Agriculture in Indonesiadata.daff.gov.au/brs/data/warehouse/pe_abarebrs... · consumption of major food products with other countries reveals some interesting consumption patterns

ABARE CONFERENCE PAPER 07.6

Agriculture in Indonesia

a review of consumption, production, imports and

import regulations

Russell Bond, Gil Rodriguez and Jammie Penm 13th Meeting of the Australia–Indonesia Working Group on Agriculture, Food and Forestry Cooperation (WGAFFC), Gold Coast, Queensland, 28–31 August 2007

Rapid growth in Indonesia’s economy has been associated with a transformation of its food consumption pattern, which was mainly based on rice, starchy roots, fish and vegetables, to a wider variety including wheat and livestock products. As demand for agricultural products rises, imports have become an important source of food supplies and intermediate inputs such as feed for the poultry industry and cotton for the textile industry. Liberalisation of both tariff and nontariff protection, especially import regulations, would facilitate further growth in import demand.

Australia is the leading agricultural exporter to Indonesia, particularly for such commodities as wheat, meat, live animals and dairy products. With its geographic proximity, Australia can play an important role in meeting Indonesia’s food demand. Australia’s agricultural resources and production systems will provide mutual benefits to both Indonesia and Australia from advancing bilateral agricultural trade.

acknowledgments Funding for this report was provided by the International Division of the Department of Agriculture, Fisheries and Forestry. This study was undertaken in the Agricultural Trade and Data Resources Branch of ABARE in consultation with the International Division of the Department of Agriculture, Fisheries and Forestry and the Department of Foreign Affairs and Trade.

ABARE project 3186

ISSN 1447-3666


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1. introduction

From 1969 to 1996, Indonesia’s economy grew, on average, in excess of 7 per cent annually. Since the economic slowdown that resulted from the Asian financial downturn in 1997–98, Indonesia has resumed its strong economic growth, averaging around 5–6 per cent a year.

Population growth in Indonesia has also been significant. Over the past four decades, the population of Indonesia has grown at an average annual rate of around 1.8 per cent. This rate of growth is higher than that of many developing countries, especially in the Asian region. Population in Indonesia was around 226 million people in 2005 (United Nations Department of Economic and Social Affairs 2007).

Economic growth and industrialisation in Indonesia has led to an increase in competition for domestic resources. As for many other developing countries in Asia, this has resulted in a reduction in the contribution of agriculture to gross domestic product. In Indonesia’s economy, the share of agriculture declined from around 49 per cent in 1970 to just over 13 per cent in 2005. Over the same period, the percentage of the workforce engaged in agriculture fell from around 66 per cent to 44 per cent. Manufacturing overtook agriculture as the largest contributor to economic activity in 1990.

Strong income and population growth has resulted in a significant increase in food demand. For the most important staple food — rice — there have been restrictive import controls in place since 2004 (imports are permitted on an ad hoc and on needs basis, for example during extreme circumstances such as drought). The growth in domestic rice production has slowed since the mid-1990s, as the availability of arable land has become a constraint and productivity growth has slowed. As a result, there has been a gradual increase in imports of other staples, such as wheat, to meet increasing domestic food demand.

Growth in per person income has also led to an increase in demand for other food products, especially vegetables, fruit, sugar, beef, dairy products, poultry and seafood. While Indonesia is largely self sufficient in fruit, poultry and seafood, imports have increasingly become an important source of vegetables, sugar, beef and dairy products.

Indonesia’s government has pursued policies that promote agricultural production and provide protection to farmers. The measures used to protect the agriculture sector include both tariff and nontariff protection, especially import regulations and have resulted in some domestic agricultural prices being well above prevailing international prices. In recent years, Indonesia has pursued regional trade agreements as a strategy to gradually reduce protection and increase access to the markets of their trading partners. Indonesia is currently a member of the ASEAN FTA, China–ASEAN FTA and Korea–ASEAN 9 FTA, with several others under negotiation. A Japan–Indonesia Economic Partnership Agreement was finalised in August 2007.


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Indonesia’s continued high economic growth and industrialisation is likely to place

considerable pressure on its policy of achieving food self sufficiency. With competitive

pressure for resources from nonagriculture sectors, there is likely to be limited capacity

to increase agricultural production in Indonesia. In broad terms, freer trade practices in

Indonesia could lead to cheaper domestic prices for agricultural products and more

efficient allocation of domestic resources to sustain high economic growth.

This study addresses two issues. First, the current conditions of agricultural

consumption, production and imports in Indonesia are discussed. Second, the current

market access arrangements and the implications for Australia as a major agricultural

exporting country to Indonesia are analysed.

2. food consumption in Indonesia

food consumption rising in response to income and population growth

Except for the downturns in the mid-1980s and the Asian financial downturn of 1997–98, Indonesia has achieved impressive economic growth since the 1970s (figure A). On average, annual economic growth was around 6 per cent a year between 1970 and 2005.

In response to income growth and the influence of western style foods, Indonesian diets have gradually been changing. While rice, vegetables and seafood remain staples, consumers have moved toward a wider variety of foods. In particular, there have been increases in consumption of wheat based products, fruit and livestock products, including beef and dairy products.

figure A: economic growth, Indonesia

-15

-10

-5

5

10

15

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

%

Source: United Nations Statistics Division (2007a).


