With the right institutional set up, smallholder palm oil can outperform estate plantations in Indonesia

A recent study has analysed factors behind the success of a scheme for 2,400 smallholders in West Sumatra, which has achieved yields nearly double the national average for smallholders in Indonesia and consistently outperformed neighbouring nucleus estate plantations.

This was part of one of many ‘Nucleus Estate with Smallholder’ state projects set up in early 1980s. But here the key difference was long term technical support funded by the German government, which enabled smallholders to participate in the creation of a nested structure for management and internal control.

Smallholders were grouped into relatively small ‘kelompoks’ – grassroot organizations, each with around 25 members among which a leader was elected. Individual smallholders were responsible for managing their plantations, harvesting and transporting fruits to pick up points. However, income from sale of produce was divided equally among the kelompok members, with only small premiums for individual performance. Peer pressure amongst farmers helped ensure that individuals did not fall behind on managing their plantations. It was in the interest of all members to assist any farmer who could not keep up with maintenance or harvesting due to illness or absence. Key tasks were checked by kelompok leadership, who received a salary from sales of produce and interest paid on farmer loans. Each group collectively decided its own rules and penalties for non-compliance with group standards.

For services more efficiently organized at a higher level, kelompoks were grouped into five cooperatives, supported by a single supra-cooperative. This allowed smallholders to combine the benefits of scale at cooperative and supra-cooperative level with the inherent advantages of smallholder farming at the kelompok and individual level. For example, the efficient use of family labour which is well motivated by the direct relationship between effort and reward, with low costs for monitoring and control of field work.

This institutional structure mitigated the major threat to collective action of free-riding of non-performing members, whilst strengthening smallholder’s commitment to the project. It is notable that this was in essence a settler project, where there was no initial sense of community. Trust and belief in the possibilities for effective cooperation had to be created by the project.High productivity enabled smallholders to pay off their debts for plantation establishment in 6 to 7 years, bringing an end to any dependency on government. During the maturing of the plantation, cooperatives and supra-cooperative were already providing services usually arranged by the nucleus estate. Farmers then became the legal holder of the land, and although land title certificates were initially kept at the cooperative level, this changed over time. Nonetheless, kelompok’s have generally held a power of veto on change of ownership through sale to outsiders. The spouse, and later the children of the owner inherit the plot when the owner dies, allowing the plot to remain in family hands hence within the community. The plot itself could not be sub- divided.

The study demonstrates that smallholders were able to manage their oil palm plantation efficiently over a long period of time, from the early 80’s through a full oil palm rotation to 2010. From here onwards members started to leave the cooperatives. The need for replanting appears to be an underlying cause. However, one of the five cooperatives has successfully replanted collectively and maintained nearly 90% of its members.

Why does this experiment in smallholder institution building, remain an exceptional case, rather than a model for replicating success in the palm oil industry? The study suggests one reason may be the switch to a laissez-faire phase of smallholder development policies in Indonesia from the late 1990s, after which smallholder farmers received very little support from government or companies, limiting their opportunities to cultivate on advantageous conditions and achieve higher yields.

Another factor must be the costs, estimated at US$ 7.6 Million, or 1,588 US$ per hectare (3,175 US$ per farmer).  Whilst the study suggests these investments in institution building were earned back over the 25-year period of the oil palm rotation, the scale of initial investment is daunting.

Read the full study: Collective action in a smallholder oil palm production system in Indonesia.