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Journal of Oil Palm & The EnvironmentAn official publication of the Malaysian Palm Oil Council (MPOC)

Journ al of Oil Palm & The Envir onm ent 2011, 2:15-24 do i:10.5366/jop e.2011.03

A Fair Trade Approach for Promoting Food Security and EnsuringSupply Sustainability in Oils & Fats TradeYusof Basiron

*

Abstract

Escalating world population requires morefood. Planet Earth is already burdened to meetthis challenge due to the omnipresent scarcityof arable land and increasing cumulativepollution loads. In order to obtain maximum

yield output, limited land resource must beused rationally by cultivating crops of choicewith the highest yield per hectare. An examplein the oils and fats sector is oil palm. Inaddition, the introduction of unfair tradepractices and regulations applied to the oilsand fats trade, disguised in the form of environmental requirements such as limitingdeforestation, can lead to lower foodproduction and consequently drive up foodprices; thus, threatening food security.

KeywordsFood security, fair trade, oils and fats, palm oil,sustainabilityJOPE 2011, 2:15-24

1. Introduction

The recent increase in oils and fats prices maysignal the beginning of a long term imbalancein the supply and demand for thesecommodities. Assuming current growth trendswill continue into the future, the projections, asshown in Figure 1, indicate that the supply of

oils and fats will lag behind demand trendsbeginning 2010. Demand is driven bypopulation growth which can be assumed togrow steadily in line with past rates andimprovement in income. It is expected that ona per capita basis, future generations will

consume oils and fats as much, if not more,than the current population.

The capacity of suppliers to produce sufficientoils and fats to satisfy growing demand may belimited due to various reasons. These includea lack of suitable agricultural land

1; slow

production expansion by imposition of stringentproduction certification schemes

2,3,4,

government policies5

and insufficientimprovement in yields of oilseed crops

6. This

may cause a widening gap between supplyand demand. To reduce this gap, the marketwill need to re-establish equilibrium by allowingprice to increase, thus simultaneouslystimulating an increase in production and areduction in demand. Producers must beassured of an opportunity to produce more oilsand fats to meet shortages but they must alsobe equally assured of “fair trade and market

access” as a motivation to increase production.

Address: Malaysian Palm Oil Council, 2nd Floor, WismaSawit, Lot 6, SS 6, Jalan Perbandaran, 47301 KelanaJaya, Selangor, Malaysia.

Email: Yusof Basiron ( [email protected] ) *Corresponding Author

Published: 1 June 2011Received: 10 May 2011 Accepted: 26 May 2011This article is available from: http://www.jope.com.my

This is an Open Access article which permits unrestricteduse, distribution and reproduction in any medium, provided

the original work is properly cited.

Review Open Access

mailto:[email protected]



http://www.jope.com.my/







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Figure 1- EMERGING G AP IN GLOBAL SUPPLY & DEMAND OF OILS & F ATS

2. Limits to growth

An exponential growth in demand is not likelyto be matched by a similar increase in supplyin the long term because there are limits toproduction capacities. This phenomenon is notonly applicable to oils and fats but also to other commodities. Studies

7have shown that the

world may see growth of many commoditiesreaching their peak in about 20 years and

subsequent decline is inevitable as shown inFigure 2. Proponents of such studies arguethat the continuing population expansion,exhaustion of natural resources, and acumulative increase of pollutants are the maindrivers for limiting future growth leading tocatastrophic declines.

In order to prevent this catastrophe, mankindmust react within the next ten years before thelimits to growth reach their peaks. For oils and

fats, the expected onset of growth limitsindicated by persistent shortfall in supplyrelative to demand as shown in Figure 1 isprobably already occurring. Prices willtherefore continue to escalate in the futurewhile accommodating short term fluctuations.The same argument applies to other commodities and, thus, their prices are alsoexpected to increase persistently. For commodity producing countries such as

Malaysia, 2010 saw prices of rubber, palm oil,timber, cocoa and pepper undergoingsignificant increases. While the high pricescontributed to an economic boom for Malaysia(7.2 % of GDP growth in 2010)

8, there is an

underlying fear that the shortage of agriculturalland will continuously limit Malaysia‟s futureability to increase the country‟s commoditysupplies.



