MARKET NEWS SERVICE MNS PALM PRODUCTS GLOBAL MARKETS AND DEVELOPMENTS

Transcription

1 MARKET NEWS SERVICE MNS PALM PRODUCTS GLOBAL MARKETS AND DEVELOPMENTS

2 Crude palm and palm kernel oils Ayoola Pure Palm Oil Nigeria Fresh palm fruit bunch Hornbill Foods USA Palm kernel cake, ACE (Singapore) Pte Ltd African crude red palm oil Palm wine The designations employed and the presentation of material in this report do not imply the expression of any opinion whatsoever on the part of the International Trade Centre concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. This document has not formally been edited by the International Trade Centre August

3 TABLE OF CONTENT Acronyms and abbreviations... 6 Background, objectives, targeted audience, coverage and content of the study. 7 PART ONE: GLOBAL ISSUES Palm products and general considerations on palm sector Palm products General considerations on palm oil position in the vegetable oils complex Factors affecting market fundamentals Supply Issues Demand and consumption Trade Participants in trade Government trade control Tariff-based instruments Non-tariff trade control measures Trade defence mechanisms Technical barriers to trade - TBT Trade development instruments International and national trade policy instruments Cross-border trade issues Price issues Correlation between prices of vegetable oils Correlation between crude petroleum and vegetable oils prices Physical and futures trading Physical (cash) trading Futures trading Contracts Physical (cash) contracts Shipping contracts Futures contracts. 48 PART TWO: PALM OIL Cultivation and harvesting Varieties Soil and climatic requirements Harvesting Commercially cultivated areas Yields Costing Fresh Fruit Bunches Sustainability of oil palm cultivation

4 2. Processing Crude palm oil and palm kernels extraction Recycling and waste management in crude palm oil production Milling and crude palm oil production costs Refining and fractionation Refining Fractionation Waste management in palm oil refining PART THREE: RECENT MARKET DEVELOPMENTS Supply outlook - palm oil, kernels and palm kernel oil Demand outlook.76 3 International trade Exports Imports Price outlook.83. PART FOUR: BIOFUELS AND PALM OIL - BASED BIODIESEL 84 1 Definition and key issues 84 2 Current market situation Biofuel policies Production and consumption Trade Pricing Major concerns Sustainability certification developments Key stakeholders involved in the development of sustainability certification schemes Conclusions and implications for developing countries 94 LINKS 95 TABLES Table 1 Eleven largest oil palm plantation companies, Table 2 FFB production cost estimate - Malaysian mature plantation, Table 3 Malaysian average FFB and palm oil yields, Table 4 Current and potential utilisation of oil palm plantation and palm oil mill by-products and wastes.. 65 Table 5 Estimation of Malaysian average milling cost, Table 6 Comparison of crude palm oil production costs in selected countries, Table 7 ECOWAS production of palm oil, palm kernels and palm kernel oil 2010/ Table 8 ECOWAS region - Exports, imports and trade balances of palm oil, palm kernels and palm kernel oil 2010/

5 Table 9 Table 10 EU imports of biodiesel by type of feed stock and corresponding tariffs ad valorem, 2008 to USA imports of biodiesel by type of feed stock and corresponding tariffs ad valorem, 2006 to CHARTS Chart 1 World production of vegetable oils 11 Chart 2: Share of palm oil in 2010/11 global output of vegetable oils 12 Chart 3: Consumption of vegetable oils for food, non-food and biofuel uses.16 Chart 4: Price correlation palm, palm kernel, coconut and soybean oils 36 Chart 5 Correlation palm, soybean and crude petroleum oils.36 Chart 6 Correlation palm kernel, coconut and crude petroleum oils 37 Chart 7 Evolution palm oil versus crude petroleum prices 38 Chart 8 Palm oil physical and futures prices. 40 Chart 9 Palm kernel oil physical and futures prices.. 40 Chart 10 Oil palm commercial mature areas..52 Chart 11 Commercial mature oil palm plantations in Chart 12 Commercial mature oil palm plantations in Chart 13 Palm oil yields 54 Chart 14 Malaysia- mature area, yields and PO production Chart 15 Malaysia - mature area, yields and PO production Chart 16 Indonesia - mature area, yields and PO production Chart 17 Thailand - mature area, yields and PO production Chart 18 Nigeria - mature area, yields and PO production Chart 19 Côte d Ivoire - mature area, yields and PO production Chart 20 Palm oil - world production 74 Chart 21 Palm kernel oil world production.. 75 Chart 22 Palm oil - global supply and demand balances.. 77 Chart 23 Leading users of palm oil in Chart 24 Palm kernel oil - global supply and demand balance Chart 25 Leading users of palm kernel oil in Chart 26 World exports of palm oil 80 Chart 27 Main exporters of palm oil in Chart 28 World exports of palm kernel oil.. 81 Chart 29 World imports of palm oil.. 81 Chart 30 Leading importers of palm oil in Chart 31 World imports of palm kernel oil 82 Chart 32 Main palm kernel oil importers in Chart 33 Main palm kernel oil importers Chart 34 Annual price indexes for palm products. 83 Chart 35 Prices of palm oils.. 83 Chart 36 World production of biodiesel by types of feedstock 86 Chart 37 Producers of palm biodiesel. 87 Chart 38 Major producers of palm biodiesel in Chart 39 Major producers of palm biodiesel in Chart 40 Monthly biodiesel production viability 91 FIGURES Fig. 1 Palm oil industry succinct view. 9 Fig. 2 Primary, secondary and further processing of palm oil; products utilisation.. 62 Fig. 3 Production of crude palm oil - unit operations, conventional process. 63 Fig. 4 Recycling and use of by products and waste from oil palm plantations and crude palm oil mills. 66 4

6 Fig. 5 Refining and fractionation of crude palm and palm kernel oils. 70 Fig. 6 Physical and chemical refining of palm oil. 71 ANNEXES Annex I Explicative glossary 102 Annex II Financial involvment of foreign groups and corporations in palm sectors in Nigeria, Liberia and Côte d'ivoire Annex III Policies adopted in in selected countries major producers, exporters and importers of palm products 109 Annex IV Palm products: customs tariffs and taxes Annex V Agreements in force in Côte d'ivoire, Nigeria, Senegal and Ghana Annex VI FOB and CIF contract terms

7 ACRONYMS AND ABBREVIATIONS AIFO-UEMOA AIPH BMD CET CIDA COMESA CPO ECOWAS EU FAO FDA FOSFA GAPKI Ha IFC ITC MEOMA MM MNS MPOA MPOB MPOC n.a. NGO NIOP RM RBD RPO RSPO PNG UEMOA USDA Association des Industriels de la Filière Oléagineuse de l Union Economique et Monétaire Ouest Africaine Association Interprofessionnelle de la filière Palmier à huile en Côte d Ivoire Bursa Malaysia Derivatives Common External Tariff Canadian International Development Agency (The) Common Market for Eastern and Southern Africa Crude Palm Oil (The) Economic Community of West African States European Union Food and Agriculture Organisation of the United Nations Food and Drug Administration of USA (The) Federation of Oils, Seeds and Fats Associations Gabungan Pengusaha Kelapa Sawit Indonesia Hectare International Finance Corporation International Trade Centre Malaysian Edible Oil Manufacturers Association Million Market News Service Malaysian Palm Oil Association Malaysian Palm Oil Board Malaysian Palm Oil Council Non available Non-Governmental Organisation National Institute of Oilseed Products Malaysian ringgit Refined, Bleached, Deodorised palm oil Refined Palm Oil Roundtable on Sustainable Palm Oil Papua New Guinea West African Economic and Monetary Union US Department of Agriculture 6

8 BACKGROUND, OBJECTIVES, TARGETED AUDIENCE, COVERAGE AND CONTENT OF THE STUDY Background The continuous growth of the international demand for, and trade in oil seeds, oils, fats and oil meals has exceedingly increased business opportunities for producers and exporters of palm products in developing countries in general, and for several ECOWAS member countries in particular. However, these opportunities remain only partly exploited due to investment and trade development constraints, the insufficient knowledge of palm products and the inadequate information made available to palm sector stakeholders on markets, products and business opportunities. The International Trade Centre (ITC) is implementing, in close collaboration with the regional economic communities ECOWAS 1, ECCAS, COMESA the trade-related technical assistance Programme for building African Capacity for Trade - PACT II, funded by the Canadian International Development Agency (CIDA). The programme aims at reinforcing the capacity of African regional and national institutions to enhance export supply and competitiveness, market linkages and export revenues of African enterprises, with a special focus on small and medium size and women-owned firms. One of the expected outcomes of the programme is the strengthening of trade support networks in the regional economic communities. The setup of a trade information system in the ECOWAS region and the strengthening of the information service of the ECOWAS Trade and Enterprise Experts Network (ECOWAS TEN) are key deliverables of this outcome. The trade information system will serve the business community needs for promotion, facilitation and increase of regional and international trade in selected commodities, supporting business information exchanges at national and regional level, facilitating linkages and building up exporters knowledge about markets. The commodities selected for the initial phase of the programme are palm products, mango and cashew. In this framework, the Market News Service (MNS) programme of ITC Trade Information Services section is collaborating with the ECOWAS TEN Secretariat in the setting up of a regionally focused Market News Service in the ECOWAS region. The MNS programme supports in particular the customisation, publication and dissemination of product studies and market bulletins on the selected commodities. This study on global issues and market developments for palm products is the first one in a series. Objectives The present study is aiming to contribute to the development of palm industries in ECOWAS member countries by providing producers, processors and exporters of palm products with global technical and market information, improving their knowledge on selected aspects of processing and trade. The study could thus contribute to bestowing the improvement of profitability and competitiveness of West African exports of palm products and the increase of trade operations performance, hereby boosting the regional and international trade, increasing national foreign exchange earnings and ultimately contributing to regional food security and the decline of poverty level in the palm sector. 1 Member countries: Benin, Burkina Faso, Cape Verde, Côte d'ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, Togo. 7

9 The study is conceived as a basic tool for training events on palm products and markets, recommended to be organised for the benefit of palm business communities By providing the basic understanding of factors influencing the palm sector development, which is necessary for the elaboration of palm sector development strategies, the study is intended to facilitate the process and thereby contribute to the sustainable development of palm production and processing. ECOWAS Commission, through its EXPECT Advisory Committee, is already ensuring its inputs in priority discussions with the Export Actors Platform on palm oil value chain development and are in the process of setting up strategic business partnerships with leading palm oil players such as the SIFCA Group. Meanwhile, a new global strategy that could raise the African competitiveness in palm oil production is being developed by experts from the World Bank Group and the International Finance Corporation (IFC). The strategy, awaited for the end 2011, is expected to result in financing a multi-million dollar oil palm development programme for policymakers and governments, focusing on access to land-use policies, technology transfer, financing, pricing mechanisms, marketing, certification, as well as infrastructure development from the farm to the port. Target audience The study is written for a specific target audience comprising of producers, processors and exporters of palm oil products, in particular SMEs, as well as government bodies and ECOWAS Commission departments in charge of the elaboration of palm sector strategies and development programmes and product sector associations. Product description and content of the study The study covers the following palm products, described according to their Harmonized System classification codes: HS codes Product description Palm nuts and kernels, whether or not broken 1511 Palm oil & its fractions Palm oil, crude Palm oil, other than crude, & fractions thereof, whether/not refined but not chemically modified Palm kernel or babassu oil, crude Palm kernel/babassu oil, other than crude, & fractions thereof, whether/not refined but not chemically modified Source: United Nations Commodity Trade Statistics Database- Comtrade Topics developed include the factors influencing markets of palm products and the market access; the correlation between crude palm oil prices, petrol, and vegetable oil substitutes; the status and importance of sustainability of oil palm cultivation and processing; as well as the market situation of palm products and its relation with palm biodiesel developments. Governmental policies, which are of critical importance for the palm sector development, and are generally insufficiently known and comprehended by farmers and SME processors, are also considered in the study. These topics may constitute the subjects of highly recommended series of national and regional workshops on palm oil development. 8

10 PART ONE: GLOBAL ISSUES 1. Palm products and general considerations on palm sector 1.1 Palm products Oil palms are at the base of the complex palm oil industry. The multiple outputs of their processing are summarised in Figure 1. Three main products and numerous derived ones are obtained by extraction and processing palm fruit bunches. From the fleshy portion of the oil palm fruit is extracted the crude palm oil, together with its primary derivatives - neutralised 2, bleached 3, deodorised 4, and refined/bleached/deodorised RBD 5 palm oils; crude palm stearin and olein. From the seed 2 Neutralised (refined) palm oil (palm olein and stearin) results from the neutralisation process and has a free fatty acids (FFA) content (i.e. acidity) expressed as palmitic acid not exceeding 0.3% 3 Bleached palm oil (olein and stearin) has undergone bleaching up to its colour does not exceed 20 Red measured with the Lovibond tintometer with a 5.5 cell 4 Deodorised palm oil (olein and stearin) result from the deodorisation processs 5 RBD palm oil (olein and stearin) has undergone all these three processes, until the FFA not exceed 0.1% expressed as palmitic acid; its colour measured with the Lovibond tintometer with a 5.5 cell does not exceed 3 Redand the product is odourless and has a neutral taste. 9

11 (kernel) of the palm fruit is extracted the palm kernel oil, further primary processed to refined palm kernel oil and palm fatty acids, alcohols, esters and glycerine derivatives. The two oils have very different fatty acid compositions 6 (see glossary for the explanation of the terms). Palm kernel oil meal is the by-product of palm kernels crushing, used as animal feed ingredient. Empty bunches remaining after the removal of oil palm fruits, as well as palm kernel shells and fibre remaining after the crude palm kernel oil extraction, are used as fertilisers and as fuel. A sap tapped from the palm flower is processed into palm wine 7 and is also a source of yeast. The tree itself can be split and used as supporting frames in buildings. Leaf fibres and empty fruit bunches are used to produce chipboard and plywood. After clearing out plantations, trunks of old palms provide furniture wood. The bark of the palm frond is peeled and woven into baskets. The leaves of oil palm are used for making brooms, roofing and thatching, baskets and mats, while the thicker leaf stalks are reinforcing the walls of village huts. Palm oils have a multitude of food utilisations, often in competition with other vegetable oil substitutes. The crude palm oil is one of the main and richest sources of carotene (which confer the bright red colour to the oil). Its other valuable constituents are vitamin E fractions 8 which act as antioxidants and can reduce cell damage caused by toxic substances and environmental pollution. In addition, the oil is an excellent source of powerful anticarcinogenic 9 and anti-thrombosis substances. Crude, bleached and refined palm oils are widely used as cooking and salad oils, in competition with substitutable soybean, sunflower and other polyunsaturated vegetable oils. Palm oil is considered one of the best frying oils because of its great stability at high temperatures (it does not produce unpleasant smells) and its lower cost in comparison with other vegetable oils. Because of its plasticity and its emulsifying properties, the bleached, refined and fractionated palm oil is used in competition with hydrogenated soybean, cotton, groundnut, maize or coconut oils in the manufacture of shortenings, margarines, confectionery products, ice creams, milk and cocoa butter substitutes. Palm and palm kernel oils are also feed stocks for the manufacture of oleo chemicals including fatty acids, fatty esters and fatty alcohols. Derived non-edible uses of palm oil include the manufacture of soaps and detergents, candles, cosmetics, lubricants, greases, drilling mud for the petroleum industry, plasticizers, glues, printing inks, etc. Palm oil-based environmentally friendly biodiesel fuel is increasingly used and economically more advantageous than other oilseed-based biofuels. Palm kernel oil and coconut oils are the two lauric oils of commercial importance. They are interchangeable in many applications because of their similarities in properties. However, palm kernel oil contains a higher amount of oleic acid than coconut oil, making it more suitable oil for hydrogenation (hardening) and the production of edible speciality fats with different melting points, hardness and end-uses. These fats are used in the production of 6 Palm oil contains equal amounts of saturated and unsaturated fatty acids. The saturated fatty acid portion consists of palmitic acid (44%) and stearic acid (5%). The unsaturated part consists of about 40% monounsaturated oleic acid and 10% polyunsaturated linoleic acid, which is also an essential fatty acid (see glossary). Conversely, palm kernel oil is over 80% saturated (48% lauric acid, 16% miristic acid, 8% palmitic acid and 10% others. Only 18% of its composition is unsaturated: 15% mono unsaturated oleic acid and 3% poly unsaturated linoleic acid. Its composition resembles that of coconut oil, the two oils being interchangeable in many uses. 7 The palm wine can be fermented and distilled into a gin known as Akpetesin in Ghana and Ogogoro in Nigeria 8 tocopherols and tocotrienol 9 tocotrienols 10

12 coffee and cocoa butter substitutes, toffees, coffee whiteners, whipped toppings, filler creams and other non-dairy products. The relatively high content of myristic and lauric fatty acids of the palm kernel oil makes it very suitable for the manufacture of soaps, washing powders and personal care products. Other non-edible applications of the oil include candles manufacture, as well as the pharmaceutical and perfume industries. Crude and primary processed palm and palm kernel oils have already a multitude of applications when utilised as such; the range of applications can be however extended by modifying their properties by secondary processing (refining). Palm kernel cake is used as a medium grade protein feed, containing about 15% crude proteins and up to 12% oil, depending on the extraction method 10. Although the cake provides both protein and energy, it is looked upon more as a source of medium grade protein with high fibre content, more suitable for feeding ruminants. Supplemented with minerals and vitamins, the cake can be the sole ingredient in dairy cattle ration, or can be mixed with other feedstuffs. More information on palm oil processing and uses are given in the second part of the study in chapter 2 (processing). 1.2 General considerations on palm oil position in the vegetable oils complex Vegetable oils are a group of staple 11 food of capital economic and social importance to all countries. According to USDA, the world output of the five major 12 vegetable oils over the ten past seasons increased by about 6 per cent per year, from 90.2 million tons in 2000/01 to million tons in 2010/11 (See Chart 1 and the definition of split years in the explicative glossary in Annex I) Chart 1: World production of vegetable oils, million tons PO SBO SFO PKO RSO Other 10 The expeller-pressed palm kernel cake contains 5 to 12% oil and the solvent extracted one only 0.5 to 3%. 11 Staple food is that regularly consumed in a community/country as source of most, or a significant proportion, of their calorie requirements. 12 The major vegetable oils include oils of palm (PO), soybean (SBO), sunflower (SFO), palm kernel (PKO) and rapeseed (RSO), which covered about eighty eight per cent of the world production of vegetable oils in 2010/11. Others include cottonseed, coconut, groundnut, olive, mustard and castor oils. 11

13 Global production of palm oil increased at a higher rate than the world output of the five major vegetable oils, i.e. by 9.5 per cent per year, rising from 24.3 million tons in 2000/2001 to nearly 48 million tons in 2010/11. Since 2006/07 onwards, the palm oil overtook in importance the soybean oil, becoming the most produced vegetable oil worldwide. In 2010/11, the palm oil amounted to a third of the world output of major vegetable oils, followed closely by soybean oil (Chart 2). Chart 2: Share of palm oil in 2010/11 global output of vegetable oils (147.3 million tons) PKO 4% RSO 16% SFO 8% Other 11% SBO 28% PO 33% Although the palm oil markets are facing major challenges, palm industry is a highly profitable and evolved into a global agro-industry. The dominant position of palm oil in the global supplies of vegetable oils is due to its competitive position in comparison with the other of oils: the oil palm yield per hectare is 5 to 10 times higher than other oil bearing crops and its cultivation has the lowest requirements of fuel, fertilisers and pesticides. The specificity of oil palm is that through processing its fruits yields three very distinct primary palm products: palm oil, palm kernel oil and palm kernel meal. The supply of palm products is determined by the demand for palm oil for edible and biodiesel uses, and influenced only to a limited extent by the demand for lauric oils 13 (palm kernel) or for animal feed (palm cake). In addition, oil palm is an investment crop. The stability of supply of this perennial tree crop is higher than that of annual oilseed crops such as soybean or rapeseed. However, oil palm production can hardly be adjusted to short term variations in world demand and prices of vegetable oils, unlike the annual oilseed crops. Palm oil is of particular importance to West Africa. According to FAO, the oil is currently providing 8 per cent on the average of the daily energy intake 14 of the population. West African development potential of oil palm plantations and processing industries attracts the keen interest of investors, multinationals, commodity traders and business developers. Some examples of the growing interest and considerable financial involvement of foreign groups and corporations in the palm sectors in Nigeria, Liberia and Côte d Ivoire are summarised Annex II. The ECOWAS region is a net importer of palm oil, although many of the member countries cultivate oil palms and have the potential to increase their production of palm oil in order to meet both the domestic and the regional demand, in particular the needs of ECOWAS member countries with vulnerable economies and high rates of hunger. The ECOWAS deficit for edible oils which has to be covered by imports is estimated to reach nowadays to 13 Laurics are vegetable oils containing 48 % to 57% of saturated lauric fatty acid, occurring especially in coconut oil and palm-kernel oil kcal/capita/day 12

14 tons per year and is foreseen to increase to some 1.5 million tons by The cost of imports of palm oil or its substitutes, such as soybean or sunflower oils - generally supplied by countries where production and exports are subsidised, exert a very strong pressure on foreign exchange balances of ECOWAS member countries. Meanwhile, the availability of relatively low-cost imported oils diminishes the competitiveness and development prospects of domestic oils and fats industries. However, recent development strategies and substantial investments into oil palm cultivation in the region should result in a large increase of palm oil supply in the medium term. The major characteristics of the vegetable oils markets, palm oil included, are the overwhelming weight of governmental policies on the sector development; the volatility of prices and the impact of speculation; and the correlations between the consumption and prices of several oils due to their substitutability for major uses. Governmental policies 15, strategies and legal and regulatory frameworks are governing the development of the vegetable oils sectors worldwide, and palm oil makes no exception. Governmental policies and interventions in production, marketing and international trade in palm products are elaborated and continuously reappraised and adjusted under the influence of specific domestic and international market developments, with a view to achieving stability and balanced growth of the sector, as well as the satisfaction of consumers needs. Various policy instruments are available and globally applied, although their intended purposes most often induce unintended side effects and create strong distortions within the domestic and international vegetable oils markets in general, and in palm oil markets in particular. Market distortions are induced not only by policies addressing straightforwardly oil palm cultivation, processing, consumption, trade and prices, but also by policies affecting the economy of palm oil substitutes, i.e. soybean, rapeseed and sunflower oils. Commonly, policies of palm exporting countries tend to support domestic producers and exporters, while importing countries tend to apply measures leading to border protection, in an effort to shield domestic industries from international competition and high consumer prices. In Annex III are summarised the selected policy measures applied from 2009 to 2011 by governments of major countries producing and trading in palm oil products; these reflect their forceful impact on the markets. The selected countries monitored are the major producers, importers and exporters of palm products, covering over 90% of the world supply. Given the overwhelming importance of government implications in palm oil markets and the wide range of measures employed, these are further considered in sub chapter Factors affecting market fundamentals 2.1 Supply Issues Given the economic benefits of the palm oil sector, governments support its development and are generally supportive of the smallholding farmers and processors. Poor coordination between central and regional administrations, the lean public financing resources and important problems and disputes in regard to land allocation are however leading very often to uncertain investment climates. Cultivation of oil palms is challenged by the decline in cropland availability due to human activities and the resulting competition for land use with cereals and other crops, especially in the two leading producing and exporting countries 16, Malaysia and Indonesia. West African 15 The oilseeds desk of the Trade and Markets Division of FAO monitors policy measures and issue Monthly Price and Policy Update MPPU reviews that can be downloaded at 16 Together they cover over 85% of world supplies of palm oil and derived products. 13

15 arable land resources have shrunk and degraded at a greater than the world average; this is mainly due to desertification, overgrazing, expanding agricultural activities and urbanization 17. In nearly all ECOWAS countries where oil palm is cultivated, the legitimacy and security of land holdings are critical issues for large estates and smallholders alike. Small and medium scale landowners are often reluctant to invest in joint ventures by handing over land, which they see as a right of inheritance. Holders of customary land rights in several countries are challenging the lack of recognition of their rights in the allocation of land for oil palm plantations and the unfair practices in allocating plots to smallholders. Inadequate land policies, disagreements and uncertainty over land tenure, and security are the causes of the most persistent and tenacious conflicts preventing increased cultivation of oil palms. Strong public policies for settling land disputes and developing share-based, flexible and affordable land management systems are critically needed in order to solve long-standing conflicts over land for oil palm cultivation in the region. Land development policies, including restrictions on land use aiming at controlling oil palm supplies, are often used together with price support schemes and input subsidies. In Indonesia, oil palm cultivation and replanting incentives are being granted in the form of preferential loans and land concessions for new, sustainably managed plantations. In an attempt to control national palm oil output during periods of oversupply and excess stocks, Malaysian government uses land management measures to slow down the expansion of oil palm cultivation, offering meanwhile incentives for using palm-based biodiesel and increase the domestic consumption of palm oil. The continuing concentration of palm oil production in Malaysia and Indonesia raised concerns regarding environmental sustainability of oil palm cultivation. The scarcity of land available in both countries and the need to maintain their leadership position on palm oil export markets has led the governments of the two countries to extend oil palm cultivation in environmentally sensitive areas. However, production of palm oil is being increased mainly through replanting existing estates with high-yielding varieties, rather than through the setup of new plantations. Practically all countries producing oilseeds, fats and oils apply production support and trade control measures. Policies supporting production of oilseeds and vegetable oils which are direct substitutes of palm oil 18 (namely soybeans, rapeseed and sunflower) and their international trade are directly influencing the position of palm oil in the international market. By distorting palm oil competitiveness versus annual oilseeds and vegetable oils, they allow major exporters of soybeans and rapeseed oils, such as United States, the European Union, Canada or Argentina, to maintain/gain shares in the global vegetable oils market. 17 See 18 For example, the United States curtailed the former system of target prices, deficiency payments and area set-aside requirements for soybeans, rapeseed and sunflower and replaced it with income stabilisation measures since the past ten years. Income support is extended in the form of fixed producer payments decreasing over time, which are not dependent on production levels; planting decisions are now determined by market conditions. In Mexico, soybeans and rapeseed continue to benefit from PROCAMPO decoupled payments; target incomes were raised in 2009 by 30 per cent for rapeseed and 40 per cent for soybeans and will remain valid until Canada, the largest single rapeseed producer, set since 2008 a policy supporting a better response to changing market conditions, enhancing risk management and reducing the government s regulatory role in the rapeseed sector. Support includes measures to help covering farm income declines and promotion of production insurance. Revenue insurance programmes were also strengthened in the United States. Subsidized palm crop insurance schemes are being reinforced in Brazil, Mexico, and India since

16 Countries supplying vegetable oils, including palm oil, are following the long term tendency to gradually substitute direct production support schemes with indirect policy measures intended to stabilize incomes and make production more responsive to market signals. Indirect production support schemes are applied in Thailand for example, through the intensification of incentives extended for oil palm cultivation and palm oil production in an effort to meet the rising domestic demand for edible palm oil and biodiesel. In addition to providing low interest loans to oil palm farmers and palm oil producers and supporting the production and use of high-yielding seedlings, the government is imposing minimum purchase prices at which crushers have to buy oil palm fruit branches from farmers; provision are also made for public purchases of the oil at subsidized prices. In other countries such as Colombia, India, Indonesia, Kenya, Malaysia and Venezuela, producers are granted tax exemptions and/or receive subsidised seasonal credits and loans for various on-farm investments (purchase of fertilisers, provision of adequate storage facilities, etc.). Countries India, Colombia, the Philippines and Thailand are also supporting the development and use of high yielding oil palm seed and the improvement of cultural practices, with a view to increase domestic palm oil self-sufficiency and reduce their dependence on imported vegetable oils. In developing countries comprising ECOWAS member states the public financial resources for a steady expansion of oil palm cultivation are insufficient. Therefore, national foreign investment policies are encouraging and greatly facilitating foreign investment in palm plantations and upstream industries; these developments contribute finally to poverty alleviation and the strengthening of the national industrial tissue, in addition to expanding palm oil export availabilities. Having to face increasing difficulties to match the domestic demand of edible oils in general, and of palm oil in particular, as well as the high volatility of palm oil prices - which constitute a potential threats to national food supplies and security, governments of ECOWAS countries with a potential to develop palm industries elaborated and reinforced development strategies and plans promoting a sustained growth of the sector. These strategies are generally underpinned by production support measures, rather than by price or income support measures, particularly in countries constrained by resource limitations. Incentives to increase domestic production remain however extremely vulnerable to low priced imports of palm oil from Asian countries, wherefrom the need to couple production support with import control measures - mainly taxes. Prominent multinational companies involved in palm industries, as well as banks and commodity traders, are granted concessions for oil palm estates and the production and marketing of palm oil. Very large palm conglomerates and multinationals are driven in the ECOWAS region by the opportunity to redevelop neglected West African plantations and establish new ones. Recent investments in oil palm cultivation and processing were estimated at 6 billion US$. Aid to developing countries schemes are extended to palm oil development; one of the numerous examples is the support provided by Australia for the cultivation of oil palm and the production of palm oil in Papua New Guinea. Financial and technical support to oil palm developments in Africa are also extended by international organisations including the World Bank and the International Finance Corporation, FAO and UNIDO. 15

17 2.2 Demand and consumption 19 According to USDA, in 2000/01 about 94 per cent of the world output of vegetable oils was used as food; non-food uses amounted to only 6 per cent. The development of oleo chemical industries and of biofuel markets changed drastically the structure of consumption ten years after. In 2010/11, 72 per cent of the world production of vegetable oils was used in the food sector, while non-food and biofuel uses took in respectively 18 per cent and 15 per cent of the output. 200 Chart 3: Consumption of vegetable oils for food, non-food and biofuel uses, million tons Food Non-food Biofuels The fast increasing demand for palm oil for edible, non-edible and biodiesel uses is driven by population increase, economic growth and limited petroleum resources. World population attained 7 billion in 2010 and is expected to increase by 29% and exceed 9 billion by According to PricewaterhouseCoopers estimation, the ECOWAS region accounts already for about 4.5% of the world s population, having reached 306 million people in Considering an annual average demographic increase in ECOWAS region of 2.7% per year, by 2040 its population could attain some 612 million. Palm oil availability must be ensured for at least meeting the fast growing demand fuelled by this rate of population increase. The current average consumption of fats and oils in the ECOWAS region averages, according to FAO and Oil World statistics, 40 g/head/day, equivalent to some 4.47 million tons per year, of which at least a half consists of palm oil. It is important noting that the region is a net importer of palm oil; the combined imports of the fifteen ECOWAS member countries rose from 65 million US dollars in 2001 to over 550 million in Imports will continue in the medium term in order to satisfy consumption requirements, even if the regional production of palm oil rises according to expectations. At low income levels, demand for edible fats and oils, including palm oil, is highly elastic; small rises or falls in income bring about large rises or falls in consumption. At higher income 19 Demand is an economic principle that describes a consumer s desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa. Consumption is the amount of a specific good or service used in a particular time period. In the case of oils and fats, consumption is calculated as: opening stocks plus production and imports minus exports and ending stocks. Very often the two notions are confounded. 16

18 levels, the income elasticity of demand decreases, i.e. demand is less responsive to changes in income until, at a certain level, response ceases and the market reaches saturation. Developing countries have lower incomes per capita and higher income elasticity of demand for edible oils and fats. As incomes in these countries are expected to continue growing faster than in developed countries, consumption should also grow faster. By contrast, the per capita consumption of edible oils and fats will remain sluggish in many industrialised countries where incomes are high and population is not expected to attain significant rates of growth. In these countries, the main dynamic factor determining the growth of palm oil consumption will remain the demand for biodiesel and oleo chemicals. Demand for palm and palm kernel oils is also a function of their price compared to prices of oils and fats substitutes for specific end uses, such as soybean, rapeseed, sunflower, cotton or coconut oils in food and biodiesel applications. Abundant supplies of substitute crops and oils depress demand and prices of palm products. Consumers taste preferences, dietary habits and knowledge of properties and mode of use of palm oil determine its choice between the other edible oils alternatives. The taste and odour of unrefined red palm oil 20 is being thought after in Africa, where it is traditionally used in cooking. Western consumers prefer the refined, uncoloured and deodorized palm oil and use it extensively for deep frying. Asian consumers use it for all edible purposes. Price competitiveness of different types of edible oils (palm, soybean, sunflower, rapeseed, sesame, cotton, etc.) weighs heavily in determining the choice. The negative campaigns aiming at discontinuing the food use of palm oil and replacing it with other vegetable oils on health grounds had adverse effects and hindered temporarily the raise in palm oil consumption. The bottom line of these campaigns stirred initially by the American Soybean Association was the replacement of edible palm oil by soy bean oil, but their impact faded away following results of scientific research 21 and accurate public information campaigns financed mainly by the major palm oil producing countries. Other public campaigns initiated by NGOs and environmental activist groups at the beginning of this decade stated the possibility of irreversible harmful environmental effects of palm oil cultivation and processing because of the deforestation of tropical rain forests; the destruction of natural habitat of critically endangered species (such as the orang-utans and tigers); inappropriate land use and human-rights violations (from low pay and poor working conditions, to theft of land); and to the contribution to global increase in greenhouse gas emissions. These campaigns proved potent in raising consumers concern about the sustainability of cultivation and processing of palm oil, jeopardising future raise in demand. 20 Red palm oil gets its name from its characteristic red colour given by its natural content of at least ten types of carotenes (pro-vitamin A). During the conventional refining process, 100% of the natural carotenes are destroyed, while with the new refining technology over 90% of the natural carotenes content may be retained. 21 Changes in dietary intake of fats and oils which occurred over the past century comprised an increasing consumption of saturated and partially hydrogenated trans-fats which can increase the risk of coronary heart disease by raising levels of bad cholesterol and lowering levels of "good" cholesterol - wherefrom the claim that palm oil has harmful effects on public health. Yet, the chemical composition of palm oil is conferring the product a neutral cholesterolaemic effect (induction of elevated levels of cholesterol in blood). The saturated palmitic fatty acid contained for about 50% in the palm oil has been proven to have a neutral cholesterolaemic effect; the hypercholesterolemic effect caused by the less than 1.5% of lauric and myristic saturated fatty acids contained in the oil are compensated by these of the moderate amounts of monounsaturated oleic acid and linoleic fatty acids which are hypocholesterolaemic, as well as by the presence of vitamin E, which are natural inhibitors of cholesterol synthesis. Therefore, the consumption of palm oil as a source of dietary fat does not pose any additional risks for coronary artery disease when consumed in realistic amounts, as part of a healthy diet; this is the case in its wide use in Asia and Africa. 17

19 Voluntary organisations, such as RSPO - The Roundtable on Sustainable Palm Oil were formed since 2004, with the objective to promote the growth and use of sustainable oil palm products through credible global standards and engagement of stakeholders. This issue is specifically considered in the second part of this study under the sub-chapter 1.7. Petroleum price is one of the factors affection palm oil demand and prices; there is a tight correlation between the price of crude petroleum and that of certain vegetable oils. A commodity analyst of LMC International 22 estimated that every rise of 10 dollars per barrel of crude petroleum price may raise prices of the major vegetable oils by 70 dollars per ton. Limited petroleum availability and the rise of its price above certain limits support a larger use of certain soft oils 23 and of palm oil for the manufacture of supplementing biodiesel. Both the United States and the European Union have set ambitious long term targets for the use of biofuels in transport, with a view to decrease their dependence on petrol, as well as for reducing carbon dioxide emissions in transport because they impact on global warming. National policies in support of biofuel consumption include tax credits extended to blenders of palm-based biodiesel. Biofuel mandates create a higher demand for soft oils, leaving a gap in vegetable oils supplies that could be met also by palm oil. When supplies of crude palm oil are abundant and stocks are high, its price falls so far that it becomes profitable to produce and use palm-made biodiesel. However, when the demand for the oil is high, stocks are low and supplies are tight, crude palm oil price will not justify its use as biodiesel. Several types of consumer policies and measures are currently in use and can prove highly effective in at least some situations. Many of them are aiming at raising consumption from domestic sources and/or reduce dependency on imports. Some measures are intended to support directly the consumers, by subsidising domestic palm oil consumer prices in order to reduce the cost of living, or to increase consumption within nutrition policies. Indirect policy measures include the levy of Value Addition Tax (VAT) on the final consumption 24 of all goods, palm and palm kernel oils included. Other policy measures aim at facilitating consumption and improving domestic market availabilities by setting-up food-based safety net programs, improving meanwhile safety and the health of consumers by controlling more strictly the quality of vegetable oils imports, palm oil included. In India, for instance, the government operates an extensive and fiscally expensive set of food-based safety net programs. The largest among these is the Targeted Public Distribution System, which operates through a country-wide distribution network of government stores selling wheat, rice, and sometimes palm oil to households below the poverty line at heavily subsidized prices. Other food-based safety net programs operated in India and several African countries are the food-for-work programs and mid-day school meals. Consumer protection measures can be either directed at companies supplying food palmbased products, which are required to provide certain information on product composition through labelling, or by the imposition of restrictions on some types of sales and advertising practices. The challenge for policy makers is to apply the most adequate policy and consumption control methods for addressing the specific problems they are confronting. In some importing countries and circumstances, the level of the domestic consumption of edible oils, including palm oil, is maintained through price policy measures: retail prices for oils can be either set, or controlled closely by government. In other cases, government 22 Independent economic and business consultancy company for the agribusiness sector, 23 Soybean, sunflower, rapeseed and corn oils 24 Business community in many developing countries claim that VAT is not simply a tax on final consumption, but is very commonly levied in addition to normal VAT and tariffs, at often quite high rates, on imports and sales of the formal sector so as to bear differentially on the informal sector. 18

20 control agencies and public retail outlets are directed to sell the oils procured on the national or international market at prices below the market level. However, in an attempt to limit the distorting effects of such measures, most often they are applied on a temporary basis. For example, Tamil Nadu government is distributing palm oil at subsidised prices. In Bangladesh, the government fixed retail price of palm oil at the demand of importers. More examples of policy measures supporting the consumption of palm products implemented during the period are given in the Table in Annex III. 2.3 Trade A number of factors have a decisive influence on trade in palm and palm kernel oils. These include the uncertainty over supply and export availabilities (volumes and prices depending on weather, pests and disease, natural phenomena, economic and political situation, exchange rates 25, etc.), as well as the adequacy of trade and investment policies, infrastructure conditions and facility of access to information (influencing the reliability and performance of trade operations). Most of the high and middle income economies 26, which encompass the majority of countries exporting and importing palm products, operate in a free market. The private sector plays an important role in marketing and trade 27 in palm products; the extent of its involvement differs, however, from country to country. Multinational corporations dominate the bulk of the international trade Participants in trade Several types of actors intervene in palm trade, starting with the farmers cultivating oil palm and ending with the end-users and consumers of palm products. Each of them has definite functions and responsibilities, and their performance determines the efficiency and profitability of trade operations. There are four basic types of participants in palm and palm kernel oil trade, namely: Traders, associated with all commercial activities and including farmers selling exfarm, crushing and refining plant managers purchasing the palm raw materials (FFBs), buyers at corporate head offices, government purchasing bodies, brokers, commission agents, seat holders at commodity exchanges dealing in palm products, and even physical persons who may speculate from time to time. Two types of trading exist in palm and palm kernel oils: physical (cash) trading and trading in futures (commodity exchanges) 28. Traders in physical markets, generally called cash traders, have specific quantities of palm products of particular grades and specifications to buy from merchandisers and to move on to customers. They are therefore involved in logistics and assume responsibility for transport and shipping. Commodity brokers are the traders responsible for arranging the purchase or sale of palm and palm kernel oils in commodity exchanges. 25 Please note that nearly all trade figures throughout the study are expressed in quantity, rather than value, in order to avoid the impact of exchange rate on the value of trade 26 See World Bank country classification at 27 Marketing is the process of planning and executing the conception, pricing, promotion and distribution of goods and services. Trade is the proper exchange of goods and services. 28 Physical trading (also named cash trading) involves the actual movement of goods from origin to destination and is associated with cash contracts and documents on insurance, shipping and storage. Trading in futures concerns transactions carried out under futures contracts. This type of trading allows offsetting some of the risks of price fluctuations inherent to physical trading. 19

21 Agents and brokers, operating on behalf of buyers or sellers on the basis of a commission and expected to resolve contractual difficulties Merchants and dealers, who take title to palm products purchased with their own capital, assisted at times by external financial sources End users including manufacturers of food products, oleo chemicals, personal care products, etc., who have an influential role to play, reflecting final consumers demand which finally determine what is bought, quality requirements, where and how the products are transported and stored, etc. The end users choice of function, formula, brand name, labelling and marketing strategies for their products affects significantly consumers choices Governmental trade control Trade in palm products is heavily controlled by governments through trade policies implemented through various types of trade policy instruments. In each country, these instruments are chosen and prioritised in order to ensure maximum effectiveness in stimulating trade and domestic growth, taking into consideration specific factors such as the structure of the national economy, the growing challenge of globalisation, and the respective roles in trade attributed to public and private sectors. Trade policies and instruments are frequently reappraised and adapted to changing market conditions. In general, in developing countries where foreign exchange incomes depend significantly on the trade in vegetable oils including palm oil, governments are involved in their commercialisation to a larger extent. The various types of trade policy measures considered below are largely used; selected trade policy developments and measures which have been applied between 2009 and 2011 in the main countries producing, importing and exporting palm products are further summarised in the table in Annex IV Tariff-based instruments Tariffs are foreign trade policies measures undertaken by government with the main intention to protect domestic production by restricting foreign competition. They are also levied for revenue generation, as well as for implementing government policies relative to the development of domestic industries and national exports. More specifically, tariffs are taxes levied either per unit of product traded, or ad valorem. Tariffs are levied on trade in palm products in nearly all markets. The term covers customs duties and charges on imports and exports, together with additional fiscal charges and internal taxes. Import tariffs The primary goal of import tariffs is to reduce imports in order to increase domestic production. They raise the demand price paid by domestic consumers, reducing the quantity of imports from abroad, and reduce the supply price received by foreign producers. The imposition of imports tariffs is commonly justified for three reasons: the protection of domestic industries (if foreign imports compete with a relatively young domestic industry that is not large enough to benefit from economies of scale, tariffs on imports protect it while it matures and develops); unfair trade (foreign imports might be sold at lower prices on importing markets because foreign producers engage in unfair trade practices, such as subsidisation of their production or dumping imports at prices below production cost. Import tariffs are then balancing the competitive playing field), and national food security considerations (tariffs discourage imports and encourage domestic production of goods that are deemed critical to national food security). 20

