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How the mighty Indonesian sugar industry
fell
By Bill Guerin
Thousands
of Javanese sugarcane farmers staged a massive rally in
Jakarta on Tuesday demanding protection from the glut of
cheap imported sugar that has threatened their very
existence.
The Java sugar industry in its
colonial-era heyday was a mighty agricultural and
industrial enterprise and by the late 19th century
Indonesia was in the forefront of the world's sugar
producers, beaten only by Cuba. How the mighty have
fallen. High input costs, poor management practices,
inefficient government policies and a steady stream of
cheaper imports mean that the angry farmers are being
driven out of a basic industry built by their
forefathers.
The country has been a net importer
of sugar since the 1960s and now ranks as one of the
world's biggest importers. Indonesia's annual
consumption of sugar is about 3.3 million tons. Annual
imports went down from 2.1 million tons in 1999 to 1.2
million tons in 2000 and about 1.6 million last year. It
will likely import 1.5 million tons this year, mainly
from Thailand. There are a mere 174 tons in stock, which
will improve when the season kicks off in two months
time. Total sugar production is currently 1.7 million
tons.
Manufacture of sugar in Indonesia in the
early days was almost exclusively confined to Java, with
its rich volcanic soils and a vast supply of labor. The
factories and their mainly Dutch owners and managers
dominated the Javanese countryside and set in place
agricultural systems in the Dutch mode. Sugar brought
work opportunities galore but many small landholders
became victims as the factory managers embarked on a
lengthy program to grab peasant land for cane
production. They also took over what had been the
state's function to recruit labor for the planting,
harvesting and haulage of cane.
From then onward
the state-owned enterprises and factories dominated the
country's sugar industry until, in 1957, the industry
was nationalized and regulated.
A day before the
farmers came to town, Minister of Trade and Industry
Rini M Soewandi issued a new decree regulating sugar
imports in a bid to redress the price imbalances. Only
state-owned plantation companies (PTPNs) will be allowed
to import white sugar and imports of both raw and
refined sugar will be approved only for manufacturers
who use sugar as raw material in their production
processes.
Though one of the world's top sugar
importers, Indonesia applies the lowest import tariffs,
a modest 25 percent duty on white sugar and 20 percent
on raw sugar, levels set by the International Monetary
Fund (IMF) in its Letter of Intent. Thailand and the
Philippines, for example, impose an import duty of
almost 100 percent. The European Union imposes a massive
240 percent import duty and the United States slams a
150 percent duty on sugar.
In 1998, the
Indonesian government set a zero duty on sugar at the
behest of the IMF but in 2000 new rates were
implemented. President Megawati Sukarnoputri, in Rome in
June for an international food security conference,
reportedly agreed to increase import tariffs again on
all food and agricultural commodities in the near term.
However, Soewandi has rejected the demands for
tariff hikes on the grounds that raising the import
duties would boost sugar prices at home and burden
consumers. Minister for Agriculture Bungaran Saragih
also says there is no need to raise the tariff on sugar
because it is already high enough, in principle, to
assist farmers. Bungaran says sugar prices in the
domestic market had to be increased so that farmers
would have sufficient incentive to plant sugarcane.
"We'll also help push up sugar prices on the
domestic market to encourage local sugarcane farmers to
plant more crops," he said.
The Indonesian Sugar
Association wants a new import duty of at least 95
percent but Soewandi is fearful that this could lead to
even more rampant smuggling of the white gold.
There are some 400,000 hectares of sugarcane
plantations in Indonesia and almost three-quarters of
this on Java, although productivity in Sumatra, at eight
tons a hectare, outstrips that in most Javanese
plantations, which average only between four and five
tons per hectare.
Ten years ago more than half
of Java's cane was irrigated, but this acreage has
substantially diminished, reflecting a shift to the
cultivation of more profitable crops. Farmers have
switched to higher-profit, shorter-duration food crops.
Sugarcane has had to compete with other crops,
especially rice.
Relatively less attractive
returns compared with other crops have discouraged many
farmers from growing cane, leaving factories without
sufficient raw materials to operate at capacity.
That said, sugarcane cultivation in the major
producing islands is still a very significant economic
enterprise, and encompasses more than one-third of the
total land area.
About 70 percent of the
sugarcane areas are cultivated by farmers with
small-to-medium-sized holdings. The remainder is grown
on the sugar-factory plantations, where the dominant
form of sugarcane cultivation is plantation-style.
Farmers have a different system, that of Kelompok Tani,
where small groups are responsible for at least 20
hectares of land and coordinate the supply of cane to
the mills.
Many cane farmers have
production-sharing agreements with the state sugar mills
whereby up to 65 percent of the sugar produced by the
mill is returned to the farmers as payment in kind.
Others just sell their cane and are paid based on the
current official procurement price. Farmers in this
scheme get 90 percent of their payment in cash and 10
percent in kind.
The government also subsidizes
cane farmers by authorizing mills to pay the farmers
based on the volume of raw cane they bring to the mill
and on the extraction yields of their cane.
Only
12 of 59 sugar mills nationwide are operating
efficiently and 12 more have already been shut down.
