The factors Involved in the Process Cane into Sugar in Indonesia

Dyana Sari1Wahib Muhaimin2

Wahyunindyawati31) Lecturer at Faculty of Agriculture, University of Tribhuwana Tungga Dewi, Malang, Indonesia

2)Lecturer at Faculty of Agriculture, University of Brawijaya, Malang, Indonesia3)Researcher at BPTP, Malang, Indonesia

Abstract : The Indonesian sugar economy is quite worrying due to the increasing of imported

sugar from year to year. Therefore it is necessary to study, what factors are involved in the Indonesian sugar economy and how far these factors play a role in the arena of sugar economy.

This study is based on secondary data from the years 1983-2013, from several sources such as BPS, AGI, USDA, and the World Bank. Then the data is poured into models are made in such a way that is similar to the actual conditions, according to the theory of agricultural economics. SAS version 9 is utilized to process the data, with technique of simultaneous link.

The result says, factors involved in Indonesian sugar economy has 3 sectors : cane farmers that grow sugarcane, sugar mills that process sugarcane into sugar, and sugar in the marketplace. In cane farmers, factors affecting cane field is the price of sugar (Pg), while the price of paddy (Pa), Price of corn (Pj), and lending interest rate (ir) are not significant. Whilst, factors affect cane productivity are the price of sugar (Pg), lending interest rate (ir), and price of Urea (PfUrea). Between sectors of cane farmers and sugar mills, there is analysis of the factors that influence sucrose-content rate, those are time (t) and ratooning. Increasing the frequency of ratooning, the better the results of sucrose-content. Between sectors of sugar mills and sugar marketplace, there is sugar demand, which has factors affecting domestic sugar demand are the price of sugar (Pg), population (Pop), income level (Ini), and the previous year's sugar demand (Dg1). In the marketplace, factors affecting Indonesian sugar import is the difference between sugar demand (Dg) and sugar production (Qg), time (t) and sugar imports in the previous year (Mg1). The factors that affect the price of sugar is the world sugar price (PWg), the Rupiah exchange rate against the USD(ERI), Nominal Rate of Protection (nrp), Cost of Sugar Cane Growers (HPP) and the price of sugar a year earlier(Pg1), while Indonesian sugar supply(Sg) is not significant.

Indonesian government should be aware about the increasing sugar imports to solve the problem of sugar economy in Indonesia, so that future problems do not become more complicated.

Keywords : Indonesian sugar economy, Indonesian sugar demand, Indonesian sugar supply, Indonesian sugar import, Indonesian cane farmers, sugar, sugarcane.

1. Introduction :As a sovereign country, Indonesia would like to fulfill her own need of several basic

commodities, one of them is sugar as the second most important after the staples of rice.

However, fulfillment of this need is not as simple as imagined. Past glory as the second world's

largest sugar exporter in 1930s, has vanished already. As the country's second largest sugar

exporter, Indonesia could be proud at the time, but it is not now. Since 1967, Indonesia has

never stopped importing sugar until today. The amount of imports continued to rise from year to

year, so it is not surprising if OECD FAO predicts that Indonesia will become the world's largest

sugar importer, surpassing China and the USA in 2022 (OECD-FAO, 2013). Various policies

have been launched, but it did not succeed to restore its past glory. If the desire to achieve the

glorious years, perhaps it is too much, so that the target is only to be achieved by Indonesia as

just sugar self-sufficient and it has been a target, even it has never been achieved yet. This

shows there are lots of problems in the sphere . Therefore, it is needed to take a full overview,

what are the factors involved in the sugar economy in Indonesia and what have been happened

there. A study is needed to do, starting of sugar cane planting, sending to the manufactures to

make sugar until it sells the marketplace, and if there is a shortage of supply, sugar is imported

to fulfill the demand. As a result, it can be seen which factors involved from planting sugar cane

to be sugar and it put in the marketplace.

2. The situation of Indonesian Sugar EconomyIndonesia produces sugar from sugarcane. If there are other sources of sweeteners,

they come mostly from palm sugar and industry (artificial sweeteners), but the last those

mentioned have a relatively very small amount comparing to the use of sugar for 260 millions of

Indonesia people.

