Part 2/2: The Role of Supply Chain Traceability in Making Palm Oil Sustainable

The loose ends of the status quo in sustainable palm oil
To ensure the use of strictly sustainable palm oil, global consumer brands work closely together with their first-tier suppliers. The sustainability norms, controls, and checks that are initiated at the top are expected to disseminate from the first-tier suppliers all the way upwards the supply chain to the growers (e.g. smallholders etc.). However, structured communication (let alone collaboration) between consumer brands and parties that are positioned further at the upstream-side of the supply chain are virtually non-existing.

Similarly, cooperation at the start of the supply chain between smallholders and their direct customers (mostly mills) is almost completely missing. The pick-ups of the fresh oil palm fruits are often arranged on short-notice via calls from the mills. After a quick talk with the smallholder on the phone, the mill or dealer sends a truck to pick up the fruits. Because the smallholders prefer to sell the fruits at any price over not selling at all, the mills or dealers have a tremendous bargaining power over them. On top of that, smallholders have hardly any reference on the current market price because they lack communication with other fresh fruit bunch (FFB) producers. The bottom line is that the smallholders are forced to take what they can get in exchange for their palm oil.

The loose ends are losing
As a result, smallholders only earn a minor portion on what their palm oil is actually worth on the global market. One cost-efficient but environmentally-detrimental way of making up for the low profit margin is to simply increase the plantation area and have a higher output. To make room for a larger plantation area, smallholders burn down significant parts of the rain forest. The implied negative effects on the environment are especially critical considering that half of the globally produced palm oil stems from such smallholders.

Another, more environmentally friendly way of counteracting the low profit margins is to increase the yield and profit per hectare by qualifying for a sustainability certificate. However, doing so requires higher up-front investments such as buying more efficient seeds as well as paying expensive audits to verify the sustainability claims. Increasing the plantation size seems simply to be the cheaper option here. Only large-scale farms possess the financial resources to make such sustainability investments.

How to tighten the loose ends and making the whole chain prosper
Yes, the demand for sustainable palm oil is rising. But the premium that consumers are willing to pay for it gets lost on its way from the top to the bottom of the supply chain. And with the huge variety of products containing palm oil there is always a possibility for the smallholders to still sell their non-sustainable goods on the market. In a nutshell, the lack of collaboration among supply chain partners which originates from a lack of transparency impedes the higher prices paid for sustainable goods at the top to be passed along to the smallholders at the bottom.

In order to help the smallholders benefit from the global sustainability there is a huge value of establishing transparency throughout the supply chain. Specifically, by having real-time access to each other’s information as well as excellent two-way communication, both, smallholders and mills can benefit from. A few examples:

In the bigger picture, the implementation of transparency within the supply chain allows the consumer brands at the top to accurately trace back the origin of their palm oil orders, down to the growers. This transparency empowers smallholders by giving them the opportunity to profit from switching to the production of sustainable palm oil. The higher yield and profit per plant, in turn, makes deforestation redundant and the production of palm oil truly sustainable.

Let’s be honest: Making a real shift towards sustainability needs to be profitable for every party with an influence on it – Not just for a few chosen ones!

By Fabian Wollersheim (link)