Month: September 2017

According to the critics, a decline in terms of trade would indicate that farmers’ economic position is deteriorating and thus that the reform program is ineffective.
While such conclusion might be an intuitive one, it’s not necessarily the right one.

This is because the terms of trade as calculated by the Indonesian Statistics Agency BPS only signals the relative development of input and output prices, but tells nothing about sales quantity and input quality.

As such, it may not say much about farmers’ income either. Let us explain.

Farmers’ output and input price index is calculated based on Laspeyres price index, the formula is as follow:

Qo means the quantity is a constant factor hence increase in crops harvest does not affect the index.

For example, due to larger supply, a year with a good harvest may yield lower average sales prices as compared to the previous year.

This sales price decline would deteriorate the terms of trade. Yet, due to the higher quantity sold, the good harvest is likely to bring in more money for each farmer as compared to a bad harvest sold at higher prices due to shortage of supply.

Also, the terms of trade measure says nothing about the quality of the inputs. For example, the adoption of higher quality inputs – such as the more expensive, but higher yielding hybrid seeds – may increase input costs.

This would deteriorate the terms of trade. Yet, the higher production yields following the use of these higher quality inputs are not captured in the terms of trade calculation.
We believe the efforts made by the government are primarily aimed at improving the three drivers of production: the surface used for agriculture, yields per hectare and the number of plantings per year.

The terms of trade captures exactly none of these drivers. As such, we may quickly dismiss the usage of terms of trade as a suitable measure to assess the effectiveness of the government reform efforts in the agricultural sector.

BPS and The Indonesian Center for Agricultural Socio Economic and Policy Studies are fully aware that this metric does not measure farmer’s income and they are taking steps to improve the methodology to account for this.

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Are farmers in Indonesia a happy lot?

In the past few years, Heyokha team has been traveling to many provinces in Indonesia to meet and talk to people from different walk of life. One group that represents a stand out is farmers.

We believe that the farmers’ good mood has something to do with commitment and efforts by the government to deliver a tangible reform in the agri sector. Following similar steps previously taken by Japan, Korea, Taiwan, and China, Indonesia is currently in the beginning of a long agri reform agenda to lift “small long-forgotten people” out from poverty and towards achieving food self-sufficiency.

Just like any new initiative, you are bound to get criticism from skeptics. Each initiative will have pros and cons. We are not here to debate what works best. There is no perfect solution. Instead, we think it is more meaningful to let the farmers be the judge.

A new survey by a credible political think tank CSIS has some interesting findings.

Of course, the most important finding from the survey is that President Jokowi electability rating went up by 9 percentage points from 41.9% in 2016 to 50.9% in 2017.

Source: CSIS survey in September 2017

Overall public satisfaction is also moving up to 68.3%, the highest ever since President Jokowi took office.

Other than the main obvious findings, one area that we would like to focus on is the fact that President Jokowi has the highest approval rating among farmers across all occupational categories.

Support from farmers is gaining ground, even stronger than the finding from the similar survey in Sept 2016.

Source: CSIS survey in September 2017

It must be recognised that the government reform program is not without its shortcomings. Overall, however, this high approval rate from farmer confirms our on the ground observation that farmers are indeed a happy lot.

If the government is announcing big reforms in agriculture, but the farmers were not seeing the results, you can bet they wouldn’t be happy about it. Pure and simple.

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Jungle night trekking, from anxiety to serenity
Mud-drenched clothes, legs covered by leeches, it didn’t seem to matter anymore after the darkness fell in the jungle. It was pitch black, and only where we pointed our flashlights could we anxiously try figure out what we were seeing. We heard cracking sounds in the dense vegetation around us. Was it coming for us? One thing is for sure, in the dark our mind is impeccable at seeing things that are not there. This didn’t seem to apply to our Dayak guide though, who effortlessly led us over slippery mud paths and deep canyons.

How much longer? We asked him. Oh, it’s just a cigarette smoke away now, he replied. Good, good… Three (!) hours later, we made it to the waters. It was then, when we reached the center of the serene, that we realized the Kalimantan Jungle was like a treasure in the deep sea, a beauty in the darkness…

Spending a lot of time in cities and farmlands, Heyokha team thought it was time to take it to the next level: we made a trip to the virgin forest area of Mahakam Hulu in East Kalimantan, Borneo.

