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In the Name of Growth and Equity: The Future of Oil Palm Smallholders in Indonesia

Au nom de la croissance et de l’équité : l’avenir des petits producteurs de palmiers à huile en Indonésie
Wayan R. Susila et Robin Bourgeois
p. 87-107


Presque toute l’industrie indonésienne fut frappée par la crise de 1997-1998 et le PNB décrût (-13,2 % in 1998). Dans ce contexte, le secteur de l’huile de palme montra sa force et sa résistance. Les surfaces plantées et la production d’huile augmentent respectivement de 7 % et 6 % par an entre 1996 et 2001. Les trois systèmes de gestion qui co-existent dans ce secteur – grandes plantations privées, petites plantations familiales et plantations d’état – bénéficient de cette croissance. Le bien-être des petits planteurs dans les zones de production d’huile de palme est notablement plus élevé que celui de la plupart des autres planteurs et le palmier à huile, avec un bénéfice net moyen de 500 dollars par hectare, et ceci attire de plus en plus de producteurs. Ce papier combine des données secondaires et les résultats d’enquêtes de terrain pour discuter deux questions clés pour l’avenir du secteur des plantations familiales. La première a trait à l’émergence et à l’existence de ménages prospères sur le long terme : les conditions sont-elles réunies pour leur assurer un revenu durable ? La seconde est une question d’économie politique à propos du choix d’un modèle de développement entre la grande plantation privée et la petite plantation familiale, dans une perspective de croissance et d’équité : quels sont les termes de l’alternative ? Ces questions permettent d’aborder en conclusion un certain nombre d’options de politique et les actions qui en dérivent.

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1The monetary, social and political crisis that hit Indonesia in 1997-1998 had lasting effects and affected most economic sectors in the country. The inflation rate jumped to 77% and Indonesia’s GNP contracted by 13% in 1998 (Badan Pusat Statistik 2001). The rate of unemployment substantially increased and, as a result, so did the number of poor people. Estimations of unemployed and partly unemployed people rose to respectively 9 and 39 million in 2002 (Kompas, 2003). Equity, as measured through income distribution, worsened (Badan Pusat Statistik 2001).

2Unlike many sectors and sub-sectors, the estate crops sub-sector, largely dominated by smallholders (see Fig. 1) demonstrated its strength and resilience during the economic crisis (Arifin et al. 2001). Various studies also indicate that this sub-sector has played an important role in the Indonesian economy as a source of economic growth as well as improvement of income distribution (Pakpahan 1999, Arifin et al. 1999). As a consequence, the estate crops sub-sector can be considered a leading sub-sector, not only when the economy is booming, but also during crisis periods, able to speed up Indonesian economic recovery, both in terms of economic growth or equity.

Fig. 1: Importance of Main Smallholder Estate Crops in Indonesia


Total Area

Smallholder Area

Smallholder Share

(106 ha)

(106 ha)


Oil Palm
























3Among the major estate crops developed in Indonesia, oil palm is one of the commodities that have a major potential for further economic development (Arifin & Susila 1999, Girsang 1995). Oil palm plantations have experienced an 11% annual growth rate while export volume rose at a 13% annual growth rate (Direktorat Bina Produksi Perkebunan 2002). Oil palm has been considered the most profitable crop during the last two decades. Herman et al. (2000) show that oil palm has the highest profitability with an internal rate of return ranging from 28-40 per cent, while those for rubber, coffee, and cocoa are around 12-31 per cent. The results of the field survey (see below) also indicate that oil palm has the highest return with gross margin (revenue minus variable costs) around Rp 4 million/ha, while rubber, coconut, and coffee, less than Rp 2.5 million/ha.

4Besides, the important role of this commodity in the economic development and recovery of Indonesia can be seen on its impressive performance in the last two decades, even during the economic crisis period (see Fig. 2).

Fig 2: Contribution of CPO Industry to some Indicators of Economic Growth


Before Crisis*

During Crisis

Area (million ha)



Production/Output (million tons)



Export Volume (million tons)



Export Value (US$ million)



Domestic Consumption (million tons)



*Before Crisis: 1992-1996; After Crisis: 1997-2001

5The general objective of this paper is to discuss the contribution of the oil palm production to economic development, poverty alleviation, and income distribution, focusing on smallholders. The issue of smallholder development in oil palm production becomes a hot topic today, for several reasons. First, some analysts expect that a further 3 million hectare could be planted in Indonesia during the next 20 years, of which the oil palm smallholder sub-sector, which has tremendously developed over the few past years, could occupy 50% (Sargeant 2001: 9). Second, with more and more voices raising concerns about the social conflicts due to the practices of industrial oil palm development, oil palm smallholder development offers an alternative pattern. Third, large-scale, mainly foreign investment in oil palm is more and more associated to forest degradation and environmental negative externalities (Casson 2000; Sargeant 2001). A smallholder development process could contribute to reduce the impact of oil palm on the environment.

