Case Studies on Inductrial Processing of Primary Products. Volume 2 Cocoa, Coconut Oil, Tea International Bank for Reconstruction and Dcvelopmcnt, Washington, DC - - . - . -- - - . - --. - - - 1 -> T.r"--.. -- -;- .' *A*.:)*, --* ---. .-- - .--. - -. . -1 # s I 4 I r . d c c-!,-i21.1 r 1 I 1 I 1 i Case Studies on i " I i; Industrial Processing of I RIBLIOCRAPHIC IKFORXATION Case Studies on Industrial Processing of Primary products. Volume 2. Cocoa, Colconut Oil, Tea. c1983 PERFORMER: Xnternational Rank for Reconotruction and Development, Washington, DC. ISBN-0-8213-0155-1 Iv2) Library of Conqress catalog card no, 83-1200, Hicrofiche copies only. Paper copy available from World Bank, 1818 H St., YW, Washington, K. 20433. In the last decade there has been increasing interest in aiding the economics of developing countries by expanding local processing of primary products. Much of the recent work undertaken by international organizations with regard to processing has addressed policy issues at the international level. It was intended that the findings would provide a basis for formulating some general principles regarding processing in developinq countries, The studies for cocoa and coconut oil suggested that'downstream' manufacturing warranted investigation of chains beyond what was done. It is hoped that these studies will help to advance discussion about increased prw--sing in developing countries, not only of the p m u c t s covered, but also more , I generally. KEYWORDS: *Agriculltural products, *Processfng, *Developing - countries. - Available from the National Technical Information Service, Springfield, Va. 22161 5 = . .jFA01 PRICE CODE: * a I Case Studies on Industrial Processing of Primary Products Volume 11: Cocca, Coconut Oil, Tea CommcnwcalthSecretariat Tbe World Bank London, U.K. Washington, D.C., US.A. Copyripbt cj 198J The Intern3tiund R ~ n kfor Rccb a~truct:-r and Dcuclqrncnt / r l l E HORLL .rAYK I1118ti Street. X.W. Warnington. D.C. ZWJJ. US.A. ~ rightsr a n d l l Manuf~clurcdin the United SUte of America This is s document publsthcd inlrmally by tbc World Bank. In d c r tbrt t k ' information containedin it a n k presented with thc lau pouitie delay. tbc t y p r i p t has not k e n prcprcd ia accordante with thc p ~ t d u r appropriate to a formal prin~cdltexts. and the World 8ank reccpts no r a p r i t i l i t y for ttra-r The prblicatm is uuppltcdat a lulcn charse to defray par1 d thc a t of mrnufacturc and E'strtbutbn. The sicus and intcrprc~a~hsin thin d a t m t arc thaK of t k author(,) and should no^ be rttributcd to the WorM Bank. to iuafiliatcd cqanimtions. or to an). izdiridual acting on their kbalf, Any map mcd have kcn prepared d c l y lor the convcnlcmcc of the readen; the dcnominatiow used and thc h n d z r i a shorn do not imply. on the p r t of !he W l d bank and iurfiliatu. any judgrncnt on the Iqal statusof any territory w any cndoncmtat or acccpam d such boundaria The lull range of the UbrM h n k plblicath it &&bd in the Catalog of World Bank Publirationr. The Cctalog is updated annually. tbc mort man1 edition is available without c k r r ~ efrom the PuNicltionr DiuributionUnit of Ik Bank in Washington or from t k EuropeanOfiict of t k Bank, 66. avenue d'luu. 75116 Park Fram. Fin1printing: May I983 Library of Congress Cataloging in Publiarioa Dau Main entry undcr tilk. Inclvdcr bibliqlnphies. Contcnw: v. I. Ikuxi\e. rubber. vopial hardwood- v. 2. Caccrr. tu. &nut oil. 1. Undcrdo*lged J n a -1nduicria 2. Undadcvtbpdarea* -Raw mateTi.Is-Gsc s t d u 3. Manufacturing promsa. I.World I k n t R.CornmonrtclltbSactctariat. m359.7C3146 1983 33b4767'091724 83-IMO ISBN 0-8213-0lkl-3 (v. 1) lgBN 0-8213-0155-l (v. 2) PREFACE In the laat decade there has k e n Increa3ing i c t e r e r t i n aiding the econooles of developing countries by expanding local proetsring of primary product::. Indeed, the overvhelalng signiflcance of exports oI primary ?roducts 1.1 s o many developing counrriea ha8 made the idea of more procerslng p a r t l c u l ~ ~ r lattractive. y k'uch of the recent vork undertaken by internat l o n i l orga?izal lonr with regatd t o processing has addrtssed policy issues a t the i n t ~ r n a t i o n a l level. It kcamr apparent, houcver, that thee vork needed t o be hcked up by In-depth strtdies arsessing the probleao involved in and the potential banefits of spccif i c projects. Accordingly, the Co-anvcalth S t c r e t a r i r t and the World Bank undertc%k a :loinc research project, now conpleted, on industrial procetrlng of primary products. Ihe projtct involved s i x c i r e studies of individual p r d u c t s of interest t o a broad spcctrua of developing countries. I t vrs intended chat the findings vould provide r b r i s for formulating soee general :rinciples regarding ?recessing in developing countries. me Comonoca1:h Secreturiat carried out investigations i n t o cocoa, coconut o i l , natural rubber and tea, while tha World Bank undertook t o analyze bauxit e and tropical lurduod. Centrally, the 8tud:es def ined "processing" a s the transformatioa of the priorry product t o the point a t uhich it ceased t o be the chief ~ r c e r i a linput i n the production process. Rouever, the studies covered d i f f e r e n t degrees of progre8sion along the processing chain and included comoditlee i n vhich proceselng has already artained degrees of 5UCCeSJ. The processing cha:nr of rubber and tea included the production of f i n a l goods. 'Iht studies f o r cocoa and coconut o i l suggested t h a t "dovnstream" manufacturing vrrrrnted invescigatioa of chains beyond what was done. With respect t o b u x i t e and tropical herdwood, the chains studied included processing through t o aluminr/aluminua and plywood and savnvood, respect tvely, Each u s e study a d d r e s ~ e d three important questiom. F i r s t , vhat factors a r e mst inflrlcntial i n dereraining the particular slocation of the v a r i o w processing chains? In t h i s connection, each itudy aamised the differen& i n entry and production costa r e l a t i n g t o location awl t h e i r iiapllcatioos, as w e l l a s the inflrlcnce of factors such as transport costs, national polictea and trade barriers. Second, what gainn and l o s s e s might r e s u l t fron the i n i t i a t i o n o r e x p m i o n o f ~ l o c s lprocessing? The stuZies reviewed cbe potential e f f e c t s on export '$arningr, toploprwnt , regional development and- for cocoa and natural rubber-social coats and k n e f i t r . Third, can selected pol%cymeasures l e d t o arCefficient s h i f t i n the location of the progessing u t i v i t i e s s o chat a great* share of the v a l w added would accrue t o developing country mppliern? a c h study concluded with an asresameat of t h i s issue and provided some policy recoprpeedationr. Thia joint research project was begun i n April 1979. To coordinate tha uork, several meetings were held st the World Bank i n April 1979 t o d i s c w s the scope of the research and its uthodnlogy. I n Koveabcr 1979, a t a meeting a t tha C o ~ l o a u o l t hS c c r e t r r i a t , the r e a u l t s of the in- howe portion of each Case study uere revlrvcd by represcntatl%c%f r m t h e Orgbnlzrttrn of Econonl: Cooperation and Dcvelop~ent (OECD), L'nltcd Sat Ions Confercn:t on Trodc and Developenc (USCTAU), Unl tt d Sdttion~ Industrlol Deve;opcrcnt OrganlzCat[on (UNIDO), Internat lonal Labour Organltrt lon ( 1U)), Inter,uclonal Trrde Centrc (ITC), Afrlcan Devclopmcnt Bank, Ccncral S e c r e t a r i a t of the Croup of Afrlea, Carlbbcan and Paclflc (ACP) S t a t e s , Intcrnatl*+nal Cocoa Organlzac!on, Intcrnat ionnl Coffee Organlxat Lon, Intcrnat konal Sugar Organization, ~ n t e r n a t l o n n l Rubbcr Study Croup. and Trnplcal Products Inst lture. Subsequently, f l s l d olsslons were undrrtuken to s e v e r a l countries f o r Intoroat Ion-garhcrlng. f i e above organ1r a t lonr provlded 1r.valuablo asslstancc, as d l d the government agcnclca and l n d u r t r l c s that provlded the necessary lnfomatlon. T)le rcports on the care scudlea a r e presented In two volumes. Voluuc I ccncalns those on bouxlca, rubber and t r o p l c r l hardwood, whlch verc prepared by Hldco Hsshlwto. R. C. Vonlgotun~a, and Kenji Takeuchl , rcrpcctlvely. Volme 11 c o n s l s t s of t!~ose on cocoa, coconut o f 1 and t e a , by Jackson Kbrunasekera, J. J. HcNcrney, and R. C. Uanlgatungn, resptcclvely. I t I s hoped rhet there s t u d l c s u l l l help to advance discussion about lncreascd p r o c e r s l n ~ i n dcvcloplng countries, not only of the products covered, but a l s o wrc generally. 8. Persaud Shaasher Slngh The Coumonwcalth Secretariat The World Bank Cocoj, C ~ C L ' I011~ and T z U The l!echanlcs of Industrial Procrenla~of Cocoa Y. V. 0 . J .Karunasekara Indust.1~1Proceaslng of Coconut 011: Refining J. J. Hc!:erney lhc Paclraglng of Tea Into Bags an4 the hnufectura of Instant Tea for a p o r t in India and Srl bnka it. C. Yanlgatunga Bauxlte, Rubber and troplcal Harduaod Bauxite Processlq :'.n Developing Countrien Hideo Hashllaota, Processing of Notural Rubber in South Aaian Countries for the Export Market R. C. Vanigacunga Hechanical Processing of Tropical Rardvood in lkveloping Countries: Issue6 and Prcrvcts for the Plywood Industry's +velopmett in the Amia-Pacific Region m n j i Takeuchl THE ECOSWICS OF INDUSTRIAL PROCESSISG OF COCOA Senlor Econwfcr Off lcer Yhe Comaonutalth Secretarlac ;. Tha~~ksgo t o Dr. 8. Pcrsaud, Director of the Econbolt A!frlrs Dlvlslon, the Cao=lonucalth Secretorlot, as well as t o A. Rala**-r*are- C m o d l t lcs Off leer, Ecanoalc Affair- Pi*::-ion, the Coa=onvcalth Secrctarlat, for ~ s s f s t l n r rI*!:'.L s c ~ t l ~ t l to~putatlons. The Invaluable assistance of c ~ l che many people who rcrlcvcd and couaenteo on thlo report I s ~ r a t e t u l l y arknswledl;ed, an 1s the coo$tratlon owl help pxtcnded to ce by p.ovcrnarnt and industry otflelnla d u r l n ~the tleldvort. Specl.11 aanka &a t o Vllllaa Steel of the Afrlciin Wvelopcant Bank. Flnally, but not least, thanks are o v d to H1:drcd L'cler d~nd b%ltncy U ~ t r l s s for thelr asslrtanca in prtparlng thlm report fcr pub\ieatlon and to Paaelo Sauhney and Rcbccca Sugsrl for thclr patlcnco 11 typlng i t . TABLE OF CO?;TE!iTS . ..........0 + ?'= TiIkYF.VO3K FOR THE SIVDY*... . . . 0 . . . . . . . . . . . . , . . 1 3 P. Uorldl Dlrrr1butlon of Producclon and trade PatCerns.................................................l7 ................ C. The Characterloclcr of the HarkaC,.........................22 ..............................22 I . The @ct o! P r o c c ~ a c diocoa Products ..22 2. The Harkct Structure... ............25 D. Tariffs, Hon-Tariff Bnrrlcr~and Export. Sub~ldles................~............ F. Tna 8:lendrng t' COCO~......................................~~ ..............37 C. Competition frao'Subt:l~utt.~~................ 6. Entry Co8ts................................................02 C. DIc.:cC Gs~s..................................~ 1. .............................................. F ~ ~terlaLs.........................................h4 v ..........................................43 2. bergy.. 49 .................................................52 3. Other Inputs ................................55 4. Wager. ............................. 5. b p i t a l . . . . . . . . . . . . . . . 6. O-aerhead................ 56 7. Transportation and Disc~ibucloaCOSCS.................~~ Factors Indirectly Affecting Costs.........................@ 1- P~ll~leS.e..............-- ..........................e - b h 2. Technical Corutraints.................................b7 = 3. The bvirora.ent........,..............................67 '9 6 B. Foreign Exchange Earnings ond Covernoent Revtnuc....,..................................74 I D. Stlaulf to 1ndurtrlaIitatfon and Regional Dovelopocnt.~..................~.............. . . I 1 P. 0ar:olnlng 30~*r............~~........................... ..a2 C. Soclal Cart-Bcnrflt ~lpfs...............................83 'J FOLLCY ISSUES...eee...........e*.*.e.*.e....... ........90 MhTX: STATISTICAL TABteS......ee.....e...........e.e...................93 RtFER~SCGS."..........**.*.***.*.*-......~**...****~.*...*...**...**....lo% LIST OF 1AB!ES TNE RECO'~LSK uc COCOA PRCDUCTS FRQV A nnRIc tOS OF COCOA EE.lYS....*.......*...........*....r*..r........~,.~ld ...............I9 L'ORLD PRODCCTIOS L S D E m R t S O F COCOA B a Y S M D C3COA PLODL'(XS.................................. M E STRL'CN'IPE OF ME TARIFF PROTE(t1ON IN SEISCTED m v e w P e D C O C ~ ~ I COSH COCOA sws MD COCOA PROMIflS..................o~..~~~~*~~~.~~~~~~~.~~.~..~~~26 D'FECTIVB r A R I F F S O I COCOA PRODUCTS I N THE EC ASD JAPLS....-........................................29 L%IT VALUES O f CCCOA BEAHS AND COCOA PRODUCfS R E C L I V m BY C W V A s THE IVORY W4ST AND NfCERIA.........-....................32 ?RICE DATA ON COCOA BEUS, BUTTER AND POOER...................-33 .... VMJJZ ADDED DATA FOR COCOA PROCESSIhY; I N SELECTED COU!.XRLES..-..................e................... 35 COCO's B U K E R S U A ! I m S USED I N -0UTE-FLAVORED C O A T I N C S . . . . . . . . . . ~ ~ . S ~ * ~ ~ - . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ . ~ ~ ~ ~ AVEPAC;E P R I C E S O F COCQA C m AND 17SSUBSnNTM......m...........e..........m........s..........19 - ASEDO IRCREDIL~TS F THE COCOA, m l i l g AND WSI)ZCTSOhTRY IND'JSTRY I# THE U.K........s......o...............bl - JLAN USE, B E E ! P R I C E S Aaab THE L. . '.RE O F B?X.SS I3 TOTAL PRODUCTION ,#COSTS I# CUXA, THE ImORY COAST AND RICERfA................................~........................b5 FIE SHARE OF INPUTS OTHER TMN BEANS I N THE TXAL PRODUCTION COSTS I N CHAM, TME IVORY COAST, N I C E R I A Ah7! 'ntE U.K.................................-.......;..a49 .*................** THC ~IS1':L'IAL COSTS 3F PROCCSSIh% A TCS S f B U S S 1.': @A%* IilE IVORY COAST* KIGtP' \ AND fie U o K * SO THE SHAIIC OF PACKACISG COSTS 1.Y TOTAL PROWlCTIOS COSTS A!!3OTHER COSTS IS [;WASA, THE I'VORY COAST AVD SXCLRIA....*.....m*.*...**...........*~**~.~SI ................... ME AVERSE Sq!!BER OF NPLdYtD lLVD NOLL?IESTS IN CHILYA, TRE IVORY COAST, NICERIA AND THE U.K. e S 3 IhDICArORS OF W O R I h l t Y S l T Y I N COCOA PROC&SSIX IS CHM'A, TllE IVORY COAST, NICEIZA LSD TNE O.lt**.....m..........*.mS4 THE SURE OF OVERHEAD, CAPITAL AND TOTAL FIXED COSiS IS THE mru PRODUCTION AND OXIER COSTS IS CflASA, THE IVORY COAST, SICERZA AND THE L'.Ka*.m............*..*.S7 AVEWICE TUTAL PAOD1;CfI3Y COSTS OF P R O C E S S I S A TOf OF BUSS IS CIUSA, THE IVORY COAST, SICERIA A\?)ME U.K..*..*.........-oo-o..e.D***............oo.a.59 oms ......*...*..m...61 TRAXSPORTCOSTS snon NICERIA TO =ST LUROPUS, HEDIIERRXSEAS~ U.S. AHD JAP&!iTSE PORIS..*D..... WY TRASSPORTCOSTS mon QUXA TO ~ZST~'ROPUS. 9EDITERRUYU\'* U.5. AND JAPAhZSE PORTS........e....*...........-62 OCLAN IWfiSPORT COSTS FOR COCOA PRODUCTS, IS CEhN EQUXVhLEhT, FBW (;fUXA ASD SICBRIA 10 LTSTERN ECI;ROPC...rr.r...*****.........r.r........*......-.......63 I THE COST OF PRODUCTION OF COCOA PRODUGS Am VALUE AWED AT D I F F E R m STACES I N CtUNA....... ..*.......*.....*69 'IEIE COST OF PROWCfION OF COCOA DaODUCTS Am VALUE . ADDED d DiFFERENT SU&S I N THE3VfflY COm.........***......*.70 & IRE COST OF PRODUCIIO# OF COCOA B O W C r S AK3 VALUE ADDED AT PIFFEREKT STAGES IN II- - ..........*.*..............a71 PROCESSIRE W C I N AHD P R O C E S S I S FCST SrTIOS.......*m...........72 COCOA mor,ccT OUIFJUTARD m SET GAIN FRH PROCESSIPS I N CHAIPA, THE IVaRY COAST M D XGERIA................75 MIlEIQI UCESCE FAICtINCS llYD atrtaSHFXT RINaflfE FRWCOCOA PROCESSING In GHANA, TBE IVORY COAST AHD ~~RU.....*..*....*..............m......*.76 2 ................................0**0.........79 4.7 SALARIES ASD MACES DISBCRSED 13 THE COCM PRCICESSINC FACTCRIES SURVEYED* 4.8 fHE COST OF PROWCTIaY OF CHOCOLATE PRODL'CTS AXD VALLF ADDED AT DIFFLRLYT STACES 13 THE IVORY COAST ...***.***.....-...- . . . ~ . . * . ~ ~ ~ ~ ~ ~ ~ ~ 4.9 IhTLSEtEST rX)STS OF A HODEL COCOA PROCESS1.X PUKT IN ........*....*................85 C U U UYIW A)1 &\WAL MROUCHPVT OF 30,000 TOSS OF Ba%S.......*.*...* .......--**.......*....*...... k . I 1 EC01OYIC U T E OF RENRS (FIR= APPR3XI.UtION) IN A YODEL PROCESSIX ~t~\73 1 w. a7 4-12 THE SE.YSITlVIfY OF 7HE ECOXYJCIIC RATE OF RENRS r0 wCFS I S THE B U Y COhVUISION RATIO IN A YODEL PROCESSIS PLAN' IS CHILYA*....*....*.-*. 0.*...*.**.....0........88 LIST OF FIGURES Page - 2.1 THE STAGES IH THE PIIKESSIX OF COCOA........................... .J6 .L .....................-38 4.1 THE LABOR INTESSITY OF GHANA, ME IVORY CQAST, NICERIA Xh'D THE U.K. I S COCOA PROCESSISC.. I b - * ACP Afrlean, hrlbbean, and Paelfie (councrler) GSP Ctnetall tad Syrtea of Prefrrencer ICCO Iatrrnaalonrl Coeor Organitatloa HFX Wrt-Favored Mtlon M E 8 Non-carlff barrlrrr F'CR Proceraltu cost ratio PHR Procrrrlng atruin rat lo UliCTAD U.W. Confrrrnce on Trade and Development The oalrn purpose of thlr study war to rxamlne the p o s r l b i ~ l t i r sfor expanding cocoa procesrln~ln the bean-prcduclng countrler. The study rounht: ( I ) t o ldcntffy the locrtlonal deteralnrnts of cocoa procrasln~; 2 to ascertain the tcchtcal and +conoalc feaaiblllty of trpndln& procesrln~in the kan-producing countrler; and (3) t o exaolnr the k n e f l t r of exprndlng dovnstrtam processing In chose countries The anal ysf s foc~rscd on cocoa- procesrlng factorlea ln three Veat Afrlcan hart-producing councrler (Ghana, the Ivory Coaat and Nfgerla) and i n the U.K. According t o the eaplrlcal analyrlr, the Ivory "orst vaa the leaat- coat processor ot the three krn-producing countrler . I t s coopet i t lve sdvrntane lays In lts relatively low bran prices, vhlch alloved it to alnlmlrr I t s total productlon costa, glvrn that k e n s account for soot 902 of productlon costr. Although Chrna'r -other coatsn vere lover than the Ivory Corst'r, its bean prlcer (using f.0.b. prlcer) v r r r relatively hleh, rerultlng In higher total productlon cortr. Comparison vlth the U,K. was not posslble because of lfafted data there. Bean prlcer varied vldely u r o r s loeations and w e r time. This factor has strengthened the coapctltivenees of procesrors in tk developed countrler, a s they a n h y froo the cheaperr murce, b h r e a r procerrors in the bean-produc lng countrler m r t nomally buy t h r l r beaar domesrlcally. Uartover, the dtmertic procelsorr i n t?.e ban-producing co*mtrtes have faced rignificant constralatr a8 t o suppller of branr. Thtr sltwtlor, har hindered full-erpaclty utilization and hrr contrlbuttd to hlgh fired costs. the reason for the shortages l a that tha bean season l a r t s only reven moatha, vhereas the demand for grt ndinga ir year-round. Storage f a e l l i t l e s , parrfeularly i n Ghana and Nigeria, have beta inadequate to u l n t a i n ruffielrar anounta of beam t o emure year-round grindings. Saae of the doresclc policier adopted by t h t beaa-produciq eouatrlea bare a l r a aot eacouraged the tranrfer of procerrtng from the coiuuaing countries. For inrtadce, i n the Ivory Coaat, domestic processors vere sold rubgr.de bum a t tbe f.0.b. prictr of quality beaus, even though the opportunity corc of there beam w u virtually zero. Further, there uere ao formal a p o r t duties on beaus, vherear export taxem vere levied on processed prducQ. 'J S t c o r u l a ~ ~inputs m r e atgligible. Yith respect to the other variable costr, jhc u i n it- vert wages, packaging materials and enemy. Both in Cham # Plgerla, the r l s i d i t i e r usoclattd vith eoployment conditions contr'Ibutcd to overunning. Further, i n charm, people with apparently inadequate sU11r held akilltd poritlonr becacse of tk high turnover that resulced f r m lieration t o aeighb0rir.g couatries where wager were higher. A. for energy, the three bean-producing countries had relatively lov energy cortr. For emmple, Nigerla ir a large 011 producer, ail*Ghana is -11-served vith hydroelectricity. 60th hrd louer energy cost8 than those in the U.K. The lvory Coast. vhlch I r dependent on energy fnportr, used warre products to f l r e I t s bollerr, rcduclng i t 8 energy c a r t s by a r euch 8s 1st. Tk.e rxaaination of the frclght cortr fndlcstcd that f r e i ~ h tr a t e r were hlgher for the rwre valuable cocoa p r d u c t ~ ,but there was no clear ev(dcnce of an orcalation of frelght rater, except for cocoa powder. However, aleort 2Of of the ;aw beanr that were rhlpped uerc warte, for vhlch fre:ght costs had to be pald unnecesrarlly. Uhen the frelaht r a t e r for beanr r a r e adjusted t o rellect t h l s , I t uar cheaprr to tranrport cocoa products than beans. Horeover, carto verralr are increarlngly rerort lng t o containerl~atlon. This r h l f t prercnts technical pcoblear, a8 I t w l l l b necessary to i n r t a l l r p e c l r l equlprant i n the contalnorr t a ship th. beans. Hast llkely t h i s w?ll caure the frelght rate t o lncreare, and the c ~ ~ t l t l v e n e ofr the bean-producina countrler wlll therefore dlmlnlrh In the s long run, cecerlr p r l b u s . The study taploped nuaber of a~earurcrto evalurte the benefltn of protesnlng cocoa: value added, procarring nargln ratfor and proccsrlng cost ratlor (PtlRr/PCIPr), net benefits, and the sot181 bsnefltr of a d e 1 procerrlng plant. With rerpect t o value added, a t intr, *atlonal (f.0.b.) hcrn prlcer, the v a l w added accruina t o d o r u t 1c procerrorr i n tha kan-producing couatrler war highest i n the Ivory Coart, followed by Charm and Nlgerla, and ccupartd favorably with the value added f o r procrrrors In the U.K. and thz Natherlandr. The P3Rs a d the PCRr were rubrtrntlal in a11 three West Afrlcan sountrler. The hlghcst R[Rr were recorded in the Ivory Coart, folloued by Nlgerla and Gtuno, but each war l o w r than i n the U.K. In a l l but one case, the M r exceeded the PCRr, indicating that the net revenue generated froa relllng c o c a beans in procerrcd f o m was greater than that f r a s e l l i n g raw beans. The aaalyris on net benefit8 highlighted thc greater foreign exchange revenue accruing t o Nigeria and Chrz% than t o tho Ivory Coast, vhere there uere eons1derable lealoger. The social cort- benefit &tUlySiS indicated roaa An interesting finding of Chi8 study is that the value added accrulng*to c o c a processing was relativaly lov, regardlerr of the locatloo, a s compared vlth, f o r instance, the d u e added i n the U.K. and the Netherlands for such dovnstrear a c t i v i t i e r a s the manufacture of chocolate aad othcr cocoa-tmrcd products. In f a c t , valuc'ndded is inevitably lou for any ~ t e r i a l - i n t a n r i v e a c t i v l f y , a r value a d d 4 mearures the returns cn the original factorr- that is, labor and capital.' In cocoa procerrlng, the &sic rav material accopmted for between 85% aad 9%of production corts in the locat ion* invtrtigated. b C It is likely that actlvities vith r e l a u l v e l ~low value added w i l l not even be coaridertd i n policy formulation. It is argued here, hovavet, that the appropriate c r i t e r i o n for dccislon-oaking regarding m t a r i a l - intenrive a c t l v i t i e s 11 the return on inveatocnt, rather than the value added nper me." fn the care of cocoa procerrlna, the social cort- benefit analyris indicated that t h return on investmeat ir relatively hlgh. Further, the payback p a r i d ir relatively short and the investment outlay u a proportion of the potential "turnover" in the a c t i v i t y d e n t . Hence, an expansion of cocoa procerrlng would benefit the kan- producing cormcrier. 1. Tlt& FRAWNORK FOR M E SNDY Cocoa kana are produced only in troplcal developlng countrler, 01% of vhich--8rr1i1, C.arroon, Leuador, Chna, the Ivory Coart and Sigeria-- account for .ore than 89Z of tho uorld'r output. The U.S., Vestern Europe, the USSR and Japan conruw tho bulk of thlr output. Cocoa proeerrln~h r r nuakr of rtagcr. The f l r r t coc\elrts of openin., th. cocoa pod8 and rcoopint out t k kana, uhlch are then fermented and arltd. fermantatlon developr tha atom and flavor by rducing the dlragrerable tlttomers of the kana. tbverlnt the moisture content fa=illrater s h l l f n t the kana, after vhlch they are traded and cold as cocoa kane. The recod stage l r the productlon of cocoa liquor- thlr lavolvcr r o r r t l n ~the kana; rduclng thee to hlbr and then grlnding t h o u to produce a Ilquor mars (paeta). In the thlrd rtaga, cocoa butter 11 extracted by pressing tk llquor u r r (parre); the rerultnnt rerldru lo coccw cake. A t a later rtrge, the cocoa cake 1. ground lato cocoa poud~r. In thlr rtudy, wprocerrlng" war defined ar the act of rrrarforrint the cocoa podr into an latermadlate product ready to k converted into dlffereat praductr ia cooblfutlon with other Inputs. Although cow cocoa proteraing lo tou done by the bran producrrr, alport 70%of cocoa proctssing 10 cartied out in th. -jot coorumlng cowtrier. Th.u i a objective of the rtudy uar to examine the poralbilitler for cxpndin8 cocoa ptocerrin8 In t t a kacrpr4ucint couatrtes. lha rtudy sought to (1) ldantify thr locatioual deterriruatr for the cocoa-procerairy indurtry; (2) to arcertaio tha technical and ecoaaic fearibility of a p n d l n g procerslw rctivitie. in t)w kaa-producing couatrieo; and (3) to u u i o e the hoefit. of apaodi* douratram proceirlag fa those couatrler. 'L& r t d y covered t h productioa of cocor liquor (p.rte), butter, c a b a d powder. T b i n i t i a l fementatlon aod drying procearer urra excluded, r r t k y ara a l w y carriod out war the coeor~rowirya n a rlace the kana deteriorate vicbin a few &ya of tatWrin8. T h rtudy did oot look at d w n r t r e u proceasing a c t i v i t i ~ rrueh u the -nufacture of cbocolater and other cocoa-based product., A n&r of factor. #till hinder the drwelownt of ao apurt-orieated c ~ o l a t eindustry in the bean-producing countrice, a t , l e u t la tke rborc term. 90-wr, oor factor? in the Ivory Chart h r been' umfacturiry chocolate couverturer I/ with f o r e i p collaboratloo aincei 1976. Tbe rtudy did u r m i n c r itr +conooTc pmrfomnce. * C * Field ia*rrt@atioar urre conducted in the u j o r karrproducingh counttier of U s t ffrlca--C?uru, the Ivory Coast a d Higrria-ad fa a u j o r coarrai* country, the U.K. -I/ An isterrrdiate plrodoct wed is =kina chocolater. Chapter I: presents background 1nlara.ttlan on selected ataEes of procrrslng, t t ~ e hlstorlcal trends In vorld product lon and cr3de, and the charnctcrtstLcs of ?arclculsr aarkccs ( t a r l f f and non-trrllf barrterr, prlces and unlr values). Chapter 111 cxrrtneo the l o c a t l o ~ ldctcrrlnanrs of the coccl proccrslng Industry. KC lncludes cocparl8on8 of the d i r e c t production carts. dlstrlSutton c=s:s arrd l ~ d t r u trorts. The coat data are based on flnrnclal data made r v a l l r b l e by the proccsslng plants surveyed. Chrpccr 1V assesses the galns froa processing, uhlLr Chapter Y craalnrs the trawr lnvolved 1n crpondlng dounstreaa act l v l t i t 8 in the bean-produclng cuuotrler. A. -the Procssslng Chain After the cocoa beans arrive a t a plant, they are checked for motsturc content a d classified by color. They are than passed through cleaners to rewve extraneous ~ t e r l a l sa*& are subsequently rorstad to enhance the flavor. Roasting a l r o reduces coirture, lovers acidity and deepens color. M e rcustedl k a n a are shelled and passed throu&h huskers t o separate the shalls, husks and germs froa the broken kernels, called nibs. The shells a r t disposed of as f e r t i l i z e r , mulch or f w l . When dllulited chocolate liquor is to be proiuced, the nibs are treated with an allulinr solution to remove the acidity. Up to thlr point in th. processin#, the dry w i g h t losr of the beans is approximately 201. The rorrtedl nibs are then fed into heated disc cnuherr for grinding. This proceas break# the c e l l walls of the n i k , producing a l!quor u r s consisting of approxiaately 552 fatty matter. The l i q w r , o r paate, is subsequently parrad throuuh cooling tunnels and aolldif fed into liquor blocks o r kibbled liquor. (Figure 2.1 depicts the processing stages.) In modern plants, these activities are carried out in a fully rechanlred, sealed rysueo. The machinery is laid out in a straight line, with raw 'beans e n t e r i w a r one end a d unsueeteaed cocoa liquor emerging a t the other, already packed l a polythne-liaad bags d i c h are p a l l e t i d and shrink- wrapped for dfatributioa t o the c u s t m r . Ihr sealed syata prwider a high- quality product with l i t t l a risk of coatasination. Sampler are notmdly selected a t every atage for a w l y s i a i n ricrobiolwical and quality coatrol laboratories. In the nett stage, the cocoa liquor is preaaed t o extract cocoa butter, l e a v i w a disc-shapd cake. It w i l l still contain .ow butter, with the amount varying according t o the relative prices of butter and po-r. The butter f a then deodorizcrd t o ppove aay r e u i n i r y fatty acids. *re are tw deodoriution processes. In batch deodorlution, used by all the factories surveyed here, bubbling rteam is p a s s d throxqh a stagnant pool of cocoa butter for aeveral hours- f i e mare recently developed ParUnaon dtodoriuclon offers conside:able energy savings, a s the batter l a parsed through a heat exchanger f o r k weh shorter period. 'J The;ocoa butter 1s next cooled and d i r p u ~ dof either in liquld form or in rlUBs. Cenerully it 1s yellovlrh a d bra an agrteabla flavor. Jr The I l n a l stage i n the proeessieg chain studied tiere l a the produccion of cocoa pcwder by p u l v e r i t l n ~the cake and passing it through breakerr and gridera. To ~ ~ u t r a l i zthe acidity, deepen th. :olor e and increase rolubtlity, the powder is treated with s l k a l i n t substances. Ihe press systco deacrlbed above 16 used ln the manufacture of cocoa liquor, butter (and poudcr. Another cootwrclal system for processing cocoa beans in the enrpeller s y a p a , in uhlch the cleaned raw beana are parsed through a continuous crusher, uhlch prcases out the butter, with any reojlnlng butter extracted v l t h a 6olvent. Theobrosinc can then be extracted from the defatted cake and the r?aldues used a s c a t t l e fodder. Since only a handful of old f i r a s rtlll use thc expeller Jyatec, the press syatea l a probably more econoslcn\. V. Coraj estimated vhat the beat input-output rat lo obtainable wlth the press syrtrm w u l d be, asawing that the Ueat C e ~ factory he atudled n was opcrdtlng under ideal c o n d l t l ~ n o . / He then lookec: a t the actual p c r f o m n c e of o Chanrlon factory i n ts mid-1960s and found that it war operrtlng a t only 86: of techalsal efficiency. (See Table 2.1.) I. Uorld Distrthrtlon of Productlon and Trade Patterns Over moat of the l a s t third of the century. bean production wrc than doubled. Exports of raw cocoa beanm alao increased, although much less rapidly. In the years l ~ c e d l a t e l ya f t e r the Second Uorld Uar, alooat 902 of productlun uas exported. During the l970., havtver, production increased very alouly, and exports actually declined. I 1979/80, exports had fallen t o 59%. (See Table 2.2 f o r figures oa world production and the trade patterna :or cocoa k a n a and proceased products.) Cocoa grindings i n the bean-producing countriea averaged about 2Z of the w r l d t o t a l during the period 1928 t o 1932 (Annex Table 4); they increased rapidly i n the 1940s and 1950s. although admittedly the i n i t i a l v o l w had been small. This expansion can be a t t r i b u t e d t o dlaruptions i n trrnaportatlon during the war. ~ i t hthe paatwar recovery i n the developed countries, the expansion of ~ r o e e a a i n gi n the ban- producing countries s l o w d coaaiderably. Since 1968, however, t h e producing countriea' share has again shorn an upward trend. reaching 33% of world grindings i n 1980. While the iacreanea In grladlngs i n the tean-producing councries an group were aignificnnt, there were c ~ n r i d e r a l l evariations. For instance, Brazll accounted f o r 41% of the t o t a l 8rindings i n these countries In 1980, while Ecuador and the Ivory -at together accounted f o r 25%. Furtircnmre, i n -l/ 'i The formula Garaj used for the recovery of butter is ar follows: .s -- - here V The percentage of cocoa b u t t e r obtained frou the cocoa liquor, T The content of cocas butter i n cocoa liquor, and t The content of cocoa b u t t e r i n cocoa cake. See 7. Garaj, "A Note on the State of the Cocoa Processing Intirutty l a [kana," The Ecsnol~icBulletin, 1958, pp. 41-66. -'able- 3.1: - THC RECOVERY OF COCOA PRODUCTS FROH A !DTRIC TO!i O f COC'M ae;lsS Product Ideal process Actual process Beans I'A.0 100.0 j t I02 fat 201 fat 102 fat 202 fat in cake in cake i n cake in cake -a/ Unlese othewise rtat@d, "tOri!Jnrefer t o metric tom chrou~houtthe study. Source: Adapted froa V. Garaj. "A Note on the State of the Cocoa Procerring Industry in Ghana," The Economic Bullecln, 1968, pp. 41-46. Uarld net empclrtr ul kanm f thourrd tuna 010 Lb? 1.11) Ia m I .nOl 1,m* ).a C ~ C Mpaste r s ~ . r l sf r x t h bran-prdurlng cnc*rlr lea aa a p . r c e n t r y 01 the world t o t a l n.a. n.a. 5rzf M 91 C O Cbutter **FerlB f r u t k ~ b a n - p r d u c l r @c ~ ~ rl lrr ls am a prrccn;are of the uorld l o c a l k c o r calelpordrr rapartm f r c r the bar.-prcduclfu C0Ufltrl.S a* prtC*ntaE. of t k world t o t a l n.a. ltkf I&' 39 U U b1 -6/ a/ Tor tIu .warm IM5-69. - f a r c t u years 1953-51- c l f o r th yearm 19b3-67, -- !ate: n... Sean~not mrallmble. Thc prrfodm corer October 1 t o S a p t r r k r 30 . n e ~ tf o r ~ r l a d i s ~ md, l c h are f o r calrrdar yrerm. A l l q l u n t f t l r s are Ilre-year -1 areranem. w e p t f o r c h a p l l t yearm 1977f71, 117117Q -4 1S:9lM. Source: .Sumurfzd Ira A~MI Tabli. t.2, 3. 1. 7 a d 1. 1985) Brazil procesred 682 of l t r cucor crop an3 rcurdor alraost d2t, r h l l e the Ivory Coast, Ghana and Slgerla grauqd only l i t , 92 and l l t , rrspectlvely. The data on net lopurtr of cocor beans r e f l e c t the rtructural changcr that have occurred rn the w r l d c ~ c o aeconoo: (krncr Table 3). The lcpqr: shares of roee countrlcr have ~ h l f t e dmarkedly. in particular, the share of the U.S., for many years the rporlJ's l a r & r r t Iolortar of k a n a . f e l l sharply in thr 1970s. d i l l * that of the redrro: R:publlc of C l w a y (Uert Cerwrny), once :he second lar&est inportrr, tnrteaarf. l s p o r t ~of beans by Uer: C c r ~ n yhad averaged or.1~50: of U.S. import5 In 1971/73, but by 1919-80 uere higtwr than U.S. lsWt:r, g u t t l n t Gemany In f l r r t place. lhe Nethcrlrnds toc~kover stcand place, x l t h the U.S. thlrd. the increased bean lsports by Vcat Gemany and the Setherlands and the decrearr by the U.:. ware reflected in r h ~1evr.l~of thelr &rlndinga (tee Annex Table I ) . fhe decrrase in U.S. loports of brrns war ucountcd for In rare by 1tm 1ncre;amed lmports of cocoa productm. uhich in 19?7/7e were 402 more than tha average for 1971/73 a d were equivalent t o 752 of bean laportm. Fraqce and the USSR ~ l m orecorded larba lncreasrs in Imports of prucerrcd cocoa products. This ~xpansionIn trade was pormlble because sf an increase ln cb,e output of proc~erstd products, largely cocor llquor, b) the bean-producing k data on the world production of prlllcy of "hedging" their bean purckases aqalnat thelr product s a l t s hra allou!d rhea t o reduce the effect of price varlatloaa; that fa, they have bee3 able :o assume a net n i l poaltlon. Because beans a r e available throughout the year froa different parts of the world, I r l t i s h processors have r-qulred leas atorage rprcr than h o e thoae In tiu drvcloplng countries. Consequently, their c a r r y i q ~costa h*.rk e n l o e r - The s t u r e of krar i n t o t a l production coats varlcd conalderably by location. It was ouch lower in C~.Mthan fa Nfgr r aad the Ivory Coast. For Ilutance, ln 1976/77, k a n a aecounttd for 782 of ,he productton costs i n Ch.na, 89Z In the Ivory b a s t and 882 i n Rlgerta (TaSle 3.2)- This dlf ference was ~ a r t l yattributable to the fact that the Ghanaian govetancat fixed the bean price f o r doacstlc proceeaoro M o v the I.0-b. prlce, uhile i n Yigeria and the Ivory Coast, processore had t o pay the f-6.b- prices- 'In 1978/79, the ahare of bean c o r t s i n t o t a l production coat f a !3aaa rose draaatlcally t o 93%. The rearon is that the price c h r g e d t o doreatlc processors more t1,rn tripled, although it r m i o r d lower than the f.0.b- price. e * fbe sbre of ban costs also varied kcac9e each country had a different pricing poiicy- Ibc differing unit raluea of Ver: African cocoa are s h o i~n Table 2.7. These prica differences a_rrengtkeacd the c ~ : r t i t i v e n e s a of U.K. procssaors, as they could buy f r o r the cheapest source, whereas proceasors i n the bean-producing countriea nor&ly h d t o buy dooeatic katmr - -- .B -I b / It is clallwd th-e offlciala in the Caiase Ere cloaely a~aoclatedvith the traders and therefore b v e an intereat i u fixing low f.o.b. pricta. The cost of ecergy uas a relatirely s ~ l part of the total cost of \ processing beans ln the countries st.died. Even SO, lt could ba a d e t r m i n i c ~ factor in the ;nnice of vhere to locate new procrcr1r.g c a p c t r r . Tab:. 3.3 shovr t'he production cost srructutr of tb Yest African proceasorr and tw britlsh ILrcs In percentage terms for lreos othrr t h n kana. a share of the secondary casts (i.e., ar -.'4-.iiag the bean costs), eatrgy cosrr l a 1977178 -re the lowest in Sigerla (2.':;. and h i g h s t i c one uf the British companies (21.22). Wigerlc, r larae riicrgy producer, urn supplying ewrgy LO dcrestic users a t low unit prices. The energy costs were also rclatlvely low in Chrna, A i c h a l t o !tar an abundance of hydroe:rctrle powr. In contrast, the Xvory C o a ~ thas been heavil y Ceptndent on la?or?cE *nargy. However, I t s tactrrry haa begun t o uae rnste product8 t o f i r e 1ta boile:m, thereby r a d n t i q eneqy costs by some 142. I a terms of the energy costs per ton of b a n s prccesaed (Tablr 3.4), Nlgerl and Chana have had a cmpatltive advrocage over the Ibory tgoaat and the U.K. Coats in thc U.K. h v e k e n eapezlrlly high, even thou81 cocoa liquor and butter h v e been sold in liquid foro, thus ~ a v l n gthe energy that wuld U v e been needed for solid!flcatlon. 3. Other Tnputo S.con&ty input* a r e mt important for processing baanr. Although soa alkalitar (potamslum or sdlum carboa~te)1 4 used to reduce acidity cad dtepen the color uher procasaiq the liquor rwrs t o lncrrare the . rolubillty of tha toe- povdet. thr cost is low a d mcSC prOCe8SOto have tended to icclude it under d r c e l l a n e o w expendlturea ihu nocd A packaglag u t e r l a l s bu v a r i d from loeation t o loutlon. Far lnataoce. i n Western Europe, deliverlea of liquor and buztur from other tLLTapeaa proces~or8 are made by road tanker, wharea8 from developiq couatr:ea th8 product is rh1pp.d la 3olid fom, v u m m packed la polycheo. bag8 and cardboird boxes. The share of tk gucbglzq materials i n t& total coats varied amng t t e three Vast Afticln producers (Tabls 3.5). It vu btgheat i n Chm, p e r b p s beuuse of the U g h monopoly pricea &urged by the l3ul producer. Z h aharp declloa of ?ackagfog costs a8 a sbarc of total costs between 1977!78 and 1973179 reflects the auSrUPtia1 f a c r u s e i n the coats of the beans; u a shra of ma-bra cost8, tha decline uas p c h smaller. The Ueat Europtrn proeeasors packaae d y for cheir oreratas srlca. b w e r , as they u t e r m l n l y t o Earoptan end-wet., their p~clcrgingcosta are DO^ significant a d are entered d e t Pi.celIancow expeoditures. Spare p r t a ocra a a i g a i f i u n t coat fartor for all t k factories surveyed, u the factories were a l l a t leaat LO years old and the mmal vorkiag i l f e of m a t of the n o c h l a e ~and eqdplcnt a s ouch leas ttun 20 p a r s . In Chon., the coaLa of spares would nave k e n evea greater had cheir p m c u r w a t k e a wte rwJ)llr rad had not some of the arlrriag urchlnery been . Chana Ivory C 6 . m ~ b l p r l r 11.K.at I brcr - 7 i i ~ h ~ ) ? rrrlTT;i X r h p r u l r t lon 9.66 112.20 + ,, , Intrrort neb. 4.b. & l a t l r r i33.35 24.- MS. rrpnrrD 31.87 31.61 Plant Lnauraace 4.03 6-25 - I l d ~ .molrtrruncr 1.31 4.11 Property tarre I). 30 k n t 0.38 3. 72 Secondary Lnputr Pnckalln@ ray Trrnrport (1r;put a) Urarr Scclrl lnrurancr Intarrat on v o r k l n ~ capltrl 8prrr p r r t r Ulreellrneow - a/ n m artr arr for rha lrr~rr rha rvo U.K. of prncorrorr I n Tabla 3.). - - lbtrl Mcana not app1lcrhlr, Scurerr Compurrd by thr author traa f l n r n c l r l data f u r n l r k d hy the erncrrrorm. Tablo 3.5: TllE SIURE OF PACKACL!X COSTS IS TOTAL PRODUCTIOS COSTS A\.D OTHER COSTS IS CHASA, ME LYORY COAST A..D NIGERIA (percent 1 Country Chicn;r Shnrc in total product ton corer 2.11 Jn Share other cost& 10.30 Ivory Shoru In total Coarc producllon costa 0.69 Nlgerla Share tn total production costs 0.68 Share n orher cost*3) 5-83 -a/ %ther ~ o s t s "arc the total production costs excluding bean costs. - Note: n.a. Means not available. Source: S-rited froa Tablet 3.3, 4.1, 6.2 and 4.3. n 5 beyond repair. (The government has asked the Afrtcan Otvelopacnt Bank to finance a ruhabtlitrtioa program.) 4. Yilges In Ghana, wage* I/ accounted for the largest r h r e of the variable costs excluding beans. T h ~ yreached 452 in 1977/78; although they dtclined t o 38% i n 1978P79, they wre still higher than in the other countrlss surveyed, including the U.K., where they amounted t 3 34-362. Chana's high share uas attributable to its relatively large work force (Table. 3-61. In Niger:r, although tho work force was a l w large, the other costs were likeulsc high, and the shara of uages was only 272. In the Ivory Coast, the share uas only I52 in 1977/78, the lwest of thr four countrier. The structure of tbplopent and average wages arc, presented in Table 3.6. In spite of a lover output (see Table 3.7). both th.m and Nigeria eaployd more than twice as u n y wrlrara as the Ivory Coast, scggrstlvc of overrunning. A tthe nacugaaent level, the differential uith the Ivory Coast was even greatar--alaost 5:1 for CZuna and 7 t l for Nigeria. There vere no expatriates i n zmrgerlal positions i n Chrm o r Nigeria, vhereas In the Ivory Coast half these positions wen filled by expatriater. Tbis was the rerult differences i n the industrial policies of the three couatries. In thc Ivory Coast, all the processin8 p l u t s have retained some I o n of forclgn collaboration, d i l e tnere is v i r t u 1 1 7 none i n Gturu and Nigeria. The skilled work force la baa processing u i s relatively small in Ch.na, In #i&eria, tt appeared t o be much larger, a s th. natioorl company vould proaote unrkillcd vorkcn with seve. ' 1 year8 of service to semi-rkilled grades. In Chrna, relatively lou vages i. '-.ed with high unemployment) have eocouragcd 8kSlled amrkers to migrate to .-.w r a prosperous neighboring c o u a t r i o ; hence, undertrained uor'brr b v e k e n occupying ski llcd positions. To i n c r u s e the tupply of skilled h b o r , tLe Ch.aaian frctorier are seeking t r e i n i w assistance. They a a j 81.0 hawe t o iacruse the r h o s t negligible vrge differentiai kt- r U l l e d rnd uasklllad labor. In Nigeria, there hu beer1 a greater vyte differential Ly gra&; it has beta frr more pronounced k t u e e n amagemeat rad no-gtment positlonr. A fomalized u l a r y structure corer8 a11 tbe grades, and the work force appear. t o hawe been f a r -re 0rg.nized. Such A oystcn u y make it d i f f i c u l t f o r uriagcrcnt t o lay off workera i f it ho to reduce output, therfbj lacreasing the processiag coot@ per ton. In the Ivory Coast, -gem have not k e n openly negotiated, and it was wt possible t o o b u i a diuggregated data; houlver, it appear8 that awerage tugen generally hoe k e n relatively high. Offsetting t h i s hu k t n tbe lack of job security, as worken caa bc laid off t o maintain a steady labor-output ratio. -1/ II Wages in t h i s .action refer t o a l l m l u s e n t r accruing to a l l u t e g o r i e s of labor. Tabla 3-68 THE AVERAGE NUHBER MPLOYEO AND D f O L U H M t S I N CHW, THE IVORY COAST, NIERI AND me UwKw G A - cI Calegory chon&/ - lvory b a r & / h'igeri.lbl U.K.- Average Average Average Average Numbsr wager Numbes wrp,er Nuuher v a ~ e r N~rmbe r UJ~EI @mployed (UwSW$) employed (UwSw$) uaployrd (UwSwS) cuploycd (US.$) ) 3,040 ) 2,164 - - 1 1 Unskilled 081 1,5Q7 167 ) I84 1 a/ 1976/77-1978/79 avuragew 61 1976177-1977/78 average. -1 - 1978. d l Head8 of various d l v i r i n n r and rupervf.8orr. In the Ivory Coart, only heads of divirlons. - - h t e a Heanr not applicable, gourcea Coaputed on the bario of i n f o n r t i o n provided by the PI-occrrorrw - Tabla 1.7: WOtCAfORS OF UBOR ISTESSITY IS CKOA PROCESSIS IN GHANA, THE IVORY COAST, NIGERIA ASD ME l'-K- - -c/ Category Chana 1' Ivory Colmt5. Nlgcrf a b1 U.K. Value added per coployee (U.S.$) 18,299 Voluw of output per employee (tons) 24.87 Valw of output per employee (U-SsS) 111,137 Average number of workers 593 -61 J/ 1976177-1978/'19average. 19764'77-1977178 average. C/ 1978. 1 - Net wrlw dded crfaccory (rtagc 1)- Source: Cauputed by cbe author. On the averagt, the share of net valrre added accounted for by labor (Table 3.7; was low in the latter part of the seventies, reflecting the capltal intensity of the industry. In Ghana, labor's share w a r 17.62, as against 152 ?n Slgerla and only 5.9f in the Ivory Coast. In fact, 1n the Ivory Coast, labor productlvlry was over four times higher than In Cbna and Higeria, and its capacity utlllzatlon vrs far greater. i/ Hovever, the nunber of employees was relatively low, a fact that explains the low share of labor In the vnlue added. In the U.K., the nwber of esployacs was lower, uhile the productivfty or value added pcr unit of labor was relatively high, as much as 152 above rho level in the Ivory Coast. The unit cost of labor vas the least 1n Ghana, follovcd by the Ivory Coast, Nlgerla and the U.U. Hovever, the labor costs per ton of beans processed were on the average higher in h'igeria and Chana than in the U.K., indlcatin$ that they used labor less efflclently (Table 3.4). 5. capital The depreciation costs recordcd during the same 1 varied consider;rb!y among the locations (Table 3.4). 