Agribusiness Sector and its Support Institutions

Agribusiness Sector and its Support Institutions

Agribusiness Sector and its Support Institutions

Agribusiness Sector and its Support Institutions

Agribusiness Sector and its Support Institutions

The Agribusiness Sector

The nature and character of farm agribusiness linkages in Nigeria can best be understood within the context of the Nigerian economy. Obviously, the supply of raw materials to the agro-industrial processing and manufacturing sector is a primary role of agriculture. This role also facilitates the other traditional roles of agriculture as a food supplier, provider of employment opportunities and income generation and a contributor to foreign exchange earnings through exports. In Nigeria, the rate of achievement of the linkage between agriculture and industrial sector has remained very tardy. This is partly because of the frequent changes in policy beginning with the import substitution strategies of the pre-1986 era that discouraged industrialists from patronizing locally produced raw materials.

During the Structural Adjustment years, government encouraged backward integration but inconsistencies in macroeconomic policy initiatives between 1986 and 1995 discouraged farmers from expanding production of suitable agricultural raw materials for local processing and manufacturing. Backward integration and the privatization of state-owned enterprises are currently emphasized as a desirable policy objective by the new democratic government but growth in the manufacturing and agribusiness sector has changed very little in the past decade. Between 1990 and 1999, manufacturing including agro-industrial output in real terms actually dropped to about 92 percent of the level reached in 1990. Whilst the other productive sectors did register modest growth, this was more than offset – in terms of per capita output – by the annual increase in population. The one exception was agriculture. There were no significant changes in the structure of output over the decade in Nigeria. In 1999, agriculture accounted for nearly 40 percent of GDP, virtually the same proportion as in 1990. The average share of output originating from manufacturing declined from eight to nine percent. The crude oil sector share of GDP accounted for 12.7 percent in 1999, virtually the same as nine years ago. Nigeria’s continued dependence on the oil sector is dramatically illustrated in the data in table 2 on export earnings. Oil continues to account for over 95 percent of Nigeria’s export earnings as well as being a major source of government revenue.

More than 70 percent of all businesses operating in the country are agribusiness concerns primarily in the hands of the private sector. In a recent survey, NISER (1999) observed that 41 percent of agro industries are sole proprietorships, while another 41 percent are private limited liability companies. About 4 percent are government owned, and 5 percent are of partnership nature while 8 percent are public liability companies. These agribusiness enterprises include the whole gamut of operations in the agricultural production, processing, distribution, and consumption spectrum. Agribusiness enterprises in Nigeria can be classified into four major groups, farming input supply companies, producing farm firms, food processing agribusiness firms, and food marketing and distribution agribusiness organizations. Twenty-one types of agribusiness firms can be identified for Nigeria within these four categories.

Farm input supply businesses comprise: agricultural chemical input suppliers of fuels, fertilizers, pesticides and herbicides seed and feed concentrate suppliers; agricultural machinery and equipment suppliers; automobile, tube, tyre, and foam manufacturers; credit and veterinary services suppliers. The producing farm firms are crop producers and livestock producers who are farmers scattered all over the country. Food processing agribusinesses in Nigeria include food and fruit juice canners; manufacturers of beer, soft drinks, cocoa drinks, coffee, and tea; producers of confectionary sugar sweets, chocolate, cakes, biscuits; tobacco processors and/or manufacturers; meat processors; wood processors and furniture makers and distributors, paper millers and tissue paper manufacturers; leather and footwear manufacturers; food packaging and cartons manufacturers; cotton processing, spinning, weaving and textile companies; food processors of cornflakes, jam, bread, butter, milk, margarine, and tomato puree; oils, soap, and toothpaste manufacturers; fishing companies, fish processors, packers and distributors. The food marketing and distribution agribusiness companies in the country include private food stores; wholesalers and retailers of frozen foods including super markets;

These four groups can be found in the formal and informal sector of the economy. The formal agribusiness sector is defined as any manufacturing firm registered with the National Directory of Establishments published by the Federal Office of Statistics and includes those that are registered with the Manufacturers Association of Nigeria (MAN) or the National Association of Small and Medium Scale Enterprises (NASME).The informal sector is not registered with these umbrella bodies but may or may not be organized into localised associations. Examples include food processors, private food stores, supermarkets, farmer cooperatives, and wholesalers scattered all over the country. This group differ from micro-enterprises by the share volume of output or sophistication of machinery used in the production process.

Agribusiness firms are scattered all over the country but are concentrated in three main industrial clusters in Nigeria; Kano Kaduna Jos in the north; Lagos Otta Ibadan in the south west and Port Harcourt Aba Nnewi Onitsha in the southeast. In general, the Lagos Otta Ibadan axis accounts for 44 percent of the registered firms and roughly 52 percent of the employment. Based on the average number of employees per firm, the largest firms are also located in the Lagos area. While most of the sector is made up of small-scale enterprises (about 60 percent of the firms have between 20 and 49 employees), these account for 12 percent of employment. With a few exceptions, firms with more than 500 employees provide the bulk of sectoral employment. As a whole they account for 53 percent of total employment in the manufacturing sector (Marchet et al, 2001).

Support Institutions

Agricultural development in Nigeria has been supply driven focussing primarily on the generation of technology and transfer. This supply driven approach is dominated entirely by the public sector, operating within a Research-Extension-Farm Input Supply Linkage System (REFILS). The key players in this system are 18 agricultural research institutes, 37 public extension outfits; state owned input supply companies and farmers especially smallholder farmers. Much emphasise was placed over the years on the generation and transfer of improved agricultural technologies to farmers. Very little emphasis was placed on the development of markets and the commercialisation of agricultural output in Nigeria. This is one factor that has impinged negatively on agribusiness development in Nigeria.

