Sustained by a diverse landscape, Indonesia’s agriculture sector has long been an important source of income for local households and has also contributed much-needed export revenue. The sector has historically served as a pillar of the Indonesian economy, but has yet to achieve its full potential, though significant progress has been made in recent years under the business-orientated administration of President Joko Widodo. Partly as a result of adopting business-friendly initiatives, the sector has been able to attract necessary investment, which in turn is helping to bridge structural gaps. Despite major gains, a host of challenges restrict crop yields, such as limited access to capital for farmers and outdated infrastructure. In order to address these issues the administration of President Widodo has successfully increased the use of mechanised agricultural technology, invested in infrastructure and expanded the total area of farming land (see analysis).
CURRENT STATE: While the implementation of dynamic reforms has triggered an increase in farming output, progress in the sector continues to be hindered by an underdeveloped downstream segment, as well as the inability of smallholder farmers to capture growing international demand. In terms of structure, Indonesia’s agricultural sector consists of two types of production: large-scale plantations under the guidance of the government or private investors, and smallholders using traditional farming methods. The latter tend to focus on horticultural commodities, while large plantations dominate leading exports such as palm oil, although a recent shift has seen smallholders increasingly account for a dominant share in other exports such as rubber.
As it stands, rural income is predominately generated by small-scale growers who lack access to finance and technology, which hinders their commercial viability. In terms of the labour market, agriculture has historically played a pivotal role in the economy, though data from Statistics Indonesia (BPS) indicates that the percentage of Indonesians working in the sector is decreasing, falling from 55.1% in 1990 to 31.9% in February 2017. This is a significant drop from 1976, when two-thirds of the population depended on agriculture for their income, according to World Bank figures.
Improving the welfare of people working in the agriculture sector has been a priority of the government. As a result of various efforts made by the Ministry of Agriculture (MoA), farmers’ welfare is increasing. Based on BPS data, the number of low-income people in rural areas in March 2017 was 17.1m, a year-on-year decrease of 600,000. The Gini coefficient of income distribution has also improved for rural areas. In March 2017 the ratio was 0.320, compared to 0.327 in March 2016.
In 2016 Indonesia ranked 71st out of 113 countries, and was listed by the Global Food Security Index as the country with the biggest changes in overall scores year to year. For factors such as affordability, availability, quality and safety, Indonesia’s total score of 50.6 out of 100 was better than its 2015 score of 46.7. In the same year, the Food Sustainability Index ranked Indonesia 21st out of 25 countries overall, which factors in food loss and waste, sustainable agriculture and nutritional challenges. Indonesia ranked 16th in the sustainable agriculture category, higher than China and the US.
HIGHER OUTPUT: In an effort to capitalise on the sector’s potential, a number of international food companies have entered the market in recent years. Despite this influx of foreign investment, the country still relies heavily on imported food, a situation that stems from structural shortages in the upstream segment. Likewise, the total contribution of agriculture to GDP has historically been hindered by weak processing capacity, and as a result, much of the nation’s commodities are exported as raw materials. According to the World Bank, in 2016 value-added agricultural products contributed 13% to GDP. Didik Prasetyo, president director of state-owned holding company Rajawali Nusantara Indonesia, told OBG, “In order to increase the competitiveness of the food supply chain in Indonesia, we need to watch for the quality of products and lower distribution costs, but also to improve warehousing in remote areas and consistency in regulations.” However, important strides have been made in both policy and infrastructure gaps in recent years, which are increasing the segment’s capacity. These gains are gradually leading to a decline in food imports, which has seen Indonesia reclaim its title as a self-sufficient rice producer after more than three decades of importing (see analysis).
