ABSTRAK
Indonesia is grouped in a small country, as Indonesia's market share of milk commodity is less than 0.05 7 in the world market (1987), and Indonesia cannot influence the world price of milk. From 1978 until now, Indonesia has been conducting inward looking policy by controlling milk imported by the milk industry. The government regulates local content requirement for the industry's milk raw material. Every milk raw material imported by the industry must be guaranteed by local fresh milk, it is known by Ratio Policy. Restriction of raw material milk imported by the industry has a tendency more tight than 10-year ago, and it caused milk scarcity in the domestic market. Coefficient of income elasticity of milk demand in Indonesia is 2.3, it said that each increasing one percent of income, demand for milk must increases 2.3 percent. In fact GNP per head has a tendency increasingly, but it is contradiction that rate of milk consumption per head has a tendency decreasingly. It is as a description for milk consumption, an Indonesian consumes milk is about 4.23 kg/year in 1978 and compared to 1990 is about 4.08 kg/year. Government of Indonesia also protects the domestic milk industry through instrument of tariff and non-tariff barriers. Average of rate of nominal tariff for final goods between 30 until 40 percent, and intermediate input is about 22.84 percent. In other side, the government controls local content requirement (semi quota) through the Ratio Policy. By using the Ratio Policy, average of rate of real nominal tariff approach 270 percent. The fact, domestic milk price is higher than world milk price. The effective rate of protection (ERP) received by the milk industry is almost 345 %. The rill ERP is higher than nominal tariff, and it indicates protection of milk commodity in Indonesia is aimed to protect final goods and milk industry not farmers as suppliers? local fresh milk. 19 medium and large milk factories control a large number of final goods, and the market structure is oligopoly. Variable of dairy cows correlates and influences significantly the supply side of milk production, that means the rate of productivity a dairy cow from 1978 - 1990 increase sharply. But the productivity of dairy cow in Indonesia is still less than in the United Stated. Variables of GNP per head and Ratio Policy, and Price of milk influence significantly to the demand side. Study recommends 1) The Real Effective Rate of Protection for milk industries must be decreased by relaxing or Ratio Policy; 2) Productivity of dairy cows have to increase through improving management at farmers level and nutrient for the cows; 3) In conducting Ratio Policy needs considering national growth of population and rate of consumption of people; 4) The milk industries must keep to obligate to absorb all local fresh milk produced by the farmers.