Republic of the Philippines

Laguna State Polytechnic University

Province of Laguna

CASE STUDY NO. 2

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?

Prepare the following:

1. Best title for this case

2. Executive summary
3. Introduction and case background
4. Case Fact, Analysis of the issues, and factors
5. Relevant theories that help explain the case
6. Causes or implications of the problems/issues
7. SWOT Analysis
8. Conclusion
9. Recommendation