The Andhra Agric.

J 64 (4): 934-940, 2017

An Economic Analysis of Oilpalm Cultivation in West Godavari District of

Andhra Pradesh

K Solmon Raju Paul, N S Praveen Kumar and CH Satish Kumar

Department of Agricultural Economics, Agricultural College, Bapatla 522 101, Andhra Pradesh

ABSTRACT
Oil palm is the world’s highest oil yielding crop, with an output 5-10 times greater per hectare than other
leading vegetable oils. The study examines the financial and economic aspects of establishing an oil palm plantation
in West Godavari district of Andhra Pradesh. A spreadsheet model was used to develop and calculate the Net
Present Value (NPV), Internal Rate of Return (IRR) and Benefit Cost ratio (BCR). Sensitivity analysis of NPV to the
default discount rate (11.5%) was included. A positive NPV of Rs. 157487, IRR at 41.77% and BCR of 1.63. showed
that establishing an oil palm plantation to be a profitable investment. Change in selling price of FFB is more
sensitive to NPV than a change in total cost and total revenue.

Key words: BCR, IRR, NPV and Sensitivity analysis.

India is one of the major oilseeds grower to exploit domestic resources to maximize
and importer of edible oils. India’s vegetable oil production to ensure edible oil security for the
economy is world’s fourth largest after the USA, country. Oil palm is comparatively a new crop in
China & Brazil. The oilseed accounts for 13% of India and is the highest vegetable oil yielding
the Gross Cropped Area, 3% of the Gross National perennial crop. With quality planting materials,
Product and 10% value of all agricultural irrigation and proper management, there is the
commodities. This sector has recorded annual potential of achieving 20-30 MT Fresh Fruit
growth rate of the area, production and yield @ Bunches (FFBs) per ha after attaining the age of 5
2.44%, 5.47% and 2.96% respectively during last years. Therefore, there is an urgent need to intensify
decade (1999-2009). The diverse agro-ecological efforts for area expansion under oil palm to enhance
conditions in the country are favourable for growing palm oil production in the country. Shortage of edible
nine annual oilseed crops, which include seven oils assumed a crisis situation of perennial nature
edible oilseeds (groundnut, rapeseed & mustard, during the 1980s and these prompted government
soybean, sunflower, sesame, safflower and niger) agencies to evolve long term and short term
and two non-edible oilseeds (castor and linseed). mechanisms to step up production and productivity
Oilseeds cultivation is undertaken across the of oil seeds in the country. Part of the efforts was
country in about 27 million hectares mainly on the launching of the Technology Mission on Oil
marginal lands, of which 72% is confined to rainfed Seeds by the Ministry of Agriculture of the
farming. During the last few years, the domestic Government of India in 1986 to address the problem
consumption of edible oils has increased (Rethinam, 1992). The major objective of the
substantially and has touched the level of 18.90 mission was to increase production through the
million tonnes in 2011-12 and is likely to increase improvement of productivity and providing better
further. With per capita consumption of vegetable infrastructural facilities like irrigation. The
oils at the rate of 16 kg/year/person for a projected introduction of high potential crops has been
population of 1276 million, the total vegetable oils considered as a viable option to the conventional
demand is likely to touch 20.4 million tonnes by ones as a long-term measure to satisfy the
2017. A substantial portion of our requirement of increasing demand for edible oils. Palm oil is the
edible oil is met through import of palm oil from world’s highest yielding oil crop, with an output 5–
Indonesia and Malaysia. It is, therefore, necessary 10 times greater per hectare than other leading
2017 Economic analysis of Oilpalm Cultivation 935

