Abstract
Data indicate that its domestic price in Indonesia has been increasing regardless of movements in the international price of wheat. A test for asymmetric price transmission from international wheat to domestic wheat flour markets is conducted using an error correction model and find the presence of asymmetric price transmission. The upward adjustment in the domestic price of wheat flour is much faster than its adjustment downward when it deviates from long-run equilibrium. Our results are robust to use of disaggregated data as well as to inclusion of additional of control variables such as prices of other inputs. We argue that asymmetric transmission occurs due to market concentration of wheat flour milling. We offer some policy suggestions for correcting these.
Highlights
Wheat flour is arguably an essential part of the Indonesian diet
A variation of equation (4) that breaks the lagged estimated deviations into a positive and a negative term allows us to test whether the speed at which wheat flour prices adjust toward the longrun relationship with international wheat prices is different when it implies an increase in wheat flour prices, from when it implies a decrease in wheat flour prices
Even though direct consumption of wheat flour represents only a small share of the household expenditure, wheat flour consumption in other forms, such as breads, noodles, and snacks is an important part of the Indonesian diet
Summary
Wheat flour is arguably an essential part of the Indonesian diet. Over the last decade, the average real expenditure on wheat-related products per household in Indonesia has increased by 26% as wheatbased food products are emerging as new daily staple food in Indonesia. The irregular movement of the domestic wheat flour price in Indonesia suggests that prices may not be symmetrically transmitted in Indonesia’s wheat flour market. This paper adds to the available evidence on the presence of APT in agricultural markets by examining the relationship between the international price of wheat flour and its domestic price in Indonesia. It aims to inform policymakers and private sector operators how wheat and wheat flour markets operate in Indonesia. It measures the intensity of vertical APT in the wheat–wheat flour markets.
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