Category: Blog

Palm is not a Focus for IPCC Experts – only for NGOs, media

The newest IPCC special report on climate change and land is fascinating reading for anyone interested in food production and its impact on the environment. It argues quite convincingly that a meat-based diet has a more harmful impact on land systems and the climate overall.

This largely stems from the production systems around livestock, including feed production, deforestation and livestock emissions themselves.

But anyone expecting some ammunition against palm oil will be sorely disappointed. Palm oil – unlike livestock – didn’t garner a mention in the Summary for Policymakers, and it was referred to only twice in the main report — indirectly. Once was in reference to isoprene emissions, which it said were ‘negligible’, and in another case where Indonesian shifting cultivation was described as a major problem, and that other pressures from land acquisitions for “oil palm, logging and mining” could risk future sustainability.

Despite this, NGOs have used the report as a platform to attack palm oil. Oxfam issued this statement in response to the report:

Meanwhile, our food system is only making matters worse. More than 70 percent of ice-free land is now under human use, largely driven by industrial agriculture and the growing demand for commodities like meat and palm oil. Agriculture, forestry, and land use contribute 22 percent of global greenhouse emissions, half of which come from deforestation and emissions associated with fertilizer use, livestock, and rice paddy … The production of palm oil, an ingredient commonly found in chips and cookies, has been responsible for pushing communities off their land in countries from Peru to Indonesia.

The New York Times has, of course, run with the Oxfam line on palm oil. Their story read as follows:

The report said that activities such as draining wetlands — as has happened in Indonesia and Malaysia to create palm oil plantations, for example — is particularly damaging. When drained, peatlands, which store between 530 and 694 billion tons of carbon dioxide globally, release that carbon dioxide back into the atmosphere. Carbon dioxide is a major greenhouse gas, trapping the sun’s heat and warming the planet. Every 2.5 acres of peatlands release the carbon dioxide equivalent of burning 6,000 gallons of gasoline.

Science magazine, which is generally well respected, thought that this sentence should be thrown in the middle of a piece on the report when looking at the impact of biofuel plantations:

The bioenergy plantations could also take a toll on biodiversity—as is happening in Southeast Asia, where plantations producing palm oil for biodiesel as well as food are displacing diverse tropical forest.

Just so we’re clear, peatland emissions aren’t just the domain of Southeast Asia, nor are they just a draining problem. The most comprehensive study on peat emissions shows that the EU is the second-largest source of peatland emissions after Indonesia. In this study, Finland’s peatland emissions are higher than Malaysia’s.

Peatland emissions occur when it is used for agriculture – regardless of whether it is drained or not.

According to one study, around 30 per cent of the EU’s agriculture emissions come from peatland degradation – even though it peatland makes up just 7 per cent of EU agricultural land.

As usual, palm is the whipping boy for environmental problems where it’s not the major contributor.

And, as usual, too many civil society organisations are quick to point the finger at Southeast Asia, rather than acknowledge that the bigger problems lie in Europe.

 

China, Palm and Soybean: Where next?

A small story appeared in news feeds last week, noting that China is considering lifting its tariff rate quotas on three vegetable oils – palm, soybean and rapeseed.

Tariff rate quotas work as follows. The importing country sets a quota for a particular good, with a set tariff. Once that quota is reached, the same goods are imported at a higher out-of-quota rate.

For palm oil, the tariff is 9 per cent in-quota, and 60 per cent outside of that quota. Other vegetable oils are similar. Companies in China need to apply to the Ministry of Commerce (MOFCOM) to be eligible for the quota.

So, what changed?

China has said it will completely halt buying US agricultural imports. This means that the massive quantities of soybean that are imported for oils and meals will drop. That also means there will be a big drop in domestically produced soybean oil, which is China’s most popular vegetable oil.

The country’s pig farmers will need to seek other sources of feed, but the country will also need to make up the shortfall in vegetable oil. Hence the potential easing up of market access restrictions.

Is this a good sign for palm oil?

Soybean is China’s most consumed oil, hitting around 16.0MMt annually, with just around 1.0MMt imported. After that comes rapeseed (around 8.1MMt consumed, 1.5MMt imported), then palm oil as the biggest consumed import (6.67MMt, all imported).

Up until the US-China trade war, China took around half to one-third of its soybeans from the US. It’s therefore conceivable that it will need another 5000-7000Mt of imported vegetable oils to make up any shortfall.

This isn’t insignificant, probably around 8 per cent of the total global export market for palm oil.

When the US-China battle over soybeans commenced two years ago, there were a few predictions that palm oil exporters could capitalise. We haven’t seen that eventuate – mainly on account of US soybean exporters lowering their prices and getting their products into China.

But halting US soybean imports completely is another thing.

The determining factor might be how Brazilian exporters respond to the new conditions – and if they ramp up their production accordingly.

 

France Confirms Finance Bill, Total Outrage Follows 

France continues to move ahead with the implementation of the Finance Bill 2019 – representing another step towards palm oil losing its renewable fuel tax concessions in France. Earlier this month, the French Government passed a Decree adapting the French Customs Code to align with the wording of the Finance Bill 2019.

The removal of the tax concessions – a de facto ban — was attached as an amendment to the Finance Bill in December last year. The Bill was then signed into law at the beginning of 2019 by President Macron. This resulted in a letter of protest from Prime Minister Mahathir to President Macron.

According to Bruno Millienne, the MP who introduced the Bill, palm-based biodiesel will be 40 per cent more expensive than non-palm biodiesel fuels after the removal of the subsidy.

Unsurprisingly, Total, which commenced production at its La Mede biorefinery just weeks ago, is objecting to the change. Total commenced converting the plant from a conventional oil refinery to a biodiesel refinery, using palm oil as the main feedstock. Total has made a submission to the French Council of State arguing that it is being discriminated against by the tax change. A Total spokesperson stated:

“We filed with the Council of State an appeal against the decree of application of the provision of the Finance Act for 2019 which excludes the only products based on palm oil, even sustainable, of the list of biofuels … We believe that this provision of the French law introduces discrimination incompatible with the French Constitution and EU law.”

Total CEO Patrick Pouyanné said that he “doesn’t intend to run the plant at a loss,” implying that the 250 jobs there may have to go.

He has come under fire from French NGOs, attacking him for contributing to deforestation. Mr Pouyanné responded to them confirming that his plant uses “palm oil produced sustainably in Malaysia and Indonesia, not linked to deforestation”.

Macron is under enormous pressure from a well-organised French farm sector (whose members apparently have time to protest quite regularly). Farmers have been protesting for weeks against the EU-Canada trade deal, dumping manure outside MPs’ offices.

In this environment, Macron has signalled that France is interested in taking on the Trade Commissioner portfolio. That could have significant consequences for palm oil trade. What will the reaction be among French rapeseed and sunflower farmers if the EU-Indonesia deal gets over the line?

First, the French Government needs to make a decision: is it prepared to lose French jobs in La Mède, reduce investment, and perhaps harm exports, all simply to appease farmers in this palm oil dispute?

 

IN BRIEF: Russia increases its palm tariff

The Russian Parliament (Duma) has voted to increase the tariff on imports of palm oil to 20 per cent. This is in response to an influx of imports harming local sunflower oil growers and the dairy sector.

There have been objections to palm oil in many Eastern European states on food ingredient grounds, as it is often used in dairy-based products such as ice cream. The final rule still needs approval from President Vladimir Putin, who is expected to provide exemptions to Indonesia – and possibly Malaysia – on the back of military hardware purchases.

EU Introduces Duties on Indonesian Biodiesel

The EU has announced that it will introduce countervailing duties (CVDs) on exports of biodiesel from Indonesia. The EU has set the duties ranging between 8 and 18 per cent across the board, with a slightly reduced level for some producers such as Wilmar and Musim Mas.

CVDs are introduced when countries believe that products are subsidised in exporting countries, and therefore harm local producers in the importing country. The European producers in this case are the members of the European Biodiesel Board.

The CVD investigation was initiated in 2018, almost precisely when the EU’s antidumping tariffs on Indonesian biodiesel were declared illegal under WTO rules.

The EU has laid out the CVD case, and it’s thin at best. The leading example it uses for a subsidy is the provision of preferential export financing via Indonesia’s export-import bank.

Whether this is a subsidy is contingent upon whether the preferential terms are sector-specific, i.e. specifically directed towards the biodiesel industry. If they are for agricultural commodities, they don’t count.

But the politics of the investigation couldn’t look worse for the EU given that Indonesia has just launched its WTO case against the EU for excluding palm oil from the RED.

 

WTO RED Update

Both the Indonesian and Malaysian governments have stated that they are proceeding apace with action against the European Union regarding the RED at the World Trade Organization.

Word from Jakarta is that Indonesia has engaged European law firm Sidley Austin to handle the case; the latest from Malaysia is that the Ministry of Primary Industries (MPI) and the Ministry of International Trade and Industry (MITI) are working together jointly.

In the meantime, MITI has called on the EU to recognise MSPO certification within the RED as meeting regulatory requirements. This is definitely a neat technical solution, and would also likely require recognition of RSPO and ISPO alongside it.

However, it doesn’t provide the political solution that the EU is seeking: the EU is looking for ways to keep palm oil out of the European market for biodiesel and – in the longer term – food.  The antidumping and countervailing cases against Indonesian biodiesel are clearly the best examples of this ambition.

