Choosing an Estimation Methodology for Natural Rubber Price Forecasting Models

By

AYE AYE KHIN, ZAINAL ABIDIN MOHAMED, MAD NASIR SHAMSUDIN, EDDIE CHIEW FOOK CHONG

Institut Kajian Dasar Pertanian dan Makanan Universiti Putra Malaysia 43400 UPM Serdang, Selangor, Malaysia
http://www.ikdpm.upm.edu.my

January 2011

Choosing an Estimation Methodology for Natural Rubber Price Forecasting Models

Aye Aye Khin 1, Zainalabidin Mohamed 2, Mad Nasir Shamsudin 2, and Eddie Chiew Fook Chong 2
1 2

Faculty of Management, Multimedia University (MMU), Cyberjaya, Malaysia Faculty of Agriculture, Universiti Putra Malaysia (UPM), Serdang, Malaysia

ayeaye@mmu.edu.my, zam@agri.upm.edu.my, nasir@agri.upm.edu.my, eddie@econ.upm.edu.my

Abstract This study developed a short run econometric model of price, supply and demand of Malaysian natural rubber. Both single and simultaneous equations will be utilized using monthly data from January 1990 December 2008 as estimation period and data from January 2009 June 2009 will be used as an ex-ante forecast. The data were tested for unit root and Vector Error Correction and co-integration method was used to estimate the parameters of the model. The models specifications were developed in order to discover the inter-relationships between NR production, consumption and prices of SMR20 and to determine forecast price of SMR20. Comparative analysis between the single-equation specification and simultaneous supply-demand and price equation were made in terms of their estimation accuracy based on RMSE, MAE and (U-Thile) criteria. The models, solved dynamically for ex ante forecasts over for the period of January 2009 June 2009 as indicated earlier. The results revealed that the values of the RMSE, MAE and U of simultaneous supply-demand and price equations model were comparatively smaller than the values generated by the single-equation model. These statistics suggested that the simultaneous equation of supply-demand and price model was more accurate and efficient measured in terms of its statistical criteria than the single-equation model in predicting the price of SMR20 in the next 6 months or so Keyword: Simultaneous supply-demand and price model, econometric, Root Mean Squared Error

(RMSE), Mean Absolute Error (MAE), Theils Inequality Coefficients (U) criteria, Natural Rubber Introduction Natural Rubber (NR) is now produced almost exclusively in developing countries and South-east Asia is the largest producing region. Thailand was the largest producer with an annual production of 2.69 million MT (30.3 percent of Worlds NR production) in 2006. However, in 2008, Indonesia has become the largest producer at 2.73 million MT (29.3 percent of Worlds NR production), followed by Thailand at 2.63 million MT (28.2 percent) and Malaysia at 1.29 million MT (13.8 percent) (IRSG, 2008). On consumption, China was the largest consumer at 2.33 million MT, (26.2 percent of worlds NR consumption), followed by U.S.A at 1.89 million MT (10.5 percent) and Japan at 1.03 million MT (9.1%) in 2008 (Table 1).

Table 1. World Natural Rubber Production/Consumption and Supply Surplus/Deficit (000 MT unless otherwise indicated)
Countries Thailand Indonesia Malaysia India Others a World Supply % change China North & Latin America Japan India Africa Europe Countries a World Demand % change a World Supply a World Demand Surplus/Deficit
a

2004 2,984 2,066 1,169 743 1,672 8,634 8.1 1,630 1,810 815 745 123 1,491 8,343 4.7 8,634 8,343 291

2005 2,833 2,271 1,126 772 1,702 8,703 0.8 1,826 1,848 857 789 121 1,560 8,777 5.2 8,703 8,777 - 74

2006 2,690 2,450 1,200 830 1,720 8,890 2.1 1,990 1,850 900 840 120 1,610 9,150 4.3 8,890 9,150 - 260

2007 2,580 2,600 1,240 860 1,760 9,040 1.7 2,150 1,850 950 880 120 1,530 9,510 3.9 9,040 9,510 - 470

2008 2,633 2,733 1,288 890 1,823 9,340 3.3 2,325 1,890 1,025 925 120 1,710 9,880 3.9 9,340 9,880 - 540

Rounded to nearest 10,000 metric tones (MT) Source: (IRSG, 2008)

World natural rubber supply was 8.6 million MT in 2004 and estimated to increase to 9.3 million MT in 2008. Conversely, world natural rubber demand was 8.3 million MT in 2004 and estimated to reach 9.9 million MT in 2008. The year 2008 shows a deficit situation in the world natural rubber supply at -0.54 million MT in 2008 (see Table 1). However, due to the current global recession, the International Rubber Study Group (IRSG) has projected that world natural rubber supply will be only 7.87 million MT in 2010. It is projected that total natural rubber production in Asia alone would reach 6.84 million MT with an annual growth rate of 1 percent by 2010. Conversely, world natural rubber demand is projected at 7.91 million MT at an annual growth rate of 1.3 percent in 2010. Likewise, projections of total rubber consumption in Asia would reach 3.88 million MT with an annual growth rate of 2.8 percent by 2010 (IRSG, 2009). In Table 1 above, although NR production increased over the period 2004-2008, the NR situation was unable to meet increasing global demand due to declining planted area, labour shortage, aged smallholders, uneconomic-size holdings, low productivity, diversification away from rubber and inadequate resources (Kamarul and Damardjati, 2009). Table 2 shows the new and replanted area in major rubber producing countries as well as other countries over the period 2003-08. Out of 1,189,000 hectare of new planting area during 2003-08, about 88 percent (or 1,058,000 hectare) was undertaken from 2005 onwards. On the other hand, out of 763,000 hectare of area replanted during 2003-08, about 77 percent (or 588,000 hectare) was carried out from 2005 to 2008. Potential impact of newly and replanted area on global NR supply cannot exert any significant impact until 2011, due to low addition in new and replanted area planted during 2003-04. So the addition to tappable area during 2009-2010 would be low. Although the 2005-08 new planting and replanted rate was high, these cannot reach tappable age before 2011 due to the gestation lag.

Table 2. Natural Rubber New Planted area and Replanted area during 2003-08 (000 ha)
Countries Thailand Indonesia Malaysia India Vietnam Sri Lanka Other countries Total 2003-04 New Planted Replanted 49 81 0 10 0 39 23 15 38 7 1 3 20 20 131 175 2005-08 New Planted Replanted 352 154 171 195 11 105 99 45 195 32 10 17 220 40 1058 588 Total New Planted Replanted 401 235 171 205 11 144 122 60 233 39 11 20 240 60 1189 763

Source: (ANRPC and MRB, 2009)

Table 3 shows that the stock of world natural rubber was 2.3 million MT in 2004 and it declined to 2.0 million MT in 2008 and it was the lowest level since 2004. Moreover, the stock of natural rubber shows a decrease situation in year-on-year terms during this period and a decrease situation of the world natural rubber stock was -0.038 million MT in 2008 (or the percent change of 1.8 percent) as compared with 2007.
Table 3. World Natural Rubber Stocks (million MT)
Year a 1 Qtr a 2 Qtr a 3 Qtr a 4 Qtr Year Increase/Decrease percent change (%)
a

