Indonesia Agribusiness Report Q4 2009

The re-election of President Susilo Bambang Yudhoyono to a second term in office in mid-July is welcome news for Indonesian agriculture. The sprawling country has for decades struggled to produce enough key food staples to feed its vast population of more than 230mn. This has changed in the past year with Indonesia now producing enough rice and corn to meet domestic demand and enough sugar for household consumption. All three of these have been long-term goals for successive rulers of the archipelago.

While Yudhoyono cannot be given all the credit for the achievement, after all even the best policies could be undone by a run of poor weather, he has provided a stable investment climate and enough incentives and aid for farmers to increase production. Yudhoyono, known locally by his initials SBY, has put improving food security high up on his agenda. With a PhD in agriculture specialising in poverty alleviation through rural development, Yudhoyono is well qualified to be at the helm of building up Indonesia's agriculture.

We expect the progress made over the past few years to be sustained over the president's next term and production of staple foods to continue rising. Yudhoyono has spoken of his desire to increase research in agricultural technology to allow the country to emerge as a food exporter to challenge the major regional agricultural players of Thailand and Vietnam. There is, however, undoubtedly a long way to go before Indonesia will be approaching Thailand as a food exporter.

As a massive archipelago of thousands of islands Indonesia faces acute problems with infrastructure.

Much potentially promising land away from the overcrowded main island of Java is so distant as to make profitable production difficult. Ethnic tensions in areas such as West Papua and Kalimantan also put extra risk on investment.

While production of staple food crops has been doing well, some key plantation crops have been running into problems. Indonesia's cocoa sector is still suffering from the 2008 outbreak of vascular-streak dieback on the main producing island of Sulawesi. We forecast production to fall sharply again this year.

Exports will be even harder hit as demand for cocoa suffers owing to the financial crisis. High stockpiles of cocoa butter at Malaysia's cocoa grinders have put a break on exports to that country.

Coffee producers have also been under pressure. Low prices for robusta, which makes up around 90% of Indonesia's coffee production, has seen profits for growers all but disappear. If prices do not rise soon, producers could be forced to leave the sector leading to further declines in production.