4.1 Introduction

Ethiopia’s food system is characterised by a puzzling paradox. On the one hand, the country has a strong agricultural potential. With around 38.5 million hectares of agricultural land, generous water resources and a wide variety of agroecological zones, Ethiopia has the potential not only to feed its own population but even to become a major exporter of food products.[122] On the other hand, however, over the past few decades the country has been struggling with widespread and persistent food insecurity. For decades, Ethiopia has been importing large quantities of food, both commercially and in the form of food aid, to meet local demand.[123] Currently, an estimated 20 million people (around one of every six citizens) are in need of food assistance,[124] and deaths by starvation are increasingly reported in different areas of the country.[125] Most puzzlingly, this happens while the government announces plans to export wheat[126] and receives praises by the Food and Agriculture Organization of the United Nations (FAO) for its efforts to develop the agricultural sector.[127] This paradox begs the question of why, despite its potential and the progress achieved over recent decades in terms of increasing agricultural production, food security concerns regularly persist in multiple areas of Ethiopia.[128]

Building on the previous chapter, this chapter uses a concrete case study to illustrate how efforts to increase agricultural production do not necessarily translate into improved food security for the population. Through an analysis of Ethiopia’s wheat value chain, the chapter shows how food security outcomes largely depend on the political economy context in which crops are produced, traded and brought to the market.[129] The focus on wheat is motivated by several factors, including its (growing) importance for food security in Ethiopia, the political value it has acquired over the past years and the linkages between domestic and international markets. By focusing on a country with a strong domestic production potential, this analysis adds to the literature on food security in fragile settings, which has often focused instead on food insecure countries with a limited ability to grow food domestically.

To provide a picture of the relevant political economic dynamics, this chapter explores a number of factors that have a significant impact on the wheat value chain in Ethiopia. The first section looks at how Ethiopia’s conflicts disrupt activities along the value chain, as well as at how economic activities along the chain can fuel tensions and conflicts. The second one explores how Ethiopia’s governance structure – particularly the heavy presence of the state in the agricultural sector – shapes the functioning of the wheat value chain. The third section focuses more specifically on the wheat policies adopted by successive Ethiopian governments, showing how these policies are often more geared towards satisfying political imperatives rather than food security ones. The fourth section looks at how Ethiopia’s economic crisis shapes the functioning of the wheat value chain, introducing market distortions that undermine food security. Finally, the fifth section explores the power imbalances within the value chain and how these impact potential food security interventions. As a context for this analysis, annex 2 provides a more descriptive overview of the various stages of Ethiopia’s wheat value chain. Overall, understanding these dynamics is critical to design effective food security interventions, mitigating the risk that they end up being ineffective or achieving unintended negative effects.

4.2 The impact of conflict, the impact on conflict

Over the past years, multiple, recurring conflicts have had a strong negative impact on food security in many regions of the country. Only seven months into the war that started in northern Ethiopia in November 2020, the conflict had already led to an estimated 37 percent increase in the probability of people being affected by moderate or severe food insecurity in conflict-affected areas.[130] According to these estimates, the presence of a battle in a specific geographic area had led to a one percent increase in the probability of moderate or severe food insecurity for residents of that area.[131] Not coincidentally, the regions most affected by conflict are also among the regions facing the worst level of hunger, with reports of deaths by starvation in both Tigray and Amhara and acute food insecurity in conflict-affected regions of Oromia.[132] While conflict is rarely the only cause of food insecurity (which can also depends on other factors such as droughts and pests), it often plays a major role in it.

In line with the examples described in the previous chapter, Ethiopia’s multiple conflicts have severely disrupted activities along virtually all stages of agricultural value chains, including that of wheat. The effects have been particularly strong in areas affected by high-intensity fighting, most notably Tigray. For instance, according to a survey conducted among smallholder farmers in the region, more than 81 percent of the household crops were devastated – often deliberately – by fighting, burning and looting.[133] In addition, almost half of the surveyed smallholders reported suffering from damage or looting of their agricultural tools, such as ploughing tools, irrigation infrastructure and other farm equipment.[134] This means that the conflict has damaged not only the available stocks of food, but also the farmers’ capacity to work on future agricultural seasons. In addition, the siege suffered by Tigray during the war meant that no food or necessary agricultural inputs (e.g., fertilisers, improved seeds) could come in from the rest of the country, while fuel shortages prevented the transport of inputs or products within the region. This further worsened the food security situation in both the short and long term.

