[Jpn. J. Rural Econ. Vol. 18, pp. 51-55, 2016]
Potential Malaysian Profits from Sustainable Energy Sources in European Markets Koichi Yamaura 1* This study proposes a new framework to include individual European countries, largely ignored in previous studies, to analyze the market margins of Southeast Asian exporters in world markets of sustainable energy trade. We find that the German and Dutch markets underestimate exporter margins compared with the whole EU market. Belgium and France have close and higher magnitudes of market margins, respectively. Another result of interest is that the United Kingdom (U.K.) is insignificant. Malaysian palm oil exporters are price takers in the U.K. where the sustainable energy share of energy production is one oflowest in EU-27.
Key words: sustainable energy sources, residual demand elasticity, market power
1. Introduction
Several recent studies of biofuels indicate that the biofuel
Replacing petroleum-based fuels with renewable energy
industry will have a negative impact on both food prices and
sources has become important to reducing global climate
the environment. Sexton and Zilberman (2008) reveal that
change and helping to achieve a sustainable energy supply.
deforestation would be a result of allocating massive land for
Many alternatives exist for renewable energy sources.
plantations to provide raw material for the biofuel industry.
Primary sources of renewable energy are corn and sugarcane
Their study also emphasizes that this trend will hurt the small
for ethanol, and soybeans, canola, and palm oil for biodiesel.
farmers world-wide and create concentration in the
However, much discussion and research remain as to the
agricultural industry.
significance ofbiofuels in world energy supplies. "Biofuels is the biggest market failure ever seen" (Stern
Currently, palm oil is for food oil, energy and biodiesel use. Palm oil originally and mainly uses for food oil in the world
2006). This statement reflects the importance of studying
including West Africa, Brazil and Southeast Asia as cooking
biofuels as an alternative energy source from the perspective
oil. Palm oil-food oil is widely used for variety of
of sustainability and economics. It is important to consider
convenience food such as instant noodles and snack food.
whether biofuels will become a significant global energy
After 2000, palm oil had begun to be used for biodiesel fuel
source, especially in countries that must import large
as sustainable energy sources.
quantities of energy resources although Food and Agriculture
In Southeast Asia, where palm oil is the main raw material
Organization of the United Nations (FAO) reports that
for biofuels, the biofuel industry is already harming the
biofuels including ethanol and biodiesel have both positive
environment via massive deforestation (Fargione et al. 2008).
and negative impacts on food security and agricultural and
This can have important consequences for countries who
rural development (FAO 2008). Biofuels are the key to the global effort to reduce greenhouse gas (GHG) emissions, one of the main sources of
import palm oil for biofuel because the fuel may not be considered renewable due to the deforestation for its production.
global warming (IPCC 2007). Many governments and
Market power may exist in world markets for palm oil due
industries expect biofuels to be the main sustainable
to high market concentration and/or state trading behaviors.
renewable energy during this century. Therefore, many
The existence and degree of the market power in those
researches focus on the palm oil industry, including
markets have important implications for world agricultural
production cost (Barlow et al. 2003), market structure (Chalil
producers, consumers, and governments.
2009), and trade (Simeh and Kamarudin 2009).
1Tokyo University ofAgriculture and Technology Corresponding author*:
[email protected]
Previous studies have examined and measured the degree
52 of market power in the markets of commodities and other
country. We compare the two sets of results to find out how
agricultural/food products. For example, Carter, MacLarean,
failing to include the individual European country affects the
and Yihnaz (1999) analyze the competitiveness in the world
elasticity estimates and the measures of market power in
wheat market; Goldberg and Knetter (1999) study the market
world palm oil markets.
