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Have we reached peak palm oil? (commentary)

Kenia, 38, collects the oil palm fruit that her colleagues cut. The plantation where Kenia and her colleagues work began to be cultivated following a land reclamation process in 2012. Image by Martín Cálix/Contracorriente.

  • Palm oil prices have rocketed since the outbreak of COVID-19, but the surge in deforestation that usually accompanies this isn’t happening.
  • Mark Gregory asks whether the market for one of the biggest drivers of tropical deforestation in the world is waning, and what it means for the fight to protect forests.
  • This post is a commentary. The views expressed are those of the author, not necessarily of Mongabay.

The price of palm oil has doubled since the early weeks of the pandemic. In May 2020, the price of palm oil contracts sold on the Bursa Malaysia, the main trading market, was below $600 a metric ton; it is now more than $1,200.

Even a decade ago, a price hike on this scale would probably have signaled the start of a new wave of tropical forest destruction, with growers incentivized by the prospect of higher profits to rip down forests to make way for new plantations. But this time around things seem to be different. There is no sign that the latest price rises will lead to significant expansion of the area under cultivation for palm oil.

So why is the market for palm oil behaving differently than in the past? And what does that mean for forests?

Supply shortages

The stakes are high. Oil palm cultivation for palm oil is ranked as the third most important source of global forest loss linked to agriculture, after beef and soy. More than 10 million hectares (25 million acres) of tropical forest has been lost to palm oil since 1990, most of it in Southeast Asia: 85% of global output comes from Indonesia and Malaysia.

The recent price rises are perceived as being probably temporary. Industry players are waiting to see how things pan out before making new planting decisions. Higher prices have been driven by two main factors: economic forces unleashed by the pandemic, and the wrong kind of weather.

Let’s start with the pandemic. It has led to supply shortages and pricing pressures in palm oil similar in nature to those seen for many other physical products, spanning from timber to microchips. High shipping costs, a lack of shipping containers, and drastic labor shortages in Malaysia, the second-largest palm oil producer, are among the specific factors cited for palm oil. At one stage, Malaysian plantations were short of 80,000 foreign migrant workers due to COVID-19 travel restrictions, a problem that is taking a long time to unravel.

Oil palm plantation adjacent to the forests of Borneo, Malaysia. Image by Rhett A. Butler / Mongabay.

Weather events have also contributed to price rises. Palm oil’s value is influenced by what is happening in markets for other vegetable oils that have similar uses and can to some extent be substituted for each other.

Simultaneous weather disasters, maybe ultimately linked to climate change, have gripped the entire sector over the last couple of years, with, for example, heat and drought affecting soy in South America and canola/rapeseed in Canada and Europe, while for palm oil the issue has been too much rain in Southeast Asia. These products have been hit by a “perfect storm,” leading to supply shortages and higher prices for all of them.

But market analysts expect these impacts to be relatively short-lived, with palm oil prices staying above $1,000 a metric ton for another few months, before falling back although to a level somewhat higher than before the pandemic. With the recent price rises seen as unlikely to be sustained, the industry has had little additional incentive to invest heavily in new plantations.

Anti-deforestation measures

Other trends may be having a more lasting impact. These include company commitments to halt deforestation, European Union legislation to restrict palm oil use for biofuels, and a draft regulation that sets legal requirements for EU imports of palm oil to be free from deforestation.

NGOs say the NDPE (no deforestation, no growing on peat, no exploitation) commitments signed by many of the large growers, processors and traders of palm oil in recent years, especially those that supply Western markets, are holding up quite well, despite the recent price incentive to plant more oil palm.

While there is some “leakage,” for the most part, supply chains to Europe and the U.S. have had a greatly reduced deforestation footprint. Instead, the front line of forest destruction has shifted to a different part of the market. Nowadays, the bad players tend to be small and medium-sized producers supplying local markets in Indonesia or nearby Asian countries, such as South Korea and Japan, where consumers are less fussy about the environment.

The market impact of EU and member states’ “no-deforestation” policies and regulations remains to be seen. But there are already clear indications that another measure on these lines, a restriction in the use of palm oil for biofuel, is reducing EU imports of the commodity.

Peatlands deforestation for oil palm in Sumatra, Indonesia. Image by Rhett A. Butler / Mongabay.

Market forces

Nonetheless, some factors are pointing the other way: toward an increase in palm oil-driven deforestation. Biofuel use in developing countries, especially Indonesia, is the fastest-growing area of demand for palm oil. Nearly a quarter of global palm oil consumption goes to biofuels, up from 10% only a few years ago, despite declining demand in Europe.

Meanwhile, there are forces at work that may reshape markets for palm oil and rival products in a more fundamental way.

One respected market expert, James Fry of LMC International, predicts that palm oil will lose its well-established status as the leading vegetable oil. He calculates that the area under cultivation for palm oil globally is already in decline. Just as important, he says, yields — productivity per hectare planted — are static in palm oil, whereas they are rising for competing crops. As a result, palm oil is ceasing to be the cheapest plant oil to produce. He thinks soy is the one most likely to take over. Worryingly, soy production comes with environmental problems, including deforestation, at least as great as those associated with palm oil.

So even if we have reached peak palm oil, there is no certainty of a reprieve for forests.

Banner: Kenia, 38, collects the oil palm fruit that her colleagues cut. The plantation where Kenia and her colleagues work began to be cultivated following a land reclamation process in 2012. Image by Martín Cálix/Contracorriente.

Mark Gregory is a financial campaigner at FERN, a Dutch-based NGO that tracks the EU’s involvement in forests. He previously worked for more than 20 years at the BBC, where he was a business correspondent. Follow him on Twitter at @markg2v.