9.

NEEM TREE PLANTATION AND

PROCESSING PLANT
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Table OF CONTENTS

PAGE

I. SUMMARY 9-3

II. PRODUCT DESCRIPTION & USES 9-3

III. MARKET STUDY, FARM & PLANT CAPACIT 9-3

A. MARKET STUDY 9-3

B. FARM AND PROCESSING PLANTCAPACITY &

PRODUCTION PROGRAMME 9-5

IV. FARM & PROCESSING PLANT MATERIALS AND UTILITIES 9-6

A. FARM & PROCESSING PLANT MATERIALS & INPUTS 9-6

B. UTILITIES 9-6

V. FARM OPERATION & PROCESSING TECHNOLOGY &

ENGINEERING 9-7

A. FARM OPERATION & PROCESSING PLANT

TECHNOLOGY 9-7

B. ENGINEERING 9-8

VI. MANPOWER & TRAINING REQUIREMENT 9-9

A. MANPOWER REQUIREMENT 9-9

B. TRAINING REQUIREMENT 9-10

VII. FINANCIAL ANLYSIS 9-10

A. TOTAL INITIAL INVESTMENT COST 9-11

B. FARM OPERATION & PROCESSING COST 9-11

C. FINANCIAL EVALUATION 9-12

D. ECONOMIC BENEFITS 9-13

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I. SUMMARY

This profile envisages the establishment of a Neem tree plantation farm with a
capacity of about 5 million kg Neem fruits & Neem oil processing plant with a
capacity of 800 tonnes of oil per annum.

The present demand for the proposed product is estimated at 3,705 tonnes per annum.
The demand is expected to reach at 5,880 tonnes by the year 2010.

The plant will create employment opportunities for 45 persons.

The total investment requirement is estimated at Birr 18.22 million, out of which Birr
7.4 million is required for farm & plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 28% and a net
present value (NPV) of Birr 27 million, discounted at 8.5 %.

II. PRODUCT DESCRIPTION AND USES

Neem is a moderate-sized to large ever green tree. It is about 11 meter tall with dense
rounded crown. It grows fairly rapidly. Bark is thick and dark grey, flowers with
bunches of small white blossoms from March -May, and fruit ripens from mid-May
on wards.

The seed kernel from the neem fruit is very rich in fatty acids, often upto 50 per cent
of the kernel's weight. Neem seed oil is very bitter with a garlic/ sulfur smell and
contains vitamin E and other essential amino-acids. Studies of the various
components of the oil have found the percentages of the following fatty acids; Oleic
acid- 52.8%, Stearic acid 21.4%, Palmitic acid - 12.6%, Linoleic acid 2.1% and
various lower fatty acids 2.3%. The Azadirachtin which is found in all parts of the
plant, but the highest level in seeds, is a powerful insect repellent and harmless to
human, animal and environment. It breaks down rapidly after application. At present,
neem oil emerges as an alternative to pesticides due to its biodegradability, relatively
low toxicity and botanical nature. It is repellent for pests. It has various uses, other
than in agriculture, as medicinal, public care cosmetics and veterinary applications.
Neem cake is used as natural organic manure. It is compatible with most product
from other fertilizers.

III. MARKET STUDY FARM & PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Although Ethiopia has the potential for neem tree production, neem oil is not
currently produced either due to lack of proper information on its uses or available
technologies. However, every part of the neem tree viz roots, leaves, flowers, seeds,
trunks and branches has multiple uses.
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The demand for neem oil is assessed based on its potential uses. Neem oil is an
excellent source of pesticides. Growing opposition to synthetic pesticides has led
enthusiasm for the pharmaceutical properties of neem. Neem pesticides are now
increasingly used around the world on crops like cotton, vegetables, fruit trees, coffee,
tea, etc.

Neem has an important application as a fertilizer. It not only provides organic

nitrogen but also inhibits the nitrification process when mixed with urea. Neem
coated urea in 90:10 proportion can save upto 30% of the total chemical nitrogen
requirement of the crops.

The other most common use of neem oil is for soap production. Medicated soaps
with neem odour are proved to have very effective anti-germ properties.

Neem is also used in the production of some dental-care products like toothpaste,
pharmaceuticals, methane gas production, industrial fermentation, production
cosmotics like facial creams, nail polish of oils, shampoos and conditioners, etc. It is
also a very effective mosquito repellent and other insects such as spiders,
cockroaches, grain weevils and other pests of homes.

With the global trend towards the use of alternative ecologically beneficial
agricultural and health agents and broad application of the product in various
industries, there is a wide potential for domestic use or export market.

