The impact of the capital market on the performance of the agricultural sector

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The Agricultural sector has been identified as one of the sectors that can help drive the Nigerian economy at this critical time that crude oil as a major source of revenue for the nation is falling at the international market. The present administration has reiterated that the nation must return to agriculture as it has become evident that oil and gas will no longer be sufficient as a major revenue driver for the economy (The Analyst, November, 2015).

It is worth re-stating the fact that Nigeria’s golden years in agriculture was before the discovery of oil in commercial quantity and consequent consignment of agriculture to the backyard. The golden years of agriculture was also when the regions were fully involved in agriculture; each of the regions specializing on products where it has natural comparative advantage. The export earnings from these produce made the regions financially and fiscally independent from the center. All these changed with the discovery of oil and accretion of oil revenues to the various tiers of government (El-Rufai, 2011).

There is no gainsaying the fact that agricultural has been the mainstay of the Nigerian economy despite its decline especially since the oil boom of 1970s that heralded the petro-dollar era. A great proportion of the population- about two-third of the total labour force of the nation depends on the sector for their livelihood and the rural economy in particular is propelled by agriculture. It is main source of food for most of the population and also the dominant economic activity in terms of employment and linkages with other sectors of the economy, serving a major source of raw material for Agro-Allied industries and a potent source of foreign exchange. The sector has been the highest contributor to the Nation’s GDP over the years accounting for 42.07 percent in 2008, 35.8 percent in 2009 and 2.2 percentage points to the growth in real GDP in the first quarter of 2010 (Uzor, 2011).

Sectoral analysis showed that agricultural output declined as its relative contribution in real GDP decreased from 0.92 percent in the first quarter of 2015 to 0.73 percent in the second quarter of 2015. The decline was attributed to the decrease in the relative contribution of crop production, livestock and fishing from 0.76, 0.11 and 0.04 percent in the preceding quarter to 0.59, 0.10 and 0.03 percent, respectively in the second quarter of 2015. However, relative contribution of forestry remained at 0.01 percent in the second quarter of 2015 (CBN Statistical Bulletin, June 2015).

The agricultural sector grew by 9.33 percent driven by output in crop production which accounted for 83.35 percent of the overall growth of the sector. While the agricultural section contributed 24.5 percent to the Nominal GDP in Q3 2015 (National Bureau of Statistics Q3 GDP report). It is expected that the sector will do far better than this with more investment and access to funds by the sector. Funds of the investment in the sector can be garnered through the capital market.

The capital market holds the stand point for the agricultural sector to take its prime place in the Nigerian economy. The agricultural sector has remained subsistent because its financial need is quite substantial and it cannot be met by the money market (Onyeama, 2015). Taking into consideration the long term nature of the sector, as well as the capital intensive disposition of the industry. The agriculture sector cannot rely predominantly on short term borrowing. It is a known fact that the capital market has a comparative advantage over other sources of finance in the provision of long term funds compared to the generally higher cost of bank financing for long term infrastructural projects. There are only five companies listed in the agriculture sector of this exchange and this sector accounts for #34.62 Billion (0.4 percent) out of the total  market capitalization of #8.59 Trillion as at October 2012. (Onyeama, 2012). As at April 2016, there are currently five companies listed in the agriculture sector of the NSE and this sector accounts for N69.9 billion out of the total Market Capitalization of N8.475 trillion as at April 11, 2016, representing 0.43 percent of the total market capitalization. The companies are FTN Cocoa, Okomu Oil, Presco, Ellah lake and Livestock Feed. Okomu Oil and Presco are the most performing stock trading at N31.25, N34.60 with year to date growth of 3.14 percent and 3.85 percent, respectively. FTN Cocoa trading at its normal value of 50kobo, Ellah Lake is selling at N4.26 and Livestock at 94kobo per share as at April 11, 2016.

Nigeria is well placed to provide the resources to solve these problems. Too few agricultural companies are listed on the Nigeria stock exchange. There are over two hundred (200) Agro-Allied companies in Nigeria but only five (5) of them are listed companies, these account for only 0.33per cent of the total market capitalization of the Nigeria Stock Exchange to emerge as one of the sectors with the lowest representation on the bourse (National Bureau of statistics, 2015).

1.2 STATEMENT OF THE PROBLEM

The promoters of agricultural ventures have failed to avail themselves of the long term funding provided by the nation’s capital market. The unimpressive performance of the agricultural sector despite its abundant potentials was largely caused by the lack of the money market to support farming and agricultural ventures which required long term funding (NSE, 2015). Despite the importance of the capital market to the growth and development of the sector, promoters of Nigerian agricultural ventures are yet to take advantage of the opportunities the stock market provide.  One of the reasons why the capital market has remained subsistent is because the financing needs for agriculture is quite substantial and it cannot be met through the money market. Taking into consideration the long term nature of the sector as well as the capital intensive disposition of the industry, the agriculture sector cannot rely predominantly on short term borrowing. (Onyeama, 2012).

The problem of the sector is not insurmountable since Nigeria is well placed to provide the resources to solve these problems. Too few agricultural companies are listed on the Nigeria stock exchange. There are over two hundred (200) Agro-Allied companies in Nigeria but only five (5) of them are listed companies (National Bureau of statistics, 2015).

