MANDALA

The blind spot of Indonesian Agriculture

MANDALA CONSULTING, JULY 13, 2023

Undoubtedly, agriculture is vital to Indonesia as a country. President Soeharto was an ardent proponent of advancing Indonesian agriculture. Today, agriculture is the second-highest GDP contributor (13%) after manufacturing and employs 29% of the Indonesian workforce. Despite these crucial facts, the struggles of the agriculture sector remain to haunt the country. The big question mark always hovers over the Indonesian government’s agriculture import decision. The repeated knee-jerk policy reactions over the “believed low stockholding” in rice, while the annual phenomenon of chili price spikes, further adds to the challenges. The same old political campaign promises for better farmer welfare conditions have proven empty. The situation is exacerbated by 73% of Indonesian farmers having no more than an elementary school education. As the last straw, according to our estimation, Indonesian rice farmers earn a meager average monthly income of IDR 1.4 million, 22% less than the lowest minimum wage in Indonesia (Banjarnegara). These persistent issues have been left unresolved for years, creating a heart-wrenching scenario for the agricultural sector in Indonesia.

Besides the sentimental factors, it is also necessary to conduct a comparative analysis across various parameters to objectively appraise Indonesia’s progress vis-a-vis those countries that are more advanced, slightly more advanced, and slightly below Indonesia (Figure 1). The first aspect to look at is the farmland size. As per Figure 1, Indonesia has a larger total agriculture area than Thailand and Vietnam. Yet, according to our estimation, Indonesia has the smallest average farm size per farmer (0.5 ha) compared to Thailand (4 ha) and Vietnam (0.63 ha). Theoretically, small farm size presents a significant obstacle to farmers’ earnings. Nevertheless, Indonesia is on par with most selected benchmark countries—specifically, rice—on yield per hectare. While with other staple food crops category, Indonesia falls in the middle of the pack.

Figure 1 – Estimated Agricultural Productivity Metrics

Disclaimer: Data was gathered from various resources and based on our estimation

A nation’s ultimate agricultural progress metric is the self-sufficiency rate (swasembada). According to the Food and Agriculture Organization (FAO), if a country’s production meets 90% of domestic consumption, it is deemed self-sufficient. Indonesia’s rice crop category has reached this milestone. Furthermore, the International Rice Research Institute (IRRI) has awarded Indonesia for achieving Agri-food System Resiliency and Rice Self-Sufficiency for 2019-2021. President Jokowi well-received this swasembada award.

Nonetheless, Indonesia’s self-sufficiency rate is not at the same level as Thailand’s (155%). Despite the challenges posed by Thailand’s low yield due to its lowland rainfed production, the high self-sufficiency rate has allowed Thailand to become one of the leading countries in rice exports. Additionally, Thailand has one of the most impressive paddy-to-rice conversion rates (55-70%) compared to Indonesia (40-60%), barely on the FAO paddy quality threshold of 60%. The lack of progress in mitigating climate change also exacerbates Indonesia’s agricultural predicaments. Overall, Indonesia is neither leading nor lagging in any agricultural metric category. Yet, Indonesia’s economic reliance on agriculture (13% of GDP) is the most significant among the selected benchmark countries in Figure 1. This heavy reliance underscores the importance of having long-term planning and deploying a coherent strategy for agriculture.

Given the presented facts and arguments, why do these stubborn issues persist? One of the main factors is the welfare of farmers, which is often the blindspot of Indonesia’s agriculture. The low welfare of farmers is a result of their meager earnings and market failure, which leaves Indonesian farmers with the least bargaining power in the value chain. The middlemen or tengkulak, who act as intermediaries, practically hold significant influence over pricing through their ‘tebasan’ or ‘ijon’ method, leaving farmers with little control. Sadly, Indonesian farmers could not oppose and were left vulnerable as they were held ransom by their lack of capital (fund or seed) which intermediaries conveniently offer in exchange for a substantial margin (41.2% – 51.5% tengkulak vs. 38%-40.2% farmers).

Nevertheless, the role of the middleman in the agriculture market is critical. The value chain would not function without intermediaries. They help aggregate the supply chain’s fragmented side, which is the farmers. They often rely on tengkulak for market information and price guidance.

As most Indonesian farmers live below the poverty level, access to capital remains a formidable obstacle. The vast majority of farmers lack collateral as they rent the land they farm and are categorized as at high risk for default. In the most extreme default cases, farmers may even resort to suicide as they cannot repay their debt to intermediaries or microcredit programs. The crippled Gapoktan, initially intended to balance negotiations during the Soeharto era, have now become mere formalities of extension organizations, failing to address the challenges faced by farmers effectively.

Furthermore, Indonesian farmers are relatively quiet compared to laborers who successfully advocated their concerns regarding minimum wage. An inspirational space that the farmers’ associations should have filled. The absence of a strong voice for farmers in the public sphere is alarming. Strangely, the only loud agricultural actors are political parties and government officials who make grand promises and sophisticated policies but fail at implementation.

