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Export ban by major foreign player threatens palm oil supply chain

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Export ban by major foreign player threatens palm oil supply chain

By OBINNA EZUGWU

Nigeria’s palm oil production, despite attempts by the Muhammadu Buhari government to encourage more producers, has been unable to meet local demand. Prices have been noticeably high in recent months, and with the recent ban on exports by Indonesia, the world’s biggest producers and one of the major suppliers to Nigeria, things are gradually getting worse.

“Nigeria and Africa will have shortages by the exclusion of the quantities that should have come from Indonesia,” said Felix Nwabuko, the managing director of Presco Plc.

According to Nwabuko who spoke to Nairametrics, demand which has already outstripped supply will even outpace it the more with the decision.

The country’s current palm oil production per annum is estimated at 1.25 million metric tons (MT) with demand valued at 2.5 million MT per annum, according to figures from the Central Bank of Nigeria (CBN). Imports from Malaysia and Indonesia, the world’s largest producers at the moment with 44.5 million MT production per annum, make up for the gap between what’s produced and what is consumed in the country, even as part of the local production is also exported to mostly Europe and the United States.

Late last month Indonesia began imposing a complete ban on palm oil exports as it began facing a shortage of domestic supplies amid soaring prices, with consumers in several cities having to wait for hours in front of distribution centres to buy the essential commodity at subsidised rates.

Mr. Nwabuko noted that Nigeria’s oil palm gap is not one that can be filled immediately. He said the Indonesia ban will exacerbate the gap.

Authorities in Southeast Asia’s most populous country feared the scarcity and rising costs could provoke social tensions and moved to secure supplies of the product, which is used in a range of goods such as chocolate spreads and cosmetics.

“All products,” including crude palm oil, “are covered by the Ministry of Trade regulation and will be enforced,” said Indonesia’s Coordinating Minister for Economic Affairs Airlangga Hartarto on Wednesday last week.

Russia’s invasion of Ukraine, an agricultural power house, has disrupted global food supply with Nigeria also feeling the impact. The Indonesia ban on palm export is already making matters worse, findings show.

At Eke market in Ede Oballa, a suburban community in Nsukka, Enugu State, this ought to be the full season of palm oil when prices are low on account of excess supply. Buyers come from far and wide, but mostly those intending to get the product on a cheap, store and resell during the off season.

Palm oil production is a key source of income for many housewives in the agrarian community, and from the beginning to middle or rainy season is peak production period when the palm fruits ripen.

The glut in the market often pushes down prices, and many use the opportunity to buy and store for off season sales when prices must have gone up. However, this year is different. Prices have remained high, is suddenly going up even more, and supply is rarely able to meet demands.

“The product is still very expensive,” noted Ezugwu Nenye, a buyer. “About two weeks ago, one-gallon (5 litres) of palm oil sold for N4,000, but now it sells for N4,500. By the time last year, it was at most N3,000. This year is very different.”

In the 60s, Nigeria was the world’s leading palm oil producer, but excessive focus on crude oil led to the neglect agriculture in general. Today, it has slipped to fifth and now mostly imports the vegetable oil from Indonesia and Malaysia.

In 2020, Nigeria, which remains the largest producer in Africa, exported 1.06m in palm oll, making it the 6th largest exporter of the product.

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While Nigeria is the largest producer of palm oil in Africa, Cote D’ivoire is currently the largest exporter of the commodity from Africa. Nigeria is the 28th highest palm oil-exporting country in Africa, according to the USDA.

In the same 2020, palm oil was the 137th most exported product in the country, with main destination being the United States ($451k), Canada ($208k), Benin ($89.9k), Portugal ($85.4k), and United Arab Emirates ($60.3k), according to figures from the Observatory of Economic Complexity, the world’s leading data visualization tool for international trade data.

However, in the same year, the country imported 5351m in the product, becoming the 23rd largest importer in the world. Palm oil was the 21st most imported product in the country, with import mostly from Malaysia (5242M), Singapore ($50.8M), Indonesia ($44.4M), Niger (57.35M), and Colombia ($3.75M).

The CBN in a document last week, said the country needed about N60 billion annually for the importation of palm oil to meet domestic consumption, including the Technical Palm Oil (TPO) used in industry and Special Palm Oil (SPO) used by households.

