April 13, 2004
Indonesian Wheat Imports To Grow Only Marginally
Indonesian wheat imports are forecast to grow only marginally in 2004 and 2005 as demand growth is expected to continue to be sluggish, according to information from the U.S. Department of Agriculture's Foreign Agricultural Service web site, dated April 6.
Wheat: Wheat imports are forecast to grow only marginally, reaching 4.2 million tons in 2004/05. High international prices and freight rates are expected to cause millers to gradually raise flour prices, inhibiting demand growth. In addition, increased competition among the 4 mills, combined with flour imports, will continue to squeeze margins, forcing importers to look for lowest cost supplies. As a result, mills are limiting purchases of premium- valued higher protein hard wheat, which is negatively impacting U.S. trade.
Furthermore, plentiful supplies from Australia, combined with a huge freight advantage, will ensure that Australian wheat will gain market share and continue to dominate the import market. Due to relatively high U.S. prices and unprecedented freight rate costs, U.S. market share will suffer through the rest of 2004 and into the 2004/05 marketing year.
Corn: High landed costs, combined with the collapse in feed demand through the first quarter of 2004 due to the local outbreak of bird flu, sharply reduced import demand, and corn imports are forecast to fall to 1 million tons in 2003/04. With expectations of a recovery in the poultry sector as the bird flu is controlled, corn imports are forecast to rebound to 1.1 million tons in 2004/05. Opportunities for U.S. corn are expected to emerge in the latter part of the 2003/04 marketing year and beyond, as local supplies are diminished, and with expectations that supplies from China will continue to be unavailable.
In addition, a local corn processor is expected to continue sporadic U.S. corn purchases.
Rice: Better than average precipitation leading into the planting season and since has resulted in an excellent main rice crop in 2004. As a result, local supplies are plentiful, and market prices are stable and below last year. With prices from traditional suppliers rising sharply in the first quarter of 2004, the incentive to import has been severely eroded. The local supply situation, plus the fact that the recently implemented import ban is being strictly enforced, has reduced import expectations, and 1.5 million tons are forecast to be imported in 2004.
In the first half of 2004, import levels are expected to be less than one- third the level imported over that period in the previous marketing year. Imports are expected to accelerate from August 2004 onward, when local supplies diminish and following the removal of the import ban.
Policy: Local millers continue to complain about flour being "dumped" into the market, and have lobbied successfully to get a 5% duty on flour imports. The 5% import duty on flour from all origins will remain in place at least until the end of 2004. To further control flour imports, imports must also meet a national quality standard, which includes mineral fortification. Proposals continue to be floated to raise duties on corn imports, but no action on this is expected in 2004. While the increase in international rice prices in the face of stable domestic prices have played a role in reducing import demand, it is also is apparent that the rice import ban is being strictly enforced.
In the first quarter of 2004, only about 200,000 tons were imported, well below traditional levels. After the ban is lifted in June 2004, all importers will have to be registered to be eligible to import. While applications have been presented, reportedly this application process has not been functioning smoothly.
This raises the prospect that issuance of importer registrations may be used as a tool to control imports. Bulog is authorized to release rice onto the market should prices rise, but given local supply conditions, this is unlikely.
Due to expectations for sluggish consumption growth, wheat imports are forecast to grow only marginally to 4.2 million tons in 2004/05. While one mill continues to dominate with about 80% market share, competition among Indonesia's 4 mills is expected to continue to remain fierce. This will require the mills to continue to shrink margins in the face of high international wheat prices. Also, they will continue to look for lowest cost wheat supplies, primarily from Australia, but also from other less dominant suppliers.
Mills are expected to purchase just enough high protein wheat to meat blending needs, and not try to increase protein levels for product development and innovation. As a result, U.S. market share is expected to suffer in 2004 and 2005 due to relatively high landed costs of U.S. wheat. Australia will be the main beneficiary. While local millers have complained about low cost flour imports from Australia (which is claimed to be "dumped" and/or under- invoiced), and have threatened to reduce purchases of Australian wheat as a result, this is largely thought to be an empty threat. The mills will still rely on Australian wheat for the lion's share of milling needs in 2004 and 2005.
The local milling sector is operating at about 60 to 70 percent of total capacity, so there is still plenty of room to respond to demand growth. Furthermore, ample opportunity continues to exist for product diversification. Production still basically consists of three flour types: high protein (with protein content >12%), medium protein (10%-12%), and low protein (8%-10%) flour.
Local flour (produced by the four flourmills) accounts for about 90 percent of Indonesia's total flour market, with the balance from imported flour. With rising wheat and soaring freight rates, the mills are expected to gradually increase prices in 2004. Prices have already risen about 5% in 2004, and are expected to increase another 5% to 10% through the end of the year. The higher prices are expected to tamper demand growth, and only a modest increase in use is forecast for 2004/05. Mills generally hold just over one month's stock on hand.
