February 2, 2008

 

High soy prices point to Indonesia's flawed "utopian" policy

 

 

The boom in international soy and corn prices has prompted several Asian countries to relook efforts to raise production in their own countries.

 

Indonesia is one of them. The high costs of imports has prompted soy prices in the nation to rise 110 percent over the past year. The relentless climb upwards finally culminated in protests by the soy-using industries outside Parliament recently.

 

While western nations use soy mainly for animal feed, soy-based products such as tofu and tempeh (an Indonesian food made from fermented soy) are major parts of the Indonesian diet.

 

Underlying the high soy prices caused by rising demand in the international market (especially that from China) is another factor that is the flawed but well-intentioned government policy to secure food production launched in 2005, Fajar Billion Hirawan, writing an article for the Indonesian Daily Seputar Indonesia argues. The programme, meant to revitalize food production, saw higher priority being paid to crops such as rice and corn instead of soy, resulting in declining soy production in recent years.

 

One main reason Indonesian farmers had been shunning soy was because of its low profitability. While farmers could get up to 8 million rupiah from the harvest of a hectare of rice and up to 6 million rupiah for corn, the same area only fetches about 4.5 million rupiah for soy.

 

Responding to the high soy prices currently, Indonesia has adopted a pro-import policy by removing its import tax on soy in order to stablilise prices.

 

Once prices are high enough, enough farmers would be growing soy to bring prices down, the government believes. This suggests that once that happens, soy import tariffs would be slapped on again.

 

However, higher prices in domestic and international markets is not incentive enough to spur production, the author argues. In fact, tariff controls only serves as a short term solution to what is a long term problem and would result in a vicious cycle.

 

As long as production fails to catch up with demand, Indonesia would have to be at the whims of the international market, slapping on import tariffs when prices are low and removing them when they are high.

 

From the looks of things, Indonesia would still have a long way to catch up - domestic demand is at 1.9 million tonnes last year, with 1.3 million tonnes imported. 

 

The author said what is needed is not a deliberate effort by the government to keep soy prices low by the tariff system but implementation of a comprehensive agricultural revitalization programme to spur grain production rather than one skewed towards any particular type of crops.

 

As can be seen from the chart, even though the government predicted an increased 950,000 tonne soy production in 2007, actual production fell to 608,263 tonnes in 2007, below production seen in 2006.  

 

This year, the government has moderated its expectations somewhat to 730,000 tonnes but is still a 20 percent increase compared to 2007. The new target is also a touch below that of production seen in 2006. Whether that expectation would result in a increase or a decline remains to be seen.

 

	hectares	Actual production	targetted production
2005	621541	808353	0
2006	580534	747611	0
2007	464427	608263	950000
2008			730000
Source: Indonesian Agricultural Ministry