Academic journal article Journal of Southeast Asian Economies

World Palm Oil Market under Freer Trade

Academic journal article Journal of Southeast Asian Economies

World Palm Oil Market under Freer Trade

Article excerpt

The establishment of the WTO in 1995 moves the world economy into a new unprecedented era of comprehensive freer world trade, including agricultural trade. A host of vegetable oils are traded in the world market. These oils are highly interchangeable in many uses, as they exhibit minor differences in their physical and chemical characteristics. Massive government intervention over the years has influenced the existing patterns of trade in vegetable oils. This article discusses potential adjustments that would occur in world palm oil market when countries liberalized domestic protectionism and trade enhancement measures in vegetable oils under WTO rules. It is expected that trade liberalization in vegetable oils would benefit most the low cost producers of vegetable oils - Malaysia and Indonesia. For Malaysia, however, the combined factors of rising cost of farm production associated with increased labour wages as well as increasingly inelastic land supply for ex-situ oil palm expansion potentially neutralize the benefits of trade liberalization in vegetable oils. Policy implications for Malaysia include the dire need to restructure the oil palm industry from its present focus on upstream activities towards high technology oleo-chemical industry.

Introduction

With the successful conclusion of the Uruguay Round of GATT negotiations in 1994 and the establishment of the WTO in 1995, the world economy including the agricultural sector entered a new, unprecedented era of liberalization in world trade. A strong framework to eliminate trade enhancement and protectionism measures is now in place. Under WTO rules, it is very unlikely that governments would move to massive subsidization of agriculture or revert to more restrictive trade in the future.

This article attempts to identify the long-run adjustments that would occur in Malaysia's most important agricultural and industrial crop - palm oil, when countries liberalized their trade enhancement policies in vegetable oils under WTO rules. Subsequent sections present a discussion of the trend of vegetable oil production and trade, and review domestic and trade policies of major vegetable oil producing countries and potential adjustments in the oil palm sector under a global policy reforms scenario. The final section offers several policy implications for Malaysia.

Global Vegetable Oil Output, Trade and Competition

Oilseeds and oilseed products are the second largest category of agricultural commodities, in terms of value, traded in world markets. Demand for oilseeds is a derived demand, determined mainly by the demand for the products processed from the raw seed, namely oilseed meal and vegetable oil. A host of vegetable oils is traded in the world market - soybean, palm, rapeseed, sunflower, peanut, corn, cottonseed, coconut, and palm kernel oils. These oils are highly interchangeable in some uses, since they exhibit minor differences in their physical and chemical characteristics. Of these vegetable oils, none made greater inroads into world markets in the 1970s through the 1990s than palm oil.

Table 1 depicts world production and export of vegetable oils for the period 1990-94. Soybean oil and palm oils consistently constitute more than 40 per cent of world production and exports of vegetable oils. Soybean oil tops production and accounts for about 27.2 per cent of world production of vegetable oils in 1994. Palm oil is its chief rival with 20.6 per cent of world production. Palm oil is, however, first amongst internationally traded vegetable oils since the 1980s. Malaysia has been the world's largest producer and exporter of palm oil from the 1960s through the 1990s. In 1994, Malaysia accounted for 51.7 per cent and 66.3 per cent of world production and export, respectively. Indonesia is second with 26 per cent of world production and 19 per cent of export (Figure 1 and Table 2). Since oil palm is a perennial crop, producing oil-bearing fruits all year round, it readily competes against soybean oil and other vegetable oils produced from both the southern and northern hemispheres. …

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