VZCZCXRO1777
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #0868/01 1210859
ZNR UUUUU ZZH
R 300859Z APR 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 8882
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/USDA WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 1910
RUEHBJ/AMEMBASSY BEIJING 4999
RUEHBY/AMEMBASSY CANBERRA 2432
RUEHUL/AMEMBASSY SEOUL 4555
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 05 JAKARTA 000868 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EAP/MTS 
DEPT FOR EEB/TPP/ABT/ATP JSPECKS 
TREASURY FOR IA-SETH SEARLS AND JWEEKS 
SINGAPORE FOR SBAKER 
TOKYO FOR MGREWE 
COMMERCE FOR 4430/BERLINGUETTE 
USDA/FAS/OA YOST, MILLER, JACKSON 
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER 
USDA/FAS/OGA CHAUDRY, DWYER 
USTR FOR WEISEL, EHLERS 
 
E.O. 12598: N/A 
TAGS: EFIN EAGR ECON ETRD PGOV ID
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES-INODONESIA 
 
REF: STATE 39410 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1. (SBU) Summary:  The price of most Indonesian staple foods 
(soybeans, wheat, palm oil, instant noodles, chicken, eggs) has 
risen rapidly in the past year.  In contrast, the cost of rice, the 
largest component of the Indonesian diet, has declined in Indonesia 
over the last twelve months.  However, the international price is 
now $700 per metric ton (MT) higher than the price in Indonesia, 
creating an incentive to smuggle and hoard rice and putting pressure 
on local prices.  Rice accounts for roughly one-quarter to one-third 
of poor and near poor household spending.  Production of palm oil, 
rubber, coal, and metals has increased in Indonesia in response to 
higher prices.  Food production has been slower to respond.  There 
have been numerous protests against rising food prices in recent 
months, but none have been violent. 
 
¶2. (SBU) Summary (Con'd):  The rise in food prices has already 
translated into higher overall inflation in Indonesia.  Analysts 
worry that the need to aggressively fight inflation and slowing 
world demand will push Indonesia's growth rate below 6.0%, with 
limited potential for new job creation or poverty alleviation.  GOI 
policies to respond to the food crisis center on increased subsidies 
and revised trade policies rather than longer term investments in 
agriculture.  Post recommends the GOI take a comprehensive approach 
to the food price issue that includes cash transfers to alleviate 
the burden on poor households and policies to revitalize the 
agriculture sector.  Post also recommends that Indonesia and the 
U.S. coordinate with countries in the region to discourage rice 
hoarding.  End Summary. 
 
Jakarta Cables on Food/Commodity Price Issues 
--------------------------------------------- 
¶3. (U) Post has reported on the political and economic impacts of 
food prices in the following cables:  Jakarta 86, Jakarta 204, 
Jakarta 216, Jakarta 264, Jakarta 286, Jakarta 671, Jakarta 684, 
Jakarta 762, Jakarta 780, Jakarta 848, 07 Jakarta 2857, 07 Jakarta 
2997, 07 Jakarta 3027, 07 Jakarta 3056, 07 Jakarta 3208. 
 
Demand 
------ 
¶4. (SBU) Rice is the most important food source in Indonesia.  Rice 
accounts for roughly one-quarter to one-third of poor and near poor 
household spending.  With roughly 50% of Indonesia's population at 
or near the poverty line, a rise in the price of rice could 
substantially reduce the standard of living of over 100 million 
Indonesians.  The World Bank estimates that every 10% rise in the 
price of rice puts an additional 2 million people below the poverty 
line (income of $1.55 a day or less).  In contrast to the 
international price, the cost of rice has declined in Indonesia over 
the past year, as rice prices were already high relative to 
international prices in 2007.  But the international price is now 
$700 per metric ton (MT) higher than the price in Indonesia, 
creating a significant incentive to smuggle rice out of the country 
and raising the risk that prices will climb again rapidly this year. 
 Although analysts expect the rice harvest to be better than last 
year, the U.S. FAS projects that Indonesia needs to import roughly 1 
million tons of rice before at the end of the year to meet 
consumption needs.  Recent studies reveal that 80 percent of the 
Indonesian population consumes more rice than it produces.  In 
addition, in contrast to other economies, high rice prices have 
tended to lower real incomes in rural areas in Indonesia, the 
experts warned. 
 
