Tag: palm oil


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  • Getting to the bottom of illegal plantations on Indonesia’s state-owned forests

Getting to the bottom of illegal plantations on Indonesia’s state-owned forests

13 March, 2019

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A man examines oil palm fruit at a research site in Indonesia. Photo by D. Ramsay/CIFOR
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Palm oil is used locally in cooking, and internationally in commercial food and personal care products. Photo by M. Pinheiro/CIFOR

In an ideal world, palm oil production would cause no deforestation, and have a transparent and fair supply chain. In reality, the impacts of the sector have been the cause of ethical concerns worldwide.

Palm oil is Indonesia’s most important commodity. In 2017 the country produced 37.8 million tonnes of crude palm oil (CPO) and exported over 80 percent of it, with a value of $31.8 billion. Indonesia is the world’s biggest palm oil producer, and its biggest exporter too.

The strong market demand of palm oil has led to a vast expansion of plantations. Currently smallholders make up around 40 percent of the production market, and around one-third of these do not have the correct land tenure permits. In some cases, the smallholders have moved into state-owned forest areas and in many cases, this occupancy creates conflict.

In 2017, the Ministry of Agriculture’s Directorate General of Plantations found that of the 2.5 million hectares of oil palm plantations on state-owned forests, 70 percent of these were controlled by smallholders.

To get to the bottom of why oil palm plantations continue to encroach into state forest areas, Center for International Forestry Research (CIFOR) organized a workshop in collaboration with Center for Research and Development on Social, Economics, Policy and Climate Change (P3SEPKI): ‘Linking science to policy: the role of research in the effort to accelerate solution of tenurial problems in oil palm plantation in forest areas.’

Read also: Comparative study of local nutrition and diet examines expansion of oil palm plantations into forest areas

Solving conflicts by understanding the underlying cause

In his presentation, Ismatul Hakim,  senior researcher at P3SEPKI, says that complex tenure conflicts can’t be resolved without understanding why oil palm plantations are encroaching into state forest areas. He believes assessing how different types of farmers take control of lands, what strategies they use, and most importantly, the motivations of the farmers, is needed before long-lasting resolution is achieved.

According to Hakim’s research, this can be segregated into four categories:

The first is maladministration, where a lack of coordination leads to disputes as it is unclear who legally manages the forest areas – is it the Ministry of Environment and Forestry or the local government?

Second, incomplete forest area gazettements- a legal declaration that announces state ownership- coupled with a lack of clarity and communication on where the gazetted boundaries lay, have caused local people, in need for income, to expand their plantations into unmarked forest areas.

Third, inequality of power and land ownership has caused people to encroach. Local people have watched big investors and corporations take control of and transform their ancestral land, and store land for the future (known as ‘landbanking’).

And finally, the ineffective implementation of policies for forest area release and land swap- where the government gives areas of new land to plantations in exchange for restoring degraded land. To add, he says, this is further hampered by the slow pace of conflict resolution.

Drawing from his research, Bayu Eka Yulian from Bogor Agricultural University (IPB) added “Oil palm plantations have expanded rapidly in East Kalimantan, particularly those smallholders in a silence mode.” He argued while corporations might generally adhere to tighter regulations, small holder farmers, including those with access to more capital and information, appear to expand their plantations at a scale from 0.5 to 3 hectares of land or even more, without restraint.

The attendees agreed that the situation  will keep perpetuating itself without intervention. Rapid expansion is causing damaging changes to the landscape, but farmers are also becoming trapped- as they become highly dependent on a monoculture crop, and get trapped on a single source of income.

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

A man examines oil palm fruit at a research site in Indonesia. Photo by D. Ramsay/CIFOR

Solving tenure issues through better governance

In September 2018, the Indonesian government issued a three-year moratorium on new oil palm plantation permits and devised attempts to increase productivity, expressed in Presidential Instruction (Inpres) No. 8/2018. Along with other prevailing policies, this moratorium offers an excellent opportunity to resolve tenure issues.

However, it was feared that the temporary halt might simply not be enough.

“It was generally agreed by the workshop participants that regulations should be clear and not create legal uncertainties,” said CIFOR scientist Heru Komarudin, adding that plantations that are currently operating on state forests should be given enough time to either relocate or have their land status legally changed to non-forest areas.

He similarly believes that smallholder plantations already illegally on state forests should be given the chance to confirm their land status through agrarian reform or social forestry schemes that are already in place.

“Priority should be given to those committed to practising ethical agriculture – by preventing further deforestation and promoting fair trade working rights,” said Komarudin. To create policies that work, the “heterogeneous typology” of smallholders, and the impact of plantations on local people need to be taken into account, he adds.

Furthermore, there is opportunity to raise state funds by getting tenure issues right. Legislating and governing the use and rental of state forest can then be further propped up by compensation payments by companies who have illegally encroached. While strict law enforcement could be used to police the tenure issues, granting land amnesty to those that depend heavily on these lands may be a breakthrough.

Internationally, the European Union Renewable Energy Directive which plans to phase out the use of palm oil for biofuel by 2030, has put pressure on the Indonesian palm producers. In responding to this development, workshop attendees agreed that foreign diplomacy should be strengthened by consolidating the national position, which in turn would make the Indonesian Sustainable Palm Oil (ISPO) certification credible.

“Building solidarity with other producing countries to promote best practices and a sustainable and legal palm oil industry is essential,” says Maharani Hapsari, PhD and lecturer of international relations at Gadjah Mada University. “Indonesia should focus its diplomacy on palm oil global trade not only to strengthen authority, but also to enhance legitimacy of forest and oil palm governance by the broadest possible range of stakeholders.”

By Nabiha Shahab and Dominique Lyons, originally published at CIFOR’s Forests News.

