IO – The rise and fall of the Indonesian estate crops during the ongoing Covid19 pandemic reveal several issues facing the subsector. In the last two quarters, estate crops subsector has suffered negative growth of their gross domestic products (GDP). Structural problems of low productivity, economies scale, land tenure security etc. at the farm level are not easy to solve. Issues of inefficiency, logistic problems, and value chain systems of commodity estate crops are related to broader issues or market structures and fair competition. Low added value, complexities of agroindustry and poor deepening industry strategies have also contributed to the poor competitiveness of derived products of estate crops.
Interestingly, the agricultural sector recorded positive growth in all three quarters of 2020 amid Indonesia’s economic recession, a product of the Covid10 pandemic. In Q2-2020, the agricultural sector grew 2.19 percent (YoY) and in Q3- 2020 the agricultural sector grew 2.15 percent again. This positive growth performance is in sharp contrast to Indonesia’s economic growth, which contracted by minus 5.32 percent in Q2-2020 and minus 3.49 percent in Q3-2020.
Food crops and horticulture sub-sectors recorded the highest growth performance, at 7.14% and 5.60% respectively in Q3-2020. The estate crops sub-sector recorded low growth of 0.17% and 0.67% in Q2 and Q3-2020, because the sale price of rubber, palm oil, coffee etc. was quite low. In addition, the livestock sub-sector for two quarters continued to see negative growth (-1.83% and -0.16%) because chicken meat and eggs at the farmer level were very cheap, even since Ramadan and Idul Fitri 2020 (Table 1).
Nevertheless, the estate crop subsector has also contributed to the export performance of main primary commodities: palm oil, cocoa, coffee, rubber, etc. The value of agricultural exports from January to October 2020 is Rp 359.5 trillion, an increase of 11.6 percent compared to the same period last year. Estate crops sub-sector has become the largest contributor to exports in the agricultural sector, shown by the export contribution of Rp 326.86 trillion (or about 90.92%). The highest export of estate crops occurred in October 2020, amounting to Rp 38.46 trillion, or increasing of 8.76% from the export in September 2020. Some of the estate crops exporting commodities will be examined as follows:
Sustainability Certifications in Coffee
Sustainability certification schemes in coffee value chains have promoted more sustainable sourcing of coffee beans while simultaneously serving business and development interests. Changes in the global commodity chains significantly affect the institutional mechanisms of the coffee trade, particularly in coffee- producing countries, including improving the welfare of smallholder farmers. For suppliers in developing countries, global standards are a de facto market requirement, so that the economic actors in the coffee value chain, farmers, businesses, civil society and government, need to adjust and reposition themselves from traditional, non-sustainable coffee farming practices to more responsible practices, better processing and post-harvest handling, and closer adherence to the growing changes of global environmental governance.
In the literature, sustainability certification schemes have emerged in conjunction with growing concerns about environmental governance, especially among consumers in the coffee-buying countries (see Glasbergen, 2018). On one hand, efforts to democratize markets by increasing the role of civil society in regulating production and trade-related activities have grown rapidly. On the other hand, these sustainability certifications and standards could serve as new vehicles of corporate control over global food production, trade and consumption. Efforts to improve community-cooperative governance structures in the producing regions also help with integration, as standards generally require establishment of farmers’ organizations and locally-adopted codes of conduct. Global buyers are interested in improving the control mechanisms that ensure product quality to meet both technical and non-economic requirements of coffee beans for the global market. In this case, smallholder coffee farmers need to establish partnerships with global coffee corporations, not only to ensure market access and product quality to meet global requirements, but also to increase access to information, technical assistance, empowerment and other capacity- building programs.
