Policy, Resarch, and Extemal Affairs XWORkING PAPERS- InIwnstlonal Commodity Markets International Economics Department The World Bank March 1990 WPS 382 The Indonesia Vegetable Oils Sector Modeling the Impact of Policy Changes Donald F. Larson Liberalizing vegetable oil production in Indonesia would stimu- late production, which is already expanding, but without new milling capacity, palm oil production gains are useless. And increasing export taxes would reduce export revenues. The Policy, Research, and External Affairs Complex distributcs PRE Working Papers to disseminate the findings of work in progress and to encourage the exchange of ideas among Bank suff and all others interested in development issues. These papers carry the namas of the authors, reflect only their views, and should be used and cited accordingly. The findings, interpretations. and conclusions are the authors' own. They should not be attributed to the World Bank, its Board of Directors, its mnanagement, or any of its member countries. Policy, Research, and Exlem I Affairs| I=lonal Commodity Mlarkets This paper - a product of the International Commodity Markets Division, Intemational Economics Department-is part of a larger effort in PRE to develop a thorough understanding of primary commodity sectors in the developing countries. This information is useful both for commodity outlook work as well as for policy analysis. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Dawn Gustafson, room S7-044, extension 33714 (61 pages with tables). In two decades, Indonesia has become the Removing cumbersome government regula- world's second largest producer of palm oil and tions would stimulate production but would not coconut oil. But Indonesia remains a price- guarantee consumer benefits. taking producer of perennial (tree) crops in a market dominated by annual crops, particularly Whatever scenario is pursued, past invest- soybeans. ments in tree crops guarantee rapid expansion of production. But increased production does not Indonesia has expanded production despite a give producers marketing power as they are Byzantine collection of price and quantity unable to adjust supplies as quickly as producers restrictions that affect both consumers and of annual crops. producers. But the Government of Indonesia appears ready to liberalize trade and increase The rapid expansion of vegetable oil produc- private participation in the sector - recognizing tion may precipitate a domestic crisis in the both the limits of government financing and the palm oil milling industry, as milling capacity is importance of vegetable oils to the development stretched. Should new investments in milling of the Outer Islands. fail to materialize, some production gains from existing trees will be squandered. Larson simulated the effects of trade liber- alization on the sector and the effects of an Should the export tax on vegetable oils export tax on tax and export revenues. His pol- increase, export revenues will drop. And some icy simulations show that: of the gains from tax revenues will be offset by reduced revenues from state-owned estates. The PRE Working Paper Series disseminates the findings of work under way in the Bank's Policy, Research, and External Affairs Complex. An objective ef the series is to get these fimdings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy. Produced at the PRE Dissemination Center TABLE OF CONTENTS I. INTRODUCTION AND MOTIVATION. . . . . . ....... *..* ** *1 II. INDONESIA AND THE GLOBAL MARKET. ......... .o ...*.o.*. . . o. .............3 III. HISTORICAL SETTING.o ......o.................... . ... . o. 6 IV. DOMESTIC MARKETING AND COVERNMENT POLICY ...............oo .... 12 V. FUTURE GOVERNMENT POLICIES IN PALM OIL. .......o...o.o.........*21 VI* IhDONESIAN MODEL DESCRIPTION... o ............................. . 26 VII. MODEL SCENARIOS AND SIMULATION RESULTSo ....................... 33 VIII. COdCLUSIONS ......... .... o ... o ... 0047 Annex A: Palm Oil and the Larger Market for Vegetable Oils....oo......o.49 Annex B: The Almost Ideal Demand System............................ ....54 Annex C: Listing of Model Parameter Estimates and Test Statisticsooo....56 BIBLIOGRAPHYo...o.. ...o.. el.o.... o*.o*.o*.*o.e6 THE INDONESIAN VEGETABLE OILS SECTOR: MODELING THE IMPACT OF POLICY CHANGES I. INTRODUCTION AND MOTIVATION 1. The tree crop sector has been and remains a key component of the Indonesian economy. Rubber, oil palm and coconuts together occupy about 5.5 million hectares--about 20% of the cropped area in Indonesia, and generate 20Z of non-oil export earnings. The sector employs 15% of the labor force, and from 1984 to 1986 generated 48,000 new jobs. The sector currently produces about 16% of agricultural GNP and is growing rapidly--especially oil palm and coconuts. Since 1970, the area devoted to coconuts has increased 76Z, while the oil palm area has expanded by an incredible 432%. Rapid growth is forecast as well. 2. During the period 1980-85, employment in agriculture on Java grew at 0.9% p.a., contributing about 24% of total employment growth on Java. Employment in off-Java agriculture grew at 3.1% p.a. and contributed nearly 61% of total employment growth in the Outer Islands. Over 60% of the Indonesian population resides on Java, and labor absorption is a major challenge. Rice remains the major agricultural crop of Java but prospects for continued expansion are pessimistic. Uncultivated agricultural land on Java is virtually non-existent; all economically irrigatable land is already being used and most areas are already planted with high-yielding rice varieties. - 2 - The World Bank has supported ten operations in the Indonesian tree crop sector with a lending volume of about US$ I billion and considers the sector *mportant, not only for its contribution to GDP and export revenue but also because of its strategic role in Outer Island development. A recent World Bank Staff Appraisal Report (World Bank, 1988) concluded that "...(T)hroughout Indonesia, food crops can be expected to absorb only limited amounts of additional labor, so the expansion of agricultural lands through exploitation of high-value tree crops may be the only effective means of generating growth and employment on a large scale in the Outer Islands." 3. In September, 1988 the World Bank sent a mission to Indonesia to evaluate the tree crop sector and provide recommendations to the Government regarding its future development. The model described in this paper was used to simulate policy alternatives for that study. In addition to the model description, this paper discusses the role of Indonesia as a producer of palm oil and coconut oil in a global context, provides a history of the sectors in Indonesia, as well as discussing the impacts of current government policies and model simulation results of the removal of existing restrictions on domestic and external trade in these industries. As well as supporting the policy role of the World Bank in Indonesia, this study provides input into the International Commodity Markets Division's ongoing analyses of the global outlook for the vegetable oils and meals industries. -3- II. INDONESIA AND THE GLOBAL MARKET 4. The fats and oils market is a highly integrated market characterized by substantial substitution possibilities in demand and diverse supply sources. The market encompasses oilseeds such as soybeans, rapeseed, and sunflowerseed, which are planted annually; crops such as oil palm and coconut palm which are perennials; and animal sources including butter, tallow and lard. Production decisions for annual crops are characterized by annual land allocation choices based on expected prices for meal and oil, while tree crop investment decisions are similar to other long-lived capital investment decisions. Animal fats production is the result of a set of complicated investment decisions involving the joint production of meat, dairy products and fat by-products. Fats and oils production is locationally diverse as well, with a variety of products produced and traded throughout the world. Table 2.1 conveys a sense of the wide distribution of fats and oils production. While North America and Europe are the dominant areas of production, large producers are found in South America and Asia as well. Although vegetable oil production is growing rapidly in Indonesia, the country remains a relatively medium-sized producer within the total fats and oils market. 5. The model presented in this paper is a model of Indonesia independent of other markets, and the analysis rests on the assumption that Indonesia is a price-taker in world markets. While Table 2.1 shows that Indonesia represents a small (3%) share of total fats and oils production, Indonesia is the world's -4- Table 2.1: 1987 PRODUCTION OF FATS AND OILS, BY REGION Region Production Share --Million tons-- --Z__ North America 12.5 17.2 EEC 11.4 15.7 Eastern Europe and U.S.S.R. 9.2 12.7 China 7.4 10.2 Malaysia 5.2 7.2 India 3.9 5.4 Brazil 3.5 4.8 Africa 2.8 3.9 Argentina 2.3 3.2 Indonesia 2.2 3.0 Japan 2.2 3.0 Philippines 1.5 2.1 Mexico 0.9 1.2 Other Europe 0.9 1.2 Turkey 0.8 1.1 Pakistan 0.6 0.8 Australia 0.6 0.8 Rest of the World 4.6 6.0 TOTAL 72.5 100 Source: Oil World Annual, 1988. -5- second largest producer of coconut oil (25%), and the second iargest producer of palm oil (20%). Giv-"n the strong implications for policy analysis, the alternative hyothesij thiat the palm oil and coconut oil markets should be considered somehow distinct from the larger market for fats and oils deserves consideration. 