Sugarcane is popular for Indonesian farmers and has grown since hundreds of years

ago, and the Dutch managed to intensify during the colonial period: planting sugarcane,

delivering to the plant, to later become a mainstay of export commodities. Bosma (2013) and

Kano (2008) described in detail, Indonesia had been as an exporter of sugar world at that time.

Although Sprague (2011) saw in a different perspective (a history of capitalist imperialist

exploitation), he said that period (from 1600 to 1945, particularly from Cultivation System /

Cultuurstelsel in 1830-1870), the Dutch has achieved success for export of sugar as the main

crop. Sprague (2011) said, for sugar cane plantations, farmers are forced to convert their paddy

rice (and irrigation channels and dykes) to the sugar cane fields. He said, the farmers were

asked to not only prepare the land, plant and farming, but also to harvest and transport it to the

factory, and be workers there; or in the other words, farmers did all by themselves, under

Dutch’s supervision. It was a sad story but on the other hand, the Dutch built a road and bridge

construction for the transportation of plants, improvement of port facilities, construction of

offices, factories and warehouses for products, construction of dams and irrigation canals.

Because of this effort, Sprague (2011) reported there was rapid development of this industry.

This experience may get a lesson, cultivating with suitable infrastructure can get best result.

After independence in 1945, there was no rules for the farmers anymore. They may

grow any plant they want. They can take their own decision whether they grow paddy, maize, or

sugarcane, even any other. Situations where farmers, mills and market place in Indonesian

sugar economy as follows:

Figure 1. Indonesian Sugar Economy

2.1. Sugarcane production of farmers’ sectionAll farmers are free to choose their preference to grow. Their decision is influenced by

their perception if the product they grow, can give the best profit. The typical behavior is referred

by the price of finished product as farmers consider at the price of product when they want to

grow. In fact, this similar behavior happened in other countries, say like in Vietnam, the

expansion in area under cane production may be partially reflect the fact that sugarcane is

becoming more competitive with other crops (FAO, 1997). It describes, for example, in the

southern province of Long An, the area under sugarcane has expanded to over 11 000 ha in

1990s, in direct competition with rice, groundnuts, and pineapples, and in the north-central

province of Thanh Hoa, increases in sugarcane areas were taken from land formerly used for

pineapples and coffee. In Thailand, the expansion reflected the relative attractiveness of sugar

prices compared with alternative crops such as cassava and watermelon in the Northeast, and

beans and corn in the North (FAOa, 1997). In the Philippines, the southernmost island of

Mindanao where is no typhoon, sugarcane competes with other tropical crops in a balanced

manner reflective of market conditions and investment priorities (FAOd, 1997)

In Indonesia, sugarcane is still dominated in Java island, and the farmers have

possibilities to grow paddy or corn instead of sugarcane. In other words, sugarcane competes

with paddy and corn. If the price of paddy or corn better than sugarcane, they will not grow

sugarcane and it refers.

Agricultural profiles on the area of farms are involved with the rent which is connected

with bank interest rate. It is because, in agricultural economics’ perspective, the farms of some

area are classified by tenure – owned and tented or leased ( Echevarria, 1998). Hubacek and

Berg (2002) gives emphasis that land is closed with perfect market. In fact, on farmers’

perspective, interest rate is praiseworthy to consider in order to accelerate their activity. Say. if

there is facility to borrow money with interesting interest rate, e.g. government gives special

interest rate to grow sugarcane, then they will take the loan and cultivate the cane. Based on

these reasons, it can be made a function of the land as follows:

Lt = A0 + A1*Pg - A2*Pa - A3*Pj - A4*ir + A5*Lt1………………(1)

Where :

Lt = Land as space to cultivate sugarcane (ha)

Pg = Price of sugar (IDR/kg)

Pa = Price of paddy (IDR/kg)

Pj = Price of corn (IDR/kg)

ir = interest rate of Indonesian banks (% per annum)

Lt1 = Land cultivated sugarcane in previous years (ha)

A0, A1, A2, A3, A4, A5 = parameters

In the same time, there is a function called Identical functions, as follows :

Qt = Lt * Yt……………………………………………………….(1a)

Where :

Qt = Sugarcane production ( ton)

