BEYOND THE AGRICULTURAL VALUE CHAIN IN NIGERIA
BY ALEX OTTi
I was privileged to give the dinner speech at the 59th Annual Conference of the Nigerian Economic Society in Abuja on September 27, 2018. I have taken the liberty to share excerpts of my presentation. The full paper is available on my website, www.alexotti.com
The challenges of agriculture in Nigeria are not just about the problems of the macro and micro economy but also the misdirection of public policy.
All too often, agriculture and farming are used interchangeably leading to a simplistic interpretation of the sector’s difficulties. This error is more than just a casual misuse of two words or a misapplication of concepts but a major cause of policy confusion. While farming is the act of planting seeds and growing food and cash crops or providing animal protein, agriculture on the other hand is the whole ecosystem of human economic interaction by which food and farm crops enter into a production system in exchange for monetary value. Agriculture, therefore, refers to a value chain that ultimately results in the exchange of money for produce and the subsequent impact of this exchange on the various economic agents involved in the production process.
Not seeing agriculture from a perspective of wider economic and political interactions that lead to the exchange of value leads to faulty public policies that emerge from misdirected or inappropriate trends of thought.
The Nigerian population is presently growing at a thunderous 3% per annum. This means that the population would double in roughly twenty years from now, resulting in a population of about 350million people. The magnitude of the population growth will perhaps be of less significance than its direction and composition. The country’s population growth rate will make it the third most populous nation on the planet in a mere two and a half decades. This huge population must be fed; therefore suppliers of food items are strategically positioned to create product supply chains that have exponential potential for growth.While micro agricultural production has its uses as a social signaling mechanism, its effectiveness as a strategy to enhance national food production is dubious. Going forward, agriculture would require a relatively small group of farmers applying advanced farming techniques and technology to improve yield per hectare of arable land. The government’s current perspective of throwing more people into the sector is neither sustainable nor strategically sound; and indeed, it could be self-defeating. The more labour that is committed to fixed farm lands, the lower the marginal productivity per worker and the smaller the incomes per farm hands employed, thereby discouraging further labour supply. In the fullness of time, we will realize that what is needed to avert a full blown food crisis is a dedicated community of large scale farmers investing huge amounts of money in improved seed varieties and processing technology that increases yield per land cultivated. The local agricultural value chain needs to be stretched to include semi processed goods and advanced storage facilities and improved preservation techniques to even out the supply uncertainties associated with weather and other unpredictable processing conditions. While primary commodities have not done too well in global markets as prices continue to tumble, declining foreign exchange rates have prompted rising international demand for agricultural produce and could yield stronger incomes in the years ahead. Companies such as Okomu Oil and Presco (with a 16,900 hectare plantation) that produce Oil palm products for the local market (but export about 5% of its output) have seen sales rise by as much as 60% from the second quarter of 2016. Okomu’s profit before tax stood at N11.1b as at December 31, 2017 as against N5.9b in 2016. Similarly, Presco, improved its profit after tax from N21.7b in 2016 to N25.4b in 2017.
Contemporary figures show that Nigeria’s agricultural sector over the last four years has experienced rising growth but within a declining band. For example, the agricultural sector grew by 3% in the first quarter of 2018 but dropped to 1.5% by the second quarter of the year. Indeed, heading into 2018 the agricultural sector made up over N550 billion of GDP but this has since fallen to about N355 billion by the first half of 2018. This is of major concern when it is realized that between 2009 and 2017 the government through the CBN’s Commercial Agricultural Credit Scheme (CACS) spent a thumping N551.18 billion (for 547 projects) without sustained growth. In 2017 alone, the government made provisions for N200billion in CACS of which N155billion had already been disbursed by February 2018. Poor agricultural performance relative to large fiscal outlays year-on-year reinforces the notion in business circles that subsidized lending to small scale and unstructured agricultural operations is inept, ineffective and grossly wasteful.
The agricultural sector has remained primarily subsistence and this has limited growth opportunities. If Nigeria is to advance in agriculture and be a significant influence on the global stage, it must be prepared to nurture larger farm holdings with increased application of technology. While micro, small, medium-sized entities (MSMSE’s) will not disappear, it is, however, important to canvass the argument that a more efficient structure in the agricultural sector would be to have these smaller entities serve as out croppers to larger businesses. The larger farmer would secure bigger demand through access to larger markets, which feeds through the sectoral value chain by having these more efficient economic agents serve as off takers to smaller farm producers. The larger producer would be responsible for price discovery at a more competitive global rate, take charge of storage costs and provide some form of crop insurance by way of agreed forward pricing. This would indeed make agricultural financing more attractive to banks and other non-bank financiers, who would charge lower rates for safer agricultural risk assets. The agricultural ecosystem would be bootstrapped towards greater efficiency and effectiveness through larger operators buying up commodities from smaller farming entities. If these larger entities could be supported with storage facilities and an efficient domestic commodity market then agriculture as a proportion of GDP would be significantly higher than the recent 22% down from 36% in 2009 and 37% in 2008. Between 2014 and 2017 average contribution to GDP was in the region of 21% with a variance of 7.8%, notably in 2016 the contribution fell to a ten year low of 18.2% despite huge amounts of money channeled into the sector by way of Central Bank of Nigeria (CBN) preferred lending schemes.
