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. Rising personal incomes are allowing Indonesians to diversify their food sources with a greater variety of fresh and processed agricultural produce. The last decade has seen a strong increase in the consumption of imported horticultural goods, despite cumbersome regulations that critics say unduly restrict trade. In order to compete with foreign products in satisfying rising domestic demand, Indonesia's agricultural sector needs to up its game, which requires substantial investment capital and foreign knowhow.
Notwithstanding the recent increase, Indonesia's relatively low per-capita consumption of fruit and vegetables still leaves much room for improvement. The rapidly expanding upper middle class in the world’s fourth-most-populous country will contribute to this trend, as increased awareness about the nutritional benefits of fresh fruit and vegetables becomes entrenched in everyday eating habits. This trend is also being accelerated by improved supply chains and the ease of access to modern retail outlets such as supermarkets in urban areas, which allow for the correct storage of fresh produce, thus making previously unavailable varieties of fruit and vegetables available to consumers (See Indonesia’s Retail Boom is Far From Over).
Indonesia's agriculture sector, which employs more than a third of the country's workforce, has largely failed to take advantage of consumers' growing appetite for a wide range of fruit and vegetables. Agricultural output over the past decade has grown at a slower rate than the economy at large. This is despite favourable geographic conditions, such as mineral rich volcanic soil, a varied tropical climate for counter-seasonal cultivation and the wide availability of fertile land for plantations. The reasons for the sector's under-performance are manifold. Family-run farms generally rely on low-quality seeds and lack the capital to invest in sophisticated equipment, which in any case would be unviable on the small acreage these farms typically have at their disposal. There is also a lack of knowhow on cultivating fruits and vegetables and on efficient post-harvest management. Transportation and storage is a further challenge that has held back local farmers from commanding higher prices for their produce, as the use of traditional transport methods such as open air trucks results in some products being spoiled on arrival at their destination (See Indonesia’s Logistics Sector).
Government support to educate farmers on modern cultivation methods or help them take out loans has not been forthcoming. Rather, policies have been directed at curtailing imports. When the Agriculture Ministry refused to grant import recommendations for 13 commodities (food and flowers) for the first semester of 2013 to protect domestic farmers during the harvest season, the move severely impacted imports. After years of strong annual increases to 2.1 million tonnes in 2011, incoming volumes fell to just 1.1 million tonnes in 2013 as a result of what was effectively an import moratorium. In terms of value, however, the effect was less pronounced, because the lower supply caused prices to spike. In US dollar terms, imports declined from $1.7 billion in 2011 to around $1.3 billion USD in 2013. China was far and away the dominant exporter of horticultural products to Indonesia in 2013, followed by Thailand, the US and Australia for fruit and Myanmar, Australia and India in the case of vegetables.
The importation of horticultural products requires special government licences, which have been subject to changeable rules in recent years. The central regulations concerning the importation of horticultural products are Ministry of Agriculture (MOA) Regulation No. 86/2013, and Ministry of Trade (MOT) Regulation 16/2013, as amended by MOT Regulation No. 47/2013. Both went into effect on September 2, 2013. They find their legal basis in Law No. 13/2010 on Horticulture, which in Article 88 includes a provision that imports must consider the domestic availability of horticulture products.
MOA Regulation 86/2013 requires importers to get a recommendation letter from the MOA before seeking approval from the MOT for listed fruit and vegetables and processed products. To apply for the recommendation, which is issued for either the first or second semester of each year, importers must submit a wide range of documents, including from other ministries and agencies depending on the nature of the imported good. The rules favour products that are processed by the domestic food industry over those sold to end consumers. MOT Regulation 16/2013, among other things, requires that importers prove they have the capacity to properly store and transport the good they wish to import in order for them to be registered as importers. Once holding the recommendation and being registered as an importer – a status that is only valid for two years – they must seek approval for the importation of a specific commodity. To expedite the bureaucratic process, the regulation sets specific deadlines of two or three working days for authorities to commence and complete each inspection and approval (or rejection). Importers cannot sell goods directly to customers; which means retailers cannot import goods themselves. All imported goods must meet food safety requirements as well as quality standards and have been harvested no more than six months before arriving in Indonesia. They must also conform to packaging and labelling provisions and are subject to pre-shipment inspections.
