The Sweet Price of Sugar

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What's going on?

State-owned enterprise ID Food plan to boost domestic sugar production by restarting abandoned sugar mill in Subang.

What does this mean?

Sugar price is almost double in Indonesia compared to the international market. A kilo of white sugar on average cost Rp 12.500 here compared to average international price of Rp 6.400. This impacts not just direct sugar purchases but also food and beverage producers who use sugar as raw material.

So why is this the case?

A few things:

• Demand side: We have a bit of a sweet tooth. National sugar consumption increases 40% over the past 10 years, up to 3.2 million tonnes in 2021 alone. (I mean, who doesn't like sugar?). The biggest driver is economic growth. As the economy grows, more Indonesians earn larger income, leading to more spending power.

• Supply side: Domestic production can only supply 2.35 million tonnes, so we have an 850 thousand tonnes gap between supply and demand. To fill this gap, we import both raw sugar and refined sugar from countries such as Thailand, Brazil, and Australia. Refined sugar are repackaged and sold, while raw sugar is used by local sugar mills who process it into refined sugar and sell it to the food and beverage industry.

• Regulation: The government determines a minimum farmgate price (Harga Patokan Petani) for sugarcanes, the raw material that feeds into sugar production. This normally takes into account what it cost for farmers to produce the crop and add margin on top. This is currently set at Rp 10.500 per kilo, which is the minimum price paid by sugar mills to farmers.

Wait a minute, if import price is cheaper than local price, why don't we just import more? Wouldn't that help reduce the price? Well, in a fully-efficient market, yes it should. But the sugar market here is less than efficient.

Importers are smart (or greedy, depending on your view). Seeing that local prices are high, they can import sugar at a much cheaper international price and resell it locally at a higher price. Additionally, the Indonesian Ministry of Industry also issued a ban on refined sugar import license. So now only importers who are established before 2010 have the license—which means more power to these existing importers and less sugar available than what is optimal in a free market.

What does this have to do with the story?

ID Food is a state-owned enterprise mandated by the government to boost national food production so we can be less dependent on imports. This plan to revitalise the Subang sugar mill is part of a larger strategy to increase domestic sugar production by 400 thousand tonnes in the next few years. The Subang mill was closed in 2019 due to inefficient production. This revitalisation program aims to get it back up to speed and help fill the domestic sugar supply gap.

Why should we care?

If we want to achieve self-sufficiency in sugar, this is a step in the right direction. However, ID Food must pay close attention to production efficiency. Local sugar mills should be competitive with international players.

At the moment, this is not the case.

Yield rate per hectare is much lower compared to other sugar-producing countries, shown below. This number measures how much sugar we can produce per hectare of sugarcane farmland. Without productivity improvement, production cost will still be high and local price as well by consequence.

Farmland productivity is also another area to focus on. By improving farming methods and introducing new technology to improve farm production, we can lower farming cost. Investing in better technology and education for both farmers and sugar mills will be key to reducing sugar price and securing enough supply to satisfy our sweet cravings.