Global Business Guide Indonesia

Agriculture in Indonesia Agriculture in Indonesia Agriculture in Indonesia Agriculture in Indonesia Agriculture in Indonesia
Sign up for the GBG Indonesia Quarterly Business Intelligence Report for the latest news on your sector.
Sign Up
Agriculture | Agriculture Overview of Indonesia

Indonesia is the world’s largest producer of palm oil as well as a leading global producer of other high value commodities such as cocoa, rubber and coffee. The country is rich in fertile land ideal for growing a diverse range of crops for both export and domestic consumption. However, it is export crops that have come to dominate land use and employment to take advantage of peaks in global commodity prices. The country is still heavily reliant on imports for staple goods such as wheat, soybeans and sugar which have raised the issue of food security on the national agenda as world food prices have continued to climb. Improving the productivity of government and privately owned plantations, in addition to small hold farmers through adoption of technology and land consolidation is a further issue to contend with that requires striking a delicate balance in a sector that employs over 40% of the workforce.

The agricultural sector is highly fragmented in the country, made up of state owned estates called PT Perkebunan Nusantara (PTPN), large scale private plantations and small hold farmers. Palm oil is the dominant subsector as well as cocoa, rubber and coffee that are mainly exported. Staple crops such as corn, sugar and rice alongside vegetables for domestic consumption are mainly carried out by small holding farmers. Improving self sufficiency in the main foodstuffs is a priority for the sector as imports of key crops such as sugar and wheat are increasing. For wheat in particular, the country is almost entirely reliant on imports from markets such as Australia and is the largest importer of the crop in South East Asia.

2010 Agricultural Output of Main Plantation Crops

Source: Ministry of Agriculture, Statistics Indonesia

The issue of national food security has been a major concern for the government since the 1960s with the formation of the national logistics agency BULOG. The issue has recently gathered pace on a domestic, regional and global scale. Crop yields have declined due to changing weather patterns coupled with high oil prices that have seen the United Nations Food and Agricultural Index hit an all time high of 238 points in February 2011 and averaging 234 points in June 2011. In 2009, a framework for regional food security within the ASEAN was formed and is set to run to 2014. The plan includes the allocation of funds for agricultural investment as well as to improve efficiency in production methods. President Yudhoyono has been particularly vocal on the subject, notably at the 18th ASEAN Summit held in Jakarta as well as urging members of the G20 to enhance global cooperation as part of his goal to feed ‘Indonesia and the World’.

The Food Estate Program was established in 2009 in the midst of the global economic crisis as food and energy prices shot up. In February 2010, the program was launched by provisioning 1.6 million hectares of land in Merauke, Papua for agricultural production of food and bio energy. The Merauke Integrated Food and Energy Estate, or MIFEE, is a Special Economic Zone that aims to attract $8.6 billion USD in investment for commercial plantations for staple food items including soybean production, rice, and cattle rearing. The controversial program has already attracted investors from the Middle East such as Saudi Arabia’s Bin Laden Group for basmati rice production. Other investors expressing interest include Wilmar Internation for the cultivation of cane sugar at the site. Yet, zoning problems regarding protected forest areas have been an obstacle in moving the project forward as well as regulations regarding land acquisition. Existing infrastructure surrounding the cultivation areas that is needed for delivery of produce as well as machinery and fertiliser has also restrained investors due to the resulting price increases. Other issues revolve around concerns for the welfare of local Papuan tribes that lay claim to the land and has thus created further investor uncertainty. The government is trying to soothe the situation through greater involvement of local authorities in drawing up the zoning areas for the site in Papua as well as in other regions such as Kalimantan and Aceh where future food estates are potentially planned. Local regents are also being given greater say in the issuing of land permits to protect Indonesian interests. As part of the Negative Investment List in 2010 investors can have up to 95% ownership for estates of more than 25 hectares (see Agricultural Land – Right to Cultivate) but will also require permits from the local authority and a permission from the Ministry of Agriculture.

