Wednesday, September 04, 2019
/08:48AM / By CSL Research / Header Image Credit: GreenBiz
Amid a mounting movement against deforestation by environmentalists to fight climate change, the future of the oil palm industry stands threatened. The European Union passed an act earlier this year to phase out palm oil from renewable fuel by 2030 due to environmental concerns. Palm oil production is said to have been responsible for about 8% of the world's deforestation between 1990 and 2008. The crop has also contributed towards pollution and climate change as land, including carbon-rich peatlands, have been converted to plantations. While demand for palm oil used in EU biofuel accounts for a fraction of global supply, industry heavyweights- Malaysia and Indonesia- worry the law could spur calls for regulation in its usage in food, which accounts for nearly 70% of global palm oil consumption. A global upheaval against the use of palm oil in processed food could further hurt Nigeria's ailing palm oil industry.
Currently, palm oil produced in Nigeria is not readily accepted in the international market due to its low quality. In 2016, the European Union suspended some agricultural food exports from Nigeria which include palm oil, due to its low quality. This has resulted in excessive discount pricing of Nigerian palm oil in the global market which has discouraged local oil palm farmers from producing. Consequently, Nigeria spends about N180bn ($500mn) annually to import palm oil in order to meet domestic consumption, an anomaly that has compelled the Central Bank to implement interventionist policies to revive the sector.
In our opinion, growing concerns about the environmental damages that come with cultivating oil palm could limit the end-markets for the crop in the long term. Although, the Nigerian authorities are implementing policies to increase local production of palm oil, we believe emphasis should also be placed on sustainability of production by focusing on increasing yields rather than expanding plantations. In our view, this can be achieved through collaboration between the government and the private sector in providing financial and technical support to smallhold farmers.