FARMERS TERMS OF TRADE ANALYSIS AS PREPARATION OF NATIONAL MIDTERM DEVELOPMENT PLANNING IN COOPERATION

Transcription

1 FARMERS TERMS OF TRADE ANALYSIS AS PREPARATION OF NATIONAL MIDTERM DEVELOPMENT PLANNING IN COOPERATION NATIONAL DEVELOPMENT PLANNING AGENCY/BAPPENAS JAPAN INTERNATIONAL COOPERATION AGENCY (JICA) 13

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3 FARMER TERMS OF TRADE ANALYSIS AS A PREPARATION OF NATIONAL MIDTERM DEVELOPMENT PLANNING IN COOPERATION NATIONAL DEVELOPMENT PLANNING AGENCY/BAPPENAS JAPAN INTERNATIONAL COOPERATION AGENCY (JICA) 13 i

4 PREFACE National development is basically intended to improve people welfare therefore social welfare is a primary goal in every development stages. As an agricultural country there are a large number of people involved in agriculture/agribusiness. This is the reason why the welfares of the agriculture and especially the farmers welfare are very important. One of the measurements that can be used to assess the farmers welfare level is by using the Farmer Terms of Trade. Advanced knowledge about the conduct of the farmer terms of trade developmental impact and identified the factors of exchange rate will be useful for the development policies and for the improvement of the future development programs. This report is made after doing an initiative study conduct by the National Development Planning Agency and JICA. As a team we would like to send our gratitude for your trust. It is expected that the results of this study will provide comprehensive illustration on the Farmer Terms of Trade in designing policies for the improvement of the welfare for farmers. This report however is far from perfection. Inputs therefore are mostly welcome. Team Jakarta 13 September 13 i

5 SUMMARY 1) National development is basically intended to improve people welfare therefore social welfare is a primary goal in every development stages. As an agricultural country there is a large number of people involved in agriculture/agribusiness. This is the reason why the welfare of the agriculture and especially the farmer s welfare are very important. ) One of the measurements that can be used to assess the farmer s welfare level is by using the Farmer Terms of Trade. Advanced knowledge about the conduct of the farmer terms of trade developmental impact and identified the factors of exchange rate will be useful for the development policies and for the improvement of the future development programs. 3) Generally this study is aimed to at formulate a policies that could improve farmers welfare as a basic material for Agricultural Mid-term National Development Planning The research goals are: (1) Analyzing the behavior of Indonesian Farmer Terms of Trade() Analyzing the factors that influence the Farmers Term of Trade and (3) Formulate policies that can be used to improve the Farmer Terms of Trade/farmers welfare. Agricultural Household Performances 4) Based on Agricultural census in 1993 and 3 there was an increase number in agricultural household performances from 51 million to 484 million (113%). The biggest increase was occurred in horticulture household from 486 million to 845 million (7993%) followed by plantation household that increased to 137% crops household increased to 386% and farm household increased to 89%. 5) Crops household is dominated by rice (569%) followed by corn (58%) and cassava (1833%). Another household commodityisin relatively in small number less than 5 percent. Whereas the prominent horticulturist household are rubber (18.36%) coconut (16.1%) and coffee (15.86%). Meanwhile from 5.63 million cattle nearly half of it is cows (45.65%) goats (1.6%) chickens (1.88%) and the rest is other livestock such as pigs horses ducks and others. 6) Indonesian farming household is dominated by smallholder farmer most of them did not own a land. Agricultural census in 3 showed that small scale household (less than 5 ha) number is increasing from 163 million in 1993 to 143 million in 3 (3195 percent). FTT Behaviour 7) The Farmer Terms of Trade (FTT) index is calculated from the ratio of prices received by farmers and prices paid by farmers. If the PR rate is higher than PP rate the FTT value will increase and otherwise. The FTT movement identified the welfare improvement. 8) In January 8 to May 13 FTT movement show an increase with marginal rate 38/month. This increase is caused by PR rate increase (about 33/month) is higher that PP rate (18/month). ii

