CHALLENGES FACED BY THE PRESIDENT IN FIRST 100-DAY PROGRAM- November 2009

INDONESIAN COMMERCIAL NEWSLETTER

December 2009

AGRIBUSINESS OUTLOOK 2010

Current Issue

The country's agribusiness sector still faced the adverse effects of the global financial crisis with weak demand in international markets for commodities such as rubber. Weak demand resulted in shrinking production. However, the condition is expected to improve in 2010.

The Indonesian Cacao Association (Askindo) predicted an increase in the country's production of cacao to 500,000 tons in 2010 from an estimated 480,000 tons in 2009. The increase in output came with improve productivity as a result of intensification program, rehabilitation and replanting.

The increase in production resulted in an increase in exports. In 2010, exports of cacao are forecast to rise to 380,000 tons, up from 350,000 tons in 2009. The increase in output is also boosted by growing demand in international market such as in Malaysia. In the New York Commodity Exchange the price of cacao reached US$ 3,100 per ton.

Meanwhile, the price of crude palm oil (CPO) was already on the rise since late 2009 and the trend is expected to continue this year. Similar trend is recorded for other plantation cash crops. The improvement in the market of the commodities is expected to attract investors to doing business in the plantation sector. The increase in the price of CPO followed a shrinking production of that commodity and soybean oil as the main basic materials for vegetable oils in the world.

The Association of Indonesian Palm Oil Companies (GAPKI) sets production target for CPO at 20.9 million tons in 2010, up from 19.4 million tons in 2009. In the past three years Indonesia has become the world's largest producer of CPO replacing Malaysia. Indonesia and Malaysia dominate 85% the world's palm oil market.

Indonesia is also a major exporter of a number of other plantation commodities including coffee and rubber, the prices of which have also tended to increase.

Agribusiness sector down 32.2% in 2009

In general a decline was recorded for the agribusiness sector in 2009 with growth rate falling to 3.75% in the second quarter of 2009 from 5.53% in the same period in 2008

The unfavorable condition in 2009 resulted in a setback in the exports of a number of primary commodities including palm oil, rubber, coffee and cacao.

Late that year, however, the prices of a number of the commodities began to pick up such as palm oil demand for which rose from bio-diesel producers. In addition many consumers began to favor palm oil over soybean oil especially after the discovery of transfat content which could cause health hazard in soybean oil. Shrinking supplies also contributed to increase in prices.

The price of rubber rose to follow the increase in the price of synthetic rubber as a result of the oil price hike.

In 2009, the country's main export commodities from the agribusiness sector include palm oil, rubber, cacao, coffee, and tea.

In the first nine months of 2009, exports of palm oil reached 14.9 million tons valued at US$ 7.7 billion, rubber 1.5 million tons valued at US$ 2.3 billion, cacao 396 thousand tons valued at US$ 986 million and coffee 399 thousand tons valued at US$ 644 million.

Prices to rise in 2010

CPO prices to hit US$ 800 per ton

Based on data from the Bloomberg, the CPO price in the Rotterdam Commodity Exchange late 2009 was USS 757.5 per ton or up 40.3% from US$ 540 early that year. The price of that commodity peaked at US$ 1,395 per ton on March 3, 2008, before sliding to US$435 per ton on 29 October. Profit taking caused the decline in price. In addition, CPO production and demand from India and China dropped toward the end of 2009.

In 2010, the price of CPO will still be determined by the crude oil price developments. In general the price of CPO is based on the spot price in Rotterdam. GAPKI predicted the price of CPO in international market will be around US$ 800 in the first quarter of 2010. CPO stocks in 2010 are expected to fall from earlier estimate of 4.45 million tons to 3.25 million tons, resulting in price rising higher.

The recovery of the US, Japanese and European economies will also contribute to increase in the price of commodities CPO. Demand for bio-fuel is expected to raise strengthening demand for palm oil. However, in April the price of CPO is forecast to begin to fall with growing supply.

GAPKI estimates that the country's CPO production in 2010 will reach 20.9 million tons or an increase of 7.7% from 2009's level of 19.4 million tons. Meanwhile, the world's CPO production is predicted to reach 47 million tons in 2010 or an increase of 6% from 2009's production of 44.35 million tons. Indonesia will maintain lead in CPO production, followed by Malaysia with production of 17.9 million tons.

The increase in the CPO price will bring about a proportional rise in the prices of cooking oil. The abolition of subsidy on value added tax (VAT) in the form of VAT paid by the government, will also contribute to increase in the cooking oil price. In the 2010, state budget there is no subsidy on VAT for cooking oil in bulk resulting a 10% hike in the price of cooking oil in January.

The government has set export reference price (HPE) for CPO at US$595 per ton. The HPE for kernel palm oil is US$ 259 per ton, crude olein US$ 644 and crude palm kernel oil US$ 666 per tons. See the following table.

Price of cacao to reach US$ 3,600 per ton

The Indonesian Cacao Association (Askindo) said the international market is still open for cacao commodity. The price of cacao beans in 2010 is predicted to rise to a peak in the last two decade at US$ 3.300 - US$ 3.600 per ton, from US$ 3,250 per ton in 2009s.

The increase in the price of cacao beans in international market followed a deficit of around 100,000 tons in supply. The world's production of 3.3 million tons will not be enough to meet requirement estimated at 3.4 million tons in 2010. The shortfall in supply could even be larger at 200,000 tons with the recovery of the US and European economies that dominate 85% of the world's cacao requirement. Meanwhile, cacao production in Africa, which has been the largest supplier of cacao beans, has declined.

The world's largest producer of cacao beans is the Ivory Coast, followed by Ghana and Indonesia. The Ivory Coast's production averages 1.35 million tons per year; Ghana's production averages 700,000 tons. The quality of Indonesian cacao is relatively low and need improvement to be more competitive.

In 2010, the country's production of cacao is predicted to reach 776,000 tons or an increase of 2.4% from 758,000 tons in 2009. The increase in production followed improvement in productivity especially in Sulawesi. In addition, the government has launched intensification program by offering assistance in fertilizer and maintenance of 60,000 hectares of cacao plantations with a budget of Rp 1 trillion. ......

Price of natural rubber to reach around US$ 3 per kg

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