power that German beer exporters and U.S. linerboard exporters exert in those markets; and Yarnaura (2011, 2014) examines the imperfect competition in the Japanese soybean import market. In the palm oil industry, Chalil (2009) calculated whole
2.Models We employ a model developed by Goldberg and Knetter (1999). The reduced form of the inverse residual demand function for palm oil exporting country i can be specified as:
Indonesian palm oil export market power, and Nakajima (2012) estimated both Indonesian and Malaysian palm oil export market power with the top five import destinations:
lnP;ex,j
=Po+ TJ{ lnQ{ + y{ lniNCi + y~lnLCi + y~T + BilnXR£ + aiDi + E;i
China, India, Japan, Nethelands and Singapore. Trade in individual European countries was not taken into account in the previous studies, instead, the European Union (EU) was the single destination, though each European country has different economic and sustainable energy policies. Over 350 per cent increased use of palm oil in the EU biofuel industry from 2006 to 2012 (Gerasimchuk and Koh 2013) and major uses of this increased consumption is for renewable energy. For this consumption, EU adopted the Renewable Energy Directive (RED) and a revision of Fuel Quality Directive (FQD) in 2009 (EUR-Lex 2009). Asian palm oil has the opportunity to be a major source for biodiesel in Europe. The European demand for renewable energy depends not only on these EU policy, but also on the price and own country policies for sustainable energy. Focusing on whole EU imports and ignoring individual European country demand for palm oil can result in incorrect measures of exporter market power in world renewable energy markets, creating misleading policy and welfare implications. The present paper fills this gap in the analysis of market power in European palm oil import markets. We frrst develop a conceptual model extending the Goldberg and Knetter (1999) approach. Then, we conduct an estimation based on the conceptual model. The residual demand functions are specified and estimated to obtain the residual demand elasticities for palm oil. Estimation results measure the market power of exporters in European markets. For the purpose of comparison, the same data provides estimates of the the EU as the destination 1 ) The exchange rate between Malaysian (Indonesian) export competitor k, which are Indonesia (Malaysia), Argentina and Thailand, and European destination country j. 2) We intended to gather palm oil trade data for all EU and non-EU
where P;ex,j and Q{ are the price and quantity of country
i's palm oil export to country j. INCi is the personal disposable income in country j, LC i is the labor cost in country j. T is a time trend. Personal disposable income, labor cost and time trend are the demand shifter in the model.
XR£ is the exchange rate between country i's export competitor k and importing country j. 1l The exchange rate is the cost shifter in the model. Di is a dummy of a sustainable energy policy, and E;j is the error term. Country i's export competitor k = Thailand and Argentina. Thailand is the third largest palm oil exporting country. Argentina is one of the top alternative biodiesel source countries of soybeans. In our study, the palm oil exporting country is i =Indonesia and Malaysia, and the importing country j
=
EU-27, EU-15,
Belgium, France, Germany, Netherlands and United Kingdom (U.K). 2 l We include both EU-27 and EU-15 to determine whether EU size is matter. Some EU members do not use Euro currency. Thus, we also add U.K. as non-Euro currency EU member. For the Malaysian (Indonesian) residual demand elasticity (RDE) model, export competitors
k =Indonesia (Malaysia), Thailand and Argentina. Monthly data from December 2000 to December 2013 are used in the estimation. The monthly export price and quantity of Indonesian and Malaysian data for palm oil, personal disposable income in destination country j and labor cost in destination country j are from Eurostat. 3) Original monthly export quantity data for palm oil from Eurostat includes export quantity for food oil, energy and biodiesel fuel. For obtaining palm oil quantity for biodiesel, we calculate each demand of food oil, energy and biodiesel through the ratios
countries in Europe. Because of data limitation, we could complete 7 countries including EU. 3 ) http://ec.europa.eu/eurostat/.
Research Letters
Table 1. Selected Summary Statistics for Malaysian Exporters (n=157)
53
increase in income (or labor cost) for importing country j results in a higher Malaysian palm oil export price in the
Mean
Std.Dev.
Min.
Max.
import market. The expected coefficients of cost shifters are
P~'!;EU27
496.85
161.97
286.09
873.56
negative indicating that a higher exchange rate implies a
P~'!;NL
485.35
158.98
278.83
872.74
lower cost of the export competitors, and a lower Malaysian
Qfr~27
13,712.28
13,929.93
123.39
52,843.89
export price in terms of importing country currency, euro or
Q~~ INCEU27
9,525.08
12,563.16
66.23
51,366.66
pounds.