MITI has stated that it expects the case to go on for at least five years – which would appear to be about right. Any prospect of regulations being loosened on palm oil will raise the ire of both European farmers and NGOs.

Our prediction is that once the RED case ends, the implementation of the “EU Action to Protect and Restore the World’s Forests” (see last week’s issue) will commence. This is a clear pattern and palm oil producers appear to be on the brink of pushing back in a big way.

GAPKI, Indonesia’s palm oil producers’ body, has called on the Indonesian government to slap retaliatory tariffs on products imported from Europe. The Indonesian trade ministry is signalling that it is prepared to do so, with one trade official stating that the government is preparing to respond to the ‘discriminatory and negative’ campaign.

This would mark a significant escalation in the response to the RED: it would also confirm media reports during the RED that the imposition of palm oil restrictions would be met with economic retaliation from southeast Asia. Will the EU’s anti-palm oil coalition hold up, if and when the RED measures begin to show a negative impact on European exporters?

 

Quick Take: Indonesian Vs Russian Fires

The annual dry season is approaching Southeast Asia – at the same time a dry and hot summer is gripping parts of Europe. In both cases this has resulted in wildfires.

Estimates of the impact in both areas vary, but here’s a rough comparison on the area affected, action taken and international response.

	Russia	Indonesia
Area affected (ha)	2,300,000	30,000
GFW fire alerts (5-day period)	96,001	3,856
Personnel deployed	2,700	9,000
Google Trends average interest (7-day period)	20	21

There does seem to be a particular skew of interest here towards Indonesia. Neither global media, international NGOs nor the European Union have shown much interest in the catastrophic Russian wildfires – certainly nothing like the level of interest that typically accompanies haze season in SE Asia.

There isn’t any oil palm grown in Russia; does the environmental community simply prefer to lecture southeast Asian countries, compared to a European one? Is this about Western donor priorities? It certainly looks like a double standard.

There are a couple of other things worth mentioning:

• First, the hotspot count in the same period in Malaysia sat at 271; the US was 6,532, and Ukraine was 3,430.
• Second, Sinar Mas’ Asia Pulp and Paper – the company that was held responsible by Singapore for a large number of forest fires during the last major haze event – has mobilized thousands of staff to fight the fires.

These fires in vastly different parts of the world are an environmental tragedy. But to prevent fires from happening, we need to know what the causes are. So, before the finger gets pointed at palm oil – and this has already started – it’s worth reminding ourselves of some basic facts.

The best estimates reckon that less than 20 per cent of the fires and haze from Indonesia in 2015 were caused by oil palm cultivation – and that’s data from the European Commission.

 

Analysis: Used Cooking Oil a T&E Target?

If the RED case seemed as though it couldn’t get any odder, it just has. A new report by the UK’s National Non-Food Crops Centre (NNFCC – established by the UK government) suggests that imports of used cooking oil (UCO) into the European Union are actually potentially a new source of climate change – and they’re being exacerbated by the RED.

The logic is as follows. According to the report, imports of UCO from China have increased significantly over the past few years. The assumption is that much of the UCO is originally from palm oil, and that this demand in the EU is contributing to greater palm oil demand in China – and therefore deforestation and climate change.

There are two points made in the report that are worth examining. First, that palm oil imports into China have increased alongside UCO exports, and, second, that the price for UCO in Europe is higher than the price paid for palm oil in China.

The first assumption undermines the report. The key metric in China should be vegetable oil consumption.

China imports soybean for animal feed (meal) and for oil (crush) – the amount of soybean oil imported is around 7 per cent of consumption. Palm oil is imported as palm oil.

Between 2000 and 2018, soybean oil imports increased by about 50%, but consumption went up five-fold. Palm oil consumption (and therefore imports) tripled in the same period. But, soybean oil consumption went from 3,542MT to 16,391MT; palm went from 2,028Mt to 6,670MT. So, growth in soybean oil use was significantly larger than palm oil.

The second assumption – related to this – is that the price for UCO is higher than for crude palm (and therefore other vegetable oils). This is true.

But the report aims at palm oil. The report uses a global price for vegetable oils rather than incorporating the domestic price for soybean oil in China. Yes, globally, vegetable oil prices track each other, but the domestic price is different. This is in part because China’s agriculture sector is heavily subsidised at various levels. So, the domestic price of soybean oil might be much lower than global prices for soybean oil or palm oil.

The report’s argument is that Chinese traders might see the arbitrage opportunity created by the high UCO price versus other vegetable oils.

But what has created this? If the EU introduces a mechanism whereby renewables – particularly those derived from waste products – are supposed to replace other forms of energy, then stimulates demand with a subsidy, is it any surprise that they will command a higher price?

There are two basic points to remember.

First, if you create the demand, the price will go up. Second, if you simultaneously tighten the supply – as could happen with certification of UCO – the price will go even higher. And this will increase the incentives for getting UCO to Europe.

There’s a suggestion in the report that UCO is being ‘laundered’ through China. There’s no evidence for this. If researchers want to make this suggestion, they need to undertake ground research, not imply it based on incomplete correlations.

Possibly the worst aspect of this is that NGO Transport and Environment has said the following:

“Making biodiesel from imported UCO is no longer the environmental good it was once perceived to be …There are real concerns some of these oils may not be genuinely ‘used’ or they may be indirectly causing deforestation. Governments need to scrutinise the source of UCO far more closely and require organisations certifying biofuel feedstocks to undertake far more rigorous and extensive checks.”

At this rate of u-turns, T&E may end up recommending going back to fossil fuels. Either way, it’s becoming more obvious that the goal is to keep exports out – whatever their source.

 

Comment: Is Mogherini Serious About ASEAN?

EU High Representative/Vice-President Federica Mogherini raised some eyebrows among palm producers this week in an interview with the Nikkei Review. When questioned about the palm oil ban under the EU RED, she stated:

The EU is not banning palm oil. What we are doing is taking the climate emergency that our world faces seriously. The EU has for a long time subsidized renewable energies to reach the ambitious climate goals we set for ourselves. We will continue to do so; but the EU also wants to be careful to subsidize those energies that are truly renewable and sustainable. The EU, therefore, decided to phase out subsidies to palm oil if it is produced in an unsustainable way. So this is not about hampering imports or market access but about subsidizing less. And we are confident that what we are doing is in line with our WTO obligations.

The comments have raised eyebrows for a number of reasons.

First, she has said it’s phasing out palm in the RED if it is produced ‘in an unsustainable way’. This implies that existing sustainability schemes – MSPO, ISPO, RSPO and ISCC – aren’t sustainable. And given that the RED’s Delegated Act makes a future certification pathway difficult, if not impossible, it casts doubt on any certification scheme being considered sustainable.  How does this this sit with existing European initiatives like the Amsterdam Declaration? Several European governments have committed to that Declaration; is the Commission now dismissing it?

Second, she says she’s confident this is “in line with WTO obligations”. We probably should forgive Mogherini for simply reading Commission talking points, but there are at least two countries – Malaysia and Indonesia – that are confident that the opposite is true (see above).

Related to this, we’ve been shown some personally signed advice from no less than Jean Luc Demarty also suggesting that Mogherini is wrong – we’ll have more on that in weeks to come.

Third, and this is a broader point about EU engagement in ASEAN, she says the EU “has decided to enhance its engagement on security issues in and with Asia, and we are intent on delivering on that objective.”

This is straight from a policy delivered in 2016, which effectively only covered two things: maritime security (which is really only via the International Maritime Organization) and communications security.

As defence analysts have pointed out, the only real influence the EU has in the ASEAN region on security is via defence equipment sales. This is now under threat – because the EU won’t play ball on palm oil – and both Indonesia and Malaysia are considering going to other countries for arms purchases.

The question Mogherini needs to be considering is whether the EU is actually taking ASEAN seriously as an equal partner. It has little regard for it on trade, and can’t offer anything on security.

The Renewable Energy Directive’s planned ban on palm oil has taken its toll on the industry, but the battle is far from over as both Malaysia and Indonesia seek to take the EU to the WTO and rally support against EU regulations in the region.

However, the EU has now opened a new and arguably more dangerous front in its attempts to restrict palm oil exports to Europe.

Last Tuesday, the European Commission published its ‘Communication on Deforestation’.

The Communication is the culmination of work on deforestation by the EU that has been taking place in one form or another for more than a decade (FLEGT, the European Commission’s ‘Clean Planet for All’; the European Consensus on Development, and others).

The Communication is significant in that it takes technical work completed by the Commission over this time and distils it into actions for the next Commission to undertake from November onwards.

There’s been a political shift here. The Commission has re-named “EU Action Against Deforestation and Forest Degradation” to “EU Action to Protect and Restore the World’s Forests”. This is stylistic, but there’s also a notable attempt to soften the language.

Palm oil is mentioned more than other commodities, but the Commission hides the fact that its deforestation footprint is lower in a footnote from the Feasibility study 2018 – part I – table 4-3:

EU’s share of imported embodied deforestation (1990-2008) amounts to:

Soy	4.45 million ha (Mha) – 39%
Cocoa	0.6 Mha – 27%
Coffee	0.3 Mha – 27%
Palm Oil	0.9 Mha – 17%

The Commission omitted the percentages from the body of the report, and buried them in the footnotes. Why could this be? Perhaps because the data show that palm oil is not the most significant driver of deforestation, compared to soy, cocoa and coffee. The data severely undermine any case the Commission or Parliament may want to make that palm oil should be the primary target for any EU action.