The Nigerian agricultural research system is the largest in sub Saharan Africa employing about 1000 scientists and 10000 other staff (Shaib et al, 1997). The activities of the 18 agricultural research institutes are complemented by research in three agricultural universities and 23 regular universities with agricultural faculties. The human resource capacity in the agricultural faculties of Nigerian universities is about 1300 agricultural scientists. In addition, the international agricultural research centres have had substantial impact on the agricultural development of Nigeria. These include the International Institute of Tropical Agriculture with its headquarters located at Ibadan, the International Centre for Research in Semi Arid Tropics (sorghum) with a sub station located in Kano, northern Nigeria, West African Rice Development Association (rice) and the International Livestock Research Institute (livestock) with a substation also located in Ibadan. Private sector participation in research and development is small and confined to adaptive research by a few agro industries in Nigeria.

The extension of agricultural technologies to farmers has been the primary focus of the State Agricultural Development Programs in Nigeria. Their efforts are however complemented by the activities of NGOs such as Sasakawa Global 2000, private companies such as Shell Petroleum Development Corporation, Nigerian Agip Oil Company, and some organised farmer associations such as Farmers Development Union (FADU). Private agribusiness firms also provide extension activities usually related to specific input or product markets. Of significance in this respect is the Nigerian Tobacco Company. The extension activities of these companies (including the oil companies) are highly rated but cover a very small share of farmers and in the case of private companies; the extension is focused on specific inputs and products.

As of today, the farm input supply organizations are virtually moribund. These companies were operated, as state owned enterprises mainly involved in the supply of fertilizers, but due to high incidence of corruption, cumbersome bureaucratic problems, biases in delivery and general logistic defects their operations were largely ineffective. The National Seed Service still exists to test and certify foundation seeds developed by the research institutes. In the recent past, private sector input companies like Premier Seeds, Alheri Seeds, Candel (agro chemicals), Syngenta (agro chemicals), Leventis (seeds and agro chemicals), UAC (seeds and agro chemicals) emerged to blaze the trail in private sector participation in the Nigerian agricultural input sub sector. Even then these seed companies have to abide by the public sector norms of selling or distributing certified seeds in which the national varietal release committee has approved (foundation seeds) after three years of testing and approval. However private sector participation in input supply to farmers in Nigeria is growing.

Raw Material Sourcing

The major sources of agricultural commodities used by agribusiness enterprises and the degree of local sourcing of these commodities suggest that there is some sort of linkage between agriculture and industry in Nigeria. It is postulated that the effects of this linkage is the generation of farm-level employment and income especially for rural dwellers. It is also believed that effective farm agribusiness linkages give farmers the benefits of modern technologies, quality control, marketing, and other modern services. To gain insight into the efficacy of existing farm agribusiness linkages in achieving these objectives in Nigeria we examine the strategies adopted by the agro-industrial enterprises in local sourcing of agricultural raw materials.

Agribusiness firms in Nigeria use five strategies to source agricultural raw materials. These are direct purchase from the market, use of buying agents, direct purchase from farmers or producers, use of out-growers or contract farming, and own production where firms set up their own farm enterprises. Obviously, contract outgrower schemes and direct purchase from farmers have positive impact on rural incomes (Goldsmith 1985; Glover 1987). Unfortunately these two strategies are not popular in the Nigerian agribusiness sector. A survey by NISER (1999) on the strategies used by agribusiness firms is presented in Table 7. This suggests that the use of buying agents and direct purchase from the open market are quite popular amongst agribusiness firms. The soft drinks, livestock feeds, biscuits, and beer agribusiness sub-sectors mostly source their agricultural raw materials by direct purchase from farmers. This indicates that these sectors actually encourage farm agribusiness linkages. Use of contract farmers is virtually non-existent for all agribusiness firms except in the beer and flour-milling industries but at very low levels. The impact of farm agribusiness linkages on rural income and employment is likely to be lowest for the pharmaceuticals, confectionery, vegetable oil, and flour-milling industries.

It should be noted that the raw material requirements in the livestock feeds industry are mostly by-products hence the popularity of direct purchase from the producers may not mean better income for the farmers and does not imply that the income effects are domiciled in the rural areas. Rather, the incidence is likely to be more in favour of the other firms, the flour milling and beer industries. Unless the strategy for local sourcing of the agricultural commodities by flour-millers and vegetable oil industries have more favourable impact on rural income and employment, the indirect effects of the linkages between livestock feeds industries and agriculture cannot be favourable.

The popularity of direct purchase from the markets and reliance on buying agents by most agribusiness firms as strategies for the local sourcing of raw materials indicates that the price and income effects of the linkages on farm activities would have very little impact in the rural economy. This is because the buying agents tend to exploit the farmers by offering low farm-gate prices while taking advantage of the poor market information and scarcity situation in the urban market place. The result is that farmers do not respond as expected to price signals while the end-users continue to suffer from inadequate supply and rising costs. These strategies have the tendency to perpetuate weak and rudimentary linkages between agriculture and industry as well as increase domestic prices far beyond international market prices. The fact that agricultural subsidies in Nigeria usually goes to unintended beneficiaries (Idachaba 2000), coupled with weak farm agribusiness linkages encourages importation of raw materials by agro industries even for commodities in which Nigeria has a comparative production advantage. A possible exception is the beer industry whose linkages with cereals production are relatively more intensive and hence their employment and income effects could be relatively higher than others.

