Global oil palm grows exponentially

Dr N Yogaratnam

Palm oil is a major global agricultural commodity used in a host of food and non-food products. The palm oil sector has played a significant role in advancing development and accelerating poverty reduction in the many tropical countries in which it grows.

It often forms an important basis for national economies, both as a source of jobs, an export and a raw material for local industry.

The oil palm plant, originated from the coastal West Africa, where it has long been part of the staple diet of subsistence farmers. It is now commercially cultivated on about 12 million hectares in the humid tropics, principally in Southeast Asia. In terms of volume of production, the industry is primarily based in Malaysia and Indonesia.

The value of agricultural investment

The World Development Report on Agriculture (2008) notes that 75 percent of the world’s poor live in rural areas and most of them are farmers. The report concludes that growth originating in agriculture has been three times more effective in raising the incomes of the poor than growth generated from other sectors.

Recent analysis demonstrates that the additional agricultural investment required to meet the Millennium Development Goal of halving poverty by 2015 is estimated to be $14 billion annually for developing countries.

These conclusions have generated increased public sector investment in agriculture. The World Bank Group is committed to a significant increase in support to agriculture from a baseline in 2008 of $ 4.1 billion to between $ 6.2 and $ 8.3 billion annually by 2012.

However, public sector investment alone is unlikely to be sufficient.

Innovative approaches to inclusive public-private partnerships will be crucial for generating investment, reducing poverty, and delivering growth.

Agriculture Action Plan: 2010-2012

Rising food demand (by 2050 there will be nine billion people to feed worldwide) and climate change are placing additional pressures on rural livelihoods and the environment. Substantial productivity growth will be needed to meet demand and reduce the risks of further environmental degradation.

The Action Plan for agricultural investment has five pillars: raising productivity, linking farmers to markets, reducing risk and vulnerability, facilitating agricultural entry and exit, and enhancing environmental services and sustainability. Smallholder farmers are at the centre of each pillar.

The world’s leading vegetable oil

Palm oil is produced from the fruit of the African oil palm (Elaeis guineensis). It has become a major global agricultural commodity that is used in a host of food and non-food products. The oil palm is cultivated entirely in developing countries in the humid tropics, where it often forms an important basis for local economies, both as an export and as a raw material for local industry.

This commodity can stimulate further economic development and contribute to a rising standard of living for poor people in many developing countries, when environmental, social, and governance risks are adequately addressed.

The World Bank and the IFC, since 1965 and 1976, respectively, have invested in and supported the development of this sector in Latin America, Africa, and Asia Pacific.

These investments, in both public and private sector projects, have focused on primary production as well as downstream processing of palm oil, and have in some cases addressed complementary infrastructure, area development, and smallholder linkages to larger producers.

In recent years, cultivation of oil palm has grown exponentially. The often negative impacts associated with this expansion have focused increased attention on the environmental and social sustainability of the sector, particularly in Indonesia and Malaysia (the two largest producers of crude palm oil).

A global commodity

Palm oil has become the leading vegetable oil produced globally. Crude palm oil in particular has become a major global agricultural commodity, mainly used (in refined form) as a cooking oil but with a wide range of uses in the food industry as well as in soaps, detergents, lubricants, cosmetics, oleochemicals, and as a feedstock for the production of biodiesel.

With rising incomes and urbanization, vegetable oil consumption has grown globally at 6 percent annually since 1980.

As the lowest cost oil, the share of palm oil in the consumption of vegetable oils has increased and it is now the world’s most abundant vegetable oil by volume, accounting for one-quarter of global consumption and more than 59 percent of international trade in vegetable oils.

Malaysia and Indonesia (notably Sumatra and Kalimantan) account for about 85 percent of global output.

FAO/OECD Agricultural Outlook 2008 - 2017

Smaller but significant producers are Nigeria, Colombia, Costa Rica, Guatemala, Honduras, Cote d’Ivoire, Ghana, Cameroon, Papua New Guinea and Thailand, several of which are International Development Association (IDA5) countries.

Almost three-fourths of the 45 million tons of global production are traded and China, the European Union, India and Pakistan are the major importers.

Oil palm also provides more than 5 million tons of palm kernel oil as a valuable byproduct for industrial and food uses.

Rising prices affect demand.

Strong demand for vegetable oils has been reflected in the rising prices of palm oil since 2000.

