Formulation of Alternative Strategies for Indonesian Crude Palm Oil Palm Production Area

4.4.3 Model Validation

Model validation was undertaken by using the standard t-tests, F-tests, and R 2 procedures where applicable in this analysis. Mean Squared Error MSE and Theil’s inequality coefficient techniques were applied to assess the overall reliability of each model. MSE depends upon the units in which the variable is expressed. The magnitude of the error does not give any indication of how large the error is, therefore, this error can be assessed only by comparing it with the average size of the variable in question. However, the main advantage of MSE is that it can be decomposed into various components, which show the deviation between the simulated and actual values. Theil’s method of decomposition was applied

4.5 Formulation of Alternative Strategies for Indonesian Crude Palm Oil

In order to improve the competitiveness of Indonesian CPO in the world market, the researcher was to propose the alternative strategies for the CPO industry. In this situation, the method used was through interviews with personalities who have been working with Indonesian CPO sector. In this case, the qualitative method was used to come up with strategies that would increase the benefits of CPO to the Indonesian community as a whole. The interviews were carried out after which results were evaluated. Those interviewed included the lecturers, students and staff of PT Unilever Indonesia Tbk in Jakarta. The Unilever staff were chosen as their organization is the leading consumers of Indonesian CPO locally. The analysis involved the usage of SWOT analysis method in which the strengths, weaknesses, opportunities and threats of the sector were critically analyzed.

4.6 Data Sources and Descriptions

In general, two groups of data were used in this study, namely, palm oil and macro-economic related data. The former data consisted of oil palm mature area, production, consumption, export, import, stock, and edible oil prices. The data sources included Indonesia palm oil statistics 2004-2006 and oil world 2007. Macro-economic related data consisted of data such as population, income per capita, GDP, exchange rate, and interest rate. The main source of these data is Bank of Indonesia and BPS. Data for econometric analysis were used on quarterly basis while those for competitive analysis were on yearly based.

