The recent flurry of international buyers suspending their contracts for Indonesian crude palm oil (CPO) indicates serious problems for the local industry. The trend began when two of the world’s largest buyers of CPO, Unilever and Nestle, stopped buying CPO from Indonesia’s PT SMART.
Unilever has also halted a contract with Duta Palma, which although a member, has not been certified by the Roundtable on Sustainable Palm Oil (RSPO).
Local producers now fear other large international CPO buyers such as Cargill, Loders Croklaan, Kraft and Shell could also terminate their contracts with SMART.
The issue was ignited by a 2008 report by Greenpeace indicating massive forest destruction by CPO producers, which was later supported by a field investigation and satellite data. Greenpeace chose to aim its protests at CPO buyers and urged them to stop buying from producers that caused destruction.
In response, Unilever asked independent auditor Eric Walker to verify the claims. The results confirmed the validity of the Greenpeace report. CPO production has caused deforestation, forest fires, the depletion of peat land and reduction of orangutan habitat.
In response to the report, Unilever said it would suspend all of its CPO purchase contracts with Smart, as of April 1 this year.
Responses from related parties are still confusing. The Trade Ministry, the Business Association of Indonesian Palm Oil Produces (GAPKI) and SMART have dismissed the contract suspensions as no major threat to national CPO exports.
GAPKI has gone so far as to propose that CPO exports be redirected to Asian markets, such as China, India and Pakistan. The Agriculture Ministry has also proposed homegrown CPO be used to make biofuels for domestic consumption.
However, this solution is not appropriate as it does not attempt to solve the issue at hand, namely the termination of export contracts. Indonesia, however, should take appropriate and systematic approaches to resolving this issue. We live together as members of the international community, whose constituents generally enforce common regulations and follow similar codes of ethics. Any country that does not follow these rules will become an outcast and will be worse off.
Environmental concerns surrounding CPO production are rooted in global ethical values.
The international community is also concerned about the food production process, in particular the principles of traceability and standard compliance in green food production that adopts environmental and sustainable development principles. These principles are not only implemented in the developed world but have also become a concern among developing countries.
Indonesia would be wise to sound a serious response to this issue. Such ethical issues should not only be the concern of the CPO industry, but also other related parties. Both should cooperate to find a win-win solution.
SMART was hit with the suspension of a US$33 million contract to supply 47,000 tons of CPO per year, which has directly impacted oil palm farmers. The price of CPO purchased from farmers has dropped to Rp 1,250 per kilogram from Rp 1,300 per kg. A reduction in income for hundreds of thousands of farmers is inevitable.
Global buyers are becoming more aware of Indonesia’s environmental issues. A failure by CPO exporters to take measures to improve this situation will inevitably lead to other buyers making similar decisions to Unilever and Nestle. If this happens, the future of the national CPO industry will come under threat as will the livelihoods of millions of oil palm farmers.
Further serious action may come in the form of CPO producers cutting labor contracts, and a subsequent reduction in tax revenue derived from the industry.
If, as they claim, the accused local CPO producers are indeed not guilty of environmental destruction, they should urge new negotiations with Unilver and Nestle by defending their environmental records with facts, and highlight the potential threat to farmers.
However, if the allegations prove true, these producers face no other practical option but to reform their practices to meet international standards.
If producers choose to take “provocative action” against Unilever and Nestle, as proposed by the Association of Indonesian oil palm farmers, they will find they will resolve nothing.
In 2004, at the initiative of CPO producers, importers and related parties set up Roundtable on Sustainable Palm Oil to develop an ethical certification system that stipulates commitments to preserve rainforests and wildlife. SMART, Duta Palma, Unilever and Nestle are all members of the roundtable.
In practice, not all producers fulfill the roundtable’s stipulations. Tempo reported on March 13, 2010, of all Indonesian CPO producers only three had been certified by the roundtable, with SMART and Duta Palma among the uncertified.
A statement by the director of Sucofindo on the possible establishment of a new national CPO certification system, under the banner of Indonesia Sustainable Palm Oil (ISPO), will likely not prove a valid solution as it has already undermined international belief in Indonesia’s CPO producers.
A successful strategy would require sound diplomacy by CPO industries and the government, and the establishment of a binding commitment to international ethics and standards.
Central and local governments should tighten controls at CPO plantations to kick out rampant corruption, collusion and nepotism, which have colored the issuance of new contracts to expand plantations and have contributed to the poor performance of national CPO industries.
The future ofthe national CPO industry will come under threat as will the livelihoods of millions of oil palm farmers.The writer is a lecturer at the School of Agriculture, Gadjah Mada University, Yogyakarta, and is currently studying for a PhD at the University of Tokyo.