Lt = Land as space to cultivate sugarcane (ha)

Yt = Sugarcane productivity or yield (ton/ha)

The land is very closely related to productivity as land is one of factor productions where

the most commonly factor productions are referred from Solow’s as a three-factor agricultural

production : land, labor and capital (Echevarria, 1998). Another factor of production that

encourages productivity is fertilizer, but it is utilized more by farmers if fertilizer’s price is

affordable. Because the land is affected by interest rates and the price of sugar, then

productivity is affected by land into a function as follows:

Yt= B0 + B1*Pg - B2*ir - B3*PfUrea + B4*Yt1………………………….(2)

Where :

Yt = Productivity of the land (kg/ha)

Pg = Price of sugar (IDR/kg)

ir = interest rate ( %/year)

PfUrea = price of Urea fertilizer (IDR/kg)

B0, B1, B2, B3, B4 = parameters

Urea fertilizer use is based on the soil that Urea is most often used than other fertilizers.

2.2. Sugar production of the mills’ sectionAfter sugarcane is harvested, and it delivers to the mills, and the sugar content has

priority to be mentioned as it has high value as well as crop productivity of bulk of cane. The

ratoon or seed of cane has been quality diminishing as time goes by and ratooning as the

changing of ratoon every year is the way to improve sugar content. Therefore, the function of

sugar content is :

rt = C0 + C1*t + C2*Drtun………………………………………………..(3)

where :

rt = sucrose content of cane (%)

t = time of years (1,2,3,….)

Drtun = dummy ratooning, as ratooning started at 2003, thus dummy is 1 when

ratooning is held and 0 when there is no ratooning

In the same time, there is an identical function as follows :

Qg = Qt * rt ………………………………………………………………….(3a)

Where :

Qg = Sugar production (ton)

Qt = Sugarcane production (ton)

rt = sucrose content (%)

2.3. Sugar Situation on the MarketplaceAfter sugar has been produced by the mills, it is marketed on the marketplace and the

production of sugar depends on the demand. However, the demand has been growing as well

as population growth and it is volatile from the price. If the sugar price is lessening, the demand

grows. According to Rumankova dan Smutka (2013), GDP as the main determinant of the sugar

demand as well as sugar prices. Therefore, as GDP is affecting to the demand of sugar.

Completely, the function of sugar demand is :

Dg = D0 - D1*Pg + D2*Pop + D3*Ini + D4*Dgl…………………………(4)

Where :

Pg = Price of sugar (Rp/kg)

Pop = Population (people)

Ini = GDP per capita represents Income per capita with conversion in

Rupiah/year

Dgl = Demand of sugar in previous years ( ton/year)

D1, D2, D3, D4 = Parameters

During this time, Indonesian sugar production is unable to meet the needs of domestic

sugar demand which continues to increase from year to year. The Government of Indonesia has

to import sugar from 1967 to today. Total import of sugar depends on the amount of production

if it is able to meet the needs of sugar for all Indonesians. The shortage of sugar production

capability is implemented through importing sugar. In accordance with this situation, the function

of Indonesian sugar import is :

Mg = E0 + E1*(Dg – Qg) + E2*t + E3*Mg1…………………………………(5)

Where :

Dg – Qg = The difference between Indonesian demand for sugar and sugar production

(ton)

t = time of years (1,2,3,….)

Mg1 = Indonesian sugar import in previous years (ton)

E0, E1, E2, E3 = parameters

In the current situation of trade liberalization, with a system of openness of the

Indonesian economy, the transmission between world sugar prices and domestic sugar prices

are thought to have formed. Therefore, it takes an effort to see the distortion, how far world

sugar price gives impact on transmission to domestic prices, especially if it is not known the

tariff of a country enacted, then the measurement Nominal Rate of Protection (NRP) became

effective enough to see the trade distortions that happened. NRP is generally used in the

context of the imported product, to see the difference in proportion between domestic prices and

international prices facing a trade policy in the form of import tariff, tariff export, quantitative

restrictions such as the need for a license, the banning of certain rules of the country of origin