But let’s look at what the main part of the document actually says. The EU lays out five priority areas in relation to deforestation. These are:

• Reducing consumption of products with embedded deforestation;
• Work with exporter countries to reduce pressure on forests;
• Strengthen international cooperation on forests;
• Encourage sustainable finance;
• Support forest information sharing.

Seems pretty benign, right? None of these stand out as particularly deleterious to the palm oil sector or objectionable. But there are some potential problems. These are likely to be the result of: a) the makeup of the new European Commission; b) what the European Commission has said it will do; and c) the previous form of both the EU and NGOs on this.

 

The New European Commission

 As we’ve explored in recent weeks, the European Parliamentary elections brought a ‘Green Wave’ of policy promises and Parliamentary seats to the Greens, Renew Europe and other parties focused on environmental campaigning.

This, in turn, skewed the policy ambitions of the prospective Commission President towards Green issues. Ursula von der Leyen, who was elected with a reasonably thin margin, promised a ‘Climate Plan’ to significantly reduce emissions, as well as a carbon border tax.

The latter would require product exports to the EU to meet certain conditions on carbon emissions or face tariffs.

Although the latter is aimed at steel importers, there’s no reason it couldn’t be introduced on other products, such as processed agricultural products – and here we’re thinking of palm oil.

This would not be the first time that EU policy moved towards punishing developing world exporters rather than forcing EU countries themselves to reduce their own emissions.

While details remain unclear on either the tax or palm oil, it’s reasonably safe to say that von der Leyen will be pushing a green line in order to have a pragmatic relationship with the new, much-greener Parliament. In a fractured, fractious European political scene, one of the few elements that could unite the disparate political forces would be protectionist actions targeted at so-called ‘deforestation-linked commodities’. Palm oil producers would inevitably find themselves very high up such a target list.

 

The actions

The EU lays out a series of actions in the Communication. As with the priority areas, these are not novel – they were always part of the Commission’s Action Plan on Deforestation.

The difference is that if this Communication is adopted, the Commission has a mandate to implement some of these actions, pending an endorsement by the European Parliament and Council.  This is almost a sure thing.

Here are the standouts:

“Encourage the strengthening of standards and certification schemes that help to identify and promote deforestation-free commodities through, among other things, studies on their benefits and shortcomings and by developing guidance, including assessment based on certain criteria to demonstrate the credibility and solidity of different standards and schemes.”

The EU has made no secret of the fact that it generally dislikes MSPO and ISPO. The Parliament, too, has often stated that RSPO is flawed. The Parliament’s preferred option was to have its own standard. Having existing standards meet certain criteria is a ‘backdoor’ way of developing an EU standard. It would be smart policy, too. Simply brushing aside RSPO and MSPO/ISPO is misguided. Also, what would be the role of existing EU efforts – such as the Amsterdam Declaration – here? It’s not clear and will be one of the elements the Commission has to figure out as the Communication is turned into a concrete set of proposals over the coming weeks and months.

“Assess additional demand side regulatory and non-regulatory measures to ensure a level playing field and a common understanding of deforestation-free supply chains, in order to increase supply chain transparency and minimise the risk of deforestation and forest degradation associated with commodity imports in the EU.”

This isn’t a measure per se, but a continuation of the idea that trade in commodities such as palm oil should be regulated by the EU. This may end up recommending certain regulations be adopted further down the track. But in the meantime, it will serve as a platform for kicking around ideas on mandating sustainability standards.

“Build on the already existing monitoring tools, and establish an EU Observatory on deforestation, forest degradation, changes in the world’s forest cover, and associated drivers. The objective of this is to facilitate access to information on supply chains for public entities, consumers and businesses.”

This is potentially a boon for the palm industry as it may end up demonstrating the smaller deforestation footprint of palm oil. However, the problem will be if the Commission hits palm oil first – which is precisely what it did with its special report on palm oil certification.

Rather than underlining that palm oil has more certification coverage than any other commodity, it simply gave anti-palm oil groups a platform for their position.

“Promote trade agreements that include provisions on the conservation and sustainable management of forests and further encourage trade of agricultural and forest-based products not causing deforestation or forest degradation.”

Although this should stand out as particularly egregious, it’s not as bad as it sounds. Most of the EU’s trade agreements include sustainable development chapters, but their resolution mechanisms stand apart from the ‘serious’ parts of the agreement. The problems for the EU in this regard are twofold. First, is it doesn’t necessarily hold the upper hand in trade agreements any more, largely because it is EU exporters (i.e. Germany) seeking access to other markets rather than smaller countries seeking access to Europe. Second, EU demand is sclerotic, and markets are mature. There’s no prospect of high growth any time soon. Partners are well within their rights to walk away from FTA negotiations if the circumstances aren’t right.

Address relevant aspects on renewable energy and biofuels, review all relevant aspects of the report accompanying Commission Delegated Regulation (EU) 2019/807 in 2021 and, if appropriate, revise Delegated Regulation (EU) 2019/807 in 2023.

The RED is not forgotten in this list of actions. This is not new. This was planned in the final RED text which was approved in late 2018 and in the recently approved Delegated Act. How the Commission assesses the new studies, and the latest information available, will be key to how the status of palm oil under the RED Delegated Act will evolve, for better or for worse.

 

The EU’s protectionist pattern

The RED has been a valuable lesson for palm oil exporters around the world, and should be a guiding lesson for other commodity exporters.

The EU has an established history of using environmental – and other — regulations in order to protect their own industries.

In the recent past, this includes the EU Timber Regulation (EUTR), and the Illegal, Unregulated and Unreported (IUU) Fishing Regulation. The EU’s large-scale regulations on chemicals – the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) – is another example.

In the case of the EUTR, there was a clear ambition to keep Indonesian timber and paper products off the European market. Like palm oil, there were a number of antidumping cases run in parallel. In the case of IUU, the Thai fishing industry was the target.

But how these policies are developed – and the response — follows a formula. It can be broken down as follows:

First, the EU will find evidence to suit pre-determined political purposes.

When the EU was unable to shut palm oil out the RED with faulty data in its default greenhouse gas savings values, it blithely used indirect land use change (ILUC) as a way of constructing a new case to target palm oil. When it was declared that ILUC couldn’t be measured, Brussels decided that assessing the ‘risk’ of ILUC could work as a proxy.

See the pattern here? If the evidence doesn’t fit, simply change it, or create new evidence.

One commentator has described this as ‘policy based evidence’.

Second, the EU will concede ground when its own interests are threatened.

As we’ve explained many times before, the EU gave soybean a passing grade on deforestation because of the US. In particular, the US was threatening tariffs on steel and autos coming from the EU. President Juncker intervened personally, and allowed US soybean exports to pass the bloc’s environmental standards with the stroke of a pen.

Third, the EU has moved into gaming the WTO system.

As Indonesia’s trade ministry has pointed out, the EU has moved into new territory with the RED. The EU refused to notify the RED as a technical barrier to trade, which prevented exporter countries from engaging with it via the WTO. Instead, countries such as Malaysia and Indonesia have to go straight to the dispute settlement body. Will the EU do the same with any deforestation measures?

This is particularly ironic, as the EU has spent much of the past few years berating the Trump Administration for undermining the ‘rules-based international system’. And yet here is the EU gaming the system to undermine how the WTO is supposed to work.

Finally, prolonging the debate gives domestic industries a voice.

By accident or design, a communication like this has the effect of prolonging the debate. But the prolonging allows domestic constituents – particularly farmers and activists – to conduct more lobbying and build a louder political case.

Exporting countries simply can’t compete with this in Brussels. They are outgunned at every turn, despite what media commentators might say about the ‘palm oil lobby’.

The RED debate might be drawing to a close, but the Deforestation Communication battle is about to begin.

Palm at the WTO shifts gears

Reuters has reported that Malaysia will put forward its World Trade Organization (WTO) case on the EU’s revised Renewable Energy Directive (RED II) and palm oil sooner rather than later. Reuters reports that Primary Industries Minister Teresa Kok said that: “the documents are with the attorney general chambers now… They are assisting us… [and] helping us identify experts who can argue the case in the WTO.”

It is also understood that Indonesian President Jokowi has asked the Indonesian trade ministry to pursue Indonesia’s WTO case as soon as possible.

Malaysia and Indonesia also discussed joint action at a Council of Palm Oil Producing Countries meeting.

Malaysia, Indonesia and a number of other palm oil exporting countries have previously raised the RED II at WTO Technical Barriers to Trade (TBT) Committee meetings.

The EU is yet to put in a notification to the TBT Committee — standard practice when introducing a technical regulation that may impact the import of certain goods.

There’s a reason for this: The EU considers that the RED II falls outside of the TBT. This point was made in a letter sent by the EU in early May.

Indonesia’s response – made at the WTO at the beginning of this month – was furious:

“We beg to differ with the EU on this important issue. The requirements stipulated in the delegated regulation are technical regulations to a product and or group of products which are clearly fall under the TBT agreement … The structure, design, and expected operation of this standard are expected to discriminate biodiesels generated from palm oil against other biodiesel products produced within EU members countries, such as rapeseed and sunflower.”

Indonesia also makes that point that EU actions are “alarming” and “threaten the credibility of TBT Committee.” The point Indonesia makes is that by arguing that this is not a technical regulation, the EU can regulate as it pleases, and simply wait for the WTO to resolve a case via the WTO’s Dispute Settlement Body – a process that can take years.

