THE VALUE CHAIN OF SMALLHOLDER PLANTATION TIMBER chain... · THE VALUE CHAIN OF SMALLHOLDER PLANTATION TIMBER Dede Rohadi and Tuti Herawati How much room do we have for improving

THE VALUE CHAIN OF SMALLHOLDER PLANTATION TIMBER

Dede Rohadi and Tuti Herawati

How much room do we have for improving the farm gate price?

Symposium “Value Chains of Furniture, other Forest products and Ecosystem services”

IPB Convention Centre, 14 February 2013

Presentation Outline

1. Introduction 2. Methods 3. Results and Discussion 4. Conclusions

Introduction 1. Smallholder timber plantations

play important roles on rural development and support timber based industries.

2. Its development is challenged by various factors, including inefficient and or unfair value chain in the marketing system.

3. The weakest point along the value chain, i.e. growers (farmers) needs more attention.

4. Some lessons learnt from completed and ongoing research project are available for improving the economic benefits to smallholders.

Methods

Methods 1. Study approach

- The concept of ‘value chain’ : • a sequence of activities, such as production,

processing and marketing, that create and build value in a product or service; and

• a network of functional relationships that work together to reach an objective

- Scope of value chain in this study : Producer (grower) consumers (sawntimber

users) Source: Cromme, N., et al. (2010). Strengthening potato value chains:

Technical and policy options for developing countries. Rome: FAO.


- The findings in this paper were based on completed research project (not designed for VC analyses) and on going research project (designed for VC analyses)


- The completed projects:

Case study

Location Timber species Year of data collection

Remarks

1 Gunungkidul District (8 villages, 275 respondents)

Teak (Tectona grandis)

2008-2010 ACIAR Project

2 Tanah Laut District (Asem Jaya village. + 50 respondents)

Jabon (Anthocephalus cadamba)

2008-2010 BMZ Project


- The ongoing projects:

Case study

Location Timber species Year of data collection

Remarks

1 Sumbawa District (Semamung village, preliminary observation)

Teak 2012 ACIAR Project

2 Pati District (2 villages, preliminary observation)

Sengon (Paraserianthes falcataria)

2012 ACIAR Project

3 Krui, West Lampung (Preliminary observation)

Shorea and mix species

2013 ITTO Project

Methods

- Snowball method (entry with different starting points) - Interviews

2. Data collection:

- Descriptive - Financial analyses (margin, NPV, BCR)

3. Data analyses:

Results and Discussions

Marketing chains of smallholder timber products

Growers Brokers Processors Traders Consumers

• Individual farmer

• Informant (e.g. Blantik)

• Sawmill • Retailer • Local consumer (HH)

• Farmer’s Group

• Middlemen (e.g. Pengepul, Penebas, Chainsaw owner)

• Timber Depot • Timber Depot • Wood worker (e.g. wood carver, house frame maker), furniture maker)

• Wood based industry

• Inter island trader

• Exporter

1. Actors involved in the marketing chain


Growers Brokers Processors Traders Consumers • Individual

farmer: - Growing

trees - Selling trees

individually • Farmer’s

Group: - Growing

trees - Selling trees

collectively

• Informant: - Exchange

Information • Middlemen: - Harvesting

trees and produce logs or planks

- Transporting timber

- Manage timber transport documents (SKAU, IPKTM)

• Sawmill: - Processing logs/planks

into sawntimber - Manage timber transport

documents (SAKO) - Selling sawntimber • Timber Depot: - Processing and selling

logs/planks or sawntimber

• Wood based industry: - Processing timber into

finished products

• Retailer: - Seling

sawntimber to end consumers

• Timber Depot:

- Processing and selling logs/planks or sawntimber

• Inter island trader:

- Transporting timber inter islands

• Local consumer (HH)

• Wood workers:

- Processing timber into specific wooden products

• Exporter: - Export

finish products

2. Roles of actors


3. Marketing chains

End users Grower Broker Processors Traders

Individual farmer

Farmer's Group

Informant

Middlemen

Sawmill

Timber Depot

Wood based Industry

Retailer

Inter islands Trader

Local Consumers

Wood Workers

Exporter


3. Marketing chains

Individual farmer

Farmer's Group

Informant

Middlemen

Sawmill

Timber Depot

Wood based Industry

Retailer Local Consumers

Wood Workers

Exporter Case of smallholder teak

at Gunungkidul



3. Marketing chains

Individual farmer

Informant

Middlemen

Sawmill

Timber Depot

Wood based Industry


Exporter Case of smallholder sengon

at Pati



3. Marketing chains

Individual farmer

Middlemen

Sawmill

Timber Depot

Retailer

Inter islands Trader

Local Consumers

Wood Workers

Case of smallholder teak at Sumbawa



3. Marketing chains

Individual farmer

Middlemen

Sawmill

Timber Depot


Case of smallholder Shorea at Krui, Lampung



3. Marketing chains

Individual farmer

Middlemen

Wood based Industry

Local Consumers

Case of smallholder jabon at Tanah Laut


No. Cases Marketing chain possibilities

1 Smallholder teak - Gunungkidul 192 2 Smallholder sengon - Pati 8 3 Smallholder teak - Sumbawa 36 4 Smallholder shorea - Lampung 6 5 Smallholder jabon – Tanah Laut 2

3. Marketing chains

Marketing chains possibilities of the studied cases

Tree age (yr)

DBH (cm) Farm gate price (USD/tree)

Volume (m3) Estimated farm gate price (USD/m3)

