrated 65 85 68 84 71 94 67 75 63 94 70 70 Improved speed of adjustment during 2011 (among integrated) - % 41 25 31 44 27 29 Same speed adjust. during 2011 (among integrated) -% 59 75 69 56 67 57 Reduced/deteriorat ed speed of adjust. during 2011 (among integrated) -% 0 0 0 0 7 14 Half life (weeks) 14 10 11 6 9 5 9 6 7 4 15 13 Average speed of adjustment (among integrated) -0.16 -0.31 -0.14 -0.24 -0.10 -0.25 -0.17 -0.11 -0.16 -0.28 -0.08 -0.26 Threshold (as %ge of average price) 15 12 13 12 13 11 22 13 25 13 17 39
  • 15. Summary of the six most important markets Summary of Comparison of degree of cereal Integration between 2001 and 2011 White White White teff Mixed teff Red Teff wheat Maize sorghum 2001 2011 2001 2011 2001 2011 2001 2011 2001 2011 2001 2011 Total pairs 6 6 6 6 6 6 6 6 6 6 4 4 Percent integrated 50 83 50 100 50 100 67 83 50 100 50 50 Percent improved speed of adjustment during 2011 (among integrated) 40 67 33 40 50 50 Percent remained same during 2011 (among integrated) 60 33 67 60 50 50 Percent deteriorated during 2011 (among integrated) 0 0 0 0 0 0 Half life (weeks) 4 3 12 6 9 7 11 6 6 4 28 25 Average speed of adjustment (among integrated) -0.09 -0.27 -0.12 -0.39 -0.06 -0.24 -0.05 -0.06 -0.06 -0.34 -0.19 -0.19 Threshold (as %ge of average price) 9 8 8 7 15 8 33 16 45 17 19 27
  • 16. 7. CONCLUSION AND IMPLICATIONS 7.1. Conclusion • Markets functioning much better at the end than in the beginning of the decade • Possibly linked to structural changes over the last ten years (e.g. improvements in roads, mobile phone availability, income growth, and urbanization) • A puzzle why the sorghum market does not show improvements over time; Possibly linked to the low share of sorghum in the consumption basket of consumers in Addis (i.e. the tested market pairs only reflect thin markets and little effective flows).
  • 17. 7.2. Implications • The general improvement is good news for Ethiopia • However, continuous investments to improve market integration even further are desired given the important benefits of having integrated markets for producers and consumers alike.

Editor's Notes

  1. Research Objectives Being part of a larger project that is aimed at examining a sector little studied this section of the study is aimed at assessing if and how regional and central markets are integrated, and Identify factors that play significant role in affecting livestock price formation and study how these factors influence livestock pricing and possibly study if and how they affect trade routesTo achieve these objectives we propose: Integration of markets is intended to be investigated using threshold autoregression model We are gathering data relevant to study price formation and surveying what econometric model to use