Murray Hunter Essential Oils

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ESSENTIAL OILS: ART, AGRICULTURE,

SCIENCE, INDUSTRY AND

ENTREPRENEURSHIP (A FOCUS ON

THE ASIA-PACIFIC REGION)

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ESSENTIAL OILS: ART, AGRICULTURE,

SCIENCE, INDUSTRY AND

ENTREPRENEURSHIP (A FOCUS ON

THE ASIA-PACIFIC REGION)

M

URRAY

H

UNTER

SME

U

NIT

University Malaysia Perlis

Nova Science Publishers, Inc.

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This publication is designed to provide accurate and authoritative information with regard to the subject matter covered herein. It is sold with the clear understanding that the Publisher is not engaged in rendering legal or any other professional services. If legal or any other expert assistance is required, the services of a competent person should be sought. FROM A DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS.

LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA Hunter, Murray.

Essential oils art, agriculture, science, industry and entrepreneurship (a focus on the Asia-Pacific region) / Murray Hunter.

p. cm. Includes index.

ISBN 978-1-60741-865-8 (hardcover)

1. Essences and essential oils industry--Pacific Area. 2. Essences and essential oils--Pacific Area. I. Title.

HD9999.E783P32 2009 338.4'7661806095--dc22

2009025482

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In memory of my grandfather Leonard David Hunter

(1911-1973) A self-made chemist

A pioneer of essential oil based products in Australia

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P

REFACE

The essential oil industry is under threat from numerous issues at present. Rising agricultural input costs, particularly petrochemical based fertilizers and fuels are squeezing farmers‘ profit margins. Rising food prices and the increasing value of housing and industrial land prices is creating competition for land, particularly around populated areas. Adverse weather conditions and changing climate are creating both short and long term problems. Poor crop yields are occurring much more regularly than before because of unusually heavy rain, hail, floods, heat-waves and cold snaps. Climate change is affecting long term yields due to increasing plant stress caused by warmer temperatures. As many temperate areas are becoming drought affected, crop cultivation is becoming more difficult as irrigated water is becoming extremely scarce. This is threatening the very survival of many enterprises and industries in their present locations.

Industry change through takeovers is increasing buyer concentration, making it more difficult for small firms to survive in the industry. Technology change requires continuous learning and development of new techniques which change the way products are manufactured. Increasing consumer scrutiny, changes in taste and increasing sophistication in developing markets are creating shorter product lifecycles, requiring companies to spend more on product development. Last but not least, a rapidly tightening regional regulatory environment is increasing the costs of introducing new materials and products into the marketplace.

However, notwithstanding the threats and challenges mentioned above, opportunities still exist in the essential oil industry. In fact, the issues mentioned above can increase the propensity of opportunities to evolve inside the industry, if one knows where to look and how to evaluate their potential.

The essential oil industry is far from being monolithic. It can be seen more as a group of overlapping segments of other industries, which are related by the nature of the product – natural aromatic compounds. Its agricultural component would include the collection of biomass from the wild, the cultivation of selected flora in the field or the collection of by-products from other activities like timber logging or citrus fruit production. Manufacturers in the essential oil industry use essential oils and other natural aromatic materials to produce a number of value added products which include flavours and fragrances, fine fragrance, cosmetics, household, pharmaceutical, agro-chemical and aromatherapy products. These products are promoted, marketed, sold, transferred, shipped and consumed through various

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levels of the supply and value chains. Finally, the public sector component plays a role in both research and regulation at a local, national and international level, both on policy and specific issues.

Yet with all the attention that has been given to essential oils in the past, the reality must be stated – essential oil production will never become a major crop or contributor to any agricultural economy. It is a niche industry, an alternative crop to any mainstream agricultural portfolio in any country. Also, in the flavour and fragrance, cosmetic, household product, pharmaceutical (although nearly 70% of pharmaceuticalactive compounds have been

synthesized from the inspiration of natural compounds), and agro-chemical industries,

essential oils in an aggregate sense only play a minor part in the composition and formulary of products in those industries. Only in aromatherapy are essential oils the main ingredient in product formulatory. This scenario will never change. The importance of essential oils lies in the role they play in linking industries, which makes their economic contribution substantial – as ingredients in flavours and fragrances, as ingredients in cosmetics and household products, and as starting materials of prime active ingredients in pharmaceuticals and agro-chemicals like pesticides and fungicides. There is no doubt however that essential oils lead to great passion and take on a major role in the branding of many products.

This leads to another point. There is a vast amount of misleading and wrong information about essential oils and the industry. This can be widely found in media articles, the internet, papers presented to conferences and even books. There are a number of “consultants” around that base their advice on sometime misinformed premises and old industry paradigms. Some of the organizations involved in the essential oil industry, particularly those representing traders, sometimes appear to be contributing to industry mythology and have encouraged an elitist approach to those considered “outsiders” to the industry.

Many people who are attracted to some part of the essential oil industry, whether production or application is based on passion, emotion and infatuation, rather than business logic and sense. This can be a dangerous and delusional footing.

The failure rate of those setting up essential oil production ventures is outstandingly high. It is also sad that many of these failures involve community groups, led by some consultant‘s advice. For far too long essential oil markets been analysed on an economic basis, rather than a niche entrepreneurial opportunity.

