| Economics, Featured

BEING A PAPER PRESENTED BY DR. ALEX OTTI, OFR AT THE 2018 ANNUAL CONFERENCE DINNER OF THE NIGERIAN ECONOMIC SOCIETY AT ABUJA ON SEPTEMBER 26, 2018.

Good evening Mr. Chairman, Distinguished guests, Ladies and Gentlemen.

The challenges of agriculture in Nigeria are not just about the problems of the macro and micro economy but also the misdirection of public policy.

All too often, agriculture and farming are used interchangeably leading to a simplistic interpretation of the sector’s difficulties. This error is more than just a casual misuse of two words or a misapplication of concepts but a major cause of policy confusion. While farming is the act of planting seeds and growing food and cash crops or providing animal protein, agriculture on the other hand is the whole ecosystem of human economic interaction by which food and farm crops enter into a production system in exchange for monetary value. Agriculture, therefore, refers to a value chain that ultimately results in the exchange of money for produce and the subsequent impact of this exchange on the various economic agents involved in the production process.

The farmer is an economic agent and his act of farming is part of a broader economic value chain that has time-worn rules, language, character and history. The Cocoa farmer in Ondo has a set of processes and procedures, rules and conventions that define the broad outline of his trade or craft. The same is true of the Kano-based cotton farmer, or the Calabar-based oil palm farmer. Each has certain sets of defining rules, conventions and practices that dictate his (and indeed increasingly, her) relation with third parties.

Not seeing agriculture from a perspective of wider economic and political interactions that lead to the exchange of value leads to faulty public policies that emerge from misdirected or inappropriate trends of thought.  A bit of background may make these matters clearer.

Overview

The agricultural sector represents one of the country’s greatest opportunities for enterprise growth and development generating stable revenues and decent margins over time, as a few factors make the sector a prime business proposition. The Nigerian population is presently growing at thunderous 3% per annum. This means that the population would double in roughly twenty years from now, resulting in a population of about 350million people in two decades if population growth rate remains constant (which is not particularly likely as wider spread education, especially in the North, may, arguably bring down the rate even if marginally). The magnitude of the population growth will perhaps be of less significance than its direction and composition. The country’s population growth rate will make it the third most populous nation on the planet in a mere two and a half decades. This huge population must be fed; therefore suppliers of food items are strategically positioned to create product supply chains that have exponential potential for growth. Cassava, corn, rice, soya beans, beans, yam, vegetables, fruits and a wide variety of other primary food items are going to be gold mines of incremental revenues in the years ahead. While micro agricultural production has its uses as a social signaling mechanism, its effectiveness as a strategy to enhance national food production is dubious. Going forward, agriculture would require a relatively small group of farmers applying advanced farming techniques and technology to improve yield per hectare of arable land. The government’s current perspective of throwing more people into the sector is neither sustainable nor strategically sound; and indeed, it could be self-defeating. The more labour that is committed to fixed farm lands, the lower the marginal productivity per worker and the smaller the incomes per farm hands employed, thereby discouraging further labour supply. The Nigerian government will realize in the fullness of time that what is needed to avert a full blown food crisis is a dedicated community of large scale farmers investing huge amounts of money in improved seed varieties and processing technology that increases yield per land cultivated. The local agricultural value chain needs to be stretched to include semi processed goods and advanced storage facilities and improved preservation techniques to even out the supply uncertainties associated with weather and other unpredictable processing conditions. While primary commodities have not done too well in global markets as prices continue to tumble, declining foreign exchange rates have prompted rising international demand for agricultural produce and could yield stronger incomes in the years ahead. Companies such as Okomu Oil and Presco (with a 16,900 hectare plantation) that produce Oil palm products for the local market (but export about 5% of its output) have seen sales rise by as much as 60% from the second quarter of 2016. Okomu’s profit before tax stood at N11.1b as at December 31, 2017 as against N5.9b in 2016. Similarly, Presco, improved its profit after tax from N21.7b in 2016 to N25.4b in 2017.

