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SCP Evidence Base: Sustainable Commodities Case Studies Case Study

PALM OIL

December 2006

Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil TABLE OF CONTENTS

EXECUTIVE SUMMARY ...........................................................................................II 1 COMMODITY OVERVIEW..............................................................................1 2 SUPPLY AND DEMAND STATISTICS AND TRENDS ..................................6 3 POLICIES AND INITIATIVES .......................................................................12 4 SUPPLY CHAIN ANALYSIS ........................................................................21 5 IMPACT ASSESSMENT...............................................................................33 6 SUMMARY....................................................................................................43 APPENDIX I – LITERATURE REVIEW...................................................................46 APPENDIX II – ASSESSMENT FRAMEWORKS....................................................47 LIST OF TABLES

Table 1: Imports of palm oil products to UK in 2004, UN ComTrade, Reporter is UK (except categories indicated by*, where reporter is exporting country) ......2

Table 2: Examples of food products marketed in the UK containing palm oil ............4 Table 3: Refined palm oil imports to the UK in 2004 ..................................................7 Table 4: Crude palm oil imports to Netherlands in 2004 ............................................8 Table 5: Crude palm oil exports from Netherlands in 2004 ........................................8 Table 6: Major palm oil plantation companies operating in Malaysia .......................23 Table 7: Land Holding of Top Oil Conglomerates, 1997 ..........................................24 Table 8: Environmental Impacts of Oil Palm Establishment.....................................38 Table 9: Employment in primary commodities sector – Malaysia.............................41 LIST OF FIGURES

Figure 1: Crop Suitability for Rainfed Oil palm, High Input Level, source: FAO .........1 Figure 2: Production and uses of crude palm oil and palm kernels............................3 Figure 3: Extractions of palm kernel oil ......................................................................5 Figure 4: Actual and projected global demand for CPO up until 2020 Source: Oil

World...........................................................................................................9 Figure 5: Growth in Area of Oil Palm Plantations 1967 - 2000.................................10 Figure 6: Plantation establishment inputs and outputs.............................................27 Figure 7: Cultivation inputs and outputs...................................................................28 Figure 8: Processing inputs and outputs (Milling) ....................................................30 Figure 9: Processing inputs and outputs (Refining) .................................................31 Figure 10: Processing inputs and outputs (Crushing) ..............................................32

Scott Wilson December 2006

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Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil Executive Summary Palm oil is a leading oil in the edible oils market and is estimated to be used in 1 in 10 products on UK supermarket shelves. It is also a contender for use in the future biofuel market and palm kernel oil is currently used in a range of other chemical applications including detergents and toiletries. Palm oil, obtained from the fruit of the oil palm is the greatest import to the UK out of oil palm products and of this, 58% is in the form of crude palm oil and 14% in the form of refined palm oil.

Global demand for palm oil is forecast to double from 2000 figures by the year 2020. This increasing trend will mainly be due to the needs of the food and biofuel sectors. UK demand is likely to contribute to this increasing trend, as palm oil is predicted as the favoured oil to meet increasing processed food needs and is one of the oils which could potentially help meet government targets for biofuel use. The four countries examined in this case study, Malaysia, Indonesia, Colombia and Papua New Guinea, are among the top global exporters of palm oil and are the four largest exporters to the UK.

Taking into account the staging country, the Netherlands and inter-country trade between producers, Malaysia and Indonesia export the greatest quantities of palm oil products to the UK. However, the percentage share of UK imports within their palm oil sectors are small relative to Colombia where 39% of their palm oil products for export are exported to the UK, compared to 2% for both Indonesia and Malaysia (comparable data is unavailable for Papua New Guinea). Economically, changes in demand and trade with the UK will impact more greatly on Colombia, however environmental impacts will be proportionate to the actual land take and extent of cultivation which is high for all four countries, in particular Malaysia, Indonesia and Papua New Guinea. Social impacts will be dependent both on land take and on the reliance of the economy on UK palm oil imports, however, the extent of these impacts will depend on the structure of the industry and governance of the sector.

Malaysia and Indonesia both dominate global exports, however increase in demand is more likely to be met in Indonesia and to some extent Colombia and Papua New Guinea. Malaysia is the main foreign investor in the establishment of plantations in Indonesia where cheaper land and labour costs relative to Malaysia, together with the proximity to Malay processing facilities, make this an attractive area for investment. Foreign investment has been substantial in all four countries’ palm oil sectors and is likely to influence increased planting areas, in order to increase returns on investment.

The increased demand for palm oil will be met by further establishment of plantations, rather than increased productivity on existing plantations. This will result in large impacts associated with forest conversion in Indonesia, Colombia and Papua New Guinea, whilst cultivation impacts will continue to affect all four countries.


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Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil The main environmental and socio-economic impacts from palm oil production are associated with the establishment of the plantation. Oil palms can only be cultivated in tropical areas and the original habitat on the land most suitable for oil palm production is lowland evergreen tropical rainforest. Worldwide, this is the most species rich terrestrial habitat type. These factors, together with oil palm production being a land-intensive industry result in significant impacts to biodiversity. Habitat conversion to monoculture and threats to key species are the greatest environmental concerns associated with large-scale palm oil production.

Plantations are promoted and established in inhabited locations by government agencies, national and foreign businesses, multilateral banks, or other organizations external to the area. They will typically occupy areas already being used in various ways by local people. Indigenous populations in areas of land undergoing conversion to oil palm plantations lose the natural resources available to them in the natural forest habitat. Other social impacts include employment and labour and are influenced by the national policy and governance of the palm oil sector.

The economic benefits from palm oil production and their impact on the populations of exporting countries will depend in part to the structure of the industry, particularly the proportion of state owned and smallholder owned plantations. This, together with the extent to which smallholders are connected to markets and the risks they bear relative to larger exporting and processing companies, will impact on the gains they receive from increasing demand for palm oil. The increase in cash crop production will impact on local food security, as reliance on world palm oil prices will dictate smallholder income and less land is available for local food production. Increase in cash crop production will increase foreign revenue, however, it will be necessary to implement appropriate initiatives and governance structures to ensure this is equitably distributed and that any adverse impacts of cash crop production, both social and environmental, are removed.

Impacts have been widely documented by a range of non–governmental organizations (NGOs) and international bodies and industry organisations. There is consensus on the significance of establishment impacts and industry bodies have concluded that initiatives are required to prevent further impact on endemic forest and species. There are reports of social impacts among both NGOs and bodies such as the International Labour Organisation (ILO).


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Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil 1 Commodity Overview

1.1 Background 1.1.1 Palm oil, extracted from tropical oil palms, is the world’s largest oil crop after

soy. The variety Tenera, cultivated in nearly all the world’s plantations, gives the highest yield of any oil or oil seed crop, and is the main source for vegetable oil for many tropical countries1. The oil palm is now grown as a plantation crop in most countries with high rainfall (minimum 1 600 mm/yr) in tropical climates within 10° of the equator2. Figure 1: Crop Suitability for Rainfed Oil palm, High Input Level, source: FAO

1.1.2 Indonesia and Malaysia dominate the world export market, and, along with Papua New Guinea (PNG) and Colombia, are the principal exporters to the UK over the five classifications of palm oil products (see Table 1 below for a summary). Although in developing economies, such as Malaysia, the contribution of agriculture is declining, palm oil continues to be a strong sector and a significant source of foreign revenue. In Indonesia, PNG and Colombia, forecasted trends predict that global demand for palm oil will increase, particularly within the food and biofuel sectors, and these countries will be looking to meet this demand through further establishment of plantations.

1 RSPO (2004) Roundtable on Sustainable Palm Oil, 2004 RSPO Factsheet, Roundtable on Sustainable Palm Oil, Revised Version 2 FAO(2002) FAO Agricultural Services Bulletin, Small-Scale Palm Oil Processing in Africa


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Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil 1.1.3 This case study will examine the impact of palm oil cultivation on the major

producing countries outlined above, and the impact of further plantation establishment in light of predicted increases in demand. The impact analysis will be undertaken with due regard to the policy and governance context in each case study country, Colombia, Indonesia, Malaysia and Papua New Guinea (PNG).

1.1.4 Palm oil products include oil from the pulp of the fruit and from the kernel in either crude or a refined form, palm nuts and kernels and palm oil cake. UN ComTrade data, SITC Rev 3, classifies palm oil into the following 6 categories: Table 1: Imports of palm oil products to UK in 2004, UN ComTrade, Reporter is UK (except categories indicated by*, where reporter is exporting country)

Imports to the UK in 2004

Commodity SITC Rev 3

Total value ($)

% of total palm oil product imports

Netherlands Indonesia Malaysia PNG Colombia

Palm nuts and kernels 2232 8,165,859 1.7 3,520,994 1,526,776

Palm oil, crude 42221 273,916,256 57.5 80,205418 34,145,992 48,317,419

62,527,706

46,347,568

Palm oil, refined, and its fractions 42229 65,739,728 13.8 5,444620 12,283,787 18,840,513

21,176,177

Palm kernel or babassu oil, crude 42241 34,992,712 7.3 2,219,208 17,545,481 4,084,152 5,857,220 4,199,414Palm kernel or babassu oil, refined, and fractions thereof 42249 11,044,436 2.3 6,158,960 - 2,590,613 - - Oilcake and other solid residues of oil from palm nuts or kernel 0813

82,345,420 17.3 3,286,796 20,329,808 54,789,344 - -

Total palm oil products to UK 476204411 100 97315002 87,826,062

130,148,817 89,561103

50,546982

Total palm oil products to world*

4,055,645,315

6,805,461,224

Not available

129,601,318

All commodity exports*

64,483,516,667 1.26E+11

Not available

1.673E+10

% palm oil products to UK 2% 2% 39% % palm oil of total commodity exports 6% 5% 1%


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Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil

1.1.5 The Netherlands, although not a producer, is a significant importer to the UK. This is due to its role as a staging country. An analysis of the countries that import to the Netherlands will identify the location of production impacts of palm oil imported to the UK via the Netherlands. In addition, the amount of palm oil exported from Malaysia and Indonesia is not necessarily indicative of the relative areas of plantation in each country. Malaysia imports a significant amount of crude palm oil from Indonesia. See section 3 for further analysis and discussion of these issues.

1.2 Uses 1.2.1 The pulp of the palm fruit produces an edible vegetable oil and the kernel

produces a non-edible oil. The oils are used in a wide variety of products across the food, chemical, cosmetics and detergents industries. Palm oil and palm kernel oil have a wide range of applications, around 80% are used for food applications whilst the rest is feedstock for a number of non-food applications.

Figure 2: Production and uses of crude palm oil and palm kernels

Food Industry

1.2.2 Among the food uses, refined, bleached and deodorised (RBD) olein is used mainly as cooking and frying oils, shortenings and margarine while RBD


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stearin is used for the production of shortenings and margarine. RBD palm oil (i.e. unfractionated palm oil) is used for producing margarine, shortenings, vanaspati (vegetable ghee), frying fats and ice cream. Several blends have been developed to produce solid fats with a zero content of trans-fatty acids. In the production of ice cream, milk fats are replaced by a combination of palm oil and palm kernel oil. A blend of palm oil, palm kernel oil and other fats replaces milk fat for the production of non-diary creamers or whiteners. It is estimated that 1 in 10 products on supermarket shelves contain palm oil3. Unilever state that they buy over one million tonnes of palm oil, 6-8% of the total world production, every year, mainly from Malaysia and Indonesia4.

