Solution to Overcome Price Inequality

Oct 13, 2025 by vinooalluri.com 21 views

Analysis of Domestic CPO Transmission Elasticity on the Price of FFB (Fresh Fruit Bunches) in North Sumatra: Unraveling the Mystery Behind Oil Palm Farmers' Low Profits

Introduction

The oil palm industry is a significant contributor to the economy of North Sumatra, with millions of people relying on it for their livelihood. However, despite the soaring price of CPO (Crude Palm Oil), oil palm farmers in the region often complain about their low profits. This phenomenon has sparked intense debate among researchers, policymakers, and industry stakeholders. In this article, we will delve into the analysis of domestic CPO transmission elasticity on the price of FFB (Fresh Fruit Bunches) in North Sumatra, with a focus on understanding why oil palm farmers never feel the sweet increase in CPO prices.

Price Transmission Elasticity: The Key to Understanding the Price of FFB

Price transmission elasticity measures how much changes in FFB prices are due to changes in CPO prices. In this context, the price of CPO refers to the domestic CPO price, not the export CPO price. When the elasticity of the domestic CPO price transmission to the price of FFB is greater than one (et> 1), it means that every increase in the domestic CPO price of 1% will result in an increase in FFB prices of more than 1%. Conversely, if the transmission elasticity is less than one (et <1), it means that the increase in domestic CPO prices is not completely forwarded to the price of FFB.

Research Results in North Sumatra: Low Elasticity, Farmers' Benefits Disseminated

Research conducted in North Sumatra shows that the elasticity of the domestic CPO price transmission to the price of FFB in the region is greater than one (et> 1). These results indicate that domestic CPO price changes have a greater impact on the price of FFB compared to changes in the price of domestic CPO itself. However, this result did not necessarily show that oil palm farmers in North Sumatra gained profits comparable to the increase in domestic CPO prices.

Why?

Several factors contribute to the low profits of oil palm farmers in North Sumatra. Some of the key reasons include:

*** Weak farmers' bargaining strength: ** Oil palm farmers in North Sumatra generally only sell FFB, not CPO. They have no control over the selling price of FFB, which is often determined by traders.

*** Lack of Minimum TBS Price Regulation: ** The absence of regulations regarding the minimum purchase price (basic price) of FFB makes traders free to determine the price of FFB without considering the price of domestic CPO.

*** High production costs: ** TBS prices do not always reflect high production costs faced by oil palm farmers. The increase in fertilizer prices, pesticides, and labor costs makes it difficult for farmers to benefit even though the price of domestic CPO is high.

Solution to Overcome Price Inequality

To overcome the imbalance in the price of FFB and CPO, several solutions can be applied:

*** Encouraging an increase in the basic price of FFB: ** The government needs to set a minimum purchase price (basic price) of FFB that refers to the price of domestic CPO to protect farmers.

*** Strengthening farmers' institutions: ** The formation of cooperatives or farmer groups can provide better bargaining power for oil palm farmers in determining the price of FFB.

*** CPO Processing Industry Development: ** The development of the CPO processing industry at the local level can encourage added value and increase profits for oil palm farmers.

Conclusion

The elasticity of the domestic CPO price transmission to the price of FFB in North Sumatra, which is greater than one, shows that the change in the price of domestic CPO has a major impact on the price of FFB. However, the lack of minimum price regulations for FFB and the weak bargaining position of farmers causes the benefits obtained by farmers to be not comparable to the increase in domestic CPO prices. To achieve more equitable welfare, joint efforts are needed to encourage the increase in the basic prices of FFB, strengthen farmers' institutions, and develop the CPO processing industry in the regions.

Recommendations

Based on the analysis, the following recommendations are made:

The government should establish a minimum purchase price (basic price) of FFB that refers to the price of domestic CPO to protect farmers.
The formation of cooperatives or farmer groups should be encouraged to provide better bargaining power for oil palm farmers in determining the price of FFB.
The development of the CPO processing industry at the local level should be promoted to encourage added value and increase profits for oil palm farmers.
Research should be conducted to identify the factors that contribute to the low profits of oil palm farmers in North Sumatra and to develop strategies to address these issues.

Limitations of the Study

This study has several limitations. Firstly, the data used in the analysis is limited to the period of 2015-2020, which may not reflect the current situation. Secondly, the study only focuses on the price transmission elasticity of domestic CPO to the price of FFB in North Sumatra, and does not consider other factors that may influence the price of FFB. Finally, the study assumes that the price of FFB is determined by the price of domestic CPO, which may not be the case in reality.

Future Research Directions

Future research should focus on addressing the limitations of this study. Some potential research directions include:

Conducting a more comprehensive analysis of the price transmission elasticity of domestic CPO to the price of FFB in North Sumatra, including other factors that may influence the price of FFB.
Examining the impact of the CPO processing industry development on the profits of oil palm farmers in North Sumatra.
Investigating the factors that contribute to the low profits of oil palm farmers in North Sumatra and developing strategies to address these issues.

