EXAMINING THE INFLATION-HEDGING PROPERTIES OF AGRICULTURAL COMMODITIES STOCKS IN NIGERIA

Abstract

This paper investigated the extent to which agricultural/agro-allied stocks are a hedge against the expected and unexpected components of inflation in Nigeria over the period 2000–2011. Our analysis focused on the six most active stocks in one of the most successful and vibrant industrial sectors in the Nigerian stock market. The stocks of agricultural/agro-allied sector are actively traded on the NSE. Given the high inflation rate within the study period, we tested the inflation-hedging properties of equities of the agricultural/agro-allied sub-sector of as we did for stocks of other sectors listed on the Nigerian Stock Exchange. We employed the analytical tools of Fischer’s model and regression analysis to capture the hedging potentials of the subject stocks. With the Fischer’s model, and based on enterprise return on shareholders’ funds, livestock feeds, on the average, generated positive real return on equity over the 12-year period, followed by Presco and Okomu. Okitipupa Oil Palm had the highest average negative real return over the 12-year period. From the perspective of dividend and capital gain yields, Okitipupa, Afprint, Okomu, and Presco depicted positive real returns while Livestock feeds and FTN exhibited negative real returns on equity. Assessment based on capital gains yields revealed positive real returns from all the stocks over the period, except for the stagnant stocks of Okitipupa Oil Palm and Afprint. The evidence demonstrates the inflation-hedging property of capital gains which may explain investors’ proclivity towards stocks with price appreciation prospects.

Keywords: agricultural/agro-allied stocks, return on equity, real return, nominal return, consumer price index, inflation-hedging capacity, shareholders’ funds, dividend yield, capital gains yield, Nigeria.