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Buletin Penelitian Hortikultura, Tahun 1994, Volume XXVI, Nomor (3)

THE FARM-RETAIL PRICE SPREAD FOR SOME SELECTED VEGETABLES

Witono Adiyoga

ABSTRACT

Adiyoga, W. 1994. Penyebaran harga dari tingkat petani ke tingkat pengecer untuk beberapa

jenis komoditi sayuran. Pengkajian marjin tataniaga untuk sepuluh jenis sayuran (kentang, tomat,

kubis, bawang merah, cabai merah, seledri, buncis, bawang daun, siampo dan wortel) dilakukan

berdasarkan data harga bulanan (Januari 1981-Desember 1990) di pasar tingkat petani dan pasar

tingkat eceran. Hasil analisis menunjukkan bahwa secara umum margin tataniaga terus meningkat dari

tahun ke tahun. Rata-rata marjin tataniaga yang tertinggi tercatat untuk cabai merah dan yang

terendah adalah untuk kubis. Perbedaan marjin tataniaga antar komoditi tampaknya dipengaruhi oleh

perbedaan karakteristik dari komoditi yang bersangkutan. Persamaan regresi yang menghubungkan

harga di tingkat petani dan harga di tingkat eceran memberikan indikasi bahwa jenis penyebaran harga

untuk kentang, tomat, buncis dan bawang merah adalah marjin absolut yang tetap (fixed absolute

margin). Sementara itu, besaran elastisitas transmisi harga untuk kubis, buncis, seledri, cabai merah,

bawang daun, wortel dan bawang merah mengindikasikan bahwa perubahan relatif harga komoditi

tersebut di tingkat konsumen tidak akan melebihi perubahan harga relatif di tingkat produsen. Hal ini

menunjukkan lebih tingginya elastisitas permintaan ketujuh jenis sayuran tersebut di tingkat eceran

dibandingkan dengan di tingkat petani.

Prices play an important role in coordinating production and consumption. Prices, especially

relative prices, influence human behavior (Tomek & Robinson, 1985). For example, consumers do

respond to changes in the price of beef relative to the prices of fish or chicken. Farmers, likewise, have

demonstrated repeatedly that they will produce more onions, potatoes, cabbage or tomatoes in

response to relatively favorable prices. In theory, all prices are interrelated, though in practice some

prices are essentially independent. An understanding of relationships among prices is important both

for private and public decision making.

Particular attention has been devoted to the integrating role of price, especially to the

relationship between prices at the farm level and those at the retail level. Among the questions that

have been frequently sought to be answered are whether or not changes in farm prices are promptly

and fully reflected in retail market, whether marketing margins are too large, whether marketing

margins remain constant or vary per unit sold, whether there are differences in marketing margins

among products, and whether an increase in marketing costs results in a higher consumer price or a

lower farm price, or both. These questions basically reflect the concerns of producers and consumers

about the size, changes, and the incidence of changes in marketing margin (Tomek & Robinson,

1977).

The farm-retail price spread which is defined as the difference between farm price (price

received by farmers) and retail price (price paid by consumers) is also referred to as marketing margin.

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George and King (1971) classify the farm-retail price spread as systematic and nonsystematic.

Systematic methods of setting margin include: (a) fixed absolute margin --adding a specified amount to

the farm level price to obtain the retail price, (b) fixed percentage margin -- assuming that the margin is

a percentage of prices at the farm level or at the retail level, and (c) cost per pound margin -- adding an

amount which varies with the initial purchase price. Meanwhile, nonsystematic methods include: (a)

following closely the price of near or strong competitors by shading under or padding over the price set

by a competitor, and (b) short run profit maximization. Guidelines in determining the relationship

between price spreads and prices at different levels of marketing system can be provided by these

pricing practices. In an analysis of this nature, it is possible to incorporate only the "systematic" margin

policies.

The objectives of this study were to examine the relationships between the farm and retail

prices, and to assess the elasticity of price transmission of some selected vegetables. METHODOLOGY

Monthly farm-gate and retail prices data for ten commodities (green onions, celeries,

cabbages, potatoes, tomatoes, shallots, hot peppers, carrots, green beans, and Chinese cabbages)

were obtained from the "Vademekum Pemasaran" published by the "Direktorat Bina Usaha Tani dan

Pengolahan Hasil, Dirjentan Tanaman Pangan". The data mostly covered the period of January 1981

to December 1990.

A common approach to modeling price spread behavior is to assume the price spread is a

combination of both percentage and constant absolute amount (Waugh, 1964; George and King,

1971). Some studies indicate that many wholesalers use a constant percentage markup and retailers

appear to make greater use of a fixed-absolute markup. Thus, the assumption that the price spread is

neither constant percentage nor constant absolute amount, but somewhere in between the two is quite

reasonable (Dahl & Hammond, 1977).

