yayasan lembaga konsumen indonesia the impact of liberalisation on the food chain of dairy sector in...

YAYASAN LEMBAGA KONSUMEN INDONESIA

The Impact of Liberalisation on the The Impact of Liberalisation on the Food Chain of Dairy Sector Food Chain of Dairy Sector

in Indonesiain Indonesia

Indah Suksmaningsih

Indonesian Consumers Organisation

Delivered in PROJECT INTERIM MEETING (PIM)

Advocacy and Capacity Building on Competition Policy and Law in Asia (7up2 Project)16-17 August 2005, Melia Hotel, Hanoi, Vietnam


Framework

Liberalisasi / IMF – LOI No 35, January 1998- Presidential Instruction No. 4/1998: Abolish subsidies & protection - Import duties of raw material may not exceed 5%

- Kontribusi pengurangan impor susu- Peternak terjamin harga dan pasar susu segar- Posisi tawar peternak vs IPS seimbang (Evaluasi harga setiap 6 bulan)- Volume produksi susu naik

No incentives for farmers

Low production of milk

Lack of Gov’t and Industry Commitment

Dependency to import products

Milk = source of energy and commodity of tradeIncrease consumption of milk ® better HDI ; Increase production of milk ® devisa saving

Indication of Oligopoly

- Quota is applied. Quota was decreased per Dec’04- Standard price never changed within 4 years - Unfair farmer-manufacture relationsip - Cost of production escalates to Rp- Price at farmer level Rp - Price at cooperative level Rp - Nestle enjoys excess margin

East Java ( Monopsony, Nestle)

- No Quota- milk industry composes quite many, while suppliers are not. – Slight increase of retail price - Supply is less than Demand (S<D)- Cost of productin - Price at farmer level Rp - Price at cooperative level Rp

West Java ( ‘Pseudo’ Full Competition)

STAGNANT GROWTH- growth of cooperatives - growth of milk production LOWER BARGAINING POWER OF FARMERS- no market intensification/extensification- farmers=the least margin receiverCONSUMERS PAY MORE- Indonesian consumers pay as much as what the Aussie consumers pay for a little milk.

Harga di tingkat peternak sangat jauh dengan harga di tingkat konsumen

The Government Protection

Opportunity to develop dairy

sector

- Decree of 3 ministries on Local Absorption Ratio- Subsidies to farmers: soft loans, technical aids - Six-monthly evaluation of standard price

• Human Development Index for Indonesia : 112 out of 175

• Consumption of milk per capita: 4 liter/year


Before 1978Before 1978


5-10% national demand is met by

import

Low Productivity level

1934: 2.87 liter per cow

1942: 4.66 liter per cow

Lack of Government Commitment

The fourth priority in the strategic planning of agriculture

Opportunity

National growth of fresh milk production =

7.89% per year

No incentives for farmers

Low production of milk

Lack of Gov’t and Industry Commitment


Indication of Oligopoly

Opportunity to develop dairy

sector


Government Protection Policy

• 1978 –The Ministry of Cooperative and at the same time the Chair

of Logistic Bureau ‘forced’ the companies to absorb more milk from the cooperatives and set the milk price.

–The Ministry succeeded in raising the price from Rp 60 per liter to Rp 160 per liter in East Java. In West java the price was set at Rp 180 per liter. PT. Nestle was the only buyer of cooperatives in East Java

–The government also applied many incentives such as credit to farmers and cooperatives.

–Realizing that the domestic supply was very little, the government set the 1:20 absorption ratio (1 liter domestic dairy milk absorption may import 20 liter equivalent to dairy milk).


0

100

200

300

400

500

1979 1984 1989 1994 1999 2001

in millions kg

Items 1979 1984 1989

Farmer 1,497 32,999 58,797

Cow 5,987 131,997 235,188

Coop’s 27 182 198

0

50.000

100.000

150.000

200.000

250.000

1979 1984 1989

Farmer

Cow

Production of milk in Cooperatives

Number of Farmers, Dairy Cows and Cooperatives

Protection PolicyProtection Policy1978: Setting price by the Gov’t

IPS was obliged to aborp domestic milkSoft loans / protection policy

1979-1982: Import of 80.000 cows from AU and NZ1983: Decree of 3 ministries Trade, Cooperatives,

Industry and Agriculture1985 : Presidential Instruction No.2 / 1985

After After 19781978


Government Protection Policy (cont..)1982• Decree Minister of Trade No. 236/Kpb/VII/82, Minister of Agriculture No.

