Commissioned papers

Impact and implications of the economic crisis on livestock production, marketing and consumption in Indonesia

Tjeppy D Soedjana

Director
Centre for Agricultural Library & Research Communications
Research Institute for Animal Production
PO Box 221, Bogor 16002, Indonesia

Smallholder farming characterises Indonesia's livestock production and accounts for some 95 percent of the total livestock population, the remaining 5 percent being handled by private enterprises. Large-scale poultry and swine farming is in the hands of the private sector, which is also going into beef cattle fattening and other feedlot operations. Government policies to encourage livestock production focus on smallholders and are designed to improve income, labour absorption, export promotion and import substitution, as well as the nutritional status of the people.

Governments of developing countries such as Indonesia, because of high inflation rates, intervene in the food market by establishing price controls or subsidising various products to keep retail prices low. Since livestock products such as meat, milk and eggs are an important part of household expenditure, any intervention in the livestock product market will have an impact on the cost of living. Further, a favourable price treatment of livestock products may improve the price ratios relative to substitute products.

Livestock plays an important role in Indonesia's economy. It contributes at least 10 percent to the agricultural sector and this share keeps growing whilst the contribution of agriculture to the national economy is on the decline. However, until recently, Indonesia was a net importer of beef, feeder stock and dairy products, as well as of feed stuffs such as corn and soybean. The country also imported poultry products between 1969 and 1984 but has since then become self-sufficient in eggs and broiler meat, thanks to the Mass Guidance Programme (Bimas) on poultry launched around 1979. Until 1990, the domestic production of beef satisfied national needs, but imports of beef and feeder stocks started to increase as of 1991. As for milk, domestic production can only satisfy 35 percent of the nation's needs and the rest has to be imported.

The growing demand for livestock products in Indonesia reflects the growth of per capita income. As income increases, so does animal protein consumption while, as empirical evidence suggests, there is a decline in the consumption of carbohydrates.

In order to avoid future shortages in the supply of livestock products, the government has issued policies for the deregulation of trade in and domestic production of livestock and feed grains, with a view to providing incentives to producers and protecting consumers from the impact of price fluctuations. For instance, individual farmers can now obtain commercial credit from banks; presidential assistance (Bantuan Presiden or Banpres for short), presidential instructions (Inpres) and crash programmes are usually provided to smallholders and poor farmers; the government also has a programme for the development of livestock; and livestock projects are funded through foreign assistance.

In the last two decades Indonesia has known high economic growth rates, averaging more than 7 percent per year, and has built a basis for stable economic growth. After the success of the ‘green revolution’ in rice in the 1970s and trade liberalisation in the early 1980s, there has been a rapid expansion of labour-intensive manufacturing and, since the early 1990s, economic growth has been export-led. However, like some other East Asian countries, Indonesia was hit in 1997 by a severe economic crisis, which has threatened to wipe out the impressive achievements of the past two decades. From one year to the next, the gross domestic product turned negative - official estimates show a 13.7 percent contraction in real GDP in 1988.

In June 1997, when the rate of exchange weakened by more than 60 percent, the Indonesian banking system nearly collapsed; inflation rose by more than 100 percent; the economy was predicted to shrink by 15 percent; the national currency, the rupiah, experienced a sudden and sharp depreciation against the US dollar, triggering a host of serious economic problems. At one time in 1998, the rate of exchange plunged to an absolute low of Rp16 000 for 1 US dollar. By May 1999, it was moving up toward Rp8 000 to the dollar, but the rupiah will seemingly never return to its initially expected level of Rp4 000–5 000 per US dollar. Of course, the crisis has had a direct impact on the poor, although some agricultural commodities operating with local input have been experiencing a boom in export sales.

The pressure on the rupiah increased and the currency fell by more than 3 percent in the first few days of August. The central bank spent US$500 million to strengthen the rupiah, apparently with little success, then chose to let market forces decide: the rupiah was allowed to float freely. The currency continued to fall and, at the end of December, the exchange rate was down to Rp5 700. A sudden drop to Rp13 000 occurred in January 1998. From February to April, a sustained recovery took place. But the social unrest on 13–14 May worsened the economic climate and undermined confidence in the rupiah. In effect, the currency depreciated again, to Rp15 000 in late June. From July, it appreciated, and reached Rp11 000 in September. In January 1999, the rupiah appreciated further, and it traded at about Rp8 000 in May.

The pre-crisis situation

Beef

The per capita consumption of animal protein in 1996, including fish, poultry, beef, pork, lamb and mutton, was very low, i.e. only 16.7 kg per year, and that of beef was only 0.6 kg or 3.7 percent of total animal protein consumption. Consumption of poultry meat was more than five times that of beef, and fish consumption remained predominant as fish is cheaper than meat. Consumption of these two kinds of meat increased very rapidly. On average, the consumer price of beef ranged countrywide from Rp9 000 to Rp11 400 per kg between January 1995 and December 1997 and increased by a half-percentage point per month during the period, which is less than the increases registered in rice and cooking oil prices.

Consumer preference seems to be gradually shifting away from fresh beef bought in open-air markets to chilled or frozen beef bought in supermarkets, as a result of higher income, shopping convenience and discriminating taste. During the 1990–1997 period, the market share of supermarkets probably increased from less than 5 percent to 10–15 percent. During the period, the cattle population increased by 2 percent per year. The dairy cattle, which is another source of beef, grew by 2.6 percent. The number of buffaloes, on the other hand, declined by 0.7 percent. The chicken population increased by 10.3 percent, and that of goats and sheep by 3.9 percent. In terms of production shares, only poultry meat registered an increase, from 49 percent (1990) to 55 percent (1997), while beef declined, from 25 to 21 percent, which indicates a moderate shift in consumption from beef and other kinds of meat to poultry meat.

Furthermore, the aggregate meat production increased by 7.6 percent a year, implying a greater availability of meat for consumption. Poultry meat production grew by 10 percent, that of pork by 7.8 percent. Beef production grew by 4.8 percent while that of buffalo and lamb trailed behind with less than 1.5 percent. It can be seen that the production growth rates of beef, buffalo and pig were higher than the respective population growth rates, suggesting excessive slaughtering rates.

