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 Project Capacity 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

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. It is becoming increasingly recognized that effective liberalization and pro-competition policies can enhance the countrys domestic production and access to international market especially within the context of globalization. In this connection the Federal Government is intensifying actions on its deregulation and privatization policies and has established an Advisory and Regulatory 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 the establishment of a Federal Competition Commission is in the offing and work is already at an advanced 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 competitive prices and product choices, (iii) promote employment and advance the social and economic welfare of Nigerians, (iv) ensure that small and medium enterprises (SMEs) have an unrestricted opportunity to participate in the economy and (vi) protect Nigerian industries from unfair trade practices. When legally set up, the functions of the commission will include (i) formulation of measures to increase market transparency including weights and measures administration, (ii) initiation of policy review periodically to ascertain anti-competitive and restrictive practices which may adversely affect the economic interests of consumers, (iii) investigation of persons or firms in relation to their conduct of business in Nigeria to determine whether such businesses have engaged in reported cases of sharp practices in contravention of the law and initiate appropriate sanctions where necessary, (iv) elimination of anti-competitive, misleading, unfair, defective or questionable agreements, trading and business practices at the request of the Minister or President and (v) resolution of disputes or complaints and issuance of clear directives where necessary (see Financial Standard, September 5, 2005). There is no doubt that the promotion of healthy competition within the economy as a result 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 be strengthened for effective competition. Agriculture continues to play a significant role in the Nigerian 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-industrial processing and manufacturing sector and foreign exchange earnings through exports. In view of its large size and economic importance, the various policy reforms which sought to liberalize the economy and entrench competition over the last two decades especially since the introduction of the Structural Adjustment Programme (SAP) in 1986, were quite visible in the sector. This paper reviews the trend in competitive restructuring of the agricultural sector over the years focusing on pre-reform policies affecting competition in the sector, the pro-competition reform measures and anti-competitive practices which have tended to adversely affect the performance of agriculture over the years. 1

2. POLICIES AFFECTING COMPETITION IN THE AGRICULTURA L SECTOR Prior to the inception of SAP in 1986, several policies aimed at providing support for the agricultural sector turned out to be regarded as anti-competitive. The policies were introduced in the past due to market failures in the allocation of resources and the need to achieve sustained growth 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 monopoly Marketing boards were initially created to handle all the marketing activities relating to scheduled export commodities such as cocoa, rubber, palm produce, cotton, groundnut etc. even before independence in 1960. The marketing board system was reformed in 1973 and 1976/77 due to mounting criticisms against the inefficiencies and abuses that characterized the operations of 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 the export of agricultural commodities and fixing of prices of agricultural products in addition to other agricultural development functions. These boards were in operation until 1986 when they were abolished at the inception of SAP. In respect of food commodities, government instituted the so-called guaranteed minimum prices (GMP) which fixed the floor prices which government could buy food commodities if the ruling market prices fell below the minimum. The objective of GMP was to ensure remunerative income to producers. However, GMP policy was quite ineffective as official prices did not offer effective competition at the domestic market level. This was so because the official guaranteed minimum prices were below the farm gate prices (Table 1). Table 1: Average Farmgate and Guaranteed Minimum Prices of Selected Food crops in Nigeria (N/tonne) Crops Average Farmgate Average Price 1981-1985 1981-85 (2) (1) 1,046 616 489 n.a 833 408 257 274 433 594 (GMP) % Difference Between (1) & (2) -61.0 -58.3 -44.0 -28.7

Beans Maize Millet Rice (Paddy) Rice (Milled)

Guinea Corn 428 267 -37.6 n.a = Not available Source: Complied from CBN Annual Reports and Statement of Accounts (various Issues). 2

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 farm services were also subsidized, and these include land clearing and tractor hiring services, irrigation, farm credit, extension services, and agricultural insurance. Subsidy arrangement was partly 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 marketing arrangements. Subsidy was also intended to improve the competitiveness and productivity of farming enterprises. It was anticipated that subsidy would make farmers to adopt new production practices based on improved technologies, featuring the use of fertilizers, improved seeds and other modern inputs. The anticipated goal of subsidy policy was an increase in agricultural output and productivity. Between 1980 and 1990 huge amounts were committed to providing agricultural subsidy. Fertilizer was the most prominent of the various inputs and activities subsidized by the government. Nearly a third of the yearly capital expenditure on agriculture by the Federal Government was devoted to providing fertilizer alone between 1981 and 1990. During the same period, 1980-90, the average subsidy rates on fertilizer ranged between 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 benefit unintended beneficiaries who often manipulate the supply of fertilizer and create artificial scarcity in the market leading to the development of black markets and associated imperfections. 3. COMPETITION IN THE PRODUCT MARKETS With the economic crisis witnessed in the country in the early 1980s it was argued that both the market and the government have failed in their basic responsibilities and that solution to the economic management problems would emerge if there was greater reliance on market mechanisms in the conduct of economic activities. Thus, when the SAP was introduced in July 1986, 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 of subsidies on public sector goods and services, (v) privatization and rationalization of public enterprises and a general reduction of the government sector and (vi) strong demand management policies (particularly tight monetary and credit policies). In the agricultural sector, these translated into the following policy measures. S S S product price decontrol since the inception of SAP desubsidization (withdrawal of subsidy on agricultural inputs and services) abolition of commodity boards

privatization and commercialization of agricultural and agro-industrial enterprises

