Across large swathes of Australia’s grain-growing country, growers are unlikely to look back upon the 2018/19 season with any fondness. With severe drought conditions biting hard, many growers are understandably focused on getting through this year, rather than worrying about the future. With good news thin on the ground, it might be a good time to talk about the growing opportunity to our North, and why there is confidence that the current upward trend is a robust one. So, while there is little cause for optimism regarding the present season for many growers, beyond 2018/19, the Indonesian market appears to be a solid bright spot on the horizon.
It should come as little surprise to hear that Indonesia is Australia’s most important wheat export market. Accounting for nearly one-quarter of all wheat exports, there is clear daylight between Indonesia and our other wheat export markets. Less well-known is the fact that our neighbours to the north are poised to play an even bigger role in our wheat export program. There is no one single factor underpinning this good news story, with a number of supporting phenomena working in unison. Consequently, the “awakening giant” scenario is comparatively certain. Put another way, a lot of things have to go pear-shaped before Indonesia’s consumption of imported wheat has any chance of diminishing.
There is a reasonably solid consensus that Indonesia will eventually become the world’s 4th largest economy in a few short decades (Table 1). PWC sees Indonesia rising from 8th to 5th by 2030 and then up one place to 4th by 2050, on a GDP at PPP measure.
Table 1: 4th with a bullet – Indonesia on the rise (Source – PWC – The Long View, February 2017)
Whether referring to a country’s economy or, say, a mining exploration company, explosive and dramatic growth is often associated with increased risk that the whole thing could implode. A quick glance at my meagre, beleaguered share portfolio and trading history shows that I have lost my entire investment three times in “growth” stocks and never in a blue-chip company. So, while this might work as a useful rule of thumb in many examples of emerging economies experiencing rampant growth, Indonesia might be a notable exception.
Indonesia’s economy has some unique characteristics that distinguish it from neighbouring economies and similar countries elsewhere in the world. Since 2000, Indonesia has had the lowest volatility economic growth in OECD advanced economies. Similarly, it is often assumed that Indonesia’s economy is export driven like other emerging and post-emergent Asian countries. However, Indonesia’s economic prosperity is largely underpinned by domestic consumption, with its massive population operating as the economy’s engine room. Considering the fact that export-dominated economies are often at the mercy of their trading partners’ own economies, it is likely that this is one of the key reasons Indonesia has enjoyed stable economic growth post 1998 Asian crisis.
Another cause for optimism is the fact that Indonesia’s massive urbanisation trend is not just concentrated in Jakarta. In fact, higher rates of growth are expected in the countries “2nd tier” cities such as Pekanbaru, Pontianak, Karawang, Makassar and Balikpapan. Balanced urbanisation such as this means less likelihood of bottlenecks and supply chain congestion hampering the development of the overall economy.
There are a number of implications for Australian wheat exports. Firstly, emerging urban centres cannot be ignored by marketing and market development activities. Secondly, this creates the potential for specialised, niche wheat supply for region-specific opportunities as local palates evolve and diverge. To use Japan as an example, there are significant differences in the noodle traits sought by different parts of the country. The most likely difference is the hardness (or softness) of the noodles. It is not difficult to imagine similarly nuanced, yet important differences emerging in Indonesia as well.
Another reason for optimism is how the country has generated GDP growth. While its growing population has no doubt contributed significantly, more than half of its recent GDP growth has come from productivity gains. Combined with population growth, this creates a “one-two punch” for continued economic strength.
One of the drivers of Indonesia’s growing labour productivity has been IT and telecommunications infrastructure. There are currently more than 220 million mobile phone subscriptions, which means that the majority of “consuming class” households will have more than one mobile phone. This has wide-ranging implications regarding the Australian grain industry’s market development and branding activities, with more avenues for connecting directly with consumers.
One challenge facing policy-makers is managing the balance between rapid urbanisation on one hand and maintaining agricultural output on the other. As cities expand, they are gradually encroaching on farmland, reducing the total area available for producers. This is then exacerbated by the fact that these newly-minted urbanites who were previously net producers of food become net consumers. So, increasingly, Indonesia’s agricultural sector will somehow need to create more with less.
Australia can play a key role in helping Indonesia meet its caloric needs by providing stable access to wheat (which they cannot grow in an economically feasible manner). With a sizeable percentage of its caloric requirements “locked in”, Indonesia can focus production on those crops that produce the best possible yield for the land available.
There are a number of important takeaways from this decidedly optimistic view on Indonesia’s present status and future prospects. Firstly, in terms of upside potential for Australian wheat exports, there is no other market with anything even approaching the same potential in the short, medium or longer term. National economic and demographic shifts on this scale are rare, and Australia now has the opportunity to witness and participate in one such shift happening on our geographic door-step.
Secondly, there is a compelling rationale for our two countries to embark upon an era of greater economic and social interconnectedness. Due to the vastly different nature of our economies, demographics and most importantly, agricultural potential, an increasingly symbiotic relationship between Indonesia and Australia comes at no cost to agricultural producers. Unlike other grains imported by Indonesia, Australian wheat displaces no Indonesian farmers, which means that there is an unambiguously net benefit for Indonesian food sovereignty when they import wheat.
Thirdly, as I mentioned in my recent story on urbanisation, wheat is an uncommonly versatile fuel for urbanisation, as it can easily be processed into a number of foods that all share a common trait – they are cheap and easy to prepare. Whether we know it or not, Australia is already invested in Indonesia’s urbanisation story, and thus, there are obvious benefits in gaining a better understanding of the factors that affect its trajectory and direction.
Lastly, this good news story to our north appears to be surprisingly robust. ‘Black Swan’ events notwithstanding, there is little on the horizon to indicate that we are witnessing the beginning of an unsustainable bubble. Dutch ‘tulip mania’ of 17th century fame this is not, with contributions coming from a number of drivers within the Indonesian economy; in particular, productivity gains and domestic consumption.
These factors and their net effects have implications in terms of the Australian grains industry’s wheat export strategy. Considering the fact that Indonesia is already by far Australia’s largest wheat buyer, it may be tempting to assume that further gains might be difficult and thus better sought elsewhere. However, our research suggests that Indonesia will likely play an even bigger role absorbing Australian wheat as time goes on. So, assuming “bang for buck” as the key driver, in terms of both probability and total potential upside, Indonesia should increasingly attract the bulk of grains industry effort and resources.
 GDP at PPP: gross domestic product at purchasing power parity adjusts for price level differences across countries and provides a better measure of the volume of goods and services produced in an economy (Source – PWC)