EU deforestation rule could be threat or opportunity for Indonesia’s smallholders

Small farmers in Indonesia could be excluded from the European palm oil supply chain under a new EU deforestation regulation because they’re far from being able to comply, a new survey shows.

Small farmers in Indonesia, who manage 6.72 million hectares (16.6 million acres) of oil palm plantations, simply aren’t ready for the regulation, according to researchers from Indonesian environmental NGO Madani. Image: CIFOR, CC BY-SA 3.0, via Flickr.

New palm oil regulations being adopted by the European Union and the UK could put even more pressure on independent small farmers in Indonesia who are already struggling to meet sustainability requirements, new research suggests.

Smallholder advocates say there needs to be greater support to help these farmers join the deforestation-free supply chain and avoid a vicious cycle of unsustainable production.

Of chief concern to smallholders is a regulation set to be adopted by the EU in the coming months that will ban the trade in commodities like palm oil that come from illegal sources and deforestation. Small farmers in Indonesia, who manage 6.72 million hectares (16.6 million acres) of oil palm plantations, simply aren’t ready for the regulation, according to researchers from Indonesian environmental NGO Madani.

The researchers conducted a survey of independent smallholders in four palm oil-producing districts in the country — Rokan Hulu in Riau province and Tanjung Jabung Barat in Jambi province, both on the island of Sumatra, and Ketapang in West Kalimantan province and Kotawaringin Timur in Central Kalimantan province, on the island of Borneo.

Looking at the aspects of legality, good agricultural practices, environmental management, and transparency and traceability, the survey found that only smallholders in Tanjung Jabung Barat are ready to comply with the EU deforestation regulation.

The researchers identified traceability as the biggest challenge for independent smallholders to overcome in complying with the regulation. This is because of the largely undocumented nature of transactions: according to the survey, only 0.17 per cent of respondents were able to sell their palm fruit to mills directly or through cooperatives. The rest had to rely on an informal network of intermediaries and middlemen, making it difficult to trace the palm oil back to its origin.

This problem was compounded by a lack of documentation of transactions, with only 12.82 per cent of respondents keeping sales records of every transaction.

Falling short on legality, sustainability

Legality is another major hurdle for smallholders. The survey found only 1.8 per cent of the respondents had plantation registration certificates and environmental management statements. This echoes findings from a 2018 study by the Bogor Institute of Agriculture (IPB) in the provinces of Jambi, Riau and Central Kalimantan, which found that only 1 per cent of farmers surveyed had plantation registration certificates.

The Madani researchers said it’s likely most farmers don’t apply for the paperwork because there’s little information from local authorities about what they need and which government agencies are responsible for issuing them.

If we don’t comply [with the EU regulation], Indonesia could easily shift its market to China, India or Pakistan, which have laxer sustainability regulations compared to the EU.

Achmad Surambo, executive director, Sawit Watch

In addition to a widespread lack of plantation certificates, the survey also found many smallholders in the four districts lacked clear title to their land. This would make it difficult for the smallholders to comply with the legality element of the EU deforestation regulation.

The smallholders surveyed in the study also face challenges implementing sustainability into their agricultural practices, especially when it came to fire prevention and control. Only 13.2 per cent of the respondents had a good understanding of the mechanisms and procedures to prevent and control fire.

“Such a lack of understanding causes the smallholders to think that good environmental management is not urgent for their plantations’ sustainability,” the researchers wrote in their report. “This indicates suboptimal communication and inadequate information from the relevant officials to the independent smallholders and vice versa.”

Given all these shortcomings, it’s unlikely that smallholders will be able to meet the legality and sustainability criteria set by the EU, with the new regulation requiring that it be possible to trace commodities like palm oil back to the farm where the fruit was grown, including precise geographical coordinates.

For European importers, this narrows the pool of compliant suppliers to large-scale oil palm plantations and their associated smallholders, leaving out the independent smallholders who lack contracts with a particular mill or company.

“If this regulation is in effect, the easiest shortcut taken by [importing] companies is to only buy palm oil from growers that have been certified,” Mardi Minangsari, director of Indonesian environmental NGO Kaoem Telapak, said at a recent press conference in Jakarta. “So there’s a chance that smallholders will be excluded.”

Hitting the palm oil economy

The EU deforestation regulation could also harm the wider economy of palm oil-producing regions in Indonesia, according to a separate study by the Center for International Forestry Research (CIFOR).

The study looked at the potential impact of the regulation on Kotawaringin Barat district in Central Kalimantan province, the second-largest palm oil-producing province in the country, with 800,000 hectares (nearly 2 million acres) of plantations.