While the impact of the war has been particularly strong in Tigray, other conflict-affected regions have also suffered significantly. With widespread insecurity in Ethiopia’s two largest regions (Oromia and Amhara),[135] it has been extremely difficult to transport crops, food products or key agricultural inputs (most notably fertilisers) in many areas of the country. For instance, growing insecurity in Oromia and in the area around the capital Addis Ababa – the regions where most wheat is produced and milled – has made it increasingly challenging to transport wheat and wheat flour.[136] With the fighting between the Fano and government forces escalating in Amhara regions, millers who used to sell their wheat flour there had to stop their deliveries in the region or rely on more risky and thus expensive transport, driving prices up for the end consumers.[137]

While on the one hand conflict has impacted agricultural value chains, on the other hand economic activities along these value chains have grown increasingly enmeshed with conflicts. The most prominent example of these dynamics is arguably that of sesame in Ethiopia’s northern regions, where control over the production and trade of this lucrative crop has become a key issue of contestation at multiple levels, including locally (among Amhara political elites), across regions (between Amhara and Tigrayan political elites) and across state borders (involving Sudan and Eritrea).[138] While the wheat value chain has not intersected with conflict in such a direct way so far, the risks of increased economic activity fuelling conflict should not be discounted. For instance, as the government pushes for expanding wheat cultivation to lowland areas traditionally not used for this purpose (see section 4.4 below), there is a risk of land-related tensions and conflicts erupting among local communities.[139] Land-related conflicts are not an uncommon feature in Ethiopia,[140] and the risk is particularly high when the expansion of cultivated land takes place along contested border areas that already feature preexisting political and often ethnic tensions, such as the border between Oromia and Somali regional states.

This risk is particularly strong given Ethiopia’s political setup, in which regional states are defined on an ethno-linguistic basis and are often in strong competition against each other. In this context, competition among regional states in the agricultural domain risks feeding into broader political and identity grievances and conflicts. In particular, regions whose ruling elites enjoy more influence in the federal government (mostly Tigray until 2018 and Oromia now) are often resented by the population of other regions for being able to obtain privileges, such as preferential access to key agricultural inputs.[141] In Amhara region, for instance, delays in the distribution of fertilisers in 2023 have been attributed by some to deliberate political choices by the federal government.[142] This has tapped into existing resentment among large segments of the Amhara population, who see the federal administration as unduly dominated by Oromo elites. In a context where ethno-political competition is a major driver of conflict,[143] these competition dynamics in the agricultural domain risk exacerbating political tensions and conflicts.

4.3 An intrusive, complex state

Besides the impact of conflict, the state’s traditionally heavy-handed intervention in the agricultural sector also plays a major role in shaping the functioning of Ethiopia’s wheat value chain. Over the past several decades, successive Ethiopian governments have traditionally taken an activist approach to agricultural policy – starting with Haile Selassie’s creation of agricultural development units and continuing with extensive land reforms under the Derg regime. Two devastating famines in the early 1970s and the 1980s left a profound mark on the country, also contributing to the fall of the imperial and Derg regimes respectively.[144] Mindful of this past, when the Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF) took power in the early 1990s, it quickly made agricultural development a top priority, with a view to provide food for a growing population, promote economic development and eradicate poverty, while also securing the government’s own political stability.[145] To this end, the government drafted a number of successive agricultural strategies and came to allocate 10 percent of its annual expenditures to the agricultural sector.[146]

Under the EPRDF, the government’s approach to agriculture featured a significant focus on supporting smallholder farmers, who represented (and still represent) the backbone of the country’s agricultural system and who had historically formed the bulk of armed contestation movements in the country.[147] While the focus on smallholders prevented the concentration of land in the hands of a few private actors, it also led to a growing fragmentation of land plots, increasingly limiting the profitability of smallholder farming. In principle, under Ethiopia’s land policy, all adults have the right to use rural land. In practice, however, population growth has put pressure on this system, with family-controlled plots of land getting increasingly fragmented as they are passed over to the next generations.[148] As a result, Ethiopia’s wheat production (similarly to that of many other crops) is largely dominated by farmers who own extremely small plots of land, cultivated without the help of irrigation or mechanised systems.[149] Overall, this has resulted in low productivity levels: although wheat yields in Ethiopia have increased significantly over the past two decades (from 1.1 to 3.03 tonnes per hectare between 2000 and 2020), they have remained well below those of many other African countries (e.g., 4.14 tonnes per hectare in South Africa and 6.57 in Egypt).[150]

In addition, the established policy of state ownership of all of the country’s land means that farmers do not formally own the land they work on. This policy was first established by the Derg in 1975 and later enshrined by the EPRDF in the 1995 constitution.[151] While the declared aim of the policy was to prevent the concentration of land into the hands of a few private actors, this approach has also resulted in some significant side effects. Most notably, due to their lack of formal ownership over land, farmers cannot use land as a collateral to get finance – a bottleneck that is cited by many key informants as a significant obstacle for the development of well-functioning agricultural value chains.[152] Unable to get finance through formal channels, smallholder farmers often end up getting credit from downstream actors in the value chain, most often (local) traders. While this credit allows them to buy necessary inputs (e.g., seeds, fertilisers), it also creates a power imbalance vis-à-vis traders, diminishing farmers’ bargaining power and hence their incomes (see section 4.6 below). In an effort to address this issue, in August 2024 the government has passed a law that makes it possible to collateralise land based on its “maximum potential,”[153] though it is too early to analyse how the law will be implemented and the impact that it will have.

