Cigarette Price Hike Makes Indonesian Clove Producers Consider Alternative Export Markets

Whole Clove

Indonesia

Published Dec 12, 2019

In Indonesia, the world's largest clove producer, most cloves are consumed by the cigarette industry. A proposed tariff hike on cigarettes, however, creates a lot of uncertainty for clove farmers, as the cigarette production is expected to decrease. Amidst a good harvest, clove farmers will have to look into alternative export markets.

In Indonesia, cloves are not just used to give dishes a strong aromatic flavor. In fact, most of the clove production, around 95%, goes to the cigarette industry. Many Indonesians are avid smokers and it is estimated that approximately 39% of the adult population, equivalent to over 65 million people, smokes daily. Kretek, cigarettes that are flavored using cloves, are hugely popular. Many clove farmers have relied on the cigarette industry for years. Now, however, the government has proposed to increase the price of cigarettes on January 1st, 2020. Amid a good harvest, there is a lot of demand insecurity for clove farmers.

Increasing Clove Production in Indonesia

Indonesia is the world’s largest clove producing country by far, producing more than 77% of the world’s total. Of its total production amount, 123.7K tons in 2017, it only exports a small amount: 9K tons in 2017 and 20K tons in 2018. The clove production in 2019 was higher than in previous years due to an increase in planted area. Furthermore, every four years, clove production is higher than average due to a four-year production cycle in Indonesia.

Most cloves are meant for the domestic market and more specifically, for the cigarette industry. Indonesia has recently also started importing cloves to meet the rising demand from this industry. It is stated that the demand will rise from 120K tons per year in 2019 to 130K tons in 2024.

In order to make the Indonesian clove supply meet the domestic and international demand, the government is planning to increase clove production. In August, the Ministry of Agriculture vouched to increase the production area by 4.200 ha per year until 2024. The Ministry is also planning to enhance the productivity of farmers, as yield is still only at 2 quintals/ha. If these plans are executed, it is expected that Indonesia is able to meet its own domestic demand, as well as increase its exports to 15K tons per year.

Steep Increase in Cigarette Prices Creates Uncertainty for Farmers

Against this background, the recent move from the Indonesian government to increase tariffs on cigarettes comes as a surprise to many clove producers. The Indonesian government has long been in a battle to reduce the spiking smoker population in the country. In 2018 it already raised taxes on cigarettes, under a huge backlash. Now, the government aims to raise the tariffs on cigarettes again, starting on January 1st, 2020. Prices will increase by an average of 21.55%. Machine-produced kretek cigarettes will see a 23.29% tariff increase, whereas the increase for regular machine-produced cigarettes amounts to 29.95%. The tariff on hand-rolled cigarettes will increase by 12.84%. Cigarette companies are also expected to raise their prices as a result, to ensure that they will remain profitable. This means that the price of a pack of cigarettes can increase up to IDR 33.000 (USD 2.35).

Clove farmers have mixed reactions to the cigarette price increase. On the one hand, the price increase could potentially lead to a decrease in cigarette consumption, like the government hopes, and thus in production. This will decrease the demand for cloves significantly, leading to demand insecurity for farmers. On the other hand, cigarette companies are introducing cheaper, non-premium cigarettes into the market to offset the price increase. This could mean that the demand for cloves will not decrease as fast as first assumed. Nevertheless, the price hike does signal uncertain times for clove growers. Their high dependency on the cigarette industry makes them vulnerable to price changes like these. The awareness about dependency on the cigarette industry is growing and clove farmers are increasingly seeking to export their product.