Palm Oil Internet Seminar

2nd Half 2014: Market Challenges, Predictions And Directions:
Expanding Palm Oil Production: Prospects for Africa
By: Mr. Abah Ofon

Abah has over 21 years’ macroeconomic, commodities, trade and research experience in financial markets in Africa, Asia, the Middle East and Europe. Prior to founding 3XG UK CONSULTING LTD, he was lead analyst at the London firm Agribriefing, Head of agri-commodity research and Africa economist for Standard Chartered Bank’s global franchise based in London, Dubai and Singapore. Abah has provided advisory services on agricultural markets to some of the largest agribusiness names and institutional clients including hedge funds and central banks. Abah is a prominent pundit in the financial and business media and was profiled in the UK’s Financial Times at the height of the 2008 commodity crisis. Abah is a graduate of the London School of Economics and has been a member of UK Society of Business Economists as well as a Financial Advisor licensed by the Monetary Authority of Singapore.
Significant change is underway and gathering pace in Africa’s agricultural sector. While the region’s extractive industry has received most of the foreign direct investment (FDI) in the sector since 2008, Africa’s agro industry is now attracting greater interest from domestic, regional and international investors – especially in oil palm, sugar and rubber. According to the World Bank, agriculture accounts for over 30% of Africa’s GDP. This could be valued at over USD 1tn by 2030 if matched by the right infrastructure and institutional framework – particularly energy sufficiency and irrigation. To attain this target, a dynamic private agribusiness sector must work in tandem with farmers and consumers as Africa becomes increasingly urbanised.

While a number of factors have hampered the progress of farming in Africa, many are starting to be addressed. Indeed, as the world’s appetite for land and food grows, and as the African investment climate improves, the region is emerging as a key destination for agricultural investment.

According to the UN Conference on Trade and Development (UNCTAD), FDI inflows to Africa rose to USD 50bn in 2012 from USD 44bn in 2010. Africa is the only developing region to record two consecutive years of growth in FDI inflows to 2012. Investment in Africa is now more broad-based, with strong inflows to consumeroriented manufacturing. We believe this trend is a leading indicator of a surge in food demand in the region over the medium term. The palm oil market stands to be a major beneficiary of this development.

Private investment is needed to support Africa’s growing demand for CPO. Africa’s consumption of a range of agricultural commodities – especially edible oils such as palm oil – has grown exponentially over the past 30 years. However, acreage and yields have not followed suit, resulting in the region being a large net importer of palm oil. We estimate a 3mt supply deficit for palm in Africa in the 2012/13 season, which is 150% of Africa’s current production.

Given this deficit, there is a strong incentive to improve agricultural productivity in the region. The food import bill is growing; we currently estimate it at over USD 25bn, equivalent to more than 8% of imports to SSA. World Bank figures show that food accounts for an increasing share of Africa’s merchandise imports; this will have an adverse impact on the region’s trade and current account balances and currencies. Increasing farm productivity in the region will go some way towards reducing food inflation and improving food security, making food more accessible to both rural and urban dwellers.

We strongly believe that more investment is needed in Africa’s agro-industry. Investments by the private sector will contribute significantly to improving industry yields, in our view. The International Food Policy Research Institute (IFPRI) estimates that Africa needs USD 32-39bn of investment annually to realise the full economic potential of its farm sector, with up to 50% of the funding originating from the private sector. Africa needs investment on par with Asia and in South America during the ‘Green Revolution’ in the 1960s and 1970s, which was around 15% of their national budgets. Heavy investment in those regions raised productivity and triggered high and sustainable rates of economic growth.

We are bullish on the consumption story for palm in Africa. We believe that the economies of scale resulting from growing FDI in the sector will help to match the consumption growth that is likely over the next few decades. However, we caution that initial return on investment (ROI) could be lower than Asian levels due to the high operational costs of doing business in Africa. This is an important consideration for prospective investors, especially when combined with uncertainty over production costs.

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Questions & Answers (2) :
Abah Ofon
10 years ago
Dear Faudzy, thank you for your feedback and for the question on how NGOs impact the palm sector in Africa. A core concern for the industry is indeed the environmental impact of palm plantations, and the trade-off between expanding plantation area to meet growing demand and the environmental and social pressures that it creates. We believe the direct and indirect effects of the creation of oil palm plantations need to be taken into account and reviewed as part of an environmental and social impact assessment. Some projects in Africa have stalled because of a lack of consensus between investors and the community. In other cases, investors have been responsible and sensitive towards environmental and social interests, and planting is progressing. We hope to broaden the debate on oil palm developments in Africa in order to get all stakeholders more aware of the economic benefits as well as the externalities generated as the sector evolves.
Abah Ofon
10 years ago
Thank you for your detailed insights into the palm oil production prospect for Africa. Africa being the second-largest and second most populous continent on earth with an estimated population in 2013 of 1.033 billion people presents itself as the next frontier and opportunities for growth investment not only for the oil palm plantations and its downstream activities but as a driver for social and economic development in this continent. However one element that you have left out is the impact and influence of NGOS in dictating, governing and pressuring decision makers in Africa towards their effort to develop the oil palm plantations and its industry in Africa. What are you views on this and how are some of the African nations and government tackling these onslaughts by the NGOS.
Mukesh Gwalwanshi:
After all we are growing Africa inspite of ROI challenges .
10 years ago
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