FINANCIAL PERFORMANCE OF DRY COFFEE PROCESSING FIRMS IN OROMIA:

THE CASE OF WESTERN WALLAGA ZONE

A THESIS
PRESENTED TO
THE SCHOOL OF GRADUATE STUDIES
ALEMAYA UNIVERSITY

IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE DEGREE OF

MASTER OF SCIENCE IN AGRICULTURE

(AGRICULTURAL ECONOMICS)

BY

GARI DUGUMA

JUNE 2002
 ALEMAYA UNIVERSITY

SCHOOL OF GRADUATE STUDIES

Financial Performance of Dry Coffee Processing Firms in Oromia:

The Case of Western Wallaga Zone

By

Gari Duguma

Approved by Board of Examiners:

___________________________________ _____________
Chairman, Board of Examiners Signature

___________________________________ _____________
Major Advisor Signature

___________________________________ _____________
Internal Examiner Signature

___________________________________ _____________
External Examiner Signature
 ACRONYMS AND ABBREVIATIONS

AIDB Agricultural and Industrial Development Bank

AISCO Agricultural Input Supply Corporation
CBD Coffee Berry Disease
CBE Commercial Bank of Ethiopia
CSA Central Statistical Authority
CTDA Coffee and Tea Development Authority
DBE Development Bank of Ethiopia
ECEE Ethiopian Coffee Export Enterprise
ECMC Ethiopian Coffee Marketing Corporation
ECPSE Ethiopian Coffee Purchase and Sale Enterprise
FAO Food and Agricultural Organization
GDP Gross Domestic Product
HSIDA Handcraft and Small-scale Industry Development Agency
IAR Institute of Agricultural Research
Kg Kilogram
Km Kilometer
MCTD Ministry of Coffee and Tea Development
MOA Ministry of Agriculture
NBE National Bank of Ethiopia
0C Degree Centigrade
NCB National Coffee Board
OBPED Oromia Bureau of Planning and Economic Development
SNNRS Southern Nations and Nationalities Regional State
VIF Variable Inflation Factor
WWZPEDO West Wallaga Zone Planning and Economic Development Office
 BIOGRAPHY

Gari Duguma Fufa was born in Oromia, Western Wallaga Zone, Najjo District, Warkie Kujur

Kebele, in November 1975. He attended Warkie Nasi Elementary School during 1984-1986,

Lalisa Alaltu Junior Secondary School from 1987-1988 and Najjo Senior Secondary School

from 1989 to 1992.

In September 1993, he joined Alemaya University of Agriculture and graduated with B.Sc.

degree in agricultural economics in July 1996. Soon after graduation, Oromia Bureau of

Planning and Economic Development Office, Western Wallaga Department, employed him as a

production-planning expert. In September 1999, that is, after three years of service, he joined the

School of Graduate Studies, Alemaya University, for M. Sc. studies in agricultural economics.

ii
 ACKNOWLEDGMENTS

My heartfelt thanks and sincere appreciation are extended to my advisor Dr. Teressa Adugna for

his encouragement, support and continual guidance and understandings throughout the research

work. I convey my sincere gratitude to Mr. Abdissa Dufera, West Wallaga Finance Office, Mr.

Tesfa Lamu and Mr. Tesfaye Soressa, West Wallaga Water and Minerals Development Office

for their continuous support and encouragement especially during data collection.

I am greatly indebted to my colleagues, Mr. Berhanu Badhasa, Mr. Anbacha Olika, Mr. Tegenyi

Guddeta, Mr. Getachew Bashargo, and Mr. Akililu Ittafa for their valuable comments,

unreserved brotherly advice and encouragement during my studies.

I would like to appreciate Oromia Bureau of Planning and Economic Development for allowing

me to join the School of Graduate Studies at Alemaya University and covering my living

expenses during the study period. I would also like to extend my special thanks to Mr. Alamayo

Sambi and Mr. Ahmed Tusa from OBPED for their cooperation in providing computing

facilities and other materials during the thesis write up.

Many thanks are extended to my mother Kulani Waqwaya and my brother Galana Duguma for

their continuous encouragement and moral support during my course and research work.

iii
 TABLE OF CONTENTS

ACRONYMS AND ABBREVIATIONS .............................................................................i

BIOGRAPHY ..................................................................................................................... ii
ACKNOWLEDGMENTS ................................................................................................. iii
TABLE OF CONTENTS....................................................................................................iv
LIST OF TABLES ............................................................................................................ vii
LIST OF FIGURES............................................................................................................ ix
LIST OF TABLES IN THE APPENDIX.............................................................................x
ABSTRACT...................................................................................................................... xii
1. INTRODUCTION............................................................................................................1
1.1 Background ................................................................................................................1
1.2. Statement of the Problem..........................................................................................5
1.3 Objectives of the Study..............................................................................................6
1.4 Significance of the Study ...........................................................................................6
1.5 Scope and limitations of the Study ............................................................................6
1.6 Organization of the Thesis .........................................................................................7
2. THE COFFEE SUB-SECTOR ........................................................................................8
2.1 Coffee Production in Ethiopia ...................................................................................8
2.2 Coffee Processing ....................................................................................................12
2.3 Size and Shape of Coffee Bean................................................................................13
2.4 Institutional Framework...........................................................................................14
3. LITERATURE REVIEW...............................................................................................17
3.1 Characteristics of Agro-industries ...........................................................................17
3.2 Agro-industry and Agricultural Development .........................................................18
3.3 Efficiency versus Size of Enterprise ........................................................................21
3.4 Methodological Issues in Performance Analysis .....................................................25
3.4.1 Ratio Analysis ...................................................................................................25
3.4.2 Production Function Analysis...........................................................................26
3.4.3 Break-even Analysis .........................................................................................29

iv
4. METHODOLOGY.........................................................................................................31
4.1 Description of the Study Area..................................................................................31
4.1.1 Physical Characteristics ....................................................................................31
4.1.2 Population .........................................................................................................34
4.1.3 Agriculture ........................................................................................................34
4.1.4 Mining and Industry..........................................................................................36
4.1.5 Social Services ..................................................................................................37
4.2 Data Requirements...................................................................................................39
4.3 Sample Selection and Data Collection Methods......................................................40
4.4 Methods of Data Analysis........................................................................................40
4.4.1 Descriptive Analysis .........................................................................................40
4.4.1.1 Ratio Analysis ............................................................................................41
4.4.1.2 Break-even Analysis ..................................................................................43
4.4.1.3 Standards of comparison............................................................................43
4.4.1.4 Sample Differences ....................................................................................44
4.4.2 Econometric Analysis .......................................................................................45
4.4.2.1 Production Function Analysis....................................................................45
4.4 2.2 Profit Function ...........................................................................................47
5. RESULTS AND DISCUSSION ....................................................................................48
5.1 Results of Descriptive Analysis ...............................................................................48
5.1.1 Processed Coffee Output...................................................................................48
5.1.2 Costs of processing plants.................................................................................49
5.1.3 Group Comparison of Dry Coffee Processing Firms ........................................52
5.1.4 Major Problems.................................................................................................53
5.1.5 Balance Sheet and Financial Analysis ..............................................................54
5.1.6 Income Statement and Profitability Analysis....................................................57
5.1.7 Group- and Inter-Temporal Comparison of Profitability..................................59
5.1.8 Efficiency Analysis ...........................................................................................61
5.1.8.1 Productivity of Labour ...............................................................................61

v
 5.1.8.2 Productivity of Fixed Capital.....................................................................64
5.1.8.3 Productivity of Dry Cherry ........................................................................69
5.1.8.4 Group Comparison of Firms’ Productivity ................................................71
5.1.8.5 Inter-temporal Comparison of Factor Productivity....................................73
5.1.9 Break-even Analysis .........................................................................................75
5.2 Econometric Results ................................................................................................77
5.2.1 Production Function..........................................................................................77
5.2.2 Profit Function ..................................................................................................81
6. SUMMARY, CONCLUSIONS AND POLICY IMPLICATIONS ...............................84
6.1 Summary ……………………………………………………………………….84
6.2 Conclusions and Policy Implications…………………………………………..85
REFERENCES ..................................................................................................................88
APPENDICIES ..................................................................Error! Bookmark not defined.

vi
 LIST OF TABLES
Table 1. Number of Coffee Processing Firms in Oromia by Zone, Type of Firm

and Ownership (2000) .................................................................................................... 4

Table 2. Volume of Coffee Exported from Ethiopia, 1989-1999 .................................................. 9

Table 3. Value of Coffee Exported from Ethiopia by Type, 1989-1999 ..................................... 10

Table 4. Coffee Supplied to Central Markets by Regions and Zones, 1996-2000....................... 11

Table 5. Summary Statistics of Processed Coffee by Firm Size Groups, 1996-2000.................. 48

Table 6. Summary Statistics of Annual Fixed Costs by Firm Size Groups, 1996-2000............. 50

Table 7. Summary Statistics of Components of Variable Costs of Dry Coffee Processing

Firms by Size Groups, 1996-2000 ................................................................................ 52

Table 8. Mean Comparison Between Large and Small-sized Dry Coffee Processing Firms....... 53

Table 9. Major Problems of Small and Large Coffee Processing Firms...................................... 53

Table 10. Balance Sheet for Small and Large Groups of Dry Coffee Processing

Firms, December 31, 2000............................................................................................ 55

Table 11. Financial Ratios for Small and Large Coffee Processing Firms .................................. 56

Table 12. Income Statement for Small and Large Coffee Processing Firms, 1996-2000............ 58

Table 13. Profitability of Individual Firms (the Ratio of Net Profit to Sale), 1996-2000 ........... 59

Table 14. Profitability Ratio by Group of Dry Coffee Processing Firms

(Ratio of Net Profit to Sale), 1996-2000....................................................................... 60

Table 15. Rate of Return on Investment for Groups of Dry Coffee Processing Firms ................ 61

Table 16. Number of Coffee Processing Firms in Different Quartiles of Labour

Productivity in Relation to Net Output ......................................................................... 62

vii
Table 17. Number of Coffee Processing Firms in Different Quartile of Labour

Productivity Measured as Net Value-added per Labour ............................................... 63

Table 18. Number of Dry Coffee Processing Firms by Fixed Capital Productivity Ratio.......... 65

Table 19. Capacity Utilization by Dry Coffee Processing Firms (1996-2000)................................

(Percentage Range) ....................................................................................................... 66

Table 20. Number of Firms under Different Quartile Range for Dry Cherry Productivity ......... 70

Table 21. Group Comparison of Factor Productivities of Small and Large Firms, 1996-2000... 73

Table 22. Number of Firms by Ratios of Break-even to Actual Output ...................................... 76

Table 23. Values of Variable Inflation Factors for Selected Explanatory Variables ................... 79

Table 24. Estimation Results of Cobb-Douglas Production Function

for Small and arge Firms............................................................................................... 80

Table 25. Regression Results of Profit Function for Dry Coffee Processing Firms .................... 82

viii
 LIST OF FIGURES

Figure 1. Map of Oromia Regional State ...................................................................................32

Figure 2. Map of West Wallaga Administrative Zone................................................................33
Figure 3. Trend of Rate of Return on Investment ......................................................................61
Figure 4. Trend for Dry Cherry Productivity Ratios..............................................................…74
Figure 5. Trend for Labour Productivity Ratios.........................................................................74
Figure 6. Trend for Fixed Capital Productivity Ratios...............................................................75

ix
 LIST OF TABLES IN THE APPENDIX

Table 1. Capacity Utilization of Coffee Processing Firms .......................................................... 93

Table 2. Ratios of Net Output and Net Value-added to Labour by year ...................................... 94
Table 3. Ratios of Net Output and Net Value-added to Fixed Capital by Year........................... 95
Table 4. Ratios of Net Output and Net value-added to Dry Cherry by Year ............................... 96
Table 5. Capital to Output and Capital to Labor Ratios for Groups of Firms by Year................ 97
Table 6. Data Used for Break-even Analysis............................................................................... 98
Table 7. Profit of Dry Coffee Processing Firms per Annum for Small and Large Firms ............ 99
Table 8. Data Used for Regression Analysis ............................................................................. 100
Table 9. Results of Stepwise Regressions for Production Function of Dry Coffee .........................
Processing Firms, 1996-2000 .................................................................................... 102
Table 10. Data on Fixed Capital, Dry Cherry and Labour for Small and Large
Dry Coffee Processing Firms by Year....................................................................... 103
Table 11. Data on Output and Working Capital for Small and Large Dry Coffee
Processing Firms, 1996-2000 .................................................................................... 104
Table 12. Data on Fixed Cost, Auxiliary Materials and Labour Cost for Small
and Large Firms, 1996-2000 ..................................................................................... 105
Table 13. Data on Tax and Cost of Dry Cherry for Small and Large Firms, 1996-2000.......... 106

x
xi
 Financial Performance of Dry Coffee Processing Firms in Oromia:
The Case of Western Wallaga Zone
By
Gari Duguma

Research Advisor: - Dr. Teressa Adugna (PhD)

ABSTRACT
Despite the expansion of coffee processing firms, there has been a serious doubt on whether
coffee-processing sub-sector has been performing well. In order to clear this doubt periodic and
systematic evaluation of the actual performance of coffee processing firm is imperative, but
currently lacking. This study was, therefore, designed to evaluate the financial performance
(profitability and efficiency) of dry coffee processing firms in western Wallaga zone of Oromia
National Regional State.

Stratified random sampling based on probability proportion to size method was used to select
24 dry coffee processing firms. A five-year (1996-2000) cross-section and time-series data were
collected. The performance of the firms was analyzed and interpreted using financial,
profitability, efficiency and break-even analyses, besides the estimation of econometric models
of Cobb-Douglas production function and profit function.

Although both groups of firms had safe ratios, larger firms were slightly better off in
maintaining the solvency of their business and their financial position. The rate of return to
investment was extremely low, much lower than the interest rate (10 percent), in both groups of
firms, but higher for large-sized ones. The productivities of fixed capital and labour were higher
in the large-sized group. The break-even volumes of almost all dry coffee processing firms were
found to be less than their actual output. Even though there was under capacity utilization of
firms, the analysis showed that the firms were profitable at their actual level of output.

The Cobb-Douglas production function analysis has revealed that dry cherry, fixed capital and
working capital significantly influenced the output of dry coffee processing firms. The effect of
labour input was found to be insignificant. The sum of the significant coefficients was greater
than one implying that the sample dry coffee processing firms were characterized by increasing
returns to scale. Furthermore, results of profit function showed that three variables: fixed
capital, cost of causal labour and/or cost of auxiliary materials were found to be significantly
affecting variation in profit of sample dry coffee processing firms. The above findings have a
number of policy implications that would contribute to better financial performance of the
processing firms.

xii
1. INTRODUCTION

1.1 Background

Ethiopia is one of the least developed countries of the world with an average per capita

income of 100 dollar in 1998 and with an average annual gross domestic product (GDP)

growth rate of 4.9 percent during 1990-1998 period (World Bank, 2000). The country’s

economy is highly dependent on agriculture. The sector contributes about 40 percent to

GDP, provides both direct and indirect employment to about 85 percent of the population

and accounts for more than 90 percent of the country’s export earnings. It is widely

accepted that the development of the agricultural sector has a crucial role in determining

the course of industrialization.

The agricultural sector is crucially important to produce high quality export crops, which

have significant demand in the world market. Although many crops are grown in the

country, she is known in exporting only a few agricultural products. Out of these a few

agricultural export products, coffee is the single most important one that is contributing

significantly to the country’s economy. It is playing the major role in generating foreign

exchange that is required to finance imports of essential goods and other international

commitments. According to NBE (2000), the average value of exported coffee was 2233

million Birr per annum during the 1996-2000 and accounted for 53 percent of the total

commodity export value of the country.

In addition to being the single most important export crop of the country, it significantly

contributes to government revenue in the form of taxes and generates significant amount

1
of employment opportunities. By and large, the coffee sub-sector accounts for 81.2

percent of the total export trade tax revenue (Mazmure, 1990). It was estimated that about

7.5 million of the country’s population (13 percent) lead their livelihood directly or

indirectly by coffee production and marketing (Itana, 1987).

Coffee is grown in many parts of the country. However, the major producing areas are

Sidamo, Kefa, Wallaga, Iluabbabora, and Hararghe which taken together account for

more than 85 percent of national production (World Bank, 1987). The same source

indicated that more than 90 percent of national coffee was produced by private farmers, 2

percent by cooperatives, 5 percent by state farms and the rest 3 percent was estimated to

be the wild coffee. In most of the areas, coffee is inter-cropped with staple food crops for

subsistence or as cash crops separately (Berhanu, 1989).

The objectives of the government with reference to the coffee sub-sector are to maximize

foreign exchange earnings and meet domestic demand for coffee. The government, thus,

encourages the expansion of coffee production and processing systems in the major parts

of the Ethiopian rural economy (MCTD, 1987).

Coffee processing firms are rural small-scale industries, which help to process the bulk

cherry of coffee whole into a suitable and reduced form and thereby make coffee beans

ready for domestic consumption and export. These processing firms are installed in most

of the coffee growing areas of the country. Their locations are intended to avoid the

unnecessary transportation costs associated with moving unwanted parts and to improve

2
the quality and quantity of coffee bean supplied to central market for export.

There are basically two methods of coffee processing which differ in complexity,

resultant coffee bean and liquor. These are the wet and dry methods (Mburu, 1999). The

former method uses red cherry as its main raw material and produces washed coffee. This

accounts for about 16 percent of the total coffee export volume of Ethiopia (MCTD,

2000). The dry coffee processing method uses dry coffee as its main raw material and

produces the unwashed type. This accounts for about 84 percent of the export volume of

the country, a limited amount thereof is in the form of murbush. The sun-dried coffee

processing, thus, accounts for the largest processing activity and plays a significant role in

the national economy.

In Oromia both dry and wet coffee processing firms are available. Out of 12 zones of

Oromia regional state, 8 of them have coffee processing firms. From a total of 339 and

192 dry and wet coffee processing firms in the region, 115 and 22 are found in west

Wallaga Zone, respectively (see Table 1). About 60 percent of dry coffee processing

firms in Oromia was located in Jima and West Wallaga Zones while the rest 40 percent

was found in Iluabbabora, Borana, Bale, West Hararghe, East Wallaga, and Arsi

administrative zones. Out of the total dry coffee processing firms in Oromia, 243 and 15

were owned by private and service cooperatives, respectively.

3
Table 1. Number of Coffee Processing Firms in Oromia by Zone, Type of Firm and

Ownership (2000)

Ownership
No Zone Type of firms# Service Co
Private operatives Others* Total
1 Jima DCPF 78 9 34 121
WCPF 57 28 16 101

2 DCPF 14 na 21 35
Iluabbabora WCPF 13 4 na 17

3 West DCPF 88 5 27 120

Wallaga WCPF 20 2 na 22

4 Borana DCPF 23 na 2 25
WCPF 14 6 na 20

5 Bale DCPF 6 na na 6
WCPF 2 na na 2

6 West DCPF 15 1 4 20
Hararghe
7 East DCPF Na na 1 1
Hararghe
8 East DCPF 3 na na 3
Wallaga
9 Arsi DCPF 3 na na 3
Total DCPF 230 15 89 334
WCPF 106 40 16 162
#DCPF = dry coffee processing firms; WCPF = wet coffee processing firms; na = not available.
*Others include state farms and Ethiopian Coffee Purchase and Sale Enterprise.
Source: Oromia Bureau of Agricultural Development, 2001

4
1.2. Statement of the Problem

Dry coffee processing firm has a significant contribution in the country's socio-economic

development by bringing about the benefits of value-added and employment (MCTD,

2000). In order to properly exploit these benefits, substantial investment has been

undertaken in this sub-sector. Consequently, there has been high expansion of the firm

during the last a few years. In line with the requirements of such a firm, the country has also

taken various improvement measures in order to increase coffee output. These measures,

besides improving the quality of the raw material and promoting marketing of processed

coffee, include planting of disease resistant strains and fighting of coffee berry disease

(CBD) and pests.