22 Import tariffs may be beneficial to the aggregate domestic economy they tend to protect, and thus most commonly promoted by domestic companies facing competition from imports. Domestic companies can thus benefit from higher sales, greater profits and larger shareholders benefits. However, tariffs tend to disadvantage domestic consumers by increasing domestic prices by restricting access to imports. An example of crucial influence of the application of import tariffs in the palm oil sector: often India raised taxes on imports of crude palm oil and/or applied differential tariffs, in order to control the importation of crude palm oil over refined oil, thus supporting the domestic refining industry (latest at the end of ). At the same time, with a view to decrease the dependency on palm oil imports, the government appealed to policy measures aiming at increasing domestic cultivation and securing domestic supplies, such as financial support for establishment of plantations, or agreements with Indian agribusiness companies to negotiate land concession abroad for growing oil palms, especially in Africa and Latin America. ECOWAS member countries levy import taxes on a whole range of edible oils including palm oil originating from outside the region, with a view to counter the rising domestic consumer prices. Changes in taxation levels of specific vegetable oils are considerably affecting the composition of imports and the consumption and trade in vegetable oils from non-ecowas origins. Nigeria, for example, has a national agricultural policy relying on trade control, and government taxation measures have a direct incidence of on the imports and domestic consumption of palm oil. The country is the largest producer of palm products in West Africa. Although locally produced groundnut, soybean and cottonseed oils are increasingly consumed, Nigeria is the largest producer, consumer and importer of palm oil in the ECOWAS region. According to Oil World, the country produced some tons of commercial crude palm oil in 2011 from a mature plantation area of ha, with an average yield 2 tons per ha. Government sources estimate the total present production of crude palm oil at some 1.3 million tons, including smallholders output extracted through traditional methods. However, the current domestic disappearance 30 of palm oil exceeds the offer, being estimated by Oil World at about 2 million tons per year. The country needs therefore to resort to imports. Imports doubled over the past six years, from tons in 2006, to tons in 2008 and tons in The level of imports is largely controlled through taxation. Under the Common External Tariff 31, Nigeria levies a 35 per cent tax on imports of crude palm oil, palm olein and palm kernel oil not originating from ECOWAS countries. Under the CET tariffs these products are subject to a 5 per cent ad valorem import tax of and a valueadded tax of 5 per cent. A duty of 10 per cent and a value added tax of 5 per cent are levied on imports of palm kernel cake. Imports of palm kernels are only subject to 5 per cent value added tax. Imports of refined palm oil are prohibited 32, with a view to protecting the domestic refining industry. Additional duties and taxes increase the price of imported palm products, including a port development levy of 7 per cent of the payable duties, an ECOWAS community levy of 0.5 per cent and a Comprehensive Import Supervision Scheme charge of 1 per cent on the f.o.b. value of imports. VAT is applied at 5% and calculated on the dutyinclusive c.i.f. value of imports. After the levy of all duties and taxes, it is estimated that the domestic price of imported crude palm oil exceeds by over 40 per cent the world market 29 In response to Indonesia s restructured export tax which will boost exports of refined versus crude palm oils, making it unprofitable for importing India to buy crude palm oil for local processing, Indian government is put under pressure by refiners and requested to raise the import taxes on refined palm oil from currently 7.5% to at least 15%. 30 Residual balance of visible opening stocks plus production and imports, minus exports and visible ending stocks 31 CET tariff at 32 Nigeria Trade Policy Review

23 price. As far as the lower-taxed imposition of palm kernel is concerned, this is meant to facilitate the complementing 33 of available domestic supplies for processing. Changes to import legislation can also have a considerable impact on domestic manufacturing industries. In the case of Nigeria for instance, imports of crude palm oil - a basic ingredient in the production of noodles, were prohibited until Prohibition removal after that date has led to an increase in noodle manufacturing, despite the imposition of a 35 per cent tariff on the oil. Food industries are looking forward to the effective implementation of the CET flat rates of duty for imports into the region for the period , in line with ECOWAS recommendations. A draft of the CET is expected to be to be submitted to the ECOWAS Council of Ministers for adoption by end of June In Annex IV are shown the European Union import tariffs levied on palm products of different origins. Export control measures Export taxes and quantitative export restrictions are commonly applied in the palm sector. At the global level and in the short run, palm supply restrictions push up international prices, given the inelasticity of supplies. Countries or consumers who are net importers of taxed palm products would lose out, while countries and producers who are net exporters would benefit from the application of export taxation. Export taxation and restrictions are bound to restrain the incentive for domestic suppliers to produce, but could also easily lead to trade diversion: other countries may increase their supplies and gain international market shares. For instance, when Indonesia started imposing an export tax on crude palm oil with the objective of making larger supplies of the raw material available to domestic refiners, India - which is the largest importer of Indonesian palm oil, started diverting as much as possible of its procurement to other origins, in addition to supporting the domestic development of palm production and investments in palm cultivation and processing abroad. At the same time Malaysia, with a processing sector that uses crude palm oil and competes with the Indonesian refining industry, is imposing its own export restrictions on crude palm oil to offset the additional pressure on its domestic refining caused by Indonesian export taxation. This illustrates the fact that export restrictions imposed by a country may trigger a domino effect, in addition to causing some trade diversion. Several justifications are stated for the application of export taxation and other export trade restrictions, including: Terms of trade: by restricting their exports, Indonesia and Malaysia, which together cover 86 per cent of the world supplies, can raise palm oil international price, thereby improving their own terms of trade Food security and domestic consumers protection: by creating a wedge between world prices and domestic prices, governments lower the latter by reorienting domestic supply towards domestic supply. This is the case in Indonesia, where the government imposes at times export taxes on palm crude oil, together with the other cooking oils, which are strategic food commodities. Other governments have used this rationale during the food crisis of to justify the application of export taxes and other forms of restrictions in order to protect local consumers 33 Availability of domestically produced palm kernel oil is smaller than the refining needs tons in 20010/2011, because a large amount of unprocessed palm kernels are exported as such 22

24 Domestic consumption price: export taxation of crude palm oil constitutes an indirect subsidy to value-added domestic refining sector, as it lowers the domestic price of crude palm oil feed stock relative to the international undistorted price. For example, the Indonesian export tax on crude palm oil is aiming to support the development of local refining (installed capacities are not fully used) and the local supply of lower priced palm cooking oil Public receipts: export taxes provide revenues to developing countries with limited capacity to rely on other types of domestic taxation Income redistribution: similar to import tariffs, export taxes are measures that imply the redistribution of income at the detriment of domestic producers, benefitting domestic consumers and public revenues Stabilization of domestic prices and better responsiveness to market fluctuations: exporting countries such as Indonesia and Malaysia have export tax regimes with sliding rates based on international prices, providing a built-in mechanism to improve responsiveness to international market fluctuations Malaysia and Indonesia are periodically facing periodically high levels of production and high stocks of palm oils, combined with sluggish import demand; this results in large supply surpluses. The trade policy measures applied by the two countries in order to solve oversupply situations is very much the same: governments lower export taxes or apply temporary tax waivers, concurrently applying differential export tax schemes to stimulate the domestic refining, raise domestic consumption, undertake aggressive promotional campaigns or support palm oil consumption abroad through joint ventures. In Annex V are shown the Indonesian and European export taxes levied on crude and refined palm oils and biodiesel, as well as the taxes levied on crude palm oil exports outside quota in Malaysia. The differential among the export tax rates levied on unprocessed and processed products constitutes an effective export subsidy for the processed products. In the case of palm oils, exports of crude oil which is the input raw material for refining are taxed at a higher rate than the exports of refined oil. Indonesia, for instance, levied an export tax of 13.5 per cent on crude palm oil in December 2011, and of only 8.5 per cent on refined palm oil (the price of the crude palm oil at that time was 969 US$ per ton CIF Rotterdam - see Annex V). This differential export tax structure reduces the cost of crude palm oil raw material for Indonesian processors by 13.5 per cent, while reducing the export revenue for refined oil by only 8.5 per cent. The application of differential export taxation on different types of palm oil is, however, a double-edged sword. While encouraging the development of domestic palm oil processing industry, the taxation hurts producers of crude palm oil, in particular smallholders, who have no incentives to invest in replanting and maintenance of their estates. Moreover, it can become an incentive for rampant smuggling of crude palm oil. As far as the ECOWAS region is concerned, taxation on exports of palm oil and its incidence is best illustrated by the case of Côte d Ivoire, as a major ECOWAS producer and the largest West African exporter of palm oil. With a current output of about tons of palm oil per year, Côte d Ivoire is a much smaller producer than Nigeria. However, the domestic consumption amounts to only a half of the production and the country is exporting the surplus to both the ECOWAS region and the European Union (50 per cent each). The Ivorian government applies several types of taxation on palm oil exports. An export tax (Droit Unique de Sortie - DUS) is levied on crude palm oil exports - currently at 8.5 per cent ad valorem. The impact of this tax on palm oil economy is complex. The apparently flat tax seems to not take into account the variations of international price and is not really effective in smoothing the transmission of world price shocks to the domestic economy. Taxing unprocessed palm oil provides an indirect subsidy to domestic refiners. They can thus dispose of domestic price of crude palm oil (which is not taxed) below world market price, improving therefore their price competitiveness. However, 23

25 as regards income distribution, the export taxation entails the redistribution of welfare from smallholders as primary commodity suppliers to downstream processors. This might increase income inequality within the country and negatively affect the poorest smallholders population. Moreover, export tax revenues can be highly volatile, subject to large fluctuations of international market prices and the variability of exchange rates. Palm exports are additionally taxed through a profit tax (a percentage of the commercial profits), reported by World Bank at 8.8 per cent in Moreover, companies registered in Côte d Ivoire, regardless of the nationality of the shareholders or where they are managed and controlled, are subject to a corporate income tax on local profits; the current taxation rate is 25 per cent. However, profits realized in Côte d Ivoire by branches of foreign companies are deemed to be distributed and therefore are subject to a branch withholding tax on onehalf of the before-tax profit at a rate of 12 per cent (a withholding tax of 18 per cent is levied if the profit is exempt from corporate tax). Branches of foreign companies are also subject to a remittance tax regardless of actual amounts transferred. Fifty per cent of the branch's profits are treated as though they had been remitted as a dividend (subject to a 6 per cent rate). Finally, the value-added tax is levied at a rate of 18 per cent Non-tariff trade control measures Non-tariff measures are instruments other than tariffs applied by governments to control trade; several of them are largely applied in the palm sector. These include: pre-shipment inspections 34), customs valuation, TRIMs, quantitative restrictions (quotas or bans) and government procurement. The non-tariff trade control measures influence prices, quantity, structure and/or direction of international trade in palm products. Pre shipment Inspection (PI) is the practice of employing specialized private companies to check shipment details. Inspections are conducted in most cases prior to shipment, in the country of origin. The physical inspection of goods is an integral part of the procedures adopted by pre shipment inspection companies to ensure that the prices invoiced by the exporter are reflecting the true value of the goods; bringing in this way under control the under- or over-invoicing of imported goods and other unfair or improper practices. These inspections assure importers that the goods they have ordered meet contractual specifications and quality standards, thereby reducing possibilities for dispute after the arrival of the goods at destination. The inspections also prevent the import of products that are considered harmful to health and therefore could not be commercialised (in this respect, it is worth recalling the unfortunate cases of commercialisation of adulterated edible oils). In addition, the scope of pre shipment inspections is to safeguard national financial interests (prevention of capital flight and commercial fraud, as well as customs duty evasion, for instance) and to compensate for inadequacies in the administrative practice. Inspection companies charge fees ranging from 0.6 to 0.75 per cent of the f.o.b. value of goods imported, to be paid either by the government or by the importer. In certain cases, a lump sum is payable and this means much higher charges. In general, the system is complex to administer and subject to numerous exceptions. For information on the WTO pre shipment inspection agreement please access: Customs valuation is the procedure applied to determine the customs value of imported goods. In the case of countries trading in palm products, the rate of duty is ad valorem; 34 Set of activities aimed at the verification of quality, quantity, price, exchange rates, financial terms and customs classification of goods undertaken in the exporting country, at the request of the importing country. Developing countries apply pre-shipment inspections with the main objective of preventing capital flight through over-invoicing and the loss of customs revenue through under invoicing by traders. 24

26 therefore the declared value is essential for determining the customs duties to be paid. For more information please access: Trade-Related Investment Measures (TRIM) are domestic regulations a country applies to foreign investors, often as part of an industrial policy. In general, TRIM rules enable multinationals to operate more easily in foreign markets. The significant increase in foreign investments in the palm sector leads governments receiving these investments (and foreign companies) to impose restrictions aiming to protect and foster domestic industries and prevent the outflow of foreign exchange reserves. Examples of restrictions include local content requirements (i.e. the use or purchase of locally-produced inputs) and requirements on trade balancing, level of domestic sales, technology transfer, export performance (namely the export of a specified percentage of production volume), local equity, remittance, as well as employment conditions. These measures can also be used in connection with fiscal incentives. Some of the investment control restrictions may distort trade in violation of WTO Agreement on Trade-Related Investment Measures, but developing countries involved in production and trade in palm products are permitted to apply them, provided the measures meet the conditions of specified derogation from the WTO provisions, by virtue of the economic development needs of developing countries. For technical information on the WTO TRIM Agreement please access: Quantitative restrictions Quotas are legal physical limitations on the quantity of goods that can be imported or exported in a given period of time. They can be established as a simple aggregate, presumably satisfied on a first-come-first-serve basis. Once the quota level is reached, no more imports of the particular good are allowed. Alternatively, the total quota can be divided among foreign suppliers, often calculated on pro-rates based on past import levels. In general, quotas cause the price of goods to rise above the world level. Import quotas are restrictions setting a physical limit on the quantity of goods produced abroad, imported and sold domestically. The primary goal of import quotas is to increase the domestic part of total supplies by reducing imports, thus protecting domestic production and restricting foreign competition. While import quotas benefit domestic producers, they disadvantage domestic consumers. Fewer imports of goods in a domestic market allow fewer choices to consumers, often at higher prices. Import quota measures are not customary in palm trade. Export quotas are quantitative restrictions imposed either voluntarily, or on the decision of importing countries. The various justifications for their imposition may include the protection of domestic industries from shortages of raw materials; the protection of local consumers from shortages of foodstuffs or other essential goods 35 ; the maintenance of international commodity prices; the compliance with export restraint agreements (for instance the quotas imposed on members of the OPEC agreement), or the compliance to export restraint agreements with importing countries. Export quotas implemented by large suppliers of palm products (with large shares in the international market and a certain power in setting world price) depress the domestic prices, increase the international price of the products and reduce the volume of trade. The mode in 35 Essential goods are physical items required by consumers in order to sustain their health or life, such as food, water, gasoline and heating fuel, as well as building materials used for homes/shelter construction. 25

27 which the Malaysian government employs the quota instruments in order to adjust to palm world market situation is eloquent. The country is the second largest world exporter of crude palm oil, with an oligopolistic power in setting the world price. During periods of low peak world market prices, the Malaysian government imposes a combination of high crude palm oil export taxation to protect the domestic refining industry, and tax free quotas 36 curtailing the quantities exported. Under these conditions, two consecutive things happen. In the first place, it is more expensive for Malaysian exporters to export crude palm oil; as a result, international oil supplies decrease and world price should rise. Higher prices will in turn reduce the demand for crude palm oil from the rest of the world and more crude palm oil will be shifted onto the local market, causing a fall in the domestic price. Bans (also called embargos or prohibitions) are absolute trade restrictions by which a country completely banishes trade with another country or forbids exporting its own products to it. At present, the only ban on palm products in force in ECOWAS member countries is the Nigerian prohibition of exports of palm kernels. Palm kernel-based industry is regarded as a high-growth business by the private Nigerian sector. The total output of raw palm kernels ( tons in 2011) is crushed locally. In 2011, processing of the domestic palm kernel production yielded tons of palm kernel oil (consumed domestically, mainly as raw material for a whole range of secondary processing industries, for instance the manufacture of detergents, personal care products, confectionary fat and margarine), as well as tons of palm kernel meal. However, the domestic output of palm kernels falls short of the domestic demand for crushing corresponding to national installed capacities and additional supplies have to be imported every year ( tons in 2011) - wherefrom the ban on exports of the product for protecting the local processing industry. Malaysian palm kernels and oil palm seedling are prohibited from exportation. The entire output of palm kernels is used locally, as raw material for the domestic processing industries, wherefrom the ban on their exports. Since the 1970s, the government of Malaysia prohibits also the export of oil palm seedlings, to ensure sufficient supply to domestic farmers and to protect the intellectual property rights from being copied by other oil palm producers. Meanwhile, oil palm seedings are supplied to Malaysian companies overseas, as well as to Honduras, Colombia, Sierra Leone, Thailand and Indonesia on the basis of government-togovernment agreements. Malaysia produces at present 80 million tons of oil palm seedlings, of which 50 million are supplied to local planters. The country could become the world's largest supplier of germinated oil palm seedlings, provided that the ban on their export is removed. World import demand is large; African and Indonesian annual demand is estimated at 50 million and 130 million tons respectively. Government procurement is often practiced by developing countries involved in trade in vegetable oils including palm oil. The major objective of government involvement in procurement is to secure sufficient domestic supplies in order to ensure acceptable consumer prices and cover the needs of local refiners. Least cost government purchases are facilitated by the centralisation of international and national procurement procedures, based on a tendering system. Various sources provide information on the topic, including the WTO Government Procurement Agreement ( 94_01_e.htm) and the Asia-Pacific Economic Cooperation APEC non-binding Principles governing government procurement ( 36 According to trade sources, in 2011 the government allocated 4.9 million tons of the national crude palm oil output under the tax free quotas given to holders of export licenses such as the state run plantation agency FELDA plantation, or private plantations such as Sime Darby and IOI Corporation. 26

28 Trade defence mechanisms The trade defence mechanisms most often applied by countries trading in palm products are safeguards measures, subsidies and Rules of Origin. Safeguard measures consist of temporary restrictions on imports threatening, or causing serious injury, to domestic industries. Technical information on the WTO Agreement on Safeguards, setting forth the rules for application of safeguard measures, is accessible at A typical example is the Nigerian restriction on imports of refined vegetable oils and fats 37, applied with a view to protect the domestic edible oil refining industries. Subsidies are less direct forms of trade restriction conferring benefits to domestic producers and exporters and providing domestic industry an advantage over foreign competitors who are not subsidized. They represent a direct government support to a particular industry and consist of public financial contributions to producers and exporters in the form of grants, soft loans or equity. It often happens that, although intended as a temporary trade restriction, subsidies become permanent and the supported industry becomes dependent on government aid. Subsidies are generally intended to increase and diversify production and exports, promote technological development and enhance competitiveness both in the domestic and international markets. Subsidy programmes are granted by practically all governments in palm producing and exporting countries for research, technological developments, adaptation of existing production facilities to new environmental requirements, or the development of palm cultivation on peat or other bad land. However, subsidies granted by an exporting country can hurt a domestic industry in an importing country and disadvantage exporters from another country when the two compete in third markets. For example, subsidies granted to Indonesian and Malaysian producers and exporters of crude palm oil are afflicting the competitiveness and export performance of the Indian refiners. The WTO Agreement on Subsidies and Countervailing Measures monitors and disciplines the use of subsidies, regulating the actions countries can take to counter their effects. Under the agreement, a country can use the WTO s dispute-settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. For more information on the issue please access Rules of origin are the criteria needed to determine the national origin of a product. Their importance is derived from the fact that import duties and restrictions in several cases depend upon the source of imports. They are considered in: the implementation of safeguard measures; the decision whether imported products shall receive or not most-favoured-nation (MFN) treatment or preferential treatment; the application of labelling and marking requirements; government procurement procedures, as well as for statistical purposes. The WTO Agreement on Rules of Origin aims at harmonizing the non-preferential rules of origin and ensuring that such rules do not create unnecessary obstacles to trade. The Agreement requires WTO members to insure that their rules of origin are transparent; do not have restricting, distorting or disruptive effects on international trade; are administered in a consistent, uniform, impartial and reasonable manner; and are based on a positive standard (in other words, they should state what does confer origin rather than what does not). 37 See Nigeria Trade Policy Review 2011 at 27

29 More information on the Agreement is accessible at ECOWAS member countries have to conform to ECOWAS protocol and procedures for approval of products origin. In the frame of the ECOWAS Trade Liberalization Scheme, the evolution of international trade and the adoption by the World Trade Organization (which most ECOWAS Member States are members of) of the Agreement on rules of origin, ECOWAS and UEMOA adopted the same origin criteria. The ECOWAS protocol A/P1/1/03 38 of 31st January 2003 defined the concept of originating products and the origin criteria applicable for the free circulation of industrial goods. ECOWAS regulation REG./3/4/02 of 23rd April 2002 established the procedure for approval of industrial products, foreseeing that national approvals committees in each member state are responsible for approving and listing the enterprises and products fulfilling the conditions of origin; the lists should be forwarded to the ECOWAS Commission. The ECOWAS Commission is responsible for the distribution of the lists of approved products sent by Member States. The approved enterprises and palm products listed by member country are accessible at Technical barriers to trade (TBT) Technical barriers to trade include Standards and Sanitary and PhytoSanitary (SPS) trade control measures. In general, quality standards and Sanitary and Phytosanitary measures are used as instruments for authenticating the conformity of quality and specifications of imports and exports with international safety standards, requirements and regulations aiming at consumer protection. Technical regulations and standards 39, and conformity assessment procedures 40 vary from country to country; they often create difficulties to producers and exporters from developing countries. Standards justification includes the protection of consumers health and safety, consumers information needs, national security or the environment protection. However, when set arbitrarily, they can be used as an excuse for protectionism and become obstacles to trade. The WTO Agreement on Technical Barriers to Trade recognizes countries rights to adopt the standards they consider appropriate for human, animal or plant life or health, for the protection of the environment or for meeting other consumer interests, and tries to ensure that regulations, standards, testing and certification procedures do not create unnecessary obstacles to trade. More information on this Agreement is accessible at 38 accessible at 39 Technical regulations and standards set out specific characteristics of a product, such as: its size, shape, design, functions and performance, or the way it is labelled or packaged before it is put on sale. In certain cases, the way a product is produced can affect these characteristics; it may then prove more appropriate to draft technical regulations and standards in terms of the process and production methods used for producing the product, rather than in terms of product characteristics. The difference between a standard and a technical regulation lies in compliance: while conformity with standards is voluntary, technical regulations are by nature mandatory. Regulations and standards have different implications for international trade. If an imported product does not fulfil the requirements of a technical regulation, it will not be allowed to be put on sale. In case of standards, non-complying imported products will be allowed on the market, but then their market share may be affected if consumers prefer products that meet local standards. 40 Conformity assessment procedures are technical procedures which confirm that products fulfil the requirements laid down in regulations and standards, namely testing, verification, inspection and certification. Generally, exporters bear the cost, if any, of these procedures. Non-transparent and discriminatory conformity assessment procedures can become effective protectionist tools. 28

30 Manufacturers and exporters need to know what the latest standards are in their target markets. WTO member governments have therefore established national enquiry points 41 making this information available conveniently and keeping each other informed of notifications on new or changed regulations. Moreover, a TBT Information Management System has been set up as a "one-stop" system allowing users to track and obtain information on TBT measures notified to WTO by Member governments, on enquiry points, on standardizing bodies having accepted the Code of Good Practice, and on publications providing information on technical regulations, standards and conformity assessment procedures. More technical Information on Technical barriers to trade can be found at Trade in palm products has to comply with a combination of mandatory and voluntary standards and technical regulation. Some of them are aiming to protect human safety or health. For instance, edible palm oil labelling requirements impose the indication of their trans-fatty acids 42 content; palm kernel oils have to comply with quality standards related to their physical and chemical characteristics. Compliance with existing quality standards and the regulations on edible palm oil production, processing and packaging in order to ensure its quality and consumers safety could have avoided adulteration cases, such as the repeated cases of palm oil adulteration with carcinogenic Sudan red dyes which occurred in Ghana and Nigeria between 2004 and Increased consumers concern about environmental preservation and sustainable palm oil production has led many governments and private groupings to adopt standards and regulations in this respect. From 2012 onwards, several voluntary certification schemes set up by industry and associations and recognised in importing countries will be in use simultaneously with the mandatory, government-led and industry-controlled sustainable palm oil schemes of Indonesia and Malaysia. The further alignment of mandatory Malaysian and Indonesian sustainability standards with the voluntary standards adopted by the majority of importers of palm oil for biodiesel and food products manufacture is a major challenge to be faced the soonest. Sanitary and Phytosanitary measures are designed with a view to ensuring food safety and animal and plant health. The WTO Sanitary and Phytosanitary Measures Agreement sets out the basic rules for the application of their application. The agreement stipulates that SPS measures should be based on recognized international standards (particularly these issued by the FAO/WHO Codex Alimentarius Commission 43, the World Organisation for Animal Health 44 and the International Plant Protection Convention 45. They should also be based on science and the scientific assessment of risk. The temporary precautionary principle should be applied in the absence of international standards or scientific evidence. Countries are free to set their own standards and regulations provided that these are based on science and are applied only to the extent necessary to protect health and safety, and that they do not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail. WTO member countries are encouraged therefore to use international standards, guidelines and recommendations where they exist, or to adopt SPS measures provided that they are scientifically justified. 41 The list of enquiry points for each ECOWAS member country can be seen at 42 Trans fatty acids may increase the risk of coronary heart disease by raising the levels of bad cholesterol and lowering levels of "good" cholesterol in blood

31 A recent (2009) case of utilisation of sanitary standards for discrediting a palm product had a happy resolution, namely the tentative of Senegal to prohibit imports of edible palm oil from Côte d Ivoire. The protectionist market access tentative was initially caused by the rough competition between the two major producers and exporters of edible palm oil in the two countries and the efforts of the major Senegalese palm oil manufacturer to maintain his monopoly on the domestic market. The pretext used by the Senegalese producer was the necessity to impose a sanitary standard setting the acceptable maximum threshold of 30% saturated fatty acids in the refined edible palm oils consumed or imported into Senegal, in order to protect consumers health, knowing however that the Côte d Ivoire manufacturer could produce and export only refined palm oil with a content of 50% saturated fatty acids. This tentative aborted following the ECOWAS and WAEMU ruling on the issue. According to the definition of SPS Agreement, measures taken to protect human or animal life from food safety risks (biosafety) could be related in the future to genetically modified organisms (it is not yet decided). Malaysia is the only country undertaking experimental research on genetic modification of oil palm with the strong support and commitment from the government and the involvement of the Malaysian Palm Oil Board Trade development instruments These instruments comprise trade facilitation measures and export promotion measures. They are used for stimulating export development and can concern the entire supply chain including production, processing, marketing and delivery of goods. Promotion and facilitation of exports are key issues for increasing supply availabilities and trade expansion in developing countries. Export promotion measures are generalised in countries producing and exporting palm products. They are focused primarily on the demand side of the products and are best implemented for products with existing competitive supply capacities. They entail the provision of export support services including market research, trade information provision, organisation of trade missions, monitoring of demand, prices, quality requirements, market access rules and regulations, business opportunities and import and distribution channels in target markets. Market linkages complement export promotion measures by placing equal emphasis on both supply and demand side. In the case of palm products, they also entail the organisation of the sector, training of farmers and processors, the provision of inputs and extension services and the facilitation of contractual linkage with commercial enterprises. In Malaysia and Indonesia for instance, government and the industry are joining efforts to foster the expansion of palm oil uses, increase exports and improve the image of palm oil in Europe and the United States. Malaysian government provides also substantial incentives to plantation companies and processors for market linkages and supports strengthening of trade links with overseas buyers. Trade facilitation is essential for export development; this is particularly true for trade in palm and palm kernel oils in West Africa. Trade facilitation measures include governmental support in simplification of trade procedures and the increase in product competitiveness through the facilitation of exports (export credit financing, insurance and credit guarantee schemes, access to better storage facilities, etc.). Trade facilitation is also encompassing technology infrastructure because of the fast integration of networked information technology into trade. The organisation and simplification of customs procedures and formalities, more transparent legal rights and obligations for traders, increased efficiency of the logistics of moving goods through ports or the documentation requirements at a customs post at the border, and the harmonization of regulatory requirements constitute the core of trade facilitation reforms. 30

32 More recently, trade facilitation measures were broadened to include the environment in which trade transactions take place and where national policies and institutional structures play an important role; for instance, transparent and incorrupt government regulatory agencies are considered to provide a favorable environment for trade transactions. Increasing awareness of border trade-related transaction costs has called for multilateral regulations and regional and multilateral coordination regarding trade facilitation. Trade facilitation in the WTO definition has a more specific and limited focus than trade facilitation for development; it centers on general trade principles that underpin an open trading system and include transparency, predictability, due process, nondiscrimination, and simplification and avoidance of unnecessary restrictions to trade. 46 A Trade Facilitation Agreement is in preparation in WTO, considering issues such as the freedom of transit (providing a basis for creating an environment in which the transit of goods is free from barriers to transport and discrimination between suppliers, firms, and traders from different countries, fees and formalities related to importation and exportation (related to customs clearance procedures and the nondiscrimination and transparency in fees and rules applied to goods crossing borders), and the publication and administration of trade regulations (containing general commitments to assist in ensuring timely publication of regulations regarding imports, including fees, customs valuation procedures, and other rules). Trade facilitation Agendas and arrangements are also pursued by the World Customs Organization, UNCTAD (actively involved in trade facilitation at a global level, both in transports and in the running and spread utilization of the ASYCUDA 47 customs software program), and several regional integration initiatives. The trade facilitation measures adopted in this context are not implemented as enforceable agreements, but rather as action programs. Within the Asia and Pacific region, the Asia-Pacific Economic Cooperation (APEC) is committed to regional trade facilitation initiatives focusing mainly on the simplification and standardization of customs procedures. Trade costs associated with transportation charges, documentation requirements, security measures and delays in clearance at national borders are very high in West Africa. The ability of ECOWAS member countries to deliver goods in time and at low costs is a key determinant of their competitive participation in the regional and international trade. Facilitation of border trade in palm products is particularly important, since the resolution of the Abuja Food Security Summit in December 2006 identified palm oil as one of the nine continental strategic commodities; the envisaged building of a Common African Market for palm products transcending national and sub-regional borders would offer an appropriate economic space for private investments justifying the setup of large estates and the implementation of profitable, large scale processing plants. ECOWAS Commission has adopted already a series of protocols aimed at facilitating trade and investment in the subregion, with a view to attaining full regional integration. However, the implementation of these protocols has not been totally effective for various reasons including insufficient political commitment, the ignorance of the protocols by the business community and the infringement practices of some implementing public officers. The Federation of West Africa Chambers of Commerce and Industry supports the lifting of all bottlenecks to the implementation of ECOWAS protocols aimed at facilitating cross-border trade and investments, as an important pillar of its actions in serving the interests of ECOWAS companies and preparing them for international competition. 46 Other WTO agreements that have an effect on trade facilitation agenda include the Agreement on Import Licensing Procedures, and the agreements on Technical Barriers to Trade and on Sanitary and Pytosanitary Measures. 47 Automated System for Customs Data and Management 31

33 Four of the ECOWAS member countries, Burkina Faso, Chad, Mali and Niger, are leastdeveloped and landlocked, lacking maritime access and resting until now isolated from world markets. In addition to their nearly total dependence on the neighbouring countries to access sea ports and engage in international trade, these countries have to face additional high border crossing and transport costs. Trade and transit transport corridors have been established in order to address their specific needs, linking their economic centres with neighbouring ports. These corridors are accepted by custom authorities; the main corridors are Dakar - Mali (1250 km by rail), Abidjan -Burkina Faso - Mali (1200 km with multimodal transport options to Ouagadougou and road transport to Mali), Tema/Takoradi -Burkina Faso Mali (1100 km by road to Ouagadougou), Lome Burkina Faso Mali (200 km by road), Cotonou Niger Burkina Faso Mali (1000 km to Niger, multimodal options) and Lagos Niger (1500 km by road). In addition, ECOWAS drives the development of and maintenance of Trans-African Highway network, namely the Dakar-Njamena and Dakar-Lagos corridors. An on-going ECOWAS Transit Facilitation Programme undertakes the monitoring and the management of road blocks 48 existent in the sub-region, with a view to suppress the illegal and inefficient ones. A coordinated action is undertaken in cooperation with WAEMU to facilitate trade procedures, in particular customs, and to stop the unlawful harassment of travellers on regional key road corridors across the sub-region International and national trade policy instruments International trade policy instruments include regional and preferential trade arrangements (RTAs), the multilateral trading system and WTO agreements, and bilateral cooperation initiatives. Regional trade arrangements are defined as reciprocal trade agreements between two or more partner countries. Their major objectives are to reduce trade imbalances and achieve harmonisation of policies with regional partners, promote diversification of exports, and create a competitive regional economy. These objectives should be attained through access to the larger markets resulting from regional economic co-operation. RTAs comprise free trade agreements and customs unions. RTAs in force notified to WTO include the Economic Community of West African States (ECOWAS) and the West African Economic and Monetary Union 49 (WAEMU), and the Association of Southeast Asian Nations 50 (ASEAN). Detailed information on RTAs is available at: and data on RTAs notified to the WTO is available in the RTA database: In line with its mandate, ECOWAS is aiming to promote co-operation and integration, leading to the establishment of an economic union in West Africa in order to raise the living standards of its peoples, to maintain and enhance economic stability, foster relations among Member States and contribute to the progress and development of the African Continent. The Community is progressing in the process of harmonization and coordination of national 48 Nearly all ECOWAS member states have set up a multitude of check-points (road blocks) where drivers are subject to unnecessary administrative harassments and extortions. For example, according to ECA there are 25 checkpoints on the 960 km between Tema and Ouagadougou; 37 on the 1100 km between Abidjan and Ouagadougou, 34 on the 1000 km between Cotonou and Niamey and 20 on the 500 km between Niamey and Ouagadougou. 49 Benin; Burkina Faso; Côte d'ivoire; Guinea Bissau; Mali; Niger; Senegal; Togo. See ( 50 ASEAN has eight member countries; six of them are already members of the WTO (Brunei, Cambodia, Indonesia, Malaysia, Myanmar, the Philippines, Singapore and Thailand), and two others (Laos and Vietnam) are negotiating WTO membership. 32

34 policies and the establishment of a common market through liberalization of trade, by the abolition, among Member States, of customs duties levied on imports and exports and the abolition of non-tariff barriers in order to establish a free trade area at the Community level. The finalisation of the Common External Tariff (CET) is one of the major steps in the establishment of a Customs Union under the ECOWAS integration agenda and the conclusion of on-going Economic Partnership Agreement negotiations between ECOWAS, the West African Economic and Monetary Union (UEMOA) Commissions and the European Union. Trade in palm products in the ECOWAS region will be facilitated by the adoption of the Common External Tariff (CET) and the implementation of accompanying safeguard measures, foreseen to take place by mid The difficult resolution of the serious incident which led to the Senegalese import ban on refined palm oil imports from Côte d Ivoire in September 2011 illustrates the necessity of establishing and enforcing standards and certification systems for palm products, the importance of the abolition of non-tariff barriers and the harmonization of trade policies in the Community. ASEAN agreement is of particular relevance to trade in palm products, as over 95 per cent of the palm oil exported by the region is destined to non-asean markets. Tariff policies of ASEAN member countries, in particular Indonesia and Malaysia, have a direct bearing on world supplies and prices of palm products. Palm industries in this zone experienced in the recent years the greatest changes in terms of economic integration, export competitiveness and inbound investment. Preferential trade arrangements (PTAs) are unilateral trade preferences. The granting of non-reciprocal trade preferences to developing countries by developed countries on a unilateral basis is a traditional mechanism for developed-developing country trade relationships. Such preferential trading schemes include the GSP with global coverage, the cross-regional Lomé Convention, the African Growth and Opportunity Act (AGOA) provided by USA, the duty-free treatment for African LDCs provided by Morocco and the ECOWAS- EU economic partnership agreement ( Information on PTAs notified to the WTO is available in the PTA database at Multilateral trading system (MTS) aims at stimulating the sustainable world economic growth through trade expansion, encouraging specialisation and the opening up of national economies through elimination of tariffs and NTBs. The basic premises on which MTS operates include fair competition and transparency in trade, national treatment entailing equal consideration of nationals and foreigners in trade, and the most favoured nation treatment (MFN) - whereby the most favourable terms in trade are extended to all WTO members. The system includes a mechanism for dispute settlements amongst members and allowable trade defence mechanisms. WTO coordinates the rules-based MTS. Bilateral agreements between partner countries are concluded for a limited period of time and are usually very attractive to both politicians and business communities who are looking for quick results. Because of similarities in interests and similar common values, bilateral trade agreements cover areas such as investment, competition, technical standards, labour standards or environment provisions. They are often used as instruments for domestic reforms in areas where the multilateral system offers a weaker leverage. Examples of bilateral agreements include Sweden Côte d Ivoire, Brazil Côte d Ivoire agreements and Ghana EU Interim Economic Partnership Agreement (I-EPA). A few government to government barter trade agreements involving palm oil, generally in periods of ample domestic supplies, were reported from Indonesia and Malaysia. 33

35 The agreements in force in the main ECOWAS countries producing palm oil, namely Côte d Ivoire, Nigeria, Senegal and Ghana, are shown in Annex IV Cross-border trade issues Informal trade between ECOWAS member countries has been and remains an obvious practical response of the population to economic crises and wars in the region. Informal and the cross-border trade - prohibited or not, secure the distribution of food and consumer goods, although it is not recorded in national accounts. Once they have entered a country, goods informally traded across borders are openly sold in licensed shops by registered traders; taxes and levies on these goods are paid to local administration. A profusion of participants undertake cross-border trade in the ECOWAS region. The competiveness of informal markets and the direction of trade routes are reacting very fast to economic and political changes in member countries, such as changes in government trade policies and measures, crop outputs, purchasing power, trade security, etc. Exchange rate movements can also constitute trade incentives and determine producers and exporters competitiveness. Although the currencies of choice for wholesalers are the CFA in WAEMU zone and the US dollar in Guinea, Liberia, Sierra Leone and Gambia, informal transactions are commonly made in the national currencies of cross-border markets. Since 2009, all currencies have declined in value compared to the US dollar, but at different rates; when the devaluation of currency of one country versus currencies of neighbouring countries is higher, the competitiveness of its exports increase and bear upon the direction of trade. In addition, the number of checkpoints on roads and the storage capacities of markets are critical in choosing a trade route, wherefrom the importance of trade facilitation measures to be undertaken by governments and ECOWAS in order to facilitate palm oil distribution in the region. Palm oil is one of the staple foods regularly traded informally at borders. The buoyant crossborder trade is supporting incomes of oil palm and provides food access and security to a multitude of vulnerable rural households, in addition to meeting a part of the dynamic urban market demand in the region. The informal border markets response ability is adversely affected by poor transportation, lack of credit, volatile exchange rates which influence the direction of the cross-border trade flows, border security problems and administrative burdens. Palm oil border trade at a small scale is done by traders using informal transit services and paying only a token sum to customs in order to cut the cost of clearing. Informal trade for reexport is considerably larger and highly organized in finance operations, transport, and storage, as well as trade information networks. Big transnational or national networks of traders organised by ethnic groupings are handling the important trade in palm oil originating from the region and from imports (mainly from Asia). ECOWAS acknowledges the importance of palm oil re-exports for the region; its list of major products for re-export in West Africa include palm oil and its fractions, whether or not refined (code 15.11). Three main types of informal markets exist: weekly rural markets (lumos), assembly markets and urban consumer markets, each characterised by well-defined roles and specific modes of trading. The purpose of the weekly markets is to concentrate supply and demand in order to reach a critical mass that can trigger trading activities; they are localised in specific areas and coordinate their schedules, operating in relationship with assembly markets. The assembly markets host transactions between wholesalers and function as an interface with the port (and the international market) and urban markets. They gather traders from the sub region, often organized in national syndicates and concentrate the consignments of palm oil collected from lumos and the imports received from the port. Bulk consignments are further 34

