THE IMPACT OF TARIFF POLICY AND INTER-ISLAND TRANSPORT COSTS ON THE PROFITABILITY OF SOYBEAN PRODUCTION IN NGADA REGENCY, NTT by Wiendiyati Umbu Reku Raya Paulus Un Faculty of Agriculture Nusa Cendana University December 2002 TABLE OF CONTENTS ACKNOWLEDGEMENTS ...........................................................................................................3 SUMMARY .....................................................................................................................................4 1. INTRODUCTION.......................................................................................................................5 1.1. Background of the Study .........................................................................................5 1.2. Description of the Research Site..............................................................................6 1.3. Objectives of the Study.............................................................................................7 2. RESEARCH METHODOLOGY ..............................................................................................7 2.1. Methodology.............................................................................................................7 2.2. Data Collection .........................................................................................................7 3. RESEARCH RESULTS AND ANALYSIS ..............................................................................8 3.2. The Policy Analysis Matrix ......................................................................................8 3.2.1. Assumptions .......................................................................................................8 3.2.2. Input-Output .......................................................................................................8 3.2.3. Private Prices ......................................................................................................9 3.2.4. Private Budget ..................................................................................................10 3.2.5. Calculating Import Parity Prices: Soybean.......................................................11 3.3.6. Social Prices......................................................................................................12 3.3.7. Social Budget....................................................................................................12 3.3.8. PAM..................................................................................................................13 3.3. Ratios .....................................................................................................................14 3.4. Sensitivity Analysis ................................................................................................15 REFERENCES..............................................................................................................................17 2 ACKNOWLEDGEMENTS With our deepest gratitude, we thank God Almighty, because only by His grace was our research about “The Impact of Tariff Policy and Inter-island Transport Cost on The Profitability of Soybeans Production In Ngada Regency, NTT” completed. This research was done with the help of many people. The authors want to thank: • Mr. James Gingerich, Team Leader of Food Policy Support Activity DAI Jakarta, who agreed to fund the research. • Professor Scott R. Pearson (Stanford University, USA) who guided us and sharpened our proposal until the final report of the research. • Bapak Sjaiful Bahri (DAI Jakarta) for his guidance on PAM analysis and data collection and for communicating with the authors through email, telephone, and SMS. • Ibu Nurhayati (DAI Jakarta) who assisted on financial administration procedures. • Head of Food & Agriculture Office of Ngada Regency who helped us on sampling soybeans farmers in Golewa and Bajawa. Funding for the study was provided under USAID contract 4104-102-01S-001 as part of the Indonesian Food Policy Support Activity administered by Development Alternatives, Inc., Washington, D.C. We hope this research will benefit the local government of Nusa Tenggara Timur in its efforts to encourage soybean development. Kupang, December 2002 Wiendiyati Team Leader 3 SUMMARY Ngada Regency is an area in East Nusa Tenggara Province where soybeans are grown during the dry season. Typically, soybeans follow paddy and are produced with a minimum of tillage. After the rice residue is cleared, seeds are simply dropped into a hole made with a sharp stick. Red beans, grown during the same season, are a food staple often grown as an alternative to soybeans. Because the rising demand for soybeans in Indonesia has increased the country’s reliance on imported beans, proposals have been made to stimulate domestic production by introducing a soybean tariff. In this study, a policy analysis matrix (PAM) is computed to analyze the desirability of such an intervention in the Ngada area. The data required to calculate private and social profitability were obtained from a survey of farmers in the area and from secondary sources such as CASER. The analysis of the PAM shows that soybeans are both privately and socially profitable. According to the calculations, farmers have a strong economic incentive to produce soybeans and soybeans have a significant competitive advantage over the alternative, red beans. Soybeans are also profitable socially indicating that Ngada Regency has a comparative advantage in producing soybeans as opposed to red beans. Producing soybeans is an efficient use of the Regency’s agricultural resources. The positive evidence on profitability indicates that introducing a tariff on soybeans would be undesirable and result in a distortion of incentives in the agricultural sector. 4 1. INTRODUCTION 1.1. Background In 2001, the demand for soybean in East Nusa Tenggara province was 4,973 tons. It is expected to increase in the coming years due to people’s awareness of soybeans’ nutritional advantages. (Soybean is used for tofu and tempe production for the local market.) The domestic supply in 2001 was less than 3,200 tons. Thirty-nine percent of the demand was fulfilled through inter-island imports from Surabaya. The biggest demand for soybean in this province is from Kupang City on Timor Island. Assimilation with Chinese and Javanese has made the local people that live in the provincial capital more aware of soybean nutrition. By 1997, farmers in Kupang district had developed soybean farming with good yields (900–1200 kg/ha). But today many of those soybean farmers have switched to other crops. To fulfill the demand for soybean in Kupang, soybean distributors import soybean from Ngada by using inter-island transportation from Flores. The cost of transportation is highly affected by the fuel price. Fuel in Indonesia is subsidized, and the central government has gradually decreased the subsidy for fuel. As fuel prices increase, transportation costs also increase. Since August 2002, the Government of Indonesia (through the Ministry of Transportation) has increased shipping costs by 17%-50%. This increase has affected the prices of goods that are transported between islands, including soybean from Surabaya to Kupang and from Ngada to Kupang. Currently, there is no tariff on imported soybean. But the government of Indonesia (through the Ministry of Industries and Trade) has announced plans to impose tariffs on food and horticulture products, including soybean. Based on importers’ information, the tariff for imported soybean would be low and would likely be in the 2% - 6% range. These government policies – inter-island transportation costs and increased import tariffs – will influence the profitability of soybean production in Ngada. Both higher inter- island transport cost and a non-zero tariff would improve private profitability (competitiveness). Higher inter-island transport charges would increase social profits (comparative advantage), while tariffs would not affect social profits. There are several reasons to think that there is a potential for increasing soybean production in East Nusa Tenggara: (1) East Nusa Tenggara has unused dry land (29,096 ha) that is good for soybean cultivation from a climate and soils point of view. (2) Farmers in several parts of East Nusa Tenggara have considerable experience with soybean production. (3) According to tofu and tempe producers, local cultivated soybean is stickier than the imported soybean that comes through Surabaya. (Direct importation from foreign countries to Kupang is not possible because the port in Kupang is not suitable for international shipping.) 5 1.2. Description of the Research Site Ngada Regency in Flores is the main soybean producing area in East Nusa Tenggara. Data on the area’s soybean production for the period 1994-2001 are presented in Table 1.1. The wide variation in hectares harvested, yields, and production is caused by high variation in seed availability and rainfall intensity. The largest area harvested occurred in 1998. Highest yields were attained in 2001. There is no significant trend in acreage or yields. Table 1.1. Productivity of Soybean in Ngada Harvested area Production Productivity Year (ha) (ton) (kg/ha) 1994 2605 1595 612 1995 2429 1201 494 1996 1575 1015 644 1997 1691 812 480 1998 2719 1131 416 1999 2617 1511 577 2000 1806 1176 651 2001 810 700 864 Average 2032 1143 592 Source: Office of Agriculture and Food Crops of Ngada Regency, 2002 Dry land and a dry climate (9 months dry,