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Short-Term Price Forecasting of Natural Rubber in the World Market

Conference Paper · October 2008

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 SHORT TERM PRICE FORECASTING OF
NATURAL RUBBER IN THE WORLD MARKET

By

AYE AYE KHIN, EDDIE CHIEW F. C, MAD NASIR SHAMSUDIN,

ZAINAL ABIDIN MOHAMED

Email: ayeaye5@yahoo.com, eddie@econ.upm.edu.my, nasir@env.upm.edu.my,

zam@agri.upm.edu.my

Department of Agribusiness & Information Systems

Faculty of Agriculture
University Putra Malaysia
Kuala Lumpur
Malaysia
 Short-Term Price Forecasting of Natural Rubber in the World Market

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

ABSTRACT

The paper presents a number of some short-term ex ante and ex post forecasts of natural
rubber (NR) prices in the world market. The multivariate autoregressive-moving average
(MARMA) model, which integrates the normal autoregressive-integrated-moving average
(ARIMA) and the econometric model by using Vector Error Correction Method, they were
developed to forecast short-run monthly prices of SMR20 in the world market. The
econometric model with specifications for production, consumption and prices, were
developed to determine the inter-relationships between NR production, consumption and prices,
to derive and forecast the various econometric models and for each forecast, to estimate and
analyze individually in terms of their comparative price forecasting correctness. The
models solved dynamically for ex ante forecasts, over for the period of January 2006 -
December 2010 and the models subsequently employed for ex post forecasts based on data from
period January 1990 - December 2006. The results indicated that the price of natural rubber
(PSMR20) is highly related to total consumption of natural rubber (000, tonne), exchange
rate of Malaysia RM to USD (RM/US$), price in the pervious period and a dummy (taking
the value in price) where they are significant at the 1 percent level. The price of natural rubber
(SMR20) is expected to remain firm and will increase to around US$ 2000 per tonne in 2010.

Keyword: Price Forecasting, Multivariate autoregressive-moving average, autoregressive-

integrated-moving average, econometric (Vector Error Correction), Natural Rubber, World Market

Introduction

From the Amazon basin, rubber has become significant industries in the developing
economies of South-East and South Asia such as Malaysia, Indonesia, Thailand, Sri
Lanka and India since the late 19th century. Rubber is now produced almost exclusively
in developing countries and Asia is the largest producing region. It is projected that total
production in Asia would reach 6.84 million tonnes with an annual growth rate of 1
percent by 2010. World natural rubber production increased from 6.79 million tonnes in
1999 and projected to increase to 7.87 million tonnes at an annual growth rate of 1.3
percent in 2010. Projections of total rubber consumption can be obtained by summing
adding the two components: namely rubber consumption in the tyre industry and in the
general rubber goods sector. Projections of total rubber consumption in Asia would reach
3.88 million tonnes with an annual growth rate of 2.8 percent by 2010. World natural rubber
consumption increased from 6.85 million tonnes in 1999 and projected to increase to 7.91
million tones at an annual growth rates of 1.3 percent in 2010 (IRSG, FAO Agricultural
commodity projections to 2010).

Natural rubber is a vital commodity used in the manufacture of a wide range of rubber-
based products. Rubber (Hevea brasillensis) plays a major role in the socio-economic fabric
of many developing countries. Over 20 million families are dependent on rubber cultivation
for their livelihood in the world natural rubber market (http://www.irrdb.com/irrdb/
1
. Ph.D Candidate ayeaye5@yahoo.com, Department of Agribusiness & Information Systems, Faculty of Agriculture, Universiti
Putra Malaysia (UPM), 43400 Serdang, Selangor, Malaysia. Tel: 0389464149, Fax: 0389464142.
2
. Lecturers, Department of Agribusiness & Information Systems, Faculty of Agriculture, UPM.

