1THE PRODUCTION COST OF OIL PALM FRESH FRUIT BUNCHES: THE CASE OF INDEPENDENT SMALLHOLDERS IN JOHOR

ABSTRACT

Like in other perennial crops, the Malaysian oil palm smallholdingsector can be broadly categorized into organized and independentsmallholders. Despite the overall decline in oil palm smallholdingsrecently, there has been an expansion of the independent smallholdersland from 287 000 ha in 1999 to 320 000 ha in 2000. However, due tothe unorganized nature of the latter, updated data and informationpertaining to the performance of such smallholdings are limited. Thispaper attempts to overview the economic performance of thesesmallholders based on a survey in Johor, which has the largest numberof independent smallholders (45%) and the largest independentsmallholdings (40%) in the country. The paper also discusses theproduction cost structures of the independent smallholders comparedto their counterparts in the organized smallholder sector as well aswith estates.

Azman Ismail*;Mohd Arif Simeh* andM Mohd Noor*

* Malaysian Palm Oil Board,P. O. Box 10620,50720 Kuala Lumpur, Malaysia.

The Production Cost of Oil Palm Fresh Fruit Bunches:the Case of Independent Smallholders in Johor

INTRODUCTION

Oil palm smallholders can begrouped into two main categories,namely; the organized and inde-pendent smallholders. The formerparticipate in public land develop-ment schemes such as FederalLand Development Authority(Felda), Federal Land Consolida-tion and Rehabilitation Authority(Felcra), Rubber Industry Small-holders Development Authority(RISDA), etc. Under this organiza-tional set-up, the smallholders get

access to services pertaining totechnical advice, input supply andmarketing outlets from these gov-ernment agencies. In the year2000, this group of farmers culti-vated 1.03 million hectares of oilpalm or one-third of the overall oilpalm areas in the country (Table 1).

On the contrary, the independ-ent smallholders established oilpalm holdings themselves withminimal government assistance,normally in the form of extensionservices imparted by the Depart-ment of Agriculture (DOA)1.

1 Since oil palm is not under the purview of the DOA, such services are now reduced. Hence, theMalaysian Palm Oil Board (MPOB) has initiated the establishment of Pusat Tunjuk Ajar dan Nasihat(TUNAS) which aims at spearheading the provision of extension services to independent oilpalm smallholders.

2OIL PALM INDUSTRY ECONOMIC JOURNAL (VOL. 3(1)/2003)

These holdings are small and scat-tered. From Table 2, it is shown thatthere were 87 717 independentsmallholders in the year 2000.They cultivated 320 835 ha of oilpalm or 9.5% of the total oil palmareas in the country.

Table 1 also shows that despitethe overall decline in oil palmsmallholdings from 1.37 millionhectares in 1999 to 1.35 millionhectares in 2000, there has beenan expansion of independentsmallholdings2 from 286 513 ha to320 818 ha. Consequently, the in-

dependent smallholders land sharehas increased from 8.65% in 1999to 9.5% in 2000. Such a positiveresponse was mainly attributed tofavourable crude palm oil (CPO)prices vis--vis the prices of othercommodities. Due to the unorgan-ized nature of the independentsmallholders, however, data andinformation pertaining to currentperformance and production costof the independent smallholdersare limited. Such evidence iscrucial in view of the need to fur-ther streamline the development of

the smallholders in the country.This paper attempts to discuss theeconomic performance of theseindependent smallholders in par-ticular their production cost, basedon a survey in Johor3.

METHODOLOGY

The study was conducted througha stratified random samplingsurvey. The independent small-holders from Johor were first listedfrom MPOBs smallholders data-base. They were later divided into

Note: *Inclusive of Felda Plantations Sdn. Bhd.Source: MPOB (2001a).

Source: MPOB (2001b).

2 The land areas under organized smallholdings have declined from 1 084 428 ha in 1999 to 1 031 560 ha in 2000.3 The survey was confined to Johor since it has the largest number of independent smallholders (45%) (Table 2) with a total area of 125 459.83 ha.

