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  • Financing farmers: Can funds for oil palm help save our forests?

Financing farmers: Can funds for oil palm help save our forests?

A worker wheels a barrow of oil palm fruit. Photo by Icaro Cooke Vieira/CIFOR
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FTA COMMUNICATIONS TEAM

Oil palm fruits in Jambi, Indonesia. Photo by Iddy Farmer/CIFOR

Palm oil: people love it, hate it or maybe just use it without even knowing. The controversial vegetable oil is found in thousands of consumer products from soap to lipstick, frozen pizza, ice cream and even fuel.

World demand continues to increase rapidly and is placing pressure on forests, mainly in Indonesia. But, for now, the profitable commodity is here to stay. So what can be done to reduce the pressure on forests?

Efforts are ongoing to stop the rapid destruction of tropical forests through more sustainable business practices. In 2004, the Roundtable on Sustainable Palm Oil (RSPO) was launched with the vision to “transform markets to make sustainable oil palm the norm”. Pressure from activists on big corporations that use palm oil in their products has also had some impact, leading them to make commitments to sustainable supply and zero deforestation.

Most action to date has focused on how large palm oil companies do business but increasingly, concerns comprise what the implications are for smallholders, and how smallholders can capture greater benefits from engaging in palm oil supply chains.

In Indonesia — one of the biggest palm oil producing countries alongside Malaysia — up to 40 percent of the land used to grow oil palm is cultivated by smallholders who farm, on average, just 2 hectares each.

The sustainability of the palm oil sector has also triggered Indonesian government efforts to improve the policy environment for inclusion of smallholders, and channeling resources for them to improve practices in management and replanting. There is also an ongoing effort to strengthening the national standards for sustainable palm oil (ISPO).

Read more: Towards responsible and inclusive financing of the palm oil sector

Three teams of researchers from the Center for International Forestry Research (CIFOR) as part of its work under the CGIAR Research Program on Forests, Trees and Agroforestry (FTA) and from partner institutions have produced a series of infobriefs looking at how smallholders can improve their lives and, at the same time, protect remaining forests. The major challenge, according to their findings? Money.

“Oil palm provides more economic benefits to smallholders than other crops, and it’s expanding,” says Pablo Pacheco, a Principal Scientist at CIFOR. “Yet smallholders have to adopt more sustainable practices. Research has to contribute to this, and identify options for them to improve their practices, as well as identify what resources are needed to make that change happen.”

“That’s where financing comes in, and becomes an important key resource for smallholders to be able to access,” he adds.

THE REPLANTING CHALLENGE

A worker wheels a barrow of oil palm fruit. Photo by Icaro Cooke Vieira/CIFOR

The Indonesian government estimates that a total of 175,000 hectares of oil palm farmed by smallholders needs to be replanted each year, and this alone creates major challenges for farmers. 

Hans Harmen Smit, global coordinator for palm oil at the Netherlands Development Organization (SNV), one of the partner organizations, was part of the team that examined current finance practices. Their focus was on Indonesia and Malaysia, which together account for about 85 percent of total global palm oil production. Smit says that without proper financing, farmers only replant when they can afford to.

“The problem is, once they replant, they have to wait three years at least for the new plantation to become productive, and during that time they have no income,” he says.

Smallholder income from oil palm varies. On average, smallholders with around two hectares of land can earn a gross monthly income of US$290 to US$400.

Researchers say that without financial support, farmers do not have the resources to replant year after year on the same plot, and so they tend to move to peatlands and forested areas, “slash and burn” the land, and plant the only crops available to them, which are often low-quality varieties.

Smit points out that in Malaysia, the sector has better systems in place for replanting, and smallholders can more easily obtain financial support. In Indonesia, there is the Crude Palm Oil (CPO) Fund that supplies replanting loans, but it is often difficult to access, especially for smallholder farmers with limited funding.

“The lesson learned here is that saving for replanting is often not done as it should be. The government needs to engage more and manage programs to help farmers save for replanting,” says Smit.

