THE MALAYSIAN SMALLHOLDER RUBBER SECTOR: IMPLICATIONS OF ETHREL STIMULATION AND THE NEW PROCESSING TECHNOLOGY Thesis for the Degree of Ph. D. MICHIGAN STATE UNIVERSITY MOHAMED HASHIM NOOR ' 1972 . i '3 LIBRARY Michigan State University This is to certify that the thesis entitled THE NALAYSIAN‘SHALLHOLOER RUBBER SECTOR: IMPLICATIONS OF ETHREL STIMULATION AND THE NEH PROCESSING TECHNOLOGY presented by Mohamed Hashim Noor has been accepted towards fulfillment of the requirements for Ph.D. “main Agricultural Economics Y Major professor Date October 20, 1972 0-7639 ‘f amom Iv ' ; MAS I SONY , 800K BINDERY INC. I "DEAF" FINGERS ‘ granuerRTmlcmuj \ _, : — pm Rf ABSTRACT THE MALAYSIAN SMALLHOLDER RUBBER SECTOR: IMPLICATIONS OF ETHREL STIMULATION AND THE NEW PROCESSING TECHNOLOGY BY Mohamed Hashim Noor The natural rubber industry plays an important role in the Malaysian economy in terms of acreage, employment, foreign exchange earnings, and export tax revenue. Re- cently, major technological deve10pments have been intro- duced in the Malaysian natural rubber industry, including the introduction of the yield-stimulant ethrel which can substantially increase the yields of rubber trees, and the new methods of processing natural rubber. Presently, most smallholder rubber is of inferior quality, and the rubber is marketed through a chain of agencies before it is exported. A reorganization of the traditional smallholder processing and marketing system, could reduce marketing costs and increase the smallholder income. The introduction of the central processing and marketing scheme to process smallholder rubber by the new processing methods represents a major reorganization of the traditional processing and marketing system. Mohamed Hashim Noor The objectives of this study are to analyze for the period 1975-80: (1) the potential impact of the yield- stimulant ethrel on the Malaysian and world natural rubber output, (2) the effect of the potential increase in output on the world and Malaysian natural rubber prices, (3) the traditional and reorganized processing and marketing system for smallholder rubber, (4) the Malaysian small- holder income with and without yield stimulation and re- organization of the traditional processing and marketing system, and (5) the implications of the study for small- holder rubber policy. An economic model of the world rubber market is developed in order to facilitate an understanding of the linkages between the various segments of the market. Due to the data and time constraints, it is not possible to include, in this study, all the variables presented in the model. However, the model provides a framework for policy makers to trace the consequences of alternative policies to be pursued on rubber, and is useful for future researchers on the rubber industry as it provides a frame- work to absorb new and more complete data on the various aspects of the industry as they become available. The study indicates that, with the adoption of the yield-stimulant ethrel, the Malaysian natural rubber output will be approximately 12 to 15 per cent higher in 1975 (than the output without yield stimulation), and in 1980, Mohamed Hashim Noor it will be approximately 34 to 36 per cent higher depend- ing on the assumed levels of adoption of the yield- stimulant. The corresponding increases for the world natural rubber output are approximately 6 to 9 per cent in 1975 and 21 to 27 per cent in 1980. The increase in output through yield stimulation will have a depressing effect on natural rubber prices. Based on the assumed levels of adoption of the yield- stimulant,and the resulting output, prices can be expected to decline by 3 to 8 cents/lb. (Malaysian) during the 1975-80 period. This is the decline from prices based on output without stimulation. Comparing the Malaysian smallholder income with and without yield stimulation and central processing and marketing (under the reorganized processing and marketing system), indicates that both yield stimulation and central processing and marketing will increase smallholder income during the period 1975-80. However, the comparison indi- cates that central processing and marketing has greater potential in increasing smallholder income than yield stimulation. An attempt is made to estimate the gains (in cents/ lb.) by smallholders under the central processing and marketing scheme by comparing the prices received for ribbed smoked sheet (RSS), unsmoked sheet (USS), and scrap rubber under this scheme,and the corresponding prices Mohamed Hashim Noor received under the traditional processing and marketing system. The comparison indicates that smallholders cur- rently producing RSS could expect to gain little (about 0.8 cents/lb.) under the central processing and marketing scheme. For the USS producers however, the price gains could be substantial and average about 5.3 cents/lb. The highest potential gain from central processing and market- ing is achieved from the sale of scrap rubber. The gain is estimated to average about 5.8 cents/1b. The introduction of yield stimulation and central processing and marketing has various implications for the Malaysian natural rubber industry. The possible reduction in production costs resulting from yield increases through yield stimulation, and the improvements in the technical properties embedded in the new process rubbers could play a major role in maintaining the competitive position of natural rubber against synthetic rubber. Output increases through yield stimulation have been estimated to sub— stantially increase natural rubber's contribution to Malaysian foreign exchange earnings, export tax revenue, and research and replanting cesses. The use of the yield- stimulant is also likely to increase the short run price reSponsiveness of natural rubber supply and reduce price instability. THE MALAYSIAN SMALLHOLDER RUBBER SECTOR: IMPLICATIONS OF ETHREL STIMULATION AND THE NEW PROCESSING TECHNOLOGY BY Mohamed Hashim Noor A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1972 Bl ACKNOWLEDGMENTS I wish to express my sincere appreciation and gratitude to Dr. Carl K. Eicher, my major professor and thesis supervisor, for his untiring assistance in this study, and throughout my doctoral program at Michigan State University. I am deeply grateful to Dr. Lester V. Manderscheid for reviewing and criticizing the manuscript. His valuable comments have contributed greatly to the improvements of this study. My deep gratitude also goes to Dr. Robert D. Stevens for his painstaking reading, con- structive comments and suggestions. I am indebted to the officials of the Smallholders' Advisory Service, and the Economics and Planning Divisions of the Rubber Research Institute of Malaya for their assistance and cooperation during my data collection for this study in Malaysia. Much appreciation is also due to Tan Sri Mohamed bin Jamil, Director-General of Agriculture, West Malaysia, for providing students at the Institute of Agriculture at Serdang, as enumerators for the survey. ii My sincere gratitude also goes to the Ford Founda- tion for the fellowship which makes_my undergraduate and graduate studies possible, and for the sympathy, under- standing and efficiency of its officials. Finally, I express my deep gratitude to my wife, Filipinas, for her patience, understanding and encourage- ment throughout my entire doctoral program. iii TABLE OF CONTENTS Page LIST OF TABLES O o o o o o o o o o o o 0 ix LIST OF FIGURES o o o o o o o o o o o o xv Chapter I. THE MALAYSIAN RUBBER INDUSTRY . . . . . 1 Introduction . . . . . . . . . . 1 Early DevelOpment of the Industry . . . 1 Importance of Rubber in the Malaysian Economy . . . . . . . 2 Estates and Smallholdings . . . . . 5 Recent Developments in Malaysian Rubber 0 O O O I O O O I O O O 6 Yield-Stimulants . . . . . . . . 6 Standard Malaysian Rubber (SMR) Scheme . . . . . . . . . 8 New Process Rubbers . . . . . . . 11 Summary . . . . . . . . . . . . 12 II. THE PROBLEM AND OBJECTIVES OF THE STUDY . . 14 Introduction . . . . . . . . . . 14 The PrOblem O O O O O O O O O O O 14 Objectives . . . . . . . . . . . 18 Sources of Data . . . . . . . . . 19 Previous Research . . . . . . . . . 22 iv Chapter Page III. MALAYSIAN AND WORLD NATURAL RUBBER SUPPLY PROJECTIONS WITH YIELD STIMULATION: 1975-80 0 o o o o o o o o o o o 28 Interrelationships Between Variables in the World Natural Rubber Market . . . 28 Malaysian Natural Rubber Supply . . . . 31 Price Elasticity of Natural Rubber Supply . . . . . . . 31 Natural Rubber Supply Function . . . 34 Output Projection of the Rubber Research Institute of Malaya . . . . 36 Estates . . . . . . . . . . . 37 Smallholdings . . . . . . . . . 38 Projections of the Impact of Yield Stimulation With Ethrel on Malaysian Natural Rubber Output: 1975-80 . . . 39 Assumptions Regarding the Use of Ethrel . . . . . . . . . . 39 Estimation Procedure . . . . . . . 42 Estimating the Estate Acreage to be Stimulated: 1975-1980 . . . . 43 Response to Stimulation . . . . . . 46 Estimating the Smallholding Acreage to be Stimulated . . . . . 49 ReSponse to Stimulation . . . . . . 56 Impact of Yield Stimulation on World Natural Rubber Output: 1975—80 . . . 57 Summary . . . . . . . . . . . . 64 IV. NATURAL RUBBER PRICE PROJECTIONS WITH AND WITHOUT YIELD STIMULATION: 1975-80 . . 66 Competition Between Natural and Synthetic Rubber . . . . . . . . 67 Competition Based on Quality . . . . 68 Price Competition . . . . . . . . 70 Chapter Page Projections of Total Elastomer Consumption . . . . . . . . . . 70 Analysis and Projections of World Natural Rubber Prices: 1975-80 . . . 78 The Price Model . . . . . . 78 Projecting World Natural Rubber Prices: 1975— 80 . . . . . . . 89 Projecting Malaysian Natural Rubber Prices: 1975- 80 . . . . . 95 Standard Malaysian Rubber (SMR) and Natural Rubber Prices . . . . . . 98 Summary . . . . . . . . . . . . 99 V. AN ANALYSIS OF THE TRADITIONAL AND RE- ORGANIZED PROCESSING AND MARKETING SYSTEM FOR SMALLHOLDER RUBBER . . . . 104 Traditional Smallholder Processing and Marketing System . . . . . . . 104 Dilution and Sieving . . . . . . . 105 Coagulation . . . . . . . . . 105 Pressing and Mangling . . . . . . 105 Drying and Smoking . . . . . . 106 The Reorganized Processing and Marketing System for Smallholder Rubber . . . . 116 New Processing Methods . . . . . . 116 New Processing Methods and the Smallholders . . . . . . 119 Central Processing of Smallholder Rubber 0 I O O O O O O O O O l 2 2 Malaysian Rubber Development Corporation (MRDC) . . . . . . . 124 Problems Experienced by MRDC . . . . 129 Smallholders' Attitudes Toward Central Processing . . . . . . . 132 Summary . . . . . . . . . . . . 138 vi Chapter Page VI. THE EFFECTS OF YIELD STIMULATION AND CENTRAL PROCESSING AND MARKETING ON SMALLHOLDERS' INCOME C O O O O O C O O C O O O 141 (i) Smallholder Income Projections Without Yield Stimulation and Under the Traditional Processing and Marketing System: 1975-80 . . . . . 143 Smallholder Output and Prices: 1975-80 0 o o o o o o o o o o 145 (ii) Smallholders' Income Projections With Yield Stimulation and Under the Traditional Processing and Marketing System: 1975-80 . . . . . 151 Smallholder Output and Prices . . . . 152 (iii) Smallholders' Income Projections Without Yield Stimulation and With Central Processing and Marketing: 1975-80 . . . . . . . . . . . . 161 Smallholder Output and Prices . . . . 162 (iv) Smallholder Income Projections With Yield Stimulation and With Central Processing and Marketing: 1975-80 . . . . . . . . . . . . 167 Central Processing and Marketing, and Smallholder Prices . . . . . . . . 175 Comparison of Smallholders' Projected Income With and Without Yield Stimu- lation and Central Processing and Marketing . . . . . . . . . . . 179 Summary . . . . . . . . . . . . 182 VII. IMPLICATIONS OF YIELD STIMULATION AND CENTRAL PROCESSING AND MARKETING FOR THE MALAYSIAN NATURAL RUBBER INDUSTRY WITH SPECIAL EMPHASIS ON SMALLHOLDERS . . 186 Competitiveness of the Natural Rubber Industry . . . . . . . . . . . 186 Foreign Exchange Earnings . . . . . . 188 vii Chapter Page Export Tax-Revenue . . . . . . . . . 189 Supply Elasticity and Price Fluctuations . . . . . . . . . . 191 Policy Implications . . . . . . . . 194 Yield Stimulation . . . . . . . . 194 Central Processing and Marketing . . . 196 Summary . . . . . . . . . . . . 198 VIII. SUMMARY AND RECOMMENDATIONS FOR FUTURE RESEARCH O O O I O O I O C O O O 201 Summary . . . . . . . . . . . . 201 Recommendations for Future Research . . . 214 BIBLIOGRAPHY . . . . . . . . . . . . . . 217 APPENDICES Appendix A.‘ Data Used in the Analysis of Natural Rubber Prices: 1955-70 . . . . . . . 222 B. Values of Variables Used in Projecting World Natural Rubber Prices: 1975-80. . . 223 C. Prices of RSS (Ribbed Smoked Sheet) 1, 2, 3, and 4, and 2XTBC (2X Thin Brown Crepe): 1960-70. . .. . . . . . . . 224 D. Smallholder Rubber Survey Questionnaire . . 225 viii Table 1.1 LIST OF TABLES Malaysia: Rubber Exports, Export Earnings and Rubber Earnings as a Per cent of all Export Earnings: 1961-70 . . . . . . . . . . . Malaysia: Rubber Acreage and Production on Estates and Smallholdings, 1961-70 0 o o o o o o o o o 0 Recent and Projected Malaysian Rubber Acreage ('000 Acres) and Production ('000 Long Tons), 1955-80 . . . . . Recent and Projected Rubber New Planting and Replanting on Malaysian Estates: 1958-80 0 o o o o o o o o o 0 Projected Malaysian Estate Rubber Acreage Seventeen Years Old and Above and Estimated Acreage to be Stimulated: 1975-80 . . . . . . . . . . . Malaysia: Response to Ethrel Stimulation, by Types of Clones . . . . . . . Projections of Rubber Output on Malaysian Estates With and Without Yield Stimu- lation: 1975-80 0 o o o o o o 0 Recent and Projected Rubber New Planting and Replanting on Malaysian Small- hOIdingS: 1958-80 a o o o o o 0 Responses of a Sample of Smallholders in Selangor to the Potential Use of Ethrel in October, 1971 . . . . . ix Page 40 44 47 48 50 51 52 Table 3.8 3.10 Page Projected Malaysian Smallholding Rubber Acreage Seventeen Years and Above and Estimated Acreage to be Stimulated: 1975-80 . . . . . . . . . . . . 55 Malaysian Smallholding Rubber Output Projections With and Without Yield stimulation: 0 O O O O O O O O O 58 Natural Rubber Output Projections for Malaysian Estates and Smallholdings With and Without Yield Stimulation: 1975-80 . . . . . . . . . . . . 59 Projection of World Natural Rubber Output Without Ethrel Stimulation: 1975-80 0 o o o o o o o o o o o 62 World Natural Rubber Output Projections With and Without Yield Stimulation: 1975-80 0 o o o o o o o o o o o 63 Total Elastomer Consumption: 1971-80 . . 76 Projected Natural Rubber Prices in New York With and Without Yield Stimulation: 1975-80 (Low Price Projection) . . . . 91 Projected Natural Rubber Prices in Malaysia With and Without Yield Stimulation: 1975-80 (Low Price Projection) . . . . 97 Projected Natural Rubber Prices in New York With and Without Yield Stimulation: 1975-80 (High Price Projection) . . . . 100 Projected Natural Rubber Prices in Malaysia With and Without Yield Stimulation: 1975-80 (High Price Projection) . . . . 101 Malaysia: Average Dealers' Estimates of Moisture Content of Unsmoked Sheet Rubber and Variability of Estimates . . 114 Table 5.3 6.1 Central Processing Factories: Purchases, Smallholders Served, Employment and Operating Capacity for 1971 . . . . . Smallholders' Benefits from Central Pro- cessing and Number of Smallholders Listing Each Benefit in Their ReSponse . . . . . . . . . . Projected Malaysian Smallholding Rubber Output Without Yield Stimulation, and Classification of Output into Ribbed Smoked Sheet (RSS), Unsmoked Sheet (USS) and Scrap for 1975-80 . . . Projected Malaysian Prices of Ribbed Smoked Sheet (RSS) 1, 2, 3 and 4; Average of RSS 2 and 3, and RSS 3 and 4 Prices, and Prices of 2X Thin Brown Crepe (2XTBC) Without Yield Stimula- tion: 1975-80 . . . . . . . . . Projected Malaysian Smallholding Rubber Output; f.o.b. Prices; Deductions from f.o.b. Prices; Prices Received by Smallholders, and Estimated Income Without Yield Stimulation and Under the Traditional Processing and Marketing System: 1975-80 . . . . . Projected Malaysian Smallholders' Total Income from Rubber Without Yield Stimu- lation and Under the Traditional Pro- cessing and Marketing System: 1975—80 . Projected Malaysian Smallholding Rubber Output With Yield Stimulation, and Classification of Output into Ribbed Smoked Sheet (RSS), Unsmoked Sheet (USS), and Scrap for 1975-80 . . . . Projected Malaysian f.o.b. Prices of Ribbed Smoked Sheet (RSS) 1, 2, 3, and 4; Average Prices of RSS 2 and 3, and RSS 3 and 4, and Prices of 2X Thin Brown Crepe (2XTBC) With Yield Stimu- lation: 1975-80 . . . . . xi Page 128 134 146 149 150 152 154 156 Table 6.7 6.8 6.9 6.10 6.11 Projected Malaysian Smallholding Rubber Output; f.o.b. Prices; Deductions from f.o.b. Prices; Prices Received by Small- holders; and Estimated Income With Yield Stimulation and Under the Traditional Processing and Marketing System: 1975— 80 (Low Output Projection) . . . . . Projected Malaysian Smallholding Rubber Output; f.o.b. Prices; Deductions from f.o.b. Prices; Prices Received by Small- holders; and Estimated Income With Yield Stimulation and Under the Traditional Processing and Marketing System: 1975- 80 (High Output Projection) . . . . Estimated Malaysian Smallholders' Total Income from Rubber With Yield Stimu- lation and Under the Traditional Processing and Marketing System: 1975-80 . . . . . . . . . . . Projected Malaysian Smallholding Rubber Output; f.o.b. Prices; Deductions from f.o.b. Prices, Prices Received by Smallholders, and Estimated Income Without Yield Stimulation and With Central Processing and Marketing: 1975-80 (With Low Price Projection) . . Projected Malaysian Smallholding Rubber Output; f.o.b. Prices; Deductions from f.o.b. Prices; Prices Received by Smallholders, and Estimated Income Without Yield Stimulation and With Central Processing and Marketing: 1975-80 (With High Price Projection). . Projected Malaysian Smallholders' Total Income from Rubber Without Yield Stimu- lation and With Central Processing and Marketing: 1975-80 (With Low and High Price Projections) . . . . . . xii Page 158 159 160 165 166 168 Table 6.13 6.15 6.17 Projected Malaysian Smallholding Rubber Output; f.o.b. Prices; Deductions from f.o.b. Prices; Prices Received by Smallholders, and Estimated Income With Yield Stimulation and With Central Processing and Marketing: 1975-80 (With Low Output and Low Price Projections) . . . . . . . . . Projected Malaysian Smallholding Rubber Output; f.o.b. Prices; Deductions from f.o.b. Prices; Prices Received by Smallholders, and Estimated Income With Yield Stimulation and With Central Processing and Marketing: 1975-80 (With High Output and Low Price Projections) . . . . . . . . . Projected Malaysian Smallholding Rubber Output; f.o.b. Prices; Deductions from f.o.b. Prices; Prices Received by Smallholders, and Estimated Income With Yield Stimulation and With Central Processing and Marketing: 1975-80 (With Low Output and High Price Projections) . . . . . . . . . Projected Malaysian Smallholding Rubber Output; f.o.b. Prices; Deductions from f.o.b. Prices; Prices Received by Smallholders, and Estimated Income With Yield Stimulation and With Central Processing and Marketing: 1975-80 (With High Output and High Price Projections) . . . . . . . . . Projected Malaysian Smallholders' Total Income from Rubber With Yield Stimula- tion and With Central Processing and Marketing (1975-80) . . . . . . Summary of Projected Prices Received by Malaysian Smallholders for Ribbed Smoked Sheet (RSS), Unsmoked Sheet (USS) and Scrap With and Without Yield Stimulation and Central Processing and Marketing: 1975-80 . . . . . . xiii Page 170 171 172 173 174 176 Page Summary of Malaysian Smallholders' Income Projections With and Without Yield Stimulation and Central Pro- cessing and Marketing: 1975-80 . . . 180 Projected Malaysian Foreign Exchange Earnings from Rubber With and With- out Yield Stimulation: 1975-80 . . . 189 Projected Malaysian Export Tax Revenue from Rubber With and Without Yield Stimulation: 1975-80 . . . . . . . 190 Malaysia: Research and Replanting Cesses from Rubber With and Without Yield Stimulation: 1975-80 . . . . 191 Data Used in the Analysis of Natural Rubber Prices: 1955-70 . . . . . . 222 Values of Variables Used in Projecting World Natural Rubber Prices: 1975-80 . 223 Prices of RSS (Ribbed Smoked Sheet) 1, 2, 3, and 4, and 2XTBC (2X Thin Brown Crepe): 1960—70 . . . . . . . . 224 xiv LIST OF FIGURES Figure Page 3.1 An Economic Model of the World Rubber Market . . . . . . . . . . 30 5.1 Traditional Marketing Channel for Smallholder Rubber . . . . . . . . 109 5.2 Flow Chart for Traditional Processing of Rubber and New Processes . . . . . 117 5.3 Central Processing and Marketing of Smallholder Rubber . . . . . . . . 123 XV CHAPTER I THE MALAYSIAN RUBBER INDUSTRY Introduction Early Development of the -: Industry The rubber tree, Hevea brasiliensis, is not indige- nous to Malaya.1 The history of rubber in Malaya has its beginnings in 1877 when some seedlings were brought to the country from Kew Gardens in England. These seedlings, in turn, originated from seeds exported from Brazil.2 Though the trOpical Malayan climate was suitable for rubber, several decades elapsed before rubber began to be grown as a commercial crop. The lack of interest in 1In this section, Malaya rather than Malaysia is used. Malaysia (which includes Malaya, Sabah and Sarawak) was only formed in 1963. 2For more information on the early developments of the Malaysian and world rubber industry, see P. T. Bauer, The Rubber Industry: A Study in Competition and Mono- oI (Cambridge, Mass.: HarvardTUniversity Press, 1948); 01 Jin-Bee, Land, People and Economy in Malaya (London: Longmans, 196 ; K. . Knorr, World Rubber and Its Regu- lations (Stanford, Ca1if.: StanfBrd UniverSIty Press, ; and H. N. Ridley, The Story of the Rubber Industry (London: L. Reeve Press, 1913). rubber in the early days was largely due to the prosperity enjoyed by coffee and the lack of knowledge about rubber cultivation, latex collection, and processing and the uncertainty about its prospects as a commercial commodity. However, in the 18905, the development of the auto- mobile industry greatly increased the demand for rubber causing prices to rise to levels which made it highly profitable to grow the crOp. As a result, rubber acreage steadily expanded from 350 acres in 1897 to about 50,000 acres in 1905 and 290,000 in 1909. By 1920, Malaya con— tributed to one-half (200,000 tons) of the total world exports of natural rubber. The steady expansion of rubber acreage and production in Malaysia has continued to the present period and has made rubber currently the most important crOp in the Malaysian economy. Importance_of Rubber in the Malaysian Economy Malaysia is the world's largest producer of natural rubber. In 1970 she produced 1.3 million long tons and this represented more than 44 per cent of the world total output of natural rubber.3 Rubber plays an important and vital role in the Malaysian economy. It is the largest single crOp by acreage. Out of some 6.9 million acres under cultivation, 3Malaysia, Department of Statistics, Monthl Statistical Bulletin (Kuala Lumpur, Malaysia, DecemHer, 1971). p. 43. about 4.2 million acres or 61 per cent are under rubber.4 Because of this extensive acreage, rubber also provides an important means of employment. Employment in rubber accounts for 32 per cent of the total labor force of 2.3 million and about 50 per cent of the 1.2 employed in agriculture.5 Apart from being a major source of employment, rubber represents the largest export item accounting for 47 per cent of the total value of exports in 1969 (Table 1.1). Rubber has also been a major contributor to federal revenue accounting for about 16 per cent of the federal taxes over the 1959-63 period. Over the last few years, however, its contribution to federal revenue has been declining. In 1969, duties from rubber exports made up only about 6 per cent of all revenue.6 This declining contribution of rubber to federal revenue can be largely attributed to the decline in natural rubber prices and the graduated export duty on the commodity. 4 . Malays1a, Department of Agriculture, Annual Report of the Department of Agriculture 1969 (KuaIa Lumpur, Malaysia), p. 47. 5Malaysia, Department of Statistics, Federation of Malaya Report on Employment, Unemployment and Under- employment (Kuala Lumpur, Malaysia, 1965), p. 24. 6Malaysia, Department of Statistics, Monthly Statistical Bulletin (Kuala Lumpur, Malaysia, Marc , 1970), p. 171. Table l.1.