Inflation kills profit growth for Nigerian agribusinesses

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Three listed Nigerian agricultural companies posted an aggregate profit after tax of N3.5 billion in the third quarter of 2022, a decrease of 39.6% from the N5.79 billion in the third quarter of 2021 and a 76.3 % lower than the N14.8 billion recorded in the previous quarter. .

The net income of the three companies decreased significantly as a result of the high cost of sales, which eroded their margins in the period under review. This is according to data compiled by Nairalytics, the research arm of Nairametrics from companies’ financial statements.

The three companies under consideration are Livestock Feeds, Okomu Oil and Presco Plc, all of which operate in the Nigerian agricultural industry. They generated an aggregate revenue of N30.91 billion in the third quarter of 2022, a decrease of 32.7% from the N45.92 billion registered in the previous quarter, although it is 32.7% higher than the N23.9 billion naira recorded in the corresponding period of 2021.

Margin drops: Despite the year-over-year increase in its top line, its net profit fell significantly in the review period, hampered by disproportionate increases in cost of sales and operating costs.

  • Specifically, a sum of N17.58 billion was spent on cost of sales, which is 69.8% more than the N10.35 billion spent in the same period last year, and 11.1% more than the previous quarter (N15.82 billion).
  • Companies operating in the country have had to deal with the high cost of raw materials, diesel and other operating expenses, which has affected the companies’ results.
  • The high cost of sales can be attributed to the depreciation of the naira against the US dollar, which has fallen more than 35% so far this year. The exchange rate has been affected by the increased demand for foreign currency in the country, in the midst of a sustained low supply.

Russia-Ukraine – We also believe that the high cost of goods and services around the world, following the war between Russia and Ukraine at the beginning of the year, in which the cost of energy shot up to a record level, triggering a chain of pressure inflation in most economies.

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Control of inflation: Nigerians have been dealing with high costs for goods and services over the years, and even worse in recent times.

  • The headline inflation rate hit a 17-year high of 20.77% in September 2022, while the three-month moving average for the third quarter of 2022 accelerated to 20.31% from 17.71% in the previous quarter.
  • Food inflation is also at a maximum of 23.3% and has been the main driver of the inflation rate in the country.

Breakdown of the numbers: Superficial review of the results of the consumer goods companies surveyed by nairametry it also reveals a pattern of widespread cost-induced declines in margins.

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  • Presco Plc posted a net profit of N2.4 billion in the third quarter of 2022, a decrease of 34.1% from the N3.6 billion reported in the corresponding period of 2021.
  • Revenue grew 37% to N17.49 billion from N12.77 billion, however a 57.5% rise in cost of sales to N9.09 billion caused both operating profit and net profit to decline. the review period.
  • Okomu Oil Palm in the same line posted a 27% year-on-year growth in its revenue, recording a top line of N9.42 billion in contrast to N7.42 billion recorded in the corresponding period of 2021. Meanwhile, the cost of sales accelerated by 289%, from N1.21 billion in the third quarter of 2021 to N4.72 billion in the review period.
  • As a result, Okomu Oil posted a net profit of N1.21 billion in the third quarter of 2021 compared to N2.07 billion in the previous year, representing a decrease in profit of 41.3%.

Like the others, Livestock feed achieved a marginal revenue growth of 7.3% in the period under review, while a 12% increase in cost of sales and operating cost led to a net loss of N114 million in the period under review. compared to the profit of N83 million recorded in the third quarter of 2021.

Food manufacturers also suffer: Consumer goods companies that depend on agricultural products also suffered a significant drop in their margins due to the excessive cost of production and operating expenses.

  • A cursory review of the financial statements of Honeywell Flour Mills showed a net loss of N4.96 billion between July and September 2022 from a profit position of N203 million recorded in the corresponding period of 2021.
  • This is despite a marginal increase in its sales revenue from N34.85 billion to N35.83 billion year on year. Similarly, Cadbury Nigeria saw its net profit for the period fall substantially by 76.6% to N474.8 million from a profit of N2.03 billion recorded in the same period last year, despite an increase in income.

A combination of increased cost of sales and distribution expenses hampered Cadbury Nigeria’s performance in terms of profitability. Meanwhile, companies such as Nestle Nigeria and BUA Foods were able to post profit growth despite incurring a large outlay on their cost of production.

Flood Concerns: Recent flooding incidents in the country have clouded the financial performance of several farms across the country, raising questions about the food supply as much farmland has been submerged by flooding.

  • Olams Farm, which operates the largest rice farms in the country, reported last month that it lost more than $15 million worth of rice farms due to flooding, while many citizens have been displaced, others have lost their lives.
  • Various businesses have been affected by the flooding incidents in the country, especially farmland. This could have a negative effect on the financial performance of companies operating in the agricultural sector.

Benefits of agricultural companies
Source: Nairalytics

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