It’s not surprising that a group of countries including Malaysia, the US, Brazil, Canada and Australia issued a joint statement at the WTO last week, taking the EU to task for its abuse of non-tariff barriers on agricultural products. Although it relates specifically to the safe use of pesticides, the statement gives a good indication of how the EU thinks in relation to agricultural protectionism:

“Despite repeated requests in the TBT and SPS (Sanitary and phytosanitary measures) Committees over the past four years, the EU has not identified either the level of protection being sought or the specific pathways of exposure or risks that it seeks to mitigate, to justify the trade impact of these restrictions. The EU has not taken into consideration the comments of other WTO Members on draft regulations. “

What does this mean? Combined, it means that the EU is taking what is best described as a harsh approach when it comes to keeping palm oil – and other commodities – out of the EU market. Anyone thinking that the negative palm campaign will end with biodiesel needs to think again.

 

EU Ambassador to Malaysia Speaks to Smallholders; Disputes Their Campaign of EU Ban

On a related note, the EU’s Ambassador to Malaysia, H.E. Maria Castillo Fernandez, appears to be courting controversy by telling Malaysia’s smallholders that the EU’s ban on palm-based biofuels will not affect them. This seems to be a direct counter to the claims of smallholders the EU is banning palm oil biofuels.

According to Malaysian Insight, Fernandez told groups of smallholders in Perak that the ban would not affect them because: products for palm-based biofuels only make up 1.4 per cent of Malaysia’s total exports; palm oil exports make up 4.4 per cent of the country’s total exports; and most smallholders aren’t certified.

There are some flaws in Fernandez’s reasoning.

First, splitting between exports of biodiesel (e.g. exports of fatty acid methyl ester) and exports of crude palm oil (CPO) isn’t an accurate way of measuring the amount of palm used for biodiesel in the EU. CPO can be refined in HVO (hydrated vegetable oil) plants in Europe.

Second, basic economics.  Prices are affected by demand. If demand for a commodity goes down, prices are likely to go down. Reducing the demand for palm oil – as is the case with EU policies – will likely push prices down, whether it’s going to be used for biofuels or for food and other products.

Third, the idea that ‘most smallholders aren’t certified’ is a bit of a red herring. Many FELDA operations – comprising many smallholders – are certified to ISCC standards specifically to participate in the existing RED scheme.

The price for fresh fruit bunches (FFBs) is impacted by myriad global factors in a complex market. Prices have been at historical lows. Farmers – of any commodity – will blame whatever is nearby. There were reports that Sumatran farmers were blaming President Jokowi’s moratorium for low prices, for example. However, saying that EU policies won’t impact smallholders simply isn’t true. It will affect the industry, and smallholders are part of that industry.

As President Jokowi recently said of the RED, “For me, if there is discrimination like that, I will fight because of the 16 million farmers and workers in this business.”

 

WWF: Orang-utan populations stable in Sabah

New research funded by WWF indicates that orang-utan populations in Sabah are stable – underlining that a balanced and sustainable approach to palm oil production is possible.

The WWF research showed that in Dermakot and Ulu Segama in Sabah orang-utan numbers increased from 5,376 to 5,933 individuals between 2002 and 2017.

WWF’s lead researcher, Donna Simon, said that “Sabah is on track to conserve this critically endangered species.”

However, the report also stated that there were population declines of 15 and 30 per cent in two separate oil palm plantation areas. This isn’t entirely surprising; plantations aren’t the orangutan’s natural habitat.

However, this is in line with Sabah’s overall conservation strategy of establishing forest corridors and connectivity between forest areas within a mixed landscape of forest and plantation.

According to Sabah Wildlife Department’s Augustine Tuuga, “This connectivity, through wildlife corridors that link patches of forest, is key to orangutan survival at oil palm plantation landscapes, especially in the lowlands of Sabah.”

The Sabah approach is a clear indication that sustainable palm oil that allies with genuine protection of orang utan is truly possible – policymakers, purchasers and consumers should take note.

The only bad news in the report was the misleading headline from Reuters.

 

CIRAD: Don’t Ban Palm Oil

A leading scientist from the French Agricultural Research Centre for International Development (CIRAD) has argued that banning palm oil will lead to more deforestation.

Jean-Marc Roda, forester and senior scientist with CIRAD, highlights that future demand for vegetable oils – partly driven by a switch away from animal fats and growing populations – is ultimately leading to more land being required for cultivation. Roda argues that palm oil is the solution, not the problem:

We know that consumers around the world will eventually demand around 250 to 350 million tonnes per year more vegetable oil than today. Soybean development in Brazil and palm plantation development everywhere else will continue because the main demand is not in the countries having interests in opposing their development.

Without palm oil, the future demand for vegetable oils would require cultivation land areas almost as large as the Australian continent.

Roda also highlights the falling levels of deforestation in both Malaysia and Indonesia, to the point where links between oil palm expansion and deforestation are no longer readily apparent:

Some palm plantations were established in lands that were previously forested, but the real share of deforestation caused by palm oil plantations peaked in the 1990s and has decreased consistently since. It is now almost non-existent in Malaysia (below 1%). In Indonesia, the peak was between 2000 and 2008, and has now decreased to 5%.

It’s also worth remembering that the European Commission stated expansion for palm oil was only responsible for around 11 to 16 per cent of deforestation in Indonesia between 1990 and 2010.

This goes some way to explaining why a large number of actors in both Malaysia and Indonesia have given behind-the-scenes support to the Amsterdam Declaration. In their view, much of the palm oil going to Europe is already sustainable and – depending which country or jurisdiction they’re in – doesn’t contribute to deforestation.

 

And finally … a housekeeping note from Palm Oil Monitor: There is likely to be some accusations in the coming days that Palm Oil Monitor is part of some kind of industry lobbying initiative. This is completely untrue: the platform is ours, and we publish stories that interest us, including information passed to us by our contacts in government, companies, NGOs, around the world. Since we started the site, we have benefited from support from various sources (including industry), which helps us to keep the newsletter going; we’re grateful for that, but we don’t lobby or cheerlead for anyone. We took a break over June and July following the EU elections, but we’re resuming normal service this week.

The EU’s Version of Cooperation on Palm Oil

The European Commission launched its Indonesian ‘Blue Book’ – a broader strategy on bilateral development cooperation – earlier this month. The launch is generally a time of EU self-congratulation.

This year, however, it was overshadowed by the Renewable Energy Directive (RED).

The Blue Book generally makes broad claims about the contribution of its programs to sustainable development in Indonesia. This year the Chargé d’Affaires of the EU Delegation to Indonesia, Charles-Michel Geurts, had to play it defensively. Geurts claimed that the EU did not have ‘an obsession’ with imports of palm oil. He said:

Indonesia wants to produce sustainable palm oil and has a whole set of policies to do that, while the EU wants to consume sustainable palm oil, so our paths are bound to meet between sustainable palm oil production and sustainable palm oil consumption.

For the moment, we fully understand the worries and concerns or even the indignation of our Indonesian friends because when you talk about palm oil you talk about 17 million people who directly or indirectly depended on palm oil, the commodity that has been a driver to get out of poverty.

Geurts happily insisted that the Commission’s assessment of drivers of Indirect Land Use Change (ILUC) from palm oil are correct. He also stated that:

We don’t want as the EU to promote deforestation and to promote degradation of peat lands by subsidizing and by heavily supporting biofuels, like we have in the past by creating this huge market.

So, the EU will support and subsidize the significantly larger quantities of deforestation that come from soybean – and its associated biofuels.

Finally, Geurts also asserted that the EU and Indonesia would meet halfway on sustainable production and consumption of palm oil.

However, this is simply not reflected in the EU’s activities. The only mention of palm oil in the Blue Book is support for Indonesia Sustainable Palm Oil (ISPO) certification. Yet, the EU supported program is an NGO-driven program to completely redefine ISPO. It would make more sense for the EU to strengthen the existing system as a standard that can be endorsed by Indonesia’s national standards body – along the lines of Malaysia’s MSPO.

This year’s Blue Book – and Geurts’ comments – underline that the EU’s contradictions on palm oil and Indonesia are firmly in place. They can be interpreted as follows: we’ll cooperate on economic development, but only on European terms. This is not genuine cooperation.

 

The EU Election Fallout Continues

 The ‘Green Wave’ from the EU elections mentioned in last week’s issue has continued to underline the broader threats to palm oil in the European market. The election results appear to have – within just a few days – emboldened the EU’s Green parties.

First, Spain’s Socialist Party has written to the Commission requesting a substantial discussion on the introduction of carbon border taxes. The idea behind carbon border taxes is that if goods are produced under conditions where more carbon is emitted, a levy is introduced. The discussion thus far has pointed towards steel, but the RED has also been used as an example.

Spanish Energy Minister Teresa Ribera and Budget Minister Maria Jesus Montero wrote:

“If Europe ends up importing goods produced under lower climate standards, the emissions we avoid will be counterbalanced, or even overcome, by those generated in countries where goods are manufactured.”

A scenario that commodity and food exporters need to consider is if this kind of levy will be applied to vegetable oils, oleochemicals or other goods, based on a deforestation profile.

