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Commodities
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Palm Oil: Sustainability with Better Margins
Palm oil is one of the most ubiquitous - and controversial - ingredients in the world. Popular because of its versatility, both the pure oil and its derivatives are used in everything from cosmetics to cleaning supplies to food.
At the same time, palm oil has unfortunately become one of the most controversial ingredients in the world, in large part due to consumer and environmental group concerns about producer practices that have attracted widespread press. Deforestation is an issue, as top-producer countries such as Indonesia and Malaysia cut down tropical forests and drain peat marshes to create land for oil palm farms. Environmental groups have raised the concern that non-sustainable growing methods combined with slash-and-burn techniques result in the loss of animals and their habitats, contribute to forest fires, and send harmful gasses into the atmosphere. There have also been accusations of child labor. As consumer awareness of these situations has increased, the palm oil industry has come under heavy fire – and end buyers, including industry leaders such as McDonald’s, Nestle, and Yum Brands, have said that they will either eliminate palm oil from their supply chains entirely, or will source only sustainable oil.
Palm oil, like many staples, is a low-margin crop, and prices fluctuate in response to palm prices, yields, refinery capacity, and alternative oil production (competition). There are many small producers, but a handful of trading companies control most of the global trade. The small producers sell to the global traders, who in turn sell to the large packaged food and cosmetic product buyers. In some cases, the traders own production capabilities as well. Major palm trading companies such as Wilmar – which moves close to 50% of the product - have lead the conversation by expressing their willingness to participate in sustainability and supply chain transparency initiatives.
Reclaiming Margin Through Tech-Enabled Logistics
Given the likelihood of increased expenses as traders respond to buyer and consumer concerns, the industry needs new ways to recapture margin. To keep margins from shrinking further, traders can use technology to reduce costs and save time on the transportation logistics supporting the trade.
Currently, freight booking for containerized commodity traders – including palm traders moving solid palm derivatives - involves working with a logistics team that goes through a process of contacting freight capacity providers by various means to get quotes. The process hasn’t changed in decades – most shops are indifferent to technology that would enable them to automate that process. But it’s time for that to change.
Freight: The Largest Variable Cost
Freight is the largest variable cost for many traders in many industries. Palm oil is no different – but palm is unique in that the industry must rapidly transform in response to consumer calls for sustainability. Therefore, instead of calling a handful of providers for quotes, or entering into long-term tenders for freight capacity, palm traders should be using a trade technology platform that enables them to access the entire market for capacity. They can locate the best-value providers and, on average, see savings of $1/metric ton if they switch from phone and email provider negotiations to an online platform such as Haven.
As we think about aligning incentives across all parties in the palm oil supply chain – producers, traders, buyers, local residents, and concerned consumers – it becomes apparent that being smart about logistics enables companies to conduct more sustainable business while remaining profitable.
NO.
2 November 2016
AGRICULTURE, LOGISTICS, AND TRADE
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