Small-scale oil extraction from groundnuts and copra/Chapter 4: Economic aspects of oil processing

This chapter is intended for practising or potential millers wishing to compare alternative oil extraction technologies suited for small-scale production. Thus, the following two sections provide a general methodological framework which may be applied by the reader to local conditions and circumstances, taking into account local demand, factor prices (e.g. wages, unit prices of various inputs), local interest rates, etc. An illustrative example of this methodological framework is provided in section IV.3 in relation to a two-ghani power mill. Section IV.4 provides an economic evaluation of the processes described in Chapter III, on the basis of a given set of factor prices and interest rates. The above section may be of interest to public planners who must decide on the type of plants which should be promoted in the country. Finally, section IV.5 provides a sensitivity analysis with a view to showing how the economic feasibility of various oil extraction technologies may differ with varying wages and interest rates.

IV.1. Methodological framework for the estimation of production costs and revenues[edit | edit source]

The methodological framework considered below is of a general nature and may be used to estimate production costs of groundnut as well as coconut oil.

Step 1

(i) To determine the daily and yearly quantities of raw materials (groundnuts or copra) to be processed, taking into consideration the local availability of materials and intended capital investments.

(ii) To determine the number of shifts worked per day and the number of days worked per year.

(iii) To calculate the output, using the extraction rates associated with the adopted process (see table IV. 1), and the input of raw materials:

- oil output = extraction yield of oil * M tonnes/year of raw materials.
- cake output = extraction yield of cake * M tonnes/year of raw materials.

The extraction rates in table IV. 1 should be considered as average rates obtained under fairly good processing conditions. These rates were obtained from field studies reported in a number of publications including Thampan (1975), FAO (1971), Thieme (1968), UNIDO (1977) and UNIDO (1979). Under inadequate processing conditions, the oil content of cakes may be as high as 20 percent to 30 percent in the case of power ghanis, and as high as 12 percent in the case of medium/large expellers.

Step 2

To determine fixed investment cost. This step consists of determining the costs of the following items:

L = Cost of land
B = Cost of Buildings
D = Cost of drying grounds
E = Equipment cost (local and imported)
S = Cost of initial spare parts (equal to 5 percent of initial imported equipment). Therefore Fixed Investment Cost (FI) =L + B + D + E + S.

Step 3. Working capital determination

The working capital required is dependent on the adopted levels of stocks of finished goods and raw materials. It may be estimated on the basis of the following formula:

Working capital = 1.1 * A * M/day * C

where:

A = The sum of the number of days during which raw materials input and the finished goods are kept in storage.

M/day = Amount of raw materials input (in tonnes)

C = cost of 1 tonne of raw materials input.

Table IV.1
Oil extraction rates attained by selected technologies

	Extracted oil: percentage of total raw materials input	Cake: percentage of total materials input	Percentage of oil in cake	Technical efficiency as a percentage of total oil content1
(a) Coconut (copra)
Small-powered expellers (Plants 2 and 3)	61.3	33.0	0	95.8
Power ghani	57.0	33.0	18.4	89.3
Medium/large expellers (Plants 4 and 5)	62.0	33.0	0	96.9
(b) Groundnuts
Small-powered expellers (Plants 2 and 3)	41.0	54.0	5	91.1
Power ghani	38.9	54.1	11.0	86.4
Medium/large expellers (Plants 4 and 5)	42.4	52.6	0	94.2

¹ Oil contents of 64 per cent for copra and 45 per cent for groundnuts are assumed for the purpose of the economic analysis of alternative oil extraction technologies. These percentages refer Co moisture free raw materials.

Step 4

To estimate total investment cost as the sum of investment costs and working capital.

Step 5

To determine the fixed investment annual cost for every investment component. This cost is a function of the interest rate assumed. Let this be I per cent per year. Given the value of I and knowing the useful life of the piece of equipment, the annual fixed investment cost of the latter can be calculated in the following manner: For interest I per cent p.a and a useful life U, to obtain the corresponding factor F from a discount table (see appendix). For example, given a value of I of 10 per cent and a useful life of 10 years, we find F = 6.145. Let the investment cost of the component be Z: then the annual fixed investment cost is equal to Z/F. In this manner, one may calculate this cost for each investment item including building, drying grounds and equipment. Since land has an infinite life, the annual cost may be assumed to be equal to the annual rental rate. The annual cost of spares and maintenance - which may be assumed to be equal to 7.5 percent of total equipment costs - should be added to the other annual fixed costs in order to obtain the total annual fixed costs.

