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Indonesia – islands of opportunity for Australian agriculture

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article image Michael Harvey

A new report by global agricultural banking specialist Rabobank indicates the emergence of Indonesia as a market that needs large volumes of food and agricultural products to satisfy its fast-growing consumer demand. 

Rabobank’s report, ‘Indonesia – islands of opportunity’ says the economic transformation underway in Indonesia, which is seeing the country emerge as an economic and political powerhouse in South-East Asia is leading to rapidly-increasing demand for consumer goods, including food. With pressure on its natural resources limiting the country’s ability to boost local food production, Indonesia will continue its reliance on imported agricultural commodities. 

Australia is therefore, well placed to capitalise on this demand and grow trade with its largest neighbour, according to the new industry report, especially in the key sectors of wheat, beef, dairy and sugar. However, it also warns these opportunities should not be taken for granted, and while Australia is competitively placed, the strength and focus of other food export nations should not be underestimated. 

Report lead author, Rabobank senior analyst Michael Harvey says the Australian food and agricultural industries will need to begin a ‘journey of diversification’ to help unlock more value of this trade opportunity and provide a sustainable return to the Australian supply chains. 

Mr Harvey says this will involve factors such as developing new strategies and competencies around food quality and safety, tailoring product to meet specific customer and consumer needs and providing technical service and expertise to the Indonesian agricultural sector. 

An island of opportunity 

The Rabobank report says Indonesia has all the ‘hallmark’ economic traits to remain one of the world’s fastest-growing consumer markets. Drivers include urbanisation, a rapidly-expanding middle class, a greater share of discretionary spending on food and a modernising retail sector. Mr Harvey believes these local economic changes strengthen the trend of growing food consumption and great demand for high protein food products.

In recent years, Indonesia has emerged as Australia’s fourth-largest market for food exports on the back of trade flows in grains, beef, dairy and sugar. The Rabobank report says food and agricultural exports could increase by a further 50 per cent in the next five years. 

To fully capitalise on these opportunities, the focus should be on ‘the value, not the volume’, with an aim to develop more strategic partnerships within Indonesia, build stronger government-to-government relations, continue the shift to value-added products, and extract maximum value from supply chains. 

Indonesia’s fast-growing consumer markets 

The most populous country in South-East Asia with 248 million people, Indonesia is also the fourth largest economy in the world, and is rapidly urbanising. The Rabobank report says a middle class that is expected to surpass 140 million by 2020 is driving the rapid expansion of the modern food retail and service sector.

Mr Harvey comments Indonesia’s significant increase in per capita disposable income is encouraging for a preference for western-style foods, with flour and protein-based products such as cakes, biscuits, pizza and processed foods, including a wide range of snack products, becoming more and more popular. Notably, across many food categories, consumption per person in urban areas is up to double that of rural areas. 

In recent years, many QSR (quick service restaurant) operators have increased their presence in Indonesia and are now looking to expand further beyond the island of Java. More western fast food chains are expected to set up shop with the number of fast food outlets in Indonesia going up from the current 5,890 to 9,100 in 2017. 

Limits to local production – opportunity knocks 

Agriculture is very important to the Indonesian economy and increasing food self-sufficiency is also a high priority for the Indonesia government. However, while it is possible to increase local production in some sectors, there are several structural weaknesses in Indonesia’s traditional agricultural sector, which will limit growth in local production and see growing reliance on agricultural exports. These include competition for land and other resources, lack of investment across agricultural supply chains, low farm profitability and productivity due to small scale farms, and the lack of finance and limited access to capital for expansion. 

Given its geographical proximity to Indonesia, the Rabobank report says, Australia has natural competitive advantages for trade including freight advantages to many agricultural sectors, particularly for Australian grains, meat and dairy exporters who have lower shipping time and costs than their competitors from other countries. 

Australia has also been successful in securing better market access through the implementation of the ASEAN-Australia New Zealand Free Trade Area (AANZFTA). 

Australian agriculture also has a strong reputation around its tightly-regulated food chain. However, maintaining and leveraging this strong reputation will be vital in a new era of increased public concerns around food safety. Besides, Australia cannot lose sight of the fact it competes on a world stage; therefore industry must maintain supply chain cost competitiveness.

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