However, there has been a serious doubt whether the performance of the coffee-

processing firms has been satisfactory (World Bank, 1987). In order to clear this doubt, it

is essential to make a periodic, systematic evaluation of their actual financial

performance, comprehensive review of their goals and strategies. Such an evaluation

helps to learn how effectively the coffee processing firms have performed, whether they

have achieved their objectives, identify reasons for poor/good performance and to

capitalize on the things that where done well. Such information could facilitate corrective

measures to reverse misdirected or misplaced efforts, and guide future planning and

decision-making in view of improving future performance of the firms. The study was,

therefore, designed to assess the performance of dry coffee processing firms in West

Wallaga Zone of Oromia Regional State.

5
1.3 Objectives of the Study

The overall objective of this study was to evaluate the financial performance of dry coffee

processing firms. The specific objectives were:

1. to examine the physical and financial performance of dry coffee processing firms,

2. to investigate factors influencing the level of production and profit of the firms, and

3. to identify their major problems/constraints.

1.4 Significance of the Study

The information generated by this study could be useful for the administrators of coffee

processing firms, policy makers, development planners, and financial institutions to have

an in-depth understanding regarding the physical and financial performance/efficiency of

the firms. This would in turn help to formulate and implement effective measures and

adjustments directed to improve future performance of the firms and thereby their

contributions towards the country’s economic development. Moreover, the study could

serve as a springboard for further comprehensive study.

1.5 Scope and Limitations of the Study

Measuring the financial performance of all dry coffee processing firms in the whole

Oromia region would have been much important for accuracy of the estimates and

reliability of inferences. But due to insufficient financial resource and data limitations, the

study was restricted to sampled coffee processing firms in the western part of the

6
Regional State, western Wallaga Zone. The other major limitations of this study were

non-reliability, inadequacy, and in few cases non-existent of properly recorded data. The

record keeping system of the firms’ was extremely poor. Data regarding inputs, like

number of labourers employed and numbers of various auxiliary materials used were

either at all unavailable or inappropriate.

1.6 Organization of the Thesis

The thesis is organized into five main chapters. The first chapter deals with the

introductory part, which includes background, statement of the problem, objectives,

significance, scope and limitations of the study. In the second chapter, the coffee sub-

sector is reviewed with major emphasis on coffee production, processing, marketing,

export, and institutional framework. The review of literature both theoretical and

empirical studies is presented in chapter three. The methodology of the study is treated in

chapter four. Chapter five deals with results and discussion. The final chapter presents

summary of the findings of the study, conclusions and some policy implications.

7
2. THE COFFEE SUB-SECTOR

2.1 Coffee Production in Ethiopia

Yemen was the principal source of coffee arabica germplasm before exploration began in

Ethiopia a few decades back (Meyer, 1968). Although early travelers and writers

advocated many years ago that the arabica coffee type originated in Ethiopia, after a more

careful study of the biology of this rain forest plant, there was little to continue for careful

observer that Desert Mountains of the Yemen should in any way be considered to be the

native habitat of an Ethiopian genetic center of coffee arabica.

The total area under coffee in Ethiopia is estimated to be 321,000 hectare from which

about 151,000 tones of coffee is produced annually (CSA, 2001). About 97 percent of

total coffee production and 99 percent of the total area cultivated with coffee in the

country were under smallholder agriculture (MCTD, 1989). Comparatively coffee-

holding sizes are small averaging from 0.6 hectare in Sidamo zone to 1.2 hectare in

Illuabbabora and 1.4 hectare in Wallaga zone (MCTD, 1989).

Coffee is supplied to central market annually from different parts of the country. It is

exported in two forms, namely unwashed and washed coffee. The unwashed coffee

accounts for the largest proportion in foreign exchange earning of the nation. As indicated

in Table 2 and Table 3, the proportion of unwashed coffee exported was greater in

volume and value during 1989-1990 than that of the washed coffee, though washed

coffee fetches the highest price on the world market.

8
About 84 percent of the total coffee export volume was supplied as unwashed type, while
16 percent was washed coffee. Similarly, unwashed coffee accounted for 79 percent of
the value of coffee export (Table 3).

Table 2. Volume of Coffee Exported from Ethiopia, 1989-1999

(in Tons)

Year Washed Unwashed Total

Quantity
Quantity % Quantity %
1989 16147 21 61560 79 77707
1990 16908 20 66342 80 83250
1991 11415 21 42042 79 53457
1992 7993 22 28084 78 36077
1993 9344 24 29916 76 39362
1994 8643 12 64361 88 73004
1995 8841 11 69579 89 78420
1996 13363 13 88460 87 101823
1997 19486 17 98493 83 117979
1998 15063 12 106303 88 121366
1999 16814 16 86609 84 103423
Total 144017 16 741749 84 885866
Source: MCTD, 2000

There are about 18 zones of the country that regularly supply different quantities of coffee

for central markets. In the year 1999, West Wallaga zone ranked first in supplying coffee.

For instance, according to CSA (2001), the largest supplier of coffee to the central market

was West Wallaga zone with the total amount of 27,709 tons. It ranked first by covering

16.9 percent of the national supply and followed by Gedo, Jima and Sidama zones with

their respective shares of 16.4, 15.5 and 12.3 percent, respectively. The four zones

altogether accounted for 61 percent of the total supply of processed coffee of the nation.

9
There are three regions supplying coffee to the central market, namely Oromia, Southern

Nations and Nationalities Regional State (SNNRS) and Gambella Peoples Regional State.

Oromia is the largest supplier of coffee (61 percent) followed by Southern Nations and

Nationalities Regional State (37.3 percent) and Gambella Peoples Regional State (1.6

percent) (Table 4).

Table 3 Value of Coffee Exported from Ethiopia by Type, 1989-1999

(in million Birr)

Year Washed Unwashed Total

Value
Value % Value %
1989 62.2 25 184.4 75 246.6
1990 38.3 22 135.9 78 174.2
1991 30.9 25 91.2 75 122.1
1992 26.2 29 63.9 71 90.1
1993 52.3 35 97.6 65 149.9
1994 31.0 20 121.2 80 152.2
1995 41.3 14 259.3 86 300.6
1996 43.1 15 236.4 85 279.5
1997 67.4 19 289.2 81 356.6
1998 83.3 20 327.5 80 410.8
1999 67.1 24 208.1 76 273.2
Total 543.1 21 2014.7 79 2657.8
Source: MCTD, 2000

10
Table 4. Coffee Supplied to Central Markets by Regions and Zones, 1996-2000

(in Tons)

Region/ Zone# 1996 1997 9998 1999 2000 1996- % of total

2000
1.Oromia 71996 105219.4 108855.6 94997.0 93417 474485 61
1.1. East and
W/Wallaga 27837.0 30257.1 35429.1 18258.0 27913.0 139694.2 17.9
1.2 Illubabor 29821.0 11867.5 13173.7 14809.0 9153 78824.2 10.1
1.3 W/ Shoa NA* NA 8.4 NA NA 8.4 0
1.4 W/Hararge 5774.0 8472.7 7921.6 10755 9665 42588.3 5.5
1.5 E/Hararge 2213.0 26.4.4 3232.4 4037.0 2752.0 12261.2 1.6
1.6 Bale 79 2641.6 3070.3 3428.0 3651.0 12869.9 1.6
1.7 Borana 6272 7137.2 5761.3 9131 10461 38762.5 6.0
1.8 S/ Shoa NA 6864.7 7774.8 7063.0 4290.0 25992.5 3.3
1.9 Jimma NA 35374.2 32511.0 27405.0 25498 120788.2 15.5
1.10 Arsi NA NA NA 110.0 34 144 0.0

2. SNNRS 67757.0 57196.7 43839.7 51017.0 71018.0 290828.4 37.3

2.1 Gurage, Ha
di., Kamb. and
A.T. 3669.0 NA NA NA NA 3669.0 0.5
2.2 Sidama and 48374.0 35139.3 28072.1 37643.0 47232.0 196460.4 25.2
Gedio
2.3 South Omo 4471.0 5826.0 3845.0 3843.0 3714.0 21699 2.8
2.4 North Omo 2172 1824.4 476.1 1522.0 1668 7662.5 1.0
2.5 Shekicho
and Kaficho 9071.0 6207.8 6051.9 3433.0 7438.0 32201.7 4.1
2.6 Amaro NA 1266.0 494.1 985.0 542.0 3287.1 0.4
2.7 Bench NA 6933.2 4909.5 3591.6 7437.0 22871.3 2.9

3. Gambella 1496.0 3034.2 2552.7 2183.0 2925.0 12190.9 1.6

Others** NA 852.0 119.5 74.0 62.0 1107.5 0.1
Total 141249.0 165535.5 1553367.5 148271.0 164435.0 778614.8 100
#SNNRS=Southern Nations and Nationalities Regional State, Hadi=Hadiya, Kamb.= Kambata, A.T.=
Alaba Tembaro.
*NA=Data not available.
**Coffee caught from the illegal traders and supplied to central market.
Source: CSA, 2001

11
2.2 Coffee Processing

Basically, there are two types of coffee processing technologies, which differ in their

sizes and structures. These are the wet and dry coffee processing methods. In the first

process, the ripe coffee fruit is squeezed in a pulping machine, which removes most of

the soft outer pulp, or fibrous fruit flesh leaving a slippery exposed to layer of mucilage.

Since this cannot rapidly be dispersed in water, it is removed by different methods.

Leaving the clean parchment layer, the product is called washed coffee because the

mucilage is finally removed by washing with water. Next the coffee is dried to about 12

percent moisture content, the thin yellowish parchment layer separated from the seed by

shrinkage and the layer is removed by hulling machine and the finished green coffee

results (Ukers, 1965).

In the dry coffee processing method, the fruit is allowed to remain on the tree, past fully

ripe stage and is partially dried before harvesting. Following harvesting, it is dried to

about 12 percent moisture in the whole fruit. Drying is mostly done on the ground and the

cherries prepared for sun-dried coffee /dry cherry are locally called Jenfal. The next step

after the cherries are supplied to the processing station is that the entire outer layers are

removed at one time by hulling and the finished product is obtained directly (Ukers,

1965).

Dry coffee processing plant is relatively small in size and requires lower cost of

investment. The processing activity has to follow certain procedure to reach the ultimate

12
end product. The hulling operation screws with helical pitch increasing towards the

discharge end. The 36-inch long screw rotates within matching concave covers. The top

cover is held down with quick opening clamps. Hulling is achieved by creating friction

among the beans lying along the screw. The broken parts of the parchment along with

dust are forced to fall through a perforated steal plate at the bottom by means of an air

sanction to cyclone collector. A weight loaded discharge gate regulates the backpressure

on the issuing beans so that their residence time in the cylinder is regulated in accordance

with hulling required. As beans are discharged out of the discharge counter, current

airflow carries pieces of parchment.

The machine that removes the dried skin, pulp and parchment from the dried cherry

resembles the hulling mechanism except that it has an assortment of star shaped chrome

iron screws rotating at 200 rotation per minute between protecting steel staves from the

housing. This buffering arrangement tears the husk of the dried cherries as they move the

machine. Openings in the staves allow the broken pieces to be drawn through and also

help by the movement of air to remove the fractional heat of hulling.

2.3 Size and Shape of Coffee Bean

The size and shape of coffee beans are influenced by environmental growth

circumstances. But the most common bean is oval with one flat face. The rounded back

portion may be a shallow portion of an ellipse or it may be quite rounded.

13
Bean shapes may be pointing; boating shapes with tips curling in pulp to round long and

short. Aside from these variations, there is another distinctly shaped bean, pea berry that

occurs in small percentage in every normal crop. The pea berry contains only one side

within the coffee cherry and its rounded having no flat side (Michael, 1963).

Ukers (1965) stated that the pea berry is the same in cup quality as the paired flat-faced

bean. However, in Central America the pea berry is called “Crocole” or “Snail” in

Spanish and carries the connection that it is a premium quality bean. Pea berries because

they are round roll butter and some believe that this butter flow during roasting

contributes to better heat transfer and a more even, and a more developed, roast.

Elephant seed is another type of coffee beans, which are two seeds rolled into one and

have an uneven thin walled shaped and are usually large. In addition, tringe, which is

immature or broken beans, is also available. These both types of beans are separated out

from the normal one (Michaiel 1963). On the other hand, the weight of a coffee bean

varies from 0.1 to 0.2 gram, averaging 0.15 gram. The range of bean length from one tree

varies from 5.3 millimeters to 12 millimeters with an average of 9.8 millimeters

depending on tree and picking (Harare, 1962).

2.4 Institutional Framework

The importance of coffee in the Ethiopian economy is so great that a separate

governmental institution have been established at national level from time to time. This

14
institutional framework within which the coffee sub-sector operates has remained

unstable due to changes in organizational structure over time.

The National Coffee Board of Ethiopia (NCB) was the first institution responsible for

coffee. The board was established in 1957 with the aim of upgrading coffee quality,

stimulating cooperative production, establishing marketing associations, conducting

research and dissemination of information on coffee production, processing and

marketing. During that time, excise-tax on coffee export, that is, Birr 3.00 per quintal of

coffee exported was used to achieve the institutional goal. In 1975, the Ethiopian Coffee

Marketing Corporation (ECMC) was established under the NCB to mainly strengthen

participation of the government on coffee marketing. The major responsibilities of ECMC

were collecting, processing, transporting and exporting of sun-dried coffee. The washed

coffee had been entirely exported by ECMC until the end of 1993.

The Coffee and Tea Development and Marketing Authority was established in 1978 to

promote development and marketing activities. In 1979, the Ministry of Coffee and Tea

Development (MCTD) was established with broader roles. The objectives for the

establishment of the ministry were to assist the production of coffee in order to increase

the quantity of Ethiopian coffee, purchase, process and increase coffee exports to

maximize the country’s foreign exchange earnings. In addition, it aimed in increasing

farm households’ coffee production as well as diversification to other commercial crops

and thereby raise their standard of living, to encourage the production of tea and to

improve its quality for domestic consumption and export (Negerit Gazeta No. 39/80).

15
In the process of achieving its objectives, the MCTD was supported by the Ministry of

Agriculture (MOA), Agricultural Input Supply Corporation (AISCO), the Institute of

Agricultural Research (IAR), Agricultural and Industrial Development Bank (AIDB), and

Commercial Bank of Ethiopia (CBE). The MCTD became Coffee and Tea Development

Authority (CTDA) in 1993 and lost its control over the ECMC. In November 1993, the

ECMC was restructured into two enterprises; the Ethiopian Coffee Purchase and Sale

Enterprise (ECPSE) and the Ethiopian Coffee Export Enterprise (ECEE) each with their

respective objectives.

ECPSE was established with the objectives of stabilizing domestic coffee markets

through purchasing coffee locally, improving coffee hulling centers, presenting hulled

coffee to auction market, recollecting coffee husk for sale, and/or manufacturing it as fuel

material for market with an authorized initial capital of Birr 6.99 million. The objectives

of ECEE were purchasing coffee at auction market, processing coffee at the level of

export standard, providing coffee processing and storage services, and recollecting coffee

husk for sale and/or by any means manufacture it as fuel material for market with an

authorized initial capital of Birr 2.93 million.

16
3. LITERATURE REVIEW

The chapter addresses the characteristics of agro-industries and their contribution to

agricultural development and employment. Attempt was also made to review theoretical

and empirical studies on relative efficiency of small and large enterprises and on

methodological issues in business performance analysis.

3.1 Characteristics of Agro-industries

Agro-industry is distinguished from the other manufacturing industries by an agricultural

origin of most of its material inputs. Because of a wide variety of the industries using

agricultural raw materials, it is difficult to generalize their characteristics. However, it is

desirable to examine some of the main characteristics of these industries especially in

comparison with those using non-agricultural raw materials and their suitability for

establishment in developing countries.

Agricultural raw materials and unskilled labour are the only factors of production

available abundantly in most of these countries. Industries that maximize total output and

returns to the scarce resources in combination with as much as possible of the abundant

raw material and unskilled labor are the most suitable industries for establishment in less

developed countries (FAO, 1998). In this respect a review of the main characteristics of

different industries in relation to their suitability for establishment in such countries

indicates that most industries combine both advantages and disadvantages. It was also

noted that the potential advantages could be realized, if they are efficiently operated.

17
In describing the structural characteristics of Spanish agro-industry, Apezteguia and

Garate (1997) indicate that the size of this industry is small whether measured by the

number of workers per firm or by production value per firm as compared to national

industrial average. Furthermore, the apparent productivity of the labour factor per

employment unit as well as per hour worked is lower than the industrial average. Lower

intensity of physical and human capital can be accounted for low productivity in agro-

food production. Lack of technological development in this industry prevents it from

increasing productivity and efficiency by means of innovation in processes and above all

in products.

Many agro-industries have lower capital intensity than other industries and their need for

scarce labour is often lower (FAO, 1998). In most of them, small plant may be

economically efficient, where the domestic market is limited by low purchasing power

and also some times by small size of population in developing countries.

3.2 Agro-industry and Agricultural Development

Agro-industry is the generic term applied to the industrial processing of raw materials and

intermediate products derived from the agricultural sector (FAO, 1998). The industries

comprise a very varied group. They range from simple preservation, such as sun drying

and operations closely related to harvesting, to the production by modern capital-intensive

methods of articles.

18
To create strong and independent economy, the development of heavy industry is

important and indispensable. But for a developing country, like Ethiopia, where

agriculture is the dominant sector and capital is a major bottleneck, the development of

small-scale industries, which are highly integrated with agriculture, is much more feasible

(FAO, 1998).

Heavy industry can only vigorously advance when agriculture and small-scale industry

have become firm basis for it. According to Duan (1970), ignoring the necessary link

between agriculture and small-scale industry on one hand and heavy industry on the other,

makes it difficult not only to develop heavy industry, but also worsens the existing

economic imbalance. The intimate relationship between agriculture and rural non-farm

activities by virtue of strong backward and forward production linkages and the

consumption demand of farm households to a large extent determine the attractiveness of

the rural marketing investment (Ho, 1986).

Almost all countries, which have instituted a separate policy for the sector, have given

different definitions for the small-scale industry so as to suit their purpose. That is to say,

the definition of small-scale industry varies from country to country. According to

HSIDA (1987), in Ethiopia small-scale industries are manufacturing activities, which

normally use motor power, and machine, which have fixed asset value that does not

exceed Birr 200,000 (excluding building and land improvement). In the Indian case, the

primary objective of developing small-scale industries in rural areas is to create more

employment opportunities, raise income and standard of living and to bring about a more

19
balanced and integrated rural economy (Rao, 1967).

According to FAO (1998), an effect that is sometimes overlooked is the substantial

increase in employment in the production of raw material that may result from setting up

an industry and using it. Even if the industrial process itself is capital intensive,

considerable employment may be generated in providing the raw material base. Agro-

industries give rise to demand for a wide variety of machinery, equipment, packing

materials and intermediate goods used in the processing itself (FAO, 1998). Agro-

industries have backward linkage in agriculture itself. They promote increased

agricultural production through the expansion of the market. The development of

processing facilities is an essential estimation of consumers’ demand for the processed

product and enhancing supply of raw materials. The provision of power, transport and

other infrastructure facilities required for agro-industries also benefit agricultural

production.

Jon (1974) noted that the major role of small-scale industry in China was considered as a

linkage between agriculture and industry. The implication of integrated development

approach is achieving evenly distributed economic development, both in rural and urban

areas, with the aim of abolishing the rural-urban dichotomy. More specifically, the main

envisaged role of small-scale industry in Ethiopia is to serve as linkage between

agriculture and industry.

Most of the literature on small-scale industry in developing countries deals with the

20
development problem of the sector. Schadler (1969) conducted that small-scale

industries, both rural and urban, were faced with various problems. Among the major

problems confronting small-scale industry in these countries were insufficient inputs,

power shortage, and difficulties in financing and marketing, lack of technical know-how,

backward technology and other such factors (Schadler, 1969). Small-scale industries in

Ethiopia are not exceptions to such constraints. A survey conducted by HSIDA (1988)

revealed that out of the total 1322 small-scale establishments, 42, 13, 28, and 17 percent

were found to be hindered from operating at full capacity by shortage of raw material,

power shortage, marketing and financial problems, respectively.