The current system of funding small scale farming through single digit interest rate loans in an environment of double digit inflation (currently put at 11.26%) is a clear instance of economic subsidy for an activity in which the social and economic cost, can be considerably high. The fact that poor farmers are given loans at subsidized rates suggests that the government is subsidizing the most inefficient operators in the sector, who in turn, given the fact that they have access to cheap loans continue to operate at subsistence and inefficient levels of production with a high tendency to default on agreed repayment schedules. Larger farm holders, on the other hand, with more efficient operations are likely to face the ordeal of wringing out loans from the clamped fists of bankers who are more favourably disposed to risk- free lending to the federal government at coupon rates of between 12% and 14% per annum.
Discrimination against bigger farmers discourages such operators from expansion and the application of increasingly advanced technology in the farmyard production process while at the same time encouraging smallholders to remain pint-sized and risky. The dilemma creates challenges that could be avoided if government’s fiscal policy sees beyond subsistence farming to a broader agric culture that deliberately links farmers together in a social arrangement that makes everybody better off.
Problems, Solutions and Prospects
The local agricultural sector is beset with a myriad of problems; the principal ones include, but are not limited to, Small and fractionalized land ownership, Poor yield per hectare, Poor farmer education and training, Poor seed variety, Poor storage capacity, poor transportation infrastructure, increasing rural-urban migration, Poor access to finance, Limited knowledge or use of emerging technology, Poor marketing, sales and distribution systems and Weak value chain development
There are specific solutions to the problems enumerated above but the following are broader solutions with more radical outcomes:
We believe agriculture as a means of promoting growth and development is overrated. Indeed, what spurred Europe and America out of a Malthusian population trap was not necessarily growth in agriculture, but improvement in technology and the rearrangement of agricultural management and ownership. The policy of encouraging more people into agriculture creates a situation where marginal productivity of labour and land declines
The huge growth in Nigeria’s population prompts more than passing concern about economic and social sustainability. Nigeria’s population is estimated to be a motley 198 million people. If Nigeria does not ramp up the application of technology to agricultural production it will most certainly end up a basket case of economic and social failure. Rising population on the back of subsistence agricultural production is a surefire prescription for chaos. While we may believe that it is politically correct to pour truck loads of cash into rural agricultural practices and create a semblance of employment generation, the bitter truth is that the whole agricultural value chain needs to be overhauled. A number of actions need to be taken immediately:
i) Farmers need to be organized into larger production units and large scale
farmers need to be supported in acquiring heavy duty agricultural implements to improve output per hectare of land. Small farm holders will not be eliminated (this would amount to economic genocide!) but they will be expected to enter into a supply chain arrangement with larger farmers who would support them with finance, improved variety seedlings and extension support services
ii) Agricultural storage needs to be given greater priority with government entering into a private public partnership in building food storage silos
iii) A commodity exchange needs to be created and made to effectively price farm goods forward. This allows for a more efficient pricing of agricultural products by allowing for a more resilient and reliable price discovery mechanism.
iv) The wide gaps in agricultural production, processing, distribution and sales need to be filled. This can only be achieved if farmers are seen as only part of a more intricate process of agricultural development. The narrow perspective of agriculture as just farming has limited the sector’s ability of growing at a much faster pace. Here is an example of this change: Ghana is the largest exporter of cassava in the world but Nigeria is the largest producer, a fact that clearly shows that Nigeria has failed to take full advantage of its primary production by translating it into exportable products. This is basically a failure of policy.
v) If Nigeria must grow its agricultural GDP in a meaningful way it must adopt a more strategic and long-term approach to the sector. What is needed is a structural transformation, which implies a root and branch reform. This would mean supporting complex production chains in the sector in commodities in which the country has some relative (or perhaps absolute) competitive advantage.
Nigeria has immense prospects in turning the agricultural sector into the country’s major foreign exchange earner. The challenge is a framework that develops the value chain in a manner that allows the country sell agricultural produce at a quality and price the world sees as competitive.
It is my opinion that if Nigeria’s agricultural value chain at different levels must be made to serve the overriding best interest of the nation, the governance ethos of the country has to be reviewed to make agricultural production, storage, distribution and trade more efficient and effective. We must be prepared to make radical changes to the way the country and the agricultural sector is managed. Without this, we will ultimately find out that while we quibble about narrow political interests, the rest of the world will move on, leaving us to be global hewers of wood and drawers of water. Obviously, a bright new world has emerged and is accelerating rapidly. It is the world of Artificial Intelligence (AI), Large Data processing, Cyber-connectivity, Intelligent Engineering and Robotics.
This development is not about tradable tradition but about the application of superior intellect to the evolving realities of a changing world. It is a poignant irony that while the rest of the world is safely engaged in these processes, our country is still locked in the conundrum of the struggle to achieve the most basic of human needs – food, clothing and shelter. The agricultural revolution took place in Europe hundreds of years ago. Meanwhile in Nigeria, we are still learning the basics. We must reinvent our society in order to manage our processes more effectively to serve our country and people better.
Defining Agriculture effectively and leveraging on its multiple value chain can only be achieved sustainably within the context of a reformed and restructured Nigeria, with an over hauled national value system. A rebased value system which is underpinned by responsible and responsive leadership, that locates service to the people as the central purpose of leadership is what is required at this time.
Some people, might be tempted to belittle the compelling urgency of this imperative. But, let me say, with every due respect, such people are wrong and their position, incurably defective. The truth is that Nigeria no longer has the luxury of time to keep making mistakes. The exploding demographic situation and dynamic complexities of the new world order, make it compulsory for Nigeria to either get her acts together or pay a steep price.