Besides the things we learned during the trip that are relevant for our business, we witnessed wild life in its purest form: we believe we saw the awesome Malayan Porcupine, Rhinoceros Hornbill, Oriental Pied Hornbill, Black Spitting Cobra, Brahminy Kite and, to less high profile – but nevertheless as fascinating – stick insects, giant ants, leeches (sticking to our legs), loudly buzzing insects, and many type of frogs.

While the whole experience was astonishing, it was also very exhausting as most of the trip was made over bumpy muddy paths, either by four-wheel-drive or on foot… We think that if the infrastructure was better developed, this rain forest trip could easily be one of the most popular excursion trips in the world.

Anyway, on a more serious note, the trip enabled us to confirm with locals that the government’s objective to redistribute idle land to the people is already in progress. In addition, we came across the vast assets of a forestry company that may be interesting to look at. We will elaborate more below.

Land redistribution started
As we wrote earlier in this report and in our blog “No title No glory”, the size of idle state-owned company land that is to be redistributed to Indonesian farmers is staggering. Currently, the Environment and Forestry Ministry and the National Land Agency have each earmarked 12.7 million and 9 million hectares respectively to be redistributed.

We further wrote that, to support the redistribution of the land, the government planned to introduce the draft land bill (the first bill to support the Agrarian Law) into the House of Representative in the first week of June 2017 for deliberation. The bill would provide legal certainty on land rights such as the right to use (HGU) and rights to build (HGB) and to introduce new concepts such as rights to the earth below a plot of land called subterranean rights.

June has passed and the bill is still under review. Although no passed yet, it is still expected to be passed later this year. In practice however, the government is already redistributing land, we found out.

During the long trip through Borneo, all the way up to the Malaysian border we met military personnel who were being deployed to watch the border between Indonesia and Malaysia. They were telling us that in the border area, farmland is actively being converted to prevent loss of land to Malaysia as happened in two small islands. A win-win solution that strengthens boarder protection and creates income for farmers.

Can the most distressed asset in Indonesia stage a comeback?
Part of our exiting trip was hosted by SLJ Global (SULI IJ), Indonesia’s largest integrated forestry company. This allowed us to visit their 800,000 ha natural forestry concession area and to stay in their humble camp in the middle of the Borneo rainforest.

An extremely challenging operational landscape

Other than enjoying the astonishing view, we also learned about how the company – active in a heavily regulated industry – managed to survive amid a bombardment of export bans, declining timber prices and hundreds of social and environmental issue cases.

The strongest blow to the company was the log and lumber export ban imposed by the government in 2004. This forced the company to locally process the logs into plywood and medium density fiberboard (MDF), a lower margin business with larger working capital requirements. It was only a matter of time before debt covenants were breached and production facilities were seized by its bankers. At the brink of being decimated, the recovery of plywood prices allowed a great escape, enabling the company to renegotiate with its bankers and restructure its loans in 2014 and early 2017.

With production facilities being back in operation again, the company could generate cash flow that is sufficient to service its debt and interest obligation and fund its working capital expansion.

There are some further upsides that may play out in the future. First of all, the architecture trend moving back towards wooden materials as reported by FT. For practical reasons: timber is beautiful, lightweight, and (learning from our trip to Kalimantan) actually sustainable.

Cross laminated timber (CLT) is expected to stage a comeback for timber as a building material for construction.

Secondly, the plans of the U.S. government to impose import duty on Chinese and Canadian exports (the largest timber exporters in the world) is expected to increase timber prices in the U.S. With the U.S being SULI’s main market, we believe it will boost the company’s profitability.

Thirdly, based on our conversations with Indonesian timber companies, there is the expectation that the government will at some point appreciate that the export bans – that are aimed at increasing value adding activities on Indonesian soil – are actually destroying value in the timber industry.

The thing is that the quality of Indonesian logs and lumber are internationally considered to be of premium quality. Processing it into lower grade products is seen by some as an equivalent to making bakso (meatballs) from Kobe beef. Therefore, industry insiders would not be surprised if the government will lift the export bans at some point. This would propel profits as the logs are now selling at massive discounts in the domestic market.

Lastly, the international scheme for carbon credit trading seems to be lucrative for forestry companies, who can earn money for reducing logging activities. If the Indonesian government was to adopt carbon credit trading, this could be a major upside to the firm’s profitability.

Global timber ETF making a new high as it becomes a popular choice for inflation-hedged

With such upside potential, and current depressed valuation, this company may be worth to be given a second look especially with iShare global timber ETF making a new high.

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