36 dispatched to urban markets and to the port for re-export. Trades on assembly markets takes place between sellers- who are producers or collectors, and buyers - who are wholesalers or dispatchers. Mobile small traders active in weekly rural markets can also be buyers and sellers on nearby assembly markets. Urban markets are permanent ; they handle daily large quantities of goods and can accommodate hundreds of retailers. Supply on these markets is abundant and diversified, due to consumers relatively high purchasing power and the large volumes traded. Supply and demand are particularly diversified on markets of capital cities that have a seaport and a large population, such as Banjul, Bissau, Conakry, Dakar, Freetown or Nouakchott. The largest wholesale markets for palm oil are Diaobé (in Senegalese territory, a short distance from Gambia, Guinea Bissau and Guinea), Ganta (Nimba county, Liberia) and Guéckédou (Guinea). Before the period of instability in Guinea that began in 2007, Diaobé market was reportedly handling 5000 to 6000 tons of palm oil per year, and the amount may well have been underestimated. Current trade is estimated to have dropped to a third due to poor road security. Ganta wholesale market is estimated to handle 80 to 100 tons of palm oil every week during the marketing season, of which 60 per cent are exported to Guinea. In Sierra Leone, Barmoi market handles some 25 to 30 tons of palm oil per week, two-thirds of which are traded to Guinea. Some of Guinea s palm oil imports are re-exported and make their way to Diaobé, where the commodity is passed on to Senegalese and Gambian traders. Cross-border trade in palm oil and palm olein is also covering a considerable part of Nigerian market requirements. Nigerian chronic shortage of edible oils and the ban imposed on imports of refined oils led to the regular increase of import needs, estimated to have attaint tons in Some of this demand is met by formal imports, but a large part is supplied as palm oil and packed palm olein passing through the porous borders of Nigeria with its neighbouring countries. 3. Price issues Prices are determined by fundamental factors, namely the balance between supply and demand (the change in price is in fact what keeps the supply and demand in balance), the level of stocks and government intervention in markets by fixing restrictions on prices 51. Their volatility and the amplitude of their fluctuations are influenced by speculation 52 and market feelings. Prices of palm oil are strongly correlated with the prices of annual vegetable oils, in particular its soybean oil substitute, as well as with fossil fuel prices. Palm kernel oil prices are correlated with its substitute, the coconut oil. 3.1 Correlation between prices of vegetable oils Prices of vegetable oils follow the specific three- to seven-year cycles of oil-bearing crops 53. Chart 4 illustrates the tight correlation between the prices of palm, soybean, palm kernel and coconut oils over the past ten years. 51 The two basic types of price controls are price ceilings and price floors. Price ceilings are maximum prices set below the equilibrium price, while price floors are minimum prices set above the equilibrium price. Price controls influence the market efficiencies. They are used economy-wide in an attempt to reduce inflation. 52 Speculation implies deliberate assumptions and anticipations of changes; they can control wild price fluctuations in normal times, but also exacerbate price swings in times of economic or political crises. Trading futures contracts in commodity markets is, by definition, speculation. Short selling is also, by definition, speculative. See further subchapter on futures trading. 53 Annual oilseeds (soybean, rapeseed, groundnut, etc.), as well as tree-crops (oil palm, coconut palm) 35

37 2500 Chart 4: Price corelation palm, palm kernel, coconut and soybean oils, US$/ton Feb 2002 Jul 2002 Dec 2002 May 2003 oct.03 mars.04 Aug 2004 janv.05 Jun 2005 nov.05 Apr 2006 sept.06 Feb 2007 Palm oil Palm kernel oil Coconut oil Soybean oil Note Palm oil monthly price: US $/ton, Malaysia Palm Oil Futures (first contract forward), 4-5 per cent FFA 54, source IMF Soybean oil monthly price: US $/ton, Chicago Soybean Oil Futures (first contract forward) Exchange, approved grades, source IMF Palm kernel oil monthly price: US $/ton, Malaysian origin, c.i.f. Rotterdam, source World Bank Coconut oil monthly price: US $/ton, Philippines/Indonesia origins, bulk, c.i.f. Rotterdam, source World Bank Charts 5 and 6 are showing the strong correlations between the prices of palm, soybean, palm kernel and coconut oils, and their milder correlation with crude petroleum prices during the period 2005 to Jul 2007 Dec 2007 May 2008 oct.08 mars.09 Aug 2009 janv.10 Jun 2010 nov.10 Apr 2011 sept Chart 5: Correlation palm, soybean and crude petroleum oils janv.05 Apr 2005 Jul 2005 oct.05 janv.06 Apr 2006 Jul 2006 oct.06 janv.07 Apr 2007 Jul 2007 oct.07 janv.08 Apr 2008 Jul 2008 oct.08 janv.09 Apr 2009 Jul 2009 oct.09 janv.10 Apr 2010 Jul 2010 oct.10 janv.11 Apr 2011 Jul 2011 oct.11 Palm oil Soybean oil Crude petroleum oil 54 Free Fatty Acids content 36

38 Note Palm oil monthly price: US $/ton, Malaysia Palm Oil Futures (first contract forward), 4-5 per cent FFA, source IMF Soybean oil monthly price: US $/ton, Chicago Soybean Oil Futures (first contract forward) Exchange, approved grades, source IMF Crude petroleum oil monthly price: US $/barrel, simple average of three spot prices - Dated Brent, West Texas Intermediate and the Dubai Fateh, source IMF 2500 Chart 6: Correlation palm kernel, coconut and crude petroleum oils janv.05 Apr 2005 Jul 2005 oct.05 janv.06 Apr 2006 Jul 2006 oct.06 janv.07 Apr 2007 Jul 2007 Note Palm kernel oil monthly price: US $/ton, Malaysian origin, c.i.f. Rotterdam, source World Bank Coconut oil monthly price: US $/ton, Philippines/Indonesia origins, bulk, c.i.f. Rotterdam, source World Bank Crude petroleum oil price: US $/barrel, simple average of three spot prices - Dated Brent, West Texas Intermediate and the Dubai Fateh, source IMF 3.2 Correlation between crude petroleum and vegetable oils prices oct.07 janv.08 World demand for crude petroleum oil (estimated at 88 million barrels/day, equivalent to 4.2 billion tons in 2011) is so large that the 154 million tonnes of vegetable oils and fats consumed worldwide 55 is equivalent to only 3.6 per cent of the annual crude petroleum consumption. Prices of crude petroleum oil skyrocketed over the past decade, from the annual average of 26 US$ per barrel (191 US$ per ton) in 2002, to 104 US$ per barrel (762 US$ per ton) in From 2005 to the beginning of 2007, petroleum prices overtook these of vegetable oils (see Chart 7), providing the incentive to convert vegetable oils into biodiesel for transportation. Producing biodiesel from cheaper palm, rapeseed or soybean oils and selling it at the price of petroleum diesel was very lucrative, allowing earnings of up to 40 per cent of the vegetable oils prices. This led several governments starting with the European Union and United States to promote the use of biodiesel for partial replacement of petroleum diesel. Apr 2008 Jul 2008 Palm kernel oil Coconut oil Crude petroleum oil oct.08 janv.09 Apr 2009 Jul 2009 oct.09 janv.10 Apr 2010 Jul 2010 oct.10 janv.11 Apr 2011 Jul 2011 oct Only 10% of palm oil is presently used for biodiesel manufacture, but the percentage is expected to rise, as the world envisages the increased use of cleaner alternative burning fuels. 37

39 Chart 7: Evolution palm oil versus crude petroleum prices Feb 2002 Jun 2002 oct.02 Feb 2003 Jun 2003 oct.03 Feb 2004 Jun 2004 oct.04 Feb 2005 Jun 2005 oct.05 Feb 2006 Jun 2006 oct.06 Feb 2007 Jun 2007 oct.07 Feb 2008 Jun 2008 oct.08 Feb 2009 Jun 2009 oct.09 Feb 2010 Jun 2010 oct.10 Feb 2011 Jun 2011 oct.11 Note Palm oil monthly price: US $/ton, Malaysia Palm Oil Futures (first contract forward), 4-5 per cent FFA, source IMF Crude petroleum oil: US $/ton, simple average of three spot prices: Dated Brent, West Texas Intermediate and the Dubai Fateh, source IMF At that time, governments provided subsidies and incentives to encourage the use of biofuels, which was (and remain) part of the policy to decrease dependence on fossil fuels and to lower carbon dioxide emissions for reducing global warming. As a result, while the oils and fats market has been in some degree of balance between supply and demand for the traditional food and oleo chemical applications before 2004/2005, the new demand for bio-diesel drove to a major imbalance. Prices of vegetable oils and fats started increasing in an attempt to reduce demand and recreate market equilibrium. The reduced demand led to price decreases, which in turn re-stimulated the demand for biodiesel, and the price fluctuation cycle is repeating since. These cyclic changes are being tempered by market price distortions generated by subsidies on biodiesel. With subsidies, biodiesel production appears to be viable, even if the price of vegetable oil is higher than that of petroleum diesel. However, even after the subsidies are factored in, biodiesel manufacturers are facing a no-win situation: the more advantageous the conversion of vegetable oils into biodiesel becomes, the more unprofitable the conversion operation gets because of the consequent increase of the vegetable oil raw material prices, reducing profit margins. The vicious cycle of profit margin fluctuations is aggravated by the incomplete utilisation of the large biodiesel installed capacities. 4. Physical and futures trading Crude petroleum Palm oil Two principal types of trading activities are coexisting in oilseeds, oils and meals: cash, or physical trading and trading in futures. Physical trading involves the actual movement of goods from origin to destination and is associated with cash contracts and documents on physical insurance, shipping and storage of the goods. Futures trading 56 consist in transactions on paper, carried out under futures contracts. Futures trading allow offsetting some of the risks of price fluctuations inherent to trading on cash markets. 56 More reading: see tutorial at 38

40 4.1 Physical (cash) trading The largest part of the trade in oilseeds, oils and fats, including the palm-based products, is carried out under cash contracting. Cash contracts are privately negotiated between individual buyers and sellers. They are not standardised and their details are considered confidential and usually not disclosed to public. The two contract parties bear each other s credit risk (the possibility that the partner may default by failing to pay credit and interest in a timely manner or by delivering goods not complying with the contract conditions and specifications). However, cash contracts may foresee price premiums for counterparty credit risk. Even in the case of palm and palm kernel oils, where futures markets exist, cash contracts can be used for constructing hedges 57, which may be preferred at times to a futures hedge. The main objectives in cash trading are obtaining the best price, or buying at the lowest price in order to make reasonable trade profits are. Considerations of utmost importance are high standards of business practice, professional trading skills and the standing of partners in the trade (some traders forgo lengthy, and at time costly, investigations into the status of potential partner company before accepting its business standing). On a personal level, traders should have high standards of integrity, flexibility, courtesy and maintenance of the confidentiality of transactions. They have to be familiar with their contractual obligations under the different types of cash contracts. Crude palm oil physical and futures markets tend to move together, as reflected in Chart 8. According to World Bank 58 and IndexMundi 59 data on cash prices, and to Bursa Malaysia Derivatives on futures prices, the cash CIF 60 prices of palm oil of Malaysian origin delivered to harbours in North-West Europe between 2005 and 2001 were slightly higher than the Malaysian palm oil futures prices 61. Since the launching of the crude palm kernel oil futures contract (FPKO) by Bursa Malaysia (2007), crude palm kernel oil futures prices (settlement price for next seven month contract) are higher than the cash prices of crude palm kernel oil of Malaysian origin, c.i.f. Rotterdam (see Chart 9, same sources); this may be due to the costs of storing and insuring the oil and/or to the design of the contract. 57 Hedging is making an investment to reduce the risk of adverse price movements in a purchase. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract. Investors use this strategy when they are unsure of market direction 58 Database accessible at 59 IndexMundi at 60 Prices Cost, Insurance and Freight - the seller pays for the goods, their transportation to the port of destination and the marine insurance 61 Prices of first contract forward for crude palm oil basis with 5 per cent FFA on arrival 39

41 Chart 8: Palm oil physical and futures prices, US$/ton janv.05 Apr 2005 Jul 2005 oct.05 janv.06 Apr 2006 Jul 2006 oct.06 janv.07 Apr 2007 Jul 2007 oct.07 janv.08 Apr 2008 Jul 2008 oct.08 janv.09 Apr 2009 Jul 2009 oct.09 janv.10 Apr 2010 Jul 2010 oct.10 janv.11 Apr 2011 Jul 2011 oct.11 PO futures PO c.i.f Chart 9: Palm kernel oil physical and futures prices, US$/ton janv.07 mars.07 May 2007 Jul 2007 sept.07 nov.07 janv.08 mars.08 May 2008 Jul 2008 sept.08 nov.08 janv.09 mars.09 May 2009 Jul 2009 sept.09 nov.09 janv.10 mars.10 May 2010 Jul 2010 sept.10 nov.10 janv.11 mars.11 May 2011 Jul 2011 sept.11 nov.11 PKO futures PKO c.i.f. 4.2 Futures trading Futures contracts are traded on Commodity 62 Exchanges (also called commodities futures markets). Futures trading allow producers and buyers to offset the effects of adverse future price movements through transparent, standardised and efficient hedging of agricultural 62 The term commodity describes a class of goods for which the demand is met by supplies without qualitative product differentiation across a market. A commodity is fully or partially exchangeable: that is, the market treats it as equivalent (or nearly so) no matter who produces it (palm oil, for example, is traded as a commodity independently of who produced it and where). Prices of commodity goods are a function of the market as a whole. 40

42 commodity prices. A Commodity Exchange 63 is usually an incorporated non-profit association that determines and enforces rules and procedures for the trading of commodities and related investments. It is a market in which multiple buyers and sellers trade commoditylinked contracts on the basis of rules and procedures laid down by the Exchange. The purpose of the futures exchange institution is to act as intermediary and minimize the risk of default by either contracting party. The exchange requires both parties to put up an initial amount of cash, called the margin. Since the futures price will generally change daily, the difference in the prior agreed-upon price and the daily futures price is settled daily also. The exchange will draw money out of one party's margin account and put it into the other party account, so that each party has the appropriate daily loss or profit. If the margin account goes below a certain value, then a margin call is made and the account owner must replenish the margin account. This process is known as marking to market. Thus on the delivery date, the amount exchanged is not the specified price on the contract but the spot value (since any gain or loss has already been previously settled by marking to market). Trading on a commodity exchange offers numerous benefits. One of the primary functions of a commodity exchange is to provide an efficient price discovery mechanism 64 by bringing together a large number of buyers and sellers. The commodity exchange not only enables buyers and sellers of the commodity to insure themselves against the negative effects of price fluctuations, but also performs the function of auctioneer, that is, it provides the most efficient mechanism for determining a market price. This price can then be used as a benchmark for cash transactions by producers, dealers and consumers. Other benefits of commodity exchanges and of future markets, in addition to price determination, are the provision of a means for disseminating information on price levels, enforcing contract performance, and addressing solvency and credit risks. Because of the laid-down rules and procedures, deals in a commodity exchange are transparent; prices are published and market information is available to all players, which ensures a guaranteed settlement system and reduces price risks. Exchanges ensure also the maintenance of quality standards of commodities traded and the trading practices, offering a cost effective marketing system through transparent costing and pricing of transactions. The price levels established on the open market can therefore represent accurate depictions of the prevailing supply/demand situation, whether in the spot market for current deliveries or in the forwards/futures markets for deliveries at predetermined time and place. 63 A tiny bit of history: the first equivalent of a commodity exchange is said to have been developed around year 580 BC by the Greek philosopher Thales of Miletus. He used to made agreements with local olive press owners: he deposited his money with them in exchange of the guarantee that he will be granted the exclusive use of their olive presses when the harvest was ready. Thales successfully negotiated low prices because the olive harvest was in the future - no one knew whether the harvest would be plentiful or poor, and because olive press owners were willing to protect themselves against the possibility of a poor yield. When the harvest time came, and many presses were needed concurrently and suddenly, Thales let them out at any rate he pleased, and made large quantities of money. The first futures exchange market in today s sense was established in 1730 in Japan as a rice exchange, to meet the needs of samurais; these aristocracy warriors were paid in rice and, after a series of bad harvests, they needed a stable conversion to cash money. Further futures trading continued at the same period in Japan with silk and in Holland with tulip bulbs. The first standardized futures contract has been established by the Chicago Board of Trade in grain trading in In 1875, cotton futures were being traded in Mumbai and within a few years this had expanded to futures on the edible oilseed complex, raw jute and gold bullion. 64 The method of determining spot prices through basic supply and demand factors; for example, if the demand for a particular good is higher than its supply, the price will typically increase - and vice versa. 41

43 To be successful, a futures market requires a turnover high enough to make it possible to open or close out a contract or a number of contracts at a moment's notice without distorting the price. Large-volume trading provides flexibility over time, enabling futures traders to select a particular month from among an assortment of delivery months and thus provide a hedge against the risks involved in their physical transactions. Oil palm farmers have a direct advantage to be informed on price levels via commodity exchanges: they are more accurately informed about market, pricing and the reference prices and are more likely to find a market for their crop, as the true level of demand is reflected in the price signals. Cropping based on futures rather than on spot prices increases the likely returns and facilitates crop diversification, as farmers can better appreciate the comparative prices of different crops, and ultimately income differentials. Moreover, futures trading reduce the intra-seasonal spot price volatility and farmers returns, as they are in a position to hold on the product until price level is good, in other words they can take more marketing decisions themselves. Through its price risk management function, an exchange helps farmers to avoid large losses when prices fall and offers them an increased bargaining power and better income predictability. Exchanges monitor and ensure the integrity of their member companies and brokers and provide dispute settlement systems through rules of arbitration offering a faster alternative to the court system. The following commodity exchanges offer futures trading in palm-products Dalian Commodity Exchange (DCE) Dalian Commodity Exchange ( is a non-profit, self-regulating and membership legal entity established in It is one of the four futures exchanges in China. Futures products offered are refined palm oil and RBD palm (as well as, amongst others, non-gmo and GMO soybeans, soybean oil and meal). Bursa Malaysia Derivatives Berhad (BMD) Bursa Malaysia Derivatives Berhad ( is an exchange holding company operating a fully-integrated exchange and offering the complete range of exchange-related services including trading, clearing, settlement and depository services. Today 65 BMD is one of the largest bourses in Asia 66, operating the most successful crude palm oil futures contract (FCPO), USD crude palm oil futures (FUPO), and crude palm kernel oil futures (FPKO) in the world. Market and price information provided by Bursa Malaysia can be accessed at: By mid- 2009, Bursa Malaysia launched Bursa Suq Al-Sila 67 ', the first sharia-compliant 68 commodity trading platform in the world, specifically designed to facilitate Islamic finance. 65 Previously known as Kuala Lumpur Stock Exchange (KLSE), the Exchange was set up in1930, initially as a part of the Singapore Stockbrokers' Association dealing in securities in the British Malaya. 66 The ten wholly-owned subsidiaries of Bursa Malaysia own and operate the various businesses, namely operation and maintenance of: a securities exchange, futures and options exchange, an offshore financial exchange, a registered electronic facility for secondary bond market, a clearing house for the securities exchange, a clearing house for the futures and options exchange, a central depository. It also acts as a nominee for the central depository and receives securities on deposit for safe-custody or management, provides and disseminates 67 In Arabic it means commodities market 42

44 This fully electronic commodity trading platform used crude palm oil the launch commodity. Under the Bursa Suq Al-Sila concept, the bank buys crude palm oil from a producer and sells it to a customer at a profit. The customer then sells back the commodity to the spot market for cash. At the end of 2009, Bursa Malaysia Berhad entered into a strategic partnership with Chicago Mercantile Exchange (CME), with a view to improve global accessibility to its derivatives. This allowed CME Group to develop a US dollar-denominated, cash-settled contract using Bursa Malaysia settlements as its reference, at its Globex electronic platform 69 in Chicago. With the launch of futures on crude palm oil, CME Group customers are able to trade the palm oil in a cash-settled, dollar-denominated contract, with the safety and liquidity of the CME Group. The expansion of the palm oil also creates opportunities for cross-trading with soybean oil, based on the historically strong correlation between these products. The final cash settlement prices 70 are based on the Bursa Malaysia Derivatives Berhad Crude Palm Oil futures contract (FCPO). This is the global benchmark for crude palm oil that is physically delivered and traded in Malaysian ringgits. More info on CME at and on crude palm oil futures contract at Jakarta Futures Exchange Jakarta Futures Exchange was set up in 2009 (PT. Bursa Berjangka Jakarta JFX, at This multi-commodity futures exchange started by launching crude palm oil physical trading contracts, previous to establishing its first futures trading contract in palm olein. Indonesia Commodity & Derivative Exchange (ICDX) The Indonesia Commodities and Derivatives Exchange ( launched in 2010, is attempting to win business from the South East Asian region, most notably Bursa Malaysia. The exchange is operating a crude palm oil futures contract (CPOTR) and a RBD olein futures contract (OLEINTR). Singapore Exchange (SGX) Singapore Exchange is the Asian gateway connecting investors in search of Asian growth to corporate issuers in search of global capital. Formed in 1999, the Exchange is the result of merging two exchanges: Stock Exchange of Singapore and Singapore Intl Monetary Exchange. The Exchange was a founding member of the GLOBEX Alliance, together with some other leading derivatives exchanges. It also has alliances or significant relationships with the Chicago Mercantile Exchange, the American Stock Exchange, the Australian Stock Exchange and the National Stock Exchange of India. At present it operates a crude palm oil futures contract; more information can be accessed at: hwxlegneyirczsvz62vn9qao_nt5lqj8sanlbqranqvyvhkea7h0lyphfeqx8_omhran 68 Sharia-compliant means in accordance with Islamic law and implies financial activities and investments that comply with Islamic law which prohibits the charging of interest and involvement in any enterprise associated with activities or products forbidden by the Islamic law. 69 The CME Globex trading system was introduced in 1992 as the first fully electronic trading platform for futures contracts 70 Cash settlement is a more convenient method of transacting futures contracts, whereby the seller of a commodity who does not wish to take ownership of the physical commodity traded (palm or palm kernel oils in our case), can pay the difference between its spot price and the futures price without being delivered. 43

45 EsCFMtV_nkjdjcR4goRkP0w-VFGFkl1MZZgcjBemkZr1Gn- Z38E6s8_CkF7ncvEsJpYprGBMtXWS7Xxzo3BYB-hcaKvhXxdRPo0WG- RqeDTukQRM7R1xxamxV2Abmb4F9676_AB4AThP/dl3/d3/L2dBISEvZ0FBIS9nQSEh/ National Commodity & Derivatives Exchange Limited (NCDEX) Headquartered in Mumbai, the National Commodity & Derivatives Exchange Limited ( is a private limited on-line multi commodity exchange incorporated in The exchange operates future contracts on crude palm oil and RBD palm olein. Multi Commodity Exchange of India Ltd MCX Established in 2003 and located in Mumbai, the Multi Commodity Exchange of India Ltd ( is an independent electronic commodity exchange having received the permanent recognition from the Government of India. The exchange facilitates online trading, clearing and settlement operations for commodity futures markets across the country. National Commodity & Derivatives Exchange Limited NCDEX This Indian multi commodity exchange was incorporated as a private limited company in The exchange offers a crude palm oil futures contract. 4.3 Contracts Contracts are legal trade documents. The considerable variety cash and futures contracts in use reflect the complexity of oilseeds, oils and fats trade Physical (cash) contracts A considerable number of cash contracts are used in oilseeds, oils and meals trade because of the complexity of trading operations. FOB, CIF, pro forma and informal cash contracts are extensively used in palm products trade. FOB and CIF contracts These contracts are established in accordance with the internationally accepted INCOTERMS, i.e. the international rules for the interpretation of trade terms, published by the International Chamber of Commerce. Information and links on INCOTERMS and on the obligations of buyers and sellers and the main documentary requirements for FOB and CIF contracts are detailed in Annex V. Pro forma contracts Pro forma contracts are issued by various trade associations. Although trading parties can contract with each other on any terms they desire, the use of pro forma contracts, particularly those containing agreed standard and semi-standard clauses (such as those of FOSFA), facilitate the transaction. When traders use a pro forma contract, they need only to refer to the nonstandard parts of the commodity, its position and price; the rest of the contract is covered by pre-existing terms that have been agreed to, and widely accepted by, the trade. Pro forma contracts enable trade to be undertaken on a "string" basis, i.e. the trader can accomplish the entire trade procedure under the same contractual terms. This is because the organizations negotiating contractual clauses do so in close cooperation with all sections of 44

46 the trade (for example shippers, middlemen, buyers and consumers) and thus ensure that the standard clauses are in harmony with trade practice, are consistent with other contracts and fit the purpose for which they are intended. Pro forma contracts are issued under FOB or CIF terms. For the international physical or cash trade in oilseeds, oils and meals (including palm kernels, palm and palm kernel oils and palm meal), two main international trade associations have formulated various rules and standard contractual specifications, terms and conditions in the form of pro forma contracts. These are the National Institute of Oil Seed Processors - NIOP 71, based in Washington D.C. and the Federation of Oils, Seeds and Fats Associations Ltd. - FOSFA International 72 based in London. These rules and contracts are updated on a regular basis to reflect changing practices in the trade. Some major traders in countries such as India, Pakistan, China etc., have their own trading specifications, often based on FOSFA International or NIOP contracts, modified to suit local conditions. Trade is facilitated by the existence of bulking installations at the major ports of loading for the export of the palm oil products. Codes of practice for the handling and shipment of palm oil have been formulated by the international trade associations to ensure the quality of the oil is protected. For example, the trading contracts such as FOSFA and NIOP stipulate that the previous cargoes of the ship carrying palm oil must not be any from the list of banned substances. FOSFA provides a range of arbitration services (dispute resolution) to meet the needs of the international trade. The Federation holds also training programmes for the trade which offer unique training facilities for all aspects of the oilseeds and oils and fats trades. A week-long basic course, for instance, is aimed at junior members of the trade/industry with little or no knowledge or experience in a trading environment The training course 73 covers elementary aspects relating to the international trade in oilseeds, oils, fats including FOSFA contracts, contract referred documents, arbitration and appeal, shipping, insurance, commodity banking and technical matters. The main pro forma contracts in use in palm and palm kernel oils international trade are the followings: FOSFA 4 FOSFA 29 Oil seeds in bulk, F.O.B., stowed and trimmed terms Palm kernels, C.I.F basis, 49% oil content (test by petroleum ether or hexane) 71 NIPO, based in Washington D.C, is an international trade association with the principal objective of promoting and supporting the general business interest of persons, firms and corporations engaged in the buying, selling, processing, shipping, storage and use of vegetable oils and raw materials. It s about 120 members in 15 countries include importers and exporters, samplers, transportation operators, brokers, testing laboratories, storage tank operators, processors, refiners, food manufacturers, insurance companies, soap and cosmetic firms and coconut and palm plantation operators. See 72 FOSFA is a professional international contract issuing and arbitral body concerned exclusively with the world trade in oilseeds, oils and fats with over 950 members in 79 countries. The members include producers and processors, shippers and dealers, traders, brokers and agents, superintendents, analysts, ship-owners, and others providing services to traders. FOSFA has an extensive range of standard forms of contracts covering goods shipped either CIF, C&F or FOB, for soybeans, sunflower seeds, rapeseed, and others, vegetable and marine oils and fats, refined oils and fats, from all origins worldwide, for different methods of transportation and different terms of trade. Internationally, 85% of the global trade in oils and fats is traded under FOSFA contracts. The Federation's contracts incorporate a dispute procedure involving arbitration by experienced individuals from within the trade. See 73 For more information please access 45

47 FOSFA 29 A Nigerian palm kernels, C.I.F. basis, 49% oil content (test by petroleum ether or hexane) FOSFA 31 Nigerian palm kernels F.O.B. net shipping weight basis, 49% oil content (test by petroleum ether) FOSFA 53 Vegetable oil (in bulk) F.O.B. terms FOSFA 54 Vegetable and marine oils in bulk, C.I.F terms FOSFA 61 Vegetable oils, tallow and greases, in packages, C.I.F./C&F FOSFA 80 Crude, unbleached palm oil, in bulk, C.I.F. delivered weights. The contract is issued jointly with the Malaysian Palm Oil Association FOSFA 81 Palm and palm kernel oil products in bulk, C.I.F terms, issued jointly with the Palm Oil Refiners Association of Malaysia and the Malayan Edible Oil Manufacturers Association ASEAN common contract for crude and processed palm oil/palm kernel oil/coconut oil in bulk, FOB Printed copies of these contracts and trading rules can be ordered from NIOP and FOSFA headquarters. Inland trade in palm products may obey to national contracts; for instance, the following contracts are used in Malaysia: PORAM 1 Domestic contract for Malaysian crude unbleached palm oil in bulk, for deliveries by road tankers and barges PORAM 2 FOB contract for processed palm oil and palm kernel oil products in bulk PORAM 3 Domestic contract for Malaysian processed palm oil in bulk, for delivery/collection within Malaysia including Singapore PORAM 4 FOB contract for processed palm oil products in drums PORAM 5 CIF contract for processed palm oil products in drums PORAM 6 Domestic sales contract for Malaysian crude unbleached palm oil in bulk CIF delivered weights, for sales between East and Peninsular Malaysia The Shipping/carriage of oils and fats is a complex matter. FOSFA publishes its own document referred to as the Carriage of Oils and Fats, which is a set of protocols and documents referring to contracts, contained in a loose-leaf manual. These documents include the FOSFA Qualifications and Operational Procedures for Ships Engaged in the Carriage of Oils and Fats in Bulk for Edible and Oleo-Chemical Use, Previous Cargo lists and Certificates linked to carriage conditions. For more information and ordering access please Likewise, NIOP has issued and updates regularly its own Trading Rules and a list of acceptable prior cargoes (accessible at Informal cash contracts These contracts may be based on international contract forms, but are likely to be issued by bodies less formal than trade associations Shipping contracts Shipping, handling, transport and storage of oilseeds, oils and oil meals constitute the physical side of the business. These are covered by supply contracts, under special clauses specifying terms of shipment and related operations. 46

48 Palm kernels and palm kernel meals are transported as dry bulk in conventional, usually medium size ships. Palm kernels are occasionally bagged, but the procedure is expensive. Palm and palm kernel oils require special handling, storage and shipping conditions, summarised by the Transport Information Service (TIS) from the German Insurance Association (GDV - as follows: Items PO PKO Mode of transport Quality Duration of storage Cargo handling Heatable tank containers, by ship, truck, railroad Palm oil should have an acid value not exceeding 5%. Heatable tank containers (only rarely in barrels and Jerri cans) by ship, truck, railroad Palm kernel oil should have an acid value not exceeding 7.5%. Acid value of the oil is used as a measure of quality. A too high acid value denotes an excessively high content of free fatty acids, which causes the oil to turn sour; discoloration may also occur. Rancidity of the oil is promoted by light, atmospheric oxygen and moisture and leads to changes in odour and taste. Thus, the tanks and barrels must be filled as full as possible, so that as little haulage space as possible is left above the cargo. Do not load rancid oil, since it does not meet quality requirements. Loading palm oil contaminated by ferrous and rust particles or by seawater is inacceptable. Six month at 30 0C Six month at 24 C Pumping the oil out of the tanks is only possible, if the oil has been kept liquid during the voyage (above a minimum temperature). If the oil solidifies in the tanks, it cannot be liquefied again even by forced heating. In the vicinity of the heating coils, the oil melts, scorches, discolours and becomes rancid. Loading, travel and pumping temperatures must be precisely complied with, since any change in consistency which occurs during transport may prove irreversible. Pumping out may be difficult in cold weather. The oil may cool too rapidly in the long lines and solid deposits form on the outer walls, which cannot be pumped out and prevent the still liquid cargo from reaching the suction valve. This problem can be solved by appropriate heating or insulation of the lines. Where the oil is packaged in barrels, the latter have to be handled with appropriate care. Damaged barrels quickly lead to oil leakage and thus to loss of volume or to damage to other parts of the cargo. Several FOSFA International documents provide specifications on requested sampling, storage, loading, manipulation, transport conditions, including: The international code of practice for storage and transport of edible oils and fats in bulk Operational procedures for ocean carriers of oils and fats for edible and oleo chemical use Qualifications of non-dedicated ocean carriers of oils and fats Qualifications for trans-shipment vessels List of banned goods for immediate previous cargo shipments and of preferred previous cargoes. 47

49 Two types of shipping contracts are most often available to shippers in vegetable oils and oilseeds: the charter party and the contract of affreightment. A charter party 74 is the written contract by which the owner of a vessel lets the whole, or a part of her, to a merchant or other person for the conveyance of goods, on a particular voyage, in consideration of the payment of freight. The charterer takes over the vessel for either a certain amount of time (a time charter) or for a certain point-to-point voyage (a voyage charter), giving rise to these two main types of charter agreements. The Vegoilvoy charter party contract is the most often used for the shipment of vegetable oils products in tank vessels. The contract contains many specific clauses relative to this specific type of cargo. The contract of affreightment is a trade agreement between charterer and the ship-owner for hiring the vessel or part of the vessel to carry a specific cargo for a limited number of shipments over a period of time, at fixed rates. It is mainly used for palm products Futures contracts Futures contracts specify a trade taking place in the future. A commodity futures contract is a transferable, standardized contract between two parties, for trading in a standardized quantity and quality of a given commodity for a price agreed today (called the futures price) with delivery occurring at a predetermined date in the future (the delivery date). Commodity exchange contracts are signed by both parties and are legally binding hence there is security, certainty and transparency. The contracts will cover, quality, quantity, passing of ownership and risk, price, payment terms, inspection, transport, delivery and weight, packaging, force majeure, demurrage, interest and arbitration. Commodity futures contracts are legally binding, transferable, standardised agreements to buy or sell a commodity (in our case palm oils and palm kernel oil) at a designated date in the future (the delivery date) and at a certain price agreed upon at the signature of the contract by the buyer and seller (called futures price). For instance: a company A may establish a contract with a crude palm oil producer, in which A agrees to buy a certain quantity of crude palm oil in October 2012 at ringgit per ton. This contract must be honoured whether the price of the crude palm oil in October 2012 may fall to 1500 ringgit per ton or if it rises to 4000 ringgit per ton (these prices are just examples). Below are listed the types of palm and palm kernel oils futures contracts according to the commodity exchanges which operates them, as well as the Internet addresses where their specifications can be accessed on line. Commodity Exchange Dalian Commodity Exchange Bursa Malaysia Futures contracts Palm olein contract at FCPO - crude palm oil contract, at ducts/commodity_derivatives/fcpo2.html FUPO - USD denominated, cash settled palm oil contract which does not involve physical delivery of the underlying 74 The name is derived from the fact that this contract was formerly written on a card. The card was cut into two parts from top to bottom; one part was delivered to each of the parties and produced when required, thus preventing counterfeits. 48

50 Commodity Exchange Bursa Suq Al-Sila Chicago Mercantile Exchange (CME) Jakarta futures exchange Indonesia Commodity & Derivative Exchange (ICDX) Singapore Exchange (SGX) MCX India NCDEX India Futures contracts crude palm oil, at ducts/commodity_derivatives/fupo2.html FPKO - crude palm kernel oil contract at ducts/commodity_derivatives/fpko2.html Crude palm oil contract, specification on page 3 at Crude palm oil futures _17Aug2009.pdf Crude palm oil futures contract, at pecs_ pdf Olein, at Olein 10, at &id=181 ICDX CPOTR, crude palm oil contract at ICDX OLEINTR, RBD palm olein contract at Crude palm oil futures (CPO) at mmodities/agriculture Crude palm oil contract at m_oil_jan_2011.pdf Crude palm oil contract at ecific/crude_palm_oil_contractspec_latest_ncdex.htm 49

51 PART TWO: PALM OIL 1. Cultivation and harvesting 1.1 Varieties Until the end of the nineteen century the existence of oil palm has been confined mainly to West and Central Africa. Wild palm groves sometimes developed into small peasant plantations by deliberate planting of seedlings, yielded palm oil by traditional extraction methods which supplied population dietary needs of oil and vitamin A. The first large commercial plantations established in 1911 in Sumatra were in full bearing by These were followed in the 1920s by plantations in Zaire and further in other parts of West Africa. The industry grew rapidly in Sumatra, but did not gain its full momentum in the Far East until the 1930s. In Indonesia, oil palm cultivation has expanded rapidly especially during the 1980s, following the establishment of government, as well as private foreign and national estates and nucleus estates. At present the oil palm is grown commercially in Africa, South America, Southeast Asia, the South Pacific, and on a small scale in other tropical areas. There are two species of oil palms used in the commercial production of palm oil: the African Elaeis guineensis oil palm native between Angola and Gambia, and the American Elaeis oleifera is native to tropical Central and South America. Three main varieties of Elaeis guineensis palms are producing the palm oil consumed worldwide. These are: Dura (the main variety found in natural stands, with a thick shell separating the pulp from the kernel), Pisifera (with no shell, frequently female sterile and not used for commercial planting), and higher oil-yielding Tenera (crossing of Dura and Pisifera, with smaller nuts, a thin shell between pulp and kernel and a fibrous layer around the nut). All commercial planting material consists nowadays of Tenera palms and hybrid varieties. The wild oil palm groves of West and Central Africa consist mainly of Dura variety with lower oil content. 1.2 Soil and climatic requirements Oil palm grows well in the tropical climate within 5 degrees North and South of the equator. Ideal cultivation conditions require evenly distributed annual rainfall of 2000 mm without a defined dry season; in areas with dry spells, a deep soil with high water holding capacity and a shallow water table augmented with copious irrigation will satisfy the water requirement of the palm. Moist, deep and well drained medium textured soils rich in humus content are considered ideal. Gravelly and sandy soils, particularly the coastal sands are not ideal for oil palm cultivation. Heavy clay soils with poor drainage properties may pose problems of aeration during rainy seasons. Growth of oil palm trees and their fruit output (the fresh fruit bunches 75 ) are very sensitive to weather variations; the trees are affected by El Niño and La Niña cyclical phenomenon (see explanatory glossary) and develop a biological stress practically every two years, which results in a successive declines in the production of fresh fruit bunches of up to 25%. Temperature can be a limiting factor for oil palm production efficiency; best yields are obtained in locations with maximum average temperatures of C and minimum 75 Fresh Fruit Bunch (FFB) refers to the bunch harvested from the oil palm. Each bunch weighs 5kg - 50kg and may contain 1500 or more individual fruits. Calculations of oil yield and losses in the oil mill are often referred to the fresh fruit bunch, as this is the material taken in for processing. 50

52 average temperatures of o C; higher diurnal temperature variations causes floral abortion in regions with a dry season. The crop requires sunlight hours annually, and constant sunlight of at least 5 hours per day for better oil palm yield. Countries not having the ideal conditions for growing oil palms are reported to have high cost of production to the extent that exporting of the product would not be viable. 1.3 Harvesting Oil palm is pollinated by weevils which carry maximum pollen during the third day of flowering. Harvesting has a critical influence on the yield and quality of palm oil extracted from oil palm fruits. The methods of fruit collection and the means by which the fruit is transported to the mill determine the quality of oil to a great extent. As oil palm bunches produced during the first three years have low oil content, they are removed; regular harvesting for commercial production of oil palms commence after the third year of planting. Bunches usually ripen in six months after the full opening of flowers. Unripe fruits contain very little oil, but in the ripening process the oil content in the fruit increase to 80-85%. Milling extraction rates are significantly affected by the ripeness of fruits; over ripped fruits contain more free fatty acids (FFAs) 76, i.e. they have a higher acidity due to decomposition. Ripeness of the fruit is determined by the degree of detachment of the fruit from bunches and their change in colour and texture. Harvesting turns should be made as frequent as possible to avoid over ripening of bunches; care should be taken as a bunch which is almost ripe - but not ready for harvest at a given harvesting round could become over-ripped by next round. In fresh, ripped, un-bruised fruits, the oil content is about 50 per cent of mesocarp weigh and the content of free fatty acids (FFAs) is below 0.3 per cent. However, the outside skin layer of ripped fruits becomes soft and is more easily attacked by lipolytic enzymes, resulting in the increase in the FFA of the oil through hydrolysis. Free fatty acids content in bruised fruits increase up to 60 per cent in one hour; the composition and quality of bunches is therefore dependent on how much they have been bruised. Harvesting involves the cutting of the bunch from the tree and allowing it to fall to the ground by gravity. Fruits may be damaged in the process of pruning palm fronds to expose the bunch base to facilitate bunch cutting. As the average 25 kg bunch falls to the ground, as well as during careless loading and unloading of bunches into and out of transport containers, the fruit is bruised by the impact. In Africa, most bunches are conveyed to the processing site in baskets carried on the head and the dumping of baskets on the ground to dismount the load results in more bruising. One of the many ways to minimise damages of fruits in the process of harvesting, transportation and handling of bunches is to process them as soon as possible after harvest to the mill, say within 48 hours. Large plantations operate for this reason their own mills. Harvesting rounds of 7-14 days are generally practiced; their frequency being also determined by the extraction capacity of the mill, transportation facilities, labour availability and skill of the workers. 76 Increased FFAs ad a bite to crude, red palm oil flavours; this taste is a preference, not a quality issue for those who consume the crude oil directly. However, oil refiners have a cost problem with the neutralization of high FFA content palm oil. 51

53 The most serious disease of oil palm (mainly in Malaysia and Indonesia) is the basal stem rot, caused by the fungus Ganoderma, which produces lesion in the stem. This fatal disease can lead to losses as much as 80% after repeated planting cycles. This plant disease is most often controlled by using biological control agents such as endophytic bacteria for the treatment of oil palm roots. 1.4 Commercially cultivated areas Commercial plantations developed rapidly over the past thirty years, driven by the remarkable growth of planed areas in Malaysia and Indonesia. Total mature areas under oil palm increased more than seven times, from about 1.9 million hectares in 1980, to 13.4 million hectares in Chart 10: Oil palm commercial mature areas, 1000 ha Malaysia Indonesia Nigeria Côte d'ivoire Colombia PNG According to FAOSTAT and ISTA Mielke Oil World, the commercial surfaces harvested in Malaysia (mature plantations) increased by 10 per cent per year on the average over the period considered (chart 10). In 1980, over a half of the mature commercial plantations in the world (54%) was Malaysian (chart 11). From 1990 onwards, the rate of growth of Indonesian mature surfaces under oil palm grew much faster than in Malaysia (20 per cent per year on the average) and the country has overtaken in Importance Malaysia since the year From 16 per cent of the global mature commercial plantations in the world in 1980, Indonesian shares rose to 45 per cent in 2011 (charts 11 and 12). 52