For the purpose of this project, only three potential applications, i.e., fertilizers,
pesticides and soaps are taken into consideration. According to IPM of Alaska, 2003,
use of neem oil in the above product ranges from 1% to 2% depending on the target
use. It is also stated that the product can be used in combination with other
manufactured fertilizers. Hence, it can be assumed that of the total usage of fertilizers
and pesticides and domestic production of soaps, demand for neem oil will be about
1.5%.

According to Statistical Abstract of CSA, annual average import of fertilizers during

1999/00-2001/02 was about 220,000 tonnes and current domestic production of soaps
is around 20,000 tonnes. Customs Authority data also reveals that annual average
import of pesticides (insecticides, fungicides, herbicides and rodenticides ) during
1999-2003 amounts about 4000 tonnes. Moreover, there is one domestic factory with
annual capacity of 3000 tonnes.

The sum of the above products gives 247,000 tonnes. In order to arrive at the
demand for neem oil, the ratio mentioned earlier which is 1.5% of the 247,000 tonnes
of the three products is taken. Accordingly, the present demand for neem oil is
estimated at 3,705 tonnes.

2. Projected Demand

The demand for neem oil will grow mainly with modernization of the agricultural
sector, development of the soap, pharmaceuticals and cosmetics industries. The
demand for fertilizers and insecticides in the past 5 years has been growing from 7%
to 10%. On the other hand, domestic production of soaps has registered an average
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growth of about 17%. In addition, there is a wide export market if appropriate

measures are taken. Considering the above factors, demand for neem oil is
conservatively assumed to grow by 8% per annum. The projected demand is shown
in Table 3.1.

Table 3.1
PROJECTED DEMAND FOR NEEM OIL

Year Projected Demand

(Tonnes)
2005 4001
2006 4321
2007 4667
2008 5040
2009 5444
2010 5879
2011 6350
2012 6858
2013 7406
2014 7999
2015 8639

3. Pricing and Distribution

The ex-factory price of neem oil is proposed to be Birr 9.25 per litre. The product
can be sold directly to pesticides and soap manufactures as well as to other bulk
buyers.

B. FARM AND PROCESSING PLANT CAPACITY AND

PRODUCTION PROGRAMME

1. Farm and Processing Plant Capacity

The envisaged neem tree plantation farm will have 200 ha of land. About 5 million
kg of neem fruits will be obtained per year from the total cultivated land under neem
trees. The neem oil processing plant is proposed to have a capacity of 800 tonnes
(869,565 lt) of neem oil and 3,480 tonnes of neem cake per annum. The plant will
operate for 300 days in a year, three shifts of 8 hours per day.

2. Production Programme

The farm is expected to begin with 50 per cent of its installed capacity and will grow
to 100 per cent in the second year.

Considering the experience of the country to penetrate international markets and

inadequate skill to exploit the technology, the plant is expected to start with 60 per
cent capacity and will reach to full capacity in the fifth year by progressively growing
with 10% each year.
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IV. FARM AND PROCESSING PLANT MATERIALS, INPUTS

AND UTILITIES

A. FARM AND PROCESSING PLANT MATERIALS AND INPUTS

The materials and inputs required for the farm and the processing plant and their
corresponding costs are described in Table 4.1. The total cost for the project is
estimated at Birr 0.406 million, out of which 85 per cent and 15 per cent is required in
local and foreign currency, respectively.

Table 4.1
FARM AND PROCESSING PLANT MATERIALS AND INPUTS AND COST

Sr. Unit of Cost ('000 Birr)

No. Description Measure Qty. LC FC Total
1. Seed (farm) kg 20 10 - 10
2. Sand kg 200 7.5 - 7.5
3. Drum (200 lt) Pcs. 145 30.8 - 30.8
4. Jute sack Pcs. 3480 177.4 - 177.4
5. Other materials L.S - 120 60 180
Grand Total 345.7 60 405.7

B. UTILITIES

The utilities required by the farm and processing plant are electricity, fuel and
lubricant, water, telephone and office supplies. The types of utilities and their
corresponding costs are shown in Table 4.2. According to Table 4.2, the total cost of
utilities is estimated at Birr 1.4 million.

Table 4.2
UTILITIES REQUIREMENT AND COST

Sr. No. Description Unit of Qty Cost (Birr

Measure '000)
1 Fuel lt 394.2 985.5
2 Lubricant lt/kg 39.4 98.6
3 Electricity kWh 331 156.9
4 Water m3 45 90
5 Telephone - - 8
6 Office Supplies - - 12
Total 1351
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V. FARMING AND PROCESSING TECHNOLOGY AND

ENGINEERING

A. FARMING AND PROCESSING TECHNOLOGY

1. Farming Operation & Oil Production Process

The neem tree plantation farm establishment will start with nursery and planting sites
selection. The nursery establishment will include, fencing, ploughing, leveling, seed
bed preparation and construction of shade, stores and offices. This will be followed
by seedling raising. It includes various agricultural, insect pest control etc. In
addition to nursery management agricultural operations, main planting, site
preparation such as land clearing, ploughing, leveling and digging of planting holes
are expected to be under taken simultaneously. Tree management will be routine
operations to be carried out upto seed setting. Ripened seed collection for processing
is the final agricultural operation.

