1

Buletin Penelitian Hortikultura, Tahun 1994, Volume XXVI, Nomor (4)

LEAD-LAG RELATIONSHIPS AMONG POTATO PRICES AT RETAIL,

WHOLESALE, AND FARM-GATE MARKETS IN WEST JAVA
Witono Adiyoga

ABSTRACT

Adiyoga, W., 1994. Hubungan "Lead-Lag" Harga Kentang di Tingkat Pasar Eceran, Grosir dan
Produsen di Jawa Barat. Analisis harga komoditi kentang berdasarkan data harga bulanan (1980-1986)
di ketiga tingkat pasar dilaksanakan dengan menggunakan uji "Granger Causality". Hasil uji
mengindikasikan bahwa pasar di tingkat produsen merupakan sumber informasi harga yang lebih
penting dibandingkan dengan pasar grosir maupun pasar eceran. Kedua pasar yang disebutkan terakhir,
kurang efisien dalam mencerminkan informasi baru. Sementara itu, pasar di tingkat eceran ternyata lebih
cepat dalam melakukan penyesuaian terhadap informasi harga yang baru dibandingkan dengan pasar di
tingkat grosir. Hal ini menunjukkan berkurangnya peranan pasar di tingkat grosir dalam proses
penentuan harga. Variasi kesalahan dalam peramalan harga kentang yang sebagian besar diterangkan
oleh inovasi harga di tingkat pasar eceran, menunjukkan bahwa pasar ini bersifat "exogenous". Lebih
lanjut juga terungkap bahwa setiap perubahan pada sistem yang terjadi baik dari sisi penawaran maupun
permintaan, akan terasa pengaruhnya setelah tenggang waktu satu bulan. Pengkajian lanjut mengenai
peranan serta efektivitas pasar grosir dalam proses penentuan harga disarankan untuk dapat
dilaksanakan pada kesempatan mendatang.

Economic growth in the rural sector has led to an increasing commercialization of agricultural
sector in both factor and product markets and has increased the reliance of the farm community to the
market for resource allocation signals. Marketing research in Indonesia, especially in horticultural
sub-sector, is still considered as one area of research that is not well-developed yet. Previous studies on
vegetables marketing were mostly descriptive. They were primarily dealing with the descriptions of
marketing cost, margin, and channels. Since these studies mostly used cross-section data and assumed
static nature, they could not provide the basis for implying time-related implications of market behavior.
Consequently, they provided limited information to support the efforts of placing more latitude for pricing
policy and to take advantage of the use of market signals in driving the growth of this sub-sector.
Knowledge of lead-lag relationships among retail, wholesale, and farm-gate prices of a particular
commodity is important in evaluating the margin of packers and retailers. Furthermore, the knowledge of
lead-lag structure in various markets could be used to assess pricing efficiency (Adamowicz, Baah &
Hawkins, 1984). Evidence of consistent lead-lag relationships could suggest that the leading market
either has access to more superior information or uses available information more accurately. This
implies that the leading market is a more reliable source of market information (Garbade and Silber,
1979). Identifying this source of information would be very helpful in providing signals for all agents
involve in marketing process, especially for allocating their resources.
The purpose of this study was to assess and interpret the lead-lag relationships among potato prices
at retail, wholesale, and farm-gate level in West Java.
 2
DATA AND METHOD

The data used in this study were monthly data covering the period of January 1980 to December
1986. The three series of prices data represented the monthly average price of potatoes at the retail,
wholesale, and farm-gate level.
A vector autoregressive (VAR) process of order p for a system of M variables can be defined as

yt = v + Ω1 yt-1 +.............+ Ωp yt-p + vt

In this system of M equations,

v = (v1,..............,vM)' is an M-dimensional vector

θ11,i.............. θ1M,i
ΩI = ………………….. are M x M coefficient matrices
θM1,i..............θ MM,i

vt = (vit,............,vMt)' is vector white noise

In deriving the asymptotic properties of parameter estimators, the stationarity of VAR processes
must be considered. According to Judge, Hill, Griffiths, Lutkepohl & Lee (1988), a VAR(p) process is
stationary if the time series do not have trends, fixed seasonal patterns, or time-varying variances.
The lag length for the VAR process was determined by using the generalization of the Akaike's
AIC and Schwarz's SC criteria.

2 M2 n
AIC (n) = ln det (Σn) +
T

M2 n ln T
SC (n) = ln det (Σn) +
T

where M is the number of variables in the system, T is the sample size, and Σn is an estimate of the
residual covariance matrix Σv obtained by a VAR(n) model.
Causal flows across the markets were tested using the standard Granger F-test:

• y2 does not Granger-cause y1, if and only if θ12,1 = θ12,2 = ..............= θ12,p = 0

• y1 does not Granger-cause y2, if and only if θ21,1 = θ21,2 = ..............= θ21,p = 0

Those equations are equivalent to the null hypothesis of no Granger causality from y2 to y1 and from y1 to
y2, which can be tested by F-test:
 3
SSEr - SSEu
δ=
pσ11

where SSEr and SSEu are the sums of squared error obtained by estimating the VAR(p) process with and
without imposing the restrictions, respectively. The null hypothesis of no causal relationship is rejected if
δ > F(p,T-2p-1). Note that for the VAR(1), the F-test is equivalent to t-test for the significance of θ12,1.
Meanwhile, to determine which of or to what extent the markets are exogenous or endogenous
relative to each other in the short run, the forecast error decomposition was also examined.

