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2. NUCLEUS SCHEME FOR SMALLHOLDERS (PIR) IN THE BEEF CATTLE INDUSTRY OF INDONESIA - Subandriyo, I.G. Putu, Agus Suparyanto and Ismeth Inounu (Research Institute for Animal Production)

Subandriyo, I.G. Putu, Agus Suparyanto and Ismeth Inounu
Research Institute for Animal Production, PO Box 221, Bogor 16002, Indonesia
The concept of the partnership model under a Nucleus Smallholder Scheme (Pola Intirakyat) in the beef cattle industry, was inspired by a successful similar program in the estate crop sub-sector. The main objective of the program is to minimize the burden of farmers as partners, with the assurance of the nucleus to supply raw materials and market the final products. A partnership, as the basic program to develop agribusiness in villages, is considered very promising to farmers in many aspects of life.

The concept of PIR has attracted government attention since there has been competition between the subsistence farmers and large scale enterprises in producing and marketing of final products. The bargaining position of subsistence farmers is very weak since they can not guarantee product supply. This weakness could be reduced if subsistence farmers could organise themselves under a cooperative scheme and could find a business partner who shared their objectives. On the basis of such an agribusiness oriented approach, it is expected that the performance of the farmer could be improved and this would create more employment opportunities in the village. As results, it is also expected that farmers, through development under the program could become the backbone of industry in meeting the demand for meat.

Most cattle farmers are subsistence farmers as judged by the ownership status of cattle. They only raise cattle to obtain the benefit of having offspring and the increase in body weight when the animal is fattened. Theoretically, the number of feeder cattle produced from the offspring has the potential to support a long term fattening program in Indonesia. Therefore, it is expected that given the opportunity, the economic development of the village could improve since the type and characteristic of this business is closely linked to the farmers daily life.

Soekartawi (1994) shows that there has been excellent growth in the estate crop, livestock and fisheries sub-sectors, reaching 5 to 6 per cent per year. This development gave an incentive to the government to further develop these sub-sectors. However, there are also negative issues that can hamper the approach. Simatupang et al. (1995) reported that any report that focused on the development of livestock PIR generally always arouses hot discussion on the relationship between the nucleus and partners, mainly on the topic of investment and profit sharing. Some policies that were designed to help the farmer in financial and managerial matters in many cases turned out to corner the farmer.

The village cooperative unit (Koperasi Unit Desa, KUD) as a motivator and an agent for farmers should be more pro-active in planning and implementing the program. A harmonious partnership can be achieved if both parties are responsible and functioning well, with the involved government official providing sufficient supervision of the business pattern, so that complaints between both parties are prevented.

DEVELOPMENT OF CATTLE FEEDLOT INDUSTRY AND PRODUCTION CAPACITY

As the fourth most populous country in the world after China, India and the USA, the Indonesian beef market provides an excellent opportunity to market agricultural products. Over the five years beginning in 1992, the demand for beef products grew very significantly, reflecting the increasing income per person and strong urbanization. Because of these factors, consumption of red meat increased from 1995 up to 1997 (Table 2.1).

Table 2.1. Demand and supply for beef products, 1995 - 1997

Description


Year

1995
(t)

1996
(t)

1997
(t)

Beef demand

381000

450702

498000

Supply of beef

359000

437181

468000

Imported beef

22000

13521

30000

Source: APFINDO (1997)
In 1997, 358000 t of the 468000 t of beef were produced by traditional farming systems with indigenous breeds such as Bali, Ongole (Peranakan Ongole, PO) and Madura cattle. The feedlot industry contributed 80000 tonnes and another 30000 tons was supplied by imported beef. The demand for meat over the next five years will increase. However, a constraint is that the population of cattle in Indonesia has been increasing only 2 to 3 per cent annually, while the demand for beef is likely to increase by up to 8 per cent per year.

The increase in beef demand in the last few years has been anticipated, as shown by the number of cattle feedlots. In 1992, the number of cattle feedlot companies located in Lampung, West Java and Central Java was only five. By 1996, Sitepu et al. (1996), reported that the number of cattle feedlot companies had increased to 32, spread over 12 provinces. Most of them are located in the western part of Indonesia, such as West Java (8), Central Java (6), Lampung (6) and East Java (4). Yogyakarta, East Kalimantan, South Kalimantan, NTB, Riau, South Sulawesi, North Sulawesi and Irian Jaya each have one feedlot. In 1997, the number of cattle feedlot increased to 41 companies distributed in 13 provinces. All cattle feedlot companies in Indonesia are under the Indonesia Beef Producer and Feedlot Association (APFINDO), an organization that was established in 1992.