Conclusion

In conclusion, the analysis of domestic CPO transmission elasticity on the price of FFB in North Sumatra shows that the change in the price of domestic CPO has a major impact on the price of FFB. However, the lack of minimum price regulations for FFB and the weak bargaining position of farmers causes the benefits obtained by farmers to be not comparable to the increase in domestic CPO prices. To achieve more equitable welfare, joint efforts are needed to encourage the increase in the basic prices of FFB, strengthen farmers' institutions, and develop the CPO processing industry in the regions.
Q&A: Unraveling the Mystery Behind Oil Palm Farmers' Low Profits in North Sumatra

Introduction

The oil palm industry is a significant contributor to the economy of North Sumatra, with millions of people relying on it for their livelihood. However, despite the soaring price of CPO (Crude Palm Oil), oil palm farmers in the region often complain about their low profits. In this Q&A article, we will address some of the most frequently asked questions about the analysis of domestic CPO transmission elasticity on the price of FFB (Fresh Fruit Bunches) in North Sumatra.

Q: What is price transmission elasticity, and why is it important in the context of oil palm farming?

A: Price transmission elasticity measures how much changes in FFB prices are due to changes in CPO prices. In this context, the price of CPO refers to the domestic CPO price, not the export CPO price. When the elasticity of the domestic CPO price transmission to the price of FFB is greater than one (et> 1), it means that every increase in the domestic CPO price of 1% will result in an increase in FFB prices of more than 1%. This is important because it shows that the change in the price of domestic CPO has a major impact on the price of FFB.

Q: What are the main factors that contribute to the low profits of oil palm farmers in North Sumatra?

A: Several factors contribute to the low profits of oil palm farmers in North Sumatra, including:

Weak farmers' bargaining strength: Oil palm farmers in North Sumatra generally only sell FFB, not CPO. They have no control over the selling price of FFB, which is often determined by traders.
Lack of Minimum TBS Price Regulation: The absence of regulations regarding the minimum purchase price (basic price) of FFB makes traders free to determine the price of FFB without considering the price of domestic CPO.
High production costs: TBS prices do not always reflect high production costs faced by oil palm farmers. The increase in fertilizer prices, pesticides, and labor costs makes it difficult for farmers to benefit even though the price of domestic CPO is high.

Q: What are some potential solutions to overcome the imbalance in the price of FFB and CPO?

A: Several solutions can be applied to overcome the imbalance in the price of FFB and CPO, including:

Encouraging an increase in the basic price of FFB: The government needs to set a minimum purchase price (basic price) of FFB that refers to the price of domestic CPO to protect farmers.
Strengthening farmers' institutions: The formation of cooperatives or farmer groups can provide better bargaining power for oil palm farmers in determining the price of FFB.
CPO Processing Industry Development: The development of the CPO processing industry at the local level can encourage added value and increase profits for oil palm farmers.

Q: What are the implications of the analysis for policymakers and industry stakeholders?

A: The analysis has several implications for policymakers and industry stakeholders. Firstly, it highlights the need for policymakers to establish a minimum purchase price (basic price) of FFB that refers to the price of domestic CPO to protect farmers. Secondly, it emphasizes the importance of strengthening farmers' institutions, such as cooperatives or farmer groups, to provide better bargaining power for oil palm farmers in determining the price of FFB. Finally, it suggests that the development of the CPO processing industry at the local level can encourage added value and increase profits for oil palm farmers.

Q: What are the limitations of the study, and what are some potential future research directions?

A: The study has several limitations, including:

The data used in the analysis is limited to the period of 2015-2020, which may not reflect the current situation.
The study only focuses on the price transmission elasticity of domestic CPO to the price of FFB in North Sumatra, and does not consider other factors that may influence the price of FFB.
The study assumes that the price of FFB is determined by the price of domestic CPO, which may not be the case in reality.

Some potential future research directions include:

Conducting a more comprehensive analysis of the price transmission elasticity of domestic CPO to the price of FFB in North Sumatra, including other factors that may influence the price of FFB.
Examining the impact of the CPO processing industry development on the profits of oil palm farmers in North Sumatra.
Investigating the factors that contribute to the low profits of oil palm farmers in North Sumatra and developing strategies to address these issues.

Q: What are the conclusions of the analysis, and what are the recommendations for policymakers and industry stakeholders?

A: The analysis shows that the change in the price of domestic CPO has a major impact on the price of FFB in North Sumatra. However, the lack of minimum price regulations for FFB and the weak bargaining position of farmers causes the benefits obtained by farmers to be not comparable to the increase in domestic CPO prices. To achieve more equitable welfare, joint efforts are needed to encourage the increase in the basic prices of FFB, strengthen farmers' institutions, and develop the CPO processing industry in the regions.