Factors Influencing the Price of Cocoa in Malaysia

ABSTRACT

This paper is to identify the factors influence the price of cocoa in Malaysia. It is also to determine the relationship between the dependent and independent variable (Supply and Demand). The variable for this study are price of cocoa in Malaysia as a dependent variable and production, export, grinding and also cultivated area as independent variables. The data that I use for this study is from 1991-2010 in yearly. I used ordinary least square (OLS) to test the factors that influence the price of cocoa and also to know the relationship among the variable.

Key words: Price, production, export, grinding, cultivated area, OLS.

I INTRODUCTION

Cocoa is one of the important food that human consume every day. Cocoa products may vary from solid form to liquid form. Chocolate, beverages, candy, and food are all from cocoa. So this makes cocoa important. Cocoa has been known its goodness for health so it’s important to put cocoa based food in our diet every day. Cocoa is one of the important items for economic reason in import and export purpose. Demand and supply may vary from another country to another country. This makes price of cocoa differs from one another.

What driven the price of cocoa? Whether demand and supply may vary, quantity supplied and quantity demanded may vary as well thus affecting the price. Are the variables such as production, export and cultivated area affecting the price of cocoa? For such everyday item is consumed every day, so the consumption may increase significantly.

In the normal demand curve, stated that, when price increase, the quantity demanded would fall and when price decrease, the quantity demanded rise vice versa to the supply curve. Cocoa price elasticity is inelastic where when price significantly increase, the quantity demanded would not fall drastically.

Source: Malaysian Cocoa Board (2010)

Figure 1: Average Price of Cocoa (RM) from 1991-2010 (20 years)

The Malaysian cocoa price has increased every year. As we can see in the figure 1 in 1991 until 2010 it has increased in the market. Although it price is not consistent in the middle of 2000 but it’s grow up a little bit until 2010 it increased more and more. It is depends on the world cocoa price it the market that always change. The cocoa price also is very sensitive due to changes of supply and demand in the market.

Source: Malaysian Cocoa Board (2010)

Figure 2: Total production of all Cocoa’s Product (TONNE).

Total production also decreased from 1991 until 2010. This is because of world prices, higher labour costs, loss of production due to pests and diseases to the cocoa and also they have the relative competitiveness of other crops especially for oil palm industry.

Source: Malaysian Cocoa Board (2010)

Figure 3: Export of all Cocoa’s Product (RM’000) in Malaysia, 1991-2010

Year by year the export of cocoa beans and all cocoa products is increased dramatically. This is because of the demand by the other country that very high. Malaysian cocoa industries help the global market of cocoa product.

Figure 4: Cultivated Area (ha)

The cultivated area also decreased year by year, but we can still produce a cocoa bean with the technology we had very helpful to us to increase the output although our cultivated area is low.

Figure 5: Grinding of Cocoa Beans (Tonne)

The grinding of cocoa beans also increase and a total grinding in 2008 about 324 thousand tonnes, although its decreased in 2009 but it increase back in 2010 that is 300 thousand tonnes and also we are the largest cocoa grinders in the south East Asia, most of the grinding and manufacturing is at the peninsular.

II Literature Review

We love to eat chocolate, as far from that chocolate is produced from cocoa. The price of end product may be stable and flat but the price of cocoa will still remain changeable. It can go high and it can go low. Supply and demand may vary from time to time. External cost causing it is also can be the main factor if the price of cocoa changes dramatically. Malaysian has been in the cocoa venture since the period of 1975-2008 (Abdel Hamed, 2009). In their (Abdel Hamed, 2009) journal, they are conducting a research on supply and demand model for the Malaysia cocoa market. They want to find out about what factor could determine or affecting cocoa prices. As a result from their research, they have found out that, cocoa pricing is very sensitive to its domestic consumption, lagged domestic price and its world price (Abdel Hamed, 2009). These 3 traits will determine Malaysia cocoa prices in the market.