--Ma1aysia: Rubber Exports, Export Earnings and Rubber Earnings as a Per cent of all Export Earnings: 1961-70. Quantity of Earnings Rubber Earnings as Year Rubber Exported Per cent of all (long tons) Rubber A11 Exports Export Earnings ($Mi1) ($Mi1) 1961 725,613 1347.1 2,622.4 51.4 1962 723,713 1272.8 2,620.6 48.6 1963 788,303 1300.4 2,698.9 48.2 1964 847,804 1303.4 2,780.9 46.9 1965 886,915 1368.3 3,102.9 44.1 1966 939,778 1395.8 3,119.5 44.7 1967 974,632 1216.0 2,918.8 41.7 1968 1,104,789 1300.9 3,203.4 40.6 1969 1,264,857 1940.1 4,061.4 47.7 1970 1,271,282 1663.3 4,169.1 39.8 Source: Malaysia, Department of Statistics, Monthly Statistical Bulletin (Kuala Lumpur, Malaysia, December, 1971), PP; 149-51. Estates and Smallholdings The rubber industry is essentially comprised of two main sectors, the estate sector and the smallholding sector. A smallholding is defined as any planted area of rubber under one management and less than 100 acres and an estate is defined as any planted area of rubber with 100 acres or more. However, over 50 per cent of the small- holding acreage, and about 80 per cent of the 400,000 odd smallholdings are less than 10 acres in extent.7 It must be noted at the outset that statistics relating to the smallholding sector are at best estimates. There are an estimated 400,000 smallholdings. The average smallholding is about six acres in size. As a result, it is difficult to collect data on the smallholder sector. Collection of statistics from estates is much less of a problem as there are only 2,100 estates. Furthermore, these estates main— tain records of their operations and regularly submit various data to the department of statistics. In terms of acreage, the smallholdings cover a wider area than estates. Out of the 4.2 million acres under rubber, 2.6 million acres (62 per cent) are under smallholdings and 1.6 million acres (38 per cent) are under estates in 1969. In terms of production, however, 7C. Barlow and S. C. Lim, "Natural Rubber and West Malaysia" (paper presented at the Singapore Meeting of the S.E. Asia Business Committee, May, 1968). p. 6. the smallholdings account for only about 49 per cent of the total output8 (Table 1.2). The discrepancy between the acreage occupied by the smallholding sector and its share of the total output is attributed to the lower yields on smallholdings as compared to those on estates. As shown in Table 1.2, there has been a steady decrease in planted acreage on estates. This decrease is mainly due to the fragmentation of estates, the conver- sion of rubber land to oil palm, and the reduced rate of new planting on estates. The smallholding acreage, how- ever, has been increasing steadily to more than offset the decline in estate acreage. This increase is due to the vast acreages of new plantings on land development schemes. In 1970, the smallholding acreage constituted 63 per cent of the total rubber acreage as compared with 51 per cent in 1961. Recent Developments in Malaysian Rubber Yield-Stimulants Yield-stimulants have been used to increase yields at some stage in the life of the rubber trees. So far, only two yield—stimulants 2,4,5 - T and 2,4,-D have been found suitable for commercial use. Other compounds under 8Malaysia, Department of Statistics, Rubber Statistics Handbook (Kuala Lumpur, Malaysia, I969), p. 61. .mv .a .xasma .Aonemomo .mam>mamz .usmesa mamsxv sauoaacm amoaumaumum wanucoz .moaumaumum mo ucosuummmo .mammmamz "mousom m.mv o.mnma o.mmo o.mmo v.mo vOmv mmhm mhma onma m.mv m.amaa o.nmm m.voo m.am meme mmmm mmoa moma o.mv >.vmoa n.abv o.mom w.oo mmmv Nmmm whoa moma a.mv m.mmm m.bmm m.mmm v.mm mmmv mmmm mvna noma m.~¢ m.oom v.0wm m.mam «.mm meme mmmm mama coma v.ae m.mmm m.nvm m.omv o.nm mmmv mmem mmma moma >.mm m.amn v.vam m.mnv 0.0m vOMv aavw mmma vmma a.mm o.mmn h.vmm m.mmv m.vm ammv mmmm mama moma h.mm m.van w.onm m.mmv o.mm omav vmmm mmma mmma ¢.mm h.mo> «.mbm m.mme ~.am mbmm mmon bmma aoma coauosooum omoouod ucwwumwmmmo amuoa mmcaoaogaamEm moumumm ucwwumwmmmn aouoa mmcaoaogaaMEm moumumm mmcaeaonaamsm mmaaeaonaausm Hams Anson mcoa ooo.v coauoaooua amouom ooo.v omuouo< .onnaoma .mmcaoaonaaMEm can monoumm co coauusvoum can omnouo< moans“ "Humanist... a . a ~33. experiment include copper, ethylene oxide, glutaraldehyde and formaldehyde. One of the more recent chemicals under experiment by the Rubber Research Institute of Malaya (RRIM) is ethrel. Ethrel is mixed in palm oil and applied to the scraped bark below the tapping cut at intervals of two months. Thus far,the application of ethrel is recommended by the RRIM for trees about fifteen years old and above. Results so far indicate that ethrel has no deleterious effects on the trees applied and on the quality of the latex produced.9 Experiments conducted with ethrel on estates and smallholdings since the last three years or so indicated that yields of certain clones increased by about 60 per cent, and with two widely planted clones (Tjir 1 and PB 86), yields were about doubled. In the absence of any long-term deleterious effects emerging, the use of ethrel provides a means of substantially raising the yields of the lower-yielding clones. Standard Malaysian Rubber (SMR) Scheme The Standard Malaysian Rubber Scheme was intro- duced by the RRIM in 1965 in order to improve the quality of natural rubber by ensuring that it meets specified 9P. D. Abraham, T. C. P'ng, and E. K. Ng, "RRIM Ethrel Trials: PrOgress Report," Preprint No. 1, Rubber Research Institute of Malaya Planters' Conference, Kuala Lumpur, Malaysia (July, 1971), p. 29. technical Specifications.lo A prime objective of the SMR scheme is to provide a uniform and simplified set of stand- ards for grading rubber; it is hOped that this new grading method will eventually replace the traditional method where grading is based on visual appearance of the rubber. Before the introduction of the scheme, the RRIM carried out a world-wide inquiry to ascertain the consumers' views as to which technical properties should be specified and how the product should be packed and presented. On the basis of the collected data, the specifications were formulated as follows: 1) dirt content of rubber 2) c0pper and manganese content 3) ash, nitrogen, and volatile matter content 4) an oxidizability index to determine the intrinsic quality of the polymer itself. Certain packing requirements are also laid down by the RRIM and these requirements must be met by pro- ducers before their product can be exported as Standard Malaysian Rubber (SMR). These requirements include the following: 1) the weight of each bale must not exceed 112 lbs. 10The introduction of the Standard Malaysian Rubber (SMR) Scheme was announced by the Hon'ble Minister of Commerce and Industry on March 3, 1965. 10 2) the bale must be wrapped in polyethylene or other suitable wrapping material 3) no bale coating in any form may be used.11 The above requirements satisfy the consumers' need to have small, easily handled bales free from adulterating bale coating solutions and packed in such a way that dirt and other foreign materials are not picked up in transit. Conformity with the technical specifications and the packing requirements is checked by the RRIM which is responsible for authorizing the marking of bales with the trade mark "ESEMAR" and the specification of grades. Grading of rubber under the SMR scheme is in sharp contrast to the traditional method. The latter method recognizes a multiplicity of grades based on sub- jective judgment and this results in subtle distinctions between grades which have little or no technical signifi- cance and lowers the grading of certain rubber unwarrant- ably. Under the SMR scheme, there were initially three grades of rubber exported, SMR 5, SMR 20, and SMR 50 indi- cating maximum dirt content limits of 0.05 per cent, 0.20 per cent and 0.5 per cent respectively. Recently,two new grader have been introduced, SMR EQ and SMR 10. SMR E0 is 11For a more detailed information on the technical Specifications and packing requirements, see "Standard Malaysian Rubbers," Planters' Bulletin, No. 78, Rubber Research Institute of Malaya, KuaIa Lumpur, Malaysia (May, 1965). P. 75. 11 an extra clean grade of rubber suitable for specialized products such as the manufacture of rubber thread while SMR 10 is an intergrade between SMR 5 and SMR 20, and indicates a maximum dirt content limit of 0.10 per cent. There has been a rapid increase in the export of SMR since its inception in 1965. Exports of SMR increased from 700 tons in 1965 to 139,000 tons in 1969 and about 250,000 tons in 1970.12 New Process Rubbersl3 The introduction of the SMR scheme has generated changes in the processing methods which produce rubber in block form in contrast to the conventional method of pro- cessing the rubber into sheets. The main types of block rubbers produced are Heveacrumb, Comminuted, and Pelletized rubbers. The general principle behind the new processes producing the above block rubbers is essentially the same. All these new processing methods offer a quick and easy way for converting latex or coagulum into solid granular form and for efficient cleaning, easy drying, compacting and better presentation of natural rubber to the consumers. The Heveacrumb process was developed by the RRIM. In this process the raw coagulum is successively crumbled 12Malaysia, Department of Statistics, Monthl Statistical Bulletin (Kuala Lumpur, Malaysia, JuIy, 1970), p. 60} 13New Process Rubbers refer to the block natural rubbers produced by the new processing methods. 12 by a mechano-chemical granulation process, vigorously washed, rapidly dried by hot air, and compressed into polythene-wrapped bales of standard sizes. Comminuted rubber is produced by feeding the coagulum to a rotating knife set against a stationary one causing the coagulum to be cut into small pieces while pelletized rubber is produced by extruding the coagulum through the pelletizer and chopping the threads of rubber into granules with a rotating blade.14 The introduction of the new process rubbers has been favorably received by the natural rubber consumers. The conventional grades, unlike the synthetic rubber, have to undergo a series of pre-treatments before use in the consuming factories thus involving extra processing Opera- tions and costs. The advantage of the new process rubbers is that, no pre—treatments before use are required thus cutting down costs to the consumers. Summary Malaysia is the world's largest producer of natural rubber. The rubber industry comprising of estates and smallholdings plays an important role in the 14For a technical discussion of the new processing methods, see Planters' Bulletin, No. 86, Rubber Research Institute of Malaya,Rfi§la Lumpur, Malaysia (September, 1966). pp. 106-30. 15A technical discussion of the pre—treatments is given in B. C. Sekhar, "Malaysian Natural Rubber--New Presentation Methods," Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (1967), pp. 3-10. 13 Malaysian economy. Apart from being the largest single crop by acreage, rubber provides the largest source of employment and rubber exports represent the largest source of Malaysian foreign exchange earnings. Rubber has also been a major contributor to federal revenue, but over the last few years, its contribution has declined due to the decline in natural rubber prices and the graduated export duty on the commodity. Recently, certain major technological developments have been introduced in the Malaysian rubber industry, including the introduction of the yield-stimulant ethrel, the Standard Malaysian Rubber (SMR) Scheme and the new processing methods. The introduction of the yield- stimulant ethrel has the potential of substantially in- creasing the current yields of rubber trees. The SMR Scheme enables Malaysian natural rubber to be graded on technical Specifications in contrast to the conventional method where grading was based on visual appearance of the rubber. With the deve10pment of the new processing methods, natural rubber can now be produced in block form which can be easily handled in the consuming factories. CHAPTER II THE PROBLEM AND OBJECTIVES OF THE STUDY Introduction The Malaysian rubber industry has been subject to several major technological changes as a result of re- search carried out by the Rubber Research Institute of Malaya (RRIM) and the private estates. As was indicated in the preceding chapter, the more recent technological changes in the industry are the introduction of the yield-stimulant ethrel; the Standard Malaysian Rubber (SMR) Scheme, and the new processing methods for the pro- duction of the new process rubbers. The Problem The greater part of the smallholders' rubber is of inferior quality due to inadequate care taken in latex collection, processing, drying and storage. Apart from yielding lower prices, production of inferior quality rubber reduces natural rubbers' competitiveness against synthetic rubber. 14 15 The methods of grading smallholders' rubber are unsatisfactory. The absence of a uniform standard based on technical Specifications for grading has led to the subjective method of grading based on thickness, size, shades of color, presence of bubbles and mold growth. Estimation of moisture content is also arbitrary and is based on length of drying time and thickness of the sheets. It is common among buyers to record the weight of the rubber sheets to the nearest one-half pound downwards as the weight on which payment is to be made.1 Thus, if a succession of small quantities are purchased, the buyer would receive an unusually large profit. Smallholders' rubber is marketed through a chain of agencies consisting of the local dealers, middle dealers, remillers and exporters. Each agency in the marketing chain makes certain charges to cover the cost of its services and to make a profit. About 70 per cent of the smallholders' latex is sold to first level buyers (the local dealers) as unsmoked sheet (USS) and the remaining 30 per cent is sold as ribbed smoked sheet (RSS). A recent study on the marketing margins (or the difference between the f.o.b. price and the smallholders' price) indicated that the average marketing margin was 1* 1H. G. Biggs, "Report on the Marketing of Agri- cultural and Other Rural Produce in Malaysia" (London: Department of Technical COOperation, 1964), p. 24. 16 2.8 cents/1b for RSS and 9.1 cents/lb for the USS.2 In the case of rubber sold as scrap, the marketing margin was about 13 cents/1b.3 The prices received by small— holders could be increased through a reduction in the marketing margin if this chain of marketing agencies could be reduced. Natural rubber faces strong competition from synthetic rubber and is losing out to synthetics in the world elastomer market. For example, in 1950, 78 per cent of the world elastomer supply came from natural rubber as compared to 37 per cent in 1970. Hence, in order for natural rubber to compete with synthetic rubber, it is imperative that the smallholders adOpt the new technologies in production, processing and marketing to drive down the cost of production, processing and marketing. With the development of the new process rubbers, the conventional form of rubber (sheet rubber) is likely to phase out of the international rubber market. However, the small- holders cannot be eXpected to adOpt the new technologies in processing and marketing individually as the new forms 2S. C. Lim, "A Study of the Marketing of Small- holders' Rubber at the First Trade Level in Selangor,” Economics and Planning Division Report, No. 4, Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (September, 1968), Table 24, p. 39. 38. T. Cheam, "A Study of the Marketing of Small- holders' Lower Grade Rubber," Economics and Planning Divi- sion Report, No. 8, Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (July, 1971), Table 26, p. 50. 17 of rubber are processed and marketed along lines too Specialized for them to perform competently on an indi- vidual basis. On the other hand, the estate sector has little or no difficulty in adopting the new technologies as this sector is better organized and more productive in both production and marketing Operations. In fact, production of the new process rubbers is presently mainly confined to estates and remillers. The reorganization of the traditional smallholder processing and marketing system, insofar as it involves a reduction in the chain of agencies in marketing channel, is likely to result in an increase in smallholders' in- come. This increase in income could result from the reduction in the marketing margin and the subsequent in- crease in the prices received by smallholders for their product. The introduction of the yield-stimulant ethrel has the potential of substantially increasing the Malaysian rubber output. Given the inelastic demand for natural rubber and the strong competition from synthetic rubber, the increase in output is likely to have a depressing effect on the already declining natural rubber prices. The effect of the decline in prices on smallholders' in- come is dependent on the relative increase in yields and the decline in prices. 18 In the face of the declining natural rubber prices,the ad0ption of the yield-stimulant by the small- holders could provide a means of maintaining or even possibly increasing their income through output increases despite the more rapid decline in prices which is likely to result from the adoption. Objectives The objectives of this study are to: Analyze the potential impact of the yield- stimulant ethrel on the Malaysian and world natural rubber output over the period 1975-80. Assess the effect of the potential increase in output on the world and Malaysian natural rubber prices for the period 1975-80. Analyze the traditional and reorganized process- ing and marketing system for smallholder rubber. Compare estimates of Malaysian smallholders' income for 1975-80 under the following alterna- tives: (a) Without yield stimulation and with the traditional processing and marketing system (Alternative 1) (b) With yield stimulation and traditional pro- cessing and marketing system (Alternative II) 19 (c) Without yield stimulation and with reorganized processing and marketing system (Alternative III) (d) With yield stimulation and reorganized pro- cessing and marketing system (Alternative IV) 5. Assess the implications of yield stimulation and reorganization of the smallholder processing and marketing system for: (a) The competitive position of the natural rubber industry (b) Malaysian foreign exchange earnings from rubber (c) Rubber export tax revenue (d) Supply elasticity and price fluctuations 6. Assess the implications of the study for govern- ment smallholder rubber policy. Sources of Data Data for this study are mainly from secondary sources because a wealth of data is available over a wide range of the various aspects of the Malaysian natural rubber industry. The data were obtained through the publications of the various institutions connected with the rubber industry, namely, the Rubber Research Insti- tute of Malaya (RRIM), the Rubber Replanting Board (RRB), 20 the Malaysian Rubber Fund Board (MRFB), and the Malaysian Rubber DeveIOpment Corporation (MRDC) and Malaysian De- partment of Statistics. Supporting information was obtained mainly through interviews with officials of the Economics and Planning Division and the Smallholders' Advisory Service Division of the RRIM and through recent studies conducted by these divisions. Interviews with officials of the MRDC and with managers of the corporations' central processing factories also provided valuable information. A survey of 178 smallholders was undertaken in October 1971 in order to ascertain the views of small- holders on the potential adOption of the new production, processing and marketing technologies; to identify the factors associated with their willingness to participate in the reorganization of the processing and marketing system of their product, and to gain some insight into the problems likely to be associated with the above reorganization. The smallholder survey was conducted in two areas in the state of Selangor. In the first area, the small- holders were then selling their rubber to a central processing factory established by the MRDC. In the second area, the MRDC has pr0posed to set up a central processing factory. Eighty-seven smallholders from three 21 villages constituted the sub-sample in the first area while ninety-one smallholders from four villages consti- tuted the sub-sample in the second area. The questionnaires for the survey in both areas were prepared with the c00peration of the officials of the Smallholders Advisory Service and the Economics and Planning Divisions of the Rubber Research Institute. The questions were pre-tested by the author and a colleague from the Faculty of Agriculture at the Univer- sity of Malaya. The questionnaires were subsequently revised before the actual survey was conducted. The final year students of the Institute of Agri— culture in Serdang conducted the survey over a two-week period. Three briefings were given to the enumerators to explain the objectives of the survey and the procedures to be followed. An attempt was made to collect data on the prices paid by the dealers for smallholders' ribbed smoked sheet (RSS), unsmoked sheet (USS) and scrap by interviewing the dealers in both areas with the help of the Assistant Rubber Instructors in the areas.4 However, this attempt proved more difficult than had been anticipated as 4Assistant Rubber Instructors are the extension officers in the Smallholders Advisory Service Division of the Rubber Research Institute. They form the grass-root contact between the Institute and the smallholders and are generally familiar with the rubber dealers in their respective areas. 22 almost all the dealers interviewed were reluctant to divulge the required information, let alone to give access to records of their transactions. Previous Research Economic research on the smallholder sector has been mainly confined to the processing and marketing aspects of the smallholder rubber. These studies in gen- eral concluded that the existing patterns of processing, grading and marketing of smallholder rubber are far from desirable. Biggs, in his study of the marketing of agri- cultural produce in Malaysia observed that "it is in the fields of processing and primary marketing of the latex of scattered smallholders that the least satisfactory features of the existing marketing set-up are to be found. Similarly, Lim,6 Voon7 and Cheam8 in their studies of the various aSpects of the smallholder processing and market- ing system expressed dissatisfaction with the system mainly with respect to grading, marketing margins and moisture content determination. The studies concluded 5Biggs, 92, cit. 6Lim, 92, cit. 7 in Selangor" (unpublished M.S. thesis, University of Malaya, April, 1967). 8Cheam, gp, cit. P. K. Voon, "Chinese Rubber Smallholding Industry 5 23 that there is a need for the reorganization of existing smallholder processing and marketing system. Another study on the marketing of smallholder rubber was made by Agoes Salim.9 Salim analyzed the structure of sixty-eight district markets by considering the number of dealers in each district and the size of their reSpective businesses. Salim also attempted a measure of market imperfections by the degree of rigidity in prices paid by the dealers in the districts. This was achieved by examining the relationship between the prices paid by dealers and the f.o.b. prices (f.o.b. Singapore). This study found that the number of dealers in a district was for the most part relatively small and the concentra- tion of business in each district was relatively low indicating substantial competition among the dealers. The study also found that, using average monthly prices, the prices in the districts are not rigid or sticky, that is, prices in the districts and the f.o.b. prices are very highly correlated with the coefficient of determination (R2) ranging from 0.9873 to 0.9948. Using daily prices however, it was found that the correlation between the district prices and the f.o.b. was less with the R2 rang- ing from 0.9772 to 0.9916. Salim noted that his study has labored under fairly severe data limitations and 9Agoes Salim, "The Market for Small Farm Rubber in Malaya" (unpublished Ph.D. dissertation, Department of Agricultural Economics, University of Wisconsin, 1967). 24 cautioned against any sweeping conclusions being made from his study. A study of the short-run supply response of Malaysian rubber was made by Wharton.10 The study indi- cated that the supply response of Malaysian rubber was low. Wharton found that the reSponse was lower for estates than for smallholdings. The estimated price elasticities of supply of estates ranged from +0.03 to +0.12 and were not significantly different from zero. For the smallholders, the elasticity estimates ranged from +0.20 to +0.37 and all the coefficients significantly different from zero. The classic work on the economics of the Malaysian rubber industry is by Bauer in 1948.11 In his study, Bauer noted that before World War II the assistance given to smallholders by the Rubber Research Institute in terms of research and technical advice was of a minor order compared to the assistance provided to the estates though about one-half of the Institute's revenue came from the, smallholder sector. The reason for the heavy emphasis on estates in providing assistance was that the estates were mostly European-owned and the officials of the Institute 10C. R. Wharton, Jr., "Malayan Rubber Supply Condi- tions," Reprint No. 3 (New York: Agricultural DevelOp- ment Council, 1964). 11P. T. Bauer, The Rubber Industry: A Study in Com etitionuand MonOpoly (Cambridge, Mass.: Harvard n1versIty Press,’1948). 25 itself were then mostly Europeans. Institute officers were also not familiar with the conditions and problems on smallholdings. Bauer also noted that new plantings by smallholders were discouraged through the imposition of various restrictions which were applicable to the small- holdings but not to the estates. These factors have been mainly responsible for the smallholdings lagging behind the estates in production, processing and marketing. There is a dearth of literature on the analysis and projections of natural rubber prices. Two reasons account for this dearth of literature. First, analysis of future natural rubber prices is beset with complexities arising from the problems involved in predicting the be- havior of the multiplicity of variables that determine the world price of rubber. Second, though studies on rubber prices have been made by international agencies and insti- tutions connected with the rubber industry, results of these studies are generally not available for fear of being published. An attempt was made by Crosson to forecast natural rubber prices based on qualitative analysis of several factors which are likely to influence the prices. Crosson predicted that the Malaysian price of natural 12Pierre R. Crosson, Economic Growth in Malaysia: Projections of Gross National'Product andidfTProduction, Cansumption, and NetImports of Agricultural Commodities, Planning Methods Series, No. 2 (Jerusalem: NationaI PIa - ning Association, Center for Development Planning, 1966). 