AN ECONOMIC APPRAISAL OF THE RUBBER PROCESSING INDUSTRY IN BENDEL, OGUN AND ONDO STATES OF NIGERIA BY ADEBIYI ADESIDA B .S c . Agricultural Economics And Extension (Ibadan) 1974. A Dissertation in the Department of Agricultural Economics SUBMITTED TO THE FACULTY OF AGRICULTURE AND FORESTRY IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF PHILOSOPHY (AGRIC. ECON3) OF THE U NIVERSITY OF IBA DA N . SEPTEMBER 1977 ABSTRACT This 'study attempts to assess the economic performance of the rubber processing industry in Bendel, Ogun and Ondo States of Nigeria. The Nigerian rubber industry wh ich expeiienced a boom in the early 1950's started to face some serious set-backs during and after the civil war which broke out in 13G7. This set­ backs were manifested in form of declining productivity and conse­ quent decline in its contribution to foreign exchange earnings. The study which covers the period 7-1 assesses the economic oor- formance of some rubber processing firms in the three states mentioned above in order to identify some of the factors responsible for the set-backs in the industry. The data used for the study were collected mainly through the use of questionnaires and personal interviews. Other sources of data include Federal office of statistics and ministries of Agriculture and Natural Resources in all the three states. Chapter 1 assesses the economic importance of rubber industry in terms of foreign exchange earnings , employment generation and value added to the Nigerian economy. The rubber industry contributed 6.2 percent of the country's total export earnings in 1363. By 1972, it accounted for 4 r7 percent of the country's industrial labour force and i l l Chapter 6 uses non-parametric statistical technique to assess the factors limiting expansion and economic performance of the industry. The major limiting factors are lack of capital and inadequacy of raw materials. Labour is not a limiting factor although the industry i9 short of skilled and managerial personnel. A financial analysis for the industry and the estimation of a profit function for rubber processing industry were the major highlights of chapter seven. The financial analysis shows some weak points in financial management positions of some firms while the profit function shows that volume of sa le s , and selling expenses are the two major factors affecting profits in the processing industry. Some policy recommendations were advanced and these include the need for individual processors to strive to moke use of their under utilized capacity instead of plant expansion. Also, each processor must upgrade his management capability. The rubber commodity board should (i) appoint a committee to look into the present state of affairs of the rubber industry, establish rubber lumps marketing centres and make provisions for price incentives to producers of natural rubber at all levels Iv ACKNOWLEDGEMENT I am greatly indebted to rofessor Olayide, my able heed of Department for his much appreciated effort to see that I undergo this graduate work. My whole-hearted thanks go to Dr. S.A . Oni, mi _ rvisor, for the interest he has shown in me throughout my career as a student and the pains he took all through this work. His constructive criticisms and suggestions have been very valuable. I also wish to extend my gratitude to Dr. Aklnwumi for his Dr, Ikpi, members of my dissertation committee for offering helpful suggestions and assistance at various stages of the study. I have been associated with several people and organisations during this study. I wish to express my sincere gratitude to Mrs, Oni and M rs. Osofisan both of Computer centre of University of Ibadan for helping to write-up and run the programmes for the study. I am partifularly grateful to Mr, Owumi, the Managing Director of Okpe Trading Company, Amukpe for his valuable historical background information of the Rubber Industry, My thanks also go to all rubber processors especially Mr. Quinn, the Manager of Lewis and Feat (Nig.) Limited. Ogbarafe for giving me a free access to their firms' records V I am grateful to the various Officers in the industrial Survey of the Federal Office of Statistics Lagos, the States Ministries or Agriculture and Natural Resources for providing relevant Information to the study. Next, I must express my appreciation to Professor and Mrs. Dupe Olatunbosun who have contributed immensely to my education. ivy appreciation goes to my beloved uncle Mr. Adebobajo Adesida for his fatherly love, who apart from being responsible for my education, bought me a car to facilitate my graduate study. My thanks also go to my brother, Mr. Adewole Adesida for his wonderful fatherly affection. I am greatly indebted to my most understanding and kind uncle, Adetiloye Adesida , for his personal interest in me. Also, I wish to express my appreciation to Miss Rhod Okiigbe of IITA , Mrs . Damilola Adeniyi of CRIN , Mr Olaleye Audu , Miss Ayomide Ig e , and all the office staff of Department of Agricultural Economics , University of Ibadan for their patience and Co-operation in providing secretarial services. f i n a l l y , I must express my appreciation to my w ife, Moji and our daughter, Tutu, who gave me all the assistance during hard-time and encouragement throughout the period of this study. Vi I certify that this work was carried out by Mr. Adebiyi Adesida in the Department of Agricultural Economics , University of Ibad&an. Senior Lecturer in the Department of Agricultural Economics , University of Ibadan - Nigeria. TABLE OF CONTENTS PAGE ABSTRACT , . , i - ii AC KNOWLEDGE M ENTS iv - ✓ CERTIFICATION . . . TABLE OF CONTENTS LIST OF TABLES . . . LIST OF FIGURES . . . xvi CHAPTER I The Economic Importance of in Nigeria 1 General Consideration 1 Employment Generation 5 Value added by Rubber Industry G Secondary Benefits 0 Historical Development of Rubber Processing in Nigeria 10 nd Justification of study 15 Objectives of St udy 18 .'Ian of Thesis . . . 13 v iii pa: CHAPTER II REVIEW OF LITERATURE. METHODOLOGY AND DATA SOURCE', 21 Review of Previous studies . . . . . . 21 ■ cthodology . ... 23 Area of study . 23 Selecting the sample 2 : Sources of Data . 25 i-rimary Sources . 2 C Secondary sources . 25 Limitations in Data . 27 The techniques of Analysis 28 CHAPTER III BACKGROUND TION OF THE SAMPLED RUBBER SSING FIRAiS The location of the Rubber processing firms Factors determining the location of each firm in the industry . . . . . . . . . 2 J Types of Business Organisations . . . . . . 31 Capital Investment Pattern . . . . . . O sj Employment structure . . . . . . 31 The major inputs in rubber;processing . . . 38 X c:An'.-ter iv page :OSTS. .\ND RETURNS ANALYSIS IN RUBBER PROCESSING r \ analysis of Costs . . . 61 Theoretical considerations . . . . . * 61 Gthodology . . . . . . < x P 63 Cost of rubber processing . , . 64 Cost of raw material , . . 57 Labour cost . . . v V ; 67 Celling and Shipping expenses 6F $ r - Fixed cost . . . SR returns analysis . . . 70 CHAPTER V COST FUNCTIONS FQ]>R RUBBER PROCESSING INDUSTRY 32 reliminary considerations . . . • • « 32 The Basic Model . . . • • « 3 1 Cost-output relationship . . . • • • 34 Data sources and Empirical Results • • • 35 Optimum point of Production . . . • • • 101 C ARTER VI FACTORS LIMITING THE EXPANSION AND ECONOMIC PER- FOR MANGE OF THE RUBBER PROCESSING INDUSTRY 105 Factors limiting expansion . . . • • • 105 x i PAGE Interpretation of results . . . . . . I l l Factors limiting the Economic performance of the rubber processing firms . . . . . . 113 Lack of Capital . . . . . . 113 hortage of spare parts and maintenance workers . . . Shortage of raw materials . . . 115 Labour Problem . . . 117 i -arketing Problem V * . . . 116 CHAPTER VII .^ j , iNALYSIS OF FINANCIAL STATE?R i en ts AND ESTIlviATION CF EOF IT FUNCTIONS OF TS pUBBER PROCESSING INDUSTRY 11 j reliminary Consideration « . . . 113 Financial Ratios and their use in Business Management i i : Types of financial ratios . . . . . . 121 Profitability ratios . . . . . . 121 Rate of return on operating Capital . . . 122 Ratio of fixed cost to total revenue . . . 12 i Rate of return on volume of sales 12" Liquidity Ratios . . . . . . 12 5 Solvency Ratios . . . . . . no Analysis of Factors Influencing profits in the rubber processing firms . . . . . . 131 x ii PAGE .’he basic model . . . . . . jf ypotheses . . . . . . 137 Estimating procedure . . . . . . 13C- Empirical Results . . . . . . f t 30 Eliminatig autocorrelated errors from the model 112 Empirical results of the adjusted model 1 15 C :IA ITER VIII t f t SURif .ARY AMD CQNCL.US IONS 151 Summary of Major Findings I r " 151 Limitations of the study 150 General conclusions and policy recommendations 161 j r K References . . . . . 155 Appendix I . . . . . 172 Appendix 1 7 3 x lii LIST or TABLES Table PAGE 1.1. Comparative earnings from Nigeria's major agricultural exports . . . 1 .2 Volume and value of rubber exports from Nigeria (I960 - 1973) . . . 1.3 Percentages change in volume and value of total export of rubber from Nigeria (1960 - 1973) 1.1 Employment in the rubber manufacturing industry compared with total employment in all industrial establishments in Nigeria (1965 - 1972) . . . 1.5 Value added fcr the rubber manufacturing establishments employing ten or more persons in Nigeria (195B - 1973) . . . 1 .5 Processing firms in the area of study as at December, 1976 . . . 15 3.1 Location of rubber processing firms state - wise comparison . . . 30 3.2 Factors determining the location of each firm in the industry . . . 31 3 .3 Types of Business Ownership 32 3.4 Sources of Investment funds . . . 33 3.5 Employment distribution by categories in the firms in 1974 and 1975 . . . 34 3 .5 Employment distribution by categories in each firm 1974 and 1975 . . . 35 x iv PAGE T a b le 3.7 Employment distribution by categoris in each firm 1975 . . . . . . . 35 3.3 Size of firms as determined by number of employees 1974 and 1975 . . . 37 3.9 Size of firms as determined by value of Turnover 1974 and 1975 . . . 37 3.10 Size of firms as determined by the present value of assets 1975 39 3.11 Sources of Raw materials . . . 40 3.12 Types of Finished products . . . 12 3.13 The setting of rubber prices . . . 58 4.1 Cost outlay for the rubber processing firms in 1974 . . . . . . 71 4 .2 Cost outlay for the rubber processing firms in 1975 . . . . . . 72 4 .3 Cost outlay for the rubber processing firms percentages 1974 . . . . . . 73 4.3a ^ Miscellaneous cost outlay 1974 . . . 74 4 .4 Cost outlay for the rubber processing firms in percentages 1975 . . . . . . 75 4.4a Miscellaneous cost outlay 1975 . . . 75 4 .5 Labour cost in relation to total cost in 1974 77 4 .6 Labour cost in relation to total cost in 1975 78 yx y•/ PAGE -able 4 .7 Raw materials cost in relation total cost 1974 cost 1974 . . . . . . 79 4.3 Raw materials cost in relation to total cost 1975 TO 4 .9 Selling expenses in relation to total co st 1974 31 4 .10 Selling expenses in relation to total cost in 1975 82 4.11 Fixed costs in relation to the total cost in 1974 63 4.12 Fixed costs in relation to total cost in 1975 81 4.13 Gross receipts, total cost »nd net revenue 1974 0-5 4.14 Gross receipts, total cost and net revenue in 1975 £7 4.15 Gross receipts , cost and net returns for the processing firms in 1974 . . . 86 4 .16 Gross receip ts, cost and net returns for the processing firms in 1975 . . . 89 4.17 Net returns per tonne of processed rubber in all the processing firms in 1974 and 1975 91 i . l Cost functions for rubber processing industry TVC/O 1974 . . . . . . 97 5 .2 Cost functions for rubber processing industry TVC/Q 1975 . . . . . . 98 5 .3 Cost functions for rubber processing industry TC/O 1974 . . . . . . 99 5 .4 Cost functions for rubber processing industry TC/0 1975 . . . . . . 1 0 0 X V i .'able r>* , ***“7i , t . . 3.1 Ranks assigned to the factors affecting the expansion of the rubber processln industry in order of imponiance . . . 10 5.2 Analysis of ranks assigned to the eight statements by sixteen rubber processors 110 7.1 Rates of return on operating capital / .Jk 1074 - 1975 . . . 121 7.2 Ratios of fixed cost to total revenue 125 7' «o ̂ Rate of returns on volume of sales . . . 127 7 A Liquidity ratios of some firms in the rubber processinj industry,. . . . . 12 7 c Solvency ratios of some selected firms in the rubber processing industry , . . JiL J-> .i 7 ,o 1074 Profit functions for rubber processing industry . . . . . . 1 0 7 .7 Correlation matrix for the selected factors affecting profits . . . . •. * 1 Rrofit functions for rubber processing industry in 1074 . . . . . . 1V4 ’ V Profit functions for rubber processing industry in 1074 . . . . . . 1 fit 7 .10 Correlation matrix for the selected factors excluding volume of sales . . . l j : 7.11 Profit functions for rubber processinj Indus try in 1974 . . . • • • 14 7 x v li Table PAGE 7.12 Profit function for rubber processing Industry in 1974 . . . 7.13 Correlation matrix for the selected factors excluding volume of sales 149 & xv/lii LIST OF FIGURES FIGURE PAGE Chart showing rubber sheet processing 45 II Chart showing crepe rubber processing 52 III Chart showing crumb rubber processing 56 IV Chart showing the marketing and distribution channels of rubber . . . 5 J ' " / CHAPTER 1 INTRODUCTION 1. THE ECONOMIC IMPORTANCE OF RUBBER IN NIGERIA A. fifing^ g.gnglderatigfl Prior to the advent of petroleum on the Nigerian economic scen e, rubber ranked fourth as Nigeria's most valuable agricultural export commodity In 1960, rubber accounted for about 6 percent of its total export earning.. and in terms of aggregate figure , rubber export was estimated as N28. 5 million. Table 1.1 below shows the com importance of rubber comings in relation to other major export commodities. It can be observed fror. this table that the percentage contributions of rubber to Nigeria's export earnings have declined drastically from about 8.4% in 1960 to 0.57% in 1974. This decline in percentage contribution of rubber is primarily due to the fact that the entire agricultural exports have been relegated to the backgrounc. followir. the upsurge in petroleum export as well as the expanding domestic market for rubber leading to reduction in total rubber exports. Nevertheless , rubber is still a significant agricultural commodity i.i Nigeria, particularly so in Bendel State where about 90 percent of Nigerian rubber output is produced. Table 1.2 summarizes the trend in volume and value of rubber experts in Nigeria. It can be noted fror.. the Table that the volume of rubber exoort 2 Table 1 1. Go, -irn tive earnln s fror I;Iberia's isjor a:;rric iltural c x pxorts Total Rubber Palm oil Palm Kernel Jiroundnu /sygrojate oi? Fiv i Year Exports (Mn) % % % % % of Total Exports 1960 339.4 13.5 21 .6 67.1 1961 347.2 18.5 19.4 63.3 1952 337 19.2 19.8 62.2 1953 379.4 19.2 17 .0 58.3 1964 429.4 16.0 18.7 55.2 1965 536.6 14.1 15.9 49.1 1356 542 13.1 20.2 43.3 1367 568.2 U .4 9 .3 39.5 1963 422.2 £ .0 12.1 25.02 1939 635.8 5 .6 8 .3 17.06 1370 1885.7 2 .3 7.06 11.48 1971 1293.4 1.3 11.14 16.24 1972 1411.9 1 .3 7 .16 10.07 1973 2277.4 2 .0 4 .9 8 .57 1374 5794.7 0.12 4 2 .6 4.04 COUP Annual abstract of statistics and digest of statistics (various issues) F .C .3 . Lagos. These percentages were obtained by summing up the naira value of the five export crops amnd finding what percent the amount is of total export value. '3 * 3 . -le 1 .2 . Volume and value of rubber exports from Nigeria (1960-1973) Total exports Value of all Percentage of all Year from Nigeria (TONS) exports (N,000) export earnings (%) 1960 57,229 28,478 1961 55,167 22,048 6.3 1962 60,591 2 2 , 7 1 ^ ^ 7.9 1363 64,152 23,576 6.2 1364 73,226 24,332 5 .7 1965 68,963 21,976 4.1 1966 71,398 & 22,948 2.3 1957 48 ,646 12,694 4 .0 1968 52,807 12,622 1.5 1969 57,288 19,288 1.5 1970 ^ 59,286 17,568 0.92 19 51,072 12,406 0.96 1972 41,802 7,350 0.49 1973 49,385 19,396 0.85 SOURCE: Annual abstract of statistics digest of statistics (various issues) F. O. S . Logos. 4 1.3 : Percentage change in volume and value of total export -; of rubber fron Nigeria (1960-1973) Total exports Percentage Value (N,000) Percentage Year (TONS) change change — 1960 57,229 28 1961 55,167 - 3 .6 22,048 -2 2 .5 7 1962 60,591 22,712 -2 0 .2 5 1963 64,152 23,576 -17 .21 1964 73 ,226 24,332 -1 4 .5 6 1955 68,963 21,976 -2 2 .8 3 1966 71,398 22,948 -1 9 .4 2 1967 48,646 -1 4 .9 9 12,694 -55 .43 1968 52,807 - 8 . 0 8 12,622 -5 5 .6 8 1969 57,288 0.10 19,288 -3 2 .2 7 1970 59.286 3.59 17,568 -38 .31 1971 51,072 -1 0 .7 6 12,406 -5 6 .4 4 1972 41 ,802 -2 5 .9 6 7,350 -7 4 .1 9 1973 49,385 -13 .71 19,396 -3 1 .8 9 SOURCE : Annual abstract of statistics and digest of statistics (various issues) F . C. S . Lagos. 5 was on the increase until the civil war broke out in the country in 1966. Since the war broke out and even after the war, there has been a decline in both volume and value of rubber export. The decline in export earnings from rubber can be attributed to the decline in rubber prices and the rise in production of the synthetic rubber which has virtually become a perfect substitute for natural rubber. The presence of synthetic rubber also subjects the world market price of natural rubber to wide fluctuations. At present , like many other agricultural products, rubber prices vary from week to week at international markets. In order to assess the trend in volume and value of rubber exports , Table 1.3 was computed, using 1960 volume and value as the base. It can be observed in this table that the volume shows initial increasing and later declining trend while the value shows a general declining trend which is a reflection of the falling prices obtained for natural rubber. B. Employment generation Probably, the most significant contribution of the rubber industry to the Nigerian economy is the high employment opportunities it offers to both the rural and urban population. Anschel estimated that between 134,000 to 304,000 people representing 12 to 15 percent of the Bendel state active population are engaged in peasant rubber production (1) . 5 Also, In terms of industrial employment, rubber manufacturing firms have always ranked high in employment generation. The industrial , survey in 1972 showed that about 8 ,000 people were employed by rubber processing industry. This represented about 4 .7 percent of the country's total industrial labour force at that time. The industry therefore goes a long way in helping the nation to achieve self-reliance and self-sufficiency in that it provides relatively large quantities of both skilled and semi­ skilled labour. The industrial survey also indicated that about 3 .7 percent : o l n of the total labour force in the rubber industry was either skilled or semi­ skilled. Table 1.4 shows only the nlumbter of people employed by all rubber manufacturing firms including the plantation factories but excludes peasant smallholders. Also, in the rural areas , a lot of skill and experience have been acquired at different levels in the industry. This embraces the smallholders, tappers and rubber curing workers. People who work in the factory acquire, over the years , the technical skill required to handle the processing machines. Almost most mills train some processing managers on the job. C . Value added by rubber industry Another important aspect cf the industry is its contribution to the country's gross domestic product in terms of value added. For the past 7 ’■ 'bla 1 .4 . Employment in the rubber manufacturing industry comDarcc. with total employment in all industrial establishments in Nigeria (1965 - 1972). — — - ' S t - Year Number employed by all Number employed by (b) industrial establishments rubber industry as % ox (a) (b) (° J — 1365 95,614 6,823 7,14 1967 76,395 3,12 1368 86,721 ^ 3 , 362 3.88 1969 102,532 6 , 102 5.95 1970 129,203 8,589 6. 