Global Business Guide Indonesia

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Agriculture | Indonesia’s Dairy Industry Needs to Scale Up to Meet Local Demand

The consumption of milk and dairy products continues to increase rapidly in Indonesia, creating an attractive market for local producers and foreign exporters. While inadequate road and rail links and a lack of cold storage facilities still pose logistical challenges for overland transportation of perishable goods, the expansion of modern retail (See Indonesia’s Retail Boom is Far From Over) across the island nation is giving ever more consumers access to fresh dairy products. Indonesians' growing appetite for milk and its derivatives bodes well for dairy consumption going forward. The country's large market potential and westernising diets in the fast-growing Southeast Asian region could make Indonesia an attractive hub for dairy manufacturing, provided that sufficient raw materials can be sourced from local dairy farms. The widening gap between national farm output and dairy consumption reflects poor agricultural productivity, but also points to upstream business prospects.

Indonesia’s Dairy Industry Needs to Scale Up to Meet Local Demand
As domestic output fails to meet the needs of the processing industry in terms of both quantity and quality, the bulk of milk used by local industries is shipped in from abroad
 

Indonesia's Dairy Belt

Almost all Indonesian milk originates on the Island of Java, the country's main island in terms of population and economic activity. East Java has seen particularly fast growth in the number of milk cows and the dairy industry in recent years. Domestic milk production is dominated by smallholders who usually own no more than five cows and are members of dairy cooperatives. The latter collect the milk and sell it to processing companies. The small scale and often poor equipment of local dairy farms are partly to blame for a low degree of efficiency and inferior milk quality by international comparison. Also, farmers tend to apply suboptimal production methods for the feeding and nutrition of the cows and use domestic cattle breeds that produce inferior yields. Upgrading farm equipment and importing high-yielding dairy cows are ways to address the situation, and the government supports such measures through tax and import policies aimed at boosting domestic production in the name of food security.

With more than three dozen local and foreign-controlled dairy processing companies competing for market share, Indonesia's downstream industries are well developed. In total, they processed some 3.9 million tonnes of fresh milk equivalent in 2014, according to the Milk Processing Industry Association (AIPS). Major milk-processing companies include local players like PT Ultrajaya Milk Industry and PT Indolakto (a subsidiary of PT Indofood CBP Sukses Makmur), and foreign-owned ones, including PT Frisian Flag and PT Nestle Indonesia. PT Indolakto recently acquired Danone's local dairy unit, PT Danone Dairy Indonesia.

A lack of milk

Similar to other food industries, such as cocoa (See Indonesia’s Booming Cocoa Industry Puts Farmers to the Test), farmers have become the weak link in the domestic dairy production chain. Indonesia's dairy farmers deliver around 1,800 tonnes of milk a day (AIPS), which satisfies less than a fifth of national demand. The number of dairy cows (including calves) fell from around 420,000 in 2011 to 350,000 in 2013, according to data from the Central Statistics Agency (BPS), and has fallen further since. Seeking to take advantage of high beef prices, many farmers sold off dairy cows to slaughterhouses in between 2011 and 2013, thereby exacerbating the shortfall in milk production. Rising animal feed prices have not helped either, and farmers often complain that the price they receive for milk barely – if at all – covers the costs of production.

As domestic output fails to meet the needs of the processing industry in terms of both quantity and quality, the bulk of milk used by local industries is shipped in from abroad. Imports are generally in the form of powder and mostly sourced from New Zealand, Australia and the US. Imports of milk amounted to a value of $1.318 billion USD in 2013, according to BPS data. The devaluation of the Indonesian Rupiah in recent years makes it expensive for local industries to purchase milk from other countries. In addition, there is the bureaucratic burden of importing food products to Indonesia, which includes sanitary and health certificates as well as tests from various government agencies and a halal certificate.

Indonesians' new love for all things milk

Domestic milk consumption is rising at a rapid rate of 8% per year, according to AIPS, but it remains low in absolute terms. Indonesians consumed an average of 14.6 litres of milk in 2012 (BPS), which compares to more than 22 litres in neighbouring Malaysia and the Philippines and more than 33 litres in Thailand. Health aware Indonesians are turning to cow’s milk as a source of protein and calcium, and the drink has long been recognized as the best substitute for breast milk with infants and babies.

Not only are Indonesians increasingly turning to milk as a beverage, but also all of its downstream products. Cheese is becoming more popular, especially among middle and higher-income consumers in urban areas, who are more receptive to western food, such as bread and pizza. Yoghurt and sour milk are likewise gaining in popularity, particularly for their propensity to aid digestion and weight loss. Demand for coffee whitener or creamer is increasing along with rising consumption of instant coffee (as opposed to the traditional Indonesian way of drinking black coffee) (See Indonesia’s Coffee Industry Needs Growth Capital), and cream is benefiting from the growing popularity of cakes and puddings.

Investment opportunities

Upstream investment is urgently needed to fill the milk supply gap and thereby support Indonesia's dairy industries. Most livestock investment over the past years has gone towards meat production (See Indonesia: Short Beef Supply Spells Long-Term Prospects), while milk production has made no headway despite rising consumption. Indonesia’s total dairy cow herd is far too small and productivity per animal averages at a relatively low 10-12 litres a day, according to the Ministry of Agriculture. The government is targeting to meet at least 50% of national milk demand domestically by 2020. This is a tall order given that per-capita consumption is estimated to rise to 20 litres by then and to 30 litres by 2025.

Investment opportunities lie in scaling up production, introducing modern technology and improving farming methods. Greater capacity in cold storage and transportation is also needed to transport dairy products across the archipelago (See Indonesia’s Logistics Sector). Teaming up with local dairy cooperatives, which have established sourcing and distribution networks, will generally be the easiest way for foreign companies to enter the market and get access to farmers. As they need to boost their efficiency to compete with imported milk, local farmers should be interested in cooperation that can help them become more competitive.

Meanwhile, the rapid increase in demand means Indonesia will remain heavily dependent on milk imports in the foreseeable future, which creates an attractive market for foreign-based exporters. Imports of milk and dairy products require an import permit (SPI) upon approval from the National Agency for Drug and Food Control (BPOM), which can take up to 100 working days to obtain. Before applying for the permit, foreign companies need to be pre-listed as exporters with Indonesia's Ministry of Agriculture. Dairy companies wishing to export to Indonesia are advised to work closely with an Indonesian importer to apply for approvals and permits.

Global Business Guide Indonesia - 2015

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Indonesia Agriculture Snapshot

Contribution to GDP: 13.88% (Q3 2015 including Fisheries & Livestock)
Number Employed in the Sector: 40.12 million (February 2015)
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.