EFFECT OF MARKET STRUCTURE TO INTEGRATION RICE … · INDRAMAYU REGENCY, INDONESIA Yogi Makbul...

Proceedings of the Australian Academy of Business and Social Sciences Conference 2014

(in partnership with The Journal of Developing Areas)

ISBN 978-0-9925622-0-5

EFFECT OF MARKET STRUCTURE TO INTEGRATION RICE AND PADDY PRICES

AND ITS IMPACT TO INCOME OF FARMERS’ FAMILY IN KROYA DISTRICT,

INDRAMAYU REGENCY, INDONESIA

Yogi Makbul

Institut Teknologi Bandung

Pradono


Sudrajati Ratnaningtyas


Pringgo Dwiyantoro


ABSTRACT This study is one step of a larger research scheme of poverty reduction through improved market structure. Poverty alleviation is

one of the goals to be achieved in the Millennium Development Goals. Poverty occurs mostly on subsistence rice farmers who

own small plots of land. If the income of this group can be increased, it will significantly contribute to the poverty alleviation.

One attempt to increase farmers' income is by increasing the price of rice. It is based on the assumption that the increase in the

price of rice will subsequently increase the price of paddy, which, in turn, will increase the income of the rice farmers. This

assumption is valid when there is integration between the price of rice and that of paddy; such integration occurs in a free

competitive market structure.

This study aims to find evidence that the market is not "free competitive market" but "monopsony", in which increases in rice

prices will not increase the income of farmers with small lands. This is an important scientific finding and also a suggestion for

the government in determining the policy of the prices of rice.

The results showed that only large and medium farms are "free competitive market"; in this case the increase in rice prices will

affect the increased income of the farmer‟s families. The farmers with small farms have a market structure that tended to be a

"monopsony", meaning there is no significant effect of rice price increases on income of the farmers‟ family.

JEL Classifications: O20, O13, F63

Keywords: poverty reduction, improved market structure, prices, rice, farmer

Corresponding Author’s Email Address: [email protected]

INTRODUCTION

Poverty alleviation is one of the main objectives of the Millennium Development Goals (MDG) which is a

joint commitment of 189 countries that are members of the United Nations. Indonesia is one of the countries that

must also be committed to it. Indonesia aims to reduce the amount of extreme poverty by 50 percent and decrease by

half the number of population suffering starvation (http://www.targetmdgs.org). If you look at the site of the Central

Bureau of Statistics (http://www.bps.go.id), in 2010 the percentage of poverty in urban areas was 9.87 per cent and

16.56 per cent in rural areas. Thus, rural areas had higher percentage of poverty than in urban areas. The main

livelihood of the majority of people in the rural areas is farming. Thus, if there is a study on how to alleviate farmers‟

poverty, it will be very helpful in the process of poverty reduction in Indonesia

One of the policies to help increase farmers' income is by raising the price of farm produces; one of these

farm produces is paddy. It is expected that increases in the price of paddy will increase the farmers' income as the

result of their agricultural business. Increase of rice price can go along with the rising prices of paddy, but this also

leads to a dilemma. If the price of rice is increased to up the price of paddy, consumers will suffer the consequences.

The contradiction between the policy of low rice price and the increase of the farmers' income is indeed a dilemma.

When the price of rice is low, it will undermine the efforts to increase the farmers' income; however, when the rice

price increases, it will disrupt the lives of the consumers.

The assumption is that the rise of rice price will raise the farmers' income if the percentage of the increase in

the price of rice is proportional to the increase of the price of paddy at the farmer level. It happens when the market

at the farmer's level is a free competitive market. If the market is not competitive, or especially monopsony, rice

prices will not proportionally increase the price of paddy at the farmer's level, but instead it is the trader and

mailto:[email protected]

http://www.targetmdgs.org/



ISBN 978-0-9925622-0-5

institutions participating in the rice trading system that will enjoy the advantage.

LITERATURE REVIEW

Market prices affect one another. The theory that states this is the "Law of One Price". This theory states

that "under certain conditions all prices within a market are uniform, after taking into account the cost of adding

place, time, and form utility to products within the market". Such interpretation of law states that under certain

conditions all prices in a market is uniform/equal following additional costs for place, time and utility. The term

"under certain conditions" as mentioned in the law is, according to Kohls & Uhls (1980), a condition where there is

no dominant large seller or buyer, trading restraints, manipulated prices as the result of the imperfection of the

buyers or sellers' knowledge about costs and prices, lack of information, and other obstacles found in trading. In a

free competitive market, the percentage of the price increases in a market will be followed by comparable percentage

of price increases in other markets. On the other hand, in a market that is not perfectly competitive, especially

monopsony in this case, the increase of price percentage in a market will not be the same as the increase of price

percentage in other markets. To explain these, Figure 1 illustrates the price increases in a consumer market and its

influence on the rising prices at the farmer level in a free competitive market

FIGURE 1. FREE COMPETITION MARKET

This picture is a simplification of the effect of price rises on traders and farmers. In the free competitive

market, price increases at the consumer level is P0K to P1k to be followed by the same percentage on traders and

farmers. This happens because no market barrier. Profits of farm business rises from rectangular ABCD into

rectangular EFGH. But if the market is a monopsony, as seen in Figure 2, the percentage of the increase of price at

the consumer level will not be proportional.

