Unresolved Sugar Problems

Kompas/Ferganata Indra Riatmoko

A worker passes the sugarcane milling room at Tasikmadu sugar factory in Karanganyar regency, Central Java, Monday (15/5). In the grinding season this year, the sugar mill is targeted to process 320,000 tons of sugarcane. The processing capacity of the mill, which was built in 1871, will be raised from 3,050 tons of sugarcane per day to 4,000 tons per day.

In order to overcome a glut of sugar, various regulations have been issued by different levels of government, such as the coordinating economic minister, technical ministers and directorates general of the respective ministries. However, the regulations have failed to meet the sugarcane farmers’ demand (Kompas, 28/10). The glut occurred because we have not view the problem comprehensively.

There are three main issues in the Indonesian sugar industry, all of which influence each other. First, the structure of the sugar industry is burdened by old sugar mills (PG) with limited capacity and outdated technology.

Second, sugar regulations often change and are inconsistent. Third, the impact of implementation of the price ceiling (HET), coupled with the reduced purchasing power of the lower-income segment.

Industrial structure and revitalization

According to M. Ikhsan Modjo (Kompas, 2/11), the economy is weakening due to stagnant growth in consumption and purchasing power. This article looks at all three aspects thoroughly and is intended to provide input to interested parties to help them understand the problem.

First, based on the sources of raw material, sugar producers in Indonesia consists of PGs that process sugarcane and  those that process unrefined sugar, mostly imported. The refined sugar may be sold only to industries.

PGs that process sugarcane produce approximately 2.5 million tons of white crystalline sugar (GKP) per year. Meanwhile, mills that process unrefined sugar have a capacity of around 5 million tons.

PGs that process sugarcane are mostly state owned. They mostly comprise old factories with outdated technology. About 50 percent of state-owned PGs have small capacities. State-owned PGs with large capacities are generally still competitive, but the small ones have become a burden to the sugar industry.

Actually, the government has for a long time intended to revitalize its PGs. It has even provided a financing scheme. The question is, why can\'t the revitalization be fully implemented? As for privately owned PGs, such as PG Kebonagung in Malang and PG Trangkil in Pati, revitalization has been successfully carried out and has increased production threefold. These sugar factories have become important profit centers for shareholders.  The same is true for private sugar factories in Lampung, which now produce sugar efficiently with production costs below the international average.

Judging by the experiences of private sugar factories, revitalization requires a large amount of funds and can take eight to 10 years.  At state-owned PGs, revitalization cannot be carried out smoothly because their management boards often undergo change.

If the revitalization of state-owned PGs could be implemented and the fate of the small state-owned PGs settled, the frequent sugar problems could be resolved.

Kompas/P Raditya Mahendra Yasa

A farm worker cutting down a sugar cane loaded to fulfill the needs of the sugar factory from a piece of land in Singorojo district, Kendal regency, Central Java, Friday (25/8). Farmers demand the government’s commitment in protecting the sugar cane commodity by not importing refined sugar.

Many proposals have been made concerning small-capacity PGs, such as merging them or closing those in areas that do not grow much sugarcane.  However, such revitalization is difficult to be carried out by the government because it would require long-term financing. An Indonesian Sugar Mill Research and Development Center expert once suggested that PT Perkebunan Negara, which operates state-owned sugar factories, be privatized.

Sugar mills that process unrefined sugar are generally located near ports and therefore have more efficient logistics operations. The high capacity of the sugar refineries - above the industry\'s sugar requirement of about 2.7 million tons – has added to the problems of the sugar industry.

Supposedly the excess refined sugar could be exported, like in Malaysia where there is an export obligation for refineries that possess raw sugar import permits. Another possibility is that sugar refineries that import unrefined sugar be obliged to buy sugar from farmers at a certain price and ratio.

Sugar management issues

The second aspect is related to sugar regulations, such as provisions on the benchmark purchasing price (HPP), sugar trading system and the HET and taxation. Government policy often changes, is inconsistent and seemingly patchy. For example, since 2000, HPP provisions have generally been issued as a result of pressure from sugarcane farmers and often do not have clear purposes.

Furthermore, it remains unclear which agency is assigned to intervene. Bulog has been asked to handle the case but only for certain periods (ad hoc), whereas for a company like Bulog, sustainability is important. Therefore, the task of buying sugarcane that Bulog sources from farmers is not a business opportunity but instead tends to be a shield of the weakness of the sugar industry and sugar trade.

The direction of the sugar policy itself is also biased, whether pro sugarcane farmers or pro consumers, especially industrial sugar consumers, such as the food and beverage industry. For sugarcane farmers, the orientation is high prices, especially in the midst of high labor costs. What matters for industrial consumers, especially those in the food and beverage industry, is the raw material should be cheap and easy to obtain.

The cultivation of sugarcane also requires a large scale of business so that it will be profitable and result in competitive products. Therefore, in order to make the government\'s sugar policy more focused and clear, an audit should be conducted on those involved in the cultivation of sugarcane and sugar users.

The third aspect, the impact of the implementation of the HET, especially amid the weakening purchasing power of low-income people. This is one of the causes of the glut. Sugarcane farmers find it difficult to obtain the prices they want. The HET of Rp 12,500 per kilogram has led to a fall in prices at the farmer level.  If the margin between the retail price and the factory/farmer price is 30 percent (due to costs related to bank interest, tax, transportation, etc.), then the price at the farm level is around Rp 9,750 per kg. For comparison, the margin of sugar price from  farmers and  the retail level in the era of the Soeharto government was about 40 percent.

The impact of the HET policy and the weakening of people\'s purchasing power may also affect the rice trade, especially during the harvest season in February next year.

In the early 1980s, when an economic downturn took place, the Soeharto government embarked on a belt-tightening program. The state budget was focused on labor-intensive projects, including the intensification of Bulog\'s procurement of rice, sugar, corn, soybeans, etc., but all the financial costs were borne by the government. Now, the plan to replace the distribution of subsidized rice (Raskin)  for the poor with coupons will limit Bulog\'s ability to absorb unhusked rice/milled rice.

The Raskin replacement program with coupons can indeed be categorized as a labor-intensive program, but in fact this is not a new program because it only diverts from the right pocket to the left.

In fact, low-income people need to be helped to immediately increase their purchasing power, while the government itself is required to boost the economy from the demand side.

Another thing that needs attention and clarification is the status of sugar, which is classified as a basic need. Basic needs or staple goods are goods or materials that concern the livelihoods of many people. How much sugar people need as a daily necessity needs to be reviewed. Clearly, if sugar were no longer categorized as a basic necessity, the government would not need to intervene.

SAPUAN GAFAR

Former Secretary of the State Minister of Food and Deputy Head of Bulog