Opinion: Investing in sustainable palm oil is key to mitigating future crises

As the global supply of vegetable oil experiences shocks, sustainability efforts complement measures to safeguard supply stability, argues RSPO China’s Fang Lifeng
<p>People buy cooking oil in Palu at a basic goods market, set up by the Sulawesi authorities, on 26 April 2022. To try and secure domestic supply, Indonesia would ban palm oil exports from 28 April to 19 May. (Image: Pacific Press / Alamy)</p>

People buy cooking oil in Palu at a basic goods market, set up by the Sulawesi authorities, on 26 April 2022. To try and secure domestic supply, Indonesia would ban palm oil exports from 28 April to 19 May. (Image: Pacific Press / Alamy)

Millions of people around the world who have been grappling with extreme hunger in the wake of the pandemic must now contend with a shortage of vegetable oils. These oils represent one of the biggest weekly expenditures for poor families in low-income countries and about 10% of the world’s daily calories, making them the second most important food group after cereals.

A constellation of factors has led to a tightening of global supplies of this staple ingredient of home kitchens, restaurants and packaged food. Chief among them is the war in Ukraine. Russia and Ukraine account for 60% of global sunflower oil production. Millions of tonnes of it, earmarked for export, has been stuck in Ukraine, sending prices soaring. This has compounded an already difficult situation in which droughts in Latin America reduced soybean yields; acute labour shortages and Covid-19 mobility restrictions in Malaysia reduced palm oil production; and the Indonesian government curtailed exports of palm oil by raising export tax to ensure local supply.

OECD-FAO Agricultural Outlook 2021-2030 statistics indicate global demand for vegetable oil is projected to expand by 33 million tonnes by 2030, a 15% increase on 2020 levels, with food use accounting for 68% of that demand. Palm oil remains an important part of a diversified and balanced market for vegetable oils.

Imported edible palm oil, canola oil, sunflower oil and soybean oil made up 24% of China’s 37 million tonnes of total edible oil consumption in 2021, or nearly 8.9 million tonnes. With high reliance on imports, any disruption and increased cost of supplies could have serious consequences.

Palm oil is the second most consumed vegetable oil after soybean oil in China, with a share of 20%. Of this, 80% is edible – mainly used in instant noodles, blended edible oil, processed foods, frying and industrial baking – with the rest going into industrial processes. The country’s oil-processing industry takes in imported palm oil for refining and fractionation to generate margarine, grease, shortening and cooking oil and oleochemicals.

The vegetable oil market is likely to remain dominated by palm oil and vulnerable to external risks. It is therefore crucial to manage these risks effectively and ensure the stability and sustainability of the palm oil supply chain.

Facing supply chain shocks

Safeguarding food security is a critical priority in China, and the central government has explicitly linked it to national security. But according to data from China’s General Administration of Customs, palm oil imports contracted by 58% in the first five months of 2022, compared to the same period last year. Imports of other major edible oils, including soybean, rapeseed and sunflower, also fell. Recent Covid lockdowns in China, which have reduced visits to restaurants, where palm oil is more prevalent than in households, and high global vegetable oil prices, have resulted in demand disruptions. These will have a lasting impact on domestic consumers and companies that rely on these commodities.

During the recent, short-lived palm oil export ban imposed by Indonesia, Chinese food producers scrambled to adapt as prices rose amid the supply shortage. Although vegetable oils are largely interchangeable, substituting them can cause headaches for food manufacturers due to issues including the functional properties of the oils, allergies and labelling requirements. Some companies, such as Fujian Panpan Food Group, opted to reformulate their products, while others contemplated closure.

Diversifying edible oil imports and boosting domestic production is China’s main strategy to secure a steady supply of vegetable oils. While efforts are being made to address near-term supply chain issues, we still have to deal with the climate crisis and work towards achieving long-term sustainability goals.

Food sustainability and food security are not contradictory priorities; the two must go hand-in-hand if we are to ensure the resilience of our food systems now and in the future.

Supply security and sustainability are one

As the world’s second biggest importer of palm oil, accounting for 10% of palm oil trade volume, China has a critical role to play in this regard. Supporting the sustainable development of the palm oil industry is in line with the national strategy of “ecological civilisation” as well as a green Belt and Road Initiative, and congruent with China’s commitment to be a responsible country in combating the effects of climate change and protecting biodiversity. China has also pledged to peak its carbon emissions before 2030 and achieve carbon neutrality before 2060; and at COP26, it signed up to the Glasgow Leaders’ Declaration on Forest and Land Use, committing to halting and reversing forest loss and land degradation.

Achieving these goals requires more companies along the supply chain to adhere to standards such as the RSPO’s. Certified sustainable palm oil reduces the need for land conversion and deforestation. A life cycle assessment calculates that RSPO-certified oil emits 35% less greenhouse gas and is associated with a 20% lower impact on biodiversity than conventionally produced palm oil.

Pursuing sustainability has the potential to strengthen the stability of supply chains

China has not yet issued a dedicated policy on the sustainability of palm oil importing. A positive development is that the Ministry of Ecology and Environment is leading on the development of a national strategy for a green value chain, which will involve a series of action plans such as sustainable importing policy, supply chain due diligence and international cooperation. In 2020, China and Malaysia issued a joint press statement recognising the significance of trade in commodities, especially palm oil, and committing to the sustainable development of the palm oil industry. This commitment is likely to guide trade with all palm oil producing countries, together with the upcoming national strategy.

Some may think that in the face of surging prices and supply chain uncertainties, sustainability should take a back seat. But in fact pursuing sustainability has the potential to strengthen the stability of supply chains.

China is a key destination for exports from Indonesia and Malaysia, which combined are projected to account for 83% of global palm oil production by 2030. Bilateral dialogues with these producing countries to exchange information on supply and demand dynamics, thereby promoting the consistency of policies and actions, will help China improve the stability of the supply chain and secure palm oil inventories for its domestic vegetable oil consumption needs. China’s policy signal of prioritising the sourcing of sustainable oil will also help transform the supply chain, spurring investment in sustainable production and trades.

A long-term increase in the uptake of certified sustainable palm oil in China can drive up production over time. Meanwhile, by getting involved in overseas palm oil production and the upstream supply chain, China could also leverage the financing of sustainable practices, carry out capacity building, and therefore increase the output of certified oil. This will also help reduce poverty, bring about economic growth and provide other socio-environmental benefits to palm oil producing countries in Southeast Asia, Latin America and Africa.

RSPO-certified palm oil takes innovation in oil palm cultivation and production one step further. It tries to make yields higher and more reliable than conventional palm oil by supporting growers, especially smallholders, to adopt the RSPO Principles & Criteria, in order to build their capacity via access to high quality training, project partners and resources. In the meantime, RSPO is also working with members from the supply side to ensure certified palm oil is available on the global market, and more importantly to scale up shared responsibility commitments from traders to retailers by setting annual percentage point uptake targets for them. It is hoped that these measures will boost the uptake of certified palm oil in China, where stakeholders have shown willingness to embrace the concept of sustainable palm oil, and the membership of RSPO is steadily growing.

The true test of resilience comes during times of crisis. Palm oil importers like China cannot and should not wait for a supply chain crisis to happen again. To mitigate future disruptions and stave off the climate crisis, action needs to be taken now to de-risk and future-proof China’s edible oil supply chain. After all, it takes four years for the oil palm to yield fruit.

The author would like to thank Gu Keren, vice president of the Oil and Fats Branch of the Chinese Cereals and Oils Association, for his contribution and valuable comments on this article.

This article is part of our ongoing series on palm oil. Explore the series to date here.