INDEPENDENT SMALLHOLDERS IN THE GLOBAL PALM OIL VALUE

CHAIN

A Case Study of Malaysia

Shaufique F. Sidique

Director

Institute of Agricultural & Food Policy Studies

shaufique@upm.edu.my

Outline

Background of Malaysian Oil Palm Smallholders

Current Issues Faced by the Independent Smallholders

Key Research Questions

Aims & Potential Benefits of Certifications

Challenges of Obtaining Certifications

Case Study of Malaysian Independent Smallholders

Conclusions

Background of Malaysian Oil Palm

Smallholders

Generally defined as having less than 40-ha land.

Holders of land title/customary rights.

Can be categorized into:

Organized smallholders

Growers who cultivate oil palm WITH the support of either

government or any organization that provides technical assistance,

agriculture inputs or financing etc. (FELDA, FELCRA, RISDA etc.)

Independent smallholders

Growers who cultivate oil palm WITHOUT direct assistance from the

government or any private organization.

Total Planted Area of Oil Palm in Malaysia,

2012 - 2014

Category

2012 2013 2014

Area (ha) % Area (ha) % Area (ha) %

Organized

smallholders1,258,251 24.7 1,255,138 24.0 1,240,214 23.0

Independent

smallholders691,688 13.6 732,163 14.0 808,835 15.0

Total

smallholders1,949,939 38.4 1,987,301 38.0 2,049,049 38.0

Private estates 3,126,990 61.6 3,242,438 62.0 3,343,186 62.0

TOTAL 5,076,929 100 5,229,739 100 5,392,235 100

Source : Economic & Industry Development Division, MPOB (2012, 2013, 2014)

Distribution of Oil Palm Independent Smallholders &

Land Size in Malaysia, 2014-2016

STATE2014 2015 2016

No. ha No. ha No. ha

Johor 67,499 201,258 69,622 207,483 72,463 213,396

Kedah 4,926 23,658 5,252 24,724 5,401 25,347

Kelantan 1,171 4,575 1,336 4,996 1,553 5,465

Melaka 2,286 10,571 2,489 11,347 2,703 11,905

Negeri Sembilan 4,511 22,046 4,956 23,533 5,310 25,093

Pahang 9,381 42,689 10,123 45,428 10,863 48,073

Perak 35,669 103,575 38,742 109,995 40,830 115,369

Pulau Pinang 1,723 8,879 1,754 9,019 1,776 9,078

Selangor 19,431 43,093 19,801 43,058 20,966 45,196

Terengganu 2,598 10,353 2,735 10,851 3,042 12,001

Perlis 12 68 11 67 16 82

Peninsula 149,207 470,765 156,821 490,503 164,923 511,004

Sabah 32,740 214,818 33,736 217,403 34,866 221,678

Sarawak 23,023 121,425 30,930 175,098 34,918 201,266

Sabah/S'wak 55,763 336,243 64,666 392,501 69,784 422,944

Malaysia 204,970 807,008 221,487 883,004 234,707 933,948

Source: MPOB (2017)

Demographic Background of Independent

Smallholders in Malaysia

Demographics Descriptions

Age Average 54.6 years old; 66.6% > 50 years old

Education Primary (49.6%); secondary (34.1%); tertiary (8.9%);

and 7.4% with no formal education

Household size Average 5.6 persons

Farm employment Full time (55.6%); part-time (28.9%); absentee owner

(15.5%)

Farm size Average 2.6 ha, < 4 ha (88.9%)

Source of seedling Govt. (50.4%), private (24.4%), estate (14.1%)

Average yield 17.84 mt/ha (MPOB, 2014); National Avg. – approx. 20

mt/ha

Characteristics of Independent Smallholder’s

Farming

Establishment

• Seedlings are sourced directly from private

nurseries.

• Development costs e.g. land preparation are

self- funded.

Maintenance • Self harvested and maintained.

• Maintained by casual workers or contractors.

• Organised via dealership who maintains and

harvests the crop.

Logistics • Direct transport using own vehicle.

• Dealer organises transportation of FFBs.

Point of sale • Dealership e.g. FFB collection centre.

• Direct to nearby mill or mill appointed

dealers.

