BMI View: W e hold an optimistic outlook towards Indonesia ' s agriculture sector and see significant growth opportunities in sub-sectors such as livestock , sugar and palm oil. The country's goal to become self sufficient in a large number of commodities is overly ambitious in light of the robust outlook for food and drink consumption. Agricultural production will struggle to expand in the coming years amidst scarce agricultural land, the lack of proper infrastructure and the existence of a large number of low-technology, small-scale farmers. While we believe that Indonesia will be able to reduce its dependence on rice imports in the coming y ears, sugar, corn and beef self- sufficiency are far-fetched. More worryingly, we expect coffee and cocoa production to rec ord very weak production growth in the coming years.
|Self-Sufficiency Goal Not Always Achievable|
|Indonesia - Select Commodities Self-Sufficiency Ratios (%)|
|f = BMI forecast. Source: National sources, BMI|
Cocoa production growth between 2013/14 and 2018/19: 5.3% to 410,800 tonnes. Production growth will slightly accelerate beyond 2017/18, as private grinders in the country are slowly developing programmes to improve plantation management and foster best practices. But output will record weak growth as the government's plan to revive plantations will fail to reach its goal to double cocoa output.
Palm oil consumption growth between 2014 and 2019: 44.1% to 12.2mn tonnes. Relatively recent refining and biodiesel policies (B15 mandate) will continue to inflate domestic consumption of palm oil in the coming years.
Sugar production growth between 2013/14 and 2018/19: 22.5% to 2.8mn tonnes. Moderate plantation expansion will help output grow in the coming years, but production growth will be held back by poor cane recovery rates, harvest management and infrastructure issues
BMI universe agribusiness market value: USD152.5bn in 2015 (up from USD140.7bn in 2014; forecast to grow annually by 7.5% on average between 2015 and 2019).
2015 real GDP growth: 5.0%, the same level as in 2014 and compared to five-year average growth of 6.0% over 2010-2014; forecast to grow annually by 6.0% on average between 2015 and 2019.
2015 consumer price index: 6.7% y-o-y, up from 6.4% y-o-y in 2014 and compared to five-year average growth of 5.5% over 2010-2014; forecast to grow annually by 5.3% on average between 2015 and 2019.
Indonesia's long-standing goal to reach self-sufficiency for a number of key foodstuffs will remain elusive in the coming years as production expansion remains constrained by structural deficiencies. The country will be able maintain its quasi-self-sufficiency in poultry and to reach it for rice; but sugar, corn and beef self-sufficiency will remain out of reach. In fact, we forecast the domestic deficits of commodities such as sugar and corn to widen in the coming years. As such, the Indonesian government will have little choice but to ease the import restrictions it maintains on corn and sugar, gradually allowing more imports in the coming years.
The operating environment for Indonesia's most emblematic agricultural sector, the palm oil industry, will remain challenging over 2015, as the fundamentals for the industry continue to be unfavourable. There are growing hurdles to plantation expansion, while fresh fruit bunch production and milling yields have been stagnating over recent years. Moreover, producers have to face regulatory instability and a steady increase in production costs. In light of the downturn in the sector, palm oil companies have started to adjust their strategies. We believe they will generally focus more on established plantations acquisitions and efficiency improvement in terms of plantation management and yields, while some integrated players will invest further downstream towards the oleochemical segment.
Indonesia's biodiesel sector has been experiencing a flurry of regulatory changes over recent quarters, as the country tries to support the palm oil sector amidst a new era of low oil prices and lacklustre profitability for biodiesel. In H115 only, the government announced plans to raise the biodiesel blending rate from 10% to 15%, increase subsidies for biodiesel production, impose an export tax on crude palm oil to fund and introduce a new pricing formula for biodiesel. These changes will help biodiesel producers continue operating despite the sharp drop in crude oil prices over H214, which greatly decreased the attractiveness of biodiesel use.
Palm oil is not the only sector that is going through challenging times, as sugar millers and poultry producers are also experiencing a difficult phase. For poultry, slower demand growth linked with weaker economic growth in the country over H115, coupled with oversupply in the market, is pressuring profitability for feed and chicken meat producers. Margins will remain low in 2015, as feed prices are rising in Indonesia due to the government's policy of restricting grain imports to the bare minimum. Amidst lower profitability, various poultry players, including Japfa Comfeed Indonesia and Malindo Feedmill have decided to cut and delay expansion plans.
The re-emergence of El Nino in 2015 poses clear downside risks to agricultural production in Indonesia in 2015 and 2016. The phenomenon usually brings drier-than-usual weather to the country. Although the relationship between El Nino and unusual weather patterns does not always hold, the return of the phenomenon this year implies that there is a greater-than-normal chance of below-average yields and weak output of key commodities in 2015/16. Meteorological departments' forecasts are for a moderate-to-strong El Nino event in 2015. Unseasonal weather could send Indonesia's food prices rallying and force the country to ease its restrictions on imports.