This paper assesses the impact of contract farming in the oil palm industry in Indonesia on smallholders’ well-being and investigates its implication for poverty reduction. Data were collected using random sampling from 245 smallholders in the province of Jambi, Sumatra. A treatment effects model was applied in order to capture endogeneity and selection bias. Results show that participation in contract farming is significantly associated with type of household, age of household head, size of oil palm plot, and the time of plantation establishment. While contract farming has a significant positive effect on smallholder income overall, it discriminates against poorer smallholders. It is recommended that the agro industry and government review contractual arrangements in order to increase the chances of the poor benefiting from oil palm expansion in Indonesia.