How does Change Happen in global commodities markets? The case of Palm Oil

August 4, 2015

     By Duncan Green     

This week’s Economist had an interesting discussion of the change process in the global palm oil industry. I assume all palm oil graph 1its claims are highly contested, but still, allow me to walk you through it and what it says about how change happens in one bit of the private sector.

The basics: a boom industry with a dire track record of deforestation, labour rights abuses on the plantations, and expulsion of indigenous peoples. Particularly notorious in Indonesia and Malaysia, which between them produce 90% of global output. ‘In all, palm oil has become symbolic of agriculture’s worst excesses.’

2004 and producers, users and NGOs set up the Roundtable on Sustainable Palm Oil (RSPO), which sets standards for its members on deforestation etc, backed up by a certification scheme. By 2014 11m tonnes of palm oil – about a fifth of global output, was certified (see graph).

This is where it gets interesting. The RSPO has become a floor as well as an aspirational ceiling – partly driven by some smart campaigning from Greenpeace and others, Nestle, Unilever and some of the other big palm oil using brands pledged to go further. And not just the big brands, either:

‘The watershed was an announcement made in late 2013 by Wilmar, a giant Singaporean trader which handles more than 40% of all globally-traded palm oil. Its trio of promises—no deforestation, no destruction of peatlands, and no exploitation of locals—went some way beyond what the roundtable had required. Wilmar’s decision was encouraged by pressure which campaigners had put on its big customers, such as Kellogg. It was also probably hastened by embarrassment over a severe haze which had cloaked South-East Asia that summer, caused by fires resulting from land clearance in Indonesia.’ [Apparently, our Behind the Brands campaign can take some of the credit palm oilfor focusing on making Kellogg a leader on deforestation and other palm oil (and soy) issues when it was initially behind the industry leaders.]

So a) brand leverage affects suppliers too and b) shocks like environmental disasters can be additional drivers of change.

The next step? ‘The tricky problems that remain. Activists who have managed to convince American and European consumers of the palm-oil industry’s misdeeds, for example, have so far had less success persuading Indians and Chinese. Another looming challenge is to improve productivity among the very small, often family-owned, farms that still produce something like one-third of all palm oil.’

And the Economist reckons, rightly, that this is where governments in producer countries, who have so far been keeping their heads down, need to step up. They can help with the enabling environment, for example by improving land registries and amending land use laws to encourage responsible agriculture. As a good liberal rag, the Economist stops there, but of course, governments can go much further in terms of legislation and regulation – if Indonesia declares itself a clean palm oil nation, and legislates accordingly, then it can steal a march on its rivals. Government action can even up the unfairness of companies who go further on commitments paying a significant cost to improve the industry. Their suppliers (who they are pressuring to improve) supply their competitors also, who are ‘free-riding’ off the efforts of the leaders and getting a better supply chain out of it (e.g. lower risks).

Step back from the detail, and the dynamic is interesting, and one I’ve seen at work in other sectors such as the garment industry. Consumer pressure and allies within the industry kick off a multi-stakeholder effort to deal with the most pressing problems; critics say it is all cosmetic and insufficient, and in the process help keep the pressure on;Palm oil monthly prices last 5 yearscrises and scandals act as critical junctures to move things along; but then the process bangs up against free riders, and firms immune to outside pressure – and that’s where governments need to act. Suddenly, the old ‘voluntary approach v regulation’ dichotomy looks a bit simplistic, don’t you think?

I await the brickbats about my naivety.

And some things that could be relevant, but weren’t in the article:

  • Have investors (eg fund managers) backed the RSPO or otherwise had an influence?
  • Has progress stalled now the commodity bubble has burst (see graph)?
  • Why haven’t any companies or countries done a ‘Jamaican Blue Mountain coffee’ and tried to de-commoditize palm oil? Find five good suppliers, build a long-term arrangement with them, buy all their palm oil, and work closely to make sure that they are clean in every way. Then tell consumers ‘we are structurally and materially different and we have it all under control’.

Wd be interested in hearing from people closer to the industry on whether this is a recognizable portrait and what else is missing.

[Turns out that Oxfam has been pretty involved with the RSPO (e.g. we have a rep on the board). For more background, check out Fair Partnerships and Oxfam Novib’s Programme Scaling up Sustainable Palm Oil]

And here’s the shock-tactic Greenpeace video that helped get some action from Nestle.