The greatest impediments to increased local sourcing of agricultural raw materials in the agribusiness sector, is competition from other uses especially as food and by other industries. This arises as a result of the multipurpose use of some of these commodities and hence alternative markets. Maize is used in the beer industry as well as in the flour-milling industry and the livestock industry and it is also consumed fresh. The same is true for sorghum and several other agricultural products. This is a clear indication that domestic production at the farm level is inadequate and cannot satisfy the needs of agro-industry as well as consumers.

Outside competition from consumers and other industries, most agribusinesses also have storage problems, making it difficult to stock raw materials. This calls for the use of contract farming to ensure adequate quantities of raw materials on specified delivery dates. Another impediment is the poor quality of products, especially in the pharmaceuticals and confectionery sub sectors. The issue of quality has implications for specialization in the production of specific crop varieties to suit specific types of industrial demand. A final impediment is the inadequacies and high cost of funds. The issue of inadequate funds arises because most firms purchase raw materials directly from the market, as observed earlier.

Case Studies

Abakili Rice Processors

The demand for rice has increased at a much faster rate in Nigeria than in most other West African countries. Between 1960 and 1970, Nigeria had the lowest per capita annual consumption (average of 3kg) of rice in West Africa. Since then, Nigerian per capita consumption levels of the crop have grown at 7.3 percent per annum. Per capita consumption in the 1980s averaged 18kg and reached 22kg in the 1995 to 1999 period. A combination of factors seems to have started this increase in the demand for rice consumption. The first is urbanization and urban lifestyles, which encouraged easy-to-prepare foods such as rice.

Rice production has also increased (9.3 percent p.a.) during the 1960 to 1999 period especially as a result of vast increases in area cultivated (8 percent p.a.) and to some extent through increases in yield (1.4 percent p.a.). Production increase has however not matched consumption increase so that imports had to make up the shortfall in demand.

The Nigerian government has actively interfered in the Nigerian rice economy over the last 30 years. Government policy had been inconsistent, oscillating between import tariffs and import restrictions. This oscillation has affected domestic rice production in such a way that during periods of ban, domestic rice production picked up to meet the challenge in domestic demand and during periods of reduced tariffs, domestic production and prices of local rice plummeted. In February 2002, the government again increased tariffs for imported rice to 100 percent.

Abakiliki, the capital of Ebonyi State, emerged primarily as a rice-producing town in the early 1960s. Presently, it has the largest concentration of rice mills in Nigeria with about 400 rice-processing mills located in the town. These small rice mills are all privately owned with about 96 percent owned by individual entrepreneurs. The remaining 4 percent are cooperatively owned. Most of these mills were established as early as 1960. Presently, the mills are governed by the byelaws of the Association of Rice Mill Owners at Abakiliki. The Association supervises processing operations at the mills, maintains quality control and monitors standards and measures. Individual processing mills obtain their own stock of paddy but joint processing with other mills may arise in the case of large purchases by rice merchants. Government support to the mills is non-existent but the local council collects taxes and market tolls from processors and traders.

The key players in the rice staple food sector are small-scale farmers and rice processors or millers. The small and medium scale processors initiated the relationship between rice farmers and processors in the 1960s. This relationship was basically informal and relied heavily on trust between the two parties. Initially, millers who generally were migrants from outside Abakiliki town and environs, encouraged farmers who were indigenes and owned the land, to produce rice for their mills. The millers provided inputs, rice and fertilizer, and other non-cash gifts such as goats and drinks. Later these non-cash benefits were converted into cash, but the millers/processors continued to provide credit to the farmers to enable them pay for fertilizer, labour and parboiling costs. The millers later purchased 75 percent of the total (parboiled) rice output from the farmers at harvest, when prices were lowest, and milled for the market. The balance of 25 percent was left with the farmers to sell, especially during the off-season, when prices were highest, to offset their household obligations. This informal arrangement existed and served the purpose of both parties because the confidence level between farmers and millers then was very high.

However in the recent past this arrangement has collapsed completely due to several related reasons. First, farmers became unreliable and were no longer honouring the informal agreements. Secondly, it became more difficult to produce rice due to gall midge problems resulting in low yields. However, the most important factor that led to collapse of this farm agribusiness linkage was the high cost of labour for rice production. Labour for rice production became expensive because the active labour left the rural areas in very large numbers aided by the new political freedom/democratization. The attraction to the cities is due to the discovery of a new lucrative enterprise and alternative off farm employment-motorbike taxis-popularly called ”Okada” in Nigeria. The increase in labour costs coupled with increased rice imports eroded the profit margin of farmers and made it difficult for them to meet obligations and commitments with processors.

This situation has given rise to a very critical problem in Abakiliki area. Migration of labour to the major cities in Nigeria implies that the rice production enterprise, which actually opened up the town of Abakiliki, is declining. However, the millers have not relocated. So how do they survive? Six years ago rice processors sourced 70 percent of their rice from within Abakiliki and environs. Today, rice millers source 80 percent of their rice from outside Abakiliki to keep their mills working. The major sources of paddy rice are from the production zones of Adamawa, Benue, Nasarawa, and Taraba. This has increased competition for paddy rice, as other processors from other States especially Nasarawa and Taraba States have to compete with Abakiliki processors for paddy rice from these production zones.

One critical aspect that is lacking in the rice production sector is the absence of a pressure group at the national level. The rice millers associations in the country are localised in different towns and there is little effort to influence the emergence of an enabling policy environment that would make the rice crop sector competitive in the regional market.

Sorghum Outgrower Scheme with Guinness Plc.

