Supply and Demand Model for the Malaysian Cocoa Market

Transcription

1 MPRA Munich Personal RePEc Archive Supply and Demand Model for he Malaysian Cocoa Marke Amna Awad Abdel Hameed and Akram Hasanov and Nurjihan Idris and Amin Mahir Abdullah and Faimah Mohamed Arshad and Mad Nasir Shamsudin 26. Ocober 29 Online a hp://mpra.ub.uni-muenchen.de/9568/ MPRA Paper No. 9568, posed 25. December 29 :43 UTC

2 Supply and Demand Model for he Malaysian Cocoa Marke Supply and Demand Model for he Malaysian Cocoa Marke Amna Awad Abdel Hameed, Akram Hasanov, Nurjihan Idris, Amin Mahir Abdullah Faimah Mohamed Arshad and Mad Nasir Shamsudin 2 Absrac This paper invesigaes a sysem of supply, demand, and price equaions for Malaysian cocoa using annual daa over he period Theoreically, in supply and demand models, he price variable is reaed as endogenous. However, Hausman specificaion es resul indicaes ha here is no simulaneiy problem in he model. Thus, we esimae he sysem of equaions uilizing he Seemingly Unrelaed Regression (SUR) esimaion echnique which migh be considered a more efficien esimaor for supply and demand model of he Malaysian cocoa. The resuls sugges ha he Malaysian cocoa producion is mainly affeced by he previous year producion, price of cocoa beans a lag wo as well as he harvesed area. In he expor demand equaion, he real effecive exchange raes is saisically significan deerminan while he index of indusrial producion of advanced economies and he world price of cocoa are found o be insignifican. The resuls also sugges ha boh Malaysian indusrial producion index and domesic price of cocoa beans are key deerminans of domesic demand for cocoa beans in Malaysia. Finally, he domesic price of cocoa beans is highly sensiive o is domesic consumpion, lagged domesic price, and is world price. Key words: Supply and Demand, Malaysian Cocoa, SUR echnique. I INTRODUCTION The developmen of he cocoa planing and downsream indusries in Malaysia follows various naional policies, iner alia, Naional Agriculural Policy (NAP) and Indusrial Maser Plan (IMP). To achieve he naional economic developmen owards maximizing income hrough opimum uilizaion of resources, hese naional policies focus on crop diversificaion and value added agro-based indusrializaion (Azhar, 27). The Malaysian cocoa secor has undergone dramaic changes during he las few decades. As relaively low producion coss and efficien markeing srucure made cocoa producion a profiable venure, Malaysia mainained an upward rend in he area and, consequenly, he producion of cocoa o reach heir peaks of over 44 housand hecares and 247 housand onnes in 989 and 99, respecively. However, since hen declining Paper presened a he Workshop on Agriculural Secor Modeling in Malaysia: Quaniaive Models For Policy Analysis, organized by Insiue of Agriculural and Food Policy Sudies (IKDPM), Universii Pura Malaysia, The Pueri Pacific, Johor Bahru, Ocober 29 2 Research Fellow, Insiu Kajian Dasar Peranian dan Makanan, graduae suden,faculy of Economics and Managemen; Social Science Research Officer; Head, Agribusiness and Managemen Policy Laboraory; Direcor; Insiu Kajian Dasar Peranian dan Makanan and Dean, Faculy of Agriculure respecively, Universii Pura Malaysia.

3 Supply and Demand Model for he Malaysian Cocoa Marke 2 world prices, higher labour coss, loss of producion due o pess and diseases (which is he main reason of economic decay in mos producing counries) along wih a swich in he relaive compeiiveness of oher crops (paricularly oil palm) have ransposed he previous rend, when producion grew a a rapid rae. In 28 only abou 2 housand hecares were under cocoa wih a oal producion of abou 28 housand onnes (Figure ). Mos of he planing areas are siuaed in Sabah, while mos of he grindings and manufacuring are based in he Peninsula. 5, 5, 4, Area Impors 4, Quaniy (Tonnes) 3, 2,, Producion Grindings Source: Malaysian Cocoa Board (29) , 2,, Figure : Cocoa Area (ha) and Cocoa Producion, Impors and Grindings (onnes) in Malaysia, Area(Ha) 25 2 Sabah PLaned Area ( Ha) 5 5 S arawak Peninsular Malaysia Source: Malaysian Cocoa Board (29). Figure 2: Disribuion of Cocoa Planed Area in Malaysia (ha), The Malaysian cocoa grindings and downsream indusry has however, expanded dramaically. Currenly, Malaysia, wih a oal grindings of 324 housand onnes in 28 is occupying he fifh posiion among he larges cocoa grinders in he world and he

