Original:Small Scale Vegetable Oil Extraction 4
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 Small Scale Vegetable Oil Extraction (NRI, 1995, 105 p.)
 Chapter 2 - Oilseed marketing
The techniques available for extracting oil from oilseeds will be described in subsequent chapters. The choice of technique may be determined by the amount of oilseed or financial resources available, or by the size of the planned operation. However, it will usually be necessary to consider financial and social aspects before choosing a technique. It is impossible to list all the factors which need to be considered as individual circumstances play a large part in the choice. The sections below are intended to provide a guide to the approach which should be adopted.
 The oilseed market system
The oilseed economy
Before deciding on the type and scale of processing technology to be used, all the factors which affect the oilseed economy of the area should be investigated. These should indicate where the venture will fit in and how it will relate to the existing overall production and marketing system. They should also indicate whether predictions or assumptions on, for example, the sale of oil or supply of seed, are realistic. The investigation should cover the following aspects:
- the quantities of oilseeds available, giving some indication of who produces them (estates or small-holders);
- how the oilseeds are used, including the importance of different products and the quantities of oilseeds used in them;
- the quantity of edible oil available, including a rough indication of the importance of alternative sources (imports, major factories, small expellers in provincial towns, and home production);
- the geographical distribution of production, processing and markets, and how easily these areas are linked by road or rail or across borders;
- who consumes the oilseeds and their products and the importance of oilseeds in expenditure and diet;
- why the production, processing and consumption patterns work, covering price structure, food and cash requirements, taste preferences, marketing, availability of substitutes, under-utilization of existing processing facilities, scale of processing operations, and production and processing constraints;
- the effects of government policies, including subsidies, taxes, import restrictions and exchange rate levels, and the effect of any changes in policy; and
- seasonal effects and variation, with some assessment of how predictable changes are and what causes them.
Sources of information
The degree of detail required will depend on the nature and scale of the proposed venture and the magnitude of its effect on the existing circumstances. In most cases, this information can be gathered from existing data sources and discussions with local communities, but its reliability and comprehensiveness needs to be assessed. Particular attention should be paid to the effect of any unrecorded trade, cursory treatment of the informal sector, and recent changes in the oilseed industry.
Observations of existing practices, and discussions with those involved, will yield important information on oilseeds, the quantities processed, seasonal variation, labour availability, electricity supply and costs. Depending on the circumstances, various methods can be used to acquire this information, such as informal interview and observation, or formal questionnaires. Rapid rural appraisal techniques can be useful where little documentation on, for example, household behaviour, exists. For a more detailed discussion of these techniques, see Gilling and Cropley (1993).
The characteristics of the prospective oilseed processing venture will have a major influence on the scale and type of technology selected and will vary greatly according to whether the venture is to be undertaken by individual households, farmers, farmer groups, rural communities, traders, women, men, entrepreneurs, formal established co-operative societies, or urban or rural dwellers. Each group will have different access to capital, transport, skills, communications, raw materials, information, markets and utilities. All these considerations will influence the cost, size and complexity of the venture. The following list of questions may be useful.
- Are oilseeds already being processed?
- Is the scale of operation realistic or suitable?
- What are the marketing expectations?
- Is group or individual operation planned? If group, is there experience of group operation?
- What is the access to power supply, water, raw materials and markets?
- What are the financial resources or constraints, and is there access to credit?
- Is there access to technical, managerial or financial skills?
- Do seed supply, markets, labour availability and transportation vary seasonally?
- Are there social, family or community considerations which might affect processing activities?
Skills in marketing and access to market information are crucial to a successful business. They are of less concern where processors are dealing with markets with which they are familiar, but they may become crucial if output expands or if new products are introduced. Project planners can assist by finding ways for processors to gain marketing experience. It is particularly important to determine whether the enterprise will be critically dependent on one buyer and whether it will be able to influence prices.
Market research should not only include quantitative factors, such as prices and volumes, but should also consider the perceived product quality; different processing or refining methods may alter the flavour, colour, or physical appearance of the oil and oil-cake, thus affecting their value. The greater the shift from existing market conditions in terms of volume, form, timing and location of products for example, the more critical the marketing aspects are likely to be.
Discussions should be held with as many as possible of the people and groups involved in the production and marketing system, to enable a thorough understanding of the current situation and of how the proposed processing venture may alter it. These discussions should involve the agricultural extension agents who advise the farmers, local workshop managers who may be called upon to manufacture equipment spares or carry out maintenance, farmers who will supply the raw materials, existing traders, and those who may wish to assist in marketing the products. All these people may influence the decision-making process, and their support or direct participation will be important to the long-term success of the venture. Private workshops should be involved as early as possible in the manufacture of processing equipment as this will help to provide realistic cost estimates, and draw attention to manufacturing constraints or the need for imports.
Social and environmental factors
Development organizations intending to support such oilseed processing ventures may wish to consider social, environmental and economic factors as well. As traditional oilseed processing is often carried out by women, the effect the project would have on their well-being should be considered.
