Private trade and public role in staple food marketing: The case of rice in Indonesia

This article examines the interplay between private markets and public policy in foodgrain markets, utilizing the rice market In Indonesia as a case study. The methods and results of research into the working of the private rice market In Indonesia are described. Some wider lessons are drawn for research into staple food markets and the role of the state in price stabilization.

The author is Reader, School of Develop- ment Studies, University of East Anglia, Norwich, NR4 7TJ, UK (Tel: 0603 504455; fax: 0603 505262).

‘The research was undertaken within the framework of a Natural Resources Institute (NRI) technical assistance project in In- donesia. A more complete account can be found in F. Ellis, B. Trotter and P. Magrath, Rice Marketing in Indonesia: Methodology, Results and Implications of a Research Study, Natural Resources Institute, Marketing Series Vol 4, Chatham, UK, 1992. The research is also summarized in F. Ellis, ‘Rice marketing in Indonesia: methodology and results of a research study’, Bulletin of Indonesian Economic Studies, Vol 29, No 1, 1993, pp 105-123.

Private trade and public role in staple food marketing

The case of rice in Indonesia

Frank Ellis

The deregulation and privatization of staple food markets continue to be a rather elusive quest in many developing countries. While the principles of liberalization appear to be reasonably well agreed, the practical and political issues associated with diminishing the role of the state and fostering a competitive private trading sector defy generaliza- tion, and are exceedingly variable between countries. Nor is the appropriate role for the state in the post-liberalization marketing system well defined. Few policy advisors go so far as to advocate the complete exclusion of government from a social sphere as sensitive as the price of staple foods.

With such wide degrees of freedom for policy debate, case studies can be helpful, not because the case study experience can be directly transferred to other settings, but because it can add to the range of policy possibilities which merit exploration elsewhere.

This article summarizes some research undertaken between 1989 and 1991 on private rice marketing in Indonesia.’ The genesis of this research was a similar preoccupation with the appropriate roles of the private and public sectors as that experienced in other countries. However, the circumstances informing this preoccupation in Indonesia are naturally to some extent unique to that country.

The article is structured as follows. The next section outlines the Indonesian background and objectives of the research. Subsequent sections cover the research methodology, the results of a sample survey of the private rice trade, the use of these results to interpret seasonality in the aggregate rice market, and some lessons for research into foodgrain markets and the role of the state in price stabilization.

Background and objectives

Like many other developing countries, Indonesia has a parastatal agency responsible for ensuring stable prices for its main food staple, in

428 0306-9192/93/050428-l 1 0 1993 Butterworth-Heinemann Ltd

‘L.A. Mears, The New Rice Economy of Indonesia, Gadjah Mada University Press, Yogyakarta, Indonesia, 1981; F. Ellis, ‘The rice market and its management in Indone- sia’, IDS Bullefin, Vol 21, No 3, July 1990, pp 44-51. 3The balance sheet derivation of aggregate rice consumption is based on estimated rice production adjusted for net trade, public stock changes, and deduc- tions for seed, losses and non-food uses. Data from household expenditure surveys suggest that this method exaggerates per capita rice consumption, also indicating, perhaps, that production is overestimated. 4Food policy issues surrounding Indone- sia’s rice self-sufficiency strategy are discussed in D.S. Damardjati et al, ‘Emerging problems arising from the Indonesian success in rice production’, lndonesian Agri- cultural Research and Development J&r- nal. Vol 10. No 1. 1988: W.P. Falcon and C.6. Timm&, ‘Food sedurity in Indonesia: defining the issues’, Indonesian Food Journal, Vol 2, No 3, 1991, pp 8-20; and S.R. Pearson, ed, Rice Policy in Indonesia, Cornell University Press, Ithaca, NY, 1991. ‘The budget groups include central and provincial civil servants, the armed forces, and employees in designated parastatal agencies. The annual quantity of rice distri- buted to these groups was roughly 1.8 million tons, net basis, in the late 1980s. Since domestic procurement was not always sufficient to meet this obligation, Bulog sometimes experienced conflicting signals between its price stabilization role and its quantity commitments. 6The means by which Bulog covers its operating costs involves a complicated for- mula negotiated with central government, especially concerning the valuation of rice ration distributions to the budget groups mentioned above. Financial aspects of Bulog’s operation were not included in the terms of reference of the study described here.


