Pervading nearly every level of the country’s social, geographic and economic strata, Indonesia’s agrarian roots run deep. The sector provides a livelihood for the majority Indonesian households ranging from small family subsistence plots to multinational agribusiness giants, all of whom contribute to supplying sustenance to the world’s fourth-largest population as well as growing cash crops to be shipped out to the far corners of the globe to bring in foreign currency.
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Economic diversification may have taken some of the shine of the agriculture sector in recent decades as new domestic industries have risen to prominence, but the agriculture, fisheries and livestock industries together remain the single-largest employer, providing one of every three workers with a job. Although still the largest labour market employing 38.97m Indonesians aged 15 years and older as of August 2014, urban migration and the continued rise of the services sector has eroded participation from 44.5% of the total workforce in 2004 to 34% in 2014, according to data from Indonesian Statistics Agency (BPS). Over the same time period the country’s second largest workforce in the wholesale trade, retail trade, restaurants and hotels trades have swelled their ranks from 19.61m to 24.83m.
Although not the dominant force within the economy it once was, the sector still contributed 14.33% valued at Rp1447trn ($119.6bn) to Indonesia’s economy in 2014. This was up from Rp1310trn ($108.3bn) the previous year and well above the Rp217trn ($17.9bn) in 2000, according to BPS. Food crops are the most productive subsector worth Rp668trn ($55.2bn) in 2014 followed by the fisheries sector valued at Rp340trn ($28.1bn), estate crops at Rp193trn ($16bn), livestock (Rp184trn, $15.2bn) and forestry (Rp61trn, $5bn). These figures exclude palm oil, which is categorised as a manufactured product rather than an agricultural product for export purposes. Averaging annual growth of 3.26% since 2000, the industry has been picking up steam in recent years with growth rates of 4.2%, 3.44% and 3.29% from 2012 to 2014 but still lagged behind national growth of 6.26%, 6.2% and 5.44%, respectively, over the same three-year span, according to BPS.
Palm Oil
Perhaps the country’s best-known cash crop export, palm oil has risen to prominence over the past few decades to take on a major role in not only Indonesia but also the world’s edible oils trade. Displaying unprecedented growth since the beginning of the millennium on the back of strong, sustained global demand for the inexpensive cooking oil, production continues to achieve new heights in spite of softer commodity prices and a slowdown in plantation area expansion. In 2014 Indonesian crude palm oil (CPO) producers continued to outpace their next largest competitor, Malaysia. The two countries provide more than 85% of the global market. Driven by higher yields, domestic CPO output totalled 33m tonnes for the 2014/15 season, up from 30.5m tonnes the previous season and 23.6m tonnes produced just a few years earlier in the 2010/2011 season, according to data from the US Department of Agriculture (USDA). This accounted for more than half of the global total for the most recent crop year and easily outpaced second-place Malaysia, which produced 20.5m tonnes on the year. Looking towards the future, the Indonesian Palm Oil Association (GAPKI) established has a long-term target of producing 40m tonnes of CPO per year from 2020. This increase is also supported by the government, which would like to boost the role of CPO in the domestic economy. Around two-thirds of production is derived from the more than 1600 plantation estates operating in Indonesia working a combined total area of 10.59m ha of land. The much more numerous but less productive smallholders cultivated a combined area of 4.42m ha of palm area in 2013.
Exports also recorded a new high of 22.3m tonnes on the 2014/15 season, up from 21.72m the previous year, according to the USDA’s figures, while GAPKI put exports of palm and palm kernel oil at 21.76m tonnes for 2014. These shipments netted producers $17.46bn in revenues in 2014, up from $16.52bn the previous year and roughly four times more than the $4.42bn recorded in 2005. Domestic consumption of palm oil in Indonesia has likewise surged with production and increased purchasing power, increasing from 6.41m tonnes in 2010/11 to 10.52m tonnes by 2014/15.
Although the majority of the export revenue increase is due to the dramatic rise in volume, some of this growing revenue stream is attributable to government efforts to boost the profitability of the industry by encouraging more downstream refinement of CPO to add further value to the product.
This has been carried out primarily through a reworked taxation structure, which rewards refiners and penalises shippers of raw product. Initiated in 2012, this tax regimen shifted the export tax on refined palm oil products from 25% to 10% in 2012 while taxing CPO shipments on a sliding scale ranging from 0% to 22.5% depending on the international palm oil price. In this manner higher global CPO taxes result in higher export taxes while conversely the tariff is eliminated altogether once CPO prices drop below $750 per tonne.