2004 2,277 2,192 2,379 2,413 2,315 240 11.6

2005 2,389 2,231 2,275 2,258 2,288 -27 -1.2

2006 2,425 2,110 2,080 2,084 2,175 -113 -4.9

2007 2,388 1,921 1,874 2,064 2,062 -113 -5.2

2008 2,154 1,816 1,925 2,201 2,024 -38 -1.8

Rounded to nearest 10,000 MT Source: (IRSG, 2008)

Changes to the world stock situation will also affect the price, supply and demand of world natural rubber. An inverse relationship between NR price and stock levels is implied because prices tend to peak during low levels of stock and vice versa in 2004 to 2008. As was evident, the decline in stocks during this period led to a rise in rubber prices. The recession in world natural rubber price started on a down trend from late July 2008 with recovery commencing as early as 2009 (Figure 1). It was due to the slow production recovery after wintering (mainly due to heavy rains in Thailand, Malaysia and Vietnam) and low underlying global demand as well as low demand from China and India on the market sentiment over signs of an easing of the global economy recession during this period. However, Malaysian natural rubber price was increased by 57 percent (US$ 1778.41 per MT) at the end of May 2009 from their low of US$ 1376.57 per MT in December 2008. Besides, NR prices broadly followed the same trend as crude oil prices (COP). Moreover, crude oil prices will most likely be the determinant of direction in the natural rubber market with expensive crude oil prices keeping synthetic rubber prices high and also affected to the tire manufacturers and the primary consumers of natural rubber. The impact of higher oil prices on commodities is complex as it not only raises production costs but also pushes up demand for biofuels. If oil prices stay high, major international

tire makers will switch to natural rubber. Butadiene, a petroleum by-product, is the main raw material for producing synthetic rubber. In mid-2008, supply-related concerns fueled a rally in 134.52 US$ per barrel of crude oil prices, leading to a surge in 3443.60 US$ per MT of Malaysian synthetic rubber prices. The price of crude oil has been on an upward move again (Figure 1), rising from its lowest level in over five years of US$ 40 per barrel in December 2008 to the current price of US$ 61.02 per barrel in late May, 2009 and also the synthetic rubber price falls down to US$ 1551.63 per MT in December 2008 (IRSG, 2009).
4000 3500
SMR20 (US$/MT), Synthetic Rubber Price(US$/MT)

160
Crude Oil Price (US$/barrel)

140 120 100 80 60 40 20 0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

3000 2500 2000 1500 1000 500 0

Observations
SMR20 (US$/MT) Synthetic Rubber Price (US$/MT) COP(US$/barrel)

Figure 1. Crude Oil, Malaysian Natural Rubber and Synthetic Rubber Prices in January 1990 to December 2008. (Source: IRSG and Economics and International Division, Ministry of Finance, Malaysia, 2009)

Exchange rates, especially the depreciation of the US$, have contributed to the upward pressure on world prices for most commodities traded in dollars (Short-term Economic Outlook of OECDFAO, June 2008). The US$ would be continued to depreciate against most major currencies and, for this paper, NR price is expressed in that currency of US$. If the price is expected to have negative relationship with the exchange rate for Malaysia RM per US$ (RM/US$), indicating that less Malaysia RM would be paid for an US$ when the NR price would be high again as experienced during the forecasting period. Table 4 shows that Malaysian natural rubber price and exchange rate relationship and natural rubber price was 2314.51 US$ per MT in June, 2007 and it decreased to 1376.57 US$ per MT in December 2008. It clearly shows that when the NR price was extremely low prices experienced in December 2008, indicating that more Malaysia RM was paid for an US$ in the Malaysia natural rubber market.
Table 4. Natural Rubber Price and Exchange Rate
Year Natural Rubber Price (US$/MT) Exchange Rate (RM/US$)
Source: (IRSG, 2009)

2007-06 2314.51 3.38

2007-12 2653.55 3.35

2008-01 2765.55 3.29

2008-06 3457.58 3.22

2008-12 1376.57 3.42

Hence, price forecasting mechanism is necessary for the market participants to guide them in their production, consumption and financing decisions. An accurate price forecasting is particularly important to facilitate efficient decision making as there is a considerable time lag between making output decisions and the actual output of the commodity in the market. Meyanathan (1979) only focused on the supply characteristics of the world natural rubber industry and three separate economic forces which influenced current NR output. They were long-run in nature, associated with acreage decisions made years prior to harvesting, the medium-run factors associated with yield and the short-run factors which influenced current yields. It specifically elaborated on the short-run factors, and these were in turn utilised in the estimation of monthly supply functions for the main producing countries. A short-run relationship was postulated whereby current supply St was related to lag output prices P, a time trend T in an attempt to capture the intensity of harvest and the dummy variables for seasonal adjustments Xt, where i= 2 to 12 indicating ith month and the short-run supply equation was as follow: St = S (P, T, Xt) The results indicated that a positive response to price and supply function in the study. The price variable was significant, with the expected sign for prices lagged one to three months, indicating the important role of prices in the production process. The time trend variable was also significant, reflecting technological improvements which increased yields during the estimation period. All the seasonal variables were significant, showing marked seasonality in production throughout the year. World NR prices were used to forecast by using econometric model of the world natural and synthetic rubbers market (Tan, 1984). The first part of the study was concerned with the specification, estimation and validation of an econometric model of the world natural and synthetic rubber market. The second part of the study was concerned the application of the model to forecast natural rubber price and to analyse the implications of natural rubber price stabilisation along the lines of the International Natural Rubber Agreement. The results showed that of the explanatory variables identified, stock of NR in consuming countries ('000 tons) (SCCt), consumption (demand) of NR ('000 tons) (CONt) and price of NR (PNRt) (for the study, SMR20 spot price in sen/kg) in the previous two periods, were the most important explanatory variables in the NR price forecasting model. Barlow, Jayasuriya and Tan (1994) presented a broad economic framework and the overall rubber industry where the supply of rubber was determined by the expected price in the market place, together with its production capacity, input costs, and underlying technological progress. It then interacted in a dynamic and recursive manner with demand. Demand was set by the expected rubber price as well as by the income level in the overall economy, prices of rubber substitutes, and prices of final goods, technology, consumer preferences, stocks, and manufacturing capacity utilisation. They also explained that the organisational structure of production, marketing and