FIGURE 2. MONOPSONY MARKET

A.C2

Trader Consumer

P 0d

P 1d

P 0k

P 1k

D 0

D 1

A.C1

.

MC

A.C.

MC

Farmer

Q 0 Q 1 Q 0 Q 1 Q 0 Q 1

A B

C D

E F

G H

P 1t

P 0t



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In the monopsony market, as traders are dominant, they will buy paddy from the farmers at farmer's AC

(Average Cost). As traders buy paddy at the price equal to that of AC, the farmers do not make any profit. When

prices rise, farmers do not get any profit. Price increase is equal to the increase in costs for improving production

output. In addition, the increase in consumer prices is not proportional to the increase in prices at the farmer's level.

For farmers who are in a monopsony market, rice prices will not increase the profits generated from rice farming. In

fact, the family's living expenses will increase as the rising price of rice that is supposed to be their consumption.

Many studies have proved the existence of price integration between markets. Research conducted by J.

Dawson and P. K. Dey. (2002), with the title ““Testing for the law of one price: rice market integration in

Bangladesh” results in findings of price integration in Bangladesh. Baulch, Bob et. al. (2002) “The Spatial

Integration of Paddy Markets in Vietnam” results in price integration between northern areas and southern areas of

Vietnam, Jian Yang et. al. (2000 ), with the title “The Law of One Price: Developing Country Market Integration”

published on „Journal of Agricultural and Applied Economics‟, 32,3 (December 2000): 429-440, Zanias (1993) with

the title "Testing for Integration in European Community Agricultural Markets" which proves that there is market

integration in the agricultural products among the European Economic Community. Research on market integration

is also supported by Dahlgram & Blank (1992) who evaluated market integration through a research “Evaluating the

Integration of Contiguous Discontinuous Markets” Ardeni (1989) with a title of "Does the Law of One Price Really

Hold for Commodity Price". This research proves the interconnection of prices among markets in a long run,

Gordon, Hobs & Kerr (1986), with the title "A Test for Price Integration EC Lamb Market" proves that there is

market integration in the English and French markets in marketing sheep.

The latest reasearch of integration market rice analysis is SCC Sekhar (2012) Agricultural market

integration in India: An analysis of select commodities. The purpose of this research is to analyze market integration

in India by using co-integration analysis. The results showed that the rice market is not integrated nationally. Thus

government policies will be able to effectively influence the market. Nyein Nyein Thaung (2011) Integration of

Myanmar Domestic Agricultural Marketing into ASEAN. This research examines the role of middlemen in the

marketing of agricultural market integration. Government policy by limiting the role of the private sector in the trade

have a positive effect on market integration. Madhusudan Ghosh (2011) Agricultural Policy Reforms and Spatial

Integration of Food Grain Markets in India. This research examines the role of middlemen in the marketing of

agricultural market integration. Government policy by limiting the role of the private sector in the trade have a

positive effect on market integration.

These studies conclude that there is price integration between interrelated markets, and therefore changes

of prices in a market will affect the other market prices. In a perfect competition the price integration will be perfect,

hence changes in prices in a market will be followed by proportional increases of prices in a perfect market. In an

imperfect market competition, especially monopsony market or monopoly, there is no market integration. In fact

there is actually no absolute perfect competitive market nor monopoly/monopsony; all can be found only in

theoretical studies. Yet, there are markets that are nearing perfect competitive markets and those that are nearing

monopsony/monopoly. In markets that are almost perfect competitive markets, increases of price will be followed by

nearly proportional increases of the other markets. As for monopoly/monopsony markets, price increases will not be

proportionally followed.

Trader Consumer

P 0d

P 1d

P 0k

P 1k

D 0

D 1

A.C1

.

MC

A.C.

MC

P 1t

Farmer

Q 0 Q 1 Q 0 Q 1 Q 0 Q 1

A.C2

.



