i

Digitally Signed by: Content manager’s Name

DN : CN = Weabmaster’s name

O= University of Nigeria, Nsukka

Nwamarah Uche

Faculty of Agricultural

Department of Agricultural Economics

TRADITIONAL AND MODERN GROUNDNUT

PROCESSING AND MARKETING IN NORTH CENTRAL

NIGERIA

ABOKI, PETER MAISAJE

PG/Ph.D./06/42156

ii

TRADITIONAL AND MODERN GROUNDNUT PROCESSING

AND MARKETING IN NORTH CENTRAL NIGERIA

BY

ABOKI, PETER MAISAJE

PG/Ph.D./06/42156

DEPARTMENT OF AGRICULTURAL ECONOMICS,

FACULTY OF AGRICULTURE, UNIVERSITY OF NIGERIA,

NSUKKA

iii

JANUARY, 2015

i

Title Page

TRADITIONAL AND MODERN GROUNDNUT PROCESSING AND

MARKETING IN NORTH CENTRAL NIGERIA

BY

ABOKI, PETER MAISAJE

B.Agric. Tech-Agricultural Economics and Extension (FUTO), M.Sc. Agricultural

Economics (ABU)

A Ph.D. Thesis Submitted to the

Department of Agricultural Economics,

Faculty of Agriculture, University of Nigeria, Nsukka

In partial Fulfillment of the Requirements for the Award of Doctor of

Philosophy (Ph.D) in Agricultural Economics of University of Nigeria, Nsukka

JANUARY, 2015

ii

Certification

This is to certify that ABOKI, PETER MAISAJE, a post graduate student of the Department of

Agricultural Economics, Faculty of Agriculture, University of Nigeria, Nsukka, with the

registration number PG/Ph.D./06/42156 has satisfactorily completed the requirement for the

award of degree of Doctor of Philosophy (Ph.D.) in Agricultural Economics (Agricultural

Marketing and Agribusiness Management). The work embodied in this thesis has not been

submitted in part or in full for any other degree or diploma of this or any other University.

..………………………………… …....……….

Aboki, Peter Maisaje Date

(Student)

--------------------------------- ----------------- ------------------------------- ---------------

Prof. S.A.N.D. Chidebelu Date Prof. C.J. Arene Date

(Supervisor) (Supervisor)

---------------------------------- -------------------------

Prof. S.A.N.D. Chidebelu Date

(Head of Department)

iii

Dedication

To Almighty God for His grace and mercy thus far, and which endure forever; to

the memory of my Father Mr. M R Aboki, and my Mother, Mrs. L. M. Aboki

iv

Acknowledgement

I am much gratitude to almighty God for His grace and enablement thus far. I express my

gratitude and appreciation to my supervisors, Prof. S.A.N.D. Chidebelu, the Head of department,

and Prof. C.J. Arene for their valuable contributions, prompt attention and encouragement in the

course of this thesis. The various contributions of the followings are highly noted- Prof. E.C.

Okorji, Dr. A. A. Enete (Post graduate seminar co-ordinator), Prof. Noble J. Nweze, Prof. (Mrs)

A.I. Achike, Prof. C.U. Okoye, Dr. F.U. Agbo, other lecturers, and my colleagues, the post

graduate students, Department of Agricultural Economics, University of Nigeria, Nsukka.

My appreciation also goes to Prof. D.O.A. Phillips who gave me the frontier software,

Prof. S. A. Rahaman for the initial backup. To my friends, Dr. T.A.K. Anzaku, Dr. M.M. Ari, Dr.

I. Joshua, and Dr. R. E. Barde for the encouragements. I gratefully appreciate my wife Mrs.

Felicia M. Aboki and my entire family for the support to complete this work; I cannot forget

Henry Ajuzie Dozie a Ph.D. student in the University, for always being available to run my

errands. Thank you all.

v

ABSTRACT

The study evaluated the traditional and modern groundnut processing and marketing in North

Central Nigeria. The focus was on groundnut oil processing and marketing systems; input use

efficiency in production and factors that made for efficiency; profitability of the processing

activity and factors that determined profitability; examination of value added by processing;

integration of markets for the processed products and problems of the industry. A total of 175

traditional processors were selected and 17 small-Scale modern processors covered from

Nasarawa, Benue and Niger States. Pre-tested, structured questionnaires and observations were

used as instruments of data collection. Types of data collected were those on socio-economic

characteristics of processors, groundnut procurement, processing, and ground nut oil (GNO) and

groundnut cake (GNC) marketing. Weekly price series for GNO and GNC were also collected at

various markets within the region. Data analyses were attained by use of descriptive and

inferential statistics, stochastic frontier analysis (SFA), profit function analysis, t-test statistic and

Johansen test for co-integration. Hypotheses were also tested appropriately. The average age of

traditional processors in North Central Nigeria was 38 years and 41years for modern processors.

Ninety-four percent of the traditional processors were women while 88% of modern processors

were men. Majority of the processors did not participate in co-operative activities. Sixty percent

of groundnut processed by traditional processors came from farmers while 94% of groundnut

processed by modern processors was obtained from traders. The maximum likelihood result for

traditional processors indicated the presence of inefficiency. Raw groundnut variable was

significant at 1% level of significance (LOS) in Nasarawa and Niger States. Fuel-wood and salt

were both significant at 1% LOS in Nasarawa and Benue States. In the inefficiency aspects, age

and years of experience were significant at 1% LOS in all the states. For the zone, labour and salt

were significant at 1% LOS; fuel-wood 5% and raw groundnut 10% LOS. In the inefficiency

aspect for the zone, household size was significant at 5% LOS, while level of education was

significant at 10% level of probability. Raw groundnut and labour were significant in modern

processing, while education and experience at 10% in the inefficiency aspect. Most of the

traditional processors had their efficiency scores above 0.80 and modern processors were from

0.47. In the profit function results for traditional processors, fuel-wood and packaging variables

were significant at 1% LOS. Raw groundnut, procurement and maintenance were significant at

1% in modern processing. Value added was 41% for traditional processors and 44% for modern

processors. There was significant difference in the value of groundnut before and value after

processing. The Johansen trace test result indicated five co-integration vectors at 5% level of

probability for GNO and two co-integration equations for GNC. The markets for GNO and GNC

were not fully integrated. Administrative regulations affected market integration for GNO which

was significant at 5% LOS. Constraints identified included inadequate finance, inadequate

electricity, machine breakdown and transportation. Recommendations made included improved

packaging, finance, electricity supply and co-operative education.