6In a first section, the importance of the oil palm sector in the Indonesian economy and rural development is stressed. Then, results of a survey conducted in two representative districts are used to empirically analyze the contribution of this crop to smallholder development. Finally, the paper addresses the challenges in sustaining oil palm smallholder contribution to growth and equity in Indonesia as an alternative model.

Palm Oil and the Economic Recovery

Contribution to Economic Growth

7Oil palm plantations in Indonesia cover 3.9 million hectare, 20% of arable land, and represent 30% of the permanent crop area. The sector employs 1.9 million persons. It is the major source of cooking oil for domestic consumption with 72% of the market. Crude palm oil (CPO) exports have reached 1 billion dollars earning in 1997 and represent 3,5 percent of non-oil/gas exports (Casson 2000). Indonesia is the second largest exporter of CPO, after Malaysia with between 25%-28 percent of market share.

8In 1997-1998 the economic crisis hits almost all industry and the Indonesian GNP experiences a negative growth (-13% in 1998). Meanwhile, the CPO industry shows its strength and resilience against the crisis. Total investment in oil palm plantation area has been increasing since the economic crisis began, as witnessed by a 6.8% annual growth rate of oil palm area from 2.3 million ha in 1996 to 3.6 million ha in 2001. This growth was supported by all type of oil palm management systems, namely private estates, smallholder farms, and government-owned estates. Private estates belong to private companies such as Sinar Mas Group and Astra Lestari Group. Palm oil government-owned estates belong to the government of Indonesia, i.e., the Ministry of Finance. Oil palm smallholdings are small-scale oil palm estates (1-5 ha) belonging to small farmers. Around 84 per cent of the small farmers are the owners of the land and plantation, while the rest are sharecroppers.

9In 2001, around 53.1% of the area is under management of private estate (PBS). The shares of smallholdings (PR) and government-owned estates (PBN) are 31.9% and 14.9%, respectively. The highest area expansion rate belongs to the private estates with 12,1%, followed by smallholders (10.8%) and, far behind, the government-owned estates with 3.2%. In addition, the private estates increased their output by 15.4%, followed by smallholders with 12.3% and, largely behind again, the government-owned estates with 3.2% (Direktorat Jenderal Perkebunan 2002).

10As seen in Fig. 2, a significant growth rate characterizes the oil palm industry during the economic crisis. The average planted area increased by 66% compared to the ante crisis situation. Similarly CPO production has increased at 5.8% annual growth rate in the crisis period (+49%).

11During the economic crisis, the Indonesian CPO industry greatly contributed to foreign exchange earning through exports. The average total export volume increased by 51% during the crisis, earning a 66% increase of the total export value (foreign exchange earning), exceeding today the billion of dollars. This growth would probably have been higher, had not the government implemented the ban of CPO exports for several months in 1998, resulting in an estimated 1 billion dollars loss (Casson 2000: 10).

12The output of CPO downstream industries has also increased during the crisis. This can be seen from the increase in CPO domestic consumption with around a 6% annual growth rate during the crisis (+ 49%). Domestic consumption in 1996 was around 1.26 million tons, it increased to 3.46 million tons in 2001. CPO is, thus, not only a key commodity for Indonesia trade balance, but also a strategic commodity as cooking oil in the basket of the Indonesian consumer (Ditjen IPHK Depperindag 1996).

13The future contribution of CPO industry to Indonesia’s economic growth is considered to be lastingly significant. This is firstly related to the competitiveness of the product, especially compared to other edible oils, such as soybean oil, sunflower oil, and rapeseed oil. Oil palm is considered the most efficient crop, in oil equivalent per hectare. Oil palms produce 3200 kg, rapeseeds 520, coconuts 400 and soybean 330 (Ong 1992). Bassiron (2002) indicates that oil palm production, gross margin is around 560 US dollars per ha, while soybean in the United States has a gross margin ranging from 160 to 380 US dollars (Frerich 2003).

14Secondly, more than 80% of the world population, mainly in developing countries, tend to increase its oil consumption. Due to relatively low income per capita, the consumer prefers cheaper edible oil (Susila 1997), which favors palm oil since over the last four decades the average price of CPO is around US$382.0/ton, while that of soybean is US$448/ton.

