Growth and profitability of smallholder sengon and teak plantations in the Pati district, Indonesia

Abstract

Despite the ambitious target to establish 12.7 million ha of social forestry across Indonesia and various government support for smallholder private forests, implementation has been slow and financial returns for smallholders from timber production have been variable. For most smallholders, any motivation to plant trees competes with their interest in planting short term food or cash crops to support their family's livelihood. Moreover, lack of market knowledge and monetary need often sees smallholders sell their trees at below market prices, rather than at the optimum time for financial returns. Also, a limited understanding of silvicultural options to improve log quality further undermines the financial returns from timber production for smallholders. There are few studies from Indonesia that provide sufficient detail to be able to replicate the financial analysis and benchmark the results against key input variables (e.g., unit costs of production, timber yields by product and log size class, discount rate). Another deficiency is the lack of empirical data on the growth performance of existing smallholder plantations in Indonesia. This article reports on research to fill these knowledge gaps by using inventory data from smallholder plantations in Pati (Central Java) together with other data to develop silvicultural systems that were used to assess the profitability for smallholders of growing sengon (Paraserianthes falcataria) and teak (Tectona grandis) for timber. The results indicated that growing sengon on a 6-year rotation was profitable with an estimated net present value (NPV) of USD 1015 ha−1 (Rp 14,218,000 ha−1) at a real discount rate of 8%, with an internal rate of return (IRR) of 20%. Growing teak on a 20-year rotation was also profitable with an NPV of USD 2815 ha−1 at a real discount rate of 8%, and an IRR of 15%. Although the NPV for teak was nearly three times that for sengon, in the long term (i.e., over perpetual rotations), the returns from sengon and teak were closer. Our results support the view that the best opportunity for enhancing smallholder returns from forestry lies in improving the common approach to silviculture, particularly the lack of effective pruning and thinning, to realise the financial potential of timber production.