consumption, and government measures towards rubber were also important, but they entered the rubber framework through the mentioned supply and demand factors. This theoretical framework was a good starting point for discussion and perceptive of the general rubber economy, with the opportunity of using some of these factors later in this paper for the estimation of rubber prices. Fatimah and Zainalabidin (1994) examined the forward pricing efficiency of the local crude palm oil (CPO) futures market. The forward pricing efficiency was measured in terms of the forecasting ability of Malaysian crude palm oil futures price on physical price. The relative predictive power of futures price was compared with the various forecasts estimated from proven forecasting techniques like moving average, exponential smoothing, Box Jenkins and econometric. The result showed that CPO prices were highly sensitive to changes in stock level and the prices were significantly related to the stock levels, total consumption and lagged price. They suggested that the market utilised and processed information efficiently, hence the price discovered at any point in time, can be taken as reflecting the current supply and demand for the local crude palm oil (CPO) futures market. From the study, the various forecasts estimated from proven forecasting techniques could provide relevant information of the forecasting ability for this paper. Multiple forecasts for autoregressive-integrated moving-average (ARIMA) models are useful in many areas such as economics and business forecasting. Mad Nasir and Fatimah (1998) provided some short term ex ante forecasts of Malaysian crude palm oil prices. The forecasts were derived from the univariate autoregressive integrated moving average (ARIMA) model which integrates a multivariate autoregressive-moving average (MARMA) model for the residuals into an econometric equation estimated beforehand. The results showed that the MARMA model produces a relatively more efficient forecast than the univariate and other econometric models. The forecast figures were discussed in relation to the current and expected fundamentals of the palm oil market. Several attempts have been made to forecast the long-term and short-term natural rubber market (Burger and Smit, 1997 and 2000). The essential elements of NR long-term supply model are: new planting, replanting and uprooting area, the age of the area and the yield profiles, technical progress, other factors influencing normal production and prices. The explanatory variables of NR long-term demand model are included the total rubber consumption, total tyre production, total general NR products, GDP (Gross Domestic Product), population size in the particular region, total vehicle production, total vehicles in used, the ratio of total tyre production to total vehicles in used and prices. The important exogenous variables of NR long-term price model are: NR production per country or region, NR consumption per country or region and changes in stocks. The shortterm supply model (the log of the ratio of actual and normal production) was included the endogenous variable namely, the log specification related to seasonal dummies, the log of the ratio of the world market price of NR converted into local currency and adjusted for export duties of the

particular country and the domestic consumer price-index. The variables used for short-term demand model (the log of the NR share in total world rubber consumption) namely, the log of the ratio of the price of NR (in US$) and the US export unit value of SBR (Styrene-Butadiene Rubber) (in US$) and the log of the trend. The short-term price model of Singapore RSS1 was included world natural rubber production, world total rubber consumption, exchange rate, private world stocks, and a dummy (taking in time trend). Therefore, the study included the economies of key players in the natural rubber market both on the demand side, on the supply side and price fluctuations. Moreover, it aims at providing an empirical conceptual framework basis for establishing a link between the economic theorisation and the empirical work as contained in this study. Lim (2002) estimated the short-term NR prices and evaluated the relative performance of 19 models based upon three different forecasting techniques, and four information sets. The generalized autoregressive conditional heteroscedasticity regression (or ARCH-type) models were generally better than the simple regression models and the results can potentially be beneficial to participants in the NR futures market. Krichene (2005) has argued that a relationship exist between crude oil prices, changes in the nominal effective exchange rate (NEER) of the U.S. dollar, and the U.S. interest rates. The study used the simultaneous equations model (SEM) for world crude oil and natural gas markets and found that both interest rates and the NEER were shown to influence crude prices inversely. The result explained that demand and supply for both crude oil and natural gas were highly price inelastic in the short run, leading to excessive volatility in crude oil and natural gas market. From the study, a SEM model estimation methodology could provide realistic and relevant information for this paper. This paper presents a short run econometric model of price, supply and demand of Malaysian natural rubber. Both single and simultaneous equations will be utilized using monthly data from January 1990 December 2008 as estimation period and data from January 2009 June 2009 will be used as an ex-ante forecast. The data were tested for unit root and Vector Error Correction and co-integration method was used to estimate the parameters of the model. The models specifications were developed in order to discover the inter-relationships between NR production, consumption and prices of SMR20 and to determine forecast price of SMR20. Comparative analysis between the single-equation specification and simultaneous supply-demand and price equation were made in terms of their estimation accuracy based on RMSE, MAE and (U-Thile) criteria. The models, solved dynamically for ex ante forecasts over for the period of January 2009 June 2009 as indicated earlier.

Methodology Conceptual Framework Natural rubber models were actually based on the supply and demand theory and they generally consisted of a number of components, which reflected supply, demand and price determinants (Burger and Smit, 1997 and 2000). They argued also that, however, the analysis of commodity price behavior was normally divided between the long-term price, which could be termed the equilibrium or trend price, and the short-term price, which was associated with speculation and cyclical or random price movements. On the other hand, the study will develop some short-term exante forecasts of the single and simultaneous equations of natural rubber supply, demand and price methodology in the world market. Also, the models will be determined and estimated the price of SMR20 which between the single-equation specification and simultaneous supply-demand equation is more efficient and analyse and compare individually in terms of their estimation accuracy. The framework will identify the appropriate variables and forecasting techniques to be used for the monthly short-term ex-ante forecast of this forecasting study. Burger and Smit (1997 and 2000) conducted the structure of short-term natural rubber models are conceptually using quarterly data that world NR supply, demand and prices would be used to forecast by using econometric model of the world natural rubber market. The short-term supply model (the log of the ratio of actual and normal production) was included the endogenous variable namely, the log specification related to seasonal dummies, the log of the ratio of the world market price of NR converted into local currency and adjusted for export duties of the particular country and the domestic consumer price-index. The short-term supply model was hereby constructed. Its purpose provided a theoretical basis for establishing a link between the NR supply and the factors as contained in this study. The shortterm supply function was as follow: log qqt = (log pt, log qqt-1, dt, et ) where, log qqt = the log of the ratio of actual production and normal production log pt = the log of the ratio of world market price of NR, converted into local currency and adjusted for export duties of the particular country and the domestic consumer price-index dt = the dummy variables taking the value of 1 in the first, second and third quarter of each year, respectively and the value of zero otherwise. The variables used for the short-term demand model were the log of the NR share in total world rubber consumption, the log of the ratio of the price of NR (in US$) and the US export unit value of

SBR (Styrene-Butadiene Rubber) (in US$) and the log of the trend. The short-term demand function was as follow: log snwt = (log pt, log snwt-1, logt, et ) where, log snwt log pt log t = the log of NR share in total world rubber consumption = the log of the ratio of the price of NR (in US$) and the US export unit value of SBR (Styrene-Butadiene Rubber) (in US$) = the log of the trend

The NR short-term price model included world natural rubber average production, world total rubber consumption, price index of minerals, ores and metals, real exchange rate, private world stocks, the lag of NR price (US$/tonne) and a dummy (taking in time trend). It included the economies of key players in the natural rubber market both on the demand side, on the supply side and price fluctuations. Moreover, the short-run NR supply response to price was not certain due to factors such as the economic and weather conditions that can be very different from country to country. This was accounted mainly by its inflexible capacity, long gestation period and the existence of a very large number of smallholding tappers, for many of whom the rubber production constituted the only source of income due to the relative scarcity of attractive alternatives. The short-term price function (in logs) was as follow: psdt = (pmomt-1, psdt-1, xsdrt-1, ctwt-1, sqt-1, zndzbt-1, dt , et) where, psdt xsdr ctw sq = NR price in US$/tonne = real exchange rate between US$ and SDR (US$/SDR) = world total rubber consumption (1000 tonnes), adjusted for seasonal fluctuations (1000 tonnes) = average world production of quarters t-3 through t (1000 tonnes) adjusted; zbw is the total world buffer stock (1000 tonnes) dt = the dummy variables taking the value of 1 in the first, second and third quarter of each year, respectively and the value of zero otherwise. The review of the single-equations of supply, demand and price relationship were based on earlier studies developed by Meyanathan (1979), Tan (1984), Fatimah and Zainalabdin (1994), Barlow, Jayasuriya and Tan (1994), Mad Nasir et al. (1998), Ferris (1998), Burger and Smit (1997 and 2000) and Lim (2002). For this model, short-term ex-ante forecasts of the single-equations of econometric models of monthly natural rubber supply, demand and price methodology is described zndzb = znpt-1 zbwt + zbwt-1, where znp are private world stocks (1000 tonnes), seasonally pmom = price index (current US$) of minerals, ores and metals

