Fortunes to be made in palm oil

Fortunes to be made in palm oil

Olam is one of the world’s top 10 agribusinesses, competing on an equal footing with the likes of Cargill and Louis Dreyfus. It is just as dominant in Africa where it has operations in 24 countries. If the industrial scaling up of agribusiness is the fastest and surest path to Africa’s prosperity, then Olam must rank as one of the major catalysts of this development. The Olam group is the world’s largest trader in cashew nuts and the second-biggest coffee merchant. The group claims that one in eight chocolate bars is made out of cocoa beans traded by Olam. But the group’s latest venture in Africa is on developing large-scale oil palm plantations in Gabon. Ranveer Chauhan, Olam’s regional managing director and global head of Palm explains why the company is concentrating on this commodity.

The growth of oil palm plantations in Malaysia and Indonesia is under fire from several quarters, including the environmental lobby; Unilever has announced that it is pulling out of all its plantations. What is the problem?
I must say I am surprised, because Unilever was the pioneer in discovering the outstanding properties of palm oil – originally used in the making of soaps and margarine but now an important ingredient in many other products. The early books on plantations and the palm plant that I read as a student were all written by Unilever managers.

Today, 40% of the global total vegetable oil is produced from the oil palm. In terms of environmental footprints, oil palm takes up only 5% of the total land area on which oil seed plants are grown.

Palm oil was almost single-handedly responsible for reducing and eventually eradicating poverty in Malaysia and seriously driving it down in Indonesia. Having said that, this came at a high cost in terms of deforestation – I accept that some of the arguments being put forward by environmental lobbies are valid. In addition, there are always different sides to each issue. As I mentioned, palm oil comprises 40% of all oils from vegetable sources. The demand for edible oils is expected to rise by an additional 46m tons by 2020. Oil palm is the only source that can deliver these volumes to the world in this period and we have to be very careful in blocking oil palm new growth. But the danger is to tar the whole industry with the same brush and ignore the enormous differences between different regions. The situation in Africa is vastly different from that in Asia.

Less than half a million hectares is under the crop in the entire continent. Can the ‘experts’ tell us how we are going to meet this demand if they also want to stamp out the main source? Based on lessons learned by the industry in Southeast Asia, Olam is committed to respecting the RSPO standard for its projects in Africa. Our goal of assuring RSPO certification is deeply rooted – it’s ingrained in the process of obtaining our licence to operate.

You have said that, in fact, the oil palm is a model crop for Africa. How is this so?
The impact it can have in creating jobs and in terms of dealing with issues of food security should not be underplayed. Palm oil is a hugely labour-intensive industry. This aspect of it is considered a challenge in other contexts, but in Africa, where labour is plentiful, it becomes a social asset. A 100,000 hectare plantation of palm oil creates direct and full-year employment for about 15,000 workers. In Asia, it is normal to have one worker per 8 hectares of palm plantation. I would like to target those numbers in Africa.

The one big sector that creates jobs and where income distribution is equitable is the agriculture sector. But unlike other sectors such as hydrocarbons and mining, it is a very difficult sector. The returns are not immediate, it requires a lot of hard work and long-term financing. For oil palm, it is even more difficult to find all these pieces and put them together. For starters, you need the right location. With a few exceptions, oil palm only grows within a 10-degree band of latitudes either side of the equator. Then you need the right soil and labour. Crucially, banks will not finance the gestation period until the trees mature and start producing their seeds.

Imagine the plight of, let’s say, a civil servant in an African country. He wants to develop 100 hectares of his own plantation in his village. It is not easy for him to find the capital for that. He will need close to $10,000 per hectare for developing it. That means he will need $1m to develop his palm plantation of 100 hectares. How is he going to raise that sort of money especially as he will only start to see some cash flow after four years?

So there you have the nub of the challenge and that is where we come in. Olam is a very large house. We manage a significant treasury and we know how to raise the capital needed.

I am very clear that no other sector can create the scale of jobs and raise the rural economy to the same scale as agriculture can. Olam is in the agricultural space and we have been in Africa for a long time. We know the space well and we are hugely committed to it. We are what we are today because we are committed and work hard in this sector. We would like to say we are experts in this field.

