What is the moral duty of palm oil companies that produce a product that is constantly attacked from various quarters? The answer to this question could come from comparison with, surprisingly. Bitcoin.
Like palm oil, bitcoin is a commodity. By definition, a commodity is a raw material or primary agricultural product that have not only a usefulness but also a value.
Like other commodities, including palm oil, bitcoin has to be produced. The difference is that bitcoin is produced by extraction. It is mined like coal or gold. Mining is done by massive electricity-guzzling computers, sometimes consuming as much as that needed by a small country.
This high energy need makes bitcoin very expensive to produce and, as supplies are finite and as it is becoming more and more difficult, not to mention increasingly expensive to mine them, there is only one way the bitcoin can go in terms of price. Up.
The lesson that can be drawn from the Bitcoin experience is that, if it is something of value because it is useful and demand surpasses supply, people will still be willing to pay despite rising prices.
What does this have to do with palm oil?
Palm oil is a commodity and when processed becomes a vegetable oil, something we humans need, alongside of fats, among others, to build blocks of cell membranes and ensure essential functions, such as vitamin absorption, proceeds well.
As a commodity, palm oil is very efficient to grow. Its yields per land surface is much higher than any other sources of vegetable oils, including soybeans and rapeseeds. Cultivation techniques is also ramping up yields.
Demand for edible oil has been growing in line with economic growth, at between three and five percent annually. In Indonesia, the world’s largest palm oil producer as well as its top consumer, demand continues to grow as the country moves to expand the use of biofuels to various sectors.
Supply of the commodity may, however, face a problem soon as productive crops dwindle in number in the face of replanting and the moratorium on new concessions. Techniques, better seed quality and practices are also helping raise production. The government’s extensive replanting drive, especially in plantations of independent smallholders, is, however, in the short term reducing output as the crop need to mature.
The replanting drive, is fast outstripping gains in productivity of existing plantation and supply problems may arise as soon as 2021. A negative palm oil growth may take place.
To maintain supply the only meaningful way would be to plant more or extract more oil from it. Or face the negative palm oil supply.
Bitcoin shows us that unless we act fast, prices are going to shoot up. People need a cheap and plentiful supply of edible oil. It therefore becomes the moral duty of palm oil producers to ensure a plentiful supply of edible oil. There is only one way to fulfill this moral duty, barring the discovery of a technique that can boost extraction rates exponentially. This is to start planting more palm oil.
Planting more palm oil should therefore not become a cause for alarm. As we have seen above, it is the moral duty of palm oil plantations to plant more. Those companies which understand this moral duty, are also highly likely to act in a highly responsible way in doing so.
[By Sebastian Sharp, Head-Investor Relations at PT Eagle High Plantations Tbk.]