1.2.3 The following table gives some examples of the use of palm oil in food manufacture.

Table 2: Examples of food products marketed in the UK containing palm oil

Product Type Company Name Product Name Margarines Unilever Flora Soups H J Heinz UK

Limited Heinz soups

Chocolate Cadbury Schweppes

Cadbury’s Fruit ‘n’ Nut

Snacks Jacob’s Bakery Twiglets Crisps Walkers Snack

Foods Walkers Crisps

3 FoE (2005) Friends of the Earth 2005, press release 16 December 2005 ‘Asda joins roundtable on palm oil’ 4 Unilever, Palm Oil: A Sustainable Future


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Cosmetics and detergents industry

1.2.4 Palm oil is widely used in the cosmetics and detergents industry, particularly for its lathering properties. Palm oil closely resembles coconut oil in its fatty acid formulation and characteristics and is therefore a cost effective subsititute for crude coconut oil in the manufacture of soap. Other products that contain palm oil include make-up, such as lipstick, and shampoo. The oil is also rich in lauric acid and can be used in the synthesis of lauryl alcohol for the detergent industry.

Chemical industry

1.2.5 An emerging market is that of biofuel, where crude palm oil is used as a diesel substitute. CPO serves as a biofuel, and methyl esters (derived from palm olein) can mix with diesel fuel to make biodiesel. Increased demand for this may become a significant competitor with the food industry for palm oil products.

Animal Feed

1.2.6 Palm kernels are crushed to yield Palm Kernel Oil and Palm Kernel Cake (PKC). There are two types of PKC depending on the process used to produce it, either by mechanical, metabolic or digestive methods. Its high nutritional value and competitive price ensure its widespread use throughout Europe. Figure 3: Extractions of palm kernel oil


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Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil 2 SUPPLY AND DEMAND STATISTICS AND TRENDS Crude Palm Oil Imports to UK 2004, ComTrade Data

Imports to UK Country

Value ($) Weight (kg) Top 5 export markets

UK represents % of this country's export market (by value) for this commodity

% of country's exports (by value) represented by the commodity

Netherlands 80,205,418 178,822,619

Belgium, UK, Germany, France, Spain

18%

Papua New Guinea 62,527,706 120,450,052

Not available Not available Not available

Malaysia

48,317,419 Malaysia reports half this

102,493,750

Netherlands, India, Germany, UK, Bangladesh

4% -Malay report, 8% UK and Malay(excl Netherlands) 539812081* reporter exporter

Colombia 46,347,568 96,286,746

UK, Mexico, Germany, Peru, Dominican Republic

43% world 92657139

Indonesia 34,145,992 74,356,290

India, Malaysia, Netherlands, Singapore, Germany

Require Netherlands and Malaysia Total exports to world - 1444421812

Other partners 2,372,153

2.1 Key points 2.1.1 Malaysia imports $348,212,702 from Indonesia.

2.1.2 Malaysia exports $270,266,824 to Netherlands.

2.1.3 Indonesia exports $193,559,397 to Malaysia and $179,287,634 to Netherlands.


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Table 3: Refined palm oil imports to the UK in 2004

Refined Palm Oil Imports to UK 2004, ComTrade Data

Imports to UK Country

Value Weight Top 5 export markets

UK represents % of this country's export market for this commodity

% of country's exports represented by the commodity

Papua New Guinea 21,176,177 37,683,184 Not available Not available Not

available

Malaysia 18,840,513

36,543,523 China, Pakistan, India, Jordan, Japan

Indonesia 12,283,787

25,789,965 China, India, Jordan, Pakistan, Netherlands

Total world exports 1997354171

Netherlands 5,444,620

8,530,904 Belgium, Germany, France, Poland, Austria

Germany 3,236,805

3,831,728 Denmark, Italy, Poland, Czech Republic, Romania

Other Partners 4,757,826

2.2 Additional analysis – staging country 2.2.1 The Netherlands is a key exporter to the UK, this is due to its role as a

staging country. An examination of crude palm oil flow to the Netherlands identifies Indonesia, Malaysia and Papua New Guinea as key exporters. The UK’s consumption of palm oil will include a proportion of these imports to the Netherlands.


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Table 4: Crude palm oil imports to Netherlands in 2004

Crude Palm Oil Imports to Netherlands 2004, ComTrade Data

Import to Netherlands Country of export Value ($) Weight (kg)

Indonesia

$180,957,722 Top of Form Bottom of Form 385,666,250

Malaysia $169,664,820 358,178,687 Papua New Guinea $7,791,169 14,583,433 Singapore $3,483,067 7,700,433 UK $2,813,581 6,001,074 Other $11,616,441

Table 5: Crude palm oil exports from Netherlands in 2004

Crude Palm Oil Exports from Netherlands 2004, ComTrade Data

Export from Netherlands Country of import Value ($) Weight (kg)

Belgium $31,045,827 60,112,957 UK $8,568,956 16,505,941 Germany $4,344,823 8,279,933 France $1,704,584 3,362,937 Spain $848,559 1,717,500 Other $665,657

2.3 Global Trends 2.3.1 Global demand for palm oil has doubled in the last decade. World demand

for palm oil is forecast to rise 40.5 million tonnes by 2020, nearly twice the output in 2000, this shows a growth of total area planted to oil palm from 200,000 to 3m hectares5. Malaysia and Indonesia are both increasing their production and processing of palm oil due to forecasts of further increases in demand6. In many regions, further rainforest conversion to plantation is planned. Due to cheaper land and labour costs in Indonesia relative to Malaysia, it is anticipated that most of the demand will be met here. UK demand is increasing and future demand from the UK may be for biofuel. The UK government reports that 5.75% of transport fuel will be from plants

5 Oil World, 2001 FWI World Resources Institute 2002 6 MPOB (2006), Malaysian Palm Oil Board website, http://www.mpob.gov.my/ , accessed 27 April 2006


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by 20107. Although it is anticipated by market analysts that rapeseed oil will be the oil of choice for biofuel in Europe, palm oil will be a significant competitor due to its low cost and the capacity for supply. Whether it becomes economical to use palm oil to produce biofuel or biodiesel will depend on the oil markets and the costs of other available agro-based alternative fuels. It has also been predicted that palm kernel oil will replace coconut oil as the major lauric oil in the global market8. Unilever state that palm oil is going to be the oil and fat resource which will enable them and other users to respond to the growing global demand for food ingredients and nutritional value9.Therefore, a key issue around future trends in global palm oil demand is substitutability. Figure 4: Actual and projected global demand for CPO up until 2020 Source: Oil World

Indonesia

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

1976-1980 1981-1985 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010 2011-2015 2014-2020

1000

t

2.3.2 Indonesia's 2006 production is expected to rise to 14.7 million tonnes10. Oil palm investors have been keen to establish plantations in Sumatra since it possesses the best climate and soil conditions in the country for cultivating oil palm and has necessary infrastructure already in place for initial

7 Department for Transport (2005) Renewable Transport Fuel Obligation Feasibility Report 8 Pantzaris and Ahmad, T P Pantzaris and Mohd Jaaffar Ahmad Palm Kernel Oil, Palm Oil Research Institute of Malaysia, PORIM Europe 9 Ibid, 4


processing. Areas for likely future develop in Sumatra include the provinces of Riau, Jambi and South Sumatra11. Eexpansion is proceeding rapidly in Kalimantan, Borneo, especially West Kalimantan. Further rapid development of this crop is expected to occur in East Kalimantan, Sulawesi, and Irian Jaya, the Indonesian province on New Guinea12. Foreign investors interested in oil palm production have been mainly from Malaysia. Land availability for this type of production is very limited in Malaysia and Indonesia is close to their processing facilities13.

2.3.3 Any slowdown in the growth of oil palm production in Indonesia would occur due to high export tax, reduced foreign investment resulting from political instability and fears of supply glut14.

Figure 5: Growth in Area of Oil Palm Plantations 1967 - 2000

Malaysia

2.3.4 According to industry projections, Malaysia's CPO output will rise by about 500,000 tonnes in 2006. The Malaysian government has approved around

11 Casson (2000) the Hesitant Boom: Indonesia’s oil palm sub sector in an era of economical crisis and political change, Centre for International Forestry Research 12 The State of the Forest: Indonesia FWI/WRI 2002 13 Kartodihardjo et al Occasional Paper no. 26e Centre for International Forestry Research (CIFOR) The Impact of Sectoral Development on Natural Forest conversion and Degradation: The Case of Timber and Tree Crop Plantations in Indonesia 14 as above ibid 35


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14 biodiesel projects. A National Biofuel Policy was announced by the Government in August 2005 to spur the development of the biofuel industry in Malaysia15. The Malaysian government is subsidising the use of palm oil as a renewable source of energy. In addition, Malaysia has announced plans to switch from using diesel oil to a part bio-fuel alternative. Commodities Minister Peter Chin said laws were being drafted to make the use of such fuel compulsory by 2008. Malaysia has lost much of its ancient rainforest to palm oil plantations, and Malaysian companies are thought to be behind moves to expand palm oil production in Indonesia.

PNG

2.3.5 Prime Minster, Michael Somare described the oil palm industry as “a silent achiever and is now the leading vibrant, dynamic industry with reputable status in the country, because of its professional managers, and board of directors, who have the vision for the industry for the nation, and to make it the biggest ever industry for the country in the 21st century.” Somare has recently declared tax breaks for companies interested in developing the oil palm industry in PNG. Plans for the expansion of oil palm plantations were announced for nearly every province in PNG16.

Colombia

2.3.6 The palm oil sector is Colombia is expanding as other export sectors are reducing their outputs. Output of palm oil has risen over 100% in the last ten years. Soybean output in Colombia started the decade at 194,000 tonnes but dropped steadily and is forecast to be 75,000 tonnes in 2000/01. The largest producer of cottonneseed, Colombia has seen a decline in cottonneseed output from 285,000 tonnes to 68,000 tonnes over the decade. The regional trend to palm oil and away from soybeans and cottonneseed may continue. The region exports essentially all palm oil production to Mexico and Europe as local consumers still have not developed a taste for palm oil17.

15 MPOB 2006 at http://www.mpob.gov.my/ 16 PNG RSPO project proposal 17 FAS online feature commodity article Central America and Northern South America Switch to Palm Oil www.fas.usda.gov/wap/circular/2000/00-10/wap2.htm


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Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil 3 POLICIES AND INITIATIVES

3.1 Policy Framework

Background

3.1.1 The palm oil sector is a major source of foreign revenue and is seen as an important and strategic industry in major producing countries. Larger palm oil companies and value chain stakeholders can therefore wield substantial economic and political influence and rarely have difficulty accessing credit facilities18.

3.1.2 The sector does not receive direct subsidies in most palm oil producing countries, unlike other oil crops such as soy, rape and sunflower in the EU and US. However, significant amounts of indirect support are received through assistance to smallholders as part of rural development plans, infrastructure support such as roads and ports and government investment in the establishment of plantations. In order to provide for any adjustments in management or practice, comparable levels of support and structural changes will need to take place.

Indonesia

3.1.3 Indonesia has a well balanced economy in which all sectors play a significant role, including industries such as oil and natural gas, textiles and tourism, natural resources such as tin and nickel and agricultural cash crops such as palm oil, peanuts, rubber, cocoa and coffee19. Indonesian agricultural policy since 1967 has focused on achieving food self-sufficiency. Cash crops such as palm oil, however, are produced predominantly for export. Palm oil is an important export revenue for Indonesia, in 1999 generating more than US$1 billion (at 1993 constant prices). Government investment in the sector has been significant.

3.1.4 The palm oil industry consists of three classes of producer:

• state-owned • smallholder, and; • large-scale private

3.1.5 The Suharto government (1967 –1998) invested, with World Bank assistance, in state-run companies from the late 1960s. The area of state

18 IFC, WWF (2004) Better Management Practices Project for IFC and WWF-US: Phase 2 Commodity Guides IIED, Proforest, Rabobak, March 2004 19 New Agriculturalist on line country profile; Indonesia, at www.new-agri.co.uk


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owned plantations then rose steadily over the following decade. Smallholder estates expanded after 1979, again due to government intervention and World Bank support20. The large-scale private plantation sector grew most rapidly after 1986, again with government encouragement. Companies were given a range of incentives, including access to credit at concessionary rates for estate development, planting and processing. The Yudhoyono administration has emphasised the need to lift economic growth and investment and to create jobs. The administration's other stated priority is to stamp out corruption. The Economist Intelligence Unit states that this will significantly raise producers' costs and deter investment.

