World palm oil production and exports have been increasing since the early seventies. If this trend continues and if the consuming countries do not increase consumption, a surplus may occur leading to low palm oil prices and income for the producing countries.
The general objective of this study is to investigate why palm oil imports into the United States increased and decreased drastically over the study period.
The model consists of a world fats and oils price relationship, the United States palm oil demand equation and a stock function, and definitional relationships consisting of quantity of palm oil imported, demanded and supplied, and change in the world price of palm oil. The fats and oils prices were grouped into vegetable oils and animal fats instead of including them individually in the equations to reduce the multicollinearity problem.
The results show that palm oil is a substitute for vegetable oils and animal fats. The results also show that producers of manufactured fats were slow to respond to changes in the fats and oils market conditions.
In the short run, the elasticities are elastic for own-price (-4.14) and cross-price with respect to animal fats (1.90) but inelastic with respect to vegetable oils (0.49). However, in the long run all of the elasticities are elastic. Thus palm oil is competitive in the United States market provided its prices remain lower than the overall fats and oils prices and it can be more versatile in term of end uses.
The stock function estimated shows that palm oil is stored for more than a year. Thus palm oil is held not only for pipeline purposes but also speculation, delay in response and error in judgement.
The demand function was expanded to investigate if there are changes in the parameters over time. While the F statistic is highly significant, the inconsistencies in the expected sign and t values of the coefficients of the unrestricted demand function make it hard to draw firm conclusions about the economic meaning of these results.