RECENT PERFORMANCE: Accounting for approximately one-third of all land, agriculture has contributed Rp332trn ($25bn) on average to GDP on a quarterly basis since 2010. Despite being affected by a number of recent weather events, including the 2014-16 El Niño and the 2016 La Niña weather phenomena, GDP contribution at current market prices rose to Rp468.6trn ($35.3bn) in the second quarter of 2017, an all-time high for the sector and 6% higher than Rp441.7trn ($33.3bn) in the second quarter of 2016. According to the BPS, agriculture accounted for 13.5% of GDP in 2016 and maintained this performance in the first quarter of 2017. The sector was in a prime position to surpass this by the end of 2017, the result of a combination of factors such as improved market demand and an administration focused on revitalising food production.
El Niño led to limited rainfall in March 2015, further reducing levels by July of the same year before drought levels peaked in December, particularly in Central and South Kalimantan, southern Sumatra, Java, Sulawesi and Papua. As a result, production figures took a hit as droughts and widespread wildfires destroyed a substantial amount of crops. However, much to the sector’s fortune, a second weather phenomenon – La Niña, sometimes thought of as El Niño’s opposite – provided respite, as rainfall increased and with it, crop yields.
CROPS: Thanks to Indonesia’s tropical climate and large stretches of arable, fertile soil, a wide variety of crops can be found across the countryside. In terms of production, some of the more important commodities include palm oil, natural rubber, cocoa, coffee, tea, cassava, rice and spices. Palm oil is by far the most important crop contributor to GDP, accounting for between 1.5% and 2.5% on an annual basis. Indonesia is the world’s largest producer and exporter of the oil, providing half of global supply. The majority of palm oil exports go to China, India, Pakistan, Malaysia and the Netherlands, among other countries. In spite of fluctuating prices in recent years, Indonesian crude palm oil (CPO) production continues to reach new heights.
PALM OIL: According to the Indonesian Palm Oil Association (GAPKI) and the MoA, 31.1m tonnes of crude palm oil was produced in 2015, of which 26.4m tonnes was exported, contributing up to $15.4bn in export revenue. Around 70% of plantations are located on the island of Sumatra, while the remaining 30% are situated in Kalimantan on the island of Borneo. In total, the segment accounts for 11.3m ha, and is expected to reach 13m ha by 2020, according to GAPKI. In terms of market share, private plantations are dominant with 58.5% of production, followed by smallholders which produce a combined 33.9% and state-owned plantations with 7.6%, according to figures from investment research firm Indonesia Investments.
Domestic consumption of palm oil received a boost, when the government imposed a minimum 20% biodiesel blending (B20) policy to non-subsidised diesel fuel, while power plants were obliged to blend at least 30% biodiesel (B30). The government-backed Indonesian Oil Palm Estate Fund allocated Rp10.6trn ($799m) in 2016 and Rp9.6trn ($723.6m) in 2017 to support the B20 and B30 initiatives (see analysis).
Speaking to local media in early 2017 about the biodiesel schemes, Airlangga Hartarto, minister of industry, said, “In our mid-term plan we want to prioritise efforts to boost investment in the palm oil processing industry to anticipate the growing domestic production that will need 40m tonnes of CPO by 2020. In the upstream sector we also expect to boost the replanting programme to increase [the] productivity of all smallholders.”
Only a fraction of Indonesia’s palm oil producers have obtained international accreditation, due to the high cost and lack of incentives under the voluntary Roundtable for Sustainable Palm Oil international certification programme. To rectify this, the Indonesia government developed its own certification initiative in 2011, the Indonesian Sustainable Palm Oil (ISPO) programme. While the ISPO has instituted sustainable practices, the industry still has hurdles to overcome. Sutedjo Halim, managing director for trading and downstream activities at palm oil firm Triputra Agro Persada, told OBG, “It is mandatory for a palm plantation to allocate 20% of its demarcated land to the local community. Thus, smallholders enjoy transfer of technology in good agricultural practices as well as financial benefits. However, the land beyond the allocated area is a major concern. Using fire to clear land is a common and harmful practice.”
