Case Study Indonesia

National level: Palm oil has the largest share (57%) of the world’s vegetable oil exports. The production continues to increase, particularly in Indonesia. Malaysia and Indonesia are the world’s largest producers of palm oil, producing 86% of total global palm oil output in 2006. As palm oil is one of the major natural resources for bioproducts and biofuel production in Indonesia and as large impacts are expected, it was selected as Global-Bio-Pact Case Study.

Palm oil, which is extracted from the fruits of the oil palm, has many uses, for example in food products, cosmetics, animal feed, biofuels, and chemicals. Partly because the oil palm has the highest per-hectare yield of all edible oils and due to the steady increase of Indonesia’s palm oil export, palm oil is foreseen to become one of the most important vegetable oils in the world. Thus, growers in Indonesia are increasing the production of palm oil to meet the global demand. The Indonesian Government promotes palm oil production to become the world's top producer of palm oil and at the same time it is regarded as a major tool of rural socio-economic development.

Although palm oil generates a considerable amount of foreign currency for Indonesia, its production may have significant negative environmental and socio-economic impacts resulting from large scale palm oil production. Examples are expropriation of community forest land, which deprives local communities of their livelihood resources. Large scale oil palm cultivation may also undermine local employment. Three main ownership models are investigated in the Global-Bio-Pact project:

• Private plantations
• State owned plantations
• Independent smallholders

Regional level: The main regional focus is North Sumatra. The region is a major producer of palm oil, contributing 18% of Indonesia’s national production. The sector is a key contributor to the region’s economy and is well established within the region, having originated here. North Sumatra is considered to have the most favourable soil and climatic conditions for plantation development and has well developed infrastructure. Although the full range of ownership models are represented in North Sumatra, the region is particularly notable for having the country’s longest standing plantations and those exhibiting industry best practices. North Sumatra also allows for the study of the entire conversion chain, being home to refineries and downstream processing facilities.

An important feature of the palm oil industry in Indonesia is its regional diversity. Therefore, it was decided to investigate a second region, Jambi, in South Sumatra as a comparison to those in North Sumatra. Like North Sumatra, palm oil production is important to Jambi’s regional economy. However, it represents a contrast in terms of average size of plantations, having smaller, independently owned plantations, and less established infrastructure. Drawing local Case Studies from two regions also allows understanding the impacts of the differing approaches of provincial governments on socio-economic and environmental impacts.

Local level: The first local Case Study of palm oil production in Indonesia is the independent smallholder system in Harapan Makmur Village, Jambi. The village is located in a relatively isolated part of Jambi province. Oil palm smallholders in this village have been cultivating the crop for a maximum of 6 years. They have adopted oil palm independently, purchasing planting materials from traders. The crop has been widely adopted amongst villages, with 70% of village land now used to cultivate oil palm. The socio-economic impacts of palm oil production in this village are mixed: farmers are earning a higher income than with previous crops, selling their fresh fruit bunches to traders, who subsequently sell them on to the nearest palm oil mill. However, the full income potential of palm oil is currently not yet being realized for farmers in this village. Remote from the nearest mill, lacking in extension services and market information, their yields are low and their bargaining position is weak: the price they receive for their crop is significantly lower than factory gate prices. Moreover, in converting large areas of land to oil palm from rice paddy, the village produces far less food than it previously did.

The other Case Studies are drawn from North Sumatra, with studies of a large private plantation associated mill, a contrasting group of independent smallholders, and a palm oil refinery with plans to begin biodiesel production about to be undertaken. These Case Studies have been selected to represent both the entire production and conversion chain of biodiesel from palm oil, but also to capture some of the diversity, particularly in the production stage, present in Indonesia.

The following Global-Bio-Pact report has been published:

WRIGHT A. (2011)
Global-Bio-Pact Case Study: Socio-Economic Impacts of the Palm oil chain in Indonesia
GBI; Report of the FP7 Global-Bio-Pact Project (FP7-245085) [download]