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Oil palm is good financial news for smallholders

By Suseno Budidarsono, Sonya Dewi, Muhammad Sofiyuddin and Arif Rahmanulloh


With the European Commission recently launching a proposal to reduce the amount of food-based biofuels it sources, a study by the World Agroforestry Centre team in Indonesia clarified the socioeconomic importance of oil palm.


In 1935, Indonesia became the global leader in palm oil exports, with a plantation area of 75 000 hectare. Seventy-five years later it regained the number one position that it had lost to Malaysia with a planted area of over 8 million hectare, 100 times more than in 1935, but still less than 5% of its land area.

In much of the humid lowland tropics, oil palm production is one of the most economically attractive forms of land use. The introduction and expansion of oil palm in Indonesia reflects this attractiveness and accompanying benefits, but the social interactions between companies and local communities have had a mixed track record that required attention.

Ambiguous and contested land tenure in local communities combined with the State issuing concession licenses to large companies despite the lack of tenure clarity has been at the heart of most of the problems.

In the debate about the potential negative environmental consequences of conversion of forests to oil palm, the development impacts (negative in situations dominated by conflict, potentially positive elsewhere) also needed to be quantified.

What we found

To start to understand this, we studied the social and economic contexts of palm oil production in Indonesia on 23 plantations and the smallholders in their neighbourhoods who sold palm fruit to the mills.

Not surprisingly, we found that within 10 and 20 km around the 23 plantations, 11.4% and 7.9%, respectively, of villages had oil palm as their primary economic activity. Further, in the areas surrounding new oil palm plantations, the opportunity to sell palm fruit to the mill stimulated land-use changes, with positive and negative consequences that needed to be assessed at each site.

Oil palm fruit after harvest

Those villages with oil palm as the major source of income showed significantly lower prevalence of malnutrition but similar birth and death rates compared to other villages. In-migration and the percentage of males in the population were significantly higher in such villages compared to others. These ‘oil palm’ villages tended to perform well on indicators of physical, financial and human capital.

More than 18% of the households had increased their income, in real terms, two-to-three times after five years of oil palm cultivation. About 35% had increased their income between four and 13 times after 5-to-10 years of cultivation. About 45% who had cultivated palm for more than 10 years had increased their income 22-to-25 times.

The financial results of oil palm production varied substantially between households, with clear success stories as well as reported failures. The average reported per capita expenditure data was more than twice the bureau of statistics’ poverty line in all provinces studied, except for West Kalimantan.

Further analysis of these issues is needed to find out what are the key elements of success and failure and what caused the variation in expenditure in West Kalimantan.


Edited by Robert Finlayson


Read the technical brief

Budidarsono S, Dewi S, Sofiyuddin M, Rahmanulloh A. 2012. Socioeconomic impact assessment of palm oil production. Technical Brief 27: palm oil series. Bogor, Indonesia: World Agroforestry Centre Southeast Asia Program.





This work is related to CGIAR Research Program: Forests, Trees and Agroforestry


Rob Finlayson

Robert Finlayson is the Southeast Asia program's regional communications specialist. As well as writing stories for the Centre's website, he devises and supervises strategies for projects and the countries in the Southeast Asia region, including scripting and producing videos, supervising editors and translators and also assisting with resource mobilization.

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