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Digitally Signed by: Content manager’s Name
DN : CN = Weabmaster’s name
O= University of Nigeria, Nsukka
Nwamarah Uche
Faculty of Agricultural
Department of Agricultural Economics
TRADITIONAL AND MODERN GROUNDNUT
PROCESSING AND MARKETING IN NORTH CENTRAL
NIGERIA
ABOKI, PETER MAISAJE
PG/Ph.D./06/42156
ii
TRADITIONAL AND MODERN GROUNDNUT PROCESSING
AND MARKETING IN NORTH CENTRAL NIGERIA
BY
ABOKI, PETER MAISAJE
PG/Ph.D./06/42156
DEPARTMENT OF AGRICULTURAL ECONOMICS,
FACULTY OF AGRICULTURE, UNIVERSITY OF NIGERIA,
NSUKKA
iii
JANUARY, 2015
i
Title Page
TRADITIONAL AND MODERN GROUNDNUT PROCESSING AND
MARKETING IN NORTH CENTRAL NIGERIA
BY
ABOKI, PETER MAISAJE
B.Agric. Tech-Agricultural Economics and Extension (FUTO), M.Sc. Agricultural
Economics (ABU)
A Ph.D. Thesis Submitted to the
Department of Agricultural Economics,
Faculty of Agriculture, University of Nigeria, Nsukka
In partial Fulfillment of the Requirements for the Award of Doctor of
Philosophy (Ph.D) in Agricultural Economics of University of Nigeria, Nsukka
JANUARY, 2015
ii
Certification
This is to certify that ABOKI, PETER MAISAJE, a post graduate student of the Department of
Agricultural Economics, Faculty of Agriculture, University of Nigeria, Nsukka, with the
registration number PG/Ph.D./06/42156 has satisfactorily completed the requirement for the
award of degree of Doctor of Philosophy (Ph.D.) in Agricultural Economics (Agricultural
Marketing and Agribusiness Management). The work embodied in this thesis has not been
submitted in part or in full for any other degree or diploma of this or any other University.
..………………………………… …....……….
Aboki, Peter Maisaje Date
(Student)
--------------------------------- ----------------- ------------------------------- ---------------
Prof. S.A.N.D. Chidebelu Date Prof. C.J. Arene Date
(Supervisor) (Supervisor)
---------------------------------- -------------------------
Prof. S.A.N.D. Chidebelu Date
(Head of Department)
iii
Dedication
To Almighty God for His grace and mercy thus far, and which endure forever; to
the memory of my Father Mr. M R Aboki, and my Mother, Mrs. L. M. Aboki
iv
Acknowledgement
I am much gratitude to almighty God for His grace and enablement thus far. I express my
gratitude and appreciation to my supervisors, Prof. S.A.N.D. Chidebelu, the Head of department,
and Prof. C.J. Arene for their valuable contributions, prompt attention and encouragement in the
course of this thesis. The various contributions of the followings are highly noted- Prof. E.C.
Okorji, Dr. A. A. Enete (Post graduate seminar co-ordinator), Prof. Noble J. Nweze, Prof. (Mrs)
A.I. Achike, Prof. C.U. Okoye, Dr. F.U. Agbo, other lecturers, and my colleagues, the post
graduate students, Department of Agricultural Economics, University of Nigeria, Nsukka.
My appreciation also goes to Prof. D.O.A. Phillips who gave me the frontier software,
Prof. S. A. Rahaman for the initial backup. To my friends, Dr. T.A.K. Anzaku, Dr. M.M. Ari, Dr.
I. Joshua, and Dr. R. E. Barde for the encouragements. I gratefully appreciate my wife Mrs.
Felicia M. Aboki and my entire family for the support to complete this work; I cannot forget
Henry Ajuzie Dozie a Ph.D. student in the University, for always being available to run my
errands. Thank you all.
v
ABSTRACT
The study evaluated the traditional and modern groundnut processing and marketing in North
Central Nigeria. The focus was on groundnut oil processing and marketing systems; input use
efficiency in production and factors that made for efficiency; profitability of the processing
activity and factors that determined profitability; examination of value added by processing;
integration of markets for the processed products and problems of the industry. A total of 175
traditional processors were selected and 17 small-Scale modern processors covered from
Nasarawa, Benue and Niger States. Pre-tested, structured questionnaires and observations were
used as instruments of data collection. Types of data collected were those on socio-economic
characteristics of processors, groundnut procurement, processing, and ground nut oil (GNO) and
groundnut cake (GNC) marketing. Weekly price series for GNO and GNC were also collected at
various markets within the region. Data analyses were attained by use of descriptive and
inferential statistics, stochastic frontier analysis (SFA), profit function analysis, t-test statistic and
Johansen test for co-integration. Hypotheses were also tested appropriately. The average age of
traditional processors in North Central Nigeria was 38 years and 41years for modern processors.
Ninety-four percent of the traditional processors were women while 88% of modern processors
were men. Majority of the processors did not participate in co-operative activities. Sixty percent
of groundnut processed by traditional processors came from farmers while 94% of groundnut
processed by modern processors was obtained from traders. The maximum likelihood result for
traditional processors indicated the presence of inefficiency. Raw groundnut variable was
significant at 1% level of significance (LOS) in Nasarawa and Niger States. Fuel-wood and salt
were both significant at 1% LOS in Nasarawa and Benue States. In the inefficiency aspects, age
and years of experience were significant at 1% LOS in all the states. For the zone, labour and salt
were significant at 1% LOS; fuel-wood 5% and raw groundnut 10% LOS. In the inefficiency
aspect for the zone, household size was significant at 5% LOS, while level of education was
significant at 10% level of probability. Raw groundnut and labour were significant in modern
processing, while education and experience at 10% in the inefficiency aspect. Most of the
traditional processors had their efficiency scores above 0.80 and modern processors were from
0.47. In the profit function results for traditional processors, fuel-wood and packaging variables
were significant at 1% LOS. Raw groundnut, procurement and maintenance were significant at
1% in modern processing. Value added was 41% for traditional processors and 44% for modern
processors. There was significant difference in the value of groundnut before and value after
processing. The Johansen trace test result indicated five co-integration vectors at 5% level of
probability for GNO and two co-integration equations for GNC. The markets for GNO and GNC
were not fully integrated. Administrative regulations affected market integration for GNO which
was significant at 5% LOS. Constraints identified included inadequate finance, inadequate
electricity, machine breakdown and transportation. Recommendations made included improved
packaging, finance, electricity supply and co-operative education.