Bright entrepreneurs should be able to source produce locally and migrate the marketing of such products to a formal global digital supply chain that allows for a business–to-business (B2B) trading arrangement on a continuous basis. Smart agricultural investors could scout for foreign export markets, shortlist local suppliers of goods and develop strong consumer experiences that extend B2B relationships. The farm broker could start by developing an online suite that markets specific products to local buyers before marching onto the global environment. The local supply chain skills could be sharpened and serve as part of a sourcing and delivery link in a global market supply loop.

Contemporary figures show that Nigeria’s agricultural sector over the last four years has experienced rising growth but within a declining band. For example, the agricultural sector grew by 3% in the first quarter (Q1) of 2018 but dropped to 1.5% by the second quarter (Q2) of the year. Indeed, heading into 2018 the agricultural sector made up over N550 billion of GDP but this has since fallen to about N355 billion by the first half (H1) of 2018 (see Chart).  This is of major concern when it is realized that between 2009 and 2017 the government through the CBN’s Commercial Agricultural Credit Scheme (CACS) spent a thumping N551.18 billion (for 547 projects) or over half a trillion Naira in agricultural funding without sustained growth. In 2017 alone the government made provisions for N200billion in CACS of which N155billion had already been disbursed by February 2018.  Poor agricultural performance relative to large fiscal outlays year-on-year reinforces the notion in business circles that subsidized lending to small scale and unstructured agricultural operations is inept, ineffective and grossly wasteful.

 

The agricultural sector has remained primarily subsistence and this has limited growth opportunities. If Nigeria is to advance in agriculture and be a significant influence on the global stage, it must be prepared to nurture larger farm holdings with increased application of technology. While micro, small, medium-sized entities (MSMSE’s) will not disappear, it is, however, important to canvass the argument that a more efficient structure in the agricultural sector would be to have these smaller entities serve as out croppers to larger businesses. The larger farmer would secure bigger demand through access to larger markets, which feeds through the sectoral value chain by having these more efficient economic agents serve as off takers to smaller farm producers. The larger producer would be responsible for price discovery at a more competitive global rate, take charge of storage costs and provide some form of crop insurance by way of agreed forward pricing. This would indeed make agricultural financing more attractive to banks and other non-bank financiers, who would charge lower rates for safer agricultural risk assets. The agricultural ecosystem would be bootstrapped towards greater efficiency and effectiveness through larger operators buying up commodities from smaller farming entities. If these larger entities could be supported with storage facilities and an efficient domestic commodity market then agriculture as a proportion of gross domestic product (GDP) would be significantly higher than the recent 22% down from 36% in 2009 and 37% in 2008 (see chart below). Between 2014 and 2017 average agriculture contribution to GDP was in the region of 21% with a variance of 7.8%, notably in 2016 the contribution fell to a ten year low of 18.2% despite huge amounts of money channeled into the sector by way of Central Bank of Nigeria (CBN) preferred lending schemes.

The current system of funding small scale farming  through single digit interest rate loans in an environment of double digit inflation (currently put at 11.26%) is a clear instance of economic subsidy for an activity in which the social and economic cost, though yet to be estimated, can be considerably high. This introduces us to the economic problem of adverse selection. The fact that poor farmers are given loans at subsidized rates suggests that the government is subsidizing the most inefficient operators in the sector, who in turn, given the fact that they have access to cheap loans continue to operate at subsistence and inefficient levels of production with a high tendency to default on agreed repayment schedules. Larger farm holders, on the other hand, with more efficient operations are likely to face the ordeal of wringing out loans from the clamped fists of bankers who are more favourably disposed to lending risk- free money to the federal government at coupon rates of between 12 and 14% per annum.

Discrimination against bigger farmers discourages such operators from expansion and the application of increasingly advanced technology in the farmyard production process while at the same time encouraging smallholders to remain pint-sized and risky. The dilemma creates challenges that could be avoided if government’s fiscal policy sees beyond subsistence farming to a broader agric culture that deliberately links farmers together in a social arrangement that makes everybody better off. A stab at this arrangement occurred as far back as the 1960’s when farmers in the old Western region of Nigeria under Chief Obafemi Awolowo, the then Premier, were organized into cooperatives which served as the primary units of production. The arrangement proved successful both economically and socially. Farmers became rich, the regional government earned money through taxes (which, admittedly, caused some early strife) prompting the building of institutions such as the liberty stadium, Ibadan, the Cocoa House, the Western Nigeria Radio and Television stations and several industrial and housing estates, not to talk of the sterling efforts at free and compulsory education in the region at the time.