Elsewhere (Arifin, 2020), the author suggests that sustainability certifications in coffee value chains have brought about structural changes for smallholder farmers. The demands of such better certifications and standards have increased significantly in recent decades, especially regarding better traceability, documentation, and audits. However, these demands do signify increased costs. Sustainability standards favor producers’ cooperatives over individual smallholders, lead to more specific partnerships or contract farming, and encourage exporter consolidation to ensure product quality and specifications. At the other end, such sustainability certifications could serve as powerful instruments of product differentiation. Hence, they play an important role in capturing market share. Smallholder coffee farmers are sometimes quite dependent on the traders operating in the region, which might also depend on globally-affiliated corporations. Most coffee farmers have an incomplete understanding of market pricing and price-setting mechanisms, and smallholder farmers remain in a weak bargaining position with limited access to markets. Most farmers are well-aware of the need to improve coffee quality, increase market access, and increase price transparency and fairness.
Indonesia is the fourth-largest coffee producer, after Brazil, Vietnam, and Colombia, but the second-largest Robusta producer after Vietnam. Coffee production in 2019 was 729 thousand tons, a bit increased over the 722 thousand tons recorded in 2018. Coffee production in 2020 is predicted not to change very significantly, about 720 thousand tons. About 85 percent of the Indonesian coffee is Robusta, which mostly comes from Lampung and Southern regions of Sumatra. Unfortunately, the average Robusta yield is around 560 kg/ha, which is far below that in Vietnam and Brazil, about 2 tons/ha. The remaining 15 percent is Arabica, which mostly comes from highlands, such as in Gayo, Sidikalang, Enrekang, Toraja, Bajawa, Kintamani-Bali and some from Java. Almost all Arabica coffee is exported, but domestic demand of Arabica has increased significantly in the last decade. The application of good agricultural practices (GAPs) among smallholder coffee farmers is quite low (the use of certified seedlings, fertilizer applications, leaf pruning, red-cherry picking, post-harvest, processing etc.).
Coffee production in the provinces of Lampung and Southern Sumatra account for the largest share of Indonesia’s total (49 percent combined, mostly marketed through the port in Lampung), followed by North Sumatra, Aceh and West Sumatra (21 percent combined, mostly marketed through Medan). Coffee production in Java contributes 14 percent, with the port of Surabaya also connecting produce from Bali, Sulawesi and adjacent islands to global markets (BPS, 2019). Coffee production centers in Lampung are concentrated in the district of West Lampung and Tanggamus, which are adjacent to the Bukit Barisan Selatan (BBS) National Park. A policy on community-based forestry management (HKm=Hutan Kemasyarakatan) started in 2001 after the fall of President Soeharto. These systems allow local people to grow coffee inside protected forests if they do not own land in the forest. Another important requirement to join the HKm program as a farmer organization is to maintain at least 400 MPTS trees per hectare so that the conservation function of coffee agroforestry system is ensured.
A coffee agroforestry system is a favorable pre-condition for the development and expansion of sustainability certification in coffee value chains. Coffee agroforestry systems in Lampung Province have long developed in the forest margins where local people grow coffee and multi-purpose tree species (MPTS) for timber and fruit. The tree crops in such complex agroforestry systems have served as conservation mechanisms, especially in the catchment areas of watersheds, and they serve as additional sources of income for smallholder farmers. When sustainable certifications in coffee value chains developed in Indonesia in the 1990s, the long history of agroforestry systems by smallholder farmers accelerated their spread in Lampung Province and other coffee- producing regions in Indonesia.
The first sustainability certification scheme to operate in Indonesia was the Rainforest Alliance (RFA) in 1993 in Aceh, followed by Fair Trade Labeling Organization (FLO) in 1997, also in Aceh. Utz certification started in 2002 in Aceh and Lampung, followed by CAFÉ certification in Arabica coffee production regions of Aceh, North Sumatra and South Sulawesi. Finally, 4C Association (4C) certification started in 2006 in Lampung and South Sumatra. Despite differing details, these certification schemes aim to support smallholder coffee farmers in creating more sustainable livelihoods and improving the coffee yield through application of GAPs, guaranteed prices for the products, fair trade, community development, and environmental stewardship. One should note, however, that more traditional organic standards under the International Federation of Organic Agriculture Movement (IFOAM) and Sustainable Agriculture Network (SAN) started in Indonesia in the 1970s, although on a limited scale for coffee production aimed at specific niche markets. These sustainability certifications have advantages due to long-time adoption of coffee agroforestry systems among smallholder farmers in Lampung and other regions where social forestry has been well-adopted.
