Improving the Competitiveness of the Ethiopian Edible Oil Sector - Policy Brief

The Public Private Partnership on Oilseeds, involving stakeholders from the public sector (MoARD, MoTI, EIAR, EKN) and the private sector (AAOMA, EPOSPEA, MVO)1 aims at improving the competitiveness of the Ethiopian oilseeds sector, both for the domestic and export market. One of the priority sectors of the PPPO is the edible oil sector. In its Memorandum of Understanding the PPPO has set its agenda and asked for support to the Ethiopian oil mills, to improve quality and efficiency . As a result of this, the Addis Ababa Oil Millers Association has requested for a consult team to visit Ethiopia and investigate the Ethiopian edible oil sector. In June 2009 a team of a crushing expert, refining expert and quality assurance expert investigated the potential of 12 oil crushers, some of which also have refining equipment. In addition, they investigated the enabling environment for the sector at large through conversations with MoTI, MoFED and the QSAE2. The full report of the fact-finding mission can be found in Appendix 1. This policy brief / executive summary builds on the work of the consultant team, in addition to the ongoing business-to-business (B2B) activities of the PPP on Oilseeds. With respect to the B2B activities recently an updated Business Opportunities on Ethiopian Oilseeds was launched in the presence of the Dutch Minister of Agriculture, Nature and Food Quality, and two Ethiopian State Ministers of Agriculture and Rural Development. The Oilseeds Business Opportunities report indicates further possibilities for increasing oilseeds production, processing and exports. The report can be found in Appendix 2. This policy brief highlights the conclusions of both reports.3 Launch of Business Opportunities Report on Oilseeds, Sheraton 4 November2009. From left to right: Dr. Mussie Yacob (President EPOSPEA), Mr. Jaap Biersteker (Representative MVO), H.E. Dr. Aberra Deresa (State Minister MoARD), H.E. Mrs. Gerda Verburg (Minister LNV), H.E. Mr. Yaekob Yalla (State Minister MoARD), Mr. Geert Westenbrink (Agricultural Counselor, EKN).

1,2

MoARD: Ministry of Agriculture and Rural Development, MoTI: Ministry of Trade and Industry, EIAR: Ethiopian Institute of Agriculture Research, EKN: Embassy of the Kingdom of the Netherlands, AAOMA: Addis Ababa Oil Millers Association, EPOSPEA: Ethiopian Pulses Oilseeds and Spices Exporters and Processors Association, MVO: the Dutch Product Board of Margarines Fats and Oils, MoFED: Ministry of Finance and Economic Development, QSAE: Quality and Standards Authority of Ethiopia.
3

The statements, findings, interpretations and conclusions expressed in this report are those of the authors and do not necessarily reflect the views of, or are endorsements from, the partners of the Public Private Partnership on Oilseeds.

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Vol.1. No.1 Dec 2009

Background: The Ethiopian Edible Oil Sector The Ethiopian edible oil sector consists of two groups of producers: the local, smallscale processors (>1000) and a few medium and large-scale enterprises (~20). The entire sector produces approximately 20.000 tons of edible oil annually; while domestic demand is estimated at 200.000 tons (see Appendix 2). Consequently, the information obtained from the Ethiopian Customs Authority indicates that Ethiopia imports up to 160,000 tons of edible oil annually and this figure is increasing every year. That means that in the last 5 years the imports are 10-15 times the domestic production. This results in an available amount of edible oil of around 2 kg per capita in 2009. The increase of import suggests a potentially large domestic market, with rising incomes. Main imports of edible oil are palm and soybean oil. Substitution of these oils by domestic production especially by sunflower, soybean or maize oil seems feasible, encouraged by high domestic prices. Since 2008, in the food regulations it is obligatory to refine plant oils for human consumption. However, until now the legislation has not been fully enforced. Export oil (especially sesame and linseed) is hardly being produced locally, since the export price of seed is usually very attractive and sesame oil is hardly locally consumed. It is seen as a business opportunity to increase the local capacity to produce sesame oil for export, increasing added value and foreign exchange. A Dutch-Ethiopian joint venture recently started construction for a sesame and linseed oil mill for export in Adama. The Ethiopian edible oil market is trapped between cheap, currently tax free imports of palm oil on the one hand and on the other hand the high level of standards for the export of oil (ISO, HACCP, BRC). At the moment, domestic edible oil producers find it very hard to compete with the imported 20 litres palm oil jerry cans. Only a few Ethiopian crushing and refinery units can reach export quality. Addis Modjo PLC, recently privatized, has already acquired HACCP and ISO 22000. In addition, new factories for export are being established in Adama and Bahir Dar where certification plays an important role. Enabling Environment The main challenges for the oil-crushing sector in Ethiopia are to ensure adequate and steady supply of oilseeds and to compete with world market prices. Local prices of oilseeds like noug, linseed and rapeseed and local crushing often exceeds world market prices. A great concern for Ethiopian oil millers lies in the unequal taxation of edible oils. Whereas palm oil can be imported without import tax and VAT, domestically produced oil is liable to pay VAT. Another reason for low competitiveness lies in the high value of the Ethiopian Birr (ETB) to the USD and Euro. IMF and World Bank estimated in 2008 that the ETB is 40-50% overvalued and needs gradual depreciation. This depreciation has taken place in 2009 by 25%. Further depreciation of the ETB can improve export competitiveness in oilseeds and can give more incentives for import substitution. At the moment 50% of the sesame export value is needed for importing edible oil (palm, soybean and sunflower oil). Recommendation 1: Create a level playing field for the edible oil sector by having equal taxation for domestically produced and imported edible oil.