15Furthermore, the implementation of trade liberalization, especially during the Uruguay Round, has strengthened the competitiveness of CPO on international markets (Pasquali 1995) because in contrast to oil palm in Indonesia, most of the other competing edible oils produced in developed countries, such as soybean oil in the US and sunflower oil in West Europe, have enjoyed a protection and government subsidies, that are bound to disappear. Pasquali (1995) estimated that around 82% of the total market expansion due to Uruguay Round would be enjoyed by developing countries that produce CPO.

16As a consequence, there are expectations that the world demand for oil palm might double in the next 20 years.

17Based on calculations of efficiency indicators, Indonesia appears to be an efficient resource user for CPO production. Susila (1998) estimated the value of the private cost ratio (PCR) and domestic resource cost ratio (DRCR) of Indonesian CPO at 0.53 and 0.48, respectively. These values, below one, witness the resource use efficiency of Indonesian CPO production, since they mean that it requires around US$ 0.5 of domestic resource to gain one US$ of foreign exchange, even in the hypothesis of a total removal of any distortion that might affect the prices of inputs and outputs. The substantial depreciation of the Indonesian Rupiah has strengthened the competitiveness of Indonesian CPO producers.

Contribution to Smallholder Welfare

Smallholder Income

18The importance of tree crops as a source of income, especially in rural areas out of Java, has been well known. In general, tree crops have a great contribution to the household total income. Several studies, for instance Winoto et al. (1997), indicate that the share of tree crop income to households’ total income is more than 65%. However, oil palm plantation in Indonesia started in the late 1970s, following an industrial estate model, through government and private sector investment. The oil palm smallholding sector only reached a significant level in the 1990s when smallholders’ oil palm plantation area matched Government-owned estates area. Since then, not only private company-owned plantations have further developed, but also independent smallholdings as indicated in the graph below (see Fig. 3). While large estates (private and government-owned estates) cultivate oil palm in a mono-cropping system and usually use legumes for intercropping between oil palms to enrich the fertility of soil and to prevent the development of Imperata cylindrica during the first three years (immature period), smallholders plant food crops as intercrops during the same period. When oil palms are yielding, there is no more intercropping. However, besides cultivating oil palm, smallholders have also other activities, such as animal husbandry (chicken, goats, and cow). As an indication, in the survey sample the contribution of non-oil palm activities to total smallholding income is around 40 percent, a figure that is consistent with Winoto’s data.

Fig. 3: Development of Oil Palm Area in Indonesia

Fig. 3: Development of Oil Palm Area in Indonesia

Source: Outlook Agribisnis Kehutanan Dan Perkebunan, CASER, 2000.

19A survey in 2002 in two districts, Kampar and Musi Banyuasin, (see Fig. 4) provides further and recent support to these income figures (see Fig. 5).

Fig. 4: Location of Kampar and Musi Banyuasinin Sumatra

Fig. 4: Location of Kampar and Musi Banyuasinin Sumatra

Fig. 5: Aggregate Income Structure of Agricultural Households in Kampar and MuBa


Musi Banyuasin

Source of Income





(106 Rp /year)


(106 Rp /year)


Own Farming Activities





1. Oil-palm-based Farming





2. Food Crops





3. Livestock/Fishery





Other activities





1. Agricultural Sector*





2. Non-agricultural Sector **





3. Special Income***





4. Other Income****










Source: Susila (2002)

* Mainly income from renting out household’s production factors (labor, land, equipment).

** Income from non-farm activities.

*** Includes other sources of income such as sales of assets, tranfers.

**** Includes financial and bank transactions (withdrawals, mortgage, borrowing).

20This survey was conducted in districts representative of oil palm development situation in Indonesia, with particular emphasis on smallholders’ development. In total 224 agricultural households were surveyed. As shown in Fig. 5, the average total income of oil palm smallholders in Kampar and Musi Banyuasin is around Rp 19 million and Rp 11 million per annum, respectively. In Kampar, the contribution of oil palm-based activities to total household income is above 60%. A similar feature is also recorded in Musi Banyuasin, with contribution of around 60% of the total income. The average income per capita of the sample population is Rp 3 million per year.

Smallholder Assets

21Another important indicator of farmers’ welfare is the value of their assets. The contribution of oil palm-related assets to total household assets in Kampar is around 63% (see Fig. 6), representing Rp 58 million. In Musi Banyuasin, the contribution is around 72% of total assets attaining to Rp 45 million per household. These results indicate that oil palm is not only an important contributor to the total income and welfare of rural households in the study area; it contributes also to increase their wealth.