6 9) PR is composed by price index elements of food crops sub-sector horticulture susector livestock sub-sector and fisheries sub-sector. PR increase is caused by a contribution from food crops sub-sector with the rate of 73/month and horticulture sub-sector (64/month) followed by the fisheries sub-sector (18/month) plantation sub-sector (169/month) and livestock sub-sector (155/month). 1) Further research showed that the food crops PR increase is caused by the second crops price rate is increasing (73/month). The rate is higher than the rice price with the rate of 33/month. While the horticulture sub-sector contributed in the fruit price increase (6/month). The fruit price is higher than the vegetables price (6/month). In livestock sub-sector the largest contribution is from the small cattle commodities (13/month) Further research showed that the food crops PR increase is caused by the second crops price rate is increasing (73/month). The rate is higher than the rice price with the rate of 33/month. While the horticulture sub-sector contributed in the fruit price increase (6/month). The fruit price is higher than the vegetables price (6/month). In livestock sub-sector the largest contribution is from the small cattle commodities (13/month) Further research showed that price increase accepted by farmer sub-sector of comestible plant caused by stock s price (with the rate 73/month) far more from increase of paddy s price (with the rate 33/month). While on the holticulture sub-sector the increase of fruit s price contributes a relatively higher (with the rate 6/month) compared to the increase of vegetable s price (with the rate 6/month). The plantation sub sector is not grouped according to the detailed commodity s group so that means those component of plantation sub sector is also belongs to group of civil s plantation. On the livestock sub sector the biggest contribution accepted by the farmer from the price increase of commodity from the group of the small breed (with the rate 13/month) followed by livestock s production (with the rate 178/month) poultry (with the rate 171/month) and the group of large breed (with the rate 1/month). While on the fishery sub sector the biggest contribution that the fisherman accept was from the increase from fishing product (with the rate 188/month) the rate of fish cultivation product is 138/month. 11) Index PP compiled from the factor of purchased price of Household Consumption Goods (HCG) dan the purchased price of production factor and capital goods. On the period of January 8 up until May 13 PP increased with the rate 18/month and those raised caused especially by the contribution from the purchased of HCG (with the rate /month) while the expense of production cost dan additional capital goods increased with the rate 117/month. 1) Further research showed that the main component that increasing HCG expense is the consumption of groceries (with the rate 38/month) followed by the consumption of ready food (wuth the rate 14/month) garment (with the rate 195/month) housing (with the rate 193/month) health (with the rate 13/month) educationrecreation and sport (with the rate 15/month) also transportation and communication (with the rate 35/month). While on the component that compiled the production cost and additional capital goods the biggest contribution was from the raise of capital cost (with the rate 14/month) followed by seed s price (with the iii

7 rate 13/month) labour s wages (with the rate 119/month) medicine-fertilizers (with the rate 119/month)land lease (with the rate 15/month) and transportation (with the rate 73/month). Factors and Policy that give influence to FTT 13) From the forming formula of FTT can be decrease the coefficient magnitude from the raise of marginal and elasticity of each component that compiled FTT. The magnitude of marginal value and the elasticity of FTT showed how much influence given from prices changes for the FTT. The influence from the change of PR s price towards FTT marked positive dan the influence from the change of PP s price towards FTT marked negative. 14) Between five sub sector that compiled PR the elasticity value from the price of the commodity of staple food sub sector towards FTT showed the biggest value (5) followed by horticulture sub sector (19) plantation (18) livestock (16) and fishery (13). The elasticity value from the price of staple food sub sector towards FTT with the rate 5 means that the raised of those sub sector s prices rated 1 percent will raising the FTT by 5 percent as it follows. While from the expense s factors that compiled the PP the elasticity value from the price of HCG rated -8 higher from the elasticity value from the price of additional capital goods rated ) Further research showed that on the staple foods sub sector the elasticity price of paddy towards FTT rated 8 higher than the elasticity price of crops rated 5. On the horticulture sub sector the elasticity price of vegetable and fruit towards FTT showed the same rate each of 18. The elasticity price of plantation commodity rated 18. While on the livestock sub sector the highest elasticity value was from the price of large breeds (1) followed by the price of smaller breeds (8) livestock s production (7) and poultry (6). On the fishery sub sector the elasticity value from the price of fishing rated 8 and from the price of fish cultivation rated 6. 16) From the component that compiled PPon the group of HCG the elasticity value from the price of groceries showed the highest rate (-5) followed by ready food product (-5) housing (-1) transportation and communication (-5) garments (-4) and health also education each with elasticity of -3. On the group of production facilities and capital goods the highest elasticity value was found on the elasticity of wages towards the FTT rated -8 followed by the elasticity value of fertilizersmedicine (-5) transportation (-5) lease (-3) additional capital goods (-3) and the elasticity from the seed s price (-). 17) Index of Household Consumption Goods (HCG) is index of village s inflation. Which means the analytical results showed that the village s inflation give a big contribution to the decreasing of FTT (elasticity -8) and the biggest factor contributes to the village s inflation was groceries (elasticity -5) followed by ready food (-5) also housing transportation communication garments health and education. In order to control the village s inflation strategic steps that can be done is controlling the PR because PR is strongly related to prices and also will affect on the stability of FTT. A stabile FTT means the raise of the price will happen proportionally between PR and PP. iv