54 Chart 11: Commercial mature oil palm plantations, 1980 (World total 1.9 MM ha) Others 13% Côte d'iv. 5% Nigeria 12% Indon. 16% Malaysia 54% Côte d'iv. 2% Nigeria 3% Chart 12: Commercial mature oil palm plantations, 2011 (World total 13.4 MM ha) PNG 1% Thai. 5% Colomb. 2% Indones. 45% Others 10% Malay. 32% Smallholders account for the largest part of the area cultivated and traditional and smallscale processing units provide a significant part of the palm oil production worldwide. In the ECOWAS region, small farm holdings up to three hectares are estimated to account for 65-70% of the total oil palm area cultivated and up to 60% of the palm oil output. Large oil palm estates and the industrial crude palm oil mills are generally owned by large conglomerates and multinationals; they are integrated upwards and use a large part of smallholders production as input raw material for processing. 1.5 Yields Oil palm is the most efficient, higher yielding oil crop processed to vegetable oils. On commercial plantations, productivity depends on agro-climatic conditions - in particular the climatic conditions and eventual tree stress intervened two and a half years before fruit ripening, as well as on the yield potential of the genetic material planted, the efficiency of cultural methods and of the plantation management. At country level, palm oil yields are directly dependent on the ratio between smallholders and large plantations; smallholders productivity is generally lower because of inadequate inputs, cultural practices and crop management skills. Yields and the corresponding annual production of oil palms reach generally a single peak in seasonal climates, the time of the peak depending on the age of trees. In non-seasonal climates, oil palms have often two peaks, one of them being much higher than the other one. Oil palms reach maturity and give a first output three years after plantation. The FFB yield increases gradually from about eight tonnes/ ha/ year after the third year, to 30 tonnes/ ha/ year at oil palm age of 13. This peak production continues for about four years, then decreases slowly and remains around 16 tonnes/ ha/ year until the end of oil palm economic life, at about 20 years of age. Yield of oil palms is expressed either in kg of fruit per hectare per year, or as the amount of crude palm oil obtained per hectare per year. The yield can be considered in terms two major factors: the yield of fruit bunches and the palm oil/bunch weight ratio (or extraction ratio). Fruit bunches yield is determined by the number of bunches produced by the tree and the mean bunch weight. Both the number of bunches and their average weight increase usually until palms reach nine years of age and decrease afterwards, varying however considerably in response to climatic conditions. Palm oil/ bunch ratio is a result of a number of components, namely the ratio palm fruits/bunch; the mesocarp/palm fruit ratio, and the oil content/mesocarp ratio. 53

55 Palm fruit/bunch ratio depends mainly on the efficiency of pollination The oil content of the fruit of young palms is low, but it increases steadily until the fourth or fifth year of bearing. It is usually estimated that an oil/bunch ratio of over 28 per cent may be reached as early as 40 months after field planting of Tenera palms The mesocarp/palm fruit ratio is largely genetically determined and is little affected by environmental factors Oil content/mesocarp ratio depends in part on the ripeness of the fruit, since oil is only synthesized during the later stages of fruit development. The oil/mesocarp ratio varies considerably with the times of annual harvests and the amounts and types of fertilisers used. High-yielding oil palm varieties developed by breeding programs are currently producing under ideal climatic conditions and good management over 20 tonnes of bunches/ha/year, with palm oil content of 25 per cent in the bunch; this is equivalent to a yield of 5 tonnes oil/ha/year, excluding the palm kernel oil. However, such high yields are rarely achieved in Central and West Africa because varieties under cultivation are generally low-yielding and the climatic conditions are less than ideal; tree suffer water-related stress due to erratic rainfalls and prolonged draughts. Moreover, yields of plantations are hampered by costly inputs of imported fertilizers, pesticides and harvesting machinery and sometimes by high labour costs. According to FAOSTAT and MPOB 77 data, world yields of palm oil over the past four years averaged 3.6 tons of crude palm oil per hectare and year (Chart 13). Chart 13: Palm oil yields (tons/ha) Four major producers of palm oil recorded average annual yields above the world level during the period. Costa Rica attained the highest yield of 4.2 tons/ha/year on the average, followed by Indonesia and Malaysia with similar yields of 3.9 tons/ha/year and Papua New Guinea with 3.8 tons /ha/year. Yields of oil palm in Nigeria and Côte d Ivoire averaged respectively 2 and 1.4 tons/ha/year of palm oil. 77 Accessible at 54

56 The remarkable increase of world palm oil production over the past fifty years was mainly due to the fast expansion of commercial plantations; yield improvements did not have a significant contribution to rising outputs. This is illustrated by the evolution of the commercial mature surfaces under oil palm, the annual average yields and the levels of production of palm oil since 1960 (Chart 14). During the past five years, production increases in Malaysia and Indonesia were due to sole the augmentation of mature cultivated areas (Charts 15 and 16). The decrease of yields in Thailand during the period were more than compensated by the rise in harvested surfaces, resulting in a production step-up (Chart 17). The situation has been similar in Nigeria (Chart 18), while in Côte d Ivoire both yields and harvested surfaces stagnated and the palm oil production remained at the same level since 2008 (Chart 19) Chart 14: Malaysia- mature area (MM ha), yields (tons/ha/year) and PO production (MM tons) Area Yield Production Chart 15: Malaysia - mature area (MM ha), yields (tons/ha) and PO production (MM tons) Mature area Yield Production Chart 16: Indonesia - mature area (MM ha), yields (tons/ha) and PO production (MM tons) Mature area Yield Productio n Chart 17: Thailand - mature area (MM ha), yields (tons/ha) and PO production (MM tons) Chart 18 Nigeria mature area (MM ha), yields (tons/ha) and PO production (MM tons) Mature area Yield Production Mature area Yield Production

57 Market analysts estimate that most Asian and West African oil palm industries may face soon a structural slowdown in output due to the ageing of oil palm trees and corresponding yield declines. Moreover, good soils have been already used up and the rapid expansion of oil palm area has to take place to a large extent on low-yielding poor to marginal soils, leaving the productivity dependent on agronomic inputs. Although significant improvements were obtained in oil palm breeding (new planting material attaining now potential oil yields of tons/ha, compared to current plantation yields of about 4 tons/ha), as well as in agronomic practices, Malaysian and Indonesian palm oil yields remained lower than should have been expected. One of the reasons is the fact that most often advances made in varietal improvements, agronomic practices, plant protection techniques or estate management failed to be properly implemented. Both countries are nevertheless providing incentives and implementing short and medium term strategies eventually leading to increase in yields and subsequently in the profitability of palm industries. Malaysia, for example, has embarked on the ambitious Government Transformation Programme (GTP), which is a broad based initiative aimed at addressing key areas of concern to support Malaysia s transformation into a developed and high-income nation as per Vision Twelve national key economic areas that were jointly identified by the private and public sectors to kick start the national economic transformation programme, and palm oil is one of them. The policy foreseen in the palm oil sector envisages the increase of palm oil production through research and development by attaining yields of 25 tonnes FFB per hectare per year and 25% oil extraction rates from FFBs by 2020; in other words, to increase the national palm oil yields from the current annual average of 4 tons/ha, to over 6 tons/ha. The eleven largest oil palm growers, their planted area and the crude palm oil output in 2010 are listed in Table 1. Table 1 - Eleven largest oil palm growers 78, 2010 Company Planted area (ha) Crude palm oil output (MM tons) 78 More information on the sites of these companies, at: ;

58 Sime Darby* (90% mature) 2.4 Felda Global Ventures Holdings Bhd (53% trees over 21 years) Golden Agri** Wilmar** PT Astra Agro Lestari Tbk ** Indofood Agri** (76% mature) 0.8 Kuala Lumpur Kepong Bhd (KLK)*** (79% mature) 0.7 IOI Corporation Kulim **** 0.4 First Resources** (64% mature) 0.3 Tradewinds Plantation Bhd (79% mature) 0.3 Source: Company annual reports * Plantations and production 60% in Malaysia and 40% in Indonesia ** Nucleus (own) estates only *** 44% plantations in Malaysia and 56% in Indonesia **** 33% plantations in Malaysia, 63% in PNG and 4% in Solomon Islands 1.6 Costing Fresh Fruit Bunches Costs involved in the production of FFB differ according to the type of plantation, that is whether the area is undergoing replanting (the use of land that was formerly developed with other crops) or new planting (establishing a cultivation area formerly under jungle). The cost of establishment of a new plantation would be 20 30% higher than that for replanting, because new plantings would require more intensive land preparations, including the setup of new terraces, drainage systems, roads and pathways. The topography of oil palm estates affects its operation cost: a high percentage of hilliness involves higher costs of roads, bridges and drains up keeping and in-field transportation of fresh fruit bunches. FFB production costs are depending as well on the types of farming and management systems, namely estates, organised groups of smallholdings or unorganized small holders. The unit FFB cost declines fast with the size of plantations: in Malaysia, the cost of FFBs from plantations of hectares is about 45 per cent lower than from smallholdings up to 100 hectares, and about 20% lower than from estates of 500 to 1000 hectares. In addition, different types of estate ownership and resultant management styles influence also the FFB production costs. In general, the lowest costs are attained by private limited companies, followed by sole proprietorship. Cooperatives and public agencies realise the highest FFB costs. Costs incurred during the first three years of oil palms development are different from these after this period, when the palms became mature and fresh fruit bunches could be harvested monthly and economically for the following 16 to 25 years. Estimates of FFB production cost rendered at the mill can only be general, as individual plantations costs vary widely with the type and age of estates, as well as in the methods of cultivation and maintenance of palm trees, annual yields and the accounting systems adopted. Table 2 presents an estimation of average FFB production cost for a Malaysian

59 mature plantation in 2011, in normal 79 climate and cultivating conditions. According to Maybank Kim Eng 80, FFB production costs of may be 10-20% lower than the general estimation for plantations with a high percentage of oil palm trees in full production capacity (8 to 12 years of age, reaching FFB yields of t/ha/year), and 30-50% higher for old plantations (FFB yields of t/ha/year). Direct production costs comprise expenses for plantation up keep (roads, harvesting paths, bridges, drainage), agricultural inputs (fertilisers, products for controlling pests, weeds, and diseases), pollination, labour (oil palms pruning, harvesting, collection, in-field transport of FFBs, maintenance, management and office staff), and agricultural equipment. Indirect costs comprise the depreciation of plantation and equipment, overheads (utilities, insurances, communication, other services, administration, security, etc.) and miscellaneous issues. Table 2: FFB production cost estimate - Malaysian mature plantation, 2011 Items US $/ha % Plantation upkeep and cultivation (palm seedlings, weeding, pruning, pollination, pest/disease control, infrastructure maintenance) 96 8 Fertilisers and application Harvest and collection Depreciation (plantation, machinery/equipment) Labour (workers and management) Transport FFB to milling 96 8 Overheads (utilities, insurances, communication, other services, 60 5 administration, security, etc.) Miscellaneous 24 2 Total Source: Interviews Current average FFB production costs of a mature Malaysian plantation are estimated at 1200 US$/ton. The major cost components are labour (25% of total), fertilisers (22%) and depreciation (15%). Labour costs have increased significantly in 2011, as the Malaysian Agricultural Producers Association augmented the guaranteed minimum wage of plantation estate workers at 850 ringgit/month (280 $/month). The full impact of minimum wage increase should be felt in Fertiliser 81 costs have increased by about 30% in 2011 in comparison to 2010, due to supply shortages and rising feedstock cost. According to the presentation of an expert of Tradewinds Plantation Bhd at the International Palm Oil Conference 2011, the average cost of establishing a hectare of replanted oil palm mature area could attain about 4500 $ for the first three years; the cost of establishing a new plantation on jungle area would be 20 30% higher). The establishment cost is considered depreciated over 25 years and the amortisation for the first type of replanting would average 180 $/ha, equivalent 82 to 60 $/ton of FFB. 79 Trees under no particular climatic stress and pest or disease attacks The typical N:P:K ratio for oil palm plantations is 2 :1 :2 82 The conversion of FFB production cost from $/ha into $/ton is based on FFB average yield 20 tons/ha. 58

60 For comparison, the Malaysian palm oil board (MPOB) statistics 83 on average national yields of FFB and palm per hectare, over the past five years are shown in Table 3. Table 3: Malaysian average FFB and palm oil yields, Items Average period FFB yield, tons/ha Oil yield ton/ha It is important to note that for mature plantations, the cost per ton of FFB can vary considerably based on yield performance, from 75 $/ ton for yields of 16 tons /ha to 48 $/ton for yields of 25 tons/ha. In order to protect their margins from declining crude palm oil prices, plantation companies are making all efforts to reduce the impact of the major cost components, namely labour and fertiliser inputs, by raising workers efficiency and productivity through increased mechanisation and the optimisation of fertiliser use. 1.7 Sustainability of oil palm cultivation Production of palm oil is more competitive in comparison with other vegetable oils; it consumes considerably less energy in production, uses less land and generates more oil per hectare than leading vegetable oils such as soybeans and rapeseed. However, the rapid growth of palm oil demand and the palm oil industry implied the expansion of oil palm planted areas and raised challenges and wide concern by its future sustainability. The reasons for concern related to increased oil palm cultivation are deforestation and destruction of rain forests, global warming and the contribution to the global increase in greenhouse gas emissions, wild life preservation, inappropriate land use, violation of human rights of indigenous people, labour relations on plantations, agricultural development and health issues. The on-going sustainability debate involves governments, oil palm planters, palm oil producers, traders, end-users, food industrialists, environmentalist NGOs and the civil society alike, albeit each having different, more or less balanced points of view, reasons and means of action. Environmental NGOs lobbying in anti-palm oil campaigns may link directly oil palm cultivation to deforestation, or palm oil consumption to health damage. Although partly contradicted by producing countries stakeholders in oil palm cultivation, these allegations aggravate conflicts instead of providing cooperative solutions to real environmental problems which may not be directly correlated with palm oil developments. Until recently, developing countries producing, consuming and trading in palm oil, in particular in Africa, did not make their positions well heard, although they bear the responsibility of ensuring a fair balance between the need to develop their economies, eradicate poverty, ensure food security, and preserve environment for sustainable development. Fearing the loss of markets, major food and palm-based biodiesel producers based on imported palm oil were obliged to face the situation and consider the environmental aspects of their complete supply chains. They therefore supported the set-up of voluntary certification schemes and publicised the rapid and voluntary increase of sustainable palm oil in their global vegetable oil purchases. Meanwhile, governments and private sector industrialists in 83 At 59

61 palm oil producing countries, in particular Indonesia and Malaysia, elaborated and adopted, or are in the process of adopting, policies supporting the sustainable development of their palm oil sector. In response to the global concern for sustainability, seven years ago has been set up the Roundtable on Sustainable Palm Oil RSPO ( a nonprofit association of oil palm growers, palm oil processors, traders, consumer goods manufacturers, retailers, banks and investors, as well as environmental, nature conservation and developmental NGOs. RSPO has issued a private, voluntary certification system designed to create a market for certified sustainable palm oil. Palm oil producers are thus able to prove buyers that their product is sustainable, and processors using the certified palm oil as input can prove the environmental- friendly quality of their products to consumers. The right to use the system has to be purchased from RSPO. The organisation defined eight principles and thirty nine criteria for the certification of sustainable palm oil (see and established the rules of a certification system (see at The RSPO certification is a seal of approval that is given to palm oil grown on a plantation that has been proven, through the verification of the production process by accredited certifying agencies. In theory, the certified sustainable palm oil (RSPO oil) should come from certified production, processing and end-use facilities along the chain. At the end of 2011, 174 companies had received supply chain certification for their 336 facilities; 30 growers and 147 millers were certified and produced some 6 million tons of sustainable palm oil and 1.4 million tons of sustainable palm kernel oil. Certified palm oil was supposed to be marketed at a premium and expected to be searched after in the European Union and the USA. However, the RSPO certified palm oil has received a limited acceptance to date; about twelve per cent of the world output, consumed mostly in developed countries, remained unsold reportedly because of the lack of willingness of importers to pay a premium to offset the cost of certification. Another reason is that the RSPO certified sustainable palm oil could not be used for biodiesel manufacture into the European Union because the RSPO standard does not yet meet the requirements of the EU Renewable Energy directive. Representatives of NGOs and industry bodies in Europe suggested recently that governments of the largest importing markets -- EU, China and India, lower their import tariffs for certified sustainable palm oil in order to sustain the demand. Both Malaysia and Indonesia could not accept private bodies lobbying and influencing on how palm oil, of strategic national importance, may be traded. An array of previous strict environmental regulations and policy support measures were already imposing the undertaking of environmental impact assessment studies prior to clearing or the extension of plantations, and government permission is required before proceeding. National palm growers are already increasingly using environmentally sound practices in oil palm cultivation, from cultural techniques (fertilization, pest control, land and crop management), to waste management. Indonesia had already initiated a memorandum providing assurance that the palm oil cultivation does not cause deforestation and has issued the mandatory Indonesian Sustainable Palm Oil Standard - ISPO in autumn On these grounds, the Indonesian palm oil association - GAPKI withdrew officially its membership from RSPO during the 9th Annual Roundtable Meeting on Sustainable Palm Oil in November Malaysia is expected to introduce very soon a national sustainability scheme and certification - MPSO designed at a macro level: the entire country is viewed as a single production unit for sustainable palm oil. Likewise, Germany and the United Kingdom have also introduced their national compulsory sustainability schemes and standards controlling the supply of sustainable raw materials including palm oil for biodiesel manufacture. The challenge remains in the harmonisation of these schemes and standards. 60

62 2. Processing 84 Before 1975, the near totality of palm oil traded on world markets was in crude form. The shift of refining to producing countries is one of the major developments in the palm oil industry. Conversion of oil palm fresh fruit bunches to palm products involves three major steps, each taking place in different types of processing plants, namely: (1) primary processing for the extraction of palm kernels and crude palm oil; (2) secondary processing for the refining of crude palm oil and the production of palm olein, stearin glycerol and fatty acids; and (3) tertiary processing for the manufacture of fatty acids, alcohols and palm mid-fractions, as well as derived food and non-food products. Fig. 2 illustrates the primary, secondary and further processing of palm oil, and the main utilisations of derived products. 2.1 Crude palm oil and palm kernels extraction Crude palm oil is extracted from oil-bearing FFB tissue either by traditional method, or by modern extraction processes. The traditional method of extraction is still used in villages, in particular in Africa. FFBs are threshed manually with an axe or machete and fruits are separated the spikelets, usually by children and village elders. The threshed fruits are cooked in water by most small-scale processors do not have the capacity to generate steam for sterilization. High-pressure steam is more effective in heating bunches without losing much water. When steam is available, thresh bunches after heating to loosen the fruits. Most small-scale operations thresh bunches before the fruits are cooked, while high-pressure sterilization threshes bunches after heating to loosen the fruits. Throughputs of traditional processing vary from a few hundred kilograms FFB/day for domestic use, up to 8 tonnes FFB/day and supply of crude oil to the domestic market. Efforts to mechanise and upscale traditional processing are being extensively undertaken. Large scale, fully mechanised oil palm mills use a sequence of processing steps designed to extract high yields of crude palm oil and palm kernels of acceptable quality for the international trade (see Fig. 3). This type of capital intensive mills is generally handling from 3 to 60 tonnes of FFB/h; large scale mills reach extraction rates of per cent palm oil per bunch of good palm varieties. Installations comprise mechanical handling systems (bucket and screw conveyers, pumps and pipelines) and operate continuously, depending on the availability of FFB. Boilers fuelled by palm fibre and shell produce superheated steam for electricity generation and heating purposes throughout the factory. Most processing operations are automatically controlled and sampling and analysis are routine operations. The operations undertaken for the extraction of crude palm oil and palm kernels from FFBs, such as schematised in Fig. 3, are summarised below. Fruit reception and transport to sterilisers: in order to obtain crude palm oil of good quality, it is essential that damage to fruits is minimal and the handling of bunches from the field to sterilizers is done with utmost care. 84 More information at: - Extraction and Refining of Crude Palm Oil, presentation of processing of palm oil from oil palm fruit, with a focus on the extraction process to get the crude palm oil, Professor Abd Karim Alias, School of industrial technology, Universiti Sains Malaysia, at - Palm oil factory process handbook, Kementerian Perusahaan Utama, Institiut Penyelidikan Minyak Kelapa Sawit Malaysia, Palm Oil and Oleochemical Process, online 2012 course run through the Curtin Bentley-based Distance Education, handbook.curtin.edu.au, 61

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65 Sterilization - FFBs are generally discharged at the mill from trucks or trailers on a loading ramp for the filling of sterilizer cages with a nominal capacity of 2.5 tons. Sterilization is carried out by placing sterilizer cages in vessels under steam (3 kg/cm2 and C) for about an hour. The scope is to prevent further rises in the free fatty acid content due enzymatic reactions, facilitate the mechanical stripping and prepare the pericarp for subsequent processing and precondition the nuts to minimize kernel breakage. Stripping operation realises the separation of the sterilized fruit from the bunch stalks through two basic: a small vigorous shaking and the beating of bunches. Digestion process involves the reheating of sterilized fruits, the loosening of the pericarp from the nuts and the breaking of oil cells before passing to the oil extraction unit. The best digestion conditions are obtained by mixing the fruits at a temperature between 95 and C for approximately 20 min. Oil extraction is generally carried out using continuous screw presses. Pressing pressure is regulated as to ensure a minimum of residue oil in the press cake and an acceptable amount of broken nuts. Screw presses produce a mixture of oil, water and solids, and a press cake containing fibres and nuts. Clarification The mixture of oil, water and solids from the press has an average composition of 66% oil, 24% water, and 10% nonoil solids; because of the high proportion of solids, it has to be diluted with water to reach its satisfactory settling. After dilution, the mixture is screened to remove fibrous materials and then pumped to a continuous settling tank where it separates into two parts, i.e. crude palm oil and sludge. The oil is skimmed off and passed to a centrifugal purifier followed by a vacuum dryer and a cooler before being pumped to the storage tanks. The sludge has an oil content of approximately 10%. The oil is reclaimed and fed back to the main settling tank. Crude palm oil sent to storage tanks has a moisture content of 0.1 to 0.12% and impurities less than 0.02%. Oil storage In large-scale mills, the crude palm oil is transferred to storage tanks internally coated with epoxy materials to prevent iron pickup prior to dispatch from the mill. Since the rate of oxidation of the oil increases with the temperature of storage, the oil is normally maintained around 50 C, using hot water or low-pressure steam-heating coils, to prevent solidification and fractionation. Small-scale mills pack the dried oil directly in used petroleum oil drums or plastic drums and store the drums at ambient temperature. Palm kernel recovery - The residue from the press consists of a mixture of fibre and palm kernel nuts. The nuts are separated from the fibre by hand in the small-scale operations, covered and allowed to heat for 2-3 days through their own internal exothermic reactions. They are further dried and sold to other operators who process them into palm kernel oil. The fibre is pressed in spindle presses to recover second grade (technical) oil that is used in soap-making. Large-scale mills use recovered fibre and nutshells to fire the steam boilers. The superheated steam is then used to drive turbines to generate electricity for the mill. For this reason it makes economic sense to recover the fibre and to shell the palm nuts. In the large-scale kernel recovery units, kernel nuts contained in the press cake are separated from the fibre in a de-pericarper and then dried and cracked in centrifugal crackers to release the kernels. During the nut cracking process some of the kernels are broken. The rate of FFA increase is much faster in broken kernels than in whole kernels. Breakage of kernels should therefore be kept as low as possible, given other processing considerations. 64

66 Kernels are usually separated from the shells in two operations: a winnowing system is firstly used to remove the small pieces of shell and dirt, followed by hydro cyclones or clay baths. Moisture content of fresh kernels is about 20 per cent; if bagged or stored in this condition, they would become mouldy and their FFA content would rapidly increase (the oil content of dried kernels can be over 50 per cent). Therefore, they are dried to a moisture content of about 7 per cent, before being stored in bulk in sheds, waiting to be transported to the kernel crushing plant, or bagged directly (about twelve bags per ton of kernels). 2.2 Recycling and waste management in crude palm oil production With the growing awareness of consumers and under the pressure of regulatory bodies for environment protection, oil palm planters and palm oil producers are increasingly reducing the negative impact of palm industry on environment through recycling and waste management throughout the life cycle of the main palm products. Succinct information on the current recycling and use of by products and waste from oil palm plantations and mills is given in Table 4 and Fig.4. Table 4: Current and potential utilisation of oil palm plantation and palm oil mill by-products and wastes By-products and wastes Pruned fronds Palm trunks and fronds at replanting Empty fruit bunches Fibre Average quantity 10 tons/ha tons/ha 20-23% of FFB 12-13% of FFB Use Plantation Recycled in plantation as biomass Recycled in plantation as biomass and furniture Palm oil mill Mulching in plantation Level of utilisation Very high Very high Very low Very high Potential new uses Extraction vitamin E, fibreboard Pulp, paper, palm heart, glucose, cellulose, fuel Fibreboard Fuel to boiler Very high Fibreboard Shell 6-8% of FFB Fuel to boiler Very high Decanter solid Boiler ash Steriliser concentrate Centrifuge waste Decanter effluent Hydro cyclone and clay bath 2-3% of FFB of FFB 12-20% of FFB 40-50% of FFB 30-40% of FFB 5-11% of FFB Land application as fertiliser Surface landfill and fertiliser in plantation Feed to effluent treatment plant Feed to effluent treatment plant Feed to effluent treatment plant Feed to effluent treatment plant Moderate to high Low Very high Very high Very high Very high Activated carbon, potting medium Animal feed Fertiliser and soil improver Cellulase, single cell-protein 85 Oil recovery for acid oil production _ Recycling to spare water consumption 85 Extract used as substitute for protein-rich foods in human and animal feeds 65

67 By-products and wastes water Factory washing Sludge cake Average quantity 4-8% of FFB _ Use Feed to effluent High treatment plant Effluent treatment plant Land application as fertiliser and animal feed Land application as Anaerobic solid 5-10% of FFB fertiliser Aerobic solids Less than 5% of FFB 28m 3 /ton Biogas empty fruit Biogas engine bunches Source: Bailey s Industrial Oil and Fat Products Land application as fertiliser Level of utilisation Moderate to high Very low Very high High Very low Potential new uses Oil recovery for acid oil production _ Heat and power generation Fig.4: Recycling and use of by products and waste from oil palm plantations and crude palm oil mills FFB Oil palm trunks and fronds at replanting pruned fronds Oil palm plantation Empty fruit Oil palm mill Shell fibre steriliser condensate bunches Boiler ash Animal feed Digest palm oil mill effluent Effluent treatment plant Palm oil mill effluent Excess shell Final discharge Biogas Source: ITC Waterways The main residues that must be disposed of in oil palm plantations are the regularly pruned fronds (about 0.4 tons/ha of palm fronds are produced through routine maintenance pruning and harvesting) and the biomass comprising palm trunks and fronds at the end of the oil palm economic cycle (after about twenty five years, old oil palms that should be replaced produce over 14 tons/ha fronds and 74 tons/ha of palm trunks). In commercial practice, 66

68 fronds are replanted in the field and the biomass with a high plant nutrient content is recycled, enhancing soil fertility (both Malaysia and Indonesia practice the zero burning technique for replanting). Each hectare of oil palm generates annually about 1.5 tons of empty fruit bunches (EFB), 1.6 tons of palm press fibres, 0.9 ton of palm kernel shell, 2.4 tons sterilizer condensate, and 0.7 ton of dry mill effluent. As shown in Fig. 2, the separation and winnowing operations produce residual fibre and shell which are commonly used as boiler fuel to produce steam for electricity generation and palm oil and kernel production processes. Fibre and shell alone can supply more than enough electricity to meet the energy demand of a palm oil mill. The sterilisation condensate and the separator sludge are segregated into separate oil pits for residual oil recovery before they are mixed again for treatment. The poor quality residual oil recovered from the oil pits is drummed and sold as technical oil for nonedible applications. The hydro cyclone waste containing very little residual oil is discharged directly into the treatment plant. Palm oil milling requires large quantities of water (about 1 ton of water per ton of FFB); it is therefore common to locate palm oil mills near rivers with readily available free water. A great part of water intake for processing is discharged as palm oil mill effluent. Some 2.5 tons of palm oil mill effluent are estimated to be generated for every ton of palm oil produced, coming mainly from sterilization, oil clarification and hydro cyclone 86 operations, but water consumption and waste water generation can be minimized through good process control. Palm oil mill effluent is treated in a separate plant 87. Due to its high organic content, the effluent undergoes biological oxidation; discharged untreated into the watercourse, it will deplete the dissolved oxygen and destroy aquatic life and the surrounding environment. Palm oil industries worldwide have therefore acknowledged both the social and ethical obligations to reduce the environmental impact caused by the palm oil mill effluent. Several options are available for reducing the pollution problems, depending on the local environment created by the mill. These include the complete treatment and disposal of the effluent, its systematic utilization as plantation fertiliser, or its use for the generation of biogas - further used for heat and electricity generation. A 60 ton/hour FFB mill operating 20 hours/day may provide some 20,000 m3 of biogas with a calorific value of about 5300 kcal/m3, which can be used for supplementing heat or electricity and realising substantial energy savings. 2.3 Milling and crude palm oil production costs The economic key to profitability and competitiveness in the palm oil market is to have the lowest production costs per ton of output. Palm oil processing has the advantage of yielding marketable by products, namely palm kernels and palm kernel oil. Oil palm biomass and palm kernel shells which are/can be used as complementary energy sources in the milling units, sparing on fuel costs; biomass can also be utilized as fertiliser on the plantation. Industry estimates the average Malaysian milling cost in 2011 at 13 $/ton of FFB. As shown in Table 5, the major cost components are the depreciation of equipment and plant buildings (30% of total), their maintenance (15%) and the management and qualified process staff 86 Where a mixture of water and clay or salt is used as a medium to separate shell and kernel 87 More information: Pollution control technologies for the treatment of palm oil mill effluent at Effective Operation Effluent Treatment Palm Oil Mill, to order at Review of Current Palm Oil Mill Effluent Treatment Methods: Vermicomposting as a Sustainable Practice, World Applied Sciences Journal 11 (1): 70-81, 2010, ISSN , at 67

69 (11%). Costs of unqualified labour, head office, utilities, and the palm oil cess account each for 8% of the total milling cost, while bagging of palm kernels contributes with 4%. Table 5: Estimation of Malaysian average milling cost, 2011 Items US $/ton FFB % Total, of which: Depreciation 4 30 Maintenance equipment, buildings 2 15 Management and qualified process staff Unqualified labour 1 8 Head office cost 1 8 Utilities 1 8 Palm oil cess Kernel bagging Miscellaneous 1 8 Source: Interviews Considering an input of 5 tons FFB per hectare, corresponding to an average yield of 4 tons of crude palm oil per hectare 89, the average production cost of crude palm oil would be 313 $/ton. CPO cost components $/ton 5 tons FFB at 60 $/ton 300 Milling cost 13 Total 313 Maybank Kim Eng 90 Co. estimates that Indonesian producers may benefit of $/ton cost advantage because of lower input costs. For information, a study 91 of the Centre for International Forestry Research (CIFOR) made in 2009 compared the average crude palm oil production costs in the major producing countries - see Table 6. The Malaysian crude palm oil production cost is estimated to have been only 88 The Malaysian Federal Government imposes a cess on oil palm products manufactured in, or exported from the country, under the Cooking Oil Stabilisation Scheme. The scheme is meant to subsidise the cost of producing 60,000 tonnes of cooking oil (palm olein) a month. The cess, imposed only on plantation companies owning planting acreage of 100 acres or more, is applicable only when the crude palm oil price surpasses 450 $/ton level. Collected at a rate of 0.6 $/ton FFB for every 30 $ market price increment of crude palm oil, the cess affect more than 3,000 estate plantations. The Ministry of plantation industries and commodities estimated at $ 257 MM the amount of cess collected during the period June 2007 to May 2008, when crude palm oil prices varied between 645 $/ton and 800 $/ton. The new cess levied since June 2011 was meant to compensate losses suffered by cooking oil producers and packagers, who were short of $ 260 MM needed to stabilise the ceiling price of cooking oil. The Malaysian Palm Oil Board derives a part of its funding from this cess imposed on the industry. 89 For comparison, Malaysian Palm Oil Board estimated the average yield performance of oil palm plantations over the past five years at 3.91 tons/ha see Table 2 90 Group of securities and investment banking companies 91 The hesitant boom: Indonesia s oil palm sub-sector in an era of economic crisis and political change, Anne Casson, November 1999, Centre for International Forestry Research, Bogor, Indonesia, at 68

70 7% below the cost rated for This is compatible with the fact that costs of production of FFB and crude palm oil show a relatively horizontal trend despite the strong fluctuations of palm oil market price; the slight variations in production costs over time are due mainly to small changes in oil palm productivity and the reaction of estate managers to market prices. Table 6: Comparison of crude palm oil production costs in selected countries, 1997 (US $/ton) Cost factors Indonesia Malaysia Côte d'ivoire Colombia Nigeria Establishment Cultivation Harvesting and transport FFB milling Total World average The cost of FFB processing decreases with the increase in the capacity of palm oil mills. In general, the break-even capacity 92 of mills is considered 50 tons FFB/hour. Compared with the processing cost of a mill with a capacity of 50 tons FFB/hour, milling cost is about 11 per cent higher for a plant with a capacity of 40 tons FFB/hour, and 16 per cent superior for a plant of 30 tons FFB/hour. As in the case of FFB production costs, crude palm oil processing costs are dependent on the type of palm oil mill ownership: they are the lowest for large, well-managed corporations disposing of financial resources. Second lowest costs are usually obtained by private limited companies and partnerships; the highest costs are recorded by public agencies and cooperatives. Vertically integrated estates enjoy a secured market for their FFBs, which are delivered usually to the processing mill located relatively closely. Mills, in turn, are more efficient, disposing of adequate supplies of FFBs both in quantity and quality. Vertical integration offers the advantage of reducing production and processing costs. This advantage is being taken into account by the Malaysian Government in the elaboration of strategies and policy reforms aiming at countering the Indonesian low palm oil export duty regime which makes the Malaysian independent palm oil refiners' business uncompetitive. In this context, a proposal to set up a consortium of independent palm oil producers and refiners is being considered; independent local palm refiners, especially those without upstream activities, could be linked with local independent producers of crude palm oil in a consortium, via tolled refining. Toll refinery return could be on refining cost plus margin, allowing refineries to be fully-utilised and operate viably. This would imply that over 51 refineries, mostly members of the Palm Oil Refiners Association of Malaysia (PORAM) and local independent palm oil producers with three million to five million tonnes of CPO feedstock could join forces via pool marketing and have the quantum to compete in the world market with the vertically integrated plantation companies, as well as with Indonesian large oil palm players. 2.4 Refining and fractionation Refining 92 The ratio of output to capacity which is just sufficient to allow a business to cover its costs 69

71 Crude palm oil extracted from the fresh fruit bunches contains undesirable components and impurities, such as mesocarp fibres, moisture and insolubles, free fatty acids, phospholipids, trace metals, oxidation products and odoriferous substances. The oil is commonly refined to a bland, stable product before its direct use as edible oil or for formulation of other edible product. In Africa, crude palm oil is often consumed in the crude form, particularly preferred for its taste and odour. Two types of processes are used for refining the crude palm oil, namely physical refining and chemical refining, differing mainly in the manner in which the free fatty acids are removed. Both processes yield refined, bleached, and deodorized palm oil of quality and stability suitable for direct consumption or further use in food industries. The unit operations involved in these two processes and the products obtained are illustrated in Fig. 5 and Fig

72 71

73 In physical refining, crude palm oil is initially pre-treated with concentrated phosphoric acid for degumming and subsequently cleansed with adsorptive bleaching clay and filtered. The purpose of the phosphoric acid is to precipitate the non hydratable phosphatides (up to 10 per cent of the crude palm oil contains these modified triglycerides similar to oil molecules). Bleaching clay is used for cleansing by adsorbing the undesirable impurities such as trace metals, moisture, insoluble, part of the carotenoids and other pigments, as well as the phospholipids precipitated by the phosphoric acid and any excess phosphoric acid present in the oil after degumming. The slurry containing palm oil and clay is then filtered to recover the clear, light orange colour pre-treated oil. The spent clay from the filter, containing normally 20 to 40 per cent oil, is further treated for oil recovery. The pre-treated palm oil is now ready for de-acidification and deodorization with superheated high-pressure steam, at 2400 to 2700 C and under vacuum. Under such conditions, the free fatty acids still present in the pre-treated oil are distilled together with the more volatile odoriferous and oxidation products, which otherwise would impart undesirable odour and taste to the oil. At the same time, residual carotenoids are also thermally decomposed and the resulting product is the light-coloured, bland refined, bleached, deodorised (RBD) palm oil. Chemical refining, also called caustic soda refining, involves three stages: gum conditioning and neutralization, bleaching and filtration, and deodorization. Gum conditioning and neutralization is realised by heating the crude palm oil with concentrated phosphoric acid and further treatment with a caustic soda solution. The reaction between caustic soda and the free fatty acids in the degummed oil results in the formation of sodium soap, which is removed by a centrifugal separator. The neutralized palm oil is then washed with hot water to remove traces of soap still present and dried under vacuum to a moisture level below 0.05%. The oil is subsequently bleached with clay and deodorised as in physical refining. The final product, called neutralized, bleached, and deodorized (NBD) palm oil, is then cooled down to 60 C and passed through polishing filter bags before pumping to the storage tanks. Refining of other palm products, namely crude palm olein, crude palm stearin, crude kernel oil, crude palm kernel olein, and crude palm kernel stearin can also be realised by either chemical or physical processes mentioned above Fractionation Palm oil consists of a combination of fatty acids with different chain length and degrees of unsaturation, in other words in substantial quantities of both low- and high-melting triglycerides. Crystallization of the oil under controlled cooling conditions, followed by separation, yields a low-melting liquid phase olein, and a high-melting solid phase -stearin. There are three commercial methods for fractionating palm oil: the dry, detergent, and solvent processes. Dry fractionation is usually carried out semi continuously using neutralized, neutralized and bleached, or fully refined palm oil without the use of any chemicals or additives. Crystallisation occurs as the oil is agitated and cooled by chilled-water circulation. Different filtration systems are used for the separation of palm olein and stearin. Detergent fractionation is usually carried out on crude palm oil. The oil is first cooled in the crystallizer with chilled water to allow the crystallization. The crystallized mass is mixed with an aqueous detergent solution; by wetting the stearin crystals, they can be separated out into a suspension in the aqueous phase. Olein is discharged by centrifugation as the lighter phase, washed with hot water to remove excess detergent and vacuum dried before storage. The aqueous phase containing stearin is heated to 1000 C to break the emulsion; the stearin 72

74 recovered is also washed with hot water and dried under vacuum before storage. Yield of olein is about 80 per cent. Solvent fractionation is the most expensive process because of solvent losses, solvent recovery equipment necessary and the stringent safety measures to be respected. The process involves the use of solvents such as hexane or acetone. It is only viable for the production of high value products such as cocoa butter equivalent or other specialty fats. Palm kernel oil can also be fractionated via the dry, detergent, and solvent processes in a similar manner Waste management in palm oil refining The characteristics of palm oil refinery effluents vary according to the type of refinery operations (chemical or physical refining and fractionation processes), as well as with the process monitoring and control systems used. The choice of treatments depends very much on the characteristics and flowing conditions of the raw effluents. Over the past two decades, refiners managed to reduce considerably effluent and other forms of pollution by shifting from chemical refining to physical refining; automation of processes and their strict control to prevent spillage and product losses; and the installation of new equipment designed for low energy and water consumption. One alternative is to locate the effluent treatment unit near the refinery, treat effluents to an acceptable level and discharge them directly to rivers or other public water courses. A second, cheaper and space-saving alternative is to discharge the untreated or partially treated effluent to public or private specialised sewers providing wastewater conveyance and treatment services and/or treatment units. 73

75 PART THREE: RECENT MARKET DEVELOPMENTS 1. Supply outlook - palm oil, kernels and palm kernel oil Palm oil sector is an important factor for economic expansion in South East Asia, Central and West Africa, Papua New Guinea and Latin America to a smaller extent. The key reasons for the continuous increase in importance of the palm oil in the global vegetable oils market are the inherent high productivity of the crop and its potential to meet the fast rising demand for oil with the lowest requirement for new land. World production of palm oil more than doubled over the past decade, from about 22 million tons in year 2000, to 50.3 million Chart 20: Palm oil - world production tons in 2011 /Chart 20). million tons According to USDA ( nline), Malaysia and Indonesia covered about 90 per cent of the world palm oil output. Production in Indonesia rose twice as fast as the Malaysian output over the period. In 2006, each of the two countries reached a production level of World Malaysia Indonesia Others about 16 million tons of crude palm oil; ever since Indonesia overtook Malaysia in importance and its production exceeded 25 million tons in 2011, while the Malaysian production levelled off at about 18 million tons since mainly because of the limited availability of arable land. Production outside Indonesia and Malaysia increased from four million tons in year 2000 to 6.6 million tons in 2011, out of which about 2.5 million tons in Latin America (Columbia, Ecuador, Honduras, Guatemala, Costa Rica and Brazil), 1.5 million tons in Thailand and 1.8 million tons in West Africa. ISTA Mielke estimated the annual growth of world production of palm kernels for further processing to palm kernel oil and derived products at 4 per cent, from 4.8 million tons in 2006 to 5.6 million tons in Production is concentrated in the two leading producers of oil palm and palm oil Indonesia and Malaysia (83 per cent of world output), followed far behind by Nigeria (4 per cent). Global production of palm kernel oil increased by 4 per cent per year, from 4.8 million tons in 2006 to 5.8 million tons in 2011 (see Chart 21). Indonesia and Malaysia covered together well over the three quarters of the world output. As in the case of palm oil, in 2008 Indonesia overtook Malaysia and became the world leading producer of palm kernel oil, with an output of 2.5 million tons in Malaysian production levelled off at around 2 million tons per year since

