2010 International Conference on Institutional Economics

(Shandong University, Jinan, China)

INSTUTUTIONAL ARRANGEMENT OF INDONESIAN TOBACCO FARMING

An Approach to Farming, Post-Harvest Processing and Trading

M. Rondhi, Adhitya Wardhono, Bhim Prakoso

Address: Jember University, Jl. Kalimantan III Jember, Indonesia
Contact: rondhi_mp@yahoo.co.id

Paper presented at 2010 International Conference on Institutional Economics

(Shandong University, Jinan, China. April 17– 18, 2010)

ABSTRACT

Tobacco is important plant in Indonesia. For some societies, tobacco is main

source of income. Furthermore, tobacco is a unique plant and has different
characteristics based on the region and the type. The difference includes planting,
post-harvest processing and trading. Thus, the important thing is to discuss the
uniqueness of tobacco. This paper is aimed to describe the institutional arrangement in
tobacco namely planting, post-harvest processing and trading.
The findings showed that the institutional arrangement was determined by
region and type of tobacco. In Central Java and West Java, the institutional
arrangement of tobacco prioritized cooperation with company, but the system
established did not fully bind each other. In East Java, the institutional arrangement
tended to be in form of voluntary works and helping each other in farm management
of tobacco. Furthermore, the post-harvest processing and trading was determined by
the type of tobacco and size of the land. Na-Oogst tobacco had more systematic
processing and trading system compared with the processing of rajangan and
Virginia. Trading system of rajangan tobacco was extremely complex since the
farmers had narrow land, and it was generally managed by small-scale farmers.
Keywords:

INTRODUCTION

Indonesia is a tobacco-producing country either for consumption of domestic

cigarette company or for foreign consumption. According to Santoso et. al. (2008),
two types of tobacco produced in Indonesia are: (1) Voor-oogst tobacco, which is
tobacco for raw materials of cigarette. The production of tobacco of this type has
market share ranging only 2.3 to 5 percent of the world’s products; it means that for
this type of tobacco, Indonesia is categorized as a small country because some types
of voor-oogst tobacco are still imported such as Virginia and Burley; (2) Na-oogst
tobacco; it is used as raw materials for cigar industry. All the products of this type of
tobacco are exported whose market share is for the quality of cigar wrapper
(dek/wrapper) and the quality of inner cigar wrapper (om/binder) reaching around 34-
41 percent. For this type of tobacco, Indonesia is classified as a big country whose
existence is considered in the world.
The biggest products of tobacco come from 4 provinces, they are East Java,
West Java, , Central Java and West Nusa Tenggara. The size of tobacco area in
Indonesia is about 215,000 ha; predictably East Java has 60% of the area, Central Java
has 30%, West Nusa Tenggara has 5%, and the remaining spreads throughout other
provinces. Moreover, the number of farmers who work in this sector is 8 millions on
farm and 15 millions off farm. Thus, the commodity of tobacco provides a big role in
contributing to absorption of workers.
Therefore, there are two important things in relation to tobacco business, they
are on farm and off farm businesses. The first of the two is connected with
institutional arrangement process to produce tobacco while the second one is in
connection with post-harvest process and commerce to be processed further to
become cigarette. Both on farm and off farm businesses affect each other on tobacco
business performance.
On the other hand, because the specification of tobacco type and planting
location are different, the forms of on farm and off farm businesses are also different.
Na-oogst tobacco is mostly operated by big corporation though it is not impossible for
small-scale farmers to grow it. Oppositely, Voor-oorgst is mostly managed by small-
scale farmers. This is influenced by the amount of cost which is affected by the cost
spent for each farm-management and also farmers’ ability.
In line with this, there is an important issue which significantly influences
tobacco farmer’s income, that is institutional arrangement. As we all know that not all
farmers can provide capital in their on-farm business, so that they tend to make
cooperation with other parties in running their on-farm business. Based on the
background, this paper is aimed to describe institutional arrangement of Indonesian
tobacco either on farm or off farm.
 RESEARCH METHODOLOGY

This research was carried out in central areas of Indonesian tobacco, they are East
Java, West Java, Central Java and West Nusa Tenggara. Samples of this research were
100 respondents of each area that had been determined previously by applying
proportioned random sampling (Sekaran, 2001).. In addition farmer respondents, this
research also involved respondents of seller, warehouse or cigarette factory. Method
of analysis used was descriptive-qualitative. (Strauss, Anselm dan Juliet Corbit. 2003)

FINDING AND DISCUSSION

Tobacco is a unique plant seen from planting, post-harvest processing to

trading. This is viewed from differences in the process for each type and area. The
system of tobacco institutional arrangement is highly associated with the process,
particularly dealing with human resources considering that human is social creature
which relates with others in undertaking something. Institutional arrangement is
defined largely, that is how farmers produce tobacco through the passed processes.