65 & 1371 145,445 ^ 6,013 4.13 1972 167,47(>v 7,660 4 .57 GURCE : Annual abstract of statistics (various issues) F .O .S . Lagos. 8 Table 1 .5 . Value added by the rubber manufacturing establishments employing ten or more persons in Nigeria (1965-1973) Year No. of Gross output Industrial costs Valu ed (# ,000) estab. (# ,000) ( # 000) (a) (b) , - (c). -----------------------------: v 1955 35 22,882 12,994 9,888 1967* 21 12,618 6 ,4 5 6 ^ > * 6,162 / N \ 1368* 25 17,919 8,444 1369* 31 27,022 i T /744 12,282 1970 33 34,312 18,640 15,672 1971 27 59,924 35,036 24,888 1372 35 37,490 20,333 17,157 1973 29 39,755 19,423 20,332 - \ < y oCURCE ual abstract of statistics (various issues) F .O .S . Lagos. Excludes Imo, Anambra, Cross River and River States of Nigeria. 9 ten years the rubber manufacturing sector has shown some encouro ing trends in its value added in the economy. This may be due to some protection and other industrial incentives accorded the firms in the industry. Table 1.5 summarizes the value added by the rub between 1965 and 1973. The term value added is h fined by the- Federal Office of Statistics as the naira value difference between the value of gross output and the industrial costs of the industry. The value added by rubber industry rose from *#9.3 million in 1965 to M24.9 million in 1971 but dropped to *#20.3 million in D. Secondary Benefits r v The rubber industry like most other industry provides two types of benefits. These are the direct economic benefits which can be measured in naira value as discussed in section A to C and the secondary benefits which are also important for economic development purposes. The esta­ blishment of a new rubber plantation/factory is likely to be accompanied by such activities as road building, housing construction for workers; establishment of markets and the building of schools for staff children. These activities help in no small way to develop the areas and thus make life more comfortable for the people living in these areas. The rubber - 10 - plantations in Bendel, Ogun and Ondo states helped to enhance the living- standards of the people around the project sites and thus reduced the drift of rural people to the urban centres. An example of such plantation is the Pamol Rubber Estates in the Bendel state of Nigeria. It has well built rodds , camps for all grades of workers with both electricity and pip'-- bome water. Also it provides school for staff children, n. HISTORICAL DEVELOPMENT OF RUBBER PROCESSING IN NIGERIA The rubber processing industry is made up of a group of firms and mills that process natural rubber in the form of la tex , scrap and lumps into semi-finished forms such as rubber sheets , crepe and crumbs. These are intermediate products which are either exported or consumed by local manufacturing firms. These products can be further processed into finished and final products such as tyres and tubes , shoes, mattresses , bags and many wearing apparels. There has been a lot of questions and debate as to the exact form in which natural rubber was first exported from this country. As documented by 3ara Berry, natural rubber was first exported from the country in 1885 , the export being about 534 pounds and it rose over a decade to about 5 ,069 ,577 pounds in 1895. The great increase in production was due to the 11 exploitative activities of some commercial Ghanaians who exploited and ruined all available rubber producing trees in the southern parts of the c o u n t r y ^ . In an attempt to replenish the trees , government s tarted the ..rowing of the high yielding rubber specie Funtumia elastica in plantations and . at the same time encouraged the villagers to establish communal plantations in suitable places near the villages. There was an enthusiastic response to this c a ll , particularly around the Bendel state area. Many farmers took to the cultivation of natural ru bber and also many private investors w established large rubber plantations. Among these were JoThomas rubber estate which, according to its chairman, was established in 1899 and subsequently started to process rubber around 1925. The Millers Brothers established another rubber estate at Sapele just about the same time. Also, in 1907, an English firm established another estate at Ikot Mbo in the Cross River State of Nigeria.'(57) Most of the rubber export from this country before the 1950s were processed by rubber smallholders. In most c a s e s , they employed primarily very crude processing methods which in a way led to the low quality reputation earned in the international market by the Nigerian export processed rubber. Instead of using the standard coagulants such as formic acid and acetic acid , the smallholders mode use of cassava starch water, citrus 12 juice from various wild trees for the coagulation of their latex. Usually, a bottle was used to roll the coagulum until the required thickness wns attained. This would then be passed several times through the hand- mangle (smooth roller) until the sheet gave a standard thickness of about 1 /8 -1 /4 of an inch. Smoking of the sheets was carried out by the small­ holders in a kitchen combined with the drying in the sun whenever the weather was bright. The then prevalent poor quality made the former Western Region government (which was made up e l , Ogun, Oyo, Ondo and parts of Lagos states) to step up its development activities concerning the entire rubber industry. It embarked on various programmes to train peasant rubber holders , tappers and processors. Seeing that not much success was achieved, government started to establish co-operative processing factories in the villages. Government's aim was to assist the smallholders in getting better priced sheets by using modem processing techniques. This was welcomed by the farmers and many villages were formed into co-operative processing societies. In order to encourage indigenous enterprising private investors , government decided to set up a model sheet rubber factory at Benin. 13 This was to demonstrate to the people the gains and benefits from factory rubber processing. So between 1950 and I9 6 0 , there were many commercial rubber processing factories in the region Including six rubber plantation factories. Almost all the factories were engaged in rub!toer sheets pro­ ■ T v duction but with time many either changed completely to or incorporated crepe rubber production. Although, this has lower selling price, it was easier and less complex to manufacture. In addition, crepe rubber has a relatively lower cost of production. In the late 1960s, smallholders' manual methods of production of rubber sheets and crepe were virtually discontinued. They instead concentrated mostly on the production of rubber lumps to feed the existing m ills. The practice of paying a flat price on the basis of weight without much regard to quality, coupled with the low prices of lumps encouraged the lumps producers to adulterate their rubber lumps. The presence of these adulterants which ceuld not be removed during the processing of lumps into crepe rubber was also in part responsible for the low grades of crepe rubber. In the last decade, especially during and after the civil war, many processing firms had folded up due to the acute shortage of raw materials. (25a) , Karris reported in 1965 that there were more than 20 firms engaged (3 6) in the industry. In 1966, Lloyd reported that about 18 cropping factories were in operation and C'kereka in the middle of 1963 stated that there were 13 crepeiny factories excluding the plantation factories. At the time of the present survey (November - December 1676),. there were about 14 factories including 5 plantation ies in the Bendel State that were engaged in either rubber sh eets, crepe or crumbs production. Out of these, only 2 mills were established after the civil war, while in Ogun and Ondo states there were only 3 plantation integrated factories. At the time of this survey )% of the non-plantation factories are working below 50% of their installed capacity as a result of shortage of raw material. If this continues for the next decade, probably only the plantation mills would continue to process rubber, the other marginal factories having being forced to close down. Another aspect of the problem peculiar to the industry is the diver­ sification of products. As mentioned earlier, rubber sheets processing was the first to be introduced into the country, followed by crepe pro­ duction. The changing to crepe production involved the purchase of new sets of crepeing machines and other capital necessary investment. Between 1969 and 1970, however, some firms as a result of a new type 15 of rubber product termed rubber crumbs developed in N.'alaya , commenced production of rubber crumbs. The technological process differs a little from those of rubber sheets and crepe, hence new capital investments had to be made by any existing firms that wished to produce crumbs. Crumb rubber has some advantages over other products. It can be put into a variety of u ses. While it takes about 4 -5 days to produce rubber sheets and more time to produce crepe, crumb rubber comes out in 5-5 hours. It is now being produced in the three states studied by the authors Table 1 .6 shows the year of estalblishment and the location of all the existing rubber processing firms in the Bendel, Cgun and Ondo states of Nigeria by December 1976. It can be observed from the table that over 80% of the existing mills are situated in Bendel State. This further stresses the important role played by the state as the major natural rubber producer in the country. These mills were established st different periods of this century. However, the bulk of the firms were established between 1950-1970. Ogun state has two m ills, while Ondo state has only one factory. The three mills were established in the 1960s by the former Western State government. III. NEED AND JUSTIFICATION OF STUDY In the last two decades , the Nigerian Rubber Industry has been facing some problems. Considering all the government's efforts to increase 16 Table 1 .6 : Processing firms in the area of study as at December, 1976. Firm code Years of Location State establishment A01 1957 Sapele Bendel A02 1971 Amukpe A T A03 1925 Ogborafe A 04 1959 Amukpe A05 1959 B e n l n ^ S ^ A06 1962 Ogbara A07 1960 mme indirect procedures to obtain information on profits and all the opetrating expenses. The use of such Indirect procedures necessarily limit the reliability of our data and the extent to which these data can be used for broad policy recommendations. However, when these data v/ere cross-checked with those supplied by the same firms to the Federal Office of S ta tis tics , no major variations were found for each firm for the period covered in this survey. 28 The techniques of analysis In the analysis, the author employed three statistical techniques, budgetary namely tabular, non-parametric and multiple regression. Th§/technique was used for the economic analysis in chapter four while details of the non-parametric and regression techniques are presented in chapters five , six and seven. Also, in chapter seven, the author computed some financial ratios for the firms which gave the needed data. CHAi-T£R III h/-.CXGROUND INFORMATION OF THE SAMPLED i.UBBER PROCESSING FIR -IS / W A. The location of the rubber processing firms All the rubber processing firms included in the study are , , , ^ pattern located in the southern part of Nigeria. This location/san be cxdaine: by two .major factors. Firstly, high rainfall is a necessity for high latex yields and this has led to tthee rree£s ittrrilcct ion of rubber production :o the southern rain belt. Second' ly, ■laJterx , the major input of the industry is very bulky, ms n result of this bulky nature, most processing firms rationally locate their plants near the sources of latex supply. The location of the selected processing firms has been analysed and presented in table *3.1. It can be observed from this table that about 82 per cent of all the firms are located in Bendel State whilst aoout 12 per cent are located in Cgun state with only S per cent located in Gndo State . Factors determining the location of firms in the industry. As regards the factors that determine the choice of particular site 'or each m ill, seven factors were specified as major determinants. The top executive of each firm was asked to identify these factors and the results of their responses are summarised in table 3 .2 . It can be 30 Table 3 .1 . Location of rubber processing firms state-w ise cor rtV,on State Number Percentage __ vSk Bendel 14 ^ ^ 82.35 Ogun 11.76 Ondo 5.89 Total 100 ______________ Source Field Survey (Nojveemiber - December, 1976). observed from the table that all the sixteen responding firms indicated closeness to the source of raw materials" as the major determining factor for the location of the factory. Next to this was "access to roads , rail end seaports". The latter factor is important in the transportation of raw materials and the evacuation of finished oroducts. Other important factors are availability of water and electricity which are essential for the continuous operation of the rubber processing m ills. 31 Table 3 .2 . Factors determinin'; the location of each firm la the industry B. Types of business organizations The rubber processing industry like all agro-allied Industrial establlshment?«Ern broadly be classified into five major categories of ownership v iz :- single proprietorship, patnership, private limited liability company, wholly government owned and quasi-govemrrent 32 firms corporation. The ownership pattern of all t’n^studied is presented in table 3 .3 otietors who were most Greek nationals. As a result of the continaea lack of raw materials and the Nigerian Indigenization decree, many of such firms folded up while others were sold out to Nigerian investors . 33 G Capital Investment pattern Capital has always been a major limiting factor to many co -or.-i*. 1 ventures in this country Even in the present days of oil - rich ’ :r: , capital is still not easy to come by. The Federal gover 1 0 3 1 0 1 124 122 3 3 - - 6 6 2 5 21 5 6 4 3 90 73 1 1 3 3 2 2 1 0 12 1 2 0 1 0 8 135 126 1 1 - 3 3 V 3 68 3 3 75 40 8 8 1 1 3 9 3 6 44 ( 42 1 3 0 1 0 4 222 i n 11 8 1 - 1 1 2 1 8 8 1 3 1 204 142 4 3 - - 1 0 6 2 3 0 6 0 252 72 2 2 1 1 6 , 8 > 5 6 9 9 1 0 4 113 121 1 - - - 1 7 > I V 7 5 1 3 7 6 6 152 85 1 1 ~ - i 9 V 11 3 5 2 9 75 7 6 130 117 1 1 1 1 0 8 3 2 31 3 8 3 3 9 4 4 2 5 4 3 5 2 2 1 1 J 1 1 1 0 1 0 4 7 3 4 61 48 4 3 - ^ 9 9 3 0 28 1 2 5 1 3 2 1 5 £ 172 1 1 - 4 8 1 0 11 4 9 4 6 6 4 6 6 5 5 i - 2 5 2 5 51 61 2 0 7 2 0 5 200 236 51 4 5 * S 1 6 2 1 4 8 3 4 9 3 2 9 2 1 5 3 1 7 5 7 272 0 2267 s . ' . 9 0 . 3 0 . 3 5 . 9 6 . 5 1 2 . 8 1 4 . 4 7 9 . 1 7 6 . 8 100 1 0 0 --------- Source ; Field Survey (November - December) 1976. lv> 35 On the whole, over 75 per cent of the workers can be c la ss ifie s as operatives (unskilled labour), while about 20 per cent are sen i- skilled and only 2 .5 per cent are hi. hly skilled. The Nigerian orofes: tor- ! in the industry over-shadow their expatriate counterp■aarrtts In both year* . The situation was attributed in part to the indi genization decree which l, e d to the departure of some expatriate managers^ < vP The drop in the number of unskilled labour employed in 1975 was due to the Udoji award which resulted in rise in wages and consequent decline in the number of operatives. Many casual workers were 1: id off whilst some were forced to seek more renumerative employme. : outside rubber processing industry. Many criteria were employed in the analysis of firm sizes These criteria include number of employees, value of annual turn-over and present capital outlay of each firm. Tables 3 .7 , 3 .8 and 3 .9 summarised our findinc Table ize of firms as determined by number of employees 1974 and 1975 Number of ___19Z4_____ _____________ 12Z5________ Employees Frequency % Frequency % Under 100 4 25 6 37.5 100 - 199 6 37.50 8 50 200 - 299 5 31.25 1 6.35 300 - 399 1 6.25 1 6.25 400 - 499 - - - - Cver 500 — — — — Total ~TT~ 100 16 Source Field work (November - December) 1976 . o O r H 37 It con be observed In table 3 .7 that none of the processing firms employed more than 400 employees in 1974 while the figure ran,.c: dropoei to less than 200 employees in 1975. This further confirms the fact that many people had to leave the rubber industry for mere remunerative jobs. £±0,1 million to over one million naira during the two years. The droo in the value of the annual turnover in 1975 was attributed by most -rocossors to the shortage of raw materials and as a result of the various industrial actions when production in many mills had to stop. '3 3 Table 3 .9 : Size of firms as determined by the present value of assets 1975 of the processing firm in 1975 ranged between M100,000 to N 503,000. E. The hiaior Inputs In rubber processing The major raw material in rubber processing industry is natural rubber. This can be obtained in forms of latex lumps and scraps. Processing firms that engage in the production of rubber sheets make use of latex while crepe rubber processors make use of rubber lumps or scraps. 33 Latex and lumps can be used In the production of rubber crumbs . Apart from raw rubber, some chemicals such as formic acid and acetic acid are also used as coagulants in the production of rubber sheets and crumbs. Other inputs include water which is supplied by the state gjcove rnments and electricity which is mainly supplied by National Electricity P ower Authority. These two inputs are of great importc to all m ills. As precautionary measures against the irregular supply of water and electricity , most of the firms have installed stand-by generators and water tanks. Firms that process crepe use a lot of water in order to remove dirts and particles from heavily adulterated rubber lumps. In smoking of rubber sh eets , some firms employ charcoal or fire woods Fuel and all lubricating oils for the generators and other heavy machinery are other operating input which are obtainable from local oil and jas marketing comj F . Gource iw materials The two major sources of natural rubber are peasant farmers and large rubber plantations. Factories which are integral parts of large rtbber estates readily obtain latex and lumps fron their parent rubber estates while others obtain rubber lumps from peasant rubber holders. Another important source is through the local contractors. Table 3.10 shows the main sources of raw materials as stated by the processors . 