With the implementation of SAP, the commodity boards were abolished and free market pricing was instituted in line with trade the liberalization measures. The excessive implicit taxation of farm incomes which existed before the beginning of SAP was thus eliminated. Prices not only converged with world market prices but were also enhanced by significant depreciation in the value of the local currency, the naira. This development made 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 credit advances which producers never enjoyed in the past. Further, producer-exporters and their associations were allowed to retain the foreign exchange proceeds from export trade. Moreover, the commercialization of agricultural parastatals such as the River Basin Development Authorities and the privatization of agro-allied enterprises was in line with the market orientation and liberalization policies of government. Nonetheless, with regard to the agro-industrial enterprises it has been suggested that the adoption of the privatization policy across the board without due cognizance of the specific problems of each enterprise was unnecessary. According to Olomola (2001), what is required to put the enterprises on the path of improved performance may well be improved management actions, competitive restructuring, efficient marketing management and macro-level regulatory reform rather than divestiture. By and large, operations in the agricultural sector are largely in the hands of the private sector and there is a high tendency to rely on market mechanisms. Specific operations in the cocoa industry and the grains market can be used to illustrate the extent of competition in the market. In what follows we shall present case studies from the documentary of the FAO (2004) which focused on the agribusiness sector and its support institutions in Nigeria for this purpose. 3.1 Competition in the Cocoa Industry According to the FAO report, competition is high among cocoa buying agents. International market prices are published daily in the newspapers and the farming community enjoys full access to information. Buying agents are used who employ brokers who deal with the farming community. Cocoa in Nigeria is largely produced on a small scale. The average delivery per farmer is less than 5 bags (roughly 300kg per hectare of cocoa) per season. The exporter has access to international funds and advances money to buying agents in the main season. The agents make weekly verbal contracts with farmers and agree on price. If prices fall, the farmer has to deliver more beans to the trader, 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 overseas processors are well established. Due to the small-scale nature, international and local traders are in charge of collection, transport, grading/drying, etc. The initiators of the strong links historically have been overseas processors who relied on the government for internal buying. After the collapse of the Cocoa Board private traders dominated internal buying. Competition in cocoa buying is high, benefiting the farming sector. An estimated 90 percent of the world market price is paid to the farmers. The report concludes that in

spite of a lot of recent mergers and acquisitions due to lower profit margins in the international trade, the cocoa sector in Nigeria is still profit making and is one of the most transparent 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 own individual arrangements. The FAO report reviewed the operations of a particular company -Guinness Nigeria Plc which is a multinational company that has been in the brewing business in Nigeria since 1950. Its products include Guinness extra stout, Harp Lager beer and Malta Guinness. According to the report, the company uses agents to purchase grains (sorghum) or trusted suppliers who had earlier bought from producers/farmers at prevailing market prices based on a formal contract. First, the company will receive applications or letters of intent from prospective suppliers. This is followed up by a local purchase order (LPO) to the buying agent to supply grains within a specified 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 of insect damage, weather damage and foreign matter content. The price paid for grain to the buying agent is based on market information but will usually cover the market price of 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 AGRICULT URAL SECTOR The anti-competitive prices and practices in the agricultural sector have domestic and international 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 agribusiness firms especially in the beer, flour-milling and tobacco industries. Apart from competition from 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 to ensure adequate quantities of raw materials on specified delivery dates. Contract farming experiences in Nigeria have portrayed mixed results in terms of their pro-competition characteristics. For instance in Nigeria, the British American Tobacco (BAT) started the Nigerian Tobacco Company in 1933. Initially, the company contracted growers to produce green leaf (uncured) tobacco and provided seedlings, technical assistance and credit. The company decided to transfer the curing and grading functions to selected groups of growers in 1954. In 1969 it started to experiment with farm-level curing and grading. Farmers interest in joining the programme was very strong and within five years over 2,100 were involved. Much of the success has been attributed to the quality of extension services, the continuous technical and institutional experimentation of the

