Indonesia’s dairy industry had seen market demand rising more than 10% annually over the past decade due to changing consumer habits and population growth. Indonesia’s estimated per capita milk consumption was only 11.7 liters per annum. However, recent data indicates that Indonesian per capita dairy consumption, at least by 2019, had reached 16.5 liters.
On the production side however, the majority of Indonesia’s dairy farms are small with just two or three cows. These production units are characteristically inefficient, with low productivity and profitability. On average, milk yield is less than 10 liters per animal per day, and calving intervals are between 18 and 20 months. If the price of beef is reasonable, these smallholders often prefer to sell their cows for slaughter as beef rather than maintain them for their milk production.
In 2017, only 26% of the raw materials for milk supply were produced locally with the balance being met by foreign imports. Moreover, milk consumption is currently only 16.5 liters/capita, whereas the target for milk consumption in2025 is 19.5 liters/capita. This consumption is the lowest in South-East Asia, compared with Brunei Darussalam at 129.1 liters, Malaysia with 50.9 liters, Singapore 46.1 liters per year. It’s even less than Vietnam, which stands at 20.1 liters of milk per capita per year.
Led by the Ministry of Agriculture, several Indonesian ministries have plans to help boost dairy production. All these plans recognize the need to enhance dairy genetics through live dairy heifer imports. The government also continues to encourage domestic milk processing industries to further increase their commitment to invest, especially in the development of integrated dairy cattle farms in order to reduce dependence on imported milk raw materials.
Indonesia Dairy Supply Origin
Indonesia Dairy Import Country of Origin
Indonesia’s local milk production is still limited and relies on milk imports. In 2017,74% of the total demand for dairy products was imported, worth US$973million. The main import products are milk and cream.
New Zealand occupies first place as the main import country of origin with 35.22% of the total share, or valued at US$ 340 million, followed by Australia (13.72%), USA (12.1%), France (11.28%), Belgium (7.67%) and Switzerland (0.06%), respectively.
Most Indonesians shop at traditional grocers. These traditional stores make up the largest distribution channel for milk products, at 51.3% of all grocery outlets. Other important distribution channels include 4-and 5-stars hotel chains and high-end restaurants (HORECA).
Ministry of Agriculture Regulation No. 30/2018 on Dairy Provision and Distribution amends the previous regulation from 2017, with a relaxation of requirements for farming and dairy-processing business units. Regulation 26/2017 had mandated that importers establish “partnership agreements” with local entities to procure local milk, invest in local milk production, and/or invest in promoting local fluid milk consumption. However, that revision retained a section on sanctions for failing to comply with the partnership requirement and also included some language that could be interpreted that the partnerships were still required for domestic processors. This second revision eliminates any notion that the partnership agreements are compulsory, deletes mandatory reporting requirements, removes all remaining sanctions associated with non-compliance, and deletes the clause stating that dairy processors must within three years establish their own plants that only procure milk locally.
Not surprisingly, perhaps, this has resulted in a backlash of criticism from the domestic producer organization about rescinding the local purchase and promotion mandate, The Ministry of Agriculture (MOA) has stated publicly that they will continue to “encourage” dairy processors to form partnerships to buy local milk, invest in dairy production and to promote local fluid milk consumption. Meanwhile, the local dairy processors association has stated that although no longer mandatory, they will continue to buy milk from local dairy producers, just as they did long before the requirements of the 26/2017 agreement. Nevertheless, this still raises concern among some importers that the MOA does indeed have an implicit requirement that importers must demonstrate they are doing something to promote the local industry as a condition for obtaining a permit to import dairy products.
Indonesian dairy production is also challenged by low productivity and high impact on the environment. In 2018, out of 260 million Indonesians, only 30 million have high purchasing power. Indonesia’s topography of 17,000 islands also contributes to the logistical difficulties in the distribution process. This challenge will become increasingly demanding with a milk consumption target of 19.5 litres/capita and meat consumption of 3.5 kg/capita by 2025. Nevertheless, this could be an enticing opportunity for the development of the dairy industry.
Another challenge is in reading consumer trends. Currently, over 90% of the dairy market is dominated by processed as opposed to fresh milk, i.e. UHT milk, and that in powdered or sterilized form. Annual consumption of powdered milk is expected to grow by over 7% and sweetened condensed milk average growth is expected to be 4.8% annually. Changes in retail habits and the shift towards modern retailing is opening up further opportunities, although both local and multinational downstream producers face the challenge of adjusting their dairy products to local consumer tastes. For example, the preference for sweet tasting dairy beverages and the addition of more traditional ingredients to cream or cheese-based products such as chili and curry is seeing the production of dairy products that are particular to the Indonesian market. This presents the opportunity for local dairy players to gain an inside track in crafting innovative products and brands, yet the technology, know-how and downstream production facilities remain a hurdle to realizing such potential.
As the largest economy in South-East Asia, having charted impressive economic growth since recovering from the Asian financial crisis of the late 1990s, Indonesia has seen its GDP per capita has risen steadily, from USD 807 in the year 2000 to USD 4,135 in 2019.
Today, Indonesia is the world’s fourth most populous nation, the 10th largest economy in terms of purchasing power parity, and a member of the G-20. An emerging upper middle-income country, Indonesia has made enormous gains in poverty reduction, cutting its poverty rate by more than half since 1999, to record low 9.2% in 2019. As South-East Asia’s largest economy, with a GDP of over a 1 trillion USD and a population exceeding 267 million with rising incomes, analysts predict that Indonesia will emerge as one of the world’s top five markets. Given the country’s large and growing domestic market, as well as competitive labor costs, great opportunity exists in the Indonesian dairy sector.