The Economic Benefit of Palm Oil to Indonesia - World

The Economic Benefit of Palm Oil to Indonesia

A Report by World Growth

February 2011

Alleviating Poverty through Wealth CreationPalm oil provides developing nations and the poor a path out of poverty. Expanding efficient and sustainable agriculture such as Palm Oil Plantations providessmall and large plantation owners and their workers with a means to improve theirstandard of living.

Sustainable DevelopmentSustainable development of palm oil plantations and growth of the palm oil industryin developing nations can and will be achieved through consultation and collaborationwith industry, growers, lobby groups and the wider community.

Climate and the EnvironmentPalm Oil is a highly efficient, high yielding source of food and fuel. Palm Oilplantations are an efficient way of producing fossil fuel alternatives and capturingcarbon from the atmosphere.

Opportunity and ProsperityDeveloping nations must be allowed the chance to grow and develop without political intervention by environmental groups or developed nations. It is crucial thatdeveloping nations be given the same opportunities which developed nations havebenefited from.

Property RightsEfficient palm oil plantations and the growing demand for palm oil give smaller landholders greater opportunities to make a living off their land, maintain theirownership and support their rights to property and prosperity.

2 • The Economic Benefit of Palm Oil to Indonesia

The Economic Benefit of Palm Oil to Indonesia • 3

Table of Contents

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . 4

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

II. Global Economic Importance of Palm Oil . . . . . 6

Trends in the Global Productionand Trade of Palm Oil . . . . . . . . . . . . . . . . . . . . . 6

Trends in the Global Consumption of Palm Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Trends in the Global Consumption of Vegetable Oils . . . . . . . . . . . . . . . . . . . . . . . . . 9

III. Economic Importance of Palm Oil to Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Agriculture’s Contribution to the IndonesianEconomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Palm Oil’s Contribution to the IndonesianEconomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Palm Oil and Rural Development in Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Returns from Palm Oil Production . . . . . . . . . . 14

IV. Future Prospects for Palm Oil . . . . . . . . . . . . . . 15

Future Prospects for Global Palm Oil Demand . . . . . . . . . . . . . . . . . . . . . . . . 15

Global Palm Oil Production and Opportunities . . . . . . . . . . . . . . . . . . . . . . . 15

Key Challenges and Opportunities for theIndonesian Oil Palm Sector . . . . . . . . . . . . . . . . 16

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Annex Palm Oil Production and Poverty by Province . . . . 26

4 •The Economic Benefit of Palm Oil to Indonesia

Executive Summary

Environmental NGO’s have been pushing a “no-conversion” agenda, in an attempt to halt the conver-sion of forest land to agriculture, including palm oilplantations. This agenda has extended into the opera-tions of international organisations and governments.

In May 2010, the Indonesia and Norway signed aLetter of Intent comprising a framework for Indonesiato receive financial contributions from the NorwegianGovernment in return for the implementation ofemission reducing policies, including a two-year sus-pension on all new concessions for conversion of peatand natural forest.

In July 2010, The World Bank proposed a frameworkfor its engagement in the palm oil sector, acting at thebehest of environmental NGOs to toughen the policiesof the Group on the terms financial support is provid-ed to Palm Oil projects. A revised version of the frame-work was released for consultation in January 2011.

Restrictions on the conversion of forest area will neg-atively impact economic growth and food security inIndonesia and directly impact those living in poverty.For this reason, developing countries refused toinclude “no conversion” in the approach to forestryand REDD at the UN Climate Change conference inCancun in December 2010.

Economic Benefits of Palm Oil

The palm oil industry has the potential to generatesignificant economic and social development inIndonesia. Palm oil is Indonesia’s second most suc-cessful agricultural product, after rice paddy, andlargest agricultural export. It provides a means ofincome and economic development to a large numberIndonesia’s rural poor. The Indonesian palm oil

industry is expected to continue its rapid growth inthe medium-term; however, its competitiveness willbe negatively impacted by the anti-palm oil agenda.

The global market for palm oil has experienced rapidgrowth in recent decades with current production ofpalm oil estimated at over 45 million tonnes.Indonesia is one of the world’s largest producers andexporters of palm oil, producing over 18 milliontonnes of palm oil, annually.

Agriculture and Regional Poverty

Although only contributing around 14 percent toGDP, agriculture provides employment for over 41percent of the Indonesian population and providesaround two-thirds of rural household income. Thepalm oil industry is a significant contributor to ruralincome in Indonesia. In 2008, over 41 percent of oilpalm plantations were owned by small land holders,producing 6.6 million tonnes of palm oil.

With over half of Indonesia’s population lives in ruralareas—of which over 20 percent live below the povertyline—the palm oil industry provides an incomparablemeans of poverty alleviation. Limiting the conversionof forest to agriculture or palm denies considerableprospective economic benefits and improvements inliving standards to the rural population, condemningthem to declining standards of subsistence.

Future Industry Growth

With global demand for palm oil expected to growfurther into the future, palm oil offers the most prom-ising economic prospects for Indonesia. World pro-duction of palm oil is expected to increase by 32percent to almost 60 million tonnes by 2020.

Restrictions on the conversion of forests to oil palmplantations Indonesia would reduce the availability offertile land and impede expansion of the industry.Government policies should aim to improve produc-tivity and not implement anti-growth NGO policies.

Restrictions on the conversion of forest area

will negatively impact economic growth and food

security in Indonesia and directly impact those

living in poverty. EX

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I. Introduction

Indonesia is one of the world’s largest producers ofpalm oil and the industry has been the economy’s mostvaluable agricultural export sector for the past decade.

The palm oil industry is a significant contributor toproduction in Indonesia. In 2008, Indonesia producedover 18 million tonnes of palm oil. The industry alsocontributes to regional development as a significantsource of poverty alleviation through farm cultivationand downstream processing. Palm oil production pro-vides a reliable form of income for a large number ofIndonesia’s rural poor, with one source suggestingthat employment generated from palm oil productionin Indonesia could potentially reach over 6 millionlives and take them out of poverty. Over 6.6 milliontonnes of palm oil is produced by smallholders repre-senting over 41 percent of total palm oil plantations.In 2006, it was found that around 1.7 to 2 million peopleworked in the palm oil industry.