A DIVERSE MIX: Indonesia is the world’s largest producer of cloves and cinnamon, as well as being among the world’s top producers of natural rubber, cassava, coconut oil and nutmeg. In addition, the country is a major producer of coffee, cocoa, rice, tobacco and tea. The production and export of rubber dates back to the 19th century during the colonial era. Today, smallholder farmers account for 80% of total production. According to a 2016 report by Indonesia Investments, rubber plantations covered a total of 3.62m ha in 2015, with 3.15m tonnes of rubber produced in that same year, making it the second-largest producer behind Thailand.
According to the Indonesian Rubber Association and the UN Food and Agriculture Organisation, Indonesia exports 85% of its rubber, with half of exports going to other Asian countries, although the US is the largest individual importer of Indonesian rubber. Indonesia Investments also stated that a decline in rubber imports from the US was to be expected following its 2014 decision to remove Indonesian-made tires from its Generalised System of Preference, with tire imports now being subject to a 5% tax.
A lack of downstream activity limits processing ability and revenue. Largely due to an older generation of trees and the limited capacity of smallholders, Indonesia’s per hectare rubber production rates are lower than other rubber-producing countries, with Thailand and Vietnam able to produce 60% more than Indonesia’s 1080 kg per ha, according to Indonesia Investments. In recent years a gradual decline in global demand has seen Indonesian rubber exports fall from a high of $12bn in 2011 to $3.7bn in 2015. According to local press reports, natural rubber exports totalled $3.4bn in 2016.
COCOA: As the third-largest producer in the world behind Ghana and Côte d’Ivoire, Indonesian cocoa output reached 350,000 tonnes between October 2015 and September 2016, with 1.7m ha of land dedicated to the crop. In late 2016 it was estimated that the sector would process 360,000 tonnes for the 2016/17 season. According to the Indonesia Cocoa Association and Indonesian Coffee and Cocoa Research Institute, the cocoa bean is one of the best-performing foreign exchange generators in the agriculture sector, after palm oil, rubber and coconuts. While there is room for expansion, the industry is restricted by the inability of smallholders to capitalise on growing demand. Due to a lack of value-added services, the majority of cocoa exports are raw beans. However, a number of development projects funded by the government, international donor organisations and the private sector are expected to improve downstream capacity over time.
COFFEE: Indonesia also has an ideal climate for coffee cultivation, making it home to a robust coffee industry spread over 1.23m ha, 903 ha of which are Robusta plantations with the remainder growing Arabica. Around 90% of coffee production is undertaken by smallholder growers. In recent years, the size of the country’s coffee estates has gradually declined as a number of growers have opted to use a portion of their fields to produce higher-yield crops, such as palm oil.
In an effort to build a more inclusive Indonesian coffee market, the Sustainable Coffee Platform of Indonesia (SCOPI) was established in 2015. Since its launch SCOPI has been instrumental in supporting public-private partnerships and in the creation of various task forces aimed at financial inclusion and technology transfer among farmers. Given growing domestic consumption and international demand for coffee, the programme has been applauded as a necessary step. Moenardji Soedargo, chairman of SCOPI’s executive board, told OBG, “Given global demand, there is a risk of shortage over the long term. Domestic demand for coffee is outstripping the global average growth rate. While the Indonesian coffee industry has room to grow, it needs support to mitigate certain structural shortfalls.” While concrete data is difficult to obtain, it is believed that domestic consumption of coffee is growing at a rate of 8% per annum, compared to the international average of 2-2.5%, according to figures from the Association of Indonesian Coffee Exporters.
MARITIME & FISHERIES: Maritime-related products remain a valuable source of national income, with fisheries alone contributing Rp214.5trn ($16.2bn) to GDP in 2016. While fishing is prohibited for foreign investors, a number of investment opportunities exist in terms of logistical services, fish processing and shipbuilding. The economic potential of Indonesia’s maritime sector is estimated at around $1.2trn, according to the Indonesia Investment Coordinating Board.
