Palm Oil: Risks & Opportunities

Palm oil is the lifeblood of many people across the world, but also threatens to destroy the ecosystems on which many of them depend. As one of the world’s major commodity crops, palm oil is the tide on which some companies’ fortunes rise and fall. With increasing pressure from multiple quarters to mitigate the harmful impact of palm oil cultivation, producers’ long-term viability will hinge on how they manage this delicate issue.

It giveth, and it taketh away…
Cheap and durable palm oil is the cooking oil of choice in many parts of the world, including Singapore, and accounts for more than 30% of the world’s vegetable oil production . According to Scientific American , “the plant is a major cash crop for poor farmers in developing countries such as Indonesia, the world’s largest producer of palm oil. Palm oil estates there cover an estimated 8.2 million hectares of land … and that number is poised to skyrocket as the country prepares to double its output by 2030. Palm oil exports bring Indonesia and neighboring Malaysia $40 billion a year.”

But that bounty comes at a price. Palm oil cultivation devastates tropical rainforest, destroys threatened species’ habitats, displaces indigenous populations, and contributes overwhelmingly to climate change. Not only is carbon dioxide released from forest clear-cutting, but far more potent methane is produced from the disruption of underlying peat soils. A study published in Nature Climate Change in October 2012 projected that Indonesian Borneo’s planned oil palm plantation expansion would release 558 million metric tons of carbon dioxide into the atmosphere in 2020. To put this in context, current global annual carbon dioxide emissions are estimated at 35 billion metric tons per year .

Singapore-headquartered Wilmar International (SGX: F34) is the world’s largest processor of palm oil, and owns plantations in Indonesia, Malaysia, and parts of Africa. Late last month, Wilmar acquired a majority stake in a palm plantation venture in Indonesia’s Papua owned by Singapore-based Noble Group  (SGX: N21). Noble moved into Papuan palm three years ago when it announced its intention to develop 32,500 hectares for palm oil production .

Noble intends to seek certification from the Roundtable on Sustainable Palm Oil (RSPO) for its Papuan palm oil plantations . The RSPO is a non-profit organization that unites multiple stakeholders in developing and implementing global standards for sustainable palm oil. All of Wilmar’s Malaysian palm oil acreage is RSPO certified, and the company is increasing the certified proportion of its Indonesian plantations.

RSPO certification is becoming increasingly important. Unilever (NYSE: UL) is one of the world’s largest palm oil buyers, purchasing about 3% of global volume. The company achieved its goal of matching 100% of its palm oil purchase with RSPO-issued GreenPalm certificates at the end of 2012 .

Because a segregated palm oil supply chain does not currently exist – processors mix feedstock from a variety of sources – the best a company can do is purchase these certificates that represent an equivalent amount of RSPO-certified palm oil. It does not mean that the actual palm oil in Unilever’s products was sustainably harvested, a point that the company views as problematic. Unilever has pledged to buy all its palm oil from traceable, sustainable sources by 2020.

In related moves, Starbucks (Nasdaq: SBUX) announced its decision last month to buy only RSPO-certified palm oil by 2015, and Dunkin’ Brands Group, owner of Dunkin’ Donuts, agreed on Thursday to set a date for sourcing 100% of the palm oil used to make its products from sustainable sources.

Both Starbucks and Dunkin’ Brands made their decisions after investor pressure in the form of shareholder resolutions from Green Century Capital Management and New York State Comptroller Thomas P. DiNapoli, respectively. Both filers withdrew their resolutions after reaching these agreements. More palm oil-related shareholder resolutions are currently filed with Yum! Brands, Church & Dwight, and Kroger.

The problem is, many see the RSPO as only a first step, and insufficient on its own. A group of prominent scientists signed an open letter in January 2013 detailing how the RSPO does not do enough to address palm oil cultivation’s climate threats. Many activists go a step further and dismiss the RSPO as “greenwash.” As the world gets more serious about combatting climate change, palm oil – even the certified type – will be under increasing pressure.

There may be an emerging alternative to palm oil. Solazyme (Nasdaq: SZYM) makes environmentally friendly algae oil that can replace palm oil, and it made a $20 million deal in February with Japanese conglomerate Mitsui & Co. to develop new algae oils for the oleochemical industry. Market research firm Lux Research likes Solazyme because it’s “one of the few algae companies that generates revenue today, it is aligning partners and scaling production facilities to sell into high value, personal care markets as it brings costs down to where it can compete in fuels and chemicals.”

Solazyme’s Mitsui deal is minuscule compared to the gargantuan palm oil market, but it could prove to be a leading indicator. Mitsui’s specialty chemicals division general manager, Daiji Kojima, said, “Collaborating with Solazyme allows us to develop highly attractive products to penetrate the traditional oleochemicals industry, and expand beyond the supply limitations caused by both regional oil production and constraints in conventional oil profiles.”

Foolish bottom line
Palm oil is not going away anytime soon, but producers must continue to improve if they wish to survive long term. Noble and Wilmar are both making good progress, but they both have much more to do. Not only should they pursue 100% RSPO certification, but they also should go beyond that label and address the broader sustainability challenges of palm oil production. Otherwise, disruptive alternatives like Solazyme may render them obsolete.

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