The consumption of dairy products in Indonesia is low, around 4 kg per person per year, compared with 240 kg for Australia. This consumption is predicted to increase significantly (between 2 and 7% per year) as the economy grows, given the strong link between demand for dairy products and income.

Currently the Indonesian dairy industry is subject to many government regulations and institutional arrangements. These include: proportional quotas (requiring domestically produced milk to be used with imported milk); subsidised credit for purchase of dairy cattle; restrictions on imports; guaranteed distribution channels for small farmers to private processors; and the banning of foreign investment in certain parts of the industry. Many of these regulations were established to protect the domestic industry, to raise farmers incomes, generate rural employment and save foreign exchange. The level of protection of this industry is in the order of 50 to 250%.

Indications that the Indonesian government is likely to reduce a range of tariffs on dairy produce suggest that Indonesian institutions are prepared to make changes in this industry.

The aim of this project is to examine existing government regulations in the Indonesian dairy industry, to formulate new/revised policy arrangements and to estimate the effects of these arrangements on all aspects of the dairy industry in Indonesia and on exporting countries such as Australia.

The report will focus on policies which have the most undesirable effects or where undesirable effects are judged to be likely. The policy areas to be examined in detail include:

. the requirement of dairy companies operating in Indonesia to purchase raw milk from local farmers;
. regulations governing the ratio of domestic to imported milk used in processing, which ensures an outlet for local milk; and
. restrictions on the companies permitted to import milk products.

The study will make use of partial equilibrium analysis and regression analysis to explore supply and demand in the dairy industry and develop models to calculate the impact of existing policy and estimate the changes under any revised or new policies. Surveys and site visits will be used to supplement data collected by Indonesian Government agencies.

In recent years the Indonesian economy has been growing at an annual rate of around 7%. Agriculture contributes more than half of the country's GDP and 75% of people in Indonesia live in rural areas. Yet the agricultural sector has been contributing very little to Indonesia's rapid growth with agriculture growing by less than 3.5% between 1989 and 1992.

This study will provide the Indonesian government with a comprehensive economic analysis of the dairy industry. This information is required so that informed policy decisions which optimise economic and social benefits can be made.

It is estimated that existing policies result in the annual loss to the economy of $15.05 million. It is hoped that this report will lead to policy changes which significantly reduce the size of this loss as well as preventing it from increasing. The project will jointly aid the dairy industries in Indonesia and exporting countries like Australia.