What went wrong in the agriculture sector in Nigeria?

In the year 2013 , Indonesia made $19b from exporting palm oil, this is more than the entire 2014 budgets of the South East, South South and Ondo (crude oil states) combined
(South South N1,981trn, South East N619bn, Ondo N162bn)
How is this even possible?
In 1832, 75% of the global palm oil export came from Nigeria. Between 1961 and 1965 world oil palm production was 1.5 million tons, with Nigeria accounting for 43% of that production. Today, Nigeria, ranks behind Malaysia and Indonesia accounting for only 7% of world palm oil production. It’s important to add that Malaysia and Indonesia are also oil producing nations, yes they have crude oilBy 1960, Nigeria was the World’s largest exporter of shelled groundnuts, with a 40% global market share, today we have 0% market share. Groundnuts were special to Nigeria, between 1956 and 1967, Groundnuts was one of Nigeria’s most valuable export crop, and there were groundnut pyramids in Kano, now all gone. To be specific, groundnut exports fell from 502,000 tons in 1961 to 291,000 tons in 1970 to zero by 1980….

So why did the groundnut pyramid disappear from Nigeria? Sure there was Aflatoxin contamination that affected the groundnut exports. So why did the Northern region not just fumigate and fix the contamination? Why did it just allow exports cease?
Why has agriculture collapsed? Well everyone says crude oil, but it’s not just crude oil, it’s the way we have structured our fiscal federalism.
I explain.
Below is the progression of fiscal allocation formula.

1953 Sir Louis Chick: The penultimate revenue allocation formula for Nigeria was done by Sir Louis Chick. His formula was presented and unanimously agreed at the 1953 constitutional conference in London. It was basic, it read “all mining taxes will be collected federally, distributed based on derivation, same for income taxes”.

To be clear, it was income tax, mining rent & royalty to be collected and shared 100% to states based on derivation. Federal government got 0%. The minerals at this time was Tin, Columbite and Coal.

Export duties was 50% to state of origin of export, 50% to federal government….

1958 Raisman; Commissioner Raisman amended Sir Chick formula. He slashed the 100% derivation to states to 50%…thus Mining rights was now 50% to state of origin by derivation. Of the other 50%…20% was given to the Federal Government and 30% was again pooled into the “Distributable Pool” and shared by all four regions again, in this formula… North 40%, East 31%, West 24%, and Southern Cameroon 5%.

Export duties was 100% to state of origin

1963 constitution….this followed the 1958 Raisman allocation, in summary it remained, mining rights for oil producing regions 67.4%, Federal Government 20%, non-oil regions 12.6%

Export duties maintained at 100% of state of origin

1970 Decree no 13, the Military steps in, the states lose fiscal autonomy, maintain derivation. The Distributable pool was gone, the Oil producing states lost 5% of their derivation percentage. The new formula was now…mining rights for oil producing states, 45%, Federal Government 55%

1975, Decree 6: the military further reduced derivation to 20%, thus mining rights to oil producing states….20%, Federal Government 80%

1977, Aboyade Commission. The Military created the Federation Account. Derivation abolished. Thus mineral rights to oil producing states 0%, Federal Government 100%.

Export duties now 0% to state of origin

Thus in 13 years, Nigeria went from state share of mineral rights at 67% to 0%, and took states share of export proceeds from 100% to 0%

There remains NO incentive for State Government to encourage agriculture. States own the land, Where the land is commercially farmed, the companies pay incomes taxes to the FGN, when the cash crops are exported, export duty is paid to the FGN. The states were left with nothing. The States receive a share of these taxes via Consolidated Revenue Fund, but not according to derivation). It was during this period when the States lost the right of fiscal federalism that commercial agriculture crashed in Nigeria.

When the Federal Government took the crude oil and non oil export proceeds revenues what did they do with it? The FGN shared it back to the States and Local Government according to a formula. States got on average 32%, Federal 47%, LGAs 15% (*note there are statutory transfers to Ecology, Agric development etc )

Export taxes remains 0% to States as derivation, Company income taxes remain 0% accrued to states as derivation…..This means states do not retain as revenue to their budgets the export duties on cash crops produced in their States.