6. However, the hypothesis that Indonesia holds price-setting market power in either the coconut oil or palm oil markets is rejected based on: (1) the known technical substitution possibilities among vegetable oils (2) the strong statistical evidence of price correlation among oils with varying supply conditions; (3) the inability of tree-crop vegetable oil production to expand or contract rapidly; and (4) the results of simulations of production shift effects in the context of a global model. The full arguments are given in Appendix A. -6- III. HISTORICAL SETTING 7. Although considered a "new" crop in Indonesia, palm oil was cultivated acid used for soap production in Central Java by the mid-nineteenth century and oil palm plantations producing edible oil appeared in Sumatra by 1911. In 1938 about 90,000 hectares were planted in oil. palm, but during World War II and the following years of early independence little growth occurred in m3ct of the estate crops. In 1968, all nationalized former-Dutch estates were reorganized into 28 independent management units (PNPs/PTPs), I/ and all other nationalized estates were returned to their previous owners. Expansion and rehabilitation plans were launched and new planting begun. Oil palm was considered more profitable than many of the other estate crops, and areas devoted to oil palm expanded rapidly. Areas planted in palm oil on government-owned estates grew from 84,000 hectares in 1969 to 176,000 hectares in 1979 and to 343,000 hectares in 1987 (Table 3.1). Large private estates expanded rapidly as well, growing from 35,000 hectares in 1969 to over 146,000 hectares in 1987. In addition to direct inveitment in oil palm, the Indonesian Government also sponsored small-holder development in oil palm. Lands have been cleared and planted near existing PTPs where small holders (2- 4 hectares each) care for and harvest the trees. The crop is processed into Crude Palm Oil (CPO) at the PTP's crushing plant. These "people's plantations" are currently the most rapidly expanding type of cultivation 1/ PTPs (Perseroan Terbatas Perkebunan) and PNPs (Perusahaan Negasa Perkebunan) are both state owned estates. The PTPs have more limited liability under Indonesian law. Table 3.1: INDONESIAN PALM OIL PROOUCTION ------------Production (tons) ----------- -------Harvested Area (hectares)--------- Small State Private Small State Pr;vate Date Holders Estates Estates Holders Estates Estates 1970 0 147,003 69,824 0 86,640 46.658 1971 0 170,304 79,653 0 91,153 47,950 !972 0 189,261 80,203 0 96,562 55,497 1973 0 207,448 82,229 0 98,033 59,747 1974 0 243,641 104,035 0 117,513 64,223 1975 0 271,171 126,082 0 120,940 67,885 1976 0 286,096 144,910 0 141,333 69,772 1977 0 336,891 120,716 0 148,775 71,626 1978 0 336,224 165,060 0 163,465 68,651 1979 760 438,756 201,724 3,125 176,408 81,406 1980 720 498,908 221,544 6,175 199,338 89,047 1981 1,045 533,399 265,616 5,695 213,264 100,008 1982 2,955 598,653 285,212 8,537 224,440 96,924 1983 3,4x4 710,430 269,102 37,043 261,339 107,624 1984 4,031 814,015 329,144 40,552 340,511 130,958 1985 36,216 867,973 339,241 118,564 335,185 143,603 1986 53,504 912,306 384,919 129,904 332,694 144,182 1987 66,664 1,025,882 384,919 218,510 342,725 146,671 Source: Directcr General of Estates, Indonesia. - 8 - unit. Non-existent in 1978, small-holder area in 1987 (at 218,000 hectares) exceeded that of large private plantations. Palm oil production has expanded rapidly as well, with government estates again dominating the sector. Production on government estates grew from 129,000 tons in 1969 to 1.026 million tons in 1°97. The large private estates produced over 60,000 tons in 1969 and 385,000 tons in 1987. Small-holder production is ly beginning to come on-stream, yet 1987 production is estimated at 67,000 ;as. Government- sponsored palm oil production, either directly or indirectly through small holders, 's therefore responsible for about 74Z of total production in Indonesia. 8. Cultivation of coconut trees in Indonesia is dramatically different in scale from the cultivation of oil palm. Fresh fruit bunches of oil palm must be processed quickly after harvesting and crushing plants are typically built at the hub of an estate extending over 5,000 hectares. Ninety-eight percent of the area planted to coconuts in Indonesia is cultivated by small- holders, typically in groves of less than two hectares (Table 3.2). The total coconut area has grown consistently, however, increasing from 1.2 million hectares in 1970 to 3.2 million hectares in 1987 (Table 3.2). 9. Of the 3.2 million hectares, 3.1 million hectares are managed by small-holders with little c( no government support. Government ownership is extremely limited at 14,000 hectares, and large estares account for only 42,000 hectares. Despite the availability of new, high-yielding varieties of palm, yields have remained stable and low at around 0.6 tons per hectare (copra equivalent)--suggesting that the maturity and varietal composition of Table 3.2: INDONESIAN COCONUT PROO(JCTION -------Production (tons copra Eq.)------- -------Harvested Area (hectares)------- Small State Private Small State Private Date Holders Estates Estates Holders Estates Esta.s 1970 1,198,863 1,749 2,290 1,789,262 5,928 10,541 1971 1,273,935 2,068 3,576 1,870,564 6,453 11,180 1972 1,248,739 3,007 4,205 1,889,682 6,982 11,556 1973 1,274,441 1,626 3,859 1,989,618 6,969 12,^S 1974 1,335,441 1,495 6,475 2,108,591 6,691 15,2r 1975 1,380,929 3,495 5,545 2,193,097 7,694 16,274 1976 1,526,577 3,253 4,811 2,304,790 9,243 14,800 1977 1,541,996 3,320 21,231 2,393,112 10,182 58,072 1978 1,553,763 3,527 20,952 2,454,115 9,234 42,212 1979 1,596,191 3,612 22,284 2,520,938 10,405 48,230 1980 1,629,726 3,701 32,646 2,622,206 15,050 43,167 1981 1,764,567 3,887 24,468 2,752,386 15,075 57,401 1982 1,587,177 4,457 11,411 2,808,989 13,411 29,764 1983 1,590,173 3,443 14,022 2,890,681 16,683 39,346 1984 1,737,263 2,430 10,795 2,958,170 14,197 39,113 1985 1,905,241 4,147 11,043 2,993,442 14,642 40,916 1986 1,950,290 7,628 16,724 3,056,575 14,271 41,682 1987 1,984,522 7,628 16,724 3,119,295 14,291 41,682 Source: Director General of Estates, Indonesia. - 10 - the tree stock has remained fairly constant over the last two decades. The steady expansion of coconut trees in Indonesia appears to have a life of its own. A simple linear trend which mimics population growth, explains over 99% of the expansion in coconut area over this period, leaving little room for relative price impacts on investment. However, coconut production from planted areas does respond to changes in real prices through harvesting intensification, as will be shown in the model discussion. 10. The stability of yields and the failure to adopt high-yielding varieties of coconut palm in Indonesia remains somewhat of a mystery. Anecdotal evidence indicates that the most prolific of the high-yielding varieties, the dwarf hybrid, is unpopular since the nuts are smaller and the shorter trees cannot be easily intercropped. However, other tall varieties are available which produce yields significantly higher than varieties presently in use, and yet thes-s have not been adopted either. It has also been convincingly argued that farmers are reluctant to cut down palm trees that are yielding any nuts--even when thosE trees are well over 60 years old. Yet, every year, 30-60 thousand hectares of new land are planted in coconuts. Therefore, a large number of trees have been planted and .iave matured during the past two decades of stable yields. A third argument which seems reasonable, is that because of the long gestation period and long life of coconut trees the "demonstration effect" of the new varieties is quite slow. Unlike annual crops, in which results are demonstrated each year, the results from planting tree crops are mucx. delayed. While demonstration effects grow geometrically, the four to seven year wait between "generations" of effects is likely to slow substantially the full impact of the new - 11 - technology. In addition, technologically progressive farmers who do plant improved varieties of coconut reap the benefits four to seven years after planting, but may suffer a loss in the early years due to increased input requirements and outlays for planting material. If future income is highly discounted, as is likely the case among small-holders, these up-front expenses are a strong disincentive. 11. While the total supply of coconuts does not seem responsive to economic variables, the allocation of nuts to the copra industry does seem responsive to price and income movements. In 1970, 47% of the total coconut production was crushed as copra to produce meal and oil. As prices jumped in the mid-1970s, more than 63% of production moved into the formal copra milling sector. This share dropped as prices fell in 1985 and 1986, but with the sharp price increase in 1987 the share increased again to about 60% of production. - 12 - IV. DOMESTIC KARKLqING AND GOVERNMENT POLICY 12. The composition of the domestic market for coconut oil (CCO) and palm oil has changed dramatically over the past two decades. In 1971, 93% of total expenditures on crude vegetable oil were devoted to coconut oil (see Table 4.1). Domestic use of coconut oil was greater than 373,000 tons, while of the 250,000 tons of palm oil produced in Indonesia, only 24,000 tons were used locally. As the decade progressed, palm oil's market share grew steadily-- reaching about 24% of expenditures in 1980. Over the past eight years, however, domestic use of palm oil has expanded even more rapidly and is currently about 40% of domestic expenditures. In physical terms, domestic use of palm oil now exceeds that of coconut oil. In 1987 domestic use of coconut oil dropped to 605,000 tons (from 750,000 tons in 1986), while domestic demand for palm oil grew from 601,000 tons to 757,000 tons. The motivation for the substitution of palm oil for coconut oil is easy to understand. Palm oil has historically had a discount to coconut oil on international markets, yet both crude oils are essentially equivalent as inputs for a variety of uses. It is possible to manufacture refined cooking oils from each which have no taste differences; margarine and shortening can be made from both products; both can be used to add fat content to dairy products made from dried milk; and both can be used for some types of soap. But to fully understand the timing of the substitution, and its potential impact on market prospects, it is important to understand the domestic marketing environment for vegetable oils in Indonesia. - 13 - Table 4.1: INDONESIAN CONSUMPTION OF VEGETABLE OILS Share of Vegetable Oil Expenditure Year Coconut Oil Palm oil for Palm Oil …------('000 tons)------- -------(Z)-- 1971 373 24 3 1975 500 48 9 1980 629 232 24 1985 562 769 43 1987 605 757 40 13. The Government of Indonesia jointly pursues a variety of policy goals with respect to the vegetable oils market. Cooking oil is one of the nine commodities which the government has designated as "essential" and the provision of cooking oil at a price consumers can "afford" has been a key objective of government policies. However, the government is also committed to providing a "fair" price to producers, and insuring an adequate supply of raw vegetable oil to processors. At the same time, the government is committed to protecting the processing industry as well as to increasing export revenue generated by the vegetable oil sector. These objectives are difficult to pursue simultaneously and are often at odds, leading to a proliferation of market intervention policies--including both quantity and price restrictions, a central marketing organization, and tax policies. - 14 - 14. In order to insure adequate supplies of raw material for the domestic industry, representatives of the Ministries of Trade, Agriculture, and Industry convene each year to allocate a portion of CPO production to each of the major competing industrial users--including fractionation (breaking the original oil into component fatty-acids) and refining, margarine and shortening production, soap production, chemical uses, and animal feed. In addition, in order to keep prices stable and to ensure processing profitability, an official "allocation price" is designated. With the exception of 1986 when palm oil prices hit an historic low, allocation prices have fallen below world prices (Table 4.2). Plantations owned by the state and by joint-foreign ventures are obligated to provide a portion of their production to a Joint Marketing Organization (JMO) which handles the implementation of the allocation scheme. 