Post on 24-May-2015
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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Ca
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ava
Re
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ire
d P
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Mo
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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