Environmental or public health consequences of existing or proposed processing work may also need to be evaluated.
Development agency planners may be interested in an economic analysis, as well as a financial analysis (see next section). The economic analysis measures the contribution which a project will make to the overall economic development of a country or region, whereas in the financial analysis the enterprise is considered from an entrepreneurial perspective.
There are several other factors, broadly classified as non-technical and nonfinancial, which may affect the success of processing ventures and therefore need to be noted.
It should be established whether the venture makes assumptions about the literacy and numeracy skills of the operators, whether training is needed, and where such training can be obtained if required.
Where a community or co-operative activity is planned, the participants may not feel in control of the operation if they have to depend on outsiders to do their accounts. Such a system may be vulnerable to abuse.
Another important factor is management, particularly if a group is to run the venture. The existing management experience within the group, the need for training input, and the type of training required, would need to be assessed. Other projects and enterprises in the locality may be useful sources of information on the best management system.
There are a variety of other social factors which may be relevant. For example, if the project is to be carried out by women, it is important to consider the other demands on their time and labour, and whether it has been assumed that they can work or trade in areas traditionally dominated by men.
For larger scale ventures it is important that a realistic assessment is made of the local manufacturing sector and its ability to meet the requirements for both initial equipment and subsequent spare parts. It is possible to import machinery but it is more likely to be affordable and accessible if it can be supplied and maintained by a local industry. Machine operators can be trained in the basics of regular maintenance operations, but for some processing technology, such as small-scale expellers, there may be an occasional need for more skilled inputs. Where machinery is locally made and supplied, the manufacturer should be able to meet these occasional maintenance requirements, but consideration should be given to this when planning a venture in a remote location. Where operators are given training at the beginning of a project, consideration also needs to be given to the transfer of their skills should personnel change.
 Financial analysis
Financial analysis is necessary for any enterprise. There should be a feasibility study of the processing proposals, including consideration of the relative cost of the oilseeds, the values of the oil and oil-cake, the likely costs of equipment and buildings, and the labour needed to operate the processing technology. This study should also help to clarify the operational assumptions and highlight areas of uncertainty and undue optimism.
It is not the purpose of this manual to cover financial analysis in detail. Readers interested in this are referred to one of the many books on the subject; Gittinger (1982), and UNIDO (1986), give comprehensive accounts of financial and economic analysis. In the following discussion, some of the main issues to be considered are outlined and some frequently-used terms explained.
There are several fairly standard financial 'tests' and a series of information requirements. Financial analysis is concerned with commercial viability and whether the enterprise is profitable for the 'owner-operator'. Even when the output is for home consumption, there will still be important financial criteria which affect the uptake of the technique. It must be stressed that the economics of vegetable oil extraction are highly site-specific, with costs and revenues varying appreciably according to location.
Factors which will have a major influence on the viability of an oilseed processing venture are listed below.
- The market prospects for the oil and oil-cake in relation to their acceptability and to the prices and availability of competing products.
- The price and availability of oilseed.
- The yields of oil and oil-cake.
- The capital costs of the venture (including the delivered cost of the equipment, spares, and motors, and the cost of any building and site work.
- The working capital requirement.
- The operating costs (including raw materials, labour, maintenance and spares, energy, transport, packaging and overheads).
Other costs which have to be taken into account include the installation and commissioning of the plant, taxes, and personnel training. Contingency allowances should also be made. The availability of finance for equipment purchase and working capital, and the provision of technical and business back-up services need to be assessed. It is essential to establish an efficient accounting system to prevent mishandling of stock and funds.
Technical data on equipment (throughput and yields of products) can be combined with costs and prices to project the 'net income stream'. This should highlight any obvious financial problems and can be used to calculate the 'pay-back period' (i.e. how long it takes to recoup the initial investment). This information can also be used to calculate the 'financial rate of return' (see Gittinger (1982), or other references) which the prudent investor will wish to compare with other options. Another measure of project worth is 'net present value' which enables a comparison of the income streams of different projects to be made. These different measures of project worth can be used either in combination, or separately, depending on the size and nature of the investment or on the pre-occupations of the user group.
A 'sensitivity analysis' is also important. This means that the cost and income streams should be recalculated, using alternative values for anything which is not very precisely known (such as the number of days in a year that processors will be able to operate the proposed technology), or for things which are highly variable (such as raw material costs and product prices which may be affected by the weather). The purpose of the sensitivity analysis is to anticipate, as accurately as possible, costs and income before the investment decision is actually made. Much of the information required will have been obtained during the information-gathering exercise discussed earlier.
GILLING, J. and CROPLEY, J. (1993) Needs assessment for agricultural development: practical issues in informal data collection. NRI Socio-economic Series 1. Chatham, UK: Natural Resources Institute.
GITTINGER, J. P. (1982) Economic Analysis of Agricultural Projects. 2nd edn. Baltimore, US: Johns Hopkins University.
UNIDO (1986) Manual for the Preparation of Industrial Feasibility Studies. Vienna: UNIDO.