Palm oil remains one of the significant sectors in Malaysia’s economy and has been a critical contributor to the country’s socio-economic development. In 2020, the sector’s contribution to the Malaysian gross domestic product (GDP) was estimated at 3.7% (as of Q3), and the overall export revenue at RM 72.77 billion. Palm oil provides direct and indirect employment to over 3 million Malaysians, out of which nearly 500,000 are smallholders.
Despite being a key agricultural product of the tropical region, the palm oil sector faces many challenges, both short and long term. These challenges have a direct impact on the performance of this sector. If not addressed promptly, they can adversely and permanently affect the livelihood of millions of people associated with this industry in the region.
Following are some of the challenges which the Malaysian palm oil industry is facing currently:
Unpredictable scenarios such as covid-19, political uncertainties, policy changes, trade wars, etc., have an immediate impact on all related commodities’ prices. The year 2020 saw multiple such scenarios where palm oil prices took a tumble in the first quarter due to the price war between Saudi Arabia and Russia, which crashed the crude oil market. That was followed by demand disruption caused by the global outbreak of COVID-19. A political spat between Malaysia and its largest buyer India also severely impacted the export of palm oil to India in the first half of 2020.
Supply & Demand of Oils
Supply & Demand (S&D) of palm oil within the region, competing oils, and stock levels maintained in exporting and importing countries has a direct and immediate impact on the price of this commodity. Palm oil is the largest produced and traded edible oil globally. It is always exposed to the price volatility caused by the unpredictable S&D scenarios in the edible oil and oilseed market.
Mechanization & Advancement
The Malaysian palm oil industry faces an uphill struggle with increasing dependence on foreign labour and a slow pace of mechanization. This situation will continue to hinder the overall productivity and growth of the sector.
Unfair & Negative NGO Reporting
The Malaysian palm oil sector has been unfairly targeted by NGOs on allegations of child labour, forced labour, and ill treatment of foreign workers. As a result of these baseless reports, two leading Malaysian exporters have been banned from exporting their products to the United States, pending further investigation.
European Union’s Protectionist Policies
The European Union, which considers itself the guardian of free trade, has adopted various protectionist policies directly targeting palm oil suppliers in developing countries. Following are the five key issues that affect Malaysian palm oil trade in the EU, which are the direct result of such policies:
i) EU Renewable Energy Sources Directive (RED)
The RED mandates that by the year 2030, a minimum of 14% of the energy consumed in EU transport must come from renewable sources. Already from January 1st, 2021 onward, the national levels reached in 2020 (ranging from a low 10% in Malta to a high of 49% in Sweden) must not be undercut.
To determine which biofuels are eligible to be considered “renewable,” the EU differentiates between high and low ILUC-risk feedstock. Indirect Land Use Change is a process in which production occurs on cropland that was previously used for other agricultural purposes, thus leading to an expansion of overall farmland into areas with high carbon stock like forests or wetlands. According to the EU, such land-use change may cause the release of CO2, thereby negating the greenhouse gas savings resulting from increased biofuel use in the first place.
Based on EU calculations, the percentage of ILUC in palm oil production is so extreme that it is the only biofuel feedstock considered high ILUC risk. That results in penalizing palm oil vis-a-vis competing oils, and the methodology used is very controversial.
ii) EU Policy on Forests and Deforestation
Considering that biodiversity loss and climate change require urgent action, the European Commission (EC) in July 2019 adopted a communication on “Stepping up EU action to protect and restore the world’s forests.” Notably, the Communication only provides detailed input for the Commission, which is expected to take further actions in the years to come. Regarding the priority of deforestation-free supply chains, the Communication refers to the Commission’s intention to regulate consumer food information to distinguish the various vegetable oils in products. This reference appears to endorse negative anti-palm oil campaigns. The EC estimates palm oil, soybean, and beef to drive 80% of global deforestation highlights the importance of the issue to Malaysia. The forest issue will figure high on the European agenda in the months to come, and Malaysia should prepare to take a proactive position in the debate.
iii) The EU initiative on mandatary corporate due diligence
Following a February 2020 study on due diligence requirements through the supply chain, the EC announced that it would introduce a legislative initiative on “Mandatory corporate due diligence and accountability”.
