Feasibility Study for the Edible Oils Sector in Tanzania
Transcript of Feasibility Study for the Edible Oils Sector in Tanzania
Feasibility Study for the Edible Oils Sector in Tanzania
Summary of Field Research
November 2017
2
Context: The study is informed by the Government of Tanzania’s commitment to industrialize the economy, as framed in the latest Five-Year Development Plan, and the identification of the edible oils value chain as key to the success of the agriculture sectorThree edible oils studies are being conducted in parallel. Findings will be used by the government to prioritise sector support, and enable and attract new investment into local value addition
Objective: The study assesses market opportunities, value chain dynamics and potential investments in three oil crops
Commissioned by the Tanzania Planning Commission and supported by USAID, the objective of this study is to identify and understand the options for scaling industry and local value addition to edible oils
Engagement overview
Dalberg AdvisorsFeasibility study
Palladium I4IDTariff regime study
MSU/ASPIRES (TZ)Demand analysis
Findings and Recommendations
Expanded Edible Oils Industry
Methodology
3
Sunflower, palm and cotton value chains were selected from an initial shortlist as the most promising for further research on potential investment opportunities
Soybean
Com
mer
cial
opp
ortu
nity
Social impact opportunity
Sunflower
Groundnut
Palm
Sesame
H
M
L
L M H
• Cotton – high smallholder participation, but commercial opportunities for oil currently look very limited (tied to cotton lint industry, oil only as a by-product). However, strong government focus may increase commercial opportunities
• Soybean – small but rapidly growing seed industry (currently for animal feed), potential for local processing to oil given high premium on oil vs. seeds and large global market; currently low smallholder participation, but this could grow with oil demand
• Sunflower oil – high and growing domestic consumption/production, large smallholder base; large potential for improved seed supply and further processing / packaging for domestic and export markets (esp. given large state support)
• Palm oil – large potential for import replacement given a) large and growing domestic consumption, and b) high import levels (97%); further opportunities for processing past crude oil stage given local preference against crude oil
Cotton
• Groundnut – high smallholder participation in nut farming, but oil commands no significant premium over nuts and there is social pressure to sell locally, so gains from establishing oil industry are unclear
• Sesame – limited domestic oil production; while seed production is large and growing, oil does not seem to command any significant premium over seeds so processing prospects look difficult. Low smallholder participation in oil
Source: Icons from Noun Project
4
In order to expand the edible oils industry, Tanzania should focus first on the sunflower value chain, as it is best positioned to serve strong demand given current production dynamics
Source: IHS Markit; FAOSTAT; Dalberg analysis from calculations
Focusing on sunflower is a strategic choice that is most likely to have the greatest impact in the edible oils industry in Tanzania; palm and cotton (as well as other value chains) can be pursued once critical barriers have been resolved
6,576,7436,629,7086,913,78216,147,884
31,647,531
57,562,06457,818,852
GroundnutPalm RapeseedSoybean Palm KernelSunflower Cottonseed
11,400
177,000
4,000 10,600
172,000
370,000
CottonseedPalm
DemandSupply
Oils with sizeable production in TanzaniaPalm andsunflower have the strongest global demand of oils with significant production in Tanzania
While palm has the highest demand globally, current production dynamics in Tanzania strongly favor sunflower only
Land access and significant patient capital required to
ramp up production
Dependent on seed cotton production trends.Medium-term investment
contingent on meeting national production
targets
Global edible oil production (MT, 2014)
High production (both absolute and relative to
demand) makes sunflower the most promising local oil
Tanzania’s edible oil supply and demand (MT, 2016)
5
Sunflower oil provides the strongest opportunity to expand domestic edible oils production, and has potential for high-value exports
Notes:*Consumption is used as a proxy for demand, and estimated as production + imports – exports; Estimated values based on extrapolation of 2009-13 CAGR.
