The Indonesian poultry industry is a key sector for the national economy, supplying 65% of all animal protein and employing 10% of the national labour force. All over the country, though local production successfully copes with domestic demand, the potential for growth is high, consistent with expectations of rising GDP per capita. The market looks healthy and attractive, which has resulted in this gradual entry of new foreign groups. In past decades, the production process has evolved and modernized. The market is dominated by five main players—three foreign companies operating in feed production and two in day-old chick production.
Even though expectations for the industry are strongly positive, prices for both broiler chicken and eggs are consistently higher in Indonesia than in Europe and America. From March–October 2018, Indonesian broiler chicken meat cost an average of about IDR 40,500/kg, while in the EU the price was around IDR 32,600/kg (+24%). Over the same period, the average egg price in Indonesia was around IDR 28,000/kg, compared to just above IDR 21,000/kg (+33%) in the EU. The differences in price are partially due to differences in demand and supply—Indonesia is a Muslim country, so the demand for chicken meat may be stronger than in countries with higher pork consumption. However, Indonesia’s higher prices are surprising given lower production costs. In Indonesia, farm salaries are lower than in Europe. In addition, the EU banned egg layer battery cages in 2012, forcing layer farmers to decrease bird density and therefore to implement more expensive methods of production, pushing up egg production costs. So production costs are higher in the EU, but consumer prices are lower.
Price differences can also be explained in part by general market conditions in the EU and Indonesia. While the European market is a mature one, the constant growth in Indonesia, supported by growing demand, is an important element keeping prices high.
While many economic factors are out of Indonesia’s control, prices are also affected by Indonesian public policy. Therefore, we propose policy modifications that aim to support sound growth of the industry, which might be accompanied by lower prices. The first important act would be to resolve conflicts between existing regulations, in particular between Regulation of the Minister of Trade (MOT) 21/2018 and Regulation of the Minister of Agriculture (MOA) 57/2015 on the ministerial recommendation letter for maize import and maize import rights.
Our second suggestion, related to MOA 26/2016, is to liberalize parent stock1 imports, enabling poultry producers to more freely implement sound entrepreneurial strategies rather than relying on incorrect government estimations. At the same time, we believe that it is necessary to open Indonesia to the international market for maize, rather than using trade protections to force local production. Current regulations have driven domestic maize prices incredibly high compared to the international price. Since maize is the main component of poultry feed, and feed is in turn the major cost in Indonesian poultry production, free access to international markets would heavily and positively affect production costs in the poultry industry, helping prices to cool down.
Finally, the government could play an important role in improving infrastructure, which, at the moment, burdens the industry—particularly in the case of transporting raw materials for feed from the ports to the mills. An improvement in road infrastructure would also allow the transport of heavy machinery, further boosting modernization of the poultry industry.
The poultry industry plays an important role in the Indonesian economy. According to the Indonesian Feed Producers Association (APPI/GPMT), the sector is able to supply 65% of Indonesia’s animal protein, provides jobs for 12 million people, and has an estimated value of over 34 billion USD (Wright and Darmawan, 2017, p. 2).2 Estimates for the year 2015 reported a poultry population of 3.5 billion broilers,3 200 million layers,4 and 24.8 million breeders.
The poultry industry is spread throughout Indonesia (Graph 1), with significant egg production in East Java, due to the availability of locally grown corn and the relative ease of transporting eggs to the markets in West Java. Broiler production is widespread all over the country but focused in West Java (Bandung), close to its fresh bird markets, which lack an adequate cold chain (Iowa Economic Development Authority, 2017, p. 13).
There is a correlation between regional broiler and egg production and the population distribution. High temperatures, poor road infrastructure, and the high demand for fresh eggs make it difficult to transport live birds medium distances, so demand must be met within the region (Iowa Economic Development Authority, 2017, p. 14).
The poultry industry in Indonesia has experienced cyclical fluctuations but grown consistently over the past three decades. Graph 2 shows the positive correlation between the GDP per capita growth and the poultry per capita consumption.
"Chicken can be considered an inferior good, meaning its consumption may decrease, at the margin, as consumers become richer."