26 rubber will decline in even steps from 70 cents/1b (Malaysian cents) in 1965 to 55 cents/lb in 1975. More recent attempts to project natural rubber prices have been made by Behrman,l3 Dayal14 and Hague.15 Behrman constructed an econometric model of the world rubber market and utilized the model in simulations over a decade of the sample period (1955-1964) and over a sixteen-year forecast period (1965-1980) in order to pro- ject natural rubber demand,supply;and prices. Similarly, Dayal constructed an econometric model of the world rubber market. The model was designed to produce inte- grated projections of supply,demand, and prices of natural rubber for individual years up to 1980. The model was first used to attempt separate analysis of supply, demand and prices. These separate analysis were then put together into a single framework to generate an integrated picture of the three segments of the rubber market. Hague pro- jected natural rubber prices for the period 1975-85. His projection is based on the trend in the cost of synthetic 13Jere R. Behrman, "An Econometric Study of the World Rubber Market: 1950-1980," Discussion Paper No. 85, Department of Economics, University of Pennsylvania, July, 1968. 14R. Dayal, "Econometric Model of the World Rubber Market," Commodities Division, UNCTAD, Geneva, May, 1970. (Mimeographed draft.) 15Irfan, Ul, Hague, "Efficiency in Resource Allocation: The Case of Natural Rubber," Economics Department, IBRD, July, 1971. 27 rubber and assumes that the future synthetic rubber production cost will serve as a ceiling for natural rubber prices. CHAPTER III MALAYSIAN AND WORLD NATURAL RUBBER SUPPLY PROJECTIONS WITH YIELD STIMULATION: 1975-80 Interrelationships Between Variables in the World Natural Ribber Market The world natural rubber market is influenced by a multitude of variables which interact to determine the sup- ply, demand, and prices of this commodity. In view of the close substitutability between natural and synthetic rubber, the world market for natural rubber cannot be studied in isolation but has to be studied in the context of the simultaneous analysis of the synthetic rubber market, particularly, an analysis of the nature and signi- ficance of the competition between the two elastomers. In order to facilitate an understanding of the linkages between the various segments within the Malaysian natural rubber industry; between the Malaysian and world natural rubber industry, and finally the linkages between the natural and synthetic rubber industries, an economic model of the world rubber market (natural and synthetic) is 28 29 developed and presented in Figure 3.1. The model has been presented in the form of a flow diagram so that the various linkages in the industry can be made apparent. A detailed discussion of the model and equations specifying the re- lationships between the variables will be presented when each segment of the rubber market is analyzed-—in this and the ensuing chapters. However, due to the paucity of data and the time constraint for this study, it is not possible to include all the variables in the model and quantify all the relationships between the variables in this study. In cases where quantification of the relationships between certain variables is not possible, a qualitative analysis of their impacts on the parameters of interest is attempted. The inability to quantify all the relationships between the variables in the model does not discredit the usefulness of the model itself. It provides a framework for policy makers to trace the consequences of alternative policies to be pursued on rubber, particularly on the major segments of the rubber market such as costs, supply, demand and prices. The model can also be useful for future Malay- sian and other researchers on the rubber industry as it provides a framework to absorb new and more complete data on the various aspects of the industry as they become available. The model will be used in my study as a frame- work to analyze the impacts of the new technologies in Malaysian natural rubber production, processing, and 30 53.3.3.3 «0 Evan nocal glow—3a .03.— aoxoun 69.0535 we 05am no“- 3.0.33 .093 38:35.0 59.3.35 no 90.3033 05 3333 gut 83898 3083..» 36... I no 839538 none: 3.3.: - mzu E86: u 868. contains n RE 8233— uUcfiuhm I am nonna— iuflaz - «2 33¢ so £33m . .mdi 3358 333.8 .33. u 8: 9.38:3: .. E“! “E .003 :3 END! .5 ac HOBO! Dull-08 SUI.H.M gh IIIIIIIIII hang a: «aura. u 0002 31 marketing on the different segments of world rubber market and on the income of Malaysian natural rubber producers. Malaysian Natural Rubber Supply Price Elasticity of Natural RuEBer Supply Most studies of the supply response of natural rubber have indicated that the supply of natural rubber is price inelastic. Wharton found that the price elasticity of supply of estates does not differ significantly from zero while price elasticity of supply of smallholders varies between 0.20 and +0.37.1 Dayal, in his study of the supply function of natural rubber found that the addition of a price variable has almost no effect on the supply. His analysis also shows that there is practically no in- fluence of prices on the yield and acreage of replantings and new plantings in any of the major natural rubber pro- ducing countries.2 The price inelasticity of natural rubber supply can perhaps be attributed to the perennial nature of the crop itself. At any given time, there is a fixed rubber produc- tive capacity dependent on the stock of mature trees and 1C. R. Wharton, Jr., "Malaysian Rubber Supply Conditions," Reprint No. 3 (New York: Agricultural Development Council, 1964), p. 146. 2R. Dayal, "Econometric Model of the World Rubber Market," Commodities Division, UNCTAD, Geneva, May, 1970. (Mimeographed draft.) i 32 the yield levels of the planted material. Since rubber has a long gestation period (6-8 years» there is a lapse of several years before the producers can increase the stock of his mature trees. In the short run (when the stock of mature trees is fixed),producers may respond to higher prices within certain limits by increasing the frequency of tapping and size of tapping cuts and changing the area or number of trees being tapped. However, the above response has been very limited and upward price movements, even for sus- tained periods, have not resulted in large increases in production. Wharton indicates that, as far as smallholders are concerned, the low response to upward price movements can be attributed to the fact that the smallholders are Operating at "normal" capacity levels, that is, at high frequency and intensity of tapping and the acreage tapped is close,or equa1,to the mature acreage.3 The extreme price inelasticity of estate supply can be attributed to the rather fixed tapping schedule followed by the estates. In the case of a price decline, producers may respond in the short-run by decreasing the frequency and intensity and the number of trees tapped. However, this response is also limited. The estates can be expected to continue tapping so long as their variable costs of opera- tion can be covered with the prevailing rubber prices. 3Wharton, pp. cit., p. 147. 33 In the case of smallholders, a drop in prices means a drop in family income especially for those smallholdings where the source of labor is the family labor. Producers with alternative crOps or employment Opportunities may reduce production and supplement their income from these sources. However, given the limited employment Opportunities, the majority of producers would probably continue their regular tapping schedule or may even increase the frequency and intensity of tapping in order to maintain their family income. In the long run, the estates and smallholdings could respond to price changes through an increase or de- crease in replanting and new plantings if producers eXpect the prices to increase or decrease accordingly. Thus, the long run supply elasticity is likely to be much larger than the short-run elasticity. Furthermore, the long run elasticity is probably larger for estates than for small- holdings as is evident from the decrease in replanting and new planting on Malaysian estates and the decrease in estates acreage in response to the declining natural rubber prices.4 4The Malaysian estate acreage declined from about 2 million acres in 1955 to 1.6 million acres in 1970. During the same period natural rubber prices declined from 114 cents/1b (Malaysian cents) to 56.4 cents/1b. 34 Natural Rubber Supply Function Before proceeding with supply projection, a model of the Malaysian natural rubber supply is presented and discussed to provide an insight into the various factors affecting the supply of this commodity. This model is an elaboration of the supply segment of the model of the rubber industry presented in Figure 3.1. The Malaysian rubber supply model is, however, equally applicable in analysis of supplies for other natural rubber producing countries. The supply function of natural rubber can be represented by the following equation: 1., SNRt = f (PNRt, Mt, YLDt, Ut) where SNR supply of natural rubber PNR price of natural rubber M = mature acreage YLD = yield per unit area U = random error t = time period, year The yield per unit area is a function of several variables and can be summarized by the equation: 2. YLDt = 9 (Act, Cct, Ast, T, Ut) where Ac = age composition of the mature acreage Cc = clonal composition of the mature acreage 35 As = acreage stimulated T = a time trend U - random error A time trend has been included in the second equation as a proxy for other factors which are likely to iinfluence the yield trend (e.g., fertilizers and changes in tapping system, etc.). The inclusion of Ac as an inde— pendent variable reflects the fact that the yield of rubber trees varies with age. The yield generally in- creases following the gestation period of the trees, reaches a peak about eighth to tenth year of tapping and then declines. The clonal composition of the mature trees also affects the average yield as yields vary with the types of clones planted. Another factor which could significantly affect the yield of the trees is the acreage of mature trees under yield stimulation (As). Reference to the effect of the yield-stimulant ethrel on the yields of different clones have been made in the preceding chapter. The average yield of Malaysian rubber has been increasing steadily since 1955 as a result of replantings and new plantings. Replantings and new plantings affect the yields through their effects on the clonal composition of the acreage resulting in higher proportions of acreage being under high-yielding clones. Due to the gestation period of the rubber trees, there is a lag of six to eight 36 years before the replanted and new planted trees affect the clonal composition of the mature acreage, thus the yield and output. In view of the inelasticity of natural rubber supply and the rationale for this inelasticity, most studies on supply projections of this commodity have excluded price as one of the variables affecting supply thereby assuming a perfectly inelastic supply response to price. In this study, the same assumption is made when projections for Malaysian and world natural rubber output are attempted. Output Projection of the Rubber Research Institute of Malaya The Rubber Research Institute of Malaya (RRIM) makes periodic projections of Malaysian rubber output. The most recent projection made in 1970 covers a period of ten years (1971-80).5 The RRIM projection used essentially the same variables that were Specified in the supply model presented earlier and assumed that prices have no effect on the supply. The projection, however, did not incorporate the potential use of ethrel and its effect on future output. In my attempt to project the Malaysian rubber output with the use of ethrel, the RRIM projection will be used as the benchmark or control. Thus, my projection essentially SP. 0. Thomas, "Malaysian Natural Rubber in the Seventies: A Forecast of Production Trends," Rubber Re- search Institute of Malaya, Kuala Lumpur, Malaysia (July, 1970). 37 entails a revision of the RRIM projection by incorporating the potential use of ethrel and its effect on the latter projection. A brief summary of the methodology used in the RRIM projection is presented to help understand how the various statistics presented later in the chapter are arrived at. The RRIM projection for the Malaysian rubber output is based on separate projections for estates and smallholdings. Estates For the estates, all planted rubber are classified into three categories: unselected seedlings, pre-war high—yielding clones, and post-war high—yielding clones. Acreages of each of these categories are estimated for each year. For purposes of production forecast, it is necessary to estimate the mature acreages of each category as imma- ture acreages have no effect on production and have to be subtracted from total acreage. Mature acreages are esti— mated by calculating the acreage coming into maturity annually and this is obtained by subtracting the immature acreage for a given year from the sum of the acreage planted in the same year and the immature acreage of the previous year. The immature acreage for any given year is a summa- tion of the acreage new planted or replanted during the previous Six years (which is the average gestation period for rubber trees). With the mature acreages of each 38 category for a given year estimated, yield estimates are then calculated in order to arrive at the production estimates. For the unselected seedlings and pre-war high— yielding clones, the assumption made in the RRIM projection is that these two categories will have a declining yield trend as these categories mainly consist of old trees. However, in estimating the yield for the post-war high- yielding clones, this category is grouped into three classes as there are substantial differences in yield per- formance of different clones in this category. Yield curve for each of these classes based on the latest data collected through the Commercial Registration of Estates by RRIM is then derived. Given the yield curve and the acreage planted to different clones for each class, a weighted average yield for the post-war high-yielding category is derived. Smallholdings Projecting future production on smallholdings is beset with some difficulties due to the lack of reliable and comprehensive statistics on this sector. Thus, the projection made had to be based on the best possible approximations, from data available, on acreage and yield. Total planted acreage is initially derived from the Rubber Statistics Handbook of the Department of 39 Statistics and revised in accordance with the data collected by the Smallholders' Advisory Service Division of the RRIM and the aerial survey conducted by the Ministry of Agri- culture. Using this acreage estimate as the basis, mature acreages are computed by taking into consideration the past and future rates of new planting and replanting. The yield on smallholdings has been increasing during 1960-69 due mainly to the higher proportion of high- yielding trees coming into maturity annually. The yield per acre is estimated by a multiple regression of average yield per acre on cumulative acreage maturing annually and a time trend. The last variable is used to include other factors contributing to the steady increase in yield. The results of the forecast made for both estates and small- holdings up to 1980 are summarized in Table 3.1. With the brief discussion on the methodology used in the RRIM pro- jection of the Malaysian natural rubber output, an analysis of the potential impact of ethrel on the output is now attempted. The analysis is carried out separately for estates and smallholdings. Projections of the Impact of Yield Stimulation With Ethreiion Malaysian Natural Rubber Output: 1975-80 Assum tions Regarding the Use OE Ethrel In projecting the Malaysian natural rubber output with the use of the yield-stimulant ethrel, certain 40 Table 3.l.--Recent and Projected Malaysian Rubber Acreage ('000 Acres) and Production ('000 Year Acreage Production Total Total Incizggzlin Estates Smallholdings Estates Smallholdings Acreage Production :622u2282? 1955 2015 1783 352 285 3798 637 8.9 1956 2008 1816 351 255 3824 606 4.9 1957 2011 1843 368 250 3854 618 2.0 1958 1981 1915 389 249 3896 638 3.2 1959 1942 2008 407 263 3950 670 5.0 1960 1935 2099 413 272 4034 685 2.2 1961 1937 2202 428 278 4139 706 3.1 1962 1927 2322 438 277 4249 715 1.3 1963 1919 2415 458 295 4334 753 5.3 1964 1893 2487 477 314 4380 791 5.1 1965 1859 2525 491 348 4384 839 6.1 1966 1813 2571 514 386 4384 900 7.3 1967 1746 2604 526 397 4350 923 2.5 1968 1676 2615 563 472 4291 1035 12.1 1969 1623 2625 603 587 4248 1190 15.0 1970 1575 2677 638 635 4252 1273 7.0 1971 1532 2729 672 717 4261 1389 9.1 1972 1492 2781 701 786 4273 1487 7.1 1973 1452 2833 724 846 4285 1570 5.6 1974 1437 2885 740 894 4322 1634 4.1 1975 1437 2937 751 934 4374 1685 3.1 1976 1437 2989 764 977 4426 1741 3.3 1977 1437 3041 775 1030 4478 1805 3.7 1978 1437 3093 785 1095 4530 1880 4.2 1979 1437 3145 791 1162 4582 1953 3.9 1980 1437 3197 800 1231 4634 2031 4.0 Source: P. 0. Thomas, “Malaysian Natural Rubber in the Seventies: A Forecast of Production Tronds," Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (1970), Tables 1, 4, and 5. 41 assumptions regarding the use of the stimulant are made. These assumptions, listed below, hold for both estates and smallholdings. 1. The use of ethrel has no deleterious short- or long-term effects on the trees and on the technical qualities of the rubber produced. Ethrel is applied to trees seventeen years old and above; that is, ethrel is applied on renewed bark. Tapping system used is alternate daily and half- spiral length. Ethrel strength used is 6.7 per cent active ingre- dient in palm-oil and applied every two months to the lightly scraped bark below the tapping cut. The stimulated trees are adequately fertilized in accordance with the amount recommended by the RRIM. There are no differences in response to ethrel based on age of trees. The last assumption is based on the fact that experiments have shown that there are marked differences in response to ethrel between younger trees tapped on virgin bark and the trees tapped on renewed bark, with the response being greater with the latter. However, no 42 marked differences in response are observed between trees of different age when they are tapped on renewed bark.6 The first assumption is the most crucial to the whole analysis. The results of field trials with ethrel over the last three years or so have thus far supported this assumption.7 Assumptions two to five are in accord- ance with the RRIM current recommendations regarding ethrel stimulation. Estimation Procedure Though the estimation for estates and smallholdings are done separately, the procedure used is essentially the same for both sectors. Listed below are the steps in- volved in the procedure for both estates and smallholdings. 1. Estimate the acreage expected to be stimulated annually for the period 1975-1980. 2. Calculate the weighted average response to stimu- lation based on the responses of the different clones and the acreage planted with each clone. 6P. D. Abraham, "Field Trials with Ethrel," Planters' Bulletin, NO. III, Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (November, 1970). 7P. D. Abraham, T. C. P'ng, and E. K. Ng, "RRIM Ethrel Trials: Progress Report," Preprint No. 1, Rubber Research Institute of Malaya Planters' Conference, Kuala Lumpur, Malaysia (July, 1971). 43 3. Calculate the expected incremental output resulting from stimulation and project the total Malaysian output for 1975-1980. Estimating the Estate Acreage Wtimulated: 1975-19210 The basis for this estimate is the total estate acreage for 1975-1980. Since it has been assumed that only trees seventeen years old and above will be stimu- lated, it is necessary that the acreage under seventeen years old be deducted from the total annual acreage. This is achieved by deducting from the total acreage each year the acreage new planted and replanted since the last seventeen years. For example, the acreage seventeen years and above in 1975 will be the total acreage for that year less the total acreage new planted and replanted since 1958, and the acreage seventeen years old and above in 1976 is the total acreage for that year less the total acreage new planted and replanted since 1959 and so on. Table 3.2 shows the acreage new planted and replanted since l958,and from this table, acreage of seventeen years and above for each year from 1975-1980 is calculated. The next step in the estimation of acreage to be stimulated is to estimate the proportions of the acreage seventeen years and above that is expected to go into stimulation. Since ethrel stimulation is still in the experi- mental stage, it is difficult to obtain data on the acreage 44 Table 3.2.--Recent and Projected Rubber New Planting and Replanting on Malaysian Estates: 1958-80. ('000 Acres) Year Pl:::ing Replanting Total Cumglziive 1958 14 65 79 79 1959 14 68 82 161 1960 22 75 97 258 1961 18 70 88 346 1962 10 63 73 419 1963 9 59 68 487 1964 6 59 65 552 1965 5 53 58 610 1966 3 50 53 663 1967 2 28 30 693 1968 1 13 14 707 1969 - 12 12 719 1970 - 12 12 731 1971 - 12 12 743 1972 - 10 10 753 1973 - 10 10 763 1974 - 10 10 773 1975 - 10 10 783 1976 - 10 10 793 1977 - 10 10 803 1978 - — - 803 1979 - - - 803 1980 - - - 803 Source: P. 0. Thomas, "Malaysian Natural Rubber in the Seventies: A Forecast of Production Trends," Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (1970), Table l. 45 going into stimulation during the period under study. Interviews were conducted with managers of several estates in July, 1971 with the object of securing some information on the present estate acreage under stimulation and the proportions of acreage expected to be stimulated.8 The interviews, however, failed to secure the required informa- tion as the respondents were both unable and unwilling to divulge the information at this stage. In view of this difficulty, the alternative is to make assumptions regarding the levels of adoption of the yield-stimulant by the estates. For the purpose of pro- jecting the output, two levels of adoption are assumed, the low and high levels of adoption. For the low adoption level, it is assumed that by 1975, 50 per cent of the estate acreage of seventeen years old and above will be stimulated and that there will be a 10 per cent increase in the acreage stimulated annually so that by 1980, all the estate acreage of seventeen years and above will be stimulated. In the case of the high level of adoption, the assumption is that 60 per cent of the estate acreage of seventeen years and above will be stimulated by 1975, and that there will be a 10 per cent increase in the acreage stimulated annually. With the "high level adoption" assumption, all the estate acreage of seventeen years old 8The interviews were conducted during the Rubber Research Institute of Malaya Planters' Conference held in Kuala Lumpur, Malaysia, in July, 1971. 46 and above will be under stimulation by 1979. Both assump- tions are based on the belief that in the initial stages, the estates are more cautious in their ethrel application, and that the acreage stimulated will increase as more is known about the long-term effects of the stimulant. Based on these assumptions, the estate acreages to be stimulated during the 1975-80 period are estimated. These estimated acreages are Shown in Table 3.3. Regponse to Stimulation From the total estate acreage expected to be stimulated,an estimate is made of the acreage under the different types of clones. This estimate is based on the results of the survey of estates conducted by the RRIM in 1967. For the purpose of computing the weighted average response to stimulation, it is assumed that as of 196% the proportion of each clone in the total planted acreage remains approximately the same throughout the projection period. The RRIM Survey indicates that there are some forty different clones planted on estates. However, data on the response to stimulation based on the RRIM field trials are available for only nine clones (Table 3.4). These nine clones cover about 43 per cent of the total planted estate acreage. In computing the weighted average response, it is then necessary to estimate the response of other clones to stimulation and this estimate is arrived at 47 Table 3.3.--Projected Malaysian Estate Rubber Acreage Seventeen Years Old and Above and Estimated Acreage to be Stimulated: 1975-Bo.a ('000 Acres) 1 2 3 4 5 Projected Projected Projected Est1mated Acreage to . be Stimulated Total Acreage Acreage Year Planted Under 17 Years (As t Ab 1 t Acreage 17 Years and Above per cen so u e of 4) Acreage Lowb Highc Low High 1975 1437 783 654 50 60 327 392 1976 1437 714 723 60 70 434 506 1977 1437 642 795 70 80 557 636 1978 1437 545 892 80 90 714 803 1979 1437 457 980 90 100 882 980 1980 1437 384 1053 100 100 1053 1053 aCalculated from data in Tables 3.1 and 3.2. bUnder the "low" assumption, 50 per cent of the estate acreage of 17 years Old and above will be stimulated by 1975. stimulated will increase annually by 10 per cent, so that by 1980 all the estate acreage Of 17 years old and above will be stimulated. The acreage cUnder the "high" assumption, 60 per cent of the estate acreage of 17 years Old and above will be stimulated by 1975. The acreage stimulated will increase annually by 10 per cent, so that by 1979 all estate acreage of 17 years Old and above will be stimulated. 48 .aaOIEamm ca ucoapoumca o>auom ucoo Hem b.m ma coma coaumuucoocou aounum .OCammmu acuammnmaec .maamp oumcumuam ma com: Eoummm Ocammmu can mcucos 03» muo>o poaammc ma aoucum .umom oco How one mcoaum>nomno ocem .m magma .AOHma .Sasnc mamsmamz .Aaaesq mamas .esmaaz mo ousuaumcu noncomom nonndm =.mauaue caoam .z.a.m.m mo mamhaecd vasocoomz .Eanmun< .a .m was com .w .9 “oousom v.5m a.ma o.mm a.~oa m.ov m.oa m.mm v.mm m.mh a.av omcommmm ommucoouom ems vmm mmoa mama mom mmm mmm mow hum Nmm AOM\mnaV uncommom amam omam sown mmmm mmma nmmm «mam vmma momm nmma AOM\mnav coaucaSEHum aoncum spa: mmma onma vnaa bmaa omoa mmma mama maaa mmma mava aom\mnav aouucoo ommuo>¢ nounmamz aom szm a Hahn mm as Hoa mm a .au mam same mam zamm mom szm 006 szm moccao mo momma ucoeumoua .AOHOM\mnaV cmocoau mo momma up .coauMansaum aoucum ou uncommom ”cammmamzuu.