The Indonesian palm oil industry has recently comeunder fire from a number of NGOs who have cam-paigned against the industry and its perceived contri-bution to deforestation, carbon emissions, andbiodiversity loss. As a result, there have been widespread complaints that palm oil is not sustainable andproposals to have all future forest land conversionhalted or restricted.

In May 2010, the Indonesian Government foreshad-owed a two-year moratorium on new concessions toclear natural forests and peatland under a deal signedwith the Norwegian Government, aimed at reducinggreenhouse gases. In return for the agreement,Norway has agreed to invest $1 billion in forest conservation projects in Indonesia. A year prior, theIndonesian government had announced it would dou-ble palm oil production to 40 million tonnes by 2020.The successful growth of the Indonesian palm oilindustry will be impacted greatly by any restrictionson land conversion as well as negative campaigns targeting the industry. The achievement of theIndonesian government’s target of doubling oil palmproduction will also be significantly impacted by themoratorium, as some level of land conversion isrequired for economic development.

This report has been prepared as an independent

assessment of the economic benefits of the palm oilindustry to inform policy makers and officials. It exam-ines recent industry performance and considers theprospects for future growth. Key components include:

• Current trends and future projections for global oildemand;

• The contribution of agriculture and palm oil to theIndonesian economy;

• Palm oil’s contribution to rural development; and

• Key challenges and opportunities for the Indonesianpalm oil industry.

This report has been prepared as an independent

assessment of the economic benefits of the palm

oil industry to inform policy makers and officials.


II. GLO

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II. Global Economic Importance of Palm Oil

Palm oil is a vegetable oil derived from the fruit of thepalm tree, it is used for both food and non-food con-sumption. Total global production of palm oil is esti-mated at over 45 million tonnes, with Indonesia andMalaysia as the major world producers and exporters.Major importers include India, China and theEuropean Union.

The palm oil industry has experienced rapid growth inrecent decades, and has become a significant contrib-utor to the world market for vegetable oils. Demandfor palm oil has further increased in recent years asmany developed economies are shifting away from theuse of trans-fats, to healthier alternatives. Palm oil isoften used as a substitute for trans-fat as it is one of thefew highly saturated vegetable fats that are semi-solidat room temperature, and is relatively low cost.

World trade in palm oil has increased significantly dueto increased global demand. However, there has alsobeen public concern surrounding the impact of palm

oil on deforestation, carbon emissions and biodiversi-ty loss. High returns have encouraged investment inthe Indonesian palm oil industry, and the resultingindustry growth has contributed significantly to ruraleconomic development and poverty alleviation.However, despite the expected increase in futuredemand, land use restrictions (such as the recent twoyear moratorium on new concessions to clear naturalforests and peatland in Indonesia) may constrainindustry development, as some level of land conver-sion is needed for industry growth.

Trends in the Global Production and Trade of Palm Oil

Originating in Africa, the oil palm was introduced intoMalaysia and Indonesia in the colonial period. Currentcultivation is concentrated in the tropical areas of theAmericas, Africa and Southeast Asia, particularlyIndonesia and Malaysia—where the climatic growingconditions are ideally suited for palm oil trees. Other keypalm oil producing countries include Nigeria, Thailand,Columbia, Ecuador and other African economies.

Source: Koh and Wilcove 2008

Fig. 2.1 Oil Palm Cultivation in 43 Oil Palm Producing Countries in 2006

Mexico

Panama

Guatemala

Honduras

NicaraguaCosta Rica

DominicanRepublic

Colombia

Venezuela

PeruBrazil

Suriname

Ecuador

Paraguay

Nigeria

Somalia

Tanzania

Democratic Republic of Congo

AngolaMadagascar > 1 million ha

100,000 to 1 million ha

10,000 to 100,000 ha

< 10,000 ha

Gabon

Central African Republic

Burundi

TogoBenin

GhanaIvory Coast

LiberiaSierra Leone

Guinea

Cameroon

Sao Tome &Principe

Congo

Equatorial Guinea

Senegal & Gambia

Guinea Bissau

China

Thailand

MalaysiaPapua NewGuinea

Philippines

IndonesiaSoloman

Islands


Total world production of palm oil has increasedalmost threefold over the past 3 decades to 20091. In2009/10, total palm oil production was estimated at45.1 million tonnes,2 with Indonesia and Malaysiaaccounting for more than 85 percent of the world total.Indonesia and Malaysia each produced over 18 milliontonnes of palm oil.

Total trade in palm oil and palm kernel oil is over 35million tonnes, imported and exported. Majorexporters of palm oil include Indonesia and Malaysiawho exported 15.7 and 15.1 million tonnes, respective-ly. Key importing economies included India, Chinaand the European Union, who imported 6.7 million,6.3 million and 4.6 million tonnes, respectively.3

Trends in the Global Consumption of Palm Oil

Approximately 80 percent of global palm oil produc-tion is used for food purposes including as cooking oil,in margarines, noodles, baked goods etc. In addition,palm oil is used as an ingredient in non edible prod-

ucts including in the production of bio-fuel, soaps,detergents and surfactants, cosmetics, pharmaceuti-cals and a wide variety of other household and indus-trial products. In 2009, the world consumedapproximately 6.5 kilograms of palm oil per capita,annually.4 Palm oil and palm kernel oil uses, in bothfood and non-food products, have been growing sig-nificantly. By 2020, global consumption of palm oil isexpected to grow to almost 60 million tonnes.

World demand for palm oil is also increasing, and like-ly to further increase, as developing economies moveaway from manufactured trans-fats to healthier alter-

40

45

35

30

25

20

15

10

5

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1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

South East Asia (other)AfricaIndonesiaWorld Malaysia Other

tonnes (millions)

Fig. 2.2 World Palm Oil Production 1989-2007

1 FAO (2010)2 FARPI (2010)3 FAO (2010)4 FARPI (2010)

High returns have encouraged investment in the

Indonesian palm oil industry, and the resulting

industry growth has contributed significantly to

rural economic development and poverty alleviation.

Note: Rest of the World contains all other countries except as individual listed, including other South East Asian countries

Source: FAO 2010.