76 Chart 21: Palm kernel oil - world production, million tons e World Indonesia Malaysia Others Source: ISTA Mielke November 2011 and USDA The estimated production of palm oil, palm kernels and palm kernel oil in the ECOWAS region in 2010/2011 is shown in Table 7. Nigeria is the largest manufacturer of palm products, having produced 63 per cent of the regional output of palm oil (just over one million tons), as well as 79 per cent of the total palm kernels (1.1 million tons) and 84 per cent of the palm kernel oil (0.5 million tons). Table 7: ECOWAS production of palm oil, palm kernels and palm kernel oil 2010/2011, thousand tons Palm oil Palm kernels Palm kernel oil Benin Côte d'ivoire Gambia Ghana Guinea Guinea Bissau Liberia Niger 1 Nigeria Senegal Sierra Leone Togo ECOWAS Source: ISTA Mielke November 2011 and USDA In the near future, palm industry is expected to remain centred in Southeast Asia, where large areas of new plantings are still to come into production, governments are supportive of palm sector development and the domestic and export supply chains are well established. Sustainable development policies and the adoption of eco standards and certification systems will gradually shift away oil palm cultivation from forested land to other existing agricultural land or degraded areas. 75

77 Indonesia is expected to remain the leading supplier of crude palm oil. The government foresees the country as the best sustainable palm oil producer in the world, with an output of 40 million tons by 2020, half used for food and the other half for energy. To achieve the objective of doubling its output until 2020, the country would need annually up to ha of new land devoted to oil palm cultivation. The limited land availability will reduce the expansion of oil palm estates in Malaysia, although the Sarawak state government is opening large tracts of land for palm cultivation. Plantations in West Africa and Latin America are expected to expand to meet the fast rising local, regional and global demand. Several of these countries in pursuit of economic growth, poverty reduction and decreased dependence on imported edible oils are attracting Asian and European investments in the palm sector. In addition to Brazil, Columbia, Cameroon and the Democratic Republic of Congo, these include the ECOWAS countries already mentioned previously (see Annex II). Agrimoney.com analysts ( estimate that the palm oil industry is at the dawn of a new period of expansion, based on increased investment in production by multinationals and investment groups keen to ensure their longterm sources of supply. As far as the medium term developments are concerned, market analysts in LMC International ( estimate that palm oil production outside Indonesia and Malaysia would reach 8.3 million tons by 2015 and 11.1 million tons by 2020, out of which 26% (2.6 million tons) produced in Thailand and 20% (2.2 million tons) in Columbia. 2. Demand outlook Global palm oil disappearance 93 doubled in the past decade from about 34 million tons in year 2000 to 50 million tons in 2011 (see Chart 22). At 2011 average market price, total consumption of palm oil is valued at about $54 billion. Some 77 per cent of palm oil is estimated to be consumed as food, 10 per cent as biodiesel, 8 per cent for the manufacture of oleo chemicals and 5 per cent for other uses. The importance of the eight largest users of palm oil in the global intake increased. India, Indonesia, China, EU, Malaysia, Pakistan, Nigeria and Thailand covered together 45 per cent of the entire world consumption in 2006 and 51 per cent in 2011, driven by the very rapid increase of Indian consumption (8 per cent of world total in 2006 and 14 per cent in 2011), which surpassed China and the European Union as leading global user in Indonesian consumption raised from 10 per cent of world total use in 2006 to 13 per cent in 2011; the Chinese consumption decreased from 15 per cent to 13 per cent in 2011, while palm oil utilisation in the European Union stagnated at 12 per cent of the world total over the period considered. 93 Defined by ISTA Mielke as the residual of the balance (production + imports + opening stocks - exports - ending stocks) 76

78 Chart 22: Palm oil global supply and demand balance, million tons e Beginning Stocks Production Imports Exports Disappearance Ending Stocks Source: ISTA Mielke and USDA The four largest consumers of palm oil covered over a half of the global usage in 2011, as follows (see Chart 23): India 15 per cent, Indonesia 14 per cent, China 13 per cent and the European Union 10 per cent. China and the European Union do not produce crude palm oil and the Indian production is marginal; the demand of these three largest users is met almost entirely by imports. The following large consumers were Malaysia (/ per cent), Pakistan and Nigeria 4 per cent each, and Thailand and Bangladesh each 2 per cent. Chart 23: Leading users of palm oil in 2011 (World total 49 million tons) Others 29% India 15% China 13% Bangladesh 2% Thailand 2% Nigeria 4% Pakistan 4% Malaysia 7% Indonesia 14% EU 10% Source: USDA, According to OECD - FAO Agricultural Outlook , worldwide demand for vegetable oils is expected to increase by 36 per cent, with biofuels accounting for one-third of the increase ( Palm oil is best placed to meet a very large part of this demand, given its highest productivity per hectare. 77

79 Demand of palm oil for edible uses is foreseen to further rise, determined by population growth, increased per capita consumption and the shift away from the use of saturated animal fats in developed countries. In the biofuels sector, countries have set biodiesel blending targets ranging, for example, from 1 per cent in the Philippines to 10 per cent in the European Union by If these national mandates would materialise, it is estimated that an additional four million hectares of agricultural land should be planted with oil palm to meet EU palm biodiesel requirements and another one million hectares to meet the Chinese demand. Demand growth for palm oil is currently exceeding supply growth, largely driven by biofuels policies. World stocks are projected to fall to below 8% of global consumption by the end of 2012 for the first time in 40 years. World disappearance of palm kernel oil is estimated to have increased by about 3 per cent over the past six years, from 4.4 million tons in 2006 to 5.3 million tons in Chart 24: Palm kernel oil global supply and demand balance, million tons e Beginning Stocks Production Imports Exports Disappearance Ending Stocks Source: ISTA Mielke and USDA With a different composition compared to palm oil (mainly a higher content of lauric fatty acids), the use of palm kernel oil in the food sector is much lower. Palm kernel oil products make economical effective alternatives to petroleum-based chemical products derived from depleting, non-renewable and less environmentally friendly petroleum oils. Soaps and detergents produced from palm kernel oil and stearin have superior cleansing power, in particular in hard water areas, and have a lesser impact on the environment. Likewise, they are used in the manufacture of green personal care and beauty products because of their good ability to lather, condition, moisturise and restore lustre and shine to hair and skin. Chart 25 illustrates the shares of the major palm kernel oil consuming countries in As one would expect, the leading consumers are the countries producing and processing palm kernels and/or having well-developed oleo chemicals and food industries. 78

80 Malaysia, Indonesia and the European Union the three largest users of palm kernel oil, have covered a half of the world consumption in Palm kernel and coconut oil are highly substitutable because of their similar 94 fatty acids composition. The combined use of the two oils has risen from 4.7 million tons in 2006 to 8.9 million tons in 2011, with the increase coming mainly from palm kernel oil 95, which covers now about 60 per cent of the global consumption of lauric oils. Chart 25: : Leading users of palm kernel oil in 2011 (Total 5.5 million tons) Others 21% CIS 3% India 4% Brazil 4% Nigeria 4% USA 5% China 9% Malaysia 26% Indonesia 12% EU 12% 3. International trade Palm and palm kernel oils evolved into highly traded international commodities; current shipments of the two oils exceed 42 million tons per year. About two thirds of the palm oil and a half of the palm kernel oil produced worldwide enter international trade circuits. Palm oil constitutes around 45 per cent of the global edible oil trade in volume. The ECOWAS region is a net importer of palm and palm kernel oils, with Nigeria accounting for about 80 per cent of the regional palm oil deficit (Table 8). Table 8: ECOWAS region - Exports, imports and trade balances of palm oil, palm kernels and palm kernel oil 2010/2011 ( 000 tons) 94 Both oils contain a total of 77% lauric, palmitic, stearic and miristic fatty acids in very similar ratios. They differ by the respective content of caprylic and capric fatty acids (7% in palm kernel oil and 15% in the coconut oil) and of oleic acid (15% in palm kernel oil and 7% in coconut oil). 95 This is linked with the increase in the area under palm cultivation yielding larger amounts of palm kernels and palm kernel oils produced. 79

81 3.1 Exports The palm oil sector is a major contributor to export earnings in producing countries; Indonesia and Malaysia reported, for instance, 27 billion US dollars in combined sales of palm oil and palm kernel oil products. Global exports of palm oil are estimated to have increased with 1.5 million tons per, from nearly 30 million tons in 2006 to 39 million tons in The two leading producers of palm oil - Indonesia and Malaysia, are also the largest exporters. Indonesian exports increased faster than the Malaysian ones over the past six year period (7 per cent and 2 per cent per year respectively), reaching 18 million tons in 2011, against 16.6 million tons of Malaysian palm oil exported (Chart 26, USDA and ISTA Mielke data). Far Chart 26: World exports of palm oil, million tons Indonesia Malaysia PNG Benin UAE Others behind in the third and fourth places come Papua New Guinea and Benin, with similar export levels which increased from 0.3 million tons in 2006 to 0.5 million tons in During the same period, the United Arab Emirates re-exported about 0.33 million tons of palm oil per year on the average. The share of palm oil suppliers in the export trade in 2011 is illustrated in Chart 27. Indonesia and Malaysia covered 89 per cent of the total export trade. Chart 27: Main exporters of palm oil, 2011 (Total 38.9 million tons) Malaysia 43% PNG 1% Indonesia 46% Others 8% Benin 1% UAE 1% Source: ISTA Mielke November 2011 and USDA According to ISTA Mielke estimates, exports increased from 2.4 million tons in 2006 to 3.1 million tons in 2011 (Chart 28). 80

82 Indonesia covered that year 61 per cent of the global exports and Malaysia 36 per cent. The other producing countries small exporters of palm kernel oil and the quantities exported in 2011 are Thailand tons; Latin America tons (Colombia, Guatemala, Honduras, Costa Rica, and Ecuador); Papua New Guinea tons; Côte d Ivoire tons; Benin tons and Nigeria tons. 3.2 Imports Imports of palm oil nearly doubled over the past six years, from about 27 million tons in 2006 to 38 million tons in 2011 (see Chart 29), according to USDA and ISTA Mielke data. Previous to year 2004, European Union was a leading importer of palm oil, surpassed only by China. Since 2007, India overtook them following the stagnant level of imports in Europe and the slowing growth of imports in China. Chart 29: World imports of palm oil, million tons Indian imports 9 doubled, from 3.6 million tons in to 7.3 million tons in These three countries covered the three quarters of the global import trade in palm oil in 2011 (see Chart 30). Chart 28: World exports of palm kernel oil, million tons Indonesia Malaysia Others Total India China EU Pakistan Malaysia Egypt Bangladesh USA Nigeria Iran 81

83 India 19% Nigeria 2% Egypt 2% Chart 30: Leading importers of palm oil in 2011 (Total 38 million tons) USA 4% Bangla. 5% Malaysia 3% Pakistan 9% China 29% EU 27% Annual palm kernel oil imports progressed by about 6 per cent, from about 2.3 million tons in 2006 to 3.3 million tons in 2011 (Chart 31, source ISTA Mielke). 3.7 Chart 31: World imports of palm kernel oil, million tons The four leading importers having large oleo chemical industries using palm kernel oil as feedstock, namely the European Union, China, USA and Malaysia, covered nearly 60 per cent of the trade over the period. European Union has lost shares in palm kernel oil import market during the period considered in favour of Malaysia, China, and Brazil, CIS and India to a lesser extent (Charts 32 and 33). Others 29% CIS 3% Brazil 3% India 6% Chart 32: Main palm kernel oil importers in 2006 (Total 2.3 million tons) USA 11% China 12% EU 27% Malaysi a 9% Chart 33: Main palm kernel oil importers 2011 (Total 3.3 million tons) Others 22% EU 20% CIS 5% Brazil 6% India 7% USA 10% China 15% Malaysia 15% 82

84 3.3 Price outlook Despite their high short-term volatility, palm oil prices have followed an upward trend since year 2000, sustained by a strong demand and the increased use for biodiesel manufacture. This trend is reflected in both Charts 34 and 35 covering the period 2005 to Chart 34: Annual price indexes for palm products (1990 = 100) Chart 34 illustrates the comparative 150 evolution of annual price indexes of 100 crude palm oil, palm olein RBD and palm kernel oil, based on data 50 provided by ISTA Mielke. 0 Chart 35 shows the progression of prices of CPO all origins in North Western European ports (cif), Crude palm oil Palm olein RBD Indonesian CPO (fob), and of palm RDB stearin and olein of Malaysian origin cif Rotterdam. After the high peak reached at the beginning of 2008, when CPO exceeded 950 $/ton and RBD olein 1000 $/ton in Rotterdam, prices fell sharply by the end of that year. They regained afterwards the uptrend to high levels until Chart 35: Prices of palm oils, US $ per ton CPO, all, cif N.W Europe CPO, Indon. fob Palm olein RBD, Mal. cif Rott. Palm stearin RBD, Mal. cif Rott. With several importing countries recording a slowdown in consumption caused by the persistent global macro-economic uncertainties and recession fears, lower petroleum prices, and a good soybean season in view, crude palm oil prices may loosen at least at the beginning of Afterwards they are however likely to trend upward due to bullish demand fundamentals and a rising demand from the biofuel industry, in particular if sugar prices may increase and soybean and rapeseed crops may be affected by adverse climatic conditions. 83

85 PART FOUR: BIOFUELS AND PALM OIL- BASED BIODIESEL 1. Definition and key issues Biofuels are defined as fuels composed of, or produced from, biological raw materials (as opposed to petroleum fossil fuel). Biodiesels are fuels similar to the heavy mineral oil used as fuel in diesel engines; they can be used in standard diesel engines alone, or blended with fossil diesel. Biodiesels consist of long-chain alkyl esters (methyl, propyl or ethyl) and are obtained by processing vegetable oils or animal fat. The two terms are often used alternately. Biodiesels manufacture encompasses the production of feed stocks, followed by processing to liquid biodiesel. A variety of feed stocks can be used for biodiesels manufacture, including vegetable oils which are already major cash crops used in food, cosmetics and chemical industries and as fodder (palm, soybean, rapeseed, corn, rice bran, jatropha, camelina 96, etc.), recycled oils and greases or animal fats (tallow or by-products of the production of omega-3 fatty acids from fish oil). As products, plant based biodiesels lie at the interface between agriculture and energy sectors, being therefore considerably more regulated than the input commodities. Yield efficiency is one of the factors determining the competitiveness of various biodiesel feed stocks and their commercialisation potential over the next decade. From this point of view, palm oil is by far the most advantageous feedstock (yielding 4752 litres of biodiesel /ha), followed by coconut oil and far behind by rapeseed oil (955), Chinese tallow (910), soybean ( ) and sunflower (750). Several economic and environmental factors led to the growing interest in alternative sources of energy including biodiesels, the most important being the decreasing reserves and rising costs of petroleum. Government policies, mandatory targets and financial incentives provided to private sector (subsidies and tax breaks) for the use of biodiesels are creating an artificial demand on the corresponding crop feed stocks. Following are the policy arguments most often presented for the promotion of biodiesels: Mitigation of climate change although growing concern and doubts are expressed on both the greenhouse gas emissions and the effectiveness of large-scale use of land to cultivate oilseed for biodiesel. According to calculations by the European Commission 97, greenhouse gas emissions from palm oil-based biodiesel are the highest among major biofuels when the effects of deforestation and peat lands degradation are considered. Emissions estimates, which haven't been officially released, have important implications for the biofuels industry in Europe. Likewise, the USA Environmental Protection Agency considers that palm oil-based biodiesel does not meet the requirements of its renewable fuels program because its greenhouse-gas emissions are too high. This means that palm oil-based biodiesel producers would be unable to break into US markets and compete with soybean and 96 Jatropha curcasis is a plant from the Euphorbiaceae family that can grow in marginal lands (similar to castor beans). Camelina sativa belongs to Brassicaceae family (similar to mustard and rapeseed)

86 rapeseed oil-based biodiesels. In addition, cultivation of oilseeds for biodiesel manufacture may compete with their food use, inducing pressure on food supply and prices Energy security with fossil fuel prices around or above 100 US $/barrel and uncertainty of supplies in the long term, biodiesels could be alternative or complementary fuel sources contributing to increased energy security and the reduction of petroleum import bills Rural development land use for the cultivation of biodiesel feed stocks, although involving public subsidies, could provide better incomes and food security for farmers, along with value addition when processing facilities are neighbouring farms areas 98 Export development biodiesels are an opportunity to diversify export markets for countries with favourable land endowments and labour and trade conditions. 2. Current market situation Biofuels policies Government policies are the key drivers of expanding biodiesel markets and, implicitly, the demand for feed stocks including palm oil. The decisive impact of governmental policies is best illustrated by the evolution of biodiesel production and demand in the European Union, but the situation is similar in many countries and several other examples are found in the table in Annex II. Biofuel production in European Union was triggered by two policy instruments used in the frame of the Common Agricultural Policy (CAP) 100, namely the land set-aside scheme launched in 1992 with a view to limit rising production and stabilize decreasing prices of food products, and the energy crop scheme linked to the creation and deployment of the biofuel industry. Farmers were required to set aside 10 per cent of the land on which they were allowed to grow crops as long as they were solely destined to non-food uses, and were paid 45 Euros per ha if the crops were used for energy. These policy instruments are now abandoned and replaced by tax reliefs and the obligations to blend. Specific policy measures used according to country s specific conditions include support to purchasing and maintain cars able to utilize biodiesels. In Sweden, individuals who buy new eco-friendly cars receive a subsidy of nearly 10,000 Euro; notably, at least 85% of passenger cars purchased or leased by the State are targeted to be eco-friendly. A wealth of up-to-date, detailed information about EU biofuels policy, legislation, standards and certification is available at European Biofuels Technology Platform (see 98 Palm oil produced in Indonesia and Malaysia is partly processed locally to biodiesel. The largest part is however shipped as crude palm oil to Dutch and German refineries for biodiesel manufacture. As transport costs become prohibitive, export of palm biodiesel may prevail over the export of crude palm oil. 99 See Global Biodiesel Production and Market Report at report 100 The Common Agricultural Policy - CAP is a system of EU agricultural subsidies and programmes with an annual budget amounting to about 53 billion Euros. Over 70% of CAP of the CAP budget goes to direct payments for farmers, some 20% is spent on rural development measures and the remaining is given out to food companies as export subsidies. In September 2011, the European Commission proposed overhauling the CAP and suggested shifting a greater part of the funding to the Eastern European member states. The new policy directions are now being debated between the European Parliament and the EU's 27 member states in view of an expected approval by end The annual budgets after the 2013 reform are expected to fall by some 36%. 85

87 European biodiesel policies for green fuels are currently questioned following studies claiming that the cultivation of rapeseed, palm and soybeans as feedstock for biodiesel is worse for climate than the use of regular diesel and the economics of the production of biodiesel could only be supported by subsidies. 2.2 Production and consumption World biodiesel production is estimated to have doubled from 9.3 million tons in 2007, to 18.8 million tons in (see Chart 36). 25 Chart 36: World production of biodiesel by types of feedstock, millions tons Palm oil Other feedstocks Total Sources: F.O. Licht 102, USDA; ISTA Mielke Palm biodiesel, which is a palm oil methyl ester, is obtained by esterification of palm oil feed stocks 103 with methanol. Global palm biodiesel output rose trebled from 1.3 million tons in 2007 to 3.9 million tons in It accounted for 14 per cent of the total biofuels produced in 2007 and for 21 per cent in Production of biodiesels manufactured from all other feed stocks (corn, sugar, other vegetable oils, biomass, etc.) increased during the same period from 8 million tons to 14.9 million tons. The producers of palm biodiesel are European Union, Indonesia, Thailand, Colombia and Malaysia (see Chart 37). Oil World estimates that 41 per cent of the global biodiesel production in 2011 was obtained in the European Union, 31 per cent in South America (mostly Argentina and Brazil), 14 per cent in the North and Central America and 12 per cent in Asia. European Union is world leading biodiesel producer. According to the European Biodiesel Board, EU produced approximately 9 million metric tons of biodiesel in In July 2010, some 245 biodiesel plants existed in the EU, located mainly in the Netherlands, Germany, France and Spain. 101 Over the same period, the total vegetable oils production rose from about 155 to 184 million tons. 102 F.O. Licht - World Ethanol and Biofuels Report 103 Palm biodiesel feedstock mix in Malaysia consists of 26 per cent CPO, 49 per cent RBD palm oil, 16 per cent palm stearin and 9 per cent other palm oil derivatives. 86

88 The European Biodiesel Board estimated the European Union biodiesel production capacity in 2011 at 22.1 million tonnes. However, many plants are closed or idle, the total rate of utilisation of installed capacities averaging only 44 per cent. Chart 37: Producers of palm biodiesel, million tons Indonesia Malaysia Thailand Colombia EU Sources: F.O. Licht, USDA; ISTA Mielke The excessive under utilisation rate is due to lack of price competitiveness of production based on locally available feed stocks, poor rapeseed crops, unfair trade practices 104, and the recent questioning of the green biofuels policies 105. As a result, palm biodiesel from Indonesia and Malaysia became more price-attractive. The lack of price competitiveness of imported palm oil conversion to biodiesel in Europe has resulted in increased quantities of palm biodiesel from Asia mostly Indonesia. European Union share dropped from 69 per cent of the world palm biodiesel output in 2007, to only 39 per cent in 2011 (see Charts 38 and 39), while the Malaysian production decreased from 8 per cent to 3 per cent. Indonesian shares more than doubled, from 15 per cent in 2007 to a third of the world output in 2011, while Thailand s incipient production in 2007 rose to 15 per cent of that last year. The performance of Malaysian biodiesel industry, based in near totality on palm oil feed stock, is being hammered by limited and stagnant domestic demand, strong crude palm oil prices versus of subsidised petroleum-based fuels, and stiff competition from Indonesian supplies in export markets 106. A majority of the plants are idle, not being fully economically 104 In 2007, the profitability of EU biodiesel producers was negatively affected by U.S. biodiesel imports; anti-dumping and countervailing measures were taken by the European Commission in 2009 to address this problem. A recent flood of soybean oil-based biodiesel imports from Argentina is now causing economic profitability prejudices to EU biodiesel producers. Spain's Association of Renewable Energy Producers issued recently a report stating that 60 per cent of the biodiesel utilized in Spain during the first quarter of 2010 was comprised of imports, coming mainly from Argentina. Rising imports, especially from Indonesia, also threaten to create trade friction, with allegations of unfair prices as palm oil and palm oil - based biodiesel is sold in the domestic Indonesian market at prices higher than the price of exports to Europe 105 Recent studies claim that the cultivation of rapeseed, palm and soybeans as feedstock for biodiesel has worse effects on climate than the use of regular diesel and the economics of the production of biodiesel could only be supported by subsidies. 106 In 2011, Malaysian biodiesel exports declined to 49,999 tons, compared to 89,609 tons the previous year and with Indonesia's exports at 1.37 million tonnes. 87

89 viable, and palm oil producers, most often also biodiesel manufacturers, obtain now higher returns selling CPO rather than refining the oil for biodiesel. EU 69% Chart 38: Major producers of palm biodiesel in 2007 (World total 1.3 million tons) Indon. 15% Malay. 8% EU 39% Chart 39: Major producers of palm biodiesel in 2011 (World total 3.9 million tons) Indones. 33% Thail... Colomb. 8% Colomb. 10% Thailand 15% Malaysia 3% Indonesia turned into a net petroleum importer and adopted policies for large-scale biodiesel manufacture, although having been previously an OPEC member country. The steady growth of the Indonesian production was made possible by a large array of strong incentives including tax exemptions, facilitated conditions for investment, direct subsidies to manufacturers, the establishment of contract farming schemes between industry and smallholders, the introduction of blending mandates which create a captive market for biofuels, and the introduction of a differenced export tax for crude palm oil to palm oil derived biodiesel 107. The country adopted since 2010 the set-up of food and energy estates, adding a biodiesel component to industrial plantations of oil palm. It is interesting to note that palm biodiesel is also penetrating into Latin America where, with the exception of Colombia, the traditional biofuel feed stocks are sugar and soybeans. The Brazilian mining conglomerate Vale S.A., operating already a palm oil plant supplying the food sector, is implementing a 500 million dollars project for the set - up of forest-cleared oil palm estate and the building of processing plant 108 and the conversion of palm oil to biodiesel by Trade Malaysian exports of palm biodiesel dropped by 42 per cent, from tons in 2010 to tons in 2011; the main reason is the lack of competitiveness. Export-wise, Malaysian local palm biodiesel is facing duty differential disadvantages when compared with Indonesia and Argentina, which have drastically affected the exports. Major export markets were EU, Taiwan and South Korea. With domestic production not increasing in the near future, exports should continue falling. Indonesia has been incentivising its biodiesel sector through a lower differential duty structure on its crude palm oil feedstock, to encourage local palm biodiesel production and 107 In 2011, 23 companies with an installed capacity of about 4 million produced palm biodiesel, while other companies with a combined capacity of about.3 million tons produced bioethanol from molasses and cassava, The price difference of Euros per ton of palm methyl ester compared to crude palm oil price promotes the local conversion to biodiesel, instead of exporting CPO for conversion in Europe. 108 See 88

90 blending. The country produced 1.3 million tons of palm biodiesel in 2011, out of which one million tons (77 per cent) were exported to the European Union. The remaining was shipped to China, Peru, Thailand, Australia and Korea. The Association of biofuel production Indonesia (APROBI) estimated that in 2012 production of palm biodiesel may reach 2.1 million tons, of which 1.5 million tons (71 per cent) could be exported. Trade in biofuels is heavily influenced by policies. If support policies such as mandatory blending tend to not distort trade, not distinguishing between domestic and imported biofuels, other policies such as fuel tax reductions, import tariffs and taxes and producer subsidies protect domestic production at the expense of foreign-produced biofuels. As already mentioned in subchapter 2.3.2, border protection through high tariffs and quota restrictions is an inexpensive way of protecting domestic producers liberally used by governments. Import and export taxes on palm biodiesel applied in the European Union and Indonesia respectively are shown in Annex IV. Tables 9 and 10 show the recent evolution of biodiesel imports into the European Union and the USA by types of feed stocks, correlated with the level of tariffs. They reflect the incidence of import tariffs on both the global volume of trade, and the type of feed stocks used in the production of biodiesels. Table 9: EU imports of biodiesel by type of feed stock and corresponding tariffs ad valorem, 2008 to 2011 (1000 tons) Feed stocks Mainly soybean oil Tariff 2008 Tariffs as of July 2009 Tariffs as of May 2011 USA % ADD 1,CVD 1 ADD 1,CVD 1 Argentina % 0% 0% S/total n.a n.a n.a Mainly rapeseed oil Canada % 6.50% ADD 2, CVD 2 Mainly palm oil Indonesia % 0% 0% Malaysia % 0% 0% Singapore % 6.50% 6.50% S/total n.a n.a n.a Others n.a Total n.a Sources: Eurostat data bases, USDA/ FAS 2011 ADD 1 : Anti-dumping duties of 68.6 to 198 Euro/ton depending on company CVD 1 : Countervailing duties of to 237 Euro/ton depending on company ADD 2 : Anti-dumping duties of Euro/ton CVD 2: Countervailing duties of 237 Euro/ton n.a: not applicable 89

91 Table 10: USA imports of biodiesel by type of feed stock and corresponding tariffs ad valorem, 2006 to 2011 (1000 tons) Feed stocks Current tariffs Mainly soybean oil Argentina % Mainly rapeseed oil Canada % EU % S/total Mainly palm oil Indonesia % Malaysia % Singapore % S/total Others n.a Total n.a Sources: USDA/FAS 2011, United States International Trade Commission, 2011 n.a: not applicable 2.4 Pricing Biodiesel developments depend on their price parity with petroleum-based fuels. The 2007/2008 petroleum crisis set into light the fact that even when petroleum prices soared over 130 $/barrel, production costs of biodiesels from various feed stocks remained higher, the European rapeseed-based biodiesel being the most expensive. Despite the important and growing demand for biodiesel for transportation, access to inexpensive feed stocks and financing hurdles are challenging barriers to its production, which should keep pace with target blending mandates. In general, feed stocks represent 70 to 80 per cent of the cost of biodiesel production; a palm-based biodiesel industry is beforehand a viable option for Indonesia and Malaysia. However, during high crude palm oil prices, companies have to cut production and wait for feedstock price to moderate 109. At times, some of them have no choice but to run the plants at no profit margins to honour old export contracts. In 2009, for example, both Malaysian and Indonesian palm biodiesel industries suffered, and almost collapsed, due to negative margins. Regulation of prices following the international market prices and subsidies helped the industries to regain positive margins since The following Chart 40, sourced from the Malaysian Palm Oil Board documentation, illustrates this remark. Palm biodiesel manufacturers can mitigate the situation by seeking a cheaper alternative feed stocks, such as RBD palm stearin, take advantage of forward pricing when favourable, and for a long term enhancement of viability adopt a vertical integration approach. Malaysia, for example, started manufacturing value added products from palm oil 109 It is estimated that in 2011 the lowest conversion cost of RBD palm oil into palm biodiesel averaged 130 $ per ton. 90

92 methyl esters, such as phytonutrients (carotenoids), phytosterols (used as food additives, pharmaceutical or cosmetic ingredients) or phospholipids. At present, unless it is subsidised, the manufacture of palm biodiesel is economically a marginal activity at the best. Palm biodiesel manufacturers who also own large plantations have well integrated supply chains and are vertically integrated are better off. Chart 40 Source: MPOB Dr Choo Yuen May and Dr Harrison L.N. Lau, IEA Bioenergy Task 40, ERIA workshop, Tsukuba, Japan, October Major concerns Food security and possible detrimental increases in agricultural commodities prices may be triggered by the growing production and use of biofuels, driven by the accelerated increase in demand energy crops may divert too much of cropland to fuel feed stock production. Threatening of environmental advantages and positive greenhouse benefits of using biofuels entrained by increasing biofuels demand is expressed by the environmentally unfriendly increase in water and pesticides use for their manufacture The significant costs related to sustainability certification will probably be higher for smallholders in developing countries as opposed to industrial countries Ability to effectively participate in standard development processes and the risk of domestic producers playing an overlarge role in the establishment of sustainability requirements are a major concern for developing countries Evaluation of macro effects of biofuels production and the balance between the comprehensiveness of sustainability certification criteria included in multiple schemes and the technical and administrative feasibility of their application will involve lengthy and subjective processes which may disturb trade 91

93 WTO jurisprudence is doubtful to consider favourably product differentiation based on environmental considerations and on how the products including biofuels are made and comply with food security, labour rights or rural development. In addition, biofuels certification schemes developed by private bodies may be considered private marketing schemes out of the scope of WTO rules. 4. Sustainability certification developments A variety of initiatives to set biofuels standards and develop sustainability certification 110 schemes have been, or are being developed by various stakeholders. The aims and definition of sustainability certification schemes depend on the interests of stakeholders who established them. 4.1 Key stakeholders involved in the development of sustainability certification schemes Numerous certification initiatives and schemes undertaken or in various stages of development are the work of the four categories of stakeholders enumerated below, with various - and at times contradictory interests. National Governments and regional groupings There are a number of countries involved in biofuels certification, including palm biodiesels, namely Belgium, Brazil, Canada, Indonesia, Malaysia, the Netherlands, Switzerland, the United Kingdom and United States. On the supranational level, the European Commission and ASEAN are also active in establishing policy frameworks for biofuels certification, setting sustainability criteria and measures related to blending targets, as well as support schemes and tax relief. Companies While governments and international actors tend to have a broader view of sustainability certification, corporate initiatives tend to focus on their own sectors and interests which motivate the definition of their own voluntary standards and certification schemes. Companies involved among other things in biofuels supply chain are active in discussions of biofuel sustainability certification. They have acquired experience in certification through company-specific certification and pilot studies and promote inter-company coordination and cooperation in providing governments and international initiatives with their points of view on the development and implementation of sustainability criteria and certification schemes. For example, Cargill B.V. Cefetra traders and biofuels and the bank Rabobank International are among the members of the Dutch Sustainable Production of Biomass project group111. Likewise, Unilever, Cargill B.V. and BIOX Corporation112 are RSPO members and joined also Green Gold Label programme for energy generation. British Petroleum participates in RSPO and Shell asks suppliers to incorporate supply contract 110 Certification is a procedure by which a third party gives assurance that a product, process or service is in conformity with certain standards. In other words, it ensures to buyers that suppliers are complaining with certain standards; the label indicating that compliance with standards has been verified is a form of communication with end consumers. 111 See Company involved in renewable energy that designed, built, owns and operates a 67 million litre per annum nameplate capacity biodiesel production facility in Hamilton, Ontario, Canada. 92

94 clauses that ensure biofuel components are not knowingly linked to violation of human rights and sustainable feedstock specific multi stakeholders initiatives. Food conglomerates such as Nestle, Kellogg or Unilever are also members of RSPO and claim using sustainable palm oil in the manufacture of their products. Non-governmental organisations Many NGOs are concerned by the fact that biofuels are viewed in an overly positive light and that policy makers do not fully recognise and consider the disadvantaged created by the expansion of biofuel industry expansion on food security, biodiversity, water and soil management and the fact that greenhouse gases emission savings are mot evaluated in terms of the life cycle of the products. They are participating in sustainability networks and round tables and undertake research and pilot projects on the application and impact of sustainability criteria and the feasibility of certification schemes in developing countries. World Wildlife Fund (WWF) and the Forest Stewardship Council (FSC) are particularly involved in palm biodiesel sustainability. However, NGOs have expressed different positions on the specific criteria to be included in certification schemes and didn t yet reach a consensus on the priority and the level of detail to be given in these criteria. International bodies, organisations and initiatives Their work in the area of sustainability certification ranges from policy guidance to principles and criteria development. In the policy field there is however some overlap of interests and complementary initiatives. UN-Energy Knowledge Network is an interagency mechanism aiming at promoting coherence within the United Nations family of organizations in the energy field and to develop increased collective engagement between the United Nations and other key external stakeholders. Following the 2002 World Summit on Sustainable Development, UN-Energy published the document Sustainable Bioenergy: A Framework for Decision Makers 113 stating the need for an international certification scheme ensuring that bioenergy is produced by most sustainable methods and includes the verification of their entire life cycle, in particular for biofuels. UNCTAD launched the Biofuels Initiative in 2005, seeking to provide technical analysis of issues related to biofuels production and trade and their impact on member countries. The analysis of labelling, certification and other market instruments are included in the core mandate of the agency, which provides support to policy makers from developing countries on these considerations related to biofuels. Food and Agriculture Organisation of UN - FAO launched in 2006 the International Bioenergy Platform (IBEP). The agency started since 2007 the work on developing an analytical framework to assess the implications of different types of energy systems in the food security context, supporting the formulation of national strategies. United Nations Environment Programme (UNEP) is involved in the Roundtable on Sustainable Biofuels (RSB) which pursues a multi-stakeholders approach in developing international environment sustainability schemes for bioenergy products. In collaboration with Daimler-Crysler, WWF and the Ministry of Agriculture of Baden Wuertemberg, UNEP published a document reviewing the existing sustainability certification systems and 113 At 93

95 overviewing the certification labels including bioenergy and palm oil agricultural and trade labels. Global Bio Energy Partnership (GBEP) was launched in 2006, during the 14 th session of the Commission on Sustainable Development by co-opting the G8 members, several other governments, intergovernmental organisations and some private sector associations. The partnership is developing and harmonizing methodologies for measuring the greenhouse gas impacts of biofuels. In 2008, GBEP has established a task force on sustainability aiming at developing a voluntary framework of international sustainability principles for bio energy. IEA Biotechnology Task 40 on International Sustainable Bioenergy Trade 114 investigates the requirements for the creation of a commodity market for bioenergy and the development of certification system for sustainable bioenergy trade. Until now, the participants have been mainly involved in research, case studies, country specific analysis and the collaboration with other international initiatives and roundtables. International networks and roundtables Roundtable on Sustainable Biofuels (RSB) is the initiative launched by the Ecole Polytechnique Federale in Lausanne, Switzerland. Its objective is to bring together farmers, companies, NGOs, governments and intergovernmental agencies, as well as individual experts concerned with ensuring the sustainability of biofuels production and processing. In 2007, RSB released its Draft Global Principles for Sustainable Biofuels Production, indicating the ideal scenario towards which stakeholders should be progressing, and has created Expert Advisory Groups trying to reach consensus on controversial issues. The Roundtable on Sustainable Palm Oil (RSPO) is a multi-stakeholders platform promoting production, use and trade in sustainable palm oil. Out of the 948 members in 2011, 36 per cent are were palm oil processors and traders and consumer goods manufacturers, 17 per cent are oil palm growers, 7 per cent are retailers and the remaining 4 per cent are environmental, social or development NGOs, banks and investors. The stakeholders have established a set of principles and criteria for sustainable palm oil production and certification, certification bodies and a trademark (see In August 2011, production of RSPO certified palm oil reached 5 million tonnes, equivalent to 10 per cent of the global palm oil production. 4.2 Conclusions and implications for developing countries Current and foreseen high petroleum prices and the increasing pressure to mitigate climate change effects are expected to sustain interest and market demand for biofuels and enhance their production and international trade. The effects of the climatic changes and of high petroleum prices fuelled the promotion of biofuels, but meanwhile opened the door to protectionist abuses by farmer lobbies and companies in several countries to secure high levels of subsidies for domestic biofuel producers. In order to ensure the positive contribution towards sustainability goals without having disruptive impact on international trade, certification schemes should be developed through a participatory process involving producers, processors and traders from different countries and regions involved. They should be based on scientific evidence and include quantitative criteria and indicators, as macro level concerns would be difficult to evaluate with reference

96 to a single product. Certification should not involve unnecessary costs and should not disturb or delay international trade. Engagement in sustainable production of biofuels and the compliance with certification criteria would need to be sustained by support measures, addressing especially smallholders in developing countries. Trade in palm biodiesel is already affected by the need to ensure socio-economic and environmental sustainability along the entire supply chain, and the issue of sustainability certification. From 2012 onwards, several voluntary certification schemes set up by industry and associations and recognised in importing countries will be in use simultaneously with mandatory, government-led and industry-controlled sustainable palm oil schemes of Indonesia (ISPO) and Malaysia (MSPO). 95

97 LINKS A selection of African country reports are accessible at «Agrimonde Scénarios et défis pour nourrir le monde en 2050», Edition Quae, décembre 2010, Africa: Palm Oil Fuels Land Grabs in Africa, 15 September 2011, Agra-net.com, On line home of Agra Informa, leading information portal on soft commodities, agriculture and food policy, markets and trade, Agropalma (Brazil), AIFO-UEMOA, Association des Industriels de la Filière Oléagineuse de l Union Economique et Monétaire Ouest Africaine, AIPH - Association Interprofessionnelle de la filière Palmier à huile en Côte d Ivoire, Provides prices of palm fruit bunches and palm oil American Palm Oil Council (APOC), Biofuels and Commodity Markets - Palm Oil Focus, FAO 2006, Biodiesel magazine, Biodiversity and Agricultural Commodities Program (BACP), Fintrack, +Sustainability/Sustainable+Business+Advisory+Services/Biodiversity_BACP BMD - Bursa Malaysia Derivatives, world s largest derivative exchange operates most liquid and successful crude palm oil futures contract in the world, 2.html Chicago Mercantile Exchange (CME), The CME Group exchanges are world leading and most diverse derivatives marketplace, offering a wide range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, weather and real estate. CME Group brings buyers and sellers together through the CME Globex electronic trading platform and trading facilities in New York and Chicago. CME Group also operates CME Clearing, one of the largest central counterparty clearing services in the world, which provides clearing and settlement services for exchange-traded contracts including crude palm oil. Commod@frica, Provides on line information on African commodities EC, First EU sustainability schemes for biofuels get the go-ahead, press release, 19 July 2011, 96

98 EC, Prospects for agricultural markets and income in the EU: , December 2010, EC, Prospects for agricultural markets and income in the EU: , December 2010, Economic Overview of the ECOWAS Region, Price Waterhouse Cooper, 31 October 2011, E-guide of tropical oils industry, EU 27 Biofuels Annual 2011, GAIN report no. NL 1013, ue_eu-27_ pdf European Biofuels Technology Platform, European Industrial Bioenergy Initiative EIBI, One of the industrial initiatives launched under the Investing in the Development of Low Carbon Technologies (SET plan) European statistics: Export helpdesk Executive Brief Update 2011: Oil crops sector, Executive Brief Update 2011: Oil crops sector, Executive Brief Update 2011: Oil crops sector, Fedepalma (Colombia), Federal Institute of Industrial Research, Oshodi (FIIRO), Federation of Oils, Seeds and Fats Associations Ltd, FEDIOL, (The EU Federation of the Oil and Protein Meal Industry) FENACOPAH-CI, Fédération Nationale des Coopératives des Planteurs de Palmier à Huile de Côte D'ivoire, FER-PALMIER, Fonds d Extension et de Renouvellement pour le Développement de la culture du Palmier à Huile en Côte d Ivoire, Food & Agriculture Organisation of the United Nations (FAO), The Trade and Markets Division of FAO monitors global affecting trade in agriculture, provides analytical and policy relevant information and maintains a comprehensive market intelligence service of the main agricultural commodities (see It issues Food Outlook, Crop Prospects and Food Situation, Global Food Price Monitor, FAO Food Price Index (Food Outlook on line at 97

99 Germany s biodiesel sector has now to document its sustainability UFOP, Feb. 2010, =en-us Globalising Crude Palm Oil Futures - Bursa Malaysia, nloads/bursamalaysia-cme-cpo_global_eng.pdf Global Market Challenges: Impact on Palm Oil and Other Vegetable Oil, Dr Yusof Basiron, Nov 2011, Oil-and-Other-Vegetable-Crop.pdf Global Oils and Fats Business Magazine is Malaysian Palm Oil Council's effort in disseminating information related to the global oils and fats market specifically the palm oil industry, offering news, market insights, price information, etc., GreenPalm Provides palm oil price bids up to How to Feed the World in 2050, FAO, _2050.pdf Indonesia Biofuels Annual 2011, GAIN report no. ID 1134, nesia_ pdf International biodiesel markets - Developments in production and trade, ECOFYS, 2011, Is palm oil a kernel of development for African countries like Liberia? - 8 March IPGRI - Indian Oilseed and Produce Export Promotion Council (IOPEPC), Initiative for Public Policy Analysis Nigeria, Institute for European Environmental Policy - Studies on European policy, International Finance Corporation, International finance corporation, Key Sustainability Issues in the Palm Oil Sector, IFC study by CH Teoh, 2010, cussion+paper_final.pdf International Food Policy Research Institute, web page on Bioenergy resources 98