vegetable oils. Combined with historically low 25 years. The costs of production taken into account
prices, relative shelf stability, and reported are establishment cost, input cost and labour cost.
nutritional benefits (Bethe, 2010), palm oil leverages Establishment costs are incurred during the first
natural advantages that position it as a likely long- years of planting and include clearing and
term staple of the global diet. Rapidly expanding preparation of the land, cost of seedling and planting.
populations and changing consumption patterns, as The input costs include fertilizer cost, plant
well as increasing demand from the bioenergy and protection chemicals, the cost of weedicides,
oleo chemicals industries, have resulted in sustained pruning, mulching, harvesting, fencing etc. Labour
high prices for crude palm oil. These market forces cost was incurred on fertilizing, pruning, weeding,
have driven the enormous growth of the palm oil mulching, harvesting, bunch loading etc. To evaluate
industry in recent decades. Analysts predict further the financial performance of oil palm, a spreadsheet
palm oil demand acceleration in the near term— model was constucted to describe the revenue and
potentially a 36% increase by 2012 over 2010 costs associated with oil palm plantation over 25
baselines, and more than 65% growth by 2020 years. It is considered suitable to determine the
(Mielke, 2011). In this context, an attempt has been cash-flow. The Net present value (NPV) was used
made to conduct a financial assessment of oil palm to determine the overall financial performance of
cultivation from the data gathered from the oil Palm the project (Brent, 1998; Sugden and Williams,
cultivators of West Godavari District in Andhra 1990). Annual income and returns were estimated
Pradesh. for 25 years and then discounted to present values.
The NPV of the project was calculated and derived
MATERIAL AND METHODS from the total discounted income and costs. The
This paper explores the social and net present value of a system over a period of time
economic basis of oil palm cultivation in West was derived by using Equation 1, where, Benefit in
Godavari district in the state of Andhra Pradesh. each year (Bt), Costs in each year (Ct), time period
The primary data was collected from 200 farmers (t), the number of years (n), discount rate (d).
who are cultivating oil palm, using survey type
research with a cross-sectional design. The survey NPV = ………Equation 1
involved completing a questionnaire covering
financial aspects of oil palm cultivation (Appendix
1) during a face-to-face interview with each farmer. The internal rate of return (IRR) compares
In this study, the financial return of oil Palm is a number of benefits and costs. IRR is the value of
estimated by considering the financial aspects like the discount rate at which the present value of
farmer’s income on oil palm and income on expected investment returns equal to the present
intercrop. This did not include any externalities. value of investment expenditure. It is interest
Financial performance is evaluated in terms of Net income expected from the investment plan. This
Present Value (NPV), Benefit-Cost Ratio (BCR) breakthrough discount rate is the value of cash
and Internal Rate of Return (IRR) over a period of outflows equal to the value of cash inflows. It is
calculated by using Equation 2.
Difference Present worth of the sum of positive
Lowe between net incremental benefits
IRR= + (discount)+ the two * —————————————— ………Equation 2
rates discount rates Present worth of the sum of negative
net incremental benefits
Benefit Cost Ratio (BCR) compare the present worth of costs with present worth of benefits.
To compute the BCR equation 3 is used, where, Benefit in each year (Bt), Costs in each year (Ct), time
period (t), the number of years(n), discount rate (d).

BCR = ………Equation 3
936 Solmon Raju Paul et al., AAJ 64

Fig.1 Estimated total annual cost, annual revenue, profit and discounted profit per acre of oil palm production in
West Godavari District of Andhra Pradesh.

Fig. 2 Increasing cost of capital

Fig. 3 Changes in total cost

2017 Economic analysis of Oilpalm Cultivation 937

ANALYSIS AND INTERPRETATION: for oil Palm cultivation at Rs. 157487. By

The yield depends on the maturity of the calculating the ratio of these two values BCR of
oil palm. It will normally start from fourth year 1.63 is obtained. High positive NPV indicated the
onwards. The yield of oil palm can be affected by soundness of the investment made in oil farm
many factors like age of oil palm, unusual periods orchards. The BC ratio of 1.63 indicated that a
of drought, prolonged heavy rain etc. The profit rupee invested in oil farm orchards would fetch 1.63
level is influenced by planting density, yield and rupees and this proved profitability of oil farm
market price. The market price of this crop cultivation. So the investment of oil farm cultivation
fluctuates; the FFB price has recently been was economically feasible. IRR was 41.77% which
increasing. When the survey was conducted the was much higher than the bank rate of interest on
average market price was Rs.6500 per tonne. long term loans and hence the oil farm enterprise is
Other data required for the calculations are economically feasible. It is evident from the above
discount rate and the project life (Number of years discussion that the investment on oil farm orchard
for discounting). In attaching values to the inputs is a profitable proposition.
and outputs, constant prices are assumed. The
discounted sum of total revenue (also known as Sensitivity analysis:
the present value of benefit) and the discounted Sensitivity analysis facilitates us to assess
sum of the total cost (present value of cost) are the economic risks. We explore how strong the oil
calculated annually over 25 years using an interest palm cultivation from the financial perspective may
rate of 11.5%. appear within shifting marketplace conditions. All
Figure. 1 showed estimated total annual financial indicators are affected by total costs,
cost, annual revenue, profit and discounted profit change in income, change in discount rate and
per acre of oil palm production by 200 farmers in selling price. The analysis was done by changing
West Godavari District with a market selling price financial indicators for different possible changes
of Rs. 6500/tonne, fresh fruit bunches and long- in supposed circumstances. Results show how
term interest rate of 11.5%. sensitive is the analysis to change in some factors.
The fig. 1 shows the pattern of annual cost We test the sensitivity of the system to
and returns for oil palm production for 25 years. changes in oil palm total cost, change in income,
Costs are high in the first years because of selling price and change in discount rate. For the
establishment costs incurred in the clearing, accompanying oil palm plantations play out the
preparing the land and planting the oil palm plants. affectability investigation for the four distinct
There is no revenue during the first three years instances of
because the oil palm trees starts producing Fresh
Fruit Bunches from the fourth year. In the fourth i. Increasing cost of capital
year also, the revenue is negative due to low yield ii. Estimation of the cost of the project due to
and high costs. But in the oil palm cultivation, even the different risks involved
in the initial four years, considerable revenue is iii. Uncertainties resulting due to the difference
obtained through the cultivation of intercrop. in the price receivables
Revenue starts to climb steeply from the fifth year iv. Instabilities resulting due to the difference
and continues to increase annually until ninth year. in the selling price
In the following years, income begins to fluctuate
but remains fairly stable until the 19th year, after Case I: Increasing cost of capital
which it begins to decline due to the age of the From table 2, the computation of the NPV
(over mature) trees. and BCR at different costs of capital indicates that
Applying the interest rate of 11.5% the the oil palm is feasible and profitable even at 30
discounted sum of total revenue is Rs. 407909 and percent discount rate. At 30 percentages discount
the present value of total costs is Rs. 250421. By rate also there exists a positive NPV and BCR of
subtracting the present value of total costs from more than one. The exercise indicates the high
discounted sum of total revenue NPV is obtained yielding capacity of the oil palm even at high discount
rates.
938 Solmon Raju Paul et al., AAJ 64

