Wheat prices have ebbed at the international market, and the implication for the Nigerian economy is that flour millers could be forced to reduce the price of product to fend off intense competition.
Bench mark wheat prices are down -0.31 percent to $4.31 bushel, driven by robust supplies from Ukrain and South Africa, as supply glut heightens.
Found in everything from bread to noodles, biscuits to cereals, beer to cakes – there is no more widely grown staple crop and more than 170 million metric tons trade every year.
Nigeria is sensitive to fluctuation in prices because it depends on food imports and it forms the largest share of budget.
BusinessDay analysis of the quarterly Foreign Trade Statistics released by the National Bureau of Statistics in 2018 has shown that importation of agricultural produce into the country steadily increased for most part of the year. Of note is wheat importation, which drove agricultural goods importation into Nigeria and accounted for N362.4 billion throughout 2018, representing 42.5 percent of the N852 billion officially captured to have been spent importing agricultural goods.
The Agriculture Promotion Policy (2016 – 2020), stated annual demand for Wheat in Nigeria is 4.7 million metric tonnes whereas local production is only 60 thousand metric tonnes, leaving a deficit of 4.64 million metric tonnes driven by demand for various types of wheat (white, hard, durum), etc. for bread, biscuits and semovita.
Analysts are of the view that flour millers could benefit from a slump in commodity price in form of improved margin while cost of raw materials are expected to dip.
But they added that companies could also be forced to cut price of products to fend off competition as cheap imports loom.
“It will be positive for them because wheat is a major raw material component in the manufacture of Flour assuming there are no issues with foreign exchange,” said Christian Orajekwe, equity research analyst at Cordros Capital.
Ifedayo Olowoporoku, Research analyst at Vetiva Capital Management Limited said that revenues of flour millers could experience lower revenues due to reduction in key products, further exacerbating the already anaemic position of companies grappling with ebbing top lines.
There has been a reduction in cost of raw materials in the books of the largest millers in Africa’s largest economy.
For instance, Flour Mills cost of raw materials fell by 7.55 percent to N306.25 billion in September 2018 from N331 billion as at September 2017 while Dangote Flour Mills’ cost of raw material were down 8.60 percent to N64.25 billion in September 2018 from N70.24 billion the previous year.
Expectedly, cumulative cost of sales or cost of production of the three largest millers quoted on the floor of the bourse- Flour mills Nigeria Plc, Honeywell Flour Mills Plc, and Dangote Flour Mills- fell by 8.39 percen to N338.92 billion.
However, these firms are spending more to produce each unit of products as cumulative average cost of sales ratio fell to 85.37 percent in September 2018 from 50.52 percent the previous year.
Menacing gridlock at the Apapa ports, low consumer purchasing power, double taxation, and decrepit infrastructure, have hindered flour millers from delivering higher returns to shareholders.
Nigerians are getting poorer as the clock ticks, as they are not motivated to open their purse string.
After the recession of 2016, Nigeria’s economic growth has been sluggish, sitting at 2.38 percent in the fourth quarter of 2018, lower than the 7.50 percent growth recorded a decade ago, according to the Nationl Bureau of Statistics (NBS).
While inflation has improved to 11.37 percent for the month of January from 11.47 percent in December, it is still below the 6 percent and 9 percent CBN’s range.
Of a weak economic have left most Nigerians without in their purse strings to buy consumer good products.
Nigeria with a population of 180 million people has 87 million people, nearly half its population, in extreme poverty; as high inflation environment continues to erode discretionary income.
Nigeria’s per capita income is around $2,030, but South Africa’s is $13, 090; Ghana ($4,490); Kenya ($3,250); and Egypt ($11,360)
Of course these challenges hard hit flour mills top lines as cumulative sales for the month of September 2018 dipped 11.0 percent to N389.25 billion while the combined net profit margin fell to 2.19 percent in September 2018 from 5.62 percent as at September 2017.
Combined profit after tax of the three firms were down 65.25 percent to N8.55 billion in the period under review, and a further cut in the price of products could deal a great blow on profitability.
BALA AUGIE
