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Hereby, declare that: This work has not previously been accepted in substance for any degree, locally or oversea, and is not being concurrently submitted for this degree or any other degrees. This project is the result of my independent work and investigation, except where otherwise stated. All verbatim extracts has been distinguished by quotation marks and sources of my information have been specifically and acknowledged.

Signature: (Honey Irmawati Binti Hamzah)



Honey Irmawati Binti Hamzah, BBA (Hons) Business Economics, Faculty of Business Management, Universiti Teknologi MARA, 40450 Shah Alam, Selangor Darul Ehsan. 20th November 2008

Puan Norizan Binti Mohammad Faculty of Business Management, University Technology of MARA, 40000 Shah Alam, Selangor Darul Ehsan.

Dear Miss, Submission of Project Paper Enclosed is a report entitled The Macroeconomic Determinants to the Crude Palm Oil Price in Malaysia for your kind progression. I hope that my research report fulfills the requirement stated by Faculty of Business Management, Universiti Teknologi MARA (UiTM), Shah Alam. I would very much appreciate your kind understanding in reviewing my research report.

Thank You, Yours Sincerely,

. (Honey Irmawati Binti Hamzah) 2003197753 BBA (Hons.) BUSINESS ECONOMICS


ALHAMDULILLAH, in the name of ALLAH the All Mighty, the Most Compassionate, the Most Merciful and Most Gracious, Praise to Allah, the One and Only, for giving me patience, strength and ability to complete this project.

First and foremost, the author would like to express a million thanks to the Director-General of Malaysian Palm Oil Board, Dato Dr. Mohd Basri Wahid for giving me a chance to continuing my study as a fulltime student. Appreciation and gratitude are due to the Acting Director of Economic and Industry Development Division, Dr. Faizah Mohd Shariff and Head of Techno-Economic Unit, Encik Mohd Arif Simeh. The authors would like to thank the all members of Techno-Economic Unit for their constructive ideas and comments.

This project could not have been written without the advisor of this research, Puan Norizan Mohammad who not only served as the advisor of the project but also encouraged and challenged the authors throughout the study. Also, Puan Jamaliah Mhd Khalili as a second examiner and the other group members, who was patiently guided through the writing process, never accepting less than the author best efforts.

Last but not least, thanks are due to Mohd Musa Sotiri, Adam Harith and Arissa Nurhawa for their support and prayers.

Honey Irmawati Binti Hamzah NOVEMBER 2008





1.1 Background of the Study 1.2 Problem Statement 1.3 Research Objectives 1.4 Significance of the Study 1.5 Research Question 1.6 Limitations 1.7 Scope of the Study 1.8 Definition of Term 1.8.1 Definitions for Crude Palm Oil 1.8.2 Definition for Exports 1.8.3 Definitions for Exchange Rate 1.8.4 Definitions for Consumer Price Index 1.8.5 Definitions for Price

1 4 5 6 6 6 7 8 8 9 9 10 10



2.1 Introduction 2.2 Findings of Price of Crude Palm Oil

11 12



3.1 Data and Source of Data 3.2 Theoretical Framework 3.3 Variable 3.4 Sample Size 3.5 Research Design 3.5.1 Type and nature of the study 3.5.2 Data Analytical Technique Used 3.6 Methodology 3.6.1 Multiple Regression Analysis 3.6.2 Regression Model 3.6.3 Statistical Test 3.6.4 Analysis of the Regression 3.6.5 Research Hypotheses

16 17 18 19 19 19 19 20 20 21 21 22 23



4.1 Problem in Multiple Regression Analysis 4.1.1 Multicollinearity The Consequences of Multicollinearity The Detection of Multicollinearity

25 25 26 26 VI

4.1.2 Serial Correlation The Consequences of Serial Correlation The Detection of Serial Correlation 4.2 Hypothesis Testing 4.2.1 The t-test 4.2.2 The F-test 4.3 Interpretation of the Result

27 27 28 30 30 32 33



5.1 Conclusions 5.2 Recommendations

34 35

REFERENCES APPENDICES APPENDIX 1 APPENDIX 2 APPENDIX 3 APPENDIX 4 APPENDIX 5 APPENDIX 6 APPENDIX 7 Table of Data Result from E-Views Result from SPSS Line Graphs of the Variables Durbin Watson Table Students t Distribution Critical Values of the F distribution at a 5 Percent Significance Level



Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7

Gross Export Performance for 2006 and 2007 Movements of Ringgit Results for E-Views The VIF of the Coefficients The Decision Rules of Durbin Watson Statistic The t-Value of the Variable The F-Statistic of the Overall Variable

2 3 24 27 29 31 32



Figure 1 Figure 2 Figure 3

Crude Palm Oil Price Movement from 1980 until 2007 (RM/Tonne) The Schematic Diagram Durbin Watson d Statistic

5 17 30




Ministry of Plantation Industries and Commodities Malaysian Palm Oil Board International Monetary Fund Durbin Watson Null Hypothesis Alternative Hypothesis Ordinary Least Square Coefficient of Determination Ringgit Malaysia US dollar Statistical Package for Social Science United States Variance Inflation Factors Crude Palm Oil Consumer Price Index Analysis of Variance


Definitions for Crude Palm Oil Definitions for Exports Definitions for Exchange Rate Definitions for Consumer Price Index Definition for Price



The main objective of this study is to explore different influences of crude palm oil price fluctuations to the economic growth in Malaysia. The other objective is to determine the main effects of the price fluctuations. The data for this study were obtained from the publications of Ministry of Plantation Industries and Commodities, Malaysian Palm Oil Board and International Monetary Fund. The data covered the period of 1980 to 2007. The macroeconomics variables that impact the fluctuations of palm oil price are exchange rate; export value of palm oil and consumer price index. The most significant factor that contributes to the fluctuation of CPO price is exporting value of palm oil. Therefore, the variability of the price of CPO may impact the economy growth of the country in terms of trade balance.




