ABSTRACT:
The palm oil sector has faced various challenges throughout the past decade. Climate variability is one of the major challenges to the Malaysian oil palm industry. In order to achieve higher production, oil palm needs an average maximum temperature of 29oC-33oC and an average minimum temperature of 22oC-24oC. Variability in climate leading to the development of El Niño and La Niña events, thus, affects the production of palm oil. This study focuses only on the prolonged dry and hot weather phenomenon known as El Niño. So, the following question was considered: What is the relationship between the El Niño phenomenon and Malaysia’s palm oil production? Variations in crude palm oil (CPO) production, fresh fruit bunch (FFB) yield and Ocean Niño Index (ONI) from January 2007 to December 2016 (n= 120) were analysed, based on a multivariate co-integration approach called the Vector Error Correction Model (VECM). The study found that in a long run, FFB yield and ONI influenced total palm oil production. A significant error correction term (ECT) and negative coefficient value (-0.233) show that an adjustment is needed in a short-run disequilibrium towards achieving a long-run equilibrium. The higher the value, the quicker is the adjustment needed towards a long-run equilibrium. The value of ECT showed that an adjustment of 23.3% is needed each month towards achieving a long-run equilibrium. It can be concluded that in order to gain higher CPO production, a longer time is needed because it is influenced by FFB yield and ONI. Hence, the results from this study will be able to help policymakers be aware that owing to extreme weather and its implications on palm oil production. A better irrigation system or in-depth R&D on the advance technologies need to be implemented to offset the negative effects of this phenomenon.
Keywords: El Nino, CPO production, FFB yield, Ocean Nino Index (ONI), error correction term (ECT)
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