Agricultural Industrialization: The Foundation of Nigerias Manufacturing Economy

Sawubona Advisory Services Limited, Lagos, Nigeria

Research and Intelligence Unit by Obinna Igwebuike, Brainerd Odiete and Uzoma Ikechukwu November 2013 Brief

Briefly: The transformation agenda of the Federal Government of Nigeria has agriculture development as a key strategic lever. At the recent Nigerian Economic Summit Group (NESG) summit in Abuja, the countrys influential economic and social policy advocacy platform focused on the developments in agriculture in the past few years. The Summit also highlighted areas for improvement in the sector, stressing the need for more financing, to exploit the countrys competitive advantage in the sector. In this report, we take a more microscopic view of the reforms to highlight the Ministrys attempt at developing linkages for engendering

massive national industralisation with agriculture serving as the leading industry. With manufacturing more
relevant than commodities export in global trade, these linkages are fundamental for wealth creation. An export base diversification that emphasises export of primary agricultural commodities will not have as much impact as an export base diversification that places emphasis on value added activities on the primary commodities. The logic is simple. By adding value, the economy builds its productive base. The benefits of this range from better participation in global and intra-africa trade, improvement in technology and knowledge, and perhaps the most important factor, putting the country in a better position to create skilled jobs.

Africans need to change their view of the world around them in order to reposition for more relevance in the global economy. This much was highlighted at the Woodrow Wilson International Centre for Scholars, where the Deputy Governor, Financial System Stability, Central Bank of Nigeria (CBN), Dr. Kingsley Moghalu, recently gave a keynote address. This call is a stitch in time, as it is sometimes quite difficult to reconcile the paradox between the narrative about Africas progress in the last decade or so and some realities of the continents true state in the global economy. A classic example of this paradox is Africas relevance in global trade. Africa has only been important to the world economy in its extractive capacity, which is in gradual decline with the discovery of fracking and shake oil and gas. With 3 percent of world trade and 5 percent of total global FDI, the continent still plays a negligible role in the global economy,1 Moghalu noted in the address. Moghalu assiduously makes a case for a new Africa, that would move beyond the frontiers of primary commodity trading to explore value adding manufacturing activities. This will improve the tradability of the continents commodities. He asserted, It means that the number of Africans employed by agriculture must fall sharply, with a shift to industrial and service sectors as the main employers. Currently, agriculture employs about
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involves adding value to soft and hard commodities and developing forward and backward linkages to the commodity sector. Industrialisation will yield employment, income, price and non-price benefits.3 With the penetration of agriculture in the continent, agriculture industrialisation seems like a no-brainer. A recent United Nations Conference on Trade and Development report on Economic Development in Africa, titled, Intra-Africa Trade: Unlocking Private Sector Dynamism, makes the case for manufacturing as the basis for improved trade in Africa. The report notes, The renewed political commitment by African leaders to boosting intraAfrican trade can be ascribed to several factors. African countries have grown at a reasonable rate over the last decade but this growth has not created jobs and has been driven by volatile commodity prices. There is a recognition that economic diversification is needed to create jobs and sustain growth. The composition of regional trade in Africa tends to be skewed towards manufacturing and so regional trade is seen as having the potential to promote diversification, thereby increasing the prospects for growth and development on the continent.4 Theoretical Framework Having highlighted evidence that show the need for agricultural industrialisation (which is very much a mainstream thought anyway), we need to lay the foundation for sector linkages. Linkages are input-output relationships between firms or industrial sectors in the same economy. A firm purchasing inputs from a local supplier is an example of a backward linkage, while a firm selling intermediate inputs to another firm creates a forward linkage.5 A typical example of this is the relationship between cocoa farming and chocolate beverage manufacturing. Ideally, an increase in the productive capacities of one chain in the link should have a positive impact on the other chains in the link. We refer to Vogel (1994), who, using the Social Accounting Matrix (SAM), concluded that , At the