2
NaturalRubber/) in 2008. Many of these small growers have holdings of only less than two
hectares. The years 1997 to 1999 as shown in Figure 1 as well as in the year 2000 were
turbulent years for the economies in South-East and East Asia. The extremely low prices
experienced during these years contributed to increased rural poverty in many countries,
especially rubber smallholders in South East Asia.
The fundamental influencing NR prices are demand and supply factors, while all other
factors have indirect effects through changes in the fundamentals of demand and supply.
For example, an improvements in the world economy leads to an increase in rubber demand,
a fall in the price of natural rubber relative to synthetic rubber influences a declining
share of synthetic rubber in total rubber consumption, and a weak currency exchange in
the producing countries encourages an increase in exports and concomitant output from
these producing countries and hence a rise in world natural rubber supply. Uncertain
weather, including haze, has also affected production. Table 1 shows that world natural
rubber supply-demand relationships and natural rubber supply was 8.6 million tonnes in 2004
and estimated to 9.3 million tonnes in 2008. Conversely, world natural rubber demand was 8.3
million tonnes in 2004 and estimated to reach 9.9 million tonnes in 2008. The years 2008 shows a
deficit situation in the world natural rubber supply at -0.54 million tonnes in 2008 (Table 1).
Table 1. World Supply-Demand Surplus/Deficit

Year 2004 2005 2006 2007 2008

a
Supply 8,634 8,703 8,890 9,040 9,340
Demanda 8,343 8,777 9,150 9,510 9,880
Surplus/Deficit 291 - 74 - 260 - 470 - 540
a
Rounded to nearest 10,000 tonnenes
Source: IRSG; Economist Intelligence Unit (October 2nd, 2006)

Table 2. World Natural Rubber Stocks

Year 2004 2005 2006 2007 2008

a
1 Qtr 2,277 2,389 2,425 2,177 1,250
2 Qtr a 2,192 2,231 2,110 1,989 1,000
a
3 Qtr 2,379 2,275 2,080 2,083 1,090
4 Qtr a 2,413 2,258 2,084 2,487 930
percent change 16.6 -6.4 -17.6 -31.0 -27.3
a
Rounded to nearest 10,000 tonnenes
Source: IRSG; Economist Intelligence Unit (October 2nd, 2006)

Changes to the world stock situation will also affect the price, supply and demand of
world natural rubber. Table 2 shows the stock of natural rubber was 2.4 million tonnes in
2004 and it reached 0.93 million tonnes in 2008. The deficit of world natural rubber stock
was -27.3 million tonnes in 2008. Moreover, the stock of NR, related to the changes in
price, supply and demand of NR, showed an increasing trend from 1999 onwards (Burger
and Smit, 2000). Tightness in the rubber market provides upward pressure on prices and
vice versa. Important factors in the long-term include technological innovation and
economic development. In the medium-term, i.e. 2-3 years ahead, rubber prices depend
mainly on the cyclical movement of the world economy. Then, there are fluctuations
influenced by various short-term factors such as weather, currency movements, futures
market activities, market interventions and irregular demand.

3
Agricultural commodities futures trading was introduced to provide an efficient price
discovery mechanism and to provide a hedging mechanism against the risk of price instability
(Fatimah and Zainalabidin, 1994). Like any other agricultural commodities, natural rubber was
subjected to significant price fluctuations (Figure 1). The volatility of the natural rubber prices is a
significant risk to producers, traders, consumers and others involved in the production and
marketing of the natural rubber. In situations of considerable uncertainty and high risk, price forecasts
are necessary to help in decision-making. Accurate price forecast is particularly important to
facilitate efficient decision making as there was considerable time lag between making output
decisions and the actual output of the commodity in the market (Mad Nasir and Fatimah, 1991).

2500.00

2000.00
(US$/ton)