Fig. 6: Aggregate Asset Structure of Agricultural Households in Kampar and MuBa


Musi Banyuasin

Type of Assets





(106 Rp /year)


(106 Rp /year)







1. Estate land





2. Rice field





3. Home yard





4. Fisheries





5. Livestock





6. Other





Non Land





1. House





2. Livestock





3  Agriculture Equipment





4. Motor Vehicule





5. Household Furniture





6. Saving





7. Jewelry










Contribution to Equity

Income Distribution

22The distribution of income within the population of agricultural households in Kampar and Musi Banyuasin shows a relatively equitable pattern. The income distribution of smallholders in Kampar and MuBa (see Fig. 7) has a gini coefficient of 0.36. Three groups can be identified. The first group includes the poorest smallholders, whose income per capita is less or equal to Rp 1 million per annum. This group is relatively small, accounting for around 8% of the total population. The second group is the majority, whose income per capita lies between Rp 1 –Rp 5 million per year. This group can be considered as the common feature of smallholder income in Kampar, accounting for more than 75% of the total population. The third group is the richest group, with an income per capita above Rp 5 million per annum. This group contributes to around 13% of the total population.

Fig. 7: Distribution of income per capita in Kampar and MuBa

Fig. 7: Distribution of income per capita in Kampar and MuBa

Source: 2002 survey

23The variation of income is closely related to specific factors. The results of a regression analysis indicate that income is significantly explained by the following variables: number of tree crop cultivated (+), land productivity (+), total tree crop area (+), income share of tree crop (-), asset (+), saving (+), origin (+), age of farmer (+). Smallholders with higher income present also a higher degree of crop diversification, higher land productivity, higher total tree crop area, higher income share of tree crop, higher asset and saving value. Moreover, they are also usually migrants and have a longer experience in tree crop cultivation.

Poverty Alleviation

  • 1 The Nucleus Estate and Smallholder Scheme (NES) is an estate crop development scheme in which small (...)

24The development of oil palm seems to be an effective instrument to reduce or alleviate poverty in rural areas. In Kampar, the proportion of poor people in the agricultural households community is less than 5%. A similar feature is also found in Musi Banyuasin, where the number of poor people is less than 10%. The small number of poor people can be explained by the major role of oil palm as the main source of income. For instance, most households participating in a NES development scheme1 have an income of around Rp 2 million per capita, as each hectare of their oil palm contributes Rp 5 million per annum. This figure is higher than the respective value of the poverty line in Kampar and Musi Banyuasin, which is around Rp 1.4 million and Rp 1.25 million per capita, respectively.

25Furthermore, data on credit repayment and capital accumulation for the replanting program show that in general oil palm smallholders have been able to repay their loan faster than planned (see Fig. 8). In 30 NES projects and for a total area of more than 150,000 ha involving around 77,000 households, the average credit repayment rate has reached around 85% of the total credit. Moreover, participants in 18 NES projects can be considered to have completed their loan repayment, as the rate exceeds 90%. Almost all oil palm NES are predicted to be able to repay their loan. Compared to other crops, such as coconut and rubber, the credit repayment of oil palm NES is significantly higher. For example, credit repayments in coconut and rubber NES are 12% and 37%, respectively, a clear indication that oil palm smallholders are able to live from and maintain their business. (Winoto et al. 1997, Herman et al. 2000).

Fig. 8: Credit Repayment Rates of Tree Crop NES Participants


Number of NES Project

Area (ha)


Credit Repayment (%)

NES completing Credit Repayment

Oil Palm


151 000

77 000





151 000

74 000





13 000

6 900





8 000

23 000



Source: Direktorat Jenderal Bina Produksi Perkebunan (2001) and Tim LP IPB (2000)

26Some studies show that oil palm smallholders have accumulated capital as a preparation for replanting. A study by Winoto et al. (1997) in PIR Ophir in West Sumatra states that oil palm smallholders have developed a saving program as part of a replanting program. Under this program, called Iuran Untuk Peremajaan Tanaman Perkebunan (IDAPERTABUN) or “Saving for Plantation Rehabilitation”, the participants save around Rp 40,000—75,000 per month, based on the productivity or the age of their oil palm plantation. A similar program has also been implemented in NES Sei Galuh, Riau, by which the farmers save Rp 30,000 per month.

Limiting Factors and Challenges in Oil Palm Development

  • 2 In this paper all production costs are indicated at market (nominal) price.

27Though the oil palm sector has played, and still plays, a significant economic role, it faced, and will still face, some limiting factors and challenges. These will force the sector to adjust to specific problems in order to optimize the benefits gained from oil palm cultivation. Susila and Supriono (2001) identified some current and future limiting factors and constraints, namely, increase in production cost2, trade policy, regional autonomy, environmental issues, and social conflicts.