In order to understand why per capita poultry consumption has grown slower than per capita GDP, we have to consider that to some extent, chicken can be considered an inferior good, meaning its consumption may decrease, at the margin, as consumers become richer. Beyond a certain consumption level, consumers shift to more “prestigious,” expensive protein sources, such as beef.6 Regardless, the potential for growth in this industry in Indonesia is high. In fact, in a country with a similar consumption structure, Malaysia, annual per capita chicken consumption has already reached 45 kg. In Indonesia, per capita chicken consumption is expected to reach 12.7 kg in carcass weight (CWT)7 this year, which means an annual increase of around 5%, resulting in total consumption of 3.3 million tonnes CWT (3.2 million at the end of 2017) (Mulder, 2018a, p. 11). Just few years ago, in 2012, annual per capita consumption was only 7.5 kg (Wright and Darmawan, 2017, p. 2). Therefore, Rabobank estimates robust industry growth, though slower than in past decades (Figure 1). Growth in 2017 and 2018 was so strong that all the major players are planning further expansions (Anonymous, 2018a, pp. 2-3).
Indonesia is expected to play a growing role in world poultry production in the next decade, together with other Asian countries, such as China, India, Pakistan, and Vietnam. This is illustrated in Graph 3.
"Indonesia is expected to play a growing role in world poultry production in the next decade, together with other Asian countries"
This quantitative growth is expected to be accompanied by an ongoing qualitative change. As the industry has experienced production modernization and concentration, consumer preferences have gradually shifted toward broiler meat and away from native chicken8,9 as shown in Graph 4.10.
The growth process has been supported by gradual modernization and concentration. As of 2017, the number one player in the Indonesian poultry market, PT Charoen Pokphand Indonesia, retained a 31% market share in the production of poultry feed and a 41% market share in the Day-Old-Chicks (DOCs) production (Partners, 2017a). As of 2015, the Indonesian poultry and feed markets had been consolidated, with 80% and 63% of the market share captured by the top five players respectively (Partners, 2017b).
Figure 2 also shows that the Indonesian market is dominated by foreign players (Alonzo, 2016). Charoen Pokphand Indonesia14 belongs to a Thai group,15 Malindo16 is the name for the local operations of the Malaysian based Leong Hup,17 and CJ18 is a Korean corporation which was part of Samsung until the 1990s.19 The growth potential of the Indonesian poultry market has recently attracted more foreign investors—the most important ‘new entries’ are the Chinese group New Hope,20 which started operations in Indonesia in 2006 under the name of New Hope Indonesia, and more recently, Bounty Fresh21 from the Philippines. Bounty entered Indonesia in 2015 thanks to a joint venture with Triputra Group and Persada Capital Group, called Bounty Segar Indonesia. In 2016 Japfa, through its subsidiary So Good Food, and the U.S.-owned agri-business firm PT Cargill Food Investment Indonesia, agreed to establish PT Cahaya Gunung Foods, a 40/60 joint venture to produce fully-cooked poultry products (Sulistiyono, 2016).
The presence of big corporations has played an important role in allowing Indonesia to achieve a growing level of technological modernization and supply independence. It is estimated that 60% of poultry production comes from industrialized farms (closed housing system), while 40% remains in the hands of small and medium players (open housing system) (Brockotter, 2017). Among the small players, the role of independent farmers who are not bound to any bigger poultry company has sharply decreased. According to the Indonesian Public Poultry Association (PINSAR Indonesia), the number of independent farmers has fallen from 100,000 in 2008 to 6,000 today, corresponding with a decrease in the market share of independent farmers from 70% in 2008 to 18% in 2016 (Wright and Darmawan, 2017, p. 2).
Graph 5 shows that local production has been consistently able to meet domestic demand and that the international poultry trade is virtually inexistent in Indonesia. Broiler meat production suffered a heavy cut in 1997 and 1998, but this crisis moment can be attributed to the general macroeconomic difficulties experienced by several Asian countries in that period (Saptana and Rusastra, 2001). During recovery from this crisis 1999, production grew rapidly before slowing down and then stabilizing after 2012 (Graph 5).
In the last decade, egg production has also experienced robust growth. In 2009 Indonesia produced slightly more than one million tons of eggs, while production reached 1.7 million tons in 2017 (+62.4%). Egg production also showed clear signs of modernization; native egg production grew between 2009 and 2017 from 160,920 tons to 210,924 tons (+31.1%), while layer egg production in the same period grew from 909,519 tons to 1.5 million tons (+67.9%).