This initiative aims to address the impact business operations have on human rights and the environment, regardless of where those are carried out. The Commission is currently working on a text proposal expected for the first quarter of 2021. The European Parliament, for its part, underlined that penalties should be introduced for companies that place products on the EU market which are derived from commodities that endanger forests and ecosystems. Also, within the broader context of the “Farm to Fork” (F2F) strategy published in May 2020, the Commission is pursuing food industry requirements to integrate sustainability into corporate policies and a food labeling framework to empower consumers to make sustainable food choices. Further legislative proposals concerning the supply chain sustainability of food products can be expected in the coming years.
iv) Process contaminants 3-MCPD
Process contaminants are unwanted substances that develop during food processing. 3-MCPD-esters are formed particularly during vegetable oil refining, and palm oil will soon be subject to strict maximum levels of such process contaminants. Starting from 2021, the EC opted for a split-level approach to 3-MCPD, dividing oils into lower and higher maximum levels. For oils and fats from coconut, maize, rapeseed, sunflower, soybean, palm kernel, and olive, the maximum 3-MCPD level is set at 1.250 µg/kg. For other vegetable oils such as refined palm oil, the maximum permitted level is 2.500 µg/kg.
This duality raises unnecessary concerns with the consumer about the consumption of oils considered to belong to the “worse” category. Conversely, palm oil competitors might use the difference for marketing purposes.
v) No Palm Oil & Front of Pack Labelling
Labeling products as “free of palm oil” started in Belgium and France. It has since spread to many other EU member states. Such labels arguably are illegal under state and union law because they are misleading and deceptive. Since 2014 the specific vegetable oils used in food products must be specified on the list of ingredients anyhow. So, a palm oil-free claim is self-evident. However, despite the likely illegality of such labeling practices, EU authorities and member states have largely failed to act. As part of the F2F strategy, the EC announced a proposal for a sustainable food labeling framework in 2024. The goal is to empower consumers to make sustainable food choices. Although this proposal has not received much attention, it is poised to become truly relevant for palm oil. Malaysia should prepare to take a position and proactively contribute to this debate.
Indicating the content of nutrients like fat and sugar in 100 grams or 100 milliliters of pre-packaged foods is compulsory in the EU since 2016. The private sector in various member states has also adopted different traffic light-schemes like Nutri-Score. It indicates on a scale from A to E the nutritional quality of foods. The EU’s food information regulation requires such voluntary labeling to be objective and non-discriminatory. However, Nutri-Score appears to divide foods into ´good´ and `bad` according to their nutritional contents, such as saturated fats. Therefore, palm oil products might end up with a worse score than those containing other vegetable oils.
As the second-largest palm oil producing and
exporting country, Malaysia is working with other stakeholders to address these
challenges related to palm oil trade within the EU in all available forums. Some
of the actions being taken or planned include trade negotiations, court and administrative
action to halt discriminatory and illegal initiatives, and WTO legal action
against the EU over palm biofuel and related restrictions.
Way Forward for Growth & Development of Malaysian Palm Oil Industry
The Malaysian palm oil industry will have to adopt a multi-pronged strategy to ensure that this key sector continues its contribution to the country’s socio-economic growth. There are certain challenges like the supply & demand situation of competing oils, unpredictable economic and political situations, and certain non-tariff trade barriers beyond anyone’s control. However, the industry will have to focus on the following areas to ensure the long-term survival and growth of this sector:
Technological Advancement for Higher output
Keeping in view that the Malaysian government has set a cap on the expansion of oil palm plantations in Malaysia, the only area for growth and expansion in this sector is technological advancement and improving yields. According to MPOB, oil palm yield and by-products can be enhanced to 23 percent from currently 19 percent through upgrading the technology at the plantation and production level.
Certifications & Sustainability
Malaysian industry must continue to achieve 100% sustainability and traceability throughout its supply chain to ensure its commitment towards tackling climate change. By complying with the certification standards laid out by MSPO and RSPO, plantations and smallholders will meet global requirements and achieve high productivity with a low carbon footprint.
Malaysia’s palm oil industry is heavily reliant on the export of its commodity as more than 80% of the total palm oil produced in the country is shipped to more than 150 countries worldwide. Asia-Pacific, the Indian Subcontinent, and Africa are the three largest importing regions for Malaysian palm oil, with a collective share of approximately 70% of the total. To further strengthen its position in the global market, the Malaysian industry will have to expand and establish markets by leveraging global supply chains.
Value Creation Through Downstream
The Malaysian palm oil sector is still heavily reliant on commodity exports, exposing it to a higher degree of price volatility and unpredictable market scenarios. The industry needs to create a roadmap for value-creation through new product applications, diversification, and increased complexity throughout the supply chain.
All Malaysian palm oil industry members need to continuously engage in positive stakeholder interaction and dispel any palm oil misconceptions. A proactive and coordinated communication strategy needs to be developed to convey the Malaysian palm oil industry’s contribution to UN SDGs, sustainability, wildlife conservation, and good agriculture practices.
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