Towards Inclusiveness and Mutual Benefits for Smallholder and RSPO Buyers

Towards Inclusiveness and Mutual Benefits for Smallholder and RSPO Buyers

Towards inclusiveness and mutual benefits for smallholders and RSPO buyers


Johan Verburg, Oxfam International representative to RSPO

29 June 2009

This paper is firstly aimed at briefing interested parties about the situation of smallholders in the palm oil supply chain – the myths and the facts – andhow the Roundtable on Sustainable Palm Oil is expected to impact them. In the worst case RSPO certification systems will lead to exclusion ofnumerous palm oil smallholders from international trade. In more optimistic scenarios many smallholders would acquire more secure conditions of work and fair relations in trade with mills. In best cases, with the right opportunities cultivated, sustainable palm oil may provide various smallholders with corrections in power imbalances and increased securityof income from access to international markets.

To increase further understanding of the diversity of palm oil smallholders’ situations– both technically as well as politically – and to make the RSPO deliver the maximum of benefits to them, would require tailored further research, supported practical implementation of RSPO improvements and exchanging experiences between various implementers. The RSPO’s Taskforce on Smallholders, after its initial phase of interpretation of the RSPO requirements for smallholders, would require a next phase in which it develops into an RSPO platform for linking and learning in order to support extensive smallholder capacity building and outreach. This paper’s second goal is to set the stage for planning this next phase for the RSPO Taskforce on Smallholders and the specific actors that work in support of smallholders.

Smallholders in the palm oil supply chain

Other than in most export commodity crops, smallholders are an integral part of the palm oil supply chain and as such better organised than their colleagues in many other sectors. This is because governments and companies in producing countries since the 1970shave developed oil palm according to well-intended economic development models that provided capital investment, while the smallholders provided labour and often land resources. Some models have worked out better in practice than others. Since palm oil mills and establishment of oil palm plantings are capital-intensive, only very few self-organised groups of smallholders are known to operate their own mills. Moreover, given that perishable palm oil fruits need to be processed within 48 hours after harvesting to maintain its food quality characteristics, smallholders are highly dependent on their clients, the mills. As most milling companies are also owners of plantations and providers of capital and agricultural inputs, power imbalances are not uncommon between mills and smallholders. In the extreme cases smallholders find themselves in a debt-bonded situation. In general it is fair to say that the majority of palm oil smallholders are structurally depending on their direct business counterpart. Some prefer to call them contract farmers or outgrowers rather than smallholders.

On average the productivity (yield per hectare) of smallholders is much lower than plantations’. Where producing country governments have scaled down on extension services, counting on private sector to take up that responsibility, the use of good agricultural practices is sub-optimal. Poorly trained smallholders have neither been provided with the best and sufficient seedlings, nor with the proper technological package (e.g. irrigation) during the first crucial years of their crops.

When smallholders were paid lower grade prices, based on unfair or at least non-transparent methods combined with their very weak bargaining position, conflicts have arisen that need resolution.Often low-productive grounds, poor planting material and inadequate infrastructure have been provided to smallholders. Conflicts also surface in many cases if they have given up community land to plant oil palm based on false expectations – or false promises (or “plant or perish”) – andare subsequently in debt to mills. In addition to these “vertical conflicts”, tensions arise between oil palm smallholders “horizontally” with other community members or with smallholders who have come to the production area on the basis of a transmigration programme. It also needs to be born in mind that local communities and individual households often by decision of their government have had little choice than to surrender their land for palm oil plantation development in order to hold on to some of their (customary) land rights.

RSPO and smallholders

In the context of the Roundtable on Sustainable Palm Oil (RSPO) many of the actors share concerns about smallholders, despite the fact that the roundtable has not been primarily set up to address smallholder issues. They believe, however, that in the slipstream of addressing issues higher on the agenda, notably links of the palm oil sector with deforestation and climate change, smallholders could benefit. At minimum many are aware that smallholders should not become worse-off because of the introduction of an international certification scheme. For government and private sector stakeholders alike, a variety of motivations exists for this, from sincere interest to token commitment. In any case it is clear that the millions of smallholders involved in the palm oil sector cannot be ignored.

In the RSPO Standard (criteria 6.10) mills are required to treat smallholders fairly and transparently. As one important way to prevent smallholders from getting excluded when mills only would certify the fruits coming from plantations, RSPO has defined the standard “unit of verification” as a mill and its full supply base. This means many smallholders are automatically included in the certificates’ scope. It is in the interest of the mill to at least facilitate if not drive progress, so they can claim to be 100% certified.Because of the socialisation and implementation challenge for supplying smallholders to produce in compliance with the RSPO’s agricultural, social and environmental requirements, mills can already get certified on the basis of a feasible implementation plan to cover all smallholders within the first 3 years after initial certification. These mechanisms are yet to prove their practicality and effectiveness.

