Sustainability Standards, Governments Must Do More for Palm Oil Producers

Concealed in half of all supermarket products, palm oil is the most widely produced edible oil. It represents a source of livelihood for over 7 million smallholder farmers worldwide. And given estimates that we need to generate 50% more food by 2050, it could play a key role in enhancing global food security and alleviating poverty.

Despite being incredibly versatile, palm oil often hits the headlines due to its contributions to deforestation, biodiversity loss, and climate change. A new report from the International Institute for Sustainable Development (IISD) unpacks recent market trends in the palm oil sector and examines the role that voluntary sustainability standards (VSSs) can play in improving its socio-economic benefits while addressing these environmental concerns.

The report comes at a time when international crude palm oil prices have been increasing steadily for many years—despite the volatility brought on by the COVID-19 pandemic and Russia’s invasion of Ukraine—but farm gate prices in major palm oil producing countries have declined.

“Farmers are receiving less and less for their oil palm fruits,” said Steffany Bermúdez, Policy Advisor, IISD. “Much of the value and profit in the palm oil supply chain is captured downstream by a handful of corporate groups that dominate the processing and trade of palm oil. Smallholder farmers, who account for two fifths of crude palm oil production globally, get the lowest prices and profits of all actors in the chain.”

With rising production costs, limited negotiation power, and a lack of access to finance and quality inputs to contend with, oil palm farmers are the least buffered against price volatility and market shocks. The result? Many are left struggling to earn a living.

VSSs such as the Roundtable on Sustainable Palm Oil (RSPO), Rainforest Alliance, and Organic encourage oil palm farmers to adopt more sustainable agricultural practices that can reduce the sector’s environmental impacts and increase farmers’ productivity.

“Today, around 17% of palm oil produced complies with one of these standards,” said Vivek Voora, Senior Associate, IISD. “But demand for VSS-compliant palm oil in its main consuming countries, like India and China, is lagging. This likely implies that supply is outstripping demand and that there is VSS-compliant palm oil that is being sold as conventional.”

Furthermore, evidence of the direct effects of VSSs on farmers’ incomes is limited. To date, there is no formalized system in place to calculate the prices and premiums received by VSS-compliant farmers, so direct monetary incentives are not clear or guaranteed. They depend on the willingness of the buyer and fluctuate according to the international market price.

In response to these concerns, VSSs like RSPO have introduced initiatives to provide financial assistance to smallholder farmers and to encourage actors at all levels of the supply chain to share responsibility and commit to time-bound sustainability goals. The latter has helped the proportion of crude palm oil compliant with RSPO that is sold as such rise from 50% in 2019 to 64% in 2021.

But the report argues that adequate policy support is required to make VSS-compliant palm oil more competitive in domestic and international markets and to raise awareness among processors, retailers, and end-consumers in the main consuming countries.

The report provides a series of recommendations for governments, private sector actors, and standard-setting bodies to ensure that palm oil producers receive fair incomes and are incentivized to adopt more sustainable practices. Recommendations include:

• VSSs should establish clear pricing systems that define the minimum prices and premiums required to remunerate compliant farmers fairly and make the investments required to join their schemes viable. Such systems should also consider living incomes, living wages, and the natural capital costs of growing conventional palm oil to make VSS-compliant palm oil more competitive.
• Governments in major producing and consuming countries should offer monetary incentives such as payments for ecosystem services to farmers that join VSSs and adopt successful measures to preserve forests and biodiversity.
• Public and private sector actors in key consumer markets in Asia should work to boost demand for more sustainable palm oil. For example, governments could introduce preferential taxes or tariffs to encourage sustainable consumption, and financial institutions could include stringent sustainability requirements in their funding decisions.

Contact

For more information or to set up an interview, contact media@iisd.org.

About the Sustainable Commodities Marketplace Series

This report is part of the Sustainable Commodities Marketplace Series of global market reports that analyze agricultural commodities to foster transparency, knowledge, and strategic decision making for sustainable development. The series covers bananas, cotton, cocoa, coffee, palm oil, soybeans, sugar, and tea. The series is published by IISD’s State of Sustainability Initiatives (SSI), which aims to advance inclusive value chains by providing credible and solutions-oriented research, dialogue, and strategic advice for decision-makers about voluntary sustainability standards and other supportive initiatives.

About the International Institute for Sustainable Development

The International Institute for Sustainable Development (IISD) is an award-winning independent think tank working to accelerate solutions for a stable climate, sustainable resource management, and fair economies. Our work inspires better decisions and sparks meaningful action to help people and the planet thrive. We shine a light on what can be achieved when governments, businesses, non-profits, and communities come together. IISD’s staff of more than 120 people, plus over 150 associates and consultants, come from across the globe and from many disciplines. With offices in Winnipeg, Geneva, Ottawa, and Toronto, our work affects lives in nearly 100 countries.