Now, the world is coming under a threat from a dramatic surge in the world price of food commodities.
The world price of rice jumped from US$472.48 per metric ton in May 2009 to $536.78 in December 2010, while the price of soybeans suddenly rose from $292.6 per metric ton in March 2010 to $387.51 in December 2010.
The increases in the prices of rice and soybeans raise the real income of those who sell the commodities, many of whom are relatively poor, while hurting net rice consumers, many of whom are also relatively poor.
This high volatility of the prices has caused uncertainty and vulnerability, particularly in net-importer countries like Indonesia. The Food and Agriculture Organization (FAO) reported that in 2007 Indonesia imported 1.44 million metric tons of soybeans for consumption, which was 71 percent of domestic demand.
The proportion of imported soybeans in the domestic consumption remains high as of now. The increase in the price of soybeans has had a large impact on the economy as a whole, both at the macro and at the household levels, due to industrial backward and forward linkages.
According to the 2005 Input-Output Table of Indonesia, 77.6 percent of total soybean output in Indonesia was used as intermediate inputs. Moreover, soybean-based industries such as tempe and tofu makers consumed approximately 41 percent of the soybean output. Therefore, the increase in the domestic soybean price, as a consequence of an increase in the world price, raised the price of tempe and tofu, the main protein source for low-income households, making it less affordable for the poor.
Hence, one question arises from this phenomenon: How large is the impact of the volatility of world soybean prices on poverty in Indonesia? Dartanto and Usman (2011 forthcoming) observed that a hike in the world price of soybeans by 20 percent, 40 percent, and 60 percent increases the domestic consumer price of soybeans by 11.5 percent, 22.1 percent and 31.8 percent respectively. These increases in the domestic price of soybeans will be followed by an increase in the poverty index by 0.132 percent, 0.204 percent and 0.296 percent respectively, which are equivalent to an increase in the number of the poor by 275,587, 427,971 and 619,134.
Based on this research, we should not ignore the adverse effects of a jump in the world soybean price to poverty in Indonesia, since many of the low-income groups in Indonesia would fall into poverty. We should also be aware that a high price of a commodity such as soybeans does not benefit the farmers in Indonesia as many scholars believe.
There are three main reasons to explain this phenomenon: first, households spend a high proportion of their budgets on food; second, Indonesia has a high dependency on imported soybeans; and, third, inflexibility in domestic soybean production in response to price increases.
Furthermore, a dramatic surge in the world soybean price forced the government to impose zero import tariffs on soybeans. Unfortunately, Dartanto and Usman (2011 forthcoming) showed that zero import tariffs on soybeans only decreased the poverty index by 0.059 percent, which equals a decrease in the number of poor by 123,275. Therefore, this policy might not be enough to absorb the negative impact of an increase in world soybean prices during 2010. The zero import tariffs would be effective in protecting the poor in Indonesia if the world soybean price soared by less than 10 percent.
The zero import tariff policy may not be enough to protect the low-income group and small- and medium-scale enterprises of tempe and tofu from the increase in world soybean prices. The government should think of other policies to complement the zero tariff policy. In the long run, the government should reduce dependency on imported soybeans by increasing domestic production through non-tariff (i.e., input) subsidies.
By sufficing around 80-90 percent of soybean demand, Indonesia will be able to reduce uncertainty and vulnerability resulting from high fluctuation of the world soybean price and still enjoy benefits from international trade through lowering prices and creating competition in the domestic market.
The writer is a researcher at the University of Indonesia’s Institute for Economic and Management Studies (LPEM FEUI).
