World Bank Commodity Models

Volume Ib. Papers Presented at the Wcrkshop on Commodity hlodels and Policies,

Aarhus, Denmark, December 14-1 7, 1979

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WORLD BAKK STAFF CO!tlhlOL~I'I3' IYOKKIKG P.4PERS Number o

World Bank Commodity Models

Volume Ib. Papen Presented at the Workshop on Commodity Models and Policies,

Aarhus, Denmark, December 14-1 7, 1979

- Sponsored by: - Economic &dysis and Projections Department

The World Bank - Institute &Economics. University of Aarhus -

The Worli Rank Washington. D.C., 1JS.A

Copyright C - 1381 The l n t m u t d &nL la Rrcmrtructm ad Drvrbpnrnt I na wcuu, a<= 1818 H kf&. N W Wal)un~or\. D C ZOIJJ. U S A

fint pnnlmg Id y 196 1 SccaJ prrntmg Iw 1964 (m two \.duncrl Al n&tr r d

m t h UnrlrJ 9dcr d A m r

m UOlll) TKA UXJW)(lr An E c a m m u C m a OF ITS s m m , PEwomuula Am) PIOSObCrS

V - i l i

TABLE O F COSTE!!TS .

................................................. I . LNTRODUCTLON

................................ . A Producrlon and Exports ............................... . 8 Conruprlon and Imports .......................................... . C P r l c e Trends

111. mDEL STRUCTURE AND ESTIMATION . . . . . . . . . . * . . . . . . . . . . o o o a o e a ~ a o

................. A . Overvlaw of the Model and Past M e l h ....................................... . 8 Supply Analys ls ....................................... . C D e r o d k u l y s l s ..................................... . D Pr lcer and Stock m

............................. IV . MIDEL SIWLATLON AND PROJsCTIONS

.................................... . A Ex-Port S l u l n r l o n ........... 8 . Model Projecr lons and Altarnrrlve Scenarios

V . CONCLUSIONS ..................................................

APPENDIX 11 : TIHE TRENDS IN AREA. YIELD AND PRODUCTION. 1957-1990 . .

THE VOW ECONOW: AN ECOXOHBtRIC WDEL OF ITS STWWRE, PERPORiUNCE AND PmSPECTS 1/

Thir paper a t t e q t r to:

(a ) model the r t ruc ture and , \ a r f o ~ n c e of the vorld tea econoary, taking in to account the c ' rurac tar i r t ic r peculiar t o tea ;

(b) a r r e r r the performance of the model h i r t o r i e a l l y and for project ion purpose#; and

(c) analyze the e f f ec t of a l t e rna t ive policy r c e ~ r i o r on the future developmnt of the world tea economy v i t h empbr i r on projecting fu tu re pricea.

2 . Section XI provider an overview of the vorld tea economy r u a ~ r i z i a g key c h a r a c t e r i r t i c r of the product rnd t racing the p e r f o ~ n c e of key indicators (production, c o ~ u m p t i o n , t rade and prices) . Section I11 containa the model s t r u c t u r e and the econometric e r t i u t e s . In Sectlon I V the h i r t o r i c r h l a t i o n r of the model a r e prerented, together v i t h the extrapolat ion of the w d e l fo r pro jec t ion t o 1990. Soma policy a l t e r ~ t i v e r i n p r o j e c t i e ~ key endogenous va r i ab le s t o 1990 a r e a l s o explored. Final ly, Section V r rnr~ar izer the conclusionr t h a t can be d r a m from the t ea w d e l simulations ( v i t h cophasis an p r i ce projections).

1/ We vould l i k e t o thank Peter Pollak, Jos de Vries and Maw-Cheng Yang for - t h e i r invaluable ass i s tance i n overcoming problems related t o the estimation and simulation of t h i s tea model. Thanks are a l so due t o the many reviewers a t the Aarhus Workshop (especial ly T. Akiyama) f o r t h e i r valuable co-nts vhich have been 1ncorpo;ated i n t h i s paper.

11. AN OVERVIEW OF THE WORLD TEA ECONOHY

3. Ten may bc b r o a d l y c I a s s i f l e d i n t o t v o types--depending on whether t h e t e a l e a v e s a r e f e r a e n t e d ( b l a c k t e a ) o r unfermented ( g r e e n t e a ) . Green t e a p r o d u c t i o n o r i g i n a t e d i n Chinn and I t s cons \mp t Ion a s a d r i n k was f i r s t i n t r o d u c e d I n t o Europe by t h e Dutch r e t u r n i n g from t r a d e w i t h China i n t h e 1 7 t h cer.tury. Commercial b l ack t e n p r o d u c t i o n s t a r t e d i n Assam, I n d i a , i n t h e mid-19th c e n t u r y . 11 S t a r t l n g w i t h t h e B r i t i s h c o l o n i e s , b l a c k t e a p roduc t i 'on h a s s i n c e s p r e a d a l l o v e r t h e t r o p i c s , and I t p r e s e n t l y r e p r e s e n t s a p p r o x i m a t e l y 7s p e r c e n t o f a l l :ea protiucsd. V i r t u a l l y a 1 1 t h e t e a grown i n d e v e l o p i n g c o u n t r i e s ( e x c e p t f o r Taiwan nnd Lndonesia) is b l a c k t e a .

A. Produc t l on and E x p o r t s ---.

4. Uorld t e a production grew by 3.3 p e r c e n t a n n u a l l y from 1961 t o 1977 ( T a b l e 1). P r o d u c t i o n I n c e t \ t r a l l y p l anned economies grew t w i c e a s f a s t a s i n t h e d e v e l o p i n g coun t r ies and , as a r e s u l t , t h e c a n t r a l l y p l anned economies' s h a r e i n u u r l d producr !on i n c r e , ~ s e d from 1 9 p e r c e n t i n 1961 t o 24 p e r c e n t i n 1977, v h l l a t h a t o f t h e d c v e l o p l n ~ c o u n t r i e s f e l l from 7 2 p e r c e n t t o 67 p e r c e n t . k a n u h i l e , t h e L t ~ d u r t r l a l i z e d c o u n t r i e s ' s h a r e r e m i n e d a t a h t 8- 10 p e r c e n t . The r e s p e c t l v e shares of d e v e l o p i n g c o u n t r i e s i n wor ld o u t p u t have changed s u b s t a n t i a l l y : that of t h c b i g g e s t t r a d i t l o n a l p roduce r s , I n d i a and S r i Lanlra d ropped f r o n 55 p c r c c n t i n 1961 t o 4 3 p e r c e n t i n 1977, Mile t h e A f r i c a n p roducc r s i n c r e a s e d t h e i r s h ~ r c from 5 p e r c e n t t o 11 pe rcen t l a r g e l y because o f e x t e n s i v e a r e a cxpans lon I n t h e 1960s ( T a b l e 2 ) . wor ld p roduc t i on g r o v t h (2.6 p e r c e n t a t r i~ t r a l l y d u r i n g 1961-77) h a s , however, been f a s t e r t h a a a r e a e x p a n s i o n because of y i e l d improvements n w n g r e c e n t p l a n t i n g s .

5. The s t r u c t u r e of p r o d u c t i o n of tca h n s a l s o been e v o l v i n g th rough t h e y e a r s . P r o d u c t l o n i n t h e e n r l y y e n r s of t h e t e a i n d u s t r y was th rough " s t e r l i n g " company estates I n the Asian colonies. Hence i n c o u n t r i e s l i k e I n d i a , S r i Lan t a and I n d o n e s i a ( t h e e n r l y e n t r a n t s i n t h e p r o d u c t i o n o f t e a ) , t h e e s t a t e p r o d u c t i o n s t r u c t u r e s t i l l p r edomina t e s , b u t n w p r i m a r i l y u ~ d e r l o c a l p r i v a t e s e c t o r w n e r s h i p . I t is o n l y i n a f e v A f r i c a n c o u n t r i e s l i k e Kenya a n d Tanzan i a (whose t e a p r o d u c t i o n u a s i n t r o d u c e d l a t e r ) that s ~ l l h o l d e r s c o n s t i t u t e a l a r g e p r o p o r t i o n of t o t a l tea a c r e a g e . S t a t e owne r sh ip of e s t a t e s h a s 3 1 9 0 i n c r e a s e d i n many o f t h e s e c o u n t r i e s i n r e c e n t y e a r s and o v e r a l l a r e a expans ion h a s , i n any c a s e , been i n c r e a s i n g l y

' de t e rmfned by n a t i o n a l hea development p l ans .

6 . Although p r o d u c t i o n I n d e v e l o p i n g c o u n t r i e s g r e v h i s t o r i c a l l y a t 2.6 p e r c e n t a n n l ~ a l l y , t h e i r e x p o r t s expanded a t o n l y a b o u t 1.7 p e r c e n t (Tab l e 3) l a r g e l y because domes t i c c o n s t n p t i o n r o s e f a s t e r t h a n p r o d u c t i o n i n key As i an c o u n t r i e s . For i n s t a n c e , Indi.2 and S r i Lanka's share o f w r l d n e t e x p o r t s has d e c l i n e d even more d r a s t i c . : l l y ttlnn t h e i r s h a r e o f prarluct i o n (from 6 9 p e r c e n t t o 51 p e r c e n t i n 1977). WLth p roduc t i on I n c r e a s e s o u w e i g h i n g p o p u l a t i o n and income growth , A f r i c a n t e a exports grew a t 7.7 p e r c e n r p e r y e a r and i n c r e a s e d t h e i r s h a r e from 9 p e r c e n t t o 19 p e r c e n t i n t h e same p e r i o d .

11 G. S. S s r k s r , nlr World Te;c Fco~~auy , Oxford Univ. P r e s s , 1972. - - - -- - . - - - - -

Table 1: TEA PRODUCTION, BY WIN COUNTRIES AND ECONOHIC REGIONS

Grouch Rate /. 196' 1965 1970 1974/76 1377 1961-77

I n ~ u , t r l a l i r a d Count t i e r 87.0 90.7 125.5 - -- 156.8 167.5 - - 4.5 -

Japan Turkey Other

Asia and Oceania 692.2 738.3 776.0 858.3 940.2 1.6

Ind ia 354.4 366.4 418.5 497.3 560.8 2.9 S r l b n k a 206.5 228.2 212.2 204.8 208.6 -0 .3 Inaoner l* 73.9 79.8 63.5 69.2 73.5 -0.9 Bangladenh 26.5 27.2 31.3 31.7 37.5 0.9 Other 30.9 36.7 50.5 55 .3 59.8 4.2

Kc nya 12.6 19.8 41.1 57 -4 86.3 11.4 Halaui 14.3 13.0 18.7 26 .O 31.7 5 -9 Uganda 5 -1 8.4 18.2 18.5 15.0 8 .6 Mozambique 10.1 10.7 17.0 16.5 13 -8 4 -9 Tanzania 4.5 5.7 8.5 13.6 16.7 9.1 Other 9.8 12.8 16.0 20 -4 25.4 7.4

La t i n A w r i c a 8.8 23.0 34.3 46.3 44.7 8.7

Argentina 5.9 15.5 25.8 35.3 34 .O 11.3.- O t h e r 2.9 7 . 5 8.5 11.0 11.6 8.5- - -

' Cent ra l ly Planned

* Economies 203.5 216.6 294.8 387.1 418.2 5.0 . --- - - - * m

China, Mainland 156.5 158.8 220.0 291.7 309.5 581 USSR 39.6 48.3 66.8 86.3 99.2 5z4 Other 7.4 9.5 8 .O 9.1 9 -5 1.6 ~

WORLD T3TU 1,047.9 1,139.0 1,350.1 1,600.9 1,759.5 -. 3 . 3 - . .--

/a Trend regress ions a g a i n s t time. - Source: PAO, Production Yearbooke, and I n t e r n a t i o n a l Tea Committee.

Table 2: TEA AIW PUHTED, BY HAIN COUNTRIES AND ECONOMIC REGIONS

-( '000 hectarer)- -(a* qua1 g r w t h i n 2) - /a-

I n d u r t r i a l i z e d Count t ier 101.0 123.3 150.6 --- 1.6 - 4.8 - 2.4 -

Japan 48.5 55.5 -7.6 0.9 1.8 1 .4 Turkey 13.5 28.8 . ..O 6.5 14 .O 7.9 Other 0.3 0.1 0.1 -6 -1 0.0 -4.5

Developing Count r ie r 910.7 1,006.8 1,043.6 0.8 - 0.9 - 0.9 - k i a and Oceania 7 817.2 814.8 0.1 C.3 0 . 1

India 331.3 360.1 365.0 0.8 0. 3 0.6 S r i Lak. 235.5 241.9 240.6 0.2 -0 .1 0.1 Indoner ia 135.8 104.1 101.1 -2.5 -0.6 -2.3 Bangladesh 3 7 42.7 43.0 2 .8 0.2 2 .O Other 70.4 68.5 65.1 0.1 -1.0 -0.1

Africa 68.9 1 4 3 0 171.6 6 e l 4 05 6 .O

Kc nya 15.9 49.8 66.0 9 2 6.8 9.1 Ha l a d 11.8 1 5 8 17.2 2 -4 2.1 2 -3 Uganda 6.9 19.1 20.9 8.9 2.0 7 .4 Hot-bique 15.0 15.6 15.8 0.1 0.3 0 -3 Tanzania 6.8 14.0 18.4 5.4 7.1 6.0 Other 1 28.7 33.3 7.5 3.7 6 .9

La t i n America 3 2 42.3 53.3 1.3 5.7 2.1

Argent inr 3Q.7 U . 3 44.4 , 1.0 6.7 1.9 0 Other 6 . 5 8.5 8.9 2.8 1.0 2.7

Cent ra l ly Planned Econodea 280.4 443.2 447.0 --- 2.7 - 2.2 - 2.9 -

'9 China, Mainland 200.0 317.5 350.0 3.2 2.7 3 .6

I USSR 64.4 ?4.7 76.0 1.4 0.6 1.1 Other 16.0 0 21.0 0.7 n -3 0.3 ..

WORLD TOTAL 1,292.2 1,543.3 1,641.2 1.4 - 1.6 - 1.5 - - - -

/a Tread regreeeiona a g a i a r t t h e . - Source: FA0 and I n t e r n a t i o n a l Tea C o d t t e e .

Table 3: TEA EXPORTS, - /a BY WIN COWTRIES AND ECONOMIC REGIONS

Indust r la 11 zed C o u n t r i o 25.1 29.1 53.7 - - - 61.1 - 67.9 - 6.4 -

Not her l ands 0.7 0.9 20.2 21.2 18 .O 30 .3 Uni tad K i -do. 4 . 4 17.8 19.1 25.3 34 -9 4.8 Clruda 0.5 1.3 2.2 2.7 2.7 10.5 Turkey' - 2.6 7 .8 3.9 0.1 10.0 Japan4 8 .O 4.6 1.5 2.9 3.6 -4.7 Other' 1.5 1.9 2.9 5.1 8.6 1 1 5

Dovoloping Countrierr 526.4 587.6 644.0 686.a 706.6 - - 1.7 - Asia and Oceania 470.7 508.1 511.7 521.8 523.7 0.7

India 205.0 201.1 200.2 220.9 224.0 0.3 S r i Lank8 193.1 224.3 208.4 195.9 185.5 -0.4 Indones la 32.2 32.3 36.9 47.9 51.2 3.6 Bangladesh 16.3 22.9 29.4 22.6 22.0 0.6 Other 2 4 1 27.5 36.8 34 -5 4 1.0 3.4

Afr ica 49.1 65.0 108.8 136.5 154.4 7.7

Kenya 12.0 23.3 41.6 56 .9 70.1 10 .3 k l a v i 13.0 13.2 17.7 26.7 29.9 6.3 Uganda 4 .2 6.9 15.1 1 5 .l 15 .O 8.8 Mozambique 9.9 10.1 16.6 14.1 12.3 3.2 Tanzania 3.2 4 .4 7 -1 10.7 12.1 8.- Other 6.8 7.1 10.7 13 .O 15 .O 5.

h t i n b e r ' i c a 6.6 14.5 23.5 28.5 28.5 9 .6 b

Argentiaa 5.4 12.3 19.1 ?2.2 27.8 9.1 Other 1.2 2.2 4.4 6 .3 5.7 10.2

Cen t ra l ly Planned

China; Hainland' 34.3 32.2 30.0 58.3 70.0: 5.3 USSR E 5.7 11.1 9.9 15.1 21.4 1) 5.7 Other' 2.3 3.5 2.3 3.7 5.4 - 5.5

WORLD TOTAL 593.8 663.5 739.9 825.0 871.3 2.4 --- - --- -

* I n d i c a t e s producing coun t r i e s . /a Gro39 e x p o r t s inc lud tng r eexpor t s .

From t r e n d r eg res s ions aga ins t t i n e . - Source: FAO, Production and Trade Yearbooks, and I n t e r n a t i o n a l Tea Committee.

7. Near ly 8 pe rcen t of world t e a e x p o r t s a r e r e e x p o r t s from i n d u s t r i a l - i z e d c o u n t r i e s . T r a d i t i o n a l l y , a l a r g e p r o p o r t i o n of t h e t e a s o l d i n t h e world e c k e t h a s been purchased by a handfu l o f t e a who lesa l ing f i r m s through London a u c t i o n s , and t h e s e f l r a a have blended and reexpor ted ' e s e t e a s t o o t h e r c o u n t r i e s ( i n c l u d i n g deve lop ing c o u n t r i e s ) . Other major rce ' q r t e r s i nc lude t h c Ne the r l ands and t h e USSR. I n r e c e n t y e a r s , t e a a u c t i c .and 4

d a s t i c b l end ing i n key producing c o u n t r i e s have assumed g r e a t e r ; t ance \ and t h e r e e x p o r t s from industrialized c o u n t r i e s have consequent ly d e c ~ l n e d . 11 P r e s e n t l y , a b o u t 25 t~ 30 p e r c e n t of e x p o r t s a r e s o l d through c r o p cont rac ts - and t h e r e s t t h rough a u c t i o n a n r k e t s l oca t ed p r i a a r i l y i n London, I n d i a , S r i Lanka and Ket~ya. Host of t h e a a j o r e x p o r t i n g c o u n t r i e s r e l y on s a l e s through a u c t i o n s ; o n l y some c o u n t r i e s l i k e Argent ina , Indonas l a , Hozambique, Tanzania and Malawi e x p o r t t h e m a j o r i t y of t h e i r p roduc t ion through d i r e c t s a l e s . Uh i l e t h e q u e s t i o n of p r i c e ~ s n i p u l a t i o n by m u l t i n a t i o n a l t r a d i n g l b l e n d i n g f i rma is s t l l l a m a t t e r of contention, FA0 s t u d i e s have b h w n t h a t t h e p rocess of p r i c e a r b i t r a g e a p p c r r s t o work well among t h e v a r i o u s a u c t i o n markets . 2

B. Consumption and Impor ts

8. Given t h c h t s t o r i c n l con tex t i n t h e development of t e a d r i n k i n g (pa ra . 3). t t i n n o t s u r p r l s l n g t o f i n d t h e h i g h e s t p e r c a p i t a consumption of tea among UK and t h e former B r i t i s h "co lon ia l " and now i n d u s t r i a l i z e d c o u n t r i e s l i k e Ire..ind. Canada and A u s t r a l i a . While t h e s e c o u n ~ r i e s a r e key consumers i n t h e w r l d t e a cconoay, s e v e r a l t r e n d s i n t h e p a s t one and a h a l f decades a r e becoming appa ren t ( s e c Table 4):

( a ) T h e i r s h a r e I n w r l d consuapt ion h a s d e c l i t e d from 33 p e r c e n t i n 1960 t o 20 p e r c e n t i n 1974176.

( b ) P e r c a p i t a consuap t ion is d e c l i n i n g i n a number of key indus- t r i a l i z e d c o u n t r i e s . I n some c a s e s (no tab ly UK and A u s t r a l i a ) , even t o t a l consumption is d e c l i n i n g .

(c) Among t h e major economic c o u n t r y groupings , t h e c e n t r a l l y p lanned e c o n o d e s has been t h e most d y u a d c consumers w i t h t h e s h a r e of USSR and People ' s Republ ic o f China i n c r e a s i n g from 1 5 p e r c e n t i n 1956 t o 26 pe rcen t i n 1974176.

( d ) ,India h a s emerged a s t h e s i n g l e most impor tant t e a consumer i n t h e v o r l d (17% of v o r l d co-swnption i n 1974176).

Furthermore, w r l d consumption of t e a h a s s e e n a n i n c r e a s e i n t h e p ropor t ion - a t e u s e of t e a bags and s o l u b l e ( i n s t a n t ) t e a i n comparison t o "loose" t ea . T h i s t r e n d i n f i n a l u s e h a s r e s u l t e d i n t h e r e d u c t i o n of t h e q u a n t i t y of t e a

1 The volume o f t e a s o l d through producer a u c t i o n s n w f a r outweighs t h a t - s o l d through London (see Appendix I f o r d e t a i l s ) .

21 Simple c o r r e l a t i o n m a t r l c e s of t h e main a u c t i o n markets gave c o e f f i c i e c t s - of 0.85 o r more on both An annual b a s l s (1964-75) and on a monthly basis (1972-76). See Appendix I.

Table 4: TEA CONSIRBTION, BY WIN COUNTRIES LXD ECONOHIC ReGIONS

Indua t r i a l i r e d Count.:ier 476.7 490.3 535.3 --- 566.6 609.5 - 1.4 -

United Kingdom 237.6 222.5 220.3 197.7 208.3 -1 .2 Other Wartarn

Eu topa 37.4 42.6 44.0 52 .9 63.1 2.7 United S t a t a s 51.0 60.0 67.1 76 .O 91.3 3 .O Canada 20.1 19.9 18.5 21.6 22.1 0.6 Aus t ra l i a 28.0 28.9 27.7 25 .8 25.1 -0 -7 Japan 69.9 78.6 106.0 113.5 112.6 3.6 Other 30.7 37.8 51.7 79.8 87 .O 6.8

India 139.6 166.0 213.0 274.0 310.0 5.2 S r i tanka 13.0 15.7 18.9 20.9 21.0 3 .3 Indonesia 41.9 45.8 27.0 22.8 27.0 -5.5 I ran 15.6 27.3 37.7 41.3 50 .O 7 .2 Other 66.0 77.4 106.0 143.8 167.8 5.0

M r i c a 69.8 75.6 92.9 100.6 109.2 2.6

QSY p t Kenya Sudan Other

La t i n America 9.9 12.6 20.1 29.5 29.9 6.C

Argentina 1.2 2.7 5 .O 8 -0 8.8 10 .4 Other 8.7 9.9 15.1 21 .O 21.1 5.8 -

Cent ra l ly Planned '! Economies 197.8 2 2 0 9 295.5 --- 389.1 406.7 - - 5.4 -

China. Hainland 122.2 1 3 1 5 190.0 233.3 239.5 5.6 USSR 60.2 73.5 86.1 130.0 137.6 5.7 Other 12.4 16.2 '"-4 25.8 29 .o 5.4

WORLD TOTAL 1,025.3 1,128.6 1,346.4 1,588.1 1,731.1 3.3 - -- -

Source: PAO, Production and Trade Yearbooks, a a i I n t e r n a t i o n a l Tea Comulttee.

needed per cup drunk and, t h e r e i o r e , tends t o o f f s e t any o t h e r f a c t o r s r e spons ib le f o r consuapt ion inc rease .

9 . Import g rov th has e s s e n t i a l l y r e f l e c t e d t h e consumption p a t t e r n s and r e e x ~ j r t i n g requlremcnts i n non-tea producing c o u n t r i e s . The a b s o l u t e d e c l i n e i n t h e UK, f o r example, r e f l e c t s a d e c l i n i n g t r end i n domestic consumpiion and t h e d e c l i n i n g importance of t h e London auc t ioa . The most dynamic importers i n t h e pas t decade-and-a-half have been Japan LI, t h e , t n t r a l l y r lanned economies, P a k i s t a n and Saudi Arabia (Table 5).

C. P r i c e Trt -- ads

10 . The ava-age p r i c e of t h e d i f f e r e n t t e a s s o l d i n t h e London Auctic.ns is a good i n d i c a t o r of changes i n g l o b a l supply and demand balance no t only because of t h e c l e a r evidence of a r b i t r a g e and simllar w v a w n t s among major a u c t i o n markets ( sea para. 7 and Appendix I) , but b a d o n is s t i l l t h e most important p lace where t h e widest v a r i e t y of t e a s a r e sold . Using t h e average London a u c t i o n p r i c e of t e a a s a n i n d i c a t o r of t h e g e n e r a l p r i c e t r e a d , i t may be r e e n (Tabla 6) t h a t t e a p r i c e s have k e n c o a s i s t a a t l y d e c l i n i n g before 1974. Between 1955 and 1972, t h e t e a p r i c a dec l ined , a t a t r e a d r a t e of 2.3 percent annua l ly i n n d ~ 1 ( c u r r e n t ) terms and by a h igher r a t e (48 percent annua l ly ) i n r e a l (coaotant) t e r n , 2/ h i g h l i g h t i n g t h e s u b s t a n t i a l e r o s i o n of t h e purchasing p w e r of t e a a s a c o m d i t y . Tea p r i c e s dur ing t h i s period have a l s o k e n relatively s t a b l e . 11 Since 1973, however, p r i c e s have k e n r a t h e r e r r a t i c , wi th a p a r t i c u l a r l y sha rp jump of 75 percent t ak ing place I n 1977. According to t h e t e a t r a d e , p r i c e f l u c t u a t i o n s of such a n amplitude a r e u n l i k e l y t o p e r s i s t s i n c e they were caused by t h e c o i a c l d e n t a l occurrence of shor t - term f a c t o r s !:k-.s "pull" e f f e c t of unexpected c o f f e e p r i c e i n c r e a s e due t o B r a z i l i a n f r o s t , market s p e c u l a t i o n and va r ious goverameat f i s c e l pol icy i n t e r v e n t i o n ) .

11. While t h e average London a u c t i o n p r i c e a c t s as a &,od baro-ter of t h e o v e r a l l world t e a m r k e t s and t h e t e a p r i c e i n i n d i v i d u a l c o u n t r i e s geae ra ly move i n l i n e v i t h each o t h e r , t h e r e has been changfs i n t h e p r i c e d i f f e r e n t i a l among t h e t e a s from d i f f e r e n t coun t r i e s . Kenyan t e a , which had been s e l l i n g a t p r i c e a s u b s t a n t i a l l y below t h a t of S r i Lankan and North Ind ian - t e p h a s been r e c e i v i n g equ iva len t o r h i g h s r p r i c e s i n Lcadon a u c t i o n s s i n c e 1967. Th i s development r e f l e c t s t h e improvememt i n Kenya's t e a q u a l i t y that

- 11 Although i t a l s o r a o r t s t e a , Japan's imp- r t s a r e e s s e n t i a l l y b lack t e a -

which i t does no t ::educe i n s i g n i f i c a n t q u a n t i t i e s . - 4

2 1 Using t h e ~ 6 r l d Bank's -ndex of i n t e r n a t i o n a l i n f l a t i o n ( indus t - c o u n t r i e s ' 'ICLP" index of US$ p r i c e s of manufactured expor t s , S developing c o u n t r i e s ) a s a d e f l a t o r .

3 1 The index of f l u c ~ u a t i o n (based on the r o o t mean square of d e v i a t i o n from - 1955 t o 1976, f i v e yea r moving average) i n d i c a t e s t h a t t e a was t h e lowest i n a range of 4.3 percent t o 30.3 pe rcen t f o r 41 commodities. (Source: Commodities aud E x p ~ r t P r o j e c t i o n s Div i s ion , P r i c e Prospects f o r Major Primary Cotmnodities, Report No. 814178.)

Table 5: TEA WORTS, /. BY nb;W COUNTRIES AND ECONOHIC REGIONS

1:routh Rats - Ib 1961 1965 1970 1914176 1977 1961-77

I n d u a t r l a l l t e d Count r l e r

Unltad Kingdom Othar U a r t e m

Europe Clruda United S t a t e r J rpaa A u r t r a l i a Other

Developing Countria. 1SO.2 170.2 227.4 262.4 287.1 - - 4 .o - h l a and Oceania 7b.5 80.8 116.2 161.1 185.4 5 .9

long Kong 6.8 5.7 8.4 7.9 11.4 3.0 I ran 5.8 9.7 6.2 14.1 12.3 5 .9 t r a q 18.5 12.7 19.5 25.8 25 00 1.7 Pakietan 1 6 1 20.5 29.5 47 .O 60.7 9 00 b u d i Arabia 2.8 3 08 5 06 7.8 12.8 8.0 Ocher 24.5 28.4 17.0 58.5 63.2 6.1

M r i c a 68.0 80.6 98.0 88.6 93.3 1.5

Egypt 22.8 28.7 29.8 21.0 26.2 -2 05 tlorocco 13 .9 8.1 14.2 13.6 12.4 0.7 Sudan 9.4 101 19.4 13.6 12.7 3 .2 Other 21.9 33.7 34.6 40.4 42.0 6.1

L a t i n America 7.7 8.8 13.2 12.7 8 04 1.9

- - Chi le

'! Other - - Cent ra l ly Planned - * Economies .. 23.5 59.2 45.4 - - - 86.8 - 86.8 - 7.5 - USSR Other

/a Groae imports ( inc luding reexpor ts ) . - Ib Prom t rend reg ress ions aga ins t t i n e . - Source: FAO, Production and Trade Yearbooke, and I n t e r n a t i o n a l Tea Committee.

Table 6: TEA PRICeS (IAHDON AUCTION) BY KEY PRODUCING COUNTRIES

(9143)

Average A l l Tea. S r i Lanka India Kenya Xalavi Current US$ Conrtant US$ Current US$

0

Source: PAO. Product ion year*, and International Tea C o d ttee. -

has a r i s e n from t h e l a r g e expansion and !mprove~ent programs i n i t i a t e d s i n c e t h e e a r l y 1963s.

12. With t h e inc reas ing use of t e a bags and so lub le " i n s t a ~ t " t e a , i n t h e p a r t decade and t h e advent of a m c h l e s s q u a l i t y - d i s c r i d n a t i n g genera t ion of t e a dri&.ers i n t r a d i t i o n a l t e a consuming c o u n t r i e s , h igher q u a l i t y t e a s r p p e a t t o be l e s s p r ized i n the world aa rke t . A poss ib le i n d i c a t o r of such a t r e e d is t h e reduct ion of the p r e d t m between high g r w n and low ,p.ova S r i Lankan t e a s i n t h e p a s t decade. 1/ 'This p r e d u m (expressed a s a percentage of lou q u a l i t y t e a ) dec l ined a t a fT t ted annual r a t e of near ly 12% from 1967-77.

1/ This comparison presumes t h a t c l imate is t h e determinant of t e a q u a l i t y i n - t h a t t h e high grown t e a s genera l ly provide b e t t e r "l iquoring" and "f lavor ing" c h a r a c t e r i s t i c s . I n p r a c t i c e d i f f e r e n c e s i n che arethod of manufacture ( l i k e t h e orthodox method versus the c u t t i n g , t e a r i n g and c u r l i n g [CTC] method) a l s o provides d i f f e r e n c e s i n l i q u o r and f l a v o r (see Appendix I). Since only orthodox process ing methods predominate i n S r i Lanka t h i s presumption i s reasonable.

111. HODEL STRUCTURE AND ESfIHAfION

A. An Overview of t h e Hodel and P a s t Models

13. The t e a model used i n t h i s s t u d y , is a wor ld market model w i t h supp ly and demand d i s a g g r e g a t e d by t h e main prodr:cing/consuning c o u n t r i e s ( o r r e g i o n s ) and a a u r k e t c l e a r i n g e q u a t i o n 'o r p r i c e de t e rmined s i m l t a n e o u s l y . The g e n e r a l scheme o f t h e model s t r u c t u r e is g i v e n i n C h a r t I.

14. World supp ly is o b t a i n e d by aggr c g a t i n g e l e v e n c a u n t r i e s / r e g i o n s a n a l y z e d s e p a r a t e l y and wor ld demand by a g g r e g a t i n g s e v e n t e e n c o u n t r i e s / r e g i o n s a l s o a n a l y z e d separately. The e x c e a s o f s u p p l y o v e r demand d e t e r d n e s t h e a d d i t i o n t o s t o c k s which a r e t h e p r ima ry d e t e r m i n a n t of t h e wor ld i n d i c a t o r p r i c e . Data f tom 1960-78 were used f o r demand; s u p p l y and p r i c e a n a l y s e s cnve red t h e p e r i o d 1957-78. Unde r ly ing t h e s t r u c t u r e o f s u p p l y a r e c o r r e s p o n d i n g a r e a and y i e l d e q u a t i o n s .

15. Few models o f t h e wor ld tea economy have k e n pub l i shed . Adam and B e h m n a n a l y z e d t h e World Tea Economy i n a t h r e e r e g i o n framework ( i n d u s t r i a l i z e d c o u n t r i e s , d e v e l o p i n g c o u n t r i e s eod c e n t r a l l y p lanned economies) i n t h e i r 1975 paper . 11 An e c o n o m e t r i c u * d e l o f t h e wor ld t e a mmrket was deve loped by UNCTAD ir 1970 21 b u t t h e d e r a i l s have n o t been p u b l i s h e d i n any o f f i c i a l UNCTAD docuaeTt . A model a t t h e same l e v e l o f d i s a g g r e g a t i o n a s M a ~ s a n d Behman was a l s o p r e p a r e d by UNCTADIFAO i n 1979. - 31 Only two o t h e r more d i s a g g r e g a t e d models have been developed: (a) a n u n p u b l i s h e d Ph.D. d i s s e r t a t i o n by h r t i (which was comple ted i n 1961 and is

11 F. G. M a r s and J. R. B e h r u n , Feven Models o f I n t e r n a t i o n a l Commodity - X a r k e t s , U n i v e r s i t y o f Pennsy lvan i a , Wharton Schoo l , Department o f Econornlcs, December 1974.

21 UNCTAD S e c r e t a r i a t , Economet r ic Hodel o f t h e World Tea Economy, (mimeo) , - p r e p a r e d f o r p a r t i c i p a n t s o f t h e I n t e r - R e ~ i o n a l Seminar on t h e P l a n n i n g o f . . - t h e F o r e i g n ~ ; a d e s e c t o r , September 2 1 - Octobe r 2 , 1970, Geneva.

31 UNCTAD/FAO, Tea S i m u l a t i o n Hodel: A T e c h n i c a l Note, Annex t o Document - TD/B/IPC/TEA/XC/2.

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c l e a r l y o u t of d a t e ) ; 11 and (b) a n E c o n o ~ l ? t r i c Hodel of t h e World Tea Economy by UNCTAD. 21

16. The model prerented here a t tempt6 t o ana lyze t h e world t e a econowy a t a f a i r l y h i g h l e v e l of d i raggrega t ion (eleven rupply and reventeen cogruming c o u n t r i e r o r rubreg ionr ) and t o incorporate i n t h e rupply a n a l y r i a both t h e p l a n t i n g ( a r e a p lan ted) and hurbandry ( y i e l d ) d e c i r i o n r . Th i r , t o our knouledge, h a r no t k e n at tempted before. The remaining p o r t i o n of t h i r c h a p t e r r e t r o u t t h e r a t i o n a l e f o r t h e formulat ion and empi r i ca l e r t i m t i o n of rupply , demand and pr ice .

B. Supply Analyair

17. Tea i r a pe renn ia l crop. I t g i v e r i t r f i r a t y i e l d about tw o r t h r e e y e a r r a f t e r p lant ing. Depending on l o c a t i o n and type of p lan t ing mterialr , i t t a k e r raven t o n ine yea r r t o f u l l y mature. However, more than SOX o f u t u r e y i e l d r a r e a t t a i n e d a f t e r f i v e yearr . A t r e e can cont inue t o produce u n t i l i t ir 6 0 t o 90 y e a r r o l d wi th only a a l i g h t : ec l ine i n y i e l d r toward t h e end of t h e per iod.

18. In d e c i d i n g on t h e expansion of t e a product ion tug typer of d e c i r i o n r need t o be d i a t i n g u i r h e d : ( i ) a long term invert me^-t d e c i r i o n on neu a r e a expanr ion w i t h new p l a n t i n g a n d l o r r e p l a n t i n g of t.-eer; and ( i i ) a d e c i r i o n on t h e e x t e n t t o - z r o r t t o va r iour crop hurbandry procedurer which could a f f e c t t e a y i e l d r (and t h u s production) on a s h o r t t e r n b a r i r .

19. With r e r p e c t t o t h e investment d e c i s i o n a number of f a c t o r r should be borne i n mind:

- I n v e r t i n g i n t h e i n i t i a l p l a n t i n g of t e a , u n l i k e annual c ropr , impl ie r a long term commitment of r e rource r ( e s p e c i a l l y Lor e s t a t e r where, i n a d d i t i o n t o f a c t o r y and ~ c h i n e r y , housing and h e a l t h f a c i l i t i e s f o r workers have t o be provided).

- Tea is d i f f e r e n t from most o t h e r c rops i n its high per h e c t a r e l a b o r requirement and i ts consequently h igh employment impact.

11 V. N. )turti, An ~ c o n & t r i c Study of ' t h e World Tea Econom, 1948-1961, - Unpublished Ph.D. d i q a e r t a t i o n , Univers i ty of Pennsylvania, 1961. I n t h i s s tudy , supp ly is d i s r ega ted i n t o Ind ia , S r i Lanka and r e s t of :he world; denand covers i n d u s t r i a l i z e d c o u n t r i e s , Ind ia and r e s t of t h e world.

2/ T. Akiyama E c o n o m t r i c Hodel of the World Tea Economy, mimeo, UNmAD, Nov. - 1979 (an e a r l i o r ve r s ion is i n Document No. TD/B/IPC/TEA/AC/~). The model covers supply equa t ions f o r Ind ia , S r i Lanka, Kenya, o t h e r Af r i ca , Bnngladesh, Indonesia , Argentina and r e s t of t h e uor ld ; and demand equa t ionc f o r I n d i a , U n i t e d States, U n i t e d Kfngdon, other fcdus:rialized c o u n t r i e s , o t h e r developing and E. Europe and USSR.

.Also l abor c o s t s c o n s t i t u t e a l a r g e propor t ion of t o t a l c o s t of production f o r tea . L/

- Gross r e t u r n s per hec ta re is a l s o among t h e highest f o r export c rops crown i t r a rea6 with good t e a g r w i n g condi t ionr . L/

Hence moving 7ut of t e a production is, i n p r a c t i c e , d i f f i c u l t b c a u s e of high sunk c o s t s ano t h e f a c t t h a t s h i f t i n g product ion from t e a t o another crop a l s o i n c u r s s i g n i f i r a n t expendi tures (e.g., i n t h e removal of t r e e s and fac to ry) and b r ings abo\: t t h e reduct ion i n both l abor employment and fo re ign exchange.

20 . With regard t o t h e husbandry dec i r ion , t e a production can k s i g n i f i c a ~ t l y increased i n t h e s h o r t term by two methods:

- "Coarse pluckingM--the plucking of about f i v e leaves and a bud r a t h e r than t h e usua l two leaves >nd a bud dur ing each plucking cycle . Although t e a y:eld is thereby increased, l w e r q u a l i t y r e r u l t r .

- Applicat ion of nitrogenous f e r c i l i z c r (usual ly amoniuw s u l p h a t e ) wi th y i e l d rerpocues varying from 5 to 8 @ per kilogram of n i t rogen. This response could c a r r y over more than one year depending on t h e amount appl ied.

The a v a i l a b i l i t y of these methods means t h a t , t h e o r e t i c a l l y , t e a producers can a d j u s t r a t h e r qu ick ly to changing demand condi t ions .

21. These d e c i s i o n s depend on a s e t of f a c t o r s which v a r i e s wi th t h e d i f f e r e n t modes of t e a production. I n c o u n t r i e r vhere p r i v a t e s e c t o r e r t a t e r predominate, one would expect t h a t f i a a n c i a l incen t ives a f f e c t i n g t h e t e a e n t e r p r i s e (product p r i c e and input c o s t s ) a r e l i k e l y t o be t h e most important determinants . I n smal lholder dominated c o u n t r i e s , non-financial f a c t o r s could be a s i n p o r t a n t as f i n a n c i a l f a c t o r s .

22. The e x t e n t t h e above f a c t o r s and d e c i s i o n s p r e d o d n a t e would depend on h w r e a l i s t i c is t h e modelling of producers' investment and y i e l d s t i m u l a t i o n d e c i s i o n s and t h e a v a i l a b i l i t y of re levan t data.

- - .9

1/ See f o r example, Y. L. Lim, "Impact of t h e Tea I n d d t r y on t h e Growth of - ' t h e Ceylonese Economy", S o c i a l and Economic S t u d l e g December 1968; R. W. ) Palmer-Jones, Production and Harkecing of Tea i n w w i , Un ivers i ty of ' Reading, Departaunt of A g r i c u l t u r a l Economics and Farm Hanagement,

Developaent Study No. 1 5 (1976); N. A. S t e r n , An Appraisal of Tea Product ion i n Small Holdings i n Kenya, P a r i s , Development Centre of OECD (1972); and G. S. Sarkar , Tea: Some Pol icy I s s u e s , IDS Discussion Paper No. 124, February 1968, Univers i ty of Sussex.

2/ J. d e Vr ies , Tea: The P o e s i b i l i t i e s f o r I n t e r n a t i o n a l Action, World Bank - C o m o d l t y Taper S o . 2 8 , Janaary 1977, Xikriex ZIT, p . 8.

23. Reviews of t h e supply a n a l y s e s of p e r e n n i a l s have a l r e a d y been under- t a k e n by a number of au thor s . Rather t h a n p rov ide a g l o b a l p e r s p e c t i v e , v i r t u a l l y a l l t h e s t u d i e s p e r t a i n t o c a s e s t u d i e s of a p a r t i c u l a r c rop i n a p a r t i c u l ~ r coun t ry ( o r r eg ion i n a c o u n t v ) where d e t a i l d a t a is more r e a d i l y a v a i l a b l e . Complex models l i k e that of French and Hathews 21 on US a s p a r r g u r ( a p e r e n n i a l v l t h a b e a r i n g l i f e of 10-15 y e a r s ) a r e a b l e to c a p t u r e t h e d e c i s l o n -king f ramework wi th r e s p e c t t o new ac reage p l a n t i n g and removalr of o l d p l an t s .

24. node l s on p e r e n n i a l 8 i n deve lop in8 c o u n t r i e s have, h w e v e r , had t o be more m d e s t because of d a t a l i d t a t i o n r . Ba te l an p o s t u l a t e d a p l a n t i n g d e c i s i o n model f o r Ghanian C o c a which incorpora ted t h e s t o c k of trees (number a f b e a r i n g t r e e s ) bu t proceeded t o e s t i m a t e h i s rupply e q u a t i o n on t h e b a s i r of h a r v e s t e d a c r e a g e a s a proxy. 31 S i m i l a r l y , Wickenr and Greenf i e ld 41 d e r i v e d a supply f u n c t i o n f o r c o f h i n Brarll bared on a n i n v e r c m n t fTnc t ion r e l a t e d t o a tock of treer but f i m a l l y ured p lan ted a c r e a g e as a proxy by m k i n g s i m p l i f y i n g assumpt ions on c o n s t a n t p l a n t i n g d e n s i t y and random u p r o o t i n g and abandonment of treer. They d i d , h w e v e r , a t t empt a n a p r i o r 1 d i s t i n c t l o n b e t w e n t h e i n v e r t r a n t d e c i r i o n and t h e p l a n t i n g dec i s lon . lbra r e c e n t l y , Har t l ey 51 f o r u l a t e d a d y d c programdng model f o r perenn!sl c r o p supply. He a G l y z e d the producerr ' d e c i s i o n t o p l a n t l r e p l a n t and ~ p r o o t , w i t h t h e aim of c a p t u r i n g i n t e r a l i a t h e i r e x p e c t a t i o n e on f u t u r e y i e l d ( r evenues ) , t h e o p p o r t u n i t y c o s t o f a l t e r n a t i v e l and u s e , and expected d e p l e t i o n of c a p i t a l s tock . The n j o r problem i n e s t i m a t i n g t h i s type of model is that of o b t a i n i n g t h e basic d a t a . I n s m r a r y , d e s p i t e r a t h e r s o p h i s t i c a t e d f o r m l a t i o n r of t h e d e c i r i o n p rocess a f f e c t i n g t h e supply ,f p e r e n n i a l s , a c t u a l a n a l y s i s (even a t t h e coun t ry l e v e l ) h a s r equ i red t h e e s t i m a t i o n of proxy v a r i a b l e s , l i r i t e d e s r e n t i a l l y , t o ac reage , ou tpu t and p r i c e s .

11 See: H. J. B a t e m n , "Supply R e l a t i o n s f o r P e r e n n i a l Crops i n t h e Less - Developed Areas," i n C. R. Ubarton, Jr., ed., S u b s i s t e n c e A g r i c u l t u r e and Economic Development (Chicago: Aldine Pub. Co., 19691, pp. 243-253; D. L. S. Lim, Supply Response of P r i r a r y Producers , P e n e r b i t U n i v e r s i t y Halaya, Kuala Lumpur, 1975; and R. War1 and J. T. CrrPPings, A g r i c u l t u r a l Supply Response: A Survey of t h e E c o t ~ n o c t r i c Evidence. New York: Praeger Pub- l i s h e r s (1976).

21 B. C. French and J. L. Hatheus, "A Supply Response Hodel f o r P e r e n n i a l - Crops," American J o u r n a l of A g r i c u l t u r a l Economics, No. 53 (August 1971), - pp. 478-490.

3 See: H. J. Bateman, op. c i t . and D. L. 5 . Lim, OD. c i t . - 8

4/ H. R . Wickens and J. N. G r e e n f i e l d , "The-Econometrics of A g r i c u l t u r a l - Supply: An A p p l i c a t i o n t o t h e World Coffee Market", The Review of Economics and S t a t i s t i c s , Vol. LV 1973, pp. 433-440.

51 H. J. H a r t l e y , Research P roposa l on: The Cons t ruc t ion of Econometric - Models f o r t h e Supply of P e r e n n i a l s , (mimeo), Development Economics Department, World Bank, June 1979.

25. The approach adopted i n t h i s s tudy may be c h a r a c t e r i z e d a s pragmatic i n t h a t primary a t t e n t i o n is focused on a n a p r i o r i unders tanding of the key measurable v a r i a b l e r l i k e l y t o a f f e c t t h e development of t e a ,upply, inc lud ing t h e r e l a t i v e importance of t h e long-term p l a n t i n g ( inver tment) d e c i r i o n and t h e shor t - term y i e l d (hurbandry) dec i r ion . N o f o r a ~ l a t i o n r t of t h e s t r u c t u r e and performance of supply a r e attempted: ( a ) a n a l y s i s of a r e a and y i e l d s s e p a r a t e l y , and (b) a n aggregate rupply a n a l y s i s (which combines t h e a r e a and y i e l d e f f e c t s ) .

