Th4_Policy options for accelerated growth and competitiveness of the domestic rice economy in Nigeria

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Policy options for accelerated growth and competitiveness of the

domestic rice economy inNigeria

ByOluyemisi Kuku-Shittu

Postdoctoral Fellow, Development Strategy & Governance Division, International Food Policy

Research Institute (IFPRI-Nigeria)

October 21, 2013Africa Rice Congress 2012

Yaoundé, Cameroon


NSSP Rice Study Team(alphabetic and by location)

In Nigeria

Akeem AjibolaKwabena Gyimah-BrempongOluyemisi Kuku-Shittu

In Washington, DC

Xinshen DiaoPaul DoroshMichael JohnsonJawoo KooMehrab MalekAngga PradeshaHiroyuki Takeshima


Background of the Rice Study

To achieve a transformation of the agricultural sector and food security in Nigeria, the government has identified rice as one of the key food staples – with high ambitions to..• Reverse decades of neglect in agriculture• Catch up to an Asian type green revolution (including

transforming the rice post-harvest sector), AND in the process..• Achieve rice self-sufficiency by 2015

IFPRI was asked to provide research evidence and help the government in identifying priority policy areas for achieving this goal.

The following are drawn from the results of analysis by the “Rice Study Team” of NSSP


Research Objective

What is the potential to increase rice production (quantity and quality) in Nigeria to achieve self-sufficiency? • Does local rice have the potential to realize a higher growth rate in

yield and production? And if it does, will this be enough to achieve self-sufficiency?

• Does it have the potential to improve product quality to effectively compete with imports?

In the wake of the Government introducing higher import tariffs and promoting the expansion of large scale milling operations to quickly achieve its policy goal..• Is this economically efficient and effective in the long run?• What alternative (or complementary) policy strategies will be needed

given the characteristics of the rice economy?


Methodology

Review the characteristics and current state of the rice economy in Nigeria (demand and supply)

Assess the potential to increase competitiveness – rice yields, production, and improve rice quality in Nigeria?• Analysis of bio-physical production potential and

identification of most promising competitive rice farming type

• Analysis of rice value chain and optimal rice processing sector development

Using an economic model, weigh in the welfare effects of alternative policies for realizing this potential (e.g. through import tariffs and improvements in production, quality and marketing) --- measured in terms of the self-sufficiency goal, increased rural incomes, and food security.


A simple fact.. Rice has quickly become one of the leading food staples in Nigeria(Both by per capita consumption and HH expenditures)

Urban Rural

Commodity kg/pc Rank kg/pc Rank

Rice 35.0 2 30.6 2

Maize 18.2 4 27.5 4

Sorghum 8.7 5 39.3 1

Millet 8.5 6 26.2 5

Cassava* 38.2 1 30.3 3

Yam 22.7 3 15.7 6*Processed

An average Nigerian household spent 6% of total income on rice consumption

In monetary term rice ranks No.1 in consumption among all staple items for both rural and urban households


Demand for Rice has been rising rapidly in per capita terms – leading to rising imports (Production has only kept up with population growth)

Data source: USDA international database (2012)

0.0

1,000,000.0

2,000,000.0

3,000,000.0

4,000,000.0

5,000,000.0

6,000,000.0

0

60000000

120000000

180000000

240000000

300000000

360000000

Milled Rice Imports (million tonnes)

Milled Rice Production (million tonnes)

Population (million) - R-axis


Explaining the rise in demand.. Urbanization and rising incomes (50 percent of Nigerians

now live in urban centers) Imported rice is preferred for higher quality and versatility

• Cleanliness (free from stones and other debris)• Swelling capacity and taste• Grain shape (non-broken, long grained)

Local rice has a lower price and some household prefer its taste or choose it for specialized uses, but it is often not properly processed (high percentage of brokens, etc.)

Per capita consumption (kg/pc) Income elasticity of demand

Local Rice Imported Rice Local Rice Imported Rice

Urban Rural Urban Rural Urban Rural Urban RuralNational average 10.9 21.4 24.1 9.1 0.20 0.64 0.53 1.03


The Result... domestic & imported rice are not perfect substitutes

Page 9

Mar

-01

Sep-

01

Mar

-02

Sep-

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Mar

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-04

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-05

Sep-

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-06

Sep-

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Mar

-07

Sep-

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Mar

-08

Sep-

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-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

1140

60

80

100

120

140

160

180

200

220

Enugu Imported

Enugu Local

Enugu Import Parity w Tariff

Na

ira

/Kg

Source: Authors’ calculation using NLSS 2011


Implications...