But that is not the whole story….

That 31% the FGN shares to states, is it shared equally? NO how is it shared? That’s called the horizontal revenue allocation formula. The key sharing heads are

1. Equality 45%,

2. Population 25%

3. Land mass 5%



Lets pause here

What this means is that just being a State in the Federation with a high population guarantees any State 65% of the allocation to States from the Federation purse ….

The FGN took the mineral and non-oil export earning to an central account, retained 47% of that account, then returned 51% to the States and LGAs but determined it will be shared out based on“equality” and “population”… not derivation, ie where the income was generated.
Thus all States now focused on their population figure, not agriculture. Any attempt by the National Population Commission to discuss population shifts is met with stiff resistance and with good reason too, population and “equality” not exports or derivation determine how states receive revenues from the 51% allocation. That is why a state can violate the constitution and conduct her own census…it’s that serious.

Palm Oil for instance can be farmed in 24 states in Nigeria including Southern Kaduna specifically in Abia, Akwa Ibom, Cross River, Rivers, Bayelsa, Imo, Anambra, Ebonyi, Enugu, Delta, Edo, Ondo, Ogun, Osun, Oyo, Ekiti, Benue Kwara, Kogi, Nasarawa, Plateau, Taraba, Adamawa and Kaduna…….but why bother planting palm oil? It’s much easier to lobby the National Population Commission for a high population count.
As States in Nigeria started to receive a greater percentage of their income from the federal government, they stopped farming. And you can’t blame them. If groundnuts export revenues still went to Kano State 100% via derivation, there would still be groundnut pyramids in Kano today, but Kano lost the export proceeds funds to FAAC, thus no incentive to plant groundnuts.

Same for Abia State, as they lost the oil palm export proceeds to FAAC, they then put their eyes squarely on “Abuja”
Is there a suggestion that we unhook states from crude oil funded FAAC and push them to farming? By giving them 100% of their export proceeds from their agriculture cash crops? YES

To fix agriculture we must fix the incentive process. If States retained even 13% derivation on income taxes and export duties on agricultural produce, they would see the incentive to attract companies to come to their States and push non oil exports. If we had left the derivation to states at 100%, then every state today would be viable.

The problem with agriculture in Nigeria is not crude oil, but our faulty fiscal federalism (FAAC)….

So what should Nigeria do?

We reward what you want to improve, if you want safer drivers you reward drivers with zero car scratches. Return back to the States the fiscal principle of derivation on agricultural exports. That will mean states can see a direct relationship between farming and IGR and this will spur investment in agriculture. Governors will seek out agriculture investors the same way and vigor they seek out Shoprite Malls.

Derivation on agriculture is also fair. All states have land, all states can farm, agriculture is still a major contributor to our GDP growth, and it still employs millions of Nigerians in every state. A fiscal amendment to give states 100% export earning can have two massive impacts

In the short term, it makes agriculture attractive in the long term it makes all states fiscally viable.

So agree to increase derivation on agricultural exports from state of origin back to 100%.

It’s our problem, we can fix it.

I apologise for this long post.

But if you can please read it.

This is why we must restructure Nigeria.

Any Presidential aspirant that isn't talking about restructuring shouldn't be voted into power 2019.

One of our biggest agricultural problem is that of subsidized dollar.
OP, imagine you are farmer who plants, processes and exports cocoa. You manage to make $5000/yr after hard labour. Now at the interbank exchange where you trade you dollar earned for Naira, the govt is always trying to reduce the dollar rate via 'interventions' A. K. A. subsidy. This leaves the you the farmer who is one generating wealth via labour with a smaller earning and discouraged. The govt is doing this to appeal to the larger portion of the populace who earn easy money and end up buying imported goods with most of the money earned (capital flight).
The govt doesn't feel the urgent need to encourage you by reducing her level of intervention subsidy of dollar because oil is still flowing.