Value chain Demand outlook
Investment needed for value chain growth External support needed for value chain growth
• Consumption is driven by perceived health benefits and price of crude near production regions
• As the regional leader in production, Tanzania could also supply crude and refined oil to regional markets
250
150
200
50
100
2013 2017e2014e 2015e20112009 2010 2012 2016e
Estimated demand and supply of sunflower oil in East Africa (‘000 MT)
Regional demand
Tanzania supply
Production Consumption
83% 30%
75% crude 25% refined
% of national total, all edible oils (2016)
Consumption of crude vs. refined oil
Demand Growth
2009 - 13 CAGR
Processing MarketingConsolidated crushing for stable volumes and prices
Production
Improved access to high yield seeds
Growing premium consumer market
• Many small, underutilized crushers: competition for seed drives up market prices of seed and crude oil
• Poor market links between value chain actors• Few major refiners and solvent extractors
• Government: Support seed access, frameworks for contract farming, and certifying crude oil
• Donor: Support farmer training on commercial farming and good agricultural practices
• Private: Provision of improved extraction equipment to increase oil yield and lower costs
High Medium LowSeverity of barriers to investment:
5%
6
Palm oil is currently dependent on imports, with very little local palm fruit production. Import substitution will only become viable after significant barriers are addressed
*Consumption is used as a proxy for demand, and estimated as production + imports – exports; Estimated based on extrapolation of 2009-13 CAGR
1500
1000
500
2000
02020e2019e2018e2016e2012 2014 2017e20152013
Estimated *demand and supply of palm oil in East Africa (‘000 MT)Production Consumption
2% 64%
2% 98% refined
12%
Value chain Demand outlook
Investment needed for value chain growth External support needed for value chain growth
Processing Marketing
Consolidated aggregation of fruit for volume
Production
Commercial palm farming using high yielding seeds
Lower transport costs to major refiners and urban centers
Regional demand
Regional supply% of national total, all edible oils (2016)
• Demand driven by low price and wide availability• Malaysia and Indonesia control 87% of the regional
supply; as they start to prioritize refined exports, there is an opportunity for other actors to supply crude palm oil to the region
• Production and processing highly fragmented, with very small volumes
• Few major processors, all dependent on imported crude, with little interest in backward integration
• Government: Facilitate land acquisition for palm oil investors looking to set up plantations
• Donor: Finance new seed varieties for smallholder production models
• Private: Finance new seeds, and reduce transport costs between production and processing locations
South-East Asian imports
Consumption of crude vs. refined oil
2009 - 13 CAGR
Demand Growth
High Medium LowSeverity of barriers to investment:
7
Cottonseed oil has limited production, but given current government efforts at providing significant support to the value chain, medium-term investments are viable once production challenges are resolved
Notes:*Current consumption **Consumption is used as a proxy for demand, and estimated as production + imports – exports; Estimated values based on extrapolation of 2009-14 CAGR
20
0
80
100
60
40
20152013 201420112010 2019e2018e 2020e2016 2017e2012
Estimated** regional demand of cottonseed oil in East Africa (‘000 MT)
Tanzaniasupply
Production Consumption
5% 2%
20% crude 80% double-refined*
-11%
Value chain Demand outlook
Investment needed for value chain growth External support needed for value chain growthProcessing Marketing
Improved double- refining technologies
Production
Demand pull to increase seed cotton production
Growing local consumer market
Regionaldemand
Productiontargets
% of national total, all edible oils (2016)
• Low supply due to declining seed cotton production is primary barrier to regional growth
• Global demand of 4M MT, declining at 10% annually, dominated by USA and Argentina (45% share)
• Cottonseed is a by-product of seed cotton grown for lint – the most valuable part of the cotton crop
• 400,000 farmers supply 35 under-capacity ginners• Recent consolidation has seen 3 major crushers
producing double-refined oil dominate the market
• Government: Continued support for increased production and growth of textile industries
• Donor: Technical assistance to improve the competitive advantage of local textiles sector
• Private: Investments in textile industries to create a demand pull for cotton products
Consumption of crude vs. refined oil
2009 - 13 CAGR
Demand Growth
High Medium LowSeverity of barriers to investment:
8
The highest potential investment opportunities in sunflower are vertically-integrated crushing; contract farming for crude retail; solvent extraction for refined retail; and organic exports
Organic production and processing
Vertical integration for crude processing Contract farming for crude processing
Investment detail: Crusher owns plantations and directly engage in production to ensure seed production meets their demand Revenue model: Wholesale crude to refineries Investment location: Nationwide -any area with significant farm land available for production
Investment detail: Crusher offers inputs and extension services to farmers in exchange for guaranteed seed supplyRevenue model: Retail crude to the domestic market for consumptionInvestment location: close to producing-regions, e.g., Dodoma and Singida
Investment detail: Crusher sources seeds either through contract farming or vertical integration, limiting the use of chemical inputs Revenue model: Retail organic oils at a premium in global niche export marketsInvestment location: Any area with significant land, or in sunflower producing-regions, depending on the input source. Also reliant on ease of access to export routes from production area
