Palm Oil Small Holders and Sustainability

Palm Oil Commodity and Issues in the Supply Chain

Palm oil is the world’s most traded vegetable oil. In terms of land use, oil palm tree is more efficient than any other oil crop and in economic terms, palm oil is highly competitive. (http://www.worldagroforestry.org/sea/Publications/files/bookchapter/BC0341-13.pdf). The palm oil sector is growing rapidly and the increase in demand for the multipurpose oil is expected to continue in the future. As a result, large investments in expanding oil palm plantations are on the way (Oxfam, FAIR COMPANY–COMMUNITY PARTNERSHIPS IN PALM OIL DEVELOPMENT).

Indonesia is the largest producer and exporter of palm oil and the sector is the major growth driver for the country. The value chain of palm oil and its derivatives has a strong degree of vertical integration; in the case of Indonesia, few corporations control the whole supply chain of the commodity. On the other hand, independent smallholders are becoming increasingly dominant. Presently, smallholder farmers are responsible for over 40 percent of the oil palm plantations spread throughout the archipelago (http://www.foksbi.id/en/news/read/04-05-2016-ispo-training-commences-for-independent-smallholders-in-pelalawan).

Palm oil production can lead to greenhouse gas emissions, land grabs and exploitation (Oxfam, FAIR COMPANY–COMMUNITY PARTNERSHIPS IN PALM OIL DEVELOPMENT).

The rapid expansion of oil palm plantations in Indonesia has cause the destruction of tropical forests and peatlands, the loss of biodiversity , extensive and high level of smoke pollution across Southeast Asia, and much of Indonesia’s GHG emissions (65.5%  of Indonesia’s emissions in 2013 were from land-use change and forestry) (http://www.worldagroforestry.org/sea/Publications/files/bookchapter/BC0341-13.pdf; https://www.reuters.com/article/us-indonesia-palmoil/palm-oil-industry-fumes-as-indonesia-gets-tough-on-forest-fires-idUSKCN0XI2XE; https://www.climatelinks.org/resources/greenhouse-gas-emissions-factsheet-indonesia).  

Social and economic problems, including food security challenges, land tenure and boundary conflicts and human rights abuses have also arisen in the palm oil sector (http://www.worldagroforestry.org/sea/Publications/files/bookchapter/BC0341-13.pdf).  

Palm oil production in Indonesia often comes at the expense of traditionally managed lands as well as the livelihoods of indigenous communities, causing widespread conflict in the archipelago country. Forest-dependent communities were more likely to strongly oppose oil-palm establishment because of their negative perception of oil-palm development on the environment and their own livelihoods. Conflicts regarding land boundary disputes, illegal operations by companies, perceived lack of consultation, compensation and broken promises by companies were more associated with communities that have lower reliance on forests for livelihoods, or are located in regions that have undergone or are undergoing forest transformation to oil-palm or industrial-tree-plantations (https://www.academia.edu/33840943/Oil_palm_-_community_conflict_mapping_in_Indonesia_A_case_for_better_community_liaison_in_planning_for_development_initiatives?auto=download)

Addressing Palm Oil Sustainability

There are a number of systems that promote the sustainability of palm oil sector. These standards and a pledge have been borne out of global concerns on environmental and social impacts of the palm oil sector. Those standards address environmental and social criteria in the palm oil supply chain for product certification. Those standards have been established as early as 2004 and are national and transnational in scopes. The Roundtable on Sustainable Palm Oil (RSPO) established global standards and the Indonesian Sustainable Palm Oil (ISPO) sets binding standards for palm oil supply chain.

