Report Highlights:

Post expects marketing year (MY) 2014/15 Indonesian wheat imports and consumption to decrease to 7.6 million metric tons (MMT) and 7.3 MMT respectively. The decline is due to Indonesia's economic slowdown and depressed consumer purchasing power. Post's MY 2014/15 estimate of Indonesian corn consumption is also reduced to 7.9 MMT from 8 MMT due local industry's scaling back of day old chicken (DOC) supplies and Indonesia's unofficial corn import restriction for calendar year (CY) 2015. Despite the Government of Indonesia's (GOI) claim of MY 2014/15 record rice production growth, Post maintains the current estimate production figure due to the lack of supporting evidence for the GOI's growth claims.

SITUATION AND OUTLOOK

The new Indonesian Government's (GOI) decision to remove fuel subsidies and to increase electricity tariffs during its first nine months in office has depressed consumer purchasing power and created business uncertainty. June 2015 Socio-Economic Data from the Indonesian Statistics Agency (BPS) describes the economic outcomes of these decisions as follows:

1. June 2015 inflation registered at -0.54 percent, while calendar year (CY) 2015 inflation is recorded at 0.96 percent. Year-on-year inflation is at 7.26 percent.

2. First quarter CY 2015 Indonesian economic growth slowed to 4.71 percent, compared to 5.14 percent in first quarter 2014. CY 2015 first quarter economic growth contracted by 0.18 percent compared to the previous quarter.

3. In May 2015 Indonesian exports declined to USD12.56 billion, a 4.11 percent drop from April 2015, and a 15.24 percent fall from May 2014.

4. In May 2015 Indonesian imports declined to USD 11.61 billion, an 8.05 percent fall compared to April 2015 and a 21.40 percent drop from May 2014.

5. In May 2015, farm and construction laborers' nominal wages increased by 0.17 percent and 0.15 percent compared to April 2015. However, farm and construction laborer real wages decreased by 0.42 percent and 0.35 percent in May 2015 respectively compared to the previous month.

6. In May 2015, the Indonesian Rupiah depreciated by 2.06 percent against USD.

In February 2015, the Indonesian Meteorology, Climatology, and Geophysics Agency (Badan Meteorologi, Klimatologi, dan Geofisika, BMKG) forecast that Indonesia's dry season will begin in April 2015 and will reach its peak intensity in August 2015. BMKG reported that rainy season onset will be delayed in some parts of Indonesia. A recent meeting at the Indonesian Coordinating Ministry of Marine Affairs reported that sea surface temperatures, wind patterns, and ocean currents strongly indicated that an El Nino will hit Indonesia this year, and that it will be of the same intensity as the 1997 El Nino. The 1997 event was notable for its strength, resulting in rice production declines of 3.4 percent. BMKG's most recent analysis indicates that that the 2015 El Nino will reach its peak intensity in October 2015 and will end in February 2016, running through Indonesia's largest food crop cycle. Therefore, there is a possibility that Indonesia may suffer great food crop production losses because of the prolonged and severe drought, similar to the 1997 El Nino.

Indonesia requires improved irrigation systems in order to achieve higher agricultural production. The country is divided into 90 River Area Units (Satuan Wilayah Sungai, SWS) consisting of 5,000 river basin areas (Daerah Aliran Sungai, DAS). Water Resources Law Number 7/2004 states that the primary objective for Indonesia's water conservation policies is to ensure enough water for agriculture. The GOI and provincial governments are responsible for primary and secondary irrigation development, while farmer groups are responsible for tertiary irrigation development and improvement. According to the Indonesian Ministry of Public Works (MPW), approximately 84 percent of Indonesian rice area is irrigated, while the remaining 16 percent is rain fed.

EXECUTIVE SUMMARY

Wheat

Based on an industry association report that Indonesian wheat flour consumption declined approximately one percent during the first quarter of 2015, Post estimates that MY 2014/15 Indonesian wheat consumption will reach 7.3 MMT. This estimate has been lowered from the previous estimate of 7.4 MMT. MY 2014/15 Indonesian wheat imports are also estimated to decline to 7.6 MMT compared to the previous estimate of 7.7 MMT, in line with the consumption decline.

