Why is bread getting so expensive in Nigeria?

If there’s one food item Nigerians love, it’s bread. Rice is a close second, but bread is our first love.  Personally, I can have bread three times a week (preferably toasted) with a cup of coffee.
 

Bread just ticks all our food boxes—it’s delicious, can be eaten anytime and with (almost) anything, and best of all, it’s relatively cheap. For Nigerians battling ridiculously high food prices, bread is the ultimate comfort food for our bellies and wallets. If you don't believe me, visit the bread aisle at Shoprite in Ikeja or Grandsquare in Victoria Island on a Friday evening, the long queues will swiftly convince you.

However, even bread isn’t exempt from Nigeria’s inflation problem—bread prices have risen. Currently, the supermarket price of bread is up by 58% from ₦500 at the beginning of the year to about ₦800 per loaf. Even “agege bread” prices have increased from  ₦100 to ₦150 per loaf. You can’t even find a loaf of bread for ₦50 anymore.

While the Russia-Ukraine war is the primary reason for the bread price hike, other factors along the value chain have also affected prices. You see, bread starts as wheat which is processed into flour. From there, bakers mix flour with other ingredients like milk, sugar, eggs, butter, and yeast. However, other cogs, such as diesel and forex, spin the bread wheel.

But the big question now is: are Nigerian consumers ready to pay even more for a loaf of bread?

Today’s story will first show you the link between the prices of these inputs and the domestic price of a loaf of bread in Nigeria. Then, we will look at how bakers are faring and establish whether you, as a consumer, can accommodate a further increase in the price of bread. 

Wheat is where it all begins

Bread is a finished product of flour which is obtained from wheat. Globally, wheat prices have increased by 42% to over $1,000 per bushel from $700 at the beginning of the year. Compared to this time in 2020, the price has nearly tripled.
 

And you guessed right; the primary culprit is the Russian-Ukraine war.
 

Russia and Ukraine jointly account for 30% of the global wheat supply. Wheat is currently the 64th most traded product globally, accounting for 0.3% of total international trade. Russia is the third-largest global producer of wheat and the top exporting country, while Ukraine is the eighth largest producer and fifth global exporting country. With the crisis lingering, Ukraine cannot produce enough wheat as 20%-30% of its agricultural land will remain unplanted this year. Moreso, the Russian naval blockade in the black sea is preventing Ukraine’s already harvested crops from being exported. Currently, over 20 million tonnes of wheat are trapped in grain silos near the port of Odesa (a significant seaport located at the northwestern shore of the Black Sea) in Ukraine.

Furthermore, as advanced countries continue to sanction Russia and boycott its exports of food and energy items, the global supply of wheat remains tight. So, with supply falling amid rising demand, prices will go up, causing more hunger. The World Food Programme (WFP) recently warned that 47 million people are at risk of hunger due to the Russia-Ukraine crisis.

Apart from supply shortages stemming from Russia and Ukraine, the United States (the second-largest wheat exporter and fourth-biggest producer worldwide) is also having difficulty increasing its wheat output. According, to the United States Department of Agriculture (USDA), bad weather conditions in major wheat-growing regions of the country are seriously tapering output. As the USDA has said, the global price of wheat will remain high in the near term on tight global supply. 
 

In the world of wheat, Nigeria is on the receiving end of global price changes. 

Nigeria’s toxic relationship with wheat imports

Nigeria is the second-largest importer of wheat globally after Indonesia. And as the global price of wheat increases, so do our import costs on the product that eventually feed into the price of flour and bread. Worthy of note is that our primary wheat import sources are Russia and United States, so you see how caught in the web we are. 

Most of the wheat consumed in Nigeria is imported as our wheat production is a meagre 55,000 metric tonnes or 1% of domestic demand. Meanwhile, consumption is approximately 5.6 million metric tons, indicating a wide supply gap of about 5 million metric tonnes that imports satisfy. 