To bring the many therapeutic effects of neem oil to all the people that could benefit
from them requires a major change in neem oil's quality from the picking of the fruit
to filling the oil in to drums care full attention to quality is the only way to get the best
oil possible. It is now known that if the neem seed is not dried and stored properly
and the oil is not expressed in a hygienic way the oil will be very dark, have a foul
odor and may contain dangerous contaminates.

There are three main processes for extracting the oil from the seed kernels.

1) Mechanical press method, using a screw or some form of press to squeeze the
kernels under pressure until the oil is pressed out and collected.

2) The second method uses steam and high pressures to extract the oil. The
kernels are heated with steam to increase the oil flow then squeezed under
high pressure. Most of the oil is extracted from the kernels but it is dark and
smelly with many of the active compounds destroyed by the high
temperatures.

3) The third and newest method is solvent extraction. This method is used by
most seed oil processors since almost all of the oil is removed from the
kernels. The neem seed kernel is finely ground and placed into a container
along with a petroleum solvent, usually hexane. The neem oil is captured by
the solvent and is pulled out of the kernels. The solvent / neem mixture is then
put into a vat where most of the solvent is recovered leaving neem oil and
minute traces of the solvent behind. Many of the neem oil's active
compounds are not soluble in hexane and are left behind in the solvent
extraction process.

The best method for obtaining quality neem oil with the majority of the active
compounds intact is cold pressed. This method is adopted for the envisaged project.
The fresh fruit then has to be taken to a facility where it is washed to remove the fruit
from the seeds and the clean seeds quickly air dried. Dried seeds are then de-husked
and the kernels cold pressed. The kernels should only be pressed once to obtain
"virgin" oil, guaranteeing only the oil is removed leaving the waxy and tar like
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substances behind. The light neem oil must then be double filtered and stored in
drums for marketing. This method produces high quality neem oil suitable for use in
any health and beauty aid products.

2. Source of Technology

The farm and plant machinery and equipment can be supplied by many local
companies like Ries Engineering, Hagbes Plc, Nazarth Tractor Assembly Plant and
alternative technology for the plant can be acquired from USA, Europe and Asian
countries. But the selected technology can be sourced from the following supplier.

PEC Limited'
Hansa Laya 15, Barahamba Road
E-mail: Pecdel@Recde.Pecdel,com.net.in

B. ENGINEERING

1. Farm And Processing Plant Machinery And Equipment

The types of farm and plant machinery and equipment required are listed in Table 5.1.
The total cost for machinery and equipment is estimated to be Birr 7.81 million, out of
which 19.2 per cent and 80.8 per cent will be required in local and foreign currency,
respectively.

Table 5.1
FARM AND PROCESSING PLANT MACHINERY AND EQUIPMENT
REQUIREMENT AND COST

Sr. Description Unit of Qty. Cost Birr '000

No. Measure LC FC Total
1. Tractor 110-127 HP No. 1 - 270 270
2. Vehicle No. 1 - 400 400
3. Generator No. 1 30 125 155
4. Motorcycles No. 1 - 20 20
5. Trailer No. 1 90 - 90
6. Nursery equipment Ls - 20 - 20
7. Workshop equipment Ls - - 40 40
8. Tools (set) LS - -
9. Wash basin Ls 1 - 12.50 12.50
10. Plant machinery and equipment No. - 1360 5440 6800
11. De-husker No. 1
12. Oil expelled screw type No. 1
13. Filter press No. 2
14. Boiler No. 1
15. Tanker No. 2
16. Pumps No. 2
17. Drum fining machine No. 1
Grand Total 1500 6307.5 7807.5
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2. Land, Building and Civil Works

Land development cost for 200 ha. plantation site and nursery are estimated to be Birr
4.25 million. In addition, costs for access roads and farm roads construction are
estimated at Birr 0.2 million.

The total area for neem tree plantation including open area, staff canteen, stores,
offices, workshop, etc. is estimated to be 300 ha. The building area of the envisaged
plantation is estimated to be 6,200 meter square and its cost is estimated at Birr 4.065
million. Rural land lease rate in BGRS ranges from Birr 15 to Birr 30 per hectare.
Accordilngly taking the maximum lease rate and for 70 years of land holding, the total
land lease cost is estimated at Birr 630,000. Thus, the total investment cost on land,
building and civil works, assuming that the total land lease cost will be paid in
advance, is estimated at Birr 10.8 million.

