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Buletin Penelitian Hortikultura, Tahun 1994, Volume XXVI, Nomor (3)

THE FARM-RETAIL PRICE SPREAD FOR SOME SELECTED

VEGETABLES
Witono Adiyoga

ABSTRACT

Adiyoga, W. 1994. Penyebaran harga dari tingkat petani ke tingkat pengecer untuk beberapa
jenis komoditi sayuran. Pengkajian marjin tataniaga untuk sepuluh jenis sayuran (kentang, tomat,
kubis, bawang merah, cabai merah, seledri, buncis, bawang daun, siampo dan wortel) dilakukan
berdasarkan data harga bulanan (Januari 1981-Desember 1990) di pasar tingkat petani dan pasar
tingkat eceran. Hasil analisis menunjukkan bahwa secara umum margin tataniaga terus meningkat dari
tahun ke tahun. Rata-rata marjin tataniaga yang tertinggi tercatat untuk cabai merah dan yang
terendah adalah untuk kubis. Perbedaan marjin tataniaga antar komoditi tampaknya dipengaruhi oleh
perbedaan karakteristik dari komoditi yang bersangkutan. Persamaan regresi yang menghubungkan
harga di tingkat petani dan harga di tingkat eceran memberikan indikasi bahwa jenis penyebaran harga
untuk kentang, tomat, buncis dan bawang merah adalah marjin absolut yang tetap (fixed absolute
margin). Sementara itu, besaran elastisitas transmisi harga untuk kubis, buncis, seledri, cabai merah,
bawang daun, wortel dan bawang merah mengindikasikan bahwa perubahan relatif harga komoditi
tersebut di tingkat konsumen tidak akan melebihi perubahan harga relatif di tingkat produsen. Hal ini
menunjukkan lebih tingginya elastisitas permintaan ketujuh jenis sayuran tersebut di tingkat eceran
dibandingkan dengan di tingkat petani.

Prices play an important role in coordinating production and consumption. Prices, especially
relative prices, influence human behavior (Tomek & Robinson, 1985). For example, consumers do
respond to changes in the price of beef relative to the prices of fish or chicken. Farmers, likewise, have
demonstrated repeatedly that they will produce more onions, potatoes, cabbage or tomatoes in
response to relatively favorable prices. In theory, all prices are interrelated, though in practice some
prices are essentially independent. An understanding of relationships among prices is important both
for private and public decision making.
Particular attention has been devoted to the integrating role of price, especially to the
relationship between prices at the farm level and those at the retail level. Among the questions that
have been frequently sought to be answered are whether or not changes in farm prices are promptly
and fully reflected in retail market, whether marketing margins are too large, whether marketing
margins remain constant or vary per unit sold, whether there are differences in marketing margins
among products, and whether an increase in marketing costs results in a higher consumer price or a
lower farm price, or both. These questions basically reflect the concerns of producers and consumers
about the size, changes, and the incidence of changes in marketing margin (Tomek & Robinson,
1977).
The farm-retail price spread which is defined as the difference between farm price (price
received by farmers) and retail price (price paid by consumers) is also referred to as marketing margin.
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George and King (1971) classify the farm-retail price spread as systematic and nonsystematic.
Systematic methods of setting margin include: (a) fixed absolute margin --adding a specified amount to
the farm level price to obtain the retail price, (b) fixed percentage margin -- assuming that the margin is
a percentage of prices at the farm level or at the retail level, and (c) cost per pound margin -- adding an
amount which varies with the initial purchase price. Meanwhile, nonsystematic methods include: (a)
following closely the price of near or strong competitors by shading under or padding over the price set
by a competitor, and (b) short run profit maximization. Guidelines in determining the relationship
between price spreads and prices at different levels of marketing system can be provided by these
pricing practices. In an analysis of this nature, it is possible to incorporate only the "systematic" margin
policies.
The objectives of this study were to examine the relationships between the farm and retail
prices, and to assess the elasticity of price transmission of some selected vegetables.

METHODOLOGY

Monthly farm-gate and retail prices data for ten commodities (green onions, celeries,
cabbages, potatoes, tomatoes, shallots, hot peppers, carrots, green beans, and Chinese cabbages)
were obtained from the "Vademekum Pemasaran" published by the "Direktorat Bina Usaha Tani dan
Pengolahan Hasil, Dirjentan Tanaman Pangan". The data mostly covered the period of January 1981
to December 1990.
A common approach to modeling price spread behavior is to assume the price spread is a
combination of both percentage and constant absolute amount (Waugh, 1964; George and King,
1971). Some studies indicate that many wholesalers use a constant percentage markup and retailers
appear to make greater use of a fixed-absolute markup. Thus, the assumption that the price spread is
neither constant percentage nor constant absolute amount, but somewhere in between the two is quite
reasonable (Dahl & Hammond, 1977).
In this study, the margins are specified as a linear function of retail prices.

