Analysis of incentives and disincentives for cocoa in Nigeria

1 Analysis OF incentives AND disincentives FOR cocoa IN Nigeria FEBRUARY 2013 This technical note is a product of the Monitoring African Food and Agricultural Policies project (MAFAP). It is a technical document intended primarily for internal use as background for the eventual MAFAP Country Report. This technical note may be updated as new data becomes available. MAFAP is implemented by the Food and Agriculture Organization of the United Nations (FAO) in collaboration with the Organisation for Economic Co-operation and Development (OECD) and national partners in participating countries.

2 It is financially supported by the Bill and Melinda Gates Foundation, the United States Agency for International Development (USAID), and FAO. The Analysis presented in this document is the result of the partnerships established in the context of the MAFAP project with governments of participating countries and a variety of national institutions. For more information: Suggested citation: Cadoni P., 2013. Analysis of incentives and disincentives for cocoa in Nigeria . Technical notes series, MAFAP, FAO, Rome. FAO 2013 FAO encourages the use, reproduction and dissemination of material in this information product.

3 Except where otherwise indicated, material may be copied, downloaded and printed for private study, research and teaching purposes, or for use in non-commercial products or services, provided that appropriate acknowledgement of FAO as the source and copyright holder is given and that FAO s endorsement of users views, products or services is not implied in any way. All requests for translation and adaptation rights, and for resale and other commercial use rights should be made via or addressed to FAO information products are available on the FAO website ( ) and can be purchased through 2 SUMMARY OF THE NOTE Product: cocoa Period analyzed: 2006 2010 Trade status: Export in all years Nigeria is the fourth leading exporter of cocoa in the world.

4 cocoa is mainly exported as beans, processing activities being limited within the country. cocoa is the main agricultural export in Nigeria . Low and declining yields are observed due to inconsistent production patterns, disease incidence, pest attack and little agricultural mechanization. The main challenges faced by the cocoa sector are the decreasing level of labor force and the ageing of trees resulting in low yields. The cocoa market liberalization (1986) resulted in the numerous traders and marketers involved in the value chain. However, few companies export most of the production.

5 The observed Nominal Rate of Protection (NRP, green line) indicates that producers received price incentives only in 2006 and then they received prices lower than the reference international prices from 2007 to 2010. Therefore, cocoa -supporting policies did not have the expected results namely providing incentives to producers in order to increase production by increasing productivity. The poor price transmission between export markets and producers level prevented producers from receiving prices reflecting international price trends. The export market is characterized by a high concentration of export companies benefiting from high market power compared to producers.

6 The numerous intermediaries involved in the value chain create inefficiencies and also affect prices received by producers. -100%-80%-60%-40%-20%0%20%40%60%80%100%2 0062007200820092010 Observed nominal rate of protection at farm gate3 TABLE OF CONTENTS SUMMARY OF THE NOTE .. 3 TABLE OF CONTENTS .. 4 1. PURPOSE OF THE NOTE .. 5 2. COMMODITY CONTEXT .. 6 PRODUCTION .. 6 CONSUMPTION/UTILIZATION .. 8 MARKETING AND TRADE .. 9 DESCRIPTION OF THE VALUE CHAIN AND PROCESSING .. 11 POLICY DECISIONS AND MEASURES .. 14 3. DATA REQUIREMENTS, DESCRIPTION AND CALCULATION OF INDICATORS .. 18 TRADE STATUS OF THE PRODUCTS .. 18 BENCHMARK PRICES.

7 18 DOMESTIC PRICES .. 19 EXCHANGE RATES .. 20 ACCESS COSTS .. 20 EXTERNALITIES .. 20 BUDGET AND OTHER TRANSFERS .. 20 QUALITY AND QUANTITY ADJUSTMENTS .. 21 DATA OVERVIEW .. 21 CALCULATION OF INDICATORS .. 23 4. INTERPRETATION OF THE INDICATORS .. 25 5. PRELIMINARY CONCLUSIONS AND RECOMMENDATIONS .. 28 MAIN MESSAGE .. 28 PRELIMINARY RECOMMENDATIONS .. 28 Despite the availability of certain data, the MAFAP Analysis suggests to:.. 28 LIMITATIONS .. 28 FURTHER INVESTIGATION AND RESEARCH .. 29 BIBLIOGRAPHY .. 30 ANNEX I: Methodology Used .. 32 ANNEX II: Data and calculations used in the Analysis .. 33 4 1. PURPOSE OF THE NOTE This technical note aims to describe the market incentives and disincentives for cocoa in Nigeria .

8 For this purpose, yearly averages of price at farm-gate and point of competition will be compared with reference prices calculated on the basis of the price of the commodity in the international market. The price gaps between the reference prices and the prices along the value chain indicate to which extent incentives (positive gaps) or disincentives (negative gaps) are present at farm-gate and wholesale level. In relative terms, the price gaps are expressed as Nominal Rates of Protection. These key indicators are used by MAFAP to highlight the effects of policy and market development gaps on prices.

9 The note starts with a brief review of the production, consumption, trade and policies affecting the commodity and then provides a detailed description of how the key components of the price Analysis have been obtained. The MAFAP indicators are then calculated with these data and interpreted in the light of existing policies and market characteristics. The Analysis that has been carried out is commodity and country specific and covers the period 2006 - 2010. The indicators have been calculated using available data from different sources for this period and are described in Part 3, and covers the period 2006-2009.

10 The outcomes of this Analysis can be used by those stakeholders involved in policy-making for the food and agricultural sector. They can also serve as input for evidence-based policy dialogue at country or regional level. This technical note is not to be interpreted as an Analysis of the value chain or detailed description of production, consumption or trade patterns. All information related to these areas is presented merely to provide background on the commodity under review, help understand major trends and facilitate the interpretation of the indicators. All information is preliminary and still subject to review and validation.