26. For t h e r e l e v a n t country o r region, t e a production is decompored a s f o l l w r :

where:

Q: - Tea production ('OM) ton.) i n year t;

h.lt - Hature t e a a r e a ('000 ha) i n year t , de f ined a s p lanted a r e a lagged s i x years ; L1

YLDt Yield per u n i t p a t u r e a r e a ( t o n s l h a ) i n yea r t.

27. Mature a r e a f o r each country o r r eg ion is pos tu la ted t o be determined by t h e f o l l w i n g g e n e r a l equation:

where:

PTEA D - =-the average p r i c e of a l l t e a s i n London auc t ion ( i n US cents / lb)-def la ted by a proxy f o r inpu t cos t s .

28. Since mature a t . .s def ined as t h e p lan ted a r e a lagged s i x yea r s , t h e fo rmula t ion of P a t u r e -creage response 1-,lies t h a t p r i c e expec ta t ions governing t h e dec ie ion on new p lan t ing o r r e p l a n t i n g of t e a is e s s e n t i a l l y

11 S t a t i s t i c s on mature o r bear ing a r e a is d i f f i c u l t t o o b t a i n f o r t h e - m a j o r i t y of producing coun t r i e s . However, p lanted a r e a d a t a is a v a i l a b l e from FA0 and t h e I n t e r n a t i o n a l Tea Comnittee. P lan ted a r e a lagged s i x y e a r s was f i n a l l y used because t h a t l a g would have captured more than 60% o t y i e l d i n g c a p a c i t y by then. Besides, t h e use of longer l ags d i d not improve t h e e s t f m t e s and would r e 4 u c e t h e d e g r e e s o f f r e e d o m i n e s t i m a t i n g t h e equat ions .

t h a t o f t h e n a i v e " e x t r a p o l a t i v e expec ta t ions" model o f Nerlove. 3 I n t h e l o g form, t h e p r i c e c o e f f i c i e n t m y be i n t e r p r e t e d a s t h e long-run e l a s t i c i t y o f p r d v c t i o n s i n c e i t measures t h e response a f t e r p l a n t e d a c r e a g e has matured and - ~ t i n g a d j u s t m e n t s have been ~ d e . 3

29. The f o r m l a t i o n of t h e r e a l p r i c e of t e a (PTEA D) is e s s e n t i a l l y a s a s imple oxy f o r n e t income a c c r u i n g t o t h e tea e n t e r p r i s e . F e r t i l i z e r , vage and i n t e r e s t c o s t s c o n s t i t u t e t h e l a r g e s t component i n p roduc t ion c o s t s . I n t e r e s t c o s t s , more r e l e v a n t t o t h e long t e r n d e c i s i o n , is n o t r e a d i l y a v a i l a b l e os a coun t ry b a s i s . 3/ S i m i l a r l y , t h e r e l e v a n t wage c o s t a a r e a l s o d i f f i c u l t t o o b t a i n . For t h e c o u n t r i e s which have r e l a t i v e l y l a r g e c o f f e e i n d u s t r i e s i n o r a d j a c e n t t o t h e i r tea a r e a s ( e r r e n t i a l l y t h e A f r i c a n and L a t i n American c o u n t r i e s ) , t h e p r i c a of c o f f e a (PCOF) A/ is ured as the Port r e l e v a n t d e f l a t c r o r proxy f o r u n i t i npu t c o s t s ( p a r ~ i c u l a r l y labor) . 5/ However, u n i t f e r t i l i z e r c o s t ( m n o n i u a r u l p h a t e ) A/ are used , iarteaa, f o r d e f l a t i n g t h e t e a p r i c a i n the b i a n c o u n t r i e s , because they do n o t f a c e r i d l a r i n p u t c o m p e t i t i o n from i n d u s t r i e s w i t h r e a d i l y a v a i l a b l e w r l d p r i c e d a t a ( l i k e c o f f e e ) .

1/ The e x p e c t e d p r i c e P* - Pt,l. (See )(arc Ner love , The DynrPi. - c s o f Supply : E s t i m a t i o n of Farmera' Response t o P r i c e . aaltiwre: J o h w Hopkins P r e s s , 1958). Thc u s e of lagged a r e a i n t h e above e q u a t i o n (2 ) is n o t t o c a p t u r e t h e long-run e l a s t i c i i i e s impl ied i n ~ e r l o v e ' ; f o rmula t ion of a d a p t i v e e x p e c t a t i o n s s i n c e such a n i n z e r p r e t a t i o n f o r a p e r e n n i a l c r o p i n v o l v i n g inves tmen t s w i t h long g e s t a t i o n is r a t h e r tenuous.

21 T h i s is i n l i n e v i t h t h e d e f i n i t i o n of s h o r t - and long-run p r i c e r e sponre - g i v e n i n J. R. B e h r ~ a n , % n o p o l i s t i c ,Cocoa p r i c ing" , Anerican J o u r n a l o f A g r i c u l t u r a l Economics, hug., 1968. The sho r t - run e l a s t i c i t y w u l d be t h e r e s p o n s e t o h a r v e s t i n g and husbandry o v e r a t i m e pe r iod t h a t i s n o t long enough f o r new p l a n t i n g s t o come i n t o bear ing . - -

31 I t may, i n any c a s e , n e t be very impor tant e s p e c i a l l y a w n g t h e "older" - t e a g r o v i n g c o u n t r i e s f n Asia (where t h e bu lk o f t e a p roduc t ion c a p a c i t y is o l d and u s u a l l y f u l b dep rec i a t ed ) .

* 41 The c o f f e e p r i c e c h o s e r r i s (;uatemalan, prime, washed, s p o t Neo York. - 5 The r a t i o n a l e is t h a t d i f f e r e n c e s i n t h e r e l a t i v e p r i c e of t e a and c o f f e e -

e s s e n t i a l l y r e f l e c t t h e r e l a t i v e va lue of t h e umrgina l product p e r u n i t i npu t .

61 US who lesa l e p r i c e of ammonium s u l p h a t e expres sed a s a n index ( P P I ) w i t h - 1970-100.

30. R e s u l t s of t h e mature acreage func t ions a r e given i n Tab12 7. Es t ima t ions werc by o rd ina ry l e a s t squares regress ion. k'here au to -cor re la t ion may be prob lemat ica l t h e Cochrane-Orcutt c o r r e c t ion procedure u a s used. - 11

31. Except f o r La t in M r i c a and, poss ib ly , Tanzania, t h e long run supply e l u s t i c i t i e s a r e very low. Although t\e s i g n s a t e genera l ly c o r r e c t , s i g n i f i c a n t p r i c e e f f e c t s e r e found only f o r L a t i n America and o v e r a l l developing coun t r i e s . Lagged M t u r e a r e a was s i g n i f i c a n t f o r a l l producing c o u n t r i e s o r subregions except f o ~ Ind ia , i n d i c a t i n g t h a t t h e p l a n t i n g d e c i s i o n is r e l a t e d more t o t h e previous y e a r s p lanted a r e a r a t h e r than p r i ce . A sys temat ic inc rease i n t h e p lanted ( o r -cure) a r e a s with time ( a r e f l e c t i o n of tha r a t e of expaltrion a t t r i b ~ t a b l e t o government t e a development p r o g r a m ) was found o111y i n t h e African c o u n t r i e s of Kenya and Tanzania.

32. The y i e l d f o r each c o u n t q o r region is pos tu la ted t o k determined by t h a fo l lowing s e n a r a l equat ion:

where:

Ln PTEA f l and T have a l ready k e n def ined; and CLF - c l i m a t i c f a c t o r s (e.g., amount of r a i n f a l l ) .

I n t h e l o g form, t h e p r i c e c o c f f i c i ~ n t s may be i n t e r p r e t e d a s t h e short-run e l a s t i c i t i e s o f production s i n c e t h i s f o r m l a t i o n permits response rhrough "coarse plucking" and f e r t i l i z a t i o n over a time per iod which is not long enough f o r newly planted o r replanted a r e a s t o come i n t o bear ing (para. 20). Ln P'EA Dt-2 is included t o a l l w f o r t h e pops ib le carryover e f f e c t of f e r t i l i z e r a p p l i c a t i o n . The time t rend may be i n t e r p r e t e d as represen t ing p r o d u c t i v i t y improvements over time due, f o r example, t o t h e in t roduc t ion of h igh-yie lding c l o n a l v a r i e t i e s .

33. The y i e l d f u n c t i o n s a r e g iven i n Table 8. C l imat ic d a t a f o r i n c l u d i n g C u t a s a n independent v a r i a b l e is n o t a v a i l a b l e . But, a s w i l l be d i scussed i n pa;ra. 49, t h i s d s s i o n is no t expected t o be p a r t i c u l a r l y s e r i o u s f o r t e a .

34. The r e s u l t s id Tab le 8 shov t h a t , i n c o n t r a s t t o t h e mature a r e a ' equa t ions (Table 7 ) . s i g n i f i c a n t p r i c e e f f e c t s were obta ined from one-year l a g s f o r I n d i a and Uganda and two-year l a g s f o r Indonesia and o t h e r Asia. S i g n i f i c a n t t i m e t r e n d s were obta ined f o r a l l t h e equa t iops except f o r t o t c l i n d u s t r i a l i z e d coun t r i e s . Thesc r e s u l t s show t h a t , i n ge.Qeral, the Asian c o u n t r i e s a r e more r e c e p t i v e t o short- term p r i c e i n c e n t i v e s , and t h u s correspond wi th t h e expected tendency f o r p r i v a t e sector-dpminated production

r e r e c e p t i v e t o changes i n p r i c e incen t ives . Tha such an i n t e r - p r e t a ion appears t o be c l e a r e r i n t h e case of shor t - run f i c e response r a t h e r

11 See D. Cochrane and G. Orcu t t , " ~ p p l i c a t i o n of Leas t Squdres Regressions - t o R e l a t i o n s h i p s Containing Auto-Correiated E r r o r Terms," J. Am. S t a t i s t . 9 s 3 0 r . : V n l . 6 6 , 3 ? . 72-61, 1 9 4 9 .

~0t.1 Coetrally ? l a r d Croaa la* ) .4217 - 0 . 0 1 ~ 0 . 7 2 0.0015 0.r))) 0.0279 2 . a (I.-) (-0.42LL) (S.OB51)- (1.6855)

~0t.1 W*IWIU C c r ~ r i . s 4.1248 0 . 0 2 ~ o . n n 0 . m ~ 0 . ~ 1 5 0 . m ~ 2.27 (3.7547)- (2.4221) ( 1 . W ) 0 .57?) ) -

Other

T i n perlod m u d LB tho - 1 ) ~ i a is 1937-78: a11 r p ~ . s l o o s w r o e s t l r t d r u h n l I O R - I O ~ ~ p t c i f ~ . . c i m . b Tho f l p n In p . r a r h a s i 8 hlor d c a f f i c 1 . u l a rho com8pmdl . l c a u c l a t l c . t

S U - Stmodad error o f a c l u t o . & D.2. - R R b l m Y . t m statistic.

0 - au to- rogroas ln c o o f f l c l m c s I r chr b c h r r r Q r c o t c procodof..

Total I r h r t r i r l l s d m t r l r r

Total C o t r r l l y T l d L m l r r

I o t a 1 D w m l q l m @ Caatr lom

Aml.

1 J i b

# r l U r n

l a r l a

0tb.r

Afr le r

7-1.

o w

0th

Ltl. M e .

T i n )rrid 4 L. c h m a l y l r 11 l 9 S 7 - r r dl q-mtlmam r r e e o t l r t d umlna b lop lo : m p ~ l f h t l o s . lh f l m L. m b e r l a k lw rcL d f l c l r t 11 cbe rmrrr)oaam t mutlmtlc. m - s t d r + d .~XTPC o f UCWO. D.Y. - D u b l a mat- m u t i a t k . 0 - rco--mi- c d f l c l e ~ ~ m In cba rachraoOrcPt t procdsre.

than nature a r e a response may be expla ined by t h e f a c t t h a t t h e d e f l a t o r s used f o r t e a p r i c e s a r e more re levan t t o short-run ( y i e l d ) response.

35. From t h e time t rend v a r i a b i e , one could i n f e r t h a t p roduc t iv i ty improvenects due t o technological change ( b e t t e r y i s l d i n g v a r i e t i e s ) appear t o be h ighes t i n Uganda, the Cent r a l l y Planned Economies, Tantanla, Ind ia and o t h e r Asia ( p r i m a r i l y Papua New Guinea). Theee c o u n t r i e s experienced more than a ivo percent increase i n y i e l d a f t e r the e f f e c t of s h o r t term p r i c e had k e n taken i n t o account. The t r e n d d e c l i n e s i n y i e l d f o r S r i tanka and Uganda ~ e f l e c t e the p r o t r a c t e d years of ~ ~ t r u c t u r a l d i s r u p t i o n s i n t h e i r t e a economies.

36. T o t a l world production can then be obta ined by summing up the pro- duc t ion o b t s i n e r f o r each country o r region.

n ( 4 ) World Production 9. - P Q:

1-1

where: 1-1, . . . n a r e the number of c o u n t r i e s o r regions being s tud ied .

Aggregate Supply F o r m l a t i o n

37. An a g ~ r e g a t e f o m l a t i o n of svlpply was a l s o t r i e d jn order t o t e s t whether the e s s e n t i a l d e t c r d n a n t s of acreage and y i e l d s , formulated separately, could be captured i n a s i n g l e equation. Taking t h e measurable v a r i a b l e s pos tu la ted t o a f f e c t both a r e a and y i e l d , production (QS) f o r each country o r regior. is postula ted t o be determined a s follows:

( 5 ) QS - fl' (Ln PTEA Dt-l , PTeA Dt-2, PTEA Dt-7, T) t

where: P T U D is def ined i n para. 27 and T is tt.o t i m e t rend.

The es t imated supply func t ions a r e given i n Table 9.

38. The es t imated supply equat ions ~n Table 9 appear t o have captured t h e key r e s u l t s from s e p a r a t e a r e a and y i e l d a n a l y s i s , p a r t i c u l a r l y with respec t t o shorc term p r i c e responw and t h e time trend. As obtained i n t h e y i e l d

I

equa t ions , t h e s h o r t term responsiveness of Ind ia , Uganda, InConesia, and o t h e r Asia were a l s o s i g n i f i c a n t a t approxinate ly t h e 5 percent l e v e l o r b e t t e r . The time t rend , e s s e n t i a l l y r e f l e c t i n g t h e combined d f e c t of s y s t ~ m a t i c a r e a expansion ( e s s e n t i a l l y government expansion s emes) and t echnolog ica l change, was s i g n i f i c a n t f o r a l l c o u n t r i e s and s ik regions except f o r Indonesia. Afr icqn c ~ u n t r i e s ' o v e r a l l production grew a t a n o v e r a l l r a t e of about 8 ? e r c e n t annua l ly a s a r e s u l t of these f a c t o r s , countr ies&xper ienced a corresponding growth of l e s s than 2 p cent. ,Isian Countr ies k i t h s p e c i a l au l t i -pe r iod t e a development p lans ( p a r t i c u l a r l y Kenya, Tanzani; and Uganda) had the h ighes t t rend c o e f f i c i e n t s .

39. The long term p r i c e (PTEA D 7) e f f e c t s , whi le a l s o s i g n i f i c a n t f o r Asia and developing c o u n t r i e s as a v k l e , were not t r ansmi t t ed from the mature a r e e equa t ions t o t h e o v e r a l l supply formulat ion a t t h e country/sub-regional l e v e l except for L a t i n America. Sri Lanka's negative v i ~ l r l t r e n d s dnminzted

t h e t r end of o v e r a l l supply; but i n Uganda, f a s t e r a r e a expansion compensated f o r t h e d e c l i n i n g t r e n d s i n y i e l d s .

C. Demand Analysis

40. A review of t h e t rend i n conslarption and p r i c e s (paras. 8-12) revea l a number of f e a t u r e s which need t o be captured i n analyzing t e a demand. The s t ~ a d y p r i c ? d e c l i n e , t h e inc rease i n consumer incomes and populat ion and t h e f a c t t h a t t e a remains t h e cheapest beverage per cup have provided favorab le cond i t ions f o r consumption expansion. A t t h e same time, a corresponding s h i f t i n p re fe rences from t e a t o c o f f e e and thh advent of t e a bags and i n s t a n t t e a have tended t o o f f s e t consumption expaneion. The r e l a t i v e e t r e n g t h of these opposing developments determine t h e path of t e a c o n e u p t i o n i n var ioue c o u n t r i e s o r regions.

41. Tha p o e t u l a t i o n of t e a demand which has given u s t h e most promising r e s u l t is t h e following:

where:

Q%C, - Apparent consumption per c a p i t a ;

PTEA/PCOP - Average p r i c e of a l l t e a s i n London auc t ion o r PTEA ( i n US c e n t s / l b ) d e f l a t e d by t h e average p r i c e of c o f f e e o r PCOP (Guatemalan, przme washed, s p o t , New York i n US cen t s / lb ) .

CDPPC - CDP per c a p i t a .

42. Data on t e a consumption is d i f f i c u l t t o o b t a i n on a worldwide bas i s . The d a t a used i n t h i s s tudy is t h a t of "apparent consumption". 11 Annual s t o c k adjus tments t o apparent consumption have been made f o r o n l y a few n e t importing c o u n t r i e s (mainly UK, US and A u s t r a l i a ) and some producing c o u n t r i e s (mainly Ind ia , S r i Laaka and Bangladesh).

43. The cho ice of p r i c e s was another d i f f i c u l t y i n e s t i m a t i n g demand funct ionp on a time s e r i e s bas is . p e only r e a d i l y a v a i l a b l e p r i c e se r ies - obta ined from t h e London t e a a u c t i o n s (PTEA)-is e s s e n t i a l l y a wholesale p r ice . To e x t r a p o l a t e t h i s p r i c e a s having an e f f e c t on t e a consumption i n o t h e r c o u n t r i e s v i t h changing t a r i f f s and i n t e r n a l t axes and charges can, the re fore , be somewhat tenuous. Time s e r i e s of r e t a i l p r i c e s , however, were n o t ava i l ab le .

! . 44. The demand r e s u l t s , obta ined by l e a s t squares regress ion 'and *

Cochrane-Orcut t procedures, a r e g iven i n Table 10. 8 . -

I/ For n e t e x p o r t i n g c o u n t r i e s , apparent consumption - production minus n e t - exportn; f o r n e t importing c o u n t r i e s , apparent consumption = n e t imports.

Othar L 1.5593 0.01W 0.9122 0.0571 1.70 - (12.57j1)- (12.8961)- - & r

~ i r parlod l a 1960-78; al? eqnaclms were astlprcod usin& a lot- lo* s p c c l f l c a t i m . b Ibo fl-• i n p.rmthesls k lw uch coaff lc lcac 1s tha corrampoodlq t s t a t l s c l c . t

s l ~ l ~ l c r n c c c tho It 1.r.l. C. s l g n l f l e m c a c tho 1Z 1ovaI.

4 5 . The u s e of c o f f e e p r i c e a s a d e f l a t o r ( t o c a p t u r e compet i t ion between t e a and c o f f e e ) provided expected s i g n s f o r t h e r e l e v a n t c o e f f i c i e n t s and prodllced, s t a t i s t i c a l l y , t h e bes t o v e r a l l r e s u l t s , but o t h e r d e f l a t o r s ( l i k e t h e World Bank's I n t e r n a t i o n a l P r i c e Index) a l s o y i e l d e d n i g n i f i c a n t p o s i t i v e c o e f f i c i e n t s f o r t h e e f f e c t of t e a p r i c e s on consumption. For h igh i n c k c o u n t r i e s wi th h igh pe r c a p i t a consumption ( i n d u s t r i a l i z e d c o u n t r i e s and I r a n ) a time t r e n d was included i n t h e demand f u n c t i o n s t o c a p t u r e t h e p o s s i b i l i t y of p e r c a p i t a c o n s u q t i o n r each ing s a t i a t i o n l e v e i s and t h e sys t e l aa t i c change i n t a s t e away from tea . Because of t h e d i f f i c u l t y of o b t a i n i n g comp?rable d a t a o n l y a t ime t r end is included ( f o r o t h e r i n d u s t r i a l i z e d c o u n t r i e s , o t h e r developing c o u n t r i e s and c e n t r a l l y planned economies).

46. The r e s u l t s i n d i c a t e t h a t h igh income c o u n t r i e s ( e s p e c i a l l y A u s t r a l i a and, t o a l e s s e r e x t e n t , UK) appear t o be s y s t e m a t i c a l l y swi t ch ing o u t of t e a because o f t a s t e r a t h e r than r e l a t i v e p r i c e r easons (i.e., t h e i r time c o e f f i c i e n t s r a t h e r than t h e i r r e l a t i v e p r i c e c o e f f i c i e n t s were s i g n i f i c a n t ) . I n s i g n i f i c a n t response of p e r c a r i t a t e a consumption t o changes i n the r a l a t i v e p r i c e of t e a and c o f f e e were found i n a l l c a s e s excep t f o r I n d i a and %enya. Given t h e tendency f o r compensating s h i f t s i n t h e demand f u n c t i o n ( s e e para. 3) o v e r t h e y e a r s such a r e s u l t may n o t b a l t o g e t h e r unexpected.

47. Only f o r t h e U K , J apan , I r a n and P a k i s t a n d o t h e income e l a s t i c i t i e s d e i t v e d i n t h i s s tudy conform wi th those p rev ious ly e s t ima ted by t h e Food and A g r i c u l t u r e Organ iza t ion of t h e United Nat ions (PA01 on t h e basis of cross- s e c t i o n a l expend i tu re s t u d i e s . 11 The r e s u l t s a r e d i f f e r e n t f o r t h e o t h e r f i v e c o u n t r i e s f o r which FA0 e s r h a t e s a r e a v a i l a b l e . A p a r t i c u l a r l y wide d i f f e r e n c e i n e s t i m a t e s exists i n t h e c a s e of Indones ia , where FA0 has a n income ( e x p r i d t t u r e ) e l a s t i c i t y of 0.8 ( expend i tu re survey of 1969) wh i l e o u r a n a l y s i s g i v e s a n income e l a s t i c i t y of -1.05. T h i s probably r e f l e c t s t h e d i f f i c u l t y o f u s i n g appa ren t c o ~ ~ n m p t i o n a s a measure o f "ac tua l" consumption. 21 The income e f f e c t on t e a consumption is p a r t i c u l a r l y s t r o n g f o r I r a n , ~ e % a , L a t i n America, USSR, S r i La* and India .

48. T o t a l world consumption i n t h e t e a model is ob ta ined by s d n g up consumption ob ta ined f o r each coun t ry o r region:

m , I

(7 ) World consumption QDTEA = I: QDTEAj 1-1

1 FAO, Income E l a s t i c i t i e s of Demand f o r A g r i c u l t u r a l P roduc t s , General - S t u d i e s Group, Xarch 1976.

21 An impor t an t problem i n Inrlonesia d u r i n g r e c e n t y e a r s h a s been t h e l i m i t e d - a v a i l a b i l i t y of g reen t e a (about 50 p e r c e n t of domest ic consumption) as a r e s u l t of a steadv declfne I n dnnestfc sn2llholEer 7roduc:fon a n d o f import r e s t r i c t i o n s . Such a s i t u a t i o n h a s r e s u l t e d i n a p e r c a p i t a d e c l i n e i n appa ren t consumption of t e a i n Indones ia .

where:

QMeA, - t o t a l cona.umption of t e a fo r the Jh country o r region.

j - 1, . . . a a r e the nuaber of countr ice o r rcgionb being studied.

D. Pricee and Stocke

49. Tuo cha rac t e r i a t i ca of tea pr ice behavior ( i t # r e l a t i v e a t a b i l i t y and aecular dec l ine through 1973) have already k e n noted (para. 10). The r e l a t i v e a t a b i l i t y pry be a t t r i bu t ed t o the rha~z : t e r i a t i c of the tea crop and i t e rrrrketing e t ruc ture . Although aeaaombi l i t y of harvesting (plucking) ex i a t e , moat producere can pluck throughout the year. Hence, fo r a leaf crop l i k e t e a , adverae weather during a few ronthe of the year has l e a s impact on annual y ie lde than fo r seed o r f m i t cropa a f f ec t ed during the br ief but c r i t i c a l perioda of t h e i r g r w t h (e.g., flowering a tage i n coffee) . Tea i q o r t i n g , bleoding and packaging haa a l a o been character ized ae beiag concentrated i n a few t ransna t iona l f i r m 1, and the o l igopaoa ia t ic nature of t he aa rke t haa a l s o been a t t r i bu t ed t o be a f ac to r i n t h e r e l a t i v e e t a b i l i t y of t e a pricee. However, developrrante i n recent yeara point t o the f a c t t h a t co l lu s ion and p r i ce f i x i n g i n the i n t e r a r t i o n a l t e a market may n w be m c h weaker. P a r t l y due t o ouch a tendency tea p r i ce s have a l eo become more v o l a t i l e .

50. The secula r dec l ine cha rac t e r i e t i c of t ea pr ices i e re la ted t o t h e tendency of the t e a m r k e t t o be i n oversupply and t o t he r e l a t i v e p e r i e h a b i l i t y of tea. L/ Hence, f a a t e r r tock turnovers a r e required in t h e case of t ea and r tock a c c u d a t i o n is l e e r f l e x i b l e than i n o ther beverages.

51 . Carryover etocke i n any one year should, therefore , be an important d e t e r d n a n t of price. I n addi t ion, t h e cof fee p r i ce and f e r t i l i z e r p r i ce (a~aonium sulphate) i s poetulated t o have an important e f f e c t on t ea p r i ce because of t h e i r importance a e proxies of input c o s t s (para. 29) and, p a r t i c u l a r l y , the e f f e c t on short-term y i e ld reepoase (para. 32).

P r i c e Equation L

52 . The f o l l w i n g p r i ce equation has been e s t h a t e d f o r tea ( t ime period from 1956-78): - -

1/ See Appendix I and G. Sarkar: Tea: Some Policy I ssues , IDS Discussion - Paper, February 1978, University of Sussex, Bri;{hton, p. 20.

21 While t ea s t o r a b i l i t y is s t i l l a debated i ssue , i t s e e m tha t t ea cannot - be k e p t f o r y o r e t h a n s i x z o n t y z v l t h o u t l o s s o f q u a l i t y . (See Ap?cndlx 1 )

where:

P T U - average pr ice of a l l t e a r i n the Lo~don Auction.

STKTU - t o t a l implied r tockr 3f t e a ( i n '000 metric tone).

Q M U - vorld t ea conrumption ( i n 'OW metr ic tone).

PPI - Index of f e r t i l i z e r p r i ce (amonfun rulphate) 1970-100.

PCOP - pr ice of coffee (Cuataulan , p r i m warhed, rpot , New York i n US cent r p a t lb) .

53. Tota l -lied r tockr a t t h e t is an iden t i t y defined as follows:

Where t h e var iab les have been defined i n paras. 4 8 and 52 except f o r QSTEA vhich s tands f o r world t e a production. The i n i t i a l s tock l eve l (1956) ha8 been taken from PAD 11 f o r f i v e major ne t importing countr ier (UK, US, Aus t ra l ia , IktherlanTs and Japan) and four major net exporting countr ies (India, S r i Lanka, Indonesia and Bangladesh).

1/ F h O , Tea Statistics, 1961, CCP: Tah 67/WP.1. -

IVm WDBL SMJLATION AND PROJECTIONS

A. Ex-Po8 t Sbmula t ion

54 . A r i u l a t i o n of the model f o r rupply, demand, pr ice8 and r tockr was undertaken f o r the 1934-1978 period. k c a u r e of computer capacity probleou, only the a g s r e y t e rupply f o r u l a t i o n war used i n tne r i a r l a t i o n r . The r e r u l t r f o r key v r r i a b l e r a r e given i n Table 11 belw and i n Chartr 11 and III.

55 The s i u l a t i o n r e r u l t r indicate t h ~ t the w d e l captured the per formnce of t h e world tea economy q u i t e well. In the fourteen year r i m l a t i o n period, the root-eao-rqrure e r r o r ( W Z ) f o r simulated production d id not e.:ceed 2 percent of the a c t u a l f o r each of t ~ q three main regions ( i n d u r t r i a l i z e d c a r n t r i e r , developing c o u n t r i o and cea:rally p l a ~ e d econodee) . The r i d a t i o n fo r coarurption was only r l i g h t l y 188s r a t i r f a c t o r y , l a rge ly becatme of the cen t r a l ly planned econoDdes (with a M E of 3.5 percent). Implied r tocks s h w a much l a rge r simulation + r ro r , 1 yet the movement of r i m l a t e d r tod r s is i n the cor rec t d i r ec t ion and ta? pTice t racking p e r f o r v n c e of the w d e l is not a f f ec t ed by it.

1. m d e l kroject ionr and U t e t a a t i v e Scenarios

Pro l ec t ion I - The Dame M e 1

56. The w d e l war used t o project the endogenous var iab les (supply, dcpand and pr ice) t o 1990. The erogenous variablee (population, COP, f e r t i l i z e r p r i ce and coffee price) were proiected on the bas i s of the assumptions used i n t he World Bank's Yorld Development Report, 1980. The results (he rea f t e r c a l l e d Projection I) a r e given i n Table 12.

11 The l a r g e s t e r r o r s i n etock carryover6 were obtained i n the v o l a t i l e 1977 - azd 1978 p e r l c d s .

Table 11: SUMMARY OF EX-POST SIMLATION RESULTS FGR SELECTED VARIABLES (1964-78)

S t a t i e t i c e World World World World

Product ion Conelrap t ion Stocke Price

('000 metric tone)-- ( ~ / l b )

Haaa (ac tua l da ta) 1,403 -9 1,345.2 389.5 62.6

Hean (eimulated data) 1,363.0 1,352.6 317.4 63.0

Induet r ia l i red Cantrally Planned Developing Countria8 Bconoliee Countries .

Prod. Cone. Prod. 2 . Prod. Cone.

-( '000 metr ic tone)

)(can ( ac tua l da ta) 135.5 5 2 274.7 275.2 973.9 548.4

Hean (simulated data) 137.5 538.8 171.9 265.3 953.7 541.6

M E /. 2.2 6.3 2.8 9.8 20.1 6 -8

M S B ( i n X) 1.6 1.2 1.0 3.5 2 -0 1.2

/a Root-ocan-square s i d a t i o n error . 7

57. The odly data ava i lab le t o t e s t the abort term p ro jec t ione -yea re 1979 and 1980-18 f o r pr ice and production ae shown below:

World Pr ice - -

Projec t ion I Actual Error - /a'! (a) (b) (c) -

World Production - Projection I Actual X

--- (thoueand tona)-

/a (b) - (a ) x 100 - 0) / b n.a. - not available. -

Tabl

e 12:

PRO

JECT

ION

I (

ME

MIDEL)

RES

ULT

S

Production

Conrrrpt ion

Pric

e World /s

Developing

Indu

rtri

aliz

ed

CPE

a Yorld /. Developia~

Indu

rtri

aliz

ed

CP

b -m

j

/a Totals m

ay not

add

up due

to rounding

for co

mpon

ent

regionr.

-

HART ][I; EX-POSTE SiMULATlON OF PRODUCTION. CONSUMPTION, PRICE AND STOCKS (1964-1978)

The e r r o r f o r p r i c e s r e f l e c t e d a c o n t i n u a t i o n o f t h e tendency of t h e model :o "undertrack" p r i c e s s i n c e 1976, a per iod d u r i n g which e r r a t i c p r i c e Psovemeatr became more pronounced.

58. As t h e above c o r p a r i s o n s u g g e r t s , a g iven model, even i f i t s t i m u l a t e s h i r t o r i c a l development well, need not n e c e r r r r i l y do a good job i n p r o j e c t i o n wi th r e s p e c t to t h e degree of r e l i a b i l i t y of r e s u l t r . An e v a l u a t i o n h a s t o be made o f t h e a b i l i t y o f t h e e r t i m a t e d e q u a t i o n e t o c a p t u r e s t ~ c t u r a l changes which a r e l i k e l y t o dominate t r e n d s i n t h e f u t u r e . If s t r u c t u r a l changes a r e l i k e l y t o be s u b s t a n t i a l l y d i f f e r e n t from t h e t r e n d c a p t u r e d i n t h o time pe r iod of a n a l y r i s , i t i r better to under t ake rome a d j u s t m e n t s o f r e l e v a n t c o e f f l c l e n t r t o t a k e i n t o account such char,ge than t o e x t r a p o l a t e from a set of e x l u t i n g e q u a t i o n r which t h e a n a l y s t k n o w vou ld n o t be real is t ic .

59 . T h t r hypo thes i s t r l l l u r t r a t e d f o r t h e w d e l w i t h r e r p e c t to t h e i m p l i c a t i o n of t h e d e c l i n i n g a v a i l a b i l i t y of n t u land s u i t a b l e f o r l a r g e scale t e a expansfow-a phenomenon t h a t l a becoming more crlticrrl f o r v i r t u a l l y a l l t h e major t e a p r o ~ u c i n g c o u n t r i e r a s can be s e e n from t h e ave rage annual ~ r w t h r a t e of p l an ted a r e a g iven b u l w :

Ind la S r i Lanka Indoaes ia Kenya Tanzania Uganda

- (Average annua l g r w t h i n X)-

Except f o r Indones ia where a c t i v e new p l a n t i n g programs were t a k i n g p lace i n t h e 1 9 7 0 ~ ~ t h e r a t e o f new p l a n t i n g e haye been d e c l i n i n g . The nega t ive r a t e s o f growth i n i972-78 f o r Tanzania and Uganda r e f l e c t t h e impact of p r o t r a c t e d p o l i t i c a l and economlc d i s r u p t i o n s which a r e l i k e l y t o be reve r sed (i.e., growth w i l l be positive); but t h e i r 1351-72 growth pe r fo reance i s u n l i k e l y t o be r epea ted . Hence, t o expec t t h e 1951-72 p lan ted n rea r a t e s t o c o n t i n u e , ~ a s u s i n g t h e e s t i m a t e d model impl i e s , vould be u n r e a l i s t i c . S i m i l a r l y , basic! t r e n d s i n long-term y i e l d s could a l s o be a f f e c t e d depending on t h e e x t e n t of r e p l a n t i n g w i t h h igh f i e l d i n g v a r i e t i c s . For example, i n S r i Lanka (and = p o s s i b l y f o z Tanzania e n d Uganda), average y i e l d s a r e l i k e l y t o i n c r e a s e a m a f a s t e r ( o r a t l e a s t d e c r e a s e a t a s lower) r a t e than i n t h e p a s t couple of decades because of s p e c i f i c government programs focused on t e a r e h a b i l i t a t i o n . Hence a n assessment , based on a knowledge of t h e r e l e v a n t coun t ry o r region, has t o be made on Likely changes i n t h e long term t r e n d of pl, . ~ t e d (and t h u s h a r v e s t e d ) a r e a and y i e l d t o ach ieve a more c r e d i b l e r e s u l t .

P r o J e c t l o n 11 - Adjustment f o r Long Term S t r u c t u r a l Change i n Supply

60. An a t t empt was made t o a d j u s t t h e time t r e n d c o e f f i c i e n t s f n r supply i n t h e p roJec t ion per iod (1979-90) t o t ake i n t o account t h e l i k e l y s t r u c t u r a l changes i n long- tern a r e a and y i e l d t r ends d i scussed above. 1/ The p r i c e c o e f f i : i e n t s a r e r e t a i n e d t o a l l w t o r p r i c e e f f e c t s . The p ~ o j c c t i o n r e s u l t s (P roJec t lon 11) a r e I n Table 13 t o r t h e major regions.

61. A comparison of s e l e c t e d s t a t l o t i c s w i t h Projec:lon I an4 wi th a c t u a l (or.ly p r i c e , world production and world consumption) l a summarized belw:

Uorld Production Uorld Consumption P r i c e P r o j I P r o j 11 ~ c t z l P r o j I P r o j 11 Actual P r o j I P w j I1 Actual

-----.-- (thousand tons! - - -(c/ 1 b)---

62. The o v e r a l l r educ t ion i n t h e t ime t renda f o r t h e supply equa t ions i n P r o j e c t l o n I1 r e s u l t e d i n its s h o r t term p r i c e p r o j e c t i o n s (1979 and 1980) c l o s e r t o a c t u a l than P r o j e = t l o n I ( t h e base case) . P t o j e c t l o n 11 p r i c e p r o j e c t i o n s f o r 1985 and 1990 were respec t ive ly 16 percent and 11 percent h i g h e r than f o r P r o j e c t i o n I. The d i f f e r e n c e s i n production and c o a s u ~ p t i o n between P r o j e c t i o n I and Pro jec t ion 11 were i n l i n e wi th t h e d i f f e r e n c e s i n p r i c e s . P r o p o r t i o n a t e l y h igher d i f f e r e n t i a l s were, h w e v e r , obta ined fo r t h e s h o r t t e r n p r o j e c t i o n s than f o r t h e longer tern.

P r o j e c t i o n 111 - Exogenous Fixed Supply P r o j e c t i o n s

63. Numerous p r o j e c t i o n s f o r t e a & / a r e based on s imple mrlre; e q u i l i b r i u m models i n which supply and demand a r e i n i t i b l l y p ro jec ted independently ( i m p l i c i t l y assumlng hat p r l c e s remain unchanged dur ing t h e p r o j e c t i o n per iod) . 'The p r i c e p r o j e c t i o n under ' such a n approach i s u s u a l l y ob ta ined by c a l c u l a t i n g t h e p r i c e change between t h e base per iod and t h e p r o j e c t e d pe r iod (through the use of p r i c e e l a s t i c i t i e s of sapply acd demand) t o e q u i l i b r a t e t h e imbalance betveen t h e supply and demnd pro jec ted -

11 t f a r a s p o s s i b l e , t h e adjustments wzre made wi th t i e p r i c e e f f e c t n - n e t t e d out . The im?lled a r e a and y i e l d component una.~r ly ing t h e adjus tments on t h e t h e t rend c o e f f i c i e n t s f o r supply .\re given i n Appendix 11.

21 See, f o r e x a ~ p l e , t h e p ro jec t ions t o 1985 undertaken by FA0 and t h e World - Bank's r e p o r t on P r l c e Prospects f o r Hajor Primary Commodities (Report No. 9 l 1 1 ! S ? , Jz-uzry 1 ? Q C ) , . f i .??t~dlx T 2nd ~ 3 . 5 5 - 7 7 .

Pro

duct

Lon

co

rau

pr l

oa

Yor

id

brvelop1r.g

Inh

rrt rla

li re

d 9E

.a

Uorl

d ~velopl~ robucrhllud

Qk

Prlc

e

exogenously. These simple models provide period by period project ions, but do not a l low f o r the inf luence of developamts i n t he intervening years. To compare the e f f e c t of incorporating supply project ions exogenously, the impact of two a l t e r n a t i v e s 11 a r e attempted: (i) Projecr ion IIIa - "Host l ike ly" crupply pro jec t ions (based on industry judgement of l i k e l y ?upply by count r ia r o r subregions) t o 1990; and (ii) Project ion I I I b - o f f i c i a l country supply pro jec t ion (based on o f f i c i a l g o v e r m n t e s t i n a t e s reported t o the FA0 Intergovernmental Croup on Tea and on o f f i c i a l development plans). The r e s u l t e a r e given i n Table 14.

64. A compariron with Project ion I f o r p r ice , world production and world conrumption i r suamarized below:

World Production Pro jec t ion:

World Consumption Project ion:

Pr ica ProJact ion: -

I l11a 111b I i11a I I I ~ I IIIa I I I b

65 . Some i n t s r e s t i n g d i f fe rences m y k gleaned from the comparison of methodologits s w r i z e d above. For p r i ce project ions, there appears t o be g r e a t e r d i f fe rences between Project ion I and Project ion 111 than within Pro jec t ion 111 ( l ee . , betweon Project ion IIIa and I I Ib ) . By making t ea production erogenous (i.e., not p e r d t t i n g any shcz t term or long term p r i ce response), projected p r i ce s are m c h lower than the base case re su l t s . This is pr imar i ly due t o t h e f a c t t h a t (i) the erogenous production i n Pro jec t ion I11 were proport ionately higher than i n che base case (Project iou I) and ( i f ) consumption r e s u l t s were r e l a t i v e l y c lo se (despi te d i f fe rences i n methodology). I n comparison with the r e s u l t s from the "gap analysis" approach, 2/ projected pr ices i n the l a t t e r were cons is ten t ly higher pr imat i l y because i ts consumption (projected exogenously) were cons is ten t ly higher than t h a t from the model projections. Plaintaining p r i c e response f o r consumption i n t he model r e s u l t s i n l e s s var iance i n t he consumption = project ions. '9

11 Sources: PA0 Intergovernmental Croup on Tea and World Bank, Pr ice - Prospects f o r Hajor P r h r y C o m d i t i e s , Report No. 814/80.

21 P r i ce s projected by t h i s approach (see para. 63) i s given i n World Bank - Report No. 814180, p. 77 (1985 = 139911b and 1990 = 185911b). The PxoTenocIs p r o d ~ r c t i o n f o r 1980, 1985 and 1990 a r e t h e same a s Project ion I I I a .

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Projection I V - Sensitivity to Coffee and Fer t i i izer Price Increaees

66. The sensi t iv i ty of the base model to changes i n coffee and f e r t i l i z e r prices w r e a l so examined. The results for a 10 percent increase i n coffee price i s given under IVa of Table 15 while that for a similar increase in f e r t i l i z e r price i s under IVb.

67. Comparison with the base model is stlnaarized be lw for price, w r l d production and w r l d c o n s q t i o n :

World Production Uorld Consumptiorl Price Pro.jaction: Projection: Projection:

I IVa IVb I iva IVb I X V ~ IVb

68. In comparison with the base case ( I ) , an increase in the price of the input cost proxies (coffee price and f e r t i l i z e r price) reeulted in higher prices for tea i n the case of the former and lover prices in the case of the l a t t e r . The cost push effect in reducirrg production (and thus tb- 3roduction- coneumption gap) through lagged prices, appears to be more importaut for coffee price than for f e r t i l i z a r price. Tea prices, a t lcas t in the ear l i e r years of the projection, a lso appear t o be more sensitive to charrges in the coffee price than the f e r t i l i z e r price. A/

1/ For 1979-1990, 10 percent higher price for coffee resulted, on the - a;.erage, ::I a nlxe perceri t ?-iigl:s~ tea p r i c e , ~ ; l - i i l ~ ~ i i a t f o r F c r t i l i z e r resulted i n a 4 percent lower tea price.

Tabla 15: PIOnCTION 1V - BASE t D D U UITII TKl4 INCRUSE It4 corm OR rKXTlLUKE P l l a S

h o d u c t loo b a a u p c l o o World Ioduatrlalixad D8vaLopla8 0 Uorld IoQlatrla1lr.d MvaLoplq ~ r l c a

V. CONCLUSIONS

69. The conclusions f o r p r ice project ions ( t he primary object ive of the study) a r e summarized below f o r 1985 and 1990. I n a l l the project ion a l t e r n a t i v e s , tne l e v e l of p r ices projected t o r 1985 and 1990 would be ?owat than the a c t u a l 1979 l e v e l of 1 0 2 ~ 1 l b i f adjustaent f o r i n t e rna t iona l i n f l a t i o n were undertaken.

--

Projec t ion Alternat ive8 15'90 P r i ce Project ionr ( ~ / l b ) -

Currant Pr ice Conatant Pr ice /a 1985 1996 1985

- 1990

I (Base Case) 123 14 6 78 69

I f (with s t r u c t u r a l a d j u r t l ~ a n t i n supply t rends ) 14 7 164 93 78

1111 (exogenous s u p p l y - m s t l i k e l y )

I I I b (exogenous supply-government plan) 78 9 3 49 44

IVa (10% higher co f f ee pr ice) 135 117 85 5 5

IVb (10% higher f e r t i l i z e r pr ice) 159 143 100 68

/a Current p r i ce de f l a t ed by the World Bank's Index of In t e rna t iona l - I n f l a t i o n with 1979-100.

70. On the bas i s of market knowledge and sho r t term va l ida t ion of the project ions, the most l i k e l y p r i ce projpct ion f o r t e a i n 1985 and 1990 (93O/lb and 78$/1b respec t ive ly) is the a l t e r u a t i v e which ad jus t s f o r s t r u c t u r a l changes i n t h e t rend i n a rea and y i e ld s f o r key countr ies . - 11

71. Oifferences in -pro jec t ion methodology r e s u l t s i n markedly d i f f e r e n t r e su l t a . I f production re exogenously determined (i.e., no provisions were ~ e d e f o r p r i ce response ?= i n l i n e with the l eve l s regarded most l i k e l y by perket ana lys t s , 21 th? r e a l p r ice of t e a could be subs t an t i a l l y lower than t h e most l i k e l y scenari&generated by the model. Allowance f o r p r i ce response - 11 The above two values i n parenthesis a r e constant (1979) pr ices . d

21 See, P r i ce Prospects f o r Major Primary Commodities, World Bank Report - c:o/sc ( p . 7 7 ) .

and i ts e f f e c t s on product ion (and coneumption) i n t h e in te rven ing years i n t h e model is important.

72. Tea p r i c e is more e e n a i t i v e t o c o f f e e p r i c e changes than t o f e r t i l i z e r p r i c e changee. The importance of c o f f e e p r i c e s seems, howeve:, t o be more apparent through i ts input e f f e c t e (used a s a proxy f o r production c o s t a ) than through i ts output e f f e c t ( v i a i ts in f luence a s a competing beverage i n consunp t ion).

C h a r a c t e r i e t i c s of Tea and I ~ l i c a t i o n s f o r Harke t ing

1. The wide v a r i e t y of growing and process ing cond i t ions has g iven r i e e t o a v ide v a r i e t y of t e a s produced. I n a d d i t i o n t o t h e broad c a t e g o r i z a t i o n of t e a e i n t o "black", "green" and t h e in te rmedia te "Oolong" t e a s 11 d i f f e r e n c e e among coneumere have meant t h a t d i f f e r e n t grades of l e a f and l ea f p a r t i c l e e (brokene) have t o be blended i n d i f f e r e n t combinations.

2 . The q u a l i t y of t eae ( l i k e t h a t of wine) is d i f f i c u l t t o def ine . Hade (proceesed) t e a may be pr ized not j u s t by i t 8 appearance ( s i z e , c o l o r , b r igh tneee) ; its method of manufacture (CTC 21 vereue orthodox), but by c h a r a c t e r i e t i c e which can on ly be evaluated th rough i n f u s i n g r?d t a s t i n g . The " l iquor" and f l a v o r of t e a ( t h e r e a r e more than 100 worde of d e s c r i p t i o n ) is determined by t h e a l t i t u d e and e o i l of t h e t e a a r e a , t h e type of bush ( c l o n a l o r i g i n ) , t h e t h e acd f ineneee of plucking and t h e s k i l l and method of manufacture. The t e c h n i c a l explanat ion of t h e d i f f e r e n c e s is manifested i n t h e amount and combination of a f l a v i n e e , and thearubigens ( f o r aroma l i q u o r i n g q u a l i t y ) , and c a f f e i n e ( f o r br isknese) . The r e s u l t a n t v a r i e t y of c h a r a c t e r i e t i c s make f o r a n almoet i n f i n i t e number of "qua l i t i e s" and confe r s on t e a i t s h e t e r o g e n e i t y which cannot be s t andard ized by t h e usual method of d e e c r i p t i o n . The t e a t r ade , hwever , groupe t h e wide range of t e a s i n t o t h r e e broad c a t e g o r l e s : ( a ) h igh "quality", (b) "medium", and (c ) p l a i n " f i l l e r " . - 31 The combination of theee c a t e r f o r d i f f e r e n t consumer t a s t e s .

