This annex outlines the specific workings of different stages of the value chain. In particular, it focuses on the incentive structures, opportunities and constraints faced by various actors at each stage of the chain – from input provision and farming to trading, processing, distribution and eventually consumption. These incentive structures shape how actors operate within the chain, how much power they wield and hence how they respond to any change or reform in the sector. Being aware of these dynamics is thus critical for any actors – including donors – who want to devise effective interventions to improve food security in Ethiopia.
Although this analysis categorises actors based on the position that they occupy in the value chain, this should not obscure the fact that there are major differences within each of these categories. Not all farmers, traders or processing businesses face the same challenges and opportunities – rather, the position of each individual actor also depends on factors such as the actor’s size and (especially) network of connections. Analysing these power dynamics is also key to understanding power structures within Ethiopia’s wheat value chain (and the agricultural sector more at large), though it lies beyond the scope of this section.
Availability of the right type of inputs – most notably seeds and fertilisers – is critical for improving yields and boosting wheat production. Aware of this, successive Ethiopian governments have made repeated efforts to increase the usage of improved seed varieties and chemical fertilisers. Over time, these efforts have resulted in an increased usage of these inputs – although it remains at a limited levels in comparison to other developing countries.[262] At the same time, however, the government’s efforts have led to the creation of a state-led, centralised system for the distribution of agricultural inputs, which has profound implications for the functioning of the value chain.
The state plays a significant role in coordinating the allocation of seeds, particularly improved varieties. According to a survey conducted in Duna district, for instance, 65 percent of the demand for wheat seeds is covered by state structures at the local level, and the remaining 35 percent consists of farmer-to-farmer or informal exchanges.[263] Although some international seed companies are active in Ethiopia, they have reportedly faced some challenges, most notably related to the lack of a business-friendly environment in Ethiopia’s heavily regulated agriculture sector.[264] The state’s engagement in the seed sector takes place through state-owned seed enterprises active at different administrative levels. Seed enterprises controlled by regional administrations manage the distribution in their own regions, though they can also trade seeds with other regions according to availability. In addition, a federal entity (formerly the Ethiopian Seed Enterprise, now incorporated under the Ethiopian Agricultural Businesses Corporation, EABC) is tasked with coordinating the activities of regional enterprises. According to different sources consulted for this study, the power of the federal enterprise is decreasing vis-à-vis that of its regional counterparts, thus limiting its ability to gather seeds from different regions and redistribute them according to need.[265]
Similarly, the state plays a key role in the distribution of fertilisers, which takes place through a highly centralised system (even more so than in the seeds’ case). Cooperatives gather requests from farmers and pass them up to higher levels of government (regional and then federal). Upon receiving these requests, the Ministry of Agriculture decides how to allocate fertilisers to different regions, based on the requests received and on agricultural performance over the past years.[266] The fertilisers are then channelled to lower levels of administration and, via the cooperatives, to the farmers.[267] The price for farmers is set at the cost price plus transport, plus a five percent margin for cooperatives.[268] In the fertiliser market, no role is foreseen for the private sector, which was gradually pushed out by the government in the 2000s.[269] Rather, purchases from international markets are handled by a public enterprise (formerly the Agricultural Inputs Supply Enterprise, then incorporated under the abovementioned EABC).[270]
Overall, these centralised mechanisms put in place by the government 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.[271] Significant price hikes in recent years have made it even more difficult for many farmers, especially smallholders, to buy improved seeds (between the 2020-21 and the 2021-22 seasons, the price of a quintal of improved wheat seeds rose by almost half, from ETB 2.3k to ETB 3.4k).[272] The use of fertilisers has similarly been limited by both availability and affordability issues, due to a mix of domestic and international challenges.[273] On the one hand, Ethiopia’s dwindling foreign exchange reserves (see above) have limited the amount of fertilisers that the government is able to import. On the other hand, major price hikes in international fertilisers markets, particularly since the escalation of the war in Ukraine in 2022, have translated into major price hikes in import-dependent Ethiopia. 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 needed amount of fertilisers.[274]