100 Key Sustainability Issues in the Palm Oil Sector - Quick View IFC study by CH Teoh, 2010, cussion+paper_final.pdf Malaqysia Biofuels Annual 2011, Gain report no. MY 1006, mpur_malaysia_ pdf Malaysian Palm Oil Board (MPOB), Malaysian Palm Oil Council (MPOC), New strategy to boost palm oil production, Nigerian Institute for Oil Palm Research, Official Journal of the European Union, Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources, Oil world (ISTA Mielke GmbH - It is an independent forecasting service for oilseeds, oils and meals, providing primary information and professional analysis on subscription Palm oil giants target Africa in 'land grab' following Indonesia deforestation ban, 25th March, 2011, nd_grab_following_indonesia_deforestation_ban.html Palm Oil HQ, Leading online source of Palm Oil industry news, information, stocks and prices Palm Oil Industry Prepares For Rocky 2012, Thomson Reuters, Dec. 2011, ares%20for%20rocky% pdf Palm Oil Refiners Association of Malaysia (PORAM), Palmindustrie Côte d Ivoire, Branch of SIFCA, involved in the cultivation, processing and marketing of Crude Palm Oil PalmOil.com, - Leading one-stop centre for palm oil education and information on palm oil industry and trading, providing a large palm oil B2B directory with over 10,000 registered companies Perspectives agricoles de l OCDE et de la FAO », OCDE, FAO, juin 2011, Policies to Support Biofuels in Europe: The Changing Landscape of Instruments - Augusto Ninni, The journal of agro biotechnology management and economics, Volume 13, Number 2,

101 Public Ledger, Rabobank, - Rabobank Group is an international financial services provider operating on the basis of cooperative principles, offering rural and retail banking, wholesale banking, asset management, leasing, real estate and insurance services. Roundtable on Sustainable Palm Oil (RSPO) - News report 2011 available at Rural Hub (The), Site assisting West and Central African stakeholders, provides advisory support, expertise information and promotes consultations on issues concerning rural development and food security Small-scale palm oil processing in Africa, FAO agricultural services bulletin 148, Sustainable Palm Oil: Good Agricultural Practice Guidelines - Unilever, 2002, This guide has been developed under the Unilever Sustainable Agriculture Initiative to support sustainable management practices for palm oil production. Ten indicators of sustainability have been identified, each with specific good agricultural practice recommendations: Soil Fertility, Soil Loss, Nutrients, Pest Management, Biodiversity, Product Value, Energy, Water, Social as well as Human Capital and Local Economy. SIFCA, Leading African agribusiness group involved in the cultivation, processing and marketing of palm oil Sime Darby Proposes African Palm Oil Plantations, February 28, 2011, Thailand Biofuels Annual 2011, GAIN report no. TH 1088, ailand_ pdf Transport Information Service (TIS) - German Insurance Association (GDV e.v.), provides specialised information on various aspects of the packaging and sea transport of palm and palm kernel oils, USDA - United States Department of Agriculture, It is the US federal executive department responsible for developing and executing US federal government policy on farming, agriculture and food. Agency reports on oilseeds/oils/meals available at Oilseeds: Word Markets and Trade report at USDA GAIN report Indonesia Biofuels annual 2011, 19 August nesia_ pdf USDA GAIN report Malaysia Biofuels annual 2011, 3 August

102 mpur_malaysia_ pdf West-African Market Information Network on line, World Bank s Strategy for Palm Oil Shouldn t Curtail Economic Freedom, June 30, 2010, World Bank s Strategy for Palm Oil Shouldn t Curtail Economic Freedom, June 30, 2010, World Bank s Strategy for Palm Oil Shouldn t Curtail Economic Freedom, June 30, 2010, World Trade Organisation, Tariffs on line at the SPS Information Management System (SPS IMS) at Technical Barriers to Trade Information Management System (TBT IMS) at Regional Trade Agreements (RTAs) Database at 101

103 ANNEX I EXPLICATIVE GLOSSARY Biofuels Biodiesel Bull Market Are liquid fuels manufactured from biomass, used for transport or heating Is a liquid fuel which can be used in pure form in specially adapted vehicles, or blended with automotive diesel. It is produced usually produced from vegetable oils such as soybean, rapeseed, palm, sunflower, coconut or jatropha, or from animal fats, tallow and waste cooking oil. A second generation of biodiesel technologies yields biodiesel from wood and straw. A third generation of biodiesel technologies will use oils from algae. Biodiesel can be mixed with petroleum diesel in any percentage, from 1 to 99, which is represented by a number following a B. For example, B5 is 5 % biodiesel with 95% petroleum, B20 is 20 % biodiesel with 80 % petroleum, or B100 is 100 % biodiesel, no petroleum. A financial market of a group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities. Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue. It's difficult to predict consistently when the trends in the market will change. Part of the difficulty is that psychological effects and speculation may sometimes play a large role in the markets. If the trend is up, it's a bull market. Bear Market A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20 % or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market. If the trend is down, it's a bear market. Fatty acids A large group of organic acids, especially those found in animal and vegetable fats and oils, mainly composed of long chains of hydrocarbons ending in a carboxyl group. A fatty acid is saturated when the bonds between carbon atoms are all single bonds. It is unsaturated when any of these bonds is a double bond. Essential fatty acids are unsaturated fatty acids which are essential to human health, but cannot be produced by the body. Fundamentals Term used to refer to physical or economic matters, such as weather or changes in supply and demand, as opposed to price. Trans-fat Is the common name for unsaturated fat with trans-isomer fatty acids. Trans fats are sometimes monounsaturated (one double-carbon bond) or polyunsaturated (several double carbon bonds), but never saturated (none). They are rarely found in living nature, but can occur in food production process, such as the partial hydrogenation of vegetable oils. They extend the shelf life of food and also add a certain pleasing mouth-feel to all manner of processed foods. The consumption of trans fats increases the risk of coronary heart disease by raising levels of LDL (Low Density Protein) cholesterol and lowering levels of "good" HDL (high Density Protein) cholesterol. 102

104 In 2006, a study supported by the National Institutes of Health and the USDA Agricultural Research Service concluded that palm oil is not a safe substitute for partially hydrogenated fats in the food industry because it provokes adverse changes in the blood concentrations of LDL cholesterol just as the other trans-fat do (reference to hydrogenated soybean oil the oil produced and exported by the United States and supported by one of the strongest national lobbies). Since then, health authorities worldwide recommend that consumption of trans-fat be reduced to trace amounts and mandatory food labelling and listing of trans-fats content was introduced in 2007 in several countries. Faced with the prospect of an outright ban on sale of their products, several large food manufacturers and retailers in the United States and the European Union reformulated them voluntarily for eliminating trans-fats and reaching "zero grams trans fats per serving" definition, that is less than one gram per tablespoon, or up to 7% by weight, by boosting the saturation and then cutting the resulting solid fat with oils. In practice, they produce/use/market non-hydrogenated oils and fats made from corn, canola, and soy oils for margarines, shortenings, bakery, confectionery and other food products. Currently, trans-fat free palm oil products are produced and marketed in Asia and aggressively penetrate in the US and European markets as substitutes for a part of the non-hydrogenated oils and fats made from corn, canola, and soy oils used by food industries. 103

105 ANNEX II FINANCIAL INVOLVEMENT OF FOREIGN GROUPS AND CORPORATIONS IN PALM SECTORS IN NIGERIA, LIBERIA AND CÔTE D IVOIRE The reliability of oil palm crop, the favourable economics of production and the increasing demand for palm oil are boosting supply needs, however the expansion of oil palm plantations in Malaysia has reached a natural ceiling, and Indonesian oil palm growth is being slowed by moratoriums on forest clearance. Therefore, major Asian investors and corporations involved in oil palm plantations and processing, together with food manufacturers and commodity traders, are competing for the acquisition of palm oil assets in South East Asia and beyond. For example, Archer Daniels Midland Company, one of world largest processors of oilseeds into products for food, animal feed, industrial and energy uses, is investing in sustainable palm oil biodiesel production in Brazil. Bunge Agribusiness Singapore Pte, a wholly owned subsidiary of Bunge Ltd - a leading agribusiness and food company with integrated operations stretching from the farm field to the retail shelf, is acquiring 35% minority stake in Indonesian BRI (PT Bumiraya Investindo), which is the Indonesian palm plantation subsidiary of the multinational food producer TPS Food headquartered in Jakarta. They are increasingly investing in Africa too, because in addition to existing plantations - most of which are low yielding, Africa offers suitable land available at prices lower than in Asia. Costs of plantation management are more or less similar to Asia, but African labour is cheaper and the corporate taxes on plantation profits are much lower than in Asia. The lower African palm oil yields in comparison with Asia are compensated by the existing regional market fuelled by the fast rising demand for vegetable oils. West Africa in particular is a net importer of vegetable oils; their price on domestic markets is very high due to costly maritime transport and duties imposed on imports. The upstream moving of foreign investors, in particular Asians, is affecting directly palm industries in ECOWAS region. The following developments set into light the importance of foreign financing and intervention in the palm oil development in several ECOWAS countries. Nigeria According to The Guardian, the Asian leading agribusiness group Wilmar International Limited, headquartered in Singapore and involved in oil palm cultivation, oilseeds crushing, edible oils refining, specialty fats, oleo chemicals and biodiesel manufacturing, established by the end of 2011 a joint venture with PZ Cussons Nigeria Plc., a subsidiary of PZ Cussons Plc. Consumer Products Group based in the UK. The joint venture is structured as two companies: a branded product company (PZ Wilmar Food Ltd) and a palm oil refinery (PZ Wilmar Ltd) with equities shared equally between the two partners. An investment of 6.5 billion US $ was made in Cross Rivers State for the purchase of land for oil palm plantation and palm oil production. Liberia Foreign investments in Liberia have secured by now access to more than 1.5 million acres for oil palm plantation, equivalent to about 5.6 % of the country s total land area. In 2009, Malaysia-based multinational Same Darby signed a concession agreement with the government of Liberia on 220,000 hectares of land, on a 63-year lease, to develop palm oil and rubber plantations in four counties. The newly created Sime Darby Plantation Liberia aims to develop 120,000 ha of the land in the first 11 years and to have the whole area developed by The first oil palm tree was planted in Grand Cape Mount County in May 104

106 2011. A first palm oil plant is expected to start operating in 2014, and production levels of 10,800 tonnes are forecast to be attained by Twenty similar mills and refining units are planned to follow (one per 15,000 ha). About 90% of the palm oil produced will be for export. Through a 1.6 billion US$ agreement with the government of Liberia, Golden VerOleum (Liberia) Inc. is developing 220,000 hectares of high yielding oil palm with technical and investment support from one of major agribusiness companies in South East Asia, Golden VerOleum Limited (subsidiary of Singapore palm oil producer Golden Agri-Resources). In May 2011, the company received the environmental permit to start cultivation of oil palm in Sinoe County. The UK publicly traded Equatorial Palm Oil (EPO) company, with concessions and land bank in Liberia, has started up in 2011 the first commercial oil palm mill that can process up to five tonnes of oil palm fresh fruit bunches per hour, harvested from an existing Palm Bay estate (34,398 ha concession). By mid-2011, the company has set up a joint venture agreement with the Indian Siva group through its entity Biopalm Energy Ltd. The agreement provided for equity investment in the joint venture company Palm Developments of US$ 30 million, as well as a land bank of US$ 30 million facility in order to accelerate the development of 169,000 additional hectares. EPO plans to achieve 50,000 hectares of productive plantations in the next ten years, doubling to 100,000 hectares in twenty years. SIFCA has also obtained an oil palm concession for 46 million euros, while its local subsidiary Maryland Oil Palm is now in charge of the management of the oil mill and 8,800 hectares of palm previously largely abandoned by the Crown Corporation Decoris Palm Oil. Côte d Ivoire The important position achieved by Côte d Ivoire as palm oil producers and as regional and international export supplier was brought about by the set up in 2007 of the 50:50 joint venture Nauvu Investments, between two Asian multinational corporations headquartered in Singapore, world leaders in the integrated palm oil industry. These were Wilmar International Ltd and Olam International Ltd. The newly formed joint venture acquired a 25% stake in the Ivorian agro-industry group SIFCA, which possessed at the time 51% controlling stakes in the largest group of Ivorian plantations partly owned by Unilever- Palm CI. Sifca s business and financial structure are shown below. In addition, the Wilmar-Olam joint venture has acquired a 50.5% stake in the largest Ivorian palm oil refiner Newco, the other 49.5% being owned by Sifca. Newco covers 80% of the domestic palm oil supplies and 30% of the demand in the ECOWAS region. Through all these acquisitions and complex financial packages and interests, the joint venture between the Asian multinationals Wilmar and Olam became in 2009 the largest palm oil company in West Africa, recording that year a turnover of just over half a billion US$. It is worth mentioning that Sifca will be investing in a biomass plant which will utilise wood waste and palm shells to generate electricity to cover the energy needs in its palm oil factories, together with the Swedish company Tricorona. The project is expected to cut Sifca s energy costs by half and reduce carbon dioxide emissions by 45,000 tonnes annually, answering the strong environmental concerns in Côte d Ivoire. 105

107 Scope and structure of OLAM WILMAR joint venture and SIFCA participation 106

108 107

109 Source: Formation of 50:50 Joint Venture for Investments in Palm Oil and Rubber Assets in Africa, Presentation to Analysts and Media, 16 November 2007, Singapore 108

110 ANNEX III POLICIES ADOPTED IN IN SELECTED COUNTRIES MAJOR PRODUCERS, EXPORTERS AND IMPORTERS OF PALM PRODUCTS YEAR MONTH MEASURES 2008 December 2008 December 2008 December 2008 December 2009 January 2009 February 2009 February MALAYSIA/INDONESIA - supply control measures: Reportedly, the two countries agreed to take coordinated action to address the current slide in palm oil prices and the slowdown in demand for palm oil anticipated for next year as a result of global economic recession. The key means to temporarily slow down production growth will be to intensify replanting of old trees. A total of ha is being earmarked for this purpose. Farmers that participate in the replanting programme will be given access to high quality planting material at subsidized prices. GERMANY - biofuel policies: Reportedly, national mandatory targets for future biofuel admixture in transportation fuels are being adjusted downward. Furthermore, from 2015, the calculation basis will be switched from the energy content of biofuels to the greenhouse gas emission savings resulting from their use. Of particular concern to the oil crop sector is a provision that prevents the use of palm oil and soybean oil under the mandatory schemes and preferential taxation system until criteria for the sustainable production of biofuel feedstock are in place. THAILAND - palm oil support: After rising last month the reference price at which farmers sell palm fruit to crushers, the government plans to purchase palm oil from oil mills at a guaranteed price, hoping to prevent prices from falling further. The recent decline in mineral oil prices has made the use of palm as biodiesel feedstock uneconomic, leading to an excess of supply over demand. Sustainable palm oil: A first shipment of certified and traceable palm oil - produced in Malaysia in accordance with RSPO s sustainability criteria - has been delivered to the European Union. But environmental and social groups continue to question the value of the certification pointing at environmentally and socially unsustainable production methods in the countries of origin. Certification of sustainable palm oil : Recently, the first two oil palm plantation companies (both in Malaysia) have been ranked as certified producers of sustainable palm oil based on the criteria developed by the global multi-stakeholder initiative RSPO. Several more companies are expected to gain that status during A first shipment of certified and traceable palm oil has been delivered to the EU last November. MALAYSIA - palm oil barter trade: For the period , USD 70 million worth of palm oil have been earmarked for bartering for fertilizer with the Russian Federation and the Democratic People s Republic of Korea. INDONESIA - biodiesel support: Reportedly, the government is considering subsidizing the sale of palm oil-based diesel when low fossil fuel prices compromise the profitability of biodiesel production. 109

111 YEAR MONTH MEASURES 2009 March 2009 March 2009 March 2009 March 2009 March 2009 March 2009 March 2009 March INDONESIA - oil palm plantations: Reportedly, the government is considering lifting temporary restrictions (in place since late 2007) on the use of peat land forests for oil palm plantations. The measure would allow increasing productivity in the oil palm sector. The restrictions had been introduced to control carbon dioxide emissions associated with the use of peat land. MALAYSIA - biodiesel: Government sources confirmed that blending of diesel fuel with five per cent palm oil biofuel will become mandatory on January This year, all government vehicles will start using the blend. To remain competitive, biodiesel sales shall benefit from a subsidy. Once fully operational the programme is expected to absorb tons of palm oil annually. EUROPEAN UNION - temporary biodiesel duty: From mid-march, imports of biodiesel from the USA will face temporary antidumping and anti-subsidy duties. Tariffs ranging from 26 to 41 per 100 kg are expected to apply for an initial period of six months. Surging imports of biodiesel produced in the USA - and benefiting from government support there - are considered to have severely injured the competing EU biodiesel industry. GERMANY - biofuel legislation: The EU Commission has requested that the sustainability criteria included in a national law on the promotion of biofuels be streamlined with the relevant EU directive. As a result, importation of vegetable oils - especially soy and palm oil - for local biodiesel production is expected to resume. Furthermore, new legislation excluding biofuels that have previously received state aids from being eligible for national incentives and mandates will go ahead. Consequently, the importation of biodiesel that has benefited from state aid could become uneconomical. INDONESIA - biodiesel support: The government confirmed its plan to subsidize the sale of biofuels by state owned companies depending on how the prices for fossil fuel and biofuel feedstock (notably palm oil) develop. The subsidy would amount to Rp 1000 per litre of biofuel distributed. Under the currently envisaged level of government funding, the sale of up to tons of biofuel could be supported in an amount close to the country s mandatory consumption of biofuels in Palm oil based biodiesel should account for about three quarters of all biofuel sales. FRANCE - biodiesel taxation: Similar to Germany, where taxes on biodiesel and biodiesel feedstock have been raised in January, France has announced that all tax advantages granted to biofuel will be discontinued by INDONESIA - palm oil exchange: To date the world s leading producer of palm oil lacks an own exchange and futures market for palm oil; local traders and policy makers are used to follow contracts traded in Malaysia or the EU to determine prices. Now private sources report that physical trading in CPO through a local exchange is going to start later this year. State plantations seem committed to sell at least 20% of their output through the new platform. UNITED KINGDOM and GERMANY - biofuel targets: The rates of mandatory inclusion of biofuels in transportation fuel are being corrected downward in both countries: in the UK, the rate for 2009/10 is expected to be set at 3.25% (down from originally 3.75%), rising gradually to 5% by 2013/14. In Germany, the rate for 2009 is being reduced from initially 6.25% to 5.25%, and shall be frozen at 6.25% from

112 YEAR MONTH MEASURES 2009 April 2009 April 2009 April 2009 May 2009 June 2009 June 2009 June 2009 June 2009 June 2009 June UNITED STATES - demand for sustainable palm kernel oil: An oleo-chemicals company started to purchase sustainable palm kernel oil certification credits. It is the first step in creating a segregated supply chain for sustainably produced palm kernel oil. By doing so palm kernel oil producers that use more environmentally responsible practices to produce and harvest palm kernel oil are going to be paid a premium. PAKISTAN - INDONESIA trade agreement: Under preferential trade negotiations, Pakistan has agreed to reduce duties on palm oil imports from Indonesia by 10 per cent, which would put duties at par with those applied to imports from Malaysia. MALAYSIA - palm oil market measures: Government efforts to prevent oversupply on the domestic market continue. Under the ha oil palm replanting scheme, by March ha were approved, implying a temporary reduction in palm oil output by approx tons. Mandatory use of palm oil based B5-diesel in the entire transportation and industry sector is set to start next January, entailing a market off take of approximately tons of palm oil. And the increase in the country s duty free export quota for crude palm oil to 3 million tons in 2009 is expected to stimulate exports. INDONESIA - palm oil export tax: The government has kept the indicative world price at which the export tax on palm oil will be re-introduced at 700 US$ per ton. Accordingly, this month the exports of palm oil will remain tax-free. (The NW Europe import price for palm oil has risen markedly last month, but stopped short of Indonesia s trigger price.) SRI LANKA - palm oil import duty: To assist the domestic coconut industry, the government is considering raising the special import duty on oils of palm and palming kernel above the current level of Rs 60 per 1kg. INDONESIA - taxation of palm oil exports: Considering the recent, steady rise in international palm oil prices, the export tax on palm oil (which, inter alia, aims at protecting domestic supplies of vegetable oil) is likely to be reintroduced in June. The tax had been suspended late last year, when a decline in international prices started weighing on the country s palm oil exports. INDONESIA - palm oil export price: Reportedly, the government is studying a mechanism for setting a national standard price for palm oil exports - so as not to depend on prices determined in the major European import markets. RUSSIAN FEDERATION - import tax on selected vegetable oils: An import tax of 10% is expected to be introduced soon for palm oil and coconut oil for a period of nine months. The intention is to temporarily shield domestic products from the competition of lower priced substitutes. Sales of certified sustainable palm oil: Palm oil that has been produced meeting environmental and social safeguards is available on the market since November However, sales of certified palm oil seem to be slow in taking off. According to tentative figures compiled by the WWF, so far, only about 1 per cent of the sustainable palm oil available on the market has been bought. Sequencing of oil palm genome: According to official sources in Malaysia, researchers have finally managed to fully sequence the oil palm genome. Eventually, this breakthrough will allow enhancing the productivity and sustainability of oil palm, a plant where yield levels have not significantly improved over the last decades. 111

113 YEAR MONTH MEASURES 2009 June 2009 July 2009 July 2009 July 2009 September 2009 September 2009 September 2009 September EUROPEAN UNION - biofuel target: An official report states that the EU is unlikely to reach the indicative 2010 target of 5.75% of transport fuel coming from renewable energy sources. A community-wide share of 4% is expected instead. The respective share in the year 2005 was 1%. Biodiesel accounts for roughly three quarters of renewable fuel use; bioethanol contributes 15%. The EU- Commission estimates that, by 2020, some % of the utilization target is going to be met by second generation biofuels. INDONESIA - palm oil export tax: Suspended since December of last year, in June the export tax was re-introduced at a level of 3 per cent, in line with the government s policy to levy taxes when the world price exceeds a given level. While palm oil shipments are likely to decrease, the value of exports is anticipated to remain stable as are domestic cooking oil prices. Certified palm oil: Neste Oil, a Finnish biodiesel producer, committed to shift to certified palm oil as sole feedstock (i.e. palm oil produced according to RSPO s criteria for environmentally and socially sustainable production). The company, which introduced a system of full traceability of the palm oil it uses, expects to use tons of certified palm oil in 2009 and considerably higher amounts in the coming years. Similarly, snack food producer Mars committed to use exclusively RSPO certified palm oil originating from sustainable sources by On the other hand, to date global sales of certified palm oil seem to have been minimal. Apparently, buyers are concerned about costs and uncertainty of supply. Reportedly, certification can add a premium of US$ 50 a tonne to palm oil in the wholesale market. GERMANY - biofuel target: Despite opposition expressed by the German parliament s upper house, government plans to cut the 2009 biofuel blending target - from the current level of 6.25% to 5.25% - and to further raise taxes levied on biofuels have finally been confirmed. The higher blending ratio will be introduced only in 2010 and then remain at that level in subsequent years. EUROPEAN UNION - biodiesel import duty: EU member states have agreed to extend the countervailing duty on biodiesel imported from the USA, which was introduced in March 2009, for the next five years. The measure aims at shielding biodiesel production in the Community from unfair competition by US exporters. The range of the permanent duties has been narrowed compared to the one in place so far. Reportedly, WTO anti-dumping guidelines have been adhered to, thus reducing the likelihood of a legal dispute between the two blocks. INDIA - biodiesel import duty: The government is planning to reduce the basic customs duty on biodiesel from 7.5 to 2.5 per cent. Due to several factors the country is facing difficulties in meeting its biofuel consumption targets from domestic sources. Certified sustainable palm oil: Suppliers of palm oil certified as sustainably produced (in line with RSPO criteria) report lower than expected demand from importers. One explanation is that the global economic slowdown has curtailed demand from priceconscious buyers: reportedly, crude certified palm oil sells at a premium of about 50 USD per tonne (uncertified palm oil was traded USD per tonne in recent weeks). INDIA - subsidized vegetable oil sales: The central government is considering repeating last year s sales of cooking oil through ration shops should retail prices rise. To this end, state-owned trading companies would be directed to import up to 1 million tonnes of crude palm oil. To make the operation economic, a subsidy of 15 Rupees per kg of oil sold would be made available. 112

114 YEAR MONTH MEASURES 2009 September 2009 September 2009 September 2009 September 2009 October 2009 October 2009 December 2009 December 2009 December New options in palm oil futures trading: The Chicago Mercantile Exchange (which includes CBOT) and Bursa Malaysia are planning to jointly list dollar denominated palm oil futures using Malaysia s Ringgit-based contract as a benchmark. At the same time, efforts to create its own price benchmark are going on in Indonesia, the world s leading palm oil producing nation: the Indonesia Commodity and Derivatives Exchange announced the launch of a new palm oil contract later this year, which follows the launch (with state support) of a new physical crude palm oil contract last June by the Jakarta Futures Exchange. INDIA - ASEAN free trade agreement: The newly signed agreement will include a ceiling of 37.5 per cent on India s import tariff for crude palm oil. In recent years, the tariff rate ranged between 80 and zero per cent. The ceiling could benefit Indonesia s palm oil exports to India. Progress in sustainable oil palm: According to a study issued by CIFOR (an international research institute belonging to the CGIAR network), progress in the application of sustainability standards such as those developed by RSPO remains limited. Inter alia, the report points to the need for legal and political reforms at national level to achieve progress. INDONESIA - palm oil export tax: Following the decrease in the international price for crude palm oil, the country s variable exports tax has been reduced to zero per cent in July and is set to remain suspended also in September. INDIA - biodiesel consumption: Reportedly, Indian Railways, a major diesel consumer (that also runs 1800 state busses), decided to get involved in vegetable oil-based biodiesel production to meet its future requirements. Food industry - use of vegetable fats: Reacting to feedback from consumers, Cadbury New Zealand is reported to have announced that it will stop using palm oil in the production of its dairy milk brand chocolate and revert to using only cocoa butter. Oil palm and rapeseed genome: Important progress in sequencing the genome of the two crops has been reported. The scientific advances are expected to accelerate the development of crop varieties with higher yield potential and better resistance to diseases and environmental stress. Supply of sustainable palm oil: Estimates based on current RSPO (Roundtable on Sustainable Palm Oil) membership suggest that the amount of palm oil certified as sustainably produced is set to grow significantly in the next years. Reportedly, in May 2009, 0.5 million tons of certified produce were available; but this figure could rise to 4.5 million tons by end-year, and has been estimated at 9.3 million tons for These buoyant estimates assume that all RSPO member companies will progressively certify their entire output. Absorbing such amounts would require an expansion in global demand supported by the use of certified palm oil in power plants and as biodiesel feedstock. Use of sustainable palm oil: Retailer and private label brand Sainsbury s in UK has pledged to use, by 2014, exclusively palm oil certified as sustainable, or CSPO; reportedly, the decision was taken after the company observed sales increases following the introduction of CSPO in certain processed foods. Likewise, Nestle committed to use only CSPO by 2015 (when sufficient quantities are expected to be available), and a similar pledge was also made by Marks & Spencer. The gradual change in buying policies - by which the industry is responding to new consumer concerns - is made possible by increasing supplies of CSPO, the possibility to trade certificates and the related decrease in the CSPO price premium - from, reportedly, USD 40 per ton last year to USD today. Some market participants feel that, as supplies of CSPO continue rising, the price for certified and conventional product will 113

115 YEAR MONTH MEASURES 2009 December 2009 December 2009 December 2009 December 2009 December 2009 December eventually converge. Monitoring of sustainable palm oil use: Hoping to encourage the use and accelerate global purchases of available sustainable palm oil, WWF (a RSPO founding member) has announced the creation of a Palm Oil Buyers Scorecard - a system to publicly grade leading global retailers, traders and manufacturers of palm oil and palm-based products based on their commitment to purchase, use and promote sustainable palm oil. Preliminary results seem to suggest that today only few buyers in Europe are using CSPO, despite its increased availability and previous commitment by companies to purchase it. Palm oil environmental footprint: Malaysia - a potential exporter of palm oil-based biofuel to the European Union - decided to conduct in-depth work on the calculation of the oil s impact on the environment. The decision was triggered by forthcoming requirements in the EU, by which, from 2010, biofuels should reduce GHG emissions by at least 35% compared to fossil fuels. The default value for palm oil current assumed by the EU is 19%. However, biofuel suppliers can claim bigger saving rates by providing adequate proof. Currently available studies put GHG saving rates in palm oil in a wide range of 19 to 71%, reflecting rather diverse and complex methods of calculation. Interestingly, up to half of total GHG emissions in palm oil appear to stem from the release of methane gas during the processing stage. Consequently, in Malaysia, efforts are under way to equip palm oil mills with methane capturing technology. Reportedly, the issue of GHG emissions is also under debate at RSPO, with members split over the proposed incorporation of emission targets into the standards for sustainable production. Experts noted that the market is yet to provide clear signals on how it will value efforts by producers to control emissions and feet that, for producers to make commitments, global compensation mechanisms will need to be put in place. INDONESIA - palm oil export tax: The export tax on crude palm oil will remain suspended in December, i.e. for the fifth consecutive month. The base export price has been adjusted upward but remains below the level that would trigger a reintroduction of the export tax. MALAYSIA - smallholder oil palm support: Reportedly, the government has allocated funds to assist smallholders in adopting sustainable production practices and in adhering to the RSPO certification process. Furthermore, during , financial incentives will be provide to smallholders to allow them to participate in replanting programmes aimed at raising yields - from 20 tons of FFB per ha today to 35 tons in MALAYSIA - mandatory biodiesel use: Compulsory 5% blending was scheduled to come into effect country-wide in January 2010, but that rate may now be reduced to 3%. In Malaysia, producers of biodiesel are allowed to buy their feedstock, palm oil, at a fixed, subsidized price, with the oil palm industry contributing to the funding of this scheme. As the recent strengthening in the market value of palm oil implies a higher subsidy, and considering the very slow uptake of biodiesel consumption so far, the government and the oil palm industry plan to contain the outlays for biodiesel subsidization by reducing the compulsory blending rate. Furthermore, to spur domestic biodiesel demand, the government has announced that it will drop the 10% tax currently applying to biodiesel sales. ASEAN free trade agreement: The agreement (referred to as AFTA) is set to take effect next January, implying the introduction of common preferential tariffs ranging between 5 and zero per cent for all products, including those previously deferred under sensitive lists. The six founding members of ASEAN agreed to immediately reduce their tariffs on key agricultural products - 114

116 YEAR MONTH MEASURES including soybeans as well as soy, palm and coconut oil - to zero. This measure is expected to affect internal trade patterns, with the most competitive producers likely to gain market shares December 2009 December 2009 December 2010 January 2010 January AFRICA - new investments in oilseed production: Several countries in the region are reporting renewed interest in oilseeds, in particular as biodiesel feedstock. Government backed, large scale commercial production of biodiesel is planned in RWANDA, where a private consortium is ready to develop ha of jatropha, aiming at the production of 16 million litres of biodiesel annually. Other biodiesel feed stocks under consideration include high-altitude oil palm, moringa, castor and soy. KENIA has introduced a plan for developing biodiesel from jatropha and other locally grown trees and is eyeing a biodiesel blending ratio with fossil diesel of 5%. Comparable plans have also been launched in ETHIOPIA, focusing on castor, jatropha and oil palm cultivation on arid land not used for food crops. In LIBERIA, the government is securing major investments in oil palm by private companies from Malaysia and Indonesia, expecting significant improvements in livelihoods and social welfare in poor regions, industrial development and new export earning opportunities. Meanwhile, in UGANDA, NGOs have criticized large scale investments in oil palm for giving insufficient regard to environmental regulations and social concerns. Exposed to similar criticism and concerned about national food security, in TANZANIA, the government decided to closely monitor (and partly suspend) widespread land acquisition and investment by companies involved in biofuel production (from jatropha and other feedstock). And finally, international research is encouraging farmers in Sub-Saharan Africa to cultivate soybeans to improve both, their income and local diets. Soybean is promoted as a versatile crop that can grow well in the region and is suited for small-scale farming and processing, and new uses and marketing systems are expected to reduce the farmer s dependence on the meal and oil industry. RUSSIAN FEDERATION - import tax on tropical oils: According to private sources, the 10% temporary tariff - introduced last June to afford protection to the domestic dairy industry - could be lifted in January in an effort to address a domestic shortage in vegetable oil that is expected to arise from reduced domestic crops. SOUTH AFRICAN REPUBLIC - trans fatty acids legislation: The government is developing legislation aimed at reducing certain trans-fats in processed and prepared foods so as to contribute to the reduction of chronic diseases associated with the presence of TFAs in the diet. The proposed law would affect especially the use of partially hydrogenated vegetable oils, while naturally occurring TFAs in animal fats would be excluded. Comparable legislation is already in place in Denmark, Canada and the United States. INDONESIA - palm oil shipment facilities: Reportedly, official sources announced plans to build three new ports for shipping palm oil to handle rising output in the world s top producing country. Traders reported that congestions at ports are increasingly hampering exports from the country. The government is also planning to provide incentives to boost the development of the palm oil industry at the downstream level with a view to raise value addition and provide more employment. INDONESIA - palm oil export tax: Following the rise in the international price for palm oil beyond 750 USD, the government has announced the reintroduction of the export tax on crude palm oil at 3% in January The tax had remained suspended since August

117 YEAR MONTH MEASURES 2010 January 2010 February 2010 February 2010 February 2010 February 2010 February Sustainable palm oil: Reportedly, at a recent RSPO meeting, WWF reported that despite the availability of safe, environmentallyfriendly palm oil options, Western companies did not appear to meet commitments to only buy sustainably produced palm oil. The organization found that, while RSPO members were increasingly adopting improved production practices, the major issue of GHG emissions involved in land use changes was not adequately addressed and that related measures continued to be of a voluntary nature only. Meanwhile, global consumer goods company Unilever decided to suspend purchases of palm oil from a particular supplier in Indonesia until the same could prove that its plantations were not damaging high conservation value forests nor expanding onto peat land areas. In the meantime, official sources in INDONESIA confirmed the national target to expand total area under oil palm to 18 mill ha (from today s level of 9.7 mill ha) - while fully adhering to social, economic and environmental sustainability standards. Allegedly, the expansion was needed to allow the country meeting its commitments regarding overall reduction in GHG emissions. In COLOMBIA, the government seems determined to promote environmental and social certification in palm oil-based biofuel production. It claims that current oil palm production and the sector s planned expansion does not threaten local rainforests nor displace food crop production thanks to the availability of vast tracts of underutilized agricultural land. THAILAND - exports of palm oil under AFTA: Thai sources estimate that as a result of the common preferential tariffs recently introduced under the ASEAN Free Trade Agreement (AFTA), the country will lose 2.6% or US$ 46 million of its export business to Malaysia. ASEAN - CHINA free trade area (ACFTA): The trade agreement has come into force at the same time as trade got liberalized within the ASEAN block itself. Under the accord, China and the six founding ASEAN countries (Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand) will remove tariffs on 90 per cent of imported goods. The other four ASEAN members (Cambodia, Laos, Myanmar, and Vietnam) will follow suit in As to oilseeds, oils and meals, ASEAN exports of palm oil (primarily from Malaysia and Indonesia) are expected to benefit from improved access to the Chinese market. Palm oil, which belongs to the list of sensitive products, will see its import tariff reduced from 30 per cent to 9 per cent, and further reductions are scheduled for the coming years. INDONESIA - infrastructure development: Delegations of government and business leaders from Indonesia and Japan started discussing a project under which Indonesia - assisted by Japanese private companies - will accelerate infrastructure development in selected regions to assist industrial growth. The initiative is expected to benefit the palm oil industry and allow further growth in the sector. LIBERIA - oil palm investment: A major Indonesian oil palm operator is reported to consider investing in Liberia s oil palm industry. Negotiations with the government on a concession agreement are reported to be on-going. The project will have to conform fully to the country s environmental master plan and standards. The investment plan envisages the development of up to ha (including ha run by out growers), and would produce over one million tons of palm oil per year. UGANDA - oil palm development: Reportedly, the government has released new funds to expand oil palm growing in the country via public-private partnerships. Also, a palm oil pricing committee has been set up to ensure adequate returns for farmers. Public funds will be made available for purchasing land, and district leaders have been urged to allocate more land for oil palm cultivation. Meanwhile, according to private sources, under an on-going public-private project, the government has been asked to make 116

118 YEAR MONTH MEASURES available for oil palm growing grassland portions that belong to a forest reserve March 2010 March 2010 April 2010 April 2010 April 2010 April 2010 April 2010 May INDONESIA - palm oil exports: According to official sources, the country plans to limit exports of crude palm oil at 50% of output by 2015 and 30% by in an effort to boost the domestic downstream processing sector, thereby creating employment. To attract the required capital for investment, the government would provide fiscal incentives and encourage banks to lend at reduced interest rates. Currently, well over 50% of palm oil exports are in crude form. Reportedly, the industry expressed concern over these plans, pointing out that such policies could induce importing countries to raise tariffs on refined palm products - also in a bid to encourage refining and downstream processing at the local level. INDONESIA - PAKISTAN, oil palm trade: Indonesia is reported to be negotiating with Pakistan about its import tariff for palm oil. Currently, due to a preferential trade agreement that Pakistan signed with Malaysia in 2007, Indonesian palm oil is subject to a higher tariff than produce coming from Malaysia. Indonesia aims to have its exports charged with the same tariff enjoyed by Malaysia. INDONESIA - palm oil export tax: In response to rising global palm oil prices, in April, the ad valorem export tax will be raised to 4.5% in April (from the 3% rate applied since last January). INDONESIA - oil palm futures: The Indonesia Commodity and Derivatives Exchange is ready to launch a crude palm oil futures contract in April with a view to create a local benchmark price. Sustainable palm oil supply: RSPO has estimated current global supply of palm oil certified to comply with its sustainability criteria at 1.5 million tons per year, mostly coming from Malaysia. By the beginning of 2011, supply should double to 3 million tons as the number of certified plantations continues to rise. Due to the on-going expansion of supplies, the premium for certified palm oil is reported to have fallen from 50 USD per tonne at the end of 2008 to USD 10 today. While this should spur demand for certified oil, it could also discourage producers from shifting to the more expensive methods required to produce and market sustainable palm oil. MALAYSIA - mandatory biodiesel blending: After a number of postponements, the government is reported to be ready to implement B5 blending in June this year and to make available public funds to defray the costs associated with production and distribution. Chicago futures markets: Coming May, the CME Group Inc. intends to launch an electronically traded, US$-denominated futures contract for crude palm oil using the Bursa Malaysia Derivatives ringgit-denominated benchmark. The partnership between the two platforms aims at offering an alternative means of hedging risk to companies that trade in dollars and creates new opportunities for cross-trading with soybean oil. EAST AFRICA - oilseed supply shortages: Reportedly, limited availability of locally grown oilseeds is causing oil crushing and refining plants to work below their installed capacity. Concerned processors use oil palm (Uganda) and sunflower and cotton seed (Tanzania) as raw material. Cooking oil consumption in both countries remains heavily dependent on imported oils. 117

119 YEAR MONTH MEASURES 2010 May 2010 May 2010 May 2010 May 2010 July EUROPEAN UNION - environmental sustainability of biofuel use: A study prepared by IFPRI (on behalf of the EU Commission) states that, at the currently assumed consumption levels - namely biofuels accounting for 5.6 per cent of transport fuels in the environmental sustainability of biofuels is not significantly reduced when the effects of indirect land use changes (ILUC) are taken into account. Above the 5.6% share, however, ILUC emissions could rapidly increase, potentially eroding the environmental sustainability of biofuels. For biodiesel, the study assumes that most of the required production increase comes from domestically grown rapeseed. It also claims that the environmental sustainability of palm oil-based diesel remains similar to that derived from rapeseed oil, even when peat land emissions are taken into account. To achieve maximum GHG emission reductions, the study recommends that import demand concentrate on more sustainable sugar cane ethanol. Also, the removal of import tariffs for biofuels is recommended as this should allow production and consumption to shift towards more emission-efficient biofuels, in particular sugar cane ethanol. The study has further fuelled the debate on the suitability of different biofuels and the implication of different targets. Assumptions on future EU production and import volumes and on the related direct/indirect land use changes remain controversial. The EU Commission is expected to issue its own final report on the subject at the end of Progress in sustainable palm oil - use of certificates: Unilever reports to have secured enough certificates of sustainable palm oil to cover the entire requirements of its business in Europe (as well as in Australia and New Zealand). The effort is part of the company s commitment to source all its palm oil from sustainable sources by Unilever uses a certificate trading programme (GreenPalm) which allows palm oil producers that follow RSPO s criteria for environmentally and socially sustainable farming to increase their earnings by selling certificates. Until properly segregated supply chains for sustainable produce become widely available, certificates are used as an option to encourage growers to comply with RSPO requirements and certify their plantations as sustainable. Progress in sustainable palm oil - segregated supply chains: Global vegetable oil supplier IOI-Loders Crocklaan Europe announced the imminent sale of fully segregated, RSPO-certified palm oil. The company claims to be the first supplier in continental Europe. Sales are scheduled to begin once a new refinery featuring the technology and storage capacity that is required to fully segregate sustainable palm oil from all other oils opens in June The new chain should permit full traceability and would allow manufacturers to claim that a given product only contains certified sustainable palm oil. Progress in sustainable palm oil - INDONESIA certification initiative: Reportedly, the agricultural ministry of Indonesia is planning to set up a national certification scheme for sustainably produced palm oil (Indonesian Sustainable Palm Oil, ISPO). The scheme, which could become operational before the end of 2010, aims at protecting sales to markets where environmental concerns are important. Details on how the certificates would be granted are not yet available. The initiative follows reports about important buyers like Unilever and Nestlé suspending purchases from certain Indonesian suppliers on environmental grounds. BRAZIL - oil palm expansion: Backed by the state as well as federal government, oil palm cultivation seems poised to expand in the Amazon region. The large-scale private investments planned in one of the country s poorest regions are supposed to produce wealth via employment creation and income generation. Under the project, palm oil will be processed into biofuel for both domestic consumption and export. Allegedly, the project will contribute to reducing deforestation; plantations shall be established on previously deforested land and environmentally friendly practices are to be employed throughout the production chain. 118