this case rice. This agency, called the Badan Urusan Logistik (Bulog), operates as a classic buffer-stock authority in the rice market. It purchases rice in the peak harvest season at a floor price to farmers, and it sells rice in order to defend a ceiling retail price for consumers. The historical record of Bulog in fostering intra-year and inter-year rice price stability is encouraging compared to the poor performance often associated with foodgrain parastatals in developing countries.*

Indonesia had a population of 180 million people in 1990, and domestic rice production for the same year was estimated at roughly 28.9 million tons. Using the balance sheet method for calculating rice consumption, the 1990 annual figures for total and average consumption were 26.5 million tons, and 147 kg per person, respectively.3 Since the early 1980s this rice consumption has been met predominantly from domestic supplies. The official policy position towards the rice sector has been to maintain self-sufficiency in line with trend consumption.4

Bulog on average procures around 6% of the domestic rice harvest, equivalent to 1.8 million tons in gross terms in 1990. This is used both for price stabilization purposes, and in order to supply rice rations to government employees under a scheme dating from the 1960s called the ‘budget group’ system.5 This level of Bulog procurement means that the major proportion of rice trade in Indonesia is conducted through private channels. It also means that, in terms of the relative extent of its intervention, Bulog differs from many other types of foodgrain parastatal commonly encountered in developing countries.

Notwithstanding this low level of operations relative to total output, Bulog is a large parastatal organization by any criteria. Bulog owns and operates roughly 3.5 million tons of rice warehousing capacity spread across Indonesia. Its storage infrastructure comprises some 1400 ware- houses, 94 district offices, 27 provincial offices, and a large headquarters in the capital city, Jakarta. Annual stock turnover varies between 2.0 and 3.5 million tons. Overhead costs are substantial, and on a unit basis could not be covered by the trading margins generated through the purchase of rice at peak harvest and its market sale later in the year.6

Indonesia has experienced high rates of economic growth and considerable gains in income per capita over the past 15 years. The average GDP growth rate in the period 1980-90 was 5.5%, and per capita income rose in real terms by 40% during the 1980s.’ One consequence of this is that rice has been a declining proportion of average household consumption expenditure, falling from over 30% in the mid-1970s to under 10% at the start of the 1990s.” Indonesia has also experienced a vigorous climate of deregulation since the mid-1980s.

These circumstances mean that despite the relative success of its price stabilization mandate Bulog confronts pressures, especially from the major external donors to Indonesia, to reduce the scale of its operations and its cost to central government. However, if less reliance is to be placed on state intervention to stabilize rice prices, more needs to be known about the mode of operation of the private rice trade which

‘World Bank, World Development Report 1992: Development and the Environment,

corresponds to 94% of the rice market. It- was in pursuit of this

Oxford University Press, New York, 1992. knowledge that the rice marketing study described here was carried out.

*These figures refer to the weighting of rice In the context of the foregoing, the aims of the rice marketing study in the Consumer Price Index for the periods mentioned. The decline in the

fell into two main categories. The first category was concerned with

average proportion does not mean that the gaining a more complete understanding of the factors in the private rice

rice expenditure share for low-income marketing system influencing seasonal price formation. These factors groups has fallen at the same rate. encompass seasonal patterns of farmer behaviour with respect to the

FOOD POLICY October 1993


‘In the Indonesian context, a similar approach to the study of markets was used in a previous study of soybean marketing. See Y. Hayami, T. Kawagoe and Y. Morooka, ‘Middlemen and peasants: the structure of the Indonesian soybean market’, The Developing Economies, Vol 26, No 1, 1988.