¶5. (U) Indonesians also consume large quantities of sugar, soybeans, 
flour (mainly as a base for instant noodles), palm oil, chicken and 
eggs.  The retail price of flour and soybeans have risen 70% and 
44%, respectively, in the past 12 months.  The price of cooking oil 
and instant noodles are up roughly 30% in the past year.  The price 
of sugar has remained fairly constant this year. High prices for 
 
JAKARTA 00000868  002 OF 005 
 
 
Indonesian staple foods are likely to persist given that inadequate 
harvests, growing demand from emerging markets, and increased use of 
food to produce alternative sources of energy continue to push up 
international prices.  The high price of soybean meal, which farmers 
use as poultry feed, has also helped drive up the price of chicken 
and eggs, a key source of protein in Indonesia, by roughly 30% over 
the past year.  The rise in food prices has already translated into 
higher overall inflation in Indonesia. 
 
¶6. (U) Analysts expect high rice and other food prices to hit 
hardest in Java, where income and job growth remain limited. 
According to executives at Indofoods, sales of wheat base products 
fell most dramatically in Central Java when the price of wheat began 
to rise, providing support for the view that purchasing power is 
lowest in that area.  Anecdotal information suggests that 
Indonesians are responding to higher food prices by buying smaller 
quantities of food more often and in some cases substituting lower 
cost alternatives. 
 
¶7. (SBU) Java is also likely to be the source of most rice smuggling 
efforts as roads and transportation links there are superior to most 
other parts of the country, making it easier for illegal traders to 
move goods.  According to discussions with local traders, 
inter-island trade is up substantially this month, from around 
200-250 MT/month to around 500-600 MT month.  Traders note that the 
increase in activity reflects pre-positioning in rice deficit 
regions in anticipation of local price increases.  However, experts 
also worry this could be an early sign of smuggling.  Most of the 
rice is moving from Java to Sulawesi, where rice is easily smuggled 
to the Philippines.  Incomes outside of Java have increased in 
response to increased investment in non-food commodities and palm 
oil, according to local analysts. 
 
Supply 
------ 
 
¶8. (SBU) Production of palm oil, rubber, coal, and metals has 
increased in Indonesia in response to higher prices.  Food 
production has been slower to respond. The GOI has failed to 
meaningfully invest in the agriculture sector over the past decade, 
resulting in deterioration in agriculture productivity.  Experts 
note that Indonesia's fertilizer and seed technology is 30-40 years 
old, while irrigation systems continue to age without funds for 
repair.  Indonesia may also lose as much as 30 percent of its 
harvest in the transition from farm to market due to antiquated 
harvesting techniques.  Land use restrictions also severely limit 
the size of farms, inhibiting expanded production.  The lack of 
investment in roads and transportation systems in Indonesia limits 
farmer's access to markets and their ability to respond to higher 
prices. 
 
¶9. (SBU) Indonesia's fuel and electricity subsidy scheme also 
restricts the amount of money available to invest in agriculture 
infrastructure or provide shorter term assistance to the poor.  If 
oil prices remain near $100 per barrel, Indonesian could spend as 
much as $25 billion (roughly 25 percent of the budget) on subsidies 
this year.  Despite these problems, experts expect rice production 
to be higher this year due to better weather conditions. 
 
Political Impact 
---------------- 
 
¶10. (SBU) There have been numerous protests against rising food 
prices in recent months, but none have been violent.  The level of 
dissatisfaction with the current government is rapidly rising, but 
the President remains the front runner in the 2009 Presidential 
elections at this time.  Food price increases in Indonesia to date 
are concentrated in soybeans, wheat, and palm oil, which comprise a 
considerably smaller portion of the average Indonesian diet compared 
with rice.  Public dissatisfaction with the government is likely to 
rise significantly if rice prices begin to increase at a rapid pace. 
 In a sign that food prices have already had an impact on poor 
 
JAKARTA 00000868  003 OF 005 
 
 
household budgets, government stocks of low cost, poor quality rice 
have declined significantly in recent months. (Note: For additional 
political analysis please see Jakarta 684. End note.) 
 