Malaysias fifty one years of nationhood marks another milestone in its economic development. Upon independence, the nation was highly reliant on tin and rubber and more than half of the populations were in poverty. Today, Malaysias achievements in their broadbased and diversified economy have contributed growth to the economy. At present, Malaysia is not only the largest producer and exporter of palm oil, but also the biggest exporter of oils and fats in the world. The Malaysian oil palm industry continues to contribute significantly to the country's economic development. Under the 9th Malaysian Plan (RMK 9, 2006-2010), the agricultural sector will be the third engine of growth for the economy, after the manufacturing and services sector. The agriculture sector is targeted to grow at five to six per cent during RMK 9 with significant contribution from the oil palm, rubber, cocoa, timber, and pepper. Plantation industries and commodities remain an important sub-sector of the agricultural sector contributing five per cent to the GDP and providing employment opportunities to 1.5 million people. Its contribution to the countrys export earnings averaged RM60 billion per annum during the period under review (2001 to January-June 2005). The development of the plantation industries and commodities sector will continue to be given emphasis in other national development plans such as the Outline Perspective Plan 3 (OPP3, 2001-2010), National Agricultural Policy (NAP), and Third Industrial Master Plan (IMP3, 2006- 2015). The gross exports strengthened by 7.5% in the fourth quarter of 2007 (3Q: 0.9%) due, mainly to the marked increase in commodity exports amidst the substantial rise in

commodity prices. See table 1 below. The above also contributed to the strong growth in agriculture exports by 25.0% in the year 2007.

Table 1: Gross Export Performance for 2006 and 2007 2006 4Q Year 3Q 2007 4Q Year

Annual Change (%) Gross Exports Manufacturing Agriculture Minerals 6.6 5.7 22.1 0.5 10.3 107.0 12.5 8.6 0.9 -2.0 29.9 6.6 7.5 2.9 40.2 23.6 2.7 0.3 25.0 8.1

Source: Department of Statistics, Malaysia

Majority of the increase in the agricultural export is due to exceptionally excellent performance in receipts from palm oil exports (66.2%) combined with rising in prices. Palm oil prices strengthened to RM2,530.50 per tonne, representing an increase of more than RM1,000 in comparison to the corresponding period in 2006. The export earnings of the primary commodities recorded an excellent performance in 2007 with total export earnings recorded at RM89.6 billion as in comparison to RM76.05 billion in 2006 comprised of the exports value of palm oil, rubber products, cocoa and cocoa products, tobacco and pepper which were caused by higher commodities prices during the year. The rise in commodities prices had also increased the revenue for the plantation companies and provided remunerative income for the smallholder. The year 2007 remarks, the upward trend of the ringgit exchange rate against US dollar. The upward ringgit pressure was, to a certain extent, balanced by the demand for foreign currencies to fund larger outward direct and portfolio investment, repayment and prepayment of external loans by both the public and private sectors and the repatriation of profits and dividends by non-residents. The strengthening of the ringgit was also punctuated 2

by several external events during the year, such as the global equity correction in the first quarter and the global financial disruptions following the developments in the US housing market in the third quarter, which has been restraining effect on regional currencies, including ringgit. The upward trend in the ringgit however, disrupted by the withdrawals of funds from the region following the correction in the Shanghai equity market in February, and US sub-prime mortgage crisis, particularly in the period of June until September in the same year. These disruptions proved to be temporary as the ringgit resumed its appreciating trend, arising from the positive investor sentiment towards the Malaysian economy. For the year 2007, the ringgit appreciated by 6.8% against the US dollar to end of the year at the dollar exchange rate of RM3.3065. The performance of ringgit exhibited a mixed performance against other major currencies, appreciating against the Japanese yen (0.5%), but depreciating against the euro (-4.7%). See table 2 below. The euro strengthened due to market expectations of a widening interest rate differential in its favour.

Table 2: Movements of the Ringgit RM to one unit of foreign currency Annual change (%) 2006 US dollar 100 Japanese yen Euro 3.5315 2.9675 4.640 2007 3.3065 2.9534 4.8756 2007 6.8 0.5 -4.7

Source: Bank Negara Malaysia

The competitiveness of palm oil in the international market is influenced by exchange rate regime in exporting countries. With the introduction of fixed exchange rate in Malaysia since 1 September 1999, the Malaysian Ringgit (RM) depreciated by 34.3% in comparison to the pre crisis level of RM2.50 = US$1. The claim that the fixed exchange rate between ringgit

and US dollar has made Malaysian palm oil competitiveness among other low cost producers on account of exchange rate variations is yet to be proven. However, inflation as measured by annual percentage change in the Consumer Price Index (CPI) in the first seven months of 2007 eased significantly to2.0% (January July 2006 : 3.6%), due to better supply conditions, keen competition, effective price monitoring as well as strengthening of ringgit. The increase in CPI was largely due to higher prices of food and non-alcoholic beverages, transport, rental and utilities. This group accounted for 87.4% of the total increase in CPI.


Malaysian palm oil is subjected to have significant price fluctuations. The palm oil prices fluctuated without any clear trend or cyclical pattern in the last three decades. This has been giving an impact towards the growth of the economy of Malaysia. The average price of oil palm products in the domestic market rose sharply in 2007. The prices have risen sharply by more than 67% over the past year. The sharp rises of CPO prices pose serious challenges to the growth of the economy in the country. Refer to chart 1 below. Therefore, it is important to know the impact of the variability changes in prices to the Malaysian economic growth. This study also intends to investigate the macroeconomics effects of the price variability in crude palm oil in Malaysia.

