ASYMMETRIC EFFECTS OF CLIMATE CHANGE ON PALM OIL PRICES IN MALAYSIA

Abstract

Of all major vegetable oils, palm oil remains extremely productive crop. Malaysia is currently the world’s second-largest producer and also the world's second-largest exporter of palm oil. However, the sector most vulnerable to climatic condition is agriculture. Extreme climatic events include high temperature levels, drought and flash floods. Such events affect oil palm growth and promote plant disease which then, increase the palm oil price. Previous understandings suggest that the changing climate and palm oil prices follow similar behaviour patterns. Therefore, this study aims at exploring the asymmetric relations between climate change and palm oil prices from 1964-2016. A nonlinear autoregressive distributed lag (NARDL) cointegration methodology was employed for the estimations. Overall, the results suggest the presence of a significant and asymmetric relation between palm oil prices and temperature in the long run, the impact of a fall in the temperature is more pronounced than when the temperature increases. In contrast, the responses of the palm oil prices to the rainfall show a symmetric but insignificant in the long run. Such findings are of great importance in showing that palm oil price reacts differently to rising and falling temperature, but not for rainfall. Therefore, long-term sustainability requires a diverse and robust technological and knowledge base to enhance palm oil productivity and efficiency in order to reduce the vulnerability of palm oil to climate change.