The ministry of trade lifted a 10% tariff on soybean imports on January 21, following protests demanding price caps for soybeans which brought 10,000 farmers and tofu producers onto the streets of the capital. Indonesian animal feed is made up of 70% corn and soymeal, while tempeh and tofu are staples of the Indonesian diet.
As the international price for soybeans reached a 34-year high of $13.20 per bushel in early January, the import price in Indonesia touched $600 per tonne, up from $351 a tonne in January 2007.
International soybean prices have been pushed higher by lower production in the US, as farmers there have moved to grow more corn to take advantage of US subsidies for ethanol, destined to be processed into biofuel. In addition, rising demand in China has coincided with poor harvests in Argentina and Brazil to push prices higher.
"Price pressures on agriculture products may prevail at least for the next four to six months," said Bayu Krisna Murti, the deputy coordinating minister for economic affairs.
The government said the import tax suspension was a temporary measure, and the Coordinating Ministry for the Economy said in a statement that the tax could be re-imposed should soybean prices fall.
The government's longer term solution is to promote competition amongst soybean importers while stimulating local production.
Indonesia currently consumes a total of 2m tonnes of soybean per year, two thirds of which is imported. Indonesia's imports of the food staple rose from 1.2m tonnes in 2006 to 1.4m tonnes last year, according to the central statistics agency (BPS). Between 80% and 90% of these imports came from the US, while the rest came from Argentina.
"Sometimes imported soybeans are of higher quality and are sold at cheaper prices compared to those produced locally," a local tofu producer, who wished to remain anonymous, told OBG.
At present only four companies have been approved to import soybeans to Indonesia, including the US's Cargill, and Teluk Intan, Gunung Sewu and Liong Seng, all based in Indonesia.
"The government will strive to reduce soybean prices, including by adding to the number of importers if it is possible," Boediono, the coordinating minister for the economy, announced on January 16.
"If the number of importers is increased then the price will decrease due to tighter competition," Hasto Kristianto, a member of parliament's trade commission, said at a press conference following the commission's meeting.
Meanwhile the government has added urgency to a central plank of President Susilo Bambang Yudhoyono's campaign to achieve self-sufficiency in strategic agricultural commodities such as soybean. Although the aim was to originally achieve this by 2015, the government now plans to raise production to these levels by 2011.
Domestic soy production has declined consistently since 1992, as subsidised genetically modified US production has flooded the market. In response, Indonesian farmers have tended to convert production to corn, which achieves higher yields per hectare (ha), and palm oil, whose price has risen in line with demand from the biofuel industry.
The total area under soybean cultivation has declined from 1.6m ha in 1992 to 464,400 ha in 2007, according to figures from the BPS.
The President has announced an initiative to deliver free seeds to farmers as part of its goal to boost production to 900,000 tonnes in 2008, up from 600,000 tonnes last year. The government aims to attain a yearly production of 2.22m tonnes a year by 2011, reducing the need for imported soy to 241,500 tonnes, or 9.8% of the projected 2.46m tonnes of annual demand for 2011.
Given that soybean production is predominantly undertaken by small- and medium-sized companies, this initiative would also support the government's programme to boost employment in rural areas.
Meanwhile the ministry of agriculture aims to expand soybean cultivation areas to 700,000 ha this year, up from 464,400 ha in 2007. The government is debating ways to reduce volatility in domestic prices, although details of such a plan have not been announced.
However a note of caution has been sounded by some in government. "Farmers can only net Rp3.5m ($375) profit per hectare for soybeans, while with corn they can net Rp8m ($857). So it is difficult to increase the production of soybeans at home," Jussuf Kalla, the vice-president, told a conference on January 15.