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Legal Updates | Ministry of Agriculture Issues New Regulation on Milk Supply & Distribution

On 17th July 2017 the Ministry of Agriculture of the Republic of Indonesia passed Regulation No. 26 of 2017 on Milk Supply and Distribution ("Regulation 26") which became effective on 19th July 2017. Regulation 26 deals with milk supply and distribution, the obligation of business actors to create a partnership as well as the sanctions that might be imposed for violation of Regulation 26.

Regulation 26 is the implementing regulation of Article 37 of Law No. 18 of 2009 on Livestock and Animal Health as lastly amended by Law No. 1 of 2014 on Amendment to Law No. 18 of 2009. Regulation 26 was issued to regulate the supply as well as the distribution of milk in order to increase national milk production which is expected to be able to meet the demand for milk on the national scale, create food self-sufficiency and also improve the welfare of the community.

Regulation 26 only provides regulations on the distribution of milk within Indonesian territory. The importation of the milk will be regulated later in a ministerial regulation.

What The Regulation Says

Below are some of the noteworthy provisions of Regulation 26:

  1. Domestic Milk Providers

    Regulation 26 stipulates that domestic milk production should be conducted by farmers, cooperatives (koperasi) and business actors (together known as milk providers). Regulation 26 defines business actors as including individuals or corporations, whether or not incorporated as legal entities that conduct activities in, among other things, farming or dairy processing business units. As the purpose of this regulation is to improve milk production, milk providers are pushed to increase their milk production in manners that are stipulated in Regulation 26, which are:

    • improvement of productivity of the milk
    • improvement of dairy population
    • improvement of milk production.

    Those improvements must be done by the milk providers and will be done through assistance from the Director General of Livestock and Animal Health and the head of agency of provincial and district that is in charge of livestock and/or animal health.

  2. Domestic Milk Distribution

    Regulation 26 limits the scope of milk distribution between the milk providers, which should be performed by:

    • farmers to cooperatives
    • farmers to business actors
    • cooperatives to business actors.

    The milk that is circulated within the Indonesian territory must fulfil Indonesian national standards. If the milk has not fulfilled the standards, at least it needs to be tested and achieve the following results:

    • normal organoleptic (taste, colour and smell)
    • negative for alcohol
    • negative for antibiotic residue.

    The tests may only be done by farmers’ group associations, cooperatives and or business actors.

  3. Determination of Price of the Milk

    Regulation 26 does not set the exact price of milk. However, it regulates the component of milk price in order to protect farmers from low sale prices. Components of milk prices must cover at least:

    • the principal cost of milk

      The principal cost of milk includes production cost, handling cost and farmer's profit.

    • the quality classification of the milk

      The quality classification of the milk will be determined based on the level of fat, solid non-fat substance and protein.

    • microbial contamination level

      The microbial contamination level will be determined on the basis of microbial contamination number.

  4. The Obligation to Create a Partnership for Business Actors

    Under Indonesia's Negative Investment List, powdered and sweetened condensed milk manufacturing is conditionally open for foreign investment followed by the obligation to create a partnership with micro, small and medium businesses. Regulation 26 reinforces this obligation and provides guidelines on performing this obligation.

    Based on Regulation 26, business actors are obliged to create a partnership with farmers, farmers’ group associations and/or cooperatives through:

    1. utilisation of domestic milk
    2. mutually beneficial promotion
    3. provision of production facilities
    4. improvement of milk production process
    5. funding or financing.

    Please note that the obligation above must be carried out by all business actors not only for a foreign investment company (see again the definition of business actors in point (i) above). Regulation 26 stipulates that business actors that manufacture processed milk are required to own a milk processing unit after three years as of the effective date of Regulation 26 (ie,19th July 2017). Business actors that manufacture processed milk are also required to create a partnership through the utilisation of milk. Business actors conduct the utilisation of milk by absorbing milk produced by farmers, farmers’ group associations and/or cooperatives. The utilisation of milk should be based on the appropriateness of milk production and the business actor's real production capacity which will be determined and calculated by the Director General of Livestock and Animal Health. The capacity for each calendar year will be calculated by November of the previous year.

    Business actors who do not manufacture processed milk have to conduct activities to promote the consumption of milk in Indonesia. The milk used for the promotion movement is processed milk derived from domestic milk production. The Director General of Livestock and Animal Health will provide more detailed regulations on promotion.

    Other than the above, business actors are obliged to create a partnership with farmers, farmers group associations and/or cooperatives through schemes no. 3, 4 and 5 above. The arrangement should be drawn up in a partnership agreement along with a partnership plan proposal.
    Afterwards, the agreement and the proposal should be submitted to the Director General of Livestock and Animal Health.

    Regulation 26 also stipulates the minimum contents of the agreement, which are:

    • types of dairy, types of dairy products, and/or types of production facilities in cooperation< /li>
    • rights and obligations
    • establishment of quality standards
    • market price
    • marketing guarantees
    • sharing of profits and business risks
    • capital and/or financing
    • payment mechanism
    • duration
    • dispute resolution.
  5. The Obligation to Submit a Report

    Milk providers in conducting milk supply and milk distribution activities should submit the production and distribution reports to the head of agency in accordance with their authority. Milk providers are required to make quarterly reports on the supply and distribution of the milk.
    Afterwards, the head of agency will deliver the report to the Director General of Livestock and Animal Health.

  6. Sanctions

    The failure to comply with the obligation to create a partnership and submit a report will be imposed with administrative sanctions such as:

    • warning letter
    • temporary suspension of activities to provide and distribute the milk
    • not given importation recommendation for a year
    • proposed for a revocation of business license

    We may expect further implementing regulation of the sanctions.

Conclusion - Impact for Business Actors

Business actors should start complying with the requirements on supply and distribution of domestic milk such as the obligation of business actors to create a partnership with farmers, farmers group associations or cooperatives (ie, absorbing milk produced by farmers, farmers group associations and/or cooperatives, mutually beneficial promotion, provision of production facilities, improving the production of milk and funding/financing) and the requirement to submit reports of the supply and distribution of milk. Otherwise, they may receive an administrative sanction as listed above.

Hadiputranto, Hadinoto & Partners, Member of Baker & McKenzie International - 28th September 2017

icone share

Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)