¢.m cance 49 by taking the simple average response of the nine clones for which data on the reSponse are available. Given the clonal reSponse to stimulation and the estimated acreage planted with each clone, the weighted average reSponse to stimulation is computed,and this works out to be 770 pounds per acre (above control) or approximately 61 per cent response. Table 3.5 gives a summary Of the projec- tions for the estate sector for the period 1975—1980. Estimating the_§mallholding Acreage to be Stimulated Smallholding acreage of seventeen years and above is estimated by subtracting the acreage below seventeen years from the total planted acreage. Data on the small— holding acreage new planted and replanted since 1958 (Table 3.6) provide the basis for calculating the acreage under seventeen years for the period 1975-1980. The next step involves the projections of the prOportions of smallholding acreage (seventeen years old and above) that is expected to be stimulated. As with the estates, data on these proportions are hard to come by. Discussions with Officials of the Smallholders' Ad- visory Service and the Economics and Planning Divisions of the RRIM failed to yield the required information as these officials were hesitant to make any estimate. This hesitancy is due to the fact that ethrel stimulation is still in its experimental stage and that the long-term .m.m OHQMB CH 0 OUOCQOOM OOmU .m.m wanes ca b ouocuoou mama .mom Us H.m MOHQMB CH MUMU EOHM UOvMHSUHMUfl 50 mmaa Noaa «.mv m.mv mmm mmm orb mmoa mmoa oom omma mmaa vmoa m.~v m.mm bmm mom one omm mmm amp mnma aooa omoa a.mm ~.am men men one mom van mmh wnma mmm mom a.m~ m.vm mam ama own one nmm mun nnma mmm mam b.mm m.ma eba mva one mom vmv won mbma mmm mom m.ha m.va vma Naa one «mm bum amp mhma swam sou seam Boa roam son unmam neon aouoe\onav O coo AN m u ancoe maaa ooo.v coaueassaUm amcoe mcoa ooo.v laces maaa 000.3 Rom any on am+~v oucouoca omoouoca 0» sec mom amouoc ooo.v coauoassaum new» coaunasEaum omsucoouom ousaoona ommuo>¢ coumaSEaum usonuaz coucmaoz on on coached usmuso monounoum Baas undone coucaaumm couOOnOum usmuao anacoeouoca oouoofionm o m v m N a c.0mImhma "coauuaneaum camas usonuaz use snag mouuumm cuausaamz co unease Rosana mo maoau66aouaun.m.m manna 51 Table 3.6.--Recent and Projected Rubber New Planting and Replanting on Malaysian Smallholdings: 1958-80. ('000 Acres) Year Plgizing Replanting Total Cumglziive 1958 31 57 88 88 1959 44 69 113 201 1960 66 69 135 336 1961 96 57 153 489 1962 109 69 178 667 1963 85 83 168 835 1964 61 79 140 975 1965 33 91 124 1099 1966 27 49 76 1175 1967 19 75 94 1269 1968 14 39 53 1322 1969 15 36 51 1373 1970 60 45 105 1478 1971 60 45 105 1583 1972 60 45 105 1688 1973 60 45 105 1793 1974 60 45 105 1898 1975 60 45 105 2003 1976 60 45 105 2108 1977 60 45 105 2213 1978 60 45 105 2318 1979 60 45 105 2423 1980 60 45 105 2528 Source: Thomas, 9p. cit., Table 4. 52 effects of stimulation, and the receptivity of small- holders toward this new technology are yet unknown. In order to estimate the acreage going into stimu- lation, several questions pertaining to the attitudes of smallholders toward this new technology were included in the smallholder survey conducted by the author in October, 1971 in the State of Selangor. Out of the 178 smallholders interviewed, 79 (45%) responded that they will use ethrel when their acreage is Old enough to be stimulated. Forty- four (24%) responded that they will not use the stimulant and for 29 respondents (16%), the response given was un- certain." Fifteen per cent Of the respondents have not heard of the new yield-stimulant. The main reasons given by respondents who either will not use ethrel or express uncertainty about the use are the fear that use of ethrel might damage and/or kill the trees; the lack of knowledge about methods of ethrel application, and the effect of ethrel on output. A summary of the response is given in Table 3.7. Table 3.7.--Responses of a Sample of Smallholders in Selangor to the Potential Use of Ethrel in October, 1971. Type of ReSponse No. of Respondents Per cent Not heard of ethrel 27 15 Will use ethrel 79 45 Will not use ethrel 43 24 Uncertain 29 16 Total 178 100 53 Though the survey indicated that 45 per cent of the smallholders interviewed will be using ethrel, it is difficult to generalize from the results for the small- holder sector as a whole. It is very likely that, for the smallholder sector as a whole, the response to the potential use of ethrel would be lower than that obtained from the sample survey in Selangor for several reasons. First, the Rubber Research Institute is situated in Selangor and early experiments and field-trials with ethrel have been mainly confined to this state. Second, the sample of smallholders interviewed were from areas close to the Institute (approximately 20-40 miles from the Institute). These two factors are likely to cause an upward bias in the responses obtained as the smallholders in the survey areas are probably more informed about ethrel and hence are more willing to adOpt the stimulant as com— pared to smallholders in other states in Malaysia. Based on the response obtained from the survey, and the reasons for the probable upward bias in the re- sponse pertaining to the potential adOption of ethrel, it can be eXpected that the potential rate of adOption by the smallholder sector as a whole would be lower than the 45 per cent indicated in the survey. Thus,in estimating the smallholding acreage to be stimulated during 1975-80, the rate of adoption is assumed to be lower than that indicated by the survey. Two levels of adoption of the S4 stimulant (the low and high levels of adOption) by the smallholder sector are assumed. With the "low" assump- tion, it is assumed that by 1975, 30 per cent of the smallholding acreage of seventeen years old and above will be using ethrel,and that the acreage stimulated will increase annually by 10 per cent, so that by 1980, 80 per cent of the acreage will be stimulated. Based on the “high" assumption, 40 per cent of the smallholding acreage will be stimulated with the acreage stimulated increasing by 10 per cent annually, so that by 1980, 90 per cent of the acreage will be stimulated. Based on these assump- tions, the smallholding acreages to be stimulated for the period 1975-80 are estimated (Table 3.8). The levels of adOption of the stimulant have been assumed to be higher for estates than for smallholdings. The reason for this assumption is that it would require more time for the approximately 300,000 scattered small- holders to gain sufficient knowledge about ethrel, parti- cularly knowledge pertaining to costs of the stimulant, method of application, fertilizer requirements, and the effect of the stimulant on the yield. On the other hand, the estates are likely to have quicker access to the necessary information about the stimulant as there are only 2,100 estates, and furthermore, some of these estates are currently conducting their own field-trials with the stimulant. 55 Table 3.8.-—Projected Malaysian Smallholding Rubber Acreage Seventeen Years and Above and Estimated Acreage to be Stimulated: 1975-8O.a ('000 Acres) 1 2 3 4 5 Estimated Acreage to be Stimulated Projected Projected Projected Year Total Acreage Acreage (As per cent Absolute Planted Under 17 Years of 4) Acreage Acreage 17 Years and Above Lowb Highc Low High 1975 2937 2003 934 30 40 280 373 1976 2989 2020 969 40 50 388 485 1977 3041 2012 1029 50 60 515 618 1978 3093 1982 1111 60 70 667 778 1979 3145 1934 1211 70 80 848 969 1980 3197 1861 1336 80 90 1069 1203 aCalculated from data in Tables 3.1 and 3.6. bUnder the "low" assumption, 30 per cent of the smallholding acreage of 17 years Old and above will be stimulated by 1975. The acreage stimulated will increase annually by 10 per cent, so that by 1980, 80 per cent of the smallholding acreage of 17 years Old and above will be stimulated. cUnder the "high" assumption, 40 per cent of the smallholding acreage of 17 years Old and above will be stimulated by 1975. The acreage stimulated will increase by 10 per cent annually, so that by 1980 90 per cent of the smallholding acreage of 17 years Old and above will be stimulated. 56 Response to Stimulation Data on the reSponse of smallholding to ethrel stimulation are not available at the time of writing this thesis. The RRIM launched a large smallholding ethrel- stimulation trial in 1970 involving some 8,000 smallhold- ings and covering an area of 15,000 acres.9 Results of these trials are currently not available. To arrive at the response to stimulation on small- holdings, the response on estates will be used as the basis of comparison. The weighted average estate response is reduced by 100 lbs. per acre to yield a response of 670 lbs. per acre on smallholdings. The reduction is made in view of the generally lower standards of agricultural prac- tice on smallholdings as compared to the estates. The above derived estimate is consistent with the results of a small scale trial (involving only fifty-four smallholdings) carried out in 1970. The results show that on 80 per cent of the holdings, the yield increased by about 70 per cent in reSponse to ethrel.10 Based on the estimated acreage to be stimulated and the assumed response (lbs/acre) to stimulation, the smallholding output with yield stimulation 9P. D. Abraham, "Ethrel Trials on Smallholdings: Preliminary Results," Preprint No. 2, Rubber Research Institute of Malaya Planters' Conference, Kuala Lumpur, Malaysia, July, 1971, p. 14. loIbid., p. 11. 57 is projected for the period 1975-80 (Table 3.9). A sum- mary of the output projections for both estates and small- holdings is shown in Table 3.10. Impact of_Yield Stimulation on World Natural Rubber Output: 1975-80 The estimate of the impact of yield stimulation on natural rubber output has thus far been confined to Malaysia. However, we cannot overlook the possibility of other natural rubber producing countries (mainly Indonesia, Thailand, Ceylon) adOpting yield stimulation if this new technology is proven to have no long-term deleterious effects on the trees and on the qualities of the rubber produced. Based on the probable Spread of this new pro- duction technology, an attempt will be made to approximate the impact of the technology on the world natural rubber output. Since the Malaysian output with yield stimulation has already been projected, the impact of the stimulant on the world output then involves the estimation of its impact on the other (rest of world) natural rubber producing countries. NO objective estimate of the impact of yield stimu- lation on output for other natural rubber producing coun- tries can be made due to the paucity of the relevant data. These data include the past and future rates of new plant- ing and replanting, types of clones planted, clonal re- sponse to stimulation and the proportions of acreage 58 .m.m wanes ca n muocuoou some .m.m can a.m moanme ca Home seam emumasuamum amma amma «.mm o.o~ own omm ono moma mooa amma omma mmva oava o.mm m.am omm vmm ono mom mew moaa mnma mama mmma m.am m.ma mmm oom ono mnn noo mmoa mnma mama voaa o.ma o.ma mma vma ono mam mam omoa nnma mmaa mmoa m.va m.aa mva oaa ono mmv mom nnm onma oeoa maoa o.ma o.m maa vo ono mnm omm vmm mnma sea: 30a seam Bog roam 30a Osman neon 0 sec aouom\mnav Amcoa mcoa ooo.v amuwm woo amcoa mcoq ooo.v coaumaSEaum amcoe mcoa ooo.v am+mv ommonoc omcouoca on uncommom amouoe ooo.v coauoaQEaum noon cOaueaseaum H eucaomnd omono>¢ coucacsaum usosuaz ommucoouom Boas unease euuzmaos on on mmmmuoa unauso concenoum oouoofloum bamboo amucoeouoca couoofioum noumsaumm o m e m N a .omumnma M “coaueasaaum mama» usonuas can spas HBOAOOOAoAA unease Ransom mcaeaosHauam aaamseamzls.m.m manna 59 .m.m canoe ca 2 ouocuoom mom .mom GHQGB Gun 0 ”HOCUOOW 00mm .m.m cance ca O ouocu00u memo o .m.m cance ca b ouocu00m womb .m.m new m.m moanoe ca name Eoum poumasoamum mmnm manm m.mm o.mm Nmn Nmm oom omm mom mom amom amma oom omma ommm oamm a.mm m.wm nmo nmm omm vmm nmm mom mmma Noaa amn mnma mmmm mmmm a.nN n.mm mom mvv mmw oom onm mvm omma mmoa mmn mnma momm omau m.m~ a.ma mov men mma vma mam ama mooa omoa mnn nnma ooom ooom m.ma «.ma mam mom mva oaa vna mva avna nnm eon onma amma amoa o.va m.aa ova oma Naa em vma Naa mmoa vmm amn mnma coax sou seam eon swam sou mamas czoq unmam ozou amuoe mmcaoaonaaoem moumumm amwmwowwmwwmmw OMMMMMWHWO acuoe mmcaancaamEm moucumm new» coaunaOEaum cuaz coaueacaaum usocuaz bamboo wouOOnoum usmuso acucoaouoca concenoum bamboo nouoohoum Annoy mace ooo.o u.omumnma “coaueaBSaum mamas unocua3 one spas mocaancaamEm one moumumm ccamncaez Mom mGOauoofloum unmade Honndm amusumznn.oa.m canoe 60 expected to go into stimulation for each country. In view of these data limitations,only very rough approximations are possible in projecting the impact of the yield-stimu- lant in these countries. The estimation will be based on the assumption that the output of these countries, taken as a whole, will in- crease by a certain percentage with the adoption of the yield-stimulant. Two sets of assumptions are made, the "low" assumption and the "high" assumption. These assump- tions, listed below, show the percentage increase in out- put (over the unstimulated output for each year) for the period 1975-80. Year 1975 1976 1977 1978 1979 1980 "Low" Assumption (%) 2 5 7 9 10 10 "High" Assumption (%) 5 10 15 18 20 20 The assumptions regarding the increase in output in other rubber producing countries are substantially lower than the projected increase in Malaysian output. The reasons for these low assumptions are two-fold. Firstly, there is likely to be a time lag involved in the spread and adaptation of this technology from Malaysia to other natural rubber producing countries. Secondly, the stand- ards of agricultural practice in these countries are gen- erally lower than those in Malaysia, and as such, it can be reasonably assumed that the response to stimulation would be lower. 61 Both sets of assumptions show that there is a decline in the marginal percentage increase in output from 1977,and for the period 1979 to 1980 the marginal percent— age increase in output is zero. This aspect of the assumptions is made in view of the fact that after a few years of stimulation, the response will decline, as is assumed here, due to the inadequate fertilizers being applied to the stimulated trees. The assumption of zero marginal percentage increase in output for the period 1979-80 implies that any increase in the acreage stimu- lated for this period is offset by the generally lower responses obtained from areas stimulated in the previous years. Based on these assumptions, estimates of the impact of yield stimulation on the world natural rubber output (excluding Malaysia) are attempted. In making these estimates, the UNCTAD (United Nations Conference on Trade and DeveIOpment) projection of the world natural rubber output (without yield stimu- lation) is used as the benchmark.11 The UNCTAD projections for Indonesia, Thailand, Ceylon, and the rest of world category are shown in Table 3.11. The data for Malaysia in the table are based on the RRIM projection. Table 3.12 shows the world output projections with and without yield stimulation for the period 1975-80. llDayal, 9p, cit., p. 18. 62 Table 3.11.--Projection of Wbrld Natural Rubber Output Without Ethrel Stimulation: 1975-80. ('000 Long Tons) 1 2 3 4 5 6 Year Malaysia Indonesia Thailand Ceylon Rest Of Worlda Total 1975 1685 809 342 195 709 3740 1976 1741 817 365 202 741 3866 1977 1805 825 388 210 774 4002 1978 1880 833 411 213 807 4144 1979 1953 842 435 226 839 4295 1980 2031 850 462 235 871 4449 Sources: R. Dayal, "Econometric Model of the World Rubber Market, Commodities Division, UNCTAD (1970), Table 4, p. 18; and P. 0. Thomas, "Malaysian Natural Rubber in the Seventies: A Forecast of Production Trends," Rubber Research Insti— tute Of Malaya, Kuala Lumpur, Malaysia (July, 1970), Table 5, p. 8. aProduction for East Malaysia (Sabah and Sarawak) is included in the rest of world category. 63 comm co mcoaumesmmm comm .m.m use m.m moanse ca 0 muocuoou pump .00 ommm co chaumESOmm .m.m use m.m moanes ca n muosuoou mom ommm co chaumEdmmm mom 6 n can aa.m pap oa.m moapes ca Home soup pmumasoaeum a.n~ m.om coma «mm mmom mnmm Noam omen mmnm manm mess owma a.ma a.ma mmoa amp ommm omom oamm onmm ommm oamm mane mnma a.mm n.ma mam mum ooom mane anon movm mmmm mmmm Seas mnma m.aa m.~a mmn mmv vmne acme ommm ammm momm omam woos nnma o.ma o.m «mm mnm moms mmme mmmm mmmm ooom ooom moon onma m.m m.o mum nmm mmoe nnmm mmam omom amma amma ovnm mnma seam sou roam sou soar sou Osman o33 Osman nsoq la mo ucoo “mm adv OmMOHOGH H coausaBSaum Omconoca ousaOmnm amuoe mamas mo poem camnmamz uaonuaz new» omeucoouom bamboo usmuso ca concenoum ommouoca concenoum soauuaBSAOm spas usmuso spousaoum “mace macs 000.1 o.om-mnma “coauHHBSAOm papa» usosuaz use seas msoauomaops usauso senses amusumz pauoznn.wa.m wasps 64 Summar In this chapter,I have attempted to project the Malaysian and world natural rubber output for the period 1975-80 baSed on the potential adOption of the yield- stimulant ethrel by the natural rubber industry. Two levels of projections (low and high projections) were made for both Malaysian and world output based on the assumption of low and high levels of adoption of ethrel by the natural rubber industry. In estimating the impact of the yield- stimulant on the Malaysian and world output, the projec- tions of Malaysian and world output made by the RRIM and UNCTAD respectively were used as the benchmark as these projections did not include the potential use of the yield- stimulant. Thus, the projections of the output with yield stimulation essentially involves a revision of the RRIM and UNCTAD projections by incorporating the potential use of ethrel by the natural industry and estimating its effect on the latter projections. The analysis indicates that, with the use of the yeild-stimulant, the Malaysian natural rubber output will be approximately 196,000 to 246,500 long tons (or 11.6 to 14.6 per cent) higher in 1975 than without the use of the stimulant,and by l980,it will be approximately 682,000 to 722,000 long tons (or 33.6 to 35.5 per cent) higher depending on the assumed levels of adoption (low or high) of the stimulant by the natural rubber industry. The 65 corresponding increases for the world natural rubber out- put are 237,000 to 349,000 long tons (or 6.3 to 9.3 per cent) in 197S,and 924,000 to 1,206,000 long tons (or 20.8 to 27.1 per cent) in 1980. The analysis in this chapter thus indicates that the adoption of the yield-stimulant ethrel by the natural rubber industry can be expected to result in substantial increases in natural rubber output. CHAPTER IV NATURAL RUBBER PRICE PROJECTIONS WITH AND WITHOUT YIELD STIMULATION: 1975-80 In this chapter, an attempt is made to analyze the effect of the potential increase in output resulting from yield stimulation on the world and Malaysian natural rub- ber prices for the period 1975-80. However, for the pur- pose of analyzing and projecting prices, it is essential to analyze the factors affecting the demand for rubber with the object of projecting the demand for this commodity. The result of this demand analysis and the supply analysis from the previous chapter will be utilized in the analysis and projections of the world and Malaysian natural rubber prices. Any analysis of the demand for, and prices of, natural rubber needs to include an analysis of the compe- tition between natural and synthetic rubbers to illuminate the nature and significance of this competition and its effect on the demand and prices of natural rubber. In view of the importance of this competition on the world 66 67 elastomer market, my attempt to analyze natural rubber demand and prices will be preceded by a brief discussion of the competition between the two types of rubbers. This discussion will also facilitate an understanding of the relationship between the variables in the model presented in Chapter III. Competition Between Natural and Synthetic Rubber Like many other agricultural raw materials, nat- ural rubber faces competition from its substitute, in this case the synthetic rubber. Synthetic rubber was estab- lished during the Second World War during which a disrup- tion of trade occurred between the principal natural rubber producing countries of Southeast Asia and the con- suming areas of EurOpe and North America. During and following the war, natural rubber production could not keep pace with the total demand for rubber resulting in a rapid expansion of synthetic rubber capacity. As a re- sult of the eXpansion, the rates of increase in production and consumption of synthetic rubber have outpaced those of natural rubber,and the latter's share in the total elas- tomer consumption has been declining steadily though its absolute amount is increasing. From the period 1956-69, synthetic rubber production increased by 188 per cent while consumption increased by 190 per cent. Natural rubber production and consumption for the same period increased by 30 per cent and 34 per cent reSpectively and 68 the share of natural rubber in total elastomer consumption dropped from 71 per cent in 1956 to 41 per cent in 1969.1 The natural-synthetic competition has occurred in the form of both price and non-price basis with the latter being on the basis of quality, marketing facilities, grad- ing methods and supply conditions. Competition Based on Quality During the war and early post-war period, the syn— thetic rubber produced was almost entirely the styrene butadiene rubber (SBR) which is a general purpose synthetic rubber employed mainly in the manufacture of tires. How- ever, SBR can also be substituted for natural rubber in many other uses and is currently still the most widely consumed rubber. Concomitant with the expansion of the synthetic rubber production capacity, large scale expendi- tures on research and development were incurred by the industry resulting in the deveIOpment of new types of syn- thetic rubbers. More importantly, successive develOpments have added improvements in the technical qualities thus making each new type of synthetic rubber produced a closer substitute to natural rubber. The new types of synthetic rubbers produced are the special purpose rubbers and the stereo-regular rubbers. lInternational Rubber Study Group, Rubber Statis- tical Bulletin, London (October, 1971), Tabie 27, p. 28. 69 The special purpose synthetic rubbers include primarily polyiobutylene, polychloroprene, and co- polymerized butadiene and acrylonitrile. These rubbers have certain properties (such as heat, weather, and oil resistance) which make them more suitable than natural rubber and SBR for some special uses as in high voltage power cables, oil hose and mine conveyor belts. The stereo-regularrubbers include polybutadiene and poly- isoprene and have only been available since 1959. These rubbers have certain technical prOperties superior to those of the SBR and the special purpose synthetic rub— bers. Prior to the development of the stereo-regular rubbers, natural rubber was used in a large portion of the total elastomer consumption because the irregular link— ages in the polymer chains which characterize the SBR and the special purpose rubbers limited their degree of sub- stitutability with natural rubber which is characterized by regular linkages. Since stereo—regular rubbers are also characterized by regular linkages, their development has posed the greatest threat to natural rubber as these rubbers have bridged the gap between any technical super— iority of natural rubber over its synthetic substitutes. So far, this threat has remained more potential than real because of the difficulties involved in duplicating the 70 laboratory characteristics of these rubbers on a commer- cial scale and the difficulties in processing.2 Price Competition Since the new types of synthetic rubber have a high degree of substitutability for natural rubber, the ratio of prices of these two rubbers (eSpecially the ratio of natural rubber price to the price of its closest sub- stitute) becomes an important factor in determining the relative share of natural and synthetic rubbers in the total elastomer consumption,as small changes in this ratio will result in a shift in consumption to the cheaper alternative. Though synthetic rubber production costs are hard to acquire, it can be reasonably assumed that technolog- ical changes in the synthetic rubber industry are likely to continue to reduce production costs and improve the quality of the synthetic rubbers. Both these develOpments will enhance the position of the synthetic rubber at the expense of natural rubber unless corresponding develop- ments occur in the natural rubber industry. Projections of Total Elastomer Consumption The preceding analysis of the nature of competi- tion between natural and synthetic rubbers brings to light 2J. R. Behrman, "An Econometric Study of the World Rubber Market," Department of Economics, University of Pennsylvania, 1968, p. 23. 71 the close substitutability between the two rubbers. In view of this close substitutability, the factors affecting the demand for natural rubber are likely to be identical to those affecting the demand for synthetic and thus, the market for the two rubbers can be considered as a single market. It follows that in analyzing the factors affecting the demand for rubber (natural or synthetic) and in pro- jecting the demand, it is more meaningful to attempt a Simultaneous analysis of demand for both natural and syn- thetic rubber, rather than attempting a separate analysis for each elastomer. Once the demand for total elastomers has been analyzed and projected, its allocation between natural rubber and synthetic rubber will be mainly deter- mined by the ratio of their prices and other non-price factors. Among the non—price factors, Dayal found the ratio of natural rubber consumption to total elastomer consumption in the preceding year to be most important. This factor signifies the fact that, other things being equal, the current year's shares of natural rubber and synthetic rubber in the total demand for elastomers would be equal to their respective shares in the preceding year.3 Rubber is an important raw material in the manu- facture of a variety of industrial products. Demand for rubber is thus a derived demand, derived from the demand 3R. Dayal, "Econometric Model of the World Rubber Market," Commodities Division, UNCTAD, Geneva, May, 1970, p. 7. 