5 Sheil et al (2009)6 Sheil et al (2009) 7 OECD-FAO (2009) 8 Thoenes (2006) 9 Sheil et al (2009)10 Thoenes (2006) 11 Neste Oil (2007)12 Darby Sime

sources as palm oil currently accounts for less than 5percent of the world’s bio-diesel production5.Approximately 95 percent of the world’s energy con-sumption is sourced from fossil fuels; by 2030 energyconsumption is expected to increase by a further 50 percent.6 Many economies are setting targets to convertreliance on fossil fuels to greater use of renewable energyin efforts to reduce GHG emissions. One such renew-able energy source that has grown significantly over thelast decade is bio-fuel. Palm oil is widely used as a feed-stock in bio-diesel production. Although dependent ongovernment policies, the increased use of bio-fuels isexpected to facilitate further demand growth for palmoil. The OECD is expecting the global usage of vegetableoils in bio-diesel production to more than doublebetween 2006-08 and 2018.7 Palm oil is the most costcompetitive vegetable oil for producing bio-diesel.8

Many economies are currently adopting policies thatencourage the use of bio-fuel. If such blending mandatesare enforced an extra 4 million hectares of oil palmwould be needed to meet European Union require-ments alone. A further one million hectares may beneeded to satisfy China’s requirements, making bio-fuelproduction even more attractive.9

Investment in bio-diesel processing capacity is increas-ing; the Indonesian and Malaysian governments haveintroduced policies to develop a bio-diesel industry andtargets of allocating 6 million tonnes of palm oil to theindustry each year.10 An oil refiner in Finland (NesteOil) has built the world’s largest bio-diesel plant inSingapore11 and another major producer (Sime DarbyBerhad) has an annual processing capacity of 200,000tonnes of biodiesel in the Netherlands.12 However, insome cases, palm oils penetration of the bio-fuel mar-ket has been distorted by government assistance meas-ures. For example, the use of palm oil has been stymiedby European Union protectionist policies against theimportation of palm oil for use as a biofuel. In 2008,the European Parliament issued the Renewable EnergyDirective restricted the use of palm oil based bio-fuels,due to environmental and social concerns. This willhave direct implications for the global demand for

natives. Trans-fats are often used in the place of naturalsolid fats and liquid oils in the production of commer-cial food, particularly fast food and the snack andbaked-good industries. Artificial and synthetic trans-fats are created by the processed food industry frompartially hydrogenating unsaturated plant fats.Recently, developed economies have recognised thehealth risks of trans-fats, and have begun to limitingtheir use. Countries such as Demark, Switzerland andsome U.S counties have banned the use of trans-fats inrestaurants and fast food chains. Other countries suchas the United Kingdom, Canada and Brazil have imle-mented policies aimed at reducing the use of trans-fats, including the requirement for trans-fats to belisted on food labels. In substitute for trans-fats, thedemand for palm oil has increased. In addition tobeing a source of healthy unsaturated fats, palm oil isodourless and tasteless and does not require hydro-genation to achieve a solid state. These characteristicsmake palm oil ideal for margarine, baked goods andpackaged goods, making it a strong competitor withvegetable oils made from soybeans and rapeseed thatrequire hydrogenation to achieve a solid state. In addi-tion, palm oil is tolerant to high heat making it usefulin the fried food and fast food industries.

Palm oil’s increasing contribution to the bio-fuels indus-try is also stimulating further demand. However, thisdemand is relatively low as compared with other


Investment in bio-diesel processing capacity

is increasing; the Indonesian and Malaysian

governments have introduced policies to develop

a bio-diesel industry and targets of allocating

6 million tonnes of palm oil to the

industry each year.


percent; the main vegetable oil on world markets wassoybean, accounting for approximately a third of totalconsumption. The market share of soybean has sincefallen, with palm oil becoming the major consumedvegetable oil. In 30 years, palm oil consumption hasincreased tenfold from 4.5 to 45 million tonnes(including growth of 100 percent in the last decade)and now comprises 34 percent of the world market. In2009, despite consumption of soybean oil increasingby 22.5 million tonnes, its market share had fallen to27 percent. Rapeseed and sunflower oil’s marketshares were 16 percent and 10 percent, respectively.

palm oil as the European Union is the world’s largestconsumer of bio-fuels.

Trends in the Global Consumption of Vegetable Oils

Over the past 3 decades, there has been a substantialgrowth in the global consumption of vegetable oil.Between 1980 and 2008 consumption increased morethan threefold from 40 million tonnes to over 130 mil-lion tonnes. In addition, there has been a significantshift in the relative market share of different vegetableoils. In 1980, the market share for palm oil was 11

Fig. 2.3 World Consumption of Vegetable Oils, 1980-2009

Type of Vegetable Oil 1980 1990 2000 2009Quantity % Quantity % Quantity % Quantity %

Soybean Oil 13.4 33.7 16.1 26.5 25.6 27.7 35.9 27.0

Palm Oil 4.5 11.3 11.0 18.1 21.9 23.7 45.1 34.0

Rapeseed Oil 3.5 8.8 8.2 13.5 14.5 15.7 21.5 16.2

Sunflower Oil 5.0 12.6 7.9 12.9 9.7 10.5 13.0 9.8

Palm Kernel Oil 0.6 1.5 1.5 2.5 2.7 2.9 5.2 3.9

Other Vegetable Oils 12.8 32.1 16.1 26.5 18.1 19.6 12.0 9.0

Total Vegetable Oils 39.8 60.8 92.5 132.8

Note: Quantity in millions of tonnes

Source: Oil World (2010), in Hai Teoh (2010)


The structural composition of the Indonesian economyhas changed significantly in the past four decades. Aswith most economies in the region, it has shifted froma primarily agrarian economy towards the industry andservices sectors. Nowadays, Indonesian production islargely dominated by the industrial sector, contributingjust over 48 percent to total economic activity, includ-ing the oil and gas which contribute to over 10 percentof GDP.14 The services sector and agriculture sectorcontribute 38 percent and 14 percent, respectively.15

Agriculture’s Contribution to the Indonesian Economy

Indonesia’s major agricultural products include ricepaddy, palm oil, chicken meat, coconuts and rubber,with major exports including Indonesia’s palm oil,rubber, palm kernel oil, cocoa and coffee. The contri-bution of agriculture to GDP has steady decreasedover the past 20 years. In 2008, the agriculture sectorcontributed 14.4 percent of GDP (as compared witharound 22.5 percent in 1988 and 18.1 percent in 1998).