(rules of origin), the terms the purchase of local products and others as well as other forms of

incentives such as subsidies and tax rebates (Flatters, 2014). He continued, if the only relevant

trade policy import tariff of 20%, then the NRP also worth 20% - which is the proportional

difference between the import price and domestic prices. Therefore, according to Flatters

(2014), NRP is a measure of the total amount which has the effect of a rise or fall in the trade

under conditions of trade policy, or it has the formula as :

NRP = (Pd - Pw) / Pw x 100 %

Where:

Pd = domestic price

Pw = international prices

For a country that takes the distortion arising from the policy, then the form of protection

is taken as a response to face distorting policies (Thoma, 2006). Stated further, conditions of

high production output and export subsidies in developed countries with high protection in both

the developed and developing countries has given distortion of world trade, which consequently

affect the production distorting policies in developing countries Svatos, Maitah and Belova

(2013) asserted in research on the world sugar market, that in agricultural products trading,

especially sugar, is the most distorted product. Therefore, NRP is a way to see the extent of the

distortion that occurs in Indonesian sugar and how far it affects into sugar price.

Next, the exchange rate also plays an important role in relation to the world sugar price

which is marketed in USD. If the conversion is higher, then it allows the increase in sugar prices

in the domestic market. Another factor is the amount of sugar supply. If the supply of sugar

decreases, the price of sugar will rise. The same thing will happen to farmers’ cost of

production which is set by government. If it is enhanced by the government, then automatically

the price of sugar will rise. Finally, the function becomes:

Pg = F0 + F1*PWg + F2*eri + F3*nrp - F4*Sg + F5*HPP + F6*Pg1….(6)

Where :

Pg = Price of sugar (Rp/kg)

PWg = Price of world sugar (Rp/kg)

eri = exchange rate USD to Rupiah (Rupiah/unit)

nrp = nominal rate of protection (%)

Sg = Indonesian totally supply of sugar (ton/year)

HPP = Farmer’s Cost of Production, set by Government (Rp/kg)

Pg1 = Price of sugar in previous years

F0, F1, F2, F3, F4, F5, F6 = parameters

Whist, the identical function of Sg is :

Sg = Qg + Mg…………………………………………………………..(6a)

Where :

Sg = Indonesian Supply of sugar (ton)

Qg = Totally sugar production of Indonesian mills (ton)

Mg = Indonesian sugar import (ton)

3. Methodology of ResearchBased on the situation of Indonesian sugar economy, the research has been conducted

through time series data from 1983 – 2013, from BPS (Indonesian Central Bureau of Statistics),

AGI (Association of Indonesian Sugar Mills), World Bank, and USDA . Equations as functions

are structured as models have been built through econometrics procedure and agricultural

economics theory and it constructs as close as its reality. All the functions included has

connected one and another and these parts link makes a system of interrelated parts

functioning as a whole, as a simultaneous link. To see how far the correlations among

exogenous towards endogenous variables, there was data analysing technique through SAS

version 9 which has been utilzed.

4. Result of Research and Discussion

4.1. Response of Cane Field Function :

Variable DescriptionParameter Estimation t Value Pr > |t|

Pg Price of Sugar (Rp/kg) 18.67359 2.72 0.012

Pa Price of paddy (Rp/kg) 20.73875 0.71 0.482

Pj Price of corn (Rp/kg) -23.264 -0.73 0.4748

Ir Lending interest rate (%/year) -734.872 -0.75 0.4588

Lt1 Cane field in previous years (ha) 0.685545 8.93 <0.0001

F Value = 40.9; Pr > F = <0,0001 R-Square = 0.89496

The prediction of response obtained about cane field is quiet well with value of

calculated F is 40.9 which is significant with failure level is less than 1 percent. Determination

coefficient obtained is 0.89, indicates that exogenous variables in the model can be explained

89 %.

In table above shows that factors affecting the sugarcane area is Price of sugar (Pg),

while Price of paddy (Pa), Price of corn (Pj), and lending interest rate (ir) are not significant.

The positive sign of Price of sugar (Pg) with failure level of 1,2 % gives acknowledgment that

increasing the price of sugar will provide in response to increased acreage of cane with a

regression coefficient of 18.67. It means, every change of 1 unit Price of sugar (Pg) will give

respond 18.67 times of cane field. Parameters of the price of rice (Pa) and maize (Pj) are not

significant, indicating that the sugarcane grown by farmers is free and does not depend on the

ups and downs of the price of both commodities. Similarly, the lending interest rate is not

significant, means that farmers cultivate sugarcane don’t depend on the interest rate.

