In this paper, we analyze the structural
change in the supply chain of oil palm in North
Sumatra, Indonesia, especially after the financial crisis
of the late 20th century.
We first describe the past and present market
structure and conduct of oil palm industries in North
Sumatra with an industrial organization approach based
on our field study. The analysis reveals that the supply
chain of oil palm in North Sumatra has changed such
that farmers had more power to determine FFB prices
over crushing companies, especially from 2001 through
2004. However, farmers lost bargaining power during
2007-2008 due to a decrease in palm oil demand,
plunging of palm oil prices, and a regulation imposed
upon crushing companies by the Ministry of Agriculture.
To analyze such structural changes empirically, we
test the existence of Asymmetric Price Transmission
(APT), in which the speed of adjustments of the output
price after the input price increases or decreases is
different; the existence of APT implies the existence of
market power. We apply the (Momentum) Threshold
Autoregressive ((M-)TAR) model to estimate APT.
According to the estimation results, crushing companies
had more power to determine FFB prices over farmers
until around March 2002. This situation changed such
that farmers had more bargaining power from around
April 2002 to around April 2007 before the power
became balanced. The structural change test also shows
these time points as optimal structural change points.
The APT estimation, however, has little rigorous
theoretical background, and the concept of APT is not
necessarily related to market power. Hence, we next
analyze the market power of crushers and farmers both
theoretically and empirically. The estimation result of
market power indicates that the farmers had no market
power before the third quarter of 2002, but they did
have market power from the next quarter to the first
quarter of 2008, after which time they again lose market
power. These empirical results are consistent both with
each other and with the descriptions of the structural
change.
Finally, we conclude and draw some implications for
farmers, crushers, and consumers of palm oil.
Keywords— Indonesian palm oil, market power,
Asymmetric Price Transmission (APT), (Momentum)
Threshold Autoregressive ((M-)TAR) model.