Beginning in the 1950s and till the mid-1960s, Nigeria remained the largest producer of crude oil palm the world over. It had a market share of 43.0%, supplying 645,000 MT of palm oil, on annual basis, across the globe. The civil war which began in 1967 and lasted till 1970 changed all of that. The war predominantly took place in eastern Nigeria which was the seat of oil palm plantations. The oil palm belt includes the states of Abia, Anambra, Bayelsa, Akwa-Ibom, Cross River, Delta, Ebonyi, Ekiti, Enugu, Ondo, Ogun, Osun, Oyo, Imo and Rivers.
The war destroyed almost all of the oil palm plantations and dispersed the small landholders of oil palm, who to date, accounts for 80.0% of the oil palm produced locally. The war though ended but left behind a legacy of a crippled oil palm industry.
The total land that is ideal for oil palm plantation totals approximately 24 million hectares in the whole of Nigeria. However, little over 3.0 million hectares of land are put to use. The total plantation area of oil palm in and around the Niger Delta ranges from 1.4 million hectares – to 1.8 million hectares, the wild grove plantation is more than 1.1 million hectares, smaller plantations (categorized as plantations below 1000 hectares) approximately 26,000 hectares and organized large estates adds up to another 100,000 hectares.
Today, from being the largest producer of oil palm, Nigeria is now a net importer of palm oil. According to IndexMundi, a data portal, the domestic palm oil produced totalled 850,000 MT in 2012. As is visible, in the chart above, the growth in oil palm has stagnated at 850,000 MT since 2009. The consumption of palm oil in Nigeria amounts to 1.0 million MT per annum. The official figures state that the shortage in the oil palm industry is estimated to be around 150,000 MT annually.
However, analysts estimate that the major importers of crude palm oil (CPO); Nigeria and the Benin Republic, import 450,000MT and 470,000MT of palm oil per annum, respectively. Sources claim that most of Benin Republic’s CPO imports find their way into Nigeria as Benin exports close to 390,000 MT of palm oil annually. Thus, the actual shortage of CPO could be as high as 540,000 MT if the exports from the Benin Republic are taken into consideration.
Domestically, the technical palm oil (TPO) produced in-house is preferred because of its “tangy” flavour, a feature which is missing in imported palm oil. On the other hand, the demand for special palm oil (SPO) has been on the increase, which is further refined and bleached, to cater to the needs of industrial processors. There is an estimated shortage of 150,000 MT – 300,000 MT of TPO and 200,000 MT of SPO which is fulfilled through imports.
90.0% of palm oil is consumed by the food industry and the remaining 10.0% is used by the non-food industry. Foods like noodles, vegetable oil, biscuits, margarines, shortenings, cereals, baked stuff, washing detergents and even cosmetics thrive on palm oil. The noodle industry alone consumes 72,000 MT of imported palm oil and the leading, domestic palm oil producers fail to meet this demand. Thwarted by the unavailability of sufficient oil palm in the Nigerian market, some noodle-makers have proactively announced strategic alliances to invest in oil palm plantations.
Nigeria today produces only 1.7% of the world’s consumption of palm oil which is insufficient to meet its domestic consumption which stands at 2.7%. Thus, the question of net exports doesn’t arise; however, paradoxically, about 20.0% of the oil palm produced domestically is considered of high quality and clears all the seventeen tests for being an exportable commodity.
Challenges in the Industry
Large-scale monocultures have failed in Nigeria, for instance, the 1960’s Cross River State project and the European Union-funded “Oil palm belt rural development programme” in the 1990s. In addition, these are harmful to the ecosystem, weaken human society and are inefficient. The Cross River State was a project that included the plantation of 6,750ha of oil palm in the largest Nigerian tropical rainforest remnants undertaken by a company named Risonpalm Ltd in partnership with the state government. The project, soon after approval, received funds from the European Union for seven long years. The EU discontinued the funding in 1995. Soon after, in 1997, the plantation was abandoned as it failed to produce results. It was revitalized in 2003; however, in 2010, the state government decided to invest no further in the plantation as it was not producing the desired results. Now, the government of Cross River State has decided to appeal to people from the private sector to put money on the plantation and support the distressed oil palm industry. Presco Plc, a listed company on the Nigerian Stock Exchange (NSE) has now acquired Risonpalm from the Cross River State government.
