The Empirical Analysis on Prices of the Malaysian Crude Palm Oil Futures Market

(ProQuest: . denotes formulae omitted.)IntroductionPalm oil is currently the second most important vegetable oil in the world oils and facts market, accounting for 14.35% of world production of seventeen major oils and facts, ranking only behind soyabean oil, which contributed 20.23% of world output. In terms of world exports of oils and facts, palm oil is currently leading with a market share of 32% while soyabean oil has a share of 16.2%. Palm oil and palm kernel oil have become the production growth leaders in the oils and facts complex since the early seventies (Mielke, 1991). Although palm oil has been dominating the world export market, palm oil futures are not as active as the Chicago Board of Trade (CBOT) soyabean oil futures where volume is about 23 times the production of soyabean oil in the United States of America. The volume of crude palm oil (CPO) futures on Malaysian Derivatives Exchange (MDEX) market is slightly more than the production of the Malaysia palm oil.As the price of a palm oil is dependent on its consumption and the level of the stock, it is important to analyze these two variables simultaneously. The world stock/usage of palm oil usually higher than that of Malaysia, not only because of the large stocks in transshipment centers such as Singapore and Rotterdam, but also because some consuming countries prefer to keep relatively large stocks (Mielke, 1991). It has become a common practice among major industrialized countries to use buffer stocks to stabilize the prices of agricultural commodities in the world market [Sarasorro (1988)], including palm oil.Studies in agricultural economics have shown that the fluctuation of commodities prices is significant and persistent (Wilkinson (1976), Brandt (1985)). According to Mad Nasir and Fatimah (1992), two of the salient features of agricultural commodities are the volatility and variability in prices.As far as volatility and variability of prices are concerned, the impact is more remarkable in the vegetable oils and fats market, notably palm oil, which is the most widely consumed edible oil in the world. If producers are in fact using futures prices as expected output prices when allocating resources, an assessment of the quality of the prices is important. Thus studies on the efficiency of futures markets have important implications on the issue of whether economics resources are being optimally allocated in the agricultural sector.It is particularly important to assess the Malaysian Derivatives Exchange (MDEX) market since it is the only futures market for palm oil and producers and other market intermediaries use it as a price indicator. The existence of pricing efficiency in the markets will assume that futures prices move in lines with cash prices in the long-term and that they do not deviate from cash prices for long periods of time.The major objective of this studies is to examine empirically the price relationships and the direction of information flow between the Malaysian crude palm oil futures market and the production, stock, export variables.Review of Related LiteratureInitial empirical research on the theory of efficient markets was concerned with testing the randomness of futures price series. This followed from Working (1958) who emphasized in his Theory of Anticipatory Prices that prices are formed through human decision-making based on available information about supply and demand and past conditions on the market. The continuous flow of the many different kinds of information into the market caused frequent changers, which might be random. Price fluctuations were, therefore, implied to be due to expert appraisal of changing economics information and thus price quotations in a futures market exhibited a random walk.There has been substantial empirical work, which has investigated the efficiency issue by testing the random walk model. Some of this work rejected the random walk hypothesis, for example, Stevenson and Bear (1970), Cargill and Rausser (1975), and Barnhart (1984); other studies accepted the hypothesis, for example, Larson (1960). …