Unlocking Palm Oil’s Potential
Palm oil is one of the most important agricultural commodities in Indonesia. It represents the third largest export earnings after oil, gas and coal, contributing $17.7 billion in 2013.
By comparison, textile exports were valued at $12.7 billion in the same year. In addition, between 2010 and 2013, the value of palm oil exports grew at a rate of 14.6 percent per year.
Palm oil also provides work opportunities in many rural communities. According to an estimate by the Ministry of Trade, the palm oil sector generates over 15 million jobs in Indonesia which tend to be in underdeveloped areas. By comparison, Indonesia’s textile and clothing industry provides some 1.1 million jobs, according to Statistics Indonesia (BPS) as quoted in the Global Business Guide‘s Website.
In 2013, around 40 percent of the land covered in mature, productive plantations was owned and managed by smallholders — up from 28 percent in 2000. This represents a three hundred percent increase in production area during the same period.
Moreover, immature (not yet productive) plantations constitute 28 percent of the total plantation area in Indonesia. This indicates high potential growth for palm oil production.
Quality is key to unlocking potential
However, there are several issues in the palm oil market which might obstruct this growth, including quality, image and perception, and supply chain management.
The quality of crude palm oil depends very much on the quality of palm fruits, degree of ripeness, time between harvesting and processing, and processing and storage conditions. In particular, oil palm fruits need to be harvested when they are as ripe as possible to maximize oil yield – but before they are overripe. They also need to be processed immediately into crude palm oil at a mill, ideally within a day.
These requirements are often a challenge to smallholders, who may not have easy access to palm oil mills. As a result, crude palm oil from smallholders is typically of inferior quality compared to oil from large estates. This means logistics issues may indirectly affect prices for farmers.
Furthermore, smallholders often have limited financial resources and access to agricultural inputs such as good quality seedlings and fertilizers, so they often produce oil of a lower quality and quantity.
Image and perception are important
Image and perception are also a challenge, as palm oil is widely perceived as a driver of deforestation, especially in Indonesia and Malaysia. Various non-governmental organizations campaign against the production and purchase of palm oil. For example, in a high profile campaign in 2010, Greenpeace shared online a provocative video parodying a chocolate commercial, linking the production company with the issue of deforestation in palm oil production.
These campaigns result in various boycotts of products containing palm oil by end consumers, manufacturers, and investors. The most notable case is the Norwegian Government Pension Fund Global (GPFG), the world’s largest sovereign wealth fund, which divested from 23 palm oil companies in 2012.
End consumers, manufacturers, retailers, and governments of importing countries are increasing pressure on producers to halt unsustainable practices. In 2004, the Roundtable on Sustainable Palm Oil (RSPO) was established as an association of palm oil producers, processors, and traders, consumer goods manufacturers, retailers, banks, investors, and NGOs committed to producing, sourcing, financing, and/or using sustainable palm oil. Three years later, its members passed RSPO’s Principles and Criteria — essentially defining “sustainable” palm oil.
There is a growing perception among stakeholders that those principles and criteria do not deal sufficiently with the issue of deforestation. Partly in response to that, the Consumer Goods Forum (CGF), an industry association of over 400 retailers, manufacturers, and other stakeholders across 70 countries, explicitly pledged to help achieve “zero net deforestation” by 2020. Among these companies are Unilever, Wal-Mart, Carrefour, Heineken, Kellogg, Nestlé, Procter & Gamble and Danone.
Palm oil producers have taken up the challenge of producing sustainable palm oil.
In 2014, 10 years after RSPO was founded, 17 percent of Indonesia’s palm oil output was certified as sustainable. This accounted for half of the world’s total certified palm oil. Furthermore, five large Indonesian producers and traders (Golden Agri Resources, Wilmar, Asian Agri, Cargill, and Musim Mas) have signed the Indonesia Palm Oil Pledge (IPOP).
That pledge includes a commitment to adopt and promote sustainable production practices.
Supply chain management of palm oil
Supply chain management is another prominent issue in the palm oil sector. With the growing expectation for both producers and buyers to handle only sustainable, deforestation-free palm oil, companies need to know where their oil palm fruit supply comes from. This is not always easy when the supplying plantations are owned and managed by smallholders.
That is because there are several ways farmers can supply fruit bunches to the palm oil mills that process the fruits into crude palm oil. The farmers can deliver the fruit bunches to the mill directly, have them collected by trucks owned by the mill, or sell them indirectly through an intermediate dealer. Consequently, palm oil producing mills might find it difficult to ascertain the exact origin of each fruit bunch they buy, day by day.
Tracking and tracing the supply chain
Given all these issues, what is needed is a way for every mill to map where it is buying oil palm fruits from, and to confirm that they only buy from deforestation-free sources. GeoTraceability (GeoT) is a tool that can assist oil palm fruit buyers in mapping smallholder farms and tracking fruit bunches from farm to mill.
GeoT is used to collect and aggregate information on smallholders, such as their socio-economic conditions and farming practices. Collected data are then uploaded to a secure and confidential web platform, where they can be analyzed and selectively shared with business partners.
Using GeoT, businesses will be able to visualize and prove the origin of their fruit bunches and palm oil. Data collection could also help increase the reliability and efficiency of fruit bunch procurement, thus improving the quality of supply. It also helps mills in documenting and reporting value-added tax (VAT) on fruit bunch procurement transactions, which is now compulsory in Indonesia.
The benefits of using the GeoT system also extend to other stakeholders. By making farmer information available, companies throughout the supply chain can trace their commodity and understand their producers’ base. They can try to find out which plantations have contributed to which shipment, and the exact production practices related to the procurement. They may then confirm whether their supply comes from non-deforested areas.
Such a system could also be effectively combined with services to farmers, such as training and fertiliser provision, in order to improve their yield, quality, and loyalty. This would help reduce the pressure to extend the farm to surrounding areas, including into precious forests.
Enhancing Indonesian palm oil exports
There are many market-defined issues in the palm oil industry, in particular quality control and the perception of palm oil plantations as a driver of deforestation. Those issues reduce consumer confidence in this remarkable crop commodity, in which Indonesia holds a comparative advantage.
At the root of those issues is the lack of traceability, that is the ability of palm oil users to trace their palm oil supply all the way to the plantations. A traceability system could help address the issues, by providing information on the sources of oil palm fruits and their farming practices. This information would enable palm oil users to choose deforestation-free suppliers, as well as highlighting potential areas for improvement on farming practices.
Comprehensive data collection and analysis is the first step towards improving the quality, image, and competitive positioning of Indonesia’s palm oil in the global market.
Susetyo Priyojati is a consultant, Moray McLeish is a technical adviser in sustainability and climate change practice, and Charles Vincent is president director, all at PwC Consulting Indonesia.
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