Besides formally owning all of the country’s land, the state also plays a key role in the distribution of key agricultural inputs, most notably seeds and fertilisers (for further details, see annex 2.A). In the seeds sector, the state’s engagement takes place through state-owned enterprises active at both the federal and regional levels.[154] As for fertilisers, the distribution system is extremely centralised, with the federal government acting as the sole purchaser of fertilisers and distributing them to farmers via cooperatives.[155] Overall, however, these state-led, centralised mechanisms have traditionally struggled to ensure the availability and affordability of agricultural inputs. For instance, recurring shortages of seeds have traditionally affected Ethiopia’s wheat sector.[156] Significant price hikes in recent years (50 percent season-on-season) have made it even more difficult for many farmers, especially smallholders, to buy improved seeds.[157] The use of fertilisers has similarly been limited by both availability and affordability issues, due to a mix of domestic challenges (dwindling foreign exchange reserves) and international ones (major price hikes in international markets) (for further details, see annex 2.A).[158] As a result, the price of fertilisers has risen significantly (170 percent between 2021 and 2022), and many farmers have been unable to access the required amount of fertilisers.[159] Following the government’s decision to float the currency in July 2024, higher and more volatile prices for fertilisers are expected, although the government has pledged subsidies to offset the impact.

Finally, in certain cases, the complexity of Ethiopia’s governance structures complicates the functioning of agricultural value chains, including that of wheat. Reflecting Ethiopia’s federal arrangement, the agricultural sector is regulated through a complex set of interactions between federal, regional and local authorities.[160] Although this structure allows for a much-needed degree of consistency and coordination among different regions, it also features shortcomings. First, federal authorities tend to privilege a top-down approach, which contrasts sharply with the widely held wish for a more inclusive, participatory approach to policy making – a wish shared by several businesses, experts and development actors consulted for this study.[161] Moreover, disagreements and coordination problems across the different levels of governance can also affect the implementation of policies.[162] Besides these vertical coordination issues, the wheat value chain functioning is also hampered by the difficult horizontal coordination among the ministries in charge of different activities along the chain (e.g., Ministry of Agriculture for production, Ministry of Trade and Regional Integration for storage and exports, Ministry of Industry for milling, Ministry of Health for food safety, etc.).[163] According to some, these coordination difficulties have contributed to a situation in which the benefits of increased wheat production have been limited by bottlenecks at other stages of the value chain (e.g., post-harvest losses during storage, lack of market linkages, etc.).[164]

4.4 Wheat policies, political motives

Owing to its importance as a food staple for the Ethiopian population, wheat has had a strong political value over the past decades. As noted in the previous chapter (see section 3.3), ruling elites are often eager to actively regulate the value chains of crops that are important for national food security and hence for regime stability.[165] Aware of these dynamics, for a long time the EPRDF government implemented a scheme to import wheat and subsidise its consumption in order to bridge the gap between a growing demand and a limited domestic production. In this period, imports of wheat and wheat products accounted for an estimated 20-35 percent of local demand.[166] These imports included not only the government’s commercial purchases used to implement its subsidy scheme but also food aid (for more information on food aid, see Box 1).[167]

The government’s subsidy scheme relied on a centralised system for the procurement and distribution of wheat. A government-controlled agency would buy wheat in international markets by issuing tenders.[168] While these tenders were nominally open, some traders complained about particularly complicated processes, requiring foreign businesses to work with the state-owned Ethiopian Shipping and Logistics Services Enterprise and arrange by themselves the land transport from Djibouti’s port to Ethiopia.[169] As a result, bids were reportedly won only by a limited number of companies that enjoyed good contacts with partners within Ethiopia.[170] Following this purchase, the government would distribute wheat to selected mills at heavily reduced prices and then set fixed margins for the different actors (mills, bakeries, retailers) and products (flour, bread) along the whole value chain, down to the consumer level.[171]

While in principle this subsidy was aimed at protecting consumers from price shocks, in practice it led to a number of controversial effects. For instance, mills and bakeries often bought both subsidised and non-subsidised wheat. This made it difficult for the government to enforce its price controls, as mills and bakeries could mix the two types of flour and then sell their products at the (higher) market prices, profiting at the expense of consumers and the government.[172] Moreover, the subsidy scheme tended to favour urban populations (by lowering the price of their consumption), at the expense of domestic wheat farmers (who lost out from the subsidy-induced drop in market prices), as well as of a large bill for the federal government (estimated at between USD 0.7 and 1 billion per year, to be paid in foreign currency).[173]

These controversies eventually led the government of Prime Minister Abiy Ahmed to gradually phase out the subsidy. To offset the impact on the poorer segments of the population, the Addis Ababa city council partnered with the Shegger Bread Factory, a large, industrial-scale wheat processing factory owned by the MIDROC conglomerate, to provide bread at subsidised prices in the capital. However, despite the support received in the form of subsidised wheat, Shegger ended up suffering from wheat shortages and financial losses, which forced it to temporarily close down.[174] In addition, the government, together with the First Lady’s office, has supported the launch of 12 factories across the country.[175] While some of these factories have been inaugurated, their impact remains difficult to assess at the moment.

