Agribusiness

The purpose of the following report is to present an overview of the agriculture industry in Indonesia and to highlight potential opportunities for businesses. The agriculture industry (in this article referred to generically as agribusiness) is defined as collective business activities that cover the supply of agricultural inputs, the production and transformation of agricultural products and their distribution to the end consumer.  

The agribusiness industry is a complex but highly relevant sector in the Indonesian economy. This important role is reflected in the sector’s substantial contribution to the economy in terms of employment and Gross Domestic Product (GDP), which stands at 13.7% in 2020. This places agribusiness as the second biggest contributor to GDP after the manufacturing industry.  

The agribusiness sector also remains one of the main industrial development priorities set by the Indonesian government, as well as an important sector for both foreign and domestic investments. In 2016, imports and exports of agribusiness products amounted to USD 15.84 billion and USD 26.73 billion respectively. From 2016 to 2017, the EU export value to Indonesia reached USD 773 million, a 4.6% growth rate.  

Indonesia mainly produces corn and soya beans. Despite local production, Indonesia still requires significant imports of these commodities in order to meet local demand. The growth in local consumption of packaged food is mainly driven by the increase in urbanization, growing health awareness, and changing lifestyles.  

One of the biggest challenges facing agriculture in Indonesia is the irrigation system, which needs to be improved urgently. The other challenges are the mechanization and utilization of agricultural machinery, and chemically irrigated farming land. Poor infrastructure remains a key challenge in Indonesian agriculture.  

In Indonesia, dairy and beef cattle are mostly owned by small-scale farmers, who only raise livestock as a form of investment or savings. The Indonesian cattle population is mostly hand-fed with a mixture of grass, agricultural by-products, and added vitamins. Feedlots that allow cattle to freely feed on specified grass fields is limited, scattered, and exists only in certain areas. Indonesia imports breeding cattle, feeder cattle, live cattle, as well as frozen meat to fulfill its demand for beef. Poultry is still the most consumed meat in Indonesia and has the biggest market share for livestock. Day Old Chicks (DOC) and feed are two products that are mostly produced locally by major companies such as Japfa and Charoen Phokphand. 

Future prospects and trends regarding the agriculture sector remain broadly positive for a number of reasons. Upward demand, coupled with a young, growing Indonesian population, is resulting in positive growth. In addition, increased urbanization is also likely to support industry growth. Due to a rise in demands within the tourism and leisure sector, the consumption of food and beverages is expected to grow which will have a positive impact on agribusiness growth.  

Challenges remain when conducting business in Indonesia. Firstly, it is important to take into consideration that cold storage facilities are not yet fully developed. Secondly, due to a dynamic regulatory environment, Indonesian provisions, laws and regulations related to agricultural trade and related sectors tend to change frequently, even those that have been recently issued. Regulations that are particularly prone to frequent changes are regulations which are released by the National Agency of Food and Drug Control (BPOM), such as those related to Halal food.  

In conclusion, the dynamic agribusiness sector in Indonesia remains promising and is driven by overall national growth, as well as changes in demographics and consumption patterns. However, challenges and weaknesses still remain in the industry. 

HIGHLIGHTS

GDP at current market price by industrial origin 2014-2017 (by percent)

Source: BPS Statistics Indonesia 2018

The agriculture sector contributed 13.14% to national GDP in 2017. The GDP contribution of this sector decreased slightly from 13.49% to 13.47% in 2015/2016. Despite this reduction in its contribution to GDP, the agribusiness sector still makes the second largest contribution to GDP after the manufacturing industry. Within the agribusiness sector, plantation crops is the biggest contributor by sub-sector at3.47% in 2017, followed by food crops with 3.22%.

Agribusiness Trade in Indonesia

Source: Agribusiness Statistics, Ministry of Agriculture, 2017

Agribusiness export values declined slightly from 2015 to 2016 while import value increased in the same period. Indonesian agricultural exports are dominated by estate crops, of which the four biggest subsectors are; palm oil, rubber, cocoa, and coffee.

Production and Import of Food Agriculture Commodities in Indonesia

2017 are forecast figures for rice, soybean, corn and sugarcane and preliminary figure for beef
 

Source: Statistics of Agriculture Products and livestock/veterinary, Ministry of Agriculture, 2017

Rice, soya beans, corn, sugar cane, and beef form part of the government’s efforts to achieve self-sufficiency in food production by 2018. The rate of production for each of these commodities is increasing, with the exception of soya beans, which has been decreasing since 2015. All the above commodities are also being imported in increasing numbers (based on data from 2015 and 2016), with the exception of corn. Corn production is increasing significantly as a result of the implementation of the self-sufficiency program, which has positive impacts on the feed industry.

EU Trade with Indonesia on Agri-Food Products, 2017 (in Million of Euro)

Source: European Commission, Agriffood Trade Statistical Factsheet EU-Indonesia, 2017

EU-Indonesian trade in agricultural products remains at a stable rate of growth. EU import value from Indonesia rose by 28% from 2016 to 2017, to a total value of 5,297 million Euros. The biggest commodity imported by EU from Indonesia is palm and palm kernel oil, which accounts for 56.1% of total imports, followed by fatty acids and waxes with 18.3% of the total imports. The export value of agriculture products from the EU to Indonesia rose by 4.6% from 2016 to 2017, contributing to the 14% increase from 2013 to 2017. The EU mostly exports dairy produce, tobacco and tobacco products, as well as miscellaneous edible preparations to Indonesia.