But apart from that cocoa has developed from time to time, according to the Malaysian plan. It has undergoes many dramatic changes in 1989 to 1990 where at that time it is easily to have cheap labour with a bigger return. However a year after that, when world cocoa prices started to fall, demand slightly fall, and supply also as well being damaged by pest and natural disaster then adding to the cocoa cultivator swift to palm oil, gives a drastic changes in the cocoa market, making the price fall (Abdel Hamed, 2009).

The importance of cocoa market makes Malaysia number 5 in the world cocoa market, making it is important for economic contribution by the agriculture sector. On the findings of the journal, it has been proven that cocoa production mostly is determined by its own (Abdel Hamed, 2009) means, if the supply is enough, we got an equilibrium price, if supply is excess, price of the cocoa falls and if the supply is in shortage, the price will go up. Other factor considered by the cocoa itself is the quality of the cocoa and natural order.

Cocoa at Malaysia has change from time to time. It is getting more developed, within their consumption, demand and supply, as well as the price. Cocoa has contributed a lot in our Malaysian economy in the agricultural sector. Even though we rank number 5 (Abdel Hamed, 2009) in world cocoa market, there is some setback as well. By 2008, cocoa has fall tremendously, if it is to be compared in 1989 that is 414,236 ha, while 2008 only 19,976 hectare (Applanaidu, 2009).

In the journal of Applanaidu, S. D. (2009), Malaysian Cocoa Market Modeling: A Combination of Econometric and System Dynamics Approach. Monich Personal RePec Archive , 1-20,stated that, econometric models have been used to examine the relationship between major variables in the Malaysia cocoa industry (Rosdi, 1991, Mat Lani et al., 1993 Remali Yusoff et al., 1988 and Kox, 200 and Mohammad Haji Alias, 2001). This was to make sure that the relationship between supply, demand, inventory and the prices of cocoa is enough.

As a result of the combination, morely, they gain what they expected it will be. The econometric model really is helping prove that there is a relationship between those traits (supply, demand, inventory and the price of cocoa) is enough (Applanaidu, 2009) however they also suggest that the model can be improved.

When we talk about price, we surely are bind with the supply and demand. So as there is supply and demand to reach the equilibrium of the market, there will be an export as well as import. Export means, we sell something to another foreign country, and import, vice versa. What happen if cocoa export is being levied? Surely the cultivator of the cocoa price will fall and the price of export would increase. This is encouraging domestic use and import from other country rise. (Shamsudin, 1998).

If cocoa price fall, would anyone want to venture in this agricultural sector? Not with the smallholders of course and big estate owner will think twice. Importing from another country is not a wise choice if we can find the product in our country ourselves. More cheaply in the term of transportation as well as labour cost thus, gives the local opportunities to work as well. So why import? So as to control the price within the country but that would lead to a shortage in the future. So our country will be having trouble in stock of cocoa.

Price determines all. If the price of cocoa, maybe low but reasonable, people still wants in the business but if price are being controlled by the government, it’s better to cultivate something else like rubber or palm oil. The imposition of export levy will make the producer receive a smaller share of world price (Shamsudin, 1998) and as the export price will become higher, decrease in export is expected (Shamsudin, 1998) and import will increase.

Investment implies the price for cocoa as well. It all cause by the demand and supply for the cocoa. Ceteris Paribus, where all things remain equal, price change just like that. It could be down or vice versa. But in the law of investment where the karma goes like this, the higher the investment, the higher the return but the risky the investment will be, the lower the investment, the lower the return, but more safe and secure. As for cocoa, when they try to increase the price of the cocoa, means they are waiting for greater return. If a country successfully exported it to another country, that’s a good news and from it, they’ll gain profit, if don’t, that’s the risk a country should take, a surplus in the country and forcing the country in for a domestic market. And for the investors their fate base on the investment they made.

III DATA AND METHODOLOGY

The data that I used in this study is secondary data that I got from Malaysian Cocoa Board (MCB) website. I used 20 years data from 1991 until 2010 to regress my data. The data in this study include price, production, exports, grinding and also cultivated area (supply and demand).Ordinary least square (OLS) was carried out to analyze the data. This method are using to make a regression and to test the significant level among the dependent and independent variables.

