Tackling Rising Food Prices through Backward Integration

David Adeleke writes on how developing Agric value-chain through backward integration will help curb rising food prices

You’ve very likely heard this before: agriculture used to be the cornerstone of Nigeria’s economy before we discovered oil. After independence, agriculture accounted for more than half of Nigeria’s GDP and over 60 per cent of export revenue for the first nine years. But the sector’s contribution has waned since then, even though it still makes up a significant portion of Nigeria’s economic activity.

You’ve also likely heard that the unstable price of crude oil globally has forced Nigeria to think about creative ways to diversify its economy, leading, in part, to a renewed focus on agriculture and the value chain that upholds it.

According to PwC, Nigeria’s agricultural potential is high because it has 82 million hectares of arable land, and less than half of that has been cultivated so far. However, the value chain upon which agriculture runs remains underdeveloped. Despite this underdevelopment, that value chain in Nigeria is estimated to be worth around $85 billion.

When we think about improving this value chain, we often think about ramping up production and productivity. This makes sense because, thinking about it linearly, increased production means we can meet more demand. However, we must also look closer at the elements that lie between production and consumption.

Thinking more about these elements, which make up the rest of the value chain, will influence our approach to policy making and private sector investment.

One of the biggest challenges of the value chain is inefficiency. The current structure includes smallholder and large-scale farmers who produce crops and rear animals, off-takers and local markets, processing companies and collectors, exporters, distributors, retailers, then consumers.

The system also relies heavily on logistics, knowledge sharing, and infrastructure.
Over the years, the government has designed different policies and programmes to strengthen the agricultural value, all of which have had varying degrees of success. Some of the most recent programmes and policies include the Agriculture Promotion Policy (APP) and the Economic Recovery and Growth Plan (ERGP).

Despite these initiatives, which have contributed significantly to the value chain in their own ways, massive opportunities remain for development. Some analysts say that one possible primary reason for this is that there has been a focus on production when we should instead focus on improving the value chain.

Some ideas for improving the value chain include digital agricultural solutions such as precision farming, platforms for growers to sell directly online, increased access to financial services, and an improved flow of information through mobile technology.

All of these are great ideas. However, there is one more solution that will undoubtedly improve the value chain while also reducing the price of staple foods and creating more jobs. That solution is backward integration.

Backward Integration In Agriculture
Sometimes in business, companies analyse their supply chain and identify areas to increase efficiency and save cost. They also reckon that they can expand their operations to absorb some of those elements along the chain, so they buy or merge with other companies or set up new arms of business to handle those supply elements. This process is called backward integration.

Backward integration is when a pastry business acquires a wheat farm or sets up its own processing plant. All of these sit on the idea that integrating those supply elements will improve their pastry operations and increase the bottom line.

Backward integration could also be when a food processing company decides to buy up or build its own farm, factory, and logistics operation.
What this does is that it gives room for well-resourced organisations to go deeper into the value chain and apply decades of insight and expertise to certain elements. By doing this, they increase the quality of input and streamline their processes which will, in turn, lead to more productivity.

Backward integration also creates a platform for organisations to standardise their supply chain and bring it to world-class levels. These organisations can rely on their expertise and multiple layers of data gathered from interfacing with customers and the public to improve production while building upon the knowledge and capabilities of suppliers that may not have been able to produce at a high level before.

The World Bank reports that, in 2020 alone, rising food prices pushed at least 7 million Nigerians below the poverty line. Food prices continue to soar and have reportedly risen by more than 22 per cent since the start of the COVID-19 pandemic. One of the major reasons for this is that farmers and food manufacturers have had to pass on the rising cost of production to their customers.

The United Nations has predicted that at Nigeria’s current growth rate, the country is well on its way to becoming the third most populous country in the world – Nigeria currently occupies seventh place. With the expanding population, the skyrocketing food price and the rate of unemployment, the country may be toying with a famine crisis in the future. There is a need for swift long-term strategies and actions to arrest these worrying developments.

Increased direct investment as well as capital infusion by the various players within the sector, coupled with targeted policymaking that focuses on the root source of issues will drive this backward integration.

Backward integration will be a key solution to this problem of an underdeveloped agricultural value chain, eventually leading to lower food prices in the long term. Beyond improved efficiency, it will also create more job opportunities for both young and old Nigerians.

…Adeleke is a writer, communications manager, and content strategist.