15. Since coconut production is so widely diversified, there is no equivalent allocation scheme for coconuts (although there have been a number of local laws and taxes which discourage inter-island transport of either fresh nuts or copra). However, to ensure adequate supplies of all vegetable oils, quantitative and licensing export restrictions apply to both crude palm and coconut oil. Historically, government approval for coconut oil or copra exports has been rare. Earlier, coconut oil was devoted first to meeting domestic demand with palm oil used to supplement, but not displace, domestic coconut oil demand. More recently, as palm oil has gained increasing acceptance as a less-expensive alternative in cooking oil, the government has allowed increasing exports of coconut oil. Copra exports are still rare, in order to provide protection to domestic crushers. Until recently, imports of - 15 - Table 4.2: PRICES OF PALM OIL (Rp '000/ton) Official Year Allocation Price Rotterdam Price 1970 90 94 1971 90 103 1972 100 90 1973 120 157 1974 120 278 1975 120 180 1976 120 168 1977 120 220 1978 175 265 1979 210 407 1980 220 367 1981 260 360 1982 260 294 1983 295 455 1984 295 748 1985 425 556 1986 400 346 1987 425 562 Source: World Bank, Washington, D.C. - 16 - palm oil, coconut oil, and copra were forbidden, providing protection to farmers. Exports, which are licensed, are subject to a two-tiered tax system. There is a fixed tax of 0-5X and an additional variable "special" tax, intended to make up the dirference between domestic prices and international prices. As the domestic price is fixed, and international prices fluctuate daily, the special tax often fails to bridge the gap between domestic and international prices, creating numerous incentives to circumvent the tax and the physical trade restrictions. 16. As mentioned earlier, the government either directly, or indirectly through its sponsorship of small holders, produces most of the palm oil in Indonesia. As a result, the government has in the past encouraged production growth through direct investment in the sector. In addition, domestic production has been stimulated by other programs. Many of the best potential sites for palm development are in areas of Sumatra and Kalimantan for which property rights are allocated by local custom rather than by strict legal deed. At the same time, Indonesian oil palm plantations are typically built on a scale involving 5,000 hectares or more. Investors without sufficient knowledge of local conditions are unable to amass sufficient tracts of contiguous land. 17. Current programs often offer investors access to large tracts of land deeded to the central or local governments, circumventing the need to negotiate land-use rights with multiple (often contending) parties. Loans at subsidized rates are also included, greatly increasing already strong investment incentives. In addition, the government often provides roads and - 17 - other forms of infrastructure. Fertilizer prices are subaiidized in Indonesia as well, decreasing operating costs and increasing profit margins for the plantations. At the same time, however, complicated government allocation rules and high processing costs provide contradictory disincentives. 18. The net effect of government policies with respect to palm and coconut oil are mixed for producers, but more clear for consumers. For the consumer, despite policies which tend to reduce the price of crude oil inputs to processors, potential consumer savings are limited by concentration in the processing sector and restrictive licensing of imports. Empirical evidence would indicate that cooking oil prices in Indonesia have been higher than world prices (Table 4.3). In only seven of the 55 months covered in Table 4.3 was cooking oil produced from palm oil in Indonesia less expensive than cooking oil produced from palm oil in Europe. In only 16 of the 55 months was the price of coconut oil produced in Indonesia less than the price of refined coconut oil in Europe. In the first seven months of 1988, Jakarta cooking oil prices were 23% above an equivalent export parity price. Despite the decontrol of prices of olein, stearin and refined coconut oil in December 1987, cooking oil prices have not returned to international levels. In July of 1988, RBD stearin in Medan sold for 748 Rp/Kg compared to an f.o.b. price of 680 Rp/Kg. 19. For the producer, the allocation responsibilities imposed on oil palm plantations result in a net decrease in producer revenue as do restrictions on exports of copra, coconut oil and palm oil. Export taxes further increase the wedge between world and domestic prices. At the same time, given the rapid - 18 - Table 4.3: A COMPARISON OF INDONESIAN AND ROTTERDAM COOKING OIL PRICES Cooking Oil from CPO Cooking Oil from CCO Year/ Jakarta Rotterdam Jakarta Rotterdam Month (Rp/Kg) (Rp/Kg) S (I )/(2) (RA/Kg (Rp/Kg) S (1)/(2) 1984 I 1,007 1,041 97 1,071 1,097 98 2 867 1,057 82 938 1,188 79 3 840 864 97 963 1,152 84 4 860 873 98 1,052 1,180 89 5 771 975 79 1,044 1,348 77 6 750 500 94 1,027 1,468 70 7 750 647 116 997 1,306 76 8 750 672 112 971 1,107 88 9 750 675 III 848 1,200 71 10 750 694 108 807 1,206 67 11 750 7111 105 804 1,019 79 12 750 672 112 798 944 85 1985 1 731 698 105 777 951 82 2 725 675 107 775 840 92 3 744 725 103 838 937 89 4 770 829 93 850 854 99 5 767 765 100 786 735 107 6 750 681 110 740 639 116 7 720 572 126 723 578 125 8 574 511 112 577 507 114 9 588 457 129 605 474 128 10 547 411 133 575 478 120 11 512 428 120 541 442 122 i2 605 480 126 584 439 133 1986 1 637 424 150 687 431 159 2 624 374 167 623 361 173 3 592 345 172 588 332 177 4 539 372 145 554 302 184 5 511 369 139 556 264 210 6 479 378 127 533 288 185 7 480 293 164 525 249 210 8 585 318 184 599 239 250 9 612 455 134 626 395 159 10 653 567 115 717 707 101 11 774 631 123 867 646 134 12 707 572 124 b16 649 126 - 19 - Table 4.3: A COMPARISON OF INDONESIAN AND ROTTERDAM COOKING OIL PRICES (Covtinued) Cooking Oil from CPO Cooking Oil from CCO Year/ Jakarta Rotterdam Jakarta Rotierdam Month (RpA/g) (Rp/Kg) % (1)/(2) (Rp/Kg (Rp/Ag) S (I )/(2) 1987 1 728 651 112 826 699 118 2 768 653 118 862 663 130 3 744 615 121 82" 566 147 4 707 620 114 780 640 122 5 700 615 114 778 666 117 6 713 628 114 840 741 113 7 681 577 118 789 728 108 8 650 612 106 791 787 100 9 679 641 106 842 789 107 10 698 638 109 833 561 149 II 707 671 105 818 638 128 12 822 781 105 899 666 135 1988 1 968 957 101 1,054 962 110 2 880 819 107 975 901 108 3 783 731 107 918 877 105 4 781 750 104 934 865 108 5 791 772 102 961 906 106 6 917 887 103 1,080 1,044 103 7 945 872 108 1,144 1,132 101 Note: Exchange rates used to convert world merket prices to rupiah equivalents are annual average market exchange rates: 1984 US$I.OO = Rp. 1,026 1985 USSI.00 = Rp. 1,111 1986 USS1.00 = Rp. 1,134 1986 (post September) US$1.00 = Rp. 1,644 1987 US$1.00 = Rp. 1,644 1988 USSI.OO = Rp. 1,700 World Bank Prices are Cif Rotterdam as reported in Oil World. Domestic prices are quotations from the Department of Trade reported monthly. - 20 - expansion of both oil palm and coconut, it is hard to argue that the net incentives for investment are not positive. Access to large areas of land as well as subsidized investment capital are strong incentives, and investment has been and is likely to remain strong, especially in oil palm plantations. Given the inability of the allocation procedures to lower domestic consumer prices, despite lowering farm gate prices, it must be assumed that most of the benefits of the current system of marketing fall to processors and distributors. This segment of the market already enjoys some measure of protection due to low labor and transportation costs because of their proximity to raw inputs such as CPO and copra. - 21 - V. FUTURE GOVERNMENT POLICIES IN PALM OIL 20. As noted earlier, the government of Indonesia has played an active role in the palm oil sector through direct investments via PTPs, small-holder programs, and the private sector incentives. During the next five-year plan (Repelita V) which begins in 1989, direct government investments are likely to remain small as low petroleum prices have limited governmint re-:enues. As a result, the government has initiated an alternative investment program which emphasizes private investment and management spurred by government incentives. The program, Pir-Trans, contains elements which have appeared in earlier programs but is unique in that it assigns small-holder development assistance responsibilities to private sector investors--a role traditionally reserved for state-owned estates. Under Pir-Trans, the government would be responsible for infrastructure development such as roads, bridges, and electricity. The government would also facilitate the acquisition of property-use rights, an obstacle which has greatly limited private investment in the past. Land clearing would be handled by contractors, oftea in exchange for logging rights. Private investors would have access to credit at concessionary rates and would finance estate development, new crop planting and palm oil crushing facilities. Around this privately-managed center or nucleus, an area up to four-times as large would be devoted to small-holder development. Government resources would be used to finance small-holder plantings, initial living expenses and housing. The nucleus would be responsible for providing extension services, collecting harvested fruit bunches, and processing the bunches into crude palm oil. - 22 - 21. As we will see, assumptions concerning the success of Pir-Trans in continuing what has been rapid investment in the palm oil sector are important to the latter part of the projection period to the year 2000. Investment in new plantings during Repelita V will have negligible impact through the end of the plan in 1994, but, if sufficiently large, could prove important for the last six years of the projection period. 