A new direction: Reducing imports and boosting production of local crops are central to agricultural policy

In the 1960s Nigeria was an agricultural powerhouse. Its warm tropical climate, fertile land and ample water resources provided by the Niger and Benue rivers made it an ideal location to grow a range of crops. By 1961 the country controlled 42% of the global trade in groundnut oil, 27% of the world’s palm oil industry and 18% of its cocoa trade, according to data from the UN Food and Agriculture Organisation (FAO). Some 20 years later this dominance had evaporated in the face of domestic neglect and competition from other parts of the world such as South-east Asia. The discovery and production of large commercial volumes of hydrocarbons in the 1960s and 1970s inevitably switched the state’s and the private sector’s focus from agriculture, which required long-term planning and investment, to oil and gas, where vast profits could be realised over a shorter time-span. Since the 1980s and on into the 21st century the focus has been on recovering lost ground. Nevertheless, agriculture still makes a significant contribution to the economy, accounting for 40% of GDP at the end of the fourth quarter of 2011 and employing 60% of the population, according to the National Bureau of Statistics and the Central Bank of Nigeria (CBN). Government efforts aimed at boosting the sector are starting to take shape, which could allow the country to win back some of its former glory.

STRATEGY: An Agricultural Transformation Action Plan (ATAP) now guides current government strategy towards the sector. Much of the motivation behind the renewed focus is down to reducing the cost of food imports, diversifying the economy, as well as developing rural areas of the country. The Federal Ministry of Agriculture and Rural Development wants to boost domestic production of staple crops such as rice, sugar and cassava to lower imports and encourage the development of agribusinesses. In late April 2012 Akinwumi Adesina, the minister of agriculture and rural development, told the Edo State Agribusiness Investment Summit that the federal government spent around N1.3trn ($8.3bn) annually on imports of staples such as sugar, rice, fish and wheat and that this situation was no longer acceptable.

IMPORT COSTS: Others in the ministry agree. “The import bill is growing at about 11% per year,” Adetunji Adeleke Oredipe, a senior technical adviser to the minister, told OBG. According to the ministry, imports of wheat cost N645bn ($4.13bn) per year, while rice imports come in at N356bn ($2.3bn), sugar at N217bn ($1.4bn) and fish at some N97bn ($620.8m). “We want to cut our import costs and build up the production levels of our local farmers. But the ATAP is also a means of developing rural areas, reducing the poverty rate, as well as the exodus of people to big cities such as Abuja and Lagos. The fastest way to do this is not only to focus on specific crops, but also to create downstream businesses for food processing, food marketing and aquaculture,” Oredipe said.

The ATAP takes its model from Malawi in East Africa where government-led efforts resulted in the country becoming self-sufficient in maize production. “Malawi’s self-sufficiency is the example the political leadership is following, and we believe we can achieve the same thing,” said Oredipe. According to the ATAP guidelines, Malawi was able to achieve a surplus of 400,000 tonnes of maize in 2005-06, rising to 900,000 tonnes by 2007 through the use of focused government subsidies to stimulate production and growth in the sector. The main aim of the plan is to increase the role of the private sector, reduce the involvement of government in the day-to-day management of agricultural production and treat the sector as a business. The government is targeting significant growth in the sector via ATAP, raising its value from $99bn currently to some $300bn by 2030.

FINANCING: However, one of the major challenges facing agricultural development in the country has been the difficulties farmers and agribusinesses have met in accessing credit to invest in new equipment or expand their companies. In this Nigeria is not alone. “Across Africa banks do not generally look into financing agriculture,” Jacques Taylor, the head of agricultural banking at Stanbic IBTC Bank, told OBG. “And this is not a function you can create overnight. In Nigeria the CBN has done a lot of work on this. All local banks must now have a dedicated agricultural desk focused on the sector. Other positive moves by the CBN have been interest rate subsidies and risk guarantees.”

The Nigeria Incentive-Based Risk Management System for Agricultural Lending (NIRSAL) is the best example of the evolving approach to financing the sector. The ministry and the CBN jointly run the programme. According to the central bank, the current funding level for agriculture is 1.4% of the total lending of banks across sectors, compared to 6% in Kenya, for example. NIRSAL aims to improve the agricultural value chain so that banks have more confidence in knowing what they are actually investing in, while at the same time the CBN wants to provide the technical and financial incentives to encourage banks to lend.

CREATING LINKS, REDUCING RISK: Taylor provides an example of the current obstacles to lending from the local banks’ point of view. “At the moment there are no clear value-chain linkages. If you take, for example, a new company that wants to build feed mill and needs the banks to provide the capital expenditure, local banks want to have a more thorough understanding of the supply side of this business and its distribution network to enable them to calculate the risks of lending involved,” said Taylor.

