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05/04/2018 – News / Agriculture / Palm Oil / Indonesia / World Resources Institute

Smallholder farmers are key to making the palm oil industry sustainable, says WRI

Indonesia’s palm oil has long earned the ire of conscious consumers – its production has been linked to child and forced labour, massive deforestation and the demise of iconic species like orangutans. Most point to large corporations to solve the problem, but that’s overlooking a key actor in palm oil production: small farmers. Thontowi A. Suhada, Bukti Bagja and Shofia Saled of the World Resources Institute – an NGO – report on how smallholders may prove key to making the palm oil industry truly sustainable.


'Independent smallholders' - small-scale farmers who are not linked to any particular company or mill – manage about one-quarter of Indonesia’s palm oil plantations. That’s a huge share of an industry that produces 31 million tons of oil a year, used in everything from cosmetics to biofuels and of course in a wide array of foods. Researchers predict that smallholders will double their production capacity over the next decade, managing a 60-per-cent share of Indonesia’s total oil palm plantation area by 2030.


Independent smallholders are thus critical players for bringing sustainable, conflict-free palm oil into reality– a goal supported by both the Indonesian government and the growing number of companies currently making 'zero-deforestation' commitments. The problem is that small farmers have few resources at their disposal to actually start producing palm oil sustainably.


Independent smallholders – left out of the sustainable palm oil movement


As of 2017, less than one per cent of independent smallholders’ farms were certified as sustainable by the Roundtable on Sustainable Palm Oil (RSPO) and Indonesia Sustainable Palm Oil (ISPO). There are many reasons for that.

Since independent smallholders are not linked to any particular company or mill, they do not receive training, supervision or support from companies, and only receive limited support from the government. They get limited information about good agricultural practices. That has led to lower productivity and a lower concern for sustainability. For example, small farmers often purchase cheap, low-yield seedlings and burn land to make way for crops.


In addition, smallholders’ independence leaves them vulnerable to exploitation. Middlemen acting as fruit brokers between farmers and mills oftentimes charge exorbitant fees for their services, or take a large chunk of the profits from farmers’ oil palm sales.


Independent smallholders who do want to pursue sustainable palm oil production may find it prohibitively expensive. Researchers from Wageningen University estimated that the upfront costs for independent smallholder certification– including all the necessary documents, training and audits – range from 16-39 per cent of farmers’ mean annual incomes. The annual cost of certification, including surveillance audits and membership fees, can reach up to 12 per cent of annual incomes.


At the same time, the direct cash income benefits from premium fees for certified and higher quality fruits are limited. Research from the International Centre for Integrated Assessment and Sustainable Development suggests that certification is profitable only if independent smallholders consistently receive high premium prices and fees. In practice, the premium price is set by intermediaries, and smallholders often find themselves in a lower bargaining position. Prices also fluctuate considerably.


Even when smallholders receive help from NGOs or the private sector, the effect is not likely to last. Independent smallholders will find it difficult to maintain  their sustainable certification once support from an NGO or company ends. RSPO’s 2017 Impact Report shows a 38-per-cent decrease of certified independent smallholders in Indonesia compared to the previous year, largely due to licenses expiring. While this indicates that independent smallholders can operate sustainably, they simply lack the resources to afford and maintain certification.


Helping small farmers produce more sustainably


Indonesia needs an institutionalised, systemic transformation within the national governance system. Two tactics could help in this regard.


Firstly, government agencies could provide most of the sustainability components required by RSPO and ISPO certification, thus lowering costs for farmers. For instance, the country’s agricultural agency could provide training on best farming practices, the regional office of the labor department could offer health and safety training, and the environmental agency could conduct sustainability training. The government can start with a clear regulatory framework to sync the agencies, with the aim of reducing costs for smallholders and scaling up certification.


Secondly, the government can reallocate some of its Crude Palm Oil (CPO) Supporting Fund to help small farmers. Palm oil export taxes generate about US$700 million a year for this fund, which is supposed to support national palm oil production. While these funds may not be directly allocated to sustainability certification, they can be used to reduce other smallholder costs or increase their productivity, such as paying for replanting or replacing low-yield oil palm trees with high-yield seedlings. That would free up farmers’ scarce funds to pursue certification and more sustainable practices.


As they play an increasingly prominent role in Indonesia’s growing palm oil industry, small farmers could actually become the vanguard of sustainability. Certainly, how they transform is an important indicator of the sustainability of the palm oil industry as a whole.

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