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Food will be scarce in 9 months but this presents huge investment opportunity

Food and Agriculture Organisation predicted that 7 million Nigerians will experience food shortage between June and August 2020.

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A summer of higher food prices, limited room for monetary policy, Food will be scarce in 9 months but this presents a huge investment opportunity

For as long as life exists, people will always need food. No matter how little one’s income is, food will always own a share of it, and even if a time comes where there’s no food to buy, people will grow their food to eat – all in a bid to survive.

From a macroeconomic perspective, UN’s Food and Agriculture Organisation predicts that the agricultural market in Sub-Saharan Africa will reach $1 trillion by 2030. As expected, Nigeria’s exponentially growing population of 200 million and counting, spells an even greater demand for food supply.

Unfortunately, food insecurity has been on the rise in Nigeria. Just a few months ago, the Food and Agriculture Organisation predicted that 7 million Nigerians will experience  food shortage between June and August, this year as 16 northern states and the Federal Capital Territory (FCT) have been identified to face food and nutrition crisis.

Yet, recent happenings showed that this food shortage will be worse, as the cost of production set to significantly increase within the next 6 -9 months and every Nigerian will be affected. Here’s why:

Covid-19 

The current global pandemic, Covid-19, has disrupted life as we know it. In the agricultural industry, these disruptions have also been witnessed, forcing global food insecurity. The lockdown had forced many countries to shut down their borders thus restricting movements. Since local production in the sector cannot meet the demand of the over 200 million people in the country, augmenting with imported food became a necessity.

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(READ MORE: CBN’s MPC unlikely to cut rates, as Nigeria’s foreign reserves hit $36.16 billion)

This has led to the tightening of credit access to farmers, restricted access to inputs for farmers, limited access to transport services to transport food, and more. This has had a ripple effect on food production and transportation, leading to a hike in food prices. For this, the United Nations World Food Program UNWFP has warned that the number of people facing food insecurity may double by the end of the pandemic.

Nigeria’s food security, GDP growth hinge on financial inclusion of farmers, Food will be scarce in 9 months but this presents a huge investment opportunity

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The biggest input supplier temporarily shut down

Indorama Fertilizer & Petrochemical Ltd is the world’s largest single-train Urea, a highly demanded brand of fertilizer. However, just last week, the company announced to its clients that it had shut down temporarily owing to certain challenges as a result of Covid-19.  Being a core input requirement for farmers across the nation, the company’s shut down will further strain the existing challenges in the Agro landscape.

The implication of this is that Agro dealers, that is those who sell retail inputs, will not have these inputs to sell on a large scale and might have to source input from smaller producers. Needless to say, prices will spike even more. With input prices high, the cost of production on even packaged food products like your usual cereals will be high, thus forcing an increase in food products.

Other challenges include the supply chain disruption also owing to the Covid-19 pandemic and the lockdown resulting from it. The marketing of foodstuff has been restricted as a movement has been restricted.

More so, those who have these inputs will want to sell at the best prices they can obtain and they will hoard inputs to attain this. With these, farming will also be reduced and food supply itself will reduce. The implication of this reduced supply is that people will have money and not be able to find the food they need.

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(READ MORE: Covid-19 & Smart Food Markets for the Future)

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Uka Eje, the founder of Thrive Agric, explained that “In less than a month, one fertilizer that used to be sold for N5200 is now being sold for N7700 and it is set to increase.

Transport companies who move perishables like tomatoes are also hit. For example, journeys that used to take 17 hours, now take as much as 3 days with many of such perishables getting bad on the road. With Indorama temporarily shut down, food prices will also increase because farmers will find it expensive to purchase fertilizer, and production will drop leading to food scarcity. Cost of production could as much as double within the next 6 – 9 months.”

Food will be scarce in 9 months but this presents a huge investment opportunity

Even as we brace up for the possible impact of this, this reduced supply presents an opportunity for investors in the Agro space. It is the best time to invest in the industry because of the heightened demand for an already high demand for food.

The resulting gains are limitless as they will not only yield well for the companies involved, it will also be solving a major challenge and revamp the economy as a whole.

 

 

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Columnists

How Cash flow, Liquidity, and Leverage impacts your financial plans

Aja discusses how Cash flow, Liquidity, and Leverage impacts your financial plans.

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cash flow

It is key to discuss cash under the three themes of Liquidity, Leverage, and Cashflow. These concepts are interrelated, but each has different impacts on your financial plan.

Cashflow

It captures only cash transactions and is simply the amount of cash flowing in and out of your business or person. Hence, if you buy an asset and issue a Purchase Order to pay a supplier in 90 days, that transaction will not show up on your cash flow.

As an illustration, if Emeka buys a TV with N200,000 but issued a cheque for N100,000 cashable in 90 days; only N100,000 will be captured leaving his cash position. Thus, Emeka has positive cash flow and negative leverage, because his debt has gone up.

For Okafor, the seller who received half of the proceeds in cash, he may be liquid but cannot replace his stock due to lack of enough cash flow. He may have to leverage to generate cash. Should he need cash, he can create liquidity from his paper check of N100,000 by discounting to cash before 90 days, but at a cost.