Beef production may be divided into domestic and imported cattle. Until 1990, beef production relied entirely on domestic cattle. From 1991, when private companies were allowed to import live feeder cattle, the amount of imported cattle increased dramatically by 84.5 percent per year (in meat equivalent) until 1997, while beef production from domestic cattle almost stagnated. The share of domestic cattle in beef production of course diminished and it stood at 76.6 percent in 1997. This points to the increasing importance of imported feeder cattle, particularly from the Northern Territory of Australia.

The beef production system in Indonesia is characterised by small-scale operations with 1 to 3 head per household, which consider cattle raising as a source of draught and savings rather than meat, and use traditional technologies of low-quality feeds resulting in low productivity and low quality in output. To correct this, the government is encouraging private companies to modernise the beef sector by improving managerial ability and the welfare of smallholder producers.

The most notable development programme is the Beef Nucleus Estates and Smallholders (NES) or PIR Sapi Potong. To succeed with this programme, the government issued a set of measures in January 1990 and in June 1991 to deregulate the beef sector. Essentially, they allow the private sector to invest in cattle fattening and cattle breeding through the construction of feedlots using imported live cattle, especially from Australia. A number of companies rose to the challenge. The Association of Indonesian Meat Producers and Feedlots (Apfindo) was established. Membership grew from 37 companies in 1996 to 47 in 1998.

There are three types of beef NES operations: fattening NES or PIR Penggemukan, breeding NES or PIR Bakalan, and forage NES or PIR Pakan. In the beef NES schemes, a private company serves as a nucleus and smallholders serve as plasm. In the fattening NES scheme, the company provides the main inputs as well as technical assistance and control and purchases the cattle output, and the smallholders provide land, labour and forage and are responsible for cattle feeding and maintenance. The principal inputs include feeder cattle, which is about 10 percent of total cattle in the scheme, concentrate, vaccines and other medicines. The cattle can be domestic or imported, with a fattening period of 60 to 180 days.

In the breeding NES scheme, which runs along the same lines, the main inputs provided by the company consist of heifers or cows, semen and equipment for artificial insemination, concentrate, vaccines and other medicines. The smallholders may also provide heifers and cows if necessary. Local heifers or cows may be used, and the semen of the better-quality breeder steers being used is supplied through import.

In the forage NES scheme, the company also provides the main inputs as well as technical assistance and control and purchases the smallholders' output (i.e. forage), while the smallholders provide land and labour and are responsible for producing forage. The main inputs include seeds (mostly king grass and corn) and fertiliser.

A number of studies have concluded that the fattening NES scheme is successful. Yusdja et al. (1997), for instance, conclude that the scheme, using domestic and imported cattle, has increased beef production and provided income and employment to smallholding producers; that fattening imported cattle can mitigate the pressure on the cattle population in the producing regions and results in more intensive land use for the production of forage; and that importing feeder cattle for fattening could save foreign exchange because increased local production of beef can reduce beef imports. Adnyana et al. (1996) also show that the scheme in Lampung province, using credit from a bank or from a feedlot company or financed by the smallholders themselves, is economically viable.

The forage NES scheme has developed, though not as rapidly as the fattening NES scheme. Through this scheme, marginal and idle land can be turned into fertile land for more profitable farms. Marginal land can be turned into productive grassland for forage production, which will generate income for smallholders. Young corn plants as forage may be cultivated up to three or even four times a year depending on climatic conditions.

Adiwoso (1996) points out that the beef NES schemes have multiplier effects in terms of:

• additional income for smallholders involved in the forage NES scheme, i.e. Rp35.10 million from dried corn, Rp4.32 million from corn forage (by product), Rp15.90 million from tapioca and Rp38.61 million from grass, the additional absorption of concentrates amounting to about Rp75.62 million;

• the fattening NES scheme has provided 32 500 head of cattle to smallholders involving 650 farmer groups and 6 500 village co-operatives;

• the forage and fattening schemes have generated employment for 105 managers, 105 staffers, 175 technical staffers and 3 500 labourers;

• shipping services from Australia to Indonesia (Rp76.38 million), trucking from ship to feedlot (Rp3.25 million), trucking from feedlot to slaughterhouse (Rp16.25 million), meat trucking (11 050 units) and feed trucking (4.78 million);

• trade including machinery, fuel, leather, bone meal, and compost;

• government revenues of Rp10.89 million and other taxes; and

• meat supply for domestic consumers amounting to 55 250 tons and valued at Rp562.5 million, besides some exported meat. Furthermore, it is indicated that the breeding NES scheme is unsuccessful because the cost of production is double the revenue.

Cattle smallholders not involved in the beef NES schemes have been assisted through other schemes, such as the Poor Village Development Aid project or Inpres Desa Tertinggal, Presidential Assistance or Bantuan Presiden, and the Integrated Agricultural Development Project or Proyek Pembangunan Pertanian Rakyat Terpadu. In these schemes, smallholders either individually or collectively are provided with a number of cattle. They are responsible for redistributing half of the calves born to the principal cows to other farmers-the so-called revolving system-with no interest charge.

Meat processing activities involve slaughtering, boning, hanging, cutting, chilling or freezing, and packaging. In principle, the slaughter of cattle must be reported to the local government authority for registration and health inspection. Illegal slaughtering is still going on, however, primarily because of communication difficulties and other social aspects.

Meat supplied to supermarkets is graded, packed and chilled to enable consumers to choose according to their tastes and incomes. On the other hand, meat supplied to open-air markets takes the form of carcasses or half carcasses which are not graded. Most open-air-market consumers prefer fresh meat to chilled or frozen meat, and tend to be indifferent to quality. This difference in purchasing habits means different pricing strategies between supermarket managers and market retailers.

The import of feeder cattle is aimed at supplying more meat of good quality and fostering the modernisation process of the beef industry. Table 1 shows that the quantities imported between 1990 and 1997 grew by 82.5 percent a year on average. The large increase registered in 1995 was probably due to the doubling in the number of APFINDO members and to a lower import price. In 1996, that price increased slightly, but declined again in 1997 to a level lower than the 1995 price.