ISBN 978-0-9925622-0-5

In terms of increases of rice prices and paddy prices at the farmer level, both are interrelated markets. If the

market at the farmer‟s level is a free competitive market, the rice price increases will affect the paddy price increases

proportionally. This resulted in increases in the price of rice that will subsequently increase the income of the rice

farming. But if the structure of the market is approaching monopsony, rice price increases will not proportionally

raise the prices of paddy at the farmer‟s level. In Figure 2 it is explained that in the monopsony market, rice price

increases will not affect the profits of rice farming.

According to Mubyarto (1995) among paddy farmers there is an agricultural problem that is the "gestation

period". This situation occurs when there is a gap between the revenues obtained only at the time of harvest and

expenditure that should be paid every day. Among large farmers, because of their high revenues, this does not seem

to be a problem. On the contrary, for farmers with small lands, revenues from their harvest is not sufficient even for

financing their cost of living prior to harvest time. According to Mubyarto (1995) this leads farmers to go to money

lenders, making contracts with traders to sell their produce even before the harvest time arrives. Under these

conditions the farmers will be in a monopsony structure.

According to Firdaus (2008) "the changes of the basic price of paddy into the main cost of buying GPP

(Government Purchase Price) followed by policy reformation that stipulates that Bulog (Badan Urusan

Logistik/Logistics Bureau Affair) is no longer a price stabilizer, pushing the market structure to oligopsony. This

happens because strong investors take the opportunity to take over the position of Bulog." Furthermore, Firdaus

(2008) states "(a) Some businessmen dominant in trading rice, the rice mills owner or large traders, in addition to

conducting inter-regional trade, also perform vertical integration starting from farming business to rice mills to rice

trade, (b) among the dominant businessman, horizontal integration occurs, i.e. they know each other or even have

kinship relations among themselves, (c) ownership of large business facilities, especially warehouses, allows them to

perform paddy/rice hoarding. Bulog‟s role has been changing basic prices into Government Purchase Prices since

2003. The fundamental difference between the floor prices and that of GPP is, at floor prices, the government is

obliged to purchase paddy at the farmer level in accordance with the basic prices. At GPP, the government buys

paddy from farmers in accordance with the needs of the domestic procurement price of GPP in Bulog warehouse,

and no longer at the farmer level (Firdaus , 2008).

The next assumption is the increase in revenue from rice farming exceeds expenditure of family

consumption, which in turn increases the income of the farmers‟ family. This happens when the income of the

farming family mostly comes from the farming business and the percentage of expenditure for rice consumption is

small.

The results of research by Arifin et. Al. (2001) in Bustanul Arifin (2004) concludes that small farmers use

90 percent of the production for the consumption of their family, leaving only 10 percent to be sold to the market. If

the rice sold is 10 percent , the increase in the income from farming is 10 percent.

According to Syafaat (2005), citing a report by BPS 1998, the share of the income from farming business of

the income of the farmers‟ family is 26.2 percent for small farmers. As for farmers who own lands from 0.5 to 1 ha it

is 32.8 percent and farmers with lands over one hectare it is 34.5 percent. Thus, for small farmers, the increase of the

farmers‟ family income is 10 x 26.2 percent = 2.6 percent.

According to Krisnamukti (2006), based on the agricultural census of 2003, the number of farming

households is 25.4 million, with the proportion of small farmers in Indonesia amounting to 56.5 percent, whereas in

Java it is 74.9 percent. The majority of rice farmers reside in the island of Java, and therefore the majority of rice

farmers will enjoy only 2.6 percent increases of family income from rice price increases.

According to Zeigler (2005) poor population spend 70 percent of their income on food, especially on rice.

Small farmers belong to the poor category. Thus the increase in expenses for the purchase of rice is 70 percent.

Among small farmers, the rice consumption is largely taken from rice reserves not sold to the market. Research on

what percentage small farmers have to spend on buying rice from the market needs to be conducted.

Assumption that high rice prices will increase the income of the farmers‟ family need to be proven

empirically. If proven true, which groups of farmers? Is it among the majority of farmers or only farmers with large

lands, or even among farmers with small lands? The proportion of the number of small farmers, the majority

producing rice in Java is of 74.9 percent. There is a possibility that the increase in rice price would likely lower the

income of the small farmers instead of increasing it. According to Tampubolon (2002) the family of farmers who

have a small plot of rice farming land may probably experience rice deficit, i.e. the amount of consumption is greater

than the amount of paddy they produce. Thus, for the family of landless farmers, rice price increases are not

profitable.