3.3 Efficiency versus Size of Enterprise

The size of the enterprise has a significant influence on its efficiency. However, there is

no agreement on weather small enterprises are more efficient than large enterprise. Some

reported that small enterprises are more efficient and profitable, while the others argued

that, large enterprises are better than the smaller ones. According to Brunton (1997),

small-scale enterprises generate more direct jobs per dollar than large enterprises. They

serve as a training ground for developing technical and enterepreunal skills, and they

promote local inter-sectoral linkages particularly with agriculture and contribute to the

dynamism and competitiveness of the economy.

It was further argued that small firms are predominant in all forms of production than

large firms. The predominance of small firms has to deal with two salient facts (Harvey

21
1998): (i) small firms are especially important in certain industries such as agriculture,

retail, building, etc; and (ii) variation in the size of firms exist within the same industry,

which result from the condition of demand and supply. The same author explained that

large-scale production could be only technically efficient if a large and regular demand

justifies it. The market may be small because demand is local (e.g. personal service and

the goods sold by village store), because transport costs are high or because product

differentiation divides it artificially, where demand fluctuates like in construction, the

overhead cost of individual specialized equipment is heavy, but the smaller the firm the

less the burden.

On the supply side, there are also factors, which make small firms favorable. In certain

industries, like retail and building, it is possible to start with little capital or to be

supported by franchising or by joining the wholesale chain. Here the difficulty of

obtaining further funds and the taxation of profits are obstacle to expansion of many

small firm owners, which do not have the drive to expand, or the ability to manage the

large concern. Moreover, as the size of firm increases management difficulties will come

to place.

Experiences of a large number of countries in Africa and Asia show that small firms

usually do not need a strong infrustructural base. According to Namaki’s (1997)

explanation the smaller the unit the less formal in its frame, the less complex the product

or process and the less the need for infrastructure.

22
The labour intensity of small industry is a favorite argument in favor of the industry and

frequently cited rationale for its stimulation. The arguments leading to this labor intensity

are the degree of sophistication of technology utilized, differences in labor intensity may

simply refer to the impact of differences in wage to rental ratio, facing small and large

firms on their choice of both techniques and industry (Namaki, 1997). The degree of the

informality of the enterprise with in small scale enterprises more inclined towards

substituting capital with labour and employing low skill, minimum wage tied labour,

make small industry more attractive.

Empirical study conducted in India by Lau and Yotopoulos (1971) further indicated that

by dividing Indian state into small and large farms, small size farms were more profitable

than large farms. On the contrary, Garcia, et al. (1982) conducted a research and found

out that small farms are equally efficient as large farms.

There are also cases where large firms are more important than small firms. Some authors

argued that large enterprises are more efficient than their small counterparts. Gerald

(1995) reported that, the promotion of small enterprise is believed to have a special role

in industrial policy in facilitating efficient use of labour and other factors of production.

However, analysis based on data from India and Colombia found out that small firms are

not reliably labour intensive than large firms, and they are not consistently more

technically efficient in the use of resources.

23
Similarly, the same author indicates that large firms could achieve commercial

economies. If the sales staff is not working to capacity, the additional output can be sold

at little extra cost. For example, advertising costs are spread. Indeed, large firms often

manufacture many products, so that one acts as advertisement for the others. In addition,

a large firm may be able to sell its by-product, something that may be unprofitable for a

small firm (Harvey, 1998). The author also further argued that, a large firm is in favorable

position in raising finance for expansion. It can, for instance, offer better security for

banker, and since it is well known, raise money at lower cost, since investors prefer

shares, which can readily be the stock exchange.

In a study conducted by Asmare (1989), that the technical efficiency of large and small

producers’ cooperatives in Hararghe region of Ethiopia were compared and reported that

large cooperatives were more efficient in terms of land utilization. A similar study

conducted in India, (Sidhu, 1973) reported that large farms were more efficient than small

firms.

In summary, there is no a strong evidence that confirms either of the two size groups of

the enterprise is better than the other. The comparison of the result of different sized

enterprises differ depending up on the type of the industry, availability of factor inputs

used, etc. Therefore, this study was attempted to analyze the relative performance of large

and small sized dry coffee processing firms in the study area.

24
3.4 Methodological Issues in Performance Analysis

Although studies on the performance of processing firms are limited, review of some

related studies could provide some information on the procedures that could be used in

performance evaluation. More specifically, methods used such as ratio, break even and

econometric analyses were discussed separately hereunder.

3.4.1 Ratio Analysis

Ratio analysis plays an important role in measuring the productivity and profitability of a

business firm by relating some measures (output, net value-added, management income,

etc.) to selected inputs (labour, capital, etc.) assumed to be most important (Stanton and

Furtell, 1987). Input productivity ratios are used to measure technical efficiency of

production which refers to the achievement of the maximum potential output from a

given quantity of input taking into account physical production relationship.

According to Apezteguia and Garate (1997), the simplest approximations to technical

efficiency are partial productivity indexes, which relate the final output of a firm to the

productive forces, mainly labour and capital, used to produce it. The author noted that

changes in output to input ratios are affected by changes in the combination of different

inputs and by changes in productive efficiency. Variation in these partial productive

indexes cannot be interpreted as variation in the efficiency of a particular resource, but as

changes in the use of all the resources per unit of output (Prior, 1990). Kowero (1991)

25
conducted productivity analysis for sawmill industries based on the relationship between

yearly output and the corresponding working days.

Group comparisons of performance of producer cooperatives’ farm based on Hararghe

Awraja locations taking into account each producer cooperatives was carried out by

Getenesh (1988), by applying productivity, expense and income appropriation ratio

techniques. The author concluded that the cooperatives under investigation varied

significantly with respect to their performance results. The dominant factor that

influenced farm performance was elucidated to be location, while the impact of size was

minimal.

Mazmure (1990) also compared group productivity of washed coffee processing firms in

Sidamo zone by dividing the firms into 3 sub-periods. The author applied factor

productivity and intensity ratios in his analysis and found out that most of the units were

characterized by poor performance.

3.4.2 Production Function Analysis

Profitability of a business firm is affected by a number of factors including the level of

output. This makes the examination of the factors influencing the level of output

essential. In order to examine the relationship between inputs and the level of output

researchers use a production function. It helps to check whether business firms are

operating at constant, increasing or decreasing returns to scale, marginal analysis and

26
efficiency.

Accordingly, a number of case studies have been undertaken in developed and less

developed countries using marginal analysis. For example, Hildeharnd and Lio (1957)

undertook an investigation on the manufacturing production function in the United States.

The main result of this study was the relevance of economies of scale in manufacturing

industry. The authors pointed out that in 12 of the 15 firms; the sum of the coefficients

exceeds unity implying there was an increasing returns to scale in production.

Katz (1969) studied the Argentina manufacturing industry for the period 1943-53 and

1954-61 using both Cobb-Douglas and Constant Elasticity Production Function by

dropping the assumptions of constant returns to scale and perfect competitive factors

market. The author estimated the unrestricted version of the Cobb-Douglas production

function, that is, elasticity parameters were left to assume any value and technical changes

were still assumed to be disembodied and neutral.

Apeztguia and Garate (1997) conducted a research on Spanish agro-food industry, by

using the frontier production function, which was estimated by using the Cobb-Douglas

production function. The function was estimated by the ordinary least square technique.

As the study result indicates the sum of the coefficients of the three inputs considered

equals 1.05, with an F value of 0.004. The author, therefore, concluded that there was

slightly increasing returns to scale in the industry.

Production function technique is the widely used method for measuring efficiency. Even

though, various functional forms are possible under this approach, researchers adopted

27
Cobb-Douglas for several reasons. It allows many variables to be considered at a time, it

can show three types of relationship, namely constant, increasing and decreasing returns

to scale. Parameters estimated using Cobb-Douglas production function are also useful to

shed light on the issues of marginal productivity and factor costs in the allocation of

resources (Gujarati, 1988; Koutysoyiannis, 1972).

Hopper (1965) fitted a Cobb-Douglas production function to empirical data derived from

43 peasant farms in northern India. The data were analyzed using four major inputs and

four production alternatives (crops). He derived the marginal value of products of the four

inputs from the data and production parameters together with the price of the four

products. The results obtained were then tested against the norms of neoclassical profit

maximization behavior, and inferred that the case study farmers were allocatively

efficient.

In Ethiopia, Getenet (1994) conducted a research at Ghimbi on coffee production by

grouping coffee farmers into three size categories, that is, large, medium and small farms.

Using Cobb-Douglas production function, he found out that land, working asset and

operating expenses had positive and significant effect on coffee production in the three

size categories. The coefficient of human labour was positive, but statistically

insignificant. He further found out that the sum of elasticity coefficients for the whole

observations on the average was 1.23, which implied increasing returns to scale in

production. In the lower size group, operating expense showed negative elasticity

coefficients and the higher size group the coefficients of all independent variable were

28
significant. Increasing returns to scale in production was observed in all the size groups.

Asmerom (1980) fitted a multiple linear production function for shoe factory located in

Addis Ababa using monthly observations for 7 years data and found out that capital and

labour inputs were not statistically significant. Ermias (1985) in his study of the

efficiency of coffee producing farmers in Kefa administrative region used Cobb-Douglas

production function. The author used data derived from 292, 6 and 2 coffee producing

peasants, cooperatives and state farms, respectively, and five major inputs and one

production alternative (coffee income). He computed the marginal value products of each

input and compared those with their respective marginal factor costs and then concluded

that the coffee producing peasant farmers in Kafa administrative region were allocatively

inefficient.

3.4.3 Break-even Analysis

Break-even analysis is a technique used for determining the level of output where total

revenues equal to total expenses, that is, where there is neither profit nor loss (Parkin,

1995). The estimated break-even volume of output could be compared with the actual

output. The profit can be realized if the actual output is found to be above the break-even

volume. On the other hand, if the average price received for the product is less than the

average variable cost, the business unit will not be economically viable as it would be

unable to cover both fixed as well as variable costs.

A research undertaken by Mazmure (1990) on washed coffee processing firms in Sidamo

Region showed that from 18 washing stations investigated, stations which had break-even

29
volume levels above their actual level of production were 4, 1, 3, and 7 in 1985, 1986,

1987 and 1988, respectively. The firms were expected to be profitable at lower level of

production than the actual. In addition, a few washing stations, specifically 8, 3, and 4 in

1985, 1987, and 1988, respectively, were observed to operate with very high variable

costs, which exceeded their sales income.

The study made by farm management research unit of MCTD (1984) on washed coffee

processing stations indicated that out of 63 coffee processing cooperatives included in the

research for the period 1982/83 processing seasons, 12 cooperatives were found to have

their volume of processed parchment coffee below the break-even volume. The study also

indicated that 45 cooperatives were found to have the level of production below the

break-even volumes, while the average variable costs of 6 cooperatives were greater than

the average price received for the product.

30
4. METHODOLOGY

4.1 Description of the Study Area

4.1.1 Physical Characteristics

The study area, western Wallaga Zone, is one of the 12 zones of Oromia National

Regional State (Figure 1). It is located in the western part of the country at a distance of

441 kilometers away from Addis Ababa, the capital of the country. The zone is situated at

latitudinal and longitudinal ranges of 80 17’ to 100 38’ N and 380 8’ to 360 10’ E

geographical grids, respectively. The estimated total Arial coverage of the zone is

23778.13 square kilometer. Hence, it covers about 6.8 percent of the total area of Oromia

national regional state. West Wallaga zone is divided into 17 districts and further into

616 administrative sub-divisions of which 572 are peasant associations (PAs) and 44

were in urban kebeles including the zonal capital, Gimbie town. East Wallaga zone in the

east, Illuabbabora zone in the south, Beneshangul Gumuz Regional State in the north,

Amhara Regional State in the northeast, Gambella Peoples’ Regional State in the

southwest and Sudan in the northwest border it (Figure 2).

Topographically, it is characterized by diversified landforms, that is, mountains (such as

Tulu Walal, Jorgo, Marache, Gama Gararba and Guri Mariam), dissected plateaus, hills,

plains, valleys and gorges. The altitude range of the zone extends between 500 to 3340

meters above sea level and drained by several perennial rivers (like Birbirsa, Dabus, Keto,

Deddessa, Deggero, Sachi, Kujjur, etc.) and interminient streams.

31
Map of Oromia Should be here

32
Map of West Wallaga Should be here

33
The climatic condition of the zone is classified into three basic groups: Dega, Winadega

and Kola accounting for 62.5, 33.8 and 3.7 percent, respectively. The annual rainfall

ranges from 1500 mm to 1840 mm and the mean annual temperature of the area is 240c

(MCTD, 1990). The major soil types of the area are Humbic cambisols, Eutric fluvisols,

Nitosols, Chromic Vertisols, and Dystric Nitosols. High forest, woodland, reverine,

shrubs and bush, savanna and man-made forests are available in the zone.

4.1.2 Population

The total population of the zone is estimated to be 1.9 million of which 0. 94 million

(49.4 percent) are males and 0.96 million (50.6 percent) are females. About 96 percent of

the total populations of the zone dwell in rural areas (CSA, 2001). According to same

source, young, economically active and old age accounted for 43.9, 51.7 and 4.4 percent,

respectively. The average household size for west Wallaga zone is about 5 persons per

household. It is estimated to be 5.4 and 5 persons per household for rural and urban areas,

respectively. The zone has an estimated crude population density of 79.7 persons per

square kilometer, which ranges between 43.2 in Anfillo district and 191.3 persons per

km2 in Lalo Assabi district.

4.1.3 Agriculture

A mixed farming type practicing both crop and livestock characterizes the farming system

in West Wallaga. Crop production is the dominant activity experienced although

livestock rearing is significant. The zone has an estimated arable land of 31.9 percent of

34
which about 27.8 percent is under cultivation while the rest is covered by grazing land,

forest and others. The major crops grown in the area include teff, maize, sorghum, barley,

wheat, millet, haricot bean, field pea, chickpea, niger seed and groundnuts. Moreover,

coffee, chat, orange, banana, avocado, lemon, mango, and papaya are the major perennial

crops grown in the zone.

Majorities of crops produced in the zone are used for subsistence purpose. Furthermore, a

few commodities are grown for commercial uses. Coffee is the dominant cash crop grown

almost in all districts of the zone. According to OBPED (1994), in study zone, about

66513 hectares of land was covered by coffee trees, which accounted for 28 percent of the

total coffee production of Oromia region. In addition, onions, papers and groundnuts are

also grown as domestic cash crops in some places. Besides, three agricultural

commodities such as coffee, hides and skin (goat’s and sheep’s skin) are annually

supplied to Addis Ababa central market to be exported. For instance, in year 1988, 35429

tones of coffee, 25881 hides, 45945 goatskins and 90979 ship skins were supplied to

export market from the zone. It could be said that, in addition to fulfilling the requirement

of cash needs of producers of the zone, these commodities contributes significantly to the

cash income of retailers, wholesalers, processors, exporters and national economy

annually at large.

Likewise, West Wallaga zone had about 1.5 million livestock population of which 71.5,

14.4, 7.6 and 6.5 percent were cattle, sheep, goat and equines, respectively (WWZPEDO,

1998). The most common prevalent livestock diseases in the zone include anthrax,

35
internal and external parasites, CBPP, pastrioloisis, black leg and render pest. There are

also diseases, which have made live stock production difficult in some pocket area of the

zone.

Farmers are organizing themselves in a cooperative manner and performing different

activities in the zone. More specifically, in the year 1994 there were 572 farmers’

associations with 200 service cooperatives having 254018 (13.4 percent females) and

9287 (9.1 percent females’) member farmers, respectively.

4.1.4 Mining and Industry

The zone is endowed with a variety of mineral deposits, namely cobalt, copper chromium,

gold, platinum, nickel, coal, basalt, tungsten, uranium, lignite, manganese, marble, silver,

iron, granite and lithium (OBPED, 1994). Of these minerals, marble, copper, gold and

iron are to some extent under extraction while the rest are still unexploited.

Regarding the industry sector, there is no modern large-scale industry exists, but there are

relatively a few small and medium scale industries available in the zone. These include

grain mills, coffee hullers, coffee pulpers, wood works, metal works, brick processing

units, oil mill and brick manufacturing. Coffee processing firms (hullers and pulpers) are

distributed almost in all districts of the zone. There was rapid expansion of the firms

observed in recent time.

36
4.1.5 Social Services

The zone is generally characterized by poorly developed infrustructural facilities. Among

these infrastructural services, the existence of transportation facility is the major one. The

major and important transportation facility in West Wallaga is road network. Asphalt

road is totally non-existent in the zone. But there are two main rural gravel roads crossing

the zone to different directions. The main road passing from Addis Ababa to Asosa

crosses the zonal capital Ghimbi town, Nedjo and Menesibu districts and passes to the

west. The other main road crosses the capital towns of Ghimbi and passes to Gambela

Peoples Regional State by inter connecting 6 districts, namely, Laloassabi, Ayiragulliso,

Gawodale, Dalelalo, Anfillo and HawaWalal districts. The total length of road available

in West Wallaga is 2396 km of which 763 km are all weather roads and the remaining

1633 km accounted for dry weather roads.

The other important transportation service available in the zone is air transport. Currently,

there are two airports giving services in Begi and Dembidollo towns of Begi and Sayyo

districts, respectively. The capacity of the plane landing and the facilities of the stations

are very small that air transport is not providing sufficient services. Air transport is highly

appreciated particularly during the summer season in which traveling with other kind of

transport is hardly possible.

The other important services given in West Wallaga zone are communication services.

Telecommunication and postal services are major communication facilities available in

37
the zone. There are 10 semi-manual and two automatic telephone stations rendering

telecommunication services for the residences. As to postal services, there are 3 regular

and 11 agent post offices giving services. In general, the communication services given in

the zone is less developed.

The energy supply of the zone is back-ward. Majority of the population use firewood or

leaves, dung, charcoal, crop residues, as a source of domestic energy supply. Out of 44

urban centers, only six towns are supplied with electric power supply, on average for only

11 hours per day. Two towns, Gimbi and Dembi Dolo are provided with hydro source

electricity while the rest Gulliso, Kake, Mendi and Nedjo districts are supplied with

diesel sources.

Fuel stations are very small in number in that there are only four districts having six fuel

stations with a total capacity of about 379800 liters per year. But the other districts get

their fuel requirements from nearby districts having fuel station.

Regarding the educational facilities, there are 307 elementary schools (262 governmental,

8 NGOs, and 37 community owned), 65 junior secondary schools (61 governmental and 4

NGOs); and 10 high schools (7 governmental and 3 NGOs) senior secondary schools

found in the zone. The health facilities are also characterized by shortage of health

institutions and health personnel. There are three hospitals, 10 health centers, 86 clinics, 3

pharmacies, 101 rural drug venders and 4 malaria controlling centers rendering health

services. The ratio of health institutions to population indicates that one hospital stands

38
for 550528 persons; one health center for 165158 people and one clinic serves 19204

persons in West Wallaga zone. Outs of 207 health institutions 22 are owed by non-

governmental organizations, 105 privately owned and the government owns 80 of them.

Similarly, populations to health personnel ratio for doctor, nurse, and health assistant are

1:82579, 1:22022 and 1:5636, respectively.

The zone has 10 different financial institutions. These are 5 commercial banks (CBE), 2

development banks (DBE), one private (Awash bank), and 2 insurance companies (one

government and one private) providing insurance services. Out of these institutions, the

majorities of them are located in Gimbi town while the rest are found in other four towns

of Ayira Gulliso, Manasibu, Nedjo and Sayyo districts.

4.2 Data Requirements

Both secondary and primary data were collected for the study. Secondary data on volume

of coffee processed each year, annual fixed costs and variable costs, number of labourers

employed both permanent and casual, volume of raw materials (dry cheery) and initial

capital investment were obtained from the records, progress reports, feasibility studies,

different levels of Ministry of Agriculture, and other published and unpublished materials

found to be relevant for the study. Primary data on price information, raw-material

availability, transportation, major problems encountered and other related factors which

affect the performance and profitability of dry coffee processing were obtained from the

owners of the sampled processing units.

39
4.3 Sample Selection and Data Collection Methods

About 90 percent of the coffee processing units in the study area were privately owned.