Step 6

To estimate the working capital annual cost as the annual interest paid on the amount of working capital.

Step 7

To estimate total fixed annual costs as the sum of annual fixed costs (step 5) and interest paid on working capital (step 6).

Step 8

Next, the sum of the annual variable costs is calculated. These include the annual costs of: raw material ((M tonnes/year) * (cost of 1 tonne)); water; electricity; diesel; wood or other local fuel; filter cloth requirements; tins or drums; and labour (number required * yearly wage).

Step 9

To estimate the total annual costs as the sum of annual fixed costs and annual variable costs.

Step 10

To estimate total annual revenues as the sum of two components:

- revenues from the sale of oil
- revenues from the sale of cake

The current market prices of oil and cake may be used to estimate total revenues.

Step 11

To estimate the annual gross profits by subtracting total revenues from total costs.

This general methodology is illustrated by an example in section IV.3.

IV.2. Assumptions made in economic evaluation of alternative oil extraction technologies[edit | edit source]

An economic comparison and evaluation of various processes implies the use of certain assumptions. This section deals with the economic assumptions used in this memorandum. Care has been taken to ensure that the assumptions involved reflect, to a large extent, conditions prevailing in developing countries that produce coconut or groundnut oil. The assumptions are applied to all the processes considered, except solvent extraction (of groundnuts and coconuts) and wet-coconut-processing. These two oil extraction technologies are not evaluated for the following reasons.

Firstly, full solvent extraction of oil from high-oil-bearing seeds (e.g. copra and, to some extent, groundnuts) is rarely practised in oil extraction mills for cost reasons. Thus, the oil seeds are first processed in expellers where 85 percent of the oil is extracted. The oil remaining in the cake is then processed in the plant solvent extraction unit. The decision to invest in a solvent extraction plant is therefore, to a large extent, independent of that to invest in expellers (small or large) or ghanis, inasmuch as the former plant is generally complementary to the latter ones. Rather, the decision to invest in a solvent extraction plant should be based on a comparison of costs and revenues associated with the following two alternative choices:

- oil extraction by expellers or ghanis only;
- oil extraction by expellers or ghanis, followed by solvent extraction.

Let us assume that the choice is between the use of only an expeller with a 95 per cent oil recovery efficiency or the use of both an expeller with an 85 percent oil recovery efficiency and a solvent extraction unit (recovery of an additional 14 percent of oil from the cake). We then have the following costs and revenues per tonne of raw materials processed:

C1 =	processing cost of raw materials for 95 per cent oil recovery by expeller;
C2 =	processing cost of raw materials for 85 per cent oil recovery by expeller;
C3 =	cost for treating cake (15 per cent oil content) from expeller in solvent extraction unit (1 per cent oil remaining in cake after extraction);
R1 =	additional revenues from the sale of additional oil (4 per cent) recovered by solvent extraction, when compared to 95 per cent extraction by expeller;
R2 =	revenue from the sale of cake if only expeller is used;
R3 =	revenue from the sale of cake if both an expeller and a solvent extraction unit are used. Generally, R2 > R3 due to the higher oil content of cake from expeller.

A solvent extraction unit will then be profitable if the following relationship holds:

R₁ + (C₁ - C₂) - C₃ - (R₂ - R₃) ³ 0

Secondly, economic evaluation of wet-coconut-processing is not carried out because this technology is not yet well established in developing countries and it was not therefore possible to obtain reliable data on raw materials costs (fresh coconuts), plant costs, labour input, productivity, revenue from the sale of flour, etc. This does not, however, mean that wet-coconut-processing is not profitable. Interested readers may obtain information on this technology from available publications (see Bibliography) and equipment suppliers.

The various types of plants described in Chapter III are assigned the following numbers for easier future reference:

Plant No. 1: Power ghani mill
Plant No. 2: Baby expeller mill
Plant No. 3: Small package expeller mill
Plant No. 4: Medium and large expeller mill
Plant No. 5: Large expeller mill

IV.2.1. Fixed investment cost factors[edit | edit source]

The assumptions made in this memorandum relate to the following:

(i) Land: The cost has been assumed to be U/m². The useful life is infinite.

(ii) Buildings: The cost has been asumed to be US/m² in rural areas (Plants 1,2,3) and US/m² in urban areas (Plants 4 and 5). The useful life for all buildings is estimated at 30 years.

(iii) Drying grounds: The cost has been assumed to be US/m². Their useful life is estimated at six years.

