Competition Issues in the Agricultural Sector in Nigeria

7/27/2019 Competition Issues in the Agricultural Sector in Nigeria

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COMPETITION ISSUES IN THE AGRICULTURAL SECTOR IN NIGERIA

By

Professor Ade S. Olomola

Nigerian Institute of Social and Economic Research (NISER), Ibadan

Invited Paper Presented at the Regional Conference of the 7Up3 ProjectCapacity Building

on Competition Policy in Select Countries of Eastern and Southern Africa- Organized by the

Aha Ethiopian Consumer Protection Association and Consumer Unity & Trust Society

(CUTS) International, India, Held in Hilton Hotel, Addis Ababa, Ethiopia.

March 27-28, 2006


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COMPETITION ISSUES IN THE AGRICULTURAL SECTOR IN NIGERIA

By

Professor Ade S. Olomola

Nigerian Institute of Social and Economic Research (NISER), Ibadan

1. INTRODUCTION In Nigeria, the government is committed to the entrenchment of competition in the economy. Itis becoming increasingly recognized that effective liberalization and pro-competition policiescan enhance the country s domestic production and access to international market especiallywithin the context of globalization. In this connection the Federal Government is intensifyingactions on its deregulation and privatization policies and has established an Advisory andRegulatory Authority on competition to deal with all forms of anti-competition practices,mergers and acquisitions in the conduct of business in Nigeria. Currently an Act for theestablishment of a Federal Competition Commission is in the offing and work is already at anadvanced stage on a draft bill. The objectives of the draft bill are to (i) promote efficiency,

adaptability and development of the Nigerian economy, (ii) provide consumers with competitiveprices and product choices, (iii) promote employment and advance the social and economicwelfare of Nigerians, (iv) ensure that small and medium enterprises (SMEs) have an unrestrictedopportunity to participate in the economy and (vi) protect Nigerian industries from unfair tradepractices. When legally set up, the functions of the commission will include (i) formulation ofmeasures to increase market transparency including weights and measures administration, (ii)initiation of policy review periodically to ascertain anti-competitive and restrictive practiceswhich may adversely affect the economic interests of consumers, (iii) investigation of persons orfirms in relation to their conduct of business in Nigeria to determine whether such businesseshave engaged in reported cases of sharp practices in contravention of the law and initiateappropriate sanctions where necessary, (iv) elimination of anti-competitive, misleading, unfair,defective or questionable agreements, trading and business practices at the request of theMinister or President and (v) resolution of disputes or complaints and issuance of clear directiveswhere necessary (see Financial Standard, September 5, 2005).

There is no doubt that the promotion of healthy competition within the economy as aresult of the activities of the proposed commission will be beneficial to the agricultural sector.The sector is witnessing considerable transformation and commercial orientation and it has to bestrengthened for effective competition. Agriculture continues to play a significant role in theNigerian economy. It contributes about 40% of the GDP, plays key role in the supply of food,provision of employment, generation of income, supply of raw materials to the agro-industrialprocessing and manufacturing sector and foreign exchange earnings through exports. In view ofits large size and economic importance, the various policy reforms which sought to liberalize theeconomy and entrench competition over the last two decades especially since the introduction ofthe Structural Adjustment Programme (SAP) in 1986, were quite visible in the sector. This paperreviews the trend in competitive restructuring of the agricultural sector over the years focusingon pre-reform policies affecting competition in the sector, the pro-competition reform measuresand anti-competitive practices which have tended to adversely affect the performance ofagriculture over the years.


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2. POLICIES AFFECTING COMPETITION IN THE AGRICULTURAL SECTORPrior to the inception of SAP in 1986, several policies aimed at providing support for theagricultural sector turned out to be regarded as anti-competitive. The policies were introduced inthe past due to market failures in the allocation of resources and the need to achieve sustainedgrowth and equitable development in the country. They included:

(i) price control(administered output prices for export commodities)(ii) guaranteed minimum price for grains(iii) input subsidy(iv) centralized marketing(v) export monopolyMarketing boards were initially created to handle all the marketing activities relating toscheduled export commodities such as cocoa, rubber, palm produce, cotton, groundnut etc. evenbefore independence in 1960. The marketing board system was reformed in 1973 and 1976/77due to mounting criticisms against the inefficiencies and abuses that characterized the operationsof the boards (see Olomola and Akande, 1990). The reforms led to the creation of individual

commodity boards for both export and food crops in 1977. The boards were responsible for theexport of agricultural commodities and fixing of prices of agricultural products in addition toother agricultural development functions. These boards were in operation until 1986 when theywere abolished at the inception of SAP. In respect of food commodities, government institutedthe so-called guaranteed minimum prices (GMP) which fixed the floor prices which governmentcould buy food commodities if the ruling market prices fell below the minimum. The objectiveof GMP was to ensure remunerative income to producers. However, GMP policy was quiteineffective as official prices did not offer effective competition at the domestic market level. Thiswas so because the official guaranteed minimum prices were below the farm gate prices (Table1).

