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Opinion: who cares about sustainable palm oil?

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The recent gathering of the Round Table for Sustainable Palm Oil in Brazil has highlighted the arguments for sustainability in palm oil production.

The arguments are familiar to all sections of the global agricultural sector which has to find a balance between meeting the challenge of feeding a growing human population, while striving to preserve the health and bio-diversity of life on Earth.

In palm oil, it is the big multinational consumer brands that have more to gain or lose from public opinion concerns surrounding sustainability than any other section of the commercial community.

For brands such as Ferrero or Nestle to be associated with environmental damage or species loss would be highly damaging. Commodity pricing comes second with this category of buyer - brand integrity is key. Both these companies have pledged support for the objectives of the Round Table for Sustainable Palm Oil (RSPO).

Amongst producers, New Britain Palm Oil is a role model for plantation owners looking to the benefits of RSPO certification. The company's sustainable and fully traceable oil, coupled with modern processing facilities, has enabled it to win business directly with large consumer brands.

Controversial expansion

Since the early 1990s, the area under palm oil cultivation has increased by more than 40%, mostly in Malaysia and Indonesia, the two largest producers of the commodity.

Global vegetable oil production in 2009 was calculated by the United Nations' Food and Agriculture Organisation at about 150m tonnes. Of this, palm oil accounted for some 40m tonnes.

As the single most important of the vegetable oils, palm oil is a raw material for both food and non-food products.

The rapid expansion of oil palms - which grow only in a narrow band around the equator and thus in environmentally sensitive areas - has not been without controversy in an era concerned with bio-diversity, climate change, and loss of habit for wildlife and indigenous peoples.

Price vs sustainability

The RSPO is a not-for-profit association that unites stakeholders from seven sectors of the palm oil industry to develop and implement global standards for sustainable palm oil.

Key to the success of its goals will be the willingness of the end consumer, and the supply chain, to pay a premium for oil produced to standards winning RSPO certification.

There appears to be a difference in sensitivity to RSPO goals between more price conscious buyers, especially those in Asia, South America and Africa, and Western brands, more sensitive to environmental and sustainability issues.

For the majority of buyers, palm oil is a commodity, and with the percentage of that commodity available to RSPO standards very small, economical pricing looks to be given higher priority than sustainability.

The amount of certified palm oil is thought to be less than 3% of world production. Unilever alone is rumoured to purchase something around that volume for its manufacturing operations.

The RSPO plans to introduce a registration system for sustainably supplied oil in 2015, but buyers may be reluctant to commit today.

Compelling economics

Producers give mixed views about the value of RSPO accreditation, with some suggesting that the premium per tonne is not a sufficient incentive to go through the process.

But we hear consistent reports of premia in the region of $40 per tonne � and this seems a thoroughly commercial value to target.

We are told that the cost of gaining certification is around $20 per hectare � but with the premium at say $40 per tonne and a hectare able to yield a good 5 tonnes of oil � the economics are compelling.

However, the certification process is very consuming of management time and it exposes operators to detailed inspection, which may not always be comfortable. What is clear is that RSPO certification is not easy to achieve.

Pressure points

In the end it is public opinion, and in particular consumer purchasing behaviour, that will determine the extent to which the objectives of the Round Table gain widespread fulfilment.

Today it is big Western consumer brands, and their upstream suppliers, who will be the RSPO's principal allies.

Doug Hawkins heads up agri-business research for Hardman & Co. He was formerly head of international equity research for Nomura International and has farmed most of his life.

By Doug Hawkins

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