RESTRUCTURING OF AGRIFOOD CHAINS IN INDONESIA

COMPONENT 1 REGOVERNING MARKET PROGRAMME: RESTRUCTURING OF AGRIFOOD CHAINS IN INDONESIA

INDONESIA NATIONAL AND LOCAL MESO STUDY (MODULES 1 AND 2 OF C1) REPORT

Ronnie S. Natawidjaja, Trisna Insan Noor, Tomy Perdana, Elly Rasmikayati, Sjaiful Bachri, Thomas Reardon

Report Submitted by Center for Agricultural Policy and Agribusiness Studies Padjadjaran University. November 2006 to the Regoverning Market Programme

Summary

The study focuses on: the rise of supermarkets, the changes in their procurement systems for FFV, and the impacts of that transformation horticulture supply chains at a macro level and the case of production zones in West Java. To examine the transformation of the retail market, we interviewed supermarket chains and a number of other key informants. To examine the wholesale market with respect to its restructuring, we interviewed managers and wholesalers in the main wholesale markets in Jakarta and Bandung, as well as a further 11 supermarkets specialized wholesalers and farm companies, complemented with case study of 18 similar or same actors in 2004. To examine the impacts of the transformation of the market at a local level, we select West Java, as the leading "vegetable basket" in Indonesia. We selected 2 kabupatens (counties) and within them 8 kecamatans (districts) for interviews with wholesalers and key informants in the local governments using a local area survey, and then did 8 Participatory Rural Appraisals (PRAs) and 8 district  surveys.

The study indicates that the rapid growth of supermarket started in 1998 triggered by removal of FDI restriction, growth of urban population, and investment in property. In a decade, the growth concentration and target consumers of supermarket are now has shifting toward the whole working class population.

FFV sales share in supermarket sales increase very rapidly with high share of import. The smaller local chains had the highest share of imports and the large chains had a lower share of imports. Local farmer severely constrained by extremely poor supply chains caused by poor roads, illegal charges on the road, lacking cold chains and logistics services. Because the condition and efficiency of the traditional wholesale market system is extremely poor, leading supermarket chains stopped very early from sourcing to traditional wholesale markets. The leading chain increasingly source local vegetables via new-generation wholesalers specialized dedicated to modern market, and some products, from grower/packer/shippers using outgrower schemes.

While supermarket growth skyrockets, and wholesale markets in relative in stagnation, the horticultural economies of local areas are dynamically change and  everal surprising developments emerges: (a) decades ago was totally dominated by many small brokers, today, majority is dominated by large, more capitalized wholesalers, with still an important remnant of small brokers; (b) many farmers switching into FFV, adopting irrigation, cropping multiple seasons, and shifting from low-value commodity to intermediate-value products and even into high-value vegetables - climbing a "value ladder"; (c) rapid growth in the land rental market, horticulture farmers renting mainly from tiny rice farmers and large urban speculators.

However, there is very little reward to farmers to produce quality vegetables, since price differentiation is still very weak. In concentrated horticulture zones, estimated 11 -15% of horticulture farmers are starting to participate in sales to the supermarket channels, mainly via the specialized/dedicated wholesalers and some large wholesalers. Despite their availability in the rural area, an agricultural extension agent has been of no or little help to farmers in the horticulture boom. Farmers only receive technical assistance from chemical companies' local agents and nearly all their credit come from local wholesalers and input supplier, family, friends and local lenders.