The study also considered the potential impact of a similar due diligence law proposed by the UK on forest risk commodities including palm oil. It found that both the EU and UK regulations would help reduce deforestation in the region from 4,000 hectares (nearly 10,000 acres) annually to zero in less than 25 years, as well as slash CO2 emissions and maintain biodiversity.

On the flip side, however, they would also reduce palm oil production by 500,000 metric tons, which would lead to job losses in the sector. Overall, the palm oil economy in the district would shrink by 30 per cent from current levels, or a loss of about $2 billion annually, according to the study.

“If we simulate [the impact of] the EU deforestation law, it will be able to reduce deforestation but at the cost of reducing the palm oil economy in that district,” said study lead author and CIFOR scientist Herry Purnomo.

And it’s not just Indonesian smallholders who will struggle under the regulation; European companies importing palm oil into the block will also face a high cost for compliance, the study says. This includes costs for establishing no deforestation, peat and exploitation (NDPE) commitments; traceability policies, including internal and external auditing; due diligence frameworks; and monitoring and verification mechanisms. Importers might also need to pay a premium for certified palm oil.

2022 report by Washington, DC-based sustainability risk analysis organization Chain Reaction Research (CRR) estimates the cost of compliance could add up to 3.5 per cent of revenue. However, not complying with the EU regulation could result in $14.3 billion in losses for EU actors in the palm oil value chain, the report says.

Call for support

To help Indonesian smallholders cope with the upcoming regulatory changes, the EU should provide support, such as a premium price for palm oil produced from legal sources and without deforestation, according to CIFOR’s Herry.

This premium price could mitigate the regulation’s impact on the local palm oil economy, he added. “The only way is to increase the price [by instating a] green premium price,” he said. “It’s good to reduce deforestation, but there should be a premium price.”

The association of Indonesian palm oil farmers, or SPKS, has called on the EU to work with it on finding solutions to problems that smallholders in Indonesia face, such as the need for training and for mapping of farms.

“If the EU market wants sustainable trade and palm oil that comes from no deforestation, it has to embrace small farmers who have been impacted by large-scale illegal plantations,” SPKS head Mansuetus Darto said in a statement. “The EU market has to implement traceability and ensure that sustainable practice by small farmers is being prioritised. The EU market has to transform to [accommodate] small farmers.”

The SPKS has also called for the EU to require importers to purchase at least 30 per cent of their palm oil from smallholders, thereby ensuring a market for small Indonesian farmers. This kind of support from the EU will provide a boost to small farmers who are prepared to comply with the deforestation regulation, Mansuetus said.

SPKS advocacy head Marselinus Andri said traceability isn’t an issue for smallholders who are members of the association, numbering around 72,000. He said the SPKS has developed a database of its members that anyone can use to trace each farm to its owner.

“We have provided important data to build a traceability system by name, by address, as well as by geolocation data,” he said.

And to ensure that smallholders don’t clear forests to produce palm oil, SPKS members in Kalimantan, the Indonesian part of the island of Borneo, have also implemented a high carbon stock approach (HSCA) that requires them to conserve forests on their land that have been identified as having high stores of carbon.

“SPKS sees this [EU deforestation] regulation as a huge opportunity for millions of palm oil farmers in Indonesia to reap benefit from the EU market by providing palm oil products from no deforestation that can be traced,” Mansuetus said.

Risks from shutting out smallholders

Madani also called the EU regulation an opportunity for Indonesia to build a partnership with the EU to improve palm oil governance. Failure by the EU to help producer countries like Indonesia in complying with the regulation will push producers to export more of their commodities to countries with weaker environmental regulations instead, the NGO said.

This will defeat the purpose of the EU regulation, which is not only to ensure that European buyers only consume sustainable and legal commodities, but also to fight global deforestation and forest degradation, activists say.

Past studies by CRR found that unsustainably produced palm oil in Indonesia is being bought and financed by buyers and lenders in South KoreaIndiaJapan and China, where traceability and sustainability requirements aren’t as stringent as in the EU.

“If we don’t comply [with the EU regulation], Indonesia could easily shift its market to China, India or Pakistan, which have laxer sustainability regulations compared to the EU,” Achmad Surambo, executive director of industry watchdog group Sawit Watch, told Mongabay. “When that happens, improvement in palm oil management won’t occur. So deforestation could still happen. That’s why partnership [with the EU] is important.”

Helge Elisabeth Zeitler, the deputy head of deforestation at the European Commission, said the EU is aware of this risk.

“We don’t feel like it’s an argument not to be ambitious and not to have a strong legislation, where we feel there’s a need,” she said at a recent webinar organised by Brussels-based NGO Fern. “But it’s something that we need to work on and we will have a lot of outreach to other major consumer markets to see if we can encourage them to follow in a similar direction so that we have a more common approach for deforestation-free supply chain.”

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