Corn

Post estimates that MY 2014/15 Indonesian corn consumption for feed will marginally decrease to 7.9 MMT compared to the previous estimate of 8 MMT. The decline is due the drop in day old chick (DOC) supplies and unofficial corn import restrictions. Despite a slight decline in corn feed consumption and the GOI's 2015 first official corn production announcement that forecasts a significant production increase, Post estimates that MY 2014/15 imports will remain on par with previous MY2013/14.

Rice

Despite the BPS forecast for record rice production growth in MY 2014/15, Post will not revise its rice PSD pending the results of the second crop cycle production estimate, expected to take place in late July/August 2015.

WHEAT

Trade

During the 1998 Indonesian monetary crisis, only four flour mills were operating in Indonesia. Today Indonesia is home to 29 flour mills with a total installed capacity of 10.3 MMT/year, currently operating at 60 – 70 percent capacity. This is lower than 2012, when estimates indicated that mills were operating at 75 percent capacity. The decline is attributable to a highly competitive market and strong supply.

Following a rise in international oil prices, the Indonesian National Electricity Company (PLN, Perusahaan Listrik Negara) increased electricity tariffs for households, industry, government offices, and public lighting by 0.62 percent in June 2015 from the tariff implemented in May 2015. The Dollar/Rupiah exchange rate has continued to fall, dropping from Rp. 13,191/$1 in March 2015 to Rp. 13,305/$1 in July 2015. Heightened electricity costs and a falling exchange rate have increased production costs, resulting in the rise of Segi Tiga Biru flour from Rp. 5,832/kg ($438/MT) in March 2015 to Rp. 5,868/kg ($441/MT) in July 2015.

The aforementioned factors and Indonesian economic slowdown are inhibiting imports. Post therefore estimates that MY 2014/15 Indonesian wheat imports will be slightly lower at 7.6 MMT of wheat equivalent, compared to the previous estimate of 7.7 MMT. For the period of July 2014 through April 2015, Indonesian wheat imports reached approximately 6.3 MMT of wheat equivalent. However, millers remain optimistic for 2015/16, expecting higher demand for wheat flour-based food that will drive an increase of wheat imports to 8.1 MMT in MY 2015/16. For the period of July 2014 to April 2015, Australia held the largest market share for wheat (60 percent), followed by Canada (23 percent), the United States (9 percent), and Ukraine (4 percent). Australia's majority market share is due to the noodle industry's preference for Australian standard white wheat, price, and Australia's close proximity. U.S. wheat import market share is expected to remain stable at approximately 9 percent in MY 2015/16, in line with increasing imports from Indonesian flour mills.

Indonesia's wheat flour import quota, which limits imports of wheat flour, expired on December 4, 2014. Despite the quota's expiration, industry reports that the depreciating Rupiah has resulted in higher freight rates, discouraging wheat flour imports from Sri Lanka, India, or Turkey. Indonesian flour continues to dominate the market with a 96.4 percent market share. Based on Global Trade Atlas data for the July 2014 to April 2015 period, India overtook Turkey as the largest supplier of wheat flour to Indonesia with a 35 percent market share, followed by Turkey (28 percent), Sri Lanka (16 percent), and Ukraine (11 percent). For the same period, Indonesia imported a total of 117,698 MT of wheat flour, 161,000 MT of wheat equivalent.

Consumption

Approximately 66 percent of Indonesian flour mill customers are small and medium sized wheat-food producers. These include small scale wet noodle makers, street food vendors, low end bread and bakery businesses, and traditional Indonesian cake makers. Instant noodle manufacturers, middle and upper end bakeries, and cookie and biscuit manufacturers take the other 34 percent of the market. APTINDO reported that approximately 200,000 small and medium scale enterprises, employing two million workers, are operational in Indonesia.

In MY 2013/14, Indonesia's annual per capita wheat flour consumption reached 19 kg per capita per year. In previous years, relatively stable macro-economic conditions have allowed middle and upper-middle income consumers to diversify their diets to include more western-style foods like bread and pasta. Rather than eating rice three times per day, many Indonesians have switched to eating bread or noodles for breakfast. Restaurants are also driving demand for wheat-based food products. Contrary to the depressed growth of small and medium scale bakeries, the number of high-end bakeries is growing, mainly in major cities including Jakarta, Surabaya, Medan, and Bandung. Instant noodle prices are currently cheaper than rice, and many more lower and middle income consumers substitute instant noodles for breakfast or dinner. As a result, the noodle industry continues to grow rapidly, consuming 70 percent of Indonesia's wheat flour. Bakery industry consumption follows with 20 percent of flour, while household and commercial biscuit producers each consume 10 percent, respectively. Despite this recent growth, industry reports that the economic slowdown since the last quarter of 2014, wheat flour consumption by modern industry declined in the first semester of CY2015. Based on declining industrial consumption, Post estimates that MY 2014/15 Indonesian wheat consumption for food, seed, and industry (FSI) will decline to 7.3 MMT of wheat equivalent, compared to the previous estimate of 7.4 MMT.