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Consumption of rice per person declined between 1990 and 2005. This is in contrast to the increase in consumption of many other food products, including seafood, beef, poultry, fruit and vegetables (table 1). As a result, the contribution of rice to per person daily calorie intake declined from 55 per cent in 1990 to 48 per cent in 2005.

However, rice consumption did not decline uniformly over this time. During the Asian financial downturn, rice consumption increased as consumers turned to cheap food sources (figure B). Rice consumption began to fall again once economic growth resumed after the financial downturn.

Between 1990 and 2005, wheat consumption per person nearly doubled, rising from just over 9 kilograms per person in 1990 to 18 kilograms in 2005. A large part of this growth occurred before the onset of the Asian financial downturn in 1997–98. High rice prices since the Asian financial downturn (Warr 2005) have led poorer consumers to switch from rice to instant noodles as the main source of carbohydrates (Wagner and Meylinah 2007).

table 1: food consumption per person, Indonesia

1990 1995 2000 2005

daily calorie intake calories calories calories calories

vegetable products 2 624 2 812 2 733 2 743

animal products 113 137 129 150

total 2 737 2 949 2 862 2 893

consumption per person kg kg kg kg

cereals 253.9 267.2 255.2 252.4

– wheat 9.3 18.7 15.8 18.0

– rice 220.3 219.2 213.1 204.2

– maize 24.1 29.0 25.6 30.0

starchy roots 68.4 67.5 65.9 68.6

– cassava 53.8 52.2 52.5 55.7

– potatoes 2.6 4.4 3.9 4.3

– sweet potatoes 10.6 9.7 8.2 7.3

sugarcrops 117.7 123.8 125.4 119.3

pulses 3.0 2.3 1.8 1.4

oil crops 89.8 100.7 105.1 93.2

vegetables 23.1 29.7 32.2 32.4

fruit 30.8 36.1 38.4 51.7

meat 8.3 11.1 9.0 11.9

– bovine 1.6 2.1 2.0 2.4

– pig 3.1 3.3 2.3 2.7

– mutton and goat 0.5 0.5 0.4 0.6

– chicken 3.0 5.1 4.2 6.1

milk, whole, fresh 4.4 5.6 6.0 7.3

eggs 2.2 2.8 2.9 3.8

fish, seafood 3.7 17.5 20.5 21.3

– freshwater fish 2.2 4.0 4.4 4.9 Note: The methodology used by the FAO converts quantities of processed commodities back to their primary level. Source: FAO (2007).


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figure B: cereal consumption, per person, Indonesia

7

14

21

28

35

1990 1993 1996 1999 2002 2005

kg

205

210

215

220

225

kg

wheat

maize

rice (rhs)

Source: FAO (2007).

Total consumption of starchy roots per person has been relatively stable. However, within this food group cassava consumption per person increased by 2 kilograms to 56 kilograms between 1990 and 2005, while sweet potato consumption per person fell from over 10 kilograms to just over 7 kilograms over the same period. A downward trend has also been observed for pulse consumption.

As a major protein source, poultry meat is widely consumed in Indonesia (figure C). Between 1990 and 2005, poultry meat consumption per person more than doubled,

figure C: meat consumption, per person, Indonesia

1

2

3

4

5

6

7

1990 1993 1996 1999 2002 2005

kg

chicken

beef

pigmeat

Source: FAO (2007).


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rising from 3 kilograms to around 6 kilograms. Consumption of bovine meat per person also increased over the same period, from 1.6 kilograms to 2.4 kilograms. Mutton and goat meat consumption rose marginally, while consumption of pig meat fell.

In general, changes in the pattern of food consumption in Indonesia have been consistent with the trends observed in many rapidly growing developing countries, especially in Asia. As per person income rises, consumption of starchy staples tends to decline whereas consumption of livestock products and seafood increase gradually (Mitchell et al. 1997; Lee and Kennedy 2006).

lower food consumption in Indonesia relative to developed countries

Food consumption in Indonesia on a per person basis is between those of OECD countries and other developing Asian countries (table 2). This is not surprising given Indonesia’s economic development and household incomes. However, comparison of consumption of major food products with other countries reveals some interesting consumption patterns for Indonesia.

First, daily calorie intake in Indonesia appears higher than in many other developing countries in Asia (on a per person basis). In 2005, for example, daily calorie intake in Indonesia was higher than that in Thailand and India. Compared with the OECD countries, daily calorie intake in Indonesia was higher than Japan, but lower than most other OECD countries including the United States, Australia and the Republic of Korea.