Based on a survey of 14 cattle, Sitepu et al. (1996) also reported that production capacity of these feedlots varied between 1000 and 60000 head per year. Most of the cattle feedlot operation used imported breeds with a high preference for Brahman Cross (BX), Australian Commercial Cross (ACC) and Shorthorn Cross (SHX). The age of the imported cattle is around 1.6 to 2.5 years with average body weight of 350 kg. The fattening period depends on the initial body weight and it varies between 60 and 90 days. The total number of feeder cattle imported by feedlot companies increased very sharply from 12,591 in 1991 to 367,000 head in 1996. Between January and July 1997, 235,658 head were imported (Table 2.2).

Table 2.2. Number of feeder steers imported by APFINDO members



Year

Total


1991

1992

1993

1994

1995

1996

July ‘97

Feeder cattle

12591

24867

58200

118200

246890

367000

235658

1063374

Source: APFINDO (1997)
The allocation of feeder stock are as follows: West Java 34 per cent, Lampung 24 per cent, Central Java 12 per cent, East Java 6 per cent and the remaining 24 per cent in other provinces. Thus, 76 per cent of feeder stock are fattened by feedlots in the western part of Indonesia.

DEVELOPMENT OF CATTLE FEEDLOT UNDER NUCLEUS SCHEME

The operation of the PIR (nucleus scheme) with feedlot cattle in villages has been implemented in varied forms, using the experience of Lampung as a guide. The significant increase in the role of the nucleus scheme to assist farmers is indicated by the willingness of farmers to join the scheme. The farmers built cattle pens at their own expense. The total pen capacity built by the farmers in 1997 was 38,017 head, while the pen capacity of cattle feedlot companies was 197,339 head. Allowing for a 14 days quarantine period and a 60 days fattening period, the number of cattle able to be fattened by the farmers reached 171,076 head per year, and 888,025 head per year by the cattle feedlot companies.

The Great Giant Livestock Company (PT GGLC) carried out the nucleus scheme, with available pineapple waste sufficient to feed 7,000 head of cattle year around. This means that 21,000 heads of cattle could be fattened each year, in three periods of four months. Apparently, the company only raises 2,400 head of cattle. Hence, 18,600 head could in theory be raised by farmers. The GGLC established two kinds of nucleus scheme, namely a “credit PIR” and a “self-supporting PIR” (SS-PIR)

The credit PIR scheme has been used since 1989 with an initial number of cattle of 20 head distributed to 20 farmers. Thus, each farmer received one head of cattle. An economical farm size demands a certain number of cattle be raised by each farmer. In 1991 the company, PT GGLC, developed a cooperative arrangement with the KUD as the organiser of farmer activity.

The production target was 12,000 head of feeder cattle which were either imported or Ongole Grade (Peranakan Ongole, PO) feeder stock. The cattle were fed on pineapple waste to reduce feed cost. However, the operation only reached 2,320 head of cattle, which was far below the target. In the five years 1991 to 1995, the number of animals in each farmer’s package was increased to three head of cattle over the four months fattening period. The Brahman cross cattle, chosen by the company, and all feed, production inputs and capital were provided by the company - the nucleus. The credit, provided by the company, is repaid at the end of the fattening period through the farmer selling the fattened cattle to the company.

The SS-PIR nucleus scheme developed by PT GGLC at the beginning only included 20 farmers. The difference between the two kinds of PIR lies in the provision of capital, which in the SS-PIR is provided by the farmers themselves, while the supply of raw materials was provided by the company. The average farm size was seven head of cattle per farmer, for a six month fattening period.

The feed, in the form of pineapple waste, was provided by PT GGLC on the agreement that at the end of the fattening period, the farmer will sell the cattle to the company with the selling price being settled in advance. There is no interest applied to the value of the feed. Therefore farmers can get higher profits.