vi

TABLE OF CONTENTS

Content Page

Cover page

Title page i

Certification ii

Dedication iii

Acknowledgement iv

Abstract v

Table of contents vi

List of tables x

List of figures xii

CHAPTER ONE: INTRODUCTION

1.1 Background of the study 1

1.2 Statement of the problem 6

1.3 Objectives of the study 9

1.4 Hypotheses 10

1.5 Justification 10

1.6 Limitation of the Study 12

CHAPTER TWO: LITERATURE REVIEW

2.1 Groundnut Processing Technologies and Systems 13

2.1.1 The traditional and modern methods of groundnut oil extraction in Nigeria 15

2.1.2 Capital ownership and organizational structures of agricultural processing 17

2.2 Marketing of Finished Products 18

2.2.1 Marketing strategies for agro-industrial products 21

2.2.2 Market demand for agro-industrial products 22

vii

2.3 Profitability Measures and Value addition 24

2.3.1 Profitability analysis 26

2.3.2 The value adding process in agriculture 27

2.4 Input Use and Efficiency 29

2.4.1 Efficiency measurement 30

2.5 Market Integration 34

2.5.1 Market integration and the law of one price (LOP) 35

2.5.1.1 Stochastic Process and the Unit Root Problem 36

2.5.1.2 Co-integration 38

2.5.1.3 Co-integration and Error correction Mechanism (ECM) 39

2.5.1.4 The Johansen Trace test 39

2.6 Problems of Agricultural Processing Industry 40

2.7Theoretical Framework 41

2.7.1 Value chain in Agricultural Processing and marketing 44

2.8 Analytical Framework 47

2.8.1 Stochastic frontier production function 47

2.8.2 Profitability analysis 51

2.8.3 Measurement of co-integration and the law of one price (LOP) 52

2.8.3.1 The unit root problem 53

2.8.3.2 Unit root test 54

2.8.3.3 Co-integration: The Johansen test 56

2.8.3.4 Determinants of co-integration 58

CHAPTER THREE: METHODOLOGY

3.1 Study area 59

3.2 Sampling technique 60

3.3 Data collection 61

3.4 Data Analysis 62

viii

3.4.1. Stochastic Frontier Model 62

3.4.2 Profit Function Analysis 65

3.4.3 Value addition model 66

3.4.3 Johansen trace test 67

3.4.3.1Determinants of co-integration 67

CHAPTER FOUR: RESULTS AND DISCUSSION

4.1 Socio-economic Characteristics of Small-scale traditional and modern Groundnut

Processors in Northern Central Nigeria 69

4.1.1 Age distribution of groundnut oil processors 69

4.1.2 Gender distribution of the processors 70

4.1.3 Marital status 71

4.1.4 Household size 71

4.1.5 Educational level of processors 72

4.1.6 Cooperative participation 72

4.1.7 Years of experience 73

4.2 Groundnut Oil Production, Marketing, and the Value Chain in the Study Area 75

4.2.1 Procurement 77

4.2.2Traditional groundnut oil production method 79

4.2.3 Modern groundnut oil production method 80

4.2.4 Marketing 82

4.3. Input Use Efficiency in Traditional and Modern Groundnut Oil Production in North

Central Nigeria 86

4.3.1Technical efficiency estimates for groundnut oil producers in North Central Nigeria 89

4. 4. The Profitability Analysis of Traditional and Small-scale Modern Processing and

Marketing of GNO and GNC 94

4.4.1 Gross margin results of groundnut processing 94

4.4.2 Determinants of profitability of groundnut processing in North Central Nigeria 97

4.5 Value Added by Processing Groundnut into GNC and GNC 100

ix

4.5.1Test of significance of value added 102

4.6 Level of Integration of Markets Groundnut oil (GNO) and Groundnut cake (GNC) 103

4.6.1 Result of the unit root test 104

4.6.2 Result of the Johansen test for co-integration 105

4.6.3 Determinants of market integration 107

4. 7 Constraints Facing the Groundnut Processing Industry 109

4.7.1 Identified constraints 109

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary 113

5.2 Conclusion 118

5.3 Recommendations 119

5.4 Addition to knowledge 120

5.5 Areas needing further research 121

REFERENCES 123

APPENDIX A 131

APPENDIX B 141

LIST OF TABLES

x

Table Page

1.1 Categories of Agro-processing by level of transformation of raw materials 3

1.2. Top ten world producers of peanuts - 2008/2009 5

3.1: Population and sample selection for the study 61

4.1 Socio-economic characteristics of traditional small-scale modern processors in North

Central Nigeria 73

4.2 Statistical summary of selected activities of traditional and small-scale modern GNO

processors in North Central Nigeria 77

4.3 Marketing activities of processors in the States and North Central Nigeria 84

4.4 Generalized log likelihood-ratio tests of the complete technical efficiency of

groundnut oil processors in North Central Nigeria 86

4.5 Maximum likelihood estimates (MLE) of the stochastic frontier production

(processing) function for traditional GNO processors in Nasarawa and Benue States 90

4.6 Maximum likelihood estimates (MLE) of the stochastic frontier production

(processing) function for GNO processing in Niger state and North Central Nigeria 91

4.7 Maximum likelihood estimation (MLE) of the stochastic frontier production

(processing) function for modern GNO processors in North Central Nigeria 92

4.8 Distribution of technical efficiency estimates for traditional (small – scale) and modern

GNO processors in the states and the North Central 93

4.9 Gross Margin for Traditional and modern GNO processing the States and the Region 95

4.10 Regression results of the determinants of profitability of traditional GNO processing in

Nasrawa, Benue and Niger states 98

xi

4.11 Regression results of the profit function of determinants of profitability of traditional

and small-Scale modern GNO processing in North Central Nigeria 99

4.12 Value added by processing groundnut into oil and cake in North Central Nigeria 100

4.13 Result of test of differences in value of groundnut seed before and after processing 102

4.14 Augmented Dickey -Fuller (ADF) Unit root test for price series at level and at first

difference 103

4.15 Result of the multivariate Johansen test for Co-integration for GNO price series 105

4.16 Result of the multivariate Johansen test for Co-integration for GNC price series 105

4.17 Result of factors that determine the level of integration of groundnut oil markets in

North Central Nigeria 107

4.18 Result of factors that determine the level of integration of groundnut cake market in

North Central Nigeria 107

4.19 Constraints to groundnut oil processing in the selected states in North Central Zone 111

xii

LIST OF FIGURES

Figure Page

1.1 Peanut (Arachis hypogea) plant 4

2.1 Illustration of production efficiency 33

2.2: The generic value chain of Michael E Porter 44

2.3 Flow chart of Agro-processing value chain 46

4.1 The Groundnut oil processing chain in North Central Nigeria 75

xiii

1

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Processing, storage and marketing of agricultural produce have become increasingly

important to the economies of most developing countries, as they have been to industrialized

nations at various stages of their development. Due to technical progress, marketable surpluses

from agricultural production have grown significantly; while rapid growth in urban populations

and rising per capita incomes have enlarged and diversified the demand for processed

agricultural products, whether food or raw materials for industries. Perhaps Processing is one of

the most important physical functions of agricultural marketing. Olayide & Heady (1982) opined

that processing was an important component of agribusiness development, because a large

portion of farm production underwent some degree of change between harvesting and final use.

More so agro-processing is capable of strongly shaping farm production decisions. It enables

quality enhancement, preservation and differentiation of farm production thereby enhancing its

marketability. It has also been noted that Agricultural processing activities are small-scale and

require low investment capital, hence can easily be undertaken by women (Fellows & Hampton,

1997; RMRDC, 2004; Kadurumba, Kadurumba & Umeh, 2009; FAO, 2011).

Farm products’ processing play a significant role in the economies of developing

countries, where it accounts for between 51% and 60% of value added by manufacturing and

between 60% and 70% of total industrial development. Over half of the manufacturing activities

in the developing countries of the world consist of agro-industries preserving and transforming

agricultural raw materials (Olayide & Heady, 1982; Brown, 1986). FAO (2012) observed that

2

increased urbanization, distance between home and work-place, working women and changes in

family cohesion has increased demand for shelf-stable, convenience and value added food.

Agricultural processing facilities have a strong impact of stimulating consumer demands

backward to the farm sector, to keep pace with demand for raw materials supply for processing.

