Studies and Scientific Researches. Economics Edition, No 28, 2018 http://sceco.ub.

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AN ANALYSIS OF PALM OIL PRICE FLUCTUATION IN THE

FOREIGN MARKET

Buyung
Faculty Member of Education and Teacher Training College (STKIP) Pelita Nusa Bangsa
Binjai

Abstract
This research is aimed at investigating the impact of price and non-price on the demand for palm
oil, supply and stock of palm oil in a foreign market. The data employed in this research were
time series data. The analysis used the model of demand, supply and stock of palm oil. Full
simultaneity in a dynamic model with inventories was adopted from Nerlove (1956). This
research has shown that the supply of palm oil in the foreign market had a positive influence on
the price, the area and the supply in previous years while the response of the demand was
negative. On the other hand, the income and the demand in the previous years had a positive
influence. The palm oil stock was influenced by the quantity in the previous years and
international price.

Keywords
Price; non-price; palm oil foreign market realities

JEL Classification
F1; L10

Introduction
The main goal of long-term development is the realization of a strong foundation for
the nation to grow and thrive on its own power to a just and prosperous society. It
emphasizes on development with the main goal of achieving a balance between
agriculture and industry as well as fulfillment of community needs.
Development that maintains the linkage between agricultural and industrial sectors is
one of the required development strategies, especially by developing countries that have
great potential in agricultural sector. Kuznets (1964) argued that agricultural sector has
the potential to provide four major links to economic growth and development. First,
agricultural sector in addition to providing raw materials that non-agricultural sector
requires, or product contribution. Second, agricultural sector will produce goods for
domestic marketing, or market contribution. Third, in line with the increase in
economic growth and development, agricultural sector can be considered as main
source of capital for investment, i.e. a process of transfer of surplus capital from
agricultural to non-agricultural sector or factor contribution. Fourth, agricultural sector
can contribute to the balance of payments through the development of production of
import substitution or foreign exchange. Plantation is one of the agricultural sub-sectors
that play a role in employment, development of production of new remote areas,
supporting sector economic activities through the provision of raw materials, giving
contribution which means to increase the country's foreign exchange, provision of
foodstuffs and being able to improve the welfare of farmers. In agricultural
development, the plantation sub-sector is expected to be directed to the achievement of
plantation three dharma including (Mubyarto, 1983): financing, foreign exchange,
creating job opportunities, conservation of natural resources. One of the commodities
of the plantation sector contributes to the increase of Indonesian non-oil and gas export

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 Buyung

is a commodity of palm oil. Plantation area, volume and value of oil palm oil exports
in Indonesia are shown in (table 1). In this table represents that the area of oil palm
plantation in period of 1984 to 2000 had a tendency to increase, while the volume of
exports went through a slight fluctuation, that is the decline in export volume in 1985
amounted to 63.01%, 1988 of 2.78% and in 1993 was reducing by 11.79% and in 1996
there was a decrease of 22.45%.
The decline in export volume was likely due to the decline in global palm oil prices in
1985 from US$744.00/ton to US$533.00/ton in the previous year. Similarly, there was
a decrease from US$348.68/ton in 1989 to US$282.91/ton in 1990 (Table 1.2).
Meanwhile in 1995, there was a change of government policy in terms of palm oil
exports, related to the effort in order to ensure the availability of domestic (CPO)
cooking oil raw materials. Thus, since 1994 the Minister of Finance enacted the Decree
no. 439/KMK.017/1994 to impose an export tax on CPO based on the price of domestic
cooking oil, i.e when the price was beyond Rp.1,250 per kilogram, then the government
will apply export tax on CPO. The percentage change in the exports value every year
seems immeasurably fluctuating. In 1984, there was a decline in export value by
43.23%, in 1985 there was an increase by 162.56%, and in 1986 declined again by
33.075%, although export volumes increased during the year.
Palm oil plays an important role in the Indonesian economy, especially for raw
materials for domestic cooking oil production, which is one of the nine kinds of
community basic needs. In the past year, palm oil is the main raw material of cooking
oil production, replacing coconut oil that has been declining in its production, and it
cannot be relied upon to meet the demand for domestic cooking oil, especially its
contribution to the stability of material price which is one of vastly contributing
components in triggering inflation.