Table 1: Average Farmgate and Guaranteed Minimum Prices of

Selected Food crops in Nigeria (N/tonne)

CropsAverage Farmgate

Price 1981-1985

(1)

Average (GMP)

1981-85 (2)% Difference

Between

(1) & (2)

Beans 1,046 408 -61.0

Maize 616 257 -58.3

Millet 489 274 -44.0

Rice (Paddy) n.a 433 -Rice (Milled) 833 594 -28.7

Guinea Corn 428 267 -37.6

n.a = Not availableSource: Complied from CBN Annual Reports and Statement of Accounts (variousIssues).


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In the past input subsidies were extended to a wide range of farm inputs, including fertilizers,improved seeds, herbicides, pesticides and agricultural implements and machinery. Certain farmservices were also subsidized, and these include land clearing and tractor hiring services,irrigation, farm credit, extension services, and agricultural insurance. Subsidy arrangement waspartly intended to address and offset the bias against agriculture and rural life, which arose from

the heavy implicit taxation of farm incomes arising from produce pricing and marketingarrangements. Subsidy was also intended to improve the competitiveness and productivity offarming enterprises. It was anticipated that subsidy would make farmers to adopt newproduction practices based on improved technologies, featuring the use of fertilizers, improvedseeds and other modern inputs. The anticipated goal of subsidy policy was an increase inagricultural output and productivity. Between 1980 and 1990 huge amounts were committed toproviding agricultural subsidy. Fertilizer was the most prominent of the various inputs andactivities subsidized by the government. Nearly a third of the yearly capital expenditure onagriculture by the Federal Government was devoted to providing fertilizer alone between 1981and 1990. During the same period, 1980-90, the average subsidy rates on fertilizer rangedbetween 72% and 85%. The input subsidy policy may be plausible in principle but its

implementation in Nigeria has caused distortions in the input market. The subsidies often benefitunintended beneficiaries who often manipulate the supply of fertilizer and create artificialscarcity in the market leading to the development of black markets and associatedimperfections.

3. COMPETITION IN THE PRODUCT MARKETS

With the economic crisis witnessed in the country in the early 1980s it was argued that both themarket and the government have failed in their basic responsibilities and that solution to theeconomic management problems would emerge if there was greater reliance on marketmechanisms in the conduct of economic activities. Thus, when the SAP was introduced in July1986, the main policy elements were as follows: (i) adoption of a realistic exchange rate, (ii)deregulation and greater reliance on market forces, (iii) trade liberalization, (iv) removal ofsubsidies on public sector goods and services, (v) privatization and rationalization of publicenterprises and a general reduction of the government sector and (vi) strong demandmanagement policies (particularly tight monetary and credit policies). In the agricultural sector,these translated into the following policy measures.

S product price decontrol since the inception of SAPS desubsidization (withdrawal of subsidy on agricultural inputs and services)S abolition of commodity boards


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S privatization and commercialization of agricultural and agro-industrial enterprisesWith the implementation of SAP, the commodity boards were abolished and free marketpricing was instituted in line with trade the liberalization measures. The excessive

implicit taxation of farm incomes which existed before the beginning of SAP was thuseliminated. Prices not only converged with world market prices but were also enhancedby significant depreciation in the value of the local currency, the naira. This developmentmade farmers to become competitive in both the product and factor markets. In addition,payments were not only prompt but were sometimes pre-paid, in the form of creditadvances which producers never enjoyed in the past. Further, producer-exporters andtheir associations were allowed to retain the foreign exchange proceeds from exporttrade.

