African Journal of Food Agriculture Nutrition and Development, Vol. 9, No. 2, March, 2009
Investment in Cocoa Production In Nigeria: A Cost And Return Analysis Of Three Cocoa production Management Systems In The Cross River State Cocoa Belt
Nkang N M *1 , EA Ajah2 , SO Abang3 and EO Edet4
author e-mail: email@example.com
Code Number: nd09019
The study examined costs and returns in cocoa production in Cross River State by comparing three identified management systems of cocoa production in the area. A two-stage sampling procedure was used to select a hundred and fifty cocoa farmers for the study. Data used in the study were collected using structured questionnaires which were administered by the Agricultural Development Programme (ADP) extension agents using the participatory approach while the data were analysed using descriptive statistics such as mean, median, standard deviation, etc. and an investment decision model comprising the net present value (NPV) and benefit-cost ratio (BCR) analysis. Results show that the respondents were predominantly small scale farmers with farm sizes ranging from one to five hectares. The age distribution of the farmers showed that 61.3% of them were among the active farming population falling within the age range of 21 to 40 years, and 16.67% of the respondents had no formal education. More than 50% of the total respondents sourced funds from their personal savings in all the management systems considered. Importantly, the study found that cocoa production is a profitable business irrespective of management system, since all of the management systems had positive net present values (NPV) at 10% discount rate. The NPV for lease-managed farms is highest. The benefit-cost ratio (BCR) at 10% discount rate was greater than one for all the three management systems, which indicates that the returns from cocoa production are high. Owner-managed farms had the highest BCR followed by lease-managed farms and sharecropped farms in that order. Lease-managed farms were more viable compared with other management systems in terms of their high NPVs. The study recommends that given the high benefits relative to costs involved in cocoa production irrespective of management system, investments in cocoa production can be increased by providing expanded access to cheap and flexible credit and land, which have presented as limiting factors in cocoa production based on the descriptive statistical analysis in the study.
Key words: Cocoa, benefit, cost, investment, management
The Nigerian cocoa economy has a rich history which is well documented in literature. The contributions of cocoa to the nations economic development are vast and have been reported by many authors [1, 2, 3]. In terms of foreign exchange earnings, 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 employment, both directly and indirectly [4, 5]. In addition, it is an important source of raw materials, as well as source of revenue to governments of cocoa producing states.
Because of its importance, the recent Federal Governments concern of diversifying the export base of the nation has placed cocoa in the centre-stage as the most important export tree crop. Evidence has however shown that the growth rate of cocoa production has been declining, which has given rise to a fall in the fortunes of the sub-sector among other reasons . Folayan, Daramola and Oguntade (2006), note that cocoa production in Nigeria witnessed a downward trend after 1971 season, when its export declined to 216,000 metric tons in 1976, and 150,000 metric tons in 1986, therefore reducing the countrys market share to about 6% and to fifth largest producer to date. In fact, the recent cocoa stakeholders forum held in Calabar, Nigeria by the Presidential Initiative on cocoa was to deliberate on the state of the cocoa sub-sector and reach consensus on how investments in the cocoa sub-sector can be strengthened and increased among other issues that bother on the sub-sector, in view of the Governments renewed interest to boost cocoa production, domestic utilisation and export.
Prior to the Structural Adjustment Programme (SAP), cocoa marketing was carried out by the erstwhile highly regulated Commodity Marketing Boards, which were known 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 fared better as is evident in the declining production trend reported in previous studies. One of the possible reasons for this may be the nature of investment in cocoa production, as some worry has been expressed as to whether the returns from cocoa are not being threatened by such factors as rising costs of production, price instability, and differences in management systems and perhaps declining productivity due to ageing trees. Generally, if investment in cocoa production were attractive, farmers/investors would allocate scarce resources to cocoa farming. However, the problem is that most individual investors and even governments have only a vague idea of the potential of the industry and as such are sometimes slow in committing investment funds into the sub-sector. Beyond this, information on how the different management systems affect costs and returns has scarcely been documented. Thus, this study empirically investigates costs and returns from different cocoa production/management systems in Cross River State cocoa belt with a view to provide some informed basis for investments in the sub-sector, and particularly a guide as to which management has the highest return, and hence would raise earnings from investment in cocoa for the producers as well as exporters.
From the empirical standpoint, the key questions which need to be addressed are: What are the key socioeconomic characteristics of cocoa farmers in Cross River State? What are the various management systems in operation in the study area? What are the net present values, and benefit-cost ratios of the various management systems? Which of the management systems is more economically viable?
The sequence of this paper is as follows: the section which follows presents the methodology comprising the analytical framework, models specification and the data. Section 3 presents and discusses the results of the empirical exercise, while the last section summarises the study and concludes with policy implications.