(iv) Initial cost of spares for imported equipment: estimated at 5 per cent of imported equipment cost.

The imported equipment costs are provided below for the 5 plants:

Plant No.	1	2	3	4	5
Cost (US0	3,500	12,000	32,000	500,000	1,600,000
Useful life (years)	10	10	10	15	15

The above costs, to which must be added the local equipment costs, apply equally to copra and groundnut processing.

IV.2.2. Interest rates and discount factors1[edit | edit source]

¹ The discount factor, F is used to calculate the present value of building and equipment since the latter may have different useful lives. A table in Appendix I provides the value of F for different interest rates and numbers of years.

The interest rate has been assumed to be 10 per cent p.a. For this rate and assumed lives of buildings and equipment, one obtains the following discount factors, F:

Buildings:	F = 9.427
Drying grounds:	F = 4.355
Equipment:	For plants 1,2,3,:	F = 6.145.
	For plants 4 and 5:	F = 7.606

Since land has an infinite life, the cost of land may be assumed at 100 of its value (i.e. interest paid on purchase price).

IV.2.3. Raw material prices[edit | edit source]

Evidence available from major raw material producing countries (e.g. the Philippines and Indonesia) does not indicate an obvious pattern of consistency of local prices in separate countries with one another or with the world market price. Available price data¹ offer evidence that local prices of copra and groundnuts, in developing countries, are significantly below prices in Europe or North America. Thus the following price structure has been assumed:

¹ IMF: International Financial Statistics (Washington, D.C.), various issues.

• copra: US per metric tonne (33 percent below world market prices). This wide spread between local and world market prices is indicative of the existing complex marketing chain, including the involvement of a number of intermediaries between producers and importers.
• Groundnuts: US per metric tonne (25 percent lower than world market prices).

IV.2.4. Annual cost of various inputs used in oil extraction and packaging[edit | edit source]

The following annual costs - expressed in US0 are assumed for the purpose of evaluation:

• water: US per m³
  - electricity: USB989_7.HTM.PL.09 per kWh
  - diesel fuel: USB989_7.HTM.PL.40 per litre
  - wood (local fuel): US per metric tonne
  - filter cloths:

	for plants 1 and 2:	US.50 per cloth
	for plant 3:	US per cloth
	for plant 4:	US per cloth
	for plant 5:	US per cloth

• tins(18 kg) for plants 1,2,3: USB989_7.HTM.PL.60 each
  - drums (150 kg) for plants 4,5: US.50 each
  - outside maintenance: 7¹/2 per cent of total equipment cost.

IV.2.5. Wages[edit | edit source]

The wages used in the economic analysis are based on prevailing rates in the Philippines and top of scale wages in India. The weighted average wage per worker is:

for plants 1, 2, 3: US,000 per year.
for plants 4 and 5: US,200 per year.

Plants 4 and 5 have higher wage costs than plants 1, 2, 3 because they require permanent employees who must receive legislated benefits. Plants 1, 2, and 3 can manage with daily labour.

IV.2.6. Product prices[edit | edit source]

The data on local prices of oil are more conflicting than those on raw material prices. However, they do tend to indicate that the average local price is slightly below world prices. On the other hand, there is no evidence that local prices of cake are below world market prices. Thus the following prices have been assumed:

- coconut oil: US per metric tonne (10 percent below world market prices).

• groundnut oil: US,000 per metric tonne (10 percent below world market prices).
• oil cake: local price is assumed to be US per metric tonne for virtually oil free (solvent extracted) cake. A premium of US per tonne of cake for every additional 1 percent of oil content in cake is assumed for copra. A US premium is assumed for groundnut cake. These assumptions are probably conservative. These premiums are limited to additional oil-in-cake up to a limit of 15 per cent, i.e. the upper unit prices for oil cake are:

US + 15 * US	=	US for copra cake.
US + 11 * US	=	US for groundnut cake as the maximum assumed oil content in cake is equal to 11 percent.

IV.3. Case study: two-ghani-power mill[edit | edit source]

This section provides an illustrative example of the application of the evaluation methodology described in the previous sections. The assumptions referred to in section IV. 2 apply in this case study. The methodological framework is used to evaluate a two-ghani power mill for the extraction of oil respectively from copra and groundnuts.

IV.3.1. Two-ghani (power) unit mill: oil extraction from copra[edit | edit source]

Step 1

- input: 560 kg of copra per day (151.2 tonnes per year).