Ethiopia’s wheat production is largely dominated by smallholder farmers. The average size of wheat farmlands was reported at only 0.34 hectares in 2014, and it has been decreasing over time due to the fragmentation of family-owned land plots among multiple descendants.[275] In these areas, wheat cultivation is rain fed and non-mechanised, leading to low levels of productivity.[276] Although some large-scale commercial wheat farms do exist (particularly in the so-called ‘wheat belt’ in Oromia’s Bale and Arsi zones), they have traditionally accounted for a limited share of wheat production (five percent in 2013).[277] Overall, this has resulted in relatively low productivity levels. Although wheat yields in Ethiopia have increased significantly over the past decades (from 1.1 to 3.03 tonnes per hectare between 2000 and 2020), they have remained below those of many other African countries.[278] Wheat production in Ethiopia is very geographically concentrated, with Oromia accounting for almost 60 percent of overall production (almost half of which taking place in Bale and Arsi alone), followed at a distance by Amhara region (28 percent).[279]
Recently, the government’s wheat push (see section 4.4) has led to fast changes in Ethiopia’s wheat production patterns. In an effort to scale up wheat production, the government has been dramatically expanding wheat-cultivated areas – including in lowland areas traditionally not used for this purpose, such as in Somali region.[280] The government has also set wheat production quotas for different regions so as to meet its production targets. This push, however, risks coming at the expense of other value chains – including for instance vegetables, which have the potential to provide both nutritious food for the population and good incomes for farmers.[281] Moreover, the push has generated resentment among many farmers, who are unhappy about switching production under the government’s orders, particularly when they are then forced by government policy to sell wheat well below market prices.[282] According to some experts, this resentment has the potential to evolve into grievances against the government.[283]
Besides small land plots, a limited use of technology and intrusive government policies, Ethiopia’s (wheat) farmers suffer from another major challenge: limited access to finance. Due to Ethiopia’s policy on the state’s ownership of land, farmers do not own the land they work on and hence they cannot use it as collateral to get finance. This, coupled with the risks associated with agriculture (see above), makes it extremely difficult for them to access finance – particularly for smallholders, who do not even have any machinery to collateralise. These difficulties mean that farmers often end up getting credit from downstream actors in the value chain, most often traders. This, however, creates a relation of dependency that empowers traders (see below), while diminishing farmers’ bargaining power – and hence incomes. Recently, the government has been reportedly exploring solutions to address this issue. These include, for instance, the possibility to collateralise land with a value based on estimating production over the coming years.[284] However, it remains unclear to what extent these changes may increase the appetite of banks (particularly private ones) to provide finance to farmers.
After the production stage, a large share of Ethiopia’s wheat remains in the farmers’ houses, where it is mostly used for consumption and (to a lesser extent) seed production. In 2020, for instance, 56 percent of wheat production was used for household consumption and 16 percent for seeds, with another 4 percent used for in-kind wage distribution.[285] Storage for this wheat is usually done by small-scale farmers, who despite using simple methods (e.g., bags in their houses or traditional structures called gotera) reportedly manage to achieve relatively low losses (2-4 percent).[286]
On the other hand, a smaller share of Ethiopia’s wheat is sold via markets – around 20-25 percent of the overall production, according to various estimates.[287] These sales are rather concentrated, with the top 20 percent of wheat sellers accounting for 60 percent of wheat sales.[288] These sellers tend to be farmers that control larger plots of land, own assets (such as agricultural equipment and/or livestock) and are located closer to main roads and cooperatives. Large-scale commercial farms, for instance, tend to market almost all of their wheat.
The sale of wheat to the market generally takes place through multiple layers of intermediaries, who bridge the wide gap between small-scale producers and large-scale buyers. On the one hand, wheat farmers – mostly smallholders – rarely have the market knowledge and means to link up directly with their customers and therefore prefer to sell their produce at the farm gate. On the other hand, potential customers – such as wholesalers or agri-processing businesses – rarely have the willingness or the means to collect wheat at the farm gate of each smallholder, and thus they prefer buying in larger quantities.[289] This creates an opportunity for multiple layers of intermediaries who collect wheat at the farm gate, aggregate it, store it if needed and then bring it to larger markets. In Ethiopia’s wheat value chain, this intermediary role between farmers and the market is performed by two actors: cooperatives and traders.