Productivity has been another key area to address in Indonesia’s agriculture sector as comparative land yields remain low in most food crops. From 2007, the government embarked on a revitalisation program for small holding farmers under Ministry of Agriculture Decree No.33/2006 that focused on the palm oil, rubber and cocoa industry to address the low productivity per hectare and expand land capacity. The program allocated $514.8 billion USD in subsidised loans provided by seven state owned banks and had limited results up until 2010 due to low take up of loans. The certification of land ownership that is required to obtain a loan has been the main hurdle for farmers as the price of registration is too high at 8-9 million RP for a 4 hectare plot, depending on the province. The Ministry of Agriculture decided to extend the program to 2014 that will see greater collaboration with private sector companies on plasma farming and modern techniques.

Research and development into new methods and technology in plantations and agricultural production is making headway in the country after many years of lagging behind. Through institutions such as the Indonesian Biotechnology Information Centre, the Bogor Agricultural Institute and private sector companies, advances are being made in the development of hybrid and transgenic seeds as part of the effort to raise food production. Fertiliser, another key aspect of boosting output and keeping prices stable is another target area of the government. State owned fertiliser company PT Pupuk Kalimantan Timur announced at the beginning of 2010 that it will set up of a new $865 million USD plant to be operational by 2014. Further projects in not only improving supply but also the infrastructure to deliver products to the farmers are underway as part of the economic masterplan to 2025 that would see such plants positioned closer to the food estate hubs.

Increasing productivity through the take up of modern technology and farming methods is a contentious issue for Indonesia’s many subsistence farmers that work on small plots of land. While the number of people employed in agriculture has been slowly decreasing with the trend of urbanisation, the average of age of farmers has been rising and according to data from the Ministry of Agriculture 80% of the 140 million farmers are aged 45 years or above. This is a threat to the goal of food security as the reluctance of the younger generations to go into farming will directly impact production levels. The ageing of the industry’s workers is also holding back the implementation of new methods through technology and thus obtaining financing from banks and credit agencies. Consolidation of agricultural land is a necessity to improve efficiency and create commercially viable farms, but is a highly emotionally charged issue considering the displacement of farmers from their ancestral land and traditional way of life.

Financing for small scale agricultural businesses has been slow to come forward from the banking sector as the sector is considered high risk due to unpredictable weather (see Making the Banks Work for the Real Economy). The demand for higher values of collateral has stood in the way of obtaining loans. In 2010, $10.4 billion USD or 5.51% of the total loans for the year were provided for the agricultural sector and a survey by Bank Indonesia at the end of Q1 2011 revealed that only 4.9% of farmers had received loans from non-governmental sources. Conversely, large scale agricultural companies and conglomerates have found easy access to funding through the banks, foreign investors and the capital markets. Islamic banks are coming to play an increasing role in the sector with shariah compliant loans doubling in the past five years under Mudarabah financing arrangements (see Indonesia’s Islamic Banking Sector). Bank Mandiri Shariah has distributed over 50% of its Peoples Business Credit to the sector since 2007 while Bank Muamalat announced a target to increase agricultural lending by 800% in 2011. This increased attention towards the sector is welcome, however it will take coordination on the part of small hold farmers and the government to make such loans effective by creating economies of scale through the difficult issue of land consolidation.

Global Business Guide Indonesia - 2012

icone share

Indonesia Agriculture Snapshot

Contribution to GDP: 13.70% (2016 including Fisheries & Livestock)
Number Employed in the Sector: 46 million (2016)
Main Products: Palm Oil, Palm Kernel, Rubber, Cocoa, Coffee, Tea, Tobacco, Rice, Sugarcane, Maize, Cassava, Tropical Fruits, Spices, Poultry, Fisheries.
Main Export Markets: China, USA, Japan, India, Singapore, Malaysia, Pakistan, South Korea, Italy, Netherlands, Bangladesh, Egypt.
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List imposes varying degrees of foreign ownership limitations in plantations depending on the crop type, and Government Regulation No. 98 of 2013 limits private plantations to 100,000 hectares.

Array ( [0] => 42000 [1] => 1064 [2] => You have an error in your SQL syntax; check the manual that corresponds to your MariaDB server version for the right syntax to use near 'AND mn.published = 1 AND m.published = 1 ...' at line 43 ) 1