Similarities of different standards (The Indonesian and global standards) are, they aim to contribute to the reduction in loss of forest coverage, reduction of Green House Gas from land use change and adherence to legal requirements. While key differences include the protected area and High Conservation Value concepts, oil palm plantation land ownership procedures based on Indonesian law and the concept of Free Prior Informed Consent (FPIC) process present in the global standards, as well as procedures for new development of plantation. (https://www.rspo.org/news-and-events/news/isporspo-jointstudy-marks-a-milestone-for-sustainable-palm-oil-cooperation-in-indonesia)

The Roundtable on Sustainable Palm Oil (RSPO) emerged in 2004 as a response to global great concerns in the palm oil supply chains. The growers, financiers and buyers of palm oil collectively developed a system that would allow them to present a different vision, one of a responsible industry capable of rooting out these problems, cleaning up supply chains and, ultimately, providing customers with a “sustainable” product.

Indonesia Sustainable Palm Oil Commission establishes environmental and social standards in 2009 to be complied by oil palm farmers. As of April 2017 only about 12 percent of the oil palm plantation area in Indonesia has been certified by the ISPO made of 14 percent of at least 1600 palm oil businesses. Riau has been the first province to have its palm oil farmers certified. Certification has included land certification and other legal matters. The Commission has targeted the certification of 70% of palm oil products by 2020 (https://www.pressreader.com/indonesia/indonesia-expat/20170426/281487866230880).

Shortcomings have been identified in the implementation of the RSPO standards. A research by the Environmental Investigation Agency (EIA) and Grassroots shows how this system is critically flawed. Auditing firms are fundamentally failing to identify and mitigate unsustainable practices by oil palm firms. Not only are they conducting woefully substandard assessments but the evidence indicates that in some cases they are colluding with plantation companies to disguise violations of the RSPO Standard. (https://drive.google.com/viewerng/viewer?url=https://eia-international.org/wp-content/uploads/EIA-Who-Watches-the-Watchmen-FINAL.pdf)

While the Indonesian Palm Oil Pledge (IPOP) was a pledge launched in 2015 by a group of the world’s biggest palm oil companies committed to building an industry free of deforestation and labour exploitation. However, it was recently officially disbanded, the decision of which was due to “recent ground-breaking policy developments in Indonesia that have fulfilled the purpose of IPOP”. Nevertheless, IPOP’s member companies are still committed to zero-deforestation and sustainability policies (http://www.eco-business.com/news/indonesian-palm-oil-pledge-disbands/).

The Government of Indonesia has also implemented the Presidential Instruction on the moratorium on new forest concessions and improving governance of primary natural forest and peatland, since 2011. The Instruction has been republished several times, each valid for two years, and recently in 2017.

Palm Oil Sector in Riau Province

Riau has a total area of 9.1 million hectares (Mha), where 2.8 Mha (31%) is forested, and 4.7 Mha (51%) is peatland (Quoted in: http://daemeter.org/new/uploads/20160105233051.Smallholders_Book_050116_web.pdf).

Riau is the most deforested province in Indonesia, losing almost 3 million hectares of its natural forests between 1990 and 2007, which has largely been driven by the pulp and paper industry and the palm oil sector. Indonesia’s National Council on Climate Change and the Japan International Cooperation Agency‟s preliminary assessment report estimates that the June 2013 fires in Riau emitted between 36 million and 49 million tons of carbon dioxide equivalent (MtCO2e).5 As for the ecological loss, Professor Bambang Heru Raharjo, forest fire expert at the Bogor Agricultural University, estimated that the loss amounts to 15.7 billion rupiahs ($1.3 million). (Quoted in: Oxfam,  DEFORESTATION IN THE INDONESIAN PALM OIL SUPPLY CHAIN).

Riau has the largest area under oil palm cultivation in Indonesia, covering an estimated 23% of Indonesia’s total mature oil palm acreage and comprising an estimated 30% of Indonesian oil palm smallholders. Of the 2.46 million ha of land under oil palm in Riau, 58.6% is classified as being under smallholder oil palm cultivation, with 3.6% and 37.8% cultivated by state-owned and private companies, respectively (Direktorat Jenderal Perkebunan 2015). Mills without plantations, also referred to as independent mills, account for 33% of Riau’s palm oil processing capacity. These mills source primarily from independent smallholders, highlighting the maturity of the independent oil palm sub-sector in Riau (http://www.cifor.org/publications/pdf_files/WPapers/WP210CIFOR.pdf).