III. Economic Importance of Palm Oil to Indonesia

Indonesia’s GDP was estimated at $USD 510.77 billionin 2008, classifying it as a lower middle income coun-try. Over the past decade, GDP growth has averagedalmost 5 percent (6.0 percent in 2008) and populationgrowth has averaged 1.2 percent. GDP per capita hasalso grown steadily. Indonesia’s population is expectedto continue to grow at an annual growth rate of 0.57percent to over 271 million by 2030.13

Nowadays, Indonesian production is largely

dominated by the industrial sector, contributing

just over 48 percent to total economic activity,

including the oil and gas which contribute to

over 10 percent of GDP.

13 UN Data (2010)14 Statistics Indonesia (2010)b15 OECD (2010)

80

90

100

70

60

50

40

30

20

10

0

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Services Industry Agriculture

Fig. 3.1 Structure of the Indonesian Economy, 1960 to 2005

Source: World Bank (2010)

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small shareholders and the remaining 10 percent byGovernment plantations. Private plantations repre-sent the largest producers of palm oil in Indonesia,producing over 9.4 million tonnes of palm oil valued in2008. In the same year smallholder plantations pro-duced 6.7 million tonnes of palm oil and Governmentplantations produced 2.2 million tonnes of palm oil.

Palm Oil and Rural Development in Indonesia

Poverty in Indonesia is largely a rural occurrence. In2009, of 32.5 million Indonesians living below thenational poverty line, 20.6 million were located in rural

Palm Oil’s Contribution to the Indonesian Economy

Palm oil is Indonesia’s second largest agriculturalproduct; in 2008, Indonesia produced over 18 milliontonnes of palm oil. For the last decade, palm oil hasbeen Indonesia’s most significant agricultural export.In 2008, Indonesia exported over $14.5 billion in palmoil related products.16 The Indonesian palm oil indus-try has experienced significant growth in recent yearswith approximately 1.3 million ha of new area dedicat-ed to palm oil plantations since 2005, reaching almost5 million ha in 2007 (representing 10.3 percent of the48.1 million ha of agricultural land).17 This substantialexpansion is due to higher returns driven by strongerdemand. The majority of Indonesia’s palm crop islocated in Sumatra, with over 75 percent of totalmature palm area and 80 percent of total palm oil pro-duction.18 Key Indonesian production provincesinclude Riau, Sumatera Utara, Sumatera Selatan,Jambi and Sumatera Barat.

In 2008, approximately 49 percent of palm oil planta-tions were owned by private plantations, 41 percent by

For the last decade, palm oil has been Indonesia’s

most significant agricultural export. In 2008,

Indonesia exported over $14.5 billion in palm oil

related products.

Rice Paddy

Palm Oil

Chicken Meat

Coconuts

Natural Rubber

Other

Fig. 3.2 Indonesian Commodity Share of Agricultural Production, 2009

Source: FAO (2010)b

16 Indonesian Palm Oil Commission (2008), GAPKI(2009), Statistics vary amongst sources, unofficial FAO (2010) statistics estimate production in 2008 at over 16.9 million tonnes.

17 As measured by the FAO (2010)18 USDA (2009)


rural household income (wages and farmingincome)21. A 2004 study showed that agricultural GDPgrowth in Indonesia is beneficial in reducing poverty,particularly in rural areas. Specifically, annual growthof 1 percent was found to reduce total poverty by 1.9percentage points (urban poverty by 1.1 percentagepoints and rural poverty by 2.9 percentage points)22.World growth (2009) noted that over the past decade,industry expansion—specifically palm oil—has been asignificant source of poverty alleviation through farmcultivation and downstream processing.

Significant growth in the palm oil industry, has led topalm oil becoming component of economic activity inregional economies. In certain regions, palm oil is thedominant estate crop and major contributor to eco-nomic development. In the past decade, the palm oilplantation areas of Kalimantan and Suliwesi have expe-rienced strong development, averaging 13 percent and 8percent annual growth rates, respectively.23 The planta-tion and harvesting of oil palm is labour intensive, assuch, the industry contributes a significant portion of

areas. The percentage of poor in rural areas of Indonesiavastly outweighs that of their urban counterparts, withover 17.3 percent of the rural population below the pover-ty line, as compared with 10.7 percent in urban areas.19

This overall poverty rate doesn’t account for the millionswho live just above the poverty line.20 The InternationalFund for Agricultural Development (IFAD) found thatthe poorest people in rural areas tend to be farm labour-ers working on other peoples land, and smallholders onsmall plots of land less than 0.5 hectares.

Over half of Indonesia’s population is located in ruralareas. In 2002, agriculture represented two thirds ofrural employment and contributed to almost half of

Significant growth in the palm oil industry, has

led to palm oil becoming component of economic

activity in regional economies.

19 Statistics Indonesia (2010)20 IFAD, accessed September 201021 ADB (2006), pg 322 Sumatro and Suryahadi (2004) in ADB(2006) 23 USDA (2009)

Fig. 3.3 Key Palm Oil Areas in Malaysia and Indonesia

SabahNanggroeNanggroe

AcehAcehDarussalamDarussalam

NanggroeAceh

Darussalam

Riau

Bali

Serawak

WestKalimantan

CentralKalimantan

SouthSouthKalimantanKalimantanSouthKalimantan

WestPapua

Papua

WestWestSumatraSumatra

WestSumatra

Jambi

MALAYSIA

SINGAPORE

BRUNEI

INDONESIA

TIMOR LESTE

AUSTRALIA

Source: Sheil, D. et al (2009), pg 4


24 Goenadi (2008), pg 3.25 Sheil, D. et al (2009)26 Zen et al (2006) and Sheil, D. et al (2009)27 Hardter et al (1997), pg 99

plantations were owned by smallholders, with a fur-ther 49 percent owned by private plantations—theremaining 10 percent is owned by government. Thepalm oil industry makes a substantial contribution torural incomes, particularly small land holders. In 1997,the average net income of oil palm smallholders wasseven times that of farmers involved in subsistenceproduction of food crops.27

The importance of the palm oil industry to rural devel-opment has been recognised by both the IndonesianGovernment and the private sector. For example, the

employment in many regional areas. Goenadi (2008)estimates that employment generated from palm oilproduction in Indonesia could potentially reach over 6million lives and take them out of poverty.24 Additionalbenefits to palm oil workers have included secureincomes, access to healthcare and education.25 Palm oilproduction provides many of the rural poor with a sus-tainable income; with key palm oil developments suchas Sumatera and Riau also having a significant percent-age of rural poor. Annex 1 outlines palm oil productionand poverty statistics for key Indonesian provinces.