341/M/SK/1982, Minister of Industry No. 521/Kpts/Um/1982: Permission of importation is based on the extent of domestic

product absorption• Control of price between IPS and the Gov’t

1985• Instruction of President No. 2/1985 to support• Importation system, import product as complementary• Modernize local milk husbandry through cooperative• Obligation to set up partnership between company and farmers

Year 1979 1984 1989

L/I Ratio 1 : 20 1 : 3.5 1 : 0.7

Local absorption 5% 20% 60%


Introduction of Liberalisation

IMF – LOI No 35, January 1998

- Presidential Instruction No. 4/1998: Abolish subsidies & protection - Import duties of raw material may not exceed 5%

STAGNANT GROWTH- growth of cooperatives - growth of milk production LOWER BARGAINING POWER OF FARMERS- no market intensification/extensification- farmers=the least margin receiverCONSUMERS PAY MORE- Indonesian consumers pay as much as what the Aussie consumers pay for a little milk.


Letter of Intent,Indonesia—Memorandum of Economic and Financial Policies

Jakarta, Indonesia January 15, 1998

35. Over the past two months, it has become evident that the drought afflicting the country is the most severe in half a century, and requires emergency measures. Accordingly, to ensure that adequate food supplies will be available to the population at reasonable prices, the government has decided to go beyond the original program strategy, and include agricultural goods in the general program of tariff reduction (leaving motor vehicles as the only exception). As an immediate measure, tariffs on all food items have been cut to a maximum of 5 percent, while local content regulations on dairy dairy products have been abolishedproducts have been abolished, both effective February 1, 1998,. At the same time, tariff rates on non-food agricultural products will be reduced by 5 percentage points, and will gradually be reduced to a maximum of 10 percent by 2003.

Source: http://www.imf.org/external/np/loi/011598.htm


Liberalization in National Dairy Sector• Indonesia was involved in the liberalization scheme of global

dairy sector since December 1993. When in Geneva Indonesia was pushed to give up the absorption ratio as it is considered a potential barrier to market regime.

• In May 1994 Indonesia and New Zealand, as the initial negotiating right holder, agreed on several points:

– Indonesia to keep the absorption ratio until 10 years later to the level of no less than the ratio applied in January 1994 (1:1.6).

– The price may not exceed the price of January 1994.

– Cheese was exempted from the agreement.

– Import tariff was gradually decreased. Indonesia bargained to keep the ratio until 2005.

• IMF’s LOI No. 35 signed in January 1998

• The Presidential Instruction No. 4/1998 withdraws the absorption ratio policy. The Ministerial Decree regulates the lowering of import tariff up to 5% at maximum.

YAYASAN LEMBAGA KONSUMEN INDONESIAStagnant growth of production

YearYear 19791979 19841984 19891989 19941994 19991999 20012001 20022002

No.of coops 27 182 198 204 231 231 231

National production (million kg)

72.2 179 338 427 436 480 493

Growth (%) 147 89 26 2 10 3

Lower bargaining power of farmers

0

100

200

300

400

500

1979 1984 1989 1994 1999 2001 2002

Coops

Manf

Descp

• Increased excess of production

• No intensification and extentification of farmers’ dairy market


Growth of Import of Dairy Products, 1996-2002

YearVolume

(tons)Growth

(%)Value

(x 1000 US$)Growth

(%)

1996 2,770 - 2,678

1997 3,102 11.99 2,555 -4.6

1998 3,340 7.67 2,168 -15.1

1999 4,877 46.02 2,888 33.2

2000 5,757 18.04 3,706 28.3

2001 8,586 19.14 7,372 98.9

2002 1,896* 1,488

Average growth (% per year)

26.6 28.1

*= January-April 2002


Price 1979 1984 1989 1994 1999 2002 2003 2004

Manufct 196.50 314.00 440.00 615.00 1,246.08 1,725.00 1,725.00 1,725.00

Farmer 171.94 274.75 385.00 538.13 1,090.32 1,509.30 1,509.30 1,509.30

Consumer

265.00 750.00 1,26.00 1,823.00 4,800.00 6,250.00 6,000.00-12,000.00

6,000.00- 12,000.00

Bigger margin due to liberalisation of dairy market is not enjoyed by the farmers

0

2000

4000

6000

8000

10000

12000

1979 1984 1989 1994 1999 2002 2003 2004

IPSfarmerconsumer

source : Ditjen Peternakan 2003 and filed data


A Threat to Farmers

A Treat to Manufactures

Farmers' Selling Price

Producers Selling Price

to Consumers

0

1750

3500

5250

7000

1979 1984 1989 1994 1999 2000 2001 2002

Year

Ind

on

esia

n R

up

iah

Margin of Producers

0%

75%

150%

225%

300%

1979 1984 1989 1994 1999 2000 2001 2002

Year

Sharp increase of margin growth


Liberalization Impact to Consumers:

Consumers pay more

• The product’s price is becoming similar in Indonesia and Australia.