Under the NIRSAL programme the CBN will provide $500m of funding to be divided into five separate financial mechanisms: $300m will go towards a risk-sharing facility that would share losses on agricultural loans and address local banks’ concerns over the high risks they perceive in lending to the sector; $30m would be provided for insurance products for agricultural lending such as pest, disease or weather index insurance; $60m of technical assistance would be provided by the central bank to encourage local banks to better understand the risks and encourage them to lend to agribusinesses and farmers; $10m will fund an holistic mechanism that will rate banks on the effectiveness of their lending and the social impact that results from their investments; and finally, $100m will be offered to banks that start lending to the sector in order to provide them with the long-term financial backing to continue to do so.

EXPECTED OUTCOMES: The CBN hopes that these measures will have a significant impact on lending to the agricultural sector, bringing it from a current level of 1.4% up to 7% of total bank lending over a 10-year period. The bank hopes that the result of increased lending will be a greater contribution from the sector to GDP, higher foreign exchange earnings from agriculture and lower levels of food inflation. In turn, the CBN wants to be able to reduce the subsidies it currently provides to the sector. The ministry and the central bank hope that NIRSAL funding and backing will result in more lending trickling down to smaller farmers and cooperatives across the country, with the aim of reaching up to 3.8m cooperatives by 2020 and spreading out finance across the value chain from producers to distributors. Pilot crops being championed under NIRSAL include tomatoes, cotton, maize, soya beans, rice and cassava.

Oredipe is optimistic, but believes land reform is also required for NIRSAL to work. “With these measures in place a farmer should be able to go to a private bank, which will look at his proposal and pass it on to NIRSAL. The farmer will then receive a single-digit interest rate between 7% and 10%. Collateral will be required before the loan is granted and a certificate of title ownership of the land will be required. The Land Reform Committee is working on the issue of land registration to improve efficiency and transparency.”

GOVERNMENT ACTIONS: Providing an efficient financial framework will help place the sector on a more secure footing, but the state has also taken active steps to direct its future course. To promote domestic production of staple crops and reduce its import bill, the government announced a range of import duties, tariffs and incentives in its 2012 budget.

Part of the new strategy is to encourage the production of cassava over the importation of wheat for making bread. From July 1, 2012 the levy on wheat flour imports will be raised to 65% (bringing the effective duty to 100%) and wheat grain will attract a 15% import levy (for a total duty of 20%). At the same time, equipment related to processing cassava flour and flour blending face no duties at all, further incentivising production. Moreover, from late January 2012 agribusinesses importing agricultural machinery and equipment have faced no import duties as well.

It is a similar story with rice production. Since early July 2012 brown rice has faced a 30% import duty and polished rice a 50% import duty as a way of encouraging rice millers to select domestically produced rice. By the end of December 2012 the import duty on rice will be raised from 50% to 100%.

DUTY TO PROMOTE PRODUCTION: “There’s a clear signal coming from the government now that it will indirectly support local producers with the import duty hikes on rice and wheat,” Taylor told OBG. “This potentially makes local production extremely profitable if companies and cooperatives are able to organise themselves to take advantage of the situation. The new import duties are part of a wider shift away from a traditionally state-led sector towards one where the private sector takes the lead.”

Consultancy Business Monitor International (BMI) forecasts that government-led initiatives on domestic production should see growth across a range of crops and foods by 2015/16. Rice production is expected to rise by 14% to 3m tonnes and pork is set to increase 31% to 318,200 tonnes. The latest production data available (2010) from the FAO shows that the country produced 2.6m tonnes of groundnuts, 37.5m tonnes of cassava, 1.8m tonnes of tomatoes, 4.7m tonnes of sorghum and 1m tonnes of palm oil.

Taylor believe the changing attitude towards developing a fully fledged agricultural sector is down to two main factors. “You have the CBN, the Ministry of Finance and the Ministry of Agriculture all pushing new policies encouraging and supporting domestic food and crop production,” he told OBG. “There is also the economic growth rate to consider, which I think will ultimately be the main driver. The food production market is maturing. You are seeing high levels of consumer consumption and more retail businesses and supermarkets where customers are increasingly demanding high-quality supply and consistency.”

Forecast consumption growth rates for select crops and foods appear to back up Taylor’s viewpoint. BMI estimates sugar consumption will rise 27% to 1.7m tonnes by 2016. Consumption of another staple – milk – is expected to grow 69% to 2.7m tonnes while demand for cocoa will increase some 35% to 25,000 tonnes over the same period. Rising GDP per capita and population growth are the main reasons given for this projected expansion in consumption levels.

PALM OIL: Government moves to improve its agricultural policy and the projected levels of production and consumption across a range of crops and foods have all combined to attract international investment. In palm oil, for example, a joint venture (JV) agreement between consumer goods manufacturer PZ Cussons and Indonesia’s Wilmar International looks likely to revitalise this segment of the market. The first oil palm seeds were brought to South-east Asia from West Africa in 1848. Today Malaysian and Indonesian plantations dominate the global market for palm oil. Nigeria is hoping to recover some lost ground.

