JAKARTA, Nov 25 (Reuters) - A prolonged fall in the price of palm oil is hitting Indonesia’s legions of smallholder farmers, forcing cutbacks that will reduce output in coming years and raising the prospect of a bout of sell-outs to major producers.
Smallholder farmers account for about 40 percent of output from Indonesia’s vast plantations that cover an area the size of South Korea. A drop in smallholder output could shave total production by around 5 percent from next year, say analysts.
Up to 1 million smallholders in the world’s top palm oil producer have enjoyed a near uninterrupted decade of boom years, fuelling a rural consumer binge on new motorbikes and mobile phones.
But with prices near five-year lows some cash-strapped farmers are being forced to cut back on fertilizers, pesticides and replanting. They are calling on the government to give a sector vilified by green groups for forest destruction the type of price floor support enjoyed by rice and sugar.
“Farmers can’t increase productivity because they don’t have money,” said Mansuetus Darto, secretariat at the Indonesian Oil Palm Smallholders Union, which has 40,000 members in Sumatra and Kalimantan. “Bottom-line is - they have become poor.”
Indonesia’s palm output has jumped 140 percent over the past decade, with plantations doubling to around 10 million hectares under a government-backed ‘palm revolution’. Output in 2014 is expected to rise 7 percent to 30.5 million tonnes.
Used in everything from food to soap, palm oil is Indonesia’s second-largest non-oil export, but prices have tumbled on record supplies of competing soy crops, weak crude oil prices and disappointing uptake of biodiesel in Indonesia.
But independent farmers say changes to the industry have made them more vulnerable to price falls than major players like PT Sinar Mas Agro Resources and Technology, Astra Agro Lestari and Wilmar International Ltd.
Palm giants have integrated their businesses to include plantations and refineries, leaving smaller producers battling to sell their crops when the market is oversupplied.
“Many Indonesian planters are struggling to make ends meet as prices have already been disappointing in the past few years,” said a planter who declined to be named, pointing also to higher borrowing and logistics costs for smallholders.
In some areas on the island of Sumatra, farmers are being forced to cut the use of fertilizers and pesticides, said Carlo Nainggolan of Sawit Watch, a group which aims to protect people from exploitation by large palm firms.
“Cutting fertilizers is usually the first thing people do,” said Alvin Tai, regional head of plantations at RHB Research Institute. “It’s easy and it doesn’t immediately affect yield.”
However, any reduction in fertilizer usage will hinder palm yields from mid 2015, pushing smallholders backwards as big firms boost yields and acreage.
“If prices fall further, I would guess that we might be looking at a loss of 1.5 million tonnes of CPO (crude palm oil) in late 2015 and into 2016 compared with where it would have been,” said LMC International analyst James Fry.
The last time prices were near current levels was in 2008, when an eight-month plunge led to a spike in farmer suicides. Many debt-ridden smallholders were unable to pay workers and either left palm fruit rotting on the trees or sold their land.
Smallholders would again look at selling their plantations, said RHB’s Tai, but the pool of likely buyers would be smaller due to uncertainties around foreign ownership and possible limits on expansion.
Smallholders want the government to support the industry with import curbs and price floors, but the month-old government of President Joko Widodo is struggling with other priorities such as cutting fuel subsidies and reducing red-tape.
Indonesia’s agriculture ministry and minister were not available to comment after telephone and email requests.
“The days of easy profits with 35 percent margins for oil palm plantation companies are over,” said Howard Sargeant, director of plantations at PT Samuel International. “Many will have to become more cost efficient or go out of business.” (Additional reporting by Dennys Kapa in JAKARTA and Anuradha Raghu in KUALA LUMPUR; Editing by Richard Pullin)