EQUILIBRIUM ANALYSIS OF RICE SUPPLY AND DEMAND
SYSTEMS IN INDONESIA
Sri Nuryanti
Indonesian Center for Agriculture and Social Economic Policy Studies
Jl. A. Yani 70 Bogor 16161
ABSTRACT
This study aims to analyze the stability of Indonesian rice supply and demand
equilibrium system and to evaluate short-run and long-run impacts of price policy using
Cobweb equilibrium model. The results show that in the short-run equilibrium of rice
supply and demand deviates; however, in the long-run it is stable. These imply that price
policy on agricultural inputs and output does not disturb Indonesian rice market.
Therefore, the policy is still reasonable to implement.
Key words: stability, market equilibrium, rice, rice supply, rice demand
INTRODUCTION
Dynamic model is one of tools used to evaluate short-term and longterm impacts of a policy (Swastika, 1999). Impacts of government policies in
agricultural sector are usually observed after several months or years later. It
means that there is time lag between the period when the policy is implemented
and the farmers’ response. There are two reasons, namely the farmers can not
anticipate the policy directly and the desired impact is slowly observed. In
addition, agricultural production could be monitored after several planting
seasons. It indicates that time lag in agricultural activities takes place between
the decision in growing the crops and harvest period.
Government’s policy on floor price of rice (HDPP) depicted in Inpres No.
9/2002 on December 21, 2002 (mid of planting season on wet season 2002/03),
stated that purchase price of rice was Rp 1,725/kg. Previously, Inpres No.
9/2001 on December 31, 2001 affirmed that purchase price of rice was Rp
1,500/kg. The rice price policy got positive response from the producers
indicated by increased supply of rice in the domestic market from 1,148,300 tons
in 2002 to 1,624,600 tons in 2003. It showed that the producers had time lag in
responding to commodity market-shock. Increased supply of rice was due to
increase in rice harvested area as the impact of improved selling-price of rice.
Conversely, when fertilizer price subsidy was removed since December
1, 1998 and fertilizer price was not controlled by the government anymore but it
was determined by market mechanism, fertilizer price at farm level became
higher. However, fertilizer ceiling price removal did not encourage farmers to
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apply fertilizers more efficiently (Sutrilah et al., 2001). It was shown by
fluctuating supply of rice from 1998 to 2002, namely 1,409, 2,173, 1,287, 1,090,
and 1,148 thousand tons, respectively.
Such a fluctuating supply is susceptible because of increased growth
rate of population such that rice consumption keeps also expanding. This study
analyzes stability of equilibrium system of rice supply and demand in Indonesia
using Cobweb equilibrium model from dynamic supply and demand. It also
analyzes short-run and long-run impacts of changes in the policies on rice and
fertilizer prices, and stability of domestic rice market. Cobweb model is selected
because it is suitable for analyzing price change impact on agricultural
commodities supply and demand, especially in the short term (Widodo, 1992).
METHODOLOGY
Conceptual Framework
Supply is static correlation between quantity of commodity sold at a
certain place and time with various levels of price, other factors are assumed to
be constant (Tomek and Robinson, 1990). Supply curve shows positive
correlation between quantities of commodity to be sold with its price level
(Lantican, 1990). Increased price of a commodity when other factors are
constant encourages the producers to supply more. Conversely, if the
commodity price decreases the producers will reduce supply of the commodity.
The supply curve is assumed that the producers act rationally, namely
they try to maximize profits. Producers will apply inputs until marginal cost of
input is equal to marginal value of output. Mathematically, principle of
maximizing profit is formulated as follow:
Px = Py * MPx ..................................................................................... (1)
where Px is price of per unit of input X, Py is price of per unit of output Y, and
MPx is marginal product of input X. The equation above is static analysis. On the
other hand, dynamic analysis is not only determined by economic variables at
the same time, but also by previous variables. Such as mentioned above, in
agriculture sector there is time lag between production decision making and
realized production. Production decision is made one period before the product
is sold. If production decision is made at time t based on the price at time t,
namely Pt, the product is not realized at time t. Thus, Pt does not affect
production at time t or Qt, but Qt+1. The time lag response implies functional
correlation in which mathematically is formulated as follows (Nerlove, 1958):
Qst+1 = f(Pt) or Qst = f(Pt-1) .................................................................... (2)
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Actually, supply of the year is also affected by supply and input price in the
previous year. Thus, supply function of equation (2) becomes:
Qst+1 = f(Qst, Pt, Pft) or Qst = f(Qst-1, Pt-1, Pft-1)....................................... (3)
On the other hand, consumer’s demand is the quantities of a commodity
which the consumer is willing and able to buy in a particular place and period as
price varies, other factors are held constant. Market demand is an aggregate of
individual demands (Tomek and Robinson, 1990). Demand could be depicted as
a curve showing a negative correlation between quantities of demanded
commodity and various price levels. Such as supply, demand could be explained
using a mathematical equation as a function of many factors, namely previous
year’s demand, price of the commodity, price of other commodities, per capita
income, total population, among others.