My guy this is a brilliant submission to the conversation of Fiscal federalism. I just have a few critiques. The content is great but format bad on the eyes. It's better to break it into bite size sections.

In 1832, 75% of the global palm oil export came from Nigeria. Between 1961 and 1965 world oil palm production was 1.5 million tons, with Nigeria accounting for 43% of that production. Today, Nigeria, ranks behind Malaysia and Indonesia accounting for only 7% of world palm oil production.

Our current issue with agriculture is that we don't have financing and we are stuck in primitive mode of production. Everything by hand. There's less that 5000 tractors in country.

Nigeria was the World’s largest exporter of shelled groundnuts, with a 40% global market share, today we have 0% market share.

Sure there was Aflatoxin contamination that affected the groundnut exports. So why did the Northern region not just fumigate and fix the contamination? Why did it just allow exports cease?

The great mysteries of life.

Thus in 13 years, Nigeria went from state share of mineral rights at 67% to 0%, and took states share of export proceeds from 100% to 0%

Export taxes remains 0% to States as derivation, Company income taxes remain 0% accrued to states as derivation…..This means states do not retain as revenue to their budgets the export duties on cash crops produced in their States.

Federal Government ruining everything why am I not surprised.

There remains NO incentive for State Government to encourage agriculture. States own the land, Where the land is commercially farmed, the companies pay incomes taxes to the FGN, when the cash crops are exported, export duty is paid to the FGN. The states were left with nothing.

Compared to manufactured good I think this is true.

The FGN took the mineral and non-oil export earning to an central account, retained 47% of that account, then returned 51% to the States and LGAs but determined it will be shared out based on“equality” and “population”… not derivation, ie where the income was generated.

It should be based on derivation not just existing in same country. It gives incentives to be unproductivexported if you can eat off your neighbors plate.

Is there a suggestion that we unhook states from crude oil funded FAAC and push them to farming? By giving them 100% of their export proceeds from their agriculture cash crops? YES

Such a measure would be easy to pass even north that's against restructuring fiscally would be happy to get this.

To fix agriculture we must fix the incentive process. If States retained even 13% derivation on income taxes and export duties on agricultural produce, they would see the incentive to attract companies to come to their States and push non oil exports. If we had left the derivation to states at 100%, then every state today would be viable.

This seems like an excellent policy arangment. I doubt they do 100% maybe 50. It will be looked at as north centric. I think this policy should be extended to other natural resources as well.

Also there is the problem of value addition.
We have excellent raw cocoa but end up exporting it to merchants who process them and resell to us for a significant profit.
It applies to many other raw materials like cashew, groundnut, yam(yam is hot in asia). Cassava, corn.
Imagine we have corn but barely have enough cornflakes because it is too complex for us to produce, whereas we have custard power everywhere because it is easier to produce.

What of the problem of illiteracy. Farmers hardly catch up with latest trends in farming and end up with exports that violate the ever changing.

Desyner:
One of our biggest agricultural problem is that of subsidized dollar.
OP, imagine you are farmer who plants, processes and exports cocoa. You manage to make $5000/yr after hard labour. Now at the interbank exchange where you trade you dollar earned for Naira, the govt is always trying to reduce the dollar rate via 'interventions' A. K. A. subsidy. This leaves the you the farmer who is one generating wealth via labour with a smaller earning and discouraged. The govt is doing this to appeal to the larger portion of the populace who earn easy money and end up buying imported goods with most of the money earned (capital flight).
The govt doesn't feel the urgent need to encourage you by reducing her level of intervention subsidy of dollar because oil is still flowing.

Yes, the emphasis on a "strong" Naira punishes exporters while encouraging imports - the very opposite of what most Nigerians claim to support.