He adds that one of the main problems is a lack of available information for financial service providers (FSPs) to evaluate the lending risks and set appropriate interest rates. He says the loans are often too small on an individual level, and this makes the loan origination costs too high compared to their value.

“We need to start by supporting better data collection on the cash flows of smallholders. Once this data is available, we can create investible portfolios for investors,” says Smit.

Read more: The long and winding road to sustainable palm oil

FUNDING THE GAPS

A couple works together on a plantation. Photo by Icaro Cooke Vieira/CIFOR

The researchers also identified major gaps between existing credit schemes and what farmers actually need. Addressing this could pave the way for more sustainable palm oil for smallholders.

One key finding was that lenders who do offer credit only provide it in the short term. But what smallholders actually need is both working capital and credit in the long term for replanting and financing other management practices.

“Most lenders also don’t have schemes that take into account the fact that oil palm farmers don’t make any money in the first three or four years, so they can’t make payments at this time unless they find additional sources of income, which is difficult,” says Pacheco.

Another issue is repayment of loans. When ‘tied’ farmers, who are under contract with oil palm plantations, access funds through a cooperative, profits from their harvest are used to pay back their loans. But when individual farmers seek loans, they have to pay back in cash.

Smallholders trying to access loans also face major challenges when trying to meet the requirements of most FSPs.

“Sometimes they don’t have savings accounts or own the land, so they can’t provide collateral,” says Pacheco.

Pricing of the fresh fruit bunches (FFB) produced by oil palm can also be a challenge for farmers. FFB prices are set by governments and oil palm companies, and tied farmers are paid more than independent farmers.

But there are ways to help smallholders overcome these challenges. Incentives and technical support to meet sustainability requirements, land tenure security, and support for FSPs to assess and manage risks, and build the capacity of smallholder organizations, could all have an impact, the research finds.

FINDING SUSTAINABLE FINANCE

Most of the financing for major palm oil companies comes from FSPs based in Asian countries like Japan, Malaysia, Indonesia and Singapore. And on the whole, these do not employ adequate environmental, social and governance (ESG) policies, the research suggests.

“American- and European-based FSPs’ policies are more advanced, but even they don’t fully address how financial resources can be better channeled to smallholders,” says Pacheco.

He warns that there is the danger of a two-tier marketplace developing: one in Asia, where there is less consumer pressure for sustainable palm oil, and a second focusing on US and European markets that have adopted more sustainable practices.

INVESTING IN PEOPLE

Pacheco says the future of smallholders holds a real dilemma. If they become more integrated into the existing supply chain, more productive, use better practices and have access to good financing and markets, they are likely to become more and more dependent on supply chains and companies for their livelihoods.

“You want smallholders to improve system practices, their knowledge of fertilizers, harvesting and so on, but without losing their freedom,” says Pacheco.

It all comes down to how farmers are empowered to negotiate prices, conditions with companies and so on, he adds.

“For me, social empowerment is critical, and I think that needs to be included in the debate. Up to now, the focus has been on efficiency, sustainability, less impact on forests — and not enough attention has been given to empowering these important players, the smallholders, who are trying to reap as much benefit as possible in the market,” he concludes.

By Suzanna Dayne, originally published at CIFOR’s Forest News

For more information on this topic, please contact Pablo Pacheco at [email protected].


This research was conducted by CIFOR in partnership with Profundo, the International Center for Applied Finance and Economics (InterCafe) at the Bogor Agricultural University (IPB), the Netherlands Development Organization (SNV) and Financial Access (FA).

This research forms part of the CGIAR Research Program on Forests, Trees and Agroforestry, which is supported by CGIAR Fund Donors

This research was supported by the United States Agency for International Development (USAID) through the project “The Role of Finance in Integrating Oil Palm Smallholders into Sustainable Supply Chains.”

  • Home
  • Financing farmers: Can funds for oil palm help save our forests?

Financing farmers: Can funds for oil palm help save our forests?

