Distortions to agricultural incentives: Evidence from Nigerian value chains

• Author: Evans Osabuohien,Bas Paris,Summer Allen,Olajide Adeola,Fahd Majeed,Simla Tokgoz
• Published date: 01 August 2020
• DOI: http://doi.org/10.1111/rode.12664
• Date: 01 August 2020

Rev Dev Econ. 2020;24:1027–1045. wileyonlinelibrary.com/journal/rode

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1027

© 2020 John Wiley & Sons Ltd

Received: 21 November 2018

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Revised: 30 January 2020

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Accepted: 1 March 2020

DOI: 10.1111/rode.12664

REGULAR ARTICLE

Distortions to agricultural incentives: Evidence from

Nigerian value chains

SimlaTokgoz1

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SummerAllen1

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FahdMajeed2

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BasParis3

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OlajideAdeola4

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EvansOsabuohien5

1Markets, Trade, and Institutions Division,

International Food Policy Research

Institute, Washington, DC, USA

2Department of Agriculture and Consumer

Economics, University of Illinois Urbana-

Champaign, Urbana, IL, USA

3AGREFOS Consulting Ltd, Limassol,

Cyprus

4Department Agricultural Economics,

University of Ibadan, Ibadan, Nigeria

5Centre for Economic Policy and

Development Research (CEPDeR),

Covenant University, Ogun State, Ota,

Nigeria

Correspondence

Simla Tokgoz, Markets, Trade, and

Institutions Division, International Food

Policy Research Institute, Washington, DC,

USA.

Email: s.tokgoz@cgiar.org

Funding information

This work was undertaken as part of, and

funded by, the CGIAR Research Program

on Policies, Institutions, and Markets

(PIM) led by the International Food Policy

Research Institute (IFPRI). PIM is in turn

supported by the CGIAR Fund contributors

and through bilateral funding agreements.

This paper has not gone through IFPRI’s

standard peer review procedure. The

opinions expressed here belong to the

authors, and do not necessarily reflect

those of PIM, IFPRI, or CGIAR.

Abstract

Understanding how policies affect price transmission and

incentives for producers and consumers along the complete

value chain is a relevant research question due to the more

globalized structure of agricultural value chains. In particu-

lar, Nigerian agricultural value chains have been targeted

by a number of policy decisions. We analyze the import-

oriented palm oil value chain and the export-oriented cacao

value chain, estimating the price distortions from policies

and their implications for production incentives at the re-

gional level. For palm oil, due to protective trade policies

and domestic initiatives, the nominal rate of protection

(NRP) at the farmgate for palm oil producers shows that

producers have been protected. NRPs at the border for cacao

beans and cocoa products are negative, which may be due

to a quality gap, the export market structure, and the con-

centration of buyers in global markets. Negative NRPs at

the farmgate are seen for all regions, showing disincentives

in the cacao beans export market reverberate through the

domestic market despite domestic support policies. In both

value chains, NRPs at farmgate vary across regions partially

due to regional policy frameworks and partially due to local

conditions impacting price transmission.

KEYWORDS

agricultural distortions, Nigeria, NRP, policy analysis, value chains

JEL CLASSIFICATION

Q11; 055; L1

1028

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TOKGOZ eT al.

1

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INTRODUCTION

The expansion of regional and global value chains can be attributed to many factors such as techno-

logical advances in transportation, information, and communication, as well as lower trade barriers

(World Bank, 2020). Although most value chains expand in the industrial and the services sectors,

global and domestic agricultural value chains are also expanding. The agricultural value chain, by

definition, encompasses all actors and activities involved in production and consumption (Allen, de

Brauw, & Gelli, 2016). Supporting agricultural value chains is particularly important for economic

development in areas where agriculture comprises a significant part of gross domestic product (GDP).

Policy measures that have repercussions throughout the value chain are often used to further agri-

cultural development. As a result, to analyze the implications of agriculture-related policies, it is

necessary to correctly define, measure, and categorize distortions to agricultural incentives at the

commodity level along the entire value chain.

Agriculture constitutes the largest sector in the Nigerian economy, employing around two-thirds of

the country’s workforce (FAO, 2013). Agricultural commodity exports dominated the Nigerian econ-

omy in the 1960s and 1970s, and crude oil became the main export item after the mid-1970s (Awe,

Akinlana, Yaya, & Aromolaran, 2018). The agricultural sector is characterized by small farms, low

productivity, low levels of investment, and high input costs (FAO, 2013). Since the country gained

independence in 1960, Nigeria’s agricultural sector has experienced significant periods of output de-

clines. It is estimated that due to these declines, Nigeria loses US$10 billion in annual export op-

portunities from the groundnut, palm oil, cocoa, and cotton sectors (FAO, 2013). Over the past 20

years, Nigeria’s value-added per capita in agriculture has increased by less than 1% annually (FAO,

2013). Therefore, in a bid to diversify its economy from the production of crude oil, Nigeria has

placed renewed focus on supporting agricultural development through various programs, including

the Agricultural Transformation Agenda (Federal Ministry of Agriculture and Rural Development

[FMARD], 2013) and its successor, the Agriculture Promotion Policy (APP) 2016–2020 (FMARD,

2016). The APP attempts to support agribusiness that can foster domestic food security, generate ex-

ports, and provide sustainable income and job growth. One of the approaches to reach these goals is to

prioritize the production of rice, wheat, maize, soybeans, and tomatoes, as well as export crops such

as cocoa, cassava, oil palm, sesame, and gum arabic. Furthermore, the development of value chains is

identified as a priority with particularly identified issues of input supply, production, storage, process-

ing/utilization, marketing, and consumption (FMARD, 2016).

In this context, we analyze policy distortions to agricultural incentives along two agricultural value

chains, with a focus on understanding the implications of policies for smallholder producers. The

import-oriented palm oil value chain and the export-oriented cocoa value chain have the potential to

contribute to agricultural development, create additional value for the Nigerian economy, and increase

rural incomes and employment. These two value chains form an important share of Nigeria’s agricul-

tural sector, affecting a large number of smallholder producers.

Specifically, we measure the impact of sector-specific and national policies on agricultural in-

centives across these value chains. We utilize national-level and regional-level price data at different

points in the market to measure policy distortions to agricultural incentives and to understand how

producers in different regions are affected. To this end, we apply the nominal rate of protection (

NRP

) methodology from Krueger, Schiff, and Valdes (1988) to different nodes of the value chains: at the

border and at the farmgate. The

NRP

s measure policy impact using proportional difference between

the producer price and the border price, adjusted for access costs. Next, we compute market price

support (

MPS

) at the farmgate, which measures the value of transfers from consumers and taxpayers

to producers. Finally, we use

NRP

s and elasticities from the literature to analyze the implications