Table 1: Area, Value and Volume of Indonesian Palm Oil Exports (US$ Million)

Year Area Export % Export CPO Price

(Thousand value of Export Value Volume (US$
ha) palm oil Modifier (Thousand thousand/
Ton) ton
1984 414.6000 111,5 - 345,8 744.00
1985 549.6000 63,3 -43,23 127,9 533.00
1986 593.8000 166,2 162,56 437,8 257.00
1987 713.3000 112,9 -32,07 566,9 350.46
1988 964.5000 112,9 27,46 551,1 422.72
1989 1072.900 143,6 95,47 741,8 348.68
1990 77599.30 280,7 19,98 781,9 282.91
1991 1163.900 224,6 -9,35 815,4 324.51
1992 1259.300 203,6 64,73 1167,9 395.31
1993 1405.500 335,4 6,32 1030,2 378.90
1994 1437.700 356,6 32,47 1372,0 541.81
1995 1650.900 472,4 51,95 1631,2 649.19
1996 1885.200 717,8 4,11 1265,0 541.96
1997 2552.300 825,5 10,46 1681,9 542.57
1998 2768.600 1446,1 75,18 2891,7 656.53
1999 2785.600 1535,4 6,15 3042,3 664.56
2000 3171.600 1676,9 9,22 3321,5 687.68
Source: Indonesia Economic Indicators (BPS), Indonesia Financial Statistics
(BI) 1984 – 2000 (processed)

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 AN ANALYSIS OF PALM OIL PRICE FLUCTUATION IN THE FOREIGN MARKET

Increasing plantation area and oil palm production is inseparable from the better market
of this commodity in foreign market. The price of primary agricultural commodity
increased slightly in global market during the first half of 1993. The prominent price
increases were seen in rubber, pepper and palm oil. This price increase was mainly due
to decreased production in some major income countries (BPS, 1993). The increased
prices in export commodity can also be triggered by the declining of the Rupiah against
the US dollar. However, these improvements cannot be optimally employed in a
relatively long time. First, it was caused by hard crops commodity such as palm oil.
The development of oil palm plantations in addition to those of state-owned enterprises,
large foreign private plantations (PBSA) and large national private plantations (PBSN)
were also developed by the community (small holder’s estate) both individually and in
partnership with large plantations, known as the core estate of the community (PIR).
Development of Indonesian palm oil production is shown in table 2. In line with the
increase of plantation area, the level of palm oil production is also increasing. The
production level of the management pattern indicates varying speed of improvement.
Production of government plantations had always surpassed the production of
smallholder plantations, whereas the area of small holder plantations has increased
above the government plantations in 1992. This indicates that productivity of small
holders’ estates is very low, possibly due to the lack of integration of the permanent
process of small holders’ estate products, with a large plantation-owned processing
plant. As we know, in general, the small holders’ estate develops in PIR pattern, in
which the core estate shall accommodate production from small holders’ estate to be
processed into CPO. If the adjusted permanent timing of small holders’ estates along
with transport capacity and processing capacity of the plant is underestimated, it will
result in excessively extended accumulation of FFB (Fresh Fruit Bunches) resulting in
a decrease in oil “rendemen” (ratio of oil quantity produced from the extraction) and
increase fatty acid levels. Besides, the low productivity of small holders’ estate can also
be caused by the length of the FFB distribution line to arrive at the processing plant, for
example the small holder’s estate sells their crops to the collecting traders that it may
take up two days to process them into CPO. The FFB should be processed into CPO
within a maximum of six hours after collecting. Private plantation production increased
rapidly around 1994 and continued increasing to exceed government production in
1996. This was in line with the expanded area that began to increase beyond
government plantations in 1989, thus the increase in production occurred about five or
six years later. The average increase in oil palm production according to its
management is 106.17 for small holder’s estate and 12.63 percent for government
plantations and 16.84 percent for private plantations.

