October 25, 2008
The re-invention of Indonesian feed
Foreign investment, population growth, rising corn production and falling import prices are putting new life into Indonesia's once sleepy feed industry.
An eFeedLink Hot Topic
by Eric J. BROOKS
After going into a long post-Suharto era slumber in the late 1990s, Indonesia's feed industry is showing some very definite signs of life. According to the Indonesian Feedmill Association, 2007 Indonesian feed output increased by 5 percent to 7.6 million tonnes. This year, it is expected to rise by an additional 8 percent this year to 8.1 million tonnes.
Meanwhile, the feed mill capacity utilisation, which was just 40 percent last year, will be 50 percent this year, 60 percent in 2009 and 76 percent by 2011. The capacity utilisation rate would approach 90 to 100 percent much more quickly were it not for the new mills that are being anticipated.
A vote of confidence from foreign multinationals
In that respect, recent investments by CP, Cargill and other integrated giants express confidence in Indonesian feed's future. On October 6, Cargill announced that it had purchased a livestock feed mill in Medan, Indonesia from PT Berlian Unggas Sakti. Located in Tanjung Morawa, Medan, the mill boasts a current annual output capacity of 160,000 metric tonnes, Cargill intends to upgrade the mill and expand capacity by a third.
Clemens Tan, PT Cargill Indonesia's general manager stated that, "our added investments in modernizing this facility will reduce costs, raise yields and improve safety and farm hygiene for our customers," Tan also emphasized that the new mill extends Cargill's current supply network and coverage in Indonesia at a time when incomes and population are both growing quickly.
Export-driven demand for aquaculture & aqua feed
In addition to its current manufacturing of livestock feed, a new extruder will be installed in order to meet the anticipated demand from Sumatra's booming aquaculture industry. Aquaculture demand, which has always grown strongly, is about to take another turn upwards.
For example, Thailand's CP originally invested in Indonesian aquaculture to serve its vast domestic market. According to Nattapon Kumnounphon, an analyst at United Securities, CP's shrimp exports to the United States account for a whopping 20 per cent of its revenues. Unfortunately, due to the Thai baht's high value, protectionist actions taken against Thai shrimp and competition from lower cost shrimp from Indonesia, which enters the US market duty free.
According to the Bangkok-based Nation newspaper ("WTO Decision Leaves Thai Shrimp Exporters Cock-a-hoop", web posted July 21, 2008), CP intends to safeguard its US market share by exporting more shrimp from its Indonesian operations. To do this, it has already begun expanding both its aquaculture and aqua feed output in that country.
Population increase, political stability, rising incomes power domestic demand
However, four-fifths of Indonesian feed demand is still accounted for by the poultry sector. Here too, there is very good news on both the supply and demand side. With Indonesia's population increasing from about 200 million in the late 1990s to about 250 million today, this creates an implicit 20 percent increase in the demand for livestock and its feed. However, after a half decade of political instability and slow economic growth, since 2005, pent-up demand is causing aggregate demand for feed and livestock to rise disproportionately quickly.
Naturally, this causes demand for poultry feed's primary ingredients, corn and soy, to also rise quickly. Here too, Indonesia is enjoying a spell of good news. The country relies on soy imports and on October 16, Bloomberg reported that, "Soybean meal for delivery in December and January to the port of Jakarta has dropped to $360 a metric ton including freight costs in the past few days from $460 a ton."
Soon to become self-sufficient in corn
Best of all, this 21.7 percent drop in soy import prices coincides with Indonesia achieving self-sufficiency in corn. Corn imports, which totaled 1.6 million tonnes as recently as 2006, fell to 700,000 tonnes in 2007 and will amount to no more than 400,000 tonnes this year.
Agriculture minister Anton Apriyantono stated that after expanding the corn harvest by 14 percent in 2007 and 12 percent this year, Indonesia aspires to achieve self-sufficiency in corn by the beginning of 2009.
Moreover, as Indonesia's corn growing productivity is low, there is scope for inflowing investment to continue raising crop yields. Hence, it appears that despite a strong, ongoing upturn in feed demand, corn supplies should be able to keep pace for the foreseeable future.
There is, amidst all this sunshine, one dark cloud on the horizon. As a developing country perpetually short of hard currency, the Indonesian Feedmill Association is concerned that the global credit crisis could cut off the financing vital to its purchase of soy and inputs such as fertiliser.
The gravity of such a situation or the risk of it occurring in today's volatile economic environment cannot be understated. Nevertheless, should investments by large, integrated conglomerates such as CP or Cargill continue to rise, the proportion of imports accounted for by these large, cash-rich companies will in itself help shield Indonesia from the credit crisis's fallout.
Global monetary failures not withstanding, what matters is that after years of wallowing in a near-depressed state, Indonesian feed's fundamentals appear to be suddenly turning upwards. With both domestic and export demand trends on its side, watch for Indonesia to leverage its low cost base, ample corn supplies to attract inflows of capital and technology.
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