• organisation of production: 1 shift per day, 270 working days per year.
• output:
  

- oil: 0.57 * 151.2 = 86.2 tonnes/year
- cake (18.5 percent oil-in-cake): 0.38 * 151.2 = 57.5 tonnes/year.

Step 2: Fixed investment cost		US0/U>
	land: 100 m2 at US/m2	500
	buildings (rural area): 36m2 at US/m2	2,880
	drying grounds: 20m2 at USm/m2	200
	equipment cost	4,000
	spares (5 percent of imported equipment cost)	175
Subtotal		7,755

Step 3: Working capital

2 days finished goods + 7 days raw material = 9 days

Therefore, working capital = 1.1 * 9 * 0.56 tonnes *

US/tonne = US.369.00

Step 4:	Total investment cost
	(2 + 3) = US,124.00

Step 5: Annual fixed investment costs		US0/U>
	land: rental value at 10 per cent of cost	50.00
	buildings: 10 per cent pa, life 30 years therefore F = 9.427	305.50
	drying grounds: 10 per cent pa, life 6 years therefore F = 4.355	46.00
	equipment: 10 per cent pa, life 10 years therefore F = 6.145	651.00
	spares and maintenance: 71/2 per cent of US,000	300.00
Subtotal		1,352.50
Step 6: Working capital annual cost
	10 per cent interest on working capital of US,369	US.90
Step 7: Total annual fixed investment cost (5+6)		US,489.40
Step 8: Annual variable costs		US0/U>
	raw material (copra): 151.2 tonnes at US/tonne	37,346.60
	water	nil
	electricity	nil
	diesel fuel 2,430 litres at USB989_7.HTM.PL.40/litre	972.00
	wood	nil
	filter cloths: 24 at US.50 each	36.00
	tin (18 kg): 4,800 at USB989_7.HTM.PL.60 each	2,880.00
	labour: 2 labourers at US,000 each	2,000.00
Subtotal		43,234.60
Step 9: Total annual costs (7+8)		US,724.00
Step 10: Annual revenues
	oil: 86.2 tonnes at US/ton	41,376.00
	cake (15 percent oil-in-cake): 57.5 tonnes at US/tonne	10,637.50
Total revenues		52,013.50
Step 11: Annual gross profits
	US,013.50 - US.724	=US,289.50

IV.3.2. Two-ghani (power) unit mill: oil extraction from groundnuts[edit | edit source]

Step 1:

- input = 560 kg of groundnuts per day (151.2 tonnes per year).

organisation of production: 1 shift per day, 270 working days per year.

output:

		oil: 0.389 * 151.2	= 58.82 tonnes/year
		cake (11 per cent oil-in-cake)	= 0.541 * 151.2
			= 81.79 tonnes/year

Step 2: Fixed investment cost
	Same as step 2 in section IV.3.1 =		US,755.00
Step 3: Working capital
	2 days’ finished goods + 7 days’ raw material = 9 days
	Therefore, working capital = 1.1 * 9 * 0.56 tonnes * US/ton =		US,605.00
Step 4: Total investment cost (2+3) =			US,360.00
Step 5: Annual fixed investment cost
	Same as step 5 in section IV.3.1		US,352.50
Step 6: Annual working capital cost
	10 per cent interest on working capital of US,605		US.50
Step 7: Annual total fixed investment cost (5+6)			US,613.00
Step 8: Annual variable costs			U.S.0/U>
	raw material (groundnuts): 151.2 tonnes at US/tonne		71,064.00
	water		nil
	electricity		nil
	diesel fuel: 2,430 litres at USB989_7.HTM.PL.40/litre		972.00
	wood		nil
	filter cloth: 24 at US.50 each		36.00
	tins (18 kg): 3,300 at USB989_7.HTM.PL.60 each		1,980.00
	labour: 2 labourers at US,000 each		2,000.00
Subtotal			76,052.00
Step 9: Total annual costs (7+8) =			US,667.00
Step 10: Annual revenues
	oil 58.82 tonnes at US,000/ton		US,820.00
	cake (11 per cent oil-in-cake): 81.79 tons at US/ton		US,848.00
Total revenues			US,668.00

Step 11: Annual gross profits (Step 10 - Step 9):

US,668 - US,677 = - US,999.

This particular unit is therefore operating at a loss.

IV.4. Economic comparison of alternative oil extraction technologies[edit | edit source]

This section provides an economic comparison of the five oil extraction plants listed in section IV.2. Comparisons are made with respect to total investment costs, total annual costs and revenues and profitablity of the plants (annual profits and benefit-cost ratio).

