Insights

Indonesian Flying Chicken

The Indonesian poultry business is a fundamental part of the national economy of Indonesia, contributing to 65% of all animal protein and providing work for 10% of the national labour force. It is a widespread news that Indonesia is fronting a significant chicken deficiency which started last year and has continued to worsen this year. Despite this industry shortage, poultry stock prices have experienced tremendous gains.

Main Players

The poultry market is dominated by a few main players in Indonesia, mainly PT Charoen Pokhand, PT Malindo Feedmill and PT Japfa Comfeed. Even though expectations for the trade are strongly positive, costs for both broiler chicken and eggs are always higher in Indonesia due to variances in demand and supply. Indonesia’s Poultry Association revealed the supply of chicken will further drop from 3.2 billion to 3 billion in 2019. On the other hand, this scarcity of supply has boosted the share prices of poultry producers in the industry.

According to the latest report by Bloomberg, the growth of companies is as follows:

Poultry producers 2019 2018
PT Charoen Pokphand Indonesia 2.8% 140%
PT Malindo Feedmill 20% 89%
PT Japfa Comfeed 27% 65%

Bloomberg also stated that PT Charoen Pokphand Indonesia is projected to report the highest profit for 2018, its most extensive net profit margin in five years.

Risks for The Industry

There are several policies affecting poultry production in Indonesia, and therefore the prices of eggs and chicken in the market. A government ban on the use of antibiotics as a growth promoter in livestock was meant to reduce the risk of antimicrobial resistance. Nonetheless, this factor is one of the main contributors to the low rate of chicken supply. Moreover, according to Article 14 of the Regulation of the Minister of Agriculture (MOA) 57/2015 on the export and import of plant-based animal feed, product quality has to meet the Indonesian National Standard (SNI) which is not based on internationally-approved standards making the entire poultry production and importing processes more complicated. Furthermore, Article 2 of the above-stated regulation found the halal requirements as stipulated by the Islamic Supreme Council of Indonesia (Majelis Ulama Indonesia / MUI), which formally identifies 45 Islamic halal bodies in 26 countries. The material on halal necessities are only available in Bahasa Indonesia, which may make it challenging for importers to comprehend fully.

Also, higher maize prices and government interference pose a threat to the productiveness. Although global feed prices persist much lower than Indonesian prices, the government continues to chase its political objective of self-sufficiency. This agenda may lay the ground for higher production costs in other industries as well. The ultimate consequence of this ploy is higher end-user prices, castigating the people with the lowest purchasing power the most. Consequently, while an autarchic approach may seem favourable and in the national interest, that very interest be detrimental in other industries.

Furthermore, infrastructure influences the performance of economic structure such as the friction that has occurred in the poultry industry on a large scale. Additionally, port infrastructure and road connections between cities in Indonesia are inadequate. As such, the retail price is also affected by these transportation costs. The poultry facilities are not located in the main cities or in the neighbourhoods of ports but are located in rural areas, accessible only after several hours of travelling.

Recommendations

To correct the supply deficiency of the poultry industry, the government can intervene and request the big players to sell Day Old Chicken at a discounted price to independent farmers. Although the government is left with limited opportunity to act promptly in this situation, the government can use a long-term strategy to control this matter. They can implement this through policy recommendations such as harmonising of regulations, stock import liberalisation, maize import liberalisation and investing in infrastructure.

End Note

In a globalised economy,
international trade can fill cavities in domestic production, and it may be that imports are a better resolution than the autarchic attitude of ‘Do It Yourself’ that seems to enthuse some of the latest Indonesian policies. A shortage in demand and supply in the poultry market has caused rate hikes in stock prices of the major industry players, and it is a virtuous opening for investors looking for overseas shares and stock trading since this growth has exceeded the expected targets and revenue. Since the government has not initiated any changes to reverse or calm the seas the situation might be exacerbated, and the major players will be the only ones to benefit.

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