September 03, (THEWILL) – Nigeria’s agricultural sector has been on a steady decline in the past seven years, according to data by the National Bureau of Statistics (NBS). After the second quarter (Q2) of 2016 when it achieved a real gross domestic product (GDP) growth rate of 4.5 percent year-on-year, the strategic sector has maintained an uninterrupted slide.
In Q2 2017, agriculture declined by a growth rate of 3.01 percent from 4.5 percent in the corresponding period of the previous year, before it hit 1.19 percent in Q2 2018. The fortune of this all-important sector, which is the largest employer of labour, rose marginally to 1.79 percent in Q2 2019 then slowed to 1.58 percent in Q2 2020.
Although the overall GDP growth rate rose to 3.40 percent in Q2 2021 from -1.92 percent in the previous year’s equivalent period, the positive trend did not impact on agriculture: The sector nosedived to a 1.3 percent growth rate in Q2 of that year, and sank deeper to 1.2 percent in Q2 2022, before recording a stunted growth of 1.50 percent in Q2 2023.
While the overall contribution of agriculture to GDP hovered on the average of 23 percent during the seven-year period, the receding fortune of this sector was a major concern to the consumer goods firms. This is because the consumer goods firms rely significantly on agriculture to source their raw materials under the thriving backward integration policy.
Backward integration is a practice where companies are encouraged to cultivate their own raw materials by purchasing from their suppliers or establishing farms to grow produce for their factories. Though conceived in the 80’s, the policy gained momentum in the country following the crash in crude oil prices which started in the fourth quarter of 2014. The government put the measure in place to save foreign exchange, create jobs, boost productivity and grow the GDP.
The consumer goods firms have taken giant strides in supporting and implementing the policy which has benefitted the small and medium enterprises (SME), especially those engaged in agriculture and transportation.
For instance, Nestlé Nigeria instituted a project to engage 5,000 smallholder farmers, initially, for the supply of raw materials for its agro-business operations. The initiative, ‘Developing Inclusive Grain Value Chains Project’, was in partnership with IDH — a Sustainable Trade Initiative and TechoServe outfit.
Nigerian Breweries stepped up local production of sorghum and cassava to boost local raw material supply for its plants. The 77-year-old consumer goods firm has made significant strides towards the development and commercial cultivation of sorghum and its use by the industry since the 80’s. Although the project is challenged by the spate of insecurity across the northern states where the farms are established, the company has pushed on with the policy notwithstanding the myriad of environmental obstacles.
FrieslandCampina WAMCO Nigeria developed its local raw milk sourcing in a bid to support backward integration, an initiative that has proved a source of sustained income to almost 2,000 farmers (including 900 women).
Manufacturers in the flour milling sector have been taking steps to increase their tempo of backward integration in recent times. Flour Mills of Nigeria Plc has invested in several farms and other agricultural projects to cultivate raw materials for most of its processes. Cadbury Nigeria established a cocoa processing plant in Ondo.
These projects have been negatively impacted by the receding fortune of agriculture which stems largely from insecurity, poor infrastructure, multiple taxes, extortion, high inflation rate and other economic challenges. “The operators rely on a strong value chain that involves many micro, small and medium businesses especially in agriculture and agro-business activities. If they are not healthy, they will not feed the manufacturing companies and this will have a far-reaching impact on the economy”, said Julius Abedinego, a processing business operator.
Checks revealed that the consumer goods firms recorded higher operating expenses in the Q2 2023 mainly on the raw material/inventory, sales and energy costs as had been the case earlier.
The companies’ raw/packaging materials inventories showed a total of N161.4 billion during the first three months of the year, a 20 percent rise from N134.7 billion spent in the corresponding period in 2022. Nigerian Breweries report showed N54.7 billion worth of raw/packaging materials inventory during the period. Others are Dangote Sugar and Nestle with N48.2 billion and N32.3 billion respectively.
These include multiple taxes, high operating costs, rising inflation, low consumer demand, decrepit infrastructure, volatile exchange market, forex scarcity, policy summersault and insecurity among others. The most outstanding impact came from the devaluation of the naira.
The Central Bank of Nigeria (CBN) had on June 14, 2023, announced the unification of the multiple exchange windows of the forex market. This resulted in significant depreciation of the naira by 67 percent to the average of N777/$ (as of August 2023) against N465/$ prior to the announcement. Also, the naira traded N800/$ at the parallel market compared to N765/$ before the abolition of multiple exchange rates. This development impacted negatively on the operations of firms in the manufacturing sector. The 2023 half-year financial results of these firms proved they are walking a tight rope, and literally trudging the valley of shadow of death. It is obvious that some of them might shut down or drastically downsize soon.
Findings from 10 sampled major manufacturing firms, mainly in the consumer goods group, showed they reported a total of N517.1 billion in non-recovery, net foreign exchange losses in the first half of the year (HY 2023), occasioned by the devaluation of the naira.
Nestle Nigeria Plc and Dangote Cement Plc were the worst hit with non-recovery net forex losses of N123.7 billion and N113.6 billion respectively. They are followed by Nigerian Breweries Plc N85.26 billion, Dangote Sugar Refinery Plc N83.09 billion and Guinness Nigeria Plc N41.9 billion.
Others are International Breweries Plc with N40.66 billion, Neimeth Pharmaceuticals Plc N22.82 billion, Unilever Plc N2.93 billion and Cadbury Nigeria Plc N1.03 billion.
The eroding wave of depreciation resulted in total post-tax loss of N370.57 billion by the 10 firms, compared to N175.9 post-tax profit they posted in the equivalent period of the preceding year. The development impacted severely on the balance sheets of Nigerian businesses as they had to source extra funds in local currency to meet their dollar-denominated obligations.
Data gleaned from the financial statements of the 10 selected firms, revealed that they suffered huge forex losses which impacted severely on their earnings and drained their bottom lines as inflation rises. This resulted in a total pre-tax loss of N695.03 billion in HY 2023 against pre-tax profit of N637.61 in the corresponding period of 2022.
“It is a bad omen.” said Barnabas Ikuru, an investment and financial analyst. “Their balance sheets have been significantly eroded, their earning power vitiated, and their expansion capacity weakened. Top among the victims are the employees who may be laid off, downgraded or suffer a salary cut. Some companies will have to increase the price of their products and that would impact their sales revenue because of declining consumer power,” Ikuru added.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
