Indonesian agriculture in 1996 accounted for 16% of gross domestic product and employed 44% of the country's workforce. In 1998, the agriculture sector expanded by 0.2%, a miniscule increase that nonetheless made agriculture one of only two Indonesian economic sectors, along with utilities, to record a positive change.

Food inflation, the currency collapse and the breakdown of the banking system have taken a toll on agriculture and grain processing. Among the negative effects are plunging consumer purchasing power, which has pummeled demand for many agricultural products, and financing difficulties.

At the same time, the government eliminated a 10% duty on flour imports and withdrew consumer subsidies on domestic flour. The latter move had little practical effect because large flour price increases already had more than offset the levels of subsidy offered.

The changes meant that for the first time, Indonesia's three flour milling companies — which operate a total of five mills, including the world's largest — could procure desired quantities and qualities of wheat themselves from any source. But initially, uncertainties and confusion characterized the transition to a private market.

In the immediate aftermath of the change, a major stumbling block for mills was obtaining financing for overseas wheat purchases. With Indonesia's banking system still struggling to reform itself, local financing was next to impossible. Further, even though the governments of some wheat exporting countries offered credit guarantees, the highly unstable rupiah made it difficult for mills to open letters of credit necessary for the transactions.

Another area of confusion surrounded the fate of the wheat and flour stocks held by BULOG. At the time of the change, the agency had more than 700,000 tonnes of wheat and flour in storage, about a three- to four-month supply, making import planning difficult.

The disposition of those stocks has been slow, and as of April, BULOG still was estimated to hold 400,000 to 500,000 tonnes. For one thing, the prices BULOG established to sell its stocks were considerably higher than the market. At the same time, consumer demand remained weak.

But indications are that the transition is progressing. BULOG now offers volume discounts of 7% to 10%, which has helped move stocks into private hands. Mills, with the help of wheat exporting nations' direct credit programs, also are starting to import wheat themselves, as the quality of the remaining BULOG-owned wheat is inadequate to produce the types of flour needed.

The flour market comprises three basic grades, distinguished by protein. High protein flour (minimum 12.5%, dry basis) is used for bread and instant noodles, medium flour (10%-11%) is for snack products, and low protein flour (8%-9%) goes into cookies and cake mixes. The instant noodle industry accounts for 60% of flour output, with baking accounting for 30% and the rest in biscuit uses.

In addition to the transition to a free market, mills have been forced to contend with a precipitous plunge in demand. Flour production in 1998-99 is estimated at 2.6 million tonnes, wheat equivalent, while 1999-00 output is expected to nosedive to 2 million. With an annual installed capacity of about 6.5 million tonnes, that output level would translate into capacity utilization of only 31%.

But Indonesian millers are optimistic that if the economy continues to recover, even slightly, flour demand and output will climb back to the 2.6-million-tonne level by 2002-01. Confidence also is high over the longer term; indeed, P.T. Berdikari is continuing the expansion of its mill in Ujung Pandang to 2,900 tonnes per day from the current 1,400 tonnes.

One reason for this enthusiasm is the potential for flour exports. Indonesia's milling industry is relatively new — industrial-sized operations began to emerge in the 1970s —and highly efficient. The elimination of state control over flour supplies opens the door to possible development of a competitive export market.

The optimism also is fueled by the strong popularity of instant noodles, the largest domestic outlet for flour and one that had posted impressive growth before the crisis. In 1997, noodle production was about 650,000 tonnes, up nearly 300% from 1993 levels, making Indonesia the second-largest noodle-consuming country after China.

Noodle output in 1998 fell back to 600,000 tonnes, but indications are that consumption already has begun to rebound. Economic stabilization accounts for some of the expected increase, and the late 1998 introduction of a lower-priced noodle line by Indofood, which controls 90% of the instant noodle market, also helped.

Other signs exist of a turnaround in noodle, and flour, markets. In 1997, 21 companies produced the 8.6 billion packs of noodles consumed by the public. As of April, 13 new companies were applying for plant licenses.

In addition, overseas companies are once again interested in Indonesia's food industry. Indonesian companies are seeking foreign partners to help with debt loads and to facilitate corporate reform and restructuring.

In the case of noodles, reports indicate that Japan's Nissin Food is seeking to buy a "significant share" of Indofood's operations. Overseas companies also have partnered with Indonesian producers in the biscuit, snack food and infant formula businesses.

The steering factor behind the feed situation was the decimation of the poultry industry. At the end of 1998, poultry operations had contracted to a mere 30% of their pre-crisis levels. Again, soaring prices and the disintegration in consumer demand paved the way for the poultry industry's collapse.

But signs of improvement are evident. Feed prices have stabilized, and attractive broiler and egg returns are encouraging some smaller operators to restart their businesses. Industry sources estimate poultry output could increase to 50% of the pre-crisis level by the end of 1999.

Accordingly, projections for feed use also show promise. Consumption for the 1998-99 marketing year just ended is estimated at 1.7 million tonnes, up slightly from the previous year, while calendar 1999 use is expected to recover to 2 million.

Even though poultry prospects are improving, few expect the industry to return to its former state. Smaller operators are constrained by high prices for chicks, and although they have asked the government to institute an import program, funding for such an effort remains problematic in light of the government's financial condition.

Expectations are that conditions will continue to favor increasing concentration in integrated poultry farm and feed milling companies.

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