INSIGHT-One lump or two? Indonesian 'sugar samurai' serve foreigners sparingly
* Band of sugar traders control white sugar market -- sources
* Opaque sugar industry leaves overseas investors out in cold
* Indonesians eat more sugar than most other Asians
* Government wants to examine the issue
By Michael Taylor and Yayat Supriatna
JAKARTA, March 25 (Reuters) - White sugar prices hit a record in Indonesia last summer and further spikes are expected this year even though the world is awash with the sweetner. The main cause, say critics, is a small group of traders known in the industry as sugar samurai.
There is no evidence the samurai are doing anything illegal but they buy most of the crop through an auction system that works in their favour, say the critics, who include industry officials, government advisers and other traders. Some of the purported samurai firms deny the auctions are unfair.
The system, which some samurai helped establish, gives them the right to buy sugar at the expense of other traders under certain conditions. The samurai also run most distribution and retail networks, giving them almost total control over the market and the retail price of sugar, the critics add.
That has made it virtually impossible for foreign commodity firms or other local players to enter one of Southeast Asia's largest white sugar markets, said Indonesia's commission for the supervision of business competition, an independent body that looks into unfair and monopolistic business practices.
Three major foreign commodity companies told Reuters the system made the market unattractive, even though they would like to trade white sugar. They all declined to be identified.
Nearly all global commodity players operate in Indonesia, home to 240 million people, a fast-growing economy and a market rich in palm oil, coffee and cocoa, as well as sugar.
"Why is it possible to fix the price and put the price very high -- because we don't have any other competitors," Hermanto Siregar, an agricultural economist and economic adviser to President Susilo Bambang Yudhoyono, told Reuters.
To be sure, sugar prices are also high in Indonesia because the government sets a floor price at auction to ensure farmers don't switch crops. Many traders complain that is too high.
But the dominance of the samurai, rarely reported before, is becoming more noticeable as sugar consumption steadily rises, critics say.
"They are so powerful," said Nawir Messi, chairman of the business competition commission.
Other traders put the number of samurai at around nine. They head unlisted family-run sugar trading firms that have been in business for decades. The firms are little known outside the sugar industry in Indonesia.
Reuters spoke to five of them. They denied having a grip on the market. Several said the term, sugar samurai, did not exist. Other traders Reuters spoke to used the nickname frequently.
"No one is cornering the domestic sugar market," said Ridwan Tandiawan, owner and CEO of a sugar firm called UD Benteng Baru. "Everything is transparent, the sugar price is determined through a fair auction."
Pieko Njotosetiadi of PT Fajar Mulia Transindo echoed those comments. "Everyone can take part in the auction," he said.
The samurai are involved in the white, or processed, sugar market, which is for households and small-scale firms. Indonesia is also the world's largest importer of raw sugar, which goes to refineries and then large-scale industries such as food and beverage manufacturers.
Indonesians eat more sugar than most Asians, at 22.9 kg (50.5 pounds) per head last year versus an Asia average of 17.5 kg (38.5 pounds), says the International Sugar Organization.
It also costs them more. For example, Indonesians pay nearly 60 percent more for white sugar than consumers in Thailand, another producer. Meanwhile, global sugar stocks are set to rise this year to their highest level in 5 years.
FAVOURABLE TREATMENT AT AUCTIONS
The samurai began to dominate the white sugar market after the 1998 Asian financial crisis, as autocratic leader Suharto stepped down and the International Monetary Fund forced a range of agricultural reforms in return for loans.
When state logistics agency Bulog, as a result of those reforms, began to release its sugar stocks, the samurai bought it all, said two traders who were in the business at the time. Soon after, the samurai helped set up the auction system for harvested sugar.
Regular auctions are held during the May-December harvest season when sugar imports are banned. The sugar is processed at 62 mainly state-run mills as it comes in.
Most is then drip-fed to auctions run by the mills in small quantities. That works for the samurai but not big firms which prefer to buy large amounts for economies of scale and to keep transactions costs down, other traders said.
The samurai get another edge through a decade-old arrangement in which they have lent money to farmers for re-planting. Some farmers pay interest on the loans while others share profits. But under both schemes, the samurai get preferential auction rights.
For example, the samurai have the right to buy up to 50 percent of any winning bids, at the same price, on crops they financed, said Soemitro Samadikoen, chairman at the Indonesia Sugarcane Farmers Association.
The Trade Ministry condones the practice because it ensures domestic cane keeps flowing to state-owned, inefficient mills and thus protects jobs, say critics.
Deputy Trade Minister Bayu Krisnamurthi, a key figure in devising sugar policy, declined to respond to questions on the issue. The trade minister, Gita Wirjawan, recently said in a brief comment to Reuters that a group of companies appeared to control white sugar supply, adding he would look into the matter to bring about stable prices. He did not name any companies.
There is no centrally collated data on how much sugar is purchased at each auction. But other traders say the samurai account for the vast majority of winning bids.
On top of that, the samurai have tightened control of retail and delivery channels through their transportation services, warehousing and agents over the years, industry sources said.
A non-samurai trader would struggle to get an auction lot to the market, said the business competition commission's Messi.
"Even if you are an international trader, you cannot deal with this system. Before you start, you have died," Messi said.
INDUSTRY ROADMAP SOUGHT
Private U.S. trader Cargill, global commodity trader Louis Dreyfus and Singapore-based traders Olam International and Wilmar International operate in Indonesia.
Cargill and Louis Dreyfus trade raw sugar. Wilmar runs two sugar refineries in Indonesia, while Olam has one.
A Cargill spokesman said: "There are no current plans to trade white sugar, though we will evaluate opportunities as they come along. We are not familiar with the sugar samurai."
A Wilmar spokesperson said they were not aware of any plans to trade white sugar either. Louis Dreyfus and Olam did not give any on-the-record comments.
The competition commission investigated domestic sugar trading in 2005/2006. It recommended the government lend money to farmers instead of traders, noting a potential conflict of interest. It also said more traders should be able to enter the market.
A 2010 analysis by the commission concluded that a small number of enterprises controlled the white sugar market. It recommended the government develop a roadmap for the industry to support the creation of a competitive industry.
Indeed, high sugar prices have stoked food inflation and is another example of the commodity sectors that some analysts and industry players say President Yudhoyono has failed to fix. The president recently lambasted his ministers for not working hard enough to curb soaring staple food prices.
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