For more information on this topic, please contact Heru Komarudin at h.komarudin@cgiar.org.

This research forms part of the CGIAR Research Program on Forests, Trees and Agroforestry (FTA), which is supported by the CGIAR Trust Fund.

This research is part of the Governing Oil Palm Landscapes for Sustainability (GOLS) project, which is supported by the United States Agency for International Development (USAID). The GOLS project supports effective and equitable implementation of the New York Declaration on Forests commitments by helping to align public and private policies and actions, and by delivering targeted, research-based evidence to key stakeholders and practitioners.

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  • Making the grade: Challenges and prospects for sustainable smallholder oil palm in Indonesia

Making the grade: Challenges and prospects for sustainable smallholder oil palm in Indonesia

01 March, 2019

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“Making the Grade” looks at challenges and prospects for sustainable smallholder oil palm in Indonesia.

This video was first published by CIFOR.

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  • Multiple actors need to perform together on governing sustainable palm oil in Indonesia

Multiple actors need to perform together on governing sustainable palm oil in Indonesia


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Key players are seeing a moratorium on new oil palm concession permits in Indonesia as a significant step forward in improving governance in the sector.

During the three-year freeze, following Indonesian President Joko Widodo’s recent signing of the moratorium, the government will undertake a comprehensive nationwide review of oil palm licenses and develop efforts to enhance productivity – particularly for smallholders.

However, it remains to be seen whether the existing palm oil supply can be sustainable, and whether negative impacts on the environment can be reduced while the performance of smallholders linked to palm oil supply chains – who depend on the commodity for their livelihoods – is also improved.

Oil palms edge the forest in Sentabai, West Kalimantan, Indonesia. Photo by Nanang Sujana/CIFOR

Research conducted at the Center for International Forestry Research (CIFOR) led by senior associate Pablo Pacheco is examining how public regulations and private standards can address major performance gaps affecting the palm oil sector. The study was focused on the world’s largest palm oil producer, Indonesia.

“We looked at how the current policy regime complex can address three major gaps, specifically land conflicts and yield differences between companies and smallholders and carbon emissions arising from deforestation and peatland conversion,” Pacheco said.

“We identified opportunities for more effective governance of the palm oil value chain and supply landscapes by analyzing disconnects, complementarities and antagonisms between public regulations and private standards across global, national and subnational levels,” he added.

The scientists concluded that greater complementarities have emerged among transnational mechanisms, but found also that disconnects persist and antagonisms prevail between national state regulations and transnational private standards.

To improve the sector’s governance and address performance gaps, there is a need to overcome these disconnects and take steps to reconcile the antagonisms.

“The solutions for addressing the performance gaps need to be looked at in an integrated way and through adopting a multi-level approach,” Pacheco said. “In addition, the solutions have to involve both public regulations and private initiatives and efforts.”

Read also: Implementing sustainability commitments for palm oil in Indonesia: Governance arrangements of sustainability initiatives involving public and private actors

Oil palm fruit is numbered after harvesting. Photo by Icaro Cooke Vieira/CIFOR

GROWING SECTOR, GROWING ISSUES

Palm oil is used in thousands of products from food to cosmetics, cleaning products and biodiesel. This has created a growing global demand for the golden liquid.

“There is not a single sector that has grown as rapidly as palm oil,” Pacheco said. “However, these unresolved performance issues continue to follow this expansion.”

One of the key issues is the land used to grow oil palm. Land conflicts are difficult to solve and despite efforts to formalize tenure rights, encroachment on public lands continues to grow. Smallholders often rely on informal transactions to access land.

Smallholders produce around 40 percent of Indonesia’s oil palm, but yields are still less than they could be due to limited access to finance and services.

“Smallholders are unable to adopt best management practices and the use of substandard planting material remains widespread,” said Pacheco.

Reducing carbon emissions in the oil palm sector has been hampered by current regulations that allow the use of forested or high carbon stock areas for plantations, combined with poor use of degraded and less productive areas.

“Many companies prefer to establish their plantations in peatlands and forestland because of the reduced likelihood of land conflicts and the potential to cover the cost of establishing a plantation by selling timber cleared for these plantations,” Pacheco said.

“The result has been a significant carbon debt,” he added.

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

MIND THE GAPS

In an effort to overcome the palm oil sector’s performance gaps, a very complex governance architecture has emerged that brings together governments and the private sector, as well as multistakeholder platforms.

The Roundtable on Sustainable Palm Oil (RSPO) is perhaps the best-known sustainability standard, and has been embraced by European Union-related sustainability initiatives. This is the most relevant complementarity which has helped to reach some agreed sustainability criteria.

Yet Indonesia and Malaysia have also devised their own sustainability standards – known as ISPO and MSPO – to counteract the influence of external players. Despite efforts to strengthen these mandatory standards, the scientists say it remains to be seen whether they are going to support zero-deforestation commitments embraced by main corporate groups.

Additionally, they say that greater impact could likely be achieved by building a process to harmonize the RSPO with these national standards.

Read also: Governing sustainable palm oil supply: Disconnects, complementarities, and antagonisms between state regulations and private standards

A woman fertilizes soil in an oil palm plantation. Photo by Icaro Cooke Vieira/CIFOR

FOLLOW THE DISCONNECTS

Pacheco says for the palm oil sector to improve its performance, it is crucial to look at the implications and opportunities associated with the national fiscal incentives system, including those related to the use of the crude CPO Fund.

“For example, these funds should more actively link incentives for companies engaging in biodiesel supply with purchases from smallholders on condition they adhere to sustainability criteria,” he said, adding that this approach would help improve the environmental performance of smallholders while supporting the sustainable supply of palm oil for the domestic biodiesel market.

