I. INTRODUCTION Palm Oil the Highest Efficient Vegetable Oil. World s demand of palm oil (Elaeis Guineensis) and palm kernel oil

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1 I. INTRODUCTION 1.1 Background Palm Oil the Highest Efficient Vegetable Oil World s demand of palm oil (Elaeis Guineensis) and palm kernel oil consistently increases with the demand of food and food processed use (e.g. cooking oil, margarines, etc). The increased demand is also due to increased use of palm oil in oleo chemical products (e.g. fatty acid derivates, glycerol and biofuel), and finished downstream products (e.g. food products, vitamin A and vitamin E, cosmetics, paint, ink, and lubricants). Oil palm is the highest efficient producers of vegetable oil which requires less land than any other oil-producing crop. Figure 1 shows that one hectare planted with oil palm yields 3.6 tonnes of oil per year on average. Source: Fairhurst and Mutert, Figure 1. Vegetable Oil Yield. The effeciency of commercial vegetable crop can be measured through the balance of input to output energy. Energy balance of palm oil is 163 GJ/ha, 1

2 soybean 30 GJ/ha and rapeseed 47 GJ/ha. This fact explains why oil palm produces 22% of the world vegetable oil only by having 2% of the land which planted with oil palm compared to other major vegetable oil crops. (Fairhurst and Mutert, 1999). Figure 2 shows that in 2009 world s palm oil production had the highest growth and share compared to other edible vegetable oil. Source: USDA, Figure 2. Growth of World s Vegetable Production 2000 and 2009 Oil world in USDA (2010) reported that oil palm plantation around the world amounted to 13.1 million hectares. It was even lower than soybean plantation amounted to 97.3 million hectares. Basiron (2007) higlighted the effeciency of oil palm as eco-friendly natural resources and put oil palm as a very productive crop by a ratio of output-to-input energy ratio 9:1 of 3:1 for other oilseed crops such as soybean or rapeseed. Superior productivityy is also reflected in high photo-synthetic rates resulting in oxygen emission and carbon dioxide absorption rates that are ten times more effective than those observed for soybean. Oil palm cultivation also relatively requires less land in supplying oils and fats for food and non-food purposes, including bio-fuel. 2

3 1.1.2 The World Supply and Demand of Palm Oil The world demand of palm oil over the last several decades has grown significantly. Population growth and economic has led to increased demand. In other side, the availability of other vegetable oil in the country is other factors affected by the demand. In 1970, the palm oil consumptions achieved 1.7 million tonnes and rose to 48.4 million tonnes in 2010 or increased almost 30 times within 40 years. About three quarters of all palm oil exported, Indonesia and Malaysia palm oil export in year 2010 approximately achieved 32 million tonnes or 66.7% of total palm oil exported or equals to US$ 28 billions. India, China and the EU are the most important palm oil importers in the world with the share approximately 54% of total import. Based on Oil World Annual Report, palm oil production to palm oil demand showed growth. The share of palm oil production increased to 27.7% and the share of soybean oil production was 22.4%. Table 1 shows the global demand of oil and palm oil which was about 44.2 million tonnes per year with the average growth of 2.1 million tonnes per year. Until year 2011, palm oil supply and demand projected in negative balance even increased from negative 380,000 tonnes in 2008 into negative 495,000 tonnes in Starting year 2012, the production was projected higher than demand. The balance was projected 512,000 tonnes and the worldwide stock level would remain about 50 consumptions days (USDA, 2011). Since year 2006, Indonesia has taken over Malaysia s position as the highest producers of palm oil. Indonesia produced 16.7 million tonnes while Malaysia produced 15.2 million tonnes. Palm oil market was dominated by Indonesia and Malaysia in the total share of 85% in 2006 and 89% of growth projection in year 2012 (World Bank, 2009). 3

4 Table 1. World s Palm Oil Production and Consumption (in 000 tonnes) Note: in 000 tonnes unless otherwise indicated. Source: USDA, The Impacts of Palm Oil Demand Incremental Indonesia is known as the biggest principal producer and exporter of palm oil in the world, in the middle of low productivity and rapid deforestation rate issues. In year 2010, Indonesia s palm oil production compared to year 2000 significantly improved due to the expansion of plantation area more than double and the yield improvement support as well. Total plantation area of oil palm across the country in 2011 was about 7.9 million hectares. In other side, the productivity improved 28% within 10 years and the key success factors are implementation of improvement on cultivation management and the seeds selection which resulted high quality crops provision with higher yield. Total production of Indonesia s palm oil in 2010 was 20 million tonnes (Agriculture Minister reported the estimation was 19.6 million tonnes while Oil World was 20.6 million tonnes). 75% of palm oil production was for export purposes and the rest was for domestic consumptions. Palm oil and it derivates export is estimated contribute IDR 134 Trillion income in year 2010 as show in the Table 2. 4

