How to produce sustainable palm oil in Peru

Oil palm kernels

Alex Morrice

Palm oil is everywhere, in food, in cosmetics and in household products. It is estimated you will find it in over 50% of all products on supermarket shelves. Having rapidly become established in South-East Asia, new frontiers to meet growing global demand for palm oil are opening up in Latin America and Africa.

In Indonesia and Malaysia, palm oil production has been closely linked to deforestation, smoke haze and human rights issues, prompting a range of responses from certification to boycotts. The challenge in this region is to retro-fit sustainability into historically destructive practices. A different challenge confronts the new palm oil frontiers — how to embed sustainability from the beginning.

A new Global Canopy briefing discusses how credit-based financial incentives can be structured to achieve this in Peru.

There are two ways to increase palm oil supply to meet global demand. Increasing planted area, or improving productivity on existing plantations. Expanding plantations can drive deforestation, land conflicts and food insecurity as oil palm displaces other crops. However, improvements in productivity can boost yields in areas which have already been converted to plantations, allowing demand to be met whilst improving the livelihoods of smallholders and protecting the vital ecosystem services of tropical forests.

Palm oil yield in Peru has remained relatively constant despite consistent growth in the area under cultivation since 2005 (see Graphic 1 below). This may be due to increasing numbers of smallholders growing oil palm but lacking access to the technical capacity to ensure high yields, whereas productivity is higher on plantations owned by larger producers. This presents both a risk and an opportunity. If smallholders are provided with technical and financial support to transition to high-yield production, global demand can be met without this driving deforestation.

Graphic 1: planted area of oil palm in different regions of Peru, and average yield by year 2005–2016.

The financial instrument to achieve this transition should couple uptake of sustainable practices with enhanced access to credit. Many smallholders lack the financial resources to transition to more sustainable production alone; they need help. While it is shown yields can increase from the smallholder average of 12 tonnes per hectare, under business as usual, to a peak of 22 tonnes per hectare under sustainable management, in the first year of transition farmers will see their income fall. They need support to bridge this gap.

Therefore, banks should offer softer credit products, with longer payback periods and lower interest rates, specifically to farmers who have committed to zero deforestation and sustainable production. Ongoing access to these products would be made conditional on continual compliance with sustainable management practices, monitored by a third party, with governments playing a supporting role in providing technical assistance. This removes the risk that the greater income from sustainable practices may fund deforestation elsewhere later.

Implementing a system of truly green palm oil credit products will require collaboration between banks, farmers, governments and other companies to ensure that the financial burden does not fall on smallholders and that they are able to work towards certification. However, the potential benefits are significant, from progress on international climate targets to the maintenance of crucial ecosystem services for countries implementing more sustainable production.

To read the full briefing, click here.

With thanks to Alex Pinzon and Stuart Singleton-White.