As Nigeria’s economy contracted in 2016, the country’s agriculture sector took on even more importance. Long touted as a remedy to the West African nation’s dependence on oil, agriculture is now seen as a potential economic saviour. Before hydrocarbons became the main source of economic growth and export revenue, agriculture dominated the local economy. Although Abuja is also keen to boost other sectors, such as ICT and manufacturing, there is now a greater urgency to the redevelopment of the sector.
Current Conditions
Given recent trends, it is not too difficult to see why policymakers are placing great emphasis on the sector. In the fourth quarter of 2016 the sector contributed 26% to real GDP, marking it the largest single contributor to the country’s economic output. Furthermore, it is bucking the general economic trend in the country. While real GDP contracted by 1.3% year-on-year in the last quarter of 2016, agriculture grew at a rate of 4%. Indeed, without agriculture, the country’s economy would be in an even more precarious state. While the services and industrial sectors experienced negative growth for three of four quarters in 2016, growth in the agriculture sector exceeded 4% in the second, third and fourth quarters.
As the hydrocarbons industry has contracted in the face of low global oil prices, the government has turned to agriculture as a means of driving growth and employment. Though the sector has fallen from the heights of the 1960s, when it accounted for as much as 70% of the country’s exports, it still remains a major employer, accounting for around two-thirds of all jobs in the country. Moreover, the potential for further growth continues to look strong.
Key Crops
The country has attractive conditions for agricultural production and is a global player in a number of crops. In 2013, the latest year for which data is available, Nigeria’s leading crops by production volume were cassava, yams, maize, palm oil and vegetables. The country also has substantial production — in terms of value and volume — of sorghum, rice, groundnuts, cocoa and fruit. In 2016 Nigeria was the world’s largest producer of cassava and yams, with annual outputs of 45m and 36m tonnes, respectively, according to Heineken Lokpobiri, the minister of state for agriculture and rural development. In addition, Nigeria ranks in the top 10 for cocoa beans and groundnuts. This points to the country’s attractive agricultural environment and potential for building revenue in the sector.
Challenges
However, despite the performance of the industry, agriculture still falls well short of its potential in Nigeria. Although agriculture accounts for over a quarter of GDP, the country still spends N6.6trn ($23.3bn) each year on food imports. This is more than the N6.06trn ($21.4bn) total national budget for 2016. According to estimates by the UN Food and Agriculture Organisation (FAO), the country loses $10bn annually in export opportunities from cocoa, cotton, groundnut and palm oil alone. This is largely a consequence of declining production, which is a result of poor irrigation, limited adoption of new technology and research, inadequate storage techniques and a lack of access to credit for farmers. Productivity is also a factor; in the last two decades agriculture value added per capita has grown at less than 1% per year.
The lack of revenue generation from agricultural production is a consequence of multiple factors. On one level, it is simply the result of a lack of investment. Despite the administration’s emphasis on the sector, it has faced significant underfunding for many years.
In 2017 federal and state governments are forecast to spend 1.8% of their N13.5trn ($47.7bn) budgets on agriculture. While this is above the 1.6% figure for 2016, it is well below the target commitment of 10% set out in the Maputo Declaration on Agriculture in 2003. The declaration was formalised by the African Union; however, most countries on the continent have failed to meet its requirements. In Nigeria, the federal government has not exceeded a 2% budget share in the last five years, allocating agriculture sector 1.8% in 2011, 1.6% in 2012, 1.7% in 2013, 1.4% in 2014, 0.9% in 2015 and 1.6% in 2016.
The sector is currently hampered by a number of other issues, which include logistical challenges, land tenure problems and restricted land availability, and input challenges that constrain productivity. Indeed, in Nigeria there is only 1.8 ha of land per farming household, and on this land productivity remains low. Yields compare poorly with regional and international markets, and have not increased significantly in five decades, growing at a rate of 1.2% between 1961 and the mid-2000s, according to figures from the FAO.
Access
Transparency of information and access to the market in particular remain key challenges for farmers. Thus far, the country has yet to establish a fully functioning commodities exchange, as a means of marketing, distributing and setting price benchmarks for agricultural production.
In March 2017 Vincent Akpotaire, the acting director-general of the Bureau of Public Enterprises, told local press, “The federal government is desirous of revamping the nation’s economy through non-oil export. It is instructive to state that the much-desired economy revamp strongly hinges on a well-structured commodity exchange as a catalyst for enhancing the effective and efficient marketing and distribution of agricultural commodities and other produce.”
These comments came during an announcement that a consortium led by Lead Capital had been declared the preferred bidder for advisory services on the Nigeria Commodity Exchange (NCX), with a bid of N76.3m ($270,000). The exchange, formerly the Abuja Commodities and Securities Exchange, has struggled to have the desired impact on the market. In 2015 the exchange’s then-CEO, Zaheera Baba-Ari, told local press that the exchange “lacked adequate warehousing capacity; adequate physical infrastructure [communications, transportation]; and appropriate legal and regulatory infrastructure in terms of a system of grades and standards, and a credible system of contract enforcement and governance in spot markets”.
