Palm Oil Monitor – Weekly Update 26th June 2018

RED II: What Will It Mean for Palm Oil?

The RED II Trilogue reached something of a conclusion last week after months of wrangling between the EU Commission, Parliament and Council.

The compromise was reached after several drafts by the Commission and the Parliament were put forward and subsequently rejected. The proposed ban on palm oil was one of the major sticking-points in the negotiations. Bear in mind, this is still an informal compromise that needs to be finalized.

The European Parliament’s Greens Party immediately hailed the result as a victory over palm oil imports on Twitter. Many EU media such as Reuters initially reported that the RED agreement would mean a ‘phase out’ of palm oil biofuels by 2030. However, that initial reading may prove to be incorrect. As the days have passed, more sophisticated analysis is emerging. One such analysis – by Forbes – reports that the RED text doesn’t actually specify any ban or phase-out of palm oil at all.

Palm Oil Monitor has seen the RED text, and Forbes’ analysis seems to stand up. ‘Compromise’ is an apt description. The text had to juggle the interests of European farmers, the Commission’s trade interests, and a general desire to phase out food/feed-based biofuels.

Here are the key points from the text.

First, there is no specific phase-out of palm oil. Palm oil is not referenced or targeted in the final text.

Second, in 2019 the Commission will finalise a methodology to determine which biofuels – and their production processes – can be considered ‘high risk’ in terms of greenhouse gas savings.

This methodology will incorporate both indirect land-use change (ILUC) and high carbon stock (HCS). It also includes biomass, biofuels and bioliquids.

Third, the ‘high-risk’ biofuels will have their use frozen at 2019 levels, for the purposes of the RED targets. This will include both imported and domestic biofuels – dependent on which are categorized as ‘high risk’.

Fourth, the Commission will then recommend on a phase-out strategy for high-risk biofuels, which will take place commencing in 2024.

And we’re back to the Indirect land-use change debate.

ILUC has been subject to ongoing debate for nearly a decade. As a concept, it has been shot down for its reliance upon arbitrary assumptions about land-use decisions and crop demand. For this reason, the methodologies to determine ILUC have been considered very imprecise.

Previous ILUC assessments requested by the Commission have pointed the finger at palm oil – many in Europe will certainly see the Commission’s 2019 ILUC/HCS report as an opportunity to cement in place a formal phase-out by 2030 of palm biofuels.

Oil palm growers aren’t the only farmers to criticize ILUC. The US agriculture sector criticized ILUC from day one when it was floated in US renewable fuel policy.

More importantly, European farmers have come out against ILUC. The UFOP – an offshoot of Deutscher Bauernverband (German Farmers’ Association) – pushed back against ILUC when it became apparent that it would raise greenhouse emission calculations for their oilseed crops. This would put their access to renewable subsidies at risk. ILUC became the key argument against feed- and food-based biofuels by the Greens.

Green politicians declared it a victory. Environmental groups considered the inclusion of any biomass or first-generation biofuels to be a failure. Many released statements that were critical of the RED deal – not just over palm oil but on a wide range of issues. The EU itself made a point of noting that palm oil is not banned, and is not singled out, according to the EU Ambassador in Jakarta.

As noted earlier, the media analysis initially focused on a potential phase-out of palm oil; but this view has evolved, taking into account some of the criticisms from environmental NGOs, to understanding that there is no stated phase-out or restriction on palm oil at this stage.

In one sense, this is good news for palm oil producing nations – the proposed palm oil ban from 2021 has been decisively shelved.

In another sense, though, it may just be that the reckoning has been postponed. This is no way the end of the policy battle. The EU’s other actions against palm will now be even more centre stage. ILUC is one of them.


Ukraine Takes Action on Palm

Earlier this week, Ukraine went after palm oil, taking the first step to passing a new piece of legislation that is explained in the bill as follows:

“The purpose of the bill is clarification, namely a direct ban on the use of palm oil in the production of food, milk and dairy products and the establishment of administrative liability for the offense committed.”

Ukraine’s imports of palm oil are up around 23 per cent year-on-year according to one source.