Between 2009 and 2017, the total percentage of native eggs declined from 15% to 12%, while layer eggs grew from 85% to 88%. While native chicken eggs are normally produced in small sized backyard farms, layer eggs are the result of intensive caged hen farming. A battery cage layer house can accommodate 50,000–60,000 hens, which can produce 200,000–240,000 eggs per week (a farm usually consists of more than one house).
This scenario affects broiler meat and egg prices. As one would expect, commodity prices are affected by both economic and non-economic factors. The interaction between supply and demand is important, and in Indonesia is quite equilibrated. Per capita GDP trends and general macroeconomic conditions of the country are also important, as evidenced by the effect of the Asian financial crisis (1997–1998) on poultry production. The risk of avian influenza and the impact on demand of seasonal festivities are important non-economic factors affecting the industry. Finally, an exogenous, yet important economic role is played by the institutional framework and specifically by government regulation (the subject of the next section).
Unfortunately, it is not easy to source a complete data series of broiler meat and egg prices for the Indonesian market, but thanks to the PIHPS Nasional database, we were able to trace the weekly price fluctuations of the last two years. These are illustrated in Graph 7.
Broiler meat prices declined steadily for the entire second half of 2016, moving from more than IDR 38,450/kg to close to IDR 35,000/kg. After this period, and for a period of around one and a half years between the beginning of 2017 and May 2018, prices fluctuated between IDR 33,000/kg and IDR 36,500/kg. Prices surged in June and July 2018, reaching a new peak of IDR 45,650/kg on 8 August (an increase that may be partially attributed to the Hari Raya festivities, though an important role was also played by the bullish market).
"After this period, and for a period of around one and a half years between the beginning of 2017 and May 2018, prices fluctuated between IDR 33,000/ kg and IDR 36,500/kg. Prices surged in June and July 2018, reaching a new peak of IDR 45,650/kg on 8 August."
Mulder (2018b, p. 11) reports, “broiler retail prices ranged between IDR 35,500/kg CWT and IDR 39,500/kg CWT in May 2018—well above the government reference price of IDR 32,000/kg CWT. [...] We expect prices to moderate by the end of June, as demand normalises.” And indeed, prices began cooling down in August 2018. The last observed price, from 26 September, was IDR 40,750/kg.
The average price over the period covered by Graph 7 was IDR 35,873/kg, with a standard deviation of IDR 2,423.90/kg, 6.76% of the average value. For comparison, the broiler price (CWT) in the European Union (EU) between August 2017 and August 2018 fluctuated between €1.83/kg and €1.90/kg (IDR 31,707/kg and IDR 32,919/ kg) (European Commission, 2018a). In the same period, prices in the United States fluctuated between USD 1.9/kg and USD 2.5/kg (IDR 27,973/kg and IDR 37,587/kg) (Ycharts, 2018). This means that at the peak of the festivity season, chicken prices in Indonesia were somewhat higher than in Europe and the United States. Average prices in Indonesia are more moderately higher than ‘Western’ prices, somewhat surprising considering Indonesia’s lower labour costs, which in Indonesia represents 9% of the production cost in broiler farming and 16% in layer farming.
"This means that at the peak of the festivity season, chicken prices in Indonesia were somewhat higher than in Europe and the United States."
We believe that regulations concerning the import of raw materials and poor infrastructure play a role in these high prices. Graph 8 shows not only that prices in Indonesia are consistently higher than in Europe, but also that the latter are more stable over time.
While data from Graph 8 refer to March–September 2018, a longer historical series is also available for comparing Indonesian retail prices with world retail prices between 2010 and 2016, as is illustrated in Graph 9.
Egg prices declined for most of the second half of 2016 and remained between IDR 22,000/kg and IDR 25,000/kg for almost all of 2017. In 2018 egg prices have been stable and above IDR 25,000/kg, peaking at IDR 30,100 on 25 July 2018. As with broiler meat prices, egg prices have been declining since August and the latest observation (26 September) showed a price of IDR 28,200/kg. In general, we can say that fluctuations have not been particularly violent over the past two years, with exception in few ‘hot’ moments such as Christmas and Hari Raya. The average egg price was IDR 25,220/kg, with a standard deviation of IDR 1,950.30/kg, 6.7% of the average value.