The investigation concentrated solely on private ones. The list of all the private dry coffee

processing firms in the zone were prepared and they were then grouped into two size

categories, that is, small and large sized firms based on the initial capital investment made

for each of the processing units. A sample of 24 that is, 17 small-scale and 7 large-scale

dry coffee processing firms from a total of 62 and 26, respectively, was chosen using

stratified proportion to size random sampling. Secondary data were collected on the basis

of schedules prepared for the purpose. Physical observations and informal discussions

with workers and other relevant management bodies of the sample firms were made.

Primary data were collected on the basis of structured questionnaire through personal

interviews. Enumerators were recruited from the study area and practical training was

given to them for two weeks regarding the survey techniques.

4.4 Methods of Data Analysis

The methods of data analysis used included different descriptive analyses and

econometric analysis as outlined below.

4.4.1 Descriptive Analysis

To analyze the performance of individual and/or group dry coffee processing firms, a

wide verity of descriptive techniques were employed. These included means, standard

40
deviations, ratios and graphs. Three types of ratios, namely financial, profitability and

factor productivity ratios were applied in this study.

4.4.1.1 Ratio Analysis

There are different measures and ratios that can be used to analyze the financial

conditions and profitability of business firms. Ratios are used because they provide a

standard unit of measurement and permit comparison over time and between firms of

different sizes (Kay, 1986). These measures and ratios are used in financial, profitability

and economic efficiency analyses.

Financial analysis concentrates on the capital position of the business including solvency,

liquidity and net worth. The financial ratios or measures used in such analysis are net

capital ratio, debt/equity ratio, current ratio and net worth. These financial measures or

ratios are computed from data in balance sheet.

A firm business, which is both solvent and liquid as shown by a financial analysis, is not

necessarily a profitable one. It is, thus, necessary to determine business profitability using

different measures like: net income, return to labour and management, return to

management, rate of return to capital and rate of return to equity. These ratios are

computed on the basis of information from the income statement, which is a summary of

financial transactions (income and expenses) that occurred over a period of time.

41
In this study, two major types of profitability ratios, that is, profitability in relation to sale

or gross output and profitability in relation to investment were calculated. Net profit is the

value left after expenses are deducted from gross income. Return on investment is another

commonly used measure of managerial performance and the operating success of a firm.

These profitability measures could be calculated as: i) Net profit ratio is net profit divided

by sale and ii) Return on investment is the ratio of net profit to sale multiplied by the ratio

sales to investment.

Economic efficiency is analyzed using factor productivity ratios, which reflect the

relationship between input and output in production. Some of the ratios that could be

used in economic efficiency are: i) labour productivity was estimated as the ratios of net

output and net value-added to labour input; ii) fixed asset productivity was measured as

the ratios of net output and net value-added to fixed capital; and iii) dry cherry

productivity was calculated as the ratios of net output and net value-added to dry cherry.

The net output is gross operational income minus cost of direct materials (dry cherry,

non-durable equipment, fuel and lubricant). The net value-added indicates the value

remained after all expenses are deduced from the gross operational income except for

labour cost and interest on capital investment.

42
4.4.1.2 Break-even Analysis

This model is used to determine the level of production at which each individual coffee

processing units is run at break-even volume. It is symbolized as:

FC + VCtYt = PtYt

Where: FC = The fixed cost

VCt = Variable cost per kilogram of processed coffee in year t

Pt = Price of processed coffee per kilogram in year t

Yt = Output of processed coffee in kilogram in year t

t = The time in year, that is, 1=1996, 2=1997,..., 5=2000.

Once the break-even volume was determined for each coffee processing unit, it was

compared with the actual output processed.

4.4.1.3 Standards of comparison

As indicated above, there are various measures and ratios for the performance of a

business firm. Once a measure or ratio is calculated, is the value good, bad, or

indifferent? There are two basic methods to use in setting standards for comparison and

analyzing the results: comparative analysis and trend analysis.

In comparative analysis method, measures or ratios are computed from the actual records

and compared against predetermined standards. As an alternative the same set of

measures and ratios computed from the actual records of other firms of similar or

different size and type. These may not represent ideal standards but can indicate if the

43
firm being analyzed is above or below average for the measures being compared. The

measure that is often employed in this regard is quartiles, which divide the ordered data

into 4 equal parts and resulting into three quartiles (Chanddan, et al., 1995). They are

denoted by the symbol Q so that Q1, Q2 or Q3 are those points in the ordered data, which

has 25, 50 or 75 percent of the data below it and 75, 50 or 25 percent of the data above it,

respectively.

In trend analysis method, the various measures and ratios for a number of years are

computed and trends in the results are observed, whether they are indicating an

improvement or a decline in the measures over time. This method does not compare

results against any standards, only against historical value. This study uses both

comparative and trend analysis.

4.4.1.4 Sample Differences

In statistical analysis involving two samples, it is imperative to test whether or not the

difference between the two sample means can be attributed to chance (Freund, 1984).

This implies that it helps to confirm whether the samples are taken from homogeneous

population or not - statistical test is required to check this. This test was also used to

assess whether the difference between small and large dry coffee processing firms with

respect to different input variables was by chance or real one. In other words, the

selection of one sample was in no way affected by the selection of the other. T-test was,

thus, used to check whether means of different continuous variables of the two sized

44
groups were significantly different. The test is based on the t-distribution and was

considered as an appropriate test for judging the significance of the difference between

the means of two samples when the population mean is not known (Freund, 1984).

4.4.2 Econometric Analysis

4.4.2.1 Production Function Analysis

As it was indicated earlier, profitability of a business firm is affected by a number of

factors including the level of output. This makes the examination of the factors

influencing the level of output essential. In order to analyze the relationship between

factor inputs and the level of processed coffee output, the Cobb-Douglas production

function was used in this study. This production function was chosen for its own unique

properties and its ease of estimation and interpretation. The estimated coefficients

indicate the partial elasticity of output with respect to the corresponding factors of

production, that is, each coefficient measures the percentage change in output for one

percentage change in the corresponding input, holding other variables constant. The other

property of Cobb-Douglas production function is the sum of the coefficients gives us

information about the returns to scale, that is, the response of output to proportionate

change in inputs. If this sum is one, there are constant returns to scale implying that

doubling the inputs will double the output. If the sum is less than one, there are

decreasing returns to scale implying doubling the inputs will less than double the output.

Finally, if the sum is greater than one, there are increasing returns to scale showing that

45
doubling the inputs will more than double the output (Gujarati, 1988).

The model is symbolized as:

β β β β
Y =β X X X X e
1 2 3 4 ui
i 0 1 2 3 4

Since this model is in a non-linear form, it should be changed to log-linear model using

the natural logarithmic transformation as follows:

lnYit = lnβ0 + β1 ln X1t + β2 ln X2t + β3 ln X3t + β4 ln X4t + Ui

Let us assume lnβ0 = α then the equation becomes:

lnYit = α+ β1 ln X1t + β2 ln X2t + β3 ln X3t + β4 ln X4t + Ui

Where: Yit = gross output, X1t = labour input, X2t = fixed capital, X3t = red cherry

X4t = working capital, Ui = the random disturbance term, ln = the natural logarithm, and

α, β1, β2, β3, and β4 are structural parameters to be estimated. The structural parameters

of the model were estimated by OLS estimation technique using a computer program

known as statistical package for social scientists (SPSS).

The transformed Cobb-Douglas production function or log-linear model has the following

two special features. The model assumes that the elasticity coefficient between Y and Xs,

βi remain constant through out that means the change in lnY per unit change in lnX

remains the same no matter at which lnXi we measure the elasticity. Another feature of

the model is that although estimates of α and βi are unbiased estimators of β0 and βI, β0,

the parameter entering the original model when estimated as βo (anti log of α), is itself a

biased estimator. However, in most practical problems the intercept term is of secondary

46
importance (Gujarati, 1988).

4.4 2.2 Profit Function

In order to analyze the cost factors that affect the level of profit, a multiple regression

model was employed. The model was specified as follows:

α1 α2 α3 ε4
Π =α X X X X e
ui
i 0 1 2 3 4

lnπit = lnα0 + α1 ln X1t + α2 ln X2t + α3 ln X3t + α4 ln X4t + Ui

Let us assume lnα0 = 0 then the equation becomes:

lnπit = β0 + α1 ln X1t + α2 ln X2t + α3 ln X3t + α4 ln X4t + Ui

Where: πt = Net profit in per year, X1t = Fixed capital, X2t = Cost of dry cherry, X3t =

Cost of causal labour, X4t= Cost of permanent labour, X5t= Cost of auxiliary materials, Ut

= the disturbance term, β0, α1, α2, α3, α4 and α5 are coefficients of explanatory variables

to be estimated using OLS estimation method.

47
5. RESULTS AND DISCUSSION

This chapter presents results of the thesis in two main parts. In the first part, it deals with

results of the descriptive analyses. The second part treats results of econometric model.

5.1 Results of Descriptive Analysis

In this section, we present general overview of the sample firms, results of financial and

profitability analyses. Economic efficiency will be discussed and then followed by the

results of break-even analysis.

5.1.1 Processed Coffee Output

The end product of dry coffee processing is processed coffee bean (unwashed coffee).

This final output of the processing activities differs from year to year as well as from firm

to firm. Accordingly, in 1996, the average volume of processed coffee in large firms was

416.3 thousand kilograms with standard deviation of 139.3 while in small firms its

volume is 459.0 thousand kilograms with standard deviation of 202.0 thousand (Table 5).

In addition, the minimum and maximum values computed were different in both groups

for the years under consideration. This could arise from the variation in access to dry

cherry supply, supply of spare parts, fuel and lubricant, infrastructural facilities, age of

individual firms, designed capacity of the firms and so on.

48
Table 5. Summary Statistics of Processed Coffee by Firm Size Groups, 1996-2000

(000 kg)
Type of Firms/ Mean Maximum Minimum Standard
Year Deviation
Large Firms
1996 416.3 555.1 216.2 139.3
1997 342.0 434.3 139.2 97.1
1998 545.9 845.7 110.2 245.6
1999 312.1 836.1 110.8 263.8
2000 341.1 643.3 199.3 155.8
Small Firms
1996 459.0 905.3 12.8 202.0
1997 499.1 759.0 97.8 197.3
1998 600.8 885.6 238.2 210.2
1999 256.0 482.0 72.3 116.3
2000 354.6 584.5 71.54 160.4
Source: Survey result and own computation

The average designed capacity of large firms' was 1.4 thousand quintals of processed

coffee bean. Likewise, the average designed capacity of small firms’ was 0.8 thousand

quintals. As to the age of the firms, the average age of small and large coffee processing

machines were 10 and 7 years, respectively.

5.1.2 Costs of Processing Firms

The major cost components of a business firm are categorized into fixed and variable

costs. Fixed costs are the costs associated with owing a fixed input or resource. These are

the costs that are incurred even if the inputs are not used in the production process. Fixed

costs do not change as the level of production changes for a specific firm. On the other

hand, variable costs are those which the managers have control over at a given point in

49
time. They can be incurred as production is increased.

Accordingly, in this analysis fixed costs include depreciation and interest on capital. The

survey result indicated that the average annual fixed cost of small firms in 1996 was Birr

59.9 with maximum, minimum, and standard deviations of Birr 62.5, Birr 55.9, and Birr

24.9 thousands, respectively. Similarly, at the end of the survey period (2000), the

average, maximum, minimum and standard deviations of average annual fixed costs for

small firms were Birr 74.8 thousand, Birr 78.5 thousand, Birr 69.5 thousand and 3.3

thousand, respectively (Table 6).

Table 6. Summary Statistics of Annual Fixed Costs by Firm Size Groups, 1996-2000

(000 Birr)
Type of Firm/ Year
Statistic 1996 1997 1998 1999 2000
Small Firms
Average 59.9 63.3 69.3 72.0 74.8
Maximum 62.5 66.2 72.5 75.4 78.5
Minimum 55.9 59.1 64.5 67.0 69.5
Stand. Dev. 24.9 2.7 23.0 3.1 3.3
Large Firms
Average 86.6 98.4 115.1 127.5 140.9
Maximum 250.7 278.6 319.1 347.1 377.2
Minimum 21.9 28.0 35.9 42.9 3.3
Stand. Dev. 80.0 87.9 99.6 107.30 115.6
Source: survey result and own computation

50
Likewise, in large coffee processing firms, in 1996, the average, maximum and minimum

annual fixed costs of sample firms were computed as Birr 86.6, 250.7 and 21.9 thousands,

respectively. The corresponding figures for 2000 were Birr 140.9, 377.1 and 3.3

thousands, respectively. The standard deviations of the firms were 80.0 in 1996 and 115.6

in 2000 (Table 6). It is shown that, in both groups of firms, there was an increasing trend

of average annual fixed cost over the survey period.

On the other hand, variable costs of the firms include casual and permanent labour,

auxiliary material input (like spare parts, fuel, lubricant, etc.), dry cherry input and

working capital. The average annual variable costs of casual labour, permanent labour,

dry cherry and working capital in 1996 for large firms were Birr 83.5, 7.6, 24.2, 4113.0,

and 295.7, thousands, respectively. The corresponding values for small firms were Birr

93.5, 8.2, 25.4, 4525.5 and 288.5 thousands, respectively (Table 7). Generally, as shown

on table 7, there exist wide variations between the two groups, among the individual

firms and across the survey year.

51
Table 7. Summary Statistics of Components of Variable Costs of Dry Coffee Processing

Firms by Size Groups, 1996-2000 (000 Birr)

Type Variable Cost Components

of Casual Permanent Auxiliary Dry Working
Firms Labour Labour Materials Cherry Capital

Mean SD Mean SD Mean SD Mean SD Mean SD

Large Firms
1996 83.5 30.5 7.6 1.3 24.2 8.7 4113.0 1374.7 295.7 146.9
1997 66.9 19.7 7.6 1.8 21.8 6.6 3169.4 906.2 316.3 150.4
1998 79.4 36.3 7.7 1.3 27.2 12.2 4551.2 2949.2 343.0 117.5
1999 40.5 40.7 7.6 1.4 10.3 5.8 2486.6 2214.9 144.4 65.0
2000 63.4 31.1 7.7 1.4 20.3 10.5 2993.7 1324.1 256.3 110.6
Small firms
1996 93.3 54.6 8.2 1.8 25.3 11.1 4525.5 2011.6 288.5 97.1
1997 93.9 36.4 8.2 1.8 28.5 12.2 4625.0 1952.0 235.0 66.2
1998 90.4 38.6 8.2 1.8 29.6 13.6 5144.5 2301.8 280.1 118.5
1999 39.4 19.8 8.0 1.7 12.5 5.9 1939.9 817.8 107.9 53.1
2000 63.5 29.5 8.2 1.8 20.7 13.0 3242.9 1524.6 211.9 103.9
Source: Survey result and own computation

5.1.3 Group Comparison of Dry Coffee Processing Firms

To see whether there were real differences between the large and small groups of coffee

processing firms mean difference test was used. Five variables were incorporated into the

analysis and t-values were computed to test the difference in their mean values.

Accordingly, the computed t-tests revealed that there were significant differences between

small-and large-sized groups of coffee processing firms with respect to three of the

variables; fixed capital, labour input and working capital at 1, 10, and 5 percent

significance levels, respectively (Table 8). Thus, the differences between the two size

groups were real and it was found to be crucial to analyze the two firms separately.

52
Table 8. Mean Comparison between Large and Small-sized Dry Coffee
Processing Firms#
No. Variables Large firms Small firms
Mean SD Mean SD t-ratio
1 Output 4869548 2361622 4391869 2264012 1.019
2 Working capital 375789 184099 311211 137550 2.110**
3 Fixed capital 113709 98519 67846 6198 2.740***
4 Dry cherry 851833 451397 762811 402843 1.012
5 Labour cost 271237 138139 224691 107935 1.781*
#
***, **, * indicate significance at 1%, 5% and 10 % probabilities, respectively; SD = Standard deviation.
Source: Own computation

5.1.4 Major Problems

The sample respondents identified seven major problems during the survey years. These

include scarcity of dry cherry, shortage of spare parts, poor infrustructural facilities,

Table 9. Major Problems of Small and Large Coffee Processing Firms

Small firms Large firms Total

Problem Type No. % No. % No. %
Scarcity/lack of dry cherry input 17 100 7 100 24 100
Inadequate supply of spare parts 16 94 5 71 22 92
Infrustructural problem 15 88 6 86 21 88
Inadequate supply of fuel 16 94 6 86 22 92
Tax burden 17 100 7 100 24 100
Lack of technical know-how for
machine operators 15 88 7 100 22 92
Market instability 14 82 5 71 19 80
Source; survey result and own computation

53
inadequate supply of fuel, tax burden, lack of technical know-how and price instability.

Ninety-two percent of the sample respondents confirmed that shortage of spare parts,

inadequate supply of fuel and lack of technical know-how were the major problems

affecting the production and profitability of dry coffee processing firms. Moreover, 88

and 80 percent of the respondents pointed out infrustructural problems and coffee price

instability, respectively, as the main problems encountered during the processing

operation of the sample firms.

5.1.5 Balance Sheet and Financial Analysis

The basic parts of complete sets of firm records include a balance sheet and an income

statement. Both are financial statements serving different purposes. The balance sheet

summarizes the financial condition of a business at a point in time while the income

statement summarizes the financial transactions (revenue and expenses) that occurred

over a period of time.

In this study, the balance sheet was constructed to summarize the financial strength and

position of small- and large-sized dry coffee processing firms. Accordingly, the average

values of net worth of small and large dry coffee processing firms were found to be Birr

679.5 and 773.7 thousand, respectively (Table 10). The debt/equity ratio is a measure of

business solvency and it was calculated by dividing total liabilities by net worth. Smaller

debt/equity ratio is preferred to larger one. Accordingly, larger firms, with the ratio 0.41,

54
were better off than the small-sized firms having 0.58 ratio, which was significantly

different at 10 percent. However, such small ratios could be at the expense of a

potentially higher income. Large firms were in a better financial position than small

firms. Large firms had higher amount of money, which remained for the owner of the

firm after liquidating the business and paying all liabilities.

Table 10. Balance Sheet for Small and Large Groups of Dry Coffee Processing Firms,

(December 31, 2000) (000 Birr)

Asset Small Firms Large Firms

Current asset
Inventory of processed coffee
ready for sale 664.3 639.0
Cash income 256.3 211.9
Intermediate asset
Machinery and equipment 53.9 208.9
Building 10.0 12.0
Total asset 984.5 1071.8

Liabilities
Current liabilities
Account payable 50.0 48.0
Accrued tax payable 124.1 119.4
Operating loans 119.0 118.8
Interest on loans 11.9 11.9
Total liabilities 305.0 298.1

Net worth 679.5 773.7

Source: Survey result and own computation

55
Besides net worth and debt/equity ratio, the important financial ratios computed from data

in the above balance sheet were net capital ratio, and current ratios (Table 11). Net capital

ratio measures business solvency and it was calculated by dividing total assets by total

liabilities. Larger values are preferred to smaller ones. The values of the ratio were 3.34

and 3.66 for small and large-sized dry coffee processing firms, respectively, and

significantly different suggesting that larger firms had a better chance of maintaining the

solvency of their businesses. These values may also indicate that there was a failure to

incur debt to take advantage of profitable investment opportunities. In other words, the

high ratio could be at the expense of a potentially higher income.

Current ratio is a measure of business liquidity, or the ability to meet short-term financial

obligations from current assets. It was calculated by dividing current assets by current

liabilities. It should be greater than one. As the values of the ratio were 3.13 and 2.92 for

small- and large-sized firms, respectively, both did not face liquidity problem.

Table 11. Financial Ratios for Small and Large Coffee Processing Firms

Ratios Small firms Large firms t-value

Debt/equity ratio 0.58 0.41 1.79*
Capital ratio 3.34 3.66 1.86*
Current ratio 3.13 2.92 2.15**
Source: Own computation
**,* significant at 5% and 10% prob. levels

56
5.1.6 Income Statement and Profitability Analysis

Income statement was also used to compute profit and to compare the level of profit that

each group of dry coffee processing firms generated. Hence, in all the years under

consideration, the net profit generated was relatively higher in large firms than their

counterpart, although their difference was not statistically significant.