Based on farm products, agricultural processing schemes can be sited in areas where other

industries will not be viable, as they are more intensive users of domestic rather than imported

raw materials due to their local availability (Brown, 1986; Austin, 1992; Brown, Deloitte &

Touche, 1994). More importantly, the gains of increased agricultural production through

technical progress will be lost if it is not consolidated through the development of economically

viable processing sector. So also the skills developed through planning and implementation of

agricultural processing and preservation will strengthen stakeholders’ entrepreneurial attributes,

thereby enhancing their economic empowerment (FAO, 2011). As a means of mitigating

problem of food shortage, FAO (2012) among other issues emphasized adding value or

improving the food agro- processing for consumption and the market.

An efficient marketing system connects producers and consumers, directs efficient

allocation of resources in production and distribution of output, while ensuring maximum

economic benefits to participants. Conceptually, agricultural processing which is a segment in

agricultural marketing, involves the transformation of raw materials to the forms required by the

consumer or for the next stage in a manufacturing and distribution chain (Olukosi & Isitor, 1990;

Boland, 2009).This entails transforming and preserving agricultural output, through physical

and/ or chemical alteration. FAO (2011) defined food processing and preservation as a set of

physical, chemical and biological processes that are performed to prolong shelf-life of foods, and

at the same time retain the features that determine the quality, such as colour, texture, flavour

3

and especially its nutritional value. Austin (1992) also viewed agricultural processing industry as

any enterprise that is involved in the processing of materials of plant or animal origin, which he

also described as agro-industry. In the World Bank development activities, the term “agro-

industry” covered agro-industrial processes such as grain milling, fruit and vegetable canning, oil

seeds crushing, and meat packaging as well as the function of marketing(Brown,1986). Hence it

was touted that starting a small rice mill or an oil press marked an early stage in the first steps on

the road to industrialization. The nature of processing and level of transformation can vary

tremendously ranging from cleaning, grading and boxing fruits and milling to oil extraction,

mixing and chemical alteration(Austin,1992), (Table 1.1).

Table 1.1: Categories of Agro-processing by level of transformation of raw materials

Level Activities Illustrative Product

L1 Cleaning, grading, storage Fresh fruits, eggs, fresh vegetables.

L2 Ginning, milling, cutting, mixing Cereals (grains), meat, spices, animal

feeds, jute, cotton, rubber, lumber and

flour

L3 Cooking, pasteurization, dehydration Dairy products, canned or frozen fruits,

refined vegetable oils, furniture, sugar

and beverages.

L4 Chemical alteration and texturization Instant foods, texture vegetable,

Products, tires

Source: Adapted from Austin (1992)

Groundnut (Arachis hypogea) is known to the Hausas as ‘Gyadda’, to the Ibos as

‘Opapa’, the Yorubas as ‘Epa,’ the Americans as peanuts, and the French as arachides. It is a

4

leguminous crop grown all over the world as an important oil seed crop native to South America.

Groundnut is thought to have been introduced to West Africa early in the slave trade by the

Portuguese, mainly to supplement the diet of slaves in transit. Its spread into the interior of West

Africa was rapid in the eighteenth century. By 1850s it was common in parts of Hausa land of

Nigeria and thought to be as important as potatoes in Europe by a British traveler (Hogendorn,

1978). Groundnut is a short herbaceous annual crop that produces its pods inside the soil, (figure

1.1).

Plate 1.1 : Peanut (Arachis hypogea) plant

Source : Wikipedia (2010)

Historically, the Sudan and northern guinea savanna of Nigeria have been the high

producing zones. However, the development of several varieties by the Institute for Agricultural

Research (IAR), Ahmadu Bello University, Zaria, has led to even higher output in the southern

5

guinea savannah zone, covering the North Central States of Nigeria (RMRDC, 2004). Nigeria

was third among the world ten highest producers of groundnut with 3, 835,600 tonnes

(unshelled) after China and India in 2007/2008 output year (USDA, 2010), but now fourth with

1.55million metric tonnes (shelled) in the 2008/2009 output season (USDA, 2010), ( Table 1. 2).

Table 1. 2: Top ten world producers of peanuts - 2008/2009

Country

Production (Million Metric Tonnes)

People's Republic of China

14.30

India 6.25

United States 2.34

Nigeria 1.55

Indonesia 1.25

Myanmar 1.00

Sudan 0.85

Senegal 0.71

Argentina 0.58

Vietnam 0.50

World 34.43

Source: USDA Foreign Agricultural Service( 2010)

A mature groundnut pod contains 2-4 kernels (nuts) per pod depending on the variety and

is traded decorticated and unshelled. In Nigeria, it is eaten as whole nut, raw, boiled or roasted

and also crushed to get the oil and the cake. The oil is known as groundnut oil (GNO) and the

residue known as groundnut cake (GNC). Groundnut is rated the third major oil seed of the

world after soya bean and cotton (USDA, 2010). Groundnut oil is used for cooking, as salad oil,

for canning sardines, and margarine manufacturing (Sharma & Caralli, 2004).The residue after

oil extraction is a source of protein for animal feed. In traditional oil extraction method, this

residue is fried into a local delicacy known as groundnut cake (GNC) or ‘kulikuli’in Hausa. This

6

is ground and consumed in composite with several local dishes. Elsewhere, groundnut is

processed into peanut butter, peanut flour, peanut flakes and many other products.

Bulk export of groundnuts from Nigeria started to decline in the 1960s in favour of local

crushing by mills in and around Kano and else-where. In 1973/74 cropping season, only 35% of

the 559,000 metric tonnes purchased by the marketing board was exported. By 1973/74 also a

policy decision to discontinue export of groundnuts entirely was put in place to allow for local

processing. Any export of groundnut after then was in form of groundnut oil (GNO) or cake

(GNC) (Hogendorn, 1978).

The petroleum oil boom and its consequence upon the agricultural sector saw Nigeria

importing groundnut oil. In 1980, about 200,000 tonnes of groundnut products were imported in

form of vegetable oil. The 1.95million tonnes output in 1974 dropped to 0.4million tonnes in

1983. Consequently many groundnut processing mills had to close down because of

unavailability of the raw material (RMRDC, 2004). However, with the abolition of organized

marketing of agricultural products in 1986, the processing and marketing of groundnuts and its

products have been left to the private sector (Ingawa, 2004). A survey by RMRDC (2004)

showed groundnut output to be 1.98million tonnes for 2003, with greater portion coming from

Bauchi and Nasarawa States with 72,000 tonnes and 70,420 tonnes, respectively, and higher

estimates for 2004. The rain fed output for Nasarawa State in 2008 was put at 92,450 metric

tonnes (NADP, 2009). The soaring demand for groundnut oil in manufacturing and domestic

need has kept the pressure on the groundnut crushing industry.