Another nucleus scheme for feedlot cattle was established by PT. TIPPINDO (located in Central Lampung). This involved more than 35 farmer groups with 11,500 head of feeder cattle. In the implementation of the nucleus scheme, PT. TIPPINDO selected as participants farmers who satisfied certain criteria. This was done in order to get better results. Before the start of the program both parties would sign a contract or memorandum of understanding (MOU). In the MOU, it was specified that the farmer, as a member of the KUD, provide corn forage (72 days corn plant), animal pens and labour. The MOU required that the company provide the feeder cattle and feed supplements such as concentrate, molasses and medicine, as well as technical supervision during the fattening period. Another nucleus scheme carried out by TIPPINDO is a corn plantation program to make corn silage. The Company provides inputs such as corn seed, fertiliser and technical supervision, while the farmers provide land and labour. At the end of 72 to 75 days period, the farmers sell the corn plant to the company at an agreed price.

PT Hayuni Mas Lestari (HML), which was established in 1989 and which is located in North Lampung, has been specialising in fattening Bali cattle with an initial body weight of less then 200 kg. Production capacity of 2,400 head per year was not achieved. This company acts as a nucleus in the area and works together with farmers to do the fattening. In the province of Bali, a nucleus scheme was initiated in 1984. At the beginning, the program showed good productive performance as indicated by an increase in the cattle population of around 38 per cent per year. Also, the number of farmers involved in this program increased by about 31 per cent per year. However, in 1988, the productive performance declined due a change in policy applied by the local government. This change shifted the performance of the nucleus scheme, so that the population of cattle raised by farmer dropped by 69 per cent per year and the number of farmers involved also declined by 66 per cent per year. According to Simatupang et al. (1995), this drastic reduction resulted in a change in local income and the policy resulted in an uncertain supply of feeder cattle from the nucleus company to the farmers. At the beginning of the scheme, transportation of feeder cattle was done by the company. However, due to a change in management policy, the transportation of feeder steers was carried out by the Indonesian Animal and Product Trade Association (INDAPTA) which charged a fee.

A nucleus scheme in Lombok (West Nusa Tenggara) was carried out to enhance the supply of slaughter cattle for inter island trade. In this particular scheme, it is the trader who is the nucleus, and the trader works hand in hand with local farmers. The nucleus provides feeder stock and the farmers provide feed and raises the cattle to a certain body weight (300 kg). To achieve the desired body weight target, farmers raise cattle about 4 to 8 months, depending on the condition of the animals when they arrive in farmers place (Sarwono, 1995).

THE ROLE OF GOVERNMENT POLICY IN THE NUCLEUS SCHEME

In 1992, when the nucleus smallholder scheme was approved by the President of the Republic of Indonesia in Lampung, the scheme became one government policy that had to be implemented by any cattle feedlot operator who used imported feeder cattle. Government officers, through the Directorate General for Livestock Services (DGLS), issued a regulation that at least 10 per cent of imported cattle has to be distributed to local farmers under the nucleus smallholder scheme (PIR). The objectives of this program are:

Since 1997, the Government through the Directorate General for Livestock Service, instructed all cattle feedlot companies in Indonesia using imported feeder cattle to increase the proportion of their nucleus smallholder scheme with local farmers from 10 per cent to 20 per cent of the total imported feeder steers. This scheme has to be followed by both cattle feedlot with foreign investment (PMA) and domestic investment (PMDN). In addition to this, the government also introduced a nucleus smallholder scheme for cattle breeding in order to produce calves or feeder cattle, and to substitute these for imported feeder cattle.

The nucleus scheme as a business based in the agricultural sector, should be considered to be a system where each party has mutual interest in all aspects of production, including management, marketing, and post harvest processing. These linkages can be differentiated as forward linkages and backward linkages.

The linkage analysis was done by separating the inputs and the outputs. The coefficient of forward linkage for the livestock sub-sector, especially ruminant, was more than one (1.108), while the coefficient of backward linkage was 0.776. This indicates that the cattle business puts emphasis on the consumer, in those cases when the product goes directly to the consumer without any post harvest processing. This was different from the feed industries as the coefficient of forward linkage was smaller than that of backward linkage (0.766 versus 1.158). The implication is that the product was not delivered directly to the consumer but to other down-stream industries (Soekartawi, 1994).

These results indicate that while upstream relations were maintained, the same could not be said of downstream relations. For example, it could happen that during some fattening periods, farmers did not make any profit because they did not receive the feed they needed since the feed was used by nucleus for its own cattle. This did not happen in the poultry business, since there was not so much difference between the coefficients of forward linkage and backward linkage (0.748 vs 0.768). The arrangement was therefore apparently beneficial for both up-stream and down-stream industries (Soekartawi, 1994).