table 2: food consumption, 2005

Indonesia

United

States Australia Japan

Korea,

Rep. of China Thailand India

daily calorie

intake calories calories calories calories calories calories calories calories

vegetable 2 743 2 575 2 332 2 087 2 485 2 397 2 366 2 221

animal 150 1 062 998 592 484 554 291 196

total 2 893 3 637 3 330 2 679 2 969 2 951 2 657 2 417

consumption

per person kg kg kg kg kg kg kg kg

cereals 252.4 164.4 99.2 170.2 202.9 202.4 162.3 182.2

starchy roots 68.6 52.9 53.9 37.8 19.4 74.2 42.6 23.6

oilcrops 93.2 105.8 104.2 58.6 93.9 63.8 64.1 47.1

fruit 51.7 119.1 123.8 57.6 62.2 51.4 82.8 34.9

vegetables 32.4 123.4 111.2 119.6 259.0 251.0 41.1 66.8

sugarcrops 119.3 158.7 343.6 96.8 156.9 72.9 401.3 202.6

meat 11.9 93.7 87.4 33.2 32.6 59.8 23.3 5.2

milk, whole,

fresh 7.3 256.8 226.0 75.5 39.3 13.8 22.1 67.3

eggs 3.8 14.8 7.1 18.6 11.0 17.5 8.5 1.8

fish 21.3 23.8 23.2 64.9 51.6 na 31.1 4.8 na Not available. Note: The methodology used by the FAO converts quantities of processed commodities back to their primary level. Source: FAO (2007).


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Second, the proportion of daily calorie intake from plant based products in Indonesia (at around 95 per cent in 2005) is higher than in many OECD countries, including the United States (71 per cent), Australia (70 per cent) and Japan (78 per cent) and that in other developing countries such as China (81 per cent), Thailand (89 per cent) and India (92 per cent). Within plant based products, Indonesians consume significantly more grain based products and starchy roots.

Third, consumption of livestock products in Indonesia is lower than that in the OECD and other developing Asian countries. For example, in 2005, consumption of livestock products per person in Indonesia was around only 14 per cent of that in the United States and 15 per cent of that in Australia. This indicates that, if rapid income growth continues, there is significant scope for per person consumption of livestock products to increase in Indonesia.

3. major trends in Indonesia’s food production

agricultural policies aim to achieve self sufficiency

Over the 1980s and the early 1990s, agricultural production was stimulated through the subsidisation of key inputs and the land devoted to agricultural production increased. Commodity prices were maintained at artificially high levels through the state-owned enterprise, Bulog, which operated a buffer stock scheme and was the sole importer of rice, wheat and other agricultural commodities. Consequently, high self sufficiency for rice and sugar was achieved for most of this period (table 3).

As a condition of the IMF’s support package during the financial downturn, Bulog’s import rights over all products except rice were rescinded. However, while the sugar market was liberalised for a time, it has been heavily re-regulated since 2002. Import regulations remain an important feature of Indonesia’s self sufficiency policy.

declining agricultural productivity

Agricultural production, in volume terms, grew by 4 per cent a year between 1968 and 1992. Since then, however, growth has slowed to an average annual rate of 1 per cent.

For the period 1968 to 1992, growth in agricultural productivity, on average, is estimated to have been 2.6 per cent a year. Between 1992 and 2000, however, productivity contracted by an average 0.1 per cent a year (Fuglie 2004).

A number of factors contributed to the decline in productivity in the latter period. First, there were significant declines in both research and development and infrastructure expenditure for agriculture. Second, government subsidies on farm inputs such as fertilisers and pesticides were significantly reduced, especially in the period after the Asian financial downturn. Third, industrialisation and urbanisation led to increased competition for land and forced agricultural production onto marginal land. Fourth, lack of economies of scale proved to be a barrier for agricultural productivity. Around 75 per cent of farms in Indonesia are still less than one hectare in size (Suryhadi et al. 2006).


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Table 3: self sufficiency ratios for selected products, Indonesia

1990 1995 2000 2005

% % % %

cereals 96.3 87.7 88.1 91.5

– wheat 0.0 0.0 0.0 0.0

– rice 99.6 94.9 95.5 98.5

– maize 101.2 88.7 86.7 97.7

starchy roots 117.2 103.8 95.6 103.5

– cassava 120.8 104.4 95.9 104.5

– potatoes 104.9 104.1 83.1 90.6

– sweet potatoes 100.1 100.3 100.6 100.3

sugarcrops 117.8 100.9 82.6 67.0

pulses 92.0 78.5 89.6 92.8

oil crops 134.7 130.0 194.4 361.1

vegetables 101.3 99.6 96.7 96.0

fruit 102.6 104.1 105.0 101.1

meat 100.7 100.1 99.4 99.6

– bovine 99.5 97.2 94.7 95.9

– pig 101.3 101.4 104.2 102.3

– mutton and goat 99.6 98.9 99.0 99.5

– chicken 100.1 99.9 98.9 99.7

milk, whole, fresh 76.2 53.7 51.9 35.2

eggs 99.9 99.9 99.7 99.8

fish, seafood 112.2 116.0 112.1 118.9

– freshwater fish 102.5 105.3 106.3 106.4

Source: FAO (2007).

The government has recently introduced measures to improve agricultural productivity. In response to the high price of high yielding seeds that limits their widespread use, the government is expected to distribute free rice, corn and soybean seeds to farmers in 2007. Provided the program is implemented efficiently, making high quality seed available to farmers can be expected to have a positive impact on yields (Wagner and Meylinah 2007).

rice is the most important staple

Rice is by far the most important agricultural commodity in Indonesia. In 2005, rice made up around 23 per cent of total agricultural output in volume terms. Cassava and maize are the other two principal food crops in Indonesia, accounting for a further 13 per cent of total agricultural output in volume terms. Other important agricultural products include sugar cane, palm oil, and rubber with a total share of 19 per cent. Livestock products account for about 5 per cent of agricultural output in volume terms, with poultry being the largest component.