5 Table 2. Indonesia Palm Oil and Derivates Products Exports Source: Data Processed from Indonesia Statistics Bureau BPS, Pahan (2010) estimated number of workers involved in palm oil plantation about 0.4 worker per hectare or equal to total workers involved over the country in year 2010 about 3.1 million workers. With the assumption of each worker shoulder averagely consists of 4 family members, so that there are 12.4 populations rely on 7.9 million hectares of oil palm plantation Palm Oil Industry; Challenges and Opportunities Although palm oil plantation in Indonesia has been declared to be consumable only 6% of total 132 million hectares of rainforest and was proven improved the economic and welfare level for more than 12 million of population, the critics from environment NGOs remained high, especially related to rapid deforestation rate which sparks the concern amongst environmentalists. It has become intensive issues related to climate change where rainforest can take important role in climate changing prevention. Greenpeace put special attention on deforestation that happened in Indonesia and even do special campaign to stop deforestation totally in year Greenpeace assumed that the mass destruction of Indonesia's rainforests which rich carbon-peat lands for palm oil and paper is the main reason why Indonesia becomes the world's third largest emitter for climate changing and greenhouse gases. Greenpeace is campaigning for an immediate moratorium on forest and peat land destruction in Indonesia and for zero deforestation by

6 According to Greenpeace, the Indonesia s forest destruction also threatens wider world; peat lands are perhaps the world most critical carbon storages, and Indonesia's vast peat lands storing about 35 billion tonnes of carbon. When these peat lands are drained, burned and replaced by acacia, eucalyptus or palm oil plantations, carbon dioxide is released ( 2011). In the meantime, WWF (2011) concerned about carbon emissions effects of deforestation and forest degradation, as mentioned that emission released through plantation which has contributed almost one fifth (6 GT) of world emission total and only one half of this emission contributed by 2 countries, Indonesia and Brazil. Indonesia produced emission double than Brazil and it put Indonesia as 3 rd country with the highest emission after USA and China. By total emission related to deforestation and forest degradation, Indonesia contributed 70% of total emission. To answer the situation, government s initiative to the agreement implementation of Reduction of Emissions from Deforestation and Forest Degradation (REDD) becomes very important ( 2011). In beginning of 2010, the Indonesian government announced its plans to apply 2 years moratorium of new permits to clear natural forest with one billion USD for climate aid deal and signed with Norway to fund projects of curtail deforestation and land degradation. Starting in January 2011, Indonesia has barred companies from clearing native forest and peat lands. Timber, pulp and paper operations, and palm oil plantations are banned from expanding onto new concessions. The government also says there is around 40 million hectares of degraded land could be used for palm plantations instead, but it has not been decided on a formal definition of what degraded land is or where it is located. Indonesia has opportunities to fill up world s demand of palm oil, together with Malaysia; Indonesia is a supplier of 85% of world palm oil. One of the 6

7 advantages for Indonesia is palm oil yields which is much higher than West Africa and America due to climatic condition effect that is more favorable (even solar radiation and rainfall distribution) on palm growth and yield. The improvement of yield per hectare in Indonesia was induced by introduction of modern cultivating management and techniques, seed selection, proper and adequate fertilizer, and pest and disease control Sustainable Palm Oil Products and Urgency of Replanting Program In response to the urgent and pressing global call for sustainably produced palms oil, the Roundtable on Sustainable Palm Oil (RSPO) was formed in 2004 with the objective promoting the growth and use of sustainable oil palm products through credible global standards and engagement of stakeholders. The seat of the association is in Zurich, Switzerland, while the secretariat is currently based in Kuala Lumpur with a satellite office in Jakarta. ( 2011). There are similarity between RSPO and ISPO Principles and Criteria as shown in the table Commitment to Transparency 2. Compliance with Applicable Laws and Regulations 3. Commitment to Long Term Economic and Financial Viability 4. Use of Appropriate Best Practices by Growers and Millers 5. Environmental Responsibility and Conservation of Natural Resources and Biodiversity 6. Responsible consideration of Employees and of Individuals and Communities affected by Growers and Millers 7. Responsible Development of New Plantings 8. Commitment to Continuous Improvement in Key Areas of Activities 7

