EFFECT OF CAPITALIZATION ON PRODUCTIVITY OF RICE PROCESSORS IN EBONYI STATE, NIGERIA

ABSTRACT

This study examined the effect of capitalization on productivity of rice processors in Ebonyi state, Nigeria. It established the level of productivity, allocative efficiency and capitalization of rice processors as well as their determinants. A total of 120 rice processors were selected for study and data collected using set of structured questionnaire distributed and collected at rice processing points. Simple descriptive statistics like tables, means and percentages as well as econometric tools such as Cobb-Douglas Production frontier, Ordinary Least Square (OLS) and Heckman selectivity (Hurdle) and correlation models were employed in the data analyses. Result of the analysis revealed that rice processing is dominated by females who are married and within the age bracket of 25 – 34 years. Most of them have attended one form of education or the other with moderate years of processing experience. A mean productivity value of 1.53 implies that an average rice processor made 53 kobo for every one naira invested. The result shows that age, education, firm size, farming experience, capital inputs, household size and gender influenced rice processors’ productivity. With a mean of 0.762, the processors were allocatively inefficient and disadvantaged to increase output. Age of processors, education, cooperative membership and energy type, gender, household size, credit, training, number of times of servicing mills and age of mill all predicted allocative efficiency of rice processors. A mean investment value of ₦220, 610 implied that the processors may be involved with local processing methods which could have been responsible for their poor and inefficient allocation of resources. The result shows that age, education, loan size, farming experience and nature of ownership were positively related to the amount of capital invested by rice processors and negatively related to interest rate. Findings further showed that productivity and capitalization were positively correlated at 5% level of significance implying that as capitalization (amount of capital invested) increases, productivity increases too. A number of challenges were identified to militate against rice processing which include high cost of paddy, inadequate equipment and high transportation costs. It is recommended that the Federal government, state or local governments and non-governmental agencies should organize training for rice processors on the management of additional income from off-firm work activities. Policies should be put in place by stakeholders in rural development to encourage rice processors in non-agricultural wage and self-employment categories to reinvest off-firm income into rice production and processing. Increase in formal education of these respondents should target managerial skills that would enhance diversification through factor mobility and efficient allocation of labour between firm and off-firm sub-sectors of rural economy; extension programmes should also focus attention on efficient labour allocation so that off-firm work does not adversely affect profit efficiency among processors who participate in off-firm.

TABLE OF CONTENTS

Title Page                                                                                                                    i

Declaration                                                                                                                 ii

Certification                                                                                                               iii

Dedication                                                                                                                  iv

Acknowledgements                                                                                                    v

Table of Contents                                                                                                       vi

List of Table                                                                                                               ix

Abstract                                                                                                                      x

CHAPTER 1

1.0  INTRODUCTION                                                                                          1

1.1. Background Information                                                                                     1

1.2. Statement of Problem                                                                                          5

1.3. Research Questions                                                                                             8

1.4  Objectives of The Study                                                                                 9

1.5  Hypotheses                                                                                                     9

1.6  Justification of The Study                                                                                    10

1.7  Scope of The Study                                                                                        12

CHAPTER 2                                                                                                               13

2.0. LITERATURE REVIEW                                                                                    13

2.1.CONCEPTUAL FRAMEWORK                                                                   13

2.1.1 Rice Production in Nigeria                                                                                15  

2.1.2 Types of Cultivation                                                                                                16    

2.1.3 Rice Processing                                                                                                     16 

