How technology can help small-scale farmers in Indonesia

 

With millions of hectares of arable land across over 17,000 islands, Indonesia’s agriculture sector has long been an integral part of its economy. While its contribution to GDP may have declined in recent years – a result of the growth of other industries amid economic diversification – it remains hugely important, employing roughly one-third of the workforce. Although major companies dominate the industry from a revenue standpoint, small-scale farmers, often operating in hard-to-reach rural areas, comprise the backbone of the sector. Growers, however, face several obstacles, including a lack of access to the capital and advanced technologies that could make operations more financially viable. Improvements in this area would bring substantial benefits to the entire agricultural supply chain.

Infrastructure issues across the archipelago are also a hindrance to agricultural growth; however, since coming to power in 2014, President Joko Widodo, better known as President Jokowi, has recognised the importance of investing heavily in this area, and his re-election in 2019 is expected to lead to continued focus on overcoming the issue and contribute to improved nationwide connectivity, which will benefit many industries, including agriculture. In the meantime, technological advancements, often driven by entrepreneurs looking to fill market gaps, are presenting solutions to challenges that Indonesia’s farmers have faced for decades.

Structure & Oversight

The agriculture sector is overseen by the Ministry of Agriculture (MoA), which has secretariats for food crops, infrastructure, horticulture, plantations, livestock and animal health. The ministry also has agencies for research and development, food security, quarantine and human resource development. In the MoA’s Strategic Plan for 2015-19, prominent targets included growing sector GDP by an average of 3.87% per year; increasing yearly domestic and foreign investment by 5.02% and 4.72%, respectively; and expanding the annual per capita income of aggregate farmers by 6.29%, and the annual per capita income of smallholder farmers by 5.77%. The strategic plan supports the long-term aims of the Grand Strategy of Agricultural Development 2015-45, formulated as part of a constitutional mandate to realise a dignified, independent, developed, fair and prosperous Indonesia.

Agriculture policy is also guided by successive fiveyear National Medium-Term Development Plans. The 2020-24 plan is the latest iteration of this and aligns with the broader aims of the overarching National LongTerm Development Plan 2005-25. Broadly, current economic planning is aimed at transitioning the economy towards broad-based, high-tech manufacturing and downstream processing, with the goal of stimulating high-value job creation, boosting the value of exports and making the country more self-sufficient.

New Developments

In May 2018 the government released a plan that listed five national priorities, including increasing the added value of the economy and the creation of employment through agriculture, industry, tourism and other productive services; and strengthening energy, food and water resilience. Agriculture was selected as a priority area partly due to its 3.8% annual growth in 2018, driven by an increase in the fisheries and forestry subsector. Its strong performance was due to several factors, including the creation of irrigated dry land; a focus on cultivation in food sector products such as rice and corn; and increased livestock and fish output. While the sector grew by an estimated 3.9-4.1% in 2019, the outbreak of Covid-19 considerably halted momentum, with Statistics Indonesia reporting growth of just 0.02% for the sector in the first quarter of 2020.

At present, the agriculture sector consists of largescale mechanised plantations that are usually owned by the state or conglomerates, as well as millions of smallholders – often controlling less than 2 ha of land – who tend to rely on traditional farming methods. Indonesia’s major agricultural products are palm oil, rubber, rice, coffee, cocoa, tea and cassava, as well as spices such as pepper, cinnamon, nutmeg and cloves.

Food security is of increasing importance in Indonesia. The disruption of supply chains caused by the Covid-19 pandemic has revealed shortcomings and placed added pressure on the country’s food system, which relies on the import of staples such as corn, rice and sugar to meet demand. While the government has made efforts to address the issue, such as through ensuring adequate food stocks and improving infrastructure, local production has failed to meet the demand of a quickly growing population. With the rapid growth of urban centres, further improvements to infrastructure, as well as education and land reform measures, will allow the country’s predominately small-scale farmers to go commercial, resulting in greater local production to meet demand and reduced food waste.

