Indonesia's sugar industry dates back to the seventeenth century. It reached its zenith in the early-thirties when 179 factories produced nearly 3 million tonnes of sugar annually. Following a slump in the thirties, when low sugar prices prevailed, the industry declined to 35 factories producing about 500 000 tonnes of sugar. A decade later the industry had recovered somewhat, and by the beginning of World War II there were 93 factories producing about 1.5 million tonnes. But a second reduction occurred then, so that by the end of World War II only 30 factories remained producing less that 300 000 tonnes. During the fifties some recovery occurred and Indonesia again became a net exporter. However, since 1967, Indonesia has reverted to a net importer position. In 1957, the industry was nationalized and to-date remains highly regulated. The national sugar policy seeks to encourage the intensification of production, the rehabilitation of factories in Java, and the establishment of new factories outside Java to meet growing domestic market requirements arising from steady population growth, rising incomes and the growth of the food and beverage industries. Since the mid-eighties imports have continued to rise and could reach record levels in 1997/98. Rising land and labour costs and rapidly growing consumption make Indonesian sugar self-sufficiency a difficult target to achieve, at least in the short run.

PRODUCTION

Indonesia harvests about 400 000 ha of cane for centrifugal sugar, of which almost three-quarters is on Java. Most of the remainder comes from Sumatra, Kalimantan and Sulawesi. While a decade ago more than half of Java's cane was irrigated, this area has declined reflecting a shift to the cultivation of more profitable crops. Nevertheless, sugarcane cultivation in the major producing islands remains a highly significant economic activity, and covers more than one-third of the total land area.

About 70 percent of the sugarcane areas are cultivated by farmers, mostly on small to medium sized holdings. The remainder is cultivated on sugar factory plantations, both in Java as well as on other islands where the dominant form of sugarcane cultivation is plantation-style. Farmers are organized into groups (Kelompok Tani) responsible for at least 20 ha of land, in order to coordinate the supply of cane to the mills. Sugarcane areas have increased sharply since the mid-seventies at an average annual rate of 7.5 percent from 116 000 ha in 1976 to a peak of 423 000 ha in 1994. However, areas have since declined to 400 000 ha in 1996.

Sugarcane yields have shown little growth, fluctuating during the nineties in the range of 73 to 79 tonnes per ha, compared to an average level of 73 tonnes during the eighties and 83 tonnes during the late-seventies. The average cane yields in the nineties were thus about 8 percent lower than in the mid-seventies, though admittedly on a total harvested area, which was four times larger. During the same period, average paddy rice yields increased by 65 percent, and the area rose by 35 percent. Between the late-seventies and the nineties, average sugar extraction rates also declined from about 10 percent to 7 percent.

Production of sugarcane rose from about 28 million tons in the early-nineties to a peak of 33 million tons in 1994, but subsequently receded to 30 million tonnes in 1995 and 1996. Sugar production showed comparable changes, rising from 2.1 million tonnes in 1990 to nearly 2.5 million tons in 1993 and 1994 and declining to 2.1 million tonnes in 1996.

Sugarcane has had to compete with other crops, especially rice. Relatively less attractive returns as compared to other crops have continued to discourage some farmers from growing cane, leaving certain factories without sufficient raw materials to operate at capacity. In addition, since the 1995/96 season, there has been a weakening in the ratio of producer prices for sugarcane to those for rice. Over the years, aside from price incentives, many Government schemes have been implemented to encourage sugarcane production, including the 1975 Smallholder Sugarcane Intensification Programme and the 1981 Induced Increasing Sugar Production Programme. At present, the Government provides financial assistance to growers in various forms, for example to support production, harvesting and hauling costs through the Koperasi Unit Desa, or rural cooperative unit. Some funds also flow through the factories to assist with fertilizers and chemicals.

PROCESSING

In 1981 the Government formed the Asosiasi Gula Indonesia (AGI, or Indonesia Sugar Association) comprised of all sugar mills, whether public or private. The AGI is a member of the Indonesian Sugar Council (Dewan Gula Indonesia) and the KADIN (Indonesian Chamber of Commerce and Industry). At present there are some 69 sugar mills in Indonesia, 90 percent of which are publicly owned and organized into management units called Perseroan Terbatas Perkebunan (PTPs). PTBs operate somewhat independently, and many are involved in other businesses such as rubber or palm oil. The share of mills in the private sector is likely to grow if the industry expands as the Government envisages, and if measures are implemented to close antiquated publicly-owned small capacity mills in Java.

At present the total capacity of mills is some 209 000 tonnes of cane per day (TCD). Most mills are small by international standards: 49 have slicing capacity of less than 4 000 tonnes TCD, 12 are between 3 000 and 4 000 and eight are above 4 000 TCD. The efficiency of the small factories is generally relatively low, particularly with regard to the sugar extraction rate. Many countries achieve recovery of over 85 percent of sugar, while Indonesia obtains about 83 percent or less. It is envisaged that by the year 2000, four new sugar factories will be established outside Java with a total capacity of 34 000 to 36 000 TCD and planned sugar production of 445 000 tonnes. By 2005 further sugar processing facilities are planned to bring total production to over 3 million tonnes.

Until 1997, most manufacturers with a demand for highly refined sugar rather than the "standard" domestically produced sugar, depended on imports. The first refinery began operation in mid-1997. It is located in west Java, and will have a capacity to produce 150 000 tonnes of refined sugar per year. The owners include BULOG (a statutory organization), with a 10 percent share, and four other companies. Raw sugar is supplied by Australia, Thailand, Fiji and South Africa.

