Transmisi Harga Vertikal Di Pasar Cabai Di Indonesia.
VERTICAL PRICE TRANSMISSION IN CHILI MARKET IN
INDONESIA
MAIKA FITRIANA
GRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2016
STATEMENT OF THESIS, SOURCE OF INFORMATION
AND COPYRIGHT
I hereby declare that thesis titled Vertical Price Transmission in Chili
Market in Indonesia, was independently composed by me under the advisory
committee supervision and has not been submitted to any other universities.
Source of information derived or quoted from works published and unpublished
from other writers have been mentioned in the text and listed in the bibliography
at the end of this thesis.
I hereby assign the copyright of my thesis to the Bogor Agricultural
University.
Bogor, March 2016
Maika Fitriana
H351120191
SUMMARY
MAIKA FITRIANA. Vertical Price Transmission in Chili Market in Indonesia.
Supervised by SUHARNO, SITI JAHROH, STEPHAN von CRAMON.
Like most developing countries, the agriculture sector contributes
significantly to the Indonesian economy. In the Indonesian market, the vegetable
sector is particularly important. Globally, Indonesia is the fifth of chili producing
country in the world, next to China, Mexico, Turkey and Spain. Chili is an
essential spice in the Indonesians diet. Chili production has received considerable
attention in Indonesia due to extensive price fluctuations and its effect on
inflation.
This paper examines the cointegration of chili prices between market
players in the Indonesian chili market at three levels: farmer to trader (I), farmer
to consumer (II), and trade to consumer (III). An error correction model was
employed to measure the price transmission between different actors in the
vertical market. The empirical results show that a long-run relationship exists at
the farmer-trader, the farmer-consumer, and the trader-consumer levels.
Moreover, in the short-run, price transmission between the market levels in the
same city (I) is more rapid, and the price transmission between the direct market
levels (I) is more rapid than the non-direct market level (II, III).
Price determination in the farm market is strongly influenced by seasonal
chili production. The high production in the rainy season and low production in
the dry season create high volatility of producer price (farmer). There are no
arrangements on cropping patterns, so most farmers grow chili together
simultaneously during the rainy season. Meanwhile in the dry season, not all
farmers grow chili due to the limitation of water. There has no new technology to
grow chili in the dry season or in dry land which can produce chili as good as in
the rainy season and can be applied massively. Farmers have to buy water or build
some irrigations by build well (ground water) so they can grow their chili in the
dry season.
Over supply chili in the rainy season will lower chili price at the farmer
level, but then if there is lack of supply chili price will be higher. Some big
manufactured company or big chili sauce producers try to stabilize the price by
using contract price. They block the seasonal price effects transmitted to retailer
price or consumers. They have ability to storing chili for the stocks then manage
the supply to provide stable supply in input for their product (output). The high
price volatility of farm gate price inhibits the price transmission along the chili
market chain. Therefore, the policy implication based on this factor is that the
government should manage the price stabilization for farm gate price through
overcome the unstable supply along the year.
Keywords: vertical price transmission, market integration, cointegration,
Indonesian chili market.
RINGKASAN
MAIKA FITRIANA. Transmisi Harga Vertikal di Pasar Cabai di Indonesia.
Dibimbing oleh: SUHARNO, SITI JAHROH, STEPHAN von CRAMON.
Seperti kebanyakan negara berkembang, sektor pertanian memberikan
kontribusi yang signifikan terhadap perekonomian Indonesia. Di pasar Indonesia,
sektor sayur sangat penting. Secara global, Indonesia merupakan Negara kelima
penghasil cabai di dunia, bersama dengan China, Meksiko, Turki dan Spanyol.
Cabai merupakan rempah-rempah penting dalam diet orang Indonesia. Orang
Indonesia mengkonsumsi cabai pada tingkat 1,5 kg per kapita per tahun. Produksi
cabai telah menerima banyak perhatian di Indonesia karena fluktuasi harga yang
luas dan efeknya pada inflasi.
Studi ini membahas kointegrasi harga cabai antara pelaku pasar di
Indonesia pada tiga tingkatan: petani kepada pedagang, petani kepada konsumen,
dan pedagang kepada konsumen. Model koreksi kesalahan digunakan untuk
mengukur transmisi harga antara aktor yang berbeda di pasar vertikal. Hasil
empiris menunjukkan bahwa hubungan jangka panjang ada di petani-pedagang,
petani-konsumen, dan tingkat pedagang-konsumen. Selain itu, dalam jangka
pendek, transmisi harga antara tingkat pasar di kota yang sama lebih cepat, dan
transmisi harga antara tingkat pasar langsung lebih cepat daripada tingkat pasar
tidak langsung.
Harga cabai di tingkat petani sangat dipengaruhi oleh produksi cabai
musiman. Produksi yang tinggi pada musim hujan dan produksi rendah di musim
kemarau membuat volatilitas tinggi pada harga ditingkat petani. Tidak ada
pengaturan pola tanam, sehingga sebagian besar petani menanam cabai bersamasama secara bersamaan selama musim hujan. Sementara itu di musim kemarau,
tidak semua petani menanam cabai karena keterbatasan air. Belum ada teknologi
baru untuk menanam cabai pada musim kemarau atau di lahan kering yang dapat
menghasilkan cabai sebaik di musim hujan dan dapat diterapkan secara besarbesaran. Petani harus membeli air atau membangun irigasi dengan membangun
sumur bor (air tanah) sehingga mereka dapat menanam cabai mereka di musim
kemarau.
Kelebihan pasokan cabai (over supply) akan menurunkan harga cabai di
tingkat petani, tapi kemudian pada saat kurang pasokan harga cabai akan lebih
tinggi. Beberapa perusahaan manufaktur yang besar (produsen sambal) mencoba
untuk menstabilkan harga ini dengan menggunakan harga kontrak. Mereka
memiliki kemampuan untuk menyimpan cabai untuk stok untuk persediaan
pasokan yang stabil untuk membuat produk mereka (output). Volatilitas harga
yang tinggi pada harga produsen menghambat transmisi harga sepanjang rantai
pasar (market chain). Oleh karena itu, implikasi kebijakan berdasarkan faktor ini
adalah bahwa pemerintah harus mengelola stabilisasi harga untuk harga produsen
dengan mengelola pasokan agar stabil sepanjang tahun.
Kata kunci: transmisi harga, integrasi pasar, kointregasi, pasar cabai di Indonesia.
© All Rights Reserved by Bogor Agricultural University, 2016
Copyright Reserved
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It is prohibited to announce and reproduce part or all of this paper in any form
without the permission of the Bogor Agricultural University.
VERTICAL PRICE TRANSMISSION IN CHILI MARKET IN
INDONESIA
MAIKA FITRIANA
Master Thesis
as one of requirements to obtain a degree of
Master Science
in
an Agribusiness Study Program
GRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2016
External Examiners Commission on the Exams Thesis: Dr Ir Harianto, MS
Examiners Program: Dr Amzul Rifin, SP MA
Thesis Title
Name
Student ID
: Vertical Price Transmission in Chili Market in Indonesia
: Maika Fitriana
: H351120191
Approved
Advisory Committee
Dr Siti Jahroh, BSc, MSc
Member
Dr Ir Suharno, MADev
Chairman
Aggred by
Head of Agribusiness Study Program
Prof Dr Ir Rita Nurmalina, MS
Examination Date: December 11, 2015
Dean of Graduate School
Dr Ir Dahrul Syah, MScAgr
Submission Date:
ACKNOWLEDGMENT
All praise to God, The Gracious and The Merciful, for Allah blessings
from the first until the last step of the research process. This research would have
been impossible without the support from many people. I would like to appreciate
everything they have given to me.
I would like to thank my supervisors Dr Ir Suharno MADev and Dr Siti
Jahroh, BSc, Msc from Bogor Agricultural University, for their suggestions and
valuable comments on this research from the beginning until the last step. Dr Ir
Anna Fariyanti, MSi for valuable comment and evaluation in my colloquium.
Prof Stephan von Cramon-Taubadel my supervisor in Goettingen University
Germany, who support me academically. Dr. Ir. Harianto, MS and Dr. Amzul
Rifin, SP MA, my examiners, who give valuable comments and support. I would
like to acknowledge Prof Dr Rita Nurmalina, MS as the head of Master Science of
Agribusiness concerning the double degree program between IPB and Master of
International Agribusiness Goettingen University.
I would like to acknowledge the support from the Ministry of Education of
Indonesia (DIKTI) for funding my study in Germany. Dede Arnanto, SE, MSi
staff of Ministry of Trade of Indonesia for provided me time series data of chili
price. Mr. Saeran for his valuable comments and for provided me chili price in
farm gate price and trader price in Banyuwangi.
My sincere thanks to Ms. Grete Thinggaard, academic adviser in
Goettingen University. My sincere thanks to Ms. Yuni and Ms. Dewi, who are
staff of Master Sscience of Agribusiness IPB.
My sincere thanks to all my friends in Magister Science of Agribusiness
IPB as well as in SIA program-Goettingen University, Ka Majek, Mas Angga,
Mba Intan, Mba Wida, Ica, Dhea, Rizah, Irfan and Ian for a friendly and warm
environment during my study. I dedicate this work to my beloved parents, and my
little brother who always give me their pray, love, and never ending support and
encouragement for me.