430

harvesting, sales, storage and consumption of rice, as well as the impact of this behaviour on aggregate market supply and seasonal price trends.

The second category of objectives concerned the competitiveness and efficiency with which the private marketing system performs spatial and temporal marketing functions. This involved examining the structure of marketing channels, the choices available to farmers for paddy sales, the behaviour and strategies of traders and millers, and the formation of producer-consumer price margins.

Methodology

A threefold approach was taken towards fulfilling these objectives. The first component was a formal sample survey of market participants conducted at seasonal intervals during calendar year 1990. The second component was informal data gathering based on key informant interviews also undertaken during 1990. The third component was time series analysis of rice prices and margins based on published rice prices for the decade 1980-90. This article mainly describes the sample survey component, although reference is made to the other components of the research where appropriate.

A central feature of the sample survey investigation of rice marketing channels was that it utilized farmers as a starting point for exploring marketing chains, employing a technique of linked interviews.’ This contrasts with marketing studies which begin with traders or millers, or with marketplaces such as village markets or city markets.

Three sample districts were chosen in order to represent, first, a West Java supply area to the capital city, Jakarta, the chief urban food-deficit area in the country; second, a rice surplus area with extensive land trading links, located in East Java; and third, a rice surplus area with sea trading links to other parts of Indonesia, located in Sulawesi, one of the largest but less densely populated islands in the Indonesian archipelago.

For each of these sample survey locations, a linear random sample was taken of 10 villages, with the purpose of ensuring a spatial spread of villages across the sample district. For each village a random sample of 10 farm households was taken. This gave a total of 100 farmers for each survey location, or 300 farmers in the sample survey as a whole.

Traders and millers were interviewed according to the method of linked interviews: each farmer was asked to whom they had made their most recent sale, then each first trader or miller interviewed was asked to whom they had made their most recent sale, then each second trader or miller was asked to whom they had made their most recent sale, and

so on. The same sample of farmers, and the same method of linked

interviews, was undertaken three times, with three-month intervals between each repeat survey, during the calendar year 1990. The purpose was to capture the seasonal changes in rice marketing behaviour which occur in three consecutive agricultural seasons.

Findings of the sample surveys

The results of the sample surveys are summarized here with respect to four main considerations: the first concerns quantity flows and stocks of paddy and milled rice as determined by farmer patterns of decision making; the second concerns the structure of rice marketing channels as


‘@The sample displayed tenure proportions overall of 60% owner-cultivator, 25% sharecrop tenant, 10% sharecrop land- owner, 4% cash rent and 1% other ac- cess. For comparison with land tenure proportions in an upland Javanese village see Y. Morooka and Y. Hayami, ‘Contract choice and enforcement in an agrarian community: agricultural tenancy in upland Java’, Journal of Development Studies, Vol26, No 1, 1989; and Y. Hayami and K. Otsuka, The Economics of Contract Choice, Clarendon Press, Oxford, UK, 1993, Ch 7. “The survey findings are reported in grea- ter detail, including relevant data tables, in Ellis, Trotter and Magrath, op tit, Ref 1. ‘qhere are many factors in the livelihood of the household which determine the proportion of rice sold within a few days of harvest. An increasing amount of evidence supports the idea that rice households have been evolving into multi-activity households for which rice farming is only one amongst a range of income sources. For example, see D.A. Preston, ‘Too busy to farm: under-utilization of farm land in Central Java’, Journal of Development Studies, Vol 26, No 1, 1989.


revealed by the sample marketing chains; the third concerns marketing margins; and the fourth concerns indicators of competitiveness in the

rice marketing system. Interpretation of the discussion which follows is facilitated by refer-

ence to the pattern of rice harvest seasons in Indonesia, a feature to which we return later. The Indonesian agricultural calendar is typically characterized as consisting of three harvest seasons: the first occurs from February to May, the second from June to September, and the third from October to January (called the ‘lean’ season).