70% of Nigerians. Moghalus view on Africa and global trade bears semblance with the view of Carlos Lopes, Executive Secretary, Economic Commission for Africa. Lopes traces the current low value adding situation in Africa to the historical evolution of commodity trading in the continent. In a recent blog post, he asserted, African countries have a real opportunity to promote economic transformation through a commodity-based industrialisation process, capitalising on the continents resource endowments and high commodity prices and the changed organisation of the global production process. Maximising Africas commodities for industriali sation

level of general equilibrium, a 'leading sector' must possess strong final demand components in its production linkages in order for all sectors of a country's population to participate in the transformation of a low-income economy. Without them, an enclave economy will result, regardless of whether this enclave serves a tiny industrial, domestic labor force or fills an export niche. Agriculture possesses these strong economy-wide linkages. the
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to the current sector transformation initiative. Speaking at a recent event, the Minister of Agriculture and Rural Development, Dr. Akin Adesina stated, The government system was corrupt and undermined the private sector. It did not deliver fertiliser to genuine farmers. Instead, rich and powerful political farmers hijacked the subsidised fertilisers. As a result, no more than 11% of all the farmers in the country got the fertiliser distributed by the government. On the new fertiliser regime, he stated, Within the first 90 days of this administration, we ended the forty year-old fertiliser sector racket and corruption. The old system of government buying and selling fertilisers was scrapped, and all fertiliser companies were required to sell directly to farmers, not to government warehouses. We embarked on the Growth Enhancement Scheme (GES), which provides subsidised farm inputs directly to farmers.9 With a more efficient input system, there is further incentive to get involved in activities further down the chain (primary farming, processing and value added). In Rice production, and Ade Adefeko, Head of Corporate Government Relations, Olam

The potential for agriculture is clearly articulated in Agricultural Transformation Agenda (ATA) master plan, developed by the Federal Ministry of Agriculture and Rural Development.7 Nigeria has 84 million Hectares of land, out of which only 40% has been cultivated. The country also has 279 billion cubic meters of surface water, and a huge irrigation potential, with about 37.5% of Africas major river systems. It is expected that about 110 million youth will be in its workforce by 2020, providing a rich human resource base for the sector. Agriculture is not just a potential, its current fundamentals are stellar. The sector employs about 70% of Nigerians and contributed about 40% to the countrys GDP between 2011 and 2012. It is important however, that the strong agriculture basis is used as the foundation of Nigerias new manufacturing economy. This will consolidate economic growth that has, in the last couple of years, come from the non-oil sector. Inter sector linkages fully integrate agriculture in the industrial economy. Linkages Looking at the Transformation Agenda of the Ministry of Agriculture and Rural Development, we see some evidence to show linkages. First of all, the governments value chain approach is a signal of intent of its willingness to develop these linkages. A chain is only a chain if it provides links between its different elements. The foundation of every successful agriculture economy is the availability of quality seedling and fertiliser. These are perhaps the most critical inputs. This was a significant bottleneck in the industry prior

Nigeria, one of the Nigerias biggest rice producers, stated that the government has provided an incentive for local rice industrialisation. He asserted, Nigeria grows only about 65% of the rice it consumes and if the plan of the government is to achieve food self-sufficiency, it means that there is significant opportunity for local production. We are excited about partnering with the government to take advantage of this opportunity. Private sector initiatives have also sprung up to take advantage of these opportunities. The Olam Rice Nucleus Model, a large-scale commercial farm which will also have 16,000 so-called outgrower farmers by the end 2018 (this farm is expected to be Africas largest rice farm). Please see interview below with Ade Adefeko for more details of Olam and its projects in Nigeria. Another very brilliant initiative of the ATA is the development of Staple Crop Processing Zones (SCPZ). The SCPZ is an attempt to get agribusinesses

