: Super User; Indonesia; 10 January 2013; Hits: 1200

No Sweet Solution to Indonesian Sugar

SUGAR may be a welcome sweetener, but in Indonesia it is also capable of producing sour faces.
Last year, rocketing sugar prices as a result of a shortage in outlying provinces angered small and medium-scale food and beverage business owners.

“It’s not possible to reduce the size of my breads or raise prices, so I have to compromise my profits,” fumed one baker in Banjarmasin, capital of South Kalimantan.

Larger companies were also concerned. “The government has been unable to manage the country’s sugar production, distribution and trade,” thundered the Indonesian Chamber of Commerce and Industry (Kadin) chairman for trade, distribution and logistics affairs Natsir Mansyur. Kadin is an umbrella organisation representing Indonesian business chambers and associations.

Kadin also claimed that the ministries of industry and trade lacked decisiveness and transparency in applying sanctions on parties that illegally sold white sugar (meant for commercial use) directly to retailers.

The nation’s sugar distribution system is certainly controversial. The real problem, however, is that Indonesia does not produce enough sugar to meet its needs. It must therefore import supplies which are often cheaper.
A trade ministry regulation issued in 2009 specifies that imported raw sugar must be distributed only to the raw sugar industry, which is licensed to process it into refined sugar for the exclusive use of the food and beverage industry.

Sugar for the retail consumer market is the purview of the so-called white crystal sugar industry, which uses sugar cane sourced from local plantations. Despite this, imported sugar is often leaked to the consumer market, pushing down retail prices and prompting protests from local sugar cane growers.

The situation was not always like this. In the 1930s, Indonesia was the world’s second largest exporter of the commodity. Since then, however, a vast network of smallholders and an influx of cheaper imported sugar have limited efforts to increase production.

In February 2010, Industry Minister M.S. Hidayat announced that, as part of a wider policy to reduce Indonesia’s dependence on food imports, the government would spend 3.5 trillion rupiah (S$445 million) in the following five years to upgrade state-owned sugar factories. Private-sector involvement would also be encouraged. The ultimate goal, said the minister, was to ensure self-sufficiency in the commodity by next year.

Despite this, many factories still function with outdated equipment. And while an increasing number of private companies have shown interest in establishing factories and expanding their plantation acreage, the expected 32 new sugar factories that local entrepreneurs were expected to contribute have yet to materialise. Only 11 of the nation’s 62 sugar factories operating in mid-2012 were privately owned.

As for raw sugar production, Central Statistics Agency data shows that the country has moved even further from its goal. Annual sugar output, which totalled 2.52 million tonnes in 2009, declined to just 2.27 million tonnes in 2011.

Industry sources say that annual sugar consumption currently stands at about five million to 5.5 million tonnes and is growing by around 4 per cent to 5 per cent. Thanks to a robust economy and an expanding middle class, industrial demand is particularly strong.

While the 2014 self-sufficiency target is almost certainly unattainable, finding a way of making the local sugar industry more competitive is certainly a worthy goal.

In the past, sugar-cane producers and sugar factories have blamed each other for being inefficient and unproductive. Available information, however, suggests that both could probably do with some improvement. In June last year, Minister of State-Owned Enterprises Dahlan Iskan expressed the view that poor management was the main issue facing the nation’s sugar factories.

“The problem is not the machine. Even with a new machine, if the management is bad, well, nothing will come out of it,” he told Tempo magazine.

As for the farmers, they may benefit from more efficient farming practices. If, as the farmers’ associations say, sugar factories find it more profitable to process imported rather than locally produced sugar, then more effort needs to be put into finding ways to ensure that local sugar can be more competitively produced.

One option is to take advantage of economies of scale by consolidating Java’s numerous smallholdings, where 60 per cent of the nation’s sugar cane is grown. Few politicians are likely to want to be seen advocating such a politically thorny move. Yet something will need to be done if the government’s long-discussed and highly controversial plan to create a massive food estate in Merauke, Papua takes off.

Merauke’s fertile soil and conducive climate, together with the possibility of large-scale farming by well-funded local and international investors, suggests that Java-based sugar-cane growers could soon face serious local competition as well as cheap imports.

Sweet success, it seems, will continue to elude Indonesia’s sugar industry for some time.

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Key Political Risks

Asia is the fastest growing region in the world, and is likely to remain so in 2013. However, a number of risks cloud the picture.

The good news is that domestic demand in the region remains strong and should continue to cushion the impact of weaker external demand on overall economic growth. The completion of national elections in Japan and South Korea in December 2012 should also help reduce political uncertainties.

But Asian governments will need to guard against the adverse impact of prolonged easy financial conditions on inflation.

Rising inequality also continues to threaten social stability. Ethnic and religious rivalries remain just below the surface in many countries. When combined with government corruption and (in some countries) high youth unemployment, this could become a deadly mix. This seems particularly true of China.

Territorial disputes also require close monitoring. Much diplomatic activity in the new year is likely to be centered on finding ways to reduce tensions over resource-rich islands in the South China Sea, where Beijing's claims overlap with those of Japan, Vietnam and other Southeast Asian states. South Korea and Japan also have rival territorial claims.

North Korea remains the wild card. Inclined to believe its own propaganda, Pyongyang's new leadership could miscalculate, making belligerent moves that plunge the region into a military conflict that nobody wants.