‘Total confusion and uncertainty’ is how one member of Australia’s live cattle trade described the state of play on Wednesday after Indonesia confirmed it will scrap import quotas in favour of price-based triggers for imports.

Importers were yet to receive official confirmation of the new regulations when Indonesian trade minister Gita Wirjawan and agriculture minister Suswono announced the sweeping changes to media in Jakarta on Tuesday.

Until supporting detail comes to light, members of the trade say it is difficult to predict with any certainty how the new policy will play out in the longer term.

In the short term, immediate export activity should not be disrupted because import permits for 43,000 cattle for the current quarter are still valid and will enable shipments to continue until orders under the new system begin to flow.

What is known is that Jakarta wants to bring the price of beef in wet markets down to 76,000 Indonesian Rupiah (A$7.60) per kilogram.

In order to achieve that, it will allow imports to be ‘turned on’ when wet market prices are above a certain level – speculated to be around IR 84,000/kg – and ‘turned off’ when they slip below that level.

With prices currently averaging IR 95,000-100,000/kg, it also seems clear that large volumes of both live cattle and frozen beef imports will be required in the short term at least to make a dent on prices across a market of 250 million people.

The challenge of bringing prices in wet markets down will be affected not just by supply but other factors such as Indonesia's weakening currency and the cost of landing Australian cattle in the country. 

Indonesia's currency weakened by 6pc during August alone and dropped to its lowest level in four years against the US dollar on Tuesday, the day the changes to import quotas were being announced. 

The weaker rupiah is effectively making many of the country’s imports – including beef – more expensive.

“The weak rupiah is probably the biggest enemy of the market at the moment,” a trade source who asked not be identified told Beef Central today.

A simple comparison of trade conditions now and 10 years ago highlights the impact that Indonesia’s weakening currency has had on beef prices in Jakarta.

10 years ago Australian cattle exported from Darwin were selling for the same price they are selling for today.

But 10 years ago it took just 4500 Indonesian Rupiah to buy A$1  whereas today it takes 10,300 Rupiah to buy A$1.

Effectively, while the price of Australian cattle has not changed, Australian beef is now worth double the price in Indonesia, just by virtue of the exchange rate.

Achieving a price reduction to IR 76,000/kg in the Jakarta wet market will require prices to come down by about IR 20,000/kg from current levels or by about IR 7000/kg in the price of cattle landed in Indonesia.

At present Australian cattle are being landed in Indonesia at around IR 33,000/kg according to sources Beef Central spoke to today, and that is before the impact of a 5pc tax on imports is added to the equation.

One source said it was unlikely that prices could come back by IR 7000/kg from current levels: “We are currently selling cattle at 33,000 – so our buy price is the same as our sell price”.

The Indoneisan Government clearly wants Indonesian importers/lot feeders to play ball by converting imported cattle into finished product as quickly as possible and at prices that support its push for lower prices in the wet market. 

Some think it is likely the Government will seek to link future permit allocations for each importer to how well they perform in moving cattle through the system in a bid to deter feedlots from holding cattle back to keep prices at high levels.

Whatever feedlots do to support the government's push to bring prices down, it is also worth noting that feedlots are not the final link in the supply chain. At least four more sellers stand between the feedlot and the vendor selling beef bakso on the street. If feedlots do their best to lower prices, will each section of the chain do their bit to pass those savings on to the consumer or will they look to pocket the margin themsleves?

While the new policy should see supplies of Australian cattle and beef to Indonesia increase, whether prices can drop as quickly as the Indonesian Government hopes remains a key issue .

“It looks like being a tough and confusing year ahead for Indonesian feeders,” another source told Beef Central.

“But at least we get some volume through our feedlots and northern Australia get a break after a few very tough years.”