Agri09 day iii - session iv - timothy prewitt - usaid

African Agribusiness ForumEnsuring Raw Material Supplies

Case Study: Nigerian Rice

Sector Economics and Farmer Incentives

CASE STUDY: Rice Processing in Benue State

Traditional Vs. Commercial Market Channels

MARKETS Methodology

Discussion Points

Information Resources

USAID Nigeria – MARKETS – Investment Opportunities – 11-May-09 - 3 -

Building a Competitive Cassava Value Chain

Processing: Consistency of High Volume Supply is Critical

Processors in general are carrying very high fixed costs. Volume is critical as the

more product that is produced, the less those fixed costs impact the final unit price.

NOTE: This data represents a hypothetical cassava processing company (CassProCo). The factory has a value of 750MM Naira, of which 150MM is bank financed at 16% interest over a 7 year term. The remaining

600MM is from investors who expect a 5% annual return. The assets of the factory are depreciating over a 10 year period. The plant carries 875K Naira / month in fixed labor costs and 139K Naira / month in

fixed energy costs. The plant operates in 8 hour shifts and can process 30 Tons of Cassava per shift. The plant only operates when it has the required volume of cassava to run for a full shift. The plant can

operate up to 2 shifts per day, 20 days per month. Variable costs per shift to process the cassava are 36K Naira per shift for manual labor, fuel, and specialized inputs. The finished output of the plant is 20% of

cassava input (by weight) and sells for 110K Naira / MT. This model assumes complete market uptake of finished product at all volumes produced.

SOURCE: Processor interviews; MARKETS Cassava Production Model

500

600

700

800

900

1.000

1.100

1.200

1.300

0 2.000 4.000 6.000 8.000 10.000

To

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ava

Re

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ire

d P

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Mo

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To

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Ba

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Price of Cassava at the Mill Gate

Relationship Between Mill Gate Price Point and Volume

Commercial processors of

Cassava need consistent

volumes to be profitable.

Losses incurred due to

limited supply must be

recovered when cassava is

available.

Supply variability limits

commercial buyers ability to

pay higher prices

Operating at a Loss

Generating Profits

At 6,500 Naira /

Ton, This

processor would

need almost 900

Tons / month to

break even

Average of Other ECOWAS

Nigeria

MARKETS

Processor

Finance

Farming techniques

Government

Inputs

USAID Nigeria – MARKETS – Investment Opportunities – 11-May-09 - 7 -

Traditional

Quality

Lost

Opportunity

Wasted Effort

Domestic

Commercial

Building a Competitive Rice Industry

Processing: Optimizing Sales Channels and Processing Type

The competitiveness of rice depends on tying quality of paddy to quality of processing.

Farmers must have incentives to sell high quality paddy to the commercial market, and paddy

volumes must be sufficient to allow commercial processors to avoid low quality paddy.

Quality of Processing

Quality

of Paddy

• Improved

varieties

• Uniformity

• Unbroken

• Filled

• Clean

• Destoned

• Unbroken

• Good Color

Effective Branding and

Customer Experience

• Consistency

• Taste

• Fluffing

• Stickiness

N 2,000 / 25KgN 2000 - 4000 / 25Kg

N 2000-3000 / 25Kg N 4500-7700 / 25Kg

Source: MARKETS analysis; processor interviews

Cottage Commercial

Low

High

Market Map: Paddy DistributionUnderstanding the incentives for farmers to sell into different channels is critical to driving more paddy into commercial processing

Note: Arrow thicknesses generally reflect the scale of different distribution channels. Farm Gate buyers are optional – farmers may choose to sell directly in local paddy market. Local buyer agents operate within both local and regional paddy markets.

