Supply response of natural rubber production in Thailand

Abstract

In the Thai economy, natural rubber is a major export crop and the natural rubber sector is an important source of employment. A key issue in the analysis of natural rubber production is its supply response to economic incentives. There are several empirical studies of the supply response of natural rubber in Thailand, but knowledge gaps exist. First, since most apply Nerlovian models, their models have an inadequate dynamic structure. Second, ordinary least squares is generally applied to potentially non-stationary data, so the results may be spurious. Third, the results may be biased because many studies omitted important variables. Finally, there is no consideration of risk. It is essential to seek alternative explanations of what and how both price and non-price factors cause changes in natural rubber production using modern econometric approaches and contemporary data. Economic theory implies that the supply of a perennial crop depends on own price, the prices of competitive crops, input prices, and non-price variables, and risk and uncertainty. The time series data on these variables are examined for unit roots. Most variables are non-stationary and Johansen‟s cointegration approach is used to estimate both output and acreage-yield models. We find that unique long-run relationships exist in both models. However, weak exogeneity tests show that the rubber price in both the output and acreage equations is weakly exogenous. We therefore reformulate the output and acreage equations by setting rubber price to be weakly exogenous. Output in the output model is now weakly exogenous and there is no long-run output relationship. Thus, an output supply response model appears inappropriate to explain the supply response of rubber production of Thailand. In the acreage response model, vi we find a unique long-run relationship between the planted area and the rubber and fertiliser price. Results indicate that the estimated long-run own price elasticity of rubber planted acreage is 2.16, which is higher than those in previous studies, while the elasticity of rubber planted acreage in response to a change in the replanting subsidy is estimated to be 0.65. The estimated short-run price elasticity of rubber planted acreage is very low at 0.03. We also find that there is a unique long-run relationship between yield, the fertiliser price, and rainfall, but non-normal residuals might affect statistical inference. The long-run elasticity of yield with respect to the fertiliser price is estimated to be -5.50 while own price has no effect on yield. Rainfall has a negative effect on yield. Impulse response analysis shows that a shock in the replanting subsidy leads to a continual increase in acreage, and this might imply instability of the model. A one standard error shock in the fertiliser price causes a decrease of 7% in the yield; this effect is permanent and yield takes around seven years to restore to long-run equilibrium. Our estimates suggest that farmers in Thailand respond to price incentives. Low estimated short-run and high estimated long-run price elasticities of acreage response imply that rubber farmers only adjust planted area in the short run in response to a price change by a small amount, whereas they make substantial adjustments in the long run. Therefore, any form of pricing policy requires a long lead time to take effect. Since small increases in the price of rubber lead to large increases in the planted rubber acreage, if the government aims to increase rubber acreage, the rubber price should not be allowed to fall. The government should develop domestic markets particularly central rubber markets, encourage the establishment of farmer groups, stimulate more domestic demand, and co-operate with other rubber producing vii countries to intervene in the world market. Moreover, the government can stimulate the expansion of acreage planted in the long run by increasing the replanting subsidy. In our yield response model, the policy implication is that a sufficient amount of good quality fertiliser at reasonable prices should be provided. Also, the government should support research and development into rubber cultivation and harvesting, particularly those on integrated plantation, and then disseminate this knowledge to farmers.