22. Generally speaking, the Pir-Trans program is open to all tree crops; however, to date, the private sector has limited its interest to palm oil with the exception of a single cocoa project on Kalimantan. As of October, 1988 projects involving over 376,000 hectares had been approved by the Director General of Estates under the Pir-Trans program for development through 1994. Another 124,000 hectares were under consideration at that time. Tables 5.1 and 5.2 give a listing of these projects by implementation data. The numbers given in the tables do not include the expansion of existing private estates, nor do they include private investment outside of the Pir-Trans program (for example, plantings on private estates owned by nationals which are eligible for other credit programs.) Adding in new are. from other sources to the Pir-Trans schedule would bring total new area investment to 75-80,000 hectares annually, a large area even by the standards of recent years. There are several reasons why this schedule may be overly optimistic. Over 7CZ of the area under Pir-Trans as it stood in October, 1988 would be devoted to small holders which would be 100Z government-financed. In addition, roads, housing, and other facilities would have to be constructed at an unparalleled rate, placing an extremely heavy burden on a government with dwindling revenues for investment. Also, as can be seen in Tables 5.1-5.2, most of Table 5.1: APPEDOW PIR-TRANE Projects by Provire Total Total Total ReIita IV Repelta Pepellta V Repelita ta VI Repelita Toka1 PFtgrazi 1S85/86 1986/87 1987/88 I 9i8/89 IV 1989/90 1990/91 1991/92 1992/93 1993/94 V 19495 .995/96 VI A. Private Sector 1. RII Wdl 55,320 0 0 3,020 9,500 12,520 13,000 13,00 U1,500 10,300 5,oco 52,800 0 0 0 N.leus 16,330 0 0 1,000 2,380 3,380 2,850 4,250 3,150 1,700 1,00) 12,950 0 0 0 2. JMBI StIxl 75,840 0 0 0 500 500 9,540 16,400 17,400 17,600 9,200 70,140 2,800 2,4D0 5,200 ?aleus 26,460 0 0 0 2,000 2,000 4,710 5,600 6,100 3,300 3,550 23,260 6(0 600 1,200 3. SUM1D 96M1 17,00 0 0 0 1,200 1,200 2,0OO 3,300 4,500 3,OOD 3,000 15,800 0 0 0 SELAAN M,cla 8,o o 0 0 0 300 300 50 1,20 2,00 2,000 2,O 7,700 0 0 0 4. S143EA 9tSdl 6,000 0 0 0 500 500 1,ooo 1,500 1,500 1,500 0 5,500 0 0 0 BARAT Nclae 4,000 0 0 0 2,0O0 2,sOO 2,OD0 0 0 0 0 2,000 0 0 0 5. KAAIAN S9dl 35,300 0 0 0 0 0 500 7,200 8,100 10,000 9,500 35,300 0 0 0 BARAT ticleus 16,700 0 0 0 500 500 1,500 6,200 6,200 1,300 1,000 16,200 0 0 0 6. KUANEAN Reii 8,oco 0 0 0 0 0 0 1,200 2,400 3,200 1,200 8,10D 0 0 0 Tam ieus2 20D 0 0 0 0 0 0 300 60D 830 300 2,0DO 0 0 0 7. KALDIrA Sia 3,00X 0 0 0 0 0 0 1,500 1,500 0 0 3,00D 0 0 o TDMR * xileus 750 0 0 0 0 0 0 750 0 0 0 750 0 0 0 SU.Ak1 SWd 8,001 0 0 1,200 2,000 3,200 2,800 2,0 0 0 0 4,8oO 0 0 O SE"N N 2,000 0 0 350 500 800 700 500 0 0 0 1,200 0 0 0 9. 6SU13A1 9dxl 6,000 0 0 0 0 0 1,00) 2,0D0 3,000 0 0 6,0SO 0 0 0 TDA t&e,s 4,000 0 0 0 0 0 2,OOD 2,0D0 0 0 0 4,050 0 0 0 T1L A: SWi1 224,460 0 0 4,220 13,700 17,920 29,840 48,100 49,900 45,600 27,900 201,340 2,800 2,400 5,200 Nacle 80,240 0 0 1,300 7,680 8,960 14,260 20,830 18,050 9,100 7,850 70,060 600 60) 1,200 B. INDl PFT. (PIP') 1. 3 ERA Pl 9,300 0 0 0 0 0 1,200 2,000 2,000 2,000 2,100 9,300 0 0 0 ULARA irti6,20D 6,20D 0 0 0 6,200 0 0 0 0 0 0 0 0 0 2. RIL Pau 12,000 500 5,500 0 3,50 9,500 2,500 0 0 0 0 2,500 0 0 0 IrtA 8.000 3,500 0 0 2,ooo 5,500 1,500 1,000 0 0 0 2,500 0 0 0 3. JAN1 Plasu 16,000 0 5,500 0 4,000 9,500 4,000 2,500 0 0 0 6,500 0 0 0 iti 4,s00 0 2,000 0 0 2,0ao 0 2,OOD 0 0 0 2,OO) 0 0 0 4. SJSA1 Pl_ 12,000 0 0 0 0 0 0 2,500 3,000 3,500 3,0DO 12,000 0 0 0 1JAMAN Inti 3,000 0 0 0 0 0 0 1,000 1,000 1,000 0 3,000 0 0 0 5. KAULIN PiA 4,50D 0 0 0 750 750 750 750 750 750 750 3,75D 0 0 0 BART bti 3,000 1,198 1,802 0 0 3,0C0 0 0 0 0 0 0 0 0 0 TIrAL B: Pin 53,800 50D 11,ODO 0 8,250 19,750 8,450 7,750 5,750 6,250 5,850 0 0 0 0 nti 24,200 10,898 3,8M2 0 2,OOD 16,700 1,500 4,OOD 1,000 I,OD 0 7,500 0 0 0 TU0AL A IND B: PIau 278,260 500 11,000 4,220 21,950 37,670 38,290 55,850 55,650 51,850 33,750 253,390 2,800 2,400 5,200 Intl 104,440 10,898 3,8D2 1,300 9,680 25,660 15,760 24,80D 19,050 10,100 7,850 77,560 600 60D 1,200 Scur: Diz GIml of Fatates, 1988. Table 5.2: APLICATE Ct PR]W1 Lr8 PIP-A (HR3TNM) Total Total Total Pepeitta IV Repelita Repe VR lita VRemelta VI Repelita Total PtErwa 1985/86 1986/87 I987/88 1988/89 IV 1989/90 199D/91 1991/92 1992/93 1993/94 V 1994/9 1995/96 VI. 1. APPE A. INn SS 9Rdl 224,460 0 0 4,220 13,700 17,920 29,840 41,100 49,900 45,600 27,900 201,340 2,8D0 2,400 5,200 (Private) lixIle 8D,240 0 0 1,30D 7,68D 8,980 14,260 20,8W 18,050 9,100 7,850 70,0W0 600 600 1,200 a. iNn PT. Pis 53,80D 500 U,000 4,220 21,950 37,670 8,450 7,750 5,750 6,250 5,850 34,050 0 0 0 PfJlW Intl 24,2W0 10,898 3,832 1,3W0 9,680 25,680 1,5W0 4,00W 1,0W 1,0W 0 7,5W 0 0 0 (PIP) ITL I: Pl 278,260 500 UL,C0W 8,40 35,650 55,590 38,9 55,850 55,650 51,850 33,750 233,390 2,8W0 2,4W 5,2m Intl 104,440 10,898 3,832 2,60D 17,360 34,660 15,760 24,800 19,050 10,100 7,850 77,560 6W0 600 1,2w 11. PXZDPO A. Dn SWIM aSod 87,0oo 0 0 0 0 0 0 7,000 17,0WO 21,5w 22,500 68,00W 16,00W 3,0WD 19,OOD (Private) Nucleus 53,0W 0 0 0 0 0 0 4,500 11,250 15,250 15,5W0 46,500 6,0D 0 6,000 B. in Pr. Plas. 6,0D 0 0 0 0 0 0 1,0W 1,5W0 1,5W 1,500 5,5W0 5W 0 SOO PFU2(N Intl 4,0W0 0 0 0 0 0 0 500 1,0WD 1,0WD 1,0W0 3500 500 0 500 (PIP) 1UrAL 11: Pla. 93,0W0 0 0 0 0 0 0 8,000 18,500 23,00 24,0OO 73,500 16,500 3,(00 19,500 Intl 57,00W 0 0 0 0 0 0 5,0W0 12,250 16,250 16,500 50,0WO 6,500 0 6,500 TUiAL I AND 11: Pleas 371,260 50W 11,00D 8,440 35,650 55.590 38,290 63,850 74,150 74,850 57,750 308,890 19,300 5,40W 24,700 Inl 161,440 10,898 3,802 2,600 17,360 34,660 15,760 29,800 31,300 26,350 24,350 127,560 7,100 600 7,700 Source: Direaor Gwwral of Fatates, DM 5or: Diretor Gsel oE Ftee, 198 - 25 - the projects are located in areas without large local populations readily available to fill the need for construction workers, plantation workers, and later small-holders. In recent years, most of the investment in oil palm plantations has occured in Sumatra. Under the Pir-Trans program this would continue with a 60% of the investment appearing around Riau and Jambi (an area located in the central-western portion of Sumatra). Development in these areas should move more rapidly as some of the existing infrastructure is in place. However, opening up new areas in Sulawesi and especially Kalimantan will require substantial upfront investment in infrastructure, which will take some time to complete. 23. In order to project production beyond 1995, an assumption had to be made as to the impact of Pir-Trans. The private sector in Indonesia, though leery about small-holder development responsibilities, appears genuinely interested in the early stages of Pir-Trans--especially since the program facilitates the acquisition of property use rights. In addition, with private sector costs for palm oil at less than $220 per ton, and world market prospects near $400 per ton, most projects appear very profitable even when producers receive less than world market prices. At the same time, government obligations under the program appear quite burdensome and it is likely that the anticipated expansion of the proportionately larger small-holder development aspects of the program will require more time than has been allocated. Taking this into account, it is assumed that total investment in new oil palm areas will continue to expand quite rapidly, averaging about 50,000 hectares annually. - 26 - VI. INDONESIAN MODEL DESCRIPTION Demand 24. While production changes in Indonesia have a limited effect on global prices, the domestic market within Indonesia does react dynamically to world and domestic events and policies. In order to quantify the effects of possible policy alternatives for Indonesia, a small econometric model of the sector was estimated. The remainder of the paper is devoted to a description of the model and a discussion of projections under several scenarios. The model consists of 24 equations which simultaneously determine palm oil production, the production of coconuts, coconut crushing, fresh coconut use, coconut oil production, total expenditures for vegetable oils and the share of expenditures devoted to palm oil and coconut oil, as well as the export of palm oil and coconut oil. While the detailed model specification is given in Annex C, the main components of the model are explained below. 25. The demand for vegetable oils is modeled using Deaton and Muellbauer's (1980) Almost Ideal Demand System which is a two-stage budgeting model of consumer demand (see Annex B). Total expenditure per capita devoted to vegetable oils is determined in the first stage as a function of total income (private consumption levels) per capita, an aggregate index of vegetable oil prices, and the price of rice (the major food staple in Indonesia). All prices are deflated by the Indonesian Consumer Price Index. Expenditure share equations are specified as a function of relative prices of - 27 - coconut oil and palm oil and total vegetable oil expenditures--all deflated by an endogenously-determined index of vegetable oil prices. The shares are then applied to the first-stage expenditure level, and multiplied by population to derive domestic demand for coconut oil and palm oil. 26. Table 6.1 provides the second-stage compensated price and expenditure elasticities for palm oil and vegetable oil for the years 1970, 1980 and 1985. The results from two different specifications are presented. Both are fully constrained to meet the theoretical restrictions. However, vne system is specified in terms of Manser's (1976) habit-formation model while the other is specified without lagged variables. 27. The results from the two models are quite similar. In the early years of the sample period, when coconut oil dominated domestic vegetable oil consumption, coconut oil demand remained relatively price and expenditure inelastic. With domestic demand initially at very low levels, the percentage responses of palm oil consumption to income and price changes were large. As palm oil consumption grew, expenditure elasticities remained low for coconut oil, although the price responsiveness increased. The income and price of palm oil fell while the cross-price elasticities remained steady and relatively large. 1/ 1/ The time-paths which the income elasticities of vegetable oils exhibit are quite normal for food items which tend to respond sharply to per capita income increases at low levels, but respond less as incomes rise. Projections using constant-elasticity-demand schedules therefore tend to over-estimate income responses. - 28 - Table 6.1: COMPENSATED PRICE AND EXPENDITURE ELASTICITIES (HOMOGENEITY AND SYMMETRY IMPOSED) Habit Model /a No-Habit Model Price Price Price Price Coconut Palm Coconut Palm Levels at Year Oil Oil Expenditure Oil Oil Expenditure 1970 Coconut oil -0.3 1.8 0.53 -0.3 2.3 0.60 Palm oil 1.8 -13.3 4.09 2.3 -15.1 3.67 1980 Coconut oil -0.5 1.5 0.47 -0.6 1.8 0.54 Palm oil 1.5 -5.1 2.68 1.8 -5.6 2.45 1985 Coconut oil -1.2 1.4 0.23 -1.4 1.6 0.33 Palm oil 1.4 -1.6 1.86 1.6 -1.8 1.74 La The hypothesis of habit-formation cannot be rejected at the 95Z confidence level. - 29 - Supply 28. The supply of palm oil is modeled using a vintage capital approach. 