ISBN 978-0-9925622-0-5

RESEARCH OBJECTIVES

The purpose of this study is to analyze the market structure at the level of rice farmers. If the result of the

market structure research was close to perfect competitive market, the result of this study would suggest to maintain

high prices of rice to help paddy farmers. If the results showed that market structure at the farmer level was near

monopsony, the policy for high pricing should be re-examined. Next is to analyze whether the rise in the price of rice

would increase the income of the farmers‟ family, all farmers, or just large farmers? Respondents in this study would

be divided into farmers with small lands, i.e. those who own lands less than 0.5 Ha., medium farmers with lands

between 0.5 – 1 Ha., and large farmers with lands more than 1 Ha.

The advantage of this research is to assist the government in terms of the pricing policy of rice, whether

setting high rice prices will increase the income of the majority of the farmers‟ family or not: whether this policy will

increase or decrease the family‟s income of the small farmers. To test these assumptions it is important to conduct a

study about the effect of the increase of rice price on the increase of the income of the paddy farmers. Results of this

study will provide information on whether these assumptions are correct and empirically proven or not. This research

will be useful for the government in formulating the pricing policy of rice.

RESEARCH METHODS

Research methods and objects

The method used was a survey method with small farmers, medium farmer and large farmer as the objects

of the study. The research was conducted in Kroya sub-district, Indramayu regency, West Java. The argument for

choosing this province is the fact that it is the largest rice producer in Indonesia.

Sampling Techniques

In Kroya sub-district there are 16.120 farmers: small farmers with land under 0.5 ha are 7587; Medium

farmers with lands of 0.5 to 1 Ha are 6.110. Large farmer with lands above 1 Ha is 2.423 (Indramayu dalam Angka,

2010). The standard deviation for the number of small farmers in every sub-district of Indramayu Regency is 277.10,

for medium lands 737.79, and large land 392.29. Of the total number of farmers in the sub-district Kroja, number of

respondents with a proportional stratified random sampling was taken. The number of farmers taken was obtained

through this formula:

L

h

hh

L

h

hh

SNGN

SN

1

2222

1

22

Z

NZ

n (1)

N = population of farmers in the Kroya sub-district

Ni = population of farmers in land i

S = standard deviation

G = Fault Tolerance

n = sample size in Kroya sub-district

ii

Nn n

N (2)

ni = sample size of farmers on land i

thus

N = 16 120

Z = 1.96 (Z-score at the 99 percent confidence level)

N1 = 7587 Small Farmers



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N2 = 6,110 Medium farmers

N3 = 2,423 Large Farmers

S1 = 277.10 (Standard deviation of the number of small farmers)

S2 = 737.79 (Standard deviation of the number of medium farmers)

S3 = 392.29 (Standard deviation of large farmers)

G = 100 (thoroughness of 16120 farmers)

(( ) ( ) ( ))

(( ) ( ) ( )

(3)

Rounded up to 102 farmers.

Samples of farmers with small lands:

The number of samples of farmers with small lands is 48.

Medium Farmers are

(4)

Samples of farmers with medium size of lands are rounded up to 39 farmers

Samples of farmers with large size lands.

(5)

Rounded up to 16 large farmers.

Model Analysis

To analyze whether the market structure at the farm level is a competitive market or a monopsony, it is measured

through the integration of prices. Theoretical sizes of a free competitive market such as high number of sellers and

merchants, homogeneous products, free entry and exit, resource mobility, and perfect information are difficult to

measure. Yet, according to the theory of "Law of One Price", the size is determined in this scheme: if the price

increase in the market is followed by a proportional increase in prices in other markets, the market is a free

competitive market.

The analysis tool is the price elasticity, i.e. changes in the prices of paddy at the farmer level due to changes in the

prices of rice at the consumer level. If the elasticity is close to one, it can be concluded that the market at the farmer

level is a free competitive market. If it does not approach one, the market at the farmer level is not a free competitive

market. The analysis technique is through regression analysis.

Elasticity models used is:

Y = b0 + b1X+eu

Y = price of paddy at the farmer level

b0 = constant

X = price of rice at the consumer level

b1 = elasticity value at the farmer level due to changes in the price of rice

eu = Residual Variables

To examine the effect of statistical hypotheses used

H0: b1 = 0



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H1: b1 ≠ 0

H0 is rejected if tscore is smaller than t0, 025, (two-tail) if H0 is rejected, H1 is accepted with the conclusion that the rice

price affects the price of paddy at the farmer level.

The analysis would be performed on the small, medium and large farmers. Subsequently, an unpaired difference test

would be performed on the elasticity coefficient value of the price changes among farmers with small, medium, and

large lands.

To test whether the increase of rice price decreases the farmers' income, paired different test was performed.

The statistical hypothesis is as follows:

H0 : X1 = X2

H1 : X2 > X1

X1 = increase of income of farmers‟ family due to the rising paddy prices.

