Indonesia’s oil palm smallholders need both state and EU support (commentary)

Indonesia’s is the world’s top palm oil producer, but the industry has long been associated with environmental ills such as deforestation and habitat destruction, with oil palm plantation expansion accounting for around 3.1 million hectares (7.7 million acres) of forest loss between 1990 and 2010. At the same time, the sector provides livelihoods for millions of Indonesians — approximately 2.6 million independent oil palm smallholders and their families, and around 16 million workers.

One of the biggest importers of Indonesian palm oil is the EU. In an effort to sever the link between its own market and global deforestation, the European bloc recently adopted the EU Deforestation-Free Regulation (EUDR), which requires companies trading in certain commodities, including palm oil, to ensure the goods do not result from recent deforestation or forest degradation.

While the intention behind the EUDR is noble, its impact on Indonesian smallholders will be devastating without addressing both the government and demand-side measures.

The Indonesian palm oil industry is often associated with massive plantations owned by large agribusiness corporations. However, there also exists a vital and often overlooked segment of the industry: the smallholders who own and cultivate relatively modest plots of land, which play a pivotal role in the country’s palm oil sector. Their importance transcends mere numbers; it extends to their contributions to rural livelihoods, poverty alleviation, and the overall social fabric of the nation.

Indonesia’s oil palm smallholders often manage just a couple of hectares. While their individual holdings may be small, their collective impact is substantial. It is estimated that smallholders account for approximately 40% of Indonesia’s total palm oil production. This makes them indispensable to the industry’s overall performance and output.

One of the most significant contributions of smallholders lies in the realm of rural livelihoods. Many of these farmers are situated in rural and often economically disadvantaged areas of Indonesia. By engaging in oil palm cultivation, they not only secure a source of income for themselves but also generate employment opportunities for local communities. These smallholders often hire laborers from their communities, thereby creating a ripple effect of economic activity and unique bonds of new social formation. The income earned by smallholders through oil palm cultivation goes beyond their households and sustains local economies at a micro level.

But while these smallholders are instrumental to the Indonesian economy and society, they face a range of challenges that hinder their ability to thrive and engage in sustainable practices. One of the most pressing issues they encounter is the lack of legal recognition from the Indonesian government. The legal recognition of smallholders’ land rights has been a contentious issue in Indonesia, and while there have been efforts to formalize their status, the process has been slow and fraught with bureaucratic hurdles.

Several factors contribute to the Indonesian government’s hesitancy in recognizing local landholdings. First, the complexity of land tenure systems in Indonesia, which often ignore smallholders’ land rights and result in disputes over land titles, creating legal uncertainties that hinder smallholders’ access to resources and financing. Second, large agribusiness corporations have historically held significant influence in Indonesian politics and policymaking. This influence has, at times, created an unfavorable environment for smallholders seeking legal recognition.

The lack of legal recognition has profound implications for smallholders’ ability to adopt sustainable practices. Without formal recognition, smallholders face difficulties accessing critical resources and support systems that could aid in the adoption of sustainable agricultural methods.

One of the most critical barriers faced by unrecognized smallholders is limited access to financing. Banks and financial institutions are often hesitant to extend loans or credit to individuals without clear land titles. As a result, smallholders struggle to invest in sustainable farming practices, such as replanting with higher-yield and more sustainable palm varieties, or implementing eco-friendly farming techniques.

In addition, they also face challenges in accessing extension services, technical assistance, and training programs aimed at promoting sustainable palm oil production. These services are typically more readily available to formally recognized and registered entities, leaving smallholders at a disadvantage when it comes to acquiring the knowledge and skills necessary for sustainable cultivation.

Certification standards such as the Indonesian Sustainable Palm Oil (ISPO) scheme are designed to ensure that palm oil is produced in an environmentally and socially responsible manner. The ISPO sets strict criteria for sustainable practices, no exploitation of workers, and reduced use of harmful chemicals. While these goals are admirable, they come with a price tag that disproportionately affects smallholders.

The process of certification involves various expenses, including documentation and administrative costs, where smallholders must invest in the documentation required to prove their compliance with certification standards. This can involve extensive paperwork, record-keeping, and legal fees, all of which incur costs. These capital investments can be financially burdensome for smallholders.

Another significant challenge is training and capacity building. Smallholders often need training to understand and implement sustainable practices. This includes training on proper pesticide use, waste management and conservation techniques. These training programs have associated costs, including trainers’ fees and transportation expenses.