The analytical framework comprises both univariate descriptive statistical techniques and an investment decision model. Cocoa farmers characteristics (such as age, educational attainment, farm size, sources of funds, etc) were examined using descriptive statistics, while an investment decision model employing the use of the Net Present Value (NPV) and Benefit-Cost Ratio (BCR) was deployed to determine the most economically viable of the three management systems of cocoa production identified in the State, namely, owner-managed, lease-managed, and share-crop managed systems.
The Investment Decision Model
Net Present Value (NPV)
The net present value can be used as an important tool in making a decision by an investor to invest in cocoa production. Benefits and costs are linked to the age of the trees. At the early stages, there are heavy costs which are then followed by annual benefits that continue over the full life of the trees once they have reached maturity.
Thus, following Gotsch and Burger (2001), if we define INCit as the net income (or benefit or return) from i-year-old trees as expected in year t, then the net present value of the expected net income from one hectare of cocoa in year t for one cycle of I years duration amounts to:
Meanwhile, the expected net income per hectare in year t is given as:
REVi,t = the expected revenue per hectare from i-year-old trees in year t;
TCi,t = the total cost per hectare from i-year-old trees in year t;
r = the discount rate or the opportunity cost of capital; and
t = the time period.
The formal selection criterion for the net present value is to accept investments with net present value greater than zero. However, if the net present value works out to be negative, then we have a case in which, at the chosen discount rate, the present worth of the income or benefit stream is less than the present value of the cost stream. Hence the revenues are insufficient to allow for the recovery of the investment. An investment is technically and economically feasible if the net present value is positive.
Benefit-Cost Ratio (BCR)
The Investment Decision Model also utilizes the Benefit-Cost Ratio, which is another indicator of the worthiness of an investment decision. It is given as the ratio of the sum of discounted benefits to the sum of discounted costs. Thus, for a cycle of I years duration, the benefit-cost ratio can be represented by the formula:
DREVi,t = discounted revenue (benefits) per hectare from i-year-old trees in year t;
DTCi,t = discounted total costs per hectare from i-year-old trees in year t;
The decision rule is that for any project to be economically viable, the ratio must be greater than unity .
Sampling Procedure, Data and Implementation Techniques
The study area is Cross River State, Nigeria. A two stage sampling procedure was adopted in this study. The first stage involved the purposive selection of the two Local Government Areas known to be the largest cocoa producing areas in the State and which form the States cocoa belt, that is Ikom and Etung Local Government Areas. The second stage involved the random selection of 50 farmers apiece from the three management systems of cocoa production (a total of 150 respondents) identified in the study area based on a sampling frame constructed to identify key cocoa farmers in the area. A structured survey instrument was used to obtain the information utilised in the study. The data from the questionnaire was augmented with secondary information from the respondents who kept records, and with data from the Cross River State Ministry of Commerce and Industry, Ministry of Agriculture, Planning, Research and Statistics, the Central Bank of Nigeria (CBN), as well as United Nations Environmental Programme (UNEP).
For the cross-sectional survey of the
respondents which took place in 2002, cocoa output was measured in bags of 64kg
or 0.064 tons. Average cocoa price at the period was
Since one of the major changes in tree stock occur due to time, that is as the trees grow older, they first become more and later less productive, a time horizon of thirty years which approximates the expected life of a cocoa tree was used in the investment decision analysis checking for differences across the management systems. Thus, the yield profile of cocoa trees in Nigeria with respect to age of tree and year of planting was obtained from UNEP in Nigeria, and used to project the yield of trees thirty years back, based on the observed 2002 yield. Similarly, projections were made for cocoa prices based on 2002 cocoa price in Naira per ton following the growth rate of cocoa producer prices reported for Nigeria by the FAO. This also applied to the per hectare costs of maintenance from maturity obtained from UNEP.
These values were then used in estimating NPV and BCR for the various management systems with the assumption that differences would only be due to how the various systems were run.
Socioeconomic characteristics of cocoa farmers
Age composition and educational level
Table 1 shows a summary of the socioeconomic characteristics of the respondents. On average, the owners are the oldest group of farmers and the lease-managers the youngest, with share-croppers being intermediate. The sharecroppers have the lowest education on average and the lease-managers the highest.
Table 1: Socioeconomic characteristics of cocoa farmers in Cross River State.
Source: Field survey, 2002
The farm size distribution of the respondents reveals that under the three management systems, majority of the plots ranged between 1 and 5 hectares. Moreover, 28% of plots under owner-managers fall within the 6-10 hectare bracket, while it was 10% for lease-managed systems and 4% for sharecrop systems. These results hint that cocoa farm owners reduce risks by leasing out their farms in rather small units than giving out very big units to a single lease manager or sharecropper.