One of the biggest challenges faced by Nigeria’s oil palm industry is the dispersed nature of the oil palm plantations. Most of these plantations, as much as 80.0%, are small holdings of marginal farmers, which fail to enjoy economies of scale attributable to large-scale farming. The farmers, due to limited funds do not have access to improved seedlings and technologically advanced methods of processing. The existing land management regulations add to the woes of the oil palm industry as the crop takes long gestation periods to yield returns.
Government-induced challenges:
Poor agricultural policies gave that agriculture contributes 40.0% to the nation’s GDP while oil & gas contributes 25.0%.
Smallholders of oil palm plantations have practically no access to government credit facilities. However, 80.0% of oil palm production comes from dispersed smallholders.
Consolidated Smallholders covering an area of 1.65 million hectares still use manual techniques of processing palm oil due to a lack to of access to technology
Import tariffs on fertilizers make manure out of the reach of small-scale planters’ leading to low yields
The “Land Use Act” acts as an impediment in the growth path of palm oil plantations. It restricts the acquisition of large areas of land in the palm oil belt of the country.
Ageing plantations, yet no efforts to replant or extend the land under cultivation
Deteriorating yields due to low quality of seedlings
The indirect impediments:
Poor maintenance of plantations
Low rate of extraction
Obsolete methods of processing
The paucity of funds in the agricultural sector serves as yet another deterrent to the growth of the oil palm industry. The farmers resort to either large banks that charge exorbitant interest rates, as high as 20.0%, to extend credit or they have to curtail input costs, hindering the quality and scale of production. The waning returns from the industry no longer attract labour, thus, leading to a surge in labour expenses.
Domestically produced vegetable oil faces increasing threats from the competitive assorted oils dumped by foreign MNCs in the market. On the price front also, domestically produced palm oil is not competitive in the world market. It could only compete with the global producers in the Nigerian market because locally produced CPO is cushioned by an import duty of 35.0%. If the import tariff is removed, Nigerian CPO would be rendered uncompetitive even after the fat margins are involved all through the value chain.
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Initiatives Taken to Revive the Industry
Nigeria, the fifth-largest producer of oil palm, earned estimated revenues of $205.3 million in 2012 from oil palm and this is expected to reach a total of $290.4 million by 2016 due to the increased focus of the government on emancipating the oil palm industry and earning back its lost glory. Thus, the government is now focusing on increasing the area under cultivation and also improving the yield per unit area.
The government is taking conscious strong measures to revive the industry. It has rolled up its sleeves to increase considerably the land under cultivation and also is all set to increase the per hectare production. The target is to increase production to meet the domestic demand and curtail imports, in the near to medium term. In the long-term, the government should strategize to take on the global leaders by becoming a dominant supplier of palm oil in sub-Saharan Africa. Then, the country can move on to regain its position as the world leader in the palm oil market.
Restoration measures by the Government
Rehabilitation of an estimated unkempt plantation of 48,000 hectares, annually.
Awareness and assistance regarding “fertility management practices” to be carried out for smallholders, planters and co-operatives
The estimated 9 million seedlings raised in 2012, is expected to plant 60,000 hectares in 2013.
Motorized harvesters with capacity to plant 500-900 Fresh Fruit Bunches (FFBs) per day are to replace manual climbing of oil palm trees.
The government increased funds 77% to N9.7 billion in 2012 compared to N5.5 billion in 2011, under the re-ignited Agricultural Credit Guarantee Scheme Fund
The above mentioned initiatives are expected to reap in benefits:
Motorized harvesters are expected to add an excess of 192,000 MT of FFBs which is likely to lead to an additional 30,000 MT CPO.
The maturity of additional 60,000 hectares of plantation is expected to add 87,500 MT of CPO annually.
Would curtail the annual import bill of N24.0 trillion which the government spends on food importation.
It’s been estimated that the demand for vegetable oil in Nigeria increased at a rate of 5% annually between 1997 and 2002; however, the production of oil palm has increased only 1% – 2% per annum during the same period. The wide gap between demand and supply of oil palm in Nigeria offers huge market opportunity.