1.2 Statement of the Problem

Agricultural development policies and programmes have tended to lay emphasis on

improving farm productivity, but with less attention on the processing and storage of the

7

resultant output. For instance, 95% of funding of the Consultative Group on International

Agricultural Research (CGIAR) in about 20 to 30 years was devoted to production related

research activities (Ferris, 1999). Agricultural credit disbursement in Nigeria has also been in

favour of crop production with grain alone taking 67% (CBN, 1998). Consequently, the gains of

increased agricultural productivity will not be fully realized if not sustained through the

development of a viable processing and marketing sector to support the technical progress

attained in production. Market forces have instigated greater opportunities for product

differentiation and value addition in some respects (Boland, 2009). These include i) increased

consumer demand regarding health, nutrition, and convenience food; ii) efforts by food

processors to improve their productivity; and iii) technological advances that enable producers to

produce what consumers and processors/manufacturers desire. Importantly, improvement of

efficiency in the value chain fosters more equitable, transparent and sustainable distribution of

benefits to the various stakeholders (FAO, 2011)

Local processing of groundnut and other sources of oil have still not met the domestic

demand for vegetable oil. This is shown in the importation of vegetable oil to supplement local

production, with its attendant drain on foreign exchange. The short fall in demand has been

estimated at between 300,000 tonnes and 400,000 tonnes per annum. Hence the Presidential

Initiative on Vegetable Oil was put in place, to obtain three million tonnes of vegetable oil per

annum from five million tonnes of groundnut and to start exportation by the year 2010 (Ojowu,

2004). Consequent upon the above, the challenge of achieving this target was on the groundnut

processing industry. Hence this study focused on critical areas in groundnut processing and

products marketing chain for appropriate intervention measures to achieve efficiency and

increase products availability.

8

In agricultural processing schemes as in production, several inputs are involved. Raw

material that is the farm produce can constitute 90% of the entire inputs needed depending on the

level of processing (Austin, 1992). The efficiencies involved in transforming inputs into desired

output need be known (Olayide & Heady, 1982). One of the problems responsible for poor

performance of developing countries especially in sub- Sahara Africa in international trade is

attributed to low value addition. Consequently, products do not meet international standards, and

do not compete favourably in the international trade. Optimization of groundnut oil (GNO) and

groundnut cake) GNC processing and marketing, is therefore an ultimate desire.

It is also understood from the foregoing that there are information and product gaps in the

value chain with respect to groundnut oil, all pointing to inefficiency along the value chain. Most

technical and economic efficiency studies have concentrated on primary production of crops and

livestock with few on processing, for example Okoh, (1999) worked on cassava roots and its

processed products. Kadurumba, Kadurumba & Umeh, (2009) also worked on allocative

efficiency of traditional palm oil processing in Imo State. Analysis of technical and economic

efficiency data from processing through marketing, with its positive effects in the chain, and

integration of markets for processed products is crucial, but unavailable. Consequently, this

research has addressed the inefficiencies in the value chain, as depicted in capacity under

utilization of plants, poor quality products, low quantity of output from given level of raw

material, inadequate price and output information, unattractive profit incentives, and income

fluctuations.

It has been established that initiating activities from the market - end of the commodity

value chain, using improvements in processing and market expansion to provide “demand pull”

that benefits raw material producers, especially small- holder farmers, is necessary for

9

sustainable agricultural development (Ojowu, 2006). A survey by RMRDC (2004) revealed

Nigerian’s groundnut output of 1.976million tonnes. With the entire crop consumed in Nigeria,

examining the performance of the processing segment and hence the downstream segment of

groundnut industry will improve efficiency in operations for processors, and entire value chain.

The synchronous movement over time among prices in different markets has become an

important index of efficiency in the markets. For a market system, domestic or foreign, efficient

performances of its developmental functions depend on the ease with which price changes and

responses are transmitted spatially and temporally within the system. Market integration modeled

within the framework of the spatial price equilibrium (SPE) model of inter market linkages in the

point space tradition, that is subject to production shocks and general price information is crucial

for attainment of efficiency of the markets. The poor infrastructural development in developing

countries as Nigeria leaves lots of doubts in the attainment of integration of the markets for agro-

industrial products, such as groundnut oil and groundnut cake and hence the much desired

efficiency in their marketing systems. Acquah & Owusu (2012) suggested further investigation

into influence of external factors such as market infrastructure, government policy and self

sufficient production, product characteristics and utilization towards market integration.

1.3 Objectives of the Study.

The broad objective of the study was to examine the performance of traditional and

modern groundnut processing and marketing in North Central Nigeria. The specific objectives

were to:

(i) examine the socio- economic characteristics of traditional and modern groundnut oil

processors;

10

(ii) describe the traditional and modern groundnut oil processing and marketing systems in

the area and hence the processing value chain;

(iii) examine the technical efficiency in traditional and modern groundnut oil production and

identify the factors that determine efficiency;

(iv) estimate the profitability of groundnut oil (GNO) processing and identify the factors that

make for their profit;

(v) examine value added by processing groundnut into GNO and GNC in the area;

(vi) estimate the level of integration of GNO and GNC markets and identify the factors that

influence their integration; and

(vii) examine the problems of groundnut oil processing and marketing.

1.4 Hypotheses

The null hypotheses tested were:

H01: Groundnut processing into GNO and GNC is not efficient;

H02: Variable input and output prices of GNO and GNC do not affect their variable profit;

H03: There is no significant difference in value of groundnut before and after processing; and

H04: Markets for GNO and GNC are not integrated.

1.5 Justification of the Study

Positive net returns in any business is an incentive to continue the business. The

continuity of investment in crop processing will largely depend on its profitability. Ojowu (2006)

noted that “demand- pull” and profit incentive make the changes achieved in developing

agricultural processing sustainable. More so that participants in groundnut processing are the low

income group who depend largely on what is generated for their sustenance. Therefore the

11

findings of this study will be of immense importance to the participants in the attainment of their

business goal.

This study will particularly benefit groundnut processors in increasing the value (quality

and quantity) of products at lower cost and hence increase their income. For the marketing

agencies, efficiency in the marketing system will increase their returns and lower cost to

consumers and manufacturers that use the products as raw materials. Households will be able to

acquire GNO and GNC at lower cost for domestic needs. On the whole, the entire value chain

from raw material supply (groundnut farmers) through traders to consumers and manufacturers

(Bakers, confectioneries, margarine manufacturers, etc) will be improved.

An inverse relationship between increased mechanization of crop processing and women

participation was observed by Bruinsma (1999); and that some technologies targeted at

alleviating poverty among women did not actually benefit them. The findings of this study will

provide technology related information for purpose of intervention and development of

appropriate technologies to alleviate poverty among the rural poor, particularly in the study area

where religion and other cultural values restrict women from some outdoor income generating

activities. It is understood that spatial market integration ensures that a regional balance is

attained among food-deficit, food-surplus and non-food producing areas through effective

transmission of price signals (Chirwa, 2000).

The findings of this study will set the pace for further research into the groundnut

industry. It will also generally provide base-line information to the private sector, government

agencies and the non- governmental organizations (NGOs) in their businesses and development

activities which will also increase the supply of GNO needed for both domestic and industrial

purposes.

12

1.6 Limitations of the Study

The major limitations in this study were those inherent in social and economic research.

Foremost of which was poor record keeping especially among the traditional processors, with

consequent dependency on memory recall for processing and marketing activities with inherent

unreliability. Probing and leading questions were however used during data collection to assist

respondents affirm their responses. Secondly, the study had to contend with the mood and the

on-going activities of the processors during data collection. Because processors could not just

stop their processing work or selling products to respond to questions, it was difficult getting

them to do that. To enhance the quality of information collected, interviews and observations

were used during data collection. This however extended data collection period with its attendant

cost.

This study covered only groundnut oil processors in the selected states. Only those

actively involved in the groundnut oil processing and products marketing activities comprised

the elements in the study, hence other groundnut products were not covered.