X2 = increase of expenditure of farmers‟ family due to the rising prices of rice.

H0 is rejected if tscore is smaller than t0, 05, (one-tail) if H0 is rejected, H1 is accepted, meaning the income of the

farmers‟ family, when the price of rice is low, is higher than when the rice price is high. The data of changes were

taken from the related agencies. All analyses used statistic program tools, i.e. E views and SPSS .

RESEARCH RESULTS

Effects of the Price of Rice on Price of Paddy at Farmer Level

Large Farmers

The data used in this analysis is those of paddy sold by farmers, to be compared to the data of the rice prices in the

same area on the same day. Analysis was performed using simple regression processed using the program E views.

Results of analysis for farmers with large lands can be seen in the following table.

TABLE 1 REGRESSION ANALYSIS RESULTS FOR LARGE FARMERS

Dependent Variable: Y

Method: Least Squares

Date: 10/20/13 Time: 14:18

Sample: 1 16

Included observations: 16

Y=C(1)+C(2)*X

Coefficie

nt

Std. Error t-Statistic Prob.

C(1) -

3944.712

629.0301 -6.271102 0.0000

C(2) 1.033654 0.083291 12.41008 0.0000

R-squared 0.916672 Mean dependent var 3859.375

Adjusted R-squared 0.910720 S.D. dependent var 201.0131

S.E. of regression 60.06235 Akaike info criterion 11.14511

Sum squared resid 50504.81 Schwarz criterion 11.24169

Log likelihood -

87.16090

Durbin-Watson stat 1.322983



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The analysis shows that rice prices significantly affect the prices of paddy with the regression coefficient

equal to one. This suggests that for farmers with large lands, rice price increases proportionally affect the prices of

paddy. Thus, the market structure of farmers with large lands is free competitive, where farmers have equal

bargaining power with traders.

Farmers with Medium Lands

Using data on sales of paddy on a given day that is compared to the price of rice in the area, the results of

the regression analysis are showed in the following table.

TABLE 2 REGRESSION ANALYSIS RESULTS FOR MEDIUM FARMERS.



Date: 10/20/13 Time: 14:41

Sample: 1 39


Y=C(1)+C(2)*X

Coefficie

nt


C(1) -

865.3846

1306.975 -0.662128 0.5120

C(2) 0.626106 0.173433 3.610070 0.0009




Sum squared resid 1676809. Schwarz criterion 13.69459

Log likelihood -

263.3810


The results of the analysis show that rice prices significantly affect the prices of paddy, but not

proportionally. The value of the regression is 0.62, which means with an increase of one unit of the rice price, the

price increase received by farmers from their paddy sales is approximately 60 percent. Thus, it shows that the

bargaining power of traders is higher than that of the farmers.

Farmers with Small Lands

To see the effect of rice prices on the selling price of paddy of farmers with small lands, the selling price of

their dried paddy on a given day is compared to the selling price of the rice at the same area on the same day. From

the results of the regression analysis using the program E Views the following results can be seen.

TABLE 3 REGRESSION ANALYSIS RESULTS FOR FARMERS WITH SMALL LANDS



Date: 10/20/13 Time: 14:50

Sample: 1 48


Y=C(1)+C(2)*X



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Coefficie

nt


C(1) -

547.4200

2305.367 -0.237455 0.8134

C(2) 0.565015 0.302514 1.867730 0.0682




Sum squared resid 5948818. Schwarz criterion 14.72668

Log likelihood -

349.5691


From the analysis using the program E views it can be seen that there is no significant effect of rice prices

on the selling price of paddy. This suggests that the market structure of farmers with small lands is almost

monopsony, meaning traders set the price according to their wishes.

Effect of Rice Price Increases on Income of Farmers’ Family

To analyze the effect, the focus is on the increase of the rice price that may increase the consumption of the farmers‟

family and the increase of the selling prices of dried paddy harvest that may subsequently increase farmers' revenues.

This is done because of the large variability of income beside farming business and variability of farmers‟ spending

beside rice consumption. The data used are the paddy and rice prices in mid-July 2012 and prices in the next six

months to mid-January 2013. This six month period is used because farmers produce paddy twice in one year.

Although the rice cultivation takes only four months, the harvest is performed twice a year because the general

planting pattern is Paddy -Paddy- Off. In mid-July 2012 the paddy price was Rp. 4.200/Kg and the rice price was Rp.

7.400/Kg, while in mid-January 2013 the price of rice was Rp. 4.300/Kg and the rice price was Rp. 7.800/Kg. This

analysis will be shared between farmers with large, medium, and small lands.

