Magoosh GRE

Research Proposal on Trading in Gum Arabic

| November 11, 2012 | 0 Comments

BACKGROUND

Before the discovery of oil in 1956, the Nigerian economy was primarily agrarian with 97% of exports consisting of agricultural produce like cocoa, rubber, cotton just to mention a few, but sad to say that a shift in focus to oil has led to a decline in the production and exports of these produce which presently constitutes just 26.8% of GDP. With the growing need for a sustainable development of the Nigerian economy, there has arisen a need to shift spotlight away from oil and concentrate on other income generating sectors of the economy that can help the foreign exchange position of the country. From 1981, there was a policy shift towards export promotion and a move to intensify the use of local raw material in industrial production. However the increase in the value of imports led to a worsening of the balance of payments (with, in addition, the backdrop of the collapse in world oil prices), which forced the government to promulgate the economic stabilization (Temporary Provisions) act in April 1982[Inye, 2007].

However, some  incentives have been put together to encourage investment in agriculture, some of which are; Finance credit Tax Holdings, Reduced Customs Charges on Imported Inputs, Technical Support through Research Institutions, Export Financing and Guarantee, Agricultural Insurance Scheme, as Export Processing Zones (EPZs), Export Processing factories (EPFs), Export Processing villages (EPVs) and Extension Services. But most diversification initiatives had not made much headway until recently; they were mainly hampered by poor administration and ineffective trade policy strategy while some are still in their early stages so their impact is yet to be significant. In 2003, a lot of funds was injected into the presidential initiatives on cassava which was introduced to mobilize Nigerians to fully and profitably tap the potentials of cassava which hitherto had remained largely unharnessed, its strategy was to boost the production of cassava for both domestic consumption and for export, this development led to an increase in the production and export of ethanol. Presently,Nigeriaranks as the largest cassava producer in the world with estimated annual production of about 40million metric tons, of which about 90% is consumed as food [Yisa 2009]

In Nigeria, agriculture engages majority of the poor so the improvements in the sector is paramount to income generation, welfare enhancement, poverty alleviation, food stabilization and industrialization.  With so many resources left unharnessed like; bitumen, cocoa, cassava cocoa, palm oil, yams, cassava, sorghum, millet, corn, rice, livestock, groundnuts, cotton, Gum Arabic.  A boost in the supply side of these agricultural produce will invariably increase the country’s foreign exchange position, create employment opportunities and reduce overdependence on oil. This paper focuses on one of these unharnessed resources that have the potential of serving as a good source of foreign exchange, Gum Arabic.

Gum Arabic is an organic adhesive produced from a tree called Acacia Senegal it is a natural gum that exudes from the exterior of Acacia trees in the form of dry, hard nodules, with over 1,100 Acacia species worldwide, it produces a natural gum made of hardened sap mostly taken from three species of the acacia tree; Acacia senegal (Grade 1) which is the highest grade, Acacia seyal (Grade 2) and Combretum. In Nigeria, the major Acacia utilized for commercial Gum Arabic production are Acacia Senegal and Acacia seyal. The produce is used as a thickener, suspender, emulsifier, stabilizer, flavor carrier, binder and encapsulating material, so it is therefore needed in industries such as the textile, food, beverage, dairy and ice cream, cosmetic, confectionary  and pharmaceutical,  thereby making the market for it quite robust. The gum has binding or adhesive properties and as such is used as a good emulsifying agent.  In food products, it serves as a stabilizer, emulsifier, and binding agent for chewing gums, ice cream and jams. In pharmaceuticals, the gum is a binder in lozenges, tablets, pills, throat pastilles and cough drops. In textile industry, it is used for fabric stiffening and as a binder for textile printing gums. In miscellaneous industries it is used in producing ink, water colors, paints, carbon papers, pottery glace; it is also used in the plastic industry. In confectionery industry it is used for, hard gums, soft gum and gum pastilles.

