Inside India’s new oil palm playbook

“The profit in paddy is not more than ₹15,000 per acre. I make at least three times that from growing oil palm," Rao said over the phone. He added that most farmers in his neighbourhood have shifted to palm in recent years, lured by low management and labour costs and a sharp spike in international prices following Russia’s invasion of Ukraine last year.

“Last year, prices had shot up to ₹24,000 per tonne of fresh fruit bunches (FFB). Now, it has fallen to around ₹12,000 per tonne. Still, no other crop brings as much return," Rao added. FFB is the harvest from mature trees from which oil is extracted.

The biggest advantage of oil palm is its higher productivity compared to other oilseeds. A palm field can yield between 20-25 tonnes of FFB per hectare in ideal conditions, or about 4-5 tonnes of palm oil and about half a tonne of kernel oil. That is nearly five times the yield compared with traditional oilseeds such as mustard and groundnut. This is the reason palm oil is the cheapest among all oils—it is available for less than ₹100 a litre at the retail level. From packed savouries and samosas to soaps and cosmetic products, it is ubiquitous in our daily lives.

But there is a catch. In Indian conditions, palm can only be grown with assured irrigation— and each plant requires about 200 litres of water per day, on an average, through the year. This is unlike the tropical rainforests of South-East Asia, where palm is grown amid round-the-year rains and a humid climate.

Also, palm is a long-gestation perennial crop and begins to yield only after four years. The peak yields arrive when the trees are 8–9 years old. So, a farmer must wait for a significant period before the returns start rolling in. The wait, the government thinks, is a small price to pay when compared to the benefits: the promise of higher yields and a potential reduction in the rising edible oil import bill.

Currently, India imports nearly 65% of its cooking oil needs—about 14 million tonnes (mt) during the 2021-22 oil year (the oil year runs from November to October), spending a staggering ₹1.56 trillion. A chunk of the imports—close to 8mt—is palm oil from Indonesia and Malaysia. In 2022-23, import of vegetable oils could touch a record 17mt, according to estimates by the Solvent Extractors Association, a lobby of oil processors.

To fix India’s edible oil woes, the federal government in August 2021 launched a ₹11,040 crore National Mission on Oil Palm with a target to produce 2.8mt of crude oil by 2030. After a tepid start, the scheme finally seems to be taking off, with major players setting up new processing facilities and venturing into newer states, including in north-eastern India.

In August last year, Godrej Agrovet signed agreements with three states in the north-east—Assam, Tripura and Manipur—for development and promotion of palm oil production across 15,000 hectares. Earlier this year, the company opened a new refinery in Eluru district, Andhra Pradesh, and announced that it would develop an additional 19,000 hectares in Sangareddy district of Telangana. With a footprint spanning seven states, Godrej Agrovet is targeting the addition of 60,000 hectares to its existing sourcing area of 65,000 hectares, in the next five years.

3F Oil Palm, another major company that has invested close to ₹1,000 crore so far, is setting up three new processing units, in Karnataka, Andhra Pradesh and Arunachal Pradesh. It is targeting an increase in its sourcing area from 35,000 hectares currently to 65,000 hectares in the next few years.

Patanjali Foods Ltd. (formerly Ruchi Soya), which sources its FFB from 62,000 hectares spread across 11 states, is setting up an integrated oil palm park in Telangana and plans to invest over ₹1,000 crore.

The flurry of projects around oil palm might help India meet its modest target of producing close to 3mt of home-grown crude palm oil by 2030. But with growing consumption demand, India will continue to heavily depend on imported oils.

In addition, environmental experts have raised concerns on the ecological impact of oil palm plantations. “States like Telangana are promoting palm in a big way as an alternative to water-intensive rice cultivation, even though oil palm is a crop best suited to rainforest ecosystems," said G. V. Ramanjaneyulu, executive director at the Hyderabad-based Centre for Sustainable Agriculture.

Ramanjaneyulu added that oil palm has some other distinct disadvantages. Farmers cannot suddenly discontinue growing oil palm, say, following a price crash, like they often do for other crops. This is due to heavy investments and a long gestation period. The crop may also lead to consolidation of farm land—since palm can be easily managed by absentee landlords, it has the potential to dislodge small farmers.

A unique model

In India, oil palm fields are managed and owned by farmers, while businesses take care of processing and marketing. This is unlike Indonesia and Malaysia, where corporations own and manage vast swathes of plantations.

Under the National Mission, farmers are eligible to get about ₹1.2 lakh of financial support per hectare—to purchase saplings, and for maintenance and inter-cropping costs during the gestation period. Farmers can choose from a variety of crops in the first four years—cocoa, ginger, or banana—to earn some income before the palm trees mature.