Farmers with Large Lands

For farmers with large lands the increase in the price of paddy is proportionally received 100% because the

bargaining power of farmers is equal to the bargaining power of traders. Comparison between the increase in revenue

due to the increase in the price of paddy and the increase of rice consumption expenditure due to the rice price can be

seen in the following table.

TABLE 4 COMPARISON RICE PRICE INCREASE AND CONSUMPTION FOR LARGE FARMERS.

Type Average Value

Total paddy production (kg) 15698.13

Stored (kg) 431.19

Sale (Kg) 15266.94

The addition of paddy price increases revenues (Rp) 1,526,693.75

Consumption of rice per month (Kg) 29.94

Six months of rice consumption (kg) 179.63

Addition of spending due to rising price of rice (Rp) 71850.00

The table shows that the addition into the revenue due to the rising paddy prices is greater than the increase

in spending due to the rising prices of rice. When statistically tested, the differences are as shown in the following

table.



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TABLE 5 TEST STATISTICS TABLE OF AREA LANDOWNERS

Paired Differences t df Sig.

(2-

taile

d)

Mean Std.

Deviati

on

Std.

Error

Mean

95% Confidence

Interval of the

Difference

Lower Upper

14548

43.75

164557

0.94

411392.

73

577980.

88

2331706.

61

3.5

36

15 .003

The table shows that the increase in the rice price leads to the rise in the price of paddy produced by

farmers, and at the same time, to increase in the expenditure on rice consumption. Increased revenue derived from

the increase in paddy prices is higher than the increase in the expenditure due to the rising prices of rice. This

difference is significant at 95 percent of confidence level. It can be concluded that the rise in the price of rice

increases the income of the farmers‟ families.

Farmers with Medium lands

Medium farmers generally have a lower bargaining power than traders. From the analysis of the effect of

the rising paddy prices due to the prices of rice, farmers with medium lands get only 62 per cent of increase

proportion of the general rise of paddy prices in the area. A comparison between the increases in revenue due to the

higher price of paddy the farmers sold and the increase in the expenditure of the farmers‟ family as the result of the

increase of the rice price can be seen in the following table.

TABLE 6 COMPARISON OF RICE PRICE INCREASE AND CONSUMPTION FOR MEDIUM

FARMERS

Type Average Value

Total paddy production ( kg ) 5220.51

Stored ( kg ) 1 510.13

Sold ( kg ) 3710.38

The addition of paddy price increases revenues ( Rp. ) 230,043.85

Consumption of rice per month ( Kg ) 35.10

Six months of rice consumption ( kg ) 210.62

Addition of spending due to rising price of rice ( Rp ) 4246.15

The table shows that the addition in the revenue due to the higher selling price of paddy is higher than the

increase of expenditure due to the increase of rice the farmers‟ family have to pay. Results of test whether this

difference is real can be seen in the following table.

TABLE 7 TEST STATISTICS OF MEDIUM FARMERS

Paired Differences T df Sig. (2-tailed)

Mean Std.

Deviation

Std. Error

Mean

95% Confidence Interval of

the Difference

Lower Upper

145797.69 70090.37 11223.44 123077.019 168518.36 12.99 38 .000



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The table shows that this difference is significant at 95 percent confidence level. It can be concluded that the increase

in the rice price has a positive effect on the income of the farmers‟ family.

Farmers with Small Lands

Farmers with small lands have a lower bargaining power than those with large and medium farm lands. From the

analysis of the proportion of the selling price due to the increase of the selling prices of dry paddy yields in general,

farmers with small lands received only 56 percent. This affects the amount of the additional revenues of the small

farmers, while the increase in their expenditure due to the rising price of rice is equal to that of other farmers. The

effect of the rice price increase on the income of the farmers‟ family is shown in the following table.

TABLE 8 COMPARISON OF RICE PRICE INCREASE AND CONSUMPTION OF SMALL FARMERS

Type Average Value

Total paddy production ( kg ) 2109.85

Stored ( kg ) 521.35

Sold ( kg ) 1588.50

The addition of paddy price increases revenues ( Rp.) 88956.00

Consumption of rice per month ( Kg ) 34.15

Six months of rice consumption ( kg ) 204.88

Addition of spending due to rising price of rice ( Rp ) 81950.00

The table shows that the increase in the revenue from the increase in the selling price of paddy yields is

almost equal to the increase in expenditure due to the price increase of rice. To prove it, it is necessary to perform an

analysis on difference test, as shown in the following table.