Economic Challenges

Production Costs

28In spite of technological progress, the increase of production costs is inevitable in the future. These are expected to grow by 2%-7% per annum, depending on management efficiency (Susila 2001). The main sources of cost increase are increase in wage, input prices, and energy prices. An increase in wages may cause a significant increase in production costs because these represent 20% to 25% of all production costs. Other input prices, such as the price of fertilizers and pesticides, have also tended to increase. Moreover, the price of energy has increased due to government policy to reduce subsidies on energy. This has caused a significant increase in transportation cost and processing cost, accounting for around 8-11 percent of the cost of production.

Trade Policies and Market Mechanism

29The CPO export tax is a policy intervention that has strongly affected the oil palm sector, due to largely inconsistent measures, such as frequent changes of the export tax rate that caused difficulties in formulating long run development program (Susila & Supriono 2001).

30Market relations are also important factors that significantly influence the development of tree crops in the region. Both for non-NES and NES households, market mechanisms, for different reasons, represent constraints. Non-NES farmers, operating in a poorly regulated market environment, face the traders with a limited bargaining position. As a result, the latter determine unilaterally the quality and price of the products.

31In the NES marketing system, the determination of product quality and price is also a problem for the following reasons: 1. The farmers have not enough knowledge to appreciate the technique of measurement since it involves chemical processes; 2. The farmers’ products are generally heterogeneous and farmers with relatively better quality products feel prejudiced.

32The determination of farm gate price has also been a persistent problem for NES schemes. This stems from the fact that the formula used to determine the price is based on two-week average prices. Since the prices fluctuate daily, this causes a gap between the current market price and the price received by the farmers. This could be a result of lack of information and understanding of the price formula calculation. This problem has been aggravated in some places by the fact that the prices offered by traders surrounding NES may become more attractive because of the demand from other oil processing plants whose oil processing capacity is much higher than the availability of the raw material, inducing thus a pressure to divert NES participants from delivering their product to the NES plant.

Technical Challenges


33In smallholders oil palm plantations yields average significantly lower levels than in government-owned estates. The average yield of oil palm managed by smallholders is around 2.8 tons CPO/ha/year, while that of the government-owned estate is around 4.5 tons CPO/ha/year (Direktorat Jenderal Perkebunan 2001). The result of the field survey shows that the yield is slightly higher, with around 3.2 ton CPO in Kampar and 2.85 tons CPO in Musi Banyuasin.

34Lower yields in smallholder estates could be caused by two main factors. Firstly, smallholders’ oil palm plantations, especially in Kampar, are younger than the plantations managed by government-owned estates. Secondly, the level of input used by smallholders is generally lower than that in government-owned estates. Similarly, lower yields in private estates may be due to the younger age of plantations. The development of private estates began in the 1990s while that of government-owned estate and smallholder plantations began in the 1980s. This is a specific problem of the oil palm development sector, since for instance cocoa smallholder plantations have outdone government and private estates in South Sulawesi.

Processing Capacity

35The development of CPO processing plants does not keep pace with the development of FFB production. The total capacity of CPO processing plants in South Sumatra is around 500 tons FFB/hour, equivalent to the FFB production capacity of around 231000 ha (see Fig. 9). Since the total oil palm plantation in the province is around 368000 ha planted, the province must increase its CPO plant capacity by around 685 tones FFB/hour, or around 11 CPO plants with the capacity of 60 ton FFB/hour. On the national scale, the capacity of existing CPO plants cannot meet the FFB produced in the 16 CPO producing provinces. This situation has caused a serious problem in Riau and West Sumatra in 2001, when some FFB produced by smallholders could not be processed, leading to a decrease in FFB price.

Fig. 9: Capacity of CPO Plants in Indonesia per Province


Number of Plants

Current Capacity*

Production Potential*

Under Capacity*

West Kalimantan















Central Kalimantan





South Sumatra





D.I Aceh





East Kalimantan





West Sumatra





South Kalimantan










South Sulawesi





North Sumatra





Central Sulawesi










Irian Jaya





West Java










Source: Direktorat Jenderal Bina Produksi Perkebunan (2001)

*Ton FFB/hour

1 ton plant capacity is equivalent to a 200 ha plantation

Institutional Challenges

Implementation of Regional Autonomy

36The implementation of the laws on regional autonomy since 2001 has had a substantial impact on the industry. Among the relevant laws, law No. 25/199 regulating the revenue sharing between central and local governments has been perceived to have the greatest impact on the development of tree crops in the region (Poernomo 2002). The main idea behind this law is fiscal decentralization, which gives a wide authority to local governments to manage and to allocate their budgets and to collect their revenue.

