FOREIGN COUNTRIES' POLICIES AND PROGRAMS
Nigeria Re-Emerging as a Significant Wheat Importer, Benefitting the United States
Nigeria is currently the leading destination for U.S. wheat in Sub-Saharan Africa, accounting for nearly 70 percent of all U.S. shipments to the region. Nigerian imports in 1998/99 (July/June) are estimated at 1.5 million metric tons (MMT) and it is expected to be one of the largest markets for Hard Red Winter (HRW) wheat. Nigeria is one of only a few markets which purchases U.S. grain on a cash basis only (there are no banks approved for GSM programs).
U.S. wheat exports to Nigeria have grown substantially since 1993, when the Government of Nigeria removed a 7-year import ban. Since that time, import growth has averaged about 28 percent annually, and U.S. exports to Nigeria in the same period have grown at an average of nearly 25 percent.
Nigeria is principally a market for HRW wheat, the bulk of which is milled for the production of bread. So far in 1998/99, 90 percent of the U.S. wheat purchased has been HRW, although a small, but growing volume of Soft Red Winter (SRW) for biscuits is also evident.
Canada and Argentina are the major exporters competing with the United States for this market. U.S. market share remains dominant, but is subject to fairly large fluctuations. Over the past five years, U.S. market share has ranged from a high of 99 percent in 1995/96 to just 63 percent in 1996/97.
Flour Milling Industry is Concentrated, But Expanding
There are about 20 active flour milling companies in Nigeria, with an estimated annual milling capacity of 4.1 MMT. The top four companies account for about 75 percent of the total milling capacity, the bulk of which is located along the coast, principally in Lagos. Current estimates of capacity utilization in the industry hover around 40 percent, up significantly since 1996/97.
Local investment is growing; one mill, imported in the 1980s, but not erected until 1998 because of the import ban has come on line in the past year (daily grind 450 tons), while another mill (daily grind 500 tons) is now under construction and expected to be operational by July 1999. Another milling company has purchased an existing small mill and is in the process of moving it from the north to Lagos to mill soft wheat for biscuits.
Millers Challenged by Rising Wheat Tariffs
The Nigerian tariff for wheat was increased from an effective rate of 7.5 percent ad valorem in 1998 to 15.0 percent in 1999. Although the actual published tariff rate was 10 percent in 1998, it was subject to a temporary 25 percent reduction, thereby lowering the duty to 7.5 percent. This reduction was removed in 1999, leaving the full 15 percent in effect.
The effective doubling of the rate of duty is a significant hurdle which millers now face, however the initial impact has been small. In this price sensitive market, ultimately the price of flour may rise, and crimp demand. Recent market information is that the list price for flour has already risen slightly in the first half 1999. Since the tariff is ad valorem, when wheat prices increase the tariff cost is magnified. The cost expressed as a percentage of the flour price is also compounded by exchange rate fluctuations as well as price increases.
For example, under the previous effective tariff rate of 7.5 percent, an exchange rate of $1.00/85.00 naira, and $175 per ton for the landed cost of wheat in 1998, the estimated tariff cost as a percentage of the flour price was about 4.3 percent (given 75 percent average extraction rate and flour price of naira 1,750 per 50 kg bag). With the new 15 percent tariff, the recent devaluation to $1.00/107.00 naira, and the landed cost of wheat rising to $200.00 per ton, the tariff represents 10.4 percent of the price of flour. This also assumes an increase in the price of flour to about naira 2,000 per 50 kg bag which was recently announced by some mills.
The effective doubling of the import duty for wheat from 7.5 to 15.0 percent is an important element in the cost structure for flour millers. When combined with currency devaluation and/or price increases for wheat, the cost increases as a consequence of the tariff change can be substantial.
Future Market Growth Hinges on Economic/Political Stability
Demographic data shows that wheat importation could easily double. For this to occur in the intermediate term, several challenges must be overcome: local currency has to remain relatively stable, the new civilian government needs to begin to address chronic political, economic and legal system deficiencies, and the global oil sector, the main source of foreign exchange, must remain relatively stable. Notwithstanding these challenges, Nigeria is the largest country, in terms of population, in Sub Saharan Africa and is expected to remain the leading importer of U.S. wheat in the region.
As with most markets, there are some factors which contribute to the prospect of continued growth of U.S. wheat sales to Nigeria, as well as some which may inhibit this growth. Among the positive influences are demographics, almost total lack of local wheat production, and the apparent strong ties to U.S. wheat evidenced by local millers. Factors militating against continued growth in U.S. export sales include the likelihood of continued devaluation of the naira in dollar terms and the prospect of only a slow recovery of the global oil sector, upon which this country depends for almost all its foreign exchange earnings.