Second, the Financial Times recently profiled a high-profile French socialist civil servant – who at one point worked in the office of former President Francois Hollande – who switched his vote to France’s green candidates. The article also pointed out that the Greens’ leader Yannick Jadot is now one of France’s most popular politicians. Jadot was previously a campaign leader for Greenpeace in Europe between 2002 and 2008.

It’s also worth noting that there may be new battlefronts between MEPs and the Commission on RED implementation. The design and implementation of RED assurance schemes is the responsibility of the member states, with some suggestions that there will be greater possibility of fraud in some states. Politico this week reported a Commission official stating that “the member states are for instance responsible for the design of support schemes, which may affect the risk of fraud, and the supervision of certification bodies that are conducting independent auditing under the voluntary schemes”.

 

French Activists Chase Bolloré

France-based activist group Sherpa has filed a civil lawsuit against the Bolloré Group in France. Sherpa believes that the Bolloré group has a substantial influence on Socapalm, a plantation operation in Cameroon in the absence of a significant shareholding

Sherpa is arguing that the Bolloré Group has a legal obligation to force Socapalm to uphold an action plan it put in place in 2013 to support local communities. The action plan was put in place following a complaint against Bolloré by the same NGO group.

This complaint refers to a so-called agreement between Sherpa – and its NGO partners — and the Bolloré Group.

The agreement was made after the NGO complained to France’s National Contact Point (NCP) for the OECD in 2010. The complaint argued that Bollore had breached the OECD Guidelines for Multinational Enterprises.

In 2013, France’s NCP mediated an agreement between Bollore, the local communities and the NGOs involved, which it followed up until 2016, noting delays to implementation. Part of the problem was that Bolloré – although a major shareholder of the Socfin holding – couldn’t actually force its subsidiaries to undertake any management action at all.

The case was then handed to Belgium’s NCP.

The Belgian NCP halted its role in following up in 2017, noting Socfin’s progress on the ground.  More recently, Socfin has become a member of the Earthworm Foundation – formerly TFT. It’s also worth noting that Socfin has made a strong commitment to RSPO.

In our view, Sherpa went after the wrong target. It effectively argued that Bolloré was ‘competent’, i.e. it could make changes at Socfin. But our understanding is that:

• Bollore is a 38% shareholder in the Socfin Group
• Socfin Group owns 59% of Socfinaf
• Socfinaf owns 63% of Socapalm.

That does not mean that Bolloré can force the hand of management at Socapalm, particularly given that it is not a majority shareholder in Socfin. A major shareholder or managing director from one company may sit on the board of another, but that does not mean that they are able to out-vote other shareholders. Indeed, some major shareholders – even majority shareholders – don’t take up the number of board seats they are able to.

It’s worth noting that some of the actions in the action plan needed to be implemented with the shared responsibility of the Cameroonian government.

Sherpa is following a reasonably straightforward pattern established by NGOs in the United States, where the success or failure of the suit is actually irrelevant; the publicity gained from the suit contributes to a campaign narrative – and may yield document discovery on the way.

 

Musim Mas Announces POIG Compliance

Musim Mas has announced that it is the first company in Southeast Asia to have implemented the Palm Oil Innovations Group (POIG) standards.

The POIG standards – which are best described as a tougher version of RSPO – first rose to prominence when NGO groups were attempting to have tougher standards on new planting and high carbon stock brought into RSPO.

But after RSPO introduced HCS and a broader suite of obligations at last year’s General Assembly, does this mean POIG is irrelevant?

Not quite. One of the other key differences between RSPO and POIG is that POIG allows greater levels of scrutiny by POIG members – particularly the NGOs themselves – on member operations. It will, therefore, always be standard of choice for NGOs even if the standards are almost identical.

POIG did previously have broader support from plantation companies in the region, but this also appears to have fallen away since HCS was adopted in RSPO.

So what explains Musim Mas’ ongoing involvement?

Musim Mas has always been ahead of the green curve in relation to other Indonesian companies. It has a high degree of vertical integration and is therefore able to segregate its supply chains. This means it can produce CPO, oleochemicals and other derivative products along that supply chain. For companies that are highly sensitive to criticism in Western markets – such as L’Oreal, also a POIG member – this kind of assurance is significant.

For Musim Mas and its clients, this ability to market their products so far along the supply chain is a good hedge against NGO attacks. For NGOs, it can be used as a self-serving example: they can claim that greater NGO scrutiny creates better results.

The European Parliamentary Elections: Implications for the Industry

The European elections took place last week (23^rd to 26^th May), and the new makeup of the European Parliament announces change. This will have serious implications for the attitude towards palm oil going forward – both within the Parliament itself and, by association, within the European Commission.

A change in the Parliament means a change to the Commission – and therefore the approach to palm oil.  The workings between the Parliament, the Commission and the Council of the EU are difficult terrain to navigate for most people outside of Brussels.  The Commission President leads Commission programs. The President – on paper – is endorsed by the European Council, but the Council is supposed to take account of the wishes of the European Parliament. The Parliament’s two largest blocs – the centre right European People’s Party (EPP) and the centre left Socialists (S&D) – have lost their absolute majority in the Parliament, paving the way for Liberals, Greens, and various populists to gain power as potential ‘kingmakers’ in the negotiations. There will now be a protracted period of horse-trading between parties – including the Greens – to determine who can or should nominate the ‘lead candidate’ for Commission President.

The ‘Green Wave’ is real. The Greens bloc (known as Greens/EFA) increased its representation from 52 seats to 69 in the 751-seat Parliament. This is a negative for palm oil. But that is not all. The new ALDE group (liberals) campaigned promoting more ‘green’ policies and so did the Socialists. That is a big shift towards environmentalism, as pointed out by the Commission’s Secretary General Martin Selmayr, who emphasised that this Green ‘wave’ will have a strong impact on the next Commission’s program. And let’s not discard the fact that the Greens/EFA lead candidate Bas Eickhout MEP has been a vocal opponent of palm oil. Earlier this year he stated the following on the Renewable Energy Directive:

The good news is that after years of the Greens/EFA group fighting against the incredibly damaging effects of mass palm oil production on forests, animal habitats and the environment, the European Commission finally acknowledges that palm oil is not a sustainable biofuel.

The bad news is that the loopholes in the proposal are too big and will allow the big producers of palm oil to continue to wreak destruction. Exemptions, such as for ‘unused’ land which might serve other important purposes and those for small-holders, while size is no guarantee for good practices, need to be revisited in order to make this proposal strong enough to protect forests, the communities that depend on them and the animals that live there.

But it wasn’t a uniform swing to the Greens. The Greens/EFA gained ground in Germany, France and the UK. However, they gained little or no ground in southern or eastern member states. In Italy and Poland, for example, they failed to win any seats, and went backwards in countries such as Austria and Sweden.  What’s also notable is that the GUE/NGL (European United Left / Nordic Green Left) – the more radical of the Left wing parties, aligned with the communist parties – went backwards in most instances, going from 52 seats to 38. It’s worth remembering the GUE/NGL is home to MEP Katerina Konecna, who led the charge in the European Parliament against palm oil, sponsoring major actions against palm oil. For Konecna, the GUE/NGL representation from the Czech Republic has gone from three seats down to one, leaving her clinging on by her fingernails.

 

EU Consultation on Deforestation Regulation Skewers Palm

The Commission has published the results of its Public Consultation on ‘Stepping up EU Action against Deforestation and Forest Degradation’. The consultation is part of the EU’s longer-term work on deforestation, which will likely see the introduction of a deforestation regulation, i.e. a rule that limits imported commodities that have links to deforestation.

The consultation asked respondents to nominate which commodities should be addressed by the regulation. More than 80 per cent nominated palm oil, well ahead of meat (54 per cent) and soy (52 per cent). This is a striking indication of how skewed the deforestation and anti-palm debates in the EU have become. It is particularly striking given that EU research has clearly demonstrated the deforestation footprints of meat and soy outstrip that of palm by as much as 500 per cent.

Just as important is the means by which respondents think the EU should achieve goals ‘against’ deforestation. An overwhelming majority think that demand-side measures should be taken by the EU – over and above voluntary mechanisms. In other words, regulation that will impact trade.

An incoming green-leaning Commissioner will clearly take a tougher line on imports of palm oil – and a deforestation regulation will be the tool.

 

Sustainable Sourcing: Should Retailers Step Up?

British sustainable sourcing consultant Penny Coates has given a good overview of what UK retailers are seeking from suppliers when it comes to deforestation, and in turn, what consumers are demanding from retailers.  Overall, it’s a dismal situation.

According to Coates, retailers are increasingly demanding both sustainability and traceability from suppliers. And consumers want to be reassured that their product is sustainable or traceable, but they don’t want that decision to be made complex. This latter point about consumer information is very much in line with health labelling, where there is some evidence that more labelling information on fat content, for example, has hindered health campaigns.

In other words: consumers want a broad reassurance from brands and retailers that their products are sustainable, but they don’t want specifics.

This is problematic – because sustainability is complex. Coates uses the example of RSPO as a common point on sustainability for palm oil, but as has been pointed out many times before, barriers to smallholder certification remain high.

NGOs and some retailers – specifically Iceland and Selfridges – have not made communicating the sustainability of palm oil any easier. Why? Because they have simplified sustainability to meaning nothing more than being ‘deforestation free’ or ‘palm oil free’.

Despite the claims by Greenpeace and Iceland, palm oil certification standards are strong.