Although business failure rates have been high among producers, a number of success stories exist. These are usually about companies producing cosmetics and aromatherapy ranges utilizing essential oils. Many new aromatherapy, cosmetic and agro-chemical pesticide and fungicide products are being launched onto market. A number of companies within a short space of time have grown into international suppliers of essential oil based products. These companies have been at the innovative forefronts of their respective industries.

Thus innovation would appear a prerequisite of success, especially with changing consumer tastes, lifestyles and product expectations. This certainly supports the argument that the essential oil industry should be viewed in the entrepreneurial paradigm to see if more sense and understanding can be gained – which is what this book will try to do.

With the term technology taken simply to mean a way or means to do something, then

new technology means a new way or means to do something. In that light, it is certainly worth

examining how things are done at farm level to produce essential oils, i.e., propagation, planting, crop maintenance, harvesting and extraction. Becoming competitive and developing a source of competitive advantage in essential oil production may have more to do with new

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technology introduction than with labour cost advantages. Many methods of propagation, planting, maintenance, harvesting and extraction have been developed with knowledge built more upon learning from trial and error on the part of entrepreneurial farmers than taking stock solutions off a shelf somewhere. Through the observation of operational essential oil ventures, successful technology would appear in many cases to be homegrown solutions in response to specific farm level problems. Add to that the rapid growth of biotechnology and the emphasis on the molecular level with nano-technology - technology issues are going to continue in their importance. An entrepreneurial approach may help to understand and manage this.

There have been many books written on essential oils which have placed the word art in their titles. This has been in recognition of the creativity needed to construct a fragrance or perfume, sometimes paralleled with the artist or the musician. However the concept of art can be extended to the business of essential oils. Business commentators now tend to call business an art, rather than a science. In business there are many ways to achieve an end or objective and a multiplicity of strategies that can be used in any particular situation. The metaphor of

the art of strategy is maybe more applicable. Agriculture can also be an art form in that there

are also a number of ways to achieve an end. If we view landscapes, which are part of an eco-system as art, then utilizing the land in a sustainable way may also be considered an art form. Sustainable solutions to agricultural problems would seem to be much more important than before. Hopefully this book will provide the reader some insights into the art of essential oils in the wider, rather than the narrower sense.

The development of essential oils and related products requires some knowledge in botany, natural product and phyto-chemistry, analytical chemistry, agronomy, thermodynamics and chemical engineering, agricultural and mechanical engineering, economics, supply chain management, accounting, finance, organization, marketing, new product development, cosmetic, household product, and pesticide chemistry, farm and industrial management, human resource and project management. In addition skills in the areas of opportunity identification and evaluation, strategy selection, development and enactment are required. An ability to negotiate and present ideas to various stakeholders is also important. Thus developing essential oils or an essential oil related product requires a true multi-disciplinary approach. The entrepreneur in this industry must be a „jack of all

trades‟ to understand and find solutions to the issues he or she will encounter. It is through

inter-disciplinary thinking that new products will come to the market.

At the product level where changing consumer tastes, expectations and lifestyles influence what is required, coupled with more distribution channel avenues and a dramatic increase in new regulation around the world, new product forms, branding linkages, organizational form, and channel utilization requires new knowledge to be applied. These changes require new thinking in the industry and this may not be based on the same conventional thinking of the past. This would seem to be of advantage to small companies, where the larger multinationals have tended to follow and take ideas onboard, once someone else has proven them successful.

I have been lucky and privileged to have had the opportunity to be involved in as so many aspects of the essential oil industry as I have. Discovering new compounds in plants was an exciting time, requiring a massive and focused effort with only a remote chance of finding something that may be commercially interesting. Domesticating plants from the wild presented a number of challenges as well researching the ability of selected aromatic crops in

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adapting to different geographical locations and climates. There was great excitement about designing and developing harvest and distillation systems, especially when they are fully commissioned in working condition. As equally challenging was designing suitable field drainage and irrigation infrastructures for farms that can handle the quantity of water falling during a tropical storm without carrying away the top soil or able to irrigate a field during the dry months. One of the most important and satisfying challenges of late with the high cost of diesel was designing and commissioning alternative fuel systems to power steam generation for a distillation operation in a sustainable way. Learning how to construct a fragrance, responding to fragrance brief and having my creation selected by a customer always brought a great sense of pride and satisfaction. Developing new products for consumer markets through the process of nurturing the concept, finding the materials, evaluating packaging concepts and designing the method of production, and finally turning it into the reality was at the envelope of excitement and satisfaction. The „sell in‟ and the drama of waiting for the consumer to give their approval on the product through their purchases is something no one forgets. Traveling, meeting people, attending conferences, visiting markets and walking around a farm are all fulfilling activities for those involved in essential oils.

Having been in and around the essential oil and allied industries for many years and knowing many of the legendary people within it encouraged me to write about the industry. I recognize that this book will bring some criticisms from some quarters, but if criticism is feared and prevents ideas being put forward, then there will be no advance in knowledge.

