ANALYSIS-Investment Key as Indonesia Eyes Greater US Cocoa Exports

By Michael Taylor

A worker checks the quality of dry cocoa beans before filling them into a sack at a warehouse in Makassar, in Indonesia’s South Sulawesi province, April 7, 2011. Indonesia’s cocoa industry is looking to grab a bigger slice of the U.S. market due to unrest in top producer Ivory Coast, but needs a review of an export tax, as well as more investment to boost quality and output.       REUTERS/Yusuf Ahmad

JAKARTA, April 7 (Reuters) – Indonesia’s cocoa industry is looking to grab a bigger slice of the U.S. market due to unrest in top producer Ivory Coast, but needs a review of an export tax, as well as more investment to boost quality and output.

Often regarded as a cheap source of low-grade cocoa, Indonesia has embarked on a series of programmes to improve quality, but faces serious obstacles including disease and a switch to alternative crops like palm oil.

Indonesia signalled its intention in talks with the United States on Tuesday, with the world’s number three producer saying it aims to increase exports to the lucrative U.S. market by 10 to 15 percent.

“We would expect a continued expansion outside the Ivory Coast,” said Sudakshina Unnikrishnan, analyst at Barclays Capital.

“Sadly, if we are to see a sizeable increase in terms of Indonesian production, then further investment is needed.”

A violent political standoff brought the Ivory Coast, the world’s top cocoa producer, to the verge of an all-out civil war, threatening the cocoa harvest and exports and pushing cocoa futures to a 32-year peak last month. [ID:nLDE7352EO]

The prospect of a resolution to the conflict has seen ICE cocoa futures <CCc2> down about 20 percent from the peak as exports, banned for more than two months, are set to resume within weeks if incumbent leader Laurent Gbagbo leaves.

“Anyone would love to take advantage of this opportunity with unrest from the major exporter,” said Kona Haque, analyst with Macquarie Bank in Londonsaid, adding that Indonesia, Brazil and Ecuador are all suppliers to the U.S.

Problem-Ridden

Trailing Ivory Coast and Ghana as a producer, Indonesia is currently carrying out a three-year government-backed industry revitalisation plan.

However, cocoa production in Southeast Asia’s biggest economy is far from problem free.

Indonesian cocoa farmers have been battling the pod borer, worm-like creatures that eat cocoa beans and became a menace in 1999, as well as the spread of VSD, a fungal disease which attacked leaves, branches and tree trunks across key cocoa-growing areas of Sulawesi in 2008.

The poor quality of Indonesian cocoa makes the country’s beans unsuitable for shipment to Europe, which puts a premium on top quality chocolate, with the bulk of material moved to Asian countries such as Malaysia for grinding.

“Crop protection and fertiliser subsidies — these are really the big things that would help out the local (Indonesian) farmers,” said Hague.

“Indonesia has had bad crops this year because of heavy rains. Their exports out of Sulawesi have been falling… It’s not as good as the Ivorian.”

Indonesian cocoa output is seen flat this year at 600,000 tonnes, as higher production from new planting offsets the impact of heavy rains, the Indonesian Cocoa Association, or Askindo, said.

About 90 percent of Indonesian cocoa growers are smallholders, which has limited the sector’s expansion for decades. Many cocoa farmers have chosen to plant cheaper and more profitable crops, such as rubber or palm oil.

“Cocoa is a more difficult crop to grow than palm and is more prone to diseases,” Chris De Lavigne, vice president of Industrial Practices at Frost & Sullivan, said.

“A lot of the old plantations in Malaysia and Indonesia were ripped out and re-planted by smallholders, who have turned to palm.”

“These diseases and issues that cocoa faces can be dealt with, but the government needs to provide good support — they (farmers) need the right feeds and a lot of training and education.”

Cocoa crops start to mature around four years old.

US Market Share

Although lagging bigger cocoa consumers in Europe, the U.S. cocoa market is seen as having enormous potential.

“In Europe people eat about 10 kilos per capita each year. The U.S. are well behind but growing very strongly,” said Carlos Martinez, a marketer at Citigroup.

“They are moving away from low quality chocolate. In the next ten years (U.S. consumption) should double,” Martinez said, adding that the U.S. imports about 400,000 tonnes of cocoa per year, mainly from Latin America.

Indonesian cocoa exports to the U.S. last year were about 90,000 tonnes, down from 120,000 tonnes in 2009, Dakhri Sanusi, secretary general of Askindo, said this week.

“For 2011 I’m a bit pessimistic because of the implementation of the export levy,” he added. “It is difficult to maintain the (current) level… Maybe it will be the same as last year.”

The Indonesian government slapped an export tax for the first time on locally grown cocoa beans last April in an effort to encourage the retention of fermented beans for local refining in order to gain a premium in international markets.

At the moment, the poorer quality beans are traded at a discount as wide as $500 a tonne, while better quality West African beans enjoy a premium to futures prices.

Late last month Askindo said the export tax was diverting money that could be reinvested in plantations, while the scheme had not significantly boosted local grinding. [ID:nL3E7EN1JA]

Askindo chairman Zulhefi Sikumbang said Indonesian producers needed to invest in new farming techniques and to improve output, but they have little access to capital and interest rates for loans were too high.

“There is a tonne of potential for Indonesia,” said Frost & Sullivan’s De Lavigne.

“But if you look at the average yields that Indonesia are getting, it’s under half a tonne per hectare… You should be able to get at least a tonne if not a tonne and a half.” (Additional reporting by Fitri Wulandari and Lewa Pardomuan in SINGAPORE; Editing by Ramthan Hussain)

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