TABLE 1. DISTRIBUTION OF OIL PALM PLANTED AREA BY CATEGORY: 1999-2000

Category 1999 2000ha (%) ha (%)

Federal government/ Felda* 674 948 20.37 598 190 17.72 Felcra 132 354 4.00 154 357 4.00 Risda 41 561 1.25 37 011 1.10State schemes 235 565 7.11 242 002 7.17Total organized smallholders 1 084 428 41.38 1 031 560 29.99Independent smallholders 286 513 8.65 320 818 9.50Total smallholders 1 370 941 50.03 1 352 378 39.94Total 3 313 393 100.00 3 376 664 100.00

TABLE 2. INDEPENDENT OIL PALM SMALLHOLDINGS IN MALAYSIA: 2000

State No. (%) ha (%)Johor 39 711 45.26 125 459.83 39.10Perak 15 921 18.15 53 089.78 16.55Selangor 15 324 17.47 33 407.47 10.41Pahang 3 277 3.74 16 683.21 5.20N. Sembilan 2 015 2.30 11 057.93 3.45Kedah 1 485 1.69 10 045.77 3.13P. Pinang 1 119 1.28 6 869.02 2.14Melaka 626 0.71 4 212.29 1.31Terengganu 582 0.66 4 042.34 1.26Kelantan 103 0.12 1 128.96 0.35P. Malaysia 80 163 91.39 265 996.60 82.91Sabah 5 994 6.83 48 031.85 14.97Sarawak 1 560 1.78 6 807.21 2.12Malaysia 87 717 100.00 320 835.66 100.00

3THE PRODUCTION COST OF OIL PALM FRESH FRUIT BUNCHES: THE CASE OF INDEPENDENT SMALLHOLDERS IN JOHOR

four strata, which referred to theselected districts namely: BatuPahat, Muar, Kluang and Pontian.These districts were selectedbecause 89.6% of the total inde-pendent smallholders in Johor arefrom those areas (Table 3). Inorder to select the respondentsfrom each stratum, the randomnumber table was used. A total of300 independent smallholders wasinterviewed and their distributionis as shown in Table 4.

Source: MPOB (2001c).

The survey was conducted in2001 with the cooperation of JohorDOA. The agriculture assistants ofDOA undertook a one month-longinterpersonal interview with theindependent smallholders. Suchefforts facilitated the search forinformation since the interviewershad readily established rapportwith the smallholders.

RESULTS AND DISCUSSION

Background on Oil Palm Inde-pendent Smallholders

Slightly more than three-quarters (77%) of the independentsmallholders were Malays. Chinesefarmers comprised 22% and theIndians made up only 1%. This isshown in Figure 1. The inde-pendent smallholders wererelatively old. Their average age

was 58.6 years with a range ofbetween 45 to 76 years (Table 5).Being relatively old, they had littleopportunity for off-farm employ-ment. Their livelihood dependedmainly on income from their oilpalm holdings. The labour thatthey invested in the oil palmholdings can be considered asvalued at zero opportunity cost.Hence, the returns obtained fromthe oil palm enterprise are consi-dered as the returns to familylabour rather than profit.

Slightly more than half of theindependent smallholdings(55.4%) were inland soils whilethe remaining 44.6% were coastalsoils. The average farm size wasshown to be 2.84 ha, with a rangeof 0.81 ha to 12.14 ha. The averagefarm size can be considered asrelatively small when compared tothe 4 ha owned by Felda settlers.

On average, the age of oil palmowned by smallholders was 19.1years, with a range of between fourto 26 years. In terms of yield,the independent smallholders

Figure 1. Ethnicity of oil palm smallholders.