Moreover, the commercialization of agricultural parastatals such as the RiverBasin Development Authorities and the privatization of agro-allied enterprises was in linewith the market orientation and liberalization policies of government. Nonetheless, with

regard to the agro-industrial enterprises it has been suggested that the adoption of theprivatization policy across the board without due cognizance of the specific problems ofeach enterprise was unnecessary. According to Olomola (2001), what is required to putthe enterprises on the path of improved performance may well be improved managementactions, competitive restructuring, efficient marketing management and macro-levelregulatory reform rather than divestiture.

By and large, operations in the agricultural sector are largely in the hands of theprivate sector and there is a high tendency to rely on market mechanisms. Specificoperations in the cocoa industry and the grains market can be used to illustrate the extentof competition in the market. In what follows we shall present case studies from thedocumentary of the FAO (2004) which focused on the agribusiness sector and its supportinstitutions in Nigeria for this purpose.

3.1 Competition in the Cocoa IndustryAccording to the FAO report, competition is high among cocoa buying agents.International market prices are published daily in the newspapers and the farmingcommunity enjoys full access to information. Buying agents are used who employbrokers who deal with the farming community. Cocoa in Nigeria is largely produced on asmall scale. The average delivery per farmer is less than 5 bags (roughly 300kg perhectare of cocoa) per season. The exporter has access to international funds and advancesmoney to buying agents in the main season. The agents make weekly verbal contractswith farmers and agree on price. If prices fall, the farmer has to deliver more beans to thetrader, which does not always happen, if prices rise, the buyer has to offer more,otherwise the agent defaults on the contract. Links between producers and overseasprocessors are well established. Due to the small-scale nature, international and localtraders are in charge of collection, transport, grading/drying, etc. The initiators of thestrong links historically have been overseas processors who relied on the government forinternal buying. After the collapse of the Cocoa Board private traders dominated internalbuying. Competition in cocoa buying is high, benefiting the farming sector. An estimated90 percent of the world market price is paid to the farmers. The report concludes that in


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spite of a lot of recent mergers and acquisitions due to lower profit margins in theinternational trade, the cocoa sector in Nigeria is still profit making and is one of the mosttransparent systems in West Africa.

3.2 Competition in the Grains Market

The operations in the grain market largely depend on the forces of supply and demand.Companies that use grains as raw materials buy in the open market following their ownindividual arrangements. The FAO report reviewed the operations of a particularcompany -Guinness Nigeria Plc which is a multinational company that has been in thebrewing business in Nigeria since 1950. Its products include Guinness extra stout, HarpLager beer and Malta Guinness. According to the report, the company uses agents topurchase grains (sorghum) or trusted suppliers who had earlier bought fromproducers/farmers at prevailing market prices based on a formal contract. First, thecompany will receive applications or letters of intent from prospective suppliers. This isfollowed up by a local purchase order (LPO) to the buying agent to supply grains within aspecified number of days to any of the company's buying centres at Kaduna, Zaria, Kano,

Agbede, Ewu, and Sapele. The LPO specifies quality requirements such as percentage ofinsect damage, weather damage and foreign matter content. The price paid for grain tothe buying agent is based on market information but will usually cover the market priceof grain, market charges, transport to buying centre, handling charges at buying centre,and a premium. Grain purchases are done at specific times of the year.

4. ANTI-COMPETITIVE PRICES IN THE AGRICULTURAL SECTORThe anti-competitive prices and practices in the agricultural sector have domestic andinternational dimensions.

4.1 Sources of Anti-Competitive Prices in the Domestic Economy There are two important sources of anti-competitive prices in the domestic economy.They are:(i) use of out growers or contract farming and(ii) reliance on buying agents by most agribusiness firms as strategies for the local

sourcing of raw materials.Contract farming is an important strategy for sourcing raw materials by agribusinessfirms especially in the beer, flour-milling and tobacco industries. Apart from competitionfrom consumers and other industries, most agribusinesses also have storage problems,making it difficult to stock raw materials. This calls for the use of contract farming toensure adequate quantities of raw materials on specified delivery dates. Contract farmingexperiences in Nigeria have portrayed mixed results in terms of their pro-competitioncharacteristics. For instance in Nigeria, the British American Tobacco (BAT) started theNigerian Tobacco Company in 1933. Initially, the company contracted growers toproduce green leaf (uncured) tobacco and provided seedlings, technical assistance andcredit. The company decided to transfer the curing and grading functions to selectedgroups of growers in 1954. In 1969 it started to experiment with farm-level curing andgrading. Farmers interest in joining the programme was very strong and within five yearsover 2,100 were involved. Much of the success has been attributed to the quality ofextension services, the continuous technical and institutional experimentation of the


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company in search of more effective procurement systems, the commercial orientation ofthe people in the project area and institutional arrangements for the provision of credit(see Minot, 1986, Olomola, 1991). The experience with oil palm production under themanagement of parastatals in Ondo State of Nigeria is not as impressive. According toOlomola (1991), contract farming under the smallholder oil palm scheme which started in

1975, was characterized by monopsony abuses. The scheme failed to induce massiveparticipation by smallholders due to defective management, inadequate funding,excessive market regulation and price control.

