Keeping the ball rolling: Efforts to boost efficiency and sustainability are under way

Tasked with providing sustenance for the country’s nearly 250m citizens while contributing a steady stream of export revenue, the Indonesian agriculture sector remains an indispensable industry with an influence that extends across a broad spectrum of the social, economic and political landscape. The country’s vast territory combined with favourable soil and climactic conditions have given rise to a host of homegrown agro-industrial giants, as well as drawing the attention of some of the world’s largest international outfits.

As a whole the agriculture sector made up 14.4% of Indonesia’s total GDP in 2013 as measured in current prices, similar to 14.5% the previous year, according to data from Statistics Indonesia (BPS). Food crops remain by far the largest contributor to the sector, accounting for more than half of the industry’s value, though as the world’s top producer of palm oil, commodity exports to ports across the globe also provide a reliable inflow of foreign currency.

Other cash-generating segments include rubber, cocoa, coffee, tea, cinchona, sugarcane, tobacco and the fisheries subsector. Efforts to modernise production have a part to play. “The fragility of the tobacco crop can be mitigated through the installation of irrigation systems, and this will likely require significant investment from the private sector,” Ronald Walla, the president director of tobacco firm Wismilak, told OBG.

Book Value

As a whole, the Indonesian agriculture sector contributed Rp1.31qrn ($131.1bn) at current prices to the country’s GDP in 2013, up 9.8% from Rp1.19qrn ($119.3bn) in 2012, according to BPS data. The accelerated growth was led by expansion in the food crops subsector driven in large part by rising rice production, which increased by 2.62% in 2013 after growing by 5% the previous year. Food crops continued to contribute the lion’s share of value in 2013, accounting for 47.4% (Rp621.8trn, $62.18bn) of agricultural production, followed by the fisheries subsector with 22.2% (Rp291.8trn, $29.18bn), estate crops with 13.3% (Rp175.25trn, $17.5bn), livestock with 12.5% (Rp165.16trn, $16.5bn) and forestry with the remaining 4.3% (Rp56.9trn, $5.7bn). The sector is also the largest employer in the country, accounting for 34.36% (38.07m workers) of Indonesian workers over the age of 15 as of August 2013, according to data from BPS.

In spite of falling vegetable oil commodity prices, the plantation subsector was also able to record gains on the strength of continued expansion in the palm oil segment. Agriculture exports for 2012 increased 8.5% to $5.58bn compared to the previous year, accounting for 3% of all exports on the year, according to preliminary data from Bank ICB Bumiputera. Export values were aided in the first quarter of 2012 by an increase in global staple food prices due to supply disruptions in North and Latin America as a result of drought conditions, as well as poor wheat harvests in the Black Sea region and China due to weather conditions.

However, prices softened in the second quarter and stabilised in the second half of the year, with demand for food remaining steady in spite of a sluggish global economy. Exports for the first half of 2013 continued a positive growth trend, increasing by 2.41% to $2.53bn compared to the same time period in 2012 STAPLES: Consistent with the average Indonesian’s basic diet, rice, maize and soybeans are among the most widely grown crops in the country and are cultivated primarily for domestic consumption. While demand and climactic conditions have fostered a continuous expansion of rice production to keep pace with population growth, development of alternatives such as maize and soybeans has stagnated over the past five years in spite of concerted diversification efforts.

In 2013 Indonesian paddies yielded 70.9m tonnes of rice, up from the 69.1m tonnes produced the previous year and in keeping with the larger trend, which has seen consistent growth going back to the 51.9m tonnes recorded in 2000, according to BPS data. Over the same period, the production of soybeans – which are the primary ingredient in widely consumed traditional Indonesian dishes – has tailed off from 1.02m tonnes in 2000 to 807,568 tonnes in 2013, despite an increase in farming efficiency that saw soy yields improve from 12.34 tonnes per ha to 14.57 tonnes per ha over the same time period. This is due in part to a substantial curtailing of soybean acreage, which was been reduced by roughly one-third from 824,484 ha in 2000 to 554,132 ha in 2013, as well as new import and tariff policies.