Table. 1 Increasing cost of capital.

Total Total Discount factor at 11.5 Discount factor at 20 Discount factor at 30
cost return % of cost of capital % of cost of capital % of cost of capital
(25 (25
Total Total Total Total Total Total
years) years)
cost return cost return cost return
832780 1662175 250421 407909 145510 197621 94793 108586
NPV 157487 NPV 52110 NPV 13792
BCR 1.63 BCR 1.35 BCR 1.14

Table 2. Changes in Total cost.

Discount factor at
Total Total 11.5 % of cost of Increase Discounted Increase Discounted Increase Discounted
return capital in total cost in total cost in total cost
cost
Total Total total increase by total increase by total increase by
(25 (25
cost by 10%at 11.5% costby 20% at cost by 30%at
years) years) cost return
10% D.F. 20% 11.5% D.F. 30% 11.5% D.F.
832780 1662175 250421 407909 916058 275464 999336 300506 1082614 325548
NPV 157487 NPV 132445 NPV 107402 NPV 82360
BCR 1.63 BCR 1.48 BCR 1.35 BCR 1.25

Table.3 Changes in total returns.

Discount factor at Increase Increase

Discounted Discounted Decrease Discounted
Total Total 11.5 % of cost of in total cost in total cost in total cost
cost return capital total total
increase by increase by total increase by
(25 (25 Total cost by 10%at 11.5% costby 30%at
Total 20% at cost by
years) years) cost 10% D.F. 20% 11.5% D.F. 11.5% D.F.
return 30%

832780 1662175 250421 407909 1552702 367118 1380180 326327 1207657 285536
NPV 157487 NPV 116696 NPV 75905 NPV 35114
BCR 1.63 BCR 1.46 BCR 1.30 BCR 1.14

Table.4 Changes in selling price.

Discount factor at Increase Increase Discounted
Discounted Decrease Discounted
Total Total 11.5 % of cost of in in total cost
total cost in total cost
cost return capital total total increase by
increase by total increase by
(25 (25 Total Total cost by 10%at 11.5% costby 20% at cost by 30%at
years) years) cost return 10% D.F. 20% 11.5% D.F. 30% 11.5% D.F.
832780 1662175 250421 407909 916058 275464 999336 300506 1082614 325548
NPV 157487 NPV 132445 NPV 107402 NPV 82360
BCR 1.63 BCR 1.48 BCR 1.35 BCR 1.25
2017 Economic analysis of Oilpalm Cultivation 939

Fig. 4 Changes in total returns

Fig. 5 Changes in selling price

On increasing the cost of the oil palm, the at 10, 20 and 30 percentages. The computed NPV
computed NPV and the BCR values indicate that and BCR ratios indicate that the project can
the oil palm is feasible and economical up to a withstand uncertainties. The NPV and BCR at 30
discount rate of less than 30 percent cost increase. percentage reduction in yield in the oil palm benefits
At 30 percent increase in the total cost of the oil were found to be Rs. 35,114 and 1.14 respectively.
palm, there exists a positive NPV and BCR of more From the above table the instabilities in the
than one. oil palm benefits can be sharpened by the reverse
From table 3, the uncertainties in the oil approach of diminishing the foreseen oil palm
palm profits can be sensitized by the ex-ante benefits at 10, 20 and 30 percentages. The
approach of reducing the anticipated oil palm profits registered NPV and BCR proportions demonstrate
940 Solmon Raju Paul et al., AAJ 64

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instabilities. At 30 percentage lessening in yield in A 2009 Financial Assessment of Oil Palm
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Rahmanulloh S B A and Sofiuddin M 2012
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(Received on 27.12.2016 and revised on 30.01.2017)