The Business Times

There's loads of sustainable palm oil - but no one wants it

Production has soared, but buyers are unwilling to pay for the eco-friendly - albeit pricier - version

Published Mon, Jan 21, 2019 · 09:50 PM

Kuala Lumpur

THE world's biggest growers of palm oil say they're stepping up efforts to produce the contentious commodity more sustainably, but consumers are unwilling to pay more for environmentally friendly supply.

Production of sustainable palm oil has jumped to a record 13.6 million metric tons a year, about 20 per cent of global output, according to the industry body that certifies the commodity. But only half of that is sold as sustainable oil. That's because it's more expensive to produce and hardly anyone is willing to pay a premium, says Sime Darby Plantation, the top planter by acreage.

"Buyers don't want to pay for it," Simon Lord, chief sustainability officer at Sime Darby, said from Kuala Lumpur. "There is increasing resentment among growers that the other actors in the supply chain are not stepping up."

Palm oil is increasingly controversial, particularly in Western countries, as images of deforestation and dying orangutans turn popular opinion against the ubiquitous commodity. But producers are hitting back, saying consumers aren't willing to put their money where their mouths are.

The certified oil typically sells at a premium of about US$30 a ton to the non-certified kind, though this can vary significantly depending on volumes and negotiation between buyers and sellers.

To gain certification, it costs growers at least US$8 to US$12 a ton, and there are other expenses like audit fees, logistics and environmental assessments, says Sime Darby, the biggest producer of certified, sustainable palm oil (CSPO).

Benchmark futures fell 1.7 per cent, the most in six weeks, to 2,134 ringgit (S$704) a ton in Kuala Lumpur on Monday.

Sime Darby says it can only sell about 50 per cent of its certified variety at a premium, with the rest being offloaded into a pool of non-certified oil without achieving any added value. Companies are having to sell their CSPO below cost, and would rather do that than stockpile it, says Oscar Tjakra, a senior analyst for grains and oilseeds at Rabobank International.

"Some companies are already making a loss due to the high cost of production and financing, in addition to the extra costs for sustainable certification," said Mr Tjakra. "Considering the oversupply situation in the market, companies still have to sell their palm oil as storage tanks are full."

So who isn't buying? According to the World Wildlife Fund, demand for CSPO in major consumers India, China, Malaysia and Indonesia remains low. Some companies in Europe also haven't adopted "ambitious, time-bound commitments to procuring 100 per cent CSPO," though uptake from the EU is the highest, WWF's global palm oil lead Elizabeth Clarke said.

Mondelez International, maker of Cadbury chocolates, said it's working with suppliers to ensure its palm is fully traceable, and at the end of 2017 about 96 per cent of what it uses was traceable to the mill.

Nestle, where about half the tropical oil it sourced in 2017 was traceable to the plantation, says buying the certified variety is one way of pushing the industry toward a sustainable future and it aims to use 100 per cent RSPO certified oil by 2023.

Still, buyers do face challenges procuring the oil "in specific geographies due to the lack of proximity to available CSPO," Nestle said.

"Consumers today want to know what is in their food, where the ingredients come from and how it is made," Nestle told Bloomberg by e-mail.

The controversy surrounding palm has been simmering for decades, but the furore has recently intensified, with a UK supermarket chain's viral anti-palm ad and environmental groups naming and shaming buyers of the unsustainable oil.

The biggest blow to the industry may come from one of the top purchasers - the European Union - which is clamping down on unsustainable supply.

The body that certifies the oil is also disconcerted by the muted response from consumers. Set up in 2004, the Roundtable on Sustainable Palm Oil is responsible for assessing the product, with the costs depending on plantation size, how far auditors have to travel and whether it's a high risk area.

Market commitment and uptake of CSPO will be the defining factor when it comes to spurring adoption of sustainability standards, the RSPO said. While retailer members are almost all buying certified oil, processors, traders and consumer goods manufacturers have significant room for improvement, it said.

For Greenpeace, responsible production does cost more and consumer goods companies should pay for it to encourage change in the industry. BLOOMBERG

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