Supply and Demand in Indonesia's Fertilizer Market (in tonnes)

National demand for mixed compound fertilizers has been growing and cannot be satisfied by SOE’s supply, which only concentrates on the single compound types. This gap presents an opportunity for investors to enter the fertilizer market (especially for mixed compound fertilizers) in Indonesia.

Source: Dairy Australia

Indonesia’s total annual milk consumption per capita is 16.62 liters, an increase from 11.09 liters in 2013. This amount is still below the average consumption of other ASEAN countries such as Singapore, Malaysia, Thailand, and the Philippines, which average 20.58 liters. However, the volume of Indonesia’s milk consumption is expected to grow gradually due to increasing health awareness among middle to upper-income consumers. The demand for dairy products in Indonesia itself is expected to grow by approximately 5% annually until 2020.

CHALLENGES

Although Indonesia shows good future prospects for the agribusiness market, there are challenges to doing business in Indonesia.  

As stated in the Trade Ministry Regulation No. 72/2015, SNI are the standards regulated by the National Standardization Agency (BSN) and are applicable nationally. While not all products are obligated to pass an SNI, each product subjected to SNI is required to carry a Registration Item Number (NPB) when being traded. The list of products subjected to SNI is available on the BSN website and is updated regularly. Although the registration process to obtain NPB in the latest regulation is simpler than the 2014 regulation, the penalties for non-compliant products are tougher. SNI listed products not carrying NPB will be temporarily withdrawn from the market. 

foreign companies must also bear in mind that infrastructure related to food transport and food preservation are under-developed, particularly outside Java. Indonesia ranks 51st out of 167 countries in the 2018 Logistic Performance Index of the World Bank. This ranking is an improvement from 2014, when Indonesia ranked 53rd.  

Frozen and chilled products face significant challenges due to a lack of access to refrigeration facilities in Indonesian households, but most importantly within the entire food supply chain. Remote areas in Indonesia do not always have access to electricity, which creates significant obstacles to cold chain development. Closing the gaps within the cold chain is a tremendous challenge for a huge archipelagic country like Indonesia. Therefore, investment in transport infrastructure (not only related to food preservation) between the thousands of Indonesian islands is in high demand (roads, ports, railroads, and shipping) and makes it challenging to provide easy and fast access for food products. 

The current government is focusing on the development of more sophisticated and robust maritime connections within the archipelago, in order to lower the transportation costs between the western and eastern parts of the country. Additionally, the government is investing in the development of the trans-Sumatra and trans-Sulawesi highways to connect those consumer markets.  

Lastly, corruption and bureaucracy remain the biggest burden for those working in the Indonesian market. These issues not only affect the agribusiness sector, but also all other sectors of the Indonesian economy. Therefore, companies must be aware of the risks and difficulties they face when investing or conducting business in Indonesia.  

CONCLUSION

Agribusiness is a top contributor to GDP, which continues to grow due to significant demand, particularly in relation to the food and beverage industry and domestic consumption. Agriculture, forestry, and fisheries also remain as important employers for Indonesians, with almost 30% of the working age population employed in these industries. The ultimate goal of the government is to achieve self-sufficiency, which is a long-term vision to produce agriculture products at home. According to a 2016 data, agriculture import values reached USD 15 billion, with food crops as the dominant commodity. Although agricultural production in Indonesia is growing, there is still a need to import products in order to fulfill national demand. 

With a population of over 265 million in 2018, a growing middle class, increasing tourism, and a growing economy, Indonesia is an important market to consider. The Indonesian food and beverage sector is predicted to be the third fastest growing sector in the upcoming years. Similar to other sectors, opportunities in agribusiness also face challenges, including infrastructure, market access, and dynamic regulations related to both imports and investment.  

In the horticulture and food crops sub-sector, most consumable products are being produced locally by both foreign or local companies. The seedling sector is dominated by foreign companies that have been operating in Indonesia for a long time, such as DuPont, Cargill, Monsanto, and East West Seed. Meanwhile, the fertilizer market is dominated by State-Owned Enterprises, Pupuk Indonesia. Technology, as well as research and development to effectively increase production are greatly required. 

The EU remains the biggest exporter of dairy to Indonesia, with a total export of more than 160,000 tonnes in volume in 2019. The majority of dairy supplies are for industry, with almost five times greater value than that of direct consumption. Approximately 20% of the national demand for dairy is satisfied by imports. Packaged dairy products are gaining popularity due to increasing health awareness. To close the deficit of beef stock, Indonesia imports both breeding cattle and beef. Regulations of beef imports to Indonesia often change according to the demand and stock, in order to stabilize the price and to generate demand.  

In conclusion, the agribusiness sector provides promising potential. Challenges in the Indonesian agribusiness sector should be seen as opportunities instead of barriers, in order to create new businesses that offer innovative solutions for improving the agribusiness sector. 

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