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‘Smallholding for Whom?’: The effect of human capital appropriation on smallholder palm farmers

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A Correction to this article was published on 30 May 2023

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Abstract

Wage inequality and land and labor insecurity are critical barriers to sustainable palm oil production among those employed in Indonesia’s small-farm sector. Palm oil contract farming, a pre-harvest agreement between palm oil farmers and transnational processors and traders, facilitates smallholder participation in global agro-commodities markets, improves smallholder livelihoods, and promotes local economic development in rural communities. But negative externalities in contract farming can emerge depending on whether corporate guarantors of contract-farm assets manage farmer assets equitably. This study explores how contract farming agreements between smallholder farmers of palm oil and futures traders of palm stocks impact the long-term economic development of smallholder palm oil farming in Indonesia. We examined the relative impact of transnational palm oil corporations on smallholder assets in the Indonesian palm oil industry using annual financial data (2003–2019) from Indonesian commodities trading firms. Temporal trends indicated that oligopolistic market conditions were strongly associated with a growing comparative advantage in palm oil, the asymmetric accumulation of land resources by transnational firms, and excessive firm revenues from palm farmer activities. Our regression modelling results suggested that the comparative advantage in Indonesian palm oil was driven by state-oriented policies such that benefit palm traders but disadvantage smallholder farmers. And, through non-metric multidimensional scaling, we demonstrated that smallholder farmers were inefficiently used by firms to produce palm oil, but that smallholder assets were a significant driver to firm revenue growth. Notwithstanding the adverse consequences on palm farmers, these results indicate a set of unique effects of palm oil contract farming on land and labor security in Southeast Asia. The paper reasons that a system of inequitable contract farming is operating in the Indonesian palm oil industry, whereby smallholder palm oil farmers are trapped by transnational firms into socio-economic farming schemes of low oil yield and non-market activity, thus providing palm firms with lucrative non-market revenue streams. Large transnational trading firms are thereby implicated in the long-run commodification of smallholder land for marginal fruit production while exploiting a farmer’s non-market advantages through the manipulation of farmer assets.

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Data availability

Publicly available datasets were analyzed in this study. This data can be found here: Firm data were compiled at each firm website from the following locations: Golden Agri Resources (Sustainability Report, RSPO Profiles, Financial Highlights, Annual Reports (’03-’20)), (https://goldenagri.com.sg/); Cargill, Incorporated: RSPO Profiles, Financial Press Releases, Investor Reports (’03-’20), (https://www.cargill.com/home); Wilmar International: RSPO Profiles, Annual Reports, Sustainability Reports, Financial Fundamentals, Misc.: Presentations, Corporate Governance Files (’03-’20), (https://www.wilmar-international.com/); Musim Mas Group: (RSPO Profiles, Sustainability Reports, Subsidiary Reports, Misc.: Press Releases, Blogs, Journals (’03-’20)), (https://www.musimmas.com/); IOI Group: RSPO Profiles, Annual Reports, Financial Profiles, Media Releases, Investor Reports (’03-’20) (https://www.ioigroup.com/). Indonesian Palm Oil Industry data were collected using an online subscription to ‘Trading Economics’ (https://www.tradingeconomics.com).

Change history

Notes

  1. A “long” contract is one where the speculator expects the price to increase in the future, whereas a “short” contract is one where the speculator expects the price to decrease in the future (Lambert, 2012).

  2. Sect. "Origins, forms, and functions of capital" will further elaborate on this point.

  3. This theory of smallholder human capital appropriation agrees with past theories of de-agrarianization, whereby farmers are forced to transition into non-farm contract labor or other non-farm activities to supplement their incomes. This theory is also in agreement with the work by Hall et al. (2011) on the conversion of land to “post-agrarian” uses. As such, it hypothesizes that land is not liquidated by these de-agrarian processes, but that land and farmers are stockpiled by corporations in Southeast Asia as cumulative, proprietary assets.

  4. “…expanding commodifying dispossession (ECmD), which, along with proletarianization, involves the com- modification of means of subsistence by subjecting them to the logic through which they start to have, in addition to use values, exchange values. One way by which this has increasingly been taking place is the transfer of hitherto state-funded services to private companies. ECmD involves the creation of new industries, such as education, healthcare and pensions, the provisions of which have increasingly been transferred to the realm of exchange regulated by production costs…,” Bin (2018).

