Agronomic trade potential

By Daniel Kingsley

JAKARTA (JP): It is a government priority and focus to develop small and medium enterprises in Indonesia as a foundation for bringing the country out of it's present economic slump. Indonesia has a strong agricultural foundation which, unfortunately, is stunted by an inefficient distribution system that was never allowed to develop under the New Order government.

So, how to develop agronomic businesses into consumer product manufacturing to benefit those small and medium enterprises? Perhaps by enticing foreign investors into the sector. And how to produce profitability in the five to 10 year time span necessary to entice foreign private equity investors, or cross- border venture capitalists, to invest?

Ideally, for efficiency if nothing else, a hierarchy of cross- sectoral businesses, which increase added value for a single agricultural commodity, would be developed under "one roof". A group of farmers down on the farm, or a cooperative, will take their single product and make it worth more by processing it and exporting it, or processing it further into a consumer product for local consumption.

One of many examples of this is cashew nut; currently, Indonesian cashews are not processed, but are exported as seeds. The possibility for added value exists if the farmers kept those cashew seeds here and processed them before exporting them. The example doesn't end here; most agricultural products from Indonesia, spices, cocoa, coffee, fruit, and even leather hides are not processed in Indonesia.

If the agronomic industry can realize a goal of processing these agricultural products before exporting them, Indonesian farmers, the small businesses that handle the processing and distribution, and the investors who backed this development will all prosper

According to some, this is the challenge facing the agronomic industry in the globalization era. And to meet this challenge, the industry must prepare several strategies, some of which should include foreign investment incentives. The long-term scenario for the agronomic industry is to maximize the potential of all sectors in the hierarchy.

One solution is to map the agricultural commodities of each province in order to identify priority sectors for potential investors. However, simply knowing the geographical distribution of the commodities is not enough. Competitive value and efficiency are required to realize the kind of revenue needed to move the agronomic industry forward.

If the industry can accomplish these goals, and become structurally efficient, agronomic sectors will transform themselves from comparative superiority to competitive superiority, both domestically and internationally. Statistics show a decline in processed, and raw, agriculture product export in recent years:

Export Growth For Six Commodities In Agro-Industry Sector

                          1996          1997         1998
 No. Commodity       Volume  Value     Volume  Value   Volume  Value
 01. Palm Oil       685,594 338,383 1,519,227 747,044   900,220 428,323
 02. Coconut Oil    333,450 236,206   547,723 341,553   231,909 123,510
 03. Cocoa Powder    48,727 111,035    46,418 124,766    51,293 110,589
 04. Animal Feed  1,649,301 217,778 1,566,915 148,200 1,307,828 102,482
 05. Margarine       12,807   7,766   145,415  45,205   110,186  54,978
 06. Cashew Nuts     27,886  23,751    29,667  19,152    27,076  31,154

Volume: Metric Tons Value: US$000 Source: Ministry of Agriculture

The reasons are not yet clear, but the statistics are an indicator that efficient management, selective and effective technology, and investment are needed, because the demand for raw agricultural production rose during the same period. The agronomic industry must work with foreign investors in order to develop.

A few domestic firms have been successful in processing agricultural products and are now going upstream into consumer products manufacturing and distribution. They have been very successful over the past five years; all are poised to become market leaders when import replacement becomes a priority in a reform era of government.

With a few strong companies producing quality products, it is a good bet that Indonesia's agronomic industry will improve competitively, and develop into a superior industry. These firms are ready for the globalization era of trade, but they are few. The multi-level opportunities available to investors in the agri- business sector, including processing and consumer product distribution will attract attention.

The writer is the managing director of the Jakarta-based consultancy firm, Trade Management Indonesia (smedev@cbn.net.id/ www.tmiconsulting.com)