Rice production recorded relatively rapid increases before the mid-1990s (figure D). Since the early 1990s, rice production has increased more slowly. This slowdown in growth in rice production mainly reflects the limited availability of land and slow growth in yields. In line with the decline in total agricultural productivity, productivity


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Figure D: production of selected products, Indonesia

10

20

30

40

50

60

1970 1975 1980 1985 1990 1995 2000 2005

Mt

maize

rice

sugarcane

Source: FAO (2007).

in the rice industry declined by an average of 0.2 per cent a year over the period 1998 to 2001 (Indonesian Commercial Newsletter 2002).

maize

Growth in maize production increased gradually before slowing in the latter half of the 1990s. Production of maize was affected by the financial downturn as the demand for feed from the poultry industry declined. Production remained relatively stable during the early 2000s but has been increasing since 2003.

The majority of maize is grown on unirrigated, small farms with poor soil fertility and low productivity. Maize is largely grown on marginal land because of government support for rice. The support for rice production has increased competition for land and expanding rice production has pushed the production of secondary crops, including maize, to less productive areas (Swastika 2004).

sugar

The sugar industry has been supported under the goal of self sufficiency. Production increased in the 1970s and the early 1980s, mainly driven by an increase in the land devoted to sugar production (figure E). The majority of the rise in production was the result of an increasing number of small farms growing sugar cane.

Approximately 60 per cent of Indonesia’s sugar production occurs on the island of Java. There are some issues facing Indonesia’s sugar industry, particularly in Java, including:

• around 40 per cent of sugar cane in Java is grown on wet land where planting and cultivating cane is difficult so yields are low;


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• the average size of sugar cane farms in Java is less than half a hectare so there are few economies of scale;

• inefficient management practices are used on farms so they have lower productivity (Stapleton 2006). For example, in major sugar producing countries, sugar cane is pruned up to four or five times before replanting, while on Java, cane is pruned up to 12 times; and

• sugar mills are small and use outdated technology so they are inefficient.

Figure E: area planted to sugar cane, Indonesia

50

100

150

200

250

300

1970 1975 1980 1985 1990 1995 2000 2005

'000 ha

smallholder

state

private

Source: Ministry of Agriculture (2006).

growth in poultry production leads to higher feed demand

Poultry is the major livestock industry, and its output increased rapidly from the 1960s to the mid-1990s (figure F). The industry was severely affected by the Asian financial downturn in 1997 and 1998, as consumers switched from poultry products to cheaper sources of protein, such as tempeh and tofu (Hartono 1999). Since the Asian financial downturn, poultry output has resumed rapid growth, although outbreaks of avian influenza have the potential to adversely affect the poultry industry.

Maize is the principal feed used in poultry production in Indonesia. Between 1971 and 2001, consumption of maize increased by an average of 6.4 per cent a year (Swastika 2004). The strong performance of the poultry industry has translated into significant growth in the consumption of maize.


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figure F: poultry production, Indonesia

300

600

900

1200

1500

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

bird numbers (millions)

production (kt)

Source: FAO (2007).

4. agricultural imports in Indonesia

In the 1980s, when domestic agricultural production increased significantly, self sufficiency was achieved in rice and sugar and imports for many agricultural products were relatively low. Since the early 1990s, lower growth in agricultural production and higher domestic demand has resulted in an increase in imports.

By 2005, annual imports of wheat, sugar and cotton were around US$800 million, US$570 million and US$575 million respectively (figure G). Wheat imports, in value terms, accounted for 14 per cent of total agricultural imports in Indonesia, followed by dairy, oilseeds (of which soybeans are the most important component), fruit and beef. Over the period 1995 to 2005, the real value of dairy and sugar imports almost doubled. In contrast, rice imports were reduced significantly due to Indonesia’s restrictive import policy.

Australia, with its geographic proximity and efficient production systems, is the largest supplier of agricultural commodities to Indonesia (figure H). In 1995, Indonesia imported US$900 million (in 2005 dollars) of agricultural products from Australia. In 2005, imports from Australia were around US$1.05 billion, an increase of 17 per cent. Major imports from Australia include wheat, live cattle, dairy products, cotton, sugar and fruits.


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Figure G: major agricultural imports, Indonesia

200 400 600 800 1000 1200

wheat

sugar

cotton

dairy

oilseeds

fruit

vegetables

live cattle

rice

2005 US$m

2005

1995

Source: United Nations Statistics Division (2007b).

figure H: agricultural imports, by source, Indonesia

200

400

600

800

1000

1200

1400

Australia US Thailand EU China

2005 US$m

1995

2004

2005

Source: United Nations Statistics Division (2007b).

The United States is Indonesia’s second largest source of agricultural imports, with imports valued at around US$850 million in 2005 (around 15 per cent of Indonesia’s total agricultural imports). Major agricultural imports from the United States include cotton, soybean products, animal feed, dairy products and vegetables. Thailand is a major supplier of rice and fruit to Indonesia, accounting for around 9 per cent of Indonesia’s agricultural imports. China supplies around 6 per cent of Indonesia’s agricultural imports, and is the major supplier of fruit and vegetables.