1/ As an oil palm tree matures, the oil yield of the tree rises from zero in the first three years to over 4.6 tons/hectare by year eight. The yield remains fairly stable for about nine years thereafter and then slowly begins to decline. As the tree reaches its mid-twenties, harvesting becomes more difficult as the tree grows taller. At some point, depending upon the cost of labor and the price of the oil, it becomes economically advantageous to replant the tree--at which point the yield drops to zero once more. By tracking cohorts of newly planted trees through this life cycle, a variable representing potential production can be calculated. 29. While the potential production variable can be considered the underlying capacity to produce, actual production differs from potential production for economic and biological reasons. On the economic side, input and output prices affect a producer's willingness to supply--although the 1/ See Akiyama, T. and P. Trivedi (1987). - 30 - immediate supply response is quite small. 1/ Biologically, the hybrid trees of Indonesia exhibit a cycle as well; high yields one year stress the trees and cause yields the following year to drop. To capture this effect, the lagged ratio of production to potential production is included as an explanatory variable. 30. As discussed earlier, area devoted to coconut production has expanded steadily with population. A simple linear trend explains 99% of the expansion in coconut area over the sample period, and attempts to introduce lagged price vectors to explain past investment decisions proved unfruitful. However, coconut production from planted area does respond to real prices through harvesting and marketing intensification. In the model, coconut production is a function of harvested area, lagged production, and real prices. 31. Once coconuts have been produced, they can be used as fresh nuts, or further processed into dried copra. When regulations allow, copra can be exported, or further crushed into meal and coconut oil. The fresh nuts can be used directly as food, or locally processed into kelentic oil. The demand for fresh fruit nuts is modeled as a function of the coconut oil price, real income, and the real price of rice. The amount of coconut production devoted to the formal copra sector is calculated as a residual, i.e., the difference 1/ Once a plantation is in operation, producers have little leeway in most of the production activities. Trees that are not maintained are subject to disease and certain minimal levels of fertilizer must be applied to assure future production. Harvested planting material is used to fuel processing plants so that energy costs are minimal as well. As a result, the high fixed costs and low variable costs provide a wide range over which producers will supply. - 31 - between coconut production (in copra equivalent) and fresh use (in copra equivalent). Since copra exports are limited by trade restrictions, most of the copra in the formal sector is converted into coconut oil, providing the model's supply of coconut oil. 32. Figure 6.1 shows the overall structure of the model and helps to illustrate some of the dynamics of the model behavior. While production decisions are bound by past investment decisions for coconut and oil palm trees and prices are dictated by world events, relative price changes do allow for a wide range of behavior in demand and marketing. On the demand side relative price changes alter both the allocation of expenditures between vegetable oils and other products and between palm oil and coconut oil. On the supply side palm oil production remains relatively insensitive to prices, but coconut prices do affect the allocation of supplied nuts to food/home consumption and to marketed copra supplies. Given the simultaneity of consumption and marketing responses in the domestic vegetable sector, it is important to look at the entire sector when gauging policy effects. Figure 6.1: Model Flow Chart International prices iast investments in oil palm Population GDP G New area in coconuts Taxes Palm oil allocation rules Coconut production Producer Prices | * s ~~~~~~~~~Potential palm coil v ~~~~~~~~~productionI NConsumer Prices .-- CoouK rs Veg. oil inde - demand I _ction _Veg'. o:il expendi tures lt Copra crushing IDomestic Demand Coconut oil supply o|Exports | - 33 - VII. MODEL SCENARIOS AND SIMULATION RESULTS 33. In order to calculate the effects of certain policy changes as well as to quantify the revenues generated by a tax on vegetable oil exports which is under consideration, four policy scenarios were simulated using the model. Base Scenario: Under this scenario, the current government policy of assessing domestic allocations from producers at set allocation prices below world market prices continues. Copra exports are still banned, but the recent policy of liberalizing coconut oil exports remains in place. Base and Tax: Indonesian vegetable oil policies continue unchanged. In addition an export tax of 5% is imposed on vegetable oil exports. World + Tax: Under this scenario, Indonesia dismantles its vegetable oil allocation system, and allows unlimited export of both crude and refined vegetable oils. Farm gate prices rise to international levels minus transportation costs--about 25% above the baseline scenario prices. At the same time, however, the government imposes a 5% export tax on the oils. World Prices: Under the final scenario, trade is fully liberalized without export taxes. Domestic prices now equal international prices minus transportation costs. - 34 - 34. In examining the results of the model under the four scenarios, one result which quickly becomes obvious is that the demand and supply of vegetable oils in Indonesia have a momentum which is difficult to redirect. While demand (Table 7.1) is responsive to prices, population growth and income chauges are extremely important determinants as well. Stocks of existing trees mature over a period of several years and have lives spanning decades. Investments made today have minimal effect until the last half of the 1990s. Supplies (Table 7.2) of palm oil and coconuts do respond to prices, but these responses are slow to develop and are limited by the underlying productive capacity of the mature tree stock. 35. The supply response of palm oil under the four scenarios is straight forward. The price responsiveness in the short-run is positive, but small. As farm-gate prices rise from the Baseline scenario to the Export-tax scenario, and finally to the world price scenario, supplies of palm oil increase as more inputs are used and harvesting becomes more intensive in response to greater profitability. At the same time, however, investment decisions from previous decades have dictated a potential limit to these increases. The supply response of coconut oil is similar in direction and scale, but contains a larger degree of simultaneity. While palm oil is quickly processed once the fruit matures and before it spoils; with coconut production there is an alternative use which competes for mature nuts. Harvested nuts can be retained locally or sold to processors. One option for home consumption is the production of kelentic oil, which serves as an alternative to refined coconut oil. As the price of coconut oil increases, a larger number of nuts are retained locally (Table 7.3), leaving a reduced Table 7.1: INDOIESIAN VEGETABLE OILS: DOMESTIC DEMAND, HISTORIC 1987-1988, SIMULATED 1989-2000 Domestic Demand CPO Domestic Demand COO Scenario Scenario Year Baseline Base + Tax World + Tax World Price Baseline Base + Tax World + Tax World Price ------------------------------------ (000 mt)-- 1987 856 856.00 856.00 856.00 616.00 616.00 616.00 616.00 1988 924 924.00 924.00 924.00 591.00 591.00 591.00 591.00 1989 816 824.24 799.70 793.51 697.09 696.99 690.84 690.91 1990 954 963.51 936.51 929.58 694.23 693.85 687.73 688.01 1991 1,067 1,077.19 1,046.41 1,038.85 717.86 717.31 711.99 712.38 1992 1,186 1,197.61 1,162.49 1,154.25 744.66 743.92 739.59 740.11 1993 1,321 1,333.39 1,293.60 1,284.61 768.72 '67.76 764.51 765.19 1994 1,449 1,462.36 1,418.06 1,408.38 781.39 780.19 778.22 779.06 1995 1,588 1,601.96 1,552.72 1,542.29 794.0: 792.54 792.02 793.06 1996 1,754 1,769.51 1,715.29 1,703.98 795.55 793.73 794.59 795.87 1997 1,937 1,953.79 1,894.17 1,881.91 792.20 789.99 792.40 793.96 1998 2,136 2,154.30 2,088.81 2,075.51 785.12 782.47 786.65 788.52 1999 2,353 2,372.59 2,300.59 2,286.17 773.76 770.63 776.80 779.02 2000 2,597 2,618.90 2,539.81 2,524.12 759.46 775.76 764.21 766.82 Notes: CPO - palm oil; CCO - coconut oil. Table 7.2: INDONESIAN VEGETABLE OILS: DOIESTIC SUPPLIES, HISTORIC 1987-1988, SIMULATED 1989-2000 Production CPO Production CCO Scenario Scenario World World Year Baseline Base + Tax World + Tax Price Baseline Base + Tax World + Tax Price ---------------------------------------------- (1000 Mt) -------------------------------------------- 1987 1,465 1,465 1,465 1,465 1,465 754 754 754 1988 1,698 1,698 1,698 1,698 1,698 803 803 803 1989 2,261 2,261 2,257 2,270 2,273 804 826 831 1990 2,491 2,491 2,488 2,500 2,502 872 893 898 1991 2,693 2,693 2,690 2,701 2,703 887 925 933 1 1992 2,835 2,835 2,832 2,843 2,845 935 969 978 1993 2,953 2,953 2,950 2,960 2,962 958 1,002 1,011 1994 3,069 3,069 3,067 3,076 3,089 999 1,042 1,052 1995 3,164 3,164 3,162 3,171 3,172 1,028 1,077 1,088 1996 3,244 3,244 3,241 3,250 3,252 1,067 1,117 1,128 1997 3,314 3.314 3,312 3,321 3,322 1,099 1,154 1,166 1998 3,384 3,384 3,382 3,390 3,391 1,136 1,191 1,203 1999 3,442 3,442 3,440 3,448 3,449 1,167 1,226 1,238 2000 3,493 3,493 3,491 3,499 3,500 1,202 1,262 1,275 Table 7.3: COCONUT PRODUXCTION AND USE: HISTORIC 1987-1988, SIMULATED 1988-2000 (Copra Equivalents) Production Coconuts (Copra Eq.) Coconuts, other use Copra Crush Scenario Scenario Scenario World World World World Base World World Year Baseline Base + Tax + Tax Price Baseline Base + Tax + Tax Price Baseline + Tax + Tax Price 1987 2,009 2,009 2,009 2,009 772 772 772 722 1,237 1,237 1,237 1,237 1988 1,974 1,969 1,987 1,991 724 715 750 757 1,317 1,317 1,317 1,317 1989 2,038 2,029 2,068 2,077 788 787 792 793 1,250 1,242 1,276 1,284 1990 2,123 2,109 2,167 2,179 769 763 787 791 1,353 1,347 1,379 1,388 1991 2,192 2,176 2,242 2,257 808 806 814 815 1,384 1,371 1,429 1,442 1992 2,258 2,241 2,313 2,329 802 797 815 818 1,456 1,444 1,498 1,511 1993 2,322 2,305 2,381 2,398 827 825 833 835 1,495 1,480 1,548 1,563 1994 2,386 2,368 2,448 2,466 827 824 838 840 1,559 1,544 1,611 1,626 1995 2,450 2,431 2,5-5 2,534 844 842 851 852 1,605 1,589 1,664 1,681 1996 2,513 2,493 2,582 2,601 847 844 855 857 1,666 1,650 1,727 1,744 1997 2,577 2,556 2,648 2,668 859 857 865 866 1,718 1,699 1,783 1,802 1999 2,637 2,616 2,711 2,731 863 860 870 871 1,774 1,755 1,841 1,860 1999 2,696 2,674 2,772 2,793 872 870 877 879 1,824 1,804 1,895 1,914 2000 2,755 2,733 2,832 2,854 876 874 882 883 1,878 1,858 1,950 1,971 - 38 - amount of copra available for crushing. As a result, the supply response of coconut oil is more muted than the overall supply response of coconuts. With significant levels of pr3.ce increases, the overwhelming production increases allow an increase in both local consumption and copra crushing; small price increases could conceivably lead to a decline in cozonut oil supplies. 