The Edible Oil Industry

Overview of The Edible Oil Industry

Uganda once had a vibrant private sector driven edible oil industry. The economic turmoil of the 1970s and 80s however brought the sub-sector to its knees. With the right macro-economic policies now in place, the sub-sector has made a huge turn around and it is no longer an eyesore. The edible oil industry is now one of the leading sustainers of the positive annual economic growth rates Uganda has enjoyed for over a decade now. Ugandas demand for vegetable cooking oil has been growing at a rate of 3% per annum. The national demand for edible oil is projected to reach over 80,000 MT in 2005 up from 58,292 in 2001. National production as of 2001 stood at 22,151 MT making Uganda a net importer of edible oil to the tune of over 26,000 MT. This gives investment opportunities into the edible oil industry. More importantly, Ugandas central location in the East and Central Africa region makes her a good springboard to the COMESA market with a population estimated at over 370 million people. Trained, trainable as well as unskilled labour is readily available for prospective investors in the sector to utilise.

Developments in the industry

Government policy overview All agricultural activities in the country will be guided under the Plan for the Modernization of Agriculture (PMA). The PMA is part of the Government of Ugandas broader strategy of poverty eradication contained in the Poverty Eradication Action Plan (PEAP). Strategically the PMA objectives include: Deepening decentralization Reduction in public sector activities in favour of the private sector Adoption of productivity enhancing technologies Enhanced stakeholder participation in the planning and implementation of programmes. The overall government policy framework in the agricultural sector therefore continues to emphasise private sector participation and investments. This emphasis is highlighted in a comprehensive strategy to deal with major constraints to private sector development called the Medium-Term Competitive Strategy (MTCS) for the private sector (2000-2005). The private sector, donors and Government agreed upon the contents of the MTCS during the meeting of the consultative group for Uganda in March 2000

. Specifically, in the edible oil industry: -sector has been fully liberalised to create competition in production, processing and marketing, at promote raw material production have been set up and are adequately financed.

Trends in the edible oil sector

Raw material production Production of raw material in the edible oil industry has shown an upward trend since 1997. By 2001, importation of raw material had dropped to 60 65% from a level of 95% in 1995. In 2001, 160,000 MT of locally available oilseeds were crushed and this scenario is projected to grow positively. Today, the number of farm families involved in oilseeds growing has been expanding since 1997 from a small figure of 14,262 farm families to over 75,000 by end of 2001. This trend has reduced the reliance on imports to meet the national edible vegetable oil requirement .
3,466 9,767 16,053 2

Source: UOSPA

Institutional support to raw material production A number of institutions have been created to boost production of raw materials for crushing: The National Agricultural Research Organisation (NARO) spearheads research in the production and dissemination of improved varieties for vegetable oil processing. The IFAD funded Vegetable Oil Development Project (VODP) of the Ministry of Agriculture, Animal Industry and Fisheries (MAAIF) is spearheading the development of the vegetable oil industry in Uganda. The Cotton Development Organisation (CDO) was set up to revive the cotton industry. Already modest progress has been recorded in the supply of crushable cottonseed. The Uganda Oil Seed Processors Association (UOSPA), a private sector organisation, is very instrumental in co-ordinating the rehabilitation and development of edible oil sub-sector. UOSPA has established a sustainable seed multiplication and distribution system in the Technology International (ATI), a US-based NGO is promoting the growing and small-scale (ram press) processing of sunflower (Sunfola variety) in its operational areas of northern and northeastern Uganda.

Major raw materials for vegetable oil production in Uganda

The majority of the raw materials for the production of edible oil are sunflower and cottonseed, followed by soybean and oil palm. Sunflower: Sunflower is presently the main material for edible vegetable oil processing in Uganda. It is mainly grown in the drier northern and northeastern districts of Uganda. Research has been done to improve yield, oil content and ease of processing. The dominant variety (Sunfola) is high yielding (about 2500 kg/ha), has a greater oil content (25 40%) and is easy to crush because of its thin seed coat. It is projected that about 40,000 MT of sunfola will be crushed by end of 2003 with an oil yield of 8,500 MT. Figure 2 shows the supply of crushable sunflower and soybean to the oil mills in Uganda for the period 1997-2001. Currently, sunflower is very important for sustaining the oil processing industry when you compare it to soybean.
13,549 783 36,291 6,941