The government has resorted to prohibitive measures, like import duty of 35.0% on imported palm oil, shielding the local producers from competitive imported CPO. The question then is why these companies are not producing at their optimum levels.
For instance, the two leading oil palm companies listed on the Nigerian Stock Exchange, Okomu and Preso have been declaring cash dividends instead of reinvesting profits to boost capacity in the sector. Okomu Plc, for example, declared dividend to the tune of N8.4 billion in 2012 (compared to N6 billion in 2011) and also declared bonus issue rather than ploughing the profits back into the business to augment its capacity and addressing the crisis in the CPO market. Another public listed company, Presco Plc, declared dividends to the tune of N1 billion in both 2012 and 2011.
The mentioned factors forces one to question; if the will to not augment the production of oil palm within Nigeria connected to the ownership structures of both the companies where foreign stakeholders control majority stakes or that the high import tariff protects from competition and hence they do not feel an urgent need to increase output? Okomu Oil which announced to build the largest oil palm plant in Nigeria would be expanding its production capacity to 60,000 MT per annum by the end of 2014, from its current capacity of 30,000 MT annually. However, according to media reports, the company currently produces at 13.0% of its installed capacity which is expected to go up to a little over one-fourth of the installed capacity with the planned expansion. Thus, the plight of the industry still remains lamentable.
Progress Made So Far:
-Fri-El Green Power, an Italian company, in 2007 signed an agreement with the government of Abia State. According to the terms of the agreement, the Abia Palm Oil plantation was converted into a company named Fri-El Abia Palm Ltd, with Fri-El Green Power holding 80% stake and the remaining 20.0% will be owned by the state government. The rehabilitation work also revised the old oil mill located at Mbwasi, putting it to use. The Italian company plans to utilize the processed palm oil in fuelling European biomass power plants with little to offer to uplift the dismal state of the electricity sector in Nigeria. However, the company maintains that electricity produced out of the waste products can be used locally.
Food Products Non-Food Usage
Cooking oil, Cosmetics, Deep frying oils, Detergents, Margarines, Soaps, Shortenings, Drugs ,Spreads, Candles, Alternative fats, Lubricating oils, Confectionary fats, Grease, Ice creams, Surfactants, Nutrition, Chemicals, Others. Agric uses Paints Coatings, Electronics, Biodiesel, Leather.
Several Uses of Palm Oil Products
-The Nigerian oil palm industry has received constant support from the World Bank. Nigeria has been the 2nd largest recipient of oil palm projects from the World Bank, receiving 6 projects between 1975 and 2009. The outcomes of these projects led to an oil palm plantation of 42,658 hectares of land, road development and increased capacity of oil mills.
-In 2010, Federal Government in partnership with Cameroon and United Nations’ Industrial Development Organization (UNIDO) established a Common Fund for Commodities as part of its efforts to enhance the income generation capacity of oil palm in the Western and Central parts of Africa.
– The hybrid seedlings produced by Nigerian Institute for Oil Palm Research (NIFOR) is competitive with the Malaysian seeds’ which produces output of 4 tons of palm oil per hectare. If the state governments take to the policy of “back to the land”, Nigeria could re-gain its title of world leader in the oil palm industry, within 12 years.
On the flip side, the rippling impact of the import tariff on importation of palm oil cannot be ignored. The food industry where palm oil is the key input saw a constant increase in end prices due to increase in the manufacturing costs of food products. The increase in food products is a direct contributor to the increasing inflation levels which leads to a weak economy at large.
Global Outlook
On a global basis, the value of the oil palm industry amounts to $40 billion – $50 billion. Presently, global demand for oil palm consolidates to 49.5 million tons. The production of CPO is expected to grow by 8% – 10% in 2013 achieving a total volume of 57 million MT – 58 million MT. Indonesia is expected to produce 30 million MT and Malaysia is expected to produce 18.9 million MT between 2013 and 2015. The industry is expected to reach 62.5 million tons by 2015 attributed to the increasing demand from food, chemical and bio-diesel industries.
