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THE IMPACT OF GOVERNMENT POLICY ON THE COMPETITIVENESS OF

SUGARCANE FARMING IN LAMPUNG PROVINCE

Zainal Abidin and Hanung Ismono

University of Lampung

June 2004

.....................Table of Contents Summary.................................................................................................................................................................................................. 10 Policy Implications.......... 11 2 .................................................................................................................................................. 6 Results ....................................................................... 11 References......................................................... 5 Assumptions ............................................................................................................. 6 Sugarcane Farming ...................................... 6 Profitability................................................................................................................................................................................................................................................... 4 Method of Analysis ........................................................................................................................................................... 8 PAM Results........................................................................................................................................................................................ 5 Data .................................... 9 Interpretation of PAM Results ....................................................................................... 3 Background .....................

Under the AFTA (ASEAN Free Trade Agreement). Returns to land were included in profits because it was not possible to estimate the social opportunity costs of land. which placed an import tax of Rp 700/kg on imported sugar. which regulates the way sugar is imported into Indonesia by limiting import licenses to selected state plantations and private companies. the sugar protection was unnecessary to sustain domestic sugar production in Lampung and merely transferred large excess profits to sugar producers. No divergences were observed in the labor and capital markets. 643/MPP/Kep/IX/2002 on 22 September 2002. the total area of smallholder sugarcane farming was 12. Private revenues were more than double social revenues because of the heavy protection of sugar.000 tons sugar annually. The private costs of tradable inputs were nearly half again as much as the social costs of those inputs because of national and local taxes and corruption in marketing. Four major sugar firms produce nearly 500. Indonesia has committed to phase out its protection of sugar. But opponents of liberalization have argued that sugarcane farmers cannot compete without protection. costs. intended to protect farmers and guarantee supplies. government policy to protect sugar production greatly increased profits both the TRI farmers and the factory. and the factory’s social profits were three times those earned by the TRI farmers. was supported by SK Menkeu on 324/KMK. Because both systems were socially profitable. In 2000. But that policy caused Indonesian consumers to pay about double for their sugar. The government responded by issuing SK Menperindag No. and profits of factory estate and TRI sugarcane farming systems in Lampung Province. Both systems benefited from large positive net transfers. Based on the PAM analysis of sugarcane budgets.011 ha. 2002. Private profits for the factory system were double those for the TRI farmer system. ` 3 . whereas the large plantations covered 68.01/2002 on July 22. This study examines the impact of government policy on the revenues. This policy.Summary Lampung Province is Indonesia’s biggest sugar-producing province outside Java.891 ha.