Malay

Chinese

Indian

77%

22%

1%

TABLE 4. SIZE OF SAMPLESOF INDEPENDENT

SMALLHOLDERS, BYDISTRICT IN JOHOR

District Size of samplesBatu Pahat 107Muar 71Kluang 70Pontian 52

TABLE 3. INDEPENDENT OIL PALM SMALLHOLDINGS INJOHOR BY DISTRICT AND HECTARAGE, 2000

District No. (%) ha (%)Batu Pahat 12 669 31.90 32 563.99 25.96Muar 8 420 21.20 23 727.63 18.91Kluang 8 304 20.91 30 764.67 24.52Pontian 6 186 15.58 18 844.94 15.02Johor Bahru 1 766 4.45 8 099.52 6.46Segamat 1 115 2.81 4 906.31 3.91Kota Tinggi 704 1.77 4 413.29 3.52Mersing 547 1.38 2 139.48 1.71Total 39 711 100.00 125 459.83 100.00

TABLE 5. BASIC CHARACTERISTICS OFINDEPENDENT SMALLHOLDERS

Items Average RangeAge of smallholders (yr) 58.6 45-76Holding size (ha) 2.84 0.81-12.14Oil palm age (yr) 19.1 4-26

4OIL PALM INDUSTRY ECONOMIC JOURNAL (VOL. 3(1)/2003)

recorded an average yield level of15.85 t/ha in 2000. This figure isrelatively low if compared to theirorganized counterparts and estates(Azman et al., 2002).

The Cost of Production

In discussing the cost of freshfruit bunches (FFB) production byindependent smallholders, the costitems were grouped according tofive cost sub-centres, namelyupkeep, fertilizer application,harvesting, transportation, othercosts and labour.

Upkeep. This cost category in-cludes the general field mainte-nance of the independent small-holders oil palm. These are upkeepof roads, bridges, path, etc. inaddition to weeding, pruning andreplacement of dead palms. Thecost of upkeep was RM 385.14/haor RM 24.30/t FFB in the year2000. The major cost item was

weeding, which constituted abouthalf of the total cost (Table 6). Theother half of the costs was due topruning, replacement of deadpalms and upkeep of road, bridges,paths, etc.

Fertilizer application. Theexpenses incurred in this operationare the costs of fertilizer purchaseand labour. The results, as shownin Table 7, indicate that fertilizerpurchase, which amounted toRM 332.22/ha, comprised about93% of the total fertilizer cost.Labour cost amounted toRM 26.77/ha. Each tonne of FFBproduced, required RM 1.69 worthof labour services. In total, theaverage cost of fertilizer and itsapplication in the year 2000 wasRM 358.99/ha. For a tonne of FFBproduced, the average cost offertilizer was RM 22.65.

An important finding of thestudy is that 14% of the independ-ent smallholders did not apply

fertilizer in 2000. This can beattributed to the lack of funds forits purchase arising from low FFBprice during the year studied. Lowmargin accentuated less fertilizerpurchase. This can be detrimentalto short-term productivity of small-holders oil palm.

Harvesting. The costs involved inthis operation are harvesting andcollection, and harvesting tools.The survey indicated that slightlymore than half of the independentsmallholders, i.e. 56% hiredharvesters to undertake harvestingand collection of FFB to the col-lection platform. The breakdownof the costs is shown in Table 8. Forharvesting and collection, it costthe smallholders RM 527.01/ha in2000. It accounted for 93% ofthe total harvesting cost, whichwas RM 566.48/ha in that year.On the basis of the weight ofFFB harvested, the cost wasRM 33.25/t, also accounting for93% of the total harvesting cost(RM 35.74/t FFB). On the otherhand, cost of harvesting toolsamounted to RM 39.47/ha orRM 2.49/t FFB.

Transportation. FFB transportationinvolves in-field transportation andtransfer of FFB to the mill. Forin-field transportation, the cost perhectare was RM 68.37 orRM 4.31/t FFB. A total of 7.4% ofindependent smallholders usedmachines for their in-fieldcollection. In terms of FFBtransportation to the mill, the costwas RM 305.11/ha or RM 19.25/t.As shown in Table 9, the total costof FFB transportation incurred bythe independent smallholders wasRM 373.48/ha or RM 23.56/t FFB.