Sustainable Palm Oil for the Future
The area of palm oil plantation has grown very rapidly, especially in the last decades, and reached 14.7 million hectares in 2019. The production of crude palm oil (CPO) has reached 44 million tons and expected to rise to over 50 million tons in 2020. The surge in CPO production to close to 50 million tons is more due to the increase in the area of oil palms which exceeds 16 million hectares. Indonesia’s CPO exports in 2019 have reached 35 million tons, although the CPO market in the European Union is still considered discriminatory. The new CPO markets in Eastern Europe, Central Asia and South Asia have grown rapidly in recent years; the CPO market in China and East Asian countries is also large. Malaysia’s CPO production is in the range of 22 million tons, and is expected to grow slowly, because opportunities for oil palm expansion in Malaysia have become increasingly limited. However, Malaysian palm oil companies are expanding into Indonesia, by partnering with local Indonesian companies, taking over or buying Indonesian palm oil companies, especially those which are overwhelmed by problems. Other CPO-producing countries are still quite small because they are developing, such as Thailand’s CPO production of only 2 million tons, Colombia 1.1 million tons and Nigeria 950 thousand tons.
In Indonesia, oil palm plantation have absorbed employment of around 6 million people, with around 2.5 million being small-scale oil palm farmers, who have been enjoying the economic benefits of oil palm growth. Considering workers from the derivative sector and other related sectors, palm oil has generated employment for around 20 million people. The share of Indonesian Malaysian palm oil production is more than 85 percent, which should be able to affect the global CPO market and its derivative products. The export of Indonesian and Malaysian exports to the global market has reached 90 percent, which remain dominant in the global palm oil market for years to come.
Palm oil has dozens of high value-added derivative products, not only CPO, but also carotene, toposerol, olein, stearin, free fatty acids (free fatty acids-FFA), bar soap and others. In fact, olein and stearin alone can yield 54 types of downstream products ranging from fatty alcohols (esters), and other fatty acids. Indonesia is somewhat behind in the development of such downstream products from CPO, compared to Malaysia and even European countries and the United States, that have used its downstream products for food and energy, such as super edible oil, golden nutrition, bio-plastic, bio-surfactant, green fuel and others. Palm oil is regarded as the most efficient oil-producing plant in the world, compared to soybeans that produce soybean oil, canola into palm oil, and sunflower into sunflower oil.
Data from Oil World (2016) shows that the total land used to produce major oil seeds in 2015 was 274.4 million hectares, which produced oil and fat production of 179.6 million tons. The total area of soybean plants around the world is 120.3 million hectares (43.8 percent of total oil crops) succeeded in producing soybean oil by 41.3 million tons (23 percent and total edible oil production worldwide). The area of oil palms is only 18.1 million hectares (6.6 percent) but has succeeded in producing 69.5 million tons of palm oil (38.7 percent). The efficiency of palm oil production is much higher compared to canola, which reached production of 23.3 million tons (13 percent) coming from 35.7 million hectares (13 percent) of canola plants.
Palm oil is the most efficient and has the highest productivity of all vegetable oils (in terms of ratio of product to area), especially when compared to soybean oil, palm oil, sunflower oil etc. Palm oil has been able to replace soybean oil and palm oil in global trade, giving rise to heightened tension between Indonesia and the countries producing these vegetable oils, especially the European Union and the United States. Although the practice of oil palm exploitation is still not fully in line with sustainable principles, the kinds of negative campaigns and ill-treatment of Indonesian palm oil abroad are certainly very likely to be related to global competition and the geo-political map.
