Dairy farming business to gear up for 2005

Dairy farming business to gear up for 2005

JAKARTA (JP): Indonesia's dairy farming business, which has
been developing at a slow 4.6 percent annual growth rate in the
last five years, has less than 10 years to strengthen itself
before imports start flooding the domestic market in 2005.

Salim Al Bakry, the secretary-general of the Union of Dairy
Cooperatives in Indonesia, said that under the General Agreement
on Tariffs and Trade (GATT) framework, Indonesia will be expected
to have lifted its milk-ratio policy by 2005.

The policy -- a non-tariff barrier -- has so far been able to
protect small-scale dairy farmers from being battered in fierce
competition against imports.

"When there is no milk-ratio policy, milk-processing companies
will be allowed to import all the milk powder they need, without
having to absorb fresh milk from domestic farmers. Local dairy
farms have no choice but to prepare themselves for this," Salim
said at a recent seminar on the dairy industry.

Currently, the policy sets a ratio of 1:2.4, meaning that
milk-processing firms are allowed to import milk powder
equivalent to 2.4 liters of fresh milk for every liter of fresh
milk they buy from domestic farmers. The ratio is reviewed every
six months.

Threat

Lowering the ratio will no doubt become a threat if the
conditions of dairy farms remain the same as they are today.

According to the dairy union's figures, a small-holder's dairy
farm owns three to four milch cows, each of which produces only
about 10 liters of milk per day.

Such farms -- which make up 90 percent of the country's dairy
farming business -- generally have a calving interval of over 16
months, thereby resulting in low productivity. They are usually
managed unprofessionally, as they lack breeding knowledge and
technology.

In comparison, as recorded by Business Consultancy Indonesia,
the productivity of overseas dairy farms can reach 15 liters to
18 liters of milk per cow per day.

Small-scale farms currently gain extensive support from the
cooperatives' union, which was established in 1979 to assist
farmers at preproduction, production and postproduction stages.

The farmers are also protected by the government, which
encourages large milk-processing companies to assist small-scale
dairy farmers through small-holders nucleus estate programs.

To back this up, the government issued a presidential decree
in 1993 which stipulated that milk powder and condensed milk
industries will be closed to investment unless they are
integrated with dairy cattle-raising farms under a nucleus estate
program.

This program requires a company to act as a core, which
provides a complete aid package to dairy farms -- from management
techniques and training to capital loans.

The government also controls the imports of milk and milk
products.

Through two decrees issued in 1995 and 1996, the government
appointed 10 major milk-processing companies grouped in the
Association of Indonesian Milk Processing Producers as importers
of milk for milk-processing companies.

For non-milk industries, the imports must be conducted through
state-owned trading firms PT Pantja Niaga and PT Kerta Niaga.

The dairy goods -- classified as "luxury goods" by the
government -- are charged a 10 percent luxury tax, a 10 percent
value-added tax and import duties of between 15 percent and 35
percent.

In spite of all the backup and support, domestic milk
production is still unable to meet the demand from milk-
processing industries.

Business Consultancy Indonesia stated in its report that local
production of fresh milk meets only 30 percent of that required
by the seven largest milk-processing firms in Indonesia.

"Domestic production...cannot keep up with the requirements of
the industry," the report read.

Meanwhile, the seven companies -- PT Nestle Indonesia, PT
Indomilk, PT Friesche Vlag Indonesia, PT Foremost Indonesia, PT
Ultra Jaya, PT Dafa and PT Sari Husada -- are the main consumers
of domestic fresh milk, absorbing up to 70 percent of its total
production.

According to the report, the companies offset their shortage
-- up to 70 percent of their demand -- by importing mostly semi-
finished milk products in the form of skim milk powder,
buttermilk powder, full-cream milk powder and a hydrous milk fat.

Imports are reportedly cheaper by Rp 100 (4 U.S. cents) to Rp
150 per kilogram than local products.

As of 1994, the main countries supplying raw materials for
Indonesia's milk-processing companies are New Zealand (24
percent), Australia (20 percent), Germany (7 percent) and the
Netherlands (6 percent).

A.C.N. Zwanenbergh, the Netherlands-based Rabobank's food and
agribusiness research sector manager, said the GATT framework
will require dairy companies to reconsider their strategies.

"The future of the dairy industry will be affected by
geographical regions, scale, structure, governmental policy and
proximity to consumer markets," Zwanenbergh said.

"Many companies are now desperately seeking new markets for
their dairy products as their home markets become saturated," he
stated in a paper presented at the seminar.

Zwanenbergh pointed out that Indonesia's commitment to the
GATT will require the removal of non-tariff barriers on
agricultural products and this, in turn, will affect both farmers
and processors as they are forced to compete with cheaper import
milk products.

According to Business Consultancy Indonesia, Indonesia's milk
consumption per capita per year is presently 3.7 liters the
equivalent of fresh milk, which is extremely low compared to
neighboring countries Thailand (15 liters) and Singapore (30
liters).

Business Consultancy Indonesia estimates that the country's
milk consumption will increase at an average rate of 4 percent a
year, from 3.8 kilograms per capita in 1996 to 4.4 kg per capita
in 2000.

Meanwhile, production levels -- which are estimated at 3.9 kg
per capita -- are expected to grow by 4.6 percent a year.

"Indonesia's dairy sector will face the prospect of many
changes in consumption, production and processing. The next 10
years to 12 years will be a dynamic and challenging period for
both Indonesian and foreign companies with good opportunities
open to both," Zwanenbergh said. (pwn)