vi
TABLE OF CONTENTS
Content Page
Cover page
Title page i
Certification ii
Dedication iii
Acknowledgement iv
Abstract v
Table of contents vi
List of tables x
List of figures xii
CHAPTER ONE: INTRODUCTION
1.1 Background of the study 1
1.2 Statement of the problem 6
1.3 Objectives of the study 9
1.4 Hypotheses 10
1.5 Justification 10
1.6 Limitation of the Study 12
CHAPTER TWO: LITERATURE REVIEW
2.1 Groundnut Processing Technologies and Systems 13
2.1.1 The traditional and modern methods of groundnut oil extraction in Nigeria 15
2.1.2 Capital ownership and organizational structures of agricultural processing 17
2.2 Marketing of Finished Products 18
2.2.1 Marketing strategies for agro-industrial products 21
2.2.2 Market demand for agro-industrial products 22
vii
2.3 Profitability Measures and Value addition 24
2.3.1 Profitability analysis 26
2.3.2 The value adding process in agriculture 27
2.4 Input Use and Efficiency 29
2.4.1 Efficiency measurement 30
2.5 Market Integration 34
2.5.1 Market integration and the law of one price (LOP) 35
2.5.1.1 Stochastic Process and the Unit Root Problem 36
2.5.1.2 Co-integration 38
2.5.1.3 Co-integration and Error correction Mechanism (ECM) 39
2.5.1.4 The Johansen Trace test 39
2.6 Problems of Agricultural Processing Industry 40
2.7Theoretical Framework 41
2.7.1 Value chain in Agricultural Processing and marketing 44
2.8 Analytical Framework 47
2.8.1 Stochastic frontier production function 47
2.8.2 Profitability analysis 51
2.8.3 Measurement of co-integration and the law of one price (LOP) 52
2.8.3.1 The unit root problem 53
2.8.3.2 Unit root test 54
2.8.3.3 Co-integration: The Johansen test 56
2.8.3.4 Determinants of co-integration 58
CHAPTER THREE: METHODOLOGY
3.1 Study area 59
3.2 Sampling technique 60
3.3 Data collection 61
3.4 Data Analysis 62
viii
3.4.1. Stochastic Frontier Model 62
3.4.2 Profit Function Analysis 65
3.4.3 Value addition model 66
3.4.3 Johansen trace test 67
3.4.3.1Determinants of co-integration 67
CHAPTER FOUR: RESULTS AND DISCUSSION
4.1 Socio-economic Characteristics of Small-scale traditional and modern Groundnut
Processors in Northern Central Nigeria 69
4.1.1 Age distribution of groundnut oil processors 69
4.1.2 Gender distribution of the processors 70
4.1.3 Marital status 71
4.1.4 Household size 71
4.1.5 Educational level of processors 72
4.1.6 Cooperative participation 72
4.1.7 Years of experience 73
4.2 Groundnut Oil Production, Marketing, and the Value Chain in the Study Area 75
4.2.1 Procurement 77
4.2.2Traditional groundnut oil production method 79
4.2.3 Modern groundnut oil production method 80
4.2.4 Marketing 82
4.3. Input Use Efficiency in Traditional and Modern Groundnut Oil Production in North
Central Nigeria 86
4.3.1Technical efficiency estimates for groundnut oil producers in North Central Nigeria 89
4. 4. The Profitability Analysis of Traditional and Small-scale Modern Processing and
Marketing of GNO and GNC 94
4.4.1 Gross margin results of groundnut processing 94
4.4.2 Determinants of profitability of groundnut processing in North Central Nigeria 97
4.5 Value Added by Processing Groundnut into GNC and GNC 100
ix
4.5.1Test of significance of value added 102
4.6 Level of Integration of Markets Groundnut oil (GNO) and Groundnut cake (GNC) 103
4.6.1 Result of the unit root test 104
4.6.2 Result of the Johansen test for co-integration 105
4.6.3 Determinants of market integration 107
4. 7 Constraints Facing the Groundnut Processing Industry 109
4.7.1 Identified constraints 109
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary 113
5.2 Conclusion 118
5.3 Recommendations 119
5.4 Addition to knowledge 120
5.5 Areas needing further research 121
REFERENCES 123
APPENDIX A 131
APPENDIX B 141
LIST OF TABLES
x
Table Page
1.1 Categories of Agro-processing by level of transformation of raw materials 3
1.2. Top ten world producers of peanuts - 2008/2009 5
3.1: Population and sample selection for the study 61
4.1 Socio-economic characteristics of traditional small-scale modern processors in North
Central Nigeria 73
4.2 Statistical summary of selected activities of traditional and small-scale modern GNO
processors in North Central Nigeria 77
4.3 Marketing activities of processors in the States and North Central Nigeria 84
4.4 Generalized log likelihood-ratio tests of the complete technical efficiency of
groundnut oil processors in North Central Nigeria 86
4.5 Maximum likelihood estimates (MLE) of the stochastic frontier production
(processing) function for traditional GNO processors in Nasarawa and Benue States 90
4.6 Maximum likelihood estimates (MLE) of the stochastic frontier production
(processing) function for GNO processing in Niger state and North Central Nigeria 91
4.7 Maximum likelihood estimation (MLE) of the stochastic frontier production
(processing) function for modern GNO processors in North Central Nigeria 92
4.8 Distribution of technical efficiency estimates for traditional (small – scale) and modern
GNO processors in the states and the North Central 93
4.9 Gross Margin for Traditional and modern GNO processing the States and the Region 95
4.10 Regression results of the determinants of profitability of traditional GNO processing in
Nasrawa, Benue and Niger states 98
xi
4.11 Regression results of the profit function of determinants of profitability of traditional
and small-Scale modern GNO processing in North Central Nigeria 99
4.12 Value added by processing groundnut into oil and cake in North Central Nigeria 100
4.13 Result of test of differences in value of groundnut seed before and after processing 102
4.14 Augmented Dickey -Fuller (ADF) Unit root test for price series at level and at first
difference 103
4.15 Result of the multivariate Johansen test for Co-integration for GNO price series 105
4.16 Result of the multivariate Johansen test for Co-integration for GNC price series 105
4.17 Result of factors that determine the level of integration of groundnut oil markets in
North Central Nigeria 107
4.18 Result of factors that determine the level of integration of groundnut cake market in
North Central Nigeria 107
4.19 Constraints to groundnut oil processing in the selected states in North Central Zone 111
xii
LIST OF FIGURES
Figure Page
1.1 Peanut (Arachis hypogea) plant 4
2.1 Illustration of production efficiency 33
2.2: The generic value chain of Michael E Porter 44
2.3 Flow chart of Agro-processing value chain 46
4.1 The Groundnut oil processing chain in North Central Nigeria 75
xiii
1
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Processing, storage and marketing of agricultural produce have become increasingly
important to the economies of most developing countries, as they have been to industrialized
nations at various stages of their development. Due to technical progress, marketable surpluses
from agricultural production have grown significantly; while rapid growth in urban populations
and rising per capita incomes have enlarged and diversified the demand for processed
agricultural products, whether food or raw materials for industries. Perhaps Processing is one of
the most important physical functions of agricultural marketing. Olayide & Heady (1982) opined
that processing was an important component of agribusiness development, because a large
portion of farm production underwent some degree of change between harvesting and final use.
More so agro-processing is capable of strongly shaping farm production decisions. It enables
quality enhancement, preservation and differentiation of farm production thereby enhancing its
marketability. It has also been noted that Agricultural processing activities are small-scale and
require low investment capital, hence can easily be undertaken by women (Fellows & Hampton,
1997; RMRDC, 2004; Kadurumba, Kadurumba & Umeh, 2009; FAO, 2011).
Farm products’ processing play a significant role in the economies of developing
countries, where it accounts for between 51% and 60% of value added by manufacturing and
between 60% and 70% of total industrial development. Over half of the manufacturing activities
in the developing countries of the world consist of agro-industries preserving and transforming
agricultural raw materials (Olayide & Heady, 1982; Brown, 1986). FAO (2012) observed that
2
increased urbanization, distance between home and work-place, working women and changes in
family cohesion has increased demand for shelf-stable, convenience and value added food.
Agricultural processing facilities have a strong impact of stimulating consumer demands
backward to the farm sector, to keep pace with demand for raw materials supply for processing.
