REPUBLIKA.CO.ID, JAKARTA - 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.

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.

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