Interest Rate and Supply Response of Oil Palm Producers in Indonesia

Supply response analysis of agricultural products remains feasiblein agricultural economics because of its relevance for producers andpolicymakers. This study estimates the extended Nerlovian model ofsupply response for the Indonesian oil palm producers, namely stateowned, private-owned, and smallholders. It mainly focuses on the impactof interest rate variation that reflects the cost of borrowing by producersfor replanting purpose. The data covers annual observations between1970 and 2017. The autoregressive distributed lag (ARDL) procedure andits non-linear form (NARDL) suggest a long-run relation of Indonesia’spalm oil supply response function, except for smallholders. In the longrun, a negative expected interest rate increases palm oil supply, especiallyfor the state-owned and private-owned producers. Oil palm producersare responsive to other supply response variables viz. relative prices,and government expenditure in the short-run. Similar findings observeif expected money supply replaces expected interest rate, to capturemonetary policy. Monetary policy by Bank Indonesia (Central Bank ofIndonesia) has an important implication to the palm oil sector.