Temp August 2013 2013-860 Olagunju 5 F P2 (636-648)

International Journal of AgriScience Vol. 3(8): 636-648, August 2013 www.inacj.com ISSN: 2228-6322 International Academic Journals

International Journal of AgriScience Vol. 3(8): 636-648, August 2013 636

Impact of credit access on value chain activities of Agro-Processing Industries

in Oyo State, Nigeria

Olagunju F.I.* Department of Agricultural Economics, Ladoke Akintola University of Technology, P.M.B 4000 Ogbomoso, Oyo State,

Nigeria. Author for corespondence (email:[email protected])

Received June 2013; accepted in revised form July 2013

ABSTRACT This paper explores the structure, the financial viability of agro-processing industries and the

effect of credit access on value addition by different agro-processing units in Oyo State, Nigeria.

A multistage random sampling method was used to select a sample of 160 credit and non credit

agro-processors of different types from each selected local government areas by using

proportional allocation method. The data were analyzed using descriptive statistics. The extent of

value addition has been about 34% and 20% for credit and non credit users in the cassava mill

sector respectively. The maximum value addition has been observed in fruits/vegetable

processing (103%) followed by cashew based units. The results obtained for the processors with

credit indicated that they are efficient than their counterparts producing without credit. This

result is expected and points to the positive impact of credit on value chain activities. There was

under capacity utilization in almost all types of processing industries in the state due to lack of

adequate supplies of raw material, bottlenecks in market penetration and marketing strategies,

inadequate credit. The break-even output is very low hence the agro industries in the state were

running into loss due to low capacity utilization. Improvement in basic infrastructure like

developing railway links, metallic roads, cool chains, adequate/ uninterrupted power supply,

disposal of sewage/ industrial effluents, housing, control of traffic congestion can bring a

positive change on resource utilization.

Keywords: Financial viability, Oyo state, Value Chain, Value Addition, Credit, small scale enterprises

INTRODUCTION

The potential of the Agricultural sector in

securing incomes, employment and food

supply and thus to reduce poverty among the

small scale enterprises has greatly reduced.

The greatest challenge to the development in

the sector is low productivity and the

reasons for this among other things are little

access to financial resources by the

producers and weak modern technologies

and their organizational structures. Credit to

farmers can be categorised into cash credit

(loans given to farmers by financial

institutions), and non-cash credit which

comprise the supply of inputs to farmers by

companies, individual

entrepreneurs/businessmen etc., for which

637 International Journal of AgriScience Vol. 3(8): 636-648, August 2013

these farmers make payments after

harvesting. This study is focused on cash

credit (i.e., loans that farmers received from

the financial institutions). In most

developing countries, agricultural credit is

considered an important factor for increased

agricultural production and rural

development because it enhances

productivity and promotes standard of living

by breaking the viciouscycle of poverty of

small scale farmers. Credit is regarded as

more than just another resource such as land,

labor and equipment, because it determines

access to most of the farm resources

required by farmers. The explanation is that

farmers adoption of new technologies necessarily requires the use of some

improved inputs which may be purchased.

Credit also acts as a catalyst for rural

development by motivating latent potential

or making under-used capacities functional

(Olagunju and Babatunde, 2011).

Generally, the accessibility of a good

financial service is considered as one of the

engines of economic development.

Governments of less developed countries

have frequently practiced

the policy of providing cheap credit to the

agricultural sector through financial

intermediaries.

This cheap credit, it was hoped, would lower

the dependence on the rural money lenders.

The provision of credit has increasingly

been regarded as an important tool for

raising the incomes of rural populations,

mainly by mobilizing resources for more

productive uses. As development takes

place, one question that arises is the extent

to which credit can be offered to the rural

poor farmers to facilitate their farm

operations, all things being equal. Thus, the

usefulness of any agricultural credit program

does not only depend on its availability,

accessibility and affordability but also on its

proper and efficient allocation and

utilization for intended the purpose by

beneficiaries Oboh (2008)

In Nigeria, the problems of agricultural

credit to small scale farmers arise from the

following: source, availability and use.

