Good morning, Paul. Could you first tell me how you ended up in Singapore trading palm oil?
I worked for Cargill until 2013 when I joined Golden Agri-Resources (GAR), where I am now head of global vegetable oil and oilseeds.
How significant is GAR in palm oil?
Palm oil differs from other commodities in that the top traders are also producers. Why is that?
Several things differentiate palm from many of the competing food crops. First, you must wait four years before the trees get to an age where they bear fruit. It’s a substantial upfront cash investment with no returns for those early years.
Second, there are no government subsidies, unlike the significant taxpayer-funded contributions paid to European and American farmers.
Third, once the trees are mature, harvesting takes place every two to three weeks.
Given the size of the upstream investment and the need to ensure a home for the product year-round, many producers felt the need to control their destiny by vertically integrating into processing, trading, and distribution.
How important are physical assets in trading palm oil?
You don’t need physical assets to trade palm oil. There is plenty of liquidity in the Dalian futures market in China and the BMD in Malaysia. However, assets are a necessity if you want to be involved in the physical movement of palm oil. End users are increasingly demanding. They insist, rightly so, that their suppliers control their supply chain at every step of the process. It is not just about sustainability but also about food quality.
People talk about palm oil plantations, but what percentage of world supply is produced by smallholders versus large companies?
At least three million smallholders worldwide make a living (or part of a living) from oil palm; they produce more than 41 per cent of the world’s palm oil. Even though smallholders are a vital part of the palm supply chain, they are frequently ignored in the palm story. The focus is inevitably on the more prominent actors like us. The reality is our business relies on smallholders producing more and better-quality palm oil in line with sustainability requirements. It’s in our interests to help them get there.
The average income for palm oil farmers in Indonesia is $2,500 per hectare per year compared to only $250 per hectare for rice. Palm oil contributes up to 60 per cent of income in rural areas in Indonesia. The palm oil sector has lifted millions of Indonesians out of poverty and has had a substantial impact on the welfare of rural communities through the provision of schools and clinics. Palm oil companies also provide and maintain critical infrastructure like roads, increasing connectivity and ease of access to previously remote rural areas
How do you react when people blame palm oil for deforestation?
Given the persistent negative stories and images linked to palm oil production, it’s easy to get defensive. Many of those images are highly emotive – orangutans fighting bulldozers comes to mind. In most cases, these are images from the past. They do not reflect the amount of work that the sector has done and continues to do to address deforestation.
Facts are on our side, but truth generally loses in a battle of reality versus emotive imagery.
But I’ll give you the facts. The most important one is that, worldwide, cattle farming causes the most deforestation. The World Resources Institute (WRI) has analysed satellite data and found that, from 2000-2015, cattle farming resulted in 45.1 million hectares of deforestation. During the same period, palm oil was a long way behind, responsible for 10.5 million hectares of deforestation.
Just for comparison, soy cultivation led to 8.5 million hectares deforested over that period. When you consider that virtually all soy goes to animal feed, meat production is responsible for 53.6 million hectares of deforestation during the period – more than five times more than palm production.
Compared to the meat industry, the palm oil sector has taken significant steps to combat deforestation. A combination of corporate and government policies has led to a decrease in deforestation in the palm oil supply chain, especially in the last five years.
What challenges does palm oil face in the future?
I would say there are three main challenges:
First, trade barriers effectively ban palm oil in specific markets – in Europe, the US, and elsewhere, where sustainability is used as a barrier to market access rather than an incentive for change. The palm sector faces regulatory barriers and shifting rules of engagement even though it has demonstrably done more than any other deforestation-linked commodity to address the issue. The EU’s REDII rules that take palm oil out of biofuels, along with ongoing due diligence regulation developments in critical markets, could have a chilling effect on the progress made. It’s absolutely the opposite of what the industry needs.
The second challenge is a lack of manpower. It will get harder to recruit palm oil workers as younger people do not want to work on the land. Palm oil remains an incredibly labour-intensive industry. The manual nature of harvesting is hard work and less attractive to young people.
Third, climate change and extreme weather will increasingly impact palm oil production. Any agribusiness needs to factor in not only the reduction of its carbon emissions but also carbon adaptation strategies.
Thank you, Paul, for your time and comments
© Commodity Conversations ® 2022
This is a brief excerpt from my new book, Commodity Crops & The Merchants Who Trade Them available now on Amazon
