Hectarage and Output Responses of Major Crops to Market Liberalisation and Price Risk in Nigeria

 

ABSTRACT

Liberalization is part of the ongoing domestic market reforms and globalization policies that redefined government responsibility and actions, which affect agricultural development, and the welfare of farmers. This study examined hectarage and output responses of major crops to market liberalization, price risk and financial support. The objectives were to describe trends of output, hectarage and prices of these crops, as well as describe trends of non-price factors and estimate the effects of these factors on hectrage and output of selected crops. The study covered a period of 38 years from 1970 to 2007. Secondary data were obtained from the Food and Agriculture Organization (FAO) Statistics Data Base, Publications of Central Bank of Nigeria, (CBN) and National Bureau of Statistics. Data were analysed using descriptive statistics and seemingly unrelated regression model estimation. The descriptive statistics results showed that output of rice was the lowest among the cereals. It ranged from 403,000 to 4,165, 070 tonnes. Fluctuations that characterise nominal prices also marked the price risks. The nominal price risks for maize, rice and yam were the highest among the carbohydrate staples from 2005 to 2007. Time series property analysis showed that the variables satisfied criteria for estimation of ECM for the hectarage allocations and output estimates. Regression analysis showed that the coefficient of determination for hectarage and output equations accounted for about 80% and 85% of variation in hectarage and output of the majority of the crops. Price and price risks were major determinants of hectarage allocation and output of the crops. Real exchange rate had positive relationship with hectarage of yam but negative relationship with output of beans, cocoa and coffee. Volume of rainfall had positive relationship with the output of rice, yam and cocoa beans but a negative relationship with those of maize, sorghum and oil palm. Ten percent increase in rice price will lead to about 16 and 24 percent increases in its hectarage and output, respectively. Sorghum showed a similar pattern only that an increase in its output was 9 percent, which was less than that of rice. It was recommended that farmers should cultivate crops such as rice, maize, cassava and yam have positive relationship with the liberalization exercise. The Government should continue to attract FDI since it had positive impact on output of rice, yams, beans and cotton coffee and oil palm as well as increase funding of ACGSF since it had positive impact on hectarage of rice, maize, cassava, groundnut, and oil palm. Nigerians should redirect their taste to local foodstuffs and goods made from local agricultural raw material to limit the effect of market liberalization through substitution with imports. This is because the consumption of imported food products, which has local substitutes, limits demand for local production, which will, results in low hectarage allocation and subsequently lower output.

CHAPTER ONE

   INTRODUCTION

1.1. Background of the Study

Okuneye, Aromolaran, Adetunji, Arowolo, Adebayo and Ayinde (2001); Alabi and Chime, (2008) have, attributed the present economic problem in Nigeria to the poor performance of the agricultural sector and have argued that the persistent economic recession in Nigeria since the post oil boom era, could be corrected with improved performance of the agricultural sector. The near collapse of the Nigerian agricultural sector during the era of oil boom (1972 – 1975) and the increasing food insecurity are as a result of inconsistent and unfocused government policies (Alabi and Chime, 2008). The small-scale farmers that dominated the production sector produce about 85% of the total output (Okuneye, 1995). The majority of the farmers are small scale producers who are affected by inconsistent and unfocussed government policies, and poor infrastructure resulting in low production, high prices of food items, and underdevelopment of the sector and poverty of farmers (Alabi and Chime, 2008). Ojo (1994) argued that the Nigerian agricultural sector was rendered less competitive over time through over-valued currency, inappropriate pricing policies and rural-urban migration, which caused the dearth of farm labour. Other factors that can militate against agricultural production in Nigeria include declining arable land area per capita, erratic rainfall and climatic change, poor input supply such as fertilizers, low capital expenditure and poor financial resources (Imahe and Alabi, 2005). Mahendra (2007) aptly noted that agricultural GDP in parts of the developed world will benefit from climatic change, whereas in many developing regions it will decrease. The present poor state of agriculture may not necessarily cause the eradication even from the mind, of the positive and significant role it played in the Nigerian economy.

