Abstract
In this study, we analyzed the integration of rice prices at the producer, wholesaler, and urban and rural consumer markets with paddy prices at the farm gate, which has important implications for rice pricing policy. A high price policy can lead to high paddy prices, and thereby increase the profits of paddy farms. Although this policy can generally ensure food security, it may have the effect of decreasing rice consumption. A high-price rice policy can, nevertheless, be beneficial if rice prices are sufficiently well integrated with paddy prices, which can simultaneously enhance paddy farm profits and ensure domestic food security. For the purposes of this study, we examined monthly price data obtained from the Central Bureau of Statistics of Indonesia for the period from January 2013 to December 2016. Using this data, we applied an error correction model (ECM) to integrate the rice prices at the producer, wholesaler, and urban and rural consumer markets with paddy prices at the farm gate. The results showed that producer, wholesaler, and rural consumer market rice prices were significantly integrated with paddy prices at the farm gate. Moreover, if necessary, the government can intervene in these markets to stabilize paddy prices to maintain food security.
Highlights
Increasing the price of paddy rice can encourage farmers to increase production, as this enhances farm profitability (Yu & Fan, 2011), and increasing paddy production is one element of the rice policy in Indonesia (Robinson, et al, 1997)
In the analyses performed in this study, we used paddy prices at the farm gate as the dependent variable, with rice prices at the local producer, wholesaler, and urban and rural consumer markets being used as independent variables
The average rice price at local producer markets has nearly doubled because paddy price has decreased by 65% (Erwindodo & Pribadi, 2004), and traders must earn a marginal profit
Summary
Increasing the price of paddy rice can encourage farmers to increase production, as this enhances farm profitability (Yu & Fan, 2011), and increasing paddy production is one element of the rice policy in Indonesia (Robinson, et al, 1997). In order to maintain food security in Indonesia, it is important that farmers are guaranteed sufficiently high prices for their products in order to stimulate production (Timmer, 2002), and, many studies have concluded that high rice prices can significantly increase the supply of rice (Farooq, Young, Russell, & Iqbal, 2001); (Seck, Tollens, Marco, Diagne, & Bamba, 2010); (Zohir, Shahabuddin, & Hossain, 2002). If the price of rice continues to increase, merchants will find it desirable to sell more rice in order to obtain profits, which in turn increases the demand for paddy rice, and thereby leads to an increase in the price of paddy rice. We consider the transmission channel from rice to paddy prices
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