Milk is becoming increasingly popular in Indonesia. With a growing middleclass and shifts in local diets toward Westernized food and tastes, the country is witnessing rapid growth in the consumption of milk and dairy products.
This growing appetite for milk and its derivative products, like cheese, cream, sour cream and yoghurt, has the potential to make Indonesia a hub for the dairy industry in Southeast Asia and beyond.
But this will only happen if there is a major transformation in the industry, rectifying the widening gap between local milk production and dairy consumption.
According to the Indonesian Milk Processing Industry Association (AIPS), demand for milk in the country is growing at an annual rate of almost 10 percent.
Despite this rapid growth, Indonesia’s level of milk consumption based on 2014 data remains very low compared with its neighbors, at an annual average of just 13.4 liters per person, with Filipinos consuming 22.1 liters, Thais 33.7 liters and Malaysians an impressive 50.9 liters — almost four times the average Indonesian.
From this low base, Indonesia’s taste for milk is expected to grow rapidly, with more Indonesian’s turning towards cow’s milk as: a source of protein and calcium; a substitute for breast milk for infants and babies; the popularity of milk in beverages like coffee grows (shifting away from the Indonesian tradition of drinking black coffee); and as dairy products and cakes increase in popularity.
However, despite growing demand, local milk production has actually declined in recent years. Since reaching a peak of 975,000 tons in 2011, milk production fell to just 801,000 tons in 2014 and only recovered slightly to 805,000 tons in 2015, according to data from the Central Bureau of Statistics (BPS).
According to the Indonesian Association of Dairy Cattle Breeders (APSPI), only 750,000 tons of local milk was produced in 2015 and production is expected to fall to just 700,000 tons in 2016.
Regardless of the data source, the divergence between local milk production and growing consumption means that Indonesia can meet less than 20 percent of its domestic demand for milk from its own dairy farmers.
Added to this, due to poor nutrition of dairy cattle in Indonesia, the quality of local milk is also inferior.
The decline in local milk production in recent years has also been aggravated by a significant drop in the size of the national dairy herd, as farmers took advantage of high beef prices to sell off dairy cows to abattoirs. The total dairy herd fell from 420,000 in 2011 to 350,000 in 2013.
According to the Ministry of Agriculture, herd size recovered to about 518,600 head of dairy cattle in 2015, and this is expected to rise to over 535,000 by early 2017. However, this recovery has yet to be reflected in domestic milk production.
Disappointing growth in dairy cattle numbers has been exacerbated by the high cost of feed and the low price dairy farmers receive for their milk.
At the current average price of Rp 4,500 (US 33 cents) per liter, smallholder dairy farmers with an average of four dairy cows — who make up the majority of Indonesia’s dairy producers — make a profit of just over Rp 300,000 per month, hardly covering their production costs.
As the chairman of APSPI, Warsito Agus, points out, the price farmers receive in China is equivalent to Rp 7,330 per liter and in Vietnam Rp 8,172 per liter, suggesting that the price of milk at the farm level in Indonesia should in fact be around Rp 7,000 per liter.
As a consequence of this shortfall, the bulk of Indonesia’s milk needs to be imported from countries like New Zealand, the largest importer, followed by France, Australia and the United States.
According to BPS, the total value of imports of milk and dairy products was $1.4 billion in 2014, declining somewhat to $900 million by 2016.
The high cost to Indonesia of importing such a large proportion of its milk has only been compounded in recent years by the depreciation of the rupiah.
This high import cost is set to grow as Indonesians start to catch up with their ASEAN peers in terms of average milk and dairy product consumption.
Since December 2016, addressing the lack of local milk supply in Indonesia has become all the more urgent due to the Ministry of Agriculture’s intention to implement a regulation imposing a quota system on milk processing companies.
This forthcoming regulation, known as wajib serap, or “mandatory adsorption,” will require all milk processors to increase their local content to 40 percent by 2020.
The regulation will push milk processors to reduce their reliance on imported milk from about 82 percent currently to just 60 percent within three years.
This will provide a huge boost to Indonesia’s dairy industry in the process.
But, as things stand, such a move could trigger a scramble among milk processors to procure local milk production before their stocks run out and supermarket shelves grow empty.
What is urgently needed, with help from the government and cooperation between milk processors and dairy farmer cooperatives, is a win-win solution that enables the size of dairy herds to grow and increases productivity and efficiency.
Currently, Indonesia seems to have more than enough milk processing plants, but urgently needs more and larger dairy farms.
Several steps need to be taken to transform Indonesia from a milk importer into a major Asian milk and dairy product consuming and exporting hub.
First, the government needs to ensure that the incentives to farmers for producing milk are attractive.
This means raising the price paid to dairy farmers for their milk at the farm gate. Industry experts suggest a price of Rp 6,000 per liter would be adequate and help to avoid dairy cattle being turned into beef.
Second, quality dairy cows need to be imported into Indonesia in order to increase the national dairy herd size to be able to produce 40 percent of the country’s annual milk consumptions needs.
This will require support from the government working with the private sector and also help for smallholder dairy farmers to increase the size of their herds, ideally from an average threefive cows to 10-12 cows.
Third, the government will need to control the import of milk through tariff rate quotas in order to encourage the absorption of local milk in milk processing.
With such a transformation there is no reason why Indonesia cannot become not only a land of milk, but also earn the “honey” of foreign exchange as a major regional exporter of milk and dairy products to the growing markets across Asia.