Crude palm oil prices may fall nearly 7% in the last quarter of 2012

(http://in.reuters.com/article/2012/09/22/india-oils-prices-idINL4E8KM03F20120922)
Malaysia crude palm oil (CPO) prices may fall nearly 7 percent to 2575 ringgit per ton in the last quarter of 2012. Malaysia and Indonesia control almost 90 percent of the palm oil market which Malaysia was a leading producer and next is Indonesia. The competition has heated up since Indonesia changed its palm oil export duty structure.

            Palm oil mill is market structures of monopolistic due to the product differentiation enable the mills to compete. Their product can be differentiating in three areas which are quality, price and marketing. There is large number of firms to compete and free to enter and exit the industry. So, these firms are unable to make an economic profit in the long run and the demand of their product is downward sloping. Each of them are supplies a small part of the total industry and they must be sensitive to the average market price of their product. Since the price of the crude palm oil may fall in last quarter of 2012 and this market structure doesn’t make economic profit in long run, so there might be an amount of firms quitting.

            Assume that if the prices of crude palm oil drop 7% as the Reuters’s report, the quantity demanded for the crude palm oil will be increase. As the law of demand, the lower the price of a good, there will be the larger of quantity demanded. So, there will be an increase of quantity demanded for crude palm oil. Besides, soya bean oil is one of the substitutions of the crude palm oil. According to the Index Mundi which reporting daily prices of the soya bean oil, the price at 29 September is around 3482.07 ringgit per metric ton. This shows that the price of the substitution soya bean oil is higher than the crude palm oil. Hence, there will be no substitution effect on crude palm oil. People will seek the substitutes for a lower price and the price of crude palm oil may fall in last quarter of 2012, so the quantity demanded of the crude palm oil will be increasing. People can afford this product more than previously.

As the diagram 1 shows the demand curve of the crude palm oil. When the prices rises to 100 ringgit, the quantity demanded will be decrease into 40 ton. But when the price of crude palm oil decrease to 50 ringgit, the quantity demanded is increase into 90 ton. This curve shows the willingness and ability to pay of the consumers.

            As for the supply of the crude palm oil from a mill if the price of the crude palm oil falls, the amount will be decreased. The law of supply state that the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied. The quantity supplied of a good is the amount that producers plan to sell during a given time period at a particular price. 

           As you can see through the diagram 3, it shows the supply curve of the crude palm oil. This diagram also represents the entire relationship between the price of a good and the quantity supplied; other things remain the same like resource, number of supplier and technologies. For example, at a price of $70, amount of 30 ton supplied. When the price of crude palm oil is $100, 60 ton of crude palm oil is supplied. The supply curve slope upward; as the price of crude palm oil increase, the quantity supplied increase. Through the diagram show us that in the last quarter of 2012, the quantity supply of crude palm oil will decrease.

            According to Dr Ahmad Ibrahim, the CEO of the Academy of Sciences Malaysia says that export tax of crude palm oil had been decrease from 25 percent to 22.5 percent. The cost of production also will be decrease since the tax had been decreased. With the small duty reduction in crude palm oil will bring this product continue to remain relatively more expensive and less competitive to export the product. Besides, this will encourage larger local sales of crude palm oil to domestic refiners. With the decreasing of the export tax, in the quantity demanded and quantity supplied from the crude palm oil mill will be increase.

            In a nutshell, we assuming that the price of the crude palm oil may be decrease in the last quarter of 2012, there will be a number of firm might quit because they might cannot gain any economic profit in that firm. Besides that, they must be very sensitive to the price of crude palm oil because this firm has a lot of competitors and the competitions between them are very fierce. Next, through the price may be decrease, the quantity demanded of the crude palm oil will be increase because the consumers have higher purchase power than previous since the price become lower. On the other hand, the crude oil palm mill will be decreasing their supply because through the price falls had decreased their profit of selling tons of crude palm oil. Furthermore, with the decrease of export tax, there will be more and more supply from the crude palm oil mill. This is because the cost of product will become lower and gain higher profit. I believe that if the Malaysia government and Indonesian government step up cooperation to implement the stabilize price, so it will be effectively stabilize the price because the combination of two country is about 90 percent of global palm oil. Through the cooperation, the price can be stabilize and maintain in a high profit for every palm oil mills.