Oil Palm Smallholders

Smallholder farmers are responsible for over 40 percent of the oil palm plantations spread throughout the archipelago. A 2015 study on oil palm smallholders across provinces in Indonesia finds that, on average, smallholders manage around 2 hectares per farming household (http://daemeter.org/new/uploads/20160105233051.Smallholders_Book_050116_web.pdf). They contribute to over a third of the nation’s total palm oil supply.  (http://www.foksbi.id/en/news/read/04-05-2016-ispo-training-commences-for-independent-smallholders-in-pelalawan)

To qualify as a ‘smallholder farmer’ in Indonesia, farmer plantations must be less than 25 hectares (Ministry of Agriculture Decree No. 98/2013). However, in the study’s field discussions and recent research suggest there is a rising class of local ‘elite’ farmers in established oil palm growing regions with sufficient capital to buy larger tracts (or multiple small parcels) of land, and appear to be avoiding licensing rules by registering plantation areas under multiple names to fall below the 25-hectare limit (http://daemeter.org/new/uploads/20160105233051.Smallholders_Book_050116_web.pdf).

With oil palm smallholders becoming an increasingly dominant producer group in Indonesia, enhancing the sustainability and productivity of their production practices has begun to feature more prominently in Indonesian policy discourse. Since most smallholders operate independently – often without technical and input support from corporate producers and outside the purview of the state – the activities of many smallholders have been poorly regulated and supported. As a result, independent smallholders are not only the least productive oil palm producers in Indonesia, but also likely to operate without proper permits and on lands that, legally speaking, cannot be cultivated. Raising the productivity of independent smallholders in particular is increasingly regarded as an important pathway for enhancing sector productivity and smallholders’ incomes and, in combination with other measures, for reducing pressure on ecologically significant peat and forest landscapes. Furthermore, addressing smallholder legality issues that threaten widespread incompliance with the Indonesian Sustainable Palm Oil (ISPO) standard is of critical importance . This would reduce the risk of smallholder disarticulation from formal markets, which increasingly demand supplier compliance with public standards such as ISPO, as well as private sustainability standards such as the Roundtable for Sustainable Palm Oil (RSPO) and zero-deforestation commitments. (http://www.cifor.org/publications/pdf_files/WPapers/WP210CIFOR.pdf)

There are three main historical pathways by which smallholder farmers began participating in the oil palm sector: 1) Participant in a government scheme; 2) Approached to form a company-community partnership, wherein a company negotiated a deal with the community to secure land use rights for establishing a plantation in the area, alongside smallholder plots; and 3) Farmer independently invested in and established an oil palm plot (http://daemeter.org/new/uploads/20160105233051.Smallholders_Book_050116_web.pdf).

While the linkages of smallholders to the supply chain are by means of: 1) local agents; 2) local traders; 3) directly with the mills; 4) linkage with company’s plasma scheme. There are also smallholders who lease their lands to company, thus are linked to the supply chain via the company (http://daemeter.org/new/uploads/20160105233051.Smallholders_Book_050116_web.pdf).

With many Nuclear Estate Smallholders (PIR/NES) prospering and oil palm markets and infrastructure maturing, cultivating oil palm independently became increasingly attractive to and viable for smallholders in many provinces. With the state neither promoting nor regulating this expansion, most smallholders are dependent on informal input and offtake markets, and their production systems are characterized by low yields and poor practices. http://www.cifor.org/publications/pdf_files/WPapers/WP210CIFOR.pdf)

A study by Daemeter (2015) in provinces where oil palm plantations are prevalent and by CIFOR (2014) in Riau province identifies issues and challenges faced by oil palm smallholders which are on technical, economic and policy aspects.  