21 In Slgeria, ttey averaged arouad U.S.Sl50 par Lon of k a n s processed, uhe?eas the crrrrecpondlng figures for the Ivory Coast, Cham and the U.K. were S29, S9 and $16 respectively. Expressed as a share of the total coots excluding beans, lt aoounted to 34%in Nigeria as agolast 32 in Ghana, 92 i n the Ivory Coast and 7%i n tbe U.K. Such differences v w l d k u p c t e d i f the plants had k e n set up a t various times. In fact, a11 four vert s e t up in the 1960s and therefore sbould have had relatively uniform deprt~iation costs, subject to scale differentials, In Nigeria, bowever, the iastallation of some new machinery i n 1977178, costing approx1or:ely U.S.SL.3 million, raised the depreciation costs. S t i l l , even allowlug for this, the costs t h e n seem abnormally high, a s reflected in the relatively high unit cost for processing k a n s in Nigeria. fIad the Nigerian depreciation costs k e n s l a i l a r t o those of the Xvofrian processor, its unit processing costs would have fallen k l o v the 1vojhian levels. Because rapid dcpreclation of cap1t a l stock i a encouraged by the t a u t l o n aystem in Nigeria, most Xigeriaas do not use the straight " line method for calculatlag de@reciatioacosts. Thc mrginal variation i n -I/ I Annual plant capacity for Chana is 22,000 tom, for the Ivor) cotst &0_300 tons and for Kigeria 30,000 tons. Average capacity u t i l i = r ~ t irates in o ~ - 1976-78 were 732, 652 and 582 respectively. * -2/ Depreciathn coats for a11 plaat facilities are generally d c u l a t t d by wing the straight linc method, with zero salvage value. If tne salvage valrr is not in excess of 10% of the original cost, it is frequently ignored in calculating srraight line depreciation. depru.:iation costs amng GUM, the Ivory Coast and the U.K. can be explained noc only by the use of different valuation rystear, but also by scale &ifferences. Siollarly, the share of lntercst on vorldng capital also varied considerably among th. countries. In the Ivory -st, it was the largest single cort afrer tbat of beans (Table 3.3). lnterest costs have contlnued to increase because of rising interest rates, deapite a decline i n output during the last year under review. The working capital costs were also high in a l l four countrler. Spokesmen for the "sull" Britlrh processor streswd tht its profits were hlghly ~ n s l t l v eto changes in the costa of working captcal, such ar those required to meet an increase in k a n prices. In solla councrler, high interest racea may force proce8sors to reduce their output to keep down unit costs, a step that would result in an underutiltraclon of capacity. In Cham, the share of vorUng capital costs ln the cort of productloa, excluding bean., rose 112 in 1976177 to alaost 162 in 1978179. m e increase was caused by the devaluation of the cedi, which raised :he domestic prlce of cocoa, whereas the interest rate remained more or less the .roe. _I/ In Slgerla, the share of uorking capital costa f e l l sabatantlally betwen 1976177 and 1977178, vhen the factory war taken over by the Marketing bar;i ano no longer had to pay for i t s kana. Of tha two Britlrh processors, the share of working capital costs recorded by tlre smaller f Ira war marginally higher than chat of the larger firm, probably because it took it longer to deliver its producta and receive revenue. 6. Overhead f i e share of overhead, capitri and total fixed coats relative to production coats can be glean& froa Table 3.8. In general, thr, flxed costa were extremely lc'r. The much lover figure of the larger Bcltish processor uas probably because it also waa operating a t full capacity. I t is likely that fixed costa would be u c h higher for nev eatrants to the iodurtry. In other uords, the old processing plants w i l l enjoy a coapetitive advantage bcuuae their total caats approximate their variable coats, Rw overhead costa were higher than the capital costa except la Nigeria, as explained earlier. Ihe considerable variations in their shares (Table 3.8) MY be partly explained by the scale diCfr?reacea. The compomnts of the werhead coats are examined below. * Q Plant Insurance eosts, though extrtaely law, varied considerably i n terms of the coats pcr ton of beans procesmed. For uanple, they were lower in the Ivory Cuast than in the U.U., f a spite of the larger scale and good condition of the machinery in the U.K. -11 In Ghana, lnterest rates are administered the state a d k n e e are fairly stable. In the Ivory Coast, the cent 1 bank's diacount rate fa stable, but the comercial rates are mot k c a w e of the openness of the economy and the infant capital market. Chrnr 2' - - l r o r r b r a t Y l ~ e r l ahl V.K. e l - 1 A B Share In d h r r S h r r In Shorr S b r r l a Share lbrr In Sharr S h r r I n S k r r product Lon i n product lon 1n productlor I n pradwt Ion 1n p.duct1on In i coata othrr cortr other C O S I ~ athrr ccatr o t h r C M ~ othrr ! - COI~. cortr coat r coat l coat. I h r h rJ 3.1 21.3 . 1.1 20.1 2.9 2 3 ..a. 14.7 1.1 19.1 pita^ 0.6 II fie a. 5 4. I 13.4 II... 7.3 0. L 6.2 Total llrd 3.8 30rh 2.0 19.1 1.0 5l.L n... 46.2 1. r 2S.4 a/ r/ 19Ibl11-1918119 r v r rrur. -T I91Ull-lSlll18. I 1918. "A* ir ttn amr11ar procramor. - Motor n.r. M r n r not r v r l l r b l r . "ahor corta* rrr no@-beanc ~ r c a . b u r c r l S u a r l r d from Trblrr 1.3, 4.1, 4.2 md 4.3. Propsrty taxes were a significant expense In the :very Caast i n 1976/77, but declined folloving the revisian of the r e ~ u ltal ~ n s~f fccting industrial propertier. There were no property taxes In Chana, and they uzrc negllgl5le i n Nigeria. In contrast, pro;rerty taxes were h l ~ hl-I the U.K., Sur a s they were generally a s a a l l proportion of the total costs. t h l s cavd the bean-producing countries on1y 8 marginal advantage cver the I'.).. AdnLnlstrative expenses L! vary significanvrly a3or.g locations. In the Ivory m a a t they came t o only !.2f of the t o t a l "orher costs," while In Chanf and Sig(!rla, uhere capaclty u t i l l r a t l o n v r s lob-tr, they vere over 102. They were a l s o substantial In the smaller British firm. Building ~ l n t e n a n c e ,although negligible l n the three b e a n - p r d u c l c ~ countries, waa relatrvely high i n the U.K. Thls may have k e n becaure of the age of the bulldings rather than t h e l r location. The louest t o t a l production coats wre recorded in Chana, followed by the tvory Coast and h'lgeria (Table 3.9). Lou bean prlces explain Ghana's competitlvenesl~; when they are adjusted t o the world level, l.e., t o the oppcrtunity cort of the baana, the Ivory Coast rcerges a s rho least- cost proces.tor, follovtd by Slgeria ard then C)Iana. The cost analyris indicates the 1opor:an:e of beans in prductlon costs. Even though the other c o r t s varlcd conslderab~yamng locations, t h e i r variation u r s not significant enough t o establish a coapctitive advantqe for any location. Tor instance, the other costs e r e loutst in Ghana, even though its total production costs vere relatively high. RelatLvely low bean costs i n thc Ivorp Coast a ~ l a i nits low prAuction costs. It urs not posalblt to extend the cost cocparison t o the U.K., since the pracesror did not divulge its bean prices. Hovtver, rs the U.K. could pcrchase beans froa the cheapest suppliers .ad a s its othez costa were re1at:vely low, its t o t a l production c o r t s h d t o be low, possibly m e n lower than those of the Ivory -st. 7. Transportation and M s t r i b u t i a n Costs The two Britlsh f i m wed different methods to transport cocoa butter tban thoac the Vest African producer8 used. The f o m e r taploped road tankers to dintribute the b u t t e r i n liquid foam to the r e s t of Europe. By pumping ths liquid butter d i r e c t l y into the road tanker* froa storage drum, instead of cooling and refrigerating it, they were able t o save on packaging , and energy. The end-userr a l s o ~ v t d energy a s they did not have t o a e l t on the butter before uaiag it. In contrast, f o r technical reason. (rue21 aa keeping the b u t t e r a t fixed tenperatures), the processors i n the bean- producing cormtries had t o transport a l l t h e i r processed productb In solid form. - -?I These include expenses f o r se&taries, t t a ~ e i , auditing. l a y e r s , t t l e p h ~ n t ~supplies d postage. , Table 3.9: A\'ER*.CE TOTAL PRODVCTION COSTS OF PROCLSSI!X A TOY CF SUNS 1%GHASA, XIIE IVORY COA-CTD NIGERIA AX0 M E U.K. -at l U*K*- - c l Ghana ivory k s r -a Nlpcrfa -b/ &an coat 1,908 2,955 rer ton (3,373& achcr costs ptr ton of beans 203 Total producc,ioa costs pet toa 2,191 3,293 3,451 n.8. of beans (3,656rC1 1976/77-1978/79 average. 6/ 1976l77-1977/78 average. -a/ C / 1978. / - Ac the "world prlteH af ba.3~. - Note: a . Xeains not available- Surce: S-ritd froa tables 3.2 and 3.3. The fralght rater from Slgcrla and C3ana are prerentd in Tablea 3.10 a d 3.11. Generally, the rater were hilher for the sore vduable prcducts (e.g., butter) In the c o c a proceaalng c h i n ; h v e r , there i a no evidence t o confirm the view that "d valrrtm" ratca escalated ulth the degree of proceaaing when the three products, kana, liquor and butter, are conaldcred. However, the *ad valorem'' rater for cocoa povder dld rrcalate re2ative to baana. The freight rater frua Ghana and Wlgcrla to the u j o r cocoa-con rum in^ couatrlea were chaapert t o the U.K. and dearest t o the C.S. knee, Qunrian and Hlgrrirn cocoa exportera were a t a d:aadv.ntage in exportin8 c o c a producta to the uorld'r largert coecr Importer (the U.S.) relative the Latin herlcan cocoa exportera, who are much cloaer to the U.S. Vnen th. transport coatr are cocwred fa bean-.quivalent terns, the plcture changer dtaoattcally (Table 3.12). It taker approximately 2.5 tona of kana to realize a ton each of butter and c a b , and 1.2 ton@t o rea1:ze a ton of liquor: therefore, ahlpplng butter and take ahould lead to a aavingr of 202 on freight corta, llquor a aavingr of ISt, hen in abaalute t e m ~ ,the freight rater urce lowat for cocoa cake a d pouder, neanlng that, in ban- equivalent t a m , the raving8 r u r t have h e n considerable. Table 3.12 ahow the uvinpr that naulted frao trrnaporting cocoa products, aa oppoaed to k a n r , f r w Hfgerfa and Chea to the 'J.K. and Hamburg (th only deatinationr for rrhith eoaplete data wre available). Evident1y , h d the freight rater not dircrlnlnrted aaalnat thm more valuable proceraed products, there wuld have k e n an even s r u t e r tranaport uviaga. Ttu rbare of internal traaaportatlon coatr-the delivery of the kana t o the procarring factory rad of the product@ to the portr-appeara to h v e been leas than O.5t of total eoata. In a11 three Ueat African eouatrier, the factarfrr =re located mar eta port fasilitira, thereby mlairrlrin~ theaa itre Xousrar, in Ch.tu, iatemal tranaport diffieolcier led ta aupply aborta~erand lour+ upacity u t i l l ~ a t i o arater. f k a d l i q costa other tban tranaport t o th port, aueb ac, port dues a d atevtdoriag, w r c d n f d i n ill three cowtritm. Cocoa producta uer: cxea?t from the u a u l taxer n c h u enbarkation, u n l t a t i c n and rhipper~' council taxes. The fact that the v d u added e x - f a c t o ~ and f . ~ . b . were a h a t the urr for a l l three Veat African cotmtriea rumeyed abovs tbt handling coat8 were negligible. P . hrltsting coat;, in both abrolute t e r u md per ton of bun8 proteared, were loweat in AfgerL., fallowed by the Ivory C h a t and G31~ua. In Nigeria and tht Ivory b a t , t h e factory marluted i t 8 prcduetr. a l e in macl t b Cocoa Marketing Cuapany did 80 la return for r ap8ci.l fea. Figures were not avdlable f o r efther the d l Btitirb f i ~ which did i t 8 cvn narkatfog, , o r th large t r i t i a b procearor, uboae parent capany bud-led tht aemice, (u.S.s prr ern) London 18.bF kI.41 31.91 11.91 61.2: 39.8 4 0 . ~ 4 &o.nb u.S. ( t a r Corrt) tO9.M 119.00 93.1) 1UI.ZS 118.55 129.82 IO1.61 Il?.*7 London 38. 1I TI.91 U.44 68-44 68.11 - 1 S7.09 57.W r s t t c r d r d Hcaburg 81.91 105.69 @.a 6o.w W.26 114.96 t(5.11 70.11 Ss8ndlcuvl. 139.51 161.25 89.10 q9.10 a,.. -.a , a... n... !Idltcrra.wr-l Mriae ic U.M 11.33 46-26 44.26 95.06 3 64.76 81.19 U.S. (trat b m l t ) 118.5) I2U.93 103.67 101.67 2 2 5 131.W) 112.00 121.50 - Kate: n... ?(can8 rac .vdl.bLe. burce: Author*. mum87 of cocoa pmcerminl( phses. * -- Tabla 3. r2r OCEAY TIU)rS?r)RY COSTS FOR COCOA Pl!ObUCfS, IN BEAN 2 ~ 1 ~ A J k t i 7kRCH( QlANA , AND NICERIA TO rP.SnRH tUROPt - 1977178 !073/60 [krtimtfon Per ton ~lquar Buttrr 4 cakr Per tun Llqwr l u ~ t r r6 cake of equlvrlent equrvalent of of equlvalcnt sqdvulrnt of kana of a toa a cos of bar ar of a con t3n of barn6 kanc of beaac of kana - burcrr Ca1.culatd froa TaSlar 3.10 and 3.11. D. Factors lndlrecrly Affccclrrg Costa mare ir a view that, unaided, the developing eountrlea unnot compete in the in~erns:ional market in Mny area8 of ~nufacturing. Hcnce, roue countrier have adopted incentive8 in thr form of taxes and subsidler. Cocoa 16 one ~roductto r.hich they have been applied. For lnrtancc, Iraxll has ured thrq mtrategy mince 1967. Barides tmproving the cooperitive porltlon of the factorleu, such policler can rt2ract both forelgn and d m s t l c invertwnt to the Indu~try. Murver, while they u y accentuate tho flnanclal proficabillty of f i n s , 1f not v e l l d e r i ~ n e d , they can also entail .oclrl costs kcause of a oi~aflocationof reoourcer. Ihere exogenous factor8 are a~,?lyzcd bePw to rrcertrin hou 1ow.ttant tho policler hrv* been in the e r ~ r b l i r h a t n tof tho factorlea rtudled. 1. Pollcler In ~ S S Mand Nlgerla, uhero there ha8 been a mtrte monopoly on the bean trade, the govemwatr haw k e n able c3 influence the developent of the procssrlag lndurtry through policy inrttments euch a8 t.xe8 and robridfer. Recaatly, however, there h v e k e n ~3 open rubaldier or rebates, althornh i m Uulu che reduced h r n price. conrtituced a hidden subsidy. In 1976/77, the Marketing Board fixed the donartic bean price a t only 37X of the f.o.b. price, 1.e.. there war a rubridy of 632. Felloving r policy .Lift in 1978179, the dircowt dropped to only 4 f , a negligible factor uheo deliver; coat8 to the .hip are included. Yhcn the ban8 are valued at their f u l l f.o.b. price, ineread of their rubriditad price, the value added Lallr douertiully (Table 40 1) O t h e r dirtortlonr have af fectal. product ion cortr. For instance, govanmental r e g u l r t i o ~ou minimum wager, wage increaser a d the t t 2nd ~ coditioas of aervice hrr tended to p u h up the uage coetr. In fact, uage coarr were secoad only to k r a colts i n Cham; of tsa total nowbean cortr, the r h n of rylu arcraged 25X. In d u e added, Iabor'r ~ h r eh r been rubstantlnlly higher la Ghana thrn i n the other countrler. M i l e miafmn waga ngulatiom nay lm derirablu i n t e r u of welfare, rigid toplopent roaditions trod t o perpetuateaa pensanent uork force that excetdr the actual dcorrd for labor, p r t i c u h r l y during period8 of reduead production. In spite of lower outputa i n Ch.na, the numbem aploycd have bten almost fout &l#r tht in the U.K. In ABgerir, iltbaqh :he b a n trade ham been tn the hlndm of the rtatc, there h o e been oo apparent w~bmidier Qr Cue8 favorable to the procerrfng hduatry. Otigi.ully, the tlrrketing Board sold the h a p . to the 1 frctory a t f.o.b. i prfcer. Bowever, since .rrlV 1980 ttm goverrrPcnt h s acthorizd c b ?rocerrfry lnduatry to purchase the b a a s directly fras the producer, Iforcovet, thc ~mturullyhigh rats cf depreciation can be conaidered i a rubaidy. It b-a bee? an incrntive to invertora, I.it h a reduced the tax burden considecrbly. Of the countrier rtudlcd, HLgeria v u t*.e hfghcrt cort producer (Table 3.4). TSe average cort per ton of beam procearcd amounted t o U.S. i I - 65 - $137 for the t u ~years for vh:ch data vere available, whereas In tne Ivcry Coasc i t aaowrted to $338. One explanatioa l a that both the Ivory Coast a d Chana had lover deprcclatlon costs. Vhrn the actual costs l a Wlgerla a r r computed wlng depreciation rates s:mllar t o those of the Ivory b a s t , they decline to $257, even lover than the core in the Ivory Coast. In Nigeria, there vcrr distort ions s l n l l l a r to those associated with t t labor market in C h a ~ ~ l a i s uwages, government-detero:nrd ~ r r vat8 increases and rtgld condltlons of w n l c e . The l a t t e r ~;rrventedthe r d j u r t r m t of labur t o changing dlorrrnd, leading to overuanlng and hlth productloa costa. In fabt, tho urge cost p r ton of brans procurred i n lQ77/78 v u greater in Nlgarla thaa in the U.K., even though the reverse wlrld hove k e a axpected, given the typlcaliy low ua&es ln developin8 countries. Xu contrast t o Ghana and Nlgerln, the I w r i r n processing industry h s bean in the hands of the private sector, a d a l r m c h "major," Cacao Barry, has played an important role ln it# devrlopunt. Ihla coopany tus had an interest ln a l l the procesriq plant8 in the form of equi:y p r t i e i p a t l o a , technological ccollaborrtloa or marketing servlcur. Such a strong dependence on one major foreign aooprny suggests that product price* may have h e a detcrolned not only by the coaditionr In the produce market, but also by the internal policyr of the prrrnt cmpiay. It is likely that product prtces were kept lov. Inded, the prices for liquor and butter i n the Ivory -st have generally k e n wch lower t h n tho- f o r Ghana and Nigeria (Table 2.7). ! " Uith respect t o the input marker,, the pricing procedure s h u n k l o v uas adopted by the Caisse d r Stab1llsation in the Ivory Csart md has h e l p 5 the factories reduce their uorklcy capital a a d s r Pricing of 6 c o a haas in the Ivory &st, CFA 1. Producer prKce per kilo I 2. Cost of collectiryl a d rtoriag kuu t o take I to the buying center : 3 Price a t "centre d r c&rcidisatioan 4. Cost of transport, a o r t i z a t i o n of sacks, storage, insurance, dcchets ett. to brlnl the beans to the uarchouse f o r s c o r q e .. 5. Value ~ocg-olgasia," i.e., warehouse v a l u i - r i * - * Source: -bras survey of protesslng plants i n thc Ivory Coast. ! D I n l t f a l l p the factories paid the price given under item 5. I Ttds was 1-r than the f.0.b. price, a i c h was a r d CPA 650.000 durirq the time of the fie11 investigations (Hatch 1980). lbrw months later, vhen th processed productn were crported, the factory paid t h difference ktveen th. current f.0.b. prlce of k a n s and the price pald initially. If the f.0.b. prlce had fallen h l o v the f.0.b. price prrvallrng at tho tioh the beans were deli\-ered to the factory, the Cllsse incurred cost, as it received less revenue f r m selllng the bean. to the processcrs than to forulgn purcbrerr. bnverscly, if the f.o.b. bean prices moved upvacdr, t' Caisse d e a profit. 8 The fac.?ries utilized both auburrde and export-quality beans. The Caisse'r prlccr vas th. s a w for a l l #radar, altkau8h the opportunity cost o l tk subgrade beans -as virtually nil becoure thy could be exported. Tbe procesrora stated that tbe return (yield) had k e n relrtively lou in the converrion of sub8r.de beans, an the lnput p r i c l q system drove up th cost of produetican. Unlike beams, a l l processed coctm product exports in the I w r y Coasc were subject t o aa a p o r t tax; the curreat (1980) rate vas around 3-52 of the product's value. Ih.result vaa to reduce the cao~titlvenessof the Ivory bast a d discourage any expmrioo of d e ~ s t r e uactluicier for export. Lh ccncrasr, in tountries VLthout stdte monopolies suA u Brazil, th. a. ;ernnote actively eacouragrld the developccnc of the cocoa proctssing lndwttry by f i ~ ~ m iincrntives ~ l m a d subsidies. The Brazllfana, in parcreular, lifted the :ares a d duties on loports of processing piarrtr that p r e d m for the export rarket. This policy encouraged an inflov of u p l t a l bcause factory conrtructron costa droppud. Noreover, stvcrai other measures were introduced to i t docutic proeescing. For i n s t a ~ c e , the ~equfrewntsthat foreign currency be surrendered have k e n relatively less strfngent for proeerred products t b n for beans. Even h e n the foralgn currency restriction8 were fa force, the gorerameat subsidized the export of processed products by Latrdtxing a aore favorable rrta of exchange for cacoa products than for buns. These policies certainly helped enhaam Brr.zil*s capetitiweness i n th U.S. narket. Eoweotr, in the EC, dfscrlmfnatory t a r l f f s that favored otter auppllers rduced Brazil's caapttltfoewss. Not surprisin$ly, there bu k e n a rapid aprnnlon of Brazilian products fn the U.S. mrbt a d only a f o growth ia the =*a (Annex Tatle 5). ~ A recent study oa the Brarillan cocoa prMuctr indrratry states that ' the Bnrlllan u o a w hs beta p y i q twice for exportiq its processed cocoa: * f i r s t fn the Corn of the social CO8tS hp3fcit in the subsidles a d export q w t u , a d second in rhe form of th lover product prices. L/ On tbe other b a d , even if ehc b u c r product prlces were the result of traanfzr pricing. the subsidies -y have ambled the %roeusors to cell tbeir products at such rtduced prices. ! -1 Op. cit.. Cetulio Vargrs Foundation. 2. Technical Constraints The technlques involved In e x t r ~ cfng cocoa products a r e r f o i l a r to t those used In vegetable 011 procaslring and a r e widely knovn. Even so, technlcal constraints may a r t s c becruse of inadequate s k i l l s oc the part of the local labor force. For cxacple, once Chana and SIgerla ended t h e i r technic31 r s s c c i a i l ~ nwlth Europedn firam, t'ne rrcli3tcnonce of cachinory and equtpoent f e l l t o che factory e n ~ l n e e r s . In Cbna. the oaehinery hnd cqulpmcnt k v c been i n a poor state. Civtn t h r t a l l the plants a r e s i o i l a r i n age, the reason f o r t h r t poor s t a t e ruy hcve bean inadequrcc s k l l l s and technical knouled~e. In the Ivory Corrt, on the o:hcr hand, t+ctuological asqtscrnce 1s still being provldcd by t h e fore4gn "major" coopany. Another tcchnlcal consrralnt r c l a t e s to subpr.de processed product n. Uthough they fetcn r ~ l a t i v e l ylaw pricas a t the time of export f r m t h e productng couqtry. once In the consuaing c o u n t r i t s they a r e f u r t h e r upgraded for use i n chocolate ornufacturtng. that techr.ology ir not yet available i o t h e bean-producing countries. If they were t o obtaln it, e i t h e r by p a r e n t c t royalties o r by collaboration, they thsaoelves vould be able t o raise t h e v a l w of these products. 3. The Environment There a r e no s e r i o w environnental hazards associated with processing cocoa beans, although air pollution ruy r e s u l t from the dust, smoke. odors and hexan, A/ evaporation. b r c o v e r , controlling the dust and h e u n e level is extremely impor:aot t o prevent f i r e s and explosion&. Roughly a 8 much d u s t originates in t h e cleaning and winnowing procers a s i n oitneed proeesmiag. nost w d e m p l a o t r use p n e m t i c equipscnt and continuous closed n y s t u s to handle the dust. Because of the explosive nature of hexanc, t h e plant m m t employ stringent standards i n both coastruction and operation to enrore hrravn safety. Tropical c o n d i t i o ~ .make thc f i r e h a r d even greater. and industry spokesmen gave t h i s u one ~ s o foo r tlu widespread use of t h e pre8s system i n cocoa proce~~sing. V.ter pollutioo i8 not a problem. Although large q u a n t i t i e s of water a r e needed, it is used almost txc8usively for rteaming and cooling and therefore acquires f e u contamfaants. Moreover, in modern plants, more than 952 of the water is reelrculated, v i t h only saall amounts discharged a s vaste. Although t h e resldues f r o a plant clean-ups can k considered- as pollutants, i n t h e U.K. :hey. along with any s o l i d waste, a r e disposed oG.8 f e r t i l i z e r . vh%le i n the Ioory Coast they a r c used f o r a s fuel. In rum.Za8 enviraanental hazards are v i r t u a l l y non-existent, the location of a corn- processing factory w i l l not be determined by environmental c r i t e r i a . * b -l/ Hexam is a highly fla-ble hydrocarbon umed i n the soloear extraction system. SVe THE CAINS FRW PROCESSING A. Value Cdded - V11ue added data are presented in Table. 6.1, 4.2 and 4.3. For ir.ternatiuna1 coaparabllity, the value added was computed a t three dlstrlbution pointr. Stage 1 giver the value added ex-factory, that l a , a t the tlrsc point of dirtrlbuclon. It ir the difference k t w e n tha cort of the inputs (excluding the factorr of prcductlon) and the v r l ~ * of rhc output a d ir generally referred to a8 net value added. Stage 11 includes, in addition, the cortr incurred for r e n l c a r (Prrnsport rnd handling) in the delivery of products t o f.o.b. Stage !IS add8 to that the cortr of the marketing, lasurance and ohippiag r e n i c e r incurred in the delivery of prrriuctr to c.1.f. vo allouance ms made for internal taxer aad export dutler because tbese a: transfer prpencs t o the rtate. There -re no direct rubsidier i n the cou crier rurveyd. (Because of the paucity of data, tha value-added figurer ;raronted for the U.K. relate only t o Stage I.) %e considerable variation i n v a l w added acrorr t5e countrier and Bver tiw. m y have k e n the result of a nuokr of factorr. First, product prices \carfed amaag locationr (Tabla 2.7). t o r instance, the price different.'rl for c o c a powder between Ghana and the Ivory Colrt -8 more t b n 100f, al;.lough t h i r difference u y h o e k e n because the two producer vere not homogtnrow. Ihe ivory Coart w u producing it8 c o c a powder t o the rpecification of end me-, uherear Glum sold itr powder through the Temiaal krlrat in tondon. I n addition, the output mix u y have k e n different- Certainly tbi3 uar trua i n Nigeria. Altbugh chager i n the output mix have hd lfttle effect oa m a r l i d cortr, they have had eoariderable baring on the u r g i o . 1 remnua of tbe firm k c a w e product price8 h o e varied siflir'ieantly. Firully, there were dlffereacer in the k a n price. -roar l o u t i o a r and over ti#, a8 dircwred i n Chapter 111. T w mearurea u n be wed t o w d t n t e the combined effect of product and input price ieetability: tha procerring uqia r a t i o (m)and the procerciag eort ratto (Pa). Ihe EMR is the n t i o of the price of the proeerred product to t h price of th cocas beam required fqr itr proauction. If the ratio ir sreatar t h o unity, there are grorr revenue g a i m t o h u d e from procearimg cw.rt.or. The PCB relates th cost of procesring the I corn kana to the price of t= kana. Oaly if tbe PHR is greater t h n the PCB (1.e.. only i f the Lacreare i n revenue offretr tbe iacreaae la coetr) is it uortbuhilo to proeeaa tbe beror. The t w ratios were computed for t h e tuo main iatemediate atage8 of production- butter/& .ad liquor procerring (Table 13) ( i t was not po8rlble t o calculate the mr f o r the iadividrvl cocoa m u c t r ) . Ihe optimm technically detemfaed iaput-output ratios vere u r e d ' k u r u e the procesrors claimed t o obtain t h e w rerulcr la their factoricr. Further, rimilar t~hn010gie8 m r e mploycd i n a11 the couatrier. A. it ir technically f c u i b l e t o change the comer*ioo factorr l a procerring be- into butter/uke withln l*lt8, tbe cr5culatlom a180 used tM different sets of converrion coefficientr I(A and 1). Only OM coefficient -8 ~ e for liquor. d 1*)612? 1911111 1*7at F* L- 1 - 1 t- Y 01 G m r 1 1 - r -4 o p r r t 1 . a m w r - l l m ~ ~e m p r b t l y c d l m r m 8 I e I -61. c d ~ e c a l m b C . r b t l y mr1.l- I ( 2 ) V-A at** 1 I (21 I9?6Il1 19111;n 1971110 o n :n f St1 1100 :of ~ l l l l a n :o f C t A o y r z t l n ~ CCA oplratlnr( C f A o p r r t l n r Cost* C6.C. Cant8 ilmcd coat* k p r r c i a t ion Inrer.rt on f l r d c r p l t a l Salrrlcs *or. erpnnes Plant lnturrncm lldg. ulntenrmce ~ r o ~ ~ taxes r t : Ibet Vrrlablr ca*ts Barlc Input O p r r c 1- u r a l n 1.m3 0-A rtaae 1 4.115 Y-A in ar-8 output la - S a l e ~ l e x p r tt r u w 653 k r k 1 d t ~ l r e h t . m Transport t o port - 36 hrt landla chrxea 47 O p r a t l n g u r g l n 2.0.). 2.117 5.122 Y 2,516 V-A r t u e $1 1.119 6.310 3,744 Y-A i n aro.8 output 151 2 l X 212 O p . r a t f q M-19 c.l.f. 1.992 V-A otaaa f f L 1.016 P-A f a grooo output 141 figurea a n f o r a olngl8 r ~ l a l l r grlader. t V-A stag* I I s ex-futory; V-A stage TI l a a t t.0.b.g .od V-Artw XI1 1. at c.1.f. Source: &chorea sorrer of p r o a a s l r y plants i n cbe I m r y h a t . Cost l t r u nalra operrtin~ costa Secondary Inpats Pacuglly, Lnrrsy Transport (Inputs) &gem 552 1.57 890 1.97 Soclrl l*rura~uce 66 0.19 I3 n. 16 Interest un worklne capltal 553 1.SI 27i 0.110 S-re parts I 20 0.34 216 0.46 !ilrcellanrour 154 0.bi 205 0.45 r00.00 m.r?0 Owrat lag u r l l n , V-A stage 1 V-A 1. gross output Sales/export taxer Subsldles/r~batea Transport to port Port lamdie c&r&es Opraticy urgiG Cf.0.b.) 6,576 V-A atage X I 9,363 V-A in gr-s output 22t a Opratlw u r g l n (c.t.f.) 6.055 V-4 mtage 111 0,042 V-A in sroma o u t p t - 21% - - w Note: Heam not applicable. f l y r e a are for a allyle a ~ l d Z a grtnder. t V-A atage t ta ex-factory; V-A rtage I t la a t f.0.b.; V-A mtage 111 1 m at c.1.f. Source: htbor'a murvey of Frocearirrg plant. i n Nlgerla. Table 4.6: PROCESSLSC WCIS AND PIIXESSINC COST RATIOS ~ a t i o ~hrn-l' ~vory~osst- a/ ~ i t t r.Ic l U.K- b/ m2(liquor) 1. I b 1.20 - -d c/ / PCB (coca product#) 1.09 1.12 1.16 1 .09 a/ 1976/77-1970119 average. 61 197e. / Nlgtrla did not produce liquor. / - Data were not availabla. Source: Computed by the author. The following fotoulae were used to coopure the WR: ,0.38 (prlceofburter)+ 3.44 (price of cake) 1~ price of k a n a ,0.60 (priceofbutter)+0.42 (priceofcab) P*IB prlcc of teanr 0.82 (price of liquor) P3R2 price of k a a r . for Chana, the c.1.f. bean prlcer i n ,don corrected fcr freleht and insurance were urcd. I/ For the Ivory Corrt and Nlgerla, the f.0.b. bean prlccr Curnlrhed by t s factorler were used. To avoid the effect@of yearly :rice fluctwtlotw, 8 t;rree-year (1976/71-1916/79) average war calculated. for product pricer, the average u n i t valuer provided by the praerrorr l a the three countries were 4 e d . On:y i n tha care of Nigerian cot- butterlakt (PXR ) war the PSC lea8 ttun the PCR, a s the procr~atngcosts were relatively h/& h c a u u of the high depreeiatlon rater. bhcn drprtclrtlon eort8 ririlrr to thore in Cham or the Ivcry Coast were iapured, tha Hlgeriao PCR fell to approximately the Ivoirlan level. Roceasing cocoa l l q w r VUJ orrgiaally more beneficia1 than procerriug butter/cake under RIRIA (Table 4.4). For MIB,the reverse war t r w . The f lgurer i n the table coaflrm the coaclusiona Craw on thr hri8 of the value added data, luoely, vhlehever bean eoaverrioa eoeffielentr are umed, the Xvorianr h d conriderably higher PXR- than thr other tuo V e s t Afr:can countries. This result ruggerts that there a n net r e n a w gains t o be had from praerring k a n a in the hut-+roduciag countries. Wowewer, the aculyris ir in8ufficieat t3 detersioe tht net bearfit8 (toe., the value of the output plus the net ex=errul effect@ lass the valw of inputs) became the accountirg prices do not reflect tl.i o p p o r t ~ i t ycort of tbe factors and supplies. 2/ For instance, the wager m y not reflect the op~ortunitycort of labor. I; addition, th uae of external f u t o n may mean that t b foreign exchange earaings were overrtated. A. the average uait v d r r 8 of other iaputr and supplies had co be wed a8 a proxy for their opportunity cost, and u the data did not d l o w aa evalrutioa of the linkage effect@, the act baaofit could only be roughly erthated. -I/ ~ j r u t i -tbt pricer to reflect tht opportrmity cost ur* nccersaq am the beaaprlcea provldcd by the h . ~ l if.a~t o r i ~uere below the %or16 c price." .I - -21 For the Seth&ology. m e Seort R. Ptarooa, John Covnie, et al., E.ports 'Pd African &onoaic Dtvelopocnt," Luingtoa, Ky.2 & Capaodit bob, 1914. Nigeria registered the hfgheat net gains, *c 15%of the valu* of t h e output, wheream i n t h e Ivory Coast the correrrondin8 rl&ure uaa o*rly If, even though I t ranked higher than Sigeria in terns of value added and p r o c e s m i ~ margin ratloa (Table 4.5). me r e l a t i v e l y lou net beneffta i n the Ivory Corsr were a consequence of c ~ n s l d r r a b l eexternal leakages, 1 a r ~ + than i n any o t h e r r country. Maosc 15Z of the value of the output was repatrlatcd a s pawent f o r factors and excess p r o f i t s accruing t o the o m e r r . I/ I n both &an& and Hlqeria, the foreign exchange Ieakaqts were extremely law-32 and 22 respectively. la both they occured p r l u r i l y bccause of the use of ocean tranapnrcstion. I n the Ivory Coast, even i f the c w o a processing i n d w r r y vere not p a r t l y foretgn-owned, there still would have k e n rubatantla1 leakages, a s a n y of the inputs (ruch a e ;x l u g l n t ) had t o be imparted. 8. Foreign Excmngc Earnings and Government Reven\*e The averoue forelen exchange e a r n f n ~ sof the processing p t n ~ sa r t given i n Table 4.6. By converting k a n a t o products, the foreign exchange earnings frcu cocoa exports uere enhanced on the average by 222. 32X and 15Z i n Cluru, Nigeria and t h e Ivory Coast, respectlvely. I n Chana, almost 10% of the value of the oucput accrue8 t o the government, sin:e t h e factory is svned by the s t a t e , while in Nfger!a, p a p e n t to the govcrnatnt war limited t o o n o h a l f the net gains, vhlch rrzuuotcd t o 72 of the value of t h e output. nK other 7X was retained by thlz public company f o r further development. I n t h e Ivory Coast, the government s h a r e was r e l a t i v e l y low, a s lt was v i r t u a l l y limited t o 32 of the ourput value, levied a s an e x p r t tax. Table 4.6 l t d l c a t e r the absolute valwc of the ?early government revenue. Bema processtng increased tam goverrwnc revenue 3- 12%. 7X and 4X i n Ghana, Nlgerim and :he Ivory Coast, r e r p c t i v e l y . '2he lor flgure f o r t h e Ivory & a r t shotan t h a t t& govetarcnt h a not attempted t o transfer t h a nut m l n r f r m the private tc thr pabUc w c t o r . The s c o w f o r esploymmt creation within t h e c o r n proacaring i d u a t r y depends om e x i s t i n g f a c t o r ?otenrities, t h e s c o : ~f o r labor-c8pital substitution, md the r e l 8 t i o l u h ~ - Bk t v a t n outpu; and employment. For example, although a l l four countries used the sane '.~chnology, f a c t o r 1c;e~ities. a s measured by the f u l l u p a c i t y cap1tal-output r a t i o , d i f f e r e d videu--by ao much a s 2:l k t v c a n Ghana and Nlgaria. The Ivory Coast hed che h i g k s t c a p i t a l i n t t m l t y , followed by Nigerim and Chana. To estimte the potential f o r increaalng eaploymint, t h e fallawing Deasures w r e coasldzred: (1) t h e share of labor i n v a l e added; (t!the value added per erp!oyee; (3) the volme of output per coployee; a d 0) the value of Q-ltput per e ~ p l o y e e - - (Table 3.7). P h -J s / Ibid. RN term "excess p r ~ f l t *refers to incolre i n excess of the n o w 1 ~ r a t e of return based on t h e opportuafty c o s t of capital. .+. *.4 =*..a *. Z ha 5 , - - e - L 4 c h- hC r r - 4 I f 8 c. 5 c icccc .: ;; i, -3:z C C $ 8 , < $ I o o c c c i c c - - - \ Y C S E 8 Z 2 ZZZZ E-.r c- -: w 4 Zd i j = d c c c c c a c c c c c i d 445% % 2 - m m m *-I- 0. a o o e - C 8 m m u - b ur - - - --.a L C - e Table t.6: F0Rt:CS E A C U ! ! I LARXISCS A!! CO\'ERb)ZYT' R f V Z Y J t rRb!l COCOA ?Ra'ESSISC IS CHAM. 1HC lVGRY rocerrlaq p b s t s l a tha four countries. Tho rmuatr lavolved w t s s m a l l telrtf.ve tu the tota1 econotrltr, bu: did Refberate k-alnur to: a11 rectotr of the econmy, parttculrrly t'e agricultural rector, @lace ln thra three - . dereloplmg t o t a t ~ l e a8 h r g e propo:c,lou of L x w ~ rpcnt on food. is D. S,. =I1 co W t x t r i a l l u t i c m tcd Regio-1 Drvrlcputt Iwbrrrd llnluges occur ubes 8 flrrr'o i v y t i new i n n m m n t s La tbe supplylag f i m r or pcnrcs ezdselng ::.*=* to u t i l l t e u;rsess capacity. In Ghana, Wiger18 and the Iwoty h a t ; the iatarlodurtry flows ktweeo tbe corm pro e*rlng .=tor cud rhc reat of tLs uanomy have k n lirlted. The inputs Lbl .t;ppLicw of local orlzfc hwte been llritco to pncILIg:cq ~ t e r i a l s ,ad, La a11 three ~ o a n t ~ l e acbc p.chg1- . indust- us8 Ilreadc arull-rst.iUahed. rbreorer, dtbr;gb t h io4atic pjckglng -ortry h a r ~ c t tdr d m d for lafltted orrtarf tts, Importr qf r a w ~ t c d r l ovlre c:ill &aJ to r.m%fartore tbe p.cka&iry. figwe4.9: LobsIntentltyd Ghono.hehoryC a t .NQdo& tneU.K.In CocooPmceuhg Trblc 4.7: SALARIES AN WAGES DISlL%SLO IN THE COCOA PROCBSSISC FACTClRIES SVRYEYM) (rllllona of U.S.3) Chrnr Ivory b r a t Yigrria U.K. - L976/77 1-9 0.9 1.6 1977!78 2.5 1.3 2.2 1 . d L978/79 1.4 1.4 a*.. n.r. -a/ 1978. - )iotrr n.a. Mrnr not avallablr. Source: Computed by the author. The demad for packaging orterlalr by the $roc?-rlng lndurtry ln Chrna and the Ivory Coart amounted to approrlmacely U.S.S2 mlllloa par year. In C h a ~ ,accordfry to one rtudy, t t a fiber bags lodurtry h a rn fact yielded rrvaral benefit*. I/ The rtudy derived the not effect8 on the balance of p a y u ~ t rby calculating the c.1.f. coats of an equivalent awunt o t l a ~ r t a and then rubtractlna the lncreare in ioportr r e r u l t l n ~froo the higher income of the d a e r t i c factor8 of production. On t h i r brrlr, the net forel8n exchange brnef its aaounted t o U.S.31 mllllon. The packaging industry rervices not oaIy the cocoa procrrring lnduatry, but also the bean exportera. Wvever, the d r d .riming from the procrrrlng Industry va8 -11 relatlve to the total pulu#lng output, although it u y have helped the packaging plant increase i t 8 capacity utilirlrtion. )io r i a l l a r rrbdy exlrtr for the lndustry in Hlgerla or the Ivory Corrt. The d a carvice raqulred by the cocoa procrcmiag sector 18 r d tranrport. Llouever, a3 tha factorier are in the wtcinity of port faellicier i n all tkrtc West African countries, they have gerrtr.:tcd ?t:tle i o e t u s e In haulage. Foruard llnkagea exlrt i n a l l three Uert African countriem. Chocolate and other cocoa-bared 8ctlvltles vhlch utllixe locally produced products have k e n tstablirhcd, partlculrrly lo the Ivory Coart and Nigeria. Iha chacolata product factory rurveyed lo the Ivory a r t producer chocolate couvatturer, an intermediate product, for export mslnls t o France. Z r war set up with technologics1 and ~ r k a : i o g arrlstaace fraa the French 'k.Jot" cornpay that p r t l y o w it. l71e coat of prOductio"r a d valw added data are given la Table 4.8. This firm ha8 generated u t r e a t l y high value ad6e4, but its d c d for foreign input8 h a also k c n relatively high a d shauld k taken into ascount in measuring wt baocfitr. Uafort\nutely, th. data were not rvailrbla to do so. & Indurtries p t d u d q cocoa-baed brlrtra6t8 c o d d k d ~ e l o p c df? 811 three Wert Africaa countries. Ibty could w e the lower value cocoa czke (a joint product vith butter), at the suae time reduelag imports of thcse &veragu. Yhrtber tkcr9 would be net gain8 t o the countries uould, however, - &prd oo wveral d d i t i o w l factors. ruch u tbe otcd for imported mchinery a d gOVtmOC 80,3P0,2. rtra techaologieal characteristics of cocoa ~ ~ o e c s r i ndeterrrlne tk g extent uto which t h i r iadurtry can Iiffuoa ~ c w technique8 and s k i l l s t o other 8ec:orr of the economy. The iadurtrj appear8 to hare contributed directly to the acquirition of i d u t r i a l and u a r g e r i l l r*illr. He-*ever. althaugh the turnover of l a b r i n tS.rre grades bra k e n high, particularly In Cham, it has not benefited 1/ 9p. dt, Prarson, Covaie. a t al., p. 77. Dpratlr41 u r l l r u-A .tag. 1 V-A I n -put Sale..' export taaea Transport ca-K to port O p r a ~ l wu r a l a (c.e.b.1 V-A atagr I1 V-A l a l r o u a t p u t TL. opratlnl rrrala 10 t)r j l t f e r r r * h t m n t)r coat of prducttor a d thc valw of tb. p r o c . r d duricy t h w r l d 1dIcst.C before ea-. Source: a h o r ' s -me7 of procraalna plant. In tbo 1-rr b a t . ether sectors of the economy, a s many of the workers olffraeed to prospwour naighborlng countrlcs. tvrn ro, the Ghanaian industry h s reduced I t s dependence on foreign expertise more than the Ivory Coast has, where a substantial nurber of managers have k e n expatrlatea. In Hlgeria, thr cocoa proctsslng i d u s c r y has been relatively 1.~11,conslattng of 0aly one processing plant, although 8 numbor of other plants are in elther .the plrnalng or coartruction rta&es. Aa the processing industry has k e n neglielble i n size rclatike to the hie industrial sector, I t s concribur ion to overall ttchnologlcal a c c ~ u l a t i o nhas tended t o k llmfted. In the Ivory Coast, the govarnoent*s eaourageocnt of col laborat i o with fortlgn camprnies throughout ~ the entire industrial sector, and not jurc In c o c a process in^, )us led t o h u v y dependence on foreign collaborators for trchnolo~y. The demand f o r proccrsed c o c a products is derived fraa the C r r d for cocoa-bard products ruch as confectionery. C o n s ~ p t i o nof th final products occurs u i a l y in the developed couacries of the Vest, *rear the production of the primary tau a a t e r i a l nttded t o make the chocolate products is concentrated in a fev countrfes in the tropics. Six countries, Brazil, Cameroon, Ecusdor, WM, the Ivory Coasc and Xigeria, account f o r BOX of the ;rorldas production of beans. 'Ihe f n c a e elasticity of denand for grindin8s of cocoa is e s t f n r t d a t 62, while the price e l a s t i c i t y of d m & is 2X8 I-/ Thus, the suppliers have a relatively & r u tbrgaiaing pouer. However, other factors h o e tended t o reduce the bargaining pcrucr i the s u ~ p l i e r s i n the bean-producing countries v i t b respect t o processed productr. First, the uorld cocoa i d u s t r y appears t o tc oligopolirtic. A t l e a s t a D X of the total praluccion of cocoa- based products has been controlled by 12 * u j o r U Uestcrn conpaies. m e procesrors fln the bean-producing countriel have been reduced t o the position of residual suppliers, a situation that has discourqgd mew investment and ttn s t a t e : use of capacities. Horeooer, success i n the residual marlrtt has k e n difficulr because of 8 shortage of inforution. For inrtaace, although the k.lr~r0duCi- co\mtritS h o e btgtm t o St11 ? ~ O C ~ S S ~ product6 d i t t c t l y t o the Eut Europcan market, there has been c-oneiderable variation In the deraad frm year to year, a situation hat not e-uraged the bun-producing countries t o expad their capacity considerably. 3 The lack of conrlstency *=the dootstic c o c a policies of beao- producing countries (Chapter 111) further weakened their bargaining p s i t i o n . I n s p i t e of attempts to ex- doaestic processing, only 34%of the -1/ Iatematioaal Cocm Organization (ICCO), "Survey of the Current World Cocoa Economy v i t b Projections up t o 1985," FCAl2/2, London, SepLeuber 1978. beans have been processed In developln* c\runrrlcs. L/ For Instance, a r esplalncd above, in the Ivory Coast the conf llct of lnterert k t v e e n processors and bean exporter% has lad to s h o r t a ~ e rof beans for dooestic processors, shortages that have undemlned tho porlt lon nf the dootst lc procersors against their ccopatltors abroad. way to tncrease the cocoa prcduccrr' share of the world arrkct for procarred products wuld be through closer coopcratton in both bean production and dounstreao octlvltler, a s dlscwsed i n greater detail below. C. Social Cost-Benefit A?alysis The precedtng analysis presented the existing gatns froa processlag cocoa products. To determine vhether new undertakln~s arc eccnoa:eally ferslblc, future returns also need to be evaluated in terns of their present v a l w and then coopared with the i n i t i a l capital outlay. fht model used is a . cocoa proceasing plant in Chana with an annual capacity of 30,000 tons of bearu Prof i t a b i l i t y in the cocoa pr-srlng industty depends priaarl l y on achicvinS the technologicrlly deterr~irredoptfoum conversion ratio of 02: of tha rav beans, with cocoa butter and cake each assigned a wight of 31Z and liquor a velght o t 202. (A greater weight was given to butterlcake than l l q w r k r a u s e the price ratio in 1979-80 =as oore favorable to butter.) The model plant vould have to k flexible enough to permit varying the l i q u o r butter coapositioa of the product nix to reflect any future price change*, whereas its butter-cake ratio vould be less flexible. The folloulng procedure was followed in deriving the costs and benefits. Firrt. b t b cocoa beans and products were valued a t the 1979 border prices. 