According to the National Bureau of Statistics (NBS), the country spent $2.5 billion on wheat imports in 2021, accounting for about 6% of the country’s total import bill after Petroleum Motor Spirit (PMS) or petrol. As of Q1’2022, wheat accounted for 4.4% of Nigeria’s total imports, compared to 3.8% in Q1’2021.

In a nutshell, Nigeria’s most imported agricultural commodity is currently wheat. The deal is that we import because the local wheat supply is not enough to meet the domestic demand—typical of almost all agricultural commodities in the country, including cocoa and palm oil.

Meanwhile, we grow wheat in Nigeria, but it is not sufficient and versatile enough for manufacturers of flour and other wheat-related commodities like pasta and noodles. (Side note: there are various types of wheat categorised by season (winter or spring), texture, shape and colour, e.g. hard red winter wheat, soft red winter wheat, durum wheat, soft white wheat, hard white wheat).

You see, Nigeria produces hard wheat, which can’t be used alone to make all-purpose flour (the most common flour for baking bread and pastries). It has to be mixed with soft wheat (we do not grow that here) to create a wheat flour blend or wheat flour derivative, which will now be used to produce bread and other pastries. However, we can also get just bread flour (another type of flour) from hard wheat.

Still, as I said, we do not produce enough here, forcing manufacturers to import more hard wheat, particularly Durum wheat, which has high protein content and can be used to produce noodles, pasta, bread and even semolina flour. So, for the manufacturer looking to achieve scale, it makes sense to buy the input material that can be milled (turned) into more than just flour. And this further explains why they import as much wheat into the country. Sadly, Nigeria’s current foreign exchange (forex) crisis (we will unpack this shortly) and higher global wheat prices worsen the situation.

In addition, other factors have impeded local production, including the high cost of fertiliser, seed unavailability, flooding due to climate change and insecurity.

Of all these factors, insecurity tops the list. Here’s why. Nigeria’s 13 central wheat-producing states, including Borno, Kano, and Bauchi, are in the northern part of the country, which is highly plagued with insecurity that continues to limit output. For instance, between 2011 and 2020, Borno state recorded at least 489 fatalities during kidnap attempts. Farmers find it difficult to go farming or monitor their harvests, and they’d rather stay alive than die farming.

Another prominent factor is the high cost of fertiliser, which is imported. As of 2021, the country’s fertiliser imports rose by 65% to 706,922 metric tonnes from 429,303 in 2020. Additionally, fertiliser is a by-product of natural gas that has also witnessed a price increase. And the issue of the falling naira value and forex illiquidity is at play here. Farmers cannot nourish their crops without fertilisers to ensure a bountiful harvest, which contributes to the low domestic wheat supply.

A good piece of news to possibly cushion the impact of this problem in the wheat supply chain is the recently commissioned $2.5 billion Dangote fertiliser plant with an annual production capacity of 3 million metric tonnes. Nigeria’s fertiliser demand is estimated at 1.5 million metric tonnes.

Flooding has also affected farmlands, and some primary producing states have experienced flooding incidents that washed away crops and reduced harvest. In 2021, flooding in Kano state alone (the top wheat-producing state) destroyed 14,000 houses and 95 farmlands.

So far, we’ve established that bread is a finished product of wheat, and unfortunately, the global price of wheat is rising due to the Russian-Ukraine war. We’ve also highlighted that because Nigeria imports most of its wheat, the high international price will continue to feed into the domestic price of bread. To further explain why we import, we have also looked at the country’s abysmal state of local production compared to demand and the factors impeding the growth of our domestic wheat output. Our local production is far from demand, and the likelihood of that changing soon is wishful thinking.

Thankfully, Nigeria has the potential to grow more wheat under irrigated and rainfed conditions. And that is why the federal government and CBN have intervened in the domestic wheat industry. But as we will see soon, these policy responses and interventions have been insufficient and, in some cases, counterproductive.