37The positive impacts of this law in term of policy efficiency have not materialized. Most investors have perceived that the implementation of the laws has increased business uncertainty. For example, there are no clear regulations related to land acquisition procedure and taxing. Moreover, wider authority of local government to collect revenue has led to increased retribution, that is local levies which are often inconsistent with national and local tax, resulting in an increase in production cost. This situation has created a pressure to either existing plantations or planned investments. In other words, positive impacts of regional autonomy such as efficiency increase and better allocation of resources have not materialized, while some negative impacts have been immediate.

Viability of Smallholder Oil Palm Farms

38The surge of smallholder plantations in the last ten years calls for a stronger focus on the conditions for these farms to survive and develop into a viable model. This model may constitute an alternative to the private-estate development pattern that has prevailed in Indonesia so far and that is causing growing concerns for local communities, national and international NGOs, and fat companies and supermarkets in developed countries.

39A scale with five stages and four thresholds was established for the agricultural households in the survey area as indicated in Fig. 10 below.

Fig. 10: Basic Components of Welfare Levels and Thresholds Definition

Fig. 10: Basic Components of Welfare Levels and Thresholds Definition

40For each threshold an income equivalent was calculated, as well as the corresponding area of productive oil palm under the assumptions of field-based technical and economic coefficients.

Fig. 11: Farm Welfare Tresholds for Oil Palm Plantation and related Income per Caput

Level of Farm Welfare (thresholds)

Minimum Size (ha)

Income (Rp million/year)







Economic Reproduction



Socio Economic Reproduction



41The results of this analysis show in Fig. 11 that, in the case of a mono-cropping system:

421. For the survival level with minimum input use, the minimum oil palm plantation is around 1.8 ha. This will yield a total income around Rp 7.18 million per household per annum. This income is mainly used to fulfill the basic needs (just above poverty line). Under this limit, households are in an impoverishment situation leading to rapid loss of assets and termination of their activity as oil palm farmers.

432. To reach the production threshold where smallholders can maintain their oil palm plantation, the minimum plantation size is around 2 ha per household. With this farm size, the total income generated is around Rp 8.37 million per annum. At this income level, oil palm smallholders can fulfill their basic needs and maintain their oil palm plantation. However they will be still sensitive to any economic accident (such as climatic adverse conditions, price fall) or adverse social circumstances such as illness.

443. To achieve the economic reproduction level, the minimum farm size is 2.34 ha and the total income generated is around Rp 9.62 million per annum. This level of income is adequate to satisfy smallholders basic needs, maintenance cost, and cost of oil palm replanting (investment cost).

454. Finally, to achieve the desirable socio-economic reproduction level, the farm size must not be less that 3.56 ha, with total income from oil palm plantation around Rp 14.6 million per annum. Besides fulfilling basic needs, maintenance cost, and investment cost, this level of income is enabling smallholders to fulfill the cost for education and other social and religious activities.

46According to these numbers, the distribution of agricultural households in the sample survey reveal that (see Fig. 12) one fourth of the farmers are currently in a socio-economic situation that will not allow them to develop. However the potential of oil palm cultivation as an engine for development is shown by the situation of more than 35% of the sample households who are already above the socio-economic reproduction threshold.

Fig. 12: Distribution of Households according to Stages


Total Sample





De-capitalization (%)

Accumulation (%)

Development (%)







47These results show a rather bipolar pattern of household distribution, which implies that almost 40% of the sample farmers have not viable activities and remain extremely sensitive to climatic or socio-economic hazards. In government-supported smallholder development schemes for palm oil production, land allocation never reaches the indicated thresholds for socio-economic reproduction. A rethinking of the government intervention pattern for smallholder development in the oil palm sector is a necessity.

Policy Issues

48The future of the oil palm sector in Indonesia and the role of smallholders depend from both external and internal factors. At the oil palm sector level, we have seen that expectations are rather positive even with the current drop in world prices. The long-term trend shows a high and sustained demand on the international market while domestic consumption remains strong. Oil palm further development will depend on the orientations in the very next future. We discuss these orientations here in the light of two objectives: growth and equity. Though in our opinion these have to be combined and we present here separately the main actions.