2/ ihc average f.0.b. price for k a n a was net of delivery and hsndling charges, givlug value of '9,584 cedis per coa. Zht product prices used uere cocoa butter--18,855 cedis, cocoa cake--8,575, and c-oa l i q w r - 12,063 per toa. Tbe butter price was the average price for prime English butter corrected for freight and insurance. ;he cake a d llquar prices yere the averages received by thc Cocoa Marketing Board i n C ~ I U during the jut 1978/79. The predicted values a r e given in constant prices, vfthf the exception of wages a d salaries. - I- Btrc r e v e l 1 factor. entered In. The vage w i d t o unskilled *or va8 considerably htghcr than the opportunity cost, a divergence r t tributable to irrpcrfettsons i n the labor market, such as ainimm wage legislation, which -11 Although that percentage may appear t o k significaet, it includes ." processing by coopanies in the bean-producing countries hIt,n a r e subsidiaries of the " u j o r s -21 Cocoa b a a and butter prices vere obthined froa G i l l and hrffua Croup, - Cocoa Statistic., Loudon, December 1919. raised tba floor price above the opportunity coat. b y labor In t o m s earned about 4-6 cedis par day- In the processin8 plant, unsklllrd labor w u paid more than twice the rate of day labor. Mnce, a ahadov rate equlvaleat t o t h t of tba dry labor ur8e was used 'n thia atudy. Skilled labor, on th. other h a d , vaa relatively scarce. Iknce. the factory waae rate war b l o w the opportunity cost of .killed lrbor. In the mlahborlng Ivory Coast, uhere there waa a b r a e rxpatrlate labor force, akilled labor uagea were a b ~ 16% r h f g h r than in Ghana, and thla d i l l e d labor urge rate ura used in th. cmputatioru. Similarly, t o reflect the opportunity cost, managerial ralarlea * a r e alw d j u s t d wing Ivorirn data. Since real urge# and u l a r l e a are expected to increase in the near futwe, the vagea a d arlariea were a d J u t d upward up to the f i f t h year a t ~ n rater of l 102 for urger and 5% for ~ ularlea. Thia waa in keeping with the countryoa experleace In recent year#. Apart I r a k a n r a d b a n products, t h other iaputa and supplier required for production vere liolted ta fuela, paclu~lng m t e r l a l a and aprrea. t t e r ~ t i o a a lpricea vere wed for a p r e a inclusive of d o m a t k h n d l l r q coata, while dowatlc pricea vere used fcr the other two items. Although fuel prfcea bcluded a SO1 duty. thia w u not c o r r u t t d for k c r u s e o i l p i c a r e r i a The pacluging k.terlala were locally runufrcturd, although imported u t e r i a l a uere used t o orb them. Tbia elemeat could not be q u a t i f f e d becauae of a paucity of data. Exmcted iaveatwnt coata, ecoacnlc omrat:= coata md k n e f i t a and the economic r a t e of return are premented i n Tablea 6.9, 4.10 and 4-11. A notewrthy feature of thr investment coat. i a the wbstantial a h r e (28%) needed to obtain t a c h n i u l aaaiatance and marketing kaorhow. (Marketing costa a r e a p l a i n e d i n Chapter Iff.) The l o u r a h r e f o r tbe infraatructure l a attributable t o the availability of road, r a i l a d port facilities a t both Tema a d Taluradi, the two aitea that would be suitable f o r tbe proposed cocoa proceesiq$ project i n G ~ M . Th. project l i f e uaa taken t o be 12 years. The n a i d w l v d u a ahom f o r year 13 represent the depreciated valu*of building# aad laad and rckeipta of d e f e r r d prymenta- It was a r a d that the prductr would k aold on a 3-y papent baala, .ad the a s h flow vu adj-wted accordingly. Tbe iovearrnt coat. f o r the bu1:dinga were not broken down t o derive the coweraion factors for tradable and nan-tradable elements a s the data uere not available. The return# for tbe f i r s t two years, rcflect lesa than f u l l plant utilizatioa. I d u a t r y wurcea thought that only 60% and 802 capacity utilization rate. could be obtaiaed during t* i n i t i a l tuo ytara. Ibwever, tbe diacouated o a h f l w iadicatea t b t the initial capital iavcatment could be recovered vithln 5.6 y u r a . Tbe internal rate of return amounts t o 23.32. *.a figurea aaauae an optimum km coaveraion ratio, where.. i n pzactice tbe convcraion ratio has k e n i n the region of 80%. A a e ~ ~ t i v i t y teat was v d e t o reflect tkc lower coaveraion r a t i o (Table 6.12). Thin -11 change leg t o a declfne fn the L t e r r u l rate of return to 16.42, .uhile the payback period roae to a b s t 7 years. Table 4.9t IhVESElMT COSTS OF A HODLL COCOA PROCBSSISC PUNT IN G W W I T H AN &SUM. THROt!!HPUT OF 30,000 TONS OF BEANS C+te,p,ory of invertment costa Imporfed machinery, equipment 11,692 32,706 Other related equip#nt and local items 2,366 6,505 Canrtruction, couirsiuning, freight , ins~rance local frelght , 1,666 5,131 B u i l d i ~ a 3,172 8,723 I Iafrastrucrure 554 1,523 Ill. Knorhow Marketing Technical amsirtaace TOTAL -a/ A t the prices a d coats prevailing i n October 1979. \ Source: Iadurtry ~ u r c e si n London a d CMM. '.* R Tabla 4.10r ECONOHlC OPERATING COSTS AND BENEFITS I N A HODEL PROCESSIW PLANT IN GHANA -- k n e f l t r Net male8 197,909 263,879 329,849 329,849 329,849 329,649 h r r recelvrbler (16,492) (21,990) (27,487) (27,687) - Plw deferred payment 0 16,492 21,990 27,487 27,487 o -- Renidual vrlw - 3,489 o o o SUBIOTAL 7 m l 7 7 5 x 3 6 r 3 2 4 , 3 5 1 ~ ~ ~ ~ Cortr ( 0 -Rev oaterlalr Tranrport L handling Prckrgln~ Direct labor Repair 6 rp.rer Utllltlta Grlaritr Insurance Harketlng L inrurrnce MI. expenrer Hlrcel laneour Increare In lnventory - - SUL. JTAL 198,561 263,357 297,540 297,701 297,876 273,917 Net benefltr (or costr) (17,144) 15,024 26,812 32,148 31,968 55,932 30,976 - - kt.: Haanr not applicablea hurca: Computed by the author. - Table 4.121 THC SCNSITLVITY O t THC TCONOUIC RATC 01 R&TURN TO QWICIS I'r mlE B W COYYUSIOW MTIO I N A MODEL PROCCSS'NCRAW IN CHAWA Wet knofltr (ir ret cortr)(lb,23l) (2J.661) 8,594 18,738 23,937 21,762 47,721 30,293 - Notel Hrrna not applicrblm. Source; C&mputed by the author. , b Th above aaalyrlr 18 b a r d largely on the u o a i c tart of rrturn r ~ i y a i r . me rocial corr of wveral l t e s r could be only roughly e r t l u t t d mince it uar not porrlblo to evalutte r m c o r t a and kwtlts a t a l l . l o t alonr tl.a w l t i p l i e r e t t e c t r . Even w, tho r e r u l t a bra conrlrtsat u i t h the t'iodiagr i n t h e prevloua c b p t e r : the c o c ~procerrlag industry h a m produced rubrtantlal grin8 l o r Chrrnr In t a m 8 of v r l u d d d , foreign oxchage oaraingr a d gwommnc revenw. and tbste 18 potentlrl f c r f u r t h e r expaarloo. On t h e h s l s of the foregoin& anaIys18, a nw3cr of policy r ~ c o l r ; t a b e ~ i o ~can bo m d e t o ~CK/CISC both the u i a b t l t t v of t b e cocoa r s proccrsinb industry in the bern-~ccr4uei~gcountrita r n l r l r o rhc v d w adl;ed, o r bet.eSit, of r h r t i d u s t r y t o t~'resecountrler. 'he reco;rwnastiona fa11 lnto tuo cbtegorler--3orertiI: and Intrraat&orul. 3y Sar the a r t 1nt.arcant dooeattc policy larue cowernr the rupply ol rru c o c ~beans t o ;he p:oceaalrU f a c t s t l e a , prrt l c u l r t \ y with r e ~ p e r , tt o prlew, quality and qrunttty. Ths total costr of proceaalng a r e b.ighly aenritiva t o the price of ray k a n r : d a e a t l e b a n prices a r e kept close t o tbe world export price, p r o c r ~ ~ o ri nr p t d u c f n 8 countrfes vill not be able t o . coopete uithout aubrldita with procesrorr in develawd eeuntrtes, a s the l a t t e ' can buy t h e i r beano at the 1ovc;r prlce. To the cuterat that t h r inbustry r> haa-ptoduclng countr?ea l a rtrtt-ouued, t h i s v l t ? r a t a f f e c t itr erprnuloa, but uhera there 1, .om prrt1cipa:im by private firma, t h y -111 be deterred irom investing in the erprnaioc of the tndustry. Iha price of beans t o d w s t i c faccorier is only partly re1r:ad t o thrir y~rliLy. Domestic factor:-& a r e often l o w e d t o buy low q ~ u l i t yan$ aubgr.de hems for vhich there is 'ttle exprt d r r u d a t prfces close tq . cham f o r Ugh quality beans. llorcover, the processing of subgrade beans preaencs a 8peciaL proklco--developing cauneriea lack t h e technology to uperade the procerud Caubarade) produeta; therefore, they a r e ablized t o rol: the abbgrade products t o tareign o r n u f r .rat8 a c very low prices, rarely covering coats. rbia s i t u a t i o n coulr. k improve: ¶ C technology c a r e availabl8. A e o r e important pt3blem is the treatment rrt donestir, p r o ~ a s o r sa s r e a l d u d purchasers t h a t can b y o d y those luuer quality beans which crnnar. be sold abroaa. This a f f e c t s their a b i l i t y t o coapcte wfth devalopcd country procrsaors i n t e r u of b;5 price and quali&yo The prcfertcxt the cocoa u r i . t i s g h r d s mire t o th. a p o r t market w e u that dooecrac proct*wrr often run sbor. of beans and a t ? forced ta o p e r a t e below capacity, whtcb i n ' t u n raises tt.e mi: corcr of their output. In a t r e cases, the b a n shortat& . ero reflect 'he catflicting intereatm af tba cocoa ~ r r k e c i n gtoardr and the d a r e t i c processors, even i f the latter se stat=-ou~ed. It u n also be the reault 04 inadeqrrate storage facilities Lo the b e a n - p r o i w i ~c o w t r i e r l * With r e a p c t t o . rec-r$tlam. t o improwe t)u bean supply f o r do~aat3.c processors, procerrorr abgald be allowed t o bypaar the u r P e t i n g boards and buy tbeir beam d i r e c t from the produeerr. To protee: 30th processors a d producers iror prico 8-uctri,tiom, t b a r p t e m %red ?a th Ivc,--t Corrt mldht be adopted. There procersorr pay the Gifferanct kr,~xent.a i n i t i a l bean purchase price and tb. f.0.b. b a a p r i c e prrvalliag a t tk ti- the product8 are rcld. In sdditlom, h a m rtorage f a c ? l i t i e r should be expanded. Hore generally, procesain(~ f a c t o r i e s rhould be operazed l n d a y t d e n t l y from the rarketing h r d r . Failuro t o r a f o r r tnt.orgaalratianrrl e t r v c t w e cf rhe induatry w i l l h i d e r itr dmel-rpwnt. Another important domestic issue is labor policy. Labor regulation8 i n Chana and Nigeria prevent tlrt factorier from laying off labor duting t i m e 6 of l o r c a p a c i t y u t i l i z a t i o n , thereby increabing the wage c o r t r pcr unit of output t o near the level in the U.K. A more f l e x i b l e labor policy vould significantly reduce these costs, though it vould r e r u l t i n a welfare l o r r for those made redundant. Another opt ion would be f o r the governmento t o ocfer subsid!ts to tbe factories for the emplayaent of the otherwire redundant labor. Even where the f a c t o r i r r a r e rtate-omtd, t h i s t r a n r f e r could be f u r t i f i e d by the need to reinvert rurplua revenue. Neither of there pol:cier would be necessary, however, i f other policy changer enrured high zapacity u t i l i z a t i o n throughout the year. A major irsue a t the i o t e m a t i o ~ llevel ir market sccerr, not so much i n termr of t a r i f f b a r t i e r r a s of competition v i t h the m u l t i n ~ t i o a a l companies which control the mrket. Under the CSP, t a r i f f a have k e n removed o r reduced on most procerred products and do not present a constraint to imports from deereloping countrier. They may becme a problem, however, when the bean-producing countries begin dovnrtrem production of c h o c o ~ a t c,s since the t a r i f f s for rhea a r e high i n aort developed countrier (or, i n the case of EC, since tho imports of cocoa butter f r m non-ACP r t a t e r exceed the t a r i f f quota). As noted, a t l e a s t 80% of the praduction of cocoa-based products is 1 controlled by 12 multinational conpanits. These countries m y be able to 4 engage in monopsonistic buying o r t r a n r f e r pricicg arr:ngement8 with t h e i r 1 subsidiaries o r arrociated companies. The a b i l i t y of the bean-producing 3 1 countries t o compete with them w i l l determine whether they can increase t h e i r share of the world trade i n processed products Qr whether they a r e t o reuain 1 reeiduel exporters. I f they can canpete successfully, the value of their 1 exports should rise, both through an increased proportion of processed exports :7 and through improved prices f o r their raw cocoa bean exports. I As only 6 countries account f o r 80% of the world exports of cocoa, beans, 6ne way t o counteract the' dominance of the multinationals is f o r rhe bean-producing countries t o strengthen the Cocoa Producer's Alliance. This 1 would permit them t o coordinate p l i c i e e t o encourage d w e s t i c dcvnstream J processing. The failure of recent attempts t o get the 'vary Coast t o join the 4 cocoa agreement (under UNCTAD)--and, in particular, the s p l i t between the .1 Ivory CoasS and o t h e r producrrs--suggests, however, the difficulty of 1 obtainir~gw h d e support f o r ef f e c t ive policy formulation v i t h i 6 the Alliance. I I Another possibility is f o r the International Cocoa Organization t o provide informetion and advice on the marketing of processed products. It is not possible to estimate the exact cost of t h i s proposal. Clearly, it uotild require the employment of a small group of professionals t o carry out market surveys. Producers may a l s o wish t o consider joint marketing of t h e i r , I processed cocoa t o strengthen t h e i r bargainiag power. The competitiveness of developing country processors would be enhanced by t h e i r buying beans a t preferential prices, i.e., prices lower than t:~ose paid by the developed country processors. Bowever, the scope f o r raising bean export prices i a limited by the uoe of aubatitutea i n the manufacture of chocolate products. According to recent e a t i u t e a , the me of cocoa butter aubatituter amounted to almost 200,000 ton# per year (in bean equivalent). Moreover, legialative facL-ta a r e likely t o influence the future uae of cocoa aubatitutea. Currant develop.rlnta, particu-'arly within the tC, a r e disturbing. The EC i a leaning toward the adoption of a more liberal rtandard with cegard t o the uoe of cocoa butter equivaleata, and it i a poasible that i n t e n a t f o n r l rtandarda for chocolate produtta, notably vithin tha "Codex Alinentariur," w l l l also evolve i n a a i r f l a r direction. ANNEX: STATISTICAL TABUS Page World Produ;:ion of h u Cocoa baar by Quantity and htceata~e~~~~~~................................9b World at Export8 of Rau Cocoa Beam lror Froducting burtrier by Quantity and hrceata~e.........................95 World Net Ioportr of Cocoa m a r by Quantity and h1ceata~e......................................96 ..........97 World Criadiagr of acoa Beam by Quantity and hr~entage............................ Erportr of Cocoa Paota by Quantity and Pcrcentage......................................98 Imports of Cocoa Parte by Quantity and Pctcentage......................................99 Erportr of Cocoa Butter by Quantity and Pcrceatage.....................................100 Imports cf Cocoa Butter by Quantity and Percentage.....................................101 Exportr of Cocoa ?ouder/C.ke by Q M n a f t ~andP ~ r ~ t ~ t a 8 ~ e e e e m e e e e e . . e e * e e e e * e . e e * e . . : e e . * . e e e 1 0 2 Icports of Cocoa PoudtrfC.ke by Quantity and Pcrcentage.....................................103 .. *z e- * 9, .(I~I~I --- - *UIWI~I rr '~IIII~I area 'ur)~ mv 8.1 M e w-I-* r . u - u ~ere r l u r r b t t r ~ t i .- ..# --. - - - - - ..-I I U'WI I UI I e-wt $19 O'WI 111 nor 'nu I..) 7 a e m s I* 1'4 n tar u u n r II II w a - ~ m 6'1 II -1- Y N Y .', *'I II - Il.1.lI I.. 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I 11 r l r l r r @*~u.r &.re 1'1 .I 5.1 I1 I I1 * a .*.r I.II 1.1 II *'I 4.1 1.1 11 t.0 ? 1'0 1 1.O I 1'0 YI II 6'0 11 V a l (I 0.1 *I 1.1 *I 1.1 II 0.1 e 1 ' 1 6 e.0 ? *Il.IIW .. -- 6.8 1.1 1-11 -1 t.8 1-1 r f ~ **.I 611 m.11 III t'tf -11 .*'I 0'lf *I1 I'U 011 b ' i i nl I'C 11 1.0 UI me II 6% *I 1.1 I 1 ('I II ?'I II ('I ?I 9.9 91 V'I 1 sFr) I I1 n'm 01 6.e 11 b.O *I I 11 V V 01 t.0 ? 1 I 1.0 I 1'0 I .I&** 11 QI *'m WI 9.9 13 011 9.1 M ST 11 I II 1.8 II @'I 11 9.0 1 nm 9% S'Y I **I $1 1.1 tI *'I I1 1.1 $1 6.U b * * I t ('0 1 0'1 . . l Fl-4 1'1 11 n'l (I 1'0 *I -'I (I l't bl 1 % b v.0 ? I'Y I I'V I ?'O I 61.- 1.1 81 I ru t.8 11 **I 11 1.1 11 1.1 *I 1.1 11 1.0 s 1.0 I .I-a '6 1'1 10 0.1 *I #'I *I I .I ('I .( 1.1 tI 1.1 Il 6.0 1 V'O I 9.1 I * I V W q V Q ' 3 (9 1'9 I* 1 I d * .I ('9 rr ..I m0 @*@ t* $.(I bOI 1 Y I $11 1.11 U 'I'D I*41 -I* 1 ' d l -'I *I *.I 91 1.1 .I 1.1 1.1 *I 1.1 11 1.1 u( ?'I UI I I C I I * l l ) = U 9.1 (I -'I -I 1.1 n 1.1 11 II 1.1 I. 1.1 II 1.1 %.I II 1.1 I (.I 11 * a*. 111 @Be 111 1.6 UI I-I III 1.9 111 9.1 111 m-e ;m 1.1 t* *.a w t-01 n ~FII-*~ 1.1 .( s-I w r 1.1 I'I I* I I* 1.1 a 1'8 11 1.1 a 9.1 I 41-11 1.ml 840 b'b 1.0 4% W I *'a I?) t a b III 1.11 $?I 9.11 111 ***I W I.( 11 ?'$I ? I '4.l .w 'lua 0.1 ** b.1 I* I Z 9'1 I 1.t t ? 1.9 I. 6.s 16 6.9 It 1.I lt 1.1 U -66 9.1 I1 1'1 11 0.1 *I 1.1 *I ('1 *I 1.1 .I 9.1 UI 1.1 b ('1 a .'I @ -I*lq . w P . 0 u I u - a U C I , . i i 1 0 m - n 0 > t i - 0 I M P 3 h 0 I I . w 2 22: . r( a r r m u o = 0 9 L L. c.. d > * l C a t a m u H e o - u Y C * H . 0 0 3 2 2 !i 3 : : 0. H Z U I. I : 2 h n e x T a b l l e : IHPORTS OP COCOA PMfE BY QCANTITY Ahi PERCEmACL: W.K. ~ u a t r l d ' Iblglua France Gorarny, Fed. R~pubUlc I r l r h R e p u b l l ~ I t d l y Setherlands Portuga) Suede& ~ v t t r r r t a n d ~ Bulgaria USSR Yugo w.s.- 6! avl. Argent in&/ Coloobla Japan Other* U.K. Austrl&/ BelgIm Prance &many, Fed. y p u b l l c I r i s h R e p u b l l ~ I t a l y Setherlands F'orcugt) Swede* ~ v i t r e r l a n . ' ~ / Bulgarla USSR . t Yug0g)avla U.S, Argent 1- a / C ~ l o a b i a = - TOTAL, WORLD 100.0 100.0 10o.n 100.0 100.0 s . m a / Includes cocoa cake. / - Includea unawee~enedchocolate. - !lore: I n d i c a t e s n i l o r l e s s t5.n h a l f a u n i t . A l l q r u n t t t l e s a r e flve-year averagar except f o r t h e y e a r s 1977/78, 1978179 and 1979/80. Percentager may a.~tadd up t o 1002 because of rounding. Source: International Cocoa Organlzrrtioo, r t e r l y B u l l e t i n of Cocoa S t a t l r t l c s , London, v a r i o w 1ss-s; and C l l nd h f f w Crw~p. Cocoa S t a t i s t i c s , London, varlous issues. .I- -- - -- -- -- ----- .m!b~tl P* umcrl 'mtircsl F r-I m n u -I 8.1 ~ . k a - w IM-YO WIIBI.C)1~ II -- Pam i i ' = b T m -- -- --- -- -- m n i 3 F3rm m m mwiT e l g l '*&ru 7 b.9 .. o*.n I'Y H 4 % Ill I.. I1 .'O ((1 *1*m . *. I.# u(l *'O M s t I*'I I'b QI'I I'I (I( .*-a I . 1.1 tlt'l I* I1 H1.r I *.v 8.1 .a'# I'l IW'l 1.1 1.1 9'18 $11'1 4.11 119.1 .Bsn w - *I * 1.0 m I 1 . W l I ~ I l ~ Is* -8 I-@ 111 9% *u IS* *I *'. $61 uW ('1 10'1 *'* I*. 6.b 111 6'1 119 t % -1- a-ta m t * n 1.e I l I ' W 6.- a n ' l c a-C) U.U 1'U Ub'b *'tl III'Z * F 1 a*. U*'l ('1 M.9 9-1 V a ' S *** 11e.1 1.1 .(I dt*lI I.. (N.*I *'I tmt.1 1'. tul b~ mn t.0 l b *ll@.l *I-* '-4 *.Iu4.s 1.1 141.1 ('1 W'l 8'1 W I ' I r'l rr *-II It - I'. 1.1 1.9 * 1.. " 6 -l*lw CI I IS m 1'. .tl I' (9 .lll~ C T i i m I-Tm F L T m m m - .- .-". rnlalmm 'WrnMs .--I -- - - - - -. - - - --- . -- -- -- - .C 9.1 .-a am.. I m'v m t 61 s t II ~ILIW 1'1 l * l ' t r-v IU'I - ('0 m e ttt.1 9 Ill I; t* -11 - I* 1'1 1\b'1 0". 1It.I m?. W1.1 0'. UI 1% U. v'. m 'I.* ($1 w). lllY - - 11 11 .a I-· n 11 I r r 9 m-tu ~ ~ rb t m t b a IV II 8% nu 8 % UI 1.e 119 4.1 IN 1'1 m 9 mlr - 8.u . .. -1s 1.0 *t 1% YI s-e I 1% 111 8-· u* b.1 W*I 1% a 01m- -m t ~ . H - e I-* .I( 1% IY I - r* n IY III 11 m I* *I *"."L I 111.1 b O *#*'I b Y Wl.1 *V *I# I*# IS1 IT C.1 1'. 6. I.. Y * D l 1 *W 8.0 a n 5'. *I* t LI 1.- MI IS UI \at (11 -.* 9.0 (.I - 9.1 e n ' - 1.1 w~8.v .'I u.1 1'1 -6.t .'I #.).I 1% Ul I* 41 S V Ul S Ow- 9.t .(I.* 8-1 a ~ r ' s *-r m . 8 $*I ~I'I 4% III II wc.m b.lI tI*'Il ..Yl 'IL.'bl 1.18 m.11 1 I * 9.61 U'II 0.91 tl~'.I Iu0*l #.u ( O h W'I~ &'If 119'm *'W 1bl.e t l M .II'I H.II amam - -a. 41'. an* su.* r'l m.9 mv m o b 1 % Ill w m u.1 e m.11 1.6 -'*I r r -I'II s r w% $1 $I*'( I UI 11 lrr~ UY o m 001.01 0.. 111.11 I~.*I 8.11 .LI.rd v a t ~ s s * b tI I .-t 1.0'8 6.1 ISI'I 8'1 t w g 1 m.1 lr 0.9 (w.6 4-r IW'I 9.a f i t g ( u4 . - - 8.1 *II'* *-I 'I~S'V s . ~ #ma.# t-. -- ~ . r u-I -am I L-z - . m 1 r -81 -1rn .~)a- ~ L O W 3-s-m 41- ~ / C : O I u i ~ t b ~ W t l t b l r8nr.c 111-1 l w t r r l n m b l ISIIUI 16-I 1-1 - - .- ,auuu rr LII- r m mum r uwm - I * ~ / b ( b lpur 61!91bl *91/1161 '9161 rrea.' y a aoj adm3.m rmlvrmrr remA-mrlj arm r a l a l r u m b lly /T - C'1 t-1 9.1 1'1 S'b 6'21 2'1 1 C'LC b't b a t I * ? 1'9 2'9 Y 'Z L*O u'sl 0.9 1 - --- U'C I b*UI U.6 C 'C C * ? - 1'OC - - S'U 9'U 1'U I'l I'U K'O 9'1 I't I * ? c -1 ? * I ('I c o t t-I 2" '0 @ ('0 S*? I * ? ?*S b*? O'U! 6'01 I ' T l 5 * I - tot I*z lot I't O'C I'C U'T C ' t l -- 9*b Soul 9.6 1'11 9.S 1 'S 6't b * ? l I'Sl Y'll V'UI 1'0 C ' 0 Y 'C t'Y U'D 1's v-1 5.T U'C c -0 - 1'1 U'I U'I 1'1 U'l 2.1 1'1 1'0 6.9 5.b 1.9 1'1 2-1 0'0 1 0'1 1 - S'II S* b l 1'11 9.SI S'1C T'CC l'tl U'Z b'l 1'1 Z ' t 2.1 1'9 1'1 6.1 L't 1'1 Y'I 1'1 U'C t" 1.M 6.9 --. - -. - 0/?'1Ml ~ ( 0 ~ b l 1 Uu('191 tblV191 6 9 t ' l l I e ? b ' t ~ I 9C9'99 SSS'lT G'm S [ t ' l l S11'11 i?Ti C ~ l ' l t 0~6'11 vLL'0l ZiT p)yTi rcl'r 911's (VQ'S YS;*V 911'01 n c ' o t 912'11 LOO* L IYI'I C t -- MfIl'?t St( 'uZ Il ~ * t l Cnr'l 1 9?SaII LLl'O vIs*~ WC'L CI0'I - - - lbb 9IU'I MS 1111'1 I91 611 I 1 LO tri'i , 1t9'9 ? ~ * I I 5 t t ' b ~ ~ 9 ' 1 OSS'L ttl't v l t ' z bu'I TTI'I 0 s ' I CIO ocI 111 WI'O cb9'1 ;ulae nr'c cou'u ZU'L ((9'9 TYC'? bIC'C UW'? lll'l OV?'l Ztv't b rererve the supplies of refined o i l f o r the domestic market? Prima facie, it appears that countties endowed v i t h crude coconut o i l resources may derive significant economic benefits from coconut oil. refining. However, there m y k other forms of processing that could yield much greater benefits. Furthermore, coconut o i l refining creates only limited employment and affords little stimulus to industrialization or regional development. The edditional export earnings which it generates are modeat; while refining doeo enhance the v a l w of the o i l moderately, it also reduces by 80% its volume. Horeover, the t o t a l proceeds from exports of acid o i l , the refining byproduct, a r e rather n a l l . Lart, government revenuer are not likely to be augmented. a r t ir rome evidelce, although adnilttedly l i t t l e firm rtrtlrrficsl data, that the productioa of olaochcsicalr further domrtream r e r u l t r i n significaac value added and enhanced u p o r t earnings, and probably act6 as a stimulus of roee rignificance t o local and ~ t i o m lindurtrialftation. Coconut o i l refinin8 ir not, houtver, an important intcrrrediata rtaga t o further downrtream processing of i n e d i b l ~products for export, rincs i n many instances crude racher than refined coconut o i l is t t a hric raw material. Horsover, although refined coconut o i l Ir raquired for the srnufacture of edlblc productr, there a r e a n y obrtacler to their export. Refined coconut o i l w u not exported by the primary p r o d u c i ~ couatrler u n t i l f a i r l y rscantlp. The u i a r a u o n uu technological--refined coconut o i l tandr t o deteriorate rap:dly, particularly i n tranrit. Therefore refincrier brve had ro be located c l o ~ to both the supply of crude o i l and the point of final consuptioa, 1.c.. near the procaooorr and ~ n u f a c t u r e r sl a developed countrler. fa rort devel~pingcouatrier them8elve0, there ha8 k e n little we of refined oil. Now, homver, with the improveotnta tn tramport of the l a a t tw d e a d e r , it ir porrible to export semi-refind o i l (1.e.. neutralittd, bleached but ~ d e o d o r i i e d )without d e t e r i ~ r a t i o n . As a reault, a few expor'ing countrier have &gun t o d e r t a k c reni-refintag. On the other b a d , the transport of f u l l y refined o i l from the primary producing cotmtries contrawr to present difficultleo, although recent improvements i n shippi- facilities, developed primarily to permit the export of f u l l y refined pala o i l from Malaysia, suggest that i n the n u t few years it w i l lbe poorible t o erport fully refined coconut o i l i n significant volume vithout either serfaue deterioratioa or higber transport costs. Primary 2roducing countries v f t h f a c i l i t i e o for f u l l r e f l ~ i n gw i l lthen be able t o export their o i l in t h i s form. Fbucver, u p o r t r of f u l l y refined o i l t o many countries w i l l be hampered by tbe higher t a r i f f s on processed than oc crude oil. Ihe evidence suggeotr that e s u l a t i n g t a r i f f a have k e n highly effective I in restricting Imports af r e f i n d oegetab'le o i l r by developed countries. The refined o i l exports of t h e Philippines h v e gone mainly t o the U.S. and Japan, cuo countries which do aot have discrimhatory t a r i f f s . Papua Hew Guinea has been able to ship i t 6 refined o i l t o the EC because of itr ACP r t a t u s , which ekempts it from all dutieo. In general, however, the severely escalating d)cies of the EC appear t o have prmented iorports of processed o i l r f r a most nzn-ACP primtry producing countrisa. . C Q For t h i s reason, the main policy recoameadatfoa of t h i s study 10 that a -major e f f o r t be made t o reduce, i f not abolirh, the escalating tariff protection for refined and further proceclsed %vegetable o i l 8 in certain devsloped countrier. Answing that i n the next few p a r a , refined coconut o i l w i l l be transportable without Geterioration and a t ao greater cost than crude o i l , acceas to a convenient oupplp of crude coconut o i l w i l l Sccome the main locational determinant of refining. The question w i l l then be ðer the 9 most econo~lclocations for refining are the primary producing countries o r the importing ones. Assuming, further, that eventualiy a l l copra w i l l k crushed i a the primary producing countriss and given an absence of market dirtortionr, notably discriminatory import t a r i f f s , .he acquisition costa of crude coconut o i l should be the same for tefinezs in both the exporting and importing countrier (excluding ttanaport cortr). With the raw material corta now equal, the costa of other input6 auch aa labor, energy and capital could become c r i t i c a l In determining the relative efficiency and thua the location of the refining induatry (hitherto they have not been significant frctorr). Although cauntrier u p o r t i a g semi-refined o i l do not appear to have had difficulty with the lack of a how market, f u l l refining f o r export i n the abwnce of a rearonable domeatlc market could present difficultbaa. It ia probably no coincddence that the largert exporter, the Rtflippinaa, hu a rubrtantial internal market for refined oil. I2 fully refined coconut o i l w r e t o be exported without having a dcoeatic market, the implicationr a t e mveral: u l e r a t average rather thrn marginal corta, no domartic outlet i n timer of weak export deuqd, undue dependence on the feu ovenear rarkata uhi:h do not have diacriminatory t a r i f f r , and porriblr rhipping difficultiea i n avitchiug t o alternative marketa abroad. In rhort, the lack of an adequate domutic market leavea exporten of fully refined o i l very vulnerable t o changer i n the international marlrat. The sort favorable condltioar for f u l l refining f o r export, then, a r e t o re11 moat of the output uader contract o r through joint venture arrangemeatr . It vas not p a r i b l e to d e r t a k e ro*.ial cort/baatfit arulper. to determine u b t h e t refiniryl rbould be encouraged rver other f o r m of proceaaiq or, indeed, over other kinda of econaic a c t i v ~ t y . However, uauoing that refining l a profitable a d that it rerulta i n a aibnificant i f not rubatanrial value added, it may be desirable in rme iortaa:ea for the govenmeni to - encourage refining f o r a p o r t (although feu aach mearurea 8 e a t o have k e n taken i n countries currently exporting refined coconut oil). An9 encouragement should be i n the form of limited iacensives that refining economically viable, rather than mearures that attempt to uustain uneconomic operations over a long period. The incentives could take the foru of diffe:ential export dutiea and/or broader tax concerriolu to the refining' indwtry. This study covered the seal-ref lnlng a d refining of crude coconut oil. The production ,f acid o i l , which is obtained from the sospstock tha: remains a f t e r the coconut o i l is ref ined, is also considered, inasmuch & it 1s a byproduct of refining with significant conmtrclal -4alue. The procesain$ chain r coconut o i l refining can be broken down Into t k three o r four stages (deacribed later). These represent only a small number of the many pr~ceasing posslbilitter for coconut o i l , rome of which extend into auni-manufacture o r manufacture. noreaver, an important featura of coconut o i l refining ir t h ~ rrhile only one important bypcoduzr, acid o i l , la t derlved from the roapatock t a r oppored t o the main product, refined coconut o i l ) , t h l s acid o i l ir a h a i c mtsrCal !tom which a wide range of valuable chemical C-rivativer can be aade. Follovfng a dercription of the rrlatlonships between ollsecdb and vegetable o i l r , and more e r p u c ~ r l l ybetween copra and cr:conuc o i l , some of the -re important coconut o i l proctoring porsibilitierr are outlined briefly In subsequent paragraphs. A. O i l n a d r and Vegetable O i l s Oil=edr a r e the oil- bearing f r u i t of various f i e l d c r t r e e cropr such a s mya beam, groundnutr, coconuts and linseed. Vegetable oila, a combin~ltlonof glycerol a d f a t t y acidr, are derived from t h e m , normally by proceraing tta oilreedr either throtlgh crushlag or the application of a mlvent that reletses tbe oil from the seed. Ihe extraction process yield8 crude vegetable o i l and a reriduu of oilcake -r meal vhlch ir general.ly used a s an ingredieat la a n i d foodatuffr. Oilreed e x t r a c t l ~ nis the f i r , t rtage i n the productioa of vegetabla o i l 8 and ir esrentilrl t o t1.e furtiler procersing of crude oil.. Since the end of World h a t X I , developing cour?trieo ~ ' ~ l cused to h export oilseeds for extraction i n the developed importing cimtrierj have increasingly kea processing t h e i r own oilried crops and exportlnq the o i l and oilcake, except for vbtevtr is retained t o meet d r ~ t s t i crequlreaents. In particular , developiey countrlee producix tropica \ oil seed^ ;groundmte, copra and palm kemelr) now export t h e i r oilseed products mainly i n the form of o i l and oilcake. turrently, the main cmpirasis is oo proceaeidg the nubtropical and temperate oilseeds grmrr i n increasing volum-zs in developirigj countries, e.g., the extraction of soya lndns i n Brazi1 and Argenq.iaa. - - 3 The value added by oilsetd extraction tends to be rather low-a figure of 10%has been mentioned as typical. L / However, where develop in^ countries do not crush a l l their oilseed exports, whether a s a matter of cottmercial policy or because they lack the processlnq capacity (as in Argentina), they aur: still foregoing even thiq low potential value added. B. Copra and Coconut O i l Crude coconut 011 is obtained by crushing the dried meat of the coconut, called copra. 2 1 The coconuts ara grtvn mainly in island and coastal areas within the l ~ t i t ~ d e22% s and 22's of the equator and require f a i r l y heavy and w a l l - d l ~ t u i t u t e drainfall. 'irre coconut traa is $highly useful and has been described ar the " R u t of Ufe" bacausa it providas wny co~trunitiun with food, fuel and rhelter. In addition, it provider incoma-ganeratiw comwrcial staplis such ae copra, colr (the fiber froa tha outrida of the nut), coconut she;: charcoal sad dericcated coconut. Of these, copra is csrily the wrt Important coewrcial itam, accouatind for about three-qunrtars of the v a l w of tb vorld izrcova froa coconuts. Tabla 1.1 rho- w r l d copra production in recent year3. Dcspite substantial annual variations in output oving to f l u c t u a t l o n ~ in the Philippines, which accounts f o r naarly half the world t o t a l , the vorld output since 1970 seean t o have been rising gradually. Rather pore than half the world's copra outpat enters fnternatiorml trade, elther as copra or a r coconuc o i l extracted from the copra in the primary producing countries. An important part of vorld output is, however, retained for donertic ccnsrrnption i n the coconut-producing countrier, where it is procursed either by comaercial mills or in domertic establishments. 'Ihe Philippines, the largest exporter, accounting i n recent yearn for some two- thirds of the caoS?.ned world u p o r t r of copra and coconut o i l , exports the greater part of its production, as do many small island countries. By contrast, Tadoncela, the second largest producer, retains m e t of its output ro meet domentic requirements, while India consumes a l l of its copra dopeetically. L t Table 1.2 d h o k that world exports of coconut o i l hawe tended to r i s e Jn recent years, while those of copra have declined, notwithstanding the moderate upward trend i n vorld copra output. By 1980, 81%of the total -2/ Coconut o i l can also be obtainad directly from the fresh meat of the coconut through v a r i o u "vet procere" methods, but a r )rtt these .uwe not proven economic. Idom8la Ilrlbatt a J Tuvalu Halayria ~ l c o )loramblqw h p u a Mu Culnea Phllippi~a Sephrl1rm Solaon Irlanda St1 trnlu Tanzania 'Ihriland Tonga Trinidad and Tobgo Vuntu tu U a r , r n Slum U.;. meif ie Island. YIMIN.:. Other TOTAL, mLD 3,837 4,528 5 6 4,563 4,192 4,3M b,S52 -a/ k v i u d mrier. - Note: fbc output uu estimtcd ukre official production data -re noc available. Ihe 1980 figurn an! largely prwiriorul. Sourerr: Fa, Wnchly Bullecla of Statirtlcr, &re, rsrlour irruer: and FAO, Production Yearbook, R a w ,variour lrrwr. [ i or ' ~ ~ b 1.2:e i LXKHYS COPU (IN OIL t q u ~ v u m )run, acorn OIL moll TIE wrr p n w r rrorn~c~wc cou~nrrs i (thousand tons of o l l e q - ~ t r a l e n tor o i l ) F l j l lndonnt '.a h p w H.u Culnea Soloron Islands S r l L a n k U.S. P u l f i c Island. 4 subtotal &/ 642 674 688 W2 399 261 254 485 793 1,039 870 1,133 982 1,095 S + O 1,127 1,467- 1 , 4 5 2 1,532 1,243 1,349 TOTAL, WORLD S 662 6 9 c 734 604 631 263 282 - 0 599 1.043- 1,373 1,096 1,329 1,141 1,211 S + O 1,261 , 7 4 1 2,107 1.700 1,760 1,424 1,493 - - p a / S ( ~ e d ) copra; 0 coconut o i l . * x/ --d/ h n i n r u l a r h l a y m i a only, p r i o r t o 1976. c / Data l a c l d r t d i n those f o r Xalaysia. Including r e a p o r t s and a p o r t . of o l l by cotmtrlta importing copra a d c o n v e r t l q it into coconut of 1. - Hote: - n.a. Heana aot available. H u n r n i l . In general, the ccuatclea lirted a p o r t an annual average of R , O Wt o w of copra (aa auch) and/or 4,000 tw of coconut oil. The 1980 data a r e prwiaional. Source: FAO, Trade Yearbook, W e , various isauea. exports from primary producers were coconut o i l a d only 192 were copra, uhereas i n 1969-71 these proportions had averaged 43% for coconut o i l and 57% for copra. The reason for the s h i f t is that nearly a l l the producing countries b v e been following a long-term policy of exporting coconut o i l rather than copra t o increase the value added and create eaploymant. Thls teadency may be accentuated i n the n u t few years, a s some Pacific islands currently urportiag copra may decide t o establish copra m i l l s and export coconut oil. 11 Ncvertheltss, certain countries are likely to continue to export copra f;;r trade reasons (or because of domestic economic policy). Table 1.3 shows that thc f ~ l iln world copra exports led in turn to a n a r k 4 decline i n coconut o i l expor:r by the major importing and/or copra- processing countries batmen 1976 and 1979. Ihe f a l l was particularly marked in the case of the Federal Republic of Ckroony (West Gemany). Table 1.4 i l l u s t r a t e s that the treads in world imports of copra and coconut 011 in the period 1975-80 broadly followed those of exports; there was a 33t drop i n imports between the y a k of 1976 and 1980. The share of copra i n total imports ( i n u i l equivalent) dropped frou 36% in 1976 t o only 21% i n 1980. The s t a t i s t i c s also show that while U.S. import demand increased in 1978 and 19'89, it f e l l i n 1980 becauae of the high world prices; however, Japanese demand remalned relatively etrong. By contrast, European imports f a l l off with the decline i n copra availability, and there was some switching to rubstitutc oile. c* - Procrrring Poesibilitier The f i r s t rtage in coconut o i i processing is, as noted, the extraction of coconut o i l fro8 copra. bconut o i l extraction from copra (aost typically in "expeller" mills) addr value to the primary raw material and creates a modest degree of employment, while the local demand f o r coconut 021 a d copra. cake can k met by dcmtcltic production rather tban imports, t'nereby saving foreign exchange. bs indicated earlier, some important coconut- p r o d u d ~ gcoumtries began to c m h copra early in this century. Hovever, i n many coconut-producing cotmtrier, intensive developaent of copra-crushing induetrier only took place i n the 19600 and 1970s. m e r e was a marked rise i n o i l sales by the Philippinen, tha lcredlng exporter. In the l a t e 1970s, the proportion of itr copra and coconut o i l exports shipped as o i l roee from 65% i n 1977 t o 80%in 1978, 90% in 1979 and 92% i n 1980. Other countries also tended to export more of their out2ut as coconut o i l , and by 1978 the main primary producing countrien l i r t e d i n Table 1.2 were shippiag 74% t h e i r w e r a l l u p o r t s M o i l , vhile the figure f o r 1979 vaa 79% and f o r 1980, 81%. With rerpect t o thoracountrier rtill rhipping copra, som were i n thegprocess of erecting o i l ail/. (Weetern Samoa) o r were still undecided *@her to establish miUs (So1-n islandr). S t i l l ~ t h e r seither judged it prudent t o reserve pert of their oilneed supply for their m j o r customers t o import for -1/ A crushing plant i n Weatern Samoa with an annual capacZty of 33,000 tons of copra was t o becoae operational i n i981. Table 1.3: EXPORTS {OFCOCONW OIL BY THE W O R I)(WRLlNC AWD/a COPRA PROCP.SSINC CWNTRICS (thousand tons) Country Singapore '16 26 33 39 37 42 35 U.S. S 8 26 17 9 5 19 - - - - - - - TOTAL -8 9 - 225 - - - - - 313 202 155 99 92 Tctal a s a 2 a vorld coconut .f 011 axport& 16.4 21.6 22.8 18.4 11.7 8.7 7.6 -a . / F r a a11 exportin8 countries, lncludfm p r i u r y producers, processors of imported copra and r c e x p o r t ers - Note: - Heans nil. In general, countries vere listed i n the table only If t h e i r annual average coconut o i l exports -re 4m0(M tons o r mom. Source: FAO, Trade Yearbook, Root, various fssues. Table 1.4: MPOIETS OF COPRA (IH OIL EQUIVALENT)AND COCONUT OIL BY THE MIN THPORTINC RFSIONS (thousand ton8 of o i l equivalent or o i l ) Average Country 1961-71 1975 1976 1977 1978 1979 1980 Europe S% 364 522 615 429 340 1911 149 - - - -1 0 188 303 448 351 409 398 422 S + O - - 552 825 1,063 ?OC) 749 596 59 North and b n t r a l - - - - - - America S 143 0 280 450 636 512 527 530 446 S + Q - - - - - - - 423 450 636 512 527 530 446 - - - - - Of ~ h i c hU.S. S 141 - 0 253 409 573 471 4RO 501 401 s + o - - - - - - -401 394 409 573 471 480 501 -- Aria s 118 102 148 - 326 163 96 118 D 63 123 137 128 223 180 142 S + O - - - - - - - 181 225 285 254 386 276 260 O f which Japan S 76 58 71 63 58 36 41 0 1 21 31 2R 23 48 35 S + O - -7 77 Q - - - - - 102 91 87 84 76 Other countrter S 30 41 15 23 12 16 17 0 57 81 172 92 106 104 132 S + O - - - - - - - 87 122 187 115 118 120 149 TOTAL, WORLD IWOETS S 654 666 778 578 515 3:3 304 0 587 957 1,394 1,083 1,265 1,212 1,142 - ------ S + O 1,241 1,623 2,172 ,661 1,780 1,522 1,446 " e -a1 S (reed) = copra. - 0 COCOnUt o i l . - - - Note: - Means nil. '3 Source: FAO, Trade Yearbook, Rome, variow irmaer. extraction o r e l s e found that coconut grovers got better prices from exporting copra than they did froa s e l l i n g it t o indigenow crusherr (the Philippinee and Papua Nev Guinea). With the bulk of the w r l d extraction o eruda coconut o i l f r c a copra now located in developing cotmtries, it w u l d aptear l o g i c a l that they proceed t o the next stage of procerring, the wai- refining o r refining of crude coconut o i l . The technolwy f o r coconut o i l refining 18 r e l a t i v a l y ~ i a p l eand accessible t o developing countrier and ir in fact k i n g undertaken i n the two oilfa countrier rtudied ham, S r i h n k a .~d Philippinem, and t o r m extent tha i n other developing countrier t h a t export coconut oil. In the courra of t h i r invertigation i n t o coconut o i l refining, it became evident that i n rome developing countrier f u r t h e r d o m t r e a a procarring is technically porribla v i t h rarpsct t o both adibla and inedibla m a r . Similarly, many more chain8 could have h e n invartigatad that culainata i n the rraeufactura of i n t e m e d i a t a o r f i n a l productr. For example, a r regardr food productr, tha rtudy might h v a looked b y o d refining a t the ~ n u f a c t u r aof coconut o i l - b r a d products ruch a8 margarine, coapouhd cooking f a t o r coconut o i l vegetable g b e . Ins8 likely, but rtill p r r i b l c , i e the production of confectionery, bakery o r ryathetic dairy productr b r e d on o r inco:porating refined o r hydrogenated coconut oil. With rerpect t o inedible mes, the ?rocersing p o r r i b i l i t i e r f o r coconut o i l a r e a h r t l i r l t l e r r . Ihrough f a t r p l i t t i n g , alcoholymir a d molecular rearrangement ( e r t e r i f i c a t i o n ) , it ir posrible t o obtain glycerol, coconut f a t t y acidr, f a t t y alcohols and f a t t y esters. Ihere intermediate p r d u c t s a r e the s t a r t i n g materials for the production of a very wide range of valuable chenical derivativer, which can be obtained by fractionation, hydrogenation o r d i r t i l l a t i o n . Another usefrll derivative ir acthyl e r t e r o of coconut o i l , which can bc obtained by reacting coconut 011 with methanol. Methyl e r t e r r , which a r e s t a b l e a d easy t o make, tranryort a d f t a c t i o r u t a , can be ured by wrt coconut chemical producers as well am by tha manufacturarm of chemicals obtained froa f a t t y alcohols. I n all, over 800 cbemical products can be obtained f r o a coconut o i l , although aany are intermediate ones. while sone f i n a l products embodying coconut o i l may a l s o contain derlwativer f r c a a number of other vegetable o i l s o r even upathetic productr. In fact, many of the coconut o i l chemical d e d v a t i v e r a r a pr,oducad by chemical f i r o r , often with uecret formulae, from a number of purchared products. Moreover, coconut cbemical aarket pricer a r e , on the average, 1.6 timer higher than ttdse of coconut o i l . -1/ Thus downstream procersing add. rignificant value. - -. Rouever, with sac productr it d u o pr&tents d i f f i c u l t i e r . Going dovnatream l n t o oleochemicals prerentu technologic$ problems, although they a f e not insupcreble. More intractable are the ptoblcru of marketing, rince v t r y close contact with the uuer industrieu i t e r r e n t i a l . I n addition, -1/ Asian and Pacific Coconut Community, 'Ihe Cocomuaitq, October 31, 1980, Jakartc, p. 8. i n many instances, conoiderable technical oervice f a c i l i t i e s (uhich would probably be very upenaive) a r e requlrtd i n the conswing countrieo. 11 Furthermore, coconut o i l refining cannot really 3e considered an i m p o r t a ~ t intermediate stage to further dovnstreaa proccooing o r nuf facture, oince fully refined o i l is not required for the production oC =st oleochtpicals, although semi-reflned grade. a r e deoiroble f o r some prducto. 21 - An regards further proctssiag for edible uses, cog., the manufacture of vegetable 0 1 ghee or margarine for export, it oecos that the main difficultieo relate to marketing, tranoport, packaging, the coapetitive disadvantage of a high-priced coconut oil-baed product compared with similar products formrlated f r a cheaper o i l s , and t a r i f f and non-tariff barriero, rather than to trchnologicrl o r cost factors. Examples of there difficultleo are promotion, aotablirhing a b r a d i u w , quality control, distribution, attractive packaging that also preserves the product i n tranoit, and the Qevelopocnt of satiofactory paacu of transport. Sora of these are such serious obotacltr tht they could % doutveigh any competitive advantages the l developing countries enjoyed. Nurerow factor8 uorked against a thorough study of these other procesoiag possibilities. Among t h e m were the d i f f i c u l t y of data collection, the many complex downstream proceasing possibilities (notably for oltocheoicals , Prny of which are ured a s intermediate products), comercia1 a r t technical aecrecy, and the likelihood of marketing problems related t o such factors a8 quality control and a p o r t packaging. An such, only coconut o i l refining wms investigated i n detail. D o Country Coverage Tvo developing c o m t r i u were chosen for intensive atudy a d fieldwork. The f i r s t , S r i Xaaka, is 8 u j o r Caronwealth producer of copra and coconut o i l and was, u n t i l m e years ago vhen coconut supply :onstrainta reduced processing f o r export, an faportant coconut oil exporter. Because there a r e proceosing f a c i l i t i e s i n Sri Lanka, there is some scope for processlrg for export I f the coconut output were t o recover. The second, the Philippines, wmo mlected because it is the world's largest producer and exporter of coconut products; its coconut output, despite wide annual vatiationa, masted upward i n the 1970s a d is Atpectcd t o grow appreciably i n the l a t t e r pare of the 19801. ?urtherron, it has a substantial copra n i l l i a g i d u s t r y a d an increasing coconut o i l refining capacity. Although the latter -1/ . Joint venturer with mtltilutional companies could wercoae some of these Z problcnr . a I -2/ This material was drawn a t e n a i v e l y from 80 Verity Smith, "Non-Edible Dtrivativeo of Coconut oil," a paper prerented t o the Harktt h i a a r on Coconut Products, RAS/74/030, Quezon City, the Philippines, Hay 1975. The . paper giveu a very uoeful outline of the many poomible non-edible use8 of coconut o i l has been geared maiqly to domestic demand, the volunrc of exports of semi- refined and refined products did increaqe i n 1977-79. Brief note i e also made of Papw Ueu Guinea, which has 'ken exporting semi-refined o i l t o the U.K. and Australia. A s regard8 the importing comuaing countrter, attention her bccn focused, for reseom of convenfence, upon much coot data a r could be obtained on the U.K. b the U.S., Japan and A u t r a l i a are important buyerr of Philippine semi-refined or refiaed coconut o i l , I/ the r i t u c i o n in these countrter uas invertigated to the a t e n t porrible, although fieldvork uus not undertaken. There appear to have been prior coaprchenrive rtudicr on the procesring of coconut o i l for export in developing producing corlntricr. Thir r i t w t i o n var alluded to i n the now rather dated rtudy, brket Development o: Coconut Productu, publirhed by the UNCTADICATT International b a d e Centre ( I n ) i n October 1973 and i n krket Seminar on Coconut P t ~ d ~ c tthe, ~ proceeding8 of that seminar, uhich war held i n the Philippintr In l4.g 1975. These two rtudier noted the d i f f i c u l t i c r i n marketing the procerted product in developed couatriea and t a c i t l y accepted that, because ~ h c s t a b i l i t y of crude o i l in storage was superior t o that of refined o i l and because a -11 increare i n the free f a t t y a c i i content could occur i n rtorage and traneit, refinitg would normally taka place in the conouning market. (They also noted that refiniag yieldr about CZ f a t t y acidr i n the form of roaprtock and that t h i r h a been 8 major rourck of raw material f c r the f a t t y acid industry.) There was no discusuioa o r analyuir of whether refining for export should be undertaken. Uith reepect to the production of f a t t y acidr, f a t t y alcohols n d glycerine for export, the prorpcctr were judged to be virtually cil i n the eight marketa rumeyed. One important ruggartion war made i n term of adding value to coconut o i l exportr: that crude o i l might be procerred into methyl eaterr for export to manufacturers of f a t t y alcohol, acids a d other chemicalr for conversion into a vide range of chemical d e r i v a t i v u of cocontvt. -21 However, t h i s posribility could not be invertigated i n the prerent rtudy. . A recently plblirhed rtudy (1979) on Philippine semi-refined oil. Produce Report: &mi-~efined~oconutO i l , by L. B. -1gaaci0, Jr., executive recretary of the United Coconut k r o c l a t i o n of the Philippiner (UCAP) , tied the prospects f o r increasing the aaler of proccrsed coconut o i l to the U.S. t o the pre~irna paid f o r real- refined oil. Ko other vork i n t h i r area of procesricg is known by t h i s author. 