As regards the use of buying agents, it has been found that in most cases, thebuying agents tend to exploit the farmers by offering low farm-gate prices while takingadvantage of the poor market information and scarcity situation in the urban marketplace. The result is that farmers do not respond as expected to price signals while the end-users continue to suffer from inadequate supply and rising costs. In the final analysis, theprice and income effects of the linkages on the agricultural sector tend to be grosslylimited (see FAO, 2004).

4.2 The International PerspectiveIn spite of the increasing emphasis on globalization and the efforts of the World TradeOrganization (WTO), there are anti-competitive practices in the developed countrieswhich have adverse effects on the ability of many African including Nigeria to compete(see Olomola, 2005a). Two of the policy measures which are can affect competition inthe Nigerian agricultural sector are (i) agricultural subsidies in the developed countriesand (ii) export dumping.

4.2.1 Agricultural Subsidies in Developed CountriesThe continued high levels of support for farmers in rich countries is the majorshortcoming of the Uruguay Round Agreement. According to the OECD, developedcountries continue to provide close to $1 billion per day to their farmers little differentfrom 15 years ago. While the Uruguay Round Agreement did encourage countries to shiftfrom trade-distorting subsidies to non trade-distorting subsidies, more than 60% of thesupport provided to farmers in wealthy countries still distorts trade. The US spent $1.3billion on income support for rice farmers in 1999 2000 when its total rice productionwas worth $1.2 billion. Japan s subsidies to its farmers, on the other hand, are greaterthan the entire contribution made by agriculture to the nation s economy. The totaltransfers to agriculture amounted to 1.4% of GDP in 2000, compared to the sector s 1.1%share of GDP (Sharma, 2003). Despite the decoupling of subsidies by the rich countriesand the reform of the common agricultural policy undertaken in the EU since 2003, theexisting subsidies still cause considerable distortions in the global market and constitutebarriers to developing countries exports. The EU spends about 40% of its budget (some$60 billion) in subsidies for farmers (Godoy, 2005). Agricultural export subsidies areparticularly debilitating for developing countries because they artificially lower worldmarket prices for their exports. In the short term, low income countries benefit fromlower food import prices. But in the longer-term, farmers in low-income countries cannotcompete against subsidized imports and are forced out of business. Developing countriescannot afford to subsidize their farmers, and their farmers cannot compete against highlysubsidized farmers in developed countries. Effects of subsidization seem to be


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particularly severe in Africa. Indeed, studies have shown that EU agricultural policieshave reduced African exports of milk products by more than 90%, livestock by nearly70%, meat by about 60%, non-grain crops by 50% and grains by more than 40% (seeHassett and Shapiro, 2003). The maintenance of agricultural subsidies by developedcountries is a flagrant betrayal of their exploitative propaganda of market liberalization. It

is a predatory mechanism used by them to exclude farmers from developing countriesfrom both international and domestic markets. They goaded governments in developingcountries to withdraw subsidies and liberalize their economies while they keep subsidiesin their own economies at the highest level.

4.2 Export DumpingThe futility of WTO efforts and agreement to end market distorting practices inagriculture is exemplified by the rising trend of agricultural export dumping since itsinception about a decade ago. Available data from USDA and OECD indicate that USagricultural commodities continue to be sold well below the cost of production. Theproportion by which the average prices of the commodities fell below the cost of

production in 2003 stood at 28% in the case of wheat, 10% for soybeans, 10% for corn,47% for cotton and 26% for rice (see The NewFarm, 2005). The US farm policies havemore or less institutionalized agricultural dumping over the years. As shown in Table 2,each of the commodities witnessed considerable increase in the dumping levels betweenthe sub-periods 1990-1996 and 1997-2003.

