Futures markets play an important role in the price discovery and forward pricing of agricultural commodities. The analysis of this study has mainly focused on the empirical test of the effect of production, stock and export variables on the prices of the Malaysian Crude Palm oil futures market. For the empirical work, correlation analysis, multiple regression and recent econometric analysis were conducted to determine the price relationships of the Malaysian Crude Palm oil futures markets with the production, stock and export variables. Order of integration for all the variables was checked using Augmented Dickey-Fuller and Phillips-Perron tests of unit root. The Johansen approach was used to test cointegration in multivariate system that involved long run and short run estimations. The Vector Error Correction Model was used to test for causal relationships. The empirical evidence obtained from the study shows there exist a significant long run and short run relationships between the cash and future prices of the Malaysian Crude Palm oil futures market with the production, stock and export variables. The results of the causality test also shows that there is a strong relationship between the Malaysian Crude Palm oil futures market with the production, stock and export variables This mean that any information flow regarding the price movement of the Malaysian Crude Palm oil futures market will affect the production, stock and export variables and vice-versa.
Key Words: Oil, Future Markets, Correlation, and Empirical Evidence.
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Palm 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. …