Bogor, March 2016
Maika Fitriana
CONTENTS
CONTENTS
viii
LIST OF TABLES
ix
LIST OF FIGURES
ix
LIST OF APPENDICES
x
LIST OF ABBREVIATIONS
xi
1 INTRODUCTION
Background
Problem Statement
Research Objectives
Benefits of the Study
Scope and Limitation of the study
1
1
2
3
3
3
2 LITERATURE REVIEW
National Production and Consumption
Export and Import
Market Chain
Prices in Indonesia
3
3
6
8
9
3 FRAMEWORK
Market Integration
Price Transmission in Vertical Food Chain
Previous Study
Hypotheses
10
10
12
13
13
4 RESEARCH METHODOLOGY
Data Description
Price Transmission Analysis
Unit Root Test
Cointegration Test
Granger Causality Test
Error Correction Model (ECM) Estimation
14
14
14
14
15
15
15
5 RESULTS
Price Transmission Analysis
Unit Root Test
Cointegration Analysis
Granger Causality Test
The Result of Error Correction Model (ECM)
Discussion
16
16
19
20
20
21
24
6 CONCLUSIONS AND RECOMMENDATIONS
26
REFERENCES
26
APPENDICES
30
ix
LIST OF TABLES
1. Chili harvested by area (ha) and region in Indonesia, 2009-2013
4
2. Indonesian chili production by region, 2009-2013
5
3. Descriptive analysis of Indonesian chili prices, 2009-2013
10
4. Descriptive analysis of the farmer, trader, and consumer prices of
Indonesian chili, 2009-2013
17
5. Results of the ADF-test for chili prices at the farmer level, trader level and
consumer level
19
6. Results of Johansen trace test for chili prices at the farmer level, trader
level and consumer level
20
7. Results of Granger-Causality test for chili prices at the farmer level, trader
level and consumer level
21
8. Error correction model of chili prices between farmer and trader prices 22
9. Error correction model of chili prices between farmer and consumer
23
10. Error correction model of chili prices between trader and consumer
24
LIST OF FIGURES
1. Vegetable Production (MT) in Indonesia, 2013
1
2. Production and yield of chili in Indonesia, 2009-2013
4
3. Indonesian chili production by seasons
5
4. Annual chili consumption in Indonesia per capita
6
5. Monthly export of chili from Indonesia in 2013
7
6. Indonesian chili import per month, 2013
7
7. Market supply chain of chili in East Java, Indonesia
8
8. National consumer price for Indonesian chili, 2009-2013
9
9. Daily farmer, trader and consumer prices for Indonesian Chili, 2009-2013
17
10. Plot series of logarithmic prices of Indonesian chili at the farmer level,
2009-2013
18
11. Plot series of logarithmic prices of Indonesian chili at the trader level,
2009-2013
18
x
12. Plot series of logarithmic prices of Indonesian chili at the consumer level,
2009-2013
19
LIST OF APPENDICES
1. Chili harvested by area (ha) and province in Indonesia, 2009-2013
2. Production of chili by province in Indonesia, 2009-2013
3. Yield of Chili by Province in Indonesia, 2009-2013
4. Output of ADF-test for Pfarmer_log
5. Output of ADF-test for Ptrader_log
6. Output of ADF-test for Pconsumer_log
7. Output of ADF-test for Pfarmer_log_d1
8. Output of ADF-test for Ptrader_log_d1
9. Output of ADF-test for Pconsumer_log_d1
10. Output of Johansen trace test for chili prices in farmer level and trader
level
11. Output of Johansen trace test for chili prices in farmer level and consumer
level
12. Output of Johansen trace test for chili prices in trader level and consumer
level
13. Output of Granger causality test for chili prices in farmer level and trader
level
14. Output of Granger causality test for chili prices in farmer level and
consumer level
15. Output of Granger causality test for chili prices in trader level and
consumer level
16. Output of VECM for Pfarmer_log and Ptrader_log
17. Output of VECM for Pfarmer_log and Pconsumer_log
18. Output of VECM for Ptrader_log and Pconsumer_log
19. Chili intercropped with rubber plantation, Banyuwangi, East Java
20. Chili field on irrigated land
21. Sortation of chili is done by the trader’s workers
22. Chili packaging using carton box (30 kg), done by chili trader
23. Poor infrastructure on the road of chili intercropped with rubber plantation,
Banyuwangi, East Java
xi
LIST OF ABBREVIATIONS
ADF
APT
AVRDC
: Augmented Dickey-Fuller
: Asymmetric price transmission
: Asian Vegetable Research Development Center
Badan Perencanaan Pembangunan Nasional; National
BAPPENAS :
Development Planning Agency
BPS
: Badan Pusat Statistik; Statistics Indonesia
Departemen Pertanian. Department of Agricultural the
Deptan
:
Indonesian Ministry of Agriculture
DGH
: Directorate General of Horticulture
ECM
: Error correction model
IDR
: Indonesia Rupiah
Kemendag
MoA
UNCTA
USD
VAR
Kementerian Perdagangan; Indonesian Ministry of Trade
:
:
:
:
Indonesian Ministry of Agriculture
United Nation Conference on Trade and Development
United States Dollar
Vector autoregressive (VAR)
1
1 INTRODUCTION
Background
Like most developing countries, the agriculture sector contributes
significantly to the Indonesian economy. In the Indonesian market, the vegetable
sector is particularly important. The five vegetables with the highest production
are cabbage, potatoes, chili, shallot and tomatoes. Figure 1 shows the production
quantity of vegetables in Indonesia. From the figure, we can see that chili was the
third greatest contributor to vegetable production in 2013.
Figure 1. Vegetable Production (MT) in Indonesia, 2013
Source: Directorate General of Horticulture, Ministry of Agriculture (2014)
Globally, Indonesia is one of the top five chili producing countries in the
world (UNCTAD, 2013), along with China, Mexico, Turkey and Spain. The top
five chili exporters, however, are the Netherlands, Spain, Canada, the United
States and France. Like most of the five leading chili producing countries,
Indonesia is not a major exporter for this commodity; rather they dedicate their
production to national consumption.
Chili is an essential spice in the Indonesians diet. The Indonesians
consume chili at a rate of 1.5 kg per capita annually (Bappenas, 2013). The
majority of Indonesians consume at least a small amount of chili every day.
Therefore, as is the case with salt and many other condiments, the demand
elasticity of chili is inelastic (Asian Vegetable Research Development Center,
2006).
2
The phenomena that rise in the vegetable markets especially in red chilli
commodity markets need a further study to investigate the price and market
mechanism. Therefore, first we have to know the structure of commodity chain,
and its characteristics. According to Ferrari (1994: 14), the common feature of
vegetables market system is a collection market, which has seasonal nature. It
means, vegetables are collected from producer areas and they are sold in one
location.
Generally, the marketing channel of vegetables in Indonesia passes
through from farmer to collector and local retailer. Then, distribution channel
usually continue flows to wholesale markets and inter islands traders, and
traditional retailers. Then, finally it is received by the consumer. However, the
implementation of trade liberalization in 1990s, and the removal of restriction of
the Foreign Direct Investment (FDI) in 1998 have stimulated the rapid growth of
the supermarket sector in Indonesia. In short period, the sales of fresh vegetables
in the supermarket increase rapidly. Then, it has led to a change of vegetables
market chain where new channels are not only the supermarkets and food
processing industries, but also farmer associations, hotels and restaurants have
emerged in the marketing chain in Indonesia (Natawidjaja et al. 2007).
Over 60% of chili is produced on Java Island, with East Java being one of
the most influential sources (White et al. 2007). Banyuwangi is a city that
produces substantial quantities of chili in East Java. This paper will elaborating on
the market in Banyuwangi, East Java, including an overview and analysis of
prices incurred by farmers and traders. Moreover, the consumer price level that is
considered in this study comes from Jakarta, where 90% of the chili is sold.
Problem Statement
Chili production has received considerable attention in Indonesia due to
extensive price fluctuations and its effect on inflation (Saptana et al., 2012, Farid
& Subekti, 2012). Additionally, chili is an important crop that is commonly
produced by small-scale farmers. Furthermore, it has an important role as a source
of cash flow and daily income for small-scale producers (Sahara et al., 2011).
Many recent studies focus on analyzing the disparity between markets to
investigate price and market mechanisms. The chili market is in need of further
study in order to understand the structure of its commodity chain, as well as its
characteristics. Based on the description of chili market in Indonesia, several
issues need to be further investigated by analyzing price transmission between
different actors in the vertical chain:
1. How the vertical price transmission between farmer level and trader level?
2. How the vertical price transmission between farmer level and consumer
level?
3. How analyze the vertical price transmission between trader level and
consumer level?
3
Research Objectives
According to the description above, the objectives of this paper are:
1. To analyze the vertical price transmission between farmer level and trader
level
2. To analyze the vertical price transmission between farmer level and
consumer level
3. To analyze the vertical price transmission between trader level and
consumer level.
Benefits of the Study
1.
2.
The benefits of this study are:
As a reference and consideration in setting policy related to to chili price
in Indonesia.
As a reference and information for further study in more depth approach
regarding price transmission of chili in Indonesia for academics and
researchers.
Scope and Limitation of the study
This study was conducted using chili price data from farmer in
Banyuwangi, trader in Banyuwangi, and consumen of chili in Jakarta. The scope
of the discussion in this study includes price transmission investigated by
analyzing between different actors in the vertical chain: farmer, trader, and
consumer using VectorEerror Correction Model (VECM).
The limitations of this study are: (1) The source of data is limited to the
data from farmer and trader in Banyuwangi, and price data of the consumer from
Indonesian Ministry of Trade (2) The analysis of vertical price transmission is
limited to red chili (cabe merah besar); and (3) Chili price data used in this study
is daily time series from January 2009-December 2013.
2 LITERATURE REVIEW
National Production and Consumption
Indonesian chili production is dominated by the production of chili on
Java Island and Sumatera Island (White et al., 2007). Chili plants are mostly
grown on small plots and is often considered to be a cash crop as it is a main crop
in some areas (AVRDC, 2006), (Saptana et al., 2012). Chili plants are usually
cultivated in paddy fields (irrigated or rainfed) and on dryland fields. On irrigated
land, chili is typically planted after rice so that cropping patterns are influenced by
the rice, and is therefore rely upon climatic conditions, especially rainfall.
From 2009-2013 chili production in Indonesia has experienced an
increasing trend. Specifically, chili production increased slightly from 787,433
metric tons in 2009 to 807,160 in 2010, an increase of only 2.5%. From 2010
through 2013, this production volume increased significantly more from 888.852
4
metric tons in 2011, 954,312 metric tons in 2012, and 1,012,800 in 2013, leading
to an average production growth of 6% during this five year time period.
The average chili yield, however, experienced slight decreases from 2010
to 2013, going from 6.72 metric tons per hectare to 6.58 metric tons per hectare.
Despite this slight decrease, the trend of average yield from 2009 to 2013 showed
increasing production. The national average yield for 2009-2013 was 7.35 metric
tons per hectare. Both the national production volume and productivity are present
in Figure 2.
Figure 2. Production and yield of chili in Indonesia, 2009-2013
Source: Ministry of Agriculture (2014), and Statistics Indonesia (2014)
On the other hand, the average yield across Indonesian provinces has a
great deal of variation. Java Island has the highest yield with approximately 9.02
metric tons per hectare, with the second highest yields coming from Sumatera at
7.79 metric tons per hectare, with the other Indonesian islands averaging roughly
5.98 metric tons per hectare. Provincial data from Statistics Indonesia (BPS) and
the Directorate General of Horticulture (DGH) of the Ministry of Agriculture are
summarized in Tables 1 and 2, with all provincial data from 2009-2013 being
available in Appendices 1-3.
Table 1. Chili harvested by area (ha) and region in Indonesia, 2009-2013
Region
Harvested land area (ha)
Average
Percentage
(%)
Growth
2009
2010
2011
2012
2013
(Ha)
Sumatera
47,943
52,952
51,403
49,677
52,528
50,900
42.07
2.48
Java
57,424
57,946
56,479
56,303
57,703
57,171
47.26
0.14
Others
11,811
11,857
13,181
13,845
13,879
12,914
10.67
4.21
Indonesia 117,178 122,755 121,063 119,825 124,110
120,986
100
1.48
Source: Ministry of Agriculture (2014)
(%)
5
The total harvested area for Indonesian chili from 2009 to 2013 was just
over 100 thousand hectares (farm average of 120,986 hectares), indicating an
increase of about 1% for the time period between 2009 and 2013. According to
the table above, the total harvested land area in Java and Sumatera experienced
slight fluctuations, but overall had an increasing trend. On the other hand, the
other regions encountered an increase in total harvested land every year from
2009 to 2013, with an overall growth percentage of about 4%.
