Bill Guerin – Thousands of Javanese sugarcane farmers staged a massive rally in Jakarta on Tuesday demanding protection from the glut of cheap imported sugar that has threatened their very existence.

The Java sugar industry in its colonial-era heyday was a mighty agricultural and industrial enterprise and by the late 19th century Indonesia was in the forefront of the world's sugar producers, beaten only by Cuba. How the mighty have fallen. High input costs, poor management practices, inefficient government policies and a steady stream of cheaper imports mean that the angry farmers are being driven out of a basic industry built by their forefathers.

The country has been a net importer of sugar since the 1960s and now ranks as one of the world's biggest importers. Indonesia's annual consumption of sugar is about 3.3 million tons. Annual imports went down from 2.1 million tons in 1999 to 1.2 million tons in 2000 and about 1.6 million last year. It will likely import 1.5 million tons this year, mainly from Thailand. There are a mere 174 tons in stock, which will improve when the season kicks off in two months time. Total sugar production is currently 1.7 million tons.

Manufacture of sugar in Indonesia in the early days was almost exclusively confined to Java, with its rich volcanic soils and a vast supply of labor. The factories and their mainly Dutch owners and managers dominated the Javanese countryside and set in place agricultural systems in the Dutch mode. Sugar brought work opportunities galore but many small landholders became victims as the factory managers embarked on a lengthy program to grab peasant land for cane production. They also took over what had been the state's function to recruit labor for the planting, harvesting and haulage of cane.

From then onward the state-owned enterprises and factories dominated the country's sugar industry until, in 1957, the industry was nationalized and regulated.

A day before the farmers came to town, Minister of Trade and Industry Rini M Soewandi issued a new decree regulating sugar imports in a bid to redress the price imbalances. Only state-owned plantation companies (PTPNs) will be allowed to import white sugar and imports of both raw and refined sugar will be approved only for manufacturers who use sugar as raw material in their production processes.

Though one of the world's top sugar importers, Indonesia applies the lowest import tariffs, a modest 25 percent duty on white sugar and 20 percent on raw sugar, levels set by the International Monetary Fund (IMF) in its Letter of Intent. Thailand and the Philippines, for example, impose an import duty of almost 100 percent. The European Union imposes a massive 240 percent import duty and the United States slams a 150 percent duty on sugar.

In 1998, the Indonesian government set a zero duty on sugar at the behest of the IMF but in 2000 new rates were implemented. President Megawati Sukarnoputri, in Rome in June for an international food security conference, reportedly agreed to increase import tariffs again on all food and agricultural commodities in the near term. However, Soewandi has rejected the demands for tariff hikes on the grounds that raising the import duties would boost sugar prices at home and burden consumers. Minister for Agriculture Bungaran Saragih also says there is no need to raise the tariff on sugar because it is already high enough, in principle, to assist farmers. Bungaran says sugar prices in the domestic market had to be increased so that farmers would have sufficient incentive to plant sugarcane.

"We'll also help push up sugar prices on the domestic market to encourage local sugarcane farmers to plant more crops," he said.

The Indonesian Sugar Association wants a new import duty of at least 95 percent but Soewandi is fearful that this could lead to even more rampant smuggling of the white gold.

There are some 400,000 hectares of sugarcane plantations in Indonesia and almost three-quarters of this on Java, although productivity in Sumatra, at eight tons a hectare, outstrips that in most Javanese plantations, which average only between four and five tons per hectare.

Ten years ago more than half of Java's cane was irrigated, but this acreage has substantially diminished, reflecting a shift to the cultivation of more profitable crops. Farmers have switched to higher-profit, shorter-duration food crops. Sugarcane has had to compete with other crops, especially rice.

Relatively less attractive returns compared with other crops have discouraged many farmers from growing cane, leaving factories without sufficient raw materials to operate at capacity.

That said, sugarcane cultivation in the major producing islands is still a very significant economic enterprise, and encompasses more than one-third of the total land area.

About 70 percent of the sugarcane areas are cultivated by farmers with small-to-medium-sized holdings. The remainder is grown on the sugar-factory plantations, where the dominant form of sugarcane cultivation is plantation-style. Farmers have a different system, that of Kelompok Tani, where small groups are responsible for at least 20 hectares of land and coordinate the supply of cane to the mills.

Many cane farmers have production-sharing agreements with the state sugar mills whereby up to 65 percent of the sugar produced by the mill is returned to the farmers as payment in kind. Others just sell their cane and are paid based on the current official procurement price. Farmers in this scheme get 90 percent of their payment in cash and 10 percent in kind.

The government also subsidizes cane farmers by authorizing mills to pay the farmers based on the volume of raw cane they bring to the mill and on the extraction yields of their cane.

Only 12 of 59 sugar mills nationwide are operating efficiently and 12 more have already been shut down. Ninety percent of mills are publicly owned.