Table 1. Indonesia feeder cattle import quantity and price, 1990–1997

Source: Central Bureau of Statistics

Table 2. Indonesia beef import quantity and price, 1990–1997

Source: Central Bureau of Statistics

Beef was also imported in addition to feeder cattle, but only frozen boneless meat was of prominence. During the 1990–1997 period, the average share of this meat was about 86.5 percent, with a high import growth rate of 47.8 percent per year. The share of the other meats ranged from 0.7 to 6.5 percent, with import growth rates of -2.7 to 46.3 percent. The total volume of beef imports grew by 39.5 percent per year. This boost in the import of frozen boneless meat and other kinds of meat, aimed at meeting the increasing gap between production and consumption, seems to have been enhanced by a decline in import prices since 1995. In 1997, the price even dropped to its lowest level during the period. This decline may be attributed to oversupply of beef in the US market preventing the United States from importing beef from Australia as they usually did in the previous periods (Table 2).

The major sources of imported beef were Australia, New Zealand and the United States. In 1990, New Zealand and the United States were the main suppliers. However, since 1991 Australia has taken the lead and that country provided almost 68 percent of total beef import in 1997. New Zealand came second, while the United States and other countries became minor suppliers. Cheaper prices and shorter distances in favour of Australia could be the prime reasons for that country's dominance.

During the period considered, Indonesia exported beef only, as export of live cattle was banned. Table 3 indicates five types of exported beef, with a predominance of fresh or chilled carcasses and half carcasses. During the period, export fluctuated and even decreased considerably. Essentially, beef export was a re-export of imported beef or beef from imported feeder cattle. The main destinations were Singapore, the Philippines and Hong Kong, Japan, Italy, Germany and the Netherlands. Prior to the Asian crisis, according to the Directorate General of Customs and Excise (1995), import tariffs were imposed to protect domestic cattle from competitive beef from overseas, for example, zero percent for breeder steer, 10 percent for feeder cattle, 30 percent for fresh or chilled beef, and 35 percent for frozen beef.

Table 3. Indonesia beef exports, 1990–1997

Source: Central Bureau of Statistics

The zero-percent tariff on breeder steer import was aimed at encouraging breeding activities in order to improve cattle productivity and quality. The moderate rate on feeder cattle was aimed at fostering feedlot operations for companies to produce more and better beef without any severe effects on the domestic cattle economy. The high tariff imposed on beef import was aimed at preventing a decline in beef prices in the domestic market, and it also provided some support to feedlot-company operations.

The rates mentioned above used 1995, the year GATT was ratified, as base-year. In the following years, they were to be gradually reduced and eventually abandoned. This is of particular importance to the implementation of GATT, which seeks to eliminate distorting economic policies. The tariff rate in 1995 dropped to zero percent for feeder cattle and 5 percent for beef. This policy change resulted in a dramatic increase in feeder cattle and beef import as of 1996.

A condition attached to the import of live cattle by feedlot companies is that a minimum of 10 percent of the imported cattle must be distributed to smallholders in the beef NES schemes. As indicated earlier, this policy was aimed at attempting to modernise the beef sector through the adoption of these schemes. To some extent, it has acted as a brake on the efficiency of feedlot-company operations. Moreover, a quota was imposed in the inter-island marketing of cattle as a means to prevent a further depletion of cattle so as to sustain sufficient cattle population growth in the producing regions like South Sulawesi and East and West Nusatenggara.

Poultry

Commercial poultry has known spectacular growth since 1972 up until 1997. This has translated into a mushrooming of feed mills, breeding farms and slaughterhouses as well as medicine-producing plants. The sector has contributed to national self-sufficiency in eggs and meat. It provides about 60 percent of the national supply of meat, while beef contributes only 25 percent (DGLS, 1997).

Broilers

Poultry farming is one of the most important components of the livestock sector in Indonesia, and the market for poultry products is very large and widely distributed. However, broiler and layer raising is relatively new to Indonesia: it began in the 1970s, through the Bimas programme. By 1979, though, broiler production overtook beef production, and broiler, beef and pork are now the main contributors to the total output of meat. Currently the domestic market for broilers is saturated as a result of the national campaign of increasing non-oil exports, and it may be one of the reasons why the price of broilers has fallen drastically in recent years. The export of broilers is expected to increase as it has in the past: from 213 400 tons in 1991 to 1 000 400 tons in 1995, with a value of US$459 300 and US$3 443 300 in those years.

Eggs

Layer farming, which also started in the 1970s, is decidedly modern and highly specialised in its management. The concentration of much of the layer chicken population in west Java is due to the proximity of large markets in big cities near Jakarta, the largest market for chicken eggs. Export of eggs started in 1986 with just 6 tons of fresh eggs but jumped to 55 tons in 1987, a sign that Indonesia has the potential to export chicken eggs, whereas only three years before it had been importing hatching eggs, fresh eggs, and yolks. More recently, exports of fresh eggs amounted to 959 500 eggs in 1991 but were down to 198 200 eggs by 1995, and hatching eggs exports also went down during the period, from 1 756 300 eggs to 737 500. The reduction in export volumes was due to increased domestic demand for fresh eggs and to the derived demand for hatching eggs.

In 1974, the first, Japanese-funded feed manufacturer started operations, and several years later other large-scale supporting facilities opened in and around Jakarta. The expansion continued until 1980, when there were protests by small poultry farmers, who claimed that large companies tended to dominate the business of poultry production. The government responded by issuing a presidential decree (Kepres No50/1980) purporting to limit the capacity of the individual poultry (layer) farm to 5 000 birds. But the regulation was not properly enforced because the growing poultry industry was unable to stop individual private poultry farms from expanding if they could.

In 1990, in response to renewed protests by small farmers, the government issued another presidential decree (Kepres No22/1990), which regulated two items. First, the maximum capacity of small-scale farms was increased to 15 000 birds. Second, private commercial farms were allowed to operate so long as 65 percent of their production was exported and they involved small farms in their operations as partners. The objective of the decree was clearly to acknowledge the growing private commercial farms and to try to help the small farms. But the decree was not enforced as technical guidance on its implementation was not forthcoming until 1997.

More regulations were issued during the 1980–1997 period. Among them were a ban on the import of day-old chicks, to protect the domestic breeding farms, and the monopoly given to the National Logistics Agency (Bulog) to import feed stuff such as corn, fish meal and soybean cake, with only one company allowed to produce soybean meal in collaboration with Bulog. To protect this domestic soybean meal factory, in July 1992 the government set a 5-percent import tariff on soybean meal and an additional import tax of 35 percent. The following year, after adverse reactions, the import tax was cancelled, but yet another policy obliged importers of soybean meal to buy 40 percent of it from the domestic market. With more pressure from the public, in 1994 the government cancelled all import taxes on corn, soybean meal, fishmeal, groundnut meal and day-old chicks.

