The ACIAR Project No. FST/2005/177 "Improving economic outcomes for smallholders growing teak in agroforestry systems in Indonesia" has been implemented effectively since March 2007 by the Centre for International Forestry Research (CIFOR) and the collaborative institutions, which consist of the World Agroforestry Centre/International Centre for Research in Agroforestry (ICRAF), Winrock International; International Centre for Applied Finance and Economics Institut Pertanian Bogor (Inter-CAF IPB); Forestry Research and Development Agency (FORDA), the Ministry of Forestry of Indonesia; Farm Forestry Consortium (FFC) or Pokja Hutan Lestari of the district of Gunungkidul and the Australian National University (ANU). The project has three main objectives, i.e. (1) to introduce and adapt silvicultural technologies that improve returns for smallholder teak producers; (2) to identify and design financing schemes providing incentives for smallholder participation in profitable teak production and (3) to enhance market access by smallholder teak producers. The project site was located in the district of Gunungkidul, the province of Yogyakarta at seven selected villages which represent three different geographical areas (northern, middle and southern parts of the district).

During the first year of project period, most of the planned activities have been completed and the project implementation is progressing well. Following up to the inception meeting held in May 2007, a series of discussions among the project team members was conducted to finalize research approaches and methodologies. Integrated questionnaire was constructed for data collection during the household surveys. The household surveys were conducted during August and September 2007, following project launching in July 2007 at the Bupati office in Gunungkidul district. More than 275 farmer respondents were interviewed during the surveys. Exchange visits (study tours) to several places on two occasions in late November and early December 2007 were completed. Places visited included teak processing factories, a private teak plantation (Perum Perhutani), nursery centres and neighbouring teak producing communities. The first study tour was attended by project scientists to review the current teak management practices and identifying possible improvements that could be applied on smallholders' teak production systems. The second study tour was attended by farmer representatives to provide farmers with some experiences and knowledge of best practices of teak plantation management. A one day Focus Group Discussion (FGD) was conducted in December 2007 to cross-check collected data derived from the household surveys as well as farmers' feedback from the study tour. Simultaneously with the household surveys, in depth interviews with relevant key stakeholders at each project site were conducted. An inventory of smallholder teak plantations was conducted in March 2008 to document the existing condition of farmers' teak systems and to cross-check the collected data from the household surveys. In February 2008, a three-day training program for farmer representatives focussed on Verification of Legal Origin (VLO), Wood Tracking System and collective action to develop microfinance institutions was conducted. The first year project activities were summed up at an annual project meeting recently conducted (April 2008) in Yogyakarta.

Under objective 1, survey results have provided detailed documentation of smallholders' current silvicultural practices, attitudes and systems, which confirm many of the pre-project assumptions and provide direction for future actions. Generally smallholder teak producers use poor silvicultural practices leading to low productivity and poor timber quality. Limited knowledge, information and capital have restricted smallholders' application of "best practice" teak farming system. Data analysis from this activity is being progressed and the results are being compiled in a project working report.

Under objective 2, preliminary results show that almost all of the respondents require loan funds to fulfil their daily needs but only a limited portion (12%) of them have used loan funds for productive activities, such as for purchasing fertilizers and farming equipments. Most of the loans are obtained from informal sources, which are very common in each surveyed village. These preliminary findings are being compiled in a project working report.

Activities under objective 3 identified some key marketing problems faced by farmers when dealing with local traders. The problems faced by local traders when dealing with local farmers were also identified.

While scientific publications of project activities are in progress, the project has published one project newsletters in English and in bahasa Indonesia version. (see Annexes 1 and 2). The project also produced 2 articles in ICRAF' published newsletters (see Annex 3 and 4). In early May, the project produced a documentary film on teak farm forestry in the project area including details on project activities supporting its development. Copies of the film on compact disk (CD) will soon be distributed to community organizations and local stakeholders.

The ACIAR-funded project, FST/2005/177 'Improving economic outcomes for smallholders growing teak in agroforestry systems in Indonesia' commenced 2 years ago in Indonesia. The research project that aims at improving the livelihoods of smallholders growing teak in Indonesia has three main objectives, i.e. to introduce and adapt silvicultural technologies that improve returns for smallholder teak producers; to identify and design financing schemes providing incentives for smallholder participation in profitable teak production; and to enhance market access by smallholder teak producers. Four major activities were completed during the second year of the project. These activities covered data analysis and reporting; additional surveys, cross-visits and interviews with local and other related stakeholders; trainings and Farmers' Demonstration Trials (FDTs) establishment.