to set up production facilities in areas of high intensity food production. The Ministry has announced 12 SCPZ sites across the country in 5 value chains rice, cassava, fisheries, horticulture and sorghum, from which businesses can process these products into food products. The government has pledged to support the agribusinesses in the zones with tax breaks on import of processing equipment, tax holidays and supportive infrastructure (power, roads, storage facilities, etc). This arrangement will provide a readily accessible market for agricultural products, reducing the cases of wastage, as these products are generally perishable. The government expects investments in SCPZ to enjoy a 27% cost advantage over similar investments in non-SCPZs. The cassava SCPZ in Kogi State is expected to begin processing in 2014.10 There are other areas where we find evidence of the government trying to make the agriculture sector strong enough to provide a solid backbone for industrialisation. Financing of agriculture has always been a significant challenge. Currently, commercial bank lending exposure to the agricultural sector is only 3.5%, a shocking figure, considering the sectors contribution to GDP and employment. With the Nigerian Incentive-based Risk Sharing System for Agricultural Loans (NISRAL), an initiative of the CBN, Bankers Committee and the Ministry of Agriculture and Rural Development, the government expects to unlock some $3.5billion in longer-term, single-digit rate loans for agriculture projects. This is expected to take the loan exposure of the banking industry to the sector to about 7% within the next 10 years.11 This would obviously make the industry more productive and efficient, as cost of finance is currently one of the crippling factors in the sector. Agricultural extension is another area where we see some intent. Of course Nigeria has significant uncultivated arable land (60%), so it is not under pressure to resort to intensity in land use, but extension programmes to optimise agricultural yields. The Minister has announced plans to transform the Agriculture Research Council of

Nigeria (ARCN), in order to make it more relevant in the countrys agricultural sector. He stated his desire to model the Council after Brazils Research Council, Empresa which Brasileira is believed de to Pesquisa be the Agropecuria,

foundation of Brazils productive and efficient agricultural sector. He stated, Nigeria must learn how Brazil did it and one of the things we can take with us is how to transform our own Northern Savannah; Nigerias Northern Guinea Savannah is similar to that of Brazil.12 Conclusion The vision of the Minister of Agriculture is very clear. The goal is to make Nigeria food secure and then use this as the foundation for significant export of value added products, which can create jobs and earn significant foreign exchange for the country. We see evidence to show that the Ministry is moving in the right direction. However, we also understand that a lot of the necessary ingredients for a solid manufacturing base are beyond the control of the Ministry. Modern day manufacturing is very knowledgebased. There will be a need for more significant investments in education, to create the skills needed to take advantage important of the opportunities for a in manufacturing. Provision of critical infrastructure is another pre-requisite solid manufacturing base. Elements like power, roads, storage facilities, and again, financing, which are not completely under the control of the Ministry, are critical to the achievement of the vision of the Ministry. The next logical question to ask is; are the people in charge of these other aspects of the national economy as visionary as the Minister of Agriculture and Rural Development? It is hard to say exactly at this point in time, but we are not sure there is sufficient evidence to show this vision and commitment. This we think is the biggest risk that can provide head winds for the achievement of the exemplary vision of the Ministry of Agriculture.

References 1. How Africa can matter as a growth driver in World Economy http://businessdayonline.com/2013/08/how-africacan-matter-as-a-growth-driver-in-world-economy-bymoghalu/ 2. Already Cited in 1 above http://businessdayonline.com/2013/08/how-africacan-matter-as-a-growth-driver-in-world-economy-bymoghalu/ 3. Large scale commodity-based industrialization in Africa is imperative, possible and beneficial http://www.uneca.org/es-blog/large-scalecommodity-based-industrialization-africa-imperativepossible-and-beneficial#.UmMW5PmTioN 4. Intra-Africa Trade: Unlocking Private Sector Dynamism. (2013) United Nations UNCTAD/ALDC/AFRICA/2013 5. Linkages, backward and forward http://worldeconomics.org/611-linkages-backward-andforward.html 6. Vogel. S., (1994) Structural Changes in Agriculture: Production Linkages and Agricultural Demand-Led Industrialization. Oxford Economic Papers 46 (136156) 7. Nigerias Agricultural Transformation Agenda Lagos, April 2013, Federal Ministry of Agriculture and Rural Development, Nigeria. Federal Republic of

