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. Training programmes for independent smallholders continued throughout 2022, notwithstanding the limitations of Covid, with 1,124 independent smallholders from six cooperatives receiving technical training in oil palm cultivation.
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
Supply chain traceability is important for the industry and end users of palm oil products as it increases the visibility of supply chains to buyers and allows for the identification of illegal or unsustainable practices within supply chains. For the REA supply chain, tracing all fruit purchased from smallholders back to a specific plot of land, in conjunction with the fruit grading system at our mills, allows us to monitor the effectiveness and progress of our efforts to improve the sustainable practices of our PPMD and independent smallholders.
Mapping of smallholdings supplying FFB to the group’s mills has been completed and the group now has a database of all smallholder land within the group’s supply base. FFB suppliers are registered through their local cooperatives and each delivery to the group’s mills is recorded and its origin verified. This data is also used for analysis in connection with the group’s programme of support to local farmers with field and management training in a drive to improve their productivity, fruit quality and sustainable practices.
The group started working with smallholders in 2001 under the “Smallholder Farmers Program” which became the PPMD scheme in 2005. Under this scheme, the group supports 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 the group’s palm oil mills. By 2022, only two loans from the group to PPMD cooperatives remained outstanding.
Plasma smallholder schemes are established for the benefit of the communities that surround the group’s plantations, as part of the group’s obligation of responsible development of new land for oil palm, in accordance with regulations introduced by the Indonesian government in 2007. Plasma schemes are not required for the group’s estates that were established prior to 2007 but, in the interests of equitable treatment, the group has committed to develop plasma cooperatives for villages with land areas adjacent to the group’s 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 cooperatives from the group and local development banks. The cooperatives themselves are not responsible for, or involved in, the management of the plasma plantations, but rather the group 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 in accordance with government regulations. The development of oil palm plantations under a plasma scheme can take longer to organise than the development of PPMD or group estates, due to the more complex nature of the funding, legal aspects and management of these areas. Before development begins, it is critical that members of each cooperative fully understand how plasma schemes work, including the cost of cultivating oil palm, the terms of the financial agreements with the group or bankers to the schemes and the predicted income over time to the members of each cooperative. The group currently works with seven plasma cooperatives, which are now receiving regular monthly income from sales of FFB to the group.
Location of Plasma Smallholders
Total active smallholder areas delivering FFB to the group amounted to 13,018 hectares at 31 December 2022, equivalent to 36% of the planted areas of the group’s own estates of 35,968 hectares.
|Smallholder plantings (hectares)||2022||2021|
The group currently purchases FFB from 14 PPMD cooperatives, seven plasma scheme cooperatives and ten independent smallholder cooperatives. Together they accounted for 25 per cent of the FFB processed in the group’s mills and provided revenue to the cooperatives equivalent in total to $41.9 million in 2022.
All of the group’s FFB, including smallholder FFB, is sourced from estates and farms located in the Kutai Kartanegara and Kutai Timur Districts of East Kalimantan Province, Indonesia.
|FBB purchased (tonnes)*||2022||2021|
|Independent smallholders and PPMD||171,460||148,811|
|Revenue ($ million)||41.90||33.30|
|* Excluding purchases from third party corporates|
The increase in 2022 in independent smallholder areas resulted from the readmission to the supplier directory of some smallholders who had been deactivated in 2021. Any producer not delivering FFB to a group mill for a period of 90 days (which may be because their land is not productive) or delivering FFB that does not meet the group’s quality standards may be suspended from the active supplier directory. Previously these suppliers could not be readmitted but this policy was revised for smallholders who passed certain due diligence checks. The group continues to manage actively its relationship with smallholders to ensure that the group offers a competitive market for their FFB that also fulfils the group’s traceability and quality requirements and ensures that the group sources sufficient quantities to optimise throughput in the mills.
During 2022, the group adopted a new pricing policy for the purchase of third party 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 the group having regard to prices offered for external FFB by competitor mills. The new policy facilitates differential pricing between the group’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 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. More than 1,100 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. Replanting of three smallholder demonstration plots was carried out in the second half of 2022 with further replanting areas planned for 2023. The objective of the programme is to reduce pressure on the remaining forest areas outside the group’s concession areas as well as to improve the traceability of the FFB supply chain and improve local family incomes. The initial group of 155 smallholder farmer members in the programme successfully obtained RSPO certification covering 588 hectares of oil palm in late 2022. This is the first group of farmers in the Kutai Kartenegara district to obtain RSPO certification and there are currently several other farmers and cooperatives who are working towards obtaining RSPO certification under the programme in 2023.