Table 2: Development of Indonesian Palm Oil Production

Production (Ton)
Year Small % Government Private % %
Holder Change Plantation % Plantation Change Total Change
1983 539 96338 Change 67539 164416
1984 826 53.25 Ml All 84.22 69058 2,25 247361 50.45
1985 8816 967.31 178675 0.68 70966 2.76 258457 4.49
1986 11663 32.29 198865 11.3 73000 2.87 283528 9.7
1987 29933 156.65 213050 6.66 76066 4.2 319049 12.53
1988 31230 4.33 220538 3.51 90899 19.5 342667 7.40
1989 36736 17.63 236745 7.35 119408 31.36 392889 14.66
1990 75390 105.22 249431 5.36 178982 49.89 503803 28.23

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1991 85443 13.33 285096 14.3 180806 1.02 551345 9.44

1992 99822 16.83 287896 0.98 171556 -5.12 559274 1.44
1993 104646 4.83 288762 0.30 208821 21.72 602229 7.68
1994 162307 55.1 338741 17.31 295489 41.50 796537 32.26
1995 195533 20.47 384393 13.48 362137 22.56 942063 18.27
1996 233462 19.4 396850 3.24 454364 25.47 1084676 15.14
1997 279604 19.76 423411 6.69 526318 15.84 1229333 13.34
Source: Ministry of Forestry and Plantation, Directorate General of Plantation, 1998

Furthermore trading system is very important in agricultural development.

Nevertheless, in the link of economy and flow of goods in Indonesia, trading system is
the weakest part, or it has reasonably low efficiency. Similarly, in the case of oil palm
commodity, small holders’ estate sells FFB (Fresh Fruit Bunches) to collecting traders
or large plantations at incredibly low prices. The owners of small estates have no
mediums to improve their bargaining position. Conversely, large plantations also have
less processing process to increase value-added commodities. It can be evident from
the export commodity itself in crude palm oil (CPO). Senturi (1988) carried out an
econometric analysis of the palm oil market in the United States. He used a model for
the U.S. palm oil market formed with 3 behavioral equations and 4 identity equations.
The behavioral equation includes function of global palm oil prices and function of
quantity of the consumed palm oil and function of quantity of palm oil for final stock.
He discovered that there was a positive correlation between global palm oil prices and
function of quantity with the price of vegetable oil and animal fat. Consumption of palm
oil in the United States is positively associated with the prices of vegetable oil, animal
fats, fat processing and wage rates in food processing products and the lag of palm oil
value is negatively related to the predicted global oil price. Palm oil stocks in the United
States are positively related to the predicted global palm oil price, fat production in the
same period, and lag from palm oil stockpiles, and negatively related to changes in
global palm oil price and changes in fat production. Senturi concluded that palm oil
competes with fats and vegetable oils in the U.S. market and palm oil can compete if
the price is below the price of fats and vegetable oils. Palm oil is more versatile in end
use not only for channeling but also for speculation.
Lubis (1998) developed a marketing model appropriate to the marketing of palm oil
and took the case on production and marketing of Malaysian palm oil. He discovered
that the performance of Malaysian palm oil marketing was influenced by marketing
variables, especially international market variables such as global palm oil price and
some oil substitution prices and policy instruments on the production. The price of
Malaysian palm oil in the international market is determined by the price of global palm
oil consumption. Although Malaysia is the world's major exporter of palm oil, it only
serves as the recipient of the price.
Bond (1987) estimated export demand and supply with a regional approach for some
export commodities based on data from 1963-1982. Assuming there was no substitution
between the same export commodities in different regions. Hence estimates for demand
and supply of foodstuffs, beverages and tobacco exports between Africa, Asia and
Europe resulted that the price elasticity for demand of foodstuffs by the three regions
was negative and significant at a = 1% or a - 5%. Price elasticity for demand of
beverages and tobacco are negatively related, while income elasticity for beverages and
tobacco are positively related.