Oil palm production in Indonesia is conducted by large private companies (52 percent), state companies (7 percent) and small farmers (41 percent) (Plantation Statistics, Ministry of agriculture, 2018). These three groups of actors have contributed to CPO production, with the largest share in private companies being 57 percent, state-owned enterprises (SOEs) 8 percent, and small farmers 36 per cent. The low contribution of these small farmers is due to differences in productivity and private companies which are steadily expanding. Small farmers are only able to produce CPO productivity of around 3 tons per hectare, while large companies have been able to produce productivity of 5 tons per hectare. Many forms, formats and patterns of relationships between smallholders and industrial-based economic actors generally do not empower farmers significantly. Palm oil business requires to meet the sustainability requirements as required in the framework of the Indonesian Sustainable Palm Oil (ISPO) or voluntarily through the global scale Roundtable Sustainable Palm Oil (RSPO).
The role of palm oil in the Indonesian economy is well-known, absorbing labor, increasing income, moving the regional economy, becoming a major foreign exchange earner and helping to save Indonesia’s balance of payments. The role of oil palms in poverty alleviation in Indonesia is often claimed to be huge, but there are also those who say it is not too big. The rapid development of oil palms during the last two decades is not comparable with the decline in poverty that has begun to stall. In cases of oil palm expansion that are filled with socio-economic conflicts, especially due to land disputes in Sumatra and Kalimantan, the presence of oil palms is not really looked forward to by the surrounding community. In fact, the increase in oil palm area has a negative impact on the lives of local people. By taking samples from West Kalimantan, West Papua and Papua, the studies by Obidzinki et al. (2010) finds that oil palm causes deforestation, and other external impacts such as water pollution, soil erosion, air pollution. The exploitation of oil palms in frontier areas does not have multiple impacts, and only benefits migrants with education and skills compared to the local community.
However, oil palm farmers face uncertain market access and fluctuations in the purchase price of fresh fruit bunches (FFB) that are unstable, uncertain, and a host of other challenges (Vermeulen and Goad, 2006). Palm farmers generally depend on companies or middlemen who buy directly into the field. Smallscale oil palm farmers suffer from a lack of capital to apply the principles of good agricultural practices (GAP). Palm farmers who partner with large companies are relatively more resistant to price changes, but still vulnerable to changes in production disruptions. In short, although partnership oil palm farmers enjoy the positive impact of increased income, those who are small in scale are still vulnerable to poverty if the external disturbance is large enough.
Expansion of oil palm areas is sometimes accompanied by socio- economic conflicts, especially due to land disputes in Sumatra and Kalimantan, where the arrival of oil palm cultivation is not really welcomed by the surrounding community. Research by Obidzinki et al (2014) explicitly suggest that the area of oil palm land has a negative impact on the livelihood of local people, and oil palm production does not have a significant impact on household consumption. The economic benefits of oil palm are more enjoyed by plantation workers, and households that participate in planting oil palms, but are not enjoyed by traditional communities. The presence of oil palm also triggers land scarcity (for food), land price increases, and land conflicts that are increasingly evident everywhere. Interestingly, oil palm in aggregate has somehow improved regional economies, created jobs and increased income, especially for employees of plantations and palm oil mills. However, the exploitation of oil palms in these frontier areas did not have multiple impacts, and only benefited migrants with education and skills from the local community.
Some comprehensive econometric studies on the socio-economic impact of poverty on farmers’ welfare was conducted by Edwards, by using the district-level observation units in Sumatra, especially in North Sumatra, West Sumatra and Riau. By comparing the results of the regression with ordinary least square (OLS) and instrumental variables (IV), Edwards found that an increase in oil palm land use by 10 percentage points would encourage a reduction in the poverty rate by 40 per cent. In his research in the 10 regencies in Sumatra, Edwards concluded that at least 1.3 million people were raised out of poverty due to the development of oil palm industry or exploitation. The explanation also makes sense that many poor farmers grow oil palm or work in oil palm plantations and industries. Other poor people benefit from economic growth driven by oil palms. Similarly, a study conducted by Euler et al. (2017) suggests that adoption of oil palm has increased the welfare of smallholder households and the nutritional quality or consumption of farm households. Oil palm farmers tend to increase the area of their plantations, compared to increasing productivity or the level of profitability of their businesses, because the exploitation of oil palm is relatively easier than rubber, for example. Those who shift their business from rubber to palm oil still have extra labor, generally using it to work in other sectors, while waiting for the oil palm to produce.