Another major disconnect is related to the fact that land regularization initiatives do not necessarily go hand-by-hand with those aiming at support sustainable palm oil supply, and improve the wellbeing of smallholders. This is a major bottleneck to overcome.

“Government efforts to implement agrarian reform along with social forestry to benefit local communities have not been fully effective in resolving these issues,” said Heru Komarudin, a researcher with CIFOR.

Another disconnect is linked to land use regulations. More and more buyers are looking for No Deforestation, No Peat, No Exploitation (NDPE) – suppliers, but critics say that although companies may have the policy in place, they do not always put those policies into action.

In some cases, laws and regulations do not support companies that opt to conserve areas with high carbon stock or high conservation value, Komarudin said.

“These areas are often seen as unused lands and are at risk of being taken over by the government, and used for new plantations, instead of being protected from local people who may try to encroach on these areas,” he added.

More and more local governments are also adopting policies to protect high conservation value forests, and governments have started to adopt essential ecosystem area principles although no legally-binding rules are in place yet.

MOVING FORWARD

The researchers note that different “experimentalist approaches” are emerging that address disconnects and antagonisms, while further exploiting existing complementarities.

These approaches are increasingly orchestrated by provincial level governors and facilitated by non-governmental organizations, which often tend to operate as intermediaries.

“There’s no silver bullet, no single solution. It’s clear we need an integrated approach to effectively govern the palm oil sector, one where all actors play key roles,” Pacheco said.

 

By Suzanna Dayne, originally published at CIFOR’s Forests News.

For more information on this topic, please contact Pablo Pacheco at p.pacheco@cgiar.org or Heru Komarudin at h.komarudin@cgiar.org.

This research is supported by the United States Agency for International Development and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH.

This research forms part of the CGIAR Research Program on Forests, Trees and Agroforestry (FTA), which is supported by the CGIAR Trust Fund.

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  • Implementing sustainability commitments for palm oil in Indonesia: Governance arrangements of sustainability initiatives involving public and private actors

Implementing sustainability commitments for palm oil in Indonesia: Governance arrangements of sustainability initiatives involving public and private actors

08 November, 2018

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The palm oil sector in Indonesia has seen the adoption of zero deforestation commitments by the larger companies in the form of various pledges around No Deforestation, No Peat, and No Exploitation (NDPE). At the same time, at the national and sub-national level, new governance arrangements are emerging for sustainability initiatives involving government, the private sector and other non-state actors. These initiatives have created new forms of governance relationships, most notably a shift in the types of function that were once the sole domain of the state. Some initiatives are independent and formulated outside of the state, but others interact with, and support, state actions. This paper explores the interactions between public and private sectors in the palm oil arena in Indonesia. It examines tensions and complementarities between these sectors, the degree to which, and manner in which, private standards are pushing the sustainability debate and implementation, and the likely outcomes in relation to their design.

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  • Governing sustainable palm oil supply: Disconnects, complementarities, and antagonisms between state regulations and private standards

Governing sustainable palm oil supply: Disconnects, complementarities, and antagonisms between state regulations and private standards


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The global palm oil value chain has grown in complexity; stakeholder relationships and linkages are increasingly shaped by new public and private standards that aim to ameliorate social and environmental costs while harnessing economic gains. Regulatory initiatives in the emerging policy regime complex struggle to resolve sector-wide structural performance issues: pervasive land conflicts, yield differences between companies and smallholders, and carbon emissions arising from deforestation and peatland conversion. Identifying opportunities for more effective governance of the palm oil value chain and supply landscapes, this paper explores disconnects, complementarities, and antagonisms between public regulations and private standards, looking at the global, national, and subnational policy domains shaping chain actors’ conduct. Greater complementarities have emerged among transnational instruments, but state regulation disconnects persist and antagonisms prevail between national state regulations and transnational private standards. Emerging experimental approaches, particularly at subnational level, aim to improve coordination to both enhance complementarities and resolve disconnects.

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  • Deep down in supply chains, zero deforestation commitments look different to what appears on paper

Deep down in supply chains, zero deforestation commitments look different to what appears on paper


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Oil palm plantations are a driver of deforestation in Indonesia. Photo by Iddy Farmer/CIFOR
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A paddy field and oil palm plantation area is seen from above in East Kalimantan, Indonesia. Photo by N. Sujana/CIFOR

Oil palm, cattle, timber and soy have all received global attention in recent years for their outsized ‘forest footprints’ – the risks that their demand and cultivation pose for tropical forests around the world.

Thanks to pressure and advocacy from civil society, governments, shareholders and consumers in the Global North, many companies using and selling these commodities have begun to clean up their acts.

They have sought to become – or at least appear – more accountable for the environmental impacts of their supply chain activities. As a result, recent years have seen many make zero deforestation commitments (ZDCs) for the provenance of the commodities on which they rely.

From an environmental perspective, the move is welcome and timely. Tropical deforestation accounted for around 12% of global greenhouse gas emissions between 2000 and 2012. If these ‘big four’ commodities go deforestation-free, it could make a big difference for biodiversity and climate change mitigation worldwide.

However, following through without producing unintended negative side effects is going to be difficult. And this – or failing to follow through at all – could see ZDCs become dubbed with a tokenistic reputation as being just another public-relations and marketing strategy.

A new CGIAR Research Program on Forests, Trees and Agroforestry (FTA)-supported occasional paper by Center for International Forestry Research (CIFOR) scientist George Schoneveld and Particip GmbH consultant Peter Jopke seeks to assess the ZDCs of 50 ‘powerbrokers’ – companies that have the potential to shape rules in major commodities’ global value chains. The work attempts to unravel what these bold-sounding commitments might actually mean for forests, producers and communities on the ground.