Table 2. Indonesian chili production by region, 2009-2013
Region
Productions (metric tons)
2009
2010
2011
2012
2013
Average
Percentage
(metric
(%)
Growth
(%)
tons)
Sumatera 289,178 354,145 403,948 423,264
409,316
375,970
42.2
9.5
434,219 390,505 405,929 453,977
520,617
441,049
49.6
5.1
82,947
73,108
8.2
7.3
954312 1,012,880
890,127
100
6.5
Java
Others
64,036
62,510
78,975
Indonesia
787433 807,160 888,852
77,071
Source: Ministry of Agriculture (2014)
The total chili production in Indonesia from 2009 to 2013 is presented in
Table 2. Chili production in Indonesia has demonstrated an increasing trend over
the five year period between 2009 and 2013. Java, Sumatera and other regions
show a positive growth trend, with an average of 6.5%. Sumatera has the highest
percentage of growth at approximately 9.5%, Java at 5.1% and other regions at
about 7.3%. As previously mentioned, Java and Sumatera are the dominant chili
producers in Indonesia accounting for nearly half of the total production.
Figure 3. Indonesian chili production by seasons
Source: Webb & Kosasih (2011)
There are two primary seasons for cultivating chili in Indonesia, however,
production can take place year-round in Indonesia (Webb et al., 2012) (White et
al., 2007). The first season begins around mid-February with the harvest starting
in late April and going through early June, while the second planting season
begins late June with the harvest period running from early September to early
November (Figure 3). However, no strong seasonal pattern is observable when
considering the monthly chili production in Indonesia.
6
Figure 4. Annual chili consumption in Indonesia per capita
Source: Ministry of Agriculture (2014)
Figure 4 presents the total consumption of chili in Indonesia. According to
the Ministry of Agriculture (2014), the total chili consumption in Indonesia does
experience fluctuations, with the average consumption, however, being about 1.5
kg per capita annually. This consumption value, however, is not always steady
due to the unstable price of chili. In 2008, overall chili consumption decreased
sharply, yet the average weight of consumption increased from the year before. As
previously mentioned, the consumption of chili is inelastic. From the graph above,
we can see that the price of chili does not have a dramatic effect on chili
consumption.
There are no exact data on aggregate consumption of chili in Indonesia.
However, the data of chili consumption per capita can be seen as a benchmark for
the aggregate consumption of chili in Indonesia.
Export and Import
Chili in Indonesia is not seen as a strong option for an export commodity.
The total volume of chili export in Indonesia is highly fluctuating. This
fluctuation is due to domestic production only being able to meet the local market
demand, along with the fact that the local quality does not meet the requirements
of many export destinations. The price of chili is also very influential in the
number of exports. If the local price is very high, export numbers will decrease
because they are not competitive with the international market. Data on chili
export is only available for a certain period. Figure 5 presents the monthly data for
Indonesian chili export volume and total export value in USD for 2013. From the
following figure, it can be seen that the sum of Indonesian chili exports in 2013
was 570,256 kg with a total value of 930,550 USD. Primary Indonesian chili
export destination countries are Singapore, Malaysia, Saudi Arabia, Japan, and the
Netherland (Ministry of Agriculture, 2014).
7
Figure 5. Monthly export of chili from Indonesia in 2013
Source: Export-import database (Ministry of Agriculture, 2014)
Here, we present monthly export data for chili in Indonesia in 2013
according to Ministry of Agriculture (2014). The total chili import for 2013 was
23,145 metric tons, valued at 27,525,616 USD. The total volume of chili import in
Indonesia was forty times more than the total export in 2013. The primary sources
for Indonesia’s chili imports are India, China and Thailand. Figure 6 presents
Indonesia’s monthly chili import in 2013.
Figure 6. Indonesian chili import per month, 2013
Source: Export-import database (Ministry of Agriculture, 2014)
8
Marketing Channel
The market supply chain of chili in Indonesia differs by region, but some
features remain constant throughout the country. We will use this marketing
channel from White et al. (2007) for example. Chili marketing channel embraces
link that happened between farms gate (producers) and final consumer. According
to Stern et al. (1996: 1), “marketing channels can be viewed as sets of
interdependent organizations involved in the process of making a product or
service available for consumption or use”. The chili market supply chain consists
of the farmer, trader (collector), wholesaler, retailer, restaurant (food stall), and
consumer. The chili marketing channel in East Java is illustrated in Figure 7.
Figure 7. Market supply chain of chili in East Java, Indonesia
Source: White et al. (2007)
There are five common marketing options for Indonesian farmers
(Shepherd & Schalke, 1995):
1. Farmers can go to the local market themselves, where they sell to traders
who supply wholesale markets
2. Traders buy the entirety of the production field (standing crop purchase)
and deliver to wholesale markets
3. Traders collect from farmers then deliver to wholesales markets
4. Trader buys from farmers and sells to the retail market
5. Farmers sell to a packing house
Buying standing crop is a transaction that takes places between farmers
and traders in the field before the harvest (tebasan). This is a common buying
method in Indonesia for many crops, such as paddy rice, corn, soybean,
vegetables, and many fruits. However, many people think this practice is not fair
because the farmers may receive an undervalued price for their crop. In this
practice, the trader will pay cash to the farmer before harvest time. Therefore,
9
some farmers will choose this method to have guaranteed cash in hand. The
standing crop buying method, however, is not common in the chili sector.
Typically, chili traders give credit for chili seed and fertilizer before the
farmer beings planting. After harvest, the farmer will sell their output to the same
trader that gave them credit. When the harvest time begins, farmers will go to the
trader every day to sell their crop until the end of the harvesting period. By doing
so, farmers ensure better access to credit, while traders reduce the risk of not
obtaining enough product.
Another main actor in the market supply chain of chili is farmer
associations. An important benefit of farmer associations is that they can sell chili
to institutional buyers such as chili sauce companies, supermarkets and exporters.
An Individual farmer cannot sell their chili directly to these organizations due to
the small scale of the farmer; most farmers only produce a small amount of chili,
and the quality of the product is not uniform.
Farmers do not sort their chili outputs before selling them to the trader.
The trader will take care of the sorting process, based on color and physical
condition, at an estimated cost of 500 IDR per kg (Webb et al., 2012). There is no
storage cost at this stage because the entire chili output will be sent to another
marketing channel within a day.
Prices in Indonesia
Chili prices in Indonesia have shown high fluctuations in between 2009 to
2013, as shown in Figure 8. A standard characteristic of chili prices in Indonesia
is the extensive fluctuations, often the prices doubled in one month and then
proceeded to decrease gradually.
Figure 8. National consumer price for Indonesian chili, 2009-2013
Source: Ministry of Trade (2014)
10
Table 3 shows a comprehensive view of the descriptive analysis of the
national consumer price of chili in Indonesia.
Table 3. Descriptive analysis of Indonesian chili prices, 2009-2013
Variable
Observation Mean
Std. Dev C.V.
Min
Max
National
44,725
1304
23,246
6,792
0.29
13,184
Price
Source: Author’s calculations with data from the εinistry of Trade (2014)
Price volatility explains the variance of data compared to their mean. The
price volatilities of food commodity are really important. Price volatility will
influence economic and welfare of the society (Bustaman 2003). When chili
prices increase, the composition of public expenditure on chili will increase. It
will make reduction of revenue allocation for the other needs such as education
and health. If the food prices increase continuously and volatile, the more onerous
burden for society which can reduce the welfare of society.
Price stabilization on food can enhance economic growth and food
security (Timmer 1996; Timmer 2004; and Dawe 2011). The advantages of price
stabilization are that it can reduce the level of risk faced by producer and
stimulates farmers to invest more to produce and raise productivity, meanwhile
for consumer can get benefit from stable price and can alleviate poverty. These
notions assumed that food price transmitted completely from consumer to
producer.
The price stabilization mechanism and its consequences are explained by
simple Marshalian theory from Waugh-Oi-Massell in Newbery and Stiglitz (1981)
(Istiqomah 2006). This theory assumes that the supply and demand are linear in
the market and will response instantaneously when there is change of supply or
demand, and additive stochastic disturbances. The changes of price equilibrium in
the market due to supply or demand changes in the short-run will cause price
volatility. The price stabilization is aimed to dampen the unstable prices and lead
the prices to the mean of its prices.
As of yet, there is no comprehensive solution from the government
regarding the fluctuations in the price of chili that has happened nearly every year.
Some solutions from the government are monitoring supply, as well as the price
of the chili by giving permission to the importers to buy chili from another
country such as China, India and Thailand.
3 FRAMEWORK
Market Integration
To understand how a market works, we have to know what market
integration is. Market integration takes place when prices among different market
or related goods follow a similar pattern over a specific period of time. The flow
of goods reflects the level of integration of the market. Furthermore, integration is
a fulfillment of the law of one price (LOP). The LOP declares that if a trade
11
happens and all profitable arbitrage opportunities removed, prices are equalized
up to the cost of commerce (Barrett, 2001). Market integration is a measure of the
degree to which demand and supply are transmitted from one region to another
region (Fackler & Goodwin, 2001). Similarly, Barrett and Li (2002) describe
market integration as the core on trade of physical goods as tradability in the
operation. Tradability means transferring information when there is surplus of
good in one market and/or there is opportunity of physical flow of goods.
Besides linked to flow of physical goods, the concept of market integration
also refer to co-movement of price between markets indicated by LOP. As define
by Fackler & Goodwin (2001), strong LOP hold when spatial arbitrage condition
as an equality between spatial markets. An integrated market exists when
connected markets display high price correlations. If trade takes place beetwen
different markets for homogenous goods, the price in the origin market (Pi) is
equal to the price in the destination market (Pj) plus transfer cost (Ci). More
specifically, a strong LOP can be expressed as:
Pi-Pj = Ci.
In strong LOP, price changes in the origin market will be immediately
transmitted on a one-for-one basis to another market. While in weaker form of
LOP, a temporary price disparity between markets will arise, but it will gradually
return to equilibrium in the long run (Fackler & Goodwin, 2001). The concept of
LOP expects that all information in the markets is obtainable so that optimal
arbitrage and no-barriers to trade can be implemented (McNew, 1996), (Jensen,
2007). However, some literature suggests that this expectation is too idealistic and
would never happen in practice.The concept of LOP expects that all information
in the markets is acquired to implement optimal arbitrage and no-barriers to trade
(McNew, 1996), (Jensen, 2007). However, some literature suggests that this
expectation is too idealistic and would never happen in practice.
It is possible to have market integration despite being in a no-trade
between markets situation, as long as they are part of the marketing system.