Other costs. The cost itemsgrouped in this category includequit rent and other expenses. Theformer, estimated at RM 22.85/ha(RM 1.44/t FFB) was lower thanthe latter (RM 65.53/ha or

TABLE 6. COST OF ANNUAL OIL PALM UPKEEP, 2000

Cost items RM/ha RM/tWeeding 176.44 11.13Upkeep of roads, bridges, paths, etc. 84.03 5.30Pruning 84.80 5.35Replacement of dead palms 39.87 2.52Total 385.14 24.30

TABLE 7. COST OF FERTILIZER AND ITS APPLICATION, 2000

Cost items RM/ha RM/tFertilizer 332.22 20.96Fertilizer application 26.77 1.69Total 358.99 22.65

TABLE 8. COST OF HARVESTING, 2000

Cost items RM/ha RM/tHarvesting and collection 527.01 33.25Harvesting tools 39.47 2.49Total 566.48 35.74

5THE PRODUCTION COST OF OIL PALM FRESH FRUIT BUNCHES: THE CASE OF INDEPENDENT SMALLHOLDERS IN JOHOR

RM 4.13/t FFB) (Table 10). Thelatter refers to the summation ofcost, which is itemized as othercosts in upkeep, fertilization, har-vesting and transportation. As awhole, this category of costamounted to RM 88.38/ha orRM 5.57/t FFB.

Labour cost. Labour can be asignificant input and therefore mayaccount for a large proportion ofthe production cost of FFB.Employment of labour is either bythe work being contracted out, useof hired labour or a combinationof the two modes of labouremployment. Labour usage andmanagement systems in theindependent smallholders sub-sector, are completely differentfrom the estate sector. More familylabour was used in place of hiredlabour. About 83% of thesmallholders applied fertilizersthemselves while 14% did notapply fertilizers in the year 2000.About 82% of farmers appliedagricultural chemicals to their oilpalm holdings themselves and 44%did their own harvesting. Familylabour was not valued in this studybut it was estimated based oneither hired or contract labour.

Use of machines in oil palmsmallholdings is mainly in the

in-field FFB collection work. How-ever, such work was minor com-pared to the relatively expensiveinvestment that was needed to bemade. Only 7.4% of farmersmechanized their in-field collec-tion work mainly through the useof gerabak bermotor or power carts.The machines, when used only toservice the owners holdings wouldtend to be under utilized. Somefarmers revealed that the machineswere not idle but were hired out.

Cost summary. Table 11 reveals theproduction cost summary ofindependent smallholders. Thecost of FFB production wasestimated at RM 1772.47/ha in2000. In terms of FFB tonnage, itimplies that for every one tonne ofFFB, the production cost wasRM 111.82. At 95% confidence

interval, the estimate wasRM 104.61-RM 119.03 indicatinga relatively high precision of costestimate.

The highest cost componentwas harvesting and collectionwork, which amounted toRM 566.48/ha/yr or RM 35.74/tFFB. This cost component repre-sents 31.8% of the production cost.The second most important costitem was upkeep (22%), followedby transportation (21%), fertilizerand its application (20%) and otherexpenses (5%).

Comparison with Estate

The analysis found that the pro-duction cost of FFB by independ-ent smallholders in the year 2000was lower than that of estates. Forindependent smallholders, the pro-duction cost was RM 1772.47/hain 2000 or RM 111.82/t FFBwhereas for the estate sector,the production cost wasRM 2273.63/ha for that year orRM 122.16/t FFB (MPOB, 2001c).The breakdown of the comparisonof cost between independent small-holders and estate is shown inTable 12. The relatively lower costincurred by smallholders wasmainly due to the absence of jointestate cost (general charges), de-preciation and the lower cost offertilization and transportation.Joint estate cost represents 22.4%of the production cost of oil palmestate. However, with activitiessuch as upkeep and harvesting and