10

and it consists of three behavioral single-equations. Supply The supply of natural rubber (TPNR) is a function with related factors (in logs) as follows: TPNRt where: TPNR T ei Demand The demand of natural rubber (TCNR) as a function of the related factors (in logs) as follow: TCNRt = (PSMR20t, RSS1t, TCNRt-i, T, eti ) where: TCNR RSS1 T ei Price From the NR price (PSMR20) determination single-equation, which was derived based on the related factors (in logs), we have: PSMR20t = (TPNRt, TCNRt, STONRt, COPt, EXMt, PSMR20t-i, T, eti) where: PSMR20 = Real monthly price of SMR20 in Malaysia (US$ /MT) deflated by the CPI. TPNR TCNR COP EXM T ei = Total production of natural rubber (Total Supply) (000 metric tonnes) (MT) = Total consumption of natural rubber and synthetic rubber (Total Demand) (000 MT) = Crude oil monthly price (US$/barrel) = Real monthly average exchange rate (Malaysia Ringgit (RM) per US$) (RM/US$) = Time trend, 1990 Jan: to 2008 Dec: = error term (3) = Total consumption of natural rubber and synthetic rubber (Total Demand) (000 MT) = Real monthly price of RSS1 in New York (US$ /MT) deflated by the CPI. = Time trend, 1990 Jan: to 2008 Dec: = error term PSMR20 = Real monthly price of SMR20 in Malaysia (US$ /MT) deflated by the CPI. (2) = Total production of natural rubber (Total Supply) (000 metric tonnes) (MT) = Time trend, 1990 Jan: to 2008 Dec: = error terms PSMR20 = Real monthly price of SMR20 in Malaysia (US$ /MT) deflated by the CPI. = (PSMR20t-i, TPNRt-i, T, e ti ) (1)

STONR = World total stock of natural rubber (000 MT)

Therefore, the single-equation econometric models of the short-term supply, demand and price

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forecasting can be specifically described of the Malaysian natural rubber market in Figure 2.

World Price

Real Average Exchange Rate Current World Total Stock Malaysian Current NR Price

Crude Oil Price

Current Total Consumption of NR & SR

Current Total Production of NR

Real Price of NR

Real Price of RSS1

Real Price of NR

Figure 2. The Short-term Supply, Demand and Price Forecasting Model in the Malaysian Natural Rubber Market.
(Source: Own Findings)

Based on earlier studies, the price forecasting model equations can come from many sources: they can be simple identities, they can be the result of estimation of single-equations, or they can be the result of estimation using any one of multiple equation estimators. As mentioned when discussing the specification of the price forecasting single-equation model in verbal terms as spelled out in the previous sections, it is the intention to estimate and analyse the relationship between the prices of natural rubber and total production of natural rubber, total consumption of natural rubber and synthetic rubber, world total stock of natural rubber, and to include the crude oil monthly price and real monthly average exchange rate as an important explanatory variables. The price forecasting single-equation model will be used to ex-ante forecast of the short-term monthly natural rubber price of SMR20 (US$ /MT) in the Malaysian Natural Rubber market.

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Therefore, in the previous section it was primarily shown with single-equation models of supply, demand and price of NR. Here, it is needed to contemplatively justify of the price forecasting single-equation model specification and perhaps also some comparisons with other model specifications which are for the forecasting performance of the estimated model is satisfactory and to diagnose the variation in the errors in a set of forecasts. Moreover, in a single-equation model, the dependent variable is related to a set of explanatory variables and they do not explain the interdependencies that may exist between the explanatory variables or show how these explanatory variables are related to other variables. In addition, single-equation models explain causality only in one direction; i.e., explanatory variables determine a dependent variable, but there is no feedback relationship between the dependent variable and the explanatory variables. Therefore, the standard econometric issues related to the identification in simultaneous supplydemand equation model which is clearer to explain for the interrelationships within a set of variables and how the problem of endogeneity occurs. It means that whether the independent variable is correlated with the error term in the model or not. Also, the variables refer to a lagged or contemporaneous observation and to improve communication and presentation of the paper. Simultaneous Supply- Demand Equation Model The simultaneous equation model is a two-equation model of market demand and supply where price and quantity are both endogenous variables (Ferris, 1998), (Pindyck and Rubinfeld, 1998) and (Gujarati, 2003). The model deals with directly to the interaction of supply and demand in establishing prices without separately using the single-equations of supply, demand and price. Price and supply are endogenous. Besides, jointly determined price and demand and they are also endogenous variables. Others are exogenous variables. A simultaneous-equation model includes several endogenous variables which are simultaneously determined by an interrelated series of equations. If any time there will be a change in the variance of the residuals (et), there is a simultaneous change in price (p). Therefore, the simultaneous equations model will be substantially compared to the single-equation of the supply, demand and price forecasting model are considered in this paper. Following is the model (in logs) with price dependent supply and demand illustrating the dynamics of such models. Supply ; TPNRt = a0 + a1 PSMR20t-1 + a2 TPNRt-1 + et Demand ; TCNRt = b0 - b1 PSMR20t + b2 TCNRt-1 - b3 RSS1t + et (4) (5)

Assuming the sign on a1 is positive and on b1, b3 is negative. Therefore, we can write for the price dependent equation for supply in supply equation (6) as. PSMR20t-1 = a0 + (a1 + a2) (TPNRt-1) + et equation (7) as: TCNRt = (b0 + b1 a0) - b1 (a1 + a2) (TPNRt-1) + b2 TCNRt-1 - b3 RSS1t + et (7) (6) Equation (6) will be substituted into demand equation (5). We can see the demand simultaneous

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Moreover, the model with price dependent equation for demand in demand equation (5) and then we can write as follows: PSMR20t = b0 - (b1 + b2) (TCNRt-1) + b3 RSS1t + et as follows: TPNRt = (a0 + a1b0) - a1 (b1 + b2) (TCNRt-1) + a1b3 RSS1t + a2 TPNRt-1 + et (9) (8) Equation (8) will be substituted into supply equation (4). We can see the supply simultaneous equation

If exports and imports are negligible, Supply = Demand. Therefore, supply equation (4) and demand equation (5) will be a0 + a1 PSMR20t-1 + a2 TPNRt-1 + et = b0 + b1 PSMR20t + b2 TCNRt-1 + b3 RSS1t + et Therefore, we can write the price simultaneous equation (in logs) as follows: (a1 - b1) PSMR20t = (-a0 + b0) - a2 TPNRt-1 + b2 TCNRt-1 + b3 RSS1t PSMR20t = - (a0 - b0)/(a1 - b1) + a2 TPNRt-1 - b2 TCNRt-1 + b3 RSS1t Seasonality Test Before making to forecast of the monthly time series data, we need to look for data patterns as; time series data are included historical pattern and random variation. There are four basic patterns of data: level or horizontal, trend, seasonality, and cycle pattern. It is needed to describe and explain by using such as autocorrelations (ACs) and partial-autocorrelations (PACs) functions. Computation of the autocorrelations (ACs) and partial-autocorrelations (PACs) functions for the monthly natural rubber price of SMR20 (US$ /MT) variable indicates seasonality of the data series and this is obvious from Table 5.
Table 5. Seasonal autocorrelations (ACs) and partial-autocorrelations (PACs) functions for the monthly natural rubber price of SMR20 (US$ /MT)
Lag 12 24 36
Source: Own Data Calculation

(10)

ACs 0.58 0.21 -0.13

PACs -0.02 0.07 -0.02

Table 5 shows the possibility of seasonality in the world natural rubber price SMR20 with the ACs and PACs functions. They measures how strongly time series values at a specified number of periods apart are correlated to each other over time. In Table 5, the ACs and PACs for the price series are small and the type of seasonality indicates an additive seasonal pattern. Additive seasonal patterns are somewhat rare in nature, but a time series data that has a natural multiplicative seasonal pattern is converted to one with an additive seasonal pattern by applying a logarithm transformation to the original data. Therefore, if we are using seasonal adjustment in conjunction with a logarithm transformation for forecasting procedures, we probably should use additive rather than multiplicative seasonal adjustment.