3 . Tea is a l s o r e l a t i v e l y per ishable . While t h e r e is s t i l l some debate over t h e l e n g t h of pe r iod t e a may be s t o r e d without "e ign i f i can t " 108s of q u a l i t y , i t is g e n e r a l l y agreed t h a t t e a could l o s e i t e f l a v o r a f t e r s i x

11 "Green" t e a is unfermented; "black" t e a is f u l l y fermented; and "Oolong" - t e a is p a r t i a l l y fermented.

1 b

21 Tea produced by t h e prccess of crushing, t e a r i n g and cur l ing . - I n t h e t e a t r a d e , q u a l i t y d e s c r i p t i o n s a r e o f t e n l i n k e d t o t e a subregions ( o r even s p e c i f i c e s t a t e s ) of a p a r t i c u l a r country. Current ly t h e ranking of t e a s may be s-rized a s f o l l w s : (a) h i g h "quality1'--Darjeeling and Assam second f l u s h (Hay-June) from Ind ia , S r i Ladca high grown and Kenya h i g h grown; (b) "nediuma" ( i d e n t i f i e d by i t s b r i e t n e s s and u s e f u l l iquor -pa r t i cu la r ly f o r t e a bags) Assam and Doers ( I n d i a ) , S r i Lanka and Kenya medium grown, Halawi t e a s , "peak season" Indonesian and some t e a s from t h e People 's Republic of China (PRC); and (c) p l a i n s ( . ' f i l l e r s n ) ( i d e n t i f i e d by i t s p l a i n c o l o r and l iquor - -pa r t i cu la r ly u s e f u l a s f i l l e r t e a i n blending) lw q u a l i t y Aesame and Doers, some Malawi and most Indonesian, U a u r i t i u s , some PRC, Bangladesh, Argentina and Mozambique. Even l o v e r q u a l i t y ('3unk1') t e a a r e made--but t h e i r m a r k e t a b i l i t y is icLl:cr 1 : d t e G (Less T u r k e y , Fassia , I r a n a n d Tafizar~ian o f f - g r a d e s a r e of t h i s ca tegory) . Another ca tegory which is important f o r t h e Middle East market i s t h e lowland "tippy" d a r k t e a s from S r i Lanka and Ind ia .

months depending on s t o r a g e condi t ions ( t r o p i c a l c l i m a t e s o r moist cond i t ions vould mean an even s h o r t e r period) and t h e vapor proof ing property of t h e c o n t a i n e r i n vhich t h e t e a is kep t .L /

4. The system f o r physical ly marketing t h e product is , the re fore , geared towards handl ing these c h a r a c t e r i s t i c s . Hade t e a is convent ional ly marketed i n t e a c h e s t s (usua l ly plywood v i t h f o i l l i n e r ) . P e r i s h a b i l i t y and t h e need f o r a l a r g e v a r i e t y of consignments has a l s o meant t h a t t r a d i t i o n a l l y t h e blending of t e a t akes p lace a t t h e consumption end of t h e marketing chain. Shipment i s u s u a l l y i n 8-11 conslgnaents t o g ive u n i f o r d t y and ease of sampling and provldes t h e read i ly a v a i l a b l e t e a s f o r blending under the a u c t i o n system.

Methods of Tea b r k e t i n a

5. Tea may be marketed t i t h e r through t h e auc t ion s y s t e m o r through d i r e c t s a l e s . Of t h e approximately one d l l i o n metric t o n s of t ea produced by developing c o u n t r i e s i n 1975-77, about 652 was s o l d through auct ion systems (562 i n producer c o u n t r i e s and 92 i n London); t h e rest (352) was s o l d d i r e c t l y t o purchase rs vho may be t r a d e r s andlor b lenders (see Table 1). :'ti tanka and Bangladesh a r e good examples of producers v i t h more than 902 of t h e i r product ion s o l d i n l o c a l auctions. On t h e o t h e r hand, Argentina and Indonesia sells t h e bulk of its crop d i r e c t l y t o purchasers. V i r t u a l l y a l l of t h e product ion s o l d i n producer a u c t i o a r is exported. The main exception is I n d i a vhere 152 of t h e t e a production s o l d i n l o c a l a u c t i o n s (532 of the t o t a l ) is s o l d d i r e c t l y o r s i m i l a r l y disposed.

6 D i r e c t s a l e s t o l o c a l markets i n producing c o u n t r i e s usua l ly c o n s i s t of poorer q u a l j t y t e a s , t h e p r i c e of vh ich n e i t h e r j u s t i f its ;he i r t rans- p o r t a t i o n t o a u c t i o n s nor t h e payment by t h e producers of t h e .-ecessary brokerage fees . On t h e o t h e r h ~ r d , p r i v a t e sale. t o f o r e i g n buy:rs ( e s p e c i a l l y those s o l d on forward c o n t r a c t s ) a r e usua l ly of bettc r q u a l i t y t e a s s i n c e t h e s e l l e r h a s t o maintain consis tency i n its s a l e s o r r i s k t h e l o s s of a r e g u l a r c u s t o m e r . 3

11 A good summary of t h e evidence f o r s t o r a b i l i t y of manufactured tea may be - found i n UNCTMIFAO, The Technical F e a s i b i l i t y of Operating an I n t e r - n a t i o n a l Buffers tock f o r Teas TD/B/IPC/TEA 5, December 21, 1977 and Tee: - I n t e r n a t i o n a l Stocking Arrangements wi th Supplementary Measures, TD/B/IPC/TEA/AC/Z, J u l y 31, 1978, pp. 27-30.

21 A good example is t h e t ea exported by Malawi. -

Table 1: PRODUCTION AND DISPOSITION OF TEA BY TYPES OF SALES, AV. 1975-77

('000 m e t r i c tons )

Auction S a l e s Product ion London Producer T o t a l Di rec t S a l e e

Country

I n d i a S r i Laaka Indonee la Bangladesh Kenya

Malawi Uganda Mozambique Tanzania Argentina

Others

TOTAL DEVELOPING COUNTRIES

Source: UNCTAD, Uapubliahed Study on Marketing and D i s t r i b u t i o n of Tea, 1978.

Xarket S t r u c t u r e and Xarket Cons t ra in t s - 7. The e e l l e r a of t e a i n t h e p a j o r import markets f a c e t h r e e major problems w i t h r e s p e c t t o t h e i r a b i l i t y t o bargain f o r e q u i t a b l e p r i ces :

(a) t h e p ~ i s h a b i l i t y of t ea ;

(3) t h e o l i g o p s o a i s t i c s t r u c , t u r e i n i t s t rad ing , blending d i s t r i b u t i o n ; and - -

(c) t h e l a r g e propor t ion of s a l e s i n t h e a u c a o n system.

8. ' The r o l e of d t i n a t i o n a l co rpora t ions i n t h e c o a t s 1 of expor t s from major t& expor t ing c o u n t r i e s is n o t a s high a s t h e c o n t r o l b f purchasing and b lend ing i n t h e major importing coun t r i e s . I n S r i L a h andW1ndia, f o r

example, the s i x la rges t uul t ina t ional companies controlled only 46% and 32% of the i r respective exports (1975-77). - 1/

9. Since major importing country blenders usually purchase the .bulk of tea imports themselves (or through brokers whoa they w n or control);2/ the concentration of blending by large f i r m is the key determinant of marret control. According to a study conniseioned by the Cormaonwealth Sec re t a r i a t , A/ blending i n thc UK i s dominated by four companies - 41 and i n Australia and the US by eight corpanies each.

10. But t o what extent a r e there oligopsony/oligopoly forces a t work manipulating the tea i n major mnrkets? A t the auctions (especial ly in London), the s i t u a t i o n of a large nuo'er of s e l l e r s facing feu buyers, by i t s e l f , is not suf f ic ien t t o mke a case fo r market manipulation. Se l l e r r can, however, take advantage of a s i t ua t ion of excess supply and o f f e r lover prices. In such a s i tua t ion , the teas which a r e not auctioned (o r a r e de l ibera te ly withdrawn) face even l o w r pr icer i f sold outside the auction r ince the oppor tmi ty for holdiog out for higher pr icer i r l imited by per i shabi l i ty and carrying costs .

11. A useful measure of exploi tat ion i r the extent net return8 t o the various l eve l s of the tea industr- a r e out of l i n e with s imi lar industr ies . The conclusions from a report by the UK Price Comlsslon's inquiry in to tea pr ices and nmrket mnrgins a t the blending, wholesale and r e t a i l levels a r e worth summrizing. 5 / The report (published i n 1978) found tha t b lenders /wholesa ler maintained t h e i r h i s t o r i c gross nmrketing margin8 during the period of sharp world price increase i n 1976/77. 61 The resu l t ing increase i n blending cos ts e r e , essent ia ly , passed o n t o the r e t a i l e r and net margins were subs tant ia l ly increased above the h i s t o r i c a l rate . ~ e d p i t e the high concentration a t the wholesale and blending l eve l , no de f in i t i ve evidence on price col lusion was found. Hwever, i t concluded tha t , "while characterized a s a gentlemanly t rade, t e a blending could afford t o be more competitive." The impression of s ign i f i can t oligopoly p r o f i t s from the s a l e of t ea ty blenders appears t o be fur ther supported by the consis tent ly higher p r o f i t a b i l i t y of tea blending coppared with tha t of soluble coffee

31 Unpublished UNCTAD Study on Warketing and Distr ibut ion of Tea, 1978". .r 1

21 Commonwealth Secre tar ia t , Studies Relating t o the Development of Exports f from Bangladesh, Vol. 9. Tea - Product Summary Report, Economic I n t -

l igence Unit, 1973. er *

31 C o ~ o n w e a l t h Secre tar ia t , ib id , p. 7. - 4/ Brooke Bond 0x0, Lyons Tet ley, Typhoo Tea and CWS. - 5 / UK Price C o d s s i o n , Tea Pr ices , Report No. 32, 1978. - 6 / I b i d , paras. 4.15 aad 5.1. -

manufac tu r ing . (based o n t h e UK P r i c e Commission's r e p o r t s on t e a and c o f f e e ) .

12. The ev idence f o r o l igopo ly "rents" a t t h e b l end ing /uho le sa l e l e v e l i n 1974-76, however, does no t n e c e s s a r i l y mean t h a t t h e problem i n t h e UK i r a s s e r i o u s today. S i n c e t h e p u b l i c a t i o n of t h e P r i c e Cotmiss?on Repor t , t e a b l e n d e r s and d i s t r i b u t o r s have been under ex t reme p r e s s u r e by t h e UK government t o " r a t i o t m l i z e " t h e i r o p e r a t i o n s and p r i c i n s p o l i c i e s . M s o , a number of them ( p a r t i c u l a r l y t r a n s n a t i o n a l s l i k e Brooke Bond and Lyons T e t l e y ) have d i v e r s i f i e d t h e i r product l i n e s u b s t a n t i a l l y o v e r t h e years . T h e i r dependence o n tea a s a n impor tant s o u r c e of c o r p o r a t e income h a s d iminished; so h a s t h e i r f i n a n c i a l f l e x i b i l i t y f o r moving i n and o u t o f t h e market i n a b i g way because o f t i g h t e r c o r p o r a t e c o n t r o l s on , and t h e h i g h e r o p p o r t u n i t y cost o f , h o l d i n g l i q u i d cash. Hence, t h e c a s e f o r c o l l u r i o n and p r i c e f i x i n g i n t h e market is n w o r c h weaker.

13. The s i t u a t i o n a t t h e r e t a i l l e v e l is, i n any c a s e , d i f f e r e n t t han f o r b l e n d i n g i n t h a t a number o f v a r i e t i e s o f tea are o f t e n i n t e n t i o n a l l y p r i c e d a t l o u l e v e l s as a "106s-leader" i n t h e s t o r e s t o draw customers. Given 9uch p r a c t i c e s , t h e a s s e s s e n t o f r e t a i l margins is n o t p a r t i c u l a r l y r e l e v a n t .

14. Furthermore, t h e ev idence f o r o l i g o p o l y r e n t s shou ld be s e p a r a t e d from t h e c o m p e t i t i v e n a t u r e of t h e pr ice-oaking mechanism. Desp i t e t h e market s t r u c t u r e d i s c u s s e d , t h e p rocess of p r i c e a r b i t r a g e f o r t e a s e e m t o work very v e l l a c r o s s major a u c t i o n markets. (See t h e c o r r e l a t i o n m a t r i c e s ' f a b l e 2.) 2/ Hence, p a r t l y i n r e c o g n i t i o n o f t h i s phenomenon, t h e p r i c i n g of d i r e c t sales is u s u a l l y geared tova rds t h e p r i c e s a t London a u c t i o n s .

1 C. Uarniga tunga , Desk Study on Tea: Blending Packaging and P roduc t ion o f - I n s t a n t Tea , G m m e a l t h S e c r e t a r i a t , London, Nov. 1979 ( D r a f t ) compared "ne t p r o f i t *ginsm and " r e t u r n on c a p i t a l employed" from t h e Tea P r i c e s r e p o r t w i t h a 1977 P r i c e Commission Report on Cof fee P r i c e s and came o u t w i t h t h i s r e s d t (p. 38). *

2/ Given t h e d i f f ~ r e n c e s i n market l e v e l s (and :he need t o a d j u s t f o r - t r a n s p o r t c o s t changes) , c o r r e l a t i o n s among t h e p r i c e s i n t h e f i v e major

. marke t s a r e s u r p r i s i n g l y very high. As expected , c o r r e l a t i o n s a t t h e a n n u a l l e v e l t e n d t o be h i g h e r t h a n a t t h e monthly l e v e l . While p r i c e s a & Cochin and C a l c u t t a c o r r e l a t e very w e l l a n n u a l l y , t h e performance on a monthly b a s i s is r a t h e r poor u n t i l t h e d a t a is deseasona l i zed ( r e f l e c t i n g t h e marked v a r i a t i o n i n s e a s o n a l i t y and q u a l i t y of North I n d i a n t e a s s o l d i n C a l c u t t a ) .

Table 2: CORRELATIONS BETWEEN TIE AVERAGE PRICES OF TEA, AT VARIOUS AUCTION CENTERS

(USc/ke)

London Hombasa Colombo Cochfn Ca lcu t ta

Lnnual Date 1964-75 (12 observa t ions )

London Hombaea Colombo /a Cochfn C a l c u t t a /a

7

b n t h l y Data 1972-76 (59 observr t fonr )

London Hombdra Colombo /a Cochin C a l c u t t a

Jonthly Data Dt-Seaeonallzed 1972-76 (59 observat ions)

London bmbaea Colombo - /a Cochi n C a l c u t t a

Auction p r i c e s a d j u s t e d f o r expor t d u t i e s and cesses .

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ate.

STRUCTURE AND PROSPECTS OP TER WORLD PATS AND OILS ECONOHIt

Peter PoZtczk

I. OVERVIEW OF THE WORLD PATS AND OILS ECONOm . . . . . . . . . . . . A. S t ruc tu re of the Vorld Oilreed Economy .....,.... 8. Recent Trendr ...................................

11. ST~UCXURE OF THE mDEL FOR TtlE PATS AND CILS ECONOMY . . A. S~lpply Equationr ................................ B. Demnd Q u a t i o a r ................................ C. Pr ica Equatioar f o r Fa t r and Xi&-Protein 13aalr ..

I HODEL SUKUTIONS AND PROJECTIONS ....................... A. Val i&tion of the M e 1 ......................... B. Prorpactr f o r the World Oilseed Economy .........

VI- 1 VI- 3

I. OVERVIEW OF THE WRLD FATS AND OILS ECONOMY 11 - 1. Oi l seeds and t h e i r products--fats , o i l s and h igh p r o t e i n meals-- account f o r about 12 percent of M r l d t r ade . Although t h e bulk of these products come from i n d u s t r i a l i z e d c o u n t r i e s , many developing c o u n t r i e s r e l y heav i ly on expor t ea rn ings from o i l s e e d s ( p a r t i c u l a r l y coconut, o t l palm and groundnuts). Host of t h e s e c o u n t r i e s o r e loca ted i n t h e t r o p i c a l belt.

2. An important c h a r a c t e r i s t i c of t h e ~ r l d f a t s and o i l s economy is t h e l a r g e number of o i l -bea r ing raw mate r i a l s . On t h e b a e i r of t h e i r source , f a t s and o i l s con be grouped i n t o vegetable o i l s o r animal f a t s ( inc lud ing marine o i l s ) . Vegetable o i l s can be f u r t h e r broken down i n t o o i l 8 from annual o i l s e e d c r o p s and those f roa pe renn ia l t r e e crops. Soybeans, cunf lover seeds , co t tonseeds , groundnuts and rapeseeds a r e t h e major annual crops; coconuts, palm f r u i t and o l i v e s a r e t h e main t r e e crops. C a t t l e , hogs, f i s h and o t h e r marine products a r e t h e main sources of a r~ imal f a t s . 11

S t r u c t u r e of t h e World Oi lseed Economy

Linkages Between O i l s and Heals

3 . Many f a t s and o i l s a r e byproducts from t h c process ing of o i l s e e d s and animal products. The i r supply, then, depends l a r g e l y on t h e demand f o r t h e primary product. The a v a i l a b i l i t y of t a l l o v and l a r d , f o r example, is d i r e c t l y r e l a t e d t o t h e s l a u g h t e r of c a t t l e and hogs. Since most o j l s e e d s c o n t a i n both o i l and high-protein w a l , t h e s u p p l i e s of vegetable o i l s a r e f r e q u e n t l y determined by t h e demand f o r meals. The j o i n t recovery of two products-oil and meal--facing markat demands t h a t a r e l a r g e l y independent of one ano the r i s ano the r c h a r a c t e r i s t i c f e a t u r e of t h e world o i l s e e d economy. Since t h e economic f o r c e s t h a t determine demand f o r high-protein meals a r e d i f f e r e n t than those f o r f a t s and o i l s , t h e markets f o r both these two commodities have t o be considered. 31 -

11 While t h e a u t h o r s a r e r espons ib le f o r any e r r o r s , they wish t o thank - Mart in Pa ldas , i n p a r t i c u l a r , f o r h i s e x t e n s i v e comments and suggest ions . - -

21 The f a t s and o i l s e x t r a c t e d from these raw m a t e r i a l s a r e genera l ly c l a s s - 6 - i f i e d a s "edible /soap £fits and o i l u , " r e f l e c t i n g t h e i r two major end-uses: - e d i b l e products and soa s o r de te rgen t s . These end-uses account f o r about ' t i * 97 percent of t h e prod - t i o n of a l l major f a t s and o i l s . I n t h i s paper, - t h e term " f a t s and o i l s " r e f e r s t o t h i s ed ib le / soap category.

3 1 The c l o s e l i n k between t h e markets f o r f a t s and o i l s and high-prote in - meals i n j e c t s an a d d i t i o n a l element of i n s t a b i l i t y i n t o the supply of vege tab le o i l s . A s t r o n g demand f o r h igh-prote in meals would s t i m u l a t e t h e process ing of o i l s e e d s , which i n t u r n wouid i n c r e a s e the supply of v ~ q - t a h l ~ of!?, r p _ ~ a r r ! l r ' s c nf thr. TAT?^! f a t 9 2nd o f l s .

Linkages t o Livestock and Grains

4. Feedgrains a?d high-protein w a l s a r e the tvo main ingred ien t s i n ar.iaal feeds. The exac t composition of the feed depends on the n u t r l t i o n a l needs of the animals and the r e l a t i v e p r i c e s of t h e ingredients . Thur, the demand f o r high-protein meals is t i e d t o the production of l i ve s tock and da i ry products, a s v e l l a s t o t he market f o r feedgrains. The g r w i n g shor tage of pas tu re has boosted t he demand f o r animal feeds by producers r a i s i n g l i ve s tock i n f e e d l o t s and by o the r large-scale l ives tock operat ions .

Linkages Between Ind iv idua l Pats and O i l s

5. I n a d d i t i o n t o the linkage8 between the markets f o r f a t e , o i l s , high- p r o t e i n meals, feedgrains and l ives tock products, t he r e a r e a l s o c lose t i e s betveen t h e markets f o r individual f a t s and o i l s . Host f a t s and o i l s a r e in terchangeable , and manufactures of amrgarine, shor tening, soaps and o the r f a t products can s u b s t i t u t e one o i l f o r another , wi th in the s p e c i f i c requirements of t h e i r products. S imi la r ly , the animal feed industry can s u b s t i t u t e ona high-protein meal f o r another i n t he manufacture of feeds. Considering t h e scope of t h i s in te rchangeab i l i ty , t h e i r markets have t o be looked a t s i mu1 taneously.

Annual Versus Perenn ia l Crops

6. &I noted a uniqut fea tu re of the f a t s and o i l s amrket is t h a t i t s supp l i e s come both f r o a annual crops and perennial t r e e crops. The source of a product a f f e c t s h w suppl ies can be ad jus ted i n response t o p r i c e s and t h e s t a b i l i t y of suppl ies . Producers of annual o i l s eed c rops can a d j u s t t h e i r production plans quickly (usua l ly v i t h i n a year). 11 Producers of t r e e crops l a ck t h i s opt ion. The i r investraent i n o i l palm, coconut o r o ther l i v e t r e e s i s based on p r i c e expectat ions over a longer period a s compared t o t h a t f o r o i l s e e d crops. Because of the uncer ta in ty , investment i n t r e e crops is usua l ly more r i s ky tl-an i n annual crops.

7. The supply of o i l s from t r e e crops is more s t a b l e than t h a t of annual crops. Once t h e t r e e s have been planted, producers usua l ly have no choice but t o harves t a s unharvested crops a r e a major source of the d i s ea se s vhich endanger t h e l i f e of the t r e e s and thus fu tu r e harvests .

L

, 8. The t r e e s of most perennial o i l s eed crops remain productive f o r more than 30 years ; some such a s o l i v e t r e e s have a l i f e span of up t o 60 years.

1/ Many annual o i l s e e d crops are produced i n both the Northern and the - Southern Hemispheres. Their production cycles a r e roughly opposite-- the harves t time i n t h e Soutnern Hemisphere corresponds t o the p lan t ing time i n t he Northern Hemisphere. Thus p lan t jng dec t s i ons In one hemisphere a r e a f f ec t ed by t h e nu tcc -c o f t h e h a r . ~ e s t i n :hc o t h e r .

Although t h e y i e l d o f tree crabs f o l l w s a y a t t e r n y which v a r i e s w i t h t h e c r o p a n d somet imes e v e n w i t h t h e v a r i e t y o f t h e same c r o p , w e a t h e r , c u l t i v a t i n g p r a c t i c e s and t h e a g e o f t h e tree r e m a i n t h e most i n f l u e n t i a l f a c t o r s d e t e r m i n i n g y i e l d s . The n a t u r e o f t h e c r o p combined w i t h v a r y i n g i n v e s t m e n t h o r i z o n s g i v e s e a c h o l l s e e d c r o p a s p e c i f i c p r o d u c t i o n c y c l e . T h e s e c y c l e s , o f t e n a c c e n t u a t e d by abnormal w e a t h e r , a c c o u n t f o r a s i g n i f i c a n t p o r t i o n of t h e i n s t a b i l i t y o f s u p p l i e s o f f a t s a n d o i l s .

B. Recen t T r e n d s

9 . S i n c e t h e e a r l y 1960s. v o r l d p r o d u c t i o n o f f a t s a n d o i l s h a s g r w n a t a n a v e r a g e a n n u a l r a t c o f s l i g h t l y more t h a n 3 p e r c e n t ( T a b l e 1 ) . Dur ing t h i s p e r i o d , s u p p l i e s o f v e g e t a b l e o i l s grew f a s t e r t h a n t h o s e o f a n i m a l f a t s and m a r i n e o i l s . S e v e r a l f a c t o r s a c c o u n t f o r t h e i n c r e a s e i n t h e s u p p l i e s o f v e g e t a b l e o i l s . F i r s t , t h e g r w i n g demand f o r r o y b e a n mea l l e d t o a s h a r p i n c r e a s e i n s o y b e a n o i l , which is r e c o v e r e d j o i n t l y w i t h soybean meal. Soybean o i l n w p l a y s a dominant r o l e i n t h e f a t s a n d o i l s marke t , w i t h marke t share o f a b o u t 20 p e r c e n t .

10. A s e c o n d f a c t o r beh ind t h e i n c r e a s e i n v e g e t a b l e o i l s u p p l i e s is t h e s u d d e n g r w t h o f p a l m o i l s u p p l i e s . The d r o p i n n a t u r a l r u b b e r p r i c e e i n t h e y e a r s f o l l w n g t h e Korean War t r i g g e r e d a m a s s i v e s h i f t away from r u b b e r t o o i l palm. Crowing c o n d i t i o n s were i d e a l i n M a l a y s i a , I n d o n e s i a a n d some West A f r i c a n c o u n t r i e s and w e r e r e f l e c t e d i n t h e lw c o s t s o f p r o d u c t i o n o f palm o i l r e l a t i v e t o its p r i c e s , which were l a r g e l y d e t e r m i n e d by t h e marke t f o r a l l f a t s a n d o i l s . T h e s e f a v o r a b l e econcmic c o n d i t i o n s s u s t a i n e d t h e e x p a n s i o n o f o i l palm p r o d u c t i o n , o f t e n a t t h e e x p e n s e o f r u b b e r , t h r o u g h o u t t h e 1960s and e a r l y 1970s. The marke t s h a r e o f palm oil-10.3 p e r c e n t - - i s q u i c k l y a p p r o a c h i n g t h a t o f soybean o i l .

11. While t h e m a r k e t s h a r e s o f soybean a n d palm o i l s expanded, t a l l o w and l a r d l o s t some g r o u n d as l i v e s t o c k p r o d u c e r s began t o respond t o t h e demend f o r l e a n e r meat ( b e e f and pork) . T h i s demand grew o u t o f a c o n c e r n a b o u t t h e a d v e r s e e f f e c t s o n h e a l t h o f p o l y s a t u r a t e d f a t s . Consumer demand s h i f t e d f rom b u t t e r a n d a n i m a l f a t s t o v e g e t a b l e o i l s . T h i s c h a n g e i n t h e p a t t e r n o f consumpt ion o c c u r r e d a t a b o u t t h e same time t h e i n c r e a s e d s u p p l i e s o f v e g e t a b l e o i l s a r r i v e d on t h e market. T h e s e s u p p l i e s were t h e r e f o r e a b s o r b e d w i t h o u t a n a p p r e c i a b l e d e c l i n e i n t h e i r p r i c e s r e l a t i v e t o t h o s e o f o t h e r f a t s a n d o i l s . ,

H o s t t ree <raps h a v e a g e s t a t i o n p e r i o d which v a r i e s between t h r e e ( o i l palm) a n d f i v e y e a r s (coconut palm). Y i e l d s u s u a l l y c l i m b s h a r p l y a f t e r t h e f i r s t c r o p , r e a c h i n g a peak between 10 and 1 5 y e a r s a f t e r p l a n t i n g . From t h e n on, y i e l d s b e g i n t o d e c l i n e s l o w l y , u s u a l l y between 1 and 2 per - c e n t a y e a r . I n a d d i t i o n , t h e y i e l d o f some trees (e.g., o l i v e trees) is c h a r a c t e r i z e d by d i s t i n c t "on" and "of f" y e a r s , t h a t is, h i g h y i e l d s fallowed bv l w y i e l d s .

Table 1: WRLD PRODUCEION OF SELECTED PATS AND OILS (FAT OR OIL EQUIVALENT, FIVE-YEAR A V m e S P

Production C r w t h Rater 1961-65 1966-70 1971-75 1961-651 1966-701 1961-65/ .- -. -. - - - - - - - - -~ -~

7000,mt 2 Share '000 mt % Share '000 mt % Share 1966-70 1971-75 1971-75

(in porcent)

VEGETABLE OILS 17,831 59.4 21,392 61.9 27,209 65.1 - - - 3.7 - 4.9 - 4.3 - From: Oilrtede

Soybean Sunf l w e r Cottonreed Groundnut Rspeeeed

Frm: Tree Crope Olive Coconut Palm Palm Kernel

ANIMAL FATS 6 MARINE 01%'' " 12,126 - 40.6 13,167 - 38.1 14,564 - 34.9 - 1.7 2 .o - 1.9 - From: F l s h

Butter Lard T a l l w

TOTAL FATS 6 OILS 29,957 - 1OOeO 34,559 - 100.0 41,773 100.0 - 2.9 - 3.9 - 3.4 - Source: USDA s t a t l s t l c s .

12. Fats and o i l s en ter the in te rna t iona l market8 i n two forms-unpro- cer red (e.g, a s o i l s eed r ) , o r processed ( i n the form of o i l ) . 11 The proportions of o i l r eed t o o i l exportr vary widely among f a t e axd o i l r over time. They la rge ly r e f l e c t the r e l a t i v e prof i t a b i l i t y of o i l reed procerring ( o i l ex t rac t ion) i n producing and importing countr ier . ~ r a d i t i o n a l l y , ' t h e bulk of o i l s eed r traded in te rna t iona l ly i r procerred by the importing coun t r i t r . Further, r ince the s t ruc tu re of f r e igh t r a t e r and t a r i f f r i n importing count r ie r favorr t rade i n o i l r eed r and o i l r eed productr, they a r e traded more than f a t e and o i l r .

13. Trade i n f a t r , o i l r and high-protein meal6 mirror. t h e i r ruppller. Since the conrumption of c e r t a i n f a t , o i l o r any o ther o i l r eed product i r highly r t a b l e i n moot producing countr ier , g r w i n g sxpor t r a r e urually re la ted t o g r w i n g ruppl ier . The l ink between production and exportr becomer r t ronger the m l l e r the rhare of doaar t ic conrumption. The production of palm o i l i n Southeart h s i a i r i l l u r t r a t i v e : only a small port ion of the palm o i l i r conruwd there , the bulk f l w i n g in to in te rna t iona l marketr.

14. Since the e a r l y 19600, t rade i n f a t e and o i l 8 a r a group har grown f a r t e r than production (Table 2 and Chart 1). The correrponding average annual g r w t h r a t e r ware 4.7 and 3.4 percent. Thur conrmers i n im19rting counttier--.oainly the indur t r ia l ized c o u n t r i e r - a w have accerr t o a wider range of f a t e and o i l r than before.

15. Although moot individual f a t e and o i l s followed t h i s trend, exportr of o i l r from perennial crops grew a t a s l i g h t l y lower r a t e than production (Table 3). A g r w i n g domestic deuand fo r these o i l s (mainly l a u r i c o i l s i n Southeart Asia and palm o i l i n Vest Africa) has prevented a more rapid expanrion of t h e i r trade.

16. The p r i ce s f o r f a t s and o i l s i n the in t e rna t iona l markets f o l l w the general p r i ce l e v e l s f o r t h i s comodity group a s a whole (Charts 2 and 3). Deviations usual ly r e f l e c t a change i n the uarket shares of individual f a t s o r o i l s . An increase i n t he market share of an individual f a t o r o i l is of ten associated with a dec l ine i n i ts price r e l a t i v e t o the general pr ice l e v e l of the commodity group. The main reason behind t h i s phenomenon is that f a t s and o i l s a r e not per fec t subs t i tu tes . Xany end-uses -quire a spec i f i c product and o ther o i l s could be subs t i tu ted only a f t e r extensive ref inicg. A l e s s e r deoand f o r add i t i ona l quan t i t i e s of a ce r t a in f a t o r o i l therefore r e s u l t s i n a drop i n i ts r e l a t i v e price. The same is a l s o t r u e with respect t o high- pro te in meals.

11 Some o i l s , such a s palm o i l , can be exported only i n processed form, - s ince the oil-bearing raw mater ial , the palm f r u i t , spo i l s within hours of harvesting.

u r l r r r I. wwnLu ~ ~ U U U C ; ~ IUN AND EXPORT OF FATS AND OILS (PERCENT)

PRODUCTION

EXPORTS

n u l 1.

OIL b I 2 S

VI- 7

c h r t 2: PRICES AND €)<PORT PRICE INDEXJOF SELECTED FATS AND OILS, igso - 77 (US DOLLARS PER METRIC TON)

1 . 1 0 4 ,100

1.000 - - 150

##- -140

i I 1 I I I I I I I I

YEARS

issi 1962 im 1964 1- 1966 1967 iwa 1- lam 1971 i g n 1973 1974 i ~ n 1976 1977

J Prica rr.ighnd by wrmt m.gom.

Sou-: World Bmk. World Bank-ZZ8W1

VI- 8

art 3: PRICES AND EXPORT PRICE INDEXJOF SELECTED FATS AND OILS, 1sb0 - TI (CONSTANT 1977 US DOLLARS PER METRIC TON)

YEARS

Table 2: ' WORLD TRADE OP PATS AND OILS AS A PERCENTAGE OP PRODUCTION

VEGETABLE OILS

Prom: Oileeedr Soybean Sunflower Cot tonreed Groundnu t Rapeseed

Prom: Tree Crops 01 ive Coconut Palm Palm Kernal

ANIMAL PATS 6 MARINE OILS - 19.6 - 22.8 23 .O - Prom: Fish

But t a r Lard Tallow

TOTAL PATS 6 OILS 26.6 - 29 .2 - 30.2 -

Source: USDA r t a t i r t i c s .

Table 3: WORLD TRADE OF SELECTED FATS AND OILS (FAT OR OIL EQUIVALENT), FIVE-YEAR A V W E S

Trade 1961-65 1966-70 1971-75 , 000 mt X Share -000 st X Share - Far '011

-- ( I n percent 1---

VECt.TABLE OILS

From: 01 l r e s d r Soybean Sunf lover Cottonreed Croundnut Raperecd

?ram: Tree Cropm 0 1 i v e Coconut Palm Palm Kc rne l

ANIMAL FATS 6 MARINE 0ll.S

From: F i s h Butter Lard Ta Llov

TOTAL FATS 6 OlLS 7,959 100.0 10,078 1WeO 12,625 100.0 - - Source: USDA s c a t i s c l c s .

11. STRUCTURE OF ME HODEL FOR ME FATS AND OILS ECONOMY

17. The main o b j e c t i v e of t h e model is t o c a p t u r e long-term changes i n t h e markets f o r f a t s and o i l s and high-protein s e a l s . 11 While many of the complcx r e l a t i o n s h i p s t h a t c h a r a c t e r i z e these markets );bve been s i m p l i f i e d t o keep t h e model mnnageable, t h e e s s e n t i a l f e a t u r e s of t h e i n t e r r e l a t i o n s h i p s between t h e markets f o r t h e va r ious o i l s e e d s and t h e i r products have been incorporated.

18. The model d e s c r i b e s t h e behavior of t h e t h r e e major markets of t h e o i l s e e d complex: f a t s and o i l s , high-protein meals and o i l seeds . Although t h e atarkets f o r f a t s and o i l s and f o r high-protein meals respond t o d i f f e r e n t economic fo rceo , t h e i r b a s i c s t r u c t u r e is s i m i l a r . For example, both a r e c h a r a c t e r i z e d by a l a r g e number of products t h a t can e a s i l y be in~erchanged . Hence, t h e s t r u c t u r e of the models f o r t h e two p s r k e t s ' is i d e n t i c a l .

19. Each model c o n s i s t e of t h r e e blockb o r s e t s 3 E equations: a demand block w i t 1 1 d t m n d equa t ions f o r e i g h t regions , 21 a supply block which c o n t a i n s supply equa t ions f o r each of the o i l s h igh-prote in meals, and f i r sa l ly a t r a d e block which c o n s i s t s of expor t supply equa t ions f o r theee commodities and corresponding (price-dependent) import demand equa t ions (Chart 4). The e q u a t i o ~ s of t h e t r a d e block determine j o i n t l y t h e volume of expor te and t h e p r i c e s f a r ind iv idua l o i l s o r high-protein s e a l s . A s tock supply e q u a t i o n determines t h e l e v e l uf s t o c k s a t the end of t h e year on t h e bas ia of ~ p e n i n g s t o c k s and t h e gap between t o t a l demand and s u p p l i e s , t h i s e q u ~ t i o n c l o s e s t h e model. Tha r a t i o n a l e i o r including s t o c k v a r i a b l e s i n tl-e model was mainly t o e s t a b l i s h a l i n k between t h e markets f o r f a t s and o i ! ~ a n the one f o r h igh-prote in meals.

20. The s u p p l i e s of o i l s and high-protein meals a r e derived d i r e c t l y from t h e supply of corresponding o i l seeds . I t is i m p l i c i t l y assumed t h a t a l l of t h e h a r v e s t of each o i l s e e d is processed i n t o o i l and meal.

21. Both FA0 and USDA d a t a were used t o e s t i m a t e t h e k n a v i o r a l equa t ions of t h e model. The l a c k f published d a t a on s t o c k s and ccnsumption f o r both

11 Althcugh t h e r e a r e s e v e r a l econometric models f c r ind iv idua l f a t s , o i l s - o r h igh-prote in meals, only a f e t h a v e a t t e s p t ; l d t o include the markets f o r a l l major f a t s and o i l s simul&aneously. The major published s t u d i e s on these model l ing e f f o r t s L n c l d R.O. Vandenborro, Economic Analysis of Re la t ionsh ips i n the I n t e r n a t & n a l Vegetable O i l and Heal S e c t o r , Univers i ty of I l l i n o i s , Departmew of A g r i c u l t u r a l Economics Research Report 106 (Champaign, 111.: ~ u l ? 1970); and F.C. Adams, Afi I n t e r r e l a t e d Econometric r o d e l i n g System f o r Fa t s and O i l s Commodities, Univers i ty of Pennsylva.tia. The Wharton School. Department of Ec~nomics. Economics ~ c p a r t m e n t nisc;ssion Paper No. 327 ' ( ?h i l ade lph ia , PA.: ~ c t o b e r 1975).

21 I n d u s t r i a l i z e d c o u n t r i e s , c e n t r a l l y planned economics, L a t i n Americ-, - North Af r i ca , West Afr ica , East Af r i ca , South Asia and the East A s i . and 2 a c i i i c .

Chwt 4: STRUCTURE OF THE OILSEED ECWOMY

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f a t * and o i l s aqd high-protein maals made i t necessary t o estimate chese da ta , The f o l l o ring qpproach was taken. PJ r s t , da t a on stocks were cstimeted on the bas is of a gontulated relat ionship retween s tocks, prices and t o t a l demand t?d some informt:on on s tocks which war ava i lab le f o r a feu se lec ted years. Implied t ~ t a l ,ansumption vhs c-mputed from t t e ea t iaa ted stock data and the information on production. The regional breakdown vae obtained by a l loca t ing the estimated t o t a l comumptloa t o the variocs regions on the basis o i estimated theo re t i ca l disappearance of o i l s cnd high-proteia mealr. FAO assumptions a tou t o i l (meal) y i ~ l d s and the shares of the tota! o i l seed crop proceased fo r o i l er . t ract ion cn each councry were used t o computa the theo re t i ca l d i~appearanc3 of o i l s a d mea?~.

A. Supply Eqabrtlonu -. - 22 . Yhe supply blcck of the model contains supply equations f o r e ight oi leeeds, s i x f a t s o r a i l s and fishmeal. PA0 s t a t i s t i c s veta ured t o e s t i m t a :he parameterr fcr tkrbe aquationr. The following basic Narlovlan supply c d f u r t m n t modei uas choeen fo r tha a ~ l y s l s of the behavior of the oupply of o i l reeds :

Q0si uor;d productron of oi leeed ( i )

F O S ~ - price of oi lsced ( i )

Z - ac t of suppl j r h j f t e r s

23. Tradi t iona l ly , t h l s model is used t o capture the year-to-year f t u c t u a t i o ~ s i n thc ac.reage of a g r l c u l t l ~ r a l crops. Together with an cquation t h a t descr ibes the y lc ld behavior cf these crops, f t is ;hen possible co cxpla! - -hanges i n crop producr ion.

25 . Tht!: appraach requires the estimation of two behavioral equations. Crop y i e lds la rge ly r e f l e c t weather condi t i c n s during the groi ing pe .-Fod. For smll regions i t is usually pos3ible t o o: t a i n accurate data on r a i n f a l l and ofper w b t h e r pat terns . 'R,e usefulness of t h e ~ e data--as well a s of those on a\%rage yields--for ana ly t i ca l purposes Zeziinas a s t5e s i z e of the region i ~ r e n s e s . I t would be extremely d i f f Lcult t o co-mtruct a m n i n g f - r@ationship between av. :ge yields znd t+,e varioun weather var iables a t z , .romld level . Production, Instead of acreage, vss t h ~ r e f o ~ z chosen a s the . dependent var iable .

25. Altbwgh t h i s app: .~ach s ignlf isaqciy reduced the required nmbei of behavioral e q ~ a t i o r s i n t k c models, i t d i d not a l l e v i a t e the econome1:ric problems ass3ciated +.~th car.:uriag the response of ptuducers in many d i f f e r e n t

c o u n t r i e s t o a s e t of i n t e r n l t i o n a l market p r i c e s i n a s i n g l e equation. L/ Further a n a l y s i s w i l l be necessary :o es t imate reg iona l supply equat ions based on pradvcer p r ices .

2 6. Considr:ing these limitations, it is not durpr i s ing t h a t few e s t i m a t i o n s y i e l d e d a supply response t o p r i c e s t h a t was s t a t i e t i c a l l y s i g n i f i c i a n t . Crops produced e i t h e r i n n smal l number of c o u n t t i e s o r mainly f o r e x p u t t s appear t o respond more s t r o n g l y t o p r i c e s s o compared w i t h o t h e r crops. fhe statistical s t r e n g t h of the es t imated c o e f f i c i e n t r is ind ica ted through t h e t -values presented below t h e es t imated coef f i c i e n t s .

Vegetable O i l s from Oilseeds

27. Soybeans. Soyheans a r e a s u b t r o p i c a l crop. They grow best la a h d d c1imat.t wi:h plenty of r a i n during t h e grovitlg reason, whereas d r y weather d \ r r iag t h e r ipen ing period f a c i l i t o t e o t h e harvest . E i t h e r drought o r ~ x c e s s l v e mois tura hmcrring germirat ion w i l l , houever, lower y i e l d s . The c u l t i v a t i o n of soybeans rzarhes from t h e t r o p i c s and temperate zones up t o a l a t i t u d e uf more than SO degrees. Soybeans belong t o t h e family of legumes wh!.ch can u s e n i t r o g e n i n t h e atmosphere d i r e c t l y , reducing t h e demand f o r n i t roger, E a r t i l i z e r . A/ 28. Soybean production is concentra ted i n t h r e e coun t r i e r : t h e United S t a t e s , China and Br&ziL. Together, they supply more than 90 percent of t h e

11 I n its s t a t i s t i c a l e s t imat ion form, the model can be w r i t t e n a s follows: -

In t h i s f o r m l a t i o n t h e model represen t s a long-run supply r e l a t i o n s h i p . Short-term (eSR) and long-term (el,) e l a s t i c i t i e s can be computed a s ,

L f o l lovs :

2/ D i f f e r e n t groving condi t ions (Elimata, s o i l s , day l eng th , e tc . ) r e q u i r e - d i f f e r e n t v a r i e t i e s of soybea * -

3 i Soybeans w i l l produce t h e i r o m ni t rogen only i f they a r e e i t h e r proper ly - inocu la ted wi th nodule 5 s c t e r i a a t t h e time of p lan t ing o r if the s o i l c o n t a i n s ,hese b a c t e r i a . Usually these b a c t e r i s w i l l i i v e f o r s e v e r a l yea rs i n t h e soi l . The f a c t t h a t soybeans enr ich t h e s o i l with n i t rogen , a long w i t n t h e i r s h o r t growing per iod, makes them an i d e a l in tercrop. The length o f t h e growing period depends, houever, on :he v a r i e t y of soybean and c s n y e s f r o ? 75 32ys ' 2 : car;, z a i u r i n g varie t ies to more t h a n 200 days f o r l a t e maturing ones.

world 's soybean needr. However, only t h e United S t a t e s and B r a z i l can be regarded a s major e x p o r t e r s , a s China's product ion goes t o domestic needs.

29. Since t h e e a r l y 1 9 6 0 ~ ~ soybean production ha8 grown a t an average r a t e of about 6 pe rcen t a year (Tabla 4). k r t of t h i s expansion has taken p l a c e i n t h e United S t a t e s and, more recen t ly , i n B r a z i l . The growing demand f o r l i v e s t o c k products is a s s o c i a t e d wi th t h e i n c r e a s e i n per c a p i t a income a f t e r World War 11 and t h e s h i f t t o nore e f f i c i e n t l i v e s t o c k production-ruch a s b r o i l e c f a c t o r i e r and feedlots- -wi th t h e i r demand f o r c o m ~ c r c i a l l y manufactured animal feeds .

30. I n t h e f o l l w i n g supply cquat ion f o r roybeano, l a s e d soybean p r i c e s emerged a s a s t ~ t i r t i c a l l y s i g n i f i c a n t explanatory v a r i a b l e .

Soybean Supply: 1961-77

R~ - 0.97

where :

D.W. - 1.23

SOYS - world production of soybeans ('000 m t )

SOYP - p r i c e s f o r soybeans, US, 44 pe rcen t , d e f l a t e d by t h e Index of I n t e r n a t o n a l I n f l a t i o n , CIP Rotterdam (1974 cons tan t S l o t )

D75 = dummy v a r i a b l e s e t t o 1 f o r 1975

D76 = d w v a r i a b l e s e t t o 1 f o r 1976

31. The p r i c e of soybeans (SOYP) lagged by one year was a s t r o n g exp lana to ry v a r i a b l e of world Boybean production. Its c o e f f i c i e n t i s 1

s t a t i s t i c a l l y s i g n i f i c a n t a t t h e 5 percent l e v e l . The implied p r i c e e l a s t i c i t y measured a t t h e uean was 0.28; t h e corresponding long-run e l a s t i c i t y was 2.75. These e l a s t i c i t i e s a r e wi th in t h e range of -those es t ima ted by Houck, et. 81. 11 f o r t h e United S t a t e s . Equation ('#.(I) f i t s t h e genera l s t r u c t u r e of ~ e r i o v e ' s adap t ive e x p e c t a t i o n s model. c o e f f i c i e n t c s s o c i a t e d wi th lagged soybean product ion (SOYS) - 21 i p d i r a t e s , -

11 James P. Houck, Hary E. Ryan and Abraham Subotnik, Soybeans and The i r - Products: Xarkets , Xodels and Pol icy ( H i n n e a p o l i ~ , Hinn. : Univers i ty of U n n e s o t a P r e s s , 19721, p. 97.

2 / This v n r t a b l c : r ~ v ? l e d t 5 c b u l k "f :F,c c x p l ~ n a t o r y 2c.i.c: I: a l : ~ o s t a l l t h e - es t ima ted supply equat ions .