A firm business, which is both solvent and liquid as shown by a financial analysis, is not

necessarily a profitable one. In order to determine whether a firm is profitable or not, it is,

thus, essential to calculate the level of profit. Profit and Profitability are determined by

analyzing the income statement (Table 12). As previously pointed out, there are different

measures of business profitability, namely, net income, return to labour and management,

return to management, rate of return to capital and rate of return to equity. In this study,

two measures of profitability, namely net income, net profit on sale and return to

investment, were used.

On the basis of the ratio of net income to sale, the profitability statuses of most of the dry

coffee processing firms in the sample were found to be good in 1998 and 1999 (Table

13). Of 24 cases treated, the numbers of firms found above the upper quartile were 14 and

14 for net profit to sale ratio in 1998 and 1999, respectively. For the remaining years, the

firms were characterized with a poor profitability performance. The ratio of net profit to

sale for 1996 and 1997 showed that, out of 24 firms only 1 and 2 firms, respectively, were

found to be above the upper quartile values. Likewise, the poor profitability of firms was

57
Table 12. Income Statement for Small and Large Coffee Processing Firms, 1996-2000
(000 Birr)
Group of firm/income Year
or expense component 1996 1997 1998 1999 2000
Large firms
Income
Output sold 4903.8 3585.6 6128.2 3507.9 3833.9
Expenses
Fixed costs 86.6 98.4 115.1 127.5 140.9
Variable costs
Labour 91.1 77.2 96.2 44.1 80.7
Dry cherry 4113.0 3169.4 4551.2 2486.7 2993.7
Auxiliary material 24.2 21.8 27.2 10.3 20.3
Total variable cost 4228.3 3268.4 4674.6 2541.1 3094.7
Sales tax 145.7 119.7 191.1 109.3 119.4
Net profit 443.2 99.1 1148 730 487.9
Small firms
Income
Output sold 5406.7 5232.3 6745.0 2978.1 3985.6
Expenses
Fixed costs 59.9 63.4 69.3 72.0 74.8
Variable costs
Labour 101.5 105.7 109.1 53.3 85.0
Dry cherry 4525.5 4625.0 5144.5 1939.9 3242.9
Auxiliary material 25.3 28.5 29.7 12.5 20.7
Total variable cost 4652.3 4759.2 5283.3 2005.7 3348.6
Sales tax 160.6 174.7 210.3 92.8 124.1
Net profit 553.9 235 1182.1 807.6 438.1
Source: own computation

recorded in 1996 in which 9 firms were found below the lower quartile value. In general,

the profitability of most of the coffee processing units under investigation for 1996 and

1997 was relatively poor. This could be attributed to different factors, such as lack of dry

cherry, inadequate supply of spare parts and fuel, high tax burden, poor management of

the firms, higher margin of operating costs and low level of world price for unwashed

coffee during the period under consideration.

58
Table 13. Profitability of Individual Firms (Ratio of Net Profit to Sale), 1996-2000

Quartile range# Number of Firms

1996 1997 1998 1999 2000
>UQ 1 2 14 14 -
<LQ 9 - 5 3 2
Neither 14 22 5 6 22
Cases with negative values - - - 1 -
Total 24 24 24 24 24
#
UQ=Upper Quartile, LQ=Lower Quartile.
Source: Own computation

5.1.7 Group- and Inter-Temporal Comparison of Profitability

As presented in Table 14, small firms, on the average, had higher ratio of net profit to sale

as compared to large firms, although there was no statistically significant difference

between them, giving the clue that the former had relatively better performance. This

happened because the large firms were relatively operating below their full capacity,

which partly led to the observed poor performance level.

Inter-temporal comparison of net profit per sale showed a general increasing trend from

1996 to 1999 and it declined in 2000 (Table 14). There was the highest rise in

profitability in 1998 and 1999 preceded by lower rise and then tended to decline in 2000.

The relative rise in profitability performance in 1997 and 1998 was attributed to the price

rise observed in world market and followed by reduction in its price, which negatively

affected the profitability of dry coffee processing firms. The trend in the rate of

59
improvement of the performance status of the firms was better in large dry coffee

processing units.

Table 14. Profitability Ratio by Group of Dry Coffee Processing Firms (Ratio of Net
Profit to Sale), 1996-2000
Year Firm Size Group
Large Firms Small Firms
Value Index1 Value Index1
1996 0.10 100 0.17 100
1997 0.15 150 0.17 100
1998 0.25 250 0.21 124
1999 0.27 270 0.30 176
2000 0.20 200 0.18 106
I
the base year was 1996 and values are in percentages.
Source: own computation

The other measure of profitability of dry coffee processing firms that was used in this

study was the rate of return on investment. It is computed by multiplying the ratio of net

profit to sales by the ratio of sales to investment and expressed as a percentage. On the

basis of this ratio, large dry coffee processing firms were generally found to be in a better

profitability status than small firms (Table 15). The trend for rate of return on investment

shows irregular pattern (Figure 3). Mean difference test revealed that there was significant

difference between small-and large-sized groups of coffee processing firms with respect

to the rate of return to investment at less than 5 percent significance level in almost all

years. However, in both groups the rate of return to investment is extremely low, much

lower than the interest rate (10 percent) they paid.

60
 Table 15. Rate of Return on Investment for Groups of Dry Coffee Processing Firms

Type 1996 1997 1998 1999 2000

of Firms
Small firms 1.4106 1.7542 3.7352 2.6031 1.6482
Large firms 2.9570 3.6642 9.4231 5.9905 4.6964
All firms 1.8616 2.3113 5.3941 3.5911 2.5373
Source: own computation

Rate of 7
6 Small firms
return on
5 Large firms
investment 4 All firms
3
2
1
0
1996 1997 1968 1999 2000
Year
Figure 3. Trend of Rate of Return on Investment

5.1.8 Efficiency Analysis

In order to carry out the efficiency analysis, the ratios of net output and net value-added to

each selected factor inputs, namely labour, fixed capital and dry cherry, were computed.

5.1.8.1 Productivity of Labour

The performance of the processing firms in terms of net output to labour ratios showed

variations from year to year. As indicated in Table 16, of 24 samples coffee processing

61
firms’ only one firm was found to be above the upper quartile value in 1996. About 50

percent of them were below the critical boundary of the lower quartile. Likewise, 11 firms

(46 percent) were found in the range of the two critical boundary values. Majority of the

firms fell under the least successful performance indicator value Thus, there was no firm.

Table 16. Number of Coffee Processing Firms in Different Quartiles of Labour

Productivity in Relation to Net Output*

Number of Firms
Quartiles# 1996 1997 1998 1999 2000
Net output/Labour cost
> UQ 1(4) -(0) 14(58) 15(62.5) -(0)
< LQ 12(50) 14(58) -(0) -(0) 3(12.5)
Neither 11(46) 10(42) 10(42) 9(37.5) 21(87.5)
Total 24(100) 24(100) 24(100) 24(100) 24(100)
*
Figures in the brackets are percentage values.
#
UQ= upper quartile value; LQ =lower quartile value.
Source: Own computation.

observed to be above the upper quartile in 1997 and 2000. Fourteen and 15 firms were

found to be below the lower quartile in 1997 and 2000, respectively. Furthermore, all the

processing firms were found to be under the upper quartile. At the same time, 50 percent

and 12 percent of the total sample firms had values below the lower quartile value in

1998 and 1999, respectively.

As presented in Table 16, of 24 cases treated, 11, 10, 10, 9 and 21 firms fell neither above

the upper nor below the lower quartile values in 1996, 1997, 1998, 1999 and 2000,

62
respectively. These values revealed that there were year-to-year variations in firms’

labour productivity level. Firms that have shown productive in one year might not

continue keeping their performances regularly.

Table 17. Number of Coffee Processing Firms in Different Quartile of Labour

Productivity Measured as Net Value-added per labour*

Quartile# Number of Firms

1996 1997 1998 1999 2000
> UQ -(0) -(0) 9 (37) 1 (4) - (0)
< LQ 12(50) 12(50) 1 (4) 1 (4) 6 (25)
Neither 12(50) 12(50) 14 (59) 22 92) 18 (75)
Total 24(100) 24(100) 24(100) 24(100) 24(100)
*
Figures in the brackets are percentage values.
#
UQ upper quartile value; LQ Lower quartile range.
Source: Own computation.

Labour productivity in relation to net value-added showed similar result with the above

ratios of net output to labour. The discussions and interpretations of the results would be

the same. As depicted in Table 17, good performance was observed in the 1998 and 1999

as the majority of the cases were found to be above the lower quartile indicator. This

could be attributed to the price rise observed during these years. Average prices for

unwashed coffee in the 1998 and 1999 were 15.6 and 15.2 Birr per kilogram,

respectively, while the average price over the five years (1996-2000) was 13.28 Birr per

kilogram. The other possible reason could be labourers were managed effectively and

properly in these particular years. For 1996 and 1997 production years, the results

revealed poor performances to such an extent that almost all of the ratios were below the

63
upper quartile value and more than half of their results fell under critical boundary of the

lower quartile. This might have emanated from the relatively lower prices received for the

processed coffee product during the years and/or due to high cost of labour or poor effort

of the workers to produce high quality coffee bean.

Individual coffee processing firms, showed irregular pattern for successive years

(Appendix Table 1). This could be attributed to the fact that labour allocation was almost

done by subjective judgment, which directly or indirectly contributed to varying results.

In addition, the inflation factor on wage, which increased the real wage in one year and

reduced its magnitude in the other year, had also brought changes. Generally, there was

no uniform labour allocation system. Firms employ workers not based on the amount of

labour requirement of the specified jobs but assign randomly without following the work

norms. As a result, there was no regular pattern observed for individual firms across the

years and among the firms themselves with in a given year.

5.1.8.2 Productivity of Fixed Capital

The ratios of net output and net value-added to fixed capital were computed for individual

firms. As there are no standard norms with which to compare these ratios, they were

compared based on quartile ranges. Accordingly, the majority of the processing firms had

ratios below the upper quartile values except for 1998, in which the ratios of net output

and net value-added to fixed capital, accounted for 54 and 50 percent of the processing

firms, were lying above the upper quartile values (Table 18).

64
More than 75 and 87 percent of the firms were found under the critical boundary of upper

quartile indicator in 1996 and 1997, respectively. The corresponding figures for 1999 and

2000 were 67 and 87 percent, respectively. The computed results illustrated that the

productivity of fixed capital for the majority of coffee processing firms was poor during

the period under investigation. The possible reasons could be lower level of capacity

utilization, caused by inadequate supply of dry cherry, spare parts, fuel and lack of

technical know-how, and the high investment cost associated with the machine during the

establishment of the firms.

Table 18. Number of Dry Coffee Processing Firms by Fixed Capital Productivity Ratio*

Types of Ratio/Quartile# Number of Firms

1996 1997 1998 1999 2000
i. Net output/Fixed capital
> UQ 6(25) 3(13) 13(54) 8(33) 3(13)
< LQ 9(37.5) 7(29) 3(13) 5(21) 10(42)
Neither 9 (37.5) 14(58) 8(33) 11(36) 11(46)
Total 24(100) 24(100) 24(100) 24(100) 24(100)
ii. Net value-added/Fixed capital
> UQ 6(25) 3(13) 12(50) 8(33) 3(13)
< LQ 8(33) 7(29) 2(8) 5(21) 10(42)
Neither 10(42) 14(38) 10(42) 11(46) 11(46)
Total 24(100) 24(100) 24(100) 24(100) 24(100)
*
Figure in the brackets are percentage values.
#
UQ is upper quartile value; LQ is lower quartile value.
Source: Own computation

65
Almost all of the sample dry coffee processing firms suffered from capacity under

utilization, which mainly resulted from shortage of supply of dry cherry. The predominant

factor that in turn contributed to the scarcity of dry cherry was the increase of the number

of washed coffee processing firms in the zone that have competed for the same raw

material. The relative price premium paid by the wet coffee processing firms to

smallholder coffee farmers has made the latter sell the red cherry to coffee washing

stations.

Pulpers require red cherry input, which are fully ripe coffee beans harvested and

immediately used for washed coffee processing. During harvest time, smallholder coffee

producers critically need cash and prefer to sale their product in the form of red cherry. In

addition, the comparative price advantage for red cherry encouraged them to supply it to

the pulpers. Consequently, there was a declining trend in capacity utilization over time for

dry coffee processing firms. Very a few firms were found operating above 75 percent of

their respective annual production capacities (Table 19).

The average designed processing capacities of small and large dry coffee processing firms

per year were 800 tones and 1400 tones of unwashed coffee, respectively. But practically,

the actual capacity utilization of almost all the processing units during the survey period

was below their designed capacities. As Table 19 reveals, with the exception of 1996 and

66
Table 19. Capacity Utilization of Dry Coffee Processing Firms (1996-2000)

Year Number of Firms by Percentage Range

<25 25-50 51-75 76-100 >100 Total
1996 3 11 7 2 1 24
1997 7 5 8 4 - 24
1998 1 7 6 9 1 24
1999 10 11 3 - - 24
2000 7 11 6 - - 24
Source: Own computation

1998, when one firm was able to operate at full capacity, all the other dry coffee

processing units in the sample were functioning below their theoretical capacity.

Of 24 cases examined, 2, 4 and 9 processing firms in 1996, 1997 and 1998, respectively,

were found to operate at 76-100 percent of their respective capacities. All the remaining

processing units were operating at less than 75 percent of their capacity except in 1996

and 1998. In the last two reference years, 1999 and 2000, all firms were operating below

capacities of which 88 percent and 75 percent of the sample units, respectively, were

operating at less than or equal to 50 percent of their capacity. In the same years, some

firms were found to be operating at a very low level of their capacity, even below 25

percent. For instance, in 1999, 10 firms (42%) were operating at less than 25 percent of

their theoretical capacity.

The concrete reason played great role for capacity under utilization was the scarcity of dry

cherry. Almost all of the firms were kept idle for sometime in each year during the survey

67
period due to shortage of dry cherry. There were also other reasons, which were mainly

related to management problems. These operational constraints included lack of spare

parts, power shortage and lack of skilled technicians. All sample firms reported that there

was a delay in production at least once in a year due to shortage of spare parts. In most of

the district towns of the study zone, there were no shops supplying spare parts, like chain,

belt, etc., which were highly required by the machines.

Poor efficiency of fixed assets had been another prominent reason that contributed to

under capacity operation of the firms. Poor efficiency in the conversion rate of dry cherry

(Jenfel) to processed coffee beans had been caused by poor quality dry cherry coffee

supplied to the processing firms. Furthermore, insufficient maintenance service due to

lack of appropriate machine operators or lack of technical know-how might be another

factor.

More than 85 percent of the firms pointed out that the quality of dry cherry has become

poor because of different reasons of which pest attack, incidence of CBD, improper

handling, packing and drying could be worth mentioning. For instance, if the cherry is not

dried to the required level of moisture content, it decreases the quality as well as the

operational efficiency of the processing machine. As a result of the aforementioned

problems, the fixed assets had been utilized with lower efficiency and the designed

capacity level was not fully exploited.

68
5.1.8.3 Productivity of Dry Cherry

The ratio of net output and net value-added to dry cherry revealed poor performance of

most individual firms. About 58 and 75 percent of the processing firms were found above

the lower boundary of the upper quartile values in 1998 and 1999, respectively (Table

20). The good performances were attributed to the rise in price of the product observed in

those particular years. All processing firms were categorized below the upper quartile

boundary in 1996, 1997 and 2000, of which 29%, 42%, and 8%, respectively, were found

below the upper critical boundary of the lower quartile value. Seventy one, 58, 33, 25 and

92 percents of the processing firms in 1996, 1997, 1998, 1999, 2000, respectively were

found neither above the upper quartile nor below the lower quartile values.

Similarly, the net value-added to dry cherry ratio showed, except for 1998 and 1999, that

more than 96 percent of the firms were found to be below the upper quartile values. But

for the years 1998 and 1999, more than half of the sample dry coffee processing firms

were found above the upper quartile value. On the other hand, 75, 54, and 96 percents of

the dry coffee processing firms in 1996, 1997 and 2000, respectively, found neither above

the upper quartile nor below the lower quartile values. But in 1998, 8 (33 percent) of the

sample firms were found between the critical boundaries of the upper and the lower

quartile values.

Among the major problems, the maintenance services available for fixed assets were not

adequate in most cases due to lack of machine operators. Even a few firms having

69
machine operators were inefficient in that they did not have the necessary technical know-

how. These highly influenced the efficiency of the inputs.

Table 20. Number of Firms under Different Quartile Range for Dry Cherry Productivity*

Number of Firms
Types of Ratio/Quartile# 1996 1997 1998 1999 2000
I. Net output/Dry Cherry
(Birr/kg)
> UQ -(0) -(0) 14(58) 18(75) -(0)
< LQ 7(29) 10(42) 2(8) -(0) 2(8)
Neither 17(71) 14(58) 8(33) 6(25) 22(92)
Total 24(100) 24(100) 24(100) 24(100) 24(100)
ii. Net value-added/Dry Cherry
(Birr/kg)
> UQ 1(4) -(0) 14(58) 16(67) -(0)
< LQ 5(21) 11(46) 8(33) -(0) 1(4)
Neither 18(75) 13(54) 2(8) 8(33) 23(96)
Total 24(100) 24(100) 24(100) 24(100) 24(100)
*
Figures in brackets are percentage values
#
UQ is upper quartile value; LQ is lower quartile value.
Source: Own computation

Low productivity of the dry cherry input, in relation to the value of output and value-

added, for most of the firms in 1996, 1997 and 2000, was due to the inferior quality of dry

cherry used for processing and/or lower prices received for the processed product. Low

quality of coffee beans was attributed to improper machine operation, which also reduced

the quality of processed coffee beans.

70
5.1.8.4 Group Comparison of Firms’ Productivity

The means of the ratios of net output and net value-added to labour input of each

operational year were computed for the small and large groups of firms and compared.

There was difference between the two groups (Table 21). The implication is that a unit

cost of labour employed in large firms can produce relatively higher net output and net

value-added as compared to a unit cost of labour in the small firms. Except for 1996,

these ratios showed better productivity of labour input in large firms than in small firms.

This implies that better labour utilization was observed in large firms. The differences in

computed results suggest that improved allocation of labour in large units and/or less

efforts made by labour in small firms.

Large coffee processing firms used modern technologies, which could enhance labour

productivity. Understandably, the better the level of technology adopted by large firms the

better would be the anticipated results. The adoption of better technologies is expected to

increase the labour efficiency. Similarly, during the survey years, most of the large

processing units in the sample hired more skilled workers as compared to the small units.

The relatively more member of skilled labourers in large coffee processing firms has

helped better management and organizational structure that easily smoothened the

operational activities and improved labour efficiency.

The productivity of fixed capital was found to be higher in large dry coffee processing

firms than in the small units in all the years under discussion (Table 10). The ratios of net

71
output and net value-added per fixed cost were 15.73 and 13.79 for large firms

respectively. The corresponding figures for small firms were 10.00 and 8.63, respectively.

The difference between small and large firm groups with respect to the mean values of

both ratios was statistically different. The possible explanations for this were less capacity

utilization and old age of the machines, which also made fixed capital less efficient in

small firms. The machines of small-sized processing units were relatively older (10 years)

than that of large units (7 years) and contributed to large depreciation cost, which directly

reflected in reduction of the efficiency of fixed capital. The ratios of net output and net

value-added to labour for large firms were 14.8 and 13.1, respectively, while those of

small firms were 13.1 and 11.41, respectively. Both were statistically different at 10

percent level.

The relatively higher efficiency of labour and capital inputs in large firms could be

attributed to the economies of scale advantage they enjoy. The better use of power and

spare parts could also contribute to better performance of fixed assets in large firms.

The dry cherry productivity obtained for the two groups of firms indicated that there were

almost equal average ratios of net output to dry cherry input for both groups and a slightly

higher net value-added per dry cherry for large firms. The difference between small and

large firm groups with respect to the mean values of both ratios was not statistically

different.

