Agriculture: Moving Downstream in Cocoa

Indonesia is the world’s third largest cocoa exporter after the Ivory Coast and Ghana accounting for
18% of global market share with 470,000 MET produced in 2010. Production figures for 2011 are estimated
at 500,000 MET according to the Indonesian Cocoa Industry Association, although severe rain could result
in a drop to 450,000 MET. Global demand for the commodity rose to 3.7 million MET in 2010. Demand is
arising out of increased confectionary and chocolate consumption from markets such as China and India as
well as the European Union. This has caused a shortage of supply in the world markets that stood at 73,000
MET for 2009 and rose to 100,000 MET for 2010. Prices are rising rapidly in the confectionary market as a
result and forcing cocoa buyers to look to under exploited markets in terms of productivity for future supply.
Indonesia’s cocoa productivity per hectare has long lagged behind that of other producing countries
at 700 kg/hectare compared to a potential yield of 1,000-15000 kg/hectare (BKPM) Production is
concentrated in Sulawesi where 63% of the country’s raw cocoa is produced. Despite land under cultivation
increasing over the past three years; productivity has been declining, particularly in South Sulawesi.
Rejuvenation of current trees has been taking place under the government program Gernas Pro Kakao which
replaced 200,000 hectares of trees and will take several years before effects can be measured. The potential
for cocoa production in the country is very positive but requires investment to keep on track to the 1 million
MET annual output target by the International Cocoa Organisation by 2013-2014. The enhanced
organisation of the sector under the economic corridor program will maintain Sulawesi as the cocoa hub
while accelerating the development of much needed infrastructure for transportation to access materials such
as fertiliser.
Moving up the value added chain in cocoa is a priority area for the government with the target of
$6.25 billion USD in export value by 2025. These targets are in line with the increasing demand for cocoa
that has risen by 5% annually from 2005-2010 and is forecast to continue to grow at 2-4% for the coming
years according to the International Coffee and Cocoa Association. Indonesia is in a prime position to take
advantage of this trend but requires substantial investment to raise productivity, quality and gain added
value. The International Cocoa Organisation’s data shows that only 28% of cocoa was processed
domestically with the remaining 72% exported in raw bean form. Processed cocoa such as in butter and
powder forms hold a value of up to $5,000 USD/MET compared to $2,900 USD/MET for raw beans. The
quality of Indonesian cocoa has also been a factor holding back the potential gains from exports. The United
States, the second largest cocoa importer after the EU, requires that cocoa beans undergo a fermentation
process which the majority of Indonesian beans do not thus lowering the price significantly. The European
Union imposes an import tariff on Indonesian cocoa products while those from West Africa are subject to
zero. The issue of both import and export tariffs imposed by both sides will be one of the central matters to
be resolved in the formation of the upcoming Indonesia – EU FTA.
Cocoa is a priority area for the government as stated in Presidential Decree No. 28/2008. In order to
incentivise investment into the downstream cocoa industry, a progressive tax was introduced in April 2010
that increases in line with global prices for raw cocoa beans under Ministry of Finance Decree No. 67/2010.
The tax goes up to 15% when the world price exceeds $3,500 USD /MET. This tax maintains ample
domestic supply for processing, however it has been heavily criticised considering the low domestic uptake
which results in an excess. Increasing the capacity of the downstream sector, which accounted for 158,075
MET and 103,055 in exports for 2010 (Ministry of Trade) is now the priority. Incentives for investors
include expected revisions to Government Regulation Number 62/2008 on income tax facilities, which will
soon cover cocoa. Other incentives include the exemption of import tax on machinery and capital goods
needed for production as well as exemption of VAT on cocoa beans.

http://www.gbgindonesia.com/en/agriculture/article/2011/agriculture_moving_downstream_in_cocoa.php
 Wheat Gains in Indonesia – Downstream Opportunities on the Rise
A less than stellar beginning to 2016 has analysts across Indonesia taking steps to recalibrate industry
projections for the year amidst concerns of a longer than expected blip in economic performance (See
Indonesia’s Economic Outlook in 2016 and Beyond). In a particularly challenging position are the country’s
many import-reliant industries, which for the most part have struggled to cope with their exposure to the
fluctuation of the local currency. Amidst this context of a widespread move to keep expectations in check for
2016, however, are a handful of industries whose continued growth in spite of prolonged economic
headwinds points to the archipelago nation’s resilience. Foremost among these thriving fields of business is
the wheat and baked goods industry, buoyed by surging demand over the last decade that has been largely
unencumbered by the recent downturn.
Now already the world’s second largest importer of wheat grain, Indonesia has in recent years taken steps to
capitalise on the market’s strengthening appetite for wheat-based goods
As reported by Bloomberg, Indonesia’s wheat imports have risen by a cumulative 63% over the last
decade – a trend expected to persist going forward according to the USDA Foreign Agricultural Services’
projection of a 5.3% growth in imports to reach 8 million metric tonnes between 2016 and 2017. The
Association of Flour Producers in Indonesia (APTINDO) is even more bullish in its outlook for domestic
wheat demand, predicting that imports could reach a record 10 million metric tonnes in 2016 as an indirect
result of government action to limit the import of corn for the animal feed industry.