8 Price setting policy that makes the farmers eager to do the work is needed since it will affect on the increase of FTT and controlled the inflation. 18) There is a strong relation between HCG s price especially groceries from the side of PR especially the price of staple food commodity. The elasticity value of PR towards HCG and groceries each of 869 and 988; while the elasticity of staple food s PR towards HCG and groceries each of 71 and 81. Which means the PR especially from the price of staple food sub sector will affect on the price of groceries and HCG or the raise of staple food s price in order to raise the FTT also contributes on the raise of the inflation. 19) The affect of fuel s price adjustment towards the FTT that happens on May 8 and June 13 showed a different influence. The policy that raising the fuel s price along with the condition of the price of agricultural product in domestic and international markets are increasing rapidly so the raise of the transportation cost and PP caused by the price of commodity product increased causing FTT still showed an improvement. The opposite condition happens on 13 the increase of fuel s price in June 13 causing the price of transportation and PP increased higher than the price of agriculture product that received by the farmers (PR) causing FTT decreased. Exchange Value of Agriculture and Farm Household s Income ) The concept FTT developed based on the use of Indonesian Statistics Bureau Lespeyres index where the behavior is determined by the behavior of FTT only prices. This concept is in line with the concept of FTT as the concept of purchasing power. Nevertheless the concept of purchasing power is not developed fully describe the level of welfare in absolute terms. The concept FTT does not take into account the amount produced and the amount consumed. To further explore the level of welfare of farmers in this study also described the exchange rate of income i.e. the exchange rate and changes in commodity farm income as well as changes in regional consumption patterns. 1) From the analysis of agricultural commodities concluded overall staple food commodity horticulture public plantation and livestock making a profit. Based on the study panel the farm business profit rate tends to increase and the increase is primarily due to higher selling prices compared to the results for the effect of an increase in productivity. This condition occurs primarily in farming crops horticulture and livestock enterprises. On the farm plantations (sugarcane and tobacco cases) had an increase in productivity. ) An increase in production costs associated with the increase in the rental value of land farm labor and production facilities. The increase in production costs occur at a rate greater than the rate of increase in the value of production so that the power exchange or profitability of agricultural commodities tend to decrease. 3) Those in progress development also increased household farm incomes both in the household-based agro-ecosystem wetland with the main commodity crops of rice and plantation crop-based households. The increase in household income was primarily due to increased revenues from off-farm activities (non-agricultural) and income from farming (on-farm). The increase in income from non-agricultural (non-farm) in line with the opening of non-agricultural employment. Tug to work off the farm with better v

9 facilities led to jobs as farm laborers decreased and this is indicated by a decrease in the proportion of income from farm labour decreased in almost all sample sites. The situation shows the transformation of the rural economy and an increase in revenue with the role of non-farm income greater standard of living showed improvement / public welfare. 4) Other indicators that reflect the variability welfare society can be judged from the structure of household expenditures. There are indications the higher income / welfare decreasing the proportion of expenditure on food while the proportion for non-food consumer goods is likely to increase. Data of -11 showed the magnitude. The proportion of household expenditure on food declined from percent to percent (or a decrease of 1.54 percent / year) while the proportion for non-food increased from percent to 5.55 percent an increase of.17 percent / year. The macro magnitude above is also supported by primary research data. The proportion of expenditure relative to most major groceries but tended to decline with increasing income. While the proportion of expenditure on food housing education recreation and transportation-communications-show regional disparities. Farmers Welfare Improvement Policy 5) The concept FTT as an indicator of well-being refers to the ability of farmers' purchasing power i.e. the ability of the income received by farmers to meet and repair consumption needs. In line with the increased purchasing power of farmers associated with two important aspects of the policy namely: First the policy to increase the amount of farm household income and second the policy wherever possible to reduce the cost / expense of farming households. 6) The in progress development has increased the household income of farmers. Increased farm household income and income from farming (on-farm) still showed scattered role but a role in the development of non-farm income showed an increasing proportion. Increased role of non-farm income (non-farm) associated with the interaction of the opening of pull factors in non-agricultural employment opportunities and the presence of a major motivating factor in agricultural activities. Income from farming judged not to meet the demanding needs of the household. In the financial analysis of agricultural commodity farm produce adequate profit levels but with small scale farming agriculture income level can not meet the demanding needs of the household. 7) Increased employment outside the agricultural sector has a positive impact on employment and diversification of farm household income. The opening of employment opportunities in agriculture also means a reduction in the burden of labor in agriculture (farming) and this positive impact in improving productivity agricultural work. With the reduction in the burden of agricultural labor made possible the application of more advanced technology is relatively more capital intensive as in the application of Alsintan. For the development of non-agricultural sector needs to be encouraged. 8) The increase in the value of farm production occurs mainly due to the increase in selling prices of factors of production are rising higher than the increase in productivity. Increased farmer selling price (PR) can indicate a scarcity of production. The existence of a trade-off between production / supply the price at the farm level as well as inflation. Necessary price adjustment policy will stimulate farmers to improve the welfare of farmers (FTT) and control inflation. vi