The Contribution of Palm Oil to Local Economies and Small Land Holders

Palm oil provides employment for many small land-holders, with over 6.7 million tonnes of palm oil pro-duced by smallholders in 2008. In 2006, it was foundthat around 1.7 to 2 million people worked in the palmoil industry.26 In 2008, the Indonesian palm oil com-mission found that over 41 percent of total palm oil

yield25

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4

3

2

1

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hectares/tonnes (millions)

2002 2003 2004 2005 2006 2007 2008

Production (Other)

Production (Smallholders)

Mature Land Area (Other)

Mature Land Area (Smallholders)

Yield (Other)

Yield (Smallholders)

Fig. 3.4 Production, Land Area and Yield by Plantation Type, 2002 -2008

Note: Yield is calculated as total production to mature palm oil plantation area. Other is total production less smallholder production.

Source: World Growth calculations from Indonesian Palm Oil Commission statistics

Goenadi (2008) estimates that employment

generated from palm oil production in Indonesia

could potentially reach over 6 million lives and

take them out of poverty.


Indonesian Government has previously implementeda series of rural and socio-economic improvement pro-grams directed at small oil palm landholders. Until2001, the use of palm oil ‘nucleus estates’ was suggestedto raise the income of over 500,000 farmers. Zen et. al(2006) have also found initiatives by commercial palmoil enterprises aimed at improving the socio-economicstatus of many rural populations. For example, in1996, a Sumatran company distributed three cows tothe families of each of its 500 employees to graze on oilpalm waste and kernel cake. By 2003, the number ofcattle had doubled, area harvested per worker hadincreased from 10 to 15 hectares, and worker incomeshad been proportionately increased. Other commercialinitiatives have included community palm oil areasand nucleus estates.

Returns from Palm Oil Production

In terms of land-use, oil palm gives the highest yieldper unit area as compared with any other crop-basedoil seeds. The average oil yield from 1ha of oil palm is4.09 tonnes, as compared with soybean, sunflowerand rapeseed which yields 0.37, 0.5 and 0.75 tonnes,respectively.28 Modern high-yielding varieties of palm,under ideal climate conditions and good management

are able to yield 5 tonnes of palm oil per hectare,annually.29

Historically, smallholder plantations have been lessproductive than other palm oil plantations. In 2008,production per hectare for smallholders was estimatedat 3.04 tonnes/ha as compared with 3.7 tonnes/ha forgovernment plantations and private plantations.30

World Growth (2009) found that there is considerablepotential for small holders in Indonesia to expand out-put on existing acreages through the use of fertiliserand new genetic stock.31

Goenadi (2008) suggests that, because of the growingclimate in Indonesia, palm oil yields may potentially beas high as 6-7 tonnes per hectare. However, in 2008,Indonesia was averaging between 3-4 tonnes of palm oilper hectare.32 Increasing the yield of palm oil produc-tion gives Indonesia the potential to increase the pro-duction without requiring additional land conversion.

Land-use returns from oil palm are significant as com-pared with many other forms of land-use. In 2007, areport prepared for the Stern Review estimated thereturn from palm oil land-use as ranging from$USD960/ha to $USD3340/ha. This was in compari-son with smallholder rubber, rice fallow, cassava, andone-off timber harvesting which yielded $USD72/ha,$USD28/ha, $USD19/ha and $USD1099/ha, respec-tively. Specifically, land-use returns for palm oil wereestimated as including:

• $USD960/ha for low yield independent growers;

• $USD2340/ha for high yield independent growers;

• $USD2100/ha for supported growers; and

• $USD3340/ha for large scale growers.33

In terms of land-use, oil palm gives the highest

yield per unit area as compared with any other

crop-based oil seeds.

28 Sustainable Development Project (2010) and Oil World (2010)29 FAO (2002) 30 Indonesian Palm Oil Commission (2008)31 World Growth (2009), pgs 13 and 14. 32 Indonesian Palm Oil Commission (2008), pg 25.33 Greig-Gran M (2008)


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Future Prospects for Global Palm Oil Demand

Increased returns from a strong global demand forvegetable oils are expected to encourage investment inthe palm oil industry leading to continued growth overthe medium term, with global consumption expectedto increase over 30 percent in the next decade.34 By2020, global consumption and production of palm oilis expected to increase to almost 60 million tonnes.

The health characteristics and cost competitiveness ofpalm oil, coupled with its potential contribution torenewable energy, is expected to contribute to agrowth of over 30 percent in the next decade. Growthin the palm oil industry has been contributed to by theproduction cost advantages in oil palm cultivation.Oil palms are a highly productive tree crop in compar-ison to crop based oil seeds—oil yields are 5 to 9 timeshigher than the yields achieved by soybean, rapeseedand sunflower. There are cost advantages in oil palmfrom lower land prices and lower energy inputs.

As developed economies shift away from trans-fatstowards healthier alternatives, the demand for palm oilwill also likely increase relative to its competitors. In thelast few years, many developed economies have movedtowards reducing and banning trans-fats, as a resultmany food manufacturers have replaced trans-fats withpalm oil. In addition to being cost competitive, palm oilis high in mono-unsaturated fats which are considered

to be advantageous for a lower risk of heart disease.35

As well as total increased total consumption, per capi-ta consumption of vegetable oils has been increasingin some major developing economies due to strongincome growth. Palm oil has benefited from thisdevelopment due to its relatively high energy pergram of food. In 2009-10 China and India accountedfor over 40 percent of the net imports in world trade.Future economic growth in these countries willincrease the demand for imported vegetable oils.

Global Palm Oil Production and Opportunities

By 2020, FAPRI estimates that Indonesia will producealmost 30 million tonnes of palm oil, including exportsof almost 23 million tonnes. This growth will be achieved through increased yields and further landconversion.