This book reflects much of these experiences and it is written as I understand the issues – sometimes as a layman and sometimes as an expert, but always within the theme of being a

jack of all trades, with an attempt to inject interdisciplinary insights into issues and

challenges that development, production, marketing and management bring forward. As such, this book has attempted to look at product, market, industry and technical issues involved to assist the reader in their situation overcome their specific barriers to entry, so that they can create something of value to the industry – a trait that is needed to survive in any sustainable way in business today. Hopefully this book helps the reader make sense of things.

I hope that students undertaking subjects like business and entrepreneurship, agriculture, bio-systems engineering and chemistry are able to benefit from this book. I hope that this book can assist farmers and potential farmers make decisions about what aromatic crops they invest in. I hope this book provides some insights to researchers in the natural product chemistry and agronomic areas. I also hope this book can assist those wishing to develop aromatherapy, cosmetic, household, pharmaceutical and agro-chemical pesticide and herbicide products. I hope this book can assist the reader understand the industry better, the business involved, the challenges that it brings and develop ideas to help solve some of these problems.

The structure and content of this book is as follows:

Chapter One introduces the definitions relevant to crude products produced by the industry. The size of the market is calculated and apportioned between each product/market segment. The rest of the introduction sets the background of the industry and discusses some of the contemporary problems and issues associated with it.

Chapter Two discusses the structure and interrelationships of the industry. This is undertaken more from a macro point of view so that concepts like derived demand and the influence of synthetic materials can be understood by the reader. This chapter also looks at

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world essential oil production centres and the various types of essential oil production. The role of essential oils and flavour and fragrance materials in the market typology of consumer products is also introduced. Finally the chapter looks at the essential oil value chain.

Chapter Three takes a closer look at essential oil production in the South-East Asia-Pacific region, focusing on Australia, New Zealand and South-East Asia. Recent international published research undertaken in each country is also outlined.

Chapter Four and Five are two technical chapters which introduce phyto-chemistry and the theory behind the extraction of essential oils. These are important technical areas where any potential practitioner should have some understanding of the basic principals. Chapter Four explains the role of essential oils in plants as secondary metabolites. The various classes of essential oils are explained with a number of examples of natural aroma chemicals found in plants. Chapter Four also introduces the basic methods of essential oil analysis. Chapter Five explains the basic theories of distillation, solvent and CO2 extraction and the traditional method of enfluerage.

The next three chapters (Six, Seven and Eight) are concerned directly with the concepts of screening potential essential oils for viability to develop commercially and create a development plan. Chapter Six specifically looks at the issues involved in developing a new crop to a farmer or potential farmer, emphasizing what specific information is required to make decisions. The chapter also introduces the concept of risk and challenges. The potential reasons for success and failure are outlined, as well as showing the range of possible development strategies for a project to pursue. Finally this chapter looks at potential products that can be developed for different levels in the value chain, with corresponding potential entry strategies.

Chapter Seven is primarily concerned with the screening and evaluation process and discusses the regulatory environment in detail. Chapter Eight returns to an industry analysis to assist in the development of a strategic plan, using a number of tools. This chapter integrates both the business and technical aspects of the project together so that a comprehensive overall operational plan can be created.

Chapter Nine is concerned with the field issues of essential oil development. Agriculture is first introduced as a system and the issue of climate change and the potential consequences are discussed. The chapter then outlines the project preparation phase, the selection of genetic material, seed collection, the improvement of genetic material, land selection, propagation and planting, field development, crop maintenance, harvesting and extraction. The chapter finishes off with a discussion about Good Agriculture Practice (GAP) and financial modeling of the project.

Chapter Ten examines the organic production of essential oils. The size and growth of the organic industry is examined and the various continuum of farming are discussed. The rest of the chapter looks at the basic organic farming concepts and practices including crop rotation, cover crops and green manures, animal manures, intercropping, composting, mulching, crop diversity, natural fertilizers, minerals and supplements, insect and disease control, weed control, tillage and farmscaping. The planning and site selection issues are looked at before briefly examining the certification process and extent of organic farming in the Asia-Pacific region.

Chapter Eleven looks at the application of essential oils. The chapter begins with an overview of the classification of odours and flavours. The structure of a fragrance and the development of perfumes are described. The process of developing flavours is briefly

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discussed. The chapter then goes into the new product development process in detail, exploring the concepts of a systems approach to product development, creativity, innovation and opportunity required in ideation, the development of the product concept and prototype, market and product planning, the development of the formulation and manufacturing system and the eventual product launch. The chapter then looks at each product/industry segment utilizing essential oils including cosmetic and personal care products, natural perfumery, household products, agricultural products, pharmaceuticals and natural aroma chemicals and other isolates. The next part of the chapter examines potential distribution strategies, Good Manufacturing Practice (GMP), HACCP, Standards, Occupational Health and Safety (OSHA), environmental compliance and certification schemes. Finally the concept of the holistic and focused enterprise is introduced.

Chapter Twelve integrates enterprise viability with new crop potential, arguing that the type of production organisation will influence what type of crop is viable to select. The concept of opportunity within the framework of personal goals is re-examined. The remainder of this chapter and book looks at criteria to examine new essential oils and finishes with a number of mini-monographs on plants of interest to the author.

Most books tell the reader how to cultivate essential oil crops. This book attempts to help the reader select what crops to develop.

