ANALYSIS: Are we facing a two-tier vegetable oil market?

Long-term structural changes in global vegetable oil markets have implications on sustainability policies – and the ‘market’ for sustainability — going forward. They also reignite the possibility of a ‘two-tier’ market that goes beyond voluntary certification and structurally locks smallholders out of Western markets. As we discuss below, the clear solution is smallholders.

How is the vegetable oil market evolving?

The annual OECD-FAO Agricultural Outlook was released last month. As with previous years, the report points to flat vegetable oil consumption in developed markets, with developing countries responsible for all consumption growth going forward.

To give an idea of the numbers, over the next decade global consumption is expected to grow by roughly 27.8 Mt, which represents growth of around 12 per cent of current consumption. All of this growth will take place in developing countries. More than one-third of this growth will be palm oil.

But there are emerging clouds on the production side for rapeseed going forward. The report states:

Production of other oilseeds is projected to increase by 1.3% p.a. over the next decade, implying slower growth relative to the last ten years. Production growth incentives will be curbed by stagnating demand for rapeseed oil as a feedstock in European biodiesel production and the increasing competition by cereals for limited arable land in China and the European Union.

European rapeseed has two big problems. As we’ve seen over recent years increased production costs and poor crop yields have pushed European farmers away from rapeseed, limiting supply. At the same time, time is running out for the subsidies that have kept rapeseed alive in the first place. Any additional shortfall in food markets will be made up by palm oil on the one hand, and also by growing exports from Canada and Australia.

Imports of rapeseed – from Canada and Australia — hit a record high in 2020-2021. But clearly Brussels can’t claim that these should be subject to ILUC under the RED.

The above two stories point to a possibly fragmented future for sustainability policy in global vegetable oil markets. Flat European markets will orient itself towards distinguishing between crops using a trade-sustainability policy nexus – including deforestation regulations and labour due diligence.

In addition, developing country markets will be the sources of growth, where less attention is paid to sustainability and greater attention is paid to price. This points – significantly – to national mandatory schemes such as ISPO becoming the default.

Whether Brussels likes it or not, the combination of exporter standards and growth markets are going to have a much greater sway over sustainable production standards going forward.

A case in point: India is the world’s largest importer of vegetable oils. This week a change in India’s import tariffs was the largest story to hit palm oil markets. New Delhi reduced import tariffs on refined palm oil from 49 per cent to 41 per cent, and a reduction on crude palm oil tariffs from 35 to 30 per cent. This was the Modi government’s response to soaring food prices in a country – which imports around 60 per cent of its cooking oil.  

At the same time, the USDA reported that Indonesia’s palm oil exports to China were up 43 per cent on the previous year on the back of export tax changes and growth in the processed food markets.

Neither of these developments have anything to do with sustainability policy, it’s all about price.

Although the European Union speaks grandly of its ambitions to increase its regulatory reach with its trade agreements, the problem for Brussels is this: the less you trade with someone, the less influence you can have. If the EU continues to make it difficult to export palm oil there, how can it impact how it is produced?

Do two tiers mean smallholder exclusions?

One of the key problems that the ‘two-tier’ system has – and may have – is that the European side of the ledger tends to lock out smallholders.

It is well understood that smallholders are the backbone of Indonesia’s palm oil sector, cultivating around 41 per cent of country’s palm oil area, and producing around 38 per cent of the country’s palm oil output.

Many farmer groups are beginning to understand that many regulations in Western markets – particularly in the European Union – are having a direct and significant – impact on their livelihoods. 

The European Union’s so-called provision for smallholders under the Renewable Energy Directive effectively excluded Indonesia’s smallholders by requiring that they operate on areas less than 2ha and provide ‘additionality’ requirements. It is well understood globally that small farmer definitions – even within the European Union – are based on output rather than area. There is no ‘standard’ or internationally accepted definition of ‘smallholder’ or ‘small farm’ based solely on area published by international agencies or by the European Commission.