643/MPP/Kep/IX/2002 on 22 September 2002. which placed an import tax of Rp 700/kg on imported sugar. the RoP was 6. The government responded by issuing SK Menperindag No. 1999. But opponents of liberalization have argued that sugarcane farmers cannot compete without protection.3 In Lampung.2. One model of sugar farming development is a partnership between the factory (nucleus). 2 4 . 1 BPS. Indonesia has committed to phase out its protection of sugar. profit-sharing is determined by an old policy. Many illegal sugar imports have been confiscated recently.8%. Kepmentan No. The most common soil type is red-yellow podzolic. Lampung Dalam Angka. the ratio of harvest to yield of sugarcane is also relatively low. 04/SK/Mentan/Bimas/V/1992 dated 19 May 1992.000 tons sugar annually. whereas the large plantations covered 68. and the harvesting and milling season is from April to August. 2001. This policy. 2001.01/2002 on July 22. and the state companies. After the sugarcane enters the factory. Bandar Lampung 3 Sugar Statistics in Siagian. Analisis Efisiensi Biaya Produksi Gula di Indonesia: Pendekatan Fungsi Biaya Multi-Input Multi-Output. In 2003. intended to protect farmers and guarantee supplies. which regulates the way sugar is imported into Indonesia by limiting import licenses to selected state plantations and private companies. This study examines the impact of government policy on the revenues. BPS. In this system. which is known for its high acidity.011 ha. Four major sugar firms produce nearly 500. Bandar Lampung. V. PTPN VII unit Bunga Mayang.891 ha.2%. was supported by SK Menkeu on 324/KMK. the private sector.Background Lampung Province is Indonesia’s biggest sugar-producing province outside Java. and profits of factory estate and TRI sugarcane farming systems in Lampung Province. The planting season is from September through April. Under the AFTA (ASEAN Free Trade Agreement). The smuggling of white sugar has been very lucrative. Sugarcane plantation in Lampung is located mostly in the dryland areas of northern Lampung.1 In 2000. between 5 and 6%. which is erodable during the rainy season and very compact during the dry season. The soil structure is mostly salty loam. because the sugar price in Indonesia has increased during the past eight years (Figure 1). whereas in 2002 it was 6. 2002. and the farmers (TRI=Tebu Rakyat Intensifikasi). Lampung Dalam Angka.83 between 1979 and 1996. The productivity (yield) of sugarcane in dryland areas declined at an annual rate of 0. Doctorate Dessertation. Graduate School of Bogor Agricultural Institute. costs. These protectionist policies have sparked much controversy because they stimulate “cronyism” in import rights between the government. the total area of smallholder sugarcane farming was 12. which allocates 66% of sugar production to farmers and 34% to the factory. it is analyzed to determine the trash composition (a maximum of 7% of trash is allowed) and then the factory calculates the ratio of production (RoP).

J . and profits of sugarcane farming systems. 2003). White sugar price at consum ers in Indonesia (Rp/kg) 5000 Rp/kg 4000 3000 2000 1000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year Source: Perum Bulog. Assumptions The study is based on several assumptions (Table 2). from www.Figure 1. Method of Analysis The study employed the Policy Analysis Matrix (PAM) method to measure the revenues.go. 20044 Indonesia consumes over 3 million tons of sugar a year and domestic producers can supply about 1. Policy Analysis Matrix (PAM) Costs Revenues Private Price Social Price Divergence A E I=A–E Tradable Input B F J=B–F NonTradable input C G K=C-G Profit D=A-B–C H=E–F–G L = I .6 million tons in 2003 (Guerin. 2003).7 million tons annually (Guerin. Sugar imports were 1. The PAM tables are calculated using Net Present Values (NPVs) because sugarcane is produced on a four-year cycle with four plantings called Ratun I through IV. The PAM is illustrated in Table 1. following Monke and Pearson (1989). Table 1. 4 Perum Bulog. costs.K= D – H The study contrasts PAM results for TRI farmers and the factory estates. 2004.id 5 .bulog.

the capital city of Lampung Province.8% 1. Sixty households were interviewed in: Sukadana Ilir (7 respondents of TRIT IV). and the production costs of the Sugar Factory Bunga Mayang of PTPN VII (cane factory). Sukadana Udik (14 respondents of TRIT II and III). Kota Napal (8 respondents of TRIT II). and Tulang Bawang Baru (4 households of TRIT I) Information collected from farmers included data on input use.003 2. output yields.5% 34% 6.5% Data The study was carried out in Bunga Mayang Sub-district of North Lampung District. and current perceptions on sugarcane farming. technology of milling. Information on the estates farmed by the sugarcane factory was primary data supplied by PTPN VIII unit Bunga Mayang. ratio of production.450 Microeconomic Assumptions Sugar production ratio (%) Sugar determinant factor Ratio of production for molasses (%) Land Rent (Rp/ha/year) Cost for processing 6. systems of production. and III). The study also collected information on the proportion of production sharing. 6 .450 16 16 8.003 2. Tanah Abang (27 respondents of TRIT I. The information was gathered through direct interviews and from secondary data in the record book of the TRI system. The research site is about 150 km north of Bandar Lampung. Assumptions Entities Assumptions TRI Factory Macroeconomic Assumptions Nominal Interest Rate (%/annum) Social Interest Rate (%/annum) Official Exchange Rate (Rp/$) 16 16 8.Table 2.5% 7.8% 1. Results Sugarcane Farming The nucleus company used more tradable inputs than the TRI farmers did (Table 3). II.