17

Figure 2 - LIMITS TO GROWTH LEADING TO CATASTROPHIC DECLINES (SOURCE: MEADOWS, 1992) 7

3. Short term outlook of global oils andfats supply and demand

The high prices of oils and fats experienced in2010 may unfavorably affect consumersthrough escalating food prices. Major producers of palm oil experienced decliningproduction because of El Nino induceddryness in the early part of 2010 and floodingin the latter part of the year, especially inMalaysia. Even though Malaysia‟s palm oil

production declined by 3.4% to 16.9 milliontonnes in 2010 (compared to 17.5 milliontonnes in 2009), total revenue earned by thecountry from exports of palm based productsincreased by RM 10 billion from RM 49.9billion in 2009 to RM 59.9 billion in 2010

9. Palm

oil stocks in Malaysia were reduced from 2.2million tonnes in 2009 to 1.4 million tonnes in2010.Generally, crop failure due to drought or flooding as experienced in 2009 and 2010 inRussia, Argentina and Brazil reduced suppliesand stocks of grains and oilseeds. The

subsequent demand on land allocation toreplenish supplies is not easily met becausenew land expansion is limited. Every year theworld population will increase by between 70and 80 million

10and additional demand for oils

and fats to feed the population will increase byan estimated 2.5 million tonnes. An additional2.5 million tonnes increase in demand for oilsand fats will be generated from improved per capita income of the world population. Theresultant 5 million tonnes of additional oils andfats supply per year can only be produced by

either cultivating 10 million hectares of newland for soya-bean or 1 million hectares of oilpalm. If the task to supply the additional 5million tonnes of oil is divided equally betweenpalm and soya-bean oil, annual expansion of oil palm cultivation will have to be half a millionhectares while soya planting will need toexpand by 5 million hectares.The availability of new land for oil palm andsoya-bean cultivation to the scale indicatedabove is severely restricted. This is due to

lobbying by environmental NGOs (ENGOs),limitations imposed by the World Bank12

andcertain EU governments pressuring to limitdeforestation especially in developingcountries, combined with the potentialimplementation of a deforestation moratoriumin some producing countries such as Indonesiaand Brazil. The supply shortage problem willbe further compounded in subsequent years, if targets set for expansion of annual plantedareas are not met or the annual totalproduction of oils and fats falls belowexpectations due to weather or other inhibiting

factors. A global oils and fats supply and demandmodel developed at the Malaysian Palm OilCouncil (MPOC) that comprises theaggregation of regional supply and demandquantities has predicted that the stock tousage ratio of oils and fats in general and palmoil in particular will continue their decliningtrend for a second consecutive year in 2011(Figure 3). This suggests that prices willcontinue to remain firm at least for the first half of 2011. It will take a major improvement in



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Figure 3 – STOCK USAGE RATIO AND PRICE TRENDS FOR PALM OIL

supply to replenish stocks which have beendepleted for two consecutive years.

In 2011, it will be important to monitor theperformance of major producing andconsuming countries and how adverseweather, if any, will derail production trends.Most oils and fats producing countries arealready involved in mandatory biodieselprograms. The availability of oils and fats for the export market will be further curtailed if supplies are diverted for domesticconsumption to fulfill the mandated biodieselmarket. Brazil and Argentina have alreadyimplemented biodiesel mandates that may limitexport availability of their soya-bean oil.Columbia has become a net importer of oilsand fats as more locally produced palm oil isused for biodiesel production.

4. Net export availability of oils and fats

For many years, countries have been facingshortages in domestic supply to fulfill their oilsand fats needs. This has resulted in manycountries becoming chronic importers of oilsand fats. The major net importers are usuallycountries with a large population such asChina, India, Pakistan and the EU. Thisindicates that agricultural land for oilseedcultivation is limited. Many other countries arealso habitual net importers although on a

smaller scale. Cumulatively they constitutesignificant net importers in the global oils andfats trade.Fortunately, there are a few countriesproducing excess oils and fats which havebeen able to meet the needs of net importers.

As shown in Figure 4, only Malaysia andIndonesia are major net exporters of oils andfats, mostly in the form of palm oil and palmkernel oil. Argentina and Brazil are minor netexporters of mostly soya-bean oil. Brazil maybe a major exporter of soya-bean but the oilsubsequently produced by the importingcountry is mostly consumed domestically anddoes not appear as a net export statistic. Sinceboth Argentina and Brazil are involved inmandatory blending of biodiesel which willconsume more soya-bean oil as a rawmaterial, the net exports of soya-bean oil fromthese countries will be reduced further.

