Comment: Oil palm and its profitability

Oil palm is one crop, which has been very useful in the economic development of many farmers in Ghana. Indeed in 1983, when most cocoa plantations failed, most farmers had to rely on their oil palm plantations to survive.

The crop is a major ingredient of the popular soup, abe nkwan. The most popular gin in Ghana, Akpeteshi, is produced from the crop. The shell from its fruit is used to generate electricity in modern day milling facilities everywhere in the world and Ghana is no exception. The sheer number of jobs this crop creates makes it the darling of any serious politician wanting to shore up employment figures.

The economic renaissance of Malaysia has been credited to the cultivation of this crop, which the Malaysians adopted from Ghana. Farmers in Malaysia are well to do because of this crop. Why only few Ghanaian oil palm farmers break into the social class of well-to-do members of society is no mystery. It has been due to a mixture of misinformation and a die-hard attitude to stay with the old way of doing things.

While technocrats are very concerned about increased productivity, farmers are also steeped in the old character of just collecting seeds from anywhere and planting. Most scientists can be forgiven because their pure science background limits their ability to properly appreciate the profitability part of the crops development, while the farmers can also be forgiven because seedlings are not easily accessible - they are either too expensive or too far away from the farmers or both. The result has been lower than expected profitability for oil palm farmers.

It is true that Ghana’s productivity potential of 20tons/ha cannot compare to the 35tons/ha productivity levels in South East (SE) Asia. Indeed while many independent smallholders in SE Asia are getting 20tons/ha, many of ours are getting a mere 3tons/ha. Again while SE Asia nucleus plantations are getting 35tons/ha ours are getting 14tons/ha in the best cases. Rainfall is the major limiting factor here. While the SE Asians are supported by 3500mm of rainwater annually, which is relatively evenly distributed, our best cases have been 1600mm with long dry periods.

This means that we cannot get the same level of yields even if our cultural practices were exactly like that of the SE Asians. Our nucleus plantations however make up for the lower margins at farmgate with the very good margins from their milling facilities thus making the business still attractive for them. Most of our farmers cannot go beyond fruit production. This is why profitability at the level of fruit production is extremely crucial for the smallholder farmers in Ghana.

The question many may be asking now is, can a smallholder in Ghana therefore make it in life through the cultivation of oil palm? The situation is not completely hopeless. It can be addressed with the current resources we have.

Many different farmers are currently employing many scenarios of production. One scenario that our oil palm scientists won’t want to hear at all is the case where farmers collect seednuts from under any tree, nurse it into seedlings and plant. This scenario usually results in about 40% trees not being productive. 40% of the land, fertilizer (if any is applied), time and labour and other applied resources therefore go waste in this scenario. However the Dura fruits produced from this scenario has a unique feature that can’t be overlooked by locals who love the soup, abe nkwan.

There are many who will tell you that the unique taste that Dura (many times called “local”) gives their abe nkwan is not matched by the “improved” fruits, Tenera, which is most desired by palm oil processors because of its thicker flesh and therefore higher oil content.

Unfortunately the Dura, which is also common to get from wild palms doesn’t command a premium price, at least not for now. This scenario therefore drops off the table in our quest to find the profitability of oil palm cultivation. Our profitability search is therefore limited to scenarios of plantations developed with the Tenera variety, which commands premium prices.

Scenarios for analysis:

1. White Colour Pure Technocrat (WCPT): This refers to the scenario most adopted by the educated Ghanaians who are also doing full-time white colour jobs in the cities. It is also the case for farmers who are into outgrower/smallholder schemes. In this scenario the technical advice of scientists/extension officers are fully adopted.

2. Technocratic Locals (TL): This refers to the scenario where very educated farmers in the local communities plant improved planting materials but don’t apply fertilizer or engage paid caretakers on their farms.

3. Pure Locals (PL): These adopt the same practices of the TL. However they are either from royal families or have close land ownership links and therefore get land to farm for free.

With a higher Net Present Value (NPV), higher Internal Rate of Return (IRR) and higher average Net Cash Flow (NCF), it is obvious that WCPT practices generate better returns. However, the production cost is higher and most farmers haven’t the capacity to bear such costs.

A return on investment between 14-17% will be seen as exceptionally good and hailed in many parts of the world. However, in a country like Ghana where near risk-free financial instruments like T-bills go for between 20-25% and commercial interest rates hover above 30%, none of the scenarios comes out as a very attractive package. Any loans to finance oil palm fruit production should therefore be lower than 14-17% to make any such investment viable.

The big money earners in the oil palm industry have always been palm oil processors and other downstream processors. The palm fruit producers have therefore remained the weak link in the oil palm value chain. It will continue to threaten ambitions we have for the industry. It is the hope that we will all work to ensure that this weak link in the oil palm value chain is strengthened to guarantee sustainable development of this industry.

The low returns at farmgate is the reason why palm oil production in Ghana has increased by only two-fold over more than two decades. We make this statement because these smallholder farmers have for long held 80% share of the oil palm produced in the country.

Given the land tenure situation in the country, the sector can only grow if very serious effort is channeled to improve the profitability of the smallholder oil palm plantations! In developing the sector, any attempt to leave behind the smallholders who still account for 80% of the palm oil production in the country will be reckless and problematic. Fortunately, the Government of Ghana spent good resources to engage consultants, Masdar, to lead the development of a 15-year Oil Palm Master Plan, which was completed and launched in 2012. This well-crafted Master Plan gives direction that actually provides a balanced growth for all actors in the oil palm value chain. Unfortunately however, we live in a country that has a long history of official indiscipline.

A situation where the Master Plan wouldn’t be pushed aside and other overnight dreamt up plans rather implemented is a major challenge that confronts industry stakeholders. A disciplined implementation of the Master Plan will bring about similar giant strides made in Indonesia, Malaysia, Thailand, Columbia and Ecuador.

Example, Thailand moved from a production base of just around 13,000 mt in 1980 to 232,000 mt a decade later, representing a 16-fold increase. The period 1990 to 2000 also saw a doubling of output from 510,000 mt to 989, 000 mt. Thus from a low base of 13,000 mt, Thailand produced 1.4 million mt of palm oil in 2009. Columbia has recorded a 10-fold increase, while Ecuador has also recorded a 12-fold increase in South America.

Ghana is at the cusp of making another history. A history of carrying through the implementation of this all-embracing Oil Palm Master Plan and positively advancing the oil palm industry, or going the well-known direction of keeping the Master Plan document on the shelves, at the offices of power brokers, to gather dust and subsequently in the future brood over our failure to implement another great plan.

Written by: Joseph Baidoo-Williams

Joseph Baidoo-Williams, MBA, PMP®, the writer of this article, is a Director/Consultant at Project Management Experts (PME) Ltd. He is very experienced in Tree Crops development. He is also an outgrower/smallholder schemes expert. He was singled out for praise during the launch of Ghana’s Oil Palm Master Plan for singularly preparing the Terms of Reference and playing a crucial role during the Master Plan’s preparation. He can be contacted through the email, jbaidoowilliams@yahoo.com.