Strategic Study on Cluster Strengthening to Support the Supply of Volatile Food Commodities

WP/8/2015 WORKING PAPER STRATEGIC STUDY ON CLUSTER STRENGTHENING TO SUPPORT THE SUPPLY OF VOLATILE FOOD COMMODITIES Yunita Resmi Sari Noviarsano Manullang Nurchair Farliani Melia Oktarina Fauzan Rahman Akhmad Jaeroni Chaikal Nuryakin Hamdan Bintara 2015 The conclusions, opinions and views of the authors in this paper are those of the authors alone and do not constitute the official conclusions, opinions, and views of Bank Indonesia. i Strategic Study On Cluster Strengthening To Support The Supply Of Volatile Food Commodities Yunita Resmi Sari, Noviarsano Manullang, Nurchair Farliani, Melia Oktarina, Fauzan Rahman, Akhmad Jaeroni, Chaikal Nuryakin, Hamdan Bintara Abstract The main contributor to inflation comes from volatile food commodities whose price movements are highly influenced by seasonal factors. The supply of food commodities is affected by the disruption of production, distribution, and government policy. When there is disruption to production, the supply of commodities is unable to meet demand. The program to develop clusters was a form of Bank Indonesia’s participation in safeguarding supply in order to control the price movements of foodstuffs. The emergence of clusters is expected to raise productivity from commodities by managing clusters using the value chain approach (value chain). The study was conducted to understand and improve the role of clusters in supporting the supply and controlling the prices of volatile food commodities. The study was conducted in two commodity clusters in six regions, namely three regions for chillies (Jember Regency-East Java Province, Minahasa Regency-North Sulawesi Province, and Tanah Datar Regency-West Sumatera Province) and three regions for shallots (Majalengka Regency-West Java Province, Palangkaraya City-Central Kalimantan Province, and Simalungun Regency-North Sumatera Province). This study makes use of several analytical tools, namely: in-depth interviews with cluster stakeholders, the analytical hierarchy process (AHP), and SWOT analysis. Nationally, there was a production surplus of chillies relative to consumption. Nonetheless, it proved difficult to take advantage of the surplus at the national level in order to stabilize prices in the main centers of consumption because chillies are perishable by nature, while consumers prefer fresh chillies. Fluctuations in the prices of chillies are more determined by the distance between producers and consumers and also seasonal demand factors. The formation of national average prices of chillies was driven by the fundamentals of current production and consumption which are weekly or even daily in nature. For shallots, there was a surplus nationally, although prices still spiked at certain times. It was because the production of shallots was relatively uneven and only centered on Java and NTB. Nonetheless, the demand for shallots did not show large seasonal spikes in comparison to the demand for chillies. Key words : volatile foods, food prices JEL Classification : Q00, Q11 ii I. INTRODUCTION 1.1. Background Bank Indonesia has been assigned with the duty to meet inflation targets, as set forth in Article 7 of Law No. 23 of 1999 regarding Bank Indonesia as amended by Law No. 3 of 2004. In performing this duty, Bank Indonesia coordinates with the Government. Based on comparisons between the targeted and actual inflation in the years 2010 until 2015 (Bank Indonesia, 2015), there was, in general, a deviation between the inflation target which had been set and the actual inflation. Table 1 shows the targeted inflation along with the actual inflation from 2010 until 2015. Table 1. Comparison of Targeted Inflation and Actual Inflation Actual Inflation Year Inflation Target (%, yoy) 2010 5+1% 6.96 2011 5+1% 3.79 2012 4.5+1% 4.30 2013 4.5+1% 8.38 2014* 4.5+1% 8.36 2015* 4+1% 3.35 Source: Bank Indonesia, 2015 Explanation: *) based on PMK No.66/PMK.011/2012 dated 30 April 2012 The gap between the targeted and actual inflation prompted Bank Indonesia to continue improving instruments to control inflation. The formulation of appropriate monetary policy is needed to maintain inflation at the desired level. Historically, the main contributor toward inflation originated from volatile food commodities whose price movements are highly influenced by seasonal factors. Pressure on price movements in the volatile foods group owed mostly to supply shocks, while demand for commodities tended to be stable because they are a basic need (Prastowo, Nugroho et al., 2008). The supply side of food commodities was affected by production disturbances, distribution, and government policies. Due to production disturbances, the supply of commodities was insufficient to meet demand. The production of commodities is highly dependent on