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Blog Achieving Palm Oil Traceability in Indonesia’s Complex Supply Chain
Achieving Palm Oil Traceability in Indonesia’s
Complex Supply Chain
by Hermawati Widyapratami and Bukti Bagja - 06 March 2018
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 Collection Point or so called peron operated by
traceable supply chain. Traceability Middlemen (DO holder), here FFBs are sorted,
in the palm oil supply chain means graded and mixed from various sources before
that we are able to trace the palm oil transported to mill. Photo by Ridwan/IDOEP
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.
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.
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
Illustration of Sei Tapung Mill’s FFB Supplies.
smallholder, making them the first-
hand middleman or agent. Third, DO <p>Fluctuation of FFB supply in PTPN
holders who collect FFB from other 5’s CPO Mill. (PHK-III = third party
smaller middlemen or agents – they supplier, the other lines are internal
usually have stronger financial sources).</p>
capacity and wider network. Fluctuation of FFB supply in PTPN 5’s CPO Mill. (PHK-III =
third party supplier, the other lines are internal sources).
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
Illustration of Third party FFB sourcing.
“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.
TAGS:
agroforestry, commoditites, One Map, palm oil, sustainable agriculture
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