3.1.6 Rural development policy includes partnership working of large scale plantation companies with smallholder plantations. Large companies are obliged to take part to give technical advice to farmers. This involvement has also provided opportunities for large companies to take advantage of the scheme by taking on the role as contractors for the plantation development owned by farmers, selling the timber produced from land clearing and obtaining a special fee to assist farmers in getting access to this credit.

3.1.7 Indonesia currently receives funding from the UK government for assistance on projects within the forestry sector21.

Malaysia

3.1.8 The Malaysian economy no longer relies primarily on the export of agricultural products and is steadily being dominated by manufacturing and services. Malaysia has undergone rapid industrialisation over the past 30 years and manufactures now account on average for 85% of gross export earnings22. However, Malaysia remains the world lead in palm oil exports.

3.1.9 Government schemes have been implemented to support smallholders. The Federal Land Development Authority (FELDA) was established in 1956 to develop land in order to improve the economic situation of the rural poor. The government has also supported the development of value adding opportunities. This has resulted in a well-established palm oil processing sector. The government is also very active in export financing so as to promote Malaysian palm oil. For example, loans have been provided to Egypt and Russia in return for buying Malaysian palm oil23.

20 FWI,WRI (2002) 21 DFID country profiles at www.dfid.gov.uk 22 Economist Intelligence Unit, country profiles: Malaysia, April 2004 23 Ibid, 5


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PNG

3.1.10 NG is the largest island economy in the Pacific and has been growing palm oil over the last 40 years. Oil palm is now the third most important agricultural export and is growing rapidly. It is expected that in the short term outlook, oil palm could rival coffee in importance24. The establishment of the oil palm industry has been based on the estate-smallholder model with a central parent palm oil company, predominantly foreign owned. This has facilitated private investment in PNG. Substantial private investment was required to establish estates and associated processing and marketing facilities. The establishment of the industry also received substantial financial support from government and international donors, including the World Bank and the Asian Development Bank. In 2001, the government and overseas donors were continuing to provide substantial financial support to the industry25. It is reported that the estate-smallholder model puts the risk of palm oil production on growers as they are dependent on world palm oil prices and bear the costs of production26.

3.1.11 Key issues around its economic performance are the lack of opportunities for diversification and industrialisation as well as relative isolation from markets. Commentators have stated that there is also a significant lack of dynamic institutions and progressive policy formulation that could compensate for these disadvantages27. The Global conference on the Sustainable Development of Small Island Developing States28 concluded that small island developing states were most vulnerable to economic and environmental shocks. The relative openness of Pacific island economies (in terms of contribution of trade to the economy), compared to many developing countries tends to exacerbate this vulnerability29.

Colombia

3.1.12 Colombia has a diversified economy. In 2002, Agriculture accounted for around 14% of GDP and manufacturing for about 16% of GDP30. Colombia started growing oil palm on a large scale in the 1980s. Expansion of the sector is expected, with the establishment of a research station by the

24 Embassy of Papua New Guinea to the Americas, website at http://www.pngembassy.org/agriculture.html 26 May 2006 25 Koczberski, Curry, Gibson Improving Productivity of the Smallholder oil palm sector in PNG: A socio-economic study of the Hoskins and Popondetta schemes 26 NGO forum on Asian Development Bank at www.forum-adb.org/PDF-Manila/oilpalm-png_lee-jun03.pdf retrieved 11 July 2006 27 Duncan et al, 1999 in Hunt, Economic Globalisation impacts on Pacific island Environments and aid implications, Marine Policy Volume 27, Issue 1, January 2003, Pages 79-85 28 United Nations General Assembly, 1998 29 Hunt, Economic Globalisation impacts on Pacific island Environments and aid implications, Marine Policy Volume 27, Issue 1, January 2003, Pages 79-85 30 Economist Intelligence Unit, country profiles: Colombia, December 2003


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centre for Oil Palm Research, Cenipalma. This has been funded by the Colombian government, a loan from a national bank (Banco Agrario) and some private sector funding from oil farm farmers31.

3.2 Governance Framework 3.2.1 Known trade agreements and trade organisations:

• Malaysia, Indonesia and PNG are all members of the WTO and the Asia-Pacific Economic Cooperation (APEC)

• Malaysia and Indonesia are members of the Cairns Group of Agricultural Exporting Nations

• Colombia is one of the 34 countries participating in Free Trade Area of the Americas

• The Andean Community is a sub-regional organization endowed with an international legal status that pursues economic integration among its members - Bolivia, Colombia, Ecuador, Peru and Venezuela

• The UK has Investment Promotion and Protection Agreements (IPPAs) with Malaysia, PNG and Indonesia. IPPAs are international bilateral agreements between governments, which can protect and encourage British investment overseas. IPPAs are designed to encourage investor confidence by setting high standards of investor protection applicable in international law. Key elements include provisions for equal and non-discriminatory treatment of investors and their investments, compensation for expropriation, transfer of capital and returns and access to independent settlement of disputes32.

• Other current and future anticipated Bilateral agreements include: − The Australia PNG Trade and Commercial Relations

Agreement (PATCRA); − Australia and Malaysia are in negotiation over a bilateral Free

Trade Agreement; and − The Bush administration hopes to initiate more free-trade

agreement negotiations in 2006, possibly with South Korea and Malaysia.

31 Science and Development Network, report 4 July 2006 32 Department for Trade and Industry at www.dti.gov.uk


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3.2.2 Relevant ILO conventions to the oil palm sector:

• ILO Convention 100 Equal Remuneration Convention 1951 • ILO Convention 110 on Plantations • ILO Convention 111 Discrimination (Employment and Occupation)

Convention 1958 • ILO Recommendation 132 on Tenants & Sharecroppers • ILO Convention 138 Minimum Age Convention • ILO Convention 169 on Indigenous and Tribal Peoples' rights • ILO Convention 182 Worst Forms of Child Labour Convention

3.3 Other relevant agreements

International Covenant on Economic, Social and Cultural Rights

Indonesia

3.3.1 By law, plantations are required to be established only on forest land that has been officially designated for conversion to other uses. In practice, two factors undermine the law. First, most conversion forest in Indonesia is available in the relatively undeveloped eastern part of the country, but most companies prefer to be in the west, closer to a labor force, processing infrastructure, and markets. Second, establishing plantations in forest land is doubly attractive because, having acquired a land clearing licence (IPK), a company can clear-cut the area and sell the timber to wood-processing33.

3.3.2 Indonesia has not signed up to the International Covenant on Economic, Social and Cultural Rights. Nor has it ratified ILO Convention 169 on Indigenous and Tribal Peoples' rights; ILO Convention 110 on Plantations or ILO Recommendation 132 on Tenants & Sharecroppers. ILO Conventions 138, 132 are ratified.

Malaysia

3.3.3 The Malaysian Palm Oil Board (MPOB) was established in 1998 and is responsible for developing and promoting the Malaysian palm oil sector. The MPOB carries out research related to planting, production, harvesting,

33 WRI Earth Trends


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extraction, processing, storage, transportation, use, consumption and marketing of oil palm and oil palm products

3.3.4 The Federal Land Development Authority (FELDA) is responsible for arranging the finance for palm oil production on behalf of its members.

3.3.5 Malaysia has not signed up to the International Covenant on Economic, Social and Cultural Rights. Nor has it ratified ILO Convention 169 on Indigenous and Tribal Peoples' rights; ILO Convention 110 on Plantations or ILO Recommendation 132 on Tenants & Sharecroppers.

PNG

3.3.6 PNG has a track record of weak institution of governance. It is reported to have virtually no capacity to monitor or regulate its industries. It is therefore unrealistic to expect effective institutional intervention for a sustainable oil palm industry. However, communities wield considerable discretionary power in land use allocation and access from the customary land tenure system34.

3.3.7 Papua New Guinea is rich in natural resources including water. However, due to a lack of both human resources and political interest, and also to underlying financial constraints, it has not been able to achieve sustainable development in the water sector. The water sector in Papua New Guinea is fragmented and poorly coordinated. The Water Resources Act (1982) regulates the use of water35.

3.3.8 The existing palm oil exporting companies in PNG are international companies that self-regulate to minimise environmental controversy36. One commentator states that ‘forest administration in PNG is notoriously corrupt’ and that it has been carried out ‘in an unregulated manner, precluding forest recovery and has tended to be concentrated in certain provinces’37.

34 Roundtable for Sustainable Palm Oil (RSPO) Sustainable Oil Palm for Papua New Guinea (PNG), RSPO Project Proposals 35 FAO Land and Water Division at http://www.fao.org/landandwater/default.stm 36 Hunt, Economic Globalisation impacts on Pacific island Environments and aid implications, Marine Policy Volume 27, Issue 1, January 2003, Pages 79-85


17

37 Hunt 2002b in Hunt, Economic Globalisation impacts on Pacific island Environments and aid implications, Marine Policy Volume 27, Issue 1, January 2003, Pages 79-85


Colombia

3.3.9 The state in Colombia has three levels of government at the central, departmental and municipal level. Colombia has undergone state reform involving the decentralisation of the agriculture and rural sector. There is now an agricultural extension municipal office (UMATA) in each municipality, which is responsible for the delivery of extension services to small farmers. Colombia has also implemented the liberalisation of the land market. This has consisted of a grant and loan program for the redistribution of land.

3.4 Initiative Framework 3.4.1 The following initiatives include schemes and programs in countries other

than the case study countries and in other plantation and related sectors to give examples of better practice worldwide.

Eradication of Child Labour on Plantations National level (Ghana)- Oil Palm The General Agricultural Workers Union has negotiated a collective agreement with the Ghana Oil Palm Development Company, which commits management to the eradication of child labour in and around its plantations38.

International level - Tobacco Joint Statement signed by International Tobacco Grower’s Association and the IUF 10/06/990 Roundtable on Sustainable Palm Oil This initiative was set up by the palm industry and WWF. It is industry led and membership includes Consumer Goods Manufacturers, Retailers, Banks/Investors, Environmental NGOs and Social/Development NGOs. The principal objective of the RSPO is to ‘promote the growth and use of sustainable palm oil through co-operation within the supply chain and open dialogue between its stakeholders’. During the development of the RSPO Principles & Criteria for Sustainable Palm Oil Production, it was recognised that smallholder producers, who make up roughly 30% of palm production in Indonesia for instance would need special attention when drawing up the specifically for this sub-sector’s use. A smallholders task force has been set up.

International Finance Corporation (IFC) WWF-US Initiative

38 International Labour Organisation (ILO) 2003 Background Paper Decent work in agriculture


18


This joint project will research the environmental and social issues associated with the production of a number of agribusiness commodities, these are, palm oil, sugar, soy and cotton. The project aims to understand how useful the development and application of ‘Better Management Practices’ (BMPs) would be for these commodities. National Roundtable on Biofuels in Colombia Fedepalma, with the assistance of the Ministry of the Environment, Housing and Territorial Development, organised this roundtable event. World Bank Oro Expansion ProjectThis began in 1993 in PNG and had received in excess of $27m in funds as at 200139.

Industry voluntary standards

• The Swiss retailer, Migros, in collaboration with WWF has committed to source palm oil only from plantations that have not been established at the expense of tropical forests. It has set up a set of minimum standards for environmental and social criteria; and

• Unilever has developed indicators for agricultural practices within their palm oil plantations.

3.4.2 SAWIT watch in Indonesia major Dutch banks (ABN AMRO, Rabobank and Fortis) have decided to stop financing or substantially restrict the financing of the development of oil palm plantations which purposely destroy tropical rainforests. http://www.wrm.org.uy/index.html.

