Can agricultural markets be trusted and/or controlled?

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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
EDRI
November 18, 2014
Addis Ababa
1
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
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)
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?
2. Background urban coffee distribution
Producers
Rural collectors
Urban collectors
Urban distributers
Semi Wholesalers
Roasters
About 20-25. 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 20. Buy from ECX but also buy from urban collectors. Have warehouses.
Semi-wholesalers
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
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.
2. Background urban coffee distribution
US cents per lb.
Difference between Addis Ababa retail coffee price and the Ethiopia coffee export price,
2002 to 2013 by month
60
50
40
30
20
10
0
-10
-20
-30
-40
Dashed line is actual price difference; solid
line is 12-month moving average of the
price difference
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
3. Data
Wholesalers
Retailers
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)
3. Data - Descriptive statistics
Unit
Number of coffee
types sold per
trader
Number
Sale prices (Birr/kg) Birr/kg
Wholesalers
Retailers
Standard
Standard
Mean Deviation Mean Deviation
4.26
69.13
1.16 2.29
9.72 92.84
1.77
29.78
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%
Packaging
Wholesalers
Retailers
Packed
0%
57%
Loose
100%
42%
Branded
0%
40%
Washing
Wholesalers Retailers
Don’t know
1%
10%
Washed
23%
13%
Unwashed
77%
46%
Not raw coffee
0%
30%
Raw
Roasted
Grounded
Form
Wholesalers
100%
0%
0%
Retailers
62%
2%
35%
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 naturalsundried 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
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?
4. Traditional markets
4.2. Assessing trust
• Cheating with weights? Very little.
Semiwholesalers
Unit
Number of observations
Mean
grams
Median
grams
Underweight
%
Overweight
%
Traditional retail markets
Loose
Regular shop Open market
Total
products
100
44
51
95
202
992.6
1004.2
1002.8
1,003.4
998.2
991.5
1004.8
1001.5
1,002.5
996.5
75
36
43
40
57
25
64
57
60
43
T-test if weight is
diff. than 1 kg
-5.42
0.00
t-value*
Pr(|T| > |t|)
2.09
0.04
1.48
0.15
2.51
0.01
-1.69
0.09
4. Traditional markets
4.2. Assessing trust
• Cheating with quality? Yes with not easily observables; No with easily
observables
Semi-
Traditional retail markets
Open
wholesalers Regular shop market
Total
Statements origin
Understated
Match
Overstated
Total
Washing
Understated
Match
Overstated
Total
Number of observations
Loose
products
%
%
%
%
21
13
66
100
24
5
71
100
15
10
75
100
20
7
73
100
14
8
78
100
%
%
%
%
3
91
6
100
100
2
89
9
100
44
6
90
4
100
51
4
90
6
100
95
3
89
8
100
202
4. Traditional markets
4.2. Assessing trust
• Cheating with export quality coffee? Yes
Semi-
Traditional retail markets
Open
wholesalers Regular shop market
Total
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 >
under-grade)
Fit at under-grade level
Unfit for export
Total
Loose
products
%
%
%
%
%
16
1
0
4
2
0
2
2
2
0
4
0
2
8
0
2
1
2
5
0
9
1
1
4
1
%
%
%
%
41
33
3
100
52
32
9
100
39
31
16
100
45
32
13
100
42
33
8
100
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”
5. Modern marketing practices
5.1. Typology
Modern retail
MiniSupermarket market
Packing
Loose
Branded pack/transparent
Branded pack/non-transparent
Non branded pack/transparent
Non branded pack/non-transp.
Total
Form
Raw beans
Roasted
Grounded
Genfel (coffee beans with cover)
Total
Traditional
Regular
shop
Open market
Wholesale
Total
2
22
63
11
2
100
28
5
50
16
1
100
74
1
16
9
0
100
60
0
5
35
0
100
100
0
0
0
0
100
59
5
23
12
1
100
20
8
72
0
100
46
1
52
0
100
83
0
17
0
100
95
0
4
1
100
100
0
0
0
100
73
2
25
0
100
5. Modern marketing practices
5.1. Typology
0
.01
Density
.02
.03
• Significant quality premiums for modern retail
0
50
100
Birr/kg
modern retail
wholesale
150
traditional retail
200
5. Modern marketing practices
5.1. Typology
0
.01
Density
.02
.03
• Significant quality premiums for packing and branding
0
50
100
Birr/kg
branded bags retail
loose
150
200
unbranded bags retail
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
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
5. Modern marketing practices
5.2. Assessing trust
• Cheating with weights? Yes, but very little.
Modern retail
Unit
Number of observations
Supermarkets Mini-markets
Packed
Total
Branded Non-branded
Total
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
T-test if
weight is
%
27
37
33
15
34
30
-1.48
-2.02
-2.33
-2.35
-2.24
-2.75
0.15
0.05
0.02
0.04
0.03
0.01
t-value**
Pr(|T| >
diff. than 1 kg
|t|)
5. Modern marketing practices
5.2. Assessing trust
• Cheating with quality? Yes with not easily observables; No with easily
observables
Modern retail
Supermarkets
Statements origin
Understated
Match
Overstated
Total
Washing
Understated
Match
Overstated
Total
Number of observations
Mini-markets
Total
Branded
Packed
Nonbranded
Total
%
%
%
%
20
0
80
100
13
0
87
100
15
0
85
100
50
0
50
100
11
0
89
100
14
0
86
100
%
%
%
%
6
89
6
100
26
0
91
9
100
41
2
91
7
100
67
0
100
0
100
13
3
95
2
100
47
2
96
2
100
60
5. Modern marketing practices
5.2. Assessing trust
• Cheating with export quality coffee? Yes. But also high quality.
Modern retail
SuperMinimarkets
markets
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
Total
Branded
Packed
Nonbranded
Total
%
%
%
%
%
50
0
0
8
0
15
2
10
2
0
28
1
6
4
0
46
0
0
0
0
28
0
6
6
0
32
0
5
5
0
%
%
%
%
23
15
4
100
22
39
10
100
22
30
7
100
38
15
0
100
21
32
6
100
25
28
5
100
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
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.
Thank You
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