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Unit Root Test Next, it is also needed to develop the time series into a stationary one by using the unit root test for NR price in a series. Pindyck and Rubinfeld (1998), Ferris (1998), Clements and Hendry (2001), Gujarati (2003), and Enders (2004) explained that most of time series variables are non stationary, with mean and variance non constant (unit root). If the data contained unit root, the data are called non stationary, which lead to spurious regression result. Therefore, the unit root test checks for stationarity of the data series. The natural rubber price SMR20 variable (PSMR20) for unit root was tested in Table 6. The natural rubber price SMR20 variable (PSMR20) has been tested for stationary, using Augmented Dickey Fuller (ADF) and Phillips-Perons tests (PP) for unit root. The results of the unit root test, which are presented in Table 6. The natural rubber price SMR20 variable (PSMR20) at the level data (original data form) only is not stationary for unit root and the price variable is significant stationary at the first difference form at the 0.01 level using Augmented Dickey Fuller (ADF) and Phillips-Perons tests (PP) for unit root.
Table 6. Unit-root tests for the monthly natural rubber price of SMR20 (US$ /MT)
Variables Unit Root Test st Level 1 differ ADF P-P ADF P-P -1.93 -1.97 -6.36*** -3.46 -2.87 -9.09*** -3.49 -2.94 Stationary st Level 1 differ St

PSMR20 1% critical value 5% critical value

Source: Own Data Calculation Note: St: Stationary included **: Statistically significant at the 0.05 level. ***: Statistically significant at the 0.01 level. ADF: Augmented Dickey-Fuller test statistic P-P: Phillips-Perron test statistic

Furthermore, the estimation method of the monthly short-term natural rubber supply, demand and price forecasting models will be explained using Vector Error Correction Method (VECM) with cointegration characteristics of the data. Model Estimation Vector Error Correction (VECM) Method A vector error correction (VEC) method was a restricted vector autoregression (VAR) designed for use with non-stationary series that were known to be cointegrated (Gilbert, 1986 and Hendry and Ericsson, 2001). The VEC had cointegration relations built into the specification so that it restricted the longrun behavior of the endogenous variables to converge to their cointegrating relationships while allowing for short-run adjustment dynamics. The cointegration term was known as the error correction term since the deviation from long-run equilibrium was corrected gradually through a series of partial short-run adjustments (Engle and Granger, 1987). An ECM was developed in two

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stages. First, a general autoregressive distribute lag equation was specified, which explained an endogenous variable by its current and own lagged exogenous variables. Second, this equation was manipulated to reformulate it in terms that were more easily interpreted, producing a term representing the extent to whether the long-term equilibrium was met. The last term, one of the unique features of this approach, was called an error-correction term since it reflected the current "error" in achieving long-run equilibrium. Therefore, the relationship between variables, and with this specific relationship, there will be a series of residuals. If the residual has a pattern, and if residual are stationary, the two variables are cointegrated and there is a long run relationship between the two variables and if residuals are random walk, the two variables are not cointegrated. Model Simulation The comparison of the forecast accuracy of the natural rubber supply, demand and price forecasting models were evaluated to generate and firstly, the data used from January 1990 to December 2006 for estimation, with observations from January 2007 to June 2007 reserved for expost forecast in Figure 3. Similarly, the data used from January 1990 to June 2007 for estimation, with observations from July 2007 to December 2007 reserved for ex-post forecast. The data was subsequently employed for ex-post forecast from July 2008 to December 2008. Only data up from January 1990 to December 2008 was generated for estimation, with observations from January 2009 to June 2009 reserved for ex-ante forecasts.
(FORECASTING)

Backcasting

Ex-post simulation or Historical simulation

Ex-post forecast

Ex ante forecast

Time, t Jan07 to June07 July07 to Dec07 Jan08 to June08 Jan 2009 to June 2009

July08 to Dec08 T1 January 1990 T2 December 2006 T3 (Today) December 2008

Estimation period

Figure 3. Simulation time horizons

(Source: Own Data Calculation)

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Model Evaluation Performance of the model is measured by the validity of its estimate on the basis of its forecasting power (Makridakis, 1983) and (Pindyck and Rubinfeld, 1998). The forecasting ability is tested based on the Root Mean Squared Error (RMSE), the Mean Absolute Error (MAE) and Theils Inequality Coefficients (U) criteria. In ex-ante forecast, the RMSE of all the endogenous variables are less than one percent and the values of MAE are all small. The values of the U are all nearly zero which is that the forecasting performance of the estimated model is satisfactory. The MAE and the RMSE can be used together to diagnose the variation in the errors in a set of forecasts. The values of fraction of error due to bias (how far the mean of the forecast is from the mean of the actual series) U<SUP>m are also all very close to zero, indicating the non-existence of a systematic bias. The values of fraction of error due to variation (how far the variation of the forecast is from the variation of the actual series) U<SUP>s and the values of fraction of error due to covariation (the covariance proportion measures the remaining unsystematic forecasting errors) U<SUP>c are also small and less than one which indicated that the model is able to replicate the degree of variability in the variable of interest. Results and Discussion Supply Table 7 shows the estimated structural equation of supply log-linear model. The equation as a whole explains about 60 percent of the variation in supply. The coefficient of price of SMR20 measures the proportional change in total production of natural rubber (TPNR) for a given proportional change in price of SMR20. Therefore, a 1 percent increase in price of SMR20 in Malaysia, other things unchanged, increases total production of natural rubber (TPNR) by 0.12 percent with statistically significance at the 0.01 level. Burger and Smit (2000) also reported that for the short-term supply log-linear model, a 1 percent increase in price of RSS1 in Singapore, other things unchanged, increases the total production of natural rubber (TPNR) by 0.15 percent, 0.06 percent, 0.18 percent and 0.07 percent in Malaysia, Indonesia, Thailand and Philippines, respectively. The results of the ex-ante forecast of Malaysian natural rubber production using single econometric equation model is presented in Figure 4. Based on these forecasts, Malaysian natural rubber production in June 2009 is predicted to decrease to around 6.4 million metric tonnes (MT), a decrease of 14.7 percent (around 7.5 million MT) when compared with December 2008.

