Supply Response Analysis on the Impact of Climate Change on Oil Palm Production in Malaysia

Abstract

Climate change has significantly impact the economic development and trade of developing countries particularly those largely rely on agriculture. According to the World Bank, oil palm was the main contributor of GDP for Malaysia agriculture. Climate change affects oil palm growth and productivity in a number of ways, including reduction in sex-ration, disrupts the pollination process, abortion of newly produced inflorescence, drops in productivity, and increase in ranges and distribution of pests and diseases. Much of the economic researches devoted to employ production function and Ricardian approach. This study, therefore, focuses to model the effect of climate change on oil palm production by using supply response approach. An annual time series data used for the period of 37 years starting from 1980 until 2016, and Autoregressive Distributed Lags (ARDL) co-integration_-employed in achieving the objective of the study. Six econometric models consisting of linear and non-linear equations were constructed by incorporating temperature and rainfall as proxies for climate variable to estimate the yield response model. The results revealed that oil palm production was very negatively affected by changes in temperature compared to changes in rainfall. Meanwhile, the planted area and own price upsurge the supply of palm oil. The results also indicated that Model 3 and Model 6 were the best model to represent the linear and non-linear effect of climate_change on oil palm production, respectively. Quantifying the impact of climate change on palm oil production can help policy makers and relevant stakeholders to determine the best adaptation and mitigation measures.