Findings from the economic comparison of alternative oil extraction technologies are provided as illustrative examples only and may not be used as a basis for technological choice for the following reasons. Firstly, as indicated in the previous section, these comparisons are based on a number of assumptions regarding factor prices, interest rate, output prices, etc. which will not generally apply to all developing countries. Secondly, these assumptions apply equally to the five technologies which are being compared. For example, the prices of raw materials is the same for the five types of plants. Yet, these prices should be lower for small-scale rural plants located near the oil seed growing areas than for large-scale urban plants, as the transport costs of raw materials should be considerably lower. Similarly, the oil produced by these plants is often marketed locally, thus minimising transport and marketing costs.

Consequently, small-scale producers should enjoy a comparative advantage vis-a-vis large-scale producers with respect to these cost items. Other advantages may include low rural wages, low infrastructure costs, etc. Under these circumstances, interested readers should undertake their own evaluation of alternative oil extraction technologies and scales of production on the basis of local factor prices, transport costs, intended markets, etc., with a view to identifying the most suitable technology and scale of production.

A summary of the various cost and revenue items associated with the five oil extraction plants are provided in table IV.2 for copra and table IV.3 for groundnuts.

IV.4.1. Total investment costs[edit | edit source]

As shown in table IV.4 and IV.5 small-scale producers will need approximately between US<!10,000 and US,000 if they were to invest in one of the three small-scale plants described in this memorandum (i.e. ghani mill, baby expeller, and small package expeller). Investments in medium or large expellers (1 to 6 million dollars) will generally be outside the financial reach of small-scale producers.

Investment costs per tonne of raw materials processed are as follows:

Plant No.	1	2	3	4	5
Copra	60.30	217.30	203.0	174.10	143.80
Groundnuts	68.50	225.50	212.00	223.20	217.40

The above table shows that investment costs per tonne of raw materials are by far the lowest for the ghani mill. Thus, small investors from countries suffering from shortages of capital funds (especially in the form of foreign currency) may find it easier to invest in these mills than in baby expellers or small package expellers.

IV.4.2. Annual costs and revenues[edit | edit source]

Table IV.4 (copra processing) shows that, for all technologies and scales associated with copra processing, revenues from the sale of oil only are lower than total annual costs. Thus, it is essential that small-scale producers be able to market the cake if they are to make a profit or break even. Otherwise, the sale price of oil must be higher than the international price of oil if the operation is to be profitable. However, it may be noted that the difference between costs and revenues (from oil) per tonne of raw materials processed is much lower for the power ghani mill than for the other small-scale plants (2 and 3).

Table IV.2
Summary data on the five oil extraction units
Copra processing

Items	Plant designation
	Two-ghani mill	Baby expeller mill	Small package expeller	Medium expeller	Large expeller
	1	2	3	4	5
Raw materials -(tonnes/hour)	070	050	.100	.800	0
Hours/day	8	8	8	20	24
Days/year	270	270	270	300	300
Raw materials - (Tonnes/year)	151.2	108	216	4 000	28 800
Tonnes oil/year	86.2	66.2	132.4	2 976	17 856
Tonnes cake/year	57.5	36.4	72.8	1 584	9 504
US tonnes cake(Percentage oil-in-cake)	185 (18.5 %)	164 (8 %)	164 (8 %)	158 (6 %)	158 (6 %)
US Tonne oil	480	480	480	480	480
Land (m2) - cost US0/TD>	(100m2) 500	(90 m2) 450	(150 m2) 750	(1000 m2) 5 000	(2000 m2) 10 000
Buildings (m2)- cost US0/TD>	(36 m2) 2 880	(28.5 m2) 2 280	(50 m2) 4 000	(450 m2) 45 000	(1 050 m2) 105 000
Drying grounds (m2) - cost US0/TD>	(20 m2) 200	(16 m2) 160	(32 m2) 320
Equipment costs - US0/TD>	4 000	19 000	35 000	500 000	1 600 000
Cost spare parts - US0/TD>	175	600	1 600	25 000	80 000
Raw material cost - US year	37 746	26 676	53 352	1 185 600	7 113 600
Water (m3) - US year				(2 500 m3) 2 500	(10 000 m3) 10 000
Diesel fuel (litres) - US year	(2 430) 972	(2430) 972		(70 000) 28 000	(280 000) 112 000
Wood (tonnes) - US year		(8.1) 162	(16.2) 324
Electricity (kWh) - US year			(20 300) 1 827	(720 000) 64 800	(2 000 000) 180 000
Filter cloth (#) - US year	(24) 36	(18) 27	(30) 150	(200) 1 600	(500) 7 500
Labour (#) - US year	(2) 2000	(2) 2000	(3) 3 000	(16) 19 200	(48) 57 600
Packaging - US year	2 880	2 220	4 500	99 000	900 000
Interest on working capital - US year	137	98	217	26 083	234 748