I would have liked to elaborate and explore a number of issues in more detail than I had, but size of the manuscript led to making choices and my own research into these issues is still in its infancy. These issues include exploring alternative energy sources for extraction of natural materials from plants, including solar distillation, boiler design and fabrication, the modification of existing farm equipment to perform new roles particularly in the harvesting area, the development of low cost micro-propagation facilities, and the utilization of enzymes in agronomy, extraction and transformations. I hope sometime in the future further contributions can be made by the writer.

I hope this book leads to a better understanding of the issues involved in developing new essential oil ventures. Certainly I have tried to emphasize the need for innovation at both the technical and business model level to assist in creating product differentiation for the potential practitioner.

Please note the author has not followed strict botanical nomenclature where names familiar to the industry have been used. For any incorrect and misleading material in this book I do sincerely apologize and welcome correction. I also apologize for any grammatical errors in the manuscript.

Murray Hunter Hat Yai Songkhla Thailand

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ACKNOWLEDGEMENTS

Life is often considered a journey, where knowledge, experience and insights are gained through where you are, what you are doing and who you meet up with. I have been lucky to have a long fulfilling journey, which has made it possible to complete this book.

I was born into an entrepreneurial family in Melbourne Australia late in 1958. My grandfather, Mr. Len Hunter Senior was a ‗self made‟ chemist, inventor and entrepreneur extraordinaire. He invented the product Pine „O‟ Clean, a pine oil based disinfectant in the 1930s and was given an exemption to import American pine oil during the Second World War to supply the US troops stationed in Australia at the time. Len sold Pine „O‟ Clean, along with Oxford Shoe Polish to Reckitt and Colman in 1956 for the sum of One Million Pounds. This was an extremely large figure at the time for the family and part of this money was invested to form Hunters Products Pty Ltd, which manufactured household cleaning, personal care, gardening, pool care and institutional products up until the 1980s when again the company, a household name in Australian cleaning, was sold again to Reckitt-Benkaiser.

During the height of the family era, the household division of the group was run by my father Mr. Alan Hunter, who had great influence upon me. My father took me under his wing, always taking me to the factory during the weekends and in latter years during my teens to sales calls all over the country. It was with my father I first came into contact with top executives and even owners of companies like Dragoco, Drom, Monsanto, ICI, Haarman & Reimer, Kao, The Andrew Jergens Company, Kiwi and many others. This was a period of great excitement for me, which opened up many different aspects of the industry.

Two of the people I very fondly remember from that time were Mr. Eric Floyd, the Southern Sales Manager of Dragoco and Mr. Hans de Jong, the Victorian Sales Manager of Haarman & Reimer. Both of them gave me very firm ideas about essential oils and fragrances.

With Hunters household division going to Reckitt-Benkaiser I went out on my own forming a company called New Approach Products Pty Ltd in Melbourne during 1988. This company manufactured toilet cleaners, soaps, garden insecticide and air fresheners. In seeking to create greater competitive advantage for our air freshener range, mainly sold under generic supermarket brands, the concept of blending our own fragrances came to mind and we were in the flavour and fragrance business. At that time I met with Mr. Brian Brennan of Brennan Aromatics and developed a close relationship with him as a shareholder of his company. It was with Brian I picked up some of the practicalities of creating fragrances.

It was around the same time that my interest of producing essential oils developed. I learnt a lot from Fred Bienvenu of the Ovens Research Station, Victorian Department of

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Agriculture during our time together developing Polygonum odoratum as a new essential oil crop. I also thank Professor Glywn Jones of the Department of Food and Nutrition, Deakin University, Geelong, Victoria for inviting me to join their research group on basil oils at the time.

During the early 1990s, not only did I see South East Asia as a potential market, but a source of essential oils. It was Dr. Erich Lassak who encouraged me to be bold in introducing new crops to South East Asia. John Reece took me under his wing and we travelled all over Australia and South East Asia together visiting plantations, attending conferences and trying to set up projects in Malaysia. I also thank the late Djohan Napati, President of PT Djsula Wangi in Jakarta for opening up his plantations and business to me. I also thank the Late Mr. Karim Yaacob for the time we spent together travelling around Malaysia looking at potential new essential oil crops.

I would like to greatly thank Tan Sri Dr. Yusof, the former Director General of the Malaysian Agricultural Research and Development Institute (MARDI) and Tan Sri Dr. Hamid Bin Pawan Teh, the former Chief Minister of Perlis (now President of the Malaysian Senate) for giving me an opportunity to develop a tea tree plantation in the Northern part of Malaysia during the early 1990s. I also remember the time Mr. Mansor Puteh and myself spent on convincing people to try tea tree as a serious crop in Malaysia. I am also indebted to other members of the team including Mr. Malik and Tunku Kassim of MARDI and Mr. Hasnan Abdul Kudus of the Perlis State Economic Development Corporation.