In 2010 PZ Wilmar was formed with the intention of building a $60m palm oil refinery in the country and acquiring land for plantation development. “Since the JV was signed we have bought up around half the amount of land we need, which is in the range of 30,000-40,000 ha in the Cross-River State near Calabar. If we find we need more land in the future, we will purchase it,” Christos Giannopoulos, the CEO for PZ Cussons Nigeria, told OBG. The refinery and plantations are expected to directly employ up to 10,000 people and provide another 50,000 jobs indirectly.

Other investments in palm oil include a memorandum of understanding signed in December 2011 between the government and Indonesia-based Bakrie Group for an investment in mining, palm oil and rubber plantations in the states of Ogun and Akwa Ibom worth an estimated N155bn ($992m). Bakrie’s local subsidiary, Bakrie Delano Africa Nigeria, will handle the cross-sector investment over the next five years.

RICE: More staple crops such as rice, which the government is keen to develop in order to reduce its sizeable import bill, have also seen investment. US-based Dominion Farms has signed an agreement with the government to develop a $40m rice farm with a production target of 300,000 tonnes a year. According to the ATAP, this figure would represent 15% of current rice imports. The farm will cover 30,000 ha in Taraba State, provide 15,000 jobs and will be operated by local tenant farmers under contract to Dominion. Announcing the agreement in March 2012, Adesina said that demand for rice in Nigeria is expected to reach 35m tonnes by 2050. In addition to this future supply, local producer EbonyAgro Industries, established in 2008, has built a 50,000-tonne-per-year rice-processing mill in Ikwo in Ebonyi State.

COTTON: Another plantation cash crop that once played a major role in the country’s agricultural sector, cotton has also attracted investors. In 1961 Nigeria was the top exporter for cotton in West Africa, according to FAO data. Since that time rival producers in Mali and Burkina Faso have forged ahead. In February 2012 the government signed an agreement with the local West African Cotton Company to develop 15,625 ha for cultivation, expanding to 25,000 ha by 2015. The land covers seven states in Katsina, Jigawa, Kano, Zamfara, Gombe, Adamawa and Borno. The government is targeting a boost in productivity from 150 kg of lint per hectare in 2010 to 400 kg by 2015. It also wants to raise output of seed cotton from 120,000 tonnes over the 2011/12 season to 750,000 tonnes in the same period.

COCOA: Finally, in the cocoa industry, the state is targeting an increase in production to 1m tonnes of cocoa in less than 10 years, according to the ATAP. Plans include the creation of a cocoa investment fund for all 16 cocoa-producing states and the establishment of a new marketing and trade corporation.

Looking towards markets in Asia, Eastern Europe and Latin America, the state wants to encourage private investment to rehabilitate former cocoa plantations, expand into new areas of the country and boost output levels. Production is forecast to reach more than 300,000 tonnes of cocoa beans for 2012, with the state seeking an increase to 500,000 tonnes by 2015. Venkatramani Srivathsan, the managing director of Olam, a global supply chain manager of agricultural products and food ingredients, said, “The biggest growth areas for agricultural production in Nigeria in the coming years will be cocoa, cashew and sesame.”

Much is expected from investment in high-yielding cocoa bean hybrids. The new hybrid cocoa varieties can increase annual yields from 350 kg per hectare to 2000 kg per hectare. They are also designed to mature faster. Normal cocoa beans take four years, but the new hybrids take only 2.5 years to grow.

GROWING INFRASTRUCTURE: The past three years have seen new investments in rice, cotton and palm oil production. But while indicators for consumption and production over the next five years are expected to record growth, there is concern that the lack of sufficiently developed infrastructure, such as highways from farmlands in the north and east to major cities in the centre and south of the country, will continue to hamper the sector’s potential. There are also challenges involving gaining access to developed land for agricultural purposes and attracting the human resources required for development.

DISTRIBUTION NETWORK: In the fruit and vegetables segment, the experience of South African retailer Shoprite illustrates the difficulties agribusinesses face in this and other areas. Shoprite operates five stores in Nigeria, with three serving Lagos, one in Abuja and one in Enugu State. Much of the produce it sells comes from farms in the north of the country around the city of Jos. A cooperative of 30-40 farmers in this area supplies the firm. One of the main challenges these types of agribusinesses face is a lack of infrastructure in terms of transport and power.

Much produce is transported by road in fleets of trucks, but due to the nature of the road network in northern areas of the country, transport can prove expensive. It also takes a long time, sometimes one to three days, to move goods from the north to Lagos. Though a few larger retailers use refrigerated vehicles, in general produce is transported in open, unrefrigerated trucks, which affects quality. Packaging is also an issue. Fruit and vegetables are often not separated out or packed properly to ensure they are not damaged. Frequent power outages are another problem for refrigeration units and other farm equipment.