Growth-Oriented Actions

49There are two main comparative advantages for producing CPO in Indonesia. The first one relates to the availability of land and its cost. Malaysia, the main competitor, can hardly further expand its oil palm plantations due to lack of land, which means that further expansion of oil palm plantations would require converting land from other uses to oil palm, while Indonesia’s potential is still important in Sumatra, Kalimantan and Papua where surveys estimate that 2,9million hectares of unused, already logged land could be used for oil palm plantations with a lower cost compared to Malaysia. The second is labor cost, as wages in Indonesia are much lower compared to competing countries, especially Malaysia. Wage in oil palm plantation in Malaysia is around US$7-8 per day, while that in Indonesia is around U$S1.5-2.5 per day. As a consequence, Malaysian private investors are interested and already active in oil palm plantations in Indonesia. In order to enable Indonesian producers to benefit from the good market perspectives and remain competitive in the world market, several actions are needed. These include:

Locally Promoting an Integrated Development of CPO Production

50As discussed before, the total capacity of CPO plants has been smaller that the potential production of FFB. Given that the number of independent oil palm smallholders in the last five years increased in many areas such as Riau and South Sumatra (author’s personal observation), the development of CPO plants, either small or medium scale, is crucial. Unless more CPO plants develop in the next few years, FFB produced by independent smallholders will not be able to be processed and therefore will not find a profitable market. This will depress FFB farm gate price, leading to a lower farm income and welfare. Heavy government intervention in service provision, production and trading is not needed, but an integrated approach allowing for the simultaneous development of independent smallholders and CPO plant must combine several dimensions: transport infrastructure for improving the flow of product and inputs from and to smallholdings areas, incentives for the establishment of the corresponding oil processing units in these areas. This in turn will facilitate the development of services for smallholders such as credit and planting material.

Development of Super-mini CPO Plant for Remote Oil Palm Plantation

51In accordance with the point above, a solution to overcome the problem of matching independent smallholders’ production with oil processing capacity in remote areas, beside transport infrastructure development, consist in promoting super-mini CPO plants, managed by farmer groups. Otherwise, the cost of processing will be very expensive, CPO yield will be low, as well as CPO quality, and finally farmers will lose.

Reformulation of Farm Gate Price in NES Marketing System

52To reduce the time lag problem as indicated earlier, the price formula should use a closer reference price, such as the average of the last week prices. To realize this, a reform in the price formula stipulation is needed. A more satisfactory approach would include more stakeholders in the decision-making process through a group representing smallholders, estate companies, researchers, and government.

53Furthermore, the formulation of CPO yields needs to be improved. In the existing formulation, smallholdings CPO yields in some regions are determined with a yield table, considering the age of the plantation and the assumption that the FFB harvest follows standard criteria. In the field, the criteria are not fully observed and the table tends to be irrelevant. The use of regular laboratory analysis could be an alternative to improve this situation, especially for smallholders in palm oil development project schemes, accounting for around 86% of the total oil palm smallholding area.

Modification of CPO Export Tax

54As discussed earlier, CPO export tax reformulation needs to be discussed. A more stable tax for instance will provide a more favorable business environment. This tax could also be applied when the CPO FOB price per ton passes a certain level. Both the rate and the level should be agreed upon taking into consideration the conditions of CPO production in Indonesia and the world market price and situation of the major exporting countries. A variable levy as used before should be avoided for being inconsistent with Indonesia trade liberalization commitment.

Equity-Oriented Actions

55The above-mentioned measures aim at strengthening the global position of the palm oil sector in Indonesia and in front of the international market, as well as its contribution to growth. However these are not sufficient as far as equity is concerned. A rising opposition to the private estate-owned model is challenging this policy orientation of the Indonesian authorities and international monetary institutions in the development of the oil palm sector. Equity is at stake because in many cases local communities feel spoiled by the private-estate implementation procedures, which lead to conflicts about land rights. It is also at stake in terms of distribution of benefits, since private estates contract wageworkers, generally casual workers with very limited social rights, while smallholders are independent workers with their own assets. This leads to an uneven distribution of the benefits where a few stakeholders get the lions share while in the smallholding development pattern, the benefits are distributed among a large number of citizens.

56In order to address these issues, there are several points that need to be tackled in priority as indicated below.

National-Regional Coordination

57The future contribution of the oil palm sector to equity heavily depends on two types of arbitration. First, since the annual market expansion is limited (Arifin & Susila 1999), a coordination between national and regional policy is essential in order to minimize the risk of over-supply that can weaken the bargaining position of Indonesia on international market and adversely affect producer prices, and to minimize unnecessary and costly competition among regions for oil palm development. With regional autonomy, this coordination becomes a key issue. In fact, in order to promote the local development of oil palm plantations, regional government policies (in East Kalimantan, Riau, Jambi, West Sumatra) have already set up conducive business environments to expand oil palm plantation. However, these environments need to be viewed also from an equity-growth balance viewpoint as indicated below.

