RIRDC Short Report:
Indonesia’s Agribusiness Policies
and Opportunities for Australian
Trade and Investment

This is a summary of a number of papers available from Dr Ray Trewin, Division of Economics, RSPAS, ANU, Telephone (02) 6249 0134 or fax (02) 6249 0767.

Australian agricultural producers seeking export and investment opportunities should look north to the promising agribusiness market in Indonesia, according to a research project funded by the Rural Industries Research and Development Corporation (RIRDC).

The findings of the research were formed before the recent economic crisis in Indonesia. However, they still hold in the medium terms when factors such as the liquidity, exchange rate, prices and incomes return to trend. The opportunities will probably be even more promising then given the recent reforms in tariffs, monopoly arrangements and the like. Even in the short term some opportunities have improved, for example in investment where the Australian dollar buys far more now in terms of Indonesian rupiah investment. However, the economic crisis makes it even more imperative that Australian agribusiness improves its competitiveness in such aspects as transport if it is to be a player in a leaner Indonesian market.

While the potential exists at all levels of agribusiness in Indonesia, currently most opportunities are for unprocessed rural exports.

The report by Dr Ray Trewin, Division of Economics, Research School of Pacific and Asian Studies at the Australian National University says that liberalisation of Indonesian policies - especially in the tariffs area - also would improve Australia's processed agribusiness exports.

The report says Australia's opportunities will increase if it can improve its productivity and become more competitive in agribusiness. An example given is labour arrangements in meat processing. Competitiveness is an international concept and competitiveness in processed primary products can not be achieved by imposing unnecessary limitations on raw product exports. The report says this costs Australia market share, as in Indonesia these markets are often separate, with current examples being in meat where live product goes mainly to the wet markets and processed product to the supermarkets.

Also, Australia needs to look more closely at investment opportunities, now these are opened up in Indonesia. The report says Australian industries need to use considerable vision in assessing trade and investment opportunities in Indonesia. There are advantages in Australia's "joint benefit" approach with Indonesia. An example could be joint involvement in the Australian live cattle trade and meat processing in Indonesia, in contrast to just concentrating on processed meat exports like some other countries.

Because of such factors as increasing incomes and urbanisation (see Figure 1) Indonesian food consumption has been increasing and changing in composition from cereal staples such as rice to higher value-added products like meats, especially chicken.

Figure 1. Share of Indonesia food expenditure by degree of processing

Note:
a. Primary : rice, corn, cassava, fish, fruits and vegetables
b. Secondary : flour, meats, sugar, milk, tempe, tahu, refined vegetables oil, spices c. Tertiary : bread, biscuits, processed dairy and meat products, canned products, processed meats, and prepared foods

Source: Average Per Capita Weekly Consumption and Expenditure by Food items, in National Socio-economic Survey

But Indonesia's per capita consumption of these products remains relatively low. This suggests a large potential growth, with more analysis needed to provide a better awareness of the potential market opportunities.

Consumption changes are more evident in Indonesia's fast growing middle class which is already larger than Australia's total population. Despite this, Indonesia's average consumption levels in some high value products, such as wheat and meat products, are relatively low (and correspondingly that for staples such as rice relatively high) when compared to similarly developed neighbouring countries, even after taking into account any income differentials (see Figure 2).

Figure 2. Apparent per capita consumption, 1991
Source: East Asian Analytical Unit (1994)

These relatively low consumption levels appear the result of policy constraints on some consumption, production and trade, not other reasons such as tastes. For example, the operations of BULOG, Indonesia's logistic agency, have had direct impact on wheat and feed grain imports, limiting the consumption of these grains, and the production and consumption of associated products such as meats.

The impact is evident from comparison of self-sufficiency ratios for some of these products for Indonesia and the Philippines, a comparably endowed neighbour (see Figure 3). Increases in Indonesia's grain production appear mainly from increases in yields whereas those in livestock are from increases in livestock numbers.

Agricultural production has declining relative to demand, with imports increasing rapidly despite an exchange rate policy that was aimed at making exports relatively more attractive and policies which restricted trade and trade-facilitating investment opportunities (see Figure 4). It was also declining relative to other sectors.

However, there is still a large rural population that needs to be meaningfully employed so there has been emphasis away from higher rice production - once "self-sufficiency" had been achieved - to greater diversification. A threshold for changes to Indonesian policies is a fall in overall rice consumption. This diversification should be especially towards products in high demand and suiting Indonesia's resource endowments - such as intensive meats, which offer higher incomes as well as more regional agribusiness opportunities.

Grain prices have increased more slowly than rudiment meat prices and poultry prices have levelled off then fallen since 1985.

There are strong linkages with key policies outside specific commodities areas, for example the rice self-sufficiency policy dominated all commodities. This domination has been evident in terms of priority for production inputs such as irrigated lands and in terms of BULOG's operations.

High institutional involvement across all agribusiness components from inputs to support services, and high levels of concentration, have been evident throughout Indonesian agribusiness.

Moreover, BULOG appeared to be trying to maintain its influence through monopoly-to-monopoly arrangements with processors (e.g. wheat milling and noodle production). The different approaches of the Australian Wheat Board and the Australian Dairy Corporation to the Indonesian market were due in part to the relative influence of BULOG on their operations.

Large investment would have been required to meet official production forecasts but investment has been restricted in many agribusiness areas, through for example, licensing requirements. Joint ventures were favoured and the government put priority on small scale operations in conjunction with large operators through the so-called 'nucleus-plasma' schemes. Also, the Indonesian Government favoured investment near areas of production.

From an Australian policy perspective, the report says Australian raw product exports should not be inhibited by measures seeking to counter apparent labour market disadvantages in processing meat domestically. Such an approach would impose high costs in terms of lost livestock trade with little benefits in terms of the overall meat trade. However, this situation could change with improvements in the Indonesian feedlotting and meat processing systems, which could be accelerated by the economic crisis and the push to get more value added in Rupiah terms.

Indonesia's future patterns of consumption, production and trade need to be considered in terms of underlying assumptions on trends in incomes, productivity and other relevant factors, and on whether current policies will be maintained or changed.

BAPPENAS, Indonesia's planning agency, produces five-year development plan targets for these variables. The importance of these targets is not the numbers per se but the priorities they reveal. Greater growth was planned for poultry and dairy products than for extensive meats.

Apart from these formal government plans, a number of independent projections have been produced. They showed a marked increase in the consumption of animal feeds and associated products, and although production was projected to increase in some of these products, in contrast to a slowdown in the production of food crops, overall consumption growth was generally stronger and imports of products such as beef and milk were expected to increase.