You must be aware of negative and positive cash flow and avoid as much as possible, generating cash from financing activities i.e. borrowing to fund non-income generating assets or activities.

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Liquidity

It is determined by how fast an asset can be converted into cash. If Okafor gets a cheque offer from Dangote Cement and another from Emeka to pay for a TV, which do you think he will accept all things being equal? Most likely the Corporate cheque, because he perceives that it is easier to discount to cash; thus, more liquid than the individual cheque.

Federally issued bonds are said to be less risky than State or Corporate bonds of similar tenor because the issuer (the FGN) is more liquid than the States or even Corporates.

The same can be said of Equities. Stocks that are traded more often and held by more investors are more liquid and commands a better premium to the bonds of a similar company. This is one reason large blue-chip stocks command higher market prices, the investors are also paying for the ease of liquidity.

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A good metric for measuring liquidity has to be the Acid Test liquidity ratio that determines how easy it is for you to generate cash in an emergency. It is calculated by dividing your assets by your liabilities, but the key is that the assets are stripped off all hard assets and will include only cash and easily marketable securities and commodities like gold that can be sold. The higher the ratio the better.

Leverage

Simply put, leverage is borrowing. You can borrow to increase potential profits or to meet an obligation that is due. When cash is borrowed, it must be paid back with a cost called interest. Leverage can produce cash flow and liquidity, but no firm or household can remain a going concern solely on cashflow financed by leverage.

Eventually, the interest cost will swell and more of future operating cash generated by the firm or household will be earmarked to pay off interest, leaving the principal to remain and generate more interest cost.

In the earlier example, Emeka used leverage to buy the TV and gave Okafor a cheque, who will in turn generate cash flow by liquidating the instrument from Emeka.

Bottomline

A good leverage analysis is to calculate your Leverage Ratio. To determine your leverage ratio, list out all your liabilities, divide by your total assets, and multiply by 100. The answer tells you how much of your assets are financed by debt i.e. leverage ratio.

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Hence, you can have positive cash flow, be liquid but be highly leveraged, which is not ideal. The rule of thumb says the lower the leverage ratio, the better.

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Summarily, with cash, you must be aware of the implication in terms of cash flow, liquidity, and leverage.

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#EndSARS: Analyzing the economic prospects of another lockdown

Decisions taken in the next few days will determine how soon the issues surrounding the #EndSARS protests will be resolved.

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#EndSARS: Analyzing the economic prospects of another lockdown

The past five to seven days in Nigeria have been nothing short of fictional for the Nigerian people.

One would be hard-pressed to describe the events without seeming to take sides with either part of the standoff as emotions, euphoria and sometimes, unfounded principles have seemed to become the order of the day. Logic, accountability and common sense being on vacation as they often are in such matters.

If there were negotiations (of which there are none presently), parties involved may likely disagree on a couple of things ranging from the sincerity of the other party, approach to a peaceful resolution, what amounts to a peaceful resolution and how to forge ahead.

READ: COVID-19: How CBN policies helped prevent the collapse of the Nigerian economy – Oscar Onyema

READ: CBN removes “third parties” from buying forex routed through Form M

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There would be accusations and counter-accusations, more so, as the chasm of discord between stakeholders continues to widen with each passing day of the #ENDSARS protest across major cities and towns of the Country. Nonetheless, one thing both parties would agree on is that their continued standoff and reluctance to resolve the complex issues around the protest is ruinous to the economy.

Nigeria’s real GDP growth for 2019 was estimated at 2.3% by the AfDB. It was an improvement on the 1.9% estimate for 2018 and an achievement of the 2019 expert projections despite the uncertainty about the 2019 election outcomes, policy implementation slowdown and sell-offs by foreign investors in 2018.

READ: $70 billion per annum will be needed to tackle pandemic induced poverty – World Bank

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READ: Manufacturers receive N459.69 billion from banks, thanks to CBN’s lending policy 

Household consumption was the key growth driver in 2019, followed closely by growth in transport, the oil sector and information and communications technology. Agriculture, for all its Government patronage could not withstand the floods that heralded a climate change while suffering from the conflicts between herdsmen and farmers- it flopped, and so did manufacturing which could not be reckoned with due to a lack of financing. Estimated inflation for 2019 was 11.3%.

After a turnaround from –1.6% in 2016 to 0.8% in 2017, 2020 was supposed to be the year where Nigeria consolidated on the steady GDP growth of previous years by implementing its Economic Recovery and Growth Plan with an emphasis on economic diversification.

READ: Nigeria’s $1.5 billion steel plant set to produce 1 million MT of steel annually

The CBN’s proactive decree that banks hold loan–deposit ratios of 60% was geared to increasing lending to the real sector, even as they eased the risks of lending to small businesses.

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An increase in the value-added tax from 5% to 7.5% was implemented to shore up domestic non-oil revenues, and agro-industrial support from the Government was supposed to make 2020 a year to surpass growth forecasts even as oil revenues began to improve and drive foreign exchange reserves. Then came COVID-19.