TABLE 9 TEST STATISTICS FOR SMALL FARMERS

Paired Differences t df Sig. (2-

tailed) Mean Std. Deviation Std. Error Mean 95% Confidence Interval of the

Difference

Lower Upper

7006. 44447.39 6415.429 5900.17 19912.17 1.092 47 .280

The table shows that at 95 percent confidence level, no significant difference between the additional

revenue from the increase in paddy prices and the additional expense due to the higher rice price can be found. It can

be concluded that the increase in rice price does not significantly affect the income of the farmers‟ family.

Results

The results achieved from this research are the findings that can be briefly described as follows.

1. There is integration of the rice prices and the prices of paddy among large farmers. This is demonstrated by

the significant increase in the rice price, proportional to the selling price of dried paddy yields of the large

farmers. The effect of the proportional price is an indicator that the market structure of farmers with large

lands is free competitive market, there is a balanced bargaining power between the farmers and the traders.

2. There is insufficient integration between the price of rice and that of paddy among farmers with medium

lands. This is demonstrated by the significant increase in rice prices, but not proportional to the selling price

of dried paddy yields of the farmers with medium lands. The effects of disproportionate prices is an

indicator of a market structure that is rather monopsonistic, in which traders‟ bargaining power is higher

than that of the farmers.

3. There is no integration between the rice price and the price of paddy among farmers with small lands. This is

indicated by the increase in the price of rice that does not significantly affect the selling price of paddy of the

small farmers. This is an indicator of monopsony market where traders set prices as they wish without being

affected by the rising price of rice.



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4. The increase in the rice price affects the family‟s income of the farmers with medium and large lands. Thus,

if the government increases the price of rice, this will support the income of their family.

5. The increase in rice price does not significantly affect the income of the family of small farmers. Thus,

efforts to improve the welfare of small farmers cannot be achieved through the policy of increasing the price

of rice.

Discussion

The finding result there is integration market price of paddy and rice for large farmers and medium farmers

in Kroya District, Indramayu Regency. If this finding compared with the integration market in indonesian scale as

shown on table 10.

TABLE 10. INTEGRATION MARKET PRICE OF PADDY AND RICE AT INDONESIA 2012



Date: 12/06/13 Time: 15:23

Sample: 1 12183


Y=C(1)+C(2)*X

Coefficie

nt


C(1) 2855.132 115.4049 24.74012 0.0000

C(2) 0.126679 0.015844 7.995276 0.0000




Sum squared resid 2.62E+10 Schwarz criterion 17.41916

Log likelihood -

106099.4


This table is regression betwen the price of paddy (milled paddy) and price of rice at a whole Indonesian Region at

2012. This daily reports data is taken from the website of Indonesian agriculture ministry at in

(http://database.deptan.go.id). The result shown that there are significan effect the price of rice to the price of paddy.

The parameter number of regression is 0.126679. If compared with the result this research, the number of regression

parameter is 1.033654 for large farmer, 0.626106 for medium farmer, and 0.565015 for small farmer. The

conclussion is the regression of Indonesian Region at 2012 is less than the research in Kroya District, Indramayu

Regency. That mean integration market at another region is less than the region reasearch.

The findings as the results of this study should be completed with similar research at different time, analysis

and places. This must be done because of the variability of the prices of rice and paddy that keep changing at any

given time; it is possible that if it is done at different times, different findings will be produced. Likewise, with

different research methods, it is possible that there will be different results because each analysis has its own

advantages and disadvantages. Different places can also produce different findings. This study was conducted at the

http://database.deptan.go.id/



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paddy centers that is the largest rice producer in Indonesia.

The research was conducted at the paddy central area and therefore farmers in the study area are generally

experienced, hence very knowledgeable about farming businesses. This is evident from the productivity that is higher

than the average productivity of the nation. The average productivity for this region is 6.663 ton/ha (BPS,

Indramayu 2012) and average productivity for indonesian paddy farm is 5.146 ton/ha. Thus, judging the condition

of the respondents, the farmers in this area have higher income from their farming business than other farmers in

Indonesia. Compared the research of Arifin et. Al. (2001) that small farmers use 90 percent of the production for the

consumption of their family. But in this research the small farmers use 24 percent for his family consumption. This is

indicator the farmer from this region more advantage than another region farmer in Indonesia.

The results show that an increase in the rice prices affects the income of farmers with large and medium

lands, but has no effect on small farmers. The results may be different if the research is done in the area that is not

the rice center. It is possible that for medium farmers the rising rice prices have no effect on the income of the

farmers‟ family, and for farmers with small lands, the effect is negative. Thus, we need another similar study

conducted in other areas.