Economic Contribution

Until the 1990s agriculture accounted for almost one-quarter of GDP, but this started to change as globalisation accelerated and successive governments endeavoured to diversify the economy and enhance economic output from trade, manufacturing and tourism.

World Bank figures show that Indonesia’s agriculture sector accounted for 12.8% of GDP in 2018, down from 13.2% a year earlier and substantially less than, for example, the 1999 figure of 19.61%. Despite this decrease in its contribution to GDP, agriculture remains vitally important to the economy, and was worth $133.5bn in 2018, according to World Bank figures. It also remains Indonesia’s largest employer, providing work for over 30% of the labour force.

The percent of cultivated arable land has remained relatively consistent in recent years, at roughly 13% between 2009 and 2016, according to the most recent World Bank data. An upsurge in the percentage of arable land took place in the late 1990s and early 2000s following the establishment of large-scale plantations, in particular for oil palms, which has had a significant impact on exports and economic diversification.

Palm Oil

With its millions of hectares of fertile land, Indonesia produces a diverse range of agricultural products, most of which rely heavily on the export market, including palm oil, rubber, cocoa and coffee, as well as tea, cassava, rice and tropical spices.

Indonesia is the world’s largest producer of palm oil, recording output of 42.5m tonnes in 2019, which marked an increase of 3.6% from a year earlier. This is considerably more than the second-largest producer, Malaysia, which had output of 19.8m tonnes in 2019, followed by Thailand and Colombia, with 3m and 1.7m tonnes, respectively. Most of Indonesia’s palm oil production is exported, and major destinations include China, India, Pakistan, Malaysia and the Netherlands.

Palm oil is one of the world’s most heavily consumed vegetable oils, used in products as diverse as soap, lipstick, shampoo and chocolate. “Palm oil is by far the most important product for Indonesia’s agricultural market,” Yusup Lemanah, associate partner at PwC Indonesia, told OBG. “It dwarfs many of the other products, including coffee and cocoa.”

In positive news for the economy, the price of Indonesian crude palm oil increased considerably towards the end of 2019, reaching more than $600 per tonne, largely because of government initiatives aimed at boosting its growth by stimulating domestic consumption and enhancing sustainability. However, the production of palm oil has also faced criticism from environmental groups, which say that the uncontrolled clearing of rainforests for its plantations has had a negative impact on the environment, including the widespread loss of the habitats containing endangered species.

In 2019 the EU announced measures to end its use of palm oil-based biofuels, citing concerns over widespread deforestation caused by the industry. The EU had long been a major importer of the product, and such a move has had substantial ramifications on Indonesia’s palm oil industry. As a result, in December 2019 Indonesia filed a World Trade Organisation lawsuit against the EU, calling the move a “discriminative” measure. Indonesia also responded to restrictions on use of the product by attempting to boost its own palm oil consumption, and in December 2019 mandated that biodiesel sold across the country contain 30% palmbased fuel. This is referred to as B30 and consists of fatty acid methyl esters derived from the plant. The move followed the introduction of B20 a year earlier, a 20% palm-based fuel. B30 is the highest mandatory mix of biofuel globally, and aims to reduce Indonesia’s reliance on the export of the product. The government plans to test a 40% palm-based fuel in 2020, and may increase use of the product even further in the future.

While the palm oil segment’s environmental credentials have been the subject of international discussion, efforts have long been under way to improve its sustainability. In 2011, for example, the government introduced the Indonesia Sustainable Palm Oil Standard (ISPO), which certifies plantations that produce crude oil using environmentally sustainable methods and is mandatory for large palm oil companies but voluntary for small-scale farmers. Producers have increasingly embraced the ISPO, and the number of plantations certified since 2017 has been nearly three times that of the first four years of operations. Since 2011 the ISPO Commission has certified 502 plantations, covering about a third of the country’s 14m ha of oil palm plantations. “The ISPO is an important step in ensuring sustainable approaches, and allows the government to act as a check and balance by conducting audits on these plantations,” Lemanah told OBG.