Other people I would like to thank for ideas and insights are Professor Chia Hock Hwa, a former director of Kao Singapore, Mr Steven S. F. Yeow also of Singapore, and Professor Zuriati Zakaria of the Faculty of Science, Universiti Kebangsaan Malaysia for her suggestions on Chapter Four. My UniMAP colleagues Professor Mohd. Nor Bin Ahmed and Associate Professor Mahmad Bin Jaafar, who both made always great contributions to my thoughts. Mr. Jim Gobert of Unifect Foods, Sydney for his ideas about the industry and Mr. Anas Ahmad Nasarudin of Marditech Corporation Sdn. Bhd. for his assistance over the years. Thank you to Mr. Stuart Mason Parker of the Faculty of Law, Prince of Songkla University, Hat Yai, Thailand for reading parts of the manuscript. Associate Professor Mohariff Bin Shariff‘s help on writing style was invaluable in helping me working through parts of this monograph. I would also like to thank my wife Kittirat Yothangrong for what she taught me about herbs, the soil and sustainable farming, which had a big influence on chapter 10.

I would like to thank the Vice Chancellor of University Malaysia Perlis Brig. General Professor Dato‘ Dr. Kamaruddin Hussin, who had faith in me to become an academic and supported my activities and writing this book. Finally, thanks to Ms. Suraya Binti Mat Ros, my secretary, who ran the SME Unit while I spent countless weeks and months writing this manuscript.

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Chapter 1

I

NTRODUCTION

:

T

HE

D

EVELOPMENT

I

SSUES

Chapter one presents a basic introduction to the issues of essential oil development. The chapter begins with a discussion about the difficulties of estimating the aggregate farm-gate value of global essential oil production. The various types of natural aromatic materials are defined. The chapter then goes onto a discussion of some of the major issues facing essential oils, including global warming, the food, rural and financial crisis, market turbulence, wild collection and threatened plant species, the bargaining power of producers, the regulatory environment, and the templating of natural molecules for synthesis rather than for cultivation and extraction. The chapter then turns to outlining the factors that contribute to success or failure in essential oil development and the importance of making accurate project assumptions and estimates. These include planning and opportunity issues, management and organizational issues, financial issues, technical issues, marketing issues, fate and nature. Finally, a model outlining the potential strategic success factors is presented.

I

NTRODUCTION

Good Essential oil cultivation is based on a knowledge intensive production system. The essential oil sector within any country‘s agricultural base will never become a major industry in value terms, but it is one of the most complex ones. Although the essential oil industry is very small in aggregate terms, its influence stretches far beyond the agricultural sector. Essential oils are materials used in a number of dynamic consumer and niche industrial markets. The industry is undergoing rapid structural transformation from a craft orientated base to a modern multi-national orientated industry with very sophisticated supply chains. Essential oil usage has also widened into a number of smaller fragmented applications, which include natural perfumery, aromatherapy and bio-active agricultural chemicals. Both production geography and operational practices are changing, influenced by a number of factors that will be explained in this chapter.

Today, new essential oil based ventures usually start in one of two major ways. The first case is where private entrepreneurs find and respond to market opportunities. Their responses to these opportunities can be quite complex and very different from traditional producers. Private entrepreneurs may not be satisfied just producing a crude oil. They may involve themselves in the higher value product/market activities along the supply chain. The second case is where the government through an agency may initiate research and development of an essential oil crop for the purposes of disseminating technology, planting stock, operational methods and market connections to local farmers to exploit. A variation on this could be a community development project funded by an NGO. In both cases, the initiator will promote the formation of farmer alliances and/or cooperatives to improve the chances of success.

Unfortunately, many community projects fail to develop their full potential or even collapse. This occurs for a number of reasons. Reasons outside the farmers control include

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competition, weather and collapses in prices. Other causes of failure may develop because of structural faults, i.e., issues not properly considered when the project was conceptualised. These may include failure to continue production in a sustainable manner once external assistance has ceased, reliance on external people for motivation with no local champion to continue momentum in the farmer group, failure in dealing adequately with external competition, or failure to maintain collaborative links with other stakeholders such as research institutions. Reasons for failure within farmers control include poor management or diverging objectives and agendas by stakeholders.

Agriculture is traditionally considered an activity undertaken within a static system that is very slow and resistant to change. The reality is that agriculture is in a state of flux and transformation like many other industries. Agriculture is transforming itself from a commodity driven to a consumer and market driven activity. A recent World Bank report on agricultural innovation identified six areas of change that will drive agriculture in the coming decades. The report cites;

1. That future development will rely on market and not production orientated approaches to the agricultural sector,

2. Changes in production methods are now rapid and unpredictable, due to changing technologies and ease of technology transfer,

3. Agricultural supply chains are now very dynamic, where there is a greater propensity to create direct producer- retailer or producer-user relationships,

4. The private sector is the driving force of new knowledge and technology into the sector,

5. Information and communications technologies are having profound affects upon communities taking advantage of knowledge generated in other places, technology transfer and producer-customer relationships, and

6. Agricultural venture development is being increasingly undertaken with globalised, rather than local orientations [1].

This implies that selecting essential oil crops can be better undertaken through a market driven crop selection process, based on product development and customer driven management, rather than a commodity approach.

