Strong demand for palm oil despite global economic concerns

Written by Nariman T.

Article is written based on: <http://www.theborneopost.com/2012/10/01/strong-demand-for-palm-oil-despite-global-economic-concerns>

Suppliers of palm oil all over the world in particular Malaysia are concerned about potential diminishing of palm oil in the future. However top consumer countries still shows high rates and demonstrates good condition on their markets.

“In the first 25 days of September, Malaysia’s palm oil shipments jumped 11.3 per cent month-on-month, led by a 94.7 per cent surge in exports to India and 47 per cent increase to China,” the research analyst pointed out.

It means that demand has signally increased due to determinants factors of demand such as: 

Tastes: If taste or preference for a product increases, demand for the product will increase and shift to the right. For example if 1 billion people in China would prefer palm oil it could incredibly positive impact on Malaysian economy entirely.

On the graph it affects like that: 

If the number of buyers for a product increases, demand for the product will increase and shift to the right.

If income increases, demand for a palm oil product will increase and shift to the right (Positive relationship between Income and Demand for Normal goods).

However, in some countries a palm oil is a necessary good, thus demand will be remain.

Substitute Goods

If the price of a product increases, demand for its substitute good will increase and shift to the right (Positive relationship between Price of one good and the Demand for its substitute goods). Malaysian palm oil is a good substitution for soybean, which grows in United States. Especially, given discount of about US 350 trading in US, the palm oil has preference.

Complementary Goods

If the price of a product increases, demand for its complementary good will decrease and shift to the left (Negative relationship between Price of one good and the Demand for its complementary goods).

In New Zealand palm oil has a wide application in production of cow milk, in order to add more fat into the milk, people use palm oil. Therefore, if cow milk price go up, demand of palm oil will go down. 

Unrelated Goods

If the price of a product increases, demand for an unrelated good will remains the same (No relationship between Price of one good and the Demand for its unrelated goods).

For example, if Proton will rise the prices, it will not affect the palm oil production entirely.

Consumer Expectations

If consumer expects that prices of a product increases in the future, current demand for the product will increase and shift to the right.

“We estimate that the lower US yield will give rise to demand for 1.8 million tones of substitutes, which will be mainly palm oil,” – says author. So, it is a good sign for oil suppliers, in the future demand will increase, thus prices will be much higher.

In the long term, he believed palm oil price would strengthen as the commodity’s production in Indonesia would decelerate starting next year and reach a plateau in 2016 as its trees aged.

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Advertisement is not applicable to this case; because the buying power will not increase even it is much advertised. As I mentioned before, it is a necessary good.

There exists a direct (positive) relationship between Price and Quantity Supplied. When Price increases, the Quantity Supplied also increases and when Price decreases, the Quantity Supplied also decreases. 

So when oil suppliers will be able to set a high price, consequently Quantity Supplied also increase.

There are 7 determinants of oil supply:

Resource Prices

If resource prices increase, the cost of production of a good will increase resulting in a decrease in Supply.

If resource prices decrease, the cost of production of a good will decrease resulting in an increase in Supply.

Technology

If technology improves, this results in an increase in Supply. For instance, Malaysian scientists enhance efficiency and cleaner production, expand uses of oil and develop the processing and utilization of oil palm products.

If taxes increase, the cost of production of a good will increase resulting in a decrease in 

Supply. Malaysia can establish high taxation, however it is a bad sign for suppliers, because they will have to increase the price.

If subsidies given increases, the cost of production of a good will decrease resulting in a increase in Supply.

Prices of Other Goods

An increase in the price of a product decreases the supply of another product. 

E.g. the price of palm oil increases, more land is used to plant palms. So the supply of soybean drops. Palm oil and soybean are substitutes in production

Producer Expectations

E.g. expecting higher prices for palm oil in the future may cause a farmer to reduce his dairy production today. The current supply of oil decreases as a result of this.

Number of Sellers

As more firms (sellers) enter the market, the supply curve will shift to the right.

Climatic Conditions

Supply (lower supply - the supply curve will shift to the left) will be affected when there is a storm, rain, flood in the fishing and/or agricultural industry etc.

Elasticity

The price elasticity of export demand is expected to receive considerable attention due to the current economic climate of volatile export markets and prices. The export demand elasticity is used to predict the change in demand for an export for a unit change in its price and to model the behaviour of foreign buyers.

Elasticity is to measure responsiveness of the quantity demanded to one of its economic variable. The price elasticity of demand measures the responsiveness of quantity demanded to a change in price, ceteris paribus.

The price elasticity demand of the palm oil is inelastic because palm oil is used in food that is a basic need of human being such as cooking oil and margarine. Other than that, use of palm oil is now expended into manufacturing soap, detergent cosmetic and so on. Thus, the change in price of palm oil will not affect much on the quantity consumed.

Price elasticity of supply measure the responsiveness of quantity supplied to a change in price, ceteris paribus. As quantity supply of palm oil will not be affected by the change in price itself, the price elasticity of supply of palm oil is perfectly inelastic. The reason is oil palm tree takes 30 months of planting to start bearing fruits and maintain to be fruitful for the subsequent 20 to 30 years to ensure the consistent of oil's supply. This is a long period that cannot easily change the quantity supply of the palm oil. Any change in price of palm oil such as from P1 to P2, the quantity of palm oil supplied will remain at Q.