Dollar rationing pushes Nigeria wheat buyers to parallel market

Flour millers in Nigeria, Africa’s biggest buyer of wheat, are turning to unauthorized traders for dollars to purchase the commodity after the central bank restricted the use of the greenback to import the grain.

“The central bank is deliberately looking at ways of managing the import bill and the deployment of dollar reserve,” said Honeywell Flour Mills Plc Managing Director Lanre Jaiyeola in an interview in Lagos. “This means we have to look elsewhere for the shortfall.”

Nigeria lacks the capacity to produce the commodity, harvesting just 1% of the 4.7 million tons of the grain that it will consume this year, according to the U.S. Department of Agriculture. Most of the wheat is milled into flour for bakeries or used to produce pasta and other wheat-based foods like bread.

The pandemic-induced plunge in crude prices last year reduced foreign-exchange earnings at Africa’s largest oil producer prompting the Central Bank of Nigeria to tighten curbs. The regulator has been managing demand for dollars by placing wheat and other goods on a list of products that aren’t eligible for foreign exchange. The region’s biggest economy had about $33.6 billion of reserves as of June 22, down about 6% this year.

The central bank also wants to avoid putting pressure on the naira, which has been devalued thrice since March last year.

Single Digits

Nigeria’s flour millers used to source all of their foreign currency needs through the central bank, according to Jaiyeola. “This has gradually reduced to about single digits currently,” he said.

It’s also more expensive. The dollar is at least 22% more expensive than if they got the greenback from the central bank.

While the local unit traded at 411.16 naira to the dollar in the official interbank market as of 7:00 a.m. local time Thursday, the rate was 500 naira to dollar in the parallel market, according to abokifx.com, a website that collates the rates. Millers pass along the higher prices to consumers in the country where food inflation is already more than 20%.

The situation has forced flour millers to collaborate with domestic wheat growers to improve production and reduce some of the upward pressure on prices. The Flour Millers Association of Nigeria is working with the central bank to develop the capacity of farmers to grow improved varieties of the grain. “This period created the need to rethink and review the local wheat value chain,” Jaiyeola said.

Millers have set a target to take local wheat content to at least a million tons within a year and to 50% eventually. “It’s something that we have to do conscientiously working together with all the stakeholders, but the way we have started, it is clear to me, and it is clear to us in the industry that solution will come,” Jaiyeola said.

However, banditry and frequent incidents of kidnapping in the food producing northern part of the country have hampered prospects of boosting output immediately.

The changes have also increased the confidence of farmers to invest in the sector as they now have improved access to the market, according to Salim Mohammed, president of the Wheat Farmers Association of Nigeria.

“We are planning to cultivate 1.2 million hectares (3 million acres) this season and expecting to produce 3.6 million tons, which is almost half the demand and supply gap,” he said.