Current Issues Faced by the Independent

Smallholders in Malaysia

Lack of

agronomic

knowledge

Lack of financial

support

Lack of farm

training

Affordability to

get seedlings and

fertilizers

Lower quality

crop and yield

No clear

relationship with

the mills

Vulnerable to

highly volatile

market price

Poor public

infrastructures

No clear legal

support due to

land ownership

Poor farm

efficiency

Reliance on the

dealers to sell

FFBs

No guaranteed

crop pricing

mechanism

Four Pillars for Sustainable Inclusion of

Smallholders in the Global Value Chain

Source: Fernandez-Stark et al. (2012)

Key Research Questions

What are the current livelihood conditions of

independent smallholders in Malaysia?

Will certification help improve the welfare and livelihoods

the independent smallholders?

Understand the adoptive behavior - perception and attitude of

smallholders towards sustainable environment and certification;

Decision-making process of smallholders in getting the

certification; and

Identify barriers and challenges in getting the certification

among the smallholders

Can certification be a tool to empower the independent

smallholders in the global value chain?

Aims of Certification – Sustainable Development

Potential Benefits of

Certification

Improved market access

Earn higher household incomes

Environmental improvements

Social wellbeingHighly ordered smallholders

Improved farming practices

Stronger presence in the

supply chain

Other Potential Benefits of Certification to the

Smallholders

Helps organize the independent smallholders;

More organized smallholders enjoy greater benefits e.g.

better bargaining power;

Improves their presence and market power in the supply

chain;

Less vulnerable to the exogenous shocks e.g. global

market price fluctuations, policy shifts, global pressure;

Improved market and policy information flow and

networks; and

Better agricultural input use in the farm – reduce

wastage, minimize inputs, maximize yield, become

more efficient.

Examples of Certification Scheme in the Oil

Palm Industry

International Sustainability and

Carbon Certification (ISCC)

Rainforest Alliance

Roundtable on Sustainable

Biomaterials (RSB)

Roundtable on Sustainable

Palm Oil (RSPO)

Malaysian Sustainable Palm

Oil (MSPO)

Indonesian Sustainable

Palm Oil (ISPO)

Challenges of Obtaining Certification among

the Smallholders

Achieving certifications requires skills in management,

administration, quality control, marketing and service delivery

that are difficult for the smallholders to develop without

relevant support.

High costs associated with certification process, training and

certification assessment are beyond the means of the

smallholders and may prevent their participation in the

certification scheme.

Skepticism against effectiveness of the certification scheme;

Stringency of technical requirements for production methods;

Organizational demand for verification system; and

Auxiliary services of the certification scheme.

Case study of Certification Scheme among

Malaysian Independent Smallholders

Methodology

Location

• 10 longhouses in Bintulu, Sarawak,

Malaysia (Keresa)

• 10 villages in Telupid/Beluran, Sabah,

Malaysia (Sapi)

Data collection

Sampling

Data Analysis

Methodology

Sampling

• 76 respondents were interviewed in Sarawak

(Keresa).

• 100 respondents were interviewed in Sabah (Sapi).

Data Analysis

• Descriptive statistics: frequency count & percentages

• Efficiency Analysis – Data Envelopment Analysis:

technical efficiency

Working Model for Certification Scheme in

Keresa, Sarawak

Note: KSGS = Keresa Sustainability Group Scheme

Working Model for Certification Scheme in

Sapi, Sabah

FFBs

NGO- MPOB SPOC

CERTIFIEDSMALLHOLDERS SAPI PALM OIL

MILL

Technical Advice

Management Support

Training & Capacity Building

Advisory services

Payment Premium (RM5/ton: kicked off in the 2nd half of

2015)

Sponsorship

Potential Smallholders

Demographic Background

VariableMean

Keresa Sapi

Age of

Household

Head

55 years old 53 years old

Household Size 6 persons 7 persons

Farming

Experience8 years 17 years

Farm Profile

Mean Total Land Size (ha)

Keresa Sapi

Certified Non Certified Certified Non Certified

6.64 3.49 5.01 4.84

t-statistics = 3.976, p = 0.000*

t-statistics = 0.444,

p = 0.658

Total Land Size (ha)

