Price Transmission in International Crude Palm Oil Markets: The Effects of Export Tax of Indonesia

Abstract

Over the past decade, there have been fluctuations in the global price of CPO. These variations in global CPO price are likely to affect the local CPO price as well. To overcome this, the Indonesian government has implemented an export tax on CPO in order to maintain stability in the business of the CPO producers. The aims of this research are to assess the market integration and the price transmission between the international CPO market and the domestic CPO market of Indonesia as well as the effects of the Indonesian export tax on the domestic and on the international prices. The analysis uses 592 weekly prices from January 2005 to May 2017 and estimation of Error Correction Model as an analysis method. The results of analysis show that the domestic CPO market of Indonesia is integrated with the international market. The domestic CPO market in Indonesia responds to price fluctuations in international market. In addition, although the imposition of the export tax of CPO in Indonesia slightly reduces instability of the domestic CPO price, the overall influence is still small. It can be inferred that the policy is effective to increase government revenue as a fiscal instrument at the expanse of oil palm farmers and producers of CPO. In practice, even though the policy maker has attempted to reduce the dependency of the Indonesian CPO producers on the world market by creating a demand market, but the Indonesian government still need to optimize the policy under the new format of the export tax of CPO. Keywords— CPO, ECM, Export Tax, Market Integration, Price Transmission