A worker wheels a barrow of oil palm fruit. Photo by Icaro Cooke Vieira/CIFOR
Posted by

FTA COMMUNICATIONS TEAM

Oil palm fruits in Jambi, Indonesia. Photo by Iddy Farmer/CIFOR

Palm oil: people love it, hate it or maybe just use it without even knowing. The controversial vegetable oil is found in thousands of consumer products from soap to lipstick, frozen pizza, ice cream and even fuel.

World demand continues to increase rapidly and is placing pressure on forests, mainly in Indonesia. But, for now, the profitable commodity is here to stay. So what can be done to reduce the pressure on forests?

Efforts are ongoing to stop the rapid destruction of tropical forests through more sustainable business practices. In 2004, the Roundtable on Sustainable Palm Oil (RSPO) was launched with the vision to “transform markets to make sustainable oil palm the norm”. Pressure from activists on big corporations that use palm oil in their products has also had some impact, leading them to make commitments to sustainable supply and zero deforestation.

Most action to date has focused on how large palm oil companies do business but increasingly, concerns comprise what the implications are for smallholders, and how smallholders can capture greater benefits from engaging in palm oil supply chains.

In Indonesia — one of the biggest palm oil producing countries alongside Malaysia — up to 40 percent of the land used to grow oil palm is cultivated by smallholders who farm, on average, just 2 hectares each.

The sustainability of the palm oil sector has also triggered Indonesian government efforts to improve the policy environment for inclusion of smallholders, and channeling resources for them to improve practices in management and replanting. There is also an ongoing effort to strengthening the national standards for sustainable palm oil (ISPO).

Read more: Towards responsible and inclusive financing of the palm oil sector

Three teams of researchers from the Center for International Forestry Research (CIFOR) as part of its work under the CGIAR Research Program on Forests, Trees and Agroforestry (FTA) and from partner institutions have produced a series of infobriefs looking at how smallholders can improve their lives and, at the same time, protect remaining forests. The major challenge, according to their findings? Money.

“Oil palm provides more economic benefits to smallholders than other crops, and it’s expanding,” says Pablo Pacheco, a Principal Scientist at CIFOR. “Yet smallholders have to adopt more sustainable practices. Research has to contribute to this, and identify options for them to improve their practices, as well as identify what resources are needed to make that change happen.”

“That’s where financing comes in, and becomes an important key resource for smallholders to be able to access,” he adds.

THE REPLANTING CHALLENGE

A worker wheels a barrow of oil palm fruit. Photo by Icaro Cooke Vieira/CIFOR

The Indonesian government estimates that a total of 175,000 hectares of oil palm farmed by smallholders needs to be replanted each year, and this alone creates major challenges for farmers. 

Hans Harmen Smit, global coordinator for palm oil at the Netherlands Development Organization (SNV), one of the partner organizations, was part of the team that examined current finance practices. Their focus was on Indonesia and Malaysia, which together account for about 85 percent of total global palm oil production. Smit says that without proper financing, farmers only replant when they can afford to.

“The problem is, once they replant, they have to wait three years at least for the new plantation to become productive, and during that time they have no income,” he says.

Smallholder income from oil palm varies. On average, smallholders with around two hectares of land can earn a gross monthly income of US$290 to US$400.

Researchers say that without financial support, farmers do not have the resources to replant year after year on the same plot, and so they tend to move to peatlands and forested areas, “slash and burn” the land, and plant the only crops available to them, which are often low-quality varieties.

Smit points out that in Malaysia, the sector has better systems in place for replanting, and smallholders can more easily obtain financial support. In Indonesia, there is the Crude Palm Oil (CPO) Fund that supplies replanting loans, but it is often difficult to access, especially for smallholder farmers with limited funding.

“The lesson learned here is that saving for replanting is often not done as it should be. The government needs to engage more and manage programs to help farmers save for replanting,” says Smit.

He adds that one of the main problems is a lack of available information for financial service providers (FSPs) to evaluate the lending risks and set appropriate interest rates. He says the loans are often too small on an individual level, and this makes the loan origination costs too high compared to their value.

“We need to start by supporting better data collection on the cash flows of smallholders. Once this data is available, we can create investible portfolios for investors,” says Smit.

