EFFECT OF MARKET STRUCTURE TO INTEGRATION RICE … · INDRAMAYU REGENCY, INDONESIA Yogi Makbul...
Transcript of EFFECT OF MARKET STRUCTURE TO INTEGRATION RICE … · INDRAMAYU REGENCY, INDONESIA Yogi Makbul...
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
EFFECT OF MARKET STRUCTURE TO INTEGRATION RICE AND PADDY PRICES
AND ITS IMPACT TO INCOME OF FARMERS’ FAMILY IN KROYA DISTRICT,
INDRAMAYU REGENCY, INDONESIA
Yogi Makbul
Institut Teknologi Bandung
Pradono
Institut Teknologi Bandung
Sudrajati Ratnaningtyas
Institut Teknologi Bandung
Pringgo Dwiyantoro
Institut Teknologi Bandung
ABSTRACT This study is one step of a larger research scheme of poverty reduction through improved market structure. Poverty alleviation is
one of the goals to be achieved in the Millennium Development Goals. Poverty occurs mostly on subsistence rice farmers who
own small plots of land. If the income of this group can be increased, it will significantly contribute to the poverty alleviation.
One attempt to increase farmers' income is by increasing the price of rice. It is based on the assumption that the increase in the
price of rice will subsequently increase the price of paddy, which, in turn, will increase the income of the rice farmers. This
assumption is valid when there is integration between the price of rice and that of paddy; such integration occurs in a free
competitive market structure.
This study aims to find evidence that the market is not "free competitive market" but "monopsony", in which increases in rice
prices will not increase the income of farmers with small lands. This is an important scientific finding and also a suggestion for
the government in determining the policy of the prices of rice.
The results showed that only large and medium farms are "free competitive market"; in this case the increase in rice prices will
affect the increased income of the farmer‟s families. The farmers with small farms have a market structure that tended to be a
"monopsony", meaning there is no significant effect of rice price increases on income of the farmers‟ family.
JEL Classifications: O20, O13, F63
Keywords: poverty reduction, improved market structure, prices, rice, farmer
Corresponding Author’s Email Address: [email protected]
INTRODUCTION
Poverty alleviation is one of the main objectives of the Millennium Development Goals (MDG) which is a
joint commitment of 189 countries that are members of the United Nations. Indonesia is one of the countries that
must also be committed to it. Indonesia aims to reduce the amount of extreme poverty by 50 percent and decrease by
half the number of population suffering starvation (http://www.targetmdgs.org). If you look at the site of the Central
Bureau of Statistics (http://www.bps.go.id), in 2010 the percentage of poverty in urban areas was 9.87 per cent and
16.56 per cent in rural areas. Thus, rural areas had higher percentage of poverty than in urban areas. The main
livelihood of the majority of people in the rural areas is farming. Thus, if there is a study on how to alleviate farmers‟
poverty, it will be very helpful in the process of poverty reduction in Indonesia
One of the policies to help increase farmers' income is by raising the price of farm produces; one of these
farm produces is paddy. It is expected that increases in the price of paddy will increase the farmers' income as the
result of their agricultural business. Increase of rice price can go along with the rising prices of paddy, but this also
leads to a dilemma. If the price of rice is increased to up the price of paddy, consumers will suffer the consequences.
The contradiction between the policy of low rice price and the increase of the farmers' income is indeed a dilemma.
When the price of rice is low, it will undermine the efforts to increase the farmers' income; however, when the rice
price increases, it will disrupt the lives of the consumers.
The assumption is that the rise of rice price will raise the farmers' income if the percentage of the increase in
the price of rice is proportional to the increase of the price of paddy at the farmer level. It happens when the market
at the farmer's level is a free competitive market. If the market is not competitive, or especially monopsony, rice
prices will not proportionally increase the price of paddy at the farmer's level, but instead it is the trader and
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
institutions participating in the rice trading system that will enjoy the advantage.
LITERATURE REVIEW
Market prices affect one another. The theory that states this is the "Law of One Price". This theory states
that "under certain conditions all prices within a market are uniform, after taking into account the cost of adding
place, time, and form utility to products within the market". Such interpretation of law states that under certain
conditions all prices in a market is uniform/equal following additional costs for place, time and utility. The term
"under certain conditions" as mentioned in the law is, according to Kohls & Uhls (1980), a condition where there is
no dominant large seller or buyer, trading restraints, manipulated prices as the result of the imperfection of the
buyers or sellers' knowledge about costs and prices, lack of information, and other obstacles found in trading. In a
free competitive market, the percentage of the price increases in a market will be followed by comparable percentage
of price increases in other markets. On the other hand, in a market that is not perfectly competitive, especially
monopsony in this case, the increase of price percentage in a market will not be the same as the increase of price
percentage in other markets. To explain these, Figure 1 illustrates the price increases in a consumer market and its
influence on the rising prices at the farmer level in a free competitive market
FIGURE 1. FREE COMPETITION MARKET
This picture is a simplification of the effect of price rises on traders and farmers. In the free competitive
market, price increases at the consumer level is P0K to P1k to be followed by the same percentage on traders and
farmers. This happens because no market barrier. Profits of farm business rises from rectangular ABCD into
rectangular EFGH. But if the market is a monopsony, as seen in Figure 2, the percentage of the increase of price at
the consumer level will not be proportional.