There is inadequate or complete absence of

financial projections and planning, and also

high level of illiteracy among the processors

and lack of relevant information as to how,

when and where to obtain credit. There is

also lack of skilled personnel in our credit

institutions to supervise and monitor loan

packages as well as manage them, and

diversion of credit to non-agricultural

purposes by the beneficiaries. Every

segment of agricultural production requires

the availability of adequate capital since

capital determines access to all other

resources on which farmers depend for their

operation (Olagunju et. al. (2013).

Nevertheless, small scale processors are

constrained by inadequate credit to carry on

with meaningful agro-processing activities.

Accessibility to credit alone without good

management by beneficiaries cannot

guarantee the expected improvement in food

production level, income and hence prompt

loan repayment. It has been shown that farm

level credit if well applied, enhances capital

formation and diversified agriculture,

increases resource productivity, size of farm

operations, innovations in farming,

marketing efficiency, value added and net

farm incomes (Olagunju and Ajiboye,

2010).

In both developed and emerging economies,

the availability of credit in promoting a

favourable environment for the development

of small and medium scale enterprises

(SMEs) is seen as critical. SMEs are a

primary driver for job creation and GDP

growth. They greatly contribute to economic

diversification and social stability and also

play an important role for private sector

development (Knight, 1998). Increase in

volume of production, the optimal use of


agricultural resources, the creation of a

stable food market, the achievement of

greater level of productivity, increase the

competitiveness of agricultural products and

implementation of integrated agricultural

and rural development are some of the

strategic objectives of the development.

Small and medium sized enterprises in

agribusiness have an important role in the

realization of these

goals. Favorable natural conditions as well

as tradition in the production and processing

of agricultural products, a relatively

favorable geographic position, qualified and

relatively cheap workforce, good transport

infrastructure, as well as a relatively

unpolluted environment, are just some of the

stimulating factors for the development of

small and medium sized enterprises in

Nigeria.

In the last decade or two there has been a

resurgence of interest in value-added agriculture, driven by consumer

characteristics and the desire of farmers to

capture a larger share of the consumer

dollar. As interest in on-farm processing

(and value-added activities more generally) has grown, governments at the

national and regional levels have determined

that there are benefits to supporting various

types of value-added agricultural activities. The main motivations of governments are

enhancing or stabilizing farm-household

incomes, creating rural employment and

economic development, and maintaining

land in agricultural (or open) use (Streeter

and Bills, 2003).

The relative importance of SMEs in

advanced and developing countries has led

and would continue to lead to a

reconsideration of the role of SMEs in the

economy of nations. The development of

many countries is often measured by such

indices as the level of industrialization,

modernization, urbanization, gainful and

meaningful employment for all those who

are able and willing to work, income per

capital, equitable distribution of income, and

the welfare and quality of life enjoyed by the

citizenry. There are various multiplier

effects of agro-processing industry such as

spread of industrialization in rural areas

leading to more livelihood options to

teeming millions, nutritional supplements,

stable prices of agricultural commodities

and many other effects due to backward and

forward linkages. The economic prosperity

of rural farmers in particular was achievable

only with an effective integration and

synergy between agriculture and agro-based

industries (Tripathi, 2006).

The value addition in agriculture derives

from the value chain which encompasses all

activities involving agricultural input and

production, processing, storage, marketing

and distribution, household and industrial

consumption and export. All along the chain

many problems and constraints persist.

Agricultural input constraints include those

relating to availability and quality

of supply (e.g. land, seeds, fertilizer etc.).

Production problems include those related to

scarcity and high cost of inputs, technical

production problems (low yield, pest and

diseases problems) and unstable agro-

climatic conditions that aggravate farmers production risks. Others include socio-

