Palm oil's big issue: Smallholders

Smallholders are a vital part of the global palm oil supply chain, but they are often less productive and sustainable than big firms. Experts at RSPO's annual conference shared ways to help these farmers increase their productivity while reducing environmental impact.

If the palm oil sector wants to be environmentally and socially responsible, big businesses have to help smallholder farmers adopt sustainable cultivation methods, said industry members and financiers at the Roundtable on Sustainable Palm Oil (RSPO) annual conference on Wednesday. 

By offering smallholders the training, resources, and administrative support they need to improve their agricultural practices and obtain RSPO’s certification for sustainable palm oil, companies can help reduce environmental impact across the industry and improve farmers’ lives in the process. 

At the event held at the Shangri-La Hotel, Kuala Lumpur, Kelvin Tio, managing director of Indonesian palm oil giant Asian Agri, noted that “smallholders are vital to the industry, and there are lots of opportunities to improve their yield and income”.

RSPO and its member firms already have ongoing smallholder support initiatives, but the industry can do much more to integrate these farmers into the sustainable global supply chain, noted panellists at a discussion about these independent growers.

Only a fraction of smallholders  - who produce about 40 per cent of the world’s palm oil - are a part of this sustainable palm oil ecosystem today. While RSPO estimates that there are about 3 million smallholders worldwide, a mere 138,939, or about 4.6 per cent, are certified sustainable.

The rest may be trying to obtain the RSPO endorsement or continuing their unsustainable practices such as burning forests to expand their plantations.

The smallholder dilemma

Smallholders are defined as farmers who cultivate less than 50 hectares (ha) of family-run plantations each, and are typically dependent on agriculture for their livelihoods. They are usually less productive than commercial plantations.

For example, Singapore-listed Wilmar International notes that a fully mature oil palm tree yields between 18 and 30 tonnes of fresh fruit bunches per hectare. In comparison, the average yield of independent smallholders in Malaysia is about 17 tonnes per hectare, said Shaufique Sidique, associate professor in economics and director, Institute of Agricultural and Food Policy Studies, Universiti Putra Malaysia.

Smallholder practices are not only less efficient than commercial plantations, they may also be less sustainable. 

In the past few months, illegal forest fires in Indonesia resulted in severe air pollution across Southeast Asia. Many corporations and analysts blamed smallholders for setting their land ablaze in a bid to clear land cheaply.

These farmers cannot afford the machines and chemicals required to clear land properly - priced at about US$200 per hectare - and therefore resort to burning, which costs only US$5 per hectare in contrast. 

Big companies try to help smallholders adopt more sustainable and productive practices in a variety of ways. 

Many firms which own palm oil mills, for example, foster a network of “associated”, or “scheme” smallholders - in industry terms - who receive training and resources to operate more efficiently in exchange for selling exclusively to their mills. In Indonesia, this scheme is known as ‘plasma’, and companies have to hand over some of their concessions for small farmers to manage. 

This is in contrast to independent smallholders, who run their own operations and can sell to anyone they want. 

RSPO and its members also help all smallholders get palm oil certification by paying for their application and audits. Companies also support projects that improve their yields, and provide social services such as schools and hospitals to them.

An RSPO Smallholders Support Fund, founded in 2012, collects 10 per cent of the revenue from all CSPO sales and channels it to these purposes.Half of all income remaining at the end of the year also gets diverted to this fund.

RSPO-endorsed smallholders also receive support through the sale of sustainable palm oil certificates known as Greenpalm.

The GreenPalm scheme operates on a model similar to carbon trading, where companies that use uncertified palm oil can still claim to be sustainable by buying Greenpalm certificates. Proceeds from Greenpalm sales go to RSPO-certified smallholders. 

RSPO certification not only provides additional income to farmers, it also improves their yield and socio-economic well being, said Sidique, citing a study of two farming communities in Malaysia. 

Among smallholders, scheme smallholders have higher yields than independent smallholders, he said. Improving productivity on existing plantations reduces the need for farmers to expand into new areas.

Barriers to access

Despite the benefits, smalholders face many challenges when trying to obtain RSPO certification, including a lack of knowledge on what the principles and criteria for certification are and how to comply with them.

Rosemary Addico, oil palm programme manager at Solidaridad West Africa, an international organisation focused on sustainable supply chains, noted that not all smallholders are literate, let alone able to read the extensive list of certification requirements. 

We must empower smallholders and educate them on better practices. That’s where we should spend the money.

Emir Mavani Abdullah, chief executive officer, Felda Global Venture Holdings

They also find it daunting to complete the online application process and submit technical information such as Geographic Information Systems (GIS) data on the boundaries of their land concessions, she added.

“We don’t need to make the certification criteria less strict for smallholders, but we certainly need to make it more understandable and accessible for them to comply with requirements,” she said. RSPO does have farmer-friendly guidelines on how to start applying for certification in Thai and Malay on its website.

RSPO also provides some administrative assistance and funds to help farmers with the up-front costs of obtaining certification. It can extend additional support by creating a platform to help certified smallholders shares best practices with one another, said Addico.

For example, farmers in Thailand who have already gained certification can explain what they did to meet RSPO standards, and others in Ghana could follow their steps with minor tweaks, she noted.

“We don’t need to reinvent the wheel, and sharing experiences is a good way to scale up sustainable practices among smallholders,” she added. 

In addition to knowledge barriers, the financial incentives to gain certification are also not enough, said panellists. 

As Emir Mavani Abdullah, chief executive officer of Malaysian palm oil firm Felda Global Venture Holdings, put it: “We believe in helping smallholders operate in a more sustainable way, but when you add in certification requirements like verification and monitoring, is the consumer willing to pay the premium for this?” 

Other industry members at the conference noted that of the 12.1 million tonnes of palm oil that are certified by RSPO today, only about half is sold with the accompanying trademark at a higher price. The rest is sold as uncertified oil.

Asian Agri’s Tio added that while it costs the company about US$10 to certify each hectare of smallholder farmland, consumer goods and food manufacturers are sometimes ready to pay only a dollar for the corresponding Greenpalm certificate. 

This does not create a compelling business case for smallholders to invest the cost and effort of obtaining certification, said panellists.

While there is increasing pressure for smallholders to be more sustainable, the companies which buy palm oil from growers also have to pay the price premium for certified palm oil, said panellists.

One effort to create a market for sustainable palm oil is the Sustainable Palm Oil and Traceability with Sabah small producers (SPOTS) initaitive, spearheaded by French cosmetics multinational L’Oreal in partnership with palm oil firm Wilmar, chemical firm Clariant, and conservation social enterprise Wild Asia. 

SPOTS aims to help 500 small growers in Sabah, Malaysia get RSPO certified by 2020. These smallholders sell their harvests to Wilmar mills, and L’Oreal in turn buys the palm oil to fulfil their zero-deforestation and sustainable sourcing policy. 

Philippe Provost, raw materials category manager, L’Oreal, noted that the project has not only increased the company’s access to sustainable palm oil, it has also raised consumer awareness about smallholder issues. 

But ultimately, the industry should remember that certification simply assures others that sustainable practices are being implemented on the ground. Companies should focus first on achieving the actual sustainability gains, and then think about the accompanying label, noted Abdullah.

“We need to focus more on sustainability than certification,” he said. “We must empower smallholders and educate them on better practices. That’s where we should spend the money.”

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