Figure 2: Sunflower and Soyabean output in MT: 1997-2001 Source: USOPA

5

Cottonseed Until the early 1970s, cottonseed was the main raw material for edible vegetable oil processing. The economic mismanagement of the 70s and 80s led to the collapse of the cotton industry and hence domestic oil supply. However, since the launching of the IFAD/IDA funded Cotton Sub-sector Development Project in 1994, cottonseed output has picked up although now the output levels have been stagnating due the erratic performance of cotton in the world market. Figure 3 depicts cottonseeds available for crushing between 1997/98 and 2002/03.
28,454 40,599 34,70

Figure 3: Cotton Seeds Available for Crushing: 1998/99-2002/03 in Metric Tons (MT)
Cotton seeds

Soybean: Soybean is widely grown in Uganda. Busoga (49%) and Lango (23%) regions are the leading producing areas. The high yielding and non-shattering Nam I and Nam II are the popular varieties grown. Soybeans high protein content of up to 40% makes its cake very popular for livestock feed. Soybean production is estimated to be growing at over 30% p.a. Table 2 shows the high potential of soybean in the oil industry, although presently less than 30% of what is produced is crushed for oil due to lack of adaptable and affordable technology for crushing soybeans .
783 6,94

Source: UOSPA
Source: Cotton Development Organisation (CDO), Annual Report 2002

In terms of pricing, the average price for soybean offered by millers to farmers has been relatively higher and on an upward trend compared to that offered for sunflower and cottonseeds. Figure 5 illustrates this price trend. It should be noted that cottonseeds are a byproduct and are not produced for the sake of oil unlike sunflower or /and soybean. Over the same period cottonseeds prices were between Ushs.150 and 170 per kilogram.
Figure 5: Average price offered by millers: 19972001

Source: UOSPA Oil palm: Oil palm is the foremost producer of vegetable oil per unit land area, and on a worldwide basis, is second to soybean in oil production. Palm oil is now one of the worlds most widely consumed edible oils. In Uganda, oil palm is grown in the districts of Kalangala and Bundibugyo. It is one of the crops being developed and promoted under the VODP as an alternative source of vegetable oil. About 900 MT of crude palm oil is produced annually using traditional extraction methods. So far, only one investor is actively involved in production of palm oil from locally available raw material

Other available oilseeds

Simsim (Sesame): Simsim, with oil content 45 50% is a major crop grown in northern and northeastern Uganda with production continually growing. Some 97,000 MT of simsim was produced in 2000 but some of this output was exported as shown in Table 1. Table 1. Export of sesame seeds by value and quantity, 1995 - 1999 Year Quantity (MT) Value (000 USD)

Groundnuts (Peanuts): Groundnuts are widely produced in the country and production is continually increasing. In 2000, some 139,000 MT was produced while the 2002 estimates are put at 148,000 MT. Although production is increasing, groundnut is not a suitable raw material for vegetable oil because the price for the whole nut exceeds the value of oil produced. Table 2 gives the planted areas and output levels for simsim, groundnuts and soybean. This reveals that there is considerable opportunity for the promotion of these oil crops in the country. Essential oils Essential oils are the volatile oil fractions of some crop plants (flowers, leaves, stems or roots). They usually have the odour and/or flavour of the plant from which they are extracted. Essential oils are used in the flavourings fragrance and pharmaceutical industries. Flavourings are essential ingredients in the food industry. In terms of world demand, no accurate information is available on essential oils but it is estimated that, in 1997, consumers in the United States spent over US$5 billion on herbal products. Furthermore, the market for natural food flavourings in the United States over the same period was over US$1 billion, and US$400 million was spent for flavouring beverages. In addition, the fragrances in cosmetics and toiletries were pegged at US$900 million annually.

Uses of Essential Oils Geranium oil) Citronella) Eucalyptus oils) mint oil) Citronella) Mutete) In Uganda, possible essential oil crops are: Geranium, Citronella, Mint, Lemon grass, Eucalyptus, Neem, Vetiver, Mujaja, Mutete, etc. three East Africa countries, Kenya, Tanzania and Uganda currently import 150 MT of essential oils annually for their perfume, cosmetics, soap and detergent and food processing industries. No significant production has however started in any of these countries.

identified a range of essential oil-yielding crops in Uganda. Geranium, citronella, lemon grass and mint were particularly identified as offering high commercial potential. The lake Victoria crescent, Kabale, Mt. Elgon and Fort Portal were identified as the most suitable areas for the production of these essential oil crops.

