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Opportunities for Increasing Productivity & Profitability of Oil Palm Smallholder Farmers in Central Kalimantan

Published: April, 2015

Executive summary

The Governments of Indonesia and Central Kalimantan have ambitious targets to both grow the palm oil sector and improve environmental quality by reducing deforestation. On the production side, this includes a national target to increase crude palm oil (CPO) production to 40 million tonnes annually by 2020, and a provincial plan to triple the oil palm production area in the same time frame. On the protection side, there is a goal to reduce emissions by 26% at the national and provincial level, primarily by reducing deforestation. To achieve these dual economic and environmental goals, increasing productivity throughout the oil palm value chain and ensuring plantations are located on suitable lands will be essential.

Smallholder farmers are an important part of the picture. In Central Kalimantan, they currently manage an estimated 15% of the planted palm oil area. However, given the ambitious sectoral growth targets, coupled with the regulatory requirement that 20% of oil palm should be smallholder managed, the plantation area managed by smallholder farmers is expected to expand rapidly between now and 2020. This report begins to explore options for increasing productivity and profitability of smallholder farmers in Central Kalimantan, to align this growth with Indonesia’s economic, environmental and development goals.

Smallholder farmers in Central Kalimantan have a variety of different industrial organisation models, which impact their productivity, profitability, and risk exposure. These models can be separated into two basic types: 1) independent smallholder farmers and 2) smallholder partnership farmers, which vary between different levels of collective organisation, from individual or one-to-one partnerships with oil palm companies, to farmer groups and institutionalized cooperatives. This study examines three company-smallholder farmer partnership models in Central Kalimantan as well as independent smallholder farmers, to extract lessons that could inform the development of guidelines for improving smallholder farmer productivity through strengthened organization of farmers and the establishment of best practice company-community partnerships.

We find that, as the plantation area managed by smallholder farmers grows, there are opportunities to improve productivity and farmer benefits within all models that we examined, particularly for individual partnership and independent farmers. Specifically, our analysis suggests that:

  • The cooperative plasma model that we studied was highly successful in managing both production and market risks. It reaches the highest yields in the survey sample, at 95% of yield potential. The ability to spread risks across cooperative members is an important advantage of the cooperative;
  • The company-managed plasma model also produced high yields. For the company-managed model, high yields combined with efficient operating cost management contributed to strong profitability per hectare;
  • There is most scope to improve productivity and profitability for the individual partnership model, which is only achieving 52% of its potential yield and the lowest profits for farmers of the models sampled.
  • Additional analysis by IPB suggests that independent smallholders consistently display lower yields than plasma farmers – up to 50% lower. Qualitative analysis conducted through our study also highlighted the high exposure of independent smallholder farmers to a wide range of legal, supply, production and market risks.

Overall, the study findings provide a strong case for larger scale, more integrated smallholder plantation management. Both the cooperative and company-managed plasma models contribute to better performance in terms of yields and profitability per hectare. Both models allow for better planning and more efficient management, while also mutualizing risks among a larger pool of members.

The cooperative model tends to be more advantageous to smallholders, as it provides a greater array of benefits and they retain greater control over the plantation. However, field interviews suggest that institutional weaknesses, lack of financial transparency and budget accountability can be barriers to the emergence of successful cooperative models.

Key findings for cooperative models

Transparency and accountability are key prerequisites for cooperative production to be effective. Our analysis suggests that support from the company partners’ operations personnel in building the cooperative’s management capacity, including developing operating procedures, reporting mechanisms, transparency and accountability can help to establish more effective plantation management and administration practices,  which is perceived as a key success factor by participating farmers. In addition, oversight from the lending bank during the development and payback period, through regular audits, also contributed to high levels of transparency and accountability.

Key findings for company-managed models

Company-managed production models are generally cost effective and efficient. With the right institutional settings, they can also provide a viable model for reconciling local communities’ welfare and efficient land use. This model of partnership can benefit the company, which retains control over management and value chain, as well as smallholders, who receive benefits for leasing their land.

Efforts to strengthen transparency and accountability mechanisms, and address any land ownership issues would help ensure that this model delivers inclusive benefits and does not contribute to social conflicts in the region. Plasma schemes were initially developed as a model to raise the capacity and productivity of local smallholder farmers. Under the company-managed model, it is questionable whether it contributes to this or the original goal of improving farming practices.

Implications

Growing pressure for sustainable palm oil production has resulted in many companies involved throughout the oil palm value chain taking on significant sustainability commitments.
To achieve these goals, it will be critical to increase productivity throughout the value chain, in order to reduce pressure for expansion into forest areas to meet economic and production targets of the business sector and governments. Given smallholder farmers manage such a significant portion of oil palm plantations, increasing their productivity and integration into value chains, coupled with ensuring their plantations are located on environmentally suitable lands, is of increasing importance. Otherwise, important gains in sustainability made by companies may be offset.

Our analysis identifies opportunities to improve productivity and profitability for smallholder farmers through a combination of strengthening agricultural practices and improving the organisational models of farmers to better manage risk and maximise benefits. We propose two streams of follow up work, to support the development of successful smallholder models:

  • Case studies on cooperative models: a series of case studies on cooperative models to better understand the factors for establishing a successful cooperative, including examining value chain integration strategies, scale, capacity requirements, legal and institutional settings and governance mechanisms to provide optimal productivity, risk management, transparency, and accountability.
  • Toolkit for model selection: it is likely that there is not a ‘one-size-fits-all’ model for smallholder production. As such, we propose to develop a toolkit to assist smallholder farmers determining the most suitable model and important partnership and governance features for their circumstances. The model will take into account economic, social and environmental features for communities that have already opted to engage in oil palm activities as part of their development planning.

These case studies and tool kits will support communities engaged in oil palm production, as well as governments and business, in meeting their economic, development and environmental goals, including:

  • For communities: this will enable choices about best organizational model for communities engaged in oil palm, better manage risks, increase benefits retained locally (including economic, social and environmental), and support improved agricultural practices and market access
  • For business: this will reduce community conflict, help to manage supply chain and reputational risks, ensure business sustainability gains are not offset by smallholder expansion into important ecosystems, and increase business certainty for downstream actors
  • For governments: this will support sectoral economic growth targets, promotion of rural livelihoods and improved environmental outcomes at scale.
About this study

Through the Central Kalimantan Production – Protection Initiative, PILAR and CPI are partnering with government and businesses in Central Kalimantan to develop a plan and model for sustainable oil palm production that can help to increase agricultural productivity throughout the oil palm value chain, while protecting natural resources and delivering benefits to local communities. Under this initiative, CPI is supporting PILAR to conduct research and analysis on production and protection issues for a multi-stakeholder working group that was established by the Governor to help deliver the Government of Central Kalimantan’s vision to optimize land use and build a sustainable palm oil sector. Initial research is identifying the most relevant sectors, actors, and opportunities that could become agents of change. We have identified preliminary opportunities to adjust how land resources are allocated and how fiscal policies can incentivize more sustainable behaviour, as well as to adapt business models to increase local agriculture productivity and mechanisms for sharing benefits more equitably among government, business and community actors.