Below-average incomes from groundnuts are contributing to Stressed food security outcomes

• Senegalese oil processing companies scaled back their groundnut purchases earlier this year in an effort to minimize losses caused by declining global groundnut oil prices. This year’s official price for unshelled groundnuts, an important cash crop in Senegal, was considered too high by Senegal’s main oil processing companies during the regular groundnut marketing season (October to April), which further limited their ability to purchase from producers.
• This disruption to the groundnut marketing season resulted in below-average incomes for poor households, forcing them to sell more groundnuts than usual through informal channels and at lower prices. These households also sold unusually large volumes of their cereal crops, which they perceived to be more profitable, drawing down their food stocks to atypically low levels.
• In addition, national cereal and groundnut production levels for the 2013/14 season were 20 and 21 percent, respectively, below the five-year average due to the effects of rainfall deficits in 2013. This has also contributed to limited food access for poor households in the country’s groundnut basin, where Stressed (IPC Phase 2) food security outcomes will be observed between now and September.
• Groundnut planting rates for the upcoming growing season could be below-average in the wake of this year’s marketing problems. This, combined with seasonal forecasts showing an increased likelihood of below-average rainfall levels, suggests the possibility of below-average groundnut production for the 2014/15 cropping season. World Bank forecasts indicate that global groundnut oil market conditions are not expected to show major improvements in the coming months.

Senegal is the world’s leading exporter of groundnut oil (Figure 1). Groundnut productionoccupies approximately 40 percent of Senegal’s arable land area, employing approximately 60 percent of the rural population, or more than a million people. More specifically, the groundnut sector is the main source of cash income for rural households in the groundnut basin in central areas of the country (livelihood zones 8 and 12 in Figure 2). Economic and commercial activities associated with groundnut production can be divided into the following two categories:

• Formal sector activities: On average, 60 to 70 percent of all groundnut production is sold through formal channels (Groundnut Sector Development Policy Letter, 2003). The country’s three largest industrial oil processing companies are SUNEOR, NOVASEN, and CAI Touba, all of which are export-oriented. Producer prices in the formal sector are standard throughout the country during the marketing season (October to April) and are set by the government and the National Groundnut Trade Association Comittee (Comité National Interprofessionnel de l’Arachide, CNIA).
• Informal sector activities: An average of approximately 30 to 40 percent of groundnut production in Senegal is sold through informal channels. Unlike the formal sector, prices in the informal sector are determined through the forces of supply and demand on weekly spot markets. Farmers can sell their groundnuts at any time of the year and prcies are generally lower than in the formal sector. Small-scale processing plants produce oil and feed cakes (for animals) for sale to local households and to intermediate cities. The quality of the oil produced by these small-scale crushers is considered inferior to that of the oil produced by the formal sector.

Since most groundnuts grown in Senegal are sold to export oriented formal sector processor, any shocks to the world groundnut market can have serious implications for household income in groundnut-producing areas.

The large supply of groundnut oil in consumer countries (including China, the world’s leading importer of groundnut oil) in 2013/14 weakened world market demand compared with previous years and caused low world groundnut oil prices recently. For example, as of the beginning of this year, prices were down 38 percent from last year, 55 percent from 2012, and more than 30 percent compared to the five-year average (World Bank, Figure 3). In Senegal, these shocks coincided with a hike in the official producer price of groundnuts to 200 FCFA/kg, five percent above the 2013 price. This left oil processing companies with a very small profit margin (a high purchase price for their raw materials compared with the selling price of their end product) and weakened demand for locally-produced groundnuts.

In addition, relatively good groundnut prices in 2012/13, fueled by strong foreign demand (particularly from the Chinese), encouraged farmers to plant larger amounts of land in groundnuts (29 percent larger than in 2013), to the detriment of cereal production. However, with the 2013/14 growing season marred by a drought, both groundnut and cereal production fell short of expectations. Thus, groundnut production for 2013/14 was approximately 21 percent below the five-year average (Figure 4) and cereal production was also down approximately 20 percent (Department of Agricultural Studies, Planning, and Statistics, March 2014).

Low groundnut demand from large industrial oil processing companies at the height of the marketing season (October to March) caused households to sell more of their groundnuts to informal operators at weekly markets at lower prices (15 to 20 percent lower than the official price). Poor households also sold large volumes of cereal crops which they perceived to be more profitable, and in an effort to make up for reduced groundut revenues. However, this strategy of selling earlier than normal cereals from a below-average 2013/14 harvest has contributed to below-average cereal stock levels for poor households.

The introduction of government price support programs designed to compensate oil processing companies for their lost revenue strengthened industrial demand in March. However, only large farmers with the means with which to store their groundnut crops in anticipation of an improvement in prices have benefited from this recently improved demand.

The marketing problems in the groundnut basin, along with unfavorable prices and shortfalls in groundnut and cereal production, are responsible for lower incomes and smaller cereal stocks for poor households compared with the previous year. This has in turn weakened household purchasing power and has curtailed their market access. For example, proceeds from the sale of one kilogram of unshelled groundnuts in Kaolack in February 2014 could enable the purchase of 0.36 kg of imported rice, which is 29 percent below the five-year average of 0.51 kg of rice (Figure 5). Low incomes are also limiting households’ abilities to invest for the upcoming (2014/15) growing season.

According to World Bank forecasts, there will be no major changes in world oil market dynamics in the coming months. This will only serve to perpetuate the currently low industrial demand and producer prices for groundnuts in Senegal. While crop planting activities in most parts of the country have not yet gotten underway, these recent issues are likely to encourage farmers to scale back the size of areas planted in groundnuts in favor of cereal crops. Moreover, according to the major metereological forecasting centers (IRI, ECMWF, PRESAO 17), there is an increased likelihood of below-average to average cumulative rainfall totals during the rainy season (June to September), which could result in lower levels of cereal production for 2014/15. Below-average crop production would weaken the livelihoods of poor households and heighten their vulnerability to food insecurity during the upcoming consumption year.

As for food security outcomes between now and the end of the consumption year, the premature depletion of food stocks, particularly in groundnut-producing areas, is causing households to be highly market-dependent one to two months earlier than usual. In addition, there will be a seasonal increase in prices for locally grown cereals between now and July/August. However, favorable world market dynamics and record import levels by Senegal should keep imported rice prices stable. Poor households in northern areas that experienced poor production and households in the groundnut basin who suffered the effects of the groundnut marketing problems and crop production shortfalls are resorting to atypical coping strategies (ex. sharper than usual cutbacks in nonfood expenditures, larger than usual sales of forest products and straw, and atypically high levels of borrowing) to meet their food needs and will continue to do so until the upcoming early green harvests in September. Consequently, food security outcomes in impacted areas during this period will be Stressed (IPC Phase 2). However, the availability of green crops in September will ease food security problems and food security outcomes will improve to Minimal (IPC Phase 1) at that time.