Shea nut: Shea nut trees widely and wildly grow in northern and north-eastern Uganda. Shea nut products, the solid fat (butter) and liquid oil (olein) are ideal raw materials in cooking oil, margarine, cosmetics, soap, detergents and candles. The production of shea nut products remained traditional, until 1994 when USAID, through COVOL, started financing a community-based programme for processing shea nut oil in northern Uganda as well as a conservation programme for the Shea nut trees.

National milling capacity

Presently, the national milling capacity is estimated to be 1000 MT per day of which 409 MT is exported. The major players can be categorised into ; -scale processors with a capacity of more than 50 MT/day, -scale processors with a capacity of 10 50 MT/day, -scale/cottage (including ram presses) operators with capacities of less than 10 MT/day. Large-scale and medium-scale operators are the core of vegetable oil processing in Uganda. There are presently 38 operational large- and small-scale oil mills in the country. They are generally well-managed commercial operations. The large-scale processors have sophisticated refining, downstream manufacturing and packaging facilities. Medium-scale mills follow a similar design of 4 or 5 low-capacity expellers, a decorticator, a low-pressure boiler, a crude oil neutralising vessel and a small soap plant. The capacity of existing facilities in Uganda is shown in Table 3.
.

Potential and actual products of edible oil processing

Cooking oil This is the major product and all processors produce vegetable cooking oil for frying. The largescale processors have their product refined. One large-scale operator is estimated to control 70 80 per cent of the countrys refined edible oil market

. Vegetable cooking fat A negligible quantity of vegetable cooking fat is produced locally. The demand for vegetable cooking fat is met through importation, mainly from the neighbouring Kenya . Margarine and shortenings There is only one investor producing margarine in the country while there is no local production of shortenings such as baking fat. Ugandas demand is currently met by imports mainly from neighbouring Kenya. However, one of the local industries is considering venturing into shortenings

Cake and soap stock These are natural by-products of edible oil processing. These are usually sold to animal feed and soap manufacturers. There are presently five soap manufacturers and about 50 feed mills in the country that consume these by-products. With the increasing export of soap and demand for feeds, these by-products will continue to have a ready market.

Biodiesel Research has been going on, especially in Europe and America, on the development of renewable and environmentally friendly fuel from oilseeds. Vegetable oil fuels (biodiesel) require less refining than edible vegetable oil. Uganda produces a variety of oilseed crops and plants that can be refined into biodiesel. Ugandas favourable climate is suitable for the production of large quantities of raw material needed for the production of these vegetable fuels. Considerable opportunities exist in the edible oil sector of the Ugandan economy. The edible oil sector has shown steady growth since 1997 as figure 6 illustrates. The index of industrial production has been positive and this trend is expected to continue over the foreseeable future.
Figure 6: Index of Industrial Production for edible oil: 1997-2001

Source: Uganda Bureau of Statistics, Statistical Abstract 2002 Due to the positive performance of the edible oil sector, numerous investment opportunities are possible as outlined below:

Production of edible oil and fat Large-scale commercial production of refined vegetable oil and fat is a possible investment. National demand for vegetable oil exceeds local production, making Uganda a net importer of edible oil and fat. Currently, national demand stands at about 60,000MT and about 65% of this is met by imports. There is a big export potential for edible vegetable oil and fat for the EAC and COMESA markets. Out right purchase of existing mills or joint venture arrangement with the owners are possible investments in this area. By Ugandan standards, a large-scale oil processing facility is estimated to require a minimum of USD 350,000 450,000 on equipment and accessories. Margarine and shortenings The baking and confectionery and foodservice industries are growing. Currently, all the baking fats used by the baking and confectionery industry are being imported from neighbouring Kenya. New investments or purchase of existing oil mills or joint venture arrangements are possibilities in this line. Investors can also enter into contractual arrangements with the small- and mediumscale oil mill operators to supply crude oil for further processing. Cotton ginning and cottonseed crushing Cotton ginning and cottonseed crushing are inter-related activities. In the edible oil industry, cotton ginning is a horizontal integration venture. Cotton exports have been on the increase since the inauguration of the Cotton Sub-sector Development Project in 1994. In financial year 2000/01, cotton exports more than doubled to USD 27.4 million up from USD 12.8 million in financial year 1994/5. Outright purchase of old cotton ginneries or joint venture with existing owners or co-operatives is a big possibility since most of these facilities are run at below their installed capacities. Large scale cotton growing is also a viable opportunities to supply the below capacity run ginneries. With increased production, a lot of cottonseeds will be available for crushing