Chart 1: Crude Palm Oil Price Movement from 1980 until 2007 (RM/Tonne)

Source: Malaysian Palm Oil Board

The problem statement for this study is to look at the factors that influence the trend of CPO price. Based on the preliminary study that has been done, the main macroeconomics factors that contribute to the change in CPO price are export earnings, exchange rate and consumer prices index.


It is important to establish the flow of the study by highlighting its purpose. There are two (2) objectives to this study. The primary objective of this study is to explore different influences of the fluctuations of crude palm oil price to the economic growth in Malaysia. The secondary objective of this study is to identify the main cause(s) of crude palm oil prices fluctuations.


The significance of this study is to define the relationship of the variable in macroeconomics with crude palm oil prices. This research will investigate the influences of crude palm oil prices to the macroeconomic variables in Malaysia. This study aims to remedy the scarcity of studies regarding the influences of crude palm oil price to the nation's economic growth. This research will also analyze the trend of CPO price. Thus, enabling the government, exporters and also shareholders to forecast the price and make the most out of economic decisions, specifically in contributing to the profit maximization of the firm while ensuring growth of the country.


Specifically, the study is set to answer of the following questions:

1. How crude palm oil prices are determined? 2. What is the most significant variable to determine crude palm oil price?


The study has certain limitations that need to be taken into account when considering the study and its contributions. This study has focused on a phenomenon that is a very extensive and major, which is in the macroeconomic variable. Clearly, this represents a challenging task for research 6

regardless of the more specific interests that the study may have. In this study, the wide knowledge and understanding about the macroeconomic perspective is much needed. It is very essential to study its theory to have more supportive result and build of theoretical framework. On the other hand, this also represents the whole idea of making a research. By understanding something about this more in depth, we also can learn more bout it in a practical view. Such as, the contribution of palm oil towards the industry of agriculture to the growth of the country. More specifically, they are also limitations of the data availability. For example, CPI inflation rate is only available for the year 1980 until current. The sample size for the CPI is particularly small. A small sample size has a greater probability that the observation just happened to be particularly good or particularly bad. Therefore, it is harder to find significant relationships from the data, as statistical tests normally require a larger sample size to justify the hypothesis that the effect did not just happen by chance alone. As a conclusion, some of these limitations can be seen as fruitful avenues for future research under the same theme. It is highly interesting needed to see the results of such a study.


The prices of CPO used in the analysis were obtained from 1980 to2007, spanning a 27 year period. There are three (3) important aspects that will be focused on:Factors that have impact of the fluctuations in the price of CPO. The modeling of the multiple regression The analysis of the most important factor in determining the fluctuations of the price of CPO.

In this research, there is an abstract that explain the background of the study as well as the general objective of this study. The results from the finding are based on the overall objective in this study. To evaluate the findings this study has to include the background of the study, problem statement, the objective and overall significance of the research. The method that has been used to evaluate the findings along with the sketch of schematic diagram of dependent, and independent variable are explained through the theoretical framework. In establishing the relationship between the dependent and independent variables we have developed the three hypotheses that engaged in the course of the study. The data used in this research is secondary data. From the data collected, E-views and SPSS are vital to regress and develop a statistical relation from the data. They have provided sophisticated data analysis, regression and forecasting tools on Windows-based computers. Result of data analysis will discussed based on the result where the interpretation of R2, t-test, Durbin Watson and F-test had been interpreted.



From the palm oil is yellowish fatty oil obtained especially from the crushed nuts of an African palm (Elaeis Guineensis) and used in the manufacture of soaps, chocolates, cosmetics, and candles. It is also known that palm oil history was long recognized in West African countries, and among West African people it is in widespread use as cooking oil. European merchants trading with West Africa occasionally 8

purchased palm oil for use in Europe, but as the oil were bulky and cheap, and due to the much higher profits available from slave-trading, palm oil remained rare outside West Africa from According to the Wikipedia, palm fruit is the source of both palm oil (extracted from palm fruit) and palm kernel oil (extracted from the fruit seeds). Babassu oil is extracted from the kernels of the Babassu palm. Palm oil itself is reddish because it contains a high amount of beta carotene. It is used as cooking oil, to make margarine and is a component of many processed foods. Boiling it a few minutes destroy the carotenoids and the oil becomes white. Palm oil is the only vegetable oils relatively high in saturated fats (such as coconut oil) and thus semi-solid at room temperature.


Exports can be definite as the: 1) actual shipment of any covered goods or items; 2) the electronic or digital transmission of any covered goods, items or related goods or items; 3) any release or disclosure, including verbal disclosures or visual inspections, or any technology, software or technical data to any foreign national; or 4) actual use or application of covered technology on behalf of or for the benefit of any foreign entity or person anywhere under the (EAR)


Exchange rate can be defined as the rate at which one currency may be converted into another. Generally, one unit of the home currency is expressed in terms of another currency under the


Consumer price index can be defined as the measure of changes in the purchasing power of a currency and the rate of inflation. CPI expresses the current prices of a 'basket' of goods and services in terms of the prices during the same period in a previous year, to show effect of inflation on purchasing power. Moreover, called cost of living index (COLI), it is one of the best-known lagging indicators. See also producer price index under


The definitions for price can be explained as the amount of money for which anything is bought, sold or offered for sale under




Economics studies the allocation of scarce productive resources that includes workers, machines, and land to different productive activities, particularly in factories, offices, farms, labor, and machinery whose purpose is to generate commodities that will satisfy consumers needs. In brief, economics is hailed as the science of rational choice under conditions of scarcity (Varoufakis 1998). Therefore, economists have to focus on the way in which individuals, groups, business enterprises, and government seek to achieve efficiently any economy objectives or policy they select. It is also trying to explain the behavior of the economy by building hypotheses or theories. Specific versions of these theories are sometimes referred to as economics models. These models are implications of the real world that are potentially useful in illustrating some key feature of how the world works. As well as, macroeconomics is looking at the output of the economy as a whole and is concerned with aggregate questions relating to inflation, unemployment, the balance of payments, and business cycles. In macroeconomics, the value of all other goods and services produce is averaged together. This results into studying the movement of aggregate national product. The prices of all goods and services consumed are also averaged together and discuss the general price level for the entire economy.