Over the past year, egg prices in the European Union have fluctuated between a peak of €1.92/kg (December 2017) and a minimum of €1.13/kg on August 2018 (IDR 33,270/ kg and IDR 19,580/kg) (European Commission, 2018b). In contrast to the broiler market, the egg market in Europe has been more subject to fluctuations relative to Indonesia. Graph 11 shows that in the past six months the situation in Europe stabilized, with prices fluctuating around IDR 21,019/ kg, while in Indonesia the average price was close to IDR 28,000/kg. This illustrates that eggs in Indonesia tend to be more expensive compared to in the European Union, in spite of cheaper labour in Indonesia and the 2012 ban in the EU of battery layer cages, which forces European producers to use more humane, but more expensive, methods of production.
"This illustrates that eggs in Indonesia tend to be more expensive compared to in the European Union, in spite of cheaper labour in Indonesia and the 2012 ban in the EU of battery layer cages."
Following Mulder (2018a, p. 11), it is interesting to analyze the price of broilers at their live weight (LWT)25 in the West Java region, one of the key Indonesian markets. In this region, broiler prices have been strong since the beginning of 2018 (average IDR 20,000/kg LWT, +20% YOY26), but fell beginning in February 2018 (IDR 18,123/kg LWT) (Graph 12). Day-old-chick (DOC) prices have been more stable over the past two years, fluctuating between IDR 4,500 and IDR 5,000. In May 2018, broiler prices averaged IDR 21,345/kg LWT (+15% YOY) in key markets of West Java while DOC prices rose to IDR 5,300/chick, with a yearly increase of 19%.
In Thailand and Malaysia, where the poultry meat industry is more highly developed (Thailand is among the top exporters to the EU), prices are cheaper when compared to economies where the sector is still growing and operates with a lower level of infrastructure, as in Indonesia and the Philippines. In Vietnam, where the industry is still in its infant stage (Vietnam consumers prefer pork, it has the second highest consumption Asia, after China), prices are much higher.
There are several policies affecting poultry production in Indonesia, and therefore the prices of eggs and chicken at the market. Most of the relevant policies were implemented in 2016 and revised in 2018. According to Article 14 of the Regulation of the Minister of Agriculture (MOA) 57/2015 on the export and import of plant-based animal feed, product quality cannot be based on an internationally-approved standard, but on the Indonesian National Standard (SNI). This measure, as one would expect, makes importing processes more complicated.
"According to Articles 9 and 11 of this regulation, poultry producers are not free to import breeders according to their expected business needs. Instead, imports are regulated by supply
and demand calculations made by an analysis team appointed by the government."
While broiler and layer chickens are produced in Indonesia, the different breeders with the special genetic lines necessary for producing hatching eggs are mainly imported. In fact, 81% of Indonesian poultry has genetic stock that originated from the United States (Wright and Darmawan, 2017, p. 2). The different stages of the breeding process depend on great grand-parent stock (GPS), grand-parent stock (GPS),27 and parent stock (PS).
In Indonesia, the government is involved in the procurement of GGPS, GPS, and PS through MOA 26/2016. According to Articles 9 and 11 of this regulation, poultry producers are not free to import breeders according to their expected business needs. Instead, imports are regulated by supply and demand calculations made by an analysis team appointed by the government. The team consists of government officers, academics, experts, poultry breeder operators, and chicken farmers. There is no transparent method for the selection of these team members, so it’s impossible to know whether there might be a conflict of interest that could lead to inaccurate calculations.
Also important is MOA 34/2016, which regulates the importation of carcasses, meat, intestine, and/or their processed products into Indonesia. To make things more complicated, Article 2 of this regulation establishes the halal requirements as stipulated by the Islamic Supreme Council of Indonesia (Majelis Ulama Indonesia / MUI), which officially recognizes 45 Islamic halal bodies in 26 countries. The information on halal requirements is only available in Bahasa Indonesia, which may make it difficult for importers to fully understand the requirements. This means that this regulation can be used as an excuse to block imports of chicken meat, as was the case when Brazil complained to the WTO about Indonesia’s practices in 2016.
To obtain all required documents stipulated in the regulation of the Minister of Trade (MOT) 20/2018 in Articles 10 and 11, importers need supporting documents that take at least 20 working days to complete. This slows down the import process and burdens importers with the extra cost and time. This extra cost is likely to be passed on to consumers, driving prices even higher.
