This paper describes the impacts of rice price fluctuations and price shocks due to crises on domestic households in Indonesia. In the long term the country was able to reduce poverty and undernourishment, because of its steady and strong economic growth.
A typical household spends nearly half of its total food intake on rice. Therefore, high rice prices make especially the poor vulnerable to price increases. In order to estimate how and to which extend rice price volatility affects demand, the daily calorie intake is focused with regard to a price increase of 10 % and 30 %.
Based on the assumption that people are food insecure a total calorie intake of 2,100 calories/day/person is taken into account as poverty line. Usually households consume less rice if the price is on a higher level. In Indonesia richer households have a more price-elastic demand if rice prices increases than poor households. On the contrary, those who are net consumers or producers of rice as well as governmental supported poor households have a relatively price-inelastic demand for rice.
This fact is different for households which differ in income level and location. This paper comes up with the conclusion that for rich urban households rice is a Giffen good and that they consume more of it when prices are high while the consumption of poorer rural households suffers. The same procedure applies for rural households.
Content
Abbreviations
List of Figures
Abstract
1 Introduction
2 The State of World Rice Market
2.1 Global trade and Indonesia´s position in it
2.2 Rice price volatility and trade effects
2.3 Indonesia´s rice prices and policy efforts for stabilization
3 Food Security in Indonesia
3.1 Economic growth and poverty
3.2 Rice production and consumption
3.3 Impact of rice price increase on calorie intake
4 Conclusion
References
Abbreviations
Abbildung in dieser Leseprobe nicht enthalten
List of Figures
Figure 1 Top ten rice producers worldwide 2011 (rice paddy)
Figure 2 Indonesia´s rice trade 1970-2010 (milled rice)
Figure 3 Grain price index numbers 1990-2009 (2005=100)
Figure 4 Volatility of monthly prices for Thai 5 % broken rice... January 1961-May 2012 (%)
Figure 5 Trade effects of a shift in supply curve in a Two-Country World
Figure 6 World and domestic rice prices in Indonesia 1969-1995 (Rupiah per kg)
Figure 7 World and domestic rice prices in Indonesia 2001-2011 (Rupiah per kg)
Figure 8 Economic Development in Indonesia 1991-
Figure 9 Poverty and undernourishment in Indonesia 1991-2011
Figure 10 Indonesia´s rice market 1991-2013 (milled rice)
Figure 11 Rice calorie intake and total food supply in Indonesia 1969-2009
Figure 12 Impact of 10 % and 30 % rice price increase on calorie intake
Figure 13 Rice consumption responses to 10 % increase in rice prices
Figure 14 Impact of rice price shocks on food insecurity outcomes
List of Tables
Table 1 Ranking top ten rice traders worldwide 2011 (milled equivalent)
Abstract
This paper describes the impacts of rice price fluctuations and price shocks due to crises on domestic households in Indonesia. In the long term the country was able to reduce poverty and undernourishment, because of its steady and strong economic growth.
A typical household spends nearly half of its total food intake on rice. Therefore, high rice prices make especially the poor vulnerable to price increases. In order to estimate how and to which extend rice price volatility affects demand, the daily calorie intake is focused with regard to a price increase of 10 % and 30 %.
Based on the assumption that people are food insecure a total calorie intake of 2,100 calories/day/person is taken into account as poverty line. Usually households consume less rice if the price is on a higher level. In Indonesia richer households have a more price-elastic demand if rice prices increases than poor households. On the contrary, those who are net consumers or producers of rice as well as governmental supported poor households have a relatively price-inelastic demand for rice.
This fact is different for households which differ in income level and location. This paper comes up with the conclusion that for rich urban households rice is a Giffen good and that they consume more of it when prices are high while the consumption of poorer rural households suffers. The same procedure applies for rural households.