Table 2: Trend in US Agricultural Export Dumping Levels, 1990-2003

Commodity Export Dumping Levels

1990-1996 (% per year) 1997-2003 (% per year)

Wheat 27 37

Soybean 2 11.8

Corn 6.8 19.2

Cotton 29.4 48.4

Rice 13.5 19.2

Source: Adapted from The NewFarm, March 2005.

Despite the free trade era being championed by the World Trade Organisation,industrialized countries have protected themselves against the most dynamic exports ofdeveloping countries, including textiles and clothing, agriculture, and processed rawmaterials. Huge surpluses of products like sugar, dairy and beef accumulated under hightariff walls in industrialized countries, are often disposed of by resorting to subsidizedexports, to the detriment of African producers in particular, as they displace theirproducts in third country (export) markets and in the domestic markets of Africancountries themselves (ECA, 2000).


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5. CONCLUDING REMARKSNigerian agricultural sector has witnessed considerable competitive restructuring over the

last two decades. However, the new competitive environment while constitutingconsiderable incentive to farmers, has failed to stabilize prices and, therefore, farmincomes. The international agricultural commodity prices have been quite unstable, thuscreating unsteady and inadequate earnings from agricultural exports against expectations.Besides, there have been complaints of sub-grade quality of produce as a result of lack ofadequate supervision in the new trade regime. The sector has to come to grips with thechallenges of imperfect global agricultural market with rising globalization and its non-inclusive tendencies. According to Olomola (2005b) there is need to improve the marketstructure and performance. The export orientation must emphasize a shift from rawmaterials to value-added products. Internal and external terms of trade must improve andconsideration attention must be given to standard and quality control. Currently both

farmers and agribusiness firms are forced to operate in a non-transparent and speculativebusiness environment. Many agribusiness firms and farmers are unable to ascertainbeforehand where to buy or sell commodities in order to maximize profits and reduce therisks associated with marketing. This has created a class of market agents who havecapitalized on this non-transparent market situation and lack of information to rip offboth farmers and agribusiness firms in Nigeria. To improve competitiveness, there mustbe improved access to market information not only for the traditional export crops butalso for other crops of industrial importance such as rice, sorghum, cassava, maize, andhorticultural crops.


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REFERENCES

ECA (2000)Globalization, Regionalism and Africa s Development Agenda , PaperPrepared for UNCTAD X, Bangkok, Thailand, February 12-19.

FAO (2004) Agribusiness Sector and Support Institutions in Nigeria in StrengtheningFarm-Agribusiness Linkages in Africa, FAO Corporate Document Repository. Culledfrom the Internet

Godoy, Julio (2005) No End to Subsidies in Sight ,Inter Press Service, June 17.Hassett K. A. and R. Shapiro (2003) How Europe Sows Misery in Africa , WashingtonPost, June 22.

Minot, N. W. (1986) Contract Farming and Its Effect on Small Farmers in LessDeveloped Countries Working Paper, No. 31. MSU International Development Papers.Olomola, A. S. and S. O. Akande (1990) Marketing of Nigerian Agricultural ExportCommodities Without the Commodity Boards An Invited Paper Presented at theSeminar on Export Commodity Trade Organized by the Export Commodities Co-ordinating Committee (ECCC) Under the Auspices of the Federal Ministry of Trade andTourism. Federal Palace Hotel, Lagos. September 26-28.

Olomola, Ade S. (1991) Financing Oil Palm Production Through Contract Farming NISER Monograph Series, No. 6. Nigerian Institute of Social and Economic Research,Ibadan.

Olomola, Ade S. (2001) Strategies and Impact of Agro-allied Parastatals Reform inNigeria, Agricultural Economics (24):221-228.

Olomola, Ade S. (2005a) Dimensions and Consequences of Exclusive Mechanisms inthe Globalization of Agriculture Paper Presented at the GSN 2nd InternationalConference, Novotel, Dakar, Senegal. August 29-31.

Olomola, Ade S. (2005b) Agriculture, Labour Market and Pro-Poor Growth InvitedPaper Presented at the AERC Seventh Senior Policy Seminar, Cape Town, South Africa.March

Sharma, D. (2003) Protecting Agriculture: Zero-Tolerance on Farm Subsidies ,Foreign Policy in Focus, February 5.

The NewFarm (2005) Agriculture Export Dumping Booms Over the Last Ten Years ,The Rodale Institute.

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Competition Issues in the Agricultural Sector in Nigeria