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The Effects of Market Changes and Government Policies on the Indonesian Coffee Bean Industry
Dissertation Abstract:
The study examined the effects of market changes of government policies in the coffee bean industry using a multi-period mathematical programming model. It showed the response of the production and marketing activities to changes in domestic nd world prices, export limit, input price policy, area expansion, area conversion, change in technology, and resource availability. In addition, it determined the optimum mix of production and marketing activities of the coffee bean for domestic and world markets considering an endogenous domestic price of green Arabica and Robusta coffee as well as the risk in the industry.
There were four models applied in the analysis representing different domestic demand structure and risk levels, namely: competitive case under risk neutral (Φ = 0), competitive case under risk averse (Φ = 0.25), monopolistic case under risk neutral (Φ = 0), and monopolistic case under risk averse (Φ = 0.25). The models under risk averse seemed to be unrealistic since they allocated zero quantity of green Arabica0 coffee to the domestic market. The model validation showed that the monopolistic case under risk neutral model explained the activities in the industry relatively better.
The optimal solution showed that the industry was export maximizing. The model was very sensitive to changes in domestic demand. However, it was not sensitive to the changes in the export price. The export limit of green Arabica and Robusta coffee was binding indicating that the dual value existed for both commodities. The changes in the export limit influenced the production and marketing activities. Under 20 and 10 percent retention scenario, there had been a contraction in the production activities as well as marketing activities. Allocation to domestic market was not maximizing the revenue of the industry. Also, a decrease in the objective function value was observed. Meanwhile, under 10 percent of export expansion, the industry gained a significant revenue increase. These indicated that the implementation of stock retention was not appropriate for the industry. Rather, an export expansion was more favorable.
The industry profitability was susceptible to increase in input prices. The percentage change in input prices would cause a decrease in the industry income with a lesser percentage. The expansion especially for Arabica plantation would be beneficial if the industry could increase its marketing activities both in the domestic and world markets. The conversion of Robusta plantation to Arabica plantation was feasible in these periods when the opportunity cost of conversion was zero. The change in technology caused the change in the area of Arabica and Robusta plantation as well as increased the production quantity. Unless the export was expanded, the increase in production could lead to excessive allocation of both commodities to the domestic market. The industry was less affected by the resource availability but a minimum level of resource supply has to be assured to optimize the industry activities.