A better model for the palm oil supply chain

This highly prized commodity is making improvements to its value chain from improved sustainability to labor requirements.

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Over the past two decades, demand for vegetable oil has quadrupled, with palm oil leading the charge in quenching the world’s thirst for vegetable oil. Palm oil is highly prized for its diversity of uses as an ingredient for products from three main industries: the food industry, the health and beauty industry and the energy industry where it is used as biofuel.

The two features that make it extremely attractive are its yield and versatility. The oil palm crop has an advantage over others (soy, rapeseed and sunflower) since it has up to four to ten times higher yields per hectare. Palm oil also serves the needs of various industries, because it is a healthier alternative to other sources of oil such as trans fats. Furthermore, its moisturizing and textural qualities which are ideal for personal care products.

Indonesia and Malaysia dominate the market. Combined, the two countries have 83% of global palm oil exports. The palm oil industry offers massive economic benefits to smallholders, agro-industries, and producing countries by providing a source of livelihood, creating jobs, and growing the GDP.

However, the exponential growth of the palm oil industry comes at a significant cost to the environment and disproportionately affects smallholders and workers. Throughout the global value chain of palm oil, which for this paper will be limited to palm oil produced in Southeast Asia and exported to other countries, issues relating to the environment, equity and economy can be highlighted.

This paper seeks to provide a brief overview of the global value chain of palm oil, highlighting the key players, major sustainability issues, non-profit, and government involvement across stages, and finally scalable recommendations for improvement.

Overview of the palm oil value chain

The global value chain of palm oil originating in Southeast Asia and exported to other countries can be roughly divided into five stages: production, processing, distribution, manufacturing and consumption.

In the first stage, oil palm trees are planted in large-scale plantations owned by companies, and smallholders harvest the fruit of oil palm trees, which is called fresh fruit bunch.

In the processing stage, the fresh fruit bunch is processed into two types of palm oil: crude palm oil (CPO) and palm kernel oil (PKO). Once processing is complete, it is then distributed to manufacturers.

Large conglomerates like Cargill, Wilmar, and Sinar Mas usually have vertically integrated systems encompassing the first three stages of the value chain, meaning they can source directly from their own plantations or mills.

After the oil is distributed, consumer goods manufacturers and energy companies like Nestlé, Unilever, Manuelita, and General Mills use it to create personal products, food and biodiesel. Finally, the end products are distributed to everyday consumers to meet their daily needs.

Sustainability issues

The most pressing environmental issues the palm oil industry face are related to the heavy deforestation of tropical forests, the preservation of peatlands and biodiversity, and the access to equity for palm oil smallholders and laborers.

To meet the rise in global demand, Indonesia and Malaysia have leveled a substantial amount of the tropical rainforest, around 6 million hectares - home to over 193 critically endangered species such as the orangutan, Sumatran tiger, and the Sumatran elephant to create room for palm oil plantations. Additionally, the slash-and-burn method practiced by many producers in these countries presents a host of environmental challenges including the emission of carbon into the atmosphere and the release of harmful particulates, which have adverse effects on human health.

Moreover, according to a report on an investigation by the Associated Press into the matter, labor exploitation is widespread in the Southeast Asian palm oil industry. Researchers interviewed many foreign workers who had been victims of human trafficking or had been extorted into working at palm oil plantations. Throughout the report, the authors lamented the lack of protection these laborers have from exploitation The environmental and social issues present in palm oil production have led to heavy involvement by multiple stakeholders throughout the commodity’s global value chain, especially among global NGOs.

NGO involvement

The environmental challenges faced in the palm oil global value chain led to the establishment of the Roundtable on Sustainable Palm Oil (RSPO) in 2004 by the World Wildlife Fund (WWF), the Malaysia Palm Oil Association (MPOA), Unilever, AAK and Migros. The RSPO was formed to develop global environmental and social criteria for sustainable palm oil production while driving the demand and consumption of sustainable palm oil. The RSPO provides certification to producers that meet technical requirements designed to minimize the negative impacts on local ecosystems, communities, and wildlife. It advocates for consumer goods manufacturers to become RSPO members and commit to sourcing Certified Sustainable Palm Oil (CSPO). The WWF stated that its initial goal in the establishment was to impact 40-50% of palm oil production by reaching the 100 companies that control 25% of the palm oil trade.

