By Dr. Eleni Gabre-MadhinDaily Monitor (Addis Ababa)
January 23, 2003
Ethiopia began transforming its agriculture in 1996. The government re-vamped its national agricultural extension program, promoted a new technology package of high-yielding seeds and fertilizers to smallholder farmers, implemented major reforms of domestic input and output markets, stabilized its macro-economic environment, deregulated its exchange rate regime, and reduced inflation to nearly zero.
As farmers adopted the new technology and the weather cooperated, cereal output in the last half of the 1990s averaged 10 million metric tons a year, 4 million more metric tons per year than in the 1980s.
Despite this seeming success, nearly 15 million Ethiopians may face starvation this year, a crisis of potentially greater proportions than the 1984-85 famine. What went wrong?
Two consecutive years of bumper crops resulted in a precipitous 80 percent decline of producer prices in early 2002. As the ratio of input prices to maize prices increased from 1.7 in 2000 to 9.0 in 2002, maize production became a highly unprofitable business.
This led farmers to abandon their maize crop in the field and reduce their fertilizer use by up to 20 percent. To make matters worse, the weather stopped cooperating with the failure of rains by mid-2002. These combined factors will likely result in a drop in maize production by 52 percent and in overall cereal production by up to 15 percent in 2003.
Despite the production gains achieved in the past several years, farmers cannot even repay their loans experiencing the very failure of their progress.
How can Ethiopia sustain the momentum of its agricultural transformation? The answer is to lower transaction costs in the market.
Even prices so low that farmers would rather not harvest the grain are still too high for the hungry.
The underlying problem is that most of Ethiopia's poor are outside of the market economy, only a quarter of food-produced reaches the market, where producers could sell and consumers could buy it.
Weak agricultural commercialisation implies that most of Ethiopia's population remains rooted in subsistence and that domestic markets operate at high costs, volatile prices, and low volumes.
A month in the life of a sack of maize To illustrate how high transaction costs are in the Ethiopian grain market, consider the movement of a sack of maize through the marketing chain. On day 1, a farmer brings a quintal of grain (100 kgs), transported by donkey or cart, to the rural market, where it is sold to a rural assembler for 40 birr.
Between days 2 and 10, it is handled, transported by small truck, stored for a few days, and sold again in the central market for 70 birr.
In the central market, between days 11 and 16, a broker handles and stores the grain, finds a regional buyer, finds transport, and sells it for 80 birr. Between days 17 and 23, the regional buyer handles, transports, and stores it before selling the grain to retailers in the importing region for 100 birr.
There, between days 24 and 30, retailers handle the grain and sell it in small quantities to consumers for 120 birr.
What is wrong with this picture? First, farmers receive a mere one-third of the final price, compared to Asian farmers who receive 70 to 80 percent of the final price.
Second, the high costs of transport and handling are passed on directly to the final consumer. Third, the marketing chain has taken 20 to 30 days to go from producer to consumer, instead of the 2 to 3 days it takes to cover the distance. Fourth, there is no value-added or transformation, no safety or quality inspection, in the marketing chain, which begins and ends with a sack of unprocessed grain.
When these high costs are coupled with the lack of legal enforcement of contracts and the absence of publicly available market information about prices and grain qualities, it is little wonder that those in remote food-deficit areas simply are not served by markets.
It is often cheaper for food aid relief organizations to import food from the world market than to procure it from the producer regions of Ethiopia.
Market failure is a real problem confronting Ethiopia's food security.
The combination of high transaction costs and weak markets, weather dependence, and the lack of entitlement of the poor has ultimately caused the current food crisis in Ethiopia, in which everybody loses, from bankrupt farmers to starving consumers.
To address the root causes of this crisis, it is imperative to reduce the high transaction costs that leave much of the population outside of the reach of the economy.
Ethiopia can enjoy the yields of its agricultural transformation by designing appropriate institutions to disseminate price and quality information, provide financing to small farmers and traders, reduce risk, and by investing in infrastructure, such as roads, telecommunications networks, and modern storage.
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