August 3, 2016
Locomotive interrupted: Indonesia's promising but erratic feed and livestock sector
An eFeedLink Hot Topic
  • With half of Southeast Asia's population, Indonesia is driving ASEAN's overtaking of China for leading world feed demand growth
  • Despite its great potential, restrictive government policies, macroeconomic shocks repeatedly stall development
  • Corn import controls force mills to use feed wheat, less efficient local ingredients, resulting in lower animal productivity, higher costs
  • Recent economic problems have reduced short-term meat consumption growth to low, nominal levels
  • Long-term growth, productivity would improve if policymakers liberalized feed ingredient markets
Southeast Asia's market of over 500 million people is taking over from China as global agribusiness's top driver. Containing nearly half of ASEAN's population but with meat consumption as low as India, Indonesia's 255 million people are the region's paradoxical agribusiness locomotive.
For while Indonesian feed and livestock has great growth fundamentals, it repeatedly disappoints expectations. Beset by unlucky economic events and misguided government policies, it remains one of the world's most promising agribusiness frontiers. What makes Indonesia meat and livestock so paradoxical is that its agribusiness development was suspended for the better part of a decade, and has just paused again.
Percentage-wise, during the 1990s and for most of the years after 2010, Indonesia's feed-to-meat supply chain expanded at a rate comparable to that of China during its peak boom days. However, with Indonesia's per capita meat consumption only a fraction of China's, it has, if anything, more growth potential going forward. Per capita consumption of its main protein, chicken, remains at the same nascent stage that China's pork consumption was back in the late 1980s, just before its feed demand took off.
On one hand, much like India, it has very low livestock protein consumption, with poultry accounting for 83% of feed production, with broilers having recently overtaken layers in feed consumption. On the other hand, while they consume approximately 10kg of all meats per person, Indonesians also eat approximately 40kg of seafood annually.
Although it has export-oriented aquaculture lines like shrimp, farm raised species account for approximately a third of seafood consumption. As seafood consumption grows and wild catches level out or decline, the proportion of seafood output accounted for by aquaculture –and its feed supply chain inputs –is constantly rising.
At the bottom of the supply chain, aquaculture's export-driven growth and ongoing replacement of wild catch seafood will make it the fastest growing sector in percentage growth terms. At the same time, per capita chicken consumption has made great strides but has a long way to go: It rose from 2kg in the mid-1990s to 6.6kg this year.
Even so, this is only half the per capita chicken consumption levels found in nearby Thailand or Philippines, and only 20% of the poultry meat volume eaten annually by wealthy, neighboring Singapore.
Consequently, Indonesia can easily quadruple its chicken consumption per person over the next two twenty years; and has several decades of rapid agribusiness expansion potential left even after that. 
Unfortunately, its great development potential is matched by daunting, recurrent challenges. Indonesian agribusiness's immaturity is reflected in the high proportion of lower quality feed materials used, which is similar to the situation that existed in China several decades ago. This is particularly true of protein meals.
The USDA reports that Indonesian feed typically consists of 50% corn, 5% fishmeal but only 15% to 20% soymeal (depending on relative oilseed prices in any given year). With soymeal inclusion minimized, alternative local ingredients such as rice bran (15%), copra (5%), crude palm oil (2%) and wheat pollard (8%) are used in its place. Normally, when superior ingredients like soymeal are substituted in place of less efficient ones, import dependence inevitably occurs if the country is short of arable land.
Unfortunately, Indonesian government efforts to minimize import dependence, particularly for corn, has led to perverse results. As happened in China and Philippines, corn import restrictions have resulted in skyrocketing imports of alternative grains –and slow growth in the uptake of the most efficient, livestock-friendly feed inputs.
This can be seen in the way growth in the use of feed inputs track feed production, which grew 136% from 2005 through 2015. With corn harvests only increasing by 29% over this time and imports restricted, something had to give –and it was the quality of feed inputs used.
According to USDA statistics, over this same time, soymeal used in feed increased by 125%, which is anomalous, as one would expect its use to increase more quickly than feed output, not more slowly. In that respect, Indonesian feed's growth goes against the trend set by East Asian countries such as China or Vietnam, which saw the use soymeal and other high quality feed ingredients rise more quickly than feed production itself. –Tellingly, in place of faster growth in soymeal usage, from 2005 through 2015, the volume of copra used in feed jumped by 118% and rice bran by 140% respectively.
Moreover, we see this same, anomalous reliance on lower quality ingredients with regards to feed energy components. For example, feed corn use, which should have increased faster than feed production only increased 100% --but feed wheat use jumped 2,200%, from 50,000 tonnes in 2005 to 1.15 million tonnes in 2015.
