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Growing Indonesian wheat consumption driving imports and investment

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A new report by agribusiness banking specialist Rabobank indicates that wheat consumption is on the rise in Indonesia driven by economic growth and convenience.

Wheat provides an economical and nutritious alternative to rice, and increased consumption could help Indonesia resolve its self-sufficiency target for paddy. Given the current consumption rate, Indonesia could import more than 10 million tonnes per year in the coming five years, placing Indonesia among the top three wheat importers in the world. 

Additionally, growth in consumption of wheat-based products will come from both higher and lower income groups, driven by the growth of bakery products and food service chains. Consequently, the outlook for the wheat industry in Indonesia is very positive and will be seeing investments across its entire supply chain.

Traditionally a rice-consuming country, Indonesia has seen the growth of wheat as an important staple. Unfavourable conditions don’t allow the production of wheat in the country, and there is heavily reliance on imports from Australia, Canada and the United States (US). Wheat consumption increased by 5 percent per annum between 2002/03 and 2012/13, making Indonesia one of the highest growth countries for wheat consumption. Overall consumption grew 70 percent, rising from 3.8 million tonnes to 6.6 million tonnes. 

Driven by the increase in demand, imports shot up more than threefold in the last 20 years, reaching 7.1 million tonnes in 2012/13. Indonesia was the third largest importer in 2012/13 after Egypt and Brazil. Given the growth rate of 6 percent per annum over the last ten years, coupled with favourable economic growth and a young population, Rabobank projects that Indonesia will import more than 10 million tonnes in the next five years, which is on par with the current leading global importer, Egypt.

Rice has long been the staple food for Indonesians. However, rice self-sufficiency has been a challenge in recent years due to constraints on acreage expansion, lack of quality land and lower yields, especially among subsistence farmers. With the introduction of more wheat-based products over the years, such as instant noodles, wheat has become a competing staple to rice. Wheat has quickly gained acceptance, and now accounts for 17 percent of rice consumption, up from 6 percent in 1990/91. To a certain extent, the higher degree of wheat consumption has helped Indonesia keep rice self-sufficiency above 90 percent in recent years.

Compared to other countries with a similar diet, Indonesia has the largest gap between rice and wheat consumption, implying that there is greater potential for further increasing substitution in favour of wheat.

Wheat provides a nutritious and healthy alternative for the rice-consuming population of Indonesia. Driven by health consciousness among urbanites, some consumers are switching their daily staple from rice to wheat. Since the calories provided by spending IDR 1.00 on wheat products are comparable to those provided by spending the same amount on rice, it is also a cost-effective alternative. 

However, wheat consumption per capita still remains low regionally and globally, providing ample growth opportunities for wheat-based products. Per capita wheat consumption in Indonesia stands at 26kg per annum, which is not only lower than the world average of 76kg per annum, but is also well below the regional Asian rice-consuming countries such as the Philippines, Malaysia and China.

Indonesia relies heavily on wheat imports from Australia, Canada and the US. About 84 percent of total demand is met through wheat imports and the rest is met by wheat flour imports. Proximity to Australia, a key wheat exporter in the global trade, has provided Indonesia with a sustainable supplier. Driven by freight advantage, Australia is by far the largest wheat trade partner to Indonesia, accounting for 71 percent of the country's total wheat imports. Australian wheat is widely used for noodle production due to its good flour colour, starch characteristics and good milling extraction.

Wheat imports from the US and Canada are favoured for baking and noodle firmness. However, imports from these two countries account for a minority of the market. Going forward, Australia is expected to remain the key supplier, driven by easy access and suitable grade for the price-conscious Indonesian market. 

Indonesian domestic flour millers used to be state-owned firms. Since 1998, they have been de-regulated and are privately owned. Government policy has encouraged both the expansion of the domestic flour milling industry and an increase in imports of wheat and wheat flour. Such policies target the processing of imported wheat seeds and conversion into wheat flour.

In December 2012, to protect the milling industry from cheap wheat flour imports, the Indonesian government imposed an increased safeguard duty of 20 percent against the existing 5 percent duty, which was later extended indefinitely in July 2013. Wheat flour imports more than doubled between 2003 and 2010, rising from 343,000 tonnes in 2003 to 776,000 tonnes before declining to 480,000 tonnes due to the government's imposition of higher tariffs on wheat flour imports. 

Imports of wheat grain are not currently subject to the import duty. Grains from Australia will continue to get preferential treatment under the ASEAN-Australian-New Zealand Free Trade Agreement. The proximity of Australia and the Indonesian preference for Australian wheat makes Australia a natural option for trade with Indonesia. However, Australia needs to incorporate the price sensitivity and quality concerns of the Indonesian market into their offering to further strengthen the current partnership, as they may face challenges from cheaper wheat origins.

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