Sorghum is a very important staple crop produced mostly by small farmers and consumed as food in northern Nigeria. In 1984, the crop suddenly became an industrial raw material for breweries. The government imposed a policy of backward integration in which agro-industries including breweries were required to source their raw materials within the country. In addition, breweries were required to establish farms as a prerequisite for import licence allocations from government. With the anticipated complete ban of barley and maize imports by 1988, the breweries had no choice but to look inwards. Sorghum was found to have good malting qualities and it suddenly changed from a major household staple to a cash crop, a case of necessity becoming the mother of invention. But production still remained in the hands of small, uneducated farmers scattered in different parts of the country. The breweries were compelled to compete for this limited commodity and obviously many folded or were bought up by bigger and stronger breweries. From 34 breweries in Nigeria in 1984 the number was reduced to 16 by 2002. One of the largest breweries, Guinness Nigeria Plc survived this onslaught in the Nigerian business environment.

Guinness Nigeria Plc is a multinational company that has been in the brewing business in Nigeria since 1950. Its products include Guinness extra stout, Harp Lager beer and Malta Guinness. In 1984, the brewery acquired a 3000 ha farm in Mokwa for the production of maize but this is not the reason why the brewery was included in this study. In fact, the farm at Mokwa has already been sold as the company found it cheaper to purchase maize in the open market than to produce. Between 1995 and 1998, the company had established an outgrower scheme primarily for the promotion of ICSV 400, a particular sorghum variety among farmers in Nigeria. The variety made it cheaper to process sorghum for malting than other varieties. Other important factors that pushed the company into investing in the scheme were that profit margins were generally high with local raw materials and there was no foreign exchange risk using local raw materials. Guinness Nigeria Plc was the only company of this multinational that sources its raw material locally.

By 1997, the company started a contract grower scheme with farmers in Kano, Kaduna, Katsina and Taraba States. The objective of the company’s contract grower’s scheme was to create awareness about the improved variety and consequently get a large group of farmers to adopt and grow the crop. In other words, the company’s intention was not to continue with the scheme over a long time. In the four years that the company ran the scheme, they provided seed, basal and top dressing fertiliser to farmers in the four States. Farmers were required by formal contract to produce a field of pure ICSV 400 sorghum variety. At first, farmers were sceptical about the intentions of the company but by the following year participation increased and farmers grew the crop in an area ranging from 2 to 75 ha per farm household.

Farmers under the scheme were closely monitored four times during planting, thinning, top dressing, and during harvest. Company staffs were provided with vehicles and drivers to criss-cross the country on monitoring missions. Following increased participation of farmers, the company pulled out of the scheme in 1998. There were other reasons for the termination of the scheme. The level of commitment by farmers was not encouraging. In some cases, farmers did not honour the contracts and some diverted the fertilizers provided to alternative crops such as vegetable production. Farmers also did not follow the technical advice and suggested planting dates.

Presently, the company uses agents to purchase grains or trusted suppliers who had earlier bought from producers/farmers at prevailing market prices. This too requires a formal contract. First, the company will receive applications or letters of intent from prospective suppliers. This is followed up by a local purchase order (LPO) to the buying agent to supply grains within a specified number of days to any of the company’s buying centres at Kaduna, Zaria, Kano, Agbede, Ewu, and Sapele. The LPO specifies quality requirements such as percentage of insect damage, weather damage and foreign matter content. The price paid for grain to the buying agent is based on market information but will usually cover the market price of grain, market charges, transport to buying centre, handling charges at buying centre, and a premium. Grain purchases are done at specific times of the year.

While this option tends to meet with its grain requirements, the company would have preferred a farm-gate alternative where it would be able to bulk grain directly from farmers without getting to the market to avoid taxes and grain merchants who normally raise prices. However farmers are scattered all over the country and bulking logistics are very expensive.

Fuman Agric Agricultural Products Fruit Juice Manufacturer

Fuman Agricultural Products is a medium-scale fruit juice manufacturer who started in 1995 by taking over the old Lafia Canning Factory established in 1954. The major raw materials of the company are fresh fruits such as orange, guava, pineapple, mango, and passion fruit. Main production lines are natural fruit juices i.e., orange, pineapple, guava, in 1l and 250ml tetrapak packages; others are canned fruits. Installed capacity is 5t/h but the company presently produces at 10 percent of its installed capacity.

Fruits are procured locally by the company’s purchasing manager and from independent traders with informal links to the company. Fruits are purchased from Oyo, Osun, Ekiti, Ondo and Edo States in western Nigeria; Cross River in eastern Nigeria, and Nasarawa, Kaduna and Benue States in the Middle Belt. No formal contracts are made with suppliers. The company determines the price and usually offers the average between the seasonal and off-seasonal price. The company prefers to buy in the glut season when prices are low since fresh fruit market demand is saturated. In May 2002 pineapples were purchased at about US$ 800/tonne. The processor may provide transport and in some cases provides some pre-finance to traders.

Direct links to the farming community are limited to former cooperative groups that had worked with the former Lafia Canning Factory in the western States mentioned above. In so doing, they provide soft loans, planting materials; equipment and other agricultural inputs while the farmer cooperative groups supply their produce to the company. The company reserves the right to discard poor quality products and the average annual prices are paid to farmers for their produce. At times when open market prices are better than company prices, farmers sell their produce in the open market. The company also goes farther field to purchase supplies directly from producers and agents at prevailing market prices from eastern and central Nigeria.

The main constraint faced by the company is the availability of raw material. The farming sector is not geared for a continuous and stable supply to the factory. Competition from alternative markets especially from northern Nigeria (where these fruits are not usually grown) reduces the company’s source of raw material supply. The company is presently making efforts to obtain concentrated juice supplies from Ghana and South America. Other constraints mentioned are high interest rates charged by commercial banks (32-35 percent pa) and notorious problems with electricity supplies.