10 9) The results of the study also suggests a role in increasing the productivity of farmers' income is still relatively low. In view of the positive this means that there are still great opportunities increase in farmers' income through increased farm productivity. Increasing farm productivity through improved ways how to do cultivation production and technology implementation post-harvest technologies to reduce yield loss. Increased productivity will also increase the profitability of agricultural commodities to the value of land lease wages of farm labor and production facilities. Currently farm profitability declined due to a higher increase of the price / cost of the rental value of land farm labor and production facilities. 3) With the limitations experienced by small-scale farmers to improve farmers' access to farm services should be supported by government subsidies of inputs ( seeds fertilizers pesticides ) subsidized loans and assurance market and selling price of the product. All these times production input subsidy policy has been taken by the government through the provision of assistance and subsidies the price of seed fertilizer price subsidies pesticides and loan interest subsidies. Through a subsidy mechanism is also a medium in the transfer of new technologies. With the basic conditions of farm scale ( scale ownership ) of small -scale farming households the pattern of farming farmers need to be done through the development of integrated farming approach by maximizing the utilization of limited land. With integrated farming pattern will reduce the risk of failure due to the production of a particular plant. Development of integrated farming pattern is also considered strategic as a precaution anomalous climatic conditions increasingly difficult to predict. 31) The basic problem of improving the welfare of farmers sourced from small scale ownership patterns. Two important aspects related to the farmers' access to land namely: (a) the availability of agricultural land associated with a reduction in productive land due to land conversion degradation of land resources water and environment and (b) the pattern of land ownership and cultivation leads to the increasing small farmers and sharecroppers and absentee land. 3) Another aspect related to the production and improvement of farmers' income is the provision of infrastructure. Infrastructure such as roads irrigation and drainage electricity farm road and a telecommunications that is needed in the development of agribusiness. Limitations of agricultural infrastructure is often an obstacle for the development of agribusiness. The application of technological innovation is often hampered by the unavailability of infrastructure provision of production inputs information or infrastructure network marketing results. Policy of infrastructure not only necessary to support existing agribusiness but also stimulates the growth of new businesses are required in the system development and agribusiness. 33) Another aspect of the increased purchasing power of farmers is the reduction in household expenditure. There is a negative relationship between the expenditure of farmers against FTT so that efforts to increase FTT can be done through a decrease in the price / cost of PP elements which include the prices of products consumed (which includes food products food products garments cost housing costs education costs the cost of health care transportation and communication costs) and price / cost of vii

11 production inputs and capital goods (which include price / cost of the purchase of seeds fertilizer-medicine land lease transportation and the addition of capital goods. 34) In order to increase the welfare of the farmers and poverty alleviation the government has done a few steps in the same direction with the suppression of PP whether in relation to the price suppression or groceries price. In relation to reducing the burden of HCG the government has done intervention such as: (a) rice aid to the poor (b) suppression on education cost through allowance 9 Years Compulsory Education Program and School s Operational Aid (c) suppression on health cost in the form of public health insurance penekanan biaya kesehatan dalam bentuk Jaminan Kesehatan masuarakat (Jamkesmas) jaminan kesehatan accident insurance old age insurance pension labor guarantees and death benefits (d) low-cost housing programs low-cost public transport clean water and electricity and others. In relation with the reduction of production costs the government has to subsidize production facilities for seed and fertilizer and the interest rate subsidy. That is pro-people policies in order to reduce poverty and improve people's welfare is mostly very relevant in the context of improving the welfare of farmers. FTT s Relevance as an Indicator for Farmer s Welfare 35) The concept FTT as an indicator of the welfare of farmers who developed Indonesian Statistic Bureau is calculated from the ratio of prices received by farmers (PR) to the price paid by farmers (PP). The concept is simply to illustrate purchasing power prices received by farmers to prices / fees paid on goods purchased by farmers. Assuming a production level of farmers produced and consumed by farmers is the concept of purchasing power prices received by farmers to prices / fees paid on goods purchased farmers can describe the purchasing power of the farmers' income expenditure so as to describe the level of welfare of farmers. 36) Indicators FTT built by Indonesian Statistic Bureau has a national and regional analysis unit (province). National FTT is an aggregation of regional and sub-sectors so that the calculation can also disaggregated into the regional (provincial) and NTP sub-sector. Thus in addition to known indicators of national well-being can also be known to farmers and farmer welfare levels comparable between the provincial and regional indicators of well-being of farmers across sub-sectors. Disaggregation can also be done with more detail of each of its constituent components such as the fertilizer NT Paddy the FTT of vegetables towards land lease the FTT of poultry on wages and so on. Exchange rate index of the constituent components of the FTT is an important parameter of agricultural development policy. 37) However FTT calculation based solely on the ratio of prices does not fully describe the level of welfare in absolute terms. Conditions farming pattern of agricultural production systems is seasonal ( harvest big harvest drought ) and the structure is not an efficient trading system that cause an increase in the index of prices received by farmers have not necessarily enjoyed by farmers so that the increase in the FTT does not necessarily mean an increase in income / welfare of farmers. On the other hand assuming that the quantity produced by farmers is also significant in the calculation of FTT does not include elements of the construction progress especially technological improvement factor / productivity. With some of the deficiencies that exist in the calculation for the FTT The improvement of FTT s calculation should be considered viii

12 especially the one which closer to the measurement of well-being by incorporating elements of production in its calculations so that the NTP is defined as the value of production index value towards expenditure. 38) In another part of the compilation of the FTT still has shortcomings among others; within the scope / definition of "farmer" has not fully accommodate all the business of agricultural commodities such as medicinal plants and ornamental plants in the horticultural sub-sector and sub-sector that compiled public plantations have not been specified. 39) The existing deficiencies in the calculation FTT requires consideration to enhance the tally closer to welfare measurement by incorporating elements of production in its calculations so that the NTP is defined as the index of production value to the index value of the expenditure. ix

