Author : Tan Juat Hong

Summary : This study presents a dynamic, simultaneous-equations model of price and quantity adjustments for Malaysian cocoa exports in 1961-1990. Price determination was explicitly modelled. A review on the recent development of Malaysia cocoa in relation to world trade was included. Cocoa is a commodity produced exclusively in tropical developing countries and consumed mostly in industrial countries. Malaysia's production in 1989/90 accounted for 10.5 percent of the world's output. Of the total production, about 82.4 percent was exported in the form of dry cocoa beans. The balance was exported in semi-processed forms. The empirical estimates of real price and income elasticities of demand for Malaysian cocoa exports were greater than unity. World cocoa stock level exerted a negative effect on export demand. The estimated price elasticity of export supply from the equilibrium model was low (0.30). Non-price determinants play a relatively significant role in influencing export supply. The domestic productive capacity exerts a direct impact on export supply. There appeared to be a negative relationship between domestic demand pressure and export supply, which implied that opportunity costs were involved in exporting. In the disequilibrium model, the domestic supply shock was positive and significant, thus confirming the hypothesis that domestic production above trend is export-biased. The time trend coefficient was positive and significant in the supply equations of both models. Real commodity price of Malaysian cocoa exports was significantly influenced by the demand-side rather than the supply-side factors implying that Malaysia is a price-taker. The general prospects for Malaysian Cocoa exports can be viewed in short and long-run perspectives. In the short-run perspective, there is indication of supply-side constraints. In the long-run perspective, Malaysia faces a range of policy options. These include exploiting the domestic market to provide a cushion against world cocoa market vicissitudes, thus increasing cocoa-related downstream economic activities through vertical integration and ensuring higher productivity and quality of beans to enhance price competitiveness in relation to world cocoa trade. Future prospects also largely depend on the liberalization of trade restrictions in the importing countries.