FIGURE 2. MONOPSONY MARKET
A.C2
Trader Consumer
P 0d
P 1d
P 0k
P 1k
D 0
D 1
A.C1
.
MC
A.C.
MC
Farmer
Q 0 Q 1 Q 0 Q 1 Q 0 Q 1
A B
C D
E F
G H
P 1t
P 0t
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
In the monopsony market, as traders are dominant, they will buy paddy from the farmers at farmer's AC
(Average Cost). As traders buy paddy at the price equal to that of AC, the farmers do not make any profit. When
prices rise, farmers do not get any profit. Price increase is equal to the increase in costs for improving production
output. In addition, the increase in consumer prices is not proportional to the increase in prices at the farmer's level.
For farmers who are in a monopsony market, rice prices will not increase the profits generated from rice farming. In
fact, the family's living expenses will increase as the rising price of rice that is supposed to be their consumption.
Many studies have proved the existence of price integration between markets. Research conducted by J.
Dawson and P. K. Dey. (2002), with the title ““Testing for the law of one price: rice market integration in
Bangladesh” results in findings of price integration in Bangladesh. Baulch, Bob et. al. (2002) “The Spatial
Integration of Paddy Markets in Vietnam” results in price integration between northern areas and southern areas of
Vietnam, Jian Yang et. al. (2000 ), with the title “The Law of One Price: Developing Country Market Integration”
published on „Journal of Agricultural and Applied Economics‟, 32,3 (December 2000): 429-440, Zanias (1993) with
the title "Testing for Integration in European Community Agricultural Markets" which proves that there is market
integration in the agricultural products among the European Economic Community. Research on market integration
is also supported by Dahlgram & Blank (1992) who evaluated market integration through a research “Evaluating the
Integration of Contiguous Discontinuous Markets” Ardeni (1989) with a title of "Does the Law of One Price Really
Hold for Commodity Price". This research proves the interconnection of prices among markets in a long run,
Gordon, Hobs & Kerr (1986), with the title "A Test for Price Integration EC Lamb Market" proves that there is
market integration in the English and French markets in marketing sheep.
The latest reasearch of integration market rice analysis is SCC Sekhar (2012) Agricultural market
integration in India: An analysis of select commodities. The purpose of this research is to analyze market integration
in India by using co-integration analysis. The results showed that the rice market is not integrated nationally. Thus
government policies will be able to effectively influence the market. Nyein Nyein Thaung (2011) Integration of
Myanmar Domestic Agricultural Marketing into ASEAN. This research examines the role of middlemen in the
marketing of agricultural market integration. Government policy by limiting the role of the private sector in the trade
have a positive effect on market integration. Madhusudan Ghosh (2011) Agricultural Policy Reforms and Spatial
Integration of Food Grain Markets in India. This research examines the role of middlemen in the marketing of
agricultural market integration. Government policy by limiting the role of the private sector in the trade have a
positive effect on market integration.
These studies conclude that there is price integration between interrelated markets, and therefore changes
of prices in a market will affect the other market prices. In a perfect competition the price integration will be perfect,
hence changes in prices in a market will be followed by proportional increases of prices in a perfect market. In an
imperfect market competition, especially monopsony market or monopoly, there is no market integration. In fact
there is actually no absolute perfect competitive market nor monopoly/monopsony; all can be found only in
theoretical studies. Yet, there are markets that are nearing perfect competitive markets and those that are nearing
monopsony/monopoly. In markets that are almost perfect competitive markets, increases of price will be followed by
nearly proportional increases of the other markets. As for monopoly/monopsony markets, price increases will not be
proportionally followed.
Trader Consumer
P 0d
P 1d
P 0k
P 1k
D 0
D 1
A.C1
.
MC
A.C.
MC
P 1t
Farmer
Q 0 Q 1 Q 0 Q 1 Q 0 Q 1
A.C2
.
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
In terms of increases of rice prices and paddy prices at the farmer level, both are interrelated markets. If the
market at the farmer‟s level is a free competitive market, the rice price increases will affect the paddy price increases
proportionally. This resulted in increases in the price of rice that will subsequently increase the income of the rice
farming. But if the structure of the market is approaching monopsony, rice price increases will not proportionally
raise the prices of paddy at the farmer‟s level. In Figure 2 it is explained that in the monopsony market, rice price
increases will not affect the profits of rice farming.
According to Mubyarto (1995) among paddy farmers there is an agricultural problem that is the "gestation
period". This situation occurs when there is a gap between the revenues obtained only at the time of harvest and
expenditure that should be paid every day. Among large farmers, because of their high revenues, this does not seem
to be a problem. On the contrary, for farmers with small lands, revenues from their harvest is not sufficient even for
financing their cost of living prior to harvest time. According to Mubyarto (1995) this leads farmers to go to money
lenders, making contracts with traders to sell their produce even before the harvest time arrives. Under these
conditions the farmers will be in a monopsony structure.
