Government budgeting of the income guarantee program for oil palm farmers in Thailand

Abstract

This study aims to estimate the government budget for the income guarantee program for oil palm farmers in Thailand 2019/2020, which the government implemented in response to falling oil palm fresh fruit brunch (FFB) prices. The basis of this program is to assure that oil palm farmers will get four baht per kilogram (kg). The difference between four baht per kg and market reference prices, as announced by the sub-program committee, is referred to as a subsidy price. The announced market reference price is average daily sell prices of oil palm FFB at palm oil mills in Surat Thani, Krabi, Chumphon, Pattani, and Chonburi provinces. If there is a tool that allow the government or policy makers to foresee the market price of oil palm, could it help the government to plan on the budget allocation and/or design a proper policy to lessen farmers’ loss? Univariate autoregressive integrated moving average with explanatory variables (ARIMAX) model and vector error correction model (VECM) are used to estimate and forecast oil palm prices. Thailand oil palm FFB outputs, crude palm oil (CPO) prices, demand for biodiesel-based CPO, Malaysia CPO price, and world soybean oil price are considered in this study. Monthly data from January 2015 to September 2019 are used as in-sample data and those from October 2019 to July 2020 are used as out-of-sample data. In estimation of ARIMAX(p,d,q) model, ARIMAX4(2,1,4) model is outperforming others. Thailand oil palm FFB outputs, and domestic demand for biodiesel-based CPO have a negative relationship with Thailand oil palm FFB price. Thailand CPO price, Malaysia CPO price, and world soybean oil price have a positive relationship with Thailand oil palm FFB price. Oil palm prices, Thailand CPO price, Malaysia CPO price, and world soybean oil price are used to estimate of VECM and there is long run equilibrium relationship among them. Empirical results suggest that VECM forecasts oil palm prices better than does the ARIMAX 4(2,1,4) model. Oil palm FFB forecast prices are estimated from VECM model. The more precise oil palm prices forecasted, the more appropriate budget allocation or policies soothing farmers’ loss the government could plan. If the market price of oil palm keeps falling far from four then the government or policymaker can plan to establish a proper policy or improve efficiency in budget. Meanwhile, if the oil palm price forecasted greater than four then no need to establish the income guarantee program. The average actual subsidy price is 0.89 baht per kg, which is greater than the subsidy price calculated by the difference between four-baht target price and oil palm forecast prices, 0.62 baht per kg.