With the slump in oil prices and a slash in revenue inflows, Nigeria, the largest economy in Africa, is desperately in need of other revenue sources.
Palm oil may be one of the answers. About 80% of current global palm oil production is consumed as edible oils, used in noodles, ice cream, and margarine, to name a few. With food consumption rising rapidly this bodes well for palm oil, as does the rising demand for nonfood uses, such as: soaps, detergents, lubricants, greases and candles. The multiplicity of uses for palm oil is likely to sustain rapid growth in its demand in the foreseeable future.
However, if Nigeria is going to take advantage of this opportunity it needs to leverage the expertise, technological advantages and refining capacity of its large producers across its predominately small palm oil producers to improve their yields, export capabilities and commercial packaging. Nigeria’s top competitors in Southeast Asia offer strong lessons in this space. If Nigeria is able to learn from them, it could literally reap the benefits of what it sows.
“About 80% of current global palm oil production is consumed as edible oils.” Over 50 years ago, Nigeria held the top position as the world’s largest palm oil producer with a robust global market share of more than 40%, contributing about 82% to the national export revenue. However, by 1966, Malaysia and Indonesia surpassed Nigeria as the world’s leading producers and exporters supplying around 85% of palm oil products. It may be tempting to link the rise of Malaysia and Indonesia to World Bank funding.
One year before they took over the top positions, the World Bank started playing a major role in supporting the expansion of the palm oil sector, injecting nearly $2bn over 45 projects in Southeast Asia, African countries, and parts of Latin America. Indonesia did receive the highest amount of project funding, receiving $618.8bn, but Nigeria, not Malaysia, was second receiving $451.5bn; Malaysia, came in third with $383.5bn in project funding.
Nigeria has continued to be the second largest recipient of World Bank palm oil sector projects, with six projects over the 1975 to 2009 period. Success stories included the planting of 42,658 hectares of oil palms, road network expansion and increased milling capacity. However, only one of the World Bank projects continued operations, while the rest went bankrupt.
By 2016, Nigeria had fallen in the ranks to be the fifth largest producer of palm oil products with total output reaching 970,000 tons, while domestic consumption was 1.3 million tons. Indonesia retained the number one spot in the world, producing 32 million tons, while Malaysia continued in second position with 17.7 million tons. Global palm oil consumption reached 58.3 million tons in 2015/16 and is expected to reach 67.3 million tons in 2017/18.7 Nigeria’s underperforming palm oil sector can be linked to inefficient and outdated machinery and techniques. It is estimated that 50% of oil extraction is lost due to these challenges.
The challenge in improving these weaknesses, however, is daunting as two thirds of crop output comes from dispersed small scale farmers, spread over an estimated 1.6 million hectares of land, and harvesting semi wild plants through the use of outdated manual processing techniques.
They rarely meet the standards required for exports and have improper documentation, certification, accreditation and product packaging. Additional challenges include: government owned plantation fields, weak milling infrastructure, challenges in accessing lands, community unrest, politics and rights activism. These all contribute to hindering growth and development of the palm oil sector, and ultimately discouraging private investors.
The insufficient supply is so poor that the Central Bank of Nigeria (CBN) gave indigenous importers waivers, despite the fact that palm oil related products are on the list of 41 items banned from accessing forex at official rates. The waivers were granted because many companies had the refining capacity but no palm oil. They had to either reduce output volume or shut down production completely.
Okomu and Presco Plc, are two exceptions in this narrative. They are two of the leading palm oil producers in Nigeria and the only indigenous palm oil companies listed on the Nigerian Stock Exchange. Despite recent macroeconomic headwinds, sales and financial performance remained positive, showing significant year on year growth.
Presco’s turnover for 2016 was N15.7bn, 50.2% higher than its 2015 performance of N10.45bn. Okomu’s 2016 revenue also expanded by 47.4% to N14.3bn from N9.7bn in 2015. The success of these companies was mainly bolstered by foreign exchange restrictions, high palm oil import substitutes, continuous expansion of oil palm plantations and increasing demand.
To boost the productivity of the small holder farmers, Nigeria needs to fully leverage on the strong performance of its large scale producers. Looking to its competitors, Nigeria could leverage on common Southeast Asian practices such as incentivising exports of refined palm oil products over crude palm oil (CPO) and integrating small holder farmers into large scale commercial operations.
In Indonesia, the government slashed its export tax on refined products to spur growth in the downstream palm oil industry. As of 2015, the government levy on CPO was $50 per metric ton while the levy on refined palm oil products was a much smaller $30 per metric ton. As a result, large consumer goods companies like Unilever Indonesia have invested heavily in expanding their palm oil refining capacity, which spiked to 45mn tons as at 2015, up from 30.7mn tons in 2013 and 21.3 mn tons in 2012.
The agroindustrial approach to small holder farmers in southeast Asia is complimentary to this focus on refined palm oil products. It typically involves government leasing lands to large companies. The locals of the land are then asked for permission and given development incentives and employment opportunities. This way, the small holder farmers remain invested in the industry but are able to leverage the advanced agricultural methods used by the large companies. For the large companies, these partnerships offer more production to serve their refining needs.
Palm oil producers in Africa are somewhat hesitant in replicating the south east approach as companies scurry to secure concessions without acknowledging the possibility of ruffling feathers within the local community. If sustainable palm oil production is prioritized in a company’s investment model, the agroindustrial model would be beneficial for the local communities, while improving CPO production and ultimately addressing supply shortages for refining local production.
With the implementation of good and favourable policies and coordinated public and private investments, Nigeria has a great opportunity to gain a share of expanding world markets, as well as meet its own rapidly increasing demand. Nigeria offers the palm oil sector fertile arable land for cultivation and large human capital. What is needed is adherence to best agricultural practices and the intensification of government involvement and support.
There is a good possibility that Nigeria can triple its domestic production of palm oil to bridge the domestic demand gap as well as increase exports to the international market.