Productivity growth can help Nigeria's agriculture sector fulfil its potential

While oil may be Nigeria’s breadwinner, agriculture remains the most important component of the country’s economy. The sector is the country’s largest employer and accounts for 23.9% of GDP. And yet for many years the agriculture industry took a back seat to the country’s rise as a key global hydrocarbons producer.

However, with the fall in the price of oil, the country’s high dependence on imports and a weakening currency, domestic agricultural is taking centre stage once again. Recent government administrations, recognising the importance of the industry and its potential for improvement, have made its development a high priority.

General Performance

The sector is performing solidly, growing at a rate of 3.48% in the fourth quarter of 2015, well above the general economic growth rate of 2.11%. For the full year 2015, agriculture grew at 3.72%. A 2015 report by KPMG forecast that the sector would grow at 4.5% in 2016 and 4.3% in 2017. Given that it employs more than 70% of the country’s labour force, according to the World Bank, the stable growth of the sector will be critical to the country’s future.

However, there is ample room for increasing the sector’s level of activity. According to KPMG, despite the fact that 83.7% of land is designated as agricultural land, only 40% of this land is currently arable. As well as available land and a large pool of potential labour, the country has abundant water resources. There are 230bn cu metres of water reserves, as well as strong rainfall patterns in much of the country.

That said, productivity remains a challenge, with plenty of scope to improve yields. Productivity has hardly improved over the last 50 years, with average yields per ha growing at 1.2% between 1961 and the mid-2000s. Yields in the West African nation average just 20-50% of the yields in other developing countries. This is partly down to a lack of inputs. Fertiliser consumption stands at 5.7 kg per ha of arable land, compared to figures of 17.9 kg in Ghana, 32.2 kg in the Côte d’Ivoire and 53.2 kg per ha in South Africa, according to KPMG.

Nigeria is hampered by a number of other constraints, including limited seed varieties, poor market access and logistics chains, minimal financing and under-funding – all of which means that while the country has enormous potential, current production levels remain far below the levels of self-sufficiency the country enjoyed in the 1960s.

Key Crops 

Several major cash crops form the core of the sector. The country’s largest agricultural export by some distance is the cocoa bean. In 2015, the crop brought in revenues of $870.6m. This was followed by oil seeds, constituted largely by sesame seeds, with a value of $341.2m, and natural rubber, with a value of $316.5m, according to the UN Conference on Trade and Development (UNCTAD). These crops point to the country’s strong export potential. Indeed, Nigeria is the third-largest exporter of cocoa beans globally, behind Côte d’Ivoire and Ghana, and 11th for dry rubber. Cassava is another key crop, and the country is the largest cassava producer in the world. However, it is not in the top 20 global exporters of variants of the crop, according to the UN Food and Agriculture Organisation (FAO), with the vast majority being consumed as a popular staple food.

Imports 

However, while the country of 170m people has a sizeable output in certain cash crop segments, this has not prevented it from having to rely on imports for staples. In 2015, Nigeria spent $1.09bn importing wheat, $650.1m on rice and $470.8m on raw sugar. Indeed, the country’s trade imbalance is clear from the figures, which saw agricultural goods account for 4% of exports but 14.3% of imports in 2015, according to UNCTAD.

The West African nation has become highly reliant on the import of staple crops. The country looks abroad for its wheat and rice needs. In 2015, it spent $1.1bn on imports of the former and $650.1m on imports of the latter. The volumes of wheat imported to Nigeria almost doubled between 2000 and 2012. As a result, the country’s annual food importation bill now tops $20bn, leaving the country vulnerable to exogenous shocks and inflationary pressures associated with a weakening national currency. By March 2016, the annualised inflation rate stood at 12.77%, exacerbated by a restrictive foreign exchange regime, while the annualised food inflation rate stood at 12.74%, according to the Central Bank of Nigeria. This illustrates the strategic importance of the agricultural sector to the economy, and the need to shift the balance of agricultural trade moving forward.

Government Strategy 

The government has sought to address these issues of food security, productivity and output. For a number of years now, government officials and policy experts have been talking about agriculture as the country’s “new oil”. Under the administration of former president Goodluck Jonathan, the Federal Ministry for Agriculture and Rural Development unveiled a range of reforms that sought to boost access to finance and inputs, and improve the development of agricultural value chains, with initiatives that included providing fertiliser subsidies to farmers and encouraging bakeries to use local inputs.

“Growing our own food, processing what we produce, becoming competitive in export markets and creating jobs all across the economy are crucial for our national security... Nigeria has huge agricultural potential, with over 84m ha of arable land, of which only 40% is currently cultivated,” President Muhammadu Buhari told the local press in November 2015. “The country also has some of the richest natural resources for agricultural production in the world. The urgency of unlocking our agricultural potential is even more pertinent because Africa spends about $35bn annually on food imports. Agriculture should no longer be treated as a development programme; agriculture must henceforth be treated as a business.’’