Over the past few years, wheat has become even more politicised than before, as the government has made a strong push to achieve self-sufficiency in wheat production. This push had started already in the late EPRDF period, as the government sought to reduce the high economic costs imposed by the subsidy scheme.[186] More recently, the administration of Abiy Ahmed has doubled down on these efforts to increase wheat production. The current push relies on a combination of different measures, including expanding the area dedicated to wheat cultivation, developing irrigation systems (thus allowing for production in areas and/or seasons with limited rain availability, such as Ethiopia’s lowlands), as well as improving productivity and yields (through, for instance, an improved use of inputs and agricultural technologies, to be achieved via improved extension services or cluster farming).[187]

The strong focus by the current government on wheat is motivated by a combination of domestic and international dynamics. On the one hand, wheat demand in the country continues to grow, with an estimated growth rate of nine percent per year.[188] As of 2023, wheat represented the second most important consumption crop in the country (after maize), accounting for 14 percent of the national calories intake.[189] On the other hand, procuring wheat from international markets has become increasingly difficult and costly. With international market prices spiking after Russia’s invasion of Ukraine, wheat imports have become more expensive (see chapter 2). This, combined with the country’s worsening economic crisis (see section 4.5 below), has made it increasingly difficult for the government to foot the large import bill.[190] In addition, with the escalation of the war in northern Ethiopia, the federal government has perceived its dependency on (largely Western-funded) food aid as a disadvantage in its diplomatic disputes with Western governments concerning the war.[191] Finally, according to some, doing away with Ethiopia’s dependency on the external world for its food supplies aligns with the modern, successful image of Ethiopia that PM Abiy seeks to project, regardless of the actual circumstances on the ground.[192]

As a result of this wheat push, the government currently declares that no more wheat imports are necessary, and that Ethiopia can become instead a wheat exporter. In September 2023, the Ministry of Agriculture announced projections foreseeing a wheat harvest of 19.5 million tonness for the upcoming seasons.[193] These figures would represent a massive surge in production – a 26 percent increase compared to the 15.4 million tonnes of the previous year,[194] and a staggering three-fold increase compared to the 6.2 million tonnes of the 2020-2021 season.[195] With the domestic demand estimated at around 9.7 million tonnes, such a large harvest would allow Ethiopia to become a major exporter of wheat.[196] These figures, however, are considered unreliable by most experts and businesses engaged in the sector.[197] Although issues with the reliability of wheat data are not new in Ethiopia,[198] the government’s strong push to increase wheat production has reportedly worsened the problem by creating incentives to over-report production. In particular, reporting very high wheat production figures can allow regional administrations not only to access higher amounts of agricultural inputs for the following season (see annex 2.A), but also to gain the political favour of a federal government that is eager to showcase a large wheat harvest.[199] This has resulted in the existence of different estimates of wheat production. These divergences regarding data – including, though not only, on wheat – have reportedly prompted the government to fire the top management of the Central Statistics Agency and replace it with political appointees.[200]

While many stakeholders engaged in the wheat value chain find the idea of improving production sensible, given the country’s potential, they often consider the government’s current strategy as ineffective. For instance, traders see the government’s export push as a political move, detached from the business reality of wheat markets in Ethiopia and abroad.[201] Some of them point at the fact that Ethiopian wheat rarely passes quality tests in other countries, including neighbours such as Kenya. Moreover, most of them note that wheat prices in Ethiopia are extremely high (largely due to low productivity and relatively high post-harvest losses) and hence not competitive in international markets. For instance, some of them reported that the minimum farmgate price set by the government in early 2023 (ETB 3,300 per quintal, i.e., circa USD 600 per tonne) was much higher than the prices of wheat available in Djibouti (USD 340) or Kenya (USD 400), even before adding the costs of cleaning and transporting abroad. As a result, traders that were tasked by the government to export wheat at official prices were unable to do so.[202] According to businesspeople with knowledge of these dynamics, the only exports that happened legally have consisted of purchases by the WFP, which bought wheat from the government in hard currency but used it for distribution within Ethiopia.[203] Other wheat exports have reportedly taken place through illegal channels, as some traders are willing to export at a loss in order to retain access to foreign currency, which allows them to engage in highly profitable import businesses (for more details on these dynamics, see section 4.5 below).[204]