11 Their trade statirticr do not dirtingcirh between nre~f-refined" and "refinedn o i l . I n t h i r rtudy, nrefinedn normally includes both "semi- refined" and "'ref inedn oil. -21 The advantage of methyl eaters t o end urerr ir that they can be fractionated quite u r i l y f o r the production of f a t t y alcoholr (and other intermediate products) and a r e rtable and eary to make. * . I?. Limitatiom of t h e Study Uith respect to the present study, there vere reveral shortcosings. The -in ones were: (1) the inadequacy of tamdata collected in the fieldvork and (2) the lack of certainty regarding u#t key technological i r r u s r and trading practicer. k a rerult, it MI imporrible to present a number of the more important finding. vith much cotfidence. To a b r g e extent, firmr in both the dtveloped a d daveloping countrier proved generally unwilling t o provide cost data, a d mince much of the i n t o r u t i o n had to be derived froa secondary source*, the intfir-country c o r t comp.riroa8 in Chrpter 111 a r e quite unreliable. Thir i n turu rude the arrerraent of v a l w added and p r o f i t a b i l i t y uncertain. It uar not unexpected that the European vegetable oil interertr would continua t h e i r traditional reticence on cort data, but it war dinappointing t h a t the rafinerr i n the Phflippine8, rho appear t o have had considerable ruccerr i n e x p o r t i u refined o i l , vera a100 unwilling t o provide data o r otherwise cart much light on t h e i r operationr. In f a i m e r s to the Philippiner, vhan the fiel-rk -8 undertaken (1980). the coconut o i l m i l l s there ware undergoins mubrtantial c h a g a r follovlng the eatablirhment of JMcOX (United Coconut O i l Millo), and therefore it i8 not rurpriring that they vere unuilling t o provide confidential information. me rtate-owned Ceylon O i l s and Fats Corporation of S r i l a n k , by contrart, did u k e available a g o d deal of data. Bowever, the scale of it8 operations has been relatively small, it. plant ir old, and it has not been exporting ref ined oil. 'Ihuo it could not be used or a mrrogate f o r a f i r o exporting from the Philippines. 11. BACI(CR0WD INFORMATION .4. Ihe Proceeeing Chains Two main forms of crude coconut o i l extraction are in use: the application of pressure in screw presses (usually called "expellers"), and solvent extraction. An expeller crwhes the copra by means of a screw or worm inside a barrel ( i t s operation can be likened to a domestic meat-mincing machine). As the copra residue or oilcake that remain8 contains a rather high proportion of o i l , at larger ecale operations the oilcake ray eometimes be crubjected to solvent extraction in order to obtain the amximum o i l yield, although this approach may be governed by price conriderationo. With solvent extraction, the oil-baring material is soaked in a suitable solvent, usually hexane, which diesolver practically a l l the o i l in tha seed. The miscella (mirture of eolvent and o i l ) is then distilled, vlth the solvent being condensed for further use, while the o i l is collectad separately, as is the oilcake meal. In developing cormtrier, oxpeller pressing is still the most widespread, and it is thought that thir is also the case in Europe. The refinin3 of crude coconut o i l generally involves three (and often four) dietinct processer: L/ (1) Neutralization remover the free fatty acids (f.f.a.) and guoe f r m the crude o i l through the application of caustic soda. T11ir procers yieldo a byproduct, soapstock, o raw material used 111 the mnufacture of soap or acid oils, equivalent to about 4-7% of the original crude o i l , depending on the f.f.a. content a of the crude coconut oil. -1/ In addition to the conventional alkali form of refining, in recent yeare there has been increasing interest in a cwparatively new process called "phyeical" refinicy. Here the neutralization and deodorization tcfke place by steam dlistillation under a high vacuum. The proceee requiree a pretreatment of thorough degrrraing and prebleaching. Phyeical refining involvea lower refining losees and producee dietilled fatty acide directly rather than through the processing of soapstock. -,On the other hand, the o i l is probably more liable to deterioration. While the physical refining procees is not dealt with i n thir study, it is int&esting to note that i n 1978 a major Philippine processor installed a contfhuous phyeical refining p h n t with an annual output of 90,000 tons of refihM oil. . - -2/ The amount of soapetock produced in neutralization is about 1.4 t j m e s the f .f .a, of the crude coconut o i l being treated, The f-f .a. in a crude vegetable o i l are a measure of rancidity; the higher their percentage i n an a i l , the greater the likelihood of deterioration and the higher the cost of ref:lning. ((2) Bleachin& l a uadertaken vich absorbent agenta ouch a s Pullrr'a Earth and activated carbon. It removes color and any other unwanted constltu+nts. (3) Deodorizing ir the reaovai of odorr or off- flavors by blowing live ateam through the heated o i l . ." O i l s which have only k e n neutralized and bleached a r e n o ~ l l yknovn u "semi-refined oila e fourth proceaa vhich refined o i l frequently undergoes ta "polirhing." It conairts of paaaiag the deodorized o i l through a polishing or f i l t e r i n g press which rewvea any remaining particles and producer a clear, bright 011n Sampatock, the byproduct of the neutralization stage, l a an important raw material from uhich lauric acid o i l , the baalr of many chemicals, is produced. .'he ampstock, o r ratber the u i d o i l , is of coemerclal value--in tbe UnK. i f a w ~ t at o 811 e a t l u t e d 2-2.5% of the combined value of refined o i l and acid oil. The technologiea for refiniag range f r a e simple batch process techniquce vith low dally throughput to camplex continuour processes. Economier of rcale a r e obtalned a s the rite of the plant i n c r e u e r , notably as regards tha c a p i t a l coat par ton of annual output, aalaziea a d wages. 1/ There costa u e , bouaver, relativaly unimportant i n relation to overall cost;, vhich a t e doaiaated by tht of crude coconut oil. I n the broad Framevork of costs, vegetable o i l refining 1s u s e n t i a l l y material- intenrive; very l i t t l e labor is required. It is difficult to c a p r e the refining operationr in developed and developing c o u n t r i u becauae of t h e i r different scaler of operstion and becatme, i n 80.8 p h n t r , refiniag i a followed by 8hipment to an end user or f o r export, while i n othera it is part of more complex integrated oranufacturing proceases. In developed countrier, coconut o i l refining i e smeuhat lesr likely to be part of an integrated manufacturing chain than ia the refining of other o i l a , since nuch coconut o i l wage in for the manufacture of apacialized fooda at plant6 phya&cally ctparate from the '2hc data for the U.K. refining operation8 presented i n Table 3.2 indicate considerable reduction8 i n Coat8 u plant a i r e increases. With respect t o the much nailer-acale opcdrtiom undertaken i n developinn - territorie8, m e C. 1 , An-Ec*onomic Study of IIuric Oilseed Proce8r~n&, Tropical Products fastitute, London, Aqmt 1973. Proe Tables 15-17 of Appendix B of thar study, it can be calculated that the capital cost (excluding u o r k i q ccpital) per ton of inrtalled refining capacity per year (300 working day81 f e l l from b23.07 per ton for a plant with an annual capacity of 750 t o m t o b15.70 for a plant v i t h a capacity of 3,000 tom. refineries. The coconut o i l used in the manufacture af margarine or compound cooking f a t s is likely to involve an integrated manufacturing process but is less common l a developed countries because of cost and alleged health reasons. By contrast, in copra-producing countries, localty produced coconut o i l is likely to be the main ingredieat of most edible p r d u c t s on account of its ready availabillty and therefore relatively low cost. With respect to input-output cotfficientr, the loss of 1 in refining is a function of the f.f.a. content of the crude o i l treated, a factor that in turn relates to the quality of the copra used to produce the crude oil. The refining loss can range from about &.SX for 1%f.f.a. o i l (good quality) t o a s much as 13% for 7% f.f.a. 011. 1/ Tbe Sri tankan o i i , which has an f .f .a. of only 12, vould have a r e f i n G g loss of about 4.5%. More typical (as in the U.K. refining operations) vould bc a losr of about 8.Sf, e.g., for Philippine ell, vhich has an f.f.a. of bX. Ihe requirements for caustic soda and bleaching agents i n refining are qulte m a l l ; 2/ those for water (including steam) are also relatively mdest, except in rtaorilring. A/ Fuel costs are relatively insigniffcant st vith the steam cost includi- an additional element f o r fuel costs (nee -8 the data for the U.K. in Table 3.2). There are variow technologies f o r coconut o i l refining, and the same refining equipment can nomally be used to refine various oils. In practice, however, a plant refining coconut o i l is likely to k used a s f a r a s possible only for t h i s purpose, since switching to another o i l poses problems of contamination requiring shutdown a d plant cleanlno,. Broadly, the technologies are similar for -11 refineries such a s those found i n the rural areas of developing countries a s for the large re2ineriee in both developed and dew-loping countries, although more sophisticaLed technologies are available i?r larger plant8 vhich a r e not similarly appropriate for small plants. The main difference i n the working of small and large o i l refineries probably l i e s i n th* distinction between batch refining and continuous -11 Refinery losses refer to overall lorees through neutralizing, bleaching and deot1;orizing; tho maic loss 'occurs in neutralizing and is equal to * about 1.4 t h e e the f .f.a. content, o r 5.5X f o r a 4% f .f.a. - - -21 In the U.K., a representative figure for the consumption of caustic soda vould be 5.68 kg per too of unrefined coconut o i l with an f.f.a. of 42, ,* p l w 0.152 of the welght of the o i l beicg r rutralized, i.e., 1.42 kg, A * - giving a t o t a l usage of 7.1 kg, o r only 0.71% by weight of *e o i l used. b.. In general, the coneumption cf bleaching agents is equal t o j X by weight of the o i l being bleached. . -31 In a typical refining operation i n the U.K. two-thirds of the t o t a l a t e m and water costs a r e incurred i n deodorizing. r e i i n i ~ g . Ueually con:ituous refining vould not t a b place in plantr o. under, say, 5,000 to 10,000 tons u p a c l ty per annrra, whereas a l l modern Largr plsnts are likely to operate continuourl?. A tchc margin, i.e., in plant! v i t h an a n n ~ capscity of julrt under LO,MO tons, part of the refining may l 5( conrin~ous,e.g., n t u t r a l i z ~ t j o n ,and part m y be batch, e-g., deodorizationc The capacity of cocoauL o i l refinerlea varier from, my, 2 tonr doily to up tc 200 tons or more. Thw, the annual capacity of plentr may rings from 600 tonr t o 60,000 toor or w r e . C. Ihe World Olrtr!Sutioe of Production While rearomhly rollable data -re available on the world production of copra (Table l.l), m y counttier have not been reporting their coconut o i t production. mile copra is produced In only a r t l ~ t l v e l yomall number of tropical countrien, crude coconut o i l is extracted in both the copra-producing and i n a number of copra-importlag cormtrier, notably in Wsrtern Europe, a pattern that porer further c a p l i c a t i o n r i n analyziog production. noteover, the number of copra-lrportfng countries that report on their production of crude coconut o i l 10 a180 limited, a r Lndicrted by Table 2.1, uhfch contalne data tor the majority of there countries. Of the world production of copra i n 1978, I same 4.4 a i l l i o a t o w , roughly 3.7 mtllion wre retalned i n the prodwing co;mLrier f o r d i n g o i l o r for procersiag into irdurtraal grade o i l (for both domestic use and for export); only role 0.7 million tonr vent to the importing countrier for o i l extraction. Of the ertfmted 2.8 aSllion tons of vorld output of crude coconut o i l (including h d e o i l ) i n 1378, rome 0.5 million tonr - re produced frcm copra in the importing countries (werublmingly tb developed oats) Fiouc~er, i n 1979 rod 1980 theta uu a decline i n world copra exports .A! becauae of a s k o r t f a l l i n supplies, and t h i t rharply r r d u c d production in :kc developed countrie r The production partera for reCtned coconut o i l i e even more obr~ure. (Table 2.1). Very few countries, vhetber p r i m r y producers of copra and coconut o i l o r inporterr of copra andlor coconut o i l have reparted their output of refined coconut oil. Thm general proporitions can Sc made: houever. (1) A f a i r part of the coeoaut o i l extracted in many ec :onut-growfng cotmrries and 1n:eaded for domestic consumption was never refined because local p~pulations 'have beeu ~ t i s f i e d v i t h g o d quality unrefined - o i l Crude coconut 011made from good -I/- n. Varnakulrriagem fatimates that only 8-10% of the West Geman copra- cnlehiag capacity of sonre 665,000 t o w vas utilized during 1979 and the f i r o t half of 1980, as against 53% in 1977 (Coconut Processing I n d m t q Dendopent, Violt to Vanuatu, APCC/C. 40/80, IJNIDO , Vienna, Dccember 1980). I n October 1980, the Netherlands ceased it8 copra cruahiw altogether, while it ir anticipated that the large Uailevtr ail1 i n lhunheira will be clored. --- Takie 2. i: PRODUCTION OF REFINED COCOm 011. I N SEUCTED COtnmtIES (thousand tonr) Philippines n.8. n.a 1 3 e ' n... n.., 3 2 e 1 Camany, F. R. n... 16&' n... n... u... n.8. b/ Dcliverieo for rcfin2.q; refined o i l output vould be about 32X of the w figure rboem. - Note: n.n. &an# not avalla5le. Source: Variow, in rope caar_munofficial, estimates. quality copra under suitable conditions v i l l keep f o r a long time and does not require refining. However, the gradual devtlopocat of coconut oil-based food products and more sophisticated consumer t a r t e r in certain coconut-producing countries has led to the emergence of a demand for refined o i l i n t h w e countrler which has kdrr s e t by the establiohment of refining indrutrier. In particular, the refining industry i n the Philippines h r grown primarily t o meet the requireaenta of the domestic market; in 1979, tot81 refining capacity was reported a s nome 390,000 tons annually, and further additions to capacity vare plarured for 1980. 1 1 Howaver. i n other coconut- producing countrier, the grouch in demand for refined o i l has been lesr rapid and aore erratic. 'Ihum, in Sri b n k s , where much of the dietary requirement for coconut o i l ban k e n met by domestic productiaa through the coconut milk procers 21 or by direct consumption of coconuts i n food, the r e f i n i n c capacity for coconut o i l ir probably not much more than 15,000-20,000 t o m annually, r p l i t among three or four enterpriser. Similarly, i n India, a major copra proaucer, not much of the crude coconut 011 produced has k e n refined. 31 Dtrpite the existence of a moderate-sized ref iniag induetyy i n Indonesia, i n the earl: 19708 it uu ertimteci that much lesa than half the capacity vrr u e d . (2) A high proportion of the t o t a l coconut o i l supply (i.e., coconut o i l obtained from copra cru3hing p l w imported o i l ) consumed i n the developed cormtrtes is refined. Broadly, a l l o i l f o r ure i n food needs t o be refined. 51 With the excgption of the ro- called "captiven d l u n d for-coconut o i l i n certain food uer (1.e.. r p e d l l i t e d user, a s i n siuulated dairy ?roducte and i n spray o i l r f o r which other o i l e cannot be aubatituted aatiafactorily), the level of denad for coconut o i l for other food uees and therefore for refining dcpen.de on its price relative t o that of conpetlag oils. -11L. F. Ignacio, Jr., nRoduct Report: jcni-3efined Coconut O i l , " Quarterly Supplement t o bcommlty, December 30, 1979. -2 - 1 Coconut milk i e an oil/proteinfuater entulsion obtained uhe:c freshly grated meat (endorperm) i r equeetd through a muelin cloth. efficiency of extraction i8 low, v i t h SOX of the o i l and p r o t t i ~remaining in the residue. B. Em Griwd, Coconut Palm Producte, FAO, Rome, 1975, p. 183. -31h i a n Development %nk, Study of the Coconut Induetry i n the ADB Region, 1973, Vol. 11, tfanila, 1973, p. 29. -4 1 Ibid., p. 57. -51Some partialiy refined o i l ir also used for industrial purpoeee. The production of refined coconut o i l 1s primarily a function of the demand for coconut oil for food uses, vhich is probabiy relatively elaatic. About two-thirds of world coconut o i l output is corsumed in edible produttr and one-third in inedible products. A f a i r proportion ,f thc crude o i l prxIuced i n coconut-growing and conruaing countrter i r conrumed a0 crude. The proportion ?eft unrefined is not known but i e probably declining becaura lecono~icdevelapmeat i n the coconut-produciag countries (vhere the income e l a s t i c i t y of the deaurnd for o i l s and f a t e is high) har k e n leading t o increases i n the demand for coconut o i l , particularly refined o i l . A long-term increase i n c ~ c o n u to i l conrumption f o r food u e r i n the coconut-producing countries can therefore be poetulatad. As for conrumption for food we8 i n developed countrier, no reliable rurvey data hava been produced on coconut o i l consuaption since the 1% study of 1973, aaking it very d i f f i c u l t t o assess the long-term trend. Rouever, the pattern has been one of relatively high uraga for food vhcn prices have been low and of rharp check8 on consumption when prices hava been high. This pattern suggutr tlut the rate of long-term growth i n the developed countries' usage for food has probably k e n low. Although the deaand for food ura i n coconut-producing countries probably grev more rapidly than In developed ones, it still has remained a rather small part of world connumption f o r food purposes. Overall, therefore, the t o t a l connuuption of coconut o i l for food uses probably grev only slowly in the 19708, resulting ir. a correnpondiagty modest r i s e i n the production and consumption of refined coconut oil. During the 19708, the canzumption of coconut o i l for non-food uses may have grovn more rapidly than that f o r food user, particularly l a t e r i n the decade, vhen the great r i s e In a i n t r a l o i l prices seems to ha -e led t o a s h i f t i n demand away froo petrole\rrbaeed chemicals t o chemicals derived f r a a coconut oil. This movement may be accentuated i n the 1980s a s mfneral o i l prices continue to riee. There may be considerable grovth in world copra and coconut o i l output i n the l a t e r years of the present decade a s a result of the increasing cultivation of high- yield hybrid varieties of the coconut tree, notably i n the Philippinee. The relative decline i n tocorut o i l prices that might ennue could greatly stimulate the demand for food u e s and therefore an increase i n a the v o l w of refining. Currently, though. despite a n expansion i n coconct- producing countries, the r a t e of growth IL :coaut o i l uaage i n food products has probably been rather low. -. D. World Trade Patterr.8 - 1. Copra and Coconut oil' - w Copra crushing vas taking place early i n t h i s century i n India, S r i . tanka and the Philippices. World War I gave en important stimulus t o l o c a l crushing because of shipping d i f f i c u l t i e s During t h t interwar period, the Philippines and S r i tanka emerged a s the world's leading coconut o i l exporters. Since the end of the Secod World War, other developing countries have been exportirig increasing quantities of various kinds of o i l s produced f r a t h e i r o m oilreedr. In the care of coconut o i l , t h i r tendency war lerr pronounced for two rearonr: (1) Sri Lank and the Philippiner a l r e d y had a rubrtantirl c ~ n u h i a gcapacity and an ertablirhed export trade i n o i l , and (2) rupply conotrointr on copra tended t o l i m i t increaser i n o i l exportr. Ikrpita the l a t t e r problem, over the l a s t decade Philippine coconut o i l axportr increared markedly, raplaclag thora of copra (rea Table 2 and the Philippines government har declared i t r intention t o phare out copra exportr a d rhlp only coconut oil. 1/ Until 1977, v i r t u a l l y a l l Philippine coconut o i l exportr had been crude o n ; between 1977 and 1979, remi-ref i n d o r ref inad o i l export8 vare i n the region of about 50,000 t o m annually, o r -me 7% of t o t a l o i l exparto by volume on the average. In 1980, refined o i l exportr f e l l by about one-quarter. Papua #av Chine8 har one cnuhing m i l l , artbblirhed in 1949. There are propordo for a racond m i l l , but even ware it t o be b u i l t , only about half the available rupply of copra vould be crwhtd. In F i j i , which beg- clrportiag o i l i n rubrtantial qruatitiue rhortly a f t e r World War 11, current procarriag capacity ir about four tin- thr copra rupply. In Vanuatu, Tonga and the hurt Territorier of the Pacific Irlaada, the ertablirhmant of copra- crtmhiag r l l l a bar taken place only within t b lart decade, a i l e Wertern Suor'm plant v u not apactad to k operative until late 1981. (Ttae Trwt Territorier Lvport copra f r a Pap- liav Guinea and the Soloron I r h n d r becaore t h e i r indigenour rupply ir leas than plant capacity.) Other islandr of the Pacific do not yet have crumhing plant.. Indo-la tur a very Urge crwhiag capacity, but llttle coconut o i l bu been u p o r t e d bemuse of the large requiremento of the d o r t r t i c market. Malaysian crushing u p c i t y is v e l l i n ercesr of rupplier; about one-third of tot81 coconut o i l production ha!t been exported, the remainder being retained for thr, bome ~.rkct. 2. Refined and/or Rocerred Coconut O i l It i difficult to asoers the extent of vorld trade in refined coconut o i l because rany countries rtill do not distinguish k t v e e n crude and refined o i l Un t h e i r trade r t a t i r t i c s . Indeed, where s t a t i s t l c s a r e available, t h y frequently d i r t iuguirh only between "crude" and "other ,"-r claroify o i l ar "crude" and "procerstd," with the l a t t e r not accesoarily defined a s wholly O r r even partly refined. ltwng the major cocdaut oil- exporting cotmtries, only the Philippines distinguishee betvcen "crude" and "refined." S r i Lanka classifies o i l a s "raw" and "processed" (which n o ~ l l y wane filtered o r deodorized, but not refined), while Indonesia, Pap- New Guinea and F i j i do not classify t h e i r coconult o i l ex 'rts a t a l l . Among the oajor irportiag countries, the EC claterifier o i l a s crude" and "other than 3 -11 Informed uoutces believe it may be a long time before copra exports ceaae entirely. t - - Y 137 I - 4 b B f crude," but the l a t t e r ir not necesrarily refined. l/ The U.S. has reported its importr of refined coconut oil mparately only Tiace 1978, and even then B not i n a l l its r t a t l r t i c a l publicationr. Japan, Aurtralia and Canada do not break dovn their coconut oil imports by degree of procrrriryt, The Standard International Trade Clarrificatioa (SITC) haa no proririoa for reportirq trade i n vegetable 0118 by crude and other forms of procesmd oil. Despite the inadequate r t a t i r t i c r , it sear clear that the world trade in procerstd coconut o i l h r been f a i r l y rplll u a t i l quite recently. The volume of remi-rafincd or refined o i l exported h.8 clearly b a n even r ~ l l e r than that of proceroed o i l , given that rn rcme of tha traded "procerred" o i l ham not bten cven partly refined. It ir rignificant that the trade la refined coconut o i l t h t has emerged in recent year. developed againrt a bckgrouad of improvcmentr i n rhipping f a c i l i t ier for the bulk movercnt of v+getable 0110, technical improrawntr that u d e porrible in particular tbe l a r g e r u l e roveeent of procerred palm o i l f r m k l a y ~ i ain tha late 19708. Further, t h i r trade i n coconut o i l 1 tbought t o coarirt largely of rami-refined, i.e., not deodorized, o i l , u deodorization remover the tocopherol, the natural ant 1- oxidant in the coconut o i l t b t retardo deterioration. Bovever, it ir not porrible t o ury v i t h certainty that dl trade in refined o i l ha8 been semi- refined, since it appsarr that row fully refimed o i l hru a100 k e n moving. It is reported that 8 good deal of thc fully refined oil h.8 keen shipped in d m . Although thfr method prerarper itr c o d i t i m , it doer prerent problena a t the stage of f i n a l use and d d r t o the trarupott cortr. It rlro appearr that there h.B been o m bulk trade of fully refined o i l , although ouch o i l m y have aeeded l i g h t bleaching a d deodorizing before uu. Accordlag t o tha reportr, u p o r t r of both a d - r e f i n e d aad refined coconut o i l f r m the primary produd- countries h v e k e n quite srdll until recent years, a l t b - h the trade i n Philippine refined (probably mainly sai- refined) o i l did increase recently- In 1977 and 1978 it totalled 55,000 tons and then i n 1979 rose t o 60,000 tom, f a l l i w somewhat in 1980. Beride the Philippine trade, the loot a i g n i f i u n t area of trade i n procermd coconut o i l has bees between adjoinlag developed countrier ouch 88 the -bet stater of -1/ The "other t h e cruden classification of the BC causes particular problem. There o i l s aay crude o i l s which have merely undergone a further degree of f i l t r a t i o n than that uhlch taker place duriog the 3 productton of crude 011 froa 01 seeda. Under the Customa Classification of the EC, crude 011s must ve undergone "no other processing than centrifugation o r f i l t r a t i o n , provided that, i n order t o separate the o i l s froa their solid constituents, only mechanical force, such an gravity, pressure o r centrifugal force has been employed (ucluding any absorptioa filtering procesr or any other physical or chaicil p r o c e s ~ ) . ~It s c e ~ t o follov that aore sophisticated foras of f i l t r a t i o n such aa absorption f i l t e r i n g could confar the atatua of "proceraed" o r "other tkdu cruden on crude coconut o i l which has not been partly o r wholly refined- the EC. Owing t o the dtcline i n copra crurhing and coconut o i l refining i n the Netherlaedr (Table 2.+?), thi8 Intta-Coratraity trade currently wemr to be smaller than it war, ray, 20 yearr ago. Trade rourcer ibdicata that the trade almort certainly involver f u l l y rafined o l l acrorr adjoining frontierr t o u k e ure of the m a t convanient rafinariar. The dirtribution of prche8ea betvwn wmi-refined and refined coconut cil by the other rignificant importara-the U.S,, Japan and Awtralia--10 not really clear. Although not u, indicated in tha o f f i c i a l export r t a t i s t i c r , it apparr that P a p u Hew Cuinaa and Tonga heva bean importing semi-refined oil. E. Iha C h r a c t a r i r t i c r of tha Marketr 1. The Urar of Coconut O i l Practically a l l fully refined coconut o i l ir wad for edible purporar, Tha 1973 ITC rurvay rtill givae a good idea of the u i n usem, even though itr findingr a r e now rlightly dated, notably because of the f a i r l y marked d ~ c l i n ei n the ure of refined coconut o i l i n margarine and rhortening. hrrthtrmora, the use of refined o i l i n u n a r p c c i r l i r ~rhorteningr for bakery productr and bircuitr lur continued t o be important. A rignificant application, especially in tha U.S., her baan tbc o+aufacture of rimulated dairy productr ouch a r coffee whitanen, whipped toppingr and f i l l e d and imitation milk. l/ Coconut o i l is also used in nondairy ice cream, confectionery coatingr, creaa f i l l i a g r for caktr a d bircuits, rpray o i l f o r certain bincraitr, ice c r c u coating8 and, to a limited u t e n t , cocoa butter rubstituter, Ilccordiq t o tbe 1973 I'TC report, there wte legal rertrictionr on the w e of coconut o i l i n the manufacture of some of there productr, e.g., i n France and Germany f o r f i l l e d milk and i n tbe rix original member r t a t e r of the EC for ice c t e u and cocoa Wtcr rubrtitution. 'Ihtrc r t a t r i c t i o m a r e not thought t o have chlrged i n recent y u n . In the U.K., palm kernel rathcr than coconut o i l has k e n (and probably still 18) w e d i n chocolate coatings, uhipped toppings and r i r i l a r ?roducta h e r eit appeared t o have some advantage. In many inrtancer, the indurtrial end w a r r have bought f o r m l a t i o m f r a the refiacrr/blabderr t o meet rpacial requiremtntr. By hardeniag qtfintd coconut o i l uring hydrogen added i n the presence of a catalyst, normally tickel, the oil's chemical and physical properties are changed, permitting a vider variety of food wes. - - In general, cocoaut o i l does not need t o be fully refined for moat .? inedible urcr, although in uome instances semi-refined (lee., neutralized and - bleached) oLB m y be used, possibly formulated t o the requiraments of the -1/ In "filled milk," vegetable f a t i r rubrtituted for milk f a t in a akin milk bare. LIitation m i l b are entirely no&siry. Both products a r e cheaper than real milk and are important in the U.F., derpite the e f f o r t s of the dairy lobby t o r e s t r i c t them. Table 2.2: ME EC-1)BORTS OF COCONUT OIL, OTHER THAN CILUDe, FOR RUXM CO~PTION(1507.92) Sourca: EC, Eurorrat, Aaalytical Table. of EEC Foreign Trade (#I)(LxE), Vol. A, 1974-79, I ~ ~ . r b o u - . specific end uacr. The uae of partly refined o i l u y ba advanta~aourfor a proceaaor that makes intermediate oleochemical productr. 2. Ihe Structure of the Harbtr Ilae market rtructure of tba laduotry refining and uning coconut o i l appear. eaaeotially t o ba o w of o=i6opoly with rrrpect t o both developing cxportiag countries aad developed importing cormtrier. In the developiq co-mtrier, the %umber of ref inifq p h f t t r on the *ole h r k e n a w l 1 i n rs'..tion to the nrabar of c n u h i q plantr. In S r i t r n h in 1979, not more than 3 or 4 out of the 58 r q i r t r r e d o i l m f l l r -re for refinlag. Prominent among the refinerr wre the Ceylon O i l 0 and Patr Corporation and the Britirh Caylon Corporation (public eaterprimer) and Lever Brotherr (Ceylon), Ltd. Ihe ttrtal ref ining capacity v u 15,000-20,000 t o w , o r ienttd t o the internal rarket . In the Philippiaer , t b r i t r u t i o n uu very d i f ferett. In 1979, tot81 refining capacity uu ertfmattd a t 390,000 t o w , of uhich rooe 110,000 tons vtre available f o r export. I / In 1979, although 20 f i r m vere mcrberr of the (Philippine) Coconut O i l k f i n e r r ' k . o c i a t i a n , oaly tm (the S.n Pablo Hanufacturiq Corporation, a subsidiary of the U.S. Pacific Vegetable O i l Company, aad the IAI Do and In Y r Corporatian, rpecializing in sales t o Australia) were definitely reported u exporting rcoi-refined oil. ??owever, Lu Do and Lu Po rrsr said to be apaadiag i t 0 refining capacity, 2/ while three othcr firms (tcgsnpi, Cranaxport and Philagro), a11 large e x p o r c r r of crude, wre i a r t a l l i ~refinery capacity. In addition, proporalr by the Philippine plantera' crrganizntion for three aav ref?.nerier sf medium a p a c i t y had k e n approved. 'Ihtre additional private sactor refinerier vould increase refining capacity by a t least 402, while the planterr' ofllr vould add anather 302, 3/ - I n i t i a l l y , the ownerrhip of Philippine zopra crunhing m i l l s and rtiil~erieswas diverre, wlth ocme facilitieo 04 Philippine interertr, by whiie otherr involved Chinere and U.S. capital. ILo sultinationalr-Procter atd Gamble and Unilever--had subrtaatial r e f i n i w ca#hcitier, although they did not e x b r t refined o i l , In Septcrber 1979, an organization called United Coconut O i l H i l l , (UNICOn) v m established t o integrate the operations of farmerr and o i l - ~ i l l l e r s , from hyiq a d selling t o milling and marketing, vlth the rtated ob;cctive of imprwing the return t o coconut growerr, the majority rhareholders i n UHICOH. C l a i m e l at the time of its ertabliehment t o be only a loore associction of proccr.orr, UNICW, which was p r a o t e d by the gwerrrwnt, is wlthout doubt likely rp be the dominant force i n Philippine copra arid coconut o i l marketing. It h a , for instance, the power to enter -2/ !he the note on page 12 regarding this company's installation of a phyaical refining plant i n 1978. -3 Op. cit., IgMcio. i n t o agreamntr with variou.8 o i l millr (the "participating" rill#) to undertake procerriug either u their agents o r u affiliate8 o r rubridiarier. It coaductr itr financial operatioar through the United Coconut Plantero' Bank, the coconut farmerr' h n k , which acquired two rubridiarier -of foreign enterprirer a t the end of 1979 and m y be expacted t o =quire more. Ho new crurhicg plantr may be r e t up vithout o f f i c i a l authorizat~on. Uhila individual companier rtill appear t o trade a8 ruch, it re- more : h n l i k e l y tbt in the future UNICOn w i l l exert i n c r u r i q l y ceatralized control wer procerriqg and marketing. Itr powrr w i l l ptohbly parrit it t o regulate the refining operationr of tha o i l rill8 it controlr, and it vill be i n a m h stronger position to u r k a t refined o i l overera* than w i l l fadividual ref inerr. Yh.tever form UNICOn f i a d l y taker, there ir now mbrtant ial refining capacity i n the Philippines. 'Lhir capacity, h o ~ v e r , ir rtill geared priaarily to w e t i u g the r e q u i r m n t r of the dcmtrtic markat, aad there a r a conflicting raportr a s to vhathsr tbere ir adequate capacity t o wet export dearad. Vhila i n 1979 it uu rtated that tbere uu a refining capacity of some 110,000 t o m for export, i n 1960 other sourcer indicated tht the stronq and grouiug domwtic d d f o r f u l l y refined o i l -6 llmftiug export. of fully refined, bleached and deodorized o i l , although reportedly t h i r situation was not affecting exyortr of rcri-refined oil. Such a rituation, i f truc, m i l d seem to point t o r m irhlaacer i n raftning capacity, limiting operationr to w e l l below th theoretical muchum c r p c ity. Prior to the end of 1979, vbtn utnCfM took them over, tba rubridiarier of the foreign enterpriser h d k e n auportlng largely -mi-refined o i l s t o t h e i r associated companies, while the independent refinerias mre apparently coacentrating on exporting f u l l y refined o i l , althoogh i n relatively d l quxntities. Since the takaover by Ut?ICOW, lt appear6 that atme semi-refined or refined oil previously beia exported h u been rold on the d w u t i c larket. Philippine s t a t i r t i c r f o r 1980 indicate an increase of 14.22 i n the overall vo1-e of coconut o i l exports, both crude a d refined. Total ahipocnts of cmqe increared by 17.42, notqrftbtading a f a l l i n sales t the U.S. Even oore i n t e r u t i n g , th volume of r e f i n d o i l exports declined by 25.5% overall, and t o the U.S. (tbe largest market) by 30.72. Hot only was UeSe demand f o r coconut o i l depressed i n 1980, but aales of refined o i l t o the impprtant markets-Japan and Aurtralia-uere aloo reduced. '2 - * The question that arises i. vhether the f a l l i n exports of p f i n e d oif=in 1980 was the rerult of a reduction i n overrear demand o r a shortage of r-ed o i l caused by mtroag domutic demand. m e r e a r e indications that i n 1986 UNIm apparently directed r o r refined o i l to the d a s t i c market, suggesting t h a t an increaae i n d m e s t i c demand for refined o i l r e l a t i v e t o supplier A/ rather than a lack of ovarsuas comwaer demand eay have been the main reason f o r the check i n exports. I I , 1/ It is unclear t o VhAt extent the additional refining capacity plannal f o r , 1980 war brought into operation. I In the principal importing countrier, lee., Wertern Europe, the U.S. and Japan, the coconut oil- refining indurtry, l i k e the copra-crwhiw irdurtry, har been htqhly concentrated. According t o the 1973 ITC Report, Uailevar was the dominant refiner i n Ventern Europe, except i n Prance. In West Germany, i n addition t o Unilever, refinfog ha8 been done by nome margarine maaufacturet8. In the U.K., w c h of the relatively rp.11 volume of refining br been undertaken by Unilever. In the Nstharlandr, unlike i n other countrier, there recaed to be no direct coaruaption of reftned coconut o i l outride of margarina and coopound c o o k t q f a t arnufncture i n the early 19701. In the U.S., there may have k e n a half dozen coconut o i l refinerr. In Japan, one enrerprise, C. Itoh, through its rubrldiary, Fuji O i l , har doaiauted the coconut o i l industry and ha8 carried out the bulk of coconut o i l refining. Tht market for refined o i l hrr been much more direrrified. In addition t o sale8 by Unilever ( i n Europe) and other refinerr to r u b r i d i a r i u o r associated companier, there have been important r a l e r t o third partier. There m y ba divided i n t o ralrr to a r d l nuaber of specialized large unerr- United Bircuitr ln the U.K. and General Food. i n the U.S.--and those t o nwaerow r d l - o r medium-ritad bakury, bircuit and cocrtsctionary f i m s . ibis sector of smaller-rcale wen often b o q h t grader that were branded or even d e to rpacial formulationn. The l a m e w e n generally u t a b l i r h e d strict specifications for the quality of the coconut o r blended 0118 t h y took from the ref inerr; ,ore large user8 u y h v e b o q h t their own refined cocoaut oil sad further proceased it o r blendad it thauelver. Aa for the pattern of trade, u n y end urerr bought directly f r a the 1 refinare, while rome -11 Buropera ruerr bouj~ht through brokerr o r dealerr. An expaanion of trade through there clunnelr could raise problem regarding the grade of refined coconut o i l bought. It in recognized that aarlcetiog imported processed coconut o i l u y involve nervicing the mpecial need. of e u i users, a requiremeat that may (eventually) necessirate roae form of association, say, between Pbillppine refined o i l u p o r t e r r and U.S. processors, or even joint venturrr. I P. Tariffa, #on-Tariff Barrierr, Export Taxer a d Subsidies 1. Tariffs and en-Tariff Barrlet. - Imports of copra, tG raw a a t e r l d for coconut o i l , whether crude o r refined, have been p e r d t t e d entry duty-free by nearly a l l developed countrier; more specifically,- no import dutier have been levied on copra by the countrien l i s t e d i n T a b b 2.3. By contrast, seny countries have levied import dutien on coconut o i l . ' Table 2.3 reto out the effective HPN t a r i f f 8 on crude and refined coconut o i l on January 1, 1980 for the EC, the U.S., Japan, Australia and Catada. Where GSP r a t e s have k e n ertablirhed for developing countries, the January 1, 1980 r a t e s a r e l i 8 t t d r In general, the GATT negotlatione held under the Tokyo Round (1973-78) and incorporated into the 1979 Geneva Protocol to GATT do not show nlgnificant c o n c e s s i o ~with respect to coconut o i l , except i n the caue of the U.S. There the 1979 duty of 1 cent per lb on - 143 - -- Tablo 2.3: 1IM)BT W R I E S 01 aKOlWI OIL 011 JANWAIT 1, 1980 I. T o t ruhnical or LnduotrlJ ur00 other r h a tho urmtacrun of l d r t u f f r for ~UDM c o ~ u a p t l o a (b)(l) b l l d , lo l d l 8 r o prcki-r of a nor capulty of 1 or 1.8 l 20.0 18.0 (b)(2) b l l d , otlur; fluldr bcoour e l l , c& or -flood (176.17) 0.2 bcoaut o i l (ex. 15-01 f i n d waotablo 0110, fluid o r 0011d. crude, r o t l d , 1OZ or 10 yon&. or paritlad) rrblebo-r 10 tho sruur O t b r flmd rqorablo ollr. fluid, or oolld, c r d o , rofiaod, or puriflad; coeoaot (cop-) o i l (424.30) a - A/ W a r th. ter- af tb. I a d Comattfoo. irporta ef cocwut o i l tram AC? couetriea sro * 4ftt.d into t b C o a n i t y fro. of dr.ty. -bl Zh. duty oa cococmt oil ru rdoc+d to ail in Jmrnry !981. Prior to 1960, it w o 1 coat por lb. ih.ro 10 no CSt rate. -cl W o r tho Tobo B o d , t b m d e y L ro bm r d d in olabt oqm1 a t ~ a u ,c m n c i w J I C ~ I U1. 1980. to 92, or 10 yea pot 4. uhicho-r ~ 18 grucor. Tho duty qwtd fa tlmt aa D o c h r 31, 1979. i importr of coconut o i l , whether crude o r refined, wee reduced to 0.2 cents per 1 l b for 1980 bnd to n i l for 1981. mobably the moat revara dutier have been those i n the EC and Canada, where theta is a rtsep t a r i f f arcalation. In the -unity, the duty on crude o i l f o r technical user (other than the manufacture of foodrtuffr) har been 52 ad valorem, uhile that oa "other than crude'' h.6 k e n 82, although under the GSP it use 6.5%. I n the care of o i l other than for technical w a r ( i o t a ,for edible or food ure), the duty on crude h r been 102, that on " o ~ h e r than crude1' 15:. Under the CSP, there rater vara reduced t o 72 and 132 ad valorem, a differance of 6 percantaga pointr k t w a n crude and procarrad. The GSP rather than the ganaral t a r i f f h r r bean the ralavant factor, rinca a l l t h t primary produciag axporterr have b a n developing c o ~ u t r i a r . While UHCIAD calculated that tha 1SX noainal r a t e on procerrad coconut o i l importe4 by the EC reprerentad an effactive r a t e of protactioa of 186.3% a r as.inrt the raw material, copra, 11 it i r pcrhapr para meaningful t o rt.te the effective rate of protection afforded b) the 6 percentage point diffemnca i n the CSP t a r i f f rater on cruda and "ather than cruden import8 for food tam: it raprerented an effective r a t e of 53.0% with rerpeet to impottr f r a ths developing world. -21 Under the proviaionr of tha Fir3t Lor& Conventiot* (now rucceeded by the Second U d Conventioa), import. of moat goodr and productr Crocr the Arias, Caribbean and Pacific (ACP) couatriar hoa been a d d t t e d into t b EC free of duty. S a e 60 ACP countries aajoy thaoe duty-free exaptions. Ln the area of coconut o i l , bouevzr, the main benaficiarier a r e likely t o have k e n only Papua Wcv Guinea and F i j i ; any other Pacific Irland r t a t e s that artablirh copra- crwhing planta i n the near futurs vill benefit r i r i l a r l y . The ACP concersion for procerred o i l s h u clearly b a n b e a r t a r t ; for exmple, it provider an axamption of 131 f o r o i l other t b n crude f o r food ruee. Bovever. itr ;due ha. been potential, rather tbm real, ae tbe "procesring" of o i l currently exported frcn Papua New Cuinea and F i j i has apparently l i t t l e value added t o it. In the U.S., the already low 1980 duty of 0.2 centr per l b on impcrted coconut o i l , vhcthar crude or refined, was abolirhed e n t i r e l y i n 1981, as noted above.' Even the p r r l 9 8 0 t a r i f f of 1 cent per l b did not dircriminate againrt importo of refine4 oil. Ibe difference v i t h the European t a r i f f - treatment has probably *en a major reason (beyond transport costr) why eignificant quantities of Philippina refined coconut o i l have been exported t o <4 the U.S. but little t o Europe. & In Japan, which has been recrlv some 7,000 t c a s of scmi-refined o r refined coconut o i l annually elace 1 7, according t o Philippine export s t a t i s t i c s , the current duty on coconut o i l , *ether crude o r refined, was -11 UNCTAD, The Ktnnedy Bound, TDl61Bev. I., Geneva, April 1969, Appendix Table A, p. 210. -21 Urfug the value added data i n T a b k 3.2. marginally under 10X ad vtlorem, or 10 yen per k8 (whichever was greater). There has been no discrimination against refined o i l , but therc vsll no CSP rate fqr coconut o i l * Australia, the other importcnt market for Philippine semi-ref ined coconut o i l , has hod no duty on coconut o i l , whether crude o r refined. Canada, by contrast, has had an KFN duty on crude coconut o i l of 102 ad valorem a s against 17.52 on processed o i l ; while the CSP 1/ rate on crude coconut o i l has k e n n i l , that on refined o i l ham kexn 1 2 . 5 ~ , i.e., the duty abateaent on refined o i l war only 5 percentage point@. It ir arrwed, therefore, that moat coconut o i l iaported by Canada tun k e n crude, a r har been true for other tropical oilr. Spain has had a duty of 72 on coconut o i l i r p a r t r , vhether crude or refined. With regard to proccrred goods which may contain refined coconut o i l , import duties have varied amoag countrier and among goodr. In general, there do not appear to have been m y CSP concarrioar f o r there produtr. Sore count r i c r did, buever, extend coocerrioar to f a t t y acids, alcoholr and acid o i l r , rowe byproducts of o i l refining. 