Terms of Reference The Trueprice of Palm Oil Production and the Living Income/Wage for Palm Oil farmers in Colombia

Context & Background

In recent years the Colombian palm oil sector has become a leading provider of sustainable palm oil globally. However, despite the initial progress, the country is in a crucial phase to deliver on its national and international commitments on sustainable production and trade. Colombia requires more efforts to tackle a variety of systemic issues -environmental, social and economic- to complete sector transformation towards sustainable production and trade.

The main bottleneck to scale up sustainable production is found at the producer level. Smallholder producers make up 80% of the total farmer population in Colombia (6000 producers) and are responsible for around 40% of the total produced volume of palm oil in Colombia. Yet, only 6% out of those smallholders hold a sustainability certification such as RSPO, ISCC, Rainforest, or Organic. For Colombia to become a fully recognized sustainable and deforestation-free origin of palm oil it has to address the underlying conditions that inhibit producers from advancing in the implementation of sustainable practices.

The key objective of the Sustainable Origin Accelerator for Palm oil Supply Chains partnership (SOAPS) is to accelerate the sustainable transformation of the global palm oil supply chain and to achieve fully traceable, sustainable, and zero-deforestation supply chains from the field to the shelf.

Palm oil production is associated with environmental and social externalities. Environmental externalities are costs that infringe on the natural resources, capital, and communities of people living close to production locations or to future generations – examples include climate change, water pollution, and the use of scarce water and toxic materials. Social externalities are costs that directly affect the conditions of workers and producers in the value chain and sometimes of local communities. In the palm oil value chain, these externalities primarily occur at farm level. Producers are the most vulnerable to externalities. Assessing the true price and true ROI can help Solidaridad and its partners to develop better incentives, better sourcing, and investment strategies for the palm oil supply chain.

Under the SOAPS partnership, one key objective is to quantify the costs and benefits of VSS certified production versus conventional oil palm production in Magdalena, Colombia. This department is home to some of the key suppliers of the European market. Based on the results of the analysis, project partners will be able to contribute to a better insight for different actors in how the transformation into a sustainable palm oil sector can be realized and how Colombia performs in comparison to other global producers of palm oil.

Objectives 

The implementation of the required practices to achieve certification against Voluntary Sustainability Standards (VSS) requires investment, and the amount the sector is willing and able to invest in sustainability is not open ended. An investment agenda that supports VSS certification needs to be justified by evidence. Therefore, it is crucial to assess oil palm production from a societal cost-benefit perspective. 

Better insights into all costs of production (both financial and external) enable investments to have a higher impact and lower risk. In other words, society will receive more bang for its buck. The development of this cost-benefit driven approach requires an extensive and quantified analysis of sustainability.

Five criteria in cost-benefit assessment

Five criteria are proposed that should be met to validate the belief that investments in sustainable production are an important element towards a better palm oil sector:

  1. It is sustainable. The approach should be effective in reducing externalities, both of social and environmental nature
  2. It is contributing to a decent livelihood for the farmer and the worker. Smallholder farmers and rural workers, whose livelihoods are under severe pressure, should see their household income increase, preferably towards making a living income and/or living wage.
  3. It is feasible in the marketplace. Palm oil prices are mostly standardized according to the international market. Sustainable production should not lead to higher costs, unless this can be clearly related to a higher output per hectare or more cost-efficiency.
  4. It is profitable to the farmer. If investments are required to make the switch to sustainable production, the investments should be under control and generate sufficient profit per dollar invested.
  5. It is cost-effective to society. The investments should not only benefit the farmer, but also provide benefits to nature, by providing large natural capital benefits per dollar invested. 

Quantifying sustainability, ability to provide a decent livelihood and feasibility

In order to score VSS certified production of oil palm on the five criteria, various quantitative analyses need to be performed. Part of this can be done using traditional financial techniques. For instance, a financial model of a farm can assess the farmer income. If this is above the living income for certified farmers, and below for all realistic alternatives, certified production meets the ‘livelihood’ criteria for farmers.

