Recomendations The Price Transmission in Rice Market Chain in Indonesia

Newbery DMG, Stiglitz JE. 1981. The theory of commodity price stabilization a study in the economics of risk. London: Oxford University Press. Peltzman S. 2000. Prices raise faster than they fall. Journal of Political Economy. Vol. 108:466-502. Prakash AB. 1999. The transmission of signals in a decentralised commodity marketing system: the case of the UK pork market [PhD Thesis]. London: the Wye College, University of London. Pranolo T. 2000. The role of Bulog as a logistic and national food reserve institution [in Bahasa Indonesia]. Paper Round Table Rice Price Policy, Ministry of Agriculture. Jakarta: The Ministry of Agriculture Republic of Indonesia. Rapsomanikis G, Hallam D, Conforti P. 2006. Market integration and price transmission in selected food and cash crop markets of developing countries: review and applications. In: Sarris A, Halam D. Agricultural Commodity Markets and Trade: New Approaches to Analyzing Market Structure and Instability. Rusastra IW, Rachman B, Sumedi, Sudaryanto T. 2004. Market structure and marketing of paddy-rice and the main competitor commodity [in Bahasa Indonesia]. Center of Research and Development of Farming Socio- Economics. Sari DL. 2010. Spread analysis of paddy and rice prices, and market integration and commodity [in Bahasa Indonesia] [Master Thesis]. Bogor: Graduate School of IPB. Soekarno. 1953. A matter of life or death [in Bahasa Indonesia]. Copy from Almanak Pertanian page: 11-20. Available online at http:www.seafast.ipb.ac.idarticlePidato-Bung-Karno-Peletakan-Batu- Pertama.pdf. Tambunan TTH. 2010. Two big economic crises: the Indonesian experience. Jakarta: Center for Industry, SME and Business Competition Studies, Faculty of Economics, University of Trisakti. Timmer CP. 1996. Does Bulog stabilize rice prices in Indonesia? Should it try?. Bulletin Indonesian Economy Study No. 32: 45-74. Timmer CP. 2004. Food security in Indonesia: current challenges and the long-run outlook. Working Paper Number 48 November, Center for Global Development. Timmer CP. 2008. Causes of high food prices. ADB Economics Working Paper Series. Asian Development Bank. Manila: Asian Development Bank. The UK Hunger Alliance. 2011. Tackling the high food price challenge: five recomendations from the UK Hunger Alliance to G20 members. London: The UK Hunger Alliance. Vavra P, Goodwin BK. 2005. Analysis of price transmission along the food chain. OECD Food, Agriculture, and Fisheries. Working Papers No. 3, OECD Publishing. Braun JV. 2008. Food and financial crises: implications for agriculture and the poor. Food Policy Report of International Food Policy Research Insstitute IFPRI. World Bank. 2008. Commodity markets review November 12. Washington DC: DECPG The World Bank. APPENDIXES Appendix 1 F-test for test the difference of variance of rice prices before and during crisis Variable Standard deviation σ Variance σ 2 F-value = s 1 2 s 2 2 F-table