72
Table 21. Group Comparison of Factor Productivities of Small and Large Firms#, 1996-2000

Factor Productivity
Type of Labour Capital Dry Cherry
Firm/ Year NOP/Lb NVA/Lb NOP/FC NVA/FC NOP/DCH NVA/DCH
I. Large Firms 14.8*a 13.1*a 15.73**a 13.79**a 1.45 1.29
1996 8.41 6.81 12.8 10.36 0.89 0.76
1997 9.63 8.25 11.72 10.04 1.05 0.90
1998 18.34 16.45 25.47 22.84 1.79 1.60
1999 25.54 23.18 15.64 14.19 2.06 1.87
2000 12.08 10.67 13.04 11.52 1.47 1.30
ii. Small Firms 13.00*b 11.41*b 10.0**b 8.63**b 1.45 1.28
1996 8.43 6.85 9.89 8.03 0.85 0.69
1997 8.55 7.08 9.18 7.60 0.89 0.74
1998 16.62 14.78 15.75 14.01 1.63 1.45
1999 20.90 19.24 8.74 8.05 2.59 2.39
2000 10.48 9.09 6.32 5.48 1.28 1.11
#
NOP=net output; Lb=Labour input; FC=fixed capital input; NVA=Net value-added; DCH= Dry cherry
input, **a and **b are significantly different at 5 percent; *a and *b are significantly different at 10 percent.
Source: Own computation

5.1.8.5 Inter-temporal Comparison of Factor Productivity

As shown in Figures 4, 5 and 6, there had been an increasing trend in the productivity of

dry cherry and labour inputs for both groups of firms for the first four consecutive years

(1996-1999). A decline was observed in 2000 and it could be attributed to the fall in

nominal price for unwashed coffee at central market, which deflated the real price of

coffee. The price deflator for unwashed coffee in the year 2000 was 0.88 given the price

of 1996 as base. During the first four years of the study period (1996–1999), the trend

73
showed improvement in efficiencies of labour and dry cherry inputs, but due to the

aforementioned problems their productivity declined in 2000.

NOP/DCH (Large firms)

3
NOP/DCH (Small firms)

Output/ 2
Dry cherry
1
0
1996 1997 1998 1999 2000

Year

Figure 4. Trend in Dry Cherry Productivity

NOP/Lb (Large firms)

30
NOP/Lb (Small firms)
25
Output/ 20
labour 15
10
5
0
1996 1997 1998 1999 2000

Year

Figure 5. Trend in Labour Productivity

Changes in the productivity of fixed capital showed irregular pattern for both groups of

the dry coffee-processing firms (Figure 5). More specifically, large firms exhibited a

general increasing trend during 1996-1998 and declined in 1999 and 2000. The pattern of

changes in the variable for small firms followed the pattern of change of large firms.

74
 Output/ 30 NOP/FC (Large firms)
Fixed 25 NOP/FC (Small firms)

capital 20
15
10
5
0
1996 1997 1998 1999 2000
Year

Figure 6. Trend in Fixed Capital Productivity Ratios

The productivities of labour and fixed capital, in relation to net output and net value-

added, were better in the large dry coffee processing firms. This reveals better relative

efficiency in large firms than in the small-sized ones during the period under study.

5.1.9 Break-even Analysis

Break-even analysis revealed that the majority of the firms’ break-even quantities were

below 90 percent of their actual output for all of the years. The break-even volumes of

large firms computed for 1996 and 1997 indicated that 4 and 3 firms, respectively, were

between 81 and 90 percent of their designed capacities (Table 22). Three firms were

operating between 91 and 100 percent of their theoretical levels of outputs production,

respectively. But one firm was found to be less than 80 percent in 1997.

75
In 1998 and 1999, all large firms were operating at a break-even quantity to actual output

ratios of less than 90 percent. This shows a relatively better profitability status in these

years as compared to the preceding two years. Accordingly, out of 7 firms treated, 2, 5,

and 7 in 1998 and 4, 6, and 7 firms in 1999 were found with break-even output less than

70, 80 and 90 percent of actual output, respectively. This reveals that even if the

production level reduces to 90 percent, the firm could have operated at profit. The relative

improvement for particular years of 1998 and 1999 were mainly attributed to better price

obtained for unwashed coffee.

Table 22. Number of Firms by Ratios of Break-even to Actual Output

Size of Firms/Year Number of Cases by Cumulative Percentage

<70% <80% <90% <100% >100% Total
i. Large Firms
1996 - - 4 7 - 7
1997 - 1 4 6 - 7
1998 2 5 7 7 - 7
1999 4 6 7 7 - 7
2000 - 5 6 7 - 7
ii. Small Firms
1996 - 1 9 17 - 17
1997 - - 11 17 - 17
1998 8 9 16 17 - 17
1999 9 13 14 16 1 17
2000 3 12 17 17 - 17
Source: Own computation

All small firms exhibited similar trend to that of large firms, except one firm in 1999 that

was found to operate at loss at its actual production level, which was less than its break-

even quantity. To make the firm profitable in year 1999, production level should have

increased up to break-even volume or more. The major reason for this loss might be poor

76
management of the processing firm, high variable costs and/or poor quality of processed

coffee. The rest of small coffee processing firms were profitable even at lower level of

production than their actual quantity of output in these years.

Generally, break-even volumes of almost all sample coffee processing firms were below

their respective actual outputs. This indicates that they could have stayed at break-even

even if their outputs were decreased to lower levels than the actual produce. In spite of

under capacity utilization of most coffee processing firms, this analysis finds that they

still could remain profitable at lower level of production than the existing ones.

5.2 Econometric Results

5.2.1 Production Function

With the purpose of examining the relationship between factor inputs and the level of

processed coffee output, Cobb-Douglas production function specified in Chapter 4 was

estimated. The estimation was separately done for large and small coffee processing firms

and both together.

The variables included in the model were defined as follows:

Output: in this study output was defined as the total production of processed coffee in

each firm valued in real terms. Since the output of dry coffee processing is processed

coffee (unwashed coffee), to calculate the real values of the output national coffee price

indexes were used.

77
Labour input: labour was measured in terms of the costs incurred for labour which

include salaries, wages and per diems; measured in real terms. Here also national indexes

were used to obtain the real values of labour used in the firms.

Fixed capital: Fixed capital was the sum of the allowance for depreciation calculated for

the service of the fixed capital during the specified year and the amount of interest on

capital invested in real terms.

Dry cherry: Dry cherry was the amount of coffee cherry before hulling, locally called

Jenfel, and measured in physical terms (in kg).

Working Capital: this was defined as the amount of capital used to cover the annual

operational costs of the firm in real terms.

Before entering the selected explanatory variables into the model, it was necessary to

check for the existence of multicollinearity among the variables. The reason was to

remove one of the two highly correlated variables from the estimation of the model. If

multicollinearity turns out to be significant, the simultaneous presence of the two

variables will attenuate or reinforce the individual effects of these variables. Needless to

say, omitting significant interaction terms incorrectly will lead to a specification bias. In

short, if the coefficients of the interaction of the variables indicated serious

multicollinearity, one of the two variables highly associated should be eliminated from

model analysis (Kothari, 1990). Accordingly, a Variance Inflation Factors (VIF (Xi))

technique was employed to detect the problem of multicollinearity for continuous

variables (Gujarati, 1995). Each selected continuous explanatory variable (Xi) is

regressed on all the other continuous explanatory variables, the coefficients of

78
determination (Ri2) is constructed in each case. If an approximate linear relationship

exists among the explanatory variables then this should show up as a 'large' value for Ri2

in at least one of the test regressions. A popular measure of multicollinearity associated

with the VIF (Xi) (Gujarati, 1995), is defined as:

VIF (Xi) = (1-Ri2)-1

Where Ri2 is the coefficient of multiple determination when the variable Xi is regressed

on the other explanatory variables. A rise in the value of Ri, that is an increase in the

degree of multicollinearity, does indeed lead to an increase in the variances and the

standard errors of the OLS estimators. A VIF value greater than 10 is used as a signal for

the strong multicollinearity (Gujarati, 1995).

Table 23. Values of Variable Inflation Factors for Selected Explanatory Variables

Explanatory Variables
Firms/Group Fixed Dry Working Labour
Capital Cherry Capital
All firms 0.99 0.99 1.60 1.59
Small firms 1.12 0.99 2.97 3.00
Large firms 0.94 1.07 0.99 1.00
Source: own computation

In this analysis, the VIF values of all explanatory variables were found to be below 10

(Table 23). All the proposed explanatory variables were, thus, safely used to estimate the

models.

79
The Cobb-Douglas production functions were estimated for small and large groups of dry

coffee processing firms using five years cross-sectional time-series data (1996-2000).

Model estimates are presented in Table 24. Summary statistics show that all the three

estimated models provided good fits to the data. The F-values were significant at the 1

percent level supporting the validity of the model estimates. The variables in the model

estimates explained about 96 percent of the variation in the output of processed coffee.

Table 24. Estimation Results of Cobb-Douglas Production Function for Small and Large
Dry Coffee Processing Firms#

Explanatory variables$

Type of Adj. F-value@ Constant Fixed Dry Labour Working

firm R2 Capital cherry capital

All firm 0.967 873.035*** 1.54*** 0.032** 0.967*** 0.028 0.066***

(4,115) (4.263) (1.933) (4.537) (1.315) (3.954)

0.970 670.33*** 1.278*** 0.032* 0.947*** 0.05 0.066***

Small
firms (4, 80) (2.848) (1.738) (2.835) (1.15) (3.373)

Large 0.960 205.49*** -2.739 0.075** 0.973*** 0.024 0.074**

firms (4, 30) (-1.132) (2.149) (2.720) (0.58) (2.136)
#
***, * *, * indicate significant at 1%, 5%, and 10% probability levels, respectively.
@
Figures in the parentheses under F-values are degrees of freedom.
$
Figures in the parentheses under constant and explanatory variables are t-values.
Source: Own computation

The review of individual explanatory variables reveals that three explanatory variables,

namely fixed capital, dry cherry and working capital were found to affect positively the

output of processed coffee in all the three model estimates. Labour was not found to

significant in determining the dependent variable. The partial elasticity’s of dry cherry

80
suggest that 1 percent increase in dry cherry increases the output of processed coffee of

all firms in the sample, small and large-sized firms by 0.967, 0.947 and 0.973 percents,

respectively. The elasticity implies that dry cherry input was the most important input

factor affecting the output of processed coffee. The other two factors had relatively lower

elasticity’s. However, the sum of the elasticity coefficients of the significant variables in

all the model estimates were 1.065, 1.045 and 1.122 indicating increasing returns to scale

in production. It implies that doubling all input factors would result in more than double

value of output at least during the period under investigation. This implies that the firms

were operating in the first stage of their production frontier. Increasing all or some of the

factors of production should lead to a higher-level production of the firms.

5.2.2 Profit Function

Estimation of profit function was done to identify cost factors, which significantly

contributed to the variation in profit of dry coffee processing firms. The dependent

variable was net profit per year and the explanatory variables were fixed capital, costs of

dry cherry, casual labour, permanent labour, and auxiliary materials all measured in Birr.

In the estimation process, attempts were made to fit both linear and logarithmic models to

the empirical data. It was found that the double-log model estimates better fitted the data.

Backward method of variable selection was used in the estimation process. Model

estimates are presented in Table 25. Summary statistics show that all the three estimated

models provided acceptable fit to the data. The F-values are significant at the 1 percent

81
level supporting the validity of the model estimates. The variables in the model estimates

explained about 38 and 28 percent of the variation in profit of small-and large-sized dry

coffee processing firms and 43 percent of those all firms.

Table 25. Regression Results of Profit Function for Dry Coffee Processing Firms

Explanatory variables$

Type of R2 F-value@ Constant Fixed Auxiliary Causal

firm capital materials labour

All firms 0.426 32.213*** 9.054*** -0.302*** - 0.700***

(2,117) (5.236) (2.976) (6.851)

Small 0.382 26.967*** 8.937*** -0.266** 0.675***

(2, 82) (5.225) (2.598) - (6.524)
firms
Large 0.282 7.688*** 17.914*** -0.765** 0.396** -
Firms (2,32) (4.140) (2.393) (2.281)
#
***, * *, * indicate significance at 1% and 5% levels, respectively.
@
Figures in the parentheses under F-values are degrees of freedom.
$
Figures in the parentheses under constant and explanatory variables are t-values.
Source: Own computation

The scrutiny of individual explanatory variables reveals that one explanatory variable,

namely fixed capital assumed a negative influence on profit in all the three model

estimates. This implies that if the firms increase their fixed capital, their profit decline.

This problem is more serious in the case of large-sized firms. The result is consistent

with the under-utilization of the firms’ designed capacities. The cost of casual labour is

found to significantly and positively influence profit in small-sized and in all firms model

estimates. The partial elasticity of the variable suggests that 1 percent increase in the cost

of casual labour increases the profit by about 0.7 percent. The second important variable

82
in influencing profit in the case of large-sized dry coffee processing firms is the cost of

auxiliary materials. It assumed a positive and significant coefficient suggesting that 1

percent increase in this cost results in 0.4 percent increase in profit. This result is also

consistent with the problem of capacity under-utilization caused by lack of these inputs.

83
6. SUMMARY, CONCLUSIONS AND POLICY IMPLICATIONS

6.1 Summary

Agriculture is the dominant economic sector of Ethiopia. In spite of its great importance,

poor performance is the major characteristics of the sector. Its progress very much

determines the destiny of the country in terms of her economic development.

Among exportable agricultural commodities produced in the country, coffee is the

dominant one in generating foreign exchange earnings. A great number of people lead

their livelihood directly or indirectly in coffee production, marketing activities and

processing. Both dry and wet coffee processing firms have, thus, been installed in

different parts of the country where coffee production is mainly undertaken. These firms

are expected to contribute to improvement in the quality of the product through value

adding, generation of employment opportunities and remunerative market price for both

suppliers and processors. There has, thus, been expansion of the firms particularly since

the last decade.

However, there has been a serious doubt on whether coffee-processing sub-sector has

been performing well. In order to clear this doubt periodic and systematic evaluation of

the actual performance of dry coffee processing firm is imperative, but currently lacking.

This study was, therefore, designed to evaluate the financial performance, profitability

and efficiency of dry coffee processing firms in western Wallaga zone of Oromia

84
National Regional State.

In order to meet the objectives of the study, both secondary and primary data were used.

A five-year (1996-2000) cross-section secondary data were collected from 24 dry coffee

processing firms (17 small and 7 large) selected using stratified random sampling

technique. Moreover, formal survey, informal discussions with relevant

individuals/agents and personal observation were used to generate primary data. The

performance of the firms was analyzed and interpreted using financial, profitability,

efficiency and break-even analyses, besides the estimation of econometric models of

Cobb-Douglas production function and profit function.

6.2 Conclusions and Policy Implications

Financial analysis has revealed that, although both groups of firms had safe ratios, larger

firms were slightly better off in maintaining the solvency of their business and their

financial position. However, this solvency might be at the expense of potentially higher

income and it should thus receive due attention.

Profitability analysis of the dry coffee processing firms indicated that large dry coffee

processing firms were found to be in a better profitability status than small firms.

However, for both small- and large-sized groups of firms, the rate of return to investment

is extremely low, much lower than the interest rate (10 percent). This suggests that there

85
is a serious need to improve the profit and profitability of the dry coffee processing firms

under consideration.

The examination of the efficiency analysis of factor inputs, fixed capital, labour and dry

cherry has revealed that the productivities of the first two factors were higher in the large-

sized group of firms than the small-sized ones. A unit cost of labour employed in large

firms can produce relatively higher net output and net value-added than in the small

firms. It suggests a relatively better utilization of labour in large units and/or fewer efforts

made by labour in small firms. However, the productivity of the factor inputs used by

processing firms was found to be generally low. This suggests that adequate attention

should be given to improvement in factor productivity.

Break-even analysis has revealed that the majority of the dry coffee processing firms’

break-even volumes of output was below 90 percent of their actual levels of output. This

suggests that there are still unutilized capacities with almost all of the dry coffee

processing firms in the sample lower level of capacity utilization. More than two-third of

the sampled firms utilized less than 75 percent of their respective theoretical capacities in

all the years under study. It is thus essential to enhance the firms’ capacity utilization.

The Cobb-Douglas production function analysis has revealed that dry cherry, fixed capital

and working capital significantly influenced the output dry coffee production. The

elasticity estimates imply that dry cherry input was the most important factor affecting the

output of dry processed coffee. The other two factors had relatively lower elasticities.

86
However, the sum of the elasticity coefficients of the variables in all the model estimates

were greater than 1 indicating increasing returns to scale in production. The most

important reason was the under capacity utilization of capital assets, even though almost

all the firms in the sample were operating at profit. This implies that increasing these

three factors could result in more than double value of processed coffee output. This in

turn suggests that the firms have been operating in the first stage of their production

frontier that is characterized by inefficient use of resources.

The contribution of labour inputs to the production process was found to be statistically

insignificant in this analysis. This suggests the need to improve labour productivity

through appropriate measures. Proper labour management should be practiced and firms

should have to develop among labourers’ technical skill, consciousness, good moral and

work experience.

The analysis of the determinants of profit has revealed that fixed capital and the cost of

casual labour played significant role in the profit of small-sized group of firms negatively

and positively, respectively. For large-sized group of firms, fixed capital and the cost of

auxiliary materials were found to be the key factors influencing profit negatively and

positively, respectively. The most important reason is still the under capacity utilization

of capital assets. This suggests that it is essential to improve the utilization of fixed

capital through ensuring the availability of causal labour and auxiliary materials.

