HECTARAGE AND OUTPUT RESPONSES OF MAJOR CROPS TO MARKET LIBERALISATION AND PRICE RISK IN NIGERIA

HECTARAGE AND OUTPUT RESPONSES OF MAJOR CROPS TO MARKET LIBERALISATION AND PRICE RISK IN NIGERIA

Abstract

This study investigated the hectarage and output responses of major crops to market liberalization and price risk in Nigeria from 1981 to 2023. The specific objectives were to analyze the trends in the hectarage and output of major crops (maize, rice, cassava, and yam); examine the trends in producer prices and price volatility; determine the effects of market liberalization policies on crop hectarage and output; analyze the supply response of farmers to changes in crop prices (price elasticity of supply); and assess the impact of price risk on the production decisions of farmers. The study employed a quantitative research design utilizing secondary time-series data sourced from the Central Bank of Nigeria (CBN), the National Bureau of Statistics (NBS), the Food and Agriculture Organization (FAO), and the World Bank. The data were analyzed using descriptive statistics, trend analysis, the Augmented Dickey-Fuller (ADF) unit root test, the Johansen co-integration test, and a Nerlovian supply response model augmented with a price risk variable (measured as the coefficient of variation of crop prices). The findings revealed that market liberalization, marked by the deregulation of commodity marketing boards and input markets, had a mixed impact. While it led to an increase in producer prices for some export crops, it also introduced significant price volatility. The econometric analysis showed that farmers’ supply response to price changes is generally positive but inelastic in the short run, meaning they do not respond quickly or strongly to price signals. The long-run elasticity was found to be higher for maize and rice than for cassava and yam. The price risk variable was found to have a significant negative effect on the hectarage of all crops, indicating that farmers reduce their production area in the face of price uncertainty. The study concluded that price risk is a major deterrent to agriculturalinvestment and output growth in Nigeria. It was recommended that the government should implement policies to stabilize crop prices, such as price support mechanisms, the provision of market information, and the promotion of futures markets, to encourage farmers to respond positively to market signals and increase production.

Chapter One – Introduction

1.1 Background of the Study

Agriculture is a fundamental pillar of the Nigerian economy, providing employment for a significant majority of the population and contributing substantially to the Gross Domestic Product (GDP). The sector’s performance is crucial for ensuring national food security, reducing poverty, and generating foreign exchange. The ability of the agricultural sector to respond effectively to market signals and policy changes is a key determinant of its overall dynamism and contribution to economic development. (Food and Agriculture Organization [FAO], 2021).

Nigeria’s agricultural sector is dominated by the production of a few major crops, including maize, rice, cassava, and yam. These crops are central to the nation’s food system, serving as the primary staples for the population. They are cultivated by millions of smallholder farmers across the country’s diverse agro-ecological zones. The levels of hectarage (area planted) and output of these crops are key indicators of the sector’s performance and the nation’s food security status. (National Bureau of Statistics [NBS], 2022).

The agricultural policy landscape in Nigeria has undergone significant transformations over the past few decades. In the early post-independence era, the government played a dominant role in the agricultural sector through state-owned marketing boards, which controlled the pricing and marketing of major cash crops. These boards were designed to stabilize prices and generate government revenue. However, they were often criticized for extracting resources from the agricultural sector and providing poor incentives to farmers. (Ogen, 2020).

The Structural Adjustment Programme (SAP) of 1986 marked a watershed moment in Nigeria’s agricultural policy. As part of the SAP, the government embarked on a program of market liberalization, which involved the dismantling of the commodity marketing boards and the deregulation of input and output markets. The aim was to allow market forces to determine prices and allocate resources more efficiently. This was a fundamental shift from a state-led to a market-led approach to agricultural development. (World Bank, 2018).

