Feasibility of Agarwood Cultivation in Indonesia: Dynamic System Modeling Approach

Abstract

Most of the Indonesian agarwood in the international market is harvested from the wild, which raises concerns regarding its sustainability. The Government of Indonesia encourages agarwood cultivation produced from the cultivated Agarwood-Producing Tree (APT) to overcome this concern and replace natural agarwood. APT cultivation in Indonesia is not a new development, but it has faced various obstacles, ranging from production quantity and quality to funding and marketing. Therefore, an appropriate policy is needed to support the success of APT cultivation. This study aims to develop a dynamic system model in order to identify the gaps and determine appropriate policy strategies to improve APT cultivation in Indonesia. The model was established by compiling three conceptual stages: planting to harvest, cost–benefit analysis, and feasibility analysis. Agarwood from Aquilaria malaccensis Lam. cultivated by the community and private sector, which produces kemedangan (an agarwood grade in the Indonesian market) and oil, was chosen for the model. The model developed shows that APT cultivation development in the private sector and the community is unfeasible with the business as usual. There are three options to simulate the feasibility of agarwood produces from APT cultivation. The best scenarios are chosen based on the feasibility indicator, when benefit is higher than cost. The development of APT by the private sector that produces kemedangan and oil products is feasible, with the invention of more effective inoculant and processing technology (scenario 1), as well as applying high thinning, which can increase the yield. Oil production requires more investment, so the revenue obtained is lower than the production cost, resulting in the unfeasibility of the production. The development of APT by the community will be feasible with scenario 2, if there is government funding for the establishment of APT cultivation, inoculants application, and harvesting. Based on the model scenario, APT cultivation will be ecologically sustainable, economically feasible, and socially acceptable if carried out by the private sector or the community by applying inoculation techniques and selecting inoculants to increase production effectiveness, and will be supported by lower production costs and market stability. The Indonesian government needs to take several policies to encourage APT development, including financial assistance for APT development, setting inoculant standards at affordable prices, simplifying trade administration, stabilizing agarwood product prices at the local level, and law enforcement.

1. Introduction

Agarwood is a non-timber forest product export commodity with various trade names, such as the wood of the god, oud (Arabic), jin-ko (Japanese), aloeswood, and adlerholz (German). Agarwood has a high economic value and is produced by plants of the genus Aquilaria and Gyrinops [1]. In addition, agarwood is also known to have religious and cultural values, such as in Arabic, Chinese, Japanese, Buddhist, Hindu, and Islamic cultures [2]. The highest demand for agarwood is as a raw material for perfumes, incense, and medicine [2]. Globally, the agarwood trade is regulated by the Convention on International Trade in Endangered Species of Wild Animals and Plants (CITES). CITES data from 2000 to 2020 show that 785 million tons of agarwood were traded as 21 derivative products. Agarwood oil is one of the derivative products with the largest export volume (778 million tons), with the destination countries dominated by France and the United Arab Emirates. Other derivative products that have a large export volume are chips (585,000 tons) and powder (25,000 tons), while the volume of other derivative products adds up to 5.6 million tons [3].

Indonesia is a producer and exporter of agarwood. Currently, there are 13 species of Agarwood-Producing Tree (APT) from Aquilaria and Gyrinops genera found on the islands of Sumatra, Kalimantan, Sulawesi, Maluku, Papua, West Nusa Tenggara, and East Nusa Tenggara [4,5]. Most of the agarwood exported by Indonesia is harvested from natural forests. The species traded are Aquilaria malaccensis Lam., A. filaria (Oken) Merr., Gyrinops versteegii (Gilg) Domke, and Gyrinops sp., and these are exported mainly in the form of wood chips (52%), and powder (41%). Other categories are logs (4%), timber pieces (2%), and timber (1%) [3]. Aquilaria is the most popular species, with export volume reaching 50 million tons in 2008, but this number is decreasing every year [3]. Meanwhile, the trade of cultivated agarwood in Indonesia from 2011–2020 has only amounted to approximately 52 tons [3].

Agarwood quality is classified mostly based on color, oil (resinous) content, and aroma. National Standardization of Indonesia [6] already describes grading systems based on physical appearances such as color, weight, density, resin content, and the aroma of agarwood. The prices depend on the quality and vary greatly. The price of high-quality agarwood ranges between USD 10,000–20,000 per kg [7,8], and USD 100–300 per kg for wild and cultivated agarwood, respectively [8]. For oil, the price varies between USD 40,000–50,000 per liter [9]. The wild APT population (W) in Indonesia continues to be under pressure from trade and habitat loss due to deforestation and forest degradation [10,11]. Aquilaria and Gyrinops are reported to have low reproductive potential [12], and although the mother tree can produce a significant amount of fruit, the viability is low [13]. During a fruiting period, a tree can produce 19,000 seeds, with a germination rate of 92% in the first month, which decreases to only 20% in the second month [13]. It is a challenge to ensure the sustainability of APT in nature. APT cultivation can be a solution to prevent the extinction of APT species in nature and for their conservation. In addition, APT cultivation can ensure the availability of agarwood products and replace the supply of natural agarwood in the international market.

