Indonesia's fruit and vegetable industry continued to witness significant growth in 2015 in terms of the domestic market and local production for export. The growth of the middle class who are becoming increasingly aware of the benefits of fresh horticultural produce have contributed to the increase in the country’s fruit and vegetable consumption. Local horticultural producers also enjoyed strong sales in 2015 following a period of malaise due to the sharp rise in the volume of imported fruits and vegetables the year prior which led to a moratorium on imported fruits into Indonesia. The horticultural sector is now set to benefit further from the depreciation of the rupiah against the US dollar and a decline in consumer purchasing power which have deemed imported fruits and vegetables uncompetitive and made locally produced fruit a more attractive option. The Indonesian government’s generous support and incentives have more recently helped local fruits and vegetables make a comeback and boosted exports of Indonesian horticultural products.
The Directorate General of Horticulture recorded that Indonesia’s vegetable production in 2014 reached 11.77 million tonnes, up 1.9% from 11.55 million tonnes in 2013; the same trend occurred with fruit. Its production in 2014 rose by 9.2% to 19.97 million tonnes, up from 2013 of 18.28 million tonnes. The increase in domestic horticultural production in 2014 came as no surprise as more farmers have switched to horticultural produce to cater to the increased demand for healthy, well-priced local fruits and vegetables; especially for middle income families. However, in general, Indonesian horticultural produce struggle to compete with imported fruits and vegetables regarding price and quality which still sees the market flooded by foreign horticultural products.
One of the main problems facing the Indonesian horticultural sector is its lack of production, as is the case throughout the subsectors of Indonesia’s agricultural related industries. Local production is still insufficient to meet domestic demand. As a result, the prices of Indonesian horticultural produce often fluctuate and soar as demand goes up or when suppliers produce less making for an unstable, unpredictable market. In addition, the nation’s horticultural industry also faces a competitiveness problem. This is caused by a number of factors; firstly, the lack of post-harvest processing knowledge among local farmers; expensive logistical costs (See Indonesia’s Logistics Sector; Making Connections), inconsistent supply from farmers, unattractive packaging and branding as well as poor infrastructure, particularly roads for land transport (See High Stakes for Indonesia's New Infrastructure Push), which contributes greatly to damage to the produce when they arrive at their destination.
The Indonesian government is working hard to increase local production and improve the distribution of horticultural produce. President Joko Widodo, for example, has asked PT Perkebunan Nusantara to provide a minimum of 10,000 hectares of land to be planted with various fruit trees to boost local production. Meanwhile, to shorten distribution channels, which will eventually reduce the cost and price of local fruits and vegetables, the Ministry of Commerce has encouraged local farmers to sell their produce directly to the markets; this has been one of the priority programmes of the Ministry.
Various problems hampering the local horticultural sector have increased Indonesia’s reliance on fruit and vegetable imports. The government, however, is still ambivalent in its import policy. On the one hand, the government needs imports to meet the increasing demand for high quality fruits and vegetables and to keep their prices down. Yet, on the other hand, the government does not want to jeopardise the local horticultural industry. After all, Indonesia is still an agricultural country and nearly one-third of its workforce is engaged in agriculture. It is visible from the overly complex set of importation rules of horticultural products, however, the government justifies its policy on the ground to protect its local horticultural industry, especially smallhold growers. Otherwise, fruits and vegetables imported from Thailand, China, and the United States, which are superior in quality and competitiveness will flood the domestic market and hit local producers.
Three major horticulture exporters to Indonesia are Thailand, China and the United States. Imported fruits from Thailand include lychees and durians. China mainly exports citrus fruits and pears, while the United States exports grapes and apples.
Based on data from the Ministry of Commerce, the volume of horticultural imports in 2014 reached 400,000 tonnes. The government initially expected imports to increase to 600,000 tonnes in 2015, but in reality, there was a decrease in imports of 10 vegetable commodities by 9.6% from January to September 2015. Similarly, the imports of nine fruit commodities also fell by 16% during the same period. Apart from the global economic slowdown which led to the decrease in people’s purchasing power, the depreciation in the rupiah exchange rate and the increase in import duty, including fruits and vegetables, were the main causes behind the decline in imports of fruits and vegetables in 2015. According to Regulation of Ministry of Finance No. 132/PMK.010/2015 on the Classification System of Goods and Imposition of Duty on Imported Goods, vegetable products are subject to import duties of 20%.
