VZCZCXRO0452
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJS #0086/01 2000624
ZNR UUUUU ZZH
R 180624Z JUL 08
FM AMCONSUL SURABAYA
TO RUEHC/SECSTATE WASHDC 0257
RUEHJA/AMEMBASSY JAKARTA 0243
INFO RUEHRC/USDA FAS WASHDC
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHWL/AMEMBASSY WELLINGTON 0135
RUEHBY/AMEMBASSY CANBERRA 0135
RHHMUNA/HQ USPACOM HONOLULU HI
RUEHJS/AMCONSUL SURABAYA 0262

UNCLAS SECTION 01 OF 02 SURABAYA 000086 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/MTS 
USDA/FAS/OA FOR YOST, MILLER, JACKSON 
USDA/FAS/OCRA FOR CRIKER, HIGGISTON, RADLER 
USDA/FAS/OGA FOR HOUSE, DWYER 
 
E.O. 12958: N/A 
TAGS: EAGR ECON ETRD ID
SUBJECT: EASTERN INDONESIA: RISING PRICES PUSH INDONESIANS TO REDUCE 
WHEAT CONSUMPTION 
 
SURABAYA 00000086  001.2 OF 002 
 
 
This Message is Sensitive but Unclassified.  Please Protect 
Accordingly. 
 
¶1. (SBU) Summary: Over the past three months, Eastern 
Indonesia's flour mills have witnessed a dramatic shift in 
domestic consumption of wheat products as food and energy prices 
rise.  During recent visits by ConGen Surabaya Principal Officer 
to two of the world's largest flour mills, Bogosari in Surabaya 
and Eastern Pearl in Makassar, company officials described a 
rapid shift in consumer demand to lower-cost and lower-quality 
flour and an increase in flour smuggling.  The cheaper flour has 
lower nutritional value, raising concerns about malnutrition 
rates.  While both companies expect wheat demand to rebound and 
see many future market opportunities, in the short term they are 
looking for strategies to reduce costs and maintain current 
demand.  End Summary. 
 
Demand Shift 
----------------- 
 
¶2. (SBU) The Bogosari Flour Mill in Surabaya, East Java, is the 
world's second-largest flour mill.  The mill has a capacity to 
produce about 4,800 tons of flour a day, but it only produces 
about 60 to 70% of that capacity.   The Eastern Pearl Mill in 
Makassar, South Sulawesi, is the world's fourth largest mill. 
Both Bogosari and Eastern Pearl reported a shift in the domestic 
market's wheat preferences over the past three months in the 
face of rising fuel and food prices.  While total production has 
remained steady overall, consumers are demanding cheaper, lower 
quality flour.   (Note: Both mills are owned by the Salim Group, 
a huge Indonesian agribusiness concern). 
 
¶3. (SBU) The demand for high-end flour has remained steady; 
medium-quality flour however is falling out of favor.  Four 
months ago, production at both mills was divided 20% high 
quality, 40% medium quality, and 40% low quality.  Today, low 
quality flour makes up 60% of both mills' production.  The 
companies attribute this shift in consumer preference to higher 
food and fuel prices that have made medium-quality flour 
unaffordable, particularly in smaller towns and villages where 
the Rp. 10,000 (USD 1.00) difference between medium-quality and 
low-quality flour is significant. 
 
Imports of U.S. Wheat Up 
--------------------------------- 
 
¶4. (SBU) Bogasari imports wheat from the U.S., Canada, 
Australia, Turkey, Dubai, and to some extent China and India. 
Bogasari imports of U.S. wheat for the first six months of 2008 
(160,000 tons) had already surpassed the total volume of U.S. 
wheat purchased in 2007 (110,000 tons).   Bogasari managers 
complained that smuggled wheat and flour from Turkey was 
undercutting Indonesian mills and represented a longer term 
health risk for Indonesia. Smuggled Turkish flour has none of 
the vitamin and mineral additives usually required by the 
Indonesian government.  The government has reduced the import 
duty tax on wheat to 0% to help address millers' concerns. 
Bogasari estimated, however, that 60% of imported flour is 
smuggled.   As Eastern Pearl is partially Australian owned, the 
majority of its wheat imports are Australian. 
 
Infrastructure Constraints 
---------------------------------- 
 
¶5. (SBU) Both Bogasari and Eastern Pearl said that 
infrastructure constraints were not as big a problem for them as 
for other companies, although their transportation costs have 
increased 20-25%.  Eastern Pearl owns a fleet of ships to 
transport its flour throughout Indonesia.  Bogasari relies on 
distribution companies for delivery, so increased transportation 
costs are borne by the customer.  Both companies maintain 
generator capacity in order to avoid rolling blackouts that have 
affected many area companies. Eastern Pearl said it had reached 
agreement with the national electricity monopoly to reduce 
energy consumption during peak demand times in order to ensure 
sufficient supply.  Bogasari noted that their proximity to a 
state electrical power plant helped the company avoid blackouts. 
 
 
Plenty of Room for Growth 
------------------------------------ 
 
SURABAYA 00000086  002.2 OF 002 
 
 
 
¶6. (SBU) Bogasari management in particular expressed optimism 
that the Indonesian flour market would continue to grow in step 
with Indonesia's economy.  Indonesia's annual consumption of 
wheat is only 14 kg/capita, whereas neighboring Singapore and 
Malaysia, with their growing middle classes, consume 30 
kg/capita.  But given the size of Indonesia's population, the 
cost of expanding the facilities to produce even an additional 1 
kg/capita would be very high.  That said, two new flour mills 
are planned for West Java and one is planned for Medan. 
Bogosari management believes that low purchasing power is the 
flour industry's main obstacle to growth. 
MCCLELLAND