Indonesia: A growing wheat product market

18 July 201910 min reading

Consumption of wheat flour in Indonesia is increasing rapidly due to the its growing population, increasing per capita income and greater urbanisation. Rather than eating rice three times daily, many Indonesians have switched to eating bread or noodles for breakfast. Continued demand for wheat for feed use and stable flour demand are expected to increase Indonesia’s wheat imports to 11.15 million tons in 2018/19. And the flour milling sector’s capacity is expected to grow to more than 14 mmt by 2024–25.

Indonesia is the world’s fourth largest country by population, third biggest democracy and largest Muslim nation. With 262 million people, Indonesia’s economy comprises nearly half of ASEAN economic output. Indonesia has charted impressive economic growth since overcoming the Asian financial crisis of the late 1990s. The country’s GDP per capita has steadily risen, from $807 in the year 2000 to $3,877 in 2018. Indonesia is a thriving democracy with significant regional autonomy. It is located on one of the world’s major trade routes and has extensive natural resource wealth distributed over an area the size of the United States and comprised of 17,508 islands.

Today, Indonesia is the world’s 10th largest economy in terms of purchasing power parity, and a member of the G-20. Despite heightened global uncertainty, Indonesia’s economic outlook continues to be positive, with domestic demand being the main driver of growth. Supported by robust investment, stable inflation, and a strong job market, Indonesia’s economic growth is forecast to reach 5.2% in 2019. The Indonesian economy is forecast to become the fifth largest economy in the world by 2030, surpassing the UK and Germany.

Indonesia has the great potential land areas to develop the business in the agricultural sector. With its vast and abundant fertile soils, Indonesia is a major global key producer of a wide variety of agricultural tropical products, and although agriculture’s share of the country’s gross domestic product (GDP) has declined markedly during the last five decades, it still provides income for the majority of Indonesian households today.

The primary agricultural products in Indonesia are palm oil, rubber, cocoa, coffee, tea, cassava, rice and tropical spices. This sector encompasses large plantations and smallholder productions, both private and state-owned. While Indonesia is a net exporter of many agricultural products, the country is reliant on imports of grains (non-durum wheat), sugar, soyabeans, maize and meat. The Indonesian government has placed self sufficiency in certain agricultural products high on the agenda. In particular this applies to rice which by far is the main staple food for the majority of the population. Indonesia has the highest per capita rice consumption in the world (approximately 139 kilo per capita per year). However, the country is still dependent on imports from Vietnam and Thailand to secure the domestic rice supply. Other food crops that have become target of self sufficiency programs are soy beans, corn and sugar.

WHEAT IMPORTS TO FURTHER INCREASE Indonesia is fully reliant on wheat imports to fulfill demand for wheat flour-based food and as an ingredient for poultry and livestock feed. According to last USDA report on Indonesia published in March, despite increased corn production, feed mills will continue to use significant quantities of imported feed wheat. In line with increased corn production, 2018/19 feed mills’ demand for wheat will decline to 2 million tons. Wheat used for feed is forecast to rebound to 2.2 million tons in 2019/20 as overall feed production rises.

Continued demand for wheat for feed use and stable flour demand are expected to increase Indonesia’s wheat imports to 11.15 million tons in 2018/19. In line with population growth and expected feed production increases, 2019/20 wheat imports are forecast to further increase to 11.3 million tons, USDA reports.

FLOUR MILLING INDUSTRY IN INDONESIA Currently, twenty-eight flour mills operate under twenty-three companies, with a total installed capacity of 11.8 million tons per annum. Most of the mills are located on Java. Running capacity of the mills reached 80 percent in 2017/18, an increase from 70 percent in 2016/17. The industry is estimated to grow five percent in 2018/19 due to the relatively low price of wheat flour and wheat flour-based foods compared to rice.

Despite the number of mills, the sector remains heavily concentrated with mills controlled by the Salim Group. Of these mills, by far the biggest is Bogasari, which alone has more than 50 per cent market share. According to APTINDO, the country’s peak body for flour mills, the sector’s capacity is expected to grow to more than 14 mmt by 2024–25. Due to low labour costs, a cheap rupiah and economies of scale, Indonesia’s flour millers are generally competitive by global standards; however, this is gradually diminishing as the cost of labour and variable costs such as utilities increase.

Indonesia’s wheat imports for feed use are directly tied to the Ministry of Agriculture’s (MOA) ban on corn imports for poultry and livestock feed. Domestic corn prices, among the highest in the world, have forced feed mills to source other commodities to meet energy needs in feed rations. Since the policy went into effect in 2015, wheat imports, especially from the Black Sea region, have often filled the needs of feed millers. Despite increased corn production, growth in demand from the feed sector will continue to force feed mills to rely on imported wheat. As a result, post expects flour mills to import approximately 2 million tons of wheat for re-sale to domestic feed mills.

