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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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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.

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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.

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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.

(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.”

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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.

 

 

Patricia
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Columnists

Will the recovery in the oil market be shortlived?

The report also revealed that OPEC crude oil production averaged 22.27 mbpd in June 2020.

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FG risks backlash as oil price crash encourages deregulation policy , Crude oil prices drop as investors assess demand recovery amid supply glut, Oil falls, approaches weekly decline as Covid-19 cases hit record

According to OPEC Monthly Oil Market Report for the month of June, Brent was up 25.8% m/m to average US$40.77/b. However, on a YTD basis, Brent was substantially lower at an average price of US$42.10/b (down 36.4%) in H1 2020 when compared with the average of US$66.17/b in H1 2019. The report also revealed that OPEC crude oil production averaged 22.27 mbpd in June 2020 (down 1.89 mbpd on a m/m basis) on the back of reduced output in Saudi Arabia, Iraq, Venezuela, UAE, and Kuwait. We believe the strong growth in brent prices in the month of June was supported by the recovery in global demand for crude following the gradual easing of COVID-19 lockdown measures by countries across the globe as well as OPEC+ production cuts which contributed to a gradual rebalancing of the global oil market.

Notably, the spread between ICE Brent and West Texas Intermediate futures continued to narrow in June for the second consecutive month. The spread narrowed by US$1.43 m/m to average US$2.46/b in June compared with US$3.88/b in May. According to OPEC, this was driven by an easing of supply overhang around Cushing, Oklahoma (a key refining center in U.S and the delivery point for WTI crude oil futures) and prospects of reduced U.S oil
production this year. Already, data from Baker Hughes indicated a sharp decline in drilling activity in the US, with the number of active oil and gas rigs falling for 16 consecutive weeks.

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At the end of June, the number of active oil and gas rigs in the US fell to an all-time low of 265 units, 73% below the level in 2019, according to data from Baker Hughes.

Looking ahead, we expect OPEC+ production cuts and the recovery in global demand for crude following the easing of lockdown measures to remain positive for oil prices in the short term. We however expect the rally in oil prices to be capped by subdued growth in the global economy which would limit the pace of recovery in oil demand. In our view, the biggest downside risk to the rally in the oil market remains the growing number of new infections across the globe particularly in the U.S, which could prompt a second wave of lockdown and halt the recovery in global demand for crude.

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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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Columnists

Analysis: CBN bans maize importers from accessing FX

CBN noted that the ban was necessitated in order to protect local production of maize.

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Nestle partners USAID to improve quality of Nigerian grain 

Yesterday, the Central Bank of Nigeria (CBN) released a circular banning importers of maize from accessing forex from the apex bank. This implies importers would have to rely on supply from the parallel market to carry out their transactions. According to the circular, the CBN noted that the ban was necessitated in order to protect local production of maize, stimulate rapid economic recovery, safeguard rural livelihoods and increase job creation.

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Recall that in May 2015, the CBN announced the ban on importers of 41 items from accessing FX from official sources including items such as rice, cement, palm products etc. Since then, the CBN has increased the list by adding items like dairy products, textile, fertilizers etc. Indeed, the CBN governor, Godwin Emefiele had in 2019 guided that the list would be extended to cover some other items as the President Buhari-led administration aims to drive Nigeria towards food sufficiency. However, critics of the policy have always highlighted that the CBN only makes such moves in times of scarce FX rather than a deliberate attempt to stimulate food production.

READ MORE: FG asks UK court for more time to appeal $9.6 billion arbitration judgement

The Naira has come under severe pressure in recent months following the hit to global crude oil prices and demand. This has forced the CBN to devalue the currency and indications point to further devaluations, evidenced in the quotations from the FX futures market with the 1-year N/US$ quotation at N410.60 (as at 13 Jul 2020).

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According to data from the United States Department of Agriculture (USDA), Nigeria’s corn production for the 2019/2020 planting and market season stood at 10.5 MMT while consumption stood at 10.7 MMT. Nigeria imported 0.4 MMT of corn in 2019/2020 market season according to the data from USDA. Considering the low quantum of imports that would be disrupted relative to market size, we don’t expect any major shock to prices, though the recent decline in maize production creates some concern.

READ ALSO: This is what Ngozi Okonjo-Iweala is up against

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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.

Patricia
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Columnists

E-payments ecosystem continues to show promise

We expect the e-payments industry to continue to record significant growth even beyond the pandemic.

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E-payment

The payments industry in Nigeria continues to demonstrate its promising growth with the recent data from the Nigeria Inter-Bank Settlement System (NIBSS) showing solid growth across the various e-payments mechanisms in the first 5 months of 2020 (January – May 2020). NIBSS Instant Payment (NIP) transactions recorded a healthy 17.3% y/y and 47.7% y/y growth in transaction value and volume to N48.7tn and 615.3m respectively. For POS transactions, total transaction value and volume grew 44.0% y/y and 50.0% y/y respectively to N1.6tn and 228.9m respectively. The most impressive growth was recorded in Mobile transactions category where transaction volume and value grew 567.5% y/y and 364.7% y/y to 41.1m and N853.7bn respectively.

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The sustained growth in e-payments transaction volume and value in Nigeria evidences increased adoption of technology in payments and cash transfers by the Nigerian populace. This is driven by increasing internet & mobile penetration as well as investment by banks and other payment-based fintechs investment in payment technology infrastructure. Furthermore, we note that the Central Bank of Nigeria (CBN) announced reduction to the fees payable on mobile and internet payments/transfers. We think this has had a mild impact on increased usage of these platforms. In addition, with the onset of the pandemic the use of physical cash in settling payments and bills has been discouraged. Thus, we think e-payments benefitted from significantly from this.

Going forward, we expect the e-payments industry to continue to record significant growth even beyond the pandemic as many of the new methods of transacting will be sustained in our view. In our opinion, the e-payments sector of the fintech ecosystem is expected to serve as the growth frontier of the new decade in Nigeria as highlighted in our 2020 Nigeria Fintech Sector Report (See CSL_Nigeria’s Fintech Industry 2020; Growth Frontier of the New Decade). Consequently, we expect banks and payment fintechs like Interswitch & Paga to benefit significantly from the e-payments revolution.

READ MORE: Nigeria’s fintech industry 2020: The growth frontier of the new decade

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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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