Transactions in the Supply Chain of Oil Palm Fruits and Their Relevance for Land Conversion in Smallholdings in Indonesia

Abstract

The expansion of oil palm plantation by smallholders in Indonesia is taking place mainly by conversion of forest and arable land. This article aims to understand how institutional arrangements in the supply chain of oil palm fresh fruit bunches (FFB) affect decisions of smallholders to convert more land for oil palm cultivation instead of increasing productivity. Based on an analysis of in-depth interviews with involved actors we find that institutions meant to regulate land conversion are superseded by the structures that govern the transactions in the supply chain of FFB and that this reinforces decisions of smallholders to convert more land. Strategies designed to regulate land conversion need to look carefully at the interactions with the institutions ruling the supply chain of FFB. Institutional innovations such as establishing integrated governance structure from land use to market may induce farmers to focus on increasing productivity.