ABSTRACT:
This study examines volatility spill over between the domestic prices of selected palm oil products and the major causative factors of the volatility. Empirically, it was found that palm oil has moderate price volatility and a short-term effect in unidirectional and bi-directional price volatility spill over to the domestic prices of selected palm oil products. Since crude palm oil (CPO) is a price leader among the other selected palm oil products, an effort should be made to stabilize its price to minimize volatility in all the other prices. Using the major causative factors of price volatility, a model was developed to forecast domestic prices for the selected palm oil products. The prices for CPO and RBD palm olein (POL) were forecast and found to be good with error of less than 2% with all the directions for prices correct. Stabilizing the palm oil price can be done through market power by a monopolistic producer or forming a producer cartel or through international commodity agreements between buyers and sellers. It is believed that creating an alliance between Indonesia and Malaysia should boost the bargaining power of both countries in setting the CPO price and control output, thereby reducing the volatility of all palm oil products in the future.
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