Indonesian Rice Market Chain

2.4 Previous Studies on Rice Price Transmission in Indonesia

There are several studies about rice price transmission in the Indonesian market. These studies can illustrate how price transmissions had worked in the rice market of Indonesia, with variety of cases and conditions. The rice price performs in vertical and spatial markets from domestic market, national market and international market. The price transmission performances of Indonesian market also will be different depends on the time period of regime related to different policies. In the international market case, Aryani 2009 found that the Indonesian rice market is integrated with Thailand and the Philippine with very weak level of cointegration. This condition might be caused by the persistence of import control policies both tariff and non tariff which are applied by these countries for rice trade. In the other study, the Indonesian central market Jakarta is cointegrated with international market Bangkok and domestic markets in Indonesia Irawan 2006. The domestic markets are counted from the average rice price of 33 provinces in Indonesia. The study shows that if the international rice price increases by 1, it will increase the domestic rice price by 0,4. Whereas if the central market price in Jakarta increases by 1, the domestic rice price will increase by 0,66. The contrast result from Conforti 2004, he used annual price series and found that Indonesian rice market and international rice market are not cointegrated. But with the causality test, his study found that Bulog which holding monopoly power and managing domestic policies, following the world market price trends. In the national market case for spatial market integration, the price transmissions among retail markets are not fully cointegrated. There are only 10 cointegrating vector from 12 retail markets in Indonesia, with Jakarta as a referred market. The wholesale markets are also not fully cointegrated. There are cointegrating vectors among Jakarta, Medan, and Makasar, but no cointegration between Makassar and Surabaya Sari 2010. The previous study from Istiqomah 2006 supports this results that the domestic markets in Indonesia are not fully integrated. In her study, she did ex- post study of liberalization policy implementation in Indonesia in 1998. The result shows both regimes before and after liberalization is not fully cointegrated. The number of cointegrating vectors after market liberalization is less than before. There are about 22 cointegrating vectors of 26 domestic markets before market liberalization, and then decreased into 12 cointegrating vectors of 24 domestic markets after market liberalization. It means that the market liberalization made Indonesian market more segmented, whereas the purpose of the market liberalization is to build market to be integrated. She stated it may due to the delayed response of market, the high transaction costs of storage and distribution, non competitive market structure, the shortage of credit facilities, the slow information flows, and the weakness of human capital. Alexander and Wyeth 1994 studied the cointegration relationship among 27 provincial capitals of Indonesia and CPI. They found that the CPI is cointegrated with all rice prices series but without significant causality from it to rice prices. Furthermore in the national vertical market, paddy price is cointegrated with rice price with different pace of adjustment Sari 2010. Rice price in the retail market is more responsive when paddy price increases. When the rice price increases in the retail market, paddy price is less responsive. It shows that there is asymmetric price transmission in the vertical market of Indonesian rice market. In the domestic case, Irawan and Rosmayanti 2006 analyzed the vertical and spatial market integration in Bengkulu Province. Their study shows that the vertical market integration between consumer and producer in Bengkulu is not formed. Whereas the spatial market integration among the retail markets in Bengkulu are formed. The rice price volatility information is also useful to support the analysis. The price volatility in the producer level is higher than the price volatilities in the wholesaler and consumer market Sari 2010. The rice price volatility in 1977- 1997 is about 17-21 Mears 1982; Pranolo 2001 in Rusastra et al. 2004. Istiqomah 2006 found that the volatilities of paddy price and rice price were affected by liberalization policy in 1998. After liberalization rice price in farmer level was less volatile, whereas the rice price in consumer market was more volatile. The liberalization policy high related with the existence of Bulog as the state enterprise which hold the price stabilization right. Bulog’s policies considered to be too partial to consumers and sellers than producers or farmers, thus the volatilities of paddy price in farmer level is more volatile than rice price volatilities in the consumer and wholesaler level Sari 2010.