The Cereal Markets Performance in Ethiopia : Policy Implications for Improving Investments in Maize and Wheat Value Chains

This study sheds light on the performance of cereal markets in Ethiopia. It combines market-level temporal and spatial price analysis with a detailed analysis at the producer, wholesale and retail levels for maize and wheat value chains. Using time series price data, the study estimates (1) price volatilities to gauge the level of risk in maize and wheat markets, (2) spatial price linkages to assess the level of spatial arbitrage opportunities and market integration, and (3) seasonal price movements to assess the level of temporal arbitrage opportunities and implications for storage decisions. The price analysis results indicate four main findings. First, maize and wheat markets are integrated in the long run. This is indicative of the improvements in road infrastructure, and the availability of trucks and mobile communications. But the long-run price transmission between the deficient and surplus markets is less than complete and the adjustments to price changes in different markets are asymmetric. This could be due to asymmetric market information, transaction costs, and government interventions. Second, there is a significant degree of unpredictability in wheat and maize prices, implying high risk for the value chain actors. There has been a slight upward movement in maize and wheat nominal and real prices in different markets and at all market levels (producer, wholesale and retail), but there is significant unpredictability in maize and wheat prices, making spot market temporal and spatial arbitrage a risky business for value chain actors. Third, spatial margins are very volatile making inter-regional grain trade risky. Fourth, although there is significant seasonality in maize and wheat prices, the returns are low with high volatility. The implied storage periods for wheat and maize required between the seasonal low and high prices appear to be very long (5 to 10 months). The empirical results indicate that holding wheat and maize stock for such a lengthy period does not provide sufficient incentives, given the very low, but highly volatile monthly price returns for maize and wheat stocks. At wholesale level, the returns for maize and wheat aggregation are better than holding grain. Overall, the results indicate that there is low commercial incentive for the private sector to invest in storage. The findings point to key areas at policy level to improve the performance of cereal markets. These include the need to reduce price unpredictability through clearer policy directions and transparent information related to grain procurement and distribution, and by improving planning and coordination among grain importing entities; establishing market intelligence and data by investing in an agricultural market information system; addressing arbitrary tax enforcement based on grain stock held by traders and wholesale distributors without considering their turnover, strengthening the capacity of cooperatives and assessing the different needs and investments options of grain storage.