Ninety percent of mills are publicly owned.
About 90 percent of sugar is used directly by
households and 10 percent by industries. Imported
refined sugar is largely for industrial use. The
Indonesian mills produce a plantation-grade raw sugar
called SHS I quality, which, because it is cheaper than
refined sugar, has enjoyed an increased domestic demand.
However, the food, beverage and pharmaceutical
industries need a higher quality of refined industrial
grade that is largely met by imports. According to the
Indonesian Food and Beverage Producers Association,
local sugar quality is not suitable for these products.
The local refining industry rests with a single
refinery, in West Java, which began operations in 1997.
It can produce only 150,000 tons of refined sugar per
year.
The high incidence of smuggling of sugar
and under-invoicing of consignments into Indonesia has,
in addition to ensuring declining returns to sugar
farmers, made it difficult to attract investment for
more modern sugar refining plants.
Increasing
sugar production is far from easy. The state-run sugar
mills lack decent equipment and the ongoing shortages of
cane supply and poor-quality cane have caused many mills
in Java to close. This in turn has led to a much-reduced
cane-harvesting area.
Private sugar mills account
for only 35 percent of total sugar production and, while
they have better yields that the state-run mills, they
suffer disrupted harvests and milling operations because
of widespread land-ownership disputes with locals.
Distribution is done by private mills through
large distributors and by state mills through a tender
process. The whole system is antiquated and does not
meet the needs of an equitable system of distributing
the sugar from Java across the country. One case
illustrates the point. East Java needs some 396,000 tons
of sugar a year, but produces about 700,000 tons
annually. This year the province's Governor Imam Utomo,
backed up by the East Java military district command,
the police and the public prosecutor's office, issued a
ban on the import of raw sugar to address the
imbalances.
The National Sugar Council (DGN, or
Dewan Gula Nasional) has failed to live up to
expectations that it would help improve the efficiency
and productivity of the sugar industry and improve
farmer's competitive position in the global marketplace.
A Rp23 billion (more than US$2.5 million at
current rates) credit line for cane farmers a couple of
seasons ago proved to be of little help. The idea was
that mills and farmers would somehow work together to
improve deteriorating husbandry practices and the
financial difficulties faced by the sugar industry would
be attenuated by the credit program. Thus, it was hoped,
the quality of cane would be improved and milling
operations would be more efficient.
The small
domestic production base cannot cope with the rapidly
increasing direct domestic consumption backed by an
equally fast-growing food-processing industry, and the
upshot is that domestic sugar cannot hope to compete in
price and quality with imports.
With world sugar
prices relatively low, sugar can be imported and sold at
retail below the price of the domestically produced
sugar. The government and sugar producers complain of
unfair trading and even of "dumping" of sugar by other
countries into the Indonesian market. There may be some
truth in this but the lower efficiency and higher cost
of domestic sugar production and milling in Indonesia
are prime factors in the market price distortions.
Breakthroughs in rice production in the early
1980s led to a rapid increase in agricultural
productivity and farm incomes. Not only could Indonesia
feed itself, but millions of farm families were at last
able to break out of a subsistence existence. Later,
labor-intensive, export-oriented industrialization was
the main engine of growth until the 1997 financial
crisis. Rising labor demand in the industrial and
services sectors created jobs for the poor, boosted real
wages and caused wholesale reductions in poverty.
The substantial downsizing of the sugar industry
in Java, which has enraged the farmers, is down to the
ongoing economic reforms, the liberalization of sugar
imports, and the continuing reduction in the land
planted with sugar as farmers switch to other crops.
The debate on whether or not to raise import
tariffs (Indonesia's World Trade Organization deal
allows for imposition of tariffs of up to 110 percent)
is now likely to be colored and heightened by anti-IMF
posturing on the premise that Indonesia's farm import
liberalization was forced upon it by the agency, but the
buck must surely stop at the government's door.
The government alone must implement policies
that will ensure adequate supplies of sugar at prices
affordable to the community at large. Sustainability of
production and the availability of employment
opportunities in a Java that is getting poorer and
poorer would seem to be laudable goals.
The
government needs to tackle, head on, the corruption and
collusion that infest the customs service. Hiking the
tariffs will play straight into the hands of corrupt
customs officials and smugglers, while at the same time
ensuring prohibitively high sugar prices for consumers.
With nearly half of the country's 100
million-strong labor force either out of work or
underemployed, the challenge is immense and heightened
by the fact that between 60 and 70 percent of the
country's 210 million people live and work in the
countryside, making the agricultural sector the biggest
employer.
Sri Mulyani Indrawati, a well-known
economist, has noted that there is too much price
distortion and government intervention in the
agricultural sector. "The government needs to redefine
its policy towards the agricultural sector but it should
not be a tradeoff vis-a-vis the manufacturing and
service sectors," she said.
Given endemic
corruption at all levels in the government bureaucracy,
there are fears that any new money diverted to promoting
agriculture could end up in the pockets of bureaucrats
who still exert considerable influence in the villages
of Java and the rest of the vast archipelago.
(©2002 Asia Times Online Co, Ltd. All rights
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