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Cablegate: Eastern Indonesia: Rising Prices Push Indonesians to Reduce

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

© Scoop Media

 
 
 
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