Eduardo, B., et. al (1994) said that the marked fluctuations in commodity prices and volumes in recent years, a comprehensive analysis of the macroeconomic factors having an impact on commodity markets becomes an important factor in policy design, particularly for those countries that rely heavily on primary commodity exports and that are facing substantial terms of - trade shocks.

The study done by Mad Nasir S. and Fatimah (1997) said that, in short term, price movements of fats and oils (including palm oil) mainly reflect changes in weather conditions, in inventories, in exchange rates, and in the price of substitutes.

Dehn, Jahn (2000) also said that per capita growth rates are significantly reduced by large discrete negative commodity price shocks.

In the study done by Yusof B. (2002) saw the currency depreciate significantly and this of course impacted positively on the palm oil industry as prices of palm oil are quoted in US$.

Also study done by Basri and Zaimah (2002) the real prices of Malaysian palm oil was calculated by deflating nominal prices of Malaysian palm oil by the Malaysian consumer prices index or CPI (1900=100).

Meanwhile the study done by Wayan R. (2004) has make conclusions that the oil palm has a significant contribution to economic growth, poverty and alleviation, and equity improvement. The positive contribution to economic growth is indicated by the growth of investment, output and foreign exchange earnings. The study also said that the oil palm related industries have a significant contribution to household welfare in term of income and asset. 12

Mohd Nasir A. et al (2004) said that the export have become significant component in term of influencing the co-movement in price of palm oil in the market. The study also reveals that the export is expected to be positive related to the CPO price.

The study done by Mohammad Alias and Tuck Cheong Tang (2005) said that the significance of the relative price level lends empirical support for some form of price policy. Even though price determination is left to the forces of supply and demand with minimal government intervention, an instance of the effect of price policy, through an indirect channel, can be seen from the response of the industry to the pegging of the ringgit to the US dollar in September 1998.

Faizah, S et al (2006) said that the price of palm oil the study found that the price of palm oil plays a very significant role in the short and long runs. The ECM method was used to quantify the short-run and long-run effects of the explanatory variables on the dependent variables.

Basri, et al (2007) said that the domestic price of CPO lagged one year and economic crisis were significant at 10% level. Any attempt to adjust the domestic CPO price toward its equilibrium level had a direct effect on the current domestic price of CPO. Furthermore, the world economic crisis also significantly increased the domestic price of CPO.

Also the study done by Amna A. et al (2007) shows that the palm oil prices as well as the national income are significant determinants of palm oil demand across the 10 models. The prices of substitute oils in almost all countries have been found to play an important role in shaping the palm oil demand. Other factors such as high palm oil discount, the 1970s world petroleum prices boom, the anti-palm oil campaign, trade embargo on Libya and Iraq, and 13

exchange rate also proved to be important factors affecting import demand for palm oil in some MENA countries.

Ahmad Borhan, A N et al (2007), said that the palm oil closing stock has been used to gauge the palm oil market outlook, as it acts as proxy for the underlying supply and demand fundamentals. The volume of palm oil stock has become a strong psychological factor that can indicate a bullish or bearish outlook for the industry, presumably under the belief that stock affects market prices.

Meanwhile study done by Mohd Basri, W et al (2007) said that the spikes in the palm oil price is mainly due to the demand and supply imbalance of oils and fats especially for soybean oil. The trends of the price keep arising since mid 2006. The impacts of the trend are on the consumption, trade, price competitiveness, and investment in oil palm/palm oil and biodiesel production.

Hence the study done by Ramli, A et al (2007) said that the important of biodiesel as a renewable fuel have giving an impact towards the price. The demand would reduce the volume of palm oil available in the market and putting upward pressure on its price and those of other vegetable oils. The increase in demand for biodiesel has led to its increased

production, thus, requiring additional palm oil. This analysis shows the effect to be positive as price is increased higher that without any biodiesel demand. The country also benefited through higher export earnings and higher corporate tax. However, it is not been favorable to the licensees of biodiesel plants. It has said that it was due to the forecasting of the price of palm oil remain high in the last few months of 2007 and even higher in 2008 which is making the economics of producing biodiesel questionable.


Study done by Obasi O. Ukoha (2007) said that inflation impacts positively on price variations among agricultural commodities.

Beside that, other research from Al-Amin et al (2008) said that the import price shocks by 15% decreases the domestic production of building and construction sector by 25.87%, hotel, restaurant and entertainment sector by 12.04%, industry sector by 12.02%, agriculture sector by 11.01%, and electricity and gas sector by 9.55% from the baseline. The external price shocks falls the domestic production and imports in all industry level. Therefore, these impacts are very sensitive to the importing countries. The import price shock causes the household income, household consumption and household savings decreases as well as social welfare. It is also said that causes the decreases in the real GDP, nominal GDP and government revenue and significant negative impact goes on investment and fixed capital investment. Malaysia is now experiencing the external price shocks especially on oils markets. Therefore, the other alternative is they have to use substitute of imported petroleum and other raw materials in agriculture, industry, transport and utility sectors, which could stimulate the economy. Additionally the removal of tariff and export tax had improved domestic production, promotes exports and could mitigate the effects of international price shocks through increasing competitiveness of the economy. However, this could further been studied carefully, otherwise it may not benefited at all.