72 for the industrial products. However, the most important market for rubber is in the transportation equipment industry where the manufacture of tires and tire products account for approximately 60 per cent of the total elas- tomer consumption. In view of the importance of rubber in industrial production, particularly in the transportation industry, its demand will be highly dependent on the growth of the overall industrial production and on some measure of the activity of the transportation sector. More specifically, the demand for rubber can be represented by the following: CT = f(IPROD, ITRAN, PNR, PSR, u) where, CT = Total elastomer consumption taken to repre- sent the demand for the elastomer, IPROD = Index of industrial product1on I = Some measure of the activity of the trans- TRAN . portation sector P = Price of natural rubber P = Price of synthetic rubber = random error This model is an elaboration of the demand segment of the flow diagram of the world rubber industry presented in Figure 3.1. The growth in industrial production and the growth in the transportation sector are highly correlated and 73 hence one of these variables can be dropped from the model. Since it has been observed that the growth in industrial production and the growth in elastomer consump— tion in major consuming countries and for the world as a whole are highly correlated, the variable ITRAN can be dropped from the model. Synthetic rubber price serves as one of the ex- planatory variables in the model. However, the data on this variable are inadequate and unreliable. The United States is the only country with published data on syn- thetic rubber prices.4 However, the quoted prices have been stable for the past decade and a half. The quoted prices are not those prices at which transactions take place. Discounts of 10 per cent or more from the quoted prices are often given and these discounts are only known to the buyers and sellers.5 Thus, statistics on the prices at transactions actually take place are not avail- able. In view of this general unavailability of syn- thetic rubber prices, most studies on the demand for rubber have excluded this variable from the analysis. The demand model can be written as, 4Ibid., p. 36. 5c. Barlow and s. c. Lim, "Natural Rubber and West Malaysia," Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (paper presented at the Singapore Meeting of the South-East Asia Business Committee, May, 1968), p. 12e 74 CT = g(IPROD, PNR' u) where, CT = Total elastomer consumption taken to repre- sent the demand for the elastomer IPROD = Index of industrial production PNR = Price of natural rubber u - Random error For the purpose of this chapter, 1121' to project natural rubber prices, the total elastomer consumption projection made by Hague6 will be used as one of the ex- planatory variables in the price model. A brief summary of Hague's approach to the analysis and the subsequent projection of total elastomer demand is now presented. In his model, Hague hypothesized that the total elastomer demand outside the centrally planned economies is a func- tion of the growth in world industrial output represented by the index of industrial production. The model assumes that rubber prices have no effect on the total elastomer demand or that the demand is perfectly inelastic. How— ever, these prices (natural and synthetic prices) do affect the allocation of total elastomer demand between natural and synthetic rubber. This assumption is based on the fact that rubber essentially forms a small compo- nent of the final goods and the value of the rubber 6I. U. Hague, "Efficiency in Resource Allocation: The Case of Natural Rubber," Economics Department, IBRD, July, 1971, p. 4. 75 input as a proportion of the total value of the rubber- using goods is very small. For example, the cost of rubber for the tires of an automobile represents a small prOportion of its total cost and an increase in the cost of tires would have little effect on the cost, price, and demand for automobiles. Regression of total elastomer consumption on the index of industrial production for the period 1951—69 gives the following result: 1.19148 + 1.13300 logX R2=0.993. Log Y where, a II Total elastomer consumption X = Index of industrial production The result shows that 99 per cent of the variations in elastomer consumption is explained by variations in indus- trial production. Based on this relationship, and on the basis (x? projection of GNP and industrial production in the OECD countries, Hague projected the elastomer con- sumption outside the centrally planned economies (Table 4.1). The exclusion of the natural and synthetic rubber consumption in the centrally planned economies from the projection is due to the paucity of data on the consump- tion in these countries. In the case of natural rubber, only estimates of imports are available while no data are available on synthetic rubber consumption in these 76 Table 4.l.--Tota1 Elastomer Consumption: 1971-1980.a ('000 Long Tons) Year Consumption 1971 6935 1972 7400 1973 7896 1974 8417 1975 8800 1976 9370 1977 9980 1978 10629 1979 11320 1980 12100 Source: I. U. Hague, "Efficiency in Resource Allocation: The Case of Natural Rubber," Economics Depart- ment, IBRD, May, 1971, Table l, p. 4. aExcluding consumption in centrally planned economies. 77 countries. Moreover, the centrally planned economies are 7 In this largely self-sufficient in synthetic rubber. case, exclusion of synthetic rubber consumption in these countries from the total elastomer consumption will not significantly affect the analysis of natural rubber prices. For these reasons, other studies of the world rubber mar- ket that the author is familiar with have excluded syn- thetic rubber consumption in the centrally planned econo- mies in their analysis and projections of the world elastomer consumption.8 In my analysis of natural rubber prices, the estimates of natural rubber imports into the centrally planned economies will be included in the total elastomer consumption variable to represent the demand for natural rubber in these countries. 7Dayal, op. cit., p. 36. 8Dayal also excludes both the natural and syn- thetic rubber consumption in the centrally planned econo- mies from his analysis and projections of world elastomer consumption. The reason given for this exclusion is that, apart from the lack of data on elastomer consumption in these countries, his model of the world rubber market relates basically to the countries whose rubber markets are free partially or wholly, from government regulation. In his price analysis, Dayal deducts estimates of natural rubber imports into the centrally planned economies from the total natural rubber supply to arrive at estimates of supply to the market economy countries only. 78 Analysis and Projections of World Natural Ru er Prices: 1975480 The Price Model For the purpose of projecting natural rubber prices, the price model developed by Dayal in his Study of the world rubber market will be used with some slight modifi- cations.9 Dayal's price analysis is based on the assump- tion that natural rubber prices are dependent on the sup— ply and demand for this commodity and is represented by the following model. PNR(NY) = fICTR, (CNR/CTR)-l, QNR, Rsp,u] where, PNR(NY) = The price of natural rubber in New York CTR = Total elastomer consumption Previous year's ratio of natural rubber (C /C ) NR TR 1 consumption to total elastomer consumption QNR = Output of natural rubber RSp = Natural rubber stockpile releases u = random error In the above model, the supply of natural rubber is represented by the output (less exports to the centrally planned economies) and the rubber stockpile releases, while the demand is represented by the total elastomer consump- tion outside the centrally planned economies,and the 9Dayal, op. cit., p. 46. 79 previous year's ratio of natural rubber consumption to total elastomer consumption. Since Dayal's analysis is confined to the market economy countries, the exports of natural rubber to the centrally planned economies are deducted from the total natural rubber output to yield the supply available to the market economy countries only. The price variable is the price of ribbed smoked sheet grade 1 (RSS 1) in New York. Since the United States had tradition- ally been the largest consumer of natural rubber, the New York price is taken as representative of the world price. For the purpose of analyzing and projecting natural rubber prices in this study, slight modifications of the above model are attempted. An additional explanatory variable is included in the model, the additional variable being the prOportion of Technically Classified Rubber (TC rubber) in the total natural rubber output. TC rubber was introduced in 1949 as an effort to classify ribbed smoked sheets and air dried sheets accord- ing to their vulcanization characteristics or the rate of cure.10 The introduction of this rubber was the first attempt by natural rubber producers to satisfy the con- sumers' requirement of consistency in the rate of cure in order to be able to fit the rubbers into their specified 10For a detailed information on TC rubber and method of testing for its vulcanization characteristics, see Natural Rubber Producers' Research Association, Tech- nical Information Sheet No. 2, Technically Classified Rubber, London, 1965. 80 production schedules. Thus, information on the vulcaniza— tion characteristics is of prime importance to the con— sumers. Prior to the introduction of the TC rubber, the natural rubber exported was visually graded and no speci- fication of the technical prOperties was made. The TC rubber exported is marked with colored circles of red, yellow and blue indicating slow, normal and fast rate of cure respectively. However, there is no guarantee the rubber will meet the cure specifications indicated. The introduction of the Standard Malaysian Rubber (SMR) in 1965 and the subsequent increase in its exports, have diminished the importance of the TC rubber,and it is anticipated that SMR will ultimately replace the TR rubber. The reason for this anticipation is that SMR is classified for rate of cure by a more exact, less variable test method than TC rubber,and the specification is guaranteed. Moreover, SMR is not only classified by the rate of cure but by other technical properties such as dirt, volatile matter, ash and nitrogen content, plasticity retention index and viscosity.11 Since TC rubber and the SMR can be considered as improvements in the technical properties of natural rubber over the visually graded rubber, the proportion of these 11For a technical discussion of the SMR specifica- tions and the test methods involved in classifying these Specifications, see Rubber Research Institute of Malaya, SMR Bulletins, Nos. 3-8, Kuala Lumpur, Malaysia, 1970. 81 two types of rubber in the total natural rubber output has been included in the model as a proxy for quality improve- ments in natural rubber. The second modification of Dayal's model involves the treatment of natural rubber consumption in the cen- trally planned economies (USSR, China and Eastern EurOpe). As noted earlier, Dayal deducted exports to centrally planned economies from the natural rubber output to arrive at the supply available only to the market economy coun- tries. These estimated exports to the centrally planned economies also represent their consumption as there is practically no domestic production of natural rubber in these countries. However, in view of the increasing im- portance of the centrally planned economies as consumers of natural rubber (particularly USSR and mainland China),12 and the likely impact of this consumption on natural rub- ber prices, consumption of natural rubber in these coun- tries has been included in my analysis. The estimated exports to these countries have not been deducted from the supply but are instead added to the total elastomer con- sumption variable. lzln 1970, the USSR was the second major consumer of natural rubber with 316,000 long tons (next to the United States with 568,000 tons) followed by Japan (283,000 tons), Federal Republic of Germany (201,000 tons), United Kingdom (188,000 tons), Mainland China (181,000 tons), France (156,000 tons), and Italy (113,000 tons). 82 Consumption of synthetic rubber in the centrally planned economies has not been included in the analysis as these countries are largely self-sufficient in the con- sumption of this rubber. Secondly, data on synthetic rubber consumption in these countries are not readily available. Consumption data available are mainly esti- mated imports into these countries. Unlike the case with natural rubber, the centrally planned economies are also producers of synthetic rubber, though production data are also not available. As such, estimated imports into these countries do not approximate their consumption of syn- thetic rubber. Given the severe lack of data on consump- tion, there is no basis for projecting synthetic rubber consumption in these countries. Two price equations presented below represent the modification of Dayal's model. For both equations, linear relationships are assumed. These relationships are deter- mined using annual data over a sixteen-year sample period (1955-70).13 1. p = NR(NY)t f [ONRt, CTRt (CNR/CTR)t-l (TCR/ONR)t, RSpt] 2. P NR(NY) = g [o t NRt, cTRt (CNR/CTR)t 1, (TCR/ONR)t, RSpt D] where P = Price of Ribbed Smoked Sheet (RSS 1) in New York NR(NY) t . in 0.5. cents/pound 13The data used in the analysis and their sources are given in Appendix A, Table l. 83 O = WOrld natural rubber output in '000 long tons C = World total elastomer consumption (excluding syn- t thetic rubber consumption in the centrally planned economies) in '000 long tons The previous year's ratio of natural rubber con- sumption to total elastomer consumption in per- centage points :5 Q '\ o z wv 0 Ratio of Technically Classified Rubber (including SMR from 1965 onwards) to total natural rubber out- put, in percentage points. RSp = Net releases from government natural rubber stockpiles (mainly releases from United States) in '000 long tons C = Dummy variable (equals 1 in 1955-56 and 1959-60, and 0 for other years). In equation (2) a dummy variable is included to represent the unusual circumstances in 1955-56 and 1959—60 which led to sharp increases in total elastomer demand and resulting in high natural rubber prices in those years. The inclusion of the dummy variable increases the R2 from 0.76 to 0.86. The two functions are estimated and the results are presented below. The figures in parentheses below each coefficient are the standard errors of the coefficients. 1. PNMW)t = 4.5868 + 0.0228(0NR)t - 0.0091(CTR)t (0.0254) (0.0064) + 0'1602(CNR/CTR)t-1 + 1.2020 (TCR/ONR)t + 0.0505(Rsp)t (0.4677) (1.3355) (0.0308) R2 = 0.76 84 2.13 ' NR(NY)t = 11.7725 + o. - . 0104(0NR)t 0 0038(CTR)t (0.0197) (0.0052) + 0.1574(C C ) NR TR - + . / t 1 o 0379(TCR/0NR)t + 0.0115(Rsp)t (0.3537) (1.0862) (0.0269) + 7.0000(0) (2.4029) 2 R = 0.86 The results obtained have not been satisfactory. A_priori, we would expect that increases in output will adversely affect the price and thus the coefficient for the output variable would be negative. On the consumption side, we would expect that increases in total elastomer consumption to favorably affect the price and thus the coefficient for the consumption variable would be positive. However, as can be seen from the estimates, the signs ob- tained for the output and the consumption variables are contrary to our prior belief. As for the variable Rspt, we would also expect that its coefficient would be negative since net stockpile re- leases can be considered as an element of supply and these releases tend to adversely affect prices. However, the positive coefficient obtained for this variable is not so disturbing as it can be argued that since stockpiles are generally released when prices are high, positive coeffi- cient for this variable can be expected. [To analyze the 85 effect of stockpile releases on natural rubber prices, use of monthly data would perhaps be more apprOpriate than annual data that have been used in the above analysis.] The inclusion of the dummy variable in the second equation increases the R2 but does not change the signs of the coefficient for the output, consumption, and the stock- pile release variables. In both equations,it was found that the problem of multicollinearity exists. High corre- lations were found between the output and the total elas- tomer consumption variables (correlation coefficient: 0.98) and between the total elastomer consumption variable and the lagged variable (C )t-l (correlation coeffi- NR/CTR cient: 0.94). The presence of the multicollinearity has resulted in large standard errors of the coefficients. It is also possible that the positive and negative coeffkfients obtained for the output and the total elastomer consumption variables respectively are the result of the collinear variables. Since the total elastomer consumption variable (C t) is correlated with both the output variable (ONR ) TR t and the lagged variable, it was decided to dr0p the var- iable from the equation. The new function was estimated and the following results were obtained. 86 3. PNR(NY)t = 15.5821 - 0.0015(0NR)t + 0.2746(cNR/CTR)t_1 (0.0106) (0.3072) - 0.1155(TCR/ONR)t + 0.0003(Rsp)t + 7.6156 (0) (1.0399) (0.0215) (2.1944) R2 = 0.87 The results obtained from equation (3) are still unsatisfactory. The coefficient for the stockpile release variable (Rsp) is still positive while the coefficient for the variable (TCR/ONR) is negative. As regards the variable (TCR/ONR), if there were to be any relationship at all between this variable and natural rubber prices, a priori, we would eXpect the relationship to be positive for reasons discussed earlier. The partial correlation coefficient for this variable is very low (-0.03Sl) implying a very poor relationship between this variable and prices. This low degree of relationship can be attri— buted to the fact that SMR prices are quoted in terms of ribbed smoked sheet grade 1 (RSS 1) prices with certain grades of SMR fetching a price premium of about 2 U.S. cents/lb. over the RSS 1 prices. Since in the analysis, the RSS 1 price has been used as the price variable, variations in the ratio (TCR/ONR) would have no direct effect on RSS 1 prices. In view of this lack of relation- ship between the two variables, and the reason for this lack of relationship, the variable (TCR/ONR) was drOpped 87 from equation (3). The new function was estimated and the following results were obtained: 4. PNR(NY)t = 18.3676 - 0.0025(0NR)t + 0.2561(CNR/CTR)t_1 (0.0055) (0.2467) -0.0016(Rsp)t + 7.5361 (0) (0.0073) (1.9791) R2 = 0.87 The unsatisfactory feature of this function is that the estimated coefficients, except the coefficient for the dummy variable, are not significantly different from zero. However, the coefficients obtained are consistent with our prior belief about the relationship between these variables and the price variable. In the case of the output variable (0 ), we would expect that increases in NRt output, other things constant, would have a negative effect on prices. The negative coefficient obtained for the out- put thus confirms our belief. The positive coefficient for the variable (CNR/CTR)t-l is also consistent with our prior expectation. With the availability of synthetic rubber, there have been substantial substitution in consumption of synthetic rubber for natural rubber resulting in the steady decline in the share of natural rubber in the total elastomer con- sumption. As natural rubber loses its dominance in the world elastomer market, that is, as the ratio (CNR/CTR), 88 declines, we would expect the price of natural rubber to decline and hence the expectation of the positive relation- ship between this ratio and natural rubber prices. Natural rubber net stockpile releases essentially represent an element of supply and these releases can be expected to have a depressing effect on prices. Moreover, not only the releases of the stockpile itself, but rumors about the impending releases, particularly from the United States stockpile, could have a depressing effect on prices as these rumors lead to a rush for the disposal of stock inventories by those holding these inventories mainly for speculative purposes. The belief in the depressing effect of stockpile releases on prices is widely shared by natural rubber producers who have often voiced their opposition to the stockpile releases. From the above discussion, it follows that the negative coefficient obtained for the stockpile releases variable (Rsp) is not only consistent with, but confirms the belief that stockpile releases de- press prices. The results obtained in the estimated regression have thus confirmed our belief about the relationship be- tween the explanatory variables and the dependent variable though the confirmation is weaker than we would like. This weak confirmation could be attributed to the fact that the sample period has not been sufficiently long causing the 89 standard errors of the estimated coefficients to be larger and the t-value to be statistically insignificant. Projecting World Natural Rubber Prices: ’1975-80 The estimated equation (4) has been used to project natural rubber prices for the period 1975-80. The projec- tion is made for three projected levels of natural rubber output; output without the use of yield-stimulant; "low" projected output with use of yield-stimulant, and "high" projected output with use of the stimulant (see Table 3.12 for the projected output). For the purpose of price projections, the pro- jected ratio of natural rubber to total elastomer consump- tion is based on projections made by Hague14 and these projections are corrected for estimated natural rubber consumption in the centrally planned economies. The rubber stockpile net releases have been assumed to be fixed at 50,000 long tons per year.15 The projection is also based on the assumption that, during the projection period, no unusual circumstances occur which might cause sudden major shifts in rubber consumption. Thus, in the projec- tion, the dummy variable takes on the value of zero. 14Hague, op, cit., p. 4. 15Private communication with S. T. Semegen, President, Natural Rubber Bureau, Hudson, Ohio, in April, 1972. 90 Natural rubber price projections based on the estimated equation (4) are presented in Table 4.2. The values of independent variables used for projecting the price are given in Appendix B, Table 1. Table 4.2 shows that, based on the estimated equation (4), natural rubber prices have been projected to be as low as 13.95 and 13.41 U.S. cents/lb. with the low and high output projections respectively. The question arises as to whether natural rubber prices could decline to such low levels without adversely affecting the supply of synthetic rubber. Since natural and synthetic rubbers (especially polyisoprene which is the closest synthetic approximate to natural rubber) are close substitutes, then theoreti- cally, any price of natural rubber well below that of syn- thetic rubber could drive the latter out of the market. The ability of the synthetic rubber industry to remain in the market will depend on its ability to reduce its produc- tion costs (and hence prices) in line with the projected natural rubber prices. The general unavailability of data on current synthetic rubber production costs presents a problem in attempting to make any meaningful estimate of the future trend in the costs. However, information gathered by the International Rubber Study Group (IRSG) in 1968 on repre- sentative costs of production for several important types 91 Table 4.2.--Projected Natural Rubber Prices in New York With and Without Yield Stimulation: 1975-80 (Low Price Projection).a (U.S. cents/1b.) With Yield Stimulation Without Year Yield . . . Low Output High Output Stimulation Projection ProjectionC 1975 18.93 18.33 18.05 1976 18.61 17.68 17.28 1977 18.10 16.77 16.20 1978 17.50 15.78 15.31 1979 16.78 14.97 14.23 1980 16.13 13.95 13.41 aAssuming that the share of natural rubber in the total elastomer consumption declines from 39 per cent in 1975 to 34 per cent in 1980. See Appendix B, Table 1. bBased on low adOption level of the yield- stimulant. See footnote b in Tables 3.3 and 3.8. CBased on high adoption level of the yield- stimulant. See footnote c in Tables 3.3 and 3.8. 92 of synthetic rubber showed that production cost for the styrene butadiene rubber (SBR) is between 15.5 to 16.5 U.S. cents/1b. and production cost for polybutadiene (a type of the stereo-regular synthetic rubbers) range be- tween 16.5 to 18.0 U.S. cents/1b.16 Though the development of the stereo-regular syn- thetic rubbers almost reduces the gap for which synthetics could not be substituted for natural rubber in all uses, the degree to which these rubbers would in practice be substituted for natural rubber is still uncertain due to the difficulties involved in duplicating the laboratory characteristics of these rubbers on a commercial scale and the difficulties in processing. It has been estimated that the share of stereo-regular rubbers in the total United States synthetic rubber production in the seventies would be about 14 per cent and that of SBR to be about 67 per cent.17 From the above, it follows that during the projec- tion period (1975-80), SBR would still be the major source of substitution and competition for natural rubber. Thus, for purposes of determining the likelihood that natural 16United Nations Conference on Trade and Deve10p- ment, Review of Problems and Policies for Specific Com- modities Facing CompetitiOn from Synthetics and Substitutes, UNCTAD Document TD/B/Cl/SYN 56, Geneva, May, 1971, p. 24. 