"To obtain all required documents stipulated in the regulation of the Minister of Trade (MOT) 20/2018 in Articles 10 and 11, importers need supporting documents that take at least 20 working days to complete.
We strongly believe that the most important regulations affecting the poultry industry in Indonesia are those regarding the importation of maize, which have been deeply analyzed in Freddy and Kumara Gupta (2018). MOT 21/2018 replaced older regulations governing corn imports, specifically MOT 20/2016 and MOT 56/2016. The most critical aspect of this important regulation is the power granted to BULOG.28 Article 3(1) of MOT 21/2018 stipulates that BULOG remains the sole importer for maize for animal feed, including for poultry. This makes BULOG crucial in the development of all farming activity.
According to a Statistics Indonesia (Badan Pusat Statistik) estimation, poultry feed represents almost 57% of the production cost for broiler chickens and almost 72% in layer farming, while wages represent 9% and 16%, respectively. These figures can help us to understand how important MOT 21/2018 is to the poultry industry. According to Freddy and Kumara Gupta (2018, p. 7), it is “estimated that 58% of the national demand for maize is for livestock feed, while 30% is for human consumption [...]. The poultry industry consumes about 87% of livestock feed supplies.”
In contrast to the previous MOA regulation, MOA 21/2018 does not require a letter of recommendation from the ministry to authorize the import of maize. While this is an improvement, the regulation also introduces potential problems because it contradicts other, older regulations. In fact, according to Article 16 of MOA 57/2015, a letter of recommendation from the MOA is still a required document to import maize. Moreover, Article 3(1) of MOT 21/2018 contradicts Article 4(1) of MOA 57/2015, which governs the export and import of plant-based products. According to MOT 21/2018, only BULOG is allowed to import maize, while MOA 57/2015, which was never formally abolished, gives any private sector or State-Owned Enterprises (SOEs) in the area of animal health and husbandry the right to import and export. These contradictions create confusions in the industry and give discretionary power to the officials who authorize imports. In the worst scenario, the port authority may confiscate imported maize if the recommendation letter is missing.
Understanding how and why the policies discussed above have failed to drive industry growth and improve prices for chicken and eggs is important to understanding the best policy recommendations.
Introduction: The Method
This section constitutes two main parts. Part 4.1 (parts 1–4) discusses a theoretical overview of some crucial aspects of the market process and part 4.2 (parts 1–3) features a more technical discussion of access to some key raw materials.
4.1.1 Costs and price adjustments
It is important that the reader not fall into the trap of thinking that reducing the costs of production is enough to get cheaper market prices in a directly proportional way. While economists agree that the value of a good is subjective, many believe that the costs are determined by objective conditions. This is a mistake.
Costs, like values, are subjective (Mitchell and Boettke, 2017, pp. 34-35). The real cost that matters in economic decisions is the opportunity cost, “the value that one assigns to the highest-valued alternative that one must forgo in order to take the action”. Costs refer to actions—to choices— not to things, which economically speaking have no cost. “There are no “objective” costs. All costs are costs to someone who places value on forgone opportunities”. (Heyne, Boettke and Prychitko, 2014, pp. 76-77).
Opportunity costs are, at the same time, marginal costs. While opportunity cost is the value of a foregone opportunity because of an action/choice, marginal costs focus on the change in the existing situation that the action entails (Heyne, Boettke and Prychitko, 2014, p. 79). What will matter in the following discussion is that changes in the marginal cost of production will tend to change the supply curve.
In the case of the policy recommendations we make, a fall in the price of a factor of production will lower marginal costs (meaning alternatives become relatively more expensive), and therefore lead to a different supply curve, characterized by an increase in overall supply (and alternative courses of action become more expensive). This new supply curve corresponds with farmers who are willing and able to deliver their product at a lower price than before. (Heyne, Boettke and Prychitko, 2014, pp. 84-86).
It is difficult to predict the quantitative impact of policy suggestions. The effect we just described has to be considered as ceteris paribus (all other things remaining equal) and as a result of the adjustment process taking place in time. Cost of production is not the only element affecting price movements. They are subject to a much wider range of factors; therefore, the quantitative supply change and the consequent price reduction resulting from the policy changes we suggest are impossible to predict. These theoretical considerations are the necessary interpretative key that makes it possible for economists to understand the reality under observation. Data are not objective—they require interpretation (Mitchell and Boettke, 2017, p. 12; Huerta de Soto, 2000, pp. 72-73; Mises, 1957).