Several factors require strengthening. Appropriate staffing and a degree of decentralization in management structure are essential. Communication between the company and cooperative farmer groups and consultation especially with those inherited from the former Lafia Canning Company is vital to maintain a reliable supply of raw materials, particularly oranges. It is important that farmers work in partnership with the company and have a better understanding of their production system. This cannot be achieved without the appointment of a well-trained liaison and extension officer who speaks the local language, possesses appropriate interpersonal skills, and is preferably an indigene of the area.

Cocoa Exporter Ed&F Man Nigeria

ED&F Man Nigeria, cocoa buyer and exporter, Mushin, Lagos buys around 30-40 000 tonnes of cocoa annually, the most of which is exported. Local processing serves the domestic market of cocoa-based drinks. Capacities are around 5 000 tonnes per year. The sector used to be under government control until 1985 but is now fully liberalised. Competition is high amongst cocoa buying agents. International market prices are published daily in the newspapers and the farming community enjoys full access to information. This is not the case for the staple crops discussed above. Buying agents are used who employ brokers who deal with the farming community.

Most cocoa in Nigeria is produced on a small scale. The average delivery per farmer is less than 5 bags (roughly 300kg per hectare of cocoa) per season. The company has access to international funds and advances monies to buying agents in the main season. The agents make weekly verbal contracts with farmers and agree on price. If prices fall, the farmer has to deliver more beans to the trader, which does not always happen, if prices rise, the buyer has to offer more, otherwise the agent defaults on the contract. Links between producers and overseas processors are well established. Due to the small-scale nature, international and local traders are in charge of collection, transport, grading/drying, etc.

There are a few cooperatives still in place. The initiators of the strong links historically have been overseas processors who relied on the government for internal buying. After the collapse of the Cocoa Board private traders dominated internal buying. Competition in cocoa buying is high, benefiting the farming sector. An estimated 90 percent of the world market price is paid to the farmers. Despite a lot of recent mergers and acquisitions due to lower profit margins in the international trade the cocoa sector in Nigeria is still profit making and is one of the most transparent systems in West Africa. Input supplies to farmers, however, have collapsed after the pullout of the government. Nevertheless the country’s production base has stabilized over the last decade. Replanting of cocoa gets some support from the State.

The Association of Nigerian Cooperative Exporters, (ANCE), Ibadan was established in 1945 and closely linked to the State Marketing Board until its collapse in 1986. ANCE consists of village level cooperative farming societies (CPMS) and town-level Cooperate Produce Marketing Unions (CPMU). There are over 400 village level societies and 42 CPMU in five Western States in Nigeria, Oyo, Ondo, Osun, Ekiti and Ogun. ANCE used to be in charge of marketing Nigerian cocoa to terminal markets until 1986.

Its importance after the breakdown of the State-controlled cocoa sector has declined drastically but the organization still handles about 5 percent of Nigerian cocoa production. Cooperative members are shareholders and enjoy annual bonus payments, access to inputs, loans and voluntary credit schemes. The association supplies beans to a cooperative cocoa processor in Akure with a capacity of around 5 000 tonnes/year. The processor is supplied by the various cocoa traders and supplies cake/butter/liquor to Cadbury (Stanmark) Nigeria, Plc and other biscuit manufacturers.

Constraints in the Development of Farm-Agribusiness Linkages

That agriculture and industry remain largely separate entities within the national economy whereas a symbiotic, mutually beneficial relationship anticipated, remains a paradox. One possible explanation is that the Nigerian agribusiness environment is full of uncertainties and risks arising from several factors. To give a picture of how this environment constrains agribusiness development in Nigeria some of these critical factors are discussed below.

National and Regional Policies

There is no separate policy articulation for the development of agribusiness except for the brief objectives stated the 1988 Agricultural Policy for Nigeria document for agricultural commodity processing. The objectives of that section of the agricultural policy are stated as follows:

· to widen the demand base for agricultural commodities and, hence, accelerate the rate of growth of the agricultural sector;

· to preserve perishable agricultural commodities thereby reducing their level of waste and degree of seasonal price fluctuations; and

· diversify employment opportunities in the rural areas through the establishment of rural-based, small scale agricultural commodity processing industries.

There is no specific national policy that focuses on the development of agribusiness as an important sub-sector – especially in the areas of agricultural commodity quality standardization, storage, processing, packaging, haulage, and marketing. There is also no harmonized and regional policy that supports a programmed and targeted development of the agribusiness sub-sector in West Africa.

The Nigerian industrial policy is outdated and inconsistent with the situation of today. The last industrial policy was formulated in 1985 and ever since then the government has been unable to come out with a comprehensive industrial policy for Nigeria (Adegbenro, MAN, personal communication, 2002)


The most serious business problem in Nigeria is the state of infrastructure and the biggest infrastructure problem is electricity. According to a survey by Marchet et al. (2001), infrastructure problems are nearly two and a half times worse than the next biggest problem – finance. The deficiencies in the supply of electricity are, by far, the biggest infrastructure problem as reported by 94 percent of the firms in their sample survey.

The response mechanisms to the notorious inefficiency in public electricity supply include private provisioning, where firms purchase and use their own electricity plants, factor substitution, where firms adjust machinery from electronic to mechanical or manual; output reduction where firms reduce their output and product substitution were firms reduce the range of their products in the market. These responses are costly, as they lead to low capacity utilization, reduced output, and high production costs. These costs are in the final analysis transferred to the final consumer while some firms in the recent past have considered relocating their plants to Ghana and Côte d’Ivoire.