Read more: The long and winding road to sustainable palm oil

FUNDING THE GAPS

A couple works together on a plantation. Photo by Icaro Cooke Vieira/CIFOR

The researchers also identified major gaps between existing credit schemes and what farmers actually need. Addressing this could pave the way for more sustainable palm oil for smallholders.

One key finding was that lenders who do offer credit only provide it in the short term. But what smallholders actually need is both working capital and credit in the long term for replanting and financing other management practices.

“Most lenders also don’t have schemes that take into account the fact that oil palm farmers don’t make any money in the first three or four years, so they can’t make payments at this time unless they find additional sources of income, which is difficult,” says Pacheco.

Another issue is repayment of loans. When ‘tied’ farmers, who are under contract with oil palm plantations, access funds through a cooperative, profits from their harvest are used to pay back their loans. But when individual farmers seek loans, they have to pay back in cash.

Smallholders trying to access loans also face major challenges when trying to meet the requirements of most FSPs.

“Sometimes they don’t have savings accounts or own the land, so they can’t provide collateral,” says Pacheco.

Pricing of the fresh fruit bunches (FFB) produced by oil palm can also be a challenge for farmers. FFB prices are set by governments and oil palm companies, and tied farmers are paid more than independent farmers.

But there are ways to help smallholders overcome these challenges. Incentives and technical support to meet sustainability requirements, land tenure security, and support for FSPs to assess and manage risks, and build the capacity of smallholder organizations, could all have an impact, the research finds.

FINDING SUSTAINABLE FINANCE

Most of the financing for major palm oil companies comes from FSPs based in Asian countries like Japan, Malaysia, Indonesia and Singapore. And on the whole, these do not employ adequate environmental, social and governance (ESG) policies, the research suggests.

“American- and European-based FSPs’ policies are more advanced, but even they don’t fully address how financial resources can be better channeled to smallholders,” says Pacheco.

He warns that there is the danger of a two-tier marketplace developing: one in Asia, where there is less consumer pressure for sustainable palm oil, and a second focusing on US and European markets that have adopted more sustainable practices.

INVESTING IN PEOPLE

Pacheco says the future of smallholders holds a real dilemma. If they become more integrated into the existing supply chain, more productive, use better practices and have access to good financing and markets, they are likely to become more and more dependent on supply chains and companies for their livelihoods.

“You want smallholders to improve system practices, their knowledge of fertilizers, harvesting and so on, but without losing their freedom,” says Pacheco.

It all comes down to how farmers are empowered to negotiate prices, conditions with companies and so on, he adds.

“For me, social empowerment is critical, and I think that needs to be included in the debate. Up to now, the focus has been on efficiency, sustainability, less impact on forests — and not enough attention has been given to empowering these important players, the smallholders, who are trying to reap as much benefit as possible in the market,” he concludes.

By Suzanna Dayne, originally published at CIFOR’s Forest News

For more information on this topic, please contact Pablo Pacheco at [email protected].


This research was conducted by CIFOR in partnership with Profundo, the International Center for Applied Finance and Economics (InterCafe) at the Bogor Agricultural University (IPB), the Netherlands Development Organization (SNV) and Financial Access (FA).

This research forms part of the CGIAR Research Program on Forests, Trees and Agroforestry, which is supported by CGIAR Fund Donors

This research was supported by the United States Agency for International Development (USAID) through the project “The Role of Finance in Integrating Oil Palm Smallholders into Sustainable Supply Chains.”

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  • Attention to detail is necessary for zero deforestation intentions to succeed, say scientists

Attention to detail is necessary for zero deforestation intentions to succeed, say scientists

An alder tea mixed agroforestry site is seen in Asia. Photo by ICRAF
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Slash-and-burn land clearing of old rubber agroforest and similar practices can continue under ‘deforestation-free’ claims. Photo by Meine van Noordwijk/ICRAF

With the realization that climate change is real, consumers are demanding products that come from responsible manufacturing processes. But do market branding terms such as zero deforestation, deforestation free, carbon neutral, climate smart have any meaning? 