40 ITased on personal observations during the field survey, only mill; situated in rubber estates engaged in rubber sheets processing. Tills is attributed to the regular supply of high quality latex from the fi 1 . Source Field survey (November - December) 1976, The rubber contractors go to the interiors to assemble rubber lu ups , and scraps of different qualities from small holders. They in turn sell to processors in lorry loads. Fince there is generally an acute shorts e of rubber lumps , they sell to processors who offer good prices. They 4 1 also make sure that the processors are ready to pay on the spot. The c l i practice whereby contractors s i ned contracts with certain processors has virtually stopped. . The technology of rubber processing and products of the Ii ndustry The industry has three major products. Tfcese are rubber sheets, crepe and crumbs. Sheet rubber is divided into standardized grades ; No. IX RSS , No. 1 RSS, RS3 I I , R3S III, RSS IV, RSi V, R3S VI and cuttings . The grades are made from the same coagulated wet rubber sheets. Skim rubber made of skim latex is never used in whole or in part in the production of any grade. Crepe rubber is generally regarded as lower grade of rubber Unlike rubber sh eets, it is valued according to the appearance. Light brown crepe earns better than the dark brown crepe. Crepe is made fro.) lumps and scraps of all types and grades. Rubber crumbs can be made from latex and lumps. Crumbs made fror.i sheets generally have higher grades than those made from lumps and hence earn more revenue. Table 3.11 presents the types of finished products and the number of firms that process them. 42 Table 3.11 : Types of finished oroducts Type No. of Firms % Sheet 7 13.75 r O v " Crepe 11 68-75. Crumbs 5 v V 5 Source Field survey 1976. Processing of rubber sheets* Processing of rubber into SshOeets can be analysed under sit -11 scale or factory technology. The small scale processing is employed by s.' allholders who employ crude processing techniques whilst factory processing employ improved techniques. The technology for processing rubber will focus attention on factory processing only, and the stages of processing include latex dilution, coagulation, mill in , drying and smoking. Inspection, grading and packing are also carried out as integral parts of the processing. * A comprehensive literature on rubber processing is given by (i) Loren, J. Polhamus; Rubber botany cultivation and utilization pp. 179 - 20f . (ii) Zwanhulwen , Th. , Rural Industries for agricultural raw aterials In Eastern Region. F.A .D . Report 1932. 43 dilution of the latex The transportation of latex from the fields to the factory sites is done in tanks. Latex is then diluted with water to a certain standard Dry Rubber Content (DRC). The dilution is required to make the rubber as uniform as possible and to obtain coagulurn w ith^^roper degree of hardness. Insufficiently diluted latex makes hard coagulurn which is difficult to mill and requires excessive power. Too much dilution on the other hand makes soft coagulurn which is easily tom during milling. The dilution also facilitates the settling of dirt particles after sieving and the bubbling away of gases which can reduce the sheet quality. Coo ulatlon in Tanks The coagulating tanks are completely different from the transportation tanks . They are made of aluminium and hence known as all metal coagula­ tion tanks. They usually have standardized interior dimension of 30000 x 700 x 400 mm with 75 aluminium partitions and a capacity of 76 sheets of approximately 1.5 kg dry weight when filled to a height of 34c with latex of 16 per cent DRC. The aluminium partitions fit into notches in the side bars at the top of the tank and are kept in position by a parcidon spacer in the bottom of the tank. The tanks are either fixed or movable. They are filled by means 44 of a latex guide between the latex receiving troughs running under die outlet cocks of the receiving tanks. After filling to the specified height, froth is skimmed off and coagulant in form of formic acid is added under constant stirring with an alu. 'iniurr- latex stirring rake. After the? addition of the coagulant and skimminj, the partitions are thoroughly wetted to orevent the air bubbles from sticking to the aluminium which cause pits on the surface of the coagulum. With care, the partitions are placed in the notches to prevent havin^ coagulun of uneven thickness. promotes even contraction of coagulum and prevents them sticking to the partitions and also it prevents the formation of spots on the coe alu . Cn complete coagulation, the tanks are pushed to the other end of the track and one by one placed directly in front of the battery. The co • Ju . is fed over a short chute strai.ht into the machine between the first two rollers. ThlsVJan be performed by a man. Millin of sheet rubber and milling machinery The sheeting batteries are a combination of four to five pairs of smooth rollers , one pair of printing rollers spirally grooved which ere mechanically driven. Usually, the first pair is made up of two, 12 or 18 sided rollers to improve the grip on the thick coagulurr.. The gap 45 between the rollers decreases from one pair to the next and thev are geared together to run at differential speeds to take care of the el on at ion as the coagulum passes through the milling battery. The rollers ~re driven either by an electric motor or by a Diesel engine^ After passing through the final pair of rollers, the sheet is washed in a special tank at the end of the sheeting battery in which the water is constantly changed. This is to further remove the remaining serum from the surface of sheets in order to prevent the formation of fun i and air bubbles caused by fermentat toS^W h ere available, sheets re smoked on trucks mounted on rail tracks and these are left to drin for about an hour in a suitable cool atm osphere before pushing the. into the smoke-rooms. Dripping should not be too long to prevent rustinoas and internal mouldy spots. Drying and smoking of the sheets The sheets after dripping for about an hour still contain some of moisture of which about a third is contained in the sheet and two- thirds is surface water. They also contain serum with non-rubber constituents on which mould can easily develop. The purpose of curin, is to preserve and to dry the sheets. Preservation is brought about by certain constituents of the smoke particularly phenols which are 46 Fi urc 1 : Chart showirr rubber sheet processing 47 easily absorbed by the wet sheets. Smoking also promotes a unifor colouring of the sheets and lightly coloured spots and streaks which are apparent in the smoked sheets disappear. Asborption of smoke constituents is most rapid when the sheets are still wet. The curing process can be divided into two stages; (i) t. e actual smoking stage during which much smoke and moderate heat L, supplied and (ii) the drying stage when increased heat and little or no smoke is supplied. In general sheet with a thickness of 3 - 3 .5 cm car be cured in 4 - 6 days. An important condition is that sheets to be smoked and dried in one batch in a smoke house should have the same thickness. A typical curing scheme for rubber sheet of about 3 - 3 .5 cm thickness is - iven below. First day Smote room temperature - 40 for the first 3 hours rising to 4 5 ° ° ' Smoke production - should be at full capacity. Ventillation - Bottom window fully opened and later reduced to half open while chimney should be fully opened. 48 second day Temperature 5 0 °° to 55°° ^raoke production about 1/4 full capacity. Ventillation - Bottom and chimney half open. Third Dav Temperature - 55°° - 60°° Smoke production - about 1/4 full capacity Ventillation - Bottom very nearly closed while chimney 1/4 opened. Fourth dav J r Temperature - S G ^ Smoke production - very little and slightly opened. Strict temperature control In smoke house is very Important. The temperature is recorded at regular intervals. Ideally, a sheet is considered completely dry when the rubber has become transluscent without reyish opaque spots and eyes. smoke houses Smoke houses are built in several ways but they all have to r icet a few principal requirements. The apartments are designed to hold the total daily production. This will allow for proper smoking and drying of freshly milled rubber sheets. Smoke is produced in many ways but each smoke 49 house apartment must be provided with maximum and minimum then :o- ■ eters. The walls of the smoke houses must be properly made so th';t as little heat as possible escapes. The production of smoke and heat and the ventillators should be simple to regulate. The comportments should be easily accessible so that charging and discharging of sheets during the smoking period if required will take the minimum of time. The roof is provided with one or more chimneys with regulating valves. The side walls of the lower part having ventillation holes should have sliding valves. o r Inspection and grading of sheets > V Sheet rubber grading is also carried out using appearance criterion, but unlike crepe rubber, sheets are inspected by holding them up against the light or putting them on a special table with a milk g lass . The brightly lit glass facilitates the inspection for dirts, particles , air bubbles which are cut away with a pair of scissors. The opaque parts which ore not properly dried at the edges are cut off and they are regarded and sold as cuttings. The sheets are then sorted out into standardized grades. Tacking and balling The rubber industry uses two sets of grades for natural rubber. Grade distinctions are made on the basis of cleanliness , quality of curing , 50 mould and rust content. The Nigerian rubber industry adopts the male ’an rubber research institute specified grades. These grades have been stated earlier. Sheets of the same grades are packed together in V ia .. The grades are clearly written on the bales before they are taken ̂ the stores where they are held until they are shipped or sold locallv . Processing of crepe rubber Crepe rubber is. made from rubber lumps and scraps. The rubber lumps are sometimes heavily adulterated. On jetting to the factories, lumps are cut into two to expose the internal part and see if adulterated. Unlike few years back, processors now pay remunerative prices for lumps of good qualities. After collection the lumps are put in concrete walled tanks where they are continually soaked in water until they are ready to be milled. It is advantageous to soak the lumps in water since this soften the rubber and makes it amenable to machining. i”.tiling and crepeing machines The crepeing machines are principally made up of; (i) a set of granulators, with rollers of about 12 inch diameter by 18 inch face. (ii) The macerator and the intermediate mill which are diamond grooved. (iii) A set of smoothers ( finishers) with smooth rollers and (iv) a scrap washer 51 The scrap washer as seen in some factories consists of a b e v y trough in which revolve two large and heavy rollers. These rollers hav strong raised and blunt corrugations which grip the rubber and knr ?d it as it passes through them. The rubber is carried up again by the corru­ gations so that the action is automatic. A lot of water is used by the scrap. This further softens the rubber and allows the dirt to settle . The scrap washer eventually produces a disjointed but continuous homogenous wet rubber. The cleansed rubber is taken to the crepeing machines after some 15 to 30 minutes. The wet rubber is now fed into the granulator where the rubber is turned into a continuous blanket. Water is at all times passed over the crepe blanket. The processing is further continued on the macerator. The crepe blanket is passed through the macerator repeatedly - 3 - 6 times after which it is taken to the smoothers where a crepe blanket of required thickness is produced. For the flow chart on crepe processing , see chart II. Prying of crepe rubber Crepe rubber is never smoked. It is air dried. It has less non­ rubber constituents than sheet rubber and hence it is less susceptible to mould and smoke preservation is not required. It should however be 52 r i iure II : Chart showln:; crepe rubber processing 53 thoroughly dried and stored in a dry place. Drying is carried out in special drying houses either by ventillation or a combination of both ventillation and heat. If no heat is applied, the drying takes about 4 weeks. A normal drying period in a heated drying h is about £ - 12 days. The temperature measured between the crepe in a created drying house must not exceed 35°^ Irving houses A normal drying house consists of a large space divided into two or more drying floors , composed of hardwood laths with round tons. The usual vertical distance between the drying floors is 4 metres with about 50cm space between the lower drying floors. Heating of the dry in houses is brought about by a number of radiators heated by steam. The radiators are mounted under a perforated floor at the bottom of the drying house. The drying houses are built in such a way as to have ventillators in the walls through where ventilation air enters the heating sp aces. Porting Pecking and Baling Light brown crepe are sorted out and packed together. The dark brown ones which are of lower grades are also packed separately. 54 These are baled and markings ore put on the outside- of each bale to differentiate the grades Processing of Rubber Crumbs Crumb rubber can be made from wet rubber sheets and wet cr:. x blanket. The wet crepe and sheets are milled as de jrlier. These are taken to the chipping machine which chip ts and crepe into crumbs . The wet crumbs are later put in aluminium baking pans and subsequently placed in theuntlrier. The Unidrier The unidrier consists of a oven and a compartment ly ir ; along the length of the oven : is supplied to the oven from the compartment. The oven Is provided with a pulley device with chain This allows for a s - ooth d of the oven to the other. The movement of the baking pans over the pulley device is automated. Keat supplied to the oven is regulated through the whole length. The effective dryin of the crumbs takes about 4 - 6 hours. The crumbs corne out in different grade with wet rubber sheets coming out in higher grades. Weighing and Packing The dry crumbs are later weighed into specified standard weights before they are taken to the pressing machines. The pressing machines compress them into very compact s izes. They are then packed ip. 55 cellophane bags after which they are put in big crates ready to be jhip; ed. dee Chart III. I/. Morketirici and distribution of products Rubber is one of the principal export crops over which the Niguri 1 reduce Marketing Board has no statutory marketing control and rcc. aasi- b ilities . Since 1950, the government has been to promote co~ vV operative marketing organization among the small-holders in order to enable them secure for themselves a larger share of the price paid by the final consumer. Recently, the government decided to create through decrees, Commodity Boards for all the major export crops of this country. This means that a Rubber Commodity Board will for the first time come into being. The board will in essence perform1 all the marketing functions connected with .Mural rubber. Rubber sheets , crepe and crumbs are either consumed locally or exported. Over 90% of the country's annual rubber output is exported, whereas only 5 - 1 0 per cent is consumed locally. It has been pointed out by L.K. Laurent in his study that, prior to the Nigerian civil - war, Lhe country exported about 72,000 tons of natural rubber, whilst only 7 percent of this were consumed locally. However, after the civil war, as a result of newly established rubber manufacturing firms, the local consumption of rubber can be expected to have increased. 56 Fi ure III : Chart showing the processing of Crumb Rubber L L A T E X —=t— J r ~ E T C R E P E < } C H O P P I N G i fi I N E P R E S S I N G M A C H I N E 57 A full account of the marketing and distribution of rubber \v s , ive. by Ckereka , although lots of changes have taken place within t n<_ incus try after his work. Natural rubber unlike in the pre-civil war era is na ore dependent upon by many for their livelihood. The finished products ar~ distributed by exporters and processor-exporters. Almost all the processors A A have direct contact with the world market Some have mnrketin;; ^ents based in London. These agents feed them with the necessary information concerning rubber international market situations. They also perfor on their behalf all the marketing functions such as contracting and shinplno arrangements. Rubber processors who do not have agents abroad sell through local agents. Table 3.12 summarizes our findings on the factors deterrninin rubber prices. Prices are set by the world market forces and the quotations are sent down by the overseas agents to local processors. In certain instances, prices may be determined by an agreement between the exporters and the processors. Local markets The products of the rubber processing industry are intermediate products which are used by some egro-allied firms for further manufacture into final goods such as tyres and tubes , bags , car mots , and other 58 Table 3.12 • The setting of rubber prices Factors No. of Finns f Prices set by Overseas buyers only 62.5 By Overseas and local buyers W 12.75 Set by local buyers 18.75 Set by local buyers and processor 43.75 ? 7 Cthers - Sourc;e , : Field work 1976 v/earing apparels*.r The firms get their supplies directly from the processors and local exporters. A few large firms like Bata, Mitchelin and Dunlop have their own rubber plantations. Figure IV shows the marketing nnd distribution channels of the processed products TVh,eo processors identified rising cost of marketing in relation to returns as the main marketing problem. Lack of capital to finance the ..arketing functions was also mentioned by the respondents. None complained about the lack of demand for their products whilst many 59 Fi ure IV Chart showing the marketing and distribution channel of rubber O V E R S E A ^ A G E N T J 50 processors even claimed that they could not meet the demand for their products due to the lack of raw materials. This further confir:. • ' /. the fact that many of the processors are operating below their inst-lled capacity. & CHAPTER IV JS Q S IitfQ RETVRMS ANALY.JJS IN RUBBER PROCESSING. The objective of this chapter is to analyse the costs and returns involved in rubber processing business. Such an analysis is quite useful in determining the present level of profits in the rubber processing industry. The unfolding structure of costs should make it possible to ................................. a T ..... advise plant managers on the best way to minimize operating co sts . A. ANALYST.: OF COSTS Theoretical Considerations The budgetary technique has been adopted in economic analyses of crops, livestock and other agribusiness enterprises in both dc/eloped \ (15) and developing countries. Bradford and Johnson defined a budget os a written plan for future actions. A budgeting process for a given period converges on two figures; one of these is total revenue for the period, the other f__ig_u__rei s1 total expenses for the same period. The difference between these two figures is called net profits or net returns if revenue exc:eeds co sts . All other parts of budgets are regarded as details leading up to the derivation of net returns. The principles underlying budgeting are essentially the same whether it is made for a small farm, a large plantation, an Industrial firm or a government venture. An industrial firm's budget can then be 62 defined as a plan about different kinds of financial and technical structures of a processing firm to determine its relative profitability for a given period of time. The types of technologies to budget for in a mill will be determined on the basis of ava ilable fine 1 resources , capital assets , types In budgeting, all expecxea costs ana returns are raia out and the quantities of input and final outputs are estimated. Then comes execution in which management uses is broken down into month by month operations and the achievements Where very serious adverse variances occur , management must seek tne reason and take immediate corrective action./ In this way, the budget prevents irrational spending by over-zealous managers. For accurate budgeting, it is necessary to know the quantities and prices >uts and outputs. Thus, by calculating the various costs and examining the revenues in existing rubber firms, it will be easy to guess the future needs of similar firms in future. A careful examination of the cost structure will make it possible to suggest ways to minimize costs and thus maximize profits. All the firms visited were encouraged to provide information on their major cost items, their total input and output as well as their 63 selling prices for the various grades of processed rubber. Suffice it to say however that some of the data obtained were subject to cert- ir errors since some of the information obtained from the questionnaires might not be correct, Care must therefore be taken in interpreltin ' the analysis that follows

