Drink More Milk: Policies Supporting the Indonesian Dairy Industry

The Indonesian Government believes that milk is good for health, particularly infant health, and has a campaign to encourage consumption of fresh milk. At present per capita consumption of fresh milk, at 12 litres per head per annum, is very low and the Government hopes to double it. Fresh milk is not traded internationally so one of the consequences of encouraging consumption is to support the local dairy industry at the expense of domestic and imported suppliers of milk powder and other substitutes. On the supply side milk production per cow is also very low by international standards, at 1,740 litres a year. The Government has policies to increase both the number of dairy cattle and productivity, and ultimately to achieve self-sufficiency. There are also in place tariffs of 5-10 per cent on dairy product imports, but some of these are scheduled to be removed under existing free trade agreements. A computable general equilibrium model, GTAP, is used to estimate the impact of the fresh milk campaign, the removal of tariffs, and increases in production and productivity. The fresh milk campaign is modelled as a consumption tax to bring about a given change in domestic demand. The closure is switched to endogenise the tax. A production shift is modelled as an output subsidy, and a productivity shift as an exogenous output enhancing productivity shock. No attempt is made to measure the benefits of drinking fresh milk, although these are presumed to be positive. The results suggest supply side policies predominantly benefit consumers and demand side shocks benefit producers to a greater degree. Faced with constant and inelastic demand, a production increase drives down prices by more than the change in output. The removal of tariffs on dairy products would not be beneficial for Indonesian producers. However, producers would benefit from a shift in demand brought about by the fresh milk campaign and from a taxpayer funded output subsidy. From a consumer perspective, the fresh milk campaign would drive up the price, so existing fresh milk consumers would be worse off. However, supply side policies would provide benefits to consumers. Both a subsidy on milk producers and a productivity improvement would result in lower prices to consumers. Likewise, the elimination of tariffs benefits consumers, although not those who wish to drink fresh milk. The fresh milk campaign is likely to prove beneficial but it remains to be seen how effective it may be, the cost involved, and the magnitude of the health benefits.