The good analysis for integration market is cointegration analysis, but this analysis need a daily serial data for

one region. This data in Indonesia only find in Tapanuli Selatan. The cointegration analysis from daily data covering

from January 1, 2012 to December 31, 2012. The data taken from Indonesian Ministry of Agriculture

(http://database.deptan.go.id).

Pre condition for this analysis need a stationary data. The result test of stationary data shown in table 12.

Table 12. Unit Root Test

Null Hypothesis: Y has a unit root

Exogenous: Constant

Lag Length: 6 (Automatic - based on SIC, maxlag=16)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -4.448085 0.0003

Test critical values: 1% level -3.448363

5% level -2.869374

10% level -2.571011

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(Y)


Date: 05/10/13 Time: 19:53

Sample (adjusted): 1/08/2012 12/31/2012

Included observations: 359 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

Y(-1) -0.159457 0.035849 -4.448085 0.0000

D(Y(-1)) 0.077414 0.048879 1.583808 0.1141

D(Y(-2)) 0.076771 0.048862 1.571175 0.1170

D(Y(-3)) 0.079730 0.048839 1.632513 0.1035

D(Y(-4)) 0.077706 0.048839 1.591074 0.1125

D(Y(-5)) 0.078461 0.048815 1.607313 0.1089

D(Y(-6)) -0.405207 0.048797 -8.303944 0.0000

C 1535.472 440.7809 3.483527 0.0006

R-squared 0.275577 Mean dependent var -2.367688


http://database.deptan.go.id/



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Sum squared resid 9.40E+09 Schwarz criterion 20.04938

Log likelihood -3575.330 Hannan-Quinn criter. 19.99725

F-statistic 19.07481 Durbin-Watson stat 1.964351

Prob(F-statistic) 0.000000

In table 12 shown there is not have unit root, thus it can proceed with the cointegration test in shown on table 13.

TABLE 13. COINTEGRATION ANALYSIS

Date: 05/11/13 Time: 11:28

Sample (adjusted): 1/06/2012 12/31/2012

Included observations: 361 after adjustments

Trend assumption: Linear deterministic trend

Series: X Y

Lags interval (in first differences): 1 to 4

Unrestricted Cointegration Rank Test (Trace)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.120584 52.08316 15.49471 0.0000

At most 1 * 0.015654 5.695705 3.841466 0.0170

Trace test indicates 2 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level

**MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesized Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.120584 46.38745 14.26460 0.0000

At most 1 * 0.015654 5.695705 3.841466 0.0170

Max-eigenvalue test indicates 2 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level

**MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I):

X Y

-0.000437 0.000114

0.002976 1.46E-05

Unrestricted Adjustment Coefficients (alpha):



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D(X) 6.205357 -12.32877

D(Y) -2081.463 -8.227598

1 Cointegrating Equation(s): Log likelihood -5799.322

Normalized cointegrating coefficients (standard error in parentheses)

X Y

1.000000 -0.261670

(0.03802)

Adjustment coefficients (standard error in parentheses)

D(X) -0.002714

(0.00233)

D(Y) 0.910355

(0.13123)

The result shown there is cointegrating market between price of paddy and rice. In this analysis that mean there are

integrating market the price of rice and paddy. This analysis is additional support for the evidence integration market

between price of rice and paddy.

CONCLUSIONS AND RECOMMENDATIONS

Conclusion

From the research conducted, it can be concluded that:

1. For large farmers, there is price integration. It is shown by the significant increase in the rice price that is

proportional to the selling price of paddy.

2. For medium farmers, there is price integration but not balanced. It is shown by the significant increase in

the rice price, but not proportional.

3. For small farmers, price integration does not happen. This is shown by the increase in the rice price that

does not significantly affect the selling price of paddy.

4. For large farmers, the rice price increase has a positive effect on the income of their family. This shows an

increase in the revenues due to the higher rice price that is greater than the increase in the rice consumption.

5. For medium farmers, the rice price also has a positive effect on the income of their family. It shows the

same result as that of large farmers.

6. For small farmers, the increasing rice price does not significantly affect the income of their family. This

indicates an increase in the revenue due to the higher rice price, equal to the increase of the expenditure for

the rice consumption.

Suggestions

Suggestions that should be mentioned are the need for similar research conducted in other areas, especially

those that are not rice production centers. In this study conducted in the central areas of paddy producers, the rice

prices affect the income of the farmers‟ family, both large and medium farmers, but not the small farmers. How

about areas that are not paddy producing center?

If the results show similarity, we can conclude that it is generally prevailing. Suggestion for the government

is the need for sufficient rice price policy to increase the income of the paddy farmers.

If the results are different, some more research in other areas are deemed necessary. It is important to give

the right suggestion to the government in determining the policy of the price of rice.



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