Cooperatives have been a focal point of the government’s agricultural strategies over the past few decades. These cooperatives exist and operate at different levels (from village-level cooperatives and to unions at the woreda and zone levels), and they have traditionally been closely associated with the state and its ruling party.[290] As mentioned earlier, cooperatives play a major role in the top-down system of distribution of agricultural inputs, particularly fertilisers. On the other hand, however, their role as aggregators and marketers of wheat is rather limited. According to a 2012 survey, only 0.5 percent of wheat sales went through cooperatives, and more recent reports have confirmed that cooperatives continue to play a minor role in channelling sales as compared to private traders.[291]
The limited role played by cooperatives is largely due to their capacity and organisational shortcomings. Lacking financial resources and storage capacity, it is difficult for cooperatives to buy large amounts of wheat at harvest time and hold it until the right time for sale comes.[292] This hampers their effectiveness as aggregators and marketers – particularly as compared to traders (see below). Cooperatives also suffer from serious organisational deficiencies, including poor financial management and record keeping, as well as a limited knowledge of the products they handle.[293] Moreover, they are seen by some as excessively politicised and corrupt, as well as lacking in accountability to their members. For instance, a source who has worked with cooperatives in the past noted that many of them are not audited, regularly fail to pay dividends to their members and at times even receive bribes from traders.[294]
As a result of the cooperatives’ deficiencies, the aggregation and marketing segment of the value chain is largely dominated by private traders. Different types of traders are active in the chain – from local actors buying wheat at the farm gate and bringing it to local markets to aggregators buying wheat in medium-sized markets and selling it in larger cities (from Bale to Addis Ababa, wheat is likely to change hands at least three times).[295] These traders are often wealthy individuals (at times wealthy farmers), usually enjoying good connections to powerful actors in the areas where they operate.[296] These intermediaries are very effective in bridging the gap between suppliers (mostly smallholders) and their clients (wholesalers or agri-businesses) and thus provide a significant value added. Moreover, they do so amidst a number of growing challenges – most notably insecurity along transport routes, which has been increasing over recent years as conflict has spread to several regions of Ethiopia.
Despite facing challenges, traders are generally seen as the most powerful segment of the value chain.[297] The power of traders rests on a number of advantages that they have vis-à-vis their suppliers, their clients and/or their competitors. First of all, traders benefit from information advantages. For instance, farmers (especially smallholders) tend to lack knowledge about the quality of their produce and the demand for it in faraway markets, while larger buyers lack connections in local markets. Placed in between these layers, traders can exploit their knowledge of both sides to increase their bargaining power, for instance by keeping the farm gate price low even when the price of wheat is rising.[298]
In addition, traders tend to enjoy a financial advantage – partly thanks to their own wealth and partly thanks to their ability to access finance (see previous section). This financial capacity allows traders to outbid other potential buyers (e.g., cooperatives and/or agri-businesses that try to source directly from farmers), as well as to buy large amounts of wheat when prices are low, store it and then resell it at a later stage.[299] While storing for later resale is not per se a negative phenomenon (to the contrary, it can help to smoothen the difference between irregular supply constant demand),[300] it does offer opportunities for speculation, which are at times (though not always) seized by traders.[301] Moreover, the traders’ financial muscle allows them to provide credit to other actors in the value chain, thus putting themselves in a position of power. This happens most often with smallholder farmers at the very local level, to which traders provide credit in the form of advance payments.[302] At times, however, traders even provide credit to agri-processing businesses to buy wheat from them, particularly when they want to free their storage space ahead of a new harvest.[303]
Overall, thanks to their position as intermediaries and to their financial muscle, traders enjoy a particularly powerful position in the value chain, enabling them to ensure good profit margins for themselves. The cooperatives’ failure to act as effective aggregators of wheat and/or as representatives of farmers’ interests leaves space for traders to do business directly with many individual smallholder farmers. These farmers generally lack the market information and collective organisation needed to drive an effective bargain, and their lack of finance makes them reliant on advance payments that traders can and do provide. As a result, farmers largely become price takers, while traders enjoy more flexibility in setting the price at which they buy wheat.
