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Only within a period of 22 days, from 1 June to 22 June 1997, the price of poultry feed rose five times. As per the end of May, the factory-level price of broiler starter feed was Rp 1,728/kg and that of broiler finisher feed Rp 1,689. Early in July, however, the price of the former was Rp 2,878/kg and that of the latter Rp 2,839, up by Rp 1,150 respectively. The rise was questionably high in view of the fact that the Government subsidized the import of feed components by setting the exchange rate of the rupiah at Rp 6,000 to the dollar.

As a result of the high rise in the price of feed, tens of thousands of small-scale poultry undertakings have gone bankrupt. Earlier, when the price of feed was offIcially set at Rp 2,000/kg, only a few of such poultry undertakings managed to survive. As may have been known, shortly after the outbreak of the monetary crisis, the price of feed soared over twofold, and this already caused many small-scale poultry breeders to be unable to raise their broilers and, hence, to lose money.

Over the past few months, the price of feed stood at Rp 2,000/kg; however, the rise in the price of chicken on the market enabled small-scale poultry breeders to resume their activity although the profit margin was very small. Now, with the price of feed having soared to over Rp 3,000, small-scale poultry breeders feel 'choked' because it is very high compared to the price of farm-raised chicken on the market. As an illustration, the price of farm-raised chicken is only Rp 5,000/kg while every kilogram of such chicken requires 1.8 kilograms of feed.

The condition of small-scale poultry breeders is worsened by the fact that the poultry market in Indonesia is flooded with products from large-scale breeders, most of which are 'integrated poultry-breeding companies,' meaning those which have their own DOC, feed, and medicine production units. These integrated breeders sell their chicken at below current market prices, and small-scale breeders can do nothing but adopt the prices set by the former. Of course, integrated breeders can ride out the monetary crisis because they have their own DOC, feed, and medicine production units.

As a matter of fact, integrated breeders are legally required to supply their products to the international market. However, since their products are not competitive, they are supplied to local markets, which traditionally belong to small-scale breeders. This unsound competition has contributed to the collapse of many small-scale breeders.

Partnership harmful

Intergrated poultry-breeding undertakings are owned by large-scale feed and Doe companies. PT Nusantara Unggas Jaya, for example, is owned by PT Charoen Pokphand. Besides breeding chickens, PT Nusantara Unggas Jaya also cooperates with smallholders' poultry-breeding undertakings under a certain partnership scheme in order to secure the distribution of its feed products.

However, the partnership scheme which integrated breeders adopts in their cooperation with small-scale breeders seem to benefit the former more than it does the latter. Under the partnership scheme, small-scale breeders function no more as laborers but they have to use their own capital to buy production facilities. For example, in order to be able to apply for partnership with an integrated breeder, a small-scale breeder should already have a land certificate and its own coops and should first prepare the necessary tools. On the other hand, all the integrated breeder has to do is provide the small-scale breeders with DOCs, feed, and medication on a credit basis and market the products.

Such a partnership scheme makes the small-scale breeder highly dependent on the integrated one. Moreover, the small-scale breeder does not have a say in the pricing of its products. The price of its products is set by the integrated breeder according to the current market price level. Such a price may not benefit the small-scale breeder because a deduction has to be made from the proceeds of the sale as a repayment for the production facility credit which it has received from its partner.

In the current economic crisis, some integrated poultry-breeding undertakings of medium-scale have managed to survive. One of them belongs to PT Welgoro Industri, which is affiliated to a Singapore-based foreign partner. Thanks to such affilation, PT Welgoro Industry has a guaranteed supply of the basic materials for its feed production.

One advantage of being an integrated poultry breeder is that the distribution of its feed can be conducted not in the form of a sale/purchase transaction and, hence, it is efficient and frees the company in question from transaction/distribution cost and sales taxes. As may have been known, Presidential Decree No. 37 of 1998 - which was issued on 9 March 1998 - imposes a 10% VAT on feed and poultry products. Integrated breeders can avoid paying such a tax on feed because they use unbranded sacks for the distribution of feed and operate under the partnership scheme. On the other hand, small-scale breeders which do not have partners have to buy feed at a higher price because it is inclusive of the VAT.

Establishing working groups

The Government has recently called on small-scale breeders, which total 80,000 in Indonesia, to form working groups in order to salvage themselves from bankruptcy as a result of the monetary crisis. Soejono, a leader of the PPUI (Indonesian Poultry Breeders' Association) said to 'ICN' that in response to the call, the association had agreed to request the Government to review certain regulations/policies which proved harmful to small-scale breeders.

One policy which the PPUI wants the Government to review is that on partnership with integrated breeders because the policy benefits the interests of such breeders more than it does the interests of small-scale ones. Another policy which also needs to be reviewed is Presidential Decree No. 37 of 1998, which imposes a 10% VAT on feed and poultry products. In the current economic crisis, this decree is less likely to increase the Government's tax revenue than to speed up the bankruptcy process of poultry-breeding undertakings.

