ABSTRACT
This Research assessed the exchange rate and agricultural competitiveness of cocoa production in Nigeria from 1970 to 2014 with a view to empirically investigate the relationships between exchange rate and agricultural competitiveness of cocoa production in Nigeria. This research is particularly imperative considering the observations from various scholars that the problem in cocoa sub-sector is not only being less competitive but also less profitable. There have been fluctuations over the years and there is no meaningful statistical approach to investigate the causes of such fluctuations between 1970 and 2014. The specific objective of the study were to describe cocoa output trends in Nigeria, examine Nigeria’s exchange rate fluctuations and cocoa output, estimate and compare the competitiveness of cocoa beans in Nigeria and determine factors that drive cocoa competitiveness in Nigeria. The research covered a period of 44years from 1970 – 2014. Secondary data used for the study were collected from Food and Agriculture Organization Statistical data (FAOSTAT), and Central Bank of Nigeria. Data were analyzed using descriptive, Market share Index and Multiple regression analyses.. According to the result of this research. The regression analyses show that the SAP period had the highest R2 of 60% which was significant at (p<0.01). A number of factors significantly influenced competitiveness in the study, namely, world prices of cocoa beans (p<0.01), producer’s prices of cocoa beans (p< 0.10), domestic cocoa output (p<0.10) and exchange rate (p<0.01). This implies that the higher the producer price, world price, domestic cocoa output and favourable exchange rate, the higher the competitiveness of cocoa beans in Nigeria. It was also observed that Nigeria’s cocoa beans output and exchange rate have been uncertain and would likely continue overtime if measures are not taken to address the menace. In spite of the lapses observed in the country’s cocoa beans performance over the years, the result of this research suggests that there is potential for further improvement. However, this study recommends that more could be achieved through the establishment of industries that are into processing of cocoa beans to finished goods, and by tightening loose borders and setting-up an encouraging producer price to farmers in order to reduce cocoa beans smuggling. Continuous government support to the subsector and through timely adjustment of the exchange rate system would also help to keep the competitiveness high.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Cocoa (Theobroma cacao) tree is a small (4–8 m tall) evergreen tree in the family Malvaceae, native to the deep tropical region of South America (Motamayor et al., 2002). Its seeds are used to make cocoa powder and chocolate. Its height as well as the leaf area, branches and canopy spread depending to a great extent, on the available space when grown from seed, cocoa tree (cacao) is fully developed at about the age of ten years. If the plant is well maintained, it will continue to be profitable for more than 30 years (Nwachukwu, 2013).
The Nigerian cocoa economy has a rich and positive history which is well documented in scholarly literatures. The social and economic contributions of cocoa to the nation’s economic development are vast and have been reported by many authors (Amalu, and Abang, 1997). In terms of foreign exchange earnings as at 2007, no single agricultural export commodity has earned more than cocoa. With respect to employment, the cocoa sub- sector still offers quite a sizeable number of people employments, both directly and indirectly. In addition, it is an important source of raw materials, as well as source of revenue to governments of cocoa producing states (Nkang , Ajah, Abang and Edet 2007). Sequel to its importance, the recent Federal Government’s concern of diversifying the export base of the nation has placed cocoa in the centre-stage as one of the most important export tree crops.
In Nwachukwu (2013), cocoa is one of the major agricultural exports from Nigeria. In terms of annual production size, the eight largest cocoa-producing countries, which are Côte d’Ivoire, Ghana, Indonesia, Nigeria, Cameroon, Brazil, Ecuador and Malaysia, represent 90% of the world production. Currently, Nigeria contributes 6% to the world market (Lundstedt et al., 2009). Other cocoa producing countries in West Africa include Togo, Benin, Guinea, Liberia and Sierra Leone (International Cocoa Organization, 2009). The West African sub- region contributes a total of 70% of world market share of cocoa and yields considerable revenue to these economies. World production is in excess of 3 million tones with exports of the beans and semi-processed products valued at more than US $5 billion (Lueandra et al.,
2007). This means cocoa production and export are very vital to the GDP and therefore economic performance of Nigeria.
