POINTERS: Crude, Palm Oil Prices and Stock: The Links and Implications

By: Dr. Fatimah Mohamed Arshad & Amna Awad Abdel Hameed

A professor at the Faculty of Economics and Management, Universiti Putra Malasyia, Fatimah Mohamed Arshad started working with the faculty in 1980. Currently she is the Director of the Institut Kajian Dasar Pertanian dan Makanan (or Institute of Agricultural and Food Policy Studies). She obtained her doctoral degree in Agricultural Marketing from the University of Newcastle upon-Tyne, UK. She has taught courses on agricultural marketing, marketing research and research methodology both at the undergraduate and graduate levels. She was the Coordinator of the Centre for Agricultural Policy Studies, UPM in 1987-88 and 1991. She was the President of the Malaysian Agricultural Economics Association for 1998-2001 and has been the Associate Editor and later Chief Editor of the Malaysian Journal of Agricultural Economics (1992 – 1997). She is a member of the reviewer board of the International Journal of Agribusiness and Food Marketing (1993 – todate). She is an associate editor of the Asean Food Journal and Journal of International Society for Southeast Asian Agricultural Sciences since 2002. She was appointed as a committee member of the National Advisory Panel on Malaysian Agricultural Development, Ministry of Agriculture and Agrobased Industries, Malaysia (2008-2010). She is the Chairperson, FAMA-IHLs (Federal Agricultural Marketing Authority and Institution of Higher Learnings) Research Collaboration Committee. She is also a member of the Programme Advisory Committee to Malaysian Palm Oil Board (2010-2012). She has been actively involved in providing inputs to the Malaysian national agricultural policy (NAP) formulation (which include NAP I, NAP II, NAP III and the recent Dasar Agro-Makanan Negara). Her research topics and consultancies include supply chain of agricultural produce, padi and rice marketing, fish distribution and pricing system, agricultural policy and development, price analysis and forecasting and commodity marketing (palm oil, cocoa and pepper) and palm oil futures trading. Has received research grants from various sources. International sources include: International Development Research Centre (IDRC, Canada), The United Nations Food and Agriculture Organisation (FAO), The International Center for Living and Aquatic Resources Management (ICLARM) (Manila), Australian Centre for International Agricultural Research (ACIAR), International Atomic Energy Association (IAEA) , Agricultural Marketing Agencies in Asia and the Pacific (AFMA), Tropical Fruit Network (TFNet) and Instituto de Estudos do Comércio e Negociações Internacionais (ICONE). Local sources include: Kuala Lumpur Commodity Exchange (currently MDEX), Ministry of Agriculture and Agro-based Industries, Economic Planning Unit (EPU), Bank Rakyat, Federal Agricultural Marketing Authority (FAMA), Fisheries Development Authority of Malaysia (LKIM), Lembaga Padi dan Beras Negara (currently BERNAS), Malaysian Palm Oil Board (MPOB), Bank Rakyat, MIMOS and others. Has received Best Paper Award conferred by the International Management Development Association and Haworth Press in 1994 for her paper titled "Price Discovery through Crude Palm Oil Futures: An Economic Evaluation," Best ICT Paper Award from TELEKOM Malaysia and Universiti Putra Malaysia for paper titled "Online Survey on Consumer Attitudes towards E-Commerce: Observations and Methodological Issues." Received Excellent Service awards from UPM (1994 and 2006) and also a number of medals from Universiti Putra Malaysia for her research projects. She has received the “Consultant of the Year (2007) Award” from the Business Research Centre, Universiti Putra Malaysia for her excellent contribution in consultancy work to selected public and private agencies. Also, she has received Anugerah Putra (2010) from UPM for academic excellence.

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Questions & Answers (7) :

Alex Chin

10 years ago

LIM TECK CHAII

Fatimah Mohamed Arshad

11 years ago

Dear Mr Lim, I appreciate your question. We were asked to make some forecast for 2013's market situation, ie., a short term one. Making a forecast is both and art and science. It’s an art as it involves subjective judgment in justifying the forecast and a science when come to the theoretical and methodological issues. There are many methods available, fundamental and technical. We have chosen the earlier method as it is based on some theoretical foundations compared to the later which is largely qualitative in nature. Unavailability of short term data (monthly) for a longer time period has stopped us from estimating a comprehensive econometric model (to include all the supply and demand shifters including the variables that you have suggested). But we do observe on priori basis that there appears to be a close correlation between the said three variables: CPO and crude oil prices and stock. The underpinning causal relationship between them can be explained and justified theoretically. Hence we hypothesized that the variables may hold some answers on the future trends of crude palm oil prices in 2013. With this priori hypothesis, we have chosen the ARDL approach which is proven to be reliable in estimating relationship between variables (short and long term) as well as forecasting as supported in many literatures. Thank you. Fatimah

LIM TECK CHAII

11 years ago

Dear Dr. Fatimah, Your model for CPO price forecast uses two endogeneous variables namely crude oil price and ending palm oil stock.It seems that there are other variable that could explain price as other papers like The other Mr. Benny's paper has currency and spread between FCPO and soybean oil price as explainary variables. Issue is how does choice of the variable one decides to choice vs. choosing all the variables that could explain price affect the predictive power of the price model. Alternatively, the model fails to include certain variable, how is the predictive power of the model affected.

Fatimah Mohamed Arshad

11 years ago

TQ again Desmond. We meant to calculate the change between 2011 and 2012, hence the base year has to be 2011 (for absolute value and %). We are very aware of that. The calculation of absolute change is correct but the percentage change was not. It was an oversight; we will adjust accordingly. My apology and many thanks to you.

Desmond Ng

11 years ago

Dear Dr Fatimah, thanks for your response. If i understand your explanation correctly, should the %Change of first role in the table of Appendix II should be 23% instead of 19% showed (which is calculated by using price change against the 2012 average price 260.78/1386.20). Similarly, the 3rd last role would have shown -65% instead of -186% which means negative pricing. Appreciate our response. Thank you.

Fatimah Mohamed Arshad

11 years ago

TQ Desmond. That was what we did. The average price of CPO in 2011 was USD1125 as estimated by Oil World and cited by FAO commodity prices. Hence in order to calculate the absolute change, we took the difference between the average forecast in 2012 and the estimated price in 2011.For eg. in the case of Scenario 1, the change is is calculated as USD1386.2-USD1125.42=USD260.8 and so on.The last column translate that into %.The asterisk on Change in 2nd last column was missing in the footnote.The asterisk refers to the estimated average price in 2011 by Oil World. My apology for this. I hope that explains it. TQ for your interest n question.

Desmond Ng

11 years ago

Dear Dr Fatimah, gone through your report and noticed that the %Change in the last column of the Appendix II are calculated by using the price Change against the average price forecasted for 2012 under various cirstances, may I know what is the rational? Why %Change not being calculated against the average price of 2011? Please enlighten me, thank you.