The agricultural sector used to be the mainstay of the Nigerian economy. The exports of primary agricultural products dominated its external trade, especially from 1960 to 1970 when the exports of cocoa, palm produce (palm oil and palm kernel), groundnuts, cotton and rubber accounted for about 80% of total exports. It was also recorded that Nigeria was the largest exporter of groundnut, accounting for 40% of the world supply (Oyejide, 1987). The sector was the main source of food for the population and served as means of livelihood for over 70 percent of the population as well as major source of raw materials for agro-allied industries (Alabi, Aigbokhan and Ailemen, 2004). The Dutch disease phenomenon which crept into the economy as a result of the crude oil boom and the neglect of other productive sectors adversely affected agriculture. The neglect of the agricultural sector resulted in a decline in food production, increased rural-urban migration and importation of food. By the mid-seventies, declining output of the agricultural sector and the increasing domestic consumption needs made output of primary commodities such as palm oil, cotton and rubber to fall in the export trade. For example, groundnut completely disappeared from Nigeria’s export while cocoa declined from its 30% contribution to export to about 10% (Olopoeni, 1991).  Before the oil boom in the early 1970, by 1970 itself, the percentage share of agricultural export was 31.62 and proportion of food imports in relation to total imports was 9.1 percent. These values of share of agricultural export have continued to be on the decline while that of food imports has continued to incease.  The nominal value of agricultural export increased from 0.22 billions to 38.57 for the periods under review but the real value when defleted with exchange rate shows that value of agricultural export was more, prior to the oil boom era and shortly during that era. Acomposite view of performance of Nigerian agricultural export is presented in Table 1.1.

Table 1.1: Nigerian Agricultural Export Performance in relation to Food Imports

Year Total Agric. Export

 

(N’ Billions)

Exchange rate Share of Agric. export in Total export (%) Tood imports as

 

% of Totl Imports

1970-1974 0.228 0.628 14.462 9.064
1975-1979 0.323333 0.589 4.308333 12.93667
1980-1984 0.24 0.763 2.448 18.27
1985-1989 1.256 4.491 4.476 12.156
1990-1994 3.30 19.925 2.148 8.064
1995-1999 16.186 81.100 1.516 13.54
2000-2004 17.18 95.783 0.628 12.172
2005 only 38.57 128.27 0.61 9.41

Adopted from Idachaba, 2006;  Achike, Mkpado and Arene, 2008.

The performance of the crude oil sector improved considerably while that of agriculture and other sectors of the economy fared badly. But by the early 1980s, there was a slump in the world crude oil market. Owing to over-dependence on crude oil export, serious economic crises set in on the economy because of inadequate fund to execute national projects. This led to an increase in Nigeria’s external debt from one million United States dollars in 1970 to 21 million in 1981 (Oyejide 1987). It was recorded that by 1984 there were about 30 importable crops under ban (Oyejide 1987). This measure reduced external debt to US $9.4 billion but by 1986, the external debt rose to about US 12 billion (Olusegun, 2006)

The need for complete overhauling of the economic system led to the introduction of the Structural Adjustment Programme (SAP) in 1986. The objectives of SAP include to:

  1. diversify Nigeria’s production and exports based on promotion of agricultural production and exports,
  2. liberalize trade and exchange rate so as to achieve relative price structure in the economy which will be suitable for export promotion and import compression.

The removal of restrictions or control to ease exchange of goods and services is termed liberalisation, and when such an exercise aids the exchange of goods and services across the boundary of a country it is termed trade liberalisation, but when it aids the exchange within a country, it is termed market liberalisation however, both type of liberalisation are linked. The removal of commodity marketing boards to allow the forces of demand and supply to determine price is a major market liberalisation policy in Nigeria. When the forces of demand and supply interact to set price (instead of government price regulations), producers face higher price fluctuations leading to  price risk and the price risk is a measure of the deviation from the present price.

The libralization of agricultural marketing services has been part of a World Bank/IMF package of economic reforms in developing countries within the SAP period. The argument has been that the agricultural sector in developing countries is inefficient due to various state interventions with respect to marketing, pricing and various forms of subsidies (Chirwa, 2000).The implementation of SAP led to adoption of floating foreign exchange which resulted in depreciation in the relative value of naira by more than 100% (Khan and Knight, 1985; Soludo, 1995). Trade liberalisation was also accompanied with domestic market liberalisation. Thus, the introduction of SAP resulted in the abolition of commodity marketing boards (CMBs). The closure of CMBs, provided a good opportunity for the Nigerian Export Promotion Council to be established and independent or private exporters were also registered to facilitate trade. This exposed farmers to greater price volatility/instability, despite the efforts of the export promotion council, which concentrated on increasing production and exportation of some crops, while domestic demand and supply determine mainly the price of other crops. In other words, market liberalisation, a SAP component can cause financial (exchange rate, interest rate, and price) volatility at least in the short-run and this phenomenon is capable of increasing price risk with adverse consequences on hectarage expansion by agricultural investors.