Farmers growing modern varieties under irrigated conditions can potentially achieve three successive harvests. However, this is discour- aged by the Indonesian Ministry of Agriculture for rotational and disease control reasons. Therefore most farmers cultivate two rice crops. On Java these are usually first and second season crops, although they may occasionally be first and third season crops for reasons of irrigation scheduling. In Sulawesi the seasonal pattern of rice crops corresponds to the first and third harvest seasons.

Disposal of harvest

With respect to quantity flows and stocks, a first distinction needs to be made between gross harvest and net harvest. Farmers interviewed in the

sample survey typically interpreted total harvest as meaning the net harvest over which they had decision-making control, after deduction of payments in kind such as crop shares to landowners and payments to harvest labour.” For the main rice harvesting season, farmers were found, on average, to sell around 70% of this net harvest within five days of the harvest date. The remaining 30% of the net harvest was stored by the household. Of this about one-third on average was required for household consumption, and two-thirds were utilized for later market sales or for other purposes. Some summary findings concerning sales, consumption and purchases were as follows:”

The average net harvest in the rice marketing study sample was 5.5 tons paddy (main harvest season), of which 3.7 tons were sold immediately after harvest, and 1.8 tons were stored for later sale or home consumption. The proportional quantity sold immediately post-harvest displayed high variation for each location, and within the farmer sample as a whole. This variability was not linked in any systematic way to the level of household variables such as family size, farm size or harvest volume. I2 After the post-harvest sale, farmers tended to make subsequent sales in small lots, always retaining enough for family consumption needs up to the next rice harvest, with a margin to spare for food security in the face of uncertainty.

Farmers were found to keep their stocks in the form of paddy rather than milled rice, meeting household consumption requirements by taking small quantities of paddy (7-10 days’ worth of rice consumption) to a local mill on a regular basis. The average rice consumption of sample survey households was 1.80 kg per day, implying per capita consumption of 0.39 kg per day or 145 kg per year, a figure which is consonant with estimates of national average rice consumption.

FOOD POLICY October 1993 431


Marketing chains

A second category of sample survey results relates to the structure of the marketing system, as revealed from following marketing chains. Unlike the fledgling private food marketing systems gaining ground tentatively in some African countries, private trading in Indonesia is long estab- lished, vigorous and diverse in the size, scope and function of its participants. Sample survey findings emphasized the existence of large numbers of very small operators. These were found to operate mainly outside the framework of formal marketplaces, such as wholesale or retail marketplaces, and instead operated as part of extensive trading networks.

The sample survey identified four broad categories of trader, distin- guished by the types of transaction in which they were engaged at the time of respondent interviews. These were: paddy-paddy traders,

defined as those who bought and sold unmilled rice; paddy-rice traders, who bought unmilled rice, retained ownership while paying for its milling, and sold the milled rice; millers, defined as any trader who owned a mill; and rice-rice traders, who bought and sold only milled rice.

These categories proved useful as preliminary indicators concerning market structure and the functions performed by traders. In practice, variation in mode of operation within each category was substantial, and individual traders were observed to cross the boundaries of several categories at one time, for example selling both paddy and milled rice, or to switch categories from one season to the next. Roughly 40% of all marketing chains followed in the sample surveys included a sequence of one or more paddy-paddy traders, while in the remaining 60% farmers sold directly to paddy-rice traders, millers or state-sponsored cooperatives.”

Trading margins

The real margins earned by traders are highly sensitive to the mill recovery rate from paddy to milled rice, which in turn depends on the quality of the paddy and of the milled output. Sample survey data showed wide variation in sale and purchase prices, and in the mill recovery rate. This picture of variability was confirmed by sup- plementary case study material, which showed that margins for the same trader varied substantially from day to day and that losses on individual transactions were common.

