Economic Climate Model of the Oil Palm Production in Malaysia

Climate change is arguably one of the most important factors influencing agricultural production in developing countries such as Malaysia. Therefore, it becomes important to explore the impacts of climate change on agricultural yield and production. Cocoa was brought to Malaysia for commercial planting in the 1950s. The palm oil industry grew to become the first major commodity crop in Malaysia. This study applied the autoregressive distributed lag (ARDL) co-integration approach over the periods (1980 – 2014). There are two main methods including the Regional Climate Model (RCM) which can reasonably produce appropriate projections that can be used for climate scenario generation in a country-scale. Based on this information, this study considered three scenarios: 1) First Scenario, Rainfall changes 2) Second Scenario,Temperature changes 3) Third Scenario, Scenario 1 and 2 simultaneously. Preliminary results from the Autoregressive Distributed Lag (ARDL) model applied indicated that despite the projected changes in the climate variables (temperature and rainfall),in scenario 1 (the projected changes (5% increase) in rainfall). The result showed that climate variables (rainfall and temperature) have negative impacts on palm oil yield. The production trend is expected to be positive while changes in rainfall (5% increase), changes in temperature (2% increase) and simultaneous changes in rainfall (+5%) and temperature (+2%) will cause the yield to decline by 0.24%, 0.58%, and 0.82% respectively. Keywords— Climate Model, Oil Palm, Malaysia, ARDL.


INTRODUCTION
The Malaysian palm oil industry has now prevailed as one of the most prominent in the worldwide oils and fats market. Interests in oil palm planting continue to increase due to its monetary advantage and motivating improvement in yield that outperformed the average worldwide oils and fats development. The worldwide production of palm oil has multiplied in the last decade due to the rising overall interest in palm oil and palm oil products. With about 61.1 million tonnes produced in 2015, it represents the most widely consumed vegetable oil around the world. It has the highest yield compared to other sources of oil and is the least expensive vegetable oil to produce and refine (Arbeitsgemeinschaft Energiebilanz (AGEB), 2015). Palm oil production is expected to reach 240 million tonnes by 2050. New estates are being developed and existing ones are being expandedin Malaysia and especially in Indonesia, also in Africa and Latin America (WWF, 2016). In 2012, the Malaysian government approved an investment of RM548.7 million for the plantation and commodities sub-sector, all of which were domestic investments (MPOB, 2015). A total of RM362.8 million or 66.1% of the investment was for the production of palm oil, while RM185.9 million (33.9%) was for the production of rubber. Malaysia's palm oil industry remains one of the country's most important industries. Overall, the Malaysian state's palm oil sector is expected to generate RM22.4 billion in investments by the year 2020. Under the National Key Economic Areas (NKEA), investment in palm oil is targeted to reach RM178 billion by 2020 (Malaysian Investment Development Authority (MIDA), 2012). The industry also plays a significant role in the Malaysian economy as palm oil represents the fourth largest contributor to the GNI (Gross National Income), contributing RM63 billions of GNI in 2015 which was below the targeted amount of RM69.3 billion, a short of RM6.3 billion (Bank Negara Malaysia, 2016). Nevertheless palm oil industry is still a major contributor to the country's GDP (Gross Domestic Product). The palm oil industry accounts for 5-6% of Malaysia's GDP, and the importance of the industry to the country's export earnings is also very significant (MPOB, 2015). To bolster waste-to-riches activities, the National Biomass Strategy 2020 was propelled in 2013 to survey how Malaysia can develop new businesses through the efficient utilisation of farm biomass wastes. The palm oil biomass pellets can be used for power generation and other purposes such as the production of fiberboards with medium-thickness (11 th Malaysia Plan, 2016-2020 Finally, the impact on agriculture due to the threats and effects of climate change is therefore compelling and urgent. Not addressing the challenges and the urgency of collective actions is going to be catastrophic. The way forward requires increased understanding and awareness to cope with the interdependencies and interactions of natural resources and climate change, the vulnerabilities and interdisciplinary efforts. The general objective of this study is to find impacts of climate change on production and yield. The specific objectives are: 1) To develop oil palm market model 2) To investigate the relationship between climate change and oil palm yield 3) To estimate, forecast and simulate the level of production based on climate changes until 2020 4) To suggest policy alternative to mitigate impact of climate changes in sustaining oilpalm production.  Pesaran et al. (2001). One set assumes that all variables are I(0) and other assumes they are I(1). If the calculated F-statistics exceeds the upper critical value, the null hypothesis of no co-integration is rejected irrespective of whether the variable are I(0) or I(1). If it is below the lower critical value, the null hypothesis of no co-integration cannot be rejected. If it falls inside the critical value bands, the test is inconclusive. According to Labys (1973) and Shamsudin (2008) the conceptual framework of the oil palm and the details of structure are presented in Figure 1.

