Forward movement in local substitution
Import substitution has remained one of the FGN’s primary focus areas, with agriculture serving as a potential catalyst. Over the past eight quarters, the agriculture sector has posted uninterrupted growth.
Given Nigeria’s heavy dependence on food imports, there has been increased focus on local substitutes for food products. There are conflicting figures on Nigeria’s food import bill. A few sources suggest that the country’s annual food import bill was as high as N1.5trn (US$4.1bn) last year.
The latest inflation report also points towards a reduction in imported food items. The impact of the CBN’s stepped up fx interventions on parallel market rates has been a contributing factor to the latest decline in imported food price inflation which slowed to 14.2% y/y in June from above 21.0% throughout Q4 2016. Another data series from the CBN shows importation of food products accounted for 8.9% of fx utilisation in Q1 2017 compared with 9.5% recorded in the previous quarter.
There are a few investments within the sector which should drive sustainable local substitution of food. The rice segment has been a beneficiary. Based on industry statistics, annual rice consumption has risen from 5 million metric tons (mmt) to 7mmt with supply catering to less than half (39%) of the country’s annual demand.
The FGN has boosted rice paddy production, over that past two years annual paddy production has increased to 17mmt from 5mmt. Furthermore, the FGN is in the process of securing 200 rice mills, which it will supply at a discount. These mills could each handle between 10 and 100 metric tons (mt) per day, and are to be distributed to clusters of farmers across the country.
Investments within the rice segment led to the recent launch of the WACOT rice mill located in Kebbi State which has a milling capacity of 120,000mt. This mill is expected to engage at least 50,000 farmers over the next few years. Another development within the segment worth highlighting is the recent partnership between Lagos State and Buhler (a leading global rice milling firm situated in Switzerland). This partnership is expected to result in the construction of a 32 tons per hour rice mill in Lagos.
The second agricultural segment that is set for a boost is fertiliser, through the recently inaugurated Indorama fertiliser plant. The plant has a daily production capacity of 4,000mmt of nitrogenous fertilisers. In addition to this, the FGN’s fertiliser initiative has led to the revival of eleven fertiliser blending plants. One in Ebonyi State, another in Lagos and the remaining nine in northern states. The projected annual fx savings from the revival of these plants is US$200m. The potential impact will be a reduction in fertiliser pricing which generally feeds into domestic food product costs.
A third area to highlight is the dairy industry. Local milk production is less than 1% of Nigeria’s annual demand, estimated at 1.45bn litres. However, the dairy industry is set to receive a boost with the Dangote Group’s proposed injection of US$800m to breed 50,000 cows. This should translate into annual production of 500 million litres of milk. Although there are no official statistics on its import bill, cheese (a by-product of milk) is frequently consumed by Nigerians. In most retail shops, the cost of cheese has doubled. Ideally, a boost in milk production should stimulate production of cheese in Nigeria.
The fisheries segment has also experienced some forward movements in local substitution. Recent data from the ministry of agriculture and rural development reveal that annual national supply has increased to 1.1mmt from 800mt. The supply gap has reduced slightly to 1.0mmt. Nigeria’s annual fish import bill is estimated to have declined by 42%. This pickup in annual fish production is largely due to the progress made from the FGN’s import substitution policy. The forward steps towards self-sufficiency in fisheries are laudable. However, structural issues such as power shortages, poor access to finance and challenges with logistics amongst others still exist.
The fifth segment worth highlighting is sugar. Nigeria’s sugar requirements are mostly met through imported raw sugar refined locally. Brazil is the largest supplier with an estimated annual import value of US$500m. Nigeria’s sugar production is projected to increase by 14% y/y to 80,000 tons by the end of this year on the back of the CBN’s Anchor Borrowers Program (ABP). The sugar industry is also set to gain an injection of US$300m in investments from the BUA group for both sugar production and refining. This is expected to result in an additional production of 1.5mmt of raw sugar annually.
These investments should reduce the country’s food import bill considerably and push Nigeria closer to its self-sufficiency goals.
As for export potential, the opportunities remain vast. Historically, the trend has been higher export volumes of agricultural products when compared with processed food products. The most recent data from the CBN show agricultural products accounting for 40% of non-oil exports while food products accounted for just 10% in Q1 2017. There have been milestones achieved across most segments of the agriculture sector. However, agro-processing remains hugely untapped.
Although there are still structural issues and increased focus needs to be placed on improving product standards to enable Nigeria compete effectively in the global market, agro-processing also needs to be considered as priority in addition to increased farming activities.
Chinwe Egwim, Macro Economist & Fixed Income Securities Analyst at FBN Capital