Net oils and fats imports have undergone asteady increase, indeed almost doubling from24 million tonnes in 2000 to 47 million tonnesin 2010 as shown in Figure 5. In future, netimporting countries will continue to, at least,sustain the growth rate in net imports of oilsand fats as self-sufficiency is difficult toachieve. This is, partly, because priority willalso be given to land for oil-seed cultivationwhich will be required for allocation in thegrowing of grain crops.



19

Net Importing and Exporting Countries for Oils

& Fats (2010)

-15,000 -10,000 -5,000 0 5,000 10,000 15,000 20,000 25,000 30,000('000 MT)

Net Exporters

Net Importers

Indonesia

MalaysiaArgentina

Brazil

Canada

Philippines

India

Indonesia

Argentina

Brazil

EU-27

Ukraine

China

North Africa

Pakistan

Bangladesh

Iran

Mexico

Egypt

Nigeria

Japan

Turkey

South Africa

South Korea

TaiwanOthers

Figure 4 – NET IMPORTS AND NET EXPORTS OF OILS AND FATS

Figure 5 - NET IMPORTS OF OILS & FATS DOUBLING IN TEN YEARS

A reverse trend may occur for the netexporters of oils and fats. As more biodiesel isproduced in Brazil and Argentina, less oils andfats would be available for net export.Similarly, as more pressure is applied byENGOs on developing countries to limit their production of palm oil through moratorium on

deforestation, the availability of oils and fats for net exports would be reduced. This suggeststhat a gap will start to develop between netexports and net imports in the next few yearsas shown in Figure 6. Prices would likely riseto bring the net imports in equilibrium with netexports.



20

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1 F

2 0 1 2 F

2 0 1 3 F

2 0 1 4 F

2 0 1 5 F

2 0 1 6 F

2 0 1 7 F

2 0 1 8 F

2 0 1 9 F

2 0 2 0 F

V o l . ( ' 0 0 0 M T )

Net Export and Import Volume of Oils & Fats (2001 - 2020F)

Net Export Vol Net Import Vol

Emerging gap projected in future trends of net imports and net

exports of oils & fats

Figure 6 - EMERGING GAP BETWEEN PROJECTED FUTURE TRENDS IN NET IMPORTS AND

NET EXPORTS IN OILS & FATS

5. Fair opportunities for developingcountries to expand production tofacilitate net exports of oils and fats

With the potential long term shortages of oilsand fats to meet increasing world demand,there are significant opportunities for allcountries to enhance their capacities toproduce and export oils and fats. This canonly take place if a fair trade regime exists toenable unimpeded access for oils and fatsexports globally. Presently, the most viablecrop capable of participating in the net export

market is palm oil. This is due to its high yield(Figure 7) and the least land required toproduce a target quantity of oil (Figure 8),making oil palm the most sustainable crop toparticipate in the export trade. Oil palm thrivesin the equatorial belt of the world where thetropical climate is conducive to generate highyields. The equatorial belt is also made up of developing countries which would benefitgreatly in terms of income if they couldproduce and export palm oil to meet theworld‟s demand especially to overcome the

impending future shortages of oils and fatssupply.

Concern over deforestation has led to unfair restrictions on imports of palm oil in the EUand USA for example. The proposedimposition of stringent certification for sustainability on investment in oil palmcultivation by the World Bank

11would reduce

the expansion and development of the palm oilsector. The misleading claims made byENGOs may result in reduced investments inoil palm cultivation. Therefore, any future

shortfall in palm oil supply will require theopening of 10 times more land and forest areato grow soya-bean to produce the same targetquantity of oils and fats. This suggests that theunfair and unsubstantiated allegations levelledat palm oil linking it to deforestation mayeventually lead to much more deforestationwhen the world has to depend on other lowyielding crops as seen in Figure 7 to overcomethe projected future supply shortages.



21

Figure 7 – OIL PALM YIELD COMPARED WITH OTHER OILSEED CROPS

Figure 8 - OIL PALM SHARE OF WORLD GRAIN & OIL SEED AREA (SOURCE: FAO) 12

6. Sustainability of oil palm cultivation

The total harvested area in 2008 was 14.7million ha for oil palm cultivation. BothIndonesia and Malaysia accounted for over 85% of global palm oil supplies. This was only0.30% of the total world agriculture land (Table1). ENGOs concerned over deforestation dueto agricultural area expansion need to notethat oil palm cultivation will not impact worlddeforestation in any significant way, as a share

of 0.30% of world agricultural land used for oilpalm cultivation is a very conservative sizewhich falls within the legitimate right of the twodeveloping countries to use part of their landarea for agriculture. A comparison of forestarea between developed and selecteddeveloping countries including Malaysia andIndonesia clearly shows that these developingcountries have a generous percentage of forest reserves which can cater to the needs



22

for biodiversity conservation adequately(Figure 9).

