USAID Green Invest Asia is a facility of the United States Agency for International Development (USAID) and is implemented by Pact in collaboration with Mekong Strategic Partners.
USAID Launches Smallholder Rubber Finance Findings
August 28, 2020
USAID Green Invest Asia
Smallholder rubber plantations represent a threat and an opportunity for carbon stock and biodiversity in Indonesia. A threat because poor agriculture and forestry practices lead to overuse of pesticides and fertilizers, water and river pollution and deforestation; and an opportunity because smallholder rubber plots hold a much higher biodiversity and carbon stock than their most common alternative: palm oil monoculture. USAID Green Invest Asia's study on rubber smallholder finance addresses a longstanding industry and climate challenge: Replanting high-quality rubber trees can increase farmers’ yield and income, and preserving plantations and jungle rubber plots are crucial to maintain carbon stocks and biodiversity. Yet, long-term financing for replanting rubber trees is rarely affordable for smallholders, who grow the bulk of the world’s natural rubber. While the study focuses on Indonesia’s rubber market, its findings are applicable to other commodities and countries where insufficient long-term smallholder finance thwarts scaling climate-smart and climate-resilient agriculture.
Almost 90 business leaders in banking, agribusiness, investors from the public and private sectors and other agriculture supply chain actors joined the United States Agency for International Development (USAID) Green Invest Asia and Grow Asia on July 30 for a web launch of findings from a study on smallholder access to finance for rubber tree replanting in Indonesia.
The study addresses a longstanding industry and environmental challenge: Replanting high-quality rubber trees can increase farmers’ yield and income; smallholders’ jungle rubber plots can trap more carbon and preserve more biodiversity than large rubber or palm plantations if planted with high-yield varieties. Yet, long-term financing for replanting such rubber trees is rarely affordable for Asia’s smallholder farmers, those who plant on about 2-hectare plots of land and grow 85 percent of the world’s natural rubber.
“If you take care of the farmer, usually the farmer can take care of the environment,” said Gerald Tan, CEO of HeveaConnect, a digital marketplace for sustainably processed natural rubber. The global price for natural rubber has fallen by more than half over the last decade, driving former rubber farmers to cultivate cash crops with larger carbon footprints, like oil palm. Tan noted a farmer in Indonesia who manually extracted (or, tapped) rubber every day from 500-600 trees earns on average half the national minimum wage.
Revitalizing the rubber industry requires farmers cutting down more than an estimated 400m rubber trees (assuming 600 trees/ hectare) in Indonesia deemed too old to produce, yet there is little willingness to cut down low-yield trees said Tan. “Culturally, an Indonesian farmer sees the rubber tree like an ATM to tap when prices are good. These farmers would rather clear new land [than cut down old trees].”
Unsustainable and illegal production of rubber is one of the world’s leading causes of tropical deforestation. Asia’s acreage of rubber plantations has nearly doubled between 1983 and 2012, leading to a significant loss of natural forests and growing greenhouse gas emissions according to the International Rubber Study Group.
An initiative from Indonesia’s largest rubber processor group, Kirana Megatara, has supported near one thousand natural rubber farmers to replant rubber in Indonesia. Widyantoko Sumarlin, the company’s chief sustainability officer, said farmers’ lack of technical knowledge, insufficient cash crops they could rely on while waiting for their rubber harvest to mature, and high land-clearing and tree removal costs required the company to share costs and subsidize replanting. High-yield rubber trees can take up to seven years to mature.
“The key is to find a smallholder who is a leader of the community and willing to take the risk [to replant], has a vision, and others will follow. But it takes time to find that person,” said Sumarlin.
Business case for agroforestry
The study’s authors from USAID Green Invest Asia, HeveaConnect, Financial Access and SNV shared different funding models, discussed industry implications, and outlined possible actions for investors, donors and industry leaders to shift the rubber market – and other commodities struggling due to insufficient smallholder replanting funds – to greater sustainability through a new financial product that included technical assistance to farmers.
The rubber study drew from desk research, field interviews with 250 smallholders growing rubber in Jambi, South Sumatra, and West Kalimantan in Indonesia, and financial modelling to analyze the economic viability of different replanting approaches and loan products that could meet smallholder needs. The analysis found that an agroforestry approach – staggered replanting of rubber trees over two years, planted alongside other crops over seven years – was the most economically viable model for smallholders, particularly where selling rubberwood is also an option.
“It’s refreshing to have this study present a value proposition to address the economic needs of the most vulnerable groups in the supply chain,” said Christian Bustamante, Senior Sustainability Manager of the global rubber franchiser, Halcyon Agri. “This report is a step in the right direction… We look forward to taking this study further with our industry stakeholders.”
The study identified the highest market potential in Jambi, with a replanting need of 100,000–125,000 hectares at an approximate value of over $400 million followed by South Sumatra with a serviceable market of $100 million.
Regional rubber fund?
Stefano Savi, Director of the Global Platform for Sustainable Natural Rubber, whose membership represents about half the global natural rubber market volume, said the platform has been looking into opportunities to diversify rubber smallholders’ income and boost agroforestry practices (which includes intercropping, or planting multiple crops alongside each other at once), and that he was keen for the study to inform member initiatives to extend smallholder-appropriate loans.
Sanjiv Louis, who focuses on sustainable land use investments as investment director in Southeast Asia for Sail Ventures, said blended finance funds like &Green Fund would “definitely be interested” to invest in a regional fund that supported rubber replanting in Southeast Asia, which produces almost all the world’s natural rubber, on the condition the fund was part of a multi-stakeholder platform that included public-sector investment to absorb risk and attract private capital, technical assistance to farmers to improve their agriculture practices, and buyers (off-takers) to purchase farmers’ cash crops planted alongside rubber. “It [a regional fund] would require a lot of collaboration and risk-sharing, but can work,” Louis said.
“This study has sparked discussion and highlighted the crucial need for cooperation along the rubber supply chain,” he added. “Partnerships are key to push a solution forward to capitalize on energy and interest to ensure the long-term sustainability of this industry, inclusivity of the rubber supply chain and, ultimately, improving smallholder livelihoods.”