As mentioned in previous part that institutional arrangement of tobacco is

highly connected with its type. The followings are the types of tobacco and the largest
region of on-farm institutional in Indonesia.
Tabel 1. Types of tobacco according to each region.

No Region Type of tobacco Manager

1. Central java
Temanggung Vo-Oogst Personal
Klaten Na-Oogst Corporation
2. West Java Vo-Oogst Personal
3. East Java
Besuki (Jember, Na-Oogst (Under-string Personal and
Bondowoso, Situbondo, tobacco, Early planted corporation
Banyuwangi) Tobacco, Traditional
 Tobacco)
Vo-oorgst (rajangan) Personal
Bojonegoro, Probolinggo, Vo-orgst (Burley, Personal
Lumajang rajangan)
Madura Vo-oorgst (rajangan) Personal
4. West Nusa Tenggara Virginia Personal and
corporation
Source: Primary data, 2008

On-farm institutional of tobacco is in relationship with capital supply to

produce tobacco or to market it. Institutional arrangement of tobacco on corporation
scale is done by collecting capital from business partners who are ready to run a
business on the basis of mutual relationship. However, to small-scale farmers,
institutional arrangement of tobacco is strongly related with capital supply available at
home. The followings are models of institutional arrangement of tobacco in Indonesia.

In this case, due to the ownership of relatively narrow land and limited capital,
it is very possible for the farmers to gain an access to capital by making cooperation
with other people. In the planting process, institutional arrangement of tobacco is very
specific from seedling, fertilization, grass clearing, topping, to harvesting. These
influence the quantity and quality of the obtained results. The use of a certain type of
tobacco is affected by physical condition of a region while the results are influenced
by farmers’ accuracy in running the institutional arrangement, including determining
the correct time.

There is a partnership established between farmers and corporation as the final

wholesaler of the resulted product of tobacco. This partnership is generally divided
into three groups, they are institutional arrangement, post-harvest processing, and
system of trading.

A. On Farm Institutional Arrangement of Tobacco

The institutional arrangement of tobacco is a system which is available in the process

of farm management from seedling to harvesting. This system is different among
regions.

1. Farmers in Central Java

The pattern of farmers’ planting in Temanggung is paddy-tobacco and sometimes

corn-tobacco. Tobacco is the major plant for farmers who dare to take a risk. This can
be seen from farmers’ behavior when harvesting; they buy things for their daily basic
needs to tertiary needs (car, jewelry, etc.). Even, the capital that should be saved for
farm management of the coming period is also used for the purchase of those things.
As a result, in the next period of farm management of tobacco, many farmers are
running out capital which makes them sell all valuable things that they have. This
model is certainly benefiting particular party, that is wholesaler of wealth sold when
farmers need fresh fund for their basic since the prices of those things are relatively
cheaper and under common price.

2. Farmers in west Java

Farmers in West Java had different pattern of system from those in Central Java. In
the production of tobacco, farmers in West Java engage cooperation with a cigarette
company receiving their product of tobacco. However, the cooperation engaged did
not legally bind each other since farmers had no obligation to sell all the products.
The company only requires farmers to sell tobacco to the company as much as their
debt for production cost to the company. The company gave freedom to the farmers to
sell their products.

In the point of view of agronomy, this system was less beneficial for both parties
(farmers and cigarette company) since the quality of produced tobacco was not
appropriate with the expected one by the cigarette company.

3. Farmers in East Java (Madura, Besuki)

Madurese farmers had their uniqueness in institutional arrangement of tobacco,

especially in the use of workers. Voluntary work system was still applied in this
region. This happened when farmers carried out tobacco cultivation. There was no
payment system for workers; there was only feeding system which provided food,
snack and cigarettes as the compensation of the spent energy. This system was done
by turns between one owner and another.