Based on farm products, agricultural processing schemes can be sited in areas where other
industries will not be viable, as they are more intensive users of domestic rather than imported
raw materials due to their local availability (Brown, 1986; Austin, 1992; Brown, Deloitte &
Touche, 1994). More importantly, the gains of increased agricultural production through
technical progress will be lost if it is not consolidated through the development of economically
viable processing sector. So also the skills developed through planning and implementation of
agricultural processing and preservation will strengthen stakeholders’ entrepreneurial attributes,
thereby enhancing their economic empowerment (FAO, 2011). As a means of mitigating
problem of food shortage, FAO (2012) among other issues emphasized adding value or
improving the food agro- processing for consumption and the market.
An efficient marketing system connects producers and consumers, directs efficient
allocation of resources in production and distribution of output, while ensuring maximum
economic benefits to participants. Conceptually, agricultural processing which is a segment in
agricultural marketing, involves the transformation of raw materials to the forms required by the
consumer or for the next stage in a manufacturing and distribution chain (Olukosi & Isitor, 1990;
Boland, 2009).This entails transforming and preserving agricultural output, through physical
and/ or chemical alteration. FAO (2011) defined food processing and preservation as a set of
physical, chemical and biological processes that are performed to prolong shelf-life of foods, and
at the same time retain the features that determine the quality, such as colour, texture, flavour
3
and especially its nutritional value. Austin (1992) also viewed agricultural processing industry as
any enterprise that is involved in the processing of materials of plant or animal origin, which he
also described as agro-industry. In the World Bank development activities, the term “agro-
industry” covered agro-industrial processes such as grain milling, fruit and vegetable canning, oil
seeds crushing, and meat packaging as well as the function of marketing(Brown,1986). Hence it
was touted that starting a small rice mill or an oil press marked an early stage in the first steps on
the road to industrialization. The nature of processing and level of transformation can vary
tremendously ranging from cleaning, grading and boxing fruits and milling to oil extraction,
mixing and chemical alteration(Austin,1992), (Table 1.1).
Table 1.1: Categories of Agro-processing by level of transformation of raw materials
Level Activities Illustrative Product
L1 Cleaning, grading, storage Fresh fruits, eggs, fresh vegetables.
L2 Ginning, milling, cutting, mixing Cereals (grains), meat, spices, animal
feeds, jute, cotton, rubber, lumber and
flour
L3 Cooking, pasteurization, dehydration Dairy products, canned or frozen fruits,
refined vegetable oils, furniture, sugar
and beverages.
L4 Chemical alteration and texturization Instant foods, texture vegetable,
Products, tires
Source: Adapted from Austin (1992)
Groundnut (Arachis hypogea) is known to the Hausas as ‘Gyadda’, to the Ibos as
‘Opapa’, the Yorubas as ‘Epa,’ the Americans as peanuts, and the French as arachides. It is a
4
leguminous crop grown all over the world as an important oil seed crop native to South America.
Groundnut is thought to have been introduced to West Africa early in the slave trade by the
Portuguese, mainly to supplement the diet of slaves in transit. Its spread into the interior of West
Africa was rapid in the eighteenth century. By 1850s it was common in parts of Hausa land of
Nigeria and thought to be as important as potatoes in Europe by a British traveler (Hogendorn,
1978). Groundnut is a short herbaceous annual crop that produces its pods inside the soil, (figure
1.1).
Plate 1.1 : Peanut (Arachis hypogea) plant
Source : Wikipedia (2010)
Historically, the Sudan and northern guinea savanna of Nigeria have been the high
producing zones. However, the development of several varieties by the Institute for Agricultural
Research (IAR), Ahmadu Bello University, Zaria, has led to even higher output in the southern
5
guinea savannah zone, covering the North Central States of Nigeria (RMRDC, 2004). Nigeria
was third among the world ten highest producers of groundnut with 3, 835,600 tonnes
(unshelled) after China and India in 2007/2008 output year (USDA, 2010), but now fourth with
1.55million metric tonnes (shelled) in the 2008/2009 output season (USDA, 2010), ( Table 1. 2).
Table 1. 2: Top ten world producers of peanuts - 2008/2009
Country
Production (Million Metric Tonnes)
People's Republic of China
14.30
India 6.25
United States 2.34
Nigeria 1.55
Indonesia 1.25
Myanmar 1.00
Sudan 0.85
Senegal 0.71
Argentina 0.58
Vietnam 0.50
World 34.43
Source: USDA Foreign Agricultural Service( 2010)
A mature groundnut pod contains 2-4 kernels (nuts) per pod depending on the variety and
is traded decorticated and unshelled. In Nigeria, it is eaten as whole nut, raw, boiled or roasted
and also crushed to get the oil and the cake. The oil is known as groundnut oil (GNO) and the
residue known as groundnut cake (GNC). Groundnut is rated the third major oil seed of the
world after soya bean and cotton (USDA, 2010). Groundnut oil is used for cooking, as salad oil,
for canning sardines, and margarine manufacturing (Sharma & Caralli, 2004).The residue after
oil extraction is a source of protein for animal feed. In traditional oil extraction method, this
residue is fried into a local delicacy known as groundnut cake (GNC) or ‘kulikuli’in Hausa. This
6
is ground and consumed in composite with several local dishes. Elsewhere, groundnut is
processed into peanut butter, peanut flour, peanut flakes and many other products.
Bulk export of groundnuts from Nigeria started to decline in the 1960s in favour of local
crushing by mills in and around Kano and else-where. In 1973/74 cropping season, only 35% of
the 559,000 metric tonnes purchased by the marketing board was exported. By 1973/74 also a
policy decision to discontinue export of groundnuts entirely was put in place to allow for local
processing. Any export of groundnut after then was in form of groundnut oil (GNO) or cake
(GNC) (Hogendorn, 1978).
The petroleum oil boom and its consequence upon the agricultural sector saw Nigeria
importing groundnut oil. In 1980, about 200,000 tonnes of groundnut products were imported in
form of vegetable oil. The 1.95million tonnes output in 1974 dropped to 0.4million tonnes in
1983. Consequently many groundnut processing mills had to close down because of
unavailability of the raw material (RMRDC, 2004). However, with the abolition of organized
marketing of agricultural products in 1986, the processing and marketing of groundnuts and its
products have been left to the private sector (Ingawa, 2004). A survey by RMRDC (2004)
showed groundnut output to be 1.98million tonnes for 2003, with greater portion coming from
Bauchi and Nasarawa States with 72,000 tonnes and 70,420 tonnes, respectively, and higher
estimates for 2004. The rain fed output for Nasarawa State in 2008 was put at 92,450 metric
tonnes (NADP, 2009). The soaring demand for groundnut oil in manufacturing and domestic
need has kept the pressure on the groundnut crushing industry.