13 CONTENT Page PREFACE SUMMARY CONTENT TABLE LIST FIGURE LIST APPENDIX LIST i ii x xii xiv xv I. INTRODUCTION Background Basic Considerations 1.3. Purpose of the Study Output 5 II. LITERATURE REVIEW 6.1. Farmers Exchange as Farmers Welfare Indicators 6.. Measurement Farmer Terms of Trade (FTT) Prices Received by Farmers (PR)) 1... Prices Paid by Farmers (PP) 1.3. Development Policies in Improving the Welfare of Farmers Agricultural Production Increase Subsidize and Incentive Support Program Trade Policy Provision of Infrastructure Subsidize and Incentive Support Program 17 III. METHODOLOGY 3.1. The Conceptual Framework Effect of Changes in Prices Received by Farmers (PR) Effect of Changes in Prices Paid by Farmers (PB) Farmers Term of Trade Scope of Activity Method Analysis Source of Data 6 IV. AGRICULTURAL FARMER HOUSEHOLDS PERFORMANCE AND WELFARE Farming Household Performance Crops Household Performance Horticultural Household Performance Plantation Household Performances 36 x

14 Livestock Household Performance Farmers Household Welfare Performance 41 Page V. FARMER TERMS OF TRADE BEHAVIOUR FTT Development In Price Received by Farmers (PR) Behaviours PR Behaviors on Food Crops Sub-Sector PR Behaviors on Horticulture Sub-Sector PR behaviors on Plantation Sub-Sector PR behaviors on Fisheries Sub-Sector PR behaviors on Fisheries Sub-Sector Price Paid by Farmers (PP) Index Household Consumption Price Index Production Cost and Additional Capital Goods Index 54 VI. FACTORS AND POLICIES WHICH INFLUENCE FARMERS TERMS OF TRADE (FTT) The Effect of Change in Prices to FTT The Effect of Change in Prices Received by Farmers (PR) The Effect of Change in Prices Paid by Farmers (PP) The Relationship between Inflation and FTT The Impact of Fuel Price Policy to Farmer Terms Of Trade (FTT) The Effect of Increasing Agricultural Production to FTT 6 VII. THE TERMS OF TRADE IN FARM INCOME AND FARM HOUSEHOLD The Terms of Trade in Farm Income The Terms of Trade in Food Crops Farm The Terms of Trade in Horticulture Farm The Terms of Trade in Plantation The Terms of Trade in Livestock Business Marketing Margin of Farm Commodity The Change in Farmer Household Income The Household Income in Rice Field Agro-Ecosystem Household Income in Agro-Ecosystem Plantation 78 VIII. FTT Relevance and Enhancement Policy of Farmer Welfare FTT Relevance as an Indicator of Farmer Welfare Policy to Improve Farmer Household Welfare Policy of The Farmer s Household Income Policy of Farmer Household Expenditure 9 IX. CONCLUSIONS AND POLICY IMPLICATIONS Conclusions Policy Implications 95 LITERARTURE 97 xi

15 APPENDIX 99 TABLE LIST 3.1. PR & PB Conversion on FTT 3 Page 3.. Changes in Supply and Demand to Agricultural Product Prices Farmer Terms Of Trade (FTT) and Production on Regional Level Agricultural Sub-Sector Household Growth in (million) Regional Farm Household Growth in (million) Structure of Agricultural Household Based on Land Ownership in Farmers Households Distribution According to Land Ownership in 7 (percentage) Total Proportion of Crops Household in Proportion of Total Household Based on Farming Income from Rice and Rice Crops in Rice Farming Main Obstacles in Rice Farming Fund Source in Rice Cultivation Technology Application Level in Numbers of Household Obtained Government Aids in Numbers of Horticultural Households in and Average Horticulture Land Area Based on The Household Land Tenure Status and Land Use 3 (m ) The Average of Horticultural Business Household Land Area Based on The Land Type 3 (m ) Numbers of Capital Credit and Loan from Horticultural Household in Numbers of Horticultural Households Obtained Capital from Government in Plantation Household Growth in 1993 to The Proportion of Household Land Area Based on Livestock in Average Household Land Area Owned By Plantation Commodity Business According to Land Ownership Status and Usage in Average Household Land Area According to Land Type (m ) in 3 38 Hal 4.. Plantation Household Problems Percentage in Plants Cultivation in Number of Livestock Household in Number of Livestock Household Business by The Type of Animals Cultivated in Proportion of Total Livestock Household Proportion of Total Livestock Household Land That is Used for Agricultural Business GDP Employment Productivity from Selected Sectors Growth Rate in Growth of Poor People in Indonesia Source of Household Income (%) 43 xii

16 4.8. Structure of Household Expenditures Per Capita Per Month and 11 (Rp/People/Month) Regression Value of PR Index in 8 to Summarize of Marginal Value and Elasticity from the effect of PR to FTT Summarize of Marginal Value and Elasticity from the effect of PP to FTT The Change of Farmer Terms of Trade on Rice Maize Soybean and Cassava during The Change of Farmer Terms of Trade on Cabbage Potato Tomato and Red Chili during The Change of Farmer Terms of Trade on Sugarcane and Tobacco The Change of Farmer Terms of Trade on Cow and Sheep in Several Farm Marketing Margin Structure and Terms of Trade of Farmer Household Income on Rice Field Agro- Ecosystem in Income Structure of Farmer Plantation Household during Structure of Farmer Household Income in Agro-Ecosystem Plantation during xiii