'Lhe Lamb Convention has permitted duty-ftee entry of lthtre productr, but charger could bc letied on products subject t o the Cbmmon Agricultural Policy. The t a r i f f escalaticrn for coconut o i l tas been =st serious i n the EC, where the conventional t a r i f f a vent f r a r SX t o 152 ad valorera (2.52 t o 132 under the CSP), dependlag on the intended ure and the degree of procerring. Further procerring into small pack@ f o r r e t a i l u l e rerulted in a further escalation of the docy rate t o 202, while a manufactured product ruth as margarine attracted a duty of 252. Eouever, other ernufactured products cort- taining rafined coconut o i l , such as biscuits and confectionery, which have had duties of 13X and 122 r e s p e c t i v e l ~ , do -t represent c x a ~ p l e s of escalation when viewed against the refined o i l dut) af 15X. Iu l:g:.qt pf the high degree c f "tpchnicaln protection conferred on dooeatic refiners by the tendency of refined o i l t o deteriorate i n t r a n s i t , it is hard to see vhy Lt hrs alsa k e n aecesrary to impose a severely escalating t a r i f f structure. While recent lmprovaents i n transporting processed o i l may now; f r o r the s t a d p o i n t of refiners i n inporting countries, be t a i d t o jusPdfy higher t a r i f f s , the original escalating t a r i f f structure aust be seen 0 a s a precaution against future technical developments rather ths-n as e c o m i c a l l y justified a t the ti-. m e r e have been cutnples of escalations i n daties with other vegetable cils elaeuhere, notably i n Austria, ~ai=ada, Ne-r ZealHnd and South Africa, but because of the size of its market, the EC's t a r i f f etructure has probably i-en the most damaging t o the exporters. I i -1/ The Canadian GSP i e known as the CZT (Generalized Preferentiai '-'i f f ) . Broadly rpeaklng, there do not appear t a have beer major non-cr. lff barrierr against crude and refined coconut oil. The major dcvelo?ed country importera have not applied quantitative r e r t r i c t i o n r to cocorut o i l ioportr. FIovevar, there have been health and u n i t a r y regulatiour in different countries dcaigned t o enrure that the food reacher a miniorto q w l i t y and i r not i n j u r i ~ u at o health. Hortovar, i n ttrr: UnS. there have been rant complex regulationr at the r e t a i l level for labeling productr t o rhov the coconut o f 1 usage, am some lobbiea claim that that iagrebiati~ may be injuriour t o healtb. In the varioua member rtatua of the EC, the ruler regulating the we of coconut o i l i n ice .j-rrnm aad c b c o l a t r products hare been differeat. For exumple, i n the U.K., .Jtocolate which incorporatar coconut ,.ti1 could be dercribed an Hchocolate," and ice cream could contain non-dairy far# ruch u coconut oil. However, in Yest Camany and Prance, there urager have not been pernitted. Theme regulationr , v:wre 8pp:opriate t o each country, have rppiied t o coconut o i l rod t o producta iaco.;orating coconut o i l , but normally it war not intended that thay operate i n a dxrcrimiaator7 mrmer. Although country rcgulationa of t h l s kind have undoubtedly acted a s ltaitationa on the me of cocoaut o i l i n certain edible 0 ~ t l 8 t 8 ,they have not conrt1tli:cd major ob6cacltm t o the ura sf r?afined cocor.uc of! ur strch. 2. Export Taxec .ad Subridits ---.-- So f a r m a n h aacertaiami, ;c export subsidies have ( 8,000 per ton, of ctconut o i l to Re 6,65Q t-f which lb 1,650 vere*paid d i r e c t l y tr, the Cuatoma, v i t h the L remainder c o n r l ~ t x u g of the admhlstrative levy collected by tbe Coronut Harketing h a r d ) . iie reduction i n tbe overall lev? uae fntended to raiee the price of tbt nuts sold by gfowers by about 18%. The coconut o i l f o r uwrt i n S r i L a n k has been gold by millers t o the Coconut -ifarlrctillg Board, which fixer both the a p o r t prices a d thore at rbich d o u s t i c transactioru take place. * In connection wltho prt coatrola -ld duties, the folloving obsema- tions on tbe S r i Lankan c onut industry, derived f r a the Cezcral Bank of SF Ceylon's Review of the Economy of 1978, a r t i ~ t r u c t i v e : Adopltion of a -re r e a l i a t l c pricing policy which ensures a remunerative price to the prdccer is fun4amentsl to I I the ~upliftmentof the cocontit industry: f o r q ~ l t esome 1 time, exports of coconutr have been t i g h t l y r ~ g u l e t e d with a view t o keeping doaortic pricaa low, s a coconut I f o r w an i ~ p c r r a n tpart of indlcl,rnour dietr. The new regulatory fraacwork of 1978 rtrcoptr to arrure a price of 65 centu ( l a t a r ralred t o 85 cenr*' rur nut to the producer, but it appear8 that the prcdacur get8 auch Ierr. There appean t o be row monopclirtic control8 a t ths procereilyl rtace, bhiclr tend* to deprern produce: pricer. Eves i f the prodixer IT aroured of the target prlcz, the adequacy of returri to coconut groving 10 q=rabtionrble. It ir not rurjrlring, therefon, that cwonut h r become rr d.clinin& iudurrry. Prriuctivity of chr ladustry caa k improved by neu invertcant but, ~ l e r rtha industry be:ouer more rmnerative, no long t a m invertmeat can ba antlcipatad. Exportr of high alum COMCiC6 o i l could be iucreaued i f rubrtitute 0110 are developed locslly or even imported. But, davelopeant of local 0110o r import8 vill not be remunerativa a r long w coconut o i l pricau are h p t arttficlally depreraed by the axport controls. In otber words, coconut industry vhlch ham hlgh growth potenclrlr ham suffered for very ... long by poltcies aimed p r t u t i l yat procectlug the cunsmcr at the u p e a s e of tbs producer. Lj' In the Philipgines 2/ u i n S r i h n h , no export subridier have beta paid directly on coconut o l r u p c r t s , uhetber crude or refined, 31 but thre have bean long-atanding d l f f e m n t l a l axpott dutlaa on copra and ~ o c o n u to i l , currently of 7.5% rnd 42 zaapectivsly. %re have been intended t o favor exports of o i l , h e t h c r crude or refined, a t the expense of coprcr; a s notzd, copra c x w r t s a r e ~ ~ l t l r a t c ltyo be phased out, &:though this ir a long-tern objective. 'Ihe kistory of the r x p r t dutics t e long a d t h e i r structure complex. In a d d i t i m t o the basic -port duty, "premiumn dutic- have a100 k e n Levied o? tke difference between the Pcuatoas valuation ice and a base price ' established by tbe at;thoritilu. m e difference is the "preznirtn.n The prmium e u t ~ba; been levied at a rate of 20Z for ~ o c o n g to i l a d 302 for copra. It has not beua payable wben tb crurtoma valuation vas M o w the base price, a s is frequently the cart. Both the export a d the premi* duties Iwve favored exports of cocouut o i l a t the expense of copra, but th&e hae been provlslon f o r mfc b-:r*rous rreatoent of refined coconut o i l a t t)lg expense of . ?' I -l/ Central Beak of Ceyloc, iteviev of tlhe Economy, 1978, Colombo, p. 33. - 2/ Tt-:ir rr.rorrpstion uae correct cs of .Vaj/lunc 1980. There have been chnnges sir.ce L ; I ~ ~shich a r e not reflected here. I -31 Su'osidie?~are ?aid, however, on c e r ~ a i nproducts *old on the damestic market i n orCcr to insulate domeetic consumers from the impact of high pricce and price f l u c t u c i o n a i n the world markets. mse are financed by a e p a r s t e Stabilization Fund Levy. crude. The lw pricer early in 1980 led "te Philippine authoritier t o rurpend the axport duty on coconut ptoRuctr i n k y 1980 la an attempt t o imprcve the retnrar t o coconut g t o w r r ; t h i s rurp. -t *ur vsr likely t o be only temp r\rF. t o l a s t u n t i l the induotry rag.iW I r - p-ofitabillty. C. R i c e r , t a t t liduer and Valw Mdd Ragulazly publ1rh.d pricer for refined coconut o i l a r e rcarca. The only currently available aerier $8 i n tbr Public lad or, and it covero only the U.X., ex-mlll/refiarry, crude a d r e f i luh--rb2.4). o i l 8 Ta la Them figurer r h w a rpraad betma crude and refined o i l pricer of frm M4 per ton i n early 1977 t o U 0 5 per ton i n 1979. The difference between the tuo pricer, uttich h r usually beam between 16% and 20% of the price of c r ~ d ao i l , ir not, bornvet, a true memure of th groro procarring margin, u adjurtmanto brva not W n u d e f o r tbe vdua of the 8%refining lour a d the 52 acid o i l output. Accordingly, l a Table 2.4, the appropriate measure of tha grorr urgia added by raffaiag lr r b m la coltnn 6. Overall, the average groar margin har k e n 12.52 of the cmde price, riailar to t h a t of palm ka-1 o i l , which a n i d e e d be rubrtitoted f o r coconut o i l i n a large mt.bar of user. Over the p r r 1977-80, the t o t d grorr margin added by refining the coconut o i l ( a f t e r allovaocer f o r the r e f h i - lor8 and tha output of acid o i l ) raaged i r a M I per ton i n 1977 t o M 9 per ton i n late 1980. The gradual rlre i n the grosr u r g i n r i n recent years probably r e f l e c t r the courm of i n f h t i o a in tha U.K. Direcr competition from imported refined o i l , had it been available, uould pertup. h v e reduced the grosr u r g i n . 1. Philippine Export h t a me mt valuer of the export8 of crude aad refined coconut oil from the Philippines oh- such marked annual variations betveea 19&3 and 1976 that it is h r d to r t g ~ r dthe data so very significant or conclwive. Pui-Lheruore, while Philippine trade r e t w list only "crude" and "refined" o i l s , the tern nrefined" include8 hath emf-refined and refined 0 1 but i n unknovn proportiam. Table 2.5 rho- tht even in the p a r a 1977-78, when the volume of refined coconut 011arportr be- r u b s t a n t i d ; r i r i n g from only 8,560 cons i n 1976 (Table 2a10) LO 53,000 t o w i n 1977 a d @78, there were apparently some perverse reoultr. For axrrpla, in 1977 the unit onlw of the exports of crude o i l t o Japan vas higher, at 53 centr per kg, t h n were the reftned exports, at 53 ceatr; a r i n i l a r r i t r u t i o n aroae fn 1979, whcc the unit value of the cxportu of crude o i l ule 98 cems per kg, rather higher than the 95 cents per kg recorded f o r refined. The Ut values of exports of refined o i l t o a l l d c r t i n ~ t i o n ai n 1975 md 1976 vere 40.5% and 31.4%. respectioely, higher than for crude o i l , but o n l r 9.42 and 6.6% higher than i n 1977 end 1978. In addition, the data f o r 1979 d 1960 abav t h a t the unit value8 of refined o i l a t 7.6% and 8.1% am higher, rerpectively, than thoee of crude. Since it was probably d y i n 1977-80 that the vol- of tbt exports of refined o i l was ---- -- -- _IC_. ----..*--.. Q per :?*r------------ Yearly 8m.t. - 4 Dithr- of rmfiad oil dprul h r Cb. ra4I3L.( bdlr (Ql 4).plm P.b mss. e? t k n c l d oll (Caul 3). bra@ e* radrarad OM c l d a o i l (Go1 1). bur*l Ql- I d 2. TIn Wlle Wmr, bdeaf a*. rw.1- t e l l , Cblcraamdcr Q%:-ae mWae d c t d d t t o l u . Table 2.5: PSILIPPINES--TIE UNIT VALUES OF EXI?ORTS OP CCC0)xttr OIL (centr per kg) Total, a l l auketr Australia Japan Nsrherlandr Siagapore U.S. Total all urketr Australia 47 46 61 68 991 I" 2 - - Japan 47 - 7 1 o 53 60 95 Netherland. 84 - o Singapore -- 48 58 59 60 U.S. 35 43 57 65 99 64 - Rote: -)(cans nil. Source: Derived f r a Philippines, Foreign Trade Statisticat of tlm Philippinu, various iaauar. large enough for the irregularitier to be moothed out, it uould reem that only in there pears can the figurer be accepted, a& even then v i t h reservations. In 1977, 1978, 1979 and 1980, u h n more than half of the Philippines exports of refined o i l vere reat t o the U.S., the premium on ralar of refiaed o i l to t h i s market were 5, 5, 9 and 6 cents per kg rarpectiwly. The grorr gain8 from exporting refiaed o i l (ar a parcantage of tha v a l w of crude exportr) vere 9.6, 8.3, 10.0 rad 10.3 rerpectfvely. 2. U.S. Import Data . U.S. import figurer for coconut o i l have dirtingulrhed between crude and refiaed 1/ only rince 1978. Neverthe~err,a r rhova i n Table 2.6, the unit valuer of the ioportr i n 1978 a d 1979 (bearing i n rind that import8 are valued c.1.f. and that there ir a t b 1- i n rhipmeatr) rupport the data on Philippine unit valuer of export. a d the rilativa valuc of refincd o i l in relation t o crude to a considerable d e g w . lbua in both there yaars, the premiumr on imported refiaed o i l r f r a the Phllippiner uete about 6 =eats par lrg, while the unit valuer of r a f i n d o i l vere 111.21 aad 106.3Z. ropectlvely, of the unit value of the crude o i l fmportr. Ihe match of the two countrier' data ir better for 1978 tha 1979, uince i n tbe l a t t e r pear the monthly fluctuatiorrs in the unit valuer of U.S. import8 were arch greater than in 1978. Thlr was perhapr partly because i n 1979 the fluctrutionr in the world value of the dollar may have affected the price of coconut of 1. 'Lhs crude figure. f o r tha Philippine. and the U.S. suggert that the grosr valuc added to the refined o i l exported frcm the Philippiner m y bave been i n the region of 102. It ir hard to judge if this represeats a g o d margin or not. I f the o i l was largely m - r e f i n e d , a8 is believed, then the margin may be adequate. Eonever, as with the U.K. price8 i n Table 2.4, t t ~ crude unit valucr f o r refined o i l need to 5e adjusted dovrnrard by 8% t o take into accouat refiniag lorses. a coaridektion that ~ u l dreduce the grosr margin. The Philtppine refinery vould have been partially compensated for the refining losr by the revenue it obtained f r a tbe male of acid o i l , but this - revenue need not neceesacily have beem earned i n the export Arket. '3 L Overall, even i f semi-refintag d o u aot a o p r t o have added a great deal of valrrc to crude o i l exports, the recent uparmion i n 1977-79 indica&s that trade iri semi-refin+vab conrfdared rearouably profitable. w 1 O.S. - imports of "refined" o i l , alnort exclusively from the Philippines, probably collclist Largely of "rari-refinedn oil. -21 Note that tt.e data i n Table 2.6 are i n cents per l b , not kg. All c ~ t r h 8 fitlippitie8 January rebrurry *rch April Juar July AuStut September Ottober Norember -bet Year average $ per ton 548.29 bO7.59 59.30 546.30 1507.59 61.29 Remi- nflncd i over cnde (parcant) 10.8 11.2 January Februuy March April June July M-t f per ton 884.49 931.67 47.18 879.86 935.20 55.34 Rerium reflad over etude prreent -- Note: nerru n i l . Source: k r i v t d f r a data in U.S. . _ - -.- IlrpCrtvnt of Caaercs, Imports for Can~urptlon, IM 1 1 1 1. L Apart f r a the U.S., the other large irportiag area rrhich report. itr inportr of procerred coconut o i l reparately f r a t b o u of crude h e been the EC. Table 2.7 rho- the unit valuer of importr of crude and procramad cocomt o i l for food ures by tbs Corunity u 8 thole i n the rix years from 1974 t o 1979. In addition, the table rho- the voltme of procmrrad (leer, other than crude) coconut o i l imported by the ?LC f r a the developlq vorld and from ACP countrier . The importr of procer8ed oil f r a d e v e l o p i ~countrier for f o d urea h v e been rignificant ouly rince 1977; i n fact, t h y declined from 9.8 thousand tom i n 1978 t o only 3.2 thouund tom i n 1979. Noot aw f r a Papw New Cuinea and F i j i and were conrigned t o the U.X. Ih.figurer reveal tht the prvairur for procarred o i l differed f r a year to year and f r a cotmtry to country, rhovilrg no conrirtent p8ttern. lhir vu ro for a l l developiq countrier and for the ACP countrier u a group. The praftmo =re ba8ative I for P a p a k v Guinea i n 1977 and for F i j i lo 1978. !kme more detailed data on : U.K. importr i n 1977-79 i n a b l e 2.8 d r o rhov n o t b i q v e q concluive. I Oa the 'mrir of the import r t a t i e t i c r done, it ir irporrible t o draw any migoificant conclwiom u to the exact form of the prooerm* coconut oil imported by the gC from P a m #av Cuinu and Piji. Evidence from P a w Mew Guinea ruggertr t h t the eed-refining of coconut oil f o r a p o r t brr been taking place for rora time, i n i t i a l l y t o met the r e q u i r m a t r of a large industrial user. b a n t t u l l y , it uaa decided tht the Pap- R.v W n u rill rhould produce only one grade of oeml-refined o i l f o r export, u the production and a p o r t of semi-refined a d crude r i d e by aide presented more production and shipping problema tbur did a mingle grade of --refined. It has been stated that there was no c o ~ c i o u oattempt to obtain a higbcr price for the r d - r e f i n e d , altbo*qh a m o w v h . t -her price u y have been realized. Thir c h i r ir supported by the h p r t data f r a r tba U.K. and EC, vhich, a a s d r r g they a r e accurate, ruggert very l i t t l e ' v i l t r a added a r a r e r u l t of the procerriag. IRIF i j i , "coconut o i l other tban crude" n f e r r to o i l which has been "vigorously bleached." Therkare l i l i t a t i o a r t o ruing the unit v d t r r of a p o r t r md h p o r t s as a meamure & the grorm procerriq margiru for coconut oil. Although recent - crude trade data f o r the U.S. a d the Philippiner ruggest tbat the grolrr v d a added for d r e f i n i l r g l bu been in the region of 10X, a l l o v u r e r hoe to be .I! made for the e a r of volume i n refining and tba v d u of the u i d o i l produced from the rmprtock obtained from refining, vbathar o r not tbc acid -11 war aported. 1/ The follosfing data rhov there odjurtmntm to the Philippine unit - 1 Ibe unit vdrram of refined oil brve to k r e d 4 by 8X kcaure of t b - refining losr, rrbilo the production of acid oil from roaprtock i m about 5 1 by v o l m e of the crttde o i l proccraed. - ~ I 2-11 O TU rc-m tan t w ra rmrrn w amm orsf c r d o c o t r r t at1 for 1.rwtrla1 :1br.n1 6u& roe- 011 for V d l r af c- 011 0- t h erdo lor l o 4 u oe ALcb - - P - - 1i)l 6- 1.119 2,413 - - -. hp.llrr ktaw --- 3.m 6 . ~ 9 2.~5 m l a p l a 5 5 - 4) U swt.r c L . . J f l u t l o m air c a ~ & atwq ot c- dl w b r t h o cndo Cl.0.. 1. m w procurl Lu DOC r r r u r l l y -#Id)r l m -. I.lrrrlal lw. 111. mL.wq L w r y r o t o l y .p0~111.1 l a .DtD t ~ b u l m t l r r . Lu Lm 1ulw l a lk U -1- at '0110. o t l r t l u - c r J . . lor W t r l r l apart fro. w. Ilrrrlar bkce rd.' It a p w n thoc t h r o m m Ilyrt* .Itb10 utw lrcerC a l l w l o r tm 1876; . I r a tL.. mdonta wtt(.. hot. ~ r c r l a . . f ~ l - - t l ~ rrlr h t l 8.1. (1. O?O. 2.530 t- ltrhp ~r u 41,100 ltr1111). S l u r t U a W .ulmIrm S T R P t-lulm a d I* mlutld~ mlmprtnc. It l o w e m 4 tl. 4.u h t u n -dl*. I977 I0711 1879 Ot Y Value llnlt v r l w otY Yalu? lhl~a l ~ u r Qtr \'a1 ur l h l t v a l ~ r (tonal (U)m) (pc,ncr p.r kg) (tuns) (W) (p.nrr p r kg) Iton=) (UWO) (p.nrr per LC) Crudr cocondt 011 l o r trchnlcrl u r r 11507 29no (2619)1 World 24,545. 9 , ~ n . z ol uhlrh - - H r l r y r l r b70. I 317.9 Slnarporc Phlllpplnrr U * 4 5 . 1 S,49beh Prpru Nru Cutnor 5,102.8 I,Mb?.1 R*llnmd coconut o i l fur I tecl~nlcrlurr 11507 5810 (I511)l World 4,&1.9 L,44H.2 1h ?,0w.r 2,727.h 14 s.3hl.a ~ ~ h ~ h . 9 UI of vhlch I . Prpur Y.v Culnrr I,n5n. 1 Itbb.5 29 2*55le* 77N. 2 11 I,?h9.1 Lhl. 7 52 - PI j t Z,WO.I Io ~ ~ z . 3 . 111 I,o1n.9 1~ ?,919.5 1,475.~ 5I bconur a l l o l 15.07n I 1 b. I 1.rr (l.o., crude o t b r than e tor technlcrl unr) b# b# 11507 11UO ( b l l 2 ) l I Yorld 2 2 5 . I IO,?Ob.4 I 7 34.131.1 ll.75l.R 14 2 ? 1 11.101.5 51 of uhlch n ~ l l l p p l ~ b 3,590.1 l,lb9.9 11 11,917.9 4,179.9 I 2 l,R2R.R R7l .h Papua Wlu Culnrr 1 7 1 . 2 6,159.n 37 l l 7 5 h . I Le991.* W I?,OIn.? 11,111 1.9 52 - - - - F lJ l b.42l.h 2,401.4 I 7 1,117.7 lel?7.1 1b IeIa7.4 l,hh1 .h 52 - - -- lvory h u t I ,778.9 h11. 1 1h Mll(rr1r 1,109.4 410.1 A ? 147.9 b9. b 11 k f l n o d coconut n i l other t h n for rechnlcrl uuc, I1507 92rm (~OIA)~ Uorld 4 2 8 2,041.h - of uhlch - H r l r y r l r - Prpua Nru Culnrr l,lIR.9 1,111.4 Prklatrn b-4 II rl~t ,"a "1,219.3 511.3 - - #OK.~ Wan. n l l . The impnrr 11s: n u h e r r I n thr drnrrlpt lon I n (urrnthrsrrl r r f r r t o 1977. Suurcr: IJ.K., h p a r t n n t nf Trade, and U.Y. Cum.t-r and Fnrlar, m r r 8 r r a Trrdr S t r t l a t lea 01 Iv.11., Inrulm, varlnua Iaawa. * value of export. f o r the yearr 1977 and 1978 and provide a more valid e ~ t i m t e of the overall grorr margin f r c a r c f i n f ~ t (1) Unit v a l w r of export. of crude o i l 53 (2) Unit v d w r of export. of r e f i n d oil 58 3 ) Refined oil unit v a l w reduced by 82 53.4 - ( 4 ) Crorr procewriq margin on refined oil, (3) (1) 0.4 ( 5 ) Imputed v d w of axportr of acid o i l per unit of crude oil proerrred &/ 1 6 (6) Ertimated overall gtorr u r g i n , (4) + (5) 2 -a/ Ylve pcrcelrt of the unit v d u e s of tbe export. of acid oil i n 1977 and 1978 of 32.0 a d 36.5 cent. per kg, respectively. TIWEbyproduct acid o i l has a low value, a l t b q h the unit v a l w r themselves a r e f a i r l y high. -b/ A p p r o x i ~ t i o a . Source: Tables Zw8-2.14 The estimated grorr uamim for the crude o i l valucr vere some 4X i n 1977 an3 only 22 i n 1978. h a allowlag f o r a distortion i n the s t a t i s t i c s , it ap8ars that tefiaing for export doer not rerult i n a very high value added. The unlt valucs of export. and imports do not suggest that very large gross margins a r e added by refinlag o r otuer simple processing of crude coconut oil. In the case s f the Pbilippinu, the data on refining losaes and the value of the byproductr, notably acid o i l , sbov very low gross margins. There is no known d i r k t bmroduct of coconut o i l refining other than the acid o i l derived f r a th soapstock, exports of which do little more than offset the value l o s t 1 refining. Mscussions with PhZljppine trade sources indicate, however, a somewhat higher value f o r byproducts, suggesting thet increased v e l w ray lie i n the production of oleochemtcals futther downstream, although not r x e s s a r i l y for export, In the caw of processing elsethere, e-g., Pap- Hcw Guinea, little value seems t o have +en added. C Ihc value added i n coconut o i l refining typically has been between 102 and 202 of the value of the raw material. Such figures a r e low i n comparison with the value added in, f o r example, the p?ocersing of rubber o r tropical hardwoad. This is because coconut (and other vegetable) o i l refining is a raw material-iatensive process, i n vhich the role of labor is insignificant and i n vhich w e n increases in capital do not result in great additions to valve. UNIT VALUES OF EXPORTS OF COCONUT OIL (n. per w - - Rmv in bulk 1.36 1 3 6.29 3 2.92 Source: Sri e-ror u quoted fa Ceylon Chrber of , Colabo. Table 2.10: PAILIPPIHES-EXPORTS OF CRUDE AND REFINED COCONUT OIL (thousand tone) Coconut o i l , crude Canada chi^, P.R. Taiva?r, China Germany, FOR. Indonesi a I t a l y Japan Rep. of Korea Netherlands Singapore Spa in U.K. U.S. USSR Venezuela Others TOTAL Coconut o i l , refined Australia German Jkm. Rep. I t a l y Japan, Rep. of Korea Halayeia Netherlands U. S. - Othcrs TOTAL 8.7 a& 55.5 55.0 60. 1 44.8 - Note: - Heane nil. Source: Philippines, Foreign Trade S t a t i r t i c r of the Philippines Manila, , various is~we. (thourand ton.) I9?4 l1)t3 I W b 1-11 1 9 t h .I 1 ?roc.rr.d - k v Total ?roc.rr.d k v t n t a l ?ror.rrd h v t o t a l rrarraaui b w t o t a l h a c r a w 4 Raw tot. 1 In d r u a In d r u m I n *rum@ l a dtuna I n drama - - - - - - - - - - 1 U.K. - - - 0.2 0.2 7.6 I.4 I." fl. ? I.? - - - - L W M . ~ ~ a. I - 0.1 2.1 2.1 1.h 2.6 4. a 0. 1.1 I. 1 r4.d. 11.1 11.1 9.7 9.2 18.1 11.1 4.a 4.1 - - - RRl#tbn a. I 0.2 0.1 n.q n. r 1.b d. I n,I n. I ----- rr. I a. ) n. I 0.4 -- -- -- -- (.+ I I. 0. I n. I n. 4 n. 4 --- - ---- - - LXIM, ?.a. 1.0 1.1 2. ; 11.1 17.7 11.9 11.9 (;aman bm. --- Rap. - b. h h.L 1.4 1.4 #I \ - -- --- - I t a l y 2.5 . 1.3 n*' a. I i 7.5 I 1.0 I 1.0 4. ) 0.1 n.7 4.0 7.9 I -- - -- Indla - 2.4 2.4 .- -- --- W.therl~nda 1.1 2.7 -- 2.0 2.0 I.? 5.1 Y A. 9 e - --- --- --- - - Rru (I. I 0.2 0. r 0. 5 0. 2 n. 1 n. 1 (1.1 1.0 I - - Spaln 0. 3 0.3 I. I I. I 1.1 1.C - - - - - - U.S. - , 0.8 n. cl r .n 1.n 9.2 s.1 I .n I .o usm 4.8 4.n 4.3 4.3 othm - J. 2 2.1 2.1 0.1 0. I n. 6 n. 4 I 7 1.I 0.2 0. : n. 4 n.4 n. 1 1.1 a/ Of rrhlch 19.1 I,Ibulk and 1.4 In drur, 61 Of rmlch 31.6 I n bulh and 1II.a In d r u r . C / C I Yhlch 44.6 1.1 bulk and 11.9 I n d r u q . 21 of Yhlch 7.9 I n bulh and 0.1 I. drun. .I Of uttlch 22.4 I n bulk and 0.8 I n druq. - Table 2.12: FIJI--EXPORTS OF COCONUT O I ~ ' (thousand tons) - Australia 5.6 4 a 7 -a/ The distribution, ertimated on the baais of the valw of aport. to known dertinatioar. Source: Fiji, Parliraeat of FLJI, Ihe Trade Report, Suva, 1976, a d Bureau of Statiaticr, Current Ecooaaic Stat1sticr, Suva, vario-.w issues. Tabla 2.13: PAPUA NHtf GUINEA--EXPORTS OF COCONUT OIL 19-i.16 1976-7751 1977 1978 1979 July-June July-June Jan.-Sepc. h s t r a i i r U.S. -a/ Dirtritution eatimted oa the h a ! . ~ of the value of export6 to known destinations. -bl -- O f which t3e U.K- vu 3.0.5. 21 fit U o E a 6 j OZ vhicb the d.K. 21-0. -el The total i > r the p a r us, 29.1. - %te: - Means dl. n.a. Means tor available. Source: Various, ,.~elucling abua Wtu Culaea, S . Moreeby, a d Ib3aa a ~ dPacific C ~canur Jakarta, various islruee copra (1201.42) b r l j 278 119 a51 372 A:C 21: h d e coconut o l l f o l l d u o t r l a l (IW1.29S' Crrdr cocorrvt 011 for food uoeo Uorld 70.2 144.7 of &lea t C 3 7 . 105.8 k n l o p l ~comtrlom 32.0 38.5 X I c-trlea 9.3 13.2 tlJ i 3.2 i.C - - trench Polytmrlla 5.8 6.8 1ldorw.i. - ltdo)rla I.8 1.9 14u W r i b o (Waatutu> - h p w k u Guinea 4.2 9.0 12.1 a. 3 1.8 3-9 Uar! 3 7.9 20.4 2 't)L.3 37.0 24.0 of &I& 2'. I 20. & --- = U --- - 1.3 tn. 3 31.6 29.3 D w e l o p i q c w r t r i e o 0.7 5.n 9.R 3.2 - - AC? cormtriom 0.6 ~ 5 . n C.8 3.C rrji z04 - - - - h p - wuCUIW. -- -1.2 n. 6 3.c 6.3 3.0 )(.&yaia 0.6 - 01 U ccutom c l a u ~ l f i c o t i o c u*loo coatain a c l t e a o v of cococwt o i l otbcr t h n cru& (1.0.. in .ow w y proaowd but lot a r e e s ~ r t l yr e f t ~ d )for indwtrfol uwo. Tht* cototory l o aot aeporotolr op8cifi.d In the II!QXE tabulotione. but 10 larludd lo brooder rroaplm of "ei10. other t h s c d . f o r i n d u t r l a l u u o . Oprrt frov wya. I l a u e d o r t o b o ~ ~.ad.' o I t opprora t h L thore uere no irporto of t t i o u t - o r y of cocormt a i l prier to iW6: oiace thorn. d e r o r e q-aLicico hu been imported. but apparently only by the V.K. ( l a I978. 2.55n r u m I r a hpme Sew Culwa a d I . 0 0 0 t o m I r a tlji). Sln-a chi. o c c ~ o r y u m o t k anoty=od I r a the #I.!!lotio~od t a b u 10 q u o n t i t a t i ~ e l y uairportaot. I t 'b not included In thie rablo. Ibt.: - s a n e nil. Source: LC. t u r w t o t . Aaolytical h b l e o of f# toreitn T r d e ( I L ! R ) . Val. A. 1914-19, LraD.rkurt. 4. Price Instability Using annual data for the period 1950-80 compiled by the Caamnuedth Secretariat, the index of instability of the real oarket pricer f o r crude ' coconut o i l was calculated t o have k e n 23.42. Thia figure ir quite high. Untottunately, there were no published annual data f o r refined coconut o i l price8 over a long period, for inrtance, 20 o r 30 year., and it i o not possible t o compare the price instability of crude and proceraed o i l over a long period. However, the wnthly eerier of prices of crude and refined coconut o i l i n the U,K. for 1977-80 were calculated (Table 2.4). Bared on these rigures, the i n s t a b i l i t y index f o r monthly crude o i l pricer war 7.22 and for rafined o i l , 5.22. It is not clear to h a t extent the 2 percentage point reduction for the proceased product l a significant. It was aomevhat surprising t h . ~the monthly data over four yeare rhow thia comparatively high degree of a t a b i l i t y for crude coconut o i l price8 in the U.K., gcven the v o l a t i l i t y of world prices. However, it must be borne i n mind tht (1) the period aur~eyedfor . the monthly prices uaa relatively short and (2) the monthly data related to current sterling prices, oat real prices In compiling the tnstability indices, the forrula used bas: h e r e Xt_ = the actual value for the year codcerned, - - Xt = the 5-year (monthly) moving average, a d - n the number of observations of Xt. - - .s -- P - H. The &ompetition fran Substitutes . h Historically, there has always been a high degree of competition and hence subetitution among the different vegetsble o i l s , particularly the "soft" o i l e (groundnut, soya, rape, sunflover and cotton). Recent technical developroents have helped t o extend the scope for competitive substitution, and palm o i l fracrions now can, for example, replace s o f t 011s i n some uses. This has rendtd to ncrrow the differentials between the prices of the various oile. With coconut o i l , which has rather specialized uses because of its high proportion of lauric acid, the possibilities f o r direct substitution are limited largely to palm kernel o i l , the other lauric o i l with characterietica rimilar t o tho- of coconut oil. Therr are probably 8- food w a r for lauric o l l r for which, howver, pnlm o i l fractions could be rubrtitutrd. Broadly, the priccr of coconut a d palm kame1 o i l @ have tended eo move together, Vith ccconut o i l p h f i q the role of prics loader, rince it br been providing the greater part--currently a b u t 82%--of the t o t a l world rupply of lauric o i l r . In certain eon-odiblr u e r , mfneril of 1-bard ryatbetic rubrtterrtas haw emerged, r.g., fatty alcoholr, but it .he area hrrr rrfined lauric o i l s are usad--uinly fcr d i b l r purponr-tba artur.1 productr h o e remallold generally urrchallr~qed. lkverthelera, uhen lauric o i l price. soar or get appreciably out of l i n e v l t h t h o u of tbe r o f t oil., palm o r r o f t oil-baed productr u y k r w b a t i t u t d la raw c o n r r a i q a r m s , uhilr i n other arear the urn of h u r i c 0110 may k trutly dfmfnirhhd in favor of .oft loll aubutitutea. A l ltha uw, fn 8 numhr of war whore coconut oil'. rpecial propertier, rot., b r i t t l r a r r a .bd a low m a f t f q point, are u s e n t i a l , the demand 10 r r l a t i v d y inrlartic. b r r w e r , palm kernel o i l rupplier nre t h e m l v e a Umitd, r e a t r i c t h g tb .cope for subrtitution. With regard t o refined o u r , tbe porribilitiea for eubrtitutiag fully refined .;'% hrnul o i l for refined cocon~&o i l are probably lera than i n the c ~ r aof t d c o m r p o d i a g cnrdr oilr. lUr ir becruu a t tbt refined o i l r a g e , product forudatioru u y k .o r p c i f i c ttpt refined kernel o i l coillld not be oubrtituted for refined coconut oil. A euitch t o the use of r a f i a d b r n r l o i l *ht affect tba quality o r flavor of tbe cad product, o r t : k refined kernel o i l a h t require furtber d i f i c r t i o n t o uke it a rearonable subrtitute. 111. COST ANALYSIS A. Entry Costs Entry costs a r e treated only briefly because of the lack of data. listorical information u r m particularly d i f f i c u l t t o obtain for both the developed and developing countrier, a s o f f t c i a l r w r a e i t h e r unable or unwilling to provide the data. Zegarding prerent day entry cortr, data on the costs of plant and buildingo and inrtallation for four plant, of different sizes in the U.K. were arrerbled on behalf of the Coronuealth Secretariat by the P-E Consulting Croup. Ihe othsr entry c o r t r included in t h i s d i r c u r i o n a r e infrastructure, marketing, storage f a c i l i t i e r a d knorhou. The figures in Table 3 i n d ~ c a t e rubrtantial and progrerrive declines in the capital c o r t r ptr ton of continuous plants a r plant capacity increaser. Thus, the tot81 capital cort per ton of i w t a l v r d u p . c i t y f a l l from b63.35 for a 17,000-ton-a-year plant to only b28.85 for a 68,OOO-ton-a- year plant. It is aoteuorthy, however, that the capital cortr per ton for the emall 9,000-ton-a-year batch-operated plant sre only three-grurterr tho- for cha smallest (17,000-ton) continuoucr plant. 'Lhir indicater that the econorler of continuous plant operation can only be realized i n a large plant. 'Ihum moderate increases In caprcity may best be achieved by erecting other rrill plants. In terms of entry into ths industry, the table rho- that uhile a capital investment of bl.077 million ir required f o r u plant v l t h an laarul throughput of 17,000 tons, it is only necessary to lacrease capital expenditures by 82%-to 11.962 aillion-to iacrcase the capacity fourfold t o 68,000 tons. The i n s t a l l a t i o n costs as a proportion of the Cot81 cort of the plant, buildings and installation w e r a 35% for the batch plant and 282, 342 and 332 respectively f o r the three continuoue plants. After the plant and buildings and t h e i r installation, the next entry 3 cost for an o i l refine is infrastructure. 7sfrastructure requirements m y not vary much between veloping and deve1c;ef countries. In a l l of them, a refinery w i l l normally & associated with or be close t o an oiloeed extraction plant, 11 for which tbe'infrastructure vlll already have been establirbed. In a producing c o a r y , port or wharf f a c i l i t i e r vill be required for the export of both crude and refined oil. I n sore developing counttiem, inadequate port faci:lities, notably the lack of deep water bertha, prevent the dlrect loading of crude coconut o i l , necessitating transport t o tanker- lighters or barges, v l t h a consequent increase i n costs. Moreover, the more exacting quality standards demanded f o r e d - r e f i n e d o r refined o i l put there -11 I n a developed country, a refinery could conceivably be rupplied entirely with imported o i l , i n which case it would not need to adjoin an oilseed extraction plant. - 166 - Table ).I: L'.I.--CAPITAL WTS FOI THC 4)*SnLYTI- W COCCoU't OIL RTJ~SFIICC' Total cwpltal cnstm 9,MO toam I7.MO t o a s 51 ,M(I t o n s **,01YI ton. (Mton8 dally) On tons drily) ( \ W ton- d a i l y ) (?MCON dally) batch cnat lnuaam C M ~l n u w * rnnt I nww ' b i n process e q u l p r n t ( i n c l u d l a n pl p.varl) h c l l l a r y e q u l p r n t Scorrle e q u l p w n t Buildlnl and g c ~ r a lswrvlces I n r t a l l a r t n n cnmtr Total c o s t 3.r t o n of I n s t a l l r d c a p a c i t y (L) *in process . g u l p w a t ( L n c l u d l q pip.uora) , w I \ l a r y r g u ~ p r n & ' Storage oqulpwnt Ilulldia(( and s e n r a l s e r v i c e s [nscrl l a t Ion coat Toc.nl c o s t p.r ton ot I n s t a l led capact t y (U.5. S) a/ Excluding u o r k t q c a p l t r l . -6/ In t h e c o n t t a w - ptaats. n r u t r a I t u c i o o I n c l a th c o r e of the morpstoct-ap.ar*tn~ plant. -Mote: Data apply t o Jurw 1960. I Courcr: S t r provided by t h e P-E 6 t b u l t l n a Croup f o r t b W a r r r a l t h Seereta-lac. shipwnts a t greater risk. Thur the prevention of contamination v i l l probably be pore costly vhen direct loading from the shore is not possible. Installation of direct loading f a c i l i t i e s could be an additioaal infrastructure requirement. Although it is suggested l a t e r in t h i s study that refining for -Fort i n a developing country may k associated vith a domestic requirement for refined o i l s , even when this is not the case aad a l l the processed o i l goes so export, reasonably good f a c i l i t i e s for moving tha uecondary inputs t c and from the m i l l and the refinery are still required. The vaste products of refining must be disposed of through ueverage or vaste disposal syateas, although this is not a n r i o u s problem, u i n the case of the effluent from palm oil. As noted, the infrsstructure requlrewn(:s for a refinery in a developed country d i f f e r only i n the sen- that the port or vtrarf f a c i l i t i e s will be oriented toward import8 rather than exports. Xovemtnts out of the refinery w i l l probably be mainly by road or even by direct tranafer to an adjoining processing plant, while the finished products w i l l most likely move by road. Insofar a s the f a c i l i t i e s are already likely t o be i n existence to 4 greater o r leseer extant, additional infrastructure requirements for ref iaing coconut o i l are likely t o be u r g i a r l . lhe narlrcting costs for processed coconut o i l will, on the other hand, be high. la general, brokers and/or dealers do not handle processed coconut oil. Instead, imperfect or tied u r k e t a have often k e n the rule. In the U.K., although ex-mill prices for processed o i l are published, these are established not by an open market, but by a relatively -11 group of refiners, one of vhich is probably a prtce leader. If a developing country e r e t o aarket its sen%-refined (or even its refined) coconut o i l i n Europe or the U.S., j L k-ould probably need (1) t o negotiate a marketing tie-up with an existing dealer or processor or (2) t o establish its o m marketing agency or (3) poesibly t o engage In a form of cooperative sellin# through either a pool o r a singte carlcctlng agency. Although it has not been possible to quantify the possible aarketirrg costs, it seems that these could be substantial i n caees (2) o r (3). Insofar aa selling the refined o i l night involve processing to custoeer ~pecifications, tire cost of introducing and operating additional quality controls could be v i e d a3 entry costs. 8 Lest, it is h o v n that vegetdble o i l storage f a c i l i t i e s are fairly limited i n developing producing countries. 1/ In the event of greater refining for export, not oo1.y vould a d d i t i o n a istorage f a c i l i t i e s be needed, but the f a c i l i t i e s might have to be constructed t o the higher standards required for refined oils. Higller costs vould result i n both cases. In tka developed i m p o r t i q couatrier, rtoragr f a c i l i t i e r for &- r e f i d or refined o i l are limited because a o m ~ l l yttm refined o i l r are wed within a day o r two of refining. -refon, i f developieyy cauntrier were t o r d e r t a k e a ruecerrful export trade i n refined coconut o.X, additlo-6.d rtorage c a p c i t y might be required i n tha conrtmlq courntrier. l h i o capacity, which vould same am a bufferrtock, could be dram upon t o meet unexpected i n c r u ~ r i n d a r d or to taka up etocka rhould d r u a d f a l l belov tb level of exports. Since t h i r rtorage capacity vould need to k constructed to highrr rtandardr than that for crude o i l and w u l d involve art additionr to capacity, extra cortr m u l d again be incurred, u in tha p r i u r y producieyy comtrler. Bowaver, there are variow optionr as to the o ~ e r r b i paf these f a c i l i t i e r . For example, they could below to the asporterr or could be owed by private or public autboritier in the importing countriar uho could charge rent f o r t h l r we. Dirverthelerr, t b a i r coartruction, together with that of the correrponding f a c i l i t i e r i n t& exporting countrier, vould rapreaunt an important entry cost, no u t t e r dto financed them. Tte l a r t entry coat, t h t of b r b o v , would prohbly be r i n i u l , a r the techniqwr of coconut o i l refining are d l - k n o v n and in general are not sophisticated. 1/ The c o r t r would p r o h b l y & aigoificant only if neu advanced and patTnted techniquer were wed. While it might be porrible to rue expatriate labor i n the uoylement of s o p h i r t i c a t d plants, t h l r option doe. not s e a very likely. A pore likely cost vauld be overseas t r a i d n g for r t a f f to maage or operate tha refineries. Normally t h i r u p e n m ir not vary signiffcant. Ia suarruy, it appaarr that the entry corts for coconut refining under the headings of plant a d baildirrgr, infrastructure and hou-hav are not d d y oneroue. 'Ihe marketing cost, however, could be a heavy i n i t i d expenditure, were it nccersary f o r an enterprise to set up itr o m u r k e t i n g agency o v e r s e a o r t o take pprt i n some form of cooperative marketing. (Such one-time carts for the provirion of u r k e t i n g f a c i l i t i e s rhould be distinguished f r a the ongoing ~ r k e t i n g corta.) 'Iheze could also be' a substcuntlal entry costa i f additional and improved storage f a c i l i t i e s hnd t o be provided. Uhile their provision would probably involve a f a i r l y large capital expenditure, it vould not necessarily fall on the refiner/exporter o r - - importer, a s tbe f a c i l i t i e s could be provided by other enterprises and rented - to we=. i -- .o B. Mrect Cost Factors w !e - 1. Production Costs Tables 3.2-3.5 show the varloue costs f o r coconut o i l refining in the U.K., the Philippines, S r i Lank and Indonesia. The data indicate that i n a11 instances the caw a r t e r i a l (crude coconut o i l ) Is the ~ j o rcost i n the -1/ 'Ihis rerark does not apply to "physical refining," described i n Chapter 11, A. "Processing C'hai~s." l'lJ.1.JJ.t N l t * ~ - ~ -1 JOJ d n a ~ 3UUll l n ~ q )1-d -1 fiq p.l"d.oJ .am raalnq ~ I * U LU'O w-1 s1.1 9s.w ss-I 11.0 bl.91 d9.0 .)-0 19.1 ((1.1 vr*c rI*bsm Table 3.3: PHILIPPINES-ESTIXATeD COSTS OW COCONUT OIL REFININC Perom per toa U.S.$ per ton of refined o i l of refined oi.1 Fixed costa Dtpreciation Salaries Hircel laneoua Repairs and mi tcrance h h f ~ i l t r a ta9~ h i Variable cortm Raw material* b/ Indirect muppliea (secondary inputs) Steam and power Wages Interest on vorking capital SUBTOTAL, VARLABLE COSTS 3,87201 6,223.5 -- 519.9 843.9 TOTAL COSTS -3,95806 6,300.9 -- 531.6 85404 Total costs, other @ than rev materlsls 758.0 950.7 101.8 128.9 - -a / Includes certain ralariu and some d e p r r i a t l o n f o r &fice nachinery. equipsent a d admiaistrative buildiags. - -b/ Largely cocanut oil. h -- - m Nate: !n.a.Manenotavailable. Source: Derived from data i n the financial statements of the Lu Do and lu Ya Corporation, 1976 and 1978. ~ a b i 3.4: t sa1 UNIU-COSTS, ws v m m VALLZ ADDED XN c c c m OIL RePINIts fl - Rupee. U0S.s -per ton of refined oil-- Depreciation Interert on fixed capital Salaries Admlnirtrative axpenre8 (plant and off ice overhead) Plant lnrurance Plant rparer, repairr and ~ i n t e r u n c e Rent Property taxer SUBTOTAL, FIXED COSTS 97.58 - 6. 27 Variable costr h . i c input (raw eattrial): crude coconut o i l Secondary input a CIuatic soda Bleaching earth Filter c l o t b Filter papera Sulphurlc a i d Other Wages Social Security Fuel Electricity O i l Water Interert on working capital SUBTOTAL. VARIABLE COSrS . Total costr leas rav aaterial (coconut o i l ) .s Sales value Croee prof it (before tax) Value added 1.542.29 - 99.07 - -a/ Data apply to 1979. Plant capacity per annum (270 days), 6,480 ton installed, 5,400 ton 0 ~ t h a i ;continuous refining but batch bleaching and Qeodoriting. -- Note: Htans nil. Table 3.5: IXDC)KCSU-COSTS, U S VALUE ARD VALUl! ADDED IN cocartn OIL r n ~ r n d Rupiahr U.S.$ Fixed c o r t r Dapreciatiot+b/ Incareat on fixed capital-b/ Salarter and adminirtrative expenwr (plant and o f f i c e overhead) Plant inrurance Plact r p r e r , t e p a i r r and u i n t e r u n c e Rent Property caxe8 SUBMTAL, PIXeD COSTS Variable c o r t r Buic input (raw material): crude cocoaut o i l Saccndary inputr C.ustic soda, b l - ~ c h t a g earth, f i l t e r cloth., f i l t e r paper a d ruplhuric a c i d O t h e r (laboratory w w i c e r ) Wages Socia 1 w c u r i t y Fuel E l e c t r i c i t y O i l Steam (including fuel) Interest OE vorkiag c a p i t a l SUBMTAL, VARUBTZ COSTS 342,142 549.14 TOTAL COSTS' 349,319 560.66 Total costs l e e s rav r a t e r i a l o (crude coconut o i l ) - - 22,644 36.34 .+ales value n.a. n.a. L - S r o s s p r o f i t (before tax) n.a. n.a. 7alllir .w added n.a. n.a. -a/ Data apply to 1979. Annual capacity probably rather s m a l l ; batch processing. -b/ On an investment made i n 1975. &I the baris of replacement costs in 1979, the combined figure f o r depreciation and i n t e r e s t on fixed c a p i t a l increases f r a a Rp 5,511 t o Rp 7,045 per ton. - Note: n.a. Heane not avai .able. Scurcr: Data pubifshed in H. Varrukuhringam, Study of the O i l s and Pats Situation i n Indcnesia, Ul9XDO/APCC/C.1/8On Vienna, January 1980. - I73 - I $ z production of refined oil. I n Sri Lanka, fo: example, h e r e the non-raw P material coats of the plant examined a r e admittedly probably undereta timated, Bi crude coconut o i l was rtill 90X of the t o t a l e r f a c t o r y coatr. f C I n Indoneria, too, the &ta indicate t h a t crude coconut o i l wan 93.5f 8 of the cost of o i l refining. Similarly, i n the Philippines, where there h a b been a large volume of refining for the domestic market and of real- refining o r refining for export, the data rhov crude coconut o i l a s the p r e d a a i ~ n t A coat, viz., 812 i n 1976 a d 852 1.n 1978. In the U.K., where cort ertimater for 1980 were provided hy the P+ Consulting Group f o r four rizer of plants, crude coconut o i l was 86% and 852 of the t o t a l cortr in plants with annual thr-~whputrof crude coconut o i l of 9,000 ton8 and 17,WO t o m , rerpectively, vhilb in the larger plant@, which handle 51,000 t o m and 68,000 tons annually, crude coconut o i l was 31% and 922 of the t o t a l costs. The larger role of rav araterivl corts in the bicgcr plant8 reflects their econmier of reale i n other areas, notably c a p i t a l covtr, salaries and wages. Crude coconut o i l ts a tradable product, the cost of which r b u l d not vary amoag different market\ by more t h n the transport corte and t a r i f f r ( i f any). 'Iberefore, it does not =em that the availability of the crude o i l should be a determinant of the location of tba refining plant. 11 Nor does it seem that other fixed o r variable costs such as energy, e e c o a a r y lnputs or wage levels should play a c r i t i c a l role in decidir3 &ere t o 1.ocata a refinery, althowh ihcse corts varied froa country t o cc rntry both relatively and absolutely. Bowver, it i e d i f f i c u l t t o wke direct c a p a r i s o n s of the cost data f o r the U.K., *hPhilippines. Sri Lanh and Indoneria. An Tables 3.3-3.5 show, rose signit :cant cost elcaant ir miaring f o r each of tho three developing countries. Moreover, tha cort data have not been compiled on a uniform basis f o r a l l the countries. &catme the time periods are not the same, even with convereion into a coanon currency a t the appropriate exc5ange rates no direct comparisons over t i m e of the different count:ien a t e pos.slble. Nevertheless, Table 3.6 compares the costs (except for the o i l i t s e l f ) given i n Tablee 3.2-3.5. Table 3.7 shows the capital- labor r a t i o s for the U.K., the Philippinen a d S r i Linka. I L The lack of adequate cost data f o r the Philippines, the world's most important coconut o i l er- rter, is a particu1arI.y serioue weakness in the analysis. The cost data f o t the U.K. were useful, but m u s t be treated vith caution, since they a r e est.&ates based on a umber of assumptions, 8-6 of vhich may not apply i n p r c c t ~ c e . For instance, the costs per ton f o r the two largest plants show inportast scale econoeies, but i n f a c t , although t o t a l U.K. refined coconut oil;output i n recent years has probably k e n substantially larger than *he o f f i c i a l l y reported 18,000-35,000 tons per -11 This does not seem to be sc vhcrc there is (semi- ) refining purely f o r export (see Chapter IV, C. "The Dominance of Ckude Coconut O i l Costs"). -- 2; * a*.. a : - c -11 '11 rl C -.'I'r I 11,000 to& 1 u . 4 ~ IOIM 16.~4 10.41 )S.Y n.:t s a t 1.6s 1.11 5.9 1,? m... 1.1 8.r IL ,u , 0.L *-4. IaB9 1918 ;.1 ..A. I.4. . 0G.t m... 409 84.8 4. 1 D... :I. I? - - Crl LmL. I 9-9 br410 t m ..a* 9I.U O.lb 9t.U 1.d ..a. b0.11 5 *lotlrtlc.i bta for d o 1 plut.. h i ~ hn l i r ail- tr- t* r*eha(Liprotit. 01 ttu *rm ~*a.t.. X h e b d l ~ DC&l*lw u 1 t y *pa:*. annum, 1_! rhqt amount van sort lilrclp spread w a g a nunber of plantr. 