Another channel through which the Naira/Dollar exchange-rate punishes domestic producers is through the "Dutch Disease" effect: all those easy petrodollars push up the value of the Naira (which consumers love, because it makes imports cheaper), but the other side of the coin is that it destroys the competitiveness of domestic farmers and manufacturers, as their goods now cost more relative to the imports. This is by far the biggest reason why Nigeria's non-oil exports collapsed after 1970.

Desyner:
What of the problem of illiteracy. Farmers hardly catch up with latest trends in farming and end up with exports that violate the ever changing.

But the literacy rate in the southern part of the country is near 90%, and even among the older generations it is still >80%. This is far higher than it used to be in the days when Nigeria earned most of its export income through agriculture.

The real problem is that literacy is no use to a farmer if he still can't get any loans to improve his productivity, if he can't get his goods to market on time for lack of decent trains or roads, if he can't move up the value chain for lack of electricity, and if his income from exporting (or even selling to the domestic market) is reduced because of a stupid "strong Naira" policy. I haven't even mentioned the security challenges farmers face with nomadic pastoralists who want to feed their cows for free on the fruits of the farmers' hard work.

Crude Oil is the problem with our agricultural sector

Fulani herdsmen are the biggest threats to our agriculture.

omohayek:

But the literacy rate in the southern part of the country is near 90%, and even among the older generations it is still >80%. This is far higher than it used to be in the days when Nigeria earned most of its export income through agriculture.

The real problem is that literacy is no use to a farmer if he still can't get any loans to improve his productivity, if he can't get his goods to market on time for lack of decent trains or roads, if he can't move up the value chain for lack of electricity, and if his income from exporting (or even selling to the domestic market) is reduced because of a stupid "strong Naira" policy. I haven't even mentioned the security challenges farmers face with nomadic pastoralists who want to feed their cows for free on the fruits of the farmers' hard work.

No one is going to loan any funds to farmers when the marginal rate for one year treasury bills is ca 19%. That's supposed to be the riskless rate.

True talk op, true federalism is what nigeria needs, taxes in US is the biggest producer of crude oil yet 70% the revenue generated from crude export goes to the state not washigton

The problem with agriculture is that the whole farm land has turn to grazing reserve for the herdsmen.

Curlieweed:


No one is going to loan any funds to farmers when the marginal rate for one year treasury bills is ca 19%. That's supposed to be the riskless rate.

You can't calculate the real rate of return being demanded just by taking a number - you have to adjust for the rate of inflation, which is currently running at about 18%. That means the real rate of return being demanded on Nigerian treasury bills is actually 1.19/1.18 ~ 0.85%, a perfectly reasonable number, given that these should be the safest domestic bonds one can buy.

The right question to ask is what the real interest rate is for private enterprises, especially farmers who lack the ability to use "their" land as collateral due to the Land Use Act. For such people, there's probably no rate of interest at which reputable banks would lend to them, especially if they lack any kind of credit history, and this isn't the banks being stingy, just common sense. Who would lend money to a person they've never done business with, who has no prior reputation for repaying loans, and who lacks any assets to pledge the loan against?

omohayek:

You can't calculate the real rate of return being demanded just by taking a number - you have to adjust for the rate of inflation, which is currently running at about 18%. That means the real rate of return being demanded on Nigerian treasury bills is actually 1.19/1.18 ~ 0.85%, a perfectly reasonable number, given that these should be the safest domestic bonds one can buy.

The right question to ask is what the real interest rate is for private enterprises, especially farmers who lack the ability to use "their" land as collateral due to the Land Use Act. For such people, there's probably no rate of interest at which reputable banks would lend to them, especially if they lack any kind of credit history, and this isn't the banks being stingy, just common sense. Who would lend money to a person they've never done business with, who has no prior reputation for repaying loans, and who lacks any assets to pledge the loan against?

Good point about the Land Use Act. There was talk about a credit bureau a while ago, I don't know what's become of it. My point is that government borrowing is "crowding" out lending to the private sector, not just agriculture.

Super Intelligent Piece. Mr Singz, where have you been?? You remind me of days when Nairaland still had intelligent contributors.