Despite exchange rate volatility and price risks, the agricultural sector as a whole grew considerably since 1987 after the introduction of SAP and liberalisation of both internal and external markets (Soludo, 1995; Olusegun, 2006). Could this be growth or development and what are the factors that led to it? Agricultural farm gate producer prices were formally fixed by technical department of the marketing boards but for sometime now are purely markets determined. It has been documented that the free market pricing policy under SAP led to increase in agricultural production and nominal income of farmers. (Ajakaiye,1987; Oyejide, 1990; Kwanashie et al, 1998). Given the increased production, the expectation of policy makers is that liberalisation of the market will make price stable since opening up markets will make price stable because it will result in a greater number of producers and consumers adjusting their supply and demand,  respectively thereby reducing adjustment in prices (Olusegun, 2006). There is need to verify whether the experience during SAP was just growth or actually development by examining the effects of the ongoing liberalisation of agriculture.

It is not an overstatement to say that agriculture is instrumental to national development in sub-Saharan African developing economies. Consequently, adequate, effective and sustainable funding of agricultural projects especially at micro level, which constitutes the major proportion of the economy, has been a re-occurring issue in development literature. Nigerian governments had adopted various methods to meet this need, one of which is by seeking the assistance of the private sector of the economy. Private financial institutions resent granting loans to small-scale farmers, whether as individuals or as a group, on the premise that such farmers can not provide adequate collateral and also because high risk and uncertainties are the hallmark of agriculture due to its biological nature.  Efforts to improve financing may not produce the desired result if the industry is not lucrative due to poor pricing hence, the need to determine the factors affecting price.

The removal of government price support due to liberalisation does not imply that government is no longer interested in price stabilization and increased output. Other non-price incentives, which can increase investment and production that Nigerian government has continued to use, include micro-finance, especially the Agricultural Credit Guarantee Scheme (ACGSF), rural infrastructure and attraction of foreign direct investment (FDI).

According to World Trade Organization (WTO 1998), a holistic view of agriculture shows that the area under cultivation was about 34 million hectares, representing about 37% of total arable land mass. Post harvest losses are substantial, estimated at 40% of farm gate output (Ogunkola, 2003). Farmers are also characterized by a strong dependence on agricultural labour market, relatively little forms of savings or storage facilities and cultural practices adopted are highly labour intensive. The socio-economic and production characteristics of the farmer, inconsistent and unfocussed government policies, and the poor infrastructural base, all interact in a strong way to destroy the sector, resulting in low production, high prices of food items, inflation, underdevelopment and concomitant poverty (Alabi and Chime, 2008). Due to the fact that the majority practises extensive farming, measurement of agricultural development needs to include consistent increase in hectarage, because given extensive production system, the larger the hectrage, the larger the output ceteris paribus. Thus, hectrage is a major determinant of output and can be very senitive to price risk. Price risk is the proportion of the prevalling price series that farmers can loose or gain due to changes in market.

1.2 The Problem Statement

Food insecurity is threatening the life and health of millions of Nigerians. Food production in Nigeria has not kept pace with population growth. This is because the population is growing at about 3.2 percent per annum while food production rate is at about 2.2 percent (FAO, 2005). Food importation is used to supplement domestic production but this drains the country’s foreign exchange earnings. For example, in 1970, when the economy was not liberalized, food import value was US $81.89 million but by 2003, when liberalisation has reached almost all aspects of the economy, food import bill came to $2,018.38 millions (CBN, 2004).

The demise of CMBs as a result of liberalisation has exposed producers to more price risk in addition to production risks. The fluctuations in prices which give rise to price risks can adversely affect production. Are Nigerian farmers risk averse? What are the effect of ongoing libralisation on hectrage and output of major crops?  Many studies on agricultural supply response have neglected the effect of market liberalisation and price risk on gross domestic supply. Instead, a number of studies have examined the effects of price and exchange rate on the volume of agricultural export either holistically or for specific crop or group of crops. To illustrate, Adubi and Okunnmadewa (1999) examined the relationship between price and exchange rate volatility on agricultural exports as a whole. Studies that involved specific crops included those by Philips (1996), Ayichi (1997), Chidebelu et al (1998), Arene and Odusolu (1998), Arene and Okafor (2000), Arene (2000), Okoli and Okoye (2005). These studies have concentrated on the effects of price and exchange rate on the export of one or a few of the following crops: cocoa beans, groundnuts, cotton, palm produce and cassava but ignored measuring effects of libralisation on the exports.