Economic Impact 
--------------- 
¶11. (SBU) The rise in food prices has already translated into higher 
overall inflation in Indonesia.  The CPI inflation rate jumped to 
8.2% (YoY) in March, well outside the central bank's 4-6% target 
range.  Some analysts predict the rate could rise as high as 10% 
before the end of the year.  The GOI's 2008 GDP growth projection of 
6.4% is now well above most market forecasts, due to disparate views 
between the GOI and analysts on domestic demand and investment 
rates.  The government projection is based a continuation of current 
domestic demand and investment trends, and only a modest decline in 
net exports.  However, market analysts note that soaring food prices 
and low job growth have reduced consumer confidence, which is now at 
a two year low.  If inflation rates remain high, Bank Indonesia (BI) 
will also need to raise interest rates, which could significantly 
slow consumer finance and investment. 
 
¶12.  (SBU) On the external side, most analysts expect Indonesian 
exports to continue to benefit from high commodity prices, but 
predict Indonesian manufacturing exports will decline this year in 
response to flagging demand in Japan and the United States.  Some 
GOI advisors have also stated that BI plans to actively maintain or 
increase the value of the Rupiah in an effort to limit imported 
inflation, a move that could hurt Indonesian exporters.  The cost of 
imported food and commodity-based finished products are also likely 
to lift the import bill this year, potentially reducing the trade 
balance. 
 
¶13. (SBU) The expected slowdown in manufacturing exports will also 
disproportionately impact jobs, potentially increasing the number 
people vulnerable to poverty.  Every $1 billion in manufacturing 
exports creates 242,000 jobs, whereas the same amount of exports of 
coal, mining, or chemical products create only 12,000, 43,000, and 
8,000 jobs, respectively, according to research study by Chatib 
Basri of University of Indonesia and Gustav Papanek of Boston 
University.  The same study notes there have been no new jobs 
produced among large and medium firms in Indonesian in the last ten 
years because of stagnant growth in job-creating export sectors such 
as manufacturing.  Yet 20 million people have joined the workforce 
since 1997.  Most of these people are currently underemployed in the 
agriculture sector, living on very low wages and remaining extremely 
susceptible to poverty, according to Basri and Papanek. 
 
¶14. (SBU) Analysts note that investors are increasingly worried 
about the ability of the GOI to control the budget in light of 
rising food and oil prices, underscoring the importance of prudent 
policy making in the current environment.  According to government 
officials, the President plans to approve a 25% increase in the 
price of subsidized fuel and kerosene in the next week, in an effort 
to increase fiscal space to deal with the food crisis.  Analysts 
link the move to growing market concerns about the size of the 
subsidy bill. (see septel)  Markets declined sharply in April in 
response to worries that the fuel subsidy regime presents an 
unlimited liability to the government.  The Indonesia Stock Exchange 
index fell 7.1% within the first week of April and the yield on 
5-year Indonesian Rupiah government bonds rose to 11.6% from 10.4% 
over that same period, according to a recent Standard Chartered 
Report. 
 
¶15. (SBU) Financial markets are also nervous about inflationary 
pressure in Indonesia.  A recent report from HSBC cites Indonesia 
(along with Vietnam) as the most "behind the curve" in terms of 
fighting inflation, due to monetary policy loosening in 2007. 
Reducing the fuel subsidy may increase inflation by as much a 3 
percentage points, according to HSBC analysts.  Six months ago 
financial analysts expected the Indonesian economic growth to run 
close to 7.0% in 2008, on higher investment, domestic consumption, 
and strong exports.  Analysts now worry that the need to 
 
JAKARTA 00000868  004 OF 005 
 
 
aggressively fight inflation and slowing world demand will push 
Indonesia's growth rate below 6.0%, with limited potential for new 
job creation or poverty alleviation. 
 