Wheat

2013/2014

2014/2015

2015/2016

Market Begin Year

Jul 2013

Jul 2014

Jul 2015

Indonesia

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Area Harvested

0

0

0

0

0

0

(1000 HA)

Beginning Stocks

1,560

1,560

1,386

1,387

1,221

1,322

(1000 MT)

Production

0

0

0

0

0

0

(1000 MT)

MY Imports

7,392

7,392

7,700

7,600

8,100

8,100

(1000 MT)

TY Imports

7,392

7,392

7,700

7,600

8,100

8,100

(1000 MT)

TY Imp. from U.S.

1,126

1,126

0

600

0

700

(1000 MT)

Total Supply

8,952

8,952

9,086

8,987

9,321

9,422

(1000 MT)

MY Exports

301

300

300

200

300

370

(1000 MT)

TY Exports

301

300

300

200

300

370

(1000 MT)

Feed and Residual

165

165

165

165

200

200

(1000 MT)

FSI Consumption

7,100

7,100

7,400

7,300

7,600

7,600

(1000 MT)

Total Consumption

7,265

7,265

7,565

7,465

7,800

7,800

(1000 MT)

Ending Stocks

1,386

1,387

1,221

1,322

1,221

1,252

(1000 MT)

Total Distribution

8,952

8,952

9,086

8,987

9,321

9,422

(1000 MT)

Yield

0.0000

0.0000

0.0000

0.0000

0.0000

0.0000

(MT/HA)

CORN

Production

Indonesia's first corn season normally takes place from November to February (49 percent). The second season takes place from March to June (37 percent), and the third runs from July to September (14 percent). Due to delays in the first cop planting, the second crop cycle of corn is delayed, with MY 2014/15 harvest expected to take place in late July or August 2015. MY 2014/15 corn harvested area is estimated to increase at the expense of soybean area. Farmers are less interested in growing soybean due to lower yields and margins compared to corn.

In an effort to increase corn production, the Indonesian Ministry of Agriculture is cooperating with the Indonesian Ministry of Forestry and Environment to allow farmers to grow secondary crops and sugarcane on 1 million hectares of targeted forestry area. A pilot project on 30,000 hectares of forestry land will be carried out in Central Java.

BPS released their first forecast figures for CY 2015 Indonesian food crops production on July 1st, 2015. BPS expects that CY2015 Indonesian corn production will grow due to increased harvested area in East Java, Central Java, North Sumatera, West Nusa Tenggara, and South Sulawesi. Increased hybrid seed use will also contributes to yield increases. Post previously incorporated these factors in its annual report PSD. As a result, Post's production estimate is unchanged. Post also notes that the first corn harvest peak period has shifted due to MY 2014/15's delayed planting. The peak harvest period has shifted to March from February in MY 2014/15.

Consumption

Poultry industry sources report that Indonesian poultry producers are suffering from an oversupply of day old chicks (DOC) (broiler and layer). The oversupply resulted from a 2012 GOI policy that encouraged the industry to double annual chicken meat consumption (per capita) to 15 kg by 2017. Trade sources report that during the 2010 to 2012 period, the Indonesian poultry industry grew 10-15 percent annually. This growth encouraged grand-parent and parent stock imports, as well as feed mill capacity expansion. In CY 2014, 902,000 head of GPS were imported, a 62 percent increase compared to 554,000 head in CY2012. As a result, trade sources estimate that Indonesian DOC production will reach 73 million head per week by the end of CY 2015. The market, however, can only absorb 42 – 47 million head per week.

To overcome the problem, industry agreed in February 2015 to decrease DOC production by 25 to 40 percent by burning hatching eggs and destroying DOCs.

