The Economic Benefit of Palm Oil in Indonesia

Sustainable Development

Sustainable development of palm oil plantations and growth of the palm oil industry in developing nations can and will be achieved through consultation and collaboration with industry, growers, lobby groups and the wider community.

Climate and the Environment

Palm Oil is a highly efficient, high yielding source of food and fuel. Palm Oil plantations are an efficient way of producing fossil fuel alternatives and capturing carbon from the atmosphere.

Opportunity and Prosperity

Developing nations must be allowed the chance to grow and develop without political intervention by environmental groups or developed nations. It is crucial that developing nations be given the same opportunities which developed nations have benefited from.

Property Rights

Efficient palm oil plantations and the growing demand for palm oil give smaller land holders greater opportunities to make a living off their land, maintain their ownership and support their rights to property and prosperity.

2 • The Economic Benefit of Palm Oil to Indonesia

Table of Contents

Executive Summary .......................4 Palm Oil’s Contribution to the Indonesian Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

I. Introduction .............................5 Palm Oil and Rural Development

II. Global Economic Importance of Palm Oil .....6 in Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Trends in the Global Production

Returns from Palm Oil Production . . . . . . . . . . 14 and Trade of Palm Oil . . . . . . . . . . . . . . . . . . . . . 6

IV. Future Prospects for Palm Oil . . . . . . . . . . . . . . 15 Trends in the Global Consumption of Palm Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Future Prospects for Global Palm Oil Demand . . . . . . . . . . . . . . . . . . . . . . . . 15

Trends in the Global Consumption of Vegetable Oils . . . . . . . . . . . . . . . . . . . . . . . . . 9

Global Palm Oil Production and Opportunities . . . . . . . . . . . . . . . . . . . . . . . 15

III. Economic Importance of Palm Oil to Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Key Challenges and Opportunities for the Indonesian Oil Palm Sector . . . . . . . . . . . . . . . . 16

Agriculture’s Contribution to the Indonesian Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Annex

Palm Oil Production and Poverty by Province . . . . 26

The Economic Benefit of Palm Oil to Indonesia • 3

4 •The Economic Benefit of Palm Oil to Indonesia

Executive Summary

Environmental NGO’s have been pushing a “no- conversion” agenda, in an attempt to halt the conver- sion of forest land to agriculture, including palm oil plantations. This agenda has extended into the opera- tions of international organisations and governments.

In May 2010, the Indonesia and Norway signed a Letter of Intent comprising a framework for Indonesia to receive financial contributions from the Norwegian Government in return for the implementation of emission reducing policies, including a two-year sus- pension on all new concessions for conversion of peat and natural forest.

In July 2010, The World Bank proposed a framework for its engagement in the palm oil sector, acting at the behest of environmental NGOs to toughen the policies of the Group on the terms financial support is provid-

ed to Palm Oil projects. A revised version of the frame- work was released for consultation in January 2011.

Restrictions on the conversion of forest area will neg- atively impact economic growth and food security in Indonesia and directly impact those living in poverty. For this reason, developing countries refused to include “no conversion” in the approach to forestry and REDD at the UN Climate Change conference in Cancun in December 2010.

Economic Benefits of Palm Oil

The palm oil industry has the potential to generate significant economic and social development in Indonesia. Palm oil is Indonesia’s second most suc- cessful agricultural product, after rice paddy, and largest agricultural export. It provides a means of income and economic development to a large number Indonesia’s rural poor. The Indonesian palm oil

industry is expected to continue its rapid growth in the medium-term; however, its competitiveness will

be negatively impacted by the anti-palm oil agenda. The global market for palm oil has experienced rapid

growth in recent decades with current production of palm oil estimated at over 45 million tonnes. Indonesia is one of the world’s largest producers and exporters of palm oil, producing over 18 million tonnes of palm oil, annually.

Agriculture and Regional Poverty

Although only contributing around 14 percent to GDP, agriculture provides employment for over 41 percent of the Indonesian population and provides around two-thirds of rural household income. The palm oil industry is a significant contributor to rural income in Indonesia. In 2008, over 41 percent of oil palm plantations were owned by small land holders, producing 6.6 million tonnes of palm oil.

With over half of Indonesia’s population lives in rural areas—of which over 20 percent live below the poverty line—the palm oil industry provides an incomparable means of poverty alleviation. Limiting the conversion of forest to agriculture or palm denies considerable prospective economic benefits and improvements in living standards to the rural population, condemning them to declining standards of subsistence.

Future Industry Growth

With global demand for palm oil expected to grow further into the future, palm oil offers the most prom- ising economic prospects for Indonesia. World pro- duction of palm oil is expected to increase by 32 percent to almost 60 million tonnes by 2020.

Restrictions on the conversion of forests to oil palm plantations Indonesia would reduce the availability of fertile land and impede expansion of the industry. Government policies should aim to improve produc- tivity and not implement anti-growth NGO policies.

Restrictions on the conversion of forest area will negatively impact economic growth and food security in Indonesia and directly impact those

living in poverty.