1500.00

1000.00

500.00

0.00
1990.01

1990.08

1991.03

1991.10

1992.05

1992.12

1993.07

1994.02

1994.09

1995.04

1995.11

1996.06

1997.01

1997.08

1998.03

1998.10

1999.05

1999.12

2000.07

2001.02

2001.09

2002.04

2002.11

2003.06

2004.01

2004.08

2005.03

2005.10

2006.05

2006.12
Year

SMR20 RSS1

Figure: 1

In 2006, Thailand was the largest producer with an annual production of 2.69 million
tonnes (32percent of world’s NR production), followed by Indonesia at 2.45 million tonnes
(27percent) and Malaysia at 1.2 million tonnes (13percent). However in 2008, Indonesia was
the largest producer at 2.7 million tonnes, followed by Thailand at 2.6 million tonnes and
Malaysia at 1.29 million tonnes. China was the largest consumer at 2.3 million tonnes, (26
percent of world’s NR consumption), followed by U.S.A at 1.89 million tonnes (11 percent)
and Japan at 1.0 million tonnes (9.5percent) in 2008 (IRSG Rubber Bulletin Vol.61
No.8/Vol.61 No.9, May/June 2007 (http://www.weber-schaer. com/en.html).
Literature Review
This section presents some short term ex ante and ex post forecasting models of natural
rubber (NR) prices in the world market. The multivariate autoregressive-moving average
(MARMA) model, which integrates the normal autoregressive-integrated-moving average
(ARIMA) and the econometric model by using Vector Error Correction Method, were
developed to forecast short-run monthly prices of SMR20 in the world market. The
econometric model of the world natural rubber has specifications for production,
consumption and prices. The objectives of this paper are to determine the inter-
relationships between NR production, consumption and prices, to derive and forecast the
various econometric models and to estimate and analyze individually in terms of their
comparative price forecasting correctness. The models solved dynamically for ex ante
forecasts, over for the period of January 2006 - December 2010 and the models
subsequently employed for ex post forecasts based on data from period January 1990 -
December 2006. This paper will examine two major grades of NR, namely, the Standard
Malaysia Rubber (SMR20) and traditional Ribbed Smoke Sheet (RSS1). The Stand
Malaysia Rubber (SMR20) is the most commonly used specification in the industries and
its forecasting will be the focus of this paper.

4
Multiple forecasts for autoregressive-integrated moving-average (ARIMA) models are
useful in many areas such as economics and business forecasting. Mad Nasir and Fatimah
(2000) provided some short term ex ante forecasts of Malaysian crude palm oil prices.
The forecasts were derived from a multivariate autoregressive-moving average
(MARMA) model which integrates the normal autoregressive integrated moving average
(ARIMA) 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 econometric model. The forecast figures were discussed in relation to the current
and expected fundamentals of the palm oil market.

Burger and Smit (2000) studied the long-term and short-term analysis of the natural rubber
market. The essential elements of NR long-term supply model are: planted area, new
planting, replanting and uprooting, the age of the area and the yield profiles, technical
progress, other factors influencing normal production and prices. The variables used for
demand model are the NR share in total world rubber consumption, the ratio of the
Singapore RSS1 price of NR (in US$) and the US export unit value of SBR (Styrene-
Butadiene Rubber) (in US$) and also the short-term price model included world natural rubber
average production, world total rubber consumption, exchange rate, private world stocks, RSS1
price in Singapore (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.

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
are generally better than the simple regression models and the results can potentially be
beneficial to participants in the NR futures market.
Md Zakir (2006) developed and used ARIMA model of order (313)x(202)12 was selected
as the best model for both motor and mash prices and the model (312)x(302)12 was
selected as the best model for mung prices in Bangladesh for policy purposes as far as
price forecasts of the commodities were concerned. He also generated forecasts, namely,
historical, ex-post and ex-ante, using the familiar Box-Jenkins univariate time series
models. The models on the basis of which these forecasts have been computed were
selected by important information criteria such as Root Mean Squared Percent Errors
(RMSPE), Mean Percent Forecast Errors (MPFE) and Theil's inequality coefficients
(TICs). The smaller these values, the better are the forecasting performance of the model.
Ismail (2007) generally indicated that rubber industry of Malaysia has undergone important
structural changes, from an important raw product producer in its early years to a major
processed product manufacturer. He also stated that through research and development
and conductive government policies, have managed to become a major manufacturer of
processed rubber products. The rubber industry has always produced positive net trade flows,
provided steady employment and consistent earnings for the government. In addition, current
higher prices due to supply and demand factors as well as the rise in petroleum prices augur
well for the further development of the rubber industry in Malaysia.

Zainalabidin (2007) studied about the dilemma for the Malaysian Rubber Industry in facing
globalization. He explained that both world production and consumption were characterized by
increasing trends and it was quite an irony that Malaysian rubber production was contrary
to world production trend. This was due to an alternative crop (palm oil) that was less labor

