Abstract
ABSTRACTThis paper estimates farmers’ investment response to food price spikes using household panel data collected before and after the 2007/08 food price crisis in Indonesia. We found that an increase in farmers’ terms-of-trade allowed relatively large crop-producing farmers to increase their investments at both extensive and intensive margins. Food price spikes had a significant income effect among farmers whose production surplus is large for market sales. During the food price crisis, large farmers particularly increased machine investments, which saved some labour inputs, pointing to the importance of complementarities between land and machine investments.
Highlights
World prices of food commodities rose dramatically in 2007
The global food price inflation was transmitted to the domestic market of Indonesia, where the agricultural sector’s share is about 19% of GDP and 41% of total employment
We found that farmers benefited from the positive price shock in general and the anticipated components of the shock significantly created an incentive to invest in productive assets
Summary
World prices of food commodities rose dramatically in 2007. The global food price inflation was transmitted to the domestic market of Indonesia, where the agricultural sector’s share is about 19% of GDP and 41% of total employment. The rising food prices raised fears that the spike in food expenditures could worsen households’ well-being, especially among the poor. Welfare impacts of food price inflation can be large in Indonesia since the average family spends about a half of its income on food. Higher food prices increased agricultural profits and created large income gains to agricultural households compared to non-agricultural households (Ravallion, 1990; Yamauchi and Dewina, 2012). World Bank (2011) shows evidence that the positive impacts on producers seemed to outweigh the negative effects on consumers’ welfare in Indonesia
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