EXECUTIVE SU MMAR

I. Introduction

assessment of the economic benefits of the palm oil industry to inform policy makers and officials. It exam-

Indonesia is one of the world’s largest producers of ines recent industry performance and considers the palm oil and the industry has been the economy’s most

prospects for future growth. Key components include: valuable agricultural export sector for the past decade. • Current trends and future projections for global oil The palm oil industry is a significant contributor to

demand;

production in Indonesia. In 2008, Indonesia produced over 18 million tonnes of palm oil. The industry also

• The contribution of agriculture and palm oil to the contributes to regional development as a significant

Indonesian economy;

source of poverty alleviation through farm cultivation

ODUCTION

and downstream processing. Palm oil production pro- • Palm oil’s contribution to rural development; and vides a reliable form of income for a large number of

TR N

Indonesia’s rural poor, with one source suggesting • Key challenges and opportunities for the Indonesian

I.

that employment generated from palm oil production

palm oil industry.

in Indonesia could potentially reach over 6 million lives and take them out of poverty. Over 6.6 million tonnes of palm oil is produced by smallholders repre- senting over 41 percent of total palm oil plantations.

This report has been prepared as an independent

In 2006, it was found that around 1.7 to 2 million people worked in the palm oil industry.

assessment of the economic benefits of the palm

oil industry to inform policy makers and officials.

The Indonesian palm oil industry has recently come

under fire from a number of NGOs who have cam- paigned against the industry and its perceived contri- bution to deforestation, carbon emissions, and biodiversity loss. As a result, there have been wide spread complaints that palm oil is not sustainable and proposals to have all future forest land conversion halted or restricted.

In May 2010, the Indonesian Government foreshad- owed a two-year moratorium on new concessions to clear natural forests and peatland under a deal signed with the Norwegian Government, aimed at reducing greenhouse gases. In return for the agreement, Norway has agreed to invest $1 billion in forest conservation projects in Indonesia. A year prior, the Indonesian government had announced it would dou- ble palm oil production to 40 million tonnes by 2020. The successful growth of the Indonesian palm oil industry will be impacted greatly by any restrictions on land conversion as well as negative campaigns targeting the industry. The achievement of the Indonesian government’s target of doubling oil palm production will also be significantly impacted by the moratorium, as some level of land conversion is required for economic development.

This report has been prepared as an independent

The Economic Benefit of Palm Oil to Indonesia • 5

6 • The Economic Benefit of Palm Oil to Indonesia

II. GLOB

AL EC

ONO M

IC IMPOR

T ANCE OF P

A LM OI

II. Global Economic Importance of Palm Oil

Palm oil is a vegetable oil derived from the fruit of the palm tree, it is used for both food and non-food con- sumption. Total global production of palm oil is esti- mated at over 45 million tonnes, with Indonesia and Malaysia as the major world producers and exporters. Major importers include India, China and the European Union.

The palm oil industry has experienced rapid growth in recent decades, and has become a significant contrib- utor to the world market for vegetable oils. Demand for palm oil has further increased in recent years as many developed economies are shifting away from the use of trans-fats, to healthier alternatives. Palm oil is often used as a substitute for trans-fat as it is one of the few highly saturated vegetable fats that are semi-solid at room temperature, and is relatively low cost.

World trade in palm oil has increased significantly due to increased global demand. However, there has also been public concern surrounding the impact of palm

oil on deforestation, carbon emissions and biodiversi- ty loss. High returns have encouraged investment in the Indonesian palm oil industry, and the resulting industry growth has contributed significantly to rural economic development and poverty alleviation. However, despite the expected increase in future demand, land use restrictions (such as the recent two year moratorium on new concessions to clear natural forests and peatland in Indonesia) may constrain industry development, as some level of land conver- sion is needed for industry growth.

Trends in the Global Production and Trade of Palm Oil

Originating in Africa, the oil palm was introduced into Malaysia and Indonesia in the colonial period. Current cultivation is concentrated in the tropical areas of the Americas, Africa and Southeast Asia, particularly Indonesia and Malaysia—where the climatic growing conditions are ideally suited for palm oil trees. Other key palm oil producing countries include Nigeria, Thailand, Columbia, Ecuador and other African economies.

Source: Koh and Wilcove 2008

Fig. 2.1

Oil Palm Cultivation in 43 Oil Palm Producing Countries in 2006

Costa Rica

Dominican Republic

Democratic Republic of Congo

Angola

Madagascar > 1 million ha 100,000 to 1 million ha 10,000 to 100,000 ha < 10,000 ha

Gabon

Central African Republic

Ivory Coast

Sierra Leone Liberia Guinea

Cameroon

Sao Tome & Principe

Congo

Equatorial Guinea

Senegal & Gambia

Guinea Bissau

China

Thailand

Malaysia Papua New Guinea

Philippines

Indonesia Soloman Islands

Fig. 2.2

World Palm Oil Production 1989-2007

45 tonnes (millions) 40

South East Asia (other)

Note: Rest of the World contains all other countries except as individual listed, including other South East Asian countries Source: FAO 2010.

Total world production of palm oil has increased

High returns have encouraged investment in the

almost threefold over the past 3 decades to 2009 1 . In

2009/10, total palm oil production was estimated at

Indonesian palm oil industry, and the resulting

45.1 million tonnes, 2 with Indonesia and Malaysia accounting for more than 85 percent of the world total.

industry growth has contributed significantly to

Indonesia and Malaysia each produced over 18 million tonnes of palm oil.

rural economic development and poverty alleviation.

Total trade in palm oil and palm kernel oil is over 35 million tonnes, imported and exported. Major

ucts including in the production of bio-fuel, soaps, exporters of palm oil include Indonesia and Malaysia

detergents and surfactants, cosmetics, pharmaceuti- who exported 15.7 and 15.1 million tonnes, respective-

cals and a wide variety of other household and indus- ly. Key importing economies included India, China

trial products. In 2009, the world consumed and the European Union, who imported 6.7 million,

approximately 6.5 kilograms of palm oil per capita,

6.3 million and 4.6 million tonnes, respectively. 3 annually. 4 Palm oil and palm kernel oil uses, in both food and non-food products, have been growing sig-

Trends in the Global Consumption of Palm Oil

nificantly. By 2020, global consumption of palm oil is expected to grow to almost 60 million tonnes.

