The Malaysian Insight

OIL palm smallholders, who produce 40% of the crop in Malaysia, have nothing to fear about Europe’s latest law on the commodity, said Maria Castillo Fernandez, the region’s top envoy to the country.

The European Union Renewable Energy Directive II (EU RED II) applies only to palm oil-based biofuels, and not palm oil used in other industries and products, where the oil produced by a majority of smallholders goes towards.

And palm oil-based biofuels make up just 1.4% of Malaysia’s total exports, while palm oil products comprise 4.4% of the total exports to the regional bloc, said Fernandez, who is the European Union ambassador and head of delegation to Malaysia.

She was responding to widespread anger and fear among the country’s smallholders – numbering about 650,000 families – that the law will cause their income to shrink, given that Europe is Malaysia’s second-largest importer of palm oil.

Fernandez has visited Felda and Felcra oil palm plantations in Perak, speaking to smallholders about the law and prospects for the European market.

EU RED II was amended last month and comes into force in June 2021. It does not place an outright ban on palm oil exports to Europe but “discourages” the use of palm oil in biofuels by disqualifying the oil from financial incentives that would help make it more competitive.

The removal of incentives is because the EU deems palm oil to be unsustainable, as measured by the rate of carbon emissions released when peatland is cleared to make way for oil palm plantations.

The law comes following studies on the amount of carbon dioxide released from land-clearing, seen as a contributing factor to climate change.

Fernandez said she explained to smallholders that the law does not represent a ban and that they are not affected.

“I sat with them and explained… they are under the impression that the palm oil price has come down because Europe is banning their crop.”

The narrative surrounding EU RED II has been misunderstood by the public to mean that the bloc is closing its doors to the cash crop, which has lifted millions around the world out of poverty, she said.

Malaysian and Indonesia, the world’s two largest palm oil producers, have condemned the EU law’s impact on smallholders.

Fernandez, disputing the argument, said most smallholders are not certified and do not produce palm oil for biofuels.

Such fuels exported to Europe require certification that they are sustainably produced.

As such, said Fernandez, Malaysian smallholders are not affected by the EU law, which deals specifically with palm oil used in biofuels.

She said the crude palm oil (CPO) produced by smallholders is destined for the food, cosmetics and chemicals industries in Europe, forming the bulk of the edible oil exported to the region and not requiring certification.

In 2017, the EU imported some RM11 billion worth of CPO from Malaysia.

It is estimated that about 40% of palm oil exported to the bloc is used for biofuels, with the rest going to other industries, such as those mentioned above.

Fernandez said the smallholders she met appeared to accept her explanation and understood that European consumers are becoming environmentally conscious.

“It was a very honest exchange, and I think we need to speak more because there is this simplistic message that Europe is banning their palm oil, that Europe is their enemy. I was telling them that we are not your enemy.

“At the same time, they have to understand that in Europe, there is a lot of public opinion on the region’s environmental footprint. In the EU elections, this was a big theme, and you saw this in all (EU) countries (in the elections).”

Fernandez added that she debunked the myth that EU RED II caused a plunge in the price of palm oil, leading to a reduced income for smallholders.

“Commodity prices are going down and this is for different market reasons. This is because of supply and demand, and there is too much supply, too many competitors who produce palm oil.”

CPO prices fell to a four-year low last year due to a combination of higher global stocks and weaker demand from major markets, such as India.

That year, the average CPO price declined nearly 20% or RM551 to RM2,232, from RM2,783 in 2017, according to the Primary Industries Ministry.

Unlike 20 years ago, when Malaysia dominated the palm oil market, the country today faces competition from Indonesia and Papua New Guinea, as well as South American countries like Colombia.

“There is a lot of competition, so Malaysia must offer a better, premium, sustainable palm oil product,” said Fernandez. – July 3, 2019.