Market liberalization was expected to have a positive impact on agricultural production by providing farmers with better price incentives. The theory was that by allowing prices to rise to their market-clearing levels, farmers would be encouraged to increase their production. This, in turn, would lead to higher incomes, increased investment in the sector, and ultimately, greater national food production. The removal of government distortions was seen as a necessary condition for unlocking the sector’s potential. (Krueger, Schiff, and Valdés, 2019).

However, market liberalization also introduced a new set of challenges. One of the most significant is the increase in price volatility or price risk. Without the stabilizing influence of government intervention, crop prices became more susceptible to fluctuations caused by changes in weather, global market conditions, and other supply and demand shocks. For smallholder farmers, who are highly risk-averse and lack access to risk management tools, this price uncertainty can be a major deterrent to investment and production. (Barrett, 2018).

Price risk refers to the uncertainty associated with the future price of a commodity. For a farmer, this risk is significant because they must make production decisions (what to plant, how much to plant) months before they will sell their harvest, without knowing what the price will be at that time. The problem is that this uncertainty can lead to sub-optimal decisions. A risk-averse farmer may choose to plant a smaller area of a high-risk crop, or to plant a low-risk, low-return crop, rather than a high-risk, high-return one. This behavior reduces overall agricultural output. (Moschini and Hennessy, 2018).

The concept of supply response refers to the degree to which farmers adjust their production (hectarage and output) in response to changes in prices and other incentives. The price elasticity of supply measures the percentage change in quantity supplied in response to a percentage change in price. A high elasticity indicates that farmers are very responsive to price signals, while a low (inelastic) elasticity indicates that they are slow to respond. Understanding the elasticity of supply is crucial for predicting the impact of policy changes on agricultural production. (Sadoulet and de Janvry, 2018).

The measurement of supply response is often done using a Nerlovian supply response model. This econometric model is based on the assumption that farmers adjust their production gradually, rather than instantaneously, in response to price changes. This is due to factors such as land constraints, the time required to learn about new prices, and the costs of adjustment. The model distinguishes between short-run and long-run elasticities, with the long-run elasticity being larger as farmers have more time to fully adjust. (Nerlove, 1958).

The incorporation of price risk into the supply response model is a crucial methodological refinement. Traditional models assume that farmers make decisions based solely on expected prices, ignoring the uncertainty surrounding those prices. A more realistic model includes a measure of price variability, such as the coefficient of variation, as an additional explanatory variable. The hypothesis is that higher price risk leads to lower production, all else being equal. This allows for a more complete analysis of the effects of market liberalization. (Coyle, 2019).

Previous studies on supply response in Nigeria have produced varied results. Some have found that farmers are highly responsive to price changes, while others have found low or insignificant responses. The findings often depend on the specific crop, the time period, and the methodology used. The inclusion of a price risk variable is a relatively recent development, and more research is needed to understand its role in the Nigerian context. The differential impact of risk on different crops is also an area that requires further investigation. (Emmanuel and Okafor, 2022).

The major crops in Nigeria can have different supply response characteristics. Annual crops like maize and rice, which are planted and harvested within a single season, may be more responsive to short-term price changes. Perennial or semi-perennial crops like cassava and yam, which have longer growing cycles, may exhibit a slower and more complex response. Understanding these differences is essential for designing effective agricultural policies that are tailored to the specific needs of different commodity sectors. (Sadoulet and de Janvry, 2018).

This study is therefore designed to provide a comprehensive empirical analysis of the hectarage and output responses of major crops to market liberalization and price risk in Nigeria. It will use a long time-series dataset to analyze the trends in prices, hectarage, and output, and it will use an augmented Nerlovian model to estimate the price elasticities of supply and the impact of price risk. This will provide a deeper understanding of how farmers have responded to the policy changes of the past few decades. (World Bank, 2022).

The findings of this study are expected to be of significant value to a wide range of stakeholders. For policymakers, the study will provide evidence on the effectiveness of market liberalization and the impact of price risk, which can inform the design of more effective agricultural policies. For researchers, the study will contribute to the academic literature on agricultural supply response in developing countries. Ultimately, the study aims to contribute to the development of a more productive, resilient, and responsive agricultural sector in Nigeria. (FAO, 2021).