Approximately 80 percent of global palm oil produc- tion is used for food purposes including as cooking oil,

World demand for palm oil is also increasing, and like- in margarines, noodles, baked goods etc. In addition,

ly to further increase, as developing economies move palm oil is used as an ingredient in non edible prod-

away from manufactured trans-fats to healthier alter-

1 FAO (2010) 2 FARPI (2010) 3 FAO (2010) 4 FARPI (2010)

The Economic Benefit of Palm Oil to Indonesia • 7 The Economic Benefit of Palm Oil to Indonesia • 7

percent of the world’s bio-diesel production 5 . cial food, particularly fast food and the snack and

Approximately 95 percent of the world’s energy con- baked-good industries. Artificial and synthetic trans-

sumption is sourced from fossil fuels; by 2030 energy fats are created by the processed food industry from

consumption is expected to increase by a further 50 partially hydrogenating unsaturated plant fats.

percent. 6 Many economies are setting targets to convert Recently, developed economies have recognised the

reliance on fossil fuels to greater use of renewable energy health risks of trans-fats, and have begun to limiting

in efforts to reduce GHG emissions. One such renew- their use. Countries such as Demark, Switzerland and

able energy source that has grown significantly over the some U.S counties have banned the use of trans-fats in

last decade is bio-fuel. Palm oil is widely used as a feed- restaurants and fast food chains. Other countries such

stock in bio-diesel production. Although dependent on as the United Kingdom, Canada and Brazil have imle-

government policies, the increased use of bio-fuels is mented policies aimed at reducing the use of trans-

expected to facilitate further demand growth for palm fats, including the requirement for trans-fats to be

oil. The OECD is expecting the global usage of vegetable listed on food labels. In substitute for trans-fats, the

oils in bio-diesel production to more than double demand for palm oil has increased. In addition to

between 2006-08 and 2018. 7 Palm oil is the most cost being a source of healthy unsaturated fats, palm oil is

competitive vegetable oil for producing bio-diesel. 8 odourless and tasteless and does not require hydro-

Many economies are currently adopting policies that genation to achieve a solid state. These characteristics

encourage the use of bio-fuel. If such blending mandates make palm oil ideal for margarine, baked goods and

are enforced an extra 4 million hectares of oil palm packaged goods, making it a strong competitor with

would be needed to meet European Union require- vegetable oils made from soybeans and rapeseed that

ments alone. A further one million hectares may be require hydrogenation to achieve a solid state. In addi-

needed to satisfy China’s requirements, making bio-fuel tion, palm oil is tolerant to high heat making it useful

production even more attractive. 9 in the fried food and fast food industries. Investment in bio-diesel processing capacity is increas- Palm oil’s increasing contribution to the bio-fuels indus-

ing; the Indonesian and Malaysian governments have try is also stimulating further demand. However, this

introduced policies to develop a bio-diesel industry and demand is relatively low as compared with other

targets of allocating 6 million tonnes of palm oil to the industry each year. 10 An oil refiner in Finland (Neste Oil) has built the world’s largest bio-diesel plant in Singapore 11 and another major producer (Sime Darby

Investment in bio-diesel processing capacity Berhad) has an annual processing capacity of 200,000

tonnes of biodiesel in the Netherlands. 12 However, in

is increasing; the Indonesian and Malaysian some cases, palm oils penetration of the bio-fuel mar-

ket has been distorted by government assistance meas-

governments have introduced policies to develop ures. For example, the use of palm oil has been stymied

by European Union protectionist policies against the

a bio-diesel industry and targets of allocating

importation of palm oil for use as a biofuel. In 2008, the European Parliament issued the Renewable Energy

6 million tonnes of palm oil to the Directive restricted the use of palm oil based bio-fuels,

due to environmental and social concerns. This will

industry each year. have direct implications for the global demand for

5 Sheil et al (2009) 6 Sheil et al (2009) 7 OECD-FAO (2009) 8 Thoenes (2006) 9 Sheil et al (2009)

10 Thoenes (2006) 11 Neste Oil (2007) 12 Darby Sime

8 • The Economic Benefit of Palm Oil to Indonesia

Fig. 2.3

World Consumption of Vegetable Oils, 1980-2009

Type of Vegetable Oil

Soybean Oil 13.4 33.7 16.1 26.5 25.6 27.7 35.9 27.0 Palm Oil

4.5 11.3 11.0 18.1 21.9 23.7 45.1 34.0 Rapeseed Oil

3.5 8.8 8.2 13.5 14.5 15.7 21.5 16.2 Sunflower Oil

5.0 12.6 7.9 12.9 9.7 10.5 13.0 9.8 Palm Kernel Oil

0.6 1.5 1.5 2.5 2.7 2.9 5.2 3.9 Other Vegetable Oils

Total Vegetable Oils 39.8 60.8 92.5 132.8

Note: Quantity in millions of tonnes Source: Oil World (2010), in Hai Teoh (2010)

palm oil as the European Union is the world’s largest percent; the main vegetable oil on world markets was consumer of bio-fuels.

soybean, accounting for approximately a third of total consumption. The market share of soybean has since

Trends in the Global Consumption

fallen, with palm oil becoming the major consumed

of Vegetable Oils

vegetable oil. In 30 years, palm oil consumption has increased tenfold from 4.5 to 45 million tonnes