Finally, a study by Oktaviani et al. (2017) using computable general equilibrium (CGE) model suggest that palm oil increases employment, improves the trade balance, and improves other sectors that have links to palm such as edible oils, soap and cosmetics. Palm oil contributes to poverty alleviation in rural areas, to farm laborers and all household categories. The study also found that not all sectors benefit from trade liberalization, such as the coffee and cocoa processing industry, even tea and tea products.
Issues of Indirect Land-Use Change
The issues of indirect land-use change in the palm oil industry have obtained renewed attention as the European Union (EU) imposed a renewable energy policy (Renewable Energy Directive (RED) II, which prohibits raw materials for biofuels, bio-liquids and others deemed to have a high risk of indirect land use change. Indirect Land Use Change (ILUC) assumes that palm oil high-risk due to the conversion of natural forests into plantations and agricultural land. This ILUC phenomena is argued to increase greenhouse gas emissions, Indonesian palm oil will be banned from the European Union, because it is considered to be a source of deforestation of up to 5 million hectares over the 2008-2016 period.
The European Union seems to be looking for new cases with Indonesian palm oil. In 2018 Indonesia won the case at the Dispute Panel Assembly at the World Trade Agency (WTO) and at the European Union High Court (The European Court Justice) for the imposition of anti-dumping duties by the European Union on Indonesia’s biodiesel imports. The European Union has again made it difficult for Indonesia’s palm oil exports to European countries with the new RED II policy, as explained. Indonesia is busy enough to combat and refute these high-risk ILUC allegations, that not only is the area of palm oil growing, but the area of soybean and rape seed (sunflower seed) and palm oil is also increasing. In 2018, the total area of global vegetable oil plants has reached 170 million hectares with a very rapid expansion. The area of vegetable oil plants reaches almost one third of the total acreage of grain plants which is only 670 million hectares, a development that needs attention. The increase in the area of soybeans has now been 9 times greater than the area of oil palms. The argument for involving phenomena that occur in other countries is quite difficult to convince the European Union that Indonesia is not the sole contributor to the high-risk ILUC.
Indonesia is also trying to improve the map of oil palm land area. Currently, it still has three versions of data on oil palm land area: 15.4 million hectares by the Ministry of Environment and Forestry (KLHK), 14.3 million hectares by the Ministry of Agriculture, and 16.8 million hectares in accordance with the Corruption Eradication Commission (KPK) study, along with 20 million hectares of oil palm area in accordance with the permit or Right to Cultivate (HGU) that has been issued. The Government suggests that using One Data Policy, the allegation of deforestation rates of up to 5 million to 8 years by the EU can be refuted more objectively. Nevertheless, some people doubt that the European Union will choose to believe the arguments from the Indonesian side.