120 YEAR MONTH MEASURES 2010 July 2010 July 2010 July 2010 July 2010 July 2010 July EUROPEAN UNION - environmental standards for biofuel: The Commission remains committed to enforce, from December 2010 onward, strict standards that will apply equally to EU-produced and imported biofuels. To participate in public biofuel support programmes, evidence of sustainable sourcing, production and use is expected from the industry. The sustainability criteria centre on (i) the lifecycle GHG emissions of biofuels and (ii) the type of land use underlying biofuel production. Voluntary certification schemes developed by the industry are welcome and will be independently assessed. The official stance have been well received by the industry, whereas environmental and social interest groups have called for further clarification regarding the measurement of indirect land use change effects, the definition of highly bio diverse grassland and the methodology for identifying degraded land. With regard to palm oil, EU officials pointed out that the new directives will in no way affect crude palm oil exports to the EU market for traditional consumer products like food, cosmetics and detergents. With regard to palm oil-based biofuels, however, all supplies - whether imported or domestically produced - will fall subject to the new requirements (if they are to qualify for public support). Consequently, suppliers will, inter alia, face the onus of proving GHG emission savings of at least 35% - as opposed to the officially applied default value of 19%. RSPO or similar certification schemes may be used to prove compliance with the criteria INDONESIA - biofuel subsidy: The country s 2011 budget includes provisions for continued support to biofuel production. Sales of biodiesel and bioethanol will be subsidized at a rate of Rp per litre whenever their price exceeds the market price for mineral oil-based fuel. In the years 2009 and 2010, biofuel producers were compensated at a rate of, respectively, Rp and Rp per litre. Currently marketed diesel contains 5% of palm oil-based biodiesel. PAKISTAN - palm oil import duty: A reduction in the import tariff for crude palm oil from Rp. 9,000 per ton to Rp. 8,000 has been announced in the 2010/11 federal budget. Particularly Indonesia, Pakistan s main supplier of CPO, will benefit from the duty reduction. RUSSIAN FEDERATION, BELARUS, and KAZAKHSTAN - palm oil import duty: Reportedly, the three-country customs union decided to temporarily raise its tariff on packaged palm oil. A Euro 0.40 per kilo duty will apply to packages up to 1 kg and containers up to 20 tonnes. Bulk shipments will continue to be imported duty free. Roundtable on Responsible Soy (RTRS): The RTRS, a world-wide initiative that groups stakeholders from across the soy commodity chain and includes environmental groups, is ready to introduce voluntary certification for sustainably sourced soy products. To qualify for the label, producers will need to fulfil specific principles and criteria related to environmental and social responsibility, good agricultural and business practices and legal compliance. The initiative aims at promoting responsible production irrespective of the underlying production model. Standards include prohibitions regarding the conversion of forests and of areas with high conservation value (such as rich savannahs) as well as regarding the use of the hazardous pesticides. Certification processes, compliance verification and traceability will be regulated next. Meanwhile, social interest groups have voiced concerns with regard to the dominance of GM varieties, climate implications of the crop s rapid expansion and its use as biofuel feedstock. Consumer-oriented palm oil shortening: A newly commercialized palm oil shortening/hardening is meant to help food manufacturers and industrial bakeries to meet end-consumer demands for sustainably sourced and healthy products. Allegedly, the shortening, which consists of a blend of palm and rapeseed oil, contains only palm oil certified as sustainable (by either RSPO or 119

121 YEAR MONTH MEASURES GreenPalm) and is characterized by a limited content of saturated fats July 2010 July 2010 August 2010 August 2010 August Low-carbon oil palm expansion: Reportedly, the governments of Indonesia and the United States are considering to enter into a comprehensive partnership to control the conversion of forest and peat land by diverting oil palm expansion in Indonesia toward degraded land, i.e. areas that were cleared of forest long ago and now contain low carbon stocks and low levels of biodiversity, but are still suitable for oil palm cultivation. The effective and equitable implementation of such a strategy entails major challenges of a technical, legal, social and financial nature - which the proposed bilateral partnership would endeavour to address. Sustainable sourcing of palm oil: In pursuance of its goal to obtain 100 per cent of the palm oil it uses form sustainable sources, global consumer goods company Nestlé decided to partner with non-profit organization The Forest Trust (TFT). The performance of Nestlé s palm oil suppliers will be audited by TFT against a set of criteria. Supplier that do not meet the requirements but are committed to achieving sustainability will be provided with technical support. The project s objective is to establish fully responsible supply chains by identifying and addressing all major environmental and social issues. INDONESIA - palm oil export tax: In response to the past fall in global palm oil prices, the government decided to lower, in August, the ad valorem export tax from 4.5 % (in place since April this year) to 3 %. INDONESIA/NORWAY - joint initiative to halt forest conversion: The Indonesian government announced a 2-year moratorium (starting next year) on concessions for clearing forest and peat land - an important source of GHG emission and thus global warming. Past forest/peat land conversions into plantations and for industrial use constitute a major source of livelihood in the country. The decision to stop new concessions is part of a deal reached with Norway, which agreed to assist the country in preserving its forests. Funding for sustainable forestry programmes (worth up to USD 1 billion) shall be released from 2014, contingent on progress made in deforestation/emission reduction. Meanwhile support would be provided to set up appropriate control mechanisms, run pilot projects and to work on the issue of conflicting claims on land. Conditions for cooperation and performance-based criteria still need to be negotiated. Logging concessions already granted to companies shall be honoured, although revocation of existing licenses might be considered in particular cases, with financial compensation or land swaps granted to affected companies. Government officials pointed out that sufficient non-forest, degraded but still suitable land was available to accommodate further growth of the vitally important plantation industries. In this regard, reaching general consensus on methodologies and procedures for identifying acceptable areas for sustainable oil palm expansion will be important. If implemented successfully, the initiative could boost international cooperation in forest preservation in line with the UN-backed REDD scheme. Norway has already signed similar agreements with Brazil, Guyana and a number of African nations, and several other developed countries have pledged funds at last year s Copenhagen Climate Conference. Sustainable sourcing of palm oil: Global food producer and trader Cargill decided to partner with the World Wildlife Fund to undertake an assessment of its palm oil sources in Indonesia. The objective is to measure progress amongst suppliers in the implementation of the principles established by RSPO thereby encouraging the adoption of socially responsible and environmentally sustainable production methods. The assessment shall be used to identify gaps vis-à-vis the RSPO standards and suppliers will receive specific assistance to improve their production practices. Reportedly, Cargill aims at buying 60% of its overall palm oil from certified sources by the end of

122 YEAR MONTH MEASURES 2010 September 2010 September 2010 September 2010 September 2010 September 2010 September 2010 September EUROPEAN UNION - investigation on trade in biodiesel: Reportedly, the European Commission decided to investigate whether (i) biodiesel produced in the United States is being shipped into the EU via third countries, and (ii) whether US exporters shifted to blends containing less than 20 per cent biodiesel so as to circumvent the bloc s anti-dumping and countervailing duties (imposed on US imports in March 2009). The decision follows a confidential complaint lodged by the European Biodiesel Board. Investigations are expected to take about nine months. EUROPEAN UNION - biofuel consumption targets: Unofficial sources estimate that the EU is falling short of its target for biofuel use in the transportation sector. According to EU directives, by end of 2010, biofuels were supposed to account for 5.57% of total transport fuel sales. Instead of the corresponding 18 million tons, EU biofuel sales have been estimated to reach only 15 million tons of oil equivalents this year. Year-on-year rise in biofuel consumption is estimated at around 20% in 2010, which compares to considerably higher rates in previous years. As to the type of biofuel used, consumption of biodiesel, which accounts for roughly 80% of biofuel transport fuels (expressed in energy content), is reported to be growing less strongly than bioethanol and biogas use. INDIA - vegetable oil import taxation: In response to rumours that the government might raise import duties in an effort to support domestic farmers, official sources stated there was no intention to reintroduce or raise tariffs since such measure could increase the inflationary effect of growing global vegetable oil prices on the domestic market. As in recent years, the government s main preoccupation concerns the effect of rising domestic oil prices on consumers. INDONESIA - palm oil export tax: Following the recent rise in the global price of palm oil, the government decided to lift, in September, the ad-valorem export tax from 3 to 6 per cent - the highest level since November The export tax is adjusted on a monthly basis with a view to ensure adequate domestic supplies, thereby preventing surges in domestic prices. LIBERIA - land concession for oil palm development: Reportedly, a concession was signed between the government and an Indonesian company to set up a ha oil palm plantation. In addition to generating local employment, the project comprises the development of smallholder production with access to dedicated purchasing centres and extension services. THAILAND - biodiesel blending rates: Biodiesel consumption seems set to increase further in coming years. Reportedly, voluntary blending has been replaced earlier this year by mandatory B3 fuel nationwide and mandatory B5 is scheduled for January Furthermore, the government seems committed to develop B10, which is currently being engine-tested. The B10 target requires further expansion in the domestic oil palm plantation area so as to avoid competition between food and fuel uses and to stay away from the need to import biofuel feedstock. Rise in palm oil production costs: Triggered by Indonesia s prospective planting moratorium (see August 2010 MPPU issue), concern about future, and gradual rises in production costs is reported to be spreading among palm oil producers in Asia. The prospect of rising limitations on future expansion in plantations - based on increasingly stringent environmental regulations - could have important repercussions across the sector, such as (i) rises in the cost of land, (ii) consolidation among companies to increase their land base, (iii) increasing investments outside of Indonesia and Malaysia (e.g. in PNG and West/Central African states), and (iv) increased efforts to raise productivity levels. 121

123 YEAR MONTH MEASURES 2010 September 2010 September 2010 September 2010 September 2010 September 2010 September 2010 October 2010 October Reformulation of fat profile in food products: Reportedly, confectionary manufacturer Mars is reformulating chocolate products sold in France and the UK to reduce the content of saturated fats by per cent. Reformulation involves shifts in the type of vegetable oils employed. The company informed that by changing the fat profile it is aiming at improving the nutritional composition of its products. Global framework for palm oil development: The World Bank and the International Finance Corporation have presented a draft framework for future engagement in the palm oil sector. In the framework, priority areas and options for action are outlined. The four thematic areas identified as being crucial are: (i) policy and regulatory environment, (ii) mobilization of sustainable private sector investment, (iii) benefit sharing with smallholders and communities, and (iv) sustainability codes of practice. Vegetable oil-based aviation biofuel: Thailand: Reportedly, the country is planning to develop jet biofuels with the objective to meet demand from 2012, when European aviation regulations calling for the introduction of renewable fuels in airplanes are expected to come into effect. The goal is to become South-East Asia s hub for the supply of green aviation fuel. Although palm oil is considered a suitable feedstock, areas for expanding oil palm seem to be limited and competing uses for food purposes and as fuel for land-based transport pose problems. Other crops, such as sweet sorghum or algae seem to offer better potential. Fully segregated sustainable palm oil: Cargill has signed an agreement with Unilever Europe to supply fully segregated, sustainable palm oil, certified by RSPO. The oil will be physically segregated at every step of the supply chain. Cargill is in a position to offer segregated, refined oil after having received RSPO certification on selected plantations as well as refineries run by the company. RSPO certified smallholder palm oil: Certification of the first smallholder oil palm scheme has been reported from Indonesia. Some smallholders organized in 17 cooperatives have been certified to comply with the RSPO Smallholder Principles and Criteria for sustainable production. The smallholder scheme in question is linked to a large, already certified plantation and mill operated by Cargill. Certification is expected to lead to rising incomes for producers as demand for certified palm oil is anticipated to continue expanding in coming years. Palm oil sourcing policies: Private sources reported that a number of major, global food companies decided to stop purchasing palm oil from a particular supplier in Indonesia, based on a recently published audit of the producer s cultivation practices. Reportedly, in the audit, concerns were raised about the sustainability of the company s production practices, the possible breach of national laws, and the environmental impact of past deforestation and peat land conversion. LIBERIA - oil palm development: A major public-private partnership has been launched to develop the oil palm industry. Participating parties are committed to environmentally and socially sustainable methods of production and to work with smallholders. The investment is seen as a central growth pillar in rebuilding the country s economy and reducing poverty. MALAYSIA - biodiesel production: Reportedly, the government s recent decision to postpone by one year the introduction of B5 (i.e. mandatory blending of transport diesel with 5% of palm oil-based fuel) caused domestic production of biodiesel to virtually stop. At the current price level for crude palm oil and in the absence of subsidies, margins are reported to be insufficient to justify biodiesel production. Opportunities on the export market are also very limited due to (i) increased wariness of some buyers to 122

124 YEAR MONTH MEASURES 2010 October 2010 December 2010 December 2010 December 2010 December 2010 December 2010 December purchase palm oil-based diesel based on environmental considerations, and (ii) the availability of competitively priced biodiesel from other countries. Sustainable palm oil: Reportedly, United States food manufacturer General Mills decided to stop buying palm oil from companies suspected of using environmentally harmful practices. The food company is committed to procure, by 2015, all of its palm oil from responsible and sustainable sources. Global Mills is following the footsteps of other global food companies. AFRICA - oil palm development, Ghana: Reportedly, the government is developing an oil palm master plan to meet local demand for vegetable oil and improve the country s competitiveness as a regional exporter. Areas covered in the plan include access to finance, land-use policies, technology transfer, transportation infrastructure, pricing mechanisms, product certification and marketing. AFRICA - oil palm development, Uganda: A large national oil palm development project launched in 1998 is ready to enter its second phase. Under the project, smallholder oil crop production (in particular oil palm) is raised and smallholders are directly linked with processors. Plantations are developed according to modern environmental standards. The public-private partnership builds on a loan provided by IFAD as well as local, private capital and bilateral grant money. Reportedly, the project has led to a significant increase in oil production from domestic sources and marked improvements in average per caput consumption, while reducing the country s dependence on imported oils. BRAZIL - oil palm expansion: Reportedly, the government decided to introduce a set of rules that guarantees sustainable forms of oil palm expansion and prevents further deforestation. Oil palm plantations may only be established on degraded land, which would allow rehabilitation of previously deforested areas. All oil palm growers will be required to register for regular inspection. Oil palm expansion will also be monitored via satellite images, and companies buying palm oil from areas other than those earmarked for oil palm development risk losing their environment licenses. CHINA - measures to stem food price rise: futures markets. Concerned about rising inflation rates and with domestic vegetable oil prices recently reaching two-year highs, the government has taken the following measure: Reportedly, the government has asked the country s futures exchanges to raise margin requirements applied to trade in selected commodities, including soybeans, soya meal, soya oil and palm oil. The measure aims at deterring speculation on commodity markets. INDIA - certified palm oil: In a bid to stimulate consumption of certified sustainable palm oil, the country s vegetable oil industry proposed to the government to apply a discounted duty on future imports of green palm oil. The industry expects that pressure on big consumers to move toward environmentally friendly purchasing policies will rise in coming years. INDIA - edible oil trade policy: With this seasons improvement in domestic oilseed output and generally easing food prices, producers are asking that the duty exemption granted for imports of unrefined vegetable oil be discontinued. While considering the request, the government has informed that the exemption would remain in place until early Furthermore, the government decided to extend the ban on bulk edible oil exports for another year, until September

125 YEAR MONTH MEASURES 2010 December 2010 December 2010 December 2010 December 2010 December 2010 December 2010 December INDONESIA - palm oil export tax: monthly revision. Since 2007, the tax is adjusted on a monthly basis with a view to ensure adequate domestic supplies and prevent high volatility and hikes in domestic prices. Following uninterrupted growth in international palm oil prices, in December 2010, the ad-valorem export tax on crude palm oil will be raised for the fourth consecutive month. The rates applied in October, November and December are, respectively, 7.5%, 10% and 15%. A 15% rate had not been applied since August According to private sources, local traders are concerned that the high tax rates will reduce the competitiveness of the country s exports compared to those of the main competitor, Malaysia. Higher tax rates also imply a bigger gap between the duties applied to palm oil and palm-oil based biodiesel (palm methyl ester). With the export duty on biodiesel kept fix at 2%, companies could step up export-oriented biodiesel production. INDONESIA - palm oil export tax: taxation system review. Reportedly, a government official stated that the current taxation system will be up for review because - although helpful in reducing fluctuations in domestic supplies and prices - the system has proven ineffective in spurring the downstream palm oil industry, i.e. did not help raising exports of higher-value refined oil as opposed to crude oil. INDONESIA - palm oil certification: The government announced that, starting in January 2011, national certification of sustainable production (see news item in May 2010 MPPU) will become mandatory for all plantation firms and smallholders cultivating oil palm. Details on certification methods and procedures as well as compliance control are yet to be issued. Indonesia s industry seems to welcome national certification as opposed to RSPO-controlled certification, noting that the latter has been progressing slowly. MALAYSIA - oil palm replanting: Concerned about slow output growth and stagnating yield levels, the government has announced a new oil palm replanting scheme for The state-funded programme shall be implemented over 2-3 years and will involve some 365,000 hectares of palms older than 25 years. The previous, industry-funded scheme (which was introduced in 2008 in response to weak palm oil prices and involved 200,000 hectares) is reported to have been almost completed. MALAYSIA - support to biodiesel: blending incentives. The Malaysian Palm Oil Board was reported to have allocated funds to five major petrol companies for investment in infrastructure for biodiesel blending. According to official sources, mandatory blending at B5 level - originally planned for January is now set to come into effect in June MALAYSIA - support to biodiesel: petro-diesel subsidy. Reportedly, the government may consider cutting, from next year, subsidies traditionally applied to sales of conventional diesel. The measure would end an advantage currently enjoyed by petrodiesel when compared to palm-based biodiesel. While mandatory biofuel blending is set to commence in soon, the industry is complaining that at the current, high level of palm oil prices and without public support the production and marketing of biodiesel is not economically viable. MALAYSIA/INDIA - free trade pact: A bilateral trade pact set to come into effect next year will likely include, inter alia, concessions on Malaysian palm oil exports to India - which remained excluded from the India-ASEAN free trade agreement signed last year. 124

126 YEAR MONTH MEASURES 2010 December 2010 December 2010 December 2010 December SRI LANKA - vegetable oil import duties: Concerned about recent surges in retail prices for edible oil and the resulting hardship for consumers, the government decided to reduce the taxes applied on palm and coconut oil imports. Originally introduced to encourage domestic coconut production, the duties will now be lowered from 60 to 15 rupees per kg of coconut oil, and from 50 to 10 rupees per kg of palm oil. THAILAND - biodiesel mandate: Reportedly, the shift from mandatory use of B3 to B5 will be delayed from mid to late January 2011, as flooding has adversely affected local palm oil production. THAILAND - palm oil consumer price: With a view not to add burden to flood affected people, the government-brokered, voluntary price ceiling for palm oil will remain unchanged at Baht 38 per litre - in spite of requests by oil refiners to be allowed to raise retail prices (following rises in production cost due to record high palm fruit values). Certified sustainable palm oil: global supply and demand situation. Certification of sustainable palm oil started two years ago. Currently, certified oil reaches the market via three RSPO-approved trading systems: the full segregation method, mass balance calculation, or a book & claim mechanism. RSPO estimates current, actual demand for certified palm oil at 1.4 million tonnes per year - while annual production capacity is said to have reached 3 million tonnes. Leading international vegetable oil refining companies are estimating that annual global production of sustainable certified palm oil will need to rise to 15 million tons by 2015: this is because - feeling the pressure form environmental and social interest groups - more and more key buyers (such as Unilever or Nestlé) are committed to gradually move away from non-certified palm oil. However, current annual expansion is estimated at only 1.5 million tonnes globally, meaning that production could fall short of future demand. This view is supported by the fact that many oil palm producers continue to resist moving towards certification, because of costs involved and because premiums offered by the market (for certified product) are small. Reportedly, these premiums have fallen to USD 3-5 per tonne, compared to levels as high as USD 50 only two years ago. The steep drop in premiums occurred when supply of certified palm oil picked up. Overall, future growth of the market for certified palm remains difficult to predict. Some observers even warn of possible excesses of supply over demand, pointing out that buyers in some important consuming nations, notably China and India, are notoriously pricesensitive and therefore not likely to pay the premiums associated with certified oil - at least in the short to medium term December 2010 December Certified sustainable palm oil: sourcing policies. According to British press, The Body Shop (a major retail company for soap and cosmetics) decided to stop buying palm oil from a supplier reported to be producing under socially unsustainable conditions in Colombia. Apparently, the supplier in question used to satisfy up to 90% of the retail company s palm oil needs. Certified sustainable palm oil: trademark. RSPO has launched a trademark/logo for free use by product manufacturers and retail companies when packaging items that use certified sustainable palm ingredients. The mark is meant to reassure consumers that products they buy contribute to sustainable palm cultivation practices. If widely adopted, the measure is expected to induce more companies to commit using only certified palm oil. 125

127 YEAR MONTH MEASURES 2010 December 2011 January 2011 January 2011 January 2011 February 2011 February Biodiesel South-South cooperation: Colombia continues to offer its technical know-how in biodiesel production to countries in Central America. After participating in the construction of biodiesel plants in El Salvador and Honduras, Colombia s agricultural research institute CORPOICA is now reported to have started cooperation with Mexico, where a plant using jatropha and palm oil will be set up with public funding. INDIA - oil palm development: Given the country s almost total dependence on palm oil imports, the federal government is looking into possibilities of developing domestic production. To date, the country s oil palm development programme has produced limited results, with no more than ha covered by plantations as against a potential area estimated at 1.03 million ha. Reportedly, the federal government has urged traditional growing states to step up efforts and has decided to also explore expansion possibilities in other Eastern states. Furthermore, the Rupees per ha subsidy granted to producers might be increased to Rs and higher input subsidies are being considered. A special thrust is expected to be given to oil palm cultivation in the next five-year plan ( ). INDONESIA - palm oil export tax: Following the steady rise in international palm oil prices, the government decided to lift the country s export tax further to 20% (effective 1 st January) - the highest level since 18 months. The adjustment implies a considerable burden for export sales especially of processed palm oil, making shipments less profitable compared to those of competitors, notably Malaysia. THAILAND - palm oil market interventions: Following steep rises in the cost of crude palm oil, manufacturers sought government permission to raise palm oil retail prices by at least 25%, which, however, was not granted. Subsequently, temporary supply shortages and price inflation developed in the domestic market. Eventually, the government and manufacturers agreed on a onetime release of palm oil in retail packages at a fixed price so as to calm domestic markets. In turn, the government has given the green light for a gradual upward adjustment in prices - in accordance with rising raw material prices and based on a review of real costs of production. The gradual increase in retail prices is expected to reduce the burden on consumers. Furthermore, the government requested the cooperation of large palm oil producers regarding a steady flow of supplies and informed that it would consider granting special palm oil import licenses. BRAZIL - oil palm expansion: Oil palm cultivation seems set to expand over the coming years in the northern state of Pará, close to the eastern Amazon forest. Reportedly, important investments are planned by a biofuels subsidiary of state-controlled mineral oil giant Petrobras and other companies. Production would be geared primarily towards the biodiesel market, mostly for exportation (or exportation of oil for subsequent transformation into biodiesel abroad). Apparently, investors are responding to a government backed programme launched last May that offers soft loans and other incentives. Strict adherence to environmental and social safeguards is envisaged. Brazil s biodiesel demand for domestic use and export is set to grow steadily. Over 2 million tons are estimated to be required for domestic mandatory blending alone. Current biodiesel production relies primarily on soy oil as feedstock. INDONESIA - palm oil export tax: In view of further rising international palm oil prices, the government decided to lift the country s export tax to 25% in February - the highest level since the sliding tax scheme was introduced in

128 YEAR MONTH MEASURES 2011 February 2011 February 2011 February 2011 February 2011 February 2011 February LIBERIA - oil palm expansion: Malaysia-owned oil palm giant Sime Darby announced that this year it will start planting oil palms on a 220,000 ha concession granted by the government. Initially, the creation of some 30-35,000 new job opportunities is envisaged. The country s total land under oil palm amounted to 90,000 ha in MALAYSIA - oil palm productivity - Smallholders: MPOB has launched a government backed programme aimed at raising productivity among smallholders. The current average yield of tons of FFB per ha is to be lifted to tons in the short term. Interventions will focus the adoption of good agricultural practices and the production of higher quality fruit brunches. Furthermore, the government announced that it will support replanting activities over the period. Independent smallholders will be granted a one-off replanting sum followed by monthly payments for two years so as to compensate the loss of income from replanting activities. The supply of high-yielding hybrid planting material by the private sector is said to be adequate. Finally, sustainability certification of smallholder production according to RSPO principles will be facilitated. In Malaysia, smallholders are estimated to account for 40% of total oil palm area and 28% of national oil output. MALAYSIA - oil palm productivity - Plantation sector: During , replanting by large-scale private and governmentlinked plantation companies will also be encouraged via financial incentives. Reportedly, in order to avoid formation of a backlog, every year some 125,000 ha of oil palm need to be replanted countrywide. MALAYSIA - palm oil subsidies: Reportedly, public outlays for edible oil sales at subsidized prices have grown in line with rising palm oil prices. In an effort to counter hoarding and tight supplies, last month the government ordered producers to raise subsidized oil supplies by 20%. THAILAND - consumption policies, palm oil: Palm oil production costs have surged after domestic production was affected first by drought and then by widespread flooding, while global prices also rallied. As a result, an increasing shortage of palm cooking oil has developed in the domestic market. To avoid adverse effects on consumers, the government has taken the following measures: 1) Manufacturers have been urged to refrain from hoarding in light of soaring prices. Reportedly, the government managed to persuade leading producers to step up inventory releases and to abide by the capped price. 2) Eventually, in first week of January, an increase in the government set retail price to 47 Bath (from currently 38 Bath) has been approved so as to reflect the rise in production costs. 3) The government also promised to speed up palm oil imports (the first in three years) and said it would rethink the export plans for crude palm oil, also because of growing domestic demand from biodiesel producers. 4) The shift in mandatory biodiesel blending from B3 to B5 planned for January 2011 (which would lift CPO demand by the biofuel industry to around 1 million tons) will be postponed until at least the middle of The government s first priority remains to produce enough palm oil for food demand.5) Finally, the government informed that it was exploring the possibility to set up a fund for subsidizing palm oil sales so as to help consumers deal with escalating prices at times of supply shortages. Several funding options were under consideration, including state-financed as well as private-public formulas. Sustainable palm oil - Sourcing policies: Dutch bakery ingredient firm Sonneveld will join the list of food processors that commit to use (from 2013 onward) exclusively RSPO certified sustainable palm oil. Challenged by developments in consumer markets, the company started supporting sustainable production practices last year by buying Green Palm certificates. The decision to switch to certified palm oil consolidates the company s efforts in this field. In this context, last year, the Netherlands Europe s leading hub 127

129 YEAR MONTH MEASURES for the import and distribution of palm oil said it was aiming at importing exclusively certified palm oil from 2015 onward February 2011 March 2011 March 2011 March 2011 March 2011 March 2011 March 2011 March Sustainable palm oil - World production and trade: RSPO reported that in 2010 global production of certified palm oil amounted to 3.8 million tons compared to 2.3 million in 2009, while sales rose from less than 500,000 tons to around 1.6 million tons. CHINA: inflation control measures - vegetable oil import duties: Reportedly, relevant ministries have held consultations on whether to temporarily lower import taxes on soybeans and soya oil (to, respectively, 1% and 3%), while keeping palm oil duties unchanged (at 9%). The move would assist the country s crushing and refining industry in coping with rising world prices and hopefully contribute to controlling domestic inflation. By leaving the duty on palm oil unchanged, shipments of that oil could suffer. INDIA - oil palm expansion: The industry expressed doubts regarding recent government initiatives to encourage oil palm cultivation and thus lift palm oil output to 4 million tons over the next 5 years. According to SEA, oil palm cultivation faces important hurdles, including insufficient irrigation facilities. Furthermore, legal impediments and the fact that oil palm does not enjoy plantation crop status are said to discourage private sector investments. INDIA - import duties on vegetable oils: The government informed that the country s duty structure for edible oils will remain unchanged, with crude oils attracting zero duties and refined produce charged 7.5% so as to protect domestic refining industries. Considering the strong rise in world prices and, consequently, in domestic edible oil prices, industry sources were expecting a reduction in tariffs for refined oils. Government officials stated that the duties were not contributing to food-price driven inflation and pointed to recent signs of easing inflation. The only tariff change introduced concerns crude palm stearin, whose 10% duty will be discontinued. The duty elimination is not expected to have a noteworthy effect on stearin markets. INDIA/MALAYSIA - free trade pact: The newly signed free trade agreement (which expands on the India-ASEAN trade pact that came into effect January 2010) includes significant additional tariff concessions for Malaysia s palm oil exports to India. INDONESIA - palm oil export tax: During March, export taxes in the palm oil complex will stay at the record level established in February. Custom officers reported that spiralling prices for crude palm oil have led to an extraordinary increase in the country s export tax revenues. In January alone, the export tax collected amounted to 48% of the target set for the entire year. Given the hike in palm oil prices, the government has stepped up the control of deliveries to the national market to ensure that domestic demand is met. MALAYSIA - minimum wages for oil palm plantation workers: Reportedly, the Human Resources Ministry started discussions with government linked palm oil companies with the aim to raise wages for local and foreign plantation workers. Officials stated that workers deserved improved wages, mirroring the good prices fetched by palm oil. MALAYSIA - palm oil export earnings: Reportedly, the country s revenue from plantation crop exports has climbed to a new record last year, surpassing the 2008 record. Earnings rose as global demand for vegetable oils, rubber and cocoa surpassed supply, leading to higher world prices. To a certain extent, higher demand was also fuelled by the appreciation of the Ringgit against the US dollar, the currency in which exports tend to be denominated. Palm oil accounted for the bulk of last year s plantation crop export earnings. 128

130 YEAR MONTH MEASURES 2011 March 2011 March 2011 March 2011 March 2011 March MALAYSIA - oil palm seed market: Malaysia is estimated to produce close to 90 million oil palm seeds per year. About two thirds are for domestic use, while the remainder enters exports. The country is a world leader in oil palm breeding and cloning programmes and owns some of the highest yielding varieties. Since the 1970s, exportation is prohibited to ensure domestic supplies as well as to protect related IPRs. Current exports are restricted to Malaysian companies operating overseas and to government-to-government trade with selected countries, including Colombia, Honduras, Indonesia, Sierra Leone and Thailand. Reportedly, one of the country s leading seed producers (Felda Agricultural Services) is proposing to drop the existing seed export ban. Allegedly, the country now produces enough seed to cater for both domestic use as well as the export market. Overseas demand for certified seed is said to be huge, with Indonesia and Africa alone requiring, respectively, 130 and 50 million seedlings per year. PAKISTAN - vegetable oil import duties: Contrary to earlier announcements, import duties on palm and soya oil will remain unchanged, according to industry sources. Late last year, duty cuts had been envisaged with a view to halt the escalation in food costs. Allegedly, the government is determined to retain the revenue derived from import taxation. THAILAND - palm oil consumption policies: Following up on earlier announcements, the government has implemented several measures to address the domestic shortage in palm oil: (i) crude palm oil originally reserved for biofuel production is being refined into cooking oil; (ii) palm oil stocks held by the private sector are being turned into cooking oil and distributed at discounted prices by the Public Warehouse Organization; and (iii) crude palm oil is being imported with government permission. State ordered refining operations are subsidized to ensure that end prices do not exceed the ceiling set by the government. As to foreign purchases, special import permits amount to a total of tons. Shipments have been restricted to February and March in order not to interfere with new local supplies expected from April onward. The distribution of foreign palm oil to food industries and other domestic users is centrally controlled. Oil palm expansion - Brazil: Global agri-business firm ADM is joining the list of oil palm investors in the state of Parà. The planned investment aims at diversifying the company s feedstock options for biodiesel production. Over the next five years, ha of palm will be developed along with a processing plant. The company is dedicated to using environmentally and socially sustainable production practices. As part of Brazil s Social Fuel Stamp programme, ADM has committed to purchasing produce also from approximately 600 small family farms (cultivating ha) in the neighbourhood, providing them with technical assistance and guidance on sustainable production methods. ADM s plantation and processing facility will conform to relevant RSPO guidelines. New private-public partnerships: Indonesia - forest conservation in oil palm: Indonesian oil palm business Golden Agri- Resources Ltd has entered a multi-stakeholder partnership involving the Government of Indonesia and The Forest Trust that aims at achieving long-term sustainability in its palm oil operations - in both, environmental and social terms. In an effort to find solutions towards forest conservation, the development of high carbon stock forests, high conservation value forest areas and peat land will be subject to strict controls. In addition, free, prior and informed consent for indigenous and local communities will be guaranteed as will compliance with relevant laws and national interpretations of RSPO principles. The company committed to regularly evaluate and publicly report its performance in these areas. 129

131 YEAR MONTH MEASURES 2011 March 2011 April 2011 April 2011 April 2011 April 2011 April 2011 April Environmental footprint of plantation crops: A new international research project called Stability of Altered Forest Ecosystems (SAFE) has been launched in Malaysia with government backing. The project will look into the effects of forest fragmentation and the impact plantations have on biodiversity. The private foundation that is funding the project (and has links to oil palm business) committed to publish all research results and to promote corrective action if required. Meanwhile, an international NGO has issued a report claiming that oil palm expansion in Borneo Island continues to include conversion of carbon-rich peat swamp forests. EUROPEAN UNION - special biodiesel duties: Reportedly, the European Commission is considering widening the anti-dumping duties imposed on US biodiesel imports in March 2009 and possibly extending them to Canada. In future, purchases of certain biodiesel blends from Canada and all US imports could face duties in excess of 400 per tonne. The initiative follows a year of investigations, which, reportedly, revealed transhipments of US material through Canada as well as a shift in US exports to B19 blends to circumvent existing duties. If endorsed by EU members, the new duties could come into force towards end 2011 and remain in place until EUROPEAN UNION/MALAYSIA - palm oil trade: Private interests in Malaysia are increasingly frustrated by the EU s strict requirements regarding the environmental footprint of biofuel feedstock, notably palm oil. EU officials underlined that the regulations apply to all feedstock equally and that all shipments of certified sustainable produce are welcome. It was also pointed out that shipments destined for food and industrial uses other than biofuel faced no formal restrictions. As to the on-going bilateral free trade agreement talks between the two countries, they will likely include discussions about a sustainability chapter addressing EU palm oil importation issues. INDIA - oil palm development: The following details have emerged regarding the government s new plans in this field: a budgetary allocation of Rs 300 crore has been made to aid the establishment of ha of new plantations. Anticipating a yield of 5 tonnes per ha, the initiative aims at an annual output of tonnes of palm oil after 5 years. INDONESIA - palm oil export tax: Mirroring a decrease in the international price of palm oil, in April, the country s export tax on crude palm oil will be lowered from previously 25% to 22.5%. INDONESIA - palm oil export tax: Reportedly, the government is looking into the possibility of replacing the progressive taxation system with a flat tax on crude palm oil. Various options are being considered. Critics of the progressive tax system, which was introduced to safeguard supplies of palm oil to the domestic cooking oil industry, say that progressive taxation tends to discourage farmers and hampers the development of the downstream palm oil industry. MALAYSIA - biodiesel developments: Reportedly, the government remains committed to introduce mandatory B5 blending this year although palm oil sold for traditional uses has been fetching record prices in recent months. From June, with a 5-year delay, sales of blended diesel will be introduced in stages in the different states. Blending facilities are being set up with government support. To make biodiesel competitive, sales will be tax exempt and a variable subsidy will apply to pump prices. High mineral oil prices and the anticipated relaxation in palm oil prices should help containing government outlays. This year s step-wise implementation is estimated to require maximum tonnes of biodiesel; later, for nationwide operation, tons will be required. For comparison, estimates of the installed production capacity range between 2.6 and 3.4 million tons. Until now, export 130

132 YEAR MONTH MEASURES 2011 April 2011 April did not exceed tonnes (unofficial records). MALAYSIA - sustainable oil palm development: The Sarawak State Government (Borneo Island) issued a statement illustrating its commitment towards socially responsible and environmentally sustainable oil palm development. Last year, Sarawak reported the largest oil palm expansion in the country. Currently, the state has allocated hectares of peat land for oil palm cultivation. Initiatives taken to ensure responsible peat land use are detailed in the document, which is available at THAILAND - palm oil consumption policies: In spite of indications that palm oil prices at the global level (and hence also at national level) are set to come down, the government decided to retain the price control measures introduced last January (to stabilize the domestic market) for three more months. Hence, the palm oil retail price remains at 47 Baht per litre and the FFB price at which crushers buy from farmers remains at 6 Baht per kg. Also, for a given volume of purchases, eventual losses incurred by crushers and refiners will be compensated for by a state subsidy of 1.79 Bath per litre April 2011 April 2011 April 2011 April Sourcing of certified sustainable palm oil for food: US food company Kellogg announced that its worldwide palm oil use will be matched by purchases of RSPO-endorsed GreenPalm certificates (NB: the money raised in certificate trading is used to reward palm producers for working in a sustainable and responsible way). Once sustainably grown produce becomes available in sufficient quantities via reliable, fully segregated supply chains the company committed to purchasing directly certified sustainable palm oil. Reportedly, today, reliable and segregated supply chains for certified produce can only be found in the European market. Sourcing of certified sustainable palm oil for food: From last month, the UK subsidiary of AAK, a global manufacturer of oils and fats, is using certified sustainable palm oil in its full range of bakery fats and other standard products. The company committed to do the same for palm oil stearin from 2012/13 onward. Customers have been reminded that in order to claim ethical sourcing at subsequent marketing stages, all parties of the supply chain must become members of RSPO and need to obtain RSPO approval of their equipment and operations. Oil palm productivity: Effort are underway to accelerate, through improved breeding techniques, the development and commercial release of superior seed material without making recourse to genetic modification. Malaysian biotechnology company ACGT (Genting Plantations Bhd) informed about its work on genomic-based marker-assisted selection technology, which aims at reducing the long breeding cycle of oil palm from 12 to 6 years. Biofuel certification and supply issues: Integrated palm oil supply chain: Global renewable energy provider Mission NewEnergy Ltd. and Malaysian palm oil producer Felda Global Group have entered into a long term supply agreement establishing a fully integrated supply chain for certified palm biodiesel. To comply with European GHG saving targets, carbon emissions along the entire supply chain will be certified using ISCC (International Sustainability & Carbon Certification System). ISCC certification conforms to the EU s Renewable Energy Directive and, in Germany, companies supplying biofuel need it in order to qualify for state subsidies and privileges. 131

133 YEAR MONTH MEASURES 2011 April 2011 May 2011 May 2011 May 2011 May 2011 May Biofuel certification and supply issues: New certification system: The Roundtable on Sustainable Biofuels (RSB) has launched the RSB Certification System. Reportedly, the system provides the assurances operators need to guarantee the sustainability and traceability of their feedstock and fuels. The system has received provisional recognition under Germany s regulatory scheme for biofuels. AUSTRALIA - draft palm oil labelling bill: Tabled in parliament last year, the proposed bill calls for specific labelling standards being applied to food products that contain palm oil. Under current labelling laws, palm oil (which is estimated to be used in approx. 40 % of food products) falls under the generic label vegetable oil. Under the proposed bill, consumers would be specifically informed about the inclusion of palm oil in foods. Furthermore, the use of certified sustainable palm oil (conform to RSPO criteria) would be encouraged. In a public hearing, Malaysian officials criticized the bill stating that it was based on misleading claims, that palm oil would be singled out as the only product with mandatory labelling for reasons not related to health or nutrition, and that palm oil would be classified as a single generic product based on the environmental impact of production methods without differentiating between countries of origin. Malaysia s extensive forest and wildlife preservation policies were also illustrated. As to the bill s recommended use of certified sustainable produce, attention was drawn to the high cost of certification, especially for smallholder producers. INDONESIA - palm oil export tax: Mirroring a further drops in the international price of palm oil, in May, the country s sliding export tax on crude palm oil will be lowered from previously 22.5 to 17.5%. The local oil palm industry continued to criticize the taxation system, claiming that it hampers trade and discourages investment. THAILAND - palm oil consumption policies: Shortage of palm cooking oil in the domestic market is reported to persist. Concerned about adverse effects on consumers, the government decided to indefinitely postpone the planned shift in mandatory biodiesel blending from B3 to B5, and even ordered a cut in the mandate from B3 back to B2 during the months of March and April. THAILAND - soy oil retail price: At a meeting between the state committee overseeing product prices and edible oil manufacturers an agreement has been reached to raise the price for one-litre bottled soybean oil from Baht 46 to 55. The adjustment was made to reflect recent rises in production costs, in particular the higher cost of imported soybeans. The new retail price shall remain in effect for at least three months. The manufacturers original request for a stronger price hike was rejected as it would have posed too heavy a burden on consumers. Palm oil producers refrained from asking for similar upward adjustments, which leaves the retail price for palm oil at Baht 47. Certified sustainable palm oil: RSPO decided to suspend the certification process for an important palm oil plantation in Malaysia until an on-going dispute with natives over plantation land is resolved. The company, which has been given a deadline for reaching an equitable solution over compensation issues, accepted the decision and is working closely with RSPO to find a solution fair towards all parties. Reportedly, this is the second time a company breaching RSPO principles is facing censure. The case is putting to test RSPO s capacity to implement voluntary dispute resolution mechanisms and sanctions that are acceptable to its entire membership. Meanwhile, consumer goods manufacturer Unilever, which buys palm oil from the plantation company in question, said that it might review its buying position if the supplier failed to address the alleged violations. 132

