beyondbrics

Indonesia’s growth rate is expected to hit 6.4 per cent this year and if a report by Rabo Bank is correct much of that growth will be driven by its booming agriculture industry.

Agriculture already accounts for at least 15 per cent of Indonesia’s GDP, employs nearly 43 per cent of the country’s available labour force and generates annual trade flows of $44.5bn but it is still relatively undeveloped, lacking value-adding industries. Agri-businesses take note.

Indonesia is emerging as a major economic force in Asia and its rise has led some commentators to champion it over even China.

Leading its rise is its agriculture sector which dominates the economy. Total arable land in Indonesia is about 46.3m hectares of which around 40 per cent is devoted to export crops, according to Rabo’s report released last Thursday. The country generated an agricultural trade surplus of $19.1bn in 2010 putting it right at the top of the world’s agri-producer table:

Demand for agricultural products in Indonesia has been driven by domestic demand buoyed by rising incomes and the export of basic foodstuffs to India and China but, as the report repeatedly states, value-adding production is still relatively undeveloped in the country.

The government is looking to boost domestic production by emphasising intensive production and providing subsidies and supports for farmers. It has pursued trade policies which are aimed at promoting agricultural production and protecting domestic farmers. These policies include tariff and non-tariff measures which have resulted in some domestic prices being well above international levels.

Indonesia is already Asia’s third largest net agricultural producer, behind China and India, and is a world leader in several key agricultural sectors:

Palm oil, rubber, coffee and cocoa are all strong export industries for Indonesia, as domestic consumption is far outweighed by overseas demand, and the country has significant domestic upstream production capacity – companies which generate returns over $20m are concentrated in the animal protein, food processing or grains and oilseeds (palm oil) industries.

Rabo predict that palm oil will continue to be Indonesia’s largest agri-business earner (having already grown at a compound annual growth rate, CAGR, of 6.2 per cent over the part decade) while rubber, driven by demand for tyres from China and India, will also drive growth – the report notes that Indonesia’s rubber industry is still dominated by primary products and has not yet captured the gains available from the value-added international market.

The report also sees a bright future for Indonesian cocoa, production of which is growing at a faster rate than world production, meaning there is a real chance for it to capture a bigger share of the world market. The report again notes that domestic processing is poorly developed and much raw product has to be exported.

Indonesia is the world’s fourth largest producer and exporter of coffee after Brazil, Columbia and Vietnam and currently produces 8 per cent of the world’s supply. The export value of Indonesia’s coffee reached $814m in 2010 and has increased 17 per cent per annum since 2001 -the US accounts for 18 per cent of that figure. However, domestic demand is still low, due to poor penetration and processing methods, and there is much room for product development.

As the report says, Indonesian food sector is starting to add value to its agricultural products as demand for finished products increases, driven by rising incomes and targeted marketing. The same factors are driving up demand for meat (and animal-feed crops corn and soymeal) – demand for beef has grown by 4 per cent per annum since 2005 and Indonesia imports 30 per cent of its beef requirements.

Rabo’s report notes that noodles (5 per cent), bakery products (7 per cent) and soft drinks (14 per cent) are all enjoying impressive 10 year CAGRs and that of the 1000 businesses in the agri-sector in Indonesia, the largest segment is in the middle of the value-chain focusing on food processing or beverage manufacturing – 53 per cent of those companies are also involved in primary production.

That said there is still an enormous amount of room for investment in food processing and value-adding industries. Indonesia is still an emerging market and its agri-industry suffers from serious problems – it is hampered by low-yielding smallholder crop systems (which make up 94 per cent of the country’s 1.65m hectares planted with cocoa for example), sustainability pressures, underinvestment, poor infrastructure, underdeveloped techniques and restrictive government practices.

However, with the world’s fourth largest population, a low average age and a growth rate to envy, Indonesia’s agricultural industry is well placed to overcome those problems and continue powering the economy – particularly if it starts adding value to the huge amounts of primary product it produces.

Related reading:
Guest post: Indonesia – the next big thing, beyondbrics
Guest post by Tim Condon at ING: Indonesia rate cut – hot money, not growth, beyondbrics