TL;DR – Unlike other commodities grappling with the issue of oversupply and lack of demand due to the global economic slowdown, Indonesia’s cocoa industry suffers from lack of supply amid increasing demand from the downstream industry (See Incentivising Downstream Investment; A Look into Export Tariffs on Agricultural Commodities). The country’s cocoa production which once topped global production, is now declining as its cocoa plants age.
Unfortunately, under these circumstances, the Indonesian government and the parliament issued a number of policies (See Indonesia’s 12th Economic Policy Package is Unveiled to the Benefit of SMEs) which discourage cocoa farmers and industry players from undertaking plant rejuvenation as various rules and regulations are hampering the development of a domestic downstream cocoa processing industry in Indonesia.
Declining cocoa production
Indonesia is a major cocoa producer and currently ranked third in the world in terms of cocoa bean production. Based on data from the Central Bureau of Statistics (BPS), Indonesia’s cocoa bean production in 1990 was only 142,347 tonnes. That figure has increased significantly year-on-year reaching its peak in 2009 at 849,875 tonnes.
In 2010, however, the country’s cocoa bean production began to decline and was down to 575,000 tonnes with the downward trend continuing until 2015 when Indonesia’s cocoa bean production dropped to 400,000 tonnes. According to estimates from the Indonesian government, domestic cocoa production in 2016 will fall by another 10% to 350,000 tonnes.
The continuous decline in cocoa productíon is mainly due to aging cocoa plants which has led to lower productivity. Moreover, the quality of Indonesia’s cocoa is also at a disadvantage due to high cadmium content. According to the Indonesian Cocoa Industry Association (AIKI), domestic cocoa bean production in 2015 reached 250 kilograms (kg) per hectare (ha) with a total planted area of 1.4 million ha. This is a steep decline compared to the productivity level recorded in previous years at 500 kg per ha.
There are a number of obstacles facing plant rejuvenation efforts in Indonesia. One of them being that 94% of the country’s cocoa plantations are owned by smallholders with limited funds to undertake significant investment in their plantations. The Indonesian government has allocated state funds to assist farmers in rejuvenating their plants through the National Cocoa Movement. Unfortunately, the results of this initiative has been limited due to the lack of mentoring being provided to the farmers once new seeds and fertilisers (See Harvest Time for Indonesia’s Fertiliser Industry) have been distributed. The budget for cocoa development in Indonesia has also been reduced in the revised 2016 State Budget from 1.2 trillion IDR to 325 billion IDR due to low state revenue. Other factors causing a decline in production has been the reduction in the area utilised for cocoa planting with many cocoa farmers moving away from planting cocoa crops after the government introduced an export levy in April 2010 to protect the domestic cocoa industry, this has dented profitability for numerous smallhold farmers.
Since then, Indonesia’s cocoa bean exports have declined from 188.4 thousand tonnes in 2013 to nearly a third or 63.3 thousand tonnes in 2014. In addition, the number of cocoa bean exporters has also dropped from around 60 to three exporters. These remaining exporters are not traders but company representatives who supply cocoa beans to their overseas facilities. The decline in Indonesian cocoa exports has been followed by the decline in cocoa bean production as many farmers prefer to sell their harvest to exporters who offer higher prices than the local cocoa industry (See Indonesia’s Booming Cocoa Industry Puts Farmers to the Test).
Five major export destinations for Indonesia’s cocoa beans in 2014 were Malaysia, the United States, Germany, China and India. Its relatively high cadmium content has prevented the country’s cocoa beans from entering the European Union. In 2015, the price of edel cocoa was $7 USD or nearly 100 thousand IDR per kg, while the price of local cocoa was $3 USD or around 42,000 IDR per kg. Meanwhile, the price of cocoa at the farmer level was approximately 31,000 IDR per kg.