Table 4: SOYBEAN PRODUCTION I N W O R PRODUCING COUNTRIES, FIVE-YEAR AVERAGES AND AVEWE ANNUAL CROW RATES

eroduction Growth Ratem 1961-65 1966-70 1971-75 1961-651 1966-701 1961-651

Argentina B r a z i l canad. Chlaa Indonemla

_---- ( '000 a t )-------- -------- (percent 1- 'i

Korea, D.P. Rep. 183 226 24 7 4.3 1 . 8 3 .O Korea. R ~ D . 163 2 14 266 5.6 4 -5 5 -0 - . h x i c o 50 200 4 50 32.0 17.6 24 .6 Romanla 3 50 24 5 75.5 37 .4 55.3 US 19,600 28,697 36,632 7 .9 5 .O 6.5 USSR 394 537 435 6 .4 -4.1 1.0

WORLD TOTAL 32,471 43,099 57,764 - 5.8 - 6 -0 - 5 -9 pp - - - - -

Source: FA0 da ta .

t h e r e f o r e , t h e r a t e a t which soybean producers a d j u s t t o t h e des i red l e v e l of o u t p l t (given t h e i r p r i c e expecta t ions) . I n equa t ion (1.1), t h e r a t e of adjustment is about 10 percent a year.

L

32. In ' d i n a , Japan and o t h e r Asian c o u n t r i e s , a l a r g e por t ion of t h e soybean h a r v e s t is consumed d i r e c t l y a s a food crop-either green, d ry o r sprouted, whole o r s p l i t . Green seeds a r e used a s a vegetable ; roas ted and s a l t e d seeds a r e used i n cakes and candies. Other food uses include soybean f l o u r and soybean milk. The f l o u r is e x t r a c t e d from whole beans o r t h e soybean cake t h a t r m i n s a f t e r t h e o i l has been removed; it is a valuable source of p r o t e i n and is the re fore f requeni ly added t o p ro te in -def ic ien t f l o u r from c e r e a l g ra ins . Soybean milk i s p r e p a k d from whole beans, which have a p r o t e i n compostion s i m i l a r t o casein.

33. Soybean O i l and Heal. The h l k of the world 's soybean production i s processed i n t o soybean o i l and soybean meal. Host e x t r a c t i o n processes use e i t h e r chemical s o l v e n t s (e.g., hexane) o r mechanical devices such a s e x p e l l e r s , screw p r e s s e s o r hydraul ic p resses t o e x t r a c t the o i l contained i n t h e c e l l s of t h e soybean i n t h e form of dropletcl (goybeans c o c t a l n between 13 a n d 20 perceut o i l ) . To f a c i l i t a t e the e x t r a c t i o n of t h e o i l , t h e soybeans

V I - 1 7

a r e f i r s c : leaned a n d t h e n c r a c k e d , h e a t e d and f l a k e d . The f l a k i n g a l l w s many mnce o i l - b e a r i n g ce l l s L O be exposed t o t h e c h e m i c a l s o l v e n t , v h e n t h i s p r o c z s s is used . E x t r a c t i o n by s o l v e n t y i e l d s t v o p r o d u c t s : m i s c e l l a and d e f a t t e d f l a k e s . To o b t a i n c r u d e soybean o i l , t h e m i s c e l l a is f i l t e r e d and t h e c h e m i c a l s o l v e n t removed. Mechanica l soybean e x t r a c t i o n y i e l d s c r u d e s o y b e a n o i l and s o y b e a n cake . D e f a t t e d f l u k e s a n d soybean c a k c a r e f u r t h e r p r o c e s s e d i n t o t h e p r o t e i n f l a k e s and meal u s e d i n t h e p r e p a r a t i o n o f a n i m a l f e e d e .

34. I n t h e model , i t is assumed t h a t a l l s o y b e a n s a r e c o n v e r t e d i n t o s o y b e a n o i l a t a n a v e r a g e e x t r a c t i o n r a t e o f 17.5 p e r c e n t . The b u l k o f t h e s o y b e a n o i l ( u s u a l l y p a r t i a l l y h y d r o g e n a t e d ) is u s e d f o r e d i b l e p u r p o s e s , - 2 1 a r s i n l y i n t h e p r e p a r a t i o n o f a s r g a r i n e and s h o r t e n i n g , b u t a l s o a s l i q u i d c o o k i n g o i l a n d s a l a d o i l . 31 Soybean o i l is r a r e l y u s e d i n f r y i n g s i n c e t h a t p r o d u c e s f i s h y o d o r s . The b e is t r u e f o r s t o r e d f o o d p r o d u c t s v h i c h h a v e been f r i e d i n s o y b e a n o i l . P a i n t s , v a r n i s h e s , s o a p s a n d l u b r i c a n t s a r e t h e - i n i n d u s t r i a l u s e s f o r soybean o i l .

35. Soybean meal is 48 p e r c e n t p r o t e i n , v i t h a h i g h l y b a l a n c e d amlno a c i d c o n p o s i t i o n . T h e r e f o r e i t is u s e d i n t h e p r e p a r a t i o n o f f e e d s f o r a 1 1 l i v e s t o c k .

36. T r a d e i n Soybean P r o d u c t s . Soybean o i l a n d mea l e n t e r t h e i n t e r n a t i o n a l m a r k e t s e i t h e r i n p r o c e s s e d form, a s i n d i v i d u a l p r o d u c t s , o r u n p r o c e s s e d , i n t h e fo rm of v h o l e beans. The b u l k o f soybean o i l e x p o r t s e n t e r s t h e i n t e r n a t i o n a l m a r k e t s i n t h e form o f u n p r o c e s s e d b e a n s , m a i n l y b e c a u e e i m p o r t i n g c o u n t r i e s p r o t e c t t h e i r o i l s e e d p r o c e s s i n g i n d u s t r y t h r o u g h t a r i f f s o n i m p o r t s o f v e g e t a b l e o i l s . U s u a l l y , o i l s e e d s c a n b e impor ted du ty- f r e e . S i n c e t h e d o m e s t i c demand f o r o i l s and mea ls r a r e l y c o r r e s p o n d s t o t h e r a t i o o f o i l a n d meal e x t r a c t e d f rom imported s o y b e a n s , many o f t h e s e c o u n t r i e s h a v e become e x p o r t e r s o f e i t h e r aoybean mea l o r o i l . I n d u s t r i a l i z e d c o u n t r i e s i m p c r t t h e b u l k c f t h e i m r l d ' s s u p p l i e s o f s o y b e a n s and m e a l , v h i l e d e v e l o p i n g c o u n t r i e s i m p o r t m a i n l y soybean o i l ( T a b l e 5).

37. The volume o f t r a d e i n f a t s , o i l s and h i g h - p r o t e i n m e a l s i s d e t e r m i n e d s i m u l t a n e o u s l y th rough t h e i n t e r a c t i o n o f e x p o r t s u p p l y e q u t i o n s a n d p r i c e - d e p e n d e n t impor t demand e q u a t i o n s . The f o l l o v i n g e q u a t i o n s srrmmarize t h e e s t i m a t e d e x p o r t s u p p l y t e l a t i o n s h i p s f o r fat^ and o i l s .

'9 11 Soybean c a k e , t h e r e s i d - ~ e o f a m e c h a n i c a l p r o c e s s f o r e x t r a c t i n g o i l , - u s u a l l y c o n t a i n s -ween 1 0 and 1 2 p e r c e n t s o y b e a n o i l . A s o l v e n t is u s e d t o remove t h e 'emaining o l l . For t h e p r o c e s s i n g of a small q u a n t i t y o f o i l s e e d s , a s o l f n t e x t r a c t i o n f a c i l i t y is u s u a l l y t o o e x p e n s i v e . A c o m b i n a t i o n o f m e c h a n i c a l and s o l v e n t e x t r a c t i o n is i n t h i s c a s e more c o s t - e f f i c i e n t .

2 1 Soybean o i l was h a r d l y knoun b e f o r e World War 11. S i n c e t h e n , t h e s h a r e - o f s o y b e a n o i l i n t h e i n t e r n a t i o n a l m a r k e t s f o r f a t s and o i l s h a s expanded t o a l m o s t 30 p e r c e n t .

31 Soybean o i l h a s t o be. hydrogena ted . Unhydrogenated . soybean o i l t e n d s t o - d e v e l o p u n p l e a s a n t f i s h y o r g r a s s y f l a v o r s .

9 i?? g *88 rl d

nrl ** z s - u r l m N U hn " 4 9

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w

2 I..

.. a 0 L. 1 0 V)

Soybean O i l Exports: 1961-77

where:

SOYPOX = world e x p o r t s of soybean 011 and soybeans--oi l e q u i v a l e n t

SOYFOS = v o r l d product ion of soybean 011 ('000 a t )

D61 = dummy v a r i a b l e s e t t o 1 f o r 1961

D71 - dummy v a r i a b l e s e t t o 1 f o r 1971

SOYFOP - p r l c e s f o r soybeans, US, 44 p e r c e n t , d e f l a t e d by t h e Index o f I n t e r n a t i o ~ l I n f l a t i o n , CIF Rotterdam (1974 c o n s t a n t Slmt 1.

Soybean Heal Exportn: 1961-77

R2 = 0.97 S.E.E. = 0.097 D.W. = 1.41

where:

SOYMLX = world e x p o r t s o f soybean meal and soybeans--nreal e q u i v a l e n t ('000 at)

L

SOYHLS = world product ion of soybean meal ('000 m t )

S O W a p r i c e f o r soybean o i l (1974 c o n s t a n t S/mt)

Sun f 1 owe r Seeds

38. Although s u n f l w e r s can'be grovn i n a wide range o f cliamtes--from t h e t r o p i c s up t o a l a t i t u d e o f XI degrees-the bu lk of p roduc t ion i s c o n c e n t r a t e d i n c o u n t r i e s w i t h tgmperate c l i m a t e s . Sunflower p roduc t ion is h i g h l y s e n s i t i v e t o r a i n f a l l . An i n c r e a s e i n r a i n f a l l , p a r t i c u l a r l y i f t h e r a i n f a l l i s spaced even ly over t h e grcwing season, r e e u l t s i n h ighe r y i e l d s , a e l o n g as t h e r e is a d r y pe r iod d u r i n g t h e l a t e r s t a g e s of r ipening .

Nevertheless , a l a r g e share of t h e world's s u n f l w e r crop is produced i n regions where r a i n f a l l is l e s s than 500 pna. - 1/

39. The g r w i n g season of t h e sunflower ranges from 70 days (under favorable cond i t ions ) t o f o u r oonths f o r e a r l y maturing dwarf var ie t i ' c r . The bulk of t h e c rop is n w harvested mechanically. A 8-11 por t ion--aainly t h a t produced under t r a d i t i o n a l farming condit ions--is still harvested by hand; farmers c u t t h e f l w e r s , dry them and then rub t h e seeds o u t of t h e f lowerr.

40. The USSR is t h e l a r g e s t producer of runflower r e e d r , accounting, on the average, f o r about 60 percent of w r l d production. The combined output of t h e USSR and o t h e r c e n t r a l l y planned economier r a i r e r t h i s s h a r e t o about 75 percent (Table 6) . Although t h i r f i g u r e ha8 decl ined r l i g h t l y dur ing the p a r t tw decades, 11 w r l d production r t i l l l a r g e l y r e f l e c t r f l u c t u a t i o ~ r i n t h e USSR's ha rves t . The f l u c t u a t i o n s a r e pr imari ly caured by weather condi t ioas , which vary because of t h e Sov ie t Union'r geographical loca t ion . f h i r may exp la in why it was not poss ib le t o e r t h t e a r t a t i r t i c a l l y r i g n i f i c a n t r e l a t i o n s h i p between product ion and i n t e r n a t i o n a l market p r i c e 8 f o r t h e r u n f l w e r seed.

41. The f o l l w i n g r e l a t i o n s h i p i r ured i n t h e model t o p r o j e c t r u n f l w e r product ion.

Sunf l w e r Seedr Supply: 1961-77

(1.2) SUNS, 2232.54 + 0.7298 + 0.7502 SUNPt,l (8.41) (0.33)

R~ = 0.89 S.E.E. = 405.3 D.U. = 2.24

where :

SUNS = world production of r u n f l w e r seeds ('000 m t ) 1

SUNP = p r i c e f o r sunf lover seeds , d e f l a t e d by t h e Index of In te r - n a t i o n a l I n f l a t i o n (1974 cons tan t $/mt)

- 063646675 = dummy v a r i a b l e s e t t o 1 f o r t h e years: 1963, 1964, 1966 and .. 1975

.! - - - DS574 = dummy v a r i a b l e set t o one f o r t h e years: 1965 and 1974

!m .

1/ Dwarf v a r i e t i e s produce reasonable y i e l d s wi th l e s s than 250 mm of rain- - f a l l a year .

2/ This d e c l i n e was l a r g e l y caused by the e x p a n s i o n of s t in f lower p rodr lc t lon - i n chr Sniced Scaces, A u s t r a l i a , Spain and Turkey. I n 1975 the combined s h a r e of these c o u n t r i e s reached 16.2 percent.

w a l C r e r a l l l ? I d t c a o r ( * o 6 . l l m 0.0212 4.Q;I) 0.02M 0.- 0.021S 2.W -0.lZ21 I t0.9n)) c s . t r n ) ( 1 . ~ 1 0 -

i p a i d ud lm rL. u l p l s 1 s 1957-7k a11 oquatlmm WN utlntd lulns a lowlo: s p c c l f l c a t i o a . Z h fip.. i. p a n c h 8 I a k l a ub d f l c l r c l a elm wmupodlna c o t a c l o c l c . S U - St* mra of rc(rue.

4 D.V. - k r b l . V a c # a u c . a t 1 c . * o - nto-..p..oln ~ f f l c l a u o lm c b ~ r n L r w O m r t p t o c d m .

42. T rade i n S u n f l o v e r O i l and Heal . Sun f love r s e e d s c o n t a i n more t h a n 40 p e r c e n t 1 1 of a h i g h l y po lyunsa tu ra t ed v e g e t a b l e o i l . 21 A l a r g e p o r t i o n of t h e p r o d u c t i o n of s u n f l w e r o i l is t h e r e f o r e consumed as t a b l e o r cooking o i l . The r e s t is used i n t h e manufacture o f l i q u i d o i l , marga r ines and s h o r t e n i n g . L w - q u a i i t y s u n f l w e r o i l is bought f o r t h e p roduc t ion bf soaps , p a i n t s and v a r n i s h c s . S u n f l w e r cake is used p r i n c i p a l l y a s a h igh-pro te in supplement i n l i v e s t o c k f e e d s , v i t h a small q u a n t i t y go ing t o n i t rogeneous f e r t i l i z e r s . Sunflower s e e d s a r e a l s o consumed d i r e c t l y , u s u a l l y a f t e r t hey have been r o a s t e d and s a l t e d . Cons ide rab l e q u a n t i t i e s of s eed are a l s o f e d t o p o u l t r y .

43. The f o l l w i n g t v o e q u a t i o n s v e r e used i n t h e model t o d e s c r i b e t h e behav io r of s u n f l o v e r o i l and meal e x p o r t s :

Sunf l w e r O i l Expor ts : 1961-77

ft2 - 0.94 S.E.E. - 0.128 D.W. - 1.96

vhere :

SUNFOX = v o r l d e x p o r t s o f sunf lwer o i l and sun f lower seed-- o i l e q u i v a l e n t ( '000 m t )

SUNFOS = v o r l d p roduc t ion o f sun f lower o i l ( '000 m t )

0676869 - dummy v a r i a b l e set t o 1 f o r t h e yea r s : 1967, 1968 and 1969

D6574 = dummy v a r i a b l e s e t t o 1 f o r t h e years : 1965 and 1974

SUNFOP = p r i c e of sunf lower seed o i l , d e f l a t e d by t h e Index of I n t e r n a t i o n a l I n f l a t i o n (1974 c o n s t a n t $/mt).

I

L

- - 1/ Olde r v a r i e t i e s c o n t a i n o n l y abou t 25 pe rcen t o i l . - 8

!@ - - 2 / Sunf rove r o i l c o n t a i n s abou t 8 5 p e r c e n t u n s a t u r a t e d f a t t y a c i d s and 1 5 -

p e r c e n t f a t t y a c i d s . I ts f a t t y a c i d composi t ion r e l a t e s l a r g e l y t o growing c o n d i t i o n s ; i t is t h e r a t i o of l i n o l e i c t o o l e i c f a t t y a c i d s , r a t h e r t h a n t h e t o t a l c o n t e n t of u n s a t u r a t e d f a t t y a c i d s , which v a r i e s . Sunflower o i l e x t r a c t e d from s e e d s grovn i n t empera t e c l i m a t e s c o n t a i n 60 p e r c e n t l i n o l e i c a c i d . T h i s pe rcen tage d r o p s t o abou t 20 percent i n t r o p i c a l c l i m a t e s .

Cottonseeds

44. Cotton is grown in a large number of countries. The l a rges t producers a r e the United S ta tes , the USSR and China, followed by India , Pakistan and Brazi l (Table 7). Although the a v a i l a b i l i t y of syn the t i c ' f i be r s has reduced the importance of cot ton a s the main raw mater ial i n the production of t e x t i l e s , most producing countr ies have pol ic ies which sh i e ld t h e i r domestic co t ton production from the vagaries of in te rna t iona l markets.

4 5. The cot ton plant is g r w n pr ipar i ly fo r i ts f ibe r ; cottonseeds a r e e s s e n t i a l l y a byproduct. During the ginning operation, the long f i b e r s ( s t a p l e o r l i n t cot ton) a r e removed, while the sho r t f i be r s ( l i n t e r s ) remain at tached t o the cottonseeds. Commercial seed co t ton cons is t s of about 10-15 percent l i n t e r s , 35-40 percent hu l l s and 50-55 percent kernels. Cottonseed y i e lds vary depending on c l imat ic and u o i l condi t ions, a s v e l l a s on cu l t i va t ion methods. Egypt's high-yield v a r i e t i e s produce on the average 1.3 tons per hectare on i r r i ga t ed land. I n India, where the bulk of the cotton acreage is planted with in fe r io r va r i e t i e s , y ie lds average 288 kg per hectare. In the United S ta tes , y ie lds f luc tua te around 1.0 ton per hectare.

46. The follcming supply equation was estimated for cottonseeds.

Cottonseeds Supply: 1961-77

IL2 = 0.90 S.E.E. = 637.2 D.W. = 1.15

where:

COTS = world production of cottonseeds ('000 m t ) L

COTP = pr i ce f o r cottonseeds, def la ted by the Index of In te r - nat ional In f l a t i on (1976 constant $/mt)

TIXE = time trend.

Table 7: COTTONSEBD PRODUCTION I N MAJOR PRODUCING COUNTRIES, FIVE-YEAR AVERAGES AND AVERAGE ANKL'AL G R O m UTES

Production Grwth Rater Country 1961-65 1966-70 1971-?5 1961-651 1966-701 1961651'

1966-70 1971-75 1971-75

a r a z i l China Ewpt India I r a n

b x i c o Pakistan Sudan Turkey US

('000 at ) (percent)

USSR 3,292 3,984 4,981 3.9 4.6 4 .2

Other Countrier 2,494 2,834 3,209 2.6 2 5 2.6

Source: FA0 s t a t i s t i c s .

To ob ta in cottonseed production, it was assumed t h a t a supply of seed cot ton would y i e ld an average of 60 percent cottonseeds.

I

47. Trade i n Cottonseed O i l and Cake. Comercia1 use of cottonseed depends la rge ly on s u i t a b l e crushing capacity and inexpensive t ransport from - .

the ginneries. The o i l content of cottonseeds is low.-11 If f r e igh t r a t e s a r e high, t he p r o f i t a b i l i t y of ex t rac t ing o i l i s reducex.

48. Crude cottonseed o i l has a s t rong c h a r a c t e r i s t i c f l a v o f a n d a dark, reddish-brown color. The qua l i t y of the o i l and i n p a r t i c u l a r as f r e e f a t t y a c i d content depend la rge ly on weather conditions a f t e r the cott'on has matured, and hence on locat ion. Dry weather tends t o improve the qua l i ty of the crude o i l ; excessive r a i n f a l l (o r s torage of seeds with a high moisture content) w i l l lower it.

11 The whole seed contains 15-24 percent o i l , the kerne l about 30-38 percent. -

49. Cottonseed oil contains a large porti'n of saturated fatty acids. Because of that, the oil solidifies partially at temperatures below 50°to 60' P. Almost all cottonseed oil is used in salad and cooking oil, shorteningr and, margarine. A small portion is used for packaging f ish and cured meat.

50. Cottonseed cake (as well as the whole seed) ie fed primarily to cattle. It ccntains a toxic substance, gossypol, of which a content of 1-2 percent is tozic to small animals such &e hogs and chicker The hullr recovered in cottonuced dlling &re used ae roughage for livertock feed.

51. The follouing equations ware used in the model to da?cribe trade in cottonseed oil and meal exports.

Cottonseed Oil Exportr: 1961-77

where:

COTFOX - world exports of cottonseed oil and cottonseeds-oil equivalent

COTFOS - ucrld production of cottonseed oil ('000 mt)

M66768 = dlsay variable set to 1 fc the years: 1966, 1967 and 1968

D6465 = d u m q variable set to 1 for the yeare: !.964 and 1965

COTFOP = price of cottonseed oil, deflated by the Index of Internat ioral Inf lation (1974 cocatant $/tat)

Cottonseed Heal Exports: 1961-77

f + 6.8118 In CQIWLX~-~ - 0.2661 D7374 + 0.3 In COTKLPt 9 (7.18) - (4.67)

R~ = 0.80 S.E.E. = 0.072 D.W. = 2.21

where:

COTMLX = world expcjrts of cottonseed meal and cottonseeds--a1 e q u i v a l e n t ( '000 m t )

COTMLS = world production of cottonseed meal ('GOO mt)

D7374 - d m y v a r i a b l e s e t t o 1 f o r t h e yea r s : 1973 and i974

COTHLtl = p r i c e f o r c o t t s n s e e d w a l (1974 c o n s t a n t ' 'sat).

Groundnuts

52. The p r o d u c t i o n o f g roundnu t s is c o n c e n t r a t e d i n t h r e e c 1 . i a n t i c r e g i o n s : hun id s u b t r o p i c a l , t r o p i c a l savanna and monsoon c l i m a t e s , where i t i s g rovn a s a r a i n - f e d c r o p d u r i n g t h e wet s e a s o n and unde r i r r i g a t i o n d u r i n g t h e d r y s e a s o n . T a b l e 8 s h w s t h i n c o n c e n t r r t i o n o f g roundnu t p roduc t i cn .

53. I n d i a , China and t h a Un i t ad S t , \ t e s p roduce a b o u t h a l f t h e wor ld ' s o u t p u t o f g roundnu t s . Year-to-year f l u c t u n t i o n s i n wor ld groundnut p r o d u c t i o n c a n be t r a c e d back to h a r v a s t r i n t b a s e c o u n t t i e r . I n d i a ' s p r o d u c t i o n i l u c t u a t e s u l d e l y a round a l o v e 1 o f a b o u t 5 m i l l i o n t o n s , l a r g e l y r e f l e c t i n g * r ea the r c o n d i t i o n s t i u r i n e t h e g r w l n g s aa son . S i n c e g r o u n d n u t s need p l e n t y of n o l s ? u r e v h i l e g rowing but d r y wea the r d u r i n g t h e h a r v e s t , a s l i g h t s h i f t i ~ r t \ b p a t t e r n of monsoons h a s d d e c i s i v e impac t on y J a l d r .

54. P r o d u c t l o r i n cha o t h a r two major p roduc ing c o u n c r i e e h a s k e n t r e n d i n g u p v a r d s s t e a d i l y . S i a c a t h e Un i t ed S t a t e s h a s imposed c o ~ r t r o l s o v e r a c r e a g e , g r w t h I n p r o d u c t i o n is l a r g e l y t h e r e s u l t o f i n c r e a s e s I n y i e l d s . P r o d u c t i o n of g r o u n d n u t s i n West Af r i c a n coun t t ies has d e c l i n e d d u r i n g t h e p a s t two decades .

55. The f o l l o w i n g relationship is used i n t h e m o t e l t o c a p t u r e t h e s u p p l y r e s p o n s e f o r g roundnu t s .

Groundnut s Supply: 1962-76

p2 - 0.74 * S.EbEb 238.6 D.W. '- 1.02

where: -

GROS = w ~ l d p r o d u c t i o n o f groundnuts-shel1,'d e q u i v a l e n t ( '009 mt) % L

GROP = p r i c e f o r g rocndnu t s , d e f l a t e d by t h e l n d e x o f I n t e r n a t i o n a l - I n f l a t i o n (1974 c o n s t a n t S lmt) - B

a - D657276 a dummy v a r i a b l e set t o 1 f o r t h e yea r s : 1965, 1972 ar.d 1 9 7 6

D6973 = dummy v a r i a b l e set t o 1 f o r t h e y e a r s : 1969 and 1973

Table 8: CROUKDNUT Pil3WCTION ( I Y SHELI) I N : N O R PRODUCING COUSfRISS, FIVE-YEAR 4YERACZS AND A W X E W A L G R O m RATES

P r c ~ u c t i o a Crouth b t t s Count ry 9 6 - 6 5 13';&-70 1971-75 1961-65/ 1 3 6 6 1961-65f

1966-70 ?911-75 1971-75

Argent lna 2,071 2,478 2,691 3 . 7 1.7 2.7 Brat 11 357 300 349 -3.4 3.1 -0.2 Bur- 356 408 454 2.8 2 .2 2.5 China 225 308 376 6.5 4.1 5.3 .ndla 5,125 5,203 5,559 0.3 1.3 0.8

-11done8 fa 4 17 44G 503 1.4 2.4 1.9 lt i b e r l a 1,358 1,693 :.I6 -1.8 -16.1 -9.2 Senegal 1 ,o()Q 8 14 d74 -4 .O 1.4 -1.3 South h?rlca 890 1,175 1,567 5.7 5.9 5 08 Sudan 329 3 30 736 0.1 17 .i 8.4

Source: FA0 s t a t i s t i c e .

56. Trade f u CrouaBnut O i l an3 Htal . In genera l , groundnute of h i@ q u a l i ~ y a r e consuned d i r e c c l g e i t h e r r z , roar ted o r i n soae proceseed form (e.g., peanu: b r t t e r , cociectio-cry p ~ . d u c t s ) , whereas lover-grada groundnuts are used f o r o i l . The p r i c e c f o r %he var ious f i n a l products (food products , o i l and w z l ) r . e t e r d n e t h e shire clC groundnut product ion which w v e s i n t o e i t h e r a e r k e t .

:7. T r a d i : i o u l l y , t h e o i l s e e d cruehing Laduscry h a s absorbed t h ~ bulk or' t h e world's groundnut production. Of t h e tt.n = r c r i . ~ c t s recavercd i n t h e e x t r a c t i - ~ n procese-grca:ndn.lt 01; and mal-~fl . ~ C - I a l l y has twicc t h e value of cake. m e f a t s acd oLl3 market h a s thereih-:c c a s v m g e r impact on groundcut p r i c e s than t h e market f o r h igh-prote in mealr..

58. S h t l l e d gr?cccdr~ucs con ta in P e t - e e c 45 b4.d 55 p r rcen t o f l . The . .r.racreo: crude cfl. is, pale yellow and * I G S the c h a r a c t e r i s t f c £la-lor and odor grouninuts . l i k e c o t t ~ n s e e d c f l . I . ? ? i d i c i e e if ~ ~ Z c i g e r a t e d . The end-

uses of rhe Lwo o i l o a r e the re fore sitni?o,:: s , . ~ -cerlir.gs, margrlr4ne8, mayonnaise. and c c ~ k i n g and s t134 of; 9.

59. The r e s i d u e t h a t remains a f t e r t h e o i l h a s beerr ex t r ac t ed - the graundnut cake--is used a s a p r o t e i n supplement i n l i v e e t o c k f eed r . Sinc 1 t h e e a r l y 19608, l i v e s t o c k producere ha 1 been aware L I ~ ~ : , e p o t e ~ ~ t i a l f o r groundnuts becoming i n f e c t e d w i t h a f l a t o x i n , a ha:mful e u b r t a n c e produced by some s p e c i f l c s t r a i n e of a mold ( s p c r g i l l u s f l a v u : ) . A high moi s tu re c o n t e n t i n k e r n e l s and cake w i l l r ncou taga i ts g r w t h . U . i l e it c a n be removed r e l a t i v e l y e a s i l y from groundnut o i l d u r i n g t h e r e f i n i n g p rocess , removing it from t h e cake i 3 c o e t l y . Hajor impor t ing c o u n t r i e s have implemented s t r i c t t c a t s t o d e t e c t con tamina t ion by a f l a t o x i n .

60. The f o l l o v l n g two e q u a t l o n s were u red I n t h e model t o d e s c r i b e t h e world t r a d e i n groundnut o i l a2d cakes.

Groundnut 01 1: 1961-77

R' a 0.73 S.E.E. - 0.091 D.W. - 1.76

whe re :

CROFOX - world expor t6 of groundnut o i l and grouadnuts -o i l e q u i v a l e n t ( 'OCO a t )

CROFOS - b o r l d product ion 06 groundnut 011 ('000 m t )

D59707174 = aummy - r a r i a b l e s e t to 1 f o r t h e yea r s : 1969, 1970, 1971 and 1974

GROFOP = p r i c e of groundnut o i l , d e f l a t e d by t h e Index of I n t e r - n a t i o n a l I n f l a t i o n (1974 c o n s t a n t $/mt) .

Groundnut Heal Export 8: 1961-77

S.E.E. = 0.054 D.W. - 2.27

GROHLX = world e x p o r t s G £ groundnr~t 3 e a l and groundnuts-meal e q u i v a l e n t ('OW m t )

CROHLS = world p rnduc t ion of gtonndnuc meal ('000 m t )

GROHLP - p r i c e f o r groundnut meal (1974 c o n s t a n t $/me)

W264 dummy v a t i a b l e se t t o 1 f o r t h e years : 1962 and 1964

D74 - dummy v a r i a b l e s e t t o 1 f o r t h e y e a r 1974

Rapeseed

61. Rapeseed p roduc t ion Iran grow;\ a lmos t a s r a p i d l y a s soybean production--at a n a v e r a g e rate of 5.6 p e r c e n t a y e a r s i n c e t h e e a r l y 1960s (Tab le 9) . Host of t h i s expansion is t h e r e s u l t of i n c r e a s e d p l an t ing8 i n Canada and France. I n d i a , t h e main producer , expanded i ts rapeseed p l a n t i n g 8 a t a r a t e b e l w t h a t o f t h e v o r l d average.

Tab le 9: RAPESEED PRODUCiION IN MAJOR PRODUCING COUNTRIES, -- Y :VE-YEAR AVERAGES AND AVERACE ANNUAL CWUTH RATES

Product i on Growth Ra te r Cotrnt ry 1961-65 1966-70 1971-75 1961-651 1966-701 1961-651

1966-70 1371-75 1971-75

Bangladesh 9 4 116 114 Canada 278 796 1,492 China 1,035 1,052 1,159 Czechoelovakia 5 9 69 107 Dennark 42 29 90 France 197 46 2 64 7

Germany, Dea. Rep. 171 219 249 Germany, Fed. Pep. 130 147 243 Ind la 1,277 1,401 1,826 P a k i s t a g 221 227 280 Po l a n d 323 476 552 Sveden 153 201 320

O t h e r C o u n t r i e s 349 307 31 8 ,*

WORLD TOTAL 4,299 5,502 7,444 - - - -

Source: FA0 s tat is t ics .

62. The r a p e p l a n t i nc luuee annua l a s well a s b i e n n i a l v a r i e t i e s . I t grwde b e s t i n t empera t e c l i m e t e s and i n t h e s u b t r o p i c s d u r i n g t h e c o o l season. B i e n n i a l v a r i e t i e s a r e u ~ u a l l y p l a n t e d d u r i n g t h e f a l l i n r e p i o n s where v i n t e r s a r e n o t t o o seve re . Product ion is c o n c e n t r a t e d i n t h r e e c o u n t r i e s : I n d i a , Canada and China. Together they supply about 60 pe rcen t o i v o r l d product ion .

V I - 30

63. The r ape p l a n t needs less than 500 mm of r a i n f a l l . I n I n d i t t h e bu lk of t h e c r o p comes from a r e a s w i t h a n annua l r a i n f a l l o f between 120 and 400 mm. I n t e rc ropped w i t h o t h e r c rops , such as b a r l e y o r wheat , it is a l s o g r w n on i r r i g a t e d land.

64. I c was no t p o s s i b l e t o e s t imte a s t a t i s t i c a l l y s i g n i f i c a n t response by rapes2ed producers t o i n t e r n a t i o n a l avrrket p r i c e s . The e q u a t i o n used t o e s t i n a t e t h e supply of rapeseed i n t h e model is s h w n below. The e e t i o s t e d p r i c e c o e f f i c i e n t is s t a t i s t i c a l l y weak.. T h i s is n o t s u r p r i s i n g , c o n s i d e r i n g t h e wide d i f f e r e n c e s t h a t e x i s t i n t h e response o f p roduce r s t o changer i n i n t e r n a t i o n a l market p r i c e s i n t h e t h r e e major producing coun t r i t r - - Ind ia , Canada and China.

Rapeseed Supply: 1961-76

(1.5) RAPS, 1 -1520.56 + 1.0270 RAPSt-l + 6.2362 RAPPt-l (9.80) (1.61)

R~ - 0.90 S.E.E. - 489.9

where:

IUPS = world product ion of rapeseed ('000 a t )

RAPP = p r i c e f o r rapeseed , d e f l a t e d by t h e Index o f I n t e r n a t i o n a l I n f l a t i o n (1974 c o n s t a n t $ / a t )

0636" dummy v a r i a b l e set t o 1 f o r 'he years: 1963 and 1969

07071 = dummy v a r i a b l e s e t t o 1 f o r t h e years : 1970 and 1971

65. Trade i n Rapeseed O i l . Rapeseed o i l , d a r k ye l low o r amber i n c o l o r , is c h a r a c t e r i z e d by a h i g h c o n t e n t of e r u d i c a c i d . I n Europe and Asia i t is mainly used f o r e d i b l e p l rposes- in t h e p roduc t ion o f ( f l u i d ) margar ines and as a s a l a d o i l ( i t is a popu la r s a l a d o i l i n France) . I n t h e United S t e t e a , i t 1s used mostly i n t h e manufacture o f l u b r i c a n t s . Rapeseed cake , l i k q o t h e r o i l s e e d c a k e s , is a p r o t e i n supplement i n an imal f eeds . a - 66. The f o l l o d n g e q u a t i o n d e s c r i t : . ~ t h e world t r a d e i n rapeseed o b , a s used i n t h e model. 8 .. . Rapeseed O i 1 : 1961-77

1 5 1 In RAPFOY, = -13.G355 + 2.1253 I n PAPFOS, - 0.9808 D61 (11.65) (3.65)

S.E.E. = 0.?50

where:

RAPFOX - world exports of rapeseed 011 and rapemeeds-oil equivalent ('000 mt)

RAPFOS - world productlon of rapeseed 011 ('000 mt)

W1 - dmmy variable s e t t o 1 for 1961

D69 - duaay variable s e t t o 1 !or 1969

RhPFOP - pr lce of raperoed 011, deflated by the Index of Inter- national Inf la t lon (1974 conatant $/mt)

Rapeseed Heal Exporta: 1961-77

a2 - 0.97 s.e.e. - 47.95 D.W. - 2.60

where:

RAPXLX - world exports of rapeseed meal and rapeseeds--meal equivaleac ( '000 mt)

RAPXLS - world' production of rapeseed meal ('000 m t )

RAP- = pr ice f o r rapescrd meal (1974 constent $/rat)

D 7 1 7 i = dummy variable s e t t o 1 fo r the years: 1971 and 1977

D7475 = dummy variable s e t t o 1 f o r the years: 1974 and 1975

Vegetable O i l s f rm Tree Crops

67. Olive O i l . The o l ive t r ee thr ives i n the v a m and dry areas of temperate and subtropical climates. 11 It needs mild vinters-frost can cause ser ious danrage--and prefers l i t t l e r z in during f lovering and a s the f r u i t ripens. 21 Therefore, o l i v e t r ees a r c of ten planted i n a reas bordering deser t s , vhere r a i n f a l l is irregular . Productio'n-and a l s o consumption-2/

w . - 11 The o l i v e t r e e v i l l g r w but not bear f r u i t i n the t ropics . - 21 Commercial groves i n the Hediterranean a r e ra re ly i r r iga t ed . However, -

irrigatioo is c o m o n in C~lifornfa's olive groves.

31 The bulk of the o l i v e o i l harvest is consumed i n producing countries. - Only about 6 percent of t o t a l ?rodilction enters in te rna t ional markets.

of o l ives is concentrated in the Mediterranean region, 11 with i ts dry summers, mild winters and even temperatures, the result-of i ts proximity t o the sea (To5la 10).

68. Under ~ ~ u d growing conditions, o l ive t ree8 produce the i r f i r s r crop I a f t e r s i x years. In dry zones the gestat ion period w i l l extend up t o 20 year8 before s igni f icant yields are obtained. On the other hand, in those c l ipa te r , the o l ive t r ees bear f m i t for a t l eas t SO yearr, almost twice a s long a s under l e s s favorable growing conditions. The o l ive t r e e k a r r f r u i t only every two years. Some t r ees have s igni f icant yield8 only every three or four years. On the average, a t r ee produces between 10 and 15 kg of olive8 a year. Product ion cycles vary uidely between-and even within--producing countr ies , and world production re f l ec t s t b i r cycl ica l behavior. - 21

69. The supply e ~ ~ a t i o n for o l ive o i l r e f l ec t8 the important cha rac te r i s t i c s of o l ive o i l production. S t a t i r t i c a l l y , the most r igni f icant price responra was obtained w i t t . price8 laggad by nine yearr. The dependent variable lagged by two years uar included t o capture the two-year production cyc lee.

Olive O i l Supply: 1969-77

uhe re :

OLIS = world production o: o l ive o i l ('000 mt)

OLIP = price of o l ive o i l , deflated by the Index of Internat ional In f l a t ion (1974 constant $ / a t )

D76 = dummy variable s e t t o 1 for 1976 I

D 7 0 - I = dummy variable s e t t o 1 for 1970 and 1577

11 I t a l y and Spain produce each about one-third of the world's o l ive o i l . - However, the most rapid expansion of o l ive o i l production has taken place , i n Tunisia.

21 World product ion peaks uhenevzr several major producing count t i e s - e x ; c r i c n c c a n "--- ".I j -eaz" {an u p s i i i n g i n t h e i r p r o d u c t i o n cyc le ) .

Table 10: OLIVE OIL PRODUCTION IN N O R PRODUCING COUNTRIES, FIVE-W.R AVERAGES AND AMRAGE ANNUAL C R O m RATES

Production Crovth Rate8 1961-65 1966-70 1971-75 T ~ Z R ~ T ~ S $ ~ - ~ O / 1961-651

Argentina Craece Ira l y Spain Syr ia T u n i r i a Turkey

Other Count r i e s

(--- percent )

Source: PA0 s t a t i r t i c r .

70. Trade i n O l i v e O i l . About 90 pe rcen t of t h e o l i v e s ha rves ted a r e u r e d f o r o i l e x t r a c t i o n . The remaining 1 0 pe rcen t a r e marketed a s t a b l e o!ives. The o i l con ten t of o l i v e s ( t h e whole f r u i t ) v a r i e s between 35 and 7 0 percent . Ui th t h e excep t ion of a smll por t ion , o l i v e o i l is used e x c l u s i v e l y f o r e d i b l e purposes, mainly a s c o o k i q and s a l a d o i l . Unlike o t h e r vege tab le o i l s , o l i v e o i l can be consumed d i r e c t l y wi thout f u r t h e r r e f in ing . 11 The f i r s t p r e s s i n g of o l i v e s y i e l d s "virgin" o i l . Success ive p ress ings y i e l d lower q u a l i t y o i l . Ui th t h e h e l p of s o i v e n t e x t r a c t i o n , i t is a l s o p o s s i b l e t o e x t r a c t t h e o i l t h a t remains i n t h e r e s i d u e l e f t over from mechanical o i l e x t r a c t i o n . T h i s o i l ("olive foots") is i n e d i b l e and is used i n t h e manufacture of soap. - -

'9 71. Ol ive o i l is expensfbe comr-red t o o t h e r f a t s and o i l s . S ince t h e l o v e r g rades r e t a i n the: r st-ng f l a r o r , they a r e f r e q u e n t l y blended wi th o t h e r mild-flavored o i l s s u c b a s soybean o r cot tonseed. The amount of o l i v e o i l i n t h e b lend v a r i e s between 5 and 10 percent .

72. The fo l lowing equat ion uzs used i n t h e model t o desc r ibe world t r a d e i n o l i v e o i l .

1/ This i s t r u e of good q u a l i t y o l i v e o i l . Lower g rades a r e u s u a l l y r e f i n e d - and marketed a f t e r they have been blended wi th b e t t e r grades.

Olive O i l Exports: 1961-77

kI2 0.91 S.B.E. 0.112 D.W. - 1.17

where :

OLIFOX = w r l d expor t s o t o l i v e o i l ('000 mt)

OLIS = w r l d production o t o l i v e o i l ('000 mt)

D637475 = dummy v a r i a b l e s e t t o 1 l o r t h e years: 1963, 1974 and 1975

OLIP - p r i c e of o l i v e o i l , d e f l a t e d by the Index of I n t e r n a t i o n a l I n f l a t i o n (1974 cons tan t $ / a t ) .

Palm O i l and Palm Kernel O i l

73. O i l palms produce more o i l pe r u n i t of land than any o t h e r o i l s e e d crop. T h e i r f r u i t con ta ins two o i l s : palm o i l and palm kerne l o i l ( the l a t t e r e x t r a c t e d f r o a the seed). The economic l i f e of a t r e e is about 30 years. I t producer i ts f i r s t crop t h e t h i r d year a f t e r p lan t ing and reacher peak y i e l d s (2.5 tons per a c r e ) between t h e e i g h t h and the t e n t h years ; from then on y i ~ , l d s d e c l i n e gradual ly a t about 2 pe rcen t pe r year. - I/

74 O i l palms need between 1,800 and 2,000 mm of r a i n f a l l , d i s t r i b u t e d r e g u l a r l y over t h e year , about 2,000 hours of sunshine , and s u f f i c i e n t f e r t i l i z e r ( n i t r o g e n and potash) i f the high y i e l d s mentioned e a r l i e r a c e t o be a t t a i n e d . On the o t h e r hand, they requ i re l i t t l e l abor compared with o t h e r t r e e crops. Host of &he labor is needed f o r ha rves t ing , which demands d a r e f u l handl ing of t h e f r e s h f r u l t bunches. Bruising of t h e palm f r u i t (and a de lay i n process ing) l e a d s t o t h e formation of f r e e f a t t y a c i d s , l o v e r i n g t h e q u a l i t y nnd p r i c e of the palm o i l . To produce high-qual i ty palm o i l a t low c o s t , h a r v e s t i x and process ing have t o be well-synchronfzed. Thus good m a a a g e e z t and a well-maintained t r a n s p o r t a t i o n network '&ve a d e c i s i v e impact on t h e p r o f i t a b i l i t y of o i l palm e s t a t e s . Considering th_e needs f o r roads, t r a n s p o r t a t i o n and processing f a c i l i t i e s , t h e production'of palm o i l is more cap iea l - than labor- in tensive . .. .

11 Modern o i l palm e s t a t e s have gelccred v a r i e t i e s t h a t p r o 2 s c c p a l a Eruits -

with a smal le r ke rne l than t h a s e found i n wi ld groves. Host expor t s of palm k e r n e l o i l o r i g i n a t e i n West African c o u n t r i e s , which produce most of t h e i r palm o i l from wild groves.

75. During t h e 1960s. palm o i l production grew a t 2.4 percent per year. Since 1970, t h e r a t e of growth has a c c e l z r a t e d t o more than 10 percent a year , compared wi th a n annual grouth r a t e of 4.2 percent f o r a l l Eats and o i l s . n i s s t e e p i n c r e a s e r e f l e c t s the rap id expansion of o i l palm p l a n t i n g s i n Malaysia, Indonesia and the Ivory Coast. During t h e l a t e 1950s, about two- t h i r d s o f t h e world's palm o i l output was produced i n M r i c a ; two c o u n t r i e s , Niger ia , and Z a i r e , then suppl ied more than h a l f t h e world's palm o i l . Although s t i l l major producers, t h e combined s h a r e of these c o u n t r i e s had dropped t o about 30 percent by 1974, s l i g b t l y l e s s than Malaysia's share. 1/ From 1966-70 t o 1971-75, Helaysia 's production grew a t an average annual r s t e of 25 percent (Table 11). Though I ia lays ia is now t h e world's l ead ing producer of palm o i l , t h e d e c l i n e i n West M r i c a n product ion has r e c e n t l y been I

reversed, a s r i s i n g demand f o r f a t s and o i l s i n t h i s region has l ed t o l a rge i n v e s t w n t s i n t h e o i l palm i n s e v e r a l West M r i c a n coun t r i e s .

76. The fol lowing equat ion w s s used i n t h e model t o e s t i m a t e palm o i l product ion.

Palm O i l Supply: 1969-77

R~ - 0.995 S.E.E. 45.67 D.W. - 2.53

where:

Pi...S = world production of palm o i l ('000 m t )

PAHP = p r i c e s f o r palm o i l , Ualaysian 5 pe rcen t , d e f l a t e d by t h e Index of I n r e r n a t i o n a l I n f l a t i o n (1974 c o n s t a n t $/mt)

RUBPRI = p r i c e f o r rubber (1974 c o n s t a n t $IPt)

D73 = dummy v a r i a b l e s e t t o 1 f o r 1973

1/ C i v i l d i s o r d e r s were a major f a c t o r l n the d e c l i n e of palm o i l production - i n t h e s e ts3 coun t r i e s . Production was d i s r u p t e d i n 1964-67 i n Za i re and i n 1967-69 i n Niger ia .

Tab le 11: PAM OIL PRODUCTION I N W O R PRODUCING COUNTRIES, FIVE-YEAR AVERAGES AND AVERAGE ANNUAL GROWTH RATES

Count ry Product ion Growth Ratea

1961-65 1966-70 1971-75 1961-651 1966-701 1961-65/ 1966-70 1971-75 1971-75

Angola 38 Cameroon 4 3 Coloabia 1 Da homey 25 Indones ia 151 Ivory Coast 1 5 Ha lays ia 120 Niger ia 540 Papua New Guinea S i e r r a Leone 37 Z a i r e 210

Other Count t ies 147 189 208 5.2 1.9 3.5

WORLD TOTAL 1,327 1 ,491 2,415 - 2.4 - 10.1 6.2 - Source: i ( \O a c a t i s t i c s .

