Does vertical asymmetric price transmission exist in the rice markets?

Abstract

Purpose. This study aims to empirically measure and analyze the long-run relationship and asymmetric price transmission of the rice market in Aceh Province, Indonesia. It also attempts to empirically examine and analyze the existence of the vertical price trends along the rice distribution channels both in the short term and long term. Methodology / approach. Monthly data from January 2009 to December 2019 on the prices of dry harvested rice (known as Milled Dry Grain – MDG in Indonesia) at the farm level, the prices of MDG at the rice mill level, and the retail prices of the medium- and premium-quality rice were gathered from the report of Statistics Indonesian Agency (BPS – Statistics Indonesia). The study uses a series of econometric techniques comprising cointegration, causality, and Error Correction Model (ECM) to investigate the research objectives. Results. The study found price integration between the upstream and downstream rice markets. The asymmetric price transmission existed in the short run along the rice distribution chain, including the prices of medium-quality rice and premium-quality rice. In the long term, the price of MDG at the huller level is transmitted asymmetrically to the premium-quality rice at the consumer level. A positive asymmetric price transmission is found along the rice supply chain, indicating an increase in price in the upstream market has transmitted faster to the downstream markets than the price decreases. Originality / scientific novelty. Unlike previous studies that analyzed only price integration in the rice market and the direction of price transmission separately, this study empirically investigates both price integration, price transmission, and the direction and magnitude of asymmetric price transmission in the Indonesian rice market. Specifically, this study explores the existence of price integration from upstream to downstream markets and the existence of asymmetric price transmission as well as measures the magnitude and direction of asymmetric price transmission in the rice market in Indonesia. The findings of the study enrich the existing literature and contribute insights into enhancing rice price policy from the perspective of Indonesia, the fourth largest populous country in the world. Practical value / implications. These findings show the importance for the local government to maintain symmetrical market conditions to ensure efficient rice markets in the long term. Rice traders that control the premium-quality rice market by reprocessing medium-quality rice into premium-quality rice should be closely monitored. An inefficient rice market has caused consumers to spend a large proportion of their income on rice, leaving only a little to afford other needs.