The Economic Benefit of Palm Oil to Indonesia

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


A Report by World Growth

February 2011
Alleviating Poverty through Wealth Creation
        Palm oil provides developing nations and the poor a path out of poverty.
        Expanding efficient and sustainable agriculture such as Palm Oil Plantations provides
        small and large plantation owners and their workers with a means to improve their
        standard of living.

                                     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
Executive Summary                                            industry is expected to continue its rapid growth in
                                                                                      the medium-term; however, its competitiveness will
                         Environmental NGO’s have been pushing a “no-                 be negatively impacted by the anti-palm oil agenda.
                         conversion” agenda, in an attempt to halt the conver-
EXECUTIVE SUMMARY




                         sion of forest land to agriculture, including palm oil       The global market for palm oil has experienced rapid
                         plantations. This agenda has extended into the opera-        growth in recent decades with current production of
                         tions of international organisations and governments.        palm oil estimated at over 45 million tonnes.
                                                                                      Indonesia is one of the world’s largest producers and
                         In May 2010, the Indonesia and Norway signed a               exporters of palm oil, producing over 18 million
                         Letter of Intent comprising a framework for Indonesia        tonnes of palm oil, annually.
                         to receive financial contributions from the Norwegian
                         Government in return for the implementation of               Agriculture and Regional Poverty
                         emission reducing policies, including a two-year sus-
                         pension on all new concessions for conversion of peat        Although only contributing around 14 percent to
                         and natural forest.                                          GDP, agriculture provides employment for over 41
                                                                                      percent of the Indonesian population and provides
                         In July 2010, The World Bank proposed a framework            around two-thirds of rural household income. The
                         for its engagement in the palm oil sector, acting at the     palm oil industry is a significant contributor to rural
                         behest of environmental NGOs to toughen the policies         income in Indonesia. In 2008, over 41 percent of oil
                         of the Group on the terms financial support is provid-       palm plantations were owned by small land holders,
                         ed to Palm Oil projects. A revised version of the frame-     producing 6.6 million tonnes of palm oil.
                         work was released for consultation in January 2011.
                                                                                      With over half of Indonesia’s population lives in rural
                         Restrictions on the conversion of forest area will neg-      areas—of which over 20 percent live below the poverty
                         atively impact economic growth and food security in          line—the palm oil industry provides an incomparable
                         Indonesia and directly impact those living in poverty.       means of poverty alleviation. Limiting the conversion
                         For this reason, developing countries refused to             of forest to agriculture or palm denies considerable
                         include “no conversion” in the approach to forestry          prospective economic benefits and improvements in
                         and REDD at the UN Climate Change conference in              living standards to the rural population, condemning
                         Cancun in December 2010.                                     them to declining standards of subsistence.

                                                                                      Future Industry Growth
                        Restrictions on the conversion of forest area
                                                                                      With global demand for palm oil expected to grow
                                                                                      further into the future, palm oil offers the most prom-
                    will negatively impact economic growth and food
                                                                                      ising economic prospects for Indonesia. World pro-
                                                                                      duction of palm oil is expected to increase by 32
                      security in Indonesia and directly impact those
                                                                                      percent to almost 60 million tonnes by 2020.
                                                                 living in poverty.
                                                                                      Restrictions on the conversion of forests to oil palm
                                                                                      plantations Indonesia would reduce the availability of
                                                                                      fertile land and impede expansion of the industry.
                         Economic Benefits of Palm Oil                                Government policies should aim to improve produc-
                                                                                      tivity and not implement anti-growth NGO policies.
                         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


                         4 •The Economic Benefit of Palm Oil to Indonesia
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




                                                                                                                              I. INTRODUCTION
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
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
Indonesia’s rural poor, with one source suggesting          • Key challenges and opportunities for the Indonesian
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-
                                                            This report has been prepared as an independent
senting over 41 percent of total palm oil plantations.
In 2006, it was found that around 1.7 to 2 million people
                                                            assessment of the economic benefits of the palm
worked in the palm oil industry.
                                                            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
II. Global Economic Importance of Palm Oil                                            oil on deforestation, carbon emissions and biodiversi-
II. GLOBAL ECONOMIC IMPORTANCE




                                                                                                                       ty loss. High returns have encouraged investment in
                                 Palm oil is a vegetable oil derived from the fruit of the                             the Indonesian palm oil industry, and the resulting
                                 palm tree, it is used for both food and non-food con-                                 industry growth has contributed significantly to rural
                                 sumption. Total global production of palm oil is esti-                                economic development and poverty alleviation.
                                 mated at over 45 million tonnes, with Indonesia and                                   However, despite the expected increase in future
                                 Malaysia as the major world producers and exporters.                                  demand, land use restrictions (such as the recent two
            OF PALM OIL




