Special Report: Slowdown jolts RI's commodity-heavy economy

The Jakarta Post, Fri, 11/14/2008 11:04 AM

The Indonesian economy has been generating lucrative profits from the soaring prices of agricultural commodities during the last two years. Following increasing dependency on this business, the recent slump in commodity prices has severely impacted on the economy. The Jakarta Post business section features a special report on commodity sector problems. Here are the stories:

For seasonal farmer Alex Sinaga of Tanjungjabung Barat regency, Jambi, the world is tumbling down around his ears after knowing that his October revenue has dropped by a factor of 10 times following the plummeting global prices for palm oil.

Having previously enjoyed a monthly income of Rp 5 million (US$434 million), six times higher than a university-graduate civil servant in his province, Alex now has to end his shopping spree earlier than expected.

In Jambi, fresh oil palm fruit bunches are now sold at Rp 200 per kilogram, having dropped like a stone from Rp 1,500 per kilogram a few months ago.

Alex is just one example of how Indonesians living in rural areas have already taken a severe knock from the global economic crisis earlier than the government has estimated, since the government initially concluded that the full negative impact would not be felt until the first quarter of next year.

As one of the world's top producers of palm oil, rubber, cocoa and coffee, the Indonesian economy, Southeast Asia's biggest, was making good profits from high agricultural commodity prices earlier this year.

In the first nine months of the year, exports of crude palm oil (CPO), for example, reached $12.12 billion, or 14.5 percent of the country's non-oil and gas exports, according to the Central Statistics Agency.

"Commodity prices soared since 2007 up until early 2008. Clearly, Indonesia benefited significantly from commodity trade, as proven by exports and industry expansion," said World Bank chief economist and senior vice president Justin Yifu Lin recently.

The magnitude of agricultural commodity business is even more significant when remembering that it is estimated to have employed 99.9 million workers, both seasonal and permanent, according to Siswono Yudhohusodo, chairman of the Indonesian Farmers Union (HKTI) advisory board.

Producing an estimated 18.5 million tons of palm oil this year from more than six million hectares of plantation, Indonesia is the world's largest producer of the commodity.

However, with slumping demand from the world's largest importers of palm oil -- China, India and Europe -- local palm oil farmers are now likely to seek more loans from the pawnshop to help ends meet.

The slowing demand has sent the Malaysian CPO benchmark price down to 1,505 ringgit ($419.89) per ton on Wednesday from its peak of 4,486 per ton on March 4, as reported by Bloomberg.

Indonesian Association of Oil Palm Producers (Gapki) chairman Akmaluddin Hasibuan said the plummeting prices had been exacerbated recently by moves from several countries to intentionally default on purchase contracts due to slow demand.

Among the importers carrying out this practice are 30 Indian companies.

"The Indian companies are being unethical by defaulting on their import contracts that have consequently affected our exporters as well as our farmers," Akmaluddin told The Jakarta Post recently.

"We have filed complaints with the Indian government and Indian oil palm-related trade associations but we haven't received any response yet," he said.

There are also contract defaulters in the European Union countries and China.

Indonesia and Malaysia together produce around 85 percent of the world's CPO and account for 88 percent of global CPO exports.

Last year, Indonesia and Malaysia produced about 17 million tons and 15.7 million tons of CPO respectively.

Indonesia recorded exports of $5.5 billion in 2007, with more than 75 percent of its palm oil output being exported as CPO, while by contrast Malaysia posted a higher export revenue of $10.4 billion, with 80 percent of its output exported as value-added products.

In a bid to help bolster the CPO price, Indonesia and Malaysia agreed last week to cut palm oil output by 75,000 tons and around 500,000 to 600,000 tons respectively next year, according to the Agriculture Ministry's director general for plantations, Achmad Manggabarani.

Indonesia also plans to replant 50,000 hectares of oil palm trees while Malaysia plans to replant 250,000 hectares next year.

Achmad hoped the prices of palm oil could then reach its commercially viable level of around $700 to $800 per metric ton.

Meanwhile, Indonesian Vegetable Oil Producers Association (Gimni) executive director Sahat Sinaga said the export drop had actually been developing since 2006 when European countries began to use soybean and sunflower oil as alternatives to CPO for feedstock for biofuel.

Furthermore, he said, the financial crisis and economic downturn had led some foreign buyers to stop ordering CPO due to the drying up of liquidity in their banks, which had previously helped to finance CPO purchases.

"Capacity utilization of CPO production is expected to decline to 48 percent by the end of this year, from 52 percent forecast earlier," said Sahat.

Rubber, coffee and cacao are all experiencing similar problems to those experienced by the CPO sector.

Indonesian Rubber Association (Gapkindo) executive director Suharto Honggokusumo said the price of natural rubber reached its peak at $3.3 per kilogram on June 27 before slumping to its lowest point at $1.53 per kilogram on Sept. 16.

The price has since failed to recover.

With rubber production amounting to 2.7 million tons last year, Indonesia is the world's second biggest rubber producer after Thailand.

Last week, Indonesia, Malaysia and Thailand , which produce between them 70 percent of global natural rubber production, jointly agreed to cut rubber production by 210,000 tons next year by replanting trees.

Robusta coffee also fell to its lowest point at $1.5 per kilogram after peaking at $2.5 per kilogram around three months ago, according to the Indonesian Coffee Exporter Association (AEKI) chairman Hassan Wijaya.

Indonesia is the fourth largest producer of coffee after Vietnam , Colombia and Brazil, producing around 450,000 tons per year of which 250,000 tons are exported.

Cacao also dipped to around $1,930 per ton from a record high of $3,200 per ton around August, according to Indonesian Cacao Association (Askindo) secretary general Zulhefi Sikumbang.

Zulhefi, however, said cacao farmers were relatively safe from price volatility.

"Our farmers are still able to earn profits by selling cacao for around Rp 15,000 to Rp 16,000 per kilogram. They would suffer losses if the price dipped below Rp 11,000 to Rp 12,000 per kilogram," he said.

Indonesia is the world's third largest cacao producer with an estimated production of 500,000 tons. Ivory Coast and Ghana are the first and second largest. JP/Mustaqim Adamrah