Determinants of Supply Response of Coconut Cultivation in Sri Lanka

Abstract

Coconut (Cocos nucifera L) is a major plantation crop grown in Sri Lanka. The output has been mainly used for local consumption of fresh nuts, coconut-based industries within the country, and coconut exports. The instability of coconut supply seriously affects local as well as export market potentials. Identification of various factors and the extent to which those affected the current coconut supply have not been examined in the recent empirical work. This study examines the supply response of coconut in Sri Lanka, using Nerlovian Partial Adjustment model. The study used time series data of total coconut production, output price, rainfall, fertilizer amount, land extent, technology, and the presence of fertilizer subsidy for a period of 30 years (1985-2015) for the analysis. Among the different types of functional forms tested, the log-linear model was selected as the best fit model (R2=0.894). The model was tested for autocorrelation and heteroscedasticity using the Durbin-Watson statistic and the Breusch-pagan test, respectively. The results revealed that the variables, i.e.two years lagged price, one year lagged rainfall, and two years lagged fertilizer amount affect the coconut production significantly (p<0.05). The short-run and long-run price elasticities were estimated for two years lagged output price.The output price is the most influential factor in short run with the elasticity of 0.33 (two year lagged price variables were considered) while rainfall is the most important determinant of coconut production in Sri Lanka. The study concludes that coconut production in the country tends to change as a response to the changes in coconut price both in the short-run and long-run. Further, rainfall and amount of fertilizer applied are the two main factors that determine the coconut supply in Sri Lanka.