Can agricultural traders be trusted? Evidence from Ethiopia

1. ETHIOPIAN DEVELOPMENT
RESEARCH INSTITUTE
Can agricultural traders be trusted?
Evidence from Ethiopia
Authors Thomas W. Assefa and Bart Minten
IFPRI ESSP
Ethiopian Economics Association
13th International Conference on the Ethiopian Economy
July 23-25, 2015
Addis Ababa
1

2. 1. Introduction
• Long-standing debate on the appropriate role of the state in the
governance of markets
• Markets in developing and developed countries often not trusted and
therefore often argued that there is need for regulation
• However, no good empirical evidence whether these trades can or
can’t be trusted and to what extent?
• Lack of “Trust” important topic: 1/ public health issues related to
adulteration; 2/ lack of incentives to stick to proper practices; 3/ high
search and transaction costs
• Moreover, modern marketing practices [branding, packaging and
supermarkets] are emerging to deal with trust issues

3. 1. Introduction
• We look at this issue for the case of coffee in Addis
• Interesting case because:
1/ large price and quality differentiation
2/ government controls; By law, all marketed coffee has to be
divided in export and local quality. Only coffee that is of lower
quality is supposed to stay in the country.
3/ Emerging presence of modern retail and modern market
practices (branding and packing)

4. 1. Introduction
• Focus on three main research questions:
Question 1: Can we trust traders? Do traders cheat with
quality? Do traders cheat with weights?
Question 2: Is regulation effective?
Question 3: Are modern market practices different and more
trust-worthy?

5. 3. Data and methodology
• Sample semi-wholesalers: 100 randomly selected from the 240 in
Merkato
• Sample retailers:
- 10 sub-cities in Addis: half of them randomly selected (after geographical
stratification)
• All coffee traders in all open markets in the 5 sub cities were visited [104]
• All supermarkets and minimarkets in the 5 sub cities [97 minimarkets and 53
supermarkets]
- 4 kebeles in each sub city from an average of 10 in a sub city are selected
randomly
• 10 regular shops from each kebele [200 regular shops]
• 543 coffee traders were surveyed in October 2013

6. 3. Data
• Weight assessment:
- Purchase of 1 kg from all semi-wholesalers; half of the open market traders,
supermarkets, minimarkets; 25% of regular shops
- 262 obs.: weighted with 2 different electronic scales; average used in analysis
• Quality assessment:
- All samples sent to Coffee Liquoring Unit (CLU) for analysis (tasting/raw bean
inspection)

7. 3. Data - Descriptive statistics
Region of origin
Wholesalers Retailers
Don’t know 3% 46%
Wollega/Nekempt 32% 6%
Djimma 36% 13%
Harar 1% 1%
Others 28% 6%
Not raw coffee 0% 28%
Washing
Wholesalers Retailers
Don’t know 1% 10%
Washed 23% 13%
Unwashed 77% 46%
Not raw coffee 0% 30%
Form
Wholesalers Retailers
Raw 100% 62%
Roasted 0% 2%
Grounded 0% 35%
Packaging
Wholesalers Retailers
Packed 0% 58%
Loose 100% 42%
Branded 0% 40%

8. 4. Traditional markets
4.1. What is valued in coffee markets?
• Definition traditional: 1/ loose formats; 2/ no cash registers and no
self-service
• Stated origins of coffee little influence on prices
• Washed coffee valued at a premium of 9% compared to natural-
sundried coffee
• The more un-pure the coffee, the lower the price
• The lower the stated grade, the lower the price
• When we use measured grades of CLU, no impact on prices

9. 4. Traditional markets
4.1. What is valued in coffee markets?
• Overall, rewards to easily observable quality measures; few to not
easily observables
• Comparison with formal export markets:
- Large differences in premiums for origins and measured grades of CLU
• Seemingly a dissipation of the not easily observable quality premiums
in local markets
• Why? Lack of trust? Lack of knowledge?

10. 4. Traditional markets
4.2. Assessing trust
• Cheating with weights? Very little.
Semi-
wholesalers Traditional retail markets Loose
Unit Regular shop Open market Total products
Number of observations 100 44 51 95 202
Mean grams 992.6 1004.2 1002.8 1,003.4 998.2
Median grams 991.5 1004.8 1001.5 1,002.5 996.5
Underweight % 75 36 43 40 57
Overweight % 25 64 57 60 43
T-test if weight is t-value* -5.42 2.09 1.48 2.51 -1.69
diff. than 1 kg Pr(|T| > |t|) 0.00 0.04 0.15 0.01 0.09

11. 4. Traditional markets
4.2. Assessing trust
• Cheating with quality? Yes with not easily observables; No with easily
observables
Semi- Traditional retail markets Loose
wholesalers Regular shop
Open
market Total products
Statements origin
Understated % 21 24 15 20 14
Match % 13 5 10 7 8
Overstated % 66 71 75 73 78
Total % 100 100 100 100 100
Washing
Understated % 3 2 6 4 3
Match % 91 89 90 90 89
Overstated % 6 9 4 6 8
Total % 100 100 100 100 100
Number of observations 100 44 51 95 202