This lack of adequate storage, packing and processing facilities leads to nearly 30% of all agricultural goods produced perishing before reaching the market, according to Srivathsan. These infrastructure issues affect agribusinesses and plantation owners across the country. Transporting goods to or from markets or ports in the south is a constant problem, and firms have to factor in the time taken, the waste or rotting of a percentage of fresh produce, as well as fuel costs. Increasingly in areas of the north there are disruptions to the supply network resulting from security problems. But getting access to land to cultivate or develop in the first place is a problem as well.

LAND ACCESS: “In agriculture, commercial beef, chicken and pork operations require sizeable areas of land. Currently, access to land is a major issue since land in Nigeria has a far higher commercial value as opposed to agricultural value. This is reflected in the asking prices for farms in urban and rural areas,” Pieter Swanepoel, the managing director of Master Meats & Agro Production Nigeria, told OBG. “Although it is still difficult to convince most policymakers of the need to create farming blocks as in other countries, we have found that agricultural policy and the availability of land is slowly becoming more ‘farming-friendly’. But there is still a lot of dialogue that needs to take place to ensure vast stretches of land are released for commercial farming development rather than relying on cooperative and subsistence farming practices.”

Without these large blocks that support economies of scale, according to Swanepoel, it will prove harder for the government to attract larger private farming companies such as Brazil-based JBS or BRF. Many local farmers fear the consolidation of their smallholdings into blocks because they are concerned about communities losing ownership of the land. “The potential for the creation of new agribusinesses that would arise from large-scale farms is still not fully appreciated by many in government,” said Swanepoel.

HUMAN RESOURCES: Finally, there is the challenge of attracting large numbers of young Nigerians into the agricultural sector as opposed to the finance, oil and gas, or IT and telecommunications sectors where the financial rewards and opportunities are perceived to be greater. Significant investment in training and developing skill sets is required to make the sector a realistic choice for graduates and entrepreneurs. At present many of the latest up-to-date methods and technologies, which are taken for granted in other agricultural markets, are not yet used in Nigeria. In many cases local firms like Flour Mills Nigeria and SARO Group, a seed and fertiliser distributor, have set up training institutes and programmes to develop their employees’ skills, but more advanced knowledge in animal husbandry, crop expertise or veterinary science is often hard to find in the labour market.

FOOD PROCESSING: Infrastructure, access to land and the development of human resources are some of the obstacles the country faces as it seeks to return the agricultural sector to its previous heyday. But one area financiers and companies are eyeing with interest is the food processing market. With a rising population and growing GDP per capita, this segment is seen as one to watch. “Over the next five years I expect to see significant investments made in food processing industries for poultry, fisheries, meat and egg production. Their supply chains will also receive interest from investing in farmers to feed suppliers to the distribution network,” said Taylor.

Others are upbeat. “Plans for a new commodities exchange are being considered by the federal government, which will add stability to the price of commodities for sorghum, wheat and rice. Local banks such as Standard Bank and First Bank, and investment funds such as Johannesburg-based Tana Africa, Cyprus-based Renaissance Group, London-based Actis and the International Finance Corporation, are all positive about the opportunities in Nigeria,” said Swanepoel.

OUTLOOK: With an overarching strategy in the form of the ATAP to guide state policy, the government wants to boost domestic production for staple crops such as rice and cassava, as well as cash crops like palm oil, cocoa and cotton. Subsidies designed to expand production of rice and cassava appear to be bearing fruit as private firms start to see the financial benefits of supplying a large and increasingly sophisticated local market.

Yet significant obstacles remain in the form of finance, infrastructure and land availability. NIRSAL, the CBN-led financing initiative, should start making a difference by encouraging local banks to invest in and understand the needs of the agricultural sector more. Although in some instances, such as palm oil plantations, firms have been able to access and purchase land, in other market segments investors face the hurdle of changing the established mindset from small-scale subsistence farming to large-scale blocks. If attitudes changed, economies of scale could be achieved to boost domestic production.

However, the biggest obstacle is infrastructure – especially the transport and power networks. Private firms face delays and mounting costs when simply trying to refrigerate or move goods from the north of the country to the south and vice-versa. Investment in infrastructure would make a huge difference to the supply chain, improving profit margins.

In the past 40 years the population of urban centres like Lagos and Abuja has doubled from 24% to 49%, according to Ministry of Agriculture, and overall the UN forecasts the population will rise from 165m in 2012 to 450m by 2050. Reducing food imports and achieving self-sufficiency are thus crucial goals of Nigeria’s agricultural policy, and the efforts under way look set to yield results in the short to medium term.