Rahman and Erwidodo (1995) stated that a policy based on the use of tariffs and non-tariff barriers in milk production affected the allocation of production factors and benefits. Further, the level of nominal protection in the difference between the price of output in the country and the import price of the same commodity. The nominal protection for milk at the consumer level at the time of their study was 32 per cent. This shows that domestic consumers paid more than would have been paid without protection at the farmer level. At the industry level, the nominal protection was 38 per cent. In the credit PIR, farmers with less than four head received the smallest nominal protection (only 24 per cent) while farmers with seven to 10 head received 34 per cent. Those farmers with at least 13 lactating cows received 38 per cent.

The level of effective protection (tingkat proteksi efektif, TPE) at the farmer level was 8.3 per cent. This means that the producers of fresh milk get protection from government in the form of higher output prices. At the level of the milk processing industry, a TPE of 20 per cent was found by Rahman and Erwidodo, (1995).

The absence of a tariff on imported feeder cattle from Australia led to some operators reducing the scale of their fattening business, both at the nucleus and at the farmer level. This was based on the calculation that without fattening for three months, feeder cattle imported from Australia could be sold directly at a competitive price in the local market, and still provide a profit.

It is clear that farmers who raise local cattle, and also the consumer of meat produced from local cattle, do not get any benefit from the government policy of no tariffs for imported cattle. The impact of this policy on the fattening process done in the PIR program has not been evaluated yet. With the coming free market and globalisation era, it is hoped that all policies can be reevaluated.

In the last few years of implementation of the nucleus smallholder scheme in the cattle feedlot industry, a number of constraints have appeared at both the company and the farmer level. These include:

Additionally, the limited education and capability of those in all parts of the nucleus scheme in the beef cattle industry will hamper the adoption of new technology and management and limit their ability to make use of information. These factors, in turn, will limit the ability of scheme participants to do business. Therefore, the smallholder farmers require guidance for success in the nucleus scheme. The concept of guiding has to be able to accommodate all levels of the nucleus scheme. At the farmer level, guidance should be given as to how to increase the scale of operation. For problems related to husbandry, product quality, marketing, investment and management should be stressed so that farmer become aware of the economic aspect of the business.

FINANCIAL PERFORMANCE OF THE NUCLEUS SCHEME

The nature of PIRs being implemented in villages varies greatly, so there is a need to evaluate the financial performance of the (PIR). An analysis of the financial performance of the nucleus schemes (PIR) in Lampung was carried out for PT GGLC and PT TIPPINDO. The PIR from PT GGLC uses two year old feeder cattle with an average body weight of 250 ± 28 kg. All cattle are fed mix concentrate and pineapple waste sent by the company to the farmers at two weekly intervals. The amount of feed offered (on an air dry basis) is about 2 to 3 per cent of body weight. Concentrate and pineapple waste were mixed together before being offered to the animal and feed was offered one or two times a day. Each animal received as much as 30 to 50 kg pineapple waste and 2 to 3.5 kg concentrate per day.

Total production cost in the credit PIR was Rp. 2,799,138 per farmer per period, while SS-PIR spent Rp. 6,580,120 per farmer per period. Apparently 77 or 78 per cent of this total production cost was for buying the feeder cattle. The second largest part of the total cost (12.1 per cent) was the feed component for both credit PIR and SS-PIR. Expenses for concentrate dominated the variable cost (6.8 per cent for SS-PIR and 7.4 per cent for the credit PIR), while cost for pineapple waste reached 5.3 per cent at SS-PIR and 4.7 per cent for credited PIR.

The calculation of loss and benefit values shows that the farmers in the SS-PIR arrangement get Rp. 1,086,233 per head per period. This is higher than the profit the farmer of credit PIR Rp. 984,328 per head per period. The profit relates to the situation where SS-PIR farmers bought the feeder cattle themselves while the credit PIR farmers earned less profit as the feeder cattle were bought by the nucleus. In this latter case, the price and animal performance were not as expected by the farmer. In addition, there was a difference in selling price between SS-PIR and credit PIR. Farmers in the SS-PIR scheme sold cattle at a higher price of Rp. 2,650 to 3,000 per kg of body weight while farmers in the credit PIR scheme sold cattle at Rp. 2,500 to 2,800 per kg body weight (Santoso et al., 1995).