Over the past 3 decades, there has been a substantial (including growth of 100 percent in the last decade) growth in the global consumption of vegetable oil.

and now comprises 34 percent of the world market. In Between 1980 and 2008 consumption increased more

2009, despite consumption of soybean oil increasing than threefold from 40 million tonnes to over 130 mil-

by 22.5 million tonnes, its market share had fallen to lion tonnes. In addition, there has been a significant

27 percent. Rapeseed and sunflower oil’s market shift in the relative market share of different vegetable

shares were 16 percent and 10 percent, respectively. oils. In 1980, the market share for palm oil was 11

The Economic Benefit of Palm Oil to Indonesia • 9

II

I. EC

III. Economic Importance of Palm Oil

The structural composition of the Indonesian economy

ONO

to Indonesia

has changed significantly in the past four decades. As with most economies in the region, it has shifted from

M a primarily agrarian economy towards the industry and

Indonesia’s GDP was estimated at $USD 510.77 billion

IC IMPOR services sectors. Nowadays, Indonesian production is T

in 2008, classifying it as a lower middle income coun-

try. Over the past decade, GDP growth has averaged largely dominated by the industrial sector, contributing

OI

almost 5 percent (6.0 percent in 2008) and population just over 48 percent to total economic activity, includ-

growth has averaged 1.2 percent. GDP per capita has ing the oil and gas which contribute to over 10 percent

DON

also grown steadily. Indonesia’s population is expected of GDP. 14 The services sector and agriculture sector to continue to grow at an annual growth rate of 0.57

contribute 38 percent and 14 percent, respectively. T 15 ANCE OF P

percent to over 271 million by 2030. 13

ESIA

Agriculture’s Contribution to the Indonesian Economy

Nowadays, Indonesian production is largely

Indonesia’s major agricultural products include rice

dominated by the industrial sector, contributing paddy, palm oil, chicken meat, coconuts and rubber,

A LM OI with major exports including Indonesia’s palm oil,

just over 48 percent to total economic activity, rubber, palm kernel oil, cocoa and coffee. The contri-

bution of agriculture to GDP has steady decreased

including the oil and gas which contribute to over the past 20 years. In 2008, the agriculture sector

contributed 14.4 percent of GDP (as compared with

over 10 percent of GDP. around 22.5 percent in 1988 and 18.1 percent in 1998).

Fig. 3.1 Structure of the Indonesian Economy, 1960 to 2005

Source: World Bank (2010)

13 UN Data (2010) 14 Statistics Indonesia (2010)b 15 OECD (2010)

10 • The Economic Benefit of Palm Oil to Indonesia

Fig. 3.2 Indonesian Commodity Share of Agricultural Production, 2009

Rice Paddy Palm Oil Chicken Meat Coconuts Natural Rubber Other

Source: FAO (2010)b

Palm Oil’s Contribution to the Indonesian Economy

small shareholders and the remaining 10 percent by Government plantations. Private plantations repre-

Palm oil is Indonesia’s second largest agricultural sent the largest producers of palm oil in Indonesia, product; in 2008, Indonesia produced over 18 million

producing over 9.4 million tonnes of palm oil valued in tonnes of palm oil. For the last decade, palm oil has

2008. In the same year smallholder plantations pro- been Indonesia’s most significant agricultural export.

duced 6.7 million tonnes of palm oil and Government In 2008, Indonesia exported over $14.5 billion in palm

plantations produced 2.2 million tonnes of palm oil. oil related products. 16 The Indonesian palm oil indus- try has experienced significant growth in recent years

Palm Oil and Rural Development in Indonesia

with approximately 1.3 million ha of new area dedicat-

ed to palm oil plantations since 2005, reaching almost Poverty in Indonesia is largely a rural occurrence. In

5 million ha in 2007 (representing 10.3 percent of the 2009, of 32.5 million Indonesians living below the

national poverty line, 20.6 million were located in rural expansion is due to higher returns driven by stronger demand. The majority of Indonesia’s palm crop is located in Sumatra, with over 75 percent of total mature palm area and 80 percent of total palm oil pro-

48.1 million ha of agricultural land). 17 This substantial

For the last decade, palm oil has been Indonesia’s

duction. 18 Key Indonesian production provinces include Riau, Sumatera Utara, Sumatera Selatan,

most significant agricultural export. In 2008,

Jambi and Sumatera Barat.

Indonesia exported over $14.5 billion in palm oil

In 2008, approximately 49 percent of palm oil planta- tions were owned by private plantations, 41 percent by

related products.

16 Indonesian Palm Oil Commission (2008), GAPKI(2009), Statistics vary amongst sources, unofficial FAO (2010) statistics estimate production in 2008 at over 16.9 million tonnes. 17 As measured by the FAO (2010) 18 USDA (2009)

The Economic Benefit of Palm Oil to Indonesia • 11

Fig. 3.3 Key Palm Oil Areas in Malaysia and Indonesia

BRUNEI

Sabah

Nanggroe Nanggroe Nanggroe Aceh Aceh Aceh Darussalam Darussalam Darussalam

West West West

Kalimantan

Sumatra Sumatra Sumatra

West Jambi

South South South Kalimantan Kalimantan Kalimantan

TIMOR LESTE

AUSTRALIA

Source: Sheil, D. et al (2009), pg 4

areas. The percentage of poor in rural areas of Indonesia rural household income (wages and farming vastly outweighs that of their urban counterparts, with

income) 21 . A 2004 study showed that agricultural GDP over 17.3 percent of the rural population below the pover-

growth in Indonesia is beneficial in reducing poverty, ty line, as compared with 10.7 percent in urban areas. 19 particularly in rural areas. Specifically, annual growth

This overall poverty rate doesn’t account for the millions of 1 percent was found to reduce total poverty by 1.9

percentage points (urban poverty by 1.1 percentage Fund for Agricultural Development (IFAD) found that

who live just above the poverty line. 20 The International

points and rural poverty by 2.9 percentage points) 22 . the poorest people in rural areas tend to be farm labour-

World growth (2009) noted that over the past decade, ers working on other peoples land, and smallholders on

industry expansion—specifically palm oil—has been a small plots of land less than 0.5 hectares.

significant source of poverty alleviation through farm cultivation and downstream processing.