Finally, the study done by Simone Pfuderer and Maria del Castillo (2008) said that the changes in agricultural prices have historically not been fully reflected in consumer prices.




In this study, secondary data will be incorporated. Secondary data can be used, among other things, for forecasting prices by constructing models based on past price figures, and through extrapolation. The secondary sources will come from published articles and numerical and archival from the government. These and related studies on crude palm oil prices and economic condition will also be included. The advantage of seeking secondary data sources is savings in time and costs of acquiring information. However, secondary data as the sole source of information has the drawback of becoming obsolete, and not meeting the specific needs of the particular situation. Hence, it is important to refer to. To achieve the objectives of this study, the data for this study will be collected from the year 1980 until 2007. The type of the data is the time series data. The sources of the data are taken from various publications by Ministry of Plantation Industries and Commodities (MPIC), Malaysian Palm Oil Board (MPOB), and International Monetary Fund (IMF).



The theoretical framework is the foundation on which the entire research project is found. This theory flows logically from the documentation of previous research. Hence, the theoretical framework discusses the interrelationships among the variables which can help to postulate or hypothesize and test certain relationships. Thus, it is also to improve the understanding of the dynamics of this research. Based on the literature review, the model of the research can be build. Below is the schematic diagram of the list of dependent and independent variables. They are export of palm oil, exchange rate and consumer price index that affect the price of CPO.

Figure 1: The Schematic Diagram Export Value of Palm Oil

Price of CPO

Exchange Rate (RM to USD)

Inflation Rate Index

Dependent Variable

Independent Variable

There are three (3) proxies that were use for the variables:VARIABLE Price of CPO Export Value of Palm Oil Exchange Rate (RM to USD) Inflation Rate PROXY Annual Domestic Price of CPO Annual Export Value of Palm Oil Annual Exchange Rate Annual Average of Consumer Price Index



The dependant variable is price of crude palm oil, which is the variable of primary interest. The variation is attempted to be explained by the three independent variables of, (1) Exchange rate, (2) Export value of palm oil, and (3) Consumer Price Index (Inflation).

Export In economics, an export is any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade. Export is an important part of international trade. Its counterpart is import. Export is the taken for this study from the export value of the palm oil in RM million.

Exchange rate Exchange rate can be defined as the rate at which one currency may be converted into another.

Consumer Price Index Consumer price index can be defined as the measure of changes in the purchasing power of a currency and the rate of inflation. CPI expresses the current prices of a 'basket' of goods and services in terms of the prices during the same period in a previous year, to show effect of inflation on purchasing power.



Determining sample size is a very important issue because samples that are too large may waste time, resources and money, while samples that are too small may lead to inaccurate results (iSixSigma Staff, 2000). The sample size of this study consists of 27 years, which is from the year 1980 until 2007.


3.5.1 Type and nature of the study

The research is descriptive in nature. A descriptive research intends to present facts that concern the nature and status of the situation and to describe present conditions, events and systems based on the impressions and reactions of the respondents of the research (Creswell, 1994). A descriptive research is also concern with relationships and practices that exists, beliefs and processes that are ongoing, effects that are being felt and trends that are developing (Best, 1970).

3.5.2 Data analytical Technique Used

After the data have been collected, the next step is to analyze them from the research hypotheses. Data analysis for this study is using with various software programs such as SPSS and E-views.


SPSS (originally, Statistical Package for the Social Sciences) is a computer application that provides statistical analysis of data. It allows for in-depth data access and preparation, analytical reporting, graphics and modeling. More analytical power can be added by using optional SPSS modules. This study has also used E-views to develop an econometrics equation and statistical relations from the data. E-views have provided sophisticated data analysis, econometric techniques and evaluation on the study. Both analytical technique used is vital to develop the accurate figures for the analysis and result. It can be used to test the hypotheses and run the multiple regressions.


3.6.1 Multiple Regressions Analysis

A multiple regression analysis involves estimation, testing and diagnostic procedures designed to fit the multiple regression model

E ( y ) 0 1 1 2 2 .... k k
to a set of data. The general purpose of multiple regressions is to learn more about the relationship between several independent or predictor variables and a dependent or criterion variable. For this study, the data for export value of palm oil (in RM), exchange rate (RM to USD), and consumer price index (%) has been compiled to be regress. Once this information has been compiled, it would be interesting to see whether and how these measures relate to the price of CPO.


Due to the complexity of the calculations involved, these procedures are almost always implemented with a regression program from one of several computer packages. Such as, Statistical Package for the Social Sciences (SPSS) and E-views programs.


PCPO = 0 + 1EX + 2ER+ 3CPI


Where, PCPO ER EX CPI = = = = Malaysian Crude Palm Oil Price (RM/tonnes) Exchange Rate (RM - USD) Exports (in Value (RM million)) Consumer Prices Index (Inflation rate (%))


There three (3) types of statistical test were used in this study.

Student t-test A t-test is use to compare two small sets of quantitative data when samples are collected independently of one another. The confidence interval normally used is 95%. As a rule of thumb, if the t-test is more than 2 it indicates that a significant relationship between the dependent variable and the independent variable.