965,271.80
99,529.09
774,lll
1,123,768
Table 2 shows that the coefficient estimates of the
INCNL LCEU27
45,213.30
4,809.99
36,155
52,170.67
quantities are negative in EU-27, EU-15, Belgium, Germany
95.71
10.93
75.10
114.80
and France as expected. The coefficient estimate of the
LCNL
95.63
15.87
67.70
131.70
quantity in EU-27 is -0.1218 indicating that the Malaysian
XRfgro
11,799.41
1,834.23
8,071.74
16,455.73
palm oil exporters' market margin is 12.2% in the EU-27
XR¥'/r
44.64
4.08
37.86
52.82
import market. Similarly, market margin ofEU-15, Belgium
XR!Jtro
4.33
1.59
0.85
8.65
andFrance are 12.4%, 10.0% and 19.7%, respectively. These
Dummy
0.61
0.49
0
1.00
indicate that EU size (EU-27 or EU-15) is not matter, and
T
79
45.47
1.00
157
Note: 1) We show selected summary statistics for our analysis. Full swnmary statistics for Malaysian exporters including in EU-15, Belgium, Germany, France, and U.K., and for Indonesian case are available from author upon request. 2) AR: Argentina, JD: Indonesia, MY: Malaysia, NL: Netherlands, and TH: Thailand.
of EU-27 Palm Oil Consumption by Use (Gerasimchuk and Koh 2013) in each country (region). The monthly exchange rate between another palm oil export competitor k and importing destination countryj are from PACIFIC Exchange Rate Service, the University of British Columbia. 4> Selected variables sample statistics are summarized in Table 1.
Belgium has similar market margins withEU-15 andEU-27. This result is consistent with previous study (Nakajima 2012) that the Malaysian profit margins in the other world major markets: Chinese and Indian palm oil imports are 7.8% and 13.7%, respectively. France has relatively higher market margins (19.7%) indicating that Malaysian exporters has larger margins in France comparing with whole EU market. Policymakers in these countries are able to use market
margin in the EU for their individual country policy. One interest is the result in Germany that has 5.1% margins. Nakajima (2012) shows the Malaysian margin in the Singaporean market is 3.3%. The market margin in Germany is not too low but lower than that in EU-27. Germany is the second largest country which consumes palm oil for biodiesel
3. Results The RDE models account for possible contemporaneous correlation between the RDE equations, and endogeneity issues in each equation. The three-stages least squares (3 SLS) method estimates this trade model. Autocorrelation is corrected in all equations. The heteroskedastic-consistent standard errors are reported. This study measures the Southeast Asian palm oil exporter market power not only in the EU market but also in individual European destination
market margin in the EU, it may mislead Malaysian and/or German sustainable energy policies. Another interest is the United Kingdom. The coefficient estimates of the U.K. is 0.404 but statistically insignificant. Therefore, Malaysian palm oil exporters' market margin is zero making them price takers in the U.K. The U.K. is the only country to reduce palm oil consumption for biodiesel
markets. In the estimations of the RDE model, our focus is the coefficient estimates of the quantity
fuel in 2012. Therefore, Germany may have more market power in the Malaysian-German trade. If a policymaker uses
f!{
that indicates
Malaysian palm oil exporter market margin in importing country j market, have the expected negative signs since the residual demand curve is downward sloping. The expected coefficients of demand shifters are positive indicating that an
from 2006 to 2012 in Europe. Therefore, Malaysian exporters are price takers in the Malaysian-U.K. trade. The coefficient estimates of the Netherlands is 0.1075 and statistically significant indicating that Malaysian palm oil exporters has negative market margins. This is similar to Nakajima (2012) that Malaysian market power is zero in Dutch market. Netherlands is the largest country consumed
4) http://fx.sauder.ubc.ca/.
54
Table 2. Estimation Results of the Malaysian RDE Models (3SLS) Germany
Netherlands
U.K.