1.2 Statement of the Problem
Agricultural development policies and programmes have tended to lay emphasis on
improving farm productivity, but with less attention on the processing and storage of the
7
resultant output. For instance, 95% of funding of the Consultative Group on International
Agricultural Research (CGIAR) in about 20 to 30 years was devoted to production related
research activities (Ferris, 1999). Agricultural credit disbursement in Nigeria has also been in
favour of crop production with grain alone taking 67% (CBN, 1998). Consequently, the gains of
increased agricultural productivity will not be fully realized if not sustained through the
development of a viable processing and marketing sector to support the technical progress
attained in production. Market forces have instigated greater opportunities for product
differentiation and value addition in some respects (Boland, 2009). These include i) increased
consumer demand regarding health, nutrition, and convenience food; ii) efforts by food
processors to improve their productivity; and iii) technological advances that enable producers to
produce what consumers and processors/manufacturers desire. Importantly, improvement of
efficiency in the value chain fosters more equitable, transparent and sustainable distribution of
benefits to the various stakeholders (FAO, 2011)
Local processing of groundnut and other sources of oil have still not met the domestic
demand for vegetable oil. This is shown in the importation of vegetable oil to supplement local
production, with its attendant drain on foreign exchange. The short fall in demand has been
estimated at between 300,000 tonnes and 400,000 tonnes per annum. Hence the Presidential
Initiative on Vegetable Oil was put in place, to obtain three million tonnes of vegetable oil per
annum from five million tonnes of groundnut and to start exportation by the year 2010 (Ojowu,
2004). Consequent upon the above, the challenge of achieving this target was on the groundnut
processing industry. Hence this study focused on critical areas in groundnut processing and
products marketing chain for appropriate intervention measures to achieve efficiency and
increase products availability.
8
In agricultural processing schemes as in production, several inputs are involved. Raw
material that is the farm produce can constitute 90% of the entire inputs needed depending on the
level of processing (Austin, 1992). The efficiencies involved in transforming inputs into desired
output need be known (Olayide & Heady, 1982). One of the problems responsible for poor
performance of developing countries especially in sub- Sahara Africa in international trade is
attributed to low value addition. Consequently, products do not meet international standards, and
do not compete favourably in the international trade. Optimization of groundnut oil (GNO) and
groundnut cake) GNC processing and marketing, is therefore an ultimate desire.
It is also understood from the foregoing that there are information and product gaps in the
value chain with respect to groundnut oil, all pointing to inefficiency along the value chain. Most
technical and economic efficiency studies have concentrated on primary production of crops and
livestock with few on processing, for example Okoh, (1999) worked on cassava roots and its
processed products. Kadurumba, Kadurumba & Umeh, (2009) also worked on allocative
efficiency of traditional palm oil processing in Imo State. Analysis of technical and economic
efficiency data from processing through marketing, with its positive effects in the chain, and
integration of markets for processed products is crucial, but unavailable. Consequently, this
research has addressed the inefficiencies in the value chain, as depicted in capacity under
utilization of plants, poor quality products, low quantity of output from given level of raw
material, inadequate price and output information, unattractive profit incentives, and income
fluctuations.
It has been established that initiating activities from the market - end of the commodity
value chain, using improvements in processing and market expansion to provide “demand pull”
that benefits raw material producers, especially small- holder farmers, is necessary for
9
sustainable agricultural development (Ojowu, 2006). A survey by RMRDC (2004) revealed
Nigerian’s groundnut output of 1.976million tonnes. With the entire crop consumed in Nigeria,
examining the performance of the processing segment and hence the downstream segment of
groundnut industry will improve efficiency in operations for processors, and entire value chain.
The synchronous movement over time among prices in different markets has become an
important index of efficiency in the markets. For a market system, domestic or foreign, efficient
performances of its developmental functions depend on the ease with which price changes and
responses are transmitted spatially and temporally within the system. Market integration modeled
within the framework of the spatial price equilibrium (SPE) model of inter market linkages in the
point space tradition, that is subject to production shocks and general price information is crucial
for attainment of efficiency of the markets. The poor infrastructural development in developing
countries as Nigeria leaves lots of doubts in the attainment of integration of the markets for agro-
industrial products, such as groundnut oil and groundnut cake and hence the much desired
efficiency in their marketing systems. Acquah & Owusu (2012) suggested further investigation
into influence of external factors such as market infrastructure, government policy and self
sufficient production, product characteristics and utilization towards market integration.
1.3 Objectives of the Study.
The broad objective of the study was to examine the performance of traditional and
modern groundnut processing and marketing in North Central Nigeria. The specific objectives
were to:
(i) examine the socio- economic characteristics of traditional and modern groundnut oil
processors;
10
(ii) describe the traditional and modern groundnut oil processing and marketing systems in
the area and hence the processing value chain;
(iii) examine the technical efficiency in traditional and modern groundnut oil production and
identify the factors that determine efficiency;
(iv) estimate the profitability of groundnut oil (GNO) processing and identify the factors that
make for their profit;
(v) examine value added by processing groundnut into GNO and GNC in the area;
(vi) estimate the level of integration of GNO and GNC markets and identify the factors that
influence their integration; and
(vii) examine the problems of groundnut oil processing and marketing.
1.4 Hypotheses
The null hypotheses tested were:
H01: Groundnut processing into GNO and GNC is not efficient;
H02: Variable input and output prices of GNO and GNC do not affect their variable profit;
H03: There is no significant difference in value of groundnut before and after processing; and
H04: Markets for GNO and GNC are not integrated.
1.5 Justification of the Study
Positive net returns in any business is an incentive to continue the business. The
continuity of investment in crop processing will largely depend on its profitability. Ojowu (2006)
noted that “demand- pull” and profit incentive make the changes achieved in developing
agricultural processing sustainable. More so that participants in groundnut processing are the low
income group who depend largely on what is generated for their sustenance. Therefore the
11
findings of this study will be of immense importance to the participants in the attainment of their
business goal.
This study will particularly benefit groundnut processors in increasing the value (quality
and quantity) of products at lower cost and hence increase their income. For the marketing
agencies, efficiency in the marketing system will increase their returns and lower cost to
consumers and manufacturers that use the products as raw materials. Households will be able to
acquire GNO and GNC at lower cost for domestic needs. On the whole, the entire value chain
from raw material supply (groundnut farmers) through traders to consumers and manufacturers
(Bakers, confectioneries, margarine manufacturers, etc) will be improved.
An inverse relationship between increased mechanization of crop processing and women
participation was observed by Bruinsma (1999); and that some technologies targeted at
alleviating poverty among women did not actually benefit them. The findings of this study will
provide technology related information for purpose of intervention and development of
appropriate technologies to alleviate poverty among the rural poor, particularly in the study area
where religion and other cultural values restrict women from some outdoor income generating
activities. It is understood that spatial market integration ensures that a regional balance is
attained among food-deficit, food-surplus and non-food producing areas through effective
transmission of price signals (Chirwa, 2000).
The findings of this study will set the pace for further research into the groundnut
industry. It will also generally provide base-line information to the private sector, government
agencies and the non- governmental organizations (NGOs) in their businesses and development
activities which will also increase the supply of GNO needed for both domestic and industrial
purposes.
12
1.6 Limitations of the Study
The major limitations in this study were those inherent in social and economic research.
Foremost of which was poor record keeping especially among the traditional processors, with
consequent dependency on memory recall for processing and marketing activities with inherent
unreliability. Probing and leading questions were however used during data collection to assist
respondents affirm their responses. Secondly, the study had to contend with the mood and the
on-going activities of the processors during data collection. Because processors could not just
stop their processing work or selling products to respond to questions, it was difficult getting
them to do that. To enhance the quality of information collected, interviews and observations
were used during data collection. This however extended data collection period with its attendant
cost.
This study covered only groundnut oil processors in the selected states. Only those
actively involved in the groundnut oil processing and products marketing activities comprised
the elements in the study, hence other groundnut products were not covered.