The Renewable Energy Directives (RED II) policy is actually flexible, where the negotiation between European Union and Indonesia and other suppliers of bioenergy raw materials has been taking place for a while. European Union countries can import vegetable oil sourced from commodities with high risk ILUC, but it is not counted as part of the agreed renewable energy source target of 32 percent by 2030. In 2019 the European Union has adopted that RED II is binding on all member countries, so that Indonesia shall adopt bilateral diplomacy. Spain and Italy are two European countries which import a lot of Indonesian palm oil, both as food and for bioenergy. Switzerland, which is not part of the European Union, is quite friendly with Indonesian palm oil and may become a trade hub towards the European Union palm market. However, it might be that Switzerland will also follow the trend of policy development in the European Union, if Indonesia does not make comprehensive policy improvements at home. (table 2)
The European Union currently consumes 5.1 billion liters of crude oil, 2.3 billion liters of palm oil, 680 million liters of soybean oil and 243 million liters of sunflower oil (USDA, 2018). Most (US $ 1.68 billion) of palm oil is now used for industrial needs, including the bioenergy industry, and only US $ 672 million is used as food (Eurostat, 2019). After the victory of the case at the WTO and the European High Council, EU biodiesel imports from Indonesia jumped significantly in 2018, reaching US $ 594 million from only US $ 22.4 million in 2017. It is not surprising that the European Union is once taking an economic diplomacy tack on palm oil, as it is indeed far more efficient in producing oil, both as food products, and as bioenergy. Palm oil has become a major competitor of rapeseed oil which is widely produced in Europe. (Figure 2) The European Union loss in the anti-dumping issue of biodiesel imports at the WTO in 2018, and the European High Court might be very offensive, especially for the European Parliament. It has been a while since the European Union imposed anti-dumping duties on biodiesel imports because it accuses Indonesian biodiesel producers of getting very large subsidies, resulting in very low production costs. Indonesia is accused of selling biodiesel prices below market prices because of the government’s “partiality”. Indonesia did not accept the accusation and submitted a case to the Dispute Panel Assembly at the WTO. The fact is that Indonesia’s exports dropped dramatically from US $ 649 million in 2013 to US $ 150 million in 2016, even reaching a low of US $ 68 million in 2015.
The Panel of Judges of the WTO Dispute Panel in January 2018 gave a verdict to Indonesia, which had been proven to be harmed by the European Union policy. In its ruling, the Panel Assembly stated that the European Union implemented protectionism and discrimination against Indonesian palm oil. Interestingly, the European Union Supreme Court in March 2018 strengthened the WTO decision and ordered the European Union to revoke anti-dumping duties on biodiesel imports from Indonesia, which ranged from 8.8 to 23.3 percent. As a result, Indonesia’s biodiesel exports to the European Union soared in 2018 and reached US $ 594 million, as mentioned above.
Closing Remarks: economic diplomacy starts at home
Economic diplomacy depends not only on the performance of trade negotiators, but also the consistency of policies in the country, and the support of all parties and stakeholders at home. Economic diplomacy will become so naïve when the land use policy and other relevant policies of the Central Government and the Regional Government are not in harmony. Economic diplomacy in palm oil is not a linear process, but is more often winding. The options of a positive campaign about the role of oil palms in the domestic economy, regional development, poverty alleviation and others could be developed. This step can be taken through a series of ordinary economic diplomacy matters by ambassadors, diplomats and other representative offices, but can also be taken by academics, researchers and other stakeholders through objective and accountable scientific publications. Government and the business world can continue to negotiate on various individual levels bilaterally and/or through the European Union, such as the European Union-Indonesia Comprehensive Economic Partnership Agreement (CEPA).
Policy harmonization to improve the sustainability of land use issues should focus on the main objectives to improve the people’s welfare. Land-holding size remains problematic for the farmers’ welfare, unless agricultural policies are supported by high-quality rural development and agrarian reforms, and by “upward diversification” from low- to high-value local crops, etc. Moreover, programs on poverty alleviation, empowering the active poor, implementing concrete actions to combat child malnutrition and preventing its future occurrence by promoting food diversification based on local endowments and technological change. Proper and effective agricultural development contributes significantly to reducing income inequality in the country. (Bustanul Arifin)
Bustanul Arifin is Professor of Agricultural Economics in the University of Lampung (UNILA), Senior Economist with the Institute for Development of Economics and Finance (INDEF), and Professorial Fellow at School of Business in IPB University, Indonesia. He graduated in 1985 with a Bachelor degree in agricultural economics from IPB (Institute of Agriculture Bogor). In 1991 he went on to study Resource Economics at the University of Wisconsin-Madison, USA to receive an MS degree. In 1995 he persued a Ph.D. in resource economics from the University of Wisconsin-Madison, USA. He contributes his expertise as Food Policy Adviser for Minister of Economic Affairs, Chairman of Statistical Society Forum (FMS), and Vice Chairman of Indonesian Society of Agricultural Economics. He has served as Director of INDEF, Economic Adviser to the House of Representative, Chairman of Expert Group of Food Security Council, and Member of the National Innovation Council