5
intensive, experiences a less volatile world market price and higher return to investment in
Malaysia. However, world natural rubber production has increased due to the government
assistance programs for smallholders in major producing countries, which encouraged higher
tapping intensities which increased both tree and land productivity.
Methodology
ARIMA model
The autoregressive-integrated-moving average (ARIMA) model is discussed in detail in
Box and Jenkins (1994) and O’Donovan (1983). Briefly, this technique is a univariate
approach which is built on the premise that knowledge of past values of a time series is
sufficient to make forecasts of the variable in question. There are two types of basic Box-Jenkins
models: autoregressive (AR) models and moving-average (MA) models. In terms of the
original series such models are called integrated models and the AR and MA models may also be
combined to form by Auto Regressive, Integrated, Moving-Average (ARIMA) models.
After following the Box-Jeckins procedure, the model of ARIMA (1,1,1) was chosen. The
numbers inside the parentheses of ARIMA (1,1,1) model of order (p,d,q) refer to the order
of the autoregressive process, the degree of differencing required to induce stationary, and
the order of the moving average process, respectively. It meant that to find out what the
autocorrelation and partial autocorrelation pattern was for the series the monthly prices of
PSMR20t, we needed to determine the relationship between PSMR20t and PSMR20t-1 for
all t. Thus, PSMR20t was autocorrelated for lag 1; i.e., the autocorrelation for lag 1 was
nonzero. Otherwise, the autocorrelation for any lag greater than 1 was zero. In the ARIMA
model, the two stage least square method will be developed to forecast short-term monthly
natural rubber prices in the world market. The ARIMA model will be then used to
generate ex ante forecasts for the period of January 2006 to December 2010 and was then
fitted into the residual series from March 1990 to December 2006 which parameters the
following estimates as follow:

PSMR20t = (A1 PSMR20t-1 + ……Ap PSMR20t-p) - (B1 ε t-1 + ……Bq ε t-q) + ε t (1)
where PSMR20t is related to both past series values and past random errors and it was the
stationary series. In equation (1), ε t is a random disturbance assumed to be distributed as N (0,
σ2). The Ais are called autoregressive parameters and Bis are also called moving-average
parameters. The subscripts on the A’s and B’s are called the orders of the parameters. In
an AR model p is the order of the model, and in an MA model q is the order of the model.
The order of an ARMA model is expressed in terms of both p and q.
The stationary conditions for this model are:

/Φ1/ < 1 and /θ1/ < 1.

The Φ1PSMR20t-1 represented the fit to the series value PSMR20t, and Φ1 was also called
an AR parameter of order 1. The term θ1 εt-1 and εt represented the assumed random error
in the data at period t-1 and period t and θ 1 was also called a MA parameter of order 1. The
parameter diagnostics showed that any given value in price of PSMR20t was directly
proportional to the previous value PSMR20t-1 plus some random error εt and εt-1. That was,
what happens this period was only dependent on what happened last period, plus some current
random error. The term (- θ1 εt-1) was the use of the minus sign in front of θ1 was conventional
only and had no other significance.

6
MARMA Model
The multivariate autoregressive–moving-average (MARMA) model is well documented in
Makridakis and Wheelwright (1998) and Pindyck and Rubinfeld (1998). A brief
description of the model is discussed below. The multivariate autoregressive-moving
average (MARMA) model was developed to forecast short-run monthly prices of SMR20
in the world market. The model will also be used to generate ex ante forecasts for the
period of January 2006 to December 2010 based on data from period January 1990 to
December 2006.
Suppose that one would like to forecast a variable PSMR20t using an econometric model.
Presumably such a model would include explanatory variables which could provide an
explanation for movements in PSMR20t but which are not collinear. One effective
application of time-series analysis is to construct an ARIMA model for the residual series
εt of this regression. Then, the ARIMA model for the implicit error term was substituted
in the original regression equation. In using the equation to forecast PSMR20t, it is able to
make a forecast of the error term εt using the ARIMA moel. The ARIMA model provides
some information about what futures of εt are likely to be the unexplained variance in the
regression equation. The combined regression-time series model is:
PSMR20t = a0 +a1TPNRt-1 +a2TCNRt-1 +a3 STONRt-1 +a4COPt-1 +a5 EXMt-1 +a6 D1 +φ -1 (B) θ (B) η t (2)

