At the sidelines of POC 2014: (2) on certification and smallholders

Khor Reports was at POC 2014 to find out about some hot issues discussed on the side-lines. Here are some topics that we think might be of broader industry interest in the near and medium-term:

(2) On sustainability certification and smallholders

Sustainability was a frequently mentioned topic in and out of the hall. We heard that many groups attended briefings by Wilmar. On 5 December 2013, Wilmar announced its new “No Deforestation, No Peat, No Exploitation Policy” for suppliers (with a 31 December 2015 implementation date) via a press release on its company website. No surprise that there will be heaps of implementation queries on this big change to palm oil procurement (Khor Reports' interviewed Wilmar last week, and we are awaiting clearance on some quotes for our report on this). In the expanding market pressure (someone pointed out that one might want to differentiate "market pressure" from "market demand") for sustainability, short and simple supply-chains are the order of the day.

In this regard, the expansion of sustainability requirements point to two major new tiers of sustainability procurement programs over and above that of RSPO (and this excludes the various one-on-one B2B deals that won't be of a public nature). However, we don't think that RSPO will sit still either. The situation in palm sustainability will take time to reach a new steady-state, as announced and non-announced major programs have jolted the prior RSPO-led situation (in which ISCC was also steadily impinging).

Moreover, the big market share that the large "B2NGO2B" deals are representing are raising the antennae of the authorities. This is largely because this looks most likely now to impinge on and thus require NGO-led compliance certification by smallholders and small estates. Thus, we were not surprised to hear some buzz that smallholder associations are trying to figure out what this means for them and how they might want to step up to pressure for certification. In Malaysia, the smallholder centric organizations include Felda, Felcra, NASH and state-level bodies.

On this same topic, Khor Reports' spoke to sources in Indonesia last week. We were told that the authorities there are well prepared to discuss with international NGOs (currently clamouring and strongly  competing among themselves over smallholder certification) what they propose. We understand that they will need to pay attention to new Indonesia enactments made in 2013. Thus, the Indonesia authorities stand ready to intervene if necessary on supply-chain impacts from NGO and B2B programs, if they fail to sufficiently regard the required principles in their dealings with smallholders and farmers: "impartiality," economic benefit and others. Indonesia has two major smallholder associations, one for plasma and one for independent smallholders.

Khor Reports is intrigued to hear that some new large NGOs on smallholder certification reckon that smallholders need to take out a loan to participate in their programs. In general, the recent promotional material from NGO-led sustainability programs for smallholders lay key emphasis on the good agricultural practices that they offer (yield gains); and in at least one presentation they mention that cost of certification includes periodic payments of USD10,000 per group of smallholders (source: presentation at PIPOC on Thai smallholder sustainability certification).

The direct or indirect participation of government authorities, especially via farmer and smallholder regulations (at least for Indonesia) will add a new dimension within the B2NGO2B situation. This is in addition to direct efforts on national certification via ISPO (mandatory) for Indonesia and MSPO (voluntary) for Malaysia. We also heard that those representing Malaysia smallholders are also thinking of options and economic cost-benefits. Don't be surprised if the authorities contest the right of sustainability programs to claim credit for gains from good agricultural practices (programs for these have existed prior to the sustainability era and often available to smallholders and farmers at zero or near zero cost), and also step up their own programs. The availability of premium relative to cost will also likely be a question, especially for the less advantaged smallholders. What is an appropriate cost ratio to target? In the NGO world, one of the benchmarks is admin cost percentage per dollar donated; for example, Oxfam UK reports 9% spent on support costs per GBP1 received /donated; https://www.oxfam.org.uk/donate/).

Bottom-line: As the B2NGO2B sustainability programs expand in depth (more policies) and breadth (dominant market shares), the space to watch is emerging requirements and the economic cost-benefit of different programs for smallholders, farmers, small & mid-sized estates, and independent mills etc. In the assessment of different options, an impartial and hard-nosed analysis would be important. It is not uncommon in the sphere of agri-product eco-certification that some key early promises made on marketability / market take-up have disappointed those who gone to the effort and cost of certification. For the "other half" of the market, consideration of real market take-up, cost-effectiveness and some stability in policy evolution are of increased importance as many do not have the deep pockets of the "big boys."