According to Firdaus (2008) "the changes of the basic price of paddy into the main cost of buying GPP
(Government Purchase Price) followed by policy reformation that stipulates that Bulog (Badan Urusan
Logistik/Logistics Bureau Affair) is no longer a price stabilizer, pushing the market structure to oligopsony. This
happens because strong investors take the opportunity to take over the position of Bulog." Furthermore, Firdaus
(2008) states "(a) Some businessmen dominant in trading rice, the rice mills owner or large traders, in addition to
conducting inter-regional trade, also perform vertical integration starting from farming business to rice mills to rice
trade, (b) among the dominant businessman, horizontal integration occurs, i.e. they know each other or even have
kinship relations among themselves, (c) ownership of large business facilities, especially warehouses, allows them to
perform paddy/rice hoarding. Bulog‟s role has been changing basic prices into Government Purchase Prices since
2003. The fundamental difference between the floor prices and that of GPP is, at floor prices, the government is
obliged to purchase paddy at the farmer level in accordance with the basic prices. At GPP, the government buys
paddy from farmers in accordance with the needs of the domestic procurement price of GPP in Bulog warehouse,
and no longer at the farmer level (Firdaus , 2008).
The next assumption is the increase in revenue from rice farming exceeds expenditure of family
consumption, which in turn increases the income of the farmers‟ family. This happens when the income of the
farming family mostly comes from the farming business and the percentage of expenditure for rice consumption is
small.
The results of research by Arifin et. Al. (2001) in Bustanul Arifin (2004) concludes that small farmers use
90 percent of the production for the consumption of their family, leaving only 10 percent to be sold to the market. If
the rice sold is 10 percent , the increase in the income from farming is 10 percent.
According to Syafaat (2005), citing a report by BPS 1998, the share of the income from farming business of
the income of the farmers‟ family is 26.2 percent for small farmers. As for farmers who own lands from 0.5 to 1 ha it
is 32.8 percent and farmers with lands over one hectare it is 34.5 percent. Thus, for small farmers, the increase of the
farmers‟ family income is 10 x 26.2 percent = 2.6 percent.
According to Krisnamukti (2006), based on the agricultural census of 2003, the number of farming
households is 25.4 million, with the proportion of small farmers in Indonesia amounting to 56.5 percent, whereas in
Java it is 74.9 percent. The majority of rice farmers reside in the island of Java, and therefore the majority of rice
farmers will enjoy only 2.6 percent increases of family income from rice price increases.
According to Zeigler (2005) poor population spend 70 percent of their income on food, especially on rice.
Small farmers belong to the poor category. Thus the increase in expenses for the purchase of rice is 70 percent.
Among small farmers, the rice consumption is largely taken from rice reserves not sold to the market. Research on
what percentage small farmers have to spend on buying rice from the market needs to be conducted.
Assumption that high rice prices will increase the income of the farmers‟ family need to be proven
empirically. If proven true, which groups of farmers? Is it among the majority of farmers or only farmers with large
lands, or even among farmers with small lands? The proportion of the number of small farmers, the majority
producing rice in Java is of 74.9 percent. There is a possibility that the increase in rice price would likely lower the
income of the small farmers instead of increasing it. According to Tampubolon (2002) the family of farmers who
have a small plot of rice farming land may probably experience rice deficit, i.e. the amount of consumption is greater
than the amount of paddy they produce. Thus, for the family of landless farmers, rice price increases are not
profitable.
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
RESEARCH OBJECTIVES
The purpose of this study is to analyze the market structure at the level of rice farmers. If the result of the
market structure research was close to perfect competitive market, the result of this study would suggest to maintain
high prices of rice to help paddy farmers. If the results showed that market structure at the farmer level was near
monopsony, the policy for high pricing should be re-examined. Next is to analyze whether the rise in the price of rice
would increase the income of the farmers‟ family, all farmers, or just large farmers? Respondents in this study would
be divided into farmers with small lands, i.e. those who own lands less than 0.5 Ha., medium farmers with lands
between 0.5 – 1 Ha., and large farmers with lands more than 1 Ha.
The advantage of this research is to assist the government in terms of the pricing policy of rice, whether
setting high rice prices will increase the income of the majority of the farmers‟ family or not: whether this policy will
increase or decrease the family‟s income of the small farmers. To test these assumptions it is important to conduct a
study about the effect of the increase of rice price on the increase of the income of the paddy farmers. Results of this
study will provide information on whether these assumptions are correct and empirically proven or not. This research
will be useful for the government in formulating the pricing policy of rice.
RESEARCH METHODS
Research methods and objects
The method used was a survey method with small farmers, medium farmer and large farmer as the objects
of the study. The research was conducted in Kroya sub-district, Indramayu regency, West Java. The argument for
choosing this province is the fact that it is the largest rice producer in Indonesia.
