Required Report - public distribution

**Date:** 10/24/2005

**GAIN Report Number:** ID5026

ID5026

**Indonesia**

**Dairy and Products**

**Annual**

**2005**

**Approved by:**

![](media/image1.wmf)Chris Rittgers

U.S. Embassy, Jakarta

**Prepared by:**

Chris Rittgers/Sugiarti Meylinah

**Report Highlights:**

In 2006, Indonesia's imports of milk powder are forecast to remain on
par with the previous year, breaking several consecutive years of
growth. Expectations for an erosion in consumer purchasing power as well
as higher fuel costs hinder prospects for continued growth in 2006.
Nonetheless, Indonesia will remain an important market for U.S. milk
solids, with expectations that 2006 will top the record-setting pace of
exports in 2005.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Annual Report

Jakarta \[ID1\]

\[ID\]

Table of Contents

[Executive Summary 3](#executive-summary)

[Production 3](#production)

[Consumption 3](#consumption)

[Trade 4](#trade)

[Stocks 4](#stocks)

[Tables 5](#tables)

# Executive Summary

Productivity in Indonesia's fluid milk production sector remains very
low, and Indonesia will remain an importer for the majority of its dairy
product needs. Due to expectations for an overall rise in consumer
prices, consumption in 2006 is forecast to remain stable, unlike in
previous years when demand achieved double-digit growth. Nonetheless,
diversification and specialization in the sector is expected to
continue, as consumers continue to look for new products. With little
increase in demand expected in 2006, growth in imports will be
constrained. However, U.S. dairy solids are increasingly competitive in
this market, and prospects for continued growth in U.S. sales remain
bright.

# Production

Indonesia's milk production sector consists of about 90 dairy
cooperatives with an estimated dairy cow population of about 320,000
head. On farm productivity is generally quite low, with the average
producer owning 3-4 cows and milk production at 10-12 liters/cow/day.
Domestic milk production in 2005 is estimated at about 48,200 tons,
accounting for about 30 percent of total needs, and is forecast to grow
only marginally in 2006.

Many structural factors inhibit growth in the sector: small farm
structure; a lack of technology and improved genetics; inadequate
acquisition, distribution, and cold storage infrastructure; insufficient
feed supplies; unfavorable weather; poor milk quality; inconsistent
hygiene and sanitation practices at the farm level; and a short
lactating period. These same factors lead to problems with milk quality.
Reportedly, the quality of fresh milk produced by local farmers often
does not meet the quality standards set by the dairy processors.

Government officials, the Indonesian Milk Industry Association, and the
Union of Indonesian Dairy Cooperatives have engaged in efforts to boost
the sector's efficiency and output, but the results of these programs
have been discouraging. Most recently, the dairy processors have been in
discussions with producer cooperatives to negotiate higher purchase
prices. However, meaningful gains in productivity would require
significant outlays of capital to create modern and competitive dairy
production units. Indonesia's current business climate makes prospects
for this type of investment in the dairy sector very doubtful in the
near to medium term.

Domestic fluid milk production is used for whole milk powder (WMP)
production. Local WMP production is expected to grow only slightly in
2006. There is no significant production of NDM, and domestic needs are
met entirely by imported products.

In contrast to the small-scale and relatively inefficient milk
production units, milk processing is dominated by a handful of dynamic,
competitive, and large companies. Five dairy manufacturers
(Nutricia/Sarihusada, Nestle Indonesia, Friesche Vlag Indonesia,
Indomilk, and Ultrajaya) dominate the industry, accounting for 90
percent of the total sales volume. These large firms produce a variety
of dairy based products, including infant foods, sweetened condensed
milk, and several types of beverages. Competition is fierce, with new
product development ongoing and marketing efforts designed to reach
consumers across the sprawling archipelago.

# Consumption

With expectations for an erosion in consumer purchasing power, demand
for milk powder is not expected to grow significantly in 2006. Higher
fuel prices are having an impact throughout the economy, and will likely
result in consumers reducing purchases of some products, including dairy
products. The higher fuel prices have also led to increased
manufacturing, storage, and transportation costs for the dairy
processors. Lack of growth in 2006 would represent the first time in
several years demand has not achieved double-digit growth.

Compared to its ASEAN neighbors, Indonesian per capita milk consumption
remains low at 6.5-7 liters/capita/year. Use of milk powder for
processing is the leading component of consumption. Top consumer
products include powdered milk (skim milk, infant and children formula,
and formula for pregnant and lactating women), sweetened condensed milk,
ready to drink milk (such as fresh milk, UHT, pasteurized and
homogenized dairy mix). With the increasing awareness of the better
nutritional value contained in liquid milk, the prominence of sweet
condensed milk in the consumption mix is declining, and more are turning
to liquid milk. The market share of liquid milk market is forecast to
reach 20 percent in 2006. While increasingly available in modern retail
outlets in urban areas, consumption of other dairy products, such as
cheese, butter, ice cream, and yogurt is still low. Nonetheless, further
product segmentation and specialization continues, including formulas
for babies to toddlers, pregnant & lactating woman formulas, elder
formula, high calcium, low-fat milk and multi-flavored milk beverages.
These specialized formulations are replacing the market share of
ordinary milk powders, such as instant milk powder and full cream
powdered milk.