In this study, the margins are specified as a linear function of retail prices.

(1) Mj = αj + βjPrj

where j stands for the jth commodity. If Pr and Pf denote the retail and farm level prices,

(2) Prj = Pfj + Mj

From (1) and (2),

Prj = Pfj + αj + βjPr

Therefore,

(3) Pfj = - αj + (1 - βj)Prj

Pfj = aj + bjPrj

where aj = - αj and (1 - βj) = bj

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Equation (1), (2), and (3) describe the relationship between price spreads and prices at different levels

of marketing system.

Elasticity of price transmission is the ratio of relative change in retail price to the relative

change in the farm-level price. If the elasticity for the jth commodity is denoted as

∂Prj Pfj

(4) µj = ──── ────

∂Pfj Prj

From (3),

(5) (1 - βj)Prj = αj + Pfj

Therefore,

1

(6) Prj = ────── (αj + Pfj)

(1 - βj)

From (6)

∂Prj 1

(7) ───── = ─────

∂Pfj (1 - βj)

Substituting (7) in (4), the elasticity of price transmission is obtained as

1 Pfj

(8) µj = ───── ─────

(1 - βj) Prj

RESULTS AND DISCUSSION

Table 1 indicates that for most commodities, the increasing margin was the most probable.

The data did not show that changes in marketing margin were always sequentially increasing. When

the marketing margins were regressed on time, however, they yielded straight lines that reflected

increasing margin over time for all commodities. As suggested by Kohls and Uhl (1980), cost inflation

and consumer demand for marketing services hold the key to the increase of marketing margin. Most

marketing costs are influenced by general economic forces outside the food system, especially labor,

transportation, packaging, and energy costs. To some extent, the results suggest that increasing input

costs for the vegetables marketing system had not been offset by technological improvements. These

improvements may increase handling efficiency at all levels of vegetables marketing system. Without

technological improvements in the near future, one could expect much greater marketing margins than

have actually occurred.

The results also indicated that marketing margins varied for different commodities. The highest

and lowest marketing margins were recorded for hot peppers and cabbages, respectively. By and

large, the differences in marketing margin may reflect product characteristics which affect the

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complexity of marketing different farm products. These product characteristics include: (a) post-harvest

and marketing services, (b) perishability, (c) bulkiness, and (d) extreme seasonality of production. For

example, the marketing margin for tomatoes was higher than that of potatoes because tomatoes were

considered more perishable than potatoes. Requiring more post-harvest treatments, marketing shallots

was more costly than marketing green beans. However, a caution is advised in interpreting the

differences in marketing margin. The effects of product characteristics on marketing margin may not

always apply because of the existence of market imperfection.

Table 1 Farm-Retail Price Spread for Some Selected Vegetables, 1981-1990 (Penyebaran Harga Beberapa Jenis

Sayuran Dari Tingkat Petani ke Tingkat Eceran, 1981-1990).

Commodities 81 82 83 84 85 86 87 88 89 90 Average

Celeries

Cabbages

Green Onions

Potatoes

Tomatoes

Carrots

Green Beans

Chinese Cabbage

Shallots

Hot Peppers

98

21

52

28

47

-

58

25

-

-

89

23

27

45

58

38

73

25

-

148

121

33

56

31

57

54

77

31

123

142

93

32

73

25

55

101

51

31

117

175

101

34

74

29

80

78

69

38

143

167

195

39

70

29

91

62

79

49

168

161

139

41

55

33

67

67

94

76

190

234

169

49

91

74

190

92

107

80

192

243

174

36

79

44

153

104

128

74

218

307

223

54

92

56

68

168

124

91

245

270

140

36

67

39

87

85

86

52

175

205

Table 2 shows that six out of ten commodities had both slope and intercept significantly different from

zero. Those vegetables were celeries, cabbages, green onions, carrots, Chinese cabbage, and hot

peppers. Meanwhile, the remaining four commodities: green beans, potatoes, tomatoes, and shallots,

had intercepts that were not significantly different from zero. The non-significance of aj implied that αj

was non-significant. Therefore, for these four commodities, the hypothesis that margin was a linear

function of retail prices was not different from a hypothesis that margin was a fixed proportion of retail

prices. Previous study suggested that normally, fruits and vegetables are purchased in-elastically with

respect to their prices (Meulenberg, 1982). From the marketing agents' perspective, this implies that

fixed margins are most suitable in maintaining gross margin return, if the price variability is quite high.

It should be noted though that the type of margin varies during the course of season (Seeba, 1984).

Thus, even though the marketing agents operate in markets in which they may have some

discretionary authority in setting price, this does not mean that they are immune from demand and

supply conditions in the market.