CONSUMPTION

The population of Indonesia is young and growing rapidly. Average growth since 1970 has been around 2.0 percent annually though rates have slowed in the latter part of this period. Income has also risen rapidly. Since 1970, total real GDP grew by more than 7 percent annually, and on a per caput basis by 5 percent. These factors have led to a strong growth in the use of many consumer products, including sugar and items containing sugar, such as confectionery and beverages. About 90 percent of sugar is used directly by households and 10 percent by industries. Imported refined sugar is largely for industrial use.

Between 1976 and 1996, total sugar consumption increased from 1.8 million tonnes to 2.75 million tonnes, or by an average annual rate of 2.0 percent (Table 2). Per caput consumption rose by about 0.6 percent annually from about 12.9 kg a year in 1976 to 14.4 kg in 1994. Provisional data for 1996 indicate a per caput consumption of 13.5 kg.

It is expected that soft drink consumption growth in Indonesia would provide a stimulus to increased sugar consumption as incomes grow. At present, consumption of soft drinks is well below the levels in Malaysia and the Philippines. In Indonesia there is a large consumption of "tropicals", a juice concentrate which is mixed one part to nine parts water. The concentrate has a very high content of sugar or other sweeteners.

Consumption of sugar substitutes meets a large share of sweetener requirements, particularly in the food and beverage industries. Indonesia now uses about 70 000 tonnes of domestically-produced glucose a year, about 90 percent in candies and 10 percent in miscellaneous other uses. Most of the glucose producers have been small, producing 5 000 tonnes of glucose a year.

The soft drink companies have not generally used HFS, perhaps due to low volume and varying quality. Some increase in HFS production from cassava occurred during the nineties, though constrained by the relatively high cost of the domestic raw material. Production in 1996 was estimated at about 20 000 tonnes, and further increases are expected as a result of a British Sugar/PT Budi Acid joint venture to build a factory of 35 000 tonnes capacity in west Java to produce HFS from cassava. The factory may come on line in 1997.

Indonesia also produces non-nutritive sweeteners such as saccharin, cyclamates and sorbitol for the domestic market and for use in diet beverages. Total production in 1993 was about 10 000 metric tonnes, enough to replace 400 000 tonnes of sugar.

In addition, at least 500 000 tons are consumed of non-centrifugal sugars, sometimes called village cup sugar, and also sweeteners made from palm.

TRADE

Indonesia has been a net importer of sugar since the sixties. Since the mid-eighties, imports have ranged between 50 000 and 350 000 tonnes (Table 2). However, in 1995 imports exceeded 570 000 tonnes, and substantially higher figures are estimated for 1996 and 1997. Lacking a separate refining industry until 1997, Indonesia typically imports refined sugar, or sugars which could be consumed directly.

BULOG is legally the sole importer of sugar and does not pay an import tariff. About five Indonesian firms, and a few international sugar traders, contract with BULOG to handle the actual importation, for which a license is needed.

PRICES

Domestic sugar must be sold to BULOG, although incentives for new private investment include potential waivers for some fraction of output to be sold directly and not through BULOG. Being the sole supplier of both domestic and imported sugar, BULOG plays a key role in sugar pricing.

Each year the Government sets sugar producer prices at a parity level with competitive crops, primarily rice. In recent years, the ratio of the ex-mill sugar prices to the floor price for unmilled rice has weakened. With current sugar producer prices set at Rs 960 (US cents 41.0) per kg and the unmilled rice price at Rs 525 (US cents 22.4) per kg, the price ratio has fallen to 1.83, compared to 2.40 in the early-nineties.

Farmers are paid on the basis of average sugar content of delivered cane, with quality premiums or discounts. In April 1997, in addition to raising the producer selling price of sugar by 5.5 percent to Rs 960 (US cents 41.0) per kg, the Government increased the farmers' share under the production sharing agreement with sugar mills from 62 percent to 65 percent.

Despite higher producer prices, retail prices of domestically produced sugar have been maintained relatively stable in recent years, averaging Rs 1 477 (US cents 63.0) per kg in 1995, and Rs 1 500 (US cents 64.0) per kg in 1996 and the first half of 1997. In real terms (deflated by the consumer price index), prices have declined by about 10 percent over this period. However, these levels may have constrained consumption and encouraged the production and use of substitutes.

FUTURE PROSPECTS

At current real prices, demand for sugar is expected to continue to increase in line with population growth and rising incomes. Given the potential growth in demand, a major challenge facing the Indonesian industry is the extent to which domestic production can be expanded. Despite the dynamic growth in output between the early-eighties and the early-nineties, in more recent years production of sugar appears to have stabilized reflecting the emergence of constraints at both the agricultural and industry level. This has resulted in substantial increases in net import requirements.

Competition for land, particularly irrigated areas, not only from other crops and livestock production, but also increasingly from urbanization in densely populated areas of Java, has resulted in a shift in the cultivation of sugarcane to non-irrigated areas and to poorer lands. Thus, unless yields can be sufficiently increased to enhance the economic viability of crop, possibilities for growth will continue to be dampened. Improved productivity is particularly important because scope for raising producer prices is limited by the need to maintain balanced growth in paddy production, acceptable profit sharing with millers, and adequate margins in the marketing, storage and distribution of supplies without unduly raising retail prices for this essential and sensitive consumer product

In the processing sector, there is also scope for enhancing mill efficiency, thereby contributing to better returns to both industry and agriculture. However, certain structural rigidities make the rationalization of the industry, particularly in the older mills of Java difficult to achieve, including the need to find alternative employment and income opportunities for mill workers.

Given current production and market developments, sugar import demand is expected to remain relatively large by historical standards. However, with the increase in production capacities resulting from new plantations and the larger-scale sugar factories that are being set up outside Java, the projected deficit could be reduced substantially. The longer-term viability of the industry would, however, depend on improved agricultural and industry productivity, particularly as the sector becomes increasingly integrated into the world market and exposed to free market forces.