Indonesia's growing desire for wheat
Month Day, Year
by Arvin Donley
Driven by economic growth and convenience, wheat consumption is on the rise in Indonesia, according to a recent report issued by Rabobank entitled, “The Wheat Opportunity: Growing Indonesian Consumption Driving Imports and Investment.”
The report said that wheat provides an economical and nutritious alternative to rice, and increased consumption could help Indonesia resolve its self-sufficiency target for paddy.
“Given the current consumption rate, Indonesia could import more than 10 million tonnes per year in the coming five years, placing Indonesia among the top three wheat importers in the world,” Rabobank said. “In addition, growth in consumption of wheat-based products will come from both higher and lower income groups, driven by the growth of bakery products and food service chains.
“As a result of the demand surge, supportive regulatory environment and relatively lower prices compared to 2012-13, the outlook for the wheat industry in Indonesia is very positive and will be seeing investments across its entire supply chain.”
RISE OF A TOP IMPORTER
Indonesia has traditionally been a rice consuming country. However, in the last two decades the importance of wheat as an important staple has grown. The country is unable to produce wheat domestically due to its hot and humid climate, and therefore relies heavily on imports from Australia, Canada and the United States.
Rabobank noted that wheat consumption increased by 5% per annum between 2002-03 and 2012-13, making Indonesia one of the highest growth countries for wheat consumption. Overall consumption grew 70%, rising from 3.8 million tonnes to 6.6 million tonnes. Driven by the increase in demand, imports shot up more than threefold in the last 20 years, reaching 7.1 million tonnes in 2012-13.
The report said Indonesia was the third largest importer in 2012-13 after Egypt and Brazil. Given the growth rate of 6% per annum over the last 10 years, coupled with favorable economic growth and a young population, Rabobank projects that Indonesia will import more than 10 million tonnes in the next five years, which is on par with the current leading global importer, Egypt.
RICE SELF-SUFFICIENCY A CHALLENGE
Rice has long been the staple food for Indonesians. However, the report said rice self-sufficiency has been a challenge in recent years due to constraints on acreage expansion, lack of quality land and lower yields, especially among subsistence farmers.
Except for the period between 2007-08 and 2008-09, Indonesia has been struggling to maintain self-sufficiency in rice, which has led to occasional large imports, Rabobank said. From 1990-91 to 2012-13, a 1% per annum production increase has lagged demand growth of 1.2%. Production growth has been declining over the last five years due to stagnation in cultivated area.
Rabobank said that with the introduction of more wheat-based products over the years, such as instant noodles, wheat has become a competing staple to rice. Wheat has quickly gained acceptance, and now accounts for 17% of rice consumption, up from 6% in 1990-91. To a certain extent, the higher degree of wheat consumption has helped Indonesia keep rice self-sufficiency above 90% in recent years.
“Compared to other countries with a similar diet, Indonesia has the largest gap between rice and wheat consumption, implying that there is greater potential for further increasing substitution in favor of wheat,” Rabobank said. “Any additional increases in wheat consumption will go a long way in helping the country meet the government’s stated objective of rice self-sufficiency.”
Driven by health consciousness among urbanites, some consumers are switching their daily staple from rice to wheat, the report said. Since the calories provided by spending 1 Indonesian Rupiah on wheat products are comparable to those provided by spending the same amount on rice, it is also a cost-effective alternative, Rabobank said.
“In addition to convenience and nutrition, the lower cost may explain the attractiveness of consuming wheat noodles and bread as a source of energy, especially in lower income segments,” Rabobank said.
WHEAT CONSUMPTION STILL LOW
Wheat consumption in Indonesia rose significantly over the last 20 years – up from 1.9 million tonnes in 1990-91 to 6.6 million tonnes in 2012-13, according to the report. The industry grew at 6% per annum during this period, with strong demand back by favorable economic and demographic factors. However, Rabobank noted that despite the relatively large volume, wheat consumption per capita still remains low regionally and globally, providing ample growth opportunities for wheat-based products.
Per capita wheat consumption in Indonesia stands at 26 kg per annum, which is not only lower than the world average of 76 kg per annum, but is also well below the regional Asian rice-consuming countries such as the Philippines, Malaysia and China.
ECONOMIC GROWTH DRIVING CONSUMPTION
Income levels have been rising in Indonesia, the world’s fourth most populous country with 44% of the population under 25 years of age. Economic growth has averaged 6% per annum the last five years. According to McKinsey Consumer and Shopper Insight, the middle income “consuming class” is expected to increase by 90 million people by 2030. As a result, the preference for western wheat-based foods, such as sandwiches, muffins and cupcakes, will grow. Demand for wheat-based products has also been rising in the lower income group, McKinsey said, which can be attributed to lower costs and convenience.
Wheat is commonly made into products like noodles, bread and biscuits, which require minimal preparation, unlike rice, which takes longer to prepare and is typically accompanied by other food items.
