Palm oil sector no longer 'the golden crop'

Down to Earth No.79, November 2008

Indonesian organisations have circulated the following information about the impact of the global credit crunch and falling palm oil prices on peasant farmers in the province Jambi, Sumatra. Translation from the Indonesian by DTE.

Since palm oil became 'the golden crop' around the year 2000, the European market for this commodity has grown year on year, not only to satisfy demand from the food and cosmetics industries, but also as an alternative energy source to fossil fuels. This demand has stimulated the expansion of oil palm plantations so that, by 2007, they covered 7.4 million hectares. This area is expected to increase still further in line with government plans for 24 million ha of oil palm plantations by 2010. As nearly every province in Indonesia puts the palm oil sector high on its list of local revenue sources, it is hardly surprising that local governments are all promoting oil palm plantation expansion in their development programmes. Jambi is no exception.

Market forces rule too: as demand for palm oil increases so do prices. Between 2006 and 2008, peasant farmers growing oil palm have benefited most from the rising price of the basic commodity. Two years ago they were paid Rp 600-700/kg for fresh palm fruits; by early 2008 they were getting Rp 2,000/kg - a 250% increase! However, some of their profits were eaten up by the parallel increase in fertiliser prices.

In addition to government programmes which are promoting the palm oil sector as the prime earner, the promise of high prices for palm fruits has also attracted attention from banks. The palm oil sector is now the most highly favoured investment target.¹

The high profits for smallholders have generated a culture of consumerism in farming communities. Where peasant farmers used to consider that a single plot of oil palm was enough to meet their needs, they have extended their land holdings by taking out bank loans. Farmers are giving up growing local crops in favour of oil palm. Instead of having to walk everywhere, almost all oil palm smallholders now have motorbikes. These are the impacts of the 'palm oil boom'. So who would have suspected that the effects of the financial crisis in the USA generated by sub-prime mortgages would felt in Indonesia - even as far as Jambi? Who would have believed that the American credit crunch would cause a collapse in the price Jambi's farmers received for their harvests of oil palm fruits?

America's crisis, global crisis: local victims

If 2006-2008 were the golden years for the palm oil sector and plantation smallholders, the US crisis has generated a bitter harvest in the final months of this year. The drop in prices for palm fruit harvests, due to reduced export markets for palm oil, has had a devastating effect on the livelihoods of small-scale growers in Indonesia.² The price of palm fruits which had gone as high as Rp2,100/kg has now fallen to around Rp200-300/kg. In one district in Jambi, it has slumped to Rp80/kg.³ The global financial crisis which originated in the US has even led to a rise in the number of patients in Jambi's psychiatric hospital. In October, 140 new patients were oil palm smallholders suffering from depression because their debts are piling up and they are unable to meet the payments due to the collapse in palm fruit prices.⁴ Moreover, an actvist with the local NGO SETARA Jambi who has been working with smallholders reported that a peasant farmer from Hitam Ulu in the district of Merangin committed suicide because he was unable to repay a bank loan. So the US credit crunch is even hitting remote farming communities in Jambi!

Central government's subsidies for the rich

Throughout the palm oil boom, the government has continued to promote the unique advantages of planting oil palm - for example, Jambi governor's programme to develop one million hectares of oil palm plantations in the province. But when peasant farmers are hit by low prices for their harvests, the government's position is to do nothing apart from to urge smallholders to be patient and endure the crisis. But is this really true? And where should the government's loyalties lie at this difficult time?

In America, George W Bush's administration decided on a 'bailout' to stop the crisis spreading to other sectors which the US Senate approved. The bailout package included the following three elements: the government could spend up to US$700 bn to purchase problematic mortgaged-backed securities; the ceiling for insurance on bank deposits was raised from $100,000 to $250,000 per person; and the insurance institution (FDIC) was permitted to borrow unlimited funds from the state to cover any losses from the increase. In so doing, the US government sacrificed the interests of ordinary people, since taxpayers will ultimately bear the burden of the bailout.

The principle underlying the US government's actions appears to have been "We must move quickly to protect the wealthy" - an approach adopted first by European leaders and now by Indonesia. The Indonesian government took emergency measures in the form of issuing a national decree on the Financial System Safety Net (Perpu 4/2008) which provides support for banks facing a liquidity crisis and other insolvency problems caused by the current global economic situation. The government also decided to 'buy back' shares in state-owned enterprises and to increase guarantees for bank deposits to Rp 2 billion. (Who can afford this amount of savings? Certainly not the poor!).

This package to tackle the credit crunch clearly shows that the Indonesian government, like governments the world over, favours the interests of the rich over those of the general public - including peasant farmers who have been hit hard by the global economic crisis. It gives privileges to the wealthy who have already bled the poor dry - particularly plantation smallholders. At the very moment that the farmers are so hard-pressed by government policies and global markets that at least one has killed himself because he cannot make debt repayments from the low price he got for his palm fruit harvest, the government is bailing out the rich. Smallholders facing bankruptcy are told to continue to hold on while the Indonesian government provides guarantees and financial security for the well-off. This is not fair!

This Factsheet is a rapid response from Jambi-based civil society organisations to the global economic crisis and its impacts on local communities, particularly farmers and workers. It was initiated by Yayasan SETARA Jambi, Komite Kerja Perjuangan Buruh (KKPB) Jambi, Serikat Petani Kelapa Sawit (SPKS) Jambi dan Yayasan CAPPA. These four organisations continue to try to extend and motivate civil society coalitions in Jambi that are concerned with the global crisis and its effects.

Contacts:
Yayasan SETARA (uki@setarajambi.org) 
KKPB Jambi (sga_07@yahoo.com) 
Yayasan CAPPA (rivani@cappa.or.id) 
Serikat Petani Kelapa Sawit Jambi (spks_jambi@yahoo.com)

Notes:
¹ Investor Daily, 28/Feb/08 
² The USA and European countries are markets for Indonesian palm oil.
³ Jambi Ekspres, 24/Oct/08
⁴ Local news item on National TV (TVRI), 26/Oct/08