Folayan, Daramola, and Oguntade, ( 2006) noted that cocoa production in Nigeria witnessed a downward trend after 1971 season, when its export declined to 216,000metric tons in 1976, and 150,000 metric tons in 1986, therefore reducing the country’s market share
to about 6% and to fifth largest producer. In fact, the recent cocoa stakeholders forum held in Calabar, Nigeria by the Presidential Initiative on cocoa deliberated on the state of the cocoa sub-sector and reach consensus on how investments in the cocoa sub-sector can be strengthen and increased among other issues that bother on the subsector, in view of the renewed Government’s interest to boost cocoa production, domestic utilization and export. Prior to the Structural Adjustment Programme (SAP), cocoa marketing was carried out by the erstwhile highly regulated Commodity Marketing Boards, which were acclaimed to pay farmers far less than the export price of cocoa. This situation affected cocoa production and export in the past as it served as a disincentive to investment in cocoa production. Even after the abolition of the Marketing Boards structure, cocoa production has still not improved. One of the possible reasons for this may be the nature of investment in cocoa production, as some reasons have been expressed as to whether the returns from cocoa are not being threatened by such factors as rising costs of production, price instability, exchange rate fluctuations, and differences in management systems and perhaps declining productivity due to ageing trees (Nkang et al, 2007).
Competitiveness at the enterprise level according to Wint (2003) and Porter (1998) can be defined as the ability of enterprises to export to an array of countries without preferential treatments; the ability of enterprises to engage in foreign direct investment (FDI) using assets and skills developed at home; the ability of enterprises to operate at internationally accepted standards in terms of cost, service level, business processes, etc.; the ability of enterprises to earn above-average returns in a competitive market” (Wint, 2003). In today’s turbulent business environment, dynamic capabilities, flexibility, agility, speed, and adaptability are becoming more important sources of competitiveness (Barney, Hesterly,
2006; Snieska, Draksaite, 2007).
As many economic sources point out, competitiveness is a multidimensional concept and has many different interpretations. It has become common to describe economic strength of an entity with respect to its competitors in the global market economy in which goods, services, people, skills, and ideas move freely across geographical borders (Saboniene,2009; Malakauskaite, Navickas, 2010). On the other hand, competitiveness could be defined as the ability of firm to design, produce and or market products superior to those offered by competitors, considering the price and non-price qualities (D’Cruz, 1992).
Competitiveness can be discussed in different levels of aggregation, commodity, firm, sector, regional, national, block and international levels (Balkytė, Tvaronavičienė, 2010). “For a firm, competitiveness is the ability to produce the right commodities and services of
the right quality, at the right price, at the right time. It means meeting the product’s demand more efficiently and more effectively than other producers do” (Edmonds, 2000). Porter describes competitiveness of a product as being equal to innovation ability. He states that the sector, which ceases to constantly improve and innovate will eventually be taken over by competitors (Porter, 1990).
According to Thomas (1989), Agricultural Competitiveness can be examined by exploring the following competitive measures which include market share, relative export advantage, and revealed competitiveness.
According to Amin (1996), the most commonly used indicator of competitiveness is market share index. It shows the percentage of the world market of a commodity held by an exporter. Shifts in commodity market share reflect how competitiveness has changed for like commodities imported by other countries. For instance, the United States is generally better able to expand market share for agricultural commodities when the world economy and global trade are booming than when they are contracting (VolIrath, 1991).
More also, Relative Export Advantage is another method of estimating competitiveness based on an intermediate comparison of market shares of world trade. (Amin
1996). We first compare a country’s market share of one specific exported item with the country’s market share of all exported items to give us that country’s relative export share.
