Commentary on Farmers Exchange Value
.
Indonesia is possibly the only country where many people, institutions and academics still consider the farmers exchange value (NTP) as an indicator of farmers\' welfare.
To gain understanding together, let us begin with a review of the basic concept of exchange value with a simple example. The price of unhusked rice is Rp 400,000/quintal, while the price of cloth is Rp 100,000/meter. The barter terms of trade (BTT) of unhusked rice to cloth is 4 meters of cloth per quintal of unhusked rice.
The rice BTT is the quantity of cloth (4 meters) that can be bought from selling 1 quintal of unhusked rice. The BTT is usually calculated as a price index according to base year. For example, in the base year of 2012, the price of unhusked rice was Rp 440,000/quintal and the price of cloth was Rp 100,000/meter. In 2017, the price of unhusked rice is Rp 410,000/quintal, while the price of cloth is Rp 110,000/meter.
If the price index of the 2012 base year is set at 100, in 2017 the price index of unhusked rice is (410,000/440,000) × 100 = 93.18, while the price index of cloth is (110,000/100,000) × 100 = 110. The BTT index in the 2012 base year is 100, while in 2017 it is (93.18/110) x 100 = 84.71. This means that the terms of trade or the real price in 2017 is 15.29 percent lower than in 2012.
If the household income comes only from the sales of unhusked rice and household welfare can be measured from the purchasing power of income in cloth, it can be said that farmers\' welfare in 2017 was lower by 15.29 percent than in 2012 – as long as the volume of unhusked rice sales does not change. However, if the sales volume changes, the BTT has no direct relationship with the purchasing power based on unhusked rice sales or with farmers\' welfare. In this case, the more suitable measuring tool is the purchasing power based on sales value.
The sales purchasing power is measured by the income terms of trade (ITT), or the ratio of the selling value of goods against the purchase price of goods. The ITT index can be calculated as the results times the ratio of the sales volume against the BTT. From the above BTT calculation, if the sales volume of unhusked rice is 50 quintals in 2015 and 60 quintals in 2017, the ITT index is (60/50) × 84.71 = 101.65. This means that even though the BTT (real price) declined by 15.29 percent, the ITT of unhusked rice sales in 2017 is 1.65 percent higher than base year 2012.
The ITT also contains a weakness because it does not calculate production costs, so the concept of factorial terms of trade (FTT) was introduced, calculated as the BTT times the total factor productivity (TFP), divided by the cost of total production. Besides being more valid, the FTT is also clearer in analyzing the sources of changes in the value of famers\' welfare, which includes changes in the consumption BTT (real price of the result of farmers\' efforts), input BTT (incentive price of farmers\' efforts) and technological innovation, so that it is more useful in formulating policy responses.
With regard to the above BTT example, with a base year of 2012, a TFP index of 125 in 2017 and an input price index of 105, the FTT index is (93.18/110)× (125/105) = 100.85. This means that in the 2012-2017 period, the purchasing power of agricultural net income, which also indicates agricultural household welfare, increased by 0.85 percent. The direct contribution of its deciding variable is the contraction of price decrease in farm produce by 6.82 percent, the contraction of consumer goods inflation by 10 percent, the contraction of price increase in farm inputs by 5 percent and innovation drive by 25 percent.
From this, it can be seen that farmers\' welfare can be raised not only through the support of output price and input price subsidies (price incentive), but also through technological innovation (TFP changes) and rural inflation control. This information and comprehension cannot be obtained from the farmers exchange value (NTP) of the Central Statistics Agency (BPS). The BPS’s version of NTP is a variant of the BTT, as in the example above, with a modification that the price paid by farmers covers consumer goods and farm inputs.
NTP is calculated as the result of the price index of goods sold (index of price received) against the price index of goods farmers purchased (index of price paid). Such a modification has made the NTP calculation more difficult to interpret, so it is less useful in the formulation of policy response.
The main idea to be disclosed is that the calculation of the BPS’s NTP contains conceptual shortcomings so that it cannot be used as an indicator of the value of farmers’ net income welfare, which means that it also cannot be used as an indicator of farmers\' welfare.
NTP and farmers\' welfare
The economics concept discloses that welfare is directly proportionate to the quantity and quality of goods being consumed.In the market economy system, household welfare can be measured as the purchasing power of the household income against the consumption of goods.
If measured in indexes, the index of household economic welfare is the index of net income divided by the price index of consumer goods. The farmers\' NTP of the BPS version is the measure of the barter price of farm results against all goods purchased by household farming businesses (RTUP), and not the income purchasing power of consumer goods of the household farming business. Is the NTP calculation in line with the measurement of economic welfare?
First, from the numerator side in the NTP calculation, the price index obtained is not a good indicator for the household farming business’s income.The household farming business income consists of the business’s net profits plus non-farm incomes, in which the two do not have a clear relationship with the price farmers have obtained, while non-farm incomes is not directly linked with the price of farm business results. The Agricultural Census in 2013 showed that household farm business incomes accounted only for about 47 percent of the total income.