. Animal feeds and soap Edible vegetable oil processing gives by-products that can be used in animal feeds and soap manufacture. The demand for soap and animal feeds has shown an upward trend since 1997 as indicated

Raw material production Local production of raw materials is below the crushing demand of the edible oil processors. It is estimated that 60 65% of the material currently used in edible oil production is imported. A good proportion of this is accounted for by oil palm imports. Investment in estates/plantations, especially of oil palm and sunflower, offer investment opportunities. Only one investor has ventured into this area. Contract farming is another possibility that can be exploited. Oil palm and sunflower are ideal investments because; os1, 0.25 and 0.68 respectively, oilseeds (especially sunflower and soybean) for edible oil processing whereas oil palm is being promoted by VODP. -scale processors prefer local raw materials because of the prohibitive freight costs of similar imported raw materials. All the large-scale operators are now purchasing over 400 MT of oilseeds per week. They are also eager to promote the production of sunflower and oil palm.

Essential oils Considerable potential exists for processing of essential oils especially for the soap and detergent industries for the East African region. The Uganda soap and detergent industry consumed about 24,000 MT of citronella oil in 1998. The major suppliers being the United Kingdom and United Arab Emirates.

Technology for Crushing Soybeans Current indications are that most technologies available and accessible to local processors of soybeans are expensive and bulky. Local processors are seeking for appropriate affordable technologies for processing soybeans to extract edible Investment incentives are covered under the Income Tax Act 1997. The Uganda Revenue Authority as part of the taxation system administers these incentives. The investment incentives are indicated in the following tables:

Investment protection Investment guarantees-Uganda is a member of the Multilateral Investment Guarantee Agency (MIGA) of the World Bank and VAT deferred payment agreements. Externalisation of funds-Foreign investors are allowed to externalise funds for: Loan repayment in a foreign country

proceeds on disposal of assets. Protection against compulsory acquisition. Compulsory acquisition can only be made in accordance with the Constitution of Uganda. Should compulsory acquisition take place, the investor must be compensated within 12 months from the date of acquisition, based on fair market value of the enterprise .

Local Market

industry, and the foodservice industry. With the return of economic stability, Ugandas commercial network has re-established itself. Most urban areas now have a range of cooking oils in shops and markets, from 3 - 5 litre branded containers, sealed 1-liter bottles, and 150 ml measures drawn from bulk containers . vegetable oil is expected to reach 80,000 MT in 2005. This is an indicator of potential investment in the sub sector

. The East African Market This is a market of about 85 million people covered under the East African Community (EAC). The Treaty that established the EAC is in force awaiting ratification. But, there is no consensus yet on trade. There is a High Level Task Force (HLTF) on implementation of Article 175, which covers trade. The HLTF envisages a protocol on a Customs Union.

reciprocity when imported from Kenya to Uganda or Tanzania. manufactures that will attract a zero tariff rate for the tripartite trade is also being worked out.

but its rate is not yet agreed upon. However at present, Uganda has the lowest customs tariff among the three countries.

driven. n agreed that the region has a comparative advantage in the agricultural sector and a study on the Strategy on Agricultural Development for the region is on going. When ratified, the EAC and its focus on agricultural development, presents enormous chances for Uganda, because of the three countries, Uganda offers better avenues for agricultural development and agricultural related trade.

The CONTONOU ACP/EU Partnership Agreement

the agreement EU will be requested to establish a single regional fund for Eastern and Southern Africa region and COMESA states will adopt a common position on European Development Fund

A strategic location, a predictable and stable economic environment, cheap but quality labour force, an excellent natural resource base, a better energy supply and a rapidly growing infrastructural base are regarded as Ugandas best assets as an alternative investment location in the sub-Saharan African region.

Strategic location Uganda is strategically positioned within the East and Central Africa region that includes the Common Market for Eastern and Southern Africa States (COMESA), an economic grouping with a market of over 300 million people. This location within the heart of sub-Saharan Africa gives Uganda commanding importance as a base for regional trade and investment.

Predictable and stable economic environment Since 1986, Uganda has been on the path of economic reconstruction and development, which has made her the new face of emerging Africa. The economic reforms undertaken, coupled with political stability, have contributed to growth rates averaging 6.5% over the last decade. Inflation has consistently been maintained below 10 %. Uganda is now rated the second best improving country in sub-Saharan Africa to invest in, .

