Smallholder partnerships

Oil palm is well suited to cultivation by smallholders because its long lifecycle and high yields mean that cultivation of a few hectares of land can provide a family with a reliable source of income for around twenty years. REA’s first company-funded PPMD smallholder scheme was established in 2000 and the development of plasma smallholder schemes remains a significant focus of the group’s expansion programme.

The group supports oil palm smallholders in the surrounding communities by way of three smallholder schemes: Program Pemberdayaan Masyarakyat Desa (PPMD), Plasma, and independent smallholders. These schemes, and the purchase by the group of FFB from smallholder cooperatives, create mutually beneficial relationships, contribute to local employment and are supported by training in better, more sustainable, agricultural practices.

There are more than 2,000 independent oil palm smallholders, all grouped in village cooperatives, who cultivate over 9,000 hectares of land within the group’s supply chain. As part of the strategy to help improve smallholder productivity and profitability, REA has collaborated with the international development organisation SNV Netherlands Development Organisation (SNV) to run smallholder training workshops. Given the large number of smallholders involved, a ‘train-the-trainer’ programme has been adopted. Initially, this involved training REA’s smallholder team and the management teams from five smallholder cooperatives in the course content and techniques necessary to provide effective training in best agricultural practices and cooperative management. Once these master trainers proved their ability to convey the training materials to others effectively, they then trained others to become trainers. The ultimate aim of the training is to improve the yield and quality of the FFB that the smallholders produce which represents around 20% of the FFB processed in REA’s mills. There is a clear business case for investing in this training as improvements in smallholder yields and FFB quality will increase both the farmers’ income and the profitability of REA’s palm oil mills.

Traceability

REA has continued to address the traceability of its FFB supply chain to ensure traceability to source for external FFB that is processed in the group’s mills

REA has committed to no development of HCS forests and HCV areas and in the natural ecosystem areas that have unique values and ecological carrying capacity in accordance with the RSPO standards. Accordingly, the group continues to address the traceability of its supply chain for external FFB that is processed in REA’s mills. Traceability information, including geolocation coordinates and polygon mapping, is collected as part of the supplier due diligence process to mitigate any risk of deforestation and REA now has a database of all smallholder land within its supply base. FFB suppliers are registered through their local cooperatives and each delivery to REA’s mills is recorded and its origin verified. This data is also used for analysis in connection with REA’s programme of support to local farmers with field and management training in a drive to improve their productivity, fruit quality and sustainable practices.

 

REA actively manages its relationship with smallholders to ensure that it offers a competitive market for their FFB that also fulfils the group’s traceability and quality requirements and ensures that REA sources sufficient quantities to optimise throughput in the mills. REA adopts an inclusive approach and is working with the smallholders supplying FFB to its mills to improve the sustainable component of REA’s supply chain and promote sustainable palm oil production. REA has determined 15 November 2018 (in accordance with the RSPO Principles & Criteria 2018) as the cut off date for REA’s supply chain in compliance with its NDPE policy.

PPMD scheme

REA started working with smallholders in 2001 under the Smallholder Farmers Programme which became the PPMD scheme in 2005. Under this scheme, REA supported 14 cooperatives of local people with access to land to cultivate oil palm by providing them with oil palm seedlings, fertilisers, herbicides and technical assistance. The costs of the inputs provided are repaid by the members of these cooperatives, interest free, through deductions made when their FFB is sold to REA’s palm oil mills.

Plasma scheme

Plasma smallholder schemes are established for the benefit of the communities that surround REA’s plantations in accordance with regulations introduced by the Indonesian government in 2007. Plasma schemes are not required for REA’s estates that were established prior to 2007 but, in the interests of equitable treatment, REA has committed to develop plasma cooperatives for villages with land areas adjacent to its land allocations developed prior to 2007.

Plasma schemes differ from PPMD in their financing and management. Plasma schemes established to date have been financed by loans to the plasma cooperatives from REA and local banks. The cooperatives themselves are not responsible for, or involved in, the management of the plasma plantations owned by the plasma cooperatives, but rather REA manages these areas in return for a pre-agreed management fee. The cooperatives receive an income derived on an agreed basis by reference to the value of FFB harvested. The development of oil palm plantations under a plasma scheme can take longer to organise than the development of PPMD or REA’s estates, due to the more complex nature of the funding, legal aspects and management of these areas. REA currently works with seven plasma cooperatives, which are now receiving regular monthly income from sales of FFB to REA. All such sales are made at prices set by government regulations.

Location of Plasma Smallholders

Total active smallholder areas delivering FFB to the group amounted to 13,232 hectares on 31 December 2023, equivalent to 37 per cent of the planted areas of the group’s own estates of 35,742 hectares.

Smallholder plantings (hectares) 2022 2021
Plasma 4,034 4,034
Independent smallholders 7,689 6,011
PPMD 1,295 1,007
Total 13,018 11,052

The group currently purchases FFB from the 14 PPMD cooperatives and from nine plasma scheme cooperatives and ten independent smallholder cooperatives. Together they accounted for some 24 per cent of the FFB processed in the group’s mills and provided revenue to the cooperatives equivalent in total to $32.8 million in 2023.

All of the group’s FFB, including smallholder FFB, is sourced from estates and farms located in the Kutai Kartanegara and Kutai Timur Districts of East Kalimantan Province, Indonesia.

FBB purchased (tonnes)* 2022 2021
Plasma 73,184 62,159
Independent smallholders and PPMD 171,460 148,811
Total 244,644 210,970
Revenue ($ million) 41.90 33.30
* Excluding purchases from third party corporates

In 2022, REA adopted a new pricing policy for the purchase of independent smallholder FFB. The previous use of a single price set every two weeks by a local government authority (and applicable to all mills in East Kalimantan irrespective of their location) was replaced with a commercial price set weekly by REA having regard to prices offered for external FFB by competitor mills. The new policy facilitates differential pricing between REA’s three mills so as to better balance mill FFB throughputs and will, in due course, permit the introduction of incentive payments to local FFB suppliers who are willing to obtain sustainability certification for their FFB.

The reduction in the volume purchased from independent and PPMD smallholders in 2023 in part reflected lower production due to aging oil palms and the prolonged dry season, compounded by reduced fertiliser applications because of increasing costs. Additionally, in the first few months of 2023, competition from other local mills offering enhanced payment terms for externally sourced FFB resulted in a reduction in purchases of third party fruit. Following an adjustment of REA’s purchase prices in the second quarter, purchases returned to more normal levels.

Such reduction in the volume of purchases from independent and PPMD smallholders contributed to the fall in revenues to cooperatives as detailed in the table above. However, the principal reason for the fall was that CPO prices during 2023 were lower than in 2022.

The pilot project established in 2021 with the Abler Nordic Climate Smart Fund and Plan B to provide a mechanism for smallholder farmers to access funds for intensifying their oil palm yields and developing alternative revenue streams is currently being extended to other local villages. The objective of the programme is to reduce pressure on the remaining forest areas outside REA’s concession areas as well as to improve the traceability of the FFB supply chain and improve local family incomes.

More than 1,000 local smallholders in six local villages have so far received upskill training in best management practices for oil palm to help improve their yields and FFB quality and a total of 16 smallholder areas are currently participating in the replanting programme, with a further seven scheduled to carry out replanting in 2024. The initial group of 157 smallholder farmers covering 588 hectares of oil palm plantations were the first in the Kutai Kartenegara district to achieve RSPO certification in 2022. The number of participating farmers is continuing to grow with a further 19 smallholder farmers covering 136 hectares of oil palm plantations submitted for RSPO certification in 2023.