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IndOz forum: Imports essential to Indo herd growth

James Nason, 26/08/2013

By any measure outlined at last Friday’s IndOz beef trade investment forum in Brisbane, Indonesia is going to need a lot more cattle and beef in future to keep pace with rapidly growing consumption rates.

The 250 million strong population has one of the world’s fastest growing economies and a swiftly expanding middle class of around 50 million people, many of whom no longer see beef as a once-a-year celebratory dish but a protein source to be enjoyed year-round.

At present Indonesia’s rate of beef consumption per head is very low, and one of the lowest in Asia at just 2kg/person/year.

However, there are strong expectations that will grow, with forecasts ranging from growth to 2.5kg per head by 2020 at the conservative end of the scale to growth to 20kg per head at the more aggressive end. 

While 0.5kg per head may not sound like much, when you’re talking a population of 250 million people, even that slight increase equates to an additional requirement of 12.5 million kilograms, or roughly 70,000 cattle.

But what of the supply required to satisfy that demand, both locally and from neighbouring Australia?

Indonesia’s clearly stated desire is to achieve long-term food security by producing enough local cattle to meet demand.

However, as explained by Indonesia’s vice minister for agriculture at last week’s IndOz forum, that is no small challenge in a country where the national herd is spread across some six million farmers, who effectively own just one to two head of cattle each.

Indeed even Indonesia’s strict self-sufficiency policy recognises that imports will be required for Indonesia to keep satisfying growing demand.

The end-point of its current five-year plan is to supply 90 percent of local consumption from domestic cattle production by 2014, with the remaining 10pc to come from imports.

Imports key to herd growth: Modelling

In fact, not only are imports needed to meet demand, but to grow Indonesia’s herd.

This point was graphically illustrated in the results of sophisticated modeling presented to last week’s forum which showed how different self-sufficiency and per-capita consumption scenarios are likely to affect Indonesian cattle numbers and future import requirements.
The modeling was conducted by the ANZ bank following a meeting earlier this year by its chief Mike Smith and Indonesian president Susilo Bambang Yudyhono.

It effectively underlines the role imports will play if Indonesia is to avoid eating into its own herd as it aims to grow its cattle population and achieve food security.

One key scenario assessed the likely impact of Indonesia’s current policy of supplying 90pc of consumption from local production from 2014 onwards.

Assuming no growth at all in existing per-capita consumption levels of 2kg/hd, and no improvements in domestic cattle productivity, the modeling suggests Indonesia’s cattle herd, currently estimated to include somewhere between 12-14 million cattle, would decline to zero by 2027.

“All things being equal, that is where the Indoneisan beef herd will go if those particular variables were implemented now,” ANZ head of agribusiness research Michael Whitehead told the audience.

Tweaking the model to include conservative increases in per-capita consumption rates to 2.5kg per head by 2020, and to 3.5kg per head by 2030, accelerates the rate of herd decline to zero by 2022.

However, the modeling showed that Indonesia could expect to grow its herd over the same period if it reduced the percentage of consumption to be filled by local production to around 70pc, instead of 90pc.

Under a 70pc self-sufficiency scenario, and with per capita consumption increasing conservatively to 3.5kg per head by 2030,  the Indonesian cattle herd would grow to around 20 million head by 2020 and to 30 million by 2030.

At the same time Indonesia would still require imports of around 467,000 live cattle per year in addition to 74,000t of packaged beef in 2020, and imports of around 690,000 cattle as well as plus packaged beef by 2030.

“It (a 70pc self-sufficiency policy) provides Australia with opportunities to import, Indonesia with a largely self-sustaining domestic cattle herd, consumers with the benefit of choice between domestic and imported product, under trade policy Indonesian protection from trade shocks as well, and the potential for export from Indonesia is also strong,” Mr Whitehead told the forum.

Positive signals needed to increase Aus supply

The impact of Indonesian policies on available supplies of Australian cattle was also a key issue of discussion at the forum.

While northern Australia effectively serves as a massive southern cattle paddock for Indonesia, providing affordable and convenient access to high-quality tropical cattle ideally suited to Indonesian feedlots, Australian speakers explained the importance of positive market signals from Indonesia to keep that source of supply intact.

Indonesian policies in recent years have signaled an impression at Government level that northern Australia is seen as a tap that can be turned on or off as cattle are needed, and supply will always be there.

However consistently negative market signals of late – such as the imposition of 350kg weight limits in 2010, continuous cutbacks in import quotas and unexpected changes in breeder cattle regulations – have all impacted on the viability of northern cattle stations in recent years, hurting the many producers who have invested heavily to change their herds in accordance with Indonesia’s specific needs.

Northern Territory Cattlemen’s Association president David Warriner said the imposition of 350kg weight restrictions alone had rendered the northern cattle system unviable in the long term.

“Most cows in the marginal country need a spell from calving, (every) one in three to four years to survive,” he explained. “Too many cows means too many unproductive cows on hand, and a 300kg turn-off weight average equals too many cows on those places in the marginal areas of northern Australia.”

Recent market signals from Indonesia had also forced exporters to work harder than ever to develop new pathways for northern cattle into alternative and equally fast-growing markets such as Malaysia, Philippines and Vietnam, as well as the potentially massive Chinese feeder and breeder cattle import market.

Meat & Livestock Australia managing director Scott Hansen explained to the high-level Indonesian and Australian audience last Thursday that Australian cattle production was a ‘long-lead-time’ business that requires market certainty to sustain high levels of production. 

“By the very nature of the Australian beef and cattle industry, it requires a long term plan, long term thinking and long term partnerships,” Mr Hansen said. 

“I think we’d all agree in this room investment requires a number of factors, one of which is certainty and one is a reduction in volatility.”

While the 350kg weight limit is impacting on the viability of Australia’s northern cattle producers, it is also limiting the amount of cattle available to Indonesia.

The policy was introduced to ensure imported cattle could still be value-added in Indonesian feedlots, providing a boost to the local economy, rather than importing ready-to-slaughter cattle.

In one of the many meetings that took place in and around last week’s IndOz forum, it is understood that exporters last week asked Indonesian Government ministers to consider restoring import quotas to 500,000 head and to increase weight limits to either a 350kg average or 400kg maximum in order to vastly increase available supply.

Sources described the private meeting as constructive, and said the forum provided a valuable opportunity for both ends of the trade to come together to work on developing stronger and mutually-beneficial long-term partnerships.

A follow-up forum will be held in Jakarta later this year.
 

RELATED ARTICLE: Investors weigh up risks and rewards at Indo forum

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