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Helping Palm Oil Smallholders Navigate EU Rules

One of the challenges to Malaysia's palm oil industry is that of scale and fragmentation. The recent announcement by the Plantation and Commodities Ministry of consolidating smallholder farmers is the first step towards improving productivity and yields.

Minister Datuk Seri Johari Abdul Ghani said recently the ministry was consolidating independent palm oil smallholders to manage land more effectively to ensure timely replanting for consistent and maximum yields.

The move could not be timelier as Malaysia manoeuvres the European Union's Deforestation Regulation (EUDR), which becomes applicable on Dec 30. The EUDR seeks to address, particularly the issue of palm oil production and filtering imports into the bloc.

Currently, smallholders manage 27 per cent of the total oil palm planted area and the lack of scale poses challenges in optimising their yield count. With guidance from larger corporations, smallholders could increase the country's crude palm oil production by another 600,000 tonnes a year, without any additional land use.

Consolidation into clusters can be managed more similarly to medium or large estates and will increase capacity among smallholders, ensuring that they can navigate regulatory hurdles, certification processes and transparency and traceability considerations that may be encountered while complying with sustainability requirements.

Consolidation could also result in greater efficiency, leading to higher yields and income. Despite the benefits, smallholder farmers face bigger challenges as the EUDR remains a contentious issue.

One of the thorniest issues is the mandate to importers to verify that there is no deforestation involved in their supply chains. The burden of proof now rests on producers of palm oil, including smallholders, to show that they have adhered to strict sustainability standards.

Satisfying this burden will increase reporting and compliance costs, while the inability to do so regularly might result in their exclusion from the lucrative European market.

There are further concerns over the EUDR's categorisation of "high-risk deforestation countries". If Malaysia is classified as one, smallholders might not only lose market access but also risk falling deeper into poverty.

While the EUDR's intentions are perhaps commendable, it is crucial to consider the implications for and context of smallholders in Malaysia. These individuals are often the lifeblood of rural communities and their earnings may be below the national poverty line.

Meeting the EUDR's stringent reporting measures – even for the sake of sustainability – could affect the economic viability of small oil palm plantations and consequently, their ability to make a living.

In short, there is now friction in Malaysia's palm oil industry – between the EU's definition of sustainability and smallholder livelihoods, green concerns and economic empowerment, and environmental stewardship and social justice.

Nonetheless, smallholders have not been passively accepting such regulatory pressures. In a display of unity, a group of smallholders have petitioned the EU to apply changes to the deforestation rule, highlighting their circumstances and urging for a more nuanced approach.

Their petition, however, should not imply that smallholders' palm oil is any less sustainable as Malaysia is already making efforts towards better sustainable practices in its palm oil industry.

Malaysia is working actively towards SDG15 to end deforestation and restore degraded forests by formulating policies, such as the National Policy for Biological Diversity.

Second, the Malaysian Sustainable Palm Oil (MSPO) certification is mandatory for all plantations, including smallholders. As of May 2022, about 61 per cent of smallholder plantations have already been certified under the MSPO scheme.

Third, there are grants and funding aimed at helping smallholders produce higher-quality fruits, consequently contributing to the sustainability of their supply.

Nonetheless, as the challenges posed by the EUDR remain unresolved, Malaysia's consolidation of smallholders is a pivotal first step towards ensuring that they are not unfairly disadvantaged when confronted with the regulations.

At the same time, Malaysia must refrain from exploiting smallholders as a shield to protect the interests of major industry players. Genuine prioritisation of smallholder empowerment and welfare is essential, and it requires the establishment of a fair and transparent framework that safeguards the rights and interests of all stakeholders, regardless of their size or influence.

Leveraging on the consolidation of smallholders, Malaysia could address multiple challenges, essentially killing two birds with one stone.


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