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Agricultural investment – The scams & the reality (2)

In the wake of the financial crisis caused by the COVID-19 pandemic, many Nigerians are seeking out investment opportunities to ensure that they have alternative sources of income. The boom in agricultural investment has attracted a number of scammers who prowl the internet with very attractive returns on investment for agribusinesses.

Unfortunately, the average Nigerian is susceptible to these scams because agriculture is rightfully being seen as the new gold mine. This is underscored by the renewed interest in Agriculture from the government and policy makers, the private sector and development partners alike.

While agribusinesses are indeed profitable, caution must be exercised and it is important for aspiring investors to understand the data behind advertised agricultural products and investment schemes.
This piece aims at highlighting the pertinent facts to look out for when choosing an agricultural scheme to invest in, using the estimated cost of farming one hectare of rice. A fail safe approach is to adopt the cost–volume–profit analysis (CVP) to evaluate the reality of the advertised return on investment.

Read also: Oyo seeks partnership with FG on agric projects 

For example, you can use the cost–volume–profit analysis (CVP) to evaluate possible returns on investments using the cultivation of one hectare of tomato or raising one thousand poultry birds to clearly understand the cost of agribusiness and realistic expected returns on investment per cycle.

To farm one hectare of Faro hybrid rice, assuming no cost for land lease and irrigation, estimated costs are as follows:
• Land clearing and applying selective herbicides for weeds – ₦15,500
• Application of insecticides and growth promoter for pest control – ₦11,800
• Procurement of 40 units of hybrid seeds (Faro-44) – ₦16,000
• Application of inorganic fertilizer (N15.P15.K15 of 200kg/ha and Urea of 100kg/ha)– ₦106,000
• Labour for crop management, include planting, weed removal, ploughing, etc – ₦128,800
• Labour for harvesting, procurement of bags and fertilizer application – ₦35,600

These bring the estimated costs incurred to ₦313,700. Estimating a ton of rice to generate a profit of ₦110,000, a hectare with five tons yield (using Ebonyi State yield) will generate a total income of ₦550,000 but a net profit of ₦236,300, giving the farmer a percentage net profit of 43%.

Yield from such a farm will vary and depends on the ability and experience of the farmer, grains used, as well as good management: 1-2 tons/hectare poor, 2-3 tons/hectare medium and 3-5 tons/hectare excellent.
It is important to note that when cost of Land lease, depreciation of irrigation equipment and logistics is factored in, percentage net profit of 43% reduces significantly depending on location.

Operating Cost of a 1,000 bird capacity poultry farm:
• 1000 broiler chicks at ₦230 per chick – ₦230,000
• Feed – ₦602,114
• Drugs & vaccines – ₦35,306
• Transportation – ₦66,845
• Operating expenses, including labour, charcoal and wood shavings purchase, petrol and bird catching ¬– ₦55,030
• Insurance at 2.5% of costs – ₦24,853

These bring the cost of production to ₦1,018,993. Assuming the live birds weigh about 2.0kg each and are sold at ₦590/kg, accounting for bird loss and estimating 969 surviving birds, the estimated total income comes to ₦1,133, 730. This gives a net profit per batch of ₦114,737 and a percentage net profit of 11.26%. It is important to note that an increase in capacity to 50,000 or above the percentage net profit can be as high as 15%-17% per cycle with a very efficient management system at 5% mortality rate.
With such figures in mind, a potential investor should be able to spot realistic return rates and choose wisely. (All estimates are field data sourced in 2019 but with the onset of COVID-19 pandemic cost of inputs have significantly increased)

Some investment schemes were recently called out on social media for not paying returns to their investors. Of course the promoters of these toxic investments gave the market disruption caused by the COVID-19 pandemic as an excuse for default. However, further investigation suggested that the payment was seven months past due date.

Understanding the numbers in agribusiness will help protect discerning investors against falling prey to agricultural investment Ponzi schemes. Investors should look out for unreasonably high and “guaranteed” returns on investment within a specific period of time. They should thoroughly investigate advertised schemes that declare large return figures without proof of evidential baseline or marketplace backing for their products. Investment schemes that do not declare their assets or provide a verifiable financial history should be embraced with caution.

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