Fair Pricing Formulation for Palm Oil Fresh Fruit Bunch Produced by Smallholder Farmers: A Development Method to Form a More Effective Formula for Palm Oil Fresh Fruit Bunch Pricing to Achieve a Fair Price for Smallholder Farmers

Abstract

Objectives: The study aims to address the disparity in pricing received by smallholder farmers for their palm oil fresh fruit bunches (FFBs). It seeks to establish a fair pricing formula that balances the interests of smallholder farmers and crude palm oil (CPO) mills, ensuring the sustainability of smallholder farming practices and supporting the achievement of Sustainable Development Goals (SDGs). Methods: The research models the cost structures of palm oil smallholder farmers and CPO mills over a 30-year investment horizon. Using profitability analyses and the constraint that the Internal Rate of Return (IRR) for smallholder farmers is greater than or equal to the IRR of CPO mills, the study derives a pricing formula. The proposed formula calculates the price of FFBs (PFFB) as a function of the price of CPO (PCPO) and oil extraction yield (OER), supported by statistical simulations. Results: The study presents a pricing equation, PFFB = -2438.7971 + 0.1784 PCPO + 10219.2072 OER, which is transparent and based on significant parameters. The formula provides a practical approach to determining a fair price for FFBs, ensuring equitable profit distribution between smallholder farmers and CPO mills. This eliminates the need for prolonged negotiations while fostering sustainability and financial stability for smallholder farmers. Conclusion: The proposed pricing formula offers a straightforward and equitable method for determining FFB prices, aligning the profitability of smallholder farmers and CPO mills. This approach supports the palm oil industry's sustainability objectives and contributes to achieving the SDGs by empowering smallholder farmers and promoting fair trade practices.