AGRICULTURE BACK AGAIN AS ECONOMIC BACKBONE- April 2009

INDONESIAN COMMERCIAL NEWSLETTER

April 2009

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AGRICULTURE BACK AGAIN AS ECONOMIC BACKBONE

Agriculture saves the economy

When the manufacturing industry was badly hit by the monetary crisis toward the end of the 1990s, Indonesia relied on exports of primary commodities, which are considered to have low added value to prop up its ailing economy. Many were of the opinion that it was no longer time to sell raw materials. They questioned the policy that the country, in process of industrialization, continues to sell primary commodities.

Neighboring countries in ASEAN have moved far ahead in developing their manufacturing industry, processing their raw materials into finished goods for exports. Countries like Malaysia, Singapore and Thailand have succeeded in developing manufacturing sector to become their economic backbone.

The three countries are very much export oriented. They export not only manufactured goods but also agricultural products. Indonesia is lagging far behind in expanding its export market. Many Indonesian manufactured goods are still oriented more too domestic market. Even trade of plantation commodities like crude palm oil (CPO) is still regulated. Priority is given to domestic supply by slapping export tax.

Such policy is considered not effective in driving the economy as it will not encourage efforts to boost exports. However, the policy has positive side. When the global financial crisis that sent the prices of primary commodities skyrocketing, Indonesia had a windfall from the soaring prices of CPO, rubber, cacao and mineral products such as coal, tin and nickel. The country's foreign exchange reserve increased with hefty export earning.

When the crude oil price began to track back after peaking in July, 2008, the prices of various export commodities also fell as the world economy began to slow down followed with heavy slump and recessions in some industrialized economies. The hardest hit in the situation include countries having export driven economy that rely more on exports of manufactured goods. Almost all countries suffered a decline in exports as on weak demand and falling prices.

Singapore which is an example of export driven economy is among the hardest hit. That country recorded an economic contraction of 10% early 2009. Similarly Thailand is in for economic recession after two successive quarters suffering a negative growth. Malaysia fares no better that it is forced to send back many migrant workers who have taken part in boosting its economic expansion.

Indonesia self supporting in rice and corn supply

Manufactured goods are not as dominant in Indonesia's export commodities as in those of its neighboring countries. The country has huge domestic market to absorb its manufactured goods like textiles, and electronic goods.

Farm and plantation commodities also contribute considerably to the country's economic resilience. Indonesia, which was only a few years ago the world's largest importer of rice has regained self sufficiency in that commodity. In 2007, the country still needed to imports 1.5 million tons of rice. In 2008, domestic production which was estimated at 60.28 million tons in dry unhulled rice already exceeded domestic consumption. The production rose by around 3.13 million tons or 5.46% from 2007.

With that size of production, imports are no longer needed saving the country from having to pay heavily for imports when the rice price surged two fold in 2008. The country is even in the position to export rice and plans to do so in 2009.

Apart from rice, production of other farm commodities like corn and soybean also begins to scale up. Previously, production of the two commodities always fell short of domestic requirement that imports were always needed in large quantity. In 2009, the country also began to enter the year of self sufficiency in corn supply. The government plans to stop imports. In 2007, corn imports still reached 400,000 tons down from 600,000 tons in 2006.

In 2008, the country's corn production reached 15.86 million tons, up from 13.29 million tons in 2007 as against domestic consumption of 13 million tons a year. A number of corn producing areas such as Gorontalo and West Nusatenggara already exported corn to neighboring countries including Malaysia and the Philippines. In 2008, Indonesia's corn exports exceeded 100,000 tons.

In 2009, the agriculture ministry set the country corn production target at 18 million tons in dry grains from 4.28 million hectares of plantations with productivity of 44.12 quintals per hectare.

Meanwhile, the Central Bureau of Statistics (BPS) reported an increase in the country's soybean production in 2008 to an estimated 761,210 tons in dry grains. The production represented an increase of 168,670 tons (28.47%) from the previous year.

The production was estimated to increase on expansion of harvest area by 120, 48,000 hectares (26.24%) and increase in productivity by 0.22 quintal (1.7%) per hectare. Increase in the price of soybean in domestic and international markets has boosted production. Many farmers have used more of their farm lands to grow soybean. The increase in production is expected to reduce dependence on imports for soybeans.

Meanwhile, the prices of CPO began to scale up after shrinking earlier to follow the downtrend in the crude oil prices. The increase came with growing demands from India, China and Pakistan. China and India together with Indonesia are among the few countries recording positive economic growth amid the global slump.

CPO consumption in Indonesia has remained high; therefore, the price fall in international market had little impact on the domestic market. The prices did fall from US$1,200 per ton to less than US$600 per ton in the first quarter of 2009, but now the price is picking up to exceed US$700 per ton at present . Increase has also been recorded in the price of coffee.

Role of agricultural sector

The importance of the agricultural sector to strengthen the country's economic resilience was proven after the global financial crisis jolted the entire world. Export oriented economies like Singapore and Thailand suffered a contraction, but Indonesia could still record a positive.

In the first quarter of 2009, Indonesia's economic growth, according to BPS was 4.4% year-on-year and the growth rate is expected to increase for the whole of the year. High household consumption and government spending are expected to sustain fairly strong growth in the following quarters.

Household spending is mainly on rice, cooking oil, soybean, and other farm products. Farm products also contribute considerably to the country's exports preventing exports from falling deeper since the end of 2008 as the prices of farm commodities raised amid the slump hit the market especially the market of manufactured goods.

There has been a significant shift in the business in the agricultural sector notably in food crop business. Previously Indonesia was a major market target for foreign suppliers of rice, corn and soybean. Now, however, the market orientation has changed.

Increase in the country's production of rice, corn and soybean is partly attributable to the use of seeds of high yield varieties such as hybrid corn seeds. Hybrid seeds now account for 60% of high yield seeds grown in corn field in the country. In rice fields, however, the use of hybrid seeds is still small. Hybrid seeds account for only 4,500 tons or 1.5% of the total quantity of 300,000 tons of rice seeds used every year in Indonesia.

Investment opportunity in plant seed breeding industry

Investors have seen good opportunity in plant seed business in the country. Many investors have indicated interest in business to grow hybrid seeds in the country. Multinational companies such as DuPont, Monsanto, Bayer, and Syngenta , have even started and expanded venture to grow hybrid rice and corn seeds.

Farmers seem to have no hesitation to start using hybrid corn seeds as the seeds have proved to be highly profitable as they out higher production. Farmers, however are not as enthusiastic in using hybrid rice seeds.

In addition to technical problem with the difference in cultivation system such as in fertilization, frequency of fertilizing and expensive seeds, farmers still hesitate in using hybrid rice seeds. There is still doubt about the profitability of using hybrid rice seeds.

Farmers are also worried less they would continue to depend on foreign suppliers for the seeds as most of the parent seeds of hybrid rice are not available in the country. It will be too risky to depend on foreign supply for such strategic commodity.

The government, therefore, has issued a policy requiring importers of hybrid seeds to start producing hybrid seeds in the country and stop imports after operating for two years as importer.

Previously multinational companies were reluctant to produce seeds in Indonesia as apart from being too expensive they would gain more by supplying seeds produced by their parent companies abroad. With the potential market in Indonesia, the government does not hesitate to issue the regulation forcing the foreign companies to breed parent seeds in the country.

It is forecast, the prices of various primary agricultural commodities will increase in the coming years, therefore, the prospects of business in seed breeding industry are encouraging in Indonesia. The opportunity is wide open for domestic and foreign investors. The government is also interested in developing the industry to strengthen the country's agribusiness industry and the country's economic resilience.

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