(1) Mj = αj + βjPrj

where j stands for the jth commodity. If Pr and Pf denote the retail and farm level prices,

(2) Prj = Pfj + Mj

From (1) and (2),

Prj = Pfj + αj + βjPr

Therefore,

(3) Pfj = - αj + (1 - βj)Prj

Pfj = aj + bjPrj

where aj = - αj and (1 - βj) = bj

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Equation (1), (2), and (3) describe the relationship between price spreads and prices at different levels
of marketing system.
Elasticity of price transmission is the ratio of relative change in retail price to the relative
change in the farm-level price. If the elasticity for the jth commodity is denoted as

∂Prj Pfj
(4) µj = ──── ────
∂Pfj Prj

From (3),

(5) (1 - βj)Prj = αj + Pfj

Therefore,
1
(6) Prj = ────── (αj + Pfj)
(1 - βj)

From (6)

∂Prj 1
(7) ───── = ─────
∂Pfj (1 - βj)

Substituting (7) in (4), the elasticity of price transmission is obtained as

1 Pfj
(8) µj = ───── ─────
(1 - βj) Prj

RESULTS AND DISCUSSION

Table 1 indicates that for most commodities, the increasing margin was the most probable.
The data did not show that changes in marketing margin were always sequentially increasing. When
the marketing margins were regressed on time, however, they yielded straight lines that reflected
increasing margin over time for all commodities. As suggested by Kohls and Uhl (1980), cost inflation
and consumer demand for marketing services hold the key to the increase of marketing margin. Most
marketing costs are influenced by general economic forces outside the food system, especially labor,
transportation, packaging, and energy costs. To some extent, the results suggest that increasing input
costs for the vegetables marketing system had not been offset by technological improvements. These
improvements may increase handling efficiency at all levels of vegetables marketing system. Without
technological improvements in the near future, one could expect much greater marketing margins than
have actually occurred.
The results also indicated that marketing margins varied for different commodities. The highest
and lowest marketing margins were recorded for hot peppers and cabbages, respectively. By and
large, the differences in marketing margin may reflect product characteristics which affect the
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complexity of marketing different farm products. These product characteristics include: (a) post-harvest
and marketing services, (b) perishability, (c) bulkiness, and (d) extreme seasonality of production. For
example, the marketing margin for tomatoes was higher than that of potatoes because tomatoes were
considered more perishable than potatoes. Requiring more post-harvest treatments, marketing shallots
was more costly than marketing green beans. However, a caution is advised in interpreting the
differences in marketing margin. The effects of product characteristics on marketing margin may not
always apply because of the existence of market imperfection.

Table 1 Farm-Retail Price Spread for Some Selected Vegetables, 1981-1990 (Penyebaran Harga Beberapa Jenis
Sayuran Dari Tingkat Petani ke Tingkat Eceran, 1981-1990).

Commodities 81 82 83 84 85 86 87 88 89 90 Average

Celeries 98 89 121 93 101 195 139 169 174 223 140

Cabbages 21 23 33 32 34 39 41 49 36 54 36
Green Onions 52 27 56 73 74 70 55 91 79 92 67
Potatoes 28 45 31 25 29 29 33 74 44 56 39
Tomatoes 47 58 57 55 80 91 67 190 153 68 87
Carrots - 38 54 101 78 62 67 92 104 168 85
Green Beans 58 73 77 51 69 79 94 107 128 124 86
Chinese Cabbage 25 25 31 31 38 49 76 80 74 91 52
Shallots - - 123 117 143 168 190 192 218 245 175
Hot Peppers - 148 142 175 167 161 234 243 307 270 205

Table 2 shows that six out of ten commodities had both slope and intercept significantly different from
zero. Those vegetables were celeries, cabbages, green onions, carrots, Chinese cabbage, and hot
peppers. Meanwhile, the remaining four commodities: green beans, potatoes, tomatoes, and shallots,
had intercepts that were not significantly different from zero. The non-significance of aj implied that αj
was non-significant. Therefore, for these four commodities, the hypothesis that margin was a linear
function of retail prices was not different from a hypothesis that margin was a fixed proportion of retail
prices. Previous study suggested that normally, fruits and vegetables are purchased in-elastically with
respect to their prices (Meulenberg, 1982). From the marketing agents' perspective, this implies that
fixed margins are most suitable in maintaining gross margin return, if the price variability is quite high.
It should be noted though that the type of margin varies during the course of season (Seeba, 1984).
Thus, even though the marketing agents operate in markets in which they may have some
discretionary authority in setting price, this does not mean that they are immune from demand and
supply conditions in the market.
Using the average farm-gate and retail prices, the elasticity of transmission for all commodities
included in this analysis was calculated. Except for potatoes, tomatoes, and Chinese cabbage, the
elasticities for the other commodities were less than one. The implication of an elasticity of price
transmission of less than one is that if producers' price rises while quantity processed and such other
factors as prices of inputs by processors remain fixed, the relative change in consumers' price will not
exceed the relative change in producers' price (assuming the effective competition holds). Thus, for
those seven commodities, this suggests that their elasticity of demand at the farm level is lower than
their elasticity of demand at the retail level.
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Table 2 Relationship Between Farm Price As A Function Retail Price (Hubungan Harga di Tingkat Petani Sebagai Fungsi
Dari Harga di Tingkat Eceran).
Commodities Monthly Data Intercept Slope R2 Elasticity of
Transmission