Min Max Median Min Max Median Min Max Median 10 12 18 14 3 6 4 0.045 0.189 0.142 28.169 15 13 31 17 5 30 7 0.060 0.515 0.217 32.258 20 21 45 27 10 265 60 0.307 1.061 0.487 123.203 25 23 49 34 20 296 110 0.320 1.321 0.664 165.663

Note: USD 1 = Rp 10,000. Harvesting cost USD 73.73 /m3. Data was based on inventory of 227 parcels of teak farms and Rapid Market Appraisal on 20 local wood traders Source: Kurniawan and Roshetko (2009)


4. Lessons learnt on profit margin Farm gate price of smallholder teak at Gunungkidul


4. Lessons learnt on profit margin An illustration of marketing margin of teak middlemen (Gunungkidul)

• Cost of purchasing teak trees (8 trees, various sizes) = Rp 975,000 • Operational costs:

- Rental cost of chainsaw = Rp 180,000 - Chainsaw operator = Rp 40,000 - Cost for log hauling = Rp 210,000 - Transport and landing = Rp 100,000 - Timber documents: SIT (harvest permit) = Rp 20,000 SKSKB (transport) = Rp 230,000 TOTAL = Rp 780,000

• Selling revenue:

Diameter class

Volume (m3)

Local price (Rp/m3)

Total revenue

(Rp) UGD 0.134 2,600,000 348,400 UD 0.713 1,600,000 1,140,800 UP 0.333 1,000,000 333,000 DL 0.355 500,000 177,500

Piton 0.06 350,000 21,000 Total 1.595 2,020,700

• Profit margin = Rp (2,020,700 – 975,000 – 780,000) = Rp 265,700 (15% of the investment) • Transaction cost (timber document) = Rp 250,000 (14% of the investment or 32% of

the operational costs)


4. Lessons learnt on profit margin An illustration of marketing margin of teak middlemen (Sumbawa)

• Cost of purchasing teak trees (1 ha, 20 trees, various sizes) = Rp 4,500,000

• Operational costs = Rp 2,000,000

• Selling revenue= 80 squared planks valued at Rp 12,000,000

• Profit margin = Rp (12,000,000 – 4,500,000 – 2,000,000) = Rp 5,500,000 (85% of the investment)

• Period of selling transaction : 1 month


4. Lessons learnt on profit margin The case of smallholder jabon plantation (Tanah Laut)

• Cost of plantation establishment (1 ha, 500 trees) = Rp 3,500,000 • Cost of plantation maintenance (3 yrs) = Rp 3,000,000

• Selling prices: - Lowest estimation = Rp 125,000/m3 - Highest estimation= Rp 225,000/m3

• NPV: - Low price = (-) (BCR = 0.99) - High price = Rp 6 million (BCR = 2.17)

• Harvesting rotation: - Thinning (15 yrs) ~ 115 m3 - Final harvest (25 yrs) ~ 225 m3

Challenges for improving grower’s economic benefits

1. Thin market - No real demand at micro scale depress the farm gate

price. - The existed timber stock has not yet reach economic scale

of potential buyers (wood based industries) to operate (e.g. smallholder jabon case at Tanah Laut).

2. Premature harvest - Farmers often forced to prematurely harvest their timber

due to urgent need for cash (slash for cash/tebang butuh), eliminating the potential to get higher price for their timber.

- Limited access of farmers to microcredit.


3. Weak farmer’s bargaining position - Limited access to market information. - High transaction cost to get timber transport documents. - Lack of knowledge and skill on marketing variables (timber

volume estimation, timber grading and price, harvesting skill).

4. Limited capital (land ownership in Java; production capital in Lampung)

5. Low competitive of timber plantations compare to other commercial crops (e.g. rubber and oil palm)


6. Poor timber management - Market do not respond positively to farmer’s investment

on best silviculture practices. - Lack of knowledge and skill on best silviculture practices.

7. Low added value - Bulky characteristic of timber causing high transportation

cost. - Limited business link between farmer’s group and wood

based industries, reducing the potential for improving value added of smallholder timber.

- Lack of farmer’s skill to add value on their timber.

Options for improving grower’s economic benefits

1. Facilitate business link between farmer’s group and timber base industries - Product requirements (quantity, quality and price). - Business contract.

2. Develop appropriate micro credit schemes - Understand credit needs and smallholder financial

behavior. - Facilitate farmer’s group access to micro credit vendors. - Upgrade institutional capacity of farmer’s group

organization. 3. Improve farmer access to capital ;

- Simplify farmer’s access to state forest lands (Java) - Develop appropriate credit facilities (Lampung).

Options for improving grower’s economic benefits

4. Improve farmer’s capacity through trainings: - Timber volume estimation and grading. - Best silviculture practices. - Timber processing (House frame and furniture making).

Conclusions and Recommendations 1. Smallholder timber plantations have significant

potential to provide economic benefits to farmers, but they are facing significant challenges to achieve sustain business.

2. Major challenges that hindrance better economic return to timber growers are: • Limited market access • Premature harvest • Weak farmer’s bargaining position • Limited land ownership and production capital • Poor timber plantation management • Low added value of timber products

Conclusions and Recommendations 3. Intervention options for improving economic

benefits to growers are: • Facilitate farmer’s collective marketing and business link

with timber based industries. • Develop appropriate micro credit schemes • Improve farmer’s access to state forest land and credit

facilities • Improve farmer’s knowledge and skill in timber marketing

and value added processing.

Documents

THE VALUE CHAIN OF SMALLHOLDER PLANTATION TIMBER chain... · THE VALUE CHAIN OF SMALLHOLDER PLANTATION TIMBER Dede Rohadi and Tuti Herawati How much room do we have for improving