The Oil Palm Opportunity in Nigeria

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Tunji Adegbite

Originally native to the tropical rainforests of West Africa, Oil palm is one of Nigeria’s most economically viable agricultural products. Its production currently extends to other African countries in the Oil Palm Belt – Angola, Democratic Republic of Congo, etc; and several South-Asian countries, following the introduction of the seedlings to the region by Dutch traders in the 18th century.

Palm oil, one of the products of the oil palm plant is an important component in over half of consumer goods sold globally. It is extracted from the mesocarp of the fruits and its main chemical constituent is palmitic acid. The kernel of the palm fruit also produces a lighter oil known as the palm-kernel oil, used for cosmetic purposes.

Nigeria was the world’s largest palm oil producer with a global market share of 43% until the 1960s when Malaysia and Indonesia surpassed Nigeria’s production rate. Currently, the 5th largest producer in the world and number 1 in Africa, Nigeria’s production constitutes about 1% of the global market. However, Nigeria’s export market share is not reflective of its production capacity. In fact, Nigeria ranks 6th in African palm oil exports.

According to the World Bank in 2018, Nigeria consumed 1.34 million metric tonnes of palm oil making it Africa’s biggest palm oil consumer. Domestic production for that period stood at 1.02 million metric tonnes creating a demand-supply gap of over 300,000 metric tons, which is currently met through imports. Demand is primarily driven by the local consumption of palm oil, used in most Nigerian local cuisine because of its flavor profile, and a complementary increasing demand by industrial processors.

The palm oil value chain bears a lot of similarities to the structure of the petroleum sector. It comprises of an Upstream sector which is involved in planting, cultivation, and harvesting; a midstream sector that is involved in the refining and processing; and a downstream sector involved in the retail of end products and industrial derivatives.

Activities in the value chain of palm oil production from farming to marketing, serve as an important source of income for many farming communities in Nigeria. Oil palm is grown across 24 states in Nigeria with the 9 states of the NigerDelta playing a major role in the country’s oil palm production belt. There are three types of palm fruits- Dura, Pisifera, and Teenera- which is a hybrid of Dura and Pisifera. This hybrid fruit produces a much higher content of palm oil.

One of the reasons the oil palm industry is not meeting its potential is due to its fragmented nature. 80% of local production is controlled by small-scale farm holders who harvest semi-wild plants (mainly Dura fruits) using inefficient manual farming methods. The processing aspect of the value chain is also affected by the wide dependence on traditional processing methods which yield less output and more wastage. However, the palm oil marketing sub-sector unlike the others is run efficiently with a lot of middlemen bridging the gap between farmers and the consumers. Some marketers have gone on to brand their products to distinguish their products in the market upselling their value.

Major challenges facing the palm oil sector affecting its competitiveness and •The dominant presence of low yielding Dura variety

•Inefficient processing technologies and substandard mills that extract about 25-50% of the oil content, amounting to almost 50% of the oil being thrown away for half of all processed palm fruit

• The high cost of acquiring land for plantations

• Inadequate post-production storage facilities resulting in losses.

• Poor road networks and congested shipping ports resulting in delayed shipping times.

As part of its efforts to improve local production and protect local farmers, the Federal Government restricted access to Foreign Exchange at the Interbank Market for importation of Refined Palm Oil (RPO) and introduced a 35% customs duty charge on the importation of Crude Plam Oil (CPO). This, however, did not particularly improve local production as the bottlenecks in the production chain were not adequately addressed. Also, some commercial companies frustrated by low local yields and quality capitalized on the ECOWAS Trade Liberalisation Scheme (ETLS) to facililate imports from other West African countries at a lower rate of 0.5% tax rate.

The Central Bank of Nigeria estimates that Nigeria could earn a potential $20 billion annually from the palm oil value chain.

To drive investments in the agricultural sector and expand production capacity, the Federal Government listed Palm oil among 10 agricultural products that are to receive support from the Central Bank of Nigeria. To achieve this, the apex bank has introduced a number of intervention programs including the Anchors Borrowers Programme. This program provides a single-digit interest rate on loans to farmers through the Deposit Money Banks and other participating financial institutions, for palm oil, the interest rate per annum is 9%. While this is commendable, however, the enablers required to close the supply-demand gap go beyond financing.

Opportunities exist for investment in palm oil production across the overall value chain, including improving the processing technology, upgrading the varieties of existing palm plantations with newer higher oil content varieties, exportation, and marketing.

The export demand for palm oil is also very high; China, India, and the European market- mainly Italy, Spain, Germany, the United Kingdom and the Netherlands, are high importers of palm oil for use in their food, cosmetic, biomass, and confectionery industries.

Marketing and branding of quality palm oil products, in particular, is very lucrative for investors and has low customer attrition rates because of the proliferation of adulterated palm oil in the markets.

New market demands by the feed industry for palm kernel cake ( a by-product in the processing of palm oil), because of its high protein content (22%) is also an opportunity for investment and market growth.

•Tunji Adegbite is a thought leader in Strategy and Supply Chain and has worked with leading organisations like PwC and an IOC. He is also the founder of Naspire, a business research platform using contextual knowledge to help entrepreneurs and professionals in Africa succeed. He can be reached via tunji@naspire.com. Views expressed in this article are personal and do not represent the views of any institution he is affiliated with.