Agarwood harvesting is prohibited in the protected area of Indonesia, Malaysia, and Thailand [9]. Especially in Indonesia, agarwood harvesting can be conducted in the production forest area and other land use, with strict control of the quota system (Government Regulation No. 23 year 2021, and Forest Minister Regulation No. 447 year 2003). Based on PC25 doc 24, China reported that agarwood harvesting in the wild is prohibited; thus, there is no report on the harvest from wild trees. Other countries, such as Bangladesh and Bhutan, also reported no harvest from the wild; moreover, in Lao-PDR and Vietnam, wild APT is protected [9].

Agarwood cultivation in Indonesia has been carried out since the 2000s [14]. To date, 3.4 million APT stands have been planted [10,15,16]. The Government of Indonesia (GoI) initiated the cultivation through various policies, including the forest rehabilitation program [17]. The government distributes seedlings to the community to be planted in forest areas, gardens, or other marginal lands. Various cropping patterns, such as monoculture, mixed cropping, and agroforestry, have been developed [10,15,16]. Previous studies have reported that mixed cropping and agroforestry are more profitable than monocultures because they can provide both short and long-term income [18,19].

Cultivated APT are found across Java, Sumatra, Kalimantan, Bali, Nusa Tenggara, and Papua [12]. Most of APT cultivation is located in Sumatra and Kalimantan, with the highest stand potential in Central Kalimantan Province (24.71%), followed by North Sumatra (17.9%) [20,21]. In order to support the Government’s program to cultivate APT, the Indonesian Agarwood Association (ASGARIN) issued a policy that every owner of a distribution permit for agarwood is obligated to cultivate APT. Thus, in 2020, the total number of APT planted by ASGARIN members was 52,917 trees, with an area of 2079.5 ha [22].

In 2021, the GoI issued Government Regulation (PP) No. 23 of 2021 (PP.23/2021) in order to encourage the cultivation of non-timber forest products sustainably to improve community welfare, one of which is APT cultivation (Article 148:2, PP.23/2021). The Government’s support is also shown by giving opportunities for communities to cultivate state-owned land through social forestry permits, with various schemes, including village forest schemes, community forests, customary forests, community plantation forests, and partnership forests (Ministry of Environment and Forestry Regulation 7/2021) and MoEF Regulation 9/2021).

Although APT cultivation has been carried out in Indonesia for a considerable length of time, agarwood produced from APT cultivation is not commonly traded yet. The cultivation requires decades from planting to harvesting without inoculation treatment. Inoculation accelerates agarwood formation, so it can be harvested faster (within approximately 15 years) [16]. There are several inoculant species used to produce agarwood, such as Fusarium sp., Phialopora parasitica Medlar., Torula sp., Aspergillus sp., Penicillium sp., Cladosporium sp., Epicoccum granulatum Penz., Clymndrocladium sp., Sphaeropsis sp., Botryodiplodia theobromae Pat., Trichoderma sp., Phomopsis sp., Chunninghamella echinulate Thaxt. [23,24], Chaetomium globosum Kunze., and Fusarium oxysporum Schlecht. emend. Synder&Hansen [25]. Fusarium solani (Mart.) Sacc. is reported to be the most successful inoculant in Indonesia [26]. However, the effect of F. solani on the quality and quantity of agarwood produced differs according to the APT species, stand age, and the origin of the inoculant [27].

However, the quality of agarwood produced is still low, while the investment costs are high, and the maturation time is long [12]. Partnership policies and fund loans have been attempted [19,28], but cannot provide the right solution. From the literature, it can be inferred that agarwood cultivation in Indonesia faced management constraints. The information on the feasibility of the cultivation business is still limited and available only at the local level. Therefore, it is important to conduct research on dynamic system modeling in order to identify gaps and determine appropriate policy strategies to support APT cultivation that can ensure the sustainability of the supply of agarwood products from Indonesia.

APT development needs to be seen in a comprehensive, integrated, and systematic way. The relationship between variables that affect the APT cultivation system needs to be identified. In this research, dynamic system modeling (DSM) is chosen because it is a framework for a complex problem-solving task [29], which can obtain useful information from a dynamic complexity and policy resistance [28]. DSM is able to (1) evaluate complex policy issues by developing tools that modify intra-parameters in the mathematical form to produce effective policy strategies [28]; (2) offer alternative strategies [30], (3) describe system limitations ignored by other approaches [28]. The appropriate policy from the GoI is crucial to support the sustainability of cultivated agarwood and agarwood products. Moreover, agarwood products from APT cultivation are expected to maintain the sustainability of agarwood production.

2. Materials and Methods

The model developed in this study used system dynamic approach analysis, which consists of six steps (referring to [28,30]), namely: (a) determination of the modeling problem, objectives, and limitations; (b) description of conceptual relationships in the form of causal-loop diagrams; (c) determination of mathematical relationships between variables; (d) running the model; (e) model evaluation; and (f) scenarios development using the model. Secondary data for the agarwood growth estimation [31,32], survival rate [16] kemedangan production estimation [33,34,35], planting cost [23], and oil production cost and productivity [36,37,38] were used to construct the dynamic model.

2.1. Problems, Objectives and Limitations of the Model

An important concern in the APT forest development policy is ensuring the certainty of the export volume of cultivated agarwood products. It aims to convince the international market that they obtain a stable supply of raw materials throughout the year. A time-based policy design involving several interrelated parameters is needed. The model development goal is to develop strategies that can be implemented to sustain the APT cultivation.