The Gum Arabic tree is usually ready for tapping 4-7 years after its establishment, tapping can then continue every year for at least ten to twelve years then they are finally coppiced for fire-wood and charcoal when the trees are about 15 years old. The tree’s extensive rooting system protects the land and has high potentials of improving soil fertility through inter-cropping with arable crops and its pods are valuable sources of livestock feeds.  Due to the ability of the tree to withstand adverse environmental conditions, is now seen as a potent weapon in the continued fight against desertification and environmental degradation in the Sahelian belt of the country, Edward (1992) stated that  it can be planted as a windbrake or shelterbelt to reduce soil erosion and desertification, as the tree can exist under extreme climatic conditions, it is easily tolerant of an annual average rainfall of less than 300mm and of substantial rainfall and temperature variations over wide stretching of the northern sudanian – sahelian zone the presence of a Gum Arabic ‘belt’ helps to ‘hold back’ desertification.

Gum Arabic (Acacia Senegal) is grown in the Sahelian zone of the country, covering 14 States of the Federation namely Borno, Yobe, Jigawa, Bauchi, Gombe, Taraba, Plateau, Adamawa, Sokoto, Kebbi, Katsina, Zamfara, Nasarawa and Niger with an estimated population of 4 million Nigerians engaged in its cultivation and trade. From available data Africa produces about 98% of the world requirement of gum Arabic,Nigeria is the 2nd largest producer of the crop in the world afterSudan with an average production of 20,000 metric tonnes of all grades of Gum Arabic.  In the year 2004, world production of Gum Arabic was put at 70,000 metric tonnes while Nigeria’s production amounted to 18,935 metric tonnes with export earnings of US$88.08 million selling the raw form of the product, In 2008 alone Nigeria exported a total of 20,000 metric tons of Gum Arabic estimated at US$43.55m (N6.5325 bill) [commodity network, 2008, cited in, Aghughu and Mokwunye 2010], buyers included USA, Portugal, Holland, India, Japan, UK, France, Germany, Spain, Pakistan, Bangladesh, Italy, and China.  In Anaekwe’s (2010) opinion, the country’s current production of about 20,000 MT is low compared to its potential and it stands to gain US$5.00 for every one kilogramme of processed Gum Arabic.

While the Gum Arabic provides a good source of foreign exchange for the nation because of its high international demand, it is generally believe that Nigeria is not fully taking advantage of the large land available for the cultivation of the product, having little from the producing trees and at such, perhaps the most neglected area is in the area of processing, most of the product are harvested and sold as a raw instead of adding value to the product before sale. Industries are frustrated because of inadequacies in infrastructure (notably roads, transport logistics and the ports system) have consistently raised the cost of doing business. Critical among them is the serious deficiency in the supply of electricity which persistently defies solutions. A study on the cost of infrastructure failure inNigeriahas indicated that responders had ranked power outages and voltage fluctuations as among the major obstacles to their operations. The huge cost of production means thatNigeria’s manufactured goods do not have the desired competitive edge in the international markets [Inye 2007]. According to [Xinshe, Paul, 2007] Low productivity, high transportation, marketing costs, various formal and informal trade barriers (both physical and institutional) and inconsistencies in trade and agriculture policies all contribute to the lack of market competitiveness.

In other to resolve some of these challenges, the Gum Arabic Sector Development Program was initiated with the main objectives of, ensuring a reliable and sustained supply of quality gum arabic fromNigeria to theU.S., strengthen the ability of Nigerian stakeholders to produce and market quality gum arabic, and plant more trees in order to control environmental degradation. Presently only little has been achieved.

