Inside an Indonesian cocoa fruit.
TEXT: Embassy of Indonesia, Tokyo – Economic Division
Indonesia is the world’s third largest cocoa producer after Côte d’Ivoire and Ghana, but its significance as an exporter is declining due to rising domestic demand. Responding to Indonesians’ growing taste for chocolate and other goods made from cocoa, global companies have invested heavily in cocoa grinding facilities and downstream businesses in recent years.
Indonesia produced 400,000 tons of cocoa last year, unchanged from 2014, with output expected to rise 5-10% in 2016. In 2008/09, Indonesian production was at 490,000 tons, according to the International Cocoa Organization (ICCO). While output is still lower than six years ago, pegged at 350,000 tons for 2014/15 by the ICCO. The Non Construction Consultants Association of Indonesia (ASKINDO) sees it improving as an estimated 80% of the state plan has proved a success, especially in areas of Bali, Sumatra, and Sulawesi. Also, late last year the government announced a plan to invest almost 100 million USD on distributing seedlings and increasing cocoa productivity.
The one worry is the ongoing dryness linked to El Niño. The weather event is expected to be moderate from July to November, and worsen from September to December. A government plan is in effect to boost production and help offset any damage to crops from the current El Niño-linked dry weather. Currently, the country needs 500,000 tons of beans each year and meets a 100,000-ton shortfall through imports from Ghana and Côte d’Ivoire. Indonesia imposes export tariff on cocoa ranging from 5 to 15% in a bid to boost the cocoa downstream industry and prioritize local demand over exports.
Cocoa production can have a bright future in Indonesia, but creating the necessary economies of scale to boost productivity requires lots of investment to implement modern farming methods and technology. Once that is achieved, Indonesia will be well positioned to capitalize on cocoa production and chocolate consumption at home and in the Asia-Pacific region.
Indonesia’s equatorial climate, coupled with the fertility of its soil, provides ideal geographic conditions for cultivating cacao trees. The island of Sulawesi accounts for more than two-thirds of national cocoa production, and policies to promote integrated industry clusters based on the existing strengths of each region are established to keep it that way.
Booming Grinding Business
The immediate result was a shift from raw exports to exports of intermediate products, such as cocoa butter and cocoa powder. Bean exports fell from 439,000 tons in 2009 to 125,000 tons in 2013 (ASKINDO). As downstream industries grow, more of the intermediate products should eventually be further processed into finished goods like chocolate, biscuits, drinks, or cosmetics. At the same time, shipments to Indonesia rose to 40,000 tons in 2013 (ASKINDO) and doubled in 2014, highlighting a widening supply gap that could see Indonesia become a net importer of cocoa beans.
Without a significant rise in imports, domestic industries are at risk of running far below capacity. Following investments from companies, such as global food giant, Cargill, Singapore-based JB Cocoa, and the world’s biggest chocolate maker, Barry Callebaut, national cocoa grinding capacity reached 600,000 tons by the end of 2014, up from 324,000 tons in 2013 (ASKINDO). Grinding capacity is expected to surpass 1 million tons in 2016 as more companies plan to set up shop. Olam International, for example, wants to launch operations at a 61 million USD cocoa processing facility in early 2016.
Grinding capacity is expected to surpass 1 million tons in 2016 as more companies plan to set up shop.
Multinational firms, such as Asia Cocoa Indonesia, Jebe Koko, Barry-Comextra, and Cargill, are among the foreign players that have built their cocoa grinding facilities in Indonesia. Resulting in a combined capacity of 310,000 tons per year to cash in on the growing chocolate industry in Indonesia.
Smallholder farmers work more than 90% of Indonesia’s cocoa cultivation area of around 1.6 million hectares, with the rest shared between state-owned and private plantation companies. Typically holding less than one hectare, smallholder farmers lose out on economies of scale because it makes little sense for them to introduce sophisticated equipment. They also often employ poor farming methods and lack knowhow on pest control. In some areas, productivity has fallen so much that farmers have switched to rubber or palm oil production.
A multi-year program launched by the government in 2009 to provide free fertilizer and better seeds and to rejuvenate and strengthen cocoa trees has done little to improve the situation at the farm level. The Indonesian Coffee and Cocoa Research Institute (ICCR) organizes regular workshops to help improve skills and cocoa cultivation techniques, but that, too, has shown little effect on the ground. The private-sector initiatives, such as the Nestlé Cocoa Plan, aim to help farmers improve their methods and pest resistance through training programs.
There is widespread agreement that Indonesia has the potential to more than double the cocoa output from current levels to 1 million tons, but getting there will require substantial efforts. The quality of Indonesian cocoa could be improved if farmers used better post-harvest practices and if more of them decided to ferment beans before going to market. One factor that works in the cocoa industry’s favor is improving infrastructure, which will facilitate farmers’ access to inputs, such as fertilizer, and reduce the risk of molding while beans are transported from the farm gate to processing facilities.
Growing domestic supply of good-quality beans remains crucial for the national cocoa industry and in itself provides enticing business opportunities. Investing upstream and cooperating with local farmers to improve bean production is a way for processing companies to secure supplies for their own operations and lessen their exposure to vulnerable global prices. Eventually, well-managed plantations could supply not just domestic industries but also revive Indonesian exports to the world, with nearby India and China becoming major cocoa buyers. Developing research facilities to create pest-resistant clones and advanced side-grafting techniques are another area for collaboration. With a strong agricultural base, Indonesia could be on track to become a major global supplier of raw beans, semi-processed cocoa and finished consumer goods.