36. As noted earlier, policies in Indonesia have been effective in lowering farm-gate prices for producers, thereby guaranteeing low input costs to processors; but at the same time recent consumer prices have ranged above prices of comparable vegetable oils in Europe. The large margin between £arm- gate and consumer prices implies either inefficiencies or abnormally large profits in the processing and distribution network. In either case, allowing farm-gate prices to rise to near-world-level prices would do little to decrease the margin. Therefore, it is assumed under the model simulation, that increased costs to the processors will be passed on to consumers. 37. On the supply side, the production of palm oil is entrenched by past events, while coconut oil supplies are more sensitive to prices due to alternative uses for the fresh coconuts. On the demand side, it is the consumption of palm oil which appears more price sensitive. As prices fall, consumers are encouraged to consider both coconut oil and palm oil; however, there is a secondary effect as well. For a given level of expenditures, more total oil is affordable; that is, the consumer has suffered the equivalent of an income 1oss. Palm oil, the more income elastic of the two, is disproportionately influenced by the secondary effect, reinforcing the initial price-effect. This can best be seen with relatively small price changes. - 39 - Imposing a 5Z export tax lessens domestic prices by a comparable amount since traders would receive an equal profit by selling domestically or by exporting only if the price spread between domestic and export prices equalled the export tax. Imposing an export tax on the base line (and therefore reducing domestic prices by 5X) causes domestic CPO consumption to jump 21,000 tons by the year 2000; imposing an export tax on the world price scenario causes CPO consumption to increase by 15,800 tons by 2000. 38. Tables 7.4 to 7.6 provide the commodity-detailed results for trade under the four scenarios (Table 7.8 provides summary results for 1995 and 2000). Trade liberalization works to dampen demand and stimulate supply, resulting in substantial gains in export revenue. Moving from the Baseline to World-Price scenarios increases export revenues by $65 million in 1995 and $95 million in 2000. Liberalization plus taxation essentially negate these gains as export revenues under the World + Tax scenario are quite close to the Baseline scenario. 39. Table 7.7 shows tax revenues generated under the two tax scenarios. (These are summarized for 1995 and 2000 in Table 7.8). While generating $53 million in tax revenue, adding an export tax to the Baseline scenario also results in a $70 million drop in export revenues in 1995; this scheme generates $47 million in tax revenue in 2000 but leads to a $70 million decline in export revenues in that year. Under a trade liberalization with export tax scheme $57 million and $52 million are generated for the government in 1995 and 2000, respectively; however, export revenues decline by $71 million in each year. Since the Government of Indonesia, through its PTPs Table 7.4: COCONUT EXPORTS: HISTORIC 1987-88, SIMULATED 1989-2000 Export Quantity COo Export S Value OM Scenario Base World World Base World World Year Baseline + Tax + Tax Price Baseline + Tax + Tax Price ----------------… (000 mt)----------------- ----------(USS 1985 constant)---------- 1987 118 118 118 118 49,796 47,306 47,306 49,796 1988 226 226 226 226 126,560 120,232 120,232 126,560 1989 112 107 135 140 65,004 58,885 74,193 81,109 1990 182 178 205 210 110,602 102,711 118,478 127,949 1991 178 170 213 221 113,178 102,720 128,472 140,418 1992 198 191 230 237 131,171 120,314 144,946 157,694 1993 199 190 237 246 137,912 125,228 156,063 170,630 1994 227 219 264 273 163,607 149,811 180,585 196,559 1995 245 235 285 295 183,336 167,500 202,732 220,816 1996 283 274 323 332 215,928 198,545 234,092 253,953 1997 319 309 361 372 248,990 229,330 267,835 290,078 1998 363 353 404 415 288,633 267,060 305,806 330,151 1999 406 397 449 459 329,673 305,789 345,907 372,668 2000 456 446 497 508 376,834 350,719 390,758 419,920 Table 7.5: PALM OIL EXPORTS Export Quantity COP Export S Value COP Scenario Base World World Bease World World Year Baseline + Tax * Tax Price Baseline * Tax + Tax Price ---------------- ('000 mt)----------------- ------- ('000 USS 1985 constant)…-------- 1987 531 531 531 531 170,982 162,433 162,433 170,982 t998 692 692 692 692 307,248 291,886 291,886 307,248 1989 1,445 1,433 1,470 1,479 608,429 573,179 588,018 622,679 1990 1,537 1,524 1,564 1,573 654,807 616,895 632,758 670,036 1991 1,626 1,611 1,654 1,664 734,864 692,368 710,386 752,189 1992 1,649 1,635 1,680 1,691 793,732 747,573 768,442 813,847 1993 1,632 1,617 1,667 1,678 833,311 784,348 808,519 856,660 1994 1,620 1,604 1,658 1,670 874,524 822,664 850,287 901,260 1995 1,576 1,560 1,618 1,630 901,688 847,480 879,224 932,470 1996 1,490 1,472 1,535 1,548 875,636 821,856 857,068 909,812 1997 1,378 1,358 1,427 1,440 831,462 778,914 817,997 869,426 198 1,248 1,227 1,301 1,316 772,907 722,207 765,580 815,069 1999 1,090 1,068 1,147 1,163 692,053 644,195 692,372 738,920 2000 896 872 959 976 583,034 539,253 592,939 635,297 - 42 - Table 7.6: TOTAL EXPORT REVENUE: HISTORIC 1987-88, SIMULATED 1989-2000 ---------Total Export Revenue------- -----------------------Scenario---------------------- Base World World Year Baseline + Tax + Tax Price ----------------('000 US$ 1985 constant)-------------- 1987 220,778 209,739 209,739 220,778 1988 433,808 412,118 412,118 433,808 1989 673,433 632,064 662,211 703,787 1990 765,409 719,606 719,236 797,985 1991 848,042 795,089 838,858 892,607 1992 924,902 867,887 913,389 971,541 1993 971,223 909,576 964,582 1,027,289 1994 1,038,131 972,474 1,030,872 1,097,818 1995 1,085,024 1,014,980 1,081,956 1,153,286 1996 1,091,564 1,020,401 1,091,160 1,163,765 1997 1,080,452 1,008,244 1,085,832 1,159,505 1998 1,061,540 989,267 1,071,386 1,145,220 1999 1,021,726 949,984 1,038,279 1,111,588 2000 959,868 889,972 983,697 1,055,218 Table 7.7: TAX REVENUES GENERATED BY VEGETABLE OIL EXPORT TAX ('000 USS 1985 constant) Tax Revenue CPO Tax Revenue CCO Scenario Total Revenues from Vegetable Oil Export Tax Year Base + Tax World + Tax Base + Tax World + Tax Base + Tax World + Tax 1987 8,549 8,549 2,490 2,490 11,039 11,039 1988 15,362 15,362 6,328 6,328 21,690 21,690 1989 30,167 30,948 3,099 3,905 33,267 34,853 1990 32,468 33,303 5,406 6,236 37,874 39,539 1991 36,440 37,389 5,406 6,762 41,847 44,150 1992 39,346 40,444 6,332 7,629 45,678 48,073 1 1993 41,281 42,554 6,591 8,214 47,872 50,767 ; 1994 43,298 44,752 7,885 9,504 51,183 54,256 1995 44,604 46,275 8,816 10,670 53,420 56,945 1996 43,256 45,109 10,450 1i,321 53,705 57,429 1997 40,995 43,052 12,070 14,097 53,065 57,149 1998 38,011 40,294 14,056 16,095 52,067 56,389 1999 33,905 36,441 16,094 18,206 49,999 54,646 2000 28,382 31,207 18,459 20,566 46,841 51,774 - 44 - Table 7.8: SUMMARY OF TOTAL EXPORT REVENUE AND GOVERNMENT REVENUE FOR 1995 AND 2000 Export Revenue Government Revenue World Baseline World Baseline World Year Baseline Price and Tax and Tax and Tax and Tax (million !985 $US) 1995 1,085 1,153 1,015 1,082 53 57 2000 960 1,055 890 984 47 52 - 45 - and PNP's, is a major producer of palm oil, a portion of the lost export revenues also comes out of gavernment coffers. Hence, not only would an export tax prove relatively costly in terms of lost export revenue, part of the "gains" in terms of government revenues would come from other government institutions. Implications for Vegetable Oil MiLling 40. Total copra milling capacity has remained fairly constant in Indonesia over the past decade, although ownership of milling capacity has become more concentrated. In 1977, 415 firms had an estimated capacity of 1.66 million tons (copra). In 1985, 333 firms owned 1.98 million of capacity. In 1975, firms averaged a 51% utilization rate. In 1985, the last year for which data is available, the industry averaged a 45% utilization rate. Firms have an incentive to both over-invest (thereby increasing processing costs) and to overstate their potential capacity, however, for the following reasons. Licenses are needed in order to expand existing plants or to build new plants. In reviewing proposed expansions, the Ministry of Industry looks at existing capacity and future needs. By over-investing, existing firms prevent the establishment of new competing firms; by overstating their capacity, the firms accomplish the same goal without costs. 41. While the location of existing milling plants is not ideal, there appears to be little need for increasing capacity. Under all three scenarios, copra crushings remain under 1.9 million tons. In the near term, excess capacity will remain near current levels. - 46 - 42. In 1982, 25 plants milled palm oil with a collective capacity of 794 tons of fresh fruit bunches per hour. By 1987, capacity had grown to 2,130 tons per hour. Even assuming an optimistic extraction rate of 20% for oil, and plant operations of 450 hours/month, existing capacity translates into 1.9 million tons of palm oil. In addition, since the acid content of the ffb's climbs quickly within 24 hours of harvesting, inter-shipments of ffb's among processors is usually not feasible, nor can processing be delayed during peak production months. Production of CPO in Indonesia will problably exceed two million tons in 1989. The need for rapid expansion of CPO milling plants is crucial and the possibility of local shortages in milling capacity are real. At least one government estate is currently shipping ffb's over 60 kilometers of bad roads because of lack of adequate milling. Ten more milling plants with a total capacity of 300 ffb tons/hour are scheduled for completion in 1988/89, five of which are supported by World Bank and ADB loans. During Repelita V which ends in 1994, an additional 34 milling plants with 1,030 tons of capacity are scheduled for construction. This does not 'nclude new private milling capacity for either existing estates, or estates started under the Pir-Trans scheme. 