Carbon emission from overall agriculture isreported to contribute to 17% of greenhousegas (GHG) emission due to cumulative effectsof emission from deforestation and other decomposition processes

14. The major source

(57%) of global emission is attributed to the

burning of fossil fuels. The oil palm share of global agricultural land of 0.30% indicates thatits share of global emission is 0.30 x 0.17 =0.051 of global emissions.

Even if the oil palm planted area is doubled, itwould not dramatically contribute to globalwarming as alleged by the ENGOs. Anincrease of 0.051 % of GHG emission spreadover 50 years of plantation development israther insignificant. In reality, the carbonsequestering effect of oil palm trees mayfurther reduce or mitigate the already relatively

minute emissions of the oil palm industry.Deforestation avoidance effect resulting fromthe importation of palm oil is an additionalbeneficial contribution that is often ignored,especially in the indirect land use change(ILUC) effect of oil-seed production. As mostcountries are dependent on net imports, they

will avoid land from being deforested by afactor of 10 times if palm oil is imported.Otherwise they have to grow soya-bean using10 times more land (presumably throughdeforestation) to substitute the same quantityof palm oil. The carbon emission saving valuefor palm oil when used as biofuel is relativelyhigh. Studies

16, 17conducted in Holland by

using the EU methodology have found an

emission saving value of 62 % compared withpetroleum diesel. Using the US methodology,a study by a US researcher

18shows a higher

emission saving of 70%. These values aremuch higher than the threshold level of 35%and 50% required for biodiesel to be acceptedin the EU and US respectively as shown inFigure 10. Unfortunately, a punitive value of 19% emission saving value has been arbitrarilyassigned to palm oil by the EU in their Renewable Energy Directive (RED)

19. Such

low value has been deliberately calculated tobar the entry and use of palm biodiesel in the

EU market. Such a barrier has no justificationand clearly contravenes the WTO provisionsas it discriminates treatment of „like‟commodities of foreign origin imported into theEU for biodiesel.

Table 1: OIL PALM CULTIVATED AREA COMPARED WITH TOTAL AGRICULTURAL LAND



23

0

10

20

3040

50

60

70

% Forest

Average: 25.5% Average: 57%

Forest SustainabilityPalm oil helps save forests in many developing nations

Figure 9- FOREST AREA OF DEVELOPING & DEVELOPED COUNTRIES (SOURCE: FAO15)

Threshold value

for EPA (US):50%

Eud: EU Directive 19

EU: van Zutphen’s study17

US1: GREET Model using allocation method18

US2: GREET Model using displacement method18

LCA studies in US and Europe show palm biodiesel GHG reduction

exceeds stipulated threshold values

Figure 10- CARBON EMISSION VALUES OF PALM OIL EVALUATED USING EU AND US

METHODOLOGIES



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7. Conclusions

The world is potentially facing a shortage of oils and fats in the medium to long term andmore opportunities exist for developingcountries to supply such a shortfall. Suchopportunities will also generate jobs andincrease income of the population.Unfortunately, many of the anti-development

campaigns propagated by the ENGOs andcertification systems required by certaincountries e.g. EU and some internationalorganizations such as World Bank are creatingunfair trade barriers especially for theimportation of palm oil from Malaysia andIndonesia and other developing countries. Afair trade approach should instead beuniversally promoted so that the much neededincrease to meet the shortfall in oils and fatssupply could be encouraged. This will preventthe early occurrence of shortages which couldinduce inflation on food prices. This in turn

would affect billions of low income consumersespecially in developing countries.Palm oil is the most suitable oil to help solvethe future shortages. Its high yield will requireminimum utilization of additional new landcompared to the planting of low yieldingoil-seed crops. Palm oil is also shown toprovide the most sustainable option as its cancontribute to a greater level of carbon emissionsavings. With palm oil, there is also asignificant deforestation avoidance effectwhich allows for a greater percentage of forests to be conserved in both producing and

importing countries.If fair trade and access to oils and fatsimporting markets are denied, the world mayhave to depend on low yielding oil sourceswhich will have a counterproductive effect of accelerating deforestation, increasing the rateof carbon emission and suppressingdevelopment in developing countries. This willeventually lead to job losses and aconsequential perpetuation of poverty.

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