Sustainability impacts supply-chain

Unilever said that it would only buy traceable palm oil by end 2014. One of the top buyers of palm oil, the Anglo-Dutch consumer goods manufacturer has been among those leading the charge in sustainable palm oil. It has worked closely with WWF and others in leading the Roundtable on Sustainable Palm Oil (RSPO). It is notable that "At the end of 2012, only around 5% of its palm oil was traceable and certified, a company spokesman said. Part of the problem is that the vast number of suppliers Unilever works with means the company struggles to keep tabs on where each batch of palm oil originates.... Unilever will cut its roster of suppliers to between 10 and 20 from well over 100 as it adopts traceable sourcing. Of those, "six or seven will do around 70% of volume," (Unilever) said... Another tactic Unilever is using to improve the sourcing of its palm oil is to control the process from the earliest stage. The company is already partway through building a $100 million palm-oil plant in Indonesia, and Mr. Engel said similar investments would be considered in the future" (Wall Street Journal, 12 Nov 2013).

Comment: Khor Reports' view on the consolidation of the supply-chain with increased leverage for retailers and buyers is panning out. Shorter and simpler supply-chains are the order of the day. Large complex supply-chains are now facing NGO criticisms, notably on third-party purchases from non-certified sources. We have noticed that the palm oil industry at large has been relatively uncaring of happenings at the RSPO (i.e. its something for the big players and only for the European market). However, smaller producers and smallholders in developing countries should now sit up and look out. Could they be increasingly side-lined in a palm oil supply chain that will increasingly favour larger producers, those with simpler supply-chains and those in regions with a comparative advantage in sustainability? This will solidify market tiers with discount/premiums for what is a basic agri-commodity product of bulk usage. This is unusual as certification was typically not for bulk but for niche usage e.g. FSC, Fair Trade and organic. The trajectory of sustainability in palm oil continues to surprise with the speed of its evolution and the speed of the relative decline of the negotiating power of producers. Relative to soybean oil, palm oil producers face tougher and more costly standards. Might this accelerate the convergence of unit costs? Palm oil producers have enjoyed relatively high profit margins over a long period of time. Is this set to normalize? Perhaps many also don't really mind if the speed of expansion slows. This might be supportive of prices?

UPDATE on 18 Nov 2013: Khor Reports has discussed the regressive unfairness of the structure of voluntary standards such as the RSPO. Now it looks like a big NGO-buyer processor effort could result in more serious impact on the entire palm oil supply chain. Industry leaders are starting to express worries of the unfairness of current proposals on smaller producers and farmers who supply the bulk of SE Asia palm oil. Indonesia players also point out that the push could result in a politically untenable situation for 2014. if large swathes of smaller producers end up as "ineligible suppliers" within a short time frame; assuming enough big players sign on (it may not take many). The impact on the supply-chain of the current proposals among dominant players could be significant with uncertain and unintended outcomes on spatial supply-chain & logistics, lost crop & dropping FFA quality etc. NGO pressure is particularly strong on a key part of the supply-chain. This bears watching. Have the dominant players fully assessed the potential impacts and outcomes?