However, to produce goods and services, we need resources, including labor, land, entrepreneur, capital and technology. Resources are said to be scarce because their supply is limited. In he next five years, the challenges faced by the commodities industry are not only from the industry itself but also threat from other industries. 3. 2. 1 Land use Concept of land in economy refers to natural resources in this world. Land supply is constant. Commodity is a land and labor incentive sector. The expansion of commodity plantation will affect other economic activities such as the development of residential and commercial areas and agriculture.
However, the growth of population requires more land for residential and commercial area. Moreover, the total land area which is suitable for agriculture is reaching its saturation point. To figure out issues of land, am using theory of production which is production possibility curve to explain land-use constraints on expansion of commodity plantation. Production possibility curve is a graph showing the maximum output that can be produced by using the economic factors of production that available.
Production by plantation Graph 1: Changes in technology, indifference curve switch to the right Graph 1 shows combinations of output that can be produced by the country efficiently by using the economic resources available. Land available permits country to produces combination between production by plantation and existential/commercial area along point (a) to point (c) at ICC line. Point (d) is a combination that country cannot produce. In long term, ICC line can switch to ICC” when level of technology changes. To shift right the ICC line, our country must go by research and development (R&D) in order to develop a new technology. . 2. 2 Sustainability issue Malaysia needs to develop a special brand for commodities that reflects the quality of high value added products which are sustainable at a competitive price. I am using theory of product differentiation to figure out the sustainability issue. In international market, firms from each country compete against each other by produces differentiated products. It is because to ensures sustainability of their products. Economists distinguish between two types of product differentiation: vertical and horizontal.
Vertical differentiation is about inferiority or superiority. Two products are vertically differentiated when consumers consider One product better or worse than the other. Horizontal differentiation is a situation involving two products such that some consumers view one as a poor substitute for the other and thus will buy the one even if its price is higher differentiation which is a part of barrier to entry. Without the quality of high alee added product, our country cannot compete in international market even though our country’s products prices are lower than the others.
Panel (a) Price Panel (b) Graph 2: Horizontal differentiation and Malaysia firm’s demand curve Panel (a) shows that the Malaysia firm’s demand curve with low quality in high value added product. The demand is quite sensitive to a change in its own price and the prices of its rivals. A given increase in price, from P to P’, holding competitors prices fixed, lead to a large reduction in the quantity demanded. Moreover, when competitors reduce their prices, the firm’s demand curve hafts leftward, from D to D’, by a large amount. Panel (b) shows that the Malaysia firm’s demand curves with high quality in high value added product.
The firm’s demand is not as sensitive to a change in its own price, and when competitors cut their prices, the firm’s demand curve shifts leftward, from D to D’, by a relatively smaller amount. 3. 2. 3 Labor and productivity issues For the past few years, other producing countries such as Thailand, Indonesia and Vietnam had taken over Malaysia as the main producer for palm oil and rubber. With cheap labor, these countries are able to export raw commodities with lower prices than Malaysia. Therefore, due to high production cost, the exports of our raw commodities were unable to compete in global market.
Indonesia Malaysia Year Production (1000 Met) Growth 2004 13,560 13. 28% 15,194 13. 22% 2005 15,560 14. 75% 15,485 2006 16,600 6. 68% 1 5,290 2007 18,000 8. 43% 17,567 14. 89% 2008 20,500 13. 89% 17,259 -1. 75% 2009 22,000 7. 32% 17,763 2. 92% 2010 23,600 7. 27% 18,211 2. 52% 201 1 26,200 11 . 02% 18,202 -0. 05% 2012 28,500 8. 78% 19,321 6. 15% 2013 31,000 8. 77% 19,400 0. 41% Table 1. Indonesia and Malaysia palm oil production 2004-2013 For example, Indonesia palm oil production had exceeds Malaysia palm oil reduction since year 2005.