The next major problem in the Nigerian business sector is the high cost of funds arising from the depreciation of the local currency (Naira) against major currencies coupled with high lending rates and extreme difficulties in accessing credit for working capital, especially for small agribusiness ventures. Presently, the lending rate has been allowed to float and in some banks it is as high as 25 percent. The high lending rate encourages service businesses such as trading and imports rather than productive ventures in the agri- business sector.

Unpredictable Government Actions

There is a high level of uncertainty and lack of confidence in government and its intentions for the business sector. Managers are generally unable to make predictions of future sales and investment plans in the long term. This is because of a general level of uncertainty, especially with the inability to predict government policy. Marchet et al. (2001) noted in their survey that business uncertainty and the inability to plan because of fluctuations in government policies ranked third, behind lack of infrastructure and access to finance.

Uncertainty arises basically as a result of the conflicting objectives of government agencies. It is an oversimplification to speak of ”the government” as there are in Nigeria a gamut of agencies of government that oversee the workings of the business environment. For instance, while the Federal Ministry of Agriculture and Rural Development has the mandate of supervising farmers, the Federal Ministry of Industries oversees agribusiness firms and large industries, while the Federal Ministry of Environment oversees matters related to industrial waste and effluents.

The Federal Ministry of Finance along with the Central Bank of Nigeria control matters of credit, regulate the merchant and commercial banks, foreign exchange, interest rate, and import or export regulations. But inter-ministerial relations are almost nonexistent leading to implementation conflicts and this is one reason for policy inconsistencies in the Nigerian agribusiness environment. According to Idachaba (2000), when institutional arrangements for agricultural policy become highly unstable from being frequently changed and reversed, there is cause to worry over institutional sustainability.

To make successful business plans, managers must be able to make reasonable predictions about the macroeconomic environment and how it will affect their enterprise. Unfortunately, agribusiness firms in Nigeria find it very difficult to make such predictions. The unstable macro-environment, especially the exchange rate volatility, is a major reason why firms in Nigeria are unable to plan and unwilling to make large and long-term investments.

The risk and uncertainty in the Nigerian business environment is heightened by the tax regime. This problem arises from the wide variety of constantly changing taxes and levies imposed by the state and local governments. Many local levies overlap with federal taxes or with other state and local levies. The most notorious example is the Lagos State sales tax, which is applied on top of the federal value added tax.

Other overlapping taxes include local premises tax, ground rent, federal and state education taxes; sign board tax and mobile advertising tax. In addition to these there is withholding tax and pay-as-you-earn tax. The multiplicity of taxes and the poor design and administration of some taxes contributes to the risk and uncertainty of business in Nigeria. The tax system forces managers to devote a large amount of resources to dealing with the administration and its inefficiency reduces firms’ stock of working capital. The tax regime is a particular concern to foreign-owned firms and those that employ significant numbers of expatriates. This almost certainly helps to discourage foreign investment and technology transfers.

Regulatory Environment

The regulatory environment is also problematic and is an important cause of concern for agribusiness managers. Most regulations and laws change frequently or are inconsistently applied, causing firms to expend considerable time and effort to comply with them or negotiate ways around them.

There is a multitude of regulations imposed by all levels of government agencies. The Standards Organization of Nigeria and the National Food and Drugs Administration Commission are also frequent sources of burdensome regulations. It is reported (Marchet et al. 2001) that neither organization appears to have the capabilities needed to adequately perform its regulatory roles. Therefore, instead of protecting industry and consumers, they serve more as a way to harass businesses. In fact, most business managers believe that these agencies are not competent and function more as a source of graft than as proper regulatory bodies. The same can also be said of the federal and state environmental agencies.

However, as with many other countries, most of the actual laws and policies in Nigeria are reasonable and their value is understood by most of the manufacturing and agribusiness sector. However, the value of many regulations is lost when they are implemented in an arbitrary and capricious manner. This makes them ineffective and unfortunately increases risk and uncertainty. On the other hand, one must not fail to mention the attitude of the average Nigerian businessman who is prepared to find ways and means of thwarting government regulations. A positive change in attitude and integrity may improve the administration of regulations in the Nigerian agribusiness environment.

Crime and security are significant issues facing every person and enterprise in Nigeria. Lack of security also discourages foreign investors. The government’s inability to provide security imposes many costs upon the agribusiness sector. Some are measurable; such as the amount of money firms spend hiring security guards. Others may be difficult to quantify.

Farm-Level Constraints

At the farm level, the Nigerian agricultural system is characterized by subsistence smallholder production in scattered irregular plots. Geographically, farmers are dispersed and unorganized so that the cost of bulking and consolidating their produce for commercial supplies is enormous. To circumvent the problem of bulking logistics, the formation of farmers into groups has been recommended (Kormawa et al, 2002). The weaknesses of working with groups are shifting allegiance, insincerity, loose organization and weak financial base. Shifting allegiance occurs especially when prices of commodities fluctuate. This is common for commodities that have alternative uses and/or alternative markets. Examples include sorghum and maize.

Farmers may also shift their allegiance to middlemen in such instances. Groups and individuals in the groups may be insincere and may not adhere to agreements. Sometimes groups may be loose organizations with no apparent leadership or coherence. Most farmer groups have a weak financial base and are unable to take up production opportunities. As a result (as we shall see in the next section), agro-industries use a series of alternative strategies to source raw materials. These methods include contract farming; own production, direct purchase from the producers or market, and use of bulking agents.