Other elements require quantifying the externalities of oil palm production. This is necessary for the first criteria (sustainability) but also for the last criteria (cost-effective to society). In this analysis, the purpose is to calculate the true price of VSScompliant oil palm and alternative production systems, considering the external costs of production. In this way, there will be comparable and clear insights into the environmental and social effects on society.

True pricing gives a more complete picture of the real costs of production, providing:

  • An overview of all external costs of oil palm production. This is key to test sustainability;
  • An assessment of farmer income, verifying whether decent livelihoods are provided for;
  • The value for the market price. This helps to test the feasibility criteria.

Quantifying profitability and cost-effectiveness

In order to test the fourth criteria, profitability, the idea is to calculate the true ROI of investments in VSS certified production and in conventional production systems. Additionally, the ROI of investment shows how well an investment financially pays off. This is crucial information to test the last criteria, cost-effectiveness. The true ROI provides an indication of how well an investment pays off from a societal perspective.

This learning initiative will allow Solidaridad and its partners to compare and boost their investments and efforts in sustainable production of oil palm.

Components 

  • Literature research on existing information in Colombia:
    • Calculation of living income (producer/farm owner)
    • Calculation of living wage (plantation worker) o Calculation of benchmark based on secondary data
    • Calculation of environmental and social external costs based on primary and secondary data sets o Sensitivity analysis of the true price
  • Selection of improvement levers to be analysed
  • Primary data collection in selected regions and clusters
  • Assessment of improvement levers
  • Analysis of True Return on Investment in VSS-compliant oil palm
  • Comparison of investment per production model (national benchmark, regional conventional and regional VSScompliant)
  • Comparison of benefit per production model (national benchmark, regional conventional and regional VSScompliant)
  • Comparison between Colombia and other palm oil producing countries (based on available and comparable data)
  • Presentation of results and main findings 

Products

The deliverables are:

Final report containing the following chapters:

  • Executive summary
  • Concept
  • Context analysis
  • Study methodology o Results Living income/wage analysis
  • Results True Price analysis
    • Comparison of investment per production model (national benchmark, regional conventional and regional VSS-compliant)
    • Comparison of benefit per production model (national benchmark, regional conventional and regional VSS-compliant)
    • Comparison between Colombia and other palm oil producing countries (based on available and comparable data)
  • Results True ROI analysis o Recommendations for the use of Living income/wage for decisions by stakeholders of the value chain
  • Recommendations for the use of True Price for pricing decisions by stakeholders of the value chain
  • Recommendations for the use of True ROI for investment decisions by private funds, multilateral financial institutions, governmental entities, producer organizations and other stakeholders of the value chain 

The final report will be a document between 12.000-16.000 words (excl. annexes). The executive summary will be between 1.000-1.500 words. The Recommendations will be presented in a way that can be used by SOAPS partners within their operations. The deliverables will be in English. Solidaridad will be in charge of the translation to Spanish.

The team of Solidaridad will work side-by-side with the consultant team to elaborate on the abovementioned deliverables as coauthors. Solidaridad will provide primary data and secondary data sources.

  • The final report will be disseminated in a webinar aiming to share the results and lessons learned with other SOAPS partners. A PowerPoint presentation of results and main findings will be delivered in English by December 31, 2021 (minimum 12 slides, maximum 18 slides).

Area of execution

The analysis will be executed in Magdalena, Colombia

Execution time frame

The execution of activities should take place during a time period of 6 months, from July 1st to December 31st, 2021. A final draft of the report will be delivered by December 1, 2021. 

Resources

Solidaridad and its local partners will support the study with desktop research databases and primary data collection. The consultant will be requested to deliver on the analysis and recommendation as described under the section Products.

Budget

A total budget of 35.000 EUR is estimated for the activities presented in this document. The budget is distributed as follows: 

Consultancy

29.000 EUR (incl. taxes)

Field trip expenditures

(max. 1 international trip)

2.000 EUR (incl. taxes)
Publications 4.000 EUR (incl. taxes)
Other activities -
TOTAL 35.000 EUR (incl. taxes)

Proposals

The deadline for the delivery of proposals is June 11 at 13.00 (Colombian timezone) through email: nathalia.ramos@solidaridadnetwork.org. Proposals should detail:

  • Methodology
  • Timeline
  • Experience
  • Budget