http://publicaffairs.gov.ng/transformation-in-thefertilizer-industry/ 10. Already cited in 7 above. 11. Banks lending to agric may increase to 7%, says CBN http://thenationonlineng.net/new/bankslending-to-agric-may-increase-to-7-says-cbn-2/ 12. Brazilians model - Embrapa to be used to transform Agricultural Research Council of Nigeria (ARCN) http://www.nigeria.gov.ng/2012-10-29-11-0925/news/267-brazilian-s-model-embrapa-to-be-usedto-transform-agricultural-research-council-of-nigeriaarcn

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http://publicaffairs.gov.ng/transformation-in-thefertilizer-industry/ 9. Already Cited in 8 above

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establishing and growing our position in our various markets. We have achieved the leading position in most of our businesses through a strong focus on delivering value to customers and farmers through best-in-class operational capabilities and a commitment to create greater value addition in Nigerian economy. In terms of contribution to the economy, Olam has been the leading exporter in the non-oil sector in Nigeria for the past several years. In
Adefeko

2011 and 2012, we won the award for Best Non-Oil Exporter of the Year (in the overall category) and the Presidential Export Awards. Nigeria is critical to our strategy because Nigerias agriculture potential is huge. With 84 million hectares of arable land available, current population of 165million, which is projected to reach 470 million in 2050, it only makes sense that as a business that is heavily involved in agriculture, we take Sustainability in the Agricultural value chain seriously with the Rainforest in Alliance Cocoa certification programme Nigeria, improving

In this Interview, Ade Adefeko, Head of Corporate and Government Relations, Olam Nigeria, the countrys largest non-oil exporter, with significant interests in agriculture, speaks on the progress made in the sector through the Agriculture Transformation Agenda. He also speaks about the Olam Rice Nucleus Model. Briefly describe Olam Nigeria and how important is Nigeria in Olams global strategy?
Olam Nigeria Limited is a leading company in the agricultural sector in Nigeria. We have been in Nigeria since 1989 so in 2014, we will be 25 years in this country. Olams principal activities in Nigeria include, sourcing & procurement, grading and processing, and export of various agricultural products like cocoa, cotton, cashew, sesame. We are also involved in importation, distribution and local farming of rice as well as wheat milling, through our group company, Crown Flour Mills. Our company, OK Foods Limited is also competing in the Candy market. We are in the juice and beverages market also, through our company Ranona Nigeria Limited and also in the Breakfast Foods and Kitchen Ingredients market through Caraway Foods. You can see that we are across different markets in Nigerias agricultural sector. We have a wide and deep network of operations across all regions of Nigeria. We have offices and units across all geopolitical zones of the Nigerian Federation. We have a wide and growing network of wholesalers, local buying agents (LBAs) and suppliers/customers/service

community earnings through direct sourcing and toll processing in the country and of course of our OLAM sustainable villages project pan Nigeria. We are committed to ongoing leadership in developing the livelihoods of farmers within the supply chain and ultimately aim to bring prosperity to our farming communities. We seek to transfer skills and knowledge through effective partnerships and ultimately build long term relationships based on fairness and trust.

The Agricultural Transformation Agenda has been one of the achievements Within the of the current of this administration. context

transformation, much of which we think has been in primary commodity production, do you see linkages between primary production and industry that are robust enough for agricultural industrialisation, considering the disadvantage to the economy of exporting primary commodities and then importing them as finished products?