95, 85,64

Producer price Before 0,279 0,078 1,817 1,4824 After 0,207 0,043 Rice miller price Before 0,165 0,027 0,648 1,4824 After 0,205 0,042 Wholesaler price Before 0,188 0,035 1,181 1,4824 After 0,173 0,029 Retailer price Before 0,089 0,008 1,122 1,4824 After 0,084 0,007 Appendix 2 Graph of producer price and rice miller price in 2000-2012 Appendix 3 Graph of producer price and wholesaler price in 2000-2012 Appendix 4 Graph of producer price and retailer price in 2000-2012 Appendix 5 Graph of rice miller price and wholesaler price in 2000-2012 Appendix 6 Graph of rice miller price and retailer price in 2000-2012 Appendix 7 Graph of wholesaler price and retailer price in 2000-2012 ABSTRACT HUSNUL KHOTIMAH. The Price Transmission in Rice Market Chain in Indonesia. Supervised by SUHARNO, RITA NURMALINA, and STEPHAN VON CRAMON-TAUBADEL. The aim of this study is to assess the rice market chain performance, namely price volatility and price transmission among producer, rice miller, wholesaler, and retailer, with respect to the enforcement of rice price stabilization policy in Indonesia. We use the standard deviation of return for price volatility and the Cointegration test and the Error Correction Model for price transmission analysis. The results of this study show that the magnitudes of price volatilities along market chain decrease from producer to retailer. Producer in the upstream faces the highest price volatility at 24,9, and then ricemiller and wholesaler face the lower price volatility than producer but still high at 18,3 and 18,1, respectively. Whereas retailer in the downstream faces the stable price at 8,7. The price transmission analysis concludes that the rice market chain in Indonesia is segmented. The rice price is not transmitted completely from producer to consumer, and vice versa. There are only two markets which are integrated, namely price relationships between producer and ricemiller and between wholesaler and retailer. Meanwhile the price relationships between producer and wholesaler, producer and retailer, ricemiller and wholesaler, and ricemiller and retailer are not integrated. Keywords: rice, price volatility, price transmission, error correction model SUMMARY HUSNUL KHOTIMAH. The Price Transmission in Rice Market Chain in Indonesia. Supervised by SUHARNO, RITA NURMALINA, and STEPHAN VON CRAMON-TAUBADEL. Rice commodity has important and strategic roles in Indonesia economically, socially, and politically. Therefore the government of Indonesia imposes comprehensive policies to maintain rice price to be stable. The performance of its policies can be seen from Indonesian rice market resilience faced the world rice crisis in 20072008. The Indonesian rice market policy for price stabilization is executed by Bulog. Bulog has tasks to import rice, purchase domestic excess supply, maintain government rice reserve, inject additional supply when rice price rise, and distribute rice for the poor with low price. The successful of price stabilization policy in Indonesian rice market raise a question how did this policy influence the rice market chain performance? especially price volatility and price transmission among producer, rice miller, wholesaler, and retailer. We use the standard deviation of return for price volatility and the Cointegration test and the Error Correction Model for price transmission analysis. The result of this study shows that the magnitudes of price volatilities along market chain decrease from producer to retailer. Producer faces the highest price volatility at 24,9, and then rice miller and wholesaler face the lower price volatility than producer but still high at 18,3 and 18,1, respectively. Whereas retailer faces the stable price at 8,7. This study also confirms that the rice price volatilities before and during crisis are not different significantly for retailer price, wholesaler price, and rice miller price, but decrease significantly for producer price. The price transmission analysis concludes that the rice market chain in Indonesia is segmented. The rice price is not transmitted completely from producer to consumer, and vice versa. There are only two markets which are integrated, namely price relationships between producer