F-test It can be also known as Analysis of Variance (ANOVA). F-test can be used to test whether any of the independent variables has an effect on the dependent variable. The standard error 21

of estimation can help to indicate how good a regression model can predict the dependent variable. F-test is used to test the strength of the relationship between the dependent and independent variables. It measures how well a linear model fits a set of data or to know the significant of the whole model. The level significance that were used in this research is 5 percent

Coefficient of Determination In statistics, the coefficient of determination, R2, is the proportion of variability in data set that is accounted for by a statistical model.R2 is a statistic that will give some information about the goodness of fit of a model. In regression, the R2 coefficient of determination is a statistical measure of how well the regression line approximates the real data points. A R2 of 1.0 indicates that the regression line perfectly fits the data.


Coefficients of the Multiple Regressions The size of the coefficient for each independent variable gives the size of the effect that variable is having on the dependent variable, and the sign on the coefficient (positive or negative) gives the direction of the effect. In regression with multiple independent variables, the coefficient tells that how much the dependent variable is expected to increase when that independent variable increases by one, holding all the other independent variables constant.

Coefficient of Determination (R-squared) The R-squared of the regression is the fraction of the variation in the dependent variable that is accounted for the independent variables. For example is r is 0.95, therefore, 95 percent of variance in the dependent variables are explained by the independent variables. The


remaining of 5 percent of the variation is come from the omitted independent variables that has not included in the regression model.


Once the important variables have been identified in the theoretical framework, the test, whether the relationships have been theorized or significant is been developed. Formulating such testable statements are called hypotheses testing. Hypothesis testing is usually to explain the nature of certain relationships, or establish the differences among the independence of two or more factors. As for this study, we develop three hypotheses. These hypotheses are for the use of a t-test, an ANOVA and a multiple regression analysis. The result and their interpretation will be discussed in chapter 4 later. The paper will work on the following assumptions:

HO1: There is no significant relationship between prices of crude palm oil to the export HA1: There is significant relationship between prices of crude palm oil to the export

HO1: There is no significant relationship between prices of crude palm oil to the exchange rate HA1: There is significant relationship between prices of crude palm oil to the exchange rate

HO1: There is no significant relationship between prices of crude palm oil to the consumer price index HA1: There is significant relationship between prices of crude palm oil to the consumer price index.



The table below shows the result of dependent and independent variable by using E-Views. Table 3: Result from E-Views Dependent Variable: MPOP Method: Least Squares Sample: 1980 2007 Included observations: 28 Variable C ER EXPORT CPI R-squared Coefficient Std. Error t-Statistic 392.3168 119.2955 0.024788 43.91776 0.515093 478.8249 0.819332 166.7431 0.715445 0.009095 2.725543 34.88542 1.258915 Prob. 0.4207 0.4812 0.0118 0.2202

Mean dependent var 1203.071 S.D. dependent var 455.0144 Akaike info criterion 14.60408 Schwarz criterion F-statistic Prob(F-statistic) 14.79440 8.498011 0.000506

Adjusted R-squared 0.454480 S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat 336.0707 2710644. -200.4572 1.612000


The equation of this regression is: MPOP = 392.32 + 119.30ER + 0.025EXPORT + 43.92CPI (166.743) t= 0.715 (0.0091) 2.726 (34.885) 1.259 Durbin Watson = 1.61 (model 2) The figures in parentheses are values of the standard error.

R-squared = 0.52

N = 28 (annual 1980 -2007)


There are three (3) types of problem in multiple regression analysis that violate the classical assumptions of the regression. However, since the data are time series, so we only explained the multicollinearity and serial correlation. The heteroskedasticity is more likely happened in the cross-sectional models than time-series models.

4.1.1 Multicollinearity

Multicollinearity occurs when variables are so highly correlated with each other that it is difficult to come up with reliable estimates of their individual regression coefficients. When two variables are highly correlated, they are basically measuring the same phenomenon or construct. In other words, when two variables are highly correlated, they both convey essentially the same information. Multicollinearity problem is the violation of Classical Assumption VI. There are two types of multicollinearity. Perfect multicollinearity means that one independent variable has an exact linear relationship with another independent variable with no error term. Meanwhile, Imperfect multicollinearity means that there is a linear relationship the variables, but there is some error in the relationship. 25 The Consequences of Multicollinearity

The major consequences of multicollinearity are:

1. Estimates will remain unbiased. Even if an equation has significant multicollinearity, the estimates of the s will still be centered on the true population s if all the Classical Assumptions are met for a correctly specified equation.

2. The variances and standard errors of the estimates will increase. Since two or more of the explanatory variables are significantly related, it becomes difficult to precisely identify the separate effects of the multicollinear variables. Therefore, it will make large errors in estimating the s.

3. R2 and F-test still indicate strong goodness of fit. If R2 is high, for example is 0.8, the F-test in most cases will reject the hypothesis that the partial slope coefficients are simultaneously equal to zero, but the individual t-test will show that none or very few of the partial slope coefficients are statistically different from zero (not significant). The Detection of Multicollinearity

The variance inflation factor (VIF) is a method of detecting the severity of multicollinearity by looking at the extent to which a given explanatory variable can be explained by all the other explanatory variables in an equation. A high VIF indicates that multicollinearity has increased the estimated variance of the estimated coefficient by quite a bit, yielding a decreased a tscore.


By using SPSS software application, the VIF of the 3 independent variables are stated as below. Table 4: The VIF of the Coefficient Model Exchange Rate Export CPI

i) VIF(
2.123 2.095 1.049

The higher the VIF of the coefficient, the more severe the effects of multicollinearity. As a rule of thumb is that if VIF (i) > 5, the multicollinearity is severe. conclude that, the problem of multicollinearity does not exist in this model. Therefore, we can

4.1.2 Serial Correlation

Serial correlation occurs when Classical Assumption IV, which assumes uncorrelated observations of the error term, is violated in a correctly specified equation. The Consequences of Serial Correlation

The major consequences of the serial correlation are: 1. Under estimates the standard errors. The consequences will be an inflated t-value where statistically insignificant coefficients appear to be significant.