Stanovnik and Kovacic (2000), argue that the assessment of competitiveness, normally begins with the examination of the real exchange rate. In many instances competitiveness of an economy is usually linked to changes in real exchange rate movements of that economy although there is no clear evidence of this relationship (Guerguil & Kaufman, 1998). According to Guerguil and Kaufman (1998), an appreciation of the real exchange rate may or may not have an impact on an economy’s competitiveness. They highlighted that an economy may lose its competitiveness in the event of an exchange rate appreciation if there exists a misalignment situation, while its competitiveness may be seen improving if changes in the exchange rate emanate from major causes such as productivity gains among others.
Cocoa production is expected to be affected by exchange rate to a great extent. According to Ettah, Akpan and Etim (2011), between 1970 and 1977, there was stability in both prices and exchange rate of cocoa export in Nigeria. This was as a result of controlled export prices by the Nigeria commodity board. Between 1978 and 1982 there was an upsurge of exchange rate which was due to the introduction of both managed float and dollar pegged systems of exchange rate policies in the country. The fluctuation, therefore, reduced the
quantity of cocoa export. Between 1982 and 1985 (pre-SAP era) there was stability in both managed float and dollar pegged systems of exchange rate relative to prices of cocoa (Ettah et al, (2011). Failure of the Breton Woods system to maintain exchange rate policies affected African countries including Nigeria. The country had since 1986 experienced erratic changes in her exchange rates partly due to fluctuations in the major currencies of developed countries such as dollars, pound sterling and Swiss franc. This has become a major source of internal economic shock since Nigeria has strong links with developed countries in trade and payments as well as monetary arrangements (Ettah et al, (2011).
However, most of the empirical works in this area are generally unable to establish a statistically significant link between exchange rate fluctuations and cocoa. In a developing economy like Nigeria, where export price fluctuates as a result of currency devaluation which is expected to be an incentive for export growth, the primary concern is the nature and magnitude of risk introduced by the price and exchange rate movements in agricultural exports. Many researchers who conducted researches on the effects of price and exchange rate movements on agricultural tradables had inconclusive results, leaving a gap in this area. For instance Kargbo (2006), found that prices, real exchange rates, domestic production capacity, and real incomes have significant impacts on the agricultural export. Studies by International Monetary Fund, IMF (1984) and DeGrauwe (1988) show that exchange rate variability causes fluctuations in export revenue. In spite of the government effort to improve export, the agricultural sector is yet to respond to such policy signals, instead the performance of the agricultural exports remain dismal and discouraging. Of the massive documents on the effects of exchange rate volatility on macroeconomic variables, only very few had attempted to identify the role of third world countries’ exchange rate volatility on domestic macroeconomic variables (Clark, 2007).
1.2 Statement of the Problem
There is ample evidence that unfavourable domestic terms of trade for agricultural exports and declining output are the principal contributors to the dismal performance of Nigeria’s traditional exports, and that these factors reflect the interaction of inappropriate domestic pricing policies and external shocks such as exchange rate (Gbetnkom & Khan,
2002). These situations may have led the country to a number of macroeconomic imbalances, including fluctuations in agricultural production.
Accordingly, a better understanding of the determinants of past performance, and the direction and magnitude of the production elasticity and competitiveness of cocoa beans, is
desirable but lacking in existing literatures. This is particularly important considering the arguments by scholars that overvalued exchange rate makes domestic products, including cocoa, not only less competitive but also less profitable as export (Mamingi, 1997). Exchange rate depreciation lowers the foreign currency price of export and tends to increase the quantity of export and export revenue in domestic country (Fang et al; Hadiwibowo 2010; Azgun 2011). Also, empirical studies by Bahmani-Oskooee and Kara (2003) and Abolagbo et al (2010) affirm that devaluation increases export.
A bigger problem of fluctuations exists in cocoa sub-sector in Nigeria. According to International cocoa organization, (ICCO) (2013), fluctuation in cocoa output is evident in Nigeria. Between 1970 and 1976, Nigeria produced between 305,000MT to 181,000MT; between 1977 and 1986, its output was between 193,000MT and 148,000MT; 1987 to 1996 was between 100,000MT and 325,000MT. Also between 1997 and 2006, Nigeria produced between 318,000MT and 485,000MT and has also varied greatly between 2007 till date (FAO, 2015). Despite these evidences, there is no meaningful statistical approach to investigate the causes of such fluctuations between 1970 and 2014.
