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Cocoa, chocolate and structural stagnation of the Nigerian economy 10 Dec 2020

Despite the never-ending posturing by Nigerian policymakers about diversifying the economy, the performance of the oil sector continues to have an outsized impact on the country's gross domestic product (GDP) growth even though the sector contributes less than 10 per cent to GDP. Oil and gas remain disproportionately the largest source of foreign exchange for Nigeria and the exports still the mainstay of government revenue.      

Due to the lack of value-addition to the country's key exports, the performance potentials of the economy, especially in the non-oil sector, is perpetually stifled. For instance, agriculture – a key performing area of the non-oil sector – contributed 25.16 per cent to GDP in 2019. Yet, Nigeria's top 10 agricultural exports are mostly raw materials imported by countries that are upstream in the global value chains and processed into value-added goods.

A farmer extracting cocoa beans from the pods

It goes without saying that countries with established industries for higher value exports are more economically competitive than countries whose exports are largely raw materials. I would like to discuss the economic potential of one of Nigeria's top agricultural exports, cocoa, to highlight an area the country can effectively drive economic and trade diversification through value-addition.     

Cocoa is derived from processing cacao bean. It is a major ingredient in chocolate production. It is also used in producing several other products such as cocoa powder, cocoa butter, cocoa liquor, and cosmetics. To cultivate cocoa, high temperatures, humidity and lots of rain are essential conditions. Nearly two-thirds of the world's cocoa is cultivated in West Africa, predominantly in Côte d'Ivoire, Ghana and Nigeria.

Nigeria is currently the fourth largest producer of cocoa in the world, producing about 245,000 tonnes of the commodity in 2019. Before the oil boom of the 1970s, Nigeria was the second largest producer of cocoa in the world, producing around 420,000 tonnes. Output was down to 170,000 tonnes by 1999, a situation that led to the establishment of the National Cocoa Development Committee (NCDC) under the President Olusegun Obasanjo administration.

Amongst the objectives of NCDC was the improvement of Nigeria's cocoa quality and increasing production to 600,000 tonnes annually. While output has since increased compared with the level in 1999, the goals and targets of NCDC have not been met.

The country's cocoa export was estimated at $800 million in 2016. In comparison, Côte d'Ivoire, the largest exporter of cocoa beans generated $3.9 billion in the same year. The country produces about 2 million tonnes annually and accounts for about 30 per cent of the world's cocoa.

Ghana, the world's second largest producer of cocoa, produces about 800,000 tonnes annually and the country generated about $2.5 billion from export in 2016. After Côte d'Ivoire and Ghana, Indonesia is the world's third-largest cocoa bean producer, with output of 650,000 tonnes of cocoa in 2019. Interestingly, Indonesia did not start growing cocoa until the 1980s. The country uses 1.5 million hectares of farmland for cultivation of cocoa, compared to Nigeria's 600,000 hectares of cocoa farmland, despite being a relatively older producer.   

According to a report by the International Institute for Sustainable Development (IISD), the combined export value of cocoa beans in 2017 was $8.6 billion globally. About 90 per cent of the global cocoa beans produced are consumed by the chocolate industry. The value of cocoa as a raw material for chocolate production is 8 per cent of the global chocolate market, which was valued at $103.28 billion in 2017 and is expected to grow to about $161.56 billion by 2024. Whereas, the export market for cocoa is forecast to reach only $16.32 billion by 2025.

According to the Nigerian Export Promotion Council (NEPC), about 90 per cent of cocoa produced in Nigeria is exported as cocoa bean while, the remaining 10 per cent is processed before being exported. While cocoa remains one of Nigeria's largest agricultural exports, the lack of processing facilities deprives Nigerian cocoa farmers the opportunity of deriving the maximum value for their products. Currently, only one processing plant, Ede Cocoa Processing Plant in Osun State, is fully functional.

Though there are other processing facilities in the country, they all produce less than 3,000 tonnes, which is insignificant in the scheme of things. Of course, the other West African major producers of the commodity are also in the downstream of the global value chain.
 
The contribution of cocoa to economic output continues to dwindle, dropping from 0.3 per cent of GDP in 2010 to 0.05 per cent as of 2016. Only 20 per cent of the cocoa farmland across the major producing states – Ondo, Ogun, Osun, Oyo and Ekiti – is reportedly being cultivated. Moreover, the cultivation methods used are obsolete as the lack of attention to the crop has led to a dearth of innovation and technological improvement in the cocoa industry.

It has been estimated that if the trends in Nigeria's cocoa production do not change, cocoa farming in the country would cease in twenty years. The federal government – through the NEPC and other ministries and agencies – and sub-national governments, especially in the southwestern states, need to revive cocoa production. There is no doubt that the southwestern states can grow their economy if they invest in the cocoa industry.  

As the Nigerian government faces a steep decline in revenue due to low oil prices, there is no better time to make economic and trade diversification an urgent policy agenda. In this regard, incentivizing investment in cocoa farming and facilitating the processing of the commodity for export should be prioritised. With proper planning and investment, cocoa could net the country between $3 billion to $5 billion annually. With value-addition, Nigeria could gain a significant share of the over $100 billion global chocolate market.
 
Cocoa is traded on two world exchanges, New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) in London. The London market is based on West African cocoa, while the New York futures are based on the cocoa from Southeast Asia. This tight market structure suggests Nigeria needs to do more to benefit from the commodity.

Besides the economic potential of cocoa, the nutritional value of the crop cannot be overemphasised. No one has put it better than geographer and explorer, Alexander Von Humboldt (1769-1859), who said: “At no other time has nature concentrated such a wealth of valuable nourishment into such a small space as in the cocoa bean.”

Olajide Olutuyi, a Financial Nigeria Columnist, holds a degree in Management from the University of Lethbridge, Canada; an MBA from the Australian Institute of Business; and a certificate in Social Impact Leadership from University of California, Berkeley, Haas School of Business. He is the Co-Founder/CEO Top-Olax Energy Limited and Executive Director, Samuel Olutuyi Foundation. Email: Olajide@theolutuyifoundation.org. Twitter: @jideolutuyi