Indonesia

Sudden law change may open Indonesian market to India, Brazil

James Nason, 26/09/2014
Australian cattle on feed in Indonesia.

Australian cattle on feed in Indonesia.

In a sudden move that has taken Australia’s cattle and beef export trade to Indonesia by surprise, the outgoing SBY Government has passed changes to legislation that appear to open the Indonesian market to beef and cattle imports from Foot and Mouth Disease-free zones within FMD-affected countries.

Australia’s trade was digesting news of the decision at the time of Beef Central’s publishing deadline today, and clarification of the detail contained within the changes was still being sought.

Trade sources told Beef Central it appears that the new laws passed on Wednesday night will now allow Indonesia to import beef, cattle and offal from vaccinated areas or areas declared free of FMD within countries otherwise affected by FMD, such as India and Brazil.

However confusion exists over what the revisions entail, with other sources believing the changes may be limited to the import of productive heifers only from FMD-free zones within FMD affected countries.

Confirmation of the detail will be critical before any clear assessment can be formed as to how Australia’s recently recovered cattle and beef export trade to Indonesia may be impacted.

Based on the information available at the time of Beef Central’s deadline today, a number of well placed export sources were of the view that the most likely impact will be in the form of increased imports of boxed buffalo meat and beef from India in particular into Indonesia.

Growing Indonesian desire to diversify import sources

Until now, Indonesian law has banned the import of beef or cattle from countries affected by Foot and Mouth Disease, regardless of whether those countries also contain FMD-free zones.

Brazil and India have been actively lobbying Indonesian politicians for several years to open Indonesia’s market to beef and cattle from FMD-free zones within their respective countries.

Their push has been staunchly opposed by Indonesia’s agriculture sector, which argues that the move would expose Indonesia’s important livestock industry, a major source of employment and economic strength in the country, to an unacceptable risk of devastation from the highly infectious livestock disease.

Indeed Indonesia’s agricultural lobby was successful in convincing the Indonesian Supreme Court to overturn a similar Parliamentary decision made in 2009.

However, pressure on Indonesia to diversify its beef import sources beyond Australia has been building in recent times.

Beef prices have been soaring to unaffordable levels for consumers ever since the SBY Government began cutting import quotas in a rushed and unsuccessful bid to achieve self-sufficiency in beef production within an unrealistic five-year time frame between 2010 to 2014.

The resulting beef shortage and rising cost of beef for consumers has given greater impetus to the push within Indonesia to diversify its import options and broaden its supply base.

Almost exactly 12 months ago, with wet market prices soaring well beyond the reach of most consumers at 120,000 IDR/kg, the SBY Government introduced dramatic changes to import policies in a bid to rapidly rebuild beef supplies and to lower prices.

The previous quota-based system governing imports was abolished and replaced with a new system linking import volumes to the price of beef in Jakarta wet markets.

Under the new policy, when the average wet market price is above a nominated trigger price of 76,000 IDR/kg, Indonesia allows more beef and cattle imports to improve supply and bring prices down. When the price falls below 76,000 IDR/kg, Indonesia will then restrict or even stop imports until such time as prices rise again and greater supply is needed to bring them back down.

Q4 permits for 260,000 cattle allocated to importers yesterday

The relaxed restrictions on imports triggered a massive rise in the volume of Australian cattle and beef exported to Indonesia in the past 12 months.

Australian cattle shipments this year are on track to smash the previous annual record of 772,000 head, exported to the market in 2009. If Australia can supply the massive 260,000 of cattle Indonesia now wants in the final quarter (official Q4 permits for that volume were released to importers in Jakarta yesterday), its total export volumes for 2014 will exceed 870,000 head.

Exports of Australian boxed beef have also doubled in the past year. According to Department of Agriculture data, Australia exported 51,200t of boxed beef and 12,400t of fancy meat (offal) to Indonesia in 2013-14, compared to 28,600t of beef and 2485t of fancy meat in 2012-13.

‘Shock’ changes bring renewed uncertainty

But, just as export volumes have returned to strong levels, the outgoing Indonesian Government has again surprised the Australian trade with a sudden change of policy that subjects Australian exporters to renewed uncertainty.

Australian export industry sources have told Beef Central that it was a shock to learn that changes to the Law 18 import decree were suddenly passed by the outgoing Indonesian Government this week.

It was widely expected that voting on the proposed changes to the import decree would not occur until some time after the new Jokowi Government was installed, and probably not for another 12 months at least.

Indonesia’s push to shore up its supply channels beyond Australia alone is being driven by a range of factors, principally the fear of being unable to source the cattle it needs from Australia, and having to pay more for Australian beef and cattle to compete with demand from other countries.

Recent media comments have illustrated an increasing awareness among Indonesian politicians of the high level of demand that now exists for Australian beef and cattle from other countries, particularly the US and from China, and what that means for Indonesia’s own food security.

The Indonesian Government is also well aware that Australia and China are in the final stages of signing a protocol that will allow Australia to export feeder and slaughter cattle to China, a development that will create even stronger competition for Australian cattle and, once signed, will push the purchase price of feeder cattle even higher.

Feeder steers in Darwin are commanding $2.35-$2.40 this week. The strong outlook for demand versus the limited nature of supply suggests that price has further upside yet before the year is out.

Should Australia and China ink an export deal in coming months, as is increasingly considered likely, the price of feeder steers in northern Australia would almost certainly rise even higher.

A case of ‘wait and see’

For Australia, it is now effectively a case of “wait and see” to learn how the changes passed in Parliament this week will affect trade.

Consensus at this stage suggests that the most immediate impact may be increased imports of low priced buffalo meat, beef and offal from India into Indonesia.

While some Indian meat is said to have been selling illegally into Indonesia via ‘grey channels’ in recent years, large volumes of Indian export meat are currently being drawn to the strong demand and higher prices available in Vietnam and China.

One issue that could make it difficult for suppliers such as India to satisfy Indonesia demand is an existing rule which requires that all meat import consignments be accompanied by ‘property of origin’ certificates. Indian exporters may struggle to comply with Indonesia’s property of origin requirements as they currently exist.

Brazilian meat is currently priced higher than Australian meat which may limit the volume of imports likely to flow into Indonesia from that country. The significantly larger costs of shipping cattle from Brazil to Indonesia would also challenge the economic viability of a live export trade between the two countries developing.

Increased supply does little to curb Indonesian beef price

With a population of 250 million people, Indonesia is a massive market and even the significant volumes of cattle and beef imported from Australia in the past 12 months have done little to bring down the price of beef in the market.

Wet market prices for beef in Jakarta are still around 100,000 IDR/kg, well above the 76,000 IDR/kg trigger point.

Australian cow-beef striploins are currently selling in Jakarta for 70,000 IDR/kg, a price even Indian buffalo meat exporters could be challenged to compete with. But even with relatively large tonnages of Australian boxed beef selling in the market at that price, demand remains so high relative to supply that wet market prices are still averaging 100,000 IDR/kg.

Whether this week’s law revision will be challenged by Indonesia’s powerful agricultural lobby, as it successfully did in 2009, remains to be seen.

The SBY regime remains in charge in Indonesia until October 22, when the new Jokowi Government officially takes office.

Australian Livestock Exporters Council chief executive officer Alison Penfold told Beef Central this morning that exporters are still yet to see confirmation of the detail on the decision, and are awaiting more information.

Another high level source in Jakarta confirmed to Beef Central yesterday that the Parliament did pass Revisions to Law 18 on Wednesday night, but was still seeking a copy of the text to fully understand what the changes might mean.

Beef Central will provide further updates as more clarification becomes available.

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