13

CHAPTER TWO

LITERATURE REVIEW

2.1 Groundnut Processing Technologies and Systems

Technology is seen as the body of know-how about materials, techniques of production,

and operation of equipment based on the application of scientific knowledge (Black,

2002).Modern technology enables the achievement of objectives at a faster rate. Therefore, a

sound understanding of current technology, their technical, social and economic environment, is

necessary to promote processing enterprises (Bruinsma, 1999). Every technology must be

assessed to determine its adaptability and attendant social, economic and environmental

consequence. Arene, Nwagbo & Okoye (2004) stressed that an existing technology can be

assessed to determine the extent it contributes to satisfying basic human needs; its promotion of

self reliance through the use of local human and material resources; and how it affects social and

cultural structures, norms and attitudes of the society.

Technology selection is often the most crucial decision in designing and undertaking an

agricultural processing project (Austin, 1992). Consequent upon that, Austin (1992) noted that

before choosing an agro-processing technology, the market requirement, technical processing

requirement, cost and availability of labour, capital, energy, raw materials, capacity utilization,

skill capabilities and nutritional consequence must be taken into account. It has been observed

that most technologies for food processing are technology driven rather than product or market

driven hence have had problems of adaptation (Bruinsma and Nont, 1991; Connry et al, 1995;

and Zommers, 1995). In agricultural processing, Orji (2008) suggested a vibrant linkage among

processors, industrial users of products and agro- equipment manufacturers. This will enable the

14

fabrication of appropriate machines for agro- processing activities and optimization of the

processing segment in the commodity chain.

Bruinsma (1999) compiled technology selection guidelines from Fellows and Hampton

(1997) as follows; (i) technological effectiveness (whether the equipment will do the job required

at the intended scale of production); (ii) relative cost of the equipment and its maintenance; (iii)

operating cost and overall profitability; (iv) conformity with existing administrative and

production conditions; (v) conformity with the existing supplies of raw material and the

marketing opportunities; (vi) social effects, such as displacement of the work force; (vii) training

and skill levels required for equipment operation, maintenance and repair; (Viii) health and

safety features and environmental impact; (ix) flexibility to perform more than one function; and

(x) compatibility with other parts of a process and stages in the food chain.

In groundnut oil extraction, the basic principle is the same worldwide. These are: (i) pre-

treatment, which involves cleaning, scorching and crushing the groundnut; and (ii) extraction,

which is the separation of the raw material into oil and residue (cake) (Sharma & Carilli, 1999;

RMRDC, 2004). The cells of groundnut embryo contain oil in an extremely fine emulsion

(Woodroof & Leahy, 1940). When nuts or kernels are broken or bruised, a sufficient number of

cells are injured, hence cause tiny drops of free oil to ooze out and collect on the surface (Asiedu,

1989). In Nigeria and elsewhere, oil extraction from groundnut kernel is done by mechanical

pressing or by use of solvent (RMRDC, 2004; Asiedu, 1989). Solvent extraction is capable of

bringing out nearly all the oil from the groundnut material, a high yield of oil of better quality

and high protein meal (Khan & Hanna, 1983). In the mechanical extraction, the efficiency of oil

expression rarely exceeds 90% but it has the advantage of yielding end-products free of

dissolved chemicals, and is safer and less expensive to undertake (Asiedu, 1989). The residue,

15

the groundnut cake is further fried dry and is used for human consumption popularly known as

‘kulikuli’ in Hausa dialect of Northern Nigeria (RMRDC, 2004).

In Nigeria and West Africa, mechanical and other methods of extraction co-exist. They

all follow the sequence thus: (i) shelling/decortications and drying of groundnut kernels; (ii)

roasting/scorching, the process where the kernels are fried to enable quick polishing and easier

oil extraction; (iii) polishing, which is the removal of the redskin or testa from the groundnut

kernel; (iv) grinding/crushing or pasting, a process that turns the roasted polished and cleaned

groundnut seeds into paste; (v) oil extraction, a process which removes the oil from the

groundnut paste by means of some mechanical effort or solvent and; (vi) refining and quality

control(Asiedu, 1989).

2.1.1 The traditional and modern methods of groundnut oil extraction in Nigeria

In the traditional method, groundnut is shelled, cleaned and roasted lightly. Next, the testa or

redskins are removed by rubbing kernels against each other by hand. The de-skinned kernels are

pounded with mortar and pestle or ground with stones. The hammer mills used to mill grains in

the villages is also used to mill the groundnut kernel in some of the communities. The oil-rich

paste is kneaded and pressed by hand or with pestle and mortar to extract the oil. Small quantity

of warm water is usually added following each pressing operation until as much of the oil-water

mixture as possible has been extracted. The oil-water mixture is fried or ‘fire dried’ over a low

fire to remove the water. Lastly, the oil is decanted into bottles or cans, for home use or the

market. Alternatively, the paste is boiled and the oil rising to the surface is skimmed off. This

may continue until no sign of oil is seen. The traditional method has low oil extraction rate, but

the resulting press cake is used for human consumption (Asiedu, 1989; RMRDC, 2004;

NAERLS, 2006).

16

The modern methods used are the expeller methods and solvent extraction process. For

the expeller pressing method, the pre-treated, crushed groundnut is continuously fed into the

expeller, consisting of a screw which rotates within a sturdily built cylinder. The groundnut mass

is fed from the top larger end of the expeller chamber and pressure exerted as the screw turns

forcing the mass towards the discharge end. Friction and pressure cause the mass to heat, which

facilitates oil extraction. The groundnut oil passes through the perforated screen walls and is

collected beneath the expeller chamber, while the press cake is extruded from the discharge end.

The resulting press cake contains 5% oil and can be made into ‘kulikuli’.

The solvent extraction of groundnut oil is similar to solvent extraction of soya bean oil.

Groundnut destined for oil is not fried, but the red skin is removed. Next, the nuts are cracked

into pieces and conditioned to 10-11 percent moisture content at 70oc or more, and then flaked

by passing through rolls. Sometimes the flakes are cooked before being conveyed into the

extractor. In the extractor, the oil is removed by means of a solvent. The solvent laden flakes

are then passed through a desolvenizer which recovers the solvent. The defatted and de-

solvenized cake may undergo further treatment before it is used as feed. The crude oil is

clarified by passing it through a filter press. After which it may be dehydrated and sent for

refining. Solvent used in oil extractor include ethanol and hexane (Asiedu, 1989; RMRDC,

2004).

This process is basically the same for most vegetable oils. It can also be applied to oil

extracted using hydraulic press or screw expeller. Refining consists of alkali refining which

neutralizes the free fatty acids using sodium hydroxide (NaOH), bleaching to improve flavor

stability using natural bleaching earth, and deodorizing to remove odour using steam distillation

under vacuum. If GNO is to be used as salad oil, it undergoes a process of winterization prior to

17

deodorization. The alkaline refined and bleached oil, if necessary, is hydrogenated to an iodine

value of about 105 before it is winterized to remove fats that crystallize out at about 0oC (Asiedu,

1989).

2.1.2 Capital ownership and organizational structures of agricultural processing

Capital has been viewed by Erikson, Akridge, Bernard & Downey (2002) as financial

resources of a business, comprising in the broadest sense, all assets of the business and

representing both owned and borrowed funds. Black (2002) sees capital as man- made means of

production. It is any good that is designed for production of other goods and services, example

machinery. These include financial assets which will be used to provide income. Olayide &

Heady (1982) explained that capital resources came into agricultural production in form of farm

machinery, as tractors, harvesters, tools and equipment for threshing, shelling, grinding, milking;

biological capital, in form of fertilizers, herbicides, insecticides, and certified seeds; and also in

form of livestock feeds, feed mixes and additives, drugs and improved breeds.