43. The need for rapid expansion of milling capacity is well understood in Indonesia, and the schedule of new plant construction addresses the problem. At the same time, however, new milling plants require one or two years to construct in Indonesiat and government and PTP resources are currently quite stretched. Slippage in meeting the construction schedule would result in local capacity shortages by the early 1990s and the potential waste of production gains by existing oil palm plantings. 47 - VIII. CONCLUSIONS 44. The production and consumption of vegetable oils in Indonesia have bean growing rapidly and will continue to grow rapidly through the end of the century. Domestic demand, driven by income and population growth is projected to increase from 856,000 tons of CPO nad 616,000 tons of CCO in 1987, to 2.6 million tons of CPO and 760,000 tons of CCO in 2000. Production will expand rapidly as well, with CPO production growing from 1.5 million tons in 1987 to 3.5 million tons in 2000. Coconut oil production will grow as well, from 754,000 tons in 1987 to 1.2 million tons int 2000. Past gains have come amid a complex collection of government interventions in the vegetable oils market, which have both encouraged production through direct investment in palm oil and indirect assistance to the private sector, and discouraged production through a system of allocation prices which lower average farm-gate receipts. Consumers do not appear to have benefited from lowered farm-gate prices, with most of the benefits going to processors and distributors. Policy simulations show that removing duch cumbersome regulations would stimulate production, but would not guarantee consumer benefits. Regardless of the policy scenario evaluated, past investments in tree crops guarantee rapid future production expansion. However, this increased production will not confer market-making power on Indonesian producers, since as tree-crop producers, they are unable to adjust supplies quickly as do suppliers of vegetable oil from annual crops. The rapid expansion of vegetable oil may precipitate a domestic crisis in the palm oil milling industry. While current - £8e - excess capacity for copra milling can easily absorb the projected production gains, palm oil milling capacity is stretched. New investments in milling are planned by the private sector and the Ministry of Industry. Should the investments fail to materialize, some future production gains from existing trees will be squandered. 45. In a country with a developing infrastructure and large social needs, government financing issues take on special significance. However, the results of the model demonstrate that an export tax on vegetable oils would prove quite costly in terms of export revenues, with tax revenue gains of $5O- 60 million annually resulting in substantially larger drops in export revenues. In addition, a portion of the gains in tax revenues will come at the expense of revenues generated by state-owned estates, essentially transferring revenues from one government institution to another and reducing further the gains from an export tax. - 49 - Annex A: Palm Oil and the Larger Market for Vegetable Oils 46. Generally speaking, any vegetable oil can be used in cooking and, therefore, the potential for a wide range of substitution exists. However, vegetable oils in their natural state have a number of unique characteristics, such as flavor, aroma, the smoking-point of the oil, and dietary differences in vitamin and saturated-fat content. Consumption of pure vegetable oils is often heavily influenced by traditional cooking techniques and cuisine which necessarily increases the differentiation among vegetable oils. At the same time, a great deal of vegetable oil consumption comes in a more highly processed form, and it is at this level that substitution possibilities abound. Chemically, different vegetable oils are distinguished primarily by the dominant type of fatty-acid contained in the oil. The chemical composition determines physical characteristics such as smelting and smoking points. Saturated fats tend to have a higher melting point and are naturally solid at room temperature. Lauric oils have a "sudsing" capacity and are often used in detergents, shampoos and soaps. However, all vegetable oils are in fact composed of several fatty-acids and, when processed, these fatty-acid chains can be separated and or otherwise altered to yield building blocks for processed products. For example, soybean oil, which is normally liquid at room temperature, can be hydrogenated and combined with other products to yield either margarine, a butter substitute, or vanaspati, a lard substitute-- both of which are solid at room temperature. Sometimes, as in the case in margarine production, the chemical structure of the oil is altered, while in other cases, the changes are cosmetic. Palm oil, which is naturally a bright - 50 - orange, is routinely bleached and deodorized. Many products can be made from a variety of vegetable oil sources using different chemical recipes, but yielding products which are indistinguishable in terms of taste, colbr, aroma, and other cooking characteristics. 47. This high level of technically-feasible substitution appears economically feasible as well--that is, while there are costs associated with "recipe-changing", processors will switch formulas as market prices change. The strongest evidence for this economic-substitution is given by the high level of correlation among prices (Table A.1). Recalling from Table 2.1 the tremendous variety in vegetable oil sources, it is easy to see how differing supply shocks can enter the vegetable oil market independently. Agricultural policy changes in North America are most likely independent of rainfall in Malaysia, or exchange rate policy in Brazil, and yet, despite the variety and evolution of supply conditions in the world, prices among vegetable oils remain highly correlated, indicating that substitution in demand largely compensates for shocks to supply. It is interesting to note that the correlation between coconut oil and palm kernel oil, which have similar demand characteristics, is greater than that between palm oil and palm kernel oil which are contained in the same fruit. 48. Even if the market were more limited, giving Indonesia a significant market share, producers or their agents would have a difficult time exercising any monopoly power. Indonesia proauces its vegetable oils from tree crops in a market dominated by annual crops. Except through short-termy stock buildup, the only feasible adjustment is through planting new trees--which begin to - 51 - Table A.l: PEARSON CORRELATION COEFFICIENTS FOR SELECTED VEGETABLE OIL PRICES Palm Soy Palm Coconut Rapeseed Groundnut Kernel Oil Oil Oil Oil Oil Oil Soy Oil 1.00 0.96 0.87 0.99 0.95 0.91 Palm Oil 1.96 1.00 0.91 0.97 0.95 0.95 Coconut Oil 0.87 0.91 1.00 0.88 0.80 0.99 Rapeseed Oil 0.99 0.97 0.88 1.00 0.95 0.92 Groundnut Oil 0.95 0.95 0.80 0.95 1.00 0.86 Palm Kernel Oil 0.91 0.95 0.99 0.92 0.86 1.00 Note: Prices are C.I.F. Rotterdam, 1960-1988. All coefficients were significant at a 99% confidence level. - 52 - produce after four years--or by slowly depreciating existing stands of trees. Adjustments in annual crop production can occur within a year on an overwhelming scale. Even weather-related or other natural events would most likely swamp adjustments from Indonesia. For example, in 1988, a drought in North America caused US soybean production to drop by nearly 11 million tons which was equivalent to a 2.26 million ton decline in world vegetable oil supplies--more than one-and-a-half times Indonesia's annual palm oil production. 49. The World Bank's multi-country model of the vegetable oil sector was used to validate the notion of Indonesia as a price taker in the world vegetable oil market. 1/ Initial model results were compared to a simulation in which Indonesia's potential palm oil and coconut oil production was increased by 33%. As can be seen in Table A.2, the impact of extremely large changes in domestic production in Indonesia quickly become dispersed and muted in a global context. In fact, the table conveys a false sense of accuracy given the small impact of the scenario change, as none of the reported changes were significantly different from zero given the forecasting error associated with the projections. 1/ The multi-country model is described in "A Global Vegetable Oils and Meals Model", currently in draft form. - 53 - Table A.2: IMPACT OF 33Z INCREASE IN PALM OIL AND COCONUT OIL PRODUCTION IN INDONESIA (Z change) Real Price Year Palm Oil Coconut Oil Soybean 1990 -0.02 0.00 -0.01 1995 -0.98 -0.01 0.00 2000 -3.10 -0.88 -0.40 Production Malaysian Palm Oil World Coconut Oil World Soybean 1990 0.00 0.00 0.0 1995 -0.02 -.002 0.0 2000 -11.40 -0.340 -0.59 - 54 - Annex B: The Almost Ideal Demand System 50. Deaton and Muellbauer's Almost Ideal Demand System begins with the following expenditure function: log c(u, p) = a(p) + ub(p) (1) where, a(p) = a + Ek log p + ½ £y log p log p, (2) o k k k m km k m b(p) = B wp k, (3) 0 k pk are prices, u is utility and a, B and y are parameters. 51. Substituting (2) and (3) into (1) and noting that alog c/a log Pi= wi the expenditure share is given by w = a + * y log p + B,log (x/P) (4) i i j ii 1 I where P is the price index: log P = a + Eak logP * z Y log p log p (5) o k k kpm km k m Alternatively the price index can be approximated using Stone's index: - 55 - log P = Pw log (P) (6) Using (4) and (6), theoretical restructures can be applied in the following way: Adding up requires, for all j, E a = 1, 0 = 0, x y =0. (7) k k k k kj Homogeneity is satisfied if and only if, for all j, y =0, (8) k jk while symmetry is satisfied provided Y.. ~ Y..* (9) i j j i Manser (1976) provides a test for habit formation. Let a a. + dq , (10) 1 1 I it-l where q is per capita consumption of good i, and ai. di are parameters. Substituting (10) into (4) yields the habit-model. Imposing the adding-up condition on the resulting habit model requires. E (a + d ) =1 (11) i I Anh Table Cl: L1Sr OF ML, PARAth2 EST AND lESI SMATISTICS MCAP4EXP(LIlAP); FR1Tl'N960-F (DIFMNJ); KW-aSa TF/lOOND;F PCOD=PcCR*E,XU RE/1000DIFO) ; POPJ..PRO1DMERATE/I1OODOIFUDP RPoDpPaPJ/cPI ; PDC- K(LuD9CFO)+ o; RPCP=CPO/CPI*100 RFCCIhPC0/CPI*100; EAPQ)PDrX i~ PCDJ;% UCO-WCDh' /REOO*POP; UXYRESHaOrXAP/RPOP; P(RP(I D)* HLpC)G(RPCPO)*SHcO, TEUwrxcp*po SHOOW Al4GI P*LOG(RPOOD)+(O-G1 1)*UEG(RPCPO)+B*(LOG(TXCAP)-SAR); Gl 1. -0.06331(-1.1) Al- 1.67(16.85) BI: -0.5119(-8.32) t' SHCFOM=(1-A1)+(O-G1_ )*IXXRPCOD)tG2 2*LOG(RRPCO)+(OBl)* (UG(TXCAP>-PSTAR); Al: 1.67(16.85) GI_1: -0.06331(-I.I) G2 2: -0.06333(-1.1) BI: -0.5119(-8.32) PDOPDOD 0+PDO 1IPCR; PDOI: 0.63%(17.7) PDOC) 0: -32.2(-0.93) U.PVXF= PIJa* OWPU 1*(pPCrT+pJp 2*(LAG(LLPDCPO/PPOT)) +PDCP 3*LAG2(LOG(RPCPO)); PDCFP1: -0.0003373(-14.27) PDCP 0:8.641(194.46) PDCR_2: -0.06118(-O.1) PDCP 3: -0.02238(-2.52) PDC(XPDOC O+PDOC 1*HADP+IXDOC 2*LAG2(RPCO)+fPDOC 3*LAG(PDOCN); PDOCXl: 0.3821(3.68) PDOC 0: 168.7(0.68) PDCC 2: 1.4(1.21) PDCC 3: 0.2176(0.91) DI1TD1:OIFN O+DI_ 1MI)G(RPI D)+DIFN 2*qLG(RPRICE)4DIFN 3* LOG(RYCAP)+DIFN 4*LAG(DIFNT>.