78 3.00 310 226 313 400 .60 1.67 2.47 3.85 7.15 8. Herbicides (liter) 3.20 4.00 - 123.15 8.0 56.32 20.41 5.50 d.20 12.33 12.05 14.33 16.48 123.42 4.53 1.13 1.00 39.74 5.53 R4 0.03 3.86 1.40 1.74 0.15 9.26 228.00 2.17 8.33 43.00 - 1.Rock Phosphate - 1.6 7.10 17.500 - - - c.65 6.66 7.12 3.93 91. loading and unloading.6 23. Equipment (pack) 1.47 182.47 4.00 43.00 54.13 10.00 - 1. and transporting of products.98 3.86 10.53 0.73 3. Table 4.00 - 1.95 3.86 5.15 41.Manure - 500 - - - - . Seedlings (ton) b. Chemical Fertilizers ) Note: R = ratoon or locally know as keprasan TRI farmers also used less than three-fourths of the labor employed by the factory (Table 4).61 11.85 3.33 2.TSP/SP-36 230 - 250 400.13 14.29 .67 2.42 167.67 1. Tradable Inputs Used by TRI Sugarcane Farmers and the Factory Estates Initial planting R2 R3 R4 TRI Factory TRI Factory TRI Factory TRI Factory 9.47 3.28 R1 0.54 37.00 Tradable Inputs a. Labor Allocation of TRI Sugarcane Farmers and the Factory Estates No.27 113. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Total Activities Land Preparation Plowing and Harrowing Planting Pruning Root Pulling (Pedot Oyot) Fertilizer Application I Land piling Replanting Fertilizer Application II Manual Weeding I Herbicide Application I Manual Weeding II Herbicide Application II Leaf Peelling (Klentek) I Leaf Peeling (Klentek) II Harvesting-LoadingTransporting R1 3.33 12.00 4.67 1.00 298 400 259 400 .00 1.07 5.34 4.73 R4 1.59 8.53 16.00 12.67 - Factory (man days) R2 R3 10.33 16.39 14.05 134.38 10.67 0.00 1.43 3. The largest gaps in labor utilization occurred during harvesting.92 193.33 1.00 1.13 1.0 53.93 4.00 49.78 3.00 11.35 40.47 0.Table 3.40 10.50 4.88 10 - - - - - - .05 TRI (man days) R2 R3 3.40 Note: R = ratoon or locally know as keprasan 7 111.Urea 230 300 303 400.29 4.14 42.80 12.56 14.53 1.67 16.41 6.KCl 230 300 248 300.45 5.67 107.00 - e.00 298 175 259 300 .67 1.46 5.65 116.56 10.0 56. Bag (unit) 43.8 3.67 14.47 7.60 12.