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principal Australian exports to Indonesia

wheat

Australia is the major supplier of wheat to Indonesia. In 2005, Indonesia imported around 2.4 million tonnes of wheat from Australia, valued at US$445 million, and accounting for 56 per cent of trade (tables 4 and 5). Canada is Australia’s main competitor in the Indonesian market, with imports valued at US$165 million in 2005. Australian wheat exports to Indonesia have grown significantly over recent years, with the volume almost doubling between 1995 and 2005. Indonesia does not produce wheat domestically because of its unsuitable climatic conditions.

table 4: Australian exports to Indonesia, selected commodities

1995 2005

kt kt

wheat 1 228 2 440

sugar 40 270

cotton 82 137

live animals 89 95

dairy 23 65

fruits 26 17

vegetables 10 16 Source: United Nations Statistical Database (2007b).

Given economic and population growth in Indonesia, it is likely that Indonesia’s wheat imports will continue to increase. In particular, imports from Australia are expected to remain an important component of Indonesian wheat consumption. Australian wheat is considered to be of better colour than wheat from other countries for the production of noodles, which gives Australian wheat a competitive advantage over wheat from other sources (Landline 2003).

cotton

Australia is the second largest supplier of cotton to Indonesia (behind the United States), with imports valued at around US$122 million in 2005. This compares with cotton imports of around US$225 million from the United States. Because of its relatively cheap labour, Indonesia is the world’s ninth largest exporter of clothes and textiles and the largest in south east Asia.

The outlook for Australian cotton exports to Indonesia depends on the performance of the Indonesian textile industry. On world markets, Indonesia is facing increasing competition from China, the world’s largest textile exporter.

live animals and processed meat

Australia is the major supplier of live animals (mostly live cattle) to Indonesia. In 2005 Indonesia imported live cattle from Australia valued at US$110 million. Australia’s position as the dominant supplier of live cattle largely reflects its proximity to Indo-nesia, the ability of Australian cattle to acclimatise to tropical conditions in Indonesia,


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Table 5: agricultural imports, by source, Indonesia

1995 2005 market share 2005 2005 US$m 2005 US$m % Total Agricultural Imports 6 392 5 575 wheat – Australia 309 445 56 – Canada 238 165 21 – Argentina 130 74 9 – Ukraine na 58 7 – USA 161 25 3 cotton – USA 520 225 39 – Australia 248 122 21 – Brazil 14 51 9 – South Africa na 14 2 – Pakistan 29 12 2 dairy – Australia 56 126 24 – New Zealand 52 107 21 – EU 116 102 20 – USA 15 62 12 oilseeds – USA 155 256 73 sugar – Thailand 150 324 55 – Australia 21 74 13 – South Africa na 32 5 – Philippines na 13 2 fruit – China 16 99 46 – USA 37 39 18 – Thailand 6 34 15 – Australia 27 12 6 live cattle – Australia 143 110 100 beef meat – New Zealand 10 23 53 – Australia 7 19 44 vegetables – China 90 72 33 – Myanmar 21 7 3 – Australia 7 7 3 – Philippines 6 6 3 rice – Thailand 239 32 64 – Viet Nam 112 12 24

na Not available. Source: United Nations Statistical Database (2007b).


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and Australia’s disease free status. Indonesian demand for cattle from Australia has also been enhanced by Indonesia’s restrictions on cheaper frozen buffalo meat from India and frozen beef from Brazil, to avoid any risk of an incursion of foot and mouth disease (Martin, Mellor and Hooper 2007).

Indonesia imports a relatively small amount of beef compared with its live animal imports. The trade in live cattle has been driven by the need to ensure supplies of fresh meat in regional areas where refrigeration is limited (Martin et al. 2007).

Australia is the second largest supplier of beef to Indonesia (behind New Zealand), with imports valued at around US$43 million in 2005. In the same year, beef imports from Australia accounted for around 45 per cent of total beef imports in Indonesia.

dairy products

Indonesia produces a relatively small amount of milk at around 635 000 tonnes a year. This compares with annual production of over 10 million tonnes each in Australia and New Zealand.

Indonesia is 35 per cent self sufficient in milk and dairy products and relies on imports to meet its domestic consumption. Australia is the largest supplier of dairy products to Indonesia (valued at around US$126 million in 2005), followed by New Zealand (US$107 million) and the European Union (US$102 million). The main dairy products that Australia exports to Indonesia are skim milk powder and whole milk powder as well as cheese, whey and butter.

Given the current low consumption of milk and dairy products in Indonesia relative to other Asian countries there is the potential for further increases in consumption and higher imports over the longer term.

sugar

Australia is the second largest supplier of sugar to Indonesia (behind Thailand). In 2005, Indonesia imported US$324 million worth of sugar from Thailand and US$74 million from Australia. Imports from both countries have increased over the past several years as a result of growing sugar consumption in Indonesia. Indonesia imported almost 2 million tonnes of raw sugar in 2005, compared with imports of over 500 000 tonnes in 1995 (United Nations Statistics Database 2007b).