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Table 7. Results of short-term NR supply model to determine structural equation

Vector Error Correction Estimates Sample (adjusted): 1990M03 2008M12 Included observations: 226 after adjustments Error Correction: CointEq1 D(TPNR) -0.144604*** (0.10382) [-11.9742] D(TPNR(-1)) 0.070497 (0.06774) [1.48813] D(PSMR20(-1)) 0.116990*** (0.00487) [5.23286] C -0.416555 (0.00692) [-0.42487] R-squared Adj. R-squared 0.603134 0.597747 D(PSMR20) -0.033987*** (0.00173) [-5.55254] 0.013772 (0.00113) [1.22361] 0.383814*** (0.06322) [6.07071] 0.022681 (0.07160) [0.31678] 0.156383 0.144931

Source: Own Data Calculation Note: Adjustment coefficients are in bold. Standard errors in ( ) and t-statistics in [ ]. Note: *** Statistically significant at the 0.01 level, ** at the 0.05 level, and * at the 0.10 level.
1000 M alaysian Natural Rubber Production (000 M T) 900 800 700 600 500 400 300 200 100 2008M06 2008M07 2008M08 2008M09 2008M10 2008M11 2008M12 2009M01 2009M02 2009M03 2009M04 2009M05 2009M06 0

Periods TPNR (000, MT) Actual TPNR (000, MT) Ex Ante Forecast

Figure 4. Ex-ante Forecast of Malaysian Natural Rubber Production (000, MT) from June 2008 to June 2009. Demand The estimated structural equation of demand log-linear model is shown in Table 8. The equation as a whole explains about 70 percent of the variation in demand. Moreover, a 1 percent increase in price of SMR20 in Malaysia, other things unchanged, decreases total consumption of rubber (TCNR) by 0.039 percent with statistically significance at the 0.01 level. Also, a 1 percent increase in price of RSS1 in New York, other things unchanged, decreases total consumption of rubber (TCNR) by 0.028 percent with statistically significance at the 0.01 level. However, the total consumption of rubber in the previous period is not significant at the 0.01 level in the demand model. Burger and Smit

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(2000) also reported that the short-term demand log-linear model for the world as a whole, a 1 percent increase in price of RSS1 in Singapore, on average, has the adverse effect of decreasing the total consumption of rubber (TCNR) by 0.026 percent.
Table 8. Results of short-term NR demand model to determine structural equations
Vector Error Correction Estimates Sample (adjusted): 1990M03 2008M12 Included observations: 226 after adjustments Error Correction: CointEq1 D(TCNR) -0.134517 (0.00124) [-1.08693] D(TCNR(-1)) 0.266442 (0.06473) [3.11590] D(PSMR20(-1)) -0.039660*** (0.06021) [-6.15695] D(RSS1(-1)) -0.028345*** (0.07107) [-5.00370] C -0.742562 (0.20141) [-3.68690] R-squared Adj. R-squared 0.702320 0.696908 D(PSMR20) 0.042613*** (0.00219) [5.26168] -0.170198 (0.11445) [-4.48712] 0.187813 (0.10645) [4.76437] 0.156029 (0.12565) [1.24173] 0.024164 (0.06974) [0.34649] 0.203352 0.188868 D(RSS1) 0.038434*** (0.00182) [5.11697] -0.177400 (0.09493) [-3.86882] 0.065440 (0.08829) [2.74119] 0.317592 (0.10422) [3.04730] 0.029208 (0.06386) [0.45737] 0.187172 0.172394

Source: Own Data Calculation Note: Adjustment coefficients are in bold. Standard errors in ( ) and t-statistics in [ ]. Note: *** Statistically significant at the 0.01 level, ** at the 0.05 level, and * at the 0.10 level.

The results of the ex-ante forecast of Malaysian total rubber consumption using single econometric equation model is presented in Figure 5. The forecasts predict that Malaysian total rubber consumption would increase to around 15.7 million MT in June 2009, an increase of 11.5 percent (around 13.9 million MT) from December 2008.
2000 1800 1600 1400 1200 1000 800 600 400 200 0

M alaysian Total R ubber

C onsum ption (000 M T)

2008M 06

2008M 07

2008M 08

2008M 09

2008M 10

2008M 11

2008M 12

2009M 01

2009M 02

2009M 03

2009M 04

2009M 05

Pe riods TCNR (000, MT) Actual TCNR (000, MT) Ex Ante Forecast

Figure 5. Ex-ante Forecast of Malaysian Total Rubber Consumption from June 2008 to June 2009.

2009M 06

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Price
Table 9. Results of short-term NR price model to determine structural equation
Vector Error Correction Estimates Sample (adjusted): 1990M03 2008M12 Included observations: 226 after adjustments Error Correction: CointEq1 D(PSMR20) -0.020331 (0.00234) [-0.86900] D(PSMR20(-1)) 0.280764 (0.06985) [ 4.01942] 0.076951 (0.04934) [0.15597] -0.102621 (0.12529) [ -0.81904] D(STONR(-1)) -0.061975 (0.12503) [-0.49567] D(COP(-1)) 0.054152 (0.06106) [ 0.88680] D(EXM(-1)) -0.458843 (0.22612) [ -2.02920] C 0.000123 (0.00492) [0.02492] 0.394987 0.365927 D(TPNR) -0.161465*** (0.00295) [-5.47181] 0.098304 (0.08811) [1.11563] 0.043678 (0.06224) [ 0.70180] -0.903993 (0.15805) [-5.71955] 0.189204 (0.15772) [1.19961] 0.020602 (0.07703) [ 0.26746] -0.116587 (0.28524) [-0.40873] -0.003912 (0.00620) [-0.63063] 0.284244 0.261261 D(TCNR) 0.710524*** (0.00116) [ 6.12647] -0.043525 (0.03463) [-1.25685] -0.149403 (0.02446) [-6.10810] 0.131083 (0.06212) [2.11027] -0.122740 (0.06199) [-1.98013] 0.127800 (0.03027) [ 4.22158] -0.048145 (0.11210) [-0.42948] -0.000567 (0.00244) [-0.23265] 0.309640 0.287472 D(STONR) 0.590223 (0.00148) [ 3.97572] -0.030100 (0.04433) [-0.67901] 0.042041 (0.03131) [ 1.34269] -0.136772 (0.07952) [-1.72008] 0.080140 (0.07935) [1.00997] 0.026371 (0.03875) [0.68050] -0.072181 (0.14350) [-0.50300] 0.002519 (0.00312) [ 0.80715] 0.160368 0.133407 D(COP) -0.141512 (0.00262) [-0.54069] 0.114720 (0.07815) [ 1.46802] 0.011733 (0.05520) [ 0.21257] 0.048424 (0.14017) [ 0.34546] 0.137328 (0.13988) [0.98177] 0.340415 (0.06831) [ 4.98304] 0.101559 (0.25297) [0.40147] 0.001212 (0.00550) [ 0.22022] 0.145401 0.117960 D(EXM) 0.383251 (0.00069) [0.55840] -0.064877 (0.02046) [-3.17134] -0.013201 (0.01445) [-0.91363] -0.032060 (0.03669) [-0.87370] -0.015161 (0.03662) [-0.41404] 0.008239 (0.01788) [ 0.46068] 0.182269 (0.06622) [ 2.75236] 0.000974 (0.00144) [ 0.67652] 0.095869 0.066837

D(TPNR(-1))

D(TCNR(-1))

R-squared Adj. R-squared

Source: Own Data Calculation Note: Adjustment coefficients are in bold. Standard errors in ( ) and t-statistics in [ ]. Note: *** Statistically significant at the 0.01 level, ** at the 0.05 level, and * at the 0.10 level.