• Dutch Lady (imported) : Rp 14.350 per 1000 ml• Indomilk (pasteurised) : Rp 8,500 per 1000 ml• Ultra Jaya (UHT) : Rp 7,475 per 1000 ml

• In Australia consumers pay 1.3-1.5 AU Dollars per liter, which equals to Rp 9,000-11,000.

• The Income per capita Australia is 5 times higher than Indonesia.


Monopsony vs. Pseudo Full Competition

- NESTLE – Quota- No price increase for farmers the last 4 year - Increased productin cost Rp 2300- Selling price at farmers only Rp 1400

East Java (Monopsony)

- No Quota- Supply is less then Demand - Incremental increase of price

West Java (‘Pseudo” Full Competition)


Pseudo Full Competition• A Handfull of Companies

• Supply of fresh milk is less than Demand

• Slight difference of prices at farmers or retails

PricePriceFresh Milk

buying price*

Powdered full cream product

400 gr**

equal to 1 liter of fresh

milk

From farm to table

Nestle 1,581 15,830 5,145 3.253.25 timesIndomilk 1,857 13,875 4,509 2.43 timesFrisian Flag 1,987 14,850 4,826 2.43 timesUltrajaya UHT 1,991 - - 3.75 times

* = standard price (TS 11,5%, TPC 3-6 million ; ** = March 2005 data


Monopsony

• A single buyer of fresh milk in East Java

• Nestle applies quota 640, reduced to 510 in early 2004

• East java fresh milk is underpriced. Some west javan milk companies are regularly supplied by the east javan fresh milk (takes 3 days from farmers to companies)

• Nestle enjoys the most excess revenue

• Unfair contract between farmers and company

• No price adjustment for the last four years

• Unrealistic/overestimate measure of Indonesian National Standard on fresh milk as pressure to legitimate low price setting for east javan fresh milk


Liberalization Impact to Farmer• Insecurity in dairy market. So far dependency has been created

between the farmers and the industries resulted in the monopsonic system in East Java, and oligopolistic market nationally.

• In average, the farmers was paid Rp 1300-1600 per liter fresh milk although the ‘cartel’ price is about Rp 1725 for standard quality (11.25% of total solid and 3% of fat).

• The milk quality was under the desired quality, no incentives are provided to improve the quality.

• The standard price has never been adjusted within the last four years, however dairy farmers seem to be able to survive.

• A production cost of a litre of fresh milk by a farmer in Boyolali is Rp 1990 (traditional farming, without calculating depreciation etc.).

• A price of recombined milk from import ingredients with equal quality to fresh milk Rp 2600/liter


Liberalization Impact to Cooperatives

• The relationship between the cooperatives and the industry has been buyer market, the price is determined by the buyer.

• Soft loans are no longer provided to the cooperatives.

• The Law No. 18/2000 : Cooperatives to submit 10% value added tax to the country.

• The Law was put into effect by way of Implementing Regulation No. 46/2003, requires the cooperatives to pay the tax since 2001.

• Many cooperatives are heavily in debt


Liberalization Impact to Industries

• Milk processing companies are no longer entitled to follow the absorption ratio.

• No more barrier to import. Import tariff is set to a favorable price (5% to finished product, 0% to raw material).

• Local and import dairy products compete in the same field

• Fierce competition is also noticeable in promotions in mass media and diversification of products.

• Companies starts to reduce the product’s size to make them more affordable to consumers.

• Early in 2005 PT. Nestle decrease its quota to 510 ton per day. PT Nestle argues that markets demand has shifted to products with lower local (fresh milk) content.


Liberalization Impact to The Government

• The role of the government as regulator in daily sector has becoming smaller and smaller.

• The Ministry of Trade could not control the import of dairy products.

• It seems that the government powerlessly accept the liberalization in dairy sector as they do in other sectors such as electricity, energy supply and water.


Conclusions• IMF’s LOI is intended to create free market in

Indonesia. However, it fails to eliminate the monopsonistic and pseudo full competition practices that has long been taken place in dairy sector.

• Farmers are paid less than the cost of production. The pasca-LOI price of imported dairy products is still higher than domestic fresh milk price.

• Consumers pay more due to liberalisation, however the standard price of fresh milk never changes for the last four years. This excess margin is enjoyed by the middlemen, not the farmers.

yayasan lembaga konsumen indonesia the impact of liberalisation on the food chain of dairy sector in...

Documents

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