Besides encouraging businesses to undertake unfeasible enterprises, the government’s wheat push risks creating active damage. In early 2023, for instance, the government’s announcement of its plan to export wheat triggered major hikes in the domestic price of wheat.[205] According to sector experts, this was due to a number of factors related to the government’s policy, including not only the rise in demand due to the government’s own purchases, but also the fact that many farmers refused to sell their wheat at the price set by the government, which was below regular market prices.[206] In late 2023, a miller consulted for this study explicitly wished that the government not make declarations about exports in the coming times, so as to avoid price distortions.[207] Besides the repercussions for wheat markets, the government’s wheat push also risks taking attention (and land) away from other important crops, such as pulses or vegetables, which have the potential to lead to good returns to farmers, positive nutritional outcomes for consumers and/or foreign currency gains from exports.[208] In some reported cases, government officials even forced farmers to farm wheat instead of other crops.[209] Overall, these dynamics show how the government’s politically motivated push to scale up production and export of wheat has resulted in market distortions, eventually creating serious challenges for actors within the whole value chain.

4.5 Economic troubles and their consequences

Over the past few years, Ethiopia has been facing an extremely challenging economic situation. The roots of this crisis stretch back to the rule of the EPRDF, which funded its development strategy through heavy borrowing and ended up leaving the country significantly indebted.[210] Efforts by the government to increasing domestic borrowing (e.g., by forcing the allocation of a share of private banks’ loans to the purchase of treasury bills) ended up squeezing the amount of finance available for the private sector, while the accumulation of foreign denominated debt put increasing pressure on the country’s foreign exchange reserves (especially when interest rates went up).

More recently, the war in northern Ethiopia has drastically worsened the country’s economic crisis, as the government has made large nonproductive expenditures (e.g., on military equipment, to be paid in foreign currency), while critical sources of inbound foreign currency (most notably foreign direct investment and aid) have drastically decreased, and the war has destroyed productive assets (e.g., factories) in several areas of the country. The steady rise of the parallel market exchange rate (which rose to become twice as high as the official rate before the floating of the currency in July 2024) created incentives for most actors to handle foreign exchange outside of formal channels, thus exacerbating the problem. As a result, Ethiopia has come to suffer from an extremely serious foreign exchange shortage (in late 2023, the forex reserves reportedly amounted to the value of 6-12 days of imports only,[211] a small fraction of the three months considered as the minimum threshold by the International Monetary Fund).

In July 2024, the government introduced sweeping economic reforms with a view to revitalising the economy, as well as to secure financing support from international financial institutions and debt restructuring from creditors. Key reforms included the floating of the birr (thus closing the gap between the official and the real exchange rate), the end of the central bank’s efforts to control the allocation of foreign currency in the country and the use of interest rates as a policy tool.[212] While these reforms are likely to significantly alter the country’s economic situation, at the moment of writing it is difficult to precisely assess their impact, including the implications for the functioning of the wheat value chain (see below for more details).

Overall, in recent years Ethiopia’s economic crisis has created serious challenges for the functioning of the wheat value chain (as well as for other agricultural value chains). To begin with, in the current economic context, banks are extremely reluctant to provide loans to agricultural businesses. This reluctance is particularly marked for farmers, who are considered by banks as too exposed to environmental risks (e.g., climate variability, crops diseases, etc.), and who often lack assets to collateralise, such as land or machinery (see annex 2.B).[213] On the other hand, business actors downstream in the value chain face fewer challenges to access credit, at least in relative terms, as their activities are less exposed to environmental risks, and they have some assets to collateralise.[214] Among this group, large scale traders are usually the ones that can access finance most easily, given their ability to generate profits in a relatively short timeframe.[215] By contrast, agri-processors often face working capital issues and struggle more to access credit due to the fact that their assets are often already collateralised for earlier loans (see annex 2.D). Overall, these differences in access to finance have profound implications on power dynamics within the value chain, which will be discussed below (see section 4.6).

