LEVERAGING ON CBN’S AGRICULTURAL FUNDING INITIATIVES TO SET UP AN INTEGRATED PALM OIL VALUE CHAINS BUSINESS|By Idika Aja, first published by National Business Extra

PROSPECT

The oil palm tree grows under strict agro-ecological conditions only found in tropical regions such as Nigeria. The major oil palm producing states are Enugu, Edo, Cross River, Imo, Abia, Bayelsa, Rivers, Anambra, Oyo, Ogun, etc.

person standing on rice terraces

The primary products of the oil palm value chain are fresh fruit bunch (FFB), palm oil, palm kernel oil and kernel cake.  The palm oil is the most globally consumed, versatile raw material/substrate commodity that comprises over half of all packaged products. Its applications cut across industries from food to cosmetics, chemicals to energy and pharmaceuticals to animal feed. Usually known in the international market as CPO, it accounts for 35% of the world’s vegetable oil market.  It is the most productive of all the vegetable oil crops globally, yielding more oil per hectare than soybean.   Also it is the most price-competitive of the global edible/vegetable oils.  Its affordability has driven its continued demand in high-consuming markets such as Nigeria, India and China, with India and China consuming 21% and 16% respectively of the world’s CPO. The world market is controlled by Indonesia (53% of output) and Malaysia (31% of output), though of recent, Nigeria, Thailand and Columbia have emerged as globally competitive players.

However, demand in Nigeria far outweighs production.  Of course, the shortfall has to be imported taking hard currency, not until few years ago, CBN included the product among the 41 items not valid for forex.  Notwithstanding, import has continue to rise. Nigeria imported the product (5,000 MT) for the first time in 1975, according to IndexMundi (United States Department of Agriculture).  Since then import of the product has surged, recording the highest in 2013 (513,000 MT).  In 2018, total import was 330,000 MT, while in 2019, import increased by 6.06% to 350,000 MT.  For palm kernel, import started in 2000 with 1,000 MT, recording the highest import in 2013 (20,000 MT) and 15,000 MT both in 2018 and 2019.  In fact to produce the 350,000 MT being imported requires having additional 100 4TPH, or 202 2TPH or 402 1TPH CPO plants

Therefore, the market is big and investment in the business offers good return and of course will provide employment.  Also states with that comparative advantage can use it to increase their IGR by investing directly and or partnering with investors; creating publicly traded financial instruments for the funding of the:

  1. Investment in upstream plantations, either greenfield or brownfield (real

    assets)

  1. Investing in midstream assets such as crushing mills and refineries.
  2. Investing in downstream assets such as renewable energy plants.

Also investors (States, corporations and/or under PPP) can leverage on Federal government funding initiatives such as Anchor Borrowers’ Program, Commercial Agricultural Credit Scheme, Real Sector Support Facility, Agricultural Credit Guarantee Scheme Fund (ACGSF), Nigeria Incentive-Based Risk Sharing for Agricultural lending (NIRSAL), and of recent Export Facilitation Initiatives. I will dwell on the EFI here.

CBN agric loan

The Export Facilitation initiative is specifically tailored for the funding of oil palm value chain businesses/projects and other agricultural products such as cashew, cocoa, sesame seeds, etc. Just like other schemes, it is a product of the Bankers’ Committee approved on April 4, 2019 at the body’s 343rd meeting.  The aim is to compliment government efforts to engender growth in the non-oil sector as well as enhance foreign earnings and employment generation.

The commodities are to be funded under the approved guidelines of AGSMEIS, NESF and RSSF-DCRR in line with the approved limits in the Export Facilitation Initiative Funding Framework (EFIFF), as provided below:

Funding Terms Large and Mid-Sized  Players (Facility A) for Land acquisition and Cultivation Large and Mid-Sized (Facility B) for Milling and Refining Capacity Small Holder Farmers (Under Clusters via Aggregation)
Tenor 7 – 10 years 5 – 7 years 5 – 7 years
Interest rate 9% 9% 9%
Moratorium/Equity contribution 3 years moratorium on principal and Nil equity 1 year moratorium on principal and 10-20% equity 2 years moratorium on principal and Nil equity
Funding sources AGSMEIS NESF & DCCR AGSMEIS