Still another policy which the PPUI wants the Government to review is that on a poultry-breeding crash program. According to Soejono of the PPUI, however, the Government has agreed to suspend the implementation of the program because it has diverted from the original purposes of the program itself. According to the PPUI, Decree of the Directorate General of Animal Husbandry No. TN. 120/326/Kpts/DJP/ Deptan/0598 re Technical Guidelines concerning Crash Program on the Rehabilitation of Poultry Breeding benefits integrated breeders more than it does small-scale ones.

As may have been known, the crash program is originally intended by the Government to revive 6,000 small-scale poultry breeders by giving each of them Rp 25 million in credit. In its implementation, however, the program has involved only those small-scale breeders that have partnership with integrated breeders. In practice, it is the integrated breeders which have the authority to select small-scale breeders are eligible for such credit. Thus, the program benefits only integrated poultry breeders, which have their own feed and DOC production units.

Subsidy enjoyed by feed producers

Until the end of August 1997, approximately two months after the monetary crisis had started, the price of broiler feed was still relatively stable at Rp 900/kg. This was so because feed producers still had some imported basic materials in stock. Over the period of August 1997-February 1998, however, the price of broiler feed rose to Rp 2,000/kg. In May, it increased further to Rp 2,400/kg. Now, it is Rp 3,300/kg.

The continued rise in the price of poultry feed is questionable because the Government subsidizes the importer of the basic materials by setting the exchange rate of the rupiah at Rp 6,000 to the dollar. Using this subsidized rate of exchange, the Government imported 600,000 tons of fish powder (fish meal) and 150,000 tons of soybean meal with the hope that the price of broiler feed could be lowered to an affordable level of Rp 1,200/kg. In reality, however, the price of broiler has kept on increasing with the continued depreciation of the rupiah.

The subsidized exchange rate of Rp 6,000 to the dollar for the import of basic materials for poultry feed left hundreds of billions of rupiahs to be enjoyed by breeders. It should have been enjoyed by small-scale breeders. In reality, however, it went into the pocket of integrated breeders such as PT Jafa Comfeed Indonesia, PT Charoen Pokphand Indonesia, PT Cibadak, and PT Teluk Intan.

In view of this, the PPUI on 27 June 1998 proposed that the subsidy for the import of basic materials for feed be determined by the Government in cooperation with the PPUI and feed producers. In addition, the assotiation also suggested that credit assistance be given to small-scale breeders not through the plasm but through certain implementing banks upon recommendation from the PPUI and that the Bimas (mass guidance) scheme be adopted in extending such credit.

In the long term, the Government needs to change the structure of the feed industry so as to free it from dependency on imported basic materials. One way to do so is by establishing small-scale feed plants around centers of fish meal, corn, and soybean production and in the vicinity of centers of farm-raised chicken production.

For this year's planting season, the Government has intensified the planting of corn and soybean in order to cut down on the import of corn and soybean meal and, hence, to push down the price of feed to affordable levels.

That the price of feed is heavily affected by the rate of exchange of the US dollar currency is caused by the fact that the feed industry is highly dependent on import sources for basic materials. As for corn, for example, which accounts for the largest portion (51%) of the total consumption of basic materials for feed, most of the demand still has to be met with imports. In the feed production cost structure, corn accounted for 39%-47% of the total cost of the procurement of basic materials for the period of August 1997-February 1998.

The cost of the procurement of basic materials for feed varies according to the fluctuations in prices. Over the past year, such cost has continued to increase with the weakening value of the rupiah. As for corn, the cost of its procurement can be pushed down if the material can be procured from local sources or can be partially or fully substituted with other types of agricultural produce produced in Indonesia. As for wheat bran (polar), soybean meal, fish meal, and premix, they still have to be procured from import sources. Although fish meal is already produced in Indonesia, the production rate is still too low to meet demand.

Feed production only 2 tons?

In view of the worsening economic condition, the Indonesian Feed Producers' Association (GPMT) predicts that this year's feed production will reach only 2 million tons, which is only 22.2 % of the industry's installed production capacity. This prediction is based on the fact that for the first semester of 1998, Indonesia's feed production was only 180,000 tons per month. For the next three to six months, it is likely to drop to only 100,000 tons per month.

Thus, the total national consumption of poultry feed for 1998 can be projected at only 2-2.5 million tons, as opposed to 4.8 million tons in 1996. For 1999, it is expected to decline more rapidly to only 10%-15% of 1996's rate, which was 4.8 million tons.

The shrinking consumption of poultry feed, according to GPMT, is caused by a number of macroeconomic factors such as the weakening value of the rupiah against the US dollar, the difficulties in opening letters of credit (L/C), the high interest rates, and the people's weakened purchasing power as well as by certain non-economic factors such as those related to the comfort in operating businesses and conducting daily-life activities.
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Publication:Indonesian Commercial Newsletter
Geographic Code:1USA
Date:Jul 13, 1998

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