ABSTRACT
This study identified the factors and further discussed the supply management policies to improve the tea prices. The empirical analysis in present study was based on the concept of demand response or elasticity and export quota scheme. The simulation results from 1999-2003 indicated that with a reduction in the export volume, the prices and export earnings go up and vice versa. Similarly, appropriate measures for export selling prices and earnings are necessary in keeping the current situation of the Indonesian tea industry in view.
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DOI: 10.3923/jas.2006.3170.3173
URL: https://scialert.net/abstract/?doi=jas.2006.3170.3173
INTRODUCTION
The tea market is dominated by five countries, Kenya, Sri Lanka, China, India and Indonesia, which export about 80% of the world tea. Apart from China, the rest mainly produce black tea. In 2004, the worlds net import of tea was 1.42 million tones, out of which 1.17 million tones (82%) was black tea (Anonymous, 2000-2003). In contrary, the growth rate in world black tea consumption was reduced to 2.2% during 1993-2003 (FAO, 2005).
The imbalance situation between the level of demand and supply of tea is a big threat for the tea producing countries, due to decline in prices. Similarly, the depressed price situation has been intensified in Kenyan tea industry due to high production cost (Gesimba et al., 2005). The impact was also enormous on price recovery of Indian tea traded through auction and was ruling below the cost of production (Anonymous, 1998). Previous studies revealed that decline in tea price had negative impact on tea industry in Sri Lanka mainly due to soil degradation and poor productivity (Iqbal et al., 2006). In Indonesia, the market price situation affected the income level of smallholders drastically, which constitutes the largest sector of tea industry (Yuliando and Nakayasu, 2006).
It is, therefore, necessary to take appropriate measures to improve the current price level. A supply management is considered as a key to influence the market price. Principally, it is an adjustment to fit the level of supply and demand at certain price goal. The objective of this study was to analyze a supply management option for tea producing countries in order to improve the price level.
MATERIALS AND METHODS
The data used in this study were collected from Tea Association of Indonesia (Asosiasi The Indonesia - ATI), Jakarta, 2005. Principally, allocating an export quota or a reduction in export volume that could likely improve the price would make the supply management works effectively (Maizels et al., 1998). In this scheme, the price goal was arranged under certain levels of export volume. In this study, the export quota scheme (export volume arrangement) was used to influence the price in the view of supply-demand law. A change in tea price due to such scheme was measured by using the concept of total demand elasticity. At first, we set the target on export volume arrangement at two levels i.e., smaller cut with 5% reduction and larger cut with 10% reduction in supply volume. Also, a simulation of supply management of 1999-2003 was run with a base case or no supply management context as a control variable.
A partial own and cross-price elasticity was used to build an understanding of interrelationship of tea producing countries toward the market or to the demand respond. This type of elasticity was computed using a translog utility function model. For a negative cross price elasticity, it is interpreted that the relationship of both sources of tea product is complement and for a positive value, it signs a substitute in their relationship.
The concept of total demand elasticity or simply total elasticity was used to measure the requirement of net percentage effect. This is the net percent change in quantity resulting from a 1% change in own price, taking the interactions of related variables into account (Tomek and Robinson, 2003). Conceptually, the total elasticity coefficient can be viewed as the sum of two terms: the own-price elasticity and cross-price elasticities multiplied by the elasticities of price transmission, for example, the elasticity of the price of j with respect to a change in the price of i. The own-price elasticity is adjusted for the cross-effects. Assuming just one substitute (j) for the commodity i, the total elasticity for i (Ti) is
Where,
Eii | = | own-price elasticity |
Eij | = | cross-price elasticity and |
Sji | = | the percentage change in the price of j given a 1% change in the price of i. |
Sji | = | Eji/(∈j - Ejj), where ∈j = supply elasticity of j. |
Theoretically, for normal-sloping supply and demand, |Eii| > Eij and 0<Sji<1. Thus, the total price elasticity is negative and smaller in absolute value than partial elasticity when goods are substitutes.
Finally, regarding to the determination of new price equilibrium for an export quota scheme, the determination can be estimated based on the concept of elasticity itself as expressed here.
Where,
CE | = | change in export volume |
DC | = | post-CE demand level |
Q0 | = | pre-CE demand level |
E11 | = | demand elasticity (total price elasticity) |
P0 | = | pre-CE price level |
P1 | = | post-CE price level |
RESULTS AND DISCUSSION
The results of own and cross-price elasticity analysis are presented in Table 1. All of the own-price elasticities were correct in sign wherein Indonesian tea was having higher demand elasticity than others. The market situation shows that Sri Lankan tea was a strong substitute for Indonesian tea but not the vice versa. When Sri Lankan and Indian tea was complement, it was found out that Kenyan tea was a substitute to others. Typically, the feature gave an insight that the market was competitive.
The total elasticity showed the net demand respond from various sources (Table 1).
Two alternatives on export volume arrangement were used for simulation during 1999-2003. The first was small-cut i.e., 5% reduction and the other for 10% reduction. The results showed that each target had a substantial expansion of export revenue for all producers simultaneously (Fig. 1). It was noted that for the small-cut the total export revenue was increased by 5.4%. However, at larger-cut, the increase of export revenue was less effective i.e., below 8% compared to the reduction proportion of 10%.
A simulation of the tea export earnings of each producing country was also run as shown in Table 2.
Fig. 1: | The impact of alternative supply management schemes on total export revenues, during 1999-2003 |
Table 1: | Own and cross-price elasticities for black tea imported from main producing countries during 1994-2003 |
Table 2: | Simulation results for alternative supply management during 1999-2003 |
Table 3: | Simulation results for the supply management on base case during 1999-2003 |
The export supply-cut target was distributed equally among the black tea exporting countries (Table 3). It was found that for 5% stock reduction, Sri Lanka enjoyed the highest increment of 6.5% in its export earnings, while India, Kenya and Indonesia were at 4.4, 4.3, 4.2%, respectively. The corresponding gains on the larger-cut scheme increased more earnings to each country, however it was less effective in its margin comparing to the reduction proportion.
Based on above results, it was evident that supply management could be assumed as a policy to influence the price and increase the export earnings. In this regard, the magnitude of gains was influenced by the elasticity factor, which could be different due to the time period used (1999-2003). In practice, however, this arrangement could be put in an advance negotiation, for an instance, it could be based on the similarity in resources and objectives among producer countries or based on the principle of differential growth, share, price level and market establishment. The total tea supply could be fixed at an amount that addressed a pre-agreed level of price. This principle would also create an opportunity to develop an influential brand of tea of each producer.
CONCLUSIONS
The supply management is considered as a policy measure to improve the price, export earnings and promote a new scheme in tea export. The implementation of such management will be more effective by making an agreement among producing countries, based on the principle of differential growth, price level, share and market establishment. It will certainly improve the current price level and earnings in Indonesia. Also, active participation of other tea producing countries in negotiations is crucial for long-term sustainability and development of tea industry and other allied sectors involved. The price improvement is indispensable for Indonesia due to weak trend in trade-flow, which eventually caused a depression in tea industry especially to the smallholding sector (Yuliando and Nakayasu, 2006).
REFERENCES
- Gesimba, R.M., M.C. Langat, G. Liu and J.N. Wolukau, 2005. The tea industry in Kenya the challenges and positive developments. J. Applied Sci., 5: 334-336.
Direct Link - Iqbal, S.M.M., C.R. Ireland and V.H.L. Rodrigo, 2006. A logistic analysis of the factors determining the decision of smallholder farmers to intercrop: A case study involving rubber-tea intercropping in Sri Lanka. J. Agric. Syst., 87: 296-312.
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