Policy responses have been inadequate

The government attempted to support the local production of wheat by instituting import substitution policies to encourage local production and providing intervention funds. In the Economic Recovery and Growth Plan (ERGP), achieving self-sufficiency in wheat production by 2019/2020 was a big deal for the Buhari Administration. We are in 2022, and our reliance on wheat imports has only become bloated. One of the CBN's policies to “support local production” was adding wheat to its 2015 forex restrictions list.

However, the ban worsened the situation as wheat imports became more expensive for importers like Flour Mills of Nigeria (FMN). The ban meant importers could not access all their forex from the official channel—IEFX rate—cheaper than the parallel market rate. This increased their blended rate (average of parallel and IEFX), making imports more expensive. Also, it takes more time to get forex out for imports as the CBN keeps rationing. So far this year, the IEFX rate (the exchange rate used by importers and exporters) has fallen to ₦420 per dollar from ₦415 per dollar at the beginning of the year. 

Additionally, the CBN established a wheat development initiative in 2018 and has continued disbursing funds under its Anchors Borrowers Programme (ABP) to wheat farmers, but these didn’t yield much. Our wheat output levels have continued to underperform demand. Meanwhile, the CBN still has an ambitious plan to reduce wheat imports by 60% in 2023, and to achieve this, the apex bank may woo private investors into the wheat industry.

So, Nigeria does not produce enough wheat to meet domestic demand, explaining why we import so much. Even though we can, the intervention funds and policies in place have been inadequate, with no substantial progress. Meanwhile, the manufacturers that import wheat are battling with falling naira and FX shortages and higher global wheat prices that eventually reflect in their cost of production of flour and other wheat derivatives like pasta and noodles. Ultimately, this burden is passed on to the baker.

But rising global wheat prices (that feed into the price of flour) and our limited domestic production levels are not the only issues influencing the price of our beloved bread in the country. We will see this by actually being in the shoes of the baker. So, here’s a glimpse of what they are currently going through. 

A baker’s perspective

To bake a loaf of bread, bakers need more than just flour. They use yeast, oil, butter, sugar, and in some cases, milk. Unfortunately, the price of all these input materials has increased significantly.
 

Interestingly, the market structure for flour and sugar in Nigeria is somewhat oligopolistic, with few sellers and many buyers. For flour, you have two significant suppliers—Olam (which bought Dangote flour) and supplies Mama Gold flour. Then we have Flour Mills of Nigeria (FMN) (which bought Honeywell) and produces Golden Penny flour. For sugar, the three leading suppliers are Dangote, Golden Penny, and BUA. Remember, when demand is more than supply, prices will go up.

With limited suppliers, bakers are stuck with whatever prices they get. Often, the prices are rarely different across the board. For example, if the price of Mama gold flour is going for ₦26,200 per 50kg bag, Golden penny flour will probably go for either the same price or ₦26,300. Also, for sugar, if Dangote increases its price, at most, in the next 48 hours, other suppliers will increase their price by either the same amount or even more. Essentially, bakers are highly vulnerable to price changes and often choose between the devil and the deep blue sea.

On average, the price of all these input materials (flour, sugar, yeast, milk, and groundnut oil) has risen by 105% compared to 2019. And because consumers are susceptible to changes in the price of bread—they could move to a cheaper source of bread (think supermarket vs street) or reduce demand; bakers’ are unable to pass this cost to consumers immediately.  So, they do it gradually. 

Secondly, the operating and distribution costs for the baker are rising. For example, bakers use cooking gas (LPG)—a refined product of natural gas—to power the ovens used to produce bread. The price of a 50kg refill cylinder for cooking gas rose by 188% to ₦38,000 from ₦13,200 just two years ago.

Also, most bakeries run on diesel, and the product's retail price has increased to ₦800 per litre from ₦250 per litre at the beginning of the year, a 220% increase. In addition, the trucks and vehicles used to distribute the bread to other destinations within a state like Lagos run on diesel, which also affects their cost of operations. In an industrial bakery, maintenance of equipment and acquiring spare parts are additional costs. To purchase the spare parts, forex is needed. As we know, the value of the naira is falling, and forex is also scarce. The forex problem is affecting every level of the bread value chain.