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READ: CBN wades into the bank vs Fintech debate

Lacking a clear nationwide pandemic framework, coupled with a nonexistent welfare system and weak healthcare infrastructure, the Nation did a relatively impressive job in managing the pandemic but did lose the economic advantage it started the year with. Negative GDP growths were projected for Q2 and Q3 even as oil prices slumped to an all-time low.

Diaspora remittances (which accounted for 83% of the FG budget in 2018) had reduced to a trickle because of the pandemic, and unemployment surges. The World Bank predicted a recession by Q4, it would be Nigeria’s worst in four decades.

READ: CBN clears air on Diaspora Remittances, official inflows $2.6bn not $26bn 

Once again, Nigeria beat the odds. A series of monetary and fiscal policies saw to it that more funds were made available to the real sector; delinquent loans were restructured to keep from becoming bad; the free fall of the Naira was staved off and key industries were supported through Government’s special intervention programs. A few optimists were beginning to think we had rounded the corner, then came #EndSARS protests.

In the few days since the protests have begun, the Nation is estimated to have lost billions of Naira with Lagos state, understandably, being the biggest loser so far hosting the largest protests. Manpower hours have been lost, properties have been destroyed and worst of all lives have been lost.

READ: CBN knocks airline and shipping firms over non-compliance with form NXP

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Household spending, transportation and manufacturing cannot continue to thrive in these unrests. September inflation was pegged at 13.7%, its highest since February 2018 there is already considerable strain on healthcare due to the pandemic and the exposure of the populace during the #endsars protests and counter-protests could spike up the COVID-19 numbers once again.

The peculiarity of the nature of the protest has seen Nigerians in the Diaspora channel their funds to supporting the protests in Nigeria while organizing theirs in their host country. Another significant loss of diaspora remittances which represent a substantial percentage of the GDP. Also, the protests are beginning to weigh in on stock market activities and could affect other economic indices if tensions escalate further.

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READ: Nike stocks post gains, women’s apparel division grow by 200%

The unfortunate resolve of both sides to fight to the finish without giving room for dialogue could lead to another lockdown of economic activities as witnessed in Edo, where a 24hr curfew has been declared; Lagos where schools and businesses have shut down; Osun, Ekiti, Plateau, Imo and the FCT where business activities have come to a grinding halt.

The cyber warfare being threatened by both sides could also have far-reaching effects on the liquidity of our financial institutions as their customers opt for crypto wallets as safe haven for their funds and as punitive measure for brands they perceive as not being supportive towards their cause.

READ: Leaked memo: CBN instructs banks to block bank account of 38 companies for “forex abuse”

Of course, decisions taken in the next few days will determine how soon the issues surrounding the protests will be resolved, but for a country on the precipice of serious economic repercussions, both parties seem a little too comfortable in staring down the opposition when serious gains could be made by coming to a round table.

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Columnists

More agriculture loans but longstanding bottlenecks remain

Despite the flurry of funds provided via intervention policies, long-standing bottlenecks in the agric sector still exist.

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Nigeria’s agricultural export, Nigeria’s top 10 agricultural exports rose to N206.16 billion in 9-month 

According to local media reports, the Minister for Agriculture, Sabo Nanono through an information official of the Agric ministry announced plans by the ministry to provide relief for farmers in form of interest-free loans, and effective input subsidisation. According to the statement credited to the minister’s representative, the relief is for the recent covid-19 disruptions to farming activities and flooding in Kebbi, Jigawa and Kano states. In addition,
the minister stated the interest-free loans would be provided through a partnership of the Agric ministry and the Central Bank of Nigeria.

We acknowledge that farming activities have been significantly affected in 2020 due to covid-19 movement restrictions during the planting season as well as abnormal rainfall patterns which led to flooding of farmlands. That said, we note that the farmers/herders clashes remain a significant threat to agricultural productivity. These unfortunate events have led to a spike in food prices refelected in the food inflation rate of 16.66% in September according to the National Bureau of Statistics (NBS). Thus, we consider provision of reliefs for farmers important to restore farming activities and output level back to pre-covid levels.

However, we note that the agriculture sector remains plagued with long-standing structural challenges which if ameliorated, would significantly improve output level and drive the country towards its goal of achieving self-sufficiency in food production. Some of the long-standing bottlenecks include; poor transport network to connect farmlands with main markets, poor storage facilities, sub-standard farming inputs, crude agricultural techniques
etc. These in our view, are the reasons why the funds that have been pumped into agriculture via different intervention schemes such as Anchors Borrowers Program (ABP) and Commercial Agricultural Credit Scheme (CACS) have yielded limited results and remain riddled with repayment controversies.

In our opinion, while short term relief for farmers is necessary to immediately alleviate some of the pressures on food prices in the short term, we think some of the flurry of funds provided via intervention policies should be directed at resolving long-standing bottlenecks to truly maximise the full potential of Nigeria’s agriculture promise.

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CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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