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The contribution and challenges of smallholders in the oil palm industry

The oil palm industry is one of the most important industries in Indonesia

Bambang Drajat (The Jakarta Post)
Fri, December 3, 2010

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The contribution and challenges of smallholders in the oil palm industry

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he oil palm industry is one of the most important industries in Indonesia. Oil palm plantations have expanded from around 120,000 hectares in 1968 to more than 7.5 million hectares to date. Oil palm plantations and smallholders have also expanded from plantations in only three provinces to 19 provinces. Sumatra is the largest area accounting for 69.85 percent, followed by Kalimantan and Sulawesi accounting for 25.98 percent and 2.95 percent, respectively. From 2003 up to now, the oil palm industry has grown consistently in line with the growth in market demand for vegetable oils, in particular palm oil.

Aside from its role as a source of foreign earnings and employment, for Indonesia, the oil palm industry is considered important for several other reasons. Palm oil is the major edible oil that is produced and consumed domestically. Palm oil is also an important raw material for industrial manufacturing. Palm oil is a primary source of income in rural areas for the present and is likely to be so in the future. The income of smallholders reached US$1,246-1,650 per year in 2005 and it is predicted to be $2,000-2,500 in 2010. Currently, palm oil is among Indonesia’s top income generating commodities. The oil palm industry has proven to be a powerful tool for poverty alleviation in Indonesia. The oil palm industry contributes to economic development, and its output growth drives industry development.

The Contribution of Oil Palm Smallholders in Poverty Alleviation

In rural areas where poverty and unemployment are endemic, the establishment of palm oil plantations has proven to provide jobs and generate significant income for the local people. Research showed that the Nucleus Estate Smallholder (NES) Project in general has been successful in reducing poverty. The number of poor people in NES areas is between 2 percent and 7 percent only. Those figures are below the national poverty level of 14 percent. The Gini coefficient of income distribution was 0.36. This means there is a relatively good income distribution as the figure is still below the upper limits of in-equal income distribution of 0.4.

The income distribution among households in the Kampar development area, in Riau Province, shows that the number of households with an annual income of around Rp 5 million which is categorized as poor is relatively small (less than 10,000). The majority of household incomes in Kampar development area are between Rp 10 million and Rp 25 million; well above the poverty line. The proportion of households above the poverty line is 75 percent, meaning that the development of the palm oil industry can reduce and even alleviate poverty.

In other case, the NES/PIR-BUN Ophir project has succeeded in implementing the principle of participatory development. The farmers are the subject and the object of development initiatives challenging many of the standard assumptions for nucleus estate smallholder project development. In the NES/PIR-BUN Ophir project farmers became a viable, progressive and self reliant farming community.

Now, in other government programs, namely modified NES (NES in transmigration areas and NES Partnerships) and the revitalization program, the industry also gave social and economic benefits to participants. In the revitalization program, farmers benefit from various access provisions, such as planting materials, credit subsidies, and market for fresh fruit bunch. So, it could be said that the development of the palm oil industry in Indonesia could be a means to reduce poverty.

Overcoming the Challenges, the Role of Government

Currently, smallholdings are growing faster, but face several disadvantages. Overall smallholders’ productivity is generally significantly lower than that of plantations, despite the fact that the overall size of the land managed by smallholders is relatively larger than that of private and state-owned companies. The average yield of the smallholders was 2.52 tons of crude palm oil per ha which was about 35 percent and 40 percent lower than those of private and government-owned plantations, respectively.

Meanwhile, the potential productivity is more than 8 tons of oil per ha. Their problems are largely due to lack of access to better information and inputs, as well as other deficiencies in their post harvest handling, access to financing and linkages to markets. However, there are opportunities to narrow the gap by improving land productivity, the application of practical technologies and access to resources and markets for smallholders.

With such development, it is important that the smallholders are not excluded in the government oil palm development program. If smallholders are part of oil palm development as a whole, the indigenous people in the area of development will benefit from their rights and their culture will be valued and protected. Conflicts involving smallholders will be resolved. Smallholders will have access to financial services and will be provided with technical assistance to improve productivity.

The smallholders development will be in the enforced spatial planning. The smallholder plantation will not be developed in an area of environmental degradation, or involve the conversion of a high conservation value area (such as protected forest and peat-land), or deforestation. The smallholder plantation will not increase methane and carbon emissions or pollute water ways.

Overcoming the Challenges, the Role of IPOA

The smallholder farmers are now managed under the Indonesian Oil Palm Farmers Association (IOPFA). This organization is closely related to the Indonesian Palm Oil Association (IPOA), especially in terms of sustainable development. These two organizations have a role in promoting the sustainable development of palm oil. The role of IPOA is to promote and to facilitate growers including smallholders in achieving the required standards in the sustainable development of palm oil. The IPOA would empower networking, participate in oil palm smallholder’s empowerment and create a funding strategy for the sustainability of oil palm smallholders including the enforcement of corporate social responsibility (CSR), propose the reallocation of the export tax fund for smallholder development. The IOPFA supports the cooperation by implementing efforts to promote sustainable development of palm oil.

Concluding Remarks

The palm oil sector generates significant employment and economic opportunities for the poor. In Indonesia alone, the sector directly and indirectly employs around four of the economically active rural population and supports a rural population of up to 20 million. The sector has proven to be a powerful tool for poverty alleviation in Indonesia.

In response to the future strategic development, there will be a need for adjustments in the Indonesian oil palm industry. While gaining from opportunities, the demands linked to social and environment protection should be internalized in the oil palm development. The development of smallholders should be included in the oil palm development as a whole otherwise current issues will remain unchanged.

The writer is a researcher at the Indonesian Estate Research Center, Bogor.

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