17 FIGURE LIST.1. FTT formation 1.. Policies that Affect the FTT Productivity Development per Sector Page 5.1. PR Index PP Index and FTT Developments in January 8 to May Sub-sector and National PR Index PP Index and FTT in January 8 to May Food Crops Sub-sector PR Index and Rice and Palawija Price Index in January 8 to May Horticulture Sub-sector PR Index and Vegetables and Fruits Price Index in January 8 to May Plantation Sub-sector PR Index in January 8 to May Livestock Sub-sector PR Index Growth. Large cattle small cattle Poultry and Livestock Products Index Price in January 8 to May Fisheries Sub-sector PR Index Fisheries Products Index and Aquaculture Index in January 8 to May PP Index Household Consumption Price Index and Production Cost and Capital Goods Index in January 8 to May Household Consumption Price Index and its Components Growth in January 8 to May Production Cost and Additional Capital Goods Index Growth in January 8 to May The impact on the Increasing of Fuel Price in 8 of May and 13 of June to FTT The Impact of Fuel Price Increase to FTT on June The Development of Production Index and Average of FTT in The Development of Sectors Production Index and The Average of FTT in xiv

18 APPENDIX LIST Appendix Table 1. National Farmers Exchange Rates 99 Appendix Table. Weight of Farmer Terms of Trade s Component 15 Page Appendix Table 3. Analysis of Farm Commodities (Paddy Corn Soybean and Cassava) in 8 and 11 (USD ) 16 Appendix Table 4. Analysis of Farm Commodities (Cabbage Potato Tomato and Red Chili) in 5 and 1 (USD ) 17 Appendix Table 5. Analysis of Farm Commodities (Sugarcane and Tobacco) in and 1 (USD ) 18 xv

19 I. INTRODUCTION 1.1. Background Community welfare needs special attention because it is related to several aspects such as: (a) the community have a right to have a prosperous life (b) In the beginning of 1945 Constitution of Republic Indonesia explicitly stated that: Prosperous Indonesia is the ultimate goal of Indonesia establishment (c) the increased number of welfare has become a world issue as it is stated on Millennium Development Goals (MDGs) and (d) community welfare has been a main priority for national development. The increased number of community is indicated by the improvement in various indicators of human resource development such as increase in per capita income; decrease in poverty and unemployment number. Agricultural sector is one of the important sectors that have an important contribution in national development. Agricultural sector have a role in forming the Gross Domestic Product (GDP) labour absorption and source of community income. It is also have a part in producing agricultural products for food supply fodder raw materials industry and export. In the last decade agricultural Gross Domestic Product (GDP) is widely increasing. Based on constant price agricultural GDP increased from 66 trillion rupiah in year to 1668 trillion rupiah in 11. The average increase of the GDP is 4 percent/year. The successes of economic transformation cause the growth rate in various sectors outside the agricultural sector so that agricultural sector contribution on national total GDP establishment decreased. Agricultural sector is also a provider of community employment. In -11 the number of labor in agricultural sector declined from 47 million people (453 percent of total employment) in year to 393 million people (359 percent of total employment) in 11 as the employment outside the agricultural sector grows. Nevertheless the number of labor absorption in the agricultural sector is still dominant. Agricultural activities are mostly done in the rural area and are dominated by on farm activities or cultivation. Activities conducted by landless farmers and farm workers who earn wage labor The implementation of agricultural development is intended to increase the community welfare especially farmers. Therefore farmers welfare is always be the main goal in every stages of agricultural development activities. Through various programs and

20 policies of agricultural development the government has made a serious effort to increase the agricultural production maintaining the stability of food supply and increasing the farmers welfare. Among activities that has been running believed many success achieved especially on production enhancement rural economy as well as for rural and urban consumers. However in rural area poverty is still being an unresolved problem. Increase in agricultural production through various engineering technology and institutional is insufficient to increase revenue farmers welfare and poverty countermeasures in rural area (Dillon et al. 1999; Simatupang et al. ). This condition is supported by the data that showed a large number of people in Indonesia especially in the rural area is still in poverty. The data from Indonesian Statistics Bureau showed that in 1 the number of poor people in Indonesia reaches 913 million people. About million (634 percent) lived in rural area and 165 million people (366 percent) lived in urban area. Agricultural development is intended to improve the farmers welfare. Therefore it is relevant to study the impact of development that has been implemented to the farmers welfare. The study is mainly aimed to assess the positive negative and neutral impact of the policies toward the farmers welfare. One of the indicators that can be used to assess the farmers welfare is the Farmer Terms of Trade. Farmer Terms of Trade is a monthly data to tracks price trends of expenditures relative to incomes for farmers. Increased number of Farmer Terms of Trade indicating that the farmers capacity and welfare have been improved and vice versa. Advanced knowledge about the behavior of the Farmer Terms of Trade the impact of development and identifying the determinants of the exchange rate will be very useful for planning policy development and improving the future development programs. 1.. Basic Considerations In the last three decades agricultural sector have shown an important role in national development especially to activate the national economy. The agricultural sector is expected to be the activator of the rural economy forward. Several decades ago agricultural growth showed considerable growth and has given a contribution to poverty reduction. Agricultural Sector include the following aspects of production improvement of public welfare or poverty reduction and environmental sustainability. In production aspect agricultural production plays a role in producing staple food domestic industrial raw materials bioenergy and export production. In the aspect of improving social welfare