To further explain this dire situation, imagine a baker has made financial projections for 2022, which typically happens at the end of the previous year, and the worst-case scenario for an increase in a running cost like diesel is that the price increases to ₦320 per litre compared to last year’s price of ₦220 per litre. But now the diesel price has risen to ₦800 per litre, with no end in sight.

Anthony Ezeji, the owner of Easy Bite bakery located in Opic, Lagos, told Stears that the prices of these input materials increase weekly. Yet it's almost impossible to keep hiking the price of your product every week.

Another baker, Yinka Omogoye, MD/CEO of Demiller Industries, who produces bread and the famous classic peanut, says that most bakers are just getting by instead of shutting down operations. Some have eaten into their capital to keep the business running while hoping for the best.

As a baker, reducing quality is never the goal especially when you have a class of consumers you sell to. So, the only options are absorbing some costs and passing the rest on to the consumers. That’s why the price of bread is rising. Currently, the national average price is up by 35% compared to last year, and the price could keep increasing due to this unending increase in the cost of production for bakers.
 

Furthermore, to reduce costs, some bakers miniaturise (reduce the quantity of the loaf). In contrast, others tweak their production, e.g., reducing or increasing the number of laminates or the size of the dough to generate more output and, in turn, make sales.

Also, as their costs increase, they are unable to increase the salary of their workers. Omogoye, who runs an industrial bakery, explained that he used to increase the wages of his workers every six months, but since the spike in costs, that hasn’t happened.

Overall, we see that bakers’ are going through headwinds from rising input materials costs and high operations costs. These costs, which seem unending, are already being passed to the consumers in the form of higher prices and, sadly, will likely continue.

Nigerians are not ready

In the midst of all these, Nigerian consumers aren’t ready to pay more for the price of bread. Nigerian consumers are already buckling under the weight of the country’s 19% food inflation, and any additional cost is highly unwelcome. But unfortunately, it's inevitable.

A key point here is that commodity prices are often sticky downwards, meaning that prices are easier to rise than fall. And this is likely going to be the case with bread and other wheat derivatives. So, even if the Russia-Ukraine war ends today, and our domestic issues like the type of wheat we produce and forex illiquidity are still in the picture, it is unlikely that the price of bread will fall sharply anytime soon.

A possible solution to our production levels would be for the government to continue its intervention programs to encourage more participation in wheat production.

Constantly, throwing money at farmers has not fixed the issue and will likely not in the near term. The government has to tighten the loose ends around monitoring and execution to ensure that the money or seedlings distributed are used appropriately.

It is also essential to stop counter-productive policies like the outright restriction of forex to manufacturers that create sudden supply shocks. The CBN and federal government need to institute these import substitution policies gradually to curb sudden changes to highly inflationary prices. Public-private partnership is another good option for the wheat industry in Nigeria. In a situation where private players are significantly involved in farmer sensitisation, training and providing seedlings could help. Meanwhile, the government could provide certain tax exemptions and business-enhancing regulations that would not only support the growth of the private companies but ensure efficiency and increased output.

To tackle the issue of the type of wheat we produce here, we can always get seedlings to replant in different regions of the country, as the weather is a significant factor in wheat production. Remember the old but relevant story of Malaysia coming to take palm kernels from Nigeria to replant. Now, they are the second-largest producer of palm oil globally.

Although, increasing wheat production is not the only problem that needs a quick fix. The price of other input materials like diesel is a big issue. And this highlights the need for the government to hasten its steps toward improving our refining capacity and reducing our exposure to global oil shocks.

While these solutions are more long-term, a short-term approach would be for the CBN to increase forex availability to importers. It’s a long shot, considering our sources of forex income are declining, but it's worth the try. Nigerians really love bread, and the government needs to ensure we have as much at the best price possible.