Read more: Strengthening social inclusion within oil palm contract farming in the Brazilian Amazon

CLEAR AS MUD

Unfortunately, the researchers found serious gaps in ZDC implementation practices, which undermine the commitments’ potentials. “On paper the commitments are great, and they use the right terms and are fairly comprehensive in their scope, but by and large companies have yet to fully think through how they’re going to deliver on them,” says Schoneveld.

Company commitments to full transparency in sourcing locations and suppliers, and to independent verification, were found to be particularly weak. This doesn’t necessarily suggest that companies are trying to hide bad practices, say the co-authors, but more that it can be very difficult for them to follow their own supply chains back to their roots. Sourcing practices of the many upstream actors often involved can change without the lead firms being aware.

The study also found that almost 75% of companies did not demand company-wide ZDCs of their suppliers. This suggests that most companies actually tolerate deforestation in their supply chains, as long as their own supply comes from non-deforested areas. So suppliers to these companies might still be instigating deforestation and selling commodities from deforested areas to other, non-ZD–committed customers.

The finding makes sense, given that going zero-deforestation was “purely a business decision,” not a moral or philanthropic one, for most of the companies surveyed, says Schoneveld. As long as their brand is not contaminated, companies have little incentive to pressure their suppliers to stop deforestation entirely.

Oil palm plantations are a driver of deforestation in Indonesia. Photo by Iddy Farmer/CIFOR

PASSING THE BUCK?

Another issue of concern is the fact that in most cases, the powerbrokers did not explicitly account for the externalities resulting from their ZDCs, says Schoneveld. For example, insisting on buying commodities cultivated on non-deforested land increases demand for that land, which can displace former land uses such as food production. As a result, deforestation could occur indirectly as other users of that land are pushed to resume their practices elsewhere.

Committing to ZDCs may also prompt companies in the supply chain to sell off forest land banks that they hold, since they will no longer be able to use them to cultivate commodities. This land could then be deforested by a new owner or by communities vacating their farmland to enable corporate expansion.

Perhaps most concerning of all is that if companies implement more stringent production standards, only some producers will have the capacity to conform, so many smallholders are likely to be excluded, says Schoneveld.

“If you have to monitor everybody and trace all oil palm that comes in, and you have ten thousand suppliers, it becomes extremely costly,” he explains. “So a lot of companies are starting to say, ‘Okay, we have to cut our supply base and focus on those suppliers that we trust and know well.’ ” Oil palm refiners in Indonesia, for example, have begun to concentrate their ‘sustainable’ supply base around larger plantations.

And this is where the tensions become quite stark. One interviewed company, for example, complained that they were forced to remove a “huge chunk” of smallholders from their supply chain to please NGOs campaigning for ZD, because they expected to be criticized for failing to protect forests more than acknowledged for their efforts of including smallholders.

Read more: Corporate commitments to zero deforestation: An evaluation of externality problems and implementation gaps

A TALL ORDER

Certainly, given the influence powerbrokers have on both suppliers and governments, there are opportunities to innovate and exert pressure within value chains themselves. “It’s an important place to start,” Schoneveld acknowledges.

But it seems something of a tall order to expect companies to enact such holistic solutions all on their own. “If you want to have ZDCs that also contribute to agricultural development and food security, and support smallholder integration, I don’t think you can rely solely on companies to deliver on those,” he says. “And that’s where governments need to step in.”

Jurisdictional approaches that integrate landscape planning, deforestation monitoring and improved regulatory enforcement across a defined jurisdiction may provide part of the solution. Most companies are interested in working in places that can guarantee that production is sustainable, because it reduces their own monitoring and traceability costs. And smallholders within those areas can comply with ZD requirements, without needing to sign up to complex and expensive monitoring and evaluation systems. Some jurisdictions, such as Indonesia’s South Sumatra and Central Kalimantan provinces and Malaysia’s Sabah state, are beginning to apply these kinds of approaches, “saying, ‘hey, there could be economic benefits to being sustainable,’ ” explains Schoneveld.

Government involvement is also important because companies making zealous commitments to managing land differently in developing countries can be perceived as challenging their sovereignty. “There needs to be a better conversation between companies, governments, and civil society,” says Schoneveld, “about what role each could play in meeting environmental, economic and developmental objectives, and how to have more complementary initiatives.”

By Monica Evans, originally published at CIFOR’s Forests News. 

For more information on this topic, please contact George Schoneveld at g.schoneveld@cgiar.org.

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 UKAID and International Forestry Knowledge II (KNOWFOR II).

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  • Evidence-based options for advancing social equity in Indonesian palm oil: Implications for research, policy and advocacy

Evidence-based options for advancing social equity in Indonesian palm oil: Implications for research, policy and advocacy

09 May, 2018

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  • Social equity is crucial to sustainable development: equity means ensuring that everyone has the resources they need to secure their well-being now and in the future.
  • Oil palm is a profitable crop, but the costs and benefits of its expansion are distributed unevenly according to gender, age, class and community of origin.
  • Different social dynamics pertain to large-scale plantations employing wage workers, tied smallholders attached to plantations and independent smallholders planting oil palm on their own land.
  • Policy should favor independent smallholders with up to 6 ha of land to optimize distributive outcomes for women and men, young and old, while giving priority to customary landholders.

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  • Good governance and sustainability incentives can provide alternatives to land conversion fires

Good governance and sustainability incentives can provide alternatives to land conversion fires


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During land burning, haze blankets the landscape in Riau Province, Indonesia. Photo by Aulia Erlangga/CIFOR
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During land burning, haze blankets the landscape in Riau Province, Indonesia. Photo by Aulia Erlangga/CIFOR

In Indonesia, palm oil is a hot industry in more ways than one. In 2015 alone, it contributed USD 20.75 billion to the country’s export revenue. Oil palm plantations cover more than 14 million hectares of the country and, together with Malaysia’s, dominate the global market.

