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.