Celeries 81-90 - 45.7545*** 0.7267*** 0.73 0.82

Cabbages 81-90 - 7.2436*** 0.7972*** 0.95 0.93

Green Onions 81-90 - 46.9724*** 0.9120*** 0.91 0.78

Potatoes 81-90 4.1575 0.8562*** 0.91 1.02

Tomatoes 81-90 17.6391 0.6499*** 0.55 1.09

Carrots 82-90 - 32.6007** 0.7648*** 0.64 0.81

Green Beans 81-90 - 4.7949 0.6929*** 0.78 0.97

Chi. Cabbages 81-90 11.3192*** 0.3835*** 0.73 1.29

Shallots 83-90 - 28.1368 0.7649*** 0.90 0.94

Hot Peppers 82-90 -101.6634*** 0.9211*** 0.98 0.92

*** Significant at the 1 percent level.

** Significant at the 5 percent level.

CONCLUSIONS

The relationship between prices at the farm and retail levels for the ten commodities being
studied is characterized by an increasing marketing margin over time. The increase in margins can
come from increases in the services being provided by marketing agents and/or from changes in the
general economic forces outside the food system, such as labor, transportation, and energy costs. The
only legitimate concern is whether the services being demanded by consumers are being provided as
efficiently as possible given current technology. If they are, there is little reason to complaint even if
increasing costs and/or more demands on marketing agents' services do push the price spread higher.
Further study on how the changes in marketing margin compare or relate to changes in other
measures of performance needs to be undertaken to confirm this argument.
The results also indicate that fixed or absolute marketing margin is likely to occur in the
marketing of potatoes, tomatoes, green beans, and shallots. Meanwhile, the elasticities of price
transmission for celeries, cabbages, carrots, green beans, green onions, shallots, and hot peppers
suggest that the relative change in consumers' price for those commodities will not exceed the relative
change in producers' price. This may imply that their elasticities of demand at the retail level are higher
than their elasticities of demand at the farm level.
In generalizing about the size of marketing margin or differences in the farm-retail price spread
among different farm products over time, care must be exercised. The spread is basically a reflection of
values at different levels of marketing system. Thus, based on the underlined framework, it is not
analytically sound to draw conclusions about inefficiency, excessive profit levels, profiteering or
exploitation just because the marketing margin is increasing over time.
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REFERENCES

Dahl, D. C. and Hammond, J. W. 1977. Market and Price Analysis: The Agricultural Industries.
McGraw-Hill Inc., New York.
Direktorat Bina Usaha Tani. 1991. Vademekum Pemasaran. Dirjen Pertanian Tanaman Pangan,
Jakarta.
George, P. S. and King, G. A. 1971. Consumer Demand for Food Commodities in the United States
with Projections for 1980. Giannini Foundation Monograph Number 26, University of
California, Berkeley.
Kohls, R. L. and Uhl, J. N. 1980. Marketing of Agricultural Products. Macmillan Publishing Co., Inc.,
New York.
Meulenberg, M. T. G. 1982. International Comparison of Consumer Demand for Fruits and Vegetables.
Proceeding of the 21st International Horticultural Congress, Wageningen.
Seeba, H. G. 1984. Marketing Margins for Fruits and Vegetables in Germany - Seasonal Aspects of
Margin Behavior. Acta Horticulturae, No. 155, The Hague, Netherlands.
Tomek, W. G. and Robinson, K. L. 1977. Agricultural Price Analysis and Outlook. In Martin, L. R. (Ed.).
A Survey of Agricultural Economics Literature. Volume 1. University of Minnesota Press,
Minneapolis.
Tomek, W. G. and Robinson, K. L. 1985. Agricultural Product Prices. Cornell University Press, Ithaca,
New York.
Waugh, F. V. 1964. Demand and Price Analysis: Some Examples from Agriculture. U. S. Department
of Agriculture Tech. Bull. No. 1316, Washington DC.