In connection with these results, it is recommended that the government gives attention

to domestic sugar price and prevents domestic sugar prices for not to fall. If it happens, sugar

cane farmers are reluctant to expand sugarcane planting areas.

Price of paddy and corn which were been supposed affecting cane field, are not proven.

This result is quite interesting, as it was thought that farmers would change into paddy or corn if

those prices are better than sugar’s, but they didn’t. In other words, paddy and corn prices do

not affect the cane field, which implies that the farmers who have been planting sugar cane, are

less interested in changing their commodities to other products even if the price of rice and corn

are more attractive. In some areas, even if price of paddy is more interesting, the farmers would

not change as cane doesn’t require water as much as paddy and it is more practical to take care

of.

Lending interest rate also didn’t give effect to cane farmers. Result of this study should

be addressed with a more thoughtful, and requires a more detailed assessment if it is true.

During this time, attractive lending money with low interest rate is not really done, and even then

it is conducted at mills as the representative of the bank-borrowers, only addressed to farmers

who submit harvest sugar cane to the mills, and not to all sugarcane farmers.

4.2. Response of Cane Yield Function

Variable DescriptionParameter Estimation t Value Pr > |t|

Pg Price of sugar 0.002881 1,93 0.0646

ir Lending interest rate -0.35958 -1.48 0.1521

Pfurea Price of Urea -0,0000027 -1.83 0.0794

Yt1 Productivity in previous years 0,101959 0.58 0.5676

F Value : 2.65 ; Pr > F : 0,0570 R-Square = 0.29769

Estimation of function sugarcane productivity gained is accepted with the calculated F

value of 2.65 and significant with an error rate of less than 10 percent. The coefficient of

determination obtained at 0.3 means the exogenous variables in the model explained 30

percent, while 70% is explained by other variables that are not included in the model.

Factors that affect the productivity of sugarcane : price of sugar (Pg), loan interest rate

(ir), and price of Urea (PfUrea). Parameter sign of price of sugar (Pg) is positive with a 6.4

percent error rate gives the understanding that increasing the price of sugar will take in

response to increased productivity of sugarcane with the regression coefficient of 0.003. In this

case, the price of sugar should be prevented for not to fall, for the increase in the productivity of

sugarcane.

In contrast to the impact of the expansion of sugar cane that is not affected by interest

rates, the increase in productivity of sugarcane depends on the decrease in interest rates and

falling prices of Urea fertilizer. Declining bank interest rate may be expected to be used to buy

Urea as if Urea is cheap, then the sugar cane farmers will be keen to improve the productivity of

sugarcane through bank loan. This is connected with the condition of cane farmers, that after

harvesting, the ratoons are needed to be grown so that the use of fertilizer is a vital part to raise

the productivity of sugarcane.

The productivity of sugarcane does not depend on the previous year with a value of t-

test is not significant, giving affirmation that the situation of last year productivity doesn’t affect

to this year productivity.

Overall from sugarcane productivity function with the parameters of sugar prices, interest

rates, and the price of urea can be interpreted that the productivity of sugar cane can still be

improved if the Government providing credit subsidies and facility of Urea fertilizer price

declines.

4.3. Response of Sucrose-Content Function

Variable DescriptionParameter Estimation t Value Pr > |t|

t Time - 0,03632 -1.81 0.0822

Drtun Dummy of Ratooning 0,7002 1,94 0.0632

F Value = 1.93; Pr > F =0,1640 R-Square = 0.12535

Estimation of yield response function assessed is quite well with the calculated F value

of 1.93 which is significant with an error rate of less than 20 percent. The coefficient of

determination obtained is 0.13 means that the exogenous variables in the model explained only

13 percent, while 87% is explained by other variables which do not participate in the estimation

of this equation. However, the factors that influence sucrose-content rate are time (t) and

dummy of ratooning as an option in the analysis to provide the number 1 when ratooning is

implemented, while 0 if it has not been done. Sign of parameter of time (t) is negative and

significant with an error rate of less than 10 percent gives the understanding that in the earlier

time, the sucrose-content obtained is better. The positive sign of the dummy of ratooning with

an error rate of less than 10 percent indicates that the sucrose-content increase is influenced by

the presence of ratooning with a regression coefficient of 0.07. Parameters of time and

ratooning dummy mean that sucrose-content produced depends on the frequency of ratooning.

