Indonesia import duty decision set to shake up global cocoa supply
* Government mulling changes to import tariff as industry pressure mounts
* Cutting import duty may halt gains in Indonesian cocoa output
* Farmers resisting duty cuts, fearing hits to profits
By Michael Taylor and Yayat Supriatna
JAKARTA, April 8 (Reuters) - Indonesia's cocoa grinding industry - which includes firms such as Cargill and Barry Callebaut - is squaring off against farmers over import duties, the outcome of which could shake up the market for the chocolate-making ingredient.
Cocoa bean production in the world's third-largest producer is set to hit the lowest in more than a decade this year at 410,000 tonnes - far behind soaring grinding capacity of 600,000 tonnes.
With Indonesia's cocoa bean imports forecast to jump nearly 300 percent to 150,000 tonnes this year, a major grinder group and government officials want to scrap or cut the 5 percent import duty to give the processing industries easier access to the beans they desperately need.
If the Southeast Asian nation agrees, it could make farmers curtail their growing of cocoa and switch to other crops. That would curb global availability of cocoa - already forecast to post a second straight annual deficit for 2013/14 - and boost futures prices that are hovering near two-and-a-half-year highs.
With presidential elections due in July and farmers constituting a significant voting bloc in Indonesia, an immediate decision is seen as unlikely, even though some key ministries have voiced their support for a cut in the duties.
The duty cut could lead to a flood of cheap imports that would hurt Indonesian cocoa farmers' profits and hinder much-needed gains in output, traders and analysts say.
Vanessa Tan, an investment analyst at Phillip Futures in Singapore, said how much the farmers would be impacted would depend on bean prices in the local and global markets.
"If there is a large difference then local farmers won't be able to compete and will suffer. If we get to the point where farmers see it as more profitable to plant something else instead, then you will see less supply," Tan said.
A big Asia-based cocoa buyer said imports from the top two producers Ivory Coast and Ghana cost 10 percent less than Indonesian beans due to their superior quality and lower wastage.
Farmers will find it hard to raise production above 425,000 tonnes next year if the import tariff is scrapped, said Zulhefi Sikumbang, chairman of the Indonesia Cocoa Association, which mostly represents exporters and traders.
"If the government scraps the cocoa bean import duty, cocoa grinders will be the winners and farmers will be the losers," added Sikumbang.
CRAVING FOR CHOCOLATE
As wealth levels increase in Asia, demand for chocolate has flourished and contributed to an expected second consecutive global cocoa deficit for 2013/14, International Cocoa Organization data shows.
The global supply-demand outlook has boosted cocoa futures , which hit a 2-1/2 year high of $3,039 a tonne in March. The prospect of increased import demand from Indonesia if it cuts the duty may support prices further, say analysts.
Firms such as Cargill, world No.1 chocolate maker Barry Callebaut, JB Cocoa and PT Bumitangerang Mesindotama have made multi-million dollar grinding investments in Indonesia, looking to feed a growing regional appetite for chocolate.
Despite the government spending more than $350 million to increase output, Indonesian cocoa farmers have struggled to contain increased crop diseases such as cocoa pod borer and many have switched to crops such as palm that are easier to care for.
Concerns over soaring grinder capacity and lagging production are now rife, with the country's deputy trade minister making the case for a lowering of the import duty in September, and the Indonesian Cocoa Industries Association also pushing for a total scrapping last week.
But with politicians keen to highlight their nationalistic credentials in the upcoming elections, observers say it is unlikely that the government will make any decision on the cocoa import tariff before votes are cast.
"We have to do in-depth study on this before deciding, to avoid the wrong decision," Gamal Nasir, director general of plantation at the agriculture ministry, said earlier this month.
"If we make a wrong decision, farmers will be the victims." (Editing by Muralikumar Anantharaman)