Market Integration and Price Transmission on the CPO and Cooking Oil Markets in Indonesia

Abstract

Cooking oil is considered as one of staple food in Indonesia. The goverment need to maintain the stability of cooking oil’s price because it will affect the wealth of the people. The aims of this study were to gain better understanding on vertikal and spatial integration of crude palm oil and cooking oil markets and to analyze the nature of price transmission both vertically and spatially and the impact of CPO export tax to market integration. Data analysis methods used in this research were:market integration by cointegration test (VAR based) and price transmission by Error Correction Model (ECM) adapted from Taubadel (1998). The research found that there was no cointegration between international and domestic prices of CPO. The implementation of progressif export tax started in 2007 had an impact to integration of international-domestic CPO markets. Vertically, CPO prices (both international and domestic) were cointegrated to domestic cooking oil’s price and the price transmissions were symmetric. Spatially, cooking oil prices of 10 big cities in Indonesia were cointegrated together with Medan and Surabaya as main markets. Price transmission from main markets to local markets were symmetric.