3.4.3 Pacific Rim Palm Oil (PRPOL) manages five plantations, two in Indonesia and three in Papua New Guinea. PRPOL was the first oil palm company in the world to put in the ISO14001 environmental management system across its whole production process from nursery to CPO leaving the mill. All five companies are certified to ISO14001.

3.4.4 The 1997 Clean Production Agreement has been signed between Colombia’s environmental authorities and the oil palm sector.

Other

3.4.5 A variety of international bodies, NGOs and stakeholders have set up campaigning initiatives around palm oil production, including the following:

39 Ibid, 12


19

http://www.wrm.org.uy/index.html


• GRASP is the flagship project of the UNEP and UNESCO set up to bring together global business and governments to save the world's great apes - man's closest relatives - from extinction in response to an appeal for their support. (Indonesia doc);

• Global Forest Watch (GFW), in collaboration with Conservation International, would like to increase the ability of the oil palm sector to contribute positively to regional development plans that balance needs of the private sector, government, local communities, and environmental interests GFW; and

• International and local campaigning NGOs which have been very active in this area include WWF and GFW.


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Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil 4 SUPPLY CHAIN ANALYSIS

4.1 Industry Structure 4.1.1 The industry structure and supply chain of palm oil is complex. Whilst

production and initial processing of fresh fruit bunches at a crude palm oil mill takes place in the tropical countries of production, further processing of palm oil is largely completed in Europe. Initial processing of fresh fruit bunches will take place in the country of production, since processing is required within 24 hours of harvesting due to rapid deterioration of the fruit. Each cluster of oil plantations will therefore usually have a Crude Palm Oil (CPO) mill. On the other hand, palm kernel crushing plants can be located in either producer or consumer countries40.

4.1.2 The supply chain includes international traders, EU trading subsidiaries of Indonesian and Malaysian oil palm plantations, trading arms of European edible oil refining companies, procurement divisions of major European food, detergent and chemical companies and independent edible oil traders and brokers. The end users are ultimately consumers who buy products that contain palm oil, however, the key node for intervention at this end of the supply chain is the manufacturers who buy palm oil as a discrete product.

4.1.3 Multilateral Development Banks, donors, technology suppliers, state investment and export credit agencies are among the main external actors that provide the impetus and the financial and technical support for the spread of plantations. The number of banks involved in the financing of the sector is substantial, both at the level of the initial production stage through to the food manufacturers. For example, financers of Kraft include ABN AMRO, BNP Paribas, Dresdner Bank, Credit Suisse, Deutsche Bank, Citibank, JP Morgan, Banco espirito Santo, Lehman Brothers, ING, HSBC, NAB Captial Markets, BBVA Securities, Den Norske Bank and Societe Generale.

4.1.4 The internal palm oil industry structure varies considerably across the different countries examined in this case study. The differences occur in the proportion of large plantations and small holder plantings, the proportion of palm oil area owned by the government and the extent to which processing is undertaken in the country of production. An interesting observation is that although Malaysia has given substantial support for smallholders, their

40 Food and Agriculture Organisation (FAO) at www.fao.org


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proportion of market share and land use relative to large plantations is small and much less so than in Indonesia. Factors other than finance and access to credit are, to some extent, having an influence on the structure of the sector. One area of uncertainty is the extent to which each type of producer contributes to the export market of palm oil. Although a third of the palm oil area in Indonesia is managed by smallholders, this may not equate to a third of exports, for two possible reasons, that productivity varies between different types of producers and cultivation and varying degrees of access to export markets.

Malaysia

4.1.5 Although production in Malaysia is dominated by plantation estates, individual smallholders41 still account for about 320,818 hectares of oil palm or 9.5% of the total planted area. The interests of individual smallholders are represented by the National Association of Smallholders (NASH). The government owns around 31% of plantation area.

4.1.6 The Federal Land Development Authority (FELDA) is responsible for more than 1.1 million hectares of plantations. FELDA is well positioned to influence the plantation sector to improve best management practice42.

4.1.7 The government has given substantial support and encouragement for the establishment of refining facilities in Malaysia. At the end of 2002, 46 refineries were operating in Malaysia. Major refining companies in Malaysia include MPOA, Golden Hope, Kumpulan Guthrie, Sime Darby, Felda and United Plantations.

4.1.8 The processing of palm oil outside of Malaysia is undertaken by a large number of processors, including multinationals such as Cargill and ADM and local companies in countries of import.

4.1.9 Financing is provided by a range of institutions including, local and international banks and the World Bank.

4.1.10 The equity of plantation companies in the country is largely under Malaysian ownership, the largest investors being the national equity corporation, Permodalan Nasional Berhad (PNB) and the Employees Provident Fund (EPF). PNB has substantial holdings in seven major plantation companies while EPF which provide retirement benefits for its members has made substantial investments in more than 14 plantation companies listed on the

41 Under the RISDA Act 1972, a smallholder is defined as the owner of legal occupier of any land that is 100 acres (40.5 ha) in area 42 Ibid, 5


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Kuala Lumpur Stock Exchange. Only a few companies have substantial or controlling foreign shareholding, notable examples being United Plantations Berhad and Pamol Plantatins Sdn Bhd which is Unilever’s plantation interest in Malaysia. However, the latter had recently announced to dispose all its plantations in the Malaysia.

Table 6: Major palm oil plantation companies operating in Malaysia

Indonesia

4.1.11 More than a third of Indonesia’s palm oil area is managed by smallholders. Around 16% of the area is owned by the government and the remaining area is owned and managed by private, large scale plantation companies43. Foreign investors interested in oil palm production have been mainly from Malaysia. Land availability for this type of production is very limited in Malaysia and Indonesia is close to their processing facilities44. Indonesia’s palm oil industry is dominated by some of the same conglomerates that control the logging, wood processing, and pulp and paper industries. In

43 Ibid,5 44 CIFOR (2000) Centre for International Forestry Research, 2000, Occasional Paper No 26E, The Impact of sectoral development on Natural Forest Conversion and degradation: The Case of Timber and Tree Crop Plantations in Indonesia


1997, the private estate sector was dominated by 10 groups that, together, owned about 64 percent of the total planted area owned by private firms. In addition, these 10 groups owned land banks, land that has been approved for development as plantations, totalling nearly 3 million ha. Four of these groups also held major logging concessions in 199745.See table below:

Table 7: Land Holding of Top Oil Conglomerates, 1997

PNG

4.1.12 A large proportion of the population is in subsistence or in subsistence mixed with small scale production and trading. However, the existing palm oil exporting companies in PNG are international companies46. In 2000, smallholders accounted for 33% of total palm oil production47.

4.1.13 The estate companies own and operate the processing mills and their own plantation estates. Some also transport smallholder fruit to their mills and provide seedling and technical advice to smallholders. Smallholders sell their fruit to the company.

45Ibid 33 46 Ibid, 16 47 Ibid, 13


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Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil 4.1.14 PNG now has five major plantations, established through loans provided by

major lenders such as the World Bank and the Asian Development Bank. All oil palm in PNG is grown under the Nucleus Estate Smallholder Scheme, whereby a central company and plantation contracts small farmers to supply them with oil palm fruit. The structure of the Nucleus Estate Smallholder Scheme and the nature of oil palm itself are raising serious concerns amongst oil palm growers and PNG civil society alike48.

Colombia

4.1.15 Colombia is the largest producer of palm oil in Latin America.

Discussion

4.1.16 Key issues include the location of food manufacturers. For example, Unilever imports 6-8% of world palm oil. If most production and manufacturing takes place in Europe, for example the company is registered in the Netherlands, food imported to the UK will increase overall palm oil consumption figures.

4.1.17 A further issue is the link between logging and timber harvesting and the palm oil industry. In Indonesia palm oil companies are interested in the timber that can be harvested from oil palm concessions in Irian Jaya and Kalimantan. An executive of North Sumatra’s leading palm oil producer said that most of the small amount of land newly planted with oil palm in North Sumatra resulted, in fact, from logging. He explained that after clearing the land, the logging companies plant oil palm in the deforested areas. Although logging companies did not intend to begin palm oil production, oil palms proved a cheap way to meet reforestation regulations.

4.1.18 The structure of the supply chain includes the amount of smallholders, large plantations and state owned plantations. This analysis and the impacts on these different types of land owners requires consideration of their relative links to global markets and the proportion they are able to export.

4.1.19 Although intervention may concentrate at a specific point in the supply chain, as Unilever identify ‘Quality assurance of palm oil and Unilever’s related environmental sustainability project is a supply chain issue. We aim to act as a catalyst for change by leading this initiative, but much change has to occur with third parties. All stakeholders have a role to play in this’

48 http://www.acfonline.org.au/default.asp?section_id=96


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4.2 Production Stages

Pre-cultivation

Figure 6: Plantation establishment inputs and outputs

4.2.1 Nursery Establishment commences as soon as the land is found to be suitable and approved by the respective agencies for development to proceed. Good quality seedlings are raised in a polybag nursery for about 12 months.

4.2.2 Site Preparation can include the conduction of a land survey, clearing of existing vegetation, establishment of a road and field drainage system, soil conservation measures such as terracing, conservation bunds and silt pits and sowing of leguminous cover crops. From the early 1990s, the zero burning technique for land clearing has been in place in Malaysia and Indonesia, however, it has been reported that burning continues in Indonesia for clearing land in preparation for oil palm.



28

4.2.3 It is important that effort is made to obtain full ground coverage by leguminous cover crops such as Pueraria javanica and Calopogonium caeruleum to minimise soil loss through runoff as well as to improve the soil properties through nitrogen fixation.

Cultivation Figure 7: Cultivation inputs and outputs

4.2.4 ield Maintenance operations include weeding, water management, pruning,

4.2.5 hes (FFB) commences between 24 to 30 months after field planting, depending on the soil type and agronomic and

Fpest and disease management and manuring or fertilizing. A mix of cultural, physical, chemical and biological control approaches to minimise crop losses to pests is commonly adopted in plantations. Examples of biological control measures applied include the use of baculovirus and Metarhizium anisopliae to control the rhinoceros beetle (Oryctes rhinoceros), control of leaf-eating bagworms and nettle caterpillars by their natural predators and parasitoids and the use of barn owls (Tyto alba) as the biological agent to control rats.

Harvesting of Fresh Fruit Bunc


management inputs. Harvesting is carried out manually. Various systems for in-field collection of FFB and transportation to the palm oil mill. In view of increasing shortage of workers as well as the need to increase worker productivity, mechanised approaches have been adopted by plantations, an example being the tractor-mounted ‘grabber’.

Replanting

4.2.6 c cycle of the oil palm is about 25 years, after which the old ero burning technique of replanting is now

4.2.7 rvesting, it is important that the fresh fruit bunches (FFB) are ent a rapid rise in free fatty acids

4.2.8 of acid in the oil. al extraction

4.2.9 from the nuts as well as to break

4.2.10

The economistand is replanted. The zcommon commercial practice. However, in some situations, plantations consider underplanting, whereby new seedlings are planted under the old palms which are thinned out progressively to allow the development of the new stand.

Processing

5.3.1 After haprocessed as soon as possible to prev(FFA) which could adversely affect the quality of the crude palm oil (CPO). Palm oil mills are generally located in the plantations to facilitate timely transportation and effective processing of FFB.

Once ripe, the fresh fruit bunches must be processed quickly to prevent a build up The palm oil milling process involves the physic

of palm products namely, crude palm oil and palm kernel from the FFB. The process begins with sterilization of the FFB. The fruit bunches are steamed in pressurised vessels up to 3 bars to arrest the formation of free fatty acids and prepare the fruits for subsequent sub-processes. The sterilised bunches are then stripped of the fruitlets in a rotating drum thresher. The stripped bunches or empty fruit bunches (EFB) are transported to the plantation for mulching while the fruitlets are conveyed to the press digesters.

