The crude palm oil (CPO) sector has strengthened its position as an increasingly important commodity in Indonesia over the last decade. Currently, Indonesia is the largest CPO producer in the world, followed by Malaysia, which produced 20 million tons in 2015.

Indonesia’s CPO yield increased from 22.5 million tons in 2010 to 30.9 million tons in 2015. Its export revenue increased more than 15 times in the last 15 years from US$1.1 billion in 2001 to $15.4 billion in 2015. The CPO industry in Indonesia creates approximately 4.2 million jobs directly and 12 million jobs indirectly.

The total CPO plantation area is about 11.4 million hectares. Provinces with large oil palm plantation areas are mostly in Sumatra and Kalimantan, with the largest as follows: Riau (2.4 million ha), North Sumatra (1.44 million ha), South Sumatra (1.16 million ha), Central Kalimantan (1.21 million ha) and West Kalimantan (1 million ha).

In addition, banks support the sector with loans recorded as of June 2016 amounting to Rp 199 trillion disbursed for oil palm plantations, Rp 30 trillion for oil palm-based industry and Rp 15.8 trillion for CPO-related trading.

CPO’s competitive advantage in Indonesia is a result of the land and weather in Indonesia, which are very suitable for this kind of crop. However, too much dependence on these natural gifts may not be sufficient for the future because competition in the market will be tougher. The competition comes from other vegetable oil products such as soya bean oil and sunflower oil.

One key issue that should be resolved mainly relates to increasing productivity, particularly for smallholders’ and state-owned enterprises’ plantations. On average, oil palm plantation productivity is 3.67 tons per ha in 2015. The most productive plantations are managed by the private sector with 3.81 tons per ha, followed by those of state owned enterprises at 3.67 tons per ha.

Interestingly, since 2013, private sector plantations surpassed the productivity of state-owned enterprise plantations, which continued to decrease. Meanwhile, smallholder plantations are the lowest in terms of productivity with 3.32 tons per ha. As a comparison, oil palm plantations in Malaysia produce 4.08 tons per ha.

The main reason why productivity of smallholders is low is simply a result of the fact that smallholders do not have an adequate plantation area to achieve economies of scale. This implies that smallholders do not produce palm oil using the most effective methods such as planting best quality oil palm seeds or providing good fertilizers and sufficient irrigation.

All of this may relate to the lack of financing faced by smallholders. Note that growing oil palm needs financing to buy fertilizer and to weed plantations.

To date, the banking sector in providing micro-financing for smallholders usually deals with classic problems such as the limited access of micro entrepreneurs to financial services, the absence of collateral, high risk and high monitoring costs for the bank.

We believe that the CPO Fund can be allocated to resolve financing problems among smallholders. Note that since the issuance of Finance Ministry Regulation No. 133/2015, all exported CPO should pay an export levy of $50 per ton. The funds raised from this levy should be used to maintain CPO competitiveness and sustainability through various activities such as replanting, research and development, biofuel development, promotion, education and smallholder empowerment.

As it is clear that smallholders’ oil palm plantations have a pretty large plantation area of 3.4 million ha, while the larger private sector has 4.6 million ha and state-owned enterprises have only 0.6 million ha, the empowerment of smallholders is key to improving the overall performance of the CPO industry.

One model that could be promoted is to intensify the partnership between large plantation companies and smallholders. So far, the partnership, known as Perkebunan Inti Rakyat (plasma plantation), has been working properly but it appears to be insufficient to increase the productivity of smallholders.

Another way to increase productivity is of course by using technology, especially genetic engineering to develop seedlings able to produce more CPO. Large companies are expected to implement research and development (R&D) for this genetic engineering. Another source of R&D is the utilization of the CPO Fund, which could be allocated for research grants to support basic research in universities to create new seedlings.

In addition, an agenda of increasing productivity is also important to be viewed from the environmental perspective as new land acquisition for oil palm plantation is being halted by government moratorium, for at least the next five years. Therefore, CPO production can only increase using existing land but with more intensive utilization to make each hectare able to produce more crops.

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The writer is head of industry and regional research at Bank Mandiri

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