By Karl Godderis 03/11/2013
Palm oil production in Indonesia is seen as the flagship
industry but cocoa is perhaps the brighter jewel. A recent opportunity to
travel extensively through South Sulawesi to observe the core producing cocoa
areas of Indonesia provided us at The Jakarta Advisory Group with new insights and inspiration for
Indonesian cocoa. The cocoa industry in Sulawesi is ripe with potential to push
Indonesia to the top of the trading tree. Furthermore, as a commodity trading
player on the global market, the performance of Indonesia in cocoa displays
much of the complexities of businesses
in global supply chains, especially as it requires looking at things from the
perspective of multiple stakeholders. It’s all there.
Indonesia is
currently one of the largest global players in Crude Palm Oil (CPO), with
production in 2012 of around 25 million tons. The focus in CPO is no longer
just in harvesting trees and processing the fruit. The industry has clearly
developed downstream, with refining capacity estimated to increase to about 40
million metric ton within the next three years. This downstream activity will
exceed production levels and may result in Indonesia becoming a net importer of
CPO, although this is a complex debate with many variables. However, during our
travels through South Sulawesi, in the company of senior executives from the
global chocolate industry who also work throughout Africa, the region’s
transformed outlook became apparent. For years now, the Indonesian economic
engine has been humming along steadily and the idea that the boom in
commodities has enabled a better distribution of wealth to the outer regions is
clearly visible in South Sulawesi (a mere 2,000 kilometres away from the
capital!).
The stretch from Makassar to Pare-Pare then onto towards
Palopo and even further north, sees roads under repair or construction and new
houses being built. Utilities are available and functioning, and even banks are
present in rural areas, where motorbikes abound. While this might seem trivial
these are significant indicators for successful cocoa production. Today,
despite being the third largest producer of cocoa, Indonesia is a considerably
smaller player compared to lead African producers the Ivory Coast and Ghana. Yet
global demand for chocolate and cocoa powder continues to rise steadily,
placing increasing pressure on the production side of cocoa beans. Interesting
things are happening in global food markets. As a general trend large numbers
of people in countries like India and China are being pulled out of poverty to
join the middle class, which at its most basic level creates a huge impact on
global food supply chains. This is also the case for chocolate & cocoa powder
and its base material, cocoa beans, the production of which has one critical
characteristic - 95% of all chocolate we eat comes from cocoa beans grown by
small farmers or smallholders.
Suddenly the old model where the West eats the final product
while far flung exotic places produce the raw material, starts looking a bit
different. Consumer markets should take an interest in how millions of farmers
grow their beans, not just from a sustainability point of view but also from the
point of view of availability. It is precisely in this context that Sulawesi
becomes relevant. The small scale cocoa farmers around Palopo and North Luwu
represent small slices of an overall bigger picture for Indonesia’s cocoa as
well as its overall food and agricultural potential. Indonesia is a key global
player in various commodities whose consumer population of 242 million is
exploding. On the one hand the country has all the necessary means to be self-sufficient
in its supply of critical food resources, however food sufficiency is yet to be
fully translated through the existing framework of government policies into manifest
intentions and objectives.
Even though Indonesia is a global player in specific
commodities like palm oil and cocoa, it has only recently started to develop a
focus on more value added processing activities rather than just raw material
exports. This issue is frequently covered in the Indonesian media. When applied
to the cocoa and chocolate industries higher chain processing has material
importance for the country. Over the last few years the global chocolate
industry, while keeping its final product manufacture close to consumer markets
like India, South East Asia and China, has engaged in a process of turning
Indonesia into a regional hub for cocoa processing. This involves processing
cocoa beans into cocoa butter and cocoa powder, two key ingredients for the
bakery sector and for chocolate production.
The fact is, by 2014 Indonesia’s processing capacity will
reach 600,000 metric tons, while current cocoa bean production hovers between 400-450
thousand tones. So technically Indonesia has become a net importer of cocoa
beans when it has the capacity to produce it domestically. Global production of
cocoa beans is about 4 million metric tons hence Indonesia is already prepared
to process a large chunk of that. As far as cocoa farmers in South Sulawesi are
concerned, during our visit we had the chance to compare both regular farmers
operating at the basic level, with farmers who just came out of productivity
enhancement programs, primarily supported by the largest chocolate players. The
difference is enormous. From a typical 200-300 kg of beans per hectare for the
regular farmer, the better-trained farmer starts producing as high as 2
tons/hectare. This does not mean Indonesia can rapidly start producing 10 x
times as many cocoa beans but it shows the massive potential in cocoa bean
production when run at best practice levels.
Indonesia’s growing capacity can also demonstrate to West
African juggernauts like the Ivory Coast and Ghana, a means to improve
productivity via smallholders. At farmer level relatively straightforward
agronomic solutions are available and already operational in Indonesia in order
to bring production to the next stage. The main problems facing this evolution
are other industrial factors like trade, financing, logistics, and downstream
processing centres that will slow down economic growth due to a poor
infrastructure base. Road systems, public transport, harbor capacity, and power
availability, which in general threaten the country’s progress. Cocoa is a lucky exception. Because Indonesia
competes primarily with Africa, Indonesia is ahead on these curves, putting the
odds in its favour. As previously mentioned Indonesia has a growing downstream
industry; Africa does not. It has a huge consumer base, farmers have access to
roads connecting them to nearby trading centres, many have mobile phones and
motorbikes, and in almost all villages there is a banking system available.
Other pros are the stable political environment which conversely
dogs countries like the Ivory Coast. Indonesia has a golden opportunity to
become a huge global player, in large part due to the competitive advantage of
its generally bemoaned infrastructure. Gone are the days of simply seeing
Western consumption fuelled by Indonesian raw materials. Indonesia is
increasingly part of global food supply chains. To lead in such a context is
not just a matter of producing the most cocoa beans, it will require a
willingness to take responsibility across a landscape of multiple stakeholders.
This requires a focus on sustainability at the source of production, it also
means that the local processing industry and downstream manufacture of cocoa
powder and chocolate should incite Indonesia to take a greater leadership role
in the cocoa industry. A more complex task than simply becoming the biggest
producer. Indonesia has a leading edge in cocoa, and it should take the reins
on the global stage, marketing itself and as a responsible and capable global
leader in this industry.
Karl is a Managing Partner at The Jakarta Advisory Group.
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