2.1.4 Method of Rice Processing                                                                             17

 2.1.5 Concept of Capitalization                                                                                18

 2.1.6 Concept of Efficiency                                                                                      19     

2.1.7 Concept of Productivity                                                                                       21

2.1.8 Factors that Affect Productivity                                                                        22    

2.1.9 Definition and Measures of Agricultural Productivity                                        24

 2.1.10 Challenges Facing Small-Scale Agriculture                                                  25 

2.1.11 Agri-Small and Medium Enterprises (SMEs)                                                            28

2.1.12 Agri-Small and Medium Enterprises (SMEs) and Rural Development   29

 2.1.13 Trade and Capital Flows                                                                                 30

2.2 THEORETICAL FRAMEWORK                                                                        34

 2.2.1 Theory of Credit Demand                                                                                 34

 2.2.2 Credit Access and Productivity of Processors                                                  36

 2.2.3 Cost Theory of Capitalization                                                                          39

 2.2.4 Earning Theory of Capitalization                                                                     39  

2.2.5 Linkage between Credit and Productivity                                                   40  

2.2.6 Credit Supply and Rationing                                                                                    40

 2.2.7 Structure of the Nigeria Financial Sector                                                         42   

2.2.8 Formal and Informal Credit Market in Nigeria                                                            44

2.2.9 Utilization of Micro Credits                                                                              46

2.2.10 Other Uses of Formal Micro-Credit Acquired for Rice Technologies  47 2.2.11 Credit Constraints                                                                                       48     

2.2.12 Issues of Credit Constraint                                                                                     49

2.2.13 Policy and Program Challenges                                                                      51

 2.2.14 Resource use and Efficiency                                                                          54

2.3 EMPERICAL FRAMEWORK                                                                            56 

2.3.1 Socio-economic Characteristics of Rice Farmers                                                56

2.3.2 Determinants of the Demand and Participation in Credit Market by Small Holder                                                                                                                           57 

2.3.3 Trends in Agricultural Production in Nigeria                                                            59 

2.3.4 Effect of Credit Constraint on Profit                                                                 67

2.4 ANALYTICAL FRAMEWORK                                                                         68

2.4.1 Descriptive Statistics                                                                                          68 2.4.2 Regression Analysis                                                                                    68

 2.4.3 Cobb-Douglas Cost Function                                                                            70   

2.4.4 Stochastic Frontier Production Function                                                    72   

2.4.5 Total Factor Productivity                                                                            73    

2.4.6 Heckman’s two stage selection model                                                               74

CHAPTER 3                                                                                                                76

3.0. METHODOLOGY                                                                                               76

3.1. Study Area                                                                                                           76

3.2  Sampling Techniques                                                                                      77

3.3  Method of Data Collection                                                                              77

3.4  Method of Data Analysis                                                                                       78

3.5  Model Specification                                                                                        78

CHAPTER 4                                                                                                                84

4.0  RESULTS AND DISCUSSION                                                                      84

4.1. Socio-Economic Characteristics of Respondents                                                 84

4.2   Productivity of Rice Processors In Ebonyi State                                            90

4.3  Factors Affecting The Productivity Of Rice Processors                                      91

4.4. Estimation of Allocative Efficiency of Rice Processors                                      97

4.5  Factors Affecting The Output Of Rice Processors                                               101

4.6  Determinants of Allocative Efficiency Of Rice Processors                                 103

4.7  Direction of Causality Between Off-Firm Income And Firm Capital                   108

4.8  Level of Capitalization (Investment) Of Rice Processors                                    114

4.9  Determinants of Capitalization Of Rice Processors                                             114

4.10        Relationship Between Capitalization And Productivity of Rice Processors  119

4.11         Constraints Militating Against Rice Processing                                            120

CHAPTER 5                                                                                                               122

5.0  SUMMARY, CONCLUSION AND RECOMMENDATION                       122

5.1 Summary                                                                                                               122

5.2  Conclusion                                                                                                      124

5.3 Recommendations                                                                                                125

REFERENCES                                                                                                           128

LIST OF TABLES

Table 1:    Nigeria milled rice domestic consumption annual growth rate                          2

Table 4.1: Distribution of respondents by their socio-economic characteristics 85

Table 4.2: Productivity of rice processors in Ebonyi state                                          90

Table 4.3: Determinants of productivity of rice processors in Ebonyi state                  91

Table 4.4: Input elasticity                                                                                            97

Table 4.5: Mean value of the rice processors’ inputs                                                  98

Table 4.6: Allocative Efficiency Estimates                                                                 99

Table 4.7: Frequency distribution of rice processors by allocative efficiency         100

Table 4.8: Cobb-Douglas estimates of rice processors’ output in Ebonyi state      101

Table 4.9: Determinants of allocative efficiency of rice processors in Ebonyi state  103