1.2 Statement of the Problem

The Nigerian agricultural sector has undergone a profound policy shift from a state-controlled system to a liberalized market environment. The core problem is that the expected supply response from farmers to this new market environment has been weak and inconsistent. Despite the theoretical benefits of market liberalization, agricultural production has not increased as rapidly as hoped, and the sector continues to underperform. The factors limiting this response, particularly the role of price risk, are not fully understood. (World Bank, 2018).

A fundamental problem is the high level of price volatility that has characterized agricultural markets in the post-liberalization era. The removal of the marketing boards’ stabilizing influence has exposed farmers to significant fluctuations in crop prices, both within and between seasons. The problem is that this price instability creates a highly uncertain environment for farmers, making it difficult for them to plan their production and make investment decisions. The risk of a price collapse at harvest time is a major deterrent. (Barrett, 2018).

The problem of a weak and inelastic supply response to price signals is a central concern. Even when prices for a particular crop are high, the increase in hectarage and output in the following season is often disappointing. The problem is that this weak responsiveness suggests that other constraints, such as lack of access to land, credit, and inputs, are preventing farmers from taking advantage of favorable market conditions. The liberalization of markets alone is not sufficient to stimulate a strong supply response. (Krueger et al., 2019).

There is a significant problem with the lack of empirical evidence on the specific role of price risk in shaping production decisions in Nigeria. While the theoretical link between risk and production is well-established, the empirical quantification of this effect is underdeveloped. The problem is that without this evidence, policymakers may be underestimating the negative impact of price volatility on agricultural output. The design of policies to mitigate price risk, such as price stabilization schemes or crop insurance, is dependent on a clear understanding of the problem. (Moschini and Hennessy, 2018).

The issue of the differential supply response of different crops is a critical gap in knowledge. The major crops in Nigeria—maize, rice, cassava, and yam—have different production cycles, market characteristics, and roles in the food system. The problem is that a “one-size-fits-all” policy approach is unlikely to be effective. Understanding which crops are more or less responsive to price signals and price risk is essential for designing targeted interventions. For example, a policy to support maize production may not be appropriate for cassava. (Sadoulet and de Janvry, 2018).

The problem of the lack of access to market information is a major constraint on farmers’ ability to respond to prices. In many rural areas, farmers have limited knowledge of the prevailing prices in different markets, and they may be at the mercy of middlemen who exploit this information asymmetry. The problem is that this lack of information prevents the market from functioning efficiently and dampens the transmission of price signals to the farm gate. Investing in market information systems is crucial for improving supply response. (Aker, 2019).

The issue of the high cost and limited availability of inputs, such as improved seeds and fertilizers, is a major supply-side constraint. Even when prices are favorable, farmers may be unable to expand their production because they cannot access the necessary inputs at an affordable cost. The problem is that the liberalization of input markets, while intended to improve efficiency, has not always led to better access for smallholder farmers, particularly in remote areas. This input constraint limits the potential for a strong supply response. (Liverpool-Tasie and Takeshima, 2019).

The problem of the impact of other policy distortions, such as the periodic bans on rice imports, complicates the analysis. These policies, while intended to protect domestic producers, can introduce their own distortions and create uncertainty. The problem is that the effects of market liberalization are difficult to isolate from the effects of these other, often ad-hoc, policy interventions. A comprehensive analysis must account for the wider policy environment. (Emmanuel and Okafor, 2022).

There is a significant problem with the potential for the “competition effect” from off-farm activities. As the rural non-farm economy grows, farmers may choose to allocate their labor and capital to off-farm activities rather than to expanding their farm operations. The problem is that this can dampen the supply response to agricultural price increases, as the returns from off-farm activities may be more attractive or less risky. The analysis of supply response must consider the broader livelihood context of the farm household. (Ellis, 2018).

