Indonesian people love spicy and fiery food. Chilli is Indonesian staple food in addition to rice making chilli one of the most important agricultural commodities in Indonesia. Its price fluctuation is said to significantly affect change in the inflation rates. As in any markets, the fluctuation can be affected by both demand and supply sides. From the supply side, chili crops that require decent dry weather before harvesting caused high prices in early 2011 due to unusual heavy rainfall during the dry season. From the demand side, food prices including chilli typically rise ahead of and during the Muslim fasting month of Ramadhan. To control the inflation rates, government assistance to help farmers deal with this climatic change is crucial in addition to (temporary) trade policy such as imports.
Indonesia’s growing supermarket channels should have also been part of these solutions. On 18 October 2011 at PPIA (Indonesian student association) academic workshop, Sahara, a PhD candidate of School of Agriculture, Food and Wine at the University of Adelaide and Lecturer at Bogor Agricultural University in Indonesia, discussed various determinants of Indonesian chilli farmers’ participation at supermarket channels and how the participation affects their income. The workshop was well-attended by Indonesian students and researchers currently residing in Adelaide, South Australia.
According to Sahara, growing supermarket channels have created new challenges. They include product homogeneity, new standards and grading and consistency in supply. Supply chains are normally well-developed and coordinated requiring farmers to adopt certain technical procedures and to have knowledge of how to access these channels. There has been a concern about small farmers’ access to participate at these supermarket channels.There are over 400,000 small-scale producers who are involved in chilli production in Indonesia.
Sahara conducted a survey to over 500 farmers in West Java, Indonesia. Sampling is designed to capture both farmers who participate at supermarket channels and those who do not. Her project is part of a bigger project funded by ACIAR. A long list of potential determinants including farmers’ individual background (such as educational background and experience), household assets, location of the farm relative to the closest market, the land size and some other factors are included in her analysis.
In addition to the significance of some other variables, her analysis suggests that the land size is positively associated with the probability of participating at a supermarket channel. The interpretation of this finding is not straightforward. The definition of large-scale farmers in Indonesia is considered to be ‘small-scale’ compared to other developed countries or farmers planting other commodities. Regardless how large is large, Sahara and the workshop’s participants agreed that there is room for improvement to increase small farmers’ participation at supermarket channels.
Sahara’s field observations provide important insights into the practise of chilli supply chains in Indonesia. One major concern is delay of payment for delivered products which may restrict participation of small farmers who own limited assets. This finding is similar to findings from a study by Umberger, Stringer and Mueller (2010) on potato farmers’ market channel choices in Indonesia. In some cases, traders or wholesalers assist farmers to receive advanced payment.
Another concern is the absence of formal contracts between farmers and traders. It is surprising to learn that traders do not document/book keep their transactions with farmers well. This issue may adversely impact both farmers and traders. It may cause the inability of traders to ensure consistency in supply – an aspect that is crucial in supermarket channels as discussed above. Contracts can be arranged such that supply can be sufficient over time taking into account seasonal effects, number of farmers and their production capacities. At the aggregate level, this problem may lead to uncertainty of chilli supply which can impact on the inflation rate. For the farmers, formal contracts would provide them certainty in selling their products as well as give them knowledge of market information. Traders could advise farmers the adjustment in production required in unusual periods (eg due to climatic change) but are still obliged to purchase the agreed amount of production as stated in the contracts.
It is worth noting that participation at supermarket channels should not necessarily imply the farmers’ withdrawals from participating at other channels such as food processing and wet markets. The objective is to create a good business portfolio for the farmers and thus minimise the risk that the farmers are dealing with. Farmers who participate at supermarket channels, however, may benefit from technical assistance that they receive and this may assist them to not only improve the quality of their products but also market their products well in other channels.
Still not clear from the discussion is the bargaining power of chilli farmers. Whilst continuing increases in chilli prices seem to suggest supply shortage, concerns about small farmers being ‘overly controlled’ by supermarket chains remain. Perhaps, this is where the role of government to ensure ‘fair trade‘ is important. Government support for the formation or revitalisation (if it already existed) of institutions such as farmers cooperatives which can facilitate discussions between the industry and farmers might be needed. The presence of such institutions can also voice farmers’ aspiration regarding the opening up of Indonesian chilli markets. Whilst trade openness can be a remedy to control inflation and a good way to put pressure on farmers to improve their competitiveness, when and to what extent the market should be opened should be throughly discussed by involving farmers.
This article is prepared by Bagus Wicaksena and Risti Permani. Bagus works for the Ministry of Trade of the Republic of Indonesia and is currently undertaking a postgraduate study in Global Food and Agricultural Business (Trade Policy) at School of Agriculture, Food, and Wine at The University of Adelaide. Risti Permani is a postdoctoral fellow at School of Economics, the University of Adelaide.