rico of the various grades of sheets , crepe and crumbs. Besides , prices of rubber fluctuate from week to week depending on supply and demand conditions in international market. The Gross receipts which are also referred to as volume of sales 71 TAbif. 4.1 -i C.QSE ou tla y f o r thn w I,her 1-im a Cost F ixed C ost Firm Row F u e l, Gas iS a la r ie s B u ild in g Transport S e l l in g M is c e lla - Depr. on Code )ep r . on M a ter ia l Water and In te r e s tInd O th er**end T o ta l Cost Expenses and 1 neous B u ild in g E l e c t r i c i t y i l l P lan t Wages onMachinery FinedSh ipp ing Expenses and Ka- Borrowed C ost Main tenance ry ° ^ a l (») (») (*) ( * ) ( * ) ( » ) ( * ) ( I f ) _:.at i01 1,098,664 27,560 87,208 7,077 18,436 117,500 6,435 4,195 68,662 12,526 1,480,262 11,668 LQ2 846,244 85,588 11,705 23 ',542 76 814F 105,867 7,427 11,830 17,771 10,486 1,238,938 14,368 24,968 5,117 7,052 9,835 7,074 2,212 1,597 14,209 4,463 176,687A03 85,792 16,319 53,325 19,560 6,178 260,909 113,077 3,752 351 — 1,764 1,659,503 104 1 , 284,268 15,889 3,402 ^2,519 49,478 3,814 4,200 6,601 1,423 521,917 105 385,345 11,940 * 37,306 1,350,525 125,579 2,328,410 106 189,505 132,138 75,513 299,215 37,671 23,259 47,052 30,740 17,213 107 874,263 29,939 76,416 58,919 1,117 70,362 33,863 6,572 17,011 1,000 3,801 1,173,263 109,712 25,479108 1,096,679 66,433 15,020 32,437 26,099 26,781 27,996 87,497 4,727 1,518,660 60,122 1 0 ,5 2 2 4,848 136,240 49,685 7,886 17,198 658 12,333 634,985109 295,344 40,149 M O 177,928 20,007 61,667 14,065 9,916 119,361 8,267 11,658 36,062 - 27,169 •486,100 176,292 12,876 64,785 9,687 6,853 63,119 20,253 22,300 9,682 - 26,603 412,450A l l 112 194,728 3,906 40,017 27,966 24,005 72,713 197,963 8,086 8,809 - 6,942 585,135 113 252,488 2,235 18,841 > 1 ,9 4 2 ^ 908 25,530 13,190 5,985 - 3,670 - 322,789 114 254,944 34,297 50,042 13,652 36,200 37,106 49,389 - - - 475,630 115 112,767 1,450 15,553 12,405 2,944 542 979 815 1,223 - 490 149,168 M6 464,198 55,085 106,860 39,362 8,022 1,839 10,638 51,314 - — — 737,318 Iv e r a g e 559,404 .5C 29,488.18 67,619.63i 25,342.81 12,984.6? 77,475 .8 ' 4 5 ,5 4 4 .3 1 14,855.31 13,575.38 14,426.75 0,121 .25 868,636.44 -------------- 1-------------- 1--------------} * M isce llan eou s expenses are d e ta i le d out in 'fa b les 4 .3a and 4 .4 a . o e p s t in c lu d es D e p re c ia t io n on J e t t y , V e h ic le s , Fences, B r id g e s , Fu rn itu re end F i t t in g s . „ , A , Id survoy (l.'ovotnber - December) 1976. 72 - - l i l e : Ogl;1 jJr-t.l; ____, S L 1-. 1 — i V a r ia o le Cost s P’ix e d Cost7 Firm Rav; F u e l, Gas S a la r ie s B u ild in g rran sport b e l l in g & ■ iis c e lla - D epr. on B epr. on In t e r e s t O th er** T o ta l Cost Code 'la te r i a l W ater and and and Sx pence 3 Sh ipping neous A l l P la n t on F ixed Cost E l ec i ; r i- ,/ages Machine ry Expenses and Borrowed c i t y la in t e ­ M achinery C a p ita l nant e ( » ) ( * ) (K ) (H ) (N ) ( » ) b ) ( * ) ( » ) ( » ) (M) A01 701,811 22,960 95,900 18,504 21,774 84,228 61,112 5,649 6,935 59,212 12,427 1,090,512 AO 2 624,264 15,422 83,343 21,498 18,878 36 ,0 3 6 ^1 129,595 7,984 35,-r72 18,934 14,869 1,010,297 a 03 83,865 16,504 30,316 2,-r93 5,695 7,073 10,722 2,101 403 9,604 4,017 172,793 A04 912,707 21,819 61,850 6,156 6,706 56,536 17,489 3,950 390 1,960 1,091,563 A05 176,761 9,721 34,019 7,372 2,621 15,227 47,130 3,538 3,360 6,409 1,134 307,292 ii.06 393,601 115,774 231,593 147,228 71,909 5 2 ,6 4 8 % . 49,418 23,259 53,927 34,062 22,359 1,696,776 A07 558,440 15,566 80,497 27,289 2,450 a f 73,837 35,126 31,929 11,469 30,049 7,056 873,708 AOS 206,543 23,190 65,392 18,999 2,436 17,194 20,793 28,874 36,299 31,475 1,651 452,849 a 09 362,208 47,438 72,827 15,773 5,029 138,654 41,021 9,040 29,443 862 10,738 733,033 A10 56,135 19,060 6 2 ,6 4 5 16,182 14,996 \ 5,058 9,419 6,108 5,685 - 317 197,807 A11 208,482 14,908 69,256 9,579 7,752 ^59,054 42,559 8,286 1,278 — 4,493 425,647 A12 NA NA NA NA NA NA NA NA NA Na NA NA A13 96,800 224 26,401 1 ,250 A 975 4,734 13,033 9,036 — 3,019 155,552 a 14 192,488 29,294 71,529 25,172 •Wt 30,755 51 ,453 62,878 — 463,569 A1 5 91,670 2,615 9,714 £,115 2,207 580 1,024 1,118 1,677 435 119,171 A16 289,662 72,484 134,000 73,047 6,029 1,313 10,166 43,912 - . „ 630,613 average 363,695.8C 26,465.27 75 ,290 .8 26,843,88 .11,297.2? 38,929.13 36,004.00 16,510.6 12,702.40 12,908.4 5,430.40 628,078.80 < * M isce llan eou s expenses arc d e ta i le d out in Tab le 4 .3 a <̂ nd 4 .4 a . Sources * * Other F ixed c o s t in c lu d es De p r e d a t io n on J e t t y , V e h ic le s , Fences, B r id g e s , F u rn itu re and F i t t in g s . N ..A , - not e va liab le ,. - 73 - m ole 4 .3 : Cost Outlay fo r the rubber process ng firm V a r ia b le Cost F ixed Cost Firm Raw Water Labour R epa ir T ransport b e l l in g M isce llan eou s In te r e s t D ep re c ia t io n on Code M a te r ia l Powe r Cost and E x p o s e s and Expenses on Loan B u ild in g , Equipment T o ta l Cost Energy Maintenance S h ipp in g and e th e r f ix e d Cost Expenses 4.64 -01 74.22 1.86 5.89 0 .48 1.25 2.16 V 9 4 1 43 1.56 100 i-02 68.30 0.94 6.91 0.94 1 .90 6.20 k 8.54 8 QA 4.82 100 -03 48.56 8.13 18.95 2.90 5.57 3.99 4.68 100 -04 77.39 0 .98 3.21 1 .18 0.37 15.72/ 0.79 1 .26 0.35 100 -0 5 73.63 2.29 7.15 3.04 0.65 W O .48 9.48 1 3? 1 .82 100 —06 56.00 5.39 8.14 • 5 .58 3 .2 * 12.85 1 .62 n na 3.76 100 - 07 74.51 2.55 6.51 5.02 0.10 6.00 2.88 tp; • nf A 2.33 1000 -0 8 72.20 4.37 7.22 1.66 0 .9 9 _ C 2.13 1 .72 0 10 3.92 100 -09 46.51 6.32 9.47 1.66 / t h e 21.45 7.82 5.89 100 A10 36.60 4.11 12.69 2.89 1 2 .0 4 1 24.55 1 .70 15.41 100 A11 42.74 3.12 15.72 2.35 1.66 r 15.30 4.91 14.20 100 —12 33.28 0.67 6.84 < .78 4.10 12.43 33.83 1 17 4.07 100 -1 3 76.22 i • i 1 0.07 5.84 0.60 0.28 7.91 4.09 1.82 100 A14 53.60 7.21 10.52 2.87 - 7.62 7.80 10.38 100 -15 75.60 0.97 10.43 8.32 1 .92 0.36 0.66 1.69 100 -16 62.96 7.47 14.49 5*34 1.09 0.25 1.44 6.96 too -v e ra g e 61,03 3 -53 9 .0 7 1 .52 8.81 6 .2 0 1 4 9 5.23 100 Source : - Computed from Tab le 4.1 74 Table 4.3a Miscellaneous cost outlay In 1974 M — Office Expenses u. edicrl Firm Auditor's Fees telephone, Post­ Insurance and jExponser, Code Legal Charges & ages , Entertain­ - o u s l i^ p ^ and Professional Charges ment fees and M v m ) Advert (N) . (& ) 101 4,274 5,035 & 6,913 102 2,578 2,486 2,720 669 103 1,390 1,219 ^ 888 1,941 104 1,206 980 2,570 1,300 A05 2,000 1,142 33 106 2,000 561 19,338 15,368 107 10,728 4,902' 5,263 1,607 108 2,099 3,300 7,559 1,024 109 4,436 6,970 20,471 15,S35 110 1 ,200 1,149 2,553 3,344 111 1,200 3,555 2,345 13,153 112 1,200 1,616 5,765 16,020 113 2,000 J 886 896 1,392 114 3,000 9,251 14,826 6,839 H 5 233 - 746 116 - 1,875 7,049 1,714 _____________________ 1 Source Field survey (November - December) 1976 . r i. J ■:I _■01 701,811 1,090,512 64.36 .*.02 634,264 1,010,297 61.79 .403 63,865 172,793 48.53 A04 912,707 1,091,563 83.61 405 176,761 307,292 57.52 406 893,601 1,673,517 53.40 A07 558,440 873,708 63.92 L08 206,543 452,849 45.61 ^09 362,208 733,033 49.41 1.10 56,125 197,807 28.38 A11 208,482 425,647 48.98 112 / ! / n.a n.a X. 13 96,800 155,552 62.23 ij.14 192,488 463,569 41,52 I M S 141,970 169,463 76.92 289,662 630,613 45.93 Average 363,695.80 628,078.80 55,42 Source Field survey (November - December) 1976 N .A , Not A vailable 81 .^blc 4 .0 . Gelling and shipping expenses in relation to total co s t it _1 ■ 7 Firm (a) (b) Code Selling and Shipping Total Cost (afc&s % of (b) Expenses (*J) ' (M) A01 31,979 1,480,262 s y 2.16 A02 76,814 1,238,938 6.20 ^03 9,835 176,687 5.57 A04 260,909 1,659,503 15.72- i.05 2,519 521,917 0.48 L06 199,215 2,328,410 12.85 A07 70,362 w,173,263 6.00 A08 32,437 x - X 1,518,860 2.13 A09 136,240 . 634,985 21.45 A10 i i 9 , ^ r A , 486,100 24.55 A11 63, 11.9V 412,450 15.30 A12 72,713 585,135 1:2.43 A13 V 25,530 322,789 7.91 AH /56,2O0 475,630 7.62 542 149,168 0.36 1 5 < s T 1,839 737,318 0.25 Average 77,475.86 868,838.44 8.81 Source: Field survey (November - December) 1976 i-’oble 4 .1 0 • Selling and shlppirv; expenses In relation to total co st in 1975 N .A . Not A v ailab le Table 4 .1 1 : Fixed co sts In relation to the total co s t In 1374 Firm (a) (b) (c) I F " Code Charges on Depreciation Total Cost (a) as % (b) vs 7o Borrowed on Fixed of (c) of (c) Capital (N) assets (N) A01 68,682 23,156 ^,480,262 4.64 1.56 A02 17,771 59,743 1,238,938 1.43 .4.82 A03 14,209 15,346 176,687 8.04 4.68 A04 - 5,867 1,659,503 - 0.35 A05 6,601 9,43? 521,917 1.26 1.82 A06 30,740 87,524 2,328,410 1.32 5.76 A07 1,000 27,384 1,173,263 0.09 2.33 AOS 67,407 59,504 1,518,860 5.76 3.92 A 09 658 37,417 654,985 0.10 5.89 A10 r s 74,889 486,100 - 15.41 M l 58,585 412,450 - 14.20 A12 23,837 585,135 - •'r.07 A13 3,670 5,985 322,789 1.17 1.82 \ 49,389 475,630 - 10.38 2,528 - 149,168 - 1.69 A16 •* 51,314 737,318 6.96 Average 14,426.75 36,836.06 868,838.4^1 1.49 5.23 Source : Field Survey (November - Deoember) 1976 84 Table 4 .1 2 : - Fixed co sts In relation to the total co s t In 1975 Firm (a) (b) (c) Code Charges on Depreciation Total Cost (b) as % of borrowed on all fixed U S ' (c) capital Assets (N) M (N) <*) A01 59,212 25,011 1,090,512 5.43 2.29 A02 18,934 62,325 1,010,297 1.87 6.17 -.03 9,604 6,521 172,793 5.56 3.77 a04 - 6,300 1,091,563 - 0.58 AO 5 6,409 307,292 2.09 2.61 A06 34,062 99,543 1,673,517 2.01 5.87 Lcrj 30,049 ( 50,454 873,708 3.44 5.77 A 08 31,495 66,824 733,033 0.12 6.70 A09 ^ x 49,221 452,849 6.95 14.75 A10 12,310 197,807 - 6.22 A11 & 14,057 425,647 - 3.30 A12 n J n.a n.a n.a n.a A13 ^ Y 3 ,0 1 9 9,036 155,552 1.94 5.8 62,578 114 ^ 463,569 - 13.56 3,230 119,171 - 2.73 X • A16 43,912 630,613 - 6.96 Average 12,908.4 34,643.6 628,078.80 1.96 5.80 n .a . = The record for 1975 is not available. Gource:- Field survey (November - December) 1976. - R5 - are therefore calculated by taking a product of prices and different quantities and types of rubber product. In some cases where the volume of sales is not clearly recorded, the gross receipts were computed from either the output or the quantity of rubber shipped plus local soles at the average prevailing price. The results of the returns analysis are presented in tables ^.13 and 4 .14 for the two years under review. The result of the analysis shows that in 1974, twelve firms representing 75 percent of the total number of firms studied recorded positive returns and in 1975, eleven firms renre- senting over 70 percent of all firms studied recorded positive returns. Also in 1974, the positive net returns to the firms ranged between #19 ,595 to #828 ,505 while in 1975, it ranged between #25 ,288 to # 6 3 6 ,93J . From , it can be observed that some firms recorded negative net returns. In fact, four out of the total number of firr s studied recorded negative net returns in 1974 while the number was also four in 1 975. The negative net returns recorded in 1974 ranged between # 5 2 7 ,4 49 to #46 ,994 and from #483 ,444 to -# 7 4 ,893 in 1975. Tables 4 .15 and 4 . IS present the comparative analysis of gross receip ts, total cost and net returns for the industry in 1974 and 1J75. 3 6 Table 4.13 Gross receipts total cost and net revenue In 107 1 Firm Gross Receipts Total Cost Net Revenue Code (N) (H) < > v i*01 1,540,918 1,480,262 \ 60,655 **02 1,301,838 1,238,938 62,900 U33 233,157 176,685" 56,472 A04 1,132,054 1,659,503 -527,449 i.05 540,612 > j 2 i ,917 18,695 406 3,156,915 2,328,419 828,505 -t-07 891,112 1,173,263 -282,151 *108 1,810,978 1,518,860 292,118 **09 634,985 346,710 **10 439,106 486,100 -46,994 A11 3?9,850 412,450 -72,600 412 898,229 585,135 313,094 470,880 322,789 148,091 414 881,537 475,630 405,907 415 258,558 149,168 109,390 416 820,678 737,318 83,360 Source : - Field survey (Noverrber - Dece ber) 1976. Table 4.1 i : Gross receipts, total cost and net revenue in 1975 Firm Gross Recei its Total Cost Code Net Revenue (N) m (N) i 01 607,068 1,090,512 , -483,44 ..02 1 ,055,585 1 ,010,297 25,288 .-05 208,117 1 7 2 ^ ^ 1 ^ 35,324 L0. 1,210,255 1,091,563 118,692 ..05 338,885 / V \ 307,292 31,593 L 06 2,335,985 1 ,673,517 662,468 i.07 598,596 873,708 -275,112 L08 339,432 1 452,849 -113,417 .u.05 850,48VN 733,033 117,450 ..10 1 2 2 , ^ 197,807 - 74,893 ..11 556,653 425,647 133,006 .-12 n.a n.a .13 ' 206,195 155,552 50,643 -14 V 679,400 463,569 215,831 .-15 151,315 119,171 32,144 x--1 O 663,459 630,613 32,846 Source : Field survey (November - Decen ber) 1976. N .A. Mot A va liable Table 4.15 : Gross receipts , cost and net returns for the processing firms lr. 1974 Firm Gross Variable Fixed Total .'Jet Code R e c ^ t s Ogst Cost Returns14 N A01 1,540,918 1,388,424 91,638 ^ I 1,480,262 60,656 -02 1,301,638 ,161,424 77,524 1,238,938 62,900 A03 233,157 147,130 29,.555 176,685 56, ^W9,400 400,691 62,878 463,569 215,871 A15 151,315 115,941 3,230 119,171 52,144 A16 663,459 586,701 43,912 630,613 32,645 Source •- Field Survey (November - December) 1976 90 From these tables , It can be observed that there was a general decline in net returns to these firms in 1975 in comparison with those of 1 ’'74. This decline is attributable to many factors. These factors include non - availability of raw materials (which in turn reduced the volume of sa les). A lso, lack of raw materials led some mills to o clow optimum capacity. Another factor which led to lower net returns in 1975 is the Udoji salary award which in a way reduced the output of the industry because many workers went on strike for months whilst production expenses rose astronomically. This constituted ble drain on the profits of processors.. Finally , table 4 .17 shows the net return, per tonne of processed rubber in all the processing firms in 1374 and 1975. This can be used in comparing the economic performance of all the firms within the processing industry. It also shows how efficient the firms are. The performances of all the firms in 1974 were higher than the performances in 1975. All the factors that are responsible for this generally poor economic performance by all the firms were mentioned earlier 91 ’able 1.17 ■ Net returns per tonne of processed rubber in all the processli' i fir s In 1971 and 1975 A . Net Return Per Tonne .■ j;le 197-2 1S7S M>1 12.52 -290.70 *.02 15.57 8.08 61.97 8 , 02 * £ > L04 -121 . 4 8 ^ Y 21 .31 i. 05 <1 0.28S>Ôt ? 33.36 LOo 106.00 95.29 j . 07 72.29 -119.72 V ,-OS 52.72 - 92.58 $ i-0 0 145.68 47.94 £10 -41.37 -187.23 £11 -51.27 -137.54 i ll 2 174.62 n.a M3 185.68 76.27 M4 101.43 135.23 M5 117.75 82.58 LA 6 33.45 14.39 N.A. Not Available CHAPTER V COST FUNCTIONS FOR RUBBER PROCESSING INDUSTRY A. Preliminary considerations During the last decade, a number of scholars have carried out some work on cost functions in Agricultural production. One of such studies is by D rs. Oni and Olayemi on the cost and returns in cocoa production (45) in the Western state of Nigeria In that study, the authors attempted to derive a functional relationship between cocoa acreage and unit cost of production. They assumed a perfectly competitive resource market and applied the quadratic equation to obtain the minimum point of average cost . This point of minimum average cost was said to represent the lona-run equilibrum size of cocoa holding. The authors however, presumed that the result would be of limited empirical value for two reasons* firstly , the derived equilibrum size was based on the assumption of the static conc^ot of perfect competition and secondly, there was a marked heterogeneity in the farm population being studied. Another relevant study was carried out byi-ikinwumi in 1970 (5) . This study was concerned with the Economics of Maize Production in Oyo division in Western State of Nigeria. The author estimated the cost-output relationships for both early and late maize by fitting five functions namely; Linear, 93 - double-log, Inverse Sem i-log, Quadratic and square root. The result; obtained showed that there was little or no correlation between output of early maize and total cost because the coefficients of multiple decer- , 2 , mination (Rs ) were very low. This low correlation was attributed to the ommission of some important explanatory variables in the model as well as the inherent errors of measurements on the field. (3) A more recent work was that of Adeniyi, which focussed on the Economics of Irrigated rice production in Bida division, North Western State of Nigeria. This study estimated some cost-output relationships for irrigated rice production in Bodeggi and Edozhigi local government areas of Niger State. The approach and findings of this study were similar to 2 those of Akinwumi since the coefficients of multiple determination (Rs) wore generally low (probably due to ommission of some important factors). All three studies dealt with on-the-farm agricultural production cost functions in different parts of the country. The major objective of this chapter is to estimate the cost functions for an agro-allied industry - the rubber processing industry. Certain assumptions have to be made in this analysis. The assumptions are as follows:- (a) That in all the rubber processing firms studied, all the cost items are similar for the same kinds of operations. Thus the 94 same equipment, row materials e tc . are used to varying levels for producing rubber sheets in each firm which produced sheets e tc . (b) That based on the above assumption, the cost functions derived should be similar for all firms. (c) That cost functions derived should be valid. (d) That the period of two years (1974 and 1975) being analysed in this study is too short to permit major changes in the sizes of plants. This means that short-run analysis is more relevant. F . The Basic model Cost-output relationship In the empirical estimation of cost functions for the rubber processing firms, the cost (G) which was specified in this study as (i) Total variable cost and (ii) Total cost was related to processed output (Q). For each relationship i . e . Total variable cost against Total output and Total cost against Total output, the following six functional forms were tried. E .Q . (1) C = bo + b^Q ------------------------------------------ Linear E .Q . (2) Log C = bo + b^logQ -------------------------Cobb-Douglas E .Q . (3) Log C = bo + ^ 0 -------------------------- Exponential E .Q . (4) C = bo > b log Q ------------------------Semi-log ' 2 E.Q . (5) C = bo *-b Q + b Q ------------------- Quadratic * 2 E.Q . (6) C = bo i-bjQ + b2Q^ •"---------------- Square root. 95 Where C represents either the Total variable cost or Total cost end Q the total output of processed rubber. C . Data sources and empirical results The data were collected from 16 firms for two years period - 197-1 and 1975, a period too short for the industry or each firm to change its scale of production. The six functions as stated earlier were fitted separately to each of the two yearly data and the empirical results obtained for total average cost against total output are summarized in tables 5.1 and 5 .2 while that of Total cost against total output are presented in tables 5 .3 and 5 .4 . Considering the results of the six fitted equations for the two separate cost-output relationships, the total variable cost results have been chosen as the cost functions for the rubber processing industry mainly for the following reasons; (i) the period of study is regarded as a relatively short period during which the firms could not have made significant changes in their scale of production, (ii) the value of the coefficients of multiple determination (R2) (iii) the significance of the regression coefficients as increased by F - test. (iv) the relationship between the regression coefficients and their - 35 - standard errors of esti .;Ote (a rule of thurfb is that the regression coefficient uat at least be one and half ti-r es greater than their standard errors of estim ate), and whether or not the equations contradict a priori expectations with reference to signs of the parameters. The Cobb-Douclas and semi-lo functions are linear and so it is not possible to derive an optimum level of output. Therefore, the quadratic —77;>* LINEAR (0.00640 TVC+ 2.365 ^ 0 0 0 2 Q 0.366 2.164* EX; CNENTIAL W )0001) TVC y 7 36.947 77.346Q 0.400 2.672* ‘Ekd-LCG (47.3198) A a TVoV" 1.947 0.1465Q+ 0.448 3.507* c u e l e log 0* E-DOUGLAS (0.0782C * Q TADRATIC < ™ 201.496 0.0380Q -0.0000028Q2 0.'t25 1. 