We do understand that there have been some problems in Ukraine and Russia with manufacturers substituting palm fats for dairy fats in some foodstuffs and labelling the products incorrectly. But rather than penalise the imports, shouldn’t enforcement for the labelling regime come under greater scrutiny?


ANZ Labelling Update

Australian wildlife campaigners have reactivated – this time at schools – in order to make renewed demands for clearer labelling of products containing palm oil.

The campaign activity has restarted in anticipation of a meeting of Australian health officials to be held on June 29.

The labelling campaign in Australia and New Zealand actually commenced back in 2011. This was in response to a review of Australia and New Zealand’s food labelling regime.

Despite extensive campaigning, the labelling of palm oil for environmental reasons did not make it on to the agenda. Why? Because the review was primarily for health and food safety labelling. The review process was put in place in an attempt to improve health outcomes, not environmental outcomes.

The result was that food authorities in New Zealand were tasked with looking at the feasibility of labelling oils and fats in products by source. This wouldn’t just include palm oil, it would include all vegetable oils and animal fats, such as shortenings and milk fats. This would no doubt raise the ire of New Zealand’s dairy farmers, who are the most powerful business interest in the country. One of the key findings from the review, however, was that they didn’t necessarily agree that more information on food labelling was a good thing for consumers. Why? Because not only do most consumers not read labelling information, but when they do, they have difficulty understanding it. It’s quite difficult for most people to remember which fats and cholesterols are considered healthy.


Malaysia and the TPP

Malaysian Prime Minister Mahathir Mohamad stated in a recent interview that his newly formed government would be reviewing the country’s participation in the Comprehensive and Progressive Trans Pacific Partnership Agreement (CPTPP).

We had originally speculated that this would be unlikely given that Malaysia would stand to gain with increased access for palm oil in the Mexican and Canadian markets.

However, the absence of the US in the CPTPP does make the agreement less attractive; better access to US markets was one of the key benefits for many countries. This was particularly the case for Vietnam, which was eyeing greater access for textiles.

Malaysia already has trade agreements under the ASEAN banner with Australia, New Zealand, Japan, as well as bilaterals with all those countries and Chile. Missing from the list are Peru, Canada and Mexico. Colombia has also signalled its intention to join the agreement.

Similarly, South Korea has been weighing up its options on joining CPTPP; for them it is not quite a cut-and-dried case. What happens next for Malaysia remains to be seen.


Is I-EU CEPA going anywhere?

Officials from both Jakarta and Brussels have gone to considerable lengths over the past two weeks to emphasise that the Indonesia-EU trade deal is still on.

This appears to be in response to what is probably the worst-kept secret in the trade world: the EU’s wrangling over palm oil has derailed the negotiations.

The last statement to come from Brussels on the talks was that the next negotiating round would be held before the summer, meaning there’s very little time – if any – for the round to take place.

The word from Jakarta is that they’re currently putting more effort into to completing their negotiations with EFTA (comprising Switzerland, Norway, Iceland and Liechtenstein).

It’s also worth remembering that there’s a reason Indonesia doesn’t have many trade agreements: they play a tough, defensive game.

By way of example, the Indonesia-Australia agreement has hit an impasse. This can be partly attributed to a low-level dispute over paper products between the two countries. The lead negotiator for Indonesia in the talks also happens to be on the board of Indonesia’s largest paper company.

Jakarta will quite happily stonewall Brussels if palm oil isn’t resolved to its satisfaction.


MSPO Gains Momentum

The Malaysian MSPO standard is planned to become mandatory for all growers in the country at the end of 2019. However, growers that are already certified to other standards – such as RSPO and ISCC – will have to be certified at the end of 2018.

Wilmar has launched an online tool for its suppliers to determine their compliance requirements. The tool allows suppliers to assess their readiness for MSPO, and against Wilmar’s NDPE (no deforestation, peat and exploitation) policies.

The Malaysian government has been providing financial support for growers in complying with MSPO standards and achieving certification.

The MSPO scheme is currently completing a chain-of-custody standard for palm oil products. This will provide additional traceability for MSPO-certified palm oil, in addition to certification of sustainable production.  The challenge now is for Malaysia to focus on its corporate buyers and customers in markets around the world – not least in Europe – and secure recognition of MSPO.