The limitations of the developed model are (1) agarwood products are limited to kemedangan chips and oil; (2) APT cultivation is carried out by the private sector or community; (3) the species for APT is A. malaccensis; (4) inoculant treatment includes inoculant species, injection time, production costs, and yields, and (5) the data and information used are obtained from journals, proceedings, and reports, as per the requirements for the development of dynamic system model [39]. The private sector referred to in this study is a business entity which has been granted a permit to plant APT in a state forest area, and the community consists of individuals or a group of people who plant APT on their land.

2.2. Conceptual Analysis

Conceptual analysis is explained by Figure 1. There are three variables used in this model: the stocks, flows, and connectors. Stocks show the information variables, flows shows the direction (in and out) of information from the stock, while connectors shows correlation form among modeling features. The stand of APT cultivation (Figure 1) is affected by planting, thinning, harvesting, and mortality. The inoculation process should be initiated in order to obtain agarwood product more quickly. The success of this process depends on the inoculant species and inoculation techniques. Oil product can be produced from the stand thinning after inoculation as part of stand growth maintenance.

Kemedangan stock (Figure 1) is the main product of APT cultivation at final harvesting. Kemedangan stock was estimated per individual tree; further estimated production is converted from volume to biomass by considering wood density, whereas tree biomass is converted to stand biomass based on stand density.

For cost estimation for tree planting and maintenance, procuring inoculants and inoculations, and harvesting, we used the single tree approach. The costs incurred are considered in estimating the price desired by the APT developer. This price is referred to in cost production as a cost (C). Cost is compared with the prevailing market price as benefit (B). If the value of B divided by C (Benefit Cost Ratio) is more than 1, the agarwood product can be sold. This determines the feasibility of agarwood cultivation.

Figure 1 shows planting, thinning, and other activities related to production costs and income earned. Harvesting produces kemedangan and oil. The type of product affects the production cost. Costs and income are time cumulative (years) functions, so feasibility is measured at the end of the rotation. In other words, business feasibility is measured by comparing the expected profit margin plus the production value per unit volume with the prevailing market price.

Furthermore, the prediction of feasibility influences government policy. In this study, two policy-related options are simulated: the government stimulates agarwood productivity by increasing the rendement of inoculated agarwood (Option A); and the government determines the reduction in production costs by providing funding for inoculants, harvesting and processing agarwood oil (Option B). The option simulation is divided into three scenarios: running option A, running option B, and running both options. The Option A and B simulations were chosen with the addition of thinning activity for oil production in order to assess the feasibility of development of APT by the private sector.

The prediction of APT cultivation development as one of the government’s policies is carried out by increasing the economic value of forest land and creating business fields in order to maintain the existence and sustainability of natural agarwood. Therefore, in APT establishment, all costs, as well as silviculture techniques for tree planting and maintaining, inoculant application, thinning, and harvesting are entrusted to the community and private sector, hereafter referred to as business actors.

Business actors determine the harvest time, which has a consequence for the planting time in the next rotation. The number of trees harvested directly affects the density of the stand. Over time, the tree density decreases due to natural mortality and thinning. Thinning is only implemented by the private sector to maintain optimum growth, as well as to produce oil as an added value. Unlike the private sector, the community did not produce oils, since it requires a large initial investment in buildings and equipment, as well as high labour costs. However, thinning is important for the private sector, since it is a strategy to obtain intermediate yields within one rotation to increase profits. This practice causes the determination of the dynamics of stand density to be carried out using the stand base approach. Meanwhile, the tree base approach is used to estimate increments.

2.3. Mathematical Analysis

Step by step mathematical analysis for this study is provided in the Supplementary Material.

2.3.1. Growth Estimation

The planting pattern of APT carried out by the private sector differs from that of the community. The planting space applied by the private sector is 3 × 3 m, while the community does not have systematic spacing. This is because, in the community-managed APT, the average density is 100 trees/farmer, varying in area and cropping patterns. The annual diameter increment is 2.8 cm/year, up to 7 years, and the average annual height increment is 2 m/year [31]. The planted seedling has a diameter of 0.37 cm and a height of 0.4 m [32]. In one rotation, thinning was conducted at the age of 4–14 years with an intensity of 5% per year. In thinning, the survival rate is also a consideration. Based on the study in [16], an equation is constructed in order to determine the survival rate ($s$) using the following formula:

$$s=0.9867\ast EXP\left(-0.04\ast Time\right)$$

Based on the formula developed, the mortality rate is 4% per year, with the year expressed as Time.

2.3.2. Estimation of Kemedangan Production

A systematic review and meta-analysis approach were used to estimate the production of agarwood produced with and without inoculants. The natural and cultivated production of kemedangan A. malacensis ranged from 0.14–1.14 kg/stem and 2.5–5.8 kg/stem, respectively (

Table 1. Production of A. malacensis kemedangan both growing in its natural habitat and cultivated.