.Cheap

but quality labour

The quality of labour force is one of Ugandas main strengths. With 12 universities and a number of polytechnics, all levels of skills and training needed to run the edible oil industry are adequately covered. Ugandas labour is cheap compared to that of most COMESA countries. Rates of USD 1.1, 0.5, 0.7 and 2.8 per day are quoted for Kenya, Uganda, Zambia and Zimbabwe respectively. In addition, a large percentage of the population can speak and write English. This should prove a major asset for foreign investors wanting to engage in edible oil processing in Uganda .

Excellent natural resource base Ugandas biggest advantage is the abundance of natural resources for crop production. The country is endowed with some of the best agricultural land in the COMESA region. It has a favourable climate with ample and well-distributed rainfall (750 1500 mm) and a little temperature variability (15 300C).

Competitive incentive regime Ugandas incentive package provides for generous capital recovery terms, particularly for investors whose projects entail significant investment in plant and machinery as well as those whose investments are likely to yield profits over the longer term. The incentive package includes; a nominal corporate tax rate of 30 per cent which is among the lowest in sub-Saharan Africa, a zero rate tax on importation of plant and machinery, import duty exemptions for plant and machinery, duty draw-back/refund facility for exporters, special initial investment allowance of 50% on plant and machinery, a special 75% initial allowance for investment in remote areas, VAT deferral facilities Investment guarantees Ugandas constitution guarantees the right to property, Uganda is a member of the Multilateral Investment Guarantee Agency (MIGA) of the World Bank.

Energy supply The mainstream hydropower supply in the country is 317 megawatts. Nalubale Dam, Ugandas major hydropower generating station underwent currently undergoing major expansion expected to boost power supply by 20%. A second hydropower dam, Kiira, has already started producing power. In addition, three private power projects are underway to supplement power production levels in the country. It is expected that once completed these projects will provide cheaper power supply for investors. In addition to these developments, the energy sector is being liberalised so that power generation and distribution become competitive

. Rapidly growing infrastructural services Ugandas excellent road network is well linked to her neighbours, Kenya, Tanzania and Rwanda. The main airport at Entebbe handles international air traffic to all major business centres in the world. Over forty international flights per week connect to European cities via Entebbe. In addition, a number of international courier firms such as DHL and TNT are represented in the country making delivery of urgent documents and materials easy. The telecommunications sector has been fully liberalised. The country now has over 250,000 fixed lines in addition to cellular telephone services provided by three mobile phone operators. Internet services are well developed and are spread all over major towns .

Key players in the Industry

Major edible vegetable oil producers Kakira Sugar Works (1985) Ltd - Oil & Soap Division Kengrow Industries Ltd Mbale Soap Works Mukwano Industries (U) Ltd New Tororo Edible Oil Products Nile Agro Industries Ltd Uganda Trade & Industrial Enterprises

Supporting Institutions UOSPA: Promotes development of oilseeds (sunflower and soybeans) as raw for

edible oil processing VODP: Promotes development of oil palm as an alternative raw material for vegetable oil processing UNBS: Offers guidance on standards for local and exports markets EADB: Provides facilities for extended yield curve funding UIA: A one-stop investment facilitator for all investors BoU Provides facilities for EIB-Uganda Apex Private Sector Loan Scheme and ECGS Useful

References and sources for further information

Background to the Budget 1999/2000, Ministry of Finance, Planning and Economic Development, Republic of Uganda. Background to the Budget 2000/01, Ministry of Finance, Planning and Economic Development, Republic of Uganda. Background to the Budget 2001/02, Ministry of Finance, Planning and Economic Development, Republic of Uganda. Background to the Budget 2002/2003, Ministry of Finance, Planning and Economic Development, Republic of Uganda. Otim-Odoch P. and Singh S, 2000. A Study to establish the oil milling capacity in Uganda. A Report for the Vegetable Oil Development Project, Ministry of Agriculture, Animal Industry and Fisheries. The Institutional Investor, 2000. The World Bank, World Development Report, 2000. Uganda Oil Seed Processors Association, Business Plan 2002/03. Uganda Bureau of Statistics, Statistical Abstract, June 2002 Vegetable Development Project, Appraisal Report, Volume 1, Ministry of Agriculture, Animal Industry and Fisheries, Republic of Uganda.

Source: COMESA web site and Report of Finance Ministers Meeting in Khartoum March, 2003
1 MFN

means Most Favoured Nations