The increased of ratooning will do, the better the results of sucrose-content will be. The real

condition is, ratooning has been conducted since 2003 through government project, and the

accomplishment of the project needs almost 3 years as the cane field is huge to be carried out

in short time. Government should find the better way so that ratooning is continuously

conducted as it is certainly effective to increase the sucrose-content.

4.4. Response of Domestic Sugar Demand Function

Variable DescriptionParameter Estimation t Value Pr > |t|

Pg Price of Sugar (Rp/kg) -199.762 -2.06 0.0495

Pop Population (number of people) 0.010763 2.47 0.0208

Ini Income per capita (Rupiah/year) -0.01704 -2.17 0.0401

Dg1Domestic sugar demand in previous years 0.662398 5.88 <.0001

F Value =16.91 ; Pr >F = <0,0001 R-Square = 0.73019

Estimation of domestic sugar demand response functions obtained is fairly well with the

calculated F value of 16.9 which has good significant number, with an error rate of less than 1

percent. The coefficient of determination obtained by 0.73 means that the exogenous variables

in the model is explainable 73 percent.

Factors affecting domestic sugar demand are the price of sugar (Pg), population (Pop),

income level (Ini), and the previous year's sugar demand (Dg1) and all is significant. The

negative sign of sugar price and significantly with an error rate of < 5 per cent gives the

understanding that declining sugar prices will take in response to increased demand for

domestic sugar with a regression coefficient of 199.8. This figure signifies the existence of a

highly elastic demand for sugar, that one unit change of sugar price, will give a response at

199.8 times the demand for sugar. This information seems to be very useful for the

Government, that the positive change in the price of sugar, not only gives the impact on

productivity of sugarcane, but also the demand for sugar is increasing. Morever, the parameter

of population (Pop) indicates that domestic sugar demand depends on the increase in the

population with a regression coefficient of 0.66, or one unit change of population, will give

response of 66 % sugar demand.

The interesting thing is about the decline in Income (Ini), will bring a response to

increased demand for domestic sugar with a regression coefficient of 0.017. This number is not

large, but it still needs serious more studies about this. Also, this result seems to be quite

different from the results obtained Rumankova and Smutka (2013), which states that GDP is the

main determinant of the demand of sugar as well as sugar prices, and the results of this study

are not consistent with the results of their research. Then, this raises a further question: are

Indonesians aware of the excess of sugar consumption? It seems that further study is needed

on this matter and a prudence is required in the conclusion.

4.5. Response of Sugar Import Function

Variable DescriptionParameter Estimation t Value Pr > |t|

(Dg-Qg) The difference between sugar demand (Dg) and sugar production (Qg) 0,003244 2,49 0.0191

t time 102630,1 3,65 0.0011

Mg1 Sugar import in previous years 0.242573 1,16 0.2543

F Value = 103,31 ; Pr > F= 0,0001 R-Square = 0.95551

Estimation of Indonesian sugar imports response function is quite well with the

calculated F of 103.31 with a failure level of less than 1 percent. The coefficient of determination

obtained amounted to 0.96 means that the exogenous variables in the model explained 96

percent.

Factors affecting Indonesian sugar import is (Dg-Qg), time (t) and sugar imports in the

previous year (Mg1). Parameters’ sign of variables (Dg-Qg), time, and imports of sugar

previously were positively and significantly with an error rate of less than 30 percent indicates

that the increasing difference between demand and production of sugar, the timing and amount

of import of sugar a year earlier, would bring a response to the increase in imports with

coefficient regression 0,003 to variable (Dg-Qg), 102 630 to variable time, and 0.243 against

imports of sugar a year earlier. Therefore the parameters of (Dg-Qg), timing and amount of

import of the previous year can be interpreted that the Indonesian sugar imports will tend to

increase from year to year and the amount of imports will depend on increasing the difference

between demand and production of sugar and the amount of imports a year earlier. This finding

is corresponding to OECD-FAO (2013), that in 2022 Indonesia will be the leading of world sugar

importer, over China and USA. The government should be aware about this serious matter to

solve the problem of sugar economy in Indonesia, so in the future, problems do not become

more complicated.

