Global Business Guide Indonesia

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Agriculture | Indonesia: Short Beef Supply Spells Long-Term Prospects

Rising personal incomes are making beef more affordable in Indonesia despite high global prices, leading to a rise in demand that domestic producers are unable to satisfy. In emerging economies, the average person's beef consumption tends to closely follow per-capita GDP – and Indonesia appears to be no exception. Industry experts anticipate double-digit growth rates for the beef market in Southeast Asia's largest economy, which opens up attractive opportunities for foreign exporters and investors. Recent steps by the Indonesian government to relax import quotas in the face of a domestic beef shortage have reopened the market for exporters. Thanks to its massive surplus in beef production and its close proximity to Indonesia, Australia is in prime position to help satisfy Indonesians' growing appetite for beef.

Indonesia: Short Beef Supply Spells Long-Term Prospects
With consumer ethics in Indonesia likely to follow those in more developed economies somewhere down the line, environmental and animal welfare considerations need to be taken into account for long-term projects

A small but growing market

Per-capita beef (including veal) consumption in Indonesia amounted to less than 3 kg in 2013, which compares to more than 6 kg in Malaysia, more than 10 kg in the EU and more than 20 kg in the US and Australia. But while consumption is on a slowly declining trend in many developed countries, it is increasing in Indonesia and the wider region. Back in 2010, Indonesian per-capita consumption stood at just 1.7 kg. Around 80% of the additional global meat (not just beef) demand until 2022 is estimated to be coming from fast-growing Asian economies. China, of course, accounts for the lion's share of additional demand in the region, but Indonesia, the world's fourth-most populous country, will play a significant role as well.

Indonesia's cattle industry has failed to fully meet domestic demand, necessitating imports of live cattle and packaged beef from abroad. Given the projected increase in per-capita consumption, in addition to overall population growth, the country will likely remain unable to supply itself with beef for the foreseeable future, despite official assurances to the contrary.

Imports still needed to fill the gap

For decades the government has been proclaiming the goal of making Indonesia self-sufficient in a number of agricultural commodities, including beef. In the case of beef, the implementation of a quota system took a serious toll on imports in recent years. While imports accounted for 58% of national consumption in 2009, that share dropped to 22% in 2013, according to figures compiled by ANZ Bank. US exports to Indonesia plunged by 90% in volume and 70% in value in 2012 from 2011 (US Meat Export Federation). The quota system also affected live exports from principal supplier Australia, with heads of cattle falling from around 700,000 in marketing year 2009/2010 to fewer than 300,000 in 2012/2013 (Australian government figures). A sudden though temporary ban on live exports imposed by the Australian government in mid-2011 (following TV footage of animal cruelty in Indonesia) soured trade relations between the two countries and motivated import restrictions.

Politically prescribed self-sufficiency, however, proved unattainable, if not counter-productive. High beef prices convinced many Indonesian farmers to cash in during 2013, which severely reduced the national herd and thereby jeopardized the policy's sustainability. A spike in inflation put additional pressure on the government, which in August 2013 began to relax the quota. In fact, after Jakarta issued permits for the import of 273,000 head of live cattle in the second quarter of 2014, the Northern Territory Livestock Exporters Association estimated full-year shipments from Australia to Indonesia to recover to 700,000 in 2014.

Japan is one country that will seek to benefit from rising Indonesian demand, after Indonesia revoked a ban it had imposed on Japanese meat in 2010 (based on a 2009 law that allows imports only from countries that are free of foot and mouth disease). The Indonesian government announced the move in August 2014 following a mutual agreement with Japan that would also reopen the Japanese market for Indonesian poultry (which had been blocked in 2004 due to the outbreak of bird flu). While Japan itself is a major importer of beef, its wagyu beef, famed for its taste and health properties, fetches premium prices in global markets and could see demand from upmarket restaurants and supermarkets in Indonesia.

Self-sufficiency: an opportunity, not a threat

The sudden rise in beef and cattle imports to Indonesia in 2014 is to some degree a reaction to the harsh quotas issued earlier and as such is not indicative of future import demand. Relaxing the policy was borne out of necessity to confront immediate shortages that had made Indonesia one of the most expensive markets for beef. Not only has this made beef unaffordable for many end consumers, but it is also hurting domestic processing industries. While local farmers obviously benefit from the shortage in beef supply, the National Meat Processor Association (NAMPA), which represents medium-sized and large processors, has warned of businesses collapsing over the lack of raw meat. Stressing that inadequate import quotas were hindering growth of the beef processing industry, NAMPA successfully lobbied for a quota increase in the second half of 2012. The association sees annual growth potential in domestic meat processing at 20%, if sufficient supplies are ensured.

While unattainable for the time being, the goal of self-sufficiency in beef production remains on the agenda and will continue to shape Indonesian policies. Therefore, long-term investors are advised to embrace the opportunities that the local beef industry has to offer, both in production and processing. In practice, the easiest way to engage in the business is by collaborating with local companies, which could take the form of joint ventures, supplying and consulting. Simultaneously improving the quantity and quality of local beef production will require a substantial investment effort. Experienced cattle producers in Australia and other major exporting countries have a lot to offer to Indonesia not just by fulfilling immediate needs, but also and increasingly by improving efficiency in the local livestock business with capital, knowhow and modern technology.

With consumer ethics in Indonesia likely to follow those in more developed economies somewhere down the line, environmental and animal welfare considerations need to be taken into account for long-term projects. This presents opportunities particularly for investors with a track record in responsible rearing and processing of cattle. Improving transport infrastructure is boosting connectivity across the archipelago, but more investment is needed in logistics, such as cold storage facilities, to facilitate distribution (See Indonesia’s Logistics Sector).

According to NAMPA there are currently too few certified slaughterhouses in Indonesia, which opens up prospects for consultation, facilitation and training. The same is true for downstream processing to produce compliant and trusted meat products. Collaboration with meat producers to develop premium brands that cater to the growing demand for organic products is as yet an untapped area of the meat and livestock market. Given Indonesia's rising affluence, westernising diets (See Thirst Quenching: Indonesia’s Food & Beverage Industry) and abundant land capable of supporting livestock, Indonesia's cattle and beef industry faces a bright future.

Global Business Guide Indonesia - 2014

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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.