Traders play a key role in maintaining price stability or volatility in the vegetable oil markets, balancing supply and demand as well as controlling the movement of palm oil and its derivatives internationally. Two key categories of traders should be considered to understand their influence on the palm oil supply chain:

1. Physical palm oil traders . These are responsible for transferring large quantities of palm oil and its derivatives from suppliers to buyers internationally. These may be independent brokers or part of larger vertically integrated companies such as Cargill or Wilmar (vertical integration refers to companies along the length of the supply chain—such as growers, millers, refineries, and traders—all being owned by the same corporation, with the palm oil moving through the supply chain from one subsidiary to the next).
2. Agricultural commodity traders: Futures or point traders on palm oil and vegetable oil commodities work within exchanges such as the Bursa Malaysian Derivatives. They influence the liquidity of the market and can have a dramatic impact on the volatility of palm oil prices. Whilst commodity traders may act to stabilise prices and keep the market fluid, speculation can cause prices to peak and trough dramatically.

Both stakeholders play an influential role in the palm oil supply chain; however, both currently lack transparency and are often poorly understood by other stakeholders. This section offers a brief insight into the subject.

Physical palm oil traders

Palm oil and its derivatives are traded from mills through to manufacturers with a varying number of steps involving refineries and processing plants in between. Palm oil imported to Europe predominantly enters through the CIF Rotterdam Market and is physically traded via three mechanisms:

• Paper. A contract is issued for a specific quantity of palm oil or palm oil derivative to be delivered to Rotterdam on a certain date. This mechanism limits traceability as the paper/contract can change hands an infinite number of times prior to delivery. Therefore it is often difficult to establish where the palm oil originated.
• Broker. A third party arranges the trade and earns a commission. Fewer steps potentially improve traceability.
• Direct shipment. Crude palm oil or its derivatives are purchased and shipped directly from supplier to buyer without a middleman. This offers the greatest level of transparency due to the involvement of fewer actors.

Agricultural commodity traders do not have the public profile of some multinational corporations, and they rarely seek media coverage. They avoid policy debates surrounding producers and consumers, although they are one of the largest member groups of the RSPO. However, a report by Oxfam identifies four companies as being the key agricultural commodity traders: Archer Daniels Midland (ADM), Bunge, Cargill, and Louis Dreyfus

Many companies involved in the palm oil industry are increasingly pursuing greater vertical integration, sourcing palm oil from their own plantations or from contracted suppliers and then processing it in their own mills and refineries, then trading and transporting their processed derivatives on to manufacturers. The major physical traders in the palm oil sector include companies such as Cargill and Wilmar, which have grown to dominate the market by developing vertically integrated supply chains.

As an example, in 2012 Cargill owned two plantations in Indonesia, accounting for about 11% of the country’s total palm oil exports. However, Cargill is best known for its role as a refiner in Malaysia, processing supplies from mills throughout the country. Similarly, Wilmar is one of the largest plantation owners internationally and has close ties to ADM after a number of mergers and acquisitions leaving ADM with a 16.4% ownership interest in Wilmar. For more information regarding the influence of traders on agricultural commodities see our useful publications section and the Oxfam report “Cereal Secrets”.

Trading giants have an unprecedented influence on the palm oil market as it is the point in the supply chain where the largest volume of palm oil passes through the fewest hands.

Sustainable palm oil trading platforms

The lack of transparency in palm oil supply chains and the paper trading system makes trading sustainable segregated palm oil very difficult. Therefore, in an attempt to simplify getting CSPO to market, the RSPO has been involved in the launch of two trading mechanisms for CSPO: RSPO eTrace and GreenPalm.

RSPO eTrace is a new system to facilitate the traceability of physically traded segregated, identity preserved, or mass balance RSPO CSPO. The system is designed to improve transparency and efficiency. The RSPO is looking to move away from the opaque paper trading system to eventually make CSPO the norm. Improved traceability, broad international uptake, and easier access to CSPO are essential to increase demand for sustainable palm oil.

GreenPalm offers an alternative solution to physical trades, where GreenPalm certificates are bought and sold instead. Certified producers who are using sustainable business practices but are unable to access segregated or mass balance supply chains earn credits for the sustainable palm oil they produce. They are then able to sell these credits via the GreenPalm platform. Manufacturers and retailers who are similarly unable to access segregated supply chains but wish to source sustainable palm oil are able to purchase credits to cover/certify the palm oil and its derivatives contained within their products.

Agricultural commodities traders on exchanges

The main commodities market for palm oil is the Bursa Malaysian Derivatives. Palm oil is a complex commodity as it is highly interchangeable with other vegetable oil crops and is therefore influenced by shifts in the vegetable oil markets.

Two main forms of trading exist within the palm oil markets:

• Spot trading takes place almost immediately. Commodity markets require the existence of predefined standards so that trades can be made without inspection.
• Futures trading is an agreement between two parties to exchange, at some fixed future date, a given quantity of a commodity for a price defined on the day of agreement. The trade takes place on a futures exchange and allows the buyer and the seller to accept the terms in regards to product but remain free to negotiate the price.

A number of reports have emerged recently about the impact that futures traders and speculation can have on food prices internationally (see the useful publications section). High prices can have a devastating impact on the world’s poor, and in many instances the high prices that are paid as commodities change hands rarely reach the farmers who produce the goods; instead, the profit is absorbed by the trading middle men.

It is worth considering, therefore, the potential knock-on effects of price volatility on sustainable practices. Palm oil is currently selling in the region of US$ 800–1000 per metric tonne (Palm Oil HQ. 2012) and profit margins remain high. However, in 2000 the price sat at US$178 per metric tonne. While prices are high, producers can afford to make the investment to support more sustainable business practices; however, if prices fall, this incentive and capital to continue these practices may be lost. Similarly, if prices were to increase further, would the demand for sustainable palm oil still exist, as manufacturers and retailers may not be willing to pass on these costs to consumers?

What does this mean in terms of sustainability?

• Price volatility could potentially threaten investment in sustainable practices by growers.
• Currently, sustainable practices are predominantly driven by demand for CSPO from Europe and America. In 2011, 4,798,512 mt of palm oil was produced but only 2,490,526 mt was purchased. The lack of uptake/demand internationally also limits access to specific CSPO derivatives.
• Dominance by key traders limits entry by smaller players and could potentially reduce premiums on CSPO for growers.

For more information on the impact of traders in the palm oil industry and the agricultural sector see our useful weblinks and publications sections.

Alternatively if you would like to contribute a report, weblink, or case study to this section, please contact us at spp@zsl.org .

©Sophia Gnych

MONGABAY:

EMAIL NEWSLETTER SIGN-UP

Stay informed by signing up for our email newsletter and updates from the Sustainable Palm Oil Platform