Now already the world’s second largest importer of wheat grain, Indonesia has in recent years taken
steps to capitalise on the market’s strengthening appetite for wheat-based baked goods. Having previously
laid claim to only four operating flour mills as of 1998, the country now serves a production base for 31
flour mills with a total installed capacity of 11.2 million metric tonnes per annum (USDA). Given the ready
availability of locally-processed wheat flour supply and the market’s growing taste for bread and noodles,
the downstream wheat-based product industry presents opportunities abound for investors.
New demand for noodles
The rising popularity of wheat in Indonesia can in part be attributed to its suitability for use in a
number of food products that have become increasingly ingrained in local diets. Noodles, as the wheat-based
product to have enjoyed the most success in penetrating the local market, continue to dominate wheat flour
use in Indonesia, accounting for 70% of total consumption. Having emerged as an inexpensive alternative to
rice that offers the added advantage of convenience, instant noodles in particular have emerged as a
consumer favourite in Indonesia, with the country placing second only to China in a 2015 Financial Times
report on the world’s biggest consumer of this product.
The Indonesian market’s loyalty to a handful of firmly entrenched brands – such as Indofood Sukses
Makmur and Wings Group, who together control nearly 80% of market share of instant noodles – however,
means that opportunities for new entrants to this area of business in Indonesia are more likely to thrive by
anticipating that demand for instant noodles will transition into a preference for more sophisticated varieties
of this meal type. The launch of a host of new restaurant chains in Jakarta offering ramen and udon dishes
certainly speaks to the early stages of this trend taking place. Investors requiring further evidence of this
pattern should look to the current strategies of prominent wheat flour manufacturers such as Sriboga
Raturaya that have increasingly turned their attention to restaurant franchise opportunities as a means of
taking full advantage of strong wheat flour supply.
Bread for the masses
The scope of downstream opportunities in Indonesia’s wheat flour industry, as well as the growing
popularity of wheat generally, is closely linked to the country’s expanding middle class and its openness to
international foods (See Thirst Quenching: Indonesia’s Food & Beverage Industry). Though often used too
readily in market analysis extolling Indonesia’s economic potential, this emerging middle class has indeed
already made a considerable impact in driving demand for breads and cakes purchased in bakeries – a trend
that bodes well for the ongoing push to integrate other wheat-based baked products into modern retail
outlets. Research carried out by Rabobank found that the sale of baked goods rose by 11.7% CAGR in value
and 5.5% in volume between 2010 and 2015, with half of the Indonesian bakery market value coming from
artisanal bakeries specifically focused on catering to the needs of the middle-upper class.
 BreadTalk stands among the most noticeable success stories in Indonesia, having leveraged its
understanding of local consumers’ current preference for bread as a sweet snack, as opposed to a
replacement for rice as the cornerstone of most meals. The Singaporean bakery franchise first entered the
country in 2003 and has since opened 162 stores across the nation, thereby precipitating the entry of new
competitors including South Korean franchise Tous Les Jours.
Greater appreciation for bread and its subconscious acceptance as an ‘aspirational’ product
demonstrative of a globally-influenced palate has also seen this wheat-based good experience a marked
uptick in sales in minimarkets and convenience stores. As reported in The Jakarta Post (8/6/2016), Indoritel
Makmur International through its Indomaret retail outlets has witnessed a 25-30% jump in bread sales (value
and volume) every year for the last five years. Its leading competitor, Alfamart, in the first quarter of this
year saw sales of its private label bread products rise by 81.3% year on year, despite dampened consumer
spending over this period of time.
A full basket of opportunities
With annual wheat consumption currently reaching only 29 kilograms per capita – a fraction of the level
seen in more mature economies – Indonesia has considerable room to grow in building upon the recent
boom in demand for wheat-based goods. Foreign investors keen to tap into this swelling market should look
to make headway by actively seeking to provide solutions to challenges inherent to Indonesia; namely,
logistics and the consequence of poor infrastructure in distributing wheat products across the country (See
High Stakes for Indonesia's New Infrastructure Push). With longevity very much a central concern for both
retailers and end-users, there are clear opportunities to be had for businesses offering expertise in effective
supply chain management to lessen time needed for delivery. Insights into the use of natural preservatives,
frozen dough and vacuum packaging are thought to be particularly sought after among local manufacturers
in search of new methods to boost shelf life without sacrificing the product’s nutritional value.
Given the relatively recent addition of bread to local diets, the sheer scope of new wheat-based goods that
can be introduced to the Indonesian market dictates that there are also openings for international entities
with extensive experience in product development. Those that have succeeded in this domain have done so
by paying close attention to the preferences of local consumers, and their aforementioned predilection for
breads that primarily serve as a vehicle for sweet taste. Moreover, lucrative opportunities exist for
companies within the field of branding; as Indonesia’s market for wheat-based baked goods becomes more
saturated, the need will arise for well-defined marketing strategies centred around USPs that have long been
emphasized in developed markets abroad such as health and the use of natural ingredients. Furthermore, as
local consumers’ taste for wheat-based goods becomes more sophisticated so will their expectations for
product packaging. This is especially true for wheat-based baked items such as pastries and cookies to be
given as gifts – an ever-present aspect of Indonesian culture that becomes particularly evident during festive
periods such as Ramadan.
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