Processing of wheat in Ethiopia takes place in two ways.[304] In rural areas, much of wheat that is produced and marketed is brought to the many small scale millers located in grain-producing areas.[305] These millers grind the wheat (and other wheat), usually with simple tools, and take a share of the product (often 10 percent) as a payment for their service. This method of milling and selling the product directly to customers has traditionally accounted for an estimated two-thirds of Ethiopia’s overall milling capacity.[306] On the other hand, in urban areas, milling is often done by a smaller number of larger flour factories, many of them located in Addis and in Oromia.[307] These millers purchase larger quantities of wheat (e.g., from traders, cooperatives or in the past also from the government), they grind it into flour, and they then sell it to downstream actors in the value chain – typically agri-processing businesses (e.g., bakeries, pasta factories, etc.) or wholesalers and retailers of flour, particularly in urban areas.
Large millers and agri-processing businesses occupy a rather difficult position along the value chain. On the supply side, these businesses face considerable challenges in securing inputs. At times, supply shortages mean that processors cannot buy the specific quality of wheat that they need for certain products. Even when wheat is available, its price over the past year has been extremely erratic, rising at times up to ETB 6.6k per quintal (almost three times as high as the minimum farm gate price set by the government in April 2023). These prices put a strain on businesses already suffering from serious working capital issues and rarely able to access loans from banks – partly because of the banks’ reluctance to provide cash and partly because these businesses’ assets (e.g., machinery) are often already collateralised for previous loans. Lacking access to credit, at times millers and processors resort to borrowing cash from traders (see above), which decreases their bargaining power. Compounding these difficulties in securing inputs, millers and processors have to face a competitive market downstream in the chain.[308] Many wholesalers and retails are active in this market, and with the purchasing power of the population eroding, they are under pressure to keep prices down to ensure that their products remain affordable.
Overall, this combination of a tight market on the supply side and a competitive one on the sales side squeezes the profit margin available to millers and agri-processors. This is exacerbated by the fact that most of these businesses currently operate well below their full capacity levels[309] – partly due to the difficulties in securing inputs, but partly also due to serious infrastructural challenges (e.g., frequent power cuts interrupting the functioning of their machines). Although the government has reportedly encouraged private sector activity in the agri-processing sector (e.g., by promoting investments), this segment of the value chain remains a difficult one to operate in.
After processing, wheat products (e.g., flour, bread, pasta, biscuits, etc.) are transported and sold to customers across the country (particularly in urban areas) through an extensive network of distributors and retailers. Profit margins in this segment of the value chain are reportedly limited – partly because of the competitive nature of the market, featuring a large number of suppliers and many small-scale agents acting as distributors, and partly due to the strong pressure to keep retail prices down, given the increasingly limited purchasing power of large segments of the population.[310] Over the past years, distribution efforts have also been often hampered by the conflicts spreading to new areas of the country – including most notably Oromia and Amhara, Ethiopia’s two largest regions, as well as the two largest producers of wheat. This has resulted in increased risks – and hence reduced profits. To offset, if not reverse, this trend, some of these businesses have reportedly engaged in illicit activities (e.g., smuggling) on the side.[311]
The effective functioning of this system has become increasingly important over the last few years, as demand for wheat products has steadily grown among the Ethiopian population. Consumption of wheat in Ethiopia has been rising at an estimated rate of nine percent per year, largely due to a mix of population growth, income growth and a growing preference among the population for wheat products, particularly in urban area (partly also as a result of the rising price of traditional products such as teff).[312] As of 2023, wheat represented the second most important consumption crop (after maize), accounting for 14 percent of the national calories intake.[313] While wheat represents an increasingly important consumption crop, however, some researchers caution that its promotion should not come at the expense of other agricultural products, such as vegetables and fruits, that have the potential to deliver both a differentiated diet for the population and good incomes for farmers.[314]