Table 4.10: Participation in off-firm work and amount of off-firm income’s share invested in rice processing                                                                                         109

Table 4.11: Level of capitalization of rice processors in Ebonyi state                          114

Table 4.12: Determinants of capitalization of rice processors in Ebonyi state     115

Table 4.13: Relationship between capitalization and productivity of rice processors119

Table 4.14: Challenges militating against rice processing                                          121

CHAPTER 1

INTRODUCTION

1.1 BACKGROUND INFORMATION

The centrality of agriculture to developing economies (DEs) is not in dispute (Umoh, 2003). This is basically because agriculture constitutes the largest sector of most of these developing economies, including Nigeria. For instance, agriculture in Nigeria provides about one-third of the nation’s workforce (NISER, 2010).  In spite of this, Nigeria faces acute shortage of food as a result of its low agricultural productivity (Okpiliya, 2003). This has severe implication on its ability to meet food security and broad economic growth. 

Since food security is constrained by gaps in food demand and supply (Nwachukwu, Oteh, Udenwoke and Ebere 2015), the need for food availability as a measure of Nigeria commitment to achieve sustainable development agenda cannot be over-emphasized especially since it is one of the dimensions of food security. The increasing attention to food availability in Nigeria is because of severe negative consequences of inactions such as multiplicity of hunger and angry people, depression, and other social issues associated with poverty of food. Food shortage which varies seasonally or yearly is reflected in the quantity of food made available for consumption (Idachaba, 1991), constrained mostly by low agricultural productivity. Although, agriculture remains a veritable platform to address the issue of food insecurity even with a growing population like Nigeria.  However, this sector is saddled with several challenges – convergence of economic, institutional, cultural and political issues that affects food and general agricultural productivity. This reflects the drop in agricultural contribution to Gross Domestic Product (GDP) from 65.7% in 1957 to 22% in 2014, representing a decrease of 43.7% (Oteh and Eleodinmuo, 2016). This has severe implication on Nigeria ability to ameliorate the challenges of food production to feed its growing population.

Nigeria has had a varied history of both good and bad in food production, sustainability and food security (Omotor, 2009). One crop that is increasingly mentioned in the context of global food security which reflects the opinion of Omotor (2009) is rice given its place in household food baskets. According to Nwachukwu et al., (2015); rice (Oryza sativa or Oryza glaberrima) has found a place in global food security and is an important staple food with rich cultural identity. In Thailand, rice is described as the essence of life; In China, it is referred to life and generally the root of Asian civilization (Gomez, 2001). According to FAO (2008) and Inuwa, Kyiogwom, Ala, Maikasuwa and Ibrahim, (2011), many people depend on it for about 80 percent of their calorie requirement; as a result, there is hardly any country in the world where it is not utilized in one form or the other. In Nigeria, rice is one of the few food items whose consumption has no cultural, religious, ethnic or geographical boundary (Ibitoye, Idoko and Shaibu, 2014). Consequently, its demand and consumption have continued to witness momentous changes with increasing population across all socio-economic classes (Ogunsumi, Ajayi, Amire and Williams, 2013) as represented in Table 1.  

Table 1: Nigeria processed rice for domestic consumption annual growth rate

Source: United States Department of Agriculture (USDA), 2014                                             

Unfortunately, rice production in Nigeria has not kept pace with the increasing population. The annual growth rate of food sub-sector is 2.0 percent while the annual population growth rate is 3.3 percent (NBS, 2002). This means that a wide gap exists between food supply and the demand for food by Nigerians. For instance, Nigeria’s annual demand consumption for milled rice exceeds domestic output of 3.3 million metric tons per annum by over 2.2 million MT per annum (FMARD, 2013).

Despite the productive capacity and advantage of Nigeria in rice production, great imbalance still exists in the demand and supply of rice. Like many agricultural produce in Nigeria, rice is grossly inadequate due in part to the fact that it is farmed by small scale processors with little or no value addition and with low resources (Ezebuiro et al, 2008) resulting in low marginal returns on their output. According to Nwajiuba (2013), “those smallholders, mostly subsistence producers’ account for 80% of all farm-holding in Nigeria” This limits their ability to compete favorably with other countries that have attained the desired level of production. The result is these farmers/processors are trapped in productivity gap.