0.02733) (0 .00000k) * TVC 86.525 0.04297Q 5.980Q 0.433 1 .502. QVJARE root 0.04672) (5.251) Fljures In brackets represent standard errors of the coefficients I-Jote * = Significant at 10% + - log of the variable 90 -ole 5 .2 • 1075 C ost function s for rubber orocessi- Industry TVC/'O :QU£.TICN Depend­ Constant Regression ent Ter^ Coefficients LR F-Retio Variable ̂ - • - M i EAR TVC 402.620 0.02858Q 0.327 1.55J? (0.02292) 1 TVC+ 2.585 0.00004Q 0.458 2.447 * ex:, onential (0.00002) TVC 698.141 ^ 113.636Q+ ' 0,264 0.974 E-I-LC G (113.173) 1 + j * TVC 3.023 0.16420Q+ 0.399 2.460 TPLE-LOG (0.10468) (0 COE-DOUGLAS) & 386.173 0.001105Q -0.0000009Q2 0.331 0 . 7:1O'Tf.DRATIC (0.009034) (0.0000005) ________ ^ TVC 4­ g 320.801 0.6625Q +3.831 24Q2 0.33t8 0.775jare roots (0.01204) (1.200726) In bracket - standard error + = lo ; of the variable * = Significant at 10% 99 Table 5 . 3 . 1971 c o s t functions for rubber processing industry TC ■ • > EQ UATION Dependent Regression Variable Coefficients \ r2 F-L.'-tio X(Q) TC 267.872 0.0000051Q 0.225 0.749 LINEAR (0 .0 0 0 0 0 2 ^ ^ TC+ 2.410 0.0000028Q 0.285 1.248 EXPONENTIAL (0.0000009) \ ) TC -86.455 56.087Q+ 0.270 1.097 E MI-LOG (53.559) + DOUBLE-LOG TC , , U 0.11215Q+ 0.342 1.65 4* COBB-DOUGLAS << (0.08237) QUADRATIC - - - - TC 64.864 -0.00001 Q 0.08487Q7 0.286 0.583 SQUARE ROOT (0.00002) (0.012707) ________ ■ — — .. - In brackets * Standard error - log of the variable * = Significant at 10% Table 5 .1 1975 co s t functions for rubber processing Industry TC/Q EQUATION Depen­ Constant Regression dent Term Coefficient F-Ratio Variable X(Q) TC 413.751 -0.000001Q 0.473 3 .7 4 * LINEAR (o .o o o o o if TC 2.61136 0.0000012Q 0 .568 6.190* EXPONENTIAL (0.0000008) w + TC 1159.811 -123.806Q+ 0.415 2 .702* SEMI-LOG (7/5.314) TC+ 3.627 -0 .168*7 0 .498 4.29 f DOUBLE-LOG (0 .8127) COBB-DOUGLAT QUADRATIC < - - - - - - i SQUARE ROOT TC 582.582 -0.00002Q 0 .0 2 0 8 ^ 0 ••■ tly 1.750 ^0.000004) (0.16657) In brackets = Standard Error + = Log of the variable * = Significant at 10% 1 '( ------- ĉ : It would be seen from table 5.1 that the coefficients of multiple , 2 . , , determination (R s) were generally low (ranging from 0.327 in linear to 0.448 in the Cobb-Douglas equation for 1974). Also in table 5 .2 , 2 the values of R ranged from 0.264 in s« Exponential equation. This in essence 1974, between 33 percent and 45 percent of the variabi 5t could be explained by output of processed rubber alone whereas in 1975 , between 26 percent and 46 percent of the variability in cost was explained study could be explained. Other factors such as management capability, institutional arrangements, varyin levels of capacity utilization which were not Incorporated into this odel also affect the total variable cost outlay for th ‘ lustry. Optimum point oi production One important optimizinj behaviour for the rubber entrepreneur is to operate at its optimum point with respect to a given plant s ize . However, as far as the industry is concerned, the optimum point to produce is the point where the total variable cost is minimum. Given the various cost functions , what will be the optimum point of operation for each rubber 102 - processing firm? In order to answer this question, the first derivative of the lead equation (Quadratic) was equated to zero and solved for Q. Then the second derivative was examined for its sign, since when it is positive, a minimum point is established but when it is negative, ? maximum point is reached on the curve. The following results obtained for the two years are presented below. For 19 74 TVC = 201.490 + 0.03C0Q - 0.0000028Q (0l..00227733)3 ) ^ J0..i0000017) ^lYC = 0.0380 - 0.0000056Q dQ 0.0380 - 0.0000056 = 0 0 .0000056Q = 0.0380 Q = 0.0380 0.0000056 6785.71 tons Taking the second derivative, we obtain- ,'2 d TVC - 0.0000056 dQ2 This is negative and confirms that a maximum has been obtained. Thus in 1974, the optimum output at minimum total variable cost for maximum profit is given above as 6785.71 tons. When compared with the mean output value of the whole industry for the same year (which was 103 2050 tons). It would be seen that In 1974, the firms in the industry were working far below the optimum capacity. The reason for this be due to lack of raw materials as well as lack of sound management practice. In order to compare the optimal output for th e tw o years under review, the optimum output for 1975 was also estimated In 1975 TVC = 386.173 + 0 .0000009Q ) (0.0000005) dTVC = 0.01105 - 00018Q <; 01, .01105 - 0. 0000018Q = 0 0.00000180 = 0.01105 Q * 0.01105 0.0000018 Q * 6138.83 tons Taking the second derivative, we obtain 2 d TVC dQ^ -0.0000018 In 1975, the optimum output of 5138.89 tons was also very much hi her than the mean operating output of 2912 tons. The optimal outputs for the two years appear quite close which in essence shows that no ;chan-es actually occured in terms of physical investments and processin g technologies in plants between 1974 and 1975. The rising variable costs explain in part the drop in optimal output. In conclusion, the processors in most cases mentioned lack of raw materials and the adverse effects of the 'U doj.i< sa?larry award as the . " , : , : , ................. V v * main reasons for operating far below the optimum capacity. CHAPTER VI FACTORS LIMITING THE EXPANSION AND ECONOMIC PERFORMANCE OF THE RUBBER PROCESSING INDUSTRY A. Factors Limiting Expansion The growth and expansion of the industrial have always been given top priorities by the Federal Government of Nigeria Towards these ends, the Federal Government has embarked on certain schemes and policies. These policies include (i) income tax relief (ii) Ir port duties relief (iii) Custom Duties (dumped and subsidized goods) act (iv) Company tax and (v) Double taxation re lie f, to mention a few. These policies protected the young indigenous companies from fierce competition coming from well established overseas manufacturers. The rubber industry like many other industries in the country has experienced considerable fluctuations in size and growth over the years. In the early part of this century, the number of firms in the industry was quite few. Between 1350 - 1365, (a period which could be regarded as the peak growth period), the number of rubber processing firms increased substantially. However, this number dropped in the late sixties following the outbreak of the civil-w ar. Aome firms folded-up due to shortage of raw materials. Even after the civil-w ar, the situation still remained the same 106 - and could even be regarded as worsening. Instead of expandin';. , the processing industry within the country is in fact now contractin. In number of firms. Why Is this so? During the field survey, an effort was made to find out the cau ic of this apparent decline in the number of firms. The processors wer asked to indicate their assessment of the entire industry in Nigeria. They were asked to rank those factors lim it in ; their growth and expansion from the following list of factors. (i) Lack of capital (ii) Lack of demand for finished products (iii) Shortage of raw materials (iv) Restriction on importation (v) Shortage of technical staff (vi) Shortag [e of management personnel (vii) Shortage of equipment, and Shortage of spare parts. All the sixteen firms studied responded enthusiastically to this section of the questionnaire. Resides ranking the factors, some firms gave additional information which though not listed above could enhance a rapid expansion of the industry. The results of the ranking obtained - 107 from all the firms have been summarized in table S . l . These results were subject to a non-parametrlc statistical test in order to determine the decre e of association among the ranking . Non-parametric statistics is based on the order of the observations and does not depend on a specific distribution of the data in question. Such a statistics is called a distribution-free sta tistic . Apart from bein. a relatively simple statistical technique to compute, it allows the analysis of data which may not be numerically precise but which throw light on the order of importance of the statements being analysed. There are many non-parametric techniques such as the Spearman Rank correlation, the sign te s t , Kendall coefficient of concordance (W) e tc . The most suitable technique for this study is the Kendall coefficient of concordance (W) because it can cope with many rankims without signs. Apart from being very reliable, this technique gives a measure of the degree of association among a number of observers or judges. Also, in a unique wa, , . . provides a simple measure of agreement among several statements in order of rankings. The mathematical notation used in this analysis is shown below; = Sum of Ranks (statements) ■ dLRj = Total sum of Ranks (statements) Mean of sum of Ranks N 108 (Rj ) = Deviation from rank mean N = ; (R̂ - ? *S ) = Jum of squares of deviation from rank ner.n N W = 12 S = Coefficient of concordance 2 3 ) Q r K (N - N) where N = Number of stated statements K = Number of Judges (. processors^) Using the rankings, the eight statements ranked by the processors are presented In the magnitude of the various sums of ranks (R̂ ) In table 5 .1 . The most Important statements were given the smallest numerical values. The analysis of ranks were derived and presented in table 5.2 The agreement as to the ranking of the statements among the processors Is expressed by W - 0 .4 3 9 . Fora meaningful Interpretation of the results of this analysis, the test of significance of the calculated .. 2 value of (W) was carried out by finding as given by the formula below - y = s i / 12kn (N + 1 ) As a rule, when N (the number of statements is lar itr than 7 as in this study, the above expression is approximately distributed as chi-squared with N - 1 degrees of freedom. 109 Table 6.1 • Ranks assigned to the factors affecttn the Expansion of the rubber processing Industry In order of Importance ource: - Field survey 1976 n o Table 6.2 Analysis of ranks assigned to the cl iht statement by sixteen rubber processors STATEMENT FIRM I II III IV V VI VII VIII Rl 42 104 72 105 87 76 47 23 C R. - ^ Kl - 3 0 .0 0 3 2 .0 0 0 .0 0 3 3 .0 0 15-< ^ 4 .00 -2 5 .0 0 -2 3 .0 3 N V / w R 2 (Ri - * 1) 9 0 0 .0 0 1024.00 0 .0 0 1 0 8 3 .0CJ* 225.00 16.00 625.00 131.00 N From table S . 2 , the following statistics were computed * 576 ^ Ri i * 72 N K ¥-- 16 S R 5 = ji (R - ; _ J _ ) - 4 7 2 0 .0 0 1 N Given the above information, we can now compute the coefficient of concordance using the formula W = 12 S K2(N3 - N) Substituting the calculated s ta tis tics , we obtain, W - 56640 , 0 .4 3 9 1 9 0 0 9 / 1 111 - which is tested by reference to table A in appendix II of Yates. 2 If the value of^X computed from above expression exceeds the tabulated figure for a particular level of significance and a particular value of df = (N - 1) then the null hypothesis (H^ that the (K) ranik ings are unrelated is rejected at that level of significance. Is . In this study, it was found that W =. 0. i39 and the significance was determined by applying the expression below X 2 = K(N - 1)W * 1 6 ( 5 - 1 ) 0 . 4 3 # X = 4 9 . 1 6 5 The tabulated X. value is 13.48 at 1% level of significance i .,- . the calculated X 2 is greater than the tabulatedjfc 2 showing that there is significant difference. In concludiin$g^r, «since calculated}^*exceeds the tab u lated ^ value, the coefficient of concordance is statistically significant at one percent level, thus indicating a rejection of the null hypothesis that the rubber processors rankings are unrelated to each other. Therefore, there is an agreement in the ranking of the statements by the processors. Interpretation of the Results The significance of the calculated (W) leads to the careful observation of the order of the magnitude of the various sums of ranks (R^). The results 112 of the chi-square and the significance of the coefficient of concordance (W) indicate that the ordering of the statements by the processors arc. relatively uniform. The least sum of ranks corresponds with the most important statement among all the statements. The highest sum correspond with the least importance factor affecting the expansion of the industry. Following the above ranking procedure, the order of importance of the eight statements as made by the processors are as follows (i) Lack of capital (ii) Shortage of spare parts (ill) Shortage of equipment and repairs men (iv) Shortage of raw materials (v) Shortage of management staff (vi) Shortage of technical staff (vli) Lack of demand for finished products (viii) Restriction on importation. On going through the above ordering of the statements as ranked by the processors, one could easily see that lack of capital with the least sum of ranks is regarded by most processors as the most limiting factor affecting their expansion. Next to this are shortage of spare parts , repair and maintenance workers and shortage of raw materials. The two least important factors are lack of demand for finished products and 113 restrictions on importation. It should be emphasized however that the significant value c£ (7.) and the result of chi-square do not necessarily mean that the pooled orderings observed by the processors are correct and exact. Infect, .nor are other factors not listed above but which have considerable r-tln ;s among each processor. Such factors however vary one processor to the other and it was admitted by many processors that once the first three or four limiting factors have been taken care o f, others would automatically be solved. E. Factors limiting the economic performance of the rubber processln . firms The above factors found to have affected the expansion of the industry were also limiting the economic performance of the existing firms. Though we accept in principle the ordering of the factors as given by the analysis, the present processing operation is afflicted by a number of problems . These problems invariably limit the profitability of the rubber processing firms. These problems include lack of capital, shortage of spare parts • and maintenance workers , shortage of raw materials and labour. (i) Lack of capital The major problem confronting the rubber processing firms is the lack of adequate capital. This problem is rampant in most developing H 4 - countries. In recent tim es, Nigeria is gradually overcoming this v/ith the mass production of crude o il. The rubber processing industry is relatively capital intensive. The current shortage of capital as claimed by most processors also lead to scarcity of raw materials since most processors need operating capital to purchase latexor other raw materials. As a whole, rubber Industry demands a substantial amount of working capital to meet operating expenses such as purchase of raw materials , labour and other inputs. Also, for a steady supply of rubber lumps, the processors have to make contracts with local rubber lump contractors and pay these contractors in advance. Besides, a lot of fund is spent on wages, plant and machinery repairs and maintenance. Another important aspect is that the large amount of capital is necessary to purchase new equipment since most of the machines are old and obseletc. The processors desire to purchase new sets of machines which can process good quality crumbs. However, not all the processors are equally affected by the lack of funds. Some processors such as government owned m ills, corporation owned mills and some processing firms with government and foreign investors are not in short of fund. The indigenous processors are mostly affected by lack of fund since th-y find it difficult to loan funds fron. commercial Banks. 115 (li) Shortage of spare parts and maintenance workers The second limiting factor is the shortage of spare ports for prccesslr. machines and equipment. This problem is however not peculiar only to the rubber processing industry. It is infact a nation-wide one affecting most industries. All the equipment and machines used in rubber nrocessin are imported. In some c a se s , processors purcha d but reconditioned machines. These machines breakdown quite frequently and require a large stock pile of spare parts to keep them in operation. Since these spare- parts are also imported, it usually takes months before they are made available to the processors. The delay is often attributed to the port congestion and bureaucracy involved in obtaining the licences from the Federal Ministry of Trade and Industry. In addition, difficulties arise in securing good maintenance technicians as repair workmen. (iii) Shortage of raw materials This is also a major problem facing the processing industry. Natural rubber in terms of latex lumps and scraps form the bulk of material input of the processing firms. The continuous shortage of raw materials commenced during the war. This condition has persisted long after the civil war as a result of the following reasons. 