Malaysia appears to have limited opportunity for

In the last few years, many developed economies

have moved towards reducing and banning

trans-fats, as a result many food manufacturers

have replaced trans-fats with palm oil.

Fig. 4.1 Projections of World Palm Oil Supply and Utilization

2009/2010 2019/2020(‘000 tonnes) (‘000 tonnes) % change

Consumption 44,330 58,639 32%

Production 45,132 59,264 31%

Trade 30,760 41,649 35%

34 OECD-FAO (2009)35 Malaysian Palm Oil Council (2008)36 FARPI (2010)

Source: FAPRI 2010

expansion through land conversion due to land zoningrestrictions. Limited land availability is expected toslow palm oil production growth, particularly inPeninsular Malaysia and Sabah.

Yield gains on existing cultivation areas are anotherway to expand output. But there are signs thatimprovements in plantation yields are slowing inIndonesia and Malaysia.37 The cost of establishingnew plantations is also increasing because of environ-mental requirements. If these trends continue andland use constraints become more restrictive therewill be opportunities for other suppliers. FAPRI pre-dicts that Malaysian palm oil production will increaseby 26.5 percent, to 23.4 million tonnes by 2020,slightly less than the predicted Indonesian productionof 28.5 million tonnes. The favourable outlook forpalm oil demand will encourage industry investmentin other countries including Nigeria and Thailandwho each produced over around 1.3 million tonnes, in2008.38 Recent reports suggest Chinese companiesare negotiating for land in DR Congo and Zambia foroil palm plantations.39 There are also reports of

investors looking at plantation growth in West Africaand Malaysian companies are looking at expansionopportunities in Brazil.40

Key Challenges and Opportunities for theIndonesian Oil Palm Sector

Environmental Challenges

Increasing global palm oil production, particularly inMalaysia and Indonesia has generated gained theattention of some major NGOs, including Greenpeace,WWF and Friends of the Earth. Initially, the majoropposition to palm oil was over deforestation withmore recent concerns surrounding the impact of oilpalm expansion on loss of biodiversity (includingorang-utan habitat) and CO2 emissions. The centralclaim of the environmental campaign against the palmoil industry is that deforestation, especially the conver-sion of forest land to palm oil, is a major contributor toCO2 emissions. Palm cultivation on peat land andindirect land use changes are often cited as the majorthreat to climate change. However, there is consider-

37 Thoenes (2006)38 FAO (2010)39 Economist (2009)40 Reuters (2010)


45

40

35

30

25

20

15

0

tonnes (millions)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

PRODUCTION World

CONSUMPTIONTRADE

Indonesia Malaysia

Fig. 4.2 Projections of Palm Oil Supply and Utilization

Source: FAPRI 2010

Malaysia appears to have limited opportunity

for expansion due to land zoning restrictions.

Limited land availability is expected to slow palm

oil production growth, particularly in Peninsular

Malaysia and Sabah.


able uncertainty and debate about the data and mod-els used to support these claims.41 The primary causesof deforestation include urban growth, subsistencefarming, housing and firewood collection.42

There is considerable debate as to the extent of defor-estation in Indonesia, largely due to varying interpre-tations of the term and insufficient information. Inthe 10 years to 2010, the FAO estimated that forestarea in Indonesia has decreased 5 percent, from 99.4million hectares to 94.4 million hectares.43 This rateof decrease has lessened from the previous decade,where forest area decreased over 1.75 percent per yearfrom 118.5 million hectares, to 99.4 million hectares.In the past decade, although the year-on-year per-centage change in forest area has been increasing (dueto a relatively smaller forest base each year) thedecrease in forest area has been less in absolute terms.

Figure 4.3 depicts total forest areas and the annualrate of change in forest area in Indonesia from 1990.

Specific data on the contribution of palm oil to defor-estation is limited, and estimates vary significantly.Some statistics of the contribution of palm oil to defor-

41 World Growth (2010) states that many of these claims are made with little or no substantiation and rely almost solely on absolute statementsand unfounded appeals to the emotions of consumers in developed nations. There is limited data on the relative size of Indonesian forest andoil palm area. There is no standard definition for what constitutes deforested land in Indonesia and estimates of the rates of deforestation areoften based on very weak science, consequently available statistics can differ greatly. Current calculations of carbon sinks and deforestationare generally based on satellite imaging which takes into account broad-area samples only and estimates are often over stated and out-of-date.

42 FAO (2010)43 FAO (2010)c

140

120

100

80

60

40

20

0

hectares (millions)

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Forest Area Annual Change (level) Annual Change (precentage)

Fig. 4.3 Indonesian Forest Area, 1990 to 2010

Note: 2009 figure is based on the half way point between the 2008 and 2010 figure.

Source: FAO (2010)

estation assume that all growth in oil palm area isattributed to the conversion of forestland into palmplantations, calculating the industry’s contribution todeforestation as the change in oil palm area to the levelof deforestation, over a given period. This gives a mis-leading image of palm oil’s contribution to deforesta-tion, as some expansion would be on degraded land.44

In 2008, the relative contribution of global CO2 emis-sions from deforestation and forest degradation wasestimated at approximately 12 percent.45 In 2006,Indonesia emitted 1.5 metric tonnes of CO2 per capi-ta, less than the average of both East Asia and thepacific and other lower middle income economies,and significantly less than the United Kingdom andthe United States who emitted 9.3 metric tonnes and19.3 metric tonnes, respectively.46 Despite the cam-paign against the palm oil industry, the production ofpalm oil is more sustainable than any other cropbased vegetable oils. Palm oil production consumesconsiderably less energy, uses less land and generatesmore oil per hectare than any other oil seeds, has acomparatively smaller carbon footprint and is aneffective carbon sink.47 The impact of deforestation onbiodiversity loss, particularly the loss of orang-utan

habitat is also a commonly raised concern. The pres-sure on biodiversity stems from a variety of sourcesincluding poverty, agricultural/forestry activity, insti-tutions and technology. Habitat loss is not solely dueto the conversion of forest lands to oil palm planta-tions. Between 2000 and 2007, palm oil land useincreased by 2.9 million hectares in comparison toother land uses which increased by 9.4 millionhectares. Orang-utan habitat is also preservedthrough protected areas in Indonesia that have beenestablished and are subject to a range of differentlaws. Over 23 percent of Indonesia is reserved for for-est conservation, including 42 percent in Aceh and 40percent in Kalimantan.48

Land Availability Constraints

The limited availability of land for conversion to oilpalm estates poses a significant challenge for thegrowth of the Indonesian palm oil industry as someland conversion to oil palm plantations will berequired for continued industry growth. A number ofNGOs have initiated a campaign against the palm oilindustry and the conversion of Indonesia’s rainforeststo oil palm plantations. As a consequence, the

44 Major Indonesian companies, including APP and APRIL, have made some efforts to improve the sustainability of their activities by agreeingto sustainability actions, such as commitments to protect High Value Conservation Forest, etc.