Key words: rice price volatility, rice Indonesia, food security, rice price stabilization, rice trade
1 Introduction
A Chinese proverb says, “A meal without rice is like a beautiful girl with only one eye. ” Indeed this is also true for Indonesia, because rice is the most popular and important stable crop in the country, among regions and especially for the poor. There, households usually get almost half of their totally calorie intake from rice. Expect for several years when self-sufficiency was achieved, Indonesia has ever been a net importer of rice. In comparison to international rice market, its reliance on imports is highest worldwide. Although Indonesia has become a middle-income country due to strong economic growth, and poverty as well as malnutrition could be significantly reduced over time, the gap between rich and poor has been widened. The international rice market is dominated by a handful of countries and significantly affected by the export policies of China, Thailand, Vietnam and India. Thus the rice market is considered to be thin and unstable. The dominance of rice in the diets of the Indonesian population, coupled to the extreme market price volatility, forced governments to make the country self-sufficient and buffer its domestic rice prices from the world price. Especially during economic crises in 1972/73, 1998 and 2007/2008 the country managed to cope with sharp price spikes. Stable rice prices help to prevent poor farmers and consumers from falling into poverty traps. Against this background the paper analyses the influence of world rice price volatilities on Indonesia´s rice market. The main goal is to investigate crises with regard to countries’ state of food security in order to assess how and to what extend rice price instability leads to market uncertainties and thus if food security occurs. In doing so, the degree of rice price volatility is quantified and determined to see how it evolves over time. For a better understanding of market price mechanism the paper points out the main facts about the international rice market and Indonesia´s trade position in it. Together with a description of how the government copes with rice price fluctuations, long-term effects of economic growth on poverty and undernourishment are examined. Besides consumption patterns are explained before the impact of rice price increases on households´ calorie intake at differing income level and national and subnational circumstances are investigated.
2 The State of World Rice Market
In times of great advanced agricultural productivity, world rice production is forecasted at a record level of 477.9 million tons for 2013/2014 with an expanded area of 161.3 million hectares (USDA, 2013). Compared to the market of important grains like maize, wheat and soybean, rice is traded at a low level accounting for just 8 % of total global production in 2008 (DAWE, 2008).
Indonesia is the third biggest rice producer worldwide and together with India, Bangladesh, Viet Nam, Thailand, Myanmar, Philippines, Brazil and Cambodia they account for 97,38 % of world production in 2011.
Figure 1 Top ten rice producers worldwide 2011 (rice paddy)
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*A = Aggregate, may include official, semi-official or estimated data Source: FAOSTAT 2013.
2.1 Global trade and Indonesia´s position in it
With a total amount of about 33.1 million metric tons (mt), the top ten rice exporters are responsible for about 91,35 % of total world exports. The three biggest exporters of rice are Thailand, Viet Nam and India, (FAOSTAT, 2013a). Beside the export policy interventions of these countries other factors such as harvest shortages, drought, weather shocks or disease have had a strong influence on the stability of the international rice price (WORLD BANK, 2010).
Except for several years when self-sufficiency was temporarily achieved, Indonesia has even been a net importer of rice (TIMMER, 2004, p. 6) with a total import quantity accounting for up to 4-5 % of total rice supply (MCCULLOCH, 2008). Indonesia imports about 33.5 mt per year. Indonesia’s reliance on imports is the highest worldwide, with a share of national production of 16.2 % in 2011 (FAOSTAT, 2013). Thus, international rice price volatility has the potential to significantly affect domestic prices (WORLD BANK, 2010).
Table 1 Ranking top ten rice traders worldwide 2011 (milled equivalent)
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Source: Own calculation based on FAOSTAT 2013a.
By a government introduced trade ban, a stabilization mandate and an import monopoly through the National Logistical Supply Organization (Bulog), Indonesia has successfully shielded its domestic rice market, and even delivered periods of selfsufficiency. In the years 1985/86, 1989 and 1993 exports for the first time exceeded imports (MCCULLOCH, 2008; FAOSTAT, 2013a).
Figure 2 Indonesia´s rice trade 1970-2010 (milled rice)
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Source: FAOSTAT 2013a.
2.2 Rice price volatility and trade effects
International prices for rice are usually higher than for other food grains because of the major importance of rice as a staple food. Within a market commonly viewed as thin and unstable, rice prices are very sensitive to fluctuation. After the food crisis in 19972/73 grain prices were more stable and on a lower level except for some peaks in 1996, 2002/04 and a major price spike in 2007/08 (DAWE and TIMMER, 2012). On the one hand, the upward drift of the rice price was due to a decreased supply caused by stagnant or declining rice yields, limited availability of land and water resources, climate change, a suffering stock-to-use ratio of rice and high oil prices as well as interlinked prices of commodities. On the other hand, a steady population growth and urbanization together with a rapid growth of per capita income, especially in India, forced a strong demand on world markets (CLARETE, 2012). Moreover, Thailand has held large rice stocks since 2011 as rice prices have exceeded international prices and is now searching for meaningful strategies to release these stocks. With a remarkable slowdown in exports the country has already lost its position as the biggest exporter worldwide. Those circumstances, coupled with a more open distribution of rice from India and China, have had considerable effects on future export availabilities and prices (FAO, 2013).