True federalism is the only fix that would cure the ailment called Nigeria. While we all complain and say corruption is the cause of our problems, we always fail to understand what the cause of the corruption is.

To help understand the problem with our system, I'd give a simple narrative.
Imagine in a city, there are 10 supermarkets scattered across the city selling different goods and services.
They stock their shelves according to the needs of their customers, train their staff on quality customer service, fix prices reasonably to ensure the are competitive, create an ambient environment to attract customers and a whole lot other things.The do all this to ensure the keep making good money.

Then one day, the authorities decide that henceforth, all the supermarkets would remit all their sales to a central pool, from whence the monies would be shared at the end of the month first equally to all supermarkets and then according to the number of staff you have. It doesn't matter what you sell, you just simply go at the end of the month to pick up your entitlement according to the new formula.

Now tell me what would happen to the 10 supermarkets? The would simply go on an employment spree! And that would be the death kneel of all the supermarkets in the city. And that's the story of Nigeria that you just narrated!!

If a state generates power above 10MW, it has to be pumped into the national grid to be shared equally
throughout the federation.
If a state attracts investors, there is no tax benefit to it except PAYE taxes which of course would be negligible in such instances.
A state cannot improve its security as it doesn't control the police force.
The state cannot build a port, a railway or an airport. Where it does, it has to hands everything over to the federal government.
The most stupid is the whole concept of Federal Roads. A state cannot fix a road built b the feds without express permission of the the feds.

The structure surely is the problem!!

omohayek:

But the literacy rate in the southern part of the country is near 90%, and even among the older generations it is still >80%. This is far higher than it used to be in the days when Nigeria earned most of its export income through agriculture.

The real problem is that literacy is no use to a farmer if he still can't get any loans to improve his productivity, if he can't get his goods to market on time for lack of decent trains or roads, if he can't move up the value chain for lack of electricity, and if his income from exporting (or even selling to the domestic market) is reduced because of a stupid "strong Naira" policy. I haven't even mentioned the security challenges farmers face with nomadic pastoralists who want to feed their cows for free on the fruits of the farmers' hard work.

The literates of nowadays are barely literates. Low quality education hardly counts as education in the face of (global) competition.

PapaBrowne:
Super Intelligent Piece. Mr Singz, where have you been?? You remind me of days when Nairaland still had intelligent contributors.

True federalism is the only fix that would cure the ailment called Nigeria. While we all complain and say corruption is the cause of our problems, we always fail to understand what the cause of the corruption is.

To help understand the problem with our system, I'd give a simple narrative.
Imagine in a city, there are 10 supermarkets scattered across the city selling different goods and services.
They stock their shelves according to the needs of their customers, train their staff on quality customer service, fix prices reasonably to ensure the are competitive, create an ambient environment to attract customers and a whole lot other things.The do all this to ensure the keep making good money.

Then one day, the authorities decide that henceforth, all the supermarkets would remit all their sales to a central pool, from whence the monies would be shared at the end of the month first equally to all supermarkets and then according to the number of staff you have. It doesn't matter what you sell, you just simply go at the end of the month to pick up your entitlement according to the new formula.

Now tell me what would happen to the 10 supermarkets? The would simply go on an employment spree! And that would be the death kneel of all the supermarkets in the city. And that's the story of Nigeria that you just narrated!!

If a state generates power above 10MW, it has to be pumped into the national grid to be shared equally
throughout the federation.
If a state attracts investors, there is no tax benefit to it except PAYE taxes which of course would be negligible in such instances.
A state cannot improve its security as it doesn't control the police force.
The state cannot build a port, a railway or an airport. Where it does, it has to hands everything over to the federal government.
The most stupid is the whole concept of Federal Roads. A state cannot fix a road built b the feds without express permission of the the feds.

The structure surely is the problem!!

Brilliant analogy!
Add the subsidy of dollar that's killing our local industries to this analogy and you realize our economy is a form of civil war against the major oil producing regions.