There are some useful lessons to be learned from the paper certification wars that took place in the 2000s. There was significant pressure on major companies from NGOs to only use FSC certified paper. But many companies were adhering to PEFC certification. The default position for purchasers eventually became that they would purchase FSC-certified where possible, and failing that, PEFC-certified.

This position helped break the ‘paper is destroying rainforests’ argument that was common at that time and – ironically– saw a bigger shift to plastic packaging. The choices on certification assured retailers, and retailers were then able to assure consumers.

This is a workable solution for palm oil. RSPO, MSPO and ISPO can be the choices for retailers. There is no excuse for retailers not to buy certified palm. What they need to do now is let consumers know that palm oil – like paper – is ok.

RSPO Smallholder Standard: Consultation Closing

RSPO’s third round of consultations for its smallholder standard is about to close – on June 8. The consultation represents the end of another stage of what has been a particularly long road in the implementation of its smallholder strategy.

Since its inception, RSPO had a difficult relationship with smallholders. This is not unique; it reflects two tensions present in implementing any environmental standard. Smallholders generally operate with lower standards and have the slimmest margins; higher standards cost money and erode margins if there is no price premium. The other tension is between increasing breadth of uptake to include smallholders without sacrificing stringency or integrity.

In 2005, RSPO introduced the Taskforce on Smallholders (TFS), which later evolved into TFS 2 and the Working Group on Smallholder Finance in 2010. The latter had limited success in having smallholders adopt RSPO standards.

The most recent strategic iteration — the Smallholder Strategy – was introduced in 2015. This was a broader recognition that an ad hoc approach to smallholders simply wasn’t working.

So, why did it take nearly 10 years for RSPO to get it together on smallholders, and why the push for completion now?

In our view there are three reasons.

First is that demand growth for RSPO is flattening as demand for vegetable oils in Europe flattens. The standard was completed at what is best described as a complex time for RSPO. The introduction of the ‘no deforestation’ requirements in the standard means there is greater scrutiny on the standard and a bar to new entrants. Supply growth has to come from somewhere, and the only way for RSPO to increase its revenue base is to increase certified volumes.

Second, and this is related to the above, some mills in Indonesia in particular are looking to certify more of their supply chain – including smallholders. As has been pointed out many times before, Western procurement standards have a habit of excluding smallholders from supply chains. This was particularly the case for Unilever in Indonesia.

Third, Malaysia has introduced a mandatory MSPO standard for smallholders, for which the government is providing financial support for certification and audits. Similarly, ISPO, although not as well resourced, provides Indonesian smallholders an alternative with a lower level of compliance. Purchasers in European markets may view a smallholder with MSPO certification as meeting sustainability procurement requirements. It would be difficult to argue with from a broader sustainability perspective.

Pressure has grown for RSPO to take a more inclusive approach to smallholders from all sectors. But it has been these most recent commercial pushes – particularly the prospect of being crowded out by other standards – that appear to have given it the final shove.

The completion of the smallholder standard is well overdue, but very welcome. It will provide a certification pathway for farmers supplying major mills selling into Europe in particular.

This is, however, provided that the standard does not get shot down by overzealous NGOs within the RSPO membership. At last year’s Roundtable there were numerous objections to any loosening of standards for smallholders. But here’s the problem: if it’s not accessible, it won’t get used. This is something for those contributing to the consultation to keep in mind.

FAO: Oilseeds Outlook 2020

The United Nations Food and Agriculture Organization (UN FAO) has issued its oilseeds outlook for the next financial year, and there are some highlights for palm growers.

But the front-and-centre question for many growers is whether the US-China trade spat will provide any relief from low prices.

When the US and China engaged in their first round of tit-for-tat tariffs, there were some analysts that argued palm could gain – if soybean demand fell in China for crushing, palm oil could take up the slack.

This didn’t eventuate. The lack of demand for soybean in China brought down vegetable oil prices across the board as inventories were depleted.

There is some concern this will happen again. The current round of tariffs hasn’t done a lot for prices – though there have been some gains over the past week – but the FAO paints an interesting picture for oils, particularly palm.  Here’s their take:

Stimulated by low international prices, global oils/fats consumption is forecast to expand by about 4–4.5 percent year-on-year. Growth is expected to be driven by palm oil and, to a lesser extent, soybean oil, resulting in palm oil further increasing its share in total oils/fats uptake.

Meanwhile, rapeseed oil consumption could fall on the back of reduced availabilities. As a group, developing nations in Asia would continue to drive the expansion in global oils/fats uptake. While consumption growth could decelerate in China, mirroring slower economic growth, stable growth is envisaged in India. At the same time, a marked acceleration in uptake is expected in Indonesia, which could account for one-third of global consumption growth. Sizeable gains are also anticipated in Brazil and the United States of America, whereas consumption may contract in the EU.

In other words, the production-utilisation gap for oils and fats appears to be narrowing right now. This is a good sign for farmers.

Beef is getting the palm treatment, but there’s a catch

European NGOs have launched a campaign against EU supermarket chains for using beef from Brazil’s JBS, the world’s largest beef producer. According to ‘Illegal Deforestation Monitor’:

Sainsbury’s, Asda, Lidl and Carrefour are among the international brands potentially fuelling illegal deforestation in Brazil’s cattle industry as they continue to stock corned beef from a firm implicated in numerous environmental and human rights abuses.

This will all sound very familiar to those in the palm oil industry. And to some, not a moment too soon. The industry has gone to great lengths to point out that the deforestation footprint of livestock is around 10 times that of palm oil.

But there’s a catch. Campaigners appear to be using the JBS story to push greater levels of regulation on imports of forest risk commodities across the board.

A long history of examples such as this one has led campaigners and parliamentarians across Europe to conclude that the only way to prevent EU consumers from unwittingly contributing to overseas deforestation – including illegal deforestation – is through government regulation. An EU law already exists which requires importers of timber to ensure their wood is legally sourced, and there are growing calls for similar legislation to be enacted for other ‘forest risk commodities’ like beef.

So, although this would be an opportune moment for the palm oil industry to pile on to an anti-beef campaign, the goal here is more regulation for beef, soy, palm – and anything else that gets imported to the European Union. And for those who are keeping track, this campaign has been supported by the UK’s aid agency.

Demarty: WTO reform necessary to prevent ‘law of jungle’

Jean-Luc Demarty, Director General of the European Commission’s Trade Directorate, has told reporters that a WTO reform should be a priority for the next European Parliament and Commission:

The major issue in trade policy for the next Commission just at the beginning of its mandate, and also for the new European Parliament, is not necessarily swiftly developing new agreements … but preserving the WTO system and reforming it … If we are not able to do it, the stakes will be enormous … The status quo is not sustainable … If there is no reform to the WTO system, in particular on the rulebook and subsidies, the WTO system will be no longer relevant … It would become the law of the jungle.

To anyone outside of Brussels, this might seem strange. The EU is often more than happy to push and flaunt WTO rules to their absolute limit. The RED is a perfect example. But for the EU, the WTO is a bureaucratic and legalistic system that provides adjudication when it pushes the limits: it is the bloc’s shield in trade matters.

If that shield falls apart – and it is currently being threatened by the China-US trade spat and potential bilateral resolution – then the EU may find itself subject to any number of unadjudicated retaliatory actions, which will be particularly damaging for an economy like Germany.

Adding to this, the nature of the EU agreements means that trade policy is handled out of Brussels; this generally means that trade actions must be negotiated among the EU members before action can be taken. This makes nimble and agile action – similar to US unilateralism – particularly difficult.

If the EU wants to get greater buy-in from the ASEAN region, it should probably consider being a more reliable trading partner.

EU recyclables are now Malaysia’s problem

POM does not often heap praise upon Greenpeace, but the NGO’s most recent advocacy efforts have highlighted the glaring hypocrisy in the EU’s management of environmental waste.

Since China introduced a ban on the importation of recyclable waste last year, there has been a flood of exports of post-consumer recyclables from the EU to Southeast Asian countries, such as Malaysia, Thailand and Vietnam. Some countries have introduced stricter import licensing measures, though their effectiveness is yet to be seen.

The resultant problem – unmanaged piles of European rubbish in semi-urban areas – is a health and environmental problem.

It also underlines that much of European sustainability policy can be considered virtue signalling with no positive outcome. Very few Westerners know – or care — that recyclables are simply exported. Or that banning palm oil has a negative impact on Indonesian and Malaysian farmers …

There are a couple of signals here.

First, Europeans don’t want to pay. European companies and consumers have little appetite for a premium on CSPO. They also don’t want to pay to manage their own recycling and waste problems.

Second, Europeans think environmental problems don’t need managing in Southeast Asia if they create them. Deforestation for food production and exports is a big problem for Europeans, apparently. But burning piles of exported European recyclables near major urban areas in Kuala Lumpur, Hanoï and Bangkok? Not Europe’s problem.

RED update

The Renewable Energy Directive’s Delegated Act has now moved past its approval date of May 13^th. So what is actually happening? Here’s a summary of what we’re hearing on the ground.

Neither the EU Parliament nor the Member States have objected: so the Delegated Act will become a reality. It will take effect in 2021 … but a lot could happen before then.

This week on May 22, DG Energy is set to meet with Member State representatives to discuss the Delegated Act.

It’s highly likely that this meeting is being pushed by the Member States in order to wring some concessions out of Brussels – and therefore salvage the relationships with ASEAN. This is important for a number of reasons.