8 Elements of RSPO certification scheme: 1. Standard. This sets out the requirements which must be met and against which certification assessments are made. The RSPO Standard is the RSPO. Principles and Criteria for Sustainable Palm Oil Production or P&C 2. Accreditation. This is to ensure that the organizations which undertake certification assessment the Certification Bodies - are competent to undertake credible, consistent audits. 3. Process requirements. This is the process for establishing whether or not a set of requirements (i.e. the standard) has been met and is carried out by an accredited Certification Body. By end of August 2011, only 88 (or 15.2 %) companies / organizations from Indonesia are registered as RSPO s member of total 566 members ( or only 4.4% of over 2,000 plantations of Indonesia. In anticipation to the approaching year 2015, when all big processors (such as Nestle, Unilever, etc) and top importers has pledged to source only CSPO (Certified Sustainable Palm Oil), there is a growing concern that not all Indonesian plantations will be able to meet that deadline by (a) voluntary scheme and (b) costly joining membership fee. In the middle of tremendous response towards RSPO certification by company and organization in Indonesia, government set one effort to response awareness toward environmental sustainability challenges; Indonesia Sustainable Palm Oil (ISPO) is a government initiative to ensure sustainability of Indonesia palm oil industry, with primary focus to ensure legal compliance according to Indonesia s law and regulation which align with sustainability standard. 8

9 Harsono (2011) as shown in Figure 9 concluded ISPO can play important role as complement of RSPO, both ISPO and RSPO have special purposes in palm oil sustainable business development. Table 3. Comparison ISPO and RSPO Source: Harsono, Principle and criteria of ISPO and RSPO basically cover the similar concern which is requested compliance on legal or law regulation, implementation on sustainable best practice cultivation, commitment to long-term economic and financial viabilities, environment responsibility, responsibility toward labor and social and community responsibility. Table 4 shows the summary of ISPO and RSPO. Holding company of PT Agrowiyana, Bakrie Sumatera Plantation or BSP s consistency in applying management system in its operations has been proven by obtaining the first RSPO certificate for the business unit, North Sumatra 1 Business Unit in June The company s commitment to manage its plantations, particularly oil palm plantation sustainably has been very high, 9

10 even long before BSP joined RSPO membership. In meeting the requirements set out in the RSPO, BSP certified the estates and plants at every business unit to obtain Certified Sustainable Palm Oil (CSPO). Table 4. ISPO and RSPO Principle and Criteria 10

11 Tabel 4. (Continue) ISPO and RSPO Principle and Criteria 11

12 Tabel 4. (Continue) ISPO and RSPO Principle and Criteria 12

13 Tabel 4. (Continue) ISPO and RSPO Principle and Criteria Source: RSPO, and ISPO, BSP is committed until the end of 2014, there will be a minimum of 5 business units with RSPO certification, namely North Sumatra 1, Jambi 1, West Sumatra, and other Business Units. On the other hand, the successful experiment at Jambi Unit with its plasma plantation that reached 65% of total 13

14 area has brought inspiration about the balance between business interest and social welfare distribution (SR BSP, 2010) Growing world s demand of palm oil has increased wealth level of smallholder grower in Indonesia, 50% of total palm oil plantation was smallholder own plantation where more than 5 Million of population rely on oil palm. Dynamics of industry will influence huge number of population and therefore good government of palm oil industry should concern to all stakeholders. Indonesia s palm oil industry faces the potential obstacle to keep fulfilling world s palm oil demand, concerning as mentioned below (RTI, 2010): a. Demand of Certified Sustainable Palm Oil for EU, China, and India market. b. Relative low productivity compare to Malaysia and global standard. c. Replanting scenario which impact to the palm oil yield. RTI on Oil Palm Replanting (2010) concluded that replanting scenario become important and urgent issues due to : a. In year 2010 there were 87,851 hectare, 32,889 hectares in 2011, 21,660 hectares in 2012, 18,723 hectares in 2013 and 27,553 in 2014 of oil palm plantation with over 25 years old and have to be replanted. b. Government scenario for replanting and revitalization which was launched on year 2006 has not run as expected. c. Delaying on replanting will cause loss revenue, job opportunity and increase the risk of unemployment. The replanting of plasma plantation within PIR (Perkebunan Inti Rakyat) /NES (Nucleus Estate Smallholders) scheme, there are potential problem for each party involve in the replanting: a. Farmers do not have sufficient fund to bear replanting expenses. It required Rp. 36 Million per hectare or Rp. 72 Million for 2 hectares (per block 14

