A similar situation affects the egg market. Transport is 5.1% of the cost of the retail price for eggs. Similarly, the highest transport cost is that of imported raw materials from the port to the feed mill.
To understand how the infrastructure issue affects poultry operations in particular, consider that, for example, feed bins are usually not used on poultry farms in Indonesia because it is impossible, on the existing roads, to transport them to farms. Feed bins for poultry farms usually range from a three metric tonne to a 100 metric tonne capacity, with a diameter ranging from 1.5 to 5 meters and a height from 3 to 12 meters, and special trucks, which Indonesian roads often cannot support, are required to transport them. Farms instead build local small hoppers, which are continuously manually fed by workers.
In five weeks, a broiler chicken consumes around 3.3 kg (for an average body weight of 2.0 kg) of feed (Akinbobola, n.d.). An average broiler house (and a farm usually consists of several houses) holds around 25,000 birds, so consumption will reach around 81.7 tonnes of feed in five weeks, or 2.3 tonnes per day. According to the same source, the cumulative feed intake of layer chicken over 42 weeks is 4.7 kg. For a layer cage house of 50,000 birds, this means 232.8 tons in 42 weeks, or 0.791 tonnes per day. Given the volume of feed involved, it’s obvious this system is only viable for as long as labour costs remain low—as was outlined above, Badan Pusat Statistik estimates that wages represent respectively 9% and 16% of the production cost in broiler and layer farming.
An improvement in infrastructure will have several benefits on the final price of chicken and eggs. Not only should the impact of transport costs be reduced, lowering a cost of production, but better roads would allow the transport of specialized equipment such as feed bins.
Infrastructure has to be taken into account also from a more general perspective. Table 4 shows some poultry welfare measures related to loading and transport of the chickens from the hatchery to the farm and from the farm to the slaughter house.
The transport of chickens from hatchery to farm and from farm to the slaughter plant have to be done in a way that does not damage the birds. While the welfare and safety of the birds matters, in poultry farming chickens also represent the main capital good in production. Damage to their bodies translates to damage to the product and therefore the main income source. Poor road conditions can damage the birds, reducing meat quality. In addition, as mentioned in Table 4, chicks must be delivered to the place where they will be reared as soon as possible after hatching. Bad infrastructures, thus, could result in a delay to the birds’ access to feed and water.
As explained by Bergoug et al. (2013, p. 3301), EU legislation specifies that broiler chicks can be transported for a maximum of 24 hours and deprived of feed or water for, 72 hours at most after hatching. These standards are based on the fact that chicks’ metabolic reserves last up to three days. The first week of life is the most crucial in the life of DOCs. The risk of mortality is higher in this period and can be increased by combined stress of post-hatch handling in hatcheries,transportation, and poor adaptation to grow-out conditions (Bayliss and Hinton, 1990).
Consideration of the topics in this report lead to policy recommendations for the Indonesian government. This section highlights four points of action: harmonization of regulations, parent stock import liberalization, maize import liberalization, and infrastructure improvement.
5.1 Harmonization of Regulations
In previous sections, this report discussed contradictions between regulations of maize imports. Harmonizing existing regulations by clearing up contradictions between MOT 21/2018 and MOA 57/2015 is important to help importers avoid confusion and to reduce discretionary power in the import process that might affect the smooth progress of the industry.
The government should abolish the requirement for a letter of recommendation from the Ministry of Agriculture that is stipulated in MOA 57/2015 Article 16 in order to expedite the import licensing process.
5.2 Parent Stock Import Liberalization
This report has discussed that the breeders that provide the genetic lines for broilers and layers are mainly imported. According to Articles 9 and 11 of MOA 26/2016, poultry producers are not free to import breeders according to their expected business needs. Instead, imports are regulated by supply and demand calculations by an analysis team appointed by the government.
The interaction between demand and supply is a dynamic process which unfolds over time. It is based on the discovery, interpretation, processing, and exchange of information. Experts can observe the outcomes of the market process as an emerging coordination pattern, but they cannot control it.
The final outcome of a market process unleashed from mandates based on government calculations would be better organization of the poultry value chain, followed by a reduction in prices due to competition and the consequent cost reduction (thanks to the implementation of better production methods in order to win market competitions).
Under a free trade regime, breeder import decisions would be left in the hands of the players in the poultry industry and therefore be based on profit expectations and entrepreneurial calculations. To make this possible, the government should abolish the parts of MOA 26/2016 (Articles 9 and 11) that make it illegal for private producers to import parent stock.
"Harmonizing exisiting regulations by clearing up contradictions between MOT 21/2018 and MOA 57/2015 is important to help importers avoid confusion and to reduce discretionary power in the import process that might affect the smooth progress of the industry."
5.3 Maize Import Liberalization
The argument in section 5.2 can be extended to the import of maize, and Indonesia’s maize industry should be opened to the international market. In addition to the arguments made for parent stock, which also apply to the maize market, the law of comparative advantage explains why Indonesia and its trading partners would both benefit from an opened maize market.
Under existing regulations, Indonesian poultry producers are paying virtually double the price they could be paying for one of their key raw materials. It goes without saying that this additional cost is reflected in market prices for chicken and eggs, and this limits both domestic consumption possibilities and further expansion of the industry. Moreover, since chicken is a major source of protein in Indonesia,34 higher prices are particularly hard on the lower income population.
The government should liberalize maize imports in Indonesia through revisions to MOT 21/2018 and MOA 57/2015. This would allow the country to specialize in the production of goods in which it can perform more efficiently. Indonesia clearly does not have a comparative advantage in maize production and could import it at a lower price. This would decrease poultry production costs, benefitting not only poultry producers but also consumers, in particular low income consumers, by making it possible to provide cheaper chicken and eggs.
Eliminating trade protections for maize could also allow Indonesia to modernize its poultry industry, becoming more efficient and perhaps developing its own comparative advantage in the future, potentially turning the country into a poultry exporter, enhancing business opportunities and creating advantages in the labour market.
5.4 Infrastructure Improvement
Although the Indonesian poultry market would benefit from the removal of government interference in the liberalization of trade in strategic elements such as parent stock and feed, we can recognize a role for the government in supporting economic development through infrastructure projects. Infrastructure is a strategic part of a sound development framework. This report has discussed the reasons that transportation is an important element in the total production cost both for chicken and eggs, and that the most intensive transportation costs occur between the port and the feed mill.
The government should invest in improving the road system, with a focus on connecting ports with nearby agriculture areas. This would naturally benefit the production process by making lower freight fares possible. Improved transportation infrastructure would also allow the movement of heavy equipment that would help Indonesian poultry farms modernize and make them better able to deal with rising wages. This would enable more efficient production processes and thus better prices.
"The government should invest in improving the road system, with a focus on connecting ports with nearby agriculture areas. This would naturally benefit the production process by making lower freight fares possible."
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Food Policy | November 2018
Policy Reforms on poultry industry in Indonesia
This study provides policy recommendations to improve the poultry industry and modernize the sector.