In agricultural processing, capital items will include the raw materials (farm produce),

processing machines and equipment, packaging items, additives, and money capital among

others required for running of the outfit (Brown, 1986; Austin, 1992). Capital in form of

machines, tools and equipment are of critical importance to an agricultural processing activity.

Many processors have encountered problems of capacity under-utilization due to improper

estimation of working capital needs, such that they are not able to acquire adequate raw materials

during harvest, hence leaving the plant short of raw materials for the processing activity.

Consequently, enterprise development and the secondary processing sector have sometimes

failed because the approach taken was technology driven, rather than market oriented (Bruinsma,

18

1999). Therefore, decision to purchase a machine must be based on market demand for the

products to be processed (Austin, 1992).

Technologies for food processing are normally small-scale as they are accessible and

affordable (Clarke, 1987). They can be sited near raw material or where other industries cannot

be located, as was the case with small-scale rice processing in Java (FAO, 1982). In small-scale

agricultural processing in sub-Sahara Africa (SSA), most machines and equipment operate on

contract providing services to owners of the crops or farm output (Clarke, 1987; Bruinsma,

1999). This was shown in cassava processing in Benue State, Nigeria. Aboki & Saingbe (2007)

also reported that all the small-scale rice hulling machines in Lafia, Nasarawa State, operated as

contract mills, providing milling services to paddy owners on hire.

Bruisma (1999) compiled the various forms of organization and ownership arrangement

for processing equipment as follows:

i the village cooperative or interest group can own and run the processing plant and pay a salary

to the machine operator(s) and labourers;

ii. the village cooperative or interest group leases equipment from a local workshop with

sufficient experience in equipment manufacture and maintenance;

iii. a private enterprise functions as a service mill and processes small batches for individual

families, or larger batches on contract for the village cooperative or individual business persons;

and, (iv) a private processing enterprise operating on a fully commercial basis where it buys raw

materials from the village and the surrounding area for further processing.

2.2 Marketing of Finished Products

One of the challenges of agricultural processing industry is the identification of the target

markets for the products. This can be based on consumer needs, market segmentation and buying

19

pattern (Austin, 1992). For processed foods, which form bulk of the agro-industrial products,

consumers’ needs are expressed in preference for products’ taste, smell, colour, texture,

appearance and convenience for users, and, most importantly, nutritional requirement (Austin,

1992; Brown et al, 1994). For other agro-industrial products such as cotton, jute and wood,

whose consumers are industrial users; the emphasis is on price and physical quality (Austin,

1992).

Products are purchased based on the various segments of the markets. These may include

geographical location of consumers which reveals ethnic or regional taste, or other socio –

cultural attributes of the consumers. Income levels of consumers are also strong determinants of

purchases hence an important segment. Also, effective demand and food preferences change as

income levels rise, which also reflect product pricing and product characteristics (Gould &

Villarreal, 2006; Abdullai & Aubert, 2004). For instance, packaging of products is made in

various sizes to cater for the low and high income consumers (Austin, 1992; Ganewatta,

Waschik, Jayasuriya & Edwards, 2005).

Another market for agro – industrial products is the export market. This market requires

high quality products with good packaging. There is increasing difficulty in export of agro –

industrial products to other countries because of increasing protection of domestic agro-

industries in the traditional export markets (Brown, 1986 and Austin, 1992). Access to such

markets may require a thorough knowledge of regulations and trade structure, changes in

packaging or distributional channel, or even new product development (Brown, 1986).

Domestic markets appear to offer growing opportunities for agro-industrial products for

both product diversification and import substitution. With increasing income and status, demand

for high value products is on the rise (Gould & Villarreal, 2006 and Brown et al, 1994). Agro-

20

industrial product user type such as industrial consumers, institutional consumers, wholesale and

retail businessmen, and end consumers need to be considered. Product type- necessities, status

items, convenience goods or specialty products, health foods, food away from home (FAH)

require attention (Austin, 1992; Gould & Villarreal, 2006). In India, 50% of the value of

agricultural production is now high value, but in Africa it is only 5% (Morris, 1994). The buying

process of agro-industrial products can also be examined based on who decides the purchase of

the product, how they decide, and where to make the purchase (Austin, 1992; Fousekis &

Lazaradis 2005). Market information helps in marketing decision for agro – products to be taken

adequately. Potential buyers, producers and marketers can be identified; while location and

prices of products can be revealed via market information research. Costs can be tremendously

reduced if reliable information on a product is available to the producer, marketer or even the

consumer (Austin, 1992).

The market place is normally crowded with agro- industrial firms and products,

especially in developed countries, each aiming at controlling or accessing the market, hence the

competitive environment. The five sources of competition of Michael Porter- rivals, potential

entrants, substitutes, suppliers and buyers- need be considered in marketing process of agro-

industrial products (Austin, 1992). Agro-industries present a typical representation of

monopolistic competition with several firms. Market place will be explored by providing buyers

with greater values, which are attainable through cost advantage or product differentiation

(Bruinsma, 1999). Cost advantage allows more effective price competition and product

differentiation enables more effective quality competition, so that the price-quality interplay

yields the ultimate consumer value. In the USA, major meat packers reduced transportation and

labor costs by relocating to rural livestock production areas. Differentiation of product can be in

21

form of, for instance, vegetable oil, with varying oleic acid, distinct flavor and special consumer

preferences (Sharma & Carralli, 2002). Packaging is also a differentiating factor. South

American banana companies’ use of cartons created value for distribution and retailers through

more efficient handling, quality control and branding. There is a difference between intrinsic and

perceived quality of products. Brand and image creation is a strategy for perceived quality

competition, but packaging, product content and services are means of intrinsic quality

differentiation; value is therefore in the eyes of the buyer (Austin, 1992).

2.2.1 Marketing strategies for agro-industrial products

The basic consideration in product marketing includes design, pricing, promotion and

distribution referred to as the marketing mix. Several design options are acceptable for agro –

industrial products. These include taste, texture, cooking ease, colour, odour, nutritive value,

convenience, size and packaging. For furniture, leather or wood products, consideration will

include durability and fashion (Austin, 1992). In Nigeria the iodization of salt and fortification of

vegetable oil, and sugar with vitamins is an example. Cost of product designs and final price of

the product must be evaluated to avoid prohibitive cost. Demand and supply forces in the

markets set prices for most agro – industrial commodities. Internationally, most developing

countries are price takers, while the exporting countries set the prices (Austin, 1992). For locally

processed products, pricing vary from market to market within regions and between regions,

attributable to such imperfections as lack of information, poor infrastructure and so on (Damisa

& Rahaman, 2004).

Sales promotion creates awareness and stimulates demand for products in a consumer. A

superior product will not reach its sales potential unless consumers are aware of its advantages.

In the USA food processors spend about 3% of their revenue on advertising, which amounts to

22

about 1.5 percent of consumers’ at home food expenditure (Kolhs & Uhls, 2002). Promotion is

much less for staples and undifferentiated products and more for processed products.

Promotional activities are commonly seen in the print and electronic media in Nigeria, and road

shows among others; they all stress real and imaginary advantages of products.

The distribution system is important because it links the processors to the market place.