2
4
1
Solvent extraction
Investment detail: Investor offtakes excess sunflower seedcake from market (maximum c.350,000MT), and extracts the remaining 20% oil content for refining Revenue model: Retail the refined oil to domestic and regional markets, and the higher-value de-oiled seedcake demand for animal feedsInvestment location: In Dodoma where there is a high crusher concentration, and low competition for seedcake from solvent extractors
3
9
The recommended structure of each investment emerges from eight decision points along the value chain
Input source
Input method
Crude production
Crude market
Refining method
Input type
Refined market
Investment thesis
Potential
Controlled production - high yield at low cost, strong
consumer demand
Tanzania’s oil “organic-by-default”, but needs
certification from export markets
Low-cost oil production to supply under-
capacity refineries
Large seedcake supply; increased value from de-oiled seedcake
Investor-controlled farms Existing crushers
Contract farming Vertical integration
Crushing
Certified exports
Retail crude to domestic
consumers
Domestic Wholesalers
Conventional Organic
Aggregation
Seed Seedcake
Solvent extractionCrushing
Certified exports
Organic crushing
Export organic to global niche
markets
High Medium High
Wholesale crude oil to domestic
refiners
Domestic Refineries
High
Retail refined to new domestic and regional markets
Investment Options
Wholesaling to refineries is likely more attractive for the vertically integrated crusher for timely recouping of high capital and operational expensesNote
New domestic and existing regional
10
LowLow LowLowLow Low
There are other investment opportunities that have limited feasibility due to unfavourable input supply, high competition, and little competitive advantage
Input source
Input method
Crude production
Crude market
Refining method
Input type
Refining sales
Investment thesis
Potential
Crusher crude too expensive
vs. imports
High seed cost due to low
supply
Volumes too low to sell to
refineries
Investor-controlled farms
Contract farming Vertical integration
Crushing
Domestic refineries
Conventional
Seed
Crushing
Domestic retail
Crude oil
Crushing
Wholesale crude oil from
contract farming
Retail refinedoil from vertical
integration
Domestic wholesalers
Buy from crusher
Investment options
Conventional
Domestic retail
Retail refined oil from
aggregated crude
Conventional
Domestic retail
Buy from market
Crushing
Wholesale crude oil from market seed
Domestic refineries
Conventional
Domestic retail
Domestic wholesalers
Retail crude oil from
market seed
High seed cost due to low supply
Retail refined oil from contract farming
Volumes too low to justify investment in
refining
Limited demand, High competition
LowCompetition from existing refiners using same method
Retail refined oil from
imported crude
Import
Conventional
Domestic retail
Conventional
New domestic and regionalconsumers
11
Each of these opportunities has unique advantages and contingencies based on the target market, business model and regulatory compliance
Sources: Icons from Noun Project
Retail Crude
Retail to domestic consumers looking for affordable healthy oils.Contract farming guarantees supply of quality sunflower seeds to crushers, with input finance costs compensated by retail margins. Contingent on TFDA approval
1
Wholesale Crude
Wholesale to major domestic and regional refineries, displacing Ukrainian imports.Vertical integration guarantees consistent supply of crude oil for refineries and enables competitive pricing. Contingent on being able to compete with import price of Ukrainian crude
2
Retail Refined
Retail to domestic and regional middle-income consumers switching from economy oils.Solvent extraction allows relatively cheap refined oil and high-value de-oiled cake for resaleto animal feed industry. Contingent on premium oil demand growth
3
Niche Organic Exports
Exporting organic sunflower products Europe, USA, and the Middle East.Organic production and processing provides access to global niche markets withpremium prices, for relatively minor investment in process improvements. Contingent on
certification and ability of Tanzanian farmers to meet certification standards
4
12
To make these opportunities viable, government needs to streamline inputs access, support market stability, and provide a conducive tax environment for domestic value addition
Inputs
Markets
Taxation
• Prioritize and streamline land allocation close to major markets for commercial farms and processing sites
• Streamline seed registration for wider access and lower prices of high-yield seed
• Regulate and TFDA certify crude sunflower oil to grow domestic consumer market
• Develop a legal framework to support enforceability of contract farming, thus reduce side-selling and promote input financing
• VAT zero-rate refined sunflower oil to make it price-competitive in domestic and export markets
• Tax exports of oily seedcake to incentivise local aggregation and solvent extraction
Donorinterventions
• Train farmers for organic production, processing and handling to raise standards and yields
• Sensitize farmers on commercial activity: contract farming, inputs use and market access
13
Investments in palm and cottonseed oil may not be feasible in the short term given current production challenges…
Cottonseed oil is a small-scale, localised value chain with potential to fill a domestic niche market.Palm oil faces high production barriers, but if addressed, could expand beyond production centres
Palm
• Oil production is limited by a small, unproductive farming base: 40,000 MT of fruits that yield only 4,000 MT of crude oil
• Use of low yielding Dura variety is perpetuated by smallholder reliance on natural germination
• Plantation models could circumvent smallholder input finance issues but previous attempts have failed at land acquisition stage