Table IV. 3 Summary data on the five oil extraction units
Groundnut processing

Items	Plant designation
	Two-ghani mill	Baby expeller mill	Small package expeller	Medium expeller	Large expeller
	1	2	3	4	5
Raw materials -(tonnes/hour)	070	050	.100	.800	0
Hours/day	8	8	8	20	24
Days/year	270	270	270	300	300
Raw materials -(Tonnes/year)	151.2	108	216	4 000	28 800
Tonnes oil/year	58.82	44.28	88.56	2 035.2	11 211.2
Tonnes cake/year	81.79	58.32	116.64	2 524.8	15 148.8
US tonne cake (Percentage oil-in-cake)	206 (11 %)	185 (7.5 %)	185 (7.5 %)	170 (5 %)	170 (5 %)
US Tonne oil	1 000	1 000	1 000	1 000	1 000
Land (m2) - cost US0/TD>	(100m2) 500	(90 m2) 450	(150 m2) 750	(1000 m2) 5 000	(2000 m2) 10 000
Buildings (m2)- cost US0/TD>	(36 m2) 2 800	(28.5 m2) 2 280	(50 m2) 4 000	(450 m2) 45 000	(1 050 m2) 105 000
Drying grounds (m2) - cost US0/TD>	(20 m2) 200	(16 m2)1 60	(32 m2) 320
Equipment costs - US0/TD>	4 000	19 000	35 000	500 000	1 600 000
Cost spare parts - US0/TD>	175	600	1 600	25 000	80 000
Raw material cost - US year	71 064	50 760	101 520	2 256 000	13 536 000
Water (m3) - US year				(2 500 m3) 2 500	(10 000 m3) 10 000
Diesel fuel (litres) - US year	(2 430) 972	(2430) 972		(70 000) 28 000	(280 000) 112 000
Wood (tonnes) - US year		(8.1) 162	(16.2) 324
Electricity (kWh) - US year			(20 300) 1 827	(720 000) 64 800	(2 000 000) 180 000
Filter cloth (#) - US year	(24) 36	(18) 27	(30) 150	(200) 1 600	(500) 7 500
Labour (#)- US year	(2) 2000	(2) 2000	(3) 3 000	(16) 19 200	(48) 57 600
Packaging - US year	1 980	2 220	2 970	67 860	611 250
Interest on working capital - US year	260	186	414	49 632	446 688

Table IV.4
Economic comparison of coconut oil producing plants:

Plant No.	1	2	3	4	5
Type of Plant	Power ghani mill	Baby expeller mill	Small package expeller	Medium expeller	Large expeller
Input (copra) tonnes/year	151.2	108	216	4 800	28 800
Total investment cost (US0	9 124	23 468	43 843	835 832	4 142 488
Total annual costs (US0	44 724	36 996	72 264	1 535 295	8 957 946
Annual revenues from oil sales	41 376	31 776	63 552	1 428 480	8 570 880
Total annual revenues from oil and cake sales(US0	52 013	37 745	75 491	1 678 752	10 072 512
Total annual gross profits(US0	7 289	749	3 227	143 457	1 114 566
Benefit-cost ratio	1 163	1 020	1 045	1 093	1 124
Output
(a) Oil (tonnes/year)	86.2	66.2	132.4	2 976.0	17 856.0
(b) Cake (tonnes/year)	57.5	36.4	72.8	1584.0	9 504.0

¹ Benefit-cost ratio is equal to the total annual revenues divided by total annual costs. This ratio takes into consideration all benefits and costs, including depreciation costs.