Sampling Techniques
In Kroya sub-district there are 16.120 farmers: small farmers with land under 0.5 ha are 7587; Medium
farmers with lands of 0.5 to 1 Ha are 6.110. Large farmer with lands above 1 Ha is 2.423 (Indramayu dalam Angka,
2010). The standard deviation for the number of small farmers in every sub-district of Indramayu Regency is 277.10,
for medium lands 737.79, and large land 392.29. Of the total number of farmers in the sub-district Kroja, number of
respondents with a proportional stratified random sampling was taken. The number of farmers taken was obtained
through this formula:
L
h
hh
L
h
hh
SNGN
SN
1
2222
1
22
Z
NZ
n (1)
N = population of farmers in the Kroya sub-district
Ni = population of farmers in land i
S = standard deviation
G = Fault Tolerance
n = sample size in Kroya sub-district
ii
Nn n
N (2)
ni = sample size of farmers on land i
thus
N = 16 120
Z = 1.96 (Z-score at the 99 percent confidence level)
N1 = 7587 Small Farmers
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
N2 = 6,110 Medium farmers
N3 = 2,423 Large Farmers
S1 = 277.10 (Standard deviation of the number of small farmers)
S2 = 737.79 (Standard deviation of the number of medium farmers)
S3 = 392.29 (Standard deviation of large farmers)
G = 100 (thoroughness of 16120 farmers)
(( ) ( ) ( ))
(( ) ( ) ( )
(3)
Rounded up to 102 farmers.
Samples of farmers with small lands:
The number of samples of farmers with small lands is 48.
Medium Farmers are
(4)
Samples of farmers with medium size of lands are rounded up to 39 farmers
Samples of farmers with large size lands.
(5)
Rounded up to 16 large farmers.
Model Analysis
To analyze whether the market structure at the farm level is a competitive market or a monopsony, it is measured
through the integration of prices. Theoretical sizes of a free competitive market such as high number of sellers and
merchants, homogeneous products, free entry and exit, resource mobility, and perfect information are difficult to
measure. Yet, according to the theory of "Law of One Price", the size is determined in this scheme: if the price
increase in the market is followed by a proportional increase in prices in other markets, the market is a free
competitive market.
The analysis tool is the price elasticity, i.e. changes in the prices of paddy at the farmer level due to changes in the
prices of rice at the consumer level. If the elasticity is close to one, it can be concluded that the market at the farmer
level is a free competitive market. If it does not approach one, the market at the farmer level is not a free competitive
market. The analysis technique is through regression analysis.
Elasticity models used is:
Y = b0 + b1X+eu
Y = price of paddy at the farmer level
b0 = constant
X = price of rice at the consumer level
b1 = elasticity value at the farmer level due to changes in the price of rice
eu = Residual Variables
To examine the effect of statistical hypotheses used
H0: b1 = 0
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
H1: b1 ≠ 0
H0 is rejected if tscore is smaller than t0, 025, (two-tail) if H0 is rejected, H1 is accepted with the conclusion that the rice
price affects the price of paddy at the farmer level.
The analysis would be performed on the small, medium and large farmers. Subsequently, an unpaired difference test
would be performed on the elasticity coefficient value of the price changes among farmers with small, medium, and
large lands.
To test whether the increase of rice price decreases the farmers' income, paired different test was performed.
The statistical hypothesis is as follows:
H0 : X1 = X2
H1 : X2 > X1
X1 = increase of income of farmers‟ family due to the rising paddy prices.
X2 = increase of expenditure of farmers‟ family due to the rising prices of rice.
H0 is rejected if tscore is smaller than t0, 05, (one-tail) if H0 is rejected, H1 is accepted, meaning the income of the
farmers‟ family, when the price of rice is low, is higher than when the rice price is high. The data of changes were
taken from the related agencies. All analyses used statistic program tools, i.e. E views and SPSS .
RESEARCH RESULTS
Effects of the Price of Rice on Price of Paddy at Farmer Level
Large Farmers
The data used in this analysis is those of paddy sold by farmers, to be compared to the data of the rice prices in the
same area on the same day. Analysis was performed using simple regression processed using the program E views.
Results of analysis for farmers with large lands can be seen in the following table.
TABLE 1 REGRESSION ANALYSIS RESULTS FOR LARGE FARMERS
Dependent Variable: Y
Method: Least Squares
Date: 10/20/13 Time: 14:18
Sample: 1 16
Included observations: 16
Y=C(1)+C(2)*X
Coefficie
nt
Std. Error t-Statistic Prob.
C(1) -
3944.712
629.0301 -6.271102 0.0000
C(2) 1.033654 0.083291 12.41008 0.0000
R-squared 0.916672 Mean dependent var 3859.375
Adjusted R-squared 0.910720 S.D. dependent var 201.0131
S.E. of regression 60.06235 Akaike info criterion 11.14511
Sum squared resid 50504.81 Schwarz criterion 11.24169
Log likelihood -
87.16090
Durbin-Watson stat 1.322983
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
The analysis shows that rice prices significantly affect the prices of paddy with the regression coefficient
equal to one. This suggests that for farmers with large lands, rice price increases proportionally affect the prices of
paddy. Thus, the market structure of farmers with large lands is free competitive, where farmers have equal
bargaining power with traders.
Farmers with Medium Lands
Using data on sales of paddy on a given day that is compared to the price of rice in the area, the results of
the regression analysis are showed in the following table.
TABLE 2 REGRESSION ANALYSIS RESULTS FOR MEDIUM FARMERS.
Dependent Variable: Y
Method: Least Squares
Date: 10/20/13 Time: 14:41
Sample: 1 39
Included observations: 39
Y=C(1)+C(2)*X
Coefficie
nt
Std. Error t-Statistic Prob.