economic problems (low level literacy,

pervading poverty and aging farming

population). Processing and storage

problems include those of poor technology,

high wastage, inadequate infrastructure

(energy) and poor quality of primary

products. Marketing and distribution

constraints include those of poor

infrastructure (access roads), inadequate

market information, lack of quality control

and safety standards and weak market

linkages. The key problem of exports is

mainly the un-competitiveness of many

commodities in the international market

(high cost of production and poor quality


control). Consumption problems relate to

household poverty, low industrial capacity

utilization and inadequate quality control

and safety standards. Common to all nodes

of the value chain are financial constraints

which include poor access to loan and high

interest rates. But, it is disheartening to note

that despite large and diversified agricultural

base, commercial processing in Nigeria is

quite low (Aremu and Adeyemi, 2011). As

such, agricultural development may not go

very far unless there is enough access to

production credit for development of agro-

based industries not only to take up surplus

labour force from agriculture but also to

provide a solid technical base to modernize

agriculture. Added to this, SMEs in Nigeria

suffer from very poor inter and intra-sectoral

linkages, and as a result lose benefits

synonymous with economies of large-scale

production. Hence the weak inter industry

relationship badly affects to weaken the

value chain thereof low value addition.

Credit supply to farmers is widely perceived

as an effective strategy for enhancing the

increase in agricultural productivity (Phillip

et al., 2008). Agricultural credit is

considered essential to the process of

improving agriculture and transformation of

the rural economy. According to Mahmood

et al., (2009), the introduction of easy and

cheap credit is the quickest way for boosting

production. The argument is that the

agricultural sector depends more on credit

than any other sector of the economy

because of the seasonal variations in the

farmers returns and credit requirement in the transformation of subsistence to

commercial farming. Credit provides the

opportunity for them to earn more money

and improve on their standard of living.

Therefore, provision of adequate credit for

agro-based industries should be enhanced.

This is perhaps the most critical factor that

planners and policy makers have ignored in

the past and that is why the burden of

workforce down the ladder (farming) in

primary sector has not diminished. This

clearly shows lopsided development wherein

changes in sectoral output composition have

not led to the proportionate changes in

structure and occupation of workforce.

Consequently, the disparity between per

worker income in agricultural vis--vis non-

agricultural sector has widened over the

years. Therefore, rapid growth of agro-

processing industry close to agricultural

production centres can bring about the

desirable shift in employment structure

without moving people from rural to urban

areas (Aremu, 2004).

The major objective of this study is to

determine the impact of credit use on value

chain of agro processing industries in the

study area. The specific objectives of the

study were:

(i) To study the structure, capital investment

and extent of value addition in various

types/sizes of agro-processing units in Oyo

State and (ii) To examine the effect of credit

use on value addition of different categories

of commodity specific agro processing units

in the state.

Value chain: Concept and Issues

The value chain concept is introduced by

Michael Porter in his book. The value chain

can break down the activity of the company

into a sequence of elementary operations

and identify potential sources of competitive

advantage. According to Adetonah et al

(2010), the value is the amount that

customers are willing to pay for the product

that is offered. The value chain is a concept

which can be simply described as the entire

range of activities required to bring a

product from the initial input-supply stage,

through various phases of production, to its

final market destination. The production

stages entail a combination of physical

transformation and the participation of

various producers and services, and the


chain includes the products disposal after use. As opposed to the traditional exclusive

focus on production, the concept stresses the

importance of value addition at each stage,

thereby treating production as just one of

several value-adding components of the

chain. It resulted from different activities

performed by suppliers, the firm and

distribution networks. According to Giertz,

et al (2008), the value chain includes all

activities undertaken by transforming raw

materials into semi-finished or finished

goods for sale or consumption. Value Chain

describes all the activities required to bring a

product or service from conception through

production stages (involving a succession of

physical and uses of various services),

distribution to final consumers and its

destruction after use. The overall

performance of the value chain can be

enhanced both by strengthening each link

and by strengthening the connections

between the links

In reality, value chains tend to be more

complex, to involve numerous interlinked

activities and industries with multiple types

of firms operating in different regions of one

country or in different countries around the

globe. For instance, agro-food value chains

encompass activities that take place at the

farm as well as in rural settlements and

urban areas. They require input supplies

(seeds, fertilizers, pesticides, etc.),

agricultural machinery, irrigation equipment

and manufacturing facilities, and continue

with handling, storage, processing, and

packaging and distribution activities. Other

elements, such as power generation,

logistics, etc., which form the chain

environment, are also important factors

affecting the performance of value chains.