# Trade

With expectations that consumption will remain stable in 2006, little
growth in imports is expected. Total milk solid imports are forecast at
around 165,000 tons in 2006, with NDM accounting for about 80 percent of
this quantity. NDM imports for 2005 are estimated to increase about 8
percent relative to the previous year.

Given their freight advantage and long historical presence in
Indonesia's dairy market, Australia and New Zealand continue to be the
dominant suppliers, but the US presence is growing. With international
prices levels reaching parity, US milk powder is competitive. In early
October 2005, landed NDM prices were quoted at \$2,100-\$2,200/ton, with
very little difference between landed U.S. prices and those from Oceana.
Processors also note that the quality of US powder continues to improve,
and is as good as that from New Zealand or Australia. As a result, US
prospects for exports to Indonesia remain bright. In 2005, U.S. exports
of dairy products to Indonesia should set another record.

To compensate for increasing input (fuel) and raw material (NDM) costs,
milk processors are increasingly substituting other dairy solids, such
as whey protein concentrate (WPC), for NDM in formulations. Therefore,
prospects for growth in WPC imports are strong as processors continue to
view this as a lower cost input in formulations.

One of many obstacles in importing dairy to Indonesia is that for every
shipment importers must attach the original copy of a Halal certificate.

On the export side Indonesia continues to trans-ship imported milk from
New Zealand to the Middle East and North Africa. This trade is estimated
at about 10-20,000 tons per year.

# Stocks

Any stocks are only held by the private sector as pipeline supplies.

# Tables

  -------------- ----------- ----------------- ---------- ----------------- ---------- -----------------
  PSD Table                                                                            

  Country        Indonesia                                                             

  Commodity      Dairy, Dry                                                 (1000 MT)  
                 Whole Milk                                                            
                 Powder                                                                

                 2004        Revised           2005       Estimate          2006       Forecast

                 USDA        Post              USDA       Post              USDA       Post
                 Official    Estimate\[New\]   Official   Estimate\[New\]   Official   Estimate\[New\]
                 \[Old\]                       \[Old\]                      \[Old\]    

  Market Year                01/2004                      01/2005                      01/2006
  Begin                                                                                

  Beginning      6           6                 6          6                 4          4
  Stocks                                                                               

  Production     45          45                45         48                0          50

  Intra EC       0           0                 0          0                 0          0
  Imports                                                                              

  Total Imports  21          21                22         26                0          31

  TOTAL Imports  21          21                22         26                0          31

  TOTAL SUPPLY   72          72                73         80                4          85

  Intra EC       0           0                 0          0                 0          0
  Exports                                                                              

  Total Exports  1           1                 1          1                 0          1

  TOTAL Exports  1           1                 1          1                 0          1

  Human Dom.     65          65                68         75                0          80
  Consumption                                                                          

  Other Use,     0           0                 0          0                 0          0
  Losses                                                                               

  Total Dom.     65          65                68         75                0          80
  Consumption                                                                          

  TOTAL Use      66          66                69         76                0          81

  Ending Stocks  6           6                 4          4                 0          4

  TOTAL          72          72                73         80                0          85
  DISTRIBUTION                                                                         

  Calendar Yr.   0           0                 0          0                 0          0
  Imp. from U.S.                                                                       

  Calendar Yr.   0           0                 0          0                 0          0
  Exp. to U.S.                                                                         
  -------------- ----------- ----------------- ---------- ----------------- ---------- -----------------

  -------------- ----------- ----------------- ---------- ----------------- ---------- -----------------
  PSD Table                                                                            

  Country        Indonesia                                                             

  Commodity      Dairy,                                                     (1000 MT)  
                 Milk,                                                                 
                 Nonfat Dry                                                            

                 2004        Revised           2005       Estimate          2006       Forecast

                 USDA        Post              USDA       Post              USDA       Post
                 Official    Estimate\[New\]   Official   Estimate\[New\]   Official   Estimate\[New\]
                 \[Old\]                       \[Old\]                      \[Old\]    

  Market Year                01/2004                      01/2005                      01/2006
  Begin                                                                                

  Beginning      12          12                10         10                8          14
  Stocks                                                                               

  Production     0           0                 0          0                 0          0

  Intra EC       0           0                 0          0                 0          0
  Imports                                                                              

  Total Imports  125         125               128        135               0          135

  TOTAL Imports  125         125               128        135               0          135

  TOTAL SUPPLY   137         137               138        145               8          149

  Intra EC       0           0                 0          0                 0          0
  Exports                                                                              

  Total Exports  12          12                10         10                0          20

  TOTAL Exports  12          12                10         10                0          20

  Human Dom.     115         115               120        121               0          120
  Consumption                                                                          

  Other Use,     0           0                 0          0                 0          0
  Losses                                                                               

  Total Dom.     115         115               120        121               0          120
  Consumption                                                                          

  TOTAL Use      127         127               130        131               0          140

  Ending Stocks  10          10                8          14                0          9

  TOTAL          137         137               138        145               0          149
  DISTRIBUTION                                                                         

  Calendar Yr.   0           0                 0          0                 0          0
  Imp. from U.S.                                                                       

  Calendar Yr.   0           0                 0          0                 0          0
  Exp. to U.S.                                                                         
  -------------- ----------- ----------------- ---------- ----------------- ---------- -----------------