Study	Year	Location	Habitat	Num. of Samples	Average Production (kg/stem)	Std Deviation
[33]	2001	Riau, Indonesia	Natural	16	0.14	0.11
[33]	2001	West Kalimantan, Indonesia	Natural	24	0.18	0.16
[33]	2001	East Kalimantan, Indonesia	Natural	77	0.17	0.11
[34]	2013	China	Cultivated	3	4.5	1
[34]	2013	China	Cultivated	3	4	1.5
[34]	2013	China	Cultivated	3	4.1	1.5
[34]	2013	China	Cultivated	3	2.5	1
[34]	2013	China	Cultivated	3	4.7	1.2
[34]	2013	China	Cultivated	3	4	1.3
[34]	2013	China	Cultivated	3	5.8	0.7
[34]	2013	China	Cultivated	3	5.2	0.25
[34]	2013	China	Cultivated	3	5	0.25
[34]	2013	China	Cultivated	3	2.5	0.2
[35]	2014	Malaysia	Natural	1	1.14	0.001
[35]	2014	Malaysia	Natural	1	0.835	0.0005
[35]	2014	Malaysia	Natural	1	0.9	0.0005

). The production of kemedangan can be increased up to 5.8 kg/stem by applying intensive inoculation (Table 1). In this study, data on cultivated kemedangan production were only collected from China.

The results of the meta-analysis presented in Table 1 show that the p-value is < 5%, which means that the results of studies on the production of kemedangan vary widely. Therefore, random-effect is used to measure effect size [40].

In order to legitimatize the data used to construct the feasibility model, a selection of analysis methods was conducted (

Table 2. Selection of analysis method.

	Estimate	se	Z	p	CI Lower Bound	CI Upper Bound
Intercept	2.71	0.526	5.15	< 0.001	1.676	3.736
Note. Tau2 Estimator: Restricted Maximum-Likelihood
Heterogeneity Statistics
Tau	Tau2	I2	H2	R2	df	Q	p
1.976	3.9046 (SE= 1.6047)	99.88%	849.436		15	311.07	< 0.001

Note: Z: Z-statistics, p: Egger biases, I: Higgins’ and Thompson’s I2 measure of heterogeneity (percentage of variation not attributable to sampling error). H: total amount of variability in the observed outcomes to the amount of sampling variability. R2: coefficient of determination. df: degree of freedom. Q: homogeneity. Tau² and SE: true heterogeneity variance and standard error.

). The results show that the p-value is <0.001, which indicates a bias in publication, and the I² value reaches 99.88%, indicating that the publication results of kemedangan production used are heterogenous. Even though there is some publication bias, the kemedangan production data can still be used to construct the feasibility model. The ANOVA table above shows that the Q value > 100 means that the research related to the production of kemedangan is significantly different [41]. The simulation shows that the production of kemedangan will increase up to 2.74 kg/stem when the inoculation technique is applied around the stem, as was carried out in [42].

Figure 2 shows that the kemedangan production described by [33] is not significantly different. This is shown by the interval line that goes beyond the axis line (line 0). In contrast, the study in [42] showed different results for kemedangan production. In general, the inoculation technique and source of inoculant increase agarwood production up to 2.7 times compared to no inoculation treatment. Since RE values vary from −0.60–7.44 (Figure 2), it requires suitable inoculant and inoculation techniques.

2.3.3. Planting Cost Analysis

The planting cost of APT cultivation, including land preparation, seedling provision, fertilization, and maintenance, for a 3 × 3 m spacing is around 832 USD/ha [23]. This cost was converted to a planting cost per stem of 0.75 USD/tree and a total APT development cost of 6.5 USD/tree (

Table 3. Analysis of APT development costs.

Item	Cost (USD/Tree)
Plantation	0.75
Inoculant material	0.64
Other chemical substance	0.39
Equipment	0.06
Fuel	0.03
Specialist technical labor	0.10
Technical assistant	0.06
Unskilled labor	0.10
Transfer of inoculant	0.30
Cost for security	0.77
Harvesting cost	3.30
Total	6.50

Source: Adapted with permission from Ref. [23]. 2011. Suharti, S.; Pratiwi, P.; Santosa, E.; Turjaman, M.

). The model uses this estimation for both the private sector and the community.

2.3.4. Estimating the Cost and Productivity of Agarwood Oil

Agarwood oil production was obtained from thinning materials carried out a year after the trees were inoculated, assuming that the thinning intensity was 0.1% for 5 months. Thinning and distillation are only carried out by the private sector in the dry season.

The investment cost to produce agarwood oil includes investment on the equipment, variable cost, and fixed cost (

Table 4. The investment cost to produce agarwood oil.

Type of Cost	Cost Specification	Volume	Cost per Item	Total
Investment	Distilling kettle 7kg	4	785.7	3142.9
	Distilling kettle 15kg	1	1285.7	1285.7
	Drum cooler	1	300.0	300.0
	Wood crusher machine	1	1214.3	1214.3
	Water exhaust machine	2	142.9	285.7
	Workshop	1	9500.0	9500.0
Subtotal				15,728.6
Variable cost	Depreciation cost for machine	11	2.2	106.7
	Depreciation cost for building	12	34.8	417.2
	Electric	12	71.4	857.1
Subtotal				894.1
Fixed cost	Fuel	12	276.2	3314.7
	Labour	12	321.4	3857.1
	Maintenance	12	35.7	428.6
Subtotal				7600.4
Total Cost (Variable and Fixed Cost)				8981.5
Total Cost				24,710.0

Source: Adapted/Reprinted with permission from Ref [37]. 2021. Wahyuni, T.; Yuliana, H.