Even under the best of circumstances, does Nigeria have the potential to..• Grow the rice sector and produce enough to meet local

demand?• Improve the final product and branding of local rice in

order to compete more favorably with imported rice?

What does it mean given the government’s current policy framework and strategy for achieving these objectives? • On paddy production and access to inputs and output

markets to rapidly expand output?• On post harvest / rice milling capacities – to improve

quality and branding• On import tariffs? (which has its own challenges)


2006 2007 2008 2009 20100.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0Nigeria Imports Exports to Nigeria

For example, a big challenge for Nigeria is import tariffs have not been easy to enforce in the past

Source: COMTRADE data.

Nigeria Rice Import Data and World Export Data, 2006-2010

Officially reported imports are much lower than the number estimated from exporting countries’ reports (e.g. most rice imported by Benin is re-exported to Nigeria)

The high tariffs may encourage under-reported imports to avoid tariff payment


Can Nigeria rapidly expand its Domestic rice production?


Assessing Potential for Production Growth

Suitability of Rice Production

Areas

Page 13

Area (1000 ha) Output (1000 ton)

Category High suitability

area

Medium suitability

area

High suitability

area

Medium suitability

area

Rainfed rice 68 843 96 1,162

Irrigated rice 3 103 11 403

Other crops 1,231 1,231

No crops 2,871 24,617

Highly suitable and rice is grown

Highly suitable and other crops (rice not grown)

Highly suitable but no crops are grown

Medium suitability and rice is grown

Medium suitability but no crops are grown

Source: IFPRI Spatial Production Allocation Model (SPAM), Global Irrigation Map (University of Frankfurt), Various literature

Low suitability

Even under the best scenario, Nigeria will not be able to produce enough to meet demand

Biophysical Rice Output Potential (Million MT) – based on crop simulation results under different technology inputs

Suitability

High Medium Low Total

(Current rice area, 1000 ha) (71) (946) (573) (1,590)

Baseline Output, Rainfed(current, million metric tons) 0.1 1.6 0.8 2.5

Simulation Output Results(million metric tons)

1. Seeds, Rainfed 0.2 1.8 0.8 2.8

2. Seeds + Fertilizer, Rainfed 0.2 2.3 0.9 3.3

3. Seeds + Fertilizer + Irrigation 0.2 2.4 1.4 4.0

Page 14

Source: Crop simulation model results


What of the potential to improve product quality?

Comparing rice value chains between Nigeria & Thailand (‘09)

Starting with Small Scale Channel for Nigeria

Quality premium can be 20% of total value chain (potential)

Trader/Wholesale costs & margins for small-scale rice value chain are almost double that of Thailand

Paddy production cost in Nigeria is 35% of total value chain and is 1.3 times higher than in Thailand

Source: Nigeria: Author field visits; Thailand, Maneechansook (2011) and FOB data from the Association of Rice Exporters in Thailand for Par-boiled rice 100%

Farm

Gat

e M

argi

n

Padd

y Tr

ader

& P

roce

ssin

g M

argi

n

Who

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ler

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gin

Ret

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Pote

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l Qua

lity

Prem

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Impo

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ariff

& R

etai

l Mar

gin

Frei

ght

& h

andl

ing

Expo

rter

Mar

gin

and

FOB

Padd

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ader

& P

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argi

n

Farm

Gat

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argi

n

Local rice production Imports of Thai rice

0

0.1

0.2

0.3

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0.5

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0.8

0.9

1

1.1

1.2

0.36

0.18

0.280.09

0.19 0.45

0.060.10

0.19

0.32

Import Parity Price, 1.12

US$

/kg

Farm

Gat

e M

argi

n

Padd

y Tr

ader

& P

roce

ssin

g M

argi

n

Who

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and

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Padd

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argi

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Farm

Gat

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argi

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Local rice production Imports of Thai rice

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

0.36

0.50

0.19 0.06 0.45

0.06 0.10

0.19

0.32

Import Parity Price, 1.12

US$

/kg

Comparing rice value chains between Nigeria & Thailand (’09)

.. With the Medium / Large Scale Channel in Nigeria

Beyond the farm gate -- milling, trader, and Wholesale costs and margins are significant (about 2.4 times that of Thailand)

Source: Nigeria, Author field visits and Oguntade (2011); Thailand, Maneechansook (2011) and FOB data from the Association of Rice Exporters in Thailand for Par-boiled rice 100%


So – what does it all mean? (looking at price structure of the rice value chain in select countries (2009, USD and %)

Nigerian farmers capture the smallest share of final price (32 to 39%) compared to Thailand and Bangladesh (52 to 81%) – although prices (USD equivalent) at farm gate are about equal.