While this variability affects the statistical confidence surrounding sample averages, some significant results concerning margins emerged from the data. First, average gross and net margins differed significantly according to the functional classification of traders already described. Second, there was little difference in average margins between sample survey locations for the same type of traders performing a similar set of

functions. Another relevant finding in this area was the lack of convergence in

marketing chains. In other words, few cases were found of marketing

13The state-sponsored village coopera- chains passing through the same trader at some point along the chain.

tives in Indonesia (known as Kooperasi This lack of convergence confirmed a more general impression, discus-

Unit Desa or KUD) act as one of the sed below, of competition in private rice marketing channels. principal channels by which rice enters the Bulog procurement system, since KUDs

The sample surveys revealed that traders displayed a high degree of

receive a small margin above private trad- flexibility in mode of operation, according to short-term changes in

ers for delivery to Bulog. margins for different activities. Traders were found to seek out new

432 FOOD POLICY October 1993


‘*B. Harriss, ‘There is method in my mad- ness: or is it vice versa? Measuring agricultural market performance’, food Re- search lnstitufe Studies, Vol XVII, No 2, 1979. IgThe pattern is derived from the monthly percentage of total area harvested, aver- aged for the four years 198689, and applied to the net production figure of 26.5 million tons. The assumption of steady- state monthly consumption is made for illustrative convenience. Data sources are Indonesia, Biro Pusat Statistik (Central Bureau of Statistics), Survei Pertanian: Prociuksi Tanaman Padi dan Palawija di Jawa, BPS, Jakarta, annual; and Indone- sia, Biro Pusat Statistik (Central Bureau of Statistics), Survei Perfanian: Produksi Tanaman Padi dan Palawija di Indonesia, BPS, Jakarta, annual.

434

Given real interest rates towards the end of the 1980s of 1.52% per month, the implication is that farmers and traders faced negative real returns to the seasonal carryover of rice in this period. The degree of retail price seasonality was observed to decline slightly over the decade, ie seasonal price spreads were lower at the end of the 1980s than at the beginning. The real producer-consumer margin (retail price minus farmgate price) also tended to decline or remain the same during the 1980s. Real price series correlations across different locations, even allowing for their limitations as a measure,‘* suggested a high degree of spatial integration in the Indonesian rice market over this period.

These features tend to confirm the competitive nature of rice marketing in Indonesia revealed by sample survey findings. They also confirm the relative success of Bulog in its seasonal price stabilization role. The existence of negative financial returns to storage is not unusual, and is discussed below in terms of operational reasons for the storage function. It reflects the margin which Bulog permits between its floor and selling prices.

As discussed in the next section, the underlying pressure for large seasonal price swings remains considerable, and this provides the main link between the sample survey findings and the policy issues surrounding the management of the aggregate rice market.

Seasonality in the aggregate rice market

The underlying price policy problem in Indonesia, as in other countries, is the high degree of seasonality of rice harvests, leading to potentially high price instability in the absence of government intervention. It might be thought that the rapid adoption of new rice technology, and the associated rise in multiple cropping, would have reduced the seasonality of rice harvests in Indonesia during the 1970s and 1980s. This has not in fact been the case. Short-season rice varieties have resulted in an earlier start to the main harvest season, beginning in February, with many farmers harvesting a second crop before the end of May. The net impact on harvest seasonality is illustrated in Figure 1, which compares the uneven seasonal pattern of output with an assumed stable monthly level of consumption, utilizing average harvest patterns for 1986-89. l9

Several interesting features can be observed or deduced from the information displayed in Figure 1. First, the pattern of rice production in Indonesia since the introduction of high-yielding varieties (HYV) remains highly seasonal. Nearly 60% of output occurs in the four months from February to May, as against 30% from June to September and 10% from October to January. Second, comparison with the steady-state consumption level suggests that a 6 million ton surplus, equivalent to nearly a quarter of the entire market, arises in the peak harvest season. Third, substantial imbalances between supply and demand occur both in the peak season and in the lean season, creating the potential for a high degree of interseasonal price instability. Fourth, Bulog procurement, at around 1.3 million tons in the peak season, accounts for only 20% of the volume of rice which must be carried over from the surplus to the deficit seasons. Fifth, therefore private agents, either farm households or traders, must be responsible for the other 80% of interseasonal storage and carryover of rice.