87
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92
 APPENDICES
Appendix 1
Table 1. Capacity Utilization of Coffee Processing Firms

Firms 1996 1997 1998 1999 2000

Amount of Capacity Amount of Capacity Amount of Capacity Amount of Capacity Amount of Capacity
Processed Utilizatio Processed Utilizatio Processed Utilizatio Processed Utilization Processed Utilization
Coffee in n (%) Coffee in kgs n (%) Coffee in n (%) Coffee in (%) Coffee in (%)
kgs kgs kgs kgs
Large firms
LI12 555135 40 357068 26 716569 51 238142.05 17 314950 22
LI13 540855 39 386572 28 540787 39 150659.19 11 201651 14
LI17 386675 28 278656 20 375693 27 105712.84 8 413565 30
LI18 216240 15 123915 9 105088 8 111475.22 8 239445 17
LI22 240890 17 339517 24 805994 58 797644.34 57 613798 44
LI23 487351 35 313781 22 630326 45 218423.16 16 304587 22
LI24 486815 35 331168 24 467115 33 462439.68 33 190146 14
Small Firms
SI01 253215 32 251242 31 605791 76 175429.26 22 234474 29
SI02 561854 70 476001 60 281163 35 234413.51 29 526196 66
SI03 664051 83 641298 80 256318 32 68991.612 9 223260 28
SI04 528700 66 313721 39 521314 65 108332.13 14 292591 37
SI05 389130 49 86998 11 671697 84 239189.75 30 339479 42
SI06 525045 66 524452 66 425800 53 128133.62 16 557649 70
SI07 444890 56 507006 63 426280 53 274287.71 34 399465 50
SI08 458965 57 675479 84 227003 28 328453.78 41 460536 58
SI09 293505 37 500727 63 658680 82 147620.81 18 183130 23
SI10 575535 72 404047 51 798163 100 238770.65 30 279325 35
SI11 12750 2 535980 67 752339 94 280783.42 35 382779 48
SI14 905335 113 448453 56 680034 85 215511.76 27 189053 24
SI15 356445 45 111811 14 659324 82 297337.1 37 498330 62
SI16 710356 89 356535 45 406490 51 275754.43 34 68246.1 9
SI19 431035 54 667006 83 770648 96 459835.21 57 481644 60
SI20 390680 49 607923 76 843996 105 366275.67 46 124729 16
SI21 301070 38 442197 55 748862 94 458661.09 57 510800 64
Source: Survey Data

93
Table 2. Ratios of Net Output and Net Value-added to Labour by year@

1996 1997 1998 1999 2000

NOP/LB NVA/LB NOP/LB NVA/LB NOP/LB NVA/LB NOP/LB NVA/LB NOP/LB NVA/LB
Firm
Large Firms
LI12 8.8 7.35 12.6 11.50 10.0 8.28 25.3 24.15 12.2 11.26
LI13 8.8 7.34 12.7 11.56 28.2 26.57 17.7 17.01 11.4 10.72
LI17 8.2 6.97 7.3 6.23 30.7 29.05 20.4 20.09 14.2 13.08
LI18 8.8 7.75 11.4 10.99 19.7 19.39 20.7 20.41 12.5 11.65
LI22 8.7 7.58 13.3 12.25 11.6 9.59 38.0 35.10 12.9 11.58
LI23 7.7 6.46 6.0 5.13 19.4 18.00 16.6 15.74 9.0 8.09
LI24 8.4 7.10 5.1 4.23 19.0 17.69 23.9 20.22 10.1 9.10
Small Firms
SI01 7.5 6.55 8.7 7.78 26.2 24.35 16.7 15.93 6.7 5.73
SI02 8.2 6.81 10.3 9.11 23.8 22.55 23.4 22.36 12.3 10.96
SI03 8.5 7.11 10.3 8.98 26.9 25.69 13.1 13.32 13.3 12.29
SI04 8.1 6.78 12.3 11.35 27.3 25.69 15.4 15.15 11.5 10.50
SI05 8.0 6.81 7.5 7.51 24.8 23.10 18.9 17.91 12.0 10.82
SI06 8.2 6.86 12.1 10.89 26.8 25.29 14.1 13.63 12.5 11.19
SI07 6.2 4.90 7.0 5.82 23.0 21.49 18.0 16.84 13.1 11.79
SI08 7.2 5.89 8.6 7.27 9.2 8.10 28.7 27.22 11.0 9.85
SI09 8.5 7.31 8.0 6.76 26.2 24.54 21.7 21.06 9.3 8.63
SI10 2.3 1.67 7.7 6.56 10.2 8.43 25.9 24.74 10.0 9.09
SI11 3.3 5.53 8.0 6.73 25.5 23.84 26.1 24.81 13.2 12.05
SI14 10.2 8.63 7.9 6.68 6.7 5.53 8.7 7.66 11.1 10.44
SI15 9.3 8.12 7.4 7.08 9.9 8.26 22.2 20.86 7.8 6.56
SI16 22.7 19.26 4.4 3.49 10.6 9.01 19.7 18.55 11.7 11.94
SI19 10.7 9.23 7.8 6.53 11.6 9.62 25.4 24.00 12.1 10.85
SI20 10.6 9.19 7.8 6.49 8.9 7.33 25.7 24.37 12.3 11.93
SI21 16.2 14.98 7.6 6.45 8.6 7.17 18.1 16.88 5.1 4.25
Upper Quartile for NOP/LB = 18.83 Upper Quartile for NVA/LB = 17.0
Lower Quartile for NOP /LB = 8.5 Lower Quartile for NVA/LB = 7.1
@
Net Output (NOP), Net Value-added (NVA) and Labour (LB) were measured in Birr.
Source: Own computation based on data given in Appendix 1 Tables 10 and 11.

94
Table 3. Ratios of Net Output and Net Value-added to Fixed Capital by Year@
1996 1997 1998 1999 2000
Firm NOP/FC NVA/FC NOP/FC NVA/FC NOP/FC NVA/FC NOP/FC NVA/FC NOP/FC NVA/FC

Large Firms
LI12 16.45 13.78 16.33 14.87 18.47 15.36 16.04 15.31 13.48 12.43
LI13 16.01 13.42 17.64 16.03 38.27 36.03 8.04 7.73 8.65 8.12
LI17 12.62 10.74 8.08 6.93 29.77 28.20 8.03 7.92 20.17 18.52
LI18 6.91 6.11 6.38 6.16 6.78 6.68 8.30 8.17 10.59 9.83
LI22 7.37 6.46 17.49 16.08 21.40 17.74 45.57 42.09 25.02 22.53
LI23 14.16 11.90 8.05 6.84 35.38 32.75 11.53 10.91 9.54 8.57
LI24 15.44 13.14 7.54 6.21 26.92 25.03 11.73 9.94 4.73 4.25
Small Firms
SI01 15.68 13.67 15.56 13.94 57.20 53.12 13.01 12.41 6.24 5.37
SI02 32.61 27.24 31.84 28.22 28.68 27.22 22.43 21.47 23.02 20.55
SI03 5.71 4.76 6.20 5.38 4.96 4.74 0.97 0.99 1.88 1.73
SI04 3.86 3.24 3.62 3.34 8.23 7.75 1.44 1.41 2.18 1.99
SI05 22.79 19.36 5.99 5.98 63.71 59.30 18.73 17.73 15.04 13.61
SI06 5.64 4.73 8.04 7.23 9.58 9.04 1.96 1.90 5.90 5.27
SI07 9.37 7.44 11.35 9.39 19.80 18.46 10.04 9.38 9.87 8.89
SI08 3.44 2.82 5.51 4.63 1.56 1.37 5.55 5.27 4.01 3.61
SI09 3.44 2.97 5.20 4.36 15.76 14.77 3.16 3.06 2.10 1.96
SI10 6.42 4.58 6.94 5.88 11.83 9.82 8.88 8.49 5.08 4.63
SI11 1.28 2.13 26.74 22.41 77.98 72.83 26.17 24.87 19.93 18.22
SI14 63.36 53.56 22.60 19.07 27.44 22.79 7.55 6.68 9.97 9.37
SI15 33.35 29.02 7.97 7.64 33.63 28.03 27.69 25.96 18.56 15.70
SI16 66.09 56.17 15.82 12.44 20.65 17.54 26.90 25.35 5.14 5.25
SI19 32.74 28.26 36.01 29.95 33.43 27.75 46.91 44.27 23.89 21.49
SI20 14.05 12.18 18.27 15.24 23.27 19.24 27.09 25.65 5.97 5.78
SI21 29.61 27.35 19.77 16.68 27.15 22.50 32.82 30.56 13.63 11.39
Upper Quartile NOP/FC= 31.60 Upper Quartile NVA/FC= 27.68

Lower Quartile NOP/FC= 8.54 Lower Quartile NVA /FC= 7.75

@
Net Output (NOP), Net Value-added (NVA) and Fixed Capital (FC) were measured in Birr
Source: Own computation based on data given in Appendix 1 Tables 10 and 11

95
Table 4. Ratios of Net Output and Net value-added to Dry Cherry by Year
(in Birr/kg)
Firm 1996 1997 1998 1999 2000
NOP/ NVA/ NOP/ NVA/ NOP/ NVA/ NOP/ NVA/ NOP/ NVA/
DCH DRH DCH DCH DCH DCH DCH DCH DCH DCH

Large Firms
LI12 0.83 0.69 1.37 1.24 0.83 0.69 3.16 3.01 1.66 1.53

LI13 0.83 0.70 1.37 1.24 3.23 3.04 2.17 2.09 1.67 1.57
LI17 0.83 0.71 0.69 0.59 3.31 3.14 3.28 3.24 1.74 1.60
LI18 0.83 0.73 1.45 1.40 2.45 2.41 3.31 3.25 1.57 1.46
LI22 0.83 0.73 1.54 1.41 0.83 0.69 2.29 2.12 1.49 1.34
LI23 0.82 0.69 0.68 0.58 2.28 2.11 2.21 2.09 1.14 1.02
LI24 0.89 0.76 0.58 0.47 2.28 2.12 0.85 0.72 0.86 0.78
Small Firms
SI01 0.82 0.72 0.94 0.84 2.40 2.23 2.11 2.01 0.68 0.58
SI02 0.82 0.69 1.11 0.98 2.95 2.80 3.42 3.27 1.37 1.22
SI03 0.83 0.70 0.98 0.85 3.53 3.37 2.42 2.46 1.37 1.26
SI04 0.83 0.70 1.52 1.40 3.23 3.04 2.78 2.73 1.41 1.28
SI05 0.82 0.70 1.14 1.14 2.60 2.42 2.43 2.30 1.38 1.25
SI06 0.83 0.70 1.33 1.20 3.12 2.94 1.96 1.90 1.39 1.24
SI07 0.60 0.47 0.67 0.56 2.35 2.19 1.96 1.83 1.39 1.25
SI08 0.70 0.58 0.79 0.66 0.84 0.74 3.17 3.01 1.40 1.26
SI09 0.83 0.72 0.83 0.69 3.01 2.82 2.91 2.82 1.39 1.29
SI10 0.44 0.31 0.83 0.70 0.83 0.69 3.30 3.16 1.31 1.19
SI11 1.54 2.57 0.83 0.69 2.87 2.68 3.11 2.95 1.58 1.45
SI14 0.95 0.81 0.82 0.70 0.82 0.68 0.83 0.74 1.59 1.49
SI15 0.95 0.83 0.82 0.79 0.83 0.69 2.22 2.08 0.85 0.72
SI16 0.95 0.81 0.48 0.38 0.83 0.71 2.39 2.26 2.06 2.10
SI19 0.95 0.82 0.82 0.69 0.83 0.69 3.27 3.09 1.38 1.24
SI20 0.95 0.83 0.82 0.69 0.83 0.68 3.26 3.08 1.75 1.69
SI21 1.75 1.61 0.82 0.69 0.82 0.68 2.35 2.19 0.80 0.67
Upper Quartile for NOP/DCH = 23.0 Upper Quartile for NVA/DCH = 20.3
Lower Quartile NOP/DCH = 6.9 Lower Quartile NVA/DCH = 6.2
NOP = Net output; NVA = Net value-added; DCH = Dry cherry.
Source: Own computation based on data given in Appendix 1 Tables 10 and 11

96
Table 5. Capital to Output and Capital to Labor Ratios for Groups of Firms by Year@

Firm 1996 1997 1998 1999 2000

Capital/ Capital/ Capital/ Capital/ Capital/ Capital/ Capital/ Capital/ Capital/ Capital/
Output Labor Output Labor Output Labor Output Labor Output Labor
Large Firms
LI12 0.01 0.53 0.02 0.77 0.01 0.54 0.03 1.58 0.02 0.91
LI13 0.01 0.55 0.01 0.72 0.01 0.74 0.04 2.20 0.03 1.32
LI17 0.01 0.65 0.02 0.90 0.01 1.03 0.05 2.54 0.01 0.71
LI18 0.02 1.27 0.04 1.78 0.05 2.90 0.05 2.50 0.03 1.18
LI22 0.02 1.17 0.02 0.76 0.01 0.54 0.01 0.83 0.01 0.51
LI23 0.01 0.54 0.02 0.75 0.01 0.55 0.03 1.44 0.02 0.94
LI24 0.01 0.54 0.02 0.68 0.01 0.71 0.01 2.03 0.03 2.14
Small Firms
SI01 0.01 0.48 0.01 0.56 0.01 0.46 0.03 1.28 0.02 1.07
SI02 0.00 0.25 0.01 0.32 0.01 0.83 0.02 1.04 0.01 0.53
SI03 0.03 1.50 0.03 1.67 0.09 5.42 0.37 13.40 0.12 7.09
SI04 0.04 2.09 0.08 3.40 0.05 3.31 0.27 10.70 0.11 5.28
SI05 0.01 0.35 0.04 1.26 0.01 0.39 0.02 1.01 0.02 0.79
SI06 0.03 1.45 0.03 1.50 0.04 2.80 0.16 7.17 0.04 2.12
SI07 0.01 0.66 0.01 0.62 0.02 1.16 0.03 1.79 0.02 1.33
SI08 0.04 2.08 0.03 1.57 0.10 5.89 0.08 5.17 0.06 2.73
SI09 0.05 2.46 0.03 1.55 0.03 1.66 0.13 6.89 0.11 4.41
SI10 0.01 0.37 0.02 1.12 0.01 0.86 0.05 2.91 0.05 1.96
SI11 0.20 2.59 0.01 0.30 0.01 0.33 0.02 1.00 0.01 0.66
SI14 0.00 0.16 0.01 0.35 0.01 0.24 0.02 1.15 0.03 1.11
SI15 0.01 0.28 0.02 0.93 0.00 0.29 0.01 0.80 0.01 0.42
SI16 0.00 0.34 0.01 0.28 0.01 0.51 0.01 0.73 0.06 2.27
SI19 0.01 0.33 0.00 0.22 0.00 0.35 0.01 0.54 0.01 0.50
SI20 0.01 0.75 0.01 0.43 0.01 0.38 0.02 0.95 0.05 2.06
SI21 0.01 0.55 0.01 0.39 0.01 0.32 0.01 0.55 0.01 0.37
@
Output, Capital and Labour were measured in Birr
Source: Own computation based on data given in Appendix 1 Tables 10 and 11

97
Table 6. Data Used for Break-even Analysis
1996 1997 1998 1999 2000
BEO/ BEO/ BEO/ BEO/ BEO/
Firm BEO AOP AOP BEO AOP AOP BEO AOP AOP BEO AOP AOP BEO AOP AOP

Large Firms
LI12 500 555 1.11 289 357 1.24 642 717 1.12 154 238 1.55 249 315 1.27
LI13 487 541 1.11 312 387 1.24 338 541 1.60 113 151 1.34 161 202 1.25
LI17 350 387 1.11 256 279 1.09 234 376 1.61 70 106 1.50 320 414 1.29
LI18 197 216 1.10 102 124 1.21 77 105 1.36 74 111 1.51 193 239 1.24
LI22 220 241 1.10 267 340 1.27 720 806 1.12 561 798 1.42 490 614 1.25
LI23 441 487 1.10 290 314 1.08 447 630 1.41 161 218 1.36 262 305 1.16
LI24 435 487 1.12 312 331 1.06 333 467 1.40 411 462 1.12 174 190 1.10
Small Firms
SI01 229 253 1.11 219 251 1.15 418 606 1.45 130 175 1.35 218 234 1.07
SI02 505 562 1.11 400 476 1.19 183 281 1.54 146 234 1.61 433 526 1.22
SI03 610 664 1.09 566 641 1.13 175 256 1.46 73 69 0.95 208 223 1.07
SI04 493 529 1.07 267 314 1.18 347 521 1.50 100 108 1.08 268 293 1.09
SI05 350 389 1.11 75 87 1.16 452 672 1.49 168 239 1.42 280 339 1.21
SI06 483 525 1.09 436 524 1.20 284 426 1.50 114 128 1.12 474 558 1.18
SI07 420 445 1.06 465 507 1.09 302 426 1.41 209 274 1.31 333 399 1.20
SI08 437 459 1.05 617 675 1.09 224 227 1.01 228 328 1.44 400 461 1.15
SI09 275 294 1.07 462 501 1.08 434 659 1.52 113 148 1.30 169 183 1.08
SI10 571 576 1.01 370 404 1.09 718 798 1.11 157 239 1.52 240 279 1.16
SI11 13 13 1.01 481 536 1.11 488 752 1.54 179 281 1.57 302 383 1.27
SI14 792 905 1.14 403 448 1.11 613 680 1.11 196 216 1.10 152 189 1.24
SI15 313 356 1.14 100 112 1.11 588 659 1.12 212 297 1.40 446 498 1.12
SI16 615 710 1.16 339 357 1.05 363 406 1.12 193 276 1.43 54 68 1.27
SI19 378 431 1.14 599 667 1.11 686 771 1.12 286 460 1.61 392 482 1.23
SI20 345 391 1.13 549 608 1.11 757 844 1.11 231 366 1.59 100 125 1.24
SI21 234 301 1.29 399 442 1.11 672 749 1.12 323 459 1.42 463 511 1.10
BEO=Break-even output in kgs; AOP=Actual output in kgs.
Source: Own computation and survey data

98
Table 7. Profit of Dry Coffee Processing Firms per Annum for Small and Large Firms
(in Birr)
Firm 1996 1997 1998 1999 2000
Large firms
LI12 650746 801388 881103 994190 781439
LI13 633367 872833 2387366 447164 475158
LI17 434901 263588 1674684 416166 1107821
LI18 223205 255404 330523 443101 552655
LI22 251884 848528 1015650 2787063 1452904
LI23 543633 279226 2159031 678618 498704
LI24 604516 222169 1582990 601205 194372
Small Firms
SI01 287163 380091 2216434 537136 192426
SI02 671814 896601 1155116 1045097 1098059
SI03 639510 884598 957764 -42480 177024
SI04 423266 553894 2049734 97248 292159
SI05 460846 138996 2590090 838766 697272
SI06 497180 1044169 1672707 166048 990775
SI07 296725 491197 1469694 769242 788782
SI08 260259 686711 36026 1185693 711852
SI09 222759 458459 2652227 406093 162173
SI10 58098 404476 939936 964913 461505
SI11 1486 643592 3112158 1194393 948713
SI14 1337438 529552 787830 234871 436731
SI15 512455 133273 837425 1000127 612232
SI16 1128391 201592 509343 972661 172365
SI19 629845 799849 996010 2045950 1059947
SI20 537978 698459 1021243 1599066 285828
SI21 795242 511139 910337 1598422 563487
Source: Own computation based on data given in Appendix 1 Tables 12 and 13.

99
Table 8. Data Used for Regression Analysis
LnYn LnX1 (Labour)
CI 1996 1997 1998 1999 2000 1996 1997 1998 1999 2000
LI24 15.6 15.2 15.5 15.5 14.6 11.0 11.1 11.2 11.2 11.3
LI23 15.6 15.1 15.8 14.8 15.1 11.0 11.1 11.2 11.2 11.3
LI22 14.9 15.2 16.1 16.1 15.8 10.9 11.0 11.1 11.1 11.2
LI18 14.8 14.2 14.0 14.1 14.9 10.9 11.0 11.1 11.1 11.2
LI17 15.3 15 15.3 14.0 15.4 11.0 11.1 11.1 11.2 11.2
LI13 15.7 15.3 15.7 14.4 14.7 11.0 11.1 11.2 11.2 11.3
LI12 15.7 15.3 16.0 14.9 15.1 11.0 11.1 11.2 11.2 11.2
SI21 15.1 15.5 16.0 15.5 15.6 10.3 10.5 10.7 10.9 11.0
SI20 15.3 15.8 16.1 15.3 14.2 10.3 10.5 10.8 10.9 11.0
SI19 15.4 15.9 16.0 15.5 15.6 12.3 12.4 12.5 12.6 12.7
SI16 15.9 15.3 15.3 15.0 13.6 12.4 12.5 12.7 12.8 12.8
SI15 15.3 14.1 15.9 15.1 15.6 10.3 10.5 10.8 10.9 11.0
SI14 16.2 15.5 15.9 14.8 14.6 12.0 12.2 12.3 12.4 12.5
SI11 11.9 15.7 16.0 15.0 15.3 11.1 11.2 11.4 11.5 11.6
SI10 15.7 15.4 16.1 14.9 15.1 12.3 12.4 12.5 12.6 12.7
SI09 15.1 15.6 15.9 14.3 14.6 12.0 12.1 12.2 12.3 12.4
SI08 15.5 15.9 14.8 15.2 15.5 11.4 11.6 11.7 11.8 11.9
SI07 15.1 15.6 15.4 15.0 15.4 10.3 10.5 10.7 10.9 11.0
SI06 15.6 15.6 15.4 14.3 15.7 10.3 10.5 10.7 10.9 11.0
SI05 15.3 13.8 15.9 14.9 15.2 10.0 10.2 10.5 10.7 10.8
SI04 15.6 15.1 15.6 14.1 15.1 10.0 10.2 10.5 10.7 10.8
SI03 15.9 15.8 14.9 13.6 14. 8 10.2 10.4 10.5 10.8 11.0
SI02 15.7 15.5 15.0 14.8 15.6 11.0 11.0 11.1 11.1 11.2
SI01 14.9 14.9 15.8 14.5 4.8 10.4 10.6 10.8 11.0 11.1

Source: Own computation based on data given in Appendix 1 Tables 10 and 11.

