Palm Oil Monitor Weekly Update – 10th September 2019

Trade War Update

The EU has hit back at Indonesia’s proposal to slap duties in European dairy products in response to the EU’s countervailing duties on biodiesel, with its most aggressive statement to date.

According to news reports, the EU’s Head of Trade and Economics for Indonesia, Raffaele Quarto said:

“What the WTO does not allow, absolutely forbidden by the WTO regulation, is retaliation, which is what’s suggested in this case of dairy products … In addition to that, if you see declaration of Indonesian importers that use dairy products from the EU, they pointed out it will damage the Indonesian economy to have this kind of measure”

This is correct to a point — if there’s a retaliatory motivation. However, there’s nothing to stop Indonesian authorities from commencing antidumping and countervailing duties investigations on European products.

In terms of following the WTO’s rules, the EU probably should have considered notifying Indonesia and Malaysia of the Renewable Energy Directive Delegated Act in the relevant WTO Committee.

A parallel battle is taking place on the ‘palm oil free’ labels front. As reported last week, the Indonesian Government has banned food labelled as being ‘palm oil-free’. This week, Malaysian supermarket chain Mydin removed products labelled ‘palm oil-free” from its stores. Malaysian Minister of Primary Industries Ms Teresa Kok welcomed the move, and confirmed the Malaysian Government would follow Indonesia with a proposal to ban products with anti-palm oil labels.

These actions led Charles Michel-Geurts, Chargé d’Affaires of the EU Delegation to Indonesia to organise a media briefing in Jakarta and declared that:

“There is no such thing as an EU ban on palm oil nor any trade war”

He also tweeted that “The EU, as a constitution, government, and the member states, has no relation to the ban on palm oil products.”

This is absurd to the extreme. The Commission’s original position on the RED and the Delegated Act was relatively sensible and had no ban on palm oil. The Council and the Parliament shouted the Commission down – and pushed the ban. But according to Michel-Geurts’ logic, the EU government had ‘no relation’ to this. Next, he’ll be suggesting that the EU’s new countervailing duties on biodiesel have nothing to do with the EU.

 

Palm bans could cost ASEAN USD4.3 billion, reduce smallholder wages by 4.5%

A new paper from Purdue University backs up many of the points the palm oil industry and deforestation experts have been making about using import restrictions against palm oil.

Although conservation advocates argue that halting palm consumption will halt deforestation, anyone close to the ground in a developing country knows how absurd this is. Actors – companies, governments, smallholders, individuals — deforest in order to generate revenue for their family, firm or state-owned enterprise.

The paper models that a trade restriction:

“does not halt deforestation in M&I, as oil palm is not the sole crop being produced. A restriction on the consumption of palm oil produced in M&I supported by an initiative that directly limits deforestation is needed to prevent additional deforestation, carbon emissions, and biodiversity loss. Targeting just a single driver of deforestation in M&I opens room for other drivers of deforestation to operate more actively in the absence of a forest protection plan.”

The paper goes through three scenarios over the medium term aimed at halting deforestation around palm oil. The first is a tax that aims to cap palm production in Malaysia and Indonesia at 2011 levels, incentivised by a tax over any limits. The second adds an incentive for reduced deforestation payments. The third is the introduction of an effective ban on palm oil use in the rest of the world.

The first scenario doesn’t stop deforestation, as actors switch to other crops. It does, however, push prices of palm oil up, and increases taxation revenue in Malaysia and Indonesia.

The second scenario does preserve forests, simply because it provides incentive payments to not deforest. Although overall welfare in Malaysia and Indonesia goes up, the wage rate in the agricultural sector decreases significantly. We’ve seen this before in payment systems for REDD (reduced emissions from deforestation and forest degradation), which effectively pay farmers in countries not to expand cropland.

Finally, the third scenario – which is closer to what the EU is aiming for with its approach on palm oil — doesn’t reduce deforestation, pushes the prices of all vegetable oils up and reduces global welfare significantly.

The authors also point out the following:

The 3 policy interventions reduce market-based global welfare by $4,300 million for [capping production], by $5,532 million for [capping production with REDD-type incentives], and by $7,398 million for the [tariff approach].

And just so we’re clear, the third scenario would cost Malaysia and Indonesia USD4.3 billion in welfare losses.  The other loser here is China, which suffers welfare losses in all three scenarios because of higher prices.

The modelling was put together using Purdue’s GTAP model, led by a Purdue Agricultural Economist. Policy wonks know that Purdue’s model is about as good as it gets, and faculty in the ag school there are nothing less than top shelf.

That said, the results are quite intuitive and can be summed up neatly:

  • If you ban one crop for deforestation, farmers will simply grow something else;
  • If you cap production, prices will go up;
  • If you pay countries not to farm, the wages of unskilled farm labourers go down.

The paper has some major real world implications.

First, it supports the case that both Malaysia and Indonesia have been making about the economic damage of existing bans (for renewables) and broader measures against palm oil consumption, and that they will have no impact on deforestation.

Second, the fall in wages is estimated at 4.5% for unskilled agricultural labour. This is largely smallholders.

Third, in terms of legal action, the EU argued it didn’t need to consult with palm producing countries on the RED’s Delegated Act in the WTO because it is in their view WTO compliant. But the point of the Technical Barriers to Trade committee notification is that it’s for consulting with partners if measures are going to disrupt trade. If anyone needed an analysis of potential trade disruption, this is about as good as it gets.

 

Certified vs Non-Certified: GHG Impacts

RSPO has been – rightly – trumpeting a life-cycle analysis (LCA) of RSPO-certified versus non-certified palm oil.

The report is independent of RSPO itself, but sponsored by some of the organisation’s biggest members.

Obviously certified palm comes out on top. This is a relief for anyone involved in certification—if there’s no advantage in terms of greenhouse emissions, it would call the entire certification exercise into question.

Only the executive summary of the report is available, so it’s difficult to assess the data for RSPO against the counterfactual.

However, a more interesting way to look at this research is how it compares with earlier research by the same authors that undertook a comparative LCA of palm oil and rapeseed.

In that research, the global warming impact of rapeseed was significantly larger than for conventional palm oil. The swing factor – as always – is land use expansion.

After the decision by RSPO members to effectively prohibit any new planting in forested areas, RSPO is now on relatively safe ground when it comes to expansion.

This approach of demonstrating the lower impact of certified oil will be particularly useful for companies that are attempting to ensure a lower overall footprint for customers and stakeholders.

But when it comes to regulation, caution needs to be used. The greenhouse footprint of palm-based biodiesel with no expansion is lower than that of soybean. That hasn’t stopped the introduction of a hastily assembled ILUC methodology to keep palm out of the EU market.

In the EU, science is no match for politics.

 

IN BRIEF: EU’s own goal on rapeseed

With an impending ban on palm oil in the EU’s renewable energy scheme, the bloc’s rapeseed farrmers should be celebrating, right? Wrong.

According to various reports, larger numbers of farmers are walking away from rapeseed  and plantings are at a 14-year low in France. This because of two factors. First is an unusually dry summer. Second is the EU’s recent ban on neonicotinoids, a type of pesticide that has been attributed by different groups to bee colony collapses.

So, despite higher prices, it’s becoming more difficult for EU farmers to get sufficient yield.

The big winner in this scenario may end up being soy-based biodiesel, with soybean prices still hitting multi-year lows.

Share