In 1990, in order to protect the domestic breeding farms, the government forbade any new domestic investment in the pure line stock and grandparent stock business except for testing purposes. But that regulation was lifted in July 1992, clearing the way for locals and foreigners alike to invest in breeding farms. This gave a boost to the poultry industry, particularly feed factories and breeding farms, and egg and broiler production increased by 17 and 25 percent per year respectively. However, some smaller feed factories and breeders had to close down: they simply could not compete with larger companies financed through domestic and foreign investments, and the structure of feed factories gradually changed toward an oligopolistic market (Hutabarat and Yusdja, 1992).

There was also a tendency for large feed companies to vertically integrate their operations in terms of both finance and management, covering in some cases both upstream and downstream industries. Thus, the price fluctuations at retail level of poultry products were felt by both consumers and small poultry producers.

Table 4. Domestic production and target figures, 1994–1996

Source: DGLS (1997)

The Indonesian poultry industry, including broilers and layers, has grown dramatically since the 1970s through the application of both output-increasing and cost-saving technologies. The modern poultry industry began in early 1980 by importing commercial breeds to produce eggs. In the early years, the local (kampung) chicken dominated the market and constituted a large portion of chicken meat consumption, as people preferred to eat kampung chicken meat or eggs for reasons having to do with taste, perceived nutritional value and so on. However, due to the low output of the local chicken in terms of meat or eggs, commercial farming of layers and broilers began to develop. Currently, the output of broiler meat is more than double that of kampung chicken meat and commercial egg production more than four times that of eggs from native chickens. Altogether, chicken meat accounts for more than 60 percent of the meat supply in Indonesia.

Most of the indigenous chickens are raised by smallholding farmers in a free-range system with little or no inputs. Farmers keep them to produce eggs for family consumption or to be sold when they need cash. Only few (1 to 10) chickens are raised per household; they have a very low productivity (20–40 kg/year) as they grow to their full, 0.8 kg body weight in four to six months. It is estimated that in 1996, the total number of kampung chicken was close to 260 million, with an annual increase of 2–3 percent. Given that they cost little to raise and the price of meat or eggs is attractive (almost double), the native chickens are still being raised by many farmers and are the least affected by the economic crisis. However, native chickens cannot produce enough meat or eggs to satisfy the growing demand, and commercial chicken raising is more than ever necessary.

Poultry and swine enterprises extensively use feed concentrates, composed of such basic ingredients as corn, soybean, rice bran, cassava, wheat pollard, fishmeal, meat meal or crude palm oil. The government's main interventions on feed stuff in the past were on rice, which affects rice bran production, and on corn, soybean and cassava. For example, it set a floor pricing at farm level for corn and soybean but none for cassava. Now, the government only intervenes on rice, through Bulog. Until 1997, Bulog controlled the trading from abroad of corn, soybean, soybean cake and fishmeal, while the domestic market of these feed stuffs was controlled to satisfy both producers and consumers by stabilising prices.

Table 5. Animal population & feed production in Southeast Asia (1996)

Source: Tangendjaya and Soedjana (1999)

Table 6. Soybean meal production and use, 1996 (thousand tonnes)

Source: Government reports

During the sixth five-year development plan (Repelita VI), livestock production was targeted to increase by 6.4 percent a year, and this was mostly achieved through the increased production of broilers and layers. The target was met during the last three years of the plan and the country was self-sufficient in broiler and egg. Furthermore, it is projected that, by 2005, Indonesia will produce more than 1.5 billion birds.

Table 7. Ratio of actual-to-capacity production of pure-bred chicken feed, 1990–1994

Source: CIC 1990–1994, various sources

Most of the broiler and layer farms are owned by smallholders with the capacity to hold 1,000–3,000 birds. A few large farms can handle more one million layers and between one and three million broilers, but these are usually poultry integrators who also have feed mills or breeding farms or slaughterhouses or all of the above. Among some 20 poultry integrators, four account for 80 percent of the market, namely Charoen Pokphand (33%), Japfa Comfeed (19%), Anwar Sierad (16%) and Subur (12%). Wonokoyo and others share the remaining 20 percent.

Although poultry production can be found in most of Indonesia's main islands, the main provinces which raise broilers or layers are those of Java and North Sulawesi. This is closely related to the supply of raw materials for feeds and the proximity to markets. Most broiler meat and most of the layer eggs are consumed by people living in the big cities. Jakarta alone before the crisis received about one million birds per day. Broiler farms therefore are located in nearby areas such as Sukabumi, Bogor, Tangerang, Serang or Tasikmalaya. For layer farms, the main areas include Tangerang, Bogor and Lampung. In central Java, the main layer farms are located in Semarang, Yogyakarta and Solo, whereas in East Java they are to be found in Sidoarjo, Blitar, Tulung Agung and Kediri. In North Sumatra, the majority of the farms are located near Medan.

In its early development, Indonesia imported parent stock for both broiler and layer farms from various countries. However, the breeding farms developed rapidly through the import of grandparent stock. From 14 grandparent-stock farms, parent stocks were distributed to 104 companies. Most of the main breeds in the world are found in Indonesia, notably Arbor Acre, Ross, Cobb, Hubbard, Avian, Lohman, Hybro, Starbro and Peterson for broilers and Isa, Hyline, Hisex, M&N and Golden Comet for layers. Indonesia also has its own pure line, called Bromo.

Table 8. Import of grandparent-stock day-old chick broiler by strain, 1996

On densely populated Java, broiler houses are located in the villages, close to the community. The houses are made of bamboo or concrete. They are open-sided, with roofs of asbestos or tiles or pandan leaf, and floors of concrete or beaten earth. Rice hull is used as litter. Most farmers operate an all-in all-out system and they sell live birds at the age of 38–45 days when their average weight is between 1 and 1.8 kg. Day-old chicks are purchased from a breeding company and broiler feed in the form of crumble or pellets is obtained from a modern feed mill. Gas, kerosene or coal is used for heating the brooding area. Mortality varies between 3 and 10 percent, and the feed conversion ratio is 1.8 to 2.2.