4.6. Response of Sugar Price Function

Variable Description Parameter Estimation t Value Pr > |t|

PWg World sugar price (Rupiah/kg) 4,089,951 4.43 0.0002

ERIExchange Rate Rupiah toward USD (Rupiah) 0.216758 4.45 0.0002

nrp Nominal rate of protection (%) 3,076,045 6.06 <.0001

Sg Indonesian sugar supply (ton) -0,0000027 -0,13 0,9009

HPPCane Farmer’s cost of production (Rupiah/kg) 0.642186 3.59 0.0015

Pg1 Price of sugar in previous years (Rupiah/kg) 0.213105 1.61 0.1216

F Value =19.02 ; Pr > F = <0,0001 R-Square =0.83225

Prediction of the response function of the domestic sugar prices gained quite well with

the calculated F value of 19.02 which is significant with an error rate of less than 1 percent. The

coefficient of determination obtained is equal to 0.83, meaning that the exogenous variables in

the model explained by 83 percent.

It shows, the factors that affect the price of sugar is the world sugar price (PWg), the

Rupiah exchange rate against the USD, Nominal Rate of Protection (nrp), Cost of Sugar Cane

Growers (HPP) and the price of sugar a year earlier, while Indonesian sugar supply is not

significant. The signs of parameters of the world sugar price (PWg), exchange rate(ERI),

Nominal Rate of Protection(nrp), HPP, and sugar prices the previous year(Pg1) are positive and

significant with an error rate of less than 1 percent gives the meaning that increased world sugar

price will take in response to increased domestic sugar price with regression coefficient of

44,089,951 for world sugar price (PWg), 0.216758 for the exchange rate, 3,076,045 for NRP,

0.642186 for HPP and 0.213105 for sugar prices in previous year gives the sense that the sugar

price formation depends on the exchange rate, NRP and the HPP and the price of the previous

year. Parameter of the supply of sugar that is not sugnificant can be interpreted that the price

formation does not depend on the supply of sugar. In the context of the discussion of global

trade, the domestic sugar price response to world prices indicates that price changes in the

world easily transmit to the domestic sugar prices.

5. ConclusionFactors involved at Indonesian sugar economy are 3 sectors included : cane farmers

that grow sugarcane, sugar mills that process sugarcane into sugar, and sugar marketplace that

market sugar in domestic marketplace. In cane farmers, factors affecting cane field is price of

sugar (Pg), while price of paddy (Pa), Price of corn (Pj), and lending interest rate (ir) are not

significant. Whilst, factors affect cane productivity are price of sugar (Pg), lending interest rate

(ir), and price of Urea (PfUrea). Between sectors of cane farmers and sugar mills, there is

analysis of the factors that influence sucrose-content rate, those are time (t) and ratooning.

Increasing the frequency of ratooning, the better the results of sucrose-content, and vice versa,

if the ratooning is not implemented, the sucrose-content will decrease.

Between sector of sugar mills and marketplace, there is sugar demand, which has factors

affecting domestic sugar demand are the price of sugar (Pg), population (Pop), income level

(Ini), and the previous year's sugar demand (Dg1) and all is significant.

In the marketplace, factors affecting Indonesian sugar import is the difference between

sugar demand (Dg) and sugar production (Qg), time (t) and sugar imports in the previous year

(Mg1). Factors that affect the price of sugar is the world sugar price (PWg), the Rupiah

exchange rate against the USD, Nominal Rate of Protection (nrp), Cost of Sugar Cane Growers

(HPP) and the price of sugar a year earlier, while Indonesian sugar supply is not significant.

Indonesian government should be aware about the increasing sugar import to solve the

problem of sugar economy in Indonesia, so that future problems do not become more

complicated.

AcknowledgementThe authors express appreciation to Dikti ( Indonesian High Education Ministry) for the

sponsorship of this research.

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