Palm Oil Monitor – Weekly Update 24th August 2018

Investors lobby RSPO: Why didn’t they just join?

A group of investors sent a letter to RSPO last week, calling on the certification body to implement tighter standards on deforestation.

More specifically, they wrote to the Principles and Criteria Review Task Force, calling on it to recommend implementation of HCSA assessments for new plantings under RSPO. This is something that Palm Oil Monitor has covered previously. This measure will be voted on at this year’s Roundtable meeting, which will be taking place in Malaysia later this year.

However, there’s something amiss in the letter. The NGO coordinating the letter – CERES – isn’t a RSPO member. It also appears that not one of the investors that have signed off on the letter is a RSPO member.

This warrants some simple questions.

First, if the investors care that much about palm oil, why aren’t they RSPO members? This would give them the opportunity not only to have input into the P&C review process, but also the opportunity to vote at RT16 later in the year.

Second, the letter states:

“Our investment portfolios include companies that have significant exposure to deforestation risks and therefore, have made robust no-deforestation polices and strong commitments to sourcing sustainably certified palm oil. As such, both investors and companies rely on the RSPO to ensure reliable supplies of verified sustainable palm oil. We strongly support the RSPO’s mission and the central role of RSPO certification in the industry.”

These investors state they have ‘significant’ exposure to deforestation risk, which they have mitigated with their existing policies. If they are unhappy with this level of risk mitigation, aren’t they in a position to strengthen their own policies, and/or divest any holdings that have any deforestation risk? Why are they calling on another organisation – which relies on a potentially unpredictable voting procedure — to mitigate that risk for them?

CERES has received several grants to undertake advocacy on palm oil.  But this strikes us as being particularly unconstructive for sustainability objectives. CERES is shouting from outside the tent, when they could be participating meaningfully.

Greenpeace opts for emotion

Speaking of being unconstructive, Greenpeace UK head John Sauven made some alarming comments to Marketing Week recently:

Greenpeace hopes taking a “heart over head” approach to its latest campaign will engage consumers at an emotional level rather than just hitting them with “cold hard facts”…. Sauven says too often people get lots of statistics thrown at them regarding biodiversity and environmental concerns that can come across as “quite cold” … “I don’t think people can really use that information. If you want people to take action, you need to find a way to motivate them to take action,” he says.

The latest campaign is a broad online media campaign that puts orang-utans at the heart of the palm oil debate.

Like most participants in the palm oil debate, Palm Oil Monitor believes that a good part of the industry is working closely with NGOs and governments to provide robust solutions. But we also believe that making blanket and emotive statements on the relationship between palm oil and orang-utan conservation is particularly unconstructive.

This includes Greenpeace’s latest tweets, which simply show an orang-utan and a burning forest, with the caption, “They’re burning it for palm oil,” as well as a slick animated video with messaging along similar lines.

There are two reasons this is unconstructive.

First, because marginal falls in consumer demand for palm oil, European markets will not make any meaningful impact on orang-utan conservation outcomes.

Second, despite the fact that Greenpeace is calling on “big companies to drop dirty palm oil”, the messaging comes across as distinctly anti palm oil.

Greenpeace likes to maintain that they support palm oil – as long as it follows their preferred production methods, i.e. the High Carbon Stock Approach.

But, as Sauven says, emotion is what Greenpeace is pursuing. And emotional arguments don’t provide room for a nuanced discussion about production techniques.

Members of the High Carbon Stock Steering Group should be somewhat alarmed; this campaign isn’t doing them any favours.

Analysis: Are RSPO and RED intertwined on HCS?

In the past few weeks, there has been a clear ramping up of activity from campaign groups aimed specifically at palm oil.

Anyone looking at the policy landscape a few months ago may well have assumed that once the RED trilogue had been completed it would have died off.

The exact opposite has been true. Campaign activity has been accelerating, and there are two clear policy events on the horizon.

The first is the RSPO’s vote on incorporating the HCSA approach into RSPO Principles and Criteria at the Roundtable event in November.

The second is the European Commission putting forth its report on ILUC and HCS as required by the revised Renewable Energy Directive.

These events are not entirely independent of one another. HCSA is gaining traction with RSPO, and at the same time RSPO members will be used to lobby the European Commission to incorporate or include the HCSA methodology into any regulations.  RSPO would likely be supportive of any such moves as, like RSPO RED, it will assist its members access to the European biofuel market going forward.