Wholesale trader and marketing price margins in Nigeria capture the bulk of the final price, especially along small scale milling channel (41%) – more than twice those seen in Asia.

The key to lower production and market costs is through yield growth and improved market efficiencies

The key to improve competitiveness with import brands is through improved processing and handling for quality products

Source: Nigeria, Author field visits and Oguntade (2011); Thailand, Maneechansook (2011); Bangladesh, Minten, Murshid, & Reardon (2013).

Standard Premium Premium Standard PremiumNigeria Thailand Bangladesh

-

0.20

0.40

0.60

0.80

1.00

1.20

39% 32% 52% 81%58%

20%

45%

31%7%

22%

41%

23%

17%

11%

20%

Rice Trader/Marketing Margin

Paddy Trader/Miller Margin

Farmgate Price

US$

/kg

Import parity price = $1.12


What are the alternative strategies for Nigeria, therefore – to achieve competitiveness and growth in rice production?

Standard Premium Premium Standard PremiumNigeria Thailand Bangladesh

-

0.20

0.40

0.60

0.80

1.00

1.20

39% 32%

20%

45%

41%

23%

Rice Trader/Marketing Margin

Paddy Trader/Miller Margin

Farmgate PriceU

S$/k

g

Import parity price with tariff = $1.12

To answer this question, we used an Economy-wide Multimarket Model (EMM) to address 4 alternative policy scenarios

Page 20

Policy Scenario 2 (S2)“Market Improvement”

Policy Scenario 1 (S1)“Technology Change”

Policy Scenario 3 (S3)“Combined S1 & S2”

Policy Scenario 4 (S4)“Import Restrictions”

Tariff


Improving rice competiveness is a Win-Win strategy on production side, and...

Page 21Source: Nigeria EMM model simulation result

4.4% 5.7%2.5%

8.5%11.4%

18.3%

4.8%

24.7%21.5%

45.1%

7.0%

58.0%

MinimumIncreasedAccelerated


.. consumption side, and...

Page 22

Source: Nigeria EMM model simulation result

S4 - Import Restric-tions

S1 - Technology Change

S2 - Market Improvement

S3 - Combined S1 & S2

-7.7%

0.9% 0.0% 1.0%

-14.9%

2.7% 3.3%

-19.3%

7.0%

0.3%

9.8%

Minimum

Increased

Accelerated

.. on household incomes

Page 23Source: Nigeria EMM model simulation result

-2.6%

0.9% 0.5% 1.5%

-6.8%

2.9% 0.9%4.7%

-13.4%

7.7%

1.3%

13.2%

% change in rural pc real income from the base


-2.1%

0.2% 0.2% 0.4%

-6.0%

0.7% 0.3% 1.3%

-13.4%

2.0% 0.5%3.7%

% change in urban pc real income from the base



Additionally... higher tariffs will create food price inflation while agricultural real incomes fall

Page 24


-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0

2

4

6

8

10

12

Change in real GDP

Change in CPI

Tariff rate (%)

cha

nge

in re

al G

DP

(%)

Change in CPI (%)

Key Findings (1)

Technology change can drive much of the growth required, but not likely to lead to self sufficiency in the short and medium term..• A modest increase in rice yield, from 1.9 to 2.2 MT/ha improves the

competitiveness of local rice (esp. when it high quality variety)• Rice production can reach a similar level achieved by a high tariff

rate of 400% • Rice consumption increases while import-dependency falls to 33%

(from 45%)• Other crop production will not be hurt

When technology change is combined with market improvement, local rice competitiveness increases significantly• Both production and consumption increase while import

dependency rate falls below 30%• Income gains go to both rural and urban consumers• Rice growth is not accompanied by domestic food price inflation as

in the case of the high protection policyPage 25


Key Findings (2)

Historical data has shown that an import restriction policy alone is not effective in reducing rice imports and increasing rice production (as the modeling analysis confirms)• From the model results, it shows that doubling rice import

tariff rate (to 100%) only modestly raises domestic rice production, and at a tariff rate of 400%, rice production only increases by less than 20%

• Tariff-induced supply response is through rice area expansion without yield growth

• Other crop production can be negatively affected

Consumers are hurt by raising high import tariffs alone. With reduced consumption caused by high tariffs, imports still account for 20% of total consumption

Page 26


Policy Implications (1)

If import tariffs are warranted (e.g. using the ‘infant industry argument’), it will be essential to ensure..• Consistency in tariff policies (e.g. to avoid using tariffs simply

as an instrument for domestic price stabilization in the short run), and

• In the commitments of public resource allocations to improve the enabling environment to attract private sector investments and growth in the rice sector