In the digesters, the fruits are heated using live steam and continuously stirred to loosen the oil-bearing mesocarpopen the oil cells present in the mesocarp. The digested mash is then pressed, extracting the oil by means of screw presses. The press cake is then conveyed to the kernel plant where the kernels are recovered.

The oil from the press is diluted and pumped to vertical clarifier tanks. The clarified oil is then fed to purifiers to remove dirt and moisture before beingdried further in the vacuum drier. The clean and dry oil is ready for storage and dispatch. The sludge from the clarifier sediment is fed into bowl centrifuges for further oil recovery. The recovered oil is recycled to the clarifiers while the water/sludge mixture which is referred to as Palm Oil Mill Effluent (POME) is treated in the effluent treatment plant.(ETP). The press cake is conveyed to the depericarper where the fibre and nuts are


29



30

separated. Fibre is burned as fuel in the boiler to generate steam. The nuts are cracked and the shell and kernel are separated by means of a winnower and hydro-cyclone. The clean kernels are dried prior to storage.

Processing (milling)

Figure 8: Processing inputs and outputs (Milling)


Scott Wilson December 2006 31

Processing (refining) Figure 9: Processing inputs and outputs (Refining)

4.2.11 The refining process removes free fatty acids, phosphatides, odouriferous matter, water as well as impurities such as dirt and traces of metals from the CPO; the objective being to produce an edible oil of consistent quality that meets industry’s standards and satisfies customer requirements, moisture and impurities, Iodine Value, Peroxide Value, melting point, colour and flavour. The refined oil must tasteless and have a bland flavour.

4.2.12 CPO is processed by either physical or chemical refining to produce either refined, bleached and deodourised palm oil (RBDPO) or neutralised, bleached and deodourised palm oil (NBDPO). These are subjected to fractionation to obtain the respective liquid olein fraction and the solid stearin fraction. (Figure 6). Of the two processes, physical refining is the predominant approach adopted by the refineries as it is simpler, less capital intensive, more efficient and produces a lower effluent load.

4.2.13 Physical or steam refining begins with degumming when the CPO is treated with food grade phosphoric acid or citric acid to remove natural gums in the form of phosphatides , followed by bleaching with activated earth (Fuller’s Earth) under vacuum to remove colouring matters as well as to adsorb any



metal ions. The treated oil is then heated to 240 C - 260 C under 2- 6 mm Hg (MEOMA, 2002) for simultaneous deacidification and deodorisation. The FFA is stripped off by live steam and is recovered together with the entrained oil is as palm fatty acid distillate. The steam distillation process also removes odours and off-flavors from the CPO (‘Deodorisation’). The oil is then cooled to 55°C before polishing. In the chemical refining process, the FFA present in CPO is removed by neutralisation with caustic soda (sodium hydroxide), the concentration of the latter being dependent on the quality of the CPO feedstock. This chemical reaction produces neutralised CPO and a soap stock; the latter is separated from the oil by a high-speed separator. The neutralised oil is subjected to earth bleaching to remove colour pigments and metal ions followed by deodorisation - steam distillation under vacuum to remove odoriferous matters such as aldehydes and ketones.

4.2.14 The refined oil contains triglycerides of various compositions and melting points, the main fractions being palm olein and palm stearin. These fractions can be separated by dry fractionation, detergent fractionation and solvent fractionation. Dry fractionation is commonly used whereby the refined oil is allowed to crystallise under controlled temperature and the resultant slurry is pumped through a membrane filter press to obtain the liquid olein fraction and the solid stearin portion. The olein could also be fractionated for a second time (‘double fractionation’) to produce a ‘super olein’ and a solid palm mid-fraction (PMF) which is the feedstock for production of specialty fats and other products.

Processing (crushing)

Figure 10: Processing inputs and outputs (Crushing)

Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil 5 IMPACT ASSESSMENT

5.1 Background 5.1.1 The magnitude of impact and risk of impact of tree plantations depends on

the scale, the aimed objective and the type of plantations, as well as on the natural and socioeconomic environment where they are implemented. The impact assessment will therefore take account of discussion in previous sections including the structure of the industry, future trends and the governance framework. For example, the structure of the industry determines the proportion of smallholders and proportion of large scale commercial plantations. The export sector is dominated by industrial scale oil palm production. Smallholders’ planting rarely exceeds a few hectares and is interspersed with other land uses, the level of imported agrochemicals is minimal and overall the environmental impact of small scale agriculture is generally low49. The cumulative impact of smallholder resource use will impact on the environment, however, the mix of land use may provide mitigating factors.

5.1.2 Synergies and links between impacts should be considered, for example, monoculture plantation, use of agrochemical, soil erosion and further need for increased inputs. A key factor determining the magnitude of impacts is the governance of the sector, in particular local governance and planning. This will influence issues such as how the trees are planted, where roads are situated and the management of effluents.

5.2 Pre-cultivation

Biodiversity

5.2.1 Oil palms can only be cultivated in tropical areas and the original habitat on the land most suitable for oil palm production is lowland evergreen tropical rainforest. Worldwide, this is the most species rich terrestrial habitat type. These factors, together with oil palm production being a land-intensive industry result in significant impacts to biodiversity. Habitat conversion to monoculture and threats to key species are the greatest environmental concerns associated with large-scale palm oil production50.

5.2.2 The impacts at this stage are the removal of vegetation and old growth forest in the initial land clearing stage and the inadequacy of the

49 Ibid, 16


50 FoE (2004) Friends of the Earth, Greasy Palms, the Social and Ecological Impacts of Large Scale Oil Palm Plantation Development in South East Asia.


monoculture palm plantation to support the variety of animal species that the forest provided a habitat to. This is due to habitat degradation and habitat fragmentation.

5.2.3 Unilever is one manufacturer advocating the sustainable production of palm oil. Land clearance is recognised as a key sustainability issue and it is suggested that the productivity and yield of existing plantations must be increased in order to reduce the need for new plantations51. However, as discussed in previous section, projected future increases in oil palm demand are being anticipated by further land conversion in producer countries.

Landscape

5.2.4 Landscape impacts are great, as natural forest area is converted to uniform monoculture across large tracts of land. Tree crops cover 17% of Malaysia’s land area52

Soil Erosion

5.2.5 Traditional practices used to establish oil palm plantations can lead to considerable soil erosion. Erosion occurs during forest clearing and plantation establishment when the soil is left uncovered. Uncovered land is vulnerable to rain water washing the top soil away, resulting in soil erosion and nutrient depletion. Erosion is accentuated by planting trees in rows up and down hillsides rather than on contours around them, by not properly siting or constructing infrastructure such as roads, and by establishing plantations and infrastructure on slopes of more than 15 degrees.

CO2 and transport

5.2.6 Indirect impacts of land conversion include reduced CO2 absorption from tree cover. Plant biomass also represents a sink for atmospheric carbon dioxide. CO2 emissions from oxidation processes associated with swamp area conversions. Methane?

Socio-economic and cultural impacts

5.2.7 Although palm oil production brings in extensive revenues for the private sector, there are significant negative impacts on livelihoods and resources of local populations. Plantations are promoted and established in inhabited locations by government agencies, national and foreign businesses, multilateral banks, or other organizations external to the area. They will

51 Ibid, 4


52 New Agriculturalist online at www.new-agri.co.uk


typically occupy areas already being used in various ways by local people. Indigenous populations in areas of land undergoing conversion to oil palm plantations lose the natural resources available to them in the natural forest habitat. Forests often supply water and compost for crops, fodder for livestock, and vegetables, game, honey, fruit, mushrooms, fibre, firewood, building wood, and medicine for local communities, and in addition are frequently a source of spiritual values.

5.2.8 Human rights abuses and conflict have been reported in areas undergoing conversion. These impacts vary according to geographic location. In PNG, the impacts are less marked due to more formal protection given to traditional rights. In Indonesia and Malaysia there have been extensive reports of human rights abuses, and people being forcibly moved off the land.

5.2.9 The magnitudes of the impacts are very high at a local level. The cumulative impact of palm oil plantations can also result in social impacts at a national level. Involuntary resettlement, if unmitigated, often gives rise to severe economic, social and environmental risks including long term hardship53.

5.2.10 Disputes can arise in several circumstances. Customary land boundaries can be crossed in the establishment of oil palm plots. In other instances disputes arise from the conversion of land which has been traditionally used for communal benefit, to uses which benefit only those working for the plantation company. The sudden introduction of a cash economy introduces inequalities amongst villagers. Downstream, waterway pollution may impact on other communities and provide another source of local dispute.

5.2.11 The agroexport development model on which large-scale tree plantations are usually based can also create economic problems on a national scale. One problem is concentration of wealth. Occupying large areas of fertile land, industrial plantations require state support and heavy, long-term investments. In the vast majority of cases, they require some or all of the following: direct subsidies, tax exemptions, soft loans from foreign creditors, forestry research, road construction, improved port installations, and other subsidies which are extracted from the nation as a whole.

5.2.12 All countries in this case study import food and some have been in receipt of food aid, the following information is for the period 1998-2000, FAO:


53 World Bank Involuntary Resettlement Policy, OP/BP 4.12, Appendix 1


• Malaysia, 63.9% net cereal imports as percentage of total consumption, 18% of children were undernourished 1995-2000;

• Indonesia, 10.5% net cereal imports as percentage of total consumption, 10.5% of this food aid, 26% of children undernourished 1995-2000;

• Colombia, 47.1% net cereal imports as percentage of total consumption, 0.4% of this food aid, 7% of children undernourished 1995-2000; and

• Papua New Guinea, 96.9% net cereal imports as percentage of total consumption, 1.2 % of this food aid, 35% of children undernourished 1995-2000.

Country specific:

5.2.13 In Indonesia and Malaysia there is worldwide concern over habitat loss and threats to key species such as the orangutan, proboscis monkey, Sumatran rhino and tiger54.

Malaysia

5.2.14 In Peninsular Malaysia, forest conversion was identified as the most serious threat to the survival of the elephant population55. It is reported that the estimated forest cover has been reduced from 84% in 1958 to 44% in 1990 and attributed the decline in the elephant population to forest conversion to monoculture plantations, especially oil palm, with the area earmarked for oil-palm plantations rising from 543,000 ha in 1960 to more than 1,625,000 ha in 1990. According to the Malaysian Palm Oil Board (MPOB), in 2003, the area planted with oil palm was 2,202,166 ha in Peninsular Malaysia and 3,802,040 ha in the whole of Malaysia, but not all of this expansion was converted from forests. Malaysia's plantations mostly found on the Malay Peninsula

Indonesia

5.2.15 The most common method for establishment of plantations is the conversion of forest land. The process of land acquisition is relatively easy and marketing of timber cut from the forest is profitable56.

54 54 FoE (2005) Friends of the Earth, The Oil for Ape Scandal, How Palm Oil is Threatening Orang-utan Survival 55 WWF (2005), Guidelines on the better management practices for the mitigation and management of human-elephant conflict in and around oil-palm plantations in Indonesia and Malaysia., version 1 July 2005, WWF


56 CIFOR (2000) Centre for International Forestry Research, 2000, Occasional Paper No 26E, The Impact of sectoral development on Natural Forest Conversion and degradation: The Case of Timber and Tree Crop Plantations in Indonesia

Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil 5.2.16 In Indonesia, the majority of oil palm plantations are located in Sumatra but

expansion is proceeding rapidly in Kalimantan, especially West Kalimantan. Further rapid development of this crop is expected to occur in East Kalimantan, Sulawesi, and Irian Jaya57. According to the Ministry of Forestry and Estate Crops, approximately 4.1 million hectares of forest land has been converted to plantations since 1982.58 Most of the land converted (3.3 million hectares) was on conversion forest land, forest area allocated for conversion to plantations (Hutan Produksi yang dapat dikonversi, HPK). However, plantations were also developed on 166,532 hectares of limited production forest (Hutan Produksi Terbatas, HPT),59 455,009 hectares of production forest (Hutan Produksi, HP),60 and 129,449 hectares of forest land designated for other uses (Penyediaan Area Penggunanan Lain, PAPL)

61.