Over half of Indonesia’s population is located in rural areas. In 2002, agriculture represented two thirds of

Significant growth in the palm oil industry, has led to rural employment and contributed to almost half of

palm oil becoming component of economic activity in regional economies. In certain regions, palm oil is the dominant estate crop and major contributor to eco- nomic development. In the past decade, the palm oil

Significant growth in the palm oil industry, has plantation areas of Kalimantan and Suliwesi have expe-

rienced strong development, averaging 13 percent and 8

led to palm oil becoming component of economic percent annual growth rates, respectively. 23 The planta-

tion and harvesting of oil palm is labour intensive, as

activity in regional economies. such, the industry contributes a significant portion of

19 Statistics Indonesia (2010) 20 IFAD, accessed September 2010 21 ADB (2006), pg 3 22 Sumatro and Suryahadi (2004) in ADB(2006) 23 USDA (2009)

12 • The Economic Benefit of Palm Oil to Indonesia

Fig. 3.4 Production, Land Area and Yield by Plantation Type, 2002 -2008

25 4 hectares/tonnes (millions)

2008 Production (Other)

Yield (Other) Production (Smallholders)

Mature Land Area (Other)

Mature Land Area (Smallholders)

Yield (Smallholders)

Note: Yield is calculated as total production to mature palm oil plantation area. Other is total production less smallholder production. Source: World Growth calculations from Indonesian Palm Oil Commission statistics

employment in many regional areas. Goenadi (2008)

Goenadi (2008) estimates that employment

estimates that employment generated from palm oil production in Indonesia could potentially reach over 6

generated from palm oil production in Indonesia

million lives and take them out of poverty. 24 Additional

benefits to palm oil workers have included secure

could potentially reach over 6 million lives and

incomes, access to healthcare and education. 25 Palm oil

production provides many of the rural poor with a sus-

take them out of poverty.

tainable income; with key palm oil developments such as Sumatera and Riau also having a significant percent- age of rural poor. Annex 1 outlines palm oil production

plantations were owned by smallholders, with a fur- and poverty statistics for key Indonesian provinces.

ther 49 percent owned by private plantations—the remaining 10 percent is owned by government. The

The Contribution of Palm Oil to

palm oil industry makes a substantial contribution to

Local Economies and Small Land Holders

rural incomes, particularly small land holders. In 1997, the average net income of oil palm smallholders was

Palm oil provides employment for many small land- seven times that of farmers involved in subsistence holders, with over 6.7 million tonnes of palm oil pro-

production of food crops. 27

duced by smallholders in 2008. In 2006, it was found that around 1.7 to 2 million people worked in the palm

The importance of the palm oil industry to rural devel- oil industry. 26 In 2008, the Indonesian palm oil com-

opment has been recognised by both the Indonesian mission found that over 41 percent of total palm oil

Government and the private sector. For example, the

24 Goenadi (2008), pg 3. 25 Sheil, D. et al (2009) 26 Zen et al (2006) and Sheil, D. et al (2009) 27 Hardter et al (1997), pg 99

The Economic Benefit of Palm Oil to Indonesia • 13

Indonesian Government has previously implemented are able to yield 5 tonnes of palm oil per hectare,

a series of rural and socio-economic improvement pro-

annually. 29

grams directed at small oil palm landholders. Until 2001, the use of palm oil ‘nucleus estates’ was suggested

Historically, smallholder plantations have been less to raise the income of over 500,000 farmers. Zen et. al

productive than other palm oil plantations. In 2008, (2006) have also found initiatives by commercial palm

production per hectare for smallholders was estimated oil enterprises aimed at improving the socio-economic

at 3.04 tonnes/ha as compared with 3.7 tonnes/ha for status of many rural populations. For example, in

government plantations and private plantations. 30 1996, a Sumatran company distributed three cows to

World Growth (2009) found that there is considerable the families of each of its 500 employees to graze on oil

potential for small holders in Indonesia to expand out- palm waste and kernel cake. By 2003, the number of

put on existing acreages through the use of fertiliser cattle had doubled, area harvested per worker had

and new genetic stock. 31

increased from 10 to 15 hectares, and worker incomes had been proportionately increased. Other commercial

Goenadi (2008) suggests that, because of the growing initiatives have included community palm oil areas

climate in Indonesia, palm oil yields may potentially be and nucleus estates.

as high as 6-7 tonnes per hectare. However, in 2008, Indonesia was averaging between 3-4 tonnes of palm oil

Returns from Palm Oil Production

per hectare. 32 Increasing the yield of palm oil produc- tion gives Indonesia the potential to increase the pro- In terms of land-use, oil palm gives the highest yield

duction without requiring additional land conversion. per unit area as compared with any other crop-based oil seeds. The average oil yield from 1ha of oil palm is