Research methods
This study aims to investigate the main issues which are:

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 AN ANALYSIS OF PALM OIL PRICE FLUCTUATION IN THE FOREIGN MARKET

(a) Response of palm oil supply represented by palm oil production, towards changes
in palm oil prices, land area and supply in the previous year;
(b) Response of palm oil demand as represented by changes in palm oil prices, palm oil
revenue and price in the previous year;
(c) Response of palm oil stocks to price changes, palm oil stocks in the previous year.
Data that will be processed and analyzed is in the form of secondary data. Data has
been linked to this research, including: Central Bureau of Statistics (BPS), Agriculture
Agency and others and completed with literature study.
The model employed in this study is Full simultaneity in a dynamic model with
inventories, derived from the Nerlove model, which are:
a. Supply function:
St*=ao+aiPt+a2At+slt (1)
b. Demand function:
Dt*=bo+b,Pt+b2Yt+S2t (2)
c. Stock Function:
Kt*=Co+C,Pt+£3t (3)

Results and Discussion

Estimation Result of Palm Oil Demand Function
Equation of palm oil demand function in the foreign market derived from the estimation
result is as follows:
Ln Dt = 0,7125 - 0,22079 Ln Pt + 0,67549 Ln Yt + 0,0000016
LnDt-i. The results of estimated palm oil demand function in the foreign market using
the 2SLS method is presented in Table 3 below:

Table 3: Estimated Results of Demand Function Coefficient

Variable Coefficient T. Ratio P-Value Significant

Pt -0,22079 -1,973 0,069 S
Yt 0,67549 18,11 0,197 S
DM 0,000015932 1,526 0,001 S
Source: author’s results

Remark: S - Significant, if T.Ratio > 1

From Table 3, it can be evident that coefficient value of independent variable-variance
indicates the appropriate results to the demand theory. Variables of palm oil price have
a negative correlation with palm oil demand with a coefficient value of -2.2979,
meaning that if the price of palm oil rises by 10% then the demand for palm oil will
decrease by 2.2079%. This indicates that palm oil price in foreign markets negatively
affects the palm oil demand in foreign markets.
The income variable is positively related to the demand for palm oil. With
coefficient value of income of 0.67549 means that if the consumer income increases by
10% then the demand for palm oil in foreign markets will increase by 6.7549%. This
indicates that if the income increases then the demand for palm oil will rise. Thereby it
is clear that the income positively affects the demand for palm oil in foreign markets as
indicated by the T-ratio of 18.11.
The lag variable to the demand for palm oil is also positively related to the
demand for palm oil with coefficient value of the previous year's demand of
0.000015932 means that if the previous year's demand increased by 10% then the

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 Buyung

demand for palm oil in foreign markets will rise by 0.00015932%. This indicates that
the previous year's demand positively affects to the demand of palm oil in foreign
markets as indicated by the T-ratio of 1.526. From the lag coefficient of one year
demand (LQt) of 0,000015932 can count up the adjustment coefficient, which is by
subtracting one to the coefficient. The obtained coefficient value is 0.999984068 or can
be identified close to one. With the adjustment coefficient value approaching one there
is precisely a little resistance in realizing the desired demand, thus the desired demand
is almost the same as the ongoing demand. From the above explanation it can be
concluded that the price of palm oil negatively affects the demand for palm oil in
foreign markets. While the previous year's income and demand positively affects the
demand for palm oil in foreign markets.

Estimation of Function of Palm Oil Supply

Equation of palm oil supply function in the foreign market derived from the estimation
result is as follows: Ln St = -1,4089 + 1,1917 Ln Pt + 0,26505 Ln At + 0,0000073 Ln
St-i The estimation of the palm oil supply function in foreign market also use 2SLS
method as presented in Table 4.