T

HE

S

IZE OF THE

E

SSENTIAL

O

IL

I

NDUSTRY

Any accurate assessment of the aggregate size of the international essential oil industry is extremely difficult. World production of essential oils is very fragmented, much of it in tropical equatorial regions that are not easily accessible to transport. Communications infrastructure is weak or even non-existent. A large quantity of essential oils are produced at subsistence level and collected from farms by individuals who sell the oil onto wholesalers. Producers are remote from the major towns and cities of Government administrations, where organization is poor. Language is yet another barrier to communication, where all the above factors combined hinder any accurate measurement of essential oil production.

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The difficulty in measuring essential oil production is further complicated by the differing statistical classification systems various countries use to tabulate production. The harmonized system of customs codes only identifies around half a dozen individual essential oils. Where essential oils are small, production figures may be grouped together with other miscellaneous activities, thus not showing up directly in statistics. Essential oil production will most likely be aggregated with herb and other natural product production.

Accurate counting is also difficult because of the unstable nature of production, where production figures may differ greatly from year to year. This occurs from poor weather, natural disasters, insurgencies, wars, and other national disturbances, crop disease and droughts, which only make the accounting of aggregate supply figures more difficult. Essential oil traders hold stocks and can distort the market through the selling of their inventories in times of shortage and buying up extra product in times of production surpluses. Most agreements between producers and traders at farm-gate level are confidential and undisclosed.

Doubt exists whether essential oil sales through the internet are statistically recorded. Most oils sold and sent through the postal system are high value/low volume oils, which will only have nominal values attached to customs forms. For example, one kilogram of rose Otto may be sold for a few thousand US Dollars, but the nominal value recorded may only be a few US Dollars.

Finally, currency values will also distort production values due to fluctuating exchange rates and parities between different producing countries. As most essential oil production occurs outside of the United States, currency conversions have to be made, where the final figure will be greatly influenced by the exchange rate at the time. For example, if aggregate essential oil farm-gate production in Australia is valued at AUD 25.0 million in June 2008 at an exchange rate of 1.04, Australian aggregate farm-gate production would be valued at USD 24 million at that time. However if the conversion was made at the end of November 2008 at a rate of 1.55, Australian aggregate farm-gate production would be valued at USD 16.20 million, almost one-third less than June in the same year, even though physical production is the same.

The author‘s estimate of the farm-gate aggregate value (in USD) of World essential oil production was USD 1,480 in 2008. Essential oil usage can be divided into a) flavour and fragrance, b) aromatherapy, c) pharmaceutical, d) intermediates, e) agrochemicals and f) cosmetics. This is shown in Figure 1.1. Aggregate essential oil production is increasing, but each sector is growing at different rates. Aggregate growth is around 8-10.0% per annum.

Even with major consumer product manufacturers espousing “natural products” in their marketing campaigns, the use of essential oils in fragrance compounds, as a percentage of the formula, has declined over the last several decades [2]. This is partly the result of US manufacturers being allowed to call synthetic aroma chemicals “nature identical”, if they are chemically the same to those found in nature. This is a factor preventing more essential oil usage in flavour formulations. However, there is still growth in the aggregate volume of essential oils supplied to the flavour and fragrance sector because of overall growth in worldwide demand for perfumed and flavoured products.

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Cosm etics, USD 90 M, 6% Agrochem icals,

USD 150 M, 10%

Interm ediates, USD 120 M, 8% Pharm aceuticals, USD 220 M 15% Aromatherapy USD 250 M 17% Flavour & Fragrance, USD 650 M, 44%

Figure 1.1. Estimate of the World Farm-gate Value of Essential Oil Production (USD) in 2008.

The aromatherapy market had enjoyed rapid growth until it stalled in the beginning of the 1990s. Aromatherapy has become much more closely aligned with cosmetics, natural perfumery and other traditional medicines, which has brought this sector into growth again. Some cosmetic categories, including cosmoceuticals and organic products are enjoying very high growth rates. Some pharmaceutical products now fit into cosmetic categories, as pharmaceutical and cosmetic companies regularly compete against each other. It is now much harder to distinguish the differences between many cosmetics and pharmaceuticals as both types of products provide the same consumer benefits. Another sector enjoying very high growth is the agricultural chemical market, where new companies are developing fungicides, pesticides and herbicides using essential oils as active ingredients.

Although the essential oil production is increasing, the growth of individual oils may bare little relationship to the overall trend. Within a given year some essential oils will drastically decline in production because of adverse weather conditions, natural disasters or political events, only to return to production levels a season or two later. Other essential oils will slowly decline in production over a long number of years because of the availability of cheaper substitutes, the exhaustion of supply from wild collection and restriction of use through increasing regulation.

As supply patterns change and materials become unavailable, users are forced to make compensatory changes to the oils they use, thereby changing demand patterns. Shortages will force users to switch to substitutes. When a shortage is overcome users may be very hesitant to return to the original oil, due to the effort involved in changing back product formulations. Demand also changes as the relative prices of substitutes move in relation to each other.

Verlet pointed out that production tends to cluster in areas because of three basic reasons. Firstly some production centres have a long history of production with a supportive social structure. This is the case in Morocco, Turkey and Egypt in the production of rose, jasmine

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and cumin oils. Secondly, large multi-national companies have intervened and promoted the development of an industry. This was the case with patchouli production in Brazil. Thirdly, production serves a large domestic market, which enables it to sustain itself. This is the case of some essential oil production in China, India and the US [3].