Funding 

While reforms of recent years have improved the efficiency of input distribution and industrial sourcing, there is scope for greater government support. Federal budget allocations for agriculture fall well below the 10% public spending figure set out in the Maputo Declaration, a continent-wide plan for food security and agriculture adopted in 2003. In 2014 and 2015, the Nigerian budget allocation for agriculture stood at 1.4% and 0.9%, respectively. The figure for 2016 jumped back up to 1.26%, or N77bn ($243.1m).

In November 2015 the government also launched the Anchor Borrowers’ Programme, a scheme aimed at transforming smallholder rice and wheat farmers into large-scale commercial operations. The programme allows farmers to borrow at interest rates below 10%; given that the monetary policy rate stood at 12% in March 2016, this represents a significant discount and subsidy to farmers. These smallholder producers will be able to access loans ranging in size from N150,000 ($473) to N250,000 ($789).

The central bank has set aside N40bn ($126.3m) from the N220bn ($694.5m) Micro, Small and Medium Enterprises Development Fund for the programme. The loans will allow farmers to access seeds, pesticides and fertilisers, that will help to push up yields. Furthermore, the programme will link producers with millers to ensure guaranteed offtake for their production.

The government believes the scheme can rebalance the economy. Godwin Emefiele, the governor of the central bank, told local press, “The top four income commodities in Nigeria, which include rice and wheat, consume over N1trn exchange annually. Relying heavily on food importation fuels domestic inflation, depletes foreign reserves and creates unemployment in Nigeria.” To achieve greater economic sustainability, the government is committed to the programme’s use of subsidies to bolster local production and reduce imports.

The Anchor Borrowers’ Programme will be welcome news for the industry. Financing has long been a major constraint for farmers. According to the World Bank, the cost of financing for the agricultural sector was as much as 18 percentage points above other segments of the economy in 2011. In addition, while loans to the sector reached N484.5bn ($1.5bn) in 2014 – a 41% increase on the previous year – this still only accounted for around 3.8% of the N12.6trn ($39.8bn) disbursed in total by deposit money banks over 2014. The government recognises these issues and, through the central bank and commercial deposit banks, has set a target of increasing agricultural lending by N300bn ($947.1m) by the end of 2016.

Indeed, the Anchor Borrowers’ Programme builds on a number of existing funds aimed at bolstering sector lending. These include the Nigerian Incentive-Based Risk Sharing System for Agricultural Lending, which provides public funds to cover potential bank losses to agricultural lending; the Rice Intervention Fund, a credit scheme focusing on processing facilities; the Fund for Agricultural Finance in Nigeria, which supports small and medium-sized enterprises; the Agricultural Credit Support Scheme; and the Commercial Agriculture Credit Scheme. All these schemes seek to bring greater liquidity into the agricultural industry, allowing for a move towards greater commercialisation and, ultimately, a reduction in food imports.

Until 2013 the sector also benefitted from the Export Expansion Grant, which was issued to non-oil exporters to reduce production, distribution and logistics costs. The previous administration suspended the scheme in 2014 in order to assess its functionality, but given Nigeria’s underperforming non-oil export activity, many are calling for the grant’s reintroduction.

Infrastructure Upgrade 

While not directly linked to agricultural line items in the state budget, the government has also committed to heavy infrastructure spending, which will be to the benefit of agricultural producers. Capital expenditure on infrastructure will also be boosted by a separate $25bn national infrastructure fund, backed by Nigeria’s sovereign wealth fund and domestic pension funds, announced in October 2015.

Agricultural productivity and exports are severely hampered by an inability to move produce efficiently throughout the country. Rural roads within the local government network are a particular problem. Up to 70% of these routes are impassable, according to the World Bank.

This leads to substantial losses. For example, Nigeria produces 1.5m tonnes of tomatoes each year, but 45% of this haul perishes before it reaches the point of sale. Indeed, with poor storage facilities and constrained market access, post-harvest food losses reach approximately 40% for perishables and 15% for cereal grains and pulses in Nigeria. This has significant financial implications for the profit margins of farmers in the country. Furthermore, the cost of shipping is high in West Africa, and Nigeria is no exception. Inadequate road, rail and port infrastructure increase the cost of moving Nigerian agricultural produce by as much as 40%. According to the World Bank, it costs N99.5 ($0.31) to transport one metric tonne one km on rural roads. This is 10 times the cost of moving produce on the country’s main roads.