Table 4: Estimation of Coefficient Value of Supply Function

Variable Coefficient T. Ratio P-Value Significant

~ LJ 1,1917 3,073 0,008 S

LA 0,26505 2,768 0,015 S

LS, 0,000072943 1,537 0,147 S

Source: author’s results

Remark: S = Significant, if T. Ratio > 1

From Table 4, it can be seen that variable of palm oil price in foreign markets are
positively associated with the supply of palm oil in foreign markets with a coefficient
of 1.1917, meaning that if the price of palm oil rises 10%, then the supply of palm oil
palm oil will increase by 11.917%. This indicates that the price of palm oil in foreign
markets has significantly positive effect on the supply of palm oil in foreign markets
indicated by the T-ratio of 3,073. While the variable of palm oil land area is positively
associated with the supply of palm oil in foreign markets with a coefficient value of
0.26505, it means that if the land area of oil palm increases by 10% then the supply of
palm oil in foreign markets will increase by 2.6505 %. This indicates that the area of
oil palm has a significant positive effect on the supply of palm oil in foreign markets
which is indicated by the T-ratio of 2,768. Meanwhile, the variable of previous year’s
palm oil supply is positively related to the supply of palm oil in the foreign market with
a coefficient value of 0.000072943, meaning that if the previous year's palm oil supply
increases by 10%, then the supply of palm oil in foreign markets will rise by
0.00072943%. This indicates that the previous year's palm oil supply positively affects
the supply of palm oil in foreign markets as indicated by the T-ratio of 1.537. From
coefficient value of the ‘lag’ of one year supply (LSt) of 0, 000072943 it can be
calculated the adjustment coefficient by subtracting one to the coefficient. The obtained

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 AN ANALYSIS OF PALM OIL PRICE FLUCTUATION IN THE FOREIGN MARKET

coefficient value is 0.999927037 or can be identified close to one. By adjustment

coefficient value exactly close to one, there is relatively little resistance in realizing the
desired supply, thus the desired supply is almost the same as the ongoing supply. From
the above explanation, it can be concluded that the price of palm oil, land area, and the
previous year’s supply had positively influenced to the supply of palm oil in foreign
markets.

Estimation of Palm Oil Stock Function

Equation of palm oil stock function derived from the estimation results is as follows:
Ln Kt = -1.0851 + 0.53292 Ln Pt + 0.45574 Ln KM
The estimated results of palm oil stock function using the 2SLS method is presented in
Table 5 below :

Table 5: Estimated Value of Stock Function Coefficients

Variable Coefficient T. Ratio P-Value

Significant
LP 0,53292 1,442 0,171 S
LKi 0,45574 1,983 0,067 S

Source: author’s results

Remark: S = Significant, if T. Ratio > 1

From Table 5, the estimation of stock function parameters can be explained as follows:
The variable of palm oil price was positively related to palm oil stock with coefficient
value of 0,53292, meaning that if the price rises 10%, the palm oil stock will rise to
5.3292%. This indicates that the price of palm oil has a significant positive effect on
the palm oil stocks as represented by the T-ratio of 1.442. While variables of the
previous year's palm oil stocks were positively related to palm oil stocks with
coefficient values of 0.45574, meaning that if the previous year stock increased by 10%,
then the palm oil stock will rise by 4.5574%. This indicates that the previous year's
stocks positively affected the palm oil stocks as shown by the T-ratio of 1,983. From
the lag coefficient of one year demand (LQt) of 0,000015932 it can be counted up the
adjustment coefficient by subtracting one to the coefficient. The obtained coefficient
value was 0.999984068 or can be identified close to one. With the adjustment
coefficient value approaching one precisely there was relatively little obstacle in
realizing the desired demand, thus the desired demand is equal to the ongoing demand.
From the above explanation, it can be concluded that the price of palm oil or palm oil
stocks of the previous year had any real effect to the palm oil stock.

Conclusions
Based on the results of the discussion and analysis of demand and supply of palm oil in
foreign markets as described and stated earlier, it can be drawn some conclusions and
suggestions as follows: (a) The price of palm oil negatively affected the demand of
palm oil in foreign markets. Whereas the income and demand of the previous year had
a significant positive effect on the demand for palm oil in foreign markets; (b) The price
of palm oil, land area and the previous year's supply positively affects the supply of
palm oil in foreign markets; (c) The price of palm oil and palm oil stocks in the previous
year have a significant effect on palm oil stocks; (d) The price of palm oil is
significantly affected by the cumulative stock of palm oil.
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 Buyung

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