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Achieving Palm Oil Traceability in Indonesia’s Complex Supply Chain

Palm oil is like a 2-sided coin. One side represents national GDP and economic growth, yet the other side often highlights deforestation, forest fires, natural resources exploitation and other social and environmental damages. Globally, efforts to achieve sustainable and conflict-free palm oil have been made, with a strong demand on a transparent and traceable supply chain. Traceability in the palm oil supply chain means that we are able to trace the palm oil product back to its origin, making sure that the palm oil was legally sourced as well as produced from an environmental and social conflict-free area. But the supply chain is complex, and we should understand such complexity before achieving traceability.

Complexity of Palm Oil Supply Chain

The journey of palm oil begins from plantation and ends in the form of various palm oil products. Fresh fruit bunches (FFB) of oil palm are commonly harvested from plantation by two mechanisms. First, palm oil companies harvest from their own plantation (called as inti) and from smallholder farmers’ plantations that are managed by companies (called as plasma). Second, palm oil companies obtain the FFB supplies from third party suppliers. Then, The FFB are transported to mills to be extracted as Crude Palm Oil (CPO). The CPO then undergo the refinery process before being transported to manufacturers as raw material for food, oleochemical, or even biofuel.

<p>Palm oil journey from plantation to palm oil products.</p>

Palm oil journey from plantation to palm oil products.

Palm oil journey in the first mechanism is relatively traceable given that companies should comply with such regulation and certification as RSPO and ISCC. The problem, however, lies in the second mechanism where FFB are supplied by third party suppliers, who collect FFB from various sources including independent smallholders.

Case Study: Palm Oil Traceability in PTPN 5’s Mill

Our field research in PTPN 5’s mill in Rokan Hulu, Riau, Indonesia, showed just how complex a palm oil supply chain can be. The company’s Inti and Plasma plantation produced approximately 67 percent of the company’s total palm oil supply, whereas the remaining supply comes from third party suppliers. This proportion is fluctuating especially during the replanting and drought season. While traceability in the Inti and Plasma plantation can be monitored by the company, traceability in the third party suppliers can become tricky.

<p>Illustration of Sei Tapung Mill’s FFB Supplies.</p>

Illustration of Sei Tapung Mill’s FFB Supplies.

<p>Fluctuation of FFB supply in PTPN 5’s CPO Mill. (PHK-III = third party supplier, the other lines are internal sources).</p>

Fluctuation of FFB supply in PTPN 5’s CPO Mill. (PHK-III = third party supplier, the other lines are internal sources).

To provide FFB supplies to PTPN V’s mill, every supplier must have a delivery order (DO) contract. In our study area, at least three types of third party suppliers are commonly found. First, DO holders who cultivate FFB from their own plantation. Second, DO holders who collect FFB directly from independent smallholder, making them the first-hand middleman or agent. Third, DO holders who collect FFB from other smaller middlemen or agents – they usually have stronger financial capacity and wider network.

<p>Illustration of Third party FFB sourcing.</p>

Illustration of Third party FFB sourcing.

The middlemen usually mix the FFB from various sources and sort the FFB based on its quality before being transported to mill, making it difficult to track the origin of the FFB since the transaction between smallholder farmers and middlemen does not have a record. Middlemen are also “unregulated” actors, no system is currently present to control their business despite their significant role in palm oil supply chain.

Room for improvement

Some improvements can be made to achieve traceability. First, the government can start by mapping independent smallholders – who they are and where their plantations are. Second, the government should enforce regulation on record keeping along the supply chain. Indonesia indeed already has a regulation for smallholder farmers to register their plantation through Cultivation Registration Permit/ Surat Tanda Daftar Budi Daya (STD-B). Since STD-B contains identity of the farmers and location of the plantation, it can be used to trace the origin of FFB provided that the actors record the data regularly. Mills can support by only accepting FFB that come with a set of STD-B data. That said, this mechanism comes with extra cost, hence there should be incentives and disincentives for the actors. Incentives can come in the forms of premium price, better access to fertilizer and better access to bank loan. Currently, incentives are only available when traceability is combined with sustainability like RSPO or ISCC. However, this requires resources which goes beyond most producers’ ability to provide. Another way to push traceability is by using disincentive system such as revocation of license to operate or exclusion from the supply chain. Finally, achieving traceability is often hampered by the lack of willingness of all actors to adopt the necessary system. Hence, creating a more doable incentive or disincentive system that can push all actors to participate in recording and sharing their regular records on the origin of FFB and transaction is needed.


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