The Impact of Contract Farming in the Oil Palm Industry on Poverty Reduction: An Analysis of Supply Chain Partnership in Sumatra, Indonesia (ab 2009)

Motivation

Indonesia is one of the largest palm oil producers in the world providing 46 percent of the world palm oil production. With around 12.8 MMT or equal to US $ 11.64 billion in 2008, palm oil has become a major export commodity in Indonesia (Biro Pusat Statistik, 2009). Small holders play a significant role in national oil palm production with a share of 44 percent of total oil palm plantation area and almost 40 percent of national palm oil production. In addition, there are about 3.2 million laborers engaged in oil palm plantation. These indicators suggest that the oil palm has the potential to make a significant contribution to poverty reduction in rural areas considering that the vast majority of those roughly 35 million Indonesian people who live below the national poverty line are in rural areas.

In view of the economic importance of the oil palm sector the Government of Indonesia (GoI) has introduced contract farming as a form of partnership in the supply chain between nucleus estate plantations and auxiliary smallholder producers. So far few studies have been contacted where the poverty reduction impact of such schemes have been analyzed in a scientifically rigorous way. Furthermore little is known about the actual implementation of contract farming arrangements considering differences in bargaining power between the contracting parties, asymmetric information and the possibility of adverse selection and moral hazard. Hence an empirical study is proposed that is guided by economic theory, namely contract theory and advanced methods of impact assessment for development.

Objectives

The general objective of this research is to establish scientific evidence of the poverty impact of contract farming between large private plantations and smallholders in the oil palm of Indonesia. The research will have three major outputs:

1. Analysis of the degree of the contract scheme adoption through the development of an adoption model that captures the factors that affect smallholders’ adoption decision in the contract adoption.

2. Analysis of the degree of compliance on contractual arrangements from the side of the company (nucleus estate) and the smallholders. This is used to understand decision evaluation by contract smallholders whether they satisfy to adopt the contract scheme.

3. Analysis of the impact of contract farming on smallholders’ well-being including consumption, household income, equity and vulnerability to poverty.

The study will allow developing recommendations for the design and the implementation of contractual arrangements in the oil palm industry in Indonesia and offering general lessons on the role of contract farming in developing countries.