Can Ethiopia Realise a Better Agriculture in its ‘Third Millennium’? The Role and Dilemma of Farm Prices

Farmers have responded positively to Government reforms that include a strong extension and credit-led push for intensification of food staples production through the use of modern seed and fertiliser. Agricultural growth has been impressive over the last decade, especially when compared against the performance of the sector in preceding decades. Although short-term economic performance is unpredictable due to the predominantly rainfed agrarian economy, aggregate agricultural GDP growth has been around 4.7% over the past decade. This growth should have resulted in substantial improvements in food supply. However, the food supply situation has improved only marginally, partly because of increased population pressure and partly because of low, stagnanting yields. Overall cereal yields have averaged about 1.4 tons per hectare, merely a quarter of yields achieved in Asia since the green revolution.

A number of well-known interacting and self-reinforcing factors have hindered the realisation of the full potential of agriculture in Ethiopia. One key factor that has received the most attention by policy makers and donors in recent years is the importance of efficient marketing and the correct setting of agricultural prices. A high farm price is, of course, important for stimulating on-farm investment and thus increasing agricultural production. But the challenge in Ethiopia is to determine the exact conditions under which a high farm price leads to increased and sustained farm investment.

This short piece focusses on the recent food price rise in Ethiopia and the resultant paradox that followed it, and aims to contribute to the ongoing debate on the future of smallholder agriculture.

The recent food price escalation in Ethiopia: a puzzle?

Primarily in response to the 2001/02 sharp decline in grain prices, and to counteract the the fall in fertiliser use the following year, policy makers have tried to improve farm prices and farmers’ access to markets (especially export markets). Policy attention to the production and marketing cash and export crops has also been growing as the push for agriculture to be more export-oriented gains speed.

Following this policy shift, the price of agricultural products and food in particular has increased substantially. Food inflation, for instance, grew from some 7.7% two years ago to about 20% recently. Although high agricultural prices was a policy choice, emerging conditions reveal the dilemma of these high food price in Ethiopia. Policy makers, busy designing strategies to increase agricultural prices only 3 or 4 years ago, are now doing an about-face and seeking to reduce the price of key food crops. For example, the Government banned the export of agricultural produce such as tef, corn and wheat one year ago. But even this measure has proved inadequate to curb soaring inflation, and the Government has resorted to distributing wheat and food oil at subsidised prices to lower-income groups in urban areas. The most recent policy intervention was to raise the wages civil servants and pensioners.

Similarly, in response to rising food prices and the falling real value of fixed cash transfers, the government shifted 1.8 million beneficiaries in the Productive Safety Net Programme (PSNP) away from cash transfers and back to food aid, even though one of the original arguments for promoting cash transfers was to encourage local production by enhancing local demand and price of food crops.

So why this paradox, and what explains it? The recent developments in the Ethiopian economy pose many important questions that could help us better understand the complexities under which Ethiopian smallholders operate, and the conditions necessary for the growth of the smallholder sector. But first, let’s revisit the factors behind soaring food prices and high inflation.

What contributed to high inflation?

Price-related inflation is either a supply- or demand-driven problem, or a combination of both. There may also be an imbalance in their respective growth rates. Although Ethiopia’s domestic food production has improved and continued to grow (albeit slowly), the key problem is instead the inability of the smallholder sector to meet the rocketing demand for food.

Demand for agricultural products both in the domestic and export markets has grown rapidly. Exports of pulses, oil seeds, meat and meat products, and live animals increased by 51%, 152%, 99% and 960%, respectively, between 2003/04 and 2005/06. Similarly, effective demand (demand backed by purchasing power) for food crops in the domestic markets has expanded in recent years following recent developments in the economy. Enhanced urban incomes, coupled with an expansion of the informal sector could generate new employment and raise the level of effective demand for food grains. In rural areas too, the demand for food grains may have been boosted following the transition of food aid programmes into cash transfer programmes.

Why have high food prices forced the attention of policy makers?

Relatively high farm prices are advantageous for smallholders and the economy in general, as they contribute to future food production and a subsequent relative decline in prices. But increased farm price has become a problem in Ethiopia in very short period of time. Why?

Four factors could help to explain this. First, the majority of Ethiopians spend a disproportionately large portion of their income on food, which makes them very sensitive to even the slightest increase in food price. This has political implications, as it could worsen political instability.

Second, and if the high food price is associated with an export market that competes with domestically processed crops, shortages or high prices of industrial crops could lead to the closing down of some domestic agro-industries. This is the case for some domestic food processing industries (e.g. the Addis Modjo Edible Oil producing industry, see

Third, a high food price also hurts Ethiopian smallholders given that the majority of farmers are net-buyers of food. This removes some of the gain they may have received from a high producer price.

Fourth, the likelihood of high food price increasing other prices (including transport, inputs, industrial goods) is high, and this again removes some of the benefit smallholders gain from a higher food price.

Apart from the aforementioned factors, high and unstable food prices could negatively affect long-term national development , as it introduces instability into the macro economy.

What is the solution? Green revolution!

In Ethiopia agricultural production is failing to keep pace with growing demand for food, and this has resulted in increasing food prices. Even though higher food prices can be good for smallholders, the solution is to realise a green revolution that allows growth in agricultural production to keep pace with increasing food demand.

Ethiopia needs a sustained and rapid growth in per capita agricultural production, which was the key to the successful green revolution in Asia. The green revolution has enabled Asian smallholders to capitalise on the advantage of high farm prices in the short-term but a relatively declining farm price in the medium-to long-term.

It is important to analyse the whole system in order to identify the policy and institutional gaps and constraints that can hold back smallholder agriculture from growing rapidly. Ethiopia must realise its own green revolution soon.

Samuel Gabrielselassie, September 2007