Government to reviews policies on sugar production

By Beddu Amang

The following article is based on a paper presented at the International Sugar Council meeting in London on Nov. 28, 1997. This is the first of two articles.

LONDON: The government will continue promoting domestic sugar production with its strategy for national food security but related policies will be reviewed to reflect the realities of new economic development.

The past several months have witnessed considerable turmoil in Southeast Asia's currency markets, and many government policies now need to be reviewed due to higher interest rates, slower economic growth and weaker exchange rates.

Indonesia started developing its sugarcane industry in the 17th century and became the world's second largest producer of sugar after Cuba in 1930. In colonial times, the sugar industry was developed to serve colonial rather than producer interests and accordingly required significant reforms after the country's independence.

Sugar mills in Indonesia traditionally mandated that farmers rent their irrigated land for cane plantations, leaving the farmers with less fertile land for their non-cane food crops. Such an allocation was considered by some scholars and government planners as unfair in terms of income distribution effects and fundamentally against the spirit of the 1945 Constitution.

This policy was revised after independence and sugarcane cultivation, which virtually ceased during the war years, grew to about 100,000 hectares in 1974. But that was still only half of the acreage recorded in 1930.

To boost production, in 1975 the government developed a comprehensive cross-sectoral package for the sugar industry. Presidential Decree No. 9/1975 was designed to improve the sugar industry for the benefit of the farmers involved. To achieve this objective, the decree fundamentally altered the relationship between farmers and the sugar mills.

The farmers were made managers of their own land under profit- sharing cooperation with sugar mills.

The decree had three objectives -- national self-sufficiency in sugar, higher incomes for farmers and increased efficiency in the sugar industry.

The change from a fixed rental system to profit-sharing cooperation was intended to bring improvements to both the sugar mills and farmers.

Twenty years later, the sugar sector proves to be more efficient than before, but various problems remain. For example, despite the fact that Indonesia has now more than doubled its sugar production from its 1975 level, domestic production still cannot meet growing demand. As a result, self-sufficiency today still remains a goal rather than an accomplishment. Moreover, farmers' income from sugar has not improved as much as expected because yields are declining.

To understand the current state of the Indonesian sugar sector, it is important to recognize that patterns of sugar production in Indonesia have been affected by two related phenomena -- the shift from sugar cultivation in Java to other islands and the shift of sugar plantations from irrigated land to dry land.

In 1975, approximately 87 percent of sugarcane plantations were in Java, where the land was usually very fertile and the yields were high. That share declined to 82 percent 10 years later and to 70 percent by 1996.

The second shift in cultivation patterns has been more apparent since the middle of the 1970s, when almost 90 percent of the sugarcane plantations were irrigated. Today, only about 60 percent are irrigated. The shift of production from fertile irrigated land to less productive dry land has meant that although more land is being used for sugar cultivation, the growth of total production is hampered by the decline in land quality.

On the demand side, growing incomes and changing food preferences mean that Indonesians need more sugar today than ever before.

Currently, Indonesia is a net importer of sugar and imports have been growing. In 1991, for example, Indonesia imported just over 300,000 tons, but by 1995 that figure had more than doubled to 620,000 tons.

In the future, demand is bound to grow. With per capita consumption at around 15 kg per year, Indonesia is still well below the world's average of 20 kg, but we must recognize that our objective of being self-sufficient in sugar is becoming even harder to reach.

How will Indonesia meet its growing need for sugar in the future? Clearly we should not expect expansion of sugar production in Java. Farmers have found that other crops are far more profitable than sugarcane and allowing farmers to make their own choices is an important part of our strategy to improve efficiency in the agricultural sector.

Moreover, since most irrigated land is suitable for rice cultivation, when farmers convert their land from sugar to rice production, they help sustain the drive for self-sufficiency in rice.

By now, many of the state-owned sugar mills in Java are inefficient and rely on out-dated equipment. In fact, many of the mills have Dutch-era equipment that is more than 50 years old. Modernizing these mills, even under normal circumstances, would have been difficult, given other important demands for public investment, such as schools, health clinics, infrastructure and poverty-alleviation programs. In the current economic environment, with the government trying to limit public expenditure, such investments are almost unthinkable.

Thus, there seems to be little rationale for continued government ownership of these aging, inefficient mills. Cognizant of these new realities, the government has already decided to close 27 of the 57 sugar mills in Java, almost all of them state- owned. Three of them have been already closed.

The government, therefore, is encouraging private investors to establish sugar factories.

Of course, the new economic circumstances do not mean that sugar cultivation and milling will cease entirely in Java, and there is much we can do to improve efficiency and maintain some production in Indonesia's most populous island. By culling the inefficient factories, a greater supply of cane will be available to the remaining profitable mills. In fact, the capacity of the remaining mills probably will need to be increased to accommodate this production. Operating at higher levels of efficiency, these mills will be able to pay a better price to farmers, and thus provide a better incentive to intensify production.

Nonetheless, the major share of expanded sugar production will need to come from islands other than Java. Although yields are lower outside Java, the cost of land there is much lower. Expansion outside Java not only makes sense for the sugar industry, but is consistent with the government's stated objective of encouraging the private sector to provide employment opportunities to Indonesians living in less developed parts of the country.

Already, the sugar industry is rapidly expanding its milling capacity outside Java. There are plans to build three large mills in the southern part of Sumatra, each with a daily capacity of 8,000 tons of cane, and two mills in Southeast Sulawesi. Other plans call for new mills in East Timor, West Nusa Tenggara and Irian Jaya.

Moreover, there is great potential for expanding production in the more recently-built mills simply by using better technology and management practices. Research has shown, for example, that sugar production at the Gula Putih Mataram Mill could be doubled given proper management and incentives.

Dr. Beddu Amang is Chairman of the State Logistics Agency and President of the Asian Society of Agricultural Economists.