According to the CBN, for the country to achieve 50 per cent import substitution through production upgrade within the next 10 years, there was need to bridge demand deficits for domestic production of fresh fruit bunches from 8.5 million MT in 2010 to about 10 million MT.

It also stated that to date, a total sum of over N45.03 billion had been disbursed to stakeholders in the oil palm industry to aid the cultivation of about 31, 442 hectares to further grow the commodity.

Just after Buhari took office in 2015, the government introduced a ban on the allocation of foreign exchange to importers of palm oil, as well as 40 other products. Importers of crude palm oil also have to pay a duty of 35 per cent.

Then, in 2019, the government unveiled a $500 million plan to increase funding to Nigerian producers through low interest loans, part of the Anchor Borrowers Programme (ABP). The aim being to raise domestic output by 700 per cent by 2027, while meeting local demand.

The efforts have achieved substantial results, even if not nearly sufficient. Palm oil production rose from 955,000 metric tonnes in 2015 to 990,000 metric tonnes in 2016, and 1 million metric tonnes in 2017. In 2018 and 2019, Nigeria’s palm oil production averaged to 1.1 million metric tonnes, and then it climbed to 1.2 million metric tonnes and 1.4 million metric tonnes in 2020 and 2021 respectively.

But one challenge with the intervention is that a lot of the money allocated by the central bank goes into the big companies like Presco and Okomu because they are much more viable investments than small scale farmers who continue to struggle to access funds.

According to the CBN, if Nigeria had maintained its market dominance in the palm oil industry, the country would have been earning approximately $20 billion annually from cultivation and processing of palm oil as of today. That’s about half the 2022 federal budget.

Godwin Emefiele, the apex bank’s boss had noted recently that the achievements so far recorded in the implementation of the ABP had started to record giant strides in the production of maize and cassava and expressed optimism that in the next 12 months, palm produce harvests would have commenced in the country.

He stressed that agriculture remained a strong pillar for Nigerian economy, while expressing satisfaction over the level of interest shown in agriculture and the tremendous impacts that the sector had recorded in the last six years.

Emefiele further disclosed that the ultimate objective of the CBN intervention in the oil palm sector was to overtake Thailand and Colombia to become the third-largest producer over the next few years through increased oil palm production by 2028.

“Core objectives of the intervention include, to meet local demand for palm oil and improve local processing quality and standards; conserve foreign exchange; create jobs and enhance the skills of Nigerian people along the oil palm value chain,” he said.

However, despite increased production on account of CBN’s initiatives, supply has failed to meet the demand for palm oil among Nigeria’s 200mn inhabitants, which has contributed to the double digit inflation that has marked much of Buhari’s tenure, and Ukraine crisis and Indonesia ban, could get much worse.

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“Nigeria has about twice the demand for vegetable oil than it has supply, and the government has made a lot of innovative policy choices,” Ikenna Nzewi, chief executive of Releaf, which evolved from a non-profit set up in 2015 told FT last week.

Nnaemeka Asogwa is a shop owner at Ede Oballa Eke market. He says he’s always bought at least 200 litres of palm oil during the season and resold at between 15 to 20 percent profit when prices go up, but now prices have refused to come down even at peak of the season.

“It’s a bit strange that instead of prices coming down during this season, it’s even going up again,” he said. “I can understand it in the context of the fact that prices of every food item have more than doubled in the last few years, but I mean, this is what we produce here.”

Asogwa maintains, however, that he would still buy the product, as according to him: “If the price is high this much at this time, I’m convinced that it will even get much higher in the future when the season is over. So, it’s better to brave up and buy it.”

The high cost of the product in local communities also means that it’s certain to be much worse.

“When I travelled to my village at Ondo waterside in February, I bought 5 litres of palm oil for N2,500, said Iya Oropo, a shop owner in Ojodu, Lagos.

“But when I came back here, they were selling N3,800. Now, the price has gone up again. In my village, that 5 litres is now N3,000 and here it is N4,000.

Asogwa’s projection of even higher prices in the near future is supported by the law of demand and supply.

The shortfall in import has put more pressure on domestic supply, which is likely to get worse with decision’s ban and Malaysia, the world’s second largest producer with significant import into Nigeria, targeting markets Europe and elsewhere served by neighbours Indonesia.

“The ban will affect many African countries that do not have as many palm plantations as Nigeria,” as Nigeria Nwabuko told online medium, Nairametrics.

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