Analysis on household survey and farm inventory data reveal eight clusters of teak plantation system currently applied by smallholders in the project area. These clusters consist of kitren (teak woodlot), tegalan (teak trees intercropped with mixed agriculture crops), pekarangan (home garden), or the combinations among them. The project team has identified some common obstacles faced by smallholder on improving their management practices. These among other are the lack of access to high quality seedlings, as well as lack of knowledge and technical skills on applying proper silviculture techniques. Best bet options for smallholders were proposed to improve their silviculture practices. Six FDTs were established on some selected farms during the year 2. These FDTs will be used as on-site trials to convince farmers to the benefits of adopting proper silviculture practices. The FDTs will also be used as avenue for farmers' training places on best bet silviculture practices.

The economic analysis based on the household survey data in year 1 and 2 shows that teak wood sales by farmers contribute relatively little to total household income, averaging only around 11.6%. However, the evidence shows that even for farmers with limited land ownership, teak plantations always exist as an important component of their land use system. In-depth interviews with farmers conclude that teak trees play important role as household savings account. The trees can be cashed in as necessary to meet household financial needs, either in hard times, or for financing wedding ceremonies and children's educations. Farmers sell their teak only as a last resort, when other assets such as motorcycles, electronic goods, jewellery or livestock are unavailable.

The study confirmed that famers often are forced to harvest their teak trees prematurely due to their urgent need for cash, leading to the loss of potential benefits that could be otherwise obtained from their teak plantations. The project team (InterCAFE IPB) is working to develop micro finance institutions that would help smallholder teak growers to have a better access to credit as it will prevent premature harvesting of teak trees. Analysis of the household data (collected during the year 1) and the additional surveys to 44 selected households identified household strategies and behaviour on accessing credit. For small amounts of money (under Rp. 1 million) it is convenient for farmers to borrow from informal sources, such as families, neighbours or farmers' group associations. For larger loans, farmers have difficulties on finding resources. Existing financial institutions (commercial banks and cooperative bodies) do not have schemes to meet the requirement of smallholder teak growers. Most of the banks see investment in teak plantations as high risk, due to long term and uncertain returns. The project team is trying to break this gap between teak growers' requirement on credit and the current credit schemes available at various finance institutions. Field activities, such as facilitation and group discussions were conducted to assist farmers' group on their collective actions and strengthen their institutional capacity.

Most of teak growers sell their teak in form of trees. Harvesting is mainly done by middlemen. The current marketing system incurs risk for both teak growers and middlemen. Teak growers lose income due to under-measurement during harvesting, whereas middlemen sometimes lose profits due to tree defects that reduce the quality of teak logs. The project team (ICRAF and Winrock) is trying to improve marketing strategy of teak wood through study of the local teak wood measurement and valuation system. The study included teak growers and middlemen. The activity provided practical training for farmers and middlemen to apply a fairer marketing system. The application of a log grading system during harvesting would improve wood valuation. Through proper measurement as well as improved bucking system, teak growers could increase their income by up to 10%. To make those additional profits, and possibly more, possible farmers and middlemen should adapt collective action to effectively increase their bargaining power with teak traders or industries.

The lessons learned from the project as summarized above are discussed in the technical reports annexed to this annual report. These preliminary finding were presented during the second project annual meeting recently conducted at Gunungkidul. Dissemination of project activities was also conducted through various pathways. A poster reporting project activities was presented at the International Union of Forestry Research Organisations 3.08 small-scale forestry conference in Geradmer, France. Two poster presentations on smallholder teak production and marketing will be presented by the project team (ICRAF and Winrock) at the World Agroforestry Congress in Nairobi, Kenya August 2009. Presentation and discussion of project activities and findings were also conducted on several other local events. Dissemination was also done through distribution of a video film which was produced during the year 1. The film was distributed to local stakeholders' institutions at Gunungkidul, other individuals and institutions at the national level; and globally through You Tube website.

In summary, the project has achieved some significant progress during the year 2. The accumulation of findings and lessons learned since the year 1 has resulted some outputs that have started giving impacts to the stakeholders. The project team is in good spirit and communication among the project members are continuously done through intensive emails, meetings and joint field works.