Market Information Service

Market-oriented production requires the use of a real-time market information service. Daily information on market prices can be found in newspapers for traditional export crops such as cocoa but is completely lacking for other crops of industrial importance such as rice, sorghum, cassava, maize, and horticultural crops. Existing market information services are of no assistance to farmers and agribusiness firms as information is collected monthly by public agencies, basically for research purposes. Hence, both farmers and agribusiness firms are forced to operate in a non-transparent and speculative business environment.

Many agribusiness firms and farmers are unable to ascertain beforehand where to buy or sell commodities in order to maximize profits and reduce the risks associated with marketing. This has created a class of market agents who have capitalized on this non-transparent market situation and lack of information to rip off both farmers and agribusiness firms in Nigeria. In general, the agribusiness sector in Nigeria is not price competitive and lacks service linkages to finance technology and export sectors due primarily to the absence of a national market information service.

Factors Contributing to Success

Economic behaviour is clearly embedded in networks of social relations. But when relations of reciprocity and cooperation, the networks of solidarity, trust, and tolerance which are important aspects of social capital, have been substantially eroded and dismantled by poor policies and a harsh business environment, it becomes difficult to entrench a beneficial culture of farm agribusiness linkages. This is exactly the case with farmers and agribusiness enterprises in Nigeria. It is therefore not surprising that most Nigerian agribusiness firms use a combination of strategies such as buying agents, direct purchase from the open market along with own production, outgrowers, and contract farmers, and direct purchase from producers, to source their raw materials. The combination of strategies is an adjustment to the harsh business environment, the need to improve capacity utilization and company profits. In general, profit maximization and not development objectives have been the driving force on the part of firms in maintaining farm agribusiness linkages.

The common feature of farm agribusiness linkages in the case studies, irrespective of whether it is a formal or informal relationship, is that farmers agree to grow crops for a processing company or for export. Contracts are usually made for a period of one year at a time, usually at planting time, specifying what percentage of produce the company will buy and at what price. Naturally, the farmer provides land, labour, and tools but is supplied with inputs such as fertilizer, seeds, insecticides, and/or credit. Extension services may also be provided, but the company retains the right to reject substandard produce. In this scheme, the power relations are often viewed as skewed in favour of the company to the detriment of the farmer. It is argued that contracts between farmers and companies are exploitative because it involves an unequal power relationship that reduces farmers to hired hands.

This however is not the case for Nigeria. Farmers have great bargaining power in that they retain ownership of land and labour and they often have access to alternative sources of income and markets. Where farmers have total legal authority over the land, as in all our case studies, they do not have to implement recommended practices to retain their land. For instance, the observation that farmers do not adhere to technical advice and suggested planting dates (as observed in the Guinness Nigeria Plc outgrower scheme) may be the result of a conscious decision taken in the light of the need to maintain diversity in production.

Secondly, where crops such as sorghum, rice, and fruits have alternative domestic markets, it is obvious that farmers are unlikely to abide by contractual agreements (whether formal or informal) in the event of a price increase in favour of the contract crop. In addition, in areas where there are better alternative commercial crops than the contract crop (e.g. vegetables), farmers are also likely to divert inputs provided for the contract crop to higher income crops. Alternative production and market possibilities are therefore strong advantages in farm agribusiness relations, which may usually favour the farmer more than the company, especially in cases where the farmer controls the production resource – land. Deviations from the letter of the contract may constitute a form of farmer resistance, but such deviations are unlikely to exist in the absence of alternative market opportunities.

Thirdly, farmers also own and administer the use of family labour but are unlikely to influence external factors that may affect (hired) labour migration. Farm labour costs have increased in the recent past (especially in Abakiliki, eastern Nigeria) due to migration to urban areas by the active farm population in search of alternative sources of income. This situation led to increased production costs for rice and makes domestic rice production and processing less attractive.

On the side of agribusiness companies, manipulations by the firms were also reported during interviews with farmers and processors for this study. For instance, farmers and suppliers have encountered manipulations of inspection standards to control deliveries. Firms discover that in bad years farmers dump grain on them and to avoid this they raise quality standards in order to reject excess supplies (S. Bello, personal communication, Lagos, 2002). Individual employees of the company may also reduce volume and standards to favour their private pockets and not company profits (A. Mouneke, personal communication, Abakiliki, 2002). Many agribusiness companies in Nigeria folded as a result of such selfish employee manipulations. Raw material purchasing officers and quality control inspectors of agribusiness companies are the major culprits of this practice and have also been known to take bribes and kickbacks.

Suffice to say however that partnerships between farmers and agribusiness firms have been most successful in areas where the firms have made conscious effort to promote and encourage farm level production without necessarily becoming involved in actual production. A typical case is the experience of Guinness Nigeria Plc described above. The relationship between farmers and processors in the informal rice sector had also been successful until recent increases in farm labour costs forced processors to look elsewhere for raw materials. A change in attitude of farmers to think in terms of commercial and not subsistence production and the identification of assured markets (agribusiness firms) helped to sustain these relationships. The fruit and cocoa industries observed in this study need to strengthen their existing farmer cooperatives/groups in order to sustain and improve raw materials supplies.


The Role of Government

Farm agribusiness linkages will remain an important and growing feature of rural Nigeria. The new democratic government continues to push a policy of increased private sector participation and western donors consider farm agribusiness linkages an appropriate tool for achieving economic growth through free market. Following the gradual withdrawal of government from the provision of farm input supply, especially the procurement and distribution of fertilizer, seed, and agrochemicals, the Nigerian agricultural sector now faces a new challenge on how to develop new private sector capacities to assume these roles. The government should provide incentives to encourage private sector participation in agriculture and agribusiness. Provision of rural roads, electricity, and telecommunication facilities is vital in this regard.