Nor does this trend show any sign of slowing down: For this year, the USDA is forecasting Indonesian feed wheat use to rise by another 13%, to 1.3 million tonnes. The flood of imported feed wheat does not reflect low wheat prices but a decade of various government efforts that limited corn imports –even though feed demand grew nearly 4.7 times faster than corn harvests.
This state of affairs continues: A July 2016 USDA report on Indonesia's feed and grain markets notes that, "Indonesian feed mills continue to face difficulties meeting feed corn demand due to 2015-16 weather related production declines and government restrictions on corn imports. In response to low local supplies and import barriers, feed mills are substituting corn with imported feed wheat. The Indonesian Flour Mills Association (APTINDO) reports that there are 22 feed mills importing feed wheat, resulting in a feed wheat import surge since September 2015."
Clearly, while government policies encouraging feed corn self-sufficiency successfully blocked foreign supplies, they were far less successful at boosting domestic corn output. The net result of efforts to block feed crop imports has been a reliance on lower quality alternative domestic inputs, higher input costs and lower animal productivity. Over the long run, this will hold back Indonesia's meat production capacity and consumption, while forcing some of the world's poorer consumers to pay more for their food.
Ironically, had meat demand as quickly as was projected, the consequences of blocking feed mills' access to the lowest cost, highest quality ingredients would be even greater. This however, brings us to the next challenge facing Indonesia's feed and livestock sector: Alongside misguided government microeconomic interference in Indonesian feed's business model, the industry has also been repeatedly subjected to macroeconomic disruptions.
After rising at double digit rates, the late 1990s Asian Economic Crisis and subsequent overthrow of President Suharto saw chicken meat consumption nosedive nearly 50% in two years. Thereafter, five years of political troubles kept meat consumption and feed demand growing at subpar rates.
Finally, during the late 2000s, political stability and steady world economic growth gave the industry a five-year growth spurt of nearly 10% per annum –and made everyone once again overoptimistic. Extrapolating the near 60% growth in feed output from 2008 through 2013 as permanent, many analysts predicted that between 2010 and 2020, chicken production would nearly double and that by now, feed output would be pushing 20 million tonnes.
Instead, for the third time in 20 years, macroeconomics has applied the brakes to Indonesia's livestock sector. Due to a steep devaluation of the rupiah, in US dollar terms, Indonesians have 10% less spending power than they did four years ago. With a large proportion of corn, soy, fishmeal and other key feed inputs imported, that has made any protein created with feed ingredients rise faster than incomes since 2012. Naturally, this decelerated meat consumption growth and with it, flattened feed 2017 feed output growth.
At 1.7%, 2016's estimated feed production growth is far below the 9.7% rate that prevailed from 2010 through 2015 and was last seen during the crisis years of the early 2000s. Declining feed output growth rates reflects how a poor macroeconomic performance has impacted Indonesia's meat consumption growth over the last three years. With chicken meat output on track for 2020 output of 2 million tonnes rather than the commonly projected 2.5 million tonnes, feed demand of 17 million tonnes is also short of the 20 million expected for this time.
Having said that, Indonesia's livestock sector remains promising, but should be put into perspective. Over the long run, barring an unusual political crisis, its petro-dependent economy will recover in tandem with energy prices, as will its income growth. While it may not grow at the torrid near 10% rate of the first half of this decade, by the most conservative estimates, feed and meat demand should rise by at least 5% to 7% annually.
It was expected to have overtaken Thailand and become Southeast Asia's largest feed producing nation at this time, but will do so over the next decade, as Thai agribusiness is more mature and slower growing. –But it is also true that Thailand, with less than 70 million people, produces more feed and meat than Indonesia does with nearly four times as many people.
Moreover, Vietnam, with 90 million people, produces and consumes almost as much meat as Indonesia does –with a feed sector that is poised to keep growing at a comparable rate.
All this reflects Indonesian feed's relative immaturity compared to some of its Southeast Asian neighbors. That is good, because it means that Indonesia has much more long-term growth momentum, multiplied by a much larger population. 
On one hand, with religious prohibitions restricting the scope of its market growth, it will never have as diverse a feed sector as some of its ASEAN neighbors. Moreover, the country's dependence on the oil industry gives it an economic structure that is vulnerable to global economic upsets. This implies that even after Indonesian feed recovers from its present slump, there probably will be more 'unexpected' macroeconomic slumps in its future development.
But while these factors are outside its control, there is one microeconomic impediment fully in the control of the country's policymakers: They should liberalize Indonesian feed input markets, such that both its feed producers and meat consumers would benefit over the long run.


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