                                 Major importers include India, China and the                                          year moratorium on new concessions to clear natural
                                 European Union.                                                                       forests and peatland in Indonesia) may constrain
                                                                                                                       industry development, as some level of land conver-
                                 The palm oil industry has experienced rapid growth in                                 sion is needed for industry growth.
                                 recent decades, and has become a significant contrib-
                                 utor to the world market for vegetable oils. Demand                                   Trends in the Global Production
                                 for palm oil has further increased in recent years as                                 and Trade of Palm Oil
                                 many developed economies are shifting away from the
                                 use of trans-fats, to healthier alternatives. Palm oil is                             Originating in Africa, the oil palm was introduced into
                                 often used as a substitute for trans-fat as it is one of the                          Malaysia and Indonesia in the colonial period. Current
                                 few highly saturated vegetable fats that are semi-solid                               cultivation is concentrated in the tropical areas of the
                                 at room temperature, and is relatively low cost.                                      Americas, Africa and Southeast Asia, particularly
                                                                                                                       Indonesia and Malaysia—where the climatic growing
                                 World trade in palm oil has increased significantly due                               conditions are ideally suited for palm oil trees. Other key
                                 to increased global demand. However, there has also                                   palm oil producing countries include Nigeria, Thailand,
                                 been public concern surrounding the impact of palm                                    Columbia, Ecuador and other African economies.



                                           Fig. 2.1                         Oil Palm Cultivation in 43 Oil Palm Producing Countries in 2006




                                  Mexico    Honduras                                                                                                            China

                                                     Colombia                               Ivory Coast
                                                             Dominican                             Ghana
                                                              Republic     Senegal & Gambia           Togo
                                                                                                        Benin   Nigeria
                                                          Venezuela                                             Cameroon                             Thailand                     Philippines
                                  Guatemala                                  Guinea Bissau
                                     Nicaragua                    Suriname           Guinea                           Central African Republic                      Malaysia
                                      Costa Rica                                 Sierra Leone                            Democratic Republic of Congo
                                                                                                                                Somalia
                                                                                                                                                                                          Papua New
                                          Panama                                         Liberia                          Burundi                                                         Guinea
                                                                                             Sao Tome &
                                           Ecuador                                             Principe
                                                                                    Equatorial Guinea                          Tanzania
                                                                    Brazil                       Gabon                                                           Indonesia
                                                Peru                                              Congo                                                                                    Soloman
                                                                                                     Angola                                                                                 Islands
                                                                                                                                                                > 1 million ha
                                                                                                                                          Madagascar
                                                        Paraguay                                                                                                100,000 to 1 million ha

                                                                                                                                                                10,000 to 100,000 ha

                                                                                                                                                                < 10,000 ha




                                 Source: Koh and Wilcove 2008




                                 6 • The Economic Benefit of Palm Oil to Indonesia
Fig. 2.2                         World Palm Oil Production 1989-2007


       45
              tonnes (millions)
       40

       35

       30

       25

       20

       15

       10

        5

        0
         1989            1991           1993           1995            1997           1999            2001           2003            2005          2007

                    World             Malaysia                Indonesia               Other              Africa                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 20091. 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
natives. Trans-fats are often used in the place of natural   sources as palm oil currently accounts for less than 5
     solid fats and liquid oils in the production of commer-      percent of the world’s bio-diesel production5.
     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
                                                                  Singapore11 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                   1980                1990               2000                   2009
                                         Quantity      %     Quantity       %    Quantity      %        Quantity        %

       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                12.8       32.1     16.1       26.5    18.1       19.6         12.0         9.0
       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
III. ECONOMIC IMPORTANCE OF PALM OIL




                                           III. Economic Importance of Palm Oil                            The structural composition of the Indonesian economy
                                           to Indonesia                                                    has changed significantly in the past four decades. As
                                                                                                           with most economies in the region, it has shifted from
                                           Indonesia’s GDP was estimated at $USD 510.77 billion            a primarily agrarian economy towards the industry and
                                           in 2008, classifying it as a lower middle income coun-          services sectors. Nowadays, Indonesian production is
                                           try. Over the past decade, GDP growth has averaged              largely dominated by the industrial sector, contributing
            TO INDONESIA




                                           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
                                           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.15
                                           percent to over 271 million by 2030.13
                                                                                                           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,
                                                                                                           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


                                                  100

                                                   90

                                                  80

                                                   70

                                                   60

                                                   50

                                                   40

                                                   30

                                                   20

                                                   10

                                                    0
                                                     1960          1965        1970        1975   1980          1985    1990          1995    2000       2005