Birds in layer farms are raised in growing houses for 13 to 16 weeks, then transferred to open-sided cages raised above ground in a two-tier system. The cages are made of bamboo or wire, while feeders ordinarily are made of bamboo, PVC pipe or wood. Most of the feeding and egg collection is done manually. The eggs are sold through agents as fresh eggs. The majority of layer farmers produce their own feed by mixing concentrate bought from a feed mill with corn and rice bran purchased locally. Some farmers, especially outside Java, purchase readymade feed from the feed mills, while large layer farms use their own feed formula.

Layer feeds are given in several forms, all without pellets. Almost all layers are of the brown type, although people in the old days used to consume white eggs. Each layer can produce 260–280 eggs per year with a feed-egg ratio of 2.5 to 3.0. All hens can be sold as meat at prices about equal or even higher than those of broiler meat. There are also specialised farmers who raise the males of layers for meat; the animals reach a body weight of 0.7–0.8 kg within 7 to 8 weeks. This type of chicken sells at higher prices than broilers because its meat tastes almost the same as native chicken.

Milk and dairy products

The dairy industry in Indonesia is characterised by two economic agents which would seem to be antagonistic by nature because they are ruled by conflicting interests. On one side, there are many producers who rely on dairy farming as their source of income and, on the other, a few processing companies enjoying government protection. The dairy sector in Indonesia has developed in the last quarter century or so mainly through government intervention, particularly on the production side, to narrow the gap between the two agents. Domestic milk production has increased each year, from 28 900 tons in 1969 to 72 200 tons in 1979, 338 200 tons in 1989 and 405 500 tons in 1998, and the ratio between domestic and imported raw materials for the milk processing industry has shrunk from 1:20 in 1980 to 1:2 in 1992 and 1:2.4 in 1996.

Indonesian dairy farms are small and not very efficient, with 3 or 4 lactating cows per household and a milk production of 9 to 10 litres per cow per day. Profit per litre is low, and the dairy income of the farmer is not sufficient to support an average family of five. In spite of this, the number of dairy farms keeps growing, and at a faster pace than that of general farm households too. This trend is attributed to the government dairy programme, which protects domestic producers from import competition through its ratio policy.

Government involvement in the sector became more apparent in early 1980, when an integrated dairy sector development programme was launched. The policy package consisted in:

• the issuance of import licences to a limited number of domestic buyers;

• tight limitation of entry into the milk processing business;

• imposition of import tariffs of between 5 and 30 percent to raw materials such as skimmed milk powder, anhydrous milk fat, butter milk, lactose and end products such as butter and cheese;

• ratio requirement for the processing industries between domestically produced milk and imported products, subject to revision every six months;

• procurement of special loans; and

• institutionalised marketing of fresh milk.

An important objective of these measures was to substitute domestic milk production to the import of dairy products. But even more important, the government sought to lay strong foundations for the local production of fresh milk. This was done by restraining the development of the processing industry in order to integrate it with the production sector. By the same token, the programme would help conserve foreign exchange, create employment for the rural population, improve the nutritional status of the people, and help promote the conservation of natural resources and of the environment.

The increase in the number of farms translated into an expansion of the dairy cattle population. During the 1973–1983 period, it almost tripled, with a growth rate of 18 percent per year which slowed to 8 percent a year over the next ten years. Domestic milk production increased by 3.5 percent a year during those years, but so did milk imports, by 12 percent per year.

The impact of the crisis

Beef

The devaluation led to a big increase in the rupiah price of imported beef and imported live cattle. After a lag of a few months, the increase was transmitted to the domestic market and the price of beef shot up. Fairly stable until the end of 1977 (Rp11 000, from Rp9 000 in January 1995, a 0.5-percent increase per month), the price of the kilo of beef rose to Rp19 000 in the first eleven months of 1998.

The devaluation also increased the price of consumer goods and services. The consumer price index for food increased from 100 in January 1995 to 157.9 in January 1998 and eventually exceeded 300 in September to November 1998. This denotes a steep decline in the purchasing power of consumers and in real per capita income. In addition, the economic crisis squeezed business operations, and this, in turn, worsened employment conditions in the private sector. All this combined to undermine the per capita consumption of expensive food such as beef.

Restricted access to credit, compounded by Australia's insistence on trading on a cash basis, has also curtailed the ability of companies to import live cattle and beef, even though the tariff levy on beef import has been reduced to 5 percent.

Poultry

Again, the devaluation of the rupiah and subsequent fluctuations in the exchange rate have made most imported products more expensive, including all materials required for poultry production. The jump in the price of soybean meal from Rp800/kg to Rp3,500/kg has forced feed mills to up their prices too, as often as eight times within one month, and this makes it difficult for farmers to raise poultry. Some companies has decided to scrap their existing contracts and to set up new feed mills. However, the increase in the investment cost of machinery from Rp5 billion (US$2 million) to Rp18–20 billion makes such investment unattractive.

As a result, a decade of rapid growth in the world trade of poultry meat has ended. Grain imports by Asia have been temporarily reduced and the patterns of world trade have changed. For example, Thailand is now more competitive in the Japanese market, to the detriment of the United States and China. The decrease in the demand for grain and soybean meal has resulted in an oversupply of grain by the United States and Argentine and of soybean meal by the United States, Argentine, Brazil and India. Last year (1998), the lowest prices for grain (US$80/tonne) and soybean meal (US$160/tonne) were experienced. Despite recent increases, they remain lower than a year ago. In 1998, for lack of cash, South Korea imported large amounts of soybean meal from the United States through a credit scheme.

In 1997, the per capita income in Indonesia was somewhat over US$1 000. Aho (1998) claims that at this point, poultry consumption is supposed to increase. Poultry demand, however, varies very much with income, especially among high-income people in rural and urban areas. A sudden decrease in people's income in US$ dollar terms or a dramatic increase in the domestic price of poultry products would certainly reduce demand. And this proved to be true, when the per capita income dropped from US$1 045 to US$430.