Companies are allotted districts or areas within a state from where they must mandatorily procure the entire harvest of farmers. The policy frees growers from the headache of marketing the produce—a considerable challenge since the highly perishable FFBs have to be processed within a day of harvest.

The payment farmers receive is determined by a ‘formula price’ that is tied to the landed price of imported crude palm oil. To protect farmers from volatility, the Centre also declares a viability price. If the formula price falls below the viability price—for instance when international rates fall sharply—the difference is paid to the farmer. This is known as viability gap price (VGP).

But this price protection to farmers is available for a limited time—till October 2028. Thereafter, VGP payments are designed to decline by 25% every three years. There will be no liability on the part of the Centre to offer a guaranteed price from November 2037 onwards. By then, Indian farmers are expected to compete with their international peers.

However, two big states focusing on oil palm—Andhra Pradesh and Telangana—have contested the VGP mechanism due to resistance from farmers. Farmer groups have flagged that the price of kernel oil is not included in the viability price paid to them.

The new policy is an excellent framework that supports both farmers and the industry, said Sanjay Goenka, managing director and CEO at 3F Oil Palm, an early entrant, which began its journey way back in 1995, in Andhra Pradesh.

3F is now deeply invested in the project and handholds new farmers to transition into oil palm, Goenka added. Its role involves supplying growers with improved saplings, which are developed from imported seed sprouts. The entire harvest is picked up for processing in refineries located close to growing areas.

“Our productivity is now at par with countries like Malaysia and we are confident that we can take on international competition. In the next five years, we plan to add between 30,000-40,000 hectares," Goenka said.

On concerns that oil palm is a water-guzzling crop that may adversely impact the fragile ecology in the north-eastern states, Goenka said that palm is just replacing one commercial crop—be it tobacco, coconut, rice or sugarcane—with another. “We are not touching even an inch of forest land anywhere. So, where is the question of disturbing the environment? Palm fields need a regular supply of water, which farmers provide through drip irrigation and the aggregate water requirement is lower when compared to flooded paddy fields."

Goenka added that the new policy can help India significantly reduce its dependence on imported palm oil, as more states join the mission.

Godrej Agrovet Ltd., the largest producer of home-grown palm oil, started off nearly three decades back in Goa. The purpose then was to use oil palm derivatives to manufacture soaps. “We were the first ones to set up a manufacturing facility in Mizoram (in 2014), which, till date, is the only factory in the north-east. For us, Andhra Pradesh is the largest growing area—45,000 hectares out of 65,000 hectares in seven states from where FFB is sourced," said Sougata Niyogi, CEO of the oil palm business at Godrej.

The company is now importing over 3 million oil palm sprouts every year to feed an expanding area. It has six processing facilities in four states—Andhra Pradesh, Goa, Tamil Nadu and Mizoram—with a seventh coming up in Telangana. It recently tied up with banks to provide loans to farmers with a moratorium of five years—to cover the long gestation period of oil palm.

Niyogi added that India is growing oil palm in irrigated conditions, which are vastly different from the naturally advantageous conditions in South East Asia. “But our productivity of 3-3.5 tonne per hectare (of crude oil) is at par with South East Asia. The water requirement (per hectare) is lower—22% when compared to paddy and 45% of the water required to grow sugarcane," Niyogi said.

So, why are states like Telangana jumping into the fray? “After close to doubling the area under irrigation, we want to provide farmers a more lucrative option compared to rice. Our target is to promote palm across 26 districts, depending on the farmer’s interest," said Sushma G. Dharamsoth, director of business development at the Telangana State Food Processing Society.

So far, 11 companies, including Patanjali Foods and Godrej Agrovet, are looking to invest close to ₹4,000 crore in oil palm projects, Dharamsoth added.

A chequered history

India had experienced a brief window of atmanirbharta (self-sufficiency) in cooking oils between 1990-1994, thanks to a technology mission promoting indigenous oils, and by ensuring a remunerative price to farmers. Dhara, the brand promoted by the National Dairy Development Board, became a household name. But this sweet spot did not last long. After it allowed and reduced duties on import of edible oils in 1994, farmers gradually lost interest amid the influx of cheaper oils.

Consumers took to branded, odourless refined oils. Being the cheapest even among imported oils (like sunflower, canola and soybean), palm oil took centre stage; its use proliferated in the making of packaged snacks and in adulterating other refined oils.

Amid the enthusiasm around home-grown palm oil, some have flagged that India should not ignore native oils such as mustard, groundnut and coconut, which are also healthier.

According to Kranthi Kumar, general secretary of the National Oil Palm Farmers Association, palm is a good alternative for growers who often struggle with timely availability of farm labour. “But the price risks are high and the crop may turn unsustainable in periods of protracted drought. In the past we have seen farmers uprooting their crop in Andhra Pradesh and Karnataka when international prices fell sharply," Kumar said. “For farmers, stable prices are key."