Unit Root Test Rice Price Transmission and Market Integration

5.2.2 Cointegration and Error Correction Models 1

Producer Price-Rice Miller Price First relationship is between producer price and rice miller price. Table 5 shows that there are strong evidences that producer price and rice miller price are cointegrated. The Johansen Trace test rejects the null hypothesis of no cointegration, but fails to reject the null hypothesis of one cointegrating vector. The cointegration indicates that producer price and rice miller price are integrated. Table 5 Cointegration test for producer price-rice miller price 3 lags Johansen Trace Test Level of significant r0 LR P-value 90 95 99 29,71 0,0014 17,98 20,16 24,69 1 6,36 0,1704 7,60 9,14 12,53 After we know that there is one cointegrating vector between producer and rice miller, we continue to examine the extent of their relationship. The Error Correction Model result shows the short-run dynamics, the adjustment parameter, and the long-run equilibrium. In the short-run there are no significant differenced lag variables. It means in the short run producer price and rice miller price move in the different way. The error correction as the adjustment parameter shows that it adjusts very fast about 0,513 of the divergence from the long-run equilibrium being corrected each month. The long-run equilibrium will be achieved when producer price increase about IDR 1.000, rice miller price will increase about IDR 1.025. The rice price from producer is transmitted to rice price in rice miller. The factors which may influence this relationship are product linkage, transaction costs, trade barrier, transparancy of information and market power. Producer price and rice miller price interact directly in the market, so there is strong linkage in the product flows. This product linkage strongly influences the price determination for both producer price and rice miller price. So, in the long-run they move together in the same way. Transaction costs including transportation cost to moving rice product from producer to rice miller is relatively low because commonly producer and rice miller are in one region. Low transaction costs can strengthen the market signal of rice price in the market. Table 6 Error Correction Model for producer price-rice miller price Dependent variable ΔMP t ΔPP t Independent variable parameter t-value parameter t-value ECM t-1 0,051 0,198 0,513 1,859 ΔMP t-1 0,368 1,277 0,446 1,453 ΔPP t-1 -0,044 -0,156 -0,150 -0,505 ΔMP t-2 -0,422 -1,550 -0,386 -1,333 ΔPP t-2 -0,062 -0,237 -0,083 -0,298 ΔMP t-3 -0,001 -0,006 0,002 0,010 ΔPP t-3 0,158 0,687 0,163 0,666 Long-run Equilibrium: MP t-1 = 12,738 + 1,025 PP t-1 + u t-1 0,704 -123,479 Note: One , two , and three asterisks indicate rejection Ho: = 0 at 10, 5, and 1 level of significance, respectively. Critical values for 10 = 1,645; 5 = 1,96; and 1 = 2,576. In addition, there are no trade barrier policies between producer and rice miller. Even though there is domestic purchasing by Bulog with determined Government Purchasing Price, but Bulog only absorbs about 7-8 of the total production and cannot reduce the impact of seasonal price. The effect of seasonal price from producer price is too big to not be transmitted because they have strong linkage in product flow. Therefore, producer price will influence the price determination in the rice miller market. If we compare with the volatility analysis result, the high volatility of seasonal producer price at 24,9 is transmitted to rice miller with lower price volatility at 18,3. Nevertheless, rice miller can reduce its transferred seasonal volatility by manage the stock in short-run and the time to sell their product with better price. 2 Producer Price-Wholesaler Price The second relationship is between producer price and wholesaler price. Table 7 shows that there are no sufficient evidences that producer price and wholesaler price are cointegrated. The Johansen Trace test cannot reject the null hypothesis of no cointegrating vector. It indicates that producer price and rice miller price are not integrated. Price determination of wholesaler price is not related with producer price, and vice versa. Each price is determined by its previous prices autoregressive. They behave in the different way both in the short-run and the long-run. Table 7 Cointegration test for producer price-wholesaler price 3 lags Johansen Trace Test Level of significant r0 LR P-value 90 95 99 16,95 0,1358 17,98 20,16 24,69 1 4,68 0,3317 7,60 9,14 12,53 The factors which may influence this relationship are transaction costs, market information, market power, and market operation policy. Transaction costs to deliver rice product from producer to wholesaler are high because the rice product has to pass the other marketing intitution, the rice miller. The rice miller cost potentially increases the transaction costs to deliver rice from producer to wholesaler. As we stated before, transaction costs potentially inhibit the price transmission. Transaction costs consist of processing cost, storage cost, transportation cost, and marketing margin between producer and wholesaler. The indirect interaction also influences the transfer of market information. Farmers as producer commonly do not have access about the demand and the price in wholesaler market. Therefore, there are no price adjustments between producer and wholesaler. In addition, wholesaler can store the rice product in warehouse and manage its supply. If we compare the price volatilities of them, wholesaler price volatility 18,1 is lower than producer prices volatility 24,9. This ability became market power for wholesaler to control its price and to inhibit the high seasonal