However, fire is still widely used in the development and planting of oil palm, including in carbon-rich peatlands. Resulting smoke and toxic haze have impacted the economy, the health and the environment of Indonesia and other Southeast Asian countries. In 2015, Indonesia’s peatland fires contributed to an economic loss of at least USD 16.1 billion and more than 100,000 premature deaths around the region.

In light of this, a new study led by Center for International Forestry Research (CIFOR) scientist Herry Purnomo, which also forms part of the CGIAR Research Program on Forests, Trees and Agroforestry (FTA), looks at the extent to which good governance principles are applied to Indonesia’s palm oil value chain and analyzes options to help reduce the use of forest and land fires in the industry.

“Palm oil is one of Indonesia’s main commodity exports, surpassing oil and gas,” says Purnomo. “But if we do not manage its sustainability, this sector can fail.

The research focuses on Indonesia’s Riau Province, which experienced massive forest conversion to have the largest area of oil palm plantations in the country. Now, it has the highest domestic frequency of fires too.

“We know that 20% of fire incidences happen in oil palm plantation areas, so we tried to find out what caused the fires and how to reduce them.”

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

WHO’S GOT THE POWER?

In theory, the central government has power to influence the oil palm supply chain through law and policies; district-level governments have the most jurisdiction for law enforcement and information-spreading; and village governments are closest to plantation developers, thus having the responsibility of dealing directly with them.

However, good governance for the industry is not as simple as a top-down approach. From consumers to mills, refineries and developers, players in palm oil influence governance processes in different, sometimes unexpected ways.

“With the governance analysis, we looked at how existing powers contest,” says Purnomo. “Along the value chain, power is not at the landscape level but at the consumer level, or at the mills and refineries. The central government can only function through the district government, but mills can influence local government using incentives and coercion.

“Sometimes the Ministry of Environment and Forestry and the Ministry of Agriculture get the blame for forest and land fire incidences. While potentially, the problem starts from the Investment Coordinating Board (BKPM) welcoming investment for refineries without considering whether there is enough capacity to supply them from legal sources.”

Furthermore, the study found that illegal oil palm developers can hold a lot of influence at local levels and force village governments to support them, often through deceptive use of a Certificate of Land (SKT).

This imbalance between governance and supply chain capacity can drive actors at the landscape level to meet the mill demands in ways detrimental to landscapes.

“Now there are mills everywhere, even in national park areas. People respond by developing plantations everywhere. The fastest and cheapest way is by burning.”

Scientists observe a drone flying over burning peat outside Palangkaraya, Indonesia. Photo by Aulia Erlangga/CIFOR

ALT OPTIONS

When demand is high and burning has long been practiced, what reason do farmers and developers have to change their habits to more arduous land-clearing methods?

“We calculated whether existing incentives in the market are enough to change the situation on the ground,” says Purnomo. “The analysis looks at benefits distrubuted from oil palm plantation development using fire, who benefits, and what alternatives can be adopted to compensate.”

The first step is for the market to support certified producers, incentivizing them not to burn as well as to employ value-added farmers. This, however, raises production costs, as well as the cost of fresh fruit bunches (FFB) of oil palm fruits. As this price margin grows, the next step is to make sure that the financial benefits go back into the hands of the farmers, to incentivize their good practices as well.

“Intermediaries have taken the benefit from this margin until now. Farmers should unite to gain more bargaining power, so once they receive a delivery order, they can cut the middleman and go straight to the mill. This will increase their value added. It is important that palm oil businesses are not only certified but also fair.”

Another key step to fire reduction is agrarian reform. While many farmers possess an SKT, the land is still legally part of a state-owned forest area. The unclarity of land status dissuades farmers from investing resrources in land.

“Why should they spend money, when the government can take their land away at any time? The farmers should be guaranteed land legality at least for 25 years, so they can invest safely.”

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

CHANGING HEADLINES

Recently on the international stage, the European Union in January approved draft measures to ban the use of palm oil in motor fuels by 2020. While this sent Southeast Asian governments reeling, Indonesia’s included, Purnomo believes that this boycott will change little. Instead, he says the EU market should give incentives for sustainable production, and Indonesia should create an environment in which that can be done.

“Incentives can change the situation. The government of Indonesia should be more transparent with environmental problems faced by the palm oil industry, show real progress in improving the industry’s sustainability, draw a clear roadmap to meet international standards in three to five years and invite the EU to participate in palm oil in more constructive ways.”

Cleaning up supply chains will come at a cost, but market incentives combined with strengthened national policies and international regulators (namely the Indonesian Sustianable Palm Oil system and Roundtable on Sustainable Palm Oil) can together compensate to make this effort viable – and cool things down.

By Nabiha Shahab, originally published at CIFOR’s Forests News.

For more information on this topic, please contact Herry Purnomo at h.purnomo@cgiar.org.

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 Department for International Development United Kingdom (DFID UK) and the United States Agency for International Development (USAID).

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Playing for keeps: How a simple board game could lead to more sustainable oil palm

26 March, 2018

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Once reserved for military war games, the Companion Modeling approach has been developed and expanded over the past two decades to include the complex issues of renewable resources and environmental management. The Center for International Forestry Research (CIFOR) is part of a consortium of international institutions led by the Swiss-based University, ETH Zurich, that is using ComMod to help chart a path toward more sustainable palm oil as part of a six-year project called OPAL, Oil Palm Adaptive Landscapes, being carried out in Cameroon, Colombia and Indonesia – some of the world’s biggest palm oil producers.