A large number of essential oils are produced by a) small-holder farmers usually at a subsistence level, b) the gathering and processing of wild plants by subsistence farmers, c) small scale plantations, and d) large scale plantations. Other essential oils are produced as by-products of other primary by-products. Examples include eucalyptus and pine oils from the timber industry, and citrus oils from the processing of fruit juices in the citrus industry. Other small farms and plantations may incorporate activities like agro-tourism into their sites to improve profitability [4]. Long periods of low prices can bring volatility to the global industry, encouraging countries like China, India and Vietnam to increase production at the expense of less competitive countries like Tanzania, Ivory Coast and Madagascar.

Some companies may move up the supply chain and scale down their farm operations to focus on higher value products. For example, Thursday Plantations in Northern NSW ceased tea tree production to focus on agro-tourism and the marketing of tea tree oil based personal care products. Today Thursday Plantation became a major buyer of tea tree oil and now sells their products in over 40 countries [5].

Differing sources of competitive advantage underlie production in different regions, which enables industry viability.

Countries like Brazil, China, India and Indonesia have large domestic markets. Their competitive position is supported by a low production cost regime based on low cost labour and/or high levels of mechanization to make them efficient. These countries control more than half the world‘s production in some of the oils they produce. Long established logistic and trading infrastructure assists in maintaining a strong market position.

Producers in countries with a small domestic market are forced to focus on exports. Production is limited to a small number of oils. Small existing industries develop with financial and research support. Effective research allows them to develop optimum methods of production to develop market competitiveness. These industries are usually located in ideal physical and climatic conditions for the chosen crops.

Some producing countries have been able to maintain their position as a preferred producer by producing exceptional quality oils. These oils become „benchmarks‟ in the Flavour & Fragrance industry, such as Haiti Vetiver or Comoros Basil. This is reinforced long term links with major trading companies or International flavour & fragrance houses.

Many distinct trends are occurring at the same time in the essential oil industry supply chain. Ownership and management of flavour and fragrance houses is becoming very concentrated. This has changed the craft orientation of most companies to a much more corporate multi-national outlook on the business and the way of doing things. Products are being standardised, eliminating various grades of essential oils in the quest for efficiency. New perfumers are trained to construct fragrances from proprietary bases to save on inventories. Chemical production is also moving away from Europe and the United States to India and China, partly to save on costs and partly to escape much stricter environmental laws.

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Table 1.1. Worlds Top Twenty Essential Oils and EU Regulatory Threats in 2006 [8] Essential

Oil

Botanical Name Volume

(Tonnes) Under Threat Cosmetics Under Threat Biocides Under threat Fragrance

Orange Citrus sinensis 26000 X X

Cornmint Mentha Arvensis 4300

Eucalyptus Euc. globulus 3728 X X X

Citronella Cym winterianus 2830 X X X

Peppermint Mentha piperita 2367

Lemon Citrus limon 2158 X X

Euc. Citriodora

Eucalyptus citriodora 2092 X X X

Clove Leaf Syzygium aromaticum 1915 X X X

Cedarwood (US) Juniperus virginiana 1640 Litsea cubeba Litsea cubeba 1005 X X Sassafras (Brazil) Ocotea pretiosa 1000 X X

Lime Citrus aurantifolia 973 X X

Spearmint Mentha spicata 851

Cedarwood (China)

Chamaecyparis funebris

800

Lavandin Lavandula intermedia 768 X X

Sassafras (China) Cinnamomum micranthum 750 X X Camphor Cinnamomum camphora 725 Coriander Coriandrum sativum 710

Grapefruit Citrus paradis 694 X X

Patchouli Pogostemom cablin 563 X X

At the same time there are a number of new emerging markets. This is encouraging the creation of new companies with committed natural product philosophies. Organic cosmetics, pharmaceuticals and aromatherapy products are being merged together to form new product groups called cosmoceuticals. Small companies specializing in the creation of natural perfumes are emerging. New companies producing organically certified bio-active products based on essential oils are growing in size exponentially. In the biotechnology sector, new companies are producing natural aroma chemicals through bio-transformations. Totally new supply chains based on new paradigms are developing like the Fairtrade movement.

The new markets mentioned above have attracted a number of new traders in essential oils, with very different backgrounds to established traders, which served the market for many years. Many new traders specialise in trade to the aromatherapy market and organics. For sellers this has opened up the market somewhat more than was the case two decades ago. Many traders are now developing direct links with producers, creating their own closed

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supply chains. New market segments driven by new ideas are nurturing new entrepreneurs who successfully interpret consumer wants and successfully develop and commercialise new products. Established companies are also feeling the pressure to change so they remain relevant to changing market expectations. Multi-national companies, usually not as innovative as pioneering entrepreneurial enterprises are purchasing some of these emerging „new theme‟ companies outright, so they can enjoy this new market growth.

Retail chains over the last decade have become very powerful. Retailers, equipped with modern point-of-sale scanners have first hand information about consumer tastes and preferences and decide their product ranges and positioning on the information they collect. Retailers work closely with manufacturers to produce product ranges that aim to maximise sales and profitability [6]. Chain retailing in developed countries controls up to 95% of retail sales and 50-70% in developing countries. Many chains operate on a trans-market basis and exert great influence over multi-national manufacturers. Some essential oil producers already supply products directly to these retail chains with retail oil packs and consumer products, either with their own brands or as private labels. This is expected to grow much larger in the near future.