Market integration is not automatically a reference to market competitiveness
(Fackler & Goodwin, 2001). In the same sense, there is possibility of a no-market
integration situation in the case of physical arbitrage where this absence of market
integration exists when there is market segmentation (Barrett & Li, 2002). The
absence of trade may also suggest that markets are in spatial equilibrium
(Stephens et al., 2012).
In the presence of market integration/s in competitive markets, the price
difference between markets should not exceed the transfer cost of trading goods.
If this situation cannot be accomplished, then the efficiency of the markets is not
fulfilled. Furthermore, minimizing transfer costs is necessary for ensuring market
efficiency between integrated markets (Barrett, 2001). If transfer costs of trade are
extremely high, due to trade barriers, poor transport infrastructure, or other
factors, markets can be uncompetitive and thus will not be socially efficient.
Therefore, the existence of market integration does not promise the maximization
of welfare unless the trade costs are minimized (Barrett, 2005).
12
Price Transmission in Vertical Food Chain
Vertical price transmission is identified by the magnitude and speed of
adjustment of goods that pass through the supply chain and are developed at any
other level of the marketing process (Vavra & Goodwin, 2005). Magnitude is
defined as the size of the effect that has been transferred to another level of the
market. It also indicates the size of the response to each market level due to the
extent of the impact (change) which appears at another level of the market. On
other hand, speed implies the significant lags of adjustment. The size of the effects
is typically of the most interest; still, the speed of adjustment is essential to fully
understanding the integration. The speed with which a market adjusts to change
(shock) from another market is specified by the actions of market agents who are
engaged in the transactions.
As a change in prices could determine the magnitude and speed of
adjustment cost, then asymmetric price transmission (APT) becomes an important
concept. Under asymmetric price transmission, producers and/or consumers may
not benefit if there is an increase or decrease in the price of goods in another level
of the market. A common occurrence is when the price increases at the retail
level, an effect which will be very quickly transmitted to the consumer, but a
decrease in the price of a good usually requires a longer period of time to be
recognized by the consumers. This common occurrence usually followed by the
small number of retailers and middlemen in the market. Moreover, in
consideration of this scenario, a decrease in input costs will benefit the retailer
more than the consumers. It can therefore be said that asymmetric price
transmission may signal welfare loss for the consumer (Meyer & von CramonTaubadel, 2004).
Several factors may lead to APT; of these, two essential factors that should
be considered are market power and menu cost. Market power implies that there is
a non-competitive market. This imperfect competition among retailers and
processor level markets may lead to APT. This imperfect competition among
retailers and processing level markets may lead to APT. It is commonly suspected
that imperfect competition will lead to positive APT, which relates to the shock in
input price when input prices increase, promptly resulting in an increase in output
price. Negative APT will occur when the impact from an increasing input causes
the market to respond more slowly than it would with a decreasing input.
Negative ATP can happen when retailers not sure of their market share in the
market, and they afraid of losing market share. Generally, the presence of market
power will lead to positive APT, yet in practice it is not impossible for market
power to lead to negative APT. Market structure determines whether the market
power factor will lead to positive or negative APT (Meyer & von CramonTaubadel, 2004).
The second factor that can lead to APT is adjustment and menu cost.
Adjustment costs may increase when retailers raise or lower their inputs price
(menu costs) and/or change the quantities of their inputs. When these change of
costs asymmetric with respect to rises or lowering in quantities and/or prices then
APT may be a result.
13
Previous Study
Many studies have been done to examine price transmission and market
integration of staple food commodities in Indonesia, relatively few studies,
however examine market integration and price transmission with respect to the
vegetables market. A study by Jubaedah (2013)regarding market integration of the
red chili commodity in Indonesia focuses on spatial price transmission and market
integrations between wholesale markets in Jakarta and 23 producer markets
throughout Indonesia. Findings indicate the potential factors behind either lacking
or strong market integration in the Indonesian chili market. The quality of
infrastructure, distance between markets, and the size of the market tend to affect
the integration on the markets. With these findings, Jubaedah gives a couple
policy recommendations with the aim of achieving better market integration in the
Indonesian chili sector; first, improve the development of infrastructure to
minimize transfer costs. Second, develop the marketing information system within
the country in order to gain clear insight into chili price and improved marketing
information.
Webb et al. (2012) study the relationship between chili traders and price
volatility. Their research question, “Do chili traders make price volatility worse?”
led to the conclusion that chili traders are relatively good about responding to a
price shock by quickly transferring chili to other parts of the island. However,
chili traders do not have stocks to anticipate increasing demand shocks in the chili
sector, which may be potentially harmful when dealing with volatile prices. Two
policies are suggested by Webb et al., one is to permit imports of fresh chili from
other countries, and the second is to subsidize investment in cold storage, which
can help holding stocks to reduce the chili price fluctuations.
Farid and Subekti (2012) examined production, consumption, distribution
and price dynamics of chili production in Indonesia. From this research, it is made
apparent that there are factors that can lead to price disparities for chili price
across the country. This is possibly due to the large concentration of chili
production taking place in Java and Sumatera, despite all Indonesian people
consuming chili. Not all provinces can produce chili, thus leading to the
conclusion that poor infrastructure and high transfer costs can often lead to price
disparities. This research also findings the factors that influenced the price of
chili in Indonesia; 1) Planting pattern (the production of chili), 2) Cost of
production (seed and fertilizer), 3) Distribution of chili; not all the provinces in
Indonesia can meet the needs of chili consumption, and non-Java region have bad
infrastructures, 4) Consumption when there is Ramadhan and Idul Fitri festival.
As with Jubaedah and Webb et al., this paper indicates policy recommendations,
the most relevant being to improve some infrastructure within the country.
Hypotheses
1.
2.
Price transmission is more rapid between the farmer-trader level than
between the farmer-consumer level.
Price transmission is more rapid between the farmer-trader level than the
trader-consumer level.
14
3.
Price transmission is more rapid between the trader-consumer level than
between the farmer-consumer level.
4 RESEARCH METHODOLOGY
Data Description
The present study uses daily consumer data of chili prices in Jakarta, trader
prices in Banyuwangi, and farmer prices in Banyuwangi from January 2009 until
December 2013. The data is secondary time series data taken from the Indonesian
Ministry of Trade, Statistics Indonesia and Ministry of Agriculture. All of the time
series data are transformed to logarithmic form.
All farmers price is a price that farmer get by selling their chili, all farmers
price is collected by one trader. This trader buy chili from about 15 farmers a day.
All trader price is a price that trader get by selling their chili to other traders
within kabupaten (district). Trader price is collected daily using their own record
book. This trader usually sell their chili to three traders based on price.
Price Transmission Analysis
Price transmission analysis is used to answer the research questions of
vertical market integration and vertical price transmission of farmer level price in
Banyuwangi, trader level price in Banyuwangi and consumer price in Jakarta. The
data was run using STATA version 13.0 statistical software for the following
statistical tests: 1) Unit root test for stationarity, 2) Johansen test for
cointegration, and 3) Granger-causality test for testing direction of price
transmission (causality). The next step is to model the vertical price transmission
in accordance with the following classifications: 1) price transmission between the
farmer level and trader level, 2) price transmission between the farmer level and
consumer level, and 3) price transmission between trader level and consumer
level. This study applies the standard linear error correction model (ECM) for data
estimation.
Unit Root Test
To examine whether the data is stationary or not, we use the unit root test.
The stationarity of each data series is needed to detect the presence of spurious
regression in the model. A spurious regression will indicate that the result of the
regression may not have a direct causal relation, but it is possible that they do.
This paper used an Augmented Dickey-Fuller (ADF) test, which is an adjustment
of the Dickey-Fuller (DF) test that is used to check the presence of unit root for
each variable in the model. The ADF model can be estimated as follows:
Δ Yt = α0 + α1 T + tYt-i + Σ βiΔYt-i + t , ~ΠD (0, 2)
where ΔYt = Yt – Yt-1
(1)
15
If the null hypothesis of | t| = 0 is rejected, then the conclusion is that the
data series is stationary, where if the null hypothesis of | t| = 0 is accepted, then
the data series is not stationary.
Cointegration Test
The next step is the cointegration test, which tests for the presence of a cointegrated relationship of two different market level’s price data. Cointegration of
two market levels indicates that there is a tendency for the price to demonstrate
one common behavior in the long run. If two price series in two markets are
integrated in the same order, i.e., I (d), and there is a linear relationship between
the price series’, then it can be assumed that those two markets are co-integrated.
The hypotheses of this test are:
1) Rank test 0
H0: There is no cointegrating vector
H1: There is one cointegrating vector
2) Rank test 1
H0: There is one cointegrating vector
H1: There are two cointegrating vectors
We reject H0 if the trace test is larger than a 5% critical value. The
cointegration test examines the presence of cointegrating vectors in the models at
the farmer-trader price level, farmer-consumer price level and trader-consumer
level.
Granger Causality Test
The Granger causality test examines the direction of the price transmission
between the two market levels. If there are two price series, and one of the prices
(Pit) current values are lagged, it can predict the value of another price (Pjt), then
Pit influence Pjt.
There are three categories of causality that may potentially take place:
1. No causality between two prices
2. Unidirectional causality; this occurs when there is only one
direction of causality between prices, e.g., Pit can be predictive of Pjt,
but not the other way around
3. Bilateral causality (Reciprocal causality); this means that both
prices can be predictive of each other.
Error Correction Model (ECM) Estimation
The third step is to create error correction models. The error correction
term of ECM depicts the short-run adjustment of certain prices toward the longrun equilibrium. Meyer & von Cramon-Taubadel (2004) describe the error
correction term through the following equation:
1
2
∆P1t = θ1 + αECTt-1 + ∑
(2)
2i ∆ P t-1 + ∑
3j ∆P t-j + t
where α represents the percentage of the price adjustment in a certain period; ∆P1t,
represents the change of the P1t in the last period, which depends on a constant
16
value θ1; changes in prices of the cointegration is indicated by ∆P2t-j; and the
distance of the variables in their last period is represented with ECTt-1.
5 RESULTS
Concept in Price Data
There are three level markets prices that used in this study; farm gate rices,
wholesale prices, retail prices.
Farm Gate Prices
The farm gate prices are in principal the prices received by farmers for
their produce at the location of farm. Thus the costs of transporting from the farm
gate to the nearest market or first point of sale and market charges (if any) for
selling the produce are, by definition, not included in the farm gate prices. Thus
the prices collected from such markets may be adjusted for these costs to arrive at
farm gate prices.
Trader Prices
After an agricultural product leaves the farm-gate, it may pass through one
or even two wholesale markets and a chain of other "middlemen before reaching
the retailer from whom the ultimate consumer buys it. This trader price that was
used is a direct trader, who buy chili from farmers in same city, Banyuwangi.
