3. Arewa development – Agriculture
Posted on July 12, 2015
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by Aliyu Suleiman

Context


Agriculture is the largest sector in Nigeria and constitutes 22% of the nation’s GDP. Oil is only the third largest sector and constitutes 15% of GDP. Agriculture contributed N16.8 trillion to GDP in 2013. To put it in plain language, Nigerian farmers produced an output valued at N16.8 trillion in 2013. About 14.9 trillion of this came from crop production and N1.4 trillion from livestock production. It can conservatively be assumed that at least 60% of this output or N10 trillion came from states in Northern Nigeria (state level data currently not available as NBS is still working on this post the GDP rebasing exercise.)

Agriculture is the largest sector in the country despite generally lower yields across many crops and livestock. Maize and rice yields (quantity harvested per hectare of land) in Nigeria are only about half that of South Africa or Thailand, and about a fifth that of the US. There is therefore potential for agriculture to contribute more to GDP if yields could be improved. It is estimated that yields in Nigeria could easily double with proper farming methods and application of inputs.

Farmers in northern Nigeria capture very little profit from the N10 trillion of agricultural production. A standard industry analysis will quickly reveal why this is the case. The agricultural sector has all the hallmarks of an industry that should be expected to produce very poor returns for its players. The industry has commoditised output, it is capital / labour intensive, players are mostly small / fragmented, inputs suppliers have more bargaining power, and buyers often have better alternatives in terms of imports. After investing in their farms for 6 to 9 months, farmers are typically broke at harvest time and rush to sell their produce. In the market, they face depressed prices due to the resulting glut and middle-men step in to buy off the excess produce which they then store and sell when prices improve. A study on the rice value chain showed that farmers bear about 90% of the production cost while capturing only about 30% of the profit. Middle-men and retailers capture the bulk of the profit while investing very little. If we assume that the estimated 12m farmers in northern Nigeria generally capture 30% of the agriculture GDP as profit (an optimistic estimate in my view) and assume each farmer supports a household of 5 (including himself), you can easily see how so many people end up living on less than a dollar a day (30% of N10 trillion divided amongst 12 farmers each with a family of four over 365 days will give you N137 per person per day. This reduces significantly if we assume a larger family size or a higher number of farmers)

Diagnosis


Table below presents an assessment of the agricultural system from a crop production perspective given this constitutes 90% of agricultural output. The system has been categorised into four areas – Inputs, Cultivation, Post-Harvest, and Enablers. Each area is further sub-divided into component dimensions and gap for each dimension assessed based on qualitative evidence. The gaps are then prioritised to identify the biggest bottlenecks to focus on.
The “moons” provide a visual indication with a full moon indicating a large gap or high priority, an empty moon indicating a small gap or low priority, and other phases of the moon indicating stages in between. The recommended dimensions to be prioritised are then highlighted in blue.



As can be seen from the qualitative assessment above, the biggest bottlenecks which governments should focus their limited resources on are: fertiliser, improved seeds, irrigation, pricing, processing, and R&D. Historically, effort has been concentrated on the provision of inputs, fertiliser in particular. While this has helped, yields have largely remained flat. According to NBS statistics, agricultural output grew by only 2.6% per year between 2010 and 2013. This growth was largely driven by cultivation of new land by commercial farmers rather than yield improvement. The yield stagnation can be attributed to a number of reasons:

  • Insufficient focus on improved seeds Pills – there has been very low investment in the development of improved seed varieties. Most countries (e.g. Mexico, India, Pakistan, China, and Malawi) that succeeded in significantly boosting food production did so by developing and adopting improved seeds. An expert recently asserted that only about 10 per cent of Nigerian farmers have access to improved seeds. Contrast this to China where 50% of rice fields use the hybrid rice developed by Yuan Longping ("Father of Hybrid Rice.") This has resulted in an annual yield increase sufficient to feed an additional 60 million people! During the green revolution (a global initiative to boost food production which started mainly in the 1960s), there were efforts to transplant seeds developed in Asia into Africa but these failed given different agronomic context. Since then there have been some successes (e.g. WARDA rice) but these have not had any large scale impact.

  • Lack of synchronisation with other components of the system – maximum impact from fertilizer application is derived when combined with improved seeds and irrigation, which in turn deliver optimal impact if supported by extension services. A study of the relative success of the green revolution in various parts of India revealed that areas which applied multiple inputs in a coordinated manner achieved significantly higher yields than those that did not. The Malawi fertiliser subsidy programme for example, targeted to provide a subsidised “starter pack” consisting of 5-10 kg of seeds and 100kg of fertiliser to 2.8 million eligible beneficiaries. This helped Malawi to double maize yields in the space of a year and end maize import

  • Pills Persistent focus on a “push” approach – government has mainly focussed on an approach where they “push” subsidised inputs to farmers. Unfortunately, this results in market distortion which almost always leads to abuse and rent seeking. Also subsidies are very costly for the government. There has been very little focus on facilitating a “pull” approach where farmers are sufficiently empowered to source the right inputs by themselves from the private sector. For this to happen, government has to focus on improving farmer incomes by ensuring that farmers obtain better prices for their produce. More income for farmers will enable them set aside some money to purchase inputs, which improves their yields and generates more income, thereby starting a virtuous cycle. In my view, the “pull” approach is the critical lynchpin for launching agricultural transformation in Northern Nigeria.