Finally, efforts to diversify the local diet by increasing the production of maize (for which Indonesia’s climate is less favourable compared to rice and soy crops) have led to a rise in production from 9.68m tonnes in 2000 to 18.5m tonnes in 2013, though growth has slowed considerably since 2009. Over this period, maize yields have increased dramatically from 27.65 tonnes per ha to 47.99 tonnes per ha, while cultivated acreage rose from around 3.5m ha in 2000 to 3.86m ha in 2013.

Despite the gains made in past years to boost the country’s food output, Indonesia’s expanding population and the changing appetites of its growing middle class will require continued expansion of the food crop sector to keep pace. Consumption of hulled rice ( converted from non-hulled product with a 63% yield and 16.4% shrinkage rate) is expected to rise from 36.5m tonnes in 2012 to 39.5m tonnes by 2020, along with corresponding increases in corn from 20.36m tonnes to 22.07m tonnes and soybean from 2.71m tonnes to 3.06m tonnes, according to the Indonesian Chamber of Commerce and Industry’s food development programme, Vision 2030. To meet and even exceed this increased demand for basic food crops (soy bean and white sugar excepted), the roadmap calls for a wide range of measures to boost productivity and output, including expanding food production areas, limiting the conversion of existing cropland for other purposes and increasing yields in these areas. While the country has in the past ventured into hybrid stains of crops such as rice and corn to boost output, further work will be needed in terms of improved irrigation, training of farmers, logistics and storage practices, and other issues across the value chain in order to maximise yields.

Policy

In addition to the long-term strategic aims of food self-sufficiency and increasing cash crop exports, the government is taking measures by which it hopes to achieve the twin goals of reducing domestic food price volatility and boosting demand for locally grown products. A key piece of legislation enacted to this end is the Food Law of 2012, which updated previous legislation concerning food security, domestic agriculture and trade restrictions, among other things. Included in the Food Law is the bolstering of the State Logistics Agency (Bulog) to expand its role as well as increase its authority to carry out its mission of stabilising key domestic food prices through the practice of buying and selling staples locally at set rates and regulating the import and export of products. While rice is by far the most important crop under Bulog’s authority, additional commodities such as beef, corn, sugar and soybeans are now subject to similar regulations that could lead to a wider dispersion of distortions in the market.

While the 2012 Food Law and Bulog’s role within this framework have been effective in achieving targets for the sector so far, there are concerns that the methods employed may not be the best solution in the long term. Detractors, including the OECD and the American Chamber of Commerce, have voiced concerns that market distortions caused by these policies will harm the sector over time by encouraging inefficiencies, while pushing up consumer prices in the short term and discouraging investment over the long term.

Although it is too early to determine the wider ranging implications of these protectionist strategies, early data indicates a rise in both wholesale and consumer foodstuff prices since the changes were made in August 2012. The composite consumer price index of 66 cities compiled by the BPS shows an average monthly rise in foodstuff prices of 0.57 points from August 2011 to July 2012, half of the 1.18 average increase exhibited in the 12 months after implementation. Core food inflation as measured by the Bank Indonesia (BI), the central bank, also outpaced non-food commodities in the fourth quarter of 2012 by 5.5% to 3.6%. By contrast, international commodity prices for basic foodstuffs rice, wheat, corn and soybean all declined or remained static after August 2012 through the end of that year.

Other measures included in the Food Law are incentives structures designed to promote domestic production, including a higher government purchasing price (which was increased by 25% in February 2012) paid by Bulog to purchase its reserve stocks, improved domestic trade system for agricultural goods and the implementation of an import ban on processed foods, which resulted in a 32.6% decrease in imports and a corresponding increase in domestically produced processed food products of 12.8%. Apart from the Food Law, other temporary measures were also taken in 2012 to ensure a continuous supply of staples, such as a reduction in tariffs on soybean imports starting in the third quarter of 2012 to counter a temporary global supply shortage and ensuing price hike.