4.1.2 The information and knowledge problem
A detailed discussion of the critical aspects of existing policies requires an understanding of some general arguments about why central planning is, in general, a non-solution for economic development. Even if the attempt to centralize the import of parent stock29 and feed ingredients like maize is done with the intention of achieving idealized development of the market, such solutions fail to recognize the difficulties implied by central planning, which can be summarized as the calculation (Mises, 1920) and knowledge problems (Hayek, 1937, 1945)30.
Individuals, when exercising human action as purposeful behaviour, set their goals based on their expectations. Having defined their ends, the means for achieving them must be chosen through a process that unfolds over time. Attaining certain objectives must involve costs that arise from the subjective perception of the foregone opportunities to achieve other goals (as discussed above). The expectation in the case of any action taken is that the subjective benefit of achieving goals will be higher than the cost. The concept of entrepreneurial profit lies in this difference between this cost and benefit.
Kirzner (1973, p. 14) defines entrepreneurs as those special individuals, who “are able to perceive opportunities for entrepreneurial profits; that is, they are able to see where a good can be sold at a price higher than that for which it can be bought”.
Since entrepreneurship is alertness to profit opportunities deriving from market ignorance, and the market process is the set of revisions in plans following the modification of knowledge, the two concepts are intrinsically bonded.
In a centrally planned system, the central authority tries to collect the necessary information from the minds of individuals, claiming to be able to provide all the information regarding prices, which goods to produce, how many, and so on. However, the nature of the information necessary for to make the choices that individuals would in economic action makes it impossible for a central planner to collect and distribute sound information. The information needed is, by its nature, tacit and not articulated, dispersed among individual minds, and ever-changing over time.
There is, among economists, an attempt to imitate the method of physical sciences, with its possibility of exact predictions (Hayek, 1974), but this attempt assumes away the impossibility of gathering the required information. Moreover, while it might be possible for a government body to possess technical/scientific knowledge (how to do things), it is impossible for it to gather entrepreneurial knowledge, which is based on the (uncertain) intuition that to do something somewhere can generate a profit. This is the essence of the knowledge problem.
4.1.3 The calculation problem and the market
Even if the knowledge problem could be overcome and this information could be gathered, the calculation problem remains. The calculation problem concerns the interaction process of price formation as the interaction between subjective evaluations over time.
Competition is a discovery process (see Hayek, 1946 and 1968). The process of interaction between competing suppliers as well as competing consumers acting in the market should be considered a restless process in the search of not an objectively correct point, but the mutual coordination of constantly (and unexpectedly) changing plans (Shackle, 1972, pp. 76-79; Lachmann, 1976, p. 56).
The market is therefore not a thing or a place, but a process in which individual purposes and plans matter and tend toward coordination through an ongoing exchange of information made possible and intelligible thanks to shared institutions. Economists can interpret and understand this process, but they cannot guide or predict it. The outcome of the market process is orderly, even though no one is in charge of ordering it. It is, “the result of human action, but not the execution of any human design” (Ferguson, 1782).
For this reason, only under a free market regime can entrepreneurial action bring about the best set of entrepreneurial decisions, which are revised in response to competition and changing conditions in the dynamic discovery process implied in the market process. Improving entrepreneurial decisions fine-tune the production process. Profits reward the wiser entrepreneurs (the ones whose choices better meet consumer needs at a lower cost) and losses penalize less insightful or inefficient decisions. The survival and consolidation of better entrepreneurs and corporations is possible only if entrepreneurs are able to gain from competition by offering better products or better prices.
Prices arise from all of these interactions between the subjective evaluations of entrepreneurs and consumers in the market process. Without the market, meaningful prices cannot exist, and so any consideration about success and failure of entrepreneurial ventures is impossible.
4.1.4 The law of comparative advantage
In order to understand the reason for preferring international trade specialization, one must understand the law of comparative advantage, which was developed two hundred years ago by David Ricardo (1817, chapter 7).31 According to this law, a country has a comparative advantage in producing a particular good if that good can be produced at a lower relative opportunity cost than in other markets. Following Rothbard (1995, pp. 94–95), “countries should specialize in what they are best or most efficient at, and then exchange these products, for in that case the people of both countries will be better off.”