Value chain analysis is a useful analytical

tool that helps understand overall trends of

industrial reorganization and identify change

agents and leverage points for policy and

technical interventions. It is increasingly

used by donors and development assistance

agencies, including UNIDO, to better target

their support and investments in various

areas such as trade capacity, enterprise

competitiveness, income distribution and

equity among value chain participants.

Value chain analysis is the process of

breaking a chain into its constituent parts in

order to better understand its structure and

functioning. The analysis consists of

identifying chain actors at each stage and

discerning their functions and relationships;

determining the chain governance, or

leadership, to facilitate chain formation and

strengthening; and identifying value adding

activities in the chain and assigning costs

and added value to each of those activities.

The flows of goods, information and finance

through the various stages of the chain are

evaluated in order to detect problems or

identify opportunities to improve the

contribution of specific actors and the

overall performance of the chain. In many

parts of the world, agriculture continues to

play a central role in economic development

and to be a key contributor to poverty

reduction. However, agriculture alone will

not be sufficient to address the poverty and

inequality that are so pervasive in todays world. It is becoming increasingly crucial

for policy makers to focus immediate

attention on agro-industries. Such industries,

established along efficient value chains, can

increase significantly the rate and scope of

industrial growth. Agro-industrial products

offer much better prospects of growth than

primary commodities. In addition, the

marked trend to break down production

processes into specific tasks opens up new

opportunities for developing countries to

specialize and take a more profitable part in

global trade provided they meet increasingly

stringent market requirements (UNIDO,

2009).

MATERIAL AND METHODS


The study was carried out in Oyo State,

located in the Southwest geopolitical zone of

Nigeria. The State lies between longitude

2.5o

E and 5 E and latitude 7o N and 19

o N

of the equator and covers an area of

approximately 26,500 km2. The state has a

total population of 5.6 million going by

provisional figures of the National

Population Commission (2008). It has a land

area of 27,140,000sq.km. The State enjoys a

tropical humid climate with two climatic

seasons, the rainy season that prevails from

April to October and the dry season that

lasts from November to March. The

Southern part of the State is dominated by

the tropical rainforest while the guinea

savannah belt dominates the remaining parts

(Agboola, 1979). In Oyo state, there are

numerous small and medium sizes of agro-

processing units for processing of fruits,

vegetables, cereals, oilseeds, animal

products, herbal/medicinal oils/products and

a variety of ancillary agricultural

commodities. Within the State however,

there are five sub-ethnic groups with distinct

dialect peculiarities, they are: Ibadans,

Ibarapas, Oyos, Oke-Oguns and

Ogbomosos. Two stage sampling design was

followed to select the processing units. In

the first stage of sampling, two local

government areas each from the groups were

randomly selected. The local government

areas selected are: Lagelu-Iyana ofa , Ibadan

north-Agodi, Atiba- Ofa Mefa, Afijio-

Jobele, Atisbo Tede, Saki West- Saki, Ibarapa East-Eruwa, Olorunsogo- Igbeti,

Ogbomoso North kinnira and Ogo Oluwa Ajawa. The complete list of agro processing units in the study area were

obtained from the state ministry of

commerce and industry, local government

areas and federal Ministry of commerce and

industry. These units were grouped into

different categories on the basis of

commodity specific agro-processing as:

cereals-based (flour mills, rice mills,

bakery), fruits and vegetables-based,

oilseeds-based, cashew based, cassava and

poultry processing units. In the second stage

of sampling, a sample of 160 agro-

processing units of different types for

processors with or without access to loan

were selected purposively from each

selected local government areas (Table 1).

The primary data on different aspects of

agro processing were collected from the

selected processing units through survey

method for the year 2010-11. The primary

data comprised information on size, type,

location, installed capacity and utilization,

capital investments, labour employment,

sources of raw material and supply

mechanism, cost of processing, value

addition, and marketing of processed

products, quality aspects, sales turnover,

financial accounts, profits, equity position

and general constraints. Different sets of

data were classified and tabulated for

carrying out detailed analysis. Tabular

analysis was extensively used in the study to

workout ratios, averages, and indices to

derive different parameters of performance

of agro-processing sector. The primary data

on different aspects of agro processing were

collected from the selected processing units

through survey method for the year 2011-12.

