A recently launched report commissioned by forestry group Rimbunan Hijau (PNG) suggests that Papua New Guinea ‘is in a perfect position to capitalise on oil palm development as a response to strong global demand for food staples and a domestic need for nutrition and food security’. The industry is seen as providing ‘enormous’ potential for economic development. In the past 15 years, ‘palm oil has recorded the greatest increase in real income out of major crops such as cocoa, copra and coffee’. The report found that ‘palm oil smallholders on a two-hectare plot receive an annual income of K5,586 [€1622] – almost double the country’s minimum wage’ and almost 10 times the income earned from cocoa production.
PNG is seen as being well placed to meet expanding demand for sustainably produced palm oil. This market component is growing even faster than the 30% expansion in global palm oil demand projected over the next 10 years. Problems of land degradation and pest infestations however need to be faced.
The PNG palm oil sector has recently been given a boost by the opening of a new £9m processing facility in Liverpool ‘dedicated to manufacturing bakery and foodservice products made from palm oil’, using sustainably certified palm oil. This is seen as following the market trend towards the production of sustainably sourced foodstuffs, as ‘all of the UK’s major retailers have previously announced their intention to convert all palm based products to segregated, certified sustainable’ products by 2015.
PNG companies are also using forward sales to cash in on high world market prices. Prices received in 2010 by PNG exporters were on average 20% higher than in 2009.
It is unclear what price premiums are attracted by certified sustainable palm oil production. In other sectors, as demand for sustainably produced raw materials expands and supply increases, the price premium tends to shrink. Indeed, in certain sectors sustainability criteria can become the industry norm. Where this occurs, price premiums based on sustainability certification can no longer be secured. In this context producers then have to carry the costs of certification and compliance without securing any additional price benefits.
The statement from New Britain Palm Oil (NBPOL), a PNG-based company listed on the London stock exchange, suggests that sustainability certification is being used by them as part of a strategy aimed at long-term sustainability of the industry, rather than solely as a vehicle for securing price premiums. It also represents a cautious approach to the market. NBPOL has recently acquired the substantial palm oil plantations of Cargill Inc in Papua New Guinea, but has yet to reveal its plans for these assets. NBPOL is already the world’s leading producer of sustainable palm oil certified in accordance with the principles and criteria of the Roundtable on Sustainable Palm Oil (RSPO), and its operations are fully vertically integrated from seed production to marketing globally. In Papua New Guinea, NBPOL is also the largest sugar and beef producer. Locally, it has a long history and is recognised for respecting the local communities and a cautious approach to palm oil expansion. Respect for the local communities is likely to stand NBPOL in good stead when dealing with the 20,000 or so smallholders involved in this industry.
NBPOL’s positioning itself in the global market could be a sound corporate strategy. Given the size, diversity and international reach of its operations, it looks likely to realise early gains from the market. Securing price premiums may represent an early gain.