21 agriculture is a source of employment and income capital formation plays a major role in poverty reduction. Various agricultural products has been provided with a low price to increase community welfare. The agricultural sector also has a role in preserving the environment; prevent erosion and reducing pollution. Many policies and programs at on-going agricultural development activity intended to maximize multifunction above. The development policies and programs are: providing infrastructure such as irrigation and farm roads; providing help insentive and subsidize the production inputs (seeds and fertilizer) and price; and provide a training and development program about farming harvesting and postharvest handling. Even though the agricultural development has a positive impact for rural communities; it has not been able to outgrow poverty. There are still a large number of poor people in the rural area. Agricultural production has grown significantly but the farmers welfare has not been improved at all. This is caused by the price paid by the consumers to the farmers is relatively low. It. It is shown that the agribusiness system cannot yet improved the farmer s welfare. Many factors affect lack of farmers bargain power institutional equity on market place I infrastructures product quality and others. From the positive side shows that there are still opportunities to improve the welfare of farmers and the rural community as a whole through the improvement and loosen the constraints that exist The agricultural sector has a great potential in national economy. Agricultural potential cover a large area with a diversity of agro-ecosystem conditions and the big potential of the commodities to be developed. However agricultural development is constrained by several limitation such as: (1) limitation in natural resources and damaged environment () the availability of supporting infrastructure (3) land acquisition by the farming households is relatively small (4) weak agricultural institutions (5) agricultural policies and development is obstructed by agencies. Improving the farmers and agricultural welfare is the priority for the future development program in line with the instruction in the long-term national development plan. In the Long-Term National Development Plan from 5-5 the National Development Vision 5-5 is: INDEPENDENT DEVELOPED EQUITY AND PROSPEROUS IINDONESIA. In the implementation of mid-term development plan 4-9 three stages of economic development strategy have been set. The three stages are Pro Growth Pro Jobs and Pro Poor. These strategies were continued in 1-14 Mid-

22 Term Development program. The strategy has it focus broaden to Triple + One Track Strategy and become Pro Growth Pro Poor Pro Jobs and Pro Environment. In these strategy the aspect of community welfare including the farmers welfare to be noticed and becomes a priority agenda for the future government. The welfare improvement will be reflected on the income enhancement decreasing unemployment number and improvement in the community life. The National Mid-Term Development Planning focus on improving the rural community welfare through Triple + One Track Strategy (Pro Growth Pro Poor Pro Jobs and Pro Environment). As an agricultural country the number of people involved in agriculture/agribusiness is relatively large. Thereby improving the welfare of the farmers will receive great attention of national development through agricultural development activities. That is why farmers welfare is the main goals in every stages in agricultural development program. The farmers welfare is also believed to be the main priority in the future agricultural development. With agricultural development orientation to towards the improvement of the welfare of development actors in this case farmersit is relevant to assess the welfare of farmers and the impact of the construction carried out for the welfare of farmers. An advanced knowledge about the farmers terms of trade measurement value the impact of the development and identification of the determinants of the exchange will be useful for planning the development policy and improving the future development program Purpose of the Study Generally this study aimed to formulate a policy to improve the Farmer Terms of Trade for National Mid-Term Development Program in agricultural sector. In general this study aims to formulate policies on farmers term of trade enhancement as preparation material for RPJMN on Agricultural Sector. The study purposes are: 1) Analyze the behavior of Indonesian Farmer Terms of Trade ) Analyze determinants and policies that influence the Farmer Terms of Trade 3) Analyze Farming Exchange Value and household income 4) Formulate policy to improve the farmers welfare for the National Mid-Term Development Program in agricultural sector.

23 1.4. Output The output of the study is the policy to improve the Farmer Terms of Trade for National Mid-term National Development Program in agricultural sector. In accordance with objectives the the output of this study is policy formulation for enhancement on farmers terms of trade as preparation material for RPJMN on Agricultural Sector. The detailed outputs of the study are: 1) Analysis of Indonesian Farmer Terms of Trade ) Analysis of determinants and policies that influence the Farmer Terms of Trade 5) Analysis of the Farming Exchange Value and household income 6) The policy formulation to improve the farmers welfare for the National Mid-Term Development Program in agricultural sector.

