Marketing channels among rubber and palm oil smallholders and traders in Jambi Indonesia

The agricultural sector in Indonesia contributed around 13 percent of GDP in 2018 and employed almost 40 percent of the workforce in the country (World Bank, 2019). Furthermore, up to 2019, Indonesia was the main producer in the world of both: oil palm fruit (60 percent) and natural rubber (31 percent) (FAO, 2019). Even though most of the production of fresh fruit bunches (FFB) takes place under private estates (62 percent), smallholders maintain consistent participation of 33.5 percent in the total production in the country.

In this context, the proposed research will take place in Jambi province, which is facing a land-use change where rubber and FFB are settling as dominant crops (Gatto et al., 2014). These two crops are an essential source of income to smallholders and traders upstream in the value chain and hold complex relations between them and with other actors involved (Kopp & Brümmer, 2015; Sujarwo, 2020). For example, the marketing channels for rubber smallholders consist of a group of village traders, district traders, Jambi-City warehouses, and factories. A significant proportion of smallholders sell their rubber production to village traders (61 percent), but also to sell it to district traders (29 percent). In this setting, there is evidence that market power is exercised by the factories downstream in the value chain among farmers and traders, and other stakeholders involved in the value chain (Kopp & Brümmer, 2015; Sujarwo, 2020). Furthermore, Kopp et al. (2009) found that the market power exercised by traders generates a market inefficiency that reduces farmer's profit.

These previous studies had focused on the role of credit in contributing to the exercise of market power in the Jambi province; however, the role of credit on smallholders' marketing channels choice requires further research. Credit access play a key role by increasing the purchasing power for better farm inputs and technology that might contribute to higher productivity (Baiyegunhi & Fraser, 2014; Haryadi et al., 2017). Yet, in this setting, when credit is provided by a trader, also constrains the decision of marketing channels tying up the loan through contracts that demand a part of the production (Sujarwo, 2020). The first part of this research will focus on the effects of credit and other factors on rubber smallholders' decision of marketing channels in Jambi.

At the trader level, FFB is bought from independent smallholders and sold it to mill oils or bigger traders. When selling it to the mill oils, some specifications related to business-related activities and quality of the FFB have to be fulfilled. These requirements are not uniform across the mill oils; thus, the second part of this research will focus on how contractual specifications might be influencing the choice of marketing channels among traders, bearing in mind that there is an increasing network formation among the traders (Hunecke, 2019). Previous work at the village level found a higher probability of holding a contract with investors (oil mill representants) if the village location was nearer to FFB mills as it cut down the transport costs and post-harvest loss due to perishability (Gatto et al., 2017). While at the smallholder level, Schipmann and Qaim (2011) found, with another perishable crop, that farmers have strong preferences for marketing channels that do not require a contract while other factors as the trust networks turned to be more relevant on explaining marketing channels choice.

The third part of this research will focus on which extent FFB farmer participation in certified markets affects their production performance. Access to certified markets can involve different sources of productivity growth, as changes in technology and technical efficiency. Particularly, Indonesia is transiting towards a universal certification through the Indonesian Sustainable Palm Oil (ISPO) standard, which provides an exciting scenario to find the causal inference of certified markets on productivity and efficiency.

Understanding the factors that affect rubber and FFB traders' and smallholders' adoption of different marketing channels is essential to build policies that seek more reliable trading relationships and promote market efficiency. In addition, given the critical challenges that face FFB farmers' adequation of their production to ISPO standards, finding the factors that affect efficiency is essential to propose suitable policy measures to smallholders.

Within that framework, this research has three intermediate objectives:

  1. Determine which are the factors that influence rubber smallholder's decision of marketing channels in Jambi and analyze the role of credit on their choice.
  2. Determine if contractual specifications between traders of FFB and oil mills are influencing traders' marketing preferences.
  3. Measure the effect of the certificated marketing channel on FFB farm productivity and efficiency.
These objectives are aligned with the Working Package 2 Trader networks and credit markets of C01: Smallholder productivity, market access, and international linkages in rubber and palm oil production in Jambi Province.