Indonesia’s palm oil industry is a stark contrast of wealth and poverty.
While corporations reap billions in revenue, villagers living near oil palm plantations suffer. They lose access to farm and forest land, and many struggle to find work.
Independent oil palm smallholders have potential to prosper with oil palm, and so far they have planted 36 percent of Indonesia’s oil palm area. Official data clearly show the contribution smallholders make to the national economy, yet the government offers them little support. Several government policies actually hinder smallholder prosperity, especially policies concerning land laws, finance, and the favored model of production.
Unfair Land Laws
Indonesia’s land laws provide scant security to oil palm smallholders, most of whom do not have land titles. The laws favor corporations, and give government officials the right to issue corporate land concessions on state-claimed land that may have been occupied and used by smallholders for generations.
When a corporation arrives, smallholders have two choices. They can accept whatever compensation the corporation offers – usually very little – or they can mobilize collectively to attempt to prevent the corporation from bulldozing their farms, actions that sometimes result in imprisonment, injury or death.
While corporations can apply to the government to have state forest land released for plantation development, smallholders do not have this privilege. A 2017 land reform program that promised to release 4.1 million hectares of state forest land to smallholders so they could legalize their land tenure has stalled, meeting less than 1 percent of its target.
While smallholders remain in legal limbo, plantation corporations are allowed to break the law with impunity. A government audit found that corporations had planted more than 2 million hectares of oil palm illegally inside state forest boundaries, but officials decided not to evict them. Instead, the government offered an amnesty and legalized the plantations retrospectively.
Thus far, the government has granted more than 10,000 concessions to oil palm corporations. Together they occupy around 22 million hectares – a third of Indonesia’s farmland. This is an area so vast that in some districts smallholders are surrounded by plantations on all sides and struggle to access land on which they can grow oil palm and other crops.
Since the land concessions are renewable, smallholders are locked out of farming now and for generations to come. Smallholders could become prosperous if the government stopped granting new corporate land concessions and proceeded rapidly with the promised land reform. With enough land they could also maintain diverse crops as a strategy to manage market and climate risks. Unlike corporations with thousands of hectares planted with just one crop, smallholders can more readily adapt.
Fraught Financing
Smallholders lacking land titles cannot use their land as collateral for bank loans, so they pay a high price for credit.
Corporations are given a much better deal. They are permitted to use their concession licenses as collateral to obtain financing from Indonesian and foreign banks. Through the concession system, corporations are not only able to access land virtually free of charge, but their access to capital is highly subsidized as well.
Despite the lack of government-supported subsidies, smallholders have still managed to plant millions of hectares of oil palm. They finance their investments by saving in credit unions, borrowing from local sources, and expanding their oil palm holdings gradually as their funds allow. But lack of finance does hold them back; few can afford to buy the good quality, high-yielding seeds that corporations use, hindering their prosperity.
Like other Indonesians, smallholders value their autonomy or “standing on their own two feet.” In the realm of finance, this means they seek credit arrangements that are flexible and, above all, transparent. Existing smallholder finance schemes run by the government or plantation corporations do not have these characteristics. Some schemes require smallholders to release their land and place it under corporate control. They also saddle them with debts that may be manipulated.
A government fund to finance smallholders who need to replant their aged palms is immensely complex and bureaucratic, and smallholders are staying away. They prefer to seek finance independently rather than lose control over their finances and farms.
Indonesia’s smallholders growing crops such as coffee, cacao, and rubber make their own decisions about what to plant and where. They access credit on transparent terms and they sell their crop freely to traders they trust. In the case of smallholder cacao, these arrangements worked with “spectacular efficiency.”
Current policies for oil palm work against these bottom-up financial arrangements.
Smallholders would find government-subsidized credit and cheap access to high quality seeds very helpful, but not if it reduces the flexibility and autonomy they rely on to protect themselves from unfair dealings and achieve prosperity on their own terms.
An Inefficient Production Model
Indonesia’s land laws and finance policies favor a plantation-based production model, with the expectation that giant plantations are more efficient than smallholdings due to economies of scale. But smallholders can grow as much oil palm per hectare as plantations, so long as they have access to high quality seeds and financing for fertilizers.
The challenge with oil palm is not growing the palms, it is transportation. The fresh fruit bunches must reach a mill within 48 hours before they spoil. Under the plantation-based model, corporations install mega plantations and centralized mills served by huge trucks plying thousands of kilometers of plantation roads.
Yet this centralized model is not especially efficient. Corporations have built huge mills with double the necessary capacity so they are often idle; plantation roads are hugely expensive to maintain and may be impassable in the rainy season, leaving piles of palm fruit to rot; and trucks have to queue for hours or days to offload the fresh fruit at the mill.
A smallholder-friendly policy would encourage the building of multiple small mills, each equipped to handle fruit from the surrounding 500 hectares, accessible using small trucks and regular village roads. This model is already in operation in parts of Sumatra where independent smallholders dominate, but in Kalimantan mega-plantations and mega-mills dominate.
Single giant mills are the enemy of smallholder prosperity, as they rob smallholders of bargaining power. Obliging smallholders to sell their fruit through cooperatives – often a condition of government or corporate smallholder schemes – presents the same, single-buyer problem.
Smallholders prosper when they cooperate among themselves on their own terms, sell freely to mills that treat them fairly, and guard their independence.
Toward Smallholder Prosperity
Current government policies hinder the prosperity of oil palm smallholders in Indonesia who face adverse land laws, corporate dominance, and a lack of effective government support.
Two myths stand in the way of meaningful reform: the myth that corporations are efficient and the myth that smallholders lack the ambition and skill to meet global demand for this important crop. The evidence suggests otherwise. Indonesia’s colonial era rubber plantations were rapidly outcompeted by smallholders. Cacao and coffee have always been smallholder crops, and oil palm could be as well if policies shifted.
In Thailand – the world’s third largest oil palm producer – 70 percent of the crop is grown by smallholders with an average plot size of 4 hectares, backed by government programs that offer appropriate technical and financial support.
Indonesia’s smallholders say 6 hectares of oil palm is a good number: The revenue from 2 hectares is enough to cover the farm’s costs, 2 hectares covers family living costs, and 2 hectares provides an investment fund for education and setting up the next generation. Add another 2 hectares and they can send their children to college.
With the right policies, millions of Indonesian smallholders could achieve prosperity with oil palm. It is well within reach.
Research funding was provided by Canada’s Social Science and Humanities Research Council, the University of Toronto, and Universitas Gadjah Mada.
Originally published under Creative Commons by 360info™.