The structure of the marketing and distribution system describes the length of channel and the

number of intermediaries between the manufacturers and the consumer. These include the

wholesalers, commission agents, brokers and retailers operating at different levels of the

product’s chain (Austin, 1992). Several marketing functions carried out include logistics

operations (transportation, storage, repackaging), financing, and promotion. In an efficient

marketing system of developed countries like USA, 28 percent of the consumers food dollar

went to farmers, 72 percent went for processing and marketing functions (Kolhs & Uhls, 2000).

The reverse was the case in Ghana where farmers received 71 percent of the retail price of rice,

processor 12 percent, assemblers / wholesalers 12 percent and retailers 5 percent (Timmer,

Walter & Scott, 1983).The nature of agricultural produce requires specialized and speedy

transportation, storage arrangement for both procured raw materials and processed products,

(Austin, 1992). Food wholesaling in developing countries tends to be highly fragmented and

relatively small-scale though effort to improve the system is being stepped up (Brown, 1986).

2.2.2 Market demand for agro-industrial products

Demand as defined by Erikson, Akridge, Bernard & Downey (2004) is the quantity of a

commodity that consumers are willing and able to buy in the market at various prices. Arising

from the theory of consumers’ behaviour, in which consumers are rational and thrive towards

maximizing utility given their income (Nellis & Parker, 2000).The demand situation for agro-

23

industrial products set the pace for its marketing plans, and because it makes no economic sense

producing a product that cannot be sold (Kotler & Keller, 2006). Therefore, consumer demand

analysis becomes critical in the processing and marketing of a product. To grapple with this,

Austin (1992) suggested consumer analysis to include consumer needs, market segmentation, the

processing process and market research ; competitive environment to include market structure,

the basis for competition and government influence; the marketing plan analysis to include

product design, pricing, promotion and distribution, and demand forecasting which include

examining data needs for forecasting technique and projecting sales.

A cross-section analysis of household demand for food and nutrients in Tanzania

(Abdullai & Aubert, 2004) revealed that income and other socio- economic variables exerted

significant effects on the demand for food and nutrients. The other socio- economic variables

included women’s schooling, size of household and urban residence. The study also showed that

households in urban areas consumed more fats and oils than their rural counterparts. In a study of

Greek households, Fousekis & Lazaradis (2005) concluded that the age of the household head,

the degree of urbanization, the percentage of expenditure devoted to food away-from home

(FAH), and per capita consumption expenditure affected the intake of nutrients; while household

head gender and educational achievements were effective only in certain locations in the study.

Gould & Villarreal (2006) in a study in China reported that 26% of household income was spent

on food at home (FAH); with household in the lowest income group spending 40% of household

income on FAH, while the highest income bracket household spent 15%. It was revealed that

percentage of food expenditure on food away from home (FAFH) was higher than on FAH.

Also, noted was decrease in percentage of income devoted to food with increase in income of

household.

24

Sabates et al (2001) noted that educational attainment of the main meal planner had

impact on food choice and nutritional quality of the resulting diet. Gould & Villarreal (2006)

observed that 40% of the household meal planners did not have a high school education. They,

also, hypothesized that household food choice patterns were influenced by the age structure of

the household members. Sub-Saharan Africa (SSA) is expected to experience growth in food

demand largely driven by rapid population growth. Demand for roots and tubers has also

increased over the years due to increased consumer and industrial needs emanating from

population pressure, favourable markets, government support and price interactions (

Nwachukwu, Agwu, Onyewaku & Egeonu, 2009). Agro – industries enhance product

diversification and improvement necessary to change the demand pattern for farm producers

(Brown, 1986).

2.3 Profitability Measures and Value addition

Profit is defined as total revenue minus total cost (Erikson, et al 2004). They outlined

four perspectives of profit; (i) profit is a reward for taking risks in business; (ii) profit results

from the control of scarce resources; when a citizen owns a resource that others want, the others

will bid up the price which will then generate profit for the owner; (iii) profits exist because

some people have access to information others do not have. This special knowledge include

secret formulas or processes, exclusive right to inventions, property rights and patents, e.t.c.,

ensuring profit for the creator; and (iv)profits could exist simply because some businesses are

managed better than others; their managers are often creative planners and thinkers with efficient

organizational abilities.

The accountant looks at profit as the income that remains after all contractual, measurable

costs are subtracted. The economists however determine profits by examining alternative uses of

25

resources within the firm. Hence, economic profit is defined as accounting profit less opportunity

cost. It forces an examination of alternative uses of resources and helps in analyzing alternative

courses of action by the firm (Kay, 2000).

It is contended that the entrepreneur’s motive for producing any given product is that of

the attainment of maximum profit, while consumers or buyers’ motive is that of utility

maximization (Olayide & Heady, 1982). The profit motive is the ‘spark plug’ of a market

oriented capitalist economy. The prospect of earning and keeping a profit serves as the incentive

for creativity and efficiency among people. It stimulates risky ventures and drives people to

develop ways of cutting costs and improving techniques, always in an effort to satisfy consumers

desires (Erikson et al, 2002).

Kotler & Keller (2006) suggested that firms should be able to measure the profitability

of their products, territories, customer groups, segments, trade channels and other sizes;

emphasizing that this will help the management to determine whether any products or marketing

activity should be expanded, reduced or eliminated. Marketing profitability analysis generally

indicates the relative profitability of different channels, products, territories or other marketing

entities. More so, companies are showing interest in using market profitability analysis or broad

version activity based cost accounting (ABC) to quantify the true profitability of different

activities (Cooper & Kaplan, 1991). Profitability can be improved by managers if there is

reduction in resources needed to perform various activities or make resources more productive or

acquire them at least cost; or alternatively raise prices on products that consume heavy amount of

support services (Kotler & Keller, 2006).

Various models of profitability have been used in production and marketing researches.

Onuoha, Okereke & Asumugha (2009) applied the gross margin and net income analysis in

26

determining profitability of feed-mills in Umudike, Abia State, Nigeria; in which profitability

was reported at 1.06 for every naira spent. In similar study on paddy enterprises, Okoye &

Anuebunwa (2009) reported gross margin of 33% and 27% for the two enterprises. Ezedinma

(2007) noted that the profitability of a market is a direct indicator of degree of efficiency of the

marketing system.

2.3.1Profitability analysis

In economic theory, profit is maximized at output level where marginal cost equals

marginal revenue (Koutsiyianis, 1979). Thus, one can determine profit by comparing total

revenue with total cost, or by comparing average price and average total cost. Multiplying the

difference by the total output gives the total profit or loss (Nellis & Parker, 2000).

Olayide & Heady (1982) derived unconstrained profit maximization given two factors and one

product production function as follows;

Q = f (x1, x2) ……………………………………. 2.1

C = r1 x1 + r2 x2 + b……………………………. 2.2

Where,

Q = output, C= cost, x1, x2 are inputs;, r= price of input, b= fixed cost.

Understanding that profit (π) is given as revenue (price multiplied by quantity) less cost,

and then one has a function of the form:

π = Pf (X1, X2) – r1 X1 – r2 X2 – b) ……………………. 2.3

To maximize profits, we set the partial derivatives of π with respect to Xs and equate to

zero and solve. Hence profit is maximized at output level where marginal cost (MC)

equals marginal revenue (MR), given p= price of output. This is given as

δπ/δx1= pf1-r1 = 0 …………………..2.4

27

δπ/δx2 = pf2 – r2 = 0 …………………… 2.5

Solving 1and 2 then

Pf1 = r1; pf2=r2 ……………………… 2.6

If the price of a commodity exceeds the average total cost (ATC) of production,

supernormal (pure) profits are made as opposed to normal profits; and if the price is below

average variable cost (AVC), the firm is at shut down point, in the short run (Nellis & Parker,

2000). Normal profit is the minimum rate of profit which must be earned to ensure that

sufficient number of people are prepared to invest, organize production and undertake risk in an

industry (Nellis & Parker, 2000; Frank & Bernanke, 2001).