). The total investment needed to produce agarwood oil is USD 24,710 [37].

Research on the yield of agarwood oil shows different results; for example, 0.017% [36] and 0.07% [37]. Meanwhile, the highest yield was 0.2%, as stated by [38]. The large difference in yield between [37,38] is due to differences in distillation methods. In [38], the supercritical fluid carbon dioxide extraction method was used, while other studies employed a simple distillation technique. The current market price for agarwood oil is 17.8 USD/mL [37].

2.3.5. Business Feasibility Analysis

The business feasibility analysis was conducted by using a Cost Benefit Analysis (CBA). The CBA is one of the risk assessment techniques which allows the users to choose or decide the best option for a risk [43]. This analysis compares benefit value and production cost. The benefit value is determined based on the prevailing market price of the product (Table 3). Meanwhile, the cost is a function of the total costs incurred to produce a product. This result is projected at 100% and added to the desired profit margin (pm). Price is calculated using the following equation:

$$\mathrm{Price}=\frac{\sum \cos t}{\mathrm{product}}\times \left(1+pm\right)$$

Feasibility analysis (f) is calculated by comparing B with C (Benefit Cost Ratio—BCR). If f > 1, the business is categorized as feasible, while if f < 1, then the business is unfeasible.

$$f=\frac{B}{C}$$

2.3.6. Model Evaluation

Model evaluation was conducted by comparing the model simulation results with other studies. In this study, the evaluation was carried out on the growth parameters of APT, which were then compared with the results of [31,44,45].

Validation of a dynamic system model is known as model evaluation, and can be carried out on limited parameters [46]. Therefore, only APT growth parameters were selected for model evaluation. This is because dynamic system modelling is a complex system abstraction technique involving many variables and having different forms of relationships.

2.3.7. APT Cultivation Management Scenario

The profit margin is simulated randomly with a value ranging from 0.00–0.06, which indicates that the certainty of the agarwood cultivation business is largely determined by the availability and stability of market prices. The inoculation technique and type of inoculant affect productivity. The strategic option scenarios are used as described in the conceptual analysis sub-chapter with the following notations: (1) the government maintains and improves the quality of inoculants (A = yes), but the government does not support the production cost reduction (B = no); (2) the government does not maintain and improve the quality of inoculants (A = no), but the government subsidizes the production costs (B = yes); and (3) the government maintains and improves the quality of inoculants (A = yes) and supports the production cost reduction (B = yes).

3. Results

3.1. Stand Growth Prediction

Stand growth is projected for three planting rotations, with a rotation length of 15 years. The analysis projected the same pattern in each rotation, shown by the growth in diameter, height, and volume of trees as well as the stand density, assuming that other factors were considered constant. Based on the simulation, three years after planting, the tree diameter was estimated to reach 5–8 cm, so the stand volume was below 0.2 m³/ha, and the stand density was above 600 stems/ha (Figure 3).

3.2. Kemedangan and Agarwood Oil Production

Kemedangan and agarwood sapwood were obtained at the end of the rotation. The final product of the rotation is dominated by kemedangan, because the production of agarwood sapwood is unpredictable. For comparison, the percentage of agarwood sapwood formation for Aquilaria in nature is only around 10% [47].

Table 5. Kemedangan and oil production based on management type.

Rotation	Kemedangan Production (kg/ha)		Average Oil Production (mL/ha)		Number of Thinning (Tree/ha/Rotation)		Average Tree Cut for Oil Production Cycle (Tree/Year/ha)
	1	2	1	2	1	2	1	2
I	264.41	34.07	103.24	-	407.97	-	25	-
II	259.05	31.89	87.82	-	371.5	-	27	-
III	252.47	29.70	72.79	-	333.08	-	24	-

Note: 1 = private sector, 2 = community.

shows that at the end of the first rotation, the private sector obtained 264.41 kg/ha of kemedangan; in the community, it was 34.07 kg/ha. Kemedangan production is projected to decrease in the next rotation due to intensive thinning and natural mortality. Severe inoculation can cause tree death.

Thinning in the first rotation produced 103.24 mL/ha of oil, and this number decreased to 87.82 mL/ha and 72.79 mL/ha in the second and third rotations, respectively (Table 5). The oil production capacity was similar to [37], which reached 30 mL/3 days/distiller. The thinning product would then be distilled in three stages (9 days). Based on these results, each distiller with a capacity of 43 kg could process the result of thinning from area of 3 ha. The APT area size and the capacity of the distiller needed to be adjusted so that oil production would become stable, in order to optimize distillation results.

3.3. APT Feasibility Analysis

The feasibility (f) of APT business is estimated by the benefit and cost ratio. The total investment cost for the private sector is higher than for the community (

Table 6. Benefit Cost Ratio of APT development, both in the private sector and the community.

Rotation (Year)	Total Cost (USD/ha)		Income (USD/ha)		Ratio (f)
	Private Sector	Community	Private Sector	Community	Private Sector	Community
I	21,915	183	6650	204	0.3	1.1
II	31,795	365	6650	204	0.2	0.6
III	41,668	548	6650	204	0.2	0.4

) due to the higher stand density and the additional cost of thinning for oil production in one rotation (Table 3). The costs incurred include managing plantation forest development and purchasing distillation equipment. On the other hand, the community only covers the establishment of the plantation forest and the purchasing of inoculants.

