The soft commodities market is on the edge of a revolution with the impending implementation of the EU Deforestation Law. Due to come into effect later this year, the law aims to prevent commodities grown on deforested land being imported into Europe.
The key to achieving the EU’s goal of ending its contribution to deforestation for commodities lies in how the bloc incorporates smallholders’ needs in the final design of the law.
Supporters of the EU law say it will secure major victories on deforestation, climate change and biodiversity loss, and may provide smallholder farmers with better prices for their palm oil. But opponents claim it is too burdensome for smallholders and could harm them economically.
The importance of smallholders
Since the first oil palms were brought to Indonesia in 1848 and plantations developed in 1911, the Indonesian industry has remained under the tight control of colonialists, large companies or the federal government.
In 2021, the estimated total productive area of oil palm plantation areas reached 12.59 million hectares, with the majority (57%) owned by large private plantations. Meanwhile, independent smallholder plantations covered over 4.8 million hectares and provided nearly 40% of Indonesia’s palm oil.
Despite their share in owning plantations and producing palm oil, smallholders have historically been excluded from deciding their own fate. Land allocations for plantations have often been decided by the government and have so far favoured large corporations. This situation has allowed the more powerful interests to use persuasion or violence against Indigenous and local communities, and even to operate plantations within protected forests.
Investigations by Rainforest Action Network show that large-scale commercial oil palm plantations are still expanding and the majority have no commitment to end their role in deforestation. Expansion continues via new concessions or the creation of new enterprises, and fruit from these operations is still making its way into the supply chain of global multinationals.
Often, the best course of action for Indonesians has been to farm oil palm themselves, which improves their economic standing and protects against encroachment from large companies. However, promises of economic gain made by government or plantation firms often go unfulfilled, and oil palm smallholders are further impoverished by unfair treatment. Analysis by Chain Reaction Research published in 2021 showed that smallholders generate nearly US$17 billion in value across the global palm oil supply chain – 6% of the total – but their share in profits is close to zero.
The new EU law could change this dynamic by providing an opportunity for smallholders to help shape policy so as to support their wellbeing and reduce nature loss. A few smallholder organisations have recognised this and have already shared statements of support for the EU law, generating some success in influencing the EU parliament to adopt stronger requirements.
These include references to promoting a living income for smallholders, securing sufficient resources for smallholders to comply with the requirements of the law, and establishing credible traceability systems that empower smallholders to collect sustainability premiums. In addition, the current version of the legislation requires due diligence systems to be designed to facilitate smallholder producer participation and establish segregated supply chains that enable smallholder access to the market.
Under a segregated model, palm oil (or any other commodity) is separated from other volumes at all stages of the supply chain. The goal is for all actors in the supply chain, especially the end user, to be able to trace the supply back to its original location or producer.
But these actions likely aren’t enough to ensure that smallholders can feasibly participate and earn the full value of palm oil they produce sustainably. Smallholder farmers will need support from all levels of government and companies in the palm oil value chain to make this work. Also needed is financial support from import country governments and the private sector to finance the investments needed for smallholders to transition to sustainable practices and learn to participate in these due diligence systems. Without this support, smallholders may face challenges selling into the EU and other markets.
Ongoing government aid programmes and private sector efforts to support Indonesia’s smallholder farmers exist, but these must recognise that the EU law provides a new opportunity to support smallholders’ transition to sustainable palm oil production. Fortunately, the foundations for assisting smallholders in becoming compliant with the EU law have already been laid.
The Indonesian Oil Palm Smallholder Union (SPKS) has worked closely with the High Carbon Stock Approach (HCSA) in the development of an Incentives and Benefit Mechanism for Smallholders in Indonesia. The mechanism drafted by SPKS is designed to act as a “flow-through” platform to provide funds to help smallholders farm more sustainably with agreement and input from local communities. SPKS is currently working to finalise the mechanism trials together with HCSA and other local experts.
If efforts like SPKS’s are taken seriously by EU lawmakers, then the EU law’s supporters could find their greatest allies in making sure the new regulation is successful among the smallholder community by capitalising on opportunities to provide additional support through policies and finance.
Despite what some claim, the EU law isn’t a threat to Indonesia’s palm oil smallholders. It, and its US and UK variants, can benefit smallholder farmers if a network to support their fair participation in the evolving market is established. Designing additional policies and securing finance that puts smallholders in a leading role is the best way to ensure everyone wins.