If only about two percent of agricultural companies in Nigeria currently make use of the platform of the Nigeria capital market, it is very glaring that the medium has not been properly harnessed by the agricultural sector.

The dearth of Agricultural companies on the floor of the Nigerian stock exchange maybe attributed to stringent listing requirement to be met before companies can get listed and enjoy the benefit presented by the Nigerian capital market. These listing requirements are perceived to be cumbersome by firms thus, most of them opt not to be listed and have remained private firms. Hence, the advantage which the capital market provides in terms of fund raising and capital formation has not passed to these firms and this has limited the growth of these firms.

The agricultural sector suffered neglect during the hey-days of the oil boom in the 1970s. Ever since then Nigeria has been witnessing extreme poverty and the insufficiency of basic food items. Historically, the roots of the crisis in the Nigerian economy lie in the neglect of agriculture and the increased dependence on mono-cultural economy based on oil.

The contribution of the agricultural sector to the Nation’s GDP has been on a decline for some years now. Looking from year 2008 where the agricultural sector contribution to GDP stood at 6.30 percent, 5.90 percent in 2009, 4.00 percent in 2012 and 2.61 percent in 2013. The real agricultural GDP growth in the fourth-quarter of 2014 stood at 3.64 percent (year-on-year), an increase of 0.62 percentage points from the corresponding period in 2013 yet a decline of 0.83 percentage point from the rates recorded during the third quarter in 2014. In the third-quarter of 2015, growth was marginally lower compared to the preceding quarter.  The study therefore seeks to evaluate the long term fund raising facilities provided by the capital market to boost the financing and the growth of the agricultural sector. The growth and performance of the agricultural sector is often measured through its impact and contribution to GDP.

1.3 RESEARCH OBJECTIVES

The general objective of this study is to evaluate the impact of the capital market on the performance of the agricultural sector.

Amidst this, the specific objectives of the study include:

1. To evaluate the contribution of the agricultural sector to market capitalization.

2. To assess the performance of the agricultural sector over time.

3. To find whether there is a relationship between the sectoral market capitalization and the performance of the agricultural sector.

1.4 RESEARCH QUESTIONS

The following questions are answered in this study

1. What has been the contribution of the agricultural sector to market capitalization?

2. How has the agricultural sector performed over time?

3. Is there any relationship between agricultural sector market capitalization and the performance of the Agricultural sector?

1.5 RESEARCH HYPOTHESIS

H01:  The Agricultural sector has no contribution to market capitalization.

H02: The Agricultural sector has not performed over time

H03: There is no relationship between agricultural sector market capitalization and the performance of the Agricultural sector

1.6 SIGNIFICANCE OF THE STUDY

The study is concerned with the financing and growth of the agricultural sector through the capital market. The Nigerian Agricultural sector stands to derive lot of benefits if steps can be taken to source for funds through the capital market which will be put into use on a long term basis.

It is expected that this study will benefit stakeholders in the agricultural sector, agricultural companies, Investors in the agricultural sector, industries (who use agricultural products as raw materials), the government and individuals and other researchers who want to look into the agricultural sector.

It will enable Agricultural companies to look into the capital market and harness opportunities of raising funds and finance for the growth of the companies and the agricultural sector at large.

Investors in the capital market are opened up to areas for diversification of their investment portfolios so as to reduce the total risk of such portfolio. Investors in the agricultural sector are induced towards increased potential gain even across national borders.

This research work will also benefit other researchers who want to look into the agricultural sector as it will serve as a basis for reference for future research work.  The growth of the agricultural sector positively affects the general economy of the country, the government as well as the entire populace.

1.7 SCOPE OF THE STUDY

This study attempts to cover the financing of the listed agricultural companies in the agricultural sector through the capital market. However, the study does not look into how the funds raised by the companies are put into use and the running of these companies.

The study will cover listed Agricultural companies in Nigeria. The time frame considered is a period of ten years between 2005 and 2015. This period was chosen in order to look into the performance of the agriculture sector in the capital market in the most recently past decade. The year 2016 will not be considered as it is impossible to get a complete record of the Agriculture sector performance as at the time of this research work.

1.8 DEFINITION OF TERMS

The key terms in this study include; Agricultural, sector, capital market, finance, growth, GDP and market capitalization.

AGRICULTURAL: This is concerned with anything connected with agriculture. Agriculture is the planting of crops and rearing of animals for man’s use and also as a source of income.

SECTOR:  This is the zone, section or a sub-division within which a unit operates and for which it is responsible.

CAPITAL MARKET: This is a financial market for buying and selling of long term debt and equity backed securities.

FINANCE: This is the monetary resource available for the running of a business or an enterprise.

GROWTH: This is an increase in business, trade or activity.

GROSS DOMESTIC PRODUCT (GDP): This is the total money of final goods and services produced within the geographical boundaries of a country during a specified period of time, usually a year minus investment in other countries.

MARKET CAPITALIZATION: This is the market value at a point in time of the shares outstanding of a publicly traded company. This figure is found by taking the stock price and multiplying it by the total number of shares outstanding.