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)