“…towards sustainable agriculture…”

AgriculturalInput Training

Keresa Sapi

CertifiedNon

CertifiedCertified

Non Certified

Seed 7 (27%) 12 (27%) 59 (87%) 7 (22%)

Fertilizer 22 (85%) 27 (59%) 61 (90%) 8 (25%)

Pesticide 5 (20%) 12 (27%) 59 (87%) 8 (25%)

Herbicide 23 (85%) 24 (52%) 61 (90%) 8 (25%)

TrainingIndex

2.12 1.61 3.53 0.97

t(67) = 1.384, p = 0.086 t(98) = 8.49, p = 0.000

Farm Profile

Agricultural input training programs

Perceived social & environmental benefits of certification by the independent smallholders

Perceived social & environmental benefits are higher

among the certified smallholders than the non-certified

ones;

They perceive that they are going to enjoy various social

benefits upon getting the certification; and

Certified smallholders have a consensus on the positive

effects of certification on the environment.

Social & Environmental Impacts of Certification

Annual Household Income

Annual Household Income

Keresa Sapi

Certified Non Certified Certified Non Certified

MYR 23,922 MYR 20,484 MYR 27,011 MYR 26,123

t(66) = 0.88, p = 0.382 t(82) = 0.25, p = 0.804

Economic Impacts of Certification

Note: USD 1 ≈ MYR 4.28.

Perceived Changes in Annual Income among Certified Smallholders

Changes in Annual Income

Keresa Sapi

Certified Certified

Increased 81% 76%

Unchanged 13% 14%

Decreased 7% 10%

Economic Impacts of Certification

Annual Yield (tonne/ha)

Age of Tree

Annual Yield (tons/ha)

Keresa Sapi

CertifiedNon

CertifiedCertified

Non Certified

3 – 6 years old15.13 8.17 10.56 13.19

t(24) = 2.848, p = 0.009* t(8) = - 0.67, p = 0.261

7 – 20 years old11.61 8.42 13.41 12.11

t(31) = 1.58, p = 0.062*** t(30) = 0.68, p = 0.250

Above 20 years old

- 4.16 14.79 16.74

- t(21) = - 0.78, p = 0.222

Economic Impacts of Certification

Input/Output Selection for Data Envelopment Analysis

Output

Yield

Input

Labour

Herbicide

Fertilizer

Cultivated Area

Number of Trees

Technical Efficiency of Independent Smallholders

Technical Efficiency of Independent Smallholders

Technical Efficiency: Input-orientated (IO)TEIO (CRS) TEIO (VRS)

Efficiency Range Certified Non-Certified Certified Non-Certified

0.000-0.250 21 (21.88) 21 (26.25) - -

0.251-0.500 28 (29.17) 23 (28.75) - -

0.501-0.750 23 (23.96) 21 (26.25) 25 (26.04) 14 (17.50)

0.750-0.999 13(13.54) 7 (8.75) 34 (35.42) 38 (47.50)

1.000 (Fully Efficient) 11 (11.46) 8 (10.00) 37 (38.54) 28 (35.00)

Total 96 (100.00) 80 (100.00) 96 (100.00) 80 (100.00)

Mean 0.544 0.504 0.859 0.878

SD 0.278 0.283 0.153 0.130

Min 0.099 0.138 0.518 0.529

Max 1.000 1.000 1.000 1.000Note: Figures in parentheses represent percentages. CRS = Constant Return to Scale;

VRS = Variable Return to Scale; SD = standard deviations.

Conclusions

Smallholders play an integral role in the global value chain.

Certification scheme appears as a promising instrument

to adequately prepare and empower the smallholders in

this sustainability age.

Despite its vast benefits and access to various market

facilities, the certification process is evidently challenging.

Barriers to the inclusion of smallholders into certification

schemes will potentially undermine the effectiveness of

sustainability standards.

Academia and industries should collaborate in various

initiatives to strengthen the smallholder’s presence in the

global supply chain.

INDEPENDENT SMALLHOLDERS IN THE GLOBAL PALM OIL VALUE

CHAIN

A Case Study of Malaysia

Thank you for listening

shaufique@upm.edu.my