Besides the banks’ reluctance to provide finance, Ethiopia’s severe economic crisis has led to a serious shortage of foreign currency, which has a major impact on the wheat value chain. Most directly, this shortage has reduced the country’s ability to source key agricultural inputs – especially fertilisers, which must be bought abroad in foreign currency.[216] In addition, it has created an unhealthy competition between the government and the private sector to access increasingly precious foreign exchange. On the one hand, the government had set up a system to handle forex in the way it deems most conducive to the country’s development. In order to attract hard currency to the country, the government encouraged exports – particularly in the agricultural sector, which accounts for around 70-80 percent of the country’s exporting capacity.[217] When this export was done by a private business, the government asked the exporter to surrender 50 percent of its foreign exchange earnings to the central bank (the National Bank of Ethiopia, NBE), which converted it into birr at the official exchange rate. The rest of the forex accrued to the exporter (40 percent) and to the bank that managed the transaction (10 percent).[218] The NBE was then responsible for reallocating the foreign exchange, prioritising critical imports (e.g., pharmaceuticals, energy, inputs for productive activities, etc.) while preventing the channelling of the funds into activities that may be profitable but do not contribute to the national economy (e.g., import of luxury goods, real estate investments abroad, etc.).[219] On the other hand, however, many private businesses faced powerful incentives to handle their transactions outside of the formal, government-controlled system. Given the difference between the official and black-market exchange rates, businesses were reluctant to hand over 50 percent of their forex earnings to the NBE – rather, they preferred to handle transactions on the black market, where they could get around twice as much birrs for the same amount of dollars.

This desperate quest for foreign exchange created serious distortions in agricultural value chains. To begin with, a growing number of traders were willing to export agricultural commodities at a loss (i.e., below their cost price), only to obtain hard currency.[220] The loss could then be compensated by using the foreign exchange that accrued to them (40 percent of the exporting transaction) to import selected goods (usually high-value, luxury goods) that could be sold within Ethiopia at high profit margins. Alternatively, the exporters could sell the forex to other companies that needed imports for their own business (e.g., spare parts for machines, necessary inputs for industrial processes, etc.) and that were willing to pay for it at the black-market exchange rate (hence, twice as much as compared to the official rate). More than simply recouping losses, this business model actually proved profitable, as shown by the abnormal growth of the number of businesses engaging in the export of agricultural commodities over the past few years.[221] In the words of a businessperson familiar with this scheme, ‘if you get hard currency, the business is almost done.’

In addition, the major benefits associated with access to foreign currency led to the growth of illicit activities, including the smuggling of wheat across Ethiopia’s borders. By smuggling goods rather than exporting them through legal channels, traders could retain 100 percent of their foreign exchange earnings, rather than only 40 percent. In the case of wheat, this reportedly led to smuggling networks flourishing along Ethiopia’s borders, including at the borders with Kenya, Somalia and Djibouti.[222] Although low wheat prices in these countries forced smugglers to sell wheat at a loss, access to hard currency enabled them to make handsome profits by engaging in the import of high-value goods or by exchanging dollars on the black market. As evidence of the existence of these smuggling networks, a source consulted for this study pointed at the presence of several wheat mills in relatively unlikely places such as Dilla, a town located in a traditionally coffee-producing area but situated along the road connecting Ethiopia’s wheat-producing areas of Bale and Arsi to the Kenyan border town of Moyale. Another source pointed at the high prices of wheat in areas close to Ethiopia’s borders, a trend confirmed by an overview of wheat price dynamics in Ethiopia (see figure 2) – though it should be noted that higher prices may be partly due to relatively high demand in some of these areas, as well as to high transport costs from production areas. Powerful actors were reportedly involved in the smuggling activities, particularly at the regional level, making it risky for people to speak out on the topic.[223]

Wheat was turned into a bartering good to get other business done, rather than being used for domestic consumption and food security. While areas of the country suffered from food insecurity, wheat was smuggled out of the country, and the proceeds were often used to finance lucrative but nonessential imports. In this way, markets shifted their focus away from meeting food demand and towards creating profits for private actors – in a process somewhat similar to that described in section 2 for international food markets. While the push to export wheat (be it by the government, private businesses or smugglers) pushed prices up domestically, making wheat products less affordable for end consumers, the profits from this increased price did not necessarily translate into increased income for smallholder farmers, due to the structural disadvantages that these actors tend to face within Ethiopia’s wheat value chain (see section 4.6 below). Therefore, the net result of this system was a distorted value chain that catered to the profits of a few actors while failing to improve the availability and affordability of wheat products for the population.

While the impact of the economic reforms passed in July 2024 cannot yet be assessed, the unification of the exchange rate and the elimination of the NBE’s oversight on forex allocation are set to disrupt these distortionary practices, which relied on the arbitrage opportunities created by the previous system. At the same time, the reform creates questions regarding the potential reaction of powerful regional actors involved in smuggling activities, which will likely see their opportunities for business significantly reduced. In this context, the reforms’ implications – both economically and politically – will deserve significant attention over the coming period. Whatever the end result, any food security initiative will have to take into account the political economy structures that will emerge from the reforms’ outcomes and the implications that this will have for the incentive structures of actors along the wheat value chain.