Apart from these national problems, farmers are also faced with certain challenges. In the early 1970s the supply of Gum Arabic was threatened by the following fact; frequent clashes between farmers during gum collection in Acacia field due to lack of ownership of the wild grooves and rapid depletion of the natural forest due to activities of the natives who cut down the Acacia Senegal and Acacia Seyal tries for fuel wood , tool handles and agric implements as well as fodder and browse for livestock [Mokwunye and Aghughu 2010], presently, the  few  farmers involved in production, face greater  problem as regards  finance. The limited access to finance available is known to be hindered by high interest rates and collateral requirements. Long term access to finance is scant and so it is only the large multinational firms that are likely to receive loans, while the small-scale entrepreneurs are marginalized [Inye 2007]. Hence, because of these constraints, the total perceived benefits from A Senegal are therefore carefully weighed by the farmer against the expected returning and benefits from cash cropping, food cropping and often from livestock raising and off-form employment, farmers expect that the relative profitability of gum to other crops should ensure sufficient incentives for them to include gum in their farming systems where it is appropriate [Edward 1992]. It is anticipated presently that the use of intercropping of immature Gum Arabic plantation with Arabic crops is recommended for effective utilization of land resources and it’s expected to motivate farmers to adopt Gum Arabic innovations [Dengle et al  2008]

At this stage of development, formal training by trained trainers has not been conducted, but an impressive amount of informal training has been done. Newly established National Association of Gum Arabic Producers, Processors and Exporters of Nigeria (NAGAPPEN) chapters in each state have been the vehicle through which informal training has been conducted. Encouraging farmers to plant Gum Arabic in organized plantations and educating them would enhance the efficiency of farmers [Dengle et al 2008]. The stage is now set for the healthy growth of Nigeria’s gum Arabic sector but the deserved attention is still yet to be given by the government in terms of huge financial support and incentives to boost the supply side and there is need for promotion and awareness, as most stakeholders and potential investors are still oblivious of the huge potentials in the product.  Recently there has been a call for new investors to invest in the technology transforming gum Arabic into powder, According to Business world (2010) the project operating at the estimated installed capacity is capable of producing 3000 tons of gum Arabic powder per annum, assuming conservative export price of $10,000per ton and the local sales prices of N150,000 per ton, annual turnover of N2.8billion can be recorded with export volume of 2000 metric tons of refined Gum Arabic powder. A Strong positive profit figure after tax can be generated and a high internal rate of return due to the foreign exchange rate component of the export product is achievable. A three year estimated payback period for the project is guaranteed.

To sustain the supply of Gum Arabic to both local and international markets, efforts are being made to establish a Gum Arabic Security Stock in the three leading producing countries (Sudan,NigeriaandChad) with the support of the GAO, Network for Natural Gums and Resins in Africa (NGARA) and Association of International Producers of Gum Arabic (AIPG). This will lead to rapid development of natural gum as a national resource for fighting poverty, desertification and environmental degradation. The National strategy for Gum Arabic is to encourage local value addition through increased local processing in order to attract better returns on investments. Thus, apart from providing more income, local processing creates job opportunities thereby empowering our people, Usman [2009] suggests that for greater benefit to enhance export there is need for Public- private partnership, he says that strategies such as establishment of an effective trade facilitation system, organization of regular capacity programmes, establishment of skills acquisition centers, storage facilities and agricultural trade support infrastructure, are key.

Ongoing policy reform and substantial investment in production agriculture and supporting infrastructure are shifting the location of production and exports of agricultural commodities, particularly for bulk agriculture products, away from the developed countries and towards the developing world. As a consequence strong competition is expected to be a feature of international agriculture markets not only from traditional exports but also from the developing and transition country exporters that are exploiting their comparative advantage in agricultural production [OECD-FAO 2006].Nigeriatherefore needs to take advantage of its abundant natural resource cum market availability and prepare for the buoyant production of Gum Arabic.

 

AIMS AND OBJECTIVES

In view of diversifying the Nigerian economy and reducing the high rate of unemployment, this research intends to provide comprehensive information that will guide investment decisions in the Gum Arabic sub sector by taking a thorough look into the potential of investing in Gum Arabic, the opportunities and profitability both in raw and refined form. It also intends to suggest strategies to help boost the supply and demand side of the sector, ensure market efficiency and effectiveness by looking at both the domestic and international market for gum Arabic.

The specific objectives are grouped under several headings namely: production, processing and equipments, transportation, products and products development, and export.