C(1) -
865.3846
1306.975 -0.662128 0.5120
C(2) 0.626106 0.173433 3.610070 0.0009
R-squared 0.260482 Mean dependent var 3851.282
Adjusted R-squared 0.240495 S.D. dependent var 244.2731
S.E. of regression 212.8830 Akaike info criterion 13.60928
Sum squared resid 1676809. Schwarz criterion 13.69459
Log likelihood -
263.3810
Durbin-Watson stat 1.844785
The results of the analysis show that rice prices significantly affect the prices of paddy, but not
proportionally. The value of the regression is 0.62, which means with an increase of one unit of the rice price, the
price increase received by farmers from their paddy sales is approximately 60 percent. Thus, it shows that the
bargaining power of traders is higher than that of the farmers.
Farmers with Small Lands
To see the effect of rice prices on the selling price of paddy of farmers with small lands, the selling price of
their dried paddy on a given day is compared to the selling price of the rice at the same area on the same day. From
the results of the regression analysis using the program E Views the following results can be seen.
TABLE 3 REGRESSION ANALYSIS RESULTS FOR FARMERS WITH SMALL LANDS
Dependent Variable: Y
Method: Least Squares
Date: 10/20/13 Time: 14:50
Sample: 1 48
Included observations: 48
Y=C(1)+C(2)*X
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
Coefficie
nt
Std. Error t-Statistic Prob.
C(1) -
547.4200
2305.367 -0.237455 0.8134
C(2) 0.565015 0.302514 1.867730 0.0682
R-squared 0.070490 Mean dependent var 3757.292
Adjusted R-squared 0.050283 S.D. dependent var 369.0110
S.E. of regression 359.6139 Akaike info criterion 14.64871
Sum squared resid 5948818. Schwarz criterion 14.72668
Log likelihood -
349.5691
Durbin-Watson stat 0.933237
From the analysis using the program E views it can be seen that there is no significant effect of rice prices
on the selling price of paddy. This suggests that the market structure of farmers with small lands is almost
monopsony, meaning traders set the price according to their wishes.
Effect of Rice Price Increases on Income of Farmers’ Family
To analyze the effect, the focus is on the increase of the rice price that may increase the consumption of the farmers‟
family and the increase of the selling prices of dried paddy harvest that may subsequently increase farmers' revenues.
This is done because of the large variability of income beside farming business and variability of farmers‟ spending
beside rice consumption. The data used are the paddy and rice prices in mid-July 2012 and prices in the next six
months to mid-January 2013. This six month period is used because farmers produce paddy twice in one year.
Although the rice cultivation takes only four months, the harvest is performed twice a year because the general
planting pattern is Paddy -Paddy- Off. In mid-July 2012 the paddy price was Rp. 4.200/Kg and the rice price was Rp.
7.400/Kg, while in mid-January 2013 the price of rice was Rp. 4.300/Kg and the rice price was Rp. 7.800/Kg. This
analysis will be shared between farmers with large, medium, and small lands.
Farmers with Large Lands
For farmers with large lands the increase in the price of paddy is proportionally received 100% because the
bargaining power of farmers is equal to the bargaining power of traders. Comparison between the increase in revenue
due to the increase in the price of paddy and the increase of rice consumption expenditure due to the rice price can be
seen in the following table.
TABLE 4 COMPARISON RICE PRICE INCREASE AND CONSUMPTION FOR LARGE FARMERS.
Type Average Value
Total paddy production (kg) 15698.13
Stored (kg) 431.19
Sale (Kg) 15266.94
The addition of paddy price increases revenues (Rp) 1,526,693.75
Consumption of rice per month (Kg) 29.94
Six months of rice consumption (kg) 179.63
Addition of spending due to rising price of rice (Rp) 71850.00
The table shows that the addition into the revenue due to the rising paddy prices is greater than the increase
in spending due to the rising prices of rice. When statistically tested, the differences are as shown in the following
table.
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
TABLE 5 TEST STATISTICS TABLE OF AREA LANDOWNERS
Paired Differences t df Sig.
(2-
taile
d)
Mean Std.
Deviati
on
Std.
Error
Mean
95% Confidence
Interval of the
Difference
Lower Upper
14548
43.75
164557
0.94
411392.
73
577980.
88
2331706.
61
3.5
36
15 .003
The table shows that the increase in the rice price leads to the rise in the price of paddy produced by
farmers, and at the same time, to increase in the expenditure on rice consumption. Increased revenue derived from
the increase in paddy prices is higher than the increase in the expenditure due to the rising prices of rice. This
difference is significant at 95 percent of confidence level. It can be concluded that the rise in the price of rice
increases the income of the farmers‟ families.
Farmers with Medium lands
Medium farmers generally have a lower bargaining power than traders. From the analysis of the effect of
the rising paddy prices due to the prices of rice, farmers with medium lands get only 62 per cent of increase
proportion of the general rise of paddy prices in the area. A comparison between the increases in revenue due to the
higher price of paddy the farmers sold and the increase in the expenditure of the farmers‟ family as the result of the
increase of the rice price can be seen in the following table.