)=) 2. Estimates are unbiased. ( E(

3. Estimators are no longer efficient (i.e. they do not have the lowest variance) 4. Observed errors follow a pattern. 5. Underestimate variance of the error term. This will results in R2 being exaggerated and incorrect F-test. 27 The Detection of Serial Correlation

The most popular method of detecting the presence of serial correlation is known as the Durbin-Watson d statistic. The advantage of the d statistic is that it is based on the estimated residuals, which are routinely computed in regression analysis. Therefore, it is now a common practice to report the Durbin-Watson d along with summary measures, such as R2, adjusted R2, t-test and F-test. The actual test procedure can be explained better with the aid of figure 2, which shows that the limits of d are 0 and 4.

Figure 2: Durbin-Watson d statistic.

Reject Ho Evidence of positive serialcorrelation 0 dL

Zone of indecision

Zone of indecision

Reject Ho Evidence of negative

Do not reject Ho or Ha or both du 2 4-du

serialcorrelation 4-dL 4 d

The hypotheses are: H0 : 0 (no positive serial correlation) Ha : > 0 (positive serial correlation exist)


To test the null hypotheses of no positive serial correlation the Durbin-Watson d statistic must be compared to two different critical d-values, dL and dU found in the tables that follow: 1. The critical value of 5 percent one sided level of significance (10 percent of twosided level of significance) 2. The number of explanatory variables (k) = 3 3. The number of observations (N) = 28, dL = 1.18 and dU= 1.65 Therefore, any computed DurbinWatson statistic less than 1.18 would lead to the rejection of the null hypotheses. For computed DW d-values between 1.18 and 1.65, the test is inconclusive, and for values greater than 1.65, we can say that there is no evidence of positive serial correlation at 5 percent significance level. The conclusion can be referring from the table of the decision rules of Durbin-Watson statistic below. Table 5: The Decision Rules of Durbin-Watson Statistic Null hypotheses H0 : 0 (No positive serial correlation) H0 : 0 (No positive serial correlation) H0 : 0 (No negative serial correlation) H0 : 0 (No negative serial correlation) Decision Reject No decision Reject No decision If 0 < d < dL dL d dU 4 - dL < d < 4 4 dU d 4 dL dU < d < 4 - dU

H0 : = 0 (No positive or negative serial correlation) Do not Reject

In this research, the computed DW d-value is 1.61, so we can conclude that the test is inconclusive1. Therefore, for this research we can conclude that there is no serial correlation exists in this model.

The inconclusive region is troubling, but the development of exact Dublin-Watson tests may eliminate this problem in the near future. The computer program of SHAZAM, allow user the option of calculating an exact Dublin-Watson probability (of first order serial correlation).



There are two test types to prove my hypothesis testing. The t-test is the test that econometrician usually use to test hypotheses about individual regression slope coefficients. Whereby, the F-test is a formal hypothesis test that is designed to deal with a null hypothesis that contains multiple hypotheses about a group of coefficients.

4.2.1 The t-test

The two-sided t-test was used to test hypotheses that should be rejected if each estimated coefficients are significantly different from zero, or specific non-zero value, in either direction. The hypothesis for this test is below. Ho : = 0 Ha : 0

As figure 3 illustrate, a two-sided test implies two different rejection regions (one positive and one negative) surrounding the acceptance region.

Figure 3: Two-Sided t-Test

Acceptance region Rejection region Rejection region




The critical values of the t-distribution at 10 percent level of significance of two-sided region are +1.711 and -1.711. For 1 Reject Ho if | 0.64 | > 1.711. In this case we can conclude that the estimated value of log 1 is smaller than critical value. So we do not reject Ho. Therefore, log 1 is not significantly related to the price of CPO. For 2 Reject Ho if | 2.58 | > 1.711. In this case, we can conclude that the estimated value of 2 is greater than critical value. So we can reject Ho. Therefore, export is significantly related to the price of CPO. For 3 Reject Ho if | 1.33 | > 1.711. In this case, we can conclude that the estimated value of 3 is smaller than critical value. So we can reject Ho. Therefore, log of CPI is not significantly related to the price of CPO. We can also using p-value approach to test the hypotheses. Below is the result, indication the probability of the t-test. Therefore, we can conclude that only variable export is significant at 0.05 significance level to the price of CPO.

Table 7: The t-value of The Variable Variable ER EXPORT CPI Estimated t-value 0.715445 2.725543 1.258915 Prob. 0.4812 0.0118 0.2202 Interpretation Not significant Significant Not significant


4.2.2 The F-test

Although R2 and Adjusted R2 measure the overall degree of fit of an equation, they dont provide a formal hypothesis test of that overall fit. Therefore, F-test is needed to test overall significance. The hypothesis for the F-test is as below. Ho : 1 = 2 = 3 = 0 Ha : Ho is not true. Critical value for F-statistic at alpha 0.05 is 3.01 Therefore, F-value 8.59 is greater than F-statistic and we should reject Ho. We can conclude that at least one of the coefficients is not equal to zero. This implies that there is significant in the relationship between independent variable and dependent variable as a whole. The table 7 below shows the probability value of the F-statistic.

Table 8: The F-statistic of The Overall Variable Value F-statistic Prob(F-statistic) 8.498011 0.000506

It can also be interpreted as; the F-test is 8.498011 which using the p-value is 0.00475 where it means that, as a group, all the independent variables are significant relationship with the dependent variable at 0.05 significance level.



