Study on Food Chain of Indonesian Dairy Sector

1
The Impact of Liberalisation on the Food Chain of
Dairy Sector in Indonesia
Indah Suksmaningsih Indonesian Consumers
Organisation
Delivered in PROJECT INTERIM MEETING
(PIM) Advocacy and Capacity Building on
Competition Policy and Law in Asia (7up2
Project) 16-17 August 2005, Melia Hotel, Hanoi,
Vietnam
2
Framework

• Human Development Index for Indonesia 112 out
  of 175
• Consumption of milk per capita 4
  liter/year

3
Before 1978
Dependency to import products 5-10 national
demand is met by import
Lack of Government Commitment The fourth priority
in the strategic planning of agriculture
Low Productivity level 1934 2.87 liter per
cow 1942 4.66 liter per cow
Opportunity National growth of fresh milk
production 7.89 per year
4
Government Protection Policy

• 1978
• The Ministry of Cooperative and at the same time
  the Chair of Logistic Bureau forced the
  companies to absorb more milk from the
  cooperatives and set the milk price.
• The Ministry succeeded in raising the price from
  Rp 60 per liter to Rp 160 per liter in East Java.
  In West java the price was set at Rp 180 per
  liter. PT. Nestle was the only buyer of
  cooperatives in East Java
• The government also applied many incentives such
  as credit to farmers and cooperatives.
• Realizing that the domestic supply was very
  little, the government set the 120 absorption
  ratio (1 liter domestic dairy milk absorption may
  import 20 liter equivalent to dairy milk).

5
After 1978
Protection Policy 1978 Setting price by the
Govt IPS was obliged to aborp domestic
milk Soft loans / protection policy 1979-1982
Import of 80.000 cows from AU and NZ 1983
Decree of 3 ministries Trade, Cooperatives,
Industry and Agriculture 1985 Presidential
Instruction No.2 / 1985
Number of Farmers, Dairy Cows and Cooperatives
Production of milk in Cooperatives
6
Government Protection Policy (cont..)

• 1982
• Decree Minister of Trade No. 236/Kpb/VII/82,
  Minister of Agriculture No. 341/M/SK/1982,
  Minister of Industry No. 521/Kpts/Um/1982
• Permission of importation is based on the
  extent of domestic product absorption
• Control of price between IPS and the Govt

• 1985
• Instruction of President No. 2/1985 to support
• Importation system, import product as
  complementary
• Modernize local milk husbandry through
  cooperative
• Obligation to set up partnership between company
  and farmers

7
Introduction of Liberalisation
8
Letter of Intent,IndonesiaMemorandum of
Economic and Financial PoliciesJakarta,
Indonesia January 15, 1998

• 35. Over the past two months, it has become
  evident that the drought afflicting the country
  is the most severe in half a century, and
  requires emergency measures. Accordingly, to
  ensure that adequate food supplies will be
  available to the population at reasonable prices,
  the government has decided to go beyond the
  original program strategy, and include
  agricultural goods in the general program of
  tariff reduction (leaving motor vehicles as the
  only exception). As an immediate measure, tariffs
  on all food items have been cut to a maximum of 5
  percent, while local content regulations on dairy
  products have been abolished, both effective
  February 1, 1998,. At the same time, tariff rates
  on non-food agricultural products will be reduced
  by 5 percentage points, and will gradually be
  reduced to a maximum of 10 percent by 2003.

Source http//www.imf.org/external/np/loi/011598.
htm
9
Liberalization in National Dairy Sector

• Indonesia was involved in the liberalization
  scheme of global dairy sector since December
  1993. When in Geneva Indonesia was pushed to give
  up the absorption ratio as it is considered a
  potential barrier to market regime.
• In May 1994 Indonesia and New Zealand, as the
  initial negotiating right holder, agreed on
  several points
• Indonesia to keep the absorption ratio until 10
  years later to the level of no less than the
  ratio applied in January 1994 (11.6).
• The price may not exceed the price of January
  1994.
• Cheese was exempted from the agreement.
• Import tariff was gradually decreased. Indonesia
  bargained to keep the ratio until 2005.
• IMFs LOI No. 35 signed in January 1998
• The Presidential Instruction No. 4/1998 withdraws
  the absorption ratio policy. The Ministerial
  Decree regulates the lowering of import tariff up
  to 5 at maximum.