Snapshot: The palm rollercoaster

For anyone observing palm trade and demand, the last few weeks have been nothing less than a roller coaster. To make it simpler for the casual market observer, we’ve lined up all the factors impacting the current price and outlook.

  • India’s currency. The rupee has taken a major hit over the past few weeks along with the Turkish lira, with the rupee reaching a historical low against the US dollar. This means that imports of all commodities – including palm oil – are coming under pressure, hence weakened demand out of India, which remains Malaysia’s largest market. According to one estimate, demand in July fell by 33 per cent.
  • US-China trade policy. China has hit US soybeans with a 25 per cent tariff. This would seem like an opportunity for palm given that the US is China’s largest source of soybeans. However, the policy uncertainty appears to be dragging everything down, not just soybean and palm. Most traders are hopeful that there will be a bounce in the next few weeks as Chinese buyers switch away from soybean.
  • European drought. Drought conditions across the EU have curtailed the region’s rapeseed crop and put considerable price pressure on the entire oils and meals complex in the EU. This is impacting prices for biofuel feedstocks – and making palm look particularly attractive at this stage.
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HCS 101: What Is HCS?

The revised Renewable Energy Directive (RED) that emerged from the European Union recently has provided some direction on where the European biofuels market will head after 2020: but it also left open the door for further, immediate, policy measures in 2018/19.

Unfortunately, these policy plans pose more questions than answers at this stage.

The core uncertainty is what will define a ‘high risk biofuel’. The RED requires that the EU Commission define a ‘high risk’ biofuel by February 2019.

Sources in Brussels tell POM that rather than using ‘sustainability criteria’ – as per the existing RED – the EU will shift to ‘deforestation criteria’.

This is likely to incorporate two elements: indirect land use change (ILUC) and a new definition for high carbon stock (HCS). This blog concentrates on the latter.

But what is HCS?

In the RED, HCS sets the definition and cutoff for cleared land, and whether biofuels grown on that land can be included in RED targets. The cutoff date in the current RED is January 2008. The EU verifies this through certification. For palm oil, the largest certification schemes are ISCC and RSPO-RED.

The EU definition in this case is “wetland; continuously forested areas; areas with 10-30% canopy cover; and peatland.”

These are reasonably obvious, except for ‘continuously forested areas’, which is defined as: “land spanning more than one hectare with trees higher than five metres and a canopy cover of more than 30%, or trees able to reach those thresholds in situ.”

This definition is a hybrid definition of forest used by the UNFCCC and FAO – although it is more specific. The international definition minimum areas start at 0.05 ha, and its canopy cover limits give a range of 10 – 30 per cent, and a range of heights from 2 to 5m.

Why is the EU definition higher? Because all forests have carbon stock; the ‘high’ part should refer to the upper end.

This definition isn’t ideal in terms of its ability to measure carbon, which is what the RED is attempting to save. There are simply too many uncertainties in measuring carbon stocks in different forest types (boreal, temperate, tropical) for this to be applied in a fair way. Soil disturbance and stored carbon in wood products also need to be counted if any carbon accounting is to be completed accurately.

The EU’s HCS definition is a shortcut. It is prescriptive without being too restrictive; it is supported by international consensus and therefore could not be easily subjected to a WTO challenge; and conceptually it is difficult to argue with.

But the element that is novel in RED II is ‘high risk’. RED II will seek to determine which biofuels are ‘high risk’, i.e. which biofuels have a ‘high risk’ of causing losses to HCS areas, directly or indirectly.

There are other definitions of HCS out there, which also need to be examined. These lean more restrictive.

This commenced in 2010. Greenpeace had attacked Nestle on its palm oil use, particularly palm oil sourced from Golden-Agri Resources (GAR). GAR engaged with Greenpeace and The Forest Trust (TFT) to determine a definition for HCS that would effectively prevent GAR from engaging in any more forest clearing.

The number they came up with was 35 tonnes of carbon per hectare (tC/ha).

At that time, Indonesia’s planning agency, BAPPENAS, considered ‘high carbon’ to be anything over 100 tC/ha. Logged over forests and acacia plantations contain as much as 200 tC/ha; rubber plantations go up to 96 tC/ha – even higher if the soil carbon pool is counted. Palm plantations contain as much as 65 tC/ha.

