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Manufacturing | Indonesia’s Spice, Seasoning and Condiment Sectors: Limited by Poor Supply Chains

Indonesia’s spice sector posted respectable growth over the last two years as the country’s emerging middle-class strengthened sales. Despite a slight decline in supply and a health and safety-related issue that hampered its exports to the global market, Indonesia has managed to retain its position as a top three spice producer worldwide. The same goes for Indonesia’s seasoning and condiment sectors. The country’s growing middle-class population and their preference for practical and instant food has helped boost the growth of these sectors. Investment and exports are equally rising (See Indonesia’s Economic Outlook in 2017: Remain Cautiously Optimistic) as further multinational companies make the spice islands their production base.

Indonesia’s Spice, Seasoning and Condiment Sectors: Limited by Poor Supply Chains
The government can play a supporting role but it will fall on the private sector to work with farmers to create a sustainable and profitable spice industry that progresses beyond the raw commodities that made Indonesia famous as the spice islands
 

Spice sector: delectable demand

Indonesia has been known for centuries as the leading producer of spices and the country’s rich natural resources were the major draw for the Portuguese, British and the Dutch who occupied the islands from the 16th century until the first half of the 20th century. To date, Indonesia still ranks among the top three producers of major spice commodities. Its leading products are pepper, nutmeg, and cinnamon. These products are mostly used by the food and beverage (See Thirst Quenching: Indonesia’s Food & Beverage Industry), pharmaceuticals (See Indonesia’s Pharmaceutical Industry is in Rude Health), cosmetics (See Overview of Indonesian Cosmetic Sector: Growing Domestic and Export Markets), perfume, and herbal medicine industries (See From Plants to Products: Turning Indonesia's Botanical Extracts into Consumer Goods). 

The United States is one of the top destinations for Indonesia’s spice exports and accounts for 50% of the country’s total spice exports (See The US Presidential Elections and What it Means for Indonesia). Germany is another major importer of Indonesian spices, where Indonesia was the third largest supplier of spices to the country after Brazil and Vietnam in 2015 with a market share of 16.51% worth $45.88 million USD. Other importers of Indonesian spices include the Netherlands, Singapore, and Japan.

Pepper

Up until 2014, Indonesia was the number one producer of pepper and accounted for 80% of global supply. Now the country ranks at number two after Vietnam. Indonesia’s pepper production centres are located in Bangka Belitung, Banda, Bandar Lampung, and Halmahera.

Around 80% of Indonesian pepper production is exported. The global pepper trade in 2014 was $4.26 billion USD, up 18.42% from that of 2013 which equated to $3.59 billion USD in value. In 2013, Indonesia exported 41,500 tonnes out of its total production of 59,000 tonnes and generated a revenue of $354 million USD which contributed 0.2% to the country’s total exports. In 2014, Indonesia’s pepper exports declined by 23% to 35,000 tonnes which generated revenues of $330 million USD.

In 2015, the country’s pepper production went up again to 60,000 tonnes. In the meantime, the global demand for pepper continues to rise every year reaching 380,000 tonnes in the same year, far beyond the global pepper production of 300,000 tonnes which suffered a decline due to drought and crop damage brought about by pests. This has driven up the prices of black pepper from $6 USD to $9 USD per kilogram and white pepper from $14 USD to $15 USD per kilogram.

Nutmeg

Another major spice product from Indonesia is nutmeg which supplies 75% of global demand. The country’s nutmeg products (seed, fuli, and oil) are exported to 30 countries. Most of them or 75% come from Siau Island and North Minahasa in North Sulawesi, which has a nutmeg plantation area of 692.34 hectares. Other nutmeg production centres are Banda in Maluku and North Maluku.

