Jakarta Globe, 20 January 2010

Nicole Fischer

A certain degree of euphoria seems to have spread through the government about producing biofuel from palm oil. Government schemes are under way to double palm oil production by 2020, mostly through an expansion of plantation areas.

Palm oil, a labor-intensive product, is promoted by President Susilo Bambang Yudhoyono as a path to leading millions out of poverty. Over 40 percent of oil palms are cultivated by 3.5 million smallholders. The National Palm Oil Association (Gapki) says expanding plantation land from the current 10 million hectares to “only” 12 million hectares can provide livelihoods for an additional five million people, almost one-sixth of the country’s poor.

Furthermore, palm oil production is centered in rural areas with high-unemployment and does not require any substantial new skills.

Palm oil production can also open up options for both companies and individuals by clarifying land titles, improving legal settlement mechanisms, enforcing labor law and curbing corruption. Government-led programs are also improving the lot of smallholders by bring market efficiencies to local practices.

But the initial costs of establishing an oil plantation are high and cash flows are generated only after several years. In practice, a model has evolved in which a large private producer will often bear the full initial costs and sublease a part of its plantation to smallholders in parcels of around two hectares with an agreed fifteen-year repayment scheme.

But as NGO detractors warn, plantations can spawn new forms of subsistence and dependency. Cases of smallholders being tricked into giving up land have contributed to perceptions of exploitation and occasional violence.

Thus the jury is still out as to whether palm oil production is efficient and whether other products, such as cooking oil, warrant greater focus.

Palm oil is also central to the “fuel versus food” debate. Increased palm oil production seems to be inflating the price of cooking oils as production shifts to palm oil.

And what of efficiencies? While it is often said that the amount of land earmarked for oil palm plantations is increasing, a closer look reveals that nearly half of all land licensed (both to commercial companies and smallholders) for oil palm plantations is still inactive.

Even Greenpeace, currently campaigning against plantation expansion, has pointed out that enormous amounts of arable land lie abandoned. This is hardly conducive to achieving maximum yield per hectare. Some of this will happen automatically, as the 30 percent of plantations that are still counted as immature reach their optimal production age. But using better seeds, more fertilizer and applying more intense plantation management techniques look even more promising.

According to the Directorate General of Estate Corps, smallholders producing at 70 percent of their potential are known to hardly use any fertilizer, while seed producers claim smallholders could raise their production by nearly 50 percent if they made use of the best seeds available.

Private estates usually produce at an average of only 60 percent of their potential. Why these rates are so low is not fully understood and needs further examination.

Indonesia exports 85 percent of its palm oil, making it the country’s largest export outside of oil and gas. It accounts for a tenth of foreign exchange receipts. And while the EU has raised its environmental standards for biofuels beyond what Indonesian producers can deliver at the moment, producers are not losing sleep yet.

Rising demand from China and India, the world’s two largest importers, more than compensate, though China has hinted at tightening environmental standards and the reintroduction of a substantial import duty in India remains a possibility.

So far, constant growth in demand has insulated the industry from most market problems, including over-dependence on a single commodity, the concentration of the market on two main countries and the immense volatility of international CPO prices, which have fluctuated between $400 and $1,100 per ton in the past 5 years.

Changes to import conditions or prices resulting from the global economic cycle, which are out of the hands of the individual companies involved, necessitate a review of the policy on biofuels. Whatever the final choice, the government needs to base its palm oil policy on an honest risk assessment.

Indonesia’s recent agreement at the first G-20 meeting (later repeated at the Copenhagen summit) to reduce green house gases by 26 percent before 2020 is a complicating factor.

Six months ago the country ended a ban on peat land conversion and allowed an additional two million hectares of peat land to be licensed for oil palm plantations. Making new land available for plantations as a result of deforestation or draining peat land threatens the habitat of flora and fauna and sets free huge amounts of CO2. This policy is not easy to defend on the international stage and will hinder reaching the agreed greenhouse gas emissions targets.

One detractor of the scheme, however, the interest group Mongabay.com, has suggested that the real intention behind this step could be to provide companies with licenses that might be sold as carbon certificates under the Reduced Emissions from Deforestation and Forest Degradation (REDD) carbon trading scheme. The group says this might offset any environmental degradation caused by land conversion.

Others point out that banks are allocating additional credits to the well-performing oil plantation sector, which may provide legal financing.

However, it could be argued that using income from logging for the clearing of plantations and using these resources to finance the high initial costs of plantation settlement seem to play into the hands of those in favor of legal deforestation.

The palm oil business has the potential to contribute to Indonesia’s economic recovery and the country’s foreign exchange needs.

It can be a source of employment with minimal new skills required. But is it the only crop that can do this? Furthermore, while benefits may appear in the short-to-mid-term, the negative impacts from land clearance, drainage, deforestation and climate change will be felt in the immediate future, the mid-term and the long-term.

Whatever the future of palm oil and biofuels in Indonesia, palm oil production is here to stay. Producing it in both an efficient and environmentally friendly way is now something of an imperative for Indonesia if it is to fulfill its domestic and international obligations on greenhouse gases. Furthermore, if palm oil is to serve as a real means of lifting people out of poverty, notorious weaknesses in land titles, labor relations, corruption and the accessibility of credit need to be eliminated.

Investors in palm oil and biofuel production are operating in a high-yield sector with growing international and domestic demand. They are also finding an open ear and a welcoming hand from the government.

Perhaps the next oil rush is upon us. But let us not forget that oil is as slippery as mercury — and look at how bad that can be for us all.