15r ruch it is not likely that the ecoaories of scale were f u l l 7 realized--or insofar an they were, the larger plant. prohbly ware operatirq continuowly with coconut o i l for only linited p a r i d s , vhile processing other 0 t h the reminder of the ti#. Indeed, the 3.K. coat data are really for "model" platite. still, some inferencar caa k dram frra tha data. Ihr firrt ir ttuc the crlde coconut o i l price8 I n t h r U.K. ream nigh Ir\ ralation t o those psi4 by the primary praducing countries. Evan i f allowance ir made 'or tta influence of freight rater and export 8ad import dutieo, i f any, for the U.K.'e raw material coatr, a d for the fact that the sterling value for June 1980 war converted into dollars a t the high value of i~Q2.344, the raw s,aterial costs still appear rela*ively high. Alteinatioely, the figures for the ocher three countrler may ba unreliablem Nevertheless, tta apparently high r a w a a t e r i a l corta provide arr Laprtanr: argument for the abolition of import dutice on crude coconut oil. Tho oecod inference ia tht in tbe U.K. fixed costs are a high p r o p r t i o a of tbe t o t a l costs excluding raw rateriala, u c e p r for the two larger plants, vherc theoreticrlly they declined, although t h i s nay nor have been so i n practice, since there plaatr would not have been operatlag a t their oavima~ throughput- me relative insignificance of fixed costs in the Philtppiaee and S r i - h n b pimp28 qwrt?ons about the r s l i a b i l i t y of the data, since it ir hard to believe thatr fixed corta could be ro low i n relation to the U.I. at, ideeil, t o Indonesia. In the F.K., vages and salaries were a significant proportion of the t o t a l costs excluding raw n a t e r i d s , aven in the larger plants, where they ver2 over 25X. In the devlloping countrieu, to the contrary, uagrr and ealnries were only a rtlativaly mall part. To qmlnimize its coopctitive disadvantage i n labor coeta', refining i n the U.K. ideally should be undertaken in large rlante. Evidently, developing countries do nct face the same pressure to refine in 1 q g e plants. Eovever, their c a p c t i t i v e advaatage may v e l l be Largely eroded by tbe high costs of their m c o d a r y Inputs. The relatively high ehare otnon-rav naterlal costa accounted for by the interest on working capital i n t& U.K. 2/ again throw into doubt the very low figures for the Philippines aad the Tack of any data under this headlag for Sri Lnkn. The f ignre for Indonesia, by contrast, mars high, although it muat be not. 3 that -1. U.K. r;fined coconut >ilproduction la almost certainlv higbtr than th?t indicated by the o f f i c i a l producciou staAirtica, since these tre understood to e x l - d e o i l which is refined sad incorporated ddrectly i a t o food 2roducte. -2/ Somver, the U.1:. data s;flect the high interest ratee prevailing i n rhe - # A A V m nC yarn the general level of interest r a t e r i n Indonesia ' h e been high i n recent years. 1 . e f i n a l important cost area includes fuel, uater and steam (the three items are grouped for convenLence ana because disaggregation war not posslSle for eoee countries). There ltamr were an important coat in the U.K. and increeeed i n r e l a t i v e importance with the r i z e of the plant, rince there were no input economier of t le t o match thora i n c a p i t a l expendlturar and wages. Fuel and rlteam cost. were a g o d deal hlgher in the Philippines and S r i Tanka, although t h i s c o i have k e n the reault of operating k l o v capac;:v rather then of l e a s e f i i c i e n t u t i l i z a t i o n of f ~ m li n the U.K. While t h e i r apparently high fuel and steam coots may handicap these primary producing countrielp, chis dis.dvantage may be a= l e a s t partly offect by the r e l a t i v e l y low 1aL.x costs. 2. Transportation and Diatribation Costs It vas not posaible t o obtain much data on traneportation and distribution costs, and, rince tbe study was limited t o crude o i l refining, it use not necessary t o examine ttte distribution system o r packaging. In an importing cormtry such as the U.R. which refines 011, the refined product is normally quoted i n a form such ss "proapt delivery, rr- refinery, i n bulk," with **deodorized o i l i n 215 ton l o t 6 basis." A t t h i s stage i n the chain, the refined o i l w i l l e i t h e r be moved t o adjacent premises for further procesaiag (i.e., it might be hjdrogeuatd before being used Tor the canufacture of margarine) cr be mved by a plrchaeer to another daetination f o r f i n a l use. Inported refined o i l is available t o buyera o r U 8 e i S on broadly the same terms, i.e., bulk ex- etort ( i n the docks) o r ex- refinery. It can be assumed that, beyond the bulk ex-plant etage, additional coete would be identical whsther tbe o i l wae imported already refined o r had been refinW i n the importing country. Neverthelaes, vere coconut o i l i?ported as "semi-refined," vhich is the m e t l i k e l y possibility, i d e a l l y its transport to the point of d e d o r i t a t i o n should be costed, I n practice, L t was no, poeeible t o inveetigate the t,reighG c o s t s of such a hypothetical situation. 4a - 'ih2 iaveetigation of triuisport coses f o r refined o r eeai-refined o i l from the primary producing c o u t t r i e s vae *at important. Processing copra ! into crude coconut o i l reduces the overall f r e i g h t coets considerably. l o r example, it January 1977, the conference race on copra i n bulk from the -- Philippines to the EC was U.6.$42 per ton, while that on coconut o i l i n bulk was $38 per ton aad on copra expellers $33 per ton. Thus, the coet of moving one ton of copra converted into o i l and cake 622 of $38 (i.e., $23.56), ~ l u e34% of $33 (i.e., $11.22), a t o t a l of $34.78, representi- savings of about 172. There tahould a l s o have been subetantial aaviags i n port b a d l i n 8 charges f o r the o i l rather than copra, though there should have been r o a handling chargee f o r the copra e x p l l e r e . Similarly, there is a srdcst r d u c t i o n i n volume when shipping refined o i l r a t h e r than c r - ~ d e ,although the savings here ma7 be largely o f i a e t because there vill h separate s h i p p l q c:targus for the acid o i l , 4.f exported. A t the next rtage of procerring, the data do r a t BnddeaEc that higber rater are i n fact charged f o r refined o r remf-refined then for crude oil. For example, the followlag v e r t - t h e barfc rat- charged 3g7 the G3yIsn Shipping Corporation f o r ttte t r a m p o r t of coconut oil and tSrrtr& pmdccttl %ramC o l a b o t o Eamburg/Rottsrdam early i n 1980 (the Currsncy MJuatmct Fsctor rsd Bunlur Surcharge, vhfch are applied on a unifoxm h i m, have %sea etxcPuril@d), a d s coconut oil IClfind coconut o i l Patty acids Refined acid oils Clpcariae - Notet Ln addition, tank cleaning c h a r g e ~of ll'*Sa$18.(8 per ton wire iapored. Thur, there uaa m a d d i t i o d charge for rbipplng refined coconut o i l am compared v i t h crude or indeed refined acid oilr. Eqmlly, tala Lraight rater quoted La a rtudy publirhed i n Hay 1977 1/ do nae rrh~w - p r a t e rater for refined coconut o i l , but are merely q w t ~ t i o r uf o r ' CBICQPLU~ o i l La bulk,(( although the rtudy doer note that the Philippinm stm!lps e i t h e r crude o i l o r refined, 2/ - On thc other h a d , che came rtudy camaesats~e l a t 'Ibe growth i n tbt export of refined palm s d cocoanut c21, as oppored t o crude, and the iacrure ieo b b f a t eg-seid by-product, ham required more-cxpnriva kaak elating. Ebwever, the parcel-tmker opefatom, i n order to1 cassPeP: higber u t i l i r a t i o n of their tonnager, have fnrrodc.cei - - amore rophisticated t& coating8 , Bere ~cr-tous aeparatioru and pump rooma with tbe lateee design of one pmp per tank, Tbir enabler the ovne~ro ta eaa- a11 J -- aA type. of liquid cargo witbout f e a r of coataminat8on. 08 the other hnd, while the o m e n enrure tb k:!eribillby and higher ra of v u s e l u t i l i r a t l o n , the shipper@ S w have to bear e coat of the new technology. %a l a t e s t -21 Ibid., p. 73. Tbat higbar rater ware not levied oa prbceesled coconut o i l i o confirmed by other rourcer, while the practice Ln the palm trade, ul~eremu& larger amount8 of refined o i l are aovd, '-AS k e s t o chlrarge the q o ~ er a t e r for crude aad refined oil. new buildings on order for delivery 1978/79 of about 31,000 tons dut cost about US$29 million each (USS937 dwt) o r about three times =ore than the 1972 deliveries. L/ I his statement m g ~ e s t s that the upgrading of facilitliee $:,: conveying refined o i l and o i l products led t o sharp increaser i n conb/tr;icti ?+a; costs, notab',y for stainlesr steel or epoxy-lined tanks urd 1n1t r g & c blanketing facilities. The higher construction costs should hr/ve k e n reflected i n increased c h ~ r g e sto shippers, but apparently theJ verel c ~ i r g ~ to the shippers as a group and not, as might be expected, only fo ehcac shippers of refined oil. Indeed, it appears t h t the whippers of c have been paging the saw rates a s the shippen of refllned o i l and been suhsidizrng Lhe l a t t e r . lhis situation u y be acceptable to shippers, since Laprovaments i n the quality of transport reduce deterioration or contuaination urd tend to benefit a l l shippers; furtpt :2nore, today's shipper of crude m y be towrrrou'r seller of refined. P i n a ~ l : ~the , cmpetitive situation i n the shipping narket nay well preclude chnrgf* ~ i g h e r rates for reflntd, even i f these seem to be ecoaarically j w t i f i a d . , I I Broadly, thea, it UJ be concluded t h a t while improuemento i h .icons,- port f a c i l i t i e s f c r refined o i l bas k e n one of sev~trlrl factors ; rdlb2ing I overall shipping costs, the costr of these improve~ents have ktjn l:ot>a equally by the shi )perm of crude and of refined of 1. In practice, :he higher shipoiilg costs psr rc are not likely to deter the bulk trade i n semi-refined or refined o i l o r acid oils. a s refining leads t o some reduction i n the volume of the is in fact some modest saving overall in transport shipping crude. Currently, technological factors seer t o be a more important to ,the shipping of fully refined coconut o i l than do shipping appears that a t present the beet way t o ship f u l l y refined o i l vithout lrlei":cnE deterioration froa moisture or oxidation is in drmu, the cost of substantial. In the Philippines i n early 19=, i t was estimated that drum required t o ship one ton of refined coconut o i i cost U.S.$72.50, la~cruc$7, tenth of the f.o.b. value of tht oil. Furth-re, i n temperate i d p o r c ~ r ? ~ eountriea, it can be d i f f i c u l t t o remope the solidified -refined o i l qroo the drums. For these reasovs, a t present exports of f u l l y qpfined o i l hqva k e n largely t o small epecialized a u l r a t s which lack refining .facilities bqt bh%c.!, can bear the freight charges f o r the drums. Otherwise, most bulk b ~ g e r r probably still import eemi-refined o i l , which is then deodorized. Whtlt r%lc shipment of semi-ref ined of 1 r2quires speciel tanka and r~umpingarrangemel-ts, cnd possibly nitrogen blanketing f a c i l i t i e s , and needs t o be undertaken wit? care, normally the o i l reaches the buyer I n an acceptable condition. In the loaget t a m , there i r good rearon to balieve that techirolsgg- i c a l progrerr w i l l permit the export of fully refined coconut o i l tn bu1.k without c e r i o ~ udeterioration. Dtawi~gcpon the vide experience of Ralayeis i n succerrfullp exporting refined palm o i l , rose expert. think that the bulk transport of refined coconut o i l rhould be no more o r lerr hazardour t h m t b t of RBD pala o i l .ad palm olein. lhey note t h a t the latter i baing tranrported ruccerofully t o several part. of the world vith very l i t t l e deterioration. lhur thir problem vary lllkely dl1 k avercome l a the w m t few yesrr and w i l l lead to a rignificant upanrion i n export.. Finally, while th. rhippiag c o r t r for refined o i l a r e not Bigher, their role i n t o t a l cootr have not been accurately evaluated beauma praciae dam h v r not been available. Rowever, arruring that refined oil kur a heaha~s v d w than crude, tbe r h a n of freight c o r t r i n tbe overall laadsd price w i l l be lear for refined t h n for crude oil. 'Iba policy facton affectiq c w t r indirectly are upart t u r n old t s r i f f r . So far 80 cm k uacertafned, tbrra h v e burn no rubridiea for exportr of wri-refined or ref incd coconut o i1 i n any of tbr rtudy caunrlriscs , nor indeed do theta appear to bve been any for crude o i l rhiprantr film tha main coconut o i l u p o r t e n . The export duty i n the Philippines, a r noted earlier, h r bean hlghar for copra (7.52) than for o i l (4L). Iba duty doan not, however, diffaranbtatct betmen cnde and refiaed all- Because of the lov world p r i e u i n tlbe titrrb half of 1980, tbe export duties on both copra and o i l uere r u r p d c d , I n addition, t b r e h r k e n a "prafumn duty on tbc difference Qaetwec?~the ~ Custour Valuation Rice a d a baric price deterriaed by the authorities. Finally, there bar bccn a levy on u p o r t r paid to tbe Coconut Comaerr' Stabillration F d , tbr proceedr of which have gone t o rubridisc the pri"6;e.a of coconut o i l and productr i n tbe doaeatic market. C h t i l r k c n t l y , tbe levy w a s paid largely by the coconut farmer, b t ~ tlegirlation bu b k n introduced t o s h i f t the payment t o the exporter in v i e w of the low world pricew. Bow successful t h i r wuure vill be i n practice cannot yet be 3-ed. - 1 h of 1901, it appeared t h a t the a p o r t duty b d been owpended, but that the p r d a m export duty (payable only in certain circtaetancer) rs rtill in effect. Since tbe r i t r u t i o n h r beem ao uncertain, it n r ? o t rnalped hem, although Table 3.7 does give roma tdtx of the duties i n June 1979 vhrn prices were very high. Studier ryggest that the export duty hm. tended t o f a l l upon the farmers,L/ particularly i~pride -1/ Sac Jord L. Tongzon, "The Economic Impact of Export Tariffs on PhilippXae Coconut Bxportr," a therir presented i n 1978. Totlgzon c~ncludaa(p, 94) that ih incidence of the export tax f a l l s imediately on the exportere, who can then s h i f t it h c k to tire coconut f a n e m . of overeupply, and that the authoritier reea t o have recognized t h i s when they suepeded the export duties i n mid-1980. / Sable 3.8, although admittedly the figures are from a period of unusually high prices, ehovs that, in addition to the 1%out-turn 1088, a further 19% of the f.0.b. price for crude coconut o i l was abrorkd by the various export duties and the arbridy for domertic consuaerr. It ir no eurprire that with tha f a l l i n coconut o i l export value8 irr the Iirrt ~ l off 1980, t3e authorities sought vaya to reduce the burden of the export t u e a which, while heavier on copra, w u l d probably have reriourly eroded the processing margin on copra crushing. A s noted e a r l i e r , export duties on coconut o i l were rrintroducad in S r i Lanka I n November 1977 a d wre rubrequently revired on tvo occrriow. However, Sri tanka har not been an exporter of refined coconut oil. An even ore important cause of distortion has been t a r i f f r . Tb4 EC imporee the port severe duties On refined COCOnut o i l , the result of a t a r i f f ercalaticn that has d i s c r i r i n a t d he8vily q a i n s t refined o i l for boch induetrial aad food ure. b a n the CSP rate8 of 7% and 13% have k e n high. Only the Asian, Pacific and Caribban countries associated v i t h the EC under the h C Treaty have gotten duty-free entry for their oil. To date, mainly Papua Nev Guinea has received the benefit. In the U.S., the duty on coconut o i l , whether crude o r refined, uss cut sharply i n 1980 and than abolished a t the baginning of 1981. m e r e 188 been no duty i n Australia, uhile in Japan, the duty has been just under 10%and has not discriminated a g a i w t refined oil. Table 3.9 set8 cut the X's WN r a t e s of duty on crude and processed coconut o i l , the GSP rates and the calculated r a t e s of effective protectiop. The most interesting feature is that the effective ratee of protection on proceesed o r refined o i l s have been heavier under the GSP tarif! (the one applying to all pq$ssry producerr) than under the HFH t a r i f f , A i c h i n practice has applied t o imports of o i l produced i n or imported from developed countries- This higber rate of effective protection has arisen frcm the proportionately greater increase i n the rate of duty on processed 051 over crude d e r the GSP (an 862 increase) as -par* v i t h the HFR (a 50% increase). - P - !e m * I -1 To analyze the incidence of a p o r t duties formally, it i e necereary t o know the e l a e t i c i t i e e of supply and demand. This analyeis wad not undertaken, since the subject was not then very relevant to the refining of cwonut oil. Were the Philippine authorities to introduce differential rates of export due7 on crude a d refined o i l s , it might became necesrary t o analyze the matter further. The subject is complicated because, vhile the supply of copra a ~ coconut o i l is broadly inelastic, demand has both d elaetic and inelastic components, representing the pnrtr of d e d which can and cannot be net by substitution vith other vegetable oils. Table 3.8: PHILIPPINeS-A BPUCDOUN OF TEE COCONUT OIL EXPORT PRICE (U.S.Q per ton) Price Philippine average uport price, f.0.b. 999.20 12 out - tun l o r r 10.00 Exp~rtduty (42 of tlu Curtomr Price Valurtion of $891.25, for Jun. 1979) 35.65 Premium export duty (202 of tbe difference between Curtou Price Valumtion a d the b r a price of $772.25, r a t i n March 1979) 23.80 - Coconut Conrumerr' Stabiliaation Fund (CCS?) (600 peror 31.26) x 1.61 &/ 130.82 f.0.b. value a f t e r deduction of the 200.27 out- turn l o r r , u p o r t dutiea aad CCSP 798.93 -a/ The figure of $81.26 i a multiplied Sy 1.61 t o convert the levy f r a a copra t o a coconut o i i hrir. - Note: Ihta apply to June 1979. Source: Derived froa data i n United Coconut b o c c i a t i o n of the Pbilippiner, Coconut Statirtica, 1979, Vol. V I , W. 12, Table. 49 and SO. -- .a P Table 3.9:- TRE EC-NOnLNAL TARIFFS AND EFFECTIVE RATES OF PROTION FOR COCONUT OIL I (percent ad valorem) nm CSP Actual Effective rate Act-1 Brfective rate rate of protection, rate OF protect ion, proceaaed ovar c r u dae 1 I. Coconut oil for technical or induotrial pirposer Cruda 5.0 Othar (i.e., procaased) 8.0 (3.0) I 11. Other coconut oil I (i.e., for food uses) I Crude 10.0 7.0 1 Other I (i.e., processed) 15.0 (5.0) 48.3 13.0 (6.0) 53.0 - Effective rate of protection - *.ere 1,-the nalnal tariff on the final product, t the norrim1 tariff on the raw material, and V = the value added as a proportion of t final rales value of the final product. In this instance, V has k e n erived - - from the data in Table 3.2 relating to tk operations of a refi cry in the U.K. vith an annual tkoughput of 51,000 torrs of crude cocoa t oil. -- 'i J Value added is b56.60 per ton, and the total sales value of t final product is M33.75 per ton. *-Note: The figures in parentheees repreneat tbe nominal increaser tn t e rate of duty for processed o i l ~over crude. D. Technical Coastraintr 458 has already k e n noted, both uemi-refined and refined coconut o i l need special care i n t h e i r transportation and storage t o prevent deterioration, Unlike crude tocolrut o i l , fully ref i a t d o i l rborild ideally be used vithin 24 hour8 of refiniag and cannot be rtored more Khan 7 t o 10 dam. While some U.K. end userr have claimed that they vould nod ure imported semi-refiaed or refined coconut o i l without further p r o c e r s i q (In addition t o deodorization of the semi-refined o i l ) , o r might even switch to other refined o i l s , other conrurcsrs, notably i n the U,S,, have been prepared to buy r a i - refined (or perhaps refined) o i l when the price uar right, carrying out further operations such a8 d e d o r i t i n g , polishlag o r re-rafiniag a 8 required. 'Ihe purchare of procerutd rather than crude o i l aould present ! probltmn for aa lategrated plant. For example, tha iatroducaion of mi- t i refined o i l halfway thraugh the refinlag operatioa could cre t e technical i d i f f i c u l t i e s a d a t tha ssre time leave part of the refin ng equipmtat I unused. Thur, while the use of procerstd o i l might appear cheapalr, becaure of i technical rearonr it could prove more expansive. Were there t 4 be a marked 1 r i r e in import. of -mi-refined o i l by conru~ingcouatriee, rhfintrr could a u l t w t e l y find parts of their plants superfluous. While e c o n a i c considerations might jut i f y ecrapping them, t h i s vould make the refiners depadent oa @emf-refined oil, vith conrequent restrictions on their freedom a s to both their source8 of purchase and their a b i l i t y t o we eubrtitute 0110. n u s refiners might choose instead to keep and maintain thb euptrfluour f a c i l i t i e s as a form of insurance, although their retention vould r a i r a overall costs. A f i n a l point v i t h porsible implications for the location of the various pharen of the refiaiag process is that refiners tewi t o regard refining as a single operation, both physically and v i t h respect! t o cost a d value added, even though three (or four) separatc 0ptt8ti0118 hre actually involved. For instance, the profit o r value added of the variolus rtages of refining, vis., tuutralizatioci, bleaching and deodorizing, could qot be l i s t e d reparattly i n Table 3.2. @ Soae rough idea of the values which are added i n the dorrespondiag stages of palm o i l processing are available. It has been eetimqted that the appropriate premium& i n Harch 1978 for the various grade8 of pqoceesed paln o i l over crude o i l d r e a s follows .l/: I h -- I -I/ From a discussion with D. B. &k-Hielsen a t the seminar on Xarket 5 Develoment of Palm Products i n Kuala I u m ~ u ri n March 1978. See D. B. Bek-~ielaea, Market Development of Palm -products, International Trade Centre, UNCTAD/GATT, Kuala 'Ltnapur, Harch 1978, p. 83. Neutralized Neutralized and bleached Neutralized, bleached and deodorized Thuu, while nautraliting increased the 1.5 centr per lb, blaachiag added only an deodorization. Related t o a c.i.f. crude palm 1978 of roughly 27.5 centr par lb, f u l l deodorizing added 11% t o the neutralization alone, about SX. I f coconut oil, then mmi-refined o i l , other things being expected t o coamad market value@ about 8%higher than Equally, i f the primary produdng c o t m t r i u ware to processiag (i.e., deodorization) i n the i n t e r e s t s the result might be a loso of 3 percentage points i n the markat value a r i a i n s f r a f u l l refining. seem to involve heavier capital costs than bleaching, L/ and since they a l s o have rather the large stearn requiremtnte, the retention of thim procema countries might not deprive the primary producing countries of eleaent of the net v d w added. On the other b a d , the pomsible refiners t o s p l i t the refinlag processem needs t o ba borne i n mind. -1/ This is Tndicated by the data for the U.K. supplied by thr. P-E Cnnnulting Croup. I IV. GAINS FROn FURTHER PROCESSING The figures f o r the value added 1/ f o r refining coconut o i l i n the U.K. and S r i L a n b were shown i n Tabler 3 3 and 3.4. I n the U*K., t h e v a l w added a8 a proport ion of the prioary input, 1.t., of the crude coconut o i l , was 142 i n the batch-operated plant an1 15% i n the thies continuour plantr. This finding indicates t h a t refining added a reaconably mbstantial v a l w to thrt crude coconut oil. I n S r i b n b , the value added by refining war a good deal higher, notably 21%. but all the refined o i l w a s for the hone market. The valus added for the Philippines could only be e r t i m t e d roughly, using both Table 3.3 and company acco\mta. Table 4.1 compares the e a t i m t e d v a l w added i n the Philippines in 1976 and 1978 vtth the data for the U.K. f o r June 1980. It shom gross profits scparattly, a s i n tha Philippines they Vera a major cause of the fluctuations in the value added in the two years atudied. I h e tuble auggesta that, in the Philippines, the v a l w added M a percentage of the value of the rav material var only 4.72 ia 1976 (a year of low profitr) but 13.4% i n 1978. The 1978 figure is aot out of line vlth the 14-15% calculated for the U.K. for 1980. The main components of value added i n the U.K. i n 1980 differed with the plant size. In the large pleats, gross profit was aignificanf, but i n the small plants, where depreciation, intereat on fixed capital, labor costs and rent accounted for most of tha value added, gross p r o f i t s vere low. 2/ - B. Foreign Exchange Earnings A straighr cmparison of the unit values of the exports of crucle and refined coconut o i l frcu the Philifpines in 1977-19 (Table 2.5) shows t h a t the a p o r t of a unit of refined o i l had a v a l ~ w7-92 higher than that of crude oil. There would also have h e n some Podesg increase i n the overall export -- -11 I Val- added is defined as tho sum of the earnlnga of labor (salerice and 1 wages), c a p i t a l (interest on fixed sad working capital, depreciation and = grocs prof it) and land (redt). h - I -21 For the U.K., the ngross p i o f i t befors tax" (as set out i n the penultimate l i n e i n Table 3.2) may perhaps 3e regarded a s the economic rent for coconut o i l r e f i n h g . Eovever, it is not possible to r e l a t e t h i s econcmic rent i n the U.K. t o that i n the primaq ?reducing countries, since i n rhe case of the Philippines (Table 3.3), t-he E.o.b. prices f o r refined coconut o i l were not available, while i n the case of S r i Lsnka (Table 3.41, refined coconut o i l is not aormally exprted. However, f o r S r i Laaka, the gross profit before tax of $97.48 per ton i n 1979 cvuld be regarded a s the "rent" f o r cocoau? oil reff ning. Table 4.1: ESCItlATLS OF THE VALUE ADDEb IN THP: PAILIPPINES AND TaE U.K. (U.S.$ per ton of refi d 4 oil) Phiiippine~ U.K. 1980 '-W ton6 r 00 cons 8 OM tutch ::,", iiuouu "."on?P.:oua Vdw added (excluding groeis profits) 14.3 17.2 112.2 118.6 51 a9 Crors prof it8 (before tax) TOTAL, VALUE ADDED -- - - 20 2 97.4 122.9 129.5 -133.1 __I Source: Tablee 3.2 and 3.3 data frcm the financial statements of the Lu Do and lu Ym Corporation, 1976 and 1978. earn1r.g~arising from the rather mml\ quantities of 'ryproduct i?xporcs, auch t o f a t t y acidr and acid o t l (there -.-al-as are mhom In line 6 of Table 4.2). The figures i n Table -1.2 show the Philippinee' achual export aarnings froa coconut o i l in 1977-79 and the estimatrd changed in earnit~&sfrom shipping refined oil. The additional export eariiega fraar"realfni?g vcce quite e d l , being .'erived from t\e byproducta, aia:e tke e x w c ~oC refined o*' reducer tle volune of ex,wrta by about 8.52 Zn the three years ram\ refir,& o i l earned l e a r than the equivalent vol-e of crud4 o i l woul4 have. I ha baa alraady :wen i d i c a t e d , there i m only one d i r e c t byproduct of i coconut o i l reiiuing, via., the acid o i l r obtaiaed Jroa th sorp~tock. Li~qt6 of Table 4.2 chow t h a ~1Se exwrt earnings from scfd o l a la 1977-79 vure qu#.te m m a l l , and indeed t1.a direct foreiga uchaage k n e f i e fror refiniag f o r erpott were inrigaificarrt. Yet jndurtrial saurcar h i tecl t h e refining of fa^ td better returnr than Table 4.2 indicat a r , apparently bcca~vsa of the value of the byproducts. Thew rourcer dfC not, howevef , indicate vhetlnr there bypts.ducts were exported. S e r e are two porrjblc uplenaticnr. me f i r r t is that the sale of acid o i l on the dweatic tarket (with its potential .m as a base for more valumbl~~byproduct5 further d o ~ t r ' e a m )yielded higher n t u r t s than did the export of acid oile. Zn t h i s case, g e a e r d policy a refinirg as much o i l u posrib. 4 (not m c e l y f o r erp:h may h ~ v cprove? f a i r l y remun+rative t o the refinlug idua',ry ae a whole, v~ithc h e benefits t, the industry not a p p e a r i y i n the figures f o r exfort byprducts were not being erporceg. The recon& po s i b i l i c y is that 7srrrings tecausc the sophirtkatet2 oleochemical productu .:e b e i q derived f r i the acid o i l v ard exported. Philippiae export c t a t i r t i c r do not suggest aln Importrrct expor: zrdde in suth chemical ptoductx; those oleochemicalr ich were exported smem t o have been derived from crudo coconut o i l . crefore t!.e f i r s t possibility- that t3e bypro&ucts were mt b d n g seem to be consistsnt with the atatitstical data and explaln wlcy the benefit^ of refining e r e not reflected i n the export earnings. n u s , while refining apparently added vary l i t t l e net value t o the export zaminge, nonetheless the poesibility of erroneous or a r t i f i c a l l g lou u p r t valuer cbnnot be ruled out. , Approaching tb' problem in reverse, i.e., eat m t i n g the export earnings that vould have a c e d in 1977-79 had the crude o i l k e n refine6 and shipped at the unit values of refined o i l , does)not provfde a more satisfactory result. Indeed, the exp rt earnings frcm ed 011 turn out t3 be lover than tbcse from shipping crude o i l bec~uae ue of the retining loas (8.5%) froa the crude o i l aceedu the increqent ip the unit value2 attributable t o refining. Even i f a l l the acid o i l from, )rsfiniqr the crudo had k e n exported, tLIe t o t a l increase i u crwrt e a n i b e vodld have h e n quite small (Table 4.3). Furthenaore, i f the import condent of the f w i requirewcts for refining had been takea into coasideration~the net efzect on export earnings night have beta aegative. A s ragzrlng p l a n t s has been the ready a v a f l a b i l i t y of crude coconut o i l . Thir f a c t o r has not, hovevcr, in itselt k e n a r f f i c i e n t reason f o r the establislrwnt of a semi-ref ining operation. Econmier of scale, t h e ex1atence of ~ r k e t s ,adequate t r a n s p o r t facilities, etc. have a11 nceded to be conridered before n semi- refining f a c l l l t y is a d d d t o a crushing plant. Nevertheleor, t h e f a c t t h a t t h e semi- refining of o i l tor export does not require a l o c a l market g r e a t l y enhances :ts feasibility, especially i f , as is likely, the cost of incorporstlng the f a c i l i t i e s is r e l a t i v e l y low. I n these circmrstancelr, v h f l e the value added may be mall, semi-refinfag m y yield a useful price prmiuo and enable the o i l t o be s o l d more e a s i l y . The f a c t o r s that i n t h e p a s t determined t h e l o c a t i o n of coconut o i l r e f i n e r f e s w i l l pzobably not be t-he same i n t h e future. This is evidenced by t w d e r a t e degree of semi-refinfng already being undertaken i n primary producing countries some d i s t ~ n c efrorr t h e markets f o r f f n a l consumption. . I In the near future, further technological developments aay v e l l allcw f u l l y refined coconut o i l t o be transpo-1:.cd3aver long distawsm. ._._-- - I f t h i s l becomes possible, access t o a c a m e d e n t Iup$ly of crude coconut o i l is l i k e l y t o suppi 7t t h e =tendency of refined oil t o s p o i l a s t h e c r i t i c a l l o c a t i o n a l determicant. ~4this point, l i t t l e of the crude coconut ~ i produced from 1 imported copra As l i k e l y t o be a v a i l a b l e t o r e f i n e r i e s i n the developed countries, s i n c e m s t dl1 be crushed i n the priaary producing countries. The question w i l l th&efore a r i s e as t o whether t h e primary producfng country o r the tmporting country is the wst econoaic location f o r refining. If t h e r e were no t a r i f f s , t h e answer w u l d be obvious. Shipping refiaed o i l vould r o u t no wre than shipping crude o i l . Thus, the transport c o s t s would t h e o r e c i c a l l y be m c h t h e s a s e f o r both t h e r e f i n e r i n t h e primary producing country shipping refined ail as f o r the r e f i n e r i n the importing country importing crude n i l . S i s i l a r l y , t h e a c q u i s i t ion c o s t s f o r crude o i l in t h e two countries should be the same i n t h e absence of market distortions. Civen equal raw material and transport c o r t r , the c r i t i c a l f a c t o r s affecting prices i n the importin8 countries would be t h e t a r i f f l r v e l r on processed o i l s and the r e l r t i v e e f f i c i e n c i e r of the r e f i n i n g i n d u r t r i t s i n the two caurrtries. I f e f f i c i e n c y wre tqunl, then the t a r i f f s would keep 1 imports out wholly o r p a r t l y and/or reduce the return on the factodr of production i n the exporting c o u n t r i e s o I f , howver, g r e a t e r e f f i c i e n c y cen be secured In the primary producing country through coat reductionr, theq the e f f e c t s of the t a r i f f s may be bPolly or p a r t l y o f f r e t . Howver, ahould the t a r i f f r be reduced o r abollrhed, the developing country r e f i n e r could d r i v e t h e import lng country r e f i n e r out of burinera. If equality of raw material r d trrnaport c o a t s is achieved and there a r e no technical obstacles to the povemeni of f u l l y refined oil, then the other c o s t s involved i n coconut o i l refinin#--e.gm, labor, secondary invuts, energy and capi tal--wi 11 become critical i n determining the r e l q t ive e f f i c i e n c y of the industry in d i f f e r e n t couatrits. I n the past, there d o s t r have not k e n s i g n i f icant locatioaal determinants. Assuming t h a t the prdblem of traneporting f u l l y r e f i n t d o i l is solved, it w i l l be very interestin$ t o follow developments i n a market much as the U.S., ut.ere, s t a r t i n g i n 1981.1 a l l t a r i f f s on coconut o i l imparts w e n e l i r i c u t e d . Last, In the past i: scerd that a strong and preferably rlsing deoand f o r f u l l y refined coconut o i l where t h e r e f i n e r y -as located was alpo a u s e f u l stimulus f o r refining for export. 'In the future, local o u c l e t r f o r f u l l y refined o i l are not l i k e l y t o be an essencial precondition f o r the I establishmeat of export- oriented refiaiag. Since wholly export-oriented e m f - r e f i n i n g i n the prisary producing countries is now established, t h e r e arg no overwheloing reasons why purely export-orierrted f u l l r e f i n i n g vithout a l q c a l market should not eventually be undertaken. ?icvertheless, s m a l l producers c u r r e n t l y exporting only semi-refind o i l may encounter severe market lng ,end transport d i f f i c u l t i t s i f they begin t o e x p r t f u l l y refined o i l . Indqed, because of the more l i n i t e d export markets, these producers could k subject t o g r e a t e r r i s k s than p d - ~ c e r sa l s o supplying a domestic market-rlnle~s, ahet is, they are protected by special contractual relationships. - - B* Policy Issues 1. The Return on Coconut Oil Befiniag *The data on the returns on coconut o i l refining 5 e t o sme extent i n conf lice u i t h other evidence f r o a industry and o t h e r sources. For instance, t h e "adjusted" u n i t values of the exports from the Philippines suggest t h a t vhen ellovance is made f o r the value of the acid o i l exports, t h e gross gains added by ref ining a r e q u i t e small. Oa the other hand, informal conversations with Philippine industry sources suggest that o v e r a l l the gain from coconut o i l refining, taklng i n t o account the value of (processed) r e f i n e r y products, vas somewhat higher than indicated by the (*Init) value of the export s t a t i s t i c s . Studies of the coconut o i l refining industry in Singapore L/ suggest that the gain from coconut o i l refining may be some 8-10X of the v a l w of the original raw material under nomal circumstances. That coconut o i l refining can be reasonably profitable is a l s o borne out by the sample cost data for the U.K. There indicate rather lov p r o f i t a b i l i t y f o r the sbnll plantr but quite high gross aargins for the larger plants. The data for the larger plants vere, hovever, " idealized" in the sense that they implied vorking a t higher throughpuca than could have been attained on the basis of the o f f i c i a l l y reported refined coconut a i l output i n the U.K. in recent yeara. Saverthaleaa, the figurer do sug8ert a f a i r degree of p r o f i t a b i l i t y a t the higher levelu of plant operation. Similar Ievels of p r o f i t a b i l i t y could probably be achieved i n a country such as the Philippines, vhcre the plants a r e of f a i r s i z e and comparable t o those i n the d.K. Another factor t h a t perhaps accounts for sortwhat higher rargina than a r e indicated by chc unit value s t a t i s t i c s is that the market is characterized by a small number of s e l l e r s . In both the Phi1ippit.e~ and the U.K., t h i s s i t u a t i o n may enable refiners t o charge higher price than w u l i be established la a f r e e earket. To t h i s extent, therefore, the gross aargina achieved by the refiners may embody en element of "monopoly rent." L/ Tariff protection could also have at. important effect on the prof itability of coconut o i 1 ref iniag i n developed countries. The combined influences of technical factors (i.e., the deterioration of refined coconut o i l in t r a n s i t ) plus the t a r i f f escalation on refined coconut o i l i n some countries, notably thooe i n the EC, could permit sosevhat higher levels of p r o f i t a b i l i t y than would prevail is a more openly competitive market. 2. The Requirements f o r the Successful Export of Refined Coconut O i l It m y seem obvio*ls, but if capital is to be invested in processing plants and earn a reasonable return, adequate supplies of rav materials must be assured. Even i n the Philippines, it now seem8 that the increase i n copra production widely predicted for 1980 onvard a s a r e s u l t of thq widespread introduction of dvarf hybrid coconut trees w l l 1 not rake place until the mid- o r l a t e 1980s. Thus supply constraints may develop i n the next five years which could interrupt the f l o v of copra and coconut o i l t o both ck3 refiner and its overseas customers. An end user of i ~ p o r t e drefined o r semi-refine& o i l vould have t o s c f f e r only one serious interruption in supplies to b d persuaded t o retain its refining plant for use v i t h a l t e r n a t i v e oils. An e v e s clearer example of the bad e f f e c t s of supply constraints is that of S r i LRnka' where even the use of e x i s t i . p copra processing f a c i l i t i e s , l e t alone r e f i n i v e -1/ See R. C. Wanigatunga, "Comrpdities and Development i n ASEAN Countries, Processing and Adding Value," unpublished, December 1980. -2/ It is paradoxical that i n order to partake of these "monopoly rents," a refined o i l exporter might i n i t i a l l y have t o incur substantial marketing costs. equipment, war severely limited duriag much of the 1970s by inadequate coconut production. Another important condition f o r the s u c c c ~ a f u lexport of "1t h crude and refined coconut o i l is a reduction i n the level of t a r i f f s . On\y a very feu of the major markets a r e without t a r i f f s , among them the U.S. s l i c e 1981. Uhile t a r i f f s on vegetable 011 imports a r e probably roughly equal t o the value added by seed cruahing o r o i l r e f l n l n ~ , 11 most coconut oil-+xporting countries seem to ba able t o sell crude o i l Telatively succrssfullyi even i n the presence of a t a r i f f (c.g., Philippine crude coconut o i l in t h e EC). Di8~ri.i~t0r~a r i f f s against t processed o i l appear t o have been highly effective i n keeping out refined o i l (e.8.. f a the EC, where llttlle o r no procosed o i l has been imported from noa-ACP countries). By coqtrast, a t a r i f f on coconut o i l that does not discriminate against the procerwql q u r i i t y and is not prohibitive (as i n Japan, vhere it has been just under 102) appears t o have allowed the entry of the proce~med product with mme p r o f i t (el- the trade would not have existed). Should the importing country l a c k adequate refining capacity and h v e t o b y semi-refined o r refined coconut bl, then the t a r i f f may not even have a revere e f f e c t on the net earnin8b of the exporting country, and it may be possible t o pars most of the t a r i f f burden on t o the end users i n the importing country. I I The absence of t a r i f f s i n the EC on imports of crude and Proceased coconut o i l from the ACP countries associated with the -unity under the m Convention appear t o h o e beta of only limited practicbl value recently. The reasons are: ( I ) there h a been only limited semi-re~fining i n the ACP countries, and (2) such memi-refining h a not added ruch valbe t o the crude o i l . However, should technological developcnts allow the bulk export -11 See Stopforth arid OO'Hagan, op. cit., Part 1, p. 4, vhere it 1s stated that: I I 1 I 0 I n an industry vhere processing adds l i t t l e more than 10 per cant t o the value of the raw materials...import t a r i f f s can exert a strong influence on location even i f they a r e not very high... However, two points a r e ~ clear. Firstly, most importing countries impose t a r i f f s which protect i n some degree the domestic crushing 1 industry against campetition from imports of o i l , 1.e. ~ tfie structure of import duties favours imports y f oil- seeds, including oilseeds from other developed countries. In general, the levels of the t a r i f f s appear t o be somewhat around the valuc added bv processing. In a number of cases, a higher duty is levied on reficed rather than crude oil. The second point is that the exceptions t o the protective duties constitute a preference which has a strong influcnce on the direction of exports of processed products fro= the developing countries.... of fully refined o i l in the next few years, t h i s concession could becase of greater importance, since it w i l l allow the ACP countries to crport f u l l y refined o i l t o the Community on very advantageow tarur a r compared wlth similar dutiable exports froo, ray, the Philippines o r Indoneslar However, the problems encountered in transporting f u l l y refined o i l w i l l have t o be overcome i f t h i s o i l is t o be exported successfully. Vhile semi-refined coconut o i l can now be Lranrported over long distatxes without d e t e r i e r a t i o ~ , it appears that fully refined o i l still tendc t o deteriorate in translt. S o w experts think that f u l l y refined coconut o i l can be effectively exported only in drumr. This undoubtedly would raisa transport costs and l i m i t exports t o small quantities g o i . ~to a r k r t r without refinetles which can bear the additional txpenre. The i n i t i a l evidenc: collected in t h i s study indicated t h a t Philippine exports of f u l l y refined o i l were small in volume and almost certaiirly mhlpped in d t w . later infomation suggest#, however, t h a t a larger, though still modest, propsttion of the processed o i l being exported from the Philippines has been f u l l y refined or a t least specially refined t o meet users' requiremeats and, furthermore, that it mas being shipped i n bulk. Inquiries have not coaflrred vhtrher mubstantial amounts of f u l l y refined o i l a r e being exported i n bulk o r net. As indicated e a r f i e r , one expert believer that the bulk rovemeat of f u l l y refined cocoeut o i l $hould be no &re hazardow than that of refined, bleached and deodorized (R5D)lpalm o i l and palm olein. It is the opinion here thnt the Philippines is probably already exporting some f u l l y refined coconut o i l in bulk, although durrently these shipments may be encountering technical d i f f i c u l t i e s , requir$ng some degree oC re- refining in the importing country. It is probably only a matter of time (perhaps two o r three years), hovever, before techn;ological developaents pcrmit the bulk shipment of refined coconut o i l with only minimal reprocessing oc arrival. Overall, therefore, the transportation problems involving semi-refined o i l have k e n v i r t u a l l y solved, although f a r f u l l y refined o i l complete solution may require more t i m e . * Only countries o r plants offering regular minimum volumes of f u l l y refined o i l f o r shipment t o specified markets vill be able to export successfully. Already the small, scattered copra and coconu: o i l exporters of Southeast A s i a a d the Pacific face marketing and shipping d i f f i c u l t i e s owing t o the fragmented nature .if t h e i r production. Since these d i f f i c u l t i e s could ell be aggravated by t h e shipment of a more highly processed product, these countries may not s h i f t tethe export of f u l l y refined o i l . I Only social c o s c h n e f i t analysis can establish whether coconut o i l refining should be encouraged i n the producing countries. However, if the hypothesis is accepted that the overall value added from refining is significant, then it would seem it should be encouraged. In the Philippines, the export of refined products appears to have evolved without v i g o r o u ~ measures for I t s encouragement, apart from the d i f f e r e n t i a l export duty (4% on o i l , 7.5% on copra) uhich favor8 011 exports a t the expecse of copra exportr. However, t h i r dlffareatial war never prohibitive in itr effects, and 3 0 1 C copra txparta have continued even i n perlodr of relatlva rtorrgg. I Thin history of the export of refined coconut o i l and produqtr i n the Philippiner auggertr that govematnt encouragarent of t h i r export t r a d e har ! been minimal. It can, h v e v e r , be argued on the h r i r of t h "infant indurtry" approach that, &era appropriate, count rler rhould enco rage the coconut 011 refining industry on a limited rcale (and f o r a limited erlod) t o undertake exports. Such ancourrgamant could take t\a form of r k i n g tha export of reflacd productr relatlvaly more profitable and giving rpdclflc tax concerrlonr t9 cha coconut o i l raflnlng i d u r t r y . Going one rtaga further back, it could perhap be argued that encouragement o r arrlrtanca lrhould be given t o tha national food o r vegttabla o i l procerring induotrier t o encourage thair conamption of procaared vegatable oils. I I 3. Other Hatarla1 Conrideratioor I The n m k r of daveloped country r a r k t t r that do not dlricrlmlnate against refined o i l importr (through t a r i f f s o r other r u r u r e r ) 4s rather 1 small. Should w r a coconut oil-exporting countricr attempt t o t x p r refined c;conut o i l , tha ncwcaarr are likely to ancounter the ram d i f f i c u l t i a e already faced by the Pbilippio48, viz., the small number of ruitablb ~ r k e t r for refined o i l , notably, the U.S., Japan and Auotralia. Other evel loped country markets, tog., the EC, offer poor prorpectr k c a u r e of the hikh dagret of protaction i o r thr d a a r t i c procoreiag ladustry. I hveloping country urkttr for h t ir a relatively txpedrive o i l with r p c l a l i r e d user likewise offer r - h t limited prorpecte. I/le Middle East, for example, s c c u not to have proven profitable to u p o r t e r r . Eouever, inrofar am tbeae countrier require moderate semi-refined or refined coconut o i l , it i e porsible they import it i n fiairhed form rather than t o rafine it themrelvar, qlnce the l a t t e r could k rat& r upenriva. 