company in search of more effective procurement systems, the commercial orientation of the 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 the management of parastatals in Ondo State of Nigeria is not as impressive. According to Olomola (1991), contract farming under the smallholder oil palm scheme which started in 1975, was characterized by monopsony abuses. The scheme failed to induce massive participation 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, the buying agents tend to exploit the farmers by offering low farm-gate prices while taking advantage of the poor market information and scarcity situation in the urban market place. The result is that farmers do not respond as expected to price signals while the endusers continue to suffer from inadequate supply and rising costs. In the final analysis, the price and income effects of the linkages on the agricultural sector tend to be grossly limited (see FAO, 2004). 4.2 The International Perspective In spite of the increasing emphasis on globalization and the efforts of the World Trade Organization (WTO), there are anti-competitive practices in the developed countries which 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 in the Nigerian agricultural sector are (i) agricultural subsidies in the developed countries and (ii) export dumping. 4.2.1 Agricultural Subsidies in Developed Countries The continued high levels of support for farmers in rich countries is the major shortcoming of the Uruguay Round Agreement. According to the OECD, developed countries continue to provide close to $1 billion per day to their farmerslittle different from 15 years ago. While the Uruguay Round Agreement did encourage countries to shift from trade-distorting subsidies to non trade-distorting subsidies, more than 60% of the support provided to farmers in wealthy countries still distorts trade. The US spent $1.3 billion on income support for rice farmers in 19992000 when its total rice production was worth $1.2 billion. Japans subsidies to its farmers, on the other hand, are greater than the entire contribution made by agriculture to the nations economy. The total transfers to agriculture amounted to 1.4% of GDP in 2000, compared to the sectors 1.1% share of GDP (Sharma, 2003). Despite the decoupling of subsidies by the rich countries and the reform of the common agricultural policy undertaken in the EU since 2003, the existing subsidies still cause considerable distortions in the global market and constitute barriers to developing countries exports. The EU spends about 40% of its budget (some $60 billion) in subsidies for farmers (Godoy, 2005). Agricultural export subsidies are particularly debilitating for developing countries because they artificially lower world market prices for their exports. In the short term, low income countries benefit from lower food import prices. But in the longer-term, farmers in low-income countries cannot compete against subsidized imports and are forced out of business. Developing countries cannot afford to subsidize their farmers, and their farmers cannot compete against highly subsidized farmers in developed countries. Effects of subsidization seem to be

particularly severe in Africa. Indeed, studies have shown that EU agricultural policies have reduced African exports of milk products by more than 90%, livestock by nearly 70%, meat by about 60%, non-grain crops by 50% and grains by more than 40% (see Hassett and Shapiro, 2003). The maintenance of agricultural subsidies by developed countries is a flagrant betrayal of their exploitative propaganda of market liberalization. It is a predatory mechanism used by them to exclude farmers from developing countries from both international and domestic markets. They goaded governments in developing countries to withdraw subsidies and liberalize their economies while they keep subsidies in their own economies at the highest level. 4.2 Export Dumping The futility of WTO efforts and agreement to end market distorting practices in agriculture is exemplified by the rising trend of agricultural export dumping since its inception about a decade ago. Available data from USDA and OECD indicate that US agricultural commodities continue to be sold well below the cost of production. The proportion 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 have more or less institutionalized agricultural dumping over the years. As shown in Table 2, each of the commodities witnessed considerable increase in the dumping levels between the 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) Wheat 27 2 6.8 29.4 13.5 Source: Adapted from The NewFarm, March 2005. 1997-2003 (% per year) 37 11.8 19.2 48.4 19.2

Soybean Corn Cotton Rice

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

5. CONCLUDING REMARKS Nigerian agricultural sector has witnessed considerable competitive restructuring over the last two decades. However, the new competitive environment while constituting considerable incentive to farmers, has failed to stabilize prices and, therefore, farm incomes. The international agricultural commodity prices have been quite unstable, thus creating 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 of adequate supervision in the new trade regime. The sector has to come to grips with the challenges of imperfect global agricultural market with rising globalization and its noninclusive tendencies. According to Olomola (2005b) there is need to improve the market structure and performance. The export orientation must emphasize a shift from raw materials to value-added products. Internal and external terms of trade must improve and consideration attention must be given to standard and quality control. Currently both farmers and agribusiness firms are forced to operate in a non-transparent and speculative business environment. Many agribusiness firms and farmers are unable to ascertain beforehand where to buy or sell commodities in order to maximize profits and reduce the risks associated with marketing. This has created a class of market agents who have capitalized on this non-transparent market situation and lack of information to rip off both farmers and agribusiness firms in Nigeria. To improve competitiveness, there must be improved access to market information not only for the traditional export crops but also for other crops of industrial importance such as rice, sorghum, cassava, maize, and horticultural crops.

REFERENCES ECA (2000) Globalization, Regionalism and Africas Development Agenda, Paper Prepared for UNCTAD X, Bangkok, Thailand, February 12-19. FAO (2004) Agribusiness Sector and Support Institutions in Nigeria in Strengthening Farm-Agribusiness Linkages in Africa, FAO Corporate Document Repository. Culled from 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, Washington Post, June 22. Minot, N. W. (1986) Contract Farming and Its Effect on Small Farmers in Less Developed Countries Working Paper, No. 31. MSU International Development Papers. Olomola, A. S. and S. O. Akande (1990) Marketing of Nigerian Agricultural Export Commodities Without the Commodity Boards An Invited Paper Presented at the Seminar on Export Commodity Trade Organized by the Export Commodities Coordinating Committee (ECCC) Under the Auspices of the Federal Ministry of Trade and Tourism. 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 in Nigeria, Agricultural Economics (24):221-228. Olomola, Ade S. (2005a) Dimensions and Consequences of Exclusive Mechanisms in the Globalization of Agriculture Paper Presented at the GSN 2nd International Conference, Novotel, Dakar, Senegal. August 29-31. Olomola, Ade S. (2005b) Agriculture, Labour Market and Pro-Poor Growth Invited Paper 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.