3.4. Model Evaluation

Model evaluation of APT growth parameters showed that at the growth stage, the increment of tree diameter and height reached 1 cm/year and 70 cm/year. This diameter growth is lower than that of A. malaccensis in Malaysia, which reached ±2 cm/year [31]. The growth rate of the diameter produced by this model is similar to that of A. malaccensis in India, which is ±1 cm/year [44]. Meanwhile, the height growth in this model is adjacent to the height growth of A. malaccensis in Malaysia, India, and Nepal, which reaches between 0.5–0.8 m/year [44,45].

The model simulation shows that stand density and wood volume continue to decrease in line with the simulation of stand growth, both in natural and plantation forests (Figure 3). The growth of plantation stands tends to decrease in the next rotation due to the decrease in site quality [48]. Meanwhile, the mortality of natural forest stands after harvesting reduces the remaining stands’ density [49,50,51].

3.5. Model Scenario Analysis—Benefit Cost Ratio APT Development

APT development strategy depends on business actors. The private sector tends to generate income from selling kemedangan and agarwood oil at the end of the rotation. In addition, agarwood sapwood was obtained at the end of the rotation period, but the amount could not be predicted because it depended on the effectiveness of the inoculant, inoculation technique, and tree health. Agarwood oil can be produced two years after inoculation, up to the final harvest.

In Figure 4, it can be seen that in rotation I, the development of APT by the private sector is feasible, because Business As Usual (BAU) is below the cost value. However, it became unfeasible in rotation II. In order to make the APT cultivation business by the private sector feasible, scenario 1, in which the government issued policies to increase kemedangan production, is needed. This can be in the form of research facilitation to increase product yields, implementing scenario 1, or subsidizing businesses with inoculant distribution or agarwood oil processing equipment to reduce production costs (Scenario 3).

In rotation III, it is necessary to determine a different strategy, because carrying out scenarios 1 and 3 will not positively impact business viability. A strategy that could be implemented is to ensure that market prices do not increase due to a function of time (cost). This strategy will increase producer surplus.

Figure 5 shows that in the development of APT by the community, rotation I is feasible even without government intervention. In rotation II, APT development requires government intervention to improve inoculants’ effectiveness and/or to facilitate production costs. In scenario 2, facilitation of production costs is still effective in supporting community APT development throughout the simulation time.

Figure 6 shows the feasibility scenario of agarwood oil production from APT cultivation. Based on the feasibility analysis, none of scenario 1, 2, and 3 in the first to third rotation are feasible, because the cost is higher than benefit. The oil production costs are high, with investment costs up to 24,710 USD [37]. All of the investments made will result in 264 mL of oil per ha in all rotations, from a total thinning of 1113 stems/ha, and an oil rendement of 0.2%. Thus, to fulfill the sustainability of oil production, an optimum area of 64.4 ha APT is required for cultivation.

From

Table 7. Benefit Cost Ratio (BCR) Analysis for oil and kemedangan for all scenarios.

Rotation	Private Sector					Community
	BAU	Scen 1	Scen 2	Scen 3	Scen 3 + Thinning	BAU	Scen 1	Scen 2	Scen 3
I	0	0	0	0	0	0	0	0	0
II	0.2	0.13	0.14	0.14	0.16	0	0	1.12	1.12
III	0.15	0.5	0.11	1.18	1.14	0	1.66	1.68	0.56
Note	Scen 1	The increase in inoculation yield
	Scen 2	Reduction of production and oil processing costs
	Scen 3	The increase in inoculation yield and subsidize the costs of developing APT and oil processing

, it can be seen that APT developed by the private sector will be profitable (BCR > 1) if the government is involved in increasing the yield of inoculation and contributes to reducing production costs (scenario 3 in rotation III). Meanwhile, the APT developed by the community is feasible if it implements scenario 2 in rotation II (1.12). The feasibility improved significantly in rotation III (1.68).

4. Discussion

4.1. Further Development of Agarwood Modelling

The model used in this study has two advantages: integrating several parameters in the system model and increasing added value for product diversification. In general, model simulation reveals that oil production and kemedangan do not provide significant benefits compared to producing kemedangan only. This is due to high development costs and the fact that inoculant effectiveness still hinders APT development by the community. However, the constraints can be subdued with the procurement of superior seedlings for APT.

Dynamic system modeling presenting APT development projections was carried out by considering the integrated factors in development activities as well as the costs incurred. The results of this projection were then measured for sustainability, with market prices as a control. This is in line with the statement by [30] that a dynamic system is an approach to summarize facts based on factual information from interacting parameters so that the information is integrated and holistic. The model indicates that the business period for APT cultivation is more than 30 years. It confirmed the findings by [52], that product diversification through kemedangan processing into oil and other derivative products will increase the added value [31]. Oil production does not increase income, because the yield is very low while the investment costs are high. Development costs and inoculant effectiveness are the main obstacles to APT development. It is in line with the findings in [53] that costs, types of inoculants, inoculation techniques, and technology are the main problems of APT development [53]. The success of APT developed by the community is largely determined by subsidies and the availability of superior seedlings. This is similar to the results of the study in [45], which shows that APT should be cultivated by the community using local superior seedlings, as in Bangladesh [44,45].