116 (A) low yield of rubber tree; The old age of the existing rubber plantations and those of sir a ll- holdincs has been responsible for the decline in latex yield. This age factor coupled with unselccted species cultivated by most smallholders , the prevalence of root diseases culmilate in poor yie] r the rubber trees. Many of the smallholdings were cultivated in the early part of this century and thus overdue for rehabilitation. (B) Lack of labour for tapping Another major attribute for the shortage of raw materials is the lack of labour to tap the rubber trees.. Since tihe out-break of the civil war in 1967, when the tappers who were mostly Ibos had to leave, the industry has been faced with non-availability of good rubber tappers. Accordin to a report by a working party on rubber production in Bendel state as a result of shortage of raw materials , five crepe fâ fcwiffi out of the existing eighteen mills which were located in the state had to close down between 1967 and 1968. A lso, the returns to the smallholders have been too low when compared with returns from alternate employment opportunities. For example, the tappers prefer to work as uardemers in the "oil boom area" rather than stay as smallholder rubber farmers. Thus, during and after the civil war, the Job of tapping has been virtually left for women and boys whilst 117 the itinerant tappers have been employed elsewhere. It should however be noted that the raw material shortage situation is li hter where shortage of toppers is not acute since the tappers are rated like their counterparts in other government owned establishments . Inspite of this attractive renumeration, some rubber p! Ions are still short of tappers and hence the mills have to workiow capacity. With regards to non-plantation mills which depend solely on the of smallholders , the lack of latex supply has led to the folding upborne of the establishments. //S’ Uv) Labour problem Another problem which is though not regarded as a major problem is labour. This is perhaps the industry is relatively less labour intensive. Instead of labour shortage, what is common within the industry omon/ the unskilled labour force is frequent absmteeian and short stay periods by workers. This is attributed to better opportunities outside the rubber processing industry. Due to the prevailing adverse condition in terms or profits to the processors , rnapy could not pay wages that would make them stay in the industry. There is a general shortage of technical and mana 'emeni: staff. As a result of the indigenization decree the top posts in the industry 118 ore manned by Nigerians. As presented earlier in table 3 .6 of chapter three, it could be seen that there were only nine Expatriate in the Industry in 1971 and by 1975 , this was reduced toefeht. They held top management posts in the industry. The shortage of unskilled labour is being experienced on rubber plantations, estates and small holdings. (v) iV.arketlng problem Lastly, the processors however stated there is always demand for their finished products which further confirms the mutual exclusiveness of synthetic rubber and natural rubber. But the frequent fluctuations in and low prices of natural rubber make the processors to be cautious in making contract for their products. Infact, some processors have direct ............... C r , ........, ' contact with the overseas buyers while many sell through local marketing agents • G r CHAPTER V n AN ANALYSIS OF FINANCIAL STATEMENTS AND ESTIMATION OF PRCFIT FUNCTIONS CF THE RUBBER PROCE IJING INDUSTRY A, Preliminary Consideration This chapter examines the financial statements and es timates some profit functions for the rubber processing firms. In the first part of the chapter, some financial ratios are computed for those firms which _ \ p submitted their Balance Sheets and Income statements for the period of 1974 and 1975. In the second part, some empirical estimates of the profit functions are made. In deriving the profit functions least square multiple regression techniques were adopted. B. Financial ratios and their use in business management The term "Financial Ratios ' is used to describe significant ralatlon- ships which exist between two pieces financial data. These ratios serve many purposes' they can be used to evaluate the financial condition and performance of a business organization. They can assist management In Its basic functions such as forecasting and planning. In lndicatin the economic performance and level of efficiency of the business concerned, they can be used to Improve the efficiency or raise the level of profits of the business organization. 120 A number of reasons account for the wide use of ratio analysis. Firstly, the ratios are easily calculated given all the accountln ; records. The second reason is that these ratios allow easy comparison between similar firms within an industry. Such a comparison gives insight into the relative financial conditions and performances of the firms. They arc also readily understood by various interested parties within and outside a firm. In many cases , not all members of the management team are financially oriented and ratios can provide a basic overview for heads of departments , the general manager and the Board of Directors. Finally, the ratios are helpful in showing the true picture of the firms financial position to all interested parties outside of management. These include creditors who are interested primarily in the liquidity of a firm. Their claim on the firm's assets is short term and the ability of a firm to pay their claim is best judged by means of a thorough analysis of its liquidity. Also the shareholders whose claim may be long-term are interested in the cash-flow and the firm's ability to service debt over the long run. The shareholder may evaluate this ability by analysing the capital structure of the firm, the major sources and uses of funds , its profitability over-time and projections of future profitability. Other interested parties include bankers, suppliersof basic inputs 121 and the government. The firm may also use ratios as part of an analysis to determine its own credit worthiness. Above a ll , in order to b: r : in more effectively for outside funds , the management of a firm should be interested in all aspects of financial analysis that outside suppliers of capital use in evaluating the firm. An adverse trend in the ratio calls for immediate corrective action. Types of financial ratios A group of financial ratios designed over the years to measure economic performance and efficiency in certain areas of a business organization may be presented under the following headings1 Profitability. Liquidity and Solvency. Profitability and solvency are ratios computed from income statement and sometimes from both the income statement and the balance sheet. Liquidity ratios are mainly computed frorr balance sheet. It should be noted that no one ratio can give sufficient information by which to judge the financial condition and performance of the firrr . Only a combination of these ratios can lead to reasonable jud -ernents. In each of these categories , we have several ratios but for this study only those ratios which can be derived from the available data will be discussed. I . -.'rofliability Ratios These are a fundamental measure of how effic iently a business - 1 2 » - or.anlzation Is bein g run and managed. Profitability ratios are of tv:o types; those showing profitability in relation to sales and those showin profitability in relation to investment. Efficiency within the rubber processing industry is measured in this study by: (a) The rate of return on operatinn capital; the higher this ratio is , the better. (b) ratio of fixed cost to total revenue- this is expected to be small. (c) rate of return on volume of s< • there are acceptable, ...re.a.s.o.n.a.b.le. .l.e.v.e.l.s... <8 ? ................ 'a) Rate of return on operating capital This is defined as net return divided by total operatin cost for the period under review. The rates of return on operatin:.' capital are derived for the various firms and the results presented in table 7 .1 . From the tab le, it can be observed that in 1374, four firms had over 50 percent rates of return on operating capital while four firms also recorded negative rates of return on operating capital. In 1375, no single firm recorded a rate of return that was higher than 50 per cent whilst four, firms recorded negative rates of return, * . \ The rates of return ranged from ^ I f . 90 per cent to 35.22 percent 123 Table 7.1 : Rates of return on operating capital 1971 - 75 - 12 4 - with an average of 22.82 percent for 1974 and for 1375 they rar ed from -4 0 .0 4 percent with an average of 3 .75 per cent. The sudd. a port Udoji increases in labour costs and the attendant disruptions in operations account for the enerally poorer performance • a ? (b) Ratio of fixed cost to total revenue This ratio gives an indication of how effic ientlv the fixe 1 assets are being used. The ratio is defined as total fixed cost divided by total revenue for die specified accounting period. The ratios are also expressed in percentages and the results derived for the various firms are presented in Table 7 .2 . The table show: 1974 > that ir^the estimated ratios ran ed from 0.52 per cent to 17.2 whilst in 1975, the range was from 0.51 percent to 2C.07 percent. These derived efficiency ratio serve two purposes: firstly , in both veers i'; could be seen that some firms were more efficient than o th er '. The most efficient firms had smaller ratios while the least efficient ones had larger ratios. Secondly, when we compere how efficient the Industry was in 1974 with that t>f 1375 , it is seen that the industry was less efficient In 1375 for the same reasons presented under profitability analysis 125 Table 7 .2 : Ratios of fixed cost to total revenue Ratios of fixed cost to total rev< (in %) Firm Code 137 A01 5 .36 13.87 A 02 5.35 7.85 A03 12.38 7.75 A 04 0.52 0.51 A05 4 .26 A06 32.975 7> O J f 5.72 A 07 3 A p 13.45 A Of 28.97 A09 Oo |Uoin> 5.89 A10 17.05 10.00 A ll 17.24 2.52 A12 2.55 n.a A13 2.05 5.85 A14 5.60 9.25 A15 0.96 2.13 A16 6.25 6.62 Source Calculated from the firms' records 126 (c) Rate of return on volume pf The ratio of net earnings to volume of sales is another measure of profitability. This ratio is usually defined as net earnings divided by value of sales within an accounting period. It demonstrates the effectiveness with which working capital was employe . e business are slow selling but have high profit margins while others compensate for small per unit margins by the large volume of sa les . In each c a se , the aim is to attain a reasonable level of pr The calculated ratios presented in table 7 .3 indicated that returns on volume of sales were generally low for the two years. The divergence between net earnings and value of sales is a reflection of high operating expenses incurred by the various firms in the industry. Secondly, the low level of capacity utilization raises unit costs of processing and thus reduced the profit margin. II. LIQUIDITY RATIOS Liquidity ratios are used to judge a firm's ability to meet short­ term obligations. From then, much insight can be obtained into the immediate solvency of the firm and its ability to remain solvent in the event of adversities. One of the most universal and most frequently used of these ratios is the current ratio 127 Table 7 .3 . Rates of returns on volume of sales Firm Code Net earnings orl volume of sales (In percentages 1974 1975 & L . A01 4 .0 A02 4.C \ 2.4’ A 03 24.2 17.0 A04 46 .6 9.8 A05 3 .5 3 .3 A 06 26.2 27.4 A07 31.7 45 .0 AOS 16.1 ✓ vC 33.4 AOS 3 5 .3 V V 13.8 A10 10.7 60.9 A ll 21.4 23.8 A12 34.9 31.9 A13 A 31.4 24 .6A14 46 .0 31.8 A15 42.3 21.2 A16 J0* 10.2 4 .9 Source Calculated from the firms' records 128 Current ratio = Current Assets Current Liabilities L somewhat more accurate guide to liquidity is the quick ratio or acid- test ratio. This is defined as acid-test-ratio current assets - Invent' current liabilities This ratio is the same as the current ratio except & excludes inventories - presumably the least liquid portion of current assets from the numerator. The ratio in fact concentrates on cash , marketable securities , and receivables in relation to current obligations and thus provides a more penetrating measure of liquidity than does the current ratio. Due to non-availability of data , the acid test ratio could not be calculated for this study. However, for those firms which provided the necessary data , the calculated current ratios are presented in table 7 .4 . The higher the ratio, the more is the chance that a firm will be able to meet its immediate obligations and stay bouyant. Firms with a ratio of 1 1 or less cannot be regarded as having a comfortable liquidity status. k close look at this table reveals that for the two years under review, on l^irm s representing 12.50 percent of all the firms studied could be regarded as being in a good financial condition. This is a reflection 0f rather poor financial management on the part of the firms. In essence , it imolies that most of the firms will have to borrow in order to meet their 129 Table 7.-1. Liquidity ratios of some firms In the rubber processing Industry A Liquidity Ratio•s J r Firm Code 1S74 197! & A 02 0.29 1 v ? 0.37:1 ^03 0.99 1 0.28:1 A 04 0.98 1 0 .5 1 1 A05 0 .2 9 1 AOS 1 .0 2 1 :& A 07 0 . 2 1 1 AOS 5.7 1 4 .6 6 1 A 09 0.71:1 0.45-1 A ll 0. 86:1 A14 4.39 1 4.75:1 Sou rce C a lc u la te d from the firm 's fin an cia l sta tem en ts 130 most immediate financial obligations. III. SOLVENCY RATIOS A business organization is said to be solvent if it can meet its immediate and long-term financial obligation and commitments. Infact, the solvency ratios reflect the position of a business capital requirements which is being supplied by the owners. These ratios are very useful and employed by people both within and outside the business concern. From lender's point of view, solvency measures indicate the kinds of problems the lending body would encounter in recovering their money in the event of business failure. The ratios can therefore have considerable impact on the availability of outside capital to the business. The solvency of a business organization can be estimated using the following formulae’ (a) Solvency = Net worth_______ Total net assets ) Solvency long term debt Capitalization The net worth/total net assets ratio gives an indication as to how a business concern can cope with its immediate financial needs , while long term debt/capitalization ratio shows the ability of the firm! to meet 131 its future financial needs. This is called ultimate solvency. Also, solvency ratios may lead to questions as to who is con troll ir the firms since as creditors supply more and more capital and thereby assume more risk , they can impose restrictive $ecvsenants onr managerial Independence. On the other hand, solvency rati los may indicate that the firm should consider borrowing more money with a subsequent opportunity of increasing returns on their investment. For this study, due to data limitations, only one of the two formulae was employed in measuring solvency ratios. The computed solvency ratios are presented in table 7 .5 . Table 7 .5 Solvency ratios of some selected firms in the rubber processing Industry Solvency Net Worth Total Net Assets _ Solvency ratio in percentages 1S74 (Sr) 1375 (Sr) A02 80.49 - A05 92.09 - AOS 88.76 89.84 A07 57.72 - A 08 65.32 68.45 A14 7 9 .M 92.00 Source Calculated from the firms financial statements 132 The ratios expressed In percentages are derived for some selected firms that made available their financial statements. The net worth/total net assets in addition to a firm's ability to meet its immediate dnancial obligations further tells us the amount of cap owners contributed to the business during the years under review . All the firm: show that owner's equity capital accounted for over 50 percent of the capital required by the firms to support their net a sse ts . These ratios thus further confirm the dependence of the various firms on personal sources as their major source of capital to finance the m ills. It should not normally be difficult for the firms to obtain additional funds from commercial lending houses. However, the results must be interpreted with caution since the items making up net worth and/or total net assets may be in appropriately valued. In summary, three points should be noted with respect to this financial analysis: firstly , there is considerable disparity in the rates of profits accruing to the rubber firms. While some firms had negative net returns, others are characterized by substantial positive returns. This variation in the rate of return may well be a good index of efficiency among the firms. The second point concerns the liquidity positions of the rubber 133 processing firms. For the two years under review, less than 13 percent of the firms were in favourable liquidity positions, thus majority of the firms would have to borrow to meet their immediate financial obligations. This situation is not always tolerated by most busiinesses * The third point to note is that some of the processing firms obtain funds from mainly personal sources. Thus reliance on personal savings rather than credit institutions limit their plant expansion. & & 134 C , ; ralysis of Factors Influencing Profits in the Rubber Processing Industry The costs and returns In rubier processing have bAeen der.lt with in details in chapter three From that chapter, it was cl earl/ shown that net returns were ,ot only highly variable but they were dependent on several factors. Furthermore, the profits in the industry appeared rather low. For instance, in both 1974 and 1975, about 25 per cent of the firms ade negative returns. In both years none of the processors made profits up to one million naira. Besides, ler e variation occured in the net returns of the firms . This lar„e variation made it quite difficult to reach concrete conclusions about the trend of net returns In order to meaningfully assess the determinants of net profit, a re resssion analysis was carried out. Four factors were selected as determinants of net profits . These factors were volume of sales , jost of labour / cost of raw materials ' and the a nount of sellin ex ,en ses. (i) Volume of sales - This is the total naira value of all transactions resultin • in sales durhg the accountin oeriod. In this study, it mainly consists of the sales of all types of finished rubber products such as crepe, sheets and crumbs. 135 At times , some firms sold scrap rubber to other processi fir s but such sales were not tHcen into consideration because the rubber had not undergone ary processing before they were sold, (ii) Labour cost - This c mi prised of salaries and wages aeid to all categories of workers. It ranged from ̂ Director's fees to unskilled workers' wages Also included in labour cost are fees oaid to owners of mills and wa es paid to casual workers who are usually enga jed for a short ti e durin j peak period. As mentioned earlier, the industry is fairly Qfipital intensive although it still e / a .e d a lot of labour. The percentage of labour cost relative to total cost for the two years in the firms have been presented in Te les 4 . 