Indeed, neither of Nigeria’s two commodity exchanges – the NCX and the AFEX Commodities Exchange – have had a transformative effect on the country’s agriculture sector. “The major problems facing farmers are poor price discovery and poor access to the market,” Ibinabo Anabraba, co-founder and CEO of Daso Food Industries, a Nigeria-based food company, told OBG. “As such, there is no way for farmers and industrial off takers to hedge their income [and make longer-term financial decisions].”
The current initiative to revitalise the NCX aims to address some of the major constraints to agricultural growth in the country: asymmetry of information, poor logistics and lack of markets for smallholders. However, while a successful exchange would go some way towards bolstering production and improving the operating environment in the local industry, other challenges still need navigating in order to unlock untapped potential within agriculture.
Inputs
Indeed, the sector is characterised by low yields, which is partly a result of the limited and haphazard use of inputs. For example, the country has been trying to solve the conundrum of low fertiliser uptake for decades with limited success.
A 2014 report by the World Bank estimated that annual fertiliser consumption in Nigeria was between 600,000 and 700,000 tonnes. This represented significant lost opportunity, given that the potential size of the market was around 10m-12m tonnes, according to the World Bank. Indeed, Nigeria falls well short of regional and international markets when it comes to fertiliser usage. Recent estimates suggest usage in the country averages somewhere between 6 kg per ha and 20 kg per ha, which is well below developed nations, where usage usually tops 200 kg per ha. It also falls far short of other major markets on the African continent. Nigeria would have to increase fertiliser application by 500% to match the trends in Egypt and South Africa, for instance.
The government has tried to address this issue through a range of subsidy programmes. Until 2011 the government itself ran a programme under which it owned and distributed fertilisers. Under the scheme, farmers were offered a 25% subsidy on the product. The federal programme was also supported by a number of state-led subsidies. However, the system was criticised for graft, with the product often ending up in the hands of traders and middlemen. In the 30 years to 2010, subsidised fertiliser only reached 11% of the farmers for whom it was intended, according to the Ministry of Agriculture and Rural Development.
Boosting Growth
One of the latest attempts to bolster fertiliser usage is the Growth Enhancement Support Scheme (GESS). Under the programme, which was launched in 2012, the government has moved from procurer to facilitator and regulator. Farmers are now able to purchase fertiliser from approved agro-dealers at a 50% subsidy rate, with 25% coming from the federal government and 25% coming from state governments, using a mobile payment system. With these efforts, the government is hoping to boost access to fertilisers, reaching 5m farmers a year and pushing fertiliser usage up to 50 kg per ha.
However, the scheme has been affected by many of the same problems that beset previous programmes. The current administration has noted that the efficacy of the GESS is affected by unscrupulous redemption practices (such as claiming the subsidy twice), late deployment of inputs as a result of shortage of supply, and non-payment to suppliers and dealers. The government is hoping to remedy this situation by improving the redemption process and managing the programme exclusively through the federal government, rather than at the state level. In addition to cutting down on fraud, these efforts are expected to improve the reach and delivery of the scheme.
The reaction to the programme has been mixed. While some international organisations and think tanks have praised the scheme, noting that it hit its target of reaching 5m farmers in its second year, for example, many farmers have complained that they still have problems with timely access to fertiliser. “The process of getting subsidised fertiliser is still arduous and problematic,” Anabraba told OBG.
New Presidential Initiative
Set up by President Muhammadu Buhari in 2016, the Presidential Fertiliser Initiative (PFI) attempts to tackle shortages and high costs of fertiliser. Since the PFI commenced operations in 2017, some 6m 50-kg bags of NPK fertiliser (a blend of nitrogen, phosphorus and potassium) have been sold, and a further output of 4m bags is targeted before the end of the year. The total number of blending plants, meanwhile, will increase from 11 to 18 by the end of 2017 to boost production.
In 2017 alone the federal government will have saved an estimated $150m in foreign exchange as a result of locally sourcing two of the raw materials and blending the NPK fertiliser locally. Another N60bn ($212m) should have been saved in subsidies, which were previously extended to import the fertiliser.
A bag of NPK, which was selling for N10,900 ($38.52) in Benue as of July 28, 2016, according to local media, is now being sold for N6500 ($22.97) in some places; however, in other parts of the country the fertiliser can be obtained at the government-approved price of N5500 ($19.44) or slightly higher.
Meanwhile, the price of a bag of maize fell from N21,000 ($74.21) in September 2016 to an average of N10,000 ($35.34), indicating that the consumer is also benefitting from the initiative.
Still, the policy focus on usage is just part of the story. The challenge with fertiliser is not only adoption, but also considerations around the associated costs of the product versus its efficacy. For example, one recent study found that the average distance a Nigerian farmer has to travel to acquire fertiliser is 70 km, while the average cost paid by farmers to transport a bag of fertiliser is between N350 ($1.24) and N450 ($1.59). At the same time, the efficacy of using nitrogen fertiliser to boost cereal yields in Nigeria is limited. The marginal physical product of applied nitrogen in Nigeria is 8 kg for maize and 9 kg for rice. This is at the low end of average productivity increases on the African continent and well below the potential boost of 50 kg of maize per kg of nitrogen.