The efficacy of shortening the value chain through agritech to improve farmers’ welfare is also questionable, as noted by Dwi Andreas Santosa, chairman at Asosiasi Bank Benih dan Teknologi Tani Indonesia (AB2TI) and a professor at IPB. This is supported by a survey conducted by AB2TI on the role of startups and IT in farming, which revealed that agritech companies had little impact on farmers.

When addressing Indonesia’s agriculture conundrum, evaluating the acceptable risk and margin to each player in the value chain—including intermediaries and large corporations—is essential. Is it equitable for farmers to bear the most risk and gain the least reward when prices rise? Without improving farmers’ welfare, progress in agriculture will be constrained, which makes it unrealistic to expect farmers to upgrade their equipment, adopt organic farming, or adhere to export standards such as Good Agricultural Practices (GAP) and Good Handling Practices (GHP).

According to a joint study, one way to improve the welfare of farmers is by increasing their average land size. Policymakers can facilitate this through various land transfer management programs, such as government purchases, consolidated rental at the association level, strict zoning policies, and incentivizing urban migration for smallholder farmers. By consolidating agricultural land, farmers can transition from small to medium or large-scale farming. If Indonesian farmers had the same average land size as those in Thailand, their welfare would increase by 2-3 times compared to the marginal gains from fertilizer subsidies.

As farmland size increases, farmers can benefit from economies of scale, which leads to the adoption of more cutting-edge technology and science-based agriculture. This, in turn, enables farmers to improve their yields, lower their costs, and increase their profitability. Farmers can invest in storage and milling equipment as they become more profitable. And the positive domino effect continues, amplifying further growth and investment in agriculture. This might be a more sustainable strategy compared to subsidies and outreach programs.

Implementing a comprehensive land transfer management program would require substantial funding from the national budget, potentially resulting in fewer funds being allocated to other programs or sectors, posing a trade-off for the advancement of agriculture. Nevertheless, the same study has shown that successfully implementing a farmland transfer policy could double total agricultural profits by reducing production costs by 50%. As such, policymakers should conduct a rigorous cost-benefit analysis to grasp the long-term trade-offs and potential gains fully.

Thailand’s Paddy Pledging Program and the Price Insurance Scheme also provide insightful guidance for Indonesia on enhancing rice farmers’ welfare. The former program enables farmers to sell their crops to the government at an intervention price 30-50% higher than the market price in exchange for a loan that farmers can repay through paddy transfer or cash payment. Conversely, the Price Insurance Scheme, a transient policy, pays farmers for the difference between the insured and benchmark price. This approach differs from Indonesia’s low government procurement price (HPP) policy, often set lower than production costs.

Other notable differences with Thailand include early HPP announcements, significant investment, and strict regulations on agricultural inputs. In stark contrast, Indonesia announced a change in HPP close to panen raya (great harvest) in 2023 and encountered difficulty realizing targeted fertilizer subsidies. Thailand’s coherent policy toward augmenting farmers’ welfare was pivotal in elevating its stature as a leading rice exporter.

Indonesia could potentially revamp its approach to HPP in two ways. First, the government could adopt the Thailand model and utilize HPP as a production incentive to encourage farmers to achieve greater productivity and quality. Alternatively, taking a cue from China, HPP could function as a backstop by raising the floor price annually—consequently improving farmer welfare. Admittedly, implementing such measures would require significant investment and possibly entail a considerable opportunity cost for the government, forcing it to make tough choices and trade-offs between various initiatives.

The next step is to recalibrate the margin of the stakeholders in the agriculture value chain. With a more considerable margin for farmers through higher HPP and putting a lower retail price cap (HET), the policy will squeeze the margin of the players in the middle of the value chain to a healthy point—and not excessive. The requisite of margin recalibration is the strong enforcement of HET and the political will to address parties’ inertia in the middle of the value chain. These two steps are critical to avoid excessive inflation and shortages.

In general, Indonesia’s agriculture occupies a middle ground, lacking prominence at the forefront, nor is it a tail end. Blessed with fertile and rich soil, the country has yet to fulfill its potential as a leading force in various agricultural sectors and improve the welfare of its farmers—a persistent blind spot. The path to achieving such progress is not without obstacles, and Indonesia will require significant investment. Perhaps, the ultimate question is whether Indonesia is financially and politically willing to prioritize agriculture over other sectors and programs. The answer to these questions sits deep in the heart of Indonesian leaders and what they interpret as the path to better prosperity for the Indonesian people.

The article was initially published by the Jakarta Post on May 9th, 2023.

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THE PURPOSE OF THIS DOCUMENT IS TO PROVIDE GENERAL INFORMATION ABOUT THE BLIND SPOT OF INDONESIAN AGRICULTURE. THE CONTENTS OF THIS DOCUMENT SHOULD NOT BE CONSTRUED AS SPECIFIC RECOMMENDATIONS OR ADVICE. FOR QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT, PLEASE CONTACT MANDALA CONSULTING. THE INFORMATION IN THIS ARTICLE IS ACCURATE AS OF THE PUBLICATION DATE. HOWEVER, DUE TO THE RAPIDLY CHANGING NATURE OF THE LAW IN INDONESIA, THE ACCURACY OF THE INFORMATION CANNOT BE GUARANTEED WITHOUT UPDATES.

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