Report Highlights:

Broiler production in 2006 is forecast to grow moderately to 672,000 tons, 5 percent above production in 2005. Avian influenza (AI) and rising input costs, particularly fuel, are expected to hinder potential for more rapid growth in 2006. The 2005 production estimate has been reduced due to a temporary drop in demand that occurred when three human AIrelated deaths were reported.

SECTION I – SITUATION AND OUTLOOK: Production

Broiler output is forecast to reach 672,000 tons in 2006, just 5 percent above that in 2005. The sector will still be operating at well below full capacity, and this forecast is about 60,000 tons below the record output achieved in 2003. However, Avian Influenza (AI) and rising input costs hinder any expectations for more rapid growth. AI is now endemic in Indonesia, with cases reported from North Sumatra, throughout Java, South Sulawesi, Kalimantan, and in many of the Islands of Eastern Indonesia. Twenty-one of Indonesia’s thirty-three provinces have reported cases. While the number of reported cases has declined significantly since the beginning of the outbreak in August 2003, and vaccination has reportedly been successful in curbing the disease in the largest integraters’ production and breeding facilities, the disease is proving almost impossible to eradicate from smaller production farms and back-yard flocks. The challenges hindering effective control of the disease include: lack of consistent reporting, lax implementation of animal movement controls and other bio security measures, unregulated live bird markets, inadequate resources to conduct mass culling and purchase vaccines, and the prevalence of backyard chickens among other avian species. These conditions are likely to continue unabated through 2006, limiting potential for faster growth in output.

In addition to AI, economic factors will likely restrain production prospects in 2006. Indonesia is expected to have to reduce fuel subsidies in the near future, increasing the cost of this important input for poultry producers. In addition, continued weakness in the rupiah will weigh heavily on the cost of imported inputs, particularly soy meal, corn, and breeder stock. These higher costs will further squeeze margins of an industry characterized by overcapacity and already struggling to maintain profits.

The 2005 production estimate has been reduced to 640,000 tons, or just 2 percent above 2004. Expectations for a stronger rebound in output in 2005 were dashed with the announcement in July 2005 of first human deaths related to AI. The news of the three deaths lead to wide and sometimes misleading coverage in the local press, causing a sharp drop in consumer confidence and a shock to demand. In the six weeks following the announcement, demand for poultry dropped in some locales as much as 25 percent as consumers turned away from chicken meat in favor of fish. In late August 2005, sales in local markets indicate demand has started to rebound, and as Ramadan approaches in October 2005, expectations are that demand will fully recover. However, fallout from the three human deaths are a continuing drag on consumer confidence, clouding future demand prospects, and any additional human cases would have a severe impact on demand and output.

Believing that a complete “stamping out” (i.e., culling) policy would not be economically viable, the Ministry of Agriculture has opted for culling only infected poultry, with mass vaccination and bio- security as the main front-line control measures. Reportedly this policy has been effective for larger companies with the capacity to purchase vaccines and the sophistication to implement strict bio-security measures, but these measures have not been fully implemented among smaller producers, and remain quite inconsistent and very difficult to implement at the village level among backyard poultry.

Day-Old-Chick (DOC) production for broilers in 2005 is estimated at approximately 19 million head/week or about 962 million per year and is expected to reach around 20 million in 2006. Four fully integrated, five semi-integrated, and sixty-four non-integrated breeder farms account for the chick production. The sector still relies on imported breeding stock.

Feed demand for poultry production (broiler and layer only) in 2005 is estimated to be around 5.8 million tons, (excluding that for swine, aquaculture, dairy and cattle feed, which is estimated at about 1 million tons) or 45 percent of the 11 million ton feed millers capacity from 26 companies (19 of them are the main players). Feed accounts for sixty to sixty-five percent of poultry production costs, and a high percentage of that is imported, particularly the protein needs. The poultry industry suffered another blow when the GOI banned U.S. Meat and Bone Meal (MBM) imports on July 1s t 2005 due to the newly reported BSE case in the United States. The sector can now only import MBM from New Zealand or Australia.

Feed demand is expected to rebound in 2006, but continued high fuel prices, as well as the weak local currency will continue to be constraints to the sector’s potential. With relatively low per capita broiler consumption and an increasing population, vast potential for further growth exists. However, the endemic AI problem, continued economic instability, and deficiencies in cold storage, distribution, and processing must still be overcome for the sector to achieve a path of continued steady growth.

Consumption

Following the demand shock associated with the report of human AI deaths in 2005, consumption is forecast to rebound about 5 percent in 2006. Consumption dropped about 20 percent after the human AI deaths were announced in July 2005, but by August 2005, consumer confidence was returning, and the sector is hopeful that consumption will fully rebound as Ramadan approaches in October 2005. Interestingly, quick–service chain outlets, located almost exclusively in urban areas, reported normal sales during the time when demand in the rest of the sector dropped. This indicates the growing role these outlets now play with urban consumers. For 2005, broiler meat consumption is estimated at 640,000 tons, or 2.9 kg/capita/year (projected 220 million population at 2005), which is still well below many of Indonesia’s ASEAN neighbors. While consumption in 2005 is expected to show a slight year-to-year increase, it is much less than what was estimated prior to the fallout from the human AI cases.

Trade

The ban on imported U.S. chicken parts implemented in September 2000 continues, and imports of other poultry meat remain relatively insignificant. One poultry company was exporting a minor quantity of processed poultry products to Japan prior to the appearance of AI in 2003. Eligibility to export to Japan has not been reinstated since the confirmation of AI.

Policy

As stated above, the de-facto ban on U.S. leg quarters imports remains, and no change in this policy is expected. In January 2005, the Government of Indonesia (GOI) released a revised list of agriculture tariffs, including an increase on that for chicken leg quarters (HS 0207 14 2500) from 5 to 25%. This led some in the sector to believe that the ban had been lifted. While theoretically leg quarter imports could occur, GOI has still not approved any U.S. plants to export broiler parts, and the ability of these products to be certified Halal in the United States is still questioned by local authorities. Furthermore, the Ministry of Agriculture controls trade through the issuance of import permits, which are withheld for poultry parts. The GOI has stated that for leg quarter imports to resume, first an “overall review” of the U.S. poultry inspection system and Halal certification process must be completed, and then individual plants must be reviewed.

Even after completing the above procedural requirements, it is questionable whether the local poultry industry would allow leg quarter imports to resume. The sector remains adamantly opposed to allowing U.S. leg quarter imports, which they view as one of the primary “threats” to the health of the industry, even though imports haven’t occurred for almost five years. While concern over "Halal” certification was used as the original justification for the barrier and still is by GOI, the private sector still couches the ban more in economic terms as a needed protectionist measure. As an indication of how the sector might react to any easing of leg quarter imports, in March 2005 the Ministry of Agriculture agreed to open the border to imports of poultry products from certain areas of Malaysia. The Ministry quickly had to rescind this decision just a few weeks later due to the outcry from the local poultry industry.

Efforts to remove the ban on U.S. broiler parts can be expected to provoke a fierce backlash from the local industry. Meanwhile, the sector continues to represent one of the most important buyers on U.S. agriculture products in Indonesia. Total purchases (feed components and live chicks) by the industry in 2005 are estimated to be around $150 million.

Further Information

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Source: USDA Foreign Agricultural Service - August 2005