24 II. LITERATURE REVIEW.1. Farmers Exchange as Farmers Welfare Indicators An important element that is used as an indicator of the welfare of farmers is the total income and expenditure. In this regard one of popular measurement instrument used is the Farmer Terms of Trade. The calculations derived from a comparison of the index of prices received by farmers (PR) to index of prices paid by farmers (PP). The FTT describe the exchange rate/purchasing power of farmers to products purchased/paid farmers that includes consumption and production of purchased inputs. The higher the FTT rate the better purchasing power of farmers on product consumption and the production inputs and it means the farmers welfare is improved. Simatupang and Maulana (8) suggesting that unique marker for the welfare of farm households practically non-existent so FTT become the only choice for observers assess the level of agricultural development in the welfare of farmers. Thus FTT is an indicator of farmers welfare level. The higher NTP the more prosper the farmers (Wata 1995; Sumodiningrat 1; Tambunan 3; BPS 6 Masyhuri 7). The FTT concepts developed by Indonesian Statistics Bureau synonymous with the concept of ratio parity (parity ratio) developed in the USA in the 193s (Tomek and Robinson 1981). It is still used and modifications made dynamically according to the changes in relative commodity constituent. The concept of parity ratio is formulated as follows: ( )( ) ( )( ) By using the theory of general equilibrium Rachmat () showed that FTT can be used as a measure of the farmers welfare level. In the conception of the direction of the FTT (increased or decreased) is the resultant of the direction of each constituent component i.e. components that have a revenue positive direction towards the welfare of farmers and payment component that has a negative direction towards prosperity. If the higher rate of income component of the

25 exchange rate of the payment of farmers will increase and vice versa. The FTT movement describes the rise and fall of the welfare of farmers. Furthermore Rachmat () showed that the FTT has characteristics that are likely to decline. It is related to the inherent characteristics of the agricultural and non-agricultural commodities. There are three possible explanations for the decline in FTT such as: (1) The income elasticity of agricultural products is inelastic while non-agricultural products tend to be more elastic () the rate of technological change with different manufacturing profitable products and (3) differences in market structure where the market structure of agricultural products tend to be competitive while the market structure of manufacturing products tend to be less competitive and leads to a market monopoly/oligopoly. In general the exchange rate has a broad meaning and can be classified into five concept of the exchange rate namely: (1) Barter Exchange () Factorial Exchange (3) Exchange acceptance (4) Subsistence Exchange (5 ) Exchange Income and (6) Farmers Exchange (Diakosawas and Scandizzo 1991; Simatupang 199; Simatupang and Isdijoso 199; Rachmat et al. ; Supriyati et al. ). 1) The Barter concept /Exchange The concept of bartering (Barter Exchange Value) refers to the relative prices of a specific agricultural commodity to the goods/non-agricultural products. Barter Exchange Value (BEV) is defined as the ratio of agricultural prices to the price of non-agricultural products. Mathematically formulated as follows: where: BEV = Agricultural Barter Exchange Value Px = price of agricultural commodities Py = price of non agricultural commodities. The concept of exchange is able to identify the relative price ratio of selected agricultural commodities to the price of the product being exchanged. BEV means the stronger increase in power exchange prices of agricultural commodities are exchanged for goods. BEV concepts only related to certain products and commodities

26 and are not able to give an explanation related to changes in productivity (technology) of agricultural commodities and non-agricultural commodities. ) The concept of Factorial Factorial concept is a refinement of the concept of barter by including the effect of technological change (productivity). Factorial Exchange Value (FEV) is defined as the ratio of agricultural prices to the price of non-agricultural farm agricultural productivity multiplied by (Zx). If only called attention to the agricultural productivity Single Factorial Exchange Value (SFEV). If the non-farm productivity (Zy) also taken into account then it is called Multiple Factorial Exchange Value (MFEV). SFEV and MVEF formulated as follows: where: SFEV = Single Factorial Exchange Value MFEV = Multiple Factorial Exchange Value Z X = Productivity of agricultural commodities Z y = productivity of non-farm products Z = Agricultural productivity Ratio (x) to non-agricultural (y). 3) Acceptance Concept The concept of revenue (Revenue Exchange Value) is a development of the concept of exchange rate factorial. Revenue Exchange Value (REV) is the exchange of a receipt (return value) of agricultural commodities that farmers produced per unit (hectare) on the value of production inputs to produce those results. REV thus describes the level of profitability of certain farm commodities. But REV only describe certain commodities exchange yet the overall revenue and expenditure components of farmers.

27 where: REV = Revenue Exchange Value P X = price of agricultural commodities P y = price of production inputs Q X = number of agricultural commodities produced Q y = Number of production inputs used. 4) The concept of Subsistence The concept of substantial exchange rate (SER) is a further development of the REV. SER describes the exchange of total farm receipts peasant farmers against total expenditures for the necessities of life (Pramonosidhi 1984). Farmer acceptance is the sum of the whole production value of agricultural commodities produced by farmers and expenditures production value of agricultural commodities produced by farmers. Farmer spending is total expenditure on household consumption and expenditure on farm production costs. SER is formulated as follows: where: SER = Subsistence Exchange PXI = price of agricultural commodities to i QXi = Production of agricultural commodities to i PYJ = price of consumer products PYJ = Price product inputs QYi = Number of product consumption PYJ = Number of production inputs. Thus SER describes the exchange rate/purchasing power of farmers' income from farm to farm household expenditures for the necessities of life which includes consumption expenditures and expenditures to the production costs. In the SER