‘%ee, for example, A. Bhaduri, ‘Forced commerce and agrarian growth’, World Developmenf, Vol 14, No 2, 1986. A case study of Bangladesh which provides an interesting contrast with Indonesia can be found in B. Crow, ‘Plain tales from the rice trade: indications of vertical integration in foodgrain markets in Bangladesh’, Journal of Peasant Studies, Vol 16, No 2, 1989; and B. Crow, K. Murshid and S. Rashid, ‘Financial structure and prices in a back- ward agrarian market’, Bangladesh De- velopment Sfudies, Vol XIX, No 3, 1991. ‘%ee, for example, W.L. Collier, G. Wiradi and Soentoro, ‘Recent changes in rice harvesting methods: some serious social implications’, Bulletin of lndonesian Eco- nomic Studies, Vol 9, No 2, 1973. 16These results are detailed in B.W. Trot- ter, Applying Price Analysis to Marketing Systems: Methods and Examples from the lndonesian Rice Market, Marketing Series Vol 3, Natural Resources Institute, Chat- ham, UK, 1992. “These price series are published under several different rubrics, for example, by Bulog under the title Laporan Perkemban- gan Harga Eceran Beras ‘Medium’ [Report on the ‘Medium’ Retail Price of Rice], and by the Central Statistical Bureau under the title Harga Beras Eceran Perjenis [Retail Price of Rice by Variety].


marketing channels within which to operate, switch from trading paddy to milled rice, close down, or trade in other commodities, according to the size of margins they were able to obtain at different times and for different functions.

Competition in rice marketing channels

The sample survey findings provided diverse evidence concerning the degree of competition prevalent in marketing channels: wide choice of sales outlets for farmers; diversity of traders with varying functions in the system; competition between them for supplies; and the small margins within which individual traders are often observed to operate.

A particular consideration which the research set out to clarify was the extent to which rice market transactions in Indonesia might be tied, due to credit or debt obligations between buyers and sellers extending over successive transactions. This is a major policy issue in the South Asian literature on foodgrain marketing.14

Farmers in the rice marketing study surveys were asked a number of questions designed to discover the relative freedom of their sales decisions. Very little evidence was found to suggest that farmgate sale transactions were tied in the majority of cases. First, negligible observations were recorded of paddy being used as repayment of debt in kind to moneylenders or shopkeepers. Second, about 60% of the total farmers did not undertake repeat transactions with the same trader. Third, the remaining farmers did not report ‘obligation’ as a significant reason for selling regularly to the same trader. Instead attributes such as familial ties or satisfaction with past transactions were cited as the cause of repeat transactions. Fourth, even though pre-harvest sales of standing paddy in order to obtain cash advances from traders have been widely noted in studies of the Indonesian rice economy,” no such sales were recorded in the rice marketing study sample surveys.

Time series unalysis

A separate component of the rice marketing study was a time series analysis of rice prices covering the period 198C-90.1h The analysis utilized monthly retail price series for rice, collected jointly by Bulog and the Central Statistical Bureau for the purposes of monitoring price trends and the construction of cost of living indices.17

Trends in monthly rice prices can capture the impact of Bulog operations on seasonal price formation. The key feature is the seasonal increase in the retail price which occurs between the peak harvest period and the lean season. Time series price data can also be used to explore other aspects, for example, the spatial transmission of prices and long-run trends in producer-consumer margins. The main findings of the rice marketing study time series analysis were as follows:

For retail prices on Java, adjusted for inflation, seasonal high prices varied between 11% and 20% above seasonal low prices over the period 1980-90, in different locations. The lowest seasonal variation, ie ll%, was observed for East Java, which is the largest rice surplus area where prices might be expected to plummet in the peak harvest season in the absence of intervention. The figures cited in the first point above imply real price increases over the six-month low-to-high period of between 1.4% and 3% per month.



