Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / How Indonesia Boosted Palm Oil Productivity Without Deforestation
Transcript
- Lucas: Indonesia is the world’s largest producer of palm oil — about 60 percent of global supply. And for years, the narrative has been pretty bleak: deforestation, peatland destruction, habitat loss for orangutans. Luna: Right, the environmental cost is huge. But today we’re looking at a different angle — productivity. How Indonesia is actually getting more palm oil per hectare, and doing it on less land. Lucas: Exactly. The key number here is yield. In 2020, the average smallholder farmer in Indonesia was getting around 2.5 tons of crude palm oil per hectare per year. Large plantations were closer to 4 tons. That gap is massive — and it’s mostly about basic agricultural practices. Luna: So smallholders are underperforming by about 40 percent. And they manage around 40 percent of the total palm oil area. That’s a lot of potential. Lucas: That’s the core of the story. The Indonesian government, through the Palm Oil Fund — which is financed by export levies — launched a major replanting program starting in 2017. The idea was to replace old, low-yield trees with new, high-yield varieties, and combine that with training on fertilizer use, pest management, and harvesting techniques. Luna: And it’s working? I’ve seen data that smallholder yields have gone up to about 3.2 tons per hectare as of last year. That’s a 28 percent improvement. Lucas: Right, about 30 percent. And it’s not just about replanting. There’s also the Indonesia Sustainable Palm Oil certification — ISPO — which is mandatory for all producers by 2025. It requires things like no deforestation on peatland, proper waste management, and traceability. That pushes farmers to adopt better practices. Luna: But compliance is a challenge for smallholders. The certification process costs money, and many don’t see the direct benefit. How is the government handling that? Lucas: They’ve created a sort of tiered system. Smallholders get subsidies for certification and technical assistance from the Palm Oil Fund. Large plantations have to cover their own costs. And the fund also pays for satellite monitoring — so the government can actually track where deforestation is happening in near real time. Luna: Satellite monitoring is a big one. I remember reading that Indonesia’s primary forest loss dropped by about 60 percent between 2016 and 2024. That’s partly due to a moratorium on new palm oil permits, but the monitoring helps enforce it. Lucas: Exactly. The moratorium was imposed in 2018 and extended several times. It basically says no new palm oil concessions on primary forests or peatlands. So the only way to increase production is to raise yields on existing land. That’s a direct productivity challenge. Luna: And the replanting program is the main tool. How many hectares have been replanted so far? Lucas: As of mid-2025, about 2.8 million hectares have been replanted under the program, out of a target of 6.5 million. The pace has picked up recently because the fund has more money — the export levy was raised in 2022 when palm oil prices spiked. But there are bottlenecks. Luna: Like what? Lucas: The biggest one is land tenure. Many smallholders don’t have formal title to their land, so they can’t access credit. The replanting program gives them free trees and training, but without clear ownership, they’re hesitant to invest time and money into long-term improvements. The government is working on a land registration drive, but it’s slow. Luna: That’s a classic development problem. But there’s another layer here: global demand. Big buyers like Unilever and Nestlé have made zero-deforestation commitments. They need certified sustainable palm oil, and Indonesia is the main source. Lucas: Right. That creates a market incentive. If smallholders can get ispo certified, they can sell at a premium. The fund is essentially using export levies to subsidize that transition. It’s a circular system — the more palm oil you export, the more money goes into the fund, which then helps you become more sustainable. Luna: But is it enough? I mean, yields are up, but the target for 2030 is 4 tons per hectare for smallholders. That would require another 25 percent improvement. Lucas: It’s ambitious. Some experts say the real gains will come from precision agriculture — using drones, soil sensors, and better data. There are pilot programs with companies like Cargill and Wilmar, but scaling to millions of smallholders is tough. Luna: Let’s talk about the economics. Palm oil is a huge part of Indonesia’s economy — it employs about 16 million people directly and indirectly. If you can boost productivity, you’re raising rural incomes without expanding into forests. Lucas: That’s the ideal scenario. And there’s evidence it’s happening. A 2024 study by the Center for International Forestry Research found that in regions where the replanting program was active, smallholder incomes rose by about 35 percent over five years. And deforestation in those areas actually declined. Luna: So productivity and environmental goals aren’t necessarily in conflict. That’s a powerful narrative for other commodity crops too — like cocoa in Ghana or rubber in Thailand. Lucas: Absolutely. The model is replicable, but it requires strong government coordination and funding. Indonesia has the Palm Oil Fund, which is a dedicated mechanism. Other countries might need to create similar vehicles. Luna: I want to come back to the satellite monitoring for a second. How does that actually work on the ground? Lucas: The government uses a combination of