3. Proposed Location

The location for the proposed project is expected to be Kemashi zone.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

A total of 45 permanent employees are required for the farm and the plant. The total
cost of manpower including employees' benefits is estimated to be Birr 0.652 million.
The manpower requirement for the farm and plant and their monthly salary is
indicated in Table 6.1.
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Table 6.1
MANPOWER REQUIREMENT AND ANNUAL LABOUR COST

Sr. Description Req. Monthly Annual Salary

No. No. Salary, Birr ('000 Birr)
1 General manager 1 2000 24,000
2 Farm manger 1 1850 22200
3 Secretary 1 700 8400
4 Commercial officer 1 1200 14,400
5 Plant manager 1 1850 22200
6 Accountant 1 800 9600
7 Mechanic 3 1800 21600
8 Electrician 3 1800 21600
9 Forester 1 1500 18000
10 Operators 12 7200 86400
11 Assistant operators 10 4500 54,000
12 Salesman / purchaser 1 700 8400
13 Chemist 1 900 10800
14 Janitor 2 400 4800
15 Assistant chemist 1 600 7200
16 Store keeper 1 450 5400
17 Cashier 1 450 5400
18 Guard 10 3000 36000
19 Driver 3 1050 12600
Sub-total 45 375,000
Employees benefit (25%) 93,750
Total 468,750
Casual labour 160,800
Grand total 629,550

B. TRAINING REQUIREMENT

Since the technology required for neem oil extraction is new to the country,
production and technic head and chemist need a two weeks training in the country of
technology supplier. Operators, mechanics and electricians need a training on the
operation and maintenance of machinery by the expert of technology supplier during
erection and commissioning. The total cost of training is estimated at Birr 100,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the Neem oil Agro-processing plant project is based on the
data presented in the previous chapters and the following assumptions:-

Construction period 1 years

Source of finance 30 % equity
70 % loan
Tax holidays 3 years
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Bank interest 7.5 %

Discounted cashflow 8.5 %

Repair and maintenance 3 % of the total plant and machinery

Accounts receivable 30 days
Raw material, local 30 days
Raw materials, import 90 days
Work in progress 1 day
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days

A. TOTAL INITIAL INVESTMENT COST

The total initial investment cost of the project including working capital is estimated
at about 18.22 million, of which 34.9 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1

Table 7.1
INITIAL INVESTMENT COST

Sr. Cost Items Total

No. ('000 BIRR)
1 Land lease value 630
2. Site preparation and development 4,450
3. Building and Civil Work 4,065
4. Farm & Plant Machinery and 7,407.5
Equipment
5. Office Furniture and Equipment 30
6. Vehicle 400
7 Pre-production Expenditure* 1,091.6
8 Working Capital 155.8
Total Investment cost 18,229.95
Foreign share 34.79

B. OPERATION & PRODUCTION COST

The annual operation & production cost at full operation capacity of the project is
estimated at Birr 4.7 million (see Table 7.2). The material and utility cost accounts for
14.1 per cent while repair and maintenance take 3.5 per cent of the operation and
production cost.

* N.B Pre-production expenditure includes interest during construction (Birr 986.6 thousand),
training (Birr 100 thousand), and ( Birr 5 thousand) costs of registration, licensing and
formation of the company including legal fees, commissioning expenses, etc.
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Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs 405.7 8.6
Utilities 1,351.4 28.6
Maintenance and repair 173.6 3.7
Labour direct 375.1 11.3
Factory overheads 93.8 2.0
Administration Cost 50 1.1
Total Operating Costs 2,735.6 54.1
Depreciation 1,320.8 27.9
Cost of Finance 799.17 16.9
Total Production Cost 4,711.17 100.0

C. FINANCIAL EVALUATION

1. Profitability

According to the projected income statement, the project will start generating profit in
the 1st year of operation. Important ratios such as profit to total sales, net profit to
equity (Return on equity) and net profit plus interest on total investment (return on
total investment) show an increasing trend during the lifetime of the project.

The income statement and the other indicators of profitability show that the project is
viable.

2. Break-even Analysis

The break-even point of the project including cost of finance when it operates at full
capacity ( year 5) is estimated by using income statement projection.

BE = Fixed Cost = 30 %
Sales – Variable cost
3. Pay-Back Period

The investment cost and income statement projection are used to project the pay-back
period. The project's initial investment will be fully recovered within 4 years.

4. Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 28% and the net
present value at 8.5% discount rate is Birr 27 million.
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D. ECONOMIC BENEFITS

The project can create employment for 45 persons. In addition to supply of the
domestic needs, the project will generate Birr 1.4 million per annum in terms of tax
revenue when it starts to operate at full capacity. Moreover, the Regional Government
can collect employment, income tax and sales tax revenue. The establishment of such
factory will have a foreign exchange saving effect to the country by substituting the
current imports.