4.6 Power imbalances in the value chain

As noted in the previous chapter, businesses that enjoy a position of power within a value chain often exploit their advantage to capture the benefits of increased economic activities along that chain. In this context, focusing solely on scaling up production through technical improvements (e.g., using better inputs, advanced agricultural techniques, etc.) is likely to further enrich these powerful actors, rather than improving food security outcomes for the population at large. Moreover, these actors are likely to resist any changes or reform that threaten their power. Given these dynamics, to design effective food security interventions, it is crucial to understand how power is distributed within the value chain, identifying existing powerbrokers and the incentives that they face. This includes looking at how power is distributed among different stages of the value chain (i.e., vertically), as well as among different businesses engaged in similar activities (i.e., horizontally).

In terms of vertical power imbalances, in Ethiopia’s wheat value chain traders are generally seen as the segment that benefits the most from the current structures. This broad category includes different types of actors – from local traders buying wheat at the farm gate and bringing it to local markets to larger aggregators that sell in bulk to agri-processors (more details in annex 2.C).[225] Despite facing significant operational challenges (especially when active in areas affected by active conflict), this category of actors tends to enjoy a good position in the chain, as they effectively bridge the large gap between their suppliers (a multitude of smallholder farmers often lacking knowledge on the market for their produce) and their clients (agri-processors eager to buy wheat in bulk, rather than from individual smallholders). Moreover, traders tend to enjoy a relatively privileged financial position – either thanks to their own capital reserves or to the lower barriers that they face in accessing finance (at least as compared to other actors in the value chain), due to their ability to repay loans in relatively short periods.[226] Often times, this financial position allows traders to even provide finance to other actors in the value chain (most often farmers, but in some cases also agri-processors), thus strengthening their own bargaining power.[227] Overall, therefore, while traders do add significant value by acting as intermediaries, they are also able to ensure a good profit margin for themselves – sometimes at the cost of squeezing out other actors.

On the other hand, farmers – and especially the majority of smallholders – find themselves in particularly difficult circumstances. The centralised, government-controlled system of distribution of agricultural inputs often fails to provide them with the inputs that they need, while state ownership of land prevents them from using their land as collateral to access finance.[228] To compensate for this, farmers often resort to embedded credit, getting finance from traders. However, this – together with their limited knowledge of market dynamics and of the products’ quality – puts them at a disadvantage in their bargaining. Cooperatives, which are supposed to represent farmers’ collective interests, are often dysfunctional and unable to act as effective aggregators and marketers of their products.[229] While in principle government policies are geared towards increasing farmers’ incomes, in practice they often struggle to do so.[230] As a result, farmers tend to have little economic power or political weight and end up largely being price takers. Similarly, large agro-industrial actors (e.g., millers, processors) are in a somewhat uncomfortable position in the value chain. Despite their size and the fact that they own assets, they often suffer from working capital issues, and they tend to be squeezed between a tight market on the supply side (a limited amount of wheat, handled by powerful traders) and a competitive market of clients (a vast network of many small-scale distributors and retailers, who face strong pressures to keep prices low to ensure that their products remain affordable in the face of plummeting purchasing power).[231] This diminishes their ability to ensure profits for themselves.

While the analysis of vertical power imbalances categorises actors based on the position that they occupy in the value chain, often times there are even more serious power imbalances among actors belonging to the same stage of the chain. Typically, these power imbalances are due to the connections of specific business actors with relevant power brokers. In Ethiopia’s case, for instance, a restricted circle of SOEs, parastatal companies and a few well-connected private businesses has traditionally dominated the economy, including in the agricultural sector. This has largely been the result of the economic strategies adopted by the last two Ethiopian regimes. Under the Derg, ruling elites promoted a centralised economic system based on the dominance of large SOEs, while the EPRDF’s rule led to the flourishing of vast networks of parastatal businesses, controlled by endowment funds linked to the EPRDF’s regional branches.[243] The reach of these businesses extended to all sectors of the Ethiopian economy – including, but not limited to, agricultural value chains.[244] The Tigray People’s Liberation Front (TPLF)’s EFFORT, for instance, was heavily engaged both in agricultural production and in the transport of agricultural goods, through companies such as Hiwot Mechanized Agriculture and Guna Trading.[245] The same sectors featured the presence of businesses from other (smaller) endowment funds, such as Oromia’s Tumsa (e.g., via Dinsho Agro-Industry, Dinsho Trading, Dinsho-Biftu) and Amhara’s Tiret (e.g., via Zeleke Agricultural Mechanization).[246] In addition to SOEs and parastatal businesses, the EPRDF rule also led to the emergence of a few private entrepreneurs that leveraged their connections with political elites to engage in profitable businesses.[247] Chief among them is Sheikh Muhammed Al-Amoudi, a Saudi-Ethiopian businessman who heads the powerful multi-sector conglomerate MIDROC. MIDROC companies have been heavily engaged in the agri-business sector, including on wheat production and processing.[248]

