3. STRENGTHS AND WEAKNESSES OF THE INDONESIAN DAIRY INDUSTRY - Paul Riethmuller and Dominic Smith (Department of Economics, The University of Queensland)

Paul Riethmuller and Dominic Smith
Department of Economics, The University of Queensland, Brisbane, Queensland, Australia

As discussed in Hutabarat et al. (1994), the Indonesian dairy industry is based on smallholder farms grouped into co-operatives. Farm size is small, with most farms having no more than three to four head of milking cows. The dairy farms are based on confined rearing of cattle with forage grasses being gathered from outside the farm in a “cut and carry” system. This involves the farmer, or agricultural labourers (some of whom may be farmers), cutting and collecting grasses from the farmer’s land, or from along the sides of roads, irrigation ditches, forests or other such places. In the early to mid 1990s there were around 75,000 dairy farms in Indonesia grouped into approximately 200 co-operatives.

Since 1979, the development of the dairy industry has been encouraged by a number of government policies. The most visible of these was a mixing ratio policy that obliged domestic processors to absorb all domestic production at “reasonable” prices. These prices were based upon production costs of processors and the prices of competing products at the retail level. Welfare effects of the mixing ratio policy, now abolished as part of the 1998 IMF reform program for the Indonesian economy, are discussed in Riethmuller et al. (1999).

Despite the rapid increases in farm and cattle numbers, and the growth in domestic milk production, by the standards of countries with economically efficient dairy industries - examples are Australia and New Zealand - the performance of the industry has been weak. Many dairy co-operatives have failed, and others are plagued by problems such as high levels of bad debts and low milk quality.

Moreover, prices have been high. According to Erwidodo and Hasan (1993), domestic prices of dairy products such as powdered milk were at least double border prices in the early 1990s. Participants at all levels of the industry have voiced their desire for the dairy industry in Indonesia to become more competitive in order to meet the challenges that lie ahead. In order to improve competitiveness, it is important that there be some general consensus as to what the problem areas are for the industry. In this way, government and industry will be able to formulate programs that will be in the best long term interest of the industry.

This chapter uses three sources of data on strengths and weaknesses of the Indonesian dairy industry. These are a survey of dairy farmers and co-operatives, a questionnaire presented to high level officials connected with the dairy industry and finally problems identified by the Directorate General of Livestock Services (DGLS) in West Java. The strengths and weaknesses identified are then compared with the experiences of a similar smallholder dairy industry, namely that of Zimbabwe and South Africa. The information presented here is believed to be the first attempt to document the views of industry leaders in Indonesia.

PROBLEMS IDENTIFIED BY DAIRY FARMERS AND CO-OPERATIVES

In July 1995, staff from the Centre for Agro Socio-Economic Research (CASER) and the Department of Economics at The University of Queensland conducted a survey of dairy farmers and co-operatives in East, Central and West Java. Forty-five dairy farmers and 30 co-operatives representing over 15,000 dairy farmers participated in this survey. Different questionnaires were used for the dairy farmers and for the co-operative officials. The main focus of the survey was to collect economic, technical, demographic and socio-economic data for the dairy industry. In addition to the collection of this largely quantitative information, farmers and co-operative officials were asked to nominate what they thought were the main problems that they believed confronted dairy farming. This method of identifying the problems and opportunities faced by smallholder farmers owes much to the “farmer-first” approach advocated by Chambers et al.(1989) and also to the Participatory Rural Approach (PRA) techniques favoured by the Intermediate Technology Development Group. Both these approaches are based on the principle that local people best know their own situation, understand their problems and often have a good idea of possible solutions (Young, 1992).

Table 3.1 lists the major problems identified by farmers and co-operative officials during the course of the survey.