100
Table 8. Data Used for Regression Analysis, (Continued)
LnX2 (Fixed Capital) LnX3 (Dry Cherry)
CI 1996 1997 1998 1999 2000 1996 1997 1998 1999 2000
LI24 11.0 11.1 11.2 11.2 11.2 12.7 12.2 13.0 13.0 10.0
LI23 11.0 11.1 11.2 11.2 11.3 12.0 12.3 13.1 12.9 13.6
LI22 11.0 11.1 11.1 11.2 11.2 13.0 12.4 13.4 11.7 12.7
LI18 11.0 11.0 11.1 11.1 11.2 11.0 12.2 12.8 12.8 13.3
LI17 10.9 11.0 11.1 11.1 11.2 12.9 12.6 13.3 13.3 12.9
LI13 11.0 11.1 11.2 11.2 11.3 11.7 12.4 13.4 13.2 12.7
LI12 11.0 11.1 11.2 11.2 11.3 13.1 12.7 13.3 12.9 12.4
SI21 10.4 10.6 10.8 11.0 11.1 12.5 12.1 13.4 12.7 13.1
SI20 11.0 11.0 11.1 11.1 11.2 12.1 11.9 12.9 12.8 13.0
SI19 10.2 10.4 10.7 10.8 11.0 12.7 11.6 12.5 12.6 12.8
SI16 10.0 10.2 10.5 10.7 10.8 12.3 11.4 11.4 11.7 12.1
SI15 10.0 10.2 10.5 10.7 10.8 13.1 13.0 13.2 12.6 12.4
SI14 10.3 10.5 10.7 10.9 11.0 12.6 12.1 13.0 12.7 12.9
SI11 10.3 10.5 10.7 10.9 11.0 12.0 12.9 12.8 12.7 12.9
SI10 11.4 11.6 11.7 11.8 11.9 12.4 11.9 13.0 12.4 12.4
SI09 12.0 12.1 12.2 12.3 12.4 12.9 12.0 12.3 12.9 13.0
SI08 12.3 12.4 12.5 12.6 12.7 12.2 11.3 11.9 13.2 13.2
SI07 11.1 11.2 11.4 11.5 11.6 12.4 11.4 12.7 12.5 13.0
SI06 12.0 12.2 12.3 12.4 12.5 12.6 12.2 13.0 11.3 12.8
SI05 10.3 10.5 10.8 10.9 11.0 13.0 11.4 12.6 13.0 12.8
SI04 12.4 12.5 12.7 12.8 12.8 12.8 12.2 12.7 13.0 12.9
SI03 12.3 12.4 12.5 12.6 12.7 12.9 12.3 12.2 13.3 12.9
SI02 10.3 10.5 10.8 10.9 11.0 12.1 11.8 12.9 13.0 12.6
SI01 10.3 10.5 10.7 10.9 11.0 12.4 12.0 13.4 12.9 13.2
Source: Own computation based on data given in Appendix 1 Table 10.

101
 Table 8. Data Used for Regression Analysis, (Continued)
LnX5 (Working Capital)
CI 1996 1997 1998 1999 2000
LI24 12.2 12.2 11.4 11.9 12.1
LI23 12.2 12.3 12.1 12.5 12.3
LI22 12.7 12.4 11.9 12.7 12.1
LI18 13.0 12.5 12.0 12.3 12.9
LI17 12.0 12.2 12.5 12.9 12.7
LI13 12.8 11.9 12.3 12.6 11.9
LI12 13.0 10.8 12.9 11.4 13.0
SI21 13.0 13.0 12.7 12.1 12.2
SI20 13.0 12.9 12.3 13.0 13.2
SI19 12.9 12.7 12.7 12.9 12.9
SI16 12.4 13.2 9.0 13.5 12.6
SI15 13.3 12.8 12.7 12.3 12.6
SI14 12.7 12.5 11.5 12.5 12.6
SI11 12.7 12.4 12.9 13.2 12.4
SI10 11.2 12.9 13.0 13.3 13.0
SI09 12.9 12.9 12.9 11.6 12.8
SI08 13.3 13.2 12.9 13.3 12.7
SI07 12.3 11.1 13.1 12.8 12.7
SI06 12.8 12.1 11.9 12.6 12.9
SI05 12.6 12.6 12.2 12.9 13.3
SI04 12.4 13.0 13.3 12.8 13.3
SI03 13.4 13.3 11.9 11.6 11.0
SI02 11.1 13.01 11.9 12.9 11.7
SI01 11.8 10.5 10.9 12.0 11.3
Source: Own computation based on data given in Appendix 1 Table 11.

Table 9. Results of Stepwise Regressions for Production Function

of Dry Coffee Processing Firms, 1996-2000

Overall firms Large firms Small firms

Variables Coefficients Coefficients Coefficient
R2 0.97*** 0.96*** 0.97***
F-value 1156 646.9 880.1
Degree of freedom 116 116 116
0.923* -2.65 1.46***
(1.904) (-1.11) (3.355)
Fixed Capital - 0.46** 0.027*
(2.167) (1.703)
Dry Cherry 0.540** 0.90*** 0.93***
(3.564) (2.879) (5.129)
Working Capital 0.057** 0.06** 0.08***
(2.155) (2.212) (3.131)
Labour 0.559*** - -
(3.077) - -
***, **, * represent 1%, 5% and 10 % Significant levels, respectively.
- means the variables could not enter the equation
Source: Own computation

102
 Table 10. Data on Fixed Capital, Dry Cherry and Labour for Small and Large Dry Coffee Processing Firms by Year

1996 1997 1998 1999 2000

Fixed Dry Labour Fixed Dry Labour Fixed Dry Labour Fixed Dry Labour Fixed Dry Labour
Capital Cherry Cost Capital Cherry Cost Capital Cherry Cost Capital Cherry Cost Capital Cherry Cost
Firm (Birr) (kg) (Birr) (Birr) (kg) (Birr) (Birr) (kg) (Birr) (Birr) (kg) (Birr) (Birr) (kg) (Birr)
Large Firms
LI12 61580 1221297 115489 65125 778800 84187 71101 1576452 131925 73820 375045 46802 76691 622875 84683
LI13 61700 1189881 112879 65249 843156 90467 71233 843150 96586 73955 273270 33599 76828 398205 58184
LI17 55940 850685 86135 59134 695772 65777 64532 579810 62639 66971 163680 26396 69544 807235 98448
LI18 57110 475728 45015 60420 266090 33862 65989 183095 22729 68539 172095 27423 71231 480865 60139
LI22 59600 529958 50767 63075 717255 82794 68913 1773188 127472 71601 1423686 85863 74440 1248995 144865
LI23 62470 1072172 115152 66217 783473 88362 72461 1125036 131860 75409 393793 52277 78527 660248 83142
LI24 60944 1058294 112709 64549 845679 94753 70581 833728 99847 73395 1017367 36071 76368 418321 35681
Small Firms
SI01 29165 557073 60856 35825 596114 64200 44630 1063148 97371 52139 321270 40606 60262 556176 56520
SI02 31085 1236079 124344 37813 1087455 117202 46752 454905 56424 54292 355866 52123 62445 1052392 117047
SI03 213709 1460912 142947 238251 1513176 142709 273673 384729 50534 298400 120372 22264 324983 446520 45822
SI04 250668 1163140 119753 278613 665665 81905 319152 814110 96290 347103 179685 32426 377141 585181 71395
SI05 30965 856086 88028 37688 197700 30011 46619 1143360 119674 54157 416760 53634 62308 678957 78395
SI06 170124 1155099 117305 190404 1151645 126519 219494 674575 78437 240106 240350 33495 262276 1115298 123526
SI07 65071 1023935 98773 75348 1269620 121551 89497 753236 76896 100527 514525 56014 112429 798930 84739
SI08 211009 1034715 101260 235456 1652200 149979 270690 499408 45929 295373 517275 57142 321913 921072 117873
SI09 156106 645711 63469 175084 1101600 113128 202220 1059190 121661 221596 240515 32182 242441 366260 54955
SI10 92976 1367245 254383 105758 888903 94805 123693 1755959 144065 137078 368885 47057 151501 587145 77119
SI11 29825 24750 11498 36509 1179155 121540 45360 1234365 138587 52879 445335 53015 61012 767085 92256
SI14 29309 1946470 181867 35974 986597 102734 44789 1496075 184482 52301 474126 45574 60426 379335 54242
SI15 21925 766357 78327 28013 271254 30235 35928 1450513 121883 42922 535707 53428 50496 1096326 120815
SI16 22045 1527265 64304 28137 931631 100293 36060 894277 70177 43057 483725 58848 50632 126500 22282
SI19 27005 926725 82639 33590 1467413 154108 42243 1695425 121837 49718 713350 91701 57806 1000505 114502
SI20 57014 839962 75595 60320 1337432 141567 65883 1856792 172955 68431 569085 72035 71122 242935 34455
SI21 33354 564865 60886 40499 972832 104742 50003 1647496 157036 58001 808940 105000 66650 1135112 178707
Source: Survey data

103
 Table 11. Data on Output and Working Capital for Small and Large Dry Coffee Processing Firms, 1996-2000
1996 1997 1998 1999 2000
Working Working Working Working Working
Output Capital Output Capital Output Capital Output Capital Output Capital
Firm (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr)
Large Firms
LI12 6539490 359205 4206261 259600 8441182 372405 2805313 125015 3710111 207625
LI13 6371272 356278 4553812 286122 6370469 286120 1774765 92733 2375453 135129
LI17 4555031 286426 3282572 231924 4425668 193270 1245297 54560 4871793 269078
LI18 2547307 148533 1459715 93132 1237940 64083 1313178 60233 2820667 168303
LI22 2837684 154662 3999512 231116 9494615 391945 9396250 208520 7230539 402454
LI23 5740995 361001 3696341 261158 7425237 375012 2573025 131264 3588034 220083
LI24 5734681 353157 3901160 282207 5502612 278218 5447539 83138 2239919 80469
Small Firms
SI01 2982872 213929 2959626 220783 7136215 335438 2066557 120476 2762103 208566
SI02 6618640 80820 5607296 374568 3312101 224644 2761391 13260 6198587 414091
SI03 7822521 409741 7554495 299287 3019427 182746 812721 58651 2630002 243912
SI04 6228086 376857 3695628 266266 6141081 305291 1276152 71874 3446717 222750
SI05 4583951 236593 1024831 74137 7912595 368416 2817655 152812 3999057 242515
SI06 6185030 358449 6178045 401901 5015928 258587 1509414 85458 6569108 425498
SI07 5240804 341312 5972535 423207 5021574 267062 3231109 182942 4705698 316008
SI08 5406608 403539 7957141 587449 2674101 143963 3869186 203677 5425116 303655
SI09 3457489 161498 5898568 360177 7759255 358948 1738973 105225 2157270 220990
SI10 6779802 431762 4759669 307175 9402362 351073 2812718 124343 3290451 193328
SI11 150195 9281 6313839 398481 8862555 397740 3307629 148445 4509136 255695
SI14 10664846 552312 5282778 311474 8010804 515472 2538729 169434 2227049 118015
SI15 4198922 246553 1317130 86308 7766838 391524 3502631 170452 5870329 381182
SI16 8367994 513952 4199981 289841 4788448 250886 3248387 150492 803940 39356
SI19 5077592 268884 7857331 493280 9078228 426984 5416859 249673 5673767 350177
SI20 4602210 244348 7161338 454908 9942278 583562 4314727 193797 1469302 82729
SI21 3546604 177093 5209075 28108 8821590 476689 5403028 253614 6017229 338780
Source: Survey data

104
 Table 12. Data on Fixed Cost, Auxiliary Materials and Labour Cost for Small and Large Firms, 1996-2000
1996 1997 1998 1999 2000

Fixed Auxiliary Labour Fixed Auxiliary Labour Auxiliary Labour Fixed Auxiliary Labour Fixed Auxiliary Labour
Cost Materials Cost Cost Materials Cost Fixed Cost Materials Cost Cost Materials Cost Cost Materials Cost
Firm (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr)
Large Firms
LI12 52220 30901 115489 55765 23700 84187 61741 34117 131925 64460 11495 46802 67331 19445 84683
LI13 52220 29042 112879 55769 25662 90467 61753 28817 96586 64475 7276 33599 67348 12454 58184
LI17 49760 20816 86135 52954 18380 65777 58352 17937 62639 60791 5115 26396 63364 25609 98448
LI18 50954 11673 45015 54264 8270 33862 59833 5032 22729 62383 5411 27423 65075 14868 60139
LI22 52220 13690 50767 55695 23858 82794 61533 40629 127472 64221 21557 85863 67060 40122 144865
LI23 54985 31878 115152 58732 25376 88362 64976 36569 131860 67924 12848 52277 71042 21941 83142
LI24 53562 31185 112709 57167 27422 94753 63199 27130 99847 66013 8137 36071 68986 8022 35681
Small Firms
SI01 20765 18635 60856 27425 14709 64200 36230 24095 97371 43739 8846 40606 51862 13392 56520
SI02 20765 42713 124344 27493 48106 117202 36432 20224 56424 43972 16049 52123 52125 55313 117047
SI03 204709 28832 142947 229251 18039 142709 264673 11636 50534 289400 5037 22264 315983 21851 45822
SI04 238668 27224 119753 266613 20196 81905 307152 23285 96290 335103 5571 32426 365141 7465 71395
SI05 20765 25729 88028 27488 7113 30011 36419 39390 119674 43957 14220 53634 52108 25819 78395
SI06 160644 28190 117305 180924 34816 126519 210014 20278 78437 230626 6190 33495 252796 34439 123526
SI07 58771 23116 98773 69048 32569 121551 83197 19644 76896 94227 12815 56014 106129 23872 84739
SI08 204709 23525 101260 229156 42888 149979 264390 5335 45929 289073 7825 57142 315613 14036 117873
SI09 147586 15249 63469 166564 31787 113128 193700 30354 121661 213076 6899 32182 233921 10945 54955
SI10 83376 29905 254383 96158 25958 94805 114093 36784 144065 127478 11156 47057 141901 16695 77119
SI11 20765 608 11498 27449 31578 121540 36300 31786 138587 43819 12026 53015 51952 20973 92256
SI14 20765 48793 181867 27430 29891 102734 36245 49425 184482 43757 10450 45574 51882 6319 54242
SI15 15625 19154 78327 21713 7425 30235 29628 31412 121883 36622 14363 53428 44196 30788 120815
SI16 15625 38355 64304 21717 23802 100293 29640 19437 70177 36637 13448 58848 44212 4230 22282
SI19 20765 23217 82639 27350 44423 154108 36003 36817 121837 43478 22274 91701 51566 24820 114502
SI20 50954 21116 75595 54260 40623 141567 59823 53729 172955 62371 17752 72035 65062 8094 34455
SI21 26214 16995 60886 33359 30863 104742 42863 50444 157036 50861 26768 105000 59510 33146 178707
Source: Survey data

105
 Table 13. Data on Tax and Cost of Dry Cherry for Small and Large Firms, 1996-2000
1996 1997 1998 1999 2000
Cost of Cost of Cost of Cost of Cost of
Dry Dry Dry Dry Dry
Tax Cherry Tax Cherry Tax Cherry Tax Cherry Tax Cherry
Firm (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr) (Birr)
Large Firms
LI12 194297 5495836 124974 3119094 250799 7094033 83350 1610068 110232 2657185
LI13 189299 5354465 135300 3376840 189275 3615849 52731 1173148 70578 1698743
LI17 135336 3828082 97530 2786567 131493 2486515 36999 702678 144748 3443665
LI18 75684 2140776 43370 1065690 36781 785203 39016 738804 83806 2051370
LI22 84311 2384811 118831 2872606 282098 7979345 279176 6111884 214829 5328213
LI23 170573 4824775 109823 3137809 220614 4824717 76448 1690553 106605 2816618
LI24 170385 4762323 115909 3386944 163490 3575443 161854 4578153 66551 1870605
Small Firms
SI01 88625 2506828 87935 2387437 212027 4559310 61400 1379212 82066 2372647
SI02 196649 5562354 166600 4355257 98407 1950860 82045 1527733 184169 4705978
SI03 232418 6574105 224454 6060270 89711 1649910 24147 516757 78141 1996702
SI04 185045 5234130 109802 2665988 182460 3491311 37916 771388 102407 2616754
SI05 136195 3852387 30449 791789 235094 4903299 83716 1789151 118817 3036091
SI06 183766 5197945 183558 4612338 149030 2892915 44847 1031823 195177 4987278
SI07 155711 4607708 177452 5084828 149198 3230253 96001 2208856 139813 3572574
SI08 160638 4656218 236418 6617061 79451 2247334 114959 2220662 161188 4118757
SI09 102727 2905700 175255 4957201 230538 4542336 51667 1032531 64095 1637803
SI10 201437 6152603 141416 4000062 279357 7901815 83570 1583623 97764 2504761
SI11 4463 111375 187593 5306197 263319 5293574 98274 1911823 133973 3272385
SI14 316867 8759116 156959 4439686 238012 6732339 75429 2133566 66169 1618243
SI15 124756 3448605 39134 1086372 230763 6527308 104068 2299790 174416 4902440
SI16 248625 6872695 124787 3731182 142271 4024247 96514 2076631 23886 539649
SI19 150862 4170263 233452 6603360 269727 7629411 160942 3062412 168575 4268154
SI20 136738 3779829 212773 6018442 295399 8355565 128196 2443082 43655 1036361
SI21 105374 2541893 154769 4377745 262102 7413730 160531 3472779 178780 5075878

Source: Survey data

106
Appendix 2

Questionnaire used for data collection on Financial Performance of Dry Coffee

Processing Firms in Oromia: The Case of Western Wallaga Zone

Instruction:
1. Introduce yourself with the selected person
2. Circle the letter(s) for closed question (s)
3. Write interviewees response clearly
4. Use only pencils

Questionnaire Number ____________ Date of Interview _______________

Name of enumerator ____________Name of District ___________________
Peasant Association ______________ Village’s name ___________________

1. Background

1.1 Name of the owner ________________

1.2 Educational level of the owner ____________________
1.3 Type of the machine ____________________________
1.4 Year established _______________________________
1.5 Year started services ____________________________
1.6 Designed capacity of the machine _________________
1.7 Initial investment made _________________________
1.8 Actual capacity of the firm ______________________

2. Major inputs of the firm

2.1 Dry cherry

2.1.1 Amount of dry cherry Used as raw material by the machine for the last 5 years

No. Year Amount of raw Value(Birr)

material (kg)
1 1996
2 1997
3 1998
4 1999
5 2000

2.1.2 Quality of raw material

(a) V. good (b) Good (c) Fair (d) Poor quality

2.1.3 Is the raw material available throughout the year? Yes / no

2.1.4 If no, in which months are the peak supply ______________________________

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2.1.5 What are the main limiting factors for irregular supply_____________________
________________________________________________________________________
________________________________________________________________________
2.1.6 What are the major problems that affect the quality of dry cherry ____________
________________________________________________________________________
________________________________________________________________________
2.1.7 Discuss any Supply-related problems for dry coffee processing firm in the Zone
________________________________________________________________________
________________________________________________________________________

Cost

2.1.8 Annual operating costs of the firm

No. Year Total working capital (birr)

1 1996
2 1997
3 1998
4 1999
5 2000

2.1.9 Annual Fixed costs of the firm

No. Year Total fixed costs (birr)

1 1996
2 1997
3 1998
4 1999
5 2000

2.2 Human Labour

2.2.1 Permanent labour employed by the firm

No Job Educati Salary/ 1988 1989 1990 1991 1992

. description onal month
level
1 Manager
2 Cashier
3 Guard
4 Others

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2.2.3 Casual Labour of the firm

No. Year Number of workers Duration of work Amount of payment

1 1996
2 1997
3 1998
4 1999
5 2000

3. Output produced
3.1 Processed coffee bean
No. Year Amount (kg) Value (Birr)
1 1996
2 1997
3 1998
4 1999
5 2000

3.2 By product

3.2.2 Amount and value of coffee whole produced each year

No. Year Amount(kg) Value(Birr)

1 1996
2 1997
3 1998
4 1999
5 2000

4. Describe problems related to coffee processing in the area.___________________

________________________________________________________________________
________________________________________________________________________

5. Describe problems related to coffee marketing in the zone. _____________________

________________________________________________________________________
________________________________________________________________________
6. Other problems (institutional, Organizational, social, etc.)
________________________________________________________________________
________________________________________________________________________

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 Declaration

I, the undersigned, declare that this thesis is the result of my work and that all sources of

materials used for the thesis have been duly acknowledged.

Name: Gari Duguma Fufa

Signature: _____________

Place: Alemaya University, Alemaya

Date of Submission: June 2002