The primary data comprised information on

size, type, location, installed capacity and

utilization, capital investments, labour

employment, sources of raw material and

supply mechanism, cost of processing, value

addition, and marketing of processed

products, quality aspects, sales turnover,

financial accounts, profits, equity position

and general constraints. Different sets of

data were classified and tabulated for

carrying out detailed analysis. Tabular

analysis was extensively used in the study to

workout ratios, averages, and indices to

derive different parameters of performance

of agro-processing sector.


Table 1. Type of Sample Agro-processing Units in Oyo State

Processing units With credit Without credit

Vegetable/ Fruit based

Oil seed based

Cereal based

flour mill

Cassava mill

Livestock Based

Cashew based

Total

4

7

18

8

15

10

7

69

6

6

23

12

23

12

9

91

Source: Local Government Areas: Various Records, 2012

RESULTS AND DISCUSSIONS

Socio-Economic Characteristics of Agro-

processors

Table 2 shows the age distribution of the

agro-processors. Majority of the respondents

(54.3%) were within the age range of 30 39 years while 20.8% were even younger. A

total of 88.1% of the respondents were thus

aged below 50 years. The mean age was

38.6 years. This indicates that most of the

processors were young and in their prime

age in terms of productivity. Hence, given

the necessary resources, these sets of

respondents have high potentials to attain a

high level of productivity. The relatively

young age of the respondents should, all

things being equal have positive impacts on

enterprise size, earnings, the ability to take

risks and adopt modern innovations within

the context of a familiar and clearly

understood technological terrain. Women

were always involved performing such tasks

as washing, sorting, roasting, peeling,

sieving and frying the products as the case

may be. This confirms the view that

processing is predominantly a female

enterprise in Nigeria and indeed, most

African societies (Ajayi, 1995; Olagunju, et,

al., 2012). This can thus be interpreted that

agricultural research and extension as well

as policy efforts aimed at enhancing food

processing in Nigeria should be tailored to

meet the needs and constraints of women.

These constraints will include the ability of

women to call on investment funds required

to purchase new technology and the

compatibility of the technology to womens physiological conditions. This is particularly

important if post harvest food losses must be

minimized through adding value to the food

crops especially at the farm gate level

(Oluwasola, 2010). Only 7.5% of the

processor had a family size of between 1 and

5. About 65% of the respondents had a

family size of between 6 and 10 while the

remaining had more than 10. The average

family size in the study area was 9.4, which

compares with similar findings from other

studies conducted in the Southwestern

region of Nigeria (Olagunju and Sanusi,

2010). The large family size is typical of

most rural farming communities in Nigeria

where household labour is the most

dependable source of farm labour. About

17.5% of the respondents did not go to

school at all, 60.0% had only primary

education, 20% completed secondary

education while 2.5% attended tertiary

institutions. Clearly, the level of education

among respondents was very low. In

traditional societies as typified by rural

areas, the education of the female gender is

not a major family priority and this was

clearly manifested in the study area. This

has serious implications for the development

of small-scale farm based enterprises in the

rural areas. The low level of education

among the respondents could have serious

implications on their ability to access

information, use new technological


innovations and even access or procure

credit from formal financial institutions. The

tendency is to operate the processing

business using traditional methods as was

done in the study area. Hence, while

attempts need to be made to access the

processors to modern machines to enhance

their output, it should be done within the

context of familiar, clearly understood and

tested technological environment. In other

words, locally fabricated technology will

serve a better purpose than imported exotic

ones as a result of their scale of operation

and level of education. Eight (5%)

respondents were new entrants in the

processing business as they had spent only

between 1 and 5 years while 63.8% had

been in the business for between 6 and 10

years. The others have been involved in

cassava processing for more than 10 years.

The mean experience of processors was 7.8

years. The experience of the processors in

various fields is sufficient for a thorough

understanding of the technical procedures of

doing the business profitably. The main

source of take-off capital for the business for

72.7% of the respondents was personal

savings although some of them invested

these savings in an inherited enterprise or

combined it with gifts from family and

friends. About 64% got credit from formal

institutions. The Small and Medium

Industries Equity Investment Scheme was

established to energize the Nigerian

economy by channeling funds from banks to

the small and medium industries.