TABLE 6 COMPARISON OF RICE PRICE INCREASE AND CONSUMPTION FOR MEDIUM
FARMERS
Type Average Value
Total paddy production ( kg ) 5220.51
Stored ( kg ) 1 510.13
Sold ( kg ) 3710.38
The addition of paddy price increases revenues ( Rp. ) 230,043.85
Consumption of rice per month ( Kg ) 35.10
Six months of rice consumption ( kg ) 210.62
Addition of spending due to rising price of rice ( Rp ) 4246.15
The table shows that the addition in the revenue due to the higher selling price of paddy is higher than the
increase of expenditure due to the increase of rice the farmers‟ family have to pay. Results of test whether this
difference is real can be seen in the following table.
TABLE 7 TEST STATISTICS OF MEDIUM FARMERS
Paired Differences T df Sig. (2-tailed)
Mean Std.
Deviation
Std. Error
Mean
95% Confidence Interval of
the Difference
Lower Upper
145797.69 70090.37 11223.44 123077.019 168518.36 12.99 38 .000
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
The table shows that this difference is significant at 95 percent confidence level. It can be concluded that the increase
in the rice price has a positive effect on the income of the farmers‟ family.
Farmers with Small Lands
Farmers with small lands have a lower bargaining power than those with large and medium farm lands. From the
analysis of the proportion of the selling price due to the increase of the selling prices of dry paddy yields in general,
farmers with small lands received only 56 percent. This affects the amount of the additional revenues of the small
farmers, while the increase in their expenditure due to the rising price of rice is equal to that of other farmers. The
effect of the rice price increase on the income of the farmers‟ family is shown in the following table.
TABLE 8 COMPARISON OF RICE PRICE INCREASE AND CONSUMPTION OF SMALL FARMERS
Type Average Value
Total paddy production ( kg ) 2109.85
Stored ( kg ) 521.35
Sold ( kg ) 1588.50
The addition of paddy price increases revenues ( Rp.) 88956.00
Consumption of rice per month ( Kg ) 34.15
Six months of rice consumption ( kg ) 204.88
Addition of spending due to rising price of rice ( Rp ) 81950.00
The table shows that the increase in the revenue from the increase in the selling price of paddy yields is
almost equal to the increase in expenditure due to the price increase of rice. To prove it, it is necessary to perform an
analysis on difference test, as shown in the following table.
TABLE 9 TEST STATISTICS FOR SMALL FARMERS
Paired Differences t df Sig. (2-
tailed) Mean Std. Deviation Std. Error Mean 95% Confidence Interval of the
Difference
Lower Upper
7006. 44447.39 6415.429 5900.17 19912.17 1.092 47 .280
The table shows that at 95 percent confidence level, no significant difference between the additional
revenue from the increase in paddy prices and the additional expense due to the higher rice price can be found. It can
be concluded that the increase in rice price does not significantly affect the income of the farmers‟ family.
Results
The results achieved from this research are the findings that can be briefly described as follows.
1. There is integration of the rice prices and the prices of paddy among large farmers. This is demonstrated by
the significant increase in the rice price, proportional to the selling price of dried paddy yields of the large
farmers. The effect of the proportional price is an indicator that the market structure of farmers with large
lands is free competitive market, there is a balanced bargaining power between the farmers and the traders.
2. There is insufficient integration between the price of rice and that of paddy among farmers with medium
lands. This is demonstrated by the significant increase in rice prices, but not proportional to the selling price
of dried paddy yields of the farmers with medium lands. The effects of disproportionate prices is an
indicator of a market structure that is rather monopsonistic, in which traders‟ bargaining power is higher
than that of the farmers.
3. There is no integration between the rice price and the price of paddy among farmers with small lands. This is
indicated by the increase in the price of rice that does not significantly affect the selling price of paddy of the
small farmers. This is an indicator of monopsony market where traders set prices as they wish without being
affected by the rising price of rice.
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
4. The increase in the rice price affects the family‟s income of the farmers with medium and large lands. Thus,
if the government increases the price of rice, this will support the income of their family.
5. The increase in rice price does not significantly affect the income of the family of small farmers. Thus,
efforts to improve the welfare of small farmers cannot be achieved through the policy of increasing the price
of rice.
Discussion
The finding result there is integration market price of paddy and rice for large farmers and medium farmers
in Kroya District, Indramayu Regency. If this finding compared with the integration market in indonesian scale as
shown on table 10.
TABLE 10. INTEGRATION MARKET PRICE OF PADDY AND RICE AT INDONESIA 2012
Dependent Variable: Y
Method: Least Squares
Date: 12/06/13 Time: 15:23
Sample: 1 12183
Included observations: 12183
Y=C(1)+C(2)*X
Coefficie
nt
Std. Error t-Statistic Prob.
C(1) 2855.132 115.4049 24.74012 0.0000
C(2) 0.126679 0.015844 7.995276 0.0000
R-squared 0.005220 Mean dependent var 3771.699
Adjusted R-squared 0.005139 S.D. dependent var 1469.280
S.E. of regression 1465.500 Akaike info criterion 17.41794
Sum squared resid 2.62E+10 Schwarz criterion 17.41916
Log likelihood -
106099.4
Durbin-Watson stat 1.978320
This table is regression betwen the price of paddy (milled paddy) and price of rice at a whole Indonesian Region at
2012. This daily reports data is taken from the website of Indonesian agriculture ministry at in
(http://database.deptan.go.id). The result shown that there are significan effect the price of rice to the price of paddy.
