Fair Pricing Formulation for Oil Palm Fresh Fruit Bunch Produced by Smallholder Farmers

Smallholder oil palm farmers play a crucial role in Indonesia's agricultural system. However, they often face price disparities in the supply chain, primarily due to their weak bargaining position against palm oil mills. This imbalance not only affects the welfare of farmers but also threatens the sustainability of the palm oil sector as a whole. This study designs a fair FFB pricing formula by considering the cost structure of farmers and mills over a 30-year investment period. The main principle is to ensure that the farmers' rate of return (IRR) is equal to or greater than that of the mills. The result is a simple yet comprehensive mathematical formula: PFFB = -2438.7971 + 0.1784 PCPO + 10219.2072 OER where the FFB price is determined by the CPO price and oil extraction rate (OER). This formula was developed through robust statistical and regression approaches, making it a reference for objective and transparent pricing policy. The implementation of this formula is expected to eliminate unequal negotiation practices, provide farmers with a fair price reference, increase their income, and promote sustainable cultivation practices. Additionally, this formula supports the integration of farmers into the increasingly demanding global supply chain for sustainability and economic fairness. Furthermore, fair pricing formulation also contributes to achieving the Sustainable Development Goals (SDGs)—particularly in poverty reduction, food security, and more equitable partnerships. By strengthening farmers' bargaining positions and clarifying the pricing structure, the future of Indonesia's palm oil industry can be directed towards a more inclusive, efficient, and sustainable system.