Improving infrastructure condition is key for lowering processing (e.g. power) and market costs (e.g. roads)

Encouraging the private sector to lead the competiveness efforts in domestic market

Page 27


Policy Implications (2)

Finally, profitability cannot be achieved so long as local varieties are not competitive• Consistency in policy is the pre condition for profitability to the

private sector• Proper policies are needed to encourage the private sector to

develop right varieties that can compete with imported rice and make them available to farmers

• Avoid winner-picking in the milling sector and encourage more small and medium sizes of millers

Page 28

Overall Key Messages“Nigeria has the potential to increase the competitiveness of local rice along the value chain – but cannot feasibly achieve its self-sufficiency goal in the short-to-medium term”

To spur growth and improved competitiveness... Increasing yield growth

• Emphasize the right seeds• Increase the number of small scale competitive rice farmers• Encourage small-scale and privately operated irrigation

technology (are there lessons from elsewhere, e.g. Asia?)• Fertilizer market efficiency is important (private sector

involvement)• Mechanization policy to promote intensification (e.g. for double

season production) -- and preferably through private sector service providers

Increasing quality of domestic rice• Emphasize right varieties, further processing, and branding

Import restrictions alone will not be effective at stimulating a large supply response

Page 29


Thank You


Assumptions in the crop simulation model

Page 31

Inputs Baseline

Simulation scenarios

1: Seeds share of Improved varieties

2: Seeds+fertilizer Improved varieties Fertilizer

3 All three Improved varieties Fertilizer Irrigation

SeedsShare of improved seeds

Rainfed- 50% Improved (IR-8 type), 50% Traditional

Irrigated- 100% Improved

Rainfed- 100% improved varieties in high suitability area- 75% improved varieties in medium suitability area- 50% improved (unchanged) in low suitability areaIrrigated- 100% Improved

Fertilizer (Nitrogen in kg/ha)

Rainfed North Rainfed Southimproved: 56 kg/ha improved: 8 kg/hatraditional: 0 traditional: 0

Irrigated North: 64 kg/ha South: 95 kg/ha

Rainfed North Rainfed Southimproved: 56 kg/ha improved: 40 kg/ha

Irrigated North: 128 kg/ha South: 150 kg/ha

IrrigationShare of irrigation area

10% (Assuming some of the irrigated area is not fully developed irrigation system)

21%(By substituting irrigation area for all other crops to rice)


Parameters used in the policy scenarios

Page 32

EMM scenarios

Exogenous parameters shocked

Targeted key endogenous variables In the relevant scenarios

base level

Low Medium High

Import restriction

Tariff rates 50% 100% 200% 400%

Technology change

Yield growth rate, non-competitive varieties

Level of yield for non-competitive local rice (mt/ha)

1.91 t/ha 1.96 t/ha

2.01 t/ha 2.06 t/ha

Yield growth rate, competitive varieties

Level of yield for competitive local rice (mt/ha)

1.91 t/ha 2.16 t/ha

2.46 t/ha 2.82 t/ha

Area growth rate, non-competitive varieties in total rice area

Area of non-competitive local rice in total rice area (%)

97.1% 94.9% 91.8% 85.1%

Area growth rate, competitive varieties in total rice area

Area of competitive local rice in total rice area (%)

2.9% 5.1% 8.2% 14.9%

Market improvement

Market margins 70% 60% 50% 40%

-1.2%

3.7%

0.5%

4.4%

-2.6%

9.8%11.4%

-3.9%

20.5%

1.4%

24.0%MinimumIncreasedAccelerated

5.7%

1.9% 2.0%3.9%

14.3%

7.7%

11.9%

26.4%

20.4%

5.4%

27.4%


..technical change is the driving force for much of the growth

Page 33

• Even with modest improvements in rice productivity and market efficiency, rice production can increase significantly, particularly when yield increases for more competitive varieties

• Under import restrictions alone (i.e. with no technology change), average rice yields actually fall given area expansion onto lands less suitable for rice and displacing other crops

• When growth is centered on technology change, the increase in rice production will not come at a cost of reducing production of other crops


% Change in Yield % Change in Area

Changes in relative rice prices (% change from base year)





-1.2%

2.0% 2.4%4.5%

0.1%

4.4% 4.7%

9.6%8.2% 7.8% 6.9%

16.5%% change in relative producer price from the base






23.1%0.2%

-1.2% -1.0%

69.8%

0.1%-2.2% -2.4%

163.7%

-0.6% -3.1% -5.3%

% change in relative consumer price from the base

Minimum Increased Accelerated

Th4_Policy options for accelerated growth and competitiveness of the domestic rice economy in Nigeria

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