77. Because t h e h a r v e s t i n g of f r e s h f r u i t bunches w i l l con t inue even i f palm o i l p r i c e s shou ld f a l l below v a r i a b l e c o s t s , 11 t h e supply of palm o i l i n response ta p r i c e s is expected t o be h i g h l y i n e i a s t i c . Producers have few a l t e r n a t i v e p r c d u c t i o n p o s s i b i l i t i e s , s h o r t of u p r o o t i n g t h e palme, 21 and they have t o c o l l e c t t h e r i p e f r e s h f r u i t bunches t o p reven t t h e p e s t s and d i s e a s e s t h a t a r e caused by o v e r r i p e and r o t t i n g f r u i t . The d e c i s i o n t o e x t r a c t , the o i l w i l l depend 1a rge ly .on t h e d i r e c t c o s t s of o p e r a t i n g t h e m i l l • and t h e merket ing c o s t s f o r t h e end products-palm o i l , palm k e r n e l o i l and palm k e r n e l cake.

1/ T h i s s t a t e m n t r e f e r s mainly t o palm o i l produced on estates..The supply - from independent smal lholdere vo rk ing a t t h e f r i n g s of t h e o i f palm estates o r c o l l e c t i n g f r u i t i n wi ld groves i e more p r i c e - e l a s t i c . These producers have u s u a l l y a wider range of employment o p o o r t u n i t i e s than producers o n smal lholder estates, and they arm a l s o less concerned about t h e d ~ n g e r o f p l a n t d i s e a s e s caused by r o t t i n g f r u i t s .

21 V a r i a b l e ccdts i n c l u d e t h e c o s t of p i ck ing t h e f r e s h f r u i t hunches, t h e - c o s t of t r a n s p o r t i n g them t o t h e process ing p l a n t and t h e c o s t of palm o i l ~ x t r a c t i o n .

78 The p ~ l m f r u i t y i e l d s two oils-palm o i l , which is con ta ined i n t h e f l e s h y o u t e r p a r t (meeocarp) of t h e palm f r u i t l e t s , and t h e palm k e r n e l o i l which l a e x t r a c t e d from t h e hard core--more s p e c i f i c a l l y , t h e p a l s kernel--of t h e f r u i t l e t s .

79. The s i z e of t h e k e r n e l s v a r i e s wi th t h e o i l palm v a r i e t y . The l a r g e s t k e r n e l r a r e c o l l e c t e d from wi ld g r w i n g palms. P l a n t b r e e d e r r have, however, been s u c c e s s f u l i n reducing t h e s i z e of t h e k e r n e l r e l a t i v e t o t h e f l e s h y p a r t o f t h e f r u i t . The o i l p a l m v a r i e t i e s , which y i e l d l a r g e r s h a r e s of palm o i l t h a n palm k e r n e l o i l have btcorae more common i n Sou theas t Aeia, whereas West Af r i ca , wi th i ts l a r g e wi ld o i l palm groves , dominatee t h e market f o r palm k e r n e l s .

8 0 Palm k e r n e l o i l is e x t r a c t e d from t h e d r i e d k e r n e l s of t h e palm f r u i t l e t s . The o i l con ten t o f t h e k e r n e l s v a r i e s be tueen 44 and 53 pe rcen t . The p h y s i c a l p r o p e r t i e s and chemical composit ion o f palm k e r n e l o i l resembles t h a t of coconut o i l , 1/ f o r which i t is t h e r e c o r e f r e q u e n t l y s u b s t i t u t e d . L ike palm o i l , i t is Zsed i n soap and food p roduc t s . Because of its s l i g h t l y h i g h e r c o n t e n t of u n r a t u r a t e d f a t t y a c i d s , i t is processed i n t o confec t iona ry b u t t e r . F r a c t i o n a t i o n of p a l m k e r n e l o i l y i e l d 8 a l i q u i d and s o l i d f r a c t i o n . The s t e a r i n e f r a c t i o n is used a s a s u b s t i t u t e f o r cocoa b u t t e r , t h e o l e i n f r a c t i o n is p r e f e r r e d i n t h e p r e p a r a t i o n of baked goods and i n t h e manufacture o f soaps .

81 Although palm o i l and palm k e r n e l s are j o i n t l y recovered i n t h e palm o i l e x t r a c t i o n p rocees , t h e i r supply is dominated by d i f f e r e n t regions . The re fo re a s e p a r a t e supply equa t ion f o r palm k e r n e l e was eetirmrted.

Palm Kernel O i l Supply: 1966-77

where:

PAKS = world product ion of palm k e r n e l s ('000 m t ) - PAKP - pr8ee i o r palm k e r n e l s , d e f l a t e d by t h e Index of

I n f e r n a t i o n a l I n f l a t i o n , CIF Europe (1974 c o n s t a n t $/rat)

* D6773 a dummy v a r i a b l e s e t t o 1 f o r t h e years : 1967 and 1973

D707477 - dummy v a r i a b l e s e t t o 1 f : t h e years : 1970, 1974 and 1977

1/ Palm k e r n e l o i l c o c t a i n s more s a t u r a t e d f a t t y a c i d s than coconut o i l . - It is t h e r e f o r e more s o l i d .

82. f ie fol louing equatlons describe world exports of palm o i l and palm kernel o i l .

Palm O i l Exports: 1960-77

( 1 . 7 . l n PAHFOXt - -5.7416 + 1.4306 In P M t - 0.2090 D74 + 0.3 l n PAWt (38.89) (3.63)

PAHS - w r l d production of palm o i l ('000 m t )

PAW - prices f o r palm o i l , tb layr ian 5 percent, deflated by the Iadex of Internat ional I n f l a t i o n (1974 constant $ / a t )

PAWOX - w r l d exportr of palm o i l ('000 m t )

D74 - dummy variable s e t t o 1 f o r 1974

Palm Kernel O i l Exports: 1961-77

where:

PAKFOX = world exports of palm kernel o i l and palm kernels-oil equivalent ( '000 mt)

PAKPOSL- World production of palm kernel o i l ('000 m t ) ,

PAKFOP = prices of palm kernel o i l , def la ted by the Index of Iaternat ional In f l a t ion (1974 oonstant - $/me)

,3 D67' = dummy variable s e t t o 1 f o r 19br7 - -

D6876 = dummy variable s e t t o 1 foz thGyears: 1968 and 1976 - D75 = dunmy variable s e t t o 1 f o r 1975

Coconut O i 1

83. 'ihe coconut palm t r ee requires a warm sunny climate with an even t e q e r d t u r e ol: a b o u t 3 5 ' ~ ( L ~ ~ C ) . Lt grows b e s t i n areas wit11 a r a i n f a l l 9t

1,300 t o 2,300 tun a year, d i s t r ibuted evenly. 11 Coconut pa lm therefore a re grovn i n a belt tha t extends about 20 degrees -d;r e i t h e r "ide of the equator. Vhile the t r a d i t i o n a l coconut t r ee produces its f i r s t crop about 6 t o 9 years a f t e r plant ing, recent ly developed hybrid dvarf v a r i e t i e s have shortened thi: gestat ion period to about 4 years. Tht economic l i fespan of a coconut t r e e extends v e l l beyond 50 years.

84. Coconut pa lm p r c ~ u c e a bunch of meturc coconuts each month, 2/ vhich a re then processed into copra. (High-quality copra can only be - a d e from f u l l y r ipe nuts, tha t is, nuts vhich have f a l l e n natural ly o r were hand- picked.) The outer par t of the coconut, the so-called exocarp, is th ick and f ibrour and y ie lds the co l t . 11 Beneath the axocarp i e , a hard she l l . Attached t o the inside of th i6 s h e l l is the endocarp, a thick l ~ y e r of coconut meat vhich, a f t e r being dried, yields the copra. The coconut a l s o c o n t ~ i u a a l i qu id , ca l l ed coconut vater.

85. The Philippines and Indonesia dominnte the prxluction rind t rade of coconut and coconut products. Their combined production of coconuts (copra equivalent) amounts t o more than 60 percent of the world's production. Powever, because most of the t r e e s a r e overage i n those two countr ies , production has grown only slowly duriag the past 10 years (Table 12).

86. The following equation was used i n the model t o capture the behavior of vorld copra production.

Copra Supply: 1967-77

R~ = 0.94 S.E.E. = 176.4 D.W. = 1.67

where:

COPS = vorld p rduc t ion of copra ('000 rnt) a

COPP = pr ice f o r copra, deflated t y t h e Index of In terna t ional Inf la t ion , CIP European ports (1974 constant $/mt)

D6774 a dummy variable s e t t o 1 f o r t h e years: 1967 and 1974

D7176 = dummy variable s e t t o 1 fo r the years: 1971 and 1976 -

11 Coconut palms need a t l ea s t 900 t o 1,203 mm of water a year t o remain pro- - ductive.

21 On the average, coconut palms yield about 50 nuts a year. This i s - c g - ~ i v a l e c t ? o I ? k?log- .?as q f c o p r a .

31 C 3 i r i s a f i b e r used fo r mnking rope and i n the manufact~re of heavy mats. - I

~ ~ r e 12: COPRA PROWC~ION IN WOR PRODUCING corrmres, FIVE-YEAS~ AVERAGES MD AVEWCE A.YHL.*'. G R O m rUTES

Pro.-.II. -:ion Crwch ht=s country 1961-65 l)o(i-70 1971-7i wm lC66-701 19d-f

1966-70 1971-73 19/1-75

India 290 Indoner i a 7 35 Ualays l a 168 ~ x l c o 181 Hozcmbique 56 Papus Neb Cuttiea 117 Phil lpplner 1,398 S r i h n & 189 Ihai land 22

Source: PA0 s t a t i a t i c a .

81. Coconut O i l and Cake. c ~ c o n u t o i l i r e:tractcd from the copra, the d r ~ :d Peat o t the coconut, vhfch cor.tains betwee& 63 and 68 percent o i l . The remainder is copra -*ice and mis tu re .

88. Coconut o i l ha8 a uniq8.q c s l t i n g behavior. I t ir a 'hard" o i l , t ha t f r , i t ;s a b r i t t l e s o l i d a t rc ..a tamparaccre i n temperate toner. I t begins t o melt within a temperature range of Just a fev degrees, k t v c e n 24' s.~d 27OC. Thir pecul iar rapid melting behavior is a coasequcace of its f a t t y ac id &nd glyceride cospcoi t iov- l / t he ~ l e c u l a r vcigbt 3f i ts f a t t y a r i b is lw, and it has a l a r g e portion z f uneaturated f a t t y acids. I n t h i s respect coconut a i l is s lml l a r t o cocoa kt:tr and is ered fo r r iml lar purposes, n m i y those which require quick melting, e a g e r coatings of i c e cream bars. 2/ Coconut o i l a l s o ha8 a lover viscosi ty than ,other f a t s aad o i l s tha t pekes iT pa r t i cu la r iy s u i t a b l e f o r the epray coatings fo r ce rea l s and crackers and a s r lubr.lcsnt i n various confectZons such a s caramels and nougats. As the small port ion of unsaturated f a t t y acids mkes coconut o i l highly s t ab le aga ins t

Coconut o i l contains a wtde var ie ty of f a t t y a c i \s vhlch . ' l f fer ~ i r i n l ~ ~ ~ n 5 molecular weight r a the r than In t h e i r degree of 8aturatlon. About 90 per- cent of the f a t t y ac ids vhich make up cacocut o i l a r e saturated.

2_/ The coating xs hard on the bar, but melts quickly and completely i n the mo~th.

oxldatlon, 1 t . 1 ~ also used i n the preparation of frylng productr that rcqulra a lcng shelf l l fc . 11 In addltron to these spcclallzcd urcr, coco.rut 011 10 used fo r traditional food and can-food urer, such a r aargariner, confectlo~rr, bakery productr, soap8 and detar;entr. Houevar, I t ham a narrou plar t lc range, and I t J r ioporslble to d l f y the phyrlca? propercler of the 011--to any great extent-through hydrogcnatlon. 21 Thus Ltr ude In edible productr 11 scvercly rcstrlctcd. Coconut 011 18 t ~ c r e f o r e rarely used ar a major ingrcdlent l a shortcnlag ( u s t a l l y 5 percent or l e r r ) , and 10 even underlrable for aargarine. 21

89. Coconut o l l :an k fractlonad. Tho solid fractlon--coccnut r t ~ a r l a a - i r used In prepatlag codtlngr for cooklor and cendlor and a r coafectlonar*r butter. Tha llquld aortlon--cocoaut ololn--contelnr w r t of the lou-oolocular ucighc and unututrced fa t ty acldr and has thatafore a lover melting polnt than coconut 011. I t l r used In Ice c r d . ~ and in the praparatlon of other food p t o d ~ t s .

90. Copra cake I s usad a s a protcla aupplcaent la the preparation of llvastock fleds and a r fe r t l l l zc r . tlaua\ar, bcuurc of I t r lou protaln coatrat (22 percent), lt plays only a alnor roie In the llvcrtock fcadr cconoq.

91. Equatloas 1.9.1 and 1.9.2 are the estfmatcd rclatlonrhlpr for world cxports of coconut 011 and copra oeal.

Coconut O f 1 Exports: 1961-77

R* = 0.82 S.E.E. = 0,097 D.W. - 1.67

COPPOX = uorld exports of coconut @ l and copra-oil cqulvalcnt ('ooo ot)

COPFOS = w r l d production of cococut o i l ('000 m t )

. d -

11 Although coconut o i l is In excellent frying o i l by i t s e l f , i t fama badly - when blended v i t h other 6:is for deep frying. -

21 Rydrogenztion does not change the melting behavior and consistency of - coconut o i l .

31 The disadvantage of coconut o i l in the preparatlon of margarine is smaller - than i c is in shortening, ~ a i n l y bera-.tse the consistency of margarine is patterned ef t e r that of butter, wr~ich a lso k.as a comparatively short p las t ic range,

074 = dumm var iab le s e t t o 1 f o r 1974

COPPOP = pr:Ce of coconut o i l , d e f l a t e d by t h e Index of I n t e r n a t r o u l l i n f l a t i o a (1974 coa lcan t S/mt).

Copra Heal txpor t s : 1961-77

COPNU - uorld rrports of copra cake and copra--meal equtvalent ('coo at)

COR(L3 - w r l d productloo of copra rul ('000 at)

C O W - p r i c e f o r copra ulu de f l ac rd by t h e Index of In ta r - mtiooal In f l a t l oo , CIP European por t s (1974 cons taa t

D71?2 - Qarl, wsriable s a t t o 1 f o r t h e years: 1971 rad 1972

A n l m l Fa t s and )(.tine O i l s

92 F i sh O i l . Tae p r d u c t i o n of f i s h 011 is c l c se ly t i e d t o t he c o r r r c i a l u t c b of f i v e species: he t r ing , u o h d e n , p l l c t e rd , sa rd ine and ubale. Durrng t h e f i r s t brlf of t he 19608, f i s h caC;t -4 thus o i l production greu s teeply-at a n ao-rage r rmnrl met of 8.2 percent. men, during t h e l a t t e r p a r t of t h e 19 ' ,h , pr&c:ion of o i l l eve led o f f a t about 1 tai l l ion tons , dropping r l l g h t l y dur ing t h e e a r l y 1970s. I b e sudden dec l i ne i n t he c a t c h of anchovies o f f the P e r m i a n cout accounts f o r a part of t5e drop ia production. #ever tha less , Peru remim the leading producer of f i s h o i l (Table 13).

93 . hltbough corwrcl.1 fishing reqoires subs tan tLa l investment (boat, f i s h l u g gear , proceasing p lan ts , etc.), fishermen respond quickly t o changes i n t h e p r i c e f o r f i sh . I n t h e i o l l w h g equat ions f o r f i s h o i l and f i s h meal, lagged product ion emerged u s t rong e r p l u u t o r y var iab les . -

m Fish O i l Supply: 1961-77 .

S.E.E. - 50.98 D.W. = 2.11

PISS - vorld production of f i sh 011 ('000 mt)

PISPOP - price for f l rh o l l , deflated by the Index of Intar- a r t l o m l Inflation, CIF Europe (1974 conrtant $/mt)

PIS- - prlce for f lsh r a l , deflated by the Index of Iutet- nat loml Iaflat loa, CIF Europe (1974 coartant $/mt)

0637273 - d v varlable r a t t o 1 for the yearrr 1963, 1972 aad 1973

(6768 - durrl, varlable r a t t o 1 tor the yasrrr 1967 and 1968

Table 13: PISIl OIL PRO'~IOH IN W O E ! PROWCIIC COUNTRIES, FIVE-YXAR A V E R S = AMD AVERAGE AWWUAL C M RATES

Product loa Crwth k t e r 1961-65 1966-70 1971-75 1961-4S/ 1966-70/ 1971-6Sf

Iceland 7 '1 SO 2 2 -7 .3 -1s. 1 -11.3 Roruay 96 242 182 20.3 -5.5 6.6 Pa ru 151 258 219 11.3 -3.2 3.8 Sarth hfrica 59 84 53 7.3 -8.8 -1.1 United States 96 7 S 105 -4.8 7 .O 0.9

Other Countries 211 309 396 7.9 5.1 6.5

Source: USM s t a t i s t i c s .

- Fish Heal Supply: @61-77

I 6

S.E.E. - 247.0 D.W. - 3.04

uhe re:

FISMLS - world production of f i r h w a l ('OW at)

F I S W - pr i ce f o r f l a h w a l , d e f l a t e d by t he Index of Inter- ~ t l o m l In f l a t l oa , CIP furopa (1974 conbtant $ / a t )

0476870 - warfable a e t t o 1 f o r t he yearn: 1967, 1968 and 1970

D7273 - var iab le met t o 1 f o r tho y u r a ; 1972 aad 1973

94 . Piah 011 and F u n -1. ?lab u o d f o r t he ex t rac t ion of f l ah 011 y i e lds a h t 10-40 percent o i l . 'Iba r m i a i t q ao l ld uaate l a fu r the r proceased i n t o f l a h -1. Plah u a l lr r l a o protearod from part8 d l a o r d e d i n t he preparat ion of f l a h f o r food. ? lab w a l h a t h e hlghert proteln eontent of a i l u J o r hlgb-protein wrlr aad l a an Important i ~ g r e d l e ~ i t i n u n y llvmatodr feeds.

95. The q u a l l t y of f l a b o i l l a a o r r u h t i n f e r l o r t o t b t of a l e o i l a lnce i t l a rendered from the ubole f l ab , which contalna la rge 8wunta of noa- f a t n t e r l a l a , r a the r t b a f tom se lec ted f a t t y t l r ruea . 1/ Compared t o whale o i l , t l a h 011 r l a o h.8 a himr content of f r e e f a t t y acTdr. - 2/

96. F l rh o i l 1s uaed IUU mainly f o r inedib le purpoaea, aucb u i n the r n u f a c t u r e of aorpa, de te rgea t r aad l u b r l u t i n g greaser. Beuume unhydro- g a t e d f l r h 0118 oxidlze quickly and develop a f iahy f lavor , u w f a c t u r e r a of abortenlug have been r e luc t an t t o use f i s h o i l s .

97. The f o l l w l ~ equat loar uere ured i n t he model t o dercr lbe the behavior of uorld export8 of f l a b 011 a d f i a h meal.

Pieh O i l Bxporta: 1961-73

- 0.88 S.B.B. - 0.090

1/ Elwewer, the f a t t y t i seuee (blubber) of whales contain about 70 percent - f a t .

2/ The c h e d c a l compoeition of f i e h o i l and its degree of sa tura t ion depend6 - l a rge ly on the speclee.

FISc'OX - u o r l d production of f!rh o i l ('000 a t )

PISPOP p t i c e r f o r f i s h 011 d e f l a t e d by t h e Index of I n C e t M t i o M l I n f l r t i o a , CIF Europe (1974 cons tan t $/mt)

W768 - d u r l , v a r i a b l e met t o 1 f o r t h e years: 19b7 and 1968

Fish Heal Exports: 1961-77

FISWWt - u o r l d e x p o r t s of f i r h meal ('000 n t )

F1SM.S - v o r l d product ioa o f f i s h -*a1 ('000 n t )

F I S a P - p r i c e f o r f i s h meal d e f l a t e d by t h e Index o f I n t e r - crrtiocrrl Ynfla t ioa , CIF Eurc?m (1974 cons tan t S/mt)

D73747677 = d u u y v a r i a b l e set t o 1 f o r t h e years: 1973, 1974, 1976 and 1377

Lard and Tallow

98. The f a t t y tissues of hogs provide l a r d , t b o r e of cattle provide ullw. Yie lds of l a r d and tallw d i f f e r by breed of bog and cattle, 1/ and product ion of t h e s e two .'ate is t i e d c l o s e l y t o animal prodcction. c0T;sumer p re fe rence i n t h e United S t a t e s and o t h e r i n d u s t r i a l i z e d c o u n t r i e s f o r l eaner pork and beef c a b i n e d w i t h a d e c l i n e la t h e p r i c e s f o r l a r d and tallw r e l a t i v e t o t h o s e f o r pork and k e f have provided a rLi-ng incen t ive t o l i v e s t o c k producers t o raire aPirals which would d h v e r t l i v e s t o c k feed i n t o more wat and less f a t . Thus, U.S. production of l a r d and t a l lw has decl ined s t e a d i l y since t h e e a r l y 1 9 6 0 ~ ~ ut i le prohuct ion of hogs and c a t t l e has grown (Tab1 14). However, l a r d and tal.',w product ion h a s increased i n t b e USSR AND Chicrr.

99. To o b t a i n a s u i t a b l e c o n a i s t e ~ c y f o r shor tening, hard add s o f t o i l s are blended toge ther . O l e o s t e a r i w and e d i b l e t a l l w a r e t h e two n a t u r a l l y hard o i l s that have k e n mart. widely used i n t h e manufacture of shor tening.

1/ The f a t t y t i s s u e s a f animals ( f r e e from a r s c l e o r bone) c o n t a i n between - 70 a n 3 90 percen t f a t ; t h e r e s t is mainly water and connective t i s s u e .

Lard is a f a t dhich does not require h y d r o g e ~ t i o n , and before the development of the hydrogenation process, I t uar the u l n lngredlent l o tha unufac tu re of shortening. Hydrogenated vegetable o i l s h v a n w largely raplacad lard i n t h l s and-uae. In recent years, t a l l w h a been lncrraslnglv replaced by hydrogenattd s o f t o l l r t o rchlav8 the hrrdealng a f fec t . b.caure there is a conrldarablr va r l a t ioa i n the hardnrra of d l f fe rent l o t r of c o w r r c l r l ad lb la t a l l w , lt har bean d i f f i c u l t t o produce shortantng v i t h a ~ a i f o r m conrlst8ncy

Table 14: LARD PRODUCflON I W W O R PIOWCINC COUNTRIES, F I V E - I U R A V U E S AN0 AVERACE ANNUAL CRMrm RATES

Count rr product f oa Crwrh Ratas

1961-65 1966-70 196145 / 1966-70/ 1961651

--< '000 rt ) ,-4 percent)

Brarf 1 Chin8 Carmay, Dep. Rap. cam^, Fad. Rep. ~ Y V 1t.1~ Japm Poland R o n ni a U S 1 USSR Yugor lav ia

UORLD TOTAL 3,533 3,681 4,052 0.8 - 1.9 - 1.4 - , Sarrce: Frn s t a t i s t i c s , L

when a l a rge proportion of uUw is used. I n shortenings which contain - - e i t h e r :all- o r o l e o s t u r i n e , any proportion of the tallov-vegetable o i l blend m y Sc replaced by lard. '! - - 100. For m a y years, tlcw and la rd vere the -in raw materials used i n i ) margarine. The f i rs t n rga r&te uas m d e from o leo o i l , the l iquid fract ion of t a l l w . (The physical proper t ies of oleo a r e very close t o thost of but ter ; it is firm a t lw temperatures, but melts readi ly i n the mouth.) Later, part of the oleo o i l was replaced by lard. With the development of che hydro- genation process, hydrogenared vegetable o i l s have increasingly replaced the tw animal f a t s . t a b l e 15, which provides an overview of the world tallow production, i l l u s t r a t e s the sloudovn i n the g r w t h of t a l lou output.

101. The f o l l w i n g equ r t i oa r (1.13) a d (1.14) a r e the e r t l u t e d r a l a t l on rh ip r f o r l a rd and ta l low ruppl ler .

Carat ry Orodu t loo Grouth Rater

1961-45 1966-70 19'11-75 1961dS/ 1966-701 1961-651

-<'Om ut) (pereeat)-

D8ve lop lq Countries 306 344 379 2.4 2.0 2.2

h r d Supply: 1961-77

LARS - uorld production of l a r d ('-30 rt)

LARP - p r i c e f o r l a rd , de f l a t ed by the Index of In te r - na t i ona l In f l a t i on , CIP European po r t s (1974 coa r t an t $ / r t )

PORKPRI , . r ice for pork, deflated by the Index of I n t e r 3. t i o m 1 Inflat ion, CIF European ports (L974 - ~ a s t a n t S / r t )

0717274 - vattable s e t t o 1 for tha yaarr: 1971, 1972 and 1974

W476 = durrl, variable r t t to 1 fo r the ytarr: 1964 and 1976

T a l l w Supply: 1961-77

a2 - 0.94 S.E.E. = 133.9

where :

TALS - aorld productioa of t a l l w ('000 r t )

BEEVPRI - k e f price (avar.ga of two rerier-Argentine frozen rnufac tu r ing beef axportad t o EC-9, and A ~ ~ r t r a l l a a oxen, ubo leu le , I r i r h n a )

rALP = price for t a l l w , deflated by the Index of Interrutioaal Inflat ion, CIF European por t r (1974 constant $ / r t )

D75 = d u a y variable r a t t o 1 for 1975

102. Tbe correrponding export rupply equationr f o r there tuo c o r o d i t l e r a n preranted belou.

- 0.3672 D6566 + 0.3 I n LAWt (6.37)

R' - 0.83 S.E.E. - 0.074

where: I

LABX = uorld exportr of lard ('000 m t )

LARS - uorld production of lard ( '000 r t )

D6566 = drnrp variable s e t t o 1 for the years: 1965 and 1966

U R P = la rd prices, deflated by the Inder. of I n t e r n a t l o ~ l Inf la t ion (1974 constant S / m t )

T a l l w Exports: 1961-77

TUX - uor ld exports of t a l l w ('000 o t )

TAlS - uorld production of t a l l w ('000 mt)

074 - d q var iab le set t o 1 f o r 1974

TAU - pr i ce f o r t a l l ou , de f l a t ed by the I n t e r l u t i o ~ L Pr ice Index, US bulk, b l u d u b l e fancy, CIP Rotterdam (1974 constant 31-

b u t t e r

103. But ter coati- t o occupy a p r o d r u n t pos i t ion m n g the various f a t s and o i l s . Despite its coqmrat ive ly high p r i c e and the groving c o q e t i t i o n from f a t products (e.8.. u w r i n e , shortening, etc.) u d e from the ample supply of vegetable o i l s , t he s h r e of b u t t e r i n the production of a11 f a t s and o i b h s decl ined only s l igiat ly during t h e pas t two decades. In abaolute t t r r , w r l d production has even i n c r w t d - a t an average a n n u l r a t e of 1.1 percent a year b r i n g t h i s period (Table 16).

104. W l e the bulk of t h e uorld production of b u t t e r is produced from cou's milk, a s i g a i f i c a n t por t loo is ude from t h e milk of o ther a n i u l s such a s buf fa lo and goats. I n i n d u o t r h l i u d count r ies , b u t t e r is i n c r w i n g l y produced i n creameries rather than f a r m . I n t he United S t a t e s , f o r e ~ l i p l e , a b u t 98 percent of t o t a l b u t t e r production is from creameries. Butter u d e on f a r m has a d i s t i n c t yel l - color; the depth of t h i s co lo r va r i e s v i t h the season of t h e year and t h e feed of the d a i r y h e r d s . 1 1 I n t h e t r o p i c a l regions of k i a a d Africa, b u t t e r is used mainly i n the form of b u t t e r f a t , uhlch ,is obtained by b a t i n g and p e p r a t i n g t h e f a t from the milk s t ru of t h e + but te r . The r e s u l t i n g b u t t e r f a t is u d l y ref ined t o dry bu t te r (its name i n Ind i a is ghee). It keeps u h b e t t e r i n t h e c l i m a t i c condi t ions of the t r o p i c s than do ordinary h r t t e r and many o t h e r f e t s and o i l s . 2-1 Butter, crean, d l k o r ice cream n y be reconstituted from dry bu t t e r by blending it v i t h i l u i d milk, ukim milk poder, water and o t h e r ingredients .

11 To a l a r g e ex t en t t h e feed of the da i ry herds determines the iodine number - and consequently t h e consistency of b u t t e r f a t .

2: Some dry b u t t e r is a l s o ma-mfactured i n Aus t ra l ia and N e w Zealand, v)rere - b u t t e r o f t e n has t o be shipped over long d i s t ances v i thout proper cold s torage.

105 bu t t e r is an e u l s i o n i n which f i n e f a t d rople t s a r e dispersed i a m t e r . The f a t content of bu t t e r var ies from ioun t ty t o country aad w u a l l y depejd. on l o c a l l ega l requirements. I a t he Uaited S ta t e s , the f a t content ranges from 80 t o 8 1 perceat. I n addi t ion t o f a t and v a t a t , bu t te r a l s o c o n t a i w phosph t ides - 1/ and V l t a m i c u A aad D.

106 The f o l l o v f n t e q r u t i o w a t e t h e estimated r e l a t ion rh ips f o r bu t t e r supplie. and exports.

bu t t e r Supply: 1961-77

WTS - uorld ptoduction of b u t t e r ('000 at)

PPO - p r i c e i d a x f o r f a t s and o i l s (1974-100)

W473 - var iab le s e t to 1 f o r rba years: 1964 and 1973

W566 = d q var iab le s e t to 1 f o r t h e years: 1965 and 1966

Butter Exports: 1961-77

BOTX = w r l d w o r t s of b u t t e r ('000 at) - ISJTS = w r l d fioduction of bu t t e r ( '000 ot)

0

D7073 = d u n y v8riable set t o 1 f o r the years: 1970 and 1973 w - BUTP b u t t e r pr ices , def la ted by the In te rna t iona l Index of

In f l a t i on (1974 constant $/mt)

1 Prote ins and pbosphatides a c t a s e l u l s i f y i n g agents. They a l e0 help - prevent t h e s p a t t e r l u g of bu t t e r vhen it is heated by permit t ing the v a t e r t o escape s l w l y .

Table 16: RZJTTU PPOWCYION I N W O R PRK' .:IS COUNTUIBS: FIVE YtAR A W E S ANB A W E ANNUAL C R M UTES

Coun t rr Product i o o Crcwth Rater

1 9 6 1 6 5 196b-70 1971-75 1961-651 196b-101 196165/;

A u r t r a l i a 201 2 10 184 0.9 -2.6 -0.9 C.arda 167 1% '7 -1.4 -6.0 -2.7 Ct.choslovakia 7 7 90 ,.8 3.2 3.7 3 -4 h a s a r k 162 150 136 -1.5 -1.9 -1.7 Prance 429 521 533 4 -0 0.5 2.2

Cexmny, Fa. U p . 175 213 252 4 -0 3.4 3.7 Cerrrny, Fed. Rep. 481 516 503 1.4 -0.5 0.5 I n d i ~ t 427 4 23 443 -0.2 0.9 0.4 Rather l a n d s 9 7 110 167 2 .6 8.7 5 .6 Nau Zealand 225 253 237 2.4 -1.3 0.5

PAkIstm Pol tnd f i r k e y u S USSR

Other Countries 1,073 1,166 1,223 1.7 0.9 1.3

WORLD TmU 5,566 5,941 6,187 - 1.3 - 0 08 - 1.1

Source: FA0 statistics.

B. Dcvnd Equations

Qrarac te r i a t i ca of Fata and Oi la

107. C h u i c a l S t ruc tu re . A l l f a t a a r c g l y c e r i d e s , t h a t is, coppounda of g l y c e r o l v i t h f a t t y acid. t h a t varp i n c i n l e n g t h and/or i n t h e degree of unsa tu ra t ion . A p a r t i c u l a r n a t u r a l f a t 8 11 c o n t a i n aevera l glycerides which w i l l d i f f e r i n t h e i r f a t t y a c i d c o ~ p o a i t i o n . Theae d i f f e r e n c e s a f f e c t t h e mel t ing c h a r a c t e r i a t i c a and o t h e r p roper t l e a of t h e glyceriAes. The mel t ing c h a r a c t e r i n t i c s of a n a t u r a l f a t are t h e r e a u l t of t h e n i x of g lycer ides i n i t and are of fund-ntal w o r t a w e t o t h e food usea of t h e f a t . For example, t h e g l y c e r i d e s i n r a l l w have a high p ropor t ion of s a t u r a t e d a c i d s of long cha in l e n g t h and h igh w l t l n g point . The u s e of t a l l w a s a s o l e ingred ien t is l h i t e d because i t docs iiot wlt a t body t e q e r a t u r e and leaves an unpleasant f e e l i n g on the p a l a t e when eaten. But te r on t h e o t h e r hand, though s o l i d enough t o be handled i n blocks, i s s o f t enough L O k spread e a s i l y and

mel t s r e a d i l y i n t h e mouth. F ina l ly , an o i l such a s soybean o r sunf lover remains l i q u i d even i n co ld ueather , a l though on t h e i r they l ack some of t h e phys ica l proper t i e r required f o r food manufacture. They a r e , hovewr, u s e f u l a s a s a l a d o i l . The iood t echnolog i r t :an choose a v a r i e t y of o i l s f r w those a v a i l a b l e on t h e a r r k e t and blend them t o o b t a i n t h e p r e c i r e p r o p e r t i e s of t h e f a t product he requires .

108. Sa tu ra ted and Unsaturated P a t t y Acids. An i a p o r t a n t d i r t i n g u i r h l n g f e a t u r e o r f a t s and o i l 8 i r t h e degree t o vh ich t h e l r f a t t y a c l d r a r e s a t u r a t e d . 011s u i t h a high percentage of unsa tu ra ted f a t t y acids-soybean o i l , l o r example-are genera l ly l l q u l d a t room t e q e r a t u r e i n t e .p r ra te c l imate r and a r e t h u s c a l l e d "rof t* o i l r . Ollr o r f a t r wi th a h r g e p ropor t ion of s a t u r a t e d f a t t y a c i d s , such a8 p a l m o i l , a r e u r r u l l y s o l i d o r m i - 0 1 In geaera l , u n u t u r a t e d f a t r and o i l r a r e used f o r t h e u n u f a c t u r u of l i q u i d f a t producrr ( sa lad and cooking 0118). Saturated f a t 8 ~ n d o i l r a r e t h e u r n i a g r e d l e n t r i n t h e u a u f a c t u r e of hard f a t productr , such a r u r ; a r l n e , rhor tonfng and roapr. fho t~8h p a l m o i l -8 used praviour:y oaly f o r i n d u r t r l a l putpore#, improved f r a c t i o a r r t i o a technlquer n w allow it t o compete u i t h o t h e r f a t r and o i l s i n t h e manufacture of margarines, shor ten ings , cooking f a t s , s a l a d oi ls , cor.fectlorury and i c e cream. Hwever, r o f t o i l s can be hardened t h r o w h h y d r o g e ~ t i o n . T b i r hu expanded th. range of f a t r and o l l s t h a t can r u b r t l t u t a f o r palm o i l and o t h e r hard (maturated) o i l s i n t h e s e end-user. Dehydrogarutlon-the t r a n r f o r u t i o a of r a t u r a t e d f a t t y a c l d r i n t o t h e i r unsa tu ra ted form-hu not proved econonic.

N u t r i t i o n a l Aspects of F a t s and O i l r

109. High C a l o r i e Food. P a t s and o i l s c o n t a i n more u l o r l e 8 than any o t h e r food. They provide about 9 l a r g e c l l o r i e r pe r g r u , compared t o about 4 c a l o r i e s from p r o t e i n s and carbohydrate3. Q a t r have 8180 t h e higherr. c a l o r i e d e n s i t y of any food, s i n c e they a r e e r r e n t i a l l y water-free i n comparison wi th p r o t e i n s and carbohydrates, vhich con ta in l a r g e q u a n t i t i e s of water. 11

110. Fat Def ic iencies . Although carbohydrates f i l l t h e saoc bb-'c need i n t h e d i e t as f a t s and o i l s , they cannot be r u b r t i t u t e d t o a n uallmltc extent . A s u b s t a n t i a l o r l a s t i n g reduct ion i n f a t i n t a k e l e a d r to f a t hunger. Thir is then u s u a l l y f g l l w e d by a period dur iag which f a t consumption increaser sharply . T h t s need f o r f a t i n t h e d i e t r a y be p a r t i a l l y explained by t h e f a c t t h a t f a t n o t only i n c r e a s e s t h e p a l a t a b i l i t y of f d s , it a l s o delays t h e d i g e s t i o n of food, prevent ing a premature pensa t ion of hungar a f t e r ea t ing. -

.; 111. F a t s and o i l s a r e not only a n i q o r t a n t source of energy, but c e r t a i n *unsa tu ra ted f a t t y a c i d s a r e e r r - a t i a l components of a ~ 1 1 - b a l a n c e d diet-. A &lack of them r e s u l t s i n a fa t -de f ic iency d i sease . Since s o m ~ of these f a t t y G c i d s play a n important r o l ? dur ing pregnancy and l a c t a t i o n , f a t d e f i c i ~ c l e s A f f e c t voPen and small c h i l d r e n more s e r i o u s l y than men. F i n a l l y , s e v e r a l vitamins a r e d i s so lved by f a t and a r e f r e q u e n t l y cocsumed v i t h f a t i p foods, s o t h a t f a t d e f i c i e n c i e s pay a l s o r e s u l t i n a l a c k of these rt-amins.

11 I n c a l o r i c - d e f i c i e n t s i r u a t i o n s , f a t s combined v i t h carbohydrates can - be s u b s t i t u t e d f o r prote in .

112. Impact of Far Cocuuaption on Health. During the e r r l y 1950a, m e d i a l rererrrch began t o ahif c atmy f ro8 the u t l l -know e f f e c t a of f a t def icienciea on h w n hea l th t o look more c lore ly a t the ra la t ionahip betueen consumption of fa*- and o i?a and the incidence of cardiovarcular diaeare. Although a c l e a r cauae and e f f e c t :elationrhip uaa n e w t ea tab l i rhed , the re ru l t rwrhoued t h a t wlyunaatura ted f a t t y ac id r , the u i n coaponenta of a t 3 . vegetable o i l a , a r e h e a l t h i e r than u t u r a t t d f a t t y acidr. Theae f i ld inga u e r t widely publ icired and contr ibuted t o a a h i f t i n conarmption from "hard" . t o "#oftn r e a r t a b l e of ls.

113. The optimal quant i ty of f a t r i n t he d i e t has been more d i f f i c u l t t o d a t r r l i a e . I t u r r -1.-lmoua tha t th. body r t o r e r f a t i n the adipore t i r r u r r u n t i l needed a s a rource o: u l o r i r r . The a u n t of f a t r t o r r d drpendr un the c a l o r i c balance of cba body. A l l e r c e r r u l o r i r r , r eaa rd l r r r of whethrr they a r e i n t he form of f a t , c r rbobydra tu o r protein, a r e atored aa fa t . Coruequently, a r u b u a t i a l port ioa of the urbohydra tea conausud, aa well a s a m pro te in , a r e coaverted i a t o f a t . LI Yhen u l o r i c naedr exceed ca lo r i e intake, f a t i r r e l r u e d f r o a tbe adipore t i a r u e r a s f r e e f a t t y acida in to the blood and i r d i a t r ibo ted t h r o t @ m ~ t tba body. The in te rac t ion of theae f r e e f a t t y a c i d r with o m e a is the u j o r rource of eaergy f o r t h r body. Although i t har not bean poaaible t o e a u b l i a b absolute q u a t i t i e r f o r f a t intake, t he fiudlnga have i a d i a c e d t h t the share of f a t i n the d i e t l a inversely ra la ted t o the average t e q w t a t u r e of tba eavi roawat . Tbua, disreg.rding other faccora, par cap i t a c o n a u q t i o a of f a t s i n temperate c l i u t e a w i l l exceed t h a t i n t r o p i c a l cl5-leer.

Ron-Nutritional Uaea of Para urd 0118

114 . I n add i t l oa t o beiag a food, f a t a and o i l s h v e aeveral noa- n u t r i t i o n a l urea. Fats a r e wed i n f r y i w t o t ranafer heat rapidly and uniformly over the ubole aurface of t he food. Coqared t o other methodm of cooking, f ry ing h a the advancage tb t the cooking take. place rapidly. Since f ry ing i n deep f a t h a not increase tbe f a t content aubatan t ia l ly , the t r a d i t i o n a l prejudice aga ina t f rying i a fading away. Host fast-food reatauranta uae deep f ry ing a s their u j o r r u m c f preparing murls. Ihe ateady increaae i n tbe runbar of meal. par f d l y eaten out of the houre has -reatad a s i zab le n r l c e t f o r f ry in8 oil. i n the United Statea and other industrialized countries. 21 I - 1U. Fat is a l s o e s s e n t i a l f o r the manufacture of bakery goods. It is capable of errtrapping and holding a i r , vhich expands under the influence of h u t , thereby cont r ibu t ing t4 luven ing .

*

11 Although a l l usual d i e t a ry f a t s a r e of equal nutritional value, ce r t a in - p o l y u ~ a t u r a t e d f a c t y ac ids , such a s l i n o l e i c ac id , cannot be made by che body and m a t be supplied i n the diec.

21 This was one of the reasons why the per capica consumption of f a t s and - o i l s i n i ndus t r i a l i zed councrles, once widely .rseumed t o have reached i t s sa tu ra t ion l eve l , continued t o c l m b .

116. rnus the use of f a t h a s two fuar.tloas. F i r s t , it enhances E d value, and recond, i t enables the product t o assuz~a I t s cha rac t e r l s t l c form and texture.

117 U1 n a t u r a l f a t s and 011s have distinctive f lavors uhlch a f f e c t the f lavor of t he foods prepared wlrh thao. Tne d e ~ n d t o r r o w 011s (rag. , o l i v e 011) r e r t s la rge ly on tha c h a r a c t e r l s t l c fl8'ror they glve t o the food. Evea decdorlzed and t a s t a l e s s 011s b r l a ~ out the mtu -a1 f lavor of foods. Thesa 011s can be used, therefore, as a "seasoning" f o r cooked vegetables, salads, sauces, ~ ~ ~ v I c o # e t ~ .

h l n Uses of Pa ts ~ n d 011s

116. Only A s u l l port lon ?f t he uorld ' r productloa of t a t s and o l l r 1s conswad d l r e c t ly , wlthout fu r the r process lag, The bulk of produetloa reacher the consuwr l a a m prucersed form. ?at@ aab o i l r a r e a major lngredlent lc a vlde var le ty of food and .\on-food productr, 1/ the wrt l apo r t r a t k l c g t ( I ) margarines; (b) s h o r t e a f w f o r use In tb. h o u ; ( c ) rbortenlrqs f o r r n u f a c t u r i a g bread, taker aad b l r c u l t r ; (d) f ry ing f a t s ; (a) u h d 0111 ( f ) farm f o r rpec l a l l t ed food u n u f r c t u r e , coafrcr lonary, Ice c r u and lmltat ion c r a u ; (8) soap and detergents; (h) pa in ts ; and (1) c h t p l u 1 product,.

Margarine

119. Margarine was the r e s u l t of a rearch f o r an lnaxpaarlve substitute f o r but ter . The f i r s t succemsful a t t e w t uar that of Preach chenlrc Wge- Hourles i n 1870. The o r i g i a n l process f o r nmkirrg p r r y r i n e required tw umjor ingredients : beef f a t a t d mllk. To prepare it, the t a c t f a t uas rendered a t a very lw temparatura and than separated i n t o f r ac t ions with d i f f e r e a t w l t i n g polntr . Tha objec t ive ws t o obta in a f a t with a lcnmr m l t l n g poi:.t than the ortgi-1 beef fa t . Thia f raccion uu then d x a d with m i l k t o glve it a but tar- l ike f lavor . I n o r h r t o a r r i v e a t a product with roughly the s m cansistency a r bu t te r , the e u l s i o a of d l k and l i qu id f a t uas slowly poured i n t o c h i l l e d vater.

120. Early margarines had severa l d i s rdvaa tae ts when coppared t o but ter . A p a r t from d i i f e r encas i n t a s t e , a corb i ru t ioa o. l l l k and f a t alone yielded an e u l s i o n which was a rch less stable . Tbis be- Pore obvioua when m r g a r i n e w a s used f o r frying; t h e rapid separa t ion of its ua te r and f a t coqonen t s caused the margarine t o s p a t t e r ar ?i t he n l l k so l id s t o s t i c k t o the pan. Thia problem uas overcome by adding various e e d s i f y i n g agents t tne mixture of nilk and f a t .

1/ The p r inc ipa l colnpetition t o f a t s and o i l s i n the manufacture of non-food - products is f rorn synthet ics .

2/ The b ~ t t e r - l i k e f lavor could only have been derived from the ac t ion of - bacter ia i n t h e d l k . It was l a t e r discovered t h a t a more pronounced f lavor of b u t t e r could be obtained by souring o r r ipening the d l k before d x i n g it u i t h t he f a t .

121. t a s t e . S ince t h e t a s t e of margar ine shou ld resemble t h a t of b u t t e r a s c l o s e l y as p o s s i b l e , i t is important t h a t none of t h e n a t u r a l f l a v o r s of t h e f a t s used i n t h e procS-lcticrn of m r g a r i n z a f f e c t t h e f l a v o r of t h e f i n a l product . Thus t h e f a t s and o i l s used I n r a r g b r i n e s must be comple te ly f l avo r l e s s .

122. H e l t i n g Behavior . Xargar inc h a s t o melt r e a d i l y and coup:ctcly when conscmd. I n t n i a r e s p e c t i t d i f f e r s f r o a sho r t en i r tg s , which a r c u s u a l l y consumed a1r::dy mel ted ( i n h o t d i s h e s ) o r f i n e l y d i s p e r s e d ( i n p a s t r i e s and baked p r o d u c t s ) . 3 a r g a r i n e is, on t h e o t h e r hand, used l i k e b u t t e r , naoely d i r e c t ly , and u s u a l l y a s a t a b l e spre..4. I f a a r g a r i n e were not t o melt comple t c ly , i t H u l d have a n u n d c r s i r a b i d "?as:y" c h a r a c t e r i s t i c . The re fo re , 1t haa t o be p l a s t & ; and has t o sr:odrl f r r ~ l y ac roolr t r a p e r a t u r e s . I n d t t t e r a l , t h e c o n s i s t e n c y and s a l t i ' r g c h a r s c c e r i s t ics of good brand3 of a a r g a r i n e r c s e b b l e t h o s e of b u t t e r a t rooa and body t c q e r a t u r c s . However, margar ine l s s u b s t a n t i a l l y s o f t a r and c a n ba s p r e a d bo re e a s i l y when co ld .