Greenpeace, GAR and TFT then undertook a context-specific study of carbon content of forests in Kalimantan, Indonesia. The study concluded, in short, that any type of forest – including canopy cover as low as 10 per cent – could be considered high carbon stock. The High Carbon Stock Approach (HCSA) was finalised, with a threshold determined to be between scrub and young regenerating forest.

But in this approach, the focus was not only carbon stock, but also other social and environmental aspects such as forest connectivity. Despite being called ‘HCS Approach’ carbon is not the only criterion.

There were some problems– and these were well noted. First, the study couldn’t account for other forest types or regions within Indonesia, let alone other countries. Second, if smallholders were going to be denied access to HCS lands, they would need to be compensated appropriately.

HCSA developed further in 2015 when its toolkit – i.e. its implementation methodology – was further refined.

The implementation really seeks to conserve large forest areas within areas that have been earmarked for oil palm development and that are under the management of a single firm.

The net result is that HCSA is a way of implementing its approach at the individual company level, rather than at an economy-wide level. It means that HCSA is in a position to ignore smallholders and broader economic impacts, and place its policy focus on carving off conservation areas.

Whether intentional or not, this approach is quite elegant. It takes government planning out of the equation; and it also doesn’t require the use of public funds. And because it is targeted at firm policy, rather than government policy, firms can be targeted individually.

It is also why the HCSA – combined with HCV approaches – will potentially be incorporated into the RSPO Principles and Criteria. This will be voted on at the RSPO General Assembly later this year.

It should be noted that this version of HCS isn’t primarily about determining carbon stocks. It’s about forest conservation. This is why it’s referred to as ‘zero deforestation in practice’.

MEPs lined up behind this approach in the lead up to the RED trilogue negotiations earlier this year, and they will likely push the Commission to have this methodology and its definitions adopted as part of any HCS definition.

There are three things to consider here.

First, the EU is seeking to adopt an economy-wide approach aimed at ‘high risk’ biofuels.  But what will be the ‘high risk’ criteria? The EU can’t discriminate between economies; this runs afoul of global trading rules.  HCSA proponents will be keen to argue that HCSA means the risk of a particular biofuel causing deforestation can be reduced to zero.  HCSA is a detailed and technologically intensive methodology that is primarily aimed at businesses and voluntary markets.

Will this force the EU to again discriminate between biofuels certified to a particular standard? If so, this will undo EU moves to have palm oil considered ‘high risk’ across the board.

Second, HCSA is applicable only for new developments, and only after the 2015 methodology. Non-compliance with this approach for pre-2015 developments is not possible. How will the European Commission reconcile compliance with HCSA and the EU’s existing 2008 cut-off date?

Third, and related to the previous point, HCSA is very much forward-looking. It’s about preventing future deforestation. This is opposed to being able to definitively and empirically state whether a biofuel has been sourced from areas that were deforested after 2008.

One should think that the Commission will be more interested in an empirical rather than predictive approach: remember, the goal is to determine what is or is not a ‘high risk’ biofuel at the present moment. HCSA, no matter the virtue of its outcomes, cannot empirically deliver that determination.

In our next blog, we’ll look at the competing view on HCS from the Sustainable Palm Oil Manifesto (SPOM).

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Palm Oil Monitor – Weekly Update 16th August 2018

New biodiesel mandates in Indonesia and Malaysia

The biggest news in palm-based biodiesel – surprisingly – has nothing to do with the European Union. Instead, both sides of the Straits are talking about new rules mandating the use of palm oil methyl esther (PME) in diesel fuels in both Malaysia and Indonesia.

Malaysian biodiesel producers are calling on the government to move ahead with the implementation of the B10 mandate, which was announced in July. The mandate requires a 10 per cent blend of PME in diesel fuels, up from the current 7 per cent.  The mandate was first put forward as part of Malaysia’s 11th Plan in 2015, with a target of 15 per cent biodiesel by 2020.

Much of the opposition to implementation has come from car and truck manufacturers or sellers who are concerned about performance and warranties.

Similarly, there has previously been concern that the higher price of CPO would push B10 prices to a point that would damage the transportation sector and perhaps require government subsidies — there is a subsidy for diesel fuels in Malaysia. However, the current spread between crude oil and CPO – with CPO sitting lower — should give fuel users some comfort.

At the same time, Indonesia has announced the implementation of its own B20 mandate for diesel users.  The mandates were announced in 2008, and have gradually increased since then, with implementation of B20 originally planned for 2016. The 20 per cent level this year is likely to be raised to 30 per cent in the next few years (that was originally set to be introduced in 2020).

