Friday, 26 October 2012

Shortfall in Palm Oil Exportations

From the Sun’s recent article excerpts

KUALA LUMPUR (OCT 15, 2012):
Malaysia, the world's second biggest palm oil producer and exporter, is expected to see a shortfall in palm oil exports this year from the record RM80.4 billion achieved in 2011, Plantation Industries and Commodities Minister Tan Sri Bernard Dompok said.

"I do not think we are able to look at (forecast) what we're going to get (this year) yet. We're trying our best and even if there's a shortfall, I don't think it will be too much," he told reporters today.

"It depends on how the market reacts during the next two months," he added.

For the first nine months of this year, crude palm oil (CPO) exports amounted to RM54 billion.

Malaysian palm oil prices have been on a decline since September, mainly due to Indonesia's tax regime, which has resulted in lower exports from Malaysia and increased domestic palm oil stocks, suggesting a storage overcapacity.

"Actually, the 2.48 million tonnes (in palm oil stocks in September) that we have today is quite small in relation to the amount of production that we have.

"It is not a figure that is really too large and I think in the coming months we'll see how much more excess that we have," said Dompok.

"But I think there will be importation of CPO from those countries which have refrained from buying before, seeing that the competition in the refining sector is being leveled off. I think the market will see refiners in Malaysia being kept very busy," he added.

Dompok cited exports of Malaysian palm oil to India, which has increased by 60% possibly due to the earlier additional allocation for duty-free CPO export quota by Malaysia and the Indian government's restructuring of its imports of edible oils to encourage imports of CPO.

"It could be all of those because what has happened in the past year or so, our refiners were not able to do their normal amount of refining.

"This is because they were not able to get their market in view of the fact that there are other producers producing cheaper palm oil as they get cheaper feedstock," said Dompok, adding that this has built up over the past year.

Malaysia produced 18.9 million tonnes or 37.7% of total world palm oil production last year and exported 17.99 million tonnes or 46.27% of world palm oil exports last year.

Meanwhile, Reuters reported that some planters are resisting the government's plan to abolish the duty free CPO export facility come Jan 1.

A senior industry source, who has direct knowledge of government policy making, told Reuters today that some plantation companies had asked the Plantation Industries and Commodities Ministry to make an exception so that firms with refineries overseas can maintain profit margins.

"There are already some protests. Some of the planters are asking the government to reconsider and make exceptions," said the source, who could not be identified as he is not authorised to speak to the media.

Planters have relied on an annual tax-free CPO export quota of about 3 million tonnes to feed their overseas refineries, limiting feedstock costs and turning the sector into one of the most profitable in global agriculture.

The palm oil exportation from Malaysia is predicted to experience some shortage in the near future. This might due to the decline in price of Malaysian Palm Oil recently. As how the Law of Supply states; when the price of one kind of good decreases, then the quantity supplied will also decrease. We can relate it as if we’re selling things to people. If the price of the goods sold by us decline, would we tend to sell it more? Or less? Well of course it should be less compared to when the price is higher. But why? Take it this way; we are doing the business to earn profit. So if the profit is less, then we also won’t feel inspired to sell that particular material/good/product more. We may also switch from selling one good to another one that could give us more profit in return. On the other hand, the Law of Demand states that when the price of a good decrease, then the quantity demanded will increase. This applies in our daily life. Say, think of the way we shop during normal season and during the MEGA SALES season. In which occasion will we buy more? Yes. It would certainly be during the MEGA SALES’ one. But again, why is it? We can buy more things while spending less when the price goes down that time. Same goes to this palm oil exportation case!

The graphs below show the relationship between the declinations of price to the Quantity of Supply/Quantity of demand

But how are they related to the shortfall (shortage) that is predicted to happen? Okay now think about what is the definition of shortage and what leads to it? Basically shortage happens when the quantity demanded exceeds the quantity of supply (Qd > Qs). In other words, the quantity of supply doesn’t meet customers’ need. Some unlucky ones may not get the goods. This is what happen during shortage (refer to the graph below)

Remember : When the price is low, the supplier will not feel motivated to produce it more, thus causing the insufficient amount of supplies.  However, there will be a noticeable amount of rise in the customers’ demand because they want to get their needs at a lower price.

Hence, if the shortage is really going to happen as how it is being predicted, the only way to overcome this situation is by increasing back the price of the palm oil until it meets the market equilibrium. Either it’s by the suppliers themselves, government intervention to regulate the law of price floor for palm oil, or by the customer; Customers can compete with each other to get the goods. (e.g: Offering a higher and higher price. Those who are willing to pay the highest will get the good first at the end of the day)


As shown in the graph above, by increasing the price of palm oil, the demand curve will gradually goes lower and lower and lower until it meets the equilibrium where the quantity demanded balances with the quantity of supply (Qd = Qs).

However, if we do notice, earlier in the article, there is a part where the Minister states that the shortfall won’t be too much. It could be true and it could be not. As we already acknowledged that there are several factors that will affect the supply curve including the taxes. Malaysian palm oil price has been declining since the tax regimes from Indonesian country too. Firms treat tax levied by government as costs. The exporters will be charged with some amount of tax. And since any increase in tax will result in lower profit, that is why the quantity of supply will reduce when there are tax charges. The higher the tax charged the less supply the supplier is more likely to produce.

Plus the declination of the Malaysian palm oil may also be caused by the other substitutes available in market. Besides CPO, there are also several other producers that are producing cheaper palm oil since they get a cheaper feedstock. Oil.. They are more or less the same anyways. So why not save the money and spend on the cheaper ones?

In terms of elasticity, the supply curve seems to be a price inelastic. The curve will look more like a steepy curve as the BIG changes of price, results in small changes in the supply curve. The graph below shows an example of a curve for quantity of supplies that are price inelastic.

Nowadays, this kind of changing phenomenon always happens in our life. It doesn’t necessarily apply to palm oils only, but also to other products including spices, vehicles, foods, clothes, and etc. Both the suppliers and consumers should be aware of what will happen in the future and know what the possible challenges that we might face are, and how to handle this kind of situation at ease and without having too much of woes.

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