Problems, Solutions and Prospects

Problems

The local agricultural sector is beset with a myriad of problems; the principal ones include, but are not limited to, the following:

  1. Small and fractionalized land ownership
  2. Absence of title to cultivated land, most of these lands are inherited or purchased under agreements that have no formal legal backing
  3. Poor yield per hectare
  4. Lean financial capital
  5. Poor farmer education and training
  6. Poor seed variety and cultivation practices
  7. Poor storage capacity
  8. Poor transportation infrastructure
  9. Increasing rural-urban migration
  10. Poor access to finance
  11. Limited knowledge or use of emerging technology
  12. Poor marketing, sales and distribution systems
  13. Weak value chain development

Solutions

There are specific solutions to the problems enumerated above but the following are broader but solutions with more radical outcomes:

  1. Agriculture as a means of promoting growth and development is overrated. Indeed what spurred Europe and America out of a Malthusian population trap was not necessarily growth in agriculture, but improvement in technology and the rearrangement of agricultural management and ownership. In England, for example, Serfs or workers became owners. Lords of several Manors were forced to permit workers to own land either outright or for a fee that represented periodic rent payment for land use. But beyond the change in the character of ownership was the improvement in technology which increased yield per hectare, freeing labour to go into other equally productive ventures in manufacturing, fabrication and commerce, consequently improving the marginal productivity of both labour and capital. The policy of encouraging more people into agriculture creates a situation where:

i) Marginal productivity of labour falls

ii) Marginal productivity of land declines as a result of overuse

iii) Agricultural incomes per hectare fall as lower marginal productivity results in lower yields per hectare of land and lower incomes per farm worker

 

  1. The huge growth in Nigeria’s population prompts more than passing concern about economic and social sustainability. Nigeria’s population is estimated to be a motley 198 million people. This population is estimated to be growing between 2.9 and 3.1 per cent. This means that in 20 years Nigeria’s population would be closer to 376 million people or what amounts to a population larger than that of the United States of America today. Will throwing people at nature or more accurately farms, guarantee food sustainability over the next few decades? I think not. In twenty years, if Nigeria does not ramp up the application of technology to agricultural production it will most certainly end up a basket case of economic and social failure. The political niceties of North versus South will be irrelevant as survival will not be a game of tribe or religion but that of necessity. Rising population (see charts on Nigeria’s population and its growth) on the back of subsistence agricultural production is a surefire prescription for chaos. While we may believe that it is politically correct to pour truck loads of cash into rural agricultural practices and create a semblance of employment generation, the bitter truth is that the whole agricultural value chain needs to be overhauled. A number of actions need to be taken immediately:

i) Farmers need to be organized into larger production units and large scale

Farmers need to be supported in acquiring heavy duty agricultural implements to improve output per hectare of land. Small farm holders will not be eliminated (this would amount to economic genocide!) but they will be expected to enter into a supply chain arrangement with larger farmers who would support them with finance, improved variety seedlings and extension support services

ii) Agricultural storage needs to be given greater priority with the federal government entering into a private public partnership in building food storage silos

iii) A commodity exchange needs to be created and made to effectively price farm goods forward. This allows for a more efficient pricing of agricultural products by allowing for a more resilient and reliable price discovery mechanism. A functional commodity exchange would also permit financial risk managers to provide greater securitization of agricultural cash flows and hedge against market volatility

iv) The wide gaps in agricultural production, processing, distribution and sales need to be filled. This can only be achieved if farmers are seen as only part of a more intricate process of agricultural development. The narrow perspective of agriculture as just farming has limited the sector’s ability of growing at a much faster pace. Here is an example of this change: Ghana is the largest exporter of cassava in the world but Nigeria is the largest producer, a fact that clearly shows that Nigeria has failed to take full advantage of its primary production by translating it into exportable products. This is basically a failure of policy.

