In today’s Finshots, we tell you why the Asian Palm Oil Alliance (APOA) is in a spot of bother over HUL’s decision to reduce palm oil in soaps.

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The Story

What’s common between your soaps, biscuits, lipsticks, ice cream and pizza dough?

Well, they all use palm oil.

That’s because palm oil is quite versatile. It works like a foaming, binding and stabilising agent. Which is why it's a great ingredient for as many as half of the packaged products and 70% of cosmetics made globally.

So you can imagine that HUL (Hindustan Unilever), the maker of Lifebuoy, Surf, Lakme, Kwality Walls and other popular brands, uses a lot of it.

But a few days ago, the FMCG (Fast Moving Consumer Goods) giant came up with something new. It said that it would use as much as 25% less palm oil in its soaps and replace it with plant based vitamins, fatty acids and polysaccharides or the stuff that helps your skin stay hydrated. And it calls this tech strategy Stratos.

The reason is simple. Palm oil prices have remained volatile for quite some time now.

See, palm oil comes from the fruit of oil palm trees. It’s colourless, odourless and doesn’t spoil easily. It also contains almost no unhealthy trans fats. It is better equipped to efficiently use land and water too. To put things into perspective, making the same amount of oil from its cousins, sunflower, soy or coconut could need up to 10 times more land. That not just makes it much cheaper to produce, but also the most commonly produced vegetable oil in the world.

But oil palm trees only make a great commercial crop for up to 25 years of their life, after which they need to be replanted. During the pandemic though, farmers in the world's largest palm oil producing regions like Malaysia and Indonesia, were forced to delay replanting. This reduced yields, hurt output and pushed up palm oil prices.

Hotter weather or El Nino in the years after the pandemic also crushed output. Labour and other input costs were soaring too, inflating palm oil prices even more. Prices would sometimes drop briefly too when good weather would result in good yields.

These price volatilities wreaked havoc for HUL because palm oil and its byproducts account for over 20% of its input costs. Palm oil prices are still 80% up from the pre-pandemic levels. And that kind of price rise translates into a 16% hike in HUL’s soap prices if it wants to keep its profit margins intact.

But that’s not the only thing. Another reason why HUL wants to reduce its reliance on palm oil is the fact that its production requires clearing vast swathes of forests.

For context, Indonesia lost nearly 25 million acres of forest over the last two decades. And roughly a third of that deforestation was caused by palm oil. Not just that. In Borneo, an island split among Brunei, Indonesia and Malaysia, the palm oil industry contributed to about 6 million acres of forest loss or 40% of deforestation between 2000 and 2018. That’s a little over the size of the Indian state of Meghalaya.

And making products linked to deforestation simply comes across as encouraging biodiversity loss and climate change. So HUL would rather ditch palm oil with Stratos and fix its public image.

But here’s the thing. HUL’s plan is worrying the Asian Palm Oil Alliance (APOA). Think of it as a group of all the apex edible oil industry associations from five of Asia’s major palm oil importing countries ― India, Pakistan, Sri Lanka, Bangladesh and Nepal.

These countries came together in 2022 to protect the economic interests of the countries that consume palm oil. They wanted to help produce it sustainably and change the negative image associated with palm oil, while also ensuring that it is recognised as a high-quality, wallet friendly and healthy vegetable oil. And the alliance would soon expand to include industry associations from other palm oil producing countries across the continent.

They think that HUL’s decision has significant ramifications for both the palm oil industry and its sustainable development efforts.

Why’s that, you ask?

You see, small scale farmers play a significant role in making palm oil.

If you actually go back a few decades and find out why farmers began growing palm oil, you’ll see that its productivity and financial returns became a way to alleviate poverty in parts of Asia. Over the years it has been able to increase farmers’ incomes in Indonesia, by up to 25%. And right now, palm oil provides employment for up to 8 million people in the country, 40% of which are small scale farmers.

So HUL’s reduced dependence on palm oil would simply hamper their livelihoods.

Sure, you could argue that a fifth of oil palm plantations in Indonesia are illegally operated inside forest areas. But it’s slowly moving towards sustainability. For instance, it’s delaying fresh palm oil cultivation to see what kind of land is being used to grow the crop. Old licences are also being reviewed to make sure their environmental impact is not too heavy.

Malaysia too has capped its land-use for oil palm cultivation at 6.5 million hectares.

And both countries have come up with mandatory certification schemes to trace the source of their palm oil and prove its sustainability.

The proof is in the pudding. Over the last decade, the amount of deforestation caused by the Indonesian palm oil industry has actually declined nearly every year, hitting a 22-year low in 2021. Malaysia has seen a similarly positive graph too.

And APOA wants to use these models to help other Asian countries move towards sustainable production too.

India, for example, is an important market for palm oil since 90% of the palm oil it imports goes into cooking food. Its National Mission for Edible Oils wants to sustainably increase oil palm cultivation and boost palm oil production to 11 lakh tonnes by FY26. That’s 300% more than the production in FY20.

HUL itself has also recently partnered with 15,000 farmers in Andhra Pradesh to sustainably transition into creating at least 30,000 hectares of oil palm plantations.

And Stratos could seem counterintuitive to all these efforts.

Can APOA’s arguments convince HUL to give the palm oil industry another chance?

We’ll only have to wait and see. Until then…

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