The parameter number of regression is 0.126679. If compared with the result this research, the number of regression
parameter is 1.033654 for large farmer, 0.626106 for medium farmer, and 0.565015 for small farmer. The
conclussion is the regression of Indonesian Region at 2012 is less than the research in Kroya District, Indramayu
Regency. That mean integration market at another region is less than the region reasearch.
The findings as the results of this study should be completed with similar research at different time, analysis
and places. This must be done because of the variability of the prices of rice and paddy that keep changing at any
given time; it is possible that if it is done at different times, different findings will be produced. Likewise, with
different research methods, it is possible that there will be different results because each analysis has its own
advantages and disadvantages. Different places can also produce different findings. This study was conducted at the
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
paddy centers that is the largest rice producer in Indonesia.
The research was conducted at the paddy central area and therefore farmers in the study area are generally
experienced, hence very knowledgeable about farming businesses. This is evident from the productivity that is higher
than the average productivity of the nation. The average productivity for this region is 6.663 ton/ha (BPS,
Indramayu 2012) and average productivity for indonesian paddy farm is 5.146 ton/ha. Thus, judging the condition
of the respondents, the farmers in this area have higher income from their farming business than other farmers in
Indonesia. Compared the research of Arifin et. Al. (2001) that small farmers use 90 percent of the production for the
consumption of their family. But in this research the small farmers use 24 percent for his family consumption. This is
indicator the farmer from this region more advantage than another region farmer in Indonesia.
The results show that an increase in the rice prices affects the income of farmers with large and medium
lands, but has no effect on small farmers. The results may be different if the research is done in the area that is not
the rice center. It is possible that for medium farmers the rising rice prices have no effect on the income of the
farmers‟ family, and for farmers with small lands, the effect is negative. Thus, we need another similar study
conducted in other areas.
The good analysis for integration market is cointegration analysis, but this analysis need a daily serial data for
one region. This data in Indonesia only find in Tapanuli Selatan. The cointegration analysis from daily data covering
from January 1, 2012 to December 31, 2012. The data taken from Indonesian Ministry of Agriculture
(http://database.deptan.go.id).
Pre condition for this analysis need a stationary data. The result test of stationary data shown in table 12.
Table 12. Unit Root Test
Null Hypothesis: Y has a unit root
Exogenous: Constant
Lag Length: 6 (Automatic - based on SIC, maxlag=16)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -4.448085 0.0003
Test critical values: 1% level -3.448363
5% level -2.869374
10% level -2.571011
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(Y)
Method: Least Squares
Date: 05/10/13 Time: 19:53
Sample (adjusted): 1/08/2012 12/31/2012
Included observations: 359 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
Y(-1) -0.159457 0.035849 -4.448085 0.0000
D(Y(-1)) 0.077414 0.048879 1.583808 0.1141
D(Y(-2)) 0.076771 0.048862 1.571175 0.1170
D(Y(-3)) 0.079730 0.048839 1.632513 0.1035
D(Y(-4)) 0.077706 0.048839 1.591074 0.1125
D(Y(-5)) 0.078461 0.048815 1.607313 0.1089
D(Y(-6)) -0.405207 0.048797 -8.303944 0.0000
C 1535.472 440.7809 3.483527 0.0006
R-squared 0.275577 Mean dependent var -2.367688
Adjusted R-squared 0.261130 S.D. dependent var 6019.632
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
S.E. of regression 5174.328 Akaike info criterion 19.96284
Sum squared resid 9.40E+09 Schwarz criterion 20.04938
Log likelihood -3575.330 Hannan-Quinn criter. 19.99725
F-statistic 19.07481 Durbin-Watson stat 1.964351
Prob(F-statistic) 0.000000
In table 12 shown there is not have unit root, thus it can proceed with the cointegration test in shown on table 13.
TABLE 13. COINTEGRATION ANALYSIS
Date: 05/11/13 Time: 11:28
Sample (adjusted): 1/06/2012 12/31/2012
Included observations: 361 after adjustments
Trend assumption: Linear deterministic trend
Series: X Y
Lags interval (in first differences): 1 to 4
Unrestricted Cointegration Rank Test (Trace)
Hypothesized Trace 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.120584 52.08316 15.49471 0.0000
At most 1 * 0.015654 5.695705 3.841466 0.0170
Trace test indicates 2 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized Max-Eigen 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.120584 46.38745 14.26460 0.0000
At most 1 * 0.015654 5.695705 3.841466 0.0170
Max-eigenvalue test indicates 2 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I):
X Y
-0.000437 0.000114
0.002976 1.46E-05
Unrestricted Adjustment Coefficients (alpha):
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
D(X) 6.205357 -12.32877
D(Y) -2081.463 -8.227598
1 Cointegrating Equation(s): Log likelihood -5799.322
Normalized cointegrating coefficients (standard error in parentheses)
X Y
1.000000 -0.261670
(0.03802)
Adjustment coefficients (standard error in parentheses)
D(X) -0.002714
(0.00233)
D(Y) 0.910355
(0.13123)
The result shown there is cointegrating market between price of paddy and rice. In this analysis that mean there are
integrating market the price of rice and paddy. This analysis is additional support for the evidence integration market
between price of rice and paddy.