Land-use returns from oil palm are significant as com-

4.09 tonnes, as compared with soybean, sunflower pared with many other forms of land-use. In 2007, a and rapeseed which yields 0.37, 0.5 and 0.75 tonnes,

report prepared for the Stern Review estimated the respectively. 28 Modern high-yielding varieties of palm,

return from palm oil land-use as ranging from under ideal climate conditions and good management

$USD960/ha to $USD3340/ha. This was in compari- son with smallholder rubber, rice fallow, cassava, and one-off timber harvesting which yielded $USD72/ha,

In terms of land-use, oil palm gives the highest $USD28/ha, $USD19/ha and $USD1099/ha, respec-

tively. Specifically, land-use returns for palm oil were

yield per unit area as compared with any other estimated as including: crop-based oil seeds. • $USD960/ha for low yield independent growers;

• $USD2340/ha for high yield independent growers; • $USD2100/ha for supported growers; and • $USD3340/ha for large scale growers. 33

28 Sustainable Development Project (2010) and Oil World (2010) 29 FAO (2002) 30 Indonesian Palm Oil Commission (2008) 31 World Growth (2009), pgs 13 and 14. 32 Indonesian Palm Oil Commission (2008), pg 25. 33 Greig-Gran M (2008)

14 • The Economic Benefit of Palm Oil to Indonesia

The Economic Benefit of Palm Oil to Indonesia • 15

IV . FUTU RE PR OSPECTS FOR P LM OI

IV. Future Prospects for Palm Oil L

Future Prospects for Global Palm Oil Demand

Increased returns from a strong global demand for vegetable oils are expected to encourage investment in the palm oil industry leading to continued growth over the medium term, with global consumption expected

to increase over 30 percent in the next decade. 34 By

2020, global consumption and production of palm oil is expected to increase to almost 60 million tonnes.

The health characteristics and cost competitiveness of palm oil, coupled with its potential contribution to renewable energy, is expected to contribute to a growth of over 30 percent in the next decade. Growth in the palm oil industry has been contributed to by the production cost advantages in oil palm cultivation. Oil palms are a highly productive tree crop in compar- ison to crop based oil seeds—oil yields are 5 to 9 times higher than the yields achieved by soybean, rapeseed and sunflower. There are cost advantages in oil palm from lower land prices and lower energy inputs.

As developed economies shift away from trans-fats towards healthier alternatives, the demand for palm oil will also likely increase relative to its competitors. In the last few years, many developed economies have moved towards reducing and banning trans-fats, as a result many food manufacturers have replaced trans-fats with palm oil. In addition to being cost competitive, palm oil is high in mono-unsaturated fats which are considered

to be advantageous for a lower risk of heart disease. 35

As well as total increased total consumption, per capi- ta consumption of vegetable oils has been increasing in some major developing economies due to strong income growth. Palm oil has benefited from this development due to its relatively high energy per gram of food. In 2009-10 China and India accounted for over 40 percent of the net imports in world trade. Future economic growth in these countries will increase the demand for imported vegetable oils.

Global Palm Oil Production and Opportunities

By 2020, FAPRI estimates that Indonesia will produce almost 30 million tonnes of palm oil, including exports of almost 23 million tonnes. This growth will be achieved through increased yields and further land conversion.

Malaysia appears to have limited opportunity for

In the last few years, many developed economies have moved towards reducing and banning trans-fats, as a result many food manufacturers have replaced trans-fats with palm oil.

Fig. 4.1

Projections of World Palm Oil Supply and Utilization

(‘000 tonnes) (‘000 tonnes) % change

34 OECD-FAO (2009) 35 Malaysian Palm Oil Council (2008) 36 FARPI (2010)

Source: FAPRI 2010

Fig. 4.2 Projections of Palm Oil Supply and Utilization

45 tonnes (millions) 40

Malaysia CONSUMPTION TRADE

World

Indonesia

Source: FAPRI 2010

expansion through land conversion due to land zoning investors looking at plantation growth in West Africa restrictions. Limited land availability is expected to

and Malaysian companies are looking at expansion slow palm oil production growth, particularly in

opportunities in Brazil. 40

Peninsular Malaysia and Sabah.

Key Challenges and Opportunities for the

Yield gains on existing cultivation areas are another

Indonesian Oil Palm Sector

way to expand output. But there are signs that improvements in plantation yields are slowing in

Environmental Challenges

Indonesia and Malaysia. 37 The cost of establishing

new plantations is also increasing because of environ- Increasing global palm oil production, particularly in mental requirements. If these trends continue and

Malaysia and Indonesia has generated gained the land use constraints become more restrictive there

attention of some major NGOs, including Greenpeace, will be opportunities for other suppliers. FAPRI pre-

WWF and Friends of the Earth. Initially, the major dicts that Malaysian palm oil production will increase

opposition to palm oil was over deforestation with by 26.5 percent, to 23.4 million tonnes by 2020,

more recent concerns surrounding the impact of oil slightly less than the predicted Indonesian production

palm expansion on loss of biodiversity (including of 28.5 million tonnes. The favourable outlook for

orang-utan habitat) and CO2 emissions. The central palm oil demand will encourage industry investment

claim of the environmental campaign against the palm in other countries including Nigeria and Thailand

oil industry is that deforestation, especially the conver- who each produced over around 1.3 million tonnes, in

sion of forest land to palm oil, is a major contributor to 2008. 38 Recent reports suggest Chinese companies