In addition, RSPO has acknowledged smallholders cannot be required to comply with the same administrative requirements as larger plantations. It has agreed to let a Taskforce on Smallholders develop a smallholder interpretation of the RSPO Standard. The work programme is externally funded. The taskforceis open to all interested parties and unlimited in size (unlike themore ‘closed-structured’ multi-stakeholder working groups in the RSPO). Physical meetings of the taskforce have been very energetic and well-attended.

Recently the taskforce established a more formal Steering Group, reflecting increasing urgency to address smallholder issues in RSPO in good coordination. This committee comprises the taskforce leaders (Sawit Watch and Forest Peoples Programme), RSPO Executive Board members and representatives from three national level working groups. These working groups are developing National Interpretations (NI) for Indonesia, Malaysia and Papua New Guinea. The Generic Smallholder Guidance and NIs are being developed on the basis of both consultations as well as outcomes expected from field trials of implementation and auditing. For those smallholders who would want to get certified independent from a mill, a group certification protocol will be developed. Resulting certificates would be on fresh fruit bunches, unlike the other RSPO certificates on crude palm oil, potentially feeding a different certificate trade market (FFB instead of CPO certificates). Markets keen on particularly buying from smallholders will hopefully provide price incentives.

In future, RSPO income generated from trade in certified oil (registered by Utz Certified) and from certificates trade (Greenpalm), is foreseen to be dedicated for a large part in support of smallholders. A fund will need to be established for this purpose. Deciding where and how the funds will be spent best, requires further understanding of smallholder needs.

Myths and facts about palm oil smallholders

The measures RSPO has taken so far – described above –are meant to mitigatethe risks that smallholders are facing. However, to turn the developments into true opportunities for smallholders, with income security and empowerment, a more extensive programme would be required. Some of the relevant issues and perceptions will be discussed here in general terms, including some of the – still insufficient – facts about oil palm smallholders.

The average smallholder does (not)exist.Therefore, there’s no sole solution for all smallholders. In itsmillions worldwide (at least 1.4 million families[1], covering at least 20% of palm oil production area, producing an estimated 4 million tonnes of oil[2]), a large variety exists with respect to many of the relevant characteristics.For the purpose of the international certification system, RSPO has simply defined smallholders on the basis of size of production (maximum 50 hectares), although the average area is much smaller (5 hectares, with the most common size at 2 hectares) and many other characteristics could be used to determine the status of smallholder: e.g. land ownership, (family) labour or income situation.Thesmallholder typology needs further definition and tailored research.However, despite the numerous economic development models which have been used in the past decades for oil palm smallholders, largely two distinct and broad categories of smallholders can be distinguished.The largest category consists of those smallholders that are structurally linked to and dependent on one mill. Often these are referred to as schemed (e.g. “plasma” schemes around nucleus plantations in Indonesia, “FELDA” centralised government land development schemes in Malaysia) orassociated, tied, bonded etc. The structural link can for instance be caused by historic reasons (land ownership), geographical reasons (mill monopsony), contractual reasons (partnership) or financial reasons (debt). The other category holds smallholders who are truly independent and free to choose which mill to sell their fruit to. They are economically more independent and, especially where they are sufficiently self-organised through associations or collectives, may have somebargaining power.

Being “independent” is (not)synonymous with being better off. Probably the most difficult group of smallholders to capture from the RSPOcertifications point of view, are those smallholders in the transitionfrom a scheme towards more independency. After a first planting cycle – of approximately 25 years – a new situation with respect to land ownership and financemay develop (but this has hardly been tested yet). The so-called independent smallholders may in reality be in transition to another variety of structural link with one mill, e.g. in a newly negotiated contract with the mill. The new space may provide an opportunity, empowering the smallholder, especially if he/she is part of a reasonably large group. Conversely, changed circumstances may also lead to the smallholder further selling off his/her (land) assets, creating further risk of being trapped in a downward poverty cycle. Sawit Watch in Indonesia is already tracking over 500 conflicts, most of which are land related, that need resolution. In a completely different development context such as Papua New Guinea, structurally becoming part of palm oil schemes is claimed to be a better development perspective for new smallholders than remaining independent and living in poverty. Little is known so far about palm oil smallholders in the rest of the world. Therefore, to support the smallholders’ capacity building during transitionconcerted efforts are needed from government agencies, private sector stakeholders and civil society organisations that are in the position to provide the smallholders with an enabling environment to achieve more sustainable positions.From a development perspective, RSPOneeds to find the right balance between an idealistic approach towards independency and realistic approaches to cover in its certification system the current majority of schemed palm oil smallholders that are structurally linked to one mill.