Technical issues that were identified in the studies by CIFOR in Riau are:

·       Poor yields, well below those of large scale plantation, due to poor planting materials, wherein the most common source of planting material was from local agents without certificates. Legally, farmers cannot purchase certified planting material without land documentation—which follow the next discussion on policy challenges. Particularly plantations in peat soil (as opposed to mineral soils) have the least yields.

·       Yields are highest for farmers planting more matured palms (~11 years)

·       Plantations in peat soil also have poor planting management which are, poor water table management and production practices.

Policy and economic challenges that were identified were:

·       Daemeter’s and CIFOR’s studies find that land title and security of tenure are the major challenges for all smallholders.

·       Daemeter’s study identify the need to reduce transaction costs between farmers and middlemen.

·       Daemeter’s study suggests improved access to formal, long term and affordable credit will be a factor that can deliver marked improvements to farmers’ livelihood.

·       Daemeter’s study also cautions the resulting improvement in productivity of farmers can encourage farm expansion into forested areas.

The study in Riau by CIFOR breaks down smallholders into 3 main categories based on area of plantation: small farmer (up to 3 hectare; medium (3.1 – 15 hectare); large (more than 15 hectare). Area based classifications are further classified based on common socio-economic and policy challenges.

·       Small migrant farmers:  From a rural development and poverty alleviation perspective, interventions should prioritize this group. Although a high proportion of farmers in this group lack formal tenure rights,  they are more likely than any other group to own land in legally designated areas. Improved extension services could contribute to enhancing both the productivity and incomes of this large, more vulnerable, producer group. Since many farmers in this group manage and work on their own plantations themselves, the effectiveness of extension services could be high. However, because government support programs have historically prioritized transmigrants, interventions to this effect should not disadvantage other marginalized producer groups.

·       Small indigenous farmers: prioritization for intervention from a rural development and poverty alleviation perspective. This group faces the most significant ISPO incompliance issues because a comparatively high proportion of farmers lack formal land documentation. This calls for a targeted land certification program. This would also enhance access to certified planting material.

·       Medium sized migrant farmers: This group should be targeted if priorities are to support a more entrepreneurial middle class and enhance both sector productivity and sustainability. The comparatively high rate of (illegal) farming on peatlands by this group is a serious environmental challenge, as expansion is frequently associated with fire and deforestation.

·       Medium sized indigenous farmers: This group should be targeted if priorities are to support a more entrepreneurial middle class. However, this group is comparatively small in both number and area. Since the majority of farmers in this group are located outside Non-Forest Land Use (APL), this group will face ISPO noncompliance issues without proper support. Farmers belonging to this group are located mostly in non- environmentally-sensitive frontier areas, reclassifying these lands as APL would avoid disarticulation of this group without significantly impacting sector sustainability. Regulating and modernizing input markets and targeted extension support could help reduce the yield gap for this group.

·       Large Frontier Pioneers: Average plantation area: 217.8 ha. This group should be prioritized from a sector sustainability perspective. Since this group is located on peatlands within the state forest estate,  are one of the primary drivers of expansion in environmentally significant frontier areas in Rokan Hulu. Most farmers in this group would not comply ISPO. Technically, this implies that this group should no longer be classified as ‘smallholders’ (with plantation of more than 25 hectare and, therefore, should adhere to the more stringent ISPO criteria for private companies. Productivity issues are prevalent within this group, however the provision of extension support to this group is unlikely to yield significant results, since owners clearly have access to sufficient capital to invest in the acquisition of knowledge needed to improve productivity. Moreover, there is little political justification for devoting public resources to land users that have already benefited extensively from the exploitation of public land resources.

·       Large Consolidated Producers: Average plantation area: 91.3 ha. This group is not a clear priority from a productivity or sustainability perspective. Nevertheless, since a large proportion of farmers are located on state forestland and should have an IUP because of their land size, legality issues that could undermine ISPO compliance do need to be addressed to prevent disarticulation. Since few are located in environmentally sensitive frontier areas, reclassifying many of these areas as APL would help to formally integrate this group into the sector without significantly compromising sector sustainability. This group has the potential to become a legitimate commercial farmer class when provided with legal support and technical assistance to enable compliance with more stringent ISPO private company criteria.