134 YEAR MONTH MEASURES 2011 May 2011 June 2011 June 2011 June 2011 June Lending framework for global oil palm development: After an 18-month moratorium on lending for new palm oil investment and extensive consultations with a wide range of stakeholders, the World Bank/IFC Group adopted a new framework and strategy for future engagement in the global palm oil sector. The Group recognizes the potential of palm oil production to contribute to poverty reduction - provided good environmental and social practices are followed - and hopes to make a contribution to strengthening the sectors sustainability. Future lending by the Group will focus on four key areas: (i) regulatory and governance reforms, (ii) responsible private investments, (iii) improved benefit sharing with smallholders and communities, and (iv) development and widespread adoption of environmentally and socially sustainable standards and codes of practice. Priority will be given to (a) institutional and market initiatives that support smallholders and foster benefit sharing with rural communities, and (b) initiatives that encourage production on degraded lands and seek to improve productivity of existing plantations. New screening and assessment procedures will also be introduced to enable appraisal of opportunities and risks around issues of land use and acquisition, governance, community concerns and working conditions. CHINA - public rapeseed stocks: The government is expected to soon start buying rapeseed (from the crop that is currently being harvested) to replenish state vegetable oil reserves. Reportedly, since last October, total release of rapeseed oil from government stocks amounted to about 1.8 million tons, bringing state reserves to below 1 million. The government is expected to pay Yuan per tonne of rapeseed - about 18 per cent more than last year - to help improve farmers income and to reflect increases in production costs. INDONESIA - palm oil certification: Originally, scheduled to be launched in January this year, mandatory ISPO certification (Indonesian Sustainable Palm oil) is reported to be almost ready to start. The government is set to appoint an ISPO Commission that will manage the certification system and issue the required approvals to sustainably managed plantation companies. Initially, some 20 plantations will be selected for trials of the new certification. Reportedly, companies found to be breaking ISPO rules are going to be subject to sanctions. In the meantime, according to RSPO, the amount of Indonesian produce enjoying (internationally recognized, voluntary) RSPO certification has reached 1.2 million tons. LIBERIA - foreign oil palm investment: Two palm oil firms from, respectively, Malaysia and Singapore have been granted concessions to develop oil palm on a total of ha. Although addressing primarily domestic food needs, in the longer term, the government is said to also eye export opportunities. Reportedly, social and environmental impact assessments will be undertaken before any development begins. Furthermore, the companies are committed to invest extensively in physical and social infrastructure and are expected to assist in the development of out-grower schemes involving smallholders. MALAYSIA-INDONESIA - cooperation on palm oil: Reportedly, the two countries jointly engaged in new efforts to defend the interests of their oil palm industries. Among other initiatives, the creation of a European Palm Oil Council has been announced. On the EU Directive on the Promotion of the Use of Renewable Sources (RED), the two countries reportedly agreed to seek legal advice as to the directive s consistency with WTO provisions. Concerns have also been voiced regarding the implications of a draft palm oil labelling bill that is under consideration in Australia (see MPPU May 2011 issue). 133

135 YEAR MONTH MEASURES 2011 June 2011 June 2011 June 2011 June 2011 August 2011 August UNITED KINGDOM - sustainable palm oil consumption: According to Proforest, an independent non-profit organization, the government of the United Kingdom is considering the introduction of specific policy interventions aimed at increasing the volume of sustainable palm oil consumed within the country s supply chain. In a report commissioned by the government, Proforest maps the structure of UK supply chains and uses of palm oil at each stage and reviews potential policy options along with the likely costs and benefits of each. Certified sustainable palm oil - sourcing policies: Global producer of household products SC Johnson has joined the list of companies committed to using exclusively palm oil originating from responsible and sustainable sources. The company expects to complete the transition to certified sustainable produce by Certified sustainable palm oil - global trade: Sources close to RSPO pointed out that currently only about half of the available certified palm oil actually enters trade as segregated produce. Although more and more end-users are keen to buy segregated produce, the fragmented nature of the industry and a very complex palm oil supply chain are said to prevent buyers from finding the quantities required. Reportedly, at this point, most end-users are forced to resort to buying certificates to back up their claims of sustainable sourcing. The certificate trading scheme offsets end- users consumption against production of an equivalent amount of sustainable oil somewhere at source. Initially conceived as a stepping stone towards physically fully segregated supply chains, certificates could dominate trade in sustainable palm oil longer than originally envisaged. Exemption from EU countervailing duties on biodiesel: A Canadian renewable energy company reported that it has been exempted from EU duties applying to biodiesel imports from North America. Reportedly, the exemption is a result of the company s full compliance with the EU s processes, including the submission of formal replies to questions and extensive collaboration with EU officials during a site visit. AUSTRALIA - draft palm oil labelling bill: The Australian Senate will likely reject a draft bill about compulsory labelling of palm oil in food products (see also MPPU no. 25, May 2011). Doubts have arisen as to whether the issues surrounding palm oil presence in foods justify an amendment of the existing labelling laws. Also, divisions became evident between industry bodies, consumer organizations and conservation groups. Furthermore, legislators also pointed to progress being made in the adoption of specific labelling under existing voluntary arrangements. CHINA - retail price cap on edible oil: According to industry sources, the price cap on sales of edible oil introduced towards the end of last year with a view to counter food price inflation is still in place. Originally, price ceilings were supposed to be lifted by June. However, in May and June 2011, consumer price inflation has risen, respectively, 5.5% and 6.4% compared to the corresponding months of 2010, thus remaining historically very high. Private sources expect the price caps to remain in place until mid-august. Reportedly, the government decided to carry out an assessment of cooking oil stocks available in the country. Only if inventories were found to be sufficiently ample, price controls would be relaxed. Meanwhile, caught between retail price caps and rising crop prices, edible oil enterprises in Heilongjiang (the country s main soybean production base) are reported to be working way below installed capacity. 134

136 YEAR MONTH MEASURES 2011 August 2011 August 2011 August 2011 August 2011 August EUROPEAN UNION - biofuel sustainability certification: Starting this year, in order to count towards the EU's renewable energy targets, utilization of biofuel - whether of domestic or imported origin - requires proof of sustainable production methods. The first seven voluntary certification schemes have just been approved by the European Commission, namely (i) ISCC, a German government-funded scheme covering all types of biofuels; (ii) Bonsucro-EU, a scheme focused on sugarcane-based biofuels in Brazil; (iii) RTRS-EU-RED, an initiative for soy-based biofuels in Argentina and Brazil; (iv) RSB-EU-RED, a scheme covering all forms of biofuels; (v) 2BSvs, a French industry initiative covering all types of biofuels; (vi) RSBA, a scheme developed by biofuel producer Abengoa to cover its supply chain; and (vii) a programme from biofuel producer Greenenergy covering sugar cane ethanol from Brazil. A number of civil society groups have questioned the schemes ability to objectively demonstrate sustainability in biofuel production. INDONESIA - palm oil export tax: Following the recent drop in international quotations, the export tax on crude palm oil and its derivatives will be lowered to 15% in August, compared 20% applied in July. Reportedly, the government is also considering lowering the upper limit in the country s progressive export taxation system to 20%, compared to 25% at present. The bottom rate of the sliding tax would remain unchanged at 1.5%. The reason provided for the proposed adjustment is that the levy failed to spur local processing of palm oil into downstream products as originally envisaged. INDONESIA - ban on forest and peat land conversion: Since the nation-wide 2-year moratorium on forest clearing and peat land conversion has come into effect last May (see also MPPU no. 17, August 2010), expansion activities by Indonesian and Malaysian oil palm firms in Borneo Island seem to have come under greater scrutiny. In particular, a recently published list of exemptions to the moratorium has attracted the attention of environmental groups. In point of fact, those concessions and licenses that were granted before the new law became effective are exempted from the moratorium. INDONESIA - palm oil certification: Mandatory certification according to the newly launched ISPO environmental standard (see also MPPU no. 20 & 26) is officially expected to start no later than August. Announced in November of last year, the initiative has been slow to take off. Reportedly, the government and the main stakeholders of the palm oil value chain still need to agree on the composition and operations of an ISPO commission and secretariat. However, a dozen independent auditors have already been officially appointed and given the green light to start the certification process. The auditing exercise is expected to require about 1-2 months per oil palm firm. MALAYSIA/INDONESIA - oil palm plantation workers: In oil palm, harvesting remains predominantly manual and is difficult to mechanise. Over the last years, a chronic shortage of workers has developed in Malaysian oil palm plantations, where 80% of the labour force comes from abroad, mostly Indonesia. Reportedly, strict entry requirements and work permit rules together with better job opportunities in Indonesia have led to a drop in foreign worker arrivals in Malaysia. Plantation companies report that the reduction in labour force has negatively affected productivity (and profit margins) as they are forces to increase the intervals between harvests. The lack of labourers also led to higher wages, thus pushing up production costs. In Indonesia, where oil palm continues to expand strongly, demand for labour is high and wages have become increasingly attractive. As a result, competition between the two countries to retain labour force has increased sharply in recent years. 135

137 YEAR MONTH MEASURES 2011 August 2011 August 2011 August 2011 August 2011 August Certified sustainable palm oil - Supply: Global production of RSPO certified palm oil is reported to grow rapidly. According to industry estimates, currently about 9% of global palm oil output is being certified. Reportedly, today about 5 million tons undergo certification compared to only 1 million tons in Around 54% of all certified produce originates from Malaysia, followed by Indonesia with 35%. A big company that runs plantations in both Malaysia and Indonesia informed that its production of certified palm and palm kernel oil has reached 1.5 million tons and is set grow to 3 million tons by Certified sustainable palm oil - Industry sourcing: Cargill is committed to source 100% of the palm oil products it trades from RSPO certified sustainable sources by Currently, about 70% of the palm oil traded comes from certified sources. The company s supplies to customers in Europe, the US, Canada, Australia and New Zealand will be fully certified already by This plan is supposed to help the company to meet the rising demand for sustainable produce amongst manufacturers and retailers. At the same time palm oil producers will be encouraged to adopt more sustainable practices. The company actively assists producers in the adoption of sustainable practices and specifically helps smallholders to understand the RSPO criteria. Reportedly, smallholders at a Cargill-owned plantation in Indonesia recently started selling certified palm oil at a premium. Other benefits reaped by the farmers are said to include increased crop productivity and enhanced operational efficiency. Biofuel feedstock preferences: Global producer and supplier of certified sustainable biofuels Neste Oil reported the following shifts in its raw material procurement: crude palm oil now accounts for no more than 50% of total feedstock, while the proportion of waste animal fat and by-products form vegetable oil refining has grown to 40%. Furthermore, the feedstock base has been expanded by adding jatropha and camelina oil. The company also conducts research on soybean oil, waste fish oil, used cooking oil, tall oil and entirely new materials (such as algae) continues. Conversion of palm oil mills: A number of palm oil processors in Malaysia and Indonesia engaged in efforts to convert their conventional mills into green ones via the full exploitation of waste products. The conversion includes the production (and commercial sales) of dry long fibre pellets and the breaking-up of palm oil mill effluent along with the corresponding energy extraction, which reduces waste treatment costs. The cost of converting a 60t FFB/hour mill is reported to amount to US$ 10 million, with an alleged payback period of only 3-4 years thanks to the associated cash returns. Certified sustainable soy: Certification and trading of sustainable soy has been launched by RTRS, the Round Table on Responsible Soy Association. RTRS brings together stakeholders of the entire soy value chain, including several civil society organizations. Certification requires compliance with the following five principles: (i) good business practices and legal compliance; (ii) responsible labour conditions; (iii) responsible community relations; (iv) environmental responsibility; and (v) good agricultural practices. Producers in Brazil and Argentina have already applied for certification. To facilitate trade, RTRS also launched a certificate trading platform under which soybean producers receive rewards for delivery of certified produce. First purchases of soybean and soy oil certificates have been reported by Unilever Brazil and the Dutch feed and food industry. The Association expects to certify 0.5 million tons of soybean this year and double that amount during Producers using RTRS certification also have the option to include a biofuel annex to the auditing process, which provides them access to the EU biofuel market, where RTRS certification enjoys official recognition. 136

138 YEAR MONTH MEASURES 2011 September 2011 September 2011 September 2011 September 2011 September 2011 September INDIA - government imports of edible oil: Reportedly, the government intends to extend its edible oils import programme for public distribution at subsidized prices, which is due to expire in September 2011, until September Up to 1 million tons would be imported and distributed by state-run trading agencies. Private sources estimate that the subsidized sales to poor households since 2008 have contributed to the rise in overall domestic consumption in recent years. INDONESIA - palm oil export tax - September tax rate: With international palm oil prices about unchanged in August, the export tax on crude palm oil will remain at 15% during September. INDONESIA - palm oil export tax - Modified taxation scheme: A modified palm oil taxation system is going to come into effect in October. While progressive taxation based on world market prices is going to remain in place, the min. /max. tax range will be narrowed to per cent for crude palm oil and for refined oil compared to the current, common band of per cent. Furthermore, in addition to quotations in Rotterdam, prices form commodity exchanges in Malaysia and Indonesia will be used to calculate the international reference price. But the key change is the preferential treatment - i.e. lower tax cap - accorded to refined oil relative to crude oil exports, which, according to market observes, denotes renewed efforts by the government to promote domestic processing and value addition in palm oil. In fact, trade data reveal a drop, over recent years, in the share of refined oil palm products in total shipments (to less than 50%). Assuming Indonesia s future shipments of processed palm oil rise as a result of the new tax rates, competing exporters (in particular Malaysia) as well as buyers of Indonesian oil palm products could be adversely affected. Malaysia, where refined product shipments account for over 80% of total exports, could be exposed to increased competition considering that Indonesian refiners enjoy significantly lower production costs. Therefore, Malaysia may consider introducing new measures to support its own processing sector. On the other hand, importing countries, in particular those that have expanded their own refining capacities and thus prefer to buy crude palm oil could experience a partial shift from crude to (more attractively priced) processed palm oil imports from Indonesia. In particular India, which is Indonesia s main customer for palm oil, could be affected - also because, protecting its own refining industry via higher import duties might not be an option when the country is faced with inflationary pressure. MALAYSIA - smallholder support: Reportedly, the government decided to allocate, through the country s Palm Oil Board, RM 7,000 per ha to small farmers for them to participate in the replanting and new planting of oil palms and thus contribute to the expansion of domestic production. The programme is targeted at some 300,000 smallholders that cultivate about 650,000 ha of land. Certified sustainable palm oil - RSPO certification: Three years after its launch, RSPO certification is now reported to involve a production area of 1 million ha word-wide, concerning close to 5 million tons of palm oil or about 10% of global output. The 1 million ha mark has been reached through the certification of the supply base and mills of a major Brazilian producer, supposedly demonstrating the feasibility of oil palm cultivation in the Brazilian Amazon region - in a manner compatible with sound environmental and social standards. Certified sustainable palm oil - national certification scheme: Following the footsteps of Indonesia, the Malaysian government reportedly started planning a national certification scheme - independent from voluntary RSPO certification (which is currently used by producers to certify about 17% of domestic output). Reportedly, the government does not fully support the RSPO scheme which 137

139 YEAR MONTH MEASURES 2011 October 2011 October is said to be subject to revisions and not to provide the type of service the market requires. Under the planned national system, buyers will be offered direct, physical access to certified palm oil, with due attention to all the concerns raised by the trade. Furthermore, small producers would not face any disadvantages in obtaining certification. AUSTRALIA - draft palm oil labelling bill (see also MPPU no. 25&27, May& Aug. 2011): Reportedly, although the concerned Parliament committee recommended not to pass the draft bill on labelling standards for food products that contain palm oil, the Senate opted to go ahead, submitting the bill to the House of Representatives. Meanwhile the bill has also been expanded to apply to any food as well as non-food product containing palm oil or its sub-products. Malaysia s industry (which provides virtually all of Australia s palm oil) responded with a second appeal to the Parliament explaining that the draft law was based on misleading claims and the bill presented an indirect trade barrier violating international trade rules. EUROPEAN UNION - sustainable biofuel production: Earlier expected for end 2011, the release by the European Commission of guidelines on the influence of indirect land use changes (ILUC) on carbon savings in biofuel production and utilization seems to have been postponed by 6 or 7 more years because scientific uncertainties persist. The ILUC concept attempts to measure the effects of local production of a particular biofuel feedstock on global food crop production and GHG emission levels. Reportedly, the idea is to delay feedstock specific rules on ILUC in favour of an indirect approach that will affect all biofuel crops equally, namely an increase in the emission savings threshold that all biofuels must meet in order to count towards the bloc s bioenergy targets (thereby gaining access to various preferential treatments). Originally set at 35% (emission savings compared to fossil fuel) from 2013 and 50% after 2017, the 2013 threshold could be revised upward to 45-50%. While providing some relief to the EU biofuel industry, the new policy would be meant to help phase out the worst performing biofuels and prevent further investments in biofuel production systems with low levels of sustainability October 2011 October INDIA - import duty on refined palm oil: In response to Indonesia s restructured export tax (which is expected to boost the nation s shipment of refined oil possibly making it unprofitable for importing countries to buy crude palm oil for local processing), India s processing industry is urging policy makers to raise the country s import duty on refined palm oil from currently 7.5% to at least 15%. At present, close to 80% of the country s edible oil requirements are covered by imports of crude palm oil, which subsequently gets refined locally. However, at the current tariff levels and with reduced prices for processed products coming from Indonesia, India s imports of refined palm oil are likely to rise sharply, thus hurting the country s refining industry. Already, the country s annual refining capacity is currently estimated to be utilized to only 60%. Reportedly, the country s Food Ministry is backing the industry s request and has taken up the matter with the Finance Ministry. INDIA - overseas farm land acquisition: According to unofficial sources the government is working on policies that will allow Indian agribusiness companies to buy land abroad for growing various crops, including oil palm. Reportedly, large tracts of uncultivated land, especially in Latin America and Africa, could be earmarked. Given India s rising population and related food security concerns, policy makers are looking into means to encourage outsourcing of domestic food production, recognizing that, in the longer term, securing food supplies alone via the introduction - at national level - of yield improving technologies and better irrigation facilities could prove challenging. Also the vulnerability of domestic agriculture to adverse weather conditions seems to be of concern. 138

140 YEAR MONTH MEASURES 2011 October 2011 October 2011 October 2011 October 2011 October 2011 December INDONESIA - palm oil export tax: After its recent decision to modify the upper and lower limits for the export duty on crude and refined palm oil (driven by the objective to stimulate shipments of processed products), the government has decided to adjust the actual level of the tax for processed palm oil from 15% to 8%, while increasing the rate for crude oil from 15% to 16.5% - a tax structure that clearly favours shipments of refined products. The new rates will come into effect on 1 st October. INDONESIA / PAKISTAN - palm oil trade: The recently signed preferential trade agreement between the two countries is expected to restore Pakistan s imports of Indonesian palm oil to their traditional level. Over the last few years, purchases from Indonesia had shrunk in favour of imports from Malaysia, which in November 2007 sealed a free trade agreement with Pakistan. Under the new trade pact, Pakistan will cut its import duty on Indonesian crude and refined palm oil by 15%, thus granting the same treatment it applies to imports from Malaysia. The new agreement will come into force next January, after more than six years of negotiation. Reportedly, until 2007, Pakistan sourced 55% of its palm oil imports from Indonesia. MALAYSIA - oil palm seed cost: Reportedly, the private industry is set to increase the price for germinated seed by 30% from January next year. Behind the rise are (i) heavy investments in past years into breeding for higher yields and (ii) rising production costs, due in particular to increases in minimum labour wages and foreign worker levies as well as higher fertilizer costs and electricity tariffs affecting production costs in plantations and processing plants. MALAYSIA - possible assistance to palm oil refiners: Indonesia s recent restructuring of palm oil export taxes was bound to affects its main competitor in the export market, Malaysia. The country, which over the years succeeded in exporting most of its palm oil in refined form, is destined to see profits in the production and exportation of refined produce falling as a result of Indonesia s tax adjustment. Experts estimated the new price advantage enjoyed by Indonesian competitors at USD 70 to 130 per tonne of refined palm oil. As under current conditions reducing costs by such amounts may well be unattainable for Malaysian refiners, the government seems to be under pressure to consider measures to support the industry. Industry experts listed the following options for possible government intervention, all aimed either at increasing domestic palm oil supplies or at lowering the domestic price for crude palm oil: (i) the gradual reduction (or abolition) of the existing tax-free export quota for crude palm oil; (ii) the reduction (or removal) of windfall taxes that were imposed on oil palm plantations in a period of rising profits; (iii) the introduction of tax rebates for the downstream industry; and (iv) setting domestic price ceilings for crude palm oil. MALAYSIA - conversion of palm oil mills: In Malaysia, the notion of converting conventional mills into green ones via the full exploitation of waste products will be the objective of a newly formed public-private partnership (between Sime Darby Foundation and Universiti Kebangsaan). The aim is to turn the waste products of the milling process (estimated at more than 80 million tonnes of biomass per year at country level) into bio-fertilizer, animal feed and bio-fuel for commercial use. EUROPEAN UNION biofuel policy and industry concerns, EU policy on ILUC: Although the European Commission committed to improve EU biofuel policy by introducing guidelines on the influence of indirect land use changes (ILUC) on carbon savings, the release of new rules has been postponed repeatedly because of persisting scientific uncertainties. The ILUC concept attempts to measure the effects of local production of a particular biofuel feedstock on global land use and GHG emission levels as well as on the production and prices of basic foods. On this matter, a group of scientists and economists urged EU policy makers to formally recognize that biofuel production can have indirect impacts on land-use, and called for the resulting emissions to be taken 139

141 YEAR MONTH MEASURES 2011 December 2011 December 2011 December 2011 December into account fully when assessing which biofuels help in the fight against global warming. The petition states that without addressing ILUC, the EU s targets for renewable energy in transport may fail to develop genuine carbon savings in the real world; ignoring ILUC in the bloc s policies could in fact cause increases in GHG emissions rather than reductions. Attention was drawn to numerous studies indicating that emissions related to biofuels expansion are significant and can be quite large possibly exceeding those related to conventional fuel. While the discussion centres on environmental gains and social justice, also the fate of the EU s biofuel industry seems to be at stake, notably that of biodiesel producers. Observers point out that a policy which ignores ILUC effects leaves the industry in turmoil and doesn t allow biofuel producers to plan properly for the future. Interestingly, EU bioethanol producers are reported to have come out in support of accounting for ILUC, because, allegedly, bioethanol stands to gain an advantage over biodiesel when land-use impacts are factored in. In the meantime, the bloc s biodiesel industry has produced studies claiming that the impact of ILUC has been greatly overestimated. EUROPEAN UNION biofuel policy and industry concerns, EU biodiesel production and trade: Total biodiesel output is estimated at 9-10 mill tons this year, implying that expansion in production has come to a halt and that no more than 40-45% of the EU s installed production capacity is being used. The low utilization rates could force part of the industry to close down. Apparently, the sector s weak performance is not the result of falling demand for biodiesel. Rather, with prices for rapeseed oil (the main feedstock) rising markedly, domestic biodiesel production has become less profitable and more exposed to import competition. Importing of soy oil and palm oil-based biodiesel has become increasingly attractive. For the current year, those imports have been tentatively estimated at 2.5 mill tons, 21% higher than in Main origins are Argentina, Indonesia and Singapore. The EU biodiesel industry claims that part of these imports involve dumping and therefore decided to call on the EU Commission to investigate on the issue. In recent, similar cases the EU decided to impose anti-dumping duties. INDIA palm oil import policy: As anticipated, the recent change in Indonesia s export duty structure for palm oil and derived products represents a major threat to India s vegetable oil refining industry (see also MPPU no. 28 & 29). After initial calls to lift the import duty on refined oils (so as to stem the inflow of refined palm oil from Indonesia), the industry is now asking for an upward revision in the base prices on which import taxes are calculated. So far the government has not yielded to the industry s request, supposedly out of concern that the proposed measures could propel domestic food price inflation upward. Market observers are warning that, eventually, the country could find itself faced with both higher landed costs for refined palm oil and rising international prices for crude palm oil. In any case, protecting the domestic refining industry may prove difficult in the long run: the sector is said to suffer from inefficiencies and poor infrastructure, which weakens its position vis-à-vis international competitors. According to the latest media reports, the Indian government is determined to seek a reduction in Indonesia s export tax on crude palm oil, possibly in lieu of low-cost supplies of Indian rice to Indonesia. INDONESIA - palm oil export policies, export tax: Based on a decrease in international palm oil quotations, the country s export tax on crude palm oil has been lowered from 16.5% in October to 15% in November. The export tax on refined palm oil was also lowered. During December, the export tax rates will remain unchanged. INDONESIA - palm oil export policies, concerns of oil palm growers: Reportedly, oil palm planters and smallholders used to ship crude palm oil are complaining that the government s recent export tax restructuring is forcing them to pay more for their exports than processors who export refined oil. Such situation is said to lower the incentive for smallholders to replant and improve 140

142 YEAR MONTH MEASURES productivity levels. In addition, the higher crude oil export tax may also encourage smuggling December 2011 December 2011 December 2011 December INDONESIA biodiesel exports: The country s exports of palm oil-based biodiesel (mainly to the European Union) are reported to be on the rise. After a slow start in the mid-2000s, since 2008 shipments (most of which are bound to the EU) have gone through a four-fold increase and are estimated at thousand tons this calendar year by private sources. The estimate implies that about three quarters of domestic production are exported a development that reflects the government s policy to set export taxes for palm oil-based fuel at a lower rate than crude palm oil. In the recent tax structure change, the tax on biodiesel has been capped at 7.5 %. In addition biodiesel exports are reported to enjoy a tax-free threshold. MALAYSIA/INDONESIA palm oil policies: The recent change in Indonesia s export duty structure for palm oil and derived products potentially reduces the competitiveness of refined palm oil production and export in Malaysia (see also MPPU no. 28 & 29). The country s refining industry is concerned about both a possible build-up in stocks of refined oil as well as growing difficulties in sourcing sufficient amounts of crude palm oil (CPO). With the country s refined palm oil becoming more expensive compared to Indonesia, Malaysian exporters could lose market share, especially in price-sensitive countries like China and India. To address these concerns, officials from the two countries are engaged in talks, focusing on review of their respective export policy measures. Joint measures that will benefit downstream palm oil processing industries in both countries are expected to be announced before year-end. Recent official sources confirmed that the two countries agreed to review their respective tax structures. Options examined include a revision of Indonesia s export duties on refined palm oil and a reduction in both countries high CPO export tax. Considering that Malaysia also imports crude oil from Indonesia (as domestic refining capacity has grown beyond the country s own output) a duty-free quota on Indonesian-origin CPO bound for Malaysia might also be considered. Apparently, the two countries are determined to come up with mutually beneficial solutions and strategies. MALAYSIA biodiesel programme: Launched in June of this year, mandatory sales of B5 biodiesel in the three central states of Peninsular Malaysia are reported to proceed as planned. A total of tons of is expected to be required to satisfy demand (based on an estimated annual diesel consumption of 2.49 billion litres). The programme relies on public subsidies to the tune of RM 106 mill per year. The subsidy is required to maintain the price of biodiesel at RM 1.80 per litre, the same as regular diesel. At present, the subsidy provided per litre amounts to RM Nationwide introduction of B5 is scheduled for early NETHERLANDS refining industry affected by Indonesian export policy: After India and Malaysia, the Netherlands has voiced concerns about adverse effects Indonesia s revised palm oil export policy is having on the Dutch vegetable oil refining industry. Recent trade reports suggest that Indonesia s new export tax structure has conferred global trade in refined palm oil with an edge over crude oil thus leading to significantly lower margins for refiners in traditional crude palm oil importing countries. The Netherlands, one of the EU s main import hubs, offer home to massive processing plants owned by domestic and foreign investors. Indonesia could be exposed to growing criticism for using tools like export taxes, which potentially affect palm oil businesses worldwide. 141

143 YEAR MONTH MEASURES 2011 December 2011 December 2011 December Certified sustainable palm oil - global market challenges: Current production of certified sustainable palm oil is estimated at 5.2 mill tons globally hence accounting for less than 10 per cent of world supply. If supply is limited, demand seems to be even smaller: reportedly, less than 60 per cent of the certified product is finding a buyer. According to market participants, lack of demand is more of a problem than lack of supply. Although major users of palm oil have pledged to move towards sourcing sustainably produced product, many of them are said to remain reliant on offsetting GreenPalm certificates rather than physical oil to meet their commitments. Moreover, part of the global market seems unwilling to pay a premium for sustainable oil. As a result, incentives for sustainable production tend to remain inadequate. Means to expedite the production and use of sustainable palm oil are being debated at RSPO, the multi-stakeholder, non-governmental initiative that has led sustainability efforts at the international level. Reportedly, increased attention is being given to possibilities of involving governments more closely. One proposal is to encourage national governments to reduce import duties for certified sustainable palm oil so as to offset the price premium coming with the product. Indeed unofficial sources reported that EU policy makers have been invited to consider exempting eco-friendly palm oil from the bloc s 3.8% import duty. Reportedly, the initiative is supported by the Dutch government and could be included in the EU s on-going free-trade negotiations with Malaysia and Indonesia. Certified sustainable palm oil - Indonesian initiative: The Indonesian Palm Oil Association (GAPKI) announced its withdrawal from RSPO. Reportedly, the industry body decided to focus on assisting the government in launching ISPO, the country s own certification system for sustainably produced palm oil. Certified palm oil-based fuel: Renewable energy business Mission NewEnergy has obtained ISCC certification (International Sustainability and Carbon Certification) for its palm oil-based biodiesel, which is said to allow GHG emission savings of 41-47%. With ISCC fully meeting European Union RED-requirements, the company has begun selling palm oil-based diesel to the EU market. The company informed that it has also submitted an application to the EPA in the United States, which is currently evaluating compliance with relevant US requirements. Source: The oilseeds desk of the Trade and Markets Division of FAO 142

144 ANNEX IV Import Tariffs, Palm Oils - European Union, December 2011 CN 115 heading Product Palm oil, crude, non-food applications, under customs control Palm oil, crude, other Palm stearin, solid fractions, in immediate packaging of a net content not exceeding 1 kg Palm stearin, solid fractions, other Palm oil, refined/palm olein, non-food applications, under customs control Palm oil, refined/palm olein, other Palm oil, hydrogenated or interesterified, in immediate packaging of a net content not exceeding 1 kg PALM PRODUCTS: CUSTOMS TARIFFS AND TAXES General/MFN (ex. Malaysia, Indonesia) GSP base regime (ex. Brazil, Nigeria, Thailand) GSP and special arrangements (ex. Colombia, Ecuador, Guatemala, Costa Rica, DR Congo) Economic partnership agreements (ex. Côte d Ivoire, Ghana, Papua New Guinea) 0% 0% 0% 0% 3.8% 0% 0% 0% 12.8% 4.4% 0% 0% 10.9% % 2 0% 0% 5.1% 2 1.6% 2 0% 0% 9% 3.1% 0% 0% 12.8% 8.9% 0% 0% 115 Combined Nomenclature, established by the European Union and meeting, at one and the same time, the requirements of the Common Customs Tariff ( ) and of the external trade statistics of the European Union see online EU customs tariff database (TARIC) The EU has fully suspended, provisionally until , its import duties on these products for the manufacture of industrial monocarboxylic fatty acids CN heading ; methyl esters of fatty acids of heading 2915 and 2916; fatty alcohols of subheading , and used for the manufacture of cosmetics, washing products or pharmaceutical products; fatty alcohols of subheading , pure or mixed, used for the manufacture of cosmetics, washing products or pharmaceutical products; stearic acid of CN heading ; goods of heading

145 Palm oil, hydrogenated or interesterified, other % 6.1% 0% 0% Source: European Union Export Helpdesk, Export tariffs, palm oils and biodiesel Indonesia, December 2011 Crude palm oil CIF Rotterdam, US$/ton Crude palm oil (%) 67/PMK.011/ applied up to September Export tariff Crude palm oil (%) 128/PMK.011/ Applied from Sept onwards Refined, bleached, deodorised RBD (%) Palm oil based biodiesel Less , Over Source: Indonesia National Trade Repository INTR, Tax on crude palm oil exported outside quota, Malaysia, December PMK, abbreviation for Peraturan Menteri Keuangan, meaning Regulation of finance ministry 144

146 Certain quotas of crude palm oil exports are free of tax, but subject to export licensing. A tax is levied on crude palm oil exported outside the quota, free of export licensing, as shown below. Price of CPO Tax, % ad valorem First RM per ton Nil Plus on the next 50 RM per ton 10 Plus on the next 50 RM per ton 15 Plus on the next 50 RM per ton 20 Plus on the next 50 RM per ton 25 Plus on the balance 30 No export tax is levied on refined palm oil (RBD) and palm olein. Source: JKDM HS Explorer 145

147 ANNEX V AGREEMENTS IN FORCE IN CÔTE D IVOIRE, NIGERIA, GHANA AND SENEGAL Côte D Ivoire Name Type Provider(s) Generalized System of Preferences - Australia Generalized System of Preferences - Canada Generalized System of Preferences - European Union Generalized System of Preferences - Japan Generalized System of Preferences - New Zealand Generalized System of Preferences - Norway Generalized System of Preferences - Switzerland Generalized System of Preferences - Turkey Generalized System of Preferences - United States Entry into force GSP Australia 1/1/1974 GSP Canada 7/1/1974 GSP European Union 7/1/1971 GSP Japan 8/1/1971 GSP New Zealand 1/1/1972 GSP Norway 10/1/1971 GSP Switzerland 3/1/1972 GSP Turkey 1/1/2002 GSP United States 1/1/1976 Other African Growth and Opportunity Act United States 5/18/2000 PTAs Others: ECOWAS - EU economic partnership agreement; Sweden - Côte d Ivoire trade agreement and Brazil - Côte d Ivoire trade agreement Nigeria Name Type Provider(s) Entry into force Generalized System of Preferences - Australia GSP Australia 1/1/1974 Generalized System of Preferences - Canada GSP Canada 7/1/1974 Generalized System of Preferences - European Union GSP European Union 7/1/1971 Generalized System of Preferences - Japan GSP Japan 8/1/1971 Generalized System of Preferences - New Zealand GSP New Zealand 1/1/1972 Generalized System of Preferences - Switzerland GSP Switzerland 3/1/1972 Generalized System of Preferences - Turkey GSP Turkey 1/1/2002 Generalized System of Preferences - United States GSP United States 1/1/1976 African Growth and Opportunity Act Other PTAs United States 5/18/

148 Ghana Generalized System of Preferences - Australia Generalized System of Preferences - Canada Generalized System of Preferences - European Union Generalized System of Preferences - Japan Name Type Provider(s) Generalized System of Preferences - New Zealand Generalized System of Preferences - Norway Generalized System of Preferences - Switzerland Generalized System of Preferences - Turkey Generalized System of Preferences - United States Entry into force GSP Australia 1/1/1974 GSP Canada 7/1/1974 GSP European Union 7/1/1971 GSP Japan 8/1/1971 GSP New Zealand 1/1/1972 GSP Norway 10/1/1971 GSP Switzerland 3/1/1972 GSP Turkey 1/1/2002 GSP United States 1/1/1976 African Growth and Opportunity Act Other PTAs United States 5/18/2000 Senegal Generalized System of Preferences - Australia Generalized System of Preferences - Canada Generalized System of Preferences - European Union Generalized System of Preferences - Japan Name Type Provider(s) Generalized System of Preferences - New Zealand Generalized System of Preferences - Norway Generalized System of Preferences - Switzerland Generalized System of Preferences - Turkey Entry into force GSP Australia 1/1/1974 GSP Canada 7/1/1974 GSP European Union 7/1/1971 GSP Japan 8/1/1971 GSP New Zealand 1/1/1972 GSP Norway 10/1/1971 GSP Switzerland 3/1/1972 GSP Turkey 1/1/

149 Generalized System of Preferences - United States Name Type Provider(s) Duty-Free Tariff Preference Scheme for LDCs Entry into force GSP United States 1/1/1976 LDC-specific India 8/13/2008 Duty-free treatment for LDCs - China LDC-specific China 7/1/2010 Duty-free treatment for LDCs - Chinese Taipei Preferential Tariff for LDCs - Republic of Korea LDC-specific Taipei, Chinese 12/17/2003 LDC-specific Korea, Republic of 1/1/2000 African Growth and Opportunity Act Other PTAs United States 5/18/2000 Others: Ghana Netherlands double taxation agreement; Ghana - EU interim economic partnership agreement 148

150 ANNEX VI FOB AND CIF CONTRACT TERMS A. Incoterms International Commercial Terms The Incoterms rules are the global standard for the interpretation of the most common terms in foreign trade. These international standard business rules are recognized and used worldwide in international and domestic contracts for the sale of goods; they provide internationally accepted definitions and rules of interpretation for most common commercial terms. They help traders avoid costly misunderstandings by clarifying the tasks, costs and risks involved in the delivery of goods from sellers to buyers. Traders commonly use Incoterms rules for purely domestic sale contracts. In the United States, Incoterms rules are increasingly used in domestic trade, rather than the former Uniform Commercial Code shipment and delivery terms. Moreover, Incoterms rules have traditionally been used in international sale contracts where goods pass across national borders. In various areas of the world, however, trade blocs, like the European Union, have made border formalities between different countries less significant. Consequently, the rules have been adapted in 2010 in order to make them applicable to both international and domestic sale contracts. Incoterms 2010, which were launched in mid-september 2010 and came into effect on 1 January 2011, state in a number of places that the obligation to comply with export/import formalities exists only where applicable. It is useful to note that the International Chamber of Commerce ( organises courses of six hours of online instruction and training in Incoterms In this respect, please consult B. FOB contracts Under the INCOTERMS, FOB implies an export sale. A FOB contract (meaning Free on Board) implies that the goods are placed on board of a ship by the seller, at the port of shipment defined in the terms of the sales contract. The risk of loss or damage to the goods is transferred from the seller to the buyer, as soon as the goods pass the ship s rail. This means, among other things, that that the buyer has to bear any unforeseen costs and risks in bringing the goods to destination and that he must pay the sales price no matter what happens to the goods, as long as the cause cannot be attributed to the seller (for example, inadequate packaging). The seller s main obligations are to: supply the goods in conformity with the sales contract; deliver the goods on board of the vessel agreed upon; obtain the export licence, where needed, and pay export taxes and fees; provide a clean-on-board receipt in proof of delivery of goods; and pay loading costs according to custom requirements of the port to the extent that they are not included in the freight. The documents required for a FOB contract are the commercial invoice, a customary clean receipt and the export licence. Optional documents may include certificate of origin and import clearance. The buyer s primary duties are to: nominate the carrier; contract for the carriage and pay the freight; pay loading costs to the extent that they are included in the freight; and pay unloading costs. 149

151 Palm products are usually carried by regular liner vessels (vessels designed and built primarily for the carriage of cargo which ply regular trade route and sailing schedule), on liner-terms (the freight, paid by the buyer, is inclusive of carriage and cost of cargo handling at the loading and discharging ports). In this case, the seller frequently makes the arrangements for shipment on buyer s behalf; the buyer having the duty to reimburse the seller s expenses, unless otherwise agreed (such as charges of freight forwarders charges and shipping agents costs). C. CIF contracts CIF means cost, insurance and freight. The seller s responsibility under this contract is to: supply the goods in conformity with the sales contract; contract for the carriage of the goods and pay the freight charges to the agreed port of destination; load the goods on board of the vessel agreed upon; obtain the export licence and pay export taxes and fees, if required; contract the insurance of goods during carriage and the insurance premium; provide the buyer with the invoice, a clean bill of lading and a cargo insurance policy or certificate; and pay loading costs and unloading costs to the extent that they are not included in the freight. The documents required for a CIF contract are the commercial invoice, bill of lading, export licence and insurance policy. Other documents, such as the certificate of origin or a consular invoice, are optional. The buyer s duties are to: accept delivery of goods upon shipment, when the invoice, cargo insurance policy and bill of lading are provided to him; and pay unloading costs to the extent that they are included in the freight. As far as the insurance is concerned, the insured amount is CIF price plus ten per cent; in case of loss or damage to the goods, the buyer turns to the insurer. CIF INCOTERMS are based on the principle of minimum liability for the seller, who only has to procure insurance on free from particular average FPA terms. This means that he does not have to pay in case of partial (particular) loss or damage, but only when an incident generally affects the ship or cargo, such as stranding 118, collision or fire. The FPA insurance covers also total loss or damage. The C&F ( cost & freight ) contract terms are similar with CIF terms, with the addition that the seller has to provide marine insurance against the risk of loss of, or damage to, the goods during carriage. The seller establishes the insurance contract and pays the premium. 118 Running of a vessel on shore by the winds, waves, to preserve her from a worse fate, or for some fraudulent purpose 150

152 Street address International Trade Centre Rue de Montbrillant 1202 Geneva, Switzerland P: F: E: Postal address International Trade Centre Palais des Nations 1211 Geneva 10, Switzerland The International Trade Centre (ITC) is the joint agency of the World Trade Organization and the United Nations.