Will the addition of certificates of compliance with ambitious commitments change the perception of Europeans on palm oil, and see the efforts of global palm oil small holders finally rewarded?


Palm Oil Monitor – Weekly Update 5th June 2018

An EU Compromise on Palm Biofuels?

Last week saw the fourth of the EU’s “Trilogue” negotiations on the Renewable Energy Directive: the meeting broke up without an agreement: and a new round of negotiations will now be scheduled for 13th June.

We are told that the European Parliament is digging in and insisting on a ban on palm oil biofuels, despite its infringing WTO rules.

The Council – made up of the more sensible EU governments, who are no doubt concerned about protecting WTO rules, and avoiding trade retaliation – is proposing a compromise deal where the Parliament drops the palm oil ban in return for concessions on other issues. This is pretty standard EU horse-trading. So far, MEPs haven’t accepted the compromise offer.

It’s worth remembering that palm oil is only one part of the Directive: apparently there are multiple other issues on which the Parliament and Council disagree.

In the end, so many EU governments rely on trade with palm oil producing countries, that they must surely continue to oppose the ban. EU jobs and businesses would suffer if MEPs get their way, not to mention it would be another blow against the rules-based international trading system, which is already under serious strain.


The EU pot calling the kettle black

Speaking of which, the EU has come out swinging against new steel tariffs imposed by Washington. EU Trade Commissioner Cecilia Malmstrom issued a statement saying that “We will now trigger a dispute settlement case at the WTO, since these U.S. measures clearly go against agreed international rules … We will also impose rebalancing measures and take any necessary steps to protect the EU market from trade diversion caused by these U.S. restrictions.”

The U.S. measures have spurious reasoning behind them (e.g. the U.S. invoking reasons of ‘national security’ to impose steel tariffs against Canada) — but this is a valuable lesson for Europe.

One country has imposed an unfair and arbitrary measure against imports from a long-term and respected trading partner. Those imports are used as a vital component in many parts of the supply chain, and the action is clearly a protectionist measure designed to support domestic industries rather than the stated purpose.

This describes both the U.S. position on steel – and the EU position on palm oil. The EU is taking action against palm oil from Malaysia, Colombia, etc: the measure has nothing to do with sustainability and everything to do with protectionism.


France and Total: Europe’s real position on palm?

Farm groups and NGOs were dismayed to learn last week that the French Government had given Total the go-ahead for its La Mede biorefinery.

The likely scenario is that Total will import around 300,000 tonnes of CPO, which will make its way into the renewable supply across Europe – and be counted under the existing Renewable Energy Directive rules.

French Oilseed Producers (FOP), Transport and Environment, and Friends of the Earth immediately went on the offensive, condemning the move.

France’s oilseed farmers were concerned at the use of palm rather than rapeseed.

France’s environment minister Nicolas Hulot stated that he had asked Total to reduce their palm oil use going into the future but also that he could not ask them to cease using palm oil completely given their EUR275 million investment.

Hulot also stated that France will eventually stop importing palm oil, though he did not state whether this was because of legislation – such as a revised RED — or customer preferences.

Friends of the Earth claims that the French Government has been actively lobbying against the elimination of palm oil from the revised RED, stating that they had sent a request to MEPs asking them to vote against the RED proposals.

If France is actively lobbying against the MEP proposals on palm, it needs to be asked what the other heavyweight in the EU – i.e. Germany – is doing.

The German biodiesel industry – including German farmers – has laid down a clear marker. They are arguing in many ways for the status quo with additional support for advanced biofuels, but with this caveat: “Particular precautionary measures should be introduced for biomass imports from third countries with demonstrable sustainability problems, in particular relating to illegal land-use changes.”

This does not appear on the surface to be any different from existing sustainability criteria for biofuels. More importantly, they do not specify a crop for special attention; they specify countries. The German coalition government’s position on palm oil in the RED II is not entirely clear. There is no doubt, however, that Germany will be seeking to keep energy costs down in order to bolster exports.