Status of Agro- Processing Sector in Oyo

State

The Small scale enterprises in Oyo State fall

into categories such as organized and unorganized enterprises. The organized groups have registered offices and have paid

workers, whilst the unorganized ones are

mainly made up of artisans. Most of these

enterprises are largely made up of family

groups and individual artisans. The activities

in the small scale enterprise sector range

from agro processing, pottery and ceramics

to manufacturing of spare parts and

electronic assembly. The small scale

industry is acknowledged to have huge

potential for employment generation and

wealth creation in any economy. Yet in

Nigeria, the sector has stagnated and

remained relatively small in terms of its

contribution to GDP or to gainful

employment. Activity mix in the sector is

also quite limited dominated by import dependent processes and factors. The agro-

processing development in Oyo State has

been quite slow just as other state in the

country. In view of this, Interest in the

development of SMEs and their contribution

in the development process continue to be in

the forefront of policy debates in the

developing countries hence, the state

government had extended some fiscal reliefs

to its citizens in other to promote industrial

development in general and agro-processing

in particular. To reap the benefits of fiscal

incentives and to promote industrial

development, the state government has

established Ministry of Industry, Applied

Science and Technology about 7 years ago.

It was created on the 24th of August, 2005

with staff strength of 90 for the promotion of

technology driven SMEs for rapid

industrialization and technological

transformation and to harness the available

raw materials and mineral resources of the

state. The classification of agro-processing

units has been depicted in Table 3. It is

observed that most of the processing units

were cereal-based, followed by cassava mill,

livestock-based, cashew and oilseed-based.

There were only 25 registered fruits and

vegetable based processing units. This

clearly shows the slow expansion of fruit

and vegetable processing industry, despite

the fact Oyo state is one of the leading

producers of fruits and off-season vegetables

in the country. This therefore disproves our


assertion and hypothesis that processing

industries expanded nearer to the potential

source/ supply of raw material. The cassava

mill can be said to be highly favoured since

UNIDO (United Nations Industrial

Development Organization) has on going

projects in Oyo State, where it is helping to

develop a cassava processing plant mainly

focusing on the major problem in cassava

processing which is drying - to develop a

cassava flash drier and this has been a

project in partnership with the Japanese

government. It is also working at improving

the quality of Nigerian products so that they

can compete favourably in the international

market.

Table 2. Socio-economic Characteristics of Agro-processors(with and without credit access)

Age of respondents (Years): Frequency Percentage Cumulative percentage

59 8 5.0 100.0

Mean = 38.6

Gender distribution of respondents:

Female 160 100 100.0

Family size of respondents:

1 5 members 12 7.5 7.5 6 10 104 65.0 72.5 11 15 36 22.5 95.0 16 20 5 3.1 98.1 >20 3 1.9 100.0 Mean = 9.4

Level of education of respondents:

No formal Education 28 17.5 17.5

Completed up to primary school 96 60.0 77.5

Completed up to secondary school 32 20.0 97.5

Completed up to tertiary Institution 4 2.5 100.0

Experience of processors(Years):

1 5 8 5.0 5.0 6 10 102 63.8 68.8 11 15 36 22.4 91.2 16 20 8 5.0 96.2 >20 6 3.8 100.0

Mean = 7.4

*Source of take-off capital

Own savings 112 72.7

Credit (formal) 98 63.6

Inheritance 42 27.3

Gifts/donations from family/friends 32 20.8

Source: Field Survey, 2012 *multiple choice

Table 3. Commodity-wise Classification of Agro-processing Units in Oyo State

Processing units Number Percent

Vegetable/ Fruit based 25 6.5

Oil seed based 32 8.0

Cereal based 102 26.5

Flour mill 46 12.0

Cassava mill 91 24.0

Livestock Based 50 13.0

Cashew based 38 10.0

Total 384 100.0

Source: LGAs; Ministry of Commerce and Industry, Oyo State.