The poultry industry consumes approximately 83 percent of Indonesia's animal feed. Aquaculture consumes 11 percent and the remaining six percent is consumed by cattle and swine. APPI reports that on average, livestock feed is composed of corn (50 percent), soybean meal (15-20 percent), corn gluten meal (3 percent), crude palm oil (2 percent), fish meal (5 percent), rice bran (15 percent), wheat pollard (8 percent), and premix (0.6 percent). Indonesian feed millers are heavily reliant on imported feed ingredients. Factors inhibiting feed millers from sourcing ingredients locally include low protein content, high raw fiber content, rancidity, limited and inconsistent corn supplies for commercial scale feed millers, and storage challenges. In conjunction with the GOI's corn self-sufficiency objective, the GOI unofficially required feed mills to reduce corn imports in CY2015. As a result, feed mills are attempting to source more corn from domestic markets and to limit corn imports to 3 MMT. Despite official reports of an increased MY 2014/15 corn production forecast, the feed mills association reported that the availability and quality of corn in the domestic market is not sufficient to meet feed mill demand. Feed mills have started to use alternative feed ingredients such as palm kernel meal and sorghum to substitute for corn. Despite these efforts, feed mills imported a total of 1.65 MMT of corn in the first semester of 2015, an increase of 13.8 percent compared to the same period of last year.

Despite the current market challenges discussed above, feed millers continue to expand, noting that Indonesian poultry meat consumption remains low on a per capita basis. Millers note that as Indonesia's population expands, consumption will grow as poultry is a cheaper source of protein than soybean-based tofu or tempeh, on a protein per kilogram basis. Sources indicate that feed mills continued to expand operations in CY 2015, resulting in an installed capacity expected to reach 20 MMT by the end of the calendar year, and 22 MMT in CY 2016. Millers report that Indonesian mills are running at 70 – 80 percent capacity.

Considering the above factors, Post decreased the MY 2014/15 corn feed consumption estimate to 7.9 MMT compared to the previous estimate of 8 MMT. Assuming the new equilibrium of DOC production is achieved, corn consumption is forecast to further increase to 8.4 MMT in MY 2015/16.

Trade

Corn constitutes about 80 percent of Indonesian feed energy sources. Despite growing domestic production and an unofficial import restriction, challenges persist due to inconsistent seasonal supplies, high moisture content and high aflatoxin levels. These factors, combined with growing feed mill capacity, are driving import demand. Post maintains MY 2014/15 and MY 2015/16 Indonesian corn import estimates at 3.5 MMT and 3 MMT respectively. According to Global Trade Atlas, Indonesian corn imports originated from Argentina (48 percent), Brazil (45 percent), India (5 percent), and the United States (2 percent) for the period of October 2014 to April 2015.

Prices

In July 2015, corn farm gate prices ranged from Rp. 3,100/kg ($233/MT) to Rp. 3,500/kg ($263/MT) compared to Rp. 2,400/kg ($180/MT) to Rp. 3,400/kg ($256/MT) in March 2015. Prices are increasing as supplies from the previous main harvest period decline, exacerbated by the delayed second harvest.

With increasing production cost, the feed mills association reported that prices of broiler feed in June 2015 increased to Rp. 6,500/kg - RP. 6,700/kg ($489/MT to 504/MT) compared to Rp. 6,200/kg - Rp. 6,500/kg ($466/MT to $489/MT) in March 2015.

Corn

2013/2014

2014/2015

2015/2016

Market Begin Year

Oct 2013

Oct 2014

Oct 2015

Indonesia

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Area Harvested

3,120

3,120

3,140

3,140

3,140

3,140

(1000 HA)

Beginning Stocks

1,040

1,040

1,729

1,715

2,399

2,495

(1000 MT)

Production

9,100

9,100

9,400

9,400

9,600

9,600

(1000 MT)

MY Imports

3,501

3,500

3,500

3,500

3,000

3,000

(1000 MT)

TY Imports

3,501

3,500

3,500

3,500

3,000

3,000

(1000 MT)

TY Imp. from U.S.

