When I first began researching oil palm, one of the Rainforest Alliance’s most strategic crops, I knew little of its global importance—nor of the environmental destruction associated with its expansion. I soon learned that two-thirds of products on supermarket shelves contain this cheap vegetable oil. To meet a global demand that is expected to reach 75 million tons by 2020, Indonesia—the world’s largest palm oil producing country—plans to boost its yearly production to 40 million metric tons of crude palm oil (CPO). Unfortunately, this increase requires converting an additional 14 million hectares of primary forest: equivalent to an area five times the size of Belgium. At this rate, Indonesia will lose 98 percent of its forest cover by 2022.
Forty percent of Indonesia’s palm oil plantations are cultivated by smallholder farmers, who each manage less than 3 hectares of land. Yet due to technical knowledge gaps, inadequate access to quality inputs, and lack of access to finance, smallholder palm oil farmers experience low productivity levels, with yields reaching only 60 percent of their maximum potential. Without the financial capacity and technical knowledge to make the investments necessary to maximize farm productivity, farmers often resort to deforestation to extend their plantations rather than invest in intensifying existing plantation productivity.
As a summer analyst with the Sustainable Finance Initiative at the Rainforest Alliance, I helped conduct a thorough analysis of the challenges facing smallholder palm oil producers. Through extensive literature review and interviews with local Indonesian experts and other industry insiders, we found that the challenges plaguing smallholder yield and income include: 1) high plantation establishment and upfront investment cost; 2) poor understanding of good agricultural practices; 3) smallholders’ lack of usage of high-quality seedlings; and 4) dependency on external processing capacity.
With this understanding, we built a cost-benefit model of smallholder palm oil production, accounting for varying levels of input usage, agronomic knowledge application, and financing options. In the research paper that summarizes these findings, we explain the clear business case for sustainable palm oil production—including the need for financing to support high plantation establishment cost and high inputs costs, especially that of seedlings and fertilizers.
By bridging the financing gap in smallholder palm oil finance, we can catalyze productivity improvements that could transform land-use practices, minimize deforestation, and conserve biodiversity, while ensuring sustainable livelihoods.
Moving forward, the Rainforest Alliance will conduct further research and develop tools to support these farmers through better agronomic and financial literacy training, and to link farmers to financing to implement these practices. As consumer pressure for traceability increases in conjunction with increasing demand for palm oil, the Rainforest Alliance invites governments, donors and private sector organizations to join its work in creating a more sustainable and competitive supply chain in an area of critical environmental and economic importance.
Jessica Guo, an undergraduate student at NYU Stern School Business interested in global business and social entrepreneurship, served as a summer analyst with the Sustainable Finance Initiative, funded by the Citi Foundation, after winning the Rainforest Alliance- NYU Stern Cocoa Investment Challenge with her classmate Aayush Gupta.