  5. The ecological functions that underlie ecosystem services are: 1) provisioning functions, 2) regulating functions, 3) cultural functions, and 4) supporting functions 82.Wallace, K.J., Classification of ecosystem services: problems and solutions. Biological conservation, 2007. 139(3–4): p. 235–246.. Depending on the trade-offs and synergies between ecosystem services and human systems 83.Bennett, E.M., G.D. Peterson, and L.J. Gordon, Understanding relationships among multiple ecosystem services. Ecology letters, 2009. 12(12): p. 1394–1404., as well as the social or ecological factors for which they are composed, ecosystem services produce food and water, genetic resources, and biodiversity for the reproduction of plant populations 75.Costanza, R., et al., The value of the world's ecosystem services and natural capital. nature, 1997. 387(6630): p. 253–260.. Ecosystem services interact across spatial scales and change over time, and the relation between ecosystem services and human society is vital for understanding the functioning of ecosystems in human livelihood, welfare, and socio-development 84.Fisher, B., R.K. Turner, and P. Morling, Defining and classifying ecosystem services for decision making. Ecological economics, 2009. 68(3): p. 643–653.. There is obstinate tension that exists in defining ecosystem services, however, because different human-knowledge systems have contrasting views toward the role that humans play in nature. Such knowledge ‘categories’ of ecosystem services include: 1) “Anthropogenic assets” (i.e., an anthropocentric value of nature, measured as the services used to improve human welfare), 2) “Nature’s benefits to people” (i.e., an intrinsic value of nature that provisions, regulates, and provides cultural services to humans), and 3) “Institutions and governance systems and other indirect drivers” (i.e., the benefits to human socio- and political-development in organizing and interacting with nature) 85.Díaz, S., et al., The IPBES Conceptual Framework—connecting nature and people. Current opinion in environmental sustainability, 2015. 14: p. 1–16.. Ecosystem services are also considered as the main example of natural capital for estimating the ‘incremental’ or ‘marginal’ value of an ecosystem to human society 75.Costanza, R., et al., The value of the world's ecosystem services and natural capital. nature, 1997. 387(6630): p. 253–260.

  6. “Tacit knowledge is action-oriented (procedural) knowledge that is usually acquired without direct help from others and that allows individuals to achieve goals that they personally value.” Source: Encyclopedia of Gerontology (Second Edition), 2007.

  7. For example, a person walking to shops is considered with shopping and is a non-market activity, but a person cycling to a tennis club is considered with cycling and not playing tennis, so it is not a non-market activity. According to the third-party criterion, transporting oneself form one place to a different place should be considered as a productive activity, provided it is not performed as a non-productive leisure activity, such as jogging or motoring for sightseeing. A frequent practice is classifying an economic activity according to its final purpose, as it is not always easy to make the distinction between market and non-market activities. Thus, walking to the shops is classified with shopping and is therefore counted as a productive activity, while cycling to a tennis club is classified as a nonproductive economic activity 95.Chadeau, A., OECD Economic Studies No. 18, Spring 1992. OECD Economic Studies, 1992(18–21): p. 85.. Non-market activity in the context of smallholder labor consists of smallholders providing market and supply information to palm oil traders, given that information on palm oil supply is considered with competing to sell palm oil in global markets—the final purpose of smallholder contract labor.

  8. See the supplementary statistical appendix for a review of all data collected, formulas and metrics, and methodological theory.

  9. Informational efficiency is the idea that information must be properly incorporated into prices. Under assumptions of rationality, when all futures traders have the same information, it follows that prices should move more or less automatically, with very little trading.

  10. Palm oil is traded at 1) Malaysia’s Stock Exchange (Bursa Malaysia/MYX), 2) the Indonesian Stock Exchange (IDX), 3) the Stock Exchange of Singapore, and 4) the London Stock Exchange (AIM).

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Acknowledgements

We would like to acknowledge Dr. Kalyanakrishnan Sivaramakrishnan and Morgan Galloway for their support with seeing this project to completion. We would not have completed the draft without their keen guidance and support.

Funding

This research was funded by Wesleyan University’s Robert Schumann Institute of the College of the Environment and the Ronald E. McNair Post Baccalaureate program.

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  1. Yale School of the Environment, Yale University, New Haven, CT, 06511, USA

    Gabriel B. Snashall

  2. College of the Environment, Wesleyan University, Middletown, CT, 06459, USA

    Helen M. Poulos

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Snashall, G.B., Poulos, H.M. ‘Smallholding for Whom?’: The effect of human capital appropriation on smallholder palm farmers. Agric Hum Values 40, 1599–1619 (2023). https://doi.org/10.1007/s10460-023-10440-8

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