where η t is a normally distributed error term which may have a different variance from
residual error εt. In the MARMA model, the two stage least square method will be developed
to forecast short-term monthly natural rubber prices in the world market. The parameters
a0, a1, a2 and ….. of the structural regression equation and the parameters φ1,…, φp and θ1,...., θq
of the time-series model should be estimated simultaneously. Then,
PSMR20 = Average FOB monthly price of SMR20 (US$ /tonne)
TPNR = Total production of natural rubber (Total Supply) (000 tonnes)
TCNR = Total consumption of natural rubber and synthetic rubber (Total Demand)(000 tonnes)
STONR = World total stock of natural rubber (000 tonnes)
COP = Crude oil monthly price (US$/barrel)
EXM = Exchange rate for Malaysia RM to USD (RM/US$)
D1 = A dummy, taking the value of 1 in price increased monthly and 0 otherwise.
T = Time trend, 1990 Jan: to 2006 Dec:
ei = error term
Equation (2) is referred to as a transfer function model or, alternatively, a multivariate
autoregressive-moving-average (MARMA) model. This combined use of regression
analysis with a time-series model of the error term is an approach to forecasting that in
some cases can provide the best of both worlds.
Econometric Model
The papers reviewed regarding the supply, demand and price relationship in the earlier
studies were based on the models developed by Meganathan (1983), Tan (1984), Mad Nasir et al.
(1993), Fatimah & Zainalabdin (1994), Barlow et al. (1994), Ferris (1998), Burger and Smit
(1997 & 2000) and Lim (2002). The Vector Error Correction (VECM) method was developed to
forecast short-run monthly natural rubber supply, demand and prices in the world market.
For this study, the econometric model will be solved dynamically for ex ante forecasts for
the period of January 2006 - December 2010 and the model will be subsequently
employed for ex post forecasts based on data from period January 1990 - December 2006.

7
Vector Error Correction (VECM) Method

A vector error correction (VEC) method is a restricted vector autoregression (VAR) designed
for use with non-stationary series that are known to be cointegrated (Gilbert, 1986 and Hendry
and Ericsson, 2001). The VEC has cointegration relations built into the specification so
that it restricts the long-run behavior of the endogenous variables to converge to their
cointegrating relationships while allowing for short-run adjustment dynamics. The
cointegration term is known as the error correction term since the deviation from long-
run equilibrium is corrected gradually through a series of partial short-run adjustments
(Engle and Granger, 1987).

Supply

It had identified the supply of natural rubber (TPNR) as a function of the related factors
as follow:

TPNRt = ƒ(PSMR20t-i, TPNRt-i, D1, T, e ti ) (3)

where:

TPNR = Total production of natural rubber (Total Supply) (000 tonnes)

PSMR20 = Average FOB monthly price of SMR20 (US$ /tonne) deflated by the CPI.
D1 = A dummy, taking the value of 1 in production increased monthly and 0 otherwise.
T = Time trend, 1990 Jan: to 2006 Dec:
ei = error terms

Demand

The demand of natural rubber (TCNR) as a function of the related factors as follow:

TCNRt = ƒ (STONR t-i, PSMR20t-i, RSS1t-i, TCNRt-i, D1, T, eti ) (4)

where:

TCNR = Total consumption of natural rubber and synthetic rubber (Total Demand)(000 tonnes)
STONR = World total stock of natural rubber (000 tonnes)
PSMR20 = Average FOB monthly price of SMR20 (US$ /tonne) deflated by the CPI.
RSS1 = Average FOB monthly price of RSS1 (US$ /tonne) deflated by the CPI.
D1 = A dummy, taking the value of 1 in consumption increased monthly and 0 otherwise.
T = Time trend, 1990 Jan: to 2006 Dec:
ei = error term

Price

The NR price (PSMR20) determination equation was derived based on the related factors,
we had
PSMR20t = ƒ(TPNRt, TCNRt, STONRt, COPt, EXMt, PSMR20t-i, D1, T, eti) (5)

8
Model Evaluation

Performance of the model is measured by the validity of its estimate on the basis of its
forecasting power. The forecasting ability is tested based on the Root Mean Squared Error
(RMSE), the Mean Absolute Error (MAE) and Theil’s inequality coefficients (U) criteria.
In the historical or ex post simulation, the RMSE of all the endogenous variables are less
than one percent and the values of MAE are all small. The values of the Theil’s
inequality coefficient U are all nearly zero which is that the forecasting performance of
the estimated model is satisfactory.

The values of U<SUP>m are also all very closed to zero, indicating the non-existence of
a systematic bias. The values of U<SUP>s and 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. The MAE and the RMSE can be used together to diagnose the
variation in the errors in a set of forecasts. The RMSE will always be larger or equal to
the MAE; the greater the difference between them, the greater the variance in the
individual errors in the sample. If the RMSE=MAE, then all the errors are of the same
magnitude. Both the MAE and RMSE can range from 0 to ∞. They are negatively-oriented
scores: Lower values are better.

Results

ARIMA Model
Table 3 shows that the results of the ARIMA model of the short-term monthly prices of
PSMR20. It indicated that Φ1PSMR20t-1 (Φ1 is an AR parameter of order 1) represented
the fit to the series value PSMR20t and the coefficient value is 0.615. The term θ1 ε t-1 (θ1
is a MA parameter of order 1) and ε t-1 represented the assumed random error in the data
at period t-1 and εt represented at period t and the coefficient value is 0.405 and 0.032.
The parameter diagnostics showed that any given value in price of PSMR20t was directly
proportional to the previous value PSMR20t-1 plus some random error ε t and ε t-1.
Meaning that, what happens this period was only dependent on what happened last
period, plus some current random error.