The significant expansion of flour mills has led to fierce competition in the market and has become one major factor in determining the source for imports. The surge in wheat imports to replace high-priced domestic corn in feed rations, as well as improved quality of wheat from the Black Sea, have altered the origins of Indonesia’s wheat imports. Australia and Ukraine currently dominate the market with 31 and 21 percent market share, respectively. Canada has maintained market share at 16 percent, followed by Russia with 14 percent market share. The growth of Ukrainian wheat imports, along with the sharp increase in Russian imports, has pushed U.S. wheat to fifth largest supplier, although overall market share has remained near 10 percent.

While much of the Black Sea wheat was initially imported for the feed sector, mills are increasingly blending the lower quality wheat with imported wheat from the traditional suppliers. This blend is to meet demand for medium protein flour, which accounts for 50 percent of the total flour market. Beginning in 2015, imports from Ukraine increased significantly. Millers also report that in addition to competitive prices, Ukrainian wheat quality has significantly improved in recent years, allowing for higher rates of blending. Similarly, Russian wheat exports to Indonesia increased by 579 percent in 2017. These increases have come at the expense of Australian wheat, which in addition to price, has had inconsistent supply due to weather related problems.

Most flour mills expect to continue sourcing Black Sea wheat in the coming years. Black Sea wheat is expected to contribute to over 40 percent of all Indonesian wheat imports through 2018/19. Domestic flour will continue to dominate the market throughout 2018/19, with a 99.9 percent market share.

In line with population and economic growth, human consumption of wheat is estimated to increase to 8.9 million tons in 2018/19 and to 9 million tons in 2019/20. Based on higher corn production, 2018/19 wheat consumption for feed is expected to decline to 2.0 million tons, compared to the 2.1 million tons in 2017/18. Growth in feed milling is expected to increase wheat consumption for feed to 2.2 million tons in 2019/20.

FLOUR CONSUMPTION INCREASING In 2017/18, annual per capita wheat flour consumption reached an estimated 25 kg, an increase from 23 kg per capita during 2015/16. 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 daily, many Indonesians have switched to eating bread or noodles for breakfast. Restaurants and high-end bakeries are also driving demand for wheat-based food products, especially in major cities including Jakarta, Surabaya, Medan, and Bandung.

Two-thirds of Indonesian flour users are considered Small and Medium Enterprise (SME), characterized as traditionally managed, family-owned, and community-oriented business. These include small scale wet noodle makers, street food vendors, low-end bread and bakery businesses, and traditional Indonesian cake makers. The other third are large enterprises, including several publicly-listed companies, with advanced production facilities and professional management. These producers include instant noodle manufacturers, high-end bakeries, and cookie and biscuit manufacturers. On a per meal basis, instant noodle prices are currently cheaper than rice, and many more lower and middle income consumers substitute instant noodles for breakfast or dinner.

Modern cafes serving instant noodles are flourishing in urban areas, increasing demand for the noodle industry. The noodle industry consumes 70 percent of Indonesia’s wheat flour. In addition to noodles, more high-end and artisan bakeries are coming online, driving the bakery industry, which already accounts for 20 percent of flour consumption. The remaining 10 percent is consumed by household and commercial biscuit producers.

CORN PRODUCTION Government efforts to increase corn production by establishing a minimum selling price and by providing subsidized seed and fertilizer have increased harvested area. The 2017/18 corn harvested area is revised to 3.65 million hectares to reflect increases in non-traditional corn producing area such as North Sulawesi. Harvested area is forecast to reach 3.7 million hectares in 2018/19 and further expand to 3.9 million hectares in 2019/20 as farmers consider corn more profitable relative to other crops. Corn import restrictions remain in place for feed use, although due to high prices in late 2018, Indonesia temporarily allowed imports of corn for feed. Corn imports for 2018/19 are expected to reach 850,000 tons.

In line with expectations for continued growth in demand for poultry feed and availability from domestic production, 2019/20 corn consumption for feed is forecast to increase to 9.5 million tons compared to 8.9 million tons in 2018/19. Additional installed corn milling capacity is expected to increase consumption for food, seed, and industrial use by 1.3 percent to 3.95 million tons from 3.9 million tons in 2018/19. The feed mill sector consists of 97 feed mills, with an installed capacity of 25.5 million tons, an increase of 3.2 percent from 24.7 million tons in 2018. Feed mills are running at 80 percent of the total installed capacity. Approximately 69 mills are located on Java. PER CAPITA RICE CONSUMPTION DECLINING USDA revised the rice production in 2018/19 downward from previous estimate to 37.1 million tons, a result of decreased harvested area from land conversion and farmers motivated by high prices to plant more corn. And rice consumption in 2019/20 is forecast to decline to 38.0 million tons as consumers continue to switch to wheat-flour based products. Per capita rice consumption is declining at about 0.62 percent per annum. Middle and upper-middle income consumers are diversifying their diets to include more western-style foods like bread and pasta and consuming more instant noodles in place of rice-based dishes. 2018/19 rice imports are estimated at 500,000 tons, consisting mainly of the specialty rice. In line with the forecasted economic growth, 2019/20 imports are forecast to increase to 510,000 tons.

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