The specific objectives are as follows:

> Identify the technical, institutional, socio-economic and policy opportunities and constraints for promoting the Gum  Arabic sub sector

>Assess the domestic market opportunity for Gum Arabic by-products inNigeriaand suggest how this potential could be realized.

>Evaluate the economics of Gum Arabic production and processing costs structures (and profitability) of value adding Gum Arabic enterprises and suggest reduction strategy

>Determine optimal locations of processing plants based on identical markets for various Gum Arabic products.

> Provide information on marketing cost structure from rural to urban areas for Gum Arabic and its products and determine the break-even distance and volume for Gum Arabic transportation

> Make recommendations on how to make Gum Arabic and its products competitive within the domestic and export markets

> To provide insight into the employment opportunities in the Gum Arabic sub-sector.

> Evaluate Gum Arabic’s contribution to the growth of non-oil exports.

The analysis will be in two parts the first part will follow a vertical agribusiness perspective in which we assume that the Gum Arabic sub sector is segmented into four categories where Gum Arabic is produced at the farm level by farmers, processed, and used by agro industries to produce other products and used by other industrial markets. Secondly we look at the export potentials, opportunities and it importance to the diversification of the Nigerian economy.

 

FIRST PART OF THE ANALYSIS

  • Production:  Provide information on the unit production cost for Gum Arabic  in the producing states inNigeria and ascertain the Gum Arabic varieties available and their actual and potential yield
  • Processing and Equipments:  Evaluate the economics of existing Gum Arabic processing equipments and new equipments. This is in view to ascertaining the current status of processing technology and local maintenance capacity.
  • Transportation:  Provide information on transportation costs from rural to urban areas for the movement of Gum Arabic produce.
  • Products and Products Market: Provide information on price trends for Gum Arabic and its products.  Identify and assess the status of existing and potential industries that use or can potentially use Gum Arabic products. And also ascertain the market share and size of use of Gum Arabic as raw material in these identified industries inNigeria. Finally to identify existing and potential volumes, prices, quality standards, and delivery schedules for Gum Arabic based products used by the various industries inNigeria and overseas.

SECOND PART OF THE ANALYSIS

  •  Export: Provide information on export quality requirements, delivery schedule, shipping costs and requirements, international prices for Gum Arabic and its products.  Establish Gum Arabic’s contribution to non-oil export growth and as a means of diversifying the economy form Oil.  Finally predict and forecast potentials of the export contribution of Gum Arabic as a stable source of foreign exchange

 

METHODOLOGY

In looking at the causes of technical inefficiencies in Gum Arabic based  cropping patterns among farmers, Dengel  et al ( 2008)  collected primary data using multi-stage, purpose and random sampling techniques, the empirical stochastic frontier production model was used and estimated using the Maximum Likelihood estimation. Edward (1992) carried out a crop profitability, financial, economic and environmental analysis to find the benefits of six representative gum Arabic production systems.

This study will build on existing documents, surveys and researches, but it will focus on Gum Arabic producers, processors and traders as well as banks, input dealers and extension institutions. The study will cover all the major sectors where Gum Arabic and its products are (potentially) utilised. For the first part of the analysis, data will be collected in three stages: first wherever available, published data would be used to establish the structure, conduct and performance of Gum-Arabic sub-sector. Secondly, a rapid appraisal survey will be conducted using focused group interviews and key informants to obtain information on trading patterns, transportation facilities, processing costs and marketing systems. The third stage of the study will focus on the captains of industry that use or are potential users of Gum Arabic. This industrial survey will among other things focus on the size and volume of different Gum Arabic commodities required in the domestic market.

The Heckscher-ohlin theory of international trade will be applied for the second part of the analysis by applying theOrdinary Least Squareestimation, in view to looking at the Gum Arabic and it contribution or potential contribution to non-exports.