123. Concts tancy . The consister.cy o t margar ine depends l a r g e l y on t h e f a t s used i n 1;s nuf facture; i t is a f f e c c e d l i t t l e by v a r i a t i o n s i n t h e m t h o d s o f s o l i d i f y i n g and e a r l s i f y i n g . When ha rd o i l s such a s coconut o i l , p . 1 1 ~ k e r n e l o i l o r l a r d a r c used, t h e d e s i r e d c o n s i s t e n c y is u s u a l l y con ta ined it t h e f a t s i n t h e p rope r p r o ~ o r t i o n . These were t h e f a t s t r a d i t i o n a l l y used i? m ~ g a r i n e . A f t e r t h e hydrogenat ion p r o c e s s becane c o m e r c l a l l y a v a i l a b l e , cha p r o p e r c o n s i s t e n c y u a s ob ta ined by b l end ing t u o o r more ( p a r t i a l l y ) hydrogenar td v e g e t a b l e o i l s t oge the r . I f a s o f t e r end p roduc t was d e s i r e d , l i q r d d vege t rb l : o i l s u e r c o f t e n blended u i t h hydrogenated o i l s .

124. Facs Csed i n t h e P r e p i r a t i o n o f & r g a r i n e s . The f i r s t m r g a r i n e s -.*-:a oade f r w beet f a t and o l e o o i l . The la t ter was l a t e r supplcmented by l a r d . Fc r a long tioc, t h e s e two a n i u a l f a t s r epa ined t h e p r i n c i p a l raw

-

m-.rerials i n t h e rsnufdc:ure o f r s r g a r i n e s . During World War I , coconut o i l , palm k e r n e l il and babessu o i l wre used i n i n c r e a s i a g q u a n t i t i e s i n nar?nr:ae; by t h e e a r l y l 9 3 0 s they m d e up more than 60 p e r c e n t of a l l f a t s and o i l s u sed i n t h e ~ a r g a r i ~ e indus t ry .

125. Thz development o f t h e hydrogenat ion p r o c e s s oade it p o s s i b l e t o r e p l a c e coc;ut o i l v i t h cheape r v e g e t a b l e o i l s , n a i n l y c o t t o n s e e d and soybean. I t ua's found t h a t u a r g a r i n e uade ' f r o a hydrogenated vege tab le o i l s as s u p e r i o r t o t h a t made from o le - o i l , coconut o i l o r o t h e r ha rd o i l s . Ir.

a d d i t i o n , hydrogenat ion pe rmi t t ed t h e manufac ture o f f a t s t h a t mere s t a b l e , - f l a v o r l e s s and u n i f o r n i n cons i s t ency . 11 The b u l k o f t h e margar ine ~ r o d u c e d .$a, i n t h e Un i t ed S t a t e s and Europe is a d e from hydrogenated vege tab le b i l e . I n :he Uni ted S t a t e s , hydrogenated soybean o i l a are by f a r t h e most

11 F i s h o i l s a r e n o t s u i t e d f o r t h e p r e p a r a t i o n o f hydrogenated f a t s ; t h e i r - f i s h y f l a v o r r e t u r n s I f they are c o t comple te ly hydrogenated. In t h i s r e s p e c t whale o i l is g r e a t l y s u p e r i o r t o f i s h o i l and has been ex tens ive - ; used i n t h e ~ r a n u f c c u r e o f marga r ine i n Europe.

i l p o r t a n t source. Hwever , t h e t rend t o use Ire p o l y u ~ s t u r a t e d f a t t y a c l d r ham r e r u l t e d i n a s u b t a n t l a l l n c r e ~ s a 1n tha usa of corn 011. - 1/

126 - 1 . I n a d d l t l o n t o f a t s and o l l s , a l l k (skim milk o r nonfat d ry milk) is t h e o t h e r u j o r lngred len t l a a r r g a r l n e r . f h a f l a v o r and aroma depend t o a l a r g e e x t e n t on tha treatment of tho a l l k . Only the b e s t t u c t e r l r 1 c u l t u r a r , wi th proved f l a v o r and aroma-producing q u a l l t l a s , should be used i n r lpen lng I1 1k.

127. C o n s t r a i n t s on t h e Narket f o r h r g r r l n e . Tlrc dcvalopment of m a r g a r l n ~ r ~ d a I t p o s s l b l e t a prepare a product r l r LO b u t t e r but m d a - - f r& f a t s a d 011s- and a r c h less axpenrlva. ! l e u u s e of ltr lou c o s t s of ~ r o d u c t l o n , u r a a r i n a posed a s a r l o u s t h r a r t t o tha d a i r y industry. I n t a n r i v a lobbying e f f o r t s by t h e d a i r y lodur t ry l ed t o a r u b r t a a t l a l amount of l e g t s l a t l o n w a k e n i n g t h a c o o p a t l t i v e advantag. of o r r g a r l n a .

128. Like ~ r r ~ r i w , s h o r t e n i ~ 1s a s u b s t i t u t e f o r bu t t e r . Houavar, i f is n o t c o o r u a c d i r e c t l y a s a spread o r t a b l e f a t , but is used f o r cookin., and Wing i n p lace of b u t t e r . I/ k t h e name "rhortening" i n d i c a t e r , i t gJvas b s b d goods a "short" o r tender quaLity.

129. P a t s Used i n t h e Prepara t ion of Shortenin&. Consistency, mel t ing beha-riot , t a s t e and o t h e r p b y s i u l c h r a c t e r i s t i c s of ~ h o r t e n i n g a r e d a r e m i n e d l a r g e l y by t h e f a t s and o i l s used i n i t s preparat ion. I n t h i r rr;rpect, t h e r e is l i t t l e d i f f e r a n c e b e t w a n s h o r t e n l a g and margarine. O r i g i n a l l y , l a r d and o t h a r a n h l f a t s were t h e p r i n c i p a l e d i b l e f a t s used. Later, r o f t vege tab le o i l s (e.g., cuttonmeed o i l ) replaced p a r t of t h e ani-1 2ats . T h i s y ie lded a r a i - s o l i d ( " c o q o u d " ) rhor tening.

U O . The d e v e l o p u n t of t h e hydrogenation process r i ld ica l ly a l t e r e d t h e demand f o r f a t s and o i l s i n t h s shor tea ing i d u s t r y . Shortening manufacture i r no longer r e s t r i c t e d by t h e a v a i l a b i l i t y of a n i r a l f a t s . Host vegetable ollm u n ncw be ured t o prepare shor tenings . I n a d d i t i o n to soybean o i l , vhich is by f a r t h e most i l p o r t a n t source of o i l f o r shor ten lag , L/ o t h e r s a r e c o t t o ~ e e d o i l , co rn o i l , s a f f l a r e r o i l , sunflower o i l and palm o i l . Host sbor ten inge a r e made from two o r more hydrogenated vege tab le o i l s which a r e blecded togetber . I n a d d i t i o n , t h e e x t e n t of hydrogenation of each o i l may be w.r ied t o g i v e t h e f i n a l product its d e s i r e d c h a r a c t e r i s t i c s . = Thus t h e

'9

11 Like ehor ten ing m n u f a c t u r e r , pa rgar ine producere have, s i k e t h e e a r l y - 19690, inc reased t h e s h a r e of polyunsaturated f a t t y a c i d s i n t h e i r p rodcc t s i n response t o ~ e d i c a l r e s e a r c h sugges t ing t h e s u b s t i t u t i o n of t h e s e f a t s f o r I o r e s a t u r a t e d ones. Hergar ines con ta in f a t t y ac ids ; i n some products t h e s h a r e of these o i l s is a s high a s 65 percent .

21 Shor ten ing is a l s o eooetimes used t o g e t h e r wi th b u t t e r . - 31 I n t h e United S t a t e s and Europe, most of t h e imported palm o i l i s used -

f o r t h e manufacture of shortening.

possibility of hydrogenation toge ther wl th t h e a v a l l a b i l i c y of inuxpene-ve vege tab le o i l s gave sLortenlng manufacturers g r e a t e r flexibility i n chooi lng t b l r raw m a t e r l a l r than they had before and, st t h e same t i n e , ~ t r a n g t h a n a d t h e i r compet i t lvc p o s i t i o n vlm-a-vim b u t t e r .

131. U n t l l t h e e a r l y 1960s, most ollm ured ?n t h e ~ a n u f a c t u r a of margarines w r e h l s h l y s a t u r a t e d . They reduced t h e amount of hydrogentation needed and y le lded a shor tenrng t h u t w u hfghly mtable. C r w l n g conmuaer warenems about t h e r e l a t l o n s h l p betuean ca rd lovarcu la r dlmeame and t h e coomumptlon of maturated f a t t y acidm led t o a mharp increame i n t h e ume of polyunmaturated 0118 l a the manufrcture of rhorteningm. b s t mhortenlngm now c o n t a l n a b u t 30 percent polyunrsturaced f a t t y acidm.

132. Llquld Shortanln&. i n recen t y u r m , m h o r t e ~ ~ l n g ~ a n u f a c t ~ r e m have d e v a l o p e d ~ l i q u i d rhor ten lng vhlch 1s made from l l q u i d and only l l g h t l y hydrogenated (moft) vegetable o i l s . [heme products c o n t a l n between 30 and 50 parcent p o l y u n s a t u n t r d f a t t y acids . Liquid mhortening i m mainly w e d i n t h e c o r w r i c a l product ion of bread and bakerm' products.

Frying F a t s

133. Frying f a t s have two functioun. Flrmt, they a c t as a heat t r a n s f e r medirn. I n deep f a t f r y i n g , t h e f a t u p be a t 180°c o r above when r h e food is put in. S t e a o ir c r e a t e d , cooking t h e food e f f i c i e n t l y and usua l ly productng a c r i s p t e x t u r e on t h e o u t r i d e . Second, a p ropor t ion of f a t is abmorbed by the food, mainly i n t h e o u t e r l a y e r s and t h e t e f o r e becomes a c o n s t i t u e n t of t h e f r i e d product. Ihe propor t ion can be a s high a s 35 - 40 percent , a s i n p o t a t o chips.

134. A t Crying t e r p e r a t u r e s , it i a i n e v i t a b l e t h a t a c e r t a i n amount o f degrada t ion of t h e o i i vill take place. A nrrnber of chemlcal r eac t ions occur, o r i d a t i o n and h y d r o l y s i s being tua Important ones. M t e r a period of use, the o l l a c q u i r e s a "fried-in" f l a v o r , which is r l i g h t l y d i f f e r e n t f o r each o i l . The o x i d a t i o n e f f e c t i n p a r t i c u l a r l y mrlred when highly unsaturated o i l s a r e used and soon remul t s i n polymerization and u n r a t i s f a c t o r y f l avors . Palm o i l has t h e g r e s t advantage i n f r y i n g of a re l t r t iva ly lw l e v e l of unaa tu ra t ion and thereCore good s t a b i l i t y . I n some c a s e s , a palm o l e t n is pre fe r red , e i t h e r because of l i d t a t l o a s of equipaent o r *cause of iaprcved product c h a r a c t e r i s t i c s . It h a s advantages i n f r y i n g s i n i l a r t o p ~ l m o i l .

135. Palm o i l h a s been used f o r f r y i n g f o r nany y e a r s i n Europe and r e c e n t l y h a s becorc e s t a b l i s h e d on t h e west c o a s t of t h e United S t a t e s , i n c o r p e t i t i o n wi th p a r t l y hydrogenated soybean o i l . - Salad O i l s

136 . In many c o u n t r i e s , t r a d i t i o n a l cookery pror idee a l a r g e market f o r a l i q u i d o i l f o r d o w s c i c purposes. This o i l i s used as a s a l a d d r e s s i n g , f o r f r y i n g and f o r o t h e r purposes. I n t h e Mediterranean basin , the t r a d i t i o n a l one uas based on o l i v e o i l , i n Japan on noya bean p l u s rapeseed o i l , i n some E a s t e r n c o u n t r i e s on groundnut o i l . The domestic demand f o r l i q u i d o i l s of t h i s type is g r w i n g i n Europe and t h e United S t a t e s . One important consuner requ i reaen t i n t h o s e a r e a s is t h a t t h z o i l remain c l e a r even a t r e l a t i v e l y low w i n t e r temperatures. As formulated i n t h e United S t a t e s , t h i s requirement is

c a l l e d t h e "cold t e s t " and s t a t e s that 30 d e p o s i t mst € o m d u r i n g 5 1/2 hours s t o r a g e a t OOC. Some o i l s sue\ a s c o t t o m e e d u s t be " v i n t e r i r t d " before they conform; that is, t h e depos i t which would form a t lov temperatures has t o be removed. The g?ycer ides l a yala o i l a l l have mel t ing p o i n t s of 1 9 ' ~ o r h igher . Therefore pal- o l e i n cannot meet t h e Uni ted S t a t e s ' c o l d t e s t s p e c i f i c a t i o n , a l though a p ropor t ion u y be u s e f u l i n a s a l a d o i l blend wi th r more s a t u r a t e d o i l such as soybean o i l .

F a t s Used f o r Confec t ionar ies

137 . h n g t!:e more s p e c l a l l t e d food use& f o r f a t s , one of t h e oost i n t e r e s t i n g I s t h e use of palm o i l i n coafectionrr) ' . The unique e a t i n g q u a l i t i e s o f choco la te s r a t h e r e s u l t of t h e p r e c i s e c h c r l c a l make-up of cocoa hit ter. I t h a s a very h i a h p ropor t ion of t h e g!ycerlde p a l r l t o o l e o r t e a r i a (POS), uh ich imparts t o choco la te i ts hard b r i t t l e r e x t u r e a t room temperature and its s h a r p s c l t i n g p ~ i a t b a l w body temperature. I t so happenr t h a t t h e f a t contectt used i n choco la te is h i g i ~ e r than t h e n a t u r a l p ropor t ion of f a t p resen t i n t h e cocoa bean, and t h e r e f o r e a d d i t i o n a l cocoa b u t t e r h a s to 'be :teed i n manufacture. As 1 t c s u l t , t h e r e is s u r p l - ~ s cocoa p w d e r from t h e process , vh ich can be made iato a very a c c e p t a b l e s u b s t i t u t e choco la te by u s i n g f a t f r o a o t h e r sources w i t h s w l a r p r o p e r t i e s . Since cocoa b u t t e r ham a l u a y s bacn a ve ry expensive f a t , m a y e f f o r t s b v e b a a u d e to develop s u b s t i t u t e s , and a n u k r of products a r e a v a i l t b l e . Som a r e based on the l r u r i c oils-c t o n u t and t h e p o l r ke rne l , u s u a l l y processed by hydrogenation and /o r f r a c t i o n a t i o n . Others, which h v e t e c h n i c a l advantages, are based on t h e f r a c t i o n a t i o n oE o i l s which c o n t a i n g l y c e r i d e s similar o r i d e n t i c a l wi th t h o s e that g i v e cocoa b u t t e r its s p e c i a l p r o p e r t i e s . Palm o i l is a s u i t a b l e suu.ce of s o w o f t h e s e g l y c e r i d e s , and s e v e r a l p a t e n t s d e s c r i b e the p repara t ion of a c o q a t i b l e cocoa b u t t e r s u b s t i t u t e from palm oi l .

Non-Food Use8 o f F a t s and O i l s

138. Soap is produced try a c h e d c a l r e a c t i o n betveen f a t wi th a n a l k a l i . While h i s t o r i c a l r ecords show t h a t t h i s process ha8 been known f o r s e v e r a l thousand yea rs , i t remains an a r t up t o this day. Ear ly soapmakers followed t h e t e d i o u s procedure of e x t r a c t i n g potassium ca rbona te from mod ashes ("le&ching"), c a u s t i c i z i n g it w i t h s l aked l l m e , and u s i n g che c a u s t i c potash f o r s a p o n f i c i a t i o n . To o b t a i n ha rd soaps , t h e s o f t components of potash had t o be " s a l t e d ou tn wi th c m n salt . L/ 139. The t - , ic process of s o a p k i n g has n o t changed a r c h over time. The s e l e c t i o n o f f a t s and o i l s depends l a r g e l y on t h e expected q u a l i t i e s of t h e f i n a l pro&t, such a s hardnesr , s o l u b i l i t y and e a s e of l a t h e r i n g . A conmon mlxture f o r t o i l e t soaps is abou t 75 percent t a l l o w and 25 percent coconut o i l . The G a r l o u s f a t s a r e blended t o g e t h e r b e f o r e t h e a c t u a l s a p o n i f i c a t i o n begins. Rts v i t h a l a r g e p o r t i o n of s a t u r a t e d f a t t y a c i d s a r e u s u a l l y p r e f e r r e d f a soapmaking, s i n c e they saponify more r e a d i l y than unsatura ted f a t t y ac ids .

1 Bai ley 's I a d u s t r i a ? O i l and F a t Products (ed., Danie l Swern, I n t e r s c i e n c e - P u b l i s h e r s , New Yo:k, London, Sydney 19641, p. 875.

1 4 ~ . Af te r s a p o n i f i c a t i o n has t aken p l a c e , t h e soap is "grained out" by a d d i n g sa l t t o t h e b o i l i n g mass. The f i m l s t e p is t h e " f i t t i n g " o p e r a t i o n , i n which t h e b a t c h of soap s e p a r a t e s i n tm d i s t i n c t l aye r s : an upper l a y e r of "neat" soap and a t h i n n e r l a y e r o f "niger" soap. The a r t of soap-asking c o n s i s t s t o a l a r g e e x t e n t of o b t a i n i n g a s l a r g e 8 s h a r e of t h e p u r i f i e d n e a t soap a s p o s s i b l e . 11 The "niger" c o n t a i n s a a i n l y d i r t , c o l o r i n g m a t e r i a l s , metallic sa l t s and-other impur i t f e s . Nost c o m e r c i a 1 soap-making p r o c e s s e s y i e l d abou t 65 p e r c e n t "neat" soap, w i t h t h e c o a p o s i t i o n and t h e r e l a t i v e s h a r e s of "neat" a d "niger" soap depending l a r g e l y on t h e phys ica l p r o p e r t i e s o f t h e f a t s which make up t h e soaps tock.

141. Soap . a n u f a c t u r e i n ba tch p r o c e s s e s is time-consuming. I t t a k e s , on t h e ave rage , 5 to 10 d a y s t o p repa re a b a t c h of f u l l - b o i l e d soap. S e v e r a l con t inuous s a p o n i f i c a t i o n p rocesses have h e n developed and have g r a d u a l l y r e p l a c e d a l a r g e n u h r of t h e lengthy o p e r a t i o a r r e q u l r a d under c o n v e n t i o n a l s o a p b o i l i n g methods ( k e t t l e process) . )(oat o f t h e con t inuous p rocesses , such as t h e s h a r p l a s p r o c e s s , f o l l w roughly t h e saw s t e p s as t h e t r a d i t i o m l k e t t l e process . Houevar, they rue c e n t r i f u g e s t o s e p a r a t e "neat" and "niger" soap , and i t t a k e s less t h a n tuo hours f o r t h e f a t s t o be conver ted i n t o n e a t soap. The p rocess is h i g h l y e f f i c i e n t and y i e l d s abou t 0.17 kg of soap f o r one k i log ram of f a t . 21

142. C l y c e r i w Recovery. An impor tant byproduct of t h e s a p o n i f i c a t i o n f r o c e s s (bo th k e t t l e and cont inuous) is g l y c e r i n e . Glycerine is recovered f t o r t h e s p e n t l y u , whlch c o n t a i n i n a d d i t i o n t o 5 - 1 5 pe rcen t g l y c e r i n e , a c o n s i d e r a b l e amount of salt and a mll amount of c a u s t i c soda.

C o n n u p t i o n P a t t e n s f o r F a t s and Oilm A/ 143. V i s i b l e and I n v i s i b l e F a t Consmpt ion . F a t s and o i l s can be consumed d i r e c t l y i n t h e form o f cook lag o i l , u r g a r i n a , s h o r t e n i n g , e tc . , o r i n d i r e c r , l y th rough t h e c o a s u q J t i o n o f l i v e s t o c k p roduc t s and vegetablem. The f i r s t type of f a t corrsumption- is u s u a l l y r e f e r r e d t o as "vis ib le" , t h e second a s " invis ib le ." I n t h e Uni ted S t a t e s , v i s i b l e consumption accounts f o r a b o u t 40 p o r c e n t of t h e t o t a l f a t i n t a k e ; t h e remaining 6 0 p e r c e n t invo lves consunp t ion o f o i l s t h a t are con ta ined i n animal t i s s u e s (e.g., meat, f i s h ,

11 The f i t t i n g o p e r a t i o n is higGly critical and r e q u i r e s a:l t h e s k i l l o f - t h e s o a p b o i l e r . me relativ! shares o f n e a t and n i g e r soap depend on h i s s k i l l .

* - 21 T h i s is on ly 15 - 20 p e r c e n m f t h e f a t aeeded i n t h e k e t t l e process . A -

s l d l a r s a v i a g is a l s o ob ta ided f o r t h e lye.

31 The tern " f a t s and oils" Is used f o r a l l f a t s and o i l s g e n e r a l l y - c l a s s i f i e d as "cd ib le / soap f a t s and o i l s " ; t h e s e i n c l u d e soybean, sun- f l w e r seed , groundnut , co t tonseed , rapeseed, o l i v e , coconut, palm k e r n e l palm, f i s h , b u t t e r , l a r d and t a l l o w , f a t s and o i l s . I n r ecen t y e a r s , t h e i r combiaed p roduc t ion h a s accounted f o r a b u t 97 pe rcen t of t h e t o t a l p roduc t ion o f a l l major f a t s and o i l s .

poultry and da i ry products) o r i n the form of oi l -bearing crops (cog., nuts) (Table 17). This paper r e f e r s only t o the v i s i b l e consumption of f a t s and o i l s .

144. Per c a p i t a consurption of f a t s and o i l s depends largely on incom. I n s eve ra l developing count r ies , a n n u l per c a p i t a consumption is l e s s t h a n 5 kg. In rost indus t r i a l i zed countr ies , i t ranges f r o a 25 t o 30 Lg. S t a t i s t i c a l a m l y s i s of the p a t r e n u of consumption s h w s t h a t demand increases rap id ly with incomes a t l a r l a c o m levels . A t hi&-iacora levels-- roughly those i n the United S t a t e s and so re European cocrntries--the responsiveaess of demand t o increases i n i ncow l eve l s off a t about 30 kg per capi ta . Ll Chart 5 i l l u s t r a t e s t h i s relat ionship.

145. Table 18 rhous the per capi ta consumption f o r f a t s and or!a i n t e ~ of f ive-year averages f o r s e l ec t ed country groupiags. mile the da t a i n t h i s t ab l e uere based on the estlmated disappearance of f a t s .ad o i l . and not on a c t u l consurpt lon surveys, they provide some ind ica t ion of l ave l s and rates of change i n constmption. I edu r t t i a l i zed count r ies with t h e i r high per cap i t a i ncows also have the hiphest par u p i t a coorumption of f a t s and o i l s .

146. The r t l a t l o n s h l p k t u e e n consup t ion arid i ncow was used to estimate par u p i t a demnd i n e igh t regions. 2 . Tbe estimated coe f f i c i en t s a r e prerented belw.

where:

PCCW' - per u p l t a coorlrpt lon of a11 f a t s and o i l s . i n region (1 1, i n b.

PFO - pr i ce index f o r f a t s and o i l s (1974-100)

= per c a p i t a CNP i n region (i), i n U S do l l a r s

147. Tbe use of t h i s r e l a t i onsh ip has severa l dr8wbacks. F i r s t , it is h u e d on data from a11 regioum and does not a l ) w f o r d i f f e r e n t i a t i o n k t v e e n

' t b e d q u e conornption pa t t e rns t ha t l i g h t e x i s t i n d i f f e r e n t regions. Second, t h e e s t l r a t e d deland re la t ionship pos tu la tes the same sa tura t ion l e v e l f o r a l l regions. - -

.!

11 N u t r i t i o n i s t s d i f f e r i n Meir vteus about t he exact amun t of f a t required ? - i n t he h-n d i e t . They rg ree , however, t h a t the o p t i a r n amount u y depend on cl imate, econoric circumntances and e a t i n g habi ts . I n thc United S t a t e s , f a t s supply about 35-46 percent of t he t o t a l p e r cap i ta i n t ake of ca lor ies ; i n Southeast Asian count r ies , they provide l e s s than 5 percent.

21 Indus t r i a l i zed countr ies , cen t r a l ly planned econonles, La t in America, - North M r i c a , West M r i c a , East M r i c a , Asia and Eaat Asia and Pacif ic .

Chut 6: PER CAPITA CON8UMPTIOFJ OF FAT8 AND OILS IN SELECTED COUNTRIES, 1@76

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148. As a r e s u l t , s e v e r a l a l t e r n a t i v e approaches f o r e s t i m a t i n g r eg iona l demand r e l a t i o n s h i p s f o r f a t s and o i l s vere explored . The r e s u l t s wre i n .,st c a s e s u n s a t i s f a c t o r y ; no t s u r p r i s i n g , c o n s i d e r i n g t h a t t h e i n f o r s r t i o n on per c a p i t a consumption o f f a t s and o i l s is l a r g e l y based on "par c a p i t a d isappearances ." i/

Tabla 18: PER CAPITA CO#Y&@TIOM OF FATS AND OILS BY REGION, FIVE-- AVERS= AHD ANNUAL GROWTH RATES

Region

C e n t r a l l y Planned E c o n d es 7.1 7.6 9.1 1.4 3.7 i .5

V e s t M r i c a 9.1 7 -9 8.6 -2.8 1.7 4.6

East M r i c a 3.5 4.1 5.2 3.2 4.9 4 .O

Horth Af r i ca 6.7 7.5 9 -6 2.3 5.1 3.7

S m t h Asia 5 .9 6.0 6.2 0.3 0.7 0.5

East Asia-Pacif ic 3.6 3.7 4.6 0.6 4.5 2.5

Source: Est imated f r a USDA and FA0 statistics.

11 The p e r c a p i t a d isappearance of f a t s and o f & is computed a s f o l l w o . - T o t a l product ion o f o i l s e e d s is converted i s o domestic a v a i l a b i l i t i e s by adding imports and s u b t r a c t i n g expor ts ; t h e a v a i l a b l e quan t i t y of each o i l s e e d is then d iv ided i n t o a po r t ion t h a t = i s processed i n t o o i l and a p o r t i o n t h a t comprises a11 o t h e r uses. By *plying t h e corresponding o i l y i e l d t o t h e q u a n t i t y a l l o c a t e d f o r crusl i ing, t o t a l domestic s u p p l i e s are obtained. T o t a l s u p p l i e s a r e c o r r e c t e d a g a i n f o r changes r e s u l t i n g from o i l irports and e x p o r t s t o o b t a i n t o t a l domestic a v a i l a b i l i t y of t h e 011. Th i s a v a i l a b i l i t y is expressed i n p e r c a p i t a terms. The veakness of t h i s c a l c u l a t i o n l i e s mainly i n t h e e s t i m a t i o n of t h e sha re of t o t a l o i l s e e d a v a i l a b i l i t y that is processed i n t o o i l . L i t t l e ' e k n w n about t h e s e s h a r e s and h w they change over time. The consumption da t a i n t h i s r e p o r t v e r e based o n s h a r e s published by PA0 f o r major o i l s e e d s and t h e i r m i a producing c o u n t r i e s .

149, Regional ;clnsuption pzt~crud f3r f a t s and o i l s generally ref lect regional production pattern8 and natural rtorage conditionr (Table. 19 and 20). economic protection and l w e r transport cor t r play an important role i n the preference for locally produced fa t8 znd 0118. Ia te.pcrata toner, roybeanr, cottonreeds and runflwer reed. r u ~ p l y 30rt of the oi l8 needed in the mnufacture of mr$&riae, rhorteningr and other f a t productr. I n t ropical and r ed t rop i ca l toner, coconut o i l and palm o i l dominate vegetable o i l

4

conrumption. i

150. Shif t t o Yetetable Of la. Since t5e early 1960r. vegetable uilr have expanded the l r m*ket rhare by about 10 p r c e n t ( table 19). The w a r drrrmatic increaou took place l a the r l rket r h r e cf vegetable oi l8 made from oilreedr, uhich increamed by r l l eh t ly more t h n 14 percent. The mrket r h r e of o i l r from t r m cropr--all of uhich are b r d oil., u i th the exception of olive oll- decl lwd by rbol~t 2 percent. h!ul f a t r and m r l r u o i l r loat about 14 percent of their -:Let rhare in the early 19608, mainly becaure of the decltoe in lard rupplier.

Table 19: tSfI)(ATED PATS AND OILS OONSUWPTION BY FECtON, PIM-YEAR AVZUCES, 1961-75

Cooruqtloa Crwth Rater 1961-65 1966-70 1971-75 1961-70 1966-75 1961-75

North Mrica-niddle - east

South Asia 3,651 4,032 4,843 2.0 3-7 2.9 - - -

Source: Estimated f roa USDA and FA0 s t a t i s t i c s ,

Y 1.9 InmZ 9.2 0bO 1 9 U b 4.2 2 . 10.2 bbb b.2 8%) 4.4 b.129 8 . b lbl :.O

hou hr Qm 0 1 1.. - ?.I. h lr Urwl

UDYL r u r r lurtn o t u

151. The increase i n soybean o i l suppl ies and the dec l ine i n la rd account f o r m a t of the s h i f t i n t he m r k e t shares of individual f a t s and o i l s . Increaned suppl ies of soybean o i l r e f l e c t the rapid expansion nf demand f o r high-protein bca ls , m i n l y soybean meal. The g r w i n g demand f o r leaner meat productr has been the -in reason f o r the alovdwn i n the growth of h r d and t a l l w suppl ies .

152 The change i n the market shares of individual f a t s and o i l s is thus l a rge ly a aupply-induced phenomenon. I t has l i t t l e t o do with the increasing d m n d because of hea l th reasons fo r s o f t vegetable o i l s vhich a r e l e s s s a tu ra t ed than both hard vegetable o i l s (coconut o i l , palm kernel o i l and p a l s o i l ) and animal f a t s .

Demnd f o r Pats and - O i l s

153. Uorlduide, t he demand f o r f a t s and o i l s has expanded s t ead i ly duriag t he pas t tuo decades a t an average r a t e of 3.2 percent a year (Table 19). L r g e l y became of the increase i n population and t o a lesser ex ten t beume of the growth i n par c a p i t a incomes, t he a n n u l i n c r e n n t Ln the demand f o r f a t s a d o i l s increased from about 050,000 toaa dur iag t he ea r ly 1960s t o about 1.3 d l l i o n tons during the l a t e 1970s. I n d m t r i a l i z e d countr ies nccarnt f o r s l i g h t l y less than half o t world consrapt ion of f a t a .ad o i l a , developing count r ies f o r almost 30 percent and c e n t r a l l y planned economlea f o r about 25 percent. These shares have remained r e u r h b l y s t a b l e during t k e p a s t tuo decades; t h e share of the developing count r ies , f o r e u u p l e , has g r a m only by t w o percentage points, n r r a ly from 27.9 percenL i n t he e a r l y 1960s t o 29.9 percent i n the late 1970s.

154. Charts 6 and 7 a h w the shares i n consrnption of a11 f a t s and o i l s and of u j o r f a t a and o i l a f o r i ndus t r i a l i zed count r ies , developing count r ies a d c e n t r a l l y planned econodea. These c h a r t s i l l u s t r a t e the observation m d e e a r l i e r that, predoduant ly , count r ies tend t o consme the o i l a they produce.

Demnd Equations f o r Ellgh-Protein Xeals

155. To capture t he behavior of t h e f a t s and o i l s markets adequately, it became necessary t o e s t i n t e the demnd funct ions f c r high-protein -1s a s w e l l . The demnd f o r high-protein meals is l a rge ly a r e f l ec t i on of the demand f o r animal feeds by t n e l ivestock industry. Income is the main economic f a c t o r determining t h e dcrand f o r l ives tock products, and i t was included, toge ther with -1 prices, i n the demand equat ion f o r high-protein meals. t h e denand equat ton f o r t h e indus t r ia l ized count r ies is shown be lw.

' I

Et2 0.94 S.E.E. = 610.86 D.W. - 2.10

where:

DHLIND = demand f o r high-protein meals (p ro t e in equivalent) i n i ndus t r i a l i zed count r ies ('000 mt)

C b t 6: FATS AND Ol LS CONSUMPTION, BY REGION, 1961-75

1%1 1963 1066 1 ~ 7 1- 1971 ion 1975

YEARS

Chrt 7: C O N W W T I W OF MAJOR FATS AND OllS. 8Y R E G I W . 1W1-76

=nt~ll C.L ~ F M R OIL

I*OUSTRIAIJZ~D

1 s t 63 e 67 w 71 n n YEARS

OEVE LOPING

1m

1961 cn ss m tw 71 n n YEARS

1- t i

J-----J 1.- L a - 0(

8 . OEVE IBPING

YEARS

World k t - 2 2 9 7 7

Pnt - pr ice index fo r high-rrocein meals (1974-100)

CHPIHD - CKP i n fnburcr ial ized count r ies ( a l l l i o n US$) . 156. Uhile t he inbur t r fa l ized count r ies a r e d e f i n i t e l y the major market f o r high-protein meals, demnd has been increasing i n cen t r a l ly planned econolies and t o a l e s s e r extent i n developing countr ies . The e s t i u t e d r~*lationot.ips f o r high-protein -1 demand i n these regioru a r e prsreated balw.

D H L B B - d c u a d fo r high-protein meal* (pro te in equivrlent) i n cen t r a l ly planned eeonodes ('000 r t )

CNPCPE - QIP i n cen t r a l ly planned econ.mfes (mil l ion US$)

La t in America: 1961-75 - (3.3) IllaUCI - 946.11 - 292.46 Rap ' I + 0.002) C)IPLAC~

(4.69) (2.43) , PKL,,l f (3.71)

IL2 = 0.65 S.E.E. - 129.2 D.W. - 1.48

DWLWC = demand f o r htgh-protein meals (pro te in equivaleni) i n Lat in America ('000 rt)

= price-,index f o r high-protein meals (1974-100) ' J

W U C = CNP id Lat in America ( p i l l i o n US$) - - * -

. . . Nor! b M r i c a and Mddle Bast: i96i-75

It2 - 0.82 S.E.E. - 0.68 D.V. - 1.06

D)(LMA - d m a d foe hlgh-protaia walr (pro te in rqulvalant) la North M r i c a Nlddlo h r t ( '000 m t )

PHL - p t i c o La&% f o t bl@t-ptotrla walr (1974-100)

C N P W - C#P l o North Anrim Nlddle h r c ( t l l l i o n US$)

RdW - d m n d f o r high-protein wala (pro te in equivaleat) i n Bart Africa ('000 u)

PHL - p r i c e index f o r high-protein -la (1976100)

mfPBAP - CNP i n p a t M r i c a ( r i l l i o n US$)

Ycet Airica: 1961-75

D U L W A P = demand f o r high-protein meals (pro te in equivalent) i n West M r i c a ('000 rt 1

PHL = pr i ce index f o r high-protein meals (1974-100)

CNPUAP - GNP i n West M r i c a ( a i l l i o n US$)

South Asia: J961-75

P)dW - demand fo r hiuh-protain -.la (pro ta la equivalent) i n South Asia ('000 rt)

P)(L - pr ice indez f o r hiuh-protein meals (1974-100)

CNPSAS - CMP i n South Asia (mll l ioa US$)

D l U A P - d a d fo r higb-pmtein wal. (protein equivalent) i n b a t Ada-Paclfic ('000 m t )

PlfL - pr ice in&= fo r high-protein -1. (1974-100)

ClPPMP - ClPP i n h s t Asia-Pacific ( n i l l i o n US$)

C, Price E q u a t i o ~ f o r Fat8 and Eigh-Protein Heale

157. The pr ices f o r o i l r eed . and t h e i r product8 a r e determined through the f ma i n t e rac t ion of urkat force,. With tba exception of o l ive o i l , no c d i t y a g r c a a n t s i n t e r f e r e with the determinetion o f i r a rke t prices. Prices f o r oilseedm r e f l e c t the r e l a t i v e s t rength of the narketa f o r o i l s and m e a l s . Sene , i n tbe loag term, o i l r eed price8 m y be viewed as the tleightedL/ averag? of t h e o i l 6 and 4 s contained i n them, corrected f o r tbe cos t of o i l ex t rac t ion ("cruahiag urgin") . The folloving r e h t i o a s h i p \ n u used i n tbe model t o determine o i l r eed prices:

I / 'Ifie w i g h t s are t h s o i l and meal concent af each oileeed. The crushing - ~ r g i n d i f f e r s a l i g h t l y f o r each oilaeed and tcnde t o f luc tua te over tke.

POS' - price of oilseed (1) (US$lmt)

P F O ~ - price of the o i l contained in oi lreed (1) (US$/mt)

Y F O ~ - o i l content of oilreed (i)

p a i - price of the meal cont*ined in oilreed (1) ( ~ ~ $ / m t )

Y) IL~ - meal content of oilreed (1)

CHi - crushing margin for oi lreed (1)

Table 21 contain8 the variour uaightr tha t were ured i n the price e q u t i o ~ f o r the e ight oi lreedr included in the model.

158. Price for o i l8 and high-proteia m a l r ref lec t t h e i r correrponding mrket condition#, in par t icular chaager la inventory levelr. Changer in the d m n d for e i t h e r o i l8 o r meals that lead t o an increase in the procarring of o i l reedr vill ra i re the leva1 of inventorier of other oi lreed product@. Consaquently, mounting inwntor ie r v i l l put prerrure on pricer.

159. The f o l l w i a g relationship fo r the price level of f a t r and o i l s a r a group capturer t h i r l ink between pricer and inventorier.

Price Equation fo r A l l Fats and Oila: 1961-75 . .

I n PFOt = 2.5 - 0.22 ln + 0.3 I n PPOt-I DPO

where:

PFO - price index fo r f a t s and c?-is (19:blW)

LFO = ending inventories of f a t s and oilr. ('000 n t )

DPO - w r l d dcrand fo r f a t r and o i l s .('000 n t ) ,

I n the model, a s i d l a r relat ionship determines the prices f o r high-protein meals a s a group.

- PriceZEquation f o r Ri gh-Protein Heals: 1961-75

s i - . .. I n PtUt = 1.94 - 0.35 I n - InL + 0.16 l a FXLt-l - -- t - where:

Pt4L = price index fo r hfgh-protein meals (1974-100)

I t = ending inventories of high-protein meals ('000 mt)

DHL = world de~arrd fo r high protein meals ('000 mt)

Table 21: OIL AND HEU YIELDS /a -

Oilseed Crop O i l Yield Heal Yield

Soybeans Sunf louor Sou& Cot tonseeds Craradnuts lbposeedr Copra Palm Kernels Linseeds

- (percent)

/a The ..re o i l and w a l contents were used t o convert oilmeed supplies i a t o - t h e i r o i l and -1 equivalents. Thur, w r l d f a t e and o i l a rupplies i r the t o t a l of t h e o i l equivalents of t he various o i l see& and the world supplres of 0118, such a r palm o i l o r o l i v e o i l , which a r e extracted from a tar u r t e r b l that has no s ign i f i can t meal component.

Source: O i l Uorld Ueekly.

160* Inventory Kquations. Inocntories f o r f a t e and o i l e a r e d e t e d n e d am t h e res idual k t u e e n the estimated demnd fo r 011~ o r m a l a and t h e i r supply. These "inventory supply" re la t ionships not only determine changer i n o i l and meal inventories , they a r e a l s o used formally t o cloee the submodels f o r o i l s and hfgh-protein meals.

161. The following r e l a t i o w h i p s were used i n the model.

Fa ts and O i l r Inventories ,

Imt + SPO, - DFO,

I W = ending i n v e ~ o t i e e f o r f a t s and o i l s ('000 m t ) - - SF0 = w r l d suppl f fs of f a t e and o i l e ('000 mt)

I

DW = dcriand f o r f a t s and o i l s ('000 m t )

High-Protein Heala I n v e n t o r i ~ s

where:

Z H t - ending inventories for high-protein meals ('000 o r )

SM. = world supplier of high-protein w a l s ('000 a t )

Dm = d u n d for high-protein malr ('000 mt)

Pricer for Xndividul Oilreed Products LI

162 An iqmr tan t character is t ic of f a t s and o i l s , but a l so of high- protein w a l s , ir t h e i r high degree of interctungeability. 2-1 Nort end- products such a s mrg. r ina , rhortening o r soap can be procerred from a wide variety of f a t8 and o i l s . I q r o v e m n t s in refining techniques have further increared t h e i r interchangeability. S t i l l , they a r e f a r f tom being perfect subst i tu te8 for one another.

163. Increasing the supplies of an individual f a t or o i l tends to deprerr i ts price r e l a t l v e t o chore of other f a t s and o i l r . This is because the d a r n d rchedule becomes inc rus lag ly i w h s t i c am the supplies f roa an i a d i r i d u l o i l increase. However, there is sore evidence that chi8 schedule becomes more e l a s t i c over t h e i f the rupplier of an o i l continue to grov. Palm o i l provider an e u r p l e . During the ear ly 1960s palm o i l became available i n increarlnjj quanti t ies , and i t 8 price dropped sharply relaeive t o t h a t of roybean o i l and other coqetirrg f a t s and 0118. However, a s the producers of f a t products, such a s rargarine, shorteniag and soap, adjusted t h e f o r d a t i o n s of t h e i r products t o use wre of the comparatively cheaper palm o i l , its price k y n to approach that of competing o i b . Today, palm o i l prices have ruchd--ad a t tiws even exceed-soybean o i l prices.

164. The ease with which the various f a t s and o i l s can be interchanged is reflected i n C b r t 8 vhich s h w s the price aovements of major oilseeds, o i l s and high-protein reals. With the exception of butter, fo r vhich denand is unique i n the f a t s and o i l s mrlcet, the prices of the other o i l s move closely together. The corre la t ion coefficients tha t vere estimated for o i l and meal prices (Tables 22 and 23) illustrate the close relat ionship that e x i s t s betveen the prices within these tw comodity groups. ,

165, Though technical ly post f a t s and o i l s a r e interchangeable, costs of r e f i a ing and spec i f i c e n d v s e requirements l i m i t the range uichin',vhich individual f a t s and o i l s actually a re substituted. The need fo r . p r t a i n cher ica l ccmponents (e.g., f a t t y acids) o r ce r t a in physical properties (e-g., - - - *

8 - 1/ The term oilseed products refers t o both facs and o i l s and high-protein -

meals.

21 Although the discussion about interchangeability i n t h i s section deals - m i n l y with f a t s and o i l s , it a l so applies t o high-protein meals. The c-dities which make up these two groups of commodities can be eas i ly interchanged f o r each other in the various end-uses.

VI-77

Chwt 8: PRICE TRENDS FOR SELECTED FATS AND OILS, 1960-7!j

Y g n

World umnk--LiUM4

VI - 60

f l a v o r , co lor , smell, mel t ing point) i n a s p e c i f i c end-use gives t h e o i l o r f a t which has t he se components o r p rope r t i e s a competit ive advantage over o the r fatm and o i l s f o r t ha t t ad-use ("mpecific demandn). l/ Thum, each o i l o r f a t ham tw d l s t i n c t aa rkc t r : f f r a t , t h e u r k e t i n whiFh i t ham a qual i ' ;a t tve advantage over o the r f a t 8 and o i l s ; and second, the u r k e t i n which !t competes d i r e c t l y with o the r fatm and o i l s . The s i z e of t h e f i r s t mark@: of a t a t o r o i l variem with t h e d t u n d f o r t he end-productm which need its s p e c i a l p roper t les . The demand i n thim u r k e t is l e s s p r i ce - t l a a t l c than d ~ n d i n t he second u r k e t . In t h e f i m t , p r lces r e f l e c t t he r e l a t i v e r t r e n g t h of d e u n d and supply f o r t h e individual o i l r a t h e r than the ps rke t mltuat ion f o r a l l f a t s and o i l s .

166. The a s t i u t e d p r i c e equationm prerented k lw represent (price- dependent) import d e u n d equatlonm. t oge the r with t he export aupply equatlonm, they determine i n t e m s t l o c u l prlcem and t rada f o r o i l s and w a l r . The basic mtructure of t he equation# d e t e t r i n i a g t he prlcem f o r individual f a t s and o l l s uaa der ived from t h e f o l l a r i a g t r a d i t i m a l demand system:

where:

Qi - quan t i t y of o i l o r f a t ( i ) demanded

Pi - p r i c e of o i l o r f a t ( I )

zi - s e t of d-nd s h i f t e r s of t h e 1" demand equation

167. Am is c o r o n i a t h e e s t i n t i o a of a g r i c u l t u r a l d t ~ a n d w d e l e , the equa t ions could be rewr i t t en with p r i c e s as t h e dependent var iable . I n t h i s form, t h e e e t i r a t e d c o e f f i c i e n t s represen t d i r e c t and c ross -pr ice f l e x i b i l i t i e s . The high degree of c o r r e l a t i o n that e x i s t s between pr ices f o r i nd iv idua l f a t s and o i l s has made i t d i f f i c u l t t o es t imate s w h a system of demand equations.

r

1/ Subet i tu t ion i s i r p o s s i b l e i f t he end product requ i res a c e r t a i n f a t t y - acid. In te rchangeabi l i ty i s a l s o 1 i n i t e d . b ~ consumer t a s t e s and preferences; examplee a r e o l i v e o i l and groundnut o i l , which a r e marketed predominantly i n t h e i r pure form because consumers p r e f e r t h e i r f lavor.

168. To avoid the e a t i n t i o n problems aasocia t td with a large n u k t of d t i c o l l a e a r p r i ce a t r i e a , pr ices f o r i n i iv idua l f a t a and o i l a v r r e co lbpaed i n t o a a lng le pr ice index. L/

Pi - price of o i l f o r f a t (1) i n year t

QFOXi - quanti ty of o i l o r f a t (1) ava i l ab le i n the i n t e r a r t i o r u l u r k e t a durina year t

PPC, - pr ice i d e r f o r a l l f a t a and o i l a In year t

T h relat ionahfp a h v e i n d i u t e a t h t the q u n t i t y of exporta of an 1nJividual f a t or o i l and the pr ice i d e x f o r f a t a and o i l a a r e the u j o r factor. deterrrining pricea. In g e w r a l , i t vuuld ba expected L h a t the co r f f i c i en t a raocia tad v l t h the quanti ty of exporta v i l l be negative. A/ me e a t l u t e d coe f f i c i en t can be used t o c o q u t e the prfce f l e x f b l l l t y with r e a p c t to erporta . 31 The pr ice i d e x f o r fat. and oi l s could be interpretad u the pr ice f o r the aubat i tu te "fata and oils." The e a t f u t e d coef f ic iea ta of t h i a variable ahould be pori t fve.

Pr ice Bquationn f o r Fata and O i l s

Soybean O i l Pricea: 1961-77

S.R.E. - 13-59 D.U, - 2-94

11 The r e s u l t s may be s l i g h t l y diatorced s ince the pr ice index (PPO).also - contains i n f o r m t i o n about the pr ices vhich it helps to deternine. This d i s t o r t i o n v i l l be d i r e c t l y proportionate t o QP0Xi, which a r e the impl ic i t weights of the p r i ce index, W

t

21 The negatlve s i g a implies tha t the scope f o r eubs t i tu t ion among f a t s and - o i l s is limited. In terna t ional markets v i l l absorb increasing supplies of a given f a t o r o i l only a t d e c l i d n g prices-at l e a s t i n the short mn- The estimated p r i ce equations therefore r e f l e c t the import demand f o r t h i s f a t o r o i l .

