Oil palm smallholder farmers and EU deforestation regulation

This article has been translated by PwC Indonesia as part of our Plantation News Highlights service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.

The Jakarta Post

17 November 2022

By: Fadhil Hasan

The European Union is currently finalizing a new deforestation regulation. The EU claims its objective is to prevent deforestation. In principle, this is a positive agenda, but in practice the current draft of the policy will prevent Indonesian small farmers from selling their products.

Four million Indonesian small farmers face the risk of being cut out of supply chains completely because the EU refuses to take their needs into consideration and refuses to be flexible on the criteria required for its regulation. The specific problem is the EU's requirement for only fully segregated palm oil, with the EU demanding this be proven for every shipment.

Perhaps in a Brussels conference room, the theory sounds good. It is simply not possible to implement in the real world.

During their talks ahead of the Group of 20 Summit in Bali on Monday, President Joko "Jokowi" Widodo expressed his concerns to European Commission President Ursula von der Leyen about trade discrimination imposed by EU against Indonesian products.

Smallholders in Indonesia operate on approximately 2 or 4 hectares of land on average, and produce an average of 1.5 tonnes per hectare of fresh fruit bunches (FFBs) per month.

Due to the small scale of production, they cannot sell directly to palm oil mills. After harvesting, the smallholders sell their FFBs to dealers who collect from surrounding smallholders on a daily basis. A single dealer collects FFBs from a number of smallholders. The FFBs mix in the truck along the way.

It is logistically impractical to achieve a segregation of FFBs at this smallholder level. The volume is just too small to have separate trucks for every farmer. By excluding any palm oil that is not fully-segregated, the EU is making a conscious choice to deny market access to all 4 million Indonesian palm oil smallholders.

This is not theoretical. Unilever, for example, introduced the same requirements into their supply chains in 2013. The company was forced to cut 80 percent of smallholders from their supply chains. This was not because the smallholders were deforesting. It was because the smallholders could not meet the high bureaucratic demands.

The EU Deforestation Regulation, if it comes into effect, will have the same perverse outcome for Indonesian small farmers. This is not the only problem with the draft regulation. Other Indonesian businesses in the palm oil value chain will also be adversely affected, especially by the lack of flexibility and cooperation when it comes to certification.

Palm oil is arguably the most-certified commodity in the world. There are more than two types of sustainable standards with which the industry has to comply.

These include mandatory sustainable standards such as Indonesian Sustainable Palm Oil (ISPO) or Malaysian Sustainable Palm Oil (MSPO) and voluntary sustainable standards such as Roundtable Sustainable Palm Oil (RSPO) and International Standard and Carbon Certification (ISCC).

The EU's refusal to recognize existing sustainability schemes means the duplication of costs and sustainability regulation for palm oil businesses. Requirements on traceability, data protection and reporting are all duplicating existing efforts. It is unnecessary.

The EU regulation will increase costs for Indonesian businesses, raise food prices for European consumers and undermine global food security. As the negotiations continue, there are key elements that the EU should change. In the light of future trialogue among the European Council, the European Commission and the European Parliament, the Indonesian Palm Oil Association request the following:

First, small farmers should be exempt from the traceability requirements of the regulation, below an appropriate size. This would serve social justice and ensure that sustainable development is protected.

Second, current certification schemes--both national schemes and voluntary schemes--should be accepted as a form of compliance under the new EU regulation. This would help with compliance.

Third, the EU regulation should build on existing supply-chain commitments and standards rather than imposing new and unilateral EU requirements.

Fourth, a sampling method and sampling audits should be considered, including as a transition period, rather than immediate traceability.

Fifth, partner governments and affected sectors, such as the Indonesian palm oil industry, should be fully involved in the consultation process for the EU's implementing legislation.

There is the question of what Indonesia, as well as other developing nations, will do if the EU continues to reject cooperation and push ahead with these unilateral rules. The policy constitutes one of the largest trade barriers ever erected against Indonesian farmers and their counterparts anywhere in the world.

Legal routes, such as filing a complaint with the World Trade Organization, remain open for Indonesia to pursue. Alternatively, there would be clear justification for a targeted and trade-focused response.

The draft EU regulation as currently planned will only give rise to poverty, decrease sustainable development and undermine decades of progress for rural communities across Indonesia.

The EU used to claim to support sustainable development. If this exclusion of small farmers is confirmed, no one will ever believe the EU's commitment again.