5.2.17 The development of estate crop plantations over the past 30 years has clearly been a major factor in deforestation, but it is difficult to present definitive data on the amount of forest that has been converted to estate crops. Official data sources vary widely and are inconsistent from year to year62. Friends of the Earth Indonesia are warning that the European biofuel market is threatening Borneo's remaining rainforests63. A report released on 13 April 2006 reveals how the Indonesian government could develop up to three million hectares of oil palm plantations on the island of Borneo, threatening wildlife and local livelihoods to cater for international demand for cheap palm oil [1]64.

5.2.18 As late as 2001 in the Riau Province of Sumatra in Indonesia, fallen trees were bulldozed into piles that went straight up and down the hillsides (as opposed to contour rows). Such practices tend to funnel the water into channels and thereby increase soil erosion.

57 FWI, WRI (2002) The State of the Forest: Indonesia 58 It’s important to note that this figure includes rubber, coffee, tea and other estate crop plantations, as well as oil palm. 59 According to the government, limited production forest can only be selectively logged. Only logs more than 50 cm diameter can be extracted from limited production forest. 60 Production forest is designated for timber extraction. 61 Ibid 33 62 http://earthtrends.wri.org/text/forests-grasslands-drylands/map-447.html 63 http://portal.campaigncc.org/?q=node/584&from=30&comments_per_page=30


64 http://www.foe.co.uk/resource/press_releases/demand_for_palm_oil_trigge_12042006.html


Papua New Guinea Table 8: Environmental Impacts of Oil Palm Establishment

5.2.19 The bacteriological and chemical quality of most of the groundwater in Papua New Guinea is good65. The internal renewable water resources are estimated at 801.0 km3/year66

5.2.20 The growing, collecting and hunting of food is an important part of PNG culture. Women sell goods in the village markets, a valued time for socialising with other village women. When customary lands are converted to oil palm many of these traditions become obsolete.

5.3 Cultivation

Biodiversity

5.3.1 The area of cultivation of a palm plantation will be a far simplified structure that that of natural forest. The ecosystem functions are no longer taking place in the same way for example, soil, water, microclimate processes. This will result in impacts on biodiversity as well as requirement s for human intervention to compensate for loss of function, such as chemical use, irrigation and drainage measures, possibly exacerbating the impacts.

Chemical Use

65 FAO Land and Water Development Division, Aquastat


66 FAO country profiles: Papua New Guinea at http://www.fao.org/ag/agl/aglw/aquastat/countries/papua_n_guin/index.stm 26 May 2006

Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil 5.3.2 Herbicides are used yearly in plantations, mainly for grass control.

Insecticides used mainly in the nursery before the oil palm seedlings are transplanted.67 Pesticides are used to control rats. Palm oil production requires less fertiliser per unit of output than other oilseed crops, however, the constant removal of nutrients from the plantations in the form of fruit bunches requires fertiliser inputs so that the production does not decline over time. For that reason the standard nutrients nitrogen, phosphorus, and potassium, plus other trace elements, are applied regularly to oil palm trees.

5.3.3 A number of factors affect the amount of any type of fertiliser that is applied to oil palm plantations. The key variables include the amount or type of ground cover, the slope of the land cleared for the plantation, and whether the empty fruit bunches or other organic matter are used to mulch the area where fertilisers are applied.

5.3.4 If these factors are not addressed then more agrochemical inputs will be required because those used will tend to leach out of the plantation and into fresh water systems.

Water resources

5.3.5 Polluted water run off, due to inefficient chemical use and drainage, can have implications for local water resources including impacts on local rivers and marine environments.

Soil Health

5.3.6 Prime sites for planting are becoming more rare and planting on marginal and fragile soils is increasing. Impacts include:

• deep peats – vulnerable to drying, oxidation CO2 emissions,

alterations to local hydrology • riparian areas – flooding and erosion • steep slopes – erosion

5.3.7 It is expensive for plantations and local governments to correct problems caused by erosion. Eroded areas require more fertiliser and other inputs including repair of roads and other infrastructure.

5.3.8 Oil palms take a large amount of nutrients out of the soil, depleting nutrient levels. It is probable that the land will be useless after the oil palm plantation is abandoned.


67 Blix, Mattsoa 1998 in Mattson et al (2000) Agricultural land use in life cycle assessment (LCA): case studies of three vegetable crops, Journal of Cleaner Production 8 (2000) 283-292


Waste

5.3.9 An additional impact to those stated above is the effluent generated by the concentration of worker housing (200 workers per 1000 hectares of palms)68

Climate Change

5.3.10 Emissions from local and international transportation. Mills generally use waste from the plantation to fuel mechanical processes.

Socio-economic

5.3.11 International NGOs have criticised working conditions for labourers on oil plantations in south east Asia, in particular, exposure to pesticides and health risks to the mainly female workforce and reports of low pay and worker exploitation69.

5.3.12 The use of child labour, either as part of a ‘family team’ or as individual workers, in plantations and commercial agriculture is an entrenched practice. Oil palm production is included in this70. Children will work alongside parents, particularly when schooling or childcare is unavailable or not affordable. The money earned will often be allocated to the male head of the household, which in effect prevents women and children from receiving their earnings. IPEC’s field experience over the last ten years suggests that child labour cannot be eliminated without effectively addressing two other important issues: lack of accessible education and lack of adequate income for parents. Trade Unions have shown a causal link between gender inequalities and child labour.

5.3.13 Reliance on cash crops can have adverse impacts on smallholders and carries a high risk. Smallholders rely on world prices for palm oil and have to buy in a large proportion of household food rather than producing it themselves. Women are especially disadvantaged by poor working conditions and lower wages for their labour.

68 Ibid, 16


70 Ibid 1


Country specific:

Malaysia Table 9: Employment in primary commodities sector – Malaysia

Year 1980 1990 1995 2001

Oil Palm 92,352 115,285 240,422 315,000

5.3.14 These figures do not include the 72,000 households in public sector land schemes.

5.3.15 Work is increasingly found through labour contractors and migrant labour accounts for 40% of all workers. In July 2002, 181,000 migrant workers were ‘registered’ on plantations. In oil palm, half the workers are migrant. This results in difficulties for trade union organisation.

Indonesia

5.3.16 Ethnic unrest can occur can this is often attributed to the government’s PIR-Transmigration programme, which established plantations with transmigrate labour in the outer islands of Indonesia and often resulted in social conflict between local people and transmigrants. These conflicts have increased during the reform era71.

5.3.17 Production of food is impacted; Indonesia is now a net importer of rice. The link with palm oil production expansion is uncertain. Rice is commonly grown in hilly areas.

5.3.18 The FAO estimates that 40,000 hectares of agricultural land were lost in Indonesia due to the tsunami in December 2004. This was mainly in the northern tip of Sumatra. Livestock and poultry were also lost, together with more than 200,000 human lives. Harm to fisheries and pre-tsunami, nearly quarter of Aceh population required food aid72.

5.4 Processing

Waste

5.4.1 The processing of fresh fruit bunches, to produce palm oil takes place at the palm oil mill. The process produces a significant amount of biomass waste

71 Ibid 33


72 New Agriculturalist on line, country profiles: Indonesia at www.new-agri.co.uk


and wastewater, Palm-Oil Mill Effluent (POME). Wastewater from palm oil mills is often discarded in disposal ponds, resulting in the leaching of contaminants that pollute the groundwater and soil, and in the release of methane gas.

5.4.2 POME mainly comprises organic compounds. It is readily decomposed by anaerobic and aerobic bacteria. However, if it is discharged to water courses, the biological reaction depletes oxygen levels in the water, causing adverse impacts to the aquatic ecosystem.

5.4.3 Run-off and waste disposal are usually completely unregulated. However, they can be re-used and applied to land or burned as a biofuel.

5.4.4 Processing effluent from palm oil can be reapplied to plantation and is an excellent soil additive.

5.4.5 At a large oil palm plantation near Bangun Bandar, North Sumatra, the company burns the empty husks that held the oil palm fruits. Efforts, however, have begun to develop a method to compost the husks and use the mulch as tree fertiliser.


Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil 6 SUMMARY

6.1 Trends in demand 6.1.1 Palm oil is a leading oil in the edible oils market and demand for its use is

predicted to rise as consumption of processed foods, detergents and soap products continues and future markets such as biofuel emerge.

6.1.2 UK demand is likely to contribute to this increasing trend, as palm oil is predicted as the favoured oil to meet increasing processed food needs and is one of the oils which could potentially help meet government targets for biofuel use.

6.2 Current exports to UK 6.2.1 The four countries examined in this case study, Malaysia, Indonesia,

Colombia and Papua New Guinea, are among the top global exporters of palm oil and are the four largest exporters to the UK.

6.2.2 Taking into account the staging country, the Netherlands and inter-country trade between producers, Malaysia and Indonesia export the greatest quantities of palm oil products to the UK. However, the percentage share of UK imports within their palm oil sectors are small relative to Colombia where 39% of their palm oil products for export are exported to the UK, compared to 2% for both Indonesia and Malaysia (comparable data is unavailable for Papua New Guinea).

6.3 Distribution of impacts of change in demand 6.3.1 Economically, changes in demand and trade with the UK will impact more

greatly on Colombia, however environmental impacts will be proportionate to the actual land take and extent of cultivation which is high for all four countries, in particular Malaysia, Indonesia and Papua New Guinea. Social impacts will be dependent both on land take and on the reliance of the economy on UK palm oil imports, however, the extent of these impacts will depend on the structure of the industry and governance of the sector.

6.4 Trends in supply 6.4.1 Malaysia and Indonesia both dominate global exports, however increase in

demand is more likely to be met in Indonesia and to some extent Colombia and Papua New Guinea. Malaysia is the main foreign investor in the establishment of plantations in Indonesia where cheaper land and labour costs relative to Malaysia, together with the proximity to Malay processing facilities, make this an attractive area for investment. Foreign investment has been substantial in all four countries’ palm oil sectors and is likely to influence increased planting areas, in order to increase returns on investment.


Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil 6.4.2 The increased demand for palm oil will be met by further establishment of

plantations, rather than increased productivity on existing plantations. This will result in large impacts associated with forest conversion in Indonesia, Colombia and Papua New Guinea, whilst cultivation impacts will continue to affect all four countries.

6.5 Main impacts of palm oil production 6.5.1 The main environmental and socio-economic impacts from palm oil

production are associated with the establishment of the plantation. Oil palms can only be cultivated in tropical areas and the original habitat on the land most suitable for oil palm production is lowland evergreen tropical rainforest. Worldwide, this is the most species rich terrestrial habitat type. These factors, together with oil palm production being a land-intensive industry result in significant impacts to biodiversity. Habitat conversion to monoculture and threats to key species are the greatest environmental concerns associated with large-scale palm oil production.

6.5.2 Plantations are promoted and established in inhabited locations by government agencies, national and foreign businesses, multilateral banks, or other organizations external to the area. They will typically occupy areas already being used in various ways by local people. Indigenous populations in areas of land undergoing conversion to oil palm plantations lose the natural resources available to them in the natural forest habitat. Other social impacts include employment and labour and are influenced by the national policy and governance of the oil palm sector.

6.5.3 The economic benefits from palm oil production and their impact on the populations of exporting countries will depend in part to the structure of the industry, particularly the proportion of state owned and smallholder owned plantations. This, together with the extent to which smallholders are connected to markets and the risks they bear relative to larger exporting and processing companies, will impact on the gains they receive from increasing demand for palm oil. The increase in cash crop production will impact on local food security, as reliance on world palm oil prices will dictate smallholder income and less land is available for local food production. Increase in cash crop production will increase foreign revenue, however, it will be necessary to implement appropriate initiatives and governance structures to ensure this is equitably distributed and that any adverse impacts of cash crop production, both social and environmental, are removed.