Ricardo also discussed that protection is often demanded by domestic producers (as may be the case for Indonesian producers of maize). Although producers and governments may try to argue that poor or developing countries may be left out in order to maintain trade protections, these protections mean that both consumers and industry lose the benefits of international trade, and as discussed above, all market decisions are affected by the interference. “[The law of comparative advantage] means that even if a country is in such poor shape that it has no absolute advantage in producing anything, it still pays for its trading partners, the people of other countries, to allow it to produce what it is least worst at” (Rothbard, 1995, p. 95).
4.2.1 The import of parent stock
The calculation and knowledge problems help illuminate our concerns about MOA 26/2016 and MOT 21/2018, and also reveal problems with MOA 57/2015 (regarding the export and import of plant-based animal feed).32 As mentioned above, Articles 9 and 11 of MOA 26/2016 do not leave poultry producers free to import breeders according to their expected business needs. Instead, imports are regulated by supply and demand calculations implemented by the government’s analysis team.
The intent of MOA 26/2016 is to determine in advance, through a pool of ‘experts’, the objective market need for parent stock, or, in other words, to simulate on paper, and in advance, the supply and demand dynamics in order to determine the market equilibrium point. Even if we do not take into account the possibility of conflicts of interest on the government’s team, the knowledge and calculation problems mean that experts will fail to predict the outcomes of the market (Koppl, 2018).
In a nutshell, the government’s attempt to set a plan controlling demand and supply behaviour is always and everywhere destined to fail because the market process can only be interpreted and not guided or predicted from the outside. Sound plans can be implemented only by individuals participating in the market process, which is the only institution that provides the tools to ensure that information can be acquired, interpreted, and transmitted among individuals. This discovery process is never at rest and drives purposes and plans, as well as their revision, in order to increase the degree of mutual compatibility of plans.
So far, the market, though not perfect, has proved to be the best system to enable such consistency to emerge as a spontaneous order—the result of human action, but not of human design.
4.2.2 The role of maize
The same argument can be used against the BULOG monopoly of the import of feed products, and in particular of maize. Freddy and Kumara Gupta (2018) have already provided a brilliant analysis of the maize market in Indonesia. As already discussed, MOT 21/2018 does not require a letter of recommendation from MOA in order to import maize, but according to Articles 16 and 22 of MOA 57/2015, a letter of recommendation from MOA remains a required document to import maize. Moreover, Article 3(1) of MOT 21/2018 contradicts Article 4(2) of MOA 57/2015 on whether only BULOG is allowed to import maize for animal feed. These contradictions not only create confusions in the industry, but in the worst case scenario may result in confiscation of imported maize.
These contradictions create arbitrary power in the hands of port authorities, which is difficult (if not impossible) to predict. The importance of maize for the poultry industry cannot be underestimated. Recall that feed represents almost 57% of the production cost in broiler farming and almost 72% in layer farming, and that 58% of the national demand for maize is for livestock33 feed, while 30% is for human consumption and the poultry industry consumes about 87% of livestock feed (Badan Pusat Statistik and Freddy and Kumara Gupta (2018, p. 7).
"The importance of maize for the poultry industry cannot be underestimated."
Following Dr. Vijaya Kumar, we know that a 50 kg bag of broiler feed contains 7.2 kg of whole maize and 11.9 kg of maize germ and a 50 kg bag of broiler starter feed (1–4 weeks) contains 28.6 kg of whole maize (Kumar, n.d.). A 70 kg bag of layer mash (for birds older than 18 weeks) has 24.3 kg of whole maize and 7.1 kg of maize bran. These claims are supported by similar figures produced by USAID (2013), according to which (p. 16), feed represents 55.1% of the total costs of the production chain (Graph 13).
Dependence on foreign production makes industry supply vulnerable to currency fluctuations. The government is optimistic about domestic production and Andi Amran Sulaiman, Minister of Agriculture, declared that Indonesia was self-sufficient in 2017 (Asian Poultry Magazine, 2018b, p. 3). However, according to official data, despite the increase in local production, consumption has grown faster and Indonesia is not self-sufficient. These data are illustrated in Graph 14.
A half million tons of maize were imported in 2017 (not enough to cover the domestic demand), but the government claims to be ready to export that amount in 2018 (Graph 15).
