Home Views Commentary

Pay up, or they give up

The Edge Singapore
The Edge Singapore5/13/2019 08:00 AM GMT+08  • 5 min read
Pay up, or they give up
SINGAPORE (May 13): The row over the palm oil industry and the detrimental effects it has on the environment has intensified in recent weeks, fired up by the European Union’s plan to curb the use of palm oil in biofuels. Significantly, biofuels only eme
Font Resizer
Share to WhatsappShare to FacebookShare to LinkedInMore Share
Scroll to top
Follow us on Facebook and join our Telegram channel for the latest updates.

SINGAPORE (May 13): The row over the palm oil industry and the detrimental effects it has on the environment has intensified in recent weeks, fired up by the European Union’s plan to curb the use of palm oil in biofuels. Significantly, biofuels only emerged in the last decade or so as another use for palm oil as the world looked for renewable sources of energy.

Login to read: Smallholders' big impact

Also: Greater transparency required to curb deforestation in Malaysia

The EU’s move has drawn strong objections from the governments of Indonesia and Malaysia, with Teresa Kok, Malaysia’s primary industries minister, accusing the EU of igniting a “trade war”. Kok is set to press her case in her tour of European capitals. She has also threatened retaliatory action at the World Trade Organization.

The ubiquitous palm oil gets a bad rap amid reports of widespread deforestation, particularly in Indonesia, and the consequent impact on animal habitats. The orangutan, two main species of which live mainly on the islands of Borneo and Sumatra and which have been declared critically endangered, has become a symbol of the ills of the palm oil industry.

In fact, Malaysian minister Kok took umbrage at the Singapore Zoo’s presentation on rainforest deforestation, displayed at its orangutan enclosure. The exhibit says illegal logging and the conversion of forests to oil palm plantations threaten the primates. It also includes statements such as “farmers kill the adults and capture the young to be sold as illegal pets”. Kok said the displays were “sensationalised” and damaged the image of palm oil producing countries, including Malaysia.

To be fair, as Kok pointed out, the palm oil industry has embarked on efforts to produce sustainable palm oil. Trouble is, it will cost the farmers a small fortune. And consumers themselves do not even seem to really want it.

The global certification body, Roundtable for Sustainable Palm Oil, says 13.6 million tonnes of certified sustainable palm oil were produced globally last year, accounting for 20% of global output. Only an estimated half of this “green” palm oil is actually being sold at the premium it commands — it is estimated that it costs US$8 to US$12 a tonne more to certify palm oil as sustainable.

A report by the World Resources Institute estimated that upfront costs for independent smallholder certification — including all the necessary documents, training and audits — range from 16% to 39% of the farmers’ mean annual income. Additionally, the annual cost of certification, including surveillance audits and membership fees, can reach up to 12% of annual income.

Yet, according to the World Wildlife Fund, demand for Certified Sustainable Palm Oil in major consumers such as India, China, Malaysia and Indonesia remains low. Even in Europe, not all companies have walked the talk to procure 100% CSPO.

What is more, smallholders say the premium prices that certified palm oil is supposed to fetch rarely trickle down to them. If sustainable palm oil does not pay, why would farmers bother with it?

Smallholders farm less than 10ha of land each, but they account for 35% of Indonesia’s crude palm oil output. According to field researchers, there could be contributions from micro farmers that go unrecorded. Smallholders sell their harvest to cooperatives or mills operated by companies. However, not all the oil produced at the mills can be traced or tracked down to the individual farmer, so it is impossible to verify whether the oil was produced in keeping with the industry’s standards of sustainability.

Still, The Edge Singapore has found smallholders in Indonesia who are working to farm oil palm more sustainably. They are getting help from NGOs and some of the larger companies to foot part of the bill of certification. But, while they are trying to make a difference, they have yet to see the returns, or any tangible reasons, for doing so.

Of course, many major food and other consumer product manufacturers have pledged to buy only sustainable palm oil. What the “palm oil-free” movement will only succeed in doing is jeopardise sustainability efforts. Should the activists’ and various organisations’ boycott of products containing palm oil achieve their stated objective of drastically reducing demand for the commodity, prices would fall further and the farmers would then have even less incentive for sustainable production.

There is a straightforward solution, albeit one that is rather contrary to what the activists have been pushing for. Consumers should take charge, but instead of shunning palm oil, they should pay more for their chocolate spread or shampoo to ensure only sustainably sourced palm oil is used. Then, they need to push for the extra to go to the farmers to offset the cost of adopting sustainable practices, instead of only boosting the consumer goods companies’ profit margins, which go into the pockets of executives and shareholders. After all, the objective here should really be maximising value not just for shareholders but also stakeholders, who would include everyone in the supply chain, right down to the farmer.

Unless, of course, as one Indonesian researcher told The Edge Singapore: “The issue is not only about the environment, it is about pressure from other countries.”

This story appears in The Edge Singapore (Issue 881, week of May 13) which is on sale now. Subscribe here

Loading next article...
The Edge Singapore
Download The Edge Singapore App
Google playApple store play
Keep updated
Follow our social media
Subscribe to The Edge Singapore
Get credible investing ideas from our in-depth stock analysis, interviews with key executives, corporate movements coverage and their impact on the market.
© 2022 The Edge Publishing Pte Ltd. All rights reserved.