17Behrman, op. cit., pp. 22-23. 93 rubber prices could actually drop to as low a level as has been projected, SBR production costs will be used as the basis. Technological changes in the synthetic rubber in- dustry can be expected to continue due to large scale expenditures on research and development expended by the industry. These changes, besides improving the qualities of the synthetic rubbers are also likely to lead to poten- tial reductions in production costs. Moreover, production in this industry has been substantially below capacity with capacity utilization averaging between 75-80 per cent.18 Thus, possibilities of cost reductions also exist through increases in capacity utilization by enabling the industry to realize further economies of size in production. Based on the possibilities of the potential cost reductions in the synthetic rubber industry, it is assumed that the SBR production costs would decline to about 15.00 and 14.00 U.S. cents/lb. by 1975 and 1980 respectively. The price projections in Table 4.2 show that natural prices with yield stimulation can be expected to decline to 13.95 and 13.41 cents/1b. in 1980 based on the low and high output projections respectively. Thus the projected natural rub- ber prices in 1980 are lower than the assumed SBR produc- tion costs for the same year. 18UNCTAD, 923 cit., p. 16. 94 It can be reasonably assumed that the synthetic rubber industry is a high fixed-cost industry. In the short run, production will continue so long as the indus- try can recover its variable costs of production. How- ever, to continue production in the long run, all costs must be recovered. Since synthetic and natural rubbers are close substitutes, both rubbers have to be priced at about the same levels in order to remain competitive in the market. It follows that by 1980, SBR (which is ex- pected to be the major source of substitution and competi- tion for natural rubber during the 1975-80 period) needs to be priced around the levels projected in Table 4.2. However, at these prices, the synthetic rubber industry is not likely to recover its total production costs but only its variable costs. Persistence of this situation in the long run would theoretically drive the synthetic industry out of the market. Natural rubber output, how- ever, cannot be expected to bridge the gap in elastomer supply created by the cut back in the synthetic produc- tion. Given the total elastomer demand, an excess demand for rubber is created and the resulting pressure of demand would exert an upward pull on prices. This upward pressure on prices can be expected to continue until prices reach a level high enough for synthetic rubber to come back into production. The analysis thus shows that, in the long 95 run, there should exist an equilibrium between natural rubber prices and synthetic production costs. Based on the above analysis, the projected prices for the latter part of the projection period are adjusted .to bring them in line with the SBR production costs. The adjustments are made for the projected prices with the low and high output projections for the last two years (1979 and 1980) of the projection period. With the low output projection, it is assumed that natural rubber prices will decline to 15.0 U.S. cents/1b. and with the high output projection, prices will decline to 14.5 U.S. cents/lb. during the 1979-80 period. The fact that the projected prices for the latter part of projection period have to be adjusted to bring them in line with synthetic production costs reflects a major weakness of the price model used in making the projections. This weakness arises from the non-inclusion of either synthetic rubber prices or production costs as one of the explanatory variables due to the unavailability of data on these variables. Projecting Malaysian Natural Rubber Prices: 1975-80 Thus far, only the New York prices (taken to represent the world price) have been projected. Since a major objective of projecting the prices is to project the income of Malaysian smallholders based on the projected 96 prices, an attempt is now made to project the Malaysian natural rubber prices. It has been observed that Malaysian rubber prices are highly correlated with the New York prices,and thus the Malaysian prices can be determined in relation to the New York prices. This relationship is determined for the period 1955-70 and the result is given in equation (5) below. 50 =- o o PNR(M) 2 5644 + 0 9985(PNR(NY)) (0.0204) R2 = 0.99 where PNR(M) and PNR(NY) are the Malaysian and New York 19 prices of RSS 1 in U.S. cents/lb. respectively. The figure in parentheses below the estimated coefficient shows the standard error of the coefficient. The coefficient of determination (R2) shows that 99 per cent of the variations in Malaysian prices is explained by variations in New York prices. The above estimated relationship has been used to project Malaysian rubber prices for the period 1975—80 (Table 4.3). 19The data used in the analysis and their sources are given in Appendix A, Table l. 97 Table 4.3.--Projected Natural Rubber Prices in Malaysia With and With- out Yield Stimulation: 1975-80 (Low Price Projection).a With Yield Stimulation Without Yield Stimulation Low Output High Output Year . . . . c PrOJection Progection U.S.¢/lb. M¢/lb. U.S.¢/1b. M¢/lb. U.S.¢/1b. M¢/lb. 1975 16.33 50.00 15.77 48.26 15.49 47.40 1976 16.05 49.11 15.12 46.27 14.72 45.04 1977 15.54 47.55 14.21 43.48 13.64 41.74 1978 14.94 45.72 13.22 40.45 12.75 39.02 1979 14.22 43.51 12.54 38.55 12.00 36.82 1980 13.57 41.52 12.54 38.55 12.00 36.82 aAssuming that the share of natural rubber in the total elastomer consumption declines from 39 per cent in 1975 to 34 per cent in 1980. See Appendix B, Table l. bBased on low level of adOption of the yield-stimulant. See footnote b in Tables 3.3 and 3.8. CBased on high level of adoption of the yield-stimulant. See footnote c in Tables 3.3 and 3.8. 98 Standard Malaysian Rubber (SMR) and Natural Rubber PrICes It was shown earlier that the introduction of the SMR would not likely have a direct effect on natural rubber prices. However, it can be argued that the avail- ability of SMR would have an indirect effect on prices through its effect on natural rubber consumption,and thus affecting the share of natural rubber in total elastomer consumption. Since its inception in 1965, SMR production has increased from 700 tons (.08 per cent of Malaysia's total production) to 310,000 tons in 1971 (representing about 21 per cent of total Malaysian production). Equally im- portant, all the SMR produced was sold. It has been estimated that by 1975, a million tons of SMR would be produced.20 SMR represents an improvement in the qualities and grading of natural rubber, and thus, its production is likely to revive the consumers' interest in natural rubber. As Malaysia increases its SMR production and as other natural rubber producing countries go into produc- tion of this new form of rubber, it can be reasonably assumed that the rate of increase in natural rubber con- sumption in the seventies would be higher than would otherwise have been. 0Natural Rubber Bureau, Natural Rubber News, Washington, D.C. (March, 1972), p. 3. 99 The above price projections have been based on the declining share of natural rubber in the total elas- tomer consumption with the share declining from about 40 per cent in 1971 to 34 per cent in 1980. In view of the likely impact of SMR (and other similar forms of rubber likely to be produced by other natural rubber producers) on the consumption and prices of natural rubber, another set of price projections is attempted. These projections are based on the assumption that, with the anticipated increased production of SMR and other similar forms of natural rubber, this elastomer would be able to maintain its current share of total elastomer consumption (40%) throughout the projection period (1975-80). The projec- tions are shown in Tables 4.4 and 4.5. Summary In this chapter, an attempt has been made to analyze the potential impact of the adoption of the yield-stimulant ethrel by the natural rubber industry on the world and Malaysian natural rubber prices during the period 1975-80. The analysis indicates that potential increases in output resulting from yield stimulation will have a depressing effect on the world and Malaysian natural rubber prices. Based on the assumed levels of stimulation and the resulting output, prices can be ex- pected to decline by one to three U.S. cents/1b. during .100 Table 4.4.--Projected Natural Rubber Prices in New York With and With- out Yield Stimulation: 1975-80 (High Price Projection).a With Yield Stimulation Without Yield Year Stimulation Low Output High Output Projection Projectionc U.S.¢/lb. M¢/lb. U.S.¢/lb. M¢/lb. U.S.¢/lb. M¢/lb. 1975 19.18 58.69 18.59 56.89 18.31 56.03 1976 18.87 57.74 17.94 54.90 17.54 53.67 1977 18.53 56.70 17.28 52.88 16.62 50.86 1978 18.17 55.60 16.55 50.64 15.88 48.60 1979 17.79 54.44 15.82 48.41 15.06 46.08 1980 17.41 53.27 15.10 46.21 14.50 44.37 3Assuming that natural rubber maintains its share in the total elastomer consumption at 40 per cent during the projection period (1975-80). bBased on low level of adOption of the yield-stimulant. See footnote b in Tables 3.3 and 3.8. cBased on high level of adOption of the yield-stimulant. See footnote c in Tables 3.3 and 3.8. 101 Table 4.5.--Projected Natural Rubber Prices in Malaysia With and With- out Yield Stimulation: 1975-80 (High Price Projection).a With Yield Stimulation Without Yield Stimulation Low Output High Output Year . . . . c PrOjection PrOjection U.S.¢/1b. M¢/lb. U.S.¢/1b. M¢/lb. U.S.¢/1b. M¢/lb. 1975 16.62 50.86 16.03 49.05 15.75 48.20 1976 16.31 50.00 15.38 47.06 14.98 45.84 1977 15.97 48.87 14.72 45.04 14.16 43.33 1978 15.61 47.77 14.00 42.84 13.42 41.07 1979 15.23 46.60 13.30 40.70 12.50 38.25 1980 14.85 45.44 12.74 39.15 12.00 36.82 aAssuming that natural rubber maintains its share in the total elastomer consumption at 40 per cent during the projection period (1975-80). bBased on low level of adoption of the yield-stimulant. See footnote b in Tables 3.3 and 3.8. CBased on high level of adoption of the yield-stimulant. See footnote c in Tables 3.3 and 3.8. 102 the 1975-80 period from prices based on output without stimulation. Two sets of price projections were made. The first set (Tables 4.2 and 4.3) was based on the continuing decline in the share of natural rubber in the total elas- tomer consumption with the share declining from 39 per cent in 1975 to about 34 per cent in 1980. The second set of projection (Tables 4.4 and 4.5) was based on the assumption that natural rubber will maintain its share of the tOtal elastomer consumption at 40 per cent throughout the projection period (1975-80). For each set of projec- tions, two levels of prices were projected based on the assumed low and high adoption levels of the yield- stimulant by the natural rubber industry. The first set of projections shows that, with yield stimulation, prices will decline from 18.93 U.S. cents/lb. to 18.33-18.05 cents/lb. in 1975 and from 16.13 cents/lb. to 15.00-14.50 cents/lb. in 1980 depending on the assumed adoption levels (low or high) of the yield- stimulant. As would be expected, the projected prices in the second set are higher than those of the first set. This set of projection shows that, with yield stimulation, prices will decline from 19.18 U.S. cents/lb. to 18.59- 18.31 cents/lb. in 1975, and from 17.41 cents/lb. to 103 15.10-14.50 cents/1b. in 1980 again depending on the adoption levels of the stimulant by the natural rubber industry. CHAPTER V AN ANALYSIS OF THE TRADITIONAL AND REORGANIZED PROCESSING AND MARKETING SYSTEM FOR SMALLHOLDER RUBBER In the preceding two chapters, the impact of yield- stimulation on world natural rubber output and prices has been analyzed. However, in analyzing prices, I have also considered the effect of changes in processing technology, that is, the production of block rubbers under the Standard Malaysian Rubber (SMR) Scheme. The analysis thus far has been in the context of the world natural rubber industry. In this and the following chapters,the analysis will be restricted to the Malaysian rubber industry; more speci- fically, to the Malaysian smallholder sector, as the main objective is to analyze the impact of changes in production and processing technologies on the Malaysian smallholders. Traditional Smallholder Processing and Marketing System Processing of smallholder rubber involves the following Operations: dilution, sieving, coagulation, 104 105 pressing, mangling, drying, and smoking. These stages require the use of simple equipment such as buckets, sieves, coagulating pans, tables and mangles. Dilution and Sieving The fresh latex brought in from the field is diluted with water to facilitate sieving. The diluted latex is then sieved to remove any impurities that might be present. Coagulation The diluted and sieved latex is placed in coagu- lating pans where formic acid is added to facilitate the coagulating process which takes approximately thirty minutes. Pressing and Mangling The coagulum is placed on a table and pressed (usually by hand) to a thickness of about one-half of an inch and then put through the mangles. Normally two types of mangles are required, the plain and the grooved mangles. The pressed coagulum if first put through the plain mangle with the mangle adjusted to give a thickness of about one-eighth of an inch. The use of the grooved mangle further reduces the thickness of the sheets and facilitates drying. 106 Drying and Smoking The sheets are now hung in the open air for three to four hours to drain off the moisture present in them. For smallholders producing unsmoked sheets, the sheets are now ready for sale. However, for those producing and selling smoked sheets, the air-dried sheets are placed in a smokehouse for further drying before sale. Processing is mostly carried out individually by smallholders. However, it is also carried out on a group basis with the establishment of group processing centers (GPC).1 These centers are either owned by smallholders themselves or privately owned, in which case the users are charged for the use of the processing facilities with the charge varying with the extent of the facilities used. The methods of processing involved are, however, similar for both individual and group processing. The greater part of the sheets made an individual holdings are of inferior quality and the sheets produced mostly fall in the third and fourth grade.2 This 1A group processing center is defined as "a shed which contains equipment used for processing latex by a group of eight or more individuals, most of whom operate separately-owned rubber holdings. Such a center may or may not be run in conjunction with a smokehouse." C. Barlow and S. C. Lim, "A Report on the Survey of Malay Group Processing Centers," Statistics Division, Economic Report No. 1, Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (1965), p. 4. 2Rubber Research Institute of Malaya, Kertas Sharahan Kursus Latehan Getah, Kuala Lumpur, MaIaysia (undated), p. l. 107 inferiority of the sheets produced is due to the inade- quate care taken in latex collection, and during the var- ious stages in processing (particularly in sieving, coagu- lation, drying and storage),and the poor maintenance of processing equipment. As a result, the sheets produced tend to be excessively high in moisture content and con- tain varying amounts of air bubbles, various impurities and mold growth. The sheets made at the GPC's are generally of a higher quality than those made on individual holdings with the sheets being mostly of first and second grade. The higher quality rubber produced at these centers can be attributed to the fact that the members of the GPC's have normally undertaken courses in processing techniques offered by the extension officers of the Rubber Research Institute. Moreover, processing at these centers is carried out under the close supervision and advice of the extension officers. A major disadvantage of processing on individual holdings is the difficulty involved in pro- viding effective supervision and advice on the processing operations of individual smallholders compared to groups of smallholders. Smallholder rubber is marketed through a chain of agencies consisting of first level dealers, middle dealers, remillers, and exporters; this traditional marketing system has remained largely unchanged since 108 3 The tradi- rubber was first planted on smallholdings. tional marketing channel is shown in Figure 5.1. The first level dealers are scattered in small towns and vil- lages and act as the first buyers of smallholder rubber. About 70 per cent of the smallholders' latex is sold to the first buyers as unsmoked sheets (USS),and these sheets are smoked by the first level dealers before sale to the dealers next in the marketing channel. The remaining 30 per cent is made into ribbed smoked sheet (RSS) before sale by the smallholders. The first level buyers also form an important source of smallholder credit. Lim,4 in his survey, found that over 90 per cent of these buyers in the state of Selangor provide cash and in-kind credit to smallholders. The in-kind credit is provided by the dealers who also own provision stores. The middle dealers Operate in larger towns and purchase rubber from the first level dealers for sale to the exporters. In certain areas, the middle dealers pur— chase rubber directly from smallholders, especially those with larger sized holdings. The remillers are also located in large towns and purchase scrap and cuplump from 3This part of the discussion is drawn heavily from S. C. Lim, "A Study of the Marketing of Smallholders' Rubber at the First Trade Level in Selangor," Economics and Planning Division Report, No. 4, Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (September, 1968). 4Ibid., p. 2. 109 SMALLHOLDERS' RUBBER (smoked sheet, unsmoked sheet, latex, scrap) 1 l UNEESEEEED ESTATES (bicycling around (made into concentrated villages) latex) 1 1 FIRST-LEVEL DEALERS (scattered around small towns and villages) 1 1 MIDDLE DEALERS k(/'l (concentrated in large towns) J Greater part Source: Rubber. —- — -9 Smaller part S. C. Lim, "A Study of the Marketing of Smallholders' Rubber at the First Trade Level in Selangor," Economics and Planning Division Report, No. 4, Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (September, 1968). p. 13. Figure 5.1.--Traditional Marketing Channel for Smallholder 110 first level and middle dealers. These lower grades are manufactured into various grades of crepe rubber. The exporters form the last link in the marketing chain and their purchases mainly come from the middle dealers, re- millers, and estates. Their main function is to regrade the rubber sheets and pack them into 250 pound bales for export overseas. As the rubber moves from the smallholdings to the final point of shipment, certain services are provided by the various agencies in the marketing channel. The cost of the services incurred, including the returns earned by the agencies at the different levels of the marketing channel, have been computed by Lim as the difference be— tween the f.o.b. price, less export duty;research and re- planting ceases, and the price received by smallholders. This difference represents the marketing margins involved. For the ribbed smoked sheet (RSSL the average marketing margin based on December 1962 to April 1964 data, ranged from 2.3 cents/lb. (Malaysian) in the state of Negri Sembilan to 4.0 cents/lb. in Pahang. The weighted average margin for all states was 2.8 cents/1b. With respect to rubber initially sold by smallholders as unsmoked sheet (USSL the margin was found to vary from 8.3 cents/lb. in Kedah to 11.3 cents/1b. in Johore, with the weighted average for all states being 910 cents/1b. 111 Despite the big decline in rubber price since l964,a11 available evidence indicates that the marketing margins have remained essentially unchanged.5 The analysis of the marketing margins indicates that the margins for the USS is high compared to those for the RSS. This can be attributed to the greater amount of services required by the USS before it can be exported, and to the greater degree of arbitrariness involved in grading the unsmoked rubber. Even within the RSS and USS, it was found that the margins tend to increase as the quality of the sheets decline. The marketing channel for smallholders' lower grade rubber, i.e. scrap material consisting mainly of cuplumps and tree lace, is essentially the same as that for the RSS and USS. Lower grade rubber makes up about 20 per cent of total smallholding production and is sold to dealers in an unprocessed form,and usually in a dirty unsorted condition. The dirty condition is the result of storing under dirty conditions, and the failure to remove soil and other foreign materials from the scrap during and after collection. The common practice of sun-drying the scrap rubber results in severe degradation in its prOperty and eventually leads to the lower grade of the processed rubber. 5Ibid., p. 39. 112 A study of the marketing of smallholders' scrap rubber indicates that the average marketing margin (or the difference between the f.o.b. price, less export duty, research and replanting cesses, and the price re- ceived by smallholders) was 13.27 cents/lb.6 This margin has been found to vary with the quality of the scrap rubber and the locations of sale. In remote areas, some unlicensed buyers were paying smallholders as much as 7.5 cents/lb. less than the licensed dealers in the towns. Apart from the series of agencies involved in the movement of rubber from the smallholdings to the point of shipment and the resultant high marketing margins for the USS and scrap rubber, another unsatisfactory feature of the traditional marketing system is the method em- ployed in moisture content determination and grading. Due to the absence of technical Specifications on which grading can be based on, the grading method employed is very subjective. Grading is based on visual inspection of the sheets and tends to be arbitrary. This is more so in the grading of USS and scrap rubber. In determining the moisture content of the USS, the most important factors considered are the thickness of the sheets, and the length of time after processing 68. T. Cheam, "A Study of the Marketing of Small— holders' Lower Grade Rubber," Economics and Planning Division Report, No. 8, Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (July, 1971), p. 51. 113 when the sheets are sold with the deduction being higher, the thicker the sheets, and the shorter the time after processing at the time of sale. The subjective nature of the moisture content estimation and the resultant wide range of deductions made based on the thickness of sheets and the length of time after processing can be seen from the study by Lim presented in Table 5.1.7 The table indicates that the average estimate of moisture content for thick sheets sold shortly after processing is 45 per cent by weight and decreases to 5 per cent for sheets sold two weeks after processing. For thin sheets the corresponding estimates are 37 and 2 per cent respectively. The standard deviation indicates that the estimates made by different dealers for both thick and thin sheets vary considerably even for sheets sold two weeks after pro- cessing. In fact, variability increases as the period after processing increases. Moreover, the dealers' decision as to whether a sheet is "thin" or "thick" has been found to be arbitrarily conceived. In grading of smallholders' sheet rubber, the dealers put major emphasis on the visual appearance such as shades of color, the presence of bubbles, dirt, blis- ters, and minor mold growth, but ignore the vulcanizing 7111!“, 22. Cit. ' pp. 60-61. 114 .Ho .o .me wanna .Ammma .umnfioummmv Manamawz .msafisq manna .mmemz mo ououfiumcH coumomom umoosm .v .02 .uuommm cofima>ao mcaccmam can moHEocoom =.nomcmHmm ca Hm>mq moons umuflm man no umoosm .mumoaonHHmEm mo mcflumxumz may no xosum 4: .EHA .U .m "mousom e.H m o.m n no . = nxoms oze o.e o o.e oH on = = x063 moo H.m oH o.o me em = = memo m N.» we. o.m mm Noe = = nuoon we H.o em o.m mm eon = = mason em o.e em H.m me see moannmoono 900mm saueonm e 8 .oz emmwmwwwm 8.8...89 emwwmwwwm .88...oe mumammo mcwmmmooum Hound oOAHmm umonm sens emoom xoene a.mcflmmmooum noumm oodumm pom newton mo mnooxoena ems .nmuoESunm eo sueaeooeuo> oat noonom 000nm omeEmcD mo ucmucou musumaoz mo mmumsflumm .mumamoo mmmum>¢ "mamamamzun.a.m magma 115 and other technical characteristics of the rubber.8 The majority Of the dealers determine the grades by merely glancing at the batch of sheet as a whole, while the rest scrutinize a few sheets at random and then apply the grading to the whole batch. The method of grading em- ployed coupled with the arbitrary determination of mois- ture content are likely to work to the disadvantage of smallholders. It is difficult to ascertain whether the smallholders receive payments commensurate with the dry rubber content and the quality of their rubber. How- ever, it is quite likely that the dealers would tend to overestimate the moisture content and underestimate sheet quality in order to safeguard themselves against mistakes that might occur in the assessment.9 In purchasing scrap rubber from smallholders, the dealers set only one basic price based on their Opinion and expectations of the prevailing market situation for 0 2X thin brown crepe (2XTBC).1 The price paid for the scrap is based on this price less deductions for moisture 8P. W. Allen, "The Evolution of Market Grades," Rubber DevelOpments, XVII, NO. 4 (1964), 90-97. 9Lim, op. cit., p. 36. 