Without substantial improvements in the productivity of Indonesia’s sugar industry, import demand for sugar in Indonesia is likely to continue to increase.

fruit and vegetables

China is the largest supplier of fruit and vegetables to Indonesia. Other ASEAN countries, including Thailand and Myanmar, are also prominent exporters. Australia is a major supplier of fruit, including citrus, apples, pears and grapes, and vegetables,


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including potatoes and onions to Indonesia. In 2005, Australia exported a total of around 33 000 tonnes of fruit and vegetables to Indonesia.

Imports of Australian fruit and vegetables tend to supply the top end of the Indonesian market, such as hotels and restaurants. Australia is in a good position to benefit from opportunities which may arise from Indonesia’s growing tourist industry (Austrade 2007).

5. trade policy in Indonesia

The levels of tariff reported in this section refer to bound and applied tariffs. Bound Most Favoured Nation (MFN) tariffs are commitments made by WTO members and are the maximum allowable tariffs that a member country may levy on imports while applied tariffs are the actual levy used.

tariffs on agricultural imports

The most common bound tariff on agricultural imports is 40 per cent but bound tariffs range from 27 per cent to 210 per cent (table 6). The highest bound tariff of 210 per cent is on imports of milk and cream in solid forms, buttermilk and fats and oils derived from milk. Imports of milled rice fetch a bound tariff of 160 per cent while that for sugar is 95 per cent. The bound tariff for fresh or frozen meat of bovine animals, frozen cuts of sheep, fresh or dried oranges and fresh or chilled potatoes is 50 per cent.

Applied tariffs are generally lower than bound tariffs and the most common level is 5 per cent except for imports of certain fruit and vegetables which are subject to a 25 per cent tariff. Rice imports, when permitted, are taxed at 450 rupiah a kilogram. Similarly, imports of raw cane sugar are taxed at 550 rupiah a kilogram, and white and industrial grade sugar at 790 rupiah a kilogram.

import regulations can affect Australia’s agricultural exports

While the tariffs on many agricultural imports are low, import regulations are in place for some commodities that either prohibit the import of some products or increase the cost of exporting to Indonesia. The majority of these regulations are claimed to be required to maintain health and environmental standards, however some may be considered trade distorting. There is often uncertainty over the specific import requirements for some products or inconsistency with their application throughout Indonesia.

Together with a discussion on tariff rates, some of the key technical market access measures that may affect Australian agricultural exports to Indonesia are also highlighted in this section.


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table 6: bound and applied tariffs

bound applied

(unless otherwise stated) % %

cereals

– wheat (excludes meslin) 27 0

– rice 160 Rp 450/kg

cotton

– cotton neither carded nor combed 27 0

live animals

– live bovine animals (excludes buffaloes) 40 0

dairy products

– milk and cream, not concentrated or sweetened 40 5

– milk and cream, concentrated or sweetened a 210 5

– yogurt 40 10

– buttermilk 210 5

– butter 40 5

– fats and oils derived from milk 210 5

– cheese 40 5

natural honey 40 5

wheat flour 27 5

malt (excludes roasted) 40 5

meat of bovine animals

– fresh of chilled bovine meat, boneless 50 5

– frozen meat of bovine animals, boneless 50 5

– frozen edible bovine offals 40 5

sheep

– frozen cuts of sheep 50 5

sugar

– raw cane sugar 95 Rp 550/kg

– industrial grade and white sugar 95 Rp 790/kg

citrus fruit fresh or dried

– oranges 50 5

– mandarinsb 50 25

– lemons 40 5

fresh fruit

– grapes 40 5

– apples 50 5

– pears and quinces 40 5

vegetables, dried leguminous

– fresh or chilled potatoes b 50 25

– fresh or chilled onions 40 5

– fresh or chilled shallots b 40 25

– dried, shelled broad beans 40 5

fruit juices

– orange juice 60 5 or 10

– apple juice 40 5 or 10

a Milk and cream concentrated, other products are subject to a tariff of 10 per cent. b 25 per cent tariffs on

horticultural products to be cut to 10 per cent in 2010.

Sources: Ministry of Finance (2006); WTO (2006).


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wheat

Wheat imports in Indonesia have been deregulated. Bulog ceased to be the sole wheat importer after the Asian financial downturn. Bogasari flour mills have become the largest importer, producing around 75 per cent of Indonesia’s wheat flour requirements.

Durum and regular wheat are not subject to a tariff, while meslin (a mixture of wheat and other grains) is subject to a 5 per cent tariff. Wheat and meslin flour are both subject to a 5 per cent tariff.

cotton

Cotton imports are not subject to trade regulations because of the importance of cotton as an input into the textile and garment manufacturing industry.

Indonesia is considering a proposal that requires all imports containing genetically modified products to be labelled. This requirement however is yet to be implemented (ASEAN 2007). This development may be of relevance to Australian cotton because 80 per cent of cotton grown in Australia is of GM varieties. At this stage, it is unclear whether this labelling requirement will have any impact on Australian cotton exports to Indonesia.

live animals and processed meat

There is no tariff on imports of live animals, and the tariff on processed meat products is 5 per cent.

A variety of meat offal products are prohibited imports into Indonesia. There has been considerable uncertainty in terms of Indonesia’s approach in developing and implementing these regulations. It is expected that such a policy would be supported by a scientific risk assessment, and that the same requirements would be applied to offals produced domestically.

Processed meat products are also subject to trade regulations. Importers of meat products must obtain a ‘letter of recommendation’ from Indonesia’s government.