Model of Analysis
Referring to the assumption of Cobweb system equilibrium, a function
model of demand for rice in year t is defined as a function of demand for rice in
year t-1, rice price in year t, per capita income in year t, and total population in
year t. Mathematically, demand for rice is formulated as follow:
Qdt = a1 Qdt-1 + a2 Pt-1 + a3 It + a4 Popt + c ............................................ (4)
Qdt = a1 Qdt-1 + a2 Pt-1 + a3 Z1 + a4 Z2 + c .............................................. (5)
On the other hand, supply function is defined as a function of rice supply in year
t-1, rice price in year t-1, and Urea fertilizer price in year t-1 which
mathematically is formulated as follow:
Qst = b1 Qst-1 + b2 Pt-1 + b3 Pft-1 + k ....................................................... (6)
Qst = b1 Qst-1 + b2 Pt-1 + b3 Z3 + k.......................................................... (7)
Based on Cobweb model’s assumption, then:
Qdt = Qst
............................................................................................................................................. (8)
where:
Qdt
= quantity of rice demanded in year t
Qdt-1 = quantity of rice demanded in year t-1
Qst
= quantity of rice supply in year t
Qst-1 = quantity of rice supply in year t-1
Pt
= rice price in year t
Pt-1
= rice price in year t-1
ANALISA KESEIMBANGAN SISTEM PENAWARAN DAN PERMINTAAN BERAS DI INDONESIA Sri Nuryanti
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Pft
= Urea fertilizer price in year t
It
= Z1 = per capita income in year t
Popt = Z2 = total population in year t
Pft-1 = Z3 = Urea fertilizer price in year t-1
a, b = estimated parameters
c, k
= first-stage regression constants
Based on equations (5), (7), and (8) there are three stages of analysis.
First stage, parameters of supply and demand functions were estimated
separately. Estimation was done through Cobb-Douglas function using an
ordinary least square (OLS) method. Cobb-Douglas equation is in natural
logarithm transform of supply and demand functions. Cobb-Douglas is chosen
because the coefficient of each variable indicates its elasticity.
Second stage, Cobweb equilibrium (equation 8) was analyzed using
supply and demand functions in which the parameters were estimated at the first
stage based on market equilibrium principle. It implies that total supply is equal
to total demand. Afterward, Cobweb equilibrium was formulated in a matrix.
Third stage, price policy impact was done for short term and long term
using Cobweb equilibrium matrix. Equilibrium stability analysis of rice supply and
demand systems was done through finding the roots of Cobweb equilibrium
characteristics equation resulted from statistical estimation transformed in a
matrix (Simatupang, 1995). The next was transforming equations (6) – (8) in a
matrix form:
Z0
1
0
1 −a2
Qt
Pt
=
b1
b2
Q t -1
a1
0
Pt -1
+
k b3
0
0
Z1
c
a3
a4
Z2
0
........ (9)
Z3
or
H1 * Yt = H2 * Yt-1 + H3 * Z ....................................................................(10)
Short-run multiplier effects were notified as D1 and D2, formulated as follows
(Ruetlinger, 1996):
D1 = H1-1 * H2 .......................................................................................(11)
D2 = H1-1 * H3 .......................................................................................(12)
Short-term shock was notified as D3 and formulated as follows:
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D3 = (I – D1)-1 * D2................................................................................(13)
where:
H1 = parameters matrix of endogenous variables in year t
Yt = parameters matrix of endogenous variables (quantity and price of
rice) in year t
H2 = parameters matrix of endogenous variables in year t – 1
Yt-1 = parameters matrix of endogenous variables (quantity and price of
rice) t–1
H3 = constants and parameters matrix of exogenous variable Z
Z = exogenous variable matrix (Z0, Z1, Z2, Z3, with Z0 = 1)
D1 = short-term multiplier effect of rice price change
D2 = short-term multiplier effect of Urea fertilizer price change
D3 = long-term multiplier effect
Data
The study used annual time series data for 32 years, namely for the
period of 1969 – 2002. Sources of data were Indonesia Statistics, Food Balance,
and SUSENAS. Types of data collected were net rice supply based on end-ofyear rice supply, floor price of rice as a proxy of farm-gate rice price, retail price
of Urea as a proxy of farm-gate Urea price (for the period of 1970 – 1998 used
highest retail price), domestic rice consumption as a proxy of quantity of demand
for price, per capita real income as a proxy of population income, and total midyear population as a proxy of total population.