Now, Indonesia palms oil production growth far than Malaysia. Table 1 shows that the Indonesia palm oil production exceeds Malaysia palm oil production at year 2005. Graph 3: Indonesia palm oil production exceeds Malaysia palm oil production at year 2005 Graph 4: Annual growth Indonesia & Malaysia palm oil production Rapid growth Indonesia palm oil production results Malaysia production palm oil market share getting smaller even though the four-firm concentration ratio in this market is getting higher.
Economists use several different quantitative metrics to describe the Truckee of a market. One common metric is the four-firm concentration ratio (or CAR for short). This metric calculates the share of country production accounted for by the four firms with the largest production in the country. If concentration ratio is 0%, no firm has a market share namely purely competitive. If concentration ratio is 1 00%, the four largest firms completely dominated the market.
Rank Country Production (1000 MET) 2 3 Thailand 2,150 4 Colombia 1,035 5 Nigeria 930 6 ‘Papua New Guiana Ecuador 365 Honduras 430 Cote Divorce 10 Guatemala 350 11 Brazil 340 12 Costa Rica 270 13 Cameroon 14 Congo 215 5 Ghana 135 16 Philippines 122 17 Mexico 83 18 Angola 58 19 Venezuela 55 20 Dominican Republic 53 21 Guiana 50 22 India 23 Benign 24 Peru 45 25 Liberia 42 26 Sierra Leone 36 27 Togo 9 Total 60,255 Table 2: Palm Oil Production by Country in 1 000 MET, 2013 Table 2 shows palm oil production by country.
Since year 2011, Indonesia, Malaysia, Thailand and Columbia are four firms with largest palm oil production in market. The CAR for these four firms are calculated by summation of market shares from these four countries. Market Share (%) 48. 97 34. 02 1,892 3. 54 945 1 . 77 Four-firm concentration ratio (CAR) 88. 30 Table 3: CAR and market share for each country, 2011 49. 60 33. 63 2,135 3. 72 974 1 . 70 88. 65 Table 4: CAR and market share for each country, 2012 production (1000 MET) 31 ,oho 51 . 45 32. 20 3. 57 1 . 72 88. 4 Table 5: CAR and market share for each country, 2013 Tables 3, 4 and 5 shows CAR and market share for each country for years 201 1-2013. Table 3 shows that the market share for Malaysia is 34. 02% and CAR is 88. 30% in year 2011. Table 4 shows that the market share for Malaysia is 33. 63% and CAR is 88. 65% in year 2012. Table 5 shows that the market share for Malaysia is 32. 20 and CAR is 88. 94% in year 2013. As we can see, the CAR for three years consecutively have increased but market share for Malaysia in the same period is getting smaller.
It is because Indonesia is enjoying comparative advantage on the amount of labor going into the production of the commodity more than Malaysia. In the general, to attract the interest of the local labor going into the production request high cost production. It is because local labor (especially younger generation) do not interested with agriculture sector and demand a high income/salary. The increased cost of production will affect the income of smallholders and plantation companies. They will transfer the increased cost of production on price of commodities.
When the phenomenon is there, the export of our raw commodities (in this case production of palm oil) are unable to compete in global market. Yet, our crop production of crude palm oil and pepper do not show significant improvement. Instead, the yield production decreased for rubber, timber and cocoa as shown in Table 6 below. Commodity Performance 201 2 performance 201 3 Performance Palm Oil (COP) (‘000 Tones) 18,912 18,785 19,216 Rubber 996 922 824 Logs (‘000 cue. M) 15,985 15,428 6,086 Sawn timber 3,995 3,946 3,105 Cocoa (‘000 Tone) 8 pepper 25. 6 26. Table 6: Production of Commodity, 2011 2013 Back to top, labor is considered one of the five factors of production (along land, capital, entrepreneur and technology). Even now, we are depending very hard on foreign labor from Indonesia and Bangladesh to overcome this problem especially in the private plantation. Thus, Malaysia needs to shift from exporting raw products of commodities to the production of high value added products.