Arbitration between Smallholdings and Private-estate Development Patterns

58Another key arbitration is needed to clarify most of these policies that do not tend to favor a smallholder development model. The oil palm sector has yet to be recognized as an area for smallholder development. In addition to well-known smallholding schemes through the NES system, spontaneous smallholding development is reported everywhere. As it is already well documented, the successful development of tree crop smallholdings depends on several factors: guarantee of land ownership, good road and communication infrastructure, effective nurseries, reliable information and extension services, credit access through local institutions and organizations (Gouyon 1997). The development of a viable oil palm smallholder sector can be attained even with lighter investment and government intervention than in the classic tree crop development schemes (Gouyon 1997). But the question is that of the political will of the ruling elites to promote equity with growth. The stakes are huge, however. Based on (Sargeant 2001) calculation, private estates have an employment rate of one worker per hectare, while a smallholder family can leave and develop from around 3,5 hectares. This implies that, in 2020, the Indonesian oil palm sector could show very different faces. If foreign and large investment is favored as the current trend leads to expect it, the oil palm production sector in 2020 could be made of a few companies controlling almost 4 million hectares employing 800,000 wage workers and of 1,2 million smallholders on average cultivating oil palm on a two-hectare holding just sufficient to ensure the simple reproduction of the farm without perspective for sustainable development of the family. The other alternative, based on a strong commitment to promote smallholder-based oil palm growth could give a 2020 vision where 1,5 million smallholders could live and develop from 3,5 hectare per household beside a private sector employing 500,000 wage workers. In terms of employment, numbers are not very different but, obviously, the situation of oil palm wageworkers cannot compare with that of the smallholders considered in this calculation. No government can ignore the implication of such a welfare gap in rural areas in terms of poverty reduction and sustainable development. Wealthy farmers can multiply the growth effect of oil palm cultivation development at local level by establishing regional poles of wealth that will induce a more harmonious regional development.

59In addition, according to Pakpahan (1999), independent smallholdings are more efficient compared to big estates because, although some production costs incurred by big estates are lower due to economy of scale, their transaction costs are much higher than those of smallholdings. The high transaction costs especially relate to land acquisition and security problems that have been increasing during the “Reformation era” (since 1998).

Towards a Sustainable Oil Palm Development Pattern

60A third issue relates to the environmental impact of oil palm plantations as it is more and more recognized that oil palm planting occurs in Indonesia at the expense of the disappearing rain forest. This issue has already internationalized with palm oil buyers in developed countries starting to move towards preferences for “sustainable palm oil production” (WWF 2003).

61Here again arbitration is needed and as a preliminary step a comprehensive assessment of the environmental impact of oil palm development is needed. This assessment should compare the situation of the different development models: NES system, private-estates, independent smallholdings, and include the environmental impact of processing plants. In a second step, this assessment could be used as guidelines for promoting investment in sustainable palm oil production that would grant the country preferential access to world markets.

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Acronyms: FFB, Fresh Fruit Bunch; CPO, Crude Palm Oil; NES, Nucleus Estate and Smallholder; MuBa, Musi Banyuasin District.

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1 The Nucleus Estate and Smallholder Scheme (NES) is an estate crop development scheme in which smallholdings develop around an estate company operating as an integrated unit of business. Smallholders cultivate the crop and their products are processed and marketed by the estate company. The company provides inputs to smallholders and keeps guarantees on land for as repayment incentive.

2 In this paper all production costs are indicated at market (nominal) price.

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Table des illustrations

Titre Fig. 3: Development of Oil Palm Area in Indonesia
Crédits Source: Outlook Agribisnis Kehutanan Dan Perkebunan, CASER, 2000.
Fichier image/png, 6,2k
Titre Fig. 4: Location of Kampar and Musi Banyuasinin Sumatra
Fichier image/png, 46k
Titre Fig. 7: Distribution of income per capita in Kampar and MuBa
Crédits Source: 2002 survey
Fichier image/png, 11k
Titre Fig. 10: Basic Components of Welfare Levels and Thresholds Definition
Fichier image/png, 108k
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Wayan R. Susila et Robin Bourgeois, « In the Name of Growth and Equity: The Future of Oil Palm Smallholders in Indonesia »Moussons, 9-10 | 2006, 87-107.

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Wayan R. Susila et Robin Bourgeois, « In the Name of Growth and Equity: The Future of Oil Palm Smallholders in Indonesia »Moussons [En ligne], 9-10 | 2006, mis en ligne le 01 février 2013, consulté le 10 mai 2021. URL : ; DOI :

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