The Oil Palm Value Capture Opportunity in Africa

July 1, 2014
Despite its natural endowment for producing palm oil, the productivity, processing, and manufacturing of palm oil in Africa is largely inefficient and limited. Low yield, limited finance, low oil extraction rates, high energy cost, and simple neglect are responsible for this. For example, with the discovery of petroleum oil in Nigeria, 2 million hectares of oil palm was left to grow in the wild with minimum to no inputs and an average yield of 2 metric tons per hectare. This neglect is highlighted when compared to Indonesia and Malaysia’s productivity of almost 20 metric tons per hectare.

The oil palm industry has multiple untapped value adding opportunities that can be captured by:

  • Closing the yield gap
  • Improving the oil extraction rate (OER)
  • Improving crude palm oil (CPO) quality of small millers
  • Promoting outgrower schemes
  • Producing energy to supplement national power grids, and
  • Producing biodiesel for domestic and export markets

Investing in efforts to close the yield gap alone can fully address the continent’s dependence on foreign palm oil. However, this would require concerted efforts from governments, research institutions, private financiers, and extension officers to insure the proper understanding and utilization of improved seeds and agronomic practices.

There are large opportunities for small-scale millers to invest in improved oil extraction machineries. For example, a $12,500 to $13,500 investment in efficient oil extraction machineries could increase OER efficiency by a range of 15-46%.

A strategy to promote oil palm cultivation would have to promote outgrower schemes whereby small farmers have a stronger association with processing units. Considering the high liquidity constraint that saddles most oil palm farmers, these schemes are an effective mechanism to stimulate palm oil production, particularly as difficulties in the access of land constitute an obstacle to substantial expansion of oil palm plantations.

Capturing downstream value addition opportunities (specialty fat, oleochemical, biodiesel,etc.) will necessitate strong participation of private sector actors given the high financial commitment that most African governments have failed to meet. African governments need to explicitly provide avenues for facilitating the participation of private investors in this industry by making more land available for large-scale plantations. This can be done by:

  • Establishing and advertising a market-based land bank with information on available land for oil palm cultivation
  • Harmonizing land policies and the legislative framework with customary law for sustainable land administration
  • Developing adequate environmental standards

Some of the stringent quality control requirements imposed by European markets can be addressed by introducing a palm oil marketing board. A highly interventionist approach to regulation and support of the palm oil sector can reduce risk and volatility for players, especially palm oil farmers, and can be an effective means for improving and maintaining quality. As an example, the Ghana Cocoa Board is considered successful in ensuring the generally higher quality of Ghanaian cocoa beans versus other major producers such as Côte d’Ivoire. However, this needs to be offset against the challenge and cost of developing and maintaining an effective and transparent sector bureaucracy.

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