The OLS equation used is:

Price = Production + exports + grinding + cultivated area

So it could be like this:

Price = α + β0 prod + β1 Exp + β2 Grn + β3 area

IV RESULTS

R-squared

0.943205

As we can see here the R-square is very high so, 94.32% changes in dependent variable can be explained by the independent variable, and the rest is cannot be explained. So, we can conclude that the dependent and independent variables has strong positive relationship. This is because the R-squared is 0.943205.

The analysis of the Variables.

Variable

Coefficient

Std. Error

t-Statistic

Prob.  

PRODUCTION

-0.047308

0.017540

-2.697137

0.0166

EXPORT

0.002854

0.000385

7.405039

0.0000

AREA

0.017703

0.009391

1.884990

0.0790

GRINDING

-0.026659

0.004915

-5.424359

0.0001

C

6980.653

803.1135

8.691988

0.0000

The econometric analysis of the data is on the above that can explained the probability for the all variables. The OLS shows that a better explanation for all variables to answer how strong the relationship among a dependent and independent variables.

For the all variables such as production, export, grinding and cultivated area we can see that there are very significant except for cultivated area but it cannot quite low. Its mean a dependent and independent variable are influenced the price of cocoa in Malaysia.

The independent variable for the production is 0.0166 significant level, that means the production also influenced to the price of cocoa. It is because when the supply(production) is low but the demand is high the price of cocoa can change automatically according to the demanded all over the world. But if the production is too many it will lead to the decreasing of demanded and also the price of cocoa will be affected. The relationship among price and production is negative relationship, that means if production increase 1 unit it will lead the decreasing of price of cocoa by -0.047308.

As we know the export is very influence the price of cocoa in the market it is because the price of cocoa is depend on the world price and it is very sensitive to change to be high or low. The factor that influenced the price of cocoa in the market is export, it is 0.0000 significant level, this mean the real affected to the price of cocoa here is export. The export today is plays an important role to the change price of cocoa in Malaysia and also to all over the world, so if it change to be high or low it is depending on supply and demand in the market. The relationship among the price and export is positive relationship, that is if 1 unit export increase it will lead the increasing of price of cocoa by 0.002854.

The cultivated area in our country is decreased year by year but we still can produce enough cocoa it is because of the advances of technology that we use is very effectively and the research and development that very helpful to produce the cocoa although our cultivated area is not too big. The significant level between the price and cultivated area in this study is 0.0790, it is quite low but not too high. So we can see here that the cultivated area is not significant. But in this part we can see the relationship between price and cultivated area is a positive relationship, that’s mean if 1 unit increase in cultivated area it will lead an increase the price of cocoa by 0.017703.

Grinding of cocoa is a measure of demand in the market. The total grinding of cocoa is increase every year although our total production and total cultivated area is low but we still can produce more to process the cocoa. The uses of high technology with effectively and efficiency to process this cocoa help us to increase the grinding of cocoa year to year, so that the significant level of the variables is 0.0001, it means very significant and very affected to the price of cocoa in the market. The relationship among the price and grinding of cocoa is negative relationships, that is if 1 unit increase in grinding of cocoa it will lead decrease the price of cocoa by -0.026659.

V CONCLUSION

The main objective of this study is to identify the factors influence the price of cocoa in Malaysia and also to determine the relationship between the dependent and independent variables. The OLS model is used to investigate the all model and also to test the relationship between the dependent and independent variable. This model are satisfactory in term of explanatory power is high. The finding in this study also the price of cocoa is determined by the production, exports and also grinding and quite low for cultivated area but not too much. In this study also we can find the world price of cocoa is very influence to the price of cocoa in export because our price today is depends on the world price of cocoa, so it is very sensitive to be increase or decrease according to the supply and demand in the market. The advances of technology today and Research and Development made by the Lembaga Koko Malaysia also help the grinding industry to increase their production on cocoa product and cocoa beans, although our production of cocoa is low from the previous year and also our cultivated area is low but we can export more.