Palm oil is a globally significant commodity used in many products. Indonesia is the world’s largest producer and exporter, contributing over 46 million tonnes annually and supplying more than half of the global market. Within this industry, palm oil smallholders are independent farmers playing a substantial role in the nation’s production.
Defining Smallholders
In Indonesia, palm oil smallholders are defined as farmers cultivating oil palm on areas less than 25 hectares. However, some definitions, like those from the Roundtable on Sustainable Palm Oil (RSPO), consider smallholders as those with up to 50 hectares, where the family provides the majority of labor and the farm is the primary income source. These operations are family-owned and rely on manual labor.
Smallholders are categorized into two types: independent and scheme smallholders. Independent smallholders manage their operations autonomously, self-financing and managing them without being bound to a specific mill or company. In contrast, scheme smallholders operate under government programs, receiving assistance from larger plantation companies. This assistance includes technical guidance and financial aid, with harvests typically distributed to the associated company at a set price.
Individual landholdings average just two hectares, but their collective impact is significant. There are an estimated 2.6 million smallholders in Indonesia, managing approximately 41% of the country’s total oil palm plantation area and contributing around 38% of national palm oil production.
Economic and Social Significance
Palm oil cultivation by smallholders provides a livelihood for millions of families across Indonesia, contributing to poverty reduction in rural areas. Regions with prevalent palm oil cultivation show lower poverty rates, demonstrating its positive impact on local economies. The income generated by smallholders extends beyond their immediate households, creating a ripple effect of economic activity within local communities.
Smallholder farms contribute substantially to Indonesia’s national palm oil production and export revenues. In 2023, Indonesia produced 47 million tonnes of crude palm oil, with the industry contributing 4.5% to the nation’s GDP and employing over 16.2 million people directly and indirectly. This economic activity also brings social benefits, including improved access to education and healthcare infrastructure in smallholder communities, as income allows for greater investment.
Navigating Complexities
Despite their contributions, Indonesian palm oil smallholders face difficulties. A primary issue is limited access to finance and credit, due to a lack of clear land titles required by banks for collateral. This financial constraint hinders investment in improved farming practices, such as replanting with higher-yielding seedlings or implementing sustainable cultivation techniques. Consequently, many smallholders rely on informal local lending markets, which come with high interest rates and limited loan amounts.
Smallholders lack technical knowledge regarding sustainable cultivation practices, including proper fertilizer application and pest management. This knowledge gap contributes to lower yields compared to large-scale plantations, with yields 50% lower. Land tenure insecurity is a persistent challenge, as many smallholders operate without formal legal recognition of their land rights. This legal ambiguity can lead to disputes and prevents access to various support systems and formal financial services. Meeting international sustainability standards, such as RSPO (Roundtable on Sustainable Palm Oil) and ISPO (Indonesian Sustainable Palm Oil), also poses barriers for smallholders due to complexity and resource demands.
Pathways to Improved Practices
Initiatives and strategies are underway to support smallholders and enhance farming practices. Government programs play a role, with efforts like the National Action Plan (NAP) for sustainable palm oil production aiming to provide coordination, improved capacities, and access to finance and seeds. These plans include regional action plans tailored to the specific needs of smallholder communities.
NGOs and industry partnerships contribute by offering training on sustainable farming methods and facilitating access to quality seedlings. Some programs, for instance, focus on training smallholders in Good Agricultural Practices (GAP) to improve yields and environmental performance. Financial assistance is an important component, with low-interest loan programs and grants for smallholders enabling investments in sustainable practices and replanting efforts. Farmer cooperatives and other collective action models empower smallholders, allowing them to overcome individual limitations in market access and resource availability by working together. These collaborative approaches enable more smallholders to achieve sustainability certifications and integrate into deforestation-free supply chains.