Table 9. Broiler retail complete feed price Aug 1997-Jan 1998

On the basis of a feed conversion rate of 2.0 for broilers and 2.7 for eggs, the number of broilers or layers and the feed production figure can be calculated. It was predicted that in 1998, broiler production would decrease to only 30 percent and egg production to only 40 percent from the previous year (1997). Reduction in feed production will influence the amount of corn and rice bran required. Excess supply of both products has prompted the world producers to apparently export as expected. Recently, corn was exported from Lampung, Medan and even East Java. The American Soybean Association in Jakarta has recorded more than 400 000 tonnes of corn exported to Malaysia, Thailand and South Korea, where the price of corn is very much affected by world market conditions. The suppliers of American corn will certainly push the world corn price down, as happened a few months ago when corn was at only US$85 per tonne.

With the crisis, the installed production capacity of upstream industries dropped to 20 percent. These industries are run mostly by vertically integrated companies. Many poultry shops closed down because of huge debts incurred by small farmers, and thus failed to fulfil their obligations to the feed companies, which eventually cut back on production and staff and insisted on cash payments from customers instead of the usual credit arrangements.

Table 10. Market situation for broilers and eggs in Indonesia (1996–1998)

Source: Centre for Market Information (Pinsar), 1998

To cushion the impact of the crisis on the poultry industry, the government has provided a rescue programme through a credit scheme to lower production costs and to purchase domestic corn. The scheme has helped broiler farmers in particular in the form of working capital for up to Rp25 million at 17-percent interest per year. However, these farmers still face low demand, due to the competition from larger companies which can cope with feed supply despite the crisis and may deposit the credit funds in the bank at 5-percent interest per month with no production risk to be borne. The credit scheme eventually cannot save the poultry industry.

Another approach has been to subsidise imports of soybean and fishmeal to the extent of the difference between the exchange rate at the time an import is taking place and a fixed exchange rate of Rp5 000 per US dollar. This was meant to reduce the retail price of feed to Rp1 200 per kg, but according to Poultry Indonesia (1998), the price continued to increase, up to Rp2 500 per kg. This gave rise to the feeling that the policy was set to benefit large-scale feed companies, because the retail price of feed is not determined by the price of soybean alone but also by that of other ingredients such as fishmeal, supplements and premix, as well as by the exchange rate and the world prices for corn and soybean meal.

Yet another policy, of purchasing the domestic corn production through village co-operatives in collaboration with feed factories, was predicted to be ineffective because corn has its own local demand, due to continuing sharp increases in price, while competitive advantage of the village co-operatives is not comparable to that of professional traders.

Milk and dairy products

The impact of the crisis on the dairy sector was indicated by distortions in milk production at farm level similar to those found in poultry, in which increased input costs mainly from feeds have reduced the ability of individual farms to cover their production costs by reducing the amount and quality of feed concentrates. Low-quality feed results in lower production of milk, and thus in lower returns for farmers. This shows in the fact that the amount of fresh milk absorbed by the milk-processing units has declined. For example, fresh milk absorbed by Indomilk from 15 dairy co-operatives in West Java and Jakarta during the period of January (before the crisis) to November 1997 (during the crisis) fell from 822 460 kg per month to 214 117 kg, a 70-percent shrinkage.

An unfavourable climate, poor management and poor milk marketing knowledge combined to slow the expansion of the industry from Java, where it is still concentrated, to other islands. The government imported large numbers of cattle in the 1960s and 1970s to stimulate the industry, and allowed the establishment of joint ventures with foreign companies. But production continued to be stalled by technical and marketing problems. A major boost in production occurred in the 1980s, when the government introduced a regulation requiring local processors to use domestic raw milk. The number of dairy cows rose from 193,000 in 1986 to 302,000 in 1991, thanks notably to massive import of live animals from Australia and New Zealand. During the same period, milk production rose from 204 000 tons to 329 000 tons.

For all that, domestic production of milk satisfies only 35 percent of local demand, and the rest has to be imported - imported milk amounted to 533 000 tons in 1993 and to 1 026 200 tons in 1995.

As part of the commitment made to IMF, the latest presidential instruction (Inpres No4/1998) has lifted the four major regulations imposed on the dairy industry: import ratio, import tariffs, import licensing, and restriction on investment in the dairy industry. The dairy industry is supposed to prepare itself for an open market, sooner than the year 2003 previously agreed upon during the APEC meeting in Bogor (the Bogor Declaration).

Effects on the livestock industry

Beef

Consumers, particularly among the poor and the middle class, have presumably switched from expensive beef to other meats like chicken and fish. The unavailability of quantitative data on beef and other meat consumption makes the development of a rigorous quantitative model of beef demand impossible. Hence, the effects of crisis on beef consumption must be assessed using qualitative judgements by looking at changes in the relative prices between beef and competing meats, and interpreting income elasticity estimates.

The relative prices of beef and chicken meat used to be fairly constant. From January 1996 to January 1997, the differential ranged from 2.20 to 2.42. In February 1998, it began to decrease, to 2.02. In the following nine months, the figure ranged from 1.60 to 1.75. Obviously, beef was becoming less expensive than chicken meat. Theoretically, people would tend to consume more beef and less chicken, all else remaining the same. But given that the actual price of chicken meat was still lower than that of beef and that the real income of consumers had decreased, what should be actually expected is lesser consumption of both beef and chicken meat, and perhaps a slight increase in the consumption of fish, the cheaper product.

Hermanto et al. (1990) provided evidence that the higher the per capita income of the consumer, the lower the income elasticity of the demand for meat in both rural and urban areas. In the case of high-spending consumers, the elasticity figures were below unity, suggesting an inelastic income effect on consumption. The income elasticity of beef consumption, in particular, was 0.45 for rural areas and 0.42 in urban areas, implying that moneyed consumers kept eating beef, irrespective of prices and variations in income.

The quantity of imported live feeder cattle in 1998 was 24 792 066 kg, at an average price of US$1.212 per kg. The figures for beef were 6 443 140 kg and US$1.068. Of this, 96.68 percent was frozen boneless beef, with an average price of US$1.056 per kg. These respective import quantities of live cattle and beef constituted 19.12 and 27.63 percent of the 1997 figures. Assuming that the import quantity up to December 1998 doubled, these 1998 figures remained much lower than the 1997 imports, suggesting a decrease in the import of live cattle and beef. Data from Apfindo (1999) show that its members imported 27 253 head of cattle and 1 635 tons of beef between January 1998 and January 1999. This constitutes only 8.39 percent of the 1996 position (325 000 head).