10The great bulk of the smallholders' scrap rubber (about 80 per cent) is processed into 2XTBC for export. The other 20 per cent is processed into other grades, mainly lXTBC and 3XTBC. This is the reason for using 2XTBC price as the basis for pricing scrap. 116 content. A major disadvantage Of using only one basic price is that it acts as a disincentive for smallholders to produce high quality scrap as no price advantage is to be gained. However, it pays the smallholders to reduce the moisture content of the scrap as drier scrap will fetch a higher price. To achieve this, smallholders have been found to sun-dry their scrap though sun drying causes the scrap to oxidize and thus lowers the quality of the processed crepe.11 The Reorganized Processing and Marketing System for SmallhoIder Rubber New Processing Methods It was noted in Chapter II that the introduction of the Standard Malaysian Rubber (SMR) scheme has paved the way for the development of new processing methods which result in the production of block rubber in contrast to the conventional methods of processing rubber into sheets and crepe (see Figure 5.2). The main types of block rubbers produced and the methods of processing in- volved have already been discussed in Chapter I. Rubbers produced by the new processing methods have good and uni- form physical properties. Uniformity in properties is achieved because the new processes lend themselves to centralization of processing facilities in large factories 11Cheam, op, cit., pp. 20-21. 117 .mommoooum 302 can Hoonam mo mcfimmoooum Honoauwomua How uuono 30amlu.m.m ououam .eoN .m .m «women .lonoec nensoaoz .usossq «Hose .mamanz mo wuouflumcH noncomom noonsm .OHH .oz .cfluoaasm .muousmam :.uucoeouasvmm vacuum can cowuomwm umxumz mzm "unwonam cowuuucmmoum 362: .004 .m .9 can .cwm .3 .m .uwmz .m "mouvom uaammoo Onom uom waaofloommollvmumauoimxogo .3 mouonulv mcwxommi uuomxm mafia» OHOE no moo mcflaoaommlllllllw oucw commoum \ . mudscmuu um .mumuusu 33.3 assocmHmAll no A1 muouauoaaom \ mxcmu mcfixmom Twasmmoo p.33 . m u muoaoesuu / 1//////I H; mHHfiEHQEEam coaumasomoo Allmxcou mcwxaon Allxouuq UZHmmmUQmm 3mz .m wagons» muommuo use mains Almuoxcgm T muoumuoomz Tmopmnm “03$ OHM» noes omumoo uuomxmATlluocm mmamo .oa own case pmxomm 05395 $113398: Allcowumanmooo Aulxouoq UZHmmmUQmm AdZOHBHQflKB .d 118 where blending is improved due to the greater throughput. Moreover, these processes are versatile and lend them- selves to production of rubbers with the prOperties de- sired by the consumers. For example, these processes require only slight modifications to produce constant viscosity rubbers, low viscosity rubbers and oil-extended rubbers.12 The above discussion indicates the technical superiority of the new processing methods over the traditional method. The latter method, as noted earlier, results in the production of generally inferior quality rubbers and require extensive pre-treatment before use in the consumers' factories. The latter methods also lack the versatility necessary to produce rubber to meet the consumers' requirement. The develOpment of the new process rubbers have revived consumers' interest in natural rubber. For 12For a detailed and technical discussion Of the new processing methods, see D. J. Graham, "New Presenta- tion Processes and SMR Scheme," Planter's Bulletin, NO. 99 Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia; B. C. Sekhar, "Malaysian Natural Rubber: New Presentation Methods," Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia, 1967; "The Marketing Of Block Natural Rubber Sold to Technical Specifications," Proceedings of Symposium organized by IRSG, London, 1969; J. E. Morris, "Heveacrumb Process," Journal of the RRIM, XXII, Rubber Research Institute of MaIaya, Kuala Lumpur, Malaysia, 1969; and P. S. Chin, Y. B. Soh and N. M. Pillai, "Factors Influencing Consistency of SMR Produc- tion," Preprint No. 20, Rubber Research Institute of Malaya Planter's Conference, Kuala Lumpur, Malaysia, July, 1971. I 119 example, the new process rubbers produced have all been sold and often at premium prices. Although the conven- tional forms of rubber (sheets and crepe) are also ex- ported under the SMR scheme, the growth in these exports have been slow. In fact, exports declined slightly in 1969 and is expected to decline further in 1970 and 1971.13 With the availability ththe new process rubbers, and their acceptance by consumers as reflected in the rapid increase in their exports, the conventional forms of rubber sold to visual Specifications can be expected to phase out of the market for natural rubber. So far, the production of the new process rubbers are mainly con- fined to the estates and remillers, while the great bulk of smallholding output (which accounts for about one-half of total Malaysian output) is still processed into the conventional forms Of rubber. New Processing Methods and the Smallholders With the superiority Of the new processing methods, it is to the advantage Of smallholders and to the Malaysian rubber industry if the smallholders' rubber is also processed by these new methods. However, for 138. Nair, S. W. Sin, and T. H. Lee, "New Pre- sentation Rubbers: SMR Market Reaction and Future Re- quirements," Planters' Bulletin, NO. 110, Rubber Research Institute Of Malaya,‘Ruala Lumpur, Malaysia (1970), p. 230. 120 several reasons, it is unlikely that the smallholders can adOpt the new methods individually or even on a group basis such as the current group processing centers. First, the new methods are relatively more compli- cated and require the use of Specialized equipment, the cost of which would be prohibitive to the smallholders. Given the current available technology, it would not be economically feasible for smallholders to establish small scale plants as these plants are not likely to achieve the economies of size in processing in order to produce at competitive costs. Moreover, the production of high and consistent quality rubbers and the need to modify the processes to produce rubbers with the technical prOperties to meet the different consumers' requirements require technical expertise. The smallholders lack the necessary expertise, and thus, cannot be expected to undertake the new processes competently. Second, the new rubbers produced must conform to certain technical specifications and packing requirements before they can be sold as Standard Malaysian Rubber (SMR), and conformity with these requirements is checked by the RRIM. In such a case, even if we assume that smallholders are able to adopt these new processes on an individual or a group processing center basis, the prob- lem of quality control and of checking for conformity 121 with the SMR.requirements and the specifications would be enormous considering the number and the scattered nature of the smallholdings. Third, as has been noted earlier, the new pro— cesses lend themselves not only to the production of rubbers with the desired technical prOperties but also to the consistency of these properties. Since rubber is an industrial raw material, consistency in its technical properties is essential for high raw material prices. The manufacturer (consumer) after choosing the raw mater- ial with the desired technical properties for his parti- cular application, requires that the raw material has consistency in these prOperties irrespective of the source of supply, period of purchase, and the forms in which it is purchased. Lack of consistency can result in rejects of finished or partly finished products thus incurring extra costs in reprocessing. As noted earlier, consis- tency can be achieved through the centralization Of pro- cessing facilities in large factories where blending is improved because of the greater throughput. Moreover, centralization of processing facilities could also result in lower processing costs through the attainment of economies Of size of large-scale processing. Adoption of the new processes by smallholders on an individual or a group basis is not likely tO result in consistency in the technical qualities of the processed rubber 122 considering the small size of the holdings and the gener- ally low output on these holdings. Central Processing_of Small- holder Rubber Due to the large minimum plant size required for the new process rubbers with the current available tech- nology, a central processing and marketing scheme for smallholder rubber is essential for smallholder partici- pation in the SMR scheme. So far, central processing for smallholders has been introduced in Malaysia on a limited scale. The Objectives of the central processing scheme are the improvement in the quality of the rubber produced by smallholders, and the increase in their in- come mainly through reductions in processing and market- ing costs. In this section, and for the rest of this chapter, a description of the general features of the scheme and the organization responsible for implementing the scheme is attempted with the Object of determining the benefits of the scheme to the smallholders and to the Malaysian rubber industry. Figure 5.3 presents the stages involved in the central processing and marketing scheme. Each central factory is supplied by a network of collecting centers with each center being manned by a collecting agent. Each factory purchases rubber from smallholders within a radius of approximately twenty miles. Smallholders 123 Smallholder Rubber (latex, scrap and unsmoked sheet) \/ Collecting Collecting Collecting Centers Centers Centers v Central Factory (Processing, Grading and Packing) Export Figure 5.3.--Centra1 Processing and Marketing of Smallholder Rubber. 124 bring their fresh latex and scrap rubber to the center closest to their holdings. At each center,the collecting agent determines the quantity Of the latex received and makes payments to the suppliers. The latex received from the smallholders is bulked, and an anti-coagulant is added to prevent pre-coagulation. The latex and the scrap materials are then transported to the factory for processing, grading, packing, and for direct export to consumers. The collecting agents are selected by the small- holders themselves and receive a commission of 1.5 cents/ lb. of rubber purchased for their services. The price paid for smallholders' latex is based on the RSS 1 f.o.b. price on the previous day, less export duty, replanting and research cesses, the collecting agents' commission, and 6 cents/1b. deduction to cover processing and trans- portation costs. For scrap rubber, the price paid is based on the f.o.b. price of 2X thin brown crepe (2XTBC) less the above deductions. The 6 cents/lb. deduction com— pares with the current margin of 2.8 cents/lb. for the ribbed smoked sheet (RSS); 9.0 cents/lb. for the unsmoked sheet (USS), and 13.27 cents/lb. for scrap rubber as indicated earlier. Malaysian Rubber Development Corporation (MRDC) The implementation of the central processing and marketing scheme for smallholders is the responsibility 125 Of the Malaysian Rubber Development Corporation, a public corporation formed in April, 1971. The history of MRDC dates back to 1965 when it was first started as a project under the Economic and Planning Division of the RRIM with the Operation Of one central factory. As activities ex- panded with the introduction of a second central factory, a new division, The Rubber Processing Unit, was created within the RRIM in 1968. As a result of rapid expansion of the unit, the Malaysian Rubber Fund Board took over the functions of Rubber Processing Unit with the forma- tion of the Malaysian Rubber Development Sendirian Berhad in 1969, a non-profit company limited to making small- holders' crop into new process rubbers under the SMR scheme. Since the objectives of the company have been the upgrading of smallholders' rubber quality and the increase in their income through higher prices paid for their out- put, the government became interested in the company. The government took over control of the company in 1971 and the name of the company was changed to Malaysian Rubber DevelOpment Corporation and in the same year MDRC became a public company. The corporation is vested with the responsibility of setting up factories; collection and processing of smallholders' rubber, and direct eXport Of the processed rubber to the consumers. The corporation 126 is financed by the Federal government, Malayan Rubber Fund Board,and State governments. Currently, five central processing factories are in Operation under the MRDC.14 Though these factories also purchase scrap rubber and unsmoked sheets (to be reprocessed into block rubbers), approximately 80 per cent of the purchases are latex.‘ The corporation has plans to establish 25 more central factories during the 1971-75 period at the cost Of approximately $35 million (Malaysian).15 Each factory is expected to serve an average of 18,000 acres or approximately 4,000 small- holders and provide employment for 180 people (factory managers, field Officers, clerical staff, laborers and collecting agents).16 The five existing factories were established at the cost of approximately $6 million (Malaysian) and cur- rently produce 85 tons of processed rubber per day. Based on 25 operating days per month, the factories thus produce about 25,000 tons of rubber annually. This represents about 3.5 per cent of the total smallholding 14The factories are located in Meru (Selangor), Rantau (Negri Sembilan), Grisek (Johore), Mentakap (Pahang) and Ulu Langat (Selangor). 15Malaysia, Second Malaysia Plan, 1971-75, Kuala Lumpur, Malaysia, 1971, p. 135. 16Private communication with MRDC. 127 production in 1971. Table 5.2 summarizes major Opera- tional features of the existing central factories. Exam- ination of the estimated operating capacity indicates that the majority of the factories are Operating either at full capacity or close to capacity. The relatively lower Oper- ating capacity of the Mentakap and Ulu Langat factories can be mainly attributed to the more recent establishment of these factories and to the lag involved in the extension efforts to get smallholders to shift to the new method of selling their output,and the lag in reSponse of small- holders themselves. Smallholders are not likely to adopt the new selling method unless they are fully convinced of the gains to be derived by this adoption. Upon arrival at the factOry, the latex, sheets, and scrap rubber are processed into different SMR grades and packed into seventy-five pound bales for direct export to consumers. The latex and sheets are processed into SMR 5, and SMR 10, while the scrap materials are pro- cessed into SMR 20, and SMR 50 depending on the quality Of the scrap. Marketing of the processed rubber is under- taken by the Marketing Division of the Corporation which is in direct contact with overseas manufacturers. As noted earlier, all the SMR produced are exported. I attempted to Obtain data on processing costs incurred by the five central factories, but my attempt failed as the MRDC was unwilling to divulge the 128 .susOE mom mmmp mcflumummo o>amu>uc03u co pmmmmn .mucmmu ocfiuumaaoo can .mumuOQMH .mmmum Hmoauoao .muooawmo pagan .muommcms uuouomm mmpoaoch .HOGQOmuom mom: saws oceanowcseeoo oun>aum poo .Hbma .mam>mamz .usmESQ «Hoax .cofluouommqu ucoEmon>mo magnum cdwmwuamz so coaumsuomcH .cOaumuomuou ucoemoaw>wo Hoonom cdwmwuamz "mousow om .. on om oo ooH om oxucoo name wagonmmo wcwumuomo pmumEHumm RH no me me on me oH lsoo\noouv Resonate one eve Nee nee omm Noe oee ooosoeoam nonesz ooo.~H ooo.mo mmo.oH oom.oa oom.oa ooe.oH oom.me om>umn moomnoo moeoeonHHoEm omm.~ ooo.~H omo.m ooe.m oom.m omm.~ omm.m 605966 nnooeoo (Hanan no nonesz mom o.meo.a o.mom H.nmm m.amo m.mov m.-m Anson mcoHV mommnousm aasucoe oumum>4 no oem on on mm no mo nuoucoo mcauooaaoo mo Honesz oumuu>¢ Hmuoa ummcmq 9H9 muxmucoz xomfiuo smucmm sum: Amcsoav chauuooq muouomm .Heoa now sueooooo mowumuomo pom ucoa>oamsm .po>uom mumpaonaamsm .uommnousm "mowuouomm mewmmoooum Hmuuc0011.N.m wanna 129 information for fear of being published and thus coming to the knowledge of synthetic rubber producers. However, some idea of the costs involved was Obtained from a sur- vey of six estate factories producing SMR in 1971 con- ducted by the Corporation. The factories have an average monthly output of 145 tons. The cost per pound was found to vary substantially between factories and range from 3.92 cents/lb. (Malaysian) to 6.49 cents/lb. Average 17 cost was 4.84 cents/1b. In contrast, under the tradi- tional processing method, processing and smoking costs (excluding labor cost) average about 4.0 to 4.5 cents/lb.18 However, comparison of costs under the new and traditional processing methods is quite meaningless as these methods result in different forms of processed rubber. Moreover, smallholders' rubber processed under the conventional method is generally of low quality with the bulk of the sheets (about 75 per cent) falling into grade 3 and 4. Problems Experienced bngRDC With the object of investigating the problems faced in the central processing and marketing of small- holders' rubber, I interviewed MRDC personnel and mana- gers of two central factories. I found that the major 17Private communication with MRDC. 18Barlow and Lim, gp, cit., Tables 3 and 7, pp. 7 and 11. 130 problem currently faced by the Corporation is the high ' tranSportation cost involved in collecting latex from the collecting centers scattered in the villages. Trans- portation cost forms the major component of the overall processing costs. This is aggravated by the fact that the latex at each collecting center has to be collected daily to avoid coagulation and degradation of its prOper- ties before arrival at the factory. The second major problem is that of obtaining adequate supplies of latex from smallholders to enable the factories to Operate at near or full capacity. How- ever, this problem is generally encountered in the first year of the factories'operation. As noted earlier, this can be mainly attributed to the lag in smallholders' re- sponse to shift from the traditional to the central pro- cessing and marketing system. TO ensure an adequate sup- ply Of rubber to feed the central factories, the Corpora- tion now purchases sheet and scrap rubber in addition to latex. In purchasing sheet and scrap rubber, each fac- tory can extend its radius of purchase,as these forms of rubber are less bulky and can be transported over longer distances without any degradation in their properties as compared to latex. While latex is purchased from indi- vidual smallholders through the collecting centers, sheet and scrap rubber are also purchased from group processing 131 centers where the members of each center pool their out- put for bulk sale to the Corporation. Third, some smallholders have been found to in- dulge in certain malpractices such as boiling or exposing their latex to sunlight before sale to increase the dry rubber content of the latex. These practices temporarily increase the viscosity and thus the dry rubber content of the latex but also leads to pre-coagulation. However, this is considered a minor problem as the collecting agents are able to detect the presence of these practices through experience and thus can make adjustments in the dry rubber content before making any payment to the smallholders concerned. Finally, many smallholders prefer daily payments for their rubber. This presents a problem insofar as it involves more work on the part of the clerical staff re- Sponsible for disbursing these payments. To mitigate this problem, the smallholders are given the option of Obtaining either cash or receipts at the time of sale,and the receipts can be redeemed for provisions at the local provision stores. The receipts can also be redeemed for cash at the collecting centers whenever the smallholders need cash. 132 Smallholders' Attitudes Toward Central Processing The preceding discussion has indicated that the central processing and marketing scheme could provide an important means in strengthening the competitive position of natural rubber against synthetic rubber and in increas- ing the income of smallholders. However, the successful implementation of the scheme is very much dependent on the smallholders' willingness to sell their rubber to the central factories as opposed to selling to the dealers under the traditional processing and marketing system. Their willingness to participate is in turn a function Of the benefits to be derived from the new processing and marketing system. To ascertain the smallholders' views on central processing, a sample survey of 178 smallholders was car- ried out in October 1971 in two areas of the state of Selangor. In the first area, a central factory has been established and the smallholders are currently selling their latex and scrap to the factory. In the second area, the smallholders are currently selling sheet rub- ber and scrap to the local dealers under the traditional processing and marketing system. However, the Malaysian Rubber Development Corporation (MRDC) has proposed to set up a central factory in the area. Eighty-seven small holders from three kampongs19 constitute the sub-sample 19The Malaysian word for village. 133 in the first area while ninety-one smallholders from four kampongs constitute the second sub-sample. The purpose of the survey in the first area was to ascertain the smallholders' views on the benefits they have achieved and the problems experienced by selling their rubber to the central factory.20 In the second area where a central factory is expected to be estab- lished, the purpose was to ascertain their views on the benefits they expect to achieve and the problems they anticipate. Thus, results obtained from the survey of both areas would enable us to ascertain whether the bene- fits perceived by smallholders are commensurate with the benefits actually realized. Moreover, an understanding Of the smallholders' views regarding the problems experienced and anticipated should help to ensure that these problems are alleviated or minimized as new central factories are established. The result of the survey in the first area indi- cated that smallholders derive four benefits by selling their latex to the central factories. The benefits listed in order of their importance as viewed by the respondents are: (a) saving in processing costs and time; (b) higher prices received; (c) more accurate and satisfactory weighing and dry rubber content (d.r.c.) 20The survey questionnaire is given in Appendix D. 134 determination by the collecting agents (that is, no "cheating" as was with the case Of the traditional buyers); and (d) the collecting center is close to the rubber holding. Table 5.3 lists the benefits and the number of reSponses to each benefit listed. It should be noted that the number Of smallholders responding to the gains listed are greater than the number of smallholders inter- viewed (87). The reason for this discrepancy is that the question on the types of gains achieved by small- holders was open-ended and more than one response to this question was obtained from some respondents. Table 5.3.--Smallholders' Benefits from Central Processing and Number Of Smallholders Listing Each Bene- fit in Their Response. Number of Per cent Type Of Benefit Smallholders Of Sample ReSponding 1. No processing costs and time required 81 93 2. Higher prices received 16 18 3. NO "cheating" in d.r.c. determination and in weighing 16 18 4. Collecting center is close to the rubber holding 28 32 135 An interesting aspect Of Table 5.3 is the low percentage of the respondents listing the higher prices received as one of the benefits of selling to the central factory. Three factors could be attributed to this low response. First, at the time of the survey, rubber prices were much lower than when they were selling to the tradi- tional buyers five to six years ago. It was found during the survey that the majority of smallholders tend to com- pare the total revenue (or the amount received per sale) obtained from selling to the traditional buyers five to six years ago and that currently obtained by selling to the central factories,rather than comparing the price/lb. received from the central factory and that received if they had sold to the traditional dealers. Due to the decline in rubber prices, the smallholders' total revenue per sale is also likely to decline. As the smallholders view it, the decline in total revenue deSpite selling to the central factory indicates that they are not receiving higher prices by selling to the central factory. Second, since the smallholders have been selling latex to the central factory for the last five years or so, they are not aware of the current prices paid by the traditional dealers which they could then compare with the prices paid by the central factory. Third, respond- ents currently selling latex to the central factory were previously selling mainly unsmoked sheet tO the traditional 136 dealers. As such, they found it difficult to compare prices received from the two buyers on a latex or any other common basis. As a result of the interaction of the above fac- tors, the majority of the respondents have difficulty in realizing that the prices received from the central fac- tory are higher than those received from the traditional dealers as will be indicated in the analysis in the follow- ing chapter. With regard to the problems encountered in the central processing and marketing scheme, seventy-six (87 per cent) responded that they encountered no problems and were satisfied with the new channel of sale. The main problem which caused dissatisfaction among the re— maining (13 per cent) respondents was with determination Of the dry rubber content (d.r.c.) of the latex. These respondents felt that the matrolax21 was inaccurate and tend to underestimate the d.r.c. In the second area where a central factory is pro— posed to be established, the majority Of the smallholders interviewed (71 per cent) indicated they would shift the sale of their rubber to the central factory if and when the factory and the collecting centers are established. A low percentage of the reSpondents (4 per cent) will not 21The device used in determining the dry rubber content of latex. 