31 The pr i ce f l e x i b i l i t y ludicaten the percentage change i n pr ice associated - w i t h a one p e r c e n t change i n t h e q u a n t i t y m r k e t e d , i n t h i s caee, e x p o r t e .

SOYPOP - prlees lo r soybtaa 011, crude, US CIP Rottrtrhm, deflated by the Index of In tenu t l ccu l I a t l a t l o a (1974 c o l t a n t S1.t 1.

SOYPOI - world exports of soybean o i l and soybeam--anal equivaltot ( '000 rt)

PW - pr l t e Index lor f a t s and o i b (1974-100)

068 - d w warlabla s e t t o 1 for 1968

D73 - d w m r l a b l e set t o 1 for 1973

SmmOP - prices for suaflover o i l , any origin, e r t a a k Rotterdam, deflated by the Index of In teraa t ioaal Xnflntion (1974 constant $/mt) .

SUNFUX - w r l d exports of sunf lwer o i l and sunf lwer seed--.oil equivalent ( '000 m t )

TOTFOX = w r l d exports of f a t s and o i b ('000 mt)

PPO = price index fo r f a t s and o i l s (1974-100) - - TIWB = t h e trend .:

C o u o m n d O i l Pricea: 1961-77

+ 10.5699 PF'O, + 99.9369 D6168 - 73.6145 D77 (13.90) (4.14) (2.27)

S-E-E. - 28.98 D.W. - 3.09

uhere:

COTFOP pr ice8 fo r cottonseed o i l , US, PBSY, CIQ Rotterdam, de f l a t ed by t he Index of In t e rna t iona l Xaflat loa (1974 constant $/me).

"WFO)r .I uar ld expor t r af f a t r and 0118 ('000 m t )

COTPOX - ~ r l d erpc ' tr of cottonneed of 1 and cottoareedr--oil equivalen: ('000 at)

PPO - pr i ce index f o r f a t 8 and o i l s (1974-100)

W168 .I dmrl , var iab le r a t t o I f o r the yearrr 1961 and 1968

077 - dvay var iab le s e t to 1 f o r t he year 1977

Crmadnut Of 1 Prices: 15b1-77

uhere:

CROPOP - p r i e e r f o r groundnut o i l , any or ig in , CIQ E u r o e n po r t r , de f l a t ed by t h e Index of In te rua t iona l I n f l a t i o n (1974 constant $/mt) .

CROPOX - wrlci exports of g c ~ d a u t o i l and groudnuts-oi l equivalent ('000 m t )

4

TOTSOX = world exports of f a t e and u l l s ('000 rt)

PPO = p r i c e index f o r f a t s and o i l s (1974-100) - - 36174 = d u r ~ y va r i ab l e 'et t o 1 f o r t h e years: 1961 and 1974

D657073 = d r m y var iab le &it t o 1 f o r the years: 1965, 1970 and 1973 * -

Rapereed 011 Prlcer: 1961-77

where r

RAPFOP - p t i c a r f o r r a p r e e d o i l , Dutch, POI a-11, def la ted by t h e Indrx of I n t e t l u t i o a r l I n f l a t i o n (1171 coar taa t S/mt) .

RAPPOX - uorld a rpo r t s of rapeseed o i l and rapareedr--oll equlvalant ('000 rt)

TOTFOX t o t a l exports of f a t r and oil. ('000 rt)

PPO - p r i c e Index f o r f a t r and o l l r (1974-100)

M177 a & u y var iab le r e t to 1 f o r t h e y u r r : 1961 and 1977

D68 - d w var iab le r a t t o 1 f o r tba year 1968

Olive O i l Prices: 1961-77

(4.6) OLIPt * -3517.69 - 8.9086 OLLW'G + 0.8134 OLIP,,l + 0.0212 OEaPt (7 -52) (7 -36) (4 -55)

I

S.E.B. = 73.68

OLIP - price6 f o r o l ive o i l , Spattiah, sdibel . LX, i n 'antas, FOB Spaairh po r t r , de f l a t ed by the Index of In te rna t iona l . I n f l a t i o n (1974 coar tan t Q/nt). -

8 * - - OLIPOX = world exports of o l i v e o i l ( '000 mt)

OECDY = C;RP i n OECD count r ies (mil l ion US$)

TIHE tire trend

Palm O i l Prices: 1961-77

n2 - 0.99

where:

PAW - p t l e e 3f p a l m o i l , Wlayr ian , 5X, CIF UK, def la ted by tho I d e x of Intermatioar1 I n f l a t i o n (1974 e o ~ t a n t $/mt 1.

PAWOX - uor ld export8 of p r h o i l ('000 m t )

TOTFOX - uorld export8 of f a t 8 and o i l 8 ('000 m t )

PFO - p r i a index f o r f a t 8 and o l l a (1974-100)

TMB - the trend

D68 - var iab le ret t o 1 f o r 1968

Coconut O i l Prices: 1961-77

- 0.93 S.B.B. - 43-49 D.V. - 1.17

COPFOP - pr i ce s f o r coconut oC1, Philippines/Indonesian, bulk C I F Rotterdam, de f l a t ed by the Index of In te rna t iona l Lnfla- - - (1974 constant $/mt).

COPPOX = world -./arts of coconut o i l and copra-oil equivalent ('000 m t )

. Pm = pr i ce index f o r f a t s and o i l s (1974=100)

D7S = d t m p var iab le s e t t o 1 f o r 1975

D68 - danrg var iab le s e t t o 1 f o r 1968

Palm Kernel O i l Pr ices: 1961-77

R2 = 0.98 S.E.E. - 22.11 D.W. - 2*43 I

PAWOP 0 pr i ce t o r palm kerne l o i l , West A f r l a n , CIP UK, de f l a t ed by t h e Index of I n t e n u t f o ~ l I n i l a t f o a (1974 constant S f r t ) .

PWOX - world a r p o r t s of palm kame1 011 and palm kernelm--011 equivalent ( '000 rt)

TOTFOX = world axporta of Latm and o i l s ('000 r t )

PW - p r i c e icdex f o r f a t # and ollm (1974-100)

W8 - va r i ab l e mat t o 1 f o r 1968

TMB - time t rend

06970 = d w q o r r i a b l e met t o 1 f o r t h e years: 1969 a d 1970

Fimh O i l Pricea: 1961-77

R2 - 0.90 S.E.E. - 28.79 D.W, = 1.91

uhere:

= FISWP - p r i c e s f o r f i s h o i l , any o r ig in , crude, CIF Europe (before ? Uarch 1973 t h e p r i c e s r e f e r r ed t o are Peruvian seni- - ref ined) , de f l a t ed by t h e Index of In t e rna t i ona l I n f l a t i o n

- - (1974 constant $ / r t ) . 8 . - PISFOX = w r l d expor t s of f i s h o i l ('OW rt)

TOTFOX = w r l d expor t s of f a t e and o i l 8 ('000 at)

PFO = p r i c e index f o r f a t s and o i l s (1974=100) 1 D6162 d u q va r i ab l e set t o 1 f o r t h e years: 1961 and 1962 I TIWE = t i m e t rend I

Lard Prices: 1961-77

lL2 - 0.94 S.E.E. - 17.52 D.W. 2.08

where:

LALRP - pr ice8 f o r l a rd , El!C r a f ln lng q w l l t y , CIP UK (before February 1973 p r i ce s r e f t r r a d t o a r e US, Pr iae Steam, CI? UK), def l a t ad by tba Index of I n t e r a r t l o n r l I n f l a t i on (1974 constant $ / r t ) .

LARX - world exports of l a r d ('000 u t )

PPO - pr i ce iadax f o r f a t 8 and o i l s (1974-100)

D68 - hamy var iab le set t o 1 f o r 1968

W46566 - d- t n r f ab l e ne t t o 1 f o r t he years: 1964, 1965 and 1966

But te r Pricea: 1961-77

IL2 = 0.85 S.E.E. = 2.089 D.U. 2.76

B O P - pr i ce s f o r bu t te r , Dutch, bulk, unsalted, UK marketa, e de f l a t ed by t he Index of I n t e r a a t i o a a l I n f l a t i o n (1974 .

constant $/nt) . WlCX = w t l d exports o f -bu t t e r ( f a t e q u i v a i e ~ t ) ('000 m t ) -

rOTPOL = w r l d exports o e f a t 8 and o i l s ('000 m t ) - 'im = time trend - * D74 * d- var iab le sGt t o 1 f o r 1974

T U P - pr ice t o r tallw, US bulk, b l m d u b l a fancy, CIP Rotterdam, def la ted by the Index of I n t e t n r t i o l u l Inf l a t i o o (1974 constant $/mt).

TOTFOX - rrorld exports of f a t 8 and o i l s ('000 rt)

TAW - vorld exports of t a l l w ('000 m t )

PPO - pr i ce index f o r f a t 8 and o i l s (1974-100)

D73 - dummy variable set t o 1 f o r 1973

-75 - drrrJr variable s e t t o 1 f o r the ymr8: 1968 and 1975

M576 - variable r a t t o 1 f o r the years: 1965 and 1976

Linseed O i l Prices: 1961-77

lL2 - 0.93

where:

D.W. - 2.04 - - 'Z

LILTPOP- - pr ices f o r l inaeed o i l , CIF Europe, deflated Z by the Index of In t e rna t iona l I n f l a t i o n (1974 c b s t a n t

! $/a). - LINFOX - world exports of l inseed o i l ('000 m t )

LIHWS - vorld production of l inseed o i l ('000 mt)

PFO = pr i ce index f o r f a t s and o i l s (1974-100)

TIMi - t i m e trend

D697071 = dummy variable set t o 1 f o r the years: 1969, 1970 and 197 L

D75 = dummy variable set t o 1 f o r 1975

Pr ice Bquatioas f o r High-Protein Xeals

Soybean Heal Prices: 1961-77

SOmLP - pr ice f o r soybean meal, US 44X, CIP Rotterdam, def la ted by the Index of In terna t ional In f l a t ion (1974 coar tan t $ / r t ) .

SOY)(LX. - w r l d export8 of roybean m a 1 and soybeans--meal equivalent ('000 rt)

TORIWt - w r l d exports of o i l reed w a l e and oilretds--a1 equivalent ( '000 nt)

I PXX. = pr ice index f o r high-protein meals (1974-100)

I T M g = t h e t reed

D63 = d u m q var iab le s e t t o 1 f o r 1963

where:

SUNKLP - pr ice of sunf la rer pe l l e t s , 37-3BX, Argentina/Umguay, CIF Rotterdam, def la ted by the Index of In terna t ional I n f l a t i o n (1974 constant S l m t ) .

SUMaX = w r l d exports of sunflower seal and sunflower seeds-- meal equivalent ( '000 m t )

TOTHLX = world expor t s af o i l s e e d meals and o i l s e e d ~ a l equ iva len t ( '000 ot)

PHL = p r i c e index f o r high-protein meals (1974-100)

TIME - t h e t rend

Rapeseed Weal Pr ices : 1963-77

R~ = 0.98

where:

RAPHLP = p r i c e f o r rapeseed wal, 342 FOB e r a i l l b a b u r g , d e f l a t e d by tLa Index of I n t t r n a t i o a a l I n f l a t i o n (1974 cons tan t S l r t ) .

RAPWlX = world expor t s of rapeseed n e a l and rapeseeds--oeal equ iva len t ( '000 rt )

T0TtU.X - u o r l d e r p o r t s of a11 high-protein meals ( i n t e r n of p r o t e i n equivalent) ( '000 m t )

PKL - p r i c e index f o r h i g h - p r o t e i n meals (1974-100)

D686970 = d w v a r i a b l e s e t t o 1 f o r t h e years: 1968, 1969 and 1970

Groundnut Heal Prices: 5963-77

where:

S.E.E. = 23.70

- I

D.W. = 1.47

GROWLP = p r i c e f o r groundnut meal, 50% any o r i g i n , CZP Luxembourg, d e f l a t e d by t h e Index of I n t e r n a t i o n a l I n f l a t i o n (1974 c o a e t a n t $ /a t ) .

GROHLX - world e x p o r t s of groundnut meal and g r o u n d n u t s v a l e q u i v a l e n t ('000 m t )

Pa - p r i c e index f o r h igh-prote in meale (1974-100)

TLWE - t i m e t r e n d

064 - dummy v a r i a b l e s e t t o 1 f o r 1964

C o t t o w e e d H t a l Price.: 1963-77

where :

CURUP - p r i c e f o r cottonneed, e x p e l l e r 45Z, CIP Europe, d e f l a t e d by t h e Index o f I n t e r u a t i o ~ l I n f l a t i o n (1974 c o n s t a n t $ /a t ) .

COTHLX = world e x p o r t s o f co t tonseed meal and cottonseeds--meal e q u i v a l e n t ('000 m t )

PWL - p r i c e index f o r h i g h - p r o t e i n meals (1974-100)

TIHE = t ise t r end

D 6 3 = dummy v a r i ~ b l e set t o 1 f o r 1963

Copra Heal Pr i ces : 1961-77 4

(5.6) COPHLP, - 172.880 - 1546.71 (COPHLXt/TOTnWt) + 0.4008 PXL, (2 -44) (3.19)

R' 0.77 S.E.E. = 12.44 D.W. = 1.32

where:

COPKLP = p r i c e f o r coconut e x p e l l e r p e l l e t s , 26X, phi lip pine^, CIP Hamburg, d e f l a t e d by t h e Index of I n t e r n a t i o n a l I n f l a t i o n (1974 c o n s t a n t $/mt).

C O ~ - world exports of copra meal and copra--a1 equivalent ('000 n t )

TOTXLX - uor ld export6 of a l l high-protein w a l e ( i n t oma of p ro t e in equivalent) ( '000 r t )

PHI, - p r i c e index f o r high-protein meals (1974-1C3)

TlWB - t i r e trend

066 - dummy var iab le a e t t o 1 f o r 1966

D74 - d r m y var iab le r e t t o 1 f o r 1974

Consistency Betwean P r i ce Index and Pricaa f o r Individual Fat6 and O i l 6

169 The p r i c e index and the p r i ce r f o r individual equationr a r e determined sepa ra t e ly la the model. To a r au re ttut t h e p r i c e index and p r i c e s ware coaa ia ten t with each other , t he p r i c e s generated by the p r i ce aquat ioar f o r i n d i d d u a l f a t a and o i l s were d j u r t e d la auch a way that the t o t a l value of cu r r en t f a t a and o i l a export6 equalled that implied by the p r i ce index. - 11 The p r i c e index rued i n t he lode1 u a be wr i t t en a a f o l l w r :

prot - i 'it QFrn i t m welt,

Pi74 QFoXit VP0X7 4

PFO - p r i c e index of a l l f a t s and o i l s i n year t

Pi74 - p r i c e of o i l o r f a t ( i ) i n 1974

QPOX = volume of world f a t s and o i l s exports, i n year t

V F O S - value of a l l f a t s and o i l s expor t s i n year t

WOX74 - value of a l l f a t s and o i l s exports i n year t valued a t their 1974 pr ices

To make p r i ce s cons i s t en t with the p r i ce index, f i r s t t he current value o L expor t s (WOX ) was corp l ted , using t h e (unadjusted) p r i ce s determined by'fbe rode la p r i c e e q y t i o n a . The the r a t i o between the two export values, (VF-) and (VFOX ) :?- appl ied t o a d j u s t t he pr ices . I -

t Ir I .. .

1/ I n an e a r l i e r vers ion of t h i s model, p r i c e index and individual p r i ce s - were obtained simultaneously. (See Noman L. Hicks, "The S id l ink M e 1 of Trade and Growth f o r t h e Developing World," World Bank Staff Working Paper No. 220, October 1975, Annex 11-9.)

111. mDeL SWUTIO!iS AND PROJECTIONS

A. Validatioa of tha Hodel

170. Tbe e r t l m t e d e q u a t i w uera t e r t ed by r i a r l a t i a g the behavior of the vorld fat. aad o i l r economy f o r the perid 1970-77. 11 'Ihe r i m l a t l o n r t a t i r t i c . of t h e Itmy variable. a r e 8 r s ~ r r i z e d i n ~8x1. 24,

t a b l a 24a SUQ(AZLI RESULTS OF TKE MOOEL SItUfLAtIONS FOR ~~D VARIABLES

Variable )(Hlu RtlS Error /a

Actual Data Sk. Data Absolute X

Pw. ~ ~ 1 8

%pply (SW) Dayad (Dm) Price (PPO) S t a d u ( X P O )

supplr ( QU.1 Desurd ( r a ) Rice (Pt't) Stock. (m)

/a RnS is t h e root-quare a i d a t J o n error . - 171. The a i m l a t i o n re8ult8 are Quite satisfactory. The model captures the trends and w e t of t h e turning points i n term# of supplies, demand, pr ices a d stoctcr of o i l s and wala w>rldtdde. Whfle sow par t s of the model, euch ao t he regional b r e a k l o a ~ of the deaand f o r f a t s and o i l s , need fu r the r r e f i n a e n t , the siru t i o n results indica te that the s t ruc tu re of the model i e OOUO~.

TP 6

1/ Since da ta f o r some of t h e key var iab les -re not ava i lab le f o r the years - before 1961 and some var iab les were w e d with 12-year lags, it uae not pos8ible t o s i u l a t e the model before 1970.

Prospec t8 f o r t h e World O i l s e t d E c o n o q

172. The model war used t o de termine 1ikc.y deve lopaen t r i n t h e world o i l s t e d economy. Table8 25 and 26 r h w t h a p r o j e c t e d v a l u e s f o r product ion , conrumption and p r i c e r .

173. The p r o j e c t i o n e c o n f i r e a d t h e v i e u t h t t h e d a d f o r h igh-prote in walr w i l l g r w f a r t e r t h a n t h e d-nd f o r f a t 8 tnd o i l s . T h i r , i n t u r c , w i l l l e a d t o g r w i n g i n v s a t o r i e r of f a t 8 and o i l . and a d e c l i n e i n t h e i r o v e r a l l p r i c e l e v e l , which e v e n t u a l l y (wi th in a n a p p r o p r i a t e l a g ) v i L l d e p r e r r t h e rupply of o i l r e e d r w i t h a hi* o i l coa tea t . The d e c l i n e o f r u p p l i a r from t h e r e c r o p r , t o g a t h e r w i t h t h e g r w i n g d e v a d f o r 011 f r o o developing c a r n t r i e r , w i l l t h a n cause a d e c l i n e i n t h e i a v e n t o r i e r of f a t o and o i l 6 and a r i r e i n t h e o v e r a l l p r i c e l e v e l f o r f a t o and 0118 touard t h e and of t h e p e r i o d ba ing p ro jec ted .

~ s ' b l e 258 WORLD PRODUtXION OF PATS AND OILS 1971-75 (ACTUAL) AND 197690 (PROJECTED) BY MOB GROVPS - FIVE-YEAR AVBMBS

1971-75 1976-80 1981-85 1986-90 '000 Tona % Share 000 Tom X Share '006 Tona % Share 8

VEGETABLE OILS

Prom: Oiloecdo Soy bean ~ u n f l o v a r 3 ;886 Co ttonoeed 2,783 Groundnu t 3,275 Raper eed 2,487

Prom: Tree Cropr 6,982 Olive 1 # bt& 1'1,532 Coconut Palm Palm Kern01

ANIMAL FATS AND MARINE OILS 14,564

Fish Butter Lard Tallow

TOTAL FATS AND OILS

Source: U.S . Department of Agricul ture ( a c tua l ) ; IBRD, Economic Aarlyaia and Pro jec t ioaa Depar u a n t (projected) .

VI-Y b

SLtO(ARY AND alICLtKIONS ......................................

......... A . htemlruntr of C m r c i . 1 n . e r m a d I . Data Avr Llrbility ................................ C . tcoaowtric Specifiutlon ........................

A . The D8ta ......................................... ............... . I Tbe Sirultanoour Bl~hmtioa kthod ................... . C The Two-step B8thmtioa netbod D . A Brief Cog.rL.oa of tba ILo ktbodr ............

i. During the 1960s, p r i m ? coxmercial ccrergy demand f o r a l l developing countr ies increased by about 72 annually, a s compared with s l i g h t l y o&r 52 i n the i n d u s t r i a l i z e d coua t r i e s (exclusive of cen t r a l l y planned economies). During the 19708, t h e world energy c r i s i s a f f ec t ed the growth of energy demand i n developing countr ies only marginally. Whereas i n i ndus t r i a l i zed countries the increase in energy demand decelerated t o an annual r a t e of about 22 betveen 1970 and 1978, the rate of increase remained a t a high 6 t o 72 i n tha developing c o u n t r i o .

ii. If r e a l enargy pr ices remain a t t h e i r 1975 leve l , energy demwd i n tha damloping c o m t r i e s w i l l i n c r e m e by about 62 annually betveen 1978 and 1985 and a t a s l i g h t l y higher r a t e of about 72 betvean 1985 and 1990, assur ing t h a t ecoaoric g r w t h and s t r u c t u r a l change f o l l w the pa t t e rn pro- jec ted i n tha World Bmk's World Damlopmaat Report 1979. A conetrnt r e a l anargy pr ice is, h a r a m r , q u i t e un rea l i s t i c . I f it is assumed, therefore , t h a t real p r i c u Fa 1990 w i l l be about SOX higher than i n 1975, energy demand i n t he developing coun t r i e s is pro jec ted t o grow a t only about 5% annually betveur 1978 and 1990, with the growth r a t e t o 1985 s l i g h t l y lover than t h a t batuean 1985 and 1990.

ill. Energy d e n ~ d i n the i n d r e t r i a l i z e d count r ies is expected t o grow a t considerably love r ra tes . Therefore, by 1990, energy demand in developing c o m t r i e s should exceed t h a t of Western and Northern Europe, and those co rn t r i e s sbould become the second l a r g e s t energy conaunrers behind North America and Oceania.

iv. The w d e l on which these pro jec t ions a r e based has been s p c = i f i c a l l y designed t o accomt f o r t he i q a c t of s t ruc t* l r a l change, a s wel l as economic g r d and energy p r i ce s , on energy dem:..l and t o all- the use of macro da t a projected 3y t h e Bank's m d e l as exogenous var iables . The bas i c e s t h a t i o n equation is a l o g linear function of per cap i t a energy demand dependent on real per cap i t a income, the real energy pr ice and s t r u c t u r a l var iab les , defined as t he shares of ag r i cu l tu re , mining and conatruct ion, ranufac tur i rg and, e l e c t r i c i t y , and t h e tzansport s e c t o r i n Cross,Domestic Product. The e s t h a t i o p a have been nade f o r t o t a l primary commercial eneray expressed in thousand metr ic tons of coal equivalent. The da t a a r e time s e r i e s , ranging from 1960 t o 1975, f o r 80 developing countr ies am6 16 indus t r i a l i zed c o u n t ~ i e s .

V. l b o a l t e r n a t i v e est imat ion =tho& were used. In the simultaneous est imat ion (SE) procedure, all parametera were ~ s t i m a t e d 13 one atep. S t r u c t u r a l and p r i c e elasticities weze based o q t h e da ta f o r each of 14 country groups; t h e income e l a s t i c i t i e s were based on the data of the respect ive cout t ry . In the two-step (TS) method, the parameters of t he s t r u c t u r a l va r i ab l e s and the energy p r i ce were estimated i n the f i r s t s tep . The impact of t he change i n econondc s t r u c t u r e and energy pr ices w a s then deducted from the o r i g i n a l energy consumption data. The reduced energy

c o r r e q t i o n va r i ab l e obtained by t h i s ca lcu la t ion war, regressed against real per cap i t a Income f o r a l l cormtrier. I n t h i s way country-bpedfic i nco l~s e l m t i d t i e a were obtained t h a t r e f l e c t var ia t ions in energy damand with respect t o chmges in income, a f t e r t he -act of 8 t r u c t u r d chmgr and mergy p r i ce s on energy demand ha r been eliminated.

vf. The project ion8 f o r the cormtry groups were obtained by adding u? the co tmtry-spedf ic project ions rod then i n f l a t i n g the aggregate by t h e r a t e of undercoverage ( w u l l y only 832 o r -re of t he grows ' energy damand w a s covered by t h e raqdu).

di. B u e d on the r e r u l t r from the two e r t i m t i o n metho&, the f o l l w i n g coac lwioaa can be dram:

- The r t a t i r t i c r l f i t hardly d i f f e r r between the two metho&. I f anything, the SE m t h o d producer r l i g h t l y b e t t e r rerultr. I i w e w r , the parawterm of t he r t r u c t u r a l v r r i a b l u a r e r t a t i r t i c a l l y r i g n i f i c m t po r t ly with the IS mthod, and r a r d y with the SE mthod. I n t he SE mthod, a courtlot term VU w e d f o r every corntry; apparently i t captured o t r h of t he r t r u c t u r a l d i f fe rencer between corn t r ies , v h i l e rtructural chmge v i t h i n count r ie r i r too rmll f o r pro- ducing r i g n i f i c m t paramterm.

- The TS mthod ten& t o -hasize the illpact of s t r u c t u r a l change, v h e m u the SE method probably producea r t r u c t u r a l p a r a w t e n t h a t a r e too lw, the remult of t he collstmt terps. The t rue r t r u c t u r a l parameters U e somewhere ln betueen thore estimated by the two methods.

- Speci f ica t ion eaperimentr v i t h the TS method show t h a t the pro jec t tons a r e rtnrarkably s t a b l e with respect t o a l t e r n a t i v e spec i f i ca t ions (e.g. using country d d e e , bmitting variables, etc.).

- S t a b f l i t 3 t e a t s of t he inc- e l a s t i c i t i e s ind ica te t h a t s p e c i f i u r t i o a r v i t h va r i ab l e elabtic,i t iea a r e not super ior t o those 'with constant elasticities.

- The aggregated est imates of a cormtry group f i t the observed values vell even i f the f i t f o r the individual countries - - waa not too good. Apparently, e r r o r s tend t o cancel each

'9 . o the r ou t in the aggregate. -

viii. - The projec t ions f o r the ind iv idua l count r ies were done r a the r s d e m a ~ c a l l y by applying the output of :he World Bank model and without taking i n t o account the spec i a l circmnetancee t h a t preva i l i n almost every cotmtry. They therefore should be used f o r discuseion only. Comments by country s p e c i a l i s t s t h a t would enable us t o improve fu tu re project ions a r e velcoue.

RIERCY DEMND IH ME DEVELOPIN L'ORU); rSTIHATIONS AND PROJEmIONS

TO 1990 3Y REGION AND COUNTRY

INTRO3UCT ION

1. The futur-c energy ace& of t he developing vor ld have becoue a mtter of unJor concern of policymakerr i n developing c o m t r i e r r q v e l l M

in i n d m t r i a l i z e d oaer. Vherear e n e r n d e w d i n i ndus t r i a l i zed c o r n t r i e r i r now beiug prc jec ted oa a regular b a s i r by na t iona l a d i n t e rna t iona l in r tLtu t ionu , i n p a r t i c u l a r t h e In t e rna t iona l Ecergy Agency, ouch pro- j t c t i o n r a r e s t i l l lacking f o r the developing world. Thir paper report. on a w j o r f i r r t r t e p tauard br idg ing thirr gap. I/ 2. A t present, the p ro fec t iom a r e confined t o t o t a l primary ccmmercial enel-gy-the rrw of coal and l ignite, petroleum, na tu ra l and maaufactured gar, and e l e c t r i c i t y , a11 converted i n t o thourmd metric ton8 of coa l equivalent. The demand f o r am-corpparcfal energy, although q u i t e important i n many developing c o m t r i e r , i r not covered here , primarily because of a formidable l ack o t da ta , but a l r o bec;.ue t h e concept of nm-comercia1 a r g y r t i l l h~ not been c l a r i f i e d . 'Ibe breakdown of c o m r c i a l energy demand by ind iv idua l f u e l s w i l l hopefully he achieved a t a l a t e r date.

3. Uben t h i s p ro jec t WM s t a r t e d , i t w u roon rea l ized t h a t avai l - a b l e e r t i m a t i m and pro jec t ion approaches were inadequate conceptually, a r w e l l M with respect t o ava i l ab l e data. It w a s therefore necereary t o develop a s u i t a b l e project ion methodology. I n the course o f the wo*, addi t iona l p r o b l e ~ v i t h da ta and e r t i u a t i o u a made r eve ra l revieion8 t o the osthod necerrary. Sect ions 11 t o I V of t h i s paper dercr ibe the theory mdar ly ing the method m d t h e mcthod i t s e l f .

4 . Projec t ions f o r t h e developing world a s a vhole a r e ne i the r wry use fu l f o r t he deweloping countr iee themselves, nor could they reasonably b e asseseed by o thers . From the beginning, therefore , t h e authors decided t o disaggregate t&e project ions by region. For technica l reasone out l ined b e l w , the regions coincide v i t h o r a r e sub-regioar of thoee w e d by the Morld Bank f o r its ucrarconomic pro jec t ion framework. 'Ibe project ion8 were no t , however, mdertaken f o r t h e r e g i m e d i r ec t l y , but were b u i l t up from pro jec t ions f o r ind iv idua l countr ies . This approach, d i c t a t ed by ~ c t h o d o l o g i c a l considerat ions, had t h e double advantage of providing information f o r ind iv idua l coun t r i e i , as vel l ae leaving the regional aggregation completely f l ex ib l e . Me d l f f icr i l ty t h a t should be noted, however, i e t h a t the pro jec t ions f o r some countriee a r e much l e e s r e l i a b l e than those f o r t he regional aggrsgaFes.

s - 11 Research f o r t h i s paper was supported by the World Bank. Walter Oberhofer -

of Regensburg University provided considerable help i n solving a number of i n t r i c a t e econometric problems. He a l so permitted the authors sub- s t a n t i a l l y more time by taking over a couple of t he more time-consuming computer runs.

5. 'Ihia p a p t i r the f i t r t c q l e t e p n r m t a t i o u of the nrultr aehiemd wing thL. ruv r t hodo low . k ouch, u ruth information u porrible h u beea proddad i n both n u u r i u l aad graphical form on the e ~ ~ g e n o u r u v e i l u the u t b a t e d v u i . b l e r . Ibe method of prueagat ioa o f the r e ru lw i m out l iord bt Sectiolr V. The r e ru l t r by couatry group apprar in Sectioo ?I, which d m contl inr the nnrltr f o r individual c o ~ t r i u irr the f o m of r m x y tables. Iludrza primarily i n t r r u t e d in th projectloxu t h m e l v u can go Wdluelr t o Section VX, coarult iag Sectioo V f o r axplr rwt iou~ of the tabla u nuded.

6. Producers r equ i r e energy t o produce c m d l t i e r and re-cer; p r i v a t e houaehol& require it f o r h e a t l q , cooking, lighting, traamportation, etc. The demand of p m d u u n &pen& on t h e oolrry o f their yroduction, u w e l l u on t h e ucrat t o which energy L w e d u m input, u coclpand t o o t h e r input r ruth u labor, c a p i t a l goods m d r a r mterialr. The n l a t i o ~ b i p be- input r m d output cm b e e q r e r r e d by a production frrrrction which, in its rort w e r d f o m , m y be w r i t t e a ua

where :

X - real output o f a r e c t o r

EI - energy input

L - l abo r input

C - c 8 p i t d input

To obta in a prultacer'r energy r e q u i r a r m t , function (1) m y be r o l n d f o r X I , i f poarible:

7. lhie gmcrd func t iona l relationship docs no t account f o r production techaologien, b u t it is u r r n r d that a (&am) met of technologies exirtr that can be t r aced c a p i r i c d l y by t m t i n g a l t e r n a t i v a r p e d f i c a t i o n r of fu rc t i on (2). Input p r i c a r a l r o do not appear in (2) b e u u r e it l a m r u ~ r d

I

in equilibrirn that a c e r t a i n ( d r o a p r i o r i mkaovn) r a l a t b n a h i p e h t r bent- Lnputr and input p r i c e r and t h a t changes in m u t o m l y changer in input p r i c e s and vice Persa.

8. Because of the lat ter asrumption, input r and input price8 are interchangeable in a production funct ion, and funct ion (2) m y therefore a l r o be wr i t t en a: -

PLC = r e a l p r i c e of l abo r i n t e r n of c l p i t a l

PEC - r e a l p r i c e of energy i n term of cap i t a l

PRC = r e a l p r i ce of rau mater ia l s i n ternre of c a p i t a l

For NO inputs. any energy and e a p i t d , ftmction (3) can be i l l w t r r t e d by t h e follovirrg f a d l i a r graph:

Figure 1

Capital

'Ih. f i gu re doum thu c e r t a i n output (3, r e p r u a r t e d by an i w q u m t , aad cartrio real p r i c e GEC) , axact ly daterriru tha d m m d f o r mergy m. 9. harm demand by pr iva t e howeholdr f o l l o w the a m principle , A howehold c a u r r v r mrrgl, f i r r t , on the b u i . of gmerd a b i l i t y to buy poda an -reared by real incme, ord, second, on ths b m i r of t he p r i c e of energy as coqmred to o the r c o m e r goods. Hence, t o c-ute h o ~ c h o l d energy d r u n d , it Fs d y neccsaary t o s & s t i t u t e i n f m c t i o n (3) red incora f o r output and tbe real p A c e of energy in t a m of o ther c a u u a e r goods f o r t he r e a l p r i c e s of inputa:

.; EB - energy coaa-apt ion by ho-mehold.

Y - real incorz - ?P= - r-1 m e r g p r i ce in term of consumer good..

Figure 1 applies to funct ion (4) also. Inwme is expressed by the budget l i n e which is tangent t o an ind i f fe rence curve; t h e gradient of the l i n e represents the real energy price.

B. Data Ava l lab i l i t r

10. Given the ava i l ab i l i ty of data for developFag countrier, it i r generally not possible t o t r a w l a t e fmct ionr (2) t o (4) in to ertimatioa equations d i rec t ly . Data problem also e x i r t v i th regard to:

- the quant i t ies and prices of energy conrumed by the varlour categorier of ladvat r ia l and non-industrial users ( indust r ia l , households, etc.),

- the q u u r t i t i e r m d pricer of noa-energy factor iaputr ; and

- the m a l w t p u t r of variova indur t r i a l ac t iv l t i e r .

11. Even i f moor of the data could be obtained f o r a part icular country, they usually are mavailable for a tioa period ru f t i c i en t ly loag fo r regresrion e r t i m t a r . k loag a r there dara probltam eldot , i t i r aacesrary t o coqrooLse batveen h a t i. ideally required fo r a r t h a t i n g specif ied functions of the theoret ical n la t ioash lps and what c m be estimated v i t h the data a t hand.

12. The lack of data on energy coarunptim by different users Puke8 it necersary t o luq energy c o n a ~ t i o n f o r productive purposer, a s raprcscnted, fo r inrtance, by f m c t i o a ( 3 , v i t h tha t of houeeholQ [fract ion (4) I.

13. The estimation of a epecif icat ioa f o r (3) requires data on output in rea l te-. Uafortvaately, fo r u n y developing comtr ies , only t o t a l output, defined by Czorr U r t i c Product (Y), and not aectoral outputr (X), are available in real t a m . X i r , therefore, defined by:

X (5) X = y . Y - u . Y

14. I f i t is assmed that in f l a t ion i n t o t a l nominal output does not d i f f e r very much frm that in sec to ra l nondnal outputs, the eectoral rharu, (u) calculated from aomlnal v a l w should be reasonable approxilaationa of the r e ~ p e c t i v e shares in coastlmt prices, because in f l a t ion would cancel out la the rat io.

15. t_ fur ther sfntplification has t o be made with respect t o the price variables. It is assrrnred that the two energy prices i n functions (3) and (4) move para l l e l over t i m e , thus permltt$ng use of jus t one price index (P . The prices f o r o ther inputs are mavailable and, therefore, have t o q e omitted. - - 16.

s Given n sectors In the econorny,ahe function for t o t a l energy

demand (E) can n w be writ ten as:

17. Tradi t ional ly , energy demand han been estimated w i n g eirupler functions, with the energy var iable regresoad only against incoma o r income and prices. I f income were the only explanatory variable, the u t i rna ted parameter of the income var iable ought t o be the qame an i n a coopparable speci f ica t ion of (6), a r long a s tha acoaomic s t ruc ture aad the r e a l energy p r i ce remain conetant. I f , on the o ther hand, r ea l entrap price8 f a l l , u they did i n the 19608, auargy consuqt ion can ba expected t o r i e e f u t e r thsn o therui re , and the parameter of Y i n the r i u q l e r function w i l l therefore be b l u e d rrpvarde. I f there 1s a s h i f t t w a r d highly energg-intensive iaduetr iea, ae hae been tha c u e i n moot developing couat r i e r , energy caarumption w i l l rime f ~ t a r than o tharui re , and the parameter of Y w i l l again ba b i u e d w a r d s .

18. For projection purpose., r I q l a r furct ioar a n acceptable u long u i t can r e u o a r b l y be ur-d tha t r t r u c t u r a l churgu v i l l f o l l w tha 8.p. trends u i n the p u t and t h a t the r e d enemy pr ice is c o a r t m t o r changar i n keeping v i t h p u t treads. Given t h u a US-~IODI, the e r t i m t e d p a r m t e r e would not produce i n c o m c t proj ectione, though they vould be b l u e d .

19. Both asr\tlptionm a re , hwever, questionable, par t icu lar ly in the longer rm. Tha pr ice of energy h u been aoving rp a f t e r a decline i n the 1950s and 196011, and r t n w t u r a l change h u been tapering off ae countries reach ce r t a in l e t n l r of development.

20. I n the prtment exarctre , the mtructural variableo i n function (6) were &fined u the s h a m of m j o r mectorm much u agricul ture, manufacturing, e tc . , in national incooc, r a i s ing the quert ioa of the level of aggregation a t which the r t r u c t u r a l variables ought t o be daf ined. Ideal ly, they rhoutd be dimaggregated a s nu& u possible i n order t o capture dl r t r u c t u r a l effecte. In prac t ice , the a v a i l a b i l i t y of da ta necemeitater a compromise.

21. Data are avai lable f o r m j o r r ec to r s fo r h s c all countries from National Accomts s t a t i s t i c s . Any fur ther disaggregation is d i f f i c u l t if the estimates a re t o be performed over a longer time period and for a l a r g e r n d e r of countrice. S t m u t (1976). f o r imtcmce, has propoeed dinaggregating manufacturing in to energy-intensive and non-energy-intensive industr ies . This ce r t a in ly is des i rableDcbut , as h i s calculations show, i t is only feasible f o r a limited n u d e r of couutries and only for a feu, =re recent years. - - C. Econoe t r i c Specif icat ion ~! 22. The econonetric speci f ica t ion is primarily a matter of conveaienceE For the estimation functions f o r production and demand, it has become common* t o use logarithmic speci f ica t ions because they can account f o r non-linearitie% and therefore tend t o produce b e t t e r s t a t i s t i c a l r e su l t s t h m do unlogged forms. I f the speci f ica t ion is log-linear, the functions estiamte e l a e t i c i t i e s d i r ec t ly , f a c i l i t a t i n g in terpre ta t ion .

23. The &vantages of logarithmic specificatioas, however, have t o be weighed a y i - & s t the i r shortcoPings. h e problem . that for the larger values, the d e ~ i a t i o n of obscrved from estimated values tends to be ucderltated, and the coefficieat of determiaation therefore is overstated. I a tir- ser ies analysis, which usually iavolves increaslag fmctions, the deviations for the most recent years are generally unders:ated. This re tu l t is undesirable ao i t la believed that the Pore recent developmentn are a t leas t ss im~or t aa t , i f aot more important, in the estimations than a re the ear l i e r values, for iartance, vhea maklag projections. While :heoretically the problem could be solved by weighiag the observations, i a practice i t is d i f f i c u l t to detrrPLae the correct mgnitude of the weights.

24. Anothar problem a r i r u with respect to rggregation, i f i t is p r t u l a t e d that tha demand fmct ioa for to ta l eaergy can be disaggregated jato the fmct ioar of the user categories In such a way that the p a r m t e r s of the l a t t e r f m c t i o n ~ cur be di~tfaguirhed from the former. Such a p o ~ t u l a t e rerioualy conrtraiar the range of permiss f i l e specif icat ions. Ia particular, it e x e l d e r all logarithmic ~pec i f i ca t i oa r , because such functioar generally cannot be &aggregated.

25. Ia .pita of thcse rhorccorLnp, log-linear specificatioa wan chosen i a th i s rtudy, p r l r u f l y Leuuse the s t ructural variables do c h g e i a a aou-llaear faohion. F r a the work of Kuzaecs (1971), Felr/Schatz/Uolter (1971) urd Churergy/Syrqufa (1975), it is known that the sectoral s b r e s fn Cross Doacstic Product (CDP) approach certain ceilfnga with r is ing per capita fncoae aad a t those points f o l l w a reverne trcnd.

26. The ftmctioa actually used l a the eatimatiorm is:

popula,tion

share of agriculture i n GDP

share of rdning in QP

share of conatr*rctioa in GDP

share of nanufacturing i n GDP

share of u t i l i t i e s in GDP

share of transport Fn CDP

error tern.

27. In ftmctim (7), the rharu of -lag .ad wnrtruction, u uel l u thore of mmufacturing .ad ut i l i t ier , a n lrrqed together nrpectively, u they cmoot be obtained repantaly for 8evera.l couatrfeo. To avoid that the cDP'~ of .PI11 md large cotmtriu -ate the reoulto, uurgy coaamrpticm md ='a of all corntrim were divided by their populatia~ (B)

111. DATA ASD ESTIMATION STHODS

28. Functio? (7) was e s t i ~ t e d using pooled time series-cross-rection samples, in uhich the t i - s e r i e s f o r individual c o m t r i e s , uhich ranged from 1960 t o 1975, were l u ~ p e d together . There vere tuo possible d i f f e r e n t es t imat ion methods. The f i r s t , which appears t o be -st appropris te fo r pure pro jec t ions , is the s inul taneous est imat ion method. The second, vhich is probably w r e s u i t a b l e fo r r imula t ionr , has two s teps .

29. The app l i ca t i on of aquation (7) t o a country pool i a r tead of ind iv idua l comcr i e r v u necessary f o r r e w r a l r a u o n r . P i n t , the wxiwu n d e r of years ava i l ab l e f o r any country vas 16, too feu f o r the est imat ion of s t a t i s t i c a l l y s i g n i f i c a n t parameters, given a mult iple regrerr ion v i t h mix independent va r i ab l e r . Second, the r t r u c t u r a l changu v i t h i n c o r n t r i e r over a period of 16 year8 a n general ly too 8-11 and the apraad of the re rpec t ive va r i ab l e s t he re fo re too narrou, so t h a t , .ga in , r t a t i r t i c r l l y s i ~ l f i c m t parametera cannot be expected. Third, s t -uc tura l chmge is a long-nm phenomcnoa, beat explained by croso-rectron ea t{ u t e r t h a t can ind i ca t e long-r\ra adjustments mxh b e t t e r than can time se r i e s .

A. The Data

30. The es t imat ion of a ftmctioa such as (7) require0 a r u b s t u n t i d amount of da t a vhich, f o r t h e = s t p a r t , a r e not read l ly ava i lab le f o r d-wloping countr ies . The da ta used he re f o r the exogenous var iab les o t h e r than p r i ce s ve re obtalned f r o n the da t a banks of the World Bank. The da t a fo r energy c a a s ~ t i c m a r e from a tape of the United Nations. L/ 31. Data on p r i c e s v e t a obtained fn pa r t from B.J. m o t of t h e Eccmoaic Analysis and P r o j e c t i o ~ Department of the World Bank and i n pa r t ve re co l lec ted by t he authors. The p r i c e s e r i e s f o r individual fuels vere used t o cons t ruc t energy p r i ce ind ices , taking a s ve ighte the fue l c o n s ~ t i o n shares o f t he respec t ive count r ies i n 1970. That year was a l s o chosen as t he base year.

32. lls income +aria; e s a r e expressed i n real terms, the nomlnal' p r i ce ind ices a l s o had t o oe def la ted . For t h i s de f l a t i on , e i t h e r the consumer p r i c e index, r e t a i l p r i c e index, wholesale pr ice index, cr CDP d e f l a t o r vere used, depending on d ~ t a a v a i l a b i l i t y . - - 33. The p r i ce s e r i e s were converted i n t o indiccs '%ecause i t appeared irmpossible t o der ive an average energy p r i c e f o r or-. c w t r y t ha t vould be

a r ab l e t o t h a t of another. The consequence of t he ' rocedure adopted is t h '*P t t h e estiamted p r i c e e l a s t i c i t i e s r e f l e c t on-y t he 4 mpact of p r i ce changes over tire and not t h a t of in te rcount r : . d i f ferences.

1/ Published as United Nations, S t a t i s t i ~ a l Papers, Ser iee J , World Energy - Supplies, 1977 c m c .

34. Ibe r i d r a ~ c o u n estimation (SE) and the ruo-atop (1s) mthoda d i f f e r b u i c a l l y i n t h e i r t rea tbur t of the reaction of deerad t o & q o r i n income. h w u argued &ow, the impact of r t ruc tu ra l change i r a long-rm pheno~moo tha t c m only be e r t i a r t e d u i t h very long ti- r r r i e e , whi& are not available, o r with a t h mcrie8-crorr-mection ram?Le. However, c5rt problem &a not apply t o estimating the I-act cf changss ln incoma, a s there c t m g a a re cer ta in ly much -re pronormcad over ti- than a m r t ruc fur r l chmgu. r u r t h e r w m , a t e r g damand c m bn expected t o nrpoad t o chaager i n i n c a r m r e i m d i a t e l y tbua t o & w e 8 Fa the ecoaory'r r t m c t u r e md the pr ice of energy. I m c e , t in re r i e r u t i m c e r oS the m~my-ineoar relationship f o r individual c o w t r i e r cm 1 ~ 1 ; t o produce r t a t i r t i c a l l y ra t la lac tory ruultr. In addition, e r t i n r t i n g tba eae-*-Lncom relat lorubip fo r each country indiPidurrlly u l l l y ia ld craada over t b for the va r iow c o u a t r i u .

35 . The S t mthod b l l r with thir problem by L a c r o d u c i ~ m income variable and a c w r t u i t term for rvrry country. Each h u a por i t ivr value fo r the n a p e c t i v r country mad * zero for .dl otker comtr ia r . For a r u p l e of two cornt r ier , the dc.4 a n arruased u follow8 (error term omitted) :

36. 'fhis ert imatioa producer parameterr of the s t ruc tu ra l variables m d the price v t t i a b l e f o r tbc group as a vbole, a s u e l l a8 paraacterr of the inctnae variab',e and a caartm: t e r a fot each country iadividually.

