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INDONESIAN COMMERCIAL NEWSLETTER
June  2009

FOCUS

CHALLENGES TO BE FACED IN MAINTAINING FOOD SELF SUFFICIENCY


Amid the global crisis, the world's greater concern is how to protect strategic sectors including food, fuel and financial sectors from its devastating impact. The three sectors concern the very basic necessity of human life.

Demand for food would not shrink despite protracting crisis. Any increase in the prices of food products like rice and corn in the world market has always triggered an uproar affecting social and political stability. Aware of the strategic importance of food sector, all governments of country have always been extra cautious in maintaining stability in food supply at all cost.

Indonesia's economy still had enough steam to grow when many other economies recorded contraction after the crisis that culminated in the last quarter of 2008. The country could whether the crisis partly owing to self sufficiency in staple food rice and other essential goods like corn and a cooking oil when the prices of the commodities were soaring in the world market. When food prices surged in the world market, the prices on the domestic market grew only moderately as supplies is sufficiently available in the country.  The condition of the economy in general, therefore, was not badly affected.

It was different from the condition 1998. When the monetary crisis hit that year marked with the rupiah fall, the country's rice production plunged. Rice production fell after long drought in 2007 worsening the condition. The rupiah fall caused panic triggering run on bank that crippled the country's banking sector.

Currently the price of rice, sugar, wheat flour and cooking oil fluctuated. The prices tended to increase but not drastically. The price hikes is partly caused by dwindling support from natural resources. Lands are no longer available easily for farm expansion to match growing population. In addition demand for preservation of natural resources is growing adding to the cost of producing food products such as in the case of palm oil.  Indonesia is facing   growing criticism for expanding oil palm plantations at the expense of the country's tropical forests. Europe has asked Indonesia to produce CPO through eco-friendly process. Rising price of fertilizers following the soaring oil prices, added to production cost of farming.

Self sufficiency in food products, therefore, has to be maintained as instability in food supply would have bad impact on other economic sector.

Challenges faced in maintaining food self sufficiency

Almost all countries have shown concern with problem in food supply. Many countries are now more serious in improving food resilience. Fluctuations have often hit the market of food products like rice, corn, soybeans and wheat grains.  Rice stability depends much on success in harvest in major producing countries like India, Thailand, and Vietnam.

When rice supplies decline or when main producers cut exports, the price of that commodity will increase and when market demand decline the price would fall. Balance in the rice market is determined by supply from main producers and demand from main consumers. When the crisis hit the world toward the end of 2008, following soaring oil prices, he prices of rice surged as main producers like India cut exports on fear of scarcity in supply in international market. When the price of rice scaled up close to US$1,000 per ton from the normal level of US$400, Indonesia was lucky that it did not need to import that commodity. In previous years the country was one of the world's largest importers of rice. The country was spared from the world's food problem as it just achieved self sufficiency in rice supply. The Philippines, that currently needs to import up to 2 million tons of rice a year is in big problem as apart from the price is high supply is scarce.

However, it is not easy for Indonesia to take advantage of the high price of rice in the world market. The country still needs to strengthen its stocks to guarantee domestic supply in time of scarcity. In addition, major producers India and Vietnam have reported good harvest. Major consumer like the Philippines has been able to cut imports as it has succeeded in increasing production.

Good price had encouraged the farmers to boost production. But now the price has declined and farmers began to face difficulty in disposing of their rice. If price stability could not be maintained at level profitable for farmers, they may be discouraged to grow rice. As a result the rice self sufficiency may not last long.

The country with a population the fourth largest in the world will need large stock of food products. A 5% shortfall in supply would mean the need to import 2 million tons of rice or 20% of the world's total exports of 10 million tons a year. Therefore, in order to improve the economic resilience, food self sufficiency is vital. The country needs to strengthen and sustain self sufficiency before embarking on plan to export rice. The same policy should be adopted with other food crops like corn, soybeans and wheat grains. The country has also only recently succeeded in achieving self sufficiency in corn supply. The use of food products to generate energy will also add to the challenge in seeking or maintaining food self sufficiency.


Food stuff for energy

The soaring oil prices that peaked at more than US$140 a barrels in July, 2008, caused panic in the energy sector. Oil consumers countries began to seriously consider the use of alternative fuel or energy. Bio-fuel from vegetable oils such as palm oil, corn oil soybean oil, etc. began to gain importance. The prices of the food commodities, therefore, rose proportionally. The food price hikes were also caused by an increase in production and transport costs.

The plans to generate energy from food crop products like CPO would increase demand for the products but at the same time could add to the threat to self sufficiency in food supply.

That problem should be seriously addressed by the government that energy requirement should not cause problem in food supply. A policy should be adopted to benefit both food crop producers while not destabilize food market.

The agriculture ministry, mining and energy ministry and industry ministry, which have each own blue print for energy development, should hold coordination between them.

Based on the   blue print  of the energy and mineral resources ministry,  5% of oil fuel consumption  will be substituted with alternative fuels like bio-fuels including bio-diesel and bio-ethanol in 2016-2025.  Around 700 million liters of bio-diesel and bio-ethanol will be needed in 2016, up to 900 million liters in 2025.

Without coordination between the ministries especially between the agriculture ministry and the two other agencies, it is feared the implementation of the program could fail over insufficient supply of the basic materials. Farm products as food products could not be sold at too high prices but as energy basic material, the prices could be higher but competitive.

Indonesia has high potential to be a major supplier of bio-fuel. The country is the word's largest producer of CPO, one of the main feedstock for bio-fuels.


Conclusion

Self sufficiency in rice supply in 2008 contributed to stability of food market in Indonesia. The self sufficiency is more significant at a time when the world including the country is hit by the global financial crisis.


Many countries and observers lauded Indonesia for its success in weathering the impact of the crisis. The   success in achieving self sufficiency in rice will give rise to new challenge as well new opportunities. Farmers are encouraged to boost production but he market could not absorb all production.


Opportunity came in generating energy from food commodities. With right policy the challenge could be turned into opportunity.


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ICN - June  2009

FOCUS: CHALLENGES TO BE FACED IN MAINTAINING FOOD SELF SUFFICIENCY
  • Challenges faced in maintaining food self sufficiency
  • Food stuff for energy
  • Conclusion

INDUSTRY : INSTANT NOODLES INDUSTRY IN SHARP COMPETITION
  • Backgrounds        
  • Production capacity and producers
  • Production up  7.7%
  • Supply of wheat flour
  • Marketing aspect
  • Market Value of Instant Noodles around Rp14 trillion
  • Tight competition
  • Costs of advertisements and promotion reach Rp 200 billion
  • Expansion by large producers
  • Exports        
  • Imports up
  • Consumption up
  • Distribution systems        
  • Prices
  • Conclusion and prospects

INDUSTRY : INDONESIA'S BISCUIT INDUSTRY GROWS 8.8% IN 2008
  • Backgrounds
  • Production capacity growing
  • Main players in biscuit industry in Indonesia
  • Basic Material Aspect
  • Foreign domination
  • Exports up        
  • Imports growing
  • Consumption up 8.38% per year
  • Marketing aspect
  • Competition        
  • Conclusion and prospects