Local sugar industry bitter over new policy

By Sylvia Gratia M. Nirang

JAKARTA (JP): Business is bittersweet for the local sugar industry, which is warning it could dissolve into bankruptcy due to the government's policy of adopting a free market system.

The Indonesian Sugar Association and the Indonesian Farmers Federation recently urged the government to step back from its zero import tariff on the product and instead place a high import tariff to help out their ailing members.

IGA chairman Farukh Bakrie told The Jakarta Post the national sugar industry would be bankrupt within the next two years if the government retained its sugar import policy.

He appealed to the government to review the policy to prevent cheap sugar imports from flooding the market.

The import duties, he said, should be set at 65 percent to protect the country's 1.43 million sugar farmers.

Farukh said the policy would ruin business for about 57 sugar mills on densely populated Java, which contribute about 72 percent of national sugar production.

Farukh said protection was needed when the rupiah strengthened to less than Rp 8,500 to the U.S. dollar.

When the rupiah exchange rate rose to Rp 8,500 several months ago, he added, the price of local sugar was between Rp 2,100 and Rp 2,400 per kilogram, higher than Rp 1,800 for same-quality imports.

"Adopting a free market policy during the economic crisis will only benefit consumers. So we urge the government to impose an import duty of at least 65 percent on sugar."

He added that imposing import duties was necessary because sugar prices on the international market were expected to continue declining following production surpluses from Brazil and Thailand.

Lower international prices and the strengthening of the rupiah will apply more pressure on the industry.

The government on Sept. 1 last year liberalized the importation of sugar and other important basic commodities.

Previously, all basic commodities were solely imported by the State Logistics Agency (Bulog).

A Jakarta-based trader said that sugar prices on the international market showed a decreasing trend since the economic crisis began in July 1997.

In precrisis days, sugar traded at US$380 per ton. The price declined to $280 per ton last November, and traded at $180.2 per ton in March.

The price, plus transportation costs, value-added tax and other taxes which reached 16 percent, was equal to between Rp 1,800 per kg, he said.

The trader said international prices of sugar were expected to decline this year due to the excess supply of six million tons from Brazil and 800,000 tons from Thailand.

Reuters reported earlier this month that London-based trading house Czarnikow predicted that sugar prices would fall further to $170 per ton in the second and third quarter of this year because many producing countries, such as Cuba, India, Colombia and Argentina, would start harvesting their sugarcane during the period.

The trading house estimated the world's sugar production would increase 4 percent this year, from 126 million tons in 1998 to 131 million tons.

Indonesia imports about 1.3 million tons of sugar annually, costing $350 million in foreign exchange.

Last year domestic sugar production was over 2.1 million tons against demand of 3.3 million tons. This year, Indonesia's sugar production is expected to drop by 31 percent to 1.5 million tons, Director General of Plantations Agus Pakpahan said.

Minister of Industry and Trade Rahardi Ramelan has said that Indonesia will maintain its zero import tariff policy on sugar because was not harmful to the country's sugar industry.

Rahardi said the policy -- which was implemented in compliance with an economic reform package from the International Monetary Fund -- was not disruptive to activities of the country's sugarcane farmers.

Rahardi predicted Indonesia would need to import at least 1.3 million tons of sugar this year.

Rahardi's statement contradicted support for a review of the policy by Minister of Forestry and Plantations Muslimin Nasution.

Muslimin said that imposing an import tariff on sugar would not embarrass the government because the World Trade Organization allows Indonesia to impose import duties of up to 110 percent for the import of basic staples until 2003.

Although he did not mention an appropriate import tariff, he said it should be set "at a level which will be enough to protect the local sugar farmers and will not heavier burden to consumers".

Investors are discouraged from building new mills due to the ailing industry, he said.

Not efficient

Chairman of the Association of Indonesian Food and Beverage Producers Thomas Dharmawan said that if it was necessary to impose import duties, the level should not be higher than 5 percent to prevent consumers from suffering huge losses.

He blamed the high prices of locally produced sugar on the inefficiency of most of the country's sugar mills.

"Most sugar mills on Java are very old and are no longer economically viable. They also are not supported by productive sugar cane plantations," he said.

Some of the mills on Java are state-owned and equipped with machinery dating back to colonial times, making them far less productive than those of other companies, he said.

Thomas said the lack of productive land in Java, the largest sugarcane producing area in the country, also posed another problem in raising sugar production.

He added that ideally sugar mills should be supported by sugarcane plantations which could supply 40,000 tons of sugarcane at one harvest time. Most of the country's sugarcane plantation can only provide about 5,000 tons of sugar cane.

He said increased production could only come from plantations outside of Java where more land was available.

However, it will be difficult to encourage farmers to plant sugarcane, especially after farmers were released from formal and informal obligations on planting crops following the government's agreement with the IMF in September.

"The production decline is mostly caused by the decrease in the number of sugar plantations and their size," Thomas said. "Many farmers have converted their sugarcane plantations into other crops or horticulture plantations because these are more profitable."

A trader who wished to remain anonymous also partly attributed the decline in output to farmers who could not improve the quality of their plantations.

"The highest content ratio of our sugar is only 7.5 percent. It was much lower than other producing countries which could reach 12 percent," he said.

He added that an increase in productive sugarcane plantation areas must be followed by improvement in the quality of the plantations.

Agus said that the government planned to boost the country's sugar production to 2.4 million tons next year and to 2.6 million tons in 2000.

"It can be done by increasing the sugarcane plantation area up to 423,000 hectares nationwide, with a content ratio of 7.6 percent."

He said that the country's sugarcane plantation area was decreasing by about 0.6 percent every year when farmers were still obliged to plant sugarcane.

"In the past five years, sugar consumption has exceeded production, leaving us an importer of the commodity even though we are one of the largest sugar producers."

He said imports rose from 300,000 tons in 1991 to 620,000 tons in 1995 following decreased production.

He said the government was providing incentives to both domestic and foreign investors to build sugar mills, with priority given to eastern Indonesia.

However, he acknowledged that the country's worst economic crisis in recent years has shelved some of the projects.