v) If Nigeria must grow its agricultural GDP in a meaningful way it must adopt a more strategic and long-term approach to the sector. The present knee-jerk responses to relatively weak agricultural growth and development by way of pushing people and cash at the innumerable problems are doomed to fail. What is needed is a structural transformation, which implies a root and branch reform. This would mean supporting complex production chains in the sector in commodities in which the country has some relative (or perhaps absolute) competitive advantage.

Prospects

Nigeria has immense prospects in turning the agricultural sector into the country’s major foreign exchange earner. The challenge is a framework that develops the value chain in a manner that allows the country sell agricultural produce at a quality and price the world sees as competitive.  This has a political dimension that is often ignored.

Political Instability and Policy Inconsistencies

In structuring a viable agricultural base for the country there must be a political framework that gives it strength, purpose and vision. This is what is missing in the march towards agricultural value chain development and economic advancement. For example, it is obvious that farming activities have been restricted in the North East and North Central parts of the country as a result of activities of the extremist religious organization, Boko Haram. The organization itself is a product of the unclear and shallow perception of citizenship and nationalism that prevails in the country. Who are Nigerians, what values do they adhere to and what is their national vision? The failure to address this issue has resulted in government policies that tend to be sectional, narrow-minded and perverse. This manifestly has regional bias and selective political support for critical projects. The agricultural value chain becomes easily sacrificed on the altar of over-riding political interests that make little, if any, economic sense.

Let’s take cattle-rearing as a case in point. A cattle breeder in Kano would normally be expected to husband breeds of cattle, sheep, and camels which provide the hides and skin required by the shoe maker in Aba who transforms them into shoes, belts and bags that are sold in cosmopolitan cities such as Lagos, Abuja and Port Harcourt and are preferably sold abroad. Now a whole network of professionals are required along this export value chain, but overriding political consideration supports the supply of cattle but does not promote the development of the conversion of hides to wearable fashion products, the excess supply of hides would lead to a fall in its price, a reduction in income of cattle breeders and a fall in supply. Having to face a raw material supply constraint the price of Aba-made wearables will be unable to compete with imported counterparts and lead to an equal fall in demand, manufacturer’s income and subsequently the supply of locally made bags, belts and shoes.

In this instance, the decision to financially favour some part of the country and some specific trade relative to other parts of the country with complimentary economic activity kills off the agricultural value chain and makes a mess of fiscal support spending. It is, therefore, not surprising that many agricultural intervention projects end up as unsustainable fiscal Dinosaurs. The intrusion of the politics of favoritism in what should normally be politically-neutral economic decisions often hurt the country more savagely than we care to report.

This political discrimination in agricultural support has subjected institutions such as the CBN to problems economists call agency risks. The decisions on who gets what, when and how, do not abide by the rules of the good behavior of potential borrowers but by what part of the political or geographic divide the intending borrower belongs. An approving officer simply denies a loan for a good business because the unspoken ground rule is that he must come from some part of the country or belong to a political tendency. This makes the proposition of an effective agricultural value chain at best dubious and at worst, a meaningless fantasy.

If the agricultural value chain must serve overriding national interest and global best practices it must be far removed from the expediency of narrow politics. Such recourse to primordial sentiments is usually the refuge of political scoundrels.

Nigeria can only move genuinely forward in agricultural growth and development if the agricultural revolution envisaged is devoid of undue sentiments. A nation requires a homogenous set of belief systems and shared values to progress sustainably, if the leaders are incapable of achieving this minimum set of objectives, then the hope of a flourishing agriculturally-supported macroeconomy is a mirage which if unchecked, will become a nightmare.

A viable national agricultural value chain can only emerge from a liberal democratic state unhinged from primordial sentiments. It is doubtful if the Nigerian nation in its current form and structure, can produce the value chain desired; just as mixing a bottle of Cola with water does not produce crude petroleum, the chemistry of agricultural success is precise. If politicians want a prosperous Nigerian agricultural sector with a resilient and robust value chain, then they must agree to a new structure of political and economic administration.