1/ Some Asian and Pacific c a d t ~ i e st h a t produce coconuts b: t do not refin; coconut o i l could even find themselves lmporting refined o i l from nearby countries a~ their demand for it rkrea v i t h the growth i n lac-. A m o q the larger developing cquntriee, Chiah i b already seen a s a potential buyer of Philippine refined coco@t oil. - -- I & I I I n a slightly different context, the Indian Expreas of September 29, 1980 reported that the Indian vannspati industry preferred t o import refined, bleached, deodorized palm o i l o r palm olein rather than crude o i l , a8 refining the crude required energy, c a w t i c roda and other chemicals, a l l i n short rupply. An analogy can eaeily be drawn v i t h the coconut c i l Imported by developing countries. I b. Dtodorization by Importers The bulk of the export trade of the Philippines in "refined" cnconut o i l currently seems to conrirt of semi-refined oil. The q u r ~ t l o no r t k a whether conrumerr importing for edible user vould be prepared to l i m i t their processing to light bleaching and deodorization assuming the imported o i l war of gusranteed speclficationu. 1 For existing purchasers in the U.S., Japan and Awtralia buylri8 for edible user, the anruer must be in the affimative, a s trade is already taking place. Howvet, if the cococut o i l indtutrier la the Philippines o r other I countries wanted to expand t h e i r exports of 8-1-refined o i l , the qwrt4on is highly relevant. I n fact, the Philippine millerr' cooplex, UHICW(,may shortly be in a position t o rhip large quantitier of semi-refined o i l 40 the U.S. HobWer, the porribility of t h l r taking place w i l l depend rignifidantly on the uillingaerr of U.S. refinerr o r u r e n to l i m i t their procgrring operations to the last stager of refining. Equally, rhould it ever %ppen that the highly dircrimicutory import dut it8 of the EC on ref incd coconud were r e f o r a d , would European refiaerier be prepared t o curtail their rei/ining operatione? I It has already been indicated that refiners tend to ree the thqee or four parts of the refining process a s a rin81e (if not integ*ted) operation. Therefore, i n i t i a l l y , some resirt8nce t o limiting deodorizing could be expected. Thir rerirt8ace might be greater in where the o i l refining and product unufacturing proccrrer may be more integrated and geographically close- knit than in the U.S. In the country, the refining of imported o i l s such as coconut and palm probably less important to overall operations of the o i l refining id try than is the case i n Europe. Further, the o p i t a l i u r i o n may be l e s s .&the plants older. In chert c i r c ~ t a n c e r ,U.S. procersorr might be glad t4 cut out some ref tniag upcorer and dispose of soae old plants, limiting t h e m d l w e m to the f i n a l processes needed t o make the o i l fully acgeptable t o end ujers. E ~ e ni n Europe, t a r i f f reform, d i c h holds out the prospect of ch supplies of semi-refined o i l , could v e l l stimulate the interest of an id which is traditionally very cost-conscious. In short, the answer quertioa whether refiners vould be prepared just to deodorize is probablylyes, a t least i n the long run. Tvo other points need t r i e f me6tion. F i r s t , a certain proporticjn of the semi-refined coconut o i l is i n fact~onrumedi n non-food uses. n i a $rade of o i l i8 clearly required for these user, and indeed ham frequently (been prepared t o the specifications of users. O b v i o ~ l ythere is a cost sawid,g to non-fcod processors i n uslng partly refined o i l that enables uneconomic processing to be cut out. Secord, i f and when a large-acale trade in fully refined o i l deweloj~s, it may w e l l be that importers w i l l frequently need to carry out a modest degree of re-refining, say, partial deodorizat,iod, especially on parcels which might have suffered an undue degree' of deterioration in transit. Thc need t o undertake stme clean-up operat~ione would by no aeanr wipe out the possible cost savings arising frcm the 1 importation of fully refined oil. c. Semi-Refined Versus Refined Coconut O i l I t is v i r t u a l l y impossible to uke a general rccosmtndatl)on am t o whether countries exporting processed o i l should l i m i t tlremaelves t o shipping semi-refined o i l or should attempt to utpott f u l l y refined o i l (asspmi.tg the eventwl solution of the transport problems). The aqrrpcnts favgring the shipment of f u l l y refined o i l m y be ~ u m a r i t e da s follows. (1) The v a l w added in semi- refining s e m s rather lov compared v i t h t h a t added i n f u l l I refinin&. (2) In chose countries which levy hlgher t a r i f f s on proca~srado i l , :he r a t e for semi-refined o i l is s o m l l y cot lower than that fcr f u l l y refined oil. Therefore, since any f9rm of processing kyond the erude oil stage e t t r a c t s a higher t a r i f t , it i m sensible t o attempt to max8mize the v a l w added in refining. (3) A fully refined product may have more a~tcraction for those end users who do not wish t o involve themselves in the finla1 stages of refining. I I I The main arguments f o r l i m i t i l y exports t o semi-refined 011a r e a l s o compelling. (1) For smaller exporting couatries, the addition of debdorizing f a c i l i t i e s may involve q u i t e heavy c a p i t a l expendicures. (2) ~ u l refining l involves high standards of quality control. ( 3 Difficulties may arise i n 4 small island countries in the prwision of adequaca storage facilici 8 and in the timing of shippi* movements. (4) Xarketing f u l l y refined o i l preseats more problems an4 fever market o u t l e t s than does that of semi-refined o i l . I Since both sets of atg-nta a r e perauastvc, no unbversally applicable rec-adation u n be made. Nevertheless, i n l i g h t of t h e problems faciag a purely utport-orientcd procesming industry, it might be prbdent f o r the amall Pacific island countries t o r e s t r i c t their cxparto t o aemli-refined o i l unless they can establish special contractual arrangements wit$ buyers. Otherwise, they m y incur considerable additional expenditt;res in the 1 inbtallaticn of f u l l refining f a c i l i t i e s and at the same t i n e facle a more limited range of profitable markets. For a Large exporter suc as the Philippines, where there is a strong d o ~ c s t i cdemand f o r f u l l y refine o i l and the risks faced i n exporting a r e feuer, the arguments seem t o favor t e export of f u l l y refined o i l , ~ w e v e r , as. the next paragraph indicates, the * Philippines holds a singular position. * -d. The Unique Situation of the Philippines I I This study examined i n d e t a i l only two developing countfies-the Philippines and S r l Ianka, both ~ j o exporters of coconut, r Indones* was not & clncludtd, a s it was a net importer of copra a d coconut o i l when the fonceived. 11 L i t t l e refining of coconut o i l has been undertaken i n for the d&estic market, and there is no economic incentive t o r i f i a e f o r export because the qu,,lity of the o i l sold overseas is already high. T h u s , of -11 In 1980 Indonesia reverted t o i c s traditional role of ne: exporter, but there is no evldence of its exporting refined oil. I the t w o couatries studied in d e t a i l , only the Philippines has k e n exporting refined coconut 011 on a significant scale and has the potential t o expand itr .lales. I Although Papua New Cuinea and Tonga have a l s o been ex refined o i l , t h e i r processing facilities have apparently been export- oriented. In the Philippiner, on the other large domestic market f o r f u l l y refined o i l , which has given unique position. To describe the Philippine s i t u a t i o n an Imply that other countrier may not be able t o export some already are. The Philippine s i t u r t i o n ir unique oucput, its dcwinancs of the w r l d dcnnestic s r r k a t for refined o i l , and itr advantages which cannot be fouad together coconut oil. e. 'Ihe Prcaleos Facing a Purely Export-Oriented Procemming Indus r -+ 4 Semi-refining f o r the a p o r t market alone is already e tablished i n Papua Sew Cuinea and Tonga. There reem t o be no overwhelming tec nologica? o r 1 economic reaaons uhy new o i l m i l l s l i k e l y t o k ertablished i n utheast Asia and the Pacific should not a l r o have a r e d - r e f i n i n g capaci y b u i l t in, especially sr itr provision a t the tlae of construction may n t be a very expensive additional c a p i t a l cost. Horeover, the price paid for the o i l should contain a n element of premium a t l e a s t s u f f i c i e n t t o offse the c o s t of sem-irefining. However, tbe experience of Papua New Cuinea and the data on the u n i t values of ipportr into the EC suggert t h a t the net gain from semi- refining may be quite m a a l l , even though the improved quality of the o i l aunt enhance itr marketability. I I The experience v i t h semi- refined o i l seems t o indicate &at when the 9 technological transport probl- have been completely owercooe, u l l refining f o r the export oarket might eventually be undertaken, even i n t e absence of an internal market. However, it is probably no Philippines, e a s i l y the largest developing country c o i l and already a small-scale exporter 'of p o t e r ~ t i a lfor mklng even Larger shipments), d m e s t i c market f o r refined o i l . Befining f o r been s t a r t e d there i n the aksence of a domestic .1 'J It is vorthwhile, .rherefore, t o b r i e f l y list the be faced by a country cotlblishing a purely export- oriented, f industry f o r coconut o i l . ' (1) There vould be no home market l n l t i a l l y to carry the b u l g o f ) the overhead costs. Exports wul(d tend t o be a t average c o s t s rather than a t sowwhat above m r g i n a l c o s t s . (2) There vould be no domestic o u t l e t f o r o i l t h a t might be temporarily uosaleable i n the exFurt markec; such o i l , i f disposed of on a t t r a c t i v e terms i n an existing domestic market, could a c t a s a further stimulus t o growth i n the refined coconut oil- using i d u s t r i e r (lee., che food processing industries), thereby expanding the overall market. (3) Because of the wideepkead t a r i f f discrimination against refined o i l , the number of developed couhtry markets I I I I I for the producr vtry linited. This could rerul: i n excersive dependence on a small number t export markets, with possibly wvere econonic losrer i n the event of pric. f a l l s o r intense coapetition from other 8uppliers. Essentfally, whereas an exporter of crude may divert sale.. to other urketr, the exporter of seal-refirred or refined o i l is more vulnerable to market disturbances. Diversion of saler to other markets could through d l s t r e s ~selling, possibly across high tariffa. (4) vithout a base in the home market would 8180 be a t greater shipping f a c i l i t i e s . Even if alternative urkets could be absence of suitable shipping fact1i:ies could prevent the male product in a satlsfactory rtate. I t seems thar the soat favorable circuutancer for of a purely export-oriented f u l l refining operation vould be enterprises in the inporting countrier bought a11 o r most of eL plant under contract o r if the output were urlcrrted under join venture arrangements. It is notevorthy tht p r t of the semi-refined o i l r a Papur Mu Guinea reems a t timer t o have k e n sold under i n f o r u l arraag n t s t o specific cuetonere. Likevlre, i n the Philippine8 prior t o the e r t blirhment of UKICW, semi-refined o i l war exported by the S.n P8bl0 P.nlr, l subsidiary of the U.S. Pacific Vegetable O i l Coopny, t o the parent ompang i n IIn the U.S. Similar arrangtmentr could be applied t o fully refined o 1 o r o i l processed to meet the p r t i c u k r s p e c i f i c a c i c ~ r of cad urerr. ouch instances , foreign knowhow andlor capital might be required f o r the establishment of the refinery. ~ In easeace, refinlag for export =em. t o require roae marketing outlet, either a well-founded domestic market possibilitier) o r specific contr8ctrul relationrhipr with l a t t e r case, the desire of certain importing countries t o of supply could perhaps form the basis for the relationships. f. Refining as an Intermediate Stage i n Further 3ovnstream Processing f o r Export Although t h i s study %as shown the reasonable o i l refining, it has also suggested that the value low in comrarison vfth the procesriag of some other primary raw further limitation is that coconut o i l refining is ndk intermediate stage on the way to furtaer downstream This is because coconut o i l is refincd primarily to mnufacture a f edible productr. While coconut o i l refiniiig in producing cclurtry may be undertaken prior t o the these edible' products for the domestic market, there are insuprable d i f f i c u l t i e s i n the mnrketing of these goods d i f f i c u l t i e s arise not only from trade barriers to the export of t h e finished goods, but also f r u problems associated with their transport, p/ickaging, short product l i f e and entry costs into the markets. I With respect to inedible uses, a great number of valuable oleochemicals may be obtained f r a coconut oil. b u c v e r , t h e i r rurketing, rather than the technology, presents major problems. Afiy decision to produce p a r t l c u h r chemical derivatives is l i k e l y t o be taken on its mtrlta and not on the basis of the availability of partly refined coconut oil. 'Ihw, it is even more true for intdlble uses than for edible ones that the refining of crude coconut oil is not important a s an intermediate stage t o further dovastream processing. In t h i s context, it ir significant t h t in the Philippines in the production of aethyl esters for export t o Japan (uhere they a r e used a s tmportant intermediate products for the manufacture of oleo:heoicalq), the raw material used in the three plants is crude coconut o i l . Methyl r a t e r s , f a t t y alcohol and glycerine are obtained f r m t h i s and then are shipped *O Japan. It has been statcd by one fndustry official that the cost of manufacturiag tne methyl e s t e r s is about 75% of t h e i r f.0.b. v a l w , suggesting a greater groas value added t h n in coconut of1 refining. I / - C. Pollcy Proposals The f o r e g o f ~policy analysis, together with the other irsues raised i n the a s i n body of t h i t study, suggest a number of policy proporalr. Thc majority a r e applicable a t the national rather t h n the i n t e m a t i o r i l level. However, the role proposal a t t h e international lev& is indeed crucial, an2 u n t i l it can be implemented wlth some degree of ef fectiveness, the prospects for expanding markets f o r refined coconut o i l (and indeed f o r other refined cr processed vegetable o i l s ) vlll be seriously conscraincd. A major e f f o r t should be made i n international negotiating forums t n reduce, i f not abolish, the degree of escalating t a r i f f protection t b t a number of developed countries, notably those i n t h e EC, hart bestoued on their vegetable o i l refining and processiag industries. Ideally, the successful export marketing of refined vegetable o i l s requires the abolition of both t a r i f f s and t a r i f f escalation. Although the coaplete abolition of t a r i f f s does not s e a a very r e a l i s t i c objective f o r the foreseeable future, strong arguments can be mrshalled i intercational forums f o r the complete o r p a r t i a l removal of the discrimination i n exlsting t a r i f f ~ s t r u c t u r e sagainst processed vegetable 0118. Even a reduction of the discriainatory t a r i f f s t o more moderate levels would advaace the cause of vegetable o i l refining. I n the EC, f o r example, a halving of the s i x percentage points between the GSP duty on crude coconut o i l f o r food umes (72) and that on processed coconut o i l for food uses - -1/ Methyl esters are not normally specified i n trade returns. However, it fn estimated t h a t Phiiippine exports of metS.jl esterm i n 1979 and 1980 were rope 8,000-10,000 tons a year, virtually a l l of vhich was consigned t o Japan. Exports of f a t t y alcohols from the Philippines rose f r c a 2,100 tons i n 1979 t o 13,200 tons in 1980, apparently because of the coming on- stream of a new high capacity plant. (13%) might help the exporters of refined o i l surmount the t a r i f f barrier and rtill retain some of the rather modest 7alue added from refining. Obviously, the complete abolitton of t a r i f f escalation on pr.,cessed vegetable o i l s , so that the sane rd?*rr apply t o crude, processed a . 4 purlfled o i l s (as i n Japan), vould be serious evidence of the developed ~ountrier-' intentions not to impede processing for export in the developing dountrien. The complete removal of a11 t a r i f f s on vegetable o i l s , of vhich t:he\ U.S. has provided a modest example by abolishin8 a l l duties on cocorlut 011 iln January 1981, would o f f e r the beat prospect f o r developing country export r o(f refined 41 vegetable o i l s . * A t the l ~ional level, a t l e a s t the following policy proposals should t be considered: (1) Effective and economic procesring of crude coc0nJ.t oi? demands that a l l conrtraintr on t h e rupply of the b r s i c input be removed. Thir means that rmtlorul policles should give priorrty t o increasing the prodoction of coconuts, copra add crude coconut oil. Without adequate supplies of crude cocof.ut o i l , investment i n refiaiag f a c i l i t i e r runs the r i s k or being 1 underutilized f o r coasiderable periods, and the prospec s of an econoaic return on the c a p i t a l iavesttrcnt are o riously jeopardized, In the absence of M E U ~ C .rupplies of ltht tau material, further investment CR ptocetising f a c i i i d i e s is unlikely. (2) ihe establishment of a1 export trade i n f u l l y rei'ihd (as opposed t o remi- refined) coconut is li'kely to be encouraged by the exfstence of a sustained and r i s i n ~d*mestic dem/and far refined o i l f o r use i n the food -r food- fat pro easing industry. C h Lndustrial developeent :r&s, the $at ic consumption of refined o i l s o r products s b u l d be encokragcfic, although some n u r r i t i o n i s t s might not favor t h i s . e (3) S o u .degree of encouragement 'to the reft.ri.ag i d u s t r y (eitt.er overall o r f o r export) is l i k e l y t o a s s i s t the development of coconut o i l refining f o r export. Such assistance shculd - - probably consist of a rather limited incentive to rcfinr, and not attempt to make an "unprofitable" operation "profitable"; I: 3 should be limited in time vith a viev t o making the, trade - economically viable a t the end of a certain pisliod. Encouragement cculd take the fonr of d i f f e r e n t i a l export #atits & * and/or broader t a x concessiom t o the refining ladustry. 0 ( 4 ) For an export trade i n both semi- end f u l l y refined coconut o i l t o succeed, it L s essential t h a t adequa:e shipping facilities te available, It ir reported that a hack of adequate shipping apace is already causing d i f f i c u l t i e s to the expansiou of trade i n both refined palm a d coconut oils. Fhfore a deeision t o refine for export i~ taken, the available rhipping rewices should k carefully assessed. If there prove inadequate, conslderatfon night be givta to the provision, of incentiver to supply the necessary facili tier. h i a n ~.velopaer.t Bank. Study of the Coconut industry i n the AD^ RIB ton. Vol. !I. Hanila, 1973. Asian and Pacific Coconut Commnity. The Cat-nity (October 31, 1960) and other larucs. Jakarta. I Beyali, U. E. " ~ p p r o p r l a t eI n d u r t r i r l Technology in O i l s and Fats - The Case of Fsypt." In Appropriate lnduatrlel Technology lor ~ a t n . UNIW. Vienna, 197P. Central Bank of Ceylon. Review of th. Economy, 1978. Colombo. 1 I Ceylon Chamber of -rcr. AnnurL Reviews. Colombo. Varlous years.1 I I EC. Eurostat. Anal3 Cical Tables of EEC Foreign Ttadc (NIMEXe). 1974-1979. t u i c r r g . BSCAP. Shipping P r o b l e u of Coconut Pt&*:cts and Pacif'Lc Coconut C#nwfty )krbcr Counttles t o World Harlur the Fact Finding Cocrisrioa. hagkok, 1979. 1 PCB. Honthiy Bulletin of S t a t i r t i c r . Rooe. Various issuer. . Production Yearbook. Rome. Variow isrues. I . Trade Yearbook. Rome. Vatlous issues. . Y Fiji. Bureau of Statistics. Current Econoaic Statistics. Suva. nrious issucs . P a r l i a ~ s n tof Fift. The fQade Report. Suva, 1976. I I - Flynu, C. An Economlc Study of Lauric Oilseed Proce~sors. hopica& ~&xiucrs Instic,ute. landon, A q u s t 1973. I '3 I - I Grinwood, B. Z. Caconut Palm Products. Fa. Rome, 1975. t- I a n a c i o , Lo F., "Product Report: Snl-Ref ined Coconut O i l . " &a\rtcrlp Supplement toJr&runity (December 30, 1979). I International Trade Centre. 1R1CTAD/CATT. Market Development of 6 c o n u t Products. Rneva. October 1973. I Nielre~-Bek, D. 0. Harket Oavelopmeat of Palm Products. ~ n c e r n a t i o n a lTrade \ rAntte. U?ifX~b// I I Papua Few Guinea- Sumaatp of S t a t i s t i c s . Port Horseby. Various issues& Pbil~.ppiner. Foreign Trade S t a t i s t i c s of the Philie Various isruer. S a i t h , H, Verity. "Ma-edible Derivatives of Cocoaur Oi1." A papet presented to thr Market Semirut on Coconut Ptoducca. W,b84dQ30. Queton City, The F.~illppiner,Hay 1975. S r i t w b . Cuetcms Returm. Variour ireucas. Sto pfa>rth, J., and J. P. O'Ugan. " S t r u c ~ r ~ rsef the Otlwmd Crushing Induatty -t aad Factorr Affecting it8 Location." c o a a t c s and S t a t i r ti c r (Aprll and -The -Public Ledger. London. Varioum irruem. 'rongron, Jos6 L. "The Economic L~pactof Export Tarlf f r oln Philippine Coconut txportr." A therir. 1978. UWCTAD. TIm Kenaedy Round. TD/b/lttr. 1. Visrana,, April 1969. UNDP . a d Internation81 Trade Cantre. UNCXAD/CAFT. Markat Smiaar on Coconut -Products. Vienna, Hay 1975. UNIDO. b r o p t i a t e 1ndttrtri.l Technolqgy f o r OflLlr --a-- d Fata. Selected bncltground paperr. Vicuna, 1979. . Guideliner f o r the Eotablirhment mdl &~ratf,on of Vegetable O i l I e- I Factorier. Vienna, 1917. United Coconut Asrociation of the Philippiaer, CcJcamt Sratirticm, 1979, Vol. - < V I , No. 12. Tables 49 and 50. K Ot~artment cf Trade and E.?f. Chltoan md Excise. Clhreraear Trade -, S t a t i r t i c s cf the U.K. London. Variorus issuar. U.S. Department of Commerce. 9 r t s for Cansumpt Pan. - IH fi6. Washington, D.C. V a r i o u isrues. - Varaakularingaa, H, Coconut Proccrrin_jg 1:nduatr;y kvelopmenlc , V i s i t t o Vanuatu. UNIDO/APCC'IC.~O/~O. UNIDO. Decembnr 1980. . Study on the Oils a d Fats ~ i t u a ~ t i oi n~ % Indoneria. UlllIW/APCC/C. 1/80. ~#~DO.~anuary 1980. e, Wanigatunga, R, C. "Coamdities and Developmarat i n ASEM Cotn~trier, Roceosing and Mding Value." Unpub1:Lnhtd. London, December 1980. TlIE PAC%AGI#; OF TEA LNTO M C S AND THE )(AHUPACIURI 3F INSTAT TEA Fa EXPORT In I ~ I m SOX IANIU A Senior -mica Officer The Ceuo-alth Sacretariat T,e aachor bcneftted greatly from comtnte nn curlie@ drafts by - f - q n t * in he research ptolect. Special thlnke go to P. '1. A1le.r o f the ..- .ubbcr Research and Develoy#nt b a r d ; Dr. 0. Perrkud of the COP n Secretarfat; David Val1 of Susrex Univarrity; Anne U*/rton of the 0ve8 ;1 hvelopment Inrtitute; and D. H. Forrert for thelir helpful 8UggC8tions. Coveamcnt officfalm, industry expertr and staff of the t a a Boardm in the countrler a d eeoncmier studied provided invaluablel arrircance and information. Fanally, bur not l a r r t , t h a n k a r e awed to H i l d r 4 Uelmr and Uhitney Uarrisr far their a r r i r ~ a n c ei n preparing t h i s report for (publication and to Pamela S.uhney and Rebccu Sugul for their pcience In t y p i n ~it. Be th.Uorld Motributim of Roductiooeeeeeeeeeeeeeeeeeeeee.231 1. Ihe Priury ~ode..eeeeeeee.eeeeeeeeeee.eeeee.eeeeee.231 2. P u l u ~ e dand Inatant Tu.e.eeeeeeee..e..eeee.er.eeee.233 C. Uorld Trade Patternre.eeeeeeeeeee*eeeeeeeeeeeeeeeeeieeeeee234 1. Ibe Priury Good.eeeeeee.eeeeeeeee.eeeeeeeee.e.eeee.e 2% 2. Exports in Prcluaed ?orree.eee.eeeeeeeeeeeeeeeeeeee..2M 3. Re-Export8 of Teaeeeeeeeeeee.meeeeeeeeeeeeeeeeeeeeee.242 4. Imtant Tea bportre.eeeeee.e.....eee..ee.e.eeeeeeeee243 D. Characterirticr of the ~rL.tseeeeeeeeeee.ee.eeeeeee.eee.e243 i 1. Iba Market S t r ~ c h r r e ~ ~ ~ ~ ~ ~ ~ ~ . . ~ 2. Exports by Tea liuftimtiodr in the Produciw Coootriereeee.ee.eeeeeeeeeeeeeeeeeeee245 3. A L U ~ t i 0 ~ e e e e e e e e e e e e e e e e e e e e e m e e e e e e e e e e e e e e e e e e e e e e m 2 4 8 Ee Tariffs fin-Tariff Barriers a m ,+ Export Sab8idiueeeeemee.eeeeemeeeeeee..ee.eeeee.es.---e2b9 P- lJILitP r i ~ e . e m e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e m e e e e b e e e . e 2 5 5 IIIe LOUTIWAG D ~ ~ R a K T S e e e e e e e e e e e e e e e e e e e e e e e e e e e e . e e e e e m e e e e e 2 M a L A. Sachet-- h~reeee.eeeeeeeee.eeeeee.ee.ee.eeeee.eeeemeee2S9 1. - I d i a e e e e e e e e e e e e e e e e e e e e e e e e e e e * e e e m e e e e e e e e e e e e e e e e 2 S g 2. Sri ~ b e e e e e e e e e e e e e e e - - s e - - - e . - e e e e e e e e e e e e e ~ e e Ce 1nrGnr T u (Eot VaterSoluble)e.eeeeemeeeeeeeetemeeeeeeee269 1. Sri I . . ~ b e e e e e e e e e . e e e e ~ e ~ e m e ~ e e ~ ~ ~ ~ ~ ~ e ~ ~ ~ e e m e e e e e e e e 2 6 9 2- W i ~ e m e e e e e e e e e m e e m m e e e e e e m e e m m e m m e e e e e e ~ e e m e e e e e e e m 2 7 1 . Page IV. 'IHe GAINS FROH FURTHER P R O C t S S I N G * * * . . . . * . * ~ ~ m ~ * * ~ ~ ~ ~ ~ . I ~ ~ ~ ~ ~ I LIST OF TABUS - Table 2.1 TEA PRODUCTION IN SELKCED m I E S m o o o o o o o o o o o o o o o o o o o o o o o o o o 2 3 2 2.3 ESTIMATES OF THE RELATIVE StIARES OF TU PROWCrS I N ME NOWCATmIN SETOR IN S m U m B o o o o o o o o o o o o o o o o o o o o 2 3 6 2.4 PROWCTIO~QAND EXPORT O? IN ST^ TUS IH SELECTED C O U N T R I B S o o o o o o o o o o o o o o o o o o o o o o o o . o e o e o o o o o o o o o o o o e o o o 2 3 7 2.5 COHSU)(PTIONOF TEA IN SELECTED m I l e S o o o o o o e o o o o o o o o o o o o o o o o 2 3 9 2 9 THE MARKBI SRARES OF SBlZCfEO WOlt BtENDERSI l DISTRIBOTORS, 1 9 7 3 o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o m o 2 4 6 2010 ESTIlfAIED SBARtS OF SO1 LANW EXPORTS TO SELKCreD COUNTRIES EftfD BY THE W O O : TEA EXPOafEBS FROM SRI LANltA, JANUARY-.JUNE 1 9 7 9 o o o o o o o o o o o o o o o e o o o o o o o o o o o o o o 2 4 7 2012 TARIFFS OH ftA I# SeLtCreD m S o o o o o o o o o o o p o o o o o o o o o o . o o o o o o 2 5 1 " I 2-13 TAXES ON T M I N SELECTED COO~IESooo~ooooo~ooo~oooooo..~o..o..252 Ic 3.1 ESTIXM7!D DATA ON THE PACKAGING OF TEA INTO UCS I N INDIA, 1 9 7 8 1 7 9 o o o o o e o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o 2 6 0 FREICFT BATES AND PA=, 1 9 7 9 o o o o o e o o o o o o o o o v o o o o o o o o o o . o . o o 2 6 2 ESTIHAIED DATA ON THE PACKAGING OF TEA INTO BAGS I N SRI LhHKA, 1 9 7 9 o o o o o o o o o o o o o o o o o o o o o o o o * o o o o o e o o e o o o o o o 2 6 4 - Table 304 tST1WTED COSTS OF tACUGI)I; TEA IlRO MCS IH . T U UoKon 1 9 ~ o o o o ~ o o ~ ~ ~ ~ ~ ~ o o o ~ o o o o o o o o ~ o o o o o o o o o o o o o o o 3.6 tSTUWZD DATA OW TRB ?lAaU?ACTUU OF INSTMI TEA FOR t1W)RT I# SRI WSltAB 1 9 7 9 o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o tSTUIAmDATA ON AN XIBUR TEA 0-OM I# INDIA, 1 9 7 9 o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o . . o o o o o o o o o * * o o o o o 2 7 2 GsTInATKD VALUE ADDKD m IC OC TKA PACUCtD IU S A C S o ~ o o o o o o o o o o o o o o o o ~ o ~ o o o ~ o o o o o o o o o o o o o o o o o o o o o o 2 7 5 mTmA'ILD CROSS DaaStIC VALUE AD- PP Kc OF TEA PACKACZD IN M C S o o o o o o o e o o o o o o o o o o o o o o o o o o o o o o o o o o o o a o o o * o o 2 7 6 E r n I t D maEICa'4 EX- CAI= r#m amxmrrc nu IN BAGS XU XIISTART mn9 1 7 9 o o o o o o o o o o o o . * o o * * o o o o o o o o o n o o o o o 2 7 7 1- m A c T 011 m~~ REvmem OF PAcucI#C TEA UrrO Urn AMD IXS'IbllT IXA - A m - o o o o o o o o o o o o o o o o o o o o o 2 7 9 KSTIHAIXS Or rn XdUBXUCS OC IABOR IR PCLQACIIW; TEA I m MCS Am) I1OS'Um TEA I(AIIOIACTURE, 1 9 7 9 o o o o o o - o o o o * o o o o o o o * o o o a o 2 1 1 bob K 4 T B R I A u AlDD XimCI mQmmmn3?OR FACKAGIRC 'fM rm CO-OUL TEA MGS IN i.r U o K o o o o o * o o o o o o o o o o o e o o a o o o o o COWPARISOII OF rn EmIwmD V b l f b l ~corn OF PAcmCIM; BAGSn cff 1 9 7 9 o o o o o o o o * * * * * ~ ~ * ~ ~ o o o o e o o * o o o * * * . ~ * . * * 2 8 6 s M z c I m won ~ ~ ~ ~ ~ B Tnxm A L VCUIADLB COSTS IH I c ABD 'PWUCI~~G fRlO TEA M C 3 o o o o o o o o e o o * o o o o o o o o o o o . o o o o o o o o * o o a * o o o o 2 8 7 - - I r& ujor tea-producing tawtrioa covered in thir rtudy hve hen u p o r t i a t foil-vr.pprd tear in paeketo in iacrerdin# qurntitidr to ny Middle &tern and North African cowtrier, u c e p t for t b o a within rrbicb tha r t a t e 10involved ia th importation and dirttibution of tea on a larae a ale. Vith t.rp.ct t o foil-napped t a u , India and Srl k n l u , tw u j o r t e -producily I camtrier, have h e n able to compete with packaaerr in ttu importin corratriee u well 80 with r u x p o r t e r r from tbird couatrier. i In throry, th. tea-prdueis~eorrntrier ahould k able to l port thir tu to developed economy urketr fa puluto (m oppoaed to bag.) a raitably w e r e r v d in crllophanrvrrpped cartoar. In rrrlity, hourrer, the uocrld not bn had a c#p.titln advantage i n t e r n of p~cluaina, t h y wuld have f e d hielwr freiaht c h r a e r d,moot i.gortmt, t h y wuld hn k e n iriq at a tapidly decliaiw r e p r e of th market. Hoot u j o r tea-produciq ecoaorier h r e dro )red=tion for export of bot wterroltabte iuotaat tu LHf. Alth-h t h y &re k e n able to mt w h of tha )tmtioe. Althqh foreign capital uaa tared to develop a prodwti for (bot uater) inrtant tear i n Indi. and Srt b a b e reportdly th. r n not beiw fully u0.d. Tea b a r hn p r o m to b. tb. moot urketr for tea outride tbe t u - p r d o c i q UOII.(U .0d Lwt and Sorth Africa. Ihry h r e lncreued their 1.th 0- of a feu p a n . h e r a l l , hmxver, tha -nod fairly rta-nt. * * ).cL.g- u t e r i d o hn k e n 'an mi. a d Sri trstrr han not k.9 able to l j o r urketm for tu in h a r lo that they do not m a to h r e a o&.auw in tb. prndoctiaa of tw pacww uterialr, r In fact, tu p.ck8iq into ham h r tendd to n r h t e b.uwa of th comraieuea of kw clore to -.at, kca- of ' u o d factorr ouch u th ttauport. On tha o t b C &ad, certain m u k t u ~ i a lwcceaa in'oupplfizu tu bar to oow -a and p r n t tu u r k a t r , which a n , Ib.tariffa and aoa-tariff trade barrierm impomd by tha in tbr irportiq cotmtrier h r e not, r i t h tuo important a c *" J,/ Patiotan, *ich bar h n protecting it. doamtic tu p a c ~ . ~with~ aJ 75I i t a r t i f , a d Japan. algniflcantly hindered the export of tea in a rote proceased form. 'Thia ha# been eapeclally true of t e rblga and, to a learner extent, inatant tea. Daapite tha alleaed inadequacy of the Indian import duty draubrqk achew, the overall effect of tb fiacal policy then h a betn favorable t o t h e export of tea in baga. Nevertheleaa, it l a bard to furtlfy the t u u t i o n tea bagsing machinery, aa it h a never k e n produced darertically, and tea gsing la not a laborlatenaive proceaa. The tranaport coata par b of tea h v e been higher for; tea paclu8d i n ba8a than for black tea (ulth the miwle ercrption of Sri bnlqan exporta to the U.K.). Dlapite this, they hrve only u r 8 l t ; a l l y af f e c t d th& l o u t i o n of proceaaln8. While the transport coata f o ~ inatant tear have been aubatantially hi8h.r per b of black tea equivalent than h v t thbre for black tea, the two producta a n , of couree, earentially different. While ;natant tea h a been mold principally throuah u h o l ~ r a l eoutleta to the vendlng u c h i n e reptor, d e a of tea i n bag# have betn uhufactured by conaurar brand loyalty lad the promotional effortm of the 'Their ilportance hu varied vith the urket. f a a m nsceaaitated a bcavy i n i t i a l expenditure for becauae of the tendency toward ataedardiution not been inaurrouatable, aa aboua by tha rapid increase in " aold by the large retail atorem ia cotmtriea such am the U.K. *reover, the experience g r i n d in tbe E.K. aborn tht prmotiorul betn aubatantid in relation to tba e a t l u t e d r e t a i l tea The certain tea proiucing countriem abould t r y to create 'a demand f o r their pacbged teaa, eapecitlly ia tbe f o r r of h g a . Not onlt rill their producers of black tea derive a Ngbcr unit price, but their tea (aport. w i l l yield higher foreign achrnge e a m i ~ a . la fact, the prodocera-India and Sri Lmh-have attelpted to d d z e packaged tea i n packet and in bag form. For attemptm to be mcceaaful on a large rule, they M l l b v e to overcome aeveral coxutraints. One is the higher cort of p+bgiag and ' tramport. Another is the likely competition from the pkomotion of established blenden rad diatrlbutorr in thc u j o r tea-irportidg counttier outside tbe Middle h a t and North Africa. Far more important i b the trend toward atadardizatlon of taatea; i f it eontinuta, tbe limita on lthc sale of . purely national tcu vill become atroager. I I flcverthelras, it is atrongly rtc-dad Ih.t India an$ Sri bnka uadertake p r c h g w operations vithin the u j o r u r W t a , a step ttht i m quite feasible. Perbapa their atate-owaed, large tea-trading organiza)tiona could provide the lead f a r aome of the indigenow private rector firma. The goutact u r k e t a f o r tea, which could be better aerved, a r e an area into which India and Sri Lanb could move, ulth a limited degree of p r a o t i o n for their country tea.. India and S r i h n b would alao be i n a better position t o aervict the growing demand f o r the "wu labelw tea of the major chain rtorea, rhe promotional expenditures for t r i g e t t i a g these two market regmentr uould not be very large, and the c a p l t r l c o r t r uould be well v i t h i n the reach/ of the two countries. They might even wish t o go further and attempt t o segment of the market, i.e., "strndcrdized" tea, although blending the teas of tuo o r more countries, the tea of could predominr te- 1 The price of tea lugs in cartons can be expected t o i+rease over time, relative to instant tea, becaure of ririw packaging cortr ((especially chose of tea bag papar), given the (8nticip.ted) himher real pulp. On the other hand, inrtant tea ir arch c o r t l i e r t o in any other form an4 requires a l o t of e l e c t r i c i t y t o relevant is that black tea, a w n i f packed i n bagr, is developed economy narkecs relative t o itr rubstitutes, that only a rudden and u r s i r e increare la price vo 1-c consumed. I Higher erpenditureo on research--perhaps with a rereadch program coordinated by the private and public sectors i n each tea-producinb country- might p r d u c e a better i a r t a n t product that could r i v a l the black t f a packaged in quality tea bag., Instant tea 'hro k e n largely neglect d by the pr-r ional o q a n i r a t i o l u i n the tea-producing countries. which hak expended much e f f o r t , chough with relatively little succeso, consumption of t h e i r black leaf. I There appears t o be some scope f o r prowtinp cold v a t e r o o l u b l e instant tea suitable f o r tu mixes, even though such tea vould be bnly one of 1 I a large number of beverages a country uould consume, a d its rge-male consumption is d i f f i c u l t to emvisage. Ilowever, should i m t a n t tea ver b e c o n 3 a viable alternative to tea bags, the taa-producing e c o n w i t s wou d find it 4 advantageous t o produce and export it to wholesale chains, :: 4 nstead of 1 producing black tea f o r export t o aiddlemen as they do currently. While any developent with regard t o an expansion of instant tea is purely onjectural at this stage, i c uould be d o c to vrite it off altogether. I i m c ~study focused on ;be packaging of tu i n t o bags f o r )export t o t the major developed economy markets. The success of India and Sr Lenka i n exporting tea i n a l r n i n u f o i l psclcts t o developing country mark ts i n the Middle East and Bortb Africa has been aoteuorthy- Rawever, the producers have no@ been o e l l i ~t o some developing markets, e.g., N signlficant quantities ( i n bulk o r paclcted form). The reasons d i f f i c u l t i e s and %he apparent unvillingness of the large exporting f i m r i e b o t h Iadia a d S r i Lenka to establish that would import. blend and peckage the t e a s i n the u r k e t i t s e l f ( Another oppartunAty is t o promote tbe upanrion of tea consumption i n developing countries (especially outside Latin America) which are currently nou-tea- dritking. Vigoroue uarketing e f f o r t s vould be required t o open that trade and would probably be more successful in the context of increased Suth-South trade. ~ k ah r i c i q r d i e n t of *teaa i r tba leaf of tho plant, the c u e l i a r i w n r i r plant, or y of their unufacturiry, ttm groan l e d I/ ir %itherdm by current, crurhed by rollerr, f e k n t e d and dried h u to h perforred while the green leaf lm ft88h, v e quickly. 2/ ~ A variation om thir procedure, i n th 1960r.-dlon cnrrbd, torn .ad curled 4 Whichever wthod ir u r d , tho r e r d t ir M ar black t.r. TIM quality of black tea varier ~ b r t a n t l i l l yaid u n k affected by minor dff eroocer la locrtiow, rerron, cllmto, cultiratioa p r u t i c e r , u r r u f a c t u r i ~8 adardr a d tbe *jatn (ancertry) of t& tea plant. Ibo tea ir tranrforrd la o a tarty, affordable product that i m conrrniently p.cL.l.d. Ib.dorirrrtion of t& urkat in mat ujor tea-coruurlq r f w f l r n h r rerulted in a l a w degree of rtacdardization d l u a rurrovl~of the price raqe. 'Ibe production of #rt m t a f l r a campta~henrire bleodi- operation: tmical blend for a popular brand cantaior more t h n rix Tb. tu ir tbeu packed into h$8 or packat8 lad put produclry cotmtrier, th packqiry op.ratioru for combined with t& blendi- operatiom. In p a c t g h g and bled- are often cambind. 'Lhare are three other tm of tea fn addition to black taa, uhfch ib not fernanted; mlong tea, which in .ad-ferlwnted; tu. Tbe lart ir corprired of soluble rolidr uhich u a be comert by th d d i t i o n of cold or bt mter. 'Lb. cold uater principally in th tar-Importi- coontriu, u p a c i d l y the freezing or -- * tb llquor made frar black leaf hatant tea cm also be d e in thlr way (tboogb lea8 tberefore often mumfactured out of j r n n l u f in tha f e r w n t i q tk liquor from th grwc l e d tea and then -I/ b n a i r r q of ta l u r e 8 and a kd vhen h Q b r p r i c a are qeaired or rlijhtly more l e a r u when higher output in derlred. -21 ~axi.mi 4ricultur. ~ q a n i u t i o n ,~ e aR o c e r r i q , a r i c a t u r a i ~errieer Bulletin 10o. 26, W e , 1974, pp. 2b-b. I Thir rtudy concentrates on the black tea produced i n India aad Sri Lank.. I / Ibt f i r r t rtage of the procerriag--the production of blaak tea froo the g r z n lmf--take. place a t o r near the tea plantation. lhim rtudy therefore focurem on th. b l e n d i a ~ a d p r c k q i n t hygroacopie, it i m frequently wrapped i n a l u l n u f o i l even for India and Sri h n h . Thir packr8iag. which l a expenrive, even for rhipwntr packaged for retail- sale i n nearby high humidity levelr. The outlook for expanded India i a bleak to thore government poljc,ier (reg., Zgjpt, (into packeo.s) hi- done l a q e l y d a u s t ically. (erpeciall: Nlgeria) , trawport cortr .ad d i f f i c u l t leu have r i g n i f i c ~ n t a p o r t r of tea from Iadia a d S r i I marbcr for tea (e.g., irlandr in the Pacific and the remote f r a the u j o r tea produmrr and are peripheral i The export of packttr of looae tea not n a p @ i n cellop ne ha0 not been v e q ftaalble becaure their ahelf l i f e l a rhort. Ch the other hnnd, export, of atroager, celloph.ne-vrap@, p c k t t r of loose tea h e k e n too co8tly an alterrutive. k a reault, thfr rtudy focurtd on the u rc-oriented bleeding and pclugi- of tea into b g r rather than prcketm. tYnlerr othendae rtated, "prckagiw of tea" ~ a f e r rhere to packaging into bags.) Horeover, tea h g a have k e n the h r g a r t w , m n t of the r e t a i l ma ket i n most of t h e u j o r developed countrier. fbe rtudy 0180 examined inatan tea, which ham accounted for 2-32 of tSa tea p-zoduced. I Only S r i b n k a and India vrre atudied. a s they countries capable of produciug the 7uiety of tear aeedtd to bledb. .CbC export u r b t r covered *re the important of North Mrica a d the Hiddie ma: and the developed U-K., kuttsi:r. the U.S., Japan a d Ner Zedand. tea b l e n d i q skd paclugiq h v e been handled empharir in the rtudy war on the U.K., which h a m the team consigned to the developed econaier intsrrrtt ionally. 4 Ttre irauer examined tear in b.g forr f r a tha two aelected U n L . 'Lhe relutive coat0 in the importing counttier a r e tea i~ the conmuring countrib. In.eant tea is addressed i n jooe-what less, - detail. 8 - I h -il It doer not axloiae green and ooloag tear, which have accoqted for about 21% of world tea productioa a d 8% of the i n t e t l u t i o n d te4 trade. They have been conmmed l a q e l y i n the producing c o u n t r i e ~of ~hlb Japan, and I m e r e have been many studies on tea. I-/ Principally, t h y h v e been coacerned vitb tbe growing of tea, the costs of produe~foai n the V S ~ A O ~ prduciog touatries, the pr7fits of the Mnrging Agency Iiot#resand chair mt 1 over the ?adustry, the d e d for tea, Md the profltr i l i t y of th. tea- distributin8 f i r u i n tbe U.K. -a.uealth Se retarirt has aim c m i s s i o a e d u r k e t f q rtudirs f o r the u j o r conaumlng co t r i e r . Tuo or- that h v e not been closely ~n8lpztda t e tha factors affecting the locatloa of tea packagiag and the luoufacture of instant tee. * I - -1/ See, for Prsapects 81x3 22, b l t i r o r e : Johns World Tea Eeoncmy, k l h i : Qxford Uaioerslty on Agency PutlLcrtion No. 12, U. Stationery Ofilce, iY78; Tea Board the !farletins of Tea, Calcutta: Tea I A, The Proccrrlng Ghrria--Black Tea Ttu procccserirg of 61ack rca 18 seldtrim Oy rleple. I t conrirtr of making the blend, pachting it into b g r , arrlnP.rin8 ths b.88 into p a c b cnd curtoo ur~poingfor the aarkat. To orb a bland, mreral alternrtive mlxer of "bteaks' are pmrible, rand she blsder'r tho-ea varier depndin8 i n part on rupply but u i n l y on price. In addition, 8 b i r dir c b ~ to achieve certain n tharacteristics: appecraacr, guiekaesr of bnau, flavor, color, briskness and aroma, Bledr differ yriteipally aecoding to th market k i n g supplied (e.g., tne g o u m t le+elL, the alddle rarye rad cbe b o t t a level), The cooporltioa ot a b l e d is also detar~ined t y the lade of pllckaging--the ~ppearrccaof tha leaf is impo;tant for loouu teas, ulrile qaiekwmr of brew 10 imporraat fur cea in hg0. The different 1steri.10 used for tea bags (8.g.. p~tfom:cd or fast-flw papar) also 8oorrn the choice of corutitwntr. Bland characteriuticr nre rarely changed becsuae conatmet. expect t eoeu?sterrt quality frcm a particulrr brand. Tea bags are of two U d t : cha tm popular in the markets of " t r a d t t i o d l y tendrinkiag* devalogctd monoarias ir heat-mea?ed; thc other type, which la stapled a d attached to n string and tag, u i n l y rarves the 'I gourmet markets and the waon-traditiodly teadrinldag" countries (e.g., the I Fder.1 Wepublic of Ceruny, o r t;-1: Camany). i 1 Eeat-realad tea bqgr are macrufacturd u folloum. tbpandiag on the ! scale of the operation, the tea is mnunZ1y or mecbnfcully tabn out of the cbcqta i n uhich it u s d l p leaves Ithe production center aad is passed to the d blemer on a conveyoz b B t , At ghio t h e , foreign u t t e r !nails a d woo3 I chipa) t s ertra=ced chroraqlh rrgvsctic dmiees and sieves, The tea is thr3 b l e d & very mlftly. (Tea prc-bladed irn the taa-producing counLry can also k ured,) Ibe bladed terr i n tra~aportedlBy a belt t o a hopper and fed fnto tea ' u r ~ l o g / p . c l u g i qurrhinw, each f i t t d ta a film wervrapping machine. lu a fatrly typicd operation,, L! 16 such occhdnes, each prducing l;p to e.gc, 2,000 3.125-qrsa corr~utional.tea baas per minute and oet to ;.anufacture 3 differeat s!.zes of tea bag cartons, w n package up t o 41,916 tons of tea per m r k i q day. A d l e r a v q t i o n w i ~ b2 mchices, each with a capacity of 1 , h a per hour (the ase of a sirrgle -chine is tcchniully and financially fearible, too), p e u c e s 2*6S t o w of pmckmgcd t e u per day i n the oume propottiam. In tbe q @ e r scalr operaticna, the carton8 are not made hy a w h i a e Łram blanka , 4n aa the large-rcale operation. Rather, the tee bags are mancally asseabled into rsaAp-auda cartoac purchased Iron outside and then are ~wchanlcally wrapped in ce1llopb~ae. Both operations entail negligible material sad tea loar. -11 J. El, New, "ladrutrial P.-ceasing of Prinary Producta: Packaging of Tea i n Tea Bags," a report prepared for the cColraoauealth *eretat a t , Tropical Products I a r t it l t e , London, Septmher 1980. To package OM 4 of tea requlrer approxfutely 54 gr-r of paebgiql paper, 121 8 r u r of *per borrd, 14 g r a u of cellophane and 50 grass of box board for tt# outer carer. A laser rcale operation nployr 49 rkillad aad 30 uarkilled varkerr and 0.06 uaitr of electricity per k t ~of tea prcbged, vhlle a ~ ~ 1 l .scale operation m d r 9 rkilled aad 12 unskilled wrbr-a and 0.17 r uaicr of alectricity per 4 of tea $a:kaged. 1/ ihe butldiags so b w e thr operatiom a n abort 5,000 and 450 3 nrp.ctlvay. In a cu-produdv.8 developiq +coaay, a rir.~letea h~im$/pacbginlp machine can ba operated do- vith a o i q l e bleeder that 10 a l m ured for other purpomo (e.g., to wtr tb. blend* for a p o r t or the domusic market). In a 3umb.r of ioltancer, tb. bleod. a n u d e up uauallp and fad into the h ~ i n g / p a c b gmachine. ~ 0 t h ~tw d '-&o " u C h t n att8Chtd to 8 0trg- md 8 paper t a p i 8 maled vitb an alrrrirrtr rtaple. 1& rtring a d t- ara attacbmd u a u i l y , while OM mchine pertom all th other operations except tbe crlXoph.ae urappiag, which l a doaa oo another machine. A maehina can typically hadle up to 150 l.