IO – The year 2020 dealt another blow to Indonesia’s sugar industry. Sugar shortages during the early stage of Covid-19 pandemic and soaring retail sugar prices presented serious challenges and raised questions about the future of the country’s domestic sugar industry. To stabilize the sugar price at a retail level, the government issued Presidential Regulation No. 58/2020 on Import Licensing Simplification. Raw sugar import permits were granted to several sugar factories, including state-owned sugar mills, allowing refined sugar to be traded in modern markets. This came on top of the Agriculture Ministry Circular Letter No. 593/2019 which changed the sugarcane production sharing to a buyout scheme by the sugar factories.
The two pieces of policy, which were meant to be temporary, have threatened the survival of the domestic sugar industry. At the start of the milling season in June 2020, sugar factories, especially in Java, faced raw material shortages. The government intervened by setting the auction price between the 12 sugar mills and the Indonesian Sugarcane Farmers Association (APTRI) at Rp11,200 per kilogram on July 10, 2020. However, many sugar factories were forced to stop production since the end of September due to increasing difficulty in obtaining raw material.
Performance of the domestic sugar industry
Many analysts have warned of the impending sugar crisis since the beginning of 2020. Sugar production in 2019 only reached 2.23 million tons, after the target to increase the acreage to 445,000 hectares was not met. Currently, the acreage is around 411,000, or 37,000 hectares short. Sugarcane productivity was recorded at 67.4 tons per hectare, still below the target of 71.52 tons per hectare. Fortunately, the extreme dry season in 2019 did increase the average sugar yield, from 7.8 per cent to 8.0 per cent.
Sugar price at the retail level climbed above Rp14,000 per kilogram in January 2020, to Rp16,000 per kilogram in March, then continued to soar up to Rp18,000 per kilogram in April-May 2020 during the Ramadan and Eid al-Fitr celebration. Prices began to fall after imported raw sugar milled by domestic sugar refiners entered the market and were even allowed to be traded in the modern and traditional markets. The retail price fell to Rp15,000 per kilogram after July and began to stabilize on Eid al-Adha until August 2020. By the end of October 2020, sugar price was already below Rp14,000 per kilogram, nearing the ceiling price of Rp12,500 per kilogram.
In 2020, sugar production is estimated to reach 2.1-2.2 million tons, or much lower than the target of 2.5 million tons, because the milling season ended too early. Sugar consumption in 2020 is estimated to be at just 6 million tons, as Covid-19 pandemic has eroded people’s purchasing power. As a consequence of the flexibility in raw sugar imports, total sugar imports in 2020 are estimated to increase to 4.2-4.5 million tons. Indonesia has now become the largest sugar importer in the world, topping China (3.4 million tons), the United States (2.9 million tons), Bangladesh (2.3 million tons), Algeria (2.3 million tons), South Korea (1.9 million tons), and Malaysia (1.9 million tons).
The future of Indonesia’s sugar industry
The future of Indonesia’s sugar industry is really at stake, because the economic rent for refined sugar is very lucrative. The price of raw sugar in the global market in mid-October 2020 was 14 cents per pound free on board (FOB) or around US$ 309 per ton. If the cost, insurance and freight (CIF) for imported sugar is around US$200 per ton, it means that the price of refined sugar at the producer level is around US$509 per ton or Rp7,530 per kilogram per the exchange rate of Rp14,800 per US dollar. With a retail price of Rp12,500 per kilogram, the price margin for refined sugar can reach Rp5,000 per kilogram. The economic rent for refined sugar would be enormous if the retail price reaches Rp14,000 per kilogram, let alone Rp18,000 per kilogram. The domestic sugar industry must be able to compete with the refined sugar industry.
In October 2020, several stateowned sugar mills stopped producing, due to the shortage in sugarcane supply. In fact, some sugar factories had closed as early as September 23, 2020. It is true that one or two sugar factories can still grind on until mid-October 2020. Even the ones that are still producing are experiencing cash-flow problems because they are obliged to purchase sugarcane from farmers at Rp9,000 per kilogram, which is very burdensome. Out of pragmatism, several sugar factories have turned to refining imported raw sugar to ease pressure on their cash flow.
During September-October 2020 there was a phenomenal “sugarcane tour” where many sugarcane trucks were seen playing the sugar factories in East Java and Central Java. Farmers and middlemen were looking for sugar factories that were willing to pay a higher price for their harvest. The longstanding cooperative relationship between the sugarcane farmers and sugar factories which has characterized the national sugar industry seemed to have been completely broken. The previous production sharing system between farmers and factories was changed to a more liberalistic buyout scheme. If this problem is not immediately addressed, it is feared that the domestic sugar industry can no longer survive.
What solutions are on the table?
The domestic sugar industry needs a more favorable policy in their support. First, the sugar policy needs to be comprehensive, not half-hearted and pragmatic, and is integrated from the upstream to the downstream. On the cultivation side, strategy to increase sugarcane productivity needs to be formulated, in addition to improvements in the institutional system and partnership between farmers and factories. The policy should tilt toward increasing the efficiency of sugar production and reorganizing the value chain, including the policy on raw sugar imports.
Secondly, the institutional arrangements and partnerships between the sugarcane farmers and sugar factories need to be improved, not through the liberalistic solution mentioned before. In the short term, farmers may seem to be more prosperous with the buyout scheme but in the medium to long term, the liberalistic approach can threaten the very existence of the domestic sugar industry. The emotional relationship between sugarcane farmers and sugar factories can be improved through better, more transparent governance, technical assistance by the sugar factories, and mutually beneficial cooperation.
Thirdly, the policy needs to be firm in its implementation, with all its consequences if the target for self-sufficiency in sugar production is to be achieved. Improvements in production efficiency in the upstream and in the midstream need to become strategic and operational targets, as key performance indicators (KPI) for the state-owned sugar mills. In fact, privately-owned sugar mills are able to maintain the production cost at between Rp5,000 – Rp6,000 per kilogram, enabling them to compete at the global level. If the state-owned sugar mills are able to improve their efficiency on par with their private counterparts, then the saving from consumer surplus will be around Rp7 trillion per year. Now, everything is up to the policy makers, because the window for improvement through better policy is still wide open.