37. Vhtn rhr IS wrbod 18 used, egwtion (7) l a f f r a t a r t i m t a d using a l l &ta fo r a corntry group Incorporatit.g a11 data oa Income into only oar va rL5la . Coarcqwntly, t k r e i r also oaly me coartaat t a m . ACtrr t h i r rzep ir c m l e t e d , r reduced r e a y variable l a calculatrd by d.du$ting f r o s the a r lg ina l v r r l ab le t t a r t m c t u r a l aad t h r price r f fac t r :

Tbe ~ d u c e d energy v u l a b l r l a then ragrerqed for cvcry ccuatry rgainst ttcr 172 ...a variable :

GDP (1C; h :*- ln b,. A t P l ln - -4

'Ibs t x p l h h d v r t i u r c t of t.44 two-step rstlmtlm can be calculated M

fo l low:

h e r e s2 - the variance of the e r ro r t c r . i n equation (10). and Y

? ALsa - the v8zi.a:. of tbr origdanl energy variable a s i t ap?ccrrs on a

tbe l e f t s ide of (7).

38. For a fev country groups, d ~ l e s f o r hd iv jdue l countries were d d e d t o equation (3) i f it vnz foued tha t the observed e n e r n cms.uqtioa of the respective cwmr- 1.9 t a t i r e i y erbova or b e l w ,ne regression l h e . There con be a tvera l r k ma f o r such deviations. :a sa;w cases r ich and t h r a f o r e cheap energy rol.r:ea u y t e available. The nric- variab* used h e r t - a c r t a ~ r t e d index-c..pnot capture suck cases. In cthere, the compo- s i t i o n of ootputo vithda I tduat r ies may be -m~m:al or c;imatic conditions u c e p t ~ a n a l . Hcwever. da tLilite a number of couat:ies, in ?ar t icular Africa,

i t appear8 t h a t the d f a t o r ~ e a exchsagc r a t e r used f o r converting CDP t o r e a l d o l l a n were r a 8 p o ~ i b l a f o r many of the deviation#.

D. A Brief Coapariaon of the Tuo Hrthodr

39. Ut t he r o r ?ot the two m t t o & produce the mama o r d i f f e ren t reaul ta depeodr on tna axir tcnce of ? a t t r c o r r t l a t i o n and i a ru f f i c i en t specification. k i n a lwwt ray regreraioa b u a d on ti- a e r i e r , aomr in tercorre la t ion did e d a t ba r re t a the independent vartableo i n t he armplea, and the l i a t of e rg l amtory variable8 v u cer ta in ly not c o ~ l e t e . The r a u l t a could not, therefore, be eapected t o be ident ica l .

40. Ths d i f f anncea cur be m d e n t a a d u folloua. I n the TS wthod thrce i r , i n tbe f i r r t r tep , only one conatmt term m d m a var iab le each f a r i n c o r m d the CDP aharer. The e a t i u t e d p a r m t e r r therefore m f l e c t cbaager aver ti= u well a s d iZfarmcer .raoog countries. I n e f f e c t , i n the rccoed r t e p the ti- eerie. e f f e c t i r meparated frcm the croar-aectlon e f f ec t f o r t he 3 -corn variable. Iba f i r a t e f f e c t i a re f lec ted la the para- m t c r of the In- vaciable, t he second i n the coaat lnt tern.

41. 'Lh e r r o r t h a t d g h t aria. with c h b approach is t h a t a l l i n t e f country d i f f ~ r e n e u a n forced t o ahou up i n the parametera of the f i r a t s t e p of t he u t i u t t o n , crwn i f thay a r e the r eau l t of factor, vhich h a w been o d t t e d from the model, f o r i n r t m c a , exchmge ra t8 d l t o r t i o n a , -tic d i f f e r m u a , la rge margy r o o u r c a a , e tc . 'Lhir ir a problem of f suuff ic ien t r p a c i f i u t i o n . Rwevar, f o r the inc- variable, t h i r e r r o r im "correctedn f o r i n t te aecmd r tap. The co ru tmt term then capturer thoae inter-cornrtry d i f fe r tacaa vhich w e n al locetzd t e the income variable ln the f i r r t r t e p , v h e r a u the parameter of the in topa variable re f lec t , the Impact of i a c o v chaagea over ti- only. The parnmaterr of the r t r u c t u r a l var iab les a re , houever, not "corrected" and might therefore be overstated.

42. I n rba SE method, a separa te conmtant term and aa income variable a r e ir:roduced f o r every corntry from the beginning. Consequently, differarcee rrong c o m t r i u a re re f lec ted i n the respect ive paramecare. However, because of i n t e r c o r r e h t i o a , the parameters, in pa r t i cu la r the comtant 'term, might also capture robc of the s t r u c t u r a l differences which, without in te rcorre la t ion , would be a l loca ted t o the s t ruc tur t r l variables. That t h i s occurs with the SE approach is indicated by the tendency of the parameters of the r t ruc tu ra l variables t o become s t a t i s t i c a l l y ins igni f icant d smaller i n value ae c o q a r r d v i t h the TS ~ e t h o d . I f the SE r t h o d $applied with only one c o n s t a t term, the parameters again become more a igni f icaa t and la rger . It can, therefore, be concluded tha t the SE meth tends t o mdereetimate

8 the parasc tem of the s t r u c t u r a l variables. The r-.x p a r e t e r s may l i e sonevhere between those estimated 3y the tvo methob.

63. As che p a r a e c e r s of the s t r ~ c c u r a l variables a re lese s ign i f i can t with the SE nethod than with the TS method, the f i r s t method is not very su i t ab le for s iaulacions. It is, hwever , more appropriate for pure

pro jac t iom, s i n c e it achieves an ove ra l l raLalmm of the deviationm, vhereas t he IS method eventual ly reaches only a pa rc i a l miahnu . 44. The l a t t e r is 11 e ly t o occur i f the income variable and tha s t r u c t u r a l va r i ab l e s a r e in ta rcor re la ted . Thim m y ba i l l u s t r a t e d am fo l lous :

45. I f t h e parameter of t h e income v a r i & l e is al and tha t of a struc-

tural va r i ab l e a2-asa&g f o r a m l ~ e n t t ha t there is only one s t r u c t u r a l

variablt--i t i o poaeible t o drav isoquants of the e m of equated e r r o r s which la t o be minimized. In t h e f i r s t s t e p of t h e TS rrrcthod, a minlmum i e obtained a t a* f o r m estimated ;verage a1 (-at). In the second s t ep , the 2 cour.try s p e c i f i c r, (-a!*) is e e t i m t e d f o r a t . Point (at*, a;) apparently

is not the o v e r a l l minimum. This would only be the case i f the two var iab les were orthogonal t o each o the r o r , s t a t i s t i c a l l y speaking, not in te rcor re la ted . Then (a?*, a21 would coincide with the center point C.

IV . THE PROJECTION -OD

46. The b u i c objec t ive i n derigoing the project ion method w u t o c o n s t r x t aa energy model t h a t could a u i l y be l inked t o t h s World B i a k macro model. By taking a0 input8 i n t o the energy m d e l the emganow var iab les an projected by the World B a n k uacro r~odel , i t van poasible t o avoid the vol\rrpioow~ tank of developing mothe r , coar ie ten t vor ld macro model. Ih r f~ r tuna te ly , t he l i nk lng procerr war f a i r l y d i f f i c u l t becaws the output from the World 9.nk m d e l va r a t a higher l eve l of aggregation than the input needed f o r the energy m d e l . It baa therefore neceerary t o d i rageregr te the emgenoum var iab ler u rupplied by the World Bank.

47. The lkalr r ~ o d . 1 r w p l i e d projected valurr f o r the fol loving varinbler fo r 14 world regiotrr :

- t o t a l Grorr Domertic Product a t 1975 p r i ce r ,

- Grorr hmee t i c Product i n agr icu l ture a t 1975 price8 ,

- Crorr t o u r t i c Product i n industry, which includer mlnlng, cooet tuct ion, manufacturing and u t i l i t i e s a t 1975 pr ices ,

- Groer Domestic Product in rerv icer , which a l r o includes trarmport a t 1975 prices .

48. The pro jec t ions derived i n t h i s study a r e based on equation (7) ; therefore, the da t a had t o be dieaggregated a t t vo l eve ls . F i r s t , it w a s necessary t o s epa ra t e industry fn to nining and construction and i n t o manu- fac tur ing and u t i l i t i e r , and serv ices i n t o t r an rpo r t and other re rv icer . Second, t h e group t o t a l a f o r population, CDP and aec to ra l outputs had to be dfsaggregated i n t o country-specific values. The procedures a re demonstrated here f o r Portugal, vhich belongs t o country group 1.

49. The f i r s t step vas straightforward and did not pose any major problen. A preliminary project ion of the share of manufacturing and u t i l i t i e s i n Lndustry f o r group 1 vae obtained from the fol lcving trend function, e s t i - rsa:ed over the period 1960-1975: w . (12) RS7 + RS8 - 0.7541 - 0.0011 tine

8 Z RSi (109 .9 ) ( ~ . 6 )

i -5

P r e l i d n a r y projection:

1980: 0.7306 1990: 0.7194

S i d i a r l y , fo r the #hare of t r rn rpor t in u r p i c e r of group 1 we ham '.

P r r l i d n a r y prolectioa:

Udalonr of t h u e projectioor v r r r u d a in 8 fru c u u vhar the dir.ggregatioa into country-rpedf ic v l l u u led to taruaonabla r u u l t r .

U). The reoood #tap-- tb b r i t n t i o a of cormtry-rpecific valuer-18 8 b i t rot. u>glicatrd. kr-, f o r irutmu, that tb o b j e c t i w ir t o b r im i t he rhat . of agr icul ture in CDP f o r Portugal. ihL. can be dorw fn the follarLog v w :

Rb - Groom -tic Product in .gr icul ture

i - any C0tnrtX-y in the group.

h p m r r i o n (14.3) v u b u e d on output f i gurem from tba World B8nk lpodel f o r the projection years. In t h e c u e of the other three aectorr , (14.3) ru mprasented by t h e values derived in s tep 1 of the diraggregation proced*zes.

51. E x p r e e i o m (14.1) and (14.2) v e m f i r a t astimated by l lnea r t h treudm. 'Ibe projected t r d v d w r v e m then crorr-checked by calculat ing the sec tora l aha- in the'- f o r each cormtry. I f it turned out t h a t a pa r t i cu la r aham rbaued a very rmreuoruble movemt , it v u adjuated on the b u i r of p l a w i b i l i q . ' Ih/rurplw o r d e f i c i t output of the group resul t ing from such ar a d j t m a t n t v.Cthen d i r t r ibu ted proportionately over the r d i n g cotnrtriem. In ro&i cue . revcral i t e r a t i v e adjuatmeats were necessary in order t o obtain remonable share. f o r a11 sec tors i n a11 couatries.

52. The disaggregation procedure f o r per c a p i t a income war e l i g h t l y d i f f e r en t . F i r r t , t r ead valuta f o r t he couatry-specific rharer i n t o t a l income and t o t a l population s e r e e r t h a t e d . I f the er t imated rharer appeared unreasonable, a d j u s t ~ r n t r wvre made. Af te r the f i n a l round of adjwtmentr , the valuer of per u p i t a income were calculated.

B. Projections

53. After all the erogenous variable8 had been derived as described above, the projections could be made by applying the r t r u c t u r a l and p r i ce e lu t i c i t i t r , a2 to i6, aa estimated by equation (7). u wel l u the conatant

texm and the income e l u t i c l t y estimated by eqlut ion (10).

54. Four v e n i o e u were produced f o r every couutry rrrd couutry group. For each of the two parameter s e t 8 obtained with the SE r t h o d and the I S method, there i8 one project ion period; a second one war provided when it w u asr-d t h a t tb r e d p r i c e i n c r e m e between 1975 and 1990 would .IDDM~ t o SOX, o r ur awragm of 2.n uzaually. Th. p r i c e i n c t a u e f o r the three fiva-year periob 1975 t o 1980, 1980 t o 1985, and 1985 t o 1990 vere -8-d t o be 10. 18 and 15% r e ~ e c t i v a l y .

55. Ibe p to jec t ioaa f o r t he country g row8 were obtalned by r i a p l y adding t he projectloll . f o r the ind iv idua l couutr ier . I n the c u e of per cap i t a emrgy c o a r r r q t i m , the arergy end population project ioru of the v a r i o w countries were f i r s t added and then divided by each other. Tbe a g s r e g ~ t e a of the r t r p c t u r a l variabl- vere obtained by ca lcu la t ing weighted me- of the country-specific r t r u c t u r d va r i ab l e r , v l t h the inwme rharea rervLng as weigtrts. I n the case of a group'r per capi ta Lacowe, t o t a l income an ruppl ied by the World Bank v u divided by t o t a l population.

V. PRESENTATION OF THE RESULTS

56. There i r a s e t of e igh t table8 f o r every c o m t r y group. Tablea 1 t o 5 provide the eetinrater and project ion8 from the TS method, wheredo Table8 6 t o 8 pre8-t r e r u l t r obtained with the SE mcthod. *.a content of t he e ight t ab l e s i r runmarFred b e l w .

57. t able 1 l i r t r the parameterr e r t i m t e d by equation (7). The coef f ic ien t of d e t e d n a t i o n , the n d e r of obrervationr and the F-valw f o r t h a t f r m c t i m a m a l r o o h m . k tha coef f ic ien t of determination i r biaaed i n logari thmic regrer r ioar ( m a l l . C above), the rum of the rquared deviat ionr i n a b m l u t a t e r m in r e l a t i o n t o the run of the rquared obrarvationr i n a b m l u t a terms w u added u a mra neu t r a l measure of t he gooduerr of f i t . Tbir r a t i o ir denoted by SUX l/SIJn 2. I t r nmera to r and denominator a r e a l r o rhova. P lo l l l y , tha t a b l e c o n t a m a l i r t i n g of all countr ies included i n each grow. I n t he care of Southern Europe, there a r e e ight co rn t r i e r .

58. Tha upper ha l f of Tabla 2 r h w r , in tbe f i m t C O ~ U Q , t o t a l ortimated c m r ~ t i o n of energy. firera da t a were ob tdned by multiplying t h e a r t i na t ad per cap i t a v a l * n s (colunr 3) by the population da t a (coltam 5 The secmd calm givus ac tua l energy c o p s q t i o n , the fourth the r e ~ p e c t i v e per cup i t a values. I h e lover par t of the t ab l e ohms the time a e r i e r f o r the raaining exogenou variabler . The p r i c e ae r i e r wan calculated an t h e weighted averaga of t h e country-specific p r i ce ind ices , with curremt energy comumption d u a r a r the us ight r . (For the project ion period e r t i u a t e d energy coluumpticm valuer were w e d a s weights.)

59. Table 3 p l o t s ac tua l , en t ipa ted (1960-1975) and projected (1980-1990) per capi ta c o n s w t i c m of energy.

60. Tables 4 cmd 5 p lo t the exogemous var iab les , except f o r population, i n a rder t o f a c i l i t a t e anresement of the project ionr of these variables .

61. ' Tables 6, 7 and 8 provide inforsa t ion f o r the 8~ project ions comparable t o t h a t f o r the TS pro jec t ions in Tables 1, 2 and 3. It may be noted that Table 6 contains ne i the r an income e l a s t i c i t y nor a constant term because these values were d i f f e r en t for every country.

62. The main r e s u l t s f o r the Individual countr ies a r e summarlzed i n Tables A and B. -

8 63. Table A rhous the income e l a e t l c i t l e s and the constant t e r m obtained with the two methods. Kel~eures of the goodness cf f i t a r e a l so given. The coef f ic ien t of determination is not shown f o r the SE method because i t was the same f o r all countr ies wi th in a group and can be found in Table 1.

64. Tabla B p r u m t r a c t d c a u u q t l o n of anargy by corntry batvean 1975 urd 1978, u -11 u tha p r o j a c t i o ~ f o r 1985 . ad 1990. For each of the tvo mthodr, a w a with c a u t a n t real anerg7 p r l u r aad on. v i t h a 5OZ prlca i n c n u a a r e .bcm.

65 Tabla C a h -911 granh r a t u f o r ta r rgy conrrrptloa -for th. c u e of w p r t r n t nrl e n a m p r i c u .

VII-21

VI. ME RESLZTS

66. Uhen looking a t the nru l t r presented below, it should be kept i n mind t h a t t he pro jec t ionr of energy d e w d depend on the projected valuer of t he exogenous var iab le r . k mnt ioned e a r l i e r , the pro jec t ionr of the emgenoue va r i ab l e s a r e those underlying the World Dtvelopment Report 1979 of t he World E d . The authom be l i eve t h a t t he projected growth r a t e r f o r C;DP and i t a cowonent r a r e general ly on the high r ide. However, r i nce all the er t imated paramaterr a r e p re r tn t ed here , i t w u l d be f a i r l y eary t o r eca l cu l a t e the pro jec t ionr of energy demand a m d g lover gmvth r a t ea . 67. The reader rhould a l r o note t h a t i n the care of the conatrat r e a l energy p r i ce , the yea r 1973 w u used u a base. However, t he o i l p r i ce h u Pore than doubled r l n c e 1973, .nd r e a l energy p r i ce r n igh t already h a w i n c r e u e d by around 302 l n q u i t e a n d e r of developfng co rn t r i e r . In general , therefore , the c u e involving Lacmared pr icer i r probably c l o r e r t o r e a l i t y t h m the m e v i t h conatant p r i ce r . Thir u r m r , of courre, t h a t no f u r t 5 e r d r u t i c i n c r e a ~ e r i n p r i ce w i l l occur La the 1960s. Bcuever, it ir not m l a u a i b l e t h a t f o r a couple of yearn i n f l a t i o n v i l l keep pace v i t h t he ria. i n o i l p r i c e r , so t h a t m a l p r i cea v i l l r e m l n rougbly c o o r t m t .

68. In a feu c u e s t h e e r t imat ioa wan mde v i t h an a p r i o r i given value f o r a c e r t a i n p a r m t e r . Thia van done i f Latercorrelat ion betveen t h e independent var iab lea l ed t o unreuonable reaults.

Group 1: Southern Europe

69. The coverage i n the a q l e f o r Southern Europe vaa almost 1002. G ib ra l t a r was omitted.

70. The a i d t a n e o u s entimation f i t s the da t a s i g n i f i c a n t l y b e t t e r than does the two-step e s t i aa t i on . However, the d i f fe rence in the pro jec t ions f o r 1990 ia only about 52, a r a t h e r small var ia t ion.

-.a** a o - I - . Y e . e m - I O I Y C

0 0 0 0 0 - o m 0 o m - 0 0 0 e a *

8 . . * C Y a e - o n o * I0 o o o

,-.-.-

m m m m m m m m o m m m o o m -0- * * * C C I I . Y *La-. a m - --* - 4 -

a 0 0 3 3 0 0 0 9 a n * *.a Y-- ... * * Y -** a 1 3 Y O - I I-

rl

4 . urn

. . W

u . 4

Dm. D D D a s s m w a 0 . 0 0- - * * * * 2 4 % n *a 0 . - m . a

croups 2 6 3: High and Cpper Hiddle Incoae North Africa and Hfddle E a r 8 - 71. The coverage f o r t h i s group wan 77.12. The high incom group 2 ( c a p i t a l s u r p l w o i l exgortere) and the qper middle income group 3 had t o be lumped together because i t v u not porr ib le t o obtain ru f f i c i en t .da t a and ~ a t i s f a c t o ~ y r t e t i r t i c a l r a r u l t r fo r each group reparately. Lebmoa, Bahrain, United Arab EmIratea, Qa ta r , Oaran ?ad Kwai t were omitted, the l a s t NO because of missing pr ice data.

72. In the t v e a t e p aathod, the ahare of agr icu l ture wm omftted am an explanatory variable because i a 80- couetr iar the ag r i cu l tu ra l r ec to r w u a x t r c m l y r e a l l . In a log r r i thp lc epec i f ica t ioa , changer i n vary r u l l rharer have a r t roag lmpact on th r explained variable and therefore make the project ion r a the r m r t a b l e . An 8 pr ior1 p a r a t e r of 0.3 w u w e d f o r the rhare of tranrpor:.

73. The f i t of t h t SE totimation i r a g a k b e t t e r than tha t of the TS ert imatioa. The projection8 f o r 1990 d i f f e r by about 10%.

0 4 - h Q 3 O J O n u - n-.-- P O 3 * * * > w = a - 0 3 h a 4 h

Ir * z 3 0 3 - n

C b -

moo D O 0 - 0 0 0 - 0 mmo moo . . . -we 6 a * m - Y me 0 - m

w o w - * * L . . - * e o - a a - a * * m T v m ~ ~ - 0 m w ~ * a e 8 a m * o - a 6 v a * A a - a m * a n * v a O e e D 4 a s * , -a- . * *a-o-s. .0 O % r

aa. .a .e* - - ** .DCa 8 L a * * .U*mm---** .*wCaa a e . . . . . . . . . . . . . . C C C : I s * o s 0 s * 9 s s 0 o a s 3 0 a > s <

26.- & - * * a m - e m e * m * 0 4 0 4 .......... - n m a a * m m * * n r w r * m r . * Y w O O O I O O O O O P .......... ..........

0 I . m o m m m m m o m 0 m m m m o m o m m m m o

a * . . e e - l *el)* e e o - n a m e nn*n

. . . . . . . i . . 0 . . D O I O W O O O D O ~ I O I O D

- l * * a 1 * a * Y + X Z a * r e m a - n a - r e * a a e - * m - * D I Y = r - * a * s o m a * - a r w n r a n r e e w a a r m m * m w m a m * s o - *

Croup 4 : Laver Klddle Income North Africa and Kiddle East

74. The coverage of t h i s group waa 97.82 . The two Yeraccu were omitted. The share of a g r i c u l t c r e was omitted f o r thr: same reasons aa i n groups 2 and 3, and the same ~ p r i o r i p a r m t e r w a s introduced f o r t ransport .

75. The f i t of the SE wt ima t ion is b e t t e r than tha t of the TS estimation. The p r o j e c t ~ o a r f o r 1990 -.in d i f f e r by about 10X.

'I.

1 < - r: - m'

J rn i r r 2 clr p u - I C Z (I

w C 1 . 1 1 a m u - L* & Vrr w u u a

C \ r D . . . 0 - O - o a 0 16 *a Pb C Q V # U P

. - - - - - - - - - - O O O O D O O O O D

e m - -,- nry* * * a m a . - - - . . . 0 0 s

* Y Uh Y O 0 a r,* ryY I . .

3 3

83% 3:z . . m o m

.I

I.)

a Y

Croup SA: Lou Incot-. '- c r c Africa

76. f h e World lank h 3 put t he 21 coun t r i r r of lou incoma Africa i n t o onr group. For t h r r r t b a t i o l u fn t h i r s tudy, t h r 8rot.p u a r rubdfvf&d Loto cuo ro8iolu, t h r f i r r t (5A) containin8 7 urd the rrcond (51) 8 corrartirr . f i r covrrrgr of both group8 together v u 8 8 t . S o u l l r , Esain, Guiara, Llrotho, Comror urd M a p s c a r u r n d t t r d . I f Boaln a d Cufnra h d bron included i n 5A and tho o t h r r d c t e d c o a t r i r r ia 5b, t h r c w r r a l o of 5 A would b r 792 and t b a t of Sb 89.12.

77. Tho r x o w o w da ta i o r indrptry ruppl i rd by tho bar& apprrrod t o b r f a r too lou. Hot oaly w u F o d r p t r l d output in 1975 r u b r t u r t i d l y lover tbm t h r corrrrpondint f i p x r ia t h r k t a f i l r of t b r rtudy, bu t t b r ahare of i n d w t r y la CDP war p r o j r c t r d t o dac l io r coaciauowly \rp to 1990, r m thou& it had rprr than doublrd rfaco 1960. Mlo t he Bank pro jec t ion w u uard, t h r r r w u r rapid rirr in t h r & a n of revr icer . For t h h rcudy the r h u r of i n d w t r y u u d j u a t r d up to 3Ot, 3U 4 462 f o r tho y u n 1960, 1985 and 1990 n r p r c t f v a l y . E m n with th r ro r u b r t u r t i r l e h u r p r , t h r r h a n of r r r v i c r r r t i l l romo.

78. For t h h country group, t& f i t of t h e TS ut imt ioa i r r l i g h t l y t r t t r r c h m t b a t of t h r SE u c i n r t i o n . Tbr TS r t h o d producu a i g n i f i c m t l y h ighr r r r r u l t r . T%r d i f f r r e n c r f o r 1990 m m t r to about M t .

79. Tho rharea of r i n i n g +ad eoartructiorr a r wa l l u manufacturing and d e c c r i c i t y v e n o d t t a d fn the TS ort imation b r u u s r the r r t ima t rd paramtterr vere vozy i o r ign i f icant .

" 0. .. rU

a n - .w n t u 3 u + n m a L I O N -a - e 3 n n n

-0 ee e- r n e :% i i a- ee 0 -

m e - 0 - 0 0 - 0 m m e :s:

I . . .

5 2 :::

-0- 6e.a - e m s Cad -$s t? - -# ;aa*a:ss

o m e m e - e - 0 - 0 I . . . . . . . . . . .

e * * e e m e e m m m

e m - *- w - 0 - an* m a - e m -

I...

m e * -.. * w w

a-n a.0 0- w 0-4 a-n - - -

w e o m 2 a lu' - O L L I - e m

I .a - 0 -

a = * 0 4

a-m I 4

a -* 0 4

a -4 0 4

* -a I 4

3 - I 4

u -* 0 a

a a - v I

a : 4

0

a u -s I

0 1 ~ " 1 " ~ ~ 0 0 0 0 0 1 0 ~ 1 1 ~ ~ 0 - . - . 1 " ~ 0 - . ~ 1 1 ~ 0 1 0 1 0 ~ 0 0 ~ 0 0 - ~ d 4 ~ 0 0 ~ ~ 0 ~ 0 0

a u n

2:: 222 *-9 a m 0

I . . .

m w *

- o w * wn-• r& 8 -. 2- 0 - --- w w m o

I . . . .

'sow*

- . w * 08a- 0.. 0-

- * a * .**)- , . - o m I . . . .

w . . *

80. Sea ducrQ:loa wader group $A for ooprtaga d other &tailr. m a rS ut lv t iorr for thir &row f i t . the 6.t. better than the Sll eet lut ioa doem, and it ouco *.in producer higher nrultr thaa the arcsad, Rouevet, the differroce 10 about 172 r d l e r thaa for group 5A.

a m - m o * a * . a - r n m m o ??: - 0 0 m a m a 0 0 00. m- - w a n

a=--- - 0 ll- O r m o o o m - * o o - a m o o r n m n 0 -eeee

a * . . . .

s = a a 0 0

n C m e r a '.a* 0 - -

I . . .

L L o m

;; urn

t 7 7 7

l n m 8 a

7 - n m n

1 l - 8

t " l - a : - l -n

8 L

a - w 8 C

a -- I -

l - 0 8 L

e m * 8 4

a m * 8 4

Y r -L 8 .

* - a 8 4 8

n r - n 8 .

m * - 8 a

n r - A 8 .

r) * - r * 8 4

*

Y m

h Y, * Y a s - ) - 0

r. a

G n - m - m ---o--% 22 t:::g m o o o o m @a**.*..

I . . . . . . .

0 - -or - .

0.0 0.0 o m * o m 0 0.0 *-- iii 0-a 0 - w

- 0 ::?33 0 - w n 0 0 0 0 ~ 00000

I.....

* o m 0 0

0- en

3 ----o-

I . . . . . .

- -o - -o

r r r n 0 C . r a a r r a n n r r

o m o r o e f f f

Croup 6: LGIer a d d l e Iccov Afr ier South of S l h u r

U. Croup. 6 m d 7, f o r uhich u p r r r t r r a t f m t f o a r r n p r o v i b d h r n , v r r a d o o d i a t i 3 p d a h r d by t h r World B d c , rltho- i t r t i l l u& i t a pro j re t ionr f o r th. NO tcgathrr . Tha wvarre f o r grow 6 v u 9 U ; Caps Vrrdo, Equatorial Cr?lnrr, Botrvam, C u i a r r B b a a u , S v u i l m d m d Sao T o m and P t i a d p a v r r r o d t t r d .

82. w i n , cb. f i t of tha TS r r t F v t i o o i r b r t t a t thrn t ha t of th r S1 ra t i sa t ion . Bcrvevmr, in chlr c u a t h S I m t b o d producu higher rruulu. 'Tha d i f f a r m m i r about 17%

* w e e r Y m n r n a n - m o . . . . a 1 W Y m *

8

a r i a q c o Y

3

n.. n n n n c. t a r*

n n n Y a a - - .Y n L u l 3 a w n 8 l a a - W Y I

a

m m m m m m m m m m o m - - 0 ' * o m 0 0 ' o o m m o m O * a m ,.....

r a m * * - m a moo-** I ~ 0 . 0 ~

Ztjili f ems:: r m - D ) -

I . . . . . .

m o m - - 0

C a m *

m . L O

u a* a- 0 * -

I) o m - 0 0 1 1 - 0 ......... o o w a W O m ~ *

n r o w e * m m r

= : 4 - 0

O L * ) a 0 m a r *

,;: m - a

m C I m o o m 1 .*..I 8 ....... : 7 ' . I r * - o a m u o r* 0 . - - .a O W *

0 - e m - - - o a r ) W Y r )

. * r * m m a w a m * n o m a r r * a - a * r y - e r ) m c a + * * ~ m r * r n r n m o m r * Y Y * n m Y O O m '**r*mmr*r*r* .*r* .......... s 0 - D 1 0 0 0 0 0 a

0 w -a

* I' e n - : - * - *

0 - w r y :" w o o

0 a

* - a :" l -*

0 .

s n m 0 .

0 -a

m-n

m o o - d m c . m e a a m CIro m- m ... 4 4 0 o w OCI drl IC)m 0- Y O

rn n

Group 7: Intermediate Middle Income Africa South of Sahara

83. The coverage of t h i r aroup v u 92.52. Seycheller, Ceuta, k l i l l a and h'ardbia were omitted. The rhare of mining and coar t ruc t ioa v u omltted i n the TS er t imat ioa becaure i t van i n ~ i @ f i c m t .

84. The f i t of the SE er t imat ioa i r b e t t e r thaa tha t of the TS utimtioo. The TS er t imater a r e about 172 higher than thore of the SE ertimatea.

85. The ahare of mining and comt ruc t fon had t o be o a i t t e d b e c r u e it v u r t a t i r t i c d l y i o r i m i f i c a a t .

m-n

-i::sszw; ~ Z * S S a m .

.:2t=:f * * * * * * * * * * * * ti:.. * * * 0 * 0 ~ 0 . * 0 0

m.. *** *** one 5;: * * *

e-. *-- m e - ---

3 - I 0

L C Y - - = * .a- - n o I c o a - - * - * * a S Y - a

3 3 n-a- m - 0 - e r m a % W m * * * - S a # a * - * * 8 Y s - . e m S n - - m a n * I 1 a e a a e a * m - * w w a * n o a 3 - - m * * - % e ~ * a * I a * r - e m - m * - a w w o m n 3 * +

( UI a o w m o a - - m a - - m * ) = D r C

I m e m - * - - * -e--* . -= 0 * l .................. 2 8 . - a - - n - . m m - m a n ~ b - b * * n o o a - : ; ~ e e w e w e e 8 e e w a ~ n n a n n ................... a . a m - . r a m % t

m Y Y - % r ) a m O - I a ¶ 0 0 3 0 0 0 a 1 0 3 ¶ 0 0 0 ~ a a 3 0 ~ ~ ~ c . L * o o I ) e * . I

m-n

00- no- m a -

**- ' a * - .*- rn* -m* 4 - 0

' 0 . . m a * 0 - 0 -w- C- -

-' - 0 a -a - 4 % w e - - -* * .we 3 0 ..... a * - 0 0 n-• -0- * * -

. * m a 2 E - S * - m a * . ? ? Y . - * * - n f Z - - m '. - *I

' a a . m r - m . * e C a r w r * r * r m *

w * - = w r o o m ;I';t.<?tf s r w . r * m m n m

8 ......... 0 0 ~ 0 0 ~ 0 0 0

0 3 * -r-

a o m m ~ o m m ........ . * O O O L I ~

w c n r r m *. * a

o a o 0 0 * * * * - - 0

n r - n

Croup 8: Uu boom k l a

86. Th. wtnraga of t b i r stsup v u 94.n . Clbodia , kor, Bhutan, Banglabuh, Wdlvu, Afghnlotaa and Vlat Irr urn or i t t ad . l o r . t t $ c u l t u n , an a pricri p a r m t a r of 4 . 4 u u introduced.

87. X t v u undrntood that tha Bank project. a too rapid deellna l n th ohare of a g r l c u l t u n fa CDP. I a n tha af r icul tura l output data vrn tb r t r fo ra ralaod by lU, 142 a d 17% fo r t h e ymra 1980, 198S md 1990 ruprctlvmly. Bcnrrr, it d @ t ba m n m u d l a t o n d u u GDP,

8a. ih. f i t of th. rS a a t l u t l o n l a b a t t e r thm that of the S I aat iu- tion. both wthoda produud ra thar hi& naul t r , Iha r u u l t of the TS a a t i u t i a r v u a ol@flcrotly 4OX hQbu tba t h a t of tha SB u t t u t b n . Ih vav hi& r u u l t of tha I S method ir par t ly :he r u u l t of a h i& n d u u 4 i ncon a l u t l c l t y i n Indla and a projoctad f u t o t ructura l c h p .

h - v .v Q nr "bsv m I . > n o s . . . f - 0 s E) 0 3 0 4- a h LI

" @

C) r. @ a - @ - I I - a - a

Y - * :" U -. :" a - m : - r. - r y

8 a

U 8 -

a 7: r. d*

8 a J - I

8 a a--

I a - - a

I . I

s - n I . I

a-. I . 8

a-n @ a

* u - Y I . I

a -3 - 4 .

a *-a I S I

L I I I I I - L L L I I I - . I - L ~ I - . ~ I I L L L L - . L - . - . L L L L - L ~ L - . L ~ m m ~ - - - - - - - - - - -

SUM ( t - k E S T ) e.28 71&4Y6lbL0bbb699 SUM Ee.2 t 147S4450604b.4t0979 S l r h l I YIJML t 0.004&7(,

I-VALUES

S Z E E f 3 $ i : X 2 : : 2 f S m s n m a L I O m - L I e m - : = * ; ~ s ~ m - m r m m t e m m o o r r r m - o e -

y r r r r r r r r r - r r r r r m 0 m 0 ................... m m m m m m m m m m m m m m m o m 0 0

o m o i i o i i o o

Cro\tp 9: L a o r Mddlr sad 1 n t r r m d i . t r Income k i a - 89. 'Ih cuvmralp of th i . grow v u 91.OX. Sol- Irl.ea&, S m r , T w , Papue U w W, Urr Eabr idu , Cilbart Irlro&, Eepublic of Chiaa (Trivro) sad Pac i f i c I a k & u r n a i t t r d .

90. k vith Crow 8, t h e projected drclLna in tho rha r r of agr icul tur r in CPS appeared to b r too rapid. -cultural output v u t h o r e i o n r a l r r d by Z i X , 322 rod U1S f o r tha y u n 1980, 1985 rod 1990 m p r t t i v r l y . lo o p i t r of t h r r r at- h c n u r r , r t r u c t u r a l chmgr v u r t i l l very f r s t . Tho proj rc t rd rirr f n .orrm damad v u t t u n f o s quit. high.

91. Tha f i t of tha I S r r t i u t i o a i r c l u r l y b r t t r r than tha t of the Sll e r t h t l o r r . '2hr p m j r c t i o a r IJO- v a n .loo highor. Hwrvrr, tho dlffrrenca vaa only about 10X, not wry l a r p .

e- m.. *m -- aa

E X : ...... m e = e m - u - -

. . a * o m

- :5S aum --0

m m * * m o * m m n e o m m * m ................ m m m * m m m m m m m * m - m m

e o * u n * e u u 4 - 0 t o - * - - . . .

e n * 2 = = r 0 - 1 n r y t Y Y - . . . . a 0 1

n 9

2 2 2 * a = n - a a - 0

tabla 5

m-roo

m a . * o o 2:: 2:z C I I * * a

C O O

a m - - - - a

t r t - 0 0

m e w he. n -0 - 0 -

f f f , . . a * a m

C.*h 0 - w -0.. ::I w w

a m o o

2 3 : h a - * * * * * * Y . ? t m s m

m o o * a *

m o m

Group 10: W a r Hiddlr Income Latin America

92. Thr covrragr of t h i r group v u 96.6%. H d t i ( l w income), Crrarda , S t . Vincrnt, Dominica, G u t e m d a , S t . Lucia, S t . Kittr-Nrvia, Ba l i t r , Nicaragua and Antigua v r r r omittrd.

93. For maufac tur iag rod r l r c t r i c i t y , an 8 p r i o r i p a r ~ w t r r of 0.3 v u introducrd. In order t o avoid m i r g l a w i b l a d r c l i n r i n tha rturr of indur t ry i n a a d r r of corratrirr , p ro j r c t rd i a d w t r i a l output va r r a l r r d by 15.8%. 16.12 and 15.3% f o r the g u t 8 1960, 198S and 1990 r r rprc t ive ly .

94. Thr f i t of the S t w t h o d i r b r t t r r thm t h a t of tho TS mathod. Hwrvrr , t h r d i f f r r m c r i n t h r pro j rc t iona-lrrr than 3%-ir marginal.

0

t Y

C a r)

t u

u

C 0 r).

u

I a (.I L

r G c i I . . .. 0000

n o * 0-4 -0- r)-n. r a o

o n e n .... o w n - 2,'s - m e o w .

00900 00 m o o m n - 0 - :$:;$ '.?f $

8 . .

i n n w I r m * I - 0 - I

% S t : 7 2 7 : 0 0 - I --• I - - 0 I a m * I - * 2 :

I

S f ? : * r 2 ; s o - - w e . . - 0 .

e o n r m m m - 0 r m n - a - t ? ? 0 0 0

o n o m 0 e z z z

r x i = = 3 a n a

Group .L1: Upp - e r -3Iddlc Incow Lat in A

95. TT\e coverage of t h i s group was M.42. Surinaa, Owdeloupr, Nu the r l anb Antil:er, French Cuiacr, Trtr '.dad and T o b t s , P w r t o Rico, Xartinique, B a h m u , Virgin I t l r a d u , be mud^, Barbadou and Uruguay werr omitted. Rtwoaable da t a could no t be obtained f o r aay of the countr ies . For transporc. an a p r i o r 1 parameter o f 0.2 was 'ntroduced fn *he TS eutimrtion.

96. The f i t o f the SE e a t l u t i a a i a t r t t r r t h r a t h a t of t h r TS wtimcrtion, b u t th. r t a v l t a o b t a b e d with t 4 r tvcl -tho& a r e almost idea t i c a l .

CIA

-a * - O C c t 1 1 C \ C I * * n * + * C A J l A +-*&-a& cn-3 t r r a a 4 V Y Y I Y I - C Z ; L Z L L V A A A A A A

* * m a r l r m * a * r m m * - a . m r a a o r - - - h a m '*)NN.vSry I . . . , . .

m m m m m m

. . m e * 4 6 - - n s sac 0 - 1 .... = m a

T I . zm. rrc: sz: zs: --. C C . w = . nn. = #?-. r I

£S! n rn t . n l t b * n l n . n = t E t I = z rn C. l

rn rn rn rn rn rn rn rn . rn rn ...I

m m r n

ff:

m * * m * Yen*- *- was:: 0 * 0 * 0 m m - e = ..... 3 0 0 0 0

0 0 0 a 0 0 - n o Y Y " a-- -1- ... -.a .*o r - n - e n s * 0 -

o a , o * o 0 0 0 m w o nnaa-n aa.0-a ' - *a o m * . * a * - w

I . . . . . .

- L I - . n - 4 r m n r - a fia-r*n- a * - o m 9 o - r c n n n ------

....... r * o o r - - - . % o - . - m * m e w - - - a a r a i r * - - - r*r**r*

7 I. e :a I. I. e 0 - e L.

: r e I.. e 0 e 0

e -

. Group 12: .Northern America and Oceania

97. The coverage of t h i . group w w 99.72. Only New Z ta lmd w u omitted. Strangely enough, it w u i l p o s r i b l e t o emtimate a r euonab le p r i ce e l a s t i c i t y f o r t h i r group. An a p r i o r i p a r m t e r of -0.4 war therefore introduced.

98. The f i t of t h e SE e r t i m t i o n i r r i g n i f i c a n t l y b e t t e r than t h a t of t he TS ertimtim. Hwever, in both project ion8 the f i r u l valuer c o w out very high. Thi8 i r p a r t i c u l a r l y ttua f o r t h a SB mthod, which produced a rwult 242 above t h a t obtained wi th t h e TS archod. The r a the r high rerultr a r e probably t he r e r u l t of t he high g r w t h u r m p t i o a r .

r r r r r c o = ; z z z z c - n - n - c 2 F X X r X C ' Z z*-v*c- - u . w V . Z T D

w e + - \ 2 X X 0 4 t u - VI w. - G

w e * - ..-*S$ r e m a a . : 23::: - 0 Y e 1 I

I . . . . . .

oo*e**

I I I I I

a . w I a t - I

2 % : : - 8 - I Y 2 " . : z ; : a - t * - * a * % a = * - - 0 I - 0 - I

I

rr 'I) F * f

I . . . .

O O O O . r a w

' O r ) * w m w a o B E E I * * r ) *

a I a

r n .. - .. s w 0 'I)

Croup 13: U u t e r n and tlorthern Europe

99. Tha covarage of *his group v u 97.62. Ireland, Iceland and Svi t re r land ve re omitted.

100. The f i t of the tvo mthodr ir a l m r t i den t i ca l , but the SE method produces r e a t higher r e s u l t r . The d i f fe rence la about 42.

101. & with Croup 12, i t v u f e l t that t h e demand project ionr f o r t h i r g row were on t he high ride. The CDP aruuth r a t e projected by the Bank v u r i ~ i f i c . n t l y a b m the r a t e projected by OICD. I f the OtCD grouth r a t e r were w e d , &maid f o r energy i n a11 i a d u r t r i a l co rn t r i e r i n 1990 vould probably be r o n 10X l a t e r than r h a m h e n .

- r(r n r a 3 ~ r y n a a .J a \ -u: - I L L - 3 f 2 - n m r ; .*

t r u n t mm c u r r r tuurrrtoa r r r r n r c u r r r trrrrurroa

a

l t t ).#)4?.. ~--1--~--1--1--1--1--1--I--1--t--1--I--1--~--~--1--~--1--1-~-~--~--1-I-1-1--J-!--~--l--~

hu h l 6 4 n.3 6- b) hb h l hd h Y I P ?I )d /A I* 8% *. as e ve

w ...... w.. .. .. ..

--- - a a m - a =--.* * - - a n

---- O D - w e-Ala m y - - A * & > & * a - a s - m . . a .

w w *- l a n - E w l . a a n a a- a. - *e ) r l ----

*

a w

*

. a a

C

2 - * . L

3 . 0

e a A'. L

0 . rn w 1: - w * A'

Q,

Croups i 6 , 17 6 18: Other Africa and k l a

102. fie coverage of ?hie grow woe 70. U for Asia and 68.9Z fo r Africa, excluding South M r i u , f ~ r South Africa, a r iaple u t r apo l a t i e a was made on pcut trands, as tha required data uare aot rvr:lable m tiar ',ape. I n Africa, Reuaion and nllbouti ware o d t t t d ; in hi., )(.cao, Fmcb Yolyneeia, New Caledonia, Cw-4, American S m a and Br\esi veto osit ted.

103. The f i t is bet ter f o r t h e SE e e t h c f o n t ha t fo r tha IS eatLmatIoa. The projectionr a re a l igbt ly hiahet f o r the St &',hod. ;be o l f f ennce 16 almost 9%.

0 . . a m .

n t f f j 2 ;..;rtZ'i

2 : t * : ! 2s; 23 4-4.. a*-*)* I..... . . m a .

- o % z - = * * * . . a w o o ,

nt-ur

104. I h e r u u l t o o b t a i m d l o r rho iodivid-1 c o t a t r i a 8 are r w t ! .ad i a Tableo A and 8 . Y l t h r e w r d t o rho u t l u t e d lnc- e l u t i c i t i e r , the major c o a c l w i o a l o t a a t tba e l u t l c i t l ) e r r h a t e d b y the SE r r h o d la l a r a e r than t h a t e r t l m t a d by the tS rthJ and &at thn o v e r a l l i a c m e l u t i c i t y ( the averaaa grarth r a t e o f p e r c a p i t a o a e r t j d e n a d i a r e l a t i o a t o th. averaao greurh r a t e o l COP) ir l a r m r than both.

105 Table C 8baur che tnMb r a t e r l o r o n 8 r w c o o r q r i o o b y c o w t r y t-rg*

La (L. 1.h 0.u 1-1) M 1.a (La - 0.. 1-w (La 1.m a u

~ - I.. 1.. I.. 1.m

am #.a &I am

an 0. I 4 I am & I

an LY a*&#

4.m a-m a I*

an - - an e.m -

0.1 a.u a.m e.n - a.w - - a.n -

- a-a a.m a.*

-

W L .YO.&-. -

*L)( @.M L I I1.r) 4 Y LII b.O -0.11 L I B e m 8.U

kr. LI. d 1.m LIS 0.u 4 w 0.6s n.6) r.8, e.n r.w 6 . h w4mr 1.a LI) a.a r* I.U n.o r.o e.m e.m r.hs W-0- 1.a I.U O C ~ ..a 1.6 1.n 16.- r.n 0.1) e.08 e.H -- 1. n I.BB m-61 L* 1.s~ 1.6s IJO.%) 1.11 i i r.n

1-16 1.mm.1) +.os e.16 LY 01.1) r . ~ r.n r.n r.m 1.1s I.- m.n +.SI LPI 8.0 t9.6~ r.n e . ~ @.a1 e.1~ 8-19 I.- -9 +m 0.0 0.1) O.U *a r.u r.n r.w 8.n 1.1rm.1) 4.n a.18 ~ n n . , ) O.BS ~m e.n a. BB I .n 1.n (LO 4u 0.16 4.) 0.1) a.11 r.n r.n r.11

12a - y..lm I .m LW 06.1 0. e.m L ~ S (1.0 4.17 @.at r . ~ s e.71 m 1.1 I.Y DLI) 0.1 LW 1-11 a s ) -1.u e n e.81 e.05 - I ..J a.w ~ 1 . m 0.1 @.I3 L a -I.* r.n r.w r.n LW- I .U a rr *a LI 0-1) e.m e.u r.n r.1,

W lh - m m 1.m LY -11 4 a LI* a-Y 1s.n 6-98 e . ~ r.n r.19 u 0. n 1.0 01.0 4 a o.ss 0.11 a.s) r. 16 @.I e.n r.u - 8.n 8.- a- 4 a a m 0.61 tv.18 4.m e.n r.17 w a.61 1.a -4 4.0 r.81 1.6 t -1.n r.r, 3 r.14 - LI LI m.n 4.u e-m e.61 f6.n @.IS r.n r.m o. n -. M LI- d 0.1 L.. a s s 4.u LO LY m.1) e. m e n r.n r.11 I-JT 1.n 1-16 m-m 4.u e.n 1.a m.n 4.u r.91 r.m @.IS

I-- I-u OLU a I.= r . ~ 0-u 1.w e m - 8 s r.n LI~.I.~ 4- r.n I-m a1.u 4 - 6 ~ r.u r.n @.I#

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