Do Chili Traders Make Price Volatility Worse? A Qualitative Analysis of East Java Trading Practices

Abstract

Chili prices in Indonesia at the end of 2010 soared 10-fold within the span of a few months. This was not an isolated event. Chili prices have been extremely volatile over the past decade. Although chili is a condiment in Indonesian cooking and, like other spices, demand is very inelastic, this does not explain the persistence of large price swings. Repeated large price movements create opportunities for those with the information to take market positions that would generate profit opportunities and, at the same time, result in actions that would reduce the magnitude of price fluctuations. Those with the information to take advantage of the price swings are market intermediaries — traders and wholesalers — because they must monitor both upstream and downstream activities. This paper is a qualitative investigation of the role of market intermediaries in the Indonesian chili market supplemented with available data and statistical analysis. We posit 5 possible explanations for the contribution of market intermediaries to the farm-retail price spread for chili sales in Java island which can be summarized as: (1) market structure impediments to competition; (2) lack of scale economies; (3) market intermediary value-added functions; (4) post harvest losses; and (5) price risk premiums. We use a series of structured interviews with chili traders and wholesalers in a chili-producing region of East Java to assess the effect of trader activities on the efficiency of the chili marketing chain. We follow this with a regression analysis of farm and retail prices and price margins. Results show that there is no stockholding at any level of the marketing chain. For the East Java study area, price margins are positively and statistically related to farm price levels indicating the traders exacerbate price volatility.