45 G.R. van der Werf (2009)46 World Bank (2010) 47 World Growth (2009)48 World Growth (2010)

18 •The Economic Benefit of Palm Oil to Indonesia

Fig. 4.4 Land Use in Indonesia, 1990 to 2005

1990 1995 2000 2005(‘000 ha) (‘000 ha) (‘000 ha) (‘000 ha)

Oil palm fruit* 673 1190 2,014 3,690

change 517 824 1,676

Agricultural Land 45,083 42,187 44,777 48,446

change -2,896 2,590 3,669

Forestry Land 118,545 108,977 99,409 97,857

change -9,568 -9,568 -1,552

*Area harvested, this figure differs from Indonesian Palm Oil Commission figures who measure total area of palm oil plantations at 5.95 million ha and 7.02 millionhectares in 2005 and 2008, respectively.

Source: FA0 (2010)


Indonesian Government has introduced a series ofprograms to tackle deforestation—the most significantis the 2 year moratorium on forest conversion49 InMay 2010, the Indonesian government signed a dealwith the Norwegian Government, to impose a two-year moratorium aimed at reducing greenhousegases; in return Norway will invest $1 billion in forestconservation projects in Indonesia. In addition, thegovernment has also introduced a number of defor-estation programs with the financial support of sever-al developing economies. For example, the UnitedNations’ REDD (Reducing Emissions fromDeforestation and Degradation) program contributedover $US5.6 million to Indonesia between 2009 and2011 in an attempt to reduce deforestation.50

The successful growth of the Indonesian palm oilindustry will be impacted greatly by restrictions onthe conversion of land to oil palm plantations, as somelevel of land conversion is needed for economic devel-opment.

The Conversion of Degraded Land

In May 2010, in order to reduce deforestation, theIndonesian Government announced a policy to devel-op oil plantations on degraded land instead of furtherconverting forest or peatland. Indonesian officialssuggested that the palm oil industry could still expandthrough the acquisition of six million hectares ofdegraded land.51 The current oil palm area is 7 millionhectares. However, the success of the use of degradedland depends on the extent of degradation.

There is currently no single formal definition of degrad-ed land; however, land degradation generally indicatesa decline in the productive capacity of the land.Estimates of area affected by degradation vary widely.The FAO estimates that degraded land in Indonesia islargely water and wind erosion caused by deforestationand chemical deterioration. Approximately 38 percent(71 million hectares) of Indonesian land is affected bydegradation (including 32 percent of land which isseverely degraded and 6 percent which is very severely

degraded); of this, 30 percent is human induced degra-dation due to agricultural activities, representing 11 per-cent of total land.52

Government restrictions on the conversion of forest-lands to oil palm plantations will increase the need forIndonesia to utilise other forms of land, includingdegraded land. However, the success of palm oil pro-duction on degraded land depends largely on thequality of available land. Currently, there is a lack ofcommon methodology, and accurate and timely spa-tial data, for identifying acceptable degradation areasfor sustainable oil palm plantation area.53 As part of

the 2010 agreement between Indonesia and Norway,the Indonesian government has agreed to establish adegraded land database, providing the necessarilyinformation to identify areas of land acceptable forthe establishment of economic activity, including oilpalm plantations.54

Land Rights and Degradation

The use of degraded land for oil palm plantations isdependent on the severity of degradation and the qual-ity of land available. Land degradation occurs due toland clearance, overgrazing, poor farming practices,extensive agricultural activities, poor land manage-ment and inadequate conservation. In order to reducethe severity of land degradation, land users needincentives to manage and conserve land appropriately.

The limited availability of land for conversion to

oil palm estates poses a significant challenge for

the growth of the Indonesian palm oil industry as

some land conversion to oil palm plantations will

be required for continued industry growth.

49 Government of Indonesia and Government of Norway (2010)50 UN-REDD (2010)51 Reuters (2010)c52 FAO/AGL (2010), in the 1980’s the Global Assessment of Human Induced Soil Degradation (GALSOD) estimated 16.53 percent of land

area (31.4 million hectares) in Indonesia was affected by degradation. 53 World Resources Institute (2010)

Land-use in Indonesia is generally established undertemporary rights for cultivation, clearing etc.55 Sincedecentralisation, rights for land cultivation and clear-ing are issued at various levels of government. Thedecentralisation of authority over forest resourcemanagement has resulted in confusion and a lack ofaccountability for land management. Djogo and Syaf(2003) suggest that decentralization of authority tomanage forests, coupled with laws retaining theresponsibility of conservation and rehabilitation offorests to central government has left many districtgovernment officials ambivalent toward forest reha-bilitation and conservation. There are also conflicts ofauthority between institutions such as the NationalPark Agency, the National Land Agency and theprovincial and district level forest services. Conflictsbetween spatial planning maps developed by provin-cial and district governments, in some instances, haveresulted in unauthorized land conversions endorsedby district governments without the approval ofprovincial or central governments.56 Limited or inse-

cure land tenure is a key driver of land use changesleading to deforestation and forest degradation.57

Tenants without secured land tenure have little incen-tive to maintain and protect their land as comparedwith those with secure tenure. The strengthening ofland tenure and use rights is needed in order to pro-vide incentive for land users to invest in land improve-ment. The incentive for land users to maintain andrehabilitate land—such that the severity of degrada-tion is reduced and land is rehabilitated—requireseffective, secure and transparent land rights andaccountability processes.