Indonesian customs officials use a schedule of arbitrary ‘check prices’ rather than the actual transaction price of imported food products when assessing tariffs. The practice of check prices aims to control illegal behaviour such as dumping inferior goods and to minimise under-invoicing whereby local importers deliberately underreport the value of imports to evade a portion of ad valorem taxes. However, there is little transparency on how check prices are determined. Check prices are sometimes well above the prevailing international prices (USTR 2007).

dairy products

Despite the very high level of the bound tariff, the applied tariff on most dairy products is 5 per cent, with the exception of some processed products such as yoghurt and some concentrated milk and cream which are subject to a higher applied tariff of 10 per cent.


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Dairy imports face a number of regulations in Indonesia. Finished milk products can only be imported by companies appointed by Indonesia’s government.

All dairy products imported into Indonesia must have their label pre-approved. This requirement is applied to both consumer packs and bulk products for further processing. It results in additional administrative requirements, increased costs and reduced flexibility for bulk products which may ultimately be destined for a variety of uses. Indonesia also requires that all imports of dairy products be accompanied by original halal certificates, a requirement that could also affect the ability to import.

Imports of dairy products, like all food imports, are tested by the Agency for Drug and Food Control (Badan Pengawas Obat dan Makanan), a process that is reported to be complex, time consuming and costly (USTR 2007). Tests require foreign suppliers to provide extremely detailed information on ingredients and processing that may infringe upon proprietary business information. The testing fees are expensive, ranging from US$120 to US$1200 per product, and are borne by foreign food suppliers.

sugar

Apart from high tariffs, sugar imports are also regulated by import licensing requirements, which act as an implicit import barrier.

In 2002, the Ministry of Industry and Trade implemented an import licensing scheme that limited the importation of industrial grade sugar and white sugar. Under the scheme, licenses for imports of white sugar were reallocated from 800 private importers to five importers. Three of them are state-owned sugar plantations and mills, which account for more than 60 per cent of domestic white sugar production. The remaining two importers are two state-owned trading firms (Stapleton 2006). With their exclusive licenses, these institutions can import sugar at low prices and sell it at higher prices in the domestic market.

Sugar import licenses are not tradeable or transferable, thereby preventing potential sugar importers from participating in the market. Allocating nontransferable licenses to state owned enterprises provides them with exclusive import rights, and protects them from competition from other sugar trading institutions.

In addition, the Ministry of Industry and Trade allows sugar imports for only a four month period outside Indonesia’s milling season, provided that the Indonesian Sugar Council considers domestic production as inadequate (Stapleton 2006).

fruit and vegetables

Applied tariffs on fruit and vegetables are generally 5 per cent, with some exceptions. Mangoes and mandarins are subject to a 25 per cent tariff, while shallots and potatoes face a 25 per cent tariff.


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For fruit and vegetables from ASEAN countries and China, however, there are few tariffs because of the preferential tariff agreements among these countries. Such arrangements have promoted a strong presence of fruit and vegetables from ASEAN countries and China in Indonesia (ASEAN 2007).

In April 2007, Indonesia proposed regulations for food safety control for fresh foods of plant origin including fruits, vegetables and grains. The proposed regulations, if implemented, would result in excessive requirements for testing and certification of all plant products, despite them representing a very low food safety risk.

Indonesia’s involvement in free trade agreements

Indonesia, through its membership of ASEAN, is party to a number of free trade agreements (FTAs), such as the ASEAN FTA, China–ASEAN FTA, Korea–ASEAN 9 FTA as well as the Japan–ASEAN, India–ASEAN, Australia–New Zealand–ASEAN and EU–ASEAN FTAs that are currently under negotiation. In August 2007, Indonesia finalised an Economic Partnership Agreement with Japan (table 7).

table 7: free trade agreements involving Indonesia

agreement implemented details

ASEAN 1992 Six most developed ASEAN membersa to cut all tariffs to 0–5% except for highly sensitive products by 2003. Same tariff cuts for Vietnam by 2006, Laos and Myanmar by 2008 and Cambodia by 2010. Nontariff barriers to be reduced.

China–ASEAN 2004 Tariffs on 600 agricultural products cut to zero in 2004. By 2010, tariffs on over 7000 commodities, including agricultural, merchandise and services, to be removed by six most developed ASEAN members. Less developed members have until 2015. Nontariff barriers to be reduced.

Korea–ASEAN 9 2007 Agreement covers merchandise, services and investment. Thailand rejected agreement because of lack of agricultural liberalisation.

Japan–Indonesia 2008 Japan–Indonesia Economic Partnership Agreement finalised in August 2007.

Japan–ASEAN under negotiation

Agreement on trade in goods expected to be finalised late 2007.

India–ASEAN under negotiation

Talks have been stalled since 2006, with agriculture the main sticking point.

EU–ASEAN under negotiation

Talks commenced in 2007.

Australia–New Zealand–ASEAN

under negotiation

Talks commenced in 2005. Agreement expected to be fully implemented by 2015.

a The six most developed members of ASEAN are Brunei, Indonesia, Malaysia, Philippines, Thailand and Singapore.

