Wed, 14 May 2008
Achmad Syafriel, Analyst

Many problems need to be solved before Indonesia can increase food production and mitigate food prices.

Many believe the era of cheap food prices has come to an end. Over the last two years, soft commodity prices have surged, continually breaking records. CPO reached its historical high of US$1,395 per metric ton in Rotterdam, while corn and soybean reached their respective highs of $6.31 per bushel and $15.7 per bushel in Chicago.

The main cause for these surging prices was excessive use of soft commodities to produce biofuel. With oil prices remaining high and volatile, many countries have been encouraged to seek alternative fuels, and biofuel fits the bill.

However, demand from the food industry for soft commodities now used as biofuel, including corn, rapeseed and CPO, had already been high even before biofuel demand came into the equation.

Therefore, demand from the food industry has had to compete with that from the biofuel industry.

As the World Bank reported, the United States used 20 percent of its corn production to produce ethanol last year, while Brazil used 50 percent of its sugarcane production to produce the fuel.

The EU, as a pioneer, used more than half of its rapeseed oil production last year to make ethanol, accounting for 68 percent of its total biodiesel production.

Another impact of these surging prices is a tendency for farmers to plant more commodities designated for biofuel rather than for food. Consequently, the production of staple foods, including rice, for the food sector has declined, leading to higher food prices in many countries, including Indonesia.

The government has tried to mitigate the surging prices, however, as in other countries, success has been fleeting. Price surges in the two most important staple foods in Indonesia, cooking oil and rice, have created a food crisis.

However, today's food crisis differs from those in the past. Foods are still available, but prices are high. People's purchasing powers are eroded as inflation climbs.

Many countries decided to ban exports or place export quotas on food production in order to mitigate prices and secure domestic supply. However, the actions worsened the situation as they starved the international market, pushing global prices higher.

In our view, the only way to ease food price fluctuations and secure domestic supply is by increasing food production through intensive planting and encouraging existing infrastructure to increase productivity.

Unfortunately, it is easier said than done.

Indonesia is known as an agricultural country. Nevertheless, increasing production is still a big challenge.

Although Indonesia is the world's largest CPO producer and was once known as a country self-sufficient in rice production, the nation is experiencing rice and oil palm seeds shortages.

In response, the government has launched the use of hybrid seeds, which are slated to have three times the productivity of conventional seeds.

The irony is that only one local company is able to produce hybrid seeds, and its production numbers are still lower than national demand, forcing the government to turn to imports to make up for the seed deficit.

The same applies to oil palm seeds. Since the price of CPO surged, new planting activities have intensified.

According to the Ministry of Agriculture, seeds demand in 2008 is expected to reach 220 million tons. However, Indonesia can only produce 160 million tons through its seven licensed seeds producers, requiring approximately 60 million tons in imports.

Demand for fertilizer also provides another problem for Indonesia. The government is providing subsidy for certain fertilizers, including urea, but farmers are having difficulties obtaining it.

Even if it is available, the prices are high. In addition, Indonesia also lacks access to more sophisticated fertilizers, which are needed to increase productivity.

Land availability for agricultural or plantation activities is also a problem. Even though Indonesia has a land area of more than 192 million hectares, approximately two thirds of which is forest, finding new land for plantations is made problematic by many incidents of land being owned by multiple bodies.

In fact, overlapping rights disputes have even been known to take place between plantation and mining companies.

When this happens, as regulated by Indonesian mining law, the holder of mining rights has priority, even if the plantation company already has cultivation rights and has been operating in the area for a long time.

Considering the many problems along the road, Indonesia's aim to increase food production will be very difficult to achieve without strong coordination and commitment from every party involved in the development of the agricultural sector.

The writer is a research analyst at Bahana Securities



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