The rapid growth in plantation acreage which has characterised the past 15 years is likely to have plateaued at this point, however, due in part to mounting pressure directed at the industry by environmental groups that are targeting the palm oil sector for the destruction of forest and peat lands to make way for plantations. In response, the industry created the Roundtable on Sustainable Palm Oil in 2004 to establish a standard of sustainably produced traceable products, although uptake of the voluntary certification has been slow. This was supplemented by the creation of the Indonesian Sustainable Palm Oil standard in 2011 which is required by the Indonesian government. Indonesia also accepted a $1bn payment from the Norwegian government in return for enacting a two-year moratorium on forest and peat land clearing for estate purposes, which ran from May 2011 through May 2013 and was subsequently extended for another two years.
Regulation
Despite the four-year moratorium on forest clearing for agricultural purposes, many of the largest palm oil companies still maintain vast tracts of land both actively under cultivation as well as undeveloped land banks held in reserve for future development.
Although the higher investment levels – and usage of modern farm equipment and practices – have boosted the yields of these large-scale plantations, the Indonesian government has been increasingly focused on creating an environment that fosters growth for its smaller domestic farmers. Similar in many ways to the resource nationalism that is now being applied to the mining sector, recent regulatory efforts have sought to limit foreign participation and increase local value-added services, at the risk of alienating large international players and curtailing investment.
These efforts began to accelerate in October 2013 with the introduction of a ministerial decree which stated that a company or group of affiliated companies would be allowed to own a maximum of 100,000 ha of land for new oil palm plantations (double that for plantations in Papua and West Papua). State-owned enterprises, cooperatives and publicly listed companies whose majority shares are owned by the public are exempt from the limitation. While the regulation will not require companies to sell off land already acquired, it could restrict further growth of these large operations. Major palm oil firms currently operating in Indonesia include Singapore-listed Golden Agri-Resources and Wilmar International, Malaysia’s Sime Darby and Indonesia’s Astra Agro Lestari – most of which have more than 100,000 ha of plantations.
New Plantations Law
The government doubled down on these efforts in September 2014 when it unveiled a new draft regulation for the industry with a number of new restrictions targeting primarily large, foreign-owned agribusinesses. One of the most contentious provisions included is an ownership restriction that caps foreign holding of plantation companies at 30%, dramatically less than the 95% allowed under the existing law. Rather than exempting existing companies through grandfather clauses, the law was to be applied retroactively, meaning that if foreigners held more than 30% in Indonesian plantation companies they would be required to sell down their shareholdings within five years. After a month of consultation and deliberation, a new regulation was adopted in October, although it is devoid of the controversial divestment requirement. The government has not, however, ruled out future action in the area similar to restrictions recently put in place in the mining industry, leaving a cloud of uncertainty over the sector until new limits are to be set and issued within two years.
As stated in the new plantations law, these decisions will be made with a focus on placing limitations on foreign investment in Indonesian plantations, which must be based on the “national interest”.
The national interest will be determined by taking into account the type of plants, the scale of the plantation business, and conditions specific to the location of the plantation. As such the full impact of the law will depend heavily on future interpretations on what constitutes national interest as well as whether or not foreign owners will be required to divest their stakes immediately or after the expiration of plantation land titles, most of which carry a 35-year duration.
Other provisions sought to limit the size of undeveloped land banks which most large plantations have already amassed by requiring that companies utilise a minimum of 30% of their granted land area within three years, with all of the land area technically utilised within six years. Furthermore, plantation product processing businesses must source at least 20% of the total required raw materials from their own plantations and all plantation companies must develop a plantation area of 20% to be utilised by the local community (the so-called plasma obligation).
Other restrictions in the September draft which failed to make to cut of the final October law included requirements that plantation companies must use a domestic bank; provide internship opportunities and carry out transfer of technology to local businesses; and utilise domestic processing facilities.
Cashing In
Indonesia’s lush tropical climate is also conducive to growing a number of other attractive cash crops including coffee, tea, rubber and cocoa. After the palm oil and the fisheries sector (see analysis), the most profitable agricultural export for the country is coffee. The fourth-largest producer of coffee in the world behind Brazil, Vietnam and Colombia in 2014, Indonesian growers have increased their output over the years albeit not in a linear fashion due to annual variations in growing conditions.
In 2014 the country’s coffee estates, consisting mostly of smallholders, produced some 660,000 tonnes of coffee, down from 740,000 tonnes the previous year, according to the Association of Indonesian Coffee Exporters and Producers. The majority of the country’s production was exported, netting sellers some $1.17bn worth of exports in 2013 and $1.03bn in 2014, Bank of Indonesia data show. Other significant money makers for Indonesian farmers include spices with exports worth $577.63m in 2014; followed by fruits and vegetables with $300m and $228.12m in exports, respectively; cocoa beans ($201.41m); tea ($108.84m); and resin and resin gum ($107.56m).