Freedom of Choice, Accountability, Improvement and Respect for rights (FAIR) Company–community partnerships:

FAIR-based company-community partnership, initiated by OXFAM is a partnership model that aims at sustainable production, investment and sourcing in the palm oil supply chain which simultaneously delivers benefits for the climate and communities.

The initiative has been developed to harmonize, on one hand, gaps prevalent, and on the other, sustainability opportunities in the palm oil sector. One of the main root causes of present gaps in the sector is the poorly developed relationships between companies and communities which begets a host of other problems: operational inefficiencies and irreversible impacts on local livelihoods – notably those of women – land efficiency, and climate change. On the flipsides of the above problems are various opportunities to ensure that oil palm cultivation can contribute to improved livelihoods, land efficiency and climate change mitigation.

The above mentioned model requires all stakeholders are to rethink how companies and communities engage with each other. In order to capture the full sustainability potential in palm oil production, companies and communities need to engage with each other on a fair partnership basis. The likelihood that such partnerships will result in positive outcomes depends on the design of the palm oil development model and the way that companies and communities interact from the early start of an investment. A redesign of company–community relationships is particularly relevant in the development of new plantings or in the replanting phase. It is at these moments that the rules of engagement with long-term implications are defined.

The development of the partnership model seeks to compliment the current sustainable palm oil production models/standards (e.g. RSPO) by addressing smallholders’ potentials to be climate-friendly and land efficient, and the establishment of company-community mutually beneficial relationship. 

The model partnership identified four key principles underlying the working relationship: 1) freedom of choice, 2) accountability, 3) improvement, and 4) respect for rights (FAIR).

The FAIR partnership principles are the basis for environmental and social enhancement trajectories with desired outcomes:

·       the reduction of agricultural emissions from land use change

·       smallholder income improvement

·       recognition of community land rights, and

·       community’s food security

·       equitable gender relation—women’s access to land and food resources and decision making

·       building mutually beneficial company–community partnerships to create a truly sustainable production

The principles for FAIR partnerships do not prescribe a specific “one size fits all” palm oil development model, by acknowledging that different models already exist in different contexts. The design principles, however, are considered to be applicable to all palm oil development models. Implementation will require a redesign of these models; from top-down, risk-based management and short-term profit-orientation to partnership-based, opportunity-driven, and long-term and impact-oriented. This also requires a fundamental shift in stakeholder engagement. More emphasis should be given to inclusiveness, participation, empowerment, and the application of free prior and informed consent, which should result in a more equal division of responsibilities, risks and benefits between companies and communities. Particular attention to the position of women and minorities is an important element in this.

While the primary responsibility of building FAIR partnerships lies with companies and communities, their success will also depend on the extent to which other actors create the right enabling environment. Governments have important responsibilities in developing and enforcing the appropriate laws and regulations for a sustainable palm oil sector to become a reality. Governments need to revise current policies and regulations on land acquisition, plantation establishment and management. This largely determines the boundaries in which FAIR partnerships can be set-up. Governments should also review their policies and regulations to protect high-carbon lands and provide supportive measures such as the provision of (access to) extensions, inputs and finance.

The financial sector has a role to play in making the necessary finance available for companies and communities to implement FAIR partnerships, and can promote its implementation via its lending and investment policies.

Civil society organisations have different roles to play. They can publicise conflicts between investors, governments and stakeholders and, as such, contribute to greater transparency on the conduct of agricultural investment. They can support communities to acquire the necessary awareness and capacities to participate in FAIR partnerships and provide guidance to both companies and communities on specific practices.

Finally, existing sustainability initiatives can use the principles for FAIR partnerships as a complementary framework to promote sustainability impacts and to increase, for example, the feasibility of certification in various contexts (Oxfam, FAIR COMPANY–COMMUNITY PARTNERSHIPS IN PALM OIL DEVELOPMENT).