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Price Volatility and Supply Response of Beef in Indonesia
Dissertation Abstract:
Beef is one of the strategic commodities produced from the business in the livestock sub-sector. Beef is also a potential commodity to be developed in Indonesia because: (1) Indonesia has abundant resources that could provide feed from available resources; (2) Indonesia has numerous, diverse, and adaptive local genetic resources; (3) Indonesia has developed cattle breeding technology. However, these potentials have not been optimally utilized. Hence, the increasing growth of beef cattle population and beef production is slower than that of consumption or demand, and the price of beef has continued to increase. The movement of consumer price increase goes in the same direction with producer prices but with different magnitude. The movement of price at importer and world level goes in different direction to consumer prices. Thus, it becomes interesting to examine the role of importers and producers in the formation of prices at the consumer.
On the other hand, the continuous price increases could trigger price volatility. Price volatility leads to difficult planning at the producer level, declining purchasing power in household and industrial consumers, can threaten the stability of the micro-scale beef processing industry, as well as can threaten food security, economic resilience, and inhibit economic growth. Therefore, it is important to study price volatility and influencing factors, and whether the price volatility is transmitted from the consumer center to the producer center. Given the possibility that the price volatility is transmitted from the consumer center to the producer center, it is interesting to understand how the producer responds to the price volatility.
According to those problems, the aims of this study were to: (1) analyze the role of importers and producers in price formation at the consumer level; (2) analyze the volatility of beef prices at the consumer level and the factors influencing it; (3) analyze the transmission of price volatility between consume and producer centers; and (4) analyze producer's response due to the volatility of beef price.
The data used in this study was secondary data obtained from various agencies such as Central Bureau of Statistics and others. The data used were time series data from 2008 to 2016. The role of importers and producers in price formation at the consumer level was analyzed using the asymmetric price transmission analysis of ECM model of von Cramon Taubadel and Loy. The volatility of beef prices was analyzed using the GARCH model. The factors that influence price volatility were analyzed using the OLS method. The analysis of price volatility transmission from consumer center to producer center used VAR model. The impacts of price volatility to the producer were analyzed using supply response model with OLS method.
The result of asymmetric price transmission analysis showed that the formation of beef price in consumer market was influenced by importer and producer price. The producer's price had greater effect on price formation at the consumer level. The bigger role of producers in influencing the consumer market indicated the bargaining position that the producers have; and they could act as price makers. Therefore, the producers referred in the beef market were large-scale livestock entrepreneurs or feedlotters. The results of asymmetry price transmission analysis supported the indication of market power possessed by importers and their ability to determine the price of imported beef according to domestic beef prices.
The results of price volatility analysis using the GARCH (2.3) model showed that the volatility of beef prices tends to be low and persistent in the long run. This was supported by the estimation results of factors affecting price volatility. The market power of importers in the beef market in Indonesia indicated by the significant influence of the number of feeder imports in the four previous periods and the import quota policy which did not significantly affect the volatility of beef prices. Price volatility at the consumer level was transmitted from the consumer center (Jakarta) to the producer centers (Bandung, Semarang and Surabaya). The transmission of price volatility also implied the phenomenon of asymmetric information between market participants in these regions. Price volatility transmitted from the consumer center to the producer center was responded by farmers by reducing the slaughter rate. According to the Relative risk premium calculation, the large-scale producers and feedlotters tend to be risk lovers. In other words, the reduction in the slaughter rate during the rising price and price volatility was the response of producers who would like to gain higher profit from the rising price or price volatility in the future. This could support the previous results which indicates the market power owned by importers.
The policy implications of this study are: (1) the regulation is needed to create transparent information between market participants, and thus, the market structure of beef in Indonesia is expected to be more competitive; (2) the lag or gap in the implementation has to be considered in the formulation of beef policy since it requires a long time adjustment to produce beef; (3) the quota import policy has to consider the availability of local beef and feeder cattle in large-scale livestock companies or feedlotters because the misleading calculation in determining the import quota of feeder cattle could affect price volatility; ( 4) the efforts to stabilize the price of beef are still important specifically in the areas with high prices and high price volatility by creating a short, medium and long-term planning and taking into account the availability of imported beef and cattle, local beef cattle and local beef production.