Brunei : Agriculture remains a key component of Indonesia’s economy

Hopes are rising that long-awaited reforms of national-owned enterprises and government initiatives can help Indonesia’s agriculture sector rebound from a year of commodity price shocks, which have taken their toll on the country’s biggest exports, particularly palm oil.

Indonesia tops the world inventory for crude palm oil (CPO) production and is as well a major producer of several other commodities, inclunding rubber, cocoa and coffee. Confidence amongst palm oil and rubber producers plummeted this summer, at the same time as prices hit near five-year lows. With increase at a standstill across much of the agricultural sector, industry insiders are calling on Jakarta to do additional to help.

Streamlining processes

Agriculture remains a key component of Indonesia’s economy−with approximately 38m workers − largely due to a surge in crude palm oil (CPO) production during the last decade. The sector made up 14.4% of Indonesia’s total GDP in 2013, worth Rp1.31qrn ($131.1bn), similar to 14.5% the previous year, according to Statistics Indonesia (BPS).

However, a reduction in land available for farming, combined with lower productivity, led to agriculture’s in general contribution to GDP slipping from 15.2% a decade before.

Exports of CPO and CPO derived products fell 1.75% to 15m tonnes in the initial nine months of 2014, compared with the same period last year. Slowing economic increase in China and India resulted in reduced palm oil request, prompting prices to fall to a $712 per tonne in September, down 5.4% from the previous month.

Jakarta plans to introduce several initiatives aimed at reviving the CPO sector, inclunding measures which will streamline the process governing investment for the industry, according to Secretary General for the Ministry of Agriculture, Herry Priyono.

“We want to increase coordination part public bodies to create a one-stop-shop for investors, reducing bureaucracy and increasing in general efficiencies,” Priyono told OBG at the International Palm Oil Conference in Bandung at the end of November. “We as well want to help investors with the land acquisition procedure, as this is becoming one of the major hurdles for industry increase.”

Critics say the CPO industry has long been stifled by imbalances in a system dominated by national-owned enterprises, which still relies on smallholder farms for 40% of production. A September editorial in the Jakarta Post described the government as having: “no business involving itself in so a lot of kinds of businesses that could be conducted efficiently by private firms”.

Performance power

In a significant move aimed at reforming national-owned agricultural enterprises, Jakarta announced plans in October to set up two holding companies, which will oversee Indonesia’s plantation and forestry-based operations.

PT Perkebunan Nusantara (PTPN) III will take responsibility for the 14 national plantation firms that cultivate oil palm, rubber, sugar cane and tea, while Perhutani is charged with overseeing the government’s six national forestry companies. The two enterprises are set to rank part the major plantation and forestry-based business groups in the world, with Perhutani responsible for 2.5m ha, inclunding 1.02m ha of teak forest, in Java and Madura.

Fadhil Hasan, Executive Director of the Indonesian Palm Oil Producers Association, told OBG that the unification of national-owned enterprises and plantation companies into PTPN III is long overdue. “Having finally happened, this will essentially improve the financial performance and strength of Indonesia’s local industry, as assets, resources, and procurements will be better leveraged,” he said.

The restructuring comes as request for CPO from bio-diesel programmes is expected to provide the industry with a boost next year, while analysts see CPO prices rising in the initial quarter of 2015.

Contrasting fortunes

Rubber is an extra key Indonesian crop that has been hit by a decline in prices over the completed few years. Falling request from China saw rubber futures drop 28% in 2014 to the lowest level in nearly five years. Indonesia is the world’s second-major natural rubber producer, but request has not matched the surge in supply over the completed three years. Figures from the Trade Ministry show that exports of rubber products rose by just 4.9% from 2009 to $629m last year.

With the vast majority of smallholders feeling the pinch of lower rubber prices in Indonesia, along with top producers Malaysia and Thailand, there is a threat that farmers may choose additional lucrative crops as they struggle to maintain profits.

Moenardji Soedargo, who sits on the board of GAPKINDO (Indonesian Rubber Association), told OBG that prices were being driven by sentiment rather than fundamentals. “This has a deep impact on small holders and all industry should do additional to prevent such price volatility in the rubber industry,” he said. Soedargo called on the government to highlight areas of economic activity where rubber could be utilised, such as the durability of road construction works and dock fenders for seaports.