The global nutmeg trade in 2014 was valued at $650.64 million USD, up 2.78% from that of 2013 or $633.02 million USD. The European Union (EU) including the Netherlands, Germany, Italy, Belgium, and France, is the largest importer of Indonesian nutmeg which accounts for 37.7% of total exports (See Indonesia and the EU CEPA – Deal or No Deal?) or 2,874 tonnes worth $32.1 million USD in 2014, followed by the United States and Japan. From 2010 – 2014, Indonesia’s nutmeg exports to the EU increased by 5.39% in terms of export value and accounted for 80% of total nutmeg imports by EU countries.

Cinnamon

Another major spice product from Indonesia is cinnamon which is sold in stick, broken, and powder forms. The country’s major cinnamon producing regions are West Sumatra and Jambi, particularly Kerinci Regency, which accounts for 80% of total cinnamon production.

The majority of Indonesian cinnamon products are exported to the United States, the European Union; particularly the Netherlands, France, and Germany, and Singapore.

Although Indonesian cinnamon has secured its place in the international market for decades and occupies 25% of the global maket, new competitors are emerging rapidly from China, India, Sri Lanka, Madagascar, Vietnam, and the Philippines.

The United States is the largest importer of Indonesian cinnamon, followed by India, Mexico, the Netherlands, Middle Eastern countries namely the United Arab Emirates, Singapore, South Korea, Brazil, and Japan. 

The cinnamon trade in 2014 had a value of $450.30 million USD, up 18.01% from 2013 of $381.58 million USD. In 2015, Indonesia exported 55,027 tonnes of cinnamon worth $104,052 USD. This was a decline compared to that in 2014 of 63,791 tonnes which generated revenues of $117,754 USD.

Challenges and competition

One of the major challenges facing the Indonesian spices sector is ageing plants which lead to lower productivity. According to the International Pepper Community, domestic pepper production in 2015 was only 400 - 450 kilograms (kg) per hectare (ha) per year. This was only one-fifth of Vietnam’s productivity level of 2,000 kg per ha per year. This underpins why although Indonesia has the largest pepper plantation areas in the world, the country only ranks second globally in terms of production, below Vietnam with 150,000 tonnes.

The spices and seasonings industry incurs a 12% increase in organic growth annually thus we see a positive outlook ahead for our sector. The traditional food sector has also grown exponentially in comparison to non-traditional foods.

Shrinking plantation areas are another issue (See New Restrictions on Foreign Ownership of Plantations Proposed – Updated). During the late 1990s and early 2000s when the price of tin was high, many farmers in Bangka Belitung converted their pepper plantations into tin mining sites which was considered more profitable. As a result, there was a sharp decline in the pepper plantation area which resulted in lower production and exports.

The Directorate General of Plantations of the Agriculture Ministry has been focusing on efforts to rehabilitate converted land areas which were neglected following a steep decline in the price of tin in the late 2000s. To date, nearly 10,000 hectares of these lands have been rehabilitated.

Another grand challenge for Indonesia’s spice sector is the lack of knowledge of proper cultivation and post-harvest management procedures among local farmers. As a result, the country’s pepper quality is lower than that of Vietnam. As of October 2015, Indonesian pepper was priced at $7,800 USD per tonne, while Vietnamese pepper was priced at $8,200 USD per tonne.

In addition, most Indonesian spice products are sold in raw form. This is in contrast to India which sells its pepper in various processed and thus value-added forms. This enables the country to generate more revenue from the commodity although its production volume is lower than that of other major producers.

The Indonesian government has been supporting the agricultural sector to improve spice cultivation as well as the knowledge of post-harvest handling and management by traditional farmers by providing quality seeds, mentoring, and fertiliser (See Indonesia SMEs: Increased Government Support to Overcome Challenges). This move is expected to increase farmers’ income and make the sector attractive again for smallhold farmers as well as investors in the spices sector.

The Indonesian Ministry of Industry has also persuaded farmers not to sell all of their pepper stocks during the harvest season when the price is low. Rather, they have advised them to store some of their stock in certified warehouses where they are able to use it as collateral to secure bank loans to avoid the debt spiral that plagues many smallhold producers.

Furthermore, the Ministry will also seek to expand Indonesia’s spice exports by introducing a buying mission programme. Under this programme, European importers are able to see in person the products and hold discussions with their producers.