The government is aiming to transform Indonesia into an international transport hub by ramping up cooperation with international governments and foreign businesses. For example, in March 2017 France’s Louis Dreyfus Armateurs Group signed a memorandum of understanding with Singaporean palm oil firm Golden Agri-Resources to develop more business opportunities in maritime logistics in Indonesia over a five-year period, with investments amounting to $100m. In early 2017 the Japanese government agreed to invest in maritime infrastructure such as cold storage. Susi Pudjiastuti, the minister of maritime affairs and fisheries, told local press that the state-owned General Company of Indonesian Fishing and Japanese private firms would form joint investments in areas like fishing and agriculture in Sabang, Aceh and Morotai, with projects expected to be worth between $50m and $100m.
POULTRY: The poultry sector has grown considerably over the last 30 years and employs 12m people. “With the growth of the middle class, poultry consumption is expected to continue growing at a double-digit rate, as this is the cheapest animal protein in the world,” Bambang Budi Hendarto, Vice President Director of Japfa Comfeed Indonesia, told OBG. The segment was valued at over $34bn in a January 2017 report by the US Department of Agriculture’s Global Agricultural Information Network. It went on to say that despite fears of oversupply, poultry benefits from government efforts aimed at regulating the import of breeder stock, which has slowed growth and stabilised prices. Indonesia had 3.5bn broiler chickens, 200m layer chickens and 24.8m breeder chickens, according to 2015 estimates. It does not import or export poultry meat. Ministry of Trade Regulation No. 59 of 2016 and MoA Regulation No. 34 of 2016 allow for the import and export of chicken meat; however, neither ministry issues import licences.
The poultry farming network is continuing to move away from an open-housed system to a less intensive closed-house automated system. As a result of this shift the segment is improving yield numbers and protecting poultry stock from illness and disease.
In an attempt to curb price volatility and promote the incomes of rural farmers, the government announced at the end of 2016 that the price of chicken meat would be fixed. According to local media, the price for a day-old chick was set at Rp4800 ($0.36), down from Rp5000-6000 ($0.38-0.45). The price of a chicken from a farmer’s pen was set at Rp28,390 ($2.14) and 1 kg of chicken meat costs the buyer Rp35,480 ($2.67), up from Rp33,400 ($2.52), according to BPS data.
While in early 2017 local press was reporting that chicken meat prices were dropping, it may still be too early to assess the full effects of the price revision. Implementation is expected to overcome issues with regard to ranged chicken farming and narrow price disparities. Previously, farmers’ associations have complained that the day-old chick price was controlled by large-scale companies In order to mitigate this, the price revision also requires that all companies involved in the sale of day-old chicks sell them in equal proportion to independent farmers.
OUTLOOK: Palm oil will likely continue as the primary driver of the sector, with a production target of 40m tonnes of CPO per year from 2020. As far as rubber is concerned, market prices are expected to remain low as global demand continues to decline and stockpiles rise. With El Niño expected to have no lingering impact, production figures are likely to continue on an upward trend. Likewise, as global economic conditions continue to stabilise, agriculture is expected to benefit. While a weaker rupiah against the US dollar restricts commercial activity in certain segments, farmers should benefit as a weaker rupiah translates into fewer food imports and more exports. This should boost tax receipts for the government. Furthermore, the growth in mechanised farming techniques is set to bolster agricultural revenue as demand for locally produced food grows.
With an array of infrastructure development projects rolling out in the years ahead, production and logistics costs should continue to fall. Thus, the competitiveness of the nation’s farmers is also set to improve. The progress made by smallholder farmers is arguably the largest piece of the puzzle, in terms of boosting production. Limited access to credit and inputs among smallholders means they will remain vulnerable to global downswings in commodity prices. Strengthening their capacity to mitigate market shifts is a priority for the MoA. Achieving these goals is essential for the government as the agriculture sector continues to transform and develop.
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