003.788.754.567.99 1.17 84.744. The factory portion of sugar is 34% of the total sugarcane quantity.38 12.62 1.733.520.71 3. The quantity of sugar production is determined by sugarcane production.04 79. Comparative Physical Outputs of Sugarcane.280.74 R4 10. The factory system earned more than twice as much private profit as the TRI system. 1 2 3 No .10 1.52 5.14 4.911.48 2.291. largely due to higher yields.18 R3 9.854.973.71 Factory (Rp/ha) 1 19.213. and Molasses for the Factory Estates and the TRI Farmers No.10 2.37 R2 10. the proportion allocated to the factory.110.4 1 Sugar 2.60 6.776.91 2 3 4 18.70 6.00 1.807.584.957. the cost of milling.755.27 7.14 2.61 60.17 18.60 1.099.50 Note: R = ratoon or locally know as keprasan 1.52 .123. Costs.8%.18 64. Sugar.97 3.306.152.479.83 1 2 Profitability Sugarcane farming was extremely profitable in private (actual market) prices (Table 6). the conversion ratio for sugar was 6.16 2.39 5.18 12. and the sugar determinant factor was 1.633. the conversion ratio for molasses was 2. Table 5. Table 6.962.481.05 6.109.202.215. The cost of milling is 7. Type of production TRI (Ton/ha) R1 R2 Factory (Ton/ha) R3 R4 R1 R2 R3 R4 73.5%.453.93 3. Private profits were more than half of private revenues for both systems in all four years. the conversion ratio of sugarcane to sugar (called rendemen).030.467.00 12. and the sugar determinant factor.The differences in labor allocation in sugarcane farming affected the levels of productivity of sugarcane (Table 5).052.950.815.51 8 18.472.06 59. Private Revenues.592.588.5% of the total production of sugarcane.23 12.579.2 4 Sugarcane 64.881. The highest profitability for TRI farmers occurred in the fourth year (TRIT IV) when farmers spent less on inputs to prepare for a new production cycle.046.072. 1 2 3 Description Revenues Cost Profit Description Revenues Cost Profit TRI (Rp/ha) R1 10.17 3.54 5. During the field study (AugustSeptember 2003).94 3.98 5.417.42 3 Molasses 1.19 84.828.794.769.250. and Profits of TRI Sugarcane Farmers and the Factory Estates (Before Discounting) No .24 3.597.28 5.

85 3.255.032.20 5.037.57 3.141.79 3.89 4.00 3 Profits 11.499.493.818.70 18. both 16 percent (Table 8).60 13.916.052.624.482.733.30 Profit 36.957.03 4.713.592.197. and Profits of TRI Sugarcane Farmers and the Factory Estates (Before Discounting) No .608.625.014.101.678.172.180.044.06 1.20 2. NPV PAMs for TRI Sugarcane Farmers and the Factory Estates (Private Discount Rate = 16%.567.52 Note: R = ratoon or locally know as keprasan PAM Results The NPV PAM results were based on an assumption that the private and social discount rates are identical.98 10. Costs.744.80 5.201.584.954.095.592. SP-36.588. Table 8.597.24 9.114.460. This procedure permitted easy identification of the impacts of policies on tradable outputs and inputs.190.197.60 18.887. labor and capital.34 7.911.184.352.38 6.352.417.14 10. Both sugar-producing systems were socially profitable in all four years. Social Discount Rate = 16%) Farmers Revenue Tradable Inputs Labor Domestic Factors Capital Land Private 29. The social opportunity cost of sugarcane is the price of comparable sugar imports.377.162.844.92 - - Profit Total - - Labor Domestic Factors Capital Total 8.845. although the levels of social profits were much lower than of private profits (Table 7).17 4.816.556.879.57 3.99 .121.52 - 6.54 18.585.102.920.417. and herbicides are also based on border prices.232.50 12. The social prices of tradable input such as urea.57 18.52 2 Costs 7.608.832.593.315.886.589.86 706.213.211.943.493.101.091.Note: R = ratoon or locally know as keprasan Social profitability is based on efficiency prices that reflect social opportunity costs.158.173.030.110.496.352.258.218.00 5.365.01 9 - 14. TRI (Rp/ha) Description R1 R2 R3 R4 10.00 Social 13.500.82 10.06 1.310.70 Divergences 15.633.51 FACTORY (Rp/ha) 1 Revenues 19.17 1 Revenues 2 Costs 5.46 4. Table 7.994.56 Factory Revenue Tradable Inputs 5.41 7.855.92 Private 52.846.844.036.67 3 Profits 4.52 - 6. Social Revenues.540.74 12.854.938.046.

