Strong economic growth to boost demand and spur agricultural production

by Mario Sequeira

Indonesia is the largest country in Southeast Asia, in area and population. It is the world’s largest archipelago, made up of more than 17,508 islands, with the islands of Java and Sumatra accounting for nearly 80% of the population.

With nearly 242 million people, Indonesia is the world’s fourth-largest country in terms of population and a significant agri-food market.

Indonesia has a well-balanced economy, in which all major sectors play an important role, and a diversified resource base consisting of primary energy sources, including oil, mineral deposits, timber and agricultural commodities.

Agriculture has historically been the dominant activity, at one time contributing 45% of GDP, but over the last three decades mining and manufacturing have grown rapidly. In 1991, manufacturing’s share of GDP overtook that of the agricultural sector. Agriculture accounts for approximately 15% of GDP and employs about 45% of the workforce.

Indonesia’s economy has enjoyed more than 3% annualized growth over the past five years. It grew by nearly 5% in the past two years and is forecast to maintain that level over the next two. Indonesia’s main crops are rice, maize, palm oil, soybeans, copra and cassava. The livestock industry is primarily comprised of poultry and beef production.

Rice is a staple and the most important crop. It takes up nearly 12 million hectares, more than half the arable land available for crops. More than 90% is grown using irrigation.

Production falls short of consumption, which has increased over the years in line with the population increases, but higher productivity in the past few years has reduced that gap. Production for 2005-06 is estimated at nearly 35 million tonnes, with imports projected at about 800,000 tonnes. As recently as 2002-03, imports were as high as 2.7 million tonnes.

As the second largest producer and exporter of palm oil in the world, Indonesia exerts significant influence on world oilseed prices. Farming in Indonesia is labor intensive due to the relatively small size of farms.

The Indonesian economy is market-oriented, but the government retains control over essential food items such as rice through the National Logistics Agency (BULOG).

BULOG sets support prices for rice and conducts intervention purchases or sales to maintain price stability. In recent years, the government has loosened BULOG controls, most notably by deregulating imports of wheat, maize and soybeans.

The government has been striving for food self-sufficiency since the 1960s. To achieve this, it offers farmers subsidies for crop inputs such as fertilizers and herbicides, credit programs for irrigation and other incentives to encourage efficiency.

The December 2004 tsunami was thought to have devastated agriculture in the Aceh province by contaminating farm land with salt water and destroying equipment, but a September AP report revealed a tsunami bonus for some farmers.

Aceh farmers reported their bestever rice and maize harvests and that vegetables, peanuts and fruits are also growing well.

The Aceh government estimated that the tsunami damaged nearly 20,400 hectares of farm land. But agricultural researchers, explaining the good harvests, say high rainfall must have washed out the salt quicker than expected.

WHEAT AND FLOUR MILLING
Indonesia consumes a significant amount of wheat annually, all of which is imported. Wheat-based products such as noodles, bread, biscuits, pastries and snacks, are consumed mostly by higher income families in cities.

Wheat imports in the past five years have averaged 4 million tonnes. The country has enjoyed strong economic growth in the past five years, which has boosted disposal incomes and increased the demand for wheat-based products.

Imports are forecast at 4.6 million tonnes in 2005-06, the same as the previous year but up from imports in prior years. The major suppliers of wheat to Indonesia are Australia, which has 50% of the market share, Canada and the U.S. Four companies dominate the wheat flour milling industry, producing about 3 million tonnes of flour annually, with an extraction rate estimated at 70 to 74%.

The biggest company is PT Bogasari Flour Mills, owned by Indofood Group, a significant player in Indonesia’s food processing industry.

Bogasari has a 70% share of Indonesia’s wheat flour market. It has two mills, one in Jakarta on 33 hectares, which is thought to be the largest flour mill in the world, and one in Surabaya on 13 hectares. The Jakarta and Surabaya mills have daily capacities of 10,000 and 5,900 tonnes respectively.

The second biggest flour miller is PT Berdikari Sari Utama Flour Mills, with a plant on Sulawesi that has a daily milling capacity of 2,900 tonnes and a market share of 8.5%.

The remaining milling companies are PT Panganmas Inti Persada, with a daily capacity of 1,000 tonnes, and PT Sriboga Raturaya, with a daily capacity of 1,500 tonnes (both 2003 figures). Both mills are on Java and each have a 5% share of the flour market. Per capita consumption of wheat is relatively low, at about 14 kg annually. This figure is expected to increase in coming years as the growing economy offers flour millers the opportunity to utilize more capacity, which is now at about 65%.

There are at least 400 commercialsized bakeries in Indonesia, most of which are small businesses. Bakery products are sold through the traditional village markets or directly by bakeries. There are some supermarkets and other modern retail outlets that offer bakery products, but these are located only in the major cities.

The bakeries offer eastern- and western-style baked goods. After the 1997-98 financial crisis, thousands of people who had been laid off opened bake shops at home, leading to an increase in bread consumption at the expense of rice and noodles in cities among middle- and low-income groups. It is estimated that more than 30,000 bakeshops emerged, providing cheap baked goods in urban and rural areas.

A small quantity of flour is imported.

Local millers, represented by the Association of Indonesian Flour Millers (APTINDO), have long complained that imports are of poor quality and are being dumped into Indonesia. APTINDO has a standing petition with the country’s anti-dumping committee to take measures such as counter-veiling duties against the targeted countries.

According to the U.S. Department of Agriculture (USDA), the Indonesian government in June 2005 approved plans by four investors to spend nearly U.S.$55 million in a fifth flour mill, with production capacity of 672,000 tonnes a year.

The USDA also reported that two of the existing mills, which were not identified, have invested in new blending facilities to enhance flour quality and that PT Bogasari and PT Berdikari Sari Utama recently acquired stakes in one of the other mills, which also was not identified.

LIVESTOCK AND FEED
Poultry and beef production are the main livestock industries. Poultry production in 2004-05 was estimated at 640,000 tonnes but is projected to increase to 672,000 tonnes in 2005-06.

Beef production is in the 380,000-to-400,000-tonne range and falls short of consumption by about 30,000 tonnes. Consumption has been growing at 7% annually for the past five years.

The compound feed industry produces about 7.5 million tonnes of feed annually, which is about 70% of the industry’s 11-million-tonne capacity. There are 26 feed mill companies in the country, 19 of which account for most of the production.

The poultry industry, comprising broilers and layers, will require 5.8 million tonnes of feed in 2005. The demand from other livestock industries — dairy and cattle, pigs and aquaculture — is estimated at about 1 million tonnes.

Maize is a major component of the feed industry. Until a few years ago, maize imports averaged 1.3 million tonnes, but with the government emphasizing self-sufficiency, the area devoted to maize has increased and imports in the past two years have been more than halved. Imported maize is used primarily to produce poultry feed.

The maize harvest in 2004-05 is estimated at 6.5 million tonnes. With newly reopened areas expected to be sown to maize, output is forecast to increase slightly in the coming years. The industry is attempting to address the issue of low productivity.

The animal feed industry consumes about half of maize production, with the rest used in food processing. The feed industry is expected to use 3.7 million tonnes of maize in 2005-06.