Indonesia Agribusiness Report Q1 2009

With the fourth largest population in the world, a huge land area and a strong agricultural tradition, Indonesia represents enormous opportunities for agribusiness operators. However, agricultural production in the country is blighted by low yields and consumption growth is limited by still low incomes and poor infrastructure outside the main population centres. In BMI's new Indonesia Agribusiness Report for Q109, we examine the paths for development open to agriculture in Indonesia as the country struggles to produce enough food for its almost 240mn people.

The natural fertility of Java, the engine of Indonesian agricultural production, has long been recognised and was successfully, many would say ruthlessly, exploited by the Dutch in the nineteenth century under the Cultivation System (cultuurstelsel), when they ruled over what was then the Dutch East Indies. Since independence, agriculture has continued to be dominated by Java - despite only making up 6.7% of Indonesia's land area, Java produces more than 50% of Indonesia's total output of rice, corn and sugar.

With industry also centred on Java and the island having a population of around 130mn people and a population density not far off 1,000 people per square kilometre, land is now increasingly at a premium and the time of expanding area under harvest on the island is long gone. Indeed, the loss of land from agriculture to habitation or industry will be a major challenge for authorities hoping to increase food production.

The Indonesian government has a long-held policy to reach self-sufficiency in major food staples such as rice, corn and sugar. Though rice is likely to see demand trail off over the medium term as rising incomes and the spread of modern retail allow Indonesians to vary their diets to include more meat, wheat-based products such as noodles and baked goods, and confectionery, demand for other staples will rise to fill the gap left by the falling rice consumption.

As the area available for agriculture on Java stagnates or shrinks and demand for many products rises along with income, the government is left with two avenues to meet its policy of self-sufficiency: improve yields and open up new land for agriculture outside of Java. Neither of these will be easy.

Since independence, Indonesia has been a highly centralised state with all roads leading to Java. Though a policy of devolving power to the regions has been introduced since the fall of Suharto's New Order regime in 1998, there is still the perception in much of the country of Indonesia being a 'Javanese colony'.

If programmes to increase the contribution of the outer islands to Indonesian agriculture are to take root, the government must not only improve the oft-neglected infrastructure of these regions but must also consult the local populations and involve them in the planning process. As is amply shown by the now infamous transmigrasi programme, where millions of Javanese, Balinese and Madurese were resettled from their tightly packed islands to more sparsely populated islands of the archipelago, if a project is perceived to be Jakarta-imposed for the benefit of Java or the Java-based elite, it is liable to end in failure.

Improving yields, which are often pitifully low by international standards, particularly outside of Java, also presents a major challenge for the government. The root cause of many of the obstacles to improving output lie in the highly fragmented nature of Indonesian farming. With the majority of farms in Indonesia less than one hectare in size, unless there is considerable consolidation, the government will struggle to train the 40mn or so Indonesians still reliant on agriculture in modern farming practices. Lack of knowledge among farmers is a major factor in low output and poor quality, as was shown by the poor response to the disastrous disease outbreak that hit Indonesian cocoa farms on Sulawesi in the first half of 2008. The small size of farms also impedes the introduction of capital-intensive mechanised production and works against investment in expensive high-yielding crop varieties, as many smallholders are unwilling or unable to put money up front for the promise of future gain.

As Indonesia moves on with its great democratic transition - the country is due to hold its second direct presidential election in 2009 - agriculture in the country will be presented with new challenges and opportunities. Increased political participation will encourage the government to listen to the desires of the more than 40% of the workforce employed in agriculture, and decentralisation will allow the regions to implement policies that will benefit their own populations and, in the long run, the whole country.

However, these moves also bring the threat that much-needed agricultural reform could be caught up in political wrangling and a new level of local officialdom could end up just adding an extra layer of corruption and bureaucratic inertia, further encouraging the three vices that blight economic life in the country, known to Indonesians as KKN - korupsi, kolusi dan nepotisme.