                                                                                Services             Industry                  Agriculture


                                           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
48.1 million ha of agricultural land).17 This substantial             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-                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
           Aceh
     Darussalam
                                                              Serawak
                                           MALAYSIA
                               Riau      SINGAPORE         West
                                                      Kalimantan
                       West                                                                                           West
                     Sumatra                                   Central
                                 Jambi                                                                               Papua
                                                           Kalimantan
                                                                         South
                                                                         Kalimantan                                              Papua

                                                                     INDONESIA



                                                                     Bali
                                                                                                     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
    who live just above the poverty line.20 The International                         percentage points (urban poverty by 1.1 percentage
    Fund for Agricultural Development (IFAD) found that                               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)
       20
                                                                                                                                                    3

        15




                                                                                                                                                        yield
                                                                                                                                                    2
       10

                                                                                                                                                    1
        5


        0                                                                                                                                           0
         2002                  2003                   2004                   2005                  2006                   2007                2008

                Production (Other)                                Mature Land Area (Other)                                   Yield (Other)
                Production (Smallholders)                         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,
                                                                      $USD28/ha, $USD19/ha and $USD1099/ha, respec-
In terms of land-use, oil palm gives the highest
                                                                      tively. Specifically, land-use returns for palm oil were
                                                                      estimated as including:
yield per unit area as compared with any other
                                                                      • $USD960/ha for low yield independent growers;
                                     crop-based oil seeds.
                                                                      • $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
IV. FUTURE PROSPECTS FOR PALM OIL
IV. Future Prospects for Palm Oil                               to be advantageous for a lower risk of heart disease.35

Future Prospects for Global Palm Oil Demand                     As well as total increased total consumption, per capi-
                                                                ta consumption of vegetable oils has been increasing
Increased returns from a strong global demand for               in some major developing economies due to strong
vegetable oils are expected to encourage investment in          income growth. Palm oil has benefited from this
the palm oil industry leading to continued growth over          development due to its relatively high energy per
the medium term, with global consumption expected               gram of food. In 2009-10 China and India accounted
to increase over 30 percent in the next decade.34 By            for over 40 percent of the net imports in world trade.
2020, global consumption and production of palm oil             Future economic growth in these countries will
is expected to increase to almost 60 million tonnes.            increase the demand for imported vegetable oils.

The health characteristics and cost competitiveness of
palm oil, coupled with its potential contribution to
                                                                In the last few years, many developed economies
renewable energy, is expected to contribute to a
growth of over 30 percent in the next decade. Growth
                                                                have moved towards reducing and banning
in the palm oil industry has been contributed to by the
production cost advantages in oil palm cultivation.
                                                                trans-fats, as a result many food manufacturers
Oil palms are a highly productive tree crop in compar-
ison to crop based oil seeds—oil yields are 5 to 9 times
                                                                have replaced trans-fats with palm oil.
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.
                                                                Global Palm Oil Production and Opportunities
As developed economies shift away from trans-fats
towards healthier alternatives, the demand for palm oil         By 2020, FAPRI estimates that Indonesia will produce
will also likely increase relative to its competitors. In the   almost 30 million tonnes of palm oil, including exports
last few years, many developed economies have moved             of almost 23 million tonnes. This growth will be
towards reducing and banning trans-fats, as a result            achieved through increased yields and further land
many food manufacturers have replaced trans-fats with           conversion.
palm oil. In addition to being cost competitive, palm oil
is high in mono-unsaturated fats which are considered           Malaysia appears to have limited opportunity for



        Fig. 4.1                 Projections of World Palm Oil Supply and Utilization


                                                                    2009/2010           2019/2020
                                                                 (‘000 tonnes)       (‘000 tonnes)             % change
         Consumption                                                    44,330              58,639                  32%
         Production                                                     45,132              59,264                   31%
         Trade                                                          30,760               41,649                 35%



Source: FAPRI 2010




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



                                                                              The Economic Benefit of Palm Oil to Indonesia • 15
Fig. 4.2                       Projections of Palm Oil Supply and Utilization


      45
            tonnes (millions)
      40

      35

      30

      25

      20

       15

       0
        2010         2011       2012        2013      2014     2015        2016        2017     2018        2019    2020

                      PRODUCTION                     World                 Indonesia             Malaysia
                     CONSUMPTION
                           TRADE


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
able uncertainty and debate about the data and mod-                              Figure 4.3 depicts total forest areas and the annual
els used to support these claims.41 The primary causes                           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.
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

      100

       80

       60

       40

        20

         0
          1990          1992           1994       1996         1998         2000         2002      2004        2006       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


