A recent report released by commodity risk analysis institution Chain Reaction Research revealed that palm oil-related sustainability efforts could be paid for by FMCG companies with a less than 2% increase in product prices – e.g. a US$0.06 increase on a US$3 chocolate bar.
“The overall value generated [for products using palm oil] stood at US$68.5bn in 2019/2020 for the FMCG sector alone, whereas the annual costs of producing ‘sustainable’ palm oil have been calculated to be just some US$6bn per year,” said the report authors.
“This would cover initiatives including plantation replanting costs and cash flow support for smallholders and No Deforestation, No Peat, and No Exploitation (NDPE) execution, along with monitoring and verification costs.
“[Based on our analysis], the annual costs of ‘sustainable’ palm oil would be take up some 8.8% of the profits that FMCG firms make from [palm-oil containing products], and on average these firms would need to raise the prices of these products by 1.8% [to] pay for the whole transition to sustainability.
“These numbers may appear high and could lead to the industry being reluctant to change the current status. However, FMCGs with strong brands and high margins would see nearly no impact – for instance, Procter & Gamble would require a price increase of just 0.15% for products containing palm oil.”
The report also listed the top five companies that are using palm oil to make their products – with four of these being food and beverage MNCs.
“[The] top five palm oil-sourcing companies – Unilever, PepsiCo, Procter & Gamble, Nestlé and Mondelez – have high gross margins and are specialized in marketing global brands, which can generate premium pricing as well as efficient production [so would be minimally impacted by the price increase],” said the authors.
“This top-five group alone accounts for 6.3% of total palm oil used by FMCGs, and generates 10.8% of gross profit and 13.6% of operating profit.”
However, despite the rosy picture painted by the report on getting firms to pay for palm oil sustainability, an industry expert has shot this down saying the possibility of this happening is next to none.
“In theory it sounds great, but in reality they would never do it,” consultancy firm Article Three Trade Policy Director Khalil Hegarty told FoodNavigator-Asia.
“It’s something that even the Roundtable on Sustainable Palm Oil (RSPO) has not managed to make happen – some 10 years ago, they were already talking about implementing a price premium on Certified Sustainable Palm Oil (CSPO) and the related products, but the fact is that it has been 10 years and it still has not happened.
“If this had been done since day one, we’d have far fewer disagreements and political battles between producers and processors within the industry as are ongoing now – but little to no progress has been made in this area, and I doubt they will do it now either.”
Producer suffering and MNC interest
Hegarty added that the costs of sustainable certification are currently fully on the shoulders of the palm oil producers, a situation where their costs borne are the highest but the profit gotten back is the lowest in the palm oil value chain
“All along the cost of sustainable certification has been borne by palm oil producers and not food manufacturers or consumers,” he said.
This concurred with findings from the report where smallholder palm oil producers, which make up a large part of the supply, are basically on the losing end of things.
“Smallholders generate 40% of the palm oil in Indonesia, 10% in Malaysia, 100% in Thailand and 40% in Papua New Guinea. In total, they generate some US$17bn of value, [but] their share in profits is close to zero [and] yearly income is just USD 7,540,” said the authors.
“Smallholders are often confronted with poverty and lack resources to fund the replanting of existing areas. Due to ageing palm trees, large resources are needed in the coming 25 years to pay for a ‘smooth’ renewal program without deforestation. These costs include new trees and temporary loss of cash flow until trees planted on existing land reach maturity after 3-4 years.
“[This, in addition to other technological advancements needed to achieve sustainability] would affect [their profits] by over 100% [which would affect them very heavily].”
Some of the food MNCs mentioned in the report have taken notice of the role they could play in improving sustainability – such as PepsiCo’s representation on the RSPO’s Shared Responsibility Task Force where manufacturers pledged to look at increasing CSPO uptake back in 2019.
However, one thing the task force did not agree on and has not to date was any discussion to increase product prices to fund sustainability – a glaring omission, given that the RSPO has been pushing this for many years.
“It would be amazing if they could mandate manufacturers to charge more on sustainably produced goods and get consumers on board with this – it’s definitely something everyone wants to see happen,” said Hegarty.
“That said, it’s really doubtful that it will take place in the near future – so though everyone would love to see it happen, we’re still waiting.”
By Pearly Neo
Original Link: https://www.foodnavigator-asia.com/Article/2021/07/28/They-d-never-do-it-Why-food-manufacturers-won-t-shoulder-palm-oil-sustainability-costs/