Table IV.5:
Economic comparison of groundnut oil producing plants

Plant No.	1	2	3	4	5
Type of plant	Power Ghani mill	Baby expeller	Small package expeller	Medium expeller	Large expeller
Input (groundnuts) tonnes/year.	151.2	108	216	4 800	28 800
Total investment Cost (US0	10 360	24 351	45 806	1 071 320	6 261 880
Total annual costs (US0	77 665	61 168	119 098	2 598 104	15 303 536
Annual revenues from oil sales	58 820	44 280	88 560	2 035 200	12 211 200
Total annual revenues (US0 from oil and cake sales	75 668	55 069	110 138	2 464 416	14 786 496
Total annual gross profit(US0	1 997	6 099	8 960	133 688	517 040
Benefit-cost ratio	.974	.900	.925	.948	.966
Output
(a) Oil (tonnes/year)	58.82	44.28	88.56	2 035.2	12 211.2
(b) Cake (tonnes/year)	81.79	58.32	116.64	2 524.8	15 148.8

In the case of groundnuts (see table IV.5) revenues from the sale of both cake and oil are lower than total annual costs at all scales of production. These findings are the result of the assumed local and international prices of the raw materials, oil and cake. Special local circumstances should therefore be different from those assumed in this case study since a number of groundnut oil extraction plants do operate profitably (e.g. through government subsidies, high local prices for oil, low transport costs).

IV.4.3. Annual gross profits[edit | edit source]

Table IV.4 shows that all copra processing plants can be operated at a profit. However, the calculated benefit-cost ratios show that the power ghani mill (B/C = 1.163) is the most profitable at the indicated scale of production. It is followed by the large expeller (B/C = 1.124), the medium expeller (B/C = 1.093), the small package expeller mill (B/C = 1.045), and the baby expeller mill (B/C = 1.020). On the other hand, table IV. 5 shows that all groundnut processing mills are not profitable. The two mills which are closest to the break-even point (i.e. no losses or gains) are the power ghani mill and the large expeller mill. They are followed successively by the medium expeller mill, the small package expeller mill and the baby expeller mill.

This case study shows that, given the adopted assumptions, the power ghani mill seems to be the most advantageous from the point of view of investment outlays per tonne of raw materials processed and the plant profitability. For those who may wish to produce at higher scales than allowed by the power ghani mill, the choice of the large expeller seems to be the most appropriate.

This case study also shows that the profitability of the various plants described in Chapter III are very much dependent on the prices of the raw materials and chose of the oil and cake. It is therefore interesting to investigate the price levels which, given the selected technologies and costs of production, will make the selected plants break even. Such an analysis is carried out in the following section.

IV.5. Break-even prices of raw materials and oil[edit | edit source]

IV.5.1. Break-even prices of raw materials[edit | edit source]

It is of interest to know the maximum price of raw materials which should be paid by the producer in order to break even if the assumed processing costs (i.e. total annual costs excluding the cost of raw materials) and assumed market prices of oil and cake are to be valid. These maximum raw materials prices may be calculated according to the following steps:

(i) calculate processing costs by subtracting the cost of raw materials from total annual costs. For example, in the case of copra processing through the power - ghani mill, processing costs are equal to:

US,724 - US,346 = US,378.

(ii) calculate the total amount which may be paid for raw materials in order to break even by subtracting the processing costs from the total revenues. Thus, in the case of the power ghani mill, the maximum amount which may be paid for copra is equal to:

US,013 - US,378 = US,635.

(iii) finally, calculate the maximum price of raw materials in order to break even by dividing the cost of raw materials calculated in step (ii) by the total number of tonnes processed each year. Thus, the maximum price for copra is equal to:

US,635 - 151.2 tonnes = US.21/ton.

Hence, given the assumed scale of production, processing costs and annual revenues, an oil producer may not pay more than US.21 per tonne of copra if he is to break-even. This estimated maximum price of copra is higher than the market price assumed in the case study (i.e. US/tonne), thus making copra processing by the ghani mill a particularly profitable operation.

Maximum prices of copra and groundnuts have been calculated for plants 1 to 5 as shown in table IV.6(a) for copra and table IV.7(a) for groundnuts. In the case of copra, the calculated maximum prices are higher than the one assumed in the case study (US/tonne). It is of interest to note that the largest difference between the calculated maximum price and the assumed market price is found for the power ghani mill (US.79 difference). Thus, producers which adopt this type of mill should be better protected against increases in the price of copra than if they had adopted the other types of oil extraction plants.

Table IV.6(a)
Maximum prices of copra

Plant No.	1	2	3	4	5
Total annual costs (excluding the cost of raw materials) ()	7 378	10 320	18 912	349 695	1 844 346
Total annual revenues (US 0	52 013	37 745	75 491	1 678 752	10 072 432
Maximum price of copra to break even (US tonne)1	295.21	253.94	261.94	276.88	285.70

¹ The market price of copra assumed in the case study is equal to US/tonne.