These delays and costs are particularly acute for Nigeria’s main crop, cassava. The root crop perishes rapidly and is a major source of loss for both small and larger scale farmers. The National Root Crops Research Institute (NRCRI) is now working to improve this situation. The government-funded centre is focused on the genetic improvement of cassava, yam and potatoes, as well as minor root crops. One of the biggest challenges is improving the longevity of cassava.

“Most cassava varieties deteriorate within 48 hours, so this creates significant losses,” Chiedozie Egesi, assistant director of the NRCRI, told OBG. “We are trying to prevent the crops from going bad in the field and are carrying out experiments to see if we can extend the life of the crop from 48 hours to as much as five or 10 days.”

Insurance 

For smaller farmers in particular, the vagaries of the weather can have catastrophic consequences. In another move to formalise and commercialise the sector, the government is looking to address this vulnerability, prioritising insurance as a means of supporting the industry and mitigating losses. The Nigerian Agricultural Insurance Corporation (NAIC) is tasked with promoting the roll-out of insurance products in the sector.

The public body has created a number of products that are run through commercial banks, which act as agents for selling insurance policies. Under this scheme, smallholder food crops are charged at premiums of 4%, while livestock is charged at 5%. However, these categories attract a federal and state subsidy of 50%, meaning that the real cost to the farmer is 2% of the value of food crops and 2.5% the value of livestock.

To promote penetration and coverage, certain government-backed programmes, such as the Anchor Borrowers’ Programme, mandate insurance as a prerequisite for participation. Indeed, all agricultural projects supported by financial institutions are required to be covered by insurance. Nonetheless, increasing penetration has been a significant challenge. “Coverage in the sector is very low. There has been farmer apathy and they do not believe in it from a cultural perspective,” Binji Bashir, managing director of NAIC told OBG. However, the situation is improving. “The farmers are becoming more aware of the necessity, importance and advantages of agricultural insurance for their projects,” Bashir told OBG. According to NAIC, more than 500,000 farmers sign up to one of its policies every year, while total premiums generated by the corporation stand between N800m ($2.5m) and N1bn ($3.2m).

The scheme has also demonstrated its worth to those who have chosen to take out insurance. In 2013, N300m ($947,000) worth of claims were paid out as a result of flooding in the country. In subsequent years, total claims have fallen into a range of N180m ($568,000) to N200m ($631,000).

The NAIC also works to improve practices throughout the sector to reduce losses. “We do a lot of farm inspections and training on the best farming methods,” Bashir told OBG. Indeed, the terms of participation work as a means to bring best practices into the sector. For example, farmers must use insecticides and pesticides in order to be eligible for coverage.

Seeds & Inputs 

The productivity of the sector is constrained by the lack of quality inputs, from seeds to fertiliser (see analysis). For example, the yield in the country, which amounts to around seven tonnes per ha, sits significantly below its potential. “We’re a little better off than other African countries,” NRCRI’s Egesi told OBG. According to Egesi, yields could go above 40 tonnes per ha if efforts are made to improve quality.

This starts with seeds. According to the World Bank, 5-10% of cultivated land in Nigeria is planted with certified seeds. Only 10% of farmers use such seeds and in key staple crops, like wheat and rice, the use of certified seeds falls below 5%.

For sorghum, the figure is as low as 1.7%. Farmers struggle to get their hands on quality seeds: the local commercial industry supplies between 20,000 and 50,000 tonnes of seeds to the market each year, which ultimately meets less than 5% of the total seed needs of producers.

In terms of fertiliser, the World Bank estimates that consumption now stands at approximately 600,000 to 700,000 tonnes, compared to an estimated potential market size of 10m-12m tonnes. The government has prioritised increasing usage through a number of incentive programmes, with private sector investors also seeing huge potential in expanding fertiliser production (see analysis).

Along with the NRCRI and the National Cereals Research Institute, the government has established programmes to support better quality inputs. In November 2015, for example, the federal government and the African Agricultural Technology Foundation opened a new facility for the production of superior rice varieties. The Confined Field Trial (CFT) facility will generate a genetically improved rice variety known as NEWEST (nitrogen-use efficient, water-use efficient and salt-tolerant). The modified African rice variety is expected to boost crop yields in the country.

The National Biosafety Management Agency, established in 2015, is responsible for ensuring the safe application of biotechnology and compliance at the test sites. Bio-fortified sorghum, biotechnology (BT) cowpea, and BT cotton are among other crops being trialled. While public debate continues as to the safety of GM crops for human and environmental health, supporters argue that they can be grown in a more cost-effective way and with less fertiliser, thereby reducing the amount of chemicals released into the soil.