Second, from the denominator side in the NTP calculation, the price index paid by farmers constitutes the aggregated index of household farm business consumer goods and the price index of farm input goods. Farm input goods are not direct consumer goods, so they cannot be included in the determinant of household farm business welfare. Because the price of consumer goods is included in it, the price index paid by farmers is not directly related to the farm business’s profits. Therefore, the BPS version of the NTP does not have any direct connection to farmers\' welfare, even it can be said that the NTP does not have a clear meaning.
Third, the BPS’s NTP covers the BTT, which does not factor in the impacts of technological changes vs the farm business profits, which are usually measured based on the total production factor (TFP). Changes in the TFP reflect technological advancement, which can be used to calculate the innovation impacts on production and agricultural business profits.
BPS understands the shortcomings in the NTP calculation. In order to raise the usage value of NTP data, the BPS has added the agricultural business terms of trade (NTUP) indicator since December 2013. NTUP is calculated as a ratio of the price index received by farmers against the price index of farming business inputs. The NTUP can be interpreted as an indicator of price incentives for farming businesses. However, the NTUP still has shortcomings because it does not consider technological changes. The agriculture department of the United States shows that TFP growth in Indonesia over the last 10 years reached 2 percent per year, a figure which is big enough to influence both production improvement and agricultural business profits.
A better indicator of changes in the value of welfare of farming business incomes is the agricultural business factorial terms of trade (NTFUP), which is calculated as the NTUP times the TFP. Aside from improving upon the NTUP, the TFP data can also be used to adjust the NTP calculation, mentioned as the farmers factorial terms of trade (NTFP) as explained earlier in this discussion.
Phenomenon of NTP decline
BPS data shows that the agricultural NTP has declined from 102.12 in July 2014 to 100.65 in July 2017. It also illustrates that the number of poor in rural areas fell from 17.77 million people, or 14.17 percent of the total rural population, in March 2014 to 17.10 million people, or 13.93 percent of the total rural population, in March 2017. If it can be said that the rural population reflect the existence of farmers, contrary to that which is indicated by the decline in NTP, the rural poverty data shows that most farmers enjoy welfare improvement.
Different from the decline in NTP, BPS data shows that the NTUP increased from 106.18 in July 2014 to 109.75 in July 2017, an increase of price incentives for agricultural businesses over the last three years. The NTUP increases because the price index received is bigger than the price increase in farming business inputs. In the period from July 2014 and July 2017, the price index received by farmers increased by 13.19 percent, while the price index of farming business inputs rose by 9.44 percent. The perceived indication that price incentives of farming businesses fell over the last three years is not consistent with data on NTUP increase.
Then, why does the farmers exchange value (NTP) decline? The answer is because of the relatively high inflation in rural areas, as reflected by the increase in the consumer price index by 17.37 percent in the July 2014-July 2017 period, which is bigger than the increase in the price index received by farmers (13.19 percent) and the increase in price index of farming business inputs (9.44 percent).
The consumer goods of household farming business (RTUP) include farming and non-farming results. From the fact that the growth rate of the farming business results is smaller than the growth rate of consumer goods prices, it can also be concluded that the BTT of the agricultural versus the non-agricultural sectors has tended to decline. Theoretically, the phenomenon of BTT decline in the agricultural versus the non-agricultural sectors is normal and natural.
The phenomenon happens because in line with an increase in consumer incomes, demand for agricultural products tends to decline, while demand for non-agricultural products tends to rise. Therefore, the demand for agricultural products enjoys a smaller increase compared to non-agricultural products, so the prices of agricultural products appears to fall compared to non-agricultural products.
BPS data also shows that in the July 2014-July 2017 period, inflation in urban areas reached 11.50 percent, lower than the inflation in rural areas of17.37 percent. The difference in the inflation figures between urban and rural areas reflects their inequality in infrastructure and market structure. Keeping in mind that non-agricultural products consumed by the rural population are produced or distributed from urban areas, it can be concluded that the high rural inflation rate is a reflection of inefficiency in the distribution of goods between urban and rural areas.
One of the keys to supporting the farmers exchange value (NTP) is by improving the distribution of goods or by integrating the rural and urban economies. A rural-urban economic integration is not only important to support NTP improvement, but also to encourage general economic growth in rural areas and in cities and to reduce the developmental inequality between rural and urban areas, and between the agricultural and non-agricultural sectors.
This brief note is intended to clarify the interpretation of the NTP and the factors influencing it, so that discourses on related policies can be more productive and enlightening. The writer also hopes that the BPS is willing to review the way it calculates and presents the NTP, especially to take into account technological changes (total factor productivity/TFP). The suggested improvement is calculated based on structured data of farming business costs, which are routinely compiled by the BPS.
PANTJAR SIMATUPANG
Researcher at the Agricultural Socio-Economic Research Center
