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ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE Can agricultural traders be trusted? Evidence from Ethiopia Authors: Thomas W. Assefa and Bart Minten IFPRI ESSP.

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Presentation on theme: "ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE Can agricultural traders be trusted? Evidence from Ethiopia Authors: Thomas W. Assefa and Bart Minten IFPRI ESSP."— Presentation transcript:

1 ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE Can agricultural traders be trusted? Evidence from Ethiopia Authors: Thomas W. Assefa and Bart Minten IFPRI ESSP EDRI November 18, 2014 Addis Ababa 1

2 1. Introduction Long-standing debate on the appropriate role of the state in the governance of markets Markets often not trusted and therefore often argued that there is need for regulation (because of food price volatility, adulteration, and uncompetitive behavior) However, no good empirical evidence on these issues and not clear if food markets can be trusted. 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 in the system Moreover, modern market practices 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 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? 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. Question 3: Are modern market practices different and more trust-worthy?

5 2. Background urban coffee distribution Producers Rural collectors Urban collectors Urban distributers Semi Wholesalers About 20. Buy from ECX but also buy from urban collectors. Have warehouses. Semi-wholesalers About Buy from ECX if it is to be used for grounding. Or they buy from rural collectors. They sell to urban distributors or to roasters. About 240 semi-wholesalers on “coffee street” in Merkato. They buy from urban distributors and sell to traditional shops or supermarkets, cafés or coffeehouses, roasters, or to a smaller extent to consumers Roasters They buy from urban collectors or from semi-wholesalers. These use mostly rejected coffee from ECX. They roast and/or ground. They sell to cafés (that use machines), coffee shops, or retailers.

6 2. Background urban coffee distribution Difference between Addis Ababa retail coffee price and the Ethiopia coffee export price, 2002 to 2013 by month

7 3. Data 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

8 3. Data Wholesalers Retailers

9 3. Data Survey collected information on: -Background of the retailers and the retail shop -Coffee sales turnover -Stated coffee quality and price at the time of the survey 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)

10 3. Data - Descriptive statistics WholesalersRetailers Standard UnitMeanDeviationMeanDeviation Number of coffee types sold per traderNumber Sale prices (Birr/kg)Birr/kg

11 3. Data - Descriptive statistics Region of origin WholesalersRetailers Don’t know3%46% Wollega/Nekempt32%6% Djimma36%13% Harar1% Others28%6% Not raw coffee0%28% Washing WholesalersRetailers Don’t know1%10% Washed23%13% Unwashed77%46% Not raw coffee0%30% Form WholesalersRetailers Raw100%62% Roasted0%2% Grounded0%35% Packaging WholesalersRetailers Packed0%57% Loose100%42% Branded0%40%

12 4. Traditional markets 4.1. What is valued in these 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

13 4. Traditional markets 4.1. What is valued in these 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?

14 4. Traditional markets 4.2. Assessing trust Cheating with weights? Very little. Semi- wholesalersTraditional retail marketsLoose Unit Regular shopOpen marketTotalproducts Number of observations Meangrams , Mediangrams , Underweight% Overweight% T-test if weight ist-value* diff. than 1 kg Pr(|T| > |t|)

15 4. Traditional markets 4.2. Assessing trust Cheating with quality? Yes with not easily observables; No with easily observables Semi-Traditional retail marketsLoose wholesalersRegular shop Open marketTotalproducts Statements origin Understated% Match% Overstated% Total%100 Washing Understated%32643 Match% Overstated%69468 Total%100 Number of observations

16 4. Traditional markets 4.2. Assessing trust Cheating with export quality coffee? Yes Semi-Traditional retail marketsLoose wholesalersRegular shop Open marketTotalproducts Overall quality assessment Fit for grade 2% Fit for grade 3%12011 Fit for grade 4%02221 Fit for grade 5%42854 Fit for Peaberry coffee%20001 Rejected for grades (but > under-grade)% Fit at under-grade level% Unfit for export% Total%100

17 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 [modern retail defined as self-service and cash register] 2/ Packaging and branding: -Unpacked and unbranded products indistinguishable from competitors -Branding adds “brand value”

18 5. Modern marketing practices 5.1. Typology Modern retailTraditionalWhole- Supermarket Mini- market Regular shopOpen marketsaleTotal Packing Loose Branded pack/transparent Branded pack/non-transparent Non branded pack/transparent Non branded pack/non-transp Total100 Form Raw beans Roasted Grounded Genfel (coffee beans with cover) Total100

19 5. Modern marketing practices 5.1. Typology Significant quality premiums for modern retail

20 5. Modern marketing practices 5.1. Typology Significant quality premiums for packing and branding

21 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

22 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

23 5. Modern marketing practices 5.2. Assessing trust Cheating with weights? Yes, but very little. Modern retailPacked UnitSupermarketsMini-marketsTotalBrandedNon-brandedTotal Number of observations Meangrams Mediangrams Underweight% Overweight% T-test if weight ist-value** diff. than 1 kg Pr(|T| > |t|)

24 5. Modern marketing practices 5.2. Assessing trust Cheating with quality? Yes with not easily observables; No with easily observables Modern retailPacked Super- marketsMini-marketsTotalBranded Non- brandedTotal Statements origin Understated% Match% Overstated% Total%100 Washing Understated% Match% Overstated% Total%100 Number of observations

25 5. Modern marketing practices 5.2. Assessing trust Cheating with export quality coffee? Yes. But also high quality. Modern retailPacked Super- markets Mini- marketsTotalBranded Non- brandedTotal Overall quality assessment Fit for grade 2% Fit for grade 3% Fit for grade 4% Fit for grade 5% Fit for Peaberry coffee% Rejected for grades (but >UG)% Fit at under-grade level% Unfit for export% Total%100

26 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) and cheated with; 2/ Indicators that easily observable rewarded (ECX reject cheaper than others; washed and pure coffee higher prices) and not cheated with 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 not more trust-worthy than traditional markets

27 7. Implications 1.Markets to be trusted in observables/weights. No interventions needed. 2.Markets not to be trusted in non-observables. More adapted market institutions (e.g. vertical integration; credible certification) needed in this case. However, costs involved, and interventions should be chosen carefully (food safety issues high, quality rewards high). 3.Flourishing informal market. Liberalize? Yes, but maybe not completely (especially on regional indicators) 4.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.

28 Thank You


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