The role of smallholder farmers in the palm oil sector is often overlooked in the sustainability agenda, as policies tend to focus on large industrial plantations, according to the first global Palm Oil Barometer by Solidaridad and smallholder producer organizations in Asia, Africa and Latin America. It offers a new perspective on the largely negative public debate around palm oil in western countries.

With their contribution to palm oil production expected to grow, smallholders play an increasingly central role in rural economic development and preserving biodiversity, notes the report. Palm oil is a crucial ingredient in the diet of the poorest people on earth, and its presence in F&B products across a multitude of categories is prevalent. 

Supply chain-wide smallholder inclusion is crucial for sustainable palm oil production. The controversial crop presents issues and opportunities in the F&B arena. 

Deforestation and poverty underscored
Palm oil production figures prominently in the media as a cause of deforestation, biodiversity loss and climate change. 

However, isolating its impact on the environment from the poverty crisis, to which it is directly linked, it’s easy to overlook the vital role of smallholders in palm oil production. 

Although the image of large companies growing vast expanses of oil palms as a monoculture holds true, more than three million smallholders and their families produce roughly 30% of the world’s palm oil. And a multitude of workers find jobs in oil palm production. 

In Indonesia alone, there are around 16 million workers in the palm oil sector, of which smallholders employ the majority. The contribution of smallholders to the overall supply of palm oil is only expected to increase as industrial-scale companies are forced to limit expansion due to zero-deforestation commitments.

“Smallholders produce not even 2% of certified sustainable palm oil on the market while contributing 30% of the world’s supply. Governments and businesses must make smallholder inclusion part of their sustainability criteria,” underscores Shatadru Chattopadhayay, managing director of Solidaridad Asia. 

Supply chain-wide smallholder inclusion is crucial for sustainable palm oil production.Smallholders generated US$17 billion of the palm oil industry’s US$282 billion turnover in 2020, yet many did not earn enough to cover their families’ essential living costs. 

Despite this, many smallholders prefer growing oil palm to other crops, like coffee, because they earn a higher and more consistent income throughout the year. 

Multiple factors can influence a farm’s profitability, including its size, labor and fertilizer costs, market access and prices. 

Volatile market prices squeeze smallholder margins that are already narrow. 

By 2030, Indonesian smallholder plantations are expected to account for around 60% of the country’s oil palm area. Supporting these smallholders to produce sustainably will be a crucial challenge in the coming years.

Fair value distribution 
While smallholders struggle to make ends meet, at the other end of the chain, food manufacturers, consumer goods companies and retail take 66% of the gross profits on palm oil in food, household and body care products, according to the barometer. 

The focus on cost-cutting to optimize profits contrasts starkly with individual companies’ sustainability commitments, the global climate, and the UN’s Sustainable Development Goal agendas. 

The concern is that global palm oil buyers show little willingness to compensate small producers for operating sustainably, for example, by paying a fair price and investing in long-term trading relationships. A fairer value and risk distribution across the palm oil value chain enable farmers to produce sustainably and make an income that sustains their family’s livelihood.

Future of palm oil farming
Farmers’ organizations play a key role in the debate on the future of palm oil farming. 

Focusing on fair value distribution and minimizing environmental degradation is crucial. The private sector and governments need to move from technical assistance to programs that address the structural disadvantages at the smallholder farm level. 

Heske Verburg, managing director of Solidaridad Europe, recommends that “companies and governments in consuming and producing regions must include smallholders’ interests when developing and implementing policies.”

“The EU should ensure that smallholders will be supported to meet the requirements of the EU Regulation on deforestation-free products and in partnership with producing countries tackle the root causes of deforestation, including poverty.”

Earlier this year, Indonesia lifted its palm oil export ban and relieved global food producers.

Meanwhile, the Roundtable on Sustainable Palm Oil has been scaling up its smallholder inclusion in Indonesia, with aims to incentivize landowners with a case-by-case approach.