ABSTRACT:
Indonesia and Malaysia are the major producers of palm oil in the world. Together they contribute almost 87% of the world production in 2007, while in the export market, they contribute 91% of the world palm oil export. This article analyses Indonesia’s palm oil position in the world market. A two-stage demand equation was constructed. The first equation analysed the world demand without considering the source of the product. Meanwhile, the second equation considered the source of the product using the almost ideal demand system (AIDS) approach. Considering the stationarity of the data, the error correction mechanism (ECM) was employed. The result shows that the increase in the world demand for palm oil is mostly contributed by the increase in world income. In addition, palm oil products from Indonesia and Malaysia are complementary to each other rather than competing. Therefore, both countries should co-operate in order to increase the world demand for palm oil in the future.
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