In spite of the government’s apparent goals, the problem is not self-sufficiency. In a globalized economy, international trade can fill gaps in domestic production and it may be that imports are a better solution than the autarchic principle of ‘doing it by yourself’ that seems to inspire some of the most recent Indonesian policies. Respatiadi and Nabila (2017) have expanded this argument in the context of beef imports and production. The power of trade and the law of comparative advantage (Cowen and Tabarrok, 2015, chapter 2) cannot be overestimated.
Graph 16 illustrates that international maize prices are much cheaper than domestic Indonesian prices. Over the past 10 years, while international prices have shown a cyclical dynamic and decreased since their 2013 peak, Indonesian prices have constantly risen. Indonesia’s rising prices should be considered mostly the result of constant demand pressure paired with import restrictions. Demand pressure effects could have been mitigated by foreign maize inflow if policy enabled imports according to market conditions rather than political considerations motivated by autarchic desires.
Table 3 illustrates how the small quota of permitted imports keeps prices high when compared with neighboring countries.
The previous section reviewed the regulation of maize, which is mainly characterized by two factors: complex and contradictory rules and the BULOG import monopoly. BULOG’s government monopoly is doing no good for poultry prices. The monopoly makes the use and discovery of entrepreneurial knowledge and the market process impossible. In addition, because BULOG is a government body it is naturally subject to political considerations over actual market needs. Based on these characteristics of the market, we would expect prices to be higher than they would otherwise.
The price of maize supports this claim. Even though international feed prices remain much lower than Indonesian prices, the government continues to pursue its political goal of self-sufficiency in spite of the fact that it causes high production costs in several industries. The final result of this strategy is that consumer prices remain high, penalizing the people with lowest purchasing power the most. Therefore, while a sort of autarchic approach may seem inspired by the defence of the national interest, that very interest is harmed by forcing people to buy chicken at a price higher than what would have emerged if the importation of a basic raw material were liberalized.
4.2.3 The weight of the infrastructure gap
The last point we want to touch and which suggests policy recommendations in the next section is related the problem of insufficient infrastructure in Indonesia and its effect on the poultry industry. In particular, port infrastructure and road connections between cities are insufficient.
Andersson and Andersson (2018, p. 1) recently argued that the “performance of any economic system depends on its infrastructure, because infrastructure changes at a much slower pace than other relevant factors” and they added that “material infrastructure consists of networks for transmitting information and energy or for transporting goods and people” (p. 2). Even if the infrastructure situation is improving, in particular in Jakarta, it is well known that Indonesia suffers from a lack of adequate infrastructure.
It is estimated that the country needs USD 157 billion to fulfil President Jokowi’s five- year infrastructure plan. According to this plan, only USD 15 billion should come from the government, while the rest of the money is expected to come from private and international investors (Salna, 2018; see also Oxford Business Group, 2017).
According to data published by the Indonesian Chamber of Commerce and Industry (Kadin Indonesia), around 17% of a company’s total expenditures in Indonesia is absorbed by logistics costs, while in peer economies this figure is below 10%. Such discrepancies can make investors more reluctant to invest in Indonesia (particularly in the case of foreign direct investment). At the same time, logistics problems make it difficult for existing entrepreneurs to expand their business, limiting their potential (Indonesia Investments, 2017).
In the poultry industry, transport costs are estimated to be 4.7% of the retail price for broilers (USAID, 2013, p. 21). This problem is linked with the importation of raw materials (analyzed in the previous section). In the case of imported raw materials, the price of transporting feed from the port to the mill can be up to 35% of the total transport cost. As stressed by USAID (2013, p. 21), this cost is peculiarly high for several reasons, including the high import content of Indonesian poultry feed (75% of broiler feed raw materials are imported), inefficient port handling facilities (insufficient berths in Jakarta), excess demurrage due to slow turnaround of vessels, slow transport time from port to mill, and therefore a higher number of trucks to execute the process.
"Around 17% of a company's total expenditure in Indonesia is absorbed by logistics costs, while in peer economies this is below 10%. Such discrepancies can make investors more reluctant to invest in Indonesia."
Food Policy | November 2018
Policy Reforms on poultry industry in Indonesia
This study provides policy recommendations to improve the poultry industry and modernize the sector.