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Imports of cheap crude palm stifle Uganda's oilseed farming

Monday April 04 2016
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According to recent Customs data, Kenya, Tanzania and Uganda spent $2.2 billion on crude vegetable oil imports between 2013 and 2015. Kenya led with imports of $1.14 billion, followed by Tanzania and Uganda at $604 million and $462.3 million respectively. FOTOSEARCH

The Kazimingi area of Jinja, once designated as Uganda’s industrial hub, is today a shell of rusty disused oil mills and crumbling buildings — testimony to a bygone era, when smallholder farmers prospered by growing cotton and other oil seeds to feed the mills.

Kazimingi is just one of the many ghost towns spread all over Uganda — towns that were built around an oil seed industry that no longer exists. Since the early 1980s, Uganda has been struggling to revive its vegetable oil industry to satisfy both immediate consumer demand and revive a domestic value chain.

At least four big millers — Mukwano, Bidco, Nile Agro and Tasco — have set up big vegetable oil processing plants in the country. But while they have the capacity to convert locally produced oil seeds, the lure of cheap value addition from imported southeast Asian crude palm means local farmers are still in limited.

According to recent Customs data, Kenya, Tanzania and Uganda spent $2.2 billion on crude vegetable oil imports between 2013 and 2015. Kenya led with imports of $1.14 billion, followed by Tanzania and Uganda at $604 million and $462.3 million respectively.

Independent policy analysts argue that of these three countries, two Uganda and Tanzania could save close to $500 million in foreign exchange annually if they substituted imports with locally produced oil seeds such as sunflower, soya, sesame and maize. This would also have a positive impact on the social status of communities because as much as 30 per cent of that value would be retained by producer communities, according to some estimates.

They further say that if duty were imposed on palm oil, which is currently zero-rated, and the farmers and manufacturers given incentives, East Africa could soon be growing its own oilseeds and developing a vertically integrated vegetable oil industry.

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Under the current situation, much of the profits from the vegetable oil trade go to just two firms — Wilmar (an associate of Bidco) and Louis Dreyfus Commodities. The two control bulk liquid storage for crude palm oil in Mombasa and Dar es Salaam ports. Most of the unaffiliated oil millers buy their supplies of crude palm oil from these two firms, which both have palm plantations in Malaysia and Indonesia.

Storage facilities

“Their model is to supply from their own plantations because they have a monopoly of local storage facilities. There is neither a level playing field nor any initiative to create an oilseed platform in East Africa,” said an industry player.

Louis Dreyfus Commodities declined to answer our questions while our calls to Bidco went unanswered.

“Unfortunately, I am unable to give any comments on our business to the media,” Louis Dreyfus Commodities oilseeds manager for East Africa Anthony Kariuki wrote in response to our enquiries.

For a decade now, Uganda has attempted to substitute imports with a massive palm oil project on the Ssese Islands of Lake Victoria.

Wilmar and Bidco are partners in Oil Palm Uganda Ltd, the company that in 2003 signed a 25-year concession to develop a 40,000-hectare oil palm estate in Ssese. Of this, 26,500ha was supposed to be a nuclear estate run on the company while smallholder farmers would grow oil palm on the rest.

About $120 million was committed to the first phase that included the processing plant in Jinja. Wilmar holds a 60 per cent stake in Bidco Uganda.

At current consumption rates, an estate of that scale will at full production account for 40 per cent of Uganda’s vegetable oil needs but Oil Palm Uganda has so far developed only 6,500ha, which at peak will yield 20,000 tonnes of refined vegetable oil.

Analysts question whether that output matches the economic and social costs of the project. While Bidco delivers 20,000 tonnes, it is allowed to import 100,000 tonnes of unrefined vegetable oil from Wilmar’s plantations in Southeast Asia.

The company was given exemption from corporate tax for the 25-year duration of the project on production from its Ugandan estate with VAT deferred for 12 years starting 2003. With an open licence to import from its mature and cheap estates, however, some wonder if Wilmar has sufficient incentive to grow the business in Uganda.

Activists also argue that in promoting oil palm, the government ignored alternatives with a better multiplier effect on the economy and a smaller environmental impact.

Frank Muramuzi, head of the Friends of Earth Uganda chapter, says the country’s decision to promote palm oil over other alternatives, is a poor one when the environmental and social costs are factored in.

“A lot of biodiversity has been lost and hundreds of millions of dollars in revenue foregone in tax incentives yet there is no obligation on the investor to give anything back to the community. Replacing natural forest with plantation palm was a bad choice. Worse, the people who were economically displaced by the project have not received adequate compensation,” he said.

“There are two ways of looking at it,” said a medium-scale oil miller in eastern Uganda. “Palm can employ thousands while Oilseeds can employ millions. Look at Brazil and Argentina. Why are they pushing for oilseeds and not palm? The way to go is to promote smallholder farmers as opposed to large plantations,” he added.

Furthermore, besides other industries such as textiles that can develop as spinofts from cotton seed production, for instance, a robust animal husbandry industry can be developed based on the byproducts from processing oil seeds into edible oil.

Until mid-October 2015, East African currencies were under siege as a resurgent US economy saw the local units rapidly erode against a bullish greenback. The Ugandan currency lost close to 30 per cent of its value against the US dollar between January 2014 and August 2015. Economists blamed this on the huge gap between the country’s exports and imports.

Trade deficit

“The trade deficit in goods and services has almost tripled since 2005/06, from $1 billion in that year to nearly $3 billion in 2014/15. In the past fiscal year, the trade deficit was 12.6 per cent of GDP. It is forecast to reach $3.9 billion in 2017/18,” Bank of Uganda Deputy Governor Dr Louis Kasekende told a forum on Directions, Prospects and Challenges for the Ugandan economy” at Makerere University last November.

Robert Kanusu, a political leader in Uganda’s Busoga region argues “our governments need to wake up and support the development of indigenous vegetable oil value chains or East Africa will continue to bleed foreign exchange. The first step should be to acknowledge that we have been spending billions on edible oil, then work out a detailed plan to establish an oil platform.”

Connie Masaba, the manager of the vegetable oil development projects in the Ministry of Agriculture said: “We are promoting both oilseeds and palm but palm oil is preferred because it is 10 times more productive per unit area than oil seeds. Besides, it is a perennial crop and unlike oilseeds, once planted, it does not compete with other crops for land yet you would need a lot of land to achieve a comparable output.”

According to her, a hectare of palm in Uganda can yield 3-4 tonnes of crude palm oil per annum, which cannot be matched by oilseeds. She said Uganda’s long-term strategy should be expansion of palm growing beyond the Ssese Isles to areas around Lake Victoria in Mayuge and Jinja districts.

That aside, Ms Masaba said, the government policy is to promote both palm and oil seeds. Oilseeds are being promoted in eastern and northern parts of Uganda but beyond the efforts of private miller Mukwano Group to establish a value chain around sunflower, government backing is not visible. For instance, of the $53 million IFAD committed to the Uganda vegetable oil programme, just $1 million was given as a grant for oilseeds.

According to Ms Rowena Matovu, co-ordinator for the oilseeds project at SNV Netherlands, the key challenge for oil seed development has been the absence of sustained market opportunities.

“The private in the oilseed sub-sector is still reluctant to invest because there is no guarantee that benefits will accrue directly to them. This means that poverty reduction is slowed down where necessary investments are not taking place,” she said.

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