For now, let us dwell on AGSMEIS funding source. AGSMEIS stands for Agric-Business/Small and Medium Enterprises Investment Scheme.  It is also a product of the Bankers’ committee approved at its 331st meeting held on February 9, 2017.  The initiative is to support the Federal government’s efforts and policy measures for the promotion of agricultural businesses and small and medium enterprises (SMEs) as vehicles for sustainable economic development and employment generation.  Banks are required to set aside 5% of their profit after tax annually.  The Scheme’s activities cover agricultural investments; production, storage, processing and logistics; SMEs in the real sector as well as services sectors which are backward integrated into manufacturing/agriculture/mining/modular refineries including local initiatives in information and communication technology (ICT).  The investment type under this scheme is equity and for start-up, expansion of existing companies or reviving of ailing companies.  Maximum investible amount is N2 billion.  Under the scheme SMEs are defined as companies with sales turnover and total assets not exceeding N4.5 million, and number of tax paying employees not more than 250.

Funding of any project through these schemes is routed through the commercial banks.  Respective bank’s requirement may differ depending on the bank’s credit and risk management policy.  But one common requirement that cut across all banks is having a bankable feasibility study.  Aside that, some banks may require that the investor/borrower be a practicing farmer or agro-allied entrepreneur; have; account with the bank, positive CRMS report, viable proposal, etc.  You may contact your bank for more information on how to access the fund. Viable proposal being one of the key requirements, investors should therefore prepare a bankable business plan that depicts the project’s projected scope, market trend, competitive analysis, risk, financial projections, etc.  This can be prepared on further request.

For one to optimally leverage on these funding initiatives, x-raying the entire value chain is a good way to start. The palm value chain comprised of an upstream, midstream and downstream. The scope of one’s investment depends on some critical success factors such as, the investor’s investment objectives, management team experience, availability of fund, location comparative advantage, etc.

The upstream made up of the planting, cultivation and harvesting of the palm fruit.  The midstream covers refining and processing. The downstream segment covers the retail of the end-products brands and industrial derivatives.  In addition, because energy is required to power the plants, building of waste-to-energy plant (Biomass energy plant) can be added as part of downstream.

The upstream, midstream and downstream are intertwined and interdependent; they need each other, so key respective assumptions have to be designed, established and studied before venturing.  For instance, the midstream milling operations depend on the upstream for its feedstock.  Experience and research have shown that some PKO crushing plants have gone moribund and even had to be shut down because of lack of feedstock – kernel nut.  Even in cases they do not close down, they have been found to operate below full installed capacity due to shortage of input materials.  Few key assumptions of each of the sub-sectors are therefore highlighted below.

UPSTREAM – PLANTING, CULTIVATION AND HARVESTING

The upstream provides feedstock (FFB) for the midstream. Proper analysis of the available plantations is necessary before investing in the midstream milling plants.

The upstream planting, cultivation and harvesting, take an average of 4 years. Yields peak at 7 years followed by low decline. With 9-meter planting space, presumably, a hectare can take between 128 – 140 trees. Fully matured oil palms produce 18 to 30 tons of FFB per hectare/year.  In most cases, plantation yield performance under favourable conditions in estates planted with Tenera varies between 16 – 39 tons/hectare/year.  The yield depends on a variety of factors such as age, seed quality, and soil and climate conditions, quality of plantation management and time timely harvesting and processing of FFB. For instance, the palm tree should be planted in tropical climate marked by all-year-round temperatures ranging from 25 to 330C and evenly distributed rainfall of 2,000 mm per year with minimum of 325 liters per day per plant’s tree.  If the temperatures falls below this, particularly at night to say below 190C bunch development is affected and yield reduced. Growth in young seedlings stops at temperature below 150C. Soils capable of retaining sufficient available moisture, not less than 100mm/100cm soil are best. The type and seed quality should be taken into consideration in order to enhance and get the desired yield. Tenera oil palm has smaller kernel of 3% – 15% fruit, but with higher oil content of 24% – 32% than Dura, which has a thick shell separating the pulp from the kernel, with larger kernel of about 7% – 20% fruit weight. Another sure way of increasing yield is through irrigation.