V. RESULTS AND DISCUSSION

5.1 Palm Production Area

During the last twenty years, the history of the crude palm oil CPO industry in Indonesia is one of evolution from government sponsorship and market interventions to private sector initiative in response to international price signals and market growth. Until the early 1990s, most CPO was produced on publicly-owned estates, but this changed rapidly in the following decade as existing plants matured. As indicated in Table 7, in 1985 Indonesia had about 597 362 hectare of palm plantation, in which 335 195 ha of it was owned by government. In 2005, the area for palm plantation increased by more than 800 percent to more than 5 million hectares, and the majority of it is owned by the private sector. In terms of yield, in 1985 total production was around 1 243 430 tons and around 69 percent came from state-owned estates as compared to only 27.3 and 3.7 percent from private estates and smallholder farmers perkebunan rakyat , respectively. The latter is mostly carried out in small scale but the number of units is larger than estates run by the private sector or government. In 2005, total production was about 10 times the 1985 level, with the private sector as the largest producer, followed by people small-scale plantations. The acreage under the oil palm kept on increasing at a steady rate. In 2006, the area under oil palm at the national level increased to 6 million in which smallholders accounted for 2.6 million hectares, private plantations had 2.7 million hectares, while the government had 0.7 million hectares. In the year 2007, the area that was under palm oil cultivation was equally shared by the smallholders and private plantations. Smallholders contributed to about 44.5 percent, private plantations about 44.3 percent while government only had a share of about 11.2 percent Table 7. Areas of Palm Oil Plantation in Indonesia by Ownership, Year 1985 to 2007 Year Smallholders ha Government plantations ha Private plantations ha Total ha 1985 118564 335195 143603 597362 1990 291338 372246 463093 1126677 1991 384594 395183 531219 1310996 1992 439468 389761 638241 1467470 1993 502332 380746 730109 1613187 1994 572544 386309 845296 1804149 1995 658536 404732 961718 2024986 1996 738887 426804 1083823 2249514 1997 813175 517064 1592057 2922296 1998 890506 556640 2113050 3560196 1999 1041046 576999 2283757 3901802 2000 1166758 588125 2403194 4158077 2001 1561031 609943 2542457 4713431 2002 1808424 631565 2627069 5067058 2003 1827844 645823 2765504 5239171 2004 2220338 605865 2458520 5284723 2005 2356895 529854 2567068 5453817 2006 2636425 696699 2741802 6074926 2007 2857777 717803 2849481 6425061 Source: BPS, 2006. Note: The values are forecast for that year The growth trend of palm plantation in Indonesia by ownership shows an interesting fact that during the period 2000-2005, the average growth rate of smallholder farmer plantations was the highest in the group, at 12.85 percent as compared to 3.02 and 4.99 percent of state owned and private estates, respectively. Even in 2000, the people ownership of oil palm plantation in Indonesia had already reached about 1 166 800 hectares, compared to 588 100 hectares and 2 403 200 hectares of state owned and private estates respectively as in Figure 6. As the time passes by, there is a great improvement in the ownership of oil palm plantations by smallholders in Indonesia. The area under oil palm cultivation keeps on increasing at a positive rate. In 2005, there was slight reduction in total area under oil palm as can be shown from the Figure 7. However, a positive trend was witnessed in 2006 and 2007. In 2007, the area under oil palm cultivation increased to 6.43 million hectares from 6.08 million hectares in 2006. In that period, the area cultivated by smallholders was slightly less than that of private plantations in 2006 where 2.64 million hectares against 2.74 million hectares owned by private firms. In the year 2007, smallholders surpassed the private firms when they cultivated about 2.86 million hectares as compared to 2.85 million hectares by private plantations. The government plantations however have rather been recording very slight increment in the acreage under oil palm in Indonesia. 1000000 2000000 3000000 4000000 5000000 6000000 7000000 Ar e a un de r pa lm oi l in ha Year Smallholders Government plantations Private plantations Total Source: BPS, 2006. Figure 7. Growth trend of Palm Oil in Indonesia by Ownership, Year 1995- 2007 Note: The values are forecast for that year Although there are some constraints for land expansion of palm plantation due to many factors such as urbanization, population growth, development of new industrial estates and road constructions, it is expected that the area for palm plantation in Indonesia will continue to grow. As observed in Figure 8, in 2005, it is registered about 5.6 million ha of land used for this crop with an average growth rate per year about 6.9 percent since 2000. In 2009, the total area is expected to reach 