The term (- θ1 ε t-1) was the use of the minus sign in front of θ 1 was conventional only
and had no other significance. In Box-Jenkins models, the random error component
played a dominant role in determining the structure of the model. The residual diagnostics
showed that residuals were not correlated to each other and significant that the model
have included the correct parameters. Residual diagnostics and parameter diagnostics
comprised the tools available for determining whether a selected model was valid. In the
ARIMA model price equation, the AR and MA parameters explained about 54percent of
the variation in the monthly natural rubber price.

MARMA Model
Table 3 also shows the results of the MARMA model of the short-term monthly prices of
PSMR20. It indicated that Φ1PSMR20t-1 (Φ1 is an AR parameter of order 1) represented
the fit to the series value PSMR20t and the coefficient value is 0.461. The term θ1 ε t-1 (θ1
is a MA parameter of order 1) and ε t-1 represented the assumed random error in the data
at period t-1 and εt represented at period t and the coefficient value is 0.308 and 0.044.

9
Table 3: Results of ARIMA, MARMA & Econometric Models of Short-term Prices of
PSMR20 Models to Determine Structural Equations
Summary Statistics of the Regression Coefficients
Dependent Variable Independent Variable Coefficient Std. Error t-Statistic Prob.
1. ARIMA Model
Two-Stage Least Squares Method

Price (PSMR20t) AR (1) (Φ1) 0.615 0.043 14.362 0.0000

MA(1) (θ1) 0.405 0.043 9.340 0.0000
C 0.037 0.032 0.161 0.2472
R-squared 0.544
Adjusted R-squared 0.539
Durbin-Watson stat 0.557

ARCH Test (Residual Test)

F-statistic 47.301 0.0000
Obs*R-squared 38.566 0.0000
C 0.113 0.031 3.665 0.0003
RESID
2(-1) 0.439 0.064 6.878 0.0000
2. MARMA Model
Two-Stage Least Squares Method

Price (PSMR20t) AR (1) (Φ1) 0.461 0.046 10.071 0.0000

MA(1) (θ1) 0.308 0.042 7.299 0.0000
TPNRt-1 0.050 0.001 1.035 0.3020
TCNR t-1 0.036 0.001 0.742 0.4590
STONR t-1 -0.019 0.001 -0.456 0.6489
COP t-1 0.025 0.012 2.014 0.0454
EXM t-1 -0.247 0.287 -0.859 0.3915
D1 (PSMR20) 0.438 0.067 6.607 0.0000
C 0.186 0.044 4.276 0.0000
R-squared 0.638
Adjusted R-squared 0.623
Durbin-Watson stat 0.903

ARCH Test (Residual Test)

F-statistic 29.486 0.0000
Obs*R-squared 25.924 0.0000
C 0.101 0.025 4.050 0.0001
RESID
2(-1) 0.359 0.066 5.430 0.0000
Source: Own Calculations
The parameter diagnostics of MARMA model showed that any given value in price of
PSMR20t was directly proportional to the previous value PSMR20t-1 plus some random error
εt and εt-1 significant that the model have included the correct parameters. The residual
diagnostics showed that residuals were also not correlated to each other and significant that the
model have included the correct parameters. In the MARMA model price equation, the
explanatory variables and AR and MA parameters explained about 64 percent of the
variation in the monthly natural rubber price.

10
Table 3 (Continued): Results of ARIMA, MARMA & Econometric Models of Short-term
Prices of PSMR20 Models to Determine Structural Equations
Summary Statistics of the Regression Coefficients
Dependent Variable Independent Variable Coefficient Std. Error t-Statistic
3. Econometric Model
Vector Error Correction Method

