The Long Road to Reviving Indonesia's Cacao Industry

The Indonesia Cocoa Industry Association (AIKI) estimates that the country produced around 260,000 tons of beans last year, down 31 percent from a year earlier. (Reuters Photo/Yusuf Ahmad)

By : Sarah Yuniarni | on 10:40 PM July 15, 2018
Category : Business, Commodities

Lampung/Jakarta. Indonesia had to import about 200,000 metric tons of cacao beans last year, but it was not supposed to happen.

The tropical archipelago used to be a beacon of cacao bean production, with a record 850,000 tons of raw beans in 2009, or about six times more than two decades earlier, according to Central Statistics Agency (BPS) data.

Until then, Indonesia was the third-largest cacao bean exporter in the world behind the Ivory Coast and Ghana. However, seeing that much more value could be added by processing beans domestically, the government slapped a tax on raw bean exports in 2010 and told global manufacturers to build cocoa processing plants in Indonesia.

Switzerland-based cocoa and chocolate maker Barry Callebaut expanded its Indonesia operation by establishing a plant in Makassar, South Sulawesi, in 2013 and another in Gresik, Central Java, in 2016. United States-based agricultural giant Cargill also established a processing facility in Gresik in 2014.

But then a deadly disease decimated many cacao trees, forcing farmers, most of them only using simple farming techniques, to switch to planting corn, coconut or oil palm. Indonesia had about 1.3 million hectares of cacao plantations in 2012, which have continued to decline to an estimated 1.1 million hectares last year. Yields also fell to around 660 kilograms per hectare last year from 1.1 tons just five years earlier.

The Indonesia Cocoa Industry Association (AIKI) estimates that the country produced around 260,000 tons of beans last year, down 31 percent from a year earlier.

Soetanto Abdoellah, chairman of the Indonesian Cocoa Board, said the country now has to import beans from Ghana, the Ivory Coast and Cameroon to meet local demand.

The Fall

According to Rudyanto Hady, sourcing sustainability manager at Barry Callebaut, the production decline can also be ascribed to farmers' limited skills and a lack of funds to develop new plantations.

"Most cocoa farmers in Indonesia are smallholders, which make up more than 95 percent of the total cocoa plantation area, with the remaining areas held by private firms and state-owned companies," Rudyanto said.

Farmers are meanwhile also struggling with aging cocoa trees, most of which were planted between the 1990s and 2000s, in addition to diseases that afflict trees.

All these factors have created a negative perception of cocoa as a commodity among farmers, who deem it an unprofitable crop that cannot improve their livelihoods.

Misnoto, a 49-year-old farmer from Lampung, said black pod disease infected half a hectare of his cocoa trees.

Another farmer, Sutaji, said farmers in the province, including himself, are struggling to improve yields.

"We are now still learning how to improve yields from our cocoa plantations," said Sutaji, who has a 3-hectare cocoa plantation.

Temptation of Palm Oil

AIKI chairman Piter Jasman said farmers often lack technical assistance, which affects local cocoa production and makes other cash crops, such as oil palm, to be considered as more lucrative alternatives.

"If the government does not push the national production then production from cocoa plantations will continue to decline and eventually subside over the next few years, like in Malaysia," Piter said.

The neighboring country produced around 247,000 tons of cocoa beans in 1990, which dropped to a mere 3,000 tons by 2014 as farmers switched crops amid a palm oil boom.

Lampung farmer Sutaji noted that oil palm could be an attractive option for farmers like him, who can produce around 700 kilograms of cacao per year, earning him Rp 17.5 million ($1,220). On the other hand, the same area under oil palms can earn him up to Rp 31.5 million per year.

Sutaji, a cocoa farmer from Lampung. (Photo courtesy of Barry Callebaut) Sutaji, a cocoa farmer from Lampung. (Photo courtesy of Barry Callebaut)

Demand

Still, both local and foreign chocolate companies are heavily invested in Indonesia's downstream cocoa industry, with most having established processing facilities in the country.

Indonesia's average cocoa bean production capacity rose to 800,000 tons a year from 350,000 tons since the government started to impose an export duty on the commodity, said Piter of AIKI.

The total export value of processed cacao – including cocoa cake, cocoa butter, cocoa powder and chocolate liquor – amounted to nearly $1 billion in 2016, close to 2010's peak of $1.1 billion.

Chocolate confectionery is an expanding business in Indonesia, projected to grow 42 percent to Rp 19.5 trillion by 2019, data from a research firm Mintel shows.

While Singapore and Malaysia each currently consumes about 1 kilogram of chocolate per capita per year, it is only 600 grams for Indonesia, indicating more room for growth.

Closing the Gap

Mahendra Siregar, who was a deputy trade minister and instrumental in Indonesia's tax policy on cacao bean exports in 2010, said the current government seems to have abandoned the initial plan to boost the country's cocoa processing industry.

"We want the cocoa processing industry to accelerate, just like palm oil. We want the raw material to be processed in the country," Mahendra told the Jakarta Globe.

"We encouraged local investors and even invited foreign investors to develop their upstream businesses here. But now, with the declining cocoa production ... it's like we already invited them here, they already established here, but now we only have a small cocoa supply [for processing]," he said.

Mahendra said the processing industry still has a future, but it depends on consistent government policy.

The National Cocoa Movement (Gernas Kakao) was set up in 2009 to plant new cacao trees and intensify production in existing plantations. It distributed subsidized cocoa seeds and fertilizers to farmers and provided them with technical assistance.

But the program was terminated in 2013 after efforts to expand the main cocoa producing areas from Lampung and Sulawesi to other provinces spread the government's pool of instructors too thin.

"We need to hurry to implement and revive Gernas Kakao, otherwise the processing industry business will soon melt away," Mahendra said.

Women working at a cacao nursery in Lampung (Photo courtesy of Barry Callebaut) Women working at a cacao nursery in Lampung (Photo courtesy of Barry Callebaut)

Private-Sector Assistance

Cocoa farmers in Lampung are also trying to boost bean quality and yields with assistance from Barry Callebaut, the world's largest producer of chocolate and cocoa products. The company is helping them improve their farming techniques to boost the quality of the fruit.

It works with thousands of smallholders in Lampung and Sulawesi to implement cocoa sustainability programs, allowing farmers to produce high-quality beans that can be sold under a sustainability scheme. The beans can also be certified as premium quality, which either improves farmers' incomes or earn them incentives from the company, Rudyanto said.

Cocoa can also be cultivated along with other trees and plants, such as coconuts and cloves, giving farmers additional income from the same land.

Muksininin, a 33-year-old farmer from Bumi Mulyo village in Lampung, said he still prefers to grow cocoa because the trees do not need constant attention.

"Cocoa trees are easier to manage compared with oil palms, rubber trees, or even vegetables," Muksininin said.

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