Once the initial investments have been made, smallholders must undergo regular audits and verification to maintain their certification status. These can be costly, entailing the hiring of third-party auditors to assess compliance by reviewing documentation, conducting on-site visits and interviewing workers. The process can also be time-consuming, requiring small farmers to fulfill administrative tasks, attend training programs, and undergo audits, taking time away from their ability to focus on farming.

Many smallholders operate on tight profit margins, making it challenging to absorb the upfront costs associated with certification. They lack the financial resources to invest in infrastructure upgrades or training programs without external support. This is why certification standards and improved knowledge among smallholders in Indonesia still rely on assistance from civil society organizations and smallholder unions such as the Oil Palm Farmers Union, known by its Indonesian acronym SPKS, and the Indonesian Palm Oil Farmers Forum on Sustainability, known as FORTASBI, which are also limited in their ability to provide outreach and funding support.

The cost of compliance exacerbates existing inequalities within the industry. Large plantation companies with greater financial resources can more easily afford the expenses associated with certification. This creates a divide between smallholders and larger players, making it difficult for smallholders to compete on a level playing field. At the same time, certified sustainable palm oil often commands higher prices in premium markets, which means uncertified smallholders will be excluded from markets or forced to sell at lower prices, further widening the income gap between certified and non-certified producers.

The EUDR due diligence requirements have the potential to exclude smallholders from European markets, perpetuating economic disparities within the industry and putting the livelihoods of countless families at risk. Compliance with stringent due diligence requirements, including traceability and deforestation-free practices, poses formidable challenges that requires a collaborative approach between the EU and the Indonesian government. This partnership must be rooted in mutual understanding and a shared commitment to sustainability and social equity. Both parties must recognize the urgency of the situation and work together to craft comprehensive solutions.

One key avenue for cooperation is the creation of financial mechanisms that support smallholders in meeting EUDR requirements. To further solidify its commitment as a market country, the EU can provide funding and technical assistance, while the Indonesian government can facilitate the disbursement of resources and streamline bureaucratic processes by involving civil society and smallholder unions. This initiative will establish a transparent, inclusive and democratic financial ecosystem that bolsters smallholders’ capacity to invest in sustainability.

This should be followed by a series of capacity-building initiatives, encompassing training programs on sustainable farming practices, record-keeping, and environmental assessments, which will equip smallholders with the tools they need to meet the EUDR standards. These programs should be designed to be accessible and tailored to the specific needs of smallholders. This includes empowering the smallholders with knowledge on how to use technology by providing affordable access to digital tools and platforms that enhance traceability, monitor environmental impact, and streamline certification processes.

Indonesia and the EU also need to address the financial barriers that often deter smallholders from pursuing certification and sustainability initiatives, for example by establishing low-interest loan programs tailored to smallholders’ needs that should come with flexible repayment terms and reasonable interest rates. Additionally, grants can be provided to support specific sustainability projects initiated by the smallholders.

To complement public financing, the Indonesian government and the EU need to encourage the private sector to invest in smallholder initiatives. Partnerships with agribusiness corporations and financial institutions can lead to the creation of funds dedicated to smallholder support. Incentives, such as tax breaks or preferential market access, can be offered to companies that actively engage in such collaborations.

To alleviate the burden of the certification process, the EU and the Indonesian government need to work together to streamline documentation requirements and auditing processes. Simplified procedures, standardized forms, and reduced paperwork can make certification more accessible.

At the same time, they need to promote group certification through cooperatives or unions, where multiple smallholders collectively pursue certification. By pooling resources and sharing costs, this can reduce the financial burden of certification on smallholders, while incentivizing and facilitating the formation of certification groups to ensure this approach becomes more widespread and accessible. The EU and the Indonesian government also need ensure that these certified smallholders will be connected with European buyers who value sustainable and responsibly produced palm oil.

While the ISPO still has so much room for improvement, it can serve as a valuable tool for smallholders seeking to meet EUDR standards. The EU and the Indonesian government should work together to enhance the ISPO’s credibility and effectiveness, aligning it more closely with international sustainability standards. The ISPO needs to strengthen as full commitment by Indonesia to be a leading example of producing country in promoting sustainability, while at the same time developing a robust implementation, monitoring and evaluation framework essential to ensuring the effectiveness of the ISPO as a credible standard.

This alignment would place the Indonesian palm oil smallholders as real beneficiaries of the positive trend in market countries and the producing country to combat deforestation and move toward sustainable agriculture.

Tags: palm oil, deforestation, oil palm, plantation, smallholders, EUDR, U Deforestation-Free Regulation, Indonesia, EU, Production