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Sourcing of seed One of the problems is the availability of good quality seed. The cotton ginning industry does not do a good job on their processing, which results in cottonseed of inferior quality (both in terms of Free Fatty Acid (FFA) and amount of lint). It is recommended that the oils millers association (AAOMA) talks to the different ginneries to improve the products supplied to this industry. In addition, the production of other (commodity) oilseeds needs to be increased, in addition to cottonseed, in particular good prospects exist for: rapeseed, soybean and sunflower seed. Recommendation 2: - Develop and agree (with ginneries) specifications for cottonseed with limits for FFA, lint content, moisture and impurities. - Undertake a feasibility study for increased production of soybean and sunflower seed.

Edible Oil Production: Efficiency and Competitiveness The major problem of the crushing industry is the very low crushing margin, due to the low price of the oil and the high price for the seed. This results together with the high cost for working capital in a high underutilization of the oil milling industry. Some mills were not able to buy cottonseed on the market and went partly over to toll crushing. Four oil mills stopped seed pressing for half a year, and fell back on activities as seed cleaning and warehousing. The total refining/deodorisation capacity in Ethiopia is around 70/75 ktons (including factories near Addis Ababa, Nazreth, Bahir Dar, Gondar and Amaressa). Of this potential, at present, only 15/25% is utilised. This means that an enormous area of employment and upgrading possibilities is possible. Refining, bottling and branding of oil can increase the added value of the oil as shown by two of the crushers. However, it requires a good working refinery which is able to produce good quality oil (preferentially equal to palmoleine) throughout the whole year. The consultant team is of the opinion, that with proper training, investments and more attention to detail, the quality of the oils can be improved greatly. In most cases quality as from Malaysian/Indonesian origin can be achieved. Recommendation 3: Take imported palmoil as quality benchmark and develop Good Manufacturing Practices (GMP) for the Ethiopian Oil Mill Sector accordingly. AAOMA could take the lead in this.

Today increasing quantities of palmoleine are imported from Indonesia and Malaysia. If the crushing and refining enterprises are utilised better, potentially half of the imports (~80.000 tons) can be substituted by domestically produced oils. In addition to the oil, constant quality of oilseed cake and sales to emerging animal feed factories can improve competitiveness. This requires again a good working crushing plant, which is able to supply a good quality cake throughout the whole year.

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Improving Quality In principle the Ethiopian oil industry has the capabilities of producing high quality refined cooking oil, which would be beneficial to: - import reduction, hence lower demand on foreign exchange - higher demand for local oilseeds - higher employment within crushing / refining industry - new innovation in processing and oil bottling - network of specialists The main raw materials for the production of edible oil by oil millers include, in the order of importance and quantity: cottonseed (~90%), rapeseed, nigerseed, groundnut, and soybean. The main products are refined and unrefined edible oils and are sold mainly in bulk packaging for the retailing shops and in small packages (1-5 liters) for consumers. The 200 litter drums used for bulk packaging are not food grade and mostly used for mineral oil. The main processing steps for the production of refined edible oil in most cases include oilseeds receiving, pre-cleaning, storage, cleaning, milling, cooking, pressing, crude edible oil clarification, crude edible oil storage, neutralizing, washing, drying and filling. Only few companies are involved in bleaching, deodorizing, refined oil storage, filling and packing. The two major issues that were found out during the factfinding mission with respect to refining are: Heating of oil for deodorization: Deodorization is the last step of the refinery, which enables the refiner to produce a bland tasting oil; this process requires heating the oil to a minimum of 170C. Six refineries use 16-bar steam to heat the oil before deodorization, three refineries use thermal heating oil. The use of this oil (certainly, if it is not proven to be edible) causes a food safety hazard and is therefore forbidden in deodorizers in Japan, EU and Malaysia. In case steam heating is too expensive, one could think of using electrical heaters for heating from 120C to170C. Disposal of soap stock: Soap stock from neutralization of all oils except cottonseed should be sold to soap factories in Ethiopia. Soap stock from cottonseed oil contains a lot of gossypol and is too dark as feedstock for most soap factories. Most refineries do not have a good solution for the disposal problem. One small refinery added soapstock to a firewood fed boiler. This practice however need to be further investigated (the ash contains caustic). In addition, the sector could benefit from introducing international quality and food safety standards to its factories. This holds especially for export of edible oil (sesame, linseed oil) to the critical consumer markets of EU, USA and Japan. Recommendation 4: - Set up a working group on efficient production of steam and backup power for the crushing and refining operations in Ethiopia. - Set up a working group for better disposal of cottonseed soap stock. - Discuss with selected industries the implementation and certification of HACCP and/or ISO 22000 food safety management systems.

Appendices - Appendix 1: Fact-finding report - Appendix 2: Business Opportunities Report on Oilseeds

Public Private Partnership on Oilseeds Tel. +251-11-662-3365 Fax +251-11-662-3547 Vol.1. No.1 Dec 2009