Despite the intention behind the RSPO, criticism has been mounting in recent years regarding the implementation and effectiveness of RSPO’s certification standards.

NGOs such as Greenpeace, have argued that RSPO certification is a tool to greenwash products contributing to deforestation and that stricter monitoring of oil palm concessions must take place to avoid ongoing issues. The RSPO responded by reiterating that it has made positive sustainability advancements with an extremely challenging commodity, highlighting its advanced production monitoring system, GeoRSPO, which uses high-quality satellite imagery to observe and decrease the deforestation and fire activity of RSPO member concessions. Studies do indicate that certification is shown to significantly reduce deforestation and fire activity on plantations, demonstrating the need for broader adoption throughout SE Asia.

Government involvement

With NGO involvement still falling short with regards to making the palm oil industry sustainable, national governments have also intervened.

The Malaysian government has focused on making all production in its Sabah state (6% of the world’s total production) sustainable by 2025. Sabah’s regional government oversees production land licenses to combat land-grabbing issues. It has also worked with WWF Malaysia and Unilever’s Dove to ensure RSPO certification of 70,000 hectares of plantations to conserve forests and restore elephant and orangutan habitats.

Conversely, Indonesia has adopted its own internal standards– the Indonesian Sustainable Palm Oil (ISPO) Certification. Unfortunately, ISPO is less stringent than RSPO. It does not protect secondary forests and has a much more rigid definition of indigenous people. ISPO has only recently collaborated with RSPO to test out a pilot program to increase the inclusion of smallholders in the sustainable production ecosystem in its Jambi province.

Earlier this year, the Indonesian government also intervened in the processing and distribution stages of the global value chain by implementing a ban on palm oil exports. The Indonesian government did this twice, once in January and once in April because of global supply chain issues due to the coronavirus epidemic, which made it harder for basic commodities to be transported in general. The government set this ban because the price of cooking oil had increased to the point where Indonesian citizens could not afford it.

By limiting exports, the Indonesian government was trying to increase the domestic supply of palm oil, and thereby lower prices. However, one of the repercussions of this export ban was that smallholders were able to sell fewer fresh fruit bunch to processing mills because when demand for palm oil dropped at the distribution stage, fewer mills were willing to buy fresh fruit bunch harvested by smallholders. Moreover, trust in Indonesia as a trade partner for palm oil decreased, and consumers sought to purchase more palm oil from Malaysia. For the most part, government actions have affected upstream actors in the value chain, while NGOs have pressured downstream actors.

Conclusion and recommendations

The commodity of palm oil is nearly irreplaceable considering its yield efficiency and low production cost. For this reason, feasible alternatives are currently not scalable options. In light of this, some producers of palm oil are known to engage in sustainable practices.

One such company is Manuelita - an RSPO-certified Colombian agricultural company that recently diversified into palm oil. Manuelita sets itself apart by exclusively growing palm on land that was never historically forested, actively evolving to help Colombia reach its 2050 net-zero goal. Additionally, the company safeguards its workers in accordance with Colombia’s agreement with the UN Convention on Human Rights. Manuelita demonstrates the viability of sustainable palm oil supply under an equitable, sustainable, and effective framework.

It is essential that stakeholders throughout the value chain, as outlined above, collaborate to minimize the negative effects of palm oil production on the environment and local communities while maintaining sufficient sustainable supply.

About the authors:

Sungyun (Gordon) Ryoo is a Master’s student at Georgetown’s Environment and Sustainability Management program, with work experience in the environmental space since 2021. He can be reached at [email protected].

Maanasa (Mansi) Shivkumar is currently a Master’s student at Georgetown’s Environment and Sustainability Management program with 3 years of work experience in the alternatives investments (ESG) and consulting space. She can be reached at [email protected].

Sophia Sackleh is currently at Georgetown University working towards her Master’s in Environment and Sustainability Management, with prior work experience in the architecture and design field. She can be reached at [email protected].

Tim Maguire is a Master’s student at Georgetown’s Environment and Sustainability Management program, and is passionate about sustainability in the commercial real estate industry. He can be reached at [email protected].

Uloma (Loma) Ezeogu is a Master’s student at Georgetown’s Environment and Sustainability Management program, with previous work experience in the energy industry. She can be reached at [email protected].

Mae Gleeson is a Master’s student at Georgetown’s Environment and Sustainability Management program, with previous work experience in the marketing space. She can be reached at [email protected].

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