Retail Prices
The price of a good or product when it is sold to the end user for
consumption, not for resale through a third-party distribution channe
INDONESIA
MAIKA FITRIANA
GRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2016
STATEMENT OF THESIS, SOURCE OF INFORMATION
AND COPYRIGHT
I hereby declare that thesis titled Vertical Price Transmission in Chili
Market in Indonesia, was independently composed by me under the advisory
committee supervision and has not been submitted to any other universities.
Source of information derived or quoted from works published and unpublished
from other writers have been mentioned in the text and listed in the bibliography
at the end of this thesis.
I hereby assign the copyright of my thesis to the Bogor Agricultural
University.
Bogor, March 2016
Maika Fitriana
H351120191
SUMMARY
MAIKA FITRIANA. Vertical Price Transmission in Chili Market in Indonesia.
Supervised by SUHARNO, SITI JAHROH, STEPHAN von CRAMON.
Like most developing countries, the agriculture sector contributes
significantly to the Indonesian economy. In the Indonesian market, the vegetable
sector is particularly important. Globally, Indonesia is the fifth of chili producing
country in the world, next to China, Mexico, Turkey and Spain. Chili is an
essential spice in the Indonesians diet. Chili production has received considerable
attention in Indonesia due to extensive price fluctuations and its effect on
inflation.
This paper examines the cointegration of chili prices between market
players in the Indonesian chili market at three levels: farmer to trader (I), farmer
to consumer (II), and trade to consumer (III). An error correction model was
employed to measure the price transmission between different actors in the
vertical market. The empirical results show that a long-run relationship exists at
the farmer-trader, the farmer-consumer, and the trader-consumer levels.
Moreover, in the short-run, price transmission between the market levels in the
same city (I) is more rapid, and the price transmission between the direct market
levels (I) is more rapid than the non-direct market level (II, III).
Price determination in the farm market is strongly influenced by seasonal
chili production. The high production in the rainy season and low production in
the dry season create high volatility of producer price (farmer). There are no
arrangements on cropping patterns, so most farmers grow chili together
simultaneously during the rainy season. Meanwhile in the dry season, not all
farmers grow chili due to the limitation of water. There has no new technology to
grow chili in the dry season or in dry land which can produce chili as good as in
the rainy season and can be applied massively. Farmers have to buy water or build
some irrigations by build well (ground water) so they can grow their chili in the
dry season.
Over supply chili in the rainy season will lower chili price at the farmer
level, but then if there is lack of supply chili price will be higher. Some big
manufactured company or big chili sauce producers try to stabilize the price by
using contract price. They block the seasonal price effects transmitted to retailer
price or consumers. They have ability to storing chili for the stocks then manage
the supply to provide stable supply in input for their product (output). The high
price volatility of farm gate price inhibits the price transmission along the chili
market chain. Therefore, the policy implication based on this factor is that the
government should manage the price stabilization for farm gate price through
overcome the unstable supply along the year.
Keywords: vertical price transmission, market integration, cointegration,
Indonesian chili market.
RINGKASAN
MAIKA FITRIANA. Transmisi Harga Vertikal di Pasar Cabai di Indonesia.
Dibimbing oleh: SUHARNO, SITI JAHROH, STEPHAN von CRAMON.
Seperti kebanyakan negara berkembang, sektor pertanian memberikan
kontribusi yang signifikan terhadap perekonomian Indonesia. Di pasar Indonesia,
sektor sayur sangat penting. Secara global, Indonesia merupakan Negara kelima
penghasil cabai di dunia, bersama dengan China, Meksiko, Turki dan Spanyol.
Cabai merupakan rempah-rempah penting dalam diet orang Indonesia. Orang
Indonesia mengkonsumsi cabai pada tingkat 1,5 kg per kapita per tahun. Produksi
cabai telah menerima banyak perhatian di Indonesia karena fluktuasi harga yang
luas dan efeknya pada inflasi.
Studi ini membahas kointegrasi harga cabai antara pelaku pasar di
Indonesia pada tiga tingkatan: petani kepada pedagang, petani kepada konsumen,
dan pedagang kepada konsumen. Model koreksi kesalahan digunakan untuk
mengukur transmisi harga antara aktor yang berbeda di pasar vertikal. Hasil
empiris menunjukkan bahwa hubungan jangka panjang ada di petani-pedagang,
petani-konsumen, dan tingkat pedagang-konsumen. Selain itu, dalam jangka
pendek, transmisi harga antara tingkat pasar di kota yang sama lebih cepat, dan
transmisi harga antara tingkat pasar langsung lebih cepat daripada tingkat pasar
tidak langsung.
Harga cabai di tingkat petani sangat dipengaruhi oleh produksi cabai
musiman. Produksi yang tinggi pada musim hujan dan produksi rendah di musim
kemarau membuat volatilitas tinggi pada harga ditingkat petani. Tidak ada
pengaturan pola tanam, sehingga sebagian besar petani menanam cabai bersamasama secara bersamaan selama musim hujan. Sementara itu di musim kemarau,
tidak semua petani menanam cabai karena keterbatasan air. Belum ada teknologi
baru untuk menanam cabai pada musim kemarau atau di lahan kering yang dapat
menghasilkan cabai sebaik di musim hujan dan dapat diterapkan secara besarbesaran. Petani harus membeli air atau membangun irigasi dengan membangun
sumur bor (air tanah) sehingga mereka dapat menanam cabai mereka di musim
kemarau.
Kelebihan pasokan cabai (over supply) akan menurunkan harga cabai di
tingkat petani, tapi kemudian pada saat kurang pasokan harga cabai akan lebih
tinggi. Beberapa perusahaan manufaktur yang besar (produsen sambal) mencoba
untuk menstabilkan harga ini dengan menggunakan harga kontrak. Mereka
memiliki kemampuan untuk menyimpan cabai untuk stok untuk persediaan
pasokan yang stabil untuk membuat produk mereka (output). Volatilitas harga
yang tinggi pada harga produsen menghambat transmisi harga sepanjang rantai
pasar (market chain). Oleh karena itu, implikasi kebijakan berdasarkan faktor ini
adalah bahwa pemerintah harus mengelola stabilisasi harga untuk harga produsen
dengan mengelola pasokan agar stabil sepanjang tahun.
Kata kunci: transmisi harga, integrasi pasar, kointregasi, pasar cabai di Indonesia.
© All Rights Reserved by Bogor Agricultural University, 2016
Copyright Reserved
It is prohibited to quote part or all of this paper without including or citing the
source. Quotations are only for purposes of education, research, scientific
writing, preparation of reports, critics, or review an issue; and those are not
detrimental to the interest of the Bogor Agricultural University.
It is prohibited to announce and reproduce part or all of this paper in any form
without the permission of the Bogor Agricultural University.
VERTICAL PRICE TRANSMISSION IN CHILI MARKET IN
INDONESIA
MAIKA FITRIANA
Master Thesis
as one of requirements to obtain a degree of
Master Science
in
an Agribusiness Study Program
GRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2016
External Examiners Commission on the Exams Thesis: Dr Ir Harianto, MS
Examiners Program: Dr Amzul Rifin, SP MA
Thesis Title
Name
Student ID
: Vertical Price Transmission in Chili Market in Indonesia
: Maika Fitriana
: H351120191
Approved
Advisory Committee
Dr Siti Jahroh, BSc, MSc
Member
Dr Ir Suharno, MADev
Chairman
Aggred by
Head of Agribusiness Study Program
Prof Dr Ir Rita Nurmalina, MS
Examination Date: December 11, 2015
Dean of Graduate School
Dr Ir Dahrul Syah, MScAgr
Submission Date:
ACKNOWLEDGMENT
All praise to God, The Gracious and The Merciful, for Allah blessings
from the first until the last step of the research process. This research would have
been impossible without the support from many people. I would like to appreciate
everything they have given to me.
I would like to thank my supervisors Dr Ir Suharno MADev and Dr Siti
Jahroh, BSc, Msc from Bogor Agricultural University, for their suggestions and
valuable comments on this research from the beginning until the last step. Dr Ir
Anna Fariyanti, MSi for valuable comment and evaluation in my colloquium.
Prof Stephan von Cramon-Taubadel my supervisor in Goettingen University
Germany, who support me academically. Dr. Ir. Harianto, MS and Dr. Amzul
Rifin, SP MA, my examiners, who give valuable comments and support. I would
like to acknowledge Prof Dr Rita Nurmalina, MS as the head of Master Science of
Agribusiness concerning the double degree program between IPB and Master of
International Agribusiness Goettingen University.
I would like to acknowledge the support from the Ministry of Education of
Indonesia (DIKTI) for funding my study in Germany. Dede Arnanto, SE, MSi
staff of Ministry of Trade of Indonesia for provided me time series data of chili
price. Mr. Saeran for his valuable comments and for provided me chili price in
farm gate price and trader price in Banyuwangi.
My sincere thanks to Ms. Grete Thinggaard, academic adviser in
Goettingen University. My sincere thanks to Ms. Yuni and Ms. Dewi, who are
staff of Master Sscience of Agribusiness IPB.
My sincere thanks to all my friends in Magister Science of Agribusiness
IPB as well as in SIA program-Goettingen University, Ka Majek, Mas Angga,
Mba Intan, Mba Wida, Ica, Dhea, Rizah, Irfan and Ian for a friendly and warm
environment during my study. I dedicate this work to my beloved parents, and my
little brother who always give me their pray, love, and never ending support and
encouragement for me.