RESULTS AND DISCUSSION
Estimated Parameters
First-stage analysis was using OLS method and the supply and demand
functions were formulated as follows:
Qdt
= 0,56 Qdt-1 – 0,04 Pt + 0,01 It + 0,93 Popt – 9,83 ..................... (14)
Qdt
= 0,56 Qdt-1 – 0,04 Pt + 0,01 Z1 + 0,93 Z2 – 9,83 ....................... (15)
Qst
= 0,09 Qst-1 + 1,33 Pt-1 – 1,21 Pft-1 + 12,05 .................................(16)
Qst
= 0,09 Qst-1 + 1,33 Pt-1 – 1,21 Z3 + 12,05 ....................................(17)
Using market equilibrium principle, equation (9) was transformed into:
ANALISA KESEIMBANGAN SISTEM PENAWARAN DAN PERMINTAAN BERAS DI INDONESIA Sri Nuryanti
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Z0
Z1
Qt
1 0
0,09 1,33 Q t -1
12,05 - 1,21 0
0
....(18)
=
+
1 0,04 Pt
0,56 0
Pt -1
- 9,83
0
0,01 0,93 Z 2
Z3
Short-Run Multiplier Effects
Based on equation (18), the short-term effects were obtained in matrix
forms of D1 and D2 as follows:
-1
D1 = H1 * H2 =
-1
D2 = H1 * H3 =
- 0,55 1,33
..........................................................(19)
0,56 1,33
10,32 - 0,05
- 9,83 0,00
- 0,01 - 0,93
.............................(20)
0,01 0,93
Values of D1 in equation (19) indicate that increase in supply by 1
percent in short term will result in price decrease by 0.56 percent, or increase in
supply by 10 percent will decrease rice price by 5.6 percent. Conversely,
increase in rice price by 1 percent will improve supply by 1.33 percent, or
increase in rice price by 10 percent will improve supply by 13.3 percent. Such as
responses of other commodities’ supplies, the producers will increase supply if
the price increases, other factors are held constant. It indicates that in short
term the farmers respond to price increase by increasing supply of rice. It was
shown by elasticity value of rice supply on rice price by 1.33 or more than one
(elastic).
Based on values of D2 in equation (20), it was indicated that increase in
Urea price by 1 percent would reduce supply by 0.05 percent, or increase in
Urea price by 10 percent in short term would reduce rice supply by 0.5 percent.
Trivial response to increase in Urea price indicates that subsidy decrease of
Urea price will have little impact on reduced rice supply. It is most probably due
to farmers’ risk averse. Some studies in Java showed that increase in fertilizers
price did not encourage farmers to lower fertilizers application. Reducing
fertilizers application would decrease rice yields (Swastika, 1995). Because
policies on increases in fertilizer price and floor price of rice did not reduce
optimal fertilizer application, thus, rice farm business profit could be improved
(Swastika and Fagi, 1993).
Other analysis result showed that increases in per capita income and
population growth rate were not affected by rice supply, but both variables
affected rice demand. Those two variables affected rice price hike. Specifically,
increase in per capita income by 1 percent in short term would improve demand
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for rice by 0.01 percent. Increase in population growth rate by 1 percent in short
term would enhance demand for rice 0.93 percent. Population growth rate
increase had greater impact on demand for rice than that of per capita income.
Increased population will enhance demand for rice accordingly, thus in
aggregate it will have great impact on rice demanded.
Long-Term Multiplier Effect
Change in one variable in the long term could be evaluated from D3
matrix in equation (13) as follows:
-1
D3 = (I – D1) * D2 =
- 8,90 0,02
- 1,54 - 0,07
0,00 0,82
.........................(21)
0,00 0,21
Equation (21) shows that increased price of Urea by 1 percent in the
long term will result in improved supply of rice by 0.02 percent. Long-run
increase in Urea price is accumulation of short-run changes. Such as rice supply
fluctuation after fertilizer price subsidy removal in 1998, in the long term the
farmers did not tend to reduce fertilizer application rates that the rice production
was not affected. Even though insignificant, rice production improved.