The wet noodle industry and small medium enterprises (SME) consume approximately 32% of total flour supply; instant noodle 20%; bakeries 20%; biscuit and snack 10%; household 10%; and the dry noodle industry 8%.
Approximately 75% of the Indonesia's domestic flour production is made up of high protein flour (protein content >12%) that is used for instant noodle and bakery products, while the remainder consists of medium (10%-12%) and low protein flour (8%-9%) used for wet noodle and cake products.
In order to protect the local industry, imported flour must meet a national standard (SNI-Standard Nasional Indonesia), i.e., fortified with iron, zinc, folic acid, vitamin B-1 and vitamin B-2. Also a 5% duty applies. Besides Australia, the local millers have also accused other flour suppliers of dumping into the market, and continue to appeal for a higher duty.
With better than average precipitation during the rainy season plus a slight expansion in area, 2003/04 corn production is estimated at 6.3 million tons. For 2004/05, relatively strong prices are expected to lead to further increases in area planted, plus efforts to increase hybrid seed planting are expected to continue. As a result, production in 2004/05 is forecast to increase slightly over the previous year.
Yields remain low as farmers use only 30% of certified seed and hybrid seed use continues to be low. Special credits for operating expenses are available from banks at 6% interest rates; however, accessibility to this facility is reportedly difficult. Lack of drying facilities also hinders corn marketing. To enhance quality, some large feed mills have developed contract arrangements with producers, where price commitments are made based on quality delivered.
Corn use is forecast to drop over 10% in 2003/04 due to the local Avian Influenza (AI) outbreak, which severely cut demand for compound feed in the first quarter of 2004. Total compound feed production is expected to be off as much as 15% in 2004 as a consequence of the AI problem, the report said. As of April 2004, poultry producers continued to limit placing new inventories (both layers and broilers) until the full impact of the AI has run its course, and demand and prices rebound.
However, some indications suggest the spread of the disease has been checked, and the poultry sector is expected to begin fully rejuvenating during the last quarter of 2003/04. As a result, use is forecast to rebound in 2004/05.
Typically, the animal feed industry consumes approximately 50% of all Indonesian corn, but that proportion will be down this year due to the collapse in demand from the poultry sector. Approximately 80% of imported corn is used by the feed mill industry, primarily for poultry production.
Indonesia's one and only corn processing plant is beginning to produce, but still must overcome many technical problems. Demand from this plant is expected to approach 20,000 tons per month, which will primarily be supplied through imports.
Typically, the feed sector relies on local supplies during the peak local harvest season (Feb-April) and then switches to imports. However, in 2003/04, because of the relatively good local crop, plus the decline in local demand, local supplies are expected to be available for a longer period.
With the collapse in demand as a result of the AI outbreak, and relatively good local supply situation, corn imports are forecast to drop to 1 million tons in 2003/04, about 20% less than the previous year. However, with expectations that the AI outbreak will run its course towards the end of 2003/04, and a recovery of the poultry sector, imports are forecast to rebound to 1.1 million tons in 2004/05.
With the landed cost of imported corn topping $200/ton, and already struggling to remain profitable due to the AI outbreak, the local feed mill industry will rely almost exclusively on domestic supplies while available. Local procurement should continue until around the beginning of the final quarter of 2003/04, when imports will again be required. As supplies from China are not expected to be available, firm opportunities should exist for U.S. corn in Indonesia at that time. However, importers will still have to overcome the "sticker shock" that may be associated with U.S. corn prices at that time.
As stated above, Indonesia's one and only corn processing plant relies almost exclusively on imported corn for its mill. After poor results with Chinese corn, the plant is expected to continue to purchase more U.S. corn, the report said.
The unusual market conditions (temporary local supply surplus in the midst of high international prices) led to some exports of corn during the first quarter of 2004. However, these conditions are not expected to persist, and exports for 2004/05 are expected to return to normal levels.
Farm gate prices of local corn in major producing areas (East Java, Lampung) ranged from Rp 1,400/kg (US$ 164.7/mt) to Rp. 1,600/kg (US$ 188.2), compared to landed import prices ranging from $210/mt CNF for U.S. corn to $185 from Thailand. Offers from China are no longer being made.
The first and main season crop (harvested Feb/April) benefited from good precipitation and growing conditions. While initial reports suggested damage to some rice areas due to heavy rains, the impact on production was only minimal, being far outstripped by the overall good growing conditions. As a result, production in 2004 is forecast to be up about 3% compared to the previous year. For 2005, assuming a slight increase in area, production is expected to again grow marginally.