Supply (TPNRt) PSMR20 t-1 0.178 0.046 3.842

TPNRt-1 5.649 3.959 1.427
D1 (TPNR) 0.235 0.032 7.251
C 1.974 0.229 8.629
R-squared 0.631
Adjusted R-squared 0.624
Demand (TCNRt) PSMR20 t-1 -0.026 0.019 -1.351
RSS1 t-1 -0.067 0.190 -0.354
STONR t-1 -0.370 0.228 -1.628
TCNR t-1 1.904 0.125 15.25
D1 (TCNR) 0.006 0.001 5.296
C 48.02 5.678 8.457
R-squared 0.783
Adjusted R-squared 0.776
Price (PSMR20t) TPNRt-1 0.175 0.062 1.152
TCNR t-1 0.386 0.166 2.523
STONR t-1 -0.206 0.132 -0.684
COP t-1 0.038 0.061 0.281
EXM t-1 -0.605 0.221 -2.821
PSMR20t-1 0.173 0.084 2.070
D1 (PSMR20) 0.012 0.010 7.472
C 0.049 0.046 0.097
R-squared 0.424
Adjusted R-squared 0.402
Source: Own Calculation

Econometric Model

Supply

Table 3 shows that the estimated structural equation of supply linear model. The equation
as a whole explained about 63 percent of the variation in supply. The coefficient of dummy
variable for natural rubber total production results in an increased production of 0.24 percent
of the total production. Burger and Smit (2000) found that at the each short-term supply log-
linear model, a 1 percent increase in price of RSS1 in Singapore, average and other things unchanged,
increases the total production of natural rubber (TPNR) by 0.1 percent, 0.06 percent, 0.18
percent and 0.07 percent in Malaysia, Indonesia, Thailand and Philippines, respectively.
Demand
The estimated structural equation of demand linear model is shown in Table 3. The equation
as a whole explained about 78 percent of the variation in demand. The coefficient of dummy

11
variable for natural rubber consumption leads to an increased consumption by 0.006 percent of
the total consumption. Burger and Smit (2000) found that at the short-term demand log-linear
model for world as a whole, a 1 percent increases in price of RSS1 in Singapore, on average, has
the effect of decreasing the total consumption of natural rubber (TCNR) by 0.026 percent.
Price
Table 3 also shows the short-term monthly natural rubber price PSMR20 model equation
and the explanatory variables which accounted for about 42 percent of the variation in the
monthly natural rubber price. The results indicated that the price of natural rubber (PSMR20)
is highly and positively dependent on total consumption of natural rubber (000, tonne).
Demand is projected to grow fastest in the developing countries, at about 2.5 percent
annually. Asia accounts for more than 86 percent of total developing countries’ demand,
among which China is the largest consuming country with the highest growth rate. It is
projected that China’s demand would grow by 5.1 percent annually to reach nearly 1.6 million
tonnes by 2010, reflecting largely its rapidly growing demand for tyres (IRSG, 2003 and
Ismail, 2007). Estimations reveal that the explanatory variables, namely total consumption of
NR (000 tonne), exchange rate of RM to USD (RM/US$), the price in the pervious period and
a dummy (taking the value in price) were the most important explanatory variables in the price
(PSMR20) forecasting econometric model with significant at the 1 percent level.
The slope coefficient of exchange rate measures the proportional change in price of PSMR20
for a given proportional change in exchange rate. Results indicated that a 1percent decreases
in exchange rate of RM to US$ (RM/US$), on average, has the effect of increasing the price
of PSMR20 (US$/tonne) by 0.03 percent. Also, a 1 percent increase in crude oil price
(US$/barrel), on average and other things unchanged, increases the price of PSMR20 by
0.01 percent. Shane, M. (2007) mentioned that the outlook for sustained high prices of
crude oil and petroleum price has changed the basic environment for global agriculture in
a fundamental way.

The results of the ex Post Natural Rubber (SMR20) monthly price forecast (US$ per tonne)
using ARIMA, MARMA and econometric models, are presented in Table 4 and Figure 2.
The forecasting power was compared based on the RMSE, MAE and Theil’s inequality
coefficients (U) criteria. The values of the RMSE, MAE and U of MARMA model were
comparatively smaller than the values generated by the econometric and ARIMA models. These
statistics suggested that the forecasting performance of the MARMA model was more
efficient than the econometric and ARIMA models.

The generated price forecasts from 2006 - 2010 generated from the econometric, ARIMA
and MARMA models are presented in Figure 3. The prices of natural rubber (SMR20) are
expected to remain firm and increase to around US$ 2000 per tonnes in 2010. The higher
natural rubber prices would likely lead to higher production. Burger and Smit (2000) also
showed that one of the assumptions in their base scenarios was that the synthetic rubber
(SR) prices would increase by 3 percent per annum to reach around (SR) price US$ 1500
per tonne and if SR prices a steeper increase is assumed (6 percent) under this particular
scenario, SR prices would increase to around US$ 2000 per tonne in 2020. This may lead
to higher NR prices because of competition. However, these higher NR prices would lead to
higher production and a steeper decline in prices after 2015.