 

Expected Result

To find out:

  • the production cost for Gum Arabic in producing states inNigeria
  • The availability of Gum Arabic varieties and their actual and potential yield provided.
  • The economics of existing Gum Arabic processing equipments and new equipment evaluated.
  •  the current status of processing technology, and local maintenance capacity inNigeria
  • The transportation costs from rural to urban areas.
  • The supply chain requirements and preliminary logistic framework.
  •  Price trends for Gum Arabic and its products.
  • The availability and current use of Gum Arabic products together with the key users as well as their supply chain structure (e.g. farmer groups, processor groups, industries etc).
  • The existing and potential volumes, prices, quality standards, and delivery schedules for Gum Arabic-based products used by various industries inNigeriaprovided
  •  Exports quality requirements, delivery schedule, international prices for Gum Arabic -based products, and niche markets forNigeria.
  •  Expected rate of return on investment for investors

 

  •  Predictions and  forecast on the long term viability on exporting Gum Arabic in terms of foreign exchange earnings to the country.

 

  • Its potential in terms of contribution to non-oil exports

 

  • Employment opportunities through development of the sub-sector.

 

  • Suggest policies for the development of the sub-sector.

 

The study will interest a wide range of readers including Gum Arabic producers, policy-makers, donors and banks, scientists and technicians, non-governmental organizations and the private sector.

 

SOME ANTICIPATED CHALLENGES

  1. Differences in state pricing and techniques may require adjustment of data.
  2. Inability of get documented information on some requirements might lead to reliance on word of mouth.

REFERENCES

Abdulsalam Usman K., 2009. Evaluation ofNigeria’s benefits from the African growth and opportunity act (AGOA)

Adebiyi D., Ehui S., Ukeje E. and Mclntire J. Agricultural export potentials inNigeria.

Adel Beshai A., 1984. The economics of a primary commodity: Gum Arabic. Oxford Bulletin of Economics and statistics, 46(4), pp.371-81,

Aghughu O.and Mokwunye M.U.B 2010. Restoring Nigeria’s lead in Gum Arabic production: Prospects and challenges. Report and opinion 2(4) 7-13

Anaekwe Everistus N., 2010.  Processing gum arabic for huge profit in Nigeria.  http://farriconsultingng.blogspot.com/2010/09/processing-gum-arabic-for-huge-profit.html

Business World, 2010. Earn foreign exchange processing Gum Arabic.

Dengle Y.G, Wuranti V., Abubakar M. and Ogwuche P. 2008. Analysis of the technical inefficiency of gum Arabic based cropping patterns among farmers in the gum Arabic belt of Nigeria. Journal of agriculture and social science

Edordu C.C, Oramah B.O and Osuntogun A. 1997.  Potentials for diversifying Nigeria’s non-oil exports to non-traditional markets. AERC Research Paper 68

Edward Barbier 1992. Rehabilitating Gum Arabic systems in Sudan: economic and environmental implications. Environmental and resources economics 2: 341-58

Inye Nathan Briggs 2007.Nigeria: mainstreaming trade policy into national development strategies

Lelom, J. et al., 2010.  Assessment of physical properties of gum Arabic from acaciaSenegalvarieties in Baringo district,Kenya.

Kolawole O. and Henry O. Foreign direct investment, non-oil exports and economic growth inNigeria, a causality analysis.

Yisa A. A. 2009.  Cassava markets: option for sustainable agricultural development in Nigeria. Ozean Journal of applied science 2(2)

OECD-FAO, 2006.  Agricultural outlook 2006-2015.

Production of gum Arabic, extension bulletin number 78 forestry series no 11

Market News service (MNS) quarterly edition Sep 2008 Gum Arabic

Rosemary O. Nigeria’s non-oil export product mix and the competitive global market place.

Sonja V. and Lorenzo C. 2010. Making the most of agricultural investment: a survey of business models that provide opportunities for small holders.

Truman P., Daphne S., Lateef S. and Malachy O. 2004. A cassava industrial revolution in Nigeria. IFAD.

Xinshen D., Dorosh P., Sheikh M.R 2007. Market opportunities for African agriculture: General equilibrium examination of demand-side constraints on agricultural growth in east and southernAfrica.

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Category: Free Essays, International Relations

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