13
CHAPTER TWO
LITERATURE REVIEW
2.1 Groundnut Processing Technologies and Systems
Technology is seen as the body of know-how about materials, techniques of production,
and operation of equipment based on the application of scientific knowledge (Black,
2002).Modern technology enables the achievement of objectives at a faster rate. Therefore, a
sound understanding of current technology, their technical, social and economic environment, is
necessary to promote processing enterprises (Bruinsma, 1999). Every technology must be
assessed to determine its adaptability and attendant social, economic and environmental
consequence. Arene, Nwagbo & Okoye (2004) stressed that an existing technology can be
assessed to determine the extent it contributes to satisfying basic human needs; its promotion of
self reliance through the use of local human and material resources; and how it affects social and
cultural structures, norms and attitudes of the society.
Technology selection is often the most crucial decision in designing and undertaking an
agricultural processing project (Austin, 1992). Consequent upon that, Austin (1992) noted that
before choosing an agro-processing technology, the market requirement, technical processing
requirement, cost and availability of labour, capital, energy, raw materials, capacity utilization,
skill capabilities and nutritional consequence must be taken into account. It has been observed
that most technologies for food processing are technology driven rather than product or market
driven hence have had problems of adaptation (Bruinsma and Nont, 1991; Connry et al, 1995;
and Zommers, 1995). In agricultural processing, Orji (2008) suggested a vibrant linkage among
processors, industrial users of products and agro- equipment manufacturers. This will enable the
14
fabrication of appropriate machines for agro- processing activities and optimization of the
processing segment in the commodity chain.
Bruinsma (1999) compiled technology selection guidelines from Fellows and Hampton
(1997) as follows; (i) technological effectiveness (whether the equipment will do the job required
at the intended scale of production); (ii) relative cost of the equipment and its maintenance; (iii)
operating cost and overall profitability; (iv) conformity with existing administrative and
production conditions; (v) conformity with the existing supplies of raw material and the
marketing opportunities; (vi) social effects, such as displacement of the work force; (vii) training
and skill levels required for equipment operation, maintenance and repair; (Viii) health and
safety features and environmental impact; (ix) flexibility to perform more than one function; and
(x) compatibility with other parts of a process and stages in the food chain.
In groundnut oil extraction, the basic principle is the same worldwide. These are: (i) pre-
treatment, which involves cleaning, scorching and crushing the groundnut; and (ii) extraction,
which is the separation of the raw material into oil and residue (cake) (Sharma & Carilli, 1999;
RMRDC, 2004). The cells of groundnut embryo contain oil in an extremely fine emulsion
(Woodroof & Leahy, 1940). When nuts or kernels are broken or bruised, a sufficient number of
cells are injured, hence cause tiny drops of free oil to ooze out and collect on the surface (Asiedu,
1989). In Nigeria and elsewhere, oil extraction from groundnut kernel is done by mechanical
pressing or by use of solvent (RMRDC, 2004; Asiedu, 1989). Solvent extraction is capable of
bringing out nearly all the oil from the groundnut material, a high yield of oil of better quality
and high protein meal (Khan & Hanna, 1983). In the mechanical extraction, the efficiency of oil
expression rarely exceeds 90% but it has the advantage of yielding end-products free of
dissolved chemicals, and is safer and less expensive to undertake (Asiedu, 1989). The residue,
15
the groundnut cake is further fried dry and is used for human consumption popularly known as
‘kulikuli’ in Hausa dialect of Northern Nigeria (RMRDC, 2004).
In Nigeria and West Africa, mechanical and other methods of extraction co-exist. They
all follow the sequence thus: (i) shelling/decortications and drying of groundnut kernels; (ii)
roasting/scorching, the process where the kernels are fried to enable quick polishing and easier
oil extraction; (iii) polishing, which is the removal of the redskin or testa from the groundnut
kernel; (iv) grinding/crushing or pasting, a process that turns the roasted polished and cleaned
groundnut seeds into paste; (v) oil extraction, a process which removes the oil from the
groundnut paste by means of some mechanical effort or solvent and; (vi) refining and quality
control(Asiedu, 1989).
2.1.1 The traditional and modern methods of groundnut oil extraction in Nigeria
In the traditional method, groundnut is shelled, cleaned and roasted lightly. Next, the testa or
redskins are removed by rubbing kernels against each other by hand. The de-skinned kernels are
pounded with mortar and pestle or ground with stones. The hammer mills used to mill grains in
the villages is also used to mill the groundnut kernel in some of the communities. The oil-rich
paste is kneaded and pressed by hand or with pestle and mortar to extract the oil. Small quantity
of warm water is usually added following each pressing operation until as much of the oil-water
mixture as possible has been extracted. The oil-water mixture is fried or ‘fire dried’ over a low
fire to remove the water. Lastly, the oil is decanted into bottles or cans, for home use or the
market. Alternatively, the paste is boiled and the oil rising to the surface is skimmed off. This
may continue until no sign of oil is seen. The traditional method has low oil extraction rate, but
the resulting press cake is used for human consumption (Asiedu, 1989; RMRDC, 2004;
NAERLS, 2006).
16
The modern methods used are the expeller methods and solvent extraction process. For
the expeller pressing method, the pre-treated, crushed groundnut is continuously fed into the
expeller, consisting of a screw which rotates within a sturdily built cylinder. The groundnut mass
is fed from the top larger end of the expeller chamber and pressure exerted as the screw turns
forcing the mass towards the discharge end. Friction and pressure cause the mass to heat, which
facilitates oil extraction. The groundnut oil passes through the perforated screen walls and is
collected beneath the expeller chamber, while the press cake is extruded from the discharge end.
The resulting press cake contains 5% oil and can be made into ‘kulikuli’.
The solvent extraction of groundnut oil is similar to solvent extraction of soya bean oil.
Groundnut destined for oil is not fried, but the red skin is removed. Next, the nuts are cracked
into pieces and conditioned to 10-11 percent moisture content at 70oc or more, and then flaked
by passing through rolls. Sometimes the flakes are cooked before being conveyed into the
extractor. In the extractor, the oil is removed by means of a solvent. The solvent laden flakes
are then passed through a desolvenizer which recovers the solvent. The defatted and de-
solvenized cake may undergo further treatment before it is used as feed. The crude oil is
clarified by passing it through a filter press. After which it may be dehydrated and sent for
refining. Solvent used in oil extractor include ethanol and hexane (Asiedu, 1989; RMRDC,
2004).
This process is basically the same for most vegetable oils. It can also be applied to oil
extracted using hydraulic press or screw expeller. Refining consists of alkali refining which
neutralizes the free fatty acids using sodium hydroxide (NaOH), bleaching to improve flavor
stability using natural bleaching earth, and deodorizing to remove odour using steam distillation
under vacuum. If GNO is to be used as salad oil, it undergoes a process of winterization prior to
17
deodorization. The alkaline refined and bleached oil, if necessary, is hydrogenated to an iodine
value of about 105 before it is winterized to remove fats that crystallize out at about 0oC (Asiedu,
1989).
2.1.2 Capital ownership and organizational structures of agricultural processing
Capital has been viewed by Erikson, Akridge, Bernard & Downey (2002) as financial
resources of a business, comprising in the broadest sense, all assets of the business and
representing both owned and borrowed funds. Black (2002) sees capital as man- made means of
production. It is any good that is designed for production of other goods and services, example
machinery. These include financial assets which will be used to provide income. Olayide &
Heady (1982) explained that capital resources came into agricultural production in form of farm
machinery, as tractors, harvesters, tools and equipment for threshing, shelling, grinding, milking;
biological capital, in form of fertilizers, herbicides, insecticides, and certified seeds; and also in
form of livestock feeds, feed mixes and additives, drugs and improved breeds.