For the PIR of PT TIPPINDO, 90 per cent of feeder cattle raised by the farmers were imported from Australia, with shipments arriving more than twice a month depending on market demand. The capacity of the feedlot plant is 12,000 heads and it is targeted to market 100 head per day. The fattening period is between 74 and 90 days with a quarantine period of two weeks. Green corn forages was given ad lib, and the forage originated from the nucleus scheme on cattle feed (Feed-PIR). The cattle were fed mixed feed and feed supplemented with molasses as an additional energy source. The body weight gain in this fattening program was up to 0.8 to 1.2 kg per head per day.

The farmers who are members of KUDs near the nucleus were involved at first intake FEED-PIR. The area in the first stage reached 156 hectares with a credit value of Rp. 22,477,000. In the second stage the area was expanded to 761 hectare with a credit value of Rp. 73,140,000. The harvesting time of the corn leaf is 70 days or five times in one year. At the initial stage of collaboration, the farmer earn a profit of Rp. 119,000 per month, if they have two harvests.

CONCLUDING COMMENTS

The PIRs between the nucleus (company) and farmers in the villages has a variety of forms, related to the economic, social and cultural conditions of the farmer. The advantage of the PIR for beef cattle is that better use made of available resources for the production of beef cattle. On the other hand, the negative side of this program is the sharing of profit is not equally distributed between the farmer and the nucleus, and farmers accept a higher risk in the production process.

REFERENCES

APFINDO. 1997. Information provided by the Indonesia Beef Producer and Feedlot Association.

Rahman, B dan Erwidodo (1995) Analisis kebijaksanaan usaha pengembangan ternak sapi perah domestik. (Development policy analysis on domestic dairy cattle). In Prosiding Seminar Nasional Peternakan dan Veteriner. Pusat Penelitian dan Pengembangan Peternakan, 2: 713-723.

Santoso, Sumanto, Chaniago, T.D., Winugroho, M. dan Sabrani, M. (1995). Studi perbandingan profitabilitas usaha penggemukan sapi potong pada PIR pola kredit dan swadana. (Comparative study on profitability of beef cattle fattening on credited and self-support PIR) In Edisi Khusus. Kumpulan Hasil-hasil Penelitian APBN Tahun Anggaran 1994/1995. Ternak Ruminansia Besar. Balai Penelitian Ternak, Ciawi; pp. 39-53.

Sarwono, B.D. (1995) Penggemukan sapi rakyat: Kemitraan pedagang ternak dengan petani di Lombok, Nusa Tenggara Barat. (Smallholder cattle fattening: Cattle trader and farmer partnership in Lombok, Nusa Tenggara Barat) In Industrialisasi Usaha Ternak Rakyat dalam Menghadapi Tantangan Globalisasi. Prosiding Simposium Nasional Kemitraan Usaha Ternak. Ikatan Sarjana Ilmu-Ilmu Peternakan Indonesia bekerjasama dengan Balai Penelitian Ternak, Cawi; pp. 89-94.

Simatupang, P., Jamal, E. dan Togatorop, M.H. (1995) Analisis ekonomi perusahaan inti rakyat (PIR) sapi potong di Bali. (Economic analysis on beef cattle nucleus scheme in Bali) Jurnal Penelitian Peternakan Indonesia, (2): pp. 12-17.

Sitepu, P., Diwyanto, K., Soedjana, T.D., Priyanti, A., Matondang, R.H., Lubis, A., Supriyatna, N., Panggabean, T., Putu, I.D., Suparyanto, A., Purwanto, H., Pustaka, I.K. dan Soeryono (1996) Studi potensi sapi potong lokal sebagai penghasil bakalan (feeder stock) untuk mendukung industri sapi potong. (Study on local beef cattle as feeder stock to support beef cattle industry) Laporan Hasil Penelitian Tahun Anggaran 1995/1996. Balai Penelitian Ternak, Ciawi.

Soekartawi. (1994) Manfaat agribisnis peternakan bagi kesejahteraan peternak di pedesaan. (Usefulness of livestock agribusiness for farmer welfare in villages) In Prosiding Pertemuan Ilmiah Hasil-hasil Penelitian Peternakan Lahan Kering. Sub Balai Penelitian Ternak Grati. pp. 26-35.


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