JAKARTA, Sept. 20 (Reuters) – Indonesia has launched its most aggressive bid ever to revive flagging cocoa production, with $350 million earmarked for replanting and rejuvenating ageing trees in order to lift output to a record by 2013.

The world's third-biggest grower after the Ivory Coast and Ghana could exceed its previous output peak of 600,000 tons in the next four or five years if the program is well implemented, analysts say.

''The program is very timely, and necessary. Indonesian output is on a structural decline and there is desperate need to reverse this. Given that high prices alone will not be sufficient, the government has to intervene,'' Kona Haque, an analyst at Macquarie Bank, said in an email.

The use of higher yielding seeds and a sidegrafting technique and the employment of trained workers are considered among the key factors that could make or break the program.

Indonesia's cocoa output is expected to drop to a range of 470,000-485,000 tons this year – from an estimated 500,000 tons in 2008 and 520,000 tonnes in 2007 – according to analysts, the Indonesian Cocoa Association (Askindo), International Cocoa Organization (ICCO) and Indonesian Cocoa Industry Association.

The slide in output is due to various factors including poor farming techniques and Vascular Streak Dieback (VSD), a fungal disease that has been attacking leaves, branches and tree trunks across the island of Sulawesi, which accounts for about three quarters of nationwide output.

Annual output could reach the previous peak of 600,000 tons, provided the program succeeds, said Macquarie's Haque.

Eric Llull of Noble Resources S.A., part of Noble Group , said production may be stable in the next two seasons, but there could be a rapid spurt in following years supported by output from new growing areas such as the island of Sumatra.

While Sumatra is Indonesia's main growing area for palm oil, coffee and rubber, farmers in some provinces on the island have also started to grow cocoa trees in recent years and may account for around a fifth of nationwide production this year.

''It is very difficult to quantify at this point and give a number, but I believe we could easily revisit the previously experienced peak,'' Llull said.

Indonesia's falling output is contributing to a global supply shortage estimated at 80,000 tonnes for the year to September 2009.

The deficit has been bullish for prices, which have continued to climb this year after strong gains in 2007 and 2008. The second-month New York cocoa futures contract has added 12 percent so far this year.

The government program includes the distribution of free fertilizer to boost productivity of cocoa trees over an area of 145,000 hectares, and the production of better seeds and trees.

The government-sponsored Indonesian Coffee and Cocoa Research Institute (ICCRI) is currently working on a key part of the program, which involves finding productive and disease-resistant trees that can be cloned for seed production.

ICCRI will produce at least 70 million seeds for the planned replanting of 70,000 hectares of cocoa plantations.

The government adopted Nestlé SA technology that enables mass production of high-yielding, disease-resistant seeds through somatic embryogenesis (SE), a cloning technique to speed up seed production, and ICCRI has been given the monopoly to use the technology.

''The target is to achieve productivity above 1 ton per hectare (per annum),'' said Teguh Wahyudi, a director of ICCRI.

But analysts warn that plants produced from such seeds may have a shorter lifespan.

Good seeds are important to prevent Indonesian cocoa productivity from falling below a critical level of 0.4 tons per hectare from a peak of 0.7 tonne in 2006, said Askindo's chairman Halim Abdul Razak.

''If farmers can only get 400 kgs per hectare, they will earn around 10 million rupiah ($994) a year, meaning that they are poorer than people who earn a minimum wage of 1.2 million per month,'' Razak said, adding that farmers could shift to other crops if productivity falls below the critical level.

ICCRI has produced more than 1 million seeds using the SE technology so far, and the first few trees have already started to produce pods after two years, compared to three years for conventional seeds.