2.3.2 The value adding process in agriculture

The difference in values of raw agricultural product before processing and after

processing is the added value. Black (2002) defined value adding as the total value of a firm’s

output less the value of inputs purchased from other firms. Value added is thus what is left to be

shared between wages of the employees and profits for owners of the business. Gittinger (1972)

noted that one could have gross value added, in which case the value of inputs is not subtracted,

and the net value added where deductions are made for inputs including depreciation, labor,

management, and cost, among others. In this case value added could be positive or negative as

the case may be. In agricultural processing, Austin (1992) and Brown et al, (1994) explained that

the difference between cost of ingredients (including farm produce), and the ex-factory or post-

processing price of the finished products is the value added through processing. Without

prejudice to other opinions, this will be the working definition for this study.

Agricultural marketing provides form, place, time and possession utilities to consumers

(Kohls & Uhls, 2000). Agricultural processing changes the form of the farm produce to a state

28

required by consumers or next stage in a manufacturing scheme, hence creating form utility.

Olukosi & Isitor (1990) described processors and manufacturers’ activities as increasing the

quality and value of farm produce.

The value adding process however runs in the entire food marketing channel from

production through processors, the traders to the final consumer. The optimization of the food

marketing chain is now attracting attention from agencies involved in agricultural research and

rural development (Fellows & Hampton, 1997; Bruinsma, 1999). The technical advisory

committee to CGIAR also takes the view that research on agricultural productivity needs to be

complemented by more research on product utilization and post-production activities, storage,

processing and marketing as part of a coherent approach (Bruinsman, 1999). Ezedinma (2007)

also advocated commodity chain approach to agricultural development. Ganewatta, Waschik,

Jayasuriya & Edward (2005) observed that the East Asian industrialized countries adapted

policies to enhance domestic processing of primary commodities as a tool for accelerating

employment, growth, export revenues and development.

Agricultural processing industry or Agro-industry has grown in size because of its

integration of agricultural and industrial activities (Austin, 1992). It is seen as probably the most

important component of agribusiness (Olayide & Heady, 1982). In the United States of America,

food processing constitutes the bulk of value adding activities and small businesses (Torok, et al,

1990). Agro- industry has also been defined as any activity that deals with the processing of

material of plant or animal origin, which is why agro-processing industries dominate

manufacturing activities in less developed countries where agriculture is the main stay of the

economies (Brown, Deloitte & Touch, 1994). Brown (1986) & Austin (1992) explained agro-

29

industries to include such activities as oil seed crushing, grain milling, fruit and vegetable

canning, meat packaging, the textile industry, and function of marketing.

It is said that one of the first steps on the road to industrialization is the processing

industry, so that starting a small rice mill or an oil press marks an early stage in industrialization

(Austin, 1992). More so a nation may not fully use its agronomic resources without a viable

agricultural processing sector, because most agricultural products including subsistence products

are processed to some extent (Brown, 1986). Brown, Deloitte & Touche (1994) pointed out that a

post-harvest enterprise can influence the volume and disposition of agricultural production,

likewise the degree of food self-sufficiency, it induces changes in infrastructure; enhance

employment and contribution to foreign exchange earnings. The establishment of agro allied

industry can in addition to immediate and direct benefits to farmers bring about development of

other infrastructural amenities such as improved transportation facilities, water and electricity

supply, schools and health services (Barau, 1979; Orewa, 1978).

2.4 Input Use and Efficiency Measurement

Agricultural productivity is an index of the ratio of the value of total farm input to the

value of output. The attainment of social welfare ‘parieto optimality’ of every society hinges on

the maximum use of available resources, which with every re-allocation of resources, everyone

is made better and no one is made worst off (Kutsoyianis, 1979; Black, 2000). The input- output

relationship in production process becomes important in four areas; (i) distribution of income,

(ii) allocation of resources, (iii) the relationship between stock and flow resources, and (iv)the

measurement of efficiency or productivity (Olayide & Heady, 1982). Kutsoyianis (1979) also

emphasized the principle of efficiency in the overall equilibrium of the consumers, producers

and the markets. Maximum resource productivity then means obtaining the maximum possible

30

output from the minimum possible set of inputs. In this perspective, optimal resource

productivity implies an efficient utilization of resources in the production process; thereby

expressing synonymy of productivity and efficiency (Olayide & Heady, 1982). Lassita &

Odening (2003) noted that maximum productivity also called ‘best practice’ is revealed in the

production frontier and, hence, efficiency involves the distance to this frontier.

2.4.1 Efficiency measurement

Efficiency is a term that applies in several aspects of economic life, defined by Black

(2000) as getting any given results with the smallest possible inputs, or getting the maximum

possible output from given resources. This is applied both in agricultural production and

marketing. In agricultural marketing, the term market efficiency is used to describe the

performance of the marketing system, encompassed in performance of marketing factors in

which efficiency is defined as increasing the output – input ratio (Erikson et al, (2002). Olukosi

& Isitor (1990) observed that efficiency was an engineering terminology commonly used in

machines to measure the ratio of output to input. Hence, marketing efficiency can be defined as

the maximization of the ratio of output to input of marketing (Kotler & Keller, 2006). The inputs

of marketing include the resources expended in providing marketing services such as capital,

labour and management.

Meanwhile, marketing output includes time, form, place and possession utilities which

consumers derive from the marketing of products. Therefore, marketing inputs are the cost of

providing marketing services whereas marketing outputs are the benefits or satisfaction created,

or the value added to the commodity when it passes through the marketing system (Olukosi &

Isitor, 1990; Kotler & Keller, 2006). Efficiency ratios can be measured in physical terms or in

monetary terms (Bamire et al, 2007). If in monetary terms, the concept becomes a ratio of

31

benefits to cost (Olukosi & Isitor, 1990).The higher the ratio the higher the marketing efficiency,

and the better the marketing system.

Estimating the inputs of marketing is much easier than the outputs of marketing. The

input cost of marketing is the value of all resources used in the marketing process. The best

measure of marketing output (consumers’ satisfaction) is the price consumers are willing to pay

for the farm products with different levels of marketing utilities (Shepherd & Futrell, 1970;

Downey and Trocke, 1981; Olukosi & Isitor, 1990).

Marketing efficiency, according to Kohls & Uhls (2000), Erikson et al, (2002), and

Kotler & Keller (2006) could be attained in any of the following situations:

(a) output remains constant while input decreases;

(b) output increases while input remains constant;

(c) output increase more than input increase; and

(d) output decreases more slowly than decreases in input

Marketing efficiency can be looked upon in two perspectives, operational efficiency or

technical efficiency and pricing efficiency or economic efficiency. Operational or technical

efficiency measures the productivity of performing marketing services within a firm, with

emphasis on the cost of providing marketing services. This assumes that the essential nature of

output of goods and services remain unchanged, hence the focus is on reducing the cost of inputs

used in doing the job. For instance, an innovative method of crating eggs or tomatoes may not

only increase the quantity handled in a given space, but also reduce damages during

transportation. In th