10
Stagnant growth of production
Lower bargaining power of farmers

• Increased excess of production
• No intensification and extentification of
  farmers dairy market

11
Growth of Import of Dairy Products, 1996-2002
January-April 2002
12
Bigger margin due to liberalisation of dairy
market is not enjoyed by the farmers
source Ditjen Peternakan 2003 and filed data
13
A Threat to FarmersA Treat to Manufactures
Sharp increase of margin growth
14
Liberalization Impact to Consumers Consumers
pay more

• The products price is becoming similar in
  Indonesia and Australia.
• Dutch Lady (imported) Rp 14.350 per 1000 ml
• Indomilk (pasteurised) Rp 8,500 per 1000 ml
• Ultra Jaya (UHT) Rp 7,475 per 1000 ml
• In Australia consumers pay 1.3-1.5 AU Dollars per
  liter, which equals to Rp 9,000-11,000.
• The Income per capita Australia is 5 times higher
  than Indonesia.

15
Monopsony vs. Pseudo Full Competition
16
Pseudo Full Competition

• A Handfull of Companies
• Supply of fresh milk is less than Demand
• Slight difference of prices at farmers or retails

standard price (TS 11,5, TPC 3-6 million
March 2005 data
17
Monopsony

• A single buyer of fresh milk in East Java
• Nestle applies quota 640, reduced to 510 in early
  2004
• East java fresh milk is underpriced. Some west
  javan milk companies are regularly supplied by
  the east javan fresh milk (takes 3 days from
  farmers to companies)
• Nestle enjoys the most excess revenue
• Unfair contract between farmers and company
• No price adjustment for the last four years
• Unrealistic/overestimate measure of Indonesian
  National Standard on fresh milk ? as pressure to
  legitimate low price setting for east javan fresh
  milk

18
Liberalization Impact to Farmer

• Insecurity in dairy market. So far dependency has
  been created between the farmers and the
  industries resulted in the monopsonic system in
  East Java, and oligopolistic market nationally.
• In average, the farmers was paid Rp 1300-1600 per
  liter fresh milk although the cartel price is
  about Rp 1725 for standard quality (11.25 of
  total solid and 3 of fat).
• The milk quality was under the desired quality,
  no incentives are provided to improve the
  quality.
• The standard price has never been adjusted within
  the last four years, however dairy farmers seem
  to be able to survive.
• A production cost of a litre of fresh milk by a
  farmer in Boyolali is Rp 1990 (traditional
  farming, without calculating depreciation etc.).
• A price of recombined milk from import
  ingredients with equal quality to fresh milk Rp
  2600/liter

19
Liberalization Impact to Cooperatives

• The relationship between the cooperatives and the
  industry has been buyer market, the price is
  determined by the buyer.
• Soft loans are no longer provided to the
  cooperatives.
• The Law No. 18/2000 Cooperatives to submit 10
  value added tax to the country.
• The Law was put into effect by way of
  Implementing Regulation No. 46/2003, requires the
  cooperatives to pay the tax since 2001.
• Many cooperatives are heavily in debt

20
Liberalization Impact to Industries

• Milk processing companies are no longer entitled
  to follow the absorption ratio.
• No more barrier to import. Import tariff is set
  to a favorable price (5 to finished product, 0
  to raw material).
• Local and import dairy products compete in the
  same field
• Fierce competition is also noticeable in
  promotions in mass media and diversification of
  products.
• Companies starts to reduce the products size to
  make them more affordable to consumers.
• Early in 2005 PT. Nestle decrease its quota to
  510 ton per day. PT Nestle argues that markets
  demand has shifted to products with lower local
  (fresh milk) content.

21
Liberalization Impact to The Government

• The role of the government as regulator in daily
  sector has becoming smaller and smaller.
• The Ministry of Trade could not control the
  import of dairy products.
• It seems that the government powerlessly accept
  the liberalization in dairy sector as they do in
  other sectors such as electricity, energy supply
  and water.

22
Conclusions

• IMFs LOI is intended to create free market in
  Indonesia. However, it fails to eliminate the
  monopsonistic and pseudo full competition
  practices that has long been taken place in dairy
  sector.
• Farmers are paid less than the cost of
  production. The pasca-LOI price of imported dairy
  products is still higher than domestic fresh milk
  price.
• Consumers pay more due to liberalisation, however
  the standard price of fresh milk never changes
  for the last four years. This excess margin is
  enjoyed by the middlemen, not the farmers.