CONCLUSIONS AND RECOMMENDATIONS
Conclusion
From the research conducted, it can be concluded that:
1. For large farmers, there is price integration. It is shown by the significant increase in the rice price that is
proportional to the selling price of paddy.
2. For medium farmers, there is price integration but not balanced. It is shown by the significant increase in
the rice price, but not proportional.
3. For small farmers, price integration does not happen. This is shown by the increase in the rice price that
does not significantly affect the selling price of paddy.
4. For large farmers, the rice price increase has a positive effect on the income of their family. This shows an
increase in the revenues due to the higher rice price that is greater than the increase in the rice consumption.
5. For medium farmers, the rice price also has a positive effect on the income of their family. It shows the
same result as that of large farmers.
6. For small farmers, the increasing rice price does not significantly affect the income of their family. This
indicates an increase in the revenue due to the higher rice price, equal to the increase of the expenditure for
the rice consumption.
Suggestions
Suggestions that should be mentioned are the need for similar research conducted in other areas, especially
those that are not rice production centers. In this study conducted in the central areas of paddy producers, the rice
prices affect the income of the farmers‟ family, both large and medium farmers, but not the small farmers. How
about areas that are not paddy producing center?
If the results show similarity, we can conclude that it is generally prevailing. Suggestion for the government
is the need for sufficient rice price policy to increase the income of the paddy farmers.
If the results are different, some more research in other areas are deemed necessary. It is important to give
the right suggestion to the government in determining the policy of the price of rice.
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
REFERENCES
Ardeni, Pier Giorgo, 1989, Law Of One Price. American Journal of Agricultural Economics, Volume 71,
Number 3, Agust 1989 . Louisiana State University, USA
Bob Baulch, Henrik Hansen, Le Dang Trung and Tran Ngo Minh Tam. 2002. The Spatial Integration of
Paddy Markets in Vietnam. Review of International Economics. Volume 7 Issue 2, Pages 328 – 341. Published
Online: 17 Dec 2002. Journal compilation © 2008 Blackwell Publishing Ltd.
BPS. 2011. Statistik Indonesia 2010. (http://www.bps.go.id)
BPS. Indramayu . 2011. Indramayu Dalam Angka 2010. (http://www.indramayukab.bps.go.id)
BPS. Jawa Barat. 2011. Jawa barat Dalam Angka 2010. (http://www.jabar.bps.go.id)
Bustanul Arifin. 2004. Analisis Ekonomi Pertanian Indonesia. Penerbit Kompas 2004. Jakarta
Dahlgram, Roger A & Steven C. Blank. 1992. Evaluating the Integration of Continuous Discontinous
Markets, American Journal of Agricultural Economics, Volume 74, Number 2, May 1992 , Baltimore, Maryland,
USA
Dawson , P. K. Dey. 2007. Testing for the law of one price: rice market integration in Bangladesh.
Economic Inquiry. Volume 42 Issue 4, Pages 706 – 716. Published Online: 26 Mar 2007. © 2007 Western Economic
Association International
Firdaus, Muhamad. Lukaman M. Baga. Purdiyanti Pratiwi. 2008. Swasembada Beras Dari Masa ke Masa.
IPB Press. Bogor.
Gosh, Madhusudan (2011) Agricultural Policy Reforms and Spatial Integration of Food Grain Markets in
India. Journal Of Economic Development Volume 36, Number 2, June 2011
Kohls, Richard L and Joseph Uhl. (1980) Marketing of Agricultural Products . Fith Edition. Macmillan
Publishing Co. Inc. New York. USA
Krisnamukti, Bayu . 2006, "Revitalisasi Pertanian. Sebuah Konsekuensi Sejarah dan Tuntutan Masa
Depan". Revitalisasi Pertanian dan Tarian Peradaban. Penerbit Kompas. Jakarta
Millenniums Development Goals Indonesia. 2010. (http://www.targetmdgs.org).
Mubyarto,1995. Pengantar Ekonomi Pertanian. Jakarta. Penerbit PT Pustaka LP3ES
Sekhar, SCC (2012) Agricultural market integration in India: An analysis of select commodities. Food
Policy 37 (2012) 309–322.
Syafaat, Nirwan. Pantjar Simatupang, Sudi Mardianto, Khudori.2005. Pertanian Menjawab Tantangan
Ekonomi Nasional. Penerbit Lapera Pustaka Utama. Jakarta
Tampubolon. 2002. Sistem dan Usaha Agribisnis. Penerbit Institut Pertanian Bogor. Bogor
Thaung, Nyein Nyein (2011) Integration of Myanmar Domestic Agricultural Marketing into ASEAN.
Journal of Management Policy and Practice vol. 12(5).
Yang, Jian. David A. Bessler, and David J. Leatham. 2000. The Law of One Price: Developed and
Developing Country Market Integration, Journal of Agricultural and Applied Economics, 32,3(December 2000):429-
440 © 2000 Southern Agricultural Economics Association
Zanias, G.P. "Testing For Integration In European Commodity Agricultural Product Markets." Journal of
Agricultural Economics 44(1993): 418-27
Zeigler, Robert. 2005. Rice Research Development: Supply- Demand, Water, Climate, and Research
Capacity. Revitalisasi Pertanian dan Tarian Peradaban. Penerbit Kompas. Jakarta