Bogor, March 2016
Maika Fitriana
CONTENTS
CONTENTS
viii
LIST OF TABLES
ix
LIST OF FIGURES
ix
LIST OF APPENDICES
x
LIST OF ABBREVIATIONS
xi
1 INTRODUCTION
Background
Problem Statement
Research Objectives
Benefits of the Study
Scope and Limitation of the study
1
1
2
3
3
3
2 LITERATURE REVIEW
National Production and Consumption
Export and Import
Market Chain
Prices in Indonesia
3
3
6
8
9
3 FRAMEWORK
Market Integration
Price Transmission in Vertical Food Chain
Previous Study
Hypotheses
10
10
12
13
13
4 RESEARCH METHODOLOGY
Data Description
Price Transmission Analysis
Unit Root Test
Cointegration Test
Granger Causality Test
Error Correction Model (ECM) Estimation
14
14
14
14
15
15
15
5 RESULTS
Price Transmission Analysis
Unit Root Test
Cointegration Analysis
Granger Causality Test
The Result of Error Correction Model (ECM)
Discussion
16
16
19
20
20
21
24
6 CONCLUSIONS AND RECOMMENDATIONS
26
REFERENCES
26
APPENDICES
30
ix
LIST OF TABLES
1. Chili harvested by area (ha) and region in Indonesia, 2009-2013
4
2. Indonesian chili production by region, 2009-2013
5
3. Descriptive analysis of Indonesian chili prices, 2009-2013
10
4. Descriptive analysis of the farmer, trader, and consumer prices of
Indonesian chili, 2009-2013
17
5. Results of the ADF-test for chili prices at the farmer level, trader level and
consumer level
19
6. Results of Johansen trace test for chili prices at the farmer level, trader
level and consumer level
20
7. Results of Granger-Causality test for chili prices at the farmer level, trader
level and consumer level
21
8. Error correction model of chili prices between farmer and trader prices 22
9. Error correction model of chili prices between farmer and consumer
23
10. Error correction model of chili prices between trader and consumer
24
LIST OF FIGURES
1. Vegetable Production (MT) in Indonesia, 2013
1
2. Production and yield of chili in Indonesia, 2009-2013
4
3. Indonesian chili production by seasons
5
4. Annual chili consumption in Indonesia per capita
6
5. Monthly export of chili from Indonesia in 2013
7
6. Indonesian chili import per month, 2013
7
7. Market supply chain of chili in East Java, Indonesia
8
8. National consumer price for Indonesian chili, 2009-2013
9
9. Daily farmer, trader and consumer prices for Indonesian Chili, 2009-2013
17
10. Plot series of logarithmic prices of Indonesian chili at the farmer level,
2009-2013
18
11. Plot series of logarithmic prices of Indonesian chili at the trader level,
2009-2013
18
x
12. Plot series of logarithmic prices of Indonesian chili at the consumer level,
2009-2013
19
LIST OF APPENDICES
1. Chili harvested by area (ha) and province in Indonesia, 2009-2013
2. Production of chili by province in Indonesia, 2009-2013
3. Yield of Chili by Province in Indonesia, 2009-2013
4. Output of ADF-test for Pfarmer_log
5. Output of ADF-test for Ptrader_log
6. Output of ADF-test for Pconsumer_log
7. Output of ADF-test for Pfarmer_log_d1
8. Output of ADF-test for Ptrader_log_d1
9. Output of ADF-test for Pconsumer_log_d1
10. Output of Johansen trace test for chili prices in farmer level and trader
level
11. Output of Johansen trace test for chili prices in farmer level and consumer
level
12. Output of Johansen trace test for chili prices in trader level and consumer
level
13. Output of Granger causality test for chili prices in farmer level and trader
level
14. Output of Granger causality test for chili prices in farmer level and
consumer level
15. Output of Granger causality test for chili prices in trader level and
consumer level
16. Output of VECM for Pfarmer_log and Ptrader_log
17. Output of VECM for Pfarmer_log and Pconsumer_log
18. Output of VECM for Ptrader_log and Pconsumer_log
19. Chili intercropped with rubber plantation, Banyuwangi, East Java
20. Chili field on irrigated land
21. Sortation of chili is done by the trader’s workers
22. Chili packaging using carton box (30 kg), done by chili trader
23. Poor infrastructure on the road of chili intercropped with rubber plantation,
Banyuwangi, East Java
xi
LIST OF ABBREVIATIONS
ADF
APT
AVRDC
: Augmented Dickey-Fuller
: Asymmetric price transmission
: Asian Vegetable Research Development Center
Badan Perencanaan Pembangunan Nasional; National
BAPPENAS :
Development Planning Agency
BPS
: Badan Pusat Statistik; Statistics Indonesia
Departemen Pertanian. Department of Agricultural the
Deptan
:
Indonesian Ministry of Agriculture
DGH
: Directorate General of Horticulture
ECM
: Error correction model
IDR
: Indonesia Rupiah
Kemendag
MoA
UNCTA
USD
VAR
Kementerian Perdagangan; Indonesian Ministry of Trade
:
:
:
:
Indonesian Ministry of Agriculture
United Nation Conference on Trade and Development
United States Dollar
Vector autoregressive (VAR)
1
1 INTRODUCTION
Background
Like most developing countries, the agriculture sector contributes
significantly to the Indonesian economy. In the Indonesian market, the vegetable
sector is particularly important. The five vegetables with the highest production
are cabbage, potatoes, chili, shallot and tomatoes. Figure 1 shows the production
quantity of vegetables in Indonesia. From the figure, we can see that chili was the
third greatest contributor to vegetable production in 2013.
Figure 1. Vegetable Production (MT) in Indonesia, 2013
Source: Directorate General of Horticulture, Ministry of Agriculture (2014)
Globally, Indonesia is one of the top five chili producing countries in the
world (UNCTAD, 2013), along with China, Mexico, Turkey and Spain. The top
five chili exporters, however, are the Netherlands, Spain, Canada, the United
States and France. Like most of the five leading chili producing countries,
Indonesia is not a major exporter for this commodity; rather they dedicate their
production to national consumption.
Chili is an essential spice in the Indonesians diet. The Indonesians
consume chili at a rate of 1.5 kg per capita annually (Bappenas, 2013). The
majority of Indonesians consume at least a small amount of chili every day.
Therefore, as is the case with salt and many other condiments, the demand
elasticity of chili is inelastic (Asian Vegetable Research Development Center,
2006).
2
The phenomena that rise in the vegetable markets especially in red chilli
commodity markets need a further study to investigate the price and market
mechanism. Therefore, first we have to know the structure of commodity chain,
and its characteristics. According to Ferrari (1994: 14), the common feature of
vegetables market system is a collection market, which has seasonal nature. It
means, vegetables are collected from producer areas and they are sold in one
location.
Generally, the marketing channel of vegetables in Indonesia passes
through from farmer to collector and local retailer. Then, distribution channel
usually continue flows to wholesale markets and inter islands traders, and
traditional retailers. Then, finally it is received by the consumer. However, the
implementation of trade liberalization in 1990s, and the removal of restriction of
the Foreign Direct Investment (FDI) in 1998 have stimulated the rapid growth of
the supermarket sector in Indonesia. In short period, the sales of fresh vegetables
in the supermarket increase rapidly. Then, it has led to a change of vegetables
market chain where new channels are not only the supermarkets and food
processing industries, but also farmer associations, hotels and restaurants have
emerged in the marketing chain in Indonesia (Natawidjaja et al. 2007).
Over 60% of chili is produced on Java Island, with East Java being one of
the most influential sources (White et al. 2007). Banyuwangi is a city that
produces substantial quantities of chili in East Java. This paper will elaborating on
the market in Banyuwangi, East Java, including an overview and analysis of
prices incurred by farmers and traders. Moreover, the consumer price level that is
considered in this study comes from Jakarta, where 90% of the chili is sold.
Problem Statement
Chili production has received considerable attention in Indonesia due to
extensive price fluctuations and its effect on inflation (Saptana et al., 2012, Farid
& Subekti, 2012). Additionally, chili is an important crop that is commonly
produced by small-scale farmers. Furthermore, it has an important role as a source
of cash flow and daily income for small-scale producers (Sahara et al., 2011).
Many recent studies focus on analyzing the disparity between markets to
investigate price and market mechanisms. The chili market is in need of further
study in order to understand the structure of its commodity chain, as well as its
characteristics. Based on the description of chili market in Indonesia, several
issues need to be further investigated by analyzing price transmission between
different actors in the vertical chain:
1. How the vertical price transmission between farmer level and trader level?
2. How the vertical price transmission between farmer level and consumer
level?
3. How analyze the vertical price transmission between trader level and
consumer level?
3
Research Objectives
According to the description above, the objectives of this paper are:
1. To analyze the vertical price transmission between farmer level and trader
level
2. To analyze the vertical price transmission between farmer level and
consumer level
3. To analyze the vertical price transmission between trader level and
consumer level.
Benefits of the Study
1.
2.
The benefits of this study are:
As a reference and consideration in setting policy related to to chili price
in Indonesia.
As a reference and information for further study in more depth approach
regarding price transmission of chili in Indonesia for academics and
researchers.
Scope and Limitation of the study
This study was conducted using chili price data from farmer in
Banyuwangi, trader in Banyuwangi, and consumen of chili in Jakarta. The scope
of the discussion in this study includes price transmission investigated by
analyzing between different actors in the vertical chain: farmer, trader, and
consumer using VectorEerror Correction Model (VECM).
The limitations of this study are: (1) The source of data is limited to the
data from farmer and trader in Banyuwangi, and price data of the consumer from
Indonesian Ministry of Trade (2) The analysis of vertical price transmission is
limited to red chili (cabe merah besar); and (3) Chili price data used in this study
is daily time series from January 2009-December 2013.
2 LITERATURE REVIEW
National Production and Consumption
Indonesian chili production is dominated by the production of chili on
Java Island and Sumatera Island (White et al., 2007). Chili plants are mostly
grown on small plots and is often considered to be a cash crop as it is a main crop
in some areas (AVRDC, 2006), (Saptana et al., 2012). Chili plants are usually
cultivated in paddy fields (irrigated or rainfed) and on dryland fields. On irrigated
land, chili is typically planted after rice so that cropping patterns are influenced by
the rice, and is therefore rely upon climatic conditions, especially rainfall.
From 2009-2013 chili production in Indonesia has experienced an
increasing trend. Specifically, chili production increased slightly from 787,433
metric tons in 2009 to 807,160 in 2010, an increase of only 2.5%. From 2010
through 2013, this production volume increased significantly more from 888.852
4
metric tons in 2011, 954,312 metric tons in 2012, and 1,012,800 in 2013, leading
to an average production growth of 6% during this five year time period.
The average chili yield, however, experienced slight decreases from 2010
to 2013, going from 6.72 metric tons per hectare to 6.58 metric tons per hectare.
Despite this slight decrease, the trend of average yield from 2009 to 2013 showed
increasing production. The national average yield for 2009-2013 was 7.35 metric
tons per hectare. Both the national production volume and productivity are present
in Figure 2.
Figure 2. Production and yield of chili in Indonesia, 2009-2013
Source: Ministry of Agriculture (2014), and Statistics Indonesia (2014)
On the other hand, the average yield across Indonesian provinces has a
great deal of variation. Java Island has the highest yield with approximately 9.02
metric tons per hectare, with the second highest yields coming from Sumatera at
7.79 metric tons per hectare, with the other Indonesian islands averaging roughly
5.98 metric tons per hectare. Provincial data from Statistics Indonesia (BPS) and
the Directorate General of Horticulture (DGH) of the Ministry of Agriculture are
summarized in Tables 1 and 2, with all provincial data from 2009-2013 being
available in Appendices 1-3.
Table 1. Chili harvested by area (ha) and region in Indonesia, 2009-2013
Region
Harvested land area (ha)
Average
Percentage
(%)
Growth
2009
2010
2011
2012
2013
(Ha)
Sumatera
47,943
52,952
51,403
49,677
52,528
50,900
42.07
2.48
Java
57,424
57,946
56,479
56,303
57,703
57,171
47.26
0.14
Others
11,811
11,857
13,181
13,845
13,879
12,914
10.67
4.21
Indonesia 117,178 122,755 121,063 119,825 124,110
120,986
100
1.48
Source: Ministry of Agriculture (2014)
(%)
5
The total harvested area for Indonesian chili from 2009 to 2013 was just
over 100 thousand hectares (farm average of 120,986 hectares), indicating an
increase of about 1% for the time period between 2009 and 2013. According to
the table above, the total harvested land area in Java and Sumatera experienced
slight fluctuations, but overall had an increasing trend. On the other hand, the
other regions encountered an increase in total harvested land every year from
2009 to 2013, with an overall growth percentage of about 4%.