Table 9 also shows the single-equation model of short-term monthly natural rubber price PSMR20 and the explanatory variables accounted for about only 39 percent of the variation in the monthly natural rubber price. Therefore, a 1 percent increase in price of SMR20 in Malaysia (US$/MT), other things unchanged, increases total production of natural rubber (TPNR) by 0.16 percent with statistically significance at the 0.01 level. Moreover, a 1 percent increase in price of SMR20 in Malaysia (US$/MT), on average, has the adverse effect of decreasing the total consumption of natural rubber and synthetic rubber (TCNR) by 0.71 percent with statistically significance at the 0.01 level. Therefore, they are cointegrated meaning that there is a long run relationship between the

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total production of natural rubber (TPNR), total consumption of natural rubber and synthetic rubber (TCNR) and price of SMR20 in the single-equation of price econometric forecasting model . Simultaneous Supply- Demand Model
Table 10. Results of simultaneous supply-demand model of short-term NR price to determine structural equations
System Equations Sample: 1990M02 2008M12 Included observations: 227 Dependent Independent Variable Variable Supply (TPNRt) PSMR20t-1 TPNRt-1 TCNR t-1 RSS1 t-1 C 0.801406 0.797827 0.099843 0.063575 PSMR20t-1 TPNRt-1 TCNR t-1 RSS1 t-1 C 0.922172 0.920769 0.042217 0.034866 PSMR20t-1 TPNRt-1 TCNR t-1 RSS1 t-1 C 0.968882 0.968322 0.075936 0.231554 PSMR20t-1 TPNRt-1 TCNR t-1 RSS1 t-1 C 0.977968 0.977571 0.062630 0.316467 -0.036796 -0.053375 0.886147 -0.033272 -0.483504 S.D. dependent var Sum squared resid 0.970446 0.011217 -0.076001 0.001512 0.413974 0.053889 0.040010 0.060865 0.055193 0.289922 18.00837 0.280357 -1.248667 0.027399 1.427880 0.029960 0.022244 0.033839 0.030685 0.161185 1.228191 -4.399543 26.187421 -1.084325 -2.999684 0.2197 0.0166** 0.0000*** 0.2785 0.0028 7.267020 0.149984 0.395673 0.0000*** 0.7793 0.2121 0.9781 0.1537 2.338468 0.426646 0.280123 0.044446 0.032999 0.050200 0.045521 0.239118 2.219800 0.894498 -1.948207 19.31190 -1.925172 0.0267 0.3713 0.0517 0.0000*** 0.0545 2.412712 0.418189 0.370792

Summary Statistics of the Regression Coefficients Coefficient Std. Error t-Statistic Prob. 0.130861 0.656709 -0.377657 0.141314 -0.605758 0.070854 0.052606 0.080028 0.072569 0.381198 2.043560 12.48356 -4.719083 1.194727 -1.589090 0.1653 0.0000*** 0.0000*** 0.3457 0.1124 6.345908 0.222053 0.213044

R-squared Adj: R-squared S.E. of regression Durbin-Watson stat Demand (TCNRt)

Mean dependent var S.D. dependent var Sum squared resid

R-squared Adj: R-squared S.E. of regression Durbin-Watson stat Price (PSMR20t)

Mean dependent var

R-squared Adj: R-squared S.E. of regression Durbin-Watson stat Price (RSS1t)

Mean dependent var S.D. dependent var Sum squared resid 0.098660 0.029517 -0.097800 0.879103 0.460344 S.D. dependent var Sum squared resid

R-squared Adj: R-squared S.E. of regression Durbin-Watson stat

Mean dependent var

STONRt = STONRt-1 + TPNRt TCNRt Source: Own Data Calculation Note: *** Statistically significant at the 0.01 level, ** at the 0.05 level, and * at the 0.10 level.

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Table 10 also shows the results of the short-term natural rubber price monthly simultaneous supply-demand equation model by using the system equations and all the estimated coefficients in the equations show the expected signs. Firstly, the explanatory variables accounted for about 80 percent of the variation in the monthly natural rubber supply model. Estimations reveal that the explanatory variables, namely the total production of natural rubber in the previous period and total consumption of natural rubber and synthetic rubber (TCNR), were the most important explanatory variables with statistically significance at the 0.01 level in the supply model. Likewise, the explanatory variables accounted for about 92 percent of the variation in the monthly natural rubber demand model. Estimations reveal that the explanatory variables, namely the total production of natural rubber (TPNR) and total consumption of natural rubber and synthetic rubber in the previous period, were the most important explanatory variables with statistically significance at the 0.01 level in the demand model. Moreover, the explanatory variables accounted for about 97 percent of the variation in the monthly natural rubber price (SMR20) model. Estimations reveal that the explanatory variable, namely the price of SMR20 in the previous period was the most important explanatory variable with statistically significance at the 0.01 level in the price SMR20 model. Likewise, the explanatory variables accounted for about 98 percent of the variation in the monthly natural rubber price (RSS1) model. Estimations reveal that the explanatory variable, namely the price of RSS1 in the previous period only was the most important explanatory variable with statistically significance at the 0.01 level in the price RSS1 model . The results of the comparison of ex-ante forecast of Malaysian natural rubber SMR20 (PSMR20) monthly price (US$ per MT) using single and simultaneous supply-demand equation models are presented in Table 11 and Figure 6. The comparative forecasting power was based on the forecasting power of the Root Mean Square Error (RMSE), Mean Absolute Error (MAE), Theils Inequality Coefficients (U) criteria and fraction of error due to bias (U<SUP>m), fraction of error due to variation (U<SUP>s) and fraction of error due to covariation (U<SUP>c). The results revealed that the values of the RMSE, MAE and U of simultaneous supply-demand equation model were comparatively smaller than the values generated by the single-equation of the price econometric model. These statistics suggested that the simultaneous equation of supply-demand model was more efficient measured in terms of its statistical criteria than the single-equation of price econometric model. The models solved dynamically for ex-ante forecasts, over for the period of January 2009 - June 2009 from the econometric, and simultaneous supply-demand models are presented in Figure 6 and the estimations made are based on data from period January 1990 December 2008. The Malaysian natural rubber price of natural rubber (SMR20) is expected to increase to around US$ 1700 per MT in June 2009, an increase of 28.8 percent from December 2008 with US$ 1376.57 per MT.

