FrieslandCampina, Olam, PZ, others expand backward integration projects
…amid FX scarcity
Manufacturing firms are expanding their backward integration investments amid foreign exchange scarcity that is hurting their capacity to import raw materials.
Backward integration occurs when firms acquire their suppliers or produce what their suppliers used to.
From only one state, Oyo, FrieslandCampina WAMCO has moved to four other states – Ogun, Osun, Kwara and Niger—with a view to sourcing local milk from Fulani herders.
The dairy company recently launched into northern Nigeria with a large project in Niger State’s Bobi Grazing Reserve.
“In 2019, we built a new factory and the bulk of fresh milk that is collected is what we use in producing our Peak yoghurt range,” Ben Langat, managing director, FrieslandCampina WAMCO Nigeria, told BusinessDay in a recent interview.
FrieslandCampina WAMCO, a Dutch dairy maker, has also set up 16 milk collection centres in Oyo State and is constructing 10 new ones for the collection of raw milk from local herdsmen as input.
Also, PZ Wilmar, a subsidiary of PZ Cussons, has 26,500 hectares of palm oil plantations in Cross River State. About 5,549 hectares (ha) of oil palm plantation are located in Calaro Estate, while 2,369 ha are in an area known as Calaro Extension. Its investment in oil palm plantations in Cross River State alone is worth approximately $150 million, Santosh Pillai, managing director of PZ Wilmar, told BusinessDay.
The firm also acquired Ibiae plantations with 5,595 hectares (ha); Ibad plantations in Akampa with 7,805 ha; Kwa Falls in Akampa Akpabuyo with 2,014 ha, and Oban plantations, also in Akampa, with 2,986 ha.
“We are determined to continue with these investments and looking for opportunities to expand our plantations in the state. We have also invested around N20 billion in an oil palm refinery in Lagos,” Pillai said.
Through its subsidiary, Caraway, Olam started a pilot project in September 2019 on 20 hectares of farmland across three locations in Kano and Jigawa states, which are being expanded to 500 hectares. This is followed by the commencement of a larger out growers programme to engage 1,000 farmers to be trained and provided with seeds that will deliver the same kind of output the pilot farms are recording.
“This is complete end-to-end production and backward integration,” said Prashant Thakur, the regulatory head for Caraway Africa Nigeria limited, who is also heading the tomato backward integration project, recently. He explained that existing brands, Tasty Tom and De Rica, would continue to be produced except they would now be 100 percent local content.
Furthermore, Dangote Sugar is pumping billions in sugarcane plantations across northern states to enable it cut raw sugar imports. Raw sugar, an essential input for sugar makers, is still being imported as $337.3 million was spent on the importation of the raw material in 2018, according to the National Sugar Development Council(NSDC), an agency in charge of sugar development in the country. But manufacturers are establishing nurseries and plantations to bridge this gap.
FX crunch due to oil price lows since 2014 has disrupted productions and projections, forcing 54 small factories to shut down in 2016 and threatening more closures and job losses this year in the wake of COVID-19 and crunching FX scarcity.
But multinationals, conglomerates and factories have been responding, pumping billions of naira in backward integration projects and supporting farmers to raise their local input sourcing. Already, local input sourcing has risen to 60.5 percent in 2019 from a low of 47 percent in 2014, data from the Manufacturers Association of Nigeria (MAN) say. On the average, local input sourcing has hit 56 percent since 2014.
Naira exchanged at N482/$ on Friday at the parallel market due to surging demand. Many manufacturers cannot import inputs as they struggle to get 10 percent of their needs.
Crude oil comprises 92 percent of export in the last five years, according to BusinessDay calculations, reflecting that the country may be losing the non-oil export war, focusing only on demand management of the FX market, rather than supply.
Brent closed at $44.34 per barrel on Friday. The global oil market crash is bad news for Nigerian manufacturers and the economy, with many of them in tight corner.
However, many firms are responding. Flour Mills of Nigeria (FMN) is pumping N50 billion in Sunti Golden Sugar Estates, Niger State, featuring 17, 000 hectares of irrigable farmland and a sugar mill processing 4,500 metric tons (MT) of sugarcane per day.
At full capacity, the estate can produce 1 million tons of Sugarcane which roughly translates into 100,000 MT of sugar yearly, according to John G. Coumantaros, chairman of FMN.
According to Coumantaros, the Sunti Golden Sugar Estates achieved its first development target of reaching 2,836 hectares of land under cane in July 2018.
Nestlé Cereals Plan project has over 30,000 farmers who supply 100 percent of the grain requirement for Golden Morn Maize. Through its Sorghum and Millet in the Sahel (SMS) project, now called Nestlé Nigeria & IFDC / 2Scale Project Sorghum & Millet, it engages a lot of farmers, thereby raising their incomes while reducing unemployment.