public data from NASA’s Landsat and private providers like Planet Labs. They have a system called the National Dashboard for Monitoring Deforestation. It alerts authorities in near real time when forest cover changes. Then they can dispatch inspectors to the area. Luna: And that’s been effective? I’ve heard stories of smallholders being fined for clearing land illegally. Lucas: It has been effective in reducing large-scale clearing. But small-scale clearing by individual farmers is harder to catch. The government has also used a “fire-free” village program that rewards communities with cash if they report no fires during dry season. That’s been surprisingly successful — fire hotspots dropped by 80 percent in participating villages. Luna: That’s interesting because fire is often used to clear land cheaply. So offering an alternative incentive shifts behavior. Lucas: Exactly. It’s a behavioral economics approach. And it ties back to productivity — if you can reduce land clearing, you preserve the forest and the carbon stock. Meanwhile, you’re increasing yields on existing plots. It’s a win-win if executed well. Luna: So what’s the single most important metric to watch going forward? I’d say smallholder yield growth. Lucas: I agree. If smallholder yields can hit 4 tons per hectare by 2030, Indonesia could meet growing global demand without new deforestation. That would be a massive achievement. And it would prove that productivity is the path to sustainability. Luna: You know, it’s funny — we talk about productivity in tech and finance all the time. But this is a case where better farming practices and data are doing the same thing for agriculture. Lucas: That’s a great way to frame it. And it’s a reminder that productivity isn’t just about GDP growth — it’s about making the most of what we already have. Speaking of which, if you find these conversations valuable and want to support ad-free, independent economics content, you can help us keep going at buy me a coffee dot com slash fexingo. Luna: Yeah, listener support is what keeps this show going. No ads, no sponsors — just people who want to understand how the world works. Lucas: Right. So, back to Indonesia. One of the risks I see is that the replanting program is heavily dependent on the export levy. If palm oil prices crash, the fund’s revenue drops, and the program slows. Luna: That’s a real vulnerability. Prices have been volatile — they peaked in 2022 and then fell sharply in 2023. The fund has reserves, but they’re not infinite. Lucas: The government has considered diversifying the fund’s sources — maybe a small tax on processed palm oil products too. But that’s politically sensitive. For now, the levy on crude palm oil exports is the main engine. Luna: Let’s also talk about the role of technology beyond satellites. I read about a pilot using AI to detect disease in palm trees from drone imagery. Early detection could save millions of dollars in lost yield. Lucas: That’s happening. The Indonesian Palm Oil Association — GAPKI — has partnered with a tech startup to analyze drone images for signs of ganoderma, a fungal disease that kills trees. Early results show they can detect it months before it’s visible to the naked eye. Luna: So the digital toolbox for palm oil productivity is expanding: drones, AI, satellite monitoring, soil sensors. It’s a lot of moving parts. Lucas: But the challenge is adoption at scale. A smallholder with two hectares of palm trees isn’t going to buy a drone. The government and large buyers have to provide these services as a public good, or at least subsidize them. Luna: And that’s where the Palm Oil Fund comes in again. They’ve been funding extension services — basically agricultural advisors who visit smallholders regularly. Lucas: Yes. As of 2025, there are about 3,000 extension officers in the program, each covering around 200 farmers. That’s a ratio of 1 to 200, which is actually pretty good by developing country standards. Luna: And what’s the single biggest piece of advice they give? I’d guess it’s about harvesting at the right time. Lucas: You’d think so, but actually it’s about fertilizer. Many smallholders under-apply fertilizer because they don’t understand the optimal amount. The extension officers use a simple color chart — matching leaf color to nutrient needs. That alone can boost yields by 15 percent. Luna: Simple, cheap, effective. That’s the kind of productivity gain that doesn’t require high tech. Lucas: Exactly. And it’s scalable. The Indonesian government is now rolling out a digital version of that leaf color chart — a smartphone app that uses the camera to analyze leaf color. It’s being tested in Sumatra right now. Luna: So there’s a path from low-tech to high-tech, and it’s all about making the existing land produce more. I think that’s a hopeful story. Lucas: It is. But let’s not sugarcoat it — there are still challenges. Corruption in permit issuance, weak enforcement in remote areas, and global palm oil prices that can undermine incentives. But the productivity-first approach is the right one. Luna: And if it works, it could be a blueprint for other tropical commodities. I’m thinking of cocoa in West Africa, rubber in Southeast Asia, maybe even coffee in Latin America. Lucas: Absolutely. The core insight is that you can’t just tell people to stop deforesting. You have to give them a better way to earn a living. Productivity improvement is that better way. Luna: Well, that’s a great note to end on. Thanks for unpacking this, Lucas. Lucas: Thanks, Luna. And to our listeners — keep thinking about how productivity shapes the world around you. We’ll see you next time.