-20.883
3.6661
15.308***
16.447***
(20.370)
(7.0297)
(3.0137)
(2.9734)
-0.1973***
-0.0509**
0.1075***
0.0404
(0.0207) -0.5298**
(0.0371) -0.9067***
(0.0281)
-0.0929
(0.0412) -0.9520**
(0.6489)
(0.4268)
(0.2197)
EU27
EU15
Belgium
0.8875 (2.6507)
0.4339 (2.8949)
45.301 ***
lnQky
-0.1218***
-0.1235***
(16.269) -0.1001 *
(0.0350) -0.2343
(0.0605)
lniNCj
(0.0345) -0.2403 (0.1732)
(0.1746)
Intercept
lnLCj
lnXRfv lnXR?H lnXR1R Dj
T
France
0.2714
-0.1940
-0.1902
-0.1042
0.3558
(0.2538) -0.1243
0.1492
(0.2501) -0.7265**
(0.2210)
(0.2226)
(0.5435)
(0.3496)
(0.2941)
(0.3105) 0.1403**
0.0613
0.0586
(0.8710) -0.2094
0.0135
0.1473**
0.1400***
(0.0459)
(0.0463)
(0.1752)
(0.1055)
(0.0654)
(0.0424)
(0.0602)
0.5988***
0.6295***
-4.5087**
3.4997
0.5716
-0.2075
-0.7675***
(0.1742)
(0.1950)
(2.1857)
(2.2899)
(0.5370)
(0.2823)
(0.1921)
0.0633 (0.3480)
0.0647
1.6056
-1.3699
0.1395
-0.0706
-0.4181 *
(0.3498)
(1.1567)
(1.4579)
(0.0642)
(0.2230)
0.0468
0.0497
0.1062
-0.1187
(0.2087) -0.0419
-0.0717
0.1128*
(0.0478)
(0.0481)
(0.2071)
(0.1237)
(0.0595)
(0.0436)
(0.0593)
0.0083***
0.0085***
0.0171 ***
0.0061 **
0.0058***
(0.0013)
(0.0013)
(0.0042)
(0.0027)
(0.0016)
0.0039*** (0.0012)
0.0053*** (0.0012)
R2 0.8393 0.8391 0.3166 0.6486 0.7293 0.8633 0.7803 Note:l) *,**,and*** indicate coefficient estimates are statistically significant at the 10%, 5%, and 1% level, respectively. 2) Dependent Variables: Prices of Malaysian Palm Oil Exports (in Euro except U.K.). 3) U.K. uses exchange rate between pounds and competitors. 4) The heteroskedastic-consistent standard errors are reported. both palm oil for biodiesel fuel, and the sum of palm oil for
different government policies for sustainable energy.
food oil, energy and biodiesel fuel in Europe. Therefore,
This paper proposes a new framework to include
Netherlands may control the market and have stronger
individual European countries, largely ignored in previous
market power than Malaysia.
studies, to analyze the market power of Southeast Asian
Similarly, the estimated results of the RDE model for
exporters and European importers in European markets of
Indonesian palm oil exporters in European destination
renewable energy trade. The framework is applied in an
markets show that market margins oflndonesian exporters in
empirical study of European palm oil markets. The empirical
EU are higher than that in German markets. 5>Therefore, this
analysis of European palm oil markets can provide more
study finds that Southeast Asian palm oil exporting countries
accurate estimation results of residual demand elasticities and
have relatively lower margins in some European destinations,
better measures of the market power in European palm oil
e.g., Germany, than thatinEU-15 orEU-27.
markets. The model of the German and Dutch markets
4. Conclusions People expect biofuels as one of keys for reducing GHG
underestimate Southeast Asian exporter margins compared with the model considering the whole EU market as one
emissions and future global warming. Especially in the EU
destination. Belgium and France are close and relatively
countries, where people have high motivation for global
higher magnitudes of market margins, respectively.
warming and renewable energy, and curiosities about
Another result of interest is the United Kingdom is
biodiesel by palm oil for energy. However, EU countries have
statistically insignificant. This indicates that the Malaysian
5) Estimation results of the Indonesian RDE models are not reported in this study. However, market margins of the Indonesian palm oil exporters are similar magnitudes and signs to those in
Malaysia. Estimation results are available from the author upon request.
55
Research Letters palm oil exporters are price takers in the United Kingdom where sustainable energy share of energy production is one oflowest and decreased biodiesel fuel use from 2006 to 2012 inEU-27.
and Market Power in Vegetable Oil Export Market. Ph.D.
Dissertation. University ofTokyo. (In Japanese.) Sexton, R. and D. Zilberman. (2008) Biofoel impacts on
climate change, the environment and food, Report to the
The model considered the whole EU market as one destination cannot apply to some Malaysian exporters margins in individual European destination markets.
Renewable Fuels Agency. http://www.ncsu.edu/cenrep/res earch/documents/RFA.pdf. Simeh, M.A. and M.F. K.amarudin. (2009) An Overview of
Southeast Asian renewable energy sources have less
Malaysian Palm Oil Market Share in Selected Markets. Oil
potential market margins in Germany and/or Netherlands
Palm Industry Economic Joumal9(1 ):29-36.
where there are more enthusiastic sustainable energy policies or are price takers in the U.K.
Stern, N. (2006) The Economics of Climate Change: The
Stem Review, Cambridge University Press. Yamaura, K. (2011) MarketPowerofthe Japanese Non-GM
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