Rice

The efficacy of the CFT facility will be closely watched given that rice production has been made a key priority as a means of reducing the food import bill. In November 2015 Audu Ogbeh, minister of agriculture, told Reuters that the government plans to meet the country’s rice consumption needs within a mere two years, eradicating the need for imports. In 2014, the country produced 3m tonnes of rice. However, consumption reached 6.5m metric tonnes in the 2014/15 growing year, the bulk of which was met by imports from Southeast Asian exporters like Thailand. Alongside the introduction of new varieties, the government has developed a number of other policies to bridge this rice supply gap. For example, Abuja is working on a deal with China to establish 40 rice mills across the country, according to the minister of agriculture. As part of this process, Wang Jingxin, chairman of Chinese firm Heilongjiang Hegang Sanjiang Plain Rice Group, announced an interest in establishing an integrated rice mill in Akwa Ibom during a visit to Nigeria in January 2016.

Wheat 

Indeed, as with rice, the country is highly dependent on wheat imports to meet the current consumption patterns in the market. Currently, Nigeria consumes upwards of 4.1m metric tonnes of wheat each year, and yet the total yield of local producers only amounts to 2% of this demand.

The Lake Chad Research Institute (LCRI), a federal government-owned facility, is also working towards this goal through the introduction of new high-yield wheat varieties. Two new strains released in 2014 have yields up to six and a half tonnes per ha, compared to existing yields of four tonnes in irrigated fields and two and a half tonnes per ha in rain-fed fields. The LCRI hopes that these moves will help to push local wheat production up to 1.5m tonnes by 2017. The institute hopes to have introduced two more varieties with yields of up to eight tonnes per ha by then. Given these varieties, from 2017, wheat production is expected to grow at 20% per year.

While many of these plans remain in the pipeline, there is some confidence that the emphasis on production will pay dividends. In January 2016, Olam International, the Singapore-based commodities company, announced it was acquiring the wheat-milling and pasta-making facilities of the local BUA Group at a cost of $275m. The purchase will increase Olam’s Nigerian wheat-milling capacity by 158% to 6140 tonnes per day. Anurag Shukla, managing director of Olam’s Crown Flour Mills, told the local press, “Wheat-based products, such as pasta, have grown in popularity among Nigerians due to changing tastes, the gradual rise of convenience and, for many, as an affordable option to meet carbohydrate requirements.”

A month after the Olam announcement, the Wheat Farmers Association of Nigeria (WFAN) in Kano told the press that it plans to establish a flour mills company in the state. This is the result of the federal government offering WFAN a 50% subsidy for the purchase of a milling machine. These new processing facilities will be able to absorb any growth in local wheat production capacity. However, as the wheat deficit is substantial, the government is not simply focusing on the supply side in its efforts to reduce imports. Abuja is also working on measures to reduce demand for wheat products through a substitution programme.

Indeed, the federal government has called for the promotion of cassava flour as a substitute for wheat flour. The government has said such a scheme could save the country N127bn ($400.9m) per year. Cassava is a source of huge potential for the agriculture sector, with Nigeria standing as the largest producer in the world but lagging behind the top producers in terms of yield density and export rates (see analysis).

Cocoa 

As well as focusing on strategic staples such as rice and wheat, the government is trying to promote the further growth and commercialisation of key cash crops such as cocoa.

Nigeria used to be the largest global producer of cocoa in the 1930s and 1940s. While the industry has seen some decline since that period, the country is still among the world’s top five producers. In the 2014/15 growing season, Nigeria produced 280,000 tonnes of cocoa, which amounted to 6.7% of the 4.2m tonnes of global output.

The government hopes to push this figure up. In 2014, the previous administration set a target of reaching 1m tonnes per year by 2018. This would put the country on the same level as the world’s number-two producer, Ghana, and within striking distance of the number-one producer, Côte d’ Ivoire, which had an output of 1.8m tonnes in 2014.

The latest season produced mixed results. In November 2015, the Cocoa Association of Nigeria was predicting a production increase of 5.4% to 295,000 tonnes on the back of late rains boosting the main crop harvest, which runs from October to February. However, by January 2016, the association was predicting that the mid-crop harvest, which runs from April to September, would be down by 60% as a result of prolonged dry weather. The mid-crop harvest accounts for as much as 30% of the country’s total production. Cocoa farmers have struggled with unfavourable weather conditions for the last 12 months. Cloudy conditions in September 2015 led to high mould levels on beans and the spoilage of a large portion of the crop.

Outlook 

While the headline figures on imports and productivity demonstrate the potential for growth, there are a number of programmes that are taking the industry in the right direction. In the coming years, the West African nation is likely to become a substantial producer of staple food crops, such as wheat and rice. At the same time, moves are afoot to rejuvenate traditionally strong segments like cassava and cocoa.

While it remains to be seen whether the government can meet many of the ambitious targets it has set for these crops, the commitment to reducing imports and inflationary pressures, and boosting lending should ensure that production continues to increase, in turn edging Nigeria closer to self-sufficiency and strong export growth.