In agricultural processing, capital items will include the raw materials (farm produce),
processing machines and equipment, packaging items, additives, and money capital among
others required for running of the outfit (Brown, 1986; Austin, 1992). Capital in form of
machines, tools and equipment are of critical importance to an agricultural processing activity.
Many processors have encountered problems of capacity under-utilization due to improper
estimation of working capital needs, such that they are not able to acquire adequate raw materials
during harvest, hence leaving the plant short of raw materials for the processing activity.
Consequently, enterprise development and the secondary processing sector have sometimes
failed because the approach taken was technology driven, rather than market oriented (Bruinsma,
18
1999). Therefore, decision to purchase a machine must be based on market demand for the
products to be processed (Austin, 1992).
Technologies for food processing are normally small-scale as they are accessible and
affordable (Clarke, 1987). They can be sited near raw material or where other industries cannot
be located, as was the case with small-scale rice processing in Java (FAO, 1982). In small-scale
agricultural processing in sub-Sahara Africa (SSA), most machines and equipment operate on
contract providing services to owners of the crops or farm output (Clarke, 1987; Bruinsma,
1999). This was shown in cassava processing in Benue State, Nigeria. Aboki & Saingbe (2007)
also reported that all the small-scale rice hulling machines in Lafia, Nasarawa State, operated as
contract mills, providing milling services to paddy owners on hire.
Bruisma (1999) compiled the various forms of organization and ownership arrangement
for processing equipment as follows:
i the village cooperative or interest group can own and run the processing plant and pay a salary
to the machine operator(s) and labourers;
ii. the village cooperative or interest group leases equipment from a local workshop with
sufficient experience in equipment manufacture and maintenance;
iii. a private enterprise functions as a service mill and processes small batches for individual
families, or larger batches on contract for the village cooperative or individual business persons;
and, (iv) a private processing enterprise operating on a fully commercial basis where it buys raw
materials from the village and the surrounding area for further processing.
2.2 Marketing of Finished Products
One of the challenges of agricultural processing industry is the identification of the target
markets for the products. This can be based on consumer needs, market segmentation and buying
19
pattern (Austin, 1992). For processed foods, which form bulk of the agro-industrial products,
consumers’ needs are expressed in preference for products’ taste, smell, colour, texture,
appearance and convenience for users, and, most importantly, nutritional requirement (Austin,
1992; Brown et al, 1994). For other agro-industrial products such as cotton, jute and wood,
whose consumers are industrial users; the emphasis is on price and physical quality (Austin,
1992).
Products are purchased based on the various segments of the markets. These may include
geographical location of consumers which reveals ethnic or regional taste, or other socio –
cultural attributes of the consumers. Income levels of consumers are also strong determinants of
purchases hence an important segment. Also, effective demand and food preferences change as
income levels rise, which also reflect product pricing and product characteristics (Gould &
Villarreal, 2006; Abdullai & Aubert, 2004). For instance, packaging of products is made in
various sizes to cater for the low and high income consumers (Austin, 1992; Ganewatta,
Waschik, Jayasuriya & Edwards, 2005).
Another market for agro – industrial products is the export market. This market requires
high quality products with good packaging. There is increasing difficulty in export of agro –
industrial products to other countries because of increasing protection of domestic agro-
industries in the traditional export markets (Brown, 1986 and Austin, 1992). Access to such
markets may require a thorough knowledge of regulations and trade structure, changes in
packaging or distributional channel, or even new product development (Brown, 1986).
Domestic markets appear to offer growing opportunities for agro-industrial products for
both product diversification and import substitution. With increasing income and status, demand
for high value products is on the rise (Gould & Villarreal, 2006 and Brown et al, 1994). Agro-
20
industrial product user type such as industrial consumers, institutional consumers, wholesale and
retail businessmen, and end consumers need to be considered. Product type- necessities, status
items, convenience goods or specialty products, health foods, food away from home (FAH)
require attention (Austin, 1992; Gould & Villarreal, 2006). In India, 50% of the value of
agricultural production is now high value, but in Africa it is only 5% (Morris, 1994). The buying
process of agro-industrial products can also be examined based on who decides the purchase of
the product, how they decide, and where to make the purchase (Austin, 1992; Fousekis &
Lazaradis 2005). Market information helps in marketing decision for agro – products to be taken
adequately. Potential buyers, producers and marketers can be identified; while location and
prices of products can be revealed via market information research. Costs can be tremendously
reduced if reliable information on a product is available to the producer, marketer or even the
consumer (Austin, 1992).
The market place is normally crowded with agro- industrial firms and products,
especially in developed countries, each aiming at controlling or accessing the market, hence the
competitive environment. The five sources of competition of Michael Porter- rivals, potential
entrants, substitutes, suppliers and buyers- need be considered in marketing process of agro-
industrial products (Austin, 1992). Agro-industries present a typical representation of
monopolistic competition with several firms. Market place will be explored by providing buyers
with greater values, which are attainable through cost advantage or product differentiation
(Bruinsma, 1999). Cost advantage allows more effective price competition and product
differentiation enables more effective quality competition, so that the price-quality interplay
yields the ultimate consumer value. In the USA, major meat packers reduced transportation and
labor costs by relocating to rural livestock production areas. Differentiation of product can be in
21
form of, for instance, vegetable oil, with varying oleic acid, distinct flavor and special consumer
preferences (Sharma & Carralli, 2002). Packaging is also a differentiating factor. South
American banana companies’ use of cartons created value for distribution and retailers through
more efficient handling, quality control and branding. There is a difference between intrinsic and
perceived quality of products. Brand and image creation is a strategy for perceived quality
competition, but packaging, product content and services are means of intrinsic quality
differentiation; value is therefore in the eyes of the buyer (Austin, 1992).
2.2.1 Marketing strategies for agro-industrial products
The basic consideration in product marketing includes design, pricing, promotion and
distribution referred to as the marketing mix. Several design options are acceptable for agro –
industrial products. These include taste, texture, cooking ease, colour, odour, nutritive value,
convenience, size and packaging. For furniture, leather or wood products, consideration will
include durability and fashion (Austin, 1992). In Nigeria the iodization of salt and fortification of
vegetable oil, and sugar with vitamins is an example. Cost of product designs and final price of
the product must be evaluated to avoid prohibitive cost. Demand and supply forces in the
markets set prices for most agro – industrial commodities. Internationally, most developing
countries are price takers, while the exporting countries set the prices (Austin, 1992). For locally
processed products, pricing vary from market to market within regions and between regions,
attributable to such imperfections as lack of information, poor infrastructure and so on (Damisa
& Rahaman, 2004).
Sales promotion creates awareness and stimulates demand for products in a consumer. A
superior product will not reach its sales potential unless consumers are aware of its advantages.
In the USA food processors spend about 3% of their revenue on advertising, which amounts to
22
about 1.5 percent of consumers’ at home food expenditure (Kolhs & Uhls, 2002). Promotion is
much less for staples and undifferentiated products and more for processed products.
Promotional activities are commonly seen in the print and electronic media in Nigeria, and road
shows among others; they all stress real and imaginary advantages of products.
The distribution system is important because it links the processors to the market place.
