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%


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


2009 - 13 CAGR

Demand Growth


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%


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


2009 - 13 CAGR

Demand Growth


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


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


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


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

feasibility study for the edible oils sector in tanzania

Documents