In addition, in the long term an increase in Urea price will result in rice
price decrease by 0.07 percent. Because per unit of input price increase
(especially that of Urea price), marginal income of increase in rice price received
by farmers becomes lesser. It means that in the long term real price received by
farmers decreases. In other words, ratio of rice price to fertilizer price gets
smaller. Such as in the short term, the long term effect of increase in Urea price
on rice supply and rice price is very small. The farmers did not response to Urea
price increase which was controlled by the government, so far, and rice price
fluctuation was still under control of government such that it was still affordable
to the consumers. During minimal quantity of supply (off season), the
government applied ceiling price to protect consumers and conducted market
operation. On the other hand, during peak season in which the rice supply was
abundant the government implemented rice floor price to sustain farm gate
price.
Equation (21) shows that an increase in per capita income by 1 percent in
the long term will not affect supply and price of rice. It indicates that elasticities
of per capita income to rice demand and rice price are zero. In the long term,
rice is still a primary product that it is inelastic to increases in per capita and rice
price. Even though per capita income and rice price increase but quantity of rice
consumed is constant and consumers will keep buying rice whatever its price.
Population growth rate in the long term by 1 percent will enhance
demand for rice by 0.82 percent and increase rice price by 0.21 percent. In
ANALISA KESEIMBANGAN SISTEM PENAWARAN DAN PERMINTAAN BERAS DI INDONESIA Sri Nuryanti
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accordance with market law, rice price increases if its demand increases, other
things are held constant. Such as in the short term, effects of population growth
rate and rice price in the long term on are greater than that of per capita income.
Thus, the short term effects are applicable with those in the long term.
Stability of Supply and Demand Equilibrium
Stability analysis of supply and demand system equilibrium was
evaluated through findings the roots of characteristics equation (Simatupang,
1995) from D1 matrix or multiplier effect of rice price change as follows:
I ? - D1 =
? + 0,55 - 1,33
= 0 .................................................(22)
- 0,56 ? - 1,33
The roots of equation matrix (22) were achieved by computing determinant
values of the equation matrix, and the quadratic equation obtained is as follows:
λ – 0,78λ – 1,48 = 0 ...........................................................................(23)
2
Values of λ1 and λ2 are the roots of characteristics equation obtained using ‘abc’
formula, and the values of λ1 and λ2 are 1.67 and -0.89, respectively. Equilibrium
system is stable if and only if the real parts of all matrix values are less than zero
(Simatupang, 1995). Values of λ are both positive and negative indicating that
one of real parts of the matrix has value less than zero and, thus, system
equilibrium is stable. Even though in the short term, price policy has caused
supply and demand system unstable (diverged), but in the long term the system
returns to equilibrium and become stable (converged).
In accordance with the analysis above, Adnyana and Julin (1993) and
Adnyana and Zakaria (1993) found that policy on increase in fertilizer price
lowered fertilizer demand and rice supply. The government avoided decreases
rice production and farmers’ income through compensation of increased
production costs through increasing rice price equal to percentage of output
supply decrease to input demand decrease ratio. Therefore, if rice price to urea
fertilizer price ratio increases, in the long term stability of rice supply and
demand will be sustained. Implication of the study is that in the long term price
policy will not affect market equilibrium and, thus, the policy is reliable to
implement.
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CONCLUSIONS AND POLICY IMPLICATIONS
In the short term and long term an increase in rice price will improve rice
supply. Urea fertilizer price increase in the short term will lower rice supply, but
in the long term it will enhance rice supply and decrease rice price.
Per capita income increase in the short term will improve demand for
rice, but in the long term it will not affect rice supply and rice price. On the other
hand, population growth rate both in the short and long terms have greater effect
on increases in rice demand and rice price than that of per capita income
increase on rice demand and price.
Rice supply and demand system in the short term diverges from its
equilibrium, but in the long term the system converges to equilibrium price and
becomes stable. The study implies that price policy on urea fertilizer input and
output (rice) does not affect market equilibrium, and demand for rice is relatively
stable. Thus, the price policy on input and output is reliable to implement. The
study using Cobweb dynamic equilibrium model for Indonesian rice supply and
demand system was able to evaluate effects of agricultural input and output
price policy both in the short and long terms. This model is applicable for similar
studies on agricultural and non-agricultural commodities.
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