Palm Oil Monitor Weekly Update – 21st March 2019

Analysing the Final Delegated Act: the Commission Doubles Down

The European Commission has published its final version of the Delegated Act for the Renewable Energy Directive, as was expected.

The text will now go to the Council of the EU and to the European Parliament. They have two months to consider the Act and how to proceed, but they can also request an extension.

Both the Parliament and Council can ask the Commission to redraft the legislation. They can also remove the Commission’s authority in this area, in extremis.

As noted previously, the approval period may bleed into the EU Parliament’s elections, which commence on May 23.

There are some small changes to the Act and they are clearly aimed at palm oil. But they are also changes that appear to have been forced by pressure from Green MEPs. On March 18, the Commission’s Director General for Energy Dominique Ristori presented the final Delegated Act to MEPs in the Industry, Research and Energy (ITRE) Committee members in the European Parliament. He confirmed that the changes had been made following discussions with MEPs.

Just so we’re clear, this version doesn’t pull back from keeping palm oil out of the European market; it doubles down. Here are the key changes:

  • Revision of the definition of smallholders from ‘2 to 5 hectares’ to less than 2 hectares. The only group objecting to this definition was European greens. They saw this as a ‘loophole’ for the nucleus estate model;
  • The definitions required for smallholder exemptions were narrowed to only include abandoned and degraded land, excluding ‘unused’ land;
  • The percentage share of palm oil’s expansion into high carbon stock (HCS) areas increased from 18% to 23%.

The increase from 18% to 23% has no justification within the EU text; there is no new data that explains the increase.

But the revisions to the smallholder definition are clearly alarming and display a clear disregard for the Sustainable Development Goals.

Ristori misquotes FAO smallholder definitions, ignores SDGs

Mr. Ristori justified the change in definition for smallholders by stating that it falls into line with the Food and Agriculture Organization definition of smallholders.

Let’s be clear: no such definition exists.

In fact, the FAO does quite the opposite – it encourages governments to develop their own workable definitions of smallholders based on the relevant economic and agricultural context. It also discourages relevant authorities from using an area-based definition.

This has all been laid out clearly in a working paper published by the FAO in 2017.

Even when it comes to collecting data for non-regulatory purposes, the FAO is non-prescriptive. Its flagship publication, the World Census for Agriculture, lays out its concepts and definitions and says that countries should determine their own thresholds for smallholders and agricultural holdings more broadly.

This is because the land area of a farm on its own does not indicate anything about the labour inputs, output, and profitability of the land holding. It is highly dependent upon context, including the crop type, land type and weather conditions.

A thorough analysis of 122 countries using smallholder definitions shows that:

  • 71 countries use an area-based definition;
  • Of these, 31 use a definition of less than 2ha and 40 use a definition over 2ha;

The FAO has also recommended against a regional definition for smallholders, let alone a global definition.

So where did Ristori get his definition? We suspect it is this study from the FAO in 2015, which uses 2 ha as a starting point. But this document points out that a 2 ha definition is woefully inadequate:

“The 2 hectares threshold does not provide any meaningful information for an analysis across countries.”

The FAO points out that the renewed focus on smallholder definitions is because of the Sustainable Development Goals.

SDG 2.3 seeks to double:

the agricultural productivity and incomes of small-scale food producers, in particular women, indigenous peoples, family farmers, pastoralists and fishers, including through secure and equal access to land, other productive resources and inputs, knowledge, financial services, markets and opportunities for value addition and non-farm employment.

There are two indicators, which measure smallholder productivity and income. The SDGs note that there is no methodology for measurement, and that the “The main reason for this  … is the lack of a universally-accepted international definition of “smallholder”.”

Officials from the region have been wondering whether the SDGs might be used as supporting material for a possible WTO case against the EU. This disregard of FAO methodologies and the SDGs looks like a clear entry point.

… And ignores the EU’s own definitions

What may further trip up the Commission and the European Union when it comes to international legal action – is that this new definition diverges completely from the EU’s own definition of small farmers.

The European Commission notes that a definition based on area is of very limited utility and the EU bases its definition of small farms on gross margin rather than area.

The EU defines a ‘small farm’ as being less than 8 ESU or ‘European Size Units’. ESUs are calculated by taking gross margin and dividing this number by EUR1200.

In the same way, the US Department of Agriculture uses a definition based on margin, rather than size, for small farms.

In Malaysia, a definition for smallholders is 40 ha. For palm oil specifically, the only definition is put forward by RSPO, which is 50ha.

For palm oil, a rule of thumb is one family member can work full time on 5 hectares, without the need to engage an additional worker or family members. With less than 5 ha, smallholders will find difficult to earn a decent and living wage and would look for another job. The EU has clearly not even bothered to check what ‘works’ in the sector.

But the question is this: why didn’t the EU use its own definition?

Because it would simply be too inclusive. There is a broad range of gross margins for palm oil. A CIRAD project noted that margin for Indonesian smallholders can range from IDR2000000/ha (EUR125) to 15000000/ha (EUR930).

A 5ha holding at the lower end would imply a gross margin of EUR625, roughly translating to 0.5 ESU. Using a low margin, a ‘small’ farm would be up to 80ha if calculated using ESUs.

… And casts ASEAN concerns aside

The changes to the Delegated Act have raised the ire of Malaysia and Indonesia. Both countries expended considerable resources demonstrating to the EU the problems with the Delegated Act. Both countries were ignored. Moreover, the classification of soybean as low risk has raised ire further, particularly given its higher deforestation footprint.

Ristori was asked to justify why soy was exempted and not palm oil. Without getting into details, Mr. Ristori just implied that their scientific evidence was “reliable”. Clearly, he’s towing the line for Juncker’s deal with President Trump. He also indicated that Malaysia was committed to protecting forests and sustainability. Then why ban palm oil?

Pundits are predicting a broader trade battle. The producing countries certainly seem prepared.

Malaysian Minister of Primary Industries Ms. Teresa Kok issued a statement saying, “This is totally unacceptable, and it is discriminatory and insulting to smallholders in the palm oil producing countries.”

Malaysian Minister of Foreign Affairs Saifuddin Abdullah stated “…if this Delegated Act is passed into law, that Malaysia would look to WTO for recourse. This discriminatory Delegated Act undermines the EU’s credibility as a proponent of the WTO-led rules-based system”.

Indonesia has now publicly stated that it will mount a WTO action. Trade Minister Lukita Enggartiasto said that “The decision [to take the issue to the WTO] was just made at a meeting yesterday. It is now being drafted. We will send the letter to the WTO and assign a lawyer.”

This doesn’t bode well for the EU’s trade ambitions in the region.

The EU has caved on soy in order to placate the Trump Administration’s proposed tariffs on cars. This will come at a cost for the EU’s trade plan in Indonesia, Malaysia and the rest of ASEAN.