CO2 emissions. Palm cultivation on peat land and are negotiating for land in DR Congo and Zambia for

indirect land use changes are often cited as the major

oil palm plantations. 39 There are also reports of

threat to climate change. However, there is consider-

37 Thoenes (2006) 38 FAO (2010) 39 Economist (2009) 40 Reuters (2010)

16 • The Economic Benefit of Palm Oil to Indonesia 16 • The Economic Benefit of Palm Oil to Indonesia

rate of change in forest area in Indonesia from 1990. of deforestation include urban growth, subsistence farming, housing and firewood collection. 42 Specific data on the contribution of palm oil to defor- estation is limited, and estimates vary significantly.

els used to support these claims. 41 The primary causes

There is considerable debate as to the extent of defor- Some statistics of the contribution of palm oil to defor- estation in Indonesia, largely due to varying interpre- tations of the term and insufficient information. In the 10 years to 2010, the FAO estimated that forest

Malaysia appears to have limited opportunity

area in Indonesia has decreased 5 percent, from 99.4

million hectares to 94.4 million hectares. 43 This rate

for expansion due to land zoning restrictions.

of decrease has lessened from the previous decade, where forest area decreased over 1.75 percent per year

Limited land availability is expected to slow palm

from 118.5 million hectares, to 99.4 million hectares. In the past decade, although the year-on-year per-

oil production growth, particularly in Peninsular

centage change in forest area has been increasing (due to a relatively smaller forest base each year) the

Malaysia and Sabah.

decrease in forest area has been less in absolute terms.

Fig. 4.3 Indonesian Forest Area, 1990 to 2010

140 hectares (millions) 120

2008 2010 Forest Area

Annual Change (level)

Annual Change (precentage)

Note: 2009 figure is based on the half way point between the 2008 and 2010 figure. Source: FAO (2010)

41 World Growth (2010) states that many of these claims are made with little or no substantiation and rely almost solely on absolute statements and unfounded appeals to the emotions of consumers in developed nations. There is limited data on the relative size of Indonesian forest and oil palm area. There is no standard definition for what constitutes deforested land in Indonesia and estimates of the rates of deforestation are often based on very weak science, consequently available statistics can differ greatly. Current calculations of carbon sinks and deforestation are generally based on satellite imaging which takes into account broad-area samples only and estimates are often over stated and out-of-date.

42 FAO (2010) 43 FAO (2010)c

The Economic Benefit of Palm Oil to Indonesia • 17

Fig. 4.4

Land Use in Indonesia, 1990 to 2005

Oil palm fruit*

1,676 Agricultural Land

3,669 Forestry Land

*Area harvested, this figure differs from Indonesian Palm Oil Commission figures who measure total area of palm oil plantations at 5.95 million ha and 7.02 million hectares in 2005 and 2008, respectively.

Source: FA0 (2010)

estation assume that all growth in oil palm area is habitat is also a commonly raised concern. The pres- attributed to the conversion of forestland into palm

sure on biodiversity stems from a variety of sources plantations, calculating the industry’s contribution to

including poverty, agricultural/forestry activity, insti- deforestation as the change in oil palm area to the level

tutions and technology. Habitat loss is not solely due of deforestation, over a given period. This gives a mis-

to the conversion of forest lands to oil palm planta- leading image of palm oil’s contribution to deforesta-

tions. Between 2000 and 2007, palm oil land use tion, as some expansion would be on degraded land. 44 increased by 2.9 million hectares in comparison to other land uses which increased by 9.4 million

In 2008, the relative contribution of global CO2 emis- hectares. Orang-utan habitat is also preserved sions from deforestation and forest degradation was

through protected areas in Indonesia that have been

established and are subject to a range of different Indonesia emitted 1.5 metric tonnes of CO2 per capi-

estimated at approximately 12 percent. 45 In 2006,

laws. Over 23 percent of Indonesia is reserved for for- ta, less than the average of both East Asia and the

est conservation, including 42 percent in Aceh and 40 pacific and other lower middle income economies,

percent in Kalimantan. 48

and significantly less than the United Kingdom and the United States who emitted 9.3 metric tonnes and

Land Availability Constraints

19.3 metric tonnes, respectively. 46 Despite the cam-

paign against the palm oil industry, the production of The limited availability of land for conversion to oil palm oil is more sustainable than any other crop

palm estates poses a significant challenge for the based vegetable oils. Palm oil production consumes

growth of the Indonesian palm oil industry as some considerably less energy, uses less land and generates

land conversion to oil palm plantations will be more oil per hectare than any other oil seeds, has a

required for continued industry growth. A number of comparatively smaller carbon footprint and is an

NGOs have initiated a campaign against the palm oil effective carbon sink. 47 The impact of deforestation on

industry and the conversion of Indonesia’s rainforests biodiversity loss, particularly the loss of orang-utan

to oil palm plantations. As a consequence, the

44 Major Indonesian companies, including APP and APRIL, have made some efforts to improve the sustainability of their activities by agreeing to sustainability actions, such as commitments to protect High Value Conservation Forest, etc. 45 G.R. van der Werf (2009) 46 World Bank (2010) 47 World Growth (2009) 48 World Growth (2010)

18 •The Economic Benefit of Palm Oil to Indonesia

Indonesian Government has introduced a series of degraded); of this, 30 percent is human induced degra- programs to tackle deforestation—the most significant

dation due to agricultural activities, representing 11 per-

is the 2 year moratorium on forest conversion 49 In

cent of total land. 52

May 2010, the Indonesian government signed a deal with the Norwegian Government, to impose a two-

