If you walk into a supermarket, anywhere in the world, half of the products on sale will have one common ingredient—oil palm.
From manufacturers operating in cosmetics, furniture and printing to those in agrochemicals, industrial cleaning and animal feed, oil palm is the raw material at the centre of the $150 billion edible oil industry feeding their factories.
Fortunately, in Nigeria, this raw material is produced 365 days a year.
Oil palm is a wild mangrove tree that also serves as the source of a versatile fruit called the palm fruit. The oil extracted from the palm fruit is of two varieties—crude palm oil (CPO) and palm kernel oil (PKO), and both are in high demand across the world.
In the 1960s, Nigeria was the largest producer of oil palm in the world and controlled nearly 43% of the global market. By 2018, Nigeria’s competitive position had shrunk to the point where it produced less than 2% of total global output. Instead, the market is now dominated by Malaysian and Indonesian producers.
For manufacturers and food factories that use oil palm in production or refining, their ability to run at full capacity and produce quality goods, whether for domestic consumption or export, is determined by the quality of the raw materials they can source.
In the case of oil palm itself, the primary source of these raw materials is smallholder farmers scattered across the country.
The Nigerian oil palm industry is very fragmented and dominated by numerous small-scale farmers, who are responsible for 80% of total production. These are farmers that cultivate small farm plots (5 – 10 hectares), but also control more than 1.6 million hectares of oil palm land across the country.
However, the challenge with this model is that these smallholder farmers use harvesting techniques that are outdated, slow and inefficient, leading to poor quality raw material for manufacturers, wastages during the harvesting process, and limited availability of high-quality inputs for factories further down the value chain.
Therefore, despite the extension of oil palm production to 24 states in Nigeria, and expansion of land used for oil palm production to over 3 million hectares, oil palm yield (amount of oil palm produced) was at 0.39 metric tons per hectare in 2017. This is compared with Malaysia’s 3.87 metric tons per hectare, Thailand’s 3.72 metric tons per hectare and Indonesia’s yield at 3.58 metric tons per hectare. This means that Nigeria will use 10x more land to harvest the same metric tons of Oil Palm as Malaysia and Thailand.
Today, manufacturers and food factories in the oil palm value chain lose a lot of money and time in their attempt to source the highest quality raw materials (in this case palm fruits and palm nuts) from smallholder farmers. In fact, 90% of African food factories operate at less than 50% of their capacity, due to the limited availability of raw materials.
The result is that Nigeria has gone from a global exporter to a net importer of the product. Nigeria’s oil palm deficit represents more than 20% of our total production and despite the efforts of oil palm majors like Okomu Oil and Presco, the market is still so large that it creates a premium pricing opportunity for new players. The supply deficit within the sector and growing demand from Nigeria’s population are signals that there is strong growth ahead of the industry.
That being said, if African manufacturers and food factories want to compete with their peers in the global market, they must ensure that their factories are efficiently run and supplied with high-quality inputs.
This is a prerequisite for global competitiveness. And this is the reason that these manufacturers are in desperate need of companies like Releaf.
Releaf’s business is changing the way that the oil palm value chain works.
With its new de-shelling technology and an extremely streamlined sourcing process, Releaf’s value proposition is twofold. For the farmers, Releaf acts as a consistent offtaker for palm nuts by taking them off their hands as soon as they get them, increasing the speed of their inventory turns and take home by up to 50%/month. And for the factories, Releaf guarantees a steady supply of high-quality palm kernels that they would otherwise be unable to source directly from the farmers.
By participating in the value chain, the company is creating a market amongst farmers for the previously low-value palm nuts—turning them into high-value palm kernels and acting as a raw material supplier of palm kernels to the food factories.
Before Releaf, there were a number of unattractive options for manufacturers.
On the cheap end of the spectrum, farmers could use their hands to individually select, grade and crack up to 2.5 metric tons of palm nuts a week, with up to 90% accuracy. The problem with this approach is that it is extremely slow and produces very little output for the factories.