4 Supply and Demand Model for he Malaysian Cocoa Marke 3 larges in he Souh Eas Asia. To fill he gap beween he local producion of cocoa beans and he rising demand by he grinding indusry, Malaysia increased is impors of his commodiy. In 28, Malaysia expored 8 housand onnes of cocoa beans, 8 housand onnes cocoa pase, 4 onnes of cocoa buer, 4 housand onnes of cocoa powder and 27 housand onnes of chocolae (Figure3). Cocoa buer was he highes conribuor o he oal expor earnings of cocoa beans and is producs in 28 as i accouned for 63 per cen of hem (Figure 4). This is aribuable o he premium price received for i as a resul of he special characerisic of he high meling poin of he Malaysian cocoa buer, which is advanageous for chocolae producs in warm counries. Malaysian cocoa indusry plays an imporan role in he global marke of cocoa producs. In 27 i accouned for 5% of he world expors of each of cocoa buer and cocoa powder and cake compared o 8% and 6% shares respecively in 99. Is share in he global expors of cocoa pase increased from % in 99 o 5% in 27. However, i decreased is share in he global expors of cocoa beans from9% in 99 o % in 27 o benefi from he value added resuling from manufacuring is downsream producs (refer o Appendix). Currenly, 7 per cen of he dried cocoa beans produced locally are consumed by local grinders and manufacures. Currenly, here are local grindings and more han 4 chocolae and cocoa producs manufacurers. Exors Quaniy (Tonne) 2, 8, 6, 4, 2,, 8, 6, 4, 2, Cocoa Beans Cocoa Pase Cocoa Buer Cocoa Powder Chocolae Source: Malaysian Cocoa Board (29) Figure 3: Expor Quaniies of Cocoa Bean and Cocoa Producs of Malaysia, 98-28

5 Supply and Demand Model for he Malaysian Cocoa Marke 4 3,5 3, Expo Value(RM Mn) 2,5 2,,5, Cocoa Beans Cocoa Pase Cocoa Buer Cocoa Pow der Chocolae Toal Source: Malaysian Cocoa Board (29). Figure 4: Expor Values of Cocoa Bean and Cocoa Producs of Malaysia, Owing o he growing imporance of cocoa o he Malaysian economy and he global cocoa indusry, his sudy aemps o esimae he supply and demand model of he Malaysian cocoa o invesigae he relaionships beween he differen marke variables. I makes hree noeworhy conribuions o he exising lieraure on he Malaysian cocoa indusry. Firs, he economeric mehodology employed in his sudy uses Seemingly Unrelaed Regression (SUR) esimaion echnique, which has no been applied in any of he previous perennial crop sudies. Secondly, i employs differen model specificaion. Thirdly, his sudy uses a relaively more recen daa han hose used in previous sudies on he Malaysian cocoa. The remainder of he paper is organized as follows: Secion II briefly reviews he lieraure on previous economic sudies on cocoa and he mehodologies used for examining is marke models, Secion III oulines he empirical mehodology and Secion IV repors and discusses he resuls while a summary and some conclusions are presened in Secion V. II LITERATURE REVIEW The basic srucure of models proposed in he analysis of agriculural commodiy markes are formed from he componens of he marke model approach developed by Labys (973) which suggess ha for a paricular commodiy, four equaions supply, demand,

6 Supply and Demand Model for he Malaysian Cocoa Marke 5 price and sock (commonly used as an ideniy o reveal he marke clearing condiion) are used simulaneously. To elucidae more complex srucures of he marke behavior, hese basic marke models can be ailored and reformulaed. Incorporaion of more variables enables he marke model o be exended. In his secion, relevan previous economeric sudies of perennial crops including cocoa are highlighed wih special reference o cocoa in order o undersand he marke model especially in he sysem where he marke model works. The relaively simple generalized heoreical model of Labys (973) has widely been applied o mos of he agriculural commodiies. In Malaysia, i has been applied o analyze and model he palm oil (e.g. Shamsudin e al., 988; Shamsudin and Arshad, 993; Shamsudin e al., 994; Lubis, 994 and Talib and Darawi, 22, Ernawai, 24, Amna Awad, 25), rubber (e.g. Yusoff,978 and 988a) and cocoa marke (Rosdi, 99, Remali Yusoff e al., 998 and Kox, 2). The flowing paragraphs will briefly review some of he recen sudies on he Malaysian cocoa indusry. A sudy by Rosdi (99) invesigaed he main facors ha deermine he cocoa prices Economeric cocoa models for he world and Malaysian markes were developed. The models were esimaed using annual ime series daa. Each model consiss of supply, demand and price equaions, wih sock as he ideniy. His resuls show ha domesic cocoa prices are deermined by prices prevailing in he world marke. Domesic sock change is no significan. The world marke iself, sock and consumpion are he main facors ha influence he behaviour of cocoa prices. World consumpion and expor demand are significanly influenced by he producion index of he indusrial naions and price of cocoa. On he supply side, cocoa producion is deermined by cocoa price lagged by he gesaion period. This implies ha invesmen decision on cocoa hree o five years earlier is an imporan facor ha deermines cocoa supply. Shamudin e al.(993) consruced a model of he Malaysian cocoa marke following he approach by Labys (973). The model consiss of producion, demand and price equaions in addiion o sock as an ideniy. They conduced heir sudy uilizing daa over he period The findings of heir sudy indicae ha he Malaysian cocoa price is dependen on he world cocoa price. The sudy revealed ha he indusrial index of he indusrialized naions is he key deerminan for he demand of cocoa and consequenly, is price. Moreover, he price elasiciy of supply wih respec o cocoa has been found o be low (consisen wih a priori expecaions) and is inline wih he previous sudies of perennial ree crops.

7 Supply and Demand Model for he Malaysian Cocoa Marke 6 Yusoff e al., (998) conduced a sudy o deermine he facors affecing he supply and demand for he Malaysian cocoa beans using annual daa over he period His supply sub-model followed he work of Alias e al., (987) ha diversified he supply ino maured area and producion equaions. They also differeniaed demand ino domesic demand, specified as derived demand, and expor demand. The resuls of heir sudy sugges ha cocoa hecarage is affeced by he local prices of dried cocoa beans, he price of copra, he cos of labour, and ineres raes. Producion is found o be dependan on hecarage of maured cocoa, quaniy of labour used, amoun of ferilizer applied and he level of echnology used. In addiion, heir resuls show ha domesic demand for cocoa is dependan on local prices of dried coco beans and palm oil as well as price of local cocoa- based beverage (MILO) and he local demand of he previous year. I is also revealed ha among he facors affecing he foreign demand for Malaysian cocoa are: he exchange rae of he Malaysian ringgi agains he US dollar, level of world cocoa grinding and one year lagged foreign demand. A sudy by Mohammad Haji Alias e al., (2) has invesigaed he impac of governmen rural developmen expendiure, a proxy for governmen policy, paricularly, public invesmen on he supply response of ree major perennial expor crops. Time series annual daa for he period have been used. The Engle-Granger wo sep procedures for co-inegraion analysis have been applied. The response of cocoa producers o governmen expendiure is elasic in he long run, while yield has remained fairly sable. III METHODOLOGY. Model Specificaion The basic marke model which was proposed by Labys (973) has been used o develop he framework in his sudy. The consrucion of he marke model can be summarized ino supply (Q ), demand (C ) and price (P ) models in addiion o supply equal o demand (Q = C ) as marke equilibrium condiion, is as follows Q = q (Q -, P -i, Z, U ) () C = d (D -, P, P s, A, T ) (2) P = p (P -, I ) (3) Q - C (4) where; Q = commodiy supply

8 Supply and Demand Model for he Malaysian Cocoa Marke 7 C = commodiy demand P = commodiy price P -i = prices wih lag disribuion I = invenory or sock Z = policy variables influencing supply P s = prices of subsiue commodiies A = economic aciviy level or income T = echnical facors i =,2,3.. According o Labys (973) and Pollak (984), i is assumed ha in he sysem of equaions, prices adjus o clear he marke. The supply of he commodiy depends on he lagged supply, lagged price and policy variables. Demand is dependen on lagged demand, own price, prices of one or more subsiue commodiies, level of economic aciviy and echnical facors. Lagged price and changes in invenory can also be used o explain he price. Since he supply process normally uses he general class of disribued lag funcions so he lagged price variables are included. The marke model is closed using an ideniy which equaes quaniy supplied minus quaniy demanded. i.cocoa Beans Producion The model specificaion used in esimaing he supply response for Malaysian palm oil producion is based on he model developed by Shamsudin e al., (993). The supply equaion is specified as a funcion of he lagged producion, price of cocoa, price of cocoa a lag wo, price of compeiive crop (palm oil) lagged wo years, and he harvesed area 3. So he supply equaion is specified as follows PRC = f (PRC -, CP -2, POP -2, HA, U ) (5) where PRC = Malaysian producion of cocoa a ime. PRC - = Malaysian producion of cocoa lagged one year. CP -n, = Price of cocoa beans lagged wo years. POP -2 = Price of palm oil lagged wo years. HA = Cocoa beans harvesed area a ime. U = Disurbance erm.

9 Supply and Demand Model for he Malaysian Cocoa Marke 8 ii.cocoa Beans Demand According o Yusoff e al., ( 998) he demand for cocoa beans is a derived demand as i used as inpu for producing final cocoa producs such as cocoa buer, cocoa powder and chocolaes ec. When price deermining facors change over ime, firms in general do no respond immediaely, bu hey raher, delay heir responses o changes affecing he demand. Thus, hey spread heir responses over some period of ime. The naure of such response would vary from commodiy o anoher, he differeniaing facor being he durabiliy or perishabiliy of he commodiy of ineres (Labys, 973). Due o lagged or incomplee informaion and adjusmen cos, he relaxaion of he equilibrium hypohesis in he general funcion has usually been achieved by specifying a dynamic model wihin he framework of a general disribued model. The demand for cocoa beans does no ofen adjus immediaely o he changes due o various insiuional and echnological rigidiies. Therefore, lagged price variables were included, hen, some of hem were dropped from he demand equaions during he general o specific exercise. a. Domesic Demand Domesic demand is assumed o depend on he domesic price of coca and domesic economy aciviy as follow: DD = f (IPIM, CP, U 2,) (6) where DD = Domesic consumpion a ime IPIM = Malaysian indusrial producion index a ime CP = Price of cocoa beans a ime. U 2 = disurbance erm b.expor Demand Following Yusoff e al., (998) he specificaion of expor demand of cocoa beans is similar o ha of he domesic demand wih sligh differences in he variables i.e. insead of local price we used world price of coca beans and insead of he Malaysian Indusrial Producion we used ha of he advanced economies. Incorporaing a separae exchange rae variable in he foreign demand models was found o be very imporan (Schuh, 974; Chambers and Jus (979). Thus, expor demand is modelled as a funcion of index of indusrial producion of advanced counries (as advanced counies are major consumers of his commodiy), real effecive exchange rae, and world price of cocoa as follows: DEX = f(ipia, REER, WCP, U 3 )(7) where DEx =Expor demand for cocoa beans. 3 I is worh menioning ha in supply equaion, alhough he coefficien on governmen expendiure on agriculural secor was found o be posiive in he preliminary running of he model, i is removed from he equaion during he general o specific process because i was, saisically, insignifican and i affeced he overall performance of he sysem.

10 Supply and Demand Model for he Malaysian Cocoa Marke 9 IPIA, = Indusrial Producion Index of advanced counries a ime. REER, = Real effecive exchange rae a ime. WCP = world Price of cocoa beans a ime. U 3 = disurbance erm iii. Price Sockholding of coca is assumed in he marke place for he inernaional rading. The price of cocoa is deermined by he supply and demand. The price in he marke is a resul of parial adjusmen process. The price equaion can be specified as price of domesic cocoa is regarded as a funcion of sock of cocoa, domesic consumpion, lagged price of cocoa, and world price of cocoa. PC =f (DD, WCP, SC, U 3 ) (8) where CP = Price of cocoa beans a ime. CP - = Price of cocoa beans a previous year. DD = Domesic consumpion a ime WCP = World price of cocoa beans a ime SC = Sock of cocoa in period, U 3 = disurbance erm 2.Funcional Form For he appropriae specificaion he heory does no provide any specific suggesion on he bes funcional form and he mos perinen measures of variables involved in he analysis. An appropriae model was defined as one which generae unbiased (or a leas consisen) and efficien elasiciy esimaes (Thursby and Thursby, 984). In he curren sudy he linear form has been rejeced agains he log-linear form. In log-linear form he equivalen specificaions are 4 : prc prc 2cp2 3 pop 2 4ha. (9) dex ipia 2reer 3wcp 2 dd cp 2ipim 3 pc sc dd 3wcp 4. () () (2) 4 The lower case denoes he naural log of he variables.

11 Supply and Demand Model for he Malaysian Cocoa Marke Expeced signs Following he above discussion he a priori expeced signs of he regression coefficiens are as follows:,,, ;,, ;, >;,, , 3 Table provides definiions and descripion of he variables whereas able 2 provides he descripive saisics for hem. Before compuing he descripive saisics, all variables are convered ino he naural logarihmic form. The mean values for all variables are posiive. As kurosis coefficiens and Jarque-Bera es saisics indicae all variables are normally disribued. Producion, index of indusrial producion, and domesic consumpion have exhibied he negaive skewness. This indicaes ha large negaive changes are more common han large posiive changes. Table : Definiions of he Variables Used in he Sudy Variables Definiions Endogenous Variables prc Malaysian producion of cocoa a ime in onnes dex Malaysian cocoa expor quaniy a ime in onnes dd Domesic consumpion a ime in onnes pc Price of cocoa beans a ime USD /onne Exogenous Variables ha Harvesed area in period in Hecares aciip Indusrial Producion Index of advanced counries a ime (25=). reer Real effecive exchange raes a ime RM/USD wcp World cocoa beans price a ime ipim Malaysian indusrial producion index a ime (25=) sc Sock of cocoa a ime

12 Supply and Demand Model for he Malaysian Cocoa Marke Table 2: Descripive Saisics Variable Mean Median Max Min S.dev Skew. Kur. Jar.-Bera prc pc dec aciip reer pop sc dc wpc Noe: Figures in parenheses denoe p-values.9257 [.382].654 [.722] [.286] [.335] [.363].23 [.899].728 [.423] [.49].432 [.564] Daa Sources Daa on he world cocoa price, he price indices of Malaysia and advanced counies as well as he real effecive exchange rae are obained from he Inernaional Financial Saisics of he Inernaional Moneary Fund. FAOSTAT online daabase provided he daa on quaniies of palm oil impors by counry. The daa on cocoa producion, area and grinding (as proxy for domesic demand) are available a he Malaysian Cocoa Board websie. Esimaion Mehod In supply and demand model, he price variable cov(, ) pc, or 3 pc is usually reaed as endogenous where cov( pc, ). Since price variable is augmened in boh supply and demand equaions, we bear risk of simulaneiy. To es wheher he simulaneiy exiss or no in he model, we conduc Hausman specificaion es. Tes resuls indicae ha here is no simulaneiy problem in he model. In addiion, if he classical assumpions of leas squares are saisfied, he parameers of sysem of equaions can be esimaed using Ordinary Leas Squares (OLS). However, OLS does no ake ino accoun conemporaneous correlaion among residuals of differen equaions in he

13 Supply and Demand Model for he Malaysian Cocoa Marke 2 sysem. Thus, his sudy, uilizes he Zellner's Seemingly Unrelaed Regression (SUR) echnique. Moreover, as repored in Table 2, Jarque-Bera es saisics indicae ha he srucure of disurbance erm in all equaions is likely o saisfy normaliy condiion. Auocorrelaion in he residuals may arise from many sources. In ime series daa i is common ha he residuals a one poin in ime are correlaed wih he residuals of he adjacen observaions. The effec of auocorrelaion on OLS is he loss of precision in he parameer esimaes. Moreover, exisence if auocorrelaion in he model will lead o biasness of esimaes. Thus, he auocorrelaion in he model should be deeced and correced. In his paper, we relied on Ljung-Box Q saisics o es for auocorrelaion. This es saisics deecs he problem of correlaed errors in he individual equaions in he sysem. Preliminary resuls indicae ha he expor and domesic demand equaions really suffered from auocorrelaion. Then generalized leas squares mehod is uilized o correc for auocorrelaion. In his mehod, he linear ransformaion of variables is carried ou so ha he model wih ransformed variables will saisfy he classical assumpion of OLS var( ) 2 I. The generalized leas squares allows arbirary posiive definie variance-covariance marix of 2 disurbances o be var( ) V. If V is posiive definie marix, one may find a nonsingular marix T such ha TT V. Thus, one can compue he inverse of T which is usually denoed as T. Premuliplying he model by T, he following can be obained. * * * Y X Obviously, * Y T Y, * X T X, and * T. Using his ransformaion, variancecovariance of * * 2 2 equals var( ) T V ( T ) I The OLS can be applied for he ransformed variables as * * * * ˆG X X X Y X T T X X T T Y X TT X X TT Y X V X X V Y Since our model employs he paricular form of GLS we carry ou following ransformaion o correc for auocorrelaion in demand equaions.

14 Supply and Demand Model for he Malaysian Cocoa Marke 3 * Y Y X * Y2 Y2 Y X 2 X * * Y Y Y X X As menioned earlier, he variance * 2 var( ) I. In our sysem, we used above ransformaions in foreign and domesic demand equaions. As repored in Table 3 he resuls of Q saisics show ha here is a significan decrease of correlaed error problem in foreign demand equaion while auocorrelaion is removed from he domesic demand equaion. Once all ransformaions are made, hen SUR is employed for he sysem o obain he parameer esimaes. IV RESULTS The economeric analysis of he daa produced he resuls displayed in Table 3 below along wih he diagnosic ess saisics. The supply equaion appears o fi he daa beer according o he diagnosics and esimaed parameers and i shows a high explanaory power. Furhermore, all he coefficiens carry he correc signs and hey are all saisically significan a % level excep he price of palm oil a lag 2. The price of palm oil is found o be negaive which indicaes a negaive relaionship beween palm oil price and cocoa producion. This is a plausible resul since an increase in he price of palm oil leads o an increase in is profiabiliy which becomes he pull facor ha aracs resources such as land, labour and capial ino he secor in he 98s and 99s. In he case of cocoa indusry boh push and pull facors were a work. The push facor includes, higher cos of inpus, low level of echnology and large scale incidence of cocoa pod diseases. These wo facors explained for he rapid decline in he cocoa planed area and producion saring 989. The area planed wih cocoa urned ou o be an imporan deerminan in supply equaion due o he direc associaion of cocoa producion and harvesed land. The price of cocoa beans is anoher facor affecing is supply lagged wo years, which indicaes ha he farmers ake decision abou producion wo years ahead. The previous year producion also emerged as a deerminan facor for he curren one. Mohammad Haji Alias (2) in his paper has included governmen expendiure as one of he facors as supply deerminans of palm oil, rubber and cocoa and found i o be significan. In he preliminary esimaion of he cocoa supply response, his sudy found ha he said variable showed posiive

15 Supply and Demand Model for he Malaysian Cocoa Marke 4 coefficien (as expeced) bu no saisically significan and hence was dropped from he equaion. The plausible explanaion o his is ha he benefis developmen expendiure may have no reached he major producion areas which are locaed in remoe areas in Sabah and Sarawak where infrasrucures and insiuional suppors are less developed and he majoriy of he producers are smallholders. The diagnosic ess are presened in Table 3. Q() is he Ljung-Box-Q saisics for auocorrelaion a lag for he residuals of supply, demand, and price equaions respecively. JB is Jarque-Bera es saisics is compued o es for normaliy. Auoregressive Condiional Heeroskedasiciy (ARCH) es saisics a lag based on F- es o es for heeroskedasiciy. Table 3: Parameer Esimaes for Sysem of Equaions Employing SUR echnique and Residual Diagnosics Supply Equaion Expor Demand Domesic Demand Price Equaion Variable Coefficien Variable Coefficien Variable Coefficien Variable Coefficien c *** (-3.228) prc.7386*** (7.253) pc 2.39*** (7.7344) pop -.73 ha 2 (-.347) c (.8) aciip.892 (.748) reer.8664* (.737) wpc * (-.469) c 3.663*** (3.947) c *** 4 (-3.893) pc *** (-2.7) miip sc.29 (.3643).74*** (5.848) dc.88* (.6825) pc.665*** (3.929).2444** (2.4995) wpc.9626*** (9.645) Diagnosic Tess Q() [.682] [.4] [.784] [.648] JB.5595 [.458].6364 [.44].4238 [.49].85 [.669] ARCH().522 [.856].47 [.253].4729 [.877].5496 [.233] R-squared Noes ; Figures in parenheses are saisics, figures in square brackes are p values; Aserisks *, **, *** denoe %, 5% and % significance levels respecively. We aemped o esimae he demand equaion using differen specificaions and esimaion echniques. The preliminary resuls indicae ha demand equaion is no robus. A furher analysis of sochasic erm revealed ha he demand model suffers from auocorrelaion problem. The demand specificaion was diagnosed for auocorrelaion using he Ljung-Box Q es procedure. In addiion, heeroscedasiciy es is conduced using he ARCH es. The resul of his es shows ha disurbances are no heeroscedasic. Moreover, as Jarque-Bera es

16 Supply and Demand Model for he Malaysian Cocoa Marke 5 saisics indicaes ha he esimaed errors are disribued normally. In he expor demand, he world economic aciviy parameer carries he expeced posiive sign and he magniude is.892 bu i is insignifican. World income elasiciy for cocoa demand from he model does no compare favourably wih he resuls obained by Shamsudin e al., (993) who found.764 bu i is sill in he elasic range. The expor demand for cocoa is also significanly relaed o real effecive exchange raes. The esimaed parameer is high (.8664). Anoher imporan deerminan of he expor demand is he world price of cocoa which is found o be negaive, saisically significan bu no in he elasic range. This indicaes ha expor demand for Malaysian cocoa is no so sensiive o world price of cocoa. This is due o he fac ha Malaysia is no a significan exporer of cocoa beans in he world marke. As regards he domesic demand, i is modelled incorporaing he price of cocoa and Malaysia s index of indusrial producion. The resuls indicae ha domesic consumpion is highly sensiive o boh of hem. Boh deerminans carry he a priori expeced signs and are saisically significan. Afer he ransformaion of he variables he auocorrelaion in he residuals is removed oally. Furhermore, ARCH es saisic shows ha residuals are no heeroscedasic. Previous sudies on he demand for he agriculural primary commodiies have shown ha he price elasiciies, boh in he shor and long run were generally low and inelasic. Similar resuls of he sudies were obained for cocoa by Baeman (965), Behrman (968), Melo (973), Hwa (98) Claessens (984) Shamsudin e al., (993) and Yusoff (2). These findings were consisen wih mos of he oher sudies on oher primary commodiies which were presened earlier such as on palm oil (Yusoff, 988b and Shamsudin e al., 988), and on rubber (Yusoff, 978 and Mohammad Haji Alias, 988). Furhermore, he role of he economic aciviy level was found o be highly significan relaive o he commodiy demand in all he sudies presened above. In he price equaion, all esimaed parameers are saisically significan and carry he expeced signs excep he parameer for he sock of cocoa. Alhough he coefficien of he domesic consumpion variable has he expeced posiive sign, i is saisically insignifican. The resuls also indicae ha he domesic price of cocoa is deermined by he lagged local price and he world price of cocoa. The coefficiens on lagged price and world price of cocoa are found o be posiive and saisically highly significan. A one percen increase in average world price of cocoa would increase he domesic price by abou.9626 percen. However, he elasiciy wih respec o he one year lagged local price is very low which indicaes ha i is more elasic o he world price han o is previous year s level.

17 Supply and Demand Model for he Malaysian Cocoa Marke 6 V CONCLUSIONS The main objecive of his paper is o examine he marke variables of he Malaysian cocoa. The SUR echnique is employed o invesigae he domesic supply, foreign demand, and domesic price responses o he main deerminans. All he models are consisen wih heory as all he variables carried he correc signs. The models are diagnosed for he appropriae specificaion. The resuls of he diagnosics es indicae ha he model described in mehodology secion is he proper specificaion o examine he supply and demand response. Moreover, he models are saisfacory in erms of heir explanaory powers ranging from quie high o very high. The findings indicae ha he cocoa producion is deermined by is own and palm oil price lagged wo years, planed area and he previous year producion. The Malaysian cocoa beans expors are influenced by cocoa world price and he real effecive exchange rae of he Malaysian ringgi. The domesic demand appears o be dependen on is own price and he economic aciviy of Malaysia. The previous year domesic price as well as he world price of cocoa emerged o be key facors influencing is curren price. The price is also affeced o less exen by he demand whereas sock level is found o be an insignifican facor. The esimaed model appears o explain he cocoa marke in erms of is major srucural elemens, supply, demand and price. However, he sudy does no address he developmen of he cocoa grinding indusry which is experiencing a rapid growh in he las decade. Hence, o have a complee picure of he cocoa indusry, furher research is required o analyse he grinding indusry in deail and is relaion o he oher cocoa sub-secors as well he relevan manufacuring secors. References Abdul Rahman Lubis (994). "Malaysian Marke Model for Palm Oil: Some Policy Simulaions," PhD Thesis (unpublished), Universii Pura Malaysia, Serdang, Selangor. Amna Awad Abdel Hameed (25). An Economeric Sudy of Palm Oil Impor Demand in he Middle Eas and Norh African Counries, PhD Thesis (unpublished), Universii Pura Malaysia, Serdang, Selangor. Azhar, I. (27). The Ways owards Susainabiliy of Cocoa Indusry in Malaysia, presenaion a he ICCO Round Table on A Susainable World Cocoa Economy, Inernaional Conference Cenre Accra, Ghana, 3-6 Ocober 27. Baeman, J.R. (965). Aggregae and Regional Supply Funcions for Ghanaian Cocoa, Journal of Farm Economics. 47 (2): Behrman, M.J. (968). Monopolisic Cocoa Pricing American Journal of Agriculural Economics. L:72-79.

18 Supply and Demand Model for he Malaysian Cocoa Marke 7 Chambers, R. and Jus R. (979). A Criique of Exchange Rae Treamen in Agriculural Trade Models. American Journal of Agriculural Economics, 6, Ernawai (24). Trade Liberalizaion Impac on The Indonesian Palm Oil Indusry," PhD Thesis (unpublished), Universii Pura Malaysia, Serdang, Selangor FAOSTAT online daabase of he Food and Agriculure Organizaion of he Unied hp://faosa.fao.org/defaul.aspx, accessed on 3h Augus 29. Hwa, E.C. (979) Price Deerminaion in Several Inernaional Primary Commodiy Markes: A Srucural Analysis. IMF Saff Papers. 26: IFS online daa base of he Inernaional Moneary hp:// accessed on 3h Augus 29. Kox, Henk M.L. (2). The Marke for Cocoa Powder: Modeling and Forecasing he Marke for Cocoa and Chocolae, paper prepared for he Minisry of Foreign Affairs, The Neherlands. Malaysian Cocoa Board (29). Malaysian Cocoa Board websie@ hp:// accessed on 2 Sepember 29. Melo, H.D. (972). An Analysis of World Cocoa Economy in 98. Ph. D. Disseraion, Norh Carolina Sae Universiy. Mohammad Haji Alias (988). Pembinaan dan Pemilihan Model respon Penawaran dan Pengeluar Geah Asli Jurnal Ekonomi Malaysia. 8: Mohammad Haji Alias, Anizah Md Ali dan Maria Abdul Rahman. (2). The Impac of Governmen Policy on he Supply Response of Malaysian Palm Oil, Rubber and Cocoa Producers. Uara Managemen Review. 2():4-64. Mohammad Haji Alias, Mansor Jusoh and Zulkifli Seneri, (987). A Model of Malaysian Agriculural Secor: Preliminary Resuls. Paper presened in he Fourh economic Meeing (MIER), Kuala Lumpur. Remali Yusoff, Margare Chee and Zulkefli Seneri (998). Supply and demand Model of he Malaysian Cocoa Indusry, Borneo Review, 9(),pp: Rosdi M. L. (99). An economeric Analysis of he Malaysian Cocoa Prices: A Srucural Approach, Masers Thesis, UPM. Schuh, G. E. (974). The Exchange Rae and U.S. Agriculure. American Journal of Agriculural Economics, 56, -3. Shamsudin, M. N., Rosdi, M L. and Ann, C. T. (993). Malaysian Cocoa Marke Model. In Arshad, F.M., Shamsudin, M.N. and Ohman, M.S. (Eds) Malaysian Agriculural Commodiy Forecasing and Policy Modelling. UPM: Cener for Agriculural Policy Sudies.

19 Supply and Demand Model for he Malaysian Cocoa Marke 8 Yusoff, Mohammed (988a). Malaysian Naural Rubber Marke Model. Peranika, II (3): Yusoff, Mohammed (988b). Producion and Trade Model for he Malaysian Palm Oil Indusry. Asean Economic Bullein: Yusoff, Remali, Margare Chee and Zulkefli Seneri (998). Supply and Demand Model of he Malaysian Cocoa Indusry, Borneo Review, 9 () pp:

20 Supply and Demand Model for he Malaysian Cocoa Marke 9 Appendix Expors of Cocoa Beans and Cocoa Producs by Major Exporers Produc Counry Quaniy % Quaniy % Quaniy % Brazil 8,27 6%,9 % 78 % Cameroon 4,448 6% 77,38 3% 6,96 6% Côe d'ivoire 675,525 36%,3,476 44% 83,886 29% Cocoa Ghana 248,97 3% 36,25 4% 56,358 8% Beans Indonesia 4,472 6% 333,69 3% 379,829 4% Malaysia 62,68 9%,48 % 7,82 % Nigeria 47,95 8% 39, 6% 74,9 6% World,896,4 % 2,53,449 % 2,746,97 % Brazil 47,652 3% 3,399 6% 32,744 5% Cameroon 4,82 % 3,283 % 2,243 % Côe d'ivoire 34,828 9% 33,55 7% 57,685 8% Cocoa Ghana 7,45 2% 6,733 3% 5,92 2% Buer Indonesia 8,44 2% 32,72 6% 5,49 7% Malaysia 29,97 8% 4,49 8% 3,37 5% Nigeria 3,72 % 22 %,37 % World 368,295 % 495,85 % 7,73 % Brazil 33,77 2% 9,474 3% 2,258 3% Cameroon 6,966 4% 7,244 6% 3,34 3% Côe d'ivoire 5,497 % 9,6 32% 2,66 29% Cocoa Ghana 6,35 4% 7,538 3% 26,44 6% Pase Indonesia 38 % 2,64 % 2,55 % Malaysia 2,296 % 5,99 2% 9,479 5% Nigeria 35 % 66 % 88 % World 58,882 % 28,9 % 48,93 % Brazil 53,44 5% 2,7 4% 36,83 5% Cameroon 2,25 % 3,89 % 2,287 % Cocoa Côe d'ivoire 32,683 % 2,638 2% 38,659 5% Powder Ghana 6,956 2% 9,6 3% 8,977 2% & Indonesia 82 % 25,37 4% 52,35 7% Cake Malaysia 7,465 6% 45,852 8% 2,968 5% Nigeria 2,398 % 5,38 % 5,73 % World 325,29 % 59,627 % 778,898 % Source: FAOSTAT online daabase (29)