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In addition, the values of fraction of error due to bias (U<SUP>m) were also all very close to zero, indicating the non-existence of a systematic bias. The values of fraction of error due to variation (U<SUP>s) and fraction of error due to covariation (U<SUP>c) were also small and less than one indicating that the model was able to replicate the degree of variability in the variable of interest. Thus a revision of the model was not necessary. The Theils Inequality Coefficient (U) was less than one which meant that the forecasting performance of the estimated model was satisfactory.
Table 11. Ex-ante forecast of monthly Malaysian natural rubber price SMR20 (US$ per MT) from June 2008 to June 2009 and model evaluations
Period 2008.06 2008.07 2008.08 2008.09 2008.10 2008.11 2008.12 2009.01 2009.02 2009.03 2009.04 2009.05 2009.06 RMSE MAE U-STAT (U<SUP>m) (U<SUP>s) (U<SUP>c)
Source: Own Data Calculations
4000 3500 N atural R ubbe rP ric eS M R 2 0 3000 (U S $ pe rM T) 2500 2000 1500 1000 500 0 20 0 8.0 6 20 0 8.0 7 20 0 8.0 8 20 0 8.0 9 20 0 8.1 0 20 0 8.1 1 20 0 8.1 2 20 0 9.0 1 20 0 9.0 2 20 0 9.0 3 20 0 9.0 4 20 0 9.0 5 20 0 9.0 6

Actual Price 3457.5800 3530.9611 3266.2761 3144.3619 2150.9165 1891.6306 1376.5662

Single-equation of Price Forecast Econometric Model 3367.6977 3624.1565 3135.1684 2992.8272 2023.5626 1847.3433 1228.1343 1508.1695 1634.2466 1759.6314 1849.2314 1927.6314 1924.8314 0.334 0.276 0.058 0.000 0.068 0.932

Simultaneous Equation of Price Forecast Econometric Model 3477.8518 3578.5458 3260.5059 3169.4698 2125.3833 1960.7289 1412.1854 1576.8292 1620.8233 1656.6692 1702.2697 1780.9653 1775.2114 0.093 0.068 0.019 0.000 0.013 0.987

Pe riods

Acutal Price

Econom etric

Sim ultaneous

Figure 5. Ex-ante Forecast of Malaysian Natural Rubber Price SMR20 (US$ per MT) from June 2008 to June 2009.

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Conclusion Based on the results of the above analysis, simultaneous supply-demand equation models ex-ante forecast was more efficient measured either in terms of its statistical criteria or even by visual proximity with the actual prices. Being such an important commodity to Malaysia and World market, an accurate estimation methodology for natural rubber are vital to forecast the NR supply, demand and price for decision-making process in economic planning including a price stability mechanism. The results show that Malaysian natural rubber production would be on a down trend. Iit would be interesting to factor for the natural rubber production increased of the Malaysian NR industry as well as the government assistance programs for smallholders, which increased tree and land productivity, ensuring of full government support and eradicating of poverty level to them, and finally well regulated NR trading. The results show that Malaysian total rubber consumption would be on an increasing trend and it is due to Chinas demand which grew by 5.1 percent annually and estimated to reach nearly 1.6 million MT by 2010. World rubber consumption is forecast to increase 4.0 percent annually to 26.5 million metric tons in 2011. Gains will directly benefit from solid growth in world motor vehicle production, as well as a strong global economy. The China, US and Japan dominate global rubber consumption, and will continue to do so, collectively accounting for more than half of the market in 2011. China has become the leading consumer of rubber worldwide, following more than a decade of strong growth in motor vehicle production and industrial goods manufacturing. The country overtook Japan as the second largest rubber market in the late 1990s and by 2001 had essentially caught up to the US as the worlds leading consumer. While China will continue to extend that lead, the US and Japan will remain leading markets worldwide, because of their extensive motor vehicle and tire industries (The World Tire & Rubber Market Report, 2007). The results revealed that Malaysian natural rubber price SMR20 predicted to increase and it would likely lead to higher production. The Malaysian rubber industry would be produced positive net trade flows, provided steady employment and also consistent earnings for the natural rubber producing countries. If the extremely low prices experienced during these years and it would be contributed to increase rural poverty in many countries, especially rubber smallholders in South East Asia and also due to the result of a widespread global recession, with low underlying global demand. A forecast if found to be way off target when actual data become available may lead to model revision. The forecasting is related to the current and expected fundamentals of the natural rubber producers and consumers as well as traders and planners for new investment decisions in the natural rubber markets. Hence, a price forecasting mechanism is necessary to guide market participants in their production, consumption and financing decisions. Forecasts using other price

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forecasting models and such as short-term and together with long-term price forecasts, which were not attempted for this study, could also be potentially beneficial for future work. References 1. ANRPC (Association of Natural Rubber Producing Countries) (2009). Monthly Bulletin of Rubber Statistics, 1(3). 2. Burger, K., and H. P. Smit. (1997, 2000). Long-term and short-term analysis of the natural rubber market. Department of Econometrics, Economic and Social Institute, Faculty of Economics and Business Administration, Vrije University, De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands. 3. Barlow, C., Jayasuriya, S. and Tan, C. S. (1994). The World Rubber Industry. London: Routledge. 4. Christ, C. F. (1994). Simultaneous Equation Estimation: International Library of Critical Writings in Econometrics, xi - xxii. 5. Clements, M. P. and Hendry, D. F. (2004). A Companion to Economic Forecasting. Blackwell Publishing, 350 Main Street, Malsen, MA 02148-5020., USA. 6. Djoko Said Damardjati. (2009). Outlook on global supply of natural rubber, National Rubber Economic Conference 2009, Malaysian Rubber Board. 7. Enders, W. (2004). Applied Econometric Time Series. University of Alabama. www.wiley.com/college/enders.s 8. Fatimah Mohd, Arshad and Zainalabidin Mohamed. (1994). Price discovery through crude palm oil futures market: An economic evaluation. In Erdener Kaynak and Mohamed Sulaiman in proceedings on Third Annual Congress on Capitalizing the Potentials of Globalization Strategies and Dynamics of Business, Penang. 9. Ferris, John N. 1998. Agricultural Prices and Commodity Market Analysis. 10. Gujarati, D. (2003). Basic Econometrics (4th Edition). McGraw-Hill, Inc. 11. International Rubber Study Group (IRSG), Rubber Industry Report: April/June/July, 2009. 12. King, T. M. (2002). Using simultaneous equation modeling for defining complex phenotypes. 13. Krichene, N. (2005). A simultaneous equations model for world crude oil and natural gas markets. IMF Working Paper WP/05/32. 14. Kamarul Baharain bin Basir. (2009). Sustainability and competitiveness of the Malaysian NR industry, National Rubber Economic Conference 2009, Malaysian Rubber Board. 15. Lim, J. Y. (2002). An Evaluation of Alternative Forecasting Models for Natural Rubber Prices, Curtin University of Technology, Australia. 16. Mad Nasir Shamsudin and Fatimah Mohd Arshad. (1998). Short Term Forecasting of Malaysian Crude Palm Oil Prices, http://www.econ.upm.edu.my/-fatimah/pipoc-.html. 17. Makridakis, S. (1983). Forecasting: Methods and Application. New York: John Wiley & Sons, Inc. 18. Malaysia Rubber Board (MRB). (2009). Surviving the Economic Doldrums: The Way Forward; National Rubber Economic Conference Papers. 19. OECD-FAO. (2008). Short-term Economic Outlook. Agriculture and Rural Development: Agricultural Trade Policy Analysis unit. http://ec.europa.eu/agriculture/publi/map/index_en.htm 20. Pindyck, Robert S. and Rubinfeld, Daniel L. (1998). Econometric Models and Economic Forecasts. (4th ed.). Copyright by the McGraw-Hill Companies, Inc. 21. Tan, C. S. (1984). World rubber market structure and stabilization: An econometric study. World Bank Staff Commodity Papers. No. 10. 22. World Tire & Rubber Market Report. (2007). http://www.reportlinker.com/p075716/World-Tireand-Rubber-Market.html

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