This model will be more adaptive, and if data and information are available relating to (i) the processing capacity of agarwood oil on the industrial scale to the household scale, (ii) the determination of oil rendement’s single value at various industrial scales, (iii) the percentage of yield of inoculation activities, and (iv) other interrelated parameters, such as the willingness to adopt new technology and marketing systems, so that the simulation results grow closer to reality. It was pointed out in [54] that other factors influencing the development of APT were silvicultural techniques, as well as research and development to increase the yield of inoculants.

4.2. Sustainability, Legality and Traceability

4.2.1. Sustainability

High demand for agarwood causes over-harvesting [55,56], resulting in scarcity [57]. It causes agarwood of the genera Aquilaria and Gyrinops to be included in Appendix II of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) [58,59]. The inclusion indicates that these species are not threatened with extinction, but they might become endangered without good governance, i.e., regulation and control, and determination of trade quotas [57]. Agarwood harvesting will continue to increase due to its high selling price, to the point that it will threaten the conservation of natural agarwood and its habitat [60]. It was emphasized in [19] that the scarcity of natural agarwood products can already be observed in Kalimantan, Sumatra, Papua, and West Nusa Tenggara, indicated by the unfulfillment of the supply quota for agarwood by the Natural Resources Conservation Agency (BKSDA) for the 2013–2018 period.

In general, the concept of sustainability used is a yield that ensures supply sustainability of agarwood products, including the market trusts of Indonesian APT products. The sustainability of these products also considers economic sustainability and social acceptability [61]. Therefore, agarwood sustainability should emphasize both current and future agarwood needs. Thus, the future development of APT can overcome the problem of sustainable management of natural agarwood, which has become an international issue [57,58,59,60,61,62].

The simulation shows that private sector and communities’ APT development are possible in various scenarios (Table 3, Figure 4, Figure 5 and Figure 6). The effective scenarios for the private sector are scenario 1 and scenario 3. These scenarios are effective if the government (1) implements policies to support APT development for reducing production costs; (2) ensures market prices are stable so that agarwood production continues; (3) increases quantity and quality of agarwood product; and (4) subsidizes APT development by facilitating production costs reduction, such as by giving entry fee exemption for imported machinery and equipment, tax reduction (holiday), and ease of facilities for high-quality inoculant.

The development of APT by the community is more effective than by the private sector if the government intervenes in production factors, such as assistance, to provide business capital, superior seedling, and high-quality inoculants. Procuring superior seedlings would benefit farmers by as much as 60% of what is planted per hectare on their owned land [52]. This model’s results align with the APT development success story by Bangladesh communities [44,45].

High-cost production, and selection of improper inoculant types or inoculation technology will not obtain the maximum results, similarly to [53], thus leading to unfeasibility of APT development by the private sector. The success of agarwood production was determined by inoculant; thus, selection of inoculants and inoculation technology can increase the yield, as was found in [23,24,25]. In Indonesia, Fusarium solani is reported as the best agarwood inoculant species [26]. Therefore, government intervention is necessary to set inoculant standards at affordable prices, in line with the government’s strategy to improve the quality of inoculants, provide inoculant subsidies, and maintain market prices.

In order to maintain production sustainability, determination of the correct species for APT development on the international market should be considered, because each country has agarwood preferences. For example, consumers from the Middle East and India prefer agarwood from A. malaccensis, while China chooses A. sinensis, which has medicinal properties, and Japan prefers A. crassna for meditation. The key concern of species selection is land suitability. This is important for APT plantation, because there was a case of failure in cultivating Aquilaria species from the tropics at their new planting sites [54]. Therefore, it is recommended to use agarwood species native to the lands in which they are cultivated. The availability of seed sources for planting is also important, considering that the flowering pattern varies within populations and tends to be inconsistent. This requires establishing seed orchards or nurseries in anticipation of seeds availability. Research is key to find the right inoculation method, which is an important step for agarwood production. In addition to the invention of modern inoculation techniques, planting techniques, and land use management, pest and disease control are also necessary for successful cultivation [48].

Based on the BCR analysis, the APT development business will be feasible in scenarios 2 and 3 in rotation III, both for the community and private sector (Table 3). Maximum production of kemedangan and oil can be achieved with government intervention through increasing the effectiveness of inoculants, reducing production costs, and delaying thinning in order to obtain the maximum stem diameter. In the private sector, minimum oil product can be yielded when thinning is conducted in a small stem diameter or an immature stand is harvested; therefore, a high thinning technique is necessary. This type of thinning can be applied by the private sector in order to obtain profitable oil product from the early stages of APT development. Partnership within the community and private sector can also be an option to obtain the optimum oil production yield. In this partnership, the community expected to become a supplier for raw materials, and the private sector processed the oil product. Both parties would receive benefits based on their role and sacrifice in the committed business, as occurred in the “core-plasma” partnership scheme in Bengkulu District and City [15].

4.2.2. Legality

APT development in Indonesia can be carried out in the forest area or its surroundings. The community can establish APT cultivation on their land. Based on the Government Regulation No. 23 of 2021 on Forestry Administration, the community can also establish their APT cultivation in forest areas following social forestry programs. Further, the APT cultivation registration was regulated with the Regulation of the Director General (Perdirjen) of Forest Protection and Nature Conservation (PHKA) No. P.25/IV-SET/2014. The registration was considered a complicated and bureaucratic process, and also required validation by the local forestry agency (BKSDA). Registration approval is highly dependent on the availability of validation funds at the agency. For this reason, it is necessary to simplify the registration procedure so that it does not hinder or become disincentive for the registration process.