Table 2. Indonesian chili production by region, 2009-2013
Region
Productions (metric tons)
2009
2010
2011
2012
2013
Average
Percentage
(metric
(%)
Growth
(%)
tons)
Sumatera 289,178 354,145 403,948 423,264
409,316
375,970
42.2
9.5
434,219 390,505 405,929 453,977
520,617
441,049
49.6
5.1
82,947
73,108
8.2
7.3
954312 1,012,880
890,127
100
6.5
Java
Others
64,036
62,510
78,975
Indonesia
787433 807,160 888,852
77,071
Source: Ministry of Agriculture (2014)
The total chili production in Indonesia from 2009 to 2013 is presented in
Table 2. Chili production in Indonesia has demonstrated an increasing trend over
the five year period between 2009 and 2013. Java, Sumatera and other regions
show a positive growth trend, with an average of 6.5%. Sumatera has the highest
percentage of growth at approximately 9.5%, Java at 5.1% and other regions at
about 7.3%. As previously mentioned, Java and Sumatera are the dominant chili
producers in Indonesia accounting for nearly half of the total production.
Figure 3. Indonesian chili production by seasons
Source: Webb & Kosasih (2011)
There are two primary seasons for cultivating chili in Indonesia, however,
production can take place year-round in Indonesia (Webb et al., 2012) (White et
al., 2007). The first season begins around mid-February with the harvest starting
in late April and going through early June, while the second planting season
begins late June with the harvest period running from early September to early
November (Figure 3). However, no strong seasonal pattern is observable when
considering the monthly chili production in Indonesia.
6
Figure 4. Annual chili consumption in Indonesia per capita
Source: Ministry of Agriculture (2014)
Figure 4 presents the total consumption of chili in Indonesia. According to
the Ministry of Agriculture (2014), the total chili consumption in Indonesia does
experience fluctuations, with the average consumption, however, being about 1.5
kg per capita annually. This consumption value, however, is not always steady
due to the unstable price of chili. In 2008, overall chili consumption decreased
sharply, yet the average weight of consumption increased from the year before. As
previously mentioned, the consumption of chili is inelastic. From the graph above,
we can see that the price of chili does not have a dramatic effect on chili
consumption.
There are no exact data on aggregate consumption of chili in Indonesia.
However, the data of chili consumption per capita can be seen as a benchmark for
the aggregate consumption of chili in Indonesia.
Export and Import
Chili in Indonesia is not seen as a strong option for an export commodity.
The total volume of chili export in Indonesia is highly fluctuating. This
fluctuation is due to domestic production only being able to meet the local market
demand, along with the fact that the local quality does not meet the requirements
of many export destinations. The price of chili is also very influential in the
number of exports. If the local price is very high, export numbers will decrease
because they are not competitive with the international market. Data on chili
export is only available for a certain period. Figure 5 presents the monthly data for
Indonesian chili export volume and total export value in USD for 2013. From the
following figure, it can be seen that the sum of Indonesian chili exports in 2013
was 570,256 kg with a total value of 930,550 USD. Primary Indonesian chili
export destination countries are Singapore, Malaysia, Saudi Arabia, Japan, and the
Netherland (Ministry of Agriculture, 2014).
7
Figure 5. Monthly export of chili from Indonesia in 2013
Source: Export-import database (Ministry of Agriculture, 2014)
Here, we present monthly export data for chili in Indonesia in 2013
according to Ministry of Agriculture (2014). The total chili import for 2013 was
23,145 metric tons, valued at 27,525,616 USD. The total volume of chili import in
Indonesia was forty times more than the total export in 2013. The primary sources
for Indonesia’s chili imports are India, China and Thailand. Figure 6 presents
Indonesia’s monthly chili import in 2013.
Figure 6. Indonesian chili import per month, 2013
Source: Export-import database (Ministry of Agriculture, 2014)
8
Marketing Channel
The market supply chain of chili in Indonesia differs by region, but some
features remain constant throughout the country. We will use this marketing
channel from White et al. (2007) for example. Chili marketing channel embraces
link that happened between farms gate (producers) and final consumer. According
to Stern et al. (1996: 1), “marketing channels can be viewed as sets of
interdependent organizations involved in the process of making a product or
service available for consumption or use”. The chili market supply chain consists
of the farmer, trader (collector), wholesaler, retailer, restaurant (food stall), and
consumer. The chili marketing channel in East Java is illustrated in Figure 7.
Figure 7. Market supply chain of chili in East Java, Indonesia
Source: White et al. (2007)
There are five common marketing options for Indonesian farmers
(Shepherd & Schalke, 1995):
1. Farmers can go to the local market themselves, where they sell to traders
who supply wholesale markets
2. Traders buy the entirety of the production field (standing crop purchase)
and deliver to wholesale markets
3. Traders collect from farmers then deliver to wholesales markets
4. Trader buys from farmers and sells to the retail market
5. Farmers sell to a packing house
Buying standing crop is a transaction that takes places between farmers
and traders in the field before the harvest (tebasan). This is a common buying
method in Indonesia for many crops, such as paddy rice, corn, soybean,
vegetables, and many fruits. However, many people think this practice is not fair
because the farmers may receive an undervalued price for their crop. In this
practice, the trader will pay cash to the farmer before harvest time. Therefore,
9
some farmers will choose this method to have guaranteed cash in hand. The
standing crop buying method, however, is not common in the chili sector.
Typically, chili traders give credit for chili seed and fertilizer before the
farmer beings planting. After harvest, the farmer will sell their output to the same
trader that gave them credit. When the harvest time begins, farmers will go to the
trader every day to sell their crop until the end of the harvesting period. By doing
so, farmers ensure better access to credit, while traders reduce the risk of not
obtaining enough product.
Another main actor in the market supply chain of chili is farmer
associations. An important benefit of farmer associations is that they can sell chili
to institutional buyers such as chili sauce companies, supermarkets and exporters.
An Individual farmer cannot sell their chili directly to these organizations due to
the small scale of the farmer; most farmers only produce a small amount of chili,
and the quality of the product is not uniform.
Farmers do not sort their chili outputs before selling them to the trader.
The trader will take care of the sorting process, based on color and physical
condition, at an estimated cost of 500 IDR per kg (Webb et al., 2012). There is no
storage cost at this stage because the entire chili output will be sent to another
marketing channel within a day.
Prices in Indonesia
Chili prices in Indonesia have shown high fluctuations in between 2009 to
2013, as shown in Figure 8. A standard characteristic of chili prices in Indonesia
is the extensive fluctuations, often the prices doubled in one month and then
proceeded to decrease gradually.
Figure 8. National consumer price for Indonesian chili, 2009-2013
Source: Ministry of Trade (2014)
10
Table 3 shows a comprehensive view of the descriptive analysis of the
national consumer price of chili in Indonesia.
Table 3. Descriptive analysis of Indonesian chili prices, 2009-2013
Variable
Observation Mean
Std. Dev C.V.
Min
Max
National
44,725
1304
23,246
6,792
0.29
13,184
Price
Source: Author’s calculations with data from the εinistry of Trade (2014)
Price volatility explains the variance of data compared to their mean. The
price volatilities of food commodity are really important. Price volatility will
influence economic and welfare of the society (Bustaman 2003). When chili
prices increase, the composition of public expenditure on chili will increase. It
will make reduction of revenue allocation for the other needs such as education
and health. If the food prices increase continuously and volatile, the more onerous
burden for society which can reduce the welfare of society.
Price stabilization on food can enhance economic growth and food
security (Timmer 1996; Timmer 2004; and Dawe 2011). The advantages of price
stabilization are that it can reduce the level of risk faced by producer and
stimulates farmers to invest more to produce and raise productivity, meanwhile
for consumer can get benefit from stable price and can alleviate poverty. These
notions assumed that food price transmitted completely from consumer to
producer.
The price stabilization mechanism and its consequences are explained by
simple Marshalian theory from Waugh-Oi-Massell in Newbery and Stiglitz (1981)
(Istiqomah 2006). This theory assumes that the supply and demand are linear in
the market and will response instantaneously when there is change of supply or
demand, and additive stochastic disturbances. The changes of price equilibrium in
the market due to supply or demand changes in the short-run will cause price
volatility. The price stabilization is aimed to dampen the unstable prices and lead
the prices to the mean of its prices.
As of yet, there is no comprehensive solution from the government
regarding the fluctuations in the price of chili that has happened nearly every year.
Some solutions from the government are monitoring supply, as well as the price
of the chili by giving permission to the importers to buy chili from another
country such as China, India and Thailand.
3 FRAMEWORK
Market Integration
To understand how a market works, we have to know what market
integration is. Market integration takes place when prices among different market
or related goods follow a similar pattern over a specific period of time. The flow
of goods reflects the level of integration of the market. Furthermore, integration is
a fulfillment of the law of one price (LOP). The LOP declares that if a trade
11
happens and all profitable arbitrage opportunities removed, prices are equalized
up to the cost of commerce (Barrett, 2001). Market integration is a measure of the
degree to which demand and supply are transmitted from one region to another
region (Fackler & Goodwin, 2001). Similarly, Barrett and Li (2002) describe
market integration as the core on trade of physical goods as tradability in the
operation. Tradability means transferring information when there is surplus of
good in one market and/or there is opportunity of physical flow of goods.
Besides linked to flow of physical goods, the concept of market integration
also refer to co-movement of price between markets indicated by LOP. As define
by Fackler & Goodwin (2001), strong LOP hold when spatial arbitrage condition
as an equality between spatial markets. An integrated market exists when
connected markets display high price correlations. If trade takes place beetwen
different markets for homogenous goods, the price in the origin market (Pi) is
equal to the price in the destination market (Pj) plus transfer cost (Ci). More
specifically, a strong LOP can be expressed as:
Pi-Pj = Ci.
In strong LOP, price changes in the origin market will be immediately
transmitted on a one-for-one basis to another market. While in weaker form of
LOP, a temporary price disparity between markets will arise, but it will gradually
return to equilibrium in the long run (Fackler & Goodwin, 2001). The concept of
LOP expects that all information in the markets is obtainable so that optimal
arbitrage and no-barriers to trade can be implemented (McNew, 1996), (Jensen,
2007). However, some literature suggests that this expectation is too idealistic and
would never happen in practice.The concept of LOP expects that all information
in the markets is acquired to implement optimal arbitrage and no-barriers to trade
(McNew, 1996), (Jensen, 2007). However, some literature suggests that this
expectation is too idealistic and would never happen in practice.
It is possible to have market integration despite being in a no-trade
between markets situation, as long as they are part of the marketing system.