Investment Pattern

The total capital investment under different

types of agro-processing units has been

depicted in Table 4. The total capital

investment was highest in case of livestock

(N 42.1m) followed by flour mills (N22.1m)

followed by rice mill and fruit/ vegetable

processing (N18.1m). The share of land and

building structures was substantial in all the

units that accounted for about 72, 78 and 74

per cent in case of cassava mill and rice mill,

and in Oil seed based units respectively.

There is a different story in the case of

livestock based, cashew based and fruit/

vegetable units with just about 40, 31 and 53

% respectively.

Installed Capacity, Utilization and Break-

even Production under Different Agro-

processing units in Oyo State

The processors response based on installed capacity and break-even analysis are

presented in Table 5. The table shows that

the processors have not benefited in terms of

timely availability of raw materials (72.7%),

very few (12.9) only benefitted from timely

availability of raw materials required for

processing. The results further showed that

inadequate supply of raw material was the

major factor for low capacity utilization.

The result was similar to what was obtained

in Himachal Pradesh (Sharma et al., 2010)

For instance some of the processing units

find it difficult to run the units from local

supplies and were forced to purchase raw

material from other states at higher prices. In

essence, there was under capacity utilization

in almost all types of processing industries

in the state. It was mainly due to lack of

adequate supplies of raw material as well as

bottlenecks in market penetration and

marketing strategies to woo the consumers.

Most of the processors agreed that the

break-even output is very low (66.3%)

hence most of the agro industries in the state

were running into loss due to low capacity

utilization.

Table 4. Capital Investment under Different Types of Agro-processing Units in Oyo State

Processing Units Land and Plant/ (N/unit)

Buildings Machinery Total

Vegetable/ Fruit based 9,636,555 8,548,623 18,185,178

Oil seed based 5,407,419 1,859,519 7,266,939

Rice meal 12,013,282 6,287,619 18,300,901

Flour mill 14,320,953 7,818,200 22,139,153

Cassava mill 867,420 342,286 1,209,706

Livestock Based 16,540,350 25,658,200 42,198,550

Cashew based 594,434 1,345,324 1,939,776

Overall average 4,075,307 2,486,448 6,561,755

Source: Field Survey, 2012

Table 5. Distribution of Agro-processing Units by Installed Capacity and Break-even Analysis

Processing Units Strongly Agree Undecided Disagree Strongly

Agree Disagree

Timely availability of raw material 7(4.5) 13(8.4) 22(14.3) 45(29.2) 67(43.5)

High Capacity Utilization 12(7.8) 18(11.7) 32(20.8) 44(28.6) 48(31.2)

Break-even points 9(5.8) 14(9.1) 29(18.8) 48(31.2) 54(35.1)

Source: Field Survey, 2012 Figures in parentheses are the percentage respondents

Processing and Value Addition

For farmers, value-added has a particular

importance in that it offers a strategy for

transforming an unprofitable enterprise into

a profitable one. In fact, there are very few

items that a small farmer can produce and


sell profitably at the first level (that is, on

the open wholesale market). Therefore, a

value-added strategy is critical to the long-

term survival of most small farms in Oyo

state. Many producers will look for ways to

be economically viable through voluntary,

incentive-based solutions. Producers greatest opportunities may lie in activities

