Impact of trade credit on performance of cocoa production in Southwest Nigeria

Abstract

Cocoa profitability has declined due to the low use of approved pesticides for pest and disease control and soil nutrient enhancement, which is caused by inadequate funding. This decline is particularly concerning in Nigeria’s cocoa sector, which is dominated by resource-constrained smallholder farmers who face significant credit limitations. Access to trade could address this issue by enabling farmers to increase their input usage, thereby boosting their profits. This study investigated the impact of trade credit on cocoa profitability in Southwest Nigeria, utilising a multistage sampling technique to select 300 farmers. The data were analysed using descriptive statistics, endogenous switching regression (ESR), propensity score matching (PSM), and inverse probability weighted regression adjustment (IPWRA) regression models. The results show that 80% of the farmers had access to trade credit, with 65% receiving it from buying agents. Cocoa merchants provided the highest mean trade credit value of ₦286,363.60 (~$382). The results of the IPWRA reveal that trade credit leads to a 25.62% decrease in cocoa profit. However, the heterogeneity analysis indicated that low-income farmers with access to trade credit experienced a significant 33.9% decrease in cocoa profit. In contrast, middle-income farmers had a nonsignificant 7% decrease, and high-income farmers saw an increase of 102.1%. Therefore, while trade credit holds promise, its effectiveness varies across different income groups. Policymakers should explore complementary strategies, such as financial literacy and risk management training, particularly for low-income farmers who are more vulnerable to misallocating credit. The observed differential outcomes ground these recommendations, suggesting that effective credit use, not just access, is key to improving profitability.