Coffee & Cocoa

Indonesia is one of the world’s leading coffee producers and exporters. Although the domestic industry is dominated by the lower-quality Robusta bean, the country is also well known for specialist coffees. These include Kopi Luwak, which has been described as the most expensive coffee in the world and is produced from beans that have been partially digested by the Asian palm civet – a small four-legged mammal. Indonesia’s coffee crop area stands at about 1.2m ha, of which smallholder plantations account for about 98%, with most of these on the island of Sumatra. In 2019/20 the country’s coffee production is expected to reach 10.7m 60-kg bags, an increase of 100,000 bags from a year earlier.

The Ministry of Industry developed a plan for 2015-20 that would boost the coffee industry further; measures include research and development activities, the application of national standards encouraging increased production of Arabica coffee beans and modernisation of the downstream structure of the segment. The fundamental aim of the national standards programme was to make Indonesian coffee more competitive in the international market, according to a report by the Centre for Indonesian Policy Studies. The organisation, however, suggested that the necessary supervision to enforce these new standards was not yet in place.

The cocoa bean is another crucial agricultural export for Indonesia, and the industry has seen impressive growth in the past 25 years, driven by the expansion of smallholders. There are approximately 1.5m ha of cocoa plantations, most of which are on the island of Sulawesi.

MoA figures show that 660,000 tonnes of cocoa were produced in 2017, a slight increase from a year earlier. This continues an upward trend seen since 2015, when the sector was heavily impacted by poor weather conditions and diseases that blighted cocoa trees.

According to the UN Food and Agriculture Organisation, Indonesia has had the lowest cocoa productivity of the world’s three leading producers – that is, lower than Ghana and the Côte d’Ivoire – since 2011. This is largely because of ageing trees, diseases, elderly farmers and the fact that cocoa is often regarded as a low-priority crop. “The truth is that for many smallholder farmers, crops such as cocoa are not even a priority; they tend to focus on rice, as there are higher returns,” Yohanes Agung Baskoro, corporate responsibility and sustainable development manager at Cargill, told OBG.

Pulp & Paper

Despite a global trend towards the use of electronic devices, Indonesia’s pulp and paper industry continues to perform well: exports reached $7bn in 2018, which equates to an increase of $1bn from a year earlier, according to Aryan Warga Dalam, president director of the Indonesia Pulp and Paper Association. This figure was expected to rise again in 2019, he told OBG in June of that year. As an example of the industry’s continued strong performance, Asia Pulp and Paper, one of the world’s largest companies in this sector, opened a vast $2.6bn paper mill in South Sumatra in 2018. However, like palm oil, the production of pulp and paper has attracted negative attention from environmental groups, particularly because of its contribution to deforestation. Rising global awareness of the environmental impact of paper and pulp usage, combined with growing digitisation, is likely to impact demand for such products over the long term.

Rice

Rice is a crucial staple of the Indonesian diet, and although the country is one of the world’s largest rice producers, it still relies on imports to meet demand most years. Per capita rice consumption reached 97.6 kg in 2017, and is expected to increase by 1.5% annually to hit 99.08 kg per capita in 2025. However, annual rice husk production fell by around 8% in 2019, which was attributed primarily to adverse weather conditions. Total production for the year reached 54.6m tonnes, down from 59.2m tonnes one year earlier. During the same time the size of the total rice harvested area declined from 11.28m ha to 10.68m.

The majority of the rice products imported to Indonesia are held in reserve in an effort to stabilise prices. In late 2019 the Indonesian Bureau of Logistics (BULOG), the country’s state food procurement agency, requested approximately Rp20trn ($1.4bn) in funding from the government to allow it to finance the nation’s rice reserves, according to local media reports. This financing was required because the agency was in debt, having followed instructions to import close to 1m tonnes of rice in 2018 to meet the required reserve demand. The country’s rice reserves looked prepared to supply sufficient amounts of the staple during the Covid-19 pandemic, with Budi Waseso, the head of BULOG, telling local media in April 2020 that there were around 1.4m tonnes of rice reserves located in warehouses across the archipelago. Waseso added that BULOG was planning to purchase an additional 950,000 tonnes of rice over the year to top up reserves.