Market integration is not automatically a reference to market competitiveness
(Fackler & Goodwin, 2001). In the same sense, there is possibility of a no-market
integration situation in the case of physical arbitrage where this absence of market
integration exists when there is market segmentation (Barrett & Li, 2002). The
absence of trade may also suggest that markets are in spatial equilibrium
(Stephens et al., 2012).
In the presence of market integration/s in competitive markets, the price
difference between markets should not exceed the transfer cost of trading goods.
If this situation cannot be accomplished, then the efficiency of the markets is not
fulfilled. Furthermore, minimizing transfer costs is necessary for ensuring market
efficiency between integrated markets (Barrett, 2001). If transfer costs of trade are
extremely high, due to trade barriers, poor transport infrastructure, or other
factors, markets can be uncompetitive and thus will not be socially efficient.
Therefore, the existence of market integration does not promise the maximization
of welfare unless the trade costs are minimized (Barrett, 2005).
12
Price Transmission in Vertical Food Chain
Vertical price transmission is identified by the magnitude and speed of
adjustment of goods that pass through the supply chain and are developed at any
other level of the marketing process (Vavra & Goodwin, 2005). Magnitude is
defined as the size of the effect that has been transferred to another level of the
market. It also indicates the size of the response to each market level due to the
extent of the impact (change) which appears at another level of the market. On
other hand, speed implies the significant lags of adjustment. The size of the effects
is typically of the most interest; still, the speed of adjustment is essential to fully
understanding the integration. The speed with which a market adjusts to change
(shock) from another market is specified by the actions of market agents who are
engaged in the transactions.
As a change in prices could determine the magnitude and speed of
adjustment cost, then asymmetric price transmission (APT) becomes an important
concept. Under asymmetric price transmission, producers and/or consumers may
not benefit if there is an increase or decrease in the price of goods in another level
of the market. A common occurrence is when the price increases at the retail
level, an effect which will be very quickly transmitted to the consumer, but a
decrease in the price of a good usually requires a longer period of time to be
recognized by the consumers. This common occurrence usually followed by the
small number of retailers and middlemen in the market. Moreover, in
consideration of this scenario, a decrease in input costs will benefit the retailer
more than the consumers. It can therefore be said that asymmetric price
transmission may signal welfare loss for the consumer (Meyer & von CramonTaubadel, 2004).
Several factors may lead to APT; of these, two essential factors that should
be considered are market power and menu cost. Market power implies that there is
a non-competitive market. This imperfect competition among retailers and
processor level markets may lead to APT. This imperfect competition among
retailers and processing level markets may lead to APT. It is commonly suspected
that imperfect competition will lead to positive APT, which relates to the shock in
input price when input prices increase, promptly resulting in an increase in output
price. Negative APT will occur when the impact from an increasing input causes
the market to respond more slowly than it would with a decreasing input.
Negative ATP can happen when retailers not sure of their market share in the
market, and they afraid of losing market share. Generally, the presence of market
power will lead to positive APT, yet in practice it is not impossible for market
power to lead to negative APT. Market structure determines whether the market
power factor will lead to positive or negative APT (Meyer & von CramonTaubadel, 2004).
The second factor that can lead to APT is adjustment and menu cost.
Adjustment costs may increase when retailers raise or lower their inputs price
(menu costs) and/or change the quantities of their inputs. When these change of
costs asymmetric with respect to rises or lowering in quantities and/or prices then
APT may be a result.
13
Previous Study
Many studies have been done to examine price transmission and market
integration of staple food commodities in Indonesia, relatively few studies,
however examine market integration and price transmission with respect to the
vegetables market. A study by Jubaedah (2013)regarding market integration of the
red chili commodity in Indonesia focuses on spatial price transmission and market
integrations between wholesale markets in Jakarta and 23 producer markets
throughout Indonesia. Findings indicate the potential factors behind either lacking
or strong market integration in the Indonesian chili market. The quality of
infrastructure, distance between markets, and the size of the market tend to affect
the integration on the markets. With these findings, Jubaedah gives a couple
policy recommendations with the aim of achieving better market integration in the
Indonesian chili sector; first, improve the development of infrastructure to
minimize transfer costs. Second, develop the marketing information system within
the country in order to gain clear insight into chili price and improved marketing
information.
Webb et al. (2012) study the relationship between chili traders and price
volatility. Their research question, “Do chili traders make price volatility worse?”
led to the conclusion that chili traders are relatively good about responding to a
price shock by quickly transferring chili to other parts of the island. However,
chili traders do not have stocks to anticipate increasing demand shocks in the chili
sector, which may be potentially harmful when dealing with volatile prices. Two
policies are suggested by Webb et al., one is to permit imports of fresh chili from
other countries, and the second is to subsidize investment in cold storage, which
can help holding stocks to reduce the chili price fluctuations.
Farid and Subekti (2012) examined production, consumption, distribution
and price dynamics of chili production in Indonesia. From this research, it is made
apparent that there are factors that can lead to price disparities for chili price
across the country. This is possibly due to the large concentration of chili
production taking place in Java and Sumatera, despite all Indonesian people
consuming chili. Not all provinces can produce chili, thus leading to the
conclusion that poor infrastructure and high transfer costs can often lead to price
disparities. This research also findings the factors that influenced the price of
chili in Indonesia; 1) Planting pattern (the production of chili), 2) Cost of
production (seed and fertilizer), 3) Distribution of chili; not all the provinces in
Indonesia can meet the needs of chili consumption, and non-Java region have bad
infrastructures, 4) Consumption when there is Ramadhan and Idul Fitri festival.
As with Jubaedah and Webb et al., this paper indicates policy recommendations,
the most relevant being to improve some infrastructure within the country.
Hypotheses
1.
2.
Price transmission is more rapid between the farmer-trader level than
between the farmer-consumer level.
Price transmission is more rapid between the farmer-trader level than the
trader-consumer level.
14
3.
Price transmission is more rapid between the trader-consumer level than
between the farmer-consumer level.
4 RESEARCH METHODOLOGY
Data Description
The present study uses daily consumer data of chili prices in Jakarta, trader
prices in Banyuwangi, and farmer prices in Banyuwangi from January 2009 until
December 2013. The data is secondary time series data taken from the Indonesian
Ministry of Trade, Statistics Indonesia and Ministry of Agriculture. All of the time
series data are transformed to logarithmic form.
All farmers price is a price that farmer get by selling their chili, all farmers
price is collected by one trader. This trader buy chili from about 15 farmers a day.
All trader price is a price that trader get by selling their chili to other traders
within kabupaten (district). Trader price is collected daily using their own record
book. This trader usually sell their chili to three traders based on price.
Price Transmission Analysis
Price transmission analysis is used to answer the research questions of
vertical market integration and vertical price transmission of farmer level price in
Banyuwangi, trader level price in Banyuwangi and consumer price in Jakarta. The
data was run using STATA version 13.0 statistical software for the following
statistical tests: 1) Unit root test for stationarity, 2) Johansen test for
cointegration, and 3) Granger-causality test for testing direction of price
transmission (causality). The next step is to model the vertical price transmission
in accordance with the following classifications: 1) price transmission between the
farmer level and trader level, 2) price transmission between the farmer level and
consumer level, and 3) price transmission between trader level and consumer
level. This study applies the standard linear error correction model (ECM) for data
estimation.
Unit Root Test
To examine whether the data is stationary or not, we use the unit root test.
The stationarity of each data series is needed to detect the presence of spurious
regression in the model. A spurious regression will indicate that the result of the
regression may not have a direct causal relation, but it is possible that they do.
This paper used an Augmented Dickey-Fuller (ADF) test, which is an adjustment
of the Dickey-Fuller (DF) test that is used to check the presence of unit root for
each variable in the model. The ADF model can be estimated as follows:
Δ Yt = α0 + α1 T + tYt-i + Σ βiΔYt-i + t , ~ΠD (0, 2)
where ΔYt = Yt – Yt-1
(1)
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If the null hypothesis of | t| = 0 is rejected, then the conclusion is that the
data series is stationary, where if the null hypothesis of | t| = 0 is accepted, then
the data series is not stationary.
Cointegration Test
The next step is the cointegration test, which tests for the presence of a cointegrated relationship of two different market level’s price data. Cointegration of
two market levels indicates that there is a tendency for the price to demonstrate
one common behavior in the long run. If two price series in two markets are
integrated in the same order, i.e., I (d), and there is a linear relationship between
the price series’, then it can be assumed that those two markets are co-integrated.
The hypotheses of this test are:
1) Rank test 0
H0: There is no cointegrating vector
H1: There is one cointegrating vector
2) Rank test 1
H0: There is one cointegrating vector
H1: There are two cointegrating vectors
We reject H0 if the trace test is larger than a 5% critical value. The
cointegration test examines the presence of cointegrating vectors in the models at
the farmer-trader price level, farmer-consumer price level and trader-consumer
level.
Granger Causality Test
The Granger causality test examines the direction of the price transmission
between the two market levels. If there are two price series, and one of the prices
(Pit) current values are lagged, it can predict the value of another price (Pjt), then
Pit influence Pjt.
There are three categories of causality that may potentially take place:
1. No causality between two prices
2. Unidirectional causality; this occurs when there is only one
direction of causality between prices, e.g., Pit can be predictive of Pjt,
but not the other way around
3. Bilateral causality (Reciprocal causality); this means that both
prices can be predictive of each other.
Error Correction Model (ECM) Estimation
The third step is to create error correction models. The error correction
term of ECM depicts the short-run adjustment of certain prices toward the longrun equilibrium. Meyer & von Cramon-Taubadel (2004) describe the error
correction term through the following equation:
1
2
∆P1t = θ1 + αECTt-1 + ∑
(2)
2i ∆ P t-1 + ∑
3j ∆P t-j + t
where α represents the percentage of the price adjustment in a certain period; ∆P1t,
represents the change of the P1t in the last period, which depends on a constant
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value θ1; changes in prices of the cointegration is indicated by ∆P2t-j; and the
distance of the variables in their last period is represented with ECTt-1.
5 RESULTS
Concept in Price Data
There are three level markets prices that used in this study; farm gate rices,
wholesale prices, retail prices.
Farm Gate Prices
The farm gate prices are in principal the prices received by farmers for
their produce at the location of farm. Thus the costs of transporting from the farm
gate to the nearest market or first point of sale and market charges (if any) for
selling the produce are, by definition, not included in the farm gate prices. Thus
the prices collected from such markets may be adjusted for these costs to arrive at
farm gate prices.
Trader Prices
After an agricultural product leaves the farm-gate, it may pass through one
or even two wholesale markets and a chain of other "middlemen before reaching
the retailer from whom the ultimate consumer buys it. This trader price that was
used is a direct trader, who buy chili from farmers in same city, Banyuwangi.
Retail Prices
The price of a good or product when it is sold to the end user for
consumption, not for resale through a third-party distribution channe