3 and 4 .4 . (iii) Cost of raw materials - The major raw materials cc sist of ru'ber lumps, latex and scraps. Other materials are coagulants ai ly used by rubber sheets and crumbs processors Raw materials fro: the bulk of the total cost in all the process in. units as were shown in Tables 4 .3 and 4 4, (iv) Selling and Shippin , Expenses - The finished products are • ainly exported to overseas countries. The marketing of these products involve a lot of transactions resulting in considerable expenses. Selling expenses consist of items such as port char es , 136 (arbour dues), marine insurance, shipping (frei ht) expenses, custorr duty and sales tax: alchou h sales tax was abolished race: tlv ,-y the Federal Government. I The basic -odel A profit function for the ru :ber process in? Industry car- <>e represented implicitly as follows < r = f(x, X X X U )------ •(EQ 1) _ where II = Net profit in Naira, = Volume of sales in Naira X = Labour cost in Naira , 2 X = Raw material cost in Naira, X = Selling expenses in Naira The explicit form of equation one can be written in linear for as follows •- Y = bo + biXi ---------------- +• U ---------------- (EQ 2) where i = 1 ..............................k , y = Dependent variable (Net profit in Naira) bo = the intercept bi's = Regression coefficients and Xi's = Explanatory variables 137 Putting it more clearly , we have Y = bo + b X + b X + b X + b X 1 1 2 2 3 3 4 4 where the variables are as defined above. bo = The intercept deter ines the proper profit throu jhout the entire equa and M - b , = represent the effect on net profit of a one-unit chan/e of each of the Xs The explicit forms of the rofit functions actually estimated included the linear and cower fo r 's and the empirical results are 'resented in the latter part of this chapter. Hypotheses The variables used in the re ression analysis and the expected effects of each selected factor on net profits are as follows: (i) Volume of sales - It is hypothesized that volume of sales and net profit would be directly correlated. (ii) Labour cost - An inverse relationship is expected to exist between net profit and labour cost. (iii) Cost of raw materials - An indirect relationship was expected to exist between net profit and cost of raw materials. 138 (iv) Selling expenses It was believed that a negative relationship should exist between the two variable:; „II „E stimatin Procedure A In deriving the profit functions for the rubber orocessin industry, two equations na ely linear and Cobb-Dou.las function ’d for s were fitted to data obtained for 197 3 only The 197-1 data were chosen for the followin_ reasons: 1975 was regarded by cst of the processors as the worst year i©*'all aspects. Also, the Udoji salary award had a double negative effect on profits by raisin the operating costs and simultaneously curtailing total output and revenue accruing to each firm In fact, in 1975, there were series of strike actions by factory workers end such strikes invariably led to the closure of some mills for several months- In consequence, there were conspicuous reductions in the volumes of outputs fro" various rubber processing fir with an ultimate fall in net profit ,i ar ins . Also, following the Udoji award, many tampers decided to leave the rubber industry for other sectors of the economy where wa„es were more attractive. This aggravated the perennial problem of shortage of raw materials for the processing industry. 139 III. E. ?irical results The results of both linear and nower functions fitted for 1971 data are presented in Table 7 . 5 , It can be seen fro:n the results that all the coefficients of multiple determination (R g/ are generally high. Infact, ranged from 0.92 to 0 .9 7 . This indicates that in 1974 between 92 percent and 97 percent of the variability in net profits could be accounted for by the seilected factors. Also, whilst volume of sales had positive relationship with net returns , other factors had negative relation since infact the net profit decreases as they increase. Based on its high explanatory power and the test of significance, the linear equat ion has been selected as the lead equation for the whole rubber processinj industry This linear equation has been presented in equation 3 below. w ' EQ. 3 m - = 15135.E0 + 0.M 88X - 0.978X„ (0.06230) (0.0857) - 2.82054 X3- - 1 .0622IX 4 (0.048S7) (0.4007) 2 R = 0.97 F - value - 80.44* * = Significant at 1% level of probability Figures in brackets standard error. - 140 - ___________ _____________________________________________________ Table 7 .6 r 1374 Profit Functions for Rubber Rrocessin-, Industry ^ Equation Type Dependent Constant Regression coefficients Variable tergi 2 R F-Value Xl -C r X 3 X4 Linear II 15135.00 0.9488 -0 .973 -2 .8205 -1.06221 0.3639 8 0.44 (0.08230) (0.C857) (0.4897) (0.4007) Power (Cobb - Douglas) 11+ 1G.939 -1 0 . 183 -4 .6375 -0 .2 0 9 6 0.9168 13.176 a ;0 (2.4350) (l.L 154) (1 .521L (0.598) + = log form igures in brackets are standard error 141 In the linear equation stated above, the test of significance for the regression coefficients showed that all the variables (X, X7 1 / L I and X^) were sijn ificant at the 1% level of probability. Also, the result of the linear equation in no way contradicted all the stated hypotheses with reference to s ijn s of the parareters. Because of the possibility of auto)-correlated errors in some of the selected variables the zero-ori >rrelation matrix wa: derived and presented in Table 7 ,7 . Table 7 .7 . Correlation matrix for the selected factors affectin profits C l ii x. x. X — i II i . ooC ^ X. 6 1 .0000 ‘ § / 4726 0.8463 1 .0000 x g t 0.1 473 0.8183 0.6230 1 .0000 0.0497 0.4110 0.2702 0.5236 1.0000 It could be seen that there is a close association ibetween volu. e of sales and cost of raw materials on one hand and volume of sales and labour cost on the other hand. The table thus indicates sor e presence of auto-correlated errors. This led the author to a rerun of the model after deletin one of the two variables that were closel'' associated. The statistical trial is described in detail in the next section. Eliminating autocorrelated errors from the mode Realising that when explanatory variab1les are highly correlated, the regression coefficients cannot be meaningfully interpreted; an effort was made to elinm inate the effects of auto­ correlation from the profit fun ctila:ons. This was done through a stepwise regression in which the auto correlated variables were dropped in turn from the basic equation. Thus, the following equation were fitted and examined for their ability to explain the relationship between profit level and the factors believed to affect it. bo + bjXj bo + b.X + b X 1 1 4 4 bo + b X , + b X 2 2 3 3 Eq. 7- II =■ bo + b„X + b X + b X 2 2 3 3 4 4 where all the variables are as specified earlier. Both linear and Cobb-Doujlas were fitted to each model and the Empirical results are as shown below. 1 13 Empirical results of the adjusted model The relationships between net profits and volume of sales are presented in tables 7.0 and 7 ,g \ In the linear function, It 9 was observed that the coefficient of multiple determination (R ) Is relatively high. It is 0.65 and shows that in 1971, 65 percent of the net profits could be explained by the volume of sales alone. A lso, the F-value is significant at 10% thus indicating the overall significance of the model Table 7. 91 presents thie resulllts of the combined effects of volume of sales and selling expenses on net profits. These two are rouped together because they did not show any close association. Using the linear function, the coefficient of multiple determination was reasonably high (0 .786). This shows that about 78 percent of the variability in net profits in 197-1 could be explained by the volume of sales and selling expenses. Also, the F-value is signi­ ficant at 10%. Table 7.1 o has been included to show the degree of association between the variables namely net profits , volume of sales and selling expenses. The table shows the absence of auto-correlation in this model 144 Table 7 .S . Profit functions for rubber processing Industry ̂ U7<" 7 “ ^ EQUATION Dependent Constant Term Regression Variable Coefficient R F-Value v X LINEAR TT -1 5 3 9 4 6 .32S 0.27698Xi 0.646 9.292* (0.03086) COBB- DOUGLAS -15 .297 3.44042X1 0.507 (1.52077) — — II = f(X^) volume of sa les . In brackets = standard error * = Significant at 10% tO,IO• Table 7 , :9 Profit functions for rubber processing hd 2 EQUATION Dependent Constant Term R F-Value Variable XjWS) X4(SE). LINEAR TT -3 0 3 8 5 1 .b Jl 0.26237XJ 0.29703X . 0 .776 5.613* (0.07831) (0.12538) COBE- < DOUGLAS IT -30.28989 3.G0833X1 (-2.I4779X^ 0.689 4.972* (1.42305) (0.96320) * Significant at 10?^ 146 Table 7.1 0 ■ Correlation matrix for some of the selected factors ri x § z IT X 0.44563 X 0.48088 0 .07 0 7 The results of the combined effects of labour cost and raw material cost on net profits are presented in Table 7 .11 From the linear equation, it can be observed that the coefficient of multiple determination (0.20) is rather low. This means that only 28 percent of the variability in net profits in 1974 could be accounted for by the combined effect of labour cost and raw material co st. The F-value was also not significant at 10X of probability. When selling expenses factor was added as a third variable to labour cost and raw material co st, there was an improvement in the coefficient of multiple determination (0 .55 ). This is to say that the three variables accounted for about 55 percent variability - 147 - Table 7- 11 rro fit functions for rubber p ro cess in g industry in I L'7/ EQUATION Dependent Variable Constant Term Regression C oeffic ients R2 F-value x 2 (LG) X (RC) 3 0 .2 9013 X2 0 .1941 5K3 Linear T r - 1 5 8 3 6 .4 4 5 0 .28 0 .523 (0 .5 1 0 *3 ) (0 .24375) j_______ Cobb-Douglas I T - 0 .2 9 2 5 7 X2 2 .4 2 2 0 5 X 3 - 8 .2 2 9 2 5 7 0 .3 8 2 1 .03 (1 .6 2 8 9 6 (1 .69673) TT = f(X2X3) In brackets standard error 146 Table 7 . 1 2 refit function for rubber processing Industr/ ---------------------- < ? - ■ > EQUATION Dependent Constant Term Regression Coefficients R2 Variable F-Value X (LC) X (r c ) X4(SE) 2 3 Lli.'EL-.R IT -68747.541 2.76413Xz - D.12C55X2 -1.55088X , 0.547 1.570 (1. 11105) ^ tC . 28138) (0.63508) 4 8 Cobb- IT -7 .7 3 2 -0.51242X 2 2 .4& J5X -0.15404X 1, 0.38J 0.636Oouglas (2.40317) (1.77615) (1.13601) ■ f(X2 X3 V <# In brackets Standard error. 119 In the net profits. But the F-value test showed that the estimatin' equation was still not significant at 10% level. The detaHedgesulfr. are presented in table 7 .1 2 . Also for the combined effect of these three factors on net profits. The correlation coefficient matrix is presented in table 7 .1 3 . In summary, it has been shown in the latter results that volume of sales and selling expenses are the two major factors affec’;in , profit in the industry. The former empirical results were spurious and invalidated by auto correlation. In general, one percent increase 150 in sales volume is expected to lead to about 3 .8 percent increase in net profit while a one-percent increase in sellin- expenses would lead to a decrease of about 2.14 percent in net profit. These findings have serious implications ; the rpolic” prescription for the improvement in the economic performance of the rubber processing industry. ................. o T CHAPTER VIII SUMMARY AND CONCLUSIONS ft f,J umrnary of major findings This study was undertaken to examine the perfoirmance of an egro-allied industry in Nigeria. Rubber -process ustry has been selected because of its high contribution to Nigeria’s economy. For instance, before the advent of crude o il, natural rubber was the major source of revenue to the Bend .1 State ment and it ranked fourth as a foreign exchange earner for jountry. An economic appraisal of the rubber processing industry is necessary at this time when the industry is facing a continuous yearly decline in output. The problems of declining rubber output are attributable to a number of factors among which are shortage of raw materials and a suspected poor performance of rubber processing firms. In addition an economic appraisal of this industry is likely to reveal the major operational and management problems with respect to the existing processing firms. This is the rationale behind this study. In chapter one, the economic importance of rubber in the eco> >my was shown. Its contributions to the GNP and its role as means of livelihood to many Nigerians were fully discussed. Many Nigerians are gainfully employed in the rubber processing industry, especially 152 In the Pendel State where over 85% of Nigerian rubber output Is produced. The country's rubber exoorts had increased over the years ~nd , - A her position in the world market was ranked sixth up till 19636 ^ Thereafter the position has been declining. As one of the ma. jor agricultural export crops of Nigeria , rubber accounted for about 8% of the country's total export earnings uo to 196 i. Also, in terms of employment generatioAn^. ab out 1,2 - 1 5 percent of the active population of Bendel State engaged in the rubber industry. The industrial survey carried out by the Federal Office of Statistics in 1972 showed thc^about 8000 people (representin i .7 percent of the country’s total industrial labour force) were employed by rubber process in industry. Other secondary benefits include the prevision of various infrastructures in the rural areas particularly in plantations and rubber es ta tes . The* second part of chapter one considered the historical development of rubber processin establishments in Nigeria. The origin of rubber and the various processing stages were fully discursed. Government efforts in encouraging rubber production during the early part of this century were welcomed with a great enthusiasm around Bendel and Delta areas of Nigeria. The first sets of people to establish 153 rubber plantations and subsequently rubber processing establish*' ert:- in the country were in Bendel State. Among these people are Jo Thomas and the f illers Brothers. These pioneers were followed by many enterprising Nigerians as well as foreigners and Star.; governments. The old Western region in order to demonst*ra2te the gains from factory rubber processing, established within the region sorre co-operative rubber processing mills . Between 1950 and 1967 the rubber attracted a lot of processors a result of the outbreak of the civil war during which m ostV^,®ipQp' le had to leave, many factories had to fold up and up till now some of them have not resumed operations . A brief review of some crevious studies concerning the rubber industry was undertaken in chapter two. It was found that most of these previous research work focussed on development program es concerning the rubber industry. None actually concentrated on the economic appraisal of rubber processing firms. In terms of research methodology, the area of study included Bendel, Ogun and Ondo States of Nigeria. These three states were selected primarily for three reasons. Firstly, Bendel State is the major rubber producing state in the country and should have the 154 reatest number of rubber processin firms. Secondly, the three states ( i .e . Bendel, Ogun and Cndo Including Oyo State an ’ some parts of Lagos State) comprised the former Western Region. In that w ise, they would all have many common policies, especially in respect of agriculture. Also due to limitations of funds and time more states could not be covered. The addresses of all the pr ;cessine. firms in the three states were obtained from the Federal Office of S tatistics. The data used for the study were collected with the aid of questionnaires distributed to the processing firms, and fror Federal Office of Statistics and other government institutions. In chapter three, some background information of the selactc firms were presented. These include the pattern of ownership., the amount of capital investment and sources of these capital. The analysis revealed that some of the firms are owned by private Nigerian entrepreneurs while others arc jointly owned by the government and some foreign investors. Sources of capital include personal savings, loans from commer­ cial banks, government sources and funds from foreign agencies. It was observed that quasi-government credit establishments such as NIDB, NAB and NBCI had not contributed much capital to the develop­ ment of the rubber processing industry. 155 In terms of manpower, all categories of labour were engaged in the industry. These include skilled labour, unskilled labour, technical staff, managerial st^ff and operatives. As in some .ether industries, the rubber processing industry is more capital intensive then labour intensive. A lot of capital is invested in thle paurchase of the processing machine and equipment. Also, it is noted that the expartriates in the industry are relatively few. The industry is currently experiencing a short? , e of both technical and managerial personnel. There is no shortage of unskilled labour, although there are cases of frequent absenteeism among this category of workers. The raw materials consist of rubber latex , lumps and scraps. Firms that process latex into sheets need a lot of coagulant such as formic acid or acetic acid. Other major inputs include water, fuel and electricityy Considerable amount of water is used in the processing of crepe rubber whilst all'the processing machines nre power driven. The chapter also discussed the different technological processes involved in rubber processin g. The technology involved in the processing of sheets differs fro", that of crepe, whilst that of cru. b rubber combines both methods in addition to the drying process. 156 Unlike some agricultural export commodities, marketin'; of processed natural rubber at the time of our field work was not undertaken by the Federal or Otate Government. The processor marketed their products either through local marketing agents or directlv to the international market through their overseas market sgents . A detailed analysis of costs and returns in the selected firms within the rubber processing industry was given in chapter four. It v/as noted that in all the processing firms all cost items were sir 11 t for the same kinds of operations. Detailed items of costs were O f analysed and it was revealed that the most important cost iten was raw material. Other significant cost items In decreasing order f magnitude are labour co st, selling expenses and cost of all meintennnea, The gross receipts were represented by the volume of sa les . The profit lesvels varied considerably from plant to plant and wore generally lo_w . A, bout 25 percent of the firms recorded negative returns in both years. Also, the net returns in 1375 were lower than those of 1371. This decline • can be attributed to many factors . These include non-availability of raw materials (which in turn ri(. uced the volume of sa les). Also, lack of raw materials led some mills to operate below optimum capacity. Another factor which led to lower net returns in 1975 is the Udoji Jalary Award which in a way reduced 157 the output of the industry because many workers went on strike r_;r months whilst production expenses rose astronomically thus con­ stituting a double drain on the returns to processors. In chapter five, cost functions for the rubber processin industry were estimated. Six functional forms nloameljy^;i 1linear, Cobb-Douglas , Semi-log Exponential, Quadratic dtvd Square root were fitted to two cost-output relationshi. ̂ These are total variable cost against Total output and Total cost against Total output. The Total variable cost against total1 output wi as more relevant to this study since the period of two years (1971 and 1375) being analysed in this study was too short to permit major chances in the sizes of plants. Although, they fitted the data better, the Cobb-Etouglas and Semi-log functions are linear and so it is not possible to derive an optimum level of output from them. Therefore, the quadratic function which also performed reasonably well was selected as the lead equation and was used in dert/ingtfie optimum plant s ize . It was observed that for the two years , the industry was operating far below optimum level of production. The analysis of some factors affecting the expansion and 158 economic performance of the processing industry was carried out in chapter s ix . Eight major factors were ranked by each processor as affecting the expansion and economic performance of the Industry. A non-parametric technique (the Kendall coefficient of concordance) was used in ranking these statements. The result of the analysis showed lack of capital as the most important factor. Next to this are shortage of spare parts , repair and maintenance, workers and shortage of raw materials. In the last part of the chapter, some explanations were mode on these rankings. The lack of capital was attributed ttpthe prevailing shortage of raw materials which made the industry to work below optimum capacity thereby lowering their net returns. A detailed financial analysis of the rubber processing firms was carried out in chapter seven. Financial ratios and their uses in business and management decisions were considered t Profitability ratios, liquidity ratios and solvency ratios were calculated for the firms which provided the necessary data. Due to the limitations and inadequacy of data, not all the ratios could be estimated. The major findings from the analysis are; (i) there is considerable disparity in the rates of profits accruing to the rubber firms. This variation in the 159 rates of profits may v/ell be a good index of efficior.c among the firms. (ii) For the two years under review, less than 13 percent of the firms were in favourable liquidity positions, '.hue a majority of the firms would have to borrow to meet their immediate financial obligations. This situation is not always tolerated by most business. (iii) Lastly, several of the processing firms obtained funds mainly from personal sources. This reliance on personal savings rather thany crerdit institutions tended to limit their plant expansion. The second part of chapter seven was concerXnedT with the empirical estimation of profit functions for the industry. A multir.le regression analysis involving four selected factors that influenced the returns was carried out. Two functions, namely linear and Cobb-Douglas were fitted. The linear equation performed very well and it was chosen as the lead equation. Though, the results showed that all the hypotheses postulated were valid, there was correlation between volume of sales and labour cost on one hand and volume of sales and cost of raw materials. Then by deleting some of the variables , the author fitted again the same two functional forms. 