The focus on market orientation and commercialization of agriculture invokes a new strategy and sense of urgency for government to define appropriate responses to the globalization of agricultural inputs markets and liberalized food imports under WTO rules. Without such guidelines and policy (and given the present harsh agribusiness environment), the farm and agribusiness sector may be unable to ward off stiff competition from cheap imports in an era of trade liberalization and lower tariffs. There is a need to articulate an appropriate policy for the agribusiness sector, given the growing national and international competitive environment.

Finally, government should focus on providing an enabling institutional and consistent regulatory policy environment that removes all impediments to the free flow of agricultural commodities between farmers and agribusiness enterprises as well as across the borders or into the export market. Government should also provide appropriate safeguards to enforce contracts and protect private investments in agriculture.

The Role of Agribusiness Firms

There is a need to improve supply chain efficiency through the reduction of transactions by agribusiness firms and to avoid unnecessary levels of traders. Emphasis should be given to buying directly from farmers as this will lead to some considerable advantage to both the industry and the farmer. This strategy will enable the industries to assist farmers directly as they provide them with an assured market for their crops. Basically, this implies breaking into the crop marketing chain at the farm level. Direct sourcing of raw materials will, however, require strategic planning and some investment at the grassroots level. In the case of grain crops (e.g. sorghum, rice, maize, cowpea, and soybean), with a known cropping calendar in northern Nigeria, recommended strategies for agribusiness firms might include the following:

· Identify farmers and potential farmers’ fields. This could be done with a preliminary crop prospect survey (in late August/early September). Crop prospect survey is an annual operation that can be carried out by the industry to determine the extent of crop planting and establishment;

· List farmers during the final crop survey (in early October). Discuss with listed farmers their yield prospect and possible sale and delivery to designated warehouses.

· Submit list of confirmed farmers and grain type and quantity to the agro-industry or its agent;

· Distribute a formal or informal contract or memorandum of understanding made out by the industry or its appointed agent to farmers (by the second and third week of November).

· Commence grain intake and normal inspection at intake point (during the first and second week of December). Farm-gate buying should terminate by the end of February.

Where a company already has certain mechanisms such as crop prospect survey, market survey/information, and grain inspection operations in place this, method may pose no extra cost. As observed, timing is critical with this strategy and therefore it may be necessary to limit collection points to one contiguous area and train farmers in groups on bulking strategies to further reduce costs. Extra staff may be necessary to accomplish this task if wider areas are to be covered.

Key factors to the success of this strategy would be early buying and early payment: Small farmers generally lack storage ability and capacity. Speculators take advantage of this to buy cheap from the farmers’ store the grain for about 5 – 8 weeks before it is sold to companies. Using this strategy, the agro-industries will now compete with the speculators for farmers’ output. The financial base of farmers is generally poor. They will prefer quick, near-on-the-spot type of payment (e.g. minimum delay of one week).

There are also quality and price advantages associated with this strategy. The quality advantage for the industry is that high-grade grain will be received without mixing. Admixing of high and low quality grain is almost always done at speculators’ warehouses. Secondly, grain of higher homogeneity and purity are available because grain batches of the same source will be bulked and their origin can be identified. Thirdly, there will be less infestation because there is usually no old-season grain with farmers (no carry over) that could serve as inoculum. Most infestation occurs at speculators’ warehouses. Therefore fresh new season grain obtained at the farm gate will require less fumigant usage.

With respect to prices, the use of this strategy implies the removal or reduction in suppliers’ margin by dealing directly with growers/farmers (this will encourage production) and the bypassing of market charges (taxes and levies) both of which constitute about 8 to 12 percent of present grain purchase costs. Secondly, intensive adoption of this strategy in the first year may likely improve grain requirement by 15 to 25 percent. This will lead to a significant reduction in costs and a large savings for the company. Over the years, farmers’ trust and confidence develop and supplies are likely to increase.

The above strategy will work well for agribusiness firms that use grain and to some extent fruits as their primary industrial raw material. For root and tuber crops and some vegetable oil crops, some primary processing may be required at the farm level to produce secondary products required by agro industries. This will require the introduction of small scale processing machines in rural areas to help transform the primary crop, improve shelf life, and reduce perishability. This will reduce bulk, transportation costs and spoilage. To facilitate rural transformation, large agro-industrial firms should pursue a processor group or community-based agro-processing group philosophy. This is particularly necessary for crops such as cassava, yam, plantain, and oil palm. Farm-gate processing into secondary products that are raw materials for industrial use is recommended to improve farm-level profit in rural areas.

Public Private Sector Partnership and Market Information Service

The introduction of real-time market information service is vital to enable the commercialization of agricultural production and farm agribusiness linkages. Incidentally this service is a very expensive venture, especially for traditional non-export crops. To achieve this recommendation, a public private sector partnership is recommended in which the public sector agency collects market information on a daily or weekly basis, while the private sector funds its collection and dissemination on radio, newspapers, and the Internet. With the growing introduction of mobile telephony, daily or at least weekly data collection and transmission of market information service and broadcasts on radio are feasible in Nigeria. Presently, the Rural Sector Enhancement Program located at the International Institute of Tropical Agriculture, Ibadan, Nigeria, collects and broadcasts (on radio and internet) such information in Nigeria on a weekly basis, though on a pilot level.

Finally, even though farmers have great bargaining power because they control the basic resources of production, many are not aware of this advantage. There is a need for a complete reorientation of farmers’ attitude towards commercialized production. This will require the development of improved market linkages. A market information service provides this opportunity but this is one area (market linkages) that requires strengthening through capacity building.