%ru or 2-ram h g e per minute, or 91,s !q or 126 4 of te8 per &hour rblft. 'Ibr p:bcerr involver 1 #kIlllmi a d 3 ~ r k i l l e dwrkerr per machine, or 22 vorkerr plua 2 foremen in aa oprraticsn f that involver 5 macbiaer. Zbe electr 13conrtmed 18 0.2 uaitr p@rkg. Ihs floor area requirements u e about 70 o for the rrchiner a d vorkarre Bot w t a r inatant tau are ude mainly f r a green la~af. Ib+ eonverrlon rate varier r c o r d l q to th degrm of extraction md t b efficiency of the ptocerr, but r q e s k m n 11 and 14 kg of green lcuf p.r rg of iarunt tea (about 4.35 kg of grea leaf u e required for a of b , b k tea). A JL8 of iOltmtt tea ("blown up" 6r iacrcored in volme ma that r teaspoon produces 8cup) can produce 2,OCO cum of tea (vbich 10763 cupa per of black tea equitalent). In carpuioun, a kg of loore tea a n produce about 333 cup. ( u r t d n g 33- par cup), rrhile a lrg of tea in a 2-et~phbq cf 3.124srrm prodocar 64Q cups per b,terpctively. Instant tea factorier u e w d l y u t r a c l y r::icent about de~zribiry their production praceor. W r , altbough there u & r m variaLBo~~, 2/ eseentlal1.p it imolver tbe d a c c u r r of a llquor f f a tlm vithrd .;;d fcrwnted led and spray d q i . q ~tbm Uquor. Oa the b r i o 03 approxiuted data f r a tuo d l oprratlonr, 8,000 a d 10,000 r2 of frctsry apace, 10 a d 20 rkilled workero, 70 and 80 ttnrUl1.d rorkam and 6 and Srupervlrorr per day are mqared, rerpretivaly, for iorrallrd tapacitiem of 300 and 900 ton. of instant tea per y u r for a 2-0Uft operation. -I / Includlry electricity conotnptioa for heating. -2/ See Pod ad Agriculture Organltation, op. cit., pp. 130-33- Be The World Dlrtributlon of Production 1. Ihe P r i u r y Good - Tea hrr been produced i n rignificaat quantitier (Table 2.1) 11 by 8 couutrier, uhile 5 countrier have accountad f o r 70%of t& coaruptian.- About 42% of th wrld'r output h a kcvl u p o r t a d , 4 t h four countrier accounting for about ruo-third8 of it. T ~ Uam0 videly conrumd in China u far back ar about lWO B.C. 2/ By the middle of th. 19th century, Britirh interertr accounted for the bulk z f -he tea produced for the menear urketr. After Vorld Uar 11, : b r a war generally a large increare i n tbr producciviw of the tea p l a n t a t l o p brought about by the application of f e r t i l i u r r . Since tbr 19608, the i e r u u e in production ha. been greatert i n h a t Africa, where there har beein a rapid e x p a r i o n of the a r m d e r cultivation; moreover, clonal v a r i r ~ t i e r wre plantad a h r t excluuirely, r e r u l t a i n lower cortr. 3/ nus, uhilq tbe r a t e of grouch of production mince 1965 has k e n rlouiq do= i n India ( u n t i l very recently) and output hu actually fallen i n S r l Lurlu, it h s riren rhrrply i n Lut Afria (Tmble 2.1). By 1980, I n d o m ~ i a n tea production $d almort returned to it. p r e - v u level and ir expected to continue t o rime r t e a d i l y . Chicroe tea production 5s thougbt to h v a i n c r u r e d rapidly i n recjnt year., a d that country ir nou ttn record law-rt producer of ten. Aldhough tea production h a d m lacreared tn several otber l o u t i o n r , e s p e c i a l l y t h e USSR, its direct impact on the intermatianal tea trade ham been relatively -11. A period of hurplur i n thr lnteraational utket can be f o r e ~ e e n ,v l t h the ran corp.titive Eart African tau continuing t o edge out the 3ri h n l u a a d fodima tear, a t learnt in relative ttru, u h a happened , ince the l a t e f i f t i e s . 4/ - Long before World War XI, ladim and S r i h n l u n ovllcyrh?.p of their tea production began tc incrure. lb port-independ~nceperi* u w the -1/ I n c l u d i q an ertiute for China, tbe mjor producer and consumer (albeit uidJ of green tea). w -2/ V. 8. Ukerm, A l l About Tea, h v York: h e r i c a n Tea aad Coffee Journal Corpury, 1935, Vol. 1, pp. 3-7 and 57-83; and D. W. Porremt, A Hundred Pears of Ceylon Tea, Condon: Chatto md Yindua, 1967, p. 164. -3/ Op. cit., Sakar, Tes: Soae Policy I8rutr. -41' I n t e t n a t i o d Tea CoPnittee, Annrvl Bulletin of Statistico, various irmuer, and op. cit., Singh, a t .1.,pp. 73-75. Tahle 2.1 : TEA PRODIICTION 114 SELECTED ECONOI1IP.S ,,,* * & ~ 6 4 ' (thousand tons) ndia ( aklncan (208 rngladerh ( r l Lankr 110 enya 5 gandr anzania n.8 a l a v t 5 a w n -b / 55 tvan, Chlna I I .S.S.R* 10 urkay zrm ktque I h i n b naa* an I gant lna nag donesl a 82 - - TOTAL - - - 492 534 966 - ------ 1,088 1,286 1,331 1,725 1,749 1.711 1.731 Largely the productlon of East Pakistan (Bangladeah r l n c r 1971) Largely Rraen tea production. :neg tlaanr n e ~ l l g l b l e . n.a. bleanr nat avullable. - ----- S p l l t yearr denota hnnual averagar. urct: Internat lonal Tea ramalttea, h n u n l Bullet i n of S t r t l r t lcr, v a r l o w I r r u e r . .I ' h r t h e r dirinution of British ovaerrhip i n both absolute and relrqive c e r u . I T:w un r h i f t war occurritq in &at Africa i n relative terlr. I h k a , those tea ertater rtill ovued by tha britirh mre I In Kenya, Brooke bad (a caprny ineorpor~.tdin Britain) 10- about 10,000 hectarer a d h u been involved i n tea production aloo ovar 2,000 hectarer in h n u n i a . 21 -10 fraction of the total world acreage O d e r tea, hourver, &rpita their interert i n tea production rhovn a t large Slenders and distributorr have tendad blendia8, paclu8iry, dlrtribution and iaternatioaal trade. I f 2. Paclu8d and Inrtaac Tea The hie rpter of tea produccioa i n the U.K. i n 1910 ( en it ms by far tha largert urket outride China) uu revolutionized 21 uhe blender. bqra to prck tea in airtight containerr. Pacluging allovad for 8 reduction of coots, i/rrintelunce of tmiforr quality, frerher tea reaching coruuerr a d tbe p r m c i o a of tba b r a d name of the blederlprcker. Tbe production of tea packet. woo r p r e d t o tbe l e d i n g t including India, vfth tbe prchging done lar8.l~i n the market rru tea from the U.K. or f r a a tea-producing p h g d , ualerr thc market rru perfphar4. In Egfpt, lacrearlag q ~ n t l t i e sof Sri b a l u n and I d i a n tear i n establirhed a t e a - p c k a g i ~frctory i n 1931, h v l a g of the u r k e t . 21 The major taa-produdw cormtrier of India and Sri h n k a , rich the others, have packaged the tear for their domestic markets, for exports t o nearby couatrier, i n almrintm foil. In 1978, Iadi -11 Nicola Suafnron, "COIP.ny formation in Kenya k f o r e 1945 vlth Rcference t o the Role of foreign Capital," Readings on tbe l f d Corporation i n Kenya, R.irobi: U x f o Univerrity Press, 1978, ppl 92-93. -21 * Brooke Bod ale0 ovcu about 3,200 hestarer of tea i n India and time of natloPiliution, 80 heetarcjin Sri bnka. The P Llpton, LJOM and t& Cooperative T o Society in tea men r d l e r . I I ! -31 Ikvld Wainwright, Brooke Bond: 1C0 Year., Inadon: Newan at# Wtaae, 1969, p. 22, aad 0s. cit., Ukerr, Vol. II, p. 59. I I -1 Originally most grocers a t t i e d e ~ e r types of tea, blending' them to ~ i s u i t the iadividtral conrumer, and then packaging the tea. I I 5 Op. cit., Wainwright, p. 48. 0 84,000 toar 1/ and St1 Irab an e r t i u t e d 12,@OO tonr of packaged tea, a l w r t a l l ot it Tn aluminum foil. Production of prckagd tea f o t export h r recently become rignificant (Table 2.2). I - In the 19600, the u a bra came into we u a contained for blended tea leaver. ia t e r u of the price per liven vrilht of 40-50t increare uhen b g r are wed, altbotqb uhen v o l w of tea needod to ulu a cup of th bowerage, any, kcomrr inconuqwntial mlsse only a ritqle cup ir made ba. Further, t h t coavenieace of tea b4r red tha low price of b a r particularly attractiwe in the developad uowmiea. ware introduced a t a tiw u&n tea -8 f a c i w a t i f f c a p e t i t i o n !from coffee, particularly inrtant coffee, a d when per u p i t a tu conrumption traditional tea-coaruitq counttie8 uu fallina. Th. popularity i n contrart, h r iacroasod rrrbrtantially i n the u j o r u r k a t s Iartant tea originated i n the U.S., vhere the cold uatcr type, uhich 'i ir d c out of black tea, gahed acceptance ln t& early 19608. In value terms, it represents about 4L of the urlut for tu mixer. A l t q h iartu~t tea h r k e n produced ln the U.K., principally for the domestic u kt, it h.0 not k e n poplar. Attempts i n tu- producing cotmtrier t o p r d u c f o r export an acceptable inrtant tea omt of green 1uwe.s =re unouccerrf 1 f o r u s y yean. M t t r research a d d e v e 1 1 ) ~ neffort., t bornver, an accept b l e product was developad a d is mv kiw d e In tborr countries, altho h there ir rcope f o r further i r p r o v m n t . I The urketiw of ittotant tea. a i c h fa errentiall, an ti rely new product, pores problem. In addition, it face0 c a p e t i t i o n f r a t+ h g r . A, the ( r e t a i l ) cort per cup is about double tht of t e a bags, d e r s Ithe product 10 effectively p r m t e d , its uler rlll probably b. laqely rertrqstd to the non-howehold u r b t (e.g., rendirq nrhineo). I There factors a d the impact,of f i r e d policy (axport t u a t i o n ) have influenced tbe production of i w t a n t tea. Production hu up.nded India (though this exp.nsion h.. been limited l a a e l y t o cold vat h a m declined in S r i bplu and k h v e d e r r a t i c a l l y i n h o t Africa ( Ihe u j o r u$ketr for tea in the 19th century included tht U.K., the U.S., the Netherlandr and the "rrhite" colonies of the U.K. (ar v e i l am Chi- and Japan). By about 1875, tha U.K. accounted f o r about half the world -1/ 0p. clt., Tea b a r d of India, "Report..." p. 129. I I Table 2.2: ESTIMTU) PRODUCTIO# OF P A M D TEA IN sEUCTED COmIES, 1978 1 India 0b 39 St1 Lanb 12 21 Tanunia U.K. -a/ Includes tea hgs. - Note: neg Heane n e ~ l i ~ i b l e . Laah Curtoma; Tbnuafa ~ e a Authority; U.K., Price Carirrion, Tea Pricws Londcn: E.X. Stationery Office, 1978; aad lnternatlonal Tea Committee, Annual Bulletin of Statistice 1979. -8 table 2.3: esrxrurts OF ni.~tutIvt n s ~ u r t sOF ru PPODUCZS IN THE NON-CATRIIWC S ~ IN S R E n m m~ (pereeat o t leaf qulvalent) - Tea prcketr Tea b a r ~ a i t a a ttea I I U.S. 1960 34 48 18 1965 24 50 23) a1 3)- 1974 9 57 28) .I 6)- U*K. 1965 98 2 1 0- 1974 bI 81 19 ae8 1979 - 50 49 1 Australia 1967 99 1 1-8 1972 92 7 1 1980 77 20 3 C r ~ d a 1962 29 71 - 1970 16 84 o 1973 9 91 o Ccruoy, t.R. 1968169 10 51 50 m8 -- a1 Tea c ? ~ m e di n tea airas. GI In value t . N only* C/ 102 m1.d u loore tea. P - Rote: r q t Mean, aegligible. - Heam not applicable. 7- Source: awealth Secretariat e s t h t e s . Table 2.4: PROWCTIOW AWD C)(PORT01 IWbTAnr TUB 1W StltCftO COUWIXICS Indi1 Srl L n l u . knyr Uganda U.K. Production hportr Productton trportr hoduction hporto Production Export. &duct ion Bportr 1969/70 267 259 I25 136 0 0 95 95 11.1. 237 1971 254 232 181 165 0 0 21 27 t4.0. 317 1972 238 231 I\5 101 0 0 0 0 II.~. 286 1973 2I5 243 2I5 227 0 0 0 0 (1.8. 114 1974 351 305 291 279 0 0 0 0 nor. 1% 1975 277 352 233 252 222 190 0 0 11.1. 124 1976 588 593 235 223 85 72 0 0 (1.1. 169 I 1977 601 567 268 217 125 94 0 0 11.1. 240 w 1978 639 670 109 147 37 37 0 0 n.1. 257 w Y 1979 597 668 184 1811 62 62 0 0 A*.. 176 I 1980 204 201 172 171 0 0 11.1. 284 - Note8 n.1. llaao. not rvq(wbl..brci 4 8 Source: Intarnatlonrl Tea CO.mlttee, Annual Bulletin of Statisticr, vrrlrw lrruer. imports. 2 Between the two world wars, the international d e u n d for tea contiaued to r i s e , slthough pore slowly than i n the four decades preceding 1 Uorld War I. One reason war that the USSR rtopped importi 8 tea i n significant quantities, r change that was, homver, partly o f f r t by the demand from certain Middle Eartern countries. Otherviot, the M t t e r n of consumption in the international market remained much the ume. A dtszinct pattern of tea conrumption emerged a f t e r World War XI. By 1978, conrumption i n the U.U., uhich in 1964165 accounted for 23% of vorld produc::on and 392 of traded output, f e l l t o 12% and 26%. rerpectlively. 21 Conrumption 8100 f e l l in the former "white" c o ~ o n l c rof the U.K. On Ithe oth;r hand, it continued t o rise rubstantially i n the Hiddle Eartern coutltrler and i n Pakistan, which alone accounted f o r about 5% of the world tradb in tea. There war an increase i n conrumption in the U.S., a l b e i t awun ing t o a 4 decline in per capita terns. Conrumption i n China r o n rubrtantirl\y, and it also regained itr poritioa a s a u j o r exporter. Recently it b r accdunttd f o r about 72 of thr black t e a axport.. Conowption increared rignificant,ly i n the two large producing countrier of India and S r i Lurk, with India ilncrearing i t s conrumption froa 94,000 tons in 1951-52 t o w a r 300,000 t o m , i n 1379. India har been consuming v e l l over one-half it. output recently. I Changer in production and conrumption have h d a subrtantibl impact on the i n t e r n a t i o ~ ltrade of tea (Table* 2.5 and 2.6). traded i n t e m a t i o r u l l y (excluding China) rore f r a 390,000 tons i n 1 48/50 t o 709,000 t o m by 1977178. India, Srf Lank, lCtaym, China, Indonesia 2k " O I T L HOfa h utea, i Argentina and h q l a d e r h have k e n the principal exporterr of black t AE. 'Ihe relative pooltion of India and S r i b n k a har declined largely btcau of the reduced a v a i l a b i l i t y of suppliar f o r export, derpite Lncreared q t i o n a l l y financed expcnditurer t o promote chair t e u . 'Ihe U.K., the U.S. and the Hiddle Eastern countrier, follcrved by Pakistan a d Australia. b v e ) k e n the major i ~ p ~ r t e rofs black tea%. In 1978, the urket economy intefnational trade i n black tea was worth approxfutely U.S.$1,700 mlllion. 3/ - 2. Exports i n Packaged Form L Despite increases in the exports of tea i n packages i n rec a t yearn 1 (Table 2.7). i n 1978 packaged tear accounted f o r only about 9.2% o a l l the tea trad-d. This figure i n c l u d a the trade i n t e a bags, Iieh ib .I approximately 2.5% of tbe vorld tea trade. z ' - -1/ Principally black tea, a i l e a few decades e a r l i e r it was entirexy chi^ tea." See also Ukera, op. cit., Vol. 11, 303-326 and 350-1, and Forrest, ap. cit., p. 164. -2/ Calculated from the International Tea Cormittee, op. cit., various issuer. -3/ United Nations, Yearbook of International Trade S t a t i s t i c s , Nav York, 1979. Tabla 2.31 CC)NSlMPTIOII OI IN SCUCTtD ~ n t N T R l t ~ / T?A Produclw countrler India Pa).lrcan kngladeah Srl la;rLr. Japan Indonamla b a t Afr lean count r l a r I r p o r t r for Conrwptlon .. U. 8. A u r t t a l l r l ~ d . South Afrlca New &.land Netbrlandu I/ Iran Iraq Egypt USSR -a/ The data I r a IJb9/7d~re'not r t r l c t l y caparable u l t h thore for r r r l l e r pcrr, ar the norm recent data arm b r e d an d r l t v e r l r r - from tea pacbrr for eonruptlon. b/ Importr only. - Wota: n.a. Mernr not available. I Split yearr denote anntul avara~er. mu productlon f l ~ u r e rara ertluter. Th. &tc enclub. China. -- Source: l n t omat i o a ~ L l u _ C n a L h a l ~ ~ 4 ~ , w t e u r - t + * w t . - - - - - - - -- -- IW 8 l S lW8lW 1 ~ 1 6 ~1~9170 1973174 1977t78 1979 19.0 & L.rtt. tor c s w ~ H l a lrm'r. ad Wtt orlaad. he. C I m a n y , Id. no). b c u r t 0Cb.r u W.8 OIZI M a d hm80 D.r. bp. CIuho~1~18Ua Otkr C u t e n Csropu was. cumla t t l m k.rtco ( ) r l u t ~ . l lCbllo) ~ P a U r t u ibl*lrwi.t8. s a d 1 AtaL.1. lrw lram mu,YQLLP - - - - - - - - - - - -- 394.5 W3.4 Y7.7 611.3 701.1 731.4 6 3 1 718.0 I - - 8. --8 ha pr0drcl.m Srt hot. 1w.1 1n.o 200.3 204.9 195.3 1n.o 187.5 164.5 - Id*. 152.6 U 212.0 196.5 164.5 197.5 199.3 199.6 224.5 t a m 3.5 10.7 21.7 35.0 50.5 77.5 94.0 W.O Q l l.Il ~ II 10.7 45.8 32.5 30.5 45.5 64.3 1 8 106.0 maul- 6-5 10.2 16.0 17.5 21.0 30.3 31.0 31.4 I d ~ m a l a 19.8 35. 4 2EzL.O 34.7 42.9 53.7 60.1 67.7 -- W W . 2.2 7.6 13.7 16.0 17.8 14.0 I 1 18.0 2 W t t l u a.8. t .3 13.2 16.a 21.1 16.4 2 . 32.7 - Tafwm, Qlam 12.7 19.4 22.0 19-2 20.6 19.3 18.2 bod. 3.5 9.3 15. 5 12.4 11.6 1.4 0. S - - - m a d . - 2.9 6.3 7.4 9. S 13.4 15.0 15.0 1 L ~ l d 0 . b - - - - - -- 20.7 18.4 3 34.0 I! -6-., - TOTAL, MU - - - - - -- W . 4 - - - - -- 587.8 611.2 7oA.8 793.6 7 a . r 818.4 d Iaclu&d ln rb. &u for cb. Id. h p . of & m y . -E/- h r w for tuo m m d l . C/ b u 8 l ~ t tao border t a r r i t o r t n 0tb.r t b m A f ~ k n l o u o.ad Imm b.+. oat Wen ddutd. d l IIKq1.t. &u. .I fitkcma up co 1978. 1110~1cduS- 8 4 tu. - - lotar a... Pbmu mc otrilablo. w.st applfublr. Split ywtm k t . .mol an--. Sourcar: W c u l a t d f r a tlu 1ntonutfosl.l h a Qdtta.. -1 Ddlotin of Stathtk.,+.rimL1.rw.b - I I I table 2.71 EXPORTS IIT TU I N PhCtWCS k/ 0 - India b/ c l Srl Irnk. c/ tanunla b/ U.K. I of t o t a r 3 X of rota1 I of total X of total' Tonr exportm ,. Tons export8 Ton8 export 8- Ton8 .aport8 , f 1967 noam 0.a. 2,150 1.0 n.a. n.a. n.a. n.a. 1968 n.a. n.a* 4,261 2.0 n.a. n.a. n.a. n.a. 1969 8,129 4.0 6,885 3a4 n.4. n.a. n.a. n.a. . 1970 1,439 4.2 7,720 3.7 n.4. n.a. n.a. n.a. 1971 12,951 6.4 10,211 5. I n.a n.a. n.a. n.a. 1972 11,733 5.9 14,574 7.7 0.1. n.a. IO,M3 S4.0 1973 12,131 6. 5 13,911 6.8 n.a. 90.r 16.245 63.2 1974 6,203 3.0 9,196 5-0 naa. n.a. I 4,395 55.3 1975 10,945 5.0 17,029 8.0 46 0.4 12,612 50.5 1976 12,612 5.5 17,210 8.6 123 1a0 8,143 32.6 1977 25,117 11.4 14,C66 7.6 378 3.2 15,488 44. 5 1978 38,599 21.8 25,214 13.1 79 n.a. l4,6;2 49.0 I979 n.a. 24,391 13.0 nor. n.a. 15,376 64.0 1980 n.4. 31,413 17.0 n.4. n.a. 15,106 64. 6 - . --b/ 41' Includes tea In b.80 Flrcal year Warch/April. c/ For Indla, tea bg a p a r t 8 ktueen the year8 1974 and 1978 w r e 108, 158, 285, 391 and 238 tow, rerprctl-~ely;for Srl l a n k , ktueen the year8 1975 and 1980, t h y uero 20, 39, 111, 36, 62 a d 281 tam, rorpectlvoly. - Notet n.a. kana not avallablc. Sourcemr Tagranla, h a AuLhorlty; Internrclonal Tea Commltree, Annual lullct in zf Statlmtlcm, varloua lmrurm; Srl t n h , Cuetam; and Indla. tea ,Borrd. India and Sri taaka h o e had the moat ruccesr with packaged t c s exports, a s they have h d the necerury elementr for prpducing r n acceptabla blend. The volume of their paclugtd export8 rore by rbqut 3OOX between 1970 ard 1978, with such of t h t increrra coming in the lrr~tfew year. of that period. Recently, both couatrler began t o export tea bag*. Mort S r i b n h n a d Indian tea ha8 k e n exparted l a aluninur f o i l paeketr and e ~ o r i g a e dto the Siddle Cart tnd North AfriU. A large nwber of Hiddla Enatern countrieo, herd the rorketr l o r tea h v e h e n sizable and :Q which the tea trade hu t r . u b a d l e d by tho private rqctor, have found it dvrntngeous t o get their pc3agiag dorrc i n S r i h n L . and Tndia. Howver, i n countries vb.re s t a t e agrncler run t& tea indurtry (e.&. , Sudrm, Egypt and Iraq), the chances of the p a c k a g i r ~k i n g done in India and S r i Ldca b v a been -11. Iran ham rertricted tha i .wt c f packaged teas t:, its d o o ~ r t l c tea induotry. Moreover, a s i t r b l a proportion (abot:t 6PX i n Iran) of the voltme of tte tea rhipped i n bulk t o there countrier har beta rold to the conruaer u !.oore tea. Reverthelerr, the HLddle h r t q r a markatr f o r tea packed irr a l m i a u f o i l p c k e t r (and, tc 8 Iesrer extent, tea it. bags) a r e ecxpected to g r w very tap:dly because of r l r i o g incotla +ad living standard8 and the prerence of lerga numben of afgrant workerr, hrpeciall, Iran the Indian rubccntinent. In th: daveloptd econaoier, the inrorda rade by tea packets i n t o the loq-ertablirhed lurketr r t u i o unimprerr~ve. I n terpr of volume, che a p o r t 8 3f tea i n bay drr have k e n rrall, though India h u a p o r t e d rare t 5 the C P b , t.~d S r i Laokr ws exported same ra ihe rophirticacec? tea-conruring cormtrier such a s the U.S. rd AurtraLLa. U.U. u p o r t o of packaged tear have been uell belob tbore exported by the tea-producio8 countries. mrtover, the tear rhipped ?n p c b g e d form have gone p r i n c i ~ l yt o countrit8 where th mrket hilo not bdcn large emugh t o justify domestic puckaglng o r where th deolad has been f o r high-quality cezu, vbich often came in "faacy" pnzkager such as tins. I n marketa scrcb as Japan, prcmotion has rerolted la a d e d for tea blended and packed i n tondoa o r a t l u r t marketed by cmp.nier rrrociated with the Englirh t c a - d r i n k i ~ g t r d i t i o n . b e factor in favor d tbt U.K. a* an exportek of packaged teas h a m been the a p r i l r b i l i t y of aanF differeat qualities of tea a t the fandon I auctions. IP.titutIccaI factors h v e h e n equally i q o r t a n t : m a t intsraational b l e d e ~and dirtribcrors v i t h marketing co@ectioa$ and uell- e r t a b l l s k d i-ea abroad have tud headquarter. i n the U.KO1- 3 r The U.K. %o long k e n a rigcificant r r e r p o r t e r of tean. ihvsver, with the estab1:rhrcnt of auction centerr i n the countries of origin a d general chaaprsr in the direction of lntern&tional trade (and i n mhippfnt rcheduler! , its r o l e has gradually diminirhed. 11 Currently, its re-exports (although subject to some f luctuetion~jhave co;;btituted ordy about 32 of the -1/ C. i. he., Britain'r Commodity Xarketr, London: Paul Elek, 1972, p. 194. world trade :C tea, 11~11arin volume to the r ~ ~ x ~ of rthet m ~ Prfncipal dcmti~zstioaa hare h e n Canad., the t.,ently) and aearby couctriu. Soall qurntitirr Caribbe~nam well. About half tb re-t~portad tea c lho Natharlaadm ham bralyb2We9S For b. :he er;;>ort auty pat kg of b r t a k t war 1913.50, and pet k.g o: black leaf Pr10.50, Yhea accomt urr takm la! t b coa?ersior farear, tb nara:ael t r a paia only Ra4.32 per 9 t black tea zquiwalrnt. T i v a l u ae.ld ~ s r aurtef'acturcer a 1 of iartaot taa [e*.a.i.udinig profltg; appears to have &@a h r g b , a t abi~tie 341 of the prdce of ~ L C C O Icaf, t b ~ g i runlikely to *we b e e raiB7ifiantir, k i g h ~ rt , b n " b r$ltamatlvu ~ ?roceua of uanafaC:turiag bhck t+a fsra t3,a 8re.m leaf. ,In i-mtane tea t ~ c t o r yWZE % S z ~ l l r B % ~ h d in Bdla in 1967 by Fad l S p e c i s l r i s of India, a subsidlag of Neetlk, It ec-nta, appraxhatcly Rs38 nillion. Inatant tea is mnde froa .-db ram $.c& fa the 8i%g$ria, Table 3.1 ~ h c r r tk9 uatimtifd data e l &he fa16101~,;@~~~peratlons. Alt5ough tho, datci were ~ r ' a i t t e dhi- tbe empiny AZS written 'tomp In view of :he aide raiqta ljivczl for some items, L! it neeaurzry ;o make e r t l n a t c ~ with the help of stat-ent 3 Pade da~sirqamai inftcrvfew, AR :i.asrg$i th c a p c l t y is 200 tom of hot uztsr-soluble la~etswbtea,, iffi 1378 oal) ~boaac30 tonr lucre prcduced, yielding somewhat rmutisfatzory fbmmcl+ - rsoulte. The converrion rate for 8tMa leaf iarc aaetant has b a n higher i n I than fn Sri Laah--2.617 kg 15 flamtnnr +. r 1 kg of 'fohck leaf. ;chelees, :be greec leaf a t i l l aczprluntd fos GlL over 5101C;a ~ fthe costs. 31 -7 f ~ i : r t a n t inpvitt uere elelctrlcity, bboc, h t e r e s t 4umI ga:ir;pfn3 n*c-rlafe. Overheads vete tbou: 2.7% cf eb? variantlc costa aal: en.*..*:.s'td prlceipr.lly of r-nlariee end uagw on$ d w i n t n t *atlne @*-.pensel ~ 'rofite were very m a l l and t.?rultrd ensirelt firvr) :h1 10X cmpersatory cash oupport ochemc. Clc r e (:a capttei lwr~is E-,-'.lgtble ---- -1/ F.e lover figcree of t i e range were UPO_Bf o r the~sorta. ---Tabla 3.7; tSTIXATED Mth ON Al( INSTAlll TEA OPSRATION IN I ~ U 1979 , - Indian Rr Fixed cocrr k~rrciarloaon plant a d buildins, etc. 22,151.12 nil 38,9c;.97 10,829.44 3,138.08 Collection r d transport Electrici ty Packaging u t e r i a l lnterut Uages rnd benefl~ea S U m O T ' hanrport to pare .ad hrndling SI'BTOTAB , VAIIXA!515 COSTS - Salea af 70 tom of inatme tea at 8s 56 per kg Value, added (excluding profit a d lerr compemtsry a a h rupporr) Yet ia8uur.C tea Per kg black r(u equfwilsst An a percentage or'sreen l u f Source: Co1cuL.t.d f r a data rt$plied by the capany an4 discussicn~ during the f l l d h r k . (despite very low figurer for depreciation, a r the plant ir very old), 1arge:y because the level of capacity utilization wu -11 on account of the stagnant ealer. 'Ihc long-term viability of the project war in question. Ibt f.0.b. price of ROSS per kg rerulted in a c.1.f. pr~tceof nearly Ra64 ta the U o K * As in Sri LanL., the freight pa Tn(in t r erc4latrd a r the degree of proecrring increased, although the rater per m Iad~ia)were only a l i t t l e more f o r instant than f c black tea. m e value added (exclud**y profitr) war in the region! of 21% when allowance war made f o r the colpao~tOr]ru r h Oupport p.gwnt. I . Value Mded -- n e figures needed to calculate the value added for bag. per kg of tea packaged are found i n Tablea 3.1, 3.3, 3.4 arrd 4.1 for differant opera tiona i n three primary input (black tea), the value added war (almost 140%) and i n the 3.K. (in the region of amevhnt lowar (25%) for e tag a d rtring tea packaging into almiaun f o i l packeta added about 102 t o the value of thr black leaf. Tea pockagln~l a principally a lator p h y r only a -11 role. function of the return on working capital. Domeotlc a added, e t c h embracer thc gainr to the domestic econoay through the use of damcatically produced iaputa, is a~bmtantial. Inteed, vich the important exception of tea b g paper, almoat a1.1 inputm wed in ,adla have been produced d a e e t i c a l l y (Table 4.2), and the iaport content of such production has k e n quite d l In Sri Ianlu, more i~porttd materials have been used; the import content of dome~ticuterla1r uaed can be assumed t o have k e n i n the region of JOX. the porrlbility t i a t tea packaging (in aluminua f o i l or in trgr) w i l l generate a significant amount of doreatic value has k e n the argument Indian policgukera have wed to support the incentivu given for more export* of tea i n packaged form. Horaover, i n both India and Sr.1 h n h , lndigenow firma have tended to domfaate he packaging, so that m e t of the profit f r m t h i s activity is retained i n the country. Instant tea mcmufacLure for export ham a significant relation t o the cost of the green leaf. Bowever, the procecring the green leaf lnto black ten, leaf generater a Q value added. 2. Foreign Ercbange Eamlngo -.. fn Table 4.3, t h f n e t foreign exchange earnings deducting the c.1.f. value of impor~sdinputs a d the i n depredation frou tk a& f.0.b. value of the Instant tea war dealt with h i l a r l y . w i m e foreign exchange earalngr i n India and S r i Lan have h e n lacreaaed subataatially i n 1nmf.ncea where the black leaf har bee exported i n bag0 rather than i n bulk, notwlrbstadiag the increase i n the price of the (imported) tea bag paper In 1979. ?he rearon ha, been the imp0 tance of the domestic materials used in packaging. In St, Lanka, where both the envelope and the tag paper have been imported, the foreign exchange coots of packaging have k c a larger. b r t a n t tea rhowed cmaller foreign exchange g ins than tud . I' tea bags when the opporttrcrity coat of the green leaf procerred w r taken into account Table 4.1: ESTIXATED VALUE ADDED PER KC O* TEA PACKAGED I N BAGS Val- added Prof1t Total axcludirrg profit value added Indian operation (bag with tag and rtring) 0.3 1 0.02 0.33 S r i Lankan operation (bag with tag a d rtring) 0.76 0.30 1.06 Bypothetical. U.K. operation--l.rgercale (conventio~lbag) 0.23 0.74 0. 97 Hypothrtical U.K. operation-mall-rcale (convsnt ion81 bag) 0.33 0. 57 0.90 Source: Calculated froa Tableo 3.1, 3.3 and 3.4 and the author'r e r t i u t e r vith regard to the profits of U.K. corporations. Table 4.2: ESTIMATED CROSS WHESTIC VALUE ADDED PER KC OF TEA PACKACZD I N BAGS Conventional Val- of doreatlc Total value added packaging u t e r l a l r Indian operation (bag with tag and rtring) 0. 33 3. 55 3. 88 Sri Lanlun operation ( h g with tag and rtring) 1.06 1.M a/- 2.42 Hypothetical U.K. operation- large-rcale (conventional bag) 9.97 Hypothetical U.K. operatipa-,#mall-rc.la I (convent i o m l ) N Om90 Om64 1.54 U QI I -a / On the baris that 60% of the domartic materlalr conrtltute domartic value ddul through linkage affectr. Source: Calculated frm Tabler 3.1, 3.3, 3.4, 4.1 and 5.1. 9 3. Government Revenuer Increared pckaaia# of tea bafore export u n gpvernment revenuer i f there ir a d i f f e r e n t i a l i n tba plain o r blended black leaf tea and exportr ia tea h g the d i f f e r e n t i a l i n the export duty b.r rerulted in a of inrtant tea har been converted into itr black been a lor8 i n goverumant ravanw of $0.72 per Howvet, la India, vhrre t b r e h.8 ao export b.r barn lor8 of goverawnt revenue. For iartant tea aloru, there bar beea another eourca of government revenue lorr. Ib. rtate ruthoritier ia Sri Lmlu have been levying th ad valorem r a t e u l e r tu on tb grorr auctioa price (or any authorized ex- factory u l e price) on the black leaf mold, prwided the price reachem a h r i c rinirurr ( e r u n t i a l l y , tbe e r t i u t e d cortr of p r o d a t i o n plum a m i n i e d return on capital). Hewever, when the leaf h u been converted i n t o artant, no ruch levy h r k e a r d e . The cuture of the S r i trnlmn t x ryrtem Pda q u n t i f i c a t i o n of t h i r lor8 on government revanw a t o r t imporrible. k u c v a r , the state-owned plantations obtained a p r a i u m on the u l e of green leaf t e a t o the :natant tea factory which bad, perforce, to obtain itr leaf froa neighborlag muter. In ruch c i r c w t a n c e r , the warall ef fact on goverament rewenutr uar inconrequtntial. I Import dutier b.ve k e n levied on the imported inputs, although, a t leart in theory, they ham kea fully refundable vhan t h c d i t y m a exported. A notable axceptioa appearr to have k e n the contr verrial care of the drawback paid on the import duty on tea b q paper i n India The oubridier p y a b l e on tbe aport of instant tea nd peclraged tea also affected government revenues, erpecially i n India. In S r i Lanlm, t h e subsidy, though amall, h.8 beea tu-aempt, meaning an add potential ravenw. e Profitr have k e n taxable a t norail rater (tbough a project i n S r i L.nk.qualified f o r a tu exemption), a s i t u a t i offaet some of tbe l o r t government revenue arising f r a exports. Tiowever, a s Table 4.4 rbovr, t h e n war r t 4 la - countries, particularly i n India. - i 4.,.P 5 n p l o m n t 4- The cnployncnt upectr of the paclmginq of manufacture of inrtant tea can be looked a t from the generation a s w e l l a s income. Tbe - a c h g i n g of tea h a m required mostly workers who could be c l a a a i f i d a s remi- skilled (machine operators and packerr) r a t t e r than rkilled. Per ton equivalent of black tea produced, inntant tea manufacture has needed much mars labor than paclmging i n t o tea bage, which has used aostly unskilled o r remi-skklled. However, there war hardly any gain once dcductionn vere made for the employment that would have k e n o r potential conversion of green leaf to black, vere there no manufactura of instant tea. Tea prckaaing in:o bags is Production labor ham had a relatively 1.5-3.62 of the saler value, dependiag It war estiorrttd that packaging a ton $117 (U.K.) and $474 (Sri Lank). production of the instant equivalent iacome of betvten $215 and $347 (Table 4.5). In tea-producing countrier, it ir better t o the tea p.ckaging near a tea auction center, m a t of vhich ara near ports, to assure f l e x i b i l i t y of tea rupplie- and competirive prices, cera t o blendtng f a c i l i t i e r ir alm very important, erpeclally as into bags is doae on a relatively d l - r c a l a and blending to be s h r e d with othar operatioam. Xoreover, the cheaper a t a commercial canter, while maraerr t o a importing the inputs a d exporting, tba tu, Tea h v e little impact on regional development. The manufacture of instant tea out of green leaf in theory, have s a t impact on a tea-producing network and power line. In actual located i n an area already under i n place, additional roadr would, a t best, be a power line laid to the factory would also probably already be available i n in the urnufecture of black tea, About a s i n the area aa by a factory produciag black L I 6. &uulation of Technology Tea packagiqg does not result i n the acquisition o r i n much special training of labor. iht ~ n u f a c t u r eof Iaalca and India, h u t v e t . involved no expatriate royalties. and there uas sae aequi8i:icn of technology and labor. Ibis does not necenoarily mean, houever, be readily transferred outside the firm, facilital-ing business* I The challenge of prduciag an acceptable instant tea at economic "t prices bae led to m ~ c hgovernment research i n both S r l nka rnd India- However, despite the claims of the reeearch organizations--and expenditures on research durirq: w e l l over a decade-they have not pet had Such suecess I n c a i n g up with a cmmercially viable process. I I I I Table 4.5: ESTIHATES OF THE EARNINGS OF LABOR I N PACKAGIK; TEA INTO BAGS AND INSTANT TEA HANUFACTURE, 1979 I I (U.S.$ per ton) Tea b.88 ~ India 105.66 S r i Lanh 212.01 Hypothetical l a r g r r c a l e U.K. operation 52.30 Hypothetical -11-rcale U.K. operation 83.57 I n r t m t tea (in terur of b h c k leaf equivalent) 1 Indl a Sri Lanh -a/ Smaller operation than i n S r i U n h . The figurer for both aJe very rough e l t i l a t e r . I - Note: Ihe b g r *aed in India and Sri Unka need oore labor for indeed the d l - s c a l e U.K. operation does, principnlly . packaging of tbc bags into cardboard cartons is done acale operati o m I purce: c l l = u l a t d fro. a b l u 3.1, 3.3, 3.5, 3.6 and 3.7 and froa 'data obtained during the fieldwork. - - 3 ~ 7. Stimuli t o I n d u ~ t r i a l i z a t i o n The packaging of tea requires eany different packagpng materia l s (Table 4.6). Domestic industries have been capable of supplying)m~stof them, though the Manila hemp paper used for tea bags bas been supplieq by only 4 o r 5 f i n w i n the uorld, a l l i n developed econoaier. Both India ;pnd S r i L a n k have k e n able t o develop a paper and bor board industry, well as a packaging a d prtatiag capability. There vere developed t o dorrestic demand, of which the t e a bag production sector has fragaent. Obviously, expansion of tea pacluging in bags, large dcale, vould prove very uoeful. A s noted e a r l i e r , one of the c r i t i c a l deteruinants of thb location of tea-packagiq i n t o bags is the a v a i l a b i l i t y of t e a b.$ paper a t internationally competitive prices. The econoaier of scale i n thb macufacture of t h i s product are such thar 74,000 tons of tea (or about a \third of the t t o t a l Indian or S r i 'ankan tea export.) vould netd to be packag d i n t o bags. It 1s unlikely that tither country vill have a market of that 8ze f o r t h e i r t~ hss. ! Apart fram the generation of demand f o r aagineering serv ces, inetant tar manufacture does not provide a noteworthy s t i m l u r to indub rialitation, For the w-;t part, the aachinerry has had to be imported. The e l uation would have been d i f f e r e n t had the reeearch i n s t i t u t e s of e i t h e r couatr* developed a commercially viable process. I h r g a i n i a g Power With respect t o some m j o r aarfttts f o r tea, sellers of black leaf tea have only a f e u buyers t o sell to: f o r example, i n tbe case of the U.K. and, t o a lesser extent, A - ~ ~ t r a l i athe U-S- and Japan. , In a n m W r of other important ~ r l t c t r ,such as t h e W,Poland, t h e USSR, Iraq and ~ u d a n ,a s t a t e agency is the monopoly purchaser. H e v e r t t ~ l e a r ,most of the v a r i o w p o t e n t i ~ l purchasers, as v e l l a s tbose that aupply the domestic market r4quirenentrB, ' have k e n competing m a g thedtstlves a t the auctione i n the cbuntries of origin, there hae been a s u b s t a n r i d degree of coapetition i n the deteraination of prices. -- Is the U.lt market, half of vhich has been rapplied I& the 'iondon auctions, four firms have d d u a t e d the blending end diatributip+ of tea, a situation that has created an oligopoly i n uhich the coapetition'Qas involved advertising andmother types of .ales promotion. Woreovcr, 8 a t i m e of surplus, the element of corpetition i n the bidding a t the ~ o n d h nauctions appears t o hate been d l . Profits i n tea blending and packngir& have k e n r e l a t i v i l y high. The a b i l i t y of producer co*.mtries t supply t h e i r o* teae i n packaged form v i l l a l l o v them t o coa~eted i r e c t l y u i t h the a a j o r tea blenders i n supplying the r e t a i l trade. In principle, this should itlcreaee the rcvemx of tea producers -re than the alternative of eupplying tea t o the tandon auc?ionr. Tabla 4.6: HIITEBULS AND WERCY R E Q O I 2 FOR PACXACINC TEA I M O ~ CONVKKfIORAL TEA BAGS IN TEE U a K m (per ton of tea) h q w o c a l e operation Shall-sale operation - (838.32 t O M of tU 8 (52.89 20- of tm 8 month) mpth) C e l l o p t r ~f i b (b) 14.28 14.53 outrr care (b) Source: Calculated fr- J. E. #.v, "Lndutrial R o c a r r i ~of P-ry Rductm: P u h g i - of T u in Tea Bag*," a report prapared for the C o c l o o d t h Seretariat Tropical Productr lartitute, , LoEdon, Septuber 1980. 7 h t r i t u t f o n is the rue- elthough to a f e r It -er degree--in o t h e r u v k e t r tbat a r e dodamred by a feu blenders a d lustant tea ir rald principally t o the market. tha tw c c s p n i e r i n Iodia and St1 Lank. have f o d links vith tvo m?cinat2aaalr (?krtl& and Liptoa) have been of Am the ?toduct. hrvs tlot k e o sold t o r e t a i l chains t o u r k a t i a g power of the t e a - p r o d u c ? ~ and d i r t r f b u t o r s h r r not taca rah.actd by the tea, at least, not yet. 9. 91ci.l Cost-Beaef it Anal10ir No rocial coot-bnefl: anslysir vu attempted tcc for the p.cl.g:ing of ten i n t o bqr i n Iodia and S r i tanka to supply 6c r c a l a the kx.ger traditional oarlrctr outside :ha *:iddle b a t . aur be f iu n c i a l l y viable. 1 ' THE PROSPrSC3 9 A comparison of the costs of packaging tea i n the U.K., In 1. and S r i b n k a 11 given i n Table 5.1, tbowh the opcrationr in the tm t e -producing ! countries lnvolved more opcratlons ard the use of more u t e r l a l r . e figurer given for the produciu countrlas take into account aluainum u i e, cotton thread, tag paper and the sachet, none of which have been ured i the U.K. i operat ion. A m J o r and most laportant difference between the U.K operation and the others--beyor.d size- - is that packaging material costa i n t h U.K. have been below one-half the cost of the tea (based on average lnnd n auction prices), uhercas In India and S r i b n t o the packaging c o r t r have been ouch higher relative t o the cost of the tea. 4 I t appears that the highly material- intensive a c t i v i t y of pacbgiqg tea into bags was done more cheaply i n the U.K. than i n the two t t -producing countries. The differential ura increased (with the txceptlon of S r i l r n l u vis-a-vis the U.K. market) by the higher freight payable on paclug tea t h n or. black leaf tea. India's s a t e r f a l coats were s l i g h t l y higher t n chore of S r i Lanka, whereas S r i Lanka's non-terial variable costs, notably labor and 4 interest, uere higher. Overall, houever, the difference k t w en the 2 countries was very small Even assuming that the t+a-bagging operations i n the two tea- producing countries were identical t o that i n the U.K., a s Table 5.2, the packaging costs = r e substantially higher i n countries. In the table, thr entry costs f o r S r i Lankaand U.S.$b. 5 raillion a-2 $5.2 million, respectively, f o r the operations, a s against $3.6 ~ l l l i o n i n the U K This d essentially s t t r i b u t a b l e t o the costs of oschinery, which Xndia and S r i h n k a muld have to import. Whcrr dcnesticallp produced material i puts were already being w e d , the table assuned that they would continue t be wed. Uhere inputs had t o be imported, they were assumed ;a cost U.K., plus 10X f o r freight. The cost of ~amesticinputs vas baris of current:costs but reduced t o take in.0 account - of tea i n the t z p e n t i o n a l bags that vould b :~cked i n a Labor and e l e c t s i*c i t y were shovn a t :he countries' prevailing rates. - 8 An uteilbion of the pacbging operation of t e a i n the U.K has been I marketing, which-ha8 Zncluded transport t o the regional r e t a i l depata and i advertising; there uere no precise figures f o r these a c t i v i t i e s . Aowver, data obtained fraa the report of the Price Cornmission put the marg M of the chain s t o r e s (which have h e n s e l l l a g over 50% of the tea i n the U K.) 1/ on tea sales a t 8% of turnover. It was estimated that the average pr ce oT :ea i n bags soid by the r e t a i l chains was 55 pence per 808 or 220 pence per trg i n April 1980 and that the advertising expenditures by the blender e r e 62 of turnovzr. This reeulted i n a net s e l l i n g price t o r e t a i l e r s of 192 pence per b. When rhia figure was reduced by 4 pence per lq to allow for transport 1/ Op. c i t . , U.K., Prices Coisnission, Tea Prices. Table 5.1: COHPARISON OF THE ESTIHATED VARIABLE COSTS OF PACKACINC TEA INTO LACS, END OF 1973 e (U.S.$ per kg L/) U. K. Sri U n l u ~ : d l a Large-rcale Smal1-scale (l-machlne ' ( h a c h l n c hypothat l c a l plant hypothet l c a l plant aperat lon) u pratIon) A l l m a t e r i d e o t h a r t h n tea, alumlnum wire, cotton thread, t a g paper and m ~ c h e t . - Uar:~rialrexcluded above Other v a r i a b l e c o s t s ( e x c l u d i q transport t o ,& iire rhip and the c o a t of t h e t u ) 0.19 TOTAL, PARIABLE COSTS I / Excluding the cart of t h e tea. / Allows f o r a limited import d u t y dra!;'u;:k. / Allowance is made for duty drawbacks. / Exclttdee export duty. ate: - - Urane not applicable. ources: Calculated fram Tablar 3.1, 3.3 nnd 3.4. Table 5.2: SELP.CTtD HAJOR HYPOTHETICAL f 1XP.D AND VARIABV. COSTS IN PACKAGING TFA [INTO MGS (U.S.$ per ton of tea p ~ k a s e d ) U.K. S r l t r n b lndir ?.a rgc-ocale - 1 1 - r c r l ~ IArge-rcal e SI.1 1-rcnl. b r g r - r c a l e Smail'=z'Xr operatlon oparatlon operatlon operrtlon operat Lon operat ton Le~Cbdf l ~ l dColt8 k p r e c l a t Lon 21 35.07 49.54 4ne'13 56.79 47.35 b6.1111 %nt and racer 18.98 ' 33.43 WR if ne8 i/ neu A/ nea k/ SUBTOTAL, FIXtD COStS , - -- 112.q7 41.00 c/ -- -- 5m.m c/ 4n.sn C/ bR.00 C / I Lected varlablc cosrr g/ 3. v p e r h r t o n ?actory Labor SUBTOTAL, VAULADLE COSTS Excluder offlce mrchlnery and hulldlngn. bpreclatlon b r e d on 1l.K. cart8 p l w lbZ plur import duty. The rates are negllplble. ecltlrate. Excluding interest nnd hlre charger for the forklift. The reiecte:! rreJar c w t ltemr (excaptln~tea) are for cukln6 Inter- country compstlronr. U.K. prlcer plua 10% for b n d l l n g and ocean tranrport plur 52 for import duty (a change 1n the Indian import duty structure ir nrrmad). Costs are assumed to be 62.57 of the costs f o r p a c l u g l n ~tea Into tng awl r ~ I m u 1 r - r- de -ueaic%id large operat l o w . rces: calculated f r m Tablar 1.1, 3.3 and '1.4 and J. H. New, "Induatrlal Procarrlnp of P r l u r y Praluctr: Pacbslnm of Tea I n Tea Bags," a report prepared for the Comonwaalch .Secretartat, Tropical Productr Inrtltute, landon, Septerbrr 1980. t t @& ,b* d ' coats and another 5 p n e e for credit, and than coopard the e s t i u t e d cost of bl.43 per kg of paelaged tea, the s r r g l n on a kg of bgr became about b0.40 (at 382 of the cost of the packaged v l t h a historical flgure of 29-30f f o r 811 packeted) tea. It has thus not been posrlble !or the tea-producing cocntriou ,to p a c k a ~ tand ship the tea to the U.K. a t coats c a p a r a b l e vith :hose entailed in pckaping tea In the U.K. There vould alw k further exqnsca t o rere, even if the tea were aold d l r e c t l y t o the r a t a l l china. The fxporter vould have to extend credlt for about three months to cover the rtoeiu i n t r a n s l t , whereas the blenders and packers In the U.K. would have t o give c r e d i t t o the r e t a i l c h i n s f a r only one o r two month#. Horcovcr, i n view of :ha reluctance o f many rclail chains t o deal d i r e c t l y with tea packagers i n the tea- producing countries, it seems that an lntexnadlary vould be n t c e s u r y for prclrrged exporra. The costs of such an intermediary per u n l t sold f s u l t l u t e l y determined by the turnover. trille U.K. tea uholtsalers have kt operating on a aargin of about 8% of the turnover, an intermediary might want a t least 102. Although urrehoming charges f o r prrluaed tea w u l d have to be met, it should be noted that the w a r e h o u a l ~charger f o r t e u sold a t the London auctlona h v e been paid l a r e l y if not entirely, by the tda producers. Flnall-, p r m t i o n a l expenses, partlcul8rly f o r mtdih advertisingD vould be hlgber for a new entrant. RGEBENCES Central Bank of Ceylon. h n w l Report. Colombo. Various issuer. Fod and Agriculture Or~anizstion. Tea Processinga Agriculturall Sewices bulletin No. 26. Po#, 1974. Forrest, D. V. A Huadred Years of Chylon Tea. London: Chatto and Uindus, 1967. Interrmtional Tea Comm?ttae. Annual Bulletin of Statirtics. Various irrucs. New, J. H. "Industrial Proceariq of Priury Productr: Packaging of Tea in Tea Bags." A report prepared for the Cloomonuealth Secretariat, Tropical Products Inrtitucea tomica, September 1980. Bees, C. L. Eritain'r Commodity Markets. Iandon: Par11 Elek, 1972. Satkar, Cauta~T. Teu: h e Policy fsruer. Inrtitute of Developaent Studies. thlverrity of S u r e r biacursioo Paper So. 124. February 1978. . World Tea Econm~r Dalhl: O~fordUni~e:sLry Press, 1972. Singh, Stumsher, 30s de Vrica, J o b Ca L. FIulley and Patrick Peung. "Coffee Tea and Cocoa: nirker Prorpcts a d Dcrelop.ent Lending." ,World ant Staff Occasional Paper No. 12. Baltimore: Johnn Iiopklns h i v e r r i t y Press, 1977. Sri tanka. Royal Coda-tion on Agexy Elouses an^ Brokering Firms. Report. Government Comissioncd Publication No. 12. Colo~~bo:Govef~entPrinter, 1975- Svairxson, Nicola. "Corpany ?'omation in kanya k f o r e 196.5 wlth Partlcula: Reference to the Role of, Foreign Capital." In Readings on the bltinational Corporation ia Kenya. Nairobi: Oxford Wivetsity Press, 1978. Tea Board of indiag Tea Statistics. Various issues. *! -----------. Re - rt 05,:he Coarittcc on the 2larketing of Tea. Calcutta: Tea b a d A d i a j197~. ,Ukers, W. H. A l l About Tea. Volr. I and 11. Hew York: American Tea and Coffee Journal Company, i935. U.K. Price Comsission. Coffee Prices. London: H. H. Stationery Of fice, !977. - Tea Prices. badon: H. H. Stationery Office, 1978. United ktionr. Tearbook of taterrutioaal trade Statirticr. v Tork, 1979. Volr. I & 1YI Vainvrlght, David. Brooke Doad: 100 Tearr. badon: M u e , 1969.