Originally published by CIFOR.

This work forms part of the CGIAR Research Program on Forests, Trees and Agroforestry (FTA), which is supported by CGIAR Fund Donors.

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  • New map helps track palm-oil supply chains in Borneo

New map helps track palm-oil supply chains in Borneo

08 December, 2017

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A woman begin to harvest oil palm fruit in Kalimantan. Photo by I. Cooke Vieira/CIFOR
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A woman begin to harvest oil palm fruit in Kalimantan. Photo by I. Cooke Vieira/CIFOR

The updated Borneo Atlas offers new data to measure the impact of mills and plantations on forests.

In 2013, a number of major palm-oil buyers, traders and producers promised to stop clearing natural forests. The global multi-billion-dollar business of palm oil is among the world’s most controversial agro-industries. It has been implicated in numerous cases where species- and carbon-rich forests have been cleared, yet it also contributes to the elimination of poverty in producer countries.

Indonesia and Malaysia are the world’s top two producers of palm oil. Their area of industrial plantations more than quadrupled in extent from 1990 to 2015. Over the same period, regional rates of forest loss rose to among the world’s highest. Forest clearance is driven by a number of factors — establishing plantations is one factor. The development of mills and associated infrastructure to extract and transport palm oil also impacts forests.

The latest version of the Atlas of Deforestation and Industrial Plantations in Borneo, or what we call the Borneo Atlas, part of the work of the CGIAR Research Program on Forests, Trees and Agroforestry (FTA) launched this week allows users to verify the location and ownership of 467 palm-oil mills in Borneo, the island shared by Indonesia, Malaysia and Brunei Darussalam. It includes a new tool called Analyze Land Use near Mills to provide verified information on the location of palm-oil mills, and the deforested area within a 10-kilometer radius, as detected annually by satellites.

The new tool can be used together with an earlier tool called Analyze Land Use in Concessions, to track the footprint of palm-oil growers on forests. It links the company-driven forest loss (i.e. the forest area converted each year to industrial plantations) detected annually using satellites with publicly available concession maps. Combined, these two tools are useful for the increasing number of palm-oil buyers, traders and government officials who have begun tracing supply chains to mills and plantations. Buyers are currently focusing their attention on traceability to mills, because the location of a mill is a good indicator of the approximate location of its supplier.

Understanding where mills and plantations are is also useful to better understand the overall impact of industrial palm-oil developments on tropical rainforests.

Try it: Atlas of Deforestation and Industrial Plantations in Borneo

ADDED FEATURES

Via the interactive map, users can zoom in on a 10-kilometer radius of each mill — the distance fresh palm fruit can travel without spoiling. The actual distance that fruit has travelled to reach the mill in fact vary depending on commercial agreements, road networks and terrain, and does not fall into a perfect disc around the mill.

However, this simplified added feature does offer a more complete view of the impacts of industry on forests. Users can rank concessions and mills by recent clearing, and access statistics on forest health and land use. They can visualize poorest and best performing mills and concessions by company, soil type (peat and non-peat), by remaining forest area, and by type of certification.

The idea is to offer the opportunity to investigate to what extent plantation companies have cleared forests in Borneo, and to what extent they have avoided forest loss by planting on non-forested lands. Understanding where companies practice sustainable planting is key to engaging and promoting positive actions by companies.

We developed this dataset by reviewing online documentation on company dashboards, NGO websites, certification agencies (RSPO and ISPO), mapping websites and social media. The source documents for these data are linked in the results of each search so they can be consulted by users. A link to the mills’ location on high-resolution imagery from Google Maps and ArcGIS World Imagery is also provided for each search, to prove that the mill exists.

Future developments will include linking mills to supplier plantations, to ports and refineries, and incorporating time-lapses to reveal how industrial oil palm has expanded.

Read more: What a difference 4 decades make: Deforestation in Borneo since 1973

Individual oil palm fruits are seen in Kalimantan. Photo by I. Cooke Vieira/CIFOR

AN INDUSTRIAL-SCALE ISSUE

Palm oil is produced by industrial means. It is in everything from cosmetics to processed food, and biofuels to drive cars. It requires extensive infrastructure, including processing mills and refineries. Ultimately, huge tankers ship the oil to every corner of the globe.

Oil palm isn’t the only industrial crop. Today, most of the world’s food production and supply is done by industrial means. Industrial agriculture is a system of chemically intensive food production, featuring gigantic single-crop farms and production facilities, controlled by large conglomerates.

Intensive monoculture depletes soil and leaves it vulnerable to erosion. Herbicides and insecticides harm wildlife and people. Biodiversity in and near monoculture fields takes a hit, as populations of birds and beneficial insects decline. In fact, the abundance of flying insects has plunged by three-quarters over the past 25 years in the European countryside because of industrial agriculture, according to a new study.

In the humid tropics, industrial production of palm oil, soy, pulpwood and beef depletes biodiversity by being responsible for between 35% and 68% of all tropical forest loss.

Rates of forest loss and oil-palm developments are particularly marked on Borneo. Forest losses averaged 350,000 hectares annually from 2001 to 2016, while by 2016 the area of industrial oil palm plantations reached 8.3 million hectares (Mha) — about half of the estimated global planted area of 18 Mha. From 2005 to 2015, the expansion of industrial oil palm plantations was responsible for 50 percent (2.1 Mha) of all of Borneo’s old-growth forest area loss (4.2 Mha).

Tools like the Borneo Atlas, and its new feature to assess the impact of mills, aim to equip governments, NGOS and companies with the capacity to see the full impact of industrial agriculture on forests, and to act accordingly to bring the rate of forest loss in their supply chains down to zero.