15 ownership) and buffer fund during waiting period (0 4 years), otherwise Farmers do not have adequate access to financial institution. b. The firm as nucleus partnership doubtfully to facilitate funding since there is no clear assurance on commitment and consistency for farmers as plasma partner. Learning from the experience that some farmers were not consistent some case happened when the harvest in maximum yield, some farmers sell FFB to outside broker to get instant payment. c. Government (Central and Local) is still waiting for appropriate decision which agreed and supported by all related departments or institution. d. Financial Institution (Bank, Insurance Company) asks the guarantee (avalist) to ensure that the fund will be well managed based on the professional standard. In micro scale, PIR/NES plantations also faces the similar problem in replanting program, PT Agrowiyana as PIR/NES company which was located in Kecamatan Tungkul Ulu, within the municipality of Tanjung Jabung Barat, Jambi Province, also plans replanting programs for matured oil palm of 1 st PIR-Trans and KKPA program which was planted in period 1980 to PT Agrowiyana has managed three schemes of plantation, they were Private Own Plantation or Perkebunan Besar Swasta Nasional (PBSN), PIR- Trans or Nucleus Estate Smallholder aimed Transmigrant and Kredit Koperasi Primer untuk Anggota (KKPA) or Prime Co-operative Credit for members. PT Agrowiyana s planted area in 2011 reached 11,614 ha, it consisted of: - 5,037 ha of plasma program under KKPA scheme - 2,633 of plasma PIR-Trans scheme - 4,418 of nucleus estate (PBSN) plantations The productivity of nucleus plantation can be described from mature area of Agrowiyana nucleus estate 3,739 ha, which produced 88.1 thousand tons of 15

16 FFB in 2002, the average yield 23.5 tonnes/ha was quite high compared to PIR- TRANS average yield 20.7 tonnes/ha. ( 2011). Total plasmaa plantation 7,670 ha, involved 4,583 farmers as plasma growers who were grouped into 7 cooperatives whereas 2 banks (Bank Muamalat and Bank Mandiri) experienced to be successful in funding scheme (KPPA and PIR-Trans) and loan collection for the period 2000 to As shown in Table 5, there are 98% of PIR-TRANS plasma area plantations and 100% % of KKPA area plantations have to be replanted on year And for the replanting plan, PT Agrowiyana as nucleus estate and farmer as plasma smallholder growers should choose the effective model to ensure farmers can afford their living cost during waiting period, in the mean time the plantation remain be treated as well as possible to get maximum yield and comply with sustainable replanting practice. Table 5. Area Plantations and Year of Replanting in PT Agrowiyana, Jambi. Note: Assumed productivel age of oil palm is 25 years. Source: Internal dataa PT Agrowiyana, Research Question Considering current situation and as anticipation next 5 years in PT Agrowiyana, the management question for this research are : 16

17 a. To confirm and describe what is key factors which will influence success of replanting (measure from beneficial for both farmer as plasma and firm as a nuclues) in PT Agrowiyana, Jambi. b. What replanting models which suitable for PIR (KPPA) and PIR-Trans in PT Agrowiyana? Are there any suitable models implemented and how was the success rate according to income and other parameters of farmers? c. How to implement sustainable replanting which will response to relevant issues which may rise? 1.3 Specific Research Objectives a. To analyze and determine the priority of oil palm replanting model, in the respect with related factors and impacts to the share holders of PIR Trans and KPPA plantation of PT Agrowiyana. b. To identify key success indicators relate to preferred replanting model which may influence the process and succeed of replanting program. 1.4 Scope and Limitation of the Research a. As a case study, this research will only study replanting model of plasma plantation at PT Agrowiyana Jambi. Aligned with the partnership scheme, PT Agrowiyana is a nucleus and farmer participation in PIR Trans and KPPA are smallholder oil palm grower as plasma. Farmers and PT Agrowiyana was bond into mutual benefits partnership in the form Perkebunan Inti Rakyat (PIR) or Nucleus Estate Smallholder (NES). The research will not study replanting model for nucleus plantation which usually well planning and support by quite strong financial back up. b. The research will focus on response from key actors (farmer, firm/nucleus, government, bank and NGOs) on relevant factors (technical, institution, financial and social-culture) to measure sustainable replanting model 17

18 preference. Actors chosen relate to replanting model at PT Agrowiyana Jambi, it may be different than other local plantation. Hence, the result and recommendation of this research may applicable for all stakeholders of PT Agrowiyana Jambi, oil palm grower and miller and it need further study when will be implemented in other partnership (PIR) plantation. c. This research will not assess current replanting and revitalization policy e.g. KPEN-PR but will study the replanting models which may derive from local experiences and ideas and have been formulized by RTI palm oil replanting team. 1.5 Benefits of the Research a. This research aim to contribute idea of preferred replanting model in the micro scale. By giving recommendation on suitable replanting model and key success factors of replanting which applicable for PT Agrowiyana as nucleus and farmer as plasma grower. The recommendation is expected will guide a better preparation and implementation of replanting program. b. This research may also useful as an additional references or benchmark for formulation of replanting models for partnership (PIR) scheme of other firm or other region. c. For author, this research will enrich knowledge and experience on assessing oil palm replanting especially in mapping of potential problem and formulizing suitable model. 18