Tell us about your flagship project in Gabon.
Yes, we are committed to developing oil palm plantations in Gabon and it is a lovely partnership. The government of Gabon, led by President Ali Bongo Ondimba, wants to diversity the country’s economy.President Bongo wants to create local jobs and he wants more value-addition within the economy. The agricultural sector, including palm plantations, ticked all the boxes.
He was very keen to find a partner who would believe in Gabon, in his vision and who would be able to understand and work within the local context. In terms of local context, you hear cases of investors who have failed to meet environmental impact conditionalities or have had negative impacts on local communities – as in Liberia. Olam has worked very hard in understanding the context and designing a programme which I believe will be a viable model for Africa.

What kind of support should governments provide to the agricultural sector?
Maybe we should look at what others are doing – for example, there are agricultural subsidies in the US and the EU. Ages ago, when India started its green revolution, the state invested in irrigation and subsidised inputs such as fertiliser. Today I don’t even hear about irrigation in Africa.

Africa’s green revolution is not going to happen without such investments. I think Africa requires about $50bn of investment to take a shot at food security and self-sufficiency. Just taking broad numbers, let’s say Africa wants to produce 6m tons of palm oil and 10m tons of rice. Africa imports about 9m tons of rice and 4m tons of palm oil. Put together, these crops would require about $50bn of investment. An incentive and support programme for $10bn should help encourage the investments in the agri-sector. It could be an interesting framework for policy makers to consider. If policy makers don’t think along these lines, agriculture growth in Africa will be very slow. It would be dependent on the hard work of a few corporates who are in the lucky position we are in, in that they have a large and multiple pool of resources they can dig into to be able to commit on such a transformative scale. I think governments need to provide the agricultural infrastructure such as roads and access to markets. Ultimately, governments need to commit to training people. Today, the whole burden falls on conglomerates like ours.

Our project in Gabon involves training the farmers. We employ local Gabonese workers who have never before worked on palm plantations. Given the country’s history in timber, we thought we would easily find contractors equipped with the necessary machines. But ultimately we had to put in $40m to buy machines. We have had to build rural housing for our workers. Those are some of the challenges we face on the ground. Also clearly, banking and financing frameworks need to be put in place. There are enough examples of how agriculture subsidies are created in the US, Australia, Europe, India and China. These are governments that are serious about creating jobs for their people and that want to develop their rural economies and ensure food sufficiency. There are ready-made programmes and examples available.

There are those who say your group has grown too quickly. What is your view?
We never grow without telling our investors what we are doing. I cannot agree that we grew too much or grew too fast. Companies have grown much quicker and faster than us.

How do you position African agriculture within the global context?
What I like about Africa is that it’s open for corporate agriculture. India has developed its own agricultural sector, but it breeds a smallholder farmer model and does not make a case for corporate agriculture. But we’re not there yet. The sector still has a way to go. Ghana is trying to develop a cotton industry. We haven’t even started to discuss seed research, irrigation, storage, silos and processing. So there is a lot to be done. There must be about half a dozen billionaires in Africa. How did these people make their fortunes? I don’t come from the school of thought that a billion dollars can be made only through negative means. A billion dollars is a big number. It cannot be made through negative means. It is made through a lot of hard work. Many of these businessmen have committed to creativity and hard work to succeed.

What I would like to see is billion-dollar empires outside of mining. We started our conversation by talking about palm. I have not seen a crop that has created so many billion-dollar houses as palm. It has not only created rural jobs and a rural economy but also it has created many billionaires in Asia – in Indonesia and Malaysia, there are corporate houses worth billion of dollars.

How does Olam fit into all this?
When we chose the company name, we wanted it to be Outspan. But that name had been taken. So when we were told about Olam (which can also be defined as ‘universe or ‘transcending business’ in Hebrew) we liked it, as our ambitions were to be a global player. So Olam is not just about what we are. It is what we want to be. Olam is about our ideas, skills and ambitions. In Africa, we want to create hubs around eight of these countries and then from there see how we can impact the whole of the continent.


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Written by African Business Magazine

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