6.6 Complexity of supply chain 6.6.1 The industry structure and supply chain of palm oil is complex. Whilst

production and initial processing of fresh fruit bunches at a crude palm oil mill takes place in the tropical countries of production, further processing of palm oil is largely completed in Europe.


Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil 6.6.2 The supply chain includes international traders, EU trading subsidiaries of

Indonesian and Malaysian oil palm plantations, trading arms of European edible oil refining companies, procurement divisions of major European food, detergent and chemical companies and independent edible oil traders and brokers. The end users are ultimately consumers who buy products that contain palm oil, however, the key node for intervention at this end of the supply chain is the manufacturers who buy palm oil as a discrete product.

6.6.3 Multilateral Development Banks, donors, technology suppliers, state investment and export credit agencies are among the main external actors that provide the impetus and the financial and technical support for the spread of plantations. The number of banks involved in the financing of the sector is substantial, both at the level of the initial production stage through to the food manufacturers.

6.6.4 The internal palm oil industry structure varies considerably across the different countries examined in this case study. The differences occur in the proportion of large plantations and small holder plantings, the proportion of palm oil area owned by the government and the extent to which processing is undertaken in the country of production. Factors other than finance and access to credit are, to some extent, having an influence on the structure of the sector.

6.6.5 One area of uncertainty is the extent to which each type of producer contributes to the export market of palm oil. Although a third of the palm oil area in Indonesia is managed by smallholders, this may not equate to a third of exports, for two possible reasons, that productivity varies between different types of producers and cultivation and varying degrees of access to export markets.

6.7 Robustness of information 6.7.1 Impacts have been widely documented by a range of non–governmental

organizations (NGOs) and international bodies and industry organisations. There is consensus on the significance of establishment impacts and industry bodies have concluded that initiatives are required to prevent further impact on endemic forest and species. There are reports of social impacts among both NGOs and bodies such as the International Labour Organisation (ILO).


Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil Appendix I – Literature Review See footnotes 1 to 72 in main body text. In addition, search terms used:

Palm oil / environmental impacts

Palm oil cultivation

Palm oil biodiversity

Palm oil industry structure

Sustainable palm oil

Palm oil social impacts

International Labour Organisation


Development of the Evidence Base: Sustainable Commodities Final Report Case Study – Palm Oil Appendix II – Assessment frameworks The tables outline magnitude and likelihood of impacts without intervention or mitigation measures.



Indonesia

Commodity: Risk Factor Subject Elements Commentary Magnitude Likelihood of

occurrence 1.1 Policy Framework National Palm oil is an important export revenue

for Indonesia The Suharto government (1967 –1998) invested, with World Bank assistance, in state-run companies from the late 1960s Smallholder estates expanded after 1979, again due to government intervention and World Bank support Large-scale private plantation sector grew most rapidly after 1986, again with government encouragement. Companies were given a range of incentives, including access to credit at concessionary rates for estate development, planting and processing Rural development policy includes partnership working of large scale plantation companies with smallholder plantations Indonesia currently receives funding from the UK government for assistance on projects within the forestry sector



International The sector does not receive direct subsidies in most palm oil producing countries, unlike other oil crops such as soy, rape and sunflower in the EU and US Significant amounts of indirect support are received through assistance to smallholders as part of rural development plans, infrastructure support such as roads and ports and government investment in the establishment of plantations

1.2 Initiative Framework National Pacific Rim Palm Oil (PRPOL) manages five plantations, two in Indonesia and three in Papua New Guinea. PRPOL was the first oil palm company in the world to put in the ISO14001 environmental management system across its whole production process from nursery to CPO leaving the mill. All five companies are certified to ISO14001 SAWIT watch in Indonesia major Dutch banks (ABN AMRO, Rabobank and Fortis) have decided to stop financing or substantially restrict the financing of the development of oil palm plantations which purposely destroy tropical rainforests



International • Eradication of Child Labour on Plantations, Ghana Oil Palm national initiative

• International Child Labour plantations initiative for tobacco

• Roundtable on Sustainable Palm Oil

• TInternational Finance Corporation (IFC) WWF-US Initiative

Industry voluntary standards, e.g. the Swiss retailer, Migros, and Unilever A variety of international bodies, NGOs and stakeholders have set up campaigning initiatives around palm oil production, including GRASP, the flagship project of the UNEP and UNESCO to save the world's great apes and Global Forest Watch (GFW), in collaboration with Conservation International

2.0 Supply and demand statistics and trends

Compilation of the UK’s demand for commodity and sources of production



Gd

lobal demand for palm oil is forecast to ouble from 2000 figures by the year 020. This increasing trend will mainly e due to the needs of the food and iofuel sectors. UK demand is likely to ontribute easing trend, as

palm oil is predicted as the favoured oil

y

2bbc to this incr

to meet prone of the help meet guse

ocessed food needs and isoils which could potentiallovernment targets for biofuel

Analysis of future market trends

3.0 Supply chain structure

Basic structure (nodes and networks)

a. Institutional structure

Timeline 4.0 Production Stage Sector Quantitative Qualitative



Biodiversity • 0.8 million hectares converted since 1982 on land not designated for plantations

• Total area converted since 1982 is 4.1 million hectares

Conversion of forest land. Loss of old growth forest. Habitat degradation and habitat fragmentation leading to species loss. Further expansion expected in Sumatra, Sulawesi and Indonesian provinces on Borneo and New Guinea Species at risk include Orangutans and Sumatran elephants.

likelihood. d: Likelihood

ill increase, pansion of sector

due to less available land in Malaysia,

High magnitude. High number of species per hectare of natural forest. Trend: Magnitude likely to increase. Global demand for palm oil increasing, therefore large areas of new plantations expected. Indonesia, main area for growth

increasesTrenwex

High likelihood. Land most suitable for plantations, lowland tropical forest. Poor governance

close by processing facilities in Malaysia. Slowdown factors could include high export tax, reduced foreign investment resulting from political instability and fears of supply glut.

a) Extraction*

Water quality



Climate Change Decrease in CO2 sequestration due to loss of tree cover and net biomass CO2 emissions from oxidation processes associated with swamp area conversions f

Unknown magnitude. Depends on difference in sequestration between monoculture plantation and natural orest cover. Depends on extent of swamp areas and amount of CO2 emitted during their cultivation.

High likelihood of loss of tree cover and net biomass. Unknown extent of swamp areas.

Poverty (labour, vulnerability)

• Decreases resource base for local and indigenous populations Land take from indigenous populations

•

• Loss of home, people converted,

unknown extent of ulations on this .

rights.

ed by rganisations not

local to area. Low level of consultation.

removed forcibly off land • Loss of cultural/spiritual

k

resources • Long term impacts

include cultural

popland

sustainability

High magnitude for resource loss and land take. Uncertain magnitude for future land take issues. Large areas of land

ely to be establish

li

High likelihood due to poor governance and difficult to enforce landPlantations

o

Landscape Larforemono

gh magnitude. Large areas of conversion to plantation Trend: Area

f plantations to crease.

High likelihood. ge amounts of natural st converted to uniform,

Hi

culture

oin




Soil Health Soil left uncovered during fo st clearing and plantation reestabli

depFlorelaunif

at

edium magnitude. Extent of adverse impact depends on rainfall, slope of land and planting spacing.

edium likelihood. Depends on management practices during establishment stage.

shment results in soil erosion and nutrient

letion w of water changed tive to natural forest, orm tree planting funnels er aw nd increases soil

erosion

M M

b) Cultivation* Soil Health •

•

kelihood. ng term impact

and could be mitigated by soil management

tegies.

Chemical use associated with cultivation Monoculture use of land over period of up to 20 years leaves land degraded and unfit for use

High magnitude after cultivation of site. Trend: increasing magnitude as prime sites rare and planting on marginal and fragile soils increasing.

Medium liLo

stra

Socio-economic and cultural

• use

• Gender inequalities around wages and working conditions

• Conflict caused by transmigration labour policies

• Child labour issues

Health impacts of agrochemical

Waste • 200 workers per 1000 hectares of palms

• Effluent generated by the concentration of worker housing


c) Processing* Waste • Effluent released from palm kernel processing.

• Effluent and biomass waste from palm oil processing mills impacts on local watercourses and reduces oxygen levels

d) Transportation* Climate Change • Small impacts of transportation in country, processing plants located close to plantations

• Palm oil shipped to UK and emissions associated with this

• Road transport between traders, manufacturers, end users.

Quantities and weight large therefore significant volumes to ship. Distance travelled from initial EU port to end user great due to number of stages in manufacture and delivery of final products.



Malaysia Commodity: Palm Oil

Risk Factor Subject Elements Commentary Magnitude Likelihood of

occurrence Malaysia has undergone rapid industrialisation over the

1.1 Policy Framework National past 30 years

nd manufactures now account on

earMal

o

ev

aaverage for 85% of gross export

nings. aysia remains the world lead in palm

oil exports G vernment schemes have been implemented to support smallholders. The government has also supported the d elopment of value adding opportunities, resulting in a well-established palm oil processing sector. The government is very active in export financing so as to promote Malaysian palm oil



International The sector does not receive direct subsidies in most palm oil producing countries, unlike other oil crops such as soy, rape and sunflower in the EU and US Significant amounts of indirect support are received through assistance to smallholders as part of rural development plans, infrastructure support such as roads and ports and government investment in the

stae blishment of plantations

National 1.2 Initiative Framework International • Eradication of Child Labour on

Plantations, Ghana Oil Palm national initiative International Child Labou• r

e.g. the wiss retail d Unilever

A variety of international bodies, NGOs and stakeholders have set up campaigning initiatives around palm oil production, including GRASP, the flagship project of the UNEP and UNESCO to save the world's great apes and Global Forest Watch (GFW), in collaboration with Conservation International

plantations initiative for tobacco • Roundtable on Sustainable Palm Oil • International Finance Corporation

(IFC) WWF-US Initiative ndustry voluntary standards, IS er, Migros, an





Analysis of future market trends

Global demadouble from2020. This be due to tbiofuel sectocontribute t

nd for palm oil is forecast to 2 00 figures by the year 0

cr

hpredices

s r

in easing trend will mainly he needs of the food and s. UK demar nd is likely to

o t is increasing trend, as cted as the favoured oil sed food needs and is which co

palm oil is to meet proone of the ohelp meet go euse

il uld potentially v nment targets for biofuel

3.0 Supply chain structure Basic structure (nodes and networks)

• (MPOB) was and is and promo

The Malaysian Palm Oil Board established in 1998

responsible for developing ting the Malaysian palm

oil sector. The Fede al Land Development Authority (Farranging tproduction o

rELDA) is responsible for he finance for palm oil n behalf of its members.


Timeline 4.0 Production Stage Sector Quantitative Qualitative



Biodiversity • Reduction of 75 to 10 species per hectare due to conversion from rain forest to oil palm plantation

• Reported that the estimated forest cover has been reduced from 84% in 1958 to 44% in 1990, significant amount of deforestation due to oil palm plantation.

• Conversion of forest land Loss of old growth • forest

• Habitat degradation and habitat fragmentation leading to species loss

l

• High number of endemic species in rain forest areas in Malaysia

High magnitude. Impact on high number of species per hectare. Trend: little net increase since Malaysian investors ooking to Indonesia for further plantation establishment.

ood. High likelih

Water Quality

a) Pre-cultivation

Climate Change Decrease in CO2 ude.

areas and amount of

2 emitted during r cultivation.

High likelihood of sequestration due to loss of tree cover and net biomass CO2 emissions from oxidation processes associated with swamp area conversions

COthei

Unknown magnitDepends on difference in sequestration between monoculture plantation and natural forest cover. Depends on extent of swamp

loss of tree cover and net biomass. Unknown extent of swamp areas.




