Palm Oil 2016
In 2014, the four largest palm oil trading companies signed an agreement to end deforestation, development of peat lands and exploitation of locals not only with their own operations, but also from all of their suppliers. For environmental NGOs, the Indonesian Palm Oil Pledge (as the agreement was named) represented a dramatic advance in their decades-long efforts to protect the Indonesian rainforest from further destruction. One year later the situation appeared to have reversed. Leading figures in the government of Indonesia were calling upon the companies to withdraw their pledge. And the 2015 fire season was the worst in nearly two decades, as would-be oil palm growers set fire to rainforests and peatlands to clear them for planting. The demand for palm oil had skyrocketed from 1990-2010 and crude palm oil (CPO) became the most highly traded edible oil. The palm oil boom had significant impact on economic development in rural Indonesia. Forty percent of Indonesia’s palm oil was grown by an estimated 3.5 million smallholder farmers. With government support, Indonesia had established infrastructure to mill, refine, and export the substance. However, oil palm cultivation had created social tensions as many rural inhabitants claimed that large plantation companies had violated traditional land rights. Indonesian land-use laws were ambiguous and land ownership unmapped. This indeterminate state of affairs had led to widespread corruption, as companies ‘convinced’ local and national officials to support their land claims and look away when it came to environmental regulation. In 2013, environmental campaigners believed they had found leverage to help change the palm oil industry. The supply chain for CPO suggested an hourglass. Millions of growers (if one included smallholders) supplied the raw materials. On the demand side, hundreds of thousands of companies across the globe bought palm oil or palm oil fractions to include in a wide variety of products. Between supply and demand, however, six companies: Wilmar, Musim Mas, Golden Agri (GAR), Cargill, IOI, and Bunge accounted for over 90% of the global trade. While these trading companies were vertically integrated (they own about 15% of the oil palm land in Indonesia and three own their own consumer brands of palm oil), they had vast influence on growers. If they could be convinced to “green” not only their own operations but also that of their suppliers, perhaps the problems in the palm oil industry could be resolved. So when Indonesian Palm Oil Pledge (IPOP) brought together the major traders to endorse a strong NDPE (no deforestation, no peat, no exploitation) standard, many environmentalists believed that the agreement represented a breakthrough. The events of 2015 suggested otherwise, forcing businesses, NGOs and sympathetic government officials to reconsider their positions and strategies. For the companies that signed IPOP, criticism of the pledge pressured them to reassess their plans. Wilmar, in particular, faced difficult choices. The company was the largest trader of palm oil in the world, selling in Europe, China, and India. Wilmar had been the first trader to adopt a NDPE standard for all of its suppliers. The pledge and the government’s reaction to it had created three sets of challenges for the company. First Wilmar had to find a way to police its supply chain, identifying violators and determining ways of dealing with them, especially in the face of continued NGO pressure. Secondly, some groups had indicated that they might try to bypass Wilmar and sell their CPO directly to China and India; countries which had shown no interest in sustainable palm oil. Finally, the Indonesian government’s displeasure with IPO and the NDPE meant that Wilmar might lose portions of its concessions that it decided not to develop to uphold the pledge. All of these challenges could represent substantial hits to Wilmar's business if not handled correctly. For Greenpeace and other NGOs, the opposition to IPOP raised questions of how to bring the industry to adopt NDPE standard. Who should they target with their public campaigns? If they called for a boycott of Indonesian palm oil, wouldn’t that hurt the companies who had supported IPOP? Were there other influence levers they could use to pressure the government and non-complying companies into line? Government officials sympathetic to environmental concerns had their own set of questions to consider and unravel. What was the best policy for the long-term social welfare of Indonesia? How could the government balance legitimate development needs with concerns about deforestation? And once a policy was framed, how could it be passed and enforced, especially given the decentralized nature of Indonesian government and the widespread corruption that permeated the state’s relationship with the palm oil industry?
This teaching case is available for purchase here.
Authored by Jaan Elias, Kenneth Richards, Vero Bourg-Meyer, and Greg MacDonald.
Published by Yale School of Management.