The modeling results state that the community can carry out the development of APT through financial assistance. However, APT needs to be registered as described in [63]. The implementation of this rule has a weakness; it only mentions the status of state-owned land, and does not mention the status of forest areas. This will be a main obstacle in carrying out APT cultivation with a social forestry program [64].

4.2.3. Traceability

The traceability of agarwood products has been regulated by the Minister of Forestry Decree Number 447/Kpts-II/2003 concerning the Trade of Wild Flora and Fauna Collection or Hunting and Perdirjen No. P/25/2014. The traceability of cultivated agarwood products is shown by obtaining a Certificate of Ownership of Agarwood Cultivation (SKKBG), issued by BKSDA. The SKKBG is then used to transport product for domestic trade using the Domestic Transport of Wild Plants and Animals Certificate (SATS-DN) and the International Transport of Wild Plants and Animals Certificate (SATS-DN) and CITES certificate for international trade.

This regulation shall be followed with the national tracking system in order to trace the distribution on agarwood products. Appropriate technology [65] is needed to trace and track the agarwood trade, such as using barcoding technology.

4.3. Governance, Gaps and Analysis

Marketing is the last activity of APT development. It was explained in [66] that the agarwood distribution chain consists of agarwood hunters, middlemen/collectors, and traders/exporters. In terms of profit margin revenue, traders/exporters receive the largest share (75%), followed by collectors (20%) and hunters (5%). Regarding forest products, especially agarwood, the central government and regional governments have the authority to regulate, strengthen, and develop the marketing. For example, the export and import of forest products are regulated by the Minister of Trade at the suggestion of the Minister of Environment and Forestry. The Minister’s proposal is based on a study on the need to export and import forest products as regulated in PP. 23/2020. However, in reality, local governments are not concerned about aspects of planning, development, and implementation of agarwood cultivation with enormous potential to be developed as an agriculture-based community economic growth [19].

Based on these research results, policy development is needed in order to maintain the market price of APT products. The market price of kemedangan produced by the community tends to be unstable, and does not have a standard. One of the reasons is the buyers come from close kinship or are relatives that are difficult to identify for the government. This type of system is close to monopsony [66]. Monopoly of the middleman, who has a close relationship with the quota holders, will also induce lower prices on local scales.

In a monopsony market, the owner of the agarwood cultivation business will be positioned as the price taker, while the wholesaler is the price maker. In this market, the number of traders or buyers is limited, while the number of suppliers is large. Government intervention in the monopsony/monopoly trade of products, including agarwood, has been regulated by Law no. 5 of 1999, in conjunction with PP No. 44 of 2021, concerning the Implementation of the Prohibition of Monopolistic Practices and Unfair Business Competition. The purpose of this regulation is to shift the condition of the Indonesian economy into an open economy by encouraging a healthy, efficient, and competitive business climate, in order to create equal opportunities for every citizen to participate in the production and marketing of goods and services. Thus, it is important to apply law enforcement, followed by enacting standard prices and developing the processing industry on a local scale.

The government must consistently supervise the monopsony trading system of agarwood by implementing PP no. 44/2021. Consequently, in the future, the agarwood trade will be healthier and fairer, and, at the same time will encourage the development of APT at the national level. In addition, the government and associations need to create new regulations that regulate the wholesalers/exporters of agarwood for cultivation, in addition to meeting the growing demand for agarwood and creating jobs for the local community.

The simulation results also showed that the ratio of kemedangan production in the community-developed APT was 1/6 of the results of the private-developed APT. This was because the area of land managed by the private sector is more extensive than the land owned by the community. In accordance with OPTION 2, the APT development cost is also a component that needs to be reduced. Development of partnerships within the community (farmers) and private sector can be a way forward for profit-sharing financing schemes [19]. Collaboration within the community or private sectors with investors can also be an option to accelerate the implementation of inoculation.

Another concern in agarwood marketing is the labeling of products. The label of agarwood products from APT cultivation is important for avoiding adulteration or mislabeling and for ensuring traceability of the products and consumer disadvantages [65]. Therefore, it is important for the Indonesian government to develop various tools, including a genetic marker to trace the “cultivated” and “wild” agarwood products [65], and also to certify the agarwood traded products [15]. It is also important to give notice to the related stakeholders that the use of natural agarwood labels for cultivated agarwood is illegal, and it is a criminal act that has been regulated separately in the Criminal Code (KUHP), and the legal process is carried out by the Director General of Law Enforcement of the Ministry of Environment and Forestry.

5. Conclusions

The dynamic system models used in this research are able to identify gaps in the APT development in Indonesia. The model developed shows that APT cultivation development based on business as usual (BAU) in unfeasible for business. However, based on the model that we have developed, the agarwood production from APT cultivation would be feasible for both the private sector and the community if financial assistance, setting inoculant standards at affordable prices, simplifying trade administration, stabilizing agarwood product prices at the local level, and law enforcement are ensured by the government of Indonesia.