Read more: For a better Borneo, new map reveals how much terrain has changed

By David Gaveau and Mohammad Agus Salim, originally published at CIFOR’s Forests News. 

For more information on this topic, please contact David Gaveau at d.gaveau@cgiar.org or Mohammad A. Salim at m.salim@cgiar.org.

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 UK aid from the UK government and the United States Agency for International Development (USAID).

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New map helps track palm-oil supply chains in Borneo


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A woman begin to harvest oil palm fruit in Kalimantan. Photo by I. Cooke Vieira/CIFOR
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FTA COMMUNICATIONS TEAM
A woman begin to harvest oil palm fruit in Kalimantan. Photo by I. Cooke Vieira/CIFOR

The updated Borneo Atlas offers new data to measure the impact of mills and plantations on forests.

In 2013, a number of major palm-oil buyers, traders and producers promised to stop clearing natural forests. The global multi-billion-dollar business of palm oil is among the world’s most controversial agro-industries. It has been implicated in numerous cases where species- and carbon-rich forests have been cleared, yet it also contributes to the elimination of poverty in producer countries.

Indonesia and Malaysia are the world’s top two producers of palm oil. Their area of industrial plantations more than quadrupled in extent from 1990 to 2015. Over the same period, regional rates of forest loss rose to among the world’s highest. Forest clearance is driven by a number of factors — establishing plantations is one factor. The development of mills and associated infrastructure to extract and transport palm oil also impacts forests.

The latest version of the Atlas of Deforestation and Industrial Plantations in Borneo, or what we call the Borneo Atlas, part of the work of the CGIAR Research Program on Forests, Trees and Agroforestry (FTA) launched this week allows users to verify the location and ownership of 467 palm-oil mills in Borneo, the island shared by Indonesia, Malaysia and Brunei Darussalam. It includes a new tool called Analyze Land Use near Mills to provide verified information on the location of palm-oil mills, and the deforested area within a 10-kilometer radius, as detected annually by satellites.

The new tool can be used together with an earlier tool called Analyze Land Use in Concessions, to track the footprint of palm-oil growers on forests. It links the company-driven forest loss (i.e. the forest area converted each year to industrial plantations) detected annually using satellites with publicly available concession maps. Combined, these two tools are useful for the increasing number of palm-oil buyers, traders and government officials who have begun tracing supply chains to mills and plantations. Buyers are currently focusing their attention on traceability to mills, because the location of a mill is a good indicator of the approximate location of its supplier.

Understanding where mills and plantations are is also useful to better understand the overall impact of industrial palm-oil developments on tropical rainforests.

Try it: Atlas of Deforestation and Industrial Plantations in Borneo

ADDED FEATURES

Via the interactive map, users can zoom in on a 10-kilometer radius of each mill — the distance fresh palm fruit can travel without spoiling. The actual distance that fruit has travelled to reach the mill in fact vary depending on commercial agreements, road networks and terrain, and does not fall into a perfect disc around the mill.

However, this simplified added feature does offer a more complete view of the impacts of industry on forests. Users can rank concessions and mills by recent clearing, and access statistics on forest health and land use. They can visualize poorest and best performing mills and concessions by company, soil type (peat and non-peat), by remaining forest area, and by type of certification.

The idea is to offer the opportunity to investigate to what extent plantation companies have cleared forests in Borneo, and to what extent they have avoided forest loss by planting on non-forested lands. Understanding where companies practice sustainable planting is key to engaging and promoting positive actions by companies.

We developed this dataset by reviewing online documentation on company dashboards, NGO websites, certification agencies (RSPO and ISPO), mapping websites and social media. The source documents for these data are linked in the results of each search so they can be consulted by users. A link to the mills’ location on high-resolution imagery from Google Maps and ArcGIS World Imagery is also provided for each search, to prove that the mill exists.

Future developments will include linking mills to supplier plantations, to ports and refineries, and incorporating time-lapses to reveal how industrial oil palm has expanded.

Read more: What a difference 4 decades make: Deforestation in Borneo since 1973

Individual oil palm fruits are seen in Kalimantan. Photo by I. Cooke Vieira/CIFOR

AN INDUSTRIAL-SCALE ISSUE

Palm oil is produced by industrial means. It is in everything from cosmetics to processed food, and biofuels to drive cars. It requires extensive infrastructure, including processing mills and refineries. Ultimately, huge tankers ship the oil to every corner of the globe.

Oil palm isn’t the only industrial crop. Today, most of the world’s food production and supply is done by industrial means. Industrial agriculture is a system of chemically intensive food production, featuring gigantic single-crop farms and production facilities, controlled by large conglomerates.

Intensive monoculture depletes soil and leaves it vulnerable to erosion. Herbicides and insecticides harm wildlife and people. Biodiversity in and near monoculture fields takes a hit, as populations of birds and beneficial insects decline. In fact, the abundance of flying insects has plunged by three-quarters over the past 25 years in the European countryside because of industrial agriculture, according to a new study.

In the humid tropics, industrial production of palm oil, soy, pulpwood and beef depletes biodiversity by being responsible for between 35% and 68% of all tropical forest loss.

Rates of forest loss and oil-palm developments are particularly marked on Borneo. Forest losses averaged 350,000 hectares annually from 2001 to 2016, while by 2016 the area of industrial oil palm plantations reached 8.3 million hectares (Mha) — about half of the estimated global planted area of 18 Mha. From 2005 to 2015, the expansion of industrial oil palm plantations was responsible for 50 percent (2.1 Mha) of all of Borneo’s old-growth forest area loss (4.2 Mha).

Tools like the Borneo Atlas, and its new feature to assess the impact of mills, aim to equip governments, NGOS and companies with the capacity to see the full impact of industrial agriculture on forests, and to act accordingly to bring the rate of forest loss in their supply chains down to zero.