In some cases, local cracking equipment can do the job for about $1,000, with an output of up to 24 metric tons a week. However these de-shellers can waste up to a quarter of the farmer’s original output because of their poor quality control.
Finally, for bigger mills run by large companies, imported de-shelling systems which can do volumes of up to 720 metric tons a week are available, but cost over $350,000 to purchase and are only able to de-shell with about 60% accuracy. They’re designed for the plantation variety (tenera) of oil palm but are ineffective for smallholder palm (dura) because it has a much thicker shell.
However, Releaf’s solution cost less than a half of the cost of an imported de-sheller, are significantly more accurate at 95%, and operate 25x faster than local cracking equipment crackers and 240x faster than de-shelling by hand with a 600T weekly capacity.
Beginning with Nigeria, Releaf is industrialising the African oil palm industry by leveraging technology and direct farmer sourcing to make high-quality raw materials available to local factories.
Upgrading the oil palm value-chain
At the core of any industrialisation process is leveraging technology, but not just technology as it is commonly understood. Too often we use technology to refer to machinery, equipment and devices developed using computers or other platforms.
For this reason, the holistic nature of Releaf’s approach to technology is refreshing.
Instead of just relying on software, the company is also using hardware technology to change the way farmers do business and how factories source input. It is the perfect blend of technology in a 21st-century region looking to leapfrog.
The Releaf team is currently well poised to capture this growing market for industrialisation in African agriculture, and they have shown their commitment to the process.
Releaf CEO, Ikenna Nzewi, who graduated from Yale and worked as a private equity consultant at Bain & Company, has been studying Nigeria’s agriculture market for 5 years. Before deciding on oil palm, he personally studied 8 agricultural value chains in 20+ Nigerian states by bus, collecting unit economics from farm to consumer markets.
His co-founders, Uzoma Ayogu and Isaiah Udotong, are graduates of Duke University and Massachusetts Institute of Technology (MIT) respectively, and bring deep engineering and research expertise from their combined time at General Electric and Facebook, respectively.
With growing support from the Central Bank of Nigeria and the Federal Government in the agriculture industry, the market that Releaf operates in is only set to expand. In 2015, we saw the CBN include oil palm products on the list of items that it no longer provides foreign exchange to purchase. This guarantees that demand for the products while growing, will be served by local companies.
It is well established that African countries like Nigeria export low-value primary products while importing high-value finished products. This trend applies to many agricultural products beyond oil palm like tobacco, coffee and cotton.
The consensus has always been that for Africa to earn more and develop through trade, it must process its raw materials to higher value semi-finished or finished products.
Releaf is doing just that for the oil palm industry.
Its core value proposition is that it is creating access to raw materials that are crucial to factories and manufacturers.
Crucially, its success is built on its unique ability to create, grow and scale its network of farmers that supply it with palm nuts. Before now, the market for palm nuts was fragmented and disorganised, making it difficult for manufacturers and food factories to easily build a supplier network.
Today, Releaf is the single largest source of palm nuts directly from farmers in Nigeria. The company is perfectly poised to control the market for this raw material.
Growth in the oil palm industry is not set to taper off anytime soon.
Generally, consumer demand is driven by a number of factors which include population growth, urbanisation and growth in per capita income amongst others. Nigeria’s population—estimated to grow from 200 million to 400 million in 2050, implies that oil palm demand will be sustained over the long term.
By 2025, Mckinsey expects palm oil and palm kernel oil (both oils produced from the palm fruit) to be the fastest-growing oils in the edible oil category, controlling 40% of the global market.
Releaf perfectly aligns with our vision at Future Africa. The founding team has turned one of Nigeria’s biggest challenges – agricultural output into an opportunity to build wealth for farmers and their surrounding community.
We’re excited to welcome Ikenna and the Releaf team into the Future Africa community as they build the future of Agriculture in Africa.