Furthermore, a number of regulations also discourage farmers from planting cocoa such as the decision by the Supreme Court No. 70/P/HUM/2013 which revoked several articles in Government Regulation No.31/2007. The decision has resulted in a reduction of farmers’ income because they are now subject to 10% VAT. Other regulations that also hamper the local cocoa industry are cocoa bean certification and local farmers’ obligation to ferment their cocoa beans before selling their harvest in order to add value. As a result, many farmers switch to other crops which has ultimately led to the decline in production.
When Indonesia’s cocoa production was at its peak, domestic and foreign investors invested heavily in the downstream industry by constructing cocoa processing facilities. In 2015, there were 21 cocoa processing factories operating in Indonesia with an installed production capacity of between 850,000 tonnes to 945,000 tonnes per year.
Supported by a robust downstream industry, the country’s processed cocoa exports continued to increase year-on-year. In 2013, Indonesia’s processed cocoa exports stood at 196,300 tonnes. In 2014, the figure was increased to 242,200 tonnes or up by 23.3%. A year later in 2015, the country’s processed cocoa exports reached 326,815 tonnes or growth of 7.4% compared to that of the previous year. The most exported products are cocoa butter accounting for 114,547 tonnes, cocoa cake with 88,462 tonnes, cocoa powder with 58,941 tonnes, cocoa beans comprising 39,622 tonnes, and cocoa liquor at 25,241 tonnes. Around 70% of Indonesia’s total processed cocoa products are exported. Cocoa butter products are exported to Europe and the United States, while cocoa powder is exported to Asia, the Middle East, Russia, Latin America, and others.
In 2014, cocoa contributed $1,24 billion USD to Indonesia’s foreign exchange reserves, and has the potential to increase further if Indonesian farmers can be lured back into growing the crop and boosting production. The total decline in the industry’s installed capacity equates to 385,000 tonnes. Currently, the industry’s remaining installed capacity stands at 560,000 tonnes with only eight companies left; some players have tried to solve the raw material supply problem by importing cocoa from other cocoa producing countries such as Ivory Coast and Ghana yet this has failed to solve the issue at home.
In 2014, around 109,000 tonnes of cocoa beans were imported into Indonesia. This was a significant increase compared to that of 2013 when the figure was 30,700 tonnes. The figure, however, decreased to 53,000 tonnes in 2015 and is expected to further decrease and as by June 2016, only 18,000 tonnes of cocoa beans had been imported into the country.
An additional obstacle that hampers Indonesia’s processed cocoa exports is import levy discrimination by the European Union. The EU imposes an export levy of 4%-6% on Indonesia’s processed cocoa products which is not applied to similar products imported from Africa.
Investment opportunity remains open
Despite various constraints, Indonesia’s cocoa industry is still attractive in terms of investment given the increased global as well as local demand for cocoa and chocolate products as the decline in production makes the sector ripe for upstream investment (See New Restrictions on Foreign Ownership of Plantations Proposed – Updated). Furthermore, the Jokowi administration has set a target to make Indonesia the largest cocoa producer in the world by 2020. To achieve this, the government had held a meeting with the International Cocoa Organisation in May 2015 and 10 heads of cocoa producing regions and PTPN XII to try and increase cocoa bean production.
Meanwhile, in the downstream sector, domestic and export market opportunities for semi-finished and finished cocoa products are plentiful (See Indonesia’s Retail Boom is Far From Over). Indonesia’s cocoa consumption is still low at an average of 0.5 kg/capita/year, much lower than the average consumption of other Asian countries such as Singapore and Malaysia that reach 1 kg/capita/year, and the European countries of more than 8 kg/capita/year. However, investment in the downstream sector requires significant capital since, unlike coffee (See Indonesia’s Coffee Industry Needs Growth Capital), cocoa processing technology is capital intensive. Moreover, the lack of raw material supply needs to be taken into account due to high demand. Therefore, an investment that targets the entire supply chain is the only way to guarantee sustainability of any new venture. The scale of the issue is reflected in the lack of new investment in the processed cocoa industry in the last several years and indeed the closing of 10 small-scale industry players over the same period. Indonesia’s cocoa sector therefore offers sweet rewards, but at a high price.
Originally published on Global Business Guide Indonesia