The economics of oil palm in Indonesia
By Suseno Budidarsono, Arif Rahmanulloh and Muhammad Sofiyuddin
The huge amount of oil palm in Indonesia reflects the crop’s economic attractiveness. The World Agroforestry Centre assessed the direct economic impact of oil palm to better understand the nation’s love affair with the crop.
The growing worldwide interest in biofuels as an alternative for fossil fuels will likely increase demand for feedstock, such as oil palm, and lead to the expansion of plantations, though the recent proposal of the European Commission to restrict food-based biofuels to 5% of renewable energy might slow that growth.
To understand the economics of palm oil production, which has been portrayed as environmentally and socially costly, we studied 23 oil palm plantations in Indonesia.
We found that potential profitability of the plantations varied between approximately USD 4500 and USD 30 500* per hectare over a 25-year lifecycle. Clearly, such plantations would be attractive to investors.
The returns to labour, that is, to the workers, of the 23 plantations varied between approximately USD 6.20 and USD 27 per person per day, which equated to two-to-seven times greater, respectively, than the average agricultural daily wage. Hence, labouring in an oil palm plantation was economically more attractive than other forms of agricultural day labour. Even in cases where a plantation was established in a sparsely populated area and paid higher wages, the plantation was still able to cover the cost of labour. Consequently, higher wages in certain regions attracted more people and drove further conversion of other land uses, such as forests and agricultural land. Indeed, several of the plantations received additional income from logging when they were being established, which varied between 7% and 9% of total income for the full 25-year lifecycle of the plantation.
Returns to land on independent smallholders’ plantations varied between approximately USD 9500 and USD 14 550 per hectare in a 25-year cycle, with returns to labour between approximately USD 12.70 and USD 18.50 per person per day.
The returns to land for ‘plasma’ plantations varied between USD 13 000 and USD 27 600 and returns to labour between USD 6.95 and USD 30.85. Large oil palm companies are encouraged by the Indonesian Government to develop ‘plasma’ plantations that are intended to eventually be operated by smallholders under supervision of the developer.
It is important to note that the profitability of oil palm on peat soil was 25% lower than on mineral soil and the return to labour was also 56% lower. This was in line with the 33% higher cost of establishment and 21% higher labour requirements on peat. And in the operational phase, oil palm cultivation on peat soil required 75 person-days per hectare per year, which was 10% higher than on mineral soil. It seems clear that expansion of oil palm on peat soils contributes less to the economy than expansion on mineral soils.
We also estimated the net present value (NPV) for 15 years of investment. NPV measures the value of current income against cash outgoings. It is used to estimate profitability. The NPV on the 15-year term varied between USD 13.8 million and USD 102.9 million. Profit per ton of crude palm oil (including the kernels) ranged between USD 43 and USD 164. Hence, investment in palm oil processing is attractive as long as supply can be secured.
Members of the research team also examined the socioeconomics of oil palm, which is the subject of a forthcoming post on this site.
* USD 1 = IDR 9630
Read the technical report
This work is part of the CGIAR Research Program on Forests, Trees and Agroforestry
Edited by Robert Finlayson