The structure of the marketing and distribution system describes the length of channel and the
number of intermediaries between the manufacturers and the consumer. These include the
wholesalers, commission agents, brokers and retailers operating at different levels of the
product’s chain (Austin, 1992). Several marketing functions carried out include logistics
operations (transportation, storage, repackaging), financing, and promotion. In an efficient
marketing system of developed countries like USA, 28 percent of the consumers food dollar
went to farmers, 72 percent went for processing and marketing functions (Kolhs & Uhls, 2000).
The reverse was the case in Ghana where farmers received 71 percent of the retail price of rice,
processor 12 percent, assemblers / wholesalers 12 percent and retailers 5 percent (Timmer,
Walter & Scott, 1983).The nature of agricultural produce requires specialized and speedy
transportation, storage arrangement for both procured raw materials and processed products,
(Austin, 1992). Food wholesaling in developing countries tends to be highly fragmented and
relatively small-scale though effort to improve the system is being stepped up (Brown, 1986).
2.2.2 Market demand for agro-industrial products
Demand as defined by Erikson, Akridge, Bernard & Downey (2004) is the quantity of a
commodity that consumers are willing and able to buy in the market at various prices. Arising
from the theory of consumers’ behaviour, in which consumers are rational and thrive towards
maximizing utility given their income (Nellis & Parker, 2000).The demand situation for agro-
23
industrial products set the pace for its marketing plans, and because it makes no economic sense
producing a product that cannot be sold (Kotler & Keller, 2006). Therefore, consumer demand
analysis becomes critical in the processing and marketing of a product. To grapple with this,
Austin (1992) suggested consumer analysis to include consumer needs, market segmentation, the
processing process and market research ; competitive environment to include market structure,
the basis for competition and government influence; the marketing plan analysis to include
product design, pricing, promotion and distribution, and demand forecasting which include
examining data needs for forecasting technique and projecting sales.
A cross-section analysis of household demand for food and nutrients in Tanzania
(Abdullai & Aubert, 2004) revealed that income and other socio- economic variables exerted
significant effects on the demand for food and nutrients. The other socio- economic variables
included women’s schooling, size of household and urban residence. The study also showed that
households in urban areas consumed more fats and oils than their rural counterparts. In a study of
Greek households, Fousekis & Lazaradis (2005) concluded that the age of the household head,
the degree of urbanization, the percentage of expenditure devoted to food away-from home
(FAH), and per capita consumption expenditure affected the intake of nutrients; while household
head gender and educational achievements were effective only in certain locations in the study.
Gould & Villarreal (2006) in a study in China reported that 26% of household income was spent
on food at home (FAH); with household in the lowest income group spending 40% of household
income on FAH, while the highest income bracket household spent 15%. It was revealed that
percentage of food expenditure on food away from home (FAFH) was higher than on FAH.
Also, noted was decrease in percentage of income devoted to food with increase in income of
household.
24
Sabates et al (2001) noted that educational attainment of the main meal planner had
impact on food choice and nutritional quality of the resulting diet. Gould & Villarreal (2006)
observed that 40% of the household meal planners did not have a high school education. They,
also, hypothesized that household food choice patterns were influenced by the age structure of
the household members. Sub-Saharan Africa (SSA) is expected to experience growth in food
demand largely driven by rapid population growth. Demand for roots and tubers has also
increased over the years due to increased consumer and industrial needs emanating from
population pressure, favourable markets, government support and price interactions (
Nwachukwu, Agwu, Onyewaku & Egeonu, 2009). Agro – industries enhance product
diversification and improvement necessary to change the demand pattern for farm producers
(Brown, 1986).
2.3 Profitability Measures and Value addition
Profit is defined as total revenue minus total cost (Erikson, et al 2004). They outlined
four perspectives of profit; (i) profit is a reward for taking risks in business; (ii) profit results
from the control of scarce resources; when a citizen owns a resource that others want, the others
will bid up the price which will then generate profit for the owner; (iii) profits exist because
some people have access to information others do not have. This special knowledge include
secret formulas or processes, exclusive right to inventions, property rights and patents, e.t.c.,
ensuring profit for the creator; and (iv)profits could exist simply because some businesses are
managed better than others; their managers are often creative planners and thinkers with efficient
organizational abilities.
The accountant looks at profit as the income that remains after all contractual, measurable
costs are subtracted. The economists however determine profits by examining alternative uses of
25
resources within the firm. Hence, economic profit is defined as accounting profit less opportunity
cost. It forces an examination of alternative uses of resources and helps in analyzing alternative
courses of action by the firm (Kay, 2000).
It is contended that the entrepreneur’s motive for producing any given product is that of
the attainment of maximum profit, while consumers or buyers’ motive is that of utility
maximization (Olayide & Heady, 1982). The profit motive is the ‘spark plug’ of a market
oriented capitalist economy. The prospect of earning and keeping a profit serves as the incentive
for creativity and efficiency among people. It stimulates risky ventures and drives people to
develop ways of cutting costs and improving techniques, always in an effort to satisfy consumers
desires (Erikson et al, 2002).
Kotler & Keller (2006) suggested that firms should be able to measure the profitability
of their products, territories, customer groups, segments, trade channels and other sizes;
emphasizing that this will help the management to determine whether any products or marketing
activity should be expanded, reduced or eliminated. Marketing profitability analysis generally
indicates the relative profitability of different channels, products, territories or other marketing
entities. More so, companies are showing interest in using market profitability analysis or broad
version activity based cost accounting (ABC) to quantify the true profitability of different
activities (Cooper & Kaplan, 1991). Profitability can be improved by managers if there is
reduction in resources needed to perform various activities or make resources more productive or
acquire them at least cost; or alternatively raise prices on products that consume heavy amount of
support services (Kotler & Keller, 2006).
Various models of profitability have been used in production and marketing researches.
Onuoha, Okereke & Asumugha (2009) applied the gross margin and net income analysis in
26
determining profitability of feed-mills in Umudike, Abia State, Nigeria; in which profitability
was reported at 1.06 for every naira spent. In similar study on paddy enterprises, Okoye &
Anuebunwa (2009) reported gross margin of 33% and 27% for the two enterprises. Ezedinma
(2007) noted that the profitability of a market is a direct indicator of degree of efficiency of the
marketing system.
2.3.1Profitability analysis
In economic theory, profit is maximized at output level where marginal cost equals
marginal revenue (Koutsiyianis, 1979). Thus, one can determine profit by comparing total
revenue with total cost, or by comparing average price and average total cost. Multiplying the
difference by the total output gives the total profit or loss (Nellis & Parker, 2000).
Olayide & Heady (1982) derived unconstrained profit maximization given two factors and one
product production function as follows;
Q = f (x1, x2) ……………………………………. 2.1
C = r1 x1 + r2 x2 + b……………………………. 2.2
Where,
Q = output, C= cost, x1, x2 are inputs;, r= price of input, b= fixed cost.
Understanding that profit (π) is given as revenue (price multiplied by quantity) less cost,
and then one has a function of the form:
π = Pf (X1, X2) – r1 X1 – r2 X2 – b) ……………………. 2.3
To maximize profits, we set the partial derivatives of π with respect to Xs and equate to
zero and solve. Hence profit is maximized at output level where marginal cost (MC)
equals marginal revenue (MR), given p= price of output. This is given as
δπ/δx1= pf1-r1 = 0 …………………..2.4
27
δπ/δx2 = pf2 – r2 = 0 …………………… 2.5
Solving 1and 2 then
Pf1 = r1; pf2=r2 ……………………… 2.6
If the price of a commodity exceeds the average total cost (ATC) of production,
supernormal (pure) profits are made as opposed to normal profits; and if the price is below
average variable cost (AVC), the firm is at shut down point, in the short run (Nellis & Parker,
2000). Normal profit is the minimum rate of profit which must be earned to ensure that
sufficient number of people are prepared to invest, organize production and undertake risk in an
industry (Nellis & Parker, 2000; Frank & Bernanke, 2001).