Sources of funds
Results indicate that majority of the respondents in the three management systems funded their production activities from personal savings. Particularly, 6% of the owner-managers and 12% of the lease-managers obtained bank loans while share croppers did not obtain funds from any formal credit source. On the other hand, more farmers under the sharecropping system obtained funds from relations compared with the other two systems.
Of the two marketing channels identified, one is from the producer to the licensed buying agent (LBA), the merchant and finally exports, while the other is from the producer to the small-scale buyer, the licensed buying agent, the merchant and then export. Table 1 shows that majority of the respondents from the three management systems taken together market their cocoa through the small scale buyers, who sell to the licensed buying agents, onto the merchants and finally to the export market, while the remainder pass through the licensed buying agent to merchant to the export market. This may be due to the fact that most of the farmers do not produce enough individually to sell directly to the licensed buying or merchants.
Descriptive statistics of costs and returns
Some descriptive statistics of costs and returns for the three management systems are presented in table 2. Lease-managed cocoa farms have a larger mean costs and returns per hectare followed by owner-managed farms. Standard deviations show that costs of owner-managed farms and sharecrop-managed farms are more clustered around the mean than lease-managed farms. Similarly, standard deviations also indicated that returns from the three management systems are widely dispersed from their means. The reason for the above structure, among others, may be the fact that the lease manager is primarily profit-motivated, unlike the sharecropper in this region, whose basic motivation is subsistence: the leaseholder needs a large outlay if he is to earn enough returns to cover lease and other costs and still make profit, whereas a sharecropper is a resource-poor worker, constraint by a lack of cash to own land/other inputs and cannot enjoy size economies beyond the limitations set by the landlord. A look at the sources of funds for the three systems (table 1) indicates the credit worthiness of lease managers: 12% of them have access to bank loans while no sharecropper had such access. The owner managers are just in between the two, combining both profit and subsistence motives at varying degrees.
Table 2: Descriptive statistics of costs and returns per hectare for the three management systems.
Source: Compiled from tables III, IV, and V
Investment decision analysis
The benefit cost analysis for cocoa per
hectare at 10% discount rate for owner-managed farms for a thirty-year period
is shown in table 2. Results indicate positive NPV of
The results in table 4 above show that the
calculated NPV is positive with a value of
Table 3: Benefit-cost analysis for owner-managed farms.
Table 4: Benefit-cost analysis for lease managed farms.
Table 5: Benefit-cost analysis for sharecrop-managed farms.
Source: Data analysis
The results indicate that the NPV for
sharecrop managed farm is positive and estimated to be
The study examined costs and returns in cocoa production in Cross River State in the context of three identified management systems of cocoa production in the area, namely owner-managed, lease-managed and sharecrop managed systems, using the hundred and fifty randomly selected cocoa farmers. Data were collected using structured questionnaires through the participatory approach using ADP extension agents as well as from secondary sources.
From the study, it can be inferred that majority of the cocoa farmers were in their prime ages. This may be due to the fact that cocoa production activities require physical energy and are labour intensive and thus require the young and energetic to be involved. Another important reason may be that since cocoa production is known to give relatively higher incomes than the other farming endeavours, it is the most likely farming activity that will attract young people. This was confirmed in a study by Amalu and Abang (1997).
Also, farmers level of education in the study shows that education affects the nature in which farms are managed as well as their overall productivity, hence income. This is in line with economictheory. Accordingly, the viability of the various management systems may have been influenced by the level of education of the farmers. Furthermore,the analysis of farmers sources of funds points to the fact that it is easier for owner-managers and lease-managers to obtain credit from formal sources than sharecroppers because they can provide what it takes to obtain such loans. Generally, the results show that access to bank loans by farmers is a big problem due to several reasons of which collateral and the risky nature of agricultural production are just but two.
Importantly, the investment analysisresults show that cocoa production is a profitable business irrespective of management system, since all of them had positive NPV at 10% discount rate. The NPV for lease-managed farms is highest. The benefit-cost ratio at 10% discount rate was greater than one for the three management systems, which indicates that the returns from cocoa production are high. Owner-managed farms had the highest BCR followed by lease-managed farms in that order. Lease-managed farms were more viable compared with other management systems in terms of their high NPV.
The study recommends that given the high benefits relative to costs involved in cocoa production irrespective of management system, investments in cocoa production can be increased tremendously by providing expanded access to cheap and flexible credit and land, which have presented as limiting factors in cocoa production in the State based on the descriptive statistical analysis in the study.
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