The problem of the long-term decline in soil fertility and the impact of climate change are emerging constraints on supply response. Even if farmers want to respond to higher prices, their ability to do so may be constrained by the degradation of the natural resource base. The problem is that declining soil health reduces yields, making it less profitable to expand production. The increasing variability of rainfall associated with climate change adds another layer of risk and uncertainty. These environmental factors are increasinglyimportant determinants of agricultural supply. (FAO, 2021).

The issue of the lack of a robust and consistent time-series dataset on agricultural production and prices is a constraint on research. The data from different sources can be inconsistent, and there are gaps in coverage for some crops and time periods. The problem is that this lack of reliable data makes it difficult to conduct rigorous econometric analysis and to establish robust quantitative relationships. The quality of the evidence base is a key determinant of the quality of the policy conclusions. (NBS, 2022).

This study is designed to address these problems by providing a comprehensive, rigorous analysis of the hectarage and output responses of major crops to market liberalization and price risk in Nigeria. It will use a robust econometric framework to estimate price elasticities and to quantify the impact of price risk. The core problem this research aims to solve is the lack of a clear, evidence-based understanding of how farmers are responding to the liberalized market environment, which is essential for designing effective policies to stimulate agricultural growth. (World Bank, 2022).

1.3 Aim of the Study

The aim of this study is to analyze the hectarage and output responses of major crops to market liberalization and price risk in Nigeria from 1981 to 2023.

1.4 Objectives of the Study

The specific objectives of this study are to:

1. Analyze the trends in the hectarage and output of major crops (maize, rice, cassava, and yam) in Nigeria over the study period.
2. Examine the trends in the producer prices and price volatility of these crops.
3. Determine the effects of market liberalization policies on the hectarage and output of the major crops.
4. Analyze the supply response (price elasticity of supply) of the major crops in both the short run and the long run.
5. Assess the impact of price risk on the hectarage and output decisions of farmers.

1.5 Research Questions

The following research questions were formulated to guide this study:

1. What are the trends in the hectarage and output of major crops (maize, rice, cassava, and yam) in Nigeria from 1981 to 2023?
2. What are the trends in the producer prices and price volatility of these crops?
3. What are the effects of market liberalization policies on the hectarage and output of the major crops?
4. What is the price elasticity of supply for the major crops in the short run and the long run?
5. What is the impact of price risk on the hectarage and output decisions of farmers?

1.6 Research Hypotheses

The following null (H₀) and alternative (H₁) hypotheses were tested in this study:

1. H₀: The producer price of a crop does not have a significant positive effect on its hectarage in the following season.
   H₁: The producer price of a crop has a significant positive effect on its hectarage in the following season.
2. H₀: Price risk (measured by the coefficient of variation of crop price) does not have a significant negative effect on the hectarage of the major crops.
   H₁: Price risk (measured by the coefficient of variation of crop price) has a significant negative effect on the hectarage of the major crops.
3. H₀: The market liberalization policy (post-1986 era) has not had a significant effect on the price responsiveness of farmers.
   H₁: The market liberalization policy (post-1986 era) has had a significant effect on the price responsiveness of farmers.
4. H₀: There is no significant difference in the short-run price elasticity of supply between the major crops.
   H₁: There is a significant difference in the short-run price elasticity of supply between the major crops.
5. H₀: The long-run price elasticity of supply is not significantly greater than the short-run elasticity for any of the major crops.
   H₁: The long-run price elasticity of supply is significantly greater than the short-run elasticity for the major crops.

1.7 Significance of the Study

This study holds significant value for a wide range of stakeholders. For policymakers at the Federal Ministry of Agriculture and Rural Development, the Central Bank of Nigeria, and the National Planning Commission, the findings will provide crucial evidence on the effectiveness of past agricultural policies and the key constraints that are limiting farmers’ responsiveness to market signals. The study will highlight the negative impact of price risk, which can inform the design of policies to stabilize prices, such as the establishment of price support programs or the promotion of market-based risk management tools. The evidence on differential elasticities for different crops will guide the targeting of interventions.