• There are member states that stand to lose from the Delegated Act. A country like the Netherlands will see its traded volumes of palm oil drop significantly, harming transport and logistics. Countries that don’t produce rapeseed will have to contend with simply paying more for renewable fuels – with no real economic gains.
• Some member states don’t want to see a trade war with ASEAN escalate. The EU’s foreign and trade policies are a little at sea at the moment. The US is threatening auto tariffs, and its relationship with China is fragmented. Declining relations with ASEAN will add to this mix. ‘
• Member states are also fearful of direct action, as delays to liquor shipments in Indonesia have shown. According to our sources, Indonesian vice-president Jusuf Kalla told EU officials in his bilateral that Airbus purchases and dairy purchases could be next on the disruption list.

There are three other wildcards in the mix right now.

First is the European Parliamentary elections, which take place this week. Latest polling indicates that the EU’s Green Party (Greens EFA) is set to gain, as is the Alliance for Liberals and Democrats for Europe (ALDE). Greens EFA is a clearly anti-palm party, and ALDE, although somewhat centrist, has demonstrated antipathy towards palm oil. It supported the European Parliament’s proposed ban on palm oil last year.

Second is different efforts by ASEAN countries to garner EU support. Indonesia recently hosted a study tour of plantations in Riau, with officials from Belgium, Spain, Finland, Ireland, Sweden, Hungary, the Netherlands and the United Kingdom, plus a representative from the Food and Agriculture Organization. The objective was to underline the possibility of using ISPO as a guarantee against land use change.

Third is the EU’s relationship with the US. POM readers will remember that the US and EU brokered a deal on soybean purchases. The EU fast-tracked soybean certification into the RED mix, and gave soybean a green light for indirect land-use change (ILUC) risks under the Delegated Act. It is understood that this was done in order to hold off tariffs on EU auto exports. The deadline for those tariffs was last Friday, but President Trump has now extended that deadline by six months. It is possible that the EU will renege on the soybean deal if Trump eventually pulls the auto tariffs trigger.

Malaysia stops pulling punches, calls out EU’s ‘trade war’

Malaysia’s Minister of Primary Industries Ms Teresa Kok has called the EU’s Renewable Energy Directive (RED) “a form of trade war”, as she visited European capitals to press the case for palm oil in the region last week.

According to news reports the Minister said:

We see this as a form of trade war by the EU against Malaysia and Indonesia as palm oil-producing countries … We will definitely look at what are the trade items that we import from Europe and we will look at other countries (to source them).

The comments echo those made by Prime Minister Dr Mahathir Mohamad last month when speaking of the RED as a protectionist instrument for EU farmers:

To do that kind of thing to win a trade war is unfair … Trade wars are not something we like to promote but on the other hand it is grossly unfair for rich people to try and impoverish poor people.

The Minister’s statements represent something of an escalation for Malaysia in the ongoing RED debate. Up until this point, Indonesia has been the more politically aggressive of the two, imposing quotas on EU spirits and confirming preparatory stages of filing a WTO complaint.  But, as the dust settles from the Indonesian election, Malaysia is now doing some of the punching.

Franky Widjaja: The EU will Get Their Karma

Franky Widjaja, the head of Golden Agri Resources (GAR), has also thrown his weight into the ring.

Last week Widjaja told Reuters journalists, “I believe in karma, and I think [the EU] will get their karma,” in relation to the RED.

Widjaja believes that some sort of compromise solution is forthcoming: “At the end of the day you need to sit down, after you fight and you are tired, and you compromise … Everything is like that in the world.”

GAR has had a particularly tough road in terms of altering its environmental management practices – and image — for its palm oil operations. Sinar Mas negotiated confidently with Greenpeace for both its palm and pulp/fiber operations.

Although Greenpeace might agree to a negotiated solution, EU legislators and regulators may not have the same goals in mind. As we’ve pointed out many times before, EU politicians and farmers really are seeking to limit palm’s access to the EU market. Unlike a feud with Greenpeace, a ‘trade war’ over vegetable oil may never end.

Mixed signals from Germany

To add to the current confusion over the RED, Germany’s Ambassador to Malaysia Nikolaus Graf Lambsdorff has made some odd comments to the New Straits Times in relation to palm oil. See as follows:

“Germany is not going to ban the palm oil trade from countries like Malaysia …However, other European countries have been talking about reducing and maybe stop using the natural resource.”

The German Government may not ban palm oil, but the European Union is doing a very good job of doing so, and Germany has been part of every EU conversation on this issue. Thus far we haven’t seen any evidence of German officials in Brussels taking the side of palm oil. So, Germany has been complicit in the banning of palm oil biofuels.

“We need the palm oil as it cheap and sustainable.”

Adding to the above: why is the German Ambassador prepared to call palm oil sustainable in a radio interview, but not advocate it as sustainable within European energy policy? Germany has not objected as palm oil has just been damned as “High Risk” in the Delegated Act.

“Malaysia should also reduce the dependency on palm oil and maybe should stop using it in the few years to come as many other European countries are following suit.”

Finally, this comment speaks to broader knowledge of economic development – or lack of. Palm oil is the country’s main agricultural crop. As a country develops, agriculture’s share of GDP for that country drops.  Malaysia’s current GDP share for agriculture is a little above 7 per cent, on par with neighbouring Thailand or economies of similar size and stage of development such as Colombia.

Saying Malaysia should “reduce the dependency” is a little like saying the country “should become richer”.  It is possible that he’s suggesting that Malaysia should diversify its agricultural mix; however, there are no other crops that provide such high returns to land, labour and capital.

Any Europeans undertaking business – or diplomacy – in Malaysia should probably get a handle on Prime Minister Mahathir’s thoughts on the West. He said the following almost 20 years ago in Jakarta:

“Europeans have an infinite capacity to convince themselves that, whatever it is that they are doing at the moment, it is right, proper and just … Oppressive pressures are now less direct  … But the effect is the same. The ex-colonies or the South must submit to the North, to rules and regulations and policies devised in the North for the North.”

The German Ambassador would be well-advised to take note of this, and reflect.

Selfridges boycotts palm oil, Greenpeace piles on

Just as Minister Kok was visiting London, ‘one percent’ UK retailer Selfridges has stated that it will stop using palm oil in its private label products.

Selfridges appears to have followed the same model – and possibly taken the same advice as UK low-end retail chain Iceland. Like Iceland, Selfridges has stated that it is of the opinion that purchasing ‘deforestation free’ and ‘sustainable’ palm oil is not actually possible.

A Greenpeace spokesperson said that “This war against nature has to stop. Selfridges has sent a shot across the bow of an industry that urgently needs to change if it wants to remain in business.”

Yet we’re not quite sure where Greenpeace and Selfridges are coming from in this regard. RSPO adopted Greenpeace’s preferred ‘zero deforestation’ model in November. RSPO’s fully segregated palm remains unpurchased on the market.

In our view, both retailers are playing a double game.

Selfridges – like Iceland Foods — gains a point of difference as it attempts to distinguish its private label from other brands. This was a tactic that was employed by French retailers in an attempt to distinguish their private label chocolate products from Italian behemoth Ferrero.

The Selfridges-Greenpeace announcement was timed particularly well for the NGO, just as Malaysia’s primary industry minister was meeting with officials and other retailers in the region. Greenpeace has never shied away from intimidation as a negotiating strategy. It does appear to be moving into a more extreme ‘boycott palm oil’ phase.

The NGO has in the past maintained that it does not support boycotts of palm oil, and that it instead supports sustainable solutions. Greenpeace got all the ‘sustainable’ solutions it campaigned for, but at the same time, radical groups such as ‘Extinction Rebellion’ are taking up Greenpeace’s media time and market share in the UK.

Is a boycott all that’s left for Greenpeace? What happened to its rhetoric on sustainable development?

IPBES: Surprisingly balanced

The International Science-Policy Platform on Biodiversity and EcoSystem Services (IPBES) released its first major report in more than a decade last week to somewhat moderate fanfare.

IPBES is aiming to create an “IPCC report for biodiversity” with the release that will push national governments to introduce a raft of new policies and regulations on biodiversity and ecosystem services, which is a worthy goal.

Given that the report is clearly aimed at conservation objectives, it is surprisingly balanced.

Palm oil is singled out for the Asia-Pacific region as a key deforestation agent, but no more or less so than soybean and cattle are for the Americas.

This is tempered with an understanding of the trade-offs between conservation and poverty reduction. For example:

Expansion and intensification of commercial agriculture is usually driven by poverty of local communities depending on forests and other natural ecosystems … Thus, without any alternative livelihoods and/or incentive to promote sustainable agriculture, protection of natural forests in one area may cause leakage of biodiversity in another …

And similarly, the report notes the ongoing trade-offs between environmental quality and poverty reduction, and that gazetting of protected areas may deprive local peoples of livelihoods.

There are, of course, errors. The most notable of these is as follows:

Although there are laws addressing forest fires in both Malaysia and Indonesia, these have not been a success, with 2015 seeing one of the most severe haze episodes in South East Asia to date with more than 100,000 man-made fires burning 2.6 million hectares of Indonesian land.

Given that Malaysia was the first country to ratify the ASEAN Transboundary Haze Agreement, that Malaysia has very low rates of fire use, and that there was a negligible number of fires in Malaysia in the 2015 event, this is factually wrong.

