23/05/2011 (Financial Times) - For something which ends up in such simple products as soap, fish fingers and cakes, palm oil has a tortuously complex supply chain, a fact food producers cite as a significant difficulty in attempting to source the ingredient sustainably.

The world’s most prolific vegetable oil begins life on tropical plantations; some 85 per cent hails from Indonesia and Malaysia. The fruit is then transported to crushing mills, from where the crude oil is shipped to refiners and blenders for further processing and then on to manufacturers.

Multiple links in the chain mean multiple opportunities for oils from different sources to be blended – those certified as sustainable and those which are produced without adherence to environmental or human rights principles.

Exacerbating this complexity is the fragmented nature of the industry, at both ends of the chain. More than 3m smallholders manage 20 per cent of the palm oil plantations in Indonesia and Malaysia. As for buyers, the biggest – Unilever, the Anglo-Dutch consumer goods conglomerate – takes just 3 per cent of what is produced globally.

All of this adds to the difficulty of tracing the palm oil in the average chocolate bar back to a certified plantation, mill, refiner or even ingredient manufacturer.

Subsequently, the amount of segregated sustainable palm oil produced in the past 12 months was 3m metric tonnes, a fraction of the 46m-plus tonnes of total production.

“Palm oil is palm oil,” says Chris Wille, chief of sustainable agriculture at the non-profit Rainforest Alliance, noting that there are no quality tasting sessions as there are for coffee. “There are huge quantities of it and it all just goes into various stages of refining and transport.”

As demand for palm oil surged – roughly doubling in the past decade – farmers have scrabbled to plant more trees, much of these on peat-rich forest land.

Oil palm land conversion in peninsular Malaysia, Borneo and Sumatra by the early 2000s released more greenhouse gas emissions than China’s entire transport sector in 2007, according to a recent study published in the US Proceedings of the National Academy of Sciences.

The body charged with tackling this issue is the Roundtable on Sustainable Palm Oil, a grouping of stakeholders including growers, processors, food companies, retailers and non-governmental organisations, which certifies and sets a code of conduct for its 550-plus members.

Since its establishment in 2004, the RSPO has sought to promote higher yields through more efficient agricultural processes rather than through further land grabs – a strategy curtailed by the fact oil palm trees can only grow in a narrow band around the equator.

The RSPO itself certifies plantations and mills that meet its criteria, but it is slow going: certified production is still less than one-tenth of the total. Yet if supply is small, demand for the sustainable product is smaller still. Manufacturers bought just half the 3m metric tonnes produced in the past year sustainably, and are resorting to using offset certificates to back up their claims of sustainable sourcing.

The GreenPalm certificate trading scheme, which is backed by the RSPO, offsets companies’ consumption against the production of an equivalent amount of sustainable oil. Nestlé, the world’s biggest food producer, is among those buying offset certificates, which Kevin Petrie, the Swiss group’s head of procurement, attributes to the complexity of the supply chain.

Like other food producers, Nestlé is seeking to get around this by dealing directly with vertically integrated companies that can guarantee delivery of segregated sustainable finished product.

Unilever has taken similar steps, signing supply agreements with Europe’s Unimills for speciality fats and US-based Cargill for refined palm oil. These are expected to account for about one-tenth of sustainable purchases this year – up from virtually zero physical purchases last year. This is not how many envisaged the scheme working and, say some, could jeopardise pledges set by food producers to use 100 per cent sustainable oil by 2015.

“It’s achievable but to be frank no one has said these targets are physical volumes. If this development does not pick up the speed it needs then in 2015 a large part will only be covered by certificates and that will do this initiative a disservice,” says Johan Verburg, RSPO executive board member and a policy adviser to Oxfam.

“The certificate trade was allowed to kick-start the market and get to large volumes, a stepping stone towards physically segregated supplies. But the risk is it stays there.”

GreenPalm is run by the Scandinavian diversified edible oil refinery AarhusKarlshamn. It takes a $2 brokerage fee per tonne and passes a $1 levy on to the RSPO.

“I would love to see people buy as much segregated sustainable oil as they can, and then buy the rest off GreenPalm,” says Adam Harrison, senior policy officer for food and agriculture at the WWF, formerly known as the World Wildlife Fund, and an RSPO vice-president.

“Currently only about half of the certified palm oil that is being produced is being sold as certified.”