Using the average farm-gate and retail prices, the elasticity of transmission for all commodities

included in this analysis was calculated. Except for potatoes, tomatoes, and Chinese cabbage, the

elasticities for the other commodities were less than one. The implication of an elasticity of price

transmission of less than one is that if producers' price rises while quantity processed and such other

factors as prices of inputs by processors remain fixed, the relative change in consumers' price will not

exceed the relative change in producers' price (assuming the effective competition holds). Thus, for

those seven commodities, this suggests that their elasticity of demand at the farm level is lower than

their elasticity of demand at the retail level.

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Table 2 Relationship Between Farm Price As A Function Retail Price (Hubungan Harga di Tingkat Petani Sebagai Fungsi

Dari Harga di Tingkat Eceran).

Commodities Monthly Data Intercept Slope R2 Elasticity of

Transmission

Celeries 81-90 - 45.7545*** 0.7267*** 0.73 0.82

Cabbages 81-90 - 7.2436*** 0.7972*** 0.95 0.93

Green Onions 81-90 - 46.9724*** 0.9120*** 0.91 0.78

Potatoes 81-90 4.1575 0.8562*** 0.91 1.02

Tomatoes 81-90 17.6391 0.6499*** 0.55 1.09

Carrots 82-90 - 32.6007** 0.7648*** 0.64 0.81

Green Beans 81-90 - 4.7949 0.6929*** 0.78 0.97

Chi. Cabbages 81-90 11.3192*** 0.3835*** 0.73 1.29

Shallots 83-90 - 28.1368 0.7649*** 0.90 0.94

Hot Peppers 82-90 -101.6634*** 0.9211*** 0.98 0.92

*** Significant at the 1 percent level.

** Significant at the 5 percent level.

CONCLUSIONS

The relationship between prices at the farm and retail levels for the ten commodities being

studied is characterized by an increasing marketing margin over time. The increase in margins can

come from increases in the services being provided by marketing agents and/or from changes in the

general economic forces outside the food system, such as labor, transportation, and energy costs. The

only legitimate concern is whether the services being demanded by consumers are being provided as

efficiently as possible given current technology. If they are, there is little reason to complaint even if

increasing costs and/or more demands on marketing agents' services do push the price spread higher.

Further study on how the changes in marketing margin compare or relate to changes in other

measures of performance needs to be undertaken to confirm this argument.

The results also indicate that fixed or absolute marketing margin is likely to occur in the

marketing of potatoes, tomatoes, green beans, and shallots. Meanwhile, the elasticities of price

transmission for celeries, cabbages, carrots, green beans, green onions, shallots, and hot peppers

suggest that the relative change in consumers' price for those commodities will not exceed the relative

change in producers' price. This may imply that their elasticities of demand at the retail level are higher

than their elasticities of demand at the farm level.

In generalizing about the size of marketing margin or differences in the farm-retail price spread

among different farm products over time, care must be exercised. The spread is basically a reflection of

values at different levels of marketing system. Thus, based on the underlined framework, it is not

analytically sound to draw conclusions about inefficiency, excessive profit levels, profiteering or

exploitation just because the marketing margin is increasing over time.

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REFERENCES

Dahl, D. C. and Hammond, J. W. 1977. Market and Price Analysis: The Agricultural Industries.

McGraw-Hill Inc., New York.

Direktorat Bina Usaha Tani. 1991. Vademekum Pemasaran. Dirjen Pertanian Tanaman Pangan,

Jakarta.

George, P. S. and King, G. A. 1971. Consumer Demand for Food Commodities in the United States

with Projections for 1980. Giannini Foundation Monograph Number 26, University of

California, Berkeley.

Kohls, R. L. and Uhl, J. N. 1980. Marketing of Agricultural Products. Macmillan Publishing Co., Inc.,

New York.

Meulenberg, M. T. G. 1982. International Comparison of Consumer Demand for Fruits and Vegetables.

Proceeding of the 21st International Horticultural Congress, Wageningen.

Seeba, H. G. 1984. Marketing Margins for Fruits and Vegetables in Germany - Seasonal Aspects of

Margin Behavior. Acta Horticulturae, No. 155, The Hague, Netherlands.

Tomek, W. G. and Robinson, K. L. 1977. Agricultural Price Analysis and Outlook. In Martin, L. R. (Ed.).

A Survey of Agricultural Economics Literature. Volume 1. University of Minnesota Press,

Minneapolis.

Tomek, W. G. and Robinson, K. L. 1985. Agricultural Product Prices. Cornell University Press, Ithaca,

New York.

Waugh, F. V. 1964. Demand and Price Analysis: Some Examples from Agriculture. U. S. Department

of Agriculture Tech. Bull. No. 1316, Washington DC.