For farmers and their representative organizations, the study will provide insights into the factors that affect their production decisions. By understanding the importance of price signals and the negative impact of price volatility, they can make more informed choices about their farming strategies. The study will also provide an evidence base for advocating for policies that reduce their exposure to price risk, such as better market information systems and access to credit. It will help them to articulate their needs to policymakers more effectively.

For development partners, internationalorganizations (e.g., FAO, World Bank, IFAD), and NGOs working on agricultural development in Nigeria, this study will provide a robust analytical framework for understanding the dynamics of agricultural supply. The findings on the impact of market liberalization and price risk will be valuable for designing programs that support the transition to a more market-oriented agricultural system. The study can also serve as a baseline for monitoring the impact of their interventions on farmer responsiveness and productivity.

For researchers and academics, this study will make a significant contribution to the literature on agricultural economics and policy in Nigeria. The use of an augmented Nerlovian model, which incorporates a measure of price risk, is a methodological strength. The study’s comparison of supply response across different major crops provides a nuanced analysis that is often lacking in more aggregated studies. The findings will serve as a benchmark for future research and will contribute to the ongoing debate on the role of market liberalization in agricultural development.

1.8 Scope of the Study

This study is focused on the hectarage and output responses of major crops to market liberalization and price risk in Nigeria. The geographical scope is the entire country. The temporal scope covers a period of 43 years, from 1981 to 2023, which allows for the analysis of trends before and after the market liberalization reforms that began in 1986. The study focuses on four major staple crops: maize, rice, cassava, and yam. The analysis is based on secondary, national-level time-series data. The study does not cover export cash crops like cocoa or rubber, or other food crops like sorghum and millet.

1.9 Limitation of the Study

This study is subject to certain limitations. The primary limitation is the reliance on secondary, aggregate data, which may mask important regional and crop-specific variations in production and prices. The accuracy of the analysis is dependent on the quality and consistency of the data from the various source institutions (CBN, NBS, FAO). The use of annual data may not fully capture the effects of intra-seasonal price variations. Furthermore, the study’s ability to isolate the effect of market liberalization from other concurrent policy changes and external shocks is limited. The Nerlovian model, while robust, is a simplification of the complex decision-making processes of farmers, and may not capture all the relevant factors influencing their production choices.

1.10 Definition of Terms

For the purpose of clarity, the following terms are defined as they are used in this study:

1. Market Liberalization: The process of removing government controls and interventions in a market, such as price controls and state monopolies, to allow market forces to determine prices and allocate resources.
2. Price Risk: The uncertainty associated with the future price of a commodity, which can lead to unexpected gains or losses for producers and consumers.
3. Hectarage: The area of land, measured in hectares, that is planted to a particular crop. It is a key indicator of farmers’ production intentions.
4. Supply Response: The degree to which farmers adjust their production (hectarage and output) in response to changes in prices and other incentives.
5. Price Elasticity of Supply: A measure of the responsiveness of the quantity supplied of a good to a change in its price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price.
6. Nerlovian Supply Response Model: An econometric model that assumes farmers adjust their production gradually in response to price changes, allowing for the estimation of both short-run and long-run elasticities.
7. Coefficient of Variation (CV): A statistical measure of the dispersion of data points around the mean, calculated as the standard deviation divided by the mean. It is used as a measure of price volatility or risk.
8. Structural Adjustment Programme (SAP): A set of economic policies implemented by many developing countries in the 1980s and 1990s, typically including market liberalization, privatization, and fiscal austerity, often as a condition for receiving loans from the World Bank and IMF.
9. Marketing Board: A state-owned agency that was responsible for the purchasing, pricing, and export of agricultural commodities. In Nigeria, these boards were dismantled under the SAP.
10. Time-Series Data: A sequence of data points collected over a period of time at uniform intervals, used to analyze trends and dynamic relationships.