and rice miller as well as wholesaler and retailer. Whereas the price relationships between producer and wholesaler, producer and retailer, rice miller and wholesaler, and rice miller and retailer are not integrated. The factors which may influence these relationships are the seasonal price effects, market power to manage supply, trade barriers, direct or indirect interaction related to product flows effects on price determination, transaction costs, transparancy of market information, and price stabilization policy. The policy implications which can be recommended from this study are: manage the unstable supply from production point through manage the cropping pattern in the production areas and strengthen the fa rmers’ institution by reinforce “Lumbung Padi” to the farmers, provide and manage good infrastructures for transportation, rice processing, warehousing, and communication infrastructure in Indonesian rice market chain system, encourage the market competitiveness along the rice market chain, and if everything is going well the rice price stabilization policy in the downstream market may be omitted. Keywords: rice, price volatility, price transmission, error correction model RINGKASAN HUSNUL KHOTIMAH. Transmisi Harga pada Rantai Pasar Beras di Indonesia. Dibimbing oleh SUHARNO, RITA NURMALINA, dan STEPHAN VON CRAMON-TAUBADEL. Komoditas beras memiliki peran yang penting dan strategis bagi Indonesia, baik secara ekonomi, sosial, maupun politik. Maka dari itu pemerintah Indonesia menerapkan kebijakan yang komprehensif untuk menjaga harga beras tetap stabil. Kebijakan ini dinilai berhasil menghadapi krisis pangan global pada tahun 20072008. Kebijakan stabilisasi harga beras di Indonesia dilakukan oleh Bulog. Keberhasilan kebijakan stabilisasi harga beras di pasar Indonesia menimbulkan pertanyaan bagaimana kebijakan ini mempengaruhi kinerja rantai pasar beras, khususnya volatilitas harga dan transmisi harga antara petani, penggilingan, grosir, dan ritel. Penelitian ini menggunakan standard deviation of return untuk analisis volatilitas harga serta Cointegration test dan Error Correction Model untuk analisis transmisi harga. Hasil dari penelitian ini menunjukan bahwa besar volatilitas harga beras sepanjang rantai pasar menurun dari petani ke ritel. Petani menghadapi volatilitas harga yang paling tinggi dengan volatilitas harga 24,9, kemudian penggilingan dengan 18,3, grosir dengan 18,1, dan ritel dengan 8,7. Ritel menghadapi harga yang stabil dibandingkan dengan lembaga pemasaran lainnya. Penelitian ini juga mengkonfirmasi bahwa volatilitas harga sebelum dan selama krisis tidak berbeda signifikan untuk harga penggilingan, harga grosir, dan harga ritel. Tapi menurun dengan signifikan untuk harga petani. Analisis transmisi harga menyimpulkan bahwa rantai pasar beras di Indonesia tidak terintegrasi. Harga beras tidak tertransmisikan secara sempurna dari petani ke ritel, dan begitu juga sebaliknya. Hanya ada dua pasar yang terintegrasi yaitu antara petani dengan penggilingan dan grosir dengan ritel. Sementara itu pasar antara petani dengan grosir, petani dengan ritel, penggilingan dengan grosir, dan penggilingan dengan ritel tidak terintegrasi. Faktor-faktor yang diduga mempengaruhi hubungan transmisi harga ini antara lain dampak dari harga musiman, kekuatan pasar dalam mengelola penawaran, hambatan-hambatan perdagangan, hubungan interaksi langsung atau tidak dalam perdagangan terkait dengan dampak dari aliran produk dalam penentuan harga, biaya-biaya transaksi, transparansi informasi pasar, dan kebijakan stabilitas harga. Implikasi kebijakan dari penelitian ini adalah: mengupayakan suplai produksi yang stabil melalui mengelola pola tanam di daerah produksi dan memperkuat kelembagaan petani dengan menggalakan kembali lumbung padi, mengediakan dan mengelola infrastruktur dengan baik dalam bidang transportasi, penggilingan beras, pergudangan, dan infrastruktur komunikasi dalam sistem rantai pasar, mendorong pasar yang kompetitif sepanjang rantai pasar, dan jika semuanya sudah berjalan dengan baik, kebijakan stabilisasi harga beras di hilir rantai pasar beras bisa dihilangkan. Kata kunci: beras, volatilitas harga, transmisi harga, error correction model I INTRODUCTION

