On The Profitability of Sustainability Certification: An Analysis among Indonesian Palm Oil Smallholders

Abstract

This paper analyses the profitability of palm oil certification through the use of a financial Cost-Benefit Analysis (CBA) and the assessment of Net Present Value (NPV). Better understanding the investment value of certification adoption can be used by policy makers or certification providers to bring in more smallholders and to make certification more beneficial for the generally vulnerable smallholders. The results indicate that certification is currently profitable for different types of Indonesian palm oil smallholders. The extent to which certification is profitable depends on the smallholder’s pre-conditions. In the self-funded scenario, certification is not profitable for scheme smallholders and only remains profitable for independent smallholders when they continue to receive premium prices. If premium prices are however removed the independent smallholders may need unrealistically high premium fees for certification to remain profitable in this scenario. Next to certification, we found that the organization of farmers around miller companies contributes positively to profit, even before certification takes place. Therefore investing in organization may be an effective form of government involvement.

Keywords: Profitability; palm oil; Indonesian smallholders; sustainability certification; RSPO