This system gave an influence on farmers’ spending which was relatively small if
compared with employing workers that were calculated commercially. However, this
system could be applied only in the area with farmers who had the same interest,
meaning that the farmers served merely as farmers among others (Yustika, 2006).
In Besuki, institutional arrangement was highly related with institutional arrangement
process from land processing to harvesting. In running the institutional arrangement, a
large number of workers who sometimes had to work together at the same time,
individually, and sometimes the workers were from the family and sometimes outside
of the family for the for farmers whose land is less than 0.5 hectare. They had been
accustomed to running institutional arrangement independently or by involving their
family members. Only at certain activities they employed workers outside of their
family. The followings are activities that were runt independently and by employing
workers outside of their family.

Table 2. The Employment of Workers in Institutional Arrangement with Land Size <
0.5 ha
No Types of Activities Use of Workers
Family Out of Family
1. Seedling √ -
2. Planting Preparation √ √
3. Planting √ √
4. Grass clearing √ -
5. Watering √ √
6. Harvesting √ -
Source: Data on field.

From the data above, it is known that the components of workers coming from outside
of family are planting preparation, planting and watering. In the process of planting
preparation, a tractor which was usually managed by the owner of the machine was
needed. Further, in the process of planting, workers were required to work together at
the same time in the afternoon. The land in size of one hectare usually took 1 to 15
workers.

Next, in the process of watering, family institutional arrangement required water

pump which was usually rented by the owner of the machine. This was a spending
which was out of household expenses that a farmer’s family had to spend.

For farmers whose land sized > 0.5 ha, the institutional arrangement of tobacco had to
be conducted commercially by employing more workers from outside of family. The
owner only served as a manager of a company. He acted the same way a manager did.
He gave instruction about institutional arrangement of tobacco which was going to be
operated. More than that, he also went directly in the running of his farm
management.

4. Farmers in West Nusa Tenggara

In West Nusa Tenggara, the institutional arrangement of tobacco occurred between

farmers and domestic cigarette company. Prior to planting season, the company began
to socialize the need for dry tobacco, the required land size, quality of results and the
desired purchase price. This pattern of system provided advantages either for farmers
or for the company. The quality expected by both farmers and company could also be
controlled.

Economically, this type of partnership was truly beneficial. The farming cost could be
paid by farmers themselves or by engaging cooperation with company under
particular agreements that had been approved together.

B. Post-Harvest Processing of Tobacco

Post-Harvest Processing of Tobacco is a process of converting tobacco leaf that has

been harvested to be commercially ready stock dry tobacco. The system of tobacco
processing is not very complex like institutional arrangement, and some regions in
Indonesia have the same pattern. This processing was affected by type of tobacco.
Then, in the processing stage, not all farmers carried out tobacco processing due to
limited results of the harvested tobacco.

1. Tobacco Processing in Java (West Java, Central Java, and East Java).

Vo-Oorgst tobacco (rajangan madura, bojonegoro, probolinggo/tobacco leave that

chopped to be filler in cigarette) which is managed in Java is used for non-filtered
cigarette. The processing is begun by sorting the leaves, storing the dry leaves in
humid place and chopping them. After that, the tobacco was laid over and dried for
three days under sunlight. For other types of tobacco (such as Burley tobacco), the
drying process was done without sunlight.
The post-harvest processing of tobacco is associated with human resources as the
manager. In general, tobacco processing could be conducted either individually or in
group. In individual processing, tobacco was conveyed by drying it on farmers’ own
land and sometimes on narrow land. Even, some farmers dried the tobacco on top of
the house roof for getting enough sunlight.

Afterwards, the group processing was held on large area owned by someone. The use
of this large place was not making charge but was based on agreement where the
place owner would get priority in the processing. Other users should match the
owner’s turn. An important thing in using a place for drying collectively was
willingness to help each other. One user could help another user when lifting
tempayan (a place for drying tobacco) when taking it out and putting it in. This was
related with the fact that the cost that had to be spent in the process was cheaper.
Besides, there was also processing model which was done by blandang (wholesaler).
This system was exactly held by tobacco seller who bought tobacco for self-
processing.

Especially for Na-Oogst tobacco, the processing was done by company by relatively
advanced system and had been organized. In this case, the workers were paid in
accordance with the available waging standard and the processing had used certain
operating procedure (Greif, Avner. (1998).