New Funding Models

Despite the significant potential of Indonesia’s agriculture industry, there still remain some barriers to growth, including access to capital, as well as a shortage of high-quality seeds and fertilisers, poor technological advancements and distribution challenges. However, a booming start-up culture within the country has led to the emergence of new players looking to fill this gap by developing new advanced technologies. For example, farmers can use emerging digital platforms to connect directly with the buyers of their agricultural products, including some of the country’s largest supermarket chains, such as Lotte Mart, Giant and Hero.

One such company operating in this space – Tani Group – claims to have connected farmers with more than 400 small and medium-sized enterprises (SMEs), as well as about 10,000 individual customers. Indonesia and other fast-developing economies have also seen the emergence of crowdfunding platforms that enable investors to fund independent farmers directly in return for an expected profit share. Such an approach can contribute to higher yields, as farms that perform well are usually rewarded through increased investment.

Examples include CROWDE, a crowdfunding platform that allows smartphone users to invest small amounts of capital into farms throughout the country and rewards farmers with discounts on crucial tools. Simbah is another such platform, connecting farmers to direct buyers in addition to harnessing artificial intelligence to answer farmers’ questions, which in turn contributes to increased productivity.

Rainer Heufers, executive director at the Centre for Indonesian Policy Studies, told OBG that there is considerable scope for technology to bolster the sector, but that marketing these new approaches to farmers continues to prove challenging in some cases. “There is a contrast between people living in rural areas and those in the cities. Farmers in rural areas have often been doing things the same way for decades, and it can be difficult to convince them to change their approach.”

Irrigation

As in other parts of the region, water shortages are a major challenge for farmers in Indonesia, and droughts are occurring with greater frequency. This issue is likely to be exacerbated in the years ahead due to rising global temperatures. Indonesia faced a drought throughout 2019, which resulted from the end-2018 El Niño cycle and led to a drier and harsher dry season than typically experienced across 92% of the country, according to a report from the International Committee of the Red Cross. In turn, this resulted in insufficient access to clean water and a decreasing supply of water for irrigation, as well as crop failure.

Indonesia relies heavily on rainfall for irrigation, and as the dry seasons become increasingly harsh, farmers are being advised to adopt new techniques that will lead to increased productivity, such as using a greater amount of pesticides and fertilisers. The government has made efforts to address the issue of drought, including a proposal from the MoA to introduce varieties of crops that require less water, and a directive from the Ministry of Environment and forestry to increase patrols to prevent forest fires. Meanwhile, major lenders, including the Asian Infrastructure Investment Bank, have committed to helping Indonesia develop its infrastructure. Such investment is likely to be channelled into port and road development, as well as irrigation and other agricultural projects.

Agro-Industry

In Indonesia most agri-business firms are SMEs launched through regional development initiatives and the power of local communities, and have been earmarked as a promising avenue for the future growth of the sector. In early 2019 Achmad Sigit Dwiwahjono, director general of chemical, pharmaceutical and textile industries at the ministry of industry, said he expected a 7.1% increase in agro-industry’s economic contribution that year through close linkages with other sectors – including food and beverage, tobacco and wood processing. This follows on from considerable investment in the segment, which received $1.7bn from domestic investors in the first half of 2018 alone and more than $1.1bn in foreign investment over the same period. Long-term growth in agro-industry is likely to be fuelled by domestic demand from Indonesia’s vast, consumption-driven economy.

Outlook

Providing support in the form of increased capital, access to technology and better infrastructure for Indonesia’s millions of smallholders will enable them to progress to commercial-scale production and thus improve food security. With the sector likely to see considerable change in the years ahead, particularly amid an increasing global focus on sustainability and environmental concerns, a heavy reliance on the palm oil industry will present challenges for domestic growth. Fortunately, this also presents opportunities, and not only in greater domestic consumption and innovation. Stakeholders need to embrace new technologies that find sustainable, long-term solutions and promote diversification and value-added downstream processing, ensuring that there is a strong future for the industry, even in the face of a changing climate.

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The Report: Indonesia 2020

Agriculture chapter from The Report: Indonesia 2020

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