                                                                1990                         1995                     2000                      2005
                                                            (‘000 ha)                    (‘000 ha)                (‘000 ha)                 (‘000 ha)
       Oil palm fruit*                                             673                         1190                     2,014                    3,690
       change                                                                                    517                      824                    1,676
       Agricultural Land                                       45,083                        42,187                   44,777                   48,446
       change                                                                                -2,896                    2,590                     3,669
       Forestry Land                                          118,545                      108,977                    99,409                    97,857
       change                                                                                -9,568                   -9,568                    -1,552



*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
estimated at approximately 12 percent.45 In 2006,                                   established and are subject to a range of different
Indonesia emitted 1.5 metric tonnes of CO2 per capi-                                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 conversion49 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
                                                                   oil palm estates poses a significant challenge for
the conversion of land to oil palm plantations, as some
level of land conversion is needed for economic devel-
                                                                   the growth of the Indonesian palm oil industry as
opment.
                                                                   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                        2% in 2008, 5% by 2013                                  Implemented                 Tax incentive, mandate
           Canada                                        2% by 2010                                   Indicative                               None
           China                            15% bio-fuels by 2020                          No concrete policy                  Tax support proposed
           EU                        5.75% by 2010, 10% by 2020                                  Implemented               Subsidies, tax incentives
           India                                                                        Preparing legislation
           Indonesia                               2 to 5% by 2010                                     Proposed
           Japan                                         5% in 2009                     Preparing legislation
           Korea                                                    5%                           Implemented                               Mandate
           Malaysia                                                 5%                                 Proposed
           Philippines                    1% in 2007, 2% by 2009
           Thailand                                     10% by 2012                              Implemented             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
temporary rights for cultivation, clearing etc.55 Since                              leading to deforestation and forest degradation.57
decentralisation, rights for land cultivation and clear-                             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)



20 • The Economic Benefit of Palm Oil to Indonesia
volcanic-derived soils and familiarity with the pro-       greater use of renewable energy, including bio-fuel, in
duction of palm oil give Indonesia an advantage in the     efforts to reduce GHG emissions increasing global
production of agricultural products and palm oil.59        demand for alternative fuel options. Increased
Goenadi (2008) suggests that these resources coupled       demand coupled with Indonesia’s abundance of labour
with new palm oil breeds with superior characteristics     and status as a global oil and petroleum producer,
and the current planting materials available, the          places Indonesia in a relatively good position for the
genetic potential of annual production is around 6-7       production of bio-diesel. The Indonesian government
tonnes of palm oil per hectare. However, in reality the    has already made a firm commitment to the develop-
average attainable yield only reaches around half of       ment of bio-fuel, including the development an inte-
this. In 2008, the Indonesian palm oil commission          grated strategy for implementation of a bio-fuel
measured palm oil yield as averaging between 3-4           program64 For example, countries including the
tonnes per hectare. There needs to be substantial          European Union, China, the USA, etc, have set fuel
effort in order to reduce this gap, Goenadi suggests
that such an effort would include step-by-step land
preparation, routine field management and adaption
of new technologies. Improvement in productivity,           Although palm oil currently accounts for less than
particularly among smallholders, provides the great-
est challenge. Variations in the yields of smallholder      5 percent of the world’s bio-diesel production,
plantations are also significant, likely due to differ-
ence in farming practises and inputs than the genetic       demand is likely to increase as economies adopt
potential of plants.60 Improving the productivity of
palm oil producers improves the profitability of the        policies that encourage the use of bio-fuel.
sector without significant increases in land use or
costs of production. An increase of 20 percent in pro-
duction could produce an additional 3.7 million            blending targets for bio-diesel ranging from 2 percent
tonnes of palm oil in Indonesia, equivalent to current     in the Philippines to 10 percent in the European
production from around 1.07 million hectares.61            Union, by 2020.
Other key challenges for the productivity of the
Indonesian palm oil sector, particularly in Kalimantan,
include low soil fertility, a periodic dry season and
potential land conflict.62

Indonesian Bio-diesel Industry

Although palm oil currently accounts for less than 5
percent of the world’s bio-diesel production, demand
is likely to increase as economies adopt policies that
encourage the use of bio-fuel.63 Despite a relatively
low market share, palm oil is often used as feedstock
in bio-diesel production, and as feedstock represents
the major cost of production, a bio-diesel industry is a
viable option for Indonesia. Many economies are set-
ting targets to convert reliance on fossil fuels to


58   Henson (1990)
59   Goenadi (2008), pg 2
60   Hai Teoh (2010)
61   Calculated from Indonesian Palm Oil Commission data
62   Perba et al (2006)
63   Sheil et al (2009)
64   Bio-fuel Indonesia (2010)



                                                                        The Economic Benefit of Palm Oil to Indonesia • 21
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             22 • The Economic Benefit of Palm Oil to Indonesia
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