Fig.1: Conceptual Framework for Palm Oil Market Model
Based on the production function, the FFB production is determined by its inputs namely harvested area, farm price, and technology. Talib Table 4). The results indicate the absence of any instability of the coefficients because the plot of the CUSUM and CUSUMSQ statistic fall inside the critical bands of the 5% confidence interval of parameter stability (Figure 3, 4). For the out-of-sample validation purposes, the endogenous variables are projected based on the actual values of exogenous. The comparison results in out-of-sample are shown in Table 5.

Simulation Model
In order to forecast and simulatethe commodity model, we have determined 2014 as thebase year. According to Kwan Kok Foo (2010),there are two main methods and the one we used is the Regional Climate Model (RCM) which can produce reasonably appropriate projections to be used for climate-scenario generation in countryscale.Based on this information this study has considered three scenarios: 1. First Scenario -Rainfall changes: Based on rainfall changes in Malaysia in 2020 which will increase +6% more than normal trend 2. Second Scenario -Temperature changes: Based on temperature changes in Malaysia in 2020 Rainfall ,temprature

III.
RESULTS The Climate Palm Yield equation was determined by the technology trend (T), lagged one year annual yield adjusted (PCYDTOt-1), and palm oil farm price in lagged one and two (PCFPt-1, PCFPt-2), fertiliser price (FTP), rainfall lagged one (Rainfallt-1) and temperature (TEMPER). Based on Table 3 In addition, even though the farm price lagged two, fertiliser and trend are estimated positive sign, it is stillnot statistically significant. The values of climate coefficients (Rainfall and temperature) convey that they have strong impact on palm yieldand the effect causedby the temperature is very powerful. In other words, a temperature increase by 1% would causethe palm oil yield to decline by 1.13567% and a rainfall increase by 1% would drop the the palm yield by 0.18518%.     Figure 2 shows the simulation results for palm oil yield under the three scenarios (scenario 1, 2 and 3). All projections are between the periods (2015 -2020). In scenario 1 (the projected changes (5% increase) in rainfall), palm oil yield will increase from 17.90 t/ha in 2015 to 18.46 t/ha in 2020. However, the overall trend compared to the baseline is negative and expected to drop by -0.24% annually. Likewise in scenario 2 (the projected changes (2% increase) in temperature), the yield will increase from 17.66 t/ha in 2015 to 18.06 t/ha in 2020 while the total trend compared to the baseline is also negative and expected to decline by -0.58% annually. In scenario 3 (the projected simultaneous changes (+5%) and (+2%) in rainfall and temperature respectively), palm oil yield will increase from 17.51 t/ha in 2015 to 17.81 t/ha in 2020. Similar to scenario 1 and 2, the aggregate trend compared to the baseline is negative and expected to drop by -0.82% annually. Finally, the results revealed that the overall trend is positive. However, climate change will still have negative impacts on the industry.

IV. CONCLUSION
Palm oil is the most important agricultural commodity in Malaysia and contributes the highest share to the total agricultural GDP. The result showed that climate variables (rainfall and temperature) have negative impacts on palm oil yield. The production trend is expected to be positive while changes in rainfall (5% increase), changes in temperature (2% increase) and simultaneous changes in rainfall (+5%) and temperature (+2%) will cause the yield to decline by 0.24%, 0.58%, and 0.82% respectively. Therefore, based on the negative effect of climate change on palm oil yield and the extensive nature of investments in this sub-sector, more detailed studies are required especially on rainfall and its effect on palm oil yield.