The results of estimates are generally in accordance with theories and hypotheses. This can be seen from the sign, which generally are expected. So the model that we use is model 2 that is as below:

MPOP = 392.32 + 119.30ER + 0.025EXPORT + 43.92CPI

First, lets interpret this result of the multiple regressions. As expected, there is a positive relationship between exchange rate (RM to USD) and domestic price of CPO. If the exchange rate is increase (depreciate) the domestic price will increase. On average, the domestic price increase about RM119.30 if the exchange rate increases by RM1. The sign for export also indicates that a positive relationship with price of CPO. On average, the domestic price increase RM0.24 when export increases by RM10. CPI also indicates a positive relationship where, when the increase in CPI will also increase in price of CPO. On average, increases in 1 percent of inflation will make the price of CPO increases by RM43.92. The R-squared is 0.515093, which shows that, 52% of the variations in the price of crude palm oil can be explained by the exchange rate, export and consumer price index. The 48% of the variations can be explained by other omitted independent variables.




The result shows that the effect of the fluctuation in price of CPO is determined by the exchange rate, export of palm oil and also consumer price index. The export of palm oil is significantly related to price of CPO. Based on the study done by Mohd Nasir A. et al (2004), the export has become a significant component in terms of influencing the co-movement in price of palm oil in the market. The study also reveals that the export is expected to be positive in relation to the CPO price. However, exchange rate and consumer price index are not significantly related to price of CPO. The study done by Mohammad Alias and Tuck Cheong Tang (2005) reveal that the significance of the relative price level lends empirical support for some form of price policy. It can be seen from the response of the industry to the pegging of the ringgit to the US dollar in September 1998. For this reason, the fluctuations of price of CPO not mainly reflected by the changes in the exchange rate regime in Malaysia. Even though it will impact in a positive trend towards the price of CPO. The consumer price index reveals that it is not significantly related to the price of CPO. Based from the literature review on Simone Pfuderer and Maria del Castillo (2008), the changes in agricultural prices have historically not been fully reflected in consumer prices. It also revealed that the share of the crude palm oil in the consumer product is smaller in comparison to the end of the product price. Thus, the study said that only extreme and prolonged peaks in price could lead to slightly higher consumer prices. The conclusion from this research is that the fluctuations of price of CPO are not fully impacted the growth of the economy in Malaysia. However, it will significantly be impacted if the trade of palm oil increases. Thus, it can also reflect the growth of the industry. This has 34

given many contributions to the export earning from the agriculture sector to the growth of the economy in Malaysia. The volatility of commodity prices affects the income of smallholder who depends on commodities for their livelihood. Therefore, the Government has introduced several measures to assist smallholder in time of depressed prices, such as promoting integrated farming to diversify risks and providing grants for replanting with other remunerative crops.


There are several recommendations that can be made from this study. Firstly, more research and development (R&D) undertaken by both the public and private sectors should be done. It has contributed significantly to the remarkable development of Malaysias palm oil industry. Such efforts will continue to increase the use of palm oil, which will generate added value to oil palm products. From the result, we can see export value of palm oil is significant to the variability of the price of CPO. Currently, Malaysias palm oil exports are in the form of basic products, and they have to compete directly with those from competitively priced neighbouring countries. This has affected Malaysias palm oil market share in countries such as India, the EU, Bangladesh and the People in Republic of China. In order to contribute to the economic growth, Malaysia needs to continue to diversify and promote its products into higher value added intermediate products such as biodiesel as well as finished products to enhance its image as an exporter of high quality products for the world market. Therefore, it is important as Malaysias position as the leading producer and exporter of high quality palm oil products. There s a need to formulate a national brand to project the sustainability and high quality standards of Malaysia palm oil.


Other factors that can help are to promote the export of palm oil are shipping and freight rates. The rates are major factors in determining the growth of palm oil exports as well its competitiveness. Competition in the world market is increasing in tandem. This situation is being fully exploited by some of the major palm oil importing countries by way of tariff preferential treatments for CPO (tariff escalation between crude and processed palm oil). Malaysia palm oil is unable to enjoy the tariff, as export of CPO is not fully encouraged by the country in order to maintain the supply for domestic consumption. Therefore, Malaysia has been imposed with the export duty for CPO. However, the study done by Nasir Amirrudin, 2003 said that the Malaysia has allowed duty free exports of CPO by certain selected big companies and there is no duty on exports of processed of palm oil (PPO). Currently, the main thrust of the future development of the oil palm industry is to become modern, dynamic and competitive industry by 2020. This industry is expected to experience growth momentum in the production and export of palm oil in tandem with the expected increase in demand of the world market, which by then will be fully liberalized. The competition among Malaysia and other palm oil as well as oilseeds producing countries in the global oils and fats market, is expected to become mere intense with regards to price competitiveness and quality. For contributing towards more of this research topic, it can also be expanded to other macroeconomics variables. Therefore, this type of research should encourage further study as it contributes significantly not only towards the Malaysian Palm Oil Board but also to the government to make their policy. This research can be also being expanded another methodology. The forecasting is a useful tool to predict the price of CPO. It is vital to facilitate efficient decisions to the market forces. They are also important on giving information to the producer for the decision making 36

and getting the profit for their firm directly and contributing to the growth of the economy, indirectly. In the personal opinion that the researcher should conduct further additional studies in this matter because it will give a more thorough understanding, especially in relation to the researcher role and current position. It is also presenting the opportunity to contribute by publishing a journal under current job capacity. This will also help develop a confidence and prepare for a better job position, a position that comes by understanding the job scope more.



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