Source: MARKETS research; industry interviews

Local Paddy Market

Domestic Rice Market

Tier IFarm Gate

Buyers

Tier II Local Paddy

Market

Tier III Regional Paddy Market

Local Buyer Agent

Imported Rice

CommercialMills

Brown rice

Cottage Miller

PaddyProduction

USAID Nigeria – MARKETS – Investment Opportunities – 13-APR-09 - 9 -

Understanding the Domestic Consumer Market for Rice

End Consumer Preferences

Snapshot of current pricing for Rice in Nigeria

Imported Rice

Domestic Rice

Market Product /

Price Spectrum

N 8,000 /

bag (25Kg)

Domestic

Commercial Rice

Domestic

Traditionally

Processed Rice

Import

Quality

Product

Sub-optimal

Processing or

Inputs

Benchmark Upper

Limit Price

N 7,700 / bag

Subsistence

PricingN 2,000 / bag

How do customer

preferences and biases

impact the price and

volume of “import

quality” domestic

commercial rice?

Source: MARKETS trip reports, Processor intervews

N 3,000/ bag

N ?????/ bag

N ?????/ bag

N 7,500 / bag

The apparent lack of

standardized grading

systems and accurate

pricing data

contributes to an

inefficient market

USAID Nigeria – MARKETS – Investment Opportunities – 11-May-09 - 10 -

Average Yield Per Hectare 5.0 4.5 2.0

Production Cost / Ton 30,602 25,280 45,231

Paddy Sales Price (N/MT) 58,500 (to mill) 58,500 (to mill)60,000

(3000N / 50Kg to market)

Farmer Income / Hectare 292,500 263,250 120,000

Farmer Profit / Hectare 139,489 149,489 29,539

Building a Competitive Rice Industry

Production: Cost to Produce Paddy

0

45.000

90.000

135.000

180.000

Transplant Broadcast Subsistance

Rice Production Costs / Ha

Bagging and Bag Stock

Harvest / Thresh

Fertilizer / Herbicide

Transplant

Bird Scaring

Land Prep

Inputs (Seeds and Glyphosate)

Landlease

90,462

153,012

113,762

Note: Subsistence assumes no application of fertilizer, herbicide, or pesticide, and use of saved seeds. Profit / hectare includes labor costs, the majority of which should accrue to the famer.

Source: MARKETS Production Cost Model; industry interviews

USAID Nigeria – MARKETS – Investment Opportunities – 11-May-09 - 11 -

Building a Competitive Rice Industry

Helping Farmers Make Sound Economic Decisions

• The price paid per ton appears very similar (when comparing fairly high grade traditional rice

and improved rice).

• Other factors have been cited in interviews and secondary research for why farmers may

prefer traditional sales channels

– Unbanked rural farmers view paddy as a monetary equivalent

– Pricing volatility over the year promotes multiple small sales when cash is required while

holding out for premium pricing that tends to occur just before planting of the next harvest

begins

– Immediate payment / cash for paddy is valued in a low trust environment

– Possibility for advanced credit from rural market buyers in advance of the harvest

• Impediments to farmers ability to sell direct to commercial mills

– Lack of access to capital to finance improved seeds and input costs

– Lack of proximity to commercial buyer

Very few farmers currently have a clear choice to sell direct to mills versus to

traditional markets. However, understanding why farmers choose one channel over

another is key to promoting rapid adoption of direct to mill sales

While direct price premiums will likely be most effective in migrating farmers to direct

commercial sales, replicating the benefits of these other factors can also influence the

farmers decision in favor of commercial sales

Case Study: Rice Processing in Benue

Farmer Cooperatives

First Bank of Nigeria

Nigerian Agricultural Insurance Corporation

ADP / Benue State Government

Olam Nigeria Limited

Case Study: Rice Processing in Benue

“Mama’s Pride” competes on both price

and quality with imported rice

Average of Other ECOWAS

NigeriaBenue MARKETS

Information Resources on Outgrowers Schemes

USAID’s AMAP Value Chain Wiki

www.ruralfinance.org

www.fao.org/ag/ags/contract-farming

For More Information