Indonesia poised for agricultural reform

Hopes are rising that long-awaited reforms of state-owned enterprises and government initiatives can help Indonesia’s agriculture sector rebound from a year of commodity price shocks, which have taken their toll on the country’s biggest exports, particularly palm oil.

Indonesia tops the global list for crude palm oil (CPO) production and is also a major producer of several other commodities, including rubber, cocoa and coffee. Confidence amongst palm oil and rubber producers plummeted this summer, when prices hit near five-year lows. With growth at a standstill across much of the agricultural sector, industry insiders are calling on Jakarta to do more to help.

Streamlining processes

Agriculture remains a key component of Indonesia’s economy −with approximately 38m workers − largely due to a surge in crude palm oil (CPO) production during the last decade. The sector made up 14.4% of Indonesia’s total GDP in 2013, worth Rp1.31qrn ($131.1bn), similar to 14.5% the previous year, according to Statistics Indonesia (BPS).

However, a reduction in land available for farming, combined with lower productivity, led to agriculture’s overall contribution to GDP slipping from 15.2% a decade previously.

Exports of CPO and CPO derived products fell 1.75% to 15m tonnes in the first nine months of 2014, compared with the same period last year. Slowing economic growth in China and India resulted in reduced palm oil demand, prompting prices to fall to a $712 per tonne in September, down 5.4% from the previous month.

Jakarta plans to introduce several initiatives aimed at reviving the CPO sector, including measures which will streamline the process governing investment for the industry, according to Secretary General for the Ministry of Agriculture, Herry Priyono.

“We want to increase coordination among public bodies to create a one-stop-shop for investors, reducing bureaucracy and increasing overall efficiencies,” Priyono told OBG at the International Palm Oil Conference in Bandung at the end of November.  “We also want to help investors with the land acquisition procedure, as this is becoming one of the main hurdles for industry growth.”

Critics say the CPO industry has long been stifled by imbalances in a system dominated by state-owned enterprises, which still relies on smallholder farms for 40% of production. A September editorial in the Jakarta Post described the government as having: “no business involving itself in so many kinds of businesses that could be conducted efficiently by private firms”. 

Performance power

In a significant move aimed at reforming state-owned agricultural enterprises, Jakarta announced plans in October to set up two holding companies, which will oversee Indonesia’s plantation and forestry-based operations.

PT Perkebunan Nusantara (PTPN) III will take responsibility for the 14 state plantation firms that cultivate oil palm, rubber, sugar cane and tea, while Perhutani is charged with overseeing the government’s six state forestry companies. The two enterprises are set to rank among the largest plantation and forestry-based business groups in the world, with Perhutani responsible for 2.5m ha, including 1.02m ha of teak forest, in Java and Madura.

Fadhil Hasan, Executive Director of the Indonesian Palm Oil Producers Association, told OBG that the unification of state-owned enterprises and plantation companies into PTPN III is long overdue. “Having finally happened, this will essentially improve the financial performance and strength of Indonesia’s local industry, as assets, resources, and procurements will be better leveraged,” he said.

The restructuring comes as demand for CPO from bio-diesel programmes is expected to provide the industry with a boost next year, while analysts see CPO prices rising in the first quarter of 2015.

Contrasting fortunes

Rubber is another key Indonesian crop that has been hit by a decline in prices over the past few years. Falling demand from China saw rubber futures drop 28% in 2014 to the lowest level in nearly five years. Indonesia is the world’s second-largest natural rubber producer, but demand has not matched the surge in supply over the past three years. Figures from the Trade Ministry show that exports of rubber products rose by just 4.9% from 2009 to $629m last year.

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 threat that farmers may choose more lucrative crops as they struggle to maintain profits.

Moenardji Soedargo, who sits on the board of GAPKINDO (Indonesian Rubber Association), told OBG that prices were being driven by sentiment rather than fundamentals. “This has a deep impact on small holders and the entire industry should do more to prevent such price volatility in the rubber industry,” he said. Soedargo called on the government to highlight areas of economic activity where rubber could be utilised, such as the durability of road construction works and dock fenders for seaports. 

Read Next:

In Indonesia

Diversified financing to boost private investment in Indonesian...

Indonesia has sought to increase private sector participation in major infrastructure projects, unveiling a series of new developments and announcing a shift in funding policy that could open the...

In Agriculture

Los planes de Perú para aumentar las exportaciones agrícolas

Los funcionarios de agricultura del Perú estiman que las exportaciones de ese sector continuarán creciendo significativamente durante los próximos años, debido al aumento de la demanda de los...

Latest

Myanmar: Year in Review 2019

Despite seeing solid growth, 2019 posed some challenges for Myanmar, as the country continued with plans to liberalise its economy.