that add value to theirproducts and move

their point of first sale downstream toward

consumers. Adding value to bulk raw

commodities is one way for producers to

keep a larger share of the margins associated

with further processing and market

development. Progressive producers respond

to market developments, determine what

factors will drive the future of their industry,

and use these results to their advantage by

adapting to change. The extent of value

addition was found to vary from industry to

industry and product to product, depending

upon the nature/ brand of raw materials,

technology, packaging requirement and

extent & magnitude of selling and

distribution expenses involved. It was

discovered that better training on

management and technical aspects should be

provided with market information and

infrastructure so that they could scale-up

their production and become competitive in

the market. The extent of value addition

under different types of processing

industries for those that have access to credit

and those without credit was estimated and

is shown in Table 6. It can be observed that

Vegetable/ Fruit based processors with

credit used the total inputs worth N35,758

632 and produced processed output value

totaling to N 72740712 resulting in the net

value addition of over 100 per cent over

input cost while those without credit used

total inputs that worth N15,354,431 and

produced processed output value totaling

N95,323,985 resulting in the net value

addition of N83.89. The results for the

processors without credit are not as high as

that of their counterparts; this could be an

indication of lack of resources and inability

to acquire additional capital for value

addition. The results obtained for the

processors with credit indicated that they are

efficient than their counterparts producing

without credit. This result is expected and

points to the positive impact of credit on

value chain. The flour mill, on the other

hand, enhanced value by about 28 per cent

for credit worthy processors while non credit

processors had 43%. In the case of rice mill,

46 per cent and 43% value addition were

made with rice milling for both credit

worthy and non credit worthy processors

respectively. The value addition was quite

high in cashew based (72%), oil seed based

(56%) and moderately low in cassava

processing (34%). This follows the same

trend with processors without credit access.

Table 6. Extent of Value Addition in Different Agro-processing Industries in Oyo State

Processing units Agro-Processors with Credit Agro-Processors without Credit

Value of Value of Value

material final addition

Inputs output (%)

Value of Value of Value

Material final addition

Inputs output (%)

Vegetable/Fruit based

Oil seed based

Rice mill

Flour mill

Cassava mill

Livestock Based

Cashew based

Overall average

35,758, 632 72,740,712 103.42

6,968,212 10,900,408 56.43

22,555,436 32,941,621 46.04

25,915,224 33,208,729 28.14

2,254,113 3,024,265 34.17

50,864,342 75,957,390 49.33

2,815,796 4,849,440 72.22

10,272,131 13,123,510 27.76

15,354,431 95,323,985 83.89

4,342,489 6,212,432 43.06

20,224,631 28,897,064 42.88

22,453,915 25,282,245 11.19

1,997,877 2,407,164 20.48

25,732,321 38,202,332 48.46

2,252,342 3,312,332 47.06

7,367,484 8,953,886 21.53

Source: Field Survey, 2012 Note: Inputs included value of additives/preservatives, etc.


CONCLUSIONS

The agro processing industries face variety

of constraints. Factor availability and cost

are the most common constraints. Access to

finance remains a dominant constraint to

small scale enterprises in the state. Other

constraints faced by the sector include: lack

of access to appropriate technology; the

existence of laws, regulations and rules that

impede the development of the sector; weak

institutional capacity and lack of

management skills and training. In an

attempt to enable the sector perform its role

effectively; a number of technical and

financial support institutions were put in

place by the Oyo State government. These

ranged from government institutions,

parastatals, private institutions and non-

governmental organizations.

The relatively young age of the respondents

should, all things being equal have positive

impacts on enterprise size, earnings, the

ability to take risks and adopt modern

innovations within the context of a familiar

and clearly understood technological terrain.

The low level of education among the

respondents could have serious implications

on their ability to access information, use

new technological innovations and even

access or procure credit from formal

financial institutions. The tendency is to

operate the processing business using

traditional methods as was done in the study

area. Hence, while attempts need to be made

to access the processors to modern machines

to enhance their output, it should be done

within the context of familiar, clearly

understood and tested technological

environment. In other words, locally

fabricated technology will serve a better

purpose than imported exotic ones as a

result of their scale of operation and level of

education. This study shows that credit is

very important in value chain activities.

Most of the processors shy away from

formal lending and depend on personal

savings, relatives and friends. Policy makers

should therefore solve for the bottlenecks

that hinder formal lending to small scale

processors. This is a major challenge to

policymakers and operators of credit

institutions such as banks and cooperative

societies.

Policy Implications

There should be a necessity for cost-

effective and adequate supply of raw

material by strengthening direct linkages

through suitable contract farming models

safeguarding the interests of farmers.

Liberal credit policy to modernize small-

scale processing units to enable them

(women) to compete with organized

industries and effective R&D support to the

agro-processing sector in enterprise

development/management and

marketing/exports is very essential. This will

afford them more access to funds for

business development.

Improvement in basic infrastructure like

developing railway links, metallic roads,

cool chains, adequate/ uninterrupted power

supply, disposal of sewage/ industrial

effluents, housing, control of traffic

congestion, etc. Finally, as more funds were

made available to the small scale poultry

farmers at minimal costs, the level of output

in industry will improve.

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