Palm Oil

One of two countries along with Malaysia that dominate the global production, processing and export of palm oil, Indonesia has capitalised on growing demand for the versatile commodity, which has made palm oil the largest revenue generator within the sector in spite of the recent drop in demand and global commodity prices for the product. While demand for palm oil expected to continue its upward trajectory, production and cultivated acreage growth in Indonesia, as well as Malaysia, should be substantially slower than the rapid double-digit increases that characterised the past decade of expansion for the industry. This is due to both the gap between supply and demand closing in as a result of rapid expansion in capacity over the past decade and greater efforts by both the government and industry players to implement more environmentally sustainable cultivation practices.

Production continued to increase in 2012, reaching a total of 26.5m tonnes on the year, up from the 23.5m tonnes recorded in 2011 and the 21.8m tonnes in 2010, according to data from the Indonesian Palm Oil Association (GAPKI). The majority of this was exported, with 18.22m tonnes shipped in 2012. Exports consisted of 16.77m tonnes of palm oil (9.46m tonnes processed, 7.31m tonnes crude) and 1.46m tonnes of palm kernel oil (673,490 tonnes of processed, 783,930 tonnes of crude). The largest recipient of Indonesia’s palm oil exports was India, which purchased a total of 5.85m tonnes, followed by the EU with 4.17m tonnes and China with 2.96m tonnes.

Through the first seven months of 2013 exports were on pace to outperform 2012 with a total of 12.21m tonnes shipped, and the US Department of Agriculture projected total 2013 production of around 31m tonnes (28m tonnes by GAPKI) – well above rival Malaysia’s estimated output of 19m tonnes.

Over the past 15 years, the palm oil industry has been one of Indonesia’s success stories, as its rapidly expanding palm plantations became an increasingly important foreign exchange earner and employer. As of 2013 there were roughly 9m ha of palm plantations in the country located primarily in Sumatra and to a lesser extent in Kalimantan, up more than four-fold from the approximately 2m ha present in 2000, according to the Ministry of Agriculture. Of these, some 3.6m ha are operated by smallholders – 1.6m under the nucleus/plasma system producing up to 5-6 tonnes per ha and 2m ha of individual smallholders producing 1. 8-2.1 tonnes per ha – and the remaining 5.4m ha worked by large estate plantations yielding up to 8 tonnes per ha. The large, export-oriented palm oil firms operating in Indonesia have grown into international agribusiness powerhouses in their own right and include the likes of Astra Agro Lestari, Indofood Sukses Makmur, Sinar Mas, BW Plantation, Bakrie Sumatera Plantations, Wilmar Group, Sampoerna Agro, Musim Mas, Raja Garuda Mas and PP London Sumatra Indonesia.

Driven primarily by population growth and rising per capita incomes in developing counties, production of oilseeds and the by-products of protein meals and vegetable oils is projected to grow by 26% by 2022 with palm oil share increasing to 34% of all vegetable oils (and around two-thirds of exports), according to the OECD and UN Food and Agricultural Organisation’s “Agricultural Outlook 2013-2022”. This would place Indonesia as the world’s single-largest exporter of vegetable oils in 2022 with a 34% market share, followed by Malaysia with 30%, with no other single country maintaining more than a 10% share.

Similar to its rival Malaysia, the government is making concerted efforts to add more value to the industry by encouraging domestic refinery. As a result, the export tax on refined palm oil products has been reduced from 25% to 10% in 2012, while the export tax on crude palm oil has declined from around 15% in mid-2012 to 7.5% by January 2013 due to the implementation of a sliding tax scale linked to the international palm oil price ranging from 7.5% to 22.5%.