7.125 million ha, and the private sector will be expected stay as the leader that in 2009 will have almost 3.05 million hectares, compared to smallholder plantation slightly above 3.3 million hectares and state owned much less than a million ha. 500000 1000000 1500000 2000000 2500000 3000000 3500000 199 199 1 199 2 199 3 199 4 199 5 199 6 199 7 199 8 199 9 200 200 1 200 2 200 3 200 4 200 5 200 6 200 7 200 8 200 9 P rod uc ti on Ar e a und e r Oi l Pa lm in ha Year Smallholders Government plantations Private plantations Source: BPS, 2006. Figure 8. Long term Growth of Palm Oil Plantation Area in Indonesia Note: The values are forecast for that year The relationship between land availability for palm plantation and levels of urbanization, industrialization and population density is very observable by province. As can be seen in Table 8, in West Java, the palm plantation area is much smaller as compared to those in other provinces. Sumatera has always been the key area for palm production in the country with Riau as the leading province that produces palm oil in Indonesia. Currently, the potential of land availability for palm plantation in Indonesia is about 26 million hectares scattering from Aceh to Papua. Interestingly, Papua is the largest province with more than 6 million hectares of land available, followed by other traditional provinces in the western part as the center for palm oil production in Indonesia, i.e. Riau with about 2.6 million, Jambi 1.8 million, South Sumatera 1.5 million, and Kalimantan in the central part of the country with a total of 6 million hectares. Based on productive area under palm oil, Sumatra is the main area and accounts for about 75 percent of the total area under oil palm plantation that translates to about 4.6 million hectares under the crop. Table 8. Area of Palm Oil Plantation in Indonesia by Province in Hectares, Year 2003 to 2006 Province 2003 2004 2005 2006 Nangroe Aceh D 262161 249011 254261 283283 North Sumatra 919680 844882 894911 1044230 West Sumatra 306496 279798 282518 310281 Riau 1319659 1346885 1291401 1424651 Jambi 456327 372804 403477 448027 South Sumatra 502481 497933 548678 606667 Bangka Belitung 94886 119635 130037 138367 Bengkulu 80218 126252 147125 162440 Lampung 137721 145542 148535 164786 Banten 19200 12614 14076 17322 West Java 6242 8070 8744 10666 West Kalimantan 416807 358175 381791 434459 Central Kalimantan 241615 401663 434481 467120 South Kalimantan 141638 172650 134621 146320 East Kalimantan 201871 171581 201236 219906 Central Sulawesi 43743 48236 48334 53220 South Sulawesi 78932 13925 16018 19244 West Sulawesi 4078 52476 57942 622203 Papua 49812 51051 39090 43232 Irian west Jaya - 11540 16540 18502 Total 5283557 5284723 5453817 6074926 Source: BPS, 2006. Note: The values are forecast for that year In the world as a whole, Indonesia is one of the countries that have the largest area under oil palm cultivation. According to the Oil World data, 2007, Indonesia has the largest area under oil palm followed by Malaysia. With regard to mature area, it has recorded an upward trend with time. In 2005, Indonesia had 3.69 million hectares as mature area as compared to Malaysian 3.55 million hectares. It further increased this mature area to 4.11 and 4.55 million hectares in 2006 and 2007 respectively. As can be shown in Table 9, during the same period, Malaysia registered 3.68 and 3.79 million hectares, respectively. It is expected that in 2008, the mature area will increase to over 5 million hectares as compared to that of Malaysia of about 4 million hectares. Table 9. Mature Area under Palm Oil, Year 2005-2008 Mature area in 000’ hectares Country 2005 2006 2007 2008 Ivory Coast 160 167 168 170 Nigeriaa 370 378 390 405 Costa Rica 50 53 55 58 Honduras 69 73 75 78 Mexico 18 22 24 26 Brazil 57 61 66 73 Colombia 170 184 200 220 Ecuador 150 162 178 193 Indonesia 3690 4110 4550 5010 Malaysia 3552 3678 3790 3910 Thailand 316 338 375 410 Papua New Guinea 88 92 96 100 Other countries 497 515 535 577 W0RLD 9186 9833 10502 11230 Source: Oil World, 2007. Note: The values are forecast for that year With respect to the Gross Domestic Product GDP contribution, it was found that in 2005 the prevailing market value of palm plantation was Rp 43.4 trillion that accounted for about 11.87 percent of GDP contributed by agriculture or 1.79 percent of GDP non-oil and gas as shown in Table 10 below. During the period 2003-2005, the rate of output growth of palm plantation is much higher than that of agriculture as a whole, i.e. at almost 18 percent versus 8 percent. Table 10. Gross Domestic Product Contribution of Palm Oil Industry in Indonesia, Year 2003-2005 Sector 2003 2004 2005 Growth rate per year Palm Rp trillion 31.3 35.3 43.4 17.8 Agriculture Rp trillion 313.7 331.5 365.6 8.0 Non-oil gas Rp trillion 1900.2 2060.6 2427.6 13.1 Total GDP Rp trillion 2086.8 2261.7 2729.7 14.5 Share in agriculture 9.9 10.65 11.9 9.1 Share in non-oil gas 1.7 1.71 1.8 4.1 Source: BPS, 2006.

5.2. Development of Crude Palm Oil Production