Deficit

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i

..:. :.+ -- I\ Production (net basis)

i

Surplus (+ 6.1)

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Figure 1. Indonesia: seasonal pattern of rice harvests.

Source: F. Ellis, B. Trotter and P. Magrath, Rice Marketing in Indonesia: Methodology, Results and Implications of a Research Study, Natural Resources Institute, Chatham, UK, 1992, p 24.

The results of the rice marketing study sample survey help to interpret these broad observations. From the sales and storage behaviour of farm households, it can be inferred that farmers carry over roughly 2 million tons, or one-third of the peak season surplus, in the form of household stocks. This leaves traders and millers responsible for the remaining 3 million tons, or half, of the interseasonal carryover from the peak season to the deficit reasons.

An important finding of the sample surveys was the predominantly operational, rather than price, reasons for interseasonal storage by farmers and traders. The main motive of farmer storage is to ensure family consumption needs across the cycle of the seasons. The main motives of trader storage are continuity of paddy supply into mills and the regularity of rice supply to customers. The interseasonal carryover by traders is thus mainly rice in process, and extends up to a maximum of three or four months.

Conversely, neither farmers nor traders are strongly motivated to keep stocks of rice other than for the operational reasons specified. Aside from own food security, most factors operating on farmer decision making during the main harvest season encourage the early sale of paddy surplus to own requirements.

One factor already discussed is the pattern of harvests associated with irrigated high-yielding varieties, in which for many farmers the first



2oSee A. Rudra, ‘Non-maximising behaviour of farmers: paddy sales’, Econo- mic and Political Weekly, 17 December 1983, for similar factors observed in an Indian case study. “The economic rationale of crop storage behaviour, including operational motives and price insensitivity, is explored in H. Working, ‘The theory of the price of storage’, American Economic Review, Vol 39, 1948, pp 1254-1262; and in M.J. Brennan, ‘The supply of storage’, American Econo- mic Review, Vol 47, 1958, pp 50-72.

436

harvest occurs early enough for a second harvest to take place within the same seasonal period. Other reasons are associated with farm household decisions and constraints. They include, first, the need of households for cash income after the lean season, second, the limited capacity for on-farm drying of wet paddy, and third, the need for farmers to switch quickly to land preparation and sowing for the next crop.*”

Likewise, traders lack motivation for storage other than for operational purposes. The high cost of borrowing is one; quality deteriora- tion and risk are others.

These considerations suggest that the volume of private inter-seasonal storage may be relatively insensitive to the level of the seasonal price margin. In other words, the seasonal price margin would have to grow very considerably, implying a high degree of seasonal price instability, if the private sector were to undertake fully the intertemporal storage function currently mediated by the presence of Bulog in the rice market .2’

Conclusions and wider lessons

Two rather different categories of lessons can be drawn from this study of the Indonesian rice market. The first concerns the methodology used to investigate the working of private foodgrain markets. The second concerns the policy context, and the implications of the research results for policy choices.

When considering the transfer of either or both of these components to other settings, it should be borne in mind that the Indonesian economy has been growing rapidly for several decades. During this period, market infrastructures have become relatively highly developed, transport has become everywhere available and relatively inexpensive, and information flows have become excellent. Such conditions are not always present in countries either deciding, or being pressured, to experiment with the liberalization of foodgrain markets.

Nevertheless some wider lessons may be pertinent. First, with respect to methods of investigation into private rice markets, the approach described in this article generally worked well. The key features were the utilization of farm households as the chief source of information on the working of private markets, and the seasonal dimension of the research.