For Indonesia, the higher mandates solve several problems.

First, it reduces the need for diesel imports. According to one estimate, around 43 per cent of Indonesia’s transport energy comes from diesel, and around 40 per cent of that is imported. The Indonesian government sees the biodiesel mandate as alleviating some of these problems.

Second, the mandate creates a significant market for the country’s palm producers, and that market is growing at around 5 per cent annually.

Third, Indonesia has set a renewable energy target of 23 per cent by 2025; the mandate contributes to that.

The Indonesian mandate may push up global prices for palm oil at the margins; the Malaysian mandate – if implemented – will potentially do the same.

The irony, of course, is that both these policy changes are coming at a time when the EU is seeking ways to crimp palm biodiesel demand in Europe. The silence of EU groups on Indonesia’s biodiesel subsidies speaks volumes about the nature of the campaign; it’s not about saving rainforests, it’s about propping up European farmers.

A renewed export push into China and India

Malaysia’s new Minister for Primary Industries Teresa Kok has announced that there will be a push on exports, particularly in China.

The Minister will join Prime Minister Mahathir Mohamad later this month where the issue will be pushed bilaterally.

Malaysia is seeking greater uptake in food production in China, as well as seeking to attract investment in food production in Malaysia, specifically geared towards the Chinese market.

Over the past few years China has increased its investments in food production overseas. This has been particularly noticeable in countries such as Australia, which have a ‘clean, green, safe’ image among Chinese consumers. This was particularly the case after food contamination scandals in 2008.

Unlike Western markets, there is no ‘perception’ of palm oil among China’s consumers. Although the dairy fats market is relatively new and growing, it is quite distinct from the vegetable fats market, which is generally determined by price. That said, Chinese authorities have stated they are keeping an eye on the impact of trans-fats consumption (palm oil, being free of trans fats, may even benefit from any restrictions).

At the same time, RSPO has announced a push into the Chinese market, with an announcement of a China sustainable palm oil alliance. A joint announcement was made with WWF and the CFNA, a business group for food manufacturers.  Ecolabels do not have a significant market penetration in China; food safety rather than environmental concerns take priority. This may change, but it will take some time.

Almost on the same day, India and Indonesia announced a memorandum of understanding between the Indonesian Sustainable Palm Oil (ISPO) system and the Indian Palm Oil Sustainability Network (IPOS). The announcement was made by the Solvent Extractors Association (SEA) of India, the Indonesian Palm Oil Board (DMSI) and global sustainability support organisation Solidaridad Network Asia Limited (SNAL). Although this is a nice idea, India reducing their applied tariffs on palm oil imports would be nicer.

Nestle and RSPO: The plot thickens

Swiss news outlet Swissinfo has revealed there was significantly more to Nestle’s suspension – and reinstatement – than met the eye.

To recap: Nestle had their membership suspended when they failed to pay their membership fee and did not commit to a certified sustainable timeline. The problem was resolved and Nestle was reinstated once Nestle resubmitted a new plan.

However, Swissinfo writes:

Nestlé argued that the RSPO system is insufficient and “is not conducive to achieving the levels of industry transparency and transformation the sector so urgently needs”. The Swiss firm has more faith in bringing more transparency in its own supply chain instead of relying on palm oil with RSPO’s stamp of approval … Nestlé thinks it can do a better job sourcing sustainable palm oil on its own and doesn’t want to commit to achieving 100% RSPO certified sustainable palm oil as required by RSPO.

 A Nestlé spokesperson told swissinfo.ch that when the company stated that their goal is not to achieve 100% certification of palm oil, it was asked by RSPO to remove the 2017 action plan and re-submit that they have no action plan instead. This in turn is what got Nestlé suspended. In other words, RSPO was willing to suspend Nestlé rather than accept an official challenge to its unwavering approach on certification …

 “There is broad acceptance that globally agreed standards must be implemented to stimulate the growth and demand for sustainable palm oil, in order to achieve market transformation and make sustainable palm oil the norm,” an RSPO spokesperson told swissinfo.ch.  

This is likely to have been in train for some time. Several large companies have hinted at a business-to-business approach to sustainability that doesn’t require third-party certification or audits.

Although we can see the value in that it will keep compliance costs down, it does fly in the face of everything that certification is supposed to provide to the market: independent assurance and transparency. Nestle has been scarred several times by major negative campaigns, particularly the baby formula scandal. Their aversion to risk is understandable.