France and Germany seem cognisant of what is at stake: international competitiveness and trade relations (i.e. exports). These two positions stand in clear contrast to the stance taken by the EU’s minnows in the East (see below).

This also begs another question. Does the Franco-German position indicate that the hard position taken by MEPs is a minority view, albeit a noisy one?   A good benchmark is the Nutella debate; despite the noises made about palm oil in Nutella in France, sales did not suffer. Instead, there were supermarket brawls earlier this year when Nutella was being sold at a discount.


Getting to the bottom of ‘deforestation free’

Two reports were released last week on ‘deforestation free’ palm oil. One was from Imperial College in London, and another from CIFOR in Indonesia.

The two reports have different objectives. The first looks at whether ‘deforestation free’ palm oil is actually possible. The authors note a range of problems, and most specifically the complexity of the supply chain, particularly when it involves smallholders. Ultimately what this comes down to is the large number of actors in agriculture in developing countries.

Can this be overcome? Economies gradually develop and transition away from agriculture into manufacturing and then services. But this takes time. Until then, the supply chain will remain complex.

The stakeholder group that comes off the worst in the Imperial College study is campaign groups. Lead author Dr Andrew Knight states:

“NGOs have used public shaming to compel companies to make commitments to deforestation-free palm oil … Shaming may not continue to achieve positive outcomes in terms of reduced deforestation if the complex issues impeding implementation are not worked out …A more collaborative and supportive approach to understanding supply chains and the people and companies that comprise them is required.”

The second study from CIFOR looks at a different aspect, ‘deforestation free’ commitments by major producers.

Arguably the most important takeaway is that ‘zero deforestation’ commitments often fail to take into account ‘negative externalities’. More specifically, they mean the idea of large companies preventing access to land by communities to prevent deforestation.

This has and always will be the danger of simplifying environmental problems down to a simple catchphrase or slogan. Campaign groups can make ‘zero deforestation’ sound simple, but as has been documented time and time again, deforestation is dizzyingly complex and highly dependent upon its context.

The simplicity of the ‘zero deforestation’ concept is attractive for groups such as consumers or large consumer goods companies, despite its oversimplifications. But even worse is its attractiveness to policymakers. It has resulted in any number of bad policies being developed – RED II being one of them.


Wilmar’s Uganda Project Gets Underway

Wilmar’s second Ugandan plantation can commence its preparation phase after a ten-year delay. The company has been seeking 6,000ha for what is effectively an expansion of its existing 6,200ha operation.

Wilmar’s operations in Uganda – under the joint venture Bidco – comprise nucleus estates with additional areas farmed by contract growers.

The Bidco operations were scrutinised by NGOs in 2012 and 2015, with mostly claims about a Ugandan land-grab for plantation land.

The original plantation development programs that commenced in Uganda in around 2005 were supported by the International Fund for Agricultural Development, which is part of the UN system. The rationale was to reduce the country’s reliance upon palm oil imports, which come mostly from Malaysia and Indonesia, to the tune of around 200,000 tonnes annually.

African palm oil producers are largely yet to respond to moves by MEPs to have palm oil banned from the EU’s biofuels programs. This is likely to change; MEPs will simply not be satisfied with bans from biofuel programs; they are also likely to pursue moves against palm oil use in other sectors too.


New Trade Agreements Hanging?

A statement was released last week from MITI (Malaysia’s trade ministry) Secretary General Datuk Seri J Jayasiri, who stated that the country’s new government would assess its position in its trade pacts, RCEP (Regional Comprehensive Economic Partnership) and the revised TPP (Trans Pacific Partnership).

Its speculative at this stage, but we’d be very surprised if Malaysia pulled out of RCEP, as its participation is as part of ASEAN, and moreover, negotiations are yet to be completed.

The two largest importers of palm oil in the revised TPP Agreement are Vietnam and Japan; together they swallow more than 6 per cent of Malaysia’s palm exports – more than, say, the Netherlands. But the big change – according to the MPOB – will likely be improved market access into Canada and Mexico. We’d assume that this would be worth pursuing, but that decision would depend on the trade priorities and strategy of the new government in Kuala Lumpur.