Market liberalisation has continued from the principles of Structural Adjustment Programme (SAP), which ended in 1994.  For instance in 1988, the National Fertilizer Company of Nigeria (NAFCON) was established. Due to low production capacity and the fact that fertilizer is the most important tradable agricultural input in Nigeria, the Federal Government of Nigeria (FGN) continued to import fertilizers till 1994.  From 1995 to 1996, FGN stopped the direct importation of fertilizer and it became the sole responsibility of the private sector while NAFCON and the blending plants were the agents responsible for distributing locally produced fertilizer.  States collected their fertilizer allocation from the fertilizer plants and the FGN reimbursed the transport costs later. In 1997, FGN completely eliminated fertilizer subsidy programmes and adopted a complete privatization/liberalisation of fertilizer sector (Kwa, 2002; Nagy and Edun, 2002). This liberalisation has implications for price risk, hectarage allocation and output. Market liberalisation has reached many aspects of Nigerian agriculture as World Development Report (WRD, 2008) recorded a negative nominal rate of assistance for Nigeria’s agriculture in 2005. United Nations (UN, 2008) was of the view that it is now time to examine impacts of libralisation in developing economics. Studies in Nigeria need to reflect this.

Literature on the effects of the degree of openness on hectarage is lacking. Agricultural supply response is yet to be examined in the context of trade intensity especially with respect to gross domestic output. According to Oyejide (1986), the choice of trade policy has significant implications for food demand and supply in an economy. This is because trade and associated policies influence the structure of incentives for agriculture as compared to other sectors of an economy. Trade policy can have impact on the movement of resources to and from agriculture which can encourage or discourage food production. Trade and associated policies have implications for the structure of relative domestic prices, which help to determine whether self-sufficiency in food production is possible or even desirable. The liberalisation of trade and domestic market has exposed domestic producers to price competition with large-scale producers elsewhere. This price competition tends to exert a downward pull on the domestic prices and increases price instability, which gives rise to more price risk.  However, the aspects of trade policy that has attracted the interest of some scholars have not included measuring the policy impact on hectarage expansion. For example, the study by Oyejide (1990) examined theoretical issues in supply response in the context of SAP in sub-Saharan Africa while Kwanashie et al (1998) examined the response of agriculture in Nigeria to adjustment policies. Similarly, Olusegun (2006) examined the effects of price, price risk, and real exchange rate on hectarage response of few crops in the context of SAP. His work did not cover much of Nigerian liberalisation experience as only a dummy variable was used to measure it.  But the effects of degree of openness which is a good measure of trade liberalisation, because it deals with changed in values of exports and imports,  as well as  ACGSF and FDI in agriculture are yet to be examined.

The effects of degree of openness will show the crops, which are affected by trade either positively or negatively. It will indicate the effects of trade policy on the productive sector of the economy, which can give insight into the possible effect of Ducth disease in the sector, but literature need to buttress or refute these facts with Nigerian experience.  In addition, effects of ACGSF and FDI will indicate the responsiveness of crops to such funds. Most of the FDI are given to research institutions whose mandates include production of improved breeds. Positive response of output of crops to FDI could be an indication of production and distribution of improved breeds to farmers and constitute criteria for justification of the invested fund, but research has neither buttressed nor refuted this point.   It may be informative to note that as the economy gets more liberalised; its degree of openness increases and foreign investors can be attracted, thus increasing the volume of FDI. Nevertheless, we do not know which crops loose or benefit from these experiences in Nigeria?

Food insecurity, price risk and resource allocation as well as output can be influenced by the price of local produce which the ongoing liberalisation exercise determines. Prior to liberalisation, price is controlled by government regulation, giving rise to minimum price risk, but liberalisation emphasizes market forces by which demand and supply determine price. While government subsidies and trade restrictions distort prices to local farmers’ advantage with little risk, the complex process of price discovery and determination involves different lag periods and fluctuations in a liberalized economy which give rise to high price risk. The cobweb theorem of agricultural prices is mainly a pictorial illustration of price risks occasioned by forces of demand and supply in a liberalized economy.  The determination of prices by market forces posse the question of whether self-sufficiency in food production is desirable or attainable. Given that liberalisation reduces government control of imports/exports, the size of domestic market can exceed the national geographical boundary resulting in price fluctuations and risk. The ongoing liberalisation is believed to attract FDI inflows which can help to increase the quality of inputs and possible output at a lower cost which can reduce price; hence issues involving market liberalisation and price risks appear complex and need critical examination from different paradigms.