As the domestic price of beef increases, the income of the small producers not included in the beef NES schemes also increases in rupiah terms. On the other hand, the income of the small producers included in the schemes are jeopardised as the number of head per herd declines considerably, sometimes down to zero. Profits of feedlot companies may be expected to decline substantially as a result of a big decrease in the cattle herd. Overhead costs have become higher due primarily to the fact that a significant portion of the infrastructure has become idle. A number of feedlot companies may stop operations for a while. As shown by 1999 Apfindo data, of 47 members, only 9 members (10.6 percent) imported live cattle, and only 14 members (29.8 percent) imported beef. No Apfindo member imported both. This suggests ongoing competition between cattle-importing and beef-importing companies.

Wood (1998) indicates that feedlot company profits are sensitive to changes in the landed price of live cattle and the selling price of beef. Landed price is affected by the imported price in dollar terms and by the exchange rate of the rupiah to the US dollar. According to the companies interviewed by the author, the current maximum landed price is about US$1 per kg for live cattle, though Apfindo claims it to be Rp7 000 per kg.

The income of the processing sector (slaughterhouses) has decreased as a consequence of reduced slaughtered cattle and throughput. Processing activities have become inefficient, due primarily to much underused slaughter capacity. In the case of a modern slaughterhouse owned by a private company in Jakarta, for instance, the number of cattle slaughtered during 1998 was 25 percent below breakeven throughput (i.e. 450 versus 600 head per day). Slaughtering operations could only be sustained by a cross subsidy of cattle slaughter with pig slaughter, whereby the unit cost of pig slaughter is cheap.

The substantial decline in the import of live cattle and beef during the crisis means reduced competition between local herds and imported beef. Small producers and traders have a big incentive to deplete the cattle herd so as to take advantage of the high domestic price of beef, but this could endanger the domestic cattle population in the future. In the previous (normal) conditions, trader operations were sustained by imported live cattle and beef. During the crisis, as total import of live cattle and beef drops, wholesaling and retailing decline substantially. This may also be true for trucking services.

The government has slashed tariffs on imported beef from 30 to 5 percent. This will tend to encourage imports of beef relative to live cattle whenever demand for beef picks up again. Arrangements for live cattle import have changed. It is likely that some feedlot companies are no longer allocating cattle to smallholders, while other companies maintain their partnership with smallholders through the beef NES schemes, though with smaller numbers of cattle.

Poultry

Feed industry

The increase in the price of raw materials, especially protein meal sources such as soybean meal, fishmeal, meat-and-bone meal, has resulted in an increase in the price of feed from feed mills. The feed industry does not like to sell on credit and insists on cash, in order to protect itself against bad debts when farmers cannot afford to pay. This has resulted in a drop of feed demand by poultry producers and in a subsequent decrease in feed production.

The turmoil was compounded by the fact that the industry had previously invested heavily to increase capacity in anticipation of a surge in demand. In 1997, less then 60 percent of capacity was used, and the 20-percent drop in production in 1998 resulted in idle capacity at several feed mills. Many new big feed mills in the Serang area of West Java were reported to be idle. The older feed mills produced less compound feed and less feed stuff by operating only four days a week. A few feed mills were closed down, leaving huge debts in their wake, and many foreign employees had to return home.

Distributors and supporting agents

The poultry industry is supported by many other business lines: drugs, premix or additive production, equipment supply, and so on. The significant drop in the poultry industry has affected much of these lines of business, as most of them rely on imported goods. This, in turn, has affected the sale of the products and pushed up overhead costs. Many drug distributors have had to reduce the scale of their operations and the number of their employees. With no new investment in equipment, the distributors or agents have to rely on the sale of spare parts to maintain their operations. Certainly travel budgets and other expenses have been cut drastically. People are no longer sent overseas for training or seminars unless it is absolutely necessary.

Breeding farms

Many breeding companies have decided to reduce imports of grandparent stocks due to their high price in local currency and to reduced demand. In 1998, imported grandparent stock amounted to only half of what was imported a year before. It is thought that only five strains of broiler breeders are in operation, and only two or three strains of brown layers. Many parent stock farms have been rented out or have converted their facilities to commercial broiler farming or layer farming. Many hatchery facilities have become idle.

Table 11. Impact of the monetary crisis on the poultry business in West Java, 1997

Farmers

The Association of Poultry Producers (PPUI) estimated some time ago that about 80 000 farmers were involved in broiler operations, particularly on Java. The inability to buy feed or drugs on a cash basis while the price of broilers cannot increase readily to match the cost of purchased feed has resulted in a huge loss of business and has also meant that broilers are not fed properly - some farmers feed them papaya leaves. A number of broiler farmers have had to call it quits after running huge debts, but how many of them is not known. Many broiler houses are left empty or rented out to integrators. It is predicted that large integrators will take over broiler operations or will tie up broiler farmers in production contracts.

Traders

Decreasing amounts of raw-material imports for the feed industry have resulted in many traders turning to export. Reduced consumption has resulted in surpluses of corn, rice bran and cassava. The difference in price between local corn and corn imported from neighbouring countries such as Malaysia, the Philippines or Korea has made the export of raw materials attractive. Last year more than 500 000 tonnes of corn were exported to Malaysia and Thailand. The export was not only for raw materials: several feed mills in Medan also exported broiler feed to Malaysia. More recently, several breeding companies exported day-old chicks or hatching eggs to Brunei and the Philippines.

Milk and dairy products

In January 1998, a new Presidential Instruction (Inpres No4/1988) addressed to the milk and dairy sector lifted a previous instruction (Inpres No2/1985) on the mixing ratio policy, the one-door importation policy, milk importation regulations, the obligation of absorbing domestic milk production, and domestic milk pricing policies.

The cancellation of the milk mixing ratio policy has resulted in less milk being consumed: the total amount handled by milk processors has gone down from 3 000 tons per day to only half that much.

As part of the agreement with IMF, the new presidential instruction puts an end to the government's protection of dairy farmers. If they want to compete on the world market, they have no choice but to:

• set themselves up as professionals in dairy processing and apply good farming practices;

• ask the government to guarantee that all breeding stocks provided to them and raised by them are of good quality; and

• use more local components of feed in formulating dairy rations.

Now that all regulations on the local content of milk and its derivatives have been cancelled and import tariff on several agricultural products reduced to a maximum of 5 percent, the domestic production of milk has to fully compete with imported milk and imported milk-related finished products and raw materials.