+DIFN 5*D1; DIFi 1: -O.2623(-0.43) DIFN 0: 4.349(1.7) DIMFi2: 0.6575(0.68) DIFN 3: -2.888(-4.58) DIRF_4: -0.809(-10.33) DIFN5: -3.969(-10.81) LNMnPnU4cXDLaG(RPRICE)+T)h2PSrAR!1X3*WG(RYCAP); TXI: -0.4797(-2.03) MXD: 6.296(9.19) TX2: 0.9169(6.62) 1X3: 1.483(9.09) HAM)) Al*YEAR; HACI: 91.24(51.5) HA: -177989(-50.77) Annex Table C2: MLM S SR SrATISITcS; NOINEAR SUR s9MMARY oF RESIDUAL ERRoRS Degree of Freedom Equation MDdel Error SSE HE Root NEE R-Square Label SHCPO 2.5 11.5 0.04267 .00371036 0.06091 0.8677 Expenditure share, CPO SHOCO 1.5 12.5 0.04266 .00341312 0.05842 0.8677 Expenditure share, CC0 PDCCO 2 12 9606.51 800.54 28.29386 0.9137 Production COX ('000 tons) LLPDCPO 4 10 .00047438 4.74E-05 0.0068875 0.9935 Log of production COP variable DIFNUT 6 8 0.83206 0.10401 0.32250 0.9639 Log of fresh use variable, coconuts L¶XCAP 4 10 0.08385 .00838458 0.09157 0.8656 Log total oil expenditures per capita PDCCN 4 10 56339.12 5633.91 75.05939 0.8846 Production coconuts (copra eq. -000 ton) HASDP 2 12 15170.49 1264.21 35.55570 0.9918 Area copra (-000 ha) Un - 58 - Anrex Table C.3: NON-LINEAR SUR PARAETE ESlIMAIES Approximate fort Approxmate Parameter Estimate SI) Error Ratio Proli>[T] Al 1.66961 0.09907 16.85 0.0001 PDOO 0 -32.20385 34.69638 -0.93 0.3716 PDOD 1 0.63964 0.03615 17.70 0.0001 PDCP O 8.64081 0.04444 194.46 0.0001 PDCP 1 -3.37E-04 2.36E-05 -14.27 0.0001 PDCP 2 -0.06118 0.62815 -0.10 0.9243 PDCP 3 -0.02238 0.0088682 -2.52 0.0302 PDOC O 168.74 247.87 0.68 0.5115 PDCC 1 0.38214 0.10392 3.68 0.0043 PDOC2 1.39983 1.15591 1.21 0.2537 PDXC-3 0.21764 0.24043 0.91 0.3866 GI 1 -0.06331 0.05764 -1.10 0.2936 Bi -0.51195 0.06151 -8.32 0.0001 DIFN 0 4.34948 2.55968 1.70 0.1277 DIFN 1 -0.26228 0.60695 -0.43 0.6771 DIFN 2 0.65751 0.97202 0.68 0.5178 DIFN 3 -2.88800 0.63010 -4.58 0.0018 DIFN 4 -0.80899 0.07829 -10.33 0.0001 DIFN 5 -3.96920 0.36715 -10.81 0.0001 G2 2 -0.06333 0.05764 -1.10 0.2954 TXO 6.684% 0.68496 9.19 0.0001 TX1 -0.47974 0.23660 -2.03 0.0701 TX2 0.91692 0.13854 6.62 0.0001 1X3 1.48341 0.16311 9.09 0.0001 HALD -177989 3505.65 -50.77 0.0001 HACI 91.24258 1.77185 51.50 0.0001 Annex Table C4: DESCRIPrVE SAIISTICS FOR MODEL VALMDATION; ACIUAL AND DYNAMIC SDMULAIION RESULTS ACTIAL PREDICTED Variable NOBS N MEAN SID MEAN SID LATL EXQXD 14 14 28.0357 49.3738 17.9611 37.2069 Export quantity cco FRNUT 14 14 629.5 153.0 645.4 139.4 Fresh nut use, copra eq. EXQCPO 14 14 334.9 113.2 338.2 163.1 Export quantity cpo DUCOD 14 14 546.8 81.5090 547.6 62.8039 Domestic util. cco DUCPO 14 14 283.1 286.3 279.8 271.8 Domestic util. cpo PSTAR1 14 14 4.1747 0.2299 4.1759 0.2326 Aggregate price index, oils IEXP 14 14 51916.7 15491.4 51953.3 15163.7 Total expenditures on veg. oil PXOD 14 14 341.7 212.1 341.7 212.1 EUbestic retail price cco Rp/kilo P&PO 14 14 251.1 98.0566 251.1 98.0566 Dom^estic price cpo in Rp. I RPCPO 14 14 59.5992 21.7955 59.5992 21.7955 Deflated cpo price (world) un RPCOD 14 14 72.1345 17.6411 72J1345 17.6411 Deflated cco price (world) PODPJ 14 14 234.2 118.2 234.2 118.2 Price copra Java'(nom. Rps) PDCPO 14 14 651.1 319.9 650.9 320.7 Production palm oil ('000 tons) IXCAP 14 14 368.9 81.5856 369.7 82.2421 Total veg. oil expend/cap COPoR 14 14 936.7 137.0 922.5 86.1624 Copra cnrsh RP(OP 14 14 0.5210 0.1590 0.5210 0.1590 Real price copra, S. Sulawesi PUOCN 14 14 1566.2 193.8 1567.9 172.5 Production coconuts (copra eq.) LLPDCYO 14 14 8.3751 0.0752 8.3751 0.0755 Log of production cop variable PD!OM 14 14 567.0 92.5518 557.8 55.1129 Production cco ('000 tons) 5HCC 14 14 0.7778 0.1575 0.7784 0.1437 Expenditure share cco SHCPO 14 14 0.2222 0.1575 0.2215 0.1437 Expenditure share cpo LTXCAP 14 14 5.8883 0.2190 5.8898 0.222 Ing total oil expenditures/cap DIFNUT 14 14 5.4574 1.3314 5.4526 1.2226 Log of fresh coconut use variable HACOP 14 14 2534.6 377.6 2534.8 381.7 Area copra (t00O ha) Annex Table C5: VALIDAIION STATISTICS FOR DYNAMIC MODEL SDMULATION, 1972-1985 MSE DEoX!4poSITION PROPORTIONS INEQUALrIY COEF Variable N BIAS REG DIST VAR (0VAR Ul U LABEL (UM) (UR) (UD) (UC) EX4CC0 14 0.022 0.529 0.449 0.030 0.948 1.2321 0.7138 export quantity COO FRNUT 14 0.036 0.019 0.945 0.024 0.94C 0.1301 0.0644 Fresh nut use, copra, eq. EKQCPO 14 0.002 0.598 0.401 0.389 0.609 0.2188 0.1063 Export quantity CPO DUCCO 14 0.000 0.001 0.999 0.119 0.881 0.0945 0.0473 Doenstic util. CCO DUCRO 14 0.003 0.008 0.990 0.044 0.954 0.1695 0.0861 Domestic util. C(O PSTAR 14 0.007 0.051 0.942 0.038 0.954 0.0033 0.0016 Aggregate price index, oils TYXP 14 O.000' 0.001 0.999 0.008 0.992 0.0662 0.0331 Aggregate oil expenditures PDCPO 14 0.000 0.005 1.995 0.001 0.999 0.0358 0.0179 Production palm oil o TKCAP 14 0.001 0.036 0.963 0.001 0.999 0.0693 0.0346 Total vegetable oil expend/cap CUPCR 14 0.030 0.081 0.890 0.351 0.619 0.0874 0.0442 Copra crush PDCCN 14 0.001 0.013 0.986 0.091 0.909 0.0433 0.0216 Production coconits LLPDCPO 14 0.000 0.008 1.992 0.002 0.998 0.0007 0.0003 Log of production CPO variable PD(OX 14 0.022 0.041 0.937 0.336 0.642 0.1084 0.0549 Production C0X SHiCX 14 0.000 0.016 0.984 0.080 0.920 0.0596 0.0298 Share of oil expnediture, COX SHMCP 14 0.000 0.016 0.984 0.080 0.920 0.1755 0.0890 Share of oil expenditure, CPO LTXCAP 14 0.000 0.046 0.954 0.002 0.998 0.0126 0.0063 Log total oil expenditures/CAP DIFNITf 14 0.000 0.037 0.963 0.101 0.899 0.0589 0.0295 Log of fresh use variable HA0 P 14 0.000 0.027 0.973 0.014 0.986 0.0129 0.0064 Area copra - 61 - BIBLIOGRAPHY Akiyama, T. and P.K. Trivedi (1987), "Vintage Production Approach to Perennial Crop Supply: An Application to Tea in Major Producing Countries". Journal of Econometrics, 36: 133-161, North Holland. Bennet, Christopher and Ricardo Godoy (1988), "The Indonesian Copra and Coconut Marketing Systems: A Background Study" (unpublished). Blancifort&, Laura (1984), "Habits and Autocorrelation in the Almost Ideal Demanu System Applied to Food", Economic Research Service Report No. AGES 831128, USDA, Washington, D.C. Deaton, Angus and John Muellbauer (1980), Economics and Consumer Behavior, Cambridge University Press. Director General of Estates (1988), Repelita V, Tree Crop Subsector, (draft), Jakarta. Manser, M.E. (1976), "Elasticities of Demand for Food: An Analysis Using Nonadditive Utility Functions Allowing for Habit Formation," Southern Economic Journal, 43:879-891. World Bank (1988), Indonesia: The Transmigration Program in Perspective, Washington, D.C. (1989), Indonesia: Strategies for Sustained Development of Tree Crops, Washington, D.C. PRE Working Pager Series Contact [wa AftAhor A for paper WPS360 Compounding Financial Repression Bertrand Renaud January 1990 L. Victorio with Rigid Urban Regulations: Lessons 31009 of the Korea Hiousing Market WPS361 Housing and Labor Market Stephen K. Mayo January 1990 L. Victorio Distortions in Poland: Linkages James I. Stein 31009 and Policy Implications WPS362 Urban Property Taxation: Lessons William Dillinger January 1990 L. Victorio from Brazil 31009 WPS363 Paying for Urban Services: A Study Dale Whittington January 1990 L. Victorio of Water Vending and Willingness Donald T. Lauria 31009 to Pay for Water in Onitsha, Nigeria Xinming Mu WPS364 Financing Urban Services in Latin Gian Carlo Guarda January 1990 L. Victorio America: Spatial Distribution Issues 31009 WPS365 Cost and Benefits of Rent Contiol Stephen Malpezzi January 1990 L. Victorio in Kumasi, Ghana A. Graham Tipple 31009 Kenneth G. Willis WPS366 Inflation, Monetary Balances, and Robert Buckley January 1990 L. Victorio the Aggregate Production Function: Anupam Dokeniya 31009 The Case of Colombia WPS367 The Response of Japanese and U.S. Panos Varangis March 1990 D. Gustafson Steel Prices to Changes in the Ronald C. Duncan 33714 Yen-Dollar Exchange Rate WPS368 Enterprise Reform in Socialist Guttorm Schjelderup Economies: Lease Contracts Viewed as a Principal-Agent Problem WPS369 Cost Recovery Strategy for Dale Whittington March 1990 V. David Rural Water Delivery in Nigeria Apia Okorafor 33736 Augustine Akore Alexander McPhail WPS370 Export Incentives, Exchange Rate Ismail Arslan Policy, and Export Growth in Turkey Sweder van Wijnbergen WPS371 Tariff Valuation Bases and Trade Refik Erzan February 1990 J. Epps Among Developing Countries ... Alexander Yeats 33710 Do Developing Countries Discriminate Against Tneir Own Trade? WPS372 Long-Term Outlook for the World Shahrokh Fardoust February 1990 J. Queen Economy: Issues and Proiections Ashok Dhareshwar 33740 for the 1990s PRE Working Paper Series Contact Ida Author Date for paper WPS373 Are Better-off Households More Lawrence Haddad March 1990 J. Sweeney Unequal or Less Unequal? Ravi Kanbur 31021 WPS374 Two Sources of Bias in Standard Samuel Laird February 1990 J. Epps Partial Equilibrium Trade Models Alexander J. Yeats 33710 WPS375 Regional Disparities, Targeting, and Gaurav Datt March 1990 C. Spooner Poverty In India Martin Ravallion 30464 WPS376 The World Economy in the Colin I. Bradford, Jr. Mid-1990s: Alternative Patterns of Trade and Growth WPS377 Security for Development in a John Stremlau Post-Bipolar World WPS378 How Does the Debt Crisis Affect Patricio Arrau Investment and Growth? A Neoclassi- cal Growth Model Applied to Mexico WPS 379 Implications of Policy Games for Miguel A. Kiguel Issues of High Inflation Economies Nissan Liviatan WPS380 Techniques for Railway Lee W. Huff March 1990 S. Shive Restructuring Louis S. Thompson 33761 WPS381 Trade in Banking Services: Alan Gelb March 1990 W. Pitayatona- Issues for Multilateral Negotiations Silvia Sagari karn 37666 WPS382 The Indonesian Vegetable Oils Donald F. Larson March 1990 D. Gustafson Sector: Modeling the Impact of 33714 Policy Changes WPS383 On the Relevance of World Yair Mundlak March 1990 D. Gustafson Agricultural Prices Donald F. Larson 33714 WPS384 A Review of the Use of the Rational Christopher L. Gilbert Expectations: Hypothesis in Models of Primary Commodity Prices WPS385 The Principles of Targeting Timothy Besley March 1990 J. Sweeney Ravi Kanbur 31021 WPS386 Argentina's Labor Markets in an Era Luis A. Riveros March 1990 R. Luz of Adjustment Carlos E. Sanchez 39059 WPS387 Productivity and Externalities: Jaime de Melo March 1990 M. Ameal Models of Export-Led Growth Sherman Robinson 37947