I think there is sufficient evidence to show that the governments intent is to use the progress being made in the primary agricultural sector to engender significant industrialisation of the sector. First of all, the Minister has spoken over and over again of the value-chain strategy and the sectors value chain sure includes processing and industrial manufacturing. Of course, this will not cover every single agricultural product, but for products where we have a competitive advantage. A corollary of a value chain approach like this is import-substitution, which the government has also started doing. There has also been investment driven partnerships between the government and the private sector and then the agriculture machinery zero-duty import regime. If we take a look at the seed and fertilizer distribution system, which was hitherto very flawed, you will see that private sector involvement has brought more transparency and efficiency, which will help grow both the seed and fertiliser industry (the input suppliers) and the primary production process at the farms (since they use the fertiliser and seeds). This should also have a positive impact on the industrialisation of agriculture because the more transparent and efficient the input processes are, the more investors are encouraged to get involved in agriculture value-added opportunities. Obviously, this is evidence that they see improved linkages, which make their commercial activities a more valuable proposition. In essence, we think the intent is there (to develop these linkages) and there is evidence of activities that have been achieved in this regard. This is good for us also as a business to operate in an environment where the approach to agriculture is value-chain based.

consumes. This is as much an opportunity as it is a challenge. We recognized we could complement the efforts of the government in replacing the import dependency with local self-sufficiency through a profitable commercial farm model that would reach maximum milling volume by embracing the surrounding smallholder communities. This is the motivation for our Rice Nucleus Model. To be implemented in two phases in Nasarawa State, the rice farm initiative will benefit both the Company and local smallholders. A central commercial farm of 10,000 hectares acts as the nucleus, already providing employment to the local community and therefore income and new agricultural skills to invest in surrounding family rice farms. By the end of 2014 these smallholders and others will be able to participate in an outgrower scheme whereby Olam will buy their rice at prevailing market prices in addition to the rice grown on the commercial farm. Through commitment to the model, Olam expects outgrower numbers to reach over 16,000 by 2018, equating to around 60,000 tonnes of rice per year, and an increase in average yield per smallholder of over 100% once agri inputs and the new techniques learned from the nucleus farm are applied. This approach helps to guarantee high productivity and good quality crops for Olam to purchase, while simultaneously providing a ready market for local farming communities. Outgrowers will make up around 90% of the workforce, and once the farm is fully operational, over half of the workforce will be women. In addition, Olam Nigeria is partnering with the West African Rice Development Association to test new varieties of high-yield rice. This is the uniqueness of our approach and that is why it has received such recognition, even from organisations such as the Rockefeller Foundation.

Olams Rice Nucleus Model has been hailed for its innovative approach to solving the problem of food security in Africa. What is this nucleus model about?
Nigeria is currently the second-largest importer of rice in the world, and the largest net importer in Africa. We grow only about 65% of the rice Nigeria

About the Authors is Partner, Research and Consulting at Sawubona Advisory Services Limited, Lagos. His consulting experience spans industries like Telecoms, Professional Services, Metals & Mining, and Commodities in Nigeria, UK and Serbia. He can be reached through o.igwebuike@sawubonang.com & @ObinnaIgwebuike.

is Partner, Venture Management at Sawubona Advisory Services Limited, Lagos. He has consulted for a vast number of businesses in new market development, business model (re)development, supply chain efficiency and financial strategy. He can be reached through b.odiete@sawubonang.com & @Odiete. is a Research and Consulting Analyst at Sawubona Advisory Services Limited, Lagos. She is a graduate of Economics from Covenant University, Nigeria and has significant interest in the application of technology to business solutions. She can be reached on u.ikechuwkwu@sawubonang.com & @revolutionist_d.
The authors express profound gratitude to Ade Adefeko, Head, Corporate and Government Relations, Olam Nigeria, for his contribution to the development of this report.

About Sawubona Sawubona Advisory Services works with clients in the private and public sectors to help them better achieve their objectives. Our clients have a choice of engaging us either as end-to-end solutions providers (across different service offerings) or as specific solutions providers in the different service areas. Sawubona has evolved from SMARTLab Consulting, an SMEconsulting practice, with six years experience consulting for small businesses in areas like Market Research, Business Planning and Market Entry Strategy, Corporate Finance, and Marketing Communication. We develop intimate relationships with our clients, asking the right questions and co-creating value for them. Our vision is to be the most recognized small business consulting and venture-management service provider in Nigeria. Our mission is to help clients identify and harness value opportunities to meet their organizational objectives.

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