About 90 percent of sugar is used directly by households and 10 percent by industries. Imported refined sugar is largely for industrial use. The Indonesian mills produce a plantation-grade raw sugar called SHS I quality, which, because it is cheaper than refined sugar, has enjoyed an increased domestic demand.

However, the food, beverage and pharmaceutical industries need a higher quality of refined industrial grade that is largely met by imports. According to the Indonesian Food and Beverage Producers Association, local sugar quality is not suitable for these products.

The local refining industry rests with a single refinery, in West Java, which began operations in 1997. It can produce only 150,000 tons of refined sugar per year.

The high incidence of smuggling of sugar and under-invoicing of consignments into Indonesia has, in addition to ensuring declining returns to sugar farmers, made it difficult to attract investment for more modern sugar refining plants.

Increasing sugar production is far from easy. The state-run sugar mills lack decent equipment and the ongoing shortages of cane supply and poor-quality cane have caused many mills in Java to close. This in turn has led to a much-reduced cane-harvesting area.

Private sugar mills account for only 35 percent of total sugar production and, while they have better yields that the state-run mills, they suffer disrupted harvests and milling operations because of widespread land-ownership disputes with locals. Distribution is done by private mills through large distributors and by state mills through a tender process. The whole system is antiquated and does not meet the needs of an equitable system of distributing the sugar from Java across the country. One case illustrates the point. East Java needs some 396,000 tons of sugar a year, but produces about 700,000 tons annually. This year the province's Governor Imam Utomo, backed up by the East Java military district command, the police and the public prosecutor's office, issued a ban on the import of raw sugar to address the imbalances.

The National Sugar Council (DGN, or Dewan Gula Nasional) has failed to live up to expectations that it would help improve the efficiency and productivity of the sugar industry and improve farmer's competitive position in the global marketplace.

A Rp23 billion (more than US$2.5 million at current rates) credit line for cane farmers a couple of seasons ago proved to be of little help. The idea was that mills and farmers would somehow work together to improve deteriorating husbandry practices and the financial difficulties faced by the sugar industry would be attenuated by the credit program. Thus, it was hoped, the quality of cane would be improved and milling operations would be more efficient.

The small domestic production base cannot cope with the rapidly increasing direct domestic consumption backed by an equally fast-growing food-processing industry, and the upshot is that domestic sugar cannot hope to compete in price and quality with imports.

With world sugar prices relatively low, sugar can be imported and sold at retail below the price of the domestically produced sugar. The government and sugar producers complain of unfair trading and even of "dumping" of sugar by other countries into the Indonesian market. There may be some truth in this but the lower efficiency and higher cost of domestic sugar production and milling in Indonesia are prime factors in the market price distortions.

Breakthroughs in rice production in the early 1980s led to a rapid increase in agricultural productivity and farm incomes. Not only could Indonesia feed itself, but millions of farm families were at last able to break out of a subsistence existence. Later, labor-intensive, export-oriented industrialization was the main engine of growth until the 1997 financial crisis. Rising labor demand in the industrial and services sectors created jobs for the poor, boosted real wages and caused wholesale reductions in poverty.

The substantial downsizing of the sugar industry in Java, which has enraged the farmers, is down to the ongoing economic reforms, the liberalization of sugar imports, and the continuing reduction in the land planted with sugar as farmers switch to other crops.

The debate on whether or not to raise import tariffs (Indonesia's World Trade Organization deal allows for imposition of tariffs of up to 110 percent) is now likely to be colored and heightened by anti-IMF posturing on the premise that Indonesia's farm import liberalization was forced upon it by the agency, but the buck must surely stop at the government's door.

The government alone must implement policies that will ensure adequate supplies of sugar at prices affordable to the community at large. Sustainability of production and the availability of employment opportunities in a Java that is getting poorer and poorer would seem to be laudable goals.

The government needs to tackle, head on, the corruption and collusion that infest the customs service. Hiking the tariffs will play straight into the hands of corrupt customs officials and smugglers, while at the same time ensuring prohibitively high sugar prices for consumers.

With nearly half of the country's 100 million-strong labor force either out of work or underemployed, the challenge is immense and heightened by the fact that between 60 and 70 percent of the country's 210 million people live and work in the countryside, making the agricultural sector the biggest employer.

Sri Mulyani Indrawati, a well-known economist, has noted that there is too much price distortion and government intervention in the agricultural sector. "The government needs to redefine its policy towards the agricultural sector but it should not be a tradeoff vis-a-vis the manufacturing and service sectors," she said.

Given endemic corruption at all levels in the government bureaucracy, there are fears that any new money diverted to promoting agriculture could end up in the pockets of bureaucrats who still exert considerable influence in the villages of Java and the rest of the vast archipelago.