As such, other factors beyond the simple adoption of fertiliser are at play in the Nigerian market. Soil quality and acidity also play an important role in the efficacy of fertiliser use. However, soil testing is not currently a common practice in Nigeria, and it comes with significant additional costs.
The other major impediment to productivity at present is the limited use of effective irrigation techniques. Indeed, according to the FAO, less than 1% of crop land in Nigeria is under irrigation.
Furthermore, despite relatively extensive dam infrastructure, the water resources captured are underutilised. In addition, the relatively low usage of beneficial inputs, including quality seeds, also leads to a low-yield environment in the country.
Despite low productivity, there has been some success in improving yields. For example, in 2012 Olam Nigeria, in conjunction with the federal government of Nigeria, the US Agency for International Development’s MARKETS project and other stakeholders, developed a rice outgrowers programme, which helps smallholder farmers connect to their mills, improve productivity and access credit. The programme currently includes just over 4000 farmers on 5563 ha of land. Under the scheme, rice yields have increased from 1.5 tonnes per ha to around 2.5 tonnes per ha. Such increases are achievable with basic good practices, from seed use and spacing, to the adoption and correct timing of fertiliser use. Olam hopes to incorporate around 16,000 farmers into the programme by 2018.
Bolstering Local Content
Such initiatives will be crucial as the government looks to reduce import dependency and cover the food bill. Rice is a crucial product as the country seeks to enhance food security: in 2016 Nigeria imported 2.3m tonnes of rice to meet a demand of 5.2m tonnes. The government has introduced a number of measures to bolster local production and curb imports. The central bank, for example, has restricted access to foreign exchange (forex) for rice imports. Given these moves, among others, the central bank predicts that the country will begin exporting rice by the end of 2017, with production to exceed projected local demand of 6m to 7m tonnes.
There are other areas in which Nigeria is ripe to bolster domestic production. For example, although the country produces as much as two-thirds of the tomatoes in West Africa, it is a major importer of tomato paste. Despite the efforts to boost local production and curtail imports, the market is still affected by illegal imports and smuggled products. In other areas, the government has been looking to capitalise on strong local production of certain products as a substitute for high-cost imports. Successive administrations have tried to develop a market for cassava products, such as flour and beer, as a means of reducing demand for imported grains. However, despite such efforts, Nigeria is still hampered by a substantial food import bill.
Cost Challenges
Beyond these sector-level issues, the industry is affected by the prevailing macroeconomic conditions in the country. Food processors, in particular, are suffering from cost escalation as a result of the depreciation of the naira and the lack of foreign exchange in the market. “We have high operational costs,” Johann Conradie, managing director Nigeria, Master Meats & Agro Production Company, told OBG. “Until two years ago we could manage margins.” According to Conradie, costs and expenses in the meat industry have gone up by 60%, while prices have only increased by between 10% and 20%.
Large agricultural players are additionally feeling the strain of the current environment. “Because of the volatility in rates and the difficulty in obtaining forex, certain business lines are tough,” Prakash Kanth, vice-president for corporate affairs at Olam Nigeria, told OBG. It is not simply about costs. On the company’s consumer lines, lower purchasing power is also creating a challenge. “Most of the businesses have a fairly high competitive intensity. So while the cost base goes up the same for everyone, companies are not willing to cede market share by taking the lead in passing on costs to the consumer,” Kanth added. However, companies cannot completely disregard the cost increases, and Kanth concedes that price changes are beginning to happen slowly.
Beyond this inflationary pressure, the current economic issues are also inhibiting the potential stronger growth of agro-industries. “The cost of operation in Nigeria is higher than in other markets in which we operate,” Conradie told OBG. “As a result, some companies have stopped capital investment.”
However, larger agricultural groups, which have stronger capital reserves, are not letting this type of short-term volatility obscure their longer-term view. “There will be speed bumps along the way, but we’re here to stay. Nigeria is a large market in terms of the population base. The population is growing and the economy is growing. The current situation is a blip,” Kanth told OBG. “As the economy grows and incomes rise in developing countries, there is a clear shift to increased protein consumption, for example. This is a long-term trend that will continue to play out.”
As such, in 2016-17 the company invested $150m in two animal feed mills, two poultry breeding farms and a hatchery. In addition, Olam also acquired Amber Foods for $275m, a move that will bring it the wheat milling and pasta manufacturing operations of the BUA Group. Beyond these segments, the prospects for intermediary products, such as sweeteners and emulsifiers, are also likely to be strong. These products are imported from countries such as India and China.
Outlook
Despite the shortcomings facing the sector, there is substantial opportunity for investment and revenue growth. The general dynamics of the country alone – from climate conditions to population and income growth – justify optimism. Furthermore, the government has stressed its desire to see the further commercialisation of the sector and reorientation of agricultural production towards export. At the same time, while public funds to support this sentiment have not been forthcoming, there are a number of programmes that are pushing productivity and access to markets across the country, and point towards a brighter future for the sector. A number of indicators have been stalled in a low growth pattern for decades; however, they are now beginning to move in the right direction. Despite some challenges and a high food import bill, the agriculture sector continues to grow.
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