2. Post-Harvest Processing of Tobacco in West Nusa Tenggara

The type of tobacco in West Nusa Tenggara is Virginia. This tobacco has
different processing pattern from rajangan and Na-Oogst tobaccos. Processing model
of Virginia tobacco applied technology of flow cure (processing model by flowing smoke
through pipe to tobacco laid in closed room). Model of system for production processing
in West Nusa Tenggara was conducted by corporation between farmers and cigarette
company. Cigarette company usually gave assistance to farmers in form of fuel supply
as raw material in tobacco processing.

The next step in tobacco processing did not involve all farmers to carry out the
processing by themselves because the ownership of the institutional arrangement of
tobacco could not economically be processed individually (Santoso, et all, 2008).
Thus, some farmers conducted the processing together in one closed room. The
pattern of this processing was more advantageous for farmers since they could
economize the processing cost.

C. System of Tobacco Trading

The same as institutional arrangement and processing of tobacco, tobacco trading is

highly related with the type of tobacco and actors of the institutional arrangement of
tobacco. The Vo-oogst tobacco (rajangan Madura, Temanggung, Bojonegoro) had
longer marketing (involving larger number of actors compared with Na-oogst and
Virginia tobaccos).

Na-Oogst tobacco was directly traded to importing country through the company. The
system of trading was shorter since the operator planted tobacco in large scale, so the
trading was also relatively easier. Meanwhile, Virginia tobacco also had relatively
simpler marketing due to the contract that had been made by farmers and cigarette
company for readily receiving dry tobacco.

The specific and complex marketing is available in rajangan tobacco. The marketing
method is that: Farmers  Blandang  wholesaler  big seller  company. This
type of process usually happened to small-scale farmers whose land size < 0,5 ha.
This was considered efficient since farmers could not possibly come to the company
transporting dry tobacco with low quality.

The trading relationship between farmers and wholesaler was that both of them,
serving as sellers and buyers, could freely bargain each other though the position of
buyer was higher than seller (farmer). As a result, this led to impression that the price
was determined by the buyers (Furubotn, Eirik and Rudolf Richter, 2000). This also
happened to the marketing relation between blandang, collecting seller (wholesaler)
and big seller, in which both of them, serving as seller and buyer, freely mad
transaction and the price was decided by the buyer. There was also the fact the some
sellers had been bound to particular exporter. The many marketing types caused
longer marketing chain, and the price accepted by the farmers was lower.
 CONCLUSION

Based on the discussion above, it can be concluded that:

1. The institutional arrangement of tobacco in Indonesia is divided into three, they are
farm management, post-harvest processing and trading.

2. The institutional arrangement is determined by region and type of tobacco. In

Central Java and West Java, the institutional arrangement of tobacco prioritizes
cooperation with company, but the system established does not fully bind each
other. In East Java, the institutional arrangement tends to be in form of voluntary
work and helping each other in institutional arrangement of tobacco.

3. The post-harvest processing and trading is determined by the type of tobacco and
size of the land. Na-Oogst tobacco has more systematic processing and trading
system compared with the processing of rajangan and Virginia. Trading system of
rajangan tobacco is extremely complex since the farmers have narrow land and
generally managed by small-scale farmers.

REFERENCES

Furubotn, Eirik and Rudolf Richter. (2000). Institutions and Economic Theory: The
Contribution of the New Institutional Economics. The University of
Michigan Press. USA
Greif, Avner. (1998). Historical and Comparative Institutional Analysis. The
American Economic Reviw. Vol. 88. Issue 2. May: 80-84
Santoso,K., et all , 2008, Tembakau dan Industri Rokok: Kontribusi terhadap
perekonomian nasional, serapan tenaga kerja, perilaku konsumsi, dan
perspektif petani, Lembaga Pengabdian Masyarakat, Universitas Jember

Sekaran U, 2001, Research Method for Business, Mc. Graw Hill, New York

Strauss, Anselm dan Juliet Corbit. 2003. Dasar-dasar Penelitian Kualitatif:

Tatalangkah dan Teknik-teknik Teoritisasi Data. Pustaka Pelajar. Yogyakarta

Yustika, E.A, 2006, Institutional Economics, Brawijaya University, Malang,

Indonesia./

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