Closing the Productivity Gap

A significant challenge for the palm oil industry is thelarge productivity gap between actual and achievableyields of palm oil plantations. In Indonesia, palm oilyields averaged 3-4 tonnes/ha, however, various esti-mates of potential yields are up to 8.6 tonnes/ha.58

Almost year long sunshine, abundant rainfall, rich

54 Government of Indonesia and Government of Norway (2010)55 Colchester et al (2006)56 Djogo and Syaf (2003)57 Hatcher (2009)


Fig. 4.5 National Bio-Fuel and Bio-Diesel Targets

Note: Unless specified in the table, figures refer to the percentage of bio-diesel mix e.g. 5% = 5% of bio-diesel mix.

Source: Sheil et al (2009)

Target Status Policy Initiatives

Brazil 2% in 2008, 5% by 2013 Implemented Tax incentive, mandate

Canada 2% by 2010 Indicative None

China 15% bio-fuels by 2020 No concrete policy Tax support proposed

EU 5.75% by 2010, 10% by 2020 Implemented Subsidies, tax incentives

India Preparing legislation

Indonesia 2 to 5% by 2010 Proposed

Japan 5% in 2009 Preparing legislation

Korea 5% Implemented Mandate

Malaysia 5% Proposed

Philippines 1% in 2007, 2% by 2009

Thailand 10% by 2012 Implemented Tax waver, future mandate

USA 28.4 billion litres of bio-fuel by 2012 Implemented Tax credits, state mandates


volcanic-derived soils and familiarity with the pro-duction of palm oil give Indonesia an advantage in theproduction of agricultural products and palm oil.59

Goenadi (2008) suggests that these resources coupledwith new palm oil breeds with superior characteristicsand the current planting materials available, thegenetic potential of annual production is around 6-7tonnes of palm oil per hectare. However, in reality theaverage attainable yield only reaches around half ofthis. In 2008, the Indonesian palm oil commissionmeasured palm oil yield as averaging between 3-4tonnes per hectare. There needs to be substantialeffort in order to reduce this gap, Goenadi suggeststhat such an effort would include step-by-step landpreparation, routine field management and adaptionof new technologies. Improvement in productivity,particularly among smallholders, provides the great-est challenge. Variations in the yields of smallholderplantations are also significant, likely due to differ-ence in farming practises and inputs than the geneticpotential of plants.60 Improving the productivity ofpalm oil producers improves the profitability of thesector without significant increases in land use orcosts of production. An increase of 20 percent in pro-duction could produce an additional 3.7 milliontonnes of palm oil in Indonesia, equivalent to currentproduction from around 1.07 million hectares.61

Other key challenges for the productivity of theIndonesian palm oil sector, particularly in Kalimantan,include low soil fertility, a periodic dry season andpotential land conflict.62

Indonesian Bio-diesel Industry

Although palm oil currently accounts for less than 5percent of the world’s bio-diesel production, demandis likely to increase as economies adopt policies thatencourage the use of bio-fuel.63 Despite a relativelylow market share, palm oil is often used as feedstockin bio-diesel production, and as feedstock representsthe major cost of production, a bio-diesel industry is aviable option for Indonesia. Many economies are set-ting targets to convert reliance on fossil fuels to

58 Henson (1990)59 Goenadi (2008), pg 260 Hai Teoh (2010)61 Calculated from Indonesian Palm Oil Commission data62 Perba et al (2006) 63 Sheil et al (2009)64 Bio-fuel Indonesia (2010)

greater use of renewable energy, including bio-fuel, inefforts to reduce GHG emissions increasing globaldemand for alternative fuel options. Increaseddemand coupled with Indonesia’s abundance of labourand status as a global oil and petroleum producer,places Indonesia in a relatively good position for theproduction of bio-diesel. The Indonesian governmenthas already made a firm commitment to the develop-ment of bio-fuel, including the development an inte-grated strategy for implementation of a bio-fuelprogram64 For example, countries including theEuropean Union, China, the USA, etc, have set fuel

blending targets for bio-diesel ranging from 2 percentin the Philippines to 10 percent in the EuropeanUnion, by 2020.

Although palm oil currently accounts for less than

5 percent of the world’s bio-diesel production,

demand is likely to increase as economies adopt

policies that encourage the use of bio-fuel.

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Annex: Palm Oil Production and Poverty by Province

The following table outlines palm oil production statistics for Indonesia’s top five palm oil producing provinces(Riau, Sumatera Utara, Sumatera Selatan, Jambi and Sumatera Barat) and five poorest palm oil producingprovinces (Irian Jaya Barat, Sulawesi Tenggara, Sulawesi Tengah, Lampung and Bengkulu).


Table 1 Indonesian Palm Oil Production and Poverty by Province, 2007

GRDP Pop* % of Severity SmallName (RP trillions) (millions) Poor Index Private Holder Govern. Total

Riau 210.0 4.45 12.9 0.67 2,131,450 2,054,854 335,245 4,521,549

Sumatera Utara 181.8 12.99 13.63 0.51 1,664,575 1,022,472 1,025,005 3,712,052

Sumatera Selatan 109.9 7.45 18.43 0.83 855,521 759,034 140,346 1,754,901

Jambi 32.1 3.09 7.81 0.32 434,899 709,242 133,531 1,277,672

Sumatera Barat 59.8 4.85 13.01 0.52 548,316 326,580 40,998 915,894

Irian Jaya Barat 10.4 0.76 48.84 7.29 15,915 25,366 32,087 73,368

Sulawesi Tenggara 18.0 2.23 25.84 1.52 0 0 10274 10274

Sulawesi Tengah 19.3 2.63 24.97 1.6 97,077 8,180 9,173 114,430

Lampung 49.1 7.60 23.7 1.12 149,262 162,590 36,376 348,228

Bengkulu 11.4 1.71 21.66 0.92 208,923 217,022 8,072 434,017

Indonesia 3,950 237.56 17.35 n.a. 9,263,089 6,358,388 2,174,897 17,796,374

AN

NEX

Note: * As measured by the 2010 census

Source: Statistics Indonesia (2010) and Indonesian Palm Oil Commission (2008).

PO Box 3693Arlington, VA 22203-3693

(866) 467-7200

www.worldgrowth.org

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