12. 4. Traditional markets
4.2. Assessing trust
• Cheating with export quality coffee? Yes
Semi- Traditional retail markets Loose
wholesalers Regular shop
Open
market Total products
Overall quality assessment
Fit for grade 2 % 16 0 4 2 9
Fit for grade 3 % 1 2 0 1 1
Fit for grade 4 % 0 2 2 2 1
Fit for grade 5 % 4 2 8 5 4
Fit for Peaberry coffee % 2 0 0 0 1
Rejected for grades (but >
under-grade) % 41 52 39 45 42
Fit at under-grade level % 33 32 31 32 33
Unfit for export % 3 9 16 13 8
Total % 100 100 100 100 100

13. 5. Modern marketing practices
5.1. Typology
• Two modern marketing practices emerging:
1/ Modern retail:
- Becoming very important in developing countries
- Despite prohibition of FDI in retail in Ethiopia, domestic modern
sector emerging
2/ Packaging and branding:
- Unpacked and unbranded products indistinguishable from
competitors
- Brandings adds “brand value”

14. 5. Modern marketing practices
5.1. Typology
• Significant quality premiums for modern retail
0
.01.02.03
Density
0 50 100 150 200
Birr/kg
modern retail traditional retail
wholesale

15. 5. Modern marketing practices
5.1. Typology
• Significant quality premiums for packing and branding
0
.01.02.03
Density
0 50 100 150 200
Birr/kg
branded bags retail unbranded bags retail
loose

16. 5. Modern marketing practices
5.1. Typology
• In hedonic pricing model; impact modern practices:
- Supermarkets 33% more expensive
- Mini-markets 8% more expensive
- Branded bean bags 23% more expensive than “unpure” loose coffee
- Unbranded bean bags 16% more expensive than “unpure” loose
coffee
- Grounded coffee (all branded) 34% more expensive

17. 5. Modern marketing practices
5.1. Typology
• In hedonic pricing model of modern markets regression:
- No quality premiums for origin
- Quality premium for washing (23%)
- No premiums for measured grades, except the worst ones that are
valued lower

18. 5. Modern marketing practices
5.2. Assessing trust
• Cheating with weights? Yes, but very little.
Modern retail Packed
Unit Supermarkets Mini-markets Total Branded Non-branded Total
Number of observations 26 41 67 13 47 60
Mean grams 989.1 994.2 992.2 990.9 990.4 990.5
Median grams 994.5 997.5 995.5 993.5 996.5 995.5
Underweight % 73 63 67 85 66 70
Overweight % 27 37 33 15 34 30
T-test if
weight is t-value** -1.48 -2.02 -2.33 -2.35 -2.24 -2.75
diff. than 1 kg
Pr(|T| >
|t|) 0.15 0.05 0.02 0.04 0.03 0.01

19. • Cheating with quality? Yes with not easily observables; No with easily
observables
Modern retail Packed
Super-
markets Mini-markets Total Branded
Non-
branded Total
Statements origin
Understated % 20 13 15 50 11 14
Match % 0 0 0 0 0 0
Overstated % 80 87 85 50 89 86
Total % 100 100 100 100 100 100
Washing
Understated % 6 0 2 0 3 2
Match % 89 91 91 100 95 96
Overstated % 6 9 7 0 2 2
Total % 100 100 100 100 100 100
Number of observations 26 41 67 13 47 60
5. Modern marketing practices
5.2. Assessing trust

20. • Cheating with export quality coffee? Yes. But also high quality.
Modern retail Packed
Super-
markets
Mini-
markets Total Branded
Non-
branded Total
Overall quality
assessment
Fit for grade 2 % 50 15 28 46 28 32
Fit for grade 3 % 0 2 1 0 0 0
Fit for grade 4 % 0 10 6 0 6 5
Fit for grade 5 % 8 2 4 0 6 5
Fit for Peaberry coffee % 0 0 0 0 0 0
Rejected for grades (but
>UG) % 23 22 22 38 21 25
Fit at under-grade level % 15 39 30 15 32 28
Unfit for export % 4 10 7 0 6 5
Total % 100 100 100 100 100 100
5. Modern marketing practices
5.2. Assessing trust

21. 6. Conclusions
Major findings from the research:
Q1: Can we trust traditional traders?
Answer: Depends. Can be relatively trusted with weights; On quality:
1/ Quality indicators that are not easily observable not rewarded
(origins of coffee); 2/ Indicators that easily observable rewarded (ECX
reject cheaper than others; washed and pure coffee higher prices;
packed and branded coffee higher prices)
Q2: Is regulation effective?
Answer: No. There is a flourishing informal market
Q3: What is different with modern markets?
Answer: Deliver high quality and more processed products at a high
price but no more trust-worthy than traditional markets

22. 7. Implications
1. Markets not to be trusted in non-observables. More adapted
market institutions needed.
2. Flourishing illegal market. Liberalize? Yes, but maybe not completely
(especially on regional indicators)
3. Modern markets. Strong heterogeneity. Special situation? Informal
markets and early roll-out of modern retail. Possible that FDI and
reduction of informality would solve some of the issues.

23. Thank You