TABLE 9. COST OF FRESH FRUIT BUNCHES (FFB)TRANSPORTATION, 2000

Cost items RM/ha RM/t

In-field transportation 68.37 4.31Transportation of FFB to mill 305.11 19.25

Total 373.48 23.56

TABLE 10. OTHER COSTS INCURRED BYINDEPENDENT SMALLHOLDERS, 2000

Cost Items RM/ha RM/t

Land quit rent 22.85 1.44Other expenses 65.53 4.13

Total 88.38 5.57

TABLE 11. SUMMARY OF COSTS BY INDEPENDENTOIL PALM SMALLHOLDERS IN JOHOR, 2000

Cost items RM/ha RM/t (%)

Upkeep 385.14 24.30 21.7Fertilizer and application 358.99 22.65 20.3Harvesting and collection 566.48 35.74 31.8Transportation 373.48 23.56 21.1Other costs 88.38 5.57 5.0

Total 1 772.47 111.82 100.0

6OIL PALM INDUSTRY ECONOMIC JOURNAL (VOL. 3(1)/2003)

collection, the costs in the inde-pendent smallholdings are moreexpensive.

Comparison with Other Study

The results of the study are alsocompared to Malek and Barlow(1988), who studied the cost ofproduction by oil palm smallhold-ers and estates in the mid-1980s.Their findings showed that thecosts incurred by smallholderswere found to be higher than in oilpalm estates (Table 13) due to theinclusion of the cost of family la-bour and management charges.

However in this study, familylabour is accounted for all worksin terms of hired or contract labour.Given that the opportunity cost offamily labour is lower than hiredlabour due to the lack of off-farmwork opportunities, the estimatescan be slightly overstated. Thestudy by Malek and Barlowestimated the cost of harvestingas RM 36.20/t FFB. This figurewas computed on the basis of44 man-days at RM 14 per man-day. This works out to beRM 616/ha/yr or RM 36.20/t FFB.

In Malek and Barlow, the addi-tional cost that was not consideredin this study was the one thatinvolved management and over-head costs, which amounted toRM 1.80/t FFB in 1988. In order to

from RM 20/t FFB (mid-point) toRM 35.74 or a cost increase by 76%over the period. Hence, the cost toindependent smallholders inJohor when adjusted to suit theMalek and Barlows system of costestimation was RM 113.92/t FFB,still lower than the cost in estates.The addition of the managementand overhead cost also brings thecost incurred by independentsmallholders in Johor to a compa-rable state with that of the estatesector.

The Independent Smallholdersand the Economy

The finding contradicts thegeneral paradigm that smallhold-ers are less efficient and thereforetheir costs are higher than what are

Source: Malek and Barlow (1988).

Note: * {(125459 ha x (1 276.11 1 211.89)}.

consistently compare to Malek andBarlow, this cost was adjusted tothe year 2000. Taking the rise inharvesting cost as a guide to thisadjustment, the cost increase was

TABLE 12. THE COMPARISON COSTS BETWEENINDEPENDENT SMALLHOLDERS AND ESTATE, 2000

Cost items Independentsmallholders Estate

RM/ha RM/t RM/ha RM/tUpkeep 385.14 24.30 347.19 18.67Fertilizer and its application 358.99 22.65 541.11 29.09Harvesting and collection 566.48 35.74 461.41 24.81Transportation 373.48 23.56 490.94 26.39Joint estate cost - - 509.38 27.39Other cost 88.38 5.57 - -Depreciation - - (76.40) (4.19)

Total 1 772.47 111.82 2 273.63 122.16

TABLE 14. THE COMPARISON INCOME BETWEENESTATE AND INDEPENDENT SMALLHOLDERS

IndependentItems Estates smallholdersFresh fruit bunches yield (t/ha) 19.3 15.85Price/t RM 188.28 RM 188.28Cost of fresh fruit bunches

production/t RM 122.16 RM 111.82Income/t RM 66.12 RM 76.46Income/ha RM 3 633.80 RM 2 984.24Net income/ha RM 1 276.11 RM 1 211.89Loss of net income to the nation in Johor* RM (8 056 976.98)