No divergences were observed in the labor and capital markets.855. (1987). Both systems benefited from large positive net transfers.544. This huge transfer was from Indonesian consumers of sugar to Indonesian producers of sugar. The Nominal Protection Coefficients on Tradable Inputs (NPCIs) were high because of taxes and corruption. Although these implicit taxes on sugar production were 10 .85 1.352.01 9.20 Divergences 27.825.57 5. Interpretation of PAM Results The calculation of ratios facilitates comparison of the results of the study. Returns to land were included in profits because it was not possible to estimate the social opportunity costs of land.337. et al.665.43 8. and the factory’s social profits were three times those earned by the TRI farmers.26 0.82 - - Profit Total 10.25 2.201. Table 9. Because both systems were socially profitable. Government policy to protect sugar production greatly increased the profits of sugarcane farming for both the TRI farmers and the factory.54 3.46 - 26.53 - Private profits for the factory system were double those for the TRI farmer system.856.02 809. NPV PAMs for TRI Sugarcane Farmers and the Factory Estates (Private Discount Rate = 16%.09 Factory Systems 2. The private costs of tradable inputs were nearly half again as much as the social costs of those inputs because of national and local taxes and corruption in marketing.355.1.496.258.690. But that policy caused Indonesian consumers to pay about double for their sugar.17 0.Table 8.57 1.955. Indicator Ratios from NPV PAMs for TRI Sugarcane Farmers and the Factory Estates PAM Indicator Ratios NPCO [A/E] NPCI [B/F] PCR [C/(A-B)] EPC [(A-B)/(E-F)] PC [D/H) SRP [L/E] TRI Systems 2.460.506. the sugar protection was unnecessary to sustain domestic sugar production in Lampung and merely transferred large excess profits to sugar producers.13 1.23 2.280. which concluded that the NPCO for sugar was then 2.13 1.90 4. This result is consistent with that found earlier by Rosegrant. Social Discount Rate = 16%) Farmers Revenue Tradable Inputs Labor Domestic Factors Capital Land Social 24. Private revenues were more than double social revenues because of the heavy protection of sugar.030.49 - 2.08 The Nominal Protection Coefficients on Output (NPCO) shows that policies to protect sugar production caused the domestic price of sugar to be more than twice the sugar import price.

25). Under the profit-sharing arrangement between the factory and the TRI farmers (Kepmentan No. 150 percent in the United States. causing very high Effective Protection Coefficients (EPCs). The results of this study show that sugar production in Lampung Province can remain viable in the absence of protection.at high rates. the world price of sugar will rise considerably. No conclusions can be drawn about efficiency or comparative advantage because it was not possible to estimate the social opportunity costs of land used in sugar production. This huge difference between the Indonesian and world sugar prices has created widespread incentives for smuggling. 2003).23 and 0. the farmers paid 34 percent of their sugarcane production for processing while the factory was charged only 7. These transfers are unnecessary because both the factory system and the TRI farmer system in Lampung are socially profitable and thus would earn healthy profits even if the sugar protection were eliminated.5 percent. The elimination of sugar protection would reduce corruption and cronyism in sugar trading and greatly reduce sugar prices paid by Indonesian consumers Because Indonesia is a member of the World Trade Organization (WTO) and the ASEAN Free Trade Area (AFTA). If other countries also phase out their very high protection of sugar. 04/SK/Mentan/Bimas/V/1992). That policy should be reviewed in an effort to provide more revenue for sugarcane farmers. References 11 . Policy Implications Indonesian policies to restrict imports of sugar have cause domestic prices to rise to levels more than twice the levels of comparable sugar import prices. the current sugar protection policy will need to be phased out. The Private Cost Ratios (PCRs) were very low (between 0. indicating the extremely high level of private profits. and about 100 percent in Thailand and the Philippines (Guerin. they were strongly outweighed by the considerable protection on sugar output. Indonesian consumers of sugar are forced to pay sugar prices that are more than twice the import levels. Protection through licensing and quotas has led to charges of cronyism in allocating import licenses. improving Indonesian efficiency. Recent levels of sugar protection are 240 percent in the European Union.

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