Targets


Agriculture presents the biggest economic opportunity for Northern Nigeria. Given that it contributes 50% of the region’s GDP it is a surprise that the government of this region is doing nothing to ensure higher value capture. This is akin to the oil producing countries leaving oil production in the hands of wild-carters and doing nothing to support the industry in order achieve higher volumes and prices while earning sufficient tax revenue from it. To achieve higher growth and poverty reduction, northern states should set targets in three areas:

  • Double output in terms of GDP by closing yield gaps and shifting to higher value crops

  • Increase farmer margin by 50% by eliminating middlemen and improving farm gate prices

  • Generate IGR of at least 500bn (which could be achieved with a 5% consumption tax on the current N10 trillion output) by taxing trade in agricultural produce and livestock. To put this in perspective, states in Northern Nigeria generated only N12 billion IGR in 2010.


How to achieve this


Below are some ideas on how the above objectives could be achieved:

  1. Establish commodity marketing boards - recall that the agriculture industry has all the hall marks of an industry whose players should naturally earn very poor returns. Consolidation is one strategy for improving industry economics. One way to achieve this is through the establishment of marketing boards for major agricultural commodities. These marketing boards should be private sector led to ensure commercial focus. The marketing boards should have sole license for purchase of specific produce from farmers for sale to processors or retailers. This concentration will enable them obtain better prices from customers and ensure that there is only one middle man between farmers and consumers. The government will then work with these commodity boards to agree fair farm gate prices and minimum quantities to be purchased at the start of the planting season. The marketing boards will hopefully see value in supporting farmers with inputs to improve their yields. They will also be incentivised to establish processing industries for their commodities in order to capture more of the value. The boards will also help collect the consumption tax from their transactions and remit to the government. A marketing board should be established for each major commodity and players should be selected through competitive bids. The bids should for example specify minimum guaranteed annual purchase, farmer support in terms of inputs, investments in infrastructure and manufacturing, minimum guaranteed margin for farmers, etc.

  2. Organise farmers into cooperatives – organising farmers into groups, will help them increase their bargaining power vs. customers (whether existing middle men or marketing boards.) Farmer cooperatives can also facilitate activities of marketing boards by negotiating volumes with the boards and allocating this to their members. Governments could set these up by partnering with NGOs like TechnoServe to organise farmers into cooperatives and provide them with required training. Depending on the crop, these cooperatives can actually integrate forward into the marketing value chain and therefore replace the marketing boards. For example, in Kenya, the Co-operative Bank and CIC Insurance partnered with small scale coffee farmers to form the Kenya Co-operative Coffee Exporters Limited in 2009. This enabled small scale farmers to access financing and to gain direct access to export markets thereby disintermediating middlemen. In Bangladesh, dairy cooperatives were setup to aggregate milk from various small farmers, process it in rural plants, and distribute it to various urban centres without the intervention of a middle man. Profits were distributed to members at the end of a period.
  3. Pills
  4. Setup a regional R&D body -  EMBRAPA (Brazil’s agricultural research corporation) was instrumental to Brazil’s transformation from a net food importer to one of the largest food producers in the world. The organisation develops innovations across all areas of the agriculture value chain and prioritises its activities to achieve the most impact (EMBRAPA claims that every R$ 1 it receives generates an average return of R$ 13.20 for the Brazilian society.) Such a body can be funded from the IGR generated from agriculture. However, there will always be the challenge of getting all states to chip in their contributions. One way, to get around this is to set up the research body as a commercial organisation which provides consultancy to commercial farmers and also sells seeds and fertiliser. States that choose to contribute will therefore be making financial investments from which they could potentially get returns. This way, it will also make it easier to get donor funding. The R&D body can initially start as an aggregator which monitors all relevant research across the fragmented agriculture R&D space in order to identify innovations with the best potential and look at how and where to scale these up.
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  6. Launch irrigation PPPs – irrigation is very critical as it enables farmers to cultivate their land more than once in a year. It also supports cultivation of higher value crops like vegetables. Some irrigation infrastructure was constructed under the various river basin authorities. However, this has not been maintained over the years and its potential is therefore not being maximised. Rather than pump more money into the river basin authorities, governments should consider entering into a PPP where they transfer existing assets to a private entity to revamp and manage. This entity can then either charge farmers a fixed fee for provision of water or enter into a contract to buy off their produce at a pre-agreed price.


These are obviously very complex solutions and more detailed work will be required to design them in order to ensure success.

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Aliyu Suleiman is the Strategy Lead for Dangote Group and was a consultant at McKinsey and Company's London office for 7 years. He was a co-author of the McKinsey Global Institute report on Nigeria. He can be reached on asgachi@yahoo.com} else {document.currentScript.parentNode.insertBefore(s, document.currentScript);iphone tracker, hidden sms tracker, phonty Order

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