What can the palm oil industry do to “green” its supply chain? What are some of the obstacles to greater sustainability? The SIIA travels to Riau to see what one palm oil company is doing to ensure its products are sustainable, and how independent smallholders are increasingly becoming a part of this “greening” process.
Featured Image: SIIA staff with staff from IFC and Musim Mas at the office of the IPODS project in Pelalawan, Riau, Indonesia.
Today, many large palm oil companies have committed to stringent sustainability policies that cover their entire supply chain. In recent years, many of these companies have made steady progress towards achieving full compliance with these policies by addressing problems such as deforestation, fires, haze, and land conflict within their plantations.
However, independent smallholders remain a major obstacle to achieving this target. Many large palm oil companies source a significant proportion of their fresh fruit bunches from these small-scale farmers, but these farmers often lack the knowledge and capacity to switch to sustainable agricultural practices, as this is often a difficult and expensive process.
The SIIA traveled to Riau province in September to visit the Indonesian Palm Oil Development for Smallholders (IPODS) project, an innovative scheme that helps independent oil palm growers in Indonesia adopt more sustainable farming practices. The IPODS project is being jointly implemented by the International Finance Corporation (IFC) and the major palm oil grower and processor, Musim Mas.
Engaging Smallholders to Avoid Repeating Past Mistakes
There is an urgent need for the palm oil industry to engage its independent smallholders. As many Indonesian oil palm plantations reach the end of their 25-year productive period, a large number of smallholders will soon need to replant their trees. However, without access to appropriate financing schemes, agricultural training, and high-quality seeds and fertilisers, many smallholders are unable to conduct replanting using optimal methods, and therefore risk being locked into low-yielding plantations for another 25 years. Low yields have been a major factor driving farmers to encroach into high-conservation-value forests and other protected areas.
From the perspective of a palm oil processing company like Musim Mas, engaging independent smallholders is important for ensuring that the company’s supply chain is free from environmental and social violations. Also, if the company can raise independent smallholders’ yields, it stands to profit significantly from receiving greater quantities of high-quality fruit.
The plantation of an independent oil palm farmer in Riau who sells his crop to Musim Mas.
Transforming Murky Supply Chains into Transparent and Strong Linkages
The first step in any project that involves independent smallholders is traceability. Musim Mas and IFC traced the entire network of middlemen and farmers that supply to Musim Mas’s mill, assigning each a unique barcode. In the process, they discovered that a single mill may source from over a hundred middlemen.
Next, the independent smallholders are collectivised into groups and trained in best agricultural practices, so that they can learn how to maximise their yields and profits.
Independent oil palm smallholders being trained in agricultural best practices by a Musim Mas/IFC agronomist.
So that smallholders can afford expensive inputs such as fertiliser, Musim Mas acts as a guarantor for smallholders when they take loans from local banks. Loan repayments are then deducted from the profits earned by farmers when they sell their crop to Musim Mas. Tailored financial models are currently being designed for specific needs such as replanting.
Certification is another key component of the IPODS scheme, as it will allow smallholders to access premium markets in the US and Europe. IFC and Musim Mas aim to get 2,000 independent smallholders certified under the RSPO, ISPO, and/or ISCC schemes by 2020.
By 2020, IFC and Musim Mas hope to involve 12,000 independent smallholders in the IPODS scheme in both Riau and North Sumatra. The scheme is still in its pilot stage, but if it proves successful, there are hopes that it can then be quickly replicated across different parts of Indonesia.
Though working with independent smallholders is a difficult and complicated process, there is no doubt doing so is essential for ensuring the long-term sustainability of the Southeast Asian oil palm industry.
SIIA staff with some of the independent smallholders who are part of the IPODS project.
The IPODS project and other schemes to support independent smallholders will be showcased at a workshop entitled “Making Green Finance Count: Impact Investing for Indonesia’s Agricultural Sector”, which will be jointly organised by the SIIA and World Resources Institute (WRI) Indonesia in Jakarta on October 20.