Methodological issues need to be resolved especially with respect to analytical procedure and model specification when dealing with supply response. Many studies on supply response may have been marred by spurious regression due to lack of testing for stationarity of the roots and possible co-integration, which may lead to adoption error correction mechanisim in the model. Can Nigerian liberalisation episodes be better measured with a dummy or an index?  Also, it is doubtful whether hectarage responses to price and price risks could be modeled independently as if the effects of price and price risks are not simultaneously felt. Olusegun (2006) has estimated independence equations for hectarage responses to price and price risks. Could his result be affected by the methodology? If so, untrue information may have been sent to policy markers due to inefficiency of the estimates. Many studies (such as those by Olopoeni, 1991; Adubi and Okunnmadewa, 1999; Arene and Okafor, 2000) on supply response in agriculture have concentrated on the volume of export without considering hectarage allocation. The study intends to fill this methodological controversy/debate using Seemingly Unrelated Regression (SUR) model.

1.3 Objectives of the study

The broad objective of the study was to examine the hectarage and output responses of major crops to market liberalisation, price risk and financial support for selected crops using descriptive and inferential statistics.   The specific objectives were to:

  1. examine the trends of hectarage, output levels, prices and price risks of the selected crops for the period under study;
  2. examine the trends of non-price factors such as market liberalisation indicators and financial support that can affect development of the crop sub-sector;
  • determine hectarage  and output responses of crops to price and non-price factors;
  1. simulate the responsiveness of hectarage and output of selected crops to changes in own price; and
  2. make recommendations towards increasing agricultural output.

1.4 Hypotheses

The null hypotheses that guided the study were:

I.            liberalisation exercise has not affected hectarage and output  of crops such as maize, rice, yam, cassava, groundnut, beans, cotton cocoa and oil palm from 1970 to 2007;

II.            price and non-price factors such as rainfall, ACGSF and FDI do not affect hectarage  and output of crops listed above.

 1.5 Justification

Liberalisation policies have been advocated and implemented both at international and national levels. Market liberation has exposed farmers to more price risk than ever before. There is the need to examine how the price risk affects agricultural supply with respect to factor utilization and output. It is generally accepted that as a result of the oil boom, that Dutch disease phenomenon adversely affected not only agriculture but the whole economy. However, this study will shade light on the crops that are adversely affected and explain why such crops are in that state. This thesis is justifiable because it is aimed at examining the effects of liberalisation policy on agricultural supply response with emphasis on price risk which affects the welfare/income of farmers. Over 80% of Nigerians are engaged in agricultural activities. This sector (agriculture) under-employed the largest labour force of the country, which can be mobilized for higher productivity; this demands that policy makers drive the economy with empirical results of effects of the on-going policies on resource allocation, output and price.

The ability of small-scale farmers to attain profit maximization goal or satisfy their food security needs is determined by the prevailing policy environment, which influences price and hence the need to examine the effects of this policy on agriculture. Price is an important factor in resource allocation, production and consumption of goods and services within a society. It is the edge that forms a basis for exchange of title to goods and services. Hence, it is important to examine the effects of price.

The study will provide empirical results of effects of domestic market liberalisation on agricultural supply response. This will complement other studies on supply response involving international trade. Special interest is placed on degree of openness and real exchange rate, which can help to explain the dynamic of how exchange rates pass through to domestic prices. The degree of effect of exchange rate on the prices of goods in the economy depends on the substitutability and import penetration ratio, which can be a reflection of the degree of openness.  It will also highlight methodological issues that may be of help to other researchers. It will as a result constitute a part of literature on agricultural supply response.

Extension workers and farmers will be able to know the responsiveness of crops to institutional factors, thus farmers can choose crops that respond positively to institutional factors in order to maximize their profit. This research can also interest other change agents and policy makers.

Limitations of the study

The study was aimed at examining hectarage and output responses of crops to market liberalisation and price risk in Nigeria. These crops are grown under the same macroecomomic environment.  Its ambition was to examine the responses of both the major and minor crops, but for lack of data especially for the minor crops limited the study to few representatives of major class of crops. However, crops that were viewed as minor such as cocoyam are gaining more economic importance, thus in the next two centuries, more data will be available for almost all the existing crops now. Surprisingly, adequate data was lacking in the case of rubber and little or no data was found on citrus. This shows the need to build up agricultural database via adequate documentation of agricultural data.

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References

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