A new book by the European Tropical Forest Network investigates if deforestation-free claims are genuine or simply designed to influence purchase decisions.

Consumers worldwide are becoming aware of how manufacturing processes contribute to deforestation and greenhouse gas emissions, and in the long term lead to climate change. With this knowledge, they are demanding products that come from responsible value chains, right from the point of the production and extraction of raw materials to delivery at retail points.

Manufacturers have responded to this call by consumers by using labels such as zero deforestation, deforestation free, carbon neutral, climate smart and a host of other terminologies.

Methods used by the United Nations Framework Convention on Climate Change (UNFCCC) to account for emissions focus on the supply side, based on country land area and production systems and nationally determined contributions (NDCs).

However, a new study suggests that by using demand-side accounting, looking at human population and per capita emissions based on lifestyle, individually determined contributions to climate mitigation can complement nationally determined contributions.

“Labelling products as ‘deforestation-free’ as an attempt to satisfy consumers’ demand only takes into consideration one side of the production chain without consideration for the connection with other drivers of deforestation,” said FTA researcher Dr. Meine van Noordwijk, a scientist at the World Agroforestry Centre and lead author of an introductory paper.

An alder tea mixed agroforestry site is seen in Asia. Photo by ICRAF

Making the connection between deforestation and the economy

The study explored this connection from seven perspectives:

  • When, how and why zero deforestation claims arise in global trade
  • How forest definitions relate to zero deforestation claims
  • The degree of variation in ‘footprints’ of equivalent products
  • Tracking products that go through multiple market transactions as opposed to easy-to-follow vertically integrated value chains
  • Interaction of all participants in totality in a value chain without isolation of those that are responsible producers
  • Personal consumer decisions in relation to lifestyle choices, dietary changes and waste reduction that may have a bigger effect than simply choosing products with smaller carbon footprints
  • How improved productivity and value chains can contribute to green economies

Read the full paper: Zero deforestation: A commitment to change

Conclusion

The study concludes that forms of certification that influence consumer choice need public scrutiny as use of the term ‘forest’ in the context of defining the responsible production is often unclear. Second, is that the accepted cut-off date for historical forest conversion is an essential detail for any forest-protecting claims. Third, as deforestation is a stepwise and permanent process, the chain of custody process should apply to geographical areas, not just products. Fourth, blanket certification covering products from a large landscape or jurisdiction will carry more weight rather than a product-by-product certification, especially if they demonstrate sustainable forest management. Fifth, individual efforts can go a long way in global forest protection particularly where they complement national commitments and goals. Finally, the extraction of primary agricultural products with low value addition and little on-site processing will continue to pose a risk to remaining forests.

“Green growth strategies that integrate land use plans, good agricultural practices and improved value chains, can promote a landscape approach through public-private partnerships that achieve equitable economic growth while conserving forests and maintaining healthy ecosystems,” added Dr. Sonya Dewi, the World Agroforestry Centre’s country coordinator for Indonesia and co-author of the study.

It may be too early to state what part of current zero deforestation claims are substantiated by changes on the ground in production areas, and what is perceived to be shifting blame with no net beneficial effect.

“Ultimately, positive impacts may arise from a complementarity relationship between individually and nationally determined contributions. Zero deforestation intentions are laudable, but attention to detail is needed to make it real,” concluded van Noordwijk.

Van Noordwijk, M., Dewi, S., Minang, P.A., Simons, A.J., 2017c. Deforestation-free claims: scams or substance?.

Pasiecznik, N., Savenije, H., (Eds.) 2017. Zero Deforestation: A Commitment To Change. ETFRN News 58, 11-16.

Read also: A world with trees but without the word ‘forest’ – a thought experiment

By Susan Onyango, originally published at ICRAF’s Agroforestry World


This work has been supported by the CGIAR Research Program on Forests, Trees and Agroforestry. The World Agroforestry Centre is one of the 15 members of the CGIAR, a global partnership for a food-secure future. We thank all donors who support research in development through their contributions to the CGIAR Fund.


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