Table 3.1. Constraints identified by smallholder farmers and co-operative officials

Constraint	Sub-classification
Nutrition	Availability of forage grasses Lack of water Quality of concentrates Nutritional management
Herd record keeping	Low level of herd improvement Non identification of animal health problems Poor reproductive performance
Hygiene	Lack of water Increase in mastitis incidence High level of milk contamination
Milk testing	No clear price signals to farmers
Animal health	Many diseases Lack of resources for veterinary staff Lack of experience and education
Genetics	Inappropriate genotype for Indonesian conditions Long calving intervals
Extension provision	Lack of resources to train/provide extension workers

Source: Farmer and co-operative surveys

A number of the problems identified above are interrelated. One common thread is the lack of adequate extension services. The smallholder dairy industry is largely based around farmers who have had little or no prior experience in livestock management. Once they are supplied with cattle (frequently expensive imported heifers)[1] there appears to be little or no follow-up work to ensure that they are able to cope with difficulties that invariably arise. This lack of adequate extension services is neither a reflection of a lack of personnel (de Haan [1989] has estimated that there are at least 29,000 extension workers in Indonesia) or a lack of ability on the part of workers. The main reason for lack of adequate extension services appears to be a lack of resources to provide the service to the more than 75,000 farmers in the dairy industry.

Solutions to many identified problems could perhaps be delivered by a large scale extension project. The emphasis of such a project would vary from co-operative to co-operative depending upon the particular set of problems identified by the participants in that area. According to JICA (1995), the potential gains from such a project could be large. In a pilot extension program undertaken in 1992 with six Javanese dairy co-operatives, improvements in technique of over 50 per cent were achieved after only two extension visits at each co-operative. This can be compared with average improvements in technique reported by Chamala (1993) in South East Asia as a result of different method of extension delivery. These ranged from a low of 19 per cent for indirect influence to a high of 33 per cent for group sessions.

WEAKNESSES AS IDENTIFIED BY THE DIRECTORATE GENERAL OF LIVESTOCK SERVICES

Soehadji (1992) reports that the Directorate General of Livestock Services has major areas of concern with the dairy industry in the following categories:

• feeding management and quality;
• reproduction problems and long calving intervals;
• mastitis;
• quality of milk;
• farm management;

The Directorate General of Livestock Services West Java (1996) has expanded on these broad areas of concern to provide details of specific perceived problems in West Javanese dairy farms. These are summarized in Table 3.2.

Table 3.2. Problems identified in the West Javanese dairy sector

Problem area	Perceived problem
Farmer	Farm size too small Lack of expertise Incorrect drug application
Dairy cattle	High calf mortality Reproductive disorders Mastitis Brucellosis Tuberculosis High calving interval High services per conception
Animal nutrition	Pesticide residues Lack of available land Seasonal nature of feed production
Milk processing	Poor quality of milk Lack of technology applicable to the village
Marketing systems	Highly variable price Dependence on IPS

Source: DGLS (West Java), (1996).

OPINIONS OF DAIRY INDUSTRY OFFICIALS

In January 1996 a seminar on the Indonesian Dairy Industry was held in Bogor, Indonesia. Participants in the seminar included officials of many organisations associated with the Indonesian dairy industry. These included officials of GKSI, DGLS, CASER, the Ministry of Agriculture, dairy co-operatives and milk processors.

During the course of the seminar, participants were asked to nominate what they thought the strengths and weaknesses of the Indonesian dairy industry were, and their opinions on the major problems facing the dairy industry. Table 3.3 and Table 3.4 show the respondents’ opinions on the problems faced by the industry and the industry’s weaknesses.

Table 3.3. Opinions on problems facing the Indonesian dairy industry, January 1996

Problem classification	Problem	No. of respondents
On-farm	Farm level efficiency	4
	Low level of technology	2
	Genetics	2
	Cost of feed	2
	Lack of forage land	2
	Milk quality	2
	Resources	1
	High level of capital needed	1
	Small scale of farms	1
	Feed availability	1
Off-farm	Co-operative management	3
	Lack of incentive	2
	Marketing	1
	Institutional constraints	1
	Monopoly of processors	1
	High price of milk	1
	Distribution of imported cattle	1
	Credit dispersal	1