Rubber

The rubber sector has had a tough go of things over the past few years as plummeting demand sent commodity prices into a tailspin, which has led to a decline in both exports and value for the world’s second-largest exporter of natural rubber. Production improved slightly to 3.18m tonnes in 2013, up from 3.04m tonnes in 2012 but down from 3.99m tonnes in 2011, according to statistics from the Indonesian Rubber Association (GAPKINDO). Smallholders are the dominant producers within the sector, accounting for a total of around 2.5m tonnes of output as compared to 340,000 tonnes from government estates and some 370,000 tonnes from private estates.

In spite of stable production figures, export values fell off from $11.76bn in 2011 to $7.86bn in 2012 following a dip in commodity prices that has continued through the first half of 2013, according to GAPKINDO. The price of benchmark export-grade ribbed smoked sheet (RSS) type 3 fell to $2.75 per kg in mid-2012, far below a record high of $6.40 per kg in February 2012.

In terms of volume, the country shipped a total of 2.44m tonnes in 2012 compared to 2.56m tonnes the previous year. The US was the top destination for exports, taking in 572,278 tonnes, followed by China with 437,750 tonnes and Japan with 389,234 tonnes. The majority of exports are shipped in the form of standard Indonesian rubber, which accounts for around 97% of exports, with RSS making up 2.7% and 0.3% in the form of latex concentrate.

With the vast majority of smallholders feeling the pinch of lower rubber prices in Indonesia, along with top producers Malaysia and Thailand, there is a real threat that farmers may choose more lucrative crops as they struggle to maintain profits. In order to combat this, the three countries, which are responsible for around 70% of global rubber output, agreed to cut down rubber trees and trim exports by 300,000 tonnes between October 2012 and March 2013, although the strategy proved largely unsuccessful as larger global economic factors continued to depress commodity prices.

Other Crops

In addition to food crops, palm oil and rubber, Indonesia also produces substantial quantities of other crops, including coffee, sugar, tobacco, tea, cocoa, fruits and vegetables, and seafood. Coffee remains the leading non-manufactured cash crop for exports, with the country shipping $1.24bn worth of beans in 2012, up from exports of $1.03bn in 2011, according to BOI figures.

This growth trend will likely come to an end in 2013, however, due to a combination of aging trees, inefficient cultivation and harvesting practices, and a particularly wet harvest season that has damaged crops as the majority of farmers are still reliant on sunlight to dry and cure beans prior to shipping. Production is projected by the Association of Indonesian Coffee Exporters and Industries to taper off at 728,000 tonnes in 2013, down from the 748,109 tonnes the previous year, but still significantly higher than the 633,991 tonnes cultivated in 2011.

The fisheries subsector also plays a substantial role in agriculture exports with $1.11bn in shrimp shipments in 2012, along with an equal amount of exports of fish and related products. Other major cash crops include spices with $631.80m in exports, cocoa beans worth $388.33m, fruits with $181.32m, vegetables with $134.13m and tea with exports worth $126.75m.

Outlook

Favourable weather conditions, as well as moderate increases in cultivated acreage and yield in 2012 have given Indonesia a significant boost in its push for food self-sufficiency so far. Maintaining this momentum is the next challenge for the sector and the next few years will provide an insight into how the government’s increased regulatory presence in the form of Bulog will affect further investment in the industry, as well as the effectiveness of other programmes to boost efficiency and sustainability.

Although the days of double-digit expansions for plantation crop acreage are now in all likelihood a thing of the past, continued demand should be enough to sustain profits for large agro-industrial exporters, if not at the margins they once were. In terms of the sector’s overall composition, food crops will likely remain the dominant segment for the foreseeable future. However other subsectors should continue to take on a growing role as they have in the past few years when the average annual growth from 2002 to 2011 of the fisheries (6.5%), plantation (5.1%) and livestock (4.8%) segments continued to outpace that of food crops (2.9%).