With regards to rice production, poor harvest as a result of low technology and fast expanding consumption base (FAO, 2014) mirrors the critical mass of challenge. This measure has triple implications – productivity, pricing efficiency and marketing. Firstly, low technology hinders farming efficiency and/or ability of rice farmers to optimize their productivity and compete favorably with rice farmers in other parts of the world; it makes it very difficult to control prices of rice because it depends on the world market for rice, with its great price volatility. It is easier to stabilize domestic food prices using domestic production (Timmer and Thomas, 2010). However, ability of Nigeria farmers to stabilize food prices through improved agricultural production is often constrained by many challenges. These challenges in Nigeria and other developing countries have been identified by several researchers such as Marchet, (2001); Nto et al., (2012), Idachaba, (2000); Nigeria Investment Promotion Commission (NIPC), (2006).

From these studies, there appears to be a consensus that the productivity is discouragingly low due in part to lack of adequate (working) farming capital to optimize production and effectively drive agricultural growth. For instance, a study on sources of total factor production growth in 83 industrial and developing countries for the period 1960-1990 showed that finance formation was three to four times more important than raw materials in explaining output growth of these enterprises (Nehru and Dhareshwars, 1994).  This study reflects the precarious situation of most rice processors in Nigeria in particular and developing countries in general. The demand for capital in agriculture to address both infrastructural and other facilities cannot be overemphasized. Accordingly, absence of capital base compromise the financial ability of agribusiness enterprises and expose them to risk of solvency (Nwachukwu et al., 2015). Some of these risk involved inability to make investment in modern technological inputs and other equipments that improves productivity of processors in most rural part of Nigeria. Example, the large 15 integrated rice processing plants in Nigeria birthed through agricultural transformation agenda in 2015, many rice processor in Ebonyi State, are small scale processors with little technological capabilities arising from low capital base. This has implication on their ability to compete effectively with the large commercialized and capitalized businesses. 

In recent time, local rice consumption has seen huge demand in most national market at a rate many observers believed will impact on the industry positively. This requires investment in modern day rice technology in order to bridge demand-supply gaps and afford processor power to compete favourably with foreign produced rice. According to Ebuehi et al., (2007), most Nigerians preference for imported rice brands as compared to local rice varieties is because of level of value addition and standard. Therefore the need to scale up access to finance and other support incentives for farmers and processors in most developing countries like Nigeria to take advantages of huge market opportunity cannot be over-emphasized.

According to Semboja, (2004), micro credits are used for two purposes, which are for investment and generation of wealth or for consumption smoothing. In other words capital for rice processors can be put into production use or consumption use. For the purpose of this work, capital for productive use which appears to be more documented will be given more attention.

Although many sources of finances are usually mentioned when categorizing financial availability to farmers; often only informal finance are easier to access but falls below adequacy to address processors critical challenges. However, processors ability to obtain formal credit and capitalize their businesses is often constrained by legal and collateral issues among others. This hinders productivity and its impact on food security is huge. This study is an attempt to look at this issue from a broader perspective than a series of discrete repetition. The choice of rice industry in Nigeria is apt following the surging demand and implication of this sector to Nigeria drive for food sufficiency.

1.2   STATEMENT OF PROBLEM

There is no doubt that Nigeria is one of the largest consumers of rice in Africa. This is evident in the strength of its population and import bill which was reduced from N1.1 trillion (about $6.9 billion) in 2009 to N 684.7 billion (about $4.35 billion) in 2013 representing more than 63.04 percent in four years due to increase local rice production (Nwachukwu et al., 2015). This figure is expected to reduce further with massive investment in local food production.

In 2014, agricultural transformation agenda identified Nigeria national supply gap in rice to be over 1.5million metric tonnes. Although, Nigeria has capacity to close this gap between 5 to 6 years but the productive capacities of local rice farmers and processors is hindered by low productivity due to convergence of climatic, political and institutional factors which in most cases are beyond their control given that more than 90% of all farming holding in developing countries are comprised of small holder ventures (Nwajiuba, 2013).