Read more: For a better Borneo, new map reveals how much terrain has changed

By David Gaveau and Mohammad Agus Salim, originally published at CIFOR’s Forests News. 

For more information on this topic, please contact David Gaveau at d.gaveau@cgiar.org or Mohammad A. Salim at m.salim@cgiar.org.

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 UK aid from the UK government and the United States Agency for International Development (USAID).

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


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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 p.pacheco@cgiar.org.

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

01 November, 2017

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A worker wheels a barrow of oil palm fruit. Photo by Icaro Cooke Vieira/CIFOR
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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 p.pacheco@cgiar.org.

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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CIRAD research featured in new book on corporate governance


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At a sustainably certified sawmill in Jepara, men carefully cut logs of wood that are then measured and marked. Photo by D. Ramsay/CIFOR
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A sustainably certified sawmill in Jepara, Indonesia. Photo by D. Ramsay/CIFOR

How does the complex pattern of shareholdings and subsidiaries – entangled, hierarchical and pyramidal – influence actions, decisions, policies and strategies? It could be said that the behavior of conglomerates and mega corporations is influenced by their ownership structure.

A new book, Minister of Finance Incorporated: Ownership and control of corporate Malaysia, looks at quantitative methods to decipher corporate governance, from biomass, forest and plantations to Malaysia’s corporate finance.

How the structure of commodity corporates could impact the sustainability of agricultural landscapes is of direct interest to the French Agricultural Research Centre for International Development (CIRAD), one of the CGIAR Research Program on Forests, Trees and Agroforestry’s (FTA) partner institutions.

Jean-Marc Roda speaks about the new book. Photo by IDEAS

Read more: Sustainable value chains and investments to support forest conservation and equitable development

This is because many activities linked to deforestation; forest management; the sustainability of palm oil, rubber and timber plantations; biomass and biofuel strategies are driven by the choices of international finance and mega corporations.

CIRAD’s activities concern the life sciences, social sciences and engineering sciences, applied to agriculture, the environment and territorial management. Its work centers on food security, climate change, natural resource management, the reduction of inequalities and poverty alleviation.

In particular, in Southeast Asian countries such as Malaysia and Indonesia, research by CIRAD and its public- and private-sector partners focuses on natural resource management, food security, biodiversity studies and the sustainability of tree crop-based systems, paying particular attention to island agro-ecosystems, which are particularly sensitive to climate change.

ET Gomez presents during the book launch. Photo by IDEAS

In 2010, CIRAD’s Jean-Marc Roda and his Malaysian team at Universiti Putra Malaysia started to develop methodologies aimed at deciphering corporate governance and their environmental commitments among Southeast Asian transnationals. Deciphering corporate governance and environmental commitments among Southeast Asian transnationals: Uptake of sustainability certification was subsequently published in 2015.

The paper’s coauthor Norfaryanti Kamaruddin, who also contributed to the recently launched book, previously completed a PhD that was partially supported by FTA.

An important debate on global trade and sustainability relates to the role that corporate governance has on the uptake of sustainability standards. The paper suggests that financial factors, such as ownership structure and flexibility in decision-making, may have a fundamental role in understanding the adoption of sustainable standard systems in the corporate sector. This is based on the analysis of four major Asian agribusiness transnationals comprising about 931 companies.

In addition, this paper explores as a way forward the convergence of environmental sustainability with long-term family business sustainability.

Read more: Soils, governance, big data and 99 tropical countries: Best reads in forests, trees and agroforestry

The new book looks at corporate ownership and control in Malaysia.

Research tools developed throughout the project proved extremely accurate for deciphering any kind of corporate financial structure. Such quantitative methods of ownership structure analysis, initially designed for the analysis of the forest and agriculture financial sectors, were successfully employed to independently confirm and illustrate previously published results from ET Gomez.

Roda and his team were able to demonstrate how a core of 26 corporations controlled the Malaysian corporate sector and to provide details on how that control spread throughout the financial network, leading to the chapter “Understanding the network typology of the seven government-linked investment companies (GLICs)”.

The book was launched by the Institute for Democracy and Economic Affairs (IDEAS) in August 2017. It covers all Malaysian financial sectors, with Chapter 4 focusing on the plantation sector and on quantitative methods used for comparison and validation.

Adapted from the article by Jean-Marc Roda, originally published by CIRAD.

This work is linked to the CGIAR Research Program on Forests, Trees and Agroforestry (FTA), which is supported by CGIAR Fund Donors.

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Towards responsible and inclusive financing of the palm oil sector

24 October, 2017

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The global palm oil sector faces ongoing threats to sustainability caused by deforestation, peatland development, labor rights violations and land right conflicts. Additionally, integrating smallholders into sustainable palm oil supply chains continues to be a challenge for the industry. Financial service providers (FSPs) could play a role in stimulating sustainability commitments from the palm oil companies they finance. Their potential influence stems from their capacity to set environmental, social and governance (ESG) conditions for financial services.

This research shows that European and US FSPs are further along than their counterparts in Asia in adopting policies that include ESG risk assessments as part of the process for providing financial services. However, attention to smallholder inclusion is insufficient in the policies of all FSPs included in this report. Differences between European and US versus Asian FSPs in adopting ESG standards, as well as the unique markets they finance, present a risk that two parallel but separate financial systems could emerge. Efforts by both government and nongovernmental organizations should emphasize the prevention of a two-tiered marketplace with different quality requirements for palm oil.

All actors in this sector still require a significant shift in thinking on the benefits of including ESG standards in cultivation and production processes. In palm oil producing countries, the lack of specific banking regulations emphasizing sustainability concerns regarding the sector forms a further hindrance to positive developments.

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