“The increasing pace of life in Indonesia has resulted in more consumers choosing instant noodles and bread for their meals,” Rabobank said. “With rising affluence, as seen in other developing and developed Asian cities, Indonesian consumers will start to perceive wheat-based consumption as being more global or modern, leading to a further shift away from the current staple of rice.”
NOODLE, BAKERY PRODUCTS MORE POPULAR
Noodle and baked goods industries are the major end users of wheat flour, accounting for 80% of the demand in Indonesia’s booming market for wheat products, Rabobank said. Demand for these products grew by 6% per annum between 2008 and 2013. On the other hand, the report said, demand growth has been much lower than household expenditure growth on food products, which surged 14% between 2010 and 2013, suggesting the country is still in the early stages of wheat consumption growth and has great potential to capture a higher share of increased expenditure on food items.
“Noodle consumption is now an integral part of the Indonesian diet and appeals to all income classes,” Rabobank said. “The volume of the noodle industry grew at an annual growth rate of 3.5% between 2008 and 2013. Although noodle consumption is relatively high at close to 80 packets per person, volumes are still expected to grow strongly at 3% to 4% per annum until 2018. The increased penetration of noodles in the local diet benefits wheat consumption in Indonesia.”
The report noted that among the bakery products, the bread segment has been growing at 6% per annum over the last five years, reaching 473,000 tonnes in 2013 in volume terms. Biscuits grew at a staggering 11% per annum between 2008 and 2013.
Consumption of bakery products is also well supported by the expansion of the food service industry. Rabobank said Western fast-food chains such as McDonald’s, Dunkin’ Donuts and Pizza Hut have grown significantly. The chained food service segment is growing at 13% per annum in value terms.
“Continued growth in food service would further increase demand for wheat-based products in the coming years, presenting an opportunity for higher wheat imports and increased flour milling in this country,” Rabobank said.
WHEAT IMPORT TRENDS
Indonesia relies heavily on wheat imports from Australia, Canada and the U.S. About 84% of total demand is met through wheat imports and the rest is met by wheat flour imports, the report said. It noted that its proximity to Australia, a key wheat exporter in the global trade, has provided Indonesia with a sustainable supplier. Driven by freight advantage, Australia is by far the largest wheat trade partner to Indonesia, accounting for 71% of the country’s total wheat imports.
Rabobank said Australian wheat is widely used for noodle production due to its good flour color, starch characteristics and good milling extraction. Wheat imports from the U.S. and Canada are favored for baking noodle firmness. However, imports from these two countries account for a minority of the market.
MILLING INDUSTRY GROWING
Rabobank notes that Indonesian domestic flour millers used to be state-owned firms. Since 1998, they have been deregulated and are privately owned. Government policy has encouraged both the expansion of the domestic flour milling industry and an increase in imports of wheat and wheat flour. Such policies target the processing of imported wheat and conversion into wheat flour, the report said.
In December 2012, to protect the milling industry from cheap wheat flour imports, the Indonesian government imposed an increased safeguard duty of 20% against the existing 5% duty, which was later extended indefinitely in July 2013. Rabobank said wheat flour imports more than doubled between 2003 and 2010, rising from 343,000 tonnes in 2003 to 776,000 tonnes before declining to 480,000 tonnes due to the government’s imposition of higher tariffs on wheat flour imports. In 2012, Turkey was the largest exporter of wheat flour to Indonesia, accounting for 48% of trade volumes, with Sri Lanka at 36%.
“If the safeguard duty remains, it would cause further decline in wheat flour imports and require an increased level of investment in the milling industry to support future demand growth,” Rabobank said.
Imports of wheat are not currently subject to the import duty. The report said grains from Australia will continue to get preferential treatment under the ASEAN-Australian-New Zealand Free Trade Agreement. Rabobank said the proximity of Australia and the Indonesian preference for Australian wheat makes Australia a natural option for trade with Indonesia. However, Australia needs to incorporate the price sensitivity and quality concerns of the Indonesian market into their offering to further strengthen the current partnership, as they may face challenges from cheaper wheat origins.
Since the deregulation of the wheat flour industry in 1998, the number of flour mills in Indonesia grew from 5 to 21, with a total installed capacity of 8.1 million tonnes per year in May 2013, the report said. It is estimated that up to 2 million tonnes of additional capacity are scheduled to commence operations in 2014-15.
“Most of the country’s mills are located around Jakarta, Surabaya and Medan in order to economically penetrate the more developed cities and target the large urban population,” Rabobank said. “Other cities of up to 2 million are growing even faster; Balikpapan and Pontianak in Kalimantan, and Makassarin, Sulawesi and Pekenbaru in Sumatra all are good investments for potential wheat milling companies.”
Average milling utilization stands between 65% and 70%. Although utilization rates are likely to increase due to tariffs on flour imports, the constant investments required to increase capacity will temper the utilization rate, Rabobank said.
The flour milling industry is dominated by Bogasari Flour Mills, which accounts for 53% of the market. However, investments in additional capacity are still coming in from both new and existing players.