While the transition initiated by Abiy’s rise to power has reshaped elite networks and their control structure, it has not changed the country’s underlying political economic patterns.[249] As a result, well-connected businesses – albeit at times new ones – continue to play a dominant role. For instance, the new administration has drastically reduced the power of EFFORT, but on the other hand it has empowered conglomerates from other regions, such as Amhara’s Nigat (formerly Tiret) and Oromia’s Tumsa.[250] These shifts have taken place in the agricultural sector too: for instance, Nigat has reportedly taken over some of EFFORT’s lucrative sesame business in Amhara region,[251] while Tumsa-affiliated companies have bought commercial farms from the state in Arsi and Bale (Ethiopia’s main wheat-producing regions, see annex 2.B).[252] In addition to this change of power among regions, the new administration has also reshuffled control over parastatal business networks. For instance, regional administrations in Oromia and Amhara have gained more oversight on the endowment funds and their businesses,[253] and SOEs controlled by these two regional administrations have played an increasingly prominent role in economic activities, including in the agricultural sector.[254] While this has resulted in a shift of power from party structures to (regional) state structures,[255] ultimately political elites have remained in control of the parastatal business networks that dominate the market.

Similarly, well-connected entrepreneurs continue to enjoy significant advantages. For instance, despite having been absent from the scene while under de facto house arrest in Saudi Arabia, Al-Amoudi has remained a key business actor even after the transition from the EPRDF to the PP. In recent years, MIDROC was involved in the construction of the Shegger factory, a large-scale industrial bakery that received subsidised wheat from Addis Ababa’s city council in exchange for providing bread at lower-than-market prices across the capital. According to a source consulted for this study, the company ‘was established in a handshake deal with the government, but it was a financial nonsense, unable to operate without subsidies.’[256] Despite substantial amounts of government subsidies, Shegger ended up suffering from wheat shortages and financial losses, and it was temporarily shut down.[257] Examples of how businesses can benefit from their connections to government are not limited to the most evident cases such as that of Al-Amoudi. For instance, as part of its push to export wheat in 2022-2023, the government selected a handful of companies to implement the export scheme, granting them the exclusive right to source wheat from specific zones at a fixed price.[258]

As noted in the previous chapter, the existence of power imbalances within the value chain creates a risk that interventions aimed at improving food security end up benefiting a restricted circle of power brokers – be they middlemen, (para)statal businesses, or well-connected entrepreneurs. Over the last few years, the Ethiopian government has been promoting a number of measures to reduce vertical power imbalances – so far with a mixed track record of success, not least due to resistance by existing power brokers (for more details, see box 2 above). On the other hand, however, the government has not meaningfully addressed horizontal power imbalances. Rather, as noted above, the administration has reshuffled the networks of powerful business actors, but it has not made efforts to create a more level playing field for all businesses in the country. Barring such efforts, which would likely require significant changes to Ethiopia’s political economy structures, interventions aimed at developing agricultural value chains and improving food security will continue to face the risk of seeing their benefits largely captured by powerful actors.

4.7 Conclusion

By using the wheat value chain as a case study, this chapter has showed how political and economic challenges prevent Ethiopia from achieving food security, despite a strong agricultural potential. Ethiopia’s multiple and persistent conflicts disrupt activities across all stages of the value chain, from input supply and farming to processing and distribution, and exacerbate food insecurity in many areas of the country. The country’s state-led approach to agricultural development struggles to deliver its intended benefits to smallholder farmers – by contrast, it often leaves them struggling with shrinking land plots, input shortages and a lack of finance. The current push by the government to scale up domestic production is sensible given the country’s agricultural potential, but it prioritises political imperatives over market realities. This leads to a lack of policy implementation at best (wheat exports not materialising as planned) and domestic market distortions at worst (hikes in the price of wheat, shortages for processors, limited focus on other important crops). As a result of the current economic crisis, banks are reluctant to provide finance for agricultural activities, while the government struggles to buy fertilisers. Moreover, the exchange rate disparity between the official and the black market (now unified) used to create perverse incentives for smugglers, which sold wheat abroad at a loss to make profits on the import of high-value but unnecessary imports. Finally, within the wheat value chain, a limited circle of power brokers stand ready to use their political connections and/or their market position in order to capture the benefits of increased economic activity or to resist reforms that threaten their dominant position.

Building on the arguments made in chapter 3, this analysis demonstrates through a specific case study that interventions focused on boosting production are not sufficient to improve food security outcomes. In the current context in Ethiopia, increases in production risk being captured by intermediaries who hold a powerful position in the value chain or by well-connected businesses who can leverage their ties to government to make profits – leaving little benefits for farmers struggling with low incomes or for consumers struggling with high food prices. These examples clearly show why food security interventions need to think and work politically in order to address the most relevant bottlenecks that lead to food insecurity in fragile settings. The next chapter provides concrete recommendations in this regard, including both for fragile states at large (section 5.3) and for Ethiopia more specifically (section 5.4).