Wilfred (2006) observed that rice processors faces the following challenges: inadequate knowledge on the use of herbicides and pesticides, postharvest handling, processing and marketing, pest and diseases, soil fertility management, irrigation and water, and harvesting skills. Others according to Agigi(1993), are issues of labour management and/or intensity in the absence of modernized rice processing equipments and transportation being strenuous and laborious; the problem is worsened by lack of appropriate rice farming tools, implements, and equipment. Besides this, the equipment available is often too expensive for the average farmer. Most farmers depend on rudimentary, labour, and time consuming hand tools such as hoes, slashers, sickles, axe, and rake for various farm operations. Other factors include lack of industrial drive due to poor government policy and high cost of production. Since local rice is of low quality; the rice merchants use this opportunity to expand on rice importation.

The above challenges are compounded by lack of adequate capital and its access by rice processors. According to Oteh and Eleodinmuo (2016), the current state of agribusiness sector in Nigeria is such that it is substantially under-capitalized with extremely low level of mechanization and value addition. This limits their ability to make meaningful contribution to productivity and overall industrialization. The need for finance in the operation of any agribusiness enterprise is such that its absence stalls capacity and productivity. This is the challenge which many rice processors face in rice producing areas of Nigeria. Therefore the solution lies in the provision of incentives in the form of capital, machineries, and government policies to confront these challenges faced by processors.

A thorough assessment published by West African Rice Development Association (WARDA) in 2003 on Nigeria’s processing sector showed that there were no operational industrial rice mills in the country, and therefore rice milling in Nigeria is ‘a cottage industry’.  Nevertheless, there was significant variability in the size of the mills surveyed, and the researchers concluded that about 30% of the mills have capacity below 150 kg/hr, 58% that of 150-300 kg/hr, and 12% that of 300-500 kg/hr.  These capacities are below the desired production limit to cushion the demand-supply gap in Nigeria. Therefore, the need for improved performance by processor. Most of the mills in Nigeria suffer from issue of capacity under-utilization due to lack of adequate capital to finance their operation. Most of the mills were of the Engelberg types of various sizes, with only less than 25% using a higher technology (WARDA, 2003). 

The importance of productivity in rice processing cannot be overemphasized, even as Osagie and Edodi, (1990) pointed that processors hold the key to industrialization in a country. Yet, the majority of processors are considered not creditworthy by most formal credit institutions. Whereas the informal institutions tend to meet some of their credit demand, but as processors expand in size, the characteristics of loans they require become increasingly difficult for informal credit sources to satisfy, yet they still remain too small for the formal lenders (Aryeetey, 1996).

In most cases, financial incentives are available but there is information gap regarding access for local rice processors. In Nigeria, Ebonyi state is known for its rice production but discouragingly, processors are currently saddled with the above highlighted challenges (Oteh et al., 2015).

Therefore, given their importance in Nigeria rice food security, it becomes imperative to examine the issue of productivity and its link with capitalization. Furthermore, there is a gap in literature on rice processor capitalization issue in Nigeria. This study hopes to bridge this gap and make recommendation that will scale up processors access to capital.

1.3   RESEARCH QUESTIONS

The study sought to answer the following research questions:

               i.         What is the level of productivity of rice processors in the study area?

             ii.          Are there factors influencing productivity of rice processors in the study area?

            iii.          What is the output and allocative efficiency of the processors?

            iv.         What are the direction of causality between off-firm income and firm capital of rice processors?

              v.         What is the level of capitalization involved in their processing enterprise?

            vi.         What are the factors that influence capitalization in the rice processing enterprise?

          vii.          Is there any relationship existing between capitalization and productivity of the processors in the study area?

         viii.          What are the constraints militating against productivity of the rice processors in the study area?