TABLE 13. THE COST OF PRODUCTION BETWEENINDEPENDENT SMALLHOLDERS AND ESTATE IN MID 1980s

Item Independent Estatesmallholders

Yields 17 t/ha 20 t/haCosts RM/ha RM/t RM/ha RM/tMaintenance, fertilizersand agrocides 600 35.2 500 25.0Harvesting and collection 616 36.2 450 22.5Mainline transportation 170 10.0 170 8.5Management and overhead 30 1.8 500 25.0Others 20 1.2 30 1.5Total cost 1 436 84.4 1 650 82.5

7THE PRODUCTION COST OF OIL PALM FRESH FRUIT BUNCHES: THE CASE OF INDEPENDENT SMALLHOLDERS IN JOHOR

incurred in the estates. Cost com-parison on output terms may nothighlight the real differencebetween the productivity in theestates and independent small-holders as indicated in Table 14.When the FFB price was onaverage RM 188.28/t, it is estimatedthat the independent smallholdersreturn to FFB production wasRM 2984.24/ha in the year 2000.In the estate sector, it was estimatedthat the income, on per hectarebasis was RM 3933.80. Due tolower production cost incurred bythe independent smallholders,their income was higher atRM 76.46/t FFB compared toRM 66.12/t FFB in estates. How-ever, the productivity of the inde-pendent smallholders, which ismuch lower, can lead to lowerearning from a hectare of oil palm.Table 14 hypothetically highlightsloss of net income of the independ-ent smallholders in Johor in viewof productivity disparity. If theindependent smallholders can beencouraged to improve productiv-ity to the level of the estates, thecountry could earn an additionalRM 8 million from Johor. Thisjustifies the establishment of anextension organization, aimed atimproving oil palm productivity bysmallholders.

CONCLUSION

The study reveals that in the year2000, the cost of FFB productionby smallholders was lower thanin estates. This is due to thedifference in the cost structurebetween the two productionentities. Smallholders employfamily labour for some activitiesand some even did not apply

fertilizer. It is also deduced fromthe study that the average oil palmage of independent smallholdingsis 20 years old. At this age bracket,the palms are already at thedeclining age profile. It implies thata plan for systematic replanting iscrucial in the medium term inorder to enhance productivity. Thelower yield of 15.85 t/ha is due topalm age and soil types. The yieldlevel is relatively low compared toestates. The farmers must be givenextension service to educate themon the proper agronomic practicesin oil palm cultivation so that theiryield can improve.

ACKNOWLEDGEMENTS

The authors wish to express theirutmost gratitude to the Director-

REFERENCES

AZMAN, I; ARIF, S; MOHD NOOR, M and MOHD NASIR, A (2002).The cost of FFB production by independent smallholders in Johor. VivaReport. MPOB, Bangi. Unpublished.

MPOB (2001a). MPOB Report: Laporan Bulanan Disember 2000.Unpublished.

MPOB (2001b). Palm Oil Cost of Production, Malaysia 2000: A Report ofthe MPOB Palm Oil Cost of Productioin Survey 2001. Unpublished.

MPOB (2001c). Malaysian Oil Palm Statistics 2000. 20th edition. MPOBBangi. 122 pp.

MALEK, M and BARLOW, C (1988). The production structure of theMalaysian palm oil industry with special reference to the smallholderssub-sector. PORIM Occasional Paper No. 24: 53 pp.

General of MPOB, Director ofEconomics and IndustryDevelopment as well as the Headof Techno-Economics ResearchUnit for their constructivecomments and guidance. Specialthanks are due to the Johor StateDepartment Agriculture, in parti-cular the agriculture officers andtechnicians in the districts of Muar,Pontian, Kluang and Batu Pahatfor their assistance with datacollection. Thanks are also exten-ded to HR Marketing Sdn. Bhd. forsponsoring soaps as souvenirs torespondents of this study. Last butnot least, the authors would liketo thank Abdullah Badrisah,Bahaman Shah, Roslan Abas andRohani Jaafar for their assistanceand contribution in the datacollection.

copyright: MPOB 2003