Source: Survey of seminar participants

Table 3.4. Opinions on weaknesses of the Indonesian dairy industry, January 1996

Weakness classification	Weakness	No. of respondents
On-farm	Low level of technology	3
	Low level of farm efficiency	3
	Low level of expertise	2
	Small scale of farms	2
	Animal health	1
	Feed availability	1
	Milk quality	1
	Climatic adaptation	1
	Low farmer incomes	1
Off-farm	Relationship between farmers and co-operative	2
	Corruption within co-operatives	2
	Marketing	2
	Management of co-operatives	1
	Transport infrastructure	1
	Bad planning	1
	No marketing boards	1
	Extension	1
	Price signals	1

Source: Survey of seminar participants

The same group of officials were asked to nominate what they considered to be the main strengths of the Indonesian dairy industry. The results are presented in Table 3.5.

Table 3.5. Opinions on strengths of the Indonesian dairy industry, January 1996

Strength	Number of respondents
High level of potential demand	12
Support from government policies	4
Provides rural employment	3
Availability of natural resources	2
Based on smallholder farms	2
High level of farmer interest	1
Climatic suitability	1

Source: Survey of seminar participants

Some of the strengths cited are endogenous to the industry. These include the provision of rural employment and the small scale nature of the industry. It is interesting to note that the respondent who identified the smallholder nature of the dairy industry as a strength also identified the small scale of dairy farms as a weakness.

OPINIONS FROM A SIMILAR INDUSTRY - SMALLHOLDER DAIRYING IN SOUTHERN AFRICA

The smallholder dairy industries of Zimbabwe and South Africa were chosen to compare with the Indonesian experience due to a number of similarities between the two industries. Both industries are based upon the use of temperate breed cattle in the tropics (Fresian and Jersey); both are based on confined rearing, herd sizes are similar, climatic conditions are somewhat similar; and both industries have been faced with productivity and quality problems.

Kadzere (1992) uses data gathered in a survey of 36 dairy farms in Zimbabwe and South Africa and assesses the major problems faced by the participants. The results are summarized in Table 3.6.

Table 3.6. Problems faced in southern Africa’s dairy industry

Identified problem area	Specific problems
Animal breeding	No tropical breeds used Need to develop appropriate characteristics based on criteria of Vissac(1976)
Nutrition	Seasonal nature of forage production Poor nutritional quality of available forage No legumes used
Herd recording	Lack of usable animal production records
Size of Herd	Small herd sizes mean that returns to scale are not achieved
Extension availability	Lack of available extension resources

Source: Kadzere (1992)

CONCLUDING COMMENTS

The information presented in this paper is a useful starting point for policy makers contemplating the design of programs and policies aimed at bringing about improvements to the dairy industry in Indonesia. A prerequisite for the formulation of the most cost effective solutions is the correct identification of the problems. In the case of the Indonesian dairy industry, an important priority of research should be to determine the relative importance of various problem areas at the individual co-operative level.[2] In this way, effective policies and advice can be designed for the industry. Any assistance given should conform with the view of Wilson et al. (1992). Briefly they proposed that solutions have a high likelihood of sustainability; reach the participants who are most in need; uses local knowledge; and are effective in raising farmer incomes. It is unlikely that any single solution would work in all areas of Indonesia where dairying takes place. Instead, specific programs should be tailored to meet the requirements of particular locations.

A finding that was perhaps surprising was that no mention was made of negative externalities associated with the dairy industry, the most important of which are environmental problems. In those high income countries with large dairy industries and a relatively small land area - for example, the Netherlands, Japan and to some extent New Zealand - environmental considerations are given a high priority by policy makers. With Java’s population density being one of the highest in the world, environmental costs should be given higher weighting. The fact that this issue was not mentioned in the survey may be more a reflection of the affiliation of the respondents with the dairy industry rather than this particular issue.

REFERENCES

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de Haan,? 1992. The delivery of livestock services to smallholders. In P.W. Daniels, S. Holden, E. Lewin & S. Dadi, eds. Livestock services for smallholders: Proceedings of an International Seminar held in Yogyakarta, Indonesia, 15-21 November 1992. Jakarta, SMT.

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