Chapter 6


Box 6.4: Economic justification of local purchases, the case of Ethiopia

The devaluation of the Ethiopian birr (ETB) in October 1992 has made the issue of local purchases particularly
relevant by increasing the competitiveness of local output. Although local grain prices still tend to be generally
above world market prices (except in the case of maize, see table below), it is the high cost accruing from
internal transport which gives local purchases a significant cost advantage.
 Table B6.4a: Fob. World Market and Local Grain Prices in 1992/93

 Local grain prices]) World market prices2)
 Commodities ETB/MT US-S/MT3) ETB/MT3) US-S/MT
 Wheat 1,050 210 700 140
 Maize 700 140 550 110
 Sorghum white 1,150 230 550 110
 1) Average market prices at different market centres in surplus producing areas, Jan. -March 1993
 2) 1992 average fob. world market prices, source: WFP
 3) at current exchange rate of 5 ETB/I US-S from October 1992

ITSH (costs for internal transport, storage and handling) range from 100 up to 300 US-S/MT, depending on the
distances from the ports and the road conditions. ITSH of about 90 US-$ accrue from the ports up to central
store houses from which secondary distribution takes place. The ITSH from the central stores to the final
distribution centres are assumed to be similar to the ITSH for locally procured food, to cover the distance
between purchasing and distribution place. Therefore, the local food prices can be up to 90 USS/MT above cif.
world market prices and still be competitive. The comparative cost advantages of local purchases are shown in
the following table.

 Table B6.4b: Cost Comparison: Conventional Food Aid Supplies Versus Local Purchases, 1992/93


From the analysis above it can be concluded that, for economic reasons alone, leaving aside any other aspects,
conventional food aid imports should be replaced by local purchases. Alone the funds spent for external and
internal transport for food aid imports would cover 90 % of the cost of purchasing local maize, or about 60 % of
the cost in the case of sorghum and wheat.

In spite of these advantages, it will, at least in the near future, not be possible to procure all food needed for
relief and FFW purposes through local purchases. Available market supplies are still limited and vary
significantly from place to place and season to season. However, it can be assumed that a substantial and
increasing volume of food can be procured locally, if funds are made available by donors.

Source: M. Metz, unpublished survey results.

In spite of the striking advantages of local purchases from a food security and development
perspective, there are also two major constraining factors limiting the potential scope of local
purchase operations:


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 Commodities Wheat Maize Sorghum
Costs US-S/MT US-S/MT US-$/MT
Av. fob. world market price 140 110 110
Cif. (overseas transport) 40 30 30
Cif. price imports 180 140 140
ITSH port to central store 90 90 90
Comparative costs: imports 270 230 230
Comparative costs:
Local purchases 210 140 230