Though, there are related researches done on cocoa such as Strengthening the competitiveness of cocoa production and improving the income of cocoa producers in West and Central Africa (Friedel, Claudia, Irene, Pedro,and Mara, 2016), Economic analysis of cocoa production in Oyo state, Nigeria (Fadipe, Adenuga, & Ilori, 2012), and export promotion through exchange rate policy: Exchange rate depreciation or stabilization? (Fang, Lai & Miller, 2005). but level of competitiveness of cocoa has not been established empirically but consequent upon such notable fluctuations over the period, it is expected that competitiveness over the same period may have varied greatly. Based on all these pending issues, this research calls for the need to investigate the following research questions: what are the trends in cocoa output in Nigeria? What are the trends in exchange rate fluctuations in Nigeria? What quantity of cocoa beans produced in Nigeria is held in the world market? What is the level of competitiveness of cocoa in Nigeria? And what are the major considerations that shape the competitiveness of cocoa in Nigeria?
On the other hand, the empirical literature on this issue is mixed. Several researchers have found that exchange rate uncertainty may induce marginal producers and traders to shift from traded to non-traded goods thereby affecting trade volumes (Arize, 2004; Broda, 2004
Chowdhurry, 1993 and Pozo, 1992). Cho, Sheldon and McCorrison (2002) found that there is strong negative impact of exchange rate uncertainty on agricultural trade compared to other sectors for a simple bilateral trade flows across countries.
Wei (2007) found that till date very few studies had compared the impact of exchange rate volatility on agricultural exports over time. This research intends to also find empirical solutions to all these gaps and uncertainties regarding exchange fluctuations and cocoa competitiveness in Nigeria from 1970 to 2014.
1.3 Objectives of the Study
The overall objective of the study was therefore to analyze exchange rate and agricultural competitiveness of cocoa production in Nigeria between 1970 and 2014. The specific objectives of the study were to:
i. Describe the cocoa output trends in Nigeria,
ii. examine Nigeria’s exchange rate fluctuations and cocoa output
iii. estimate and compare the competitiveness of cocoa beans in Nigeria, and iv. determine factors that drive cocoa competitiveness in Nigeria.
1.4 Hypotheses of the Study
The following null hypotheses were tested,
Ho1: Competitiveness of cocoa is not driven by changes in exchange rate
Ho2: Competitiveness of cocoa is not driven by producers’ price
Ho3: Competitiveness of cocoa is not driven by world prices
1.5 Justification of the Study
The vast majority of empirical studies on agricultural competitiveness were cross- sectional studies or those using panel with relatively short time periods. While they yielded important insights into competitiveness levels across borders and sectors, they failed to compare competitiveness levels, its influences and fluctuations, and dynamics of exchange rate over time regarding cocoa production in Nigeria.
Prior to the Structural Adjustment Programme (SAP), cocoa marketing was carried out by the erstwhile highly regulated Commodity Marketing Boards, which were acclaimed to pay farmers far less than the export price of cocoa. This situation affected cocoa production and export in the past as it served as a disincentive to investment in cocoa production. It is still evident that even after the abolition of the Marketing Boards structure, cocoa production has still not improved. This study therefore uncovered the competitiveness of cocoa before, during after SAP.
To bridge this study gap, this study used time series data from 1970 to 2014 and adopted multi-dimensional analysis approach. Sequel to this, government and other stakeholders will benefit from this research as a tool for policy formulation and implementation. Researchers will also benefit from the work as more findings abound in the areas of competitiveness and exchange rate volatility.
Farmers and investors in the sector will be guided in making some investment predictions and decisions in the area of cocoa production, export and general expansion.
This material content is developed to serve as a GUIDE for students to conduct academic research
EXCHANGE COMPETITIVENESS ON COCOA PRODUCTION FROM RATE AND NIGERIA AGRICULTURAL 1970 TO 2014
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