Agreements between countries which reduce the trade barriers faced by agricultural

products assist agricultural exporters in those countries. The lower tariff and nontariff

barriers that certain agricultural exports from ASEAN nations and China face because

of agreements with Indonesia put products from these countries at an advantage

compared to products from countries without such agreements. As noted above, talks

have commenced regarding an Australia–New Zealand–ASEAN FTA. Australia, as the


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largest exporter of agricultural products to Indonesia, can be expected to gain from such

an agreement; however the size of the gain will depend on how comprehensive

elimination of trade barriers is by those involved.

6. benefits of agricultural trade reforms in Indonesia

Indonesia’s economy has been growing strongly since the Asian financial downturn and more resources have been shifted from agriculture to manufacturing and services. With continued income and population growth, food demand in Indonesia, especially demand for wheat based and livestock products, sugar, fruit and vegetables, is expected to increase accordingly. Higher and cheaper food imports will play a crucial role in meeting this increase in domestic consumption in Indonesia.

Despite relatively high bound tariffs, applied tariffs on agricultural products in Indonesia are generally low. However, some import regulations impose an additional burden on foreign suppliers. Reforms to import regulations in Indonesia would lead to greater market access for imports and increased availability of food varieties to meet domestic consumption. Under this scenario, domestic resources in Indonesia could be utilised more efficiently elsewhere to sustain high economic growth. Agricultural trade reforms would also encourage farmers to increase productivity and/or diversify into other more profitable activities.

Because of its geographic proximity, Australia can play an important role in meeting Indonesia’s food demand. Australia’s agricultural resources will provide mutual benefits to both Indonesia and Australia from advancing bilateral agricultural trade.

references

ASEAN 2007, Non Tariff Measures Database, Jakarta (aseansec.org/16355.htm).

Austrade 2007, Agribusiness to Indonesia, Canberra (austrade.gov.au/Agribusiness-to-Indonesia/default.aspx).

FAO (Food and Agriculture Organisation of the United Nations) 2007, FAOStat Database, Rome (http://faostat.fao.org/default.aspx).

Fuglie, K. O. 2004, ‘Productivity growth in Indonesian agriculture: 1961–2000’, Bulletin of Indonesian Economic Studies, vol. 40, no. 2, pp. 209–25.

Hartono, H. S. 1999, ‘Indonesia oilseeds and products: soybeans and products update 1999’, GAIN report, report no. ID9072, United States Department of Agriculture, Washington DC.

Indonesian Commercial Newsletter 2002, ‘Dependency of rice imports likely to continue’, Indonesian Commercial Newsletter, vol. 29, issue 334.

Landline 2003, ‘Indonesia welcomes Australia’s bumper wheat harvest’, Australian Broadcasting Corporation (abc.net.au/landline/stories/s1001471.htm).


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Lee, D.S. and Kennedy, P.L. 2006, ‘A political economic analysis of US rice export programs to Japan and South Korea: a game theoretic approach’, American Journal of Agricultural Economics, vol. 88, no. 2, pp. 420–31.

Martin, P., Mellor, T.V. and Hooper, S. 2007, Live Cattle Export Trade: Importance to Northern and Southern Beef Industries, ABARE, Canberra.

Mitchell, D.O., Ingco, M. and Duncan, R. 1997, The World Food Outlook, Cambridge University Press.

Ministry of Agriculture, Indonesia 2006, Estate Crops Commodities Outlook, Jakarta.

Ministry of Finance, Indonesia 2006, Indonesian Customs Tariff Book 2007, Jakarta.

Stapleton, T. 2006, ‘Institutional arrangements of Indonesia’s sugar trade policy’, Bulletin of Indonesian Economic Studies, vol. 42, no. 1, pp. 95–103.

Suryhadi, A., Suryadarma, D., Sumarto, S. and Molyneaux, J. 2006, Agricultural Demand Linkages and Growth Multiplier in Rural Indonesia, SMERU Working Paper, SMERU Research Institute, Jakarta.

Swastika, D. 2004, ‘Developing maize for improving poor farmers’ income in Indonesia’, CGPRT Flash, vol. 2, no. 4, p. 1.

United Nations Department of Economic and Social Affairs 2007, The 2006 Revision Population Database, New York (esa.un.org/unpp).

United Nations Statistical Division 2007a, National Accounts Main Aggregates

Database, New York (unstats.un.org/unsd/snaama/selectionbasicFast.asp).

——2007b, UN Commodity Trade Statistics Database (UN Comtrade), New York (comtrade.un.org/db/default.aspx).

USTR (United States Trade Representative) 2007, ‘Indonesia’, 2007 National Trade Estimate Report on Foreign Trade Barriers, Washington DC, pp. 285–96.

Wagner, E. and Meylinah, S. 2007, Indonesia Grain and Feed: Grain and Feed Annual 2007, GAIN, Report no. ID7011, US Department of Agriculture, Washington DC.

Warr, P. 2005, ‘Food policy and poverty in Indonesia: a general equilibrium analysis’, Australian Journal of Agricultural and Resource Economics, vol. 49, pp. 429451.

WTO (World Trade Organisation) 2006, Consolidated Tariff Schedule Database, Geneva.

Agriculture in Indonesiadata.daff.gov.au/brs/data/warehouse/pe_abarebrs... · consumption of major food products with other countries reveals some interesting consumption patterns

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