Missed Opportunities in Oil Palm Puts Pressure on Forex Market

Outsourcing palm oil supply for domestic consumption in a nation like Nigeria which once controlled 40 per cent of the global supply comes with serious pressure on foreign exchange reserves and local initiatives, writes Festus Akanbi

Nothing better explains the precariousness of Nigeria’s export earning potential in recent times than a media report on the rising importation of palm oil despite the foreign exchange restrictions placed on importers of the commodity by the Central Bank of Nigeria (CBN) since 2015.

Ordinarily, Nigeria cannot be said to be doing badly in terms of total merchandise trade as figures for the National Bureau of Statistics for 2022 showed an acceleration in total merchandise trade to N52.4 trillion from N39.75 trillion in 2021.

However, analysts argued that the modest gain recorded in 2022 would have paled into insignificance if Nigeria was able to realise its full potential in some sectors of the economy instead of rationing the limited amount of foreign exchange on imported goods and services.

According to them, one of these low-hanging fruits which have not been given the desired priority is palm oil production. They explained that given the decision of the apex bank to list the commodity among items restricted from the official foreign exchange market, the government and other stakeholders in the agricultural sector should have explored ways to boost palm oil production to meet foreign and local demands.

Palm Oil Importation

Today, Nigeria is not only found wanting in the area of palm oil export, which could have fetched the country huge forex exchange, but it is also finding it difficult to meet local demands.

According to a report published last week, Nigeria imported at least N299.6 billion of palm oil from 2017 to 2022. The publication which relied on quarterly reports by the National Bureau of Statistics (NBS) indicates that ‘Palm Crude Oil’ is often among the top five imported agricultural products into the country. 

Analysts pointed out that since the CBN’s policy has barred importers of palm oil from getting foreign exchange from the official market, what it means is that this category of importers will have to slug it out at the unauthorised foreign exchange segment thereby crowding out other users.

“It is this kind of pressure that has continued to work against the naira-dollar exchange rate,” said Yakubu Mohammed, a bureau de change operator in Ikeja.

In another report, the CBN Governor, Godwin Emefiele, was quoted as saying that Nigeria imported 302,000 metric tons of palm oil in 2017 despite placing the product on the forex exclusion list. This, according to experts, is due to the current production not meeting local demand as the 1.4 million metric tons averagely produced is below the three million consumed annually. 

Untapped Potential

Although palm oil plantation is scattered all over the country, especially in the southern part, it is a surprise that state governments have not found it necessary to invest heavily in palm oil production. This, according to a farmer and chairman of Agbedes Agric Projects, Prince Adewole Adebayo amounted to a waste of opportunity.

He wondered why everyone seemed to be fixated on revenue from crude oil when palm oil production could offer better returns. “Today, a barrel of oil palm sells for over $600. The day crude oil touches $150 per barrel, the whole world will shout,”  he said.

Analysis of yearly importation showed that the product was imported more in 2021 as N148.2 billion worth of palm oil found its way to Nigeria. This is followed by 2022 with N70.2 billion and 2018 with N32.2 billion. 

Also, in 2020, N22.2 billion of the product was imported while in 2017, N21.2 billion and in 2019 with the least importation with N19 billion of the product imported. 

Preponderance of Small Holder Farmers

Giving an insight into the difficulty of meeting local demand, a report by PWC stated that Nigeria’s oil industry is mostly dominated by small-scale farm holders, which account for over 80 per cent of local production with well-established companies accounting for less than 20 per cent of the total market.

Interestingly, Nigeria was said to have owned 40 per cent of the global market share of palm oil production before gaining independence. 

The report also noted that the two largest producers, Okomu and Presco, contribute largely to the market share but the dominance of small farm holders in the palm oil market has resulted in low output compared to the country’s production potential. 

“This is because local farmers’ manual harvesting techniques are outdated, often resulting in significant wastage during harvesting. In Nigeria, lack of investment in palm oil extraction technology and technical incompetence/inadequate training have resulted in poor management of palm oil plantations over the years, causing some of them to cease operations,” the report said. 

A research analyst with CardinalStone Partners, Kayode Eseyin,  said the demand-supply gap owing to reliance on subsistent or inefficient farming, insecurity, and inadequate access to credit has made the country a net importer of palm oil.

“However, the current allure of hard currency is proving too hard to ignore for local producers,” he said.

Eseyin said the Nigerian palm oil industry is very fragmented and dominated by numerous small-scale farmers, who account for 80 per cent of local production and most of these farmers are not attuned to modern farming practices, meaning their yields and output are way lower than they could otherwise be.

With Nigeria exporting the little palm oil produced despite the local demand-supply gap, the gap is guaranteed to widen and palm oil imports are expected to surge.

Interventions

The CBN had launched a series of intervention schemes, which include the Anchor Borrowers Programme. The programme is designed to provide single-digit interest rates on loans to farmers through deposit money banks and other participating financial institutions.

For the palm oil sector, the interest on the loan facility is nine per cent per annum. In 2019, the federal government also mandated the CBN to support corporate bodies and individuals that are engaged in the production of 10 specified agricultural commodities, including palm oil.

In 2021, the government, through the CBN, launched a $500 million loan oil palm producer (i.e., including smallholders and big plantations) programme with low-interest rates.

The aim is to increase local production by 700 per cent by 2027. Private companies are developing new estates with early and high-yielding oil palm seedlings varieties. These companies are also investing in technology to boost extracting and crushing processes.

Other initiatives, such as the Edo State Oil Palm Programme, will likely boost production. The Nigerian Institute for Oil Palm Research has also increased the production of higher-yield oil palm seeds in the country.

But the Managing Director of Okomu Oil Palm Company, Dr. Graham Hefer, recently called for a review of the programme as cash crop farmers were yet to fully benefit from the programme. 

According to Hefer, “It is easy for farmers engaged in annual crops to meet their targets. This doesn’t happen with cash crops because, in the first three years of oil palm production, you are unable to break even as the tree doesn’t produce one fruit. 

“You only begin to break even normally between five years and seven years in oil palm production. And that is a long time. This is what we want the bank to understand so that it starts to grant long-term loans under the programme,” he said

However, despite all the shortcomings in the palm oil business, there are reports that palm oil producers in Nigeria are smiling to banks no thanks to the current skirmishes between Russia and Ukraine as reports have it that Nigerian palm oil producers benefited from record-high crude palm oil (CPO) prices in the first half of 2022, which was primarily driven by disruptions in the sunflower oil market brought on by the Russia-Ukraine war and Indonesian export restrictions.

Data released by the Nigerian Exchange Group (NGX) showed Nigerian palm oil producers are having a good time as the two largest oil palm producers in the country, Okomu Oil Palm and Presco Plc grew their revenue by 83 per cent to N82.47 billion in the first half of 2022 from N45.09 billion in the corresponding period of 2021.

For 2022, Nigerian palm oil producers grew their revenue by 68 per cent to N142.31 billion in 2022, from N84.82 billion in 2021, thereby bringing total profit for the year to N38.81 billion, a 26 per cent increase from N30.86 billion in 2021.

However, a combination of factors including the rising prices of raw materials, foreign exchange volatility, and rising interest rates during the year pressured profits and caused the profit margin recorded by the palm oil producers to shrink by 911 basis points to 27.27 per cent in 2022 from 36.38 per cent in 2021.

Palm oil producers have had to deal with the energy crisis which has significantly impacted operating expenses, and prices of fertilisers which hit record highs in 2022 due to supply chain disruptions.

There is no doubt that Nigeria can retrace its steps by creating an enabling environment for the revival of palm oil production. This is one of the low-hanging fruits the incoming administration should look into.