1.1 Background

“Pangan Rakyat adalah Soal HIDUP ATAU MATI” “Food for People is about LIFE OR DEATH” Soekarno, First President of Indonesia. Bogor, 27 April 1952 This quote is the title of President Soekarno’s speech in the cornerstone- laying ceremony for the Faculty of Agriculture in the University of Indonesia now Bogor Agricultural University. This quote emphasizes the important of food for people, especially rice for Indonesian people. He also stated that to provide sufficient amount of rice and maintain affordable rice price for people are the important things to maintain the economic stabilization in the country. Many efforts to depress other prices are nothing when rice price is not stable and not affordable Soekarno 1952. Rice price has important role for Indonesia with respect to poverty, economic growth, and food security. The level of rice price is the most important determinant of poverty at household level in the short-run. The Indonesian households spent about 10 of their income and the poor households spent about 20-25 of their income to buy rice. The consumption per capita of rice in Indonesia is the 3rd highest in the world; it is about 139,1 kgyearperson. The unaffordable and unstable rice price brings the disaster for the poor. The poor always bear the brunt of bad economics, and then this condition inhibits the poverty alleviation Timmer 2004. In addition, rice commodity has strategic roles both economically, socially, and politically. In January 2012, the national inflation was at 0,76 and rice contributed by 0,18 BPS 2012. The inflation of rice price will trigger the other goods prices. The severe high prices of food can trigger the riot of society and disrupt the stabilization of politics. Even it can drop the government power. This situation has occurred in Indonesia, when multi crisis hit Indonesia in 1998. The food crisis in the world market occurred twice in the last decade . The first crisis took place in 20072008 and the second crisis in 20102011. The food prices increased slowly and steadily before, then in the beginning of 2007 food prices took off and reached its peak in the mid of 2008 FAO 2011. The staple food prices surged significantly in the world market in this period, for examples maize price increased by 74, wheat price increased by 124, and rice price increased by 224 World Bank 2008. Further, after mid 2008 food prices declined but then increased again in 2010 and reached its recorded peak in February 2011 FAO Global Food Price Monitor 2011. The high food prices have severe implications for food and nutrition security, macroeconomic stability, and political security Braun 2008. Data from FAO 2008 show that the number of undernourished people increased from 848 million in 2005 to 963 million in 2008 due to the food crisis. The food crisis in 20072008 affected the economic growth of many developing countries which active as exporter and importer in the world rice market. The economic growth of these countries were dropped to negative rate, for example, in 2008 the economic growth of Singapore at -8,9, Thailand at -7,11, Malaysia at -6,2, and the Philippines still had positive economic growth with declining growth rate World Bank in Tambunan 2010. Figure 1 Comparison of rice prices between Indonesia, Thailand, and Vietnam in 2005-2010 period Source: Bulog RI 2011 On the contrary Indonesia had positive economic growth at 6,2, though then it declined into 5,2 in the last quarter of 2009. Many studies conclude that the food crisis in 20072008 did not affect Indonesian economy, especially in the rice market. The high price of rice in the world market was not transmitted into the rice price in Indonesia Timmer 2008; BAPPENAS 2009; Keats et al. 2010; Tambunan 2010; Dawe 2011. The rice production performed well in 2007. It can provide enough rice stock and injection of rice supply for domestic market. In addition the government of Indonesia also controlled on quantity of rice traded internationally with trade restrictions Dawe 2011. One of the government efforts to prevent the rice selling to abroad and also in order to maintain its stock is by announced the ban policy on rice export early in 2008 before the peak of rice harvest time Timmer 2008. Bulog as the state enterprise, whose role to stabilize the rice price, has managed well the excess supply from production and maintain the rice supply to meet demand in the rice market. Therefore, the rice price was stable with normal inflation in Indonesia BAPPENAS 2009. The price transmission occurs when the price changes in the one market of any given commodity similarly reflected in the other market in different location spatially or other level in the market chain vertically, transaction costs and marketing margin are assumed not be counted. One of the requirements for price transmission is that the policies are not an obstacle for market Keats et al. 2010. Whereas, the government of Indonesia imposes many of the rice policies to maintain stable rice price through maintain the stock, regulate the rice import, purchase the excess supply of harvest from producer, inject rice supply into market when supply from producer is shortage, and distribute rice for the poor with low price. Bulog has the right to execute these policies. These policies will influence the price determination in the rice market either directly or indirectly. The other factors which influence price transmission is market power. In the developing country such as Indonesia, the bargaining powers among market institutions in the rice market chain are not equal. Farmers as producer have the weakest bargaining power in the market chain due to the lack information about market and the need for immediate cash after harvest time. Most of them cannot hold their products to wait for the better price. They always sell their harvest immediately in harvest time with given price. The equilibrium price in harvest time is low due to the abundant supply in the market Bustaman 2003. Farmers are the net consumer for rice. Mostly farmers sell their product in unhusked form, without storing the stocks for their need. The low revenue from rice production implies the difficulties to buy their living needs, even for rice.

1.2 Problem Statement

The resilience of Indonesian economy in the rice price crisis in 2008 gave benefit for domestic consumer with stable rice price. But how does this stable price in the retail market impact the other market institutions in the rice market chain? Does the rice price in retail market transmit to the wholesaler price, the rice miller price, and the producer price? We can measure price transmission in the market chain to see how the market chain’s performance and the market efficiency during the period of price stabilization policy. The magnitude of price transmission is important because it will affect the extent of adjustment by market institutions in the market chain to stabilize price movements. In addition, the prevailing price obtained by each level influences their welfare Timmer 2008. The rice price volatilities in each level of market chain are also important to see, because the price volatility of rice might dampen the potential benefit of higher price for the market institutions in the market chain by increasing the uncertainty and distorting the economic planning Braun 2008. In the short-run, the price volatility increases risk and vulnerability for producer, rice miller, wholesaler, and retailer in the market chain by mystify the market signals and overcomplicate the decision making process IFAD 2010 in UK Hunger Alliance 2011. The government of Indonesia has intervened the rice market through variety of policy instruments. These interventions very likely influence the market performance, especially the price transmission process. This study wants to find how the government interventions influence the market performance of the Indonesian rice market chain, especially the price volatility and the price transmission. Thus the research questions of this study are: