A supply response model for Indonesian palm oil

Indonesian palm oil producers are potentially effected by six factors. These six factors are: (1) changes in domestic palm oil sales and competition for hectarage from other domestically produced crops; (2) international demand for and supplies of palm oil and its substitutes; (3) technical advances; (4) health and nutrition driven changes in consumer demand; (5) government policies; and (6) the perennial nature of palm oil trees. Given that palm oil is an important agricultural crop in Indonesia and that the profitability of the palm oil industry is heavily influenced by domestic and international markets, this study examines how palm oil hectarage is affected by market forces, grower expectations, and governmental policy. A double-log, ordinary least square analysis was used to analyze the hectarage response model for Indonesian palm oil. The variables incorporated in the model were in terms of two-year moving averages which captured grower expectations. The independent variables included two- year moving averages of hectarage, palm oil prices, coconut oil prices, Malaysian palm oil production and an interaction variable of Malaysian and Indonesian palm oil production. Results indicated that all estimated coefficients had the expected signs and were statistically significant at a 95 percent level