Global Business Guide Indonesia

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Agriculture | Indonesia's Booming Cocoa Industry Puts Farmers to the Test

Indonesia is the world’s third largest cocoa producer after the Côte d'Ivoire and Ghana, but its significance as an exporter is declining due to rising domestic demand. Responding to Indonesians' growing taste for chocolate and other goods made from cocoa, global companies have invested heavily in cocoa grinding facilities and downstream businesses in recent years. Farmers, however, are struggling to increase cocoa bean output and have become the weak link in Indonesia's cocoa industry. As a result, cocoa processors are forced to source a growing portion of their raw beans from abroad at a time of high global prices.

Indonesia's Booming Cocoa Industry Puts Farmers to the Test
With locally-grown cocoa lacking in terms of both quality and quantity, the import tax is a burden for domestic industries and stands in the way of Indonesia's aspirations of becoming a major chocolate maker

Cocoa growing can have a bright future in Indonesia, but creating the necessary economies of scale to boost productivity requires lots of investment to implement modern farming methods and technology. Once that is achieved, Indonesia will be well positioned to capitalize on growing cocoa and chocolate consumption at home and in the wider region.

Supply gap despite geographic advantage

Indonesia's equatorial climate, coupled with the fertility of the soil, provides ideal geographic conditions for cultivating cacao trees. The island of Sulawesi accounts for more than two-thirds of national cocoa production, and policies to promote integrated industry clusters based on the existing strengths of each region are set to keep it that way. Sumatra is the second significant cocoa growing region, while Java's position has declined and other islands contribute very little to overall output.

In 2013, Indonesia produced some 450,000 tonnes of cocoa beans, according to the Indonesian Cocoa Association (Askindo). This is only slightly less than a year earlier, but marks a stark decline from peak production of 620,000 tonnes in 2006. Askindo estimates that output will decline by another 11% to 400,000 tonnes in 2014, which would mark a 10-year low. While production is in decline, national demand is on the rise. To ensure sufficient supplies for domestic grinders, the government introduced a progressive tax on cocoa bean exports in April 2010, which rises to a maximum of 15% when export prices go up. In June 2014, the tax stood at 10%.

Booming grinding business

The immediate result was a shift from raw exports to exports of intermediate products, such as cocoa butter and cocoa powder. Bean exports fell from 439,000 tonnes in 2009 to 125,000 tonnes in 2013 (Askindo). As downstream industries grow, more of the intermediate products should eventually be further processed into finished goods like chocolate, biscuits, drinks or cosmetics (See Indonesia’s Fast Moving Consumer Goods Sector). At the same time, shipments to Indonesia rose to some 40,000 tonnes in 2013 (Askindo) and are expected to double or triple in 2014, highlighting a widening supply gap that could see Indonesia become a net importer of cocoa beans.

Without a significant rise in imports, domestic industries are at risk of running far below capacity. Following investment from companies such as global food giant Cargill, Singapore-based JB Cocoa and the world's biggest chocolate maker, Barry Callebaut, national cocoa grinding capacity is estimated to reach 600,000 tonnes by the end of 2014, up from 324,000 tonnes in 2013 (Askindo). Grinding capacity is expected to surpass 1,000,000 tonnes in 2016 as more companies plan to set up shop. Olam International, for one, said it wants to launch operations at a $61 million cocoa processing facility in early 2016.

Cocoa Production, Grindings and Trade (tonnes)

Cocoa Production, Grindings and Trade (tonnes)

Source: International Cocoa Organization (ICCO) Quarterly Bulletin, updated May 2014

In a trade policy that reflects conflicting interests of cocoa growers on the one hand and grinders on the other, Indonesia also maintains an import tax on cocoa beans, supposedly to protect domestic farmers. The government in June 2014 was considering to either scrap the 5% import duty to support downstream businesses, or increase the export tax to further discourage the shipping of beans abroad. With locally-grown cocoa lacking in terms of both quality and quantity, the import tax is a burden for domestic industries and stands in the way of Indonesia's aspirations of becoming a major chocolate maker. Farmers support the import tax, because it gives them an advantage on the local market, but the food industry relies on imports from West Africa, particularly for high-quality beans that it blends with lower-quality local produce.

Poor yields and low quality

Indonesian cocoa farmers have been grappling with disappointing harvests in recent years as a result of crop diseases and pests as well as adverse weather. Conditions could get worse, as experts predict that climate change could cause prolonged dry periods and more extreme rainfall – and soil erosion – in the wet season. As a result, both the quantity and quality of Indonesian beans are left wanting. Per-hectare yields have fallen in recent years to around 700 kg/hectare, far below a potential yield of up to 1,500 kg/hectare. One problem is that many cacao trees have passed their most productive age, but farmers typically lack the capital for wide-scale rejuvenation. Smallholder farmers work more than 90% of Indonesia's cocoa cultivation area of around 1.6 million hectares, with the rest shared between state-owned and private plantation companies. Typically holding less than one hectare, smallholder farmers lose out on economies of scale because it makes little sense for them to introduce sophisticated equipment. They also often employ poor farming methods and lack knowhow on pest control. In some areas, productivity has fallen so much that farmers have switched to rubber or palm oil (See An Overview of Indonesia’s Palm Oil Industry).

A multi-year programme launched by the government in 2009 to rejuvenate and strengthen cocoa trees, provide free fertilizer and better seeds has done little to improve the situation at the farm level. The Indonesian Coffee and Cocoa Research Institute (ICCR) organizes regular workshops to help improve skills and cocoa cultivation techniques, but that, too, has shown little effect on the ground. A few NGO programmes and private-sector initiatives, such as the Nestlé Cocoa Plan, aim to help farmers improve their methods and pest resistance through training programmes. There is widespread agreement that Indonesia has the potential to more than double cocoa output from current levels to 1 million tonnes, but getting there will require substantial efforts. The quality of Indonesian cocoa could be improved if farmers used better post-harvest practices and if more of them decided to ferment beans before going to market. One factor that works in the cocoa industry's favour is improving infrastructure, which will facilitate farmers' access to inputs such as fertiliser and reduce the risk of moulding while beans are transported from the farm gate to processing facilities.

A strategic location for cocoa industries

Despite the substantial growth that roasting, grinding and chocolate manufacturing have already enjoyed in recent years, the world's fourth most-populous country holds the potential for plenty more. Chocolate consumption in Indonesia remains very low at around 300 grams per capita and year, compared to more than 600 grams in neighbouring Malaysia and between 8 kg and 12 kg in numerous EU countries. As Indonesia's middle class continues to expand and disposable incomes rise, so will the consumption of chocolate and other cocoa-based products. With double-digit growth rates, Southeast Asia is the driving force behind worldwide chocolate consumption, according to global confectionary maker Mars. Companies with a presence in Indonesia, such as Mars, are well positioned in this high-growth region.

That said, a growing domestic supply of good-quality beans remains crucial for the national cocoa industry and in itself provides enticing business opportunities. Investing upstream and cooperating with local farmers to improve bean production is a way for processing companies to secure supplies for their own operations and lessen their exposure to vulnerable global prices. Eventually, well-managed plantations could supply not just domestic industries but also revive Indonesian exports to the world, with nearby India and China becoming major cocoa buyers. Developing research facilities to create pest-resistant clones and advanced side-grafting techniques are another area for collaboration. With a strong agricultural base, Indonesia could be on track to become a major global supplier of raw beans, semi-processed cocoa and finished consumer goods.

Global Business Guide Indonesia - 2014

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.