RESULTS AND DISCUSSION

The VAR process is stationary if the roots of polynomial equations are outside the unit circle,
implying that there are no fundamental changes in the structure of the process that may render further
analysis difficult or impossible. The computation indicated that the roots (root 1 = -1.174 and root 2 =
-2.739) were greater than one in absolute value. Thus, the VAR(1) process is stationary.
Up to (p = 4) lag values were examined for the three-equation system considering the time
needed in cultivating potatoes (3 - 4 months). The order of p was chosen so that the AIC or SC criterion
was minimized. It was found that both AIC (= 7.273) and SC (= 7.707) were minimized by VAR(1)
process.
The VAR system was estimated by using OLS (Ordinary Least Square). The R2's for the
farm-gate, wholesale, and retail equation were 0.90, 0.87, and 0.93, respectively. The Ljung-Box
Q-statistics indicated that no significant residual auto-correlation was reflected in price adjustments
between markets within the month. The cross-correlations were rPF,PW = 0.89, rPF,PR = 0.79, and rPW,PR =
0.82. These implied that the farther was the distance from the production area (farm-gate market), the
smaller was the correlation.
Since the order of the VAR process had been known as VAR(1), the F-test of the causality was
equivalent to the t-test for the significance of θ's. The results are presented in the following table:

Table 1 Results of Causality Test Based on the VAR(1) Process

H0 : θij,p = 0 θij,p and SE t-ratio

PW → PF 0.18092 (0.21360) 0.84700 Accept H0
PR → PF -0.13756 (0.15459) -0.88985 Accept H0

PF → PW 1.02830 (0.29248) 3.51570 Reject H0

PR → PW -0.41216 (0.18097) -2.27750 Reject H0

PF → PR 1.16060 (0.26014) 4.46150 Reject H0

PW → PR 0.25833 (0.22240) 1.16150 Accept H0

Note: PF = farm-gate price; PW = wholesale price; PR = retail price

Table 1 shows that there were some causality relationships between the price at the farm-gate
level and prices at both wholesale and retail level. These indicated that changes in the farm-gate level led
changes in the wholesale level and changes in the retail level. Meanwhile, feedbacks from either
wholesale or retail level were apparently absent. These implied that the farm-gate level appeared to be
the source of significant market information, whereas wholesale and retail level might have insufficient
activity to generate much new information. Referring to Garbade and Silber (1979), market at the
farm-gate level was considered as the dominant market.
 4
Another causality relation was indicated from the price at the retail market to the price at the
wholesale market. This indicated that the retail market led the wholesale market in price adjustment to
new information.
The results also indicated that the wholesale market seemed to lose its importance in the pricing
process. It was noted that the causality did not exist from the wholesale market to both farm-gate and
retail markets. This might be explained by the amount of potatoes inflow from the production areas to the
main consumption area (Jakarta) that was not delivered through the wholesale market (Pasar Induk
Kramatjati) before it was distributed to the retail markets.
Based on the results above, the three price series were also examined by using the forecast error
variance decomposition. The forecast error variance of a two-step forecast for the farm-gate price was
51.12 (8.86 was the contribution of innovations in farm-gate price, 11.39 was the contribution of
innovations in wholesale price, and 30.87 was the contribution of innovations in retail price). In other
words, 18% of the forecast error variance of farm-gate price was accounted for by own innovations, 22%
was accounted for by wholesale price innovations, and 60% was accounted for by retail price innovations.
Referring to Bessler (1984), the retail market was considered to be exogenous, since the major portion of
forecast error variance was explained by the retail price innovations. However, this information should be
used cautiously because the correct interpretation of such decomposition was usually difficult to obtain
since the decomposition itself was not unique (Judge et al., 1988).

CONCLUSIONS

From the Granger causality tests, the results suggested that the farm-gate market led the wholesale
and retail markets in price adjustment to new information. This implied that the farm-gate market was the
source of significant market information, whereas wholesale and retail markets were less efficient in
reflecting market information. Unidirectional causality from the retail market to the wholesale market was
also suggested from the test results. Meanwhile, no causality was indicated from the wholesale market to
both farm-gate and retail markets. These implied that the wholesale market seemed to lose its
importance in the pricing process. Therefore, the evaluation of the role and effectiveness of the wholesale
market (Pasar Induk Kramat Jati) was recommended for further study.
The findings also indicated that any changes occurred in the system, either on the supply side or
on the demand side would be felt throughout the system within one month. Furthermore, the retail market
was considered to be exogenous, since the forecast error variance was mostly explained by its price
innovations.

REFERENCES

Adamowicz, W. L., S. O. Baah & M. H. Hawkins. 1984. Pricing efficiency in hog market. Canadian Journal
of Agricultural Economics, 32: 462-477.

Bessler, D. A. 1984. Relative prices and money: A vector autoregression on Brazilian data. American
Journal of Agricultural Economics, 66(1): 25-30.

Garbade, K. D. and W. L. Silber. 1979. Dominant and satellite markets: A study of dually traded securities.
The Review of Economics and Statistics, 61: 455-461.

Judge, G. G., R. Hill, W. Griffith, H. Lutkepohl & T. Lee. 1988. Introduction to the theory and practice of
econometrics. Second Edition. John Wiley & Sons, New York.