Feeding the Masses
When imports of Indonesia’s primary food staple of rice surged from 687,581 tonnes in 2010 to a whopping 2.75m tonnes in 2011, costing $1.51bn, the government acted swiftly to boost the country’s domestic output in order to alleviate its increasing and often sudden reliance of foreign food stocks. The centrepiece of these efforts was the passage of the new Food Law in October 2012 establishing a platform for the government to institutionalise self-sufficiency in food production and food sovereignty within a comprehensive food security policy, although it should be noted that some pundits believe that pursuing a policy of self-sufficiency could decrease food security and drive up food costs in Indonesia.
The Food Law provides the legal framework to regulate a number of related activities, including food planning, food availability, food affordability, nutrition and consumption, food safety, food labelling and advertising, food institution, public participation and enforcement. These regulatory efforts included bolstering the State Logistics Agency (Bulog), which is responsible for procuring, storing and distributing strategic commodities such as rice to stabilise the supply of staples and insulate them from external price shocks.
In this role Bulog holds a monopoly on imports, exports and distribution of commodities under its authority, enabling it to build up sufficient stocks to hedge against supply gaps and protect the country from volatile world prices or low production. Bulog is thus empowered to buy rice from farmers to maintain prices at levels that keep rice farmers producing or purchase stocks from abroad in lean years. The cumulative effects of these large-scale purchases can at times also create significant market distortions such as the price spike in February 2015. While Bulog has been criticised at times for failing to maintain proper reserves and profiteering at the expense of both farmers and consumers, farmers remain wary of opening up Indonesia’s markets to less expensive imports which could undercut the local market.
One solution to this paradox is to boost the efficiency of domestic farmers in order to meet demand at a cost which is competitive with international markets.
Acknowledging this need for greater productivity, the government has embarked on a series of programmes designed to enhance rice yields with the ultimate goal of attaining food security defined as at least 90% self-sufficient. As a result, much of the Ministry of Agriculture’s efforts have been directed towards boosting production through any means available including programmes to encourage greater fertiliser utilisation, farmer education and training programmes, wider use of irrigation, expansion of paddy areas and the number of harvests per year, and the use of high-quality seeds. The impact of these and other efforts have resulted in a gradual increase in rice yields from 4401 kg per ha in 2000 to 5128 kg per ha in 2014.
According to the Indonesian Chamber of Commerce and Industry’s food development programme, Vision 2030, rice production is targeted to increase from the 66.5m tonnes produced in 2010 to 81m tonnes by 2020 and 90.1m tonnes by 2025.
Although harvests remain highly volatile due to annual fluctuations in weather patterns and other variables, the overall trends of production and imports are currently moving in positive directions in spite of an off year in 2014. Rice paddy production has increased by 36% since the beginning of the millennium, increasing from 51.9m tonnes in 2000 to 70.83m tonnes in 2014, BPS data shows. This production increase far outpaced the growth of cultivated area, which grew by 17% from 11.79m harvested ha to 13.79m ha over the same time span. Imports have also tailed off in recent years from 2.75m tonnes in 2011 to 472,665 tonnes in 2013 with longer-term trends indicating a gradual reduction of imports independent of strong year-to-year variations.
Windfall
While agriculture has long been designated as a priority development sector, particularly with the recent drive for food security, government improvement programmes have often been limited by a lack of funding or continuity in the past. Fortunately, recent reforms made in the government’s energy subsidy scheme which in the past accounted for more than a fifth of state spending should free up substantial amounts of cash to be distributed to other sectors, including agriculture and fisheries, where it is needed. The first evidence of this landmark shift was displayed in the government’s Revised State Budget (APBN-P 2015) released in January 2015. As a direct result of energy subsidy savings, the government will allocate additional funding of Rp33.31trn ($2.7bn) for infrastructure improvements, whose management is handled by the Ministry of Public Works and Public Housing, according to the Ministry of Finance. A significant portion of this will be channelled into the agriculture sector including Rp8.45trn ($698.5m) for food security (water resources) split between irrigation development and management (Rp5.8trn, $479.4m), rehabilitation of dams and ponds (Rp1.1trn, $90.9m) and flood control and coastal security outlays (Rp1.5trn, $124m). Also included are several transport infrastructure projects to the tune of Rp15.75trn ($1.3bn) which will indirectly help the sector by improving the efficiency of moving goods from the fields to the marketplace.
Outlook
Public and private efforts to nudge Indonesia closer to food self-sufficiency should continue to pay dividends in staples, particularly rice, which is likely to see continued rises in production with increased hectarage and more efficient farming practices.
Continued growth in the palm oil sector will be heavily dependent on the pending interpretation of the new plantation regulations, which could curb investment and growth in the industry if implementation laws trend disproportionately towards resource nationalism. On the long term, global palm oil demand shows a growth trend as an expanding global population gives rise to increased consumption of palm oil-based products. Other cash crops should see moderate but variable growth depending on growing conditions and market prices, with the primary restriction on their growth being a lack of infrastructure and modernisation.
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