Palm oil has become the staple food oil in Malaysia and Indonesia, joining much of West Africa in this respect. Although prices peaked in 2008, the current price of crude palm oil at over $800 per ton in 2010 is still 90 percent above the long-run trend of just over $400 per ton (CIF Rotterdam). Worldwide demand for vegetable oils is expected to increase by 36 percent from 2007 to 2017, with biofuels accounting for one-third of the increase.

Palm oil will not necessarily be used to supply all the increase in biofuel demand but will more likely supplement temperate oils, such as rapeseed oil, which will be used as biofuel feedstocks in Europe and will thus be unavailable for non-fuel uses.

With strong demand and growing land scarcity in Malaysia and, to a lesser extent, Indonesia, several countries in Latin America and Africa are seeking to expand their palm oil industry.

Several Asian and European companies are actively seeking to invest in suitable areas in Liberia, Cameroon, Democratic Republic of Congo and Brazil where prospects for growth are moderate to good.

In the immediate future, expansion of the industry will most likely continue to be centred in Southeast Asia where governments are supportive of the palm oil sector, there is a well established supply chain to both internal and external markets, and there are large areas of new plantings which will come into production over the next few years. In Southeast Asia, where eco-standards in the form of the Roundtable on Sustainable Palm Oil (RSPO) certification system are gaining traction, it is expected that planting will gradually shift away from forested areas with high conservation values to existing agricultural land or areas designated as degraded.

The palm oil sector is important for overall economic and rural development in many tropical regions.

Contribution to economic growth

Palm oil is a large industry in many tropical regions. In Indonesia it generated $7.9 billion in exports in 2007, accounting for 13 percent of agricultural output, second only to rice.

In Malaysia in 2008, palm oil exports accounted for $19.6 billion. Oil palm is generally the most profitable land use, relative to alternatives such as annual crops (rice, maize, or soybeans), timber, and pasture for livestock, for both large enterprises and smallholders.

Like many other agricultural commodities, palm oil also generates added value to downstream products (refined oil, food and consumer items) as well as stimulates upstream industries that provide inputs such as planting materials and fertilizer.

In addition, palm oil is an important source of national and local tax revenues.

Palm oil production and related industries generate jobs for many poor people. Largely due to the low level of mechanization, oil palm plantations employ about 30 times more people per hectare than substitute oils such as soybean.

However, labour use varies greatly from location to location and company to company. Up to 3 million people are directly employed in the industry in Indonesia and up to 6 million worldwide according to the RSPO. Job creation is higher where smallholders are involved.

At least 40 percent of the palm area in Southeast Asia is under smallholder management, involving 1 million smallholders, and this proportion is higher in Sub-Saharan Africa at around 80 percent. The sector can have a significant poverty reduction impact, and smallholders are entering the industry in increasing numbers. Poor people may derive social benefits from investments made in roads, schools, health, and other government services in oil palm growing areas by plantation companies and/or the Government.

Negative impacts on vulnerable groups

As increased incomes derived from oil palm cultivation come to formerly remote rural areas, towns develop and offer new economic opportunities and increased opportunities for other rural farm and off-farm employment.

Despite its high development potential, oil palm production has had some negative social and environmental consequences.

The process of land acquisition for large-scale oil palm development can generate negative impacts on the livelihoods of communities including small farmers’ and Indigenous People’s. Labour issues also arise when workers on plantations are subjected to poor labour management practices.

Social conflict surrounding oil palm expansion also derives from opaque or poorly understood agreements between companies and out-growers and smallholders due to lack of clarity on the terms under which land is transferred, smallholders are remunerated, loan repayments are made, and people are employed.

High environmental costs

Conflict seems to be greater in new development areas compared with more established regions.

Oil palm has been one of the fastest growing crops in terms of land use expansion in the tropics.

The industry has been criticized for causing large-scale deforestation and being a major contributor to greenhouse gas emissions.

Some 70 percent (4.2 million ha) of Indonesia’s oil palm plantations are on land that was previously forested; more than 56 percent of the expansion between 1990 and 2005 occurred at the expense of natural forest cover.

Similarly, about half of Malaysia’s oil palm expansion has been at the expense of forests. In common with other forms of large-scale agriculture, oil palm plantations harbour much less biodiversity than natural forests. And they do not provide the same level of other environmental services, such as carbon storage, although they are a good alternative to grassland/scrub (Imperata cylindrica), which is common in areas following repeated fires.

Land use change and deforestation are the largest single contributors to greenhouse gas emissions in tropical countries such as Brazil and Indonesia.