In the near term, the devaluation of the naira presents the most serious negative force to be faced by local flour millers. The naira over most of the past five years, when wheat imports were growing at an average annual rate of over 25 percent, remained stable at $1.00/85.00 naira. It has now fallen to $1.00/107.00 naira, and some local analysts anticipate a fall to somewhere between 120 to 150 naira to the dollar in the first months following the inauguration of a new civilian government. Such a devaluation will have profound cost implications for millers, for the cost of wheat and flour in local currency, and ultimately on the consumption of bread in the country. There are two occurrences which could limit the impact of such a devaluation on the level of wheat purchases. One would be a general debt relief package, and the other would be a continued strength and stability of the price of oil.
Although oil prices have firmed lately, global prices remain well below the level at which the Nigerian economy could add to surpluses. These surpluses have been drawn down in the past year from about $7.0 billion to perhaps as low as $2 billion by the time a new civilian government assumes power in late May. Over 95 percent of foreign exchange income is based upon the export of petroleum and natural gas. Without a stable price (one that is above levels seen in 1998) of what is really its only export, at least statistically, neither the government nor the economy as a whole will be able to support the type of growth which fuel the continued growth in the importation of U.S. wheat.
Finally, if U.S. wheat becomes more expensive relative to other countries wheat, the price sensitive millers will have ample cause to switch origins, as was done in the 1996/97 crop year when U.S. prices reached as high as $280.00 per ton (landed cost). During that period, not only did U.S. wheat loose market share, U.S. exports declined in absolute terms.
The main long term source of demand for U.S. wheat is a rapidly growing population (nearly 3.0 percent annual growth). In addition, per capita wheat consumption is still well below that seen in the mid-1980s before the imposition of the infamous wheat import ban. During that time, wheat imports were almost 2.0 million metric tons, for a population of perhaps 75 million (per capita consumption of around 25.0 kg). It is estimated that imports will be 1.5 million tons in 1998/99, but the population is now around 110 million (per capita consumption of only about 14 kg). In a purely arithmetic sense, Nigeria would have to import about 3.0 million tons of wheat to reach the per capita consumption figures witnessed in the mid-1980s. The milling capacity is sufficient to support such growth, and demographics support a continued expansion of U.S. wheat sales to this market.
Although the general state of the economy is not very healthy, a new civilian government took the reins of power May 29. Provided that this new government will instill order in the midst of what is now chaos, broaden the infrastructural base for future economic growth, privatize a number of decrepit parastatal firms such as the telephone and electric power monopolies, and move toward respect for the rule of law (especially in commercial relationships), Nigeria has a chance to improve its long term economic performance. These tasks are daunting. Nevertheless, to the extent that steps are taken to secure a more viable political and economic framework for the country in the long term, U.S. wheat exports will likely benefit.
The long term prospect for U.S. wheat exports to Nigeria is based upon demographics which suggest that significant untapped demand exists. In the near term, currency devaluation and stagnant oil sector activity could act as constraints to import growth. In the long term, for the growth that demographic data suggest is possible to take place, the new civilian government must set in motion the rebuilding of the economic, political and legal underpinnings of a market-based economy for continued growth in wheat consumption.
Prepared by Fred Kessel, who is completing a tour as Agricultural Attache at the American Embassy in Lagos. Mr. Kessel is being transferred to Nairobi, Kenya where he will also serve as Agricultural Attache. For further information, please contact Dusti Fritz at (202)-690-4200.
The Mounting Threat Of Ukrainian Wheat Exports
Ukraine is quickly becoming a major wheat exporter because of a combination of competitive advantages that are hard to beat. Wheat exports rose six-fold in just 3 years to 3.8 million tons but, in contrast to the Soviet era when most went to Russia and other FSU countries, now almost all spills onto world markets. Feed-quality wheat to South Korea and Israel competes with U.S. corn, while milling wheat to North Africa and the Middle East has reportedly displaced traditional suppliers, notably the EU.
Low production costs and the recent currency devaluation enable Ukraines emerging private traders to offer low prices that increasingly undercut the competition. Proximity to key import markets in North Africa and the Middle East gives them a freight advantage over most leading exporters (with the notable exception of the EU). However, even the EU often cannot compete with their flexibility in offering small vessels that are increasingly popular with private importers in the Mediterranean Basin.
This years (1998/99) jump in exports was facilitated by improved rail and port services and by better organization of the domestic trade. Ukrainian traders are already visiting key importers to promote new crop sales, a practice virtually unheard of just a year ago. New Ukrainian grain standards due to come into force soon may also boost grain marketing by introducing internationally-accepted criteria.
Note: *11-12% protein wheat, which is higher than is typical for French wheat.
Source: US: USDA; French: EU Grain Market News Geneva; Ukrainian: Agricultural Market News, Kiev.
As Ukraines infrastructure is upgraded and traders gain market experience wheat exports could grow even more. Production has shrunk by about half since the collapse of the Soviet Union, but should begin to recover as traders exploit these competitive advantages.
For further information, please contact Jay Mitchell at (202) 720-6722.
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