• In July 2002, 181,000 migrant workers were ‘registered’ on plantations.

• Decreases resource base for local and indigenous populations

• Land take from indigenous populations Loss of home, people removed forcibly off land Loss of

•

•

•

cultural/spiritual resources Long term impacts include cultural sustainability

ke issues.

of consultation.

High magnitude for resource loss and land take. Reduced magnitude for future land ta

Unknown likelihood, depends on effectiveness of governance Plantations established by organisations not local to area. Low level

Landscape • Tree crops cover 17% of Malaysia’s land

Largre

mono

gh magnitude. Large areas of conversion to

ntation Trend: duced magnitude,

unlikely to be extensive rther conversion

igh likelihood. e amounts of natural fo st converted to uniform,

Hi

culture plaRe

fu

H

area

Soil Health S left uncovered during st clearing and

Moilfore

ent s d

o

nincrea

edium magnitude. Extent of adverse impact depends on rainfall, slope of land

nd planting spacing.

Medium likelihood. Depends on management practices during

stablishment stage.

plantation establishme ults in soil erosion anr

nutrient depletion Fl w of water changed relative to natural forest, uniform tree planting fu nels water and

ses soil erosion

a e



b) Cultivation* Soil Health • Soil erosion 7.7-14 tonnes per ha and year. Lose soil organic matter during establishment period.

• 3900 mg per ha and year Cd added to soil

• Chemical use associated with cultivation

• Monoculture use of land over period of up to 20 years leaves land degraded and unfit for use

High magnitude after cultivation of site. Trend: increasing magnitude as prime sites rare and planting on marginal and fragile soils increasing.

Medium likelihood. Long term impact and could be mitigated by soil management strategies.

through phosphorous fertiliser


• Health impacts of agrochemical use




Waste • Effluent generated by the concentration of worker housing



d) Transportation* Transportation



Papua New Guinea Commodity: Palm Oil

Risk Factor Subject Elements Commentary Magnitude Likelihood

of occurrence

The eas

re

t

stablishment of the oil palm industry has been b ed on the estate-smallholder model with a central parent palm oil company, predominantly fo ign owned. This has facilitated private investment in PNG. Substantial private investment was required to es ablish estates and associated processing and marketing facilities The establishment of the industry also received substantial financial support from government and international donors, including the World Bank and the Asian Development Bank

National 1.1 Policy Framework

The sector does not receive direct subsidies in most palm oil producing countries, unlike other oil crops such as soy, rape and sunflower in the EU and US Significant amounts of indirect support are received through assistance to smallholders as part of rural

evelopment plans, infrastructud

International

re support such as roads and ports and government investment in the establishment of plantations



National Pacific Rim Palm Oil (PRPOL) manages five plantations, two in Indonesia and three in Papua New Guinea. PRPOL was the first oil palm company in the world to put in the ISO14001 environmental management system across its whole production process from nursery to CPO leaving the mill. All five companies are certified to ISO14001 World Bank Oro Expansion Project

1.2 Initiative Framework

International • Eradication of Child Labour on Plantations,

variety of international bodies, NGOs and stakehol aigning initiatives around palm oil production, including GRASP, the flagship project of the UNEP and UNESCO to save the world's great apes and Global Forest Watch (GFW), in collaboration with Conservation International

Ghana Oil Palm national initiative • International Child Labour plantations initiative

for tobacco • Roundtable on Sustainable Palm Oil • International Finance Corporation (IFC) WWF-

US Initiative Industry voluntary standards, e.g. the Swiss retailer, Migros, and Unilever A

ders have set up camp





Analysis of futu arket re mtrends

Global demand for l from 2000 figures by e trend will mainly be uand biofuel sectors. contribute to this increapredicted as the fafood needs and is potentially help meeuse

pa m oil is forecast to double th year 2020. This increasing d e to the needs of the food

UK demand is likely to sing trend, as palm oil is ed oil to meet procesvour sed

one of the oils which could t government targets for biofuel


PNG has a track governance. It is capacity to monitor oThe water sector fragmented and pooThe existing palm oare international com

record of weak institution of reported to have virtually no r regulate its industries in Papua New Guinea is

rly coordinated il exporting companies in PNG panies that self-regulate

Basic structure (nodes and networks)


Timeline

4.0 Production Stage Sector Quantitative Qualitative



a) Pre-cultivation Biodiversity • Conversion of forest land • Loss of old growth forest • Habitat degradation and

habitat fragmentation leading to species loss

Impact high nu

High number of endemic species in rain forest areas in Malaysia Extensive and diverse coral reef and fringing reef systems increasing land clearing for imber and subsequ

pTPoss

t ently for oil

An estimated 5 percent of the world’s biodiversity is found in PNG

. on

mber of species

er hectare. rend:

ible future high magnitude due to further establishment

ons palm will increase the amount of pollutant and sedimentation entering the coastal region. PNG forest is the largest intact remaining tropical rainforest in the Asia-Pacific and third largest in the World

High magnitude

of plantati

High likelihood.



Water Quality Pollution of waterways, Si ation, sediment run-off and

rophication during struction and

lteuton

pat

ow The tor ua

a c operations of oil palm are common In PNG, rural community de end on the extensive

erways for thew ir subsistence living – they drink, bath, wash & collect aquatic and marine resources

Unkn n High: water secin PapNew Guineis fragmented and poorly coordinated

Climate Change Decrease in CO2 sequestration due to loss of tree cover and net biomass CO2 emissions from oxidation processes associated with

dis

swamp area conversions

Unknown magnitude. Depends on

fference in equestration

between monoculture plantation and natural forest cover. Depends on extent of

areas t

on.

High likelihood of loss of tree cover and net biomass. Unknown extent of swamp areas.

swampand amounof CO2 emitted during their cultivati





• Land take from indigenous populations

• Loss of home, people removed forcibly off land

• Loss of cultural/spiritual resources

Long term impacts include

he

rLanandbetwePlantation projects change the

m

r

cy

cultural sustainability T growing, collecting and hunting of food is an important pa t of PNG culture

ds are communally owned shared within and

en clans in PNG

relationship of land and the co munity

High magnitude foresource loss and land take. Trend: potential increase in land take

High likelihood, poor governance and poliinstitutions

Landscape Largforemo

h nitude.

Large areas of conversion o plantation

end: potential increase due to further establishment of plantations

High likelihood.

e amounts of natural st converted to uniform,

noculture

Higmag

tTr



Soil Health Soil left uncovered during fo st clearing and plantation reestabli

Floto plancr

edium magnitude.

xtent of dverse

impact depends on rainfall, slope of land and

lanting spacing.

edium likelihood. Depends on management practices during establishment stage.

shment results in soil erosion and nutrient depletion

w of water changed relative natural forest, uniform tree nting funnels water and eases soil erosion

Ea

i

M

p

M

b) Cultivation* Soil Health • Chemical use associated with cultivation

• Monoculture use of land over period of up to 20 years leaves land degraded and unfit for use

High magnitude after cultivation of ite.

Medium likelihood. Long term impact, could

e mitigated y soil

management strategies.

s bb






Effluent generated by the concentration of worker housing

Waste





Waste pollution, oil palm

processing mills are usually located close to urban centres for ease of transportation and access to infrastructures

d) Transportation*



Colombia Commodity: Palm Oil

Risk Factor Subject Elements Commentary Magnitude Likelihood

of occurrence

Colombia started growing oil palm on a large scale in the 1980s Expansion of the sector is expected, with the establishment of a research station by the centre for Oil Palm Research, Cenipalma. This has been funded by the Colombian government, a loan from a national bank (Banco Agrario) and some private ector funding from oil farm farmers s

National 1.1 Policy Framework

The sector does not receive direct subsidies in most International palm oil producing countries, unlike other oil crops such as soy, rape and sunflower in the EU and US Significant amounts of indirect support are received through assistance to smallholders as part of rural development plans, infrastructure support such as roads and ports and government investment in the establishment of plantations The 1997 Clean Production Agre1.2 Initiative Framework National ement has been igned between Colombia’s environmental

authorities and the oil palm sector National Roundtable on Biofuels in Colombia

s



International • Eradication of Child Labour on Plantations, Ghana Oil Palm national initiative

• International Child Labour plantations initiative for tobacco

• Roundtable on Sustainable Palm Oil • International Finance Corporation (IFC) WWF-

US Initiative Industry voluntary standards, e.g. the Swiss retailer, Migros, and Unilever A variety of international bodies, NGOs and stakeholders have set up campaigning initiatives round palm oila production, including GRASP, the gship project of th d UNESCO to save

the world' eat apes and Global Forest Watch (GFW), in collaboration with Conservation International

fla e UNEP ans gr



Analysis of future market Global demand for palm oil is fore asfrom 2000 figures by the year 2020. Thi sing trend will mainly be due to the needs t d and biofuel sectors. UK demand is likely c to this increasing trend, as palm oil is predfavoured oil to meet processed food none of the oils which could potentially meet government targets for biofuel use

c t to double s increahe fooof

to ontributeicted as the eeds and is help

trends




Basic structure (no es and dnetworks)

The state in Colgovernment at thmunicipal level Colombia has underdecentralisation of thThere is now an aoffice (UMATA) inresponsible for the dsmall farmers Colombia has also ithe land market

ombia has three levels of e central, departmental and

gone state reform involving the e agriculture and rural sector gricultural extension municipal each municipality, which is elivery of extension services to

mplemented the liberalisation of


Timeline

4.0 Production Stage Sector Quantitative Qualitative

• Conversion of forest land

• Loss of old growth forest

• Habitat degradatio

Hig ic e

Mal

gh itude

High ikelihood.

a) Pre-cultivation Biodiversity

n and habitat fragmentation leading to species loss

h number of endemsp cies in rain forest areas in

aysia

High magnitude. Impact on high number of species per hectare. Trend: Possibly future hi

l

magndue to further plantation establishment



Water Quality Pollution of waterways, Siltation, sediment run-off and eutrophication during construction and operations of oil palm are common

own Unkn

Climate Change Decrease in CO2 sequestration due to loss of tree cover and net biomass CO2 emissions from oxidation processes associated with swamp area conversions

e.

s on

r

High likelihood of loss of tree

er and net ss.

Unknown of

Unknown magnitudDepends on difference in sequestration between

ture

covbioma

monoculplantation and natural forest cover. Dependextent of swamp areas and amount of CO2 emitted during theicultivation.

extent swamp areas.



• Land take from indigenous populations

• Loss of home, people removed forcibly off land

• Loss of cultural/spiritual resources

• Long term impacts include cultural sustainability

d take. Trend: potential increase in land take

High magnitude for resource loss and lan

Unknown



Landscape Largn

mono

h magnitude. Large areas

conversion to plantation

nd: ntial

se due to further establishment of plantations

igh likelihood.

e amounts of natural forest co verted to uniform,

Hig

culture of

Trepoteincrea

H

Soil Health Soil left uncovered during forest clearing and plantation establish

mament results in soil

erosion and nutrient depletion

rm tree

edium gnitude.

Extent of dverse

impact depends on rainfall, slope of land and planting spacing.

edium likelihood. Depends on

anagement practices during establishment stage.

Flow of water changed relative to natural forest, unifoplanting funnels water and increases soil erosion

M

a

M

m

b) Cultivation* Soil Health Chemical use associated with cultivation Monoculture use of land over period of up to 20 years leaves land degraded and unfit for use

High magnitude after cultivation of site.

Medium likelihood. Long term impact, could be mitigated by soil

anagement strategies. m








Effluent generated by the concentration of worker housing

Waste

c) Processing* Waste Effluent released from palm kernel processing Effluent and biomass waste from palm oil processing mills impacts on local watercourses and reduces oxygen levels Waste pollution, oil palm processing mills are usually located close to urban centres for ease of transportation and access to infrastructures

d) Transportation*


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