Government restrictions on the conversion of forest- year moratorium aimed at reducing greenhouse

lands to oil palm plantations will increase the need for gases; in return Norway will invest $1 billion in forest

Indonesia to utilise other forms of land, including conservation projects in Indonesia. In addition, the

degraded land. However, the success of palm oil pro- government has also introduced a number of defor-

duction on degraded land depends largely on the estation programs with the financial support of sever-

quality of available land. Currently, there is a lack of al developing economies. For example, the United

common methodology, and accurate and timely spa- Nations’ REDD (Reducing Emissions from

tial data, for identifying acceptable degradation areas Deforestation and Degradation) program contributed

for sustainable oil palm plantation area. 53 As part of over $US5.6 million to Indonesia between 2009 and 2011 in an attempt to reduce deforestation. 50

The limited availability of land for conversion to

The successful growth of the Indonesian palm oil

industry will be impacted greatly by restrictions on the conversion of land to oil palm plantations, as some

oil palm estates poses a significant challenge for

level of land conversion is needed for economic devel- opment.

the growth of the Indonesian palm oil industry as

some land conversion to oil palm plantations will

The Conversion of Degraded Land

be required for continued industry growth.

In May 2010, in order to reduce deforestation, the

Indonesian Government announced a policy to devel- op oil plantations on degraded land instead of further converting forest or peatland. Indonesian officials

the 2010 agreement between Indonesia and Norway, suggested that the palm oil industry could still expand

the Indonesian government has agreed to establish a through the acquisition of six million hectares of

degraded land database, providing the necessarily degraded land. 51 The current oil palm area is 7 million

information to identify areas of land acceptable for hectares. However, the success of the use of degraded

the establishment of economic activity, including oil land depends on the extent of degradation.

palm plantations. 54

There is currently no single formal definition of degrad-

Land Rights and Degradation

ed land; however, land degradation generally indicates

a decline in the productive capacity of the land. The use of degraded land for oil palm plantations is Estimates of area affected by degradation vary widely.

dependent on the severity of degradation and the qual- The FAO estimates that degraded land in Indonesia is

ity of land available. Land degradation occurs due to largely water and wind erosion caused by deforestation

land clearance, overgrazing, poor farming practices, and chemical deterioration. Approximately 38 percent

extensive agricultural activities, poor land manage- (71 million hectares) of Indonesian land is affected by

ment and inadequate conservation. In order to reduce degradation (including 32 percent of land which is

the severity of land degradation, land users need severely degraded and 6 percent which is very severely

incentives to manage and conserve land appropriately.

49 Government of Indonesia and Government of Norway (2010) 50 UN-REDD (2010) 51 Reuters (2010)c 52 FAO/AGL (2010), in the 1980’s the Global Assessment of Human Induced Soil Degradation (GALSOD) estimated 16.53 percent of land

area (31.4 million hectares) in Indonesia was affected by degradation. 53 World Resources Institute (2010)

The Economic Benefit of Palm Oil to Indonesia • 19

Fig. 4.5

National Bio-Fuel and Bio-Diesel Targets

Target

Status

Policy Initiatives

Brazil

Tax incentive, mandate Canada

2% in 2008, 5% by 2013

Implemented

None China

2% by 2010

Indicative

Tax support proposed EU

15% bio-fuels by 2020

No concrete policy

Subsidies, tax incentives India

5.75% by 2010, 10% by 2020

Implemented

Preparing legislation

Indonesia

2 to 5% by 2010

Preparing legislation

Mandate Malaysia

1% in 2007, 2% by 2009

Tax waver, future mandate USA

28.4 billion litres of bio-fuel by 2012

Implemented

Tax credits, state mandates

Note: Unless specified in the table, figures refer to the percentage of bio-diesel mix e.g. 5% = 5% of bio-diesel mix. Source: Sheil et al (2009)

Land-use in Indonesia is generally established under cure land tenure is a key driver of land use changes

leading to deforestation and forest degradation. 57 decentralisation, rights for land cultivation and clear-

temporary rights for cultivation, clearing etc. 55 Since

Tenants without secured land tenure have little incen- ing are issued at various levels of government. The

tive to maintain and protect their land as compared decentralisation of authority over forest resource

with those with secure tenure. The strengthening of management has resulted in confusion and a lack of

land tenure and use rights is needed in order to pro- accountability for land management. Djogo and Syaf

vide incentive for land users to invest in land improve- (2003) suggest that decentralization of authority to

ment. The incentive for land users to maintain and manage forests, coupled with laws retaining the

rehabilitate land—such that the severity of degrada- responsibility of conservation and rehabilitation of

tion is reduced and land is rehabilitated—requires forests to central government has left many district

effective, secure and transparent land rights and government officials ambivalent toward forest reha-

accountability processes.

bilitation and conservation. There are also conflicts of authority between institutions such as the National

Closing the Productivity Gap

Park Agency, the National Land Agency and the provincial and district level forest services. Conflicts

A significant challenge for the palm oil industry is the between spatial planning maps developed by provin-

large productivity gap between actual and achievable cial and district governments, in some instances, have

yields of palm oil plantations. In Indonesia, palm oil resulted in unauthorized land conversions endorsed

yields averaged 3-4 tonnes/ha, however, various esti- by district governments without the approval of

mates of potential yields are up to 8.6 tonnes/ha. 58

provincial or central governments. 56 Limited or inse-

Almost year long sunshine, abundant rainfall, rich

54 Government of Indonesia and Government of Norway (2010) 55 Colchester et al (2006) 56 Djogo and Syaf (2003) 57 Hatcher (2009)