This is what experts say –

  • USDA defines a small farm as “an operation with gross cash farm income under $250,000.”
  • World Bank’s definition is: “A smallholder farm in the developing world is typically a family owned enterprise that produces crops or livestock on two or less hectares. In some countries and sectors, however, smallholdings can exceed 10 hectares.”
  • The UN FAO’s definition is: “ ‘smallholder’ refers to their limited resource endowments relative to other farmers in the sector. Thus, the definition of smallholders differs between countries and between agro-ecological zones. In favourable areas with high population densities they often cultivate less than one ha of land, whereas they may cultivate 10 ha or more in semi-arid areas, or manage 10 head of livestock. Often, no sharp distinction between smallholders and other larger farms is necessary. Smallholders represent a large number of holdings in many developing countries and their numbers have increased in the last two decades.”

The definition from the European Commission, however, is completely arbitrary and at odds with the international mainstream. 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. Similarly, the USDA bases its definition of ‘small family farm’ on annual sales.

It is important to note there is broad range of gross margin for different palm oil smallholders – and therefore the ‘size’ of palm oil plantations. 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. To recap the UN FAO: ‘the definition of smallholder differs between countries’: this is also true within countries.

The landscape for small farmers is undergoing a significant transition in Indonesia. Key new laws and regulations have been introduced over the past year or more by the Indonesian government in order to increase both the productivity and sustainability of small farmers. In addition, private sector firms have increased their cooperation with smallholders.

The key developments are below.

Omnibus Law

The Presidential Omnibus Law was considered controversial when it was introduced. One myth that was perpetuated when the Bill was being considered was that the ‘plasma’ rule for plantations was being removed. This rule requires that 20 per cent of an approved plantation area needed to be set aside for community use, whether for palm oil or for other uses.

This misleading claim has been propagated primarily by Planet Palm author Jocelyn Zuckerman (who of late has taken to Ecuadorian palm oil). She’s wrong.

The Law reaffirms this requirement, with a small change. The previous law’s drafting meant that if a plantation area changed hands via sale or modified, that an additional 20 per cent of land area would need to be either set aside or found. This has proven to be difficult in areas of Indonesia such as Sumatra, where there are many competing land pressures from growing populations and smallholders. The Law does not waive the requirement to maintain an existing community area.


The Government has also introduced the RAN-KSB (National Action Plan for Palm Oil Sustainability). The Action Plan puts in place a number of initiatives aimed at smallholders.

These include enhancement of the role of local government in ISPO implementation. This is significant in that local governments are ideally placed to assist in facilitating – and therefore improving – smallholder certification and sustainability.

There is also support for establishing better models of cooperation between companies and smallholders. One of the major hurdles that smallholders face is the large number of middlemen traders that operate between farmers and processors. While not always the case, this often results in many smallholders simply being price takers and not receiving the ‘true’ market price for palm oil fruit. RAN-KSB is examining ways to overcome this – and many other – problems smallholders face in the market.

RAN-KSB also ensures additional financial support for smallholder ISPO implementation.

A revised ISPO and a path forward

Indonesia’s new revised ISPO principles and criteria were published earlier this year. The standard contains new requirements for smallholders, but the standards have several provisions in place that are designed to make certification more achievable.

The first is that the number of principles – and therefore criteria and indicators – required to be adhered to by smallholders is lower. Smallholders must adhere to four key principles covering Legality, Smallholder Management and Organisation, Environmental Management, and Sustainable Business Improvement. Similarly, some requirements are waived for plasma smallholders, specifically requirements on forest and peatland protection – these must be taken care of via the nucleus company. 

In addition, where ISPO has become mandatory for companies, the Government of Indonesia has introduced a five-year transition period for smallholder farmers going forward.

As stated above, this is how – and why – national certification systems are bound to become more important going forward: they are the only systems that can meaningfully include stakeholders. If the Western world wants to avoid a two-tier system and include smallholders, national certification systems are the clear path forward.