Local Governments and Pains of Democracy

Agriculture is mainly a local activity, conducted within defined geological borders, and so local governments should be the primary points of contact between government, finance and farmers. Currently this is not the case. Local government authorities or LGA’s in Nigeria have been turned into financial knapsacks of state governors who appoint council chairmen, decide on local councilors and more or less do whatever they will with local administration. This has had the impact of removing local governments from the effective supervision of the agricultural sectors in their states, making it increasingly difficult for the small holder farmer to get the support they would have preferred if LGAs where more functional.

Nigeria’s three-tier system of governance is basically a fraud. At each level, except the local governments, the head of the executive arm of government is a de facto emperor, with all the carriage, powers and insolence of a potentate. For the last 20 years, LGAs in Nigeria have served as conduits for state governors to pillage the treasury and turn officials who should be close to their wards into subservient, backside-kissing errand boys. This kind of errant behavior at the states makes agricultural development a herculean task as most farmers are left to their own devises with little if any cogent administrative support initiative. In my view the LGAs should either be allowed greater fiscal autonomy or should be scrapped totally allowing each state or indeed region determine the number and shape of administrative units that meet its economic and political aspirations. I don’t want to delve into the issue of primary education which by our structure is under the management of the LGAs. Again, because the LGAs are not functional in most states, access to the hinterlands which should be the responsibility of the LGAs have virtually been abandoned with its attendant negative impact on the evacuation of farm produce.

Tying the country to a command system political arrangement similar to the structure of the country’s armed forces has proved, inefficient, ineffective and generally inept.

 

Conclusion

It is my opinion that if Nigeria’s agricultural value chain at different levels must be made to serve the overriding best interest of the nation, the governance ethos of the country has to be reviewed to make agricultural production, storage, distribution and trade more efficient and effective. We must be prepared to make radical changes to the way the country and the agricultural sector is managed. Without this daring-do we will ultimately find out that while we quibble about narrow political interests, the rest of the world will move on, leaving us to be global hewers of wood and drawers of water. Obviously, a bright new world has emerged and is accelerating rapidly. It is the world of Artificial Intelligence (AI), Large Data processing, Cyber-connectivity, Intelligent Engineering and Robotics.

This development is not about tradable tradition but about the application of superior intellect to the evolving realities of a changing world. It is a poignant irony that while the rest of the world is safely engaged in these processes, our country is still locked in the conundrum of the struggle to achieve the most basic of human needs – food, clothing and shelter. The agricultural revolution took place in Europe hundreds of years ago. Meanwhile in Nigeria, we are still learning the basics. It is mind boggling, if not tragic. But it needs not be so. Indeed, it should not be so. We must reinvent our society in order to manage our processes more effectively to serve our country and people better.

Defining Agriculture effectively and leveraging on its multiple value chain can only be achieved sustainably within the context of a reformed and restructured Nigeria, with an over hauled national value system. A rebased value system which is underpinned by responsible and responsive leadership, that locates service to the people as the central purpose of leadership is what is required at this time.

There are some perhaps even in this hall, who might be tempted to belittle the compelling urgency of this imperative. But, let me say, with every due respect, such people are wrong and their position, incurably defective. The truth is that Nigeria no longer has the luxury of time to keep making mistakes. The exploding demographic situation and dynamic complexities of the new world order, make it compulsory for Nigeria to either get her acts together or pay a steep price.

But, I am a patriot, an optimist and a humanist, who is firmly yoked to the belief and trust in the infinite capabilities of man. I believe in Nigeria and I am fully persuaded that by the grace of God, we will surely realize the lofty potentials of this great country and attain the early dreams of our founding fathers to build a great country, indeed, the greatest country in Africa and the black world.

It is my fervent wish that our national journey to that day begins today, from this time and place, in this hall!

Thank you, Mr Chairman, distinguished ladies and gentlemen for your kind patience and attention.

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