the weather. Food commodities are also perishable in nature. The efficiency of distribution activities was affected by the length of the distribution 1 chain and profitability margins which were set by each distribution link along with conditions in the transportation sector. Disturbances in distribution activities can result in a scarcity of commodities. Meanwhile, government policies in regard to the setting of administered prices for commodities, such as fuel, electricity tariffs, and transportation tariffs can move commodity prices (especially perishable commodities) and may also influence the inflation expectations of the general public. The program to develop clusters was a manifestation of Bank Indonesia’s participation in safeguarding supply. The cluster approach is one way of grouping related core industries, either supporting industries, infrastructure, supporting services, information and technology infrastructure, natural resources, and related institutions (PRES, 2013). The presence of clusters is expected to raise the productivity of commodities by managing clusters with the value chain approach. The results of strengthening the role of clusters is expected to be able to support the increased supply of commodities in the regions. In turn, increased supply is expected to maintain the stability of commodity prices. Over the long term, it is expected that the contribution toward inflation from volatile food commodities can be better controlled. The cluster program was initiated by Bank Indonesia in 2007. By the end of 2015 Bank Indonesia had already developed more than 100 clusters in nearly all Representative Offices (KPw) of Bank Indonesia. Supported commodities are consist of commodities in the agriculture, livestock, forestry, fisheries, and manufacturing sectors. The development of clusters since 2014 was focused on either: 1) commodity clusters which support food security as they contribute to inflation or 2) main products which make a contribution to the economy. Based on volatile foods commodity group data, the five main commodities making the largest contributions toward inflation over the last five years are rice, shallots, red chillies, beef, and garlic (DKEM BI, 2014). 1.2. Identification and Formulation of the Problem In the framework of increasing the role of clusters to support supply and to control volatile food commodity prices, a study was undertaken on the strategy used to strengthen the role of clusters in supporting the supply of commodities with the highest share of inflation. 1.3. Research Objectives The objectives of this study are: 2 (1) To analyse the condition and role of clusters in supporting the supply of volatile food commodities in efforts to control prices; and (2) To recommend strategies to strengthen clusters in the framework of supporting the supply of volatile food commodities in efforts to control prices. 3 II. LITERATURE REVIEW 2.1. Inflation The continuous increase in prices at the aggregate level in the economy is the definition of inflation according to Blanchard (2004). By making reference to Neo- Keynesian economic theory in Gordon (1997), one approach to determine inflation in Indonesia can be explained through the cost-push inflation concept or commonly called supply-shock inflation, i.e. inflation which is caused by increases in the production costs or the cost of procurement and services. The cost push shock is transmitted through the production chain and affects the selling prices of goods (Bloch, 2004). BPS publishes inflation groupings called inflation disaggregation which comprise of core inflation, administered prices inflation, and volatile food inflation. Core inflation is the inflation of goods or services whose price developments are affected by economic developments in general (fundamental factors such as inflation expectations, the exchange rate, and the balance of aggregate demand and supply) which will impact price changes in general and tend to be more permanent and persistent. Administered prices inflation is inflation of goods or services whose price developments are generally regulated by the government. Volatile foods inflation is the dominant inflation created by shocks in the foodstuffs group such as harvests, natural disturbances, factors in the development of domestic food commodity prices, or developments in the international food commodity prices (BPS). 2.2. Problems Related to Chillies and Shallots Chillies and shallots are important vegetable commodities and have a high economic value in Indonesia. Chillies are both perishable and seasonal. Their production is climate-dependent which means chillies cannot be planted and harvested throughout the year. It is this seasonality which results in abundant quantities of this commodity during the harvesting

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