126

126

0

10

0

0

(1000 MT)

Total Supply

13,641

13,640

14,629

14,615

14,999

15,095

(1000 MT)

MY Exports

12

25

30

20

25

20

(1000 MT)

TY Exports

12

25

30

20

25

20

(1000 MT)

Feed and Residual

7,400

7,400

8,000

7,900

8,600

8,400

(1000 MT)

FSI Consumption

4,500

4,500

4,200

4,200

4,100

4,100

(1000 MT)

Total Consumption

11,900

11,900

12,200

12,100

12,700

12,500

(1000 MT)

Ending Stocks

1,729

1,715

2,399

2,495

2,274

2,575

(1000 MT)

Total Distribution

13,641

13,640

14,629

14,615

14,999

15,095

(1000 MT)

Yield

2.9167

2.9167

2.9936

2.9936

3.0573

3.0573

(MT/HA)

RICE, MILLED

Production

MY 2014/15 first crop paddy harvest is delayed due to rain's late onset in December 2014. Typically, irrigated farms are planted to paddy during the first crop cycle (October – February), followed by paddy on the second crop cycle (March to June), and completed with a third cycle of paddy or secondary crops such as corn, mung bean, soybean, peanut, or sweet potato (July – October). However, in MY 2014/15, most farmers on Java started the first crop cycle in mid-December 2014 due to water shortages (late rainfall). The delayed first crop is expected to push back the harvest of MY 2014/15 third crops, especially on irrigated low land areas.

BPS's official first forecast states MY2014/15 Indonesian rice production will reach a record 6.7 percent growth over last year's production. Several efforts to increase rice production have been implemented through the GOI's Upaya Khusus program. These include the development of irrigation canals; land optimization; System of Rice Intensification (SRI) programs; integrated farm management for paddy, corn, and soybean; seed assistance; fertilizer assistance; farming machinery and tools assistance; pest and disease and climate change control; agricultural insurance; and Indonesian army labor. The Ministry of Agriculture reported that as of June 2015 a total of 19,670 hand tractors have been distributed to farmers. GOI has managed to rehabilitate irrigation canals covering 833,000 hectares area. The result from these efforts is expected to increase paddy production during the second harvest that will take place in late July to August 2015.

On the other hand, BMKG forecast that Indonesia may experience a moderate to strong El Nino in November 2015 when the first cropping cycle is expected to begin. Delayed planting of the MY 2014/15 first crop will reduce the chances of an optimum harvest on the third crop cycle. Therefore, Post maintains the current estimate of MY2014/15 Indonesian rice production pending second harvest realization.

Trade

The GOI reorganized the Indonesian National Logistics Agency (BULOG) in early June 2015 in an effort to boost domestic procurement. The new BULOG administration has set the agency's domestic procurement target to 4 MMT during calendar year 2015, in line with BPS's expected production increase. The target was raised to 4 MMT from its typical procurement of 3.2 MMT. BULOG normally meets 60 percent of its procurement target during the first main harvest period. With the delay in the MY 2014/15 first harvest, BULOG only began domestic procurement in March 2015. As of June 2015, BULOG procured approximately 1.5 MMT, lower than the 1.7 MMT procured during the same period in MY 2013/14. In order to meet the new target, BULOG must procure a total of 2 MMT from farmers during the second harvest period (July to August 2015). Post notes that this target appears ambitious, given that procurement under better weather conditions during the same period in 2014 yielded 1.2 MMT.

BULOG can only buy paddy or rice from farmers when the market price is lower or equal to the GOI's official purchasing price (Harga Pembelian Pemerintah, HPP).

In the past, the GOI instructed BULOG to maintain a minimum secure stock level of 2 MMT. With the current HPP, BULOG may find it difficult to meet its procurement target as inflation and the delayed harvest will push paddy prices above the HPP. June is usually the most important month for BULOG domestic procurement objectives. Assuming that BULOG is able to reach its procurement target only buying from domestic farmers, the GOI will still need to consider imports to maintain BULOG's stock at their prescribed levels.

Indonesian regulations restrict imports of rice one month prior to, during, and two months after the main harvest period. Indonesian regulations only permit BULOG to import medium quality rice, while private companies can import specialty rice (jasmine rice, basmati rice, rice for diabetics and rice seed, for example). To date, the Ministry of Agriculture has not issued any import recommendations for japonica rice since the fourth quarter of 2014, claiming that certain local varieties can be substituted for restaurant grade japonica rice. The Ministry of Agriculture continues to issue import recommendations for other specialty rice varieties.

Prices

As the first main harvest is over, wholesale rice prices at Cipinang rice market are starting to rise. As of July 15, 2015, the price of medium quality rice was recorded at Rp. 9,500/kg ($714/MT), compared to Rp. 9,077/kg ($682/MT) during the main season period in April.