E-commerce has been another revolutionary influence on the way business is being undertaken in the marketplace. Essential oil users now issue e-tenders and invitations to

supply electronically. More mid sized producers are turning to the internet to market their

essential oils. Many producers have their own websites where they offer their products. This has not been successful as a primary marketing strategy, but is successful when used as a support tool for other marketing strategies, i.e, distributing these products through physical

distributors in different geographical markets.

The essential oil industry is not without factors that will inhibit future growth. European regulatory authorities like REACH1, SCCP2 and BPD3 are challenging the safety of many essential oils [7] and asking producers to put up a case as why they should continue to be on the market without safety warnings on labels. Table 1.1. shows the top twenty essential oils produced in the world and their status under EU regulation. This leaves an unanswered question of who will represent subsistence producers in developing countries to prove the safety of essential oils they have been producing for many years?

D

EFINITIONS OF

E

SSENTIAL

O

ILS AND

O

THER

N

ATURAL

A

ROMATIC

E

XTRACTS

The word essential oil is often used as an umbrella term to cover a number of different natural volatile aromatic materials, although strictly speaking not all of these materials are essential oils. Natural aromatic materials can be extracted from the roots, rhizomes, wood, bark, leaves, stems, fruits, flowers and seeds, from a wide variety of plant, shrub and tree

1

Registration, Evaluation and Authorisation of Chemicals.

2

The Scientific Committee on Consumer Products – previously called the SCCNFP: Scientific Committee on Cosmetic & Non Food Products) is an expert committee set up under the EC Health and Consumer Protection DG. SCCP reports to the EC H&CP Scientific Steering Committee on matters relevant to the EC countries in their defined area. The committee comprises a diverse range of experts in toxicology from industry, the medical fields and tertiary institutions.

3

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species. Different parts of the same plant may contain compounds which differ in their chemical composition, and may or may not require different methods to extract these compounds effectively. Primarily, the extraction method used determines whether the aromatic extract is called an essential oil, concrete, absolute, tincture, pomade, oleoresin, or balsam. These methods are summarized in Figure 1.2.

Essential oils result from extracting volatile compounds, mainly terpenes and oxygenated compounds, through a form of distillation. The constituents of essential oils are synthesized in the plant through the melavonic and shikimic acid pathways as secondary metabolites, stored in glandular trichomes, oil cells or ducts in plant tissue. The specific method of distillation used will depend upon the characteristics of the aromatic materials present in the plant, the structure of the plant material and the economics of extraction. Three basic types of distillation exist, hydro-distillation, water and steam distillation and steam distillation.

Other specialized methods such as vacuum distillation, high pressure distillation and destructive distillation are used in certain cases, where specific conditions are required. For example, low temperatures are sometimes needed to prevent highly volatile materials from being destructed or lost during distillation, so vacuum distillation would be used. Where greater heat and pressure is needed to extract high boiling volatile materials from the plant, high pressure distillation can be used. Where the plant material itself must be destroyed to remove volatiles, destructive distillation can be used.

Oils are also produced from citrus fruits through a process called cold expression. Orange, lime or other citrus peels are pressed until a fine spray of aromatic oil is released. This is specifically called an expressed oil. Cold expressed oils can be distilled under vacuum to remove the terpene hydrocarbons from the rest of the oxygenated components to produce what is called a terpeneless oil. The other resulting product is known as a terpene oil,

terpenes or terpene tails.

Where aromatic materials are susceptible to chemical changes from heat processes and this is undesirable, extraction can be undertaken through washing the plant material with a solvent in a method called solvent extraction. Petroleum ether, acetone, hexane or ethyl acetate can be used to wash out specific plant materials, usually volatiles, pigments and waxes into the solvent. Once the solvent has been evapourated off through vacuum distillation, the remaining material is called a concrete or in some cases a resinoid. The volatile materials can be further extracted from the concrete through washing the material with alcohol and then removing the alcohol through vacuum distillation. The remaining material is called an

absolute.

Enfleurage is an old method of extracting aromatic materials from plants, which is being revived in aromatherapy. Enfleurage involves laying plant material on specially prepared fat and lard to absorb the volatile materials. After a period of time the odourous material is extracted from the fat by heating. The material is then filtered from the solid particles, leaving a pomade. When the ethanol is distilled off through vacuum distillation, the resulting product is called an absolute.

Murray Hunter Essential Oils

ESSENTIAL OILS: ART, AGRICULTURE,

SCIENCE, INDUSTRY AND

ENTREPRENEURSHIP (A FOCUS ON

THE ASIA-PACIFIC REGION)

ESSENTIAL OILS: ART, AGRICULTURE,

SCIENCE, INDUSTRY AND

ENTREPRENEURSHIP (A FOCUS ON

THE ASIA-PACIFIC REGION)

M

URRAY

H

UNTER

SME

U

Nova Science Publishers, Inc.

Contents

P

REFACE

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EVELOPMENT

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