The European Union (EU) requires that by the year 2020, 20% and 10% of energy and transport fuel, respectively, should be derived from renewable sources of energy. This regulation is also expected to act in favor of the oil palm industry as oil palm serves as fuel for biomass plants. 50% of packaged foods and cosmetics use some form of palm oil as inputs. In addition, the rising income-levels in Asian nations also add to the demand of packaged food which has higher content of palm oil.
According to United States Department of Agriculture (USDA), palm oil accounts for 40.0% of the edible oil world over which is much higher than the next in line, soy, which accounts for 22.0% of the world market. 63.0% of the global export of vegetable oil is accounted for by palm oil. Its dominance in global market is expected to continue because of the advantages it offers compared to the sources of other edible oils. palm yields highest vegetable oil per hectare when compared to other sources of vegetable oils. In addition, it becomes indispensable because it produces two different types of chemical oils which add to the multiple uses it could be put to.
More than 42 countries across the world are engaged in production of oil palm, with South-East Asia including Indonesia, Malaysia and Thailand, contributing as high as 90.0% of the world’s production, dominates the industry. Indonesia surpassed Malaysia as the largest exporter of CPO in 2006.
Malaysia, the second largest producer and exporter of CPO, exported oil palm worth $16 billion in 2010. Further, the major oil palm producing nations are still expanding the land under cultivation more than assuring the authority of the industry in times to come.
Ivory Coast, the only exporter of palm oil in Africa, is inclined to double its oil palm production to 600,000 tons by 2020. It is the second largest producer of palm oil in Africa, producing between 300,000 tons and 350,000 tons.
For generations now, economies across the globe have taken to oil palm plantations as a method to eradicate poverty with the economies of Malaysia and Indonesia standing testimony to it. Due to the immense commercial value of palm plantations, many African nations are also adopting the formula of the South-East Asian nations to eradicate poverty; the one prominent example could be Uganda.
In the Malaysian-African Palm Oil Trade Fair 2011, Choo Yuen May, the Director General of Malaysian Palm Oil Board, stated that “There is no doubt that Africa is the land of oil palm. Malaysia owes its success in this sector to this region where the seeds or planting materials of oil palm came from.”
Suggested Measures:
-Government should invest in expansion of capacity and in technology. The traditional methods of processing functions at extraction rates between 20% and 50% whereas, with Malaysia’s adoption to technology, extraction rate have gone up to 90.0%.
-The beneficiaries of government incentives and credit facilities should be small farmers and co-operatives of farmers
-Production capacity of the existing plantations should be augmented through the use of technology and better fertilizers.
-Initiatives need to be taken to replace and replant the 2.3 million hectares of oil palm plantations. In addition, the trees which have matured and lie on the grounds of the over 50 years old plantations should be processed and utilized in the manufacturing of furniture applying the Japanese technology of EDS.
-Lessons need to be learnt from Malaysia, the second largest oil palm producer. A company in Malaysia has 1.2 million hectares of land under oil palm cultivation which produces more than 5 million tons of palm oil annually. This when compared to the consolidated production of Thailand, Nigeria and Columbia is over 7 times whereas Malaysia is 1/3rd the size of Nigeria.
-Security in the region should be heightened up and competitive farm gate price should be implemented in FFBs to make farmers return to their lands, who abandoned it.
-The Federal Government should take it in its stride to grant the pioneer status certificates to new companies venturing into palm oil production for a minimum period of 12 years as the industry has a long-gestation period. This would channel the much needed investment in the industry.
-The Malaysian equivalent of NIFOR is called Malaysian Palm Oil Board (MPOB). The Board does not engage in exporting palm oil but provides a platform for private companies to access the latest technology discovered and invented in the industry. These efforts have facilitated mass production of palm oil in Malaysia. NIFOR needs to learn the lessons from MPOB and translate the same success to the ailing Nigerian palm oil industry.
The call of the hour is to shift the focus on the potential of the oil palm industry, particularly the enterprise dynamics, and the rippling effect it could cause on the economy, at large. Sources claim that given the demand of 1,722,000 tons of vegetable oil, the industry is all set to grow leaps & bounds. These measures if adopted would be mutually beneficial, eliminating poverty and empowering the poor on one hand and enhancing the oil palm industry on other.
Gupta is senior analyst, BusinessDay Research and Intelligence Unit.
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