Price Transmission and the Effect of Indonesia's Export Tax on Crude Palm Oil (CPO) Prices

Abstract

Indonesia as the largest Crude Palm Oil (CPO) producer in the world, Indonesia should have control over the price and quantity of CPO. Over the past decade, there have been fluctuations in the global price of CPO. As the price of the world CPO fluctuates, Indonesia lacks alternative markets for its local production of CPO. This has  resulted in a unstable in the tax revenue of CPO in Indonesia. To solve this, Government has implemented Indonesia's export tax on CPO in order to maintain stability in the income of the CPO producers. The aims of this research are: (1) to assess the market integration and the price transmission between the international CPO market and the domestic CPO market of Indonesia, (2) to analyze the effects of the Indonesian export tax of CPO on the domestic and on the international prices. This study uses secondary time series data that is obtained from relevant institutions. To investigate the price transmission in international CPO markets with respect to the effects of Indonesia's export tax, several steps of this analysis consist in examining the data by using e.g. the Unit Root Test, the co-integration Test, and estimation of the Error Correction Model (ECM).  The results of the price transmission analysis show that the domestic CPO market of Indonesia is integrated with the international market. In the long run, a fluctuation of price in international market will be responded by the domestic CPO market in Indonesia. In addition, although the imposition of the export tax of CPO in Indonesia makes it possible to prevent the instability of the domestic price of CPO, the level of influence is still small.