2.3.2 The value adding process in agriculture
The difference in values of raw agricultural product before processing and after
processing is the added value. Black (2002) defined value adding as the total value of a firm’s
output less the value of inputs purchased from other firms. Value added is thus what is left to be
shared between wages of the employees and profits for owners of the business. Gittinger (1972)
noted that one could have gross value added, in which case the value of inputs is not subtracted,
and the net value added where deductions are made for inputs including depreciation, labor,
management, and cost, among others. In this case value added could be positive or negative as
the case may be. In agricultural processing, Austin (1992) and Brown et al, (1994) explained that
the difference between cost of ingredients (including farm produce), and the ex-factory or post-
processing price of the finished products is the value added through processing. Without
prejudice to other opinions, this will be the working definition for this study.
Agricultural marketing provides form, place, time and possession utilities to consumers
(Kohls & Uhls, 2000). Agricultural processing changes the form of the farm produce to a state
28
required by consumers or next stage in a manufacturing scheme, hence creating form utility.
Olukosi & Isitor (1990) described processors and manufacturers’ activities as increasing the
quality and value of farm produce.
The value adding process however runs in the entire food marketing channel from
production through processors, the traders to the final consumer. The optimization of the food
marketing chain is now attracting attention from agencies involved in agricultural research and
rural development (Fellows & Hampton, 1997; Bruinsma, 1999). The technical advisory
committee to CGIAR also takes the view that research on agricultural productivity needs to be
complemented by more research on product utilization and post-production activities, storage,
processing and marketing as part of a coherent approach (Bruinsman, 1999). Ezedinma (2007)
also advocated commodity chain approach to agricultural development. Ganewatta, Waschik,
Jayasuriya & Edward (2005) observed that the East Asian industrialized countries adapted
policies to enhance domestic processing of primary commodities as a tool for accelerating
employment, growth, export revenues and development.
Agricultural processing industry or Agro-industry has grown in size because of its
integration of agricultural and industrial activities (Austin, 1992). It is seen as probably the most
important component of agribusiness (Olayide & Heady, 1982). In the United States of America,
food processing constitutes the bulk of value adding activities and small businesses (Torok, et al,
1990). Agro- industry has also been defined as any activity that deals with the processing of
material of plant or animal origin, which is why agro-processing industries dominate
manufacturing activities in less developed countries where agriculture is the main stay of the
economies (Brown, Deloitte & Touch, 1994). Brown (1986) & Austin (1992) explained agro-
29
industries to include such activities as oil seed crushing, grain milling, fruit and vegetable
canning, meat packaging, the textile industry, and function of marketing.
It is said that one of the first steps on the road to industrialization is the processing
industry, so that starting a small rice mill or an oil press marks an early stage in industrialization
(Austin, 1992). More so a nation may not fully use its agronomic resources without a viable
agricultural processing sector, because most agricultural products including subsistence products
are processed to some extent (Brown, 1986). Brown, Deloitte & Touche (1994) pointed out that a
post-harvest enterprise can influence the volume and disposition of agricultural production,
likewise the degree of food self-sufficiency, it induces changes in infrastructure; enhance
employment and contribution to foreign exchange earnings. The establishment of agro allied
industry can in addition to immediate and direct benefits to farmers bring about development of
other infrastructural amenities such as improved transportation facilities, water and electricity
supply, schools and health services (Barau, 1979; Orewa, 1978).
2.4 Input Use and Efficiency Measurement
Agricultural productivity is an index of the ratio of the value of total farm input to the
value of output. The attainment of social welfare ‘parieto optimality’ of every society hinges on
the maximum use of available resources, which with every re-allocation of resources, everyone
is made better and no one is made worst off (Kutsoyianis, 1979; Black, 2000). The input- output
relationship in production process becomes important in four areas; (i) distribution of income,
(ii) allocation of resources, (iii) the relationship between stock and flow resources, and (iv)the
measurement of efficiency or productivity (Olayide & Heady, 1982). Kutsoyianis (1979) also
emphasized the principle of efficiency in the overall equilibrium of the consumers, producers
and the markets. Maximum resource productivity then means obtaining the maximum possible
30
output from the minimum possible set of inputs. In this perspective, optimal resource
productivity implies an efficient utilization of resources in the production process; thereby
expressing synonymy of productivity and efficiency (Olayide & Heady, 1982). Lassita &
Odening (2003) noted that maximum productivity also called ‘best practice’ is revealed in the
production frontier and, hence, efficiency involves the distance to this frontier.
2.4.1 Efficiency measurement
Efficiency is a term that applies in several aspects of economic life, defined by Black
(2000) as getting any given results with the smallest possible inputs, or getting the maximum
possible output from given resources. This is applied both in agricultural production and
marketing. In agricultural marketing, the term market efficiency is used to describe the
performance of the marketing system, encompassed in performance of marketing factors in
which efficiency is defined as increasing the output – input ratio (Erikson et al, (2002). Olukosi
& Isitor (1990) observed that efficiency was an engineering terminology commonly used in
machines to measure the ratio of output to input. Hence, marketing efficiency can be defined as
the maximization of the ratio of output to input of marketing (Kotler & Keller, 2006). The inputs
of marketing include the resources expended in providing marketing services such as capital,
labour and management.
Meanwhile, marketing output includes time, form, place and possession utilities which
consumers derive from the marketing of products. Therefore, marketing inputs are the cost of
providing marketing services whereas marketing outputs are the benefits or satisfaction created,
or the value added to the commodity when it passes through the marketing system (Olukosi &
Isitor, 1990; Kotler & Keller, 2006). Efficiency ratios can be measured in physical terms or in
monetary terms (Bamire et al, 2007). If in monetary terms, the concept becomes a ratio of
31
benefits to cost (Olukosi & Isitor, 1990).The higher the ratio the higher the marketing efficiency,
and the better the marketing system.
Estimating the inputs of marketing is much easier than the outputs of marketing. The
input cost of marketing is the value of all resources used in the marketing process. The best
measure of marketing output (consumers’ satisfaction) is the price consumers are willing to pay
for the farm products with different levels of marketing utilities (Shepherd & Futrell, 1970;
Downey and Trocke, 1981; Olukosi & Isitor, 1990).
Marketing efficiency, according to Kohls & Uhls (2000), Erikson et al, (2002), and
Kotler & Keller (2006) could be attained in any of the following situations:
(a) output remains constant while input decreases;
(b) output increases while input remains constant;
(c) output increase more than input increase; and
(d) output decreases more slowly than decreases in input
Marketing efficiency can be looked upon in two perspectives, operational efficiency or
technical efficiency and pricing efficiency or economic efficiency. Operational or technical
efficiency measures the productivity of performing marketing services within a firm, with
emphasis on the cost of providing marketing services. This assumes that the essential nature of
output of goods and services remain unchanged, hence the focus is on reducing the cost of inputs
used in doing the job. For instance, an innovative method of crating eggs or tomatoes may not
only increase the quantity handled in a given space, but also reduce damages during
transportation. In th
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