Table IV.6 (b)
Minimum prices of copra oil

Plant No.	1	2	3	4	5
Total annual costs (US0	44 724	36 996	72 264	1 535 295	8 957 946
By product (cake) annual revenues (US0	10 637	5 969	11 939	250 272	1 501 632
Minimum price of copra oil Co break even (US tonne)2	395.44	468.68	455.63	431.79	417.58

² The market price for copra oil assumed in the case study is equal to US/tonne.

In the case of groundnuts, (see table IV.7(a)), the calculated maximum prices for groundnuts are lower than the estimated market price of groundnuts (US/tonne) for the five plants. Thus, as already shown earlier, these plants may not run profitably if the assumptions made in the case study prove to be valid. Since a number of such plants are currently operating in a number of developing countries, it must be assumed that the prices of groundnuts and that of groundnut oil are different from the estimated international market prices. It should be noted that, as in the case of copra, the difference between the calculated maximum price and the estimated market price is lower for the power ghani mill than for the other plants.

IV.5.2. Break-even prices of oil[edit | edit source]

An analysis similar to that carried out for the price of raw materials may also be carried out in relation to the prices of copra and groundnut oil. In this case, we calculate the minimum price at which the oil must be sold in order to break even, given the assumed processing costs and market prices of the raw materials. This minimum price may be obtained as follows in the case of copra processing in the ghani mill:

- total annual costs - revenues from the sale of cake = US,724 - US,637 = US,087.
- The minimum price of oil to break even is therefore: US,087 * 86.2 tonnes = .44/tonne.

Table IV.6(b) provides the minimum prices at which copra oil should be sold in order for the selected plants to break even. It may be seen that all calculated minimum prices are lower than the estimated market price of US/tonne. The minimum price of copra oil produced by the power ghani mill is by far the lowest minimum price. This finding provides additional evidence of the appropriateness of this mill should the assumptions made in the case study prove to be valid.

Table IV.7(b) provides the minimum prices at which groundnut oil should be sold in order for the selected plants to break even. It may be seen that the minimum prices for all plants are higher than the estimated market price (US,000 per ton). As in the case of copra oil, the calculated minimum prices of groundnut oil are closest to the market price for the power ghani mill and the large expeller mill.

Table IV.7(a)
Maximum prices of groundnuts

Plant No.	1	2	3	4	5
Total annual costs (excluding the cost of raw materials) (US0	6 601	10 408	17 578	342 104	1 767 536
Total annual revenues (US0	75 668	55 069	110 138	2 464 416	14 786 2496
Maximum price of groundnuts to break-even1 (US tonne)	456.79	413.53	428.52	442.15	452.05

¹ The market price of groundnuts assumed in the case study is equal to US/tonne.

Table IV.7(b)
Minimum prices of groundnut oil

Plant No.	1	2	3	4	5
Total annual costs (US0	77 665	61 168	119 098	2 598 104	15 303 536
By product (cake) annual revenues (US0	16 848	10 789	21 578	429 216	2 575 296
Minimum price of groundnuts oil to break even (US tonne)2	1 033.95	1 137.73	1 101.17	1 065.69	1 042.34

² The market price for groundnuts oil assumed in the case study is equal to US,000/tonne.

IV.5.3. Concluding remarks on raw materials and oil prices[edit | edit source]

The choice of the appropriate oil extraction technology should, as shown in the previous section, improve the productivity of investments and labour in this sector and, therefore, the profitability of small-scale production units. However, the choice of technology affects mostly processing costs which represent a relatively small fraction (20 per cent to 40 per cent) of total production costs (i.e. processing costs plus raw materials costs). Thus, the market prices of raw materials and oil could have a significant impact on the profitability of an oil extraction mill. This is more so the case since the international market price of oil is not necessarily a function of total production costs. This may be explained by the fact that there are many other oil products which are good substitutes for groundnuts or copra oil (e.g. sunflower oil) and, therefore, the market price of these substitutes will necessarily affect the market price of groundnuts and copra oil. Thus, potential oil producers should carefully investigate the market of raw materials and the market where they intend to sell the produced oil. In many cases special circumstances may allow the profitable production of groundnuts and copra oil although the international prices of the raw materials and those of oil may militate against such production by small-scale producers. For example, the local prices of raw materials may be lower than the international prices because they do not include transport costs or transaction costs. Similarly, the produced oil may be competitive in the local market since similar transport and/or transaction costs may not also apply. In these cases, the choice of an appropriate oil extraction technology may play a decisive role by decreasing processing costs to the point where oil produced by small-scale units could become as or more competitive than oil marketed internationally.