150 The results showed that, volume of sales and selling expenses 're the major factors affecting profits in the industry. Limitations of the Study The major limitation of the study concerns the poor quality c f some data collected from various sources. Paucity in data cou; ple is in a poor economic state . The poor economic state of the industry would be guaged from the tate of each processors. >̂11 of which stemmed from the lack of raw materials and the subsequent under-utilization of existing capacity. The output of the industry has been drastically reduced while production expenses have been increasing. Given this situation, it is Important to find out what should be our policy recommendations in our campaign to impro/ ■ the economic performance of the rubber processing industry. The following specific recommendations are presented for consider--tion . The attitude of the processors could be understood for the present state of affairs with regards to shortage of their basic agricultural raw material concerning the industry 161 Also, this is a cross-sectional study of the industry which covered only a two-year period, assumption regarding no changes in the ' sic investments on the industry could be valid. Despite all these limitations , the study has manai ged to appraise the economic oosition of the rubber processing industry. This appraisal might be useful to individual prospective investors, to the Nigerian rubber institute, the newly created rubber commodity Board, all the Tree Crop Divisions of the States Ministries of agri­ culture and Natural Resources. General Policy Recommendations and Conclusions The various major findings in this study have great implies tions for the rubber processing industry. There is a need to find ways of improving the present poor economic state of the industry. In dealing with these problems which are mainly (i) Lack of capital, (n) shortage of both technical and management personnel. iii) Shortage of spare parts and (iv) shortage of raw materials both the rubber processors and the government have Important roles to ploy. 152 The processors There is need on the pert of the processors to improve their individual economic performance. They need to upgrade their management capability. The lac!: of highly skilled personnel has been reflected in the poor economic efficiency of most of the mills studied. Such personnel will look into some key factors such as labour, management, all types of purchases made by the firms , selling and all marketing matters and the day to day activities of the firms. Also, in the light', of the prevailing situation in the whole rubber industry, rubber processors who hope to make reasonable profits must consider ways to increase their capacity utilisation. They must find ways of getting- regular supply of natural rubber. In fa ct, at this s;ttage tXhey need not attempt to expand their plants. They should repair and maintain the existing facilities and make better use of them. ^ Since capital is the major problem feeing the processing firms, the processors must find ways of improving their poor capital position. This can be done by improved relationship with the lending Institutions especially government credit institutions. Also, they can improve the situation through sales of shares to interested people and public institutions. Finally, effor^sshould be ffi£de to effect a continuous 153 strict financial control with regards to accounting practices of some firms. Steps to be taken by the government The newly created rubber commodity Board should set ip 5 rubber processing committee to look into the present state of aff'irs in the processing industry. This committee should be made up of rubber technologists, rubber marketing experts, production economist and some representatives of rubber processors, Such a committee, must include a member of the rubber commodity board and shoul .1 examine all aspects of rubber processing including lumps production and marketing of the processed rubber. Government should also look into the possibility of establishing rubber lumps marketing centres. The location of such centres shoul*’ be around existing processing factories. This must be followed by the standardization of rubber lumps into grades. These steps will eliminate the surpluses made by rubber lump contractors over the rubber smallholders. Since returns to smallholders will be bac^:'. on the quality of lumps produced, rubber lump producers will aspire to produce better quality and therefore earn renumerative revenue. Furthermore, such establishment will eliminate the practice where by rubber lumps are heavily adulterated to increase their weight in order to make more money. Subsequently, high quality processes rubber will be produced and the frequent breakdown of process in; machines caused by foreign particles in these lumps would be reduced, Above a ll , the Rubber Commodity Board which will now control the marketing of rubber in the country should try to erase the poor image already formed by the processors towards the defunct Nigeria Produce Marketing Board by making sure thatv steady returns get to the natural rubber producers at all levels . especially the processors who have been exposed to the rubber international markets. The ............................................. Board can through the Federal government explore new markets for the Nigerian rubber in the socialist countries and the third world not only for reasons of exports stability but also for reasons of market expansion. For this purpose, the Board can use bilateral, multilateral and other contractual agreements to penetrate these new markets. 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T, and Fluctuations in the Income of Primary Producers Palsh , F. W. Economic Journal Vol. LXII, December 1952, pp. 750 ^ 7 8 0 . 14. berry, S . 3 . , Western Nj- eria 1890 - 1 j :0 . A study of an innovation in a Develooln bean :• T ublished Ph.D dissertation, University •Michigan, Michigan, 1967. 15. Bradford, L. A. , and Far . : anasement Analysis . New York , Johnson, G. L. John Wiley and Sons, Inc. 1953, do. 328 - 329. Also quoted in X. R. Anschel, Economic Aspects of Peasant Rubber Production in bild- Westem Nigeria, 1965. jo< i Dillon, J . C . , Farm size . Iowa State College Press , aes 1956. Agricultural Productions function.-. Iowa State University press , Ames , 195. 27. r eady, E. O . , Economics of Agricultural Production nnd Resources Use Brentice - Hall In c . , En lewood C liffs. M. J . , 1960. 28. Uelleiner, G. K. , Peasant Agriculture . Government and Aeon.vnlc Growth in Nigeria . Economic Growth centre, Yale University Richard Iftvin I n c . , Homewood, Illin ois. 168 29. Johnson, G. L. Factor l arkets and Economic Develo > one, !:■ Manhenson W . W. (ed) Economics development of tropical Agriculture , Gainesville , Florida , University of Florida dress, 1968, pc. J3 - 111. 30. Jtrate les and Recorn ,iendatlon for 1 1 erian Rural Development 1969/85, C3.>jpD> Report 33 July, 1969. 31. Johnston, J. , -statistical cost analyst Iviacgraw - nill Book Company, New Yea" 1958. 32. Kmenta , J . Elements of Econometrics Macmilllan company, New York, 1971. 33. Laurent, C . K. Investment in Nigerian Tree Crops • Small holder production N .I .S .E .R . University of Ibada .R.D - 18 October, 1958. 34. A -fro-Indus tries in Ni erla N .I.S .E .R . TJ nivers ity adan , Nigeria C ..'j .N. R . D. - 25 Au m at, 13 1 35. Leftwich , R. H. , Q*rice systems and Resources Allocations Hult Rinehart and Winston, New York, 1955. 35. Lloyd , N . Report to the Government of Nigeria or; the Rubber Industry in the Mid-Western I.c Ion U. N. D. P . , T.A. 2517, F .A . O. Romo , 19 68. 37. McHale, T. R. The competition between synthetic and Journal Rubber. Thevalayan Economic Review Vol. VI No. 1 April 1961 pp. 23 - 31. S .^ Cb i , M. C. The Ikpoba Factorv-A preliminary case study pf the economics of Rubber process in In ■ - Id-Western Provinces of Nigeria , ' . J . 1 Working Paper No. 7 , 1965. 3 9 . C k e r e k a , O. The distribution ch an n els in the marketln: of 169 Rubber in Mid Western Jtate of Njg&ri: , Unpublished M .3c. Thesis, Departr ent of A.T ic. Economics, University of Ibad~n, June, 1970. 40. Clatunbosun, D. KU erian Governments I-ollcles affectin' Investment in Agriculture , N .I.S .E .A . University of Ibadan C .S .N .R .D . - 16 July, 19 6 -. 41. Cnabanjo O. O. Economic Appraisal of Rubber Production in selected farms of Ogun state of M :erla , Final year project, Dept, of Agric. Economics University of Ibadan, w/ay 1976. 42. Olayemi, J . K . and Income Price and Cutout variability ;or R1 orlms 3 . O. Olayide Iviaior Agricultural Exports. Technical Report A3R. No. 752 Dept. of Agric. Economics, University of Ibadan, Riarch 1975. 43, Olayide, S . O. and Trends and prospects of Agricultural Exports Olatunbosun D. ,f j .E .R . December, 1972. a 44. Oni, S . A. An Econometric Analysis of the Provincial and i :qreqate supply responses amon V esterr. Nigerian Cocoa farmers. Unpublished . h .D . Thesis, Department of Agric. Economics, & University of Ibadan, March, 1971. 45. Oni, S . A and Costs and Returns in Peasant cocoa product!.:■ ~ , Olayemi, J . K. A case study of Western Nigeria. D .r.Ed SV cl. ¥?-= 2 , 1971 .. 46.X2Hlllip, C . P . , Evaluation of Agricultural Projects . Bulletin of Rural Economics and -Sociology, Vol 5 1 October, 1970. 47. Phillips, A. O. Nigerian Industrial Tax Incentives- Import 9utv Relief and Approved User scheme , Nigerian Journal of Economic and Social studies Vol. 9 , No. 3 , November, 1967. (o 170 40. Ni eria's Experience with Income i : Ev emotional • A Preliminary Asser ± ej. . Nigeria Journal of Economic and Soci il Studies, Vol. 10, No. 1 , March IS 65. 49 . The significance of Nigeria's Inconu . Relief Incentives Nigerian Journal of Sc:- iomic and ocial studies, Vol. 11, No. 2 , Jul' 1969. 50. Polhamus, L. G, Rubber Eotanv, Production and Utilization , Leonard H ill, (Books) L td ., London, 1962. 51. Sawyer, J . S . The rubber industry in Sierra Leone and its prospects . 13S I . 52. Saylor, R. C . A study of obstacles to Investment in oil palm and rubber plantation. CSNRD/NI3F.F University of Ibadan, 1358. 53. Sayre , P. S . , Obstacles to Nigerian private investment- Nigerian Journal of Economic and social studies Vol. 4 , No. 1 , March 1962. 54. Schatil, L. Industrialization in Nigeria , Oxford University Press, Ibadan 1974. 55. 3 i e g e l / p . J Non-parametrlc statistics for the behavioural Sciences McGraw-Hill Book Company Inc. New York, 1906. 55. Smith, J . F . and The Financial Mana gement of Agribusiness Cooper, K. firms. Special report 26. Agric. Extension Service of Agric. Economics and U .S . , Oepertment of Agriculture , University of Minnesota, September, 1967. 57. Udo, R. K. British Policy and the Development of Export crops in Nigeria: Nigerian Journal of Economics and Social Studies, Vol. 9 , 1967. 171 58. Warren, H. V, Economics and Management In Aorlc-ILor Dept. ofAgric. Economics, Michigan State University Prentice - Hall Inc. , En'lewood Cliffs New Jersey, 1962. 59. W ells, J . C . Appraisin', an Agricultural projc Northern Nigeria- A problem of investments Evaluation , Nigeria Journal of Economic and Social Studies, Vol. 5 , No. 1 , I> arch, 1963. SO. W .N .D .P . Western Nigeria Development Project- Project Analysis No. 2 , Rubber Department of Economic Development. S I . W essels , H . R . Principles of Financial Analysis; A study of financial Manngomgnt, The Mac nillian company, New York, H)51. 62. Yates and Fisher- istical tables for hinloglral , ^ r ic 11 i;:i~.-L medical research , published by Oliver d Boyd Ltd. , Edinburgh. Agricultural Industries for the process in-, of raw materials in the Eastern Re 1 on. F .A .O . Report, Rome, 1963. 172 APPENDIX I An Economic Appraisal of the Rubber Processing Industry In Bendel. Oqun and Ondo states of Nigeria Questionnaire A .eneral 1. (a) Name of establishm ent---- ---------------- — j . ----------------- (b) When was it established ? ---------- (c) Total area (acreage) owned by firm — (d) How did you acquire the land for the site ? ------------ By lease — - ---------------- ^---------------------- Outright purchase-------------------------------------------------- Inherited - — Others (sp ecify )--------------------------------------------------- (e) Name other branches (if any) owned by the firm and location --------------------------------------------------------------- l?orm of Ownership 2 . Sole Proprietorship------------------------------------------------------ Partnership----------------------------------------------------------------- Private or Public Limited Company------------------------------- Government---------------------------------------------------------------- Co-operative 173 Statutory Corporation Others (sp ecify )------ Location 3 . Why did you select this site for your business ? Cheap labour-----------------------------------------------------------O- V----*--- Close to source of raw m aterials---------------------------------------- Availability of electricity and water .............:J ._ ..................... 7 Good roads, rail and seaport--------------------------------------------- Where land is av ailab le----------------------------------------------------- On Government recommendation------------------------------------------ An ind,u..st.r.ia.l. .e.s.ta..te..--.--.--.-.---w----N------------------------------------------ Others (specify) • .............. ..................................................................... Investment Pattern (a) Initial total investment--------- (b) Current total investment------- (c) Present paid up c a p ita l--------- (d) Sources of Capital investment Government------------------------- Personal saving------------------ Cooperative members---------- Foreign investor------------------ 174 Credit Corporations -■ Commercial ban k s---- Cuildinq And Equipment (a) How many buildings do you have at the s ite? (b) Name type of building Processing h ou se------------------- v f .... Bailing room-------------------------- Store ------------------------------------- Office — (c) Give an account of the equipS me' nt used in your processing U n it------- (i) ------ c ( l i ) -------- ^ ------------------------------- --------------------------- > 3 . (ill) — - ----- (iv) ------ _ (v) — 175 Labour 6. (a) Category Number Wages an! C laries 1971 1975 1375 (i) Nigerian Professional administrative and managerial (ii) Non-Nigerian v Professional administrative a n d /} managerial. (iii) Clerical and other office workers (iv) Technical (v) Operative and Unskilled workers 0̂ (b) Other benefits to workers N .P .F . Contribution----- Private Pension scheme • iviedical B en efits--------- - _______ _ ---------------------------------------------------------------------------------------- % - 175 - Housing schem e----------------------------------------------------------- Others (specify) --------------------------------------------------------- (c) What are the main problems you have with labour in this business Shortage of skilled workers Frequent resignation T .... Strike a ctio n ---------- Low productivity---- Others (sp ecify )----- Raw i laterials And Finished Products 7. Raw materials (a) State your major raw materials and sources Type Source Quantity Purchased 1974 1975 ( j A (iii) (iv) _______________ 177 (b) Finished products (a) Domestic buyers a o _ X < 3 - Other companies Distributors Appointed Agents Others (specify) ■ (b) Foreign buyers Countries (i) 178 ( l l ) ------------------------------ (H I)------------------------- ( lv )------------------------ (v )------------------------ (c) What have been your major marketing problem ? No capital to expand----------- No demand for products--------- Rising cost of production------- Lowering selling price Government product price con tro ls--------------------------- Monopoly by larger m ills ---------------------------------------- Others (sp ecify )----------------------------------------------------- 9 . -lanagerlal Factors (a) Any market research Department? Y e s ------------------------------N o --------------------------------------- (b) Any form of advertisement ? Y e s ------------------------------N o --------------------------------------- (c) If y es, state brief the impact of advertisement on your business 179 (d) Do you consult any firm or business consultants ? (e) Have you organised any in-service-training for your employees ? (f) What are the basic roals and objectives of your business ? j Q (g) her firms in s X the industry with regards to (i) Procurement of raw materials (ii) Joint orocessing J > ' (111) Marketing each others products (iv) Staff exchange (h) Are you affieecctted by the indigenization decree? Y e s ------ ----------------------- No < 5 If yes , what have been your problems since the decree came to effect ? (i) What are the main problems facing your business expansion? 0) In youropinion, is the rubber industry contracting expandin ? (k) State briefly what you think the government can do to sustain and effect better expansion of the industry. cn ifs