Figure 3 Grain price index numbers 1990-2009 (2005=100)
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Source: GILBERT and MORGAN 2010.
How strong or weak rice price volatilities1 have been over decades can be seen in Figure 4 showing the monthly prices for Thai 5 % broken rice. Most price changes did not change by more than an absolute rate of 10 %, which basically means that they didn´t differ from common market operations. In some periods of the ‘60s, ‘70s, mid ‘80s and early ‘90s however price volatility at least reached 15 % and almost 80 % and 60 % during food/financial crisis in 1972/73 or 2007/2008 (CLARETE, 2012).
Extreme price spikes and high volatility bring uncertainties for both farmers and producers. Furthermore, governments are confronted with additional costs of intervention for price stabilization (DAWE and TIMMER, 2012).
Figure 4 Volatility of monthly prices for Thai 5 % broken rice January 1961- - May 2012 (%)
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Source: CLARETE 2012 based on World Bank Commodity Price Data (Pink Sheet).
In a world of perfect competition and information the optimal level of rice price is the world price (pw) when supply (XS) equals demand (MD) of the world market, meaning that the aggregate supply of all exporting countries is the import demand of all global importing countries. In this case pw prevails in home and foreign country and the quantity exchanged on world market (qw) equals the quantity imported (qm) by home and exported by foreign country (qx). Any shift in demand or supply of both countries causes a shift in demand and supply in world market by the same amount and finally leads to a changed pw’ and qm’ or qw’ (see Figure 5). At the autarky price (p0) domestic supply (S with quantity qs) equals demand (D with quantity qd) and there is no trade, the same for p0*. When D exceeds S the price is higher than p0 and vice versa, when S exceeds D the price is higher than p0 (VON WITZKE, 2013).
Research on import countries such as Indonesia has shown that a domestic price of about 10 % above pw seems to be optimal, because at this level short term multiplier effects are gained as agricultural incomes become higher and poverty is reduced (TIMMER, 2004). If prices are much higher, an increased farm income level faces additional costs for consumers. However, price fluctuation in the long term significantly above pw without any spike in productivity leads to trade and finally to economic losses. Besides, the rising price for rice does not result in extra demand from the farmer through improved real wages. This fact has to be seen in the context of high consumer prices, which make the poor more vulnerable in case of purchasing power and nutrition in the first place. The government should have this in mind when dealing with price stabilization policy (TIMMER, 2004). Most Asian countries strongly protected their agriculture to reach a stable real domestic price of rice but achieved no progress in diversifying and modernizing this sector, which was an unexpected effect of their growth strategy (DAWE and TIMMER, 2012). The historical development of the rice price in Indonesia and the way the government coped with it will be outlined in the next chapter.
Figure 5 Trade effects of a shift in supply curve in a Two-Country World
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Source: VON WITZKE 2013.
2.3 Indonesia´s rice prices and policy efforts for stabilization
When President Sukarno (1945-1967) was in power, high prices and food riots were not infrequent in the last years of his reign. In fact during the food crisis in 1972/73 Indonesia had no influence on the domestic rice prices. Therefore, retail prices exploded and were 54 % higher than the year before. This circumstance had already come up during previous crises (TIMMER, 2009), but the unusual thing about this time was a scant rice supply mainly caused by a low production level due to el Niño-induced droughts. Consequently, the country considerably lowered their imports to cope with domestic rice shortages and high prices in order to be more independent from international market and to raise domestic supply. To reach this, the government increased national productivity with a great focus on research and extension, improved irrigation, a better fertilizer availability and stable incentive prices what had been successful over a long period of time (TIMMER, 2004).
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1 Volatility describes the extent of price movements on markets and several concepts to measure or describe of temporal development of volatilities exist for specific field of use like options on finance markets, forecasts or historical assessments. This paper represents graphically the historical agricultural market volatility. Ledebur and Schmitz (2011) describe the calculation method of historical rice price volatilities on pp.2-3.