• Local seed multiplication and finance would increase smallholder access to high yielding seeds but both involve unattractive timelines for private investment
Cotton
• Oil production is limited by downward trends in seed cotton, as oil is a by-product of lint industry
• The use of low yielding UK91 seeds is perpetuated by farmer input access issues
• Ginners have been demotivated by declining lint prices and increased costs, as cottonseed losses were no longer cross-subsidized by lint margins
• The government is already addressing production challenges through distributing improved seed varieties and enforcing extension accountability
14
…but if these are addressed, medium and long term investment opportunities could emerge
National cotton production targets suggest oil processing investments may be viable in 5-7 years.High barriers to production in palm will likely take longer to address, with priorities being seed finance
for smallholder farming and land access for plantation farming
Cotton Palm
Integrated processing Plantation and crushing
Outgrowing and crushing
• Crush own seed, solvent extract seedcake, refine oil
• Investment justifiable after capacity of existing crushers is filled – sooner if their semi-refined oil is rejected by the market
• Serve Lake Zone demand for double-refined oil
• 2020+ start (contingent upon production growth)
• Grow and crush fruit in Kigoma, Tanga or Rufiji
• Economies of scale, large volumes, low prices
• Wholesale to refineries, displace Asian imports
• Provide farmers high-yield seed, expand acreage
• 8 year repayment period, lower capital outlay than plantation
• Wholesale to refineries, displace Asian imports
1
2
1
15
Opportunity 1: Contract farming based crude oil for consumer retail
Opportunity 2: Vertically integrated crude oil for refiner wholesale
Opportunity 3: Solvent-extraction based refining for domestic and regional retail
Opportunity 4: Organic production, crushing and refining for global niche markets
Annex
16
Crude oil
• Medium• Integrated
Contract farming
Crusher supplies own seed
Production Processing
Market-price seeds
FinancedInputs
MarketingStage
Activities
New crusherExistingfarmers
Source: Dalberg analysis, all icons from Noun Project
CR
UD
E
Consumers
ProductionInvestor can address production gap by providing improved seeds to contract farmers and off-taking harvest for crushing
ProcessingInvestor using contract farming will be limited by the scale of current farmers and would need to utilize a medium crusher
MarketingServe local consumer demand for retail crude
Contract farming arrangements guarantee the supply of quality sunflower seeds to crushers
Low capital cost, but high operating expenditure investment due to the bulk purchasing of seeds.Success is contingent upon addressing farmers’ side-selling, and crude certification by TFDA
17
Crude oil
• Large• IntegratedVertical
integration
Production Processing MarketingStage
Activities
Crusher-ownedplantation New crusher
Source: Dalberg analysis, all icons from Noun Project
CR
UD
E
Reliableseedsupply
Improved seed
Refineries
ProductionInvestor can alternatively vertically integrate by establishing a plantation -gaining economies of scale and end-to-end control of production
ProcessingVertical integration with plantation would require a large crusher as volumes produced would be over capacity for medium crushers
MarketingSupply refineries consistent crude volumes
Vertical integration guarantees consistent supply of crude oil for refineries
Crusher supplies own seed
Heavy capital expenditure investment due to the costs of land acquisition and plantation setupSuccess is contingent on control of production to limit agronomy risks, and land acquisition
18
Domestic Market and
Regional Export
Source: Dalberg analysis, all icons from Noun Project
Processing MarketingStage
New refineryInternal solvent
extractorRefined oil
Crude oil
De-oiled seedcake re-sold to animal
feed industry
REF
INED
Existing crusher seedcake
Solvent extraction allows almost 100% extraction of oil by utilizing the large supply of oily seedcake available in the market. It produces relatively cheap refined oil and high-value de-oiled cake for reselling as animal feed
This investment has relatively operational costs heavy due to the high cost of off-taking seedcake.Success is contingent upon reliable seedcake supply chain, and growing the market for refined oil
Investor can establish a refinery that offtakes crude from small crushers and aggregators, and/or invest in a solvent extractor and offtake oily seedcake to get crude oil for refining
Target consumers switching away from crude sunflower and refined palm
19
Organic production and processing provides access to global niche markets for organic virgin and refined sunflower oil, with premium prices for relatively little investment in process improvements
Harvested seeds
Improved organic certified seeds
Processing MarketingStage
Activities
Crusher
Refinery
Production
To develop an organic supply chain:• Certify organic seeds and
inputs• Develop organic farming
practices and train farmers• Obtain certification locally and
with international certification bodies
• Develop export markets for products
Contract farming
Training & extension
Training & equipment upgrade
Virgin oil
Certify oil as organic
Refined oil
ProductionInvestor can address production through contract farming where they would provide seeds to farmers and offtake harvest to crush internally
ProcessingInvestor using contract farming will be limited by the scale of current farmers and would need to utilize a medium crusher
Source: Dalberg analysis, all icons from Noun Project
OR
GAN
IC
Relative capital and operational expenditures depend on the mode of seed production.Success is contingent on securing and remaining compliant with organic certifications in target markets