MIDSTREAM – MILLING OF FRESH FRUIT BUNCHES (FFB), CRUSHING AND REFINING

Before choosing the size/capacity of the midstream plants; CPO and/or PKO plants to be installed, the size of plantation and/or availability of feedstock, have to be taken into consideration. This is to ensure that the plant operates optimally at full installed capacity.

CPO KEY PLANT AND PRODUCTION ASSUMPTIONS

First, it is important to understand that milling of the FFB should be done within 24 hours of harvesting to minimize the buildup of fatty acids that lowers the commercial value of the processed palm.  The output of the FFB milling is CPO known as palm oil.  The PO is semi solid at room temperature and is highly resistant to oxidation and prolonged exposure to heat.  The PO (CPO) is different from crude palm olein. When CPO and PKO go through a second stage of refining; bleaching, to remove impurities and deodorizing, to remove odors, they produce palm stearin (solid at room temperature) and palm olein (liquid at room temperature).  Palm olein remains completely liquid at room temperature.

  • Feedstock – FFB from the Upstream and Small farmers with varying sizes of oil palm holdings.
  • Days per year –       365
  • Peak month FFB as % of total –       15%
  • Peak month FFB productive days –       30
  • Peak month FFB productive hours –       90%
  • Peak month FFB productive hours –       648
  • CPO Yield kgs per 1,000 kgs FFB –       200
S/NO DESCRIPTION PLANT CAPACITY
1 Tonnes per hour FFB throughput nominal 1 TPH 2 TPH              4 TPH
2 Power – kW (nominal), 3 phase, 415 volt, 50 hz 19 25 48
3 Oil Extraction Ratio – OER for High Quality Tenera Fresh Fruit Bunches c.200kg c.400kg c.800kg
4 Free Fatty Acid (assuming FFB input of requisite quality) < 5.00 % < 5.00 % < 5.00 %
5 CPO Capacity Installed kgs per hour 1,000 2,000             4,000
6 Peak Month FFB Throughput kgs 650,000 1,300,000 2,600,000
7 Annual FFB Throughput kgs 4,340,000 8,670,000 17,340,000
8 CPO Annual Yield kgs  870,000 1,730,000 3,470,000

From the foregoing production assumptions, one ton per hour CPO plant will require annual FFB throughput of 4,340,000 or 4,340 tons.  At an average of 25 tons of FFB/hectare/year, 1TPH plant capacity requires minimum of 174 hectares of cultivated plantation. For 2TPH and 4TPH plants to operate optimally and at full capacity will require plantation size of 347 and 694 hectares respectively.

CPKO KEY PRODUCTION ASSUMPTIONS

It is widely believed that the feedstock – kernel nuts are available in large quantity during the rainy season from May to September and extends to December.

  • Nuts % of FFB –       12%
  • Wet Kernels % off FFB –       5%
  • PKO % of FFB –       2%
  • PKO Yield per 1,000 KGs Nuts –       167
  • PKO Productive Days Per Year –       261
  • PKO Productive Hours per Day –       16
  • PKO Productive Hours Per Year –       4,171
S/NO DESCRIPTION PLANT CAPACITY
1 PKO Capacity Required 1 TPH 2 TPH 4 TPH
2 Nuts per year KGs 520,800 1,040,400 2,80,800
3 Shelling capacity required KGs per hour 130 250 500
4 Kernels per year KGs 217,000 433,500 867,000
5 Expelling capacity required kgs per hour 60 110 210
6 PKO Yield kgs 86,800 173,400 346,800

From the PKO assumptions, for a 1TPH input capacity plant to operate fully, requires 521 tons of kernels. Consequently at 12% of FFB, a hectare of 25 tons/year of FFB will produce 3 tons of kernel nuts, thus requiring 174 hectares plantation size to be able to feed the plant, all things being equal. That means, the same plantation size when fully cultivated and operating at its peak will be able to feed CPO and CPKO plants.

COSTING/PRICING

For the upstream; planting and cultivation, the cultivation and four-year maintenance costs of one hectare can be provided on request. For the milling plants, you can go for the locally fabricated plants or imported turnkey plants, though the imported might be a bit more expensive than the locally fabricated. For the project bankable feasibility study and further project investment appraisal, where to source for the plants, you may contact the writer.

Idika Aja – idikaaja@yahoo.com

 

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