Must use atleast 3 course materials for references and in text citations.Must refer to attachments to answer questions.MDQ STEP TWO: FRAMING THE DECISIONThe purpose of Week 4’s Brainstorming Exercis
Setting the Stage
Palm oil is the most widely consumed vegetable oil on Earth. Referred to as the “Miracle Crop” (Wan, 2017) it can be found in seventy-one percent of most supermarket food products like pizza and doughnuts, 24 percent of cosmetic products like lipstick and makeup, and five percent for energy uses like heating fuel (Deutsch bank, 2015). Known as a super food, the demand for palm oil is already high, and it is expected to triple by 2050 (Deutsch Bank (db), 2015).
Currently Malaysia, Indonesia and India produce 50 of the 56 million tons needed to meet international consumer demand. While the production of Palm Oil promotes economic development badly needed in these countries, it does not come without serious environmental and social consequences (Deutsch Bank(db), 2015).
One prominent side effect of the deforestation caused by the rapid growth of palm oil production is the reduction of the Orangutan population. It is estimated that over fifty thousand Orangutans died because of palm oil production in the last 20 years. It is also estimated that 2,000- 3,000 die every year (Orangutan. n.d.). The guestimates by experts suggest that in the next 30-50 years those found in the wild will be extinct. Environmentalists are attempting to stave off the extinction by creating refuges on nearby islands and transporting the remaining Orangutans from Borneo (where most Orangutans have traditionally lived) to the sanctuaries (Emont, 2017).
Orangutans are not the only victims of the increased number of palm oil plantations, but humans also suffer from the side effects. A study estimated that 91,600 people in Indonesia, 6,500 in Malaysia and 2,200 in Singapore may have died prematurely because of exposure to fine particle pollution from burning forests (France-Presse, 2016).
The large destruction of rain forests by plantation owners and its effect on global climate is also a serious problem brought about by palm oil production. Deforestation is a significant contributor to climate change; when the forests are lost, carbon is released into the atmosphere, causing the climate to heat up. Clearing the land to plant the new crop is often done by burning timber and undergrowth putting significant amounts of smoke into the air which releases carbon dioxide in large amounts. In Indonesia and Malaysia, much of the land is on tropical peat soil. The richness of the holds carbon. Clearing the land releases that carbon into the atmosphere, which contributes to global warming (Perils of Palm, 2018).
In the last years environmentalists have actively attempted major campaigns to bring awareness of the problems related to palm oil production and have taken a variety of approaches.
One approach is to demand companies stop using palm oil altogether. The Say No to Palm Oil group states “We think that consumers should focus on cutting down unnecessary consumption in general, thus removing some palm oil and other vegetable oils from their lifestyle.” (Fassler, 2016). Those opposed to this approach suggest that considering the number of products that contain palm oil ridding it from the ingredient list or reducing it will likely just switch the burden on to another oil crop whose side effects are worse. No other crop can yield even a third as much oil per acre and use less land. Pesticide use in palm oil production is also considerably less (Fassler, 2016).
Another approach is to the problem is for user companies to buy only sustainable palm oil. NGO’s and corporations in Europe and America, two of the largest communities of palm oil consumers, have taken some steps to comply to this demand by creating the Roundtable on Sustainable Palm Oil. This organization has set out a certification process for palm oil production in compliance with a set of environmental and social criteria (Roundtable, 2018). However, organizations like Greenpeace (Moas, 2013) and the Rainforest Action Network (Tillack, 2013) complain that the organization’s standards are not strong enough and that even certified sustainable palm oil can contribute significantly to deforestation and its climate and health effects.
A third approach has been for environmental activists to stage protests, boycotts and petition drives to make corporations and their consumers aware of the side-effects that are produced by palm oil. These activities have resulted in many companies like General Mills, Mondelez International and J.M. Smucker company to adapt policies on Palm Oil use in their products. However, as pointed out by the Conservation International group in their Consumer Guide the source to market problems make certification difficult “Complexity and fragmentation in the palm oil supply chain present challenges to consumer goods manufacturers and retailers seeking to implement sustainable sourcing commitments.” (Drummond, 2015 p.15)
The rapid expansion of palm oil production in Southeast Asia endangers orangutans and humans, destroys virgin rain forests and contributes to climate change. It also is one of the most profitable products for the Southeast Asian and global economies. As noted by Sustainability Policy Transparency Toolkit group, “Palm oil is one of the most profitable land uses in the tropics. For the main producing countries, palm oil can significantly contribute to national economies, driving rapid economic growth and contributing to the alleviation of rural poverty.” (SPOTT, 2016). The question then becomes; what role does the plantation owner play in the preservation of the company’s income while dealing with competing societal concerns?
Business Background
PPO is a small family owned business which began in 1998. Owned by Abdul Tengku, PPO has three Palm Oil Plantations in Borneo in the Kilimaten region. The first of PPO’s plantations planted in 1998 is 1500 hectares in size and yields 6.5 tons per hectare. The second plantation planted in 2006 is 2,000 hectares and yields 7.25 tons per hectares. The newest plantation is only 6 years old and is the biggest at 3,500 hectares. The yield is only 3.5 tons per hectares owning to the immaturity of the trees. Currently Tengku has all his production under contract for the next two years. PPO’s current revenue annually is $24,090,000 US Dollars. Down 9.2 percent from last year. Since Palm Oil is a commodity the prices can fluctuate from month. Contracts are paid based on the price noted on the market for the transaction date of sale
Palm trees typically begin flowering and producing fruit after 3-4 years and yield well enough after 6-8 years for the owner to return a profit. Oil palm plantations generally remain profitable for 25 years, after which they need to be replanted. Peak palm oil yields occur anywhere between 10 to 18 years of age, and gradually decline thereafter. As a plantation ages it also tends to experience declining tree populations because of pests and diseases. Newly established plantations might have 130-145 trees per hectare, whereas an old plantation might be reduced to approximately 100 trees per hectare. The huge start-up costs and long lead time between plantation establishment and profitability are huge impediments to independent small farmers in Indonesia. And that is precisely why the government has had to provide substantial long-term capital and subsidies to smallholders to ensure they can participate in the industry. IPOC,the government regulatory board, indicates that roughly 98 percent of all smallholder palm farmers have successfully paid off their loans in the past 10 years. This is in fact the case for PPO.
So, PPO is now faced with the following financial situation:
They have paid off their loans.
They have the 1998 plantation coming to the end of its production numbers because of the age of the trees. The plantation will have to be replanted in five years. Leaving a 6 to 8-year gap where the plantation will not be productive and high costs for replanting will have to be absorbed.
The second oldest plantation is beginning to reach the peak time for productivity but in 6 more years the trees will begin to reach full maturity and production will decline.
The largest plantation is immature and will not bring in a strong yield for another 3 to 4 years.
While prices are still strong the market is going down.
PPO has not received its government certification as a sustainable producer because it is not yet able to pay the costs of needed changes for qualification (estimated at $1 million dollars) having just repaid its government loans.
The loss of contracted customers would threaten his financial success.
