Output Supply and Input Demand System of Commercial and Backyard Poultry Producers in Indonesia - By Jacinto F. Fabiosa, Helen H. Jensen, and Dong Yan, Center for Agricultural and Rural Development, Iowa State University - This study uses a normalized quadratic function to estimate the output supply of commercial and backyard broiler producers in Indonesia and the input demand for three major inputs: day-old chicks, feed, and labor.

Indonesia’s domestic broiler production has grown rapidly, in part because of a ban on imports of poultry parts and strict inspection and meat certification requirements. Whether Indonesia will continue to protect the domestic broiler sector and import feed grains and other inputs or whether it will directly import meat products is a relevant question to many stakeholders.

Data come from three datasets: a 1996 household survey and 1996 and 2000 surveys of commercial producers. For the most recent dataset, the own-price elasticity in both the output supply and feed input demand equations were found to be significant. The signs of the elasticities were theoretically consistent, with a positive supply and negative demand elasticity.

The magnitudes of the elasticities were smaller than expected (the supply elasticity was 0.285). The inelastic supply explains the high border protection imposed by Indonesia, which in turn implies that any income-driven expansion in the quantity of broiler product demanded would be quickly constrained by rising prices. Consequently, supply from imports would become attractive and would dampen any incentive for growth in the domestic sector. This result cast doubt on the long-term sustainability of Indonesia’s import substitution policy regime.

Introduction

Population growth, urbanization, and improvement in per capita real income have spurred the growth of meat consumption in Indonesia. Broiler consumption has gained an increasing share in the meat basket because of its lower price (the beef price is 2.26 times higher) and religious restrictions on other meats (e.g., pork). Table 1 shows that compared with pork and beef, only per capita broiler consumption shows an increasing trend since the 1997-98 macroeconomic crisis, reaching 3.12 kilograms (kg) per capita in 2003.

Combined with border protection, such as the ban on imports of poultry parts and strict inspection requirements for “halal” meat certification, the growth in broiler demand has encouraged an expansion of domestic broiler production. Broiler production increased by 17.25 percent in 1996. In turn, this has driven growth in the imports of corn and soymeal for feed production. A small importer of corn and soymeal in the 1980s, Indonesia is now importing more than one million metric tons a year of each of the two major feed ingredients. Roughly 80 percent of its imported corn is used for production of feeds for poultry.

However, Indonesia’s poultry sector suffered a serious blow following the country’s financial crisis of 1997 (when the rupiah depreciated by 244 percent in 1998, inflation skyrocketed to 75 percent, and real per capita income dropped from $1,000 in 1996 to $205). Production in 1998 was less than half of the 605 thousand metric ton pre-crisis level in 1996. The drop is due to the poultry sector’s strong ties to the exchange rate situation, with a large proportion of its operating costs based on dollar-denominated imports such as feed and breeder stock.

About 60 to 65 percent of the cost of production is accounted for by feed cost, with imported corn and soymeal representing the largest share. Recovery of the poultry sector was slow, reflecting lingering macroeconomic problems. Production exceeded the pre-crisis level only after six years, in 2002. The broiler sector is highly concentrated. It is reported that only five big companies control the importation of grandparent stock, production, processing, and the distribution of broiler meat. Roughly 90 percent of production is either through contractual arrangements or direct partnership with large integrators.

Indonesia’s rapid growth in domestic broiler production has been accomplished by maintaining a domestic price that is 55 percent higher than the world price before the crisis. (This has dropped significantly recently after the liberalization of the corn and soymeal markets and relatively higher world broiler price.) Despite its 70 to 50 percent bound rate under GATT, Indonesia’s duty for broilers is not prohibitive at 5 percent.

However, the real protection comes in the form of a ban on imports of poultry parts and strict inspection requirements for “halal” meat certification. With these restrictions in place, Indonesia has allowed only an insignificant amount of imports, representing a miniscule 0.56 percent of production. Whether Indonesia will continue to protect the domestic broiler sector and import feed grains and other inputs or whether it will directly import meat products is a relevant question to many stakeholders.

This study examines the production behavior of both commercial and backyard broiler producers in Indonesia in order to evaluate the growth potential of the sector and the sustainability of its importsubstitution policy regime. The research includes estimation of a theoretically consistent system of output supply of broilers and input demand for three major inputs: day-old chick stock, feed, and labor. The supply parameters are key in determining future growth potential of the sector as well as its feed requirements.

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Source: Center for Agricultural and Rural Development, Iowa State University - May 2004