Many horticultural goods importers believe that the regulation will backfire and negatively impact on end-consumers. They argued that the increase in import duty will push up the price of horticultural products at the consumer level due to increased costs, especially during droughts and natural disasters when local producers produce less. Importers have to bear the brunt of increasing costs due to the decline in the amount of disposable income available as a result of the slowdown of the economy. They fear that their products will not sell well if they arbitrarily raise prices. As a result, many importers prefer to decrease the volume of their imports and improve efficiency to reduce losses.
Moreover, a media report concerning imported Granny Smith and Gala apples that were said to be contaminated with the listeria monocytogenes bacteria has dramatically reduced imported apple consumption. In addition, quarantine inspections at ports has reduced the quality of imported horticultural produce, thereby reducing their appeal to consumers. The horticultural import slowdown has resulted in the suspension of licenses of 40 importers for two years for not being able to meet the import quota of 80% in accordance with Regulation of Minister of Commerce No. 47/2013 on the Import of Horticultural Products.
In the 1980s, Indonesia was the largest exporter of fruits and vegetables in the ASEAN region. This is evident from the export data at the time where Singapore imported 30% of its fruits and vegetables from Indonesia. Currently, Indonesia's biggest rival in horticulture exports is Malaysia. Today, nearly 48% of fruits are imported into Singapore from Malaysia, followed by China which accounts for 28%. Meanwhile, Indonesia only accounts for 4% of vegetable and fruit exports into Singapore.
Nevertheless, Indonesian fruits and vegetables are still in demand in foreign markets. This is demonstrated by the export data which shows that exports of 10 vegetable commodities from January to September 2015 increased by 32%. The same holds true for the exports of nine fruit commodities which grew by 29.8% during the same period. According to the Ministry of Agriculture, the five largest horticultural product exports in 2015 were pineapples, mangosteens, cabbage, chillies and ginger. The export values of fruit commodities was $250 million USD for pineapple, $20 million USD for mangosteen, $3 million USD for mangoes and $2 million USD for bananas. Indonesian chilli is imported by Japan, Hong Kong, South Korea, China, the Netherlands, Switzerland and Norway, while vegetables, especially cabbage, are mostly sold to Singapore.
Unfortunately, Indonesian horticultural products still face quality issues due to the lack of knowledge on post-harvest management, inconsistent supply and poor infrastructure. Much of its horticultural produce is rejected by the importing countries because of small defects during their transportation. An example is the Indonesian mango which has been banned from entering Japan and China in the last five years. Both countries reject mangoes from Indonesia because the fruit is considered unhygienic and exposed to fruit flies. The rejection is detrimental because mangoes are the third largest type of fruit exported from the country after pineapples and mangosteens. To that end, the Indonesian Association of Exporters of Vegetables and Fruits (AESBI) proposed to establish special areas for the cultivation of fruit and vegetable products in the country, with adequate supervision and transportation.
In addition, the government should also vigorously improve the quality of export-oriented vegetables and fruits, such as bananas, pineapples, mangosteens, and salaccas. The improvement should begin from the cultivation phase onwards by applying good agricultural practices which will make it easier to enter international export markets. An example of this successfully implemented in practice is for Indonesian mangosteen products which have entered Australia and New Zealand in the last several years.
The challenge remains that some export destination countries such as China only accept three commodities such as salaccas, bananas and mangosteens. Furthermore, the rules on regulated agents have also hampered horticulture export performance because fruit products have to pass through x-rays that add to the cost of logistics by 500 IDR per kilogram (kg).
In general, investment in the horticultural sector in Indonesia is still prospective. There is huge untapped potential that is waiting to be realised given that Indonesia’s fruit consumption per person is still low. The country’s fruit consumption per capita is only 34 kg per year. This is far below the fruit consumption in Malaysia of 70 kg a year. Meanwhile, according to the Food and Agriculture Organisation (FAO), the ideal fruit consumption per capita is 73 kg a year.
The growth of the middle class that now numbers 30 million people is a potential market for vegetable and fruit products. As for export markets, bananas are expected to become the new popular export product from Indonesia after pineapples and mangosteens. Sewu Segar Nusantara, for example, has set a target to double the exports of bananas and pineapples within the next three years.
Global Business Guide Indonesia - 2016
Indonesia's market for fruit and vegetables holds significant business potential as a growing number of health-conscious consumers are turning away from a diet that relies heavily on rice. In order to compete with foreign products, Indonesia's agricultural sector needs to up its game.
Indonesian per capita consumption of fresh fruit and vegetables is still below the recommended level leaving plenty of scope for the development of the horticulture sector. This section looks at the industry’s development in terms of imports as well as export potential.
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.