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?