Environmental Impact 
-------------------- 
¶16. (SBU) Rising CPO prices have accelerated the growth of oil palm 
plantations throughout Indonesia, particularly in Kalimantan, and 
added to pressures for significant expansion in Papua.  This 
expansion in acreage is often linked to deforestation, as companies 
or individuals clear forested land to plant oil palm -- a more 
profitable tactic than planting on existing non-forested land, which 
entails foregoing a quick return from the harvested timber.  At 
times, land owners fail to plant cleared land with oil palm, leading 
to deterioration of water catchment areas and increasing runoff. 
Anecdotal evidence does not suggest any similar large-scale trend 
with farmers clearing land to plant rice or other commodity food 
crops, though, in the past, encroachment and coffee planting in 
national parks in Sumatra was associated with increases in the price 
of coffee. 
 
Government Policy Response 
------------------------- 
¶17. (SBU) On February 4, Deputy Chief for Coordination of 
Agriculture and Marine Resources Bayu Krisnamurthi announced a host 
of new and ongoing policies designed to stabilize food prices.  GOI 
policies to respond to the food crisis center on increased subsidies 
and revised trade policies rather than longer term investments in 
agriculture.  The policies include soybean price subsidies for 
small-scale producers (Rp 1,000 per kg), which has not yet been 
implemented, rice price subsidies (Rp. 1,600 kg) for 15 kg of rice 
per household per month, and cooking oil price subsidies (Rp. 2,500 
per liter) for poor families.  In addition, the GOI will temporarily 
eliminate import duties on flour and soybeans, and lower import 
duties on rice to Rp 450 per kg from Rp 550 per kg.  The new 
policies also relax import standards for wheat.  The stabilization 
plan includes provisions to raise the export tax for palm oil and 
derivative products from 10% to 15% and expand the categories of 
cooking oil eligible for government-paid value added tax for 
domestic sales.  The GOI also announced policies to accelerate the 
provision of high quality seeds and promote the development of wheat 
alternatives. 
 
¶18. (SBU) The GOI has focused more recent policies on rice. The GOI 
banned rice exports of rice by anyone except the state-owned Bureau 
of Logistics (BULOG).  The GOI also raised the price of rice that 
BULOG pays to farmers by 10 percent to 2200 Rupiah per kg. 
According to officials from the Ministry of Finance, the GOI also 
plans to announce a cash transfer to poor households in the coming 
weeks, to offset the impact of rising food prices and fuel prices. 
The GOI has not announced large scale plans to improve 
infrastructure or reduce inefficiencies in the agriculture sector. 
According to press reports, the President recently accepted a 
proposal by the Indonesian Chamber of Commerce (KADIN) to establish 
a committee to streamline regulations and reduce bureaucratic 
requirements for investment in the commodities and agriculture 
sector.  However, it remains unclear if this committee will be an 
effective means of attracting investment to the sector. 
 
Impact of Post Programs 
----------------------- 
¶19. (U) USAID established the Agribusiness Market and Support 
Activity (AMARTA) project to increase productivity, improve quality 
and expand access to markets for Indonesia's agribusiness 
stakeholders.  As a result of the increased worldwide demand for 
rice, the AMARTA program has established a pilot project in the 
village of Agimuga, Papua.  This project will provide technical 
training for good agriculture practices for rice planting and 
harvesting.  It will also provide suitable seeds and technical 
assistance on pest control in order to increase production of this 
staple. 
 
 
JAKARTA 00000868  005 OF 005 
 
 
Policy Proposals 
---------------- 
¶20. (SBU) Post recommends the GOI take a comprehensive approach to 
the food price issue by 1) providing cash transfers to the poor to 
increase purchasing power (rather than imposing price controls); 2) 
increasing investment in agriculture infrastructure and extension 
services and reducing restrictions on land and seed use to allow 
farmers to respond to higher prices; and 3) encouraging investment 
in labor-intensive manufacturing to increase job growth and reduce 
the incidence of poverty in Indonesia.  Post also recommends the US 
and Indonesia work with ASEAN and other Asian nations to discourage 
rice hoarding and correct the current distortions in the world rice 
market. 
 
HUME