After going through a political crisis from the late 1990s to the mid 2000s and a world recession thereafter, Indonesia's pent up feed and livestock demand is truly taking off. Since recovering from the world recession in 2010, feed demand has risen at rates ranging from 9.4% to 16.5% annually.

 

 

 

This year is no exception: At approximately 17.1 million tonnes, 2014's feed consumption will be an 11% increase over 2013's output and 128% more than the 7.5 million tonnes produced 10 years earlier, in 2004. It also means that as long expected, Indonesia has taken over from Thailand as Southeast Asia's largest feed producer.

 

Of this amount, livestock feed accounts for approximately 15.4 million tonnes or 90% of the production volume. Poultry consumes approximately 14 million tonnes or 82% of all feed. With Indonesia's economy rising at a 5% to 7% rate, rapid income increases, especially among the lower middle class and working class, have made chicken consumption skyrocket.

 

According to Aryo Widiwardhonowith, managing director of the Sierad Produce's food division, poultry consumption (from both formal and backyard farms) doubled from approximately 5kg in 2003 to nearly 10kg in 2013. The trend is expected to continue in 2014, an election year, when strong demand from caterers is expected to boost broiler consumption by approximately 10%. Because of the large increases in per capita broiler consumption of recent years, eFeedLink estimates that the proportion of poultry feed consumed by broilers has increased from approximately 51% in the mid 2000s to 55% this year.

 

 

 

But with poultry feed demand rising by nearly 10% annually and swine and ruminant feed consumption growing at slow, nominal rates, overall feed demand is kept growing at double digit rates by aqua feed, which sees yearly production and consumption increases of 10% to 20%. In fact every year from 2009 onwards has seen aqua feed consumption rise at rates ranging from 11% to 21%.

 

Generally, shrimp feed demand has been growing by more than 20% annually or nearly twice the rate that of fin fish feed. This is partly due to advanced Asian integrators like CP bringing the shrimp cultivation-for-export model they cultivated in Thailand to Indonesia, which enjoys lower wages and production costs. Hence, 2013 saw shrimp feed consumption and other fish feed consumption rise by 30% and 15% respectively.

 

Shrimp feed in particular was stimulated by a coincidence of two factors. In an effort to boost their production, the government's shrimp pond revitalization program encouraged much new production. This was particularly true in West Java, where according to according to Indonesian Feed Mill Association chairman Denny Indradjaja, 1,000 acres of pond space were brought into production because of the government's pond revitalization incentives.

 

The resulting supply boost found ready demand, when Thailand's shrimp fell victim to early mortality syndrome, enabling Indonesia to take advantage of the supply gap caused by the latter's 50% drop in production.

 

This year, Thai production is expected to recover and take back some lost market share. This will keep this year's aqua feed demand growing no more quickly than that of livestock feed. Over the longer term however, aqua feed demand will grow faster. We can expect aqua feed to grow from the 9% of Indonesian feed demand it accounts for today to 15% to 20% of the country's feed output by the mid 2020s.

 

 

 

On one hand, Desianto Budi Utomo, deputy director of CP's Indonesian subsidiary, states that Indonesia's rapidly growing feed demand is making his company build and open eight new feed mills in 2014 and 2015. This will double CP's Indonesian feed milling capacity, as it currently operates seven mills in the country. Similar large expansions of feed milling capacity have also been announced by Japfa Comfeed, PT Malindo and other large feed-based integrators. As a result, the number of Indonesian commercial feed mills is rising from 65 in 2012 to 68 in 2013 to 76 or more in 2015.

 

On the other hand, despite Indonesian feed and livestock's promise, there is one weak spot that could cause this year's expansion to come in below expectations: Growing dependence on imported feed materials.  Last year, the USDA forecast corn imports to fall from 2.7 million tonnes in 2012 to 2.2 million tonnes in 2013. Instead, the Indonesian Feed Mill Association reports that 2013 corn imports amounted to 3.0 million tonnes, a much higher number than originally forecast.

 

This is happened even though at 9.2 million tonnes 2014's corn crop, according to USDA estimates, will break the previous record set in 2011 by 35%. This is because since 2008, corn consumption has jumped 24% but the harvest size only increased by 6%, putting feed demand firmly ahead of domestic feed grain supplies. For 2014, with demand growing much faster than domestic corn output, corn imports are expected to grow by another 20%, to 3.6 million tonnes.

 

While CBOT corn now costs a third less than its average price of 2011 to 2013, Indonesia's rupiah has fallen by more than 40% against the US dollar (which is the currency imported corn is priced in) since 2011. From January 2013 to early February 2014, it fell by 26%.

 

Moreover, at the time of this article's publication, as a result of the US Federal Reserve Board's monetary tightening, many developing country currencies were experiencing considerable downward pressure in foreign exchange markets. Historically, Indonesia, has seen plunges in the rupiah slash consumer demand and delay its agribusiness expansion by more than ten years.

 

This time around however, with Indonesia becoming dependent on imported feed crops, any further devaluation in the rupiah's value could boost feed production costs above meat prices, leaving at least some of the country's feed mills unprofitable.

 

According to Faiz Ahmad, Director of the Indonesian ministry of industry's food industry, sea product and fisheries division, the ongoing devaluation of Indonesia's currency, if it continues, could cut this year's feed output growth by a third, from 11% to the 7% to 8% range. So long as it does not result in a new round of sustained political and economic turmoil, it would still make Indonesia one of Asia's most promising livestock markets and rank it as one of the world's fastest growing. But given Indonesia's traditional vulnerability to international financial turbulence and growing feed crop import dependence, the interplay between feed crop imports, CBOT corn and soy prices, and the direction of Indonesia's currency must be carefully watched.