It takes (more than) only organising smallholders into groups. Empowerment and capacity building of smallholders is more easily materialized when they form into a group. However, it may take 5 to 10 years to establish strong organisations. Moreover, the group structure is not necessarily also the solution for changing the power imbalance between smallholders and mills. In many crops and in many parts of the world group models such ascooperativeshave failed, they are not a silver bullet. In fact, the natural response to “get them organised” may be a reflection of a technocratic approach or a new version of patronage. A more political approach, however, considers the failure of governments to provide for protection of the communal/collective interest against the pure corporate/private interest. It often lacks the provision of, among others, the appropriatelegal, financial, and educational (infra)structure and institutions to alleviate poverty.Research indicates that smallholder organisationshave higher success rates if – among other factors – theyeffectively respond to needs of its members and are developed on the basis of existing traditional structures and institutions, notably communities. So, smallholders would need to be better consulted about their own needs and concerns. Successes and failures of the different management mechanisms (e.g. credit schemes,contractual and negotiation arrangements) would need to be assessed.

Smallholder issues are (not) free from politics. Smallholders represent votes, especially in the cultural context of patronage. For some politicians it is of interest to mobilise them. Smallholders seem to have been more significantly mentioned in the press around recent elections in Malaysia and Indonesia. Hearing people’s voice on the other hand may also pose a threat.If smallholders are taking on their own empowerment this is not seen to be politically neutral. The powerful usually do not like that power imbalances get addressed. Smallholders also form political movements. The notion of ‘cooperatives’ in Indonesia, e.g., isoften still associated with communist opposition. Freedom of association and collective bargaining are not appreciated everywhere and by everybody – to put it mildly. Smallholder communities’ lack of consent with intended developments is seen as a veto rather than a chance to reconsider palm oil expansion projects’ longer term sustainability.But empowerment is not necessarily a “zero sum game” where if one wins more power someone else loses. Others see opportunities in new strategic partnerships between mills and smallholders.Empowerment of smallholders can be a win-win situation for economic developmentof both. Some state that milling companies would not need own land for plantations but rather a reliable supply of fresh fruit bunches from smallholders. These assertions obviously call for further field-testing of when and how opportunities for strategic partnerships would outweigh risks.

The smallholder is (not)apoor man.First of all the smallholder is often a woman. Or rather, the smallholder is dependent on family labour. And the family is dependent on him or her. On average behind every smallholder are 4 dependents. In addition there is a substantial number of labourers working on smallholder plots, including situations of “absentee landlords” that leave all work to hired labour. Moreover, palm oil smallholders also have access to other sources of livelihood, including horticulture orchards, vegetable gardens, agro-forestry and non-timber forest products, which is essential in terms of food security and risk aversion. Addressing gender and labour issues in small-scale agricultural production requires reconsidering the roles of both women and men. Secondly, the smallholder may be living in poverty, but is not “poor” as in “powerless”, “pitiable” or “inferior”. Victimisation of smallholders provides for bad help. It leads to presupposed solutions to their presupposed needs. Even social NGOs have difficulty representing the various needs of smallholders. Therefore, a participatory and consultative approach enables smallholders – women and men – toexpress their own interests, wants and needs. It enables them to stand up for their own rights, instead of being dependent upon others.Inclusiveness and participation do not happen automatically. Other actors– mills, traders, financial institutions, NGOs, government agencies – mayneed to take a more pro-active approach, reaching out to smallholders, to find out what they really want, including alternative income and employment opportunities in non-palm sectors and off-farm.

Mills and middle-men are (not) crooks. At least, not all are. They are the direct business partner for the smallholder in palm oil and often have a mutual benefit in ensuring smallholder production quality and quantity. First of all, fairness and transparency in a more balanced trade relation or even partnershipis needed. Governments have a role in regulating this (e.g. accountable pricing and grading mechanisms) and providing smallholders with education and legal protection. But more joint opportunities exist. With the increasing demand for palm oil and at the same time the increasing pressure not to expand palm oil further into areas with nature conservation or social values, it is becoming more interesting to support smallholders increase their productivity. Smallholders on average have much lower yields than plantations (1.3 tonnes/ha for smallholders against 4 tonnes/ha on average plantations). Highest potentials to raise yields are therefore in smallholder plantings. However, the smallholders would need support to materialise this from the private and/or the public sector. It seems likely that capacity building, extension service, (micro) credits, infrastructure and agricultural inputs (seedlings, fertilisers, irrigation) are needed. Possibly mills and even middle-men could enter into new partnerships with smallholders, providing these enabling elements for increased productivity to them, while ensuring dependency on them is not further increased. A specific opportunity window exists around the moment of replanting, usually when oil palms have reached the age of 25 years and/orwhen debts have been paid off, and new arrangements would need to be made for land ownership or land use. This all needs further investigation.