Some 12 percent of Indonesia’s land area (21 million ha) is classified as peat land, and some 25 percent of oil palm is estimated to have been established on peat of varying depths.

Development of oil palm on peat land causes especially high levels of carbon emissions and irreversible damage to fragile ecosystems.

Low productivity

Well managed palm oil plantations can yield ten times the oil per hectare of other oil crops, such as soy. However, there remains an enormous yield gap between palm producers, with the best estates in Southeast Asia producing more than seven t/per ha and some smallholders producing less than half a ton.

This gap exists at the production level due to deficiencies in crop and soil management and in the milling extraction rate.

Smallholder yields tend to lag behind estates. Increasing the productivity of existing plantations has the potential to increase livelihood benefits for smallholders in countries like Indonesia, where the social and environmental aspects of land use change and related governance issues are at the core of concerns.

In other regions, notably Latin America, Papua New Guinea, and Sub-Saharan Africa, the challenges have been less acute, possibly due to the much slower rate of development of the sector.

The Roundtable on Sustainable Palm Oil (RSPO)

A number of commercial participants in the global palm oil value chain with the World Wildlife Fund (WWF) in 2004 formed the RSPO, a global multi-stakeholder roundtable.

The intention of the RSPO is to improve the sustainability of palm related operations, partly in response to pressure from environmentally sensitive markets. So far the membership has expanded rapidly and is dominated by producers.

The RSPO has gained most traction in the centre of production and consumption, Asia, as well as North America and Europe.

The RSPO, with a secretariat in Kuala Lumpur, brings together stakeholders from seven sectors of the palm oil industry: palm producers, processors or traders, consumer goods manufacturers, retailers, banks and investors, environmental or nature conservation NGOs, and social or development NGOs.

The RSPO’s objective is to promote the growth and use of sustainable oil palm products through the development of a credible global standard and Code of Practice (known as the Principles and Criteria) and engagement of stakeholders.

The Principles and Criteria (P&C) cover environmental and social aspects of principally upstream development.

As of November 2008, the RSPO had implemented an auditable certification system based on the P&C, which provides independent certification that production is being managed in a sustainable fashion.

About 4 percent (nearly two million tonnes) of global palm oil supply at present is certified as CSPO (certified sustainable palm oil).

This has involved the auditing and certification by independent certification bodies (TUV, BSI) of 12 grower and 44 supply chain companies.

The RSPO plays an important role in setting standards that have impacts beyond the areas managed by its members, and is working on extending certification to smallholders.

Although the RSPO is a voluntary, market-driven program, it plays an important role in defining the nature and scope of necessary regulatory interventions.

The RSPO’s strength, visibility, and achievements so far have raised government awareness of key issues.

This places pressure on public authorities to complement the RSPO’s activities with improved policies. Market demand for sustainable palm oil is still limited and reduces incentives for some companies to join; but there are indications that demand for sustainable palm oil is emerging through a number of market instruments.

A further area that is relevant to RSPO is the installation of environmental management systems (ISO 14001) in order to speed up the implementation of the P&C in member companies.

An important mechanism for improved sustainability in the palm oil sector can come from multi-stakeholder formulated and agreed protocols such as those established by the RSPO, the Rainforest Alliance, and others.

In this respect, the palm oil sector is further advanced and has made more tangible progress than most other agricultural commodities.

Effective standards, certification and transparent monitoring in the sector are seen as critically important and in need of improvement. Considerable emphasis is placed on the role of the RSPO and its standards for sustainable palm oil.

However, current weaknesses in the RSPO related to credibility, certification delays, compliance, and capacities of the RSPO are some issues that need strengthening.

Sri Lanka

Sri Lanka’s interest in this sub-sector, centres on the cultivation of about 75,000 ha by five Regional Plantation Companies (RPCs), around 70,000 ha of which are in Indonesia and Malaysia, and about 5,000 ha in Sri Lanka.

The revival of natural rubber NR market boom, although known to be very volatile, may dampen the enthusiasm generated among some plantation companies.

Yet, as the oil palm forecasts look very stimulating and attractive in the long term, crop diversification strategies planned and adopted by some RPCs are expected to grow. The Plantation Industries Ministry also proposes to expand the land extent under oil palm from the current 5000 hectares to 25,000 hectares as a tree crop diversification policy for sustainable development of this sector.

A public - private sector partnership becomes crucial in this exercise.