Meanwhile, the Ministry of Agriculture in partnership with the European Union has launched a Trade Support Programme to identify and enhance the quality of Indonesian nutmeg products through improving the production process, transportation, and testing capabilities. This is a crucial step as since 2011, Indonesia’s nutmeg products have been subject to aflatoxin which has prompted importing countries to reject the products.

Aflatoxins are toxic metabolites produced by certain fungi in nutmeg, and sometimes in pepper and cinnamon due to poor hygiene conditions during the drying and storage processes. Aflatoxin content in Indonesian nutmeg reached 200 ppb, far above the allowable standard of 15 ppb.

This has led to the decline in nutmeg exports by 43% in 2012, from €41 million in 2011 to €23 million. Indonesian nutmeg prices also plunged from $20,000 USD per tonne to $16,500 USD per tonne as a result.

Seasoning and condiment sector: keeps growing

The prospects for Indonesia’s seasoning and condiments sector is still bright amid the national economic slowdown, buoyed by the country’s middle-income families who prefer practical and instant food to cater to changing lifestyles.

Currently, there are 94 medium to large-scale soy sauce companies and 56 seasoning companies in the country. According to the Minister of Industry Mr Airlangga Hartarto, the production value of the soy sauce and seasoning industry in 2014 was 7.1 trillion IDR and 7.2 trillion IDR, respectively. The two industries currently employ nearly 20,000 workers.

Large companies still occupy the lion’s share of the market for the seasoning and condiment sector in Indonesia. In the seasoning sector, major players are Ajinomoto, Indofood, Sasa, Unilever, Ikafood Putramas, Kobe Boga Utama, Sumber Inti Pangan, and Nestlé. In the condiment sector, Unilever, Heinz ABC, Indofood, Wings Food, Lasallefood Indonesia, and Sasa are among the top producers.

The business prospects for this sector are still attractive which is apparent from the investment spent by both old and new players in the sector. This is also supported by the performance of the food and beverage industry which posted solid growth of 7.88% in 2015 with an export value of $5.5 billion USD.

Unilever, for example, invested 820 billion IDR in 2015 to construct a new soy sauce and seasoning factory in the Jababeka Industrial Area with a production capacity of 330,000 tonnes. This is part of the 8.5 trillion IDR total investment the company spent in the last five years. Their ninth factory has a total floor area of 63,000 square metres and is capable of producing 7 billion pieces of Royco and Bango products. Some of its products will be exported to a number of countries in Asia, Europe, and Africa.

Meanwhile, Sumber Inti Pangan, a local player, aimed at tapping into the Japanese market to increase its export volumes. To date, the company has exported its products to Turkey, Syria, Myanmar, Thailand, Malaysia, Saudi Arabia, United Arab Emirates, Pakistan, and some African countries. Its exported products account for 30% of the company’s total sales.

Such investment send strong signals about the future confidence that is held in Indonesia’s spices, seasoning and condiments sector. The potential remains significant as Indonesia’s food and beverage sector continues to strengthen and serves as a production base for major brands in catering to the local and regional markets. The increasing popularity of Indonesian cuisine is also opening up new avenues of growth for the future (See Indonesia's Creative Economy & Heritage Products – A Wealth of Opportunities).

Indonesia’s status as a major spice producer given its natural resources will remain, however increased competition from markets such as Vietnam, China and India are making the need to improve productivity and enhance supply chains ever more urgent to avoid the wave of increased demand from local and multinational food and beverage brands as well as consumers being lost out to rival imports.

A common thread seen throughout Indonesia’s agricultural sector, smallhold farmers and a lack of value-added processing are plaguing the spice, seasonings and condiments industries. The Indonesian government can play a supporting role but it will fall on the private sector to work with farmers to create a sustainable and profitable spices industry that progresses beyond the raw commodities that made Indonesia famous as the spice islands.

Global Business Guide Indonesia - 2017

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