But it also looks like the first time that RSPO has rebuked a major purchaser in a very public way.

It has been the case for several years that producers have been seeking to have consumer goods companies censured for ‘palm oil free’ and ‘no palm oil’ labels.  After a long push, RSPO’s rules were changed to prevent these labels, but only if the labels carried a direct or indirect message of environmental superiority. This is in some ways absurd; ‘no palm oil’ is now almost by default an environmental message.

At the same time, Nestle’s environment section on its website states quite clearly:

 Nestlé uses palm oil as an ingredient in a number of our products. At the same time, we are meeting demand for choice in our product range where feasible, with palm-oil free recipes.

It also needs to be remembered that Nestle was one among many European companies that insisted its suppliers have RSPO certification. And now it tells them that it no longer wants it. Nestle’s new direction on sustainable sourcing, plus its fair-weather approach to palm oil may simply be too much for RSPO – particularly when around half of the world’s certified palm oil still remains unpurchased.

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Palm Oil Monitor – Weekly Update 7th August 2018

Zero Deforestation Comes to the Soy Market

The past few weeks have seen a number of new developments on ‘zero deforestation’ initiatives, but this time they are aimed squarely at the soybean industry – not palm.

First, UK retailer Tesco has announced its ‘transition plan’ to use an offsetting or credit system to have their soybean purchases produce zero net deforestation.

This plan by Tesco also includes – at a later date – a mass balance system for certified soybean, again from forest areas that haven’t been cleared for soybean.

As such there doesn’t appear to be a cutoff date for the certification, and it would appear that the purchases – which are primarily from animal feed – will only apply to Tesco’s own farms. This also presents some controversy; six months ago Tesco was embroiled in a scandal for using fictionalised farm names for its meat products.

It’s not clear at this stage if or whether Tesco will be calling on its meat suppliers to adopt the same sourcing policy. However, at this stage, we smell a token effort.

The second announcement comes from commodity trader Louis Dreyfus Company (LDC), which has announced a similar policy on deforestation for soybean, which appears to mostly be an aspirational target to eliminate deforestation from their supply chains.

Will LDC policy make a difference? From their marketing material, they’re clearly going along with a Western NGO push for zero deforestation supply chains. But the following should be kept in mind from the USDA’s forecasts for soybean this month:

[Global] Harvested area is forecast at a record 37.5 million hectares (mha), up 1.0 mha or 3 percent from last month and up 7 percent from last year. Soybean area is forecast to continue expanding as it has for the past 10 years, with 2018/19 forecast to have the highest annual increase in 5 years. It is anticipated that Brazilian producers will plant more soybeans to capitalize on the trade advantage over the United States in response to China’s imposition of retaliatory duties.

It’s also worth remembering that this area – 37.5 million ha – is more than double the global palm oil area (16.4 million ha), with one quarter of the oil yield.

Soybean has been in the gun before when it comes to deforestation, but now the ‘zero deforestation’ juggernaut is in play. They are not going to know what’s hit them.

 

Vegetable oil consumption will grow – but only in developing countries

The OECD and FAO’s annual long-term projections on global agricultural production and consumption have been released.

The annual outlook is projecting a 15-16 per cent global increase in consumption of vegetable oils over the next decade, rising to a little more than 230 million tonnes annually.

But, as to be expected, the bulk of this growth is in developing countries; consumption in developed countries is likely to very much remain flat.

The demand is, as usual, likely to be driven by rising incomes in developing countries and greater overall food consumption.

The OECD-FAO report also notes that vegetable oil consumption for biodiesel is likely to remain flat.

So what does this mean for producers and exporters? As is currently the case, lower-value, higher volume markets will continue to grow.

As difficult as regulatory requirements are in Western markets, they are still significant; moreover, substitution of oils – as often is the case in markets in China and India – simply doesn’t happen. The palm-soy spread simply isn’t as important.

 

Virgin takes the cake for symbolism

Similar to the above announcements, Virgin Atlantic airlines has announced it will remove palm, beef and soybean from inflight meals in order to decrease its carbon footprint, because of deforestation. Research has shown, and Palm Oil Monitor has reiterated, that palm oil is not a major driver of deforestation. In fact, compared to sunflower and rapeseed, palm oil ranks as far more efficient and far better for the environment.

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