With good reason, farmers tend to be more forthcoming and more accurate in the information they give on sales and prices than do traders. Traders, also with good reason, tend to falsify data related to the margins within which they operate. Therefore the following of marketing chains, and interviewing of traders, is more useful for learning about market structure and marketing channels than for accuracy of prices and

margins. Marketing studies which depend on interviews with traders are likely

to obtain a distorted picture concerning the choices confronting farmers and the prices they receive. Farmers, on the other hand, certainly know how the marketing system works for them. The survey described in this article yielded a considerable amount of policy-relevant information on farm household behaviour with respect to rice sales, stocks, consumption, purchases and prices at the farmgate level.

A further merit of the method was that farmers were interviewed as soon as possible after each harvest, thus minimizing the problems of



recall which occur with many farm household surveys. Of course, not all aspects of the method worked as planned. One

defect was the inability of some farmers to identify to whom they had sold their output, thus resulting in a reduced ability of enumerators to follow marketing chains. Another problem was that marketing chains could only be followed up to a limited distance from the point of origin. The method proved inadequate to the demands of investigating longer- distance trade, and other sources of information had to be utilized in order to examine price trends and price formation up to the retail level in nationwide terms.

Second, the policy context of the research has some wider relevance. The Indonesian case demonstrates that it is not necessary for state intervention to be monolithic in order for it to serve a useful food security and price stabilization function. Bulog achieves an ostensibly difficult price stabilization role, in a very large country, by intervening in quantity terms only at the margin of fluctuations in the volume of peak season harvests. When peak season harvests are unusually high, Bulog procurement may reach 7-8% of total output, and when low, this proportion can fall to as little as 34%.

In most countries both the location and timing of large-scale market surpluses are well defined. State intervention aimed at defending farmers from seasonal price falls only needs to be concerned with these specific locations and times; it does not need to be permanent, countrywide, and thus burdened with vast overhead costs.

In the Indonesian case, Bulog closely monitors price trends and harvest predictions in the specific areas where problems are likely to arise. When it becomes evident that a crisis may occur, a purchasing team is mobilized and sent into that area to undertake state buying operations. Up to a point, the knowledge that government buying will take place at a widely publicized floor price is sufficient in itself for private trade to be conducted at that price. Naturally, this only works if there is reliability in the government response when downward pressure on prices begins to occur.

As stated at the beginning of this article, the Indonesian market intervention system is not perfect. Like parastatals the world over, Bulog is too big, employs too many unproductive officials, and posses- ses a vastly too large storage infrastructure. The policy implications for Indonesia itself are therefore the same as those suggested more widely: price stabilization may be a valid objective, but it can be achieved by using a smaller and more focused infrastructural scale of operations than is currently used for this purpose.

Under the current climate of deregulation the advocacy of some residual government ability to influence the price movements of staple foods may appear out of step with the times. However, a plausible interpretation of the Indonesian case study is that the competitiveness observed in private sector trade exists precisely due to the stabilizing presence of Bulog in the market. Given a more unstable and high-risk free market, trader strategies would change in order either to reduce risk or to diminish its adverse effects on the prospects for trader survival. Such strategies might include the formation of alliances between traders, increased concentration and monopoly at local levels, efforts to tie farmers and smaller traders into contractual obligations (eg through debt tying), and more speculative behaviour concerning grain stocks. In other words, the absence of Bulog from the market might



create precisely those unwanted private trading conditions which are the main reasons for government intervention in the first instance.

In conclusion, the policy lessons to be derived from the Indonesian case concern how a limited degree of state intervention may help rather than hinder the development of a viable and competitive private marketing system. High levels of price instability and high levels of risk may be little less inhibiting for the spread of private trade than the monolothic presence of state agencies which preceded deregulation in many countries. The methods by which Bulog stabilizes prices - excellent price monitoring, relatively quick responses to changing local conditions, and relative reliability of its purchase operations in defence of the floor price - exemplify a number of features which are likely to be pertinent for the kind of diminished public roles in food markets which are under discussion in many other developing countries.

438 FOOD POLICY October 1993

Documents

Private trade and public role in staple food marketing: The case of rice in Indonesia