Regulations limit the possible ports of entry for fresh horticulture products to just three seaports (Tanjung Perak in Surabaya, Belawan in Medan and Soekarno-Hatta seaport in Makassar), one airport (Jakarta-serving Soekarno-Hatta International Airport), apart from points of entry located in designated free trade zones. The country's main seaport, Tanjung Priok in Jakarta, was excluded along with two other entry points in 2012, ostensibly to better control plant quarantine pests and ensure food safety. Imports originating from countries that have mutual recognition agreements with Indonesia on food safety and pest control standards, which includes the United States and Australia, are not limited to the specified points of entry.
Indonesia's regulations on horticulture imports have been criticised as shielding domestic producers, particularly farmers, from foreign competition by complicating the importation of goods with an overly complex set of rules. However, pressure is mounting on the government to ease procedures. The upcoming implementation of the ASEAN Economic Community (AEC), an integrated trade area across the Southeast Asian region, will make some of the provisions in Indonesia hard to justify. Furthermore, the United States and New Zealand have filed World Trade Organization (WTO) requests for dispute settlement over Indonesia’s import policies for horticultural (and animal) products, claiming the licensing regime unfairly restricted trade. The US also complained that measures limiting the internal sale, offering for sale, purchase, distribution, or use of horticultural products disadvantaged imported goods. Last but not least, a sharp rise in consumer price inflation in 2013 increased the pressure to ease import restrictions.
Indeed, 2013 saw regulations altered in favour of importers. The list of products that need a recommendation letter was shortened from 57 to 39 and the requirement that a horticultural product could only be imported if its domestic production failed to fulfil public demand was dropped in MOT Regulation 16/2013. On the other hand, however, a provision was included in the amendment that importers need to realize at least 80% of the quantity they applied for within the targeted period or risk losing their permit. Despite the changes, the US and New Zealand upheld their WTO request.
The Law on Horticulture (Article 100) also reduces the maximum stake foreigners can hold in local horticultural businesses to 30% from previously 95% and limits any foreign investment to large-scale businesses. The law gives foreigners owning more than 30% four years to divest and get in line with the new cap. This investment restriction appears to contradict the government's proclaimed goal of boosting Indonesia's agricultural productivity, since it makes it harder to obtain foreign capital and expertise. There is clearly resistance to greater foreign participation in Indonesia's agricultural sector as well as to food imports, and it remains to be seen how the different political forces play out once a new administration takes office following presidential elections in July 2014.
Indonesia aspires to be self-sufficient in the production of key agricultural commodities, with a particular focus on rice. Self-sufficiency is seen as achieved when 90% of a product is supplied domestically over a longer trend. The policy gained traction when global food prices rose sharply in 2008 and was enshrined in Law No. 18/2012 on Food Security, which prioritizes domestic production and subjects imports and exports of food to national demand and supply.
In the foreseeable future, Indonesia will require imports even of horticultural products that are produced in the country itself, because the domestic agriculture industry will need time to improve. In the medium term, exporters should focus on products that cannot be grown locally, such as temperate fruit varieties, rather than compete directly with local producers. For example, stone fruits such as cherries, peaches and plums as well as various berry fruit types cannot be cultivated in Indonesia’s tropical climate.
Beyond its potential as an export destination, Indonesia's horticulture market still offers ample opportunities for direct investment in farms and plantations, despite the lowered cap of foreign ownership in local enterprises. Interesting prospects could also emerge from cooperation of foreign investors and local farmers to introduce improved cultivation methods and help generate economies of scale, which would result in more competitive pricing in the domestic and international market. Finally, areas such as seed research, modern planting and greenhouse methodology in addition to cold chain storage and transport logistics offer enticing business opportunities.
Global Business Guide Indonesia - 2014
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.
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