When Sugar is No Longer Sweet
A number of sugar mills in Java stopped milling early because of competition from the private sector. It is time the government left the business and became neutral regulator.
THE government regulates the national sugar industry as if it were not a strategic commodity. A number of targets and programs to revitalize the national sugar industry have been nothing more than lip service. Now a number of sugar mills in East Java and Central Java, most of which are state-owned enterprises (SOEs), are facing severe problems.
In the last three weeks, four sugar refineries owned by Perkebunan Nusantara X, namely Lestari refinery in Nganjuk, Tjoekir refinery in Jombang, Meritjan refinery in Kediri and Kremboong refinery in Sidoarjo, all in East Java, have shut down their mills early. Pakis Baru refinery, managed by the Salim Group in Pati, Central Java, has done the same. Several refineries are expected to follow suit this week.
Going by the standard of 150 days of milling needed for a return on investment, the machines should run until the end of October—assuming the milling season started in June. However, there is no more sugarcane to refine. These old refineries are unable to compete for sugarcane. They were losing out against new privately owned refineries in Java. Farmers who usually mill their sugar at these refineries have now moved to the new factories that offer higher prices.
The ‘cane tourism’ phenomenon of the 1990s has been repeated in the last few months. It is referred to as tourism because farmers are prepared to send their sugarcane to refineries in other districts. The mills in the new factories, such as the Rejoso refinery in Blitar, East Java, deliver a better return. The more sugar produced from every quintile of cane, the more profit that the farmers make. These new factories also offer immediate payment, unlike the government refineries that pay farmers using a profit-sharing scheme after the sugar is sold.
This new system is more attractive for farmers because it gives them the option to make bigger profits. But this phenomenon at the grassroots of the sugar industry is also a sign that the major problems in the sugar industry continue to pile up. These problems add to those that existed before, particularly the failure of the 2019 sugar self-sufficiency program because of erroneous national production predictions. The result was an increase in sugar imports.
The government must immediately evaluate all its plans to revitalize refineries. This year, the revitalization program was used by the government as an excuse to inject Rp4 trillion of state capital in two SOE plantation parent companies despite the same program already costing trillions of rupiah over the previous five years. As a result, state sugar factories are in a poor condition and failed to carry out the government’s mission to support sugar self-sufficiency.
The problems at these state-owned refineries are not simply because of outdated machinery, but also because of a business model that is not transparent and that is inclined to serve the interests of cronies. For decades, farmers have had to pay for these inefficiencies through the profit-sharing system, which has reduced their income. Sugarcane farmers should not be blamed for choosing privately owned refineries. They have the right to strive for a better life.
The construction of new factories should also be focused outside Java without forgetting social and environmental aspects. Land in Java is already limited and is insufficient to support a sugar industry with sufficient capacity for scales of economy. Last year, it was estimated that only 257,000 hectares of sugarcane remained, with the area decreasing by an average of six percent per year. The construction of new refineries in Java unsupported by sufficient sugarcane plantations will trigger unhealthy competition.
Above all, the government should end its involvement in this industry. It should step out of the market and become a fair umpire producing regulations and overseeing their implementation. The government must also be better at making plans. Poor accuracy has led to an unstable sugar market: prices rise and fall at the wrong times.