Continued growth in rice production for Indonesia will remain a challenge. Insufficient water management and irrigation infrastructure will remain a persistent problem. In addition, while rice production is becoming increasingly mechanized, increasing costs of production hamper further improvements in management practices. Furthermore, urbanization and industrialization continue to limit potential for area expansion. Irrigated rice yields approach 4.7 tons/HA, but output in non-irrigated areas is often can only bring around 2.5 MT/ha. The average yields (from irrigated and non- irrigated rice areas) remain low, approximately 4.5 MT/ha. Producers continue to expect government support through subsidizing fertilizer prices and price protection through import controls.
However, the main problem with viability of rice production in Indonesia is not price levels or profitability (comparatively, prices and returns are high), but the small area held by each producer, which is less than 1/2 hectare per farmer. This is insufficient area, so alternative sources of income must be sought or crops with higher returns must be found.
Rice consumption in Indonesia is relatively stable as more availability and familiarity of alternative staple foods (such as noodle/bakery, corn, cassava, and sago) curbs growth. The GOI, through Bulog, maintains some stocks (around 5% of total consumption) for rice rations (military and civil servant in remote areas), assistance during natural disasters, and to conduct market operations for price stabilization (if needed). Bulog also continues to conduct a subsidized rice distribution program for needy families, who can buy 20 kg of rice per month at Rp. 1,000/kg. Bulog's domestic purchase of rice for 2004 is planned to be around 2.0 MMT of rice with purchasing price set at Rp. 2,790/kg.
The forecast for 2004 rice imports has been lowered from 2 to 1.5 million tons due to relatively abundant local supplies and stable local prices in the face of rising international prices and shorter export availability, the report said. As prices from key suppliers have risen, the risk of trying to bypass the import ban and bring rice in has become unattractive. Furthermore, by most accounts, the import ban is being strictly enforced. While some imports have trickled in during the first quarter (around 200,000 tons), import activity has been dramatically lower than in previous years. It is expected that local supplies will remain sufficient until at least August, when the lifting of the ban combined with drawing down of local stocks will result in an acceleration of imports.
While the ban is still in effect through June of 2004, Bulog is authorized to import 50,000 tons of rice should prices rise 25% above average historical prices; but it is expected that this will not be necessary. Bulog is expected to import about 200,000 tons in 2004, but most of this will occur in the last quarter.
For 2005, imports are pegged at 2.0 million tons.
While stocks were plentiful as of April, the heart of the main crop harvest season, carry-over stocks are forecast to be drawn down by the end of 2004. As of early April, Bulog stock was 1.6 million tons milled rice equivalent. Over the course of the year, Bulog is expected to purchase approximately 3.1 million tons of un-husked rice, or 2 million tons milled rice from local farmers.
The GOI has taken several steps to encourage production, such as providing special credits, and also to protect the domestic rice industry, and most dramatically the recent temporary rice import ban (which is effective until June 2004). The GOI is also improving/building new irrigation facilities, providing seeds for flood farmers, subsidizing fertilizer prices, and facilitating the opening of new rice areas. At this time, the GOI is not considering increasing rice floor prices, i.e., the purchasing price paid to farmers. Debate regarding increasing the import tariff (currently at Rp. 430/kilogram) continues, but no action in this regard is expected in 2004.
Under the temporary rice import ban regulation, rice (including rice for seeds, glutinous rice, rice flour and other flours) imports are subject to inspections and verifications in the exporting countries. Through Ministerial Decree No. 67/MPP/Kep/2/2004 dated Feb. 24, 2004, the Minister of Industry and Trade appointed PT. Sucofindo and PT. Surveyor Indonesia (both are state enterprises) as the authorized surveyors to conduct inspections and verifications. The decree also allows the Minister to appoint new surveyors and/or replace those currently appointed. The surveyors are to submit monthly reports regarding country of origin, rice specification (Harmonized System Code and description of rice), tonnage, and rice variety, shipment date, and ports of destination. This point of origin inspection requirement will also remain in effect once the ban has been lifted beginning in July 2004. Also at that time, importers must be registered to be eligible to import rice. Reportedly, the registration process has been difficult, and it remains to be seen just how many importers will be eligible to import once the market is open again.
On Feb. 13, 2004, GOI increased the total fertilizer price subsidy to Rp. 1.3 trillion (US$ 152.9 million), and implemented a new price structure. The new price structure determines the highest prices by farmers at authorized retailers, effective until Dec. 31, 2004. The new ceiling prices at the district level are as follows: Urea fertilizer (Rp. 1,050/kg); SP-36 super phosphate (Rp. 1,400/kg); ZA - ammonium sulphate (Rp. 950/kg); and fertilizer mix of NPK is Rp. 1,600/kg. To guarantee that retail prices will not escalate and exceed the set prices, the GOI also requires retailers and distributors to sign a contract agreement. Also, liberalization of the pesticide sector has resulted in a dramatic decline in agriculture chemical prices.