The Structural Change in the Supply Chain of Oil Palm – A Case of North Sumatra Province, Indonesia

In this paper, we analyze the structural change in the supply chain of oil palm in North Sumatra, Indonesia, especially after the financial crisis of the late 20th century. We first describe the past and present market structure and conduct of oil palm industries in North Sumatra with an industrial organization approach based on our field study. The analysis reveals that the supply chain of oil palm in North Sumatra has changed such that farmers had more power to determine FFB prices over crushing companies, especially from 2001 through 2004. However, farmers lost bargaining power during 2007-2008 due to a decrease in palm oil demand, plunging of palm oil prices, and a regulation imposed upon crushing companies by the Ministry of Agriculture. To analyze such structural changes empirically, we test the existence of Asymmetric Price Transmission (APT), in which the speed of adjustments of the output price after the input price increases or decreases is different; the existence of APT implies the existence of market power. We apply the (Momentum) Threshold Autoregressive ((M-)TAR) model to estimate APT. According to the estimation results, crushing companies had more power to determine FFB prices over farmers until around March 2002. This situation changed such that farmers had more bargaining power from around April 2002 to around April 2007 before the power became balanced. The structural change test also shows these time points as optimal structural change points. The APT estimation, however, has little rigorous theoretical background, and the concept of APT is not necessarily related to market power. Hence, we next analyze the market power of crushers and farmers both theoretically and empirically. The estimation result of market power indicates that the farmers had no market power before the third quarter of 2002, but they did have market power from the next quarter to the first quarter of 2008, after which time they again lose market power. These empirical results are consistent both with each other and with the descriptions of the structural change. Finally, we conclude and draw some implications for farmers, crushers, and consumers of palm oil.