1.4   OBJECTIVES OF THE STUDY

  The broad objective of this study was to analyze the effect of capitalization on productivity of rice processors in Ebonyi State, Nigeria. The specific objectives were to:

                  i.         estimate  the level of  productivity of rice processors in the study area;

                ii.         determine the factors influencing productivity of  rice processors in the study area;

               iii.         analyze the output and allocative efficiency of the processors;

               iv.         estimate the direction of causality between off-firm income and firm capital of rice processors;

                 v.         analyze the level of capitalization in the rice processing enterprise;

               vi.         estimate the determinants of capitalization among the processors;

             vii.         determine the effect of capitalization on the productivity of the processors in the study area;

            viii.         identify constraints militating against productivity of the rice processors in the study area.

1.5   HYPOTHESES

 The following hypotheses were tested

HO₁: Productivity of the rice processors is not significantly influenced by age, education, firm size, extension, credit, gender, household size, experience and capital inputs.

HO₂: Processors’ output is not significantly influenced by capital, labour and machines.

HO₃: Allocative efficiency is not significantly influenced by age, education, cooperative membership, training, energy type, gender, household size, credit, number of servicing times and age of mill.

HO₄: Decision to participate in off-firm work is not significantly influenced by education, primary occupation, capital inputs, age, total firm size, total revenue and asset turnover ratio.

HO₅: Amount of off-firm income share invested in rice processing is not significantly influence by household size, total revenue, primary occupation, land ownership, ratio of farm asset to household asset, operating profit margin, firm capital, education, government payment, asset turnover ratio and capital input.

HO₆: Capitalization is not significantly influenced by age, years of education, processing experience, off-firm income, interest rate and nature of ownership.

HO₇: There is no significant relationship between capitalization and productivity.

1.6   JUSTIFICATION OF THE STUDY

The importance of rice consumption and production in Nigeria cannot be over-emphasized. This is because rice has a rich cultural and nutritive value to people of all races. However, there exist a wide gap in demand and supply of rice in Nigeria due to convergence of institutional, cultural and economic factors. Although opinion of researchers differ on causes of farming productivity, but Ali and Chaudry, (1990); Bravo-Ureta, (1993); Ashok, et al., (1995); Seyoum (1998); Abay et al., (2004) and Chavas et al., (2005) identified resource use as key issue in agricultural productivity.  The scope of agricultural production can be expanded and sustained by farmers through use of resources (Udoh, 2000), one important resource in the choice set is capital.

Capital is an important factor of production and key in addressing issue of productivity. This is due in part to its ability to reduce the risk of under-utilization of other resources, insolvency, and overall poor productivity. Given the importance of rice in the food basket of most households in Nigeria; with rising food prices of rice as a result of inflation in Nigeria and general constraints to capital among rice processor who are mostly poor resource farmers, the need for increasing incentives to help them cannot be over-emphasized. Therefore, the expectation of this research work is to help the rural and urban rice farmers to gain adequate information of finance available for rice production in Nigeria. This is important to close the seeming gap in knowledge for the rural and urban rice producers on the effects of capitalization on productivity of rice processors that will lead to improved rice production and also increase their managerial capabilities.

The research work will also direct and help government and non-governmental organizations (NGOS) to form related targeted policies in the aspect of rice processing. This study would provide significant efforts towards improving resource use of rice processors because therein lies the incentive to productivity.

In line with the above, this research work will serve as reference document to advancement of knowledge for students; small and large scale farmers and in decision making among agro-based enterprises in terms of productivity.

Furthermore, the study which shall ensure comprehensive documentation of information on rice processing and be a useful document to the general public who from time to time might consult it.

Finally, the research institutes whose efforts are geared towards self-sufficiency in food production will bridge the knowledge gap which hitherto exists in finance information gathering on rice production and utilization of such knowledge for improved capacity utilization. Since rice has become an important food element of household food basket, the opportunities opened for small and medium scale businesses are enormous but finance remain a critical factor. With the information exposure of this study, agribusiness students, consultants, businesses and others will benefit immensely as this study will serve as gate way to information hidden from many.

1.7   SCOPE OF THE STUDY

The study owns its limitation to mostly its location which is Abakaliki in Ebonyi State, Nigeria, notwithstanding the peculiar nature and environmental challenge of rice operations in other States.  

Furthermore, the proposed study is focused on only small and medium scale processors in Abakaliki. For the purpose of this study, only smallholder farmers who have currently engaged in rice farming for more than two years will be selected for the interviews.

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