12
Table 4. Ex Post Natural Rubber (SMR20) Price Forecast (US$ per tonne) and Model Evaluations

Period Actual Price Econometric ARIMA MARMA

2006.01 1742.6667 1735.7975 1666.9532 1654.1740
2006.02 1899.4133 1868.1692 1765.1571 1772.8859
2006.03 1869.7333 1888.5158 1914.5460 1912.0453
2006.04 1902.9301 1921.6740 1900.0990 1908.4716
2006.05 2073.6559 2083.0217 1938.9046 1925.5742
2006.06 2290.5645 2297.8072 2095.0190 2102.2281
2006.07 2267.8378 2294.1441 2314.8391 2314.7920
2006.08 2114.9189 2116.2795 2296.7566 2294.2911
2006.09 1794.5405 1776.4856 2138.2473 2139.8562
2006.10 1797.8378 1774.9119 1820.1124 1819.6076
2006.11 1580.6486 1567.3426 1821.6535 1821.6693
2006.12 1552.9730 1562.0883 1603.4490 1604.7199
RMSE 0.49 0.45 0.39
MAE 0.35 0.31 0.28
U 0.46 0.39 0.33
U<SUP>m 0.00 0.00 0.00
U<SUP>s 0.21 0.15 0.11
U<SUP>c 0.79 0.85 0.89

Source: Own calculation

Note: U<SUP>m = Fraction of error due to bias;
U<SUP>s = Fraction of error due to variation
U<SUP>c = Fraction of error due to covariation.

2500
Prices of SMR20 (US$/tones)

2000

1500

1000

500

0
2006.01

2006.02

2006.03

2006.04

2006.05

2006.06

2006.07

2006.08

2006.09

2006.10

2006.11

2006.12

Period

PSMR20(US$/ton)(Actual) PSMR20(US$/ton)(Econometric)
PSMR20F(US$/ton)(ARIMA) PSMR20F(US$/ton)(MARMA)

Figure 2: Ex Post Natural Rubber (SMR20) Price Forecast (US$ per tonne) from 2006 Jan: to Dec:

13
Ex ante Natural Rubber (SMR20) Price Forecast (US$ per tonnees)

3000
Price of SMR20 (US$/tones)

2500

2000

1500

1000

500

0
2006.01

2006.04

2006.07

2006.10

2007.01

2007.04

2007.07

2007.10

2008.01

2008.04

2008.07

2008.10

2009.01

2009.04

2009.07

2009.10

2010.01

2010.04

2010.07

2010.10
Period
PSMR20(US$/ton)(Actual) PSMR20(US$/ton)(Econometric)
PSMR20F(US$/ton)(ARIMA) PSMR20F(US$/ton)(MARMA)

Figure 3: Ex Ante Natural Rubber (SMR20) Price Forecast (US$ per tonne) from 2006 Jan: to 2010 Dec:.

Conclusion

Based on the results of the above analysis, MARMA’s ex post forecasts were more
efficient measured either in terms of its statistical criteria or even by visual proximity
with the actual prices. For many years now, MRB (Malaysia Rubber Board) and IRSG
(International Rubber Study Group) have forecasted the price of natural rubber which will
be beneficial for the industry in their future economic planning. 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.

The price forecasting of NR would be beneficial for the industries in their future
economic planning. The results presented have assumed that “normal” global economic
scenario. However, with the global financial crisis which have resulted in perhaps a
widespread global recession, with its concomitant shrinking demand including that of
virtually all commodities. It would be interesting to factor in the new parameters of
reduced demand of rubber, due in part to the global vehicle sales contraction due to lower
purchasing power and delayed buying decisions, and the appropriate supply response by
rubber producing countries, in particular the tripartite countries, to determine what the
new price forecast of natural rubber would be in the interim world market.

A forecast if found to be way off target when actual data become available provided
information which may lead to model revision. A forecast of a high price may lead policy
makers to alter their budgetary plans to invest for new decisions in the natural rubber market.
Forecasts using other alternative models such as ARCH (Autoregressive Conditional
Heteroscedasticity), GARCH (Generalized ARCH) and EGARCH (Log Generalized
ARCH), not attempted for this study, could also be potentially beneficial for future work.

14
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