Future challenges and opportunities

Beef

There are structural weaknesses in the cattle production systems. First, the lack of domestic breeding programmes and low reproduction, which lead to a serious depletion of the herd. Second, the costs imposed on feedlot beef production through the requirement to allocate cattle to smallholders: since feedlot production is characterised by high supply elasticity, a small change in costs can have a big impact on production and profitability. Third, the heavy dependency of domestic production on imported feeder cattle, which means that domestic production is hostage to movements in exchange rates and in the import price of feeder cattle from Australia. Fourth, the low-scale operations of domestic smallholders and the constraints on supplies due to the scarcity of breeding stock, which implies that supply adjustments occur largely through prices. Fifth and last, the low productivity of smallholders: given the low feed inputs, the feed conversion rates of smallholder cattle are very low relative to those achieved by company feedlots on full feed systems.

A domestic policy which will encourage the efficient production and marketing of beef to meet the needs of the population must make sure that domestic resources such as land, cattle, capital, feed and other inputs are used efficiently, with appropriate reliance on imports of feeder cattle and beef. There are a number of problems to be solved in order to achieve this. First, how to overcome the instability of domestic production because of the vulnerability of feeder cattle import demand to exchange rate changes. Second, how to achieve the maximum efficiency of feedlot operations, whereby small improvements in feed conversion efficiency yield high profits. Third, how to handle increased competition from imported beef as a result of the reduced tariffs.

The policy is to be built around the beef value chain, with four blocks or systems integrated through value chain flows: demand for final beef product, processing, production, and trade and marketing. Apart from health issues that apply to all meat, there are no obvious policy issues in the demand system. There are also no policy issues in the trade and marketing system, except reduction of tariff on beef import from 30 to 5 percent. In the processing system, the policy issues are:

• efficiency and productivity of government versus private slaughterhouses;

• government-subsidised labour in government slaughterhouses;

• the effects of forcing government slaughterhouses to make a commercial return on their activities to ensure a more efficient processing sector and a level playing field with privately owned slaughterhouses;

• cross subsidies from other types of cattle at the government-owned slaughterhouses because of less than full capacity of the cattle slaughter chain; and

• licensing arrangements for new private slaughterhouses.

In the production system, the key policy issues are:

• the operations of the beef NES schemes;

• the lack of an effective breeding programme to supply domestic cattle to the production system;

• the low-scale operations of smallholders;

• high total taxes; and

• incentives to slaughter breeders to sustain current production at the expense of future production.

The coming vertical integration of feedlots and slaughterhouses will, according to Hadi et al. (1999), have advantages and disadvantages. On the plus side are increased overall efficiency of business operations, controllable beef quality, and additional income from leasing slaughterhouses. The disadvantages are the need for bigger investments and for more professional workers in slaughterhouses, and additional costs of maintenance and health. Furthermore, the infrastructure for slaughtering facilities, feedlots, port capacity and marketing outlets is likely to be developed to meet future increases in demand. As the economic recovery helps the beef industry recover and expand, there will be more opportunities for exporting beef to neighbouring countries such as Singapore and Hong Kong, and to European countries like the Netherlands and Germany.

Poultry

According to Aho (1998a), the Asian economic crisis presents a serious short-term problem for the feed, poultry and livestock industries of Southeast Asia as well as a long-term opportunity. The currency crisis is likely to be felt in Asia, particularly in banking and construction, for another two to three years. A dire prospect, indeed. Yet, it is generally felt that the region will, for the most part, deal appropriately with the crisis and team up to rely on markets to make wise investment decisions in the future.

Despite the current economic problems, the production and consumption of poultry and eggs in Southeast Asia is likely to rise rapidly once these problems are solved. This will happen in those countries that have experienced the most rapid decline in consumption. Income elasticity of demand is the decisive factor here. When people's income recovers rapidly, their purchasing power increases and demand for poultry eventually also increases. For Indonesia, the 70-percent decrease in broiler consumption and 60-percent drop in egg consumption are equivalent to a drop in per capita income of between US$100 and US$430. The challenging question is when will the per capita income recover.

The business climate. The decrease of poultry consumption in Indonesia is certainly caused by the factors affecting the poultry industry. The huge capacity of the industry due to rapid expansion in the last few years has intensified competition. Several companies have closed down. Yet, there are indications that things may change.

Integrated farming. Many large companies who own breeding farms and feed mills have become broiler integrators by raising broilers themselves or via contract farmers. The processing of broilers will expand to provide value-added products such as cut-up or ready-to-eat broilers.

Processing. Inefficient farmers will not survive, the number of small farmers will diminish, because the economic scale of farming has to be considered. Co-operative farmers will increase their competitiveness and efficiency, and concentration of business operations will make poultry production mature.

Export. Given the competitive advantages of Indonesian agriculture among Asean countries and the country's cheap and abundant labour force and its devalued currency. Indonesia may become an important exporter of poultry products. The availability of corn grown locally as feed ingredient and of huge amounts of cheap rice bran makes feed production cost-effective. Since feed represents 65 to 85 percent of poultry production inputs, poultry products can be exported, primarily to Japan. Aho (1998b) reports that a country's competitiveness in exporting poultry depends on cereals and labour cost plus government support.

Milk and dairy products

It is well known that, so far, domestic dairy industry has focused mainly on labour-intensive practices that tend to result in low productivity, low efficiency and low-quality products. With its population growing by 1.5 percent a year, Indonesia is a remarkably large market for milk and dairy products. In 1992, the per capita consumption of milk was 4.4 kg. Four years later, it had risen to 5.7 kg. With the crisis, the figure has gone down slightly, to 5.25 kg in 1997 and 5.10 kg in 1998 (DGLS, 1998).

The use of local resources as alternatives - particularly in feed stuff such as rice bran, which is also being exported and competing with poultry feed, or dried cassava, coconut cake and oil palm cake - must be further explored, using biotechnology to improve the quality of forages and other agricultural by-products. The existing domestic dairy production is capital-intensive, since almost 70 percent of the production costs are for purchasing feed input. With labour in abundance, ways must be found to use labour instead of scarce resources such as capital or land, by developing human skills and the appropriate technology, for feeds and feeding practices in particular. With the liberalisation of trade and investment to which the government is committed, the dairy industry should make the necessary adjustments to be more efficient, competitive and market-responsive in future.

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