California: A New Battleground – Part 2

In our last issue POM looked at legislative developments relating to palm oil in California. The first piece of legislation was the ‘Deforestation Free Procurement Act’, which requires verification of deforestation free forest risk commodities for government procurement.

The second piece of legislation is the Child Nutrition: School, Childcare, And Preschool Meals. This bill seems even more benign. It was introduced to ensure that meals provided by school cafeterias and other education bodies are relatively healthy. As it was introduced, it included restrictions of trans-fat content in meals, and limited other aspects of the meals.

But, between its introduction in early February and its amendments in April, one vegetable oil got singled out. See the following. Schools effectively must:

Not sell or serve a food item that, as part of the manufacturing process, has been deep fried, part fried, or flash fried in an oil or fat prohibited by this paragraph. Oils and fats prohibited by this paragraph include, but are not limited to, palm, coconut, palm kernel, and lard, typically solid at room temperature and are known to negatively impact cardiovascular health. Oils permitted by this provision include, but are not limited to, canola, safflower, sunflower, corn, olive, soybean, peanut, or a blend of these oils, typically liquid at room temperature and are known for their positive cardiovascular benefit.

This is nothing less than extraordinary. There is an inordinate amount of confusion around the health of different fats and oils – so much so that POM is often reluctant to discuss it.

However, when it comes to frying and deep frying, one of the most important components to look at is the stability of the fats. When the fats are unstable, they are prone to oxidation and increase their toxicity. The more stable the fat, the healthier it is for frying. Saturated fats – such as those found in palm and coconut — are more stable, and therefore better when heated.

So, how did California’s lawmakers get this so wrong?

The amendments were provided by the Committee on Education staffers. But before jumping to conclusions about whether anyone ‘got to the Committee’, consider the following. California is probably the ‘greenest’ state in the US and there are any number of anti-palm NGOs in the state. The Rainforest Action Network (RAN) is one of America’s louder anti-palm NGOs – it is based in California and it has a brief to tackle palm oil consumption in the US. But also consider that the US was the home of the anti-tropical oils health campaign of the 1990s.

In other words, disinformation about palm oil is now so widespread in some parts of the world, that it’s just assumed it is bad for health and the environment and no justification is needed.

One of the dangers here is anti-palm campaigners can use this as an example. Think of this: “palm oil is so unhealthy that California lawmakers banned it from children’s school meals.”

The other danger is that this is government procurement at the State level. There are no international agreements that exporting countries can rely on. After California, expect New York, Oregon and Washington to follow.

What does this mean? The industry needs to be vigilant across the board. Allowing such a new provision to be enacted, unopposed or unchecked, could have knock-on effects.

Kalla takes on Europe

Indonesian Vice-President has used the Belt and Road Forum (BRF) in Beijing to launch a broadside at the European Union – specifically over palm oil.

In a leaders’ forum hosted by Chinese President Xi Jinping, Kalla stated that the EU’s policies are hampering Indonesia’s ability to achieve the UN Sustainable Development Goals, and that the EU had ‘ignored’ Indonesia’s position.

“Regrettably, the EU ignored the data and continues its discriminatory campaign which has been hampering Indonesia’s effort to achieve the SDGs. For that reason, we have to fight against the discrimination,” Kalla said.

He also said that “This discriminatory measure is conducted under the pretext of sustainability … At the same time, these sustainability issues have been taken seriously by [palm oil] producing countries with data.”

Kalla also called on leaders present at the meeting to fight trade discrimination, particularly against palm and other traded commodities.

The Vice President’s choice of forum to launch such a broadside is significant. The BRF is a high-profile forum featuring 40 world leaders and all ASEAN economies.  It was also attended by European Commission Vice President Maros Sefcovic.

China has stumped up nearly $5 billion for a high-speed rail link between Jakarta and Bandung; construction commenced recently. Malaysia has renegotiated its East Coast Rail Link deal with Beijing, and both have signed an MoU on palm purchases.

The EU, for its part, issued a statement by Sefcovic that the EU’s infrastructure plan would be “more sustainable” than China’s, and concentrate on “‘sustainable financing, avoiding debt traps, environmental impact”.  And it is still looking to maintain a palm ban via the recently-released RED Delegated Act.

It is no wonder ASEAN has changed its outlook to ‘look east’ –as Malaysian Prime Minister Mahathir first said back in the 1990s.

Norway’s new contradictions at WTO

Norway has defended ‘special and differentiated’ treatment for developing countries at the World Trade Organization and stated that development is ‘at the heart’ of the WTO system.

The Norwegian statements come at a time when it is pursuing the exact opposite.

The Norwegian Parliament recently voted in favour of a ban of palm oil in biofuels. The country’s sovereign wealth fund has also divested from a large number of plantation firms.

The contradiction is curious. Norway has relied, and continues to rely, heavily upon oil revenue, but seeks to limit agricultural commodity expansion because of climate emissions.

It calls upon for ‘special treatment’ for developing countries within the multilateral trading system, but doesn’t think that any special treatment should be given to on-the-ground agricultural development in poor countries. Its solution in the case of Indonesia is to pay the country not to expand its cropland – a kind of green welfare.

Nestle’s Deforestation Free Supply Chain

Nestle announced this week that it has confirmed that 77 per cent of its palm supply chain is ‘deforestation free’. Nestle has confirmed the figure using Starling, an imaging system developed with Airbus satellite technology.

The system works by analysing images throughout Nestle’s supply chain; algorithms are used to detect when forest loss occurs. Nestle then contacts suppliers to determine the nature of the forest cover loss.

Arguably the most interesting consideration here is the resources required to implement a deforestation free supply chain – that is only three-quarters complete.

When the ‘zero deforestation’ idea was sold to followers of NGOs, there was a clear sales pitch: zero deforestation is easy. This is simply not the case. Greenpeace’s first attacks on Nestle occurred more than a decade ago. Nestle is a particularly risk averse company when it comes to reputation; the company suffered during its baby formula scandal in the 1970s and 1980s, and this has shaped its approach to reputation management.

Costing information on Starling is not publicly available; Airbus states that quotes are available on a per hectare basis. It may be a cost-effective solution for larger operations. But this solution may also make broader voluntary certification commitments redundant, particularly if all the public is interested in is ‘deforestation free’.

ANALYSIS: Is California the next front in the Palm Oil Battle?

The United States has generally not been a big part of palm oil’s trade battles. There are, of course, some exceptions to this – the ‘tropical oils’ health scare that was spread by the US soybean industry in the 1990s is probably the leading example.

There are several reasons.

First, the US imports a relatively small amount of palm oil – around 3 per cent of the global export market. Palm oil makes up around 7 per cent of consumption in the US vegetable oil market.  US farmers are also particularly efficient and competitive.

Second, the policy battleground in the US has been health, rather than environment. The biggest battle has been around trans fats, mainly impacting soybean oil. The absence of trans fats in palm oil has made palm the clear replacement for soybean oil.

The US Food and Drug Administration (FDA) introduced a full trans fats ban last year, after a lengthy phase-in period.  But the phase-in period gave US processors time to develop low-trans-fat oils and products from soy, canola and corn oils.

Third, the US renewable fuel standard has penalised palm oil, but the impact has been smaller because the market for biodiesel in the US is significantly smaller than the EU, and the major renewable fuels used in the US are for gasoline-powered vehicles, which provide a subsidy for corn ethanol producers.

One of the other exceptions in the US has been an anti-palm oil campaign on labour. The motivations here were twofold. There was a push in the US to stop or limit participation in the Trans-Pacific Partnership Agreement; the campaign sought to exaggerate poor labour practices in partner countries. At the same time, new regulation in California on human rights and labour in supply chains required companies to disclose supply chain information and risks.

California is at it again.

Legislators are pushing two pieces of legislation. The first is the California Deforestation Free Procurement Act, which we’ll analyse this week. We’ll look at the second bill, the Child Nutrition: School, Childcare, And Preschool Meals (AB 842), next week. The Deforestation Free Procurement Act (AB 572) will require government contractors and subcontractors to ensure that if they are providing products that might contain a ‘forest risk commodity’ that they must undertake certain actions. They will need to:

• Certify that the products sourced did not come from areas that were deforested from 2019 or later;
• Have a no deforestation, no peat and no exploitation policy in place;
• Make any certification and policy data publicly available.

At first glance, this might seem benign. There are two things to consider.

First is the size of the US procurement market. The US government procurement is around 9 per cent of GDP, i.e. around $1.6 trillion. In terms of magnitude, this is around the size of economies such as South Korea and Russia.

California’s state government spending was around USD225 billion in 2017. This is similar to the GDP of countries like Portugal, Greece or Vietnam.

The sheer size of California should make anyone who thinks Europe is a big market think twice.

Second is that California tends to lead the way in terms of regulation in the United States, especially on the environment. Regulation in California tends to be adopted elsewhere in the US, simply because California is such a large market.

The adoption of a new procurement rule in California could therefore have implications across the US in the longer term.

So, consider the response of producers of palm oil, other commodities and the industry more broadly if a country like Portugal, Vietnam, Korea or Russia decided to unilaterally impose similar reporting requirements.

Just as important is that this is a model that many NGOs will seek to pressure other governments to introduce for their procurement processes or as a legal and regulatory requirement.

This is precisely what the EU’s Deforestation Action Plan was originally aimed at doing: preventing ‘imported deforestation’.

There are other dimensions to this legislation, particularly on school food – and we’ll take a look at those next week.