Oil palm expansion among Indonesian smallholders - adoption, welfare implications and agronomic challenges

Oil palm has become one of the most rapidly expanding crops throughout the humid tropics. Over the last two decades, the area under oil palm has almost tripled and its production more than quadrupled. This development is mainly attributed to the rising demand for vegetable oils and biofuels, favorable government policies in producer countries, as well as oil palm´s superior production potential and profitability compared to alternative land uses. Over 85% of the world´s palm oil production originates from Indonesia and Malaysia, which offer favorable agro-ecological growing conditions with relative abundance of cultivable land and agricultural labor. While the early expansion of oil palm was mainly driven by large scale private sector plantations, the more recent expansion of oil palm is largely driven by smallholder farmers. The first oil palm smallholders participated in government-supported out-grower schemes. Whereas such schemes still exist, most of the oil palm growth among smallholders is now due to independent adoption. At present, smallholders account for 41% of the total oil palm area and for 36% of the total fresh fruit bunch (FFB) production in Indonesia. If current trends continue, smallholders are expected to dominate the Indonesian palm oil sector in the near future. Potentially, oil palm can act as an instrument to include the rural poor into the modern agricultural sector, foster rural socio-economic development and contribute to the reduction of poverty and malnutrition. Its agronomic properties and high yield potential might help to secure an environmentally sustainable supply of vegetable oils and biofuels to growing global markets. However, oil palm expansion also entails socio-economic and environmental threats. Socio-economic threats include an increasing vulnerability and economic marginalization of the rural population, unequally distributed economic benefits among adopters, as well as negative impacts on food availability and food security. The ecological drawbacks related to oil palm expansion are deforestation, biodiversity loss, greenhouse gas emissions, and environmental degradation. Moreover, smallholders face a set of agronomic and institutional constraints that hinder them to achieve the crop´s full production potential. In order to design policies that enhance the environmental and economic sustainability of the diffusion of oil palm within smallholder agriculture, it is of paramount importance to i) understand the factors that influence smallholder land use decisions in general, and their decision to adopt oil palm in particular; ii) disentangle the welfare and nutritional implications that are associated with oil palm related land use changes; and iii) minimize the agronomic limitations and foster smallholder yields in existing oil palm production systems. However, the empirical evidence related to the diffusion of palm plantations into smallholder agriculture, its socio-economic implications as well as limitations in smallholder management practices is scarce. The present study addresses this gap in the literature by analyzing farm-household survey data from Jambi Province, Sumatra with regard to the above mentioned objectives. In particular, we set up a duration model to analyze the process of oil palm adoption and adoption determinants in a smallholder context. Using econometric models and a set of quantile regressions, we further quantify the implications of oil palm cultivation on smallholder livelihoods, with a focus on household consumption expenditure, calorie consumption and dietary quality. Based on crop modelling and plot level input-output data, we quantify smallholder yield gaps relative to simulated potential and exploitable yields and identify the major agronomic and institutional constraints in smallholder oil palm production. Our results highlight the fact the speed of adoption is significantly enhanced in villages that have contractual ties to private sector palm oil companies. Even though not all oil palm growers are included in such contracts, the existence of a contract in a village ensures access to processing facilities, which is a crucial factor in oil palm cultivation since FFB have to be milled within 48 hours after harvest. Thus, oil palm adoption potentially follows a regional path-dependency with regions where the oil palm industry was developed early on also being those regions where independent oil palm adoption now occurs most widely. This path-dependency has a potential downside, as it may foster regional disparities. However, there is also a positive side, because land use change becomes more predictable and easier to control for public policymakers. The environmental sustainability of future oil palm expansion therefore depends on the government’s ability to demark land for plantation development that is already degraded, so to spare primary forest areas from direct encroachment. Analysing the welfare implications of oil palm cultivation shows that oil palm is a financially lucrative land use option for smallholder farmers. Results suggest that its cultivation is associated with increases in household consumption expenditure, calorie consumption and dietary quality. The observed effects can mainly be attributed to farm size expansions and increases in off-farm income opportunities that are achieved with the adoption of oil palm and the labor-saving management of the crop. Consequently, the net livelihood outcomes of oil palm adoption are likely to depend on smallholder household attributes which define their ability to expand their farms and diversify their off-farm incomes. Our results support this notion, showing that oil palm adoption has heterogeneous effects especially with respect to non-food expenditures. Thus, diffusion of oil palm among smallholder farmers may worsen social inequality. From a rural development perspective, oil palm expansion might ultimately become a race for land, which might become a speculative object and a scare resource. Especially more traditional land use practices, such as slash and burn farming or rubber agro-forests, might gradually be replaced with the diffusion of oil palm plantations into smallholder agriculture. Especially in regions that are still dominated by extensive land use practices, the land rent of agriculture relative to extensive agriculture (e.g., rubber agroforests) and forests could be increased, enhancing the encroachment of forests. Assessing the agronomic performance of oil palm adopters, we find smallholder yields to show large variations and to be generally far below plantation sector standards. In particular, existing oil palm smallholdings offer a tremendous potential for future yield increases, as they obtain only 56% of the cumulative exploitable yields over a 20 year plantation life cycle. The most important determinants of yield gaps are management practices such as fertilizer dosage and length of harvesting intervals. Furthermore, smallholders (formerly) operating under contract arrangements with private or government companies achieve higher yields compared to independent smallholders. Yield increases in oil palm production can help to improve the livelihoods of small scale farmers and may also reduce the conversion of forest and peat lands into oil palm plantations. Reconciling food security and rural development with the sustainable use of the global environmental resource base has widely been identified as one of the major challenges of present times. If implemented well, smallholder oil palm cultivation offers the necessary features to minimize the inherent economic-ecological tradeoff of agricultural production.