Value-added production the next step for Nigeria's agriculture market

With 170m people representing a massive domestic market, and a need to improve the supply stability of raw ingredients, Nigeria hopes that growth in agribusiness will help spur demand for the nation’s farmed output. From 2002 to 2012 sales in the food-processing sector doubled to nearly $20bn, according to a US government report, yet that number represents a market that is in its infancy.

Talk of a growing middle class in Nigeria, a key element of the country’s investment thesis, ultimately refers to no more than 15% of the population, depending on individual markets, although with a population this large these are still large markets in comparison to many other low-income countries.

Some of the main concerns investors have had in the past about setting up an agribusiness in Nigeria amount to investing in a market in which both the supply of raw materials and demand are uncertain. This has been something of a vicious cycle, but the growth of formal retailing, such as quick-service restaurants (QSRs) and supermarkets, is helping to provide the dependable offtakers an investor would want.

Size & Scope

The largest segment of the food-processing industry is beverages, including beer, soft drinks and juices. These categories account for 54% of the whole, according to data compiled by the US Department of Agriculture’s Foreign Agricultural Service. The next largest category is food, which includes millers, bakers, confectioneries and dairy. Tobacco comprises the remaining 1%. Domestically owned firms are most visible in the wheat, poultry, meat and confectionary segments of the local market.

Import policies are important to the future of agribusiness, as protectionism in the service of developing domestic industries is a common tactic in Nigeria, in particular because the costs of production are high and imports are typically cheaper for end users. These policies are sometimes at odds with international commitments made by the government, such as World Trade Organisation membership, or the comal-integration group of 16 countries, of which Nigeria is the largest. Current examples of banned products include poultry, beef and white flour. The country has been hiking tariffs on rice and plans to ban imports outright from 2015 in order to coax domestic farmers and millers to meet demand.

Often, however, the practical result of these trade policies is an influx of smuggled goods, which are usually cheaper on the market than the output of protected domestic industries (see overview). Nonetheless, the combination of protection from imports and export support has helped the industry to grow at a rate of 10% per annum in the past decade, according to US government research. Export expansion grants are available through the Nigerian Export Promotion Council, although the repatriation of profits is a requirement.

Big Names

The food-processing sector in Nigeria has already attracted some familiar international names, such as Nestlé, Olam and Dangote Group. There has been a steady inflow of foreign investment, with examples in recent years including PZ Cussons and Wilmar International establishing oil palm plantations in a joint venture called PZ Wilmar.

Wilmar is a new investor in Nigeria and will benefit from its partner’s local experience, which dates back to a branch office opened in 1899. PZ has been manufacturing in Nigeria since 1948. PZ and Wilmar aim to refine oil palm into domestically produced edible oils on a large scale, as well as use the oil as an input to make other products it offers.

Switching from imports to local palm oil will mean simpler logistics and lowered import costs, perhaps by as much as 35%, said Christos Giannopoulos, CEO of PZ Cussons Nigeria. Joint ventures with firms that have previous experience in Nigeria are important to an investment, he said, unless a company is willing to learn the particulars of doing business in Nigeria as it goes. “The ministry has managed to create interest in agriculture and attract people into the sector,” Giannopoulos said. “But in the past people have rushed to come in without thinking things through properly. You need to choose a local partner well.”

Lessons Being Learned

One recent cautionary tale is that of Tiger Brands of South Africa, which recently wrote down more than half of an investment made in late 2012. Tiger had purchased a 63.4% stake in Dangote Flour Mills, but Tiger Brands’ CEO, Peter Matlare, announced in May 2014 that two of the four mills acquired will be retired.

The Nigerian government is pushing food processing through its plan for staple-crop processing zones (SCPZs), a major element of its Agricultural Transformation Agenda (ATA). It has identified 14 spots throughout the country for these industrial areas, and envisions at least one major processing company to be located in each one and driving demand for crops that are well suited to grow in the area.

These plans include addressing logistical hurdles such as roads, a stable electricity supply, and water access near SCPZs. While these challenges are present across the country, SCPZs can expect priority treatment, according to the Federal Ministry of Agriculture and Rural Development (FMARD).

The SCPZ concept has been designed with the UN Industrial Development Organisation (UNIDO) as a consultant. Together with federal authorities, UNIDO has selected the 14 sites, and from that list six of them will be fast-tracked through the developmental process. Building the required infrastructure is estimated at a cost of $1.06bn.

The processing zones will be in the states of Kogi, Kano, Rivers, Niger, Enugu and Anambra. Private-sector anchor investors have been secured for three of these zones. In Kogi, Cargill USA will build plans to process local cassava into flour and sweeteners, which can help reduce the demand for imported sugar. In Kano, Dangote Group will focus on rice and tomatoes, and in Niger, Nigeria Flour Mills will process rice.

For the fast-food restaurants, supermarkets and manufacturers reliant on processed agricultural output, SCPZs may hold major appeal. Backward integration is already a common tactic, such as PZ Cussons’ venture with Wilmar to cultivate oil palm.

Other examples include Food Concepts, which operates 65 fried chicken QSR locations in Nigeria and Ghana under the name Chicken Republic. The local company was the target of an investment by the International Finance Corporation, the private sector investment vehicle of the World Bank, in order to scale up poultry production. The company had established its own farm and expanded an outgrower scheme in which it provides day-old chicks, vaccines and extension services to farmers in the region in return for the rights to buy the matured birds at market price.

Cassava Processing

Nigerian authorities are in particular keen to receive investment in cassava-processing businesses. The country is the largest producer of the tuber by a factor of three, but it is not a major exporter of the crop thanks to both high domestic demand and the lack of a reliable supply chain to process it into a durable and exportable good that will not spoil en route. ATA’s approach has been to promote cassava flour as an ingredient in both food and industrial uses. Import replacement remains an important element of the policy, however, as the government wants to see cassava flour increasingly blended in with wheat in the making of bread. Wheat imports of about 4m tonnes a year come at a cost of $1bn, according to UN research.

Legislation was passed in 2005 to mandate that all bread consists of 10% cassava flour, and this level has since been increased to 20%. However, some bakers have complained that reaching this precise blend can be challenging, and FMARD has established a cassava bread development fund of $66m to provide training and assistance. Additionally, in August 2013 FMARD announced a contract with Chinese buyers to supply 3.2m tonnes of dry cassava chips, which can be used as livestock feed, sweeteners, or for making ethanol.

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The Report: Nigeria 2015

Agriculture chapter from The Report: Nigeria 2015

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