137 sell tO the factory while the remaining 25 per cent were uncertain. For respondents who would not sell to the central factory, the reason given was the unsatisfactory method Of determining the dry rubber content (d.r.c.) of the latex. In the case of respondents who were uncertain, 60 per cent expressed a wait-and-see attitude and would follow the action of other smallholders in the village, while 40 per cent cited their lack of knowledge about the central processing and marketing scheme as the reason for the un- certainty. In the case Of the respondents who expressed willingness to sell to the central factory, the benefits listed in order of their importance as viewed by the re- spondents are: (a) savings in processing costs and time (70 per cent); (b) higher price (55 per cent); (c) proxi- mity of the collecting center to the rubber holdings (11 per cent); and (d) no "cheating" in weighing and d.r.c. determination by the collecting agent (5 per cent).22 The above respondents were also asked what prob- lem, if any, they would anticipate when they sell their latex to the central factory instead of their current sale 22Note that the total percentage Of respondents expressing the four anticipated benefits is greater than 100. The reason for this discrepancy is that the question pertaining to the benefits was open-ended. As such, respondents gave more than one response to the question. 138 to the traditional dealers. The majority of the re- spondents (92 per cent) anticipated no problems. The other 8 per cent cited inaccuracy in weighing and under- estimation Of the d.r.c. of the latex as the problems anticipated. Summary The comparison between the traditional and the new processing and marketing systems for smallholders' rubber indicates the superiorities of the latter system. The new processing methods have been found to be versatile and can be utilized to process rubber with different technical properties to meet the consumers' requirements. The new process rubbers are graded according to technical specifications in contrast to the visual grading of the sheet rubber processed by the traditional method. Though it is essential for the Malaysian rubber industry and particularly for the smallholders to adopt these new pro- cesses in order to remain competitive in the elastomer market, there are several important reasons why these new processes will not be adOpted by smallholders on an indi- vidual basis. However, the establishment Of the central processing factories provides a means by which small- holders' output can be processed into the new rubbers and marketed as Standard Malaysian Rubber (SMR). 139 In order to ascertain the smallholders' views on central processing, a sample survey Of 178 smallholders was carried out in October 1971 in two areas of the state of Selangor. In the first area, a central factory has been established and the smallholders are currently selling their rubber to the factory. In the second area, the smallholders are selling their rubber to the local dealers under the traditional processing and marketing system. On the basis of the survey, I am able to draw the follow- ing conclusions. First, the sale of rubber to the central factories under the central processing and marketing scheme, has been, and is likely to be, well received by the small- holders. This conclusion is based on the fact that the majority of smallholders currently selling to the central factory experience no problem and are generally satisfied with the new channel of sale and also on the fact that the majority of smallholders in the proposed central factory area have indicated their willingness to sell to the factory and anticipate no problems in shifting to this channel of sale. Second, the benefits from central pro- cessing as perceived by smallholders are commensurate with the benefits actually realized. The similarity be- tween the benefits anticipated by smallholders who ex- pressed willingness to sell to the proposed factory and the benefits achieved by those currently selling to the 140 factory bears out this conclusion. Third, insofar as bene- fits from central processing are concerned, smallholders view the savings in processing costs and time as the most important single benefit. Another interesting result Of the survey needs to be mentioned. It has been widely believed that small- holders are reluctant to shift to the new channel of sale because of the availability of credit (both in kind and cash) from the traditional dealers. However, the result of the survey has not borne out the above belief. In both areas of the survey, non-availability of credit was not considered as one of the problems experienced or anticipated by the respondents. CHAPTER VI THE EFFECTS OF YIELD STIMULATION AND CENTRAL PROCESSING AND MARKETING ON SMALLHOLDERS' INCOME In the preceding chapters, the effects of yield stimulation on world and Malaysian natural rubber output and prices have been analyzed followed by a discussion Of the traditional and the reorganized Malaysian smallholder processing and marketing system. In this chapter, an at- tempt is made to estimate the effects of ethrel stimula- tion and central processing and marketing on the income of smallholders. More Specifically, the objective of this chapter is to estimate and compare smallholders' income under the following alternatives: I. Without yield stimulation and under the traditional processing and marketing system. II. With the use of yield-stimulant but under the traditional processing and marketing system. III. Without the use of yield—stimulant but under the central processing and marketing scheme. 141 142 IV. With the use of yield-stimulant and under the central processing and marketing scheme. Gross rather than net income is used to compare smallholders' income under the alternatives because the variability in smallholder production costs makes it dif- ficult to use net income figures. For example, production costs have been found to vary with the location, size Of holding, yield per acre, types of processing equipment used, ethnic group Of smallholders (whether Chinese or Malay smallholding) and whether the holding is Operated by family labor or hired labor.1 In computing gross income, the prices used are those that are received by smallholders for their product rather than the quoted f.o.b. prices. The prices received by smallholders are arrived at by deducting from the f.o.b. prices, research and replanting cesses, export duty and the estimated marketing margins. A research cess of l cent/lb. is levied by the government on all rubber ex- ported. This cess goes to the Malayan Rubber Fund Board to meet the costs of its rubber research activities. The replanting cess is levied at the rate of 4.5 cents/lb. of rubber exported . As its name implies, this cess is levied to help pay for the costs of the smallholder rubber 1J. W. L. Bevan, "A Study of Yields, Labor Inputs and Incomes on Rubber Smallholdings in the Coastal Area of Selangor," Department of Agriculture, University of Malaya, Kuala Lumpur, Malaysia, 1962. 143 replanting scheme which has been in operation since 1955. An export duty is levied ad valorem with the rates ranging from 4 to 10 per cent depending on the prevailing rubber prices.2 The marketing margin as noted earlier, is the difference between the f.o.b. prices, less research cess, replanting cess and export duty and, the prices received by the smallholders. The marketing margins computed by Lim3 for smoked and unsmoked sheets and by Cheam4 for scrap rubber will be used to arrive at prices received by the smallholders. (i) Smallholder Income Projections Without YieIa Stimulation and Undgr the:Traditional Processing and Marketing System: 1975180 To get a meaningful estimate Of the smallholders' income, it is necessary to classify total production into its different forms as f.o.b. prices and prices received by smallholders vary with the forms of rubber produced and exported. Smallholding production can be classified 2Rubber Research Institute of Malaya, Rates of Export Duty and Cesses, Kuala Lumpur, Malaysia, OctOBer, 1968. 38. C. Lim, "A Study of the Marketing of Small- holders' Rubber at the First Trade Level in Selangor," Economics and Planning Division Report, No. 4, Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (September, 1968). 4S. T. Cheam, "A Study of the Marketing Of Small- holders' Lower Grade Rubber," Economics and Planning Division Report, No. 8, Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (July, 1971). 144 into two forms; latex and scrap rubber. It has been found that the percentage of scrap to total production is af- fected by the tapping system employed, clones planted, year of tapping,and the time between tapping and collec- tion.5 Based on the experiments conducted by the Rubber Research Institute6 and discussions with personnel of the Smallholders Advisory Service Division of the Institute, the overall average percentage scrap of smallholders' pro- duction is assumed to be 20 per cent, with the remaining 80 per cent being latex. It has been noted earlier (Chapter II) that approximately 30 per cent of the latex is processed by smallholders into ribbed smoked sheet (RSS),while the other 70 per cent is processed into un- smoked sheet (USS). The USS is smoked by the first level dealers before export. The great bulk of the RSS (76 per cent) produced by smallholders are classified as grades two and three by the first level dealers at the time of sale while the great bulk Of the USS (also 76 per cent) is finally ex- ported as grades three and four.7 For scrap rubber, more 5For the effects of these factors on the percentage of scrap, see: Rubber Research Institute of Malaya, Pignters' Bulletin, No. 101, Performance Of Clones in Commercial Practice: Fifth Report, Kuala Lumpur, Malaysia (March, 1969), pp.—85-88T 61bid., p. 85. 7Lim, gp, cit., p. 27. 145 than 80 per cent are processed into 2X thin brown crepe (2XTBC) for export.8 Thus, in computing the prices re- ceived by smallholders selling RSS, the average f.o.b. prices for RSS 2 and 3 will be used as the basis. The average f.o.b. prices for RSS 3 and 4 and the f.o.b. price for 2XTBC will form the basis for computing prices re- ceived for USS and scrap respectively. Smallholder Output and Prices: ’1975480 Output projection for the period 1975-80 without yield stimulation is Shown in Table 6.1. The table also indicates the classification of Smallholding production into ribbed smoked Sheet, unsmoked sheet and scrap rubber. Price projections based on output without yield stimula- tion have been made in Chapter IV (Tables 4.3 and 4.4). The first set of price projections based on the assumption of the continuing decline in the share of natural rubber in the total elastomer consumption will be used in this section. Since in this section,I am estimating small- holders' income under the traditional processing and marketing system, it is more apprOpriate to use the first set of projections. The second set of projections was based on the assumption that the share of natural rubber in the total elastomer consumption will be maintained at 8Cheam, gp. cit., p. 40. 146 Table 6.1.—-Projected Malaysian Smallholding Rubber Output Without Yield Stimulation,and Classification of Output into Ribbed Smoked Sheet (RSS), Unsmoked Sheet (USS) and Scrap for 1975-80a ('000 Long Tons) Classification of Total Year Prggggied Projected Output OUtPUt RSS USS Scrap 1975 934 224 523 187 1976 977 235 547 195 1977 1030 247 577 206 1978 1095 263 613 219 1979 1162 279 651 232 1980 1231 296 689 246 aAssumes that 80 per cent of the smallholding pro- duction is latex and 20 per cent is scrap. Thirty per cent of the latex is processed into ribbed smoked sheet (RSS), and the other 70 per cent is processed into unsmoked Sheet (USS). 147 40 per cent throughout the projection period as a result of the increased production of the new process rubbers. However, it should be noted that I have so far projected only RSS 1 prices. Since the average f.o.b. prices of RSS 2 and 3; RSS 3 and 4, and f.o.b. price of 2XTBC will be used in estimating prices received by smallholders for rubber sold as RSS, USS,and scrap respec- tively, it is then necessary to project the f.o.b. prices of RSS 2, 3 and 4 and f.o.b. prices Of 2XTBC. Since the above prices are highly correlated with RSS 1 prices, these prices are determined in relation to RSS 1 prices by the following estimated equations for the period 1960—70. 1' PR882 = -0.4420 +(3I3103)(PR331) R2 = 0.99 2. PRSSB = -0.7001 +(g:3218)(PR551) R2 = 0.99 3' PRSS4 = -1'0710 +(3Z314g)(PR551) R2 = 0.99 4. PZXTBC =-l.5558 +(323629)(PR551) R2 = 0.95 where PRSSl' PRSSZ' PRSS3' PRSS4 and P2XTBC are the f.o.b. prices of R881, R882, RSS3, R884 and 2XTBC respectively in Malaysian cents/1b. The figures in parentheses below each coefficient are the standard errors Of the coefficients. The data used in estimating the above equations and their sources are given in Appendix C, Table l. 148 Prices of R882, R883 and 2XTBC derived from the above equations together with the R881 prices and the average prices of R88 2 and 3, and R883 and 4 are presented in Table 6.2. Given the classification of smallholding output into R88, USS and scrap, and the average prices of R882 and 3; R883 and 4, and prices of 2XTBC, an estimate of smallholders' income is now attempted (Table 6.3). Table 6.3 Shows the various deductions made from the f.o.b. prices of the three forms of rubber, the prices actually received by smallholders as a result of the deduc- tions, and the estimated smallholders' income. In reading the table, it should be noted that the marketing margin for scrap rubber is calculated in terms of the dry weight Of rubber (100 per cent dry). In other words, the prices paid by dealers for the scrap rubber is converted to what would have been paid if the smallholders' scrap rubber had been 100 per cent dry. This procedure was followed by Cheam9 on the ground that since f.o.b. prices refer to the dry weight Of rubber, the marketing margin is also calcu- lated in terms Of the dry weight. The above procedure leads to an underestimation Of the marketing margin resulting in the overestimation of the prices received by smallholders shown in Table 6.3. However, since the objective in this chapter is to com- pare smallholders' income under different alternatives, 9Cheam' 22. Cit. ' pp. 45-49. 149 .hva mama so «Ia mcoflumsgm co pmmmo mCOeumHsoamom m¢.mm om.mm mm.ov vN.mm mm.mm no.0v «m.av omma m~.mm mm.av mm.mv ma.av Hm.Hv mn.mv Hm.mv mnma Hm.ov mm.mv om.v¢ mm.mo mo.ov om.vv Nn.mv whoa mm.av m¢.mv Hm.mv oa.mo mm.mv mb.mv mm.nv nnma H¢.mv oo.hv om.hv am.mv mm.nv om.wv Ha.mo nnma m~.¢¢ hm.bv Nn.mv me.>v mm.mv ma.mv oo.om mnma m00flum mmuaum Omaxm v pom m mmm m can N mmm q mmm m mmm N mmm H mmm mo ommuo>< mo mmmum>m “mow umonsm mo mmpmuu ucmummmwo mo mmoanm Toqo connecamzv m.omnmnma "coaumasefium came» usonufls Aumexmv mmmuu csoum owns xm mo mmowum pom .moowum Q can m mmm pom .m can m mmm mo mmmum>¢ no can m .N .H Ammmv uoonm poxOEm oooowm mo mmowum cwflmmoamz pmuommoumln.~.m manna .>Ho>wuoomuou cons and .omouo Sloan Segue umaxN no noowum can .c can n mum uo mouwum omnuo>a .uonnsu noun. new uoonn voxosusu non .nouwum n can N mmu no cucuo>i «nu can pens nonuum .n.o.u .ammx. noon» oozes» nonnau Momc .om .o .oa cance ..Heoa .Seco. nenuceo: .usoacq canoe .oscacz no ououauncu announce noonnm ..uonnou «coho nozoq .cuoceoceecam mo oceuoxucz on» 66 Steam a. .acocu .e .m “mm .o .eN «Home .lmooe .uoneuuoome cemuoecx .ucoacq cance .ahaadz uo ououauncu noncomua henna“ u.uou:uaom a“ Haboq gonna umuah onu ua Magnum .muovaonaamsm mo ocwuoxuuz on» no upsum 4: .aaq .o .m .mmmu .uonouoo .auumnauz .ucnasq «Hoax .oonnou can Nuco uuomxm mo «cane .cmcac: uo ououeunce announce nonnam ”acousom 1.5() MN.mm mH.0H bN.0N hN.MH om.m om.H mv.mn OVN ommH mo.ma No.ma SN.ON SN.na om.m Om.a m~.mm Nmm meme Nb.hm «m.aa mn.ow hN.na om.m mw.u Hm.ov maN mhma no.0m om.HN mm.ou hN.ma om.m N0.H mm.Hv moN nnma oo.ooa mm.NN Nm.ON hN.MN om.m mh.d Av.nv mma whoa «m.aa Ah.nn «m.aa hN.MH om.m mh.H mm.vv hma nnma mouom mH.H0n ov.nN ON.mH mo.m om.m Nm.H oo.mm mmw omma om.mon mn.mu o~.o~ mo.m om.m N0.H mm.uv Hmm Ohma mo.mhn mm.hN nn.on wo.m om.m mb.H 00.nv mam mnma wh.whn ma.mu nn.0a mo.m om.m mh.a mv.mv hum nnma oo.vnm mm.Om mv.ma mo.m om.m om.H oo.nv hem coma Ammo. uounm mo.00n Nv.Hm mv.ma mo.m om.m hm.a hm.bv MNm mhma voxofimca wa.dou ov.om om.m mh.N om.m No.4 om.ov mmN coma om.HON Om.Nn no.oa mo.N cm.m mo.a mn.Nv men coma ho.n0N hv.vn no.0H wb.N om.m mh.H om.vv MON meme no.00N 0H.wm mH.0H mh.N om.m hw.d an.ov th nnma o¢.mmd mm.bm mH.oa mh.N om.m hm.d vw.hv mMN osmu Amway uoonm mm.NmH vv.mm mN.OH mb.N om.m oo.N Nh.mv VNN mhma Umx06m pannfim magmas: nouuou nonconum auso x.aex ». 1.ne\oo Houoa oceuoxunz can oceucceoom uuooxm ..na\oc oaoocH muopaonaaoam mmoaum nmco4 maaa your uonnsm .ouocaoceecam an coaaooom . l.ne\oc m . h s o vouosauun noowum nouwum .n.o.u Bonn unawuusooo n o u ooo.v us use No such .ooameoe "SouaSm oceuoxncz can aces-oooue Hocoeuacaue one none: can coaucH55eum maaa» accrues oaouce coucSSunm can .nuuoHonHHnEm >8 vo>woomm moowum «wooaum .n.o.u Bonn Icoauusooo .uouwum .n.o.u uuoouso uoonsm mascaonaamsm sawuauaoz convenoamnu.m.m wands 151 the adOption of the above procedure, though it results in overestimating the prices received by smallholders, causes no problem so long as the same procedure is maintained in computing prices received and incomes under all alterna- tives. In the case of unsmoked sheet (USS), the marketing margin is computed in terms of prices paid by dealers after deducting for the estimated moisture content and the prices are not converted to reflect the 100 per cent dry weight prices.10 Such a procedure does not lead to an underestimation Of the marketing margin and the overestima- tion of the prices received by smallholders. The small- holders' income based on the total production (that is, pro- duction of ribbed smoked Sheet, unsmoked Sheet, and scrap) is calculated from Table 6.3 and iS Shown in Table 6.4. (ii) Smallholders' Income Projections With YieId Stimulation and Under the TraditionaI Processing and Marketing System: 1975-1980 Smallholding output with the application Of the yield-stimulant ethrel has been projected in Chapter III. Two sets of output projections were made, the "low" pro- jection and the "high" projection. For prices, two sets Of projections were also made. The first set was based on the assumption of the continuing decline in the share of natural rubber in the total elastomer consumption. The loLim, 9p: cit., p. 28. 152 Table 6.4.--Projected Malaysian Smallholders' Total Income from Rubber Without Yield Stimulation and Under the Traditional Processing and Marketing System: 1975-80.a Year Total Projected Income ($ Mil.) 1975 660.29 1976 672.40 1977 676.50 1978 676.48 1979 665.17 1980 652.32 Source: Calculated from data in Table 6.3. aIncludes income from ribbed smoked Sheet (R88), unsmoked sheet (U88), and scrap. second set was based on the assumption that the share Of natural rubber in the total elastomer consumption will be maintained at 40 per cent throughout the projection period (1975-80) as a result of the increased production of the new process rubbers. Since this section deals with the smallholder income under the traditional processing and marketing system, the first set of price projection will be used in computing income. Two levels of smallholder income will be estimated in this section based on the low and high output projections. Smallholder Output and Prices Projected output with yield stimulation (for the low and high projections) and the classification Of the 153 total output into its different forms are shown in Table 6.5. The estimated prOportions of each form Of rubber in total production used in this table are similar to those used in Table 6.1. However, the effect of yield stimulation on the percentage of scrap needs to be mentioned. Ethrel in— creases yield by prolonging the flow Of latex after each tapping.ll A prolonged flow period, however, is likely to lead to a higher percentage Of late dripping of latex (that is, dripping after the latex in the receiving con- tainer has been collected), and this in turn leads to a higher percentage of scrap mainly in the form of cuplumps. The percentage of scrap has been found to increase to as much as 40 per cent as a result Of late dripping of latex arising from ethrel stimulation.12 The percentage of scrap can be reduced to the normal level if a second round Of latex collection is undertaken to take advantage of the late dripping. In fact, the use of ethrel necessitates two rounds of latex collection instead Of one as with the case Of non-ethrel usage. In my analysis, I will thus assume 11G. F. J. Moir, "A Radical Approach to Exploita- tion," Planters' Bulletin, No. 111, Rubber Research Insti- tute of Malaya, Kuala Lumpur, Malaysia (November, 1970), p. 342. 12T. Y. Pee, and P. D. Abraham, "Economic Analysis of R.R.I.M. Ethrel Trials," Preprint No. 3, R.R.I.M. Planters' Conference, Kuala Lumpur, Malaysia (1971), Table l, p. 2. 154 .m.m OHQMB CH O muocuoom mom .mumpaocHHmEm swam>mHmz on» >o ucmaoeflum IOHOH> one mo co«umoom mo Ho>mH gown mcu no woman ma usauoo pmuomnoum nmfimo .m.m magma cw o muocuoom mom .muooHocaamEm cmflmmmamz can an pcmHoENum (pamflw mnu mo GOHDQOOM mo Hm>ma 30H map so pmmmn ma pomuoo pmuommoum 304o .Hom mflflma CH M UUOCUOOM mmmm mam oam Ham mom Nwm Nnm Hmma Hmma omma omN mmN mam man mom ovm Nmoa mava mhma mom mmN mob mNn mam HHm mNma mmNH mnma moN nmN 0mm mom NmN va mHNH vmaa nnma vNN mHN mNo Nam mwN NmN NNHH mmoa mnma mON mON omm mom HmN va ovoa maoa mnma swam BOA swam 30A swam 30A onmwm nsoq Snow unmuso pomuoo pmuomwoum Hmuoe mo SONDMONMHmmmHO Hmuoe pmuomfloum Amcoe ocoq ooo.c c.om-meoe eon ocean coo .lmmov 000cm pmxosmcs .Ammmv ummnm pmeEm pmoowm oucw usmuso mo SONDMONMHmmmHo pom \cofiumaseflum came» cuw3 unmuso Mooosm mcfipaonHHmEm cmwm>mHmz pmuomnoumlt.m.m manna 155 that two rounds of latex collection are undertaken by the smallholders using ethrel and so the percentage of scrap will stay at the same level (20 per cent) as in the case Of non-stimulation. In calculating the prices received by smallholders for their output shown in Table 6.5, two levels of pro- jected prices will be used as the basis. It can be re- called from Chapter IV (Table 4.4) that one level Of prices is based on the low output projection while the other is based on the high output projection. For reasons indicated in the preceding section, the average of R88 2 and R88 3 f.o.b. prices, the average of R88 3 and R88 4 f.o.b. prices, and f.o.b. prices of 2XTBC are used as the basis for calculating prices re- ceived by smallholders for their rubber sold as ribbed smoked Sheet (RSS), unsmoked sheet (U88) and scrap respec- tively. Prices of R88 2, 3, 4 and 2XTBC are derived from the projected f.o.b. R881 prices using equations 1, 2, 3 and 4 estimated in the preceding section. Table 6.6 shows the various R88 prices; average of R88 2 and 3,and average of R88 3 and 4 pricesland 2XTBC prices based on the low and high output projections. Based on the classification of output into its different forms and on the projected f.o.b. prices of each form of rubber, the two levels of smallholders' income under the low and high output projections are estimated in 156 .m.m OHQMB ON 3 muocuoom ommo .m.o magma OH 0 muocuoow mom 3 .noa mood no «la mcoflumsgm so comma mooflumasoamum mm.Nm Nm.mm «a.mm mm.mv mm.mm Hm.wm Nm.mm omma mm.Nm Nm.mm cm.mm mm.om mm.mm Hm.mm Nm.mm mnma nm.vm Nm.nm oo.mm mm.mm Ho.hm om.mm No.mm whoa no.0m Nm.mm mm.oo mv.mm ha.oo oo.ao on.av nnma mm.mm mo.mq mm.mv om.Nv ov.mw mN.vv «o.mw coma mm.av mm.mv ma.mv mm.vv an.mv mo.mv ov.n¢ mnma ocofluomnoum usouoo roam «a.mm om.mm mm.nm mm.mm vo.nm Nm.nm mm.mm omma om.mm om.mm mm.om mm.mm vo.hm Nm.nm mm.mm mnma mm.mm mm.mm Ho.mm HN.mm om.mm an.mm mv.ov mnma ON.mm Hm.av om.Nv mH.Hv nm.av Nn.Nv mv.mv nnma Hm.ov mN.vv vo.mo mm.mv oo.vv mv.mv 5N.mv whma vm.Nv na.ov Ho.nv m>.mv mm.mv mv.nv ON.mv mnma oc0wuommoum usmuoo 30A v can m mmm m can N mmm omexw mo mocnm>c mo oomno>m e mom m mmm N mom H mmm coawmmflono umooom mo mmpmuo DCOHOMMNO mo wooeum ummw A.oa\mucmo cmem>mamzv 8.0m-meme "coauoHoESun came» coax lumexmc moonu ozone care xm mo mooaum new .v cam m mmm can .m can N mmm mo mmowum mmwum>< “v pom .m .N .H Ammmv uomnm poxOEm poonwm mo mOONum .o.o.m cmwmmmamz pmuomnoumnn.o.w manna 157 Tables 6.7 and 6.8 respectively. The tables also indicate the various deductions from the f.o.b. prices and the re- sulting prices received by the smallholders. The small- holders' income based on total smallholding production (ribbed smoked Sheet, unsmoked sheet and scrap) is Shown in Table 6.9. Before comparing the smallholders' income with and without the use of the yield-stimulant ethrel, it is necessary to deduct from the former income certain addi- tional expenses expected to be incurred by smallholders using the stimulant. These additional expenses are the cost of the chemical (ethrelh,and the cost of additional fertilizers required. It has been estimated that the cur- rent cost of the chemical is approximately $24.00 per acre per year.13 However, ethrel is still in the early stages of commercial production. For the purpose of deducting the ethrel cost from the smallholders' income, a cost of $20.00 per acre throughout the projection period (1975-80) is assumed. This assumption is based on the likelihood that full-scale commercial production of ethrel would re- sult in lowering the production costs and hence the price of the chemical. In the case of fertilizers, additional costs would be incurred as a result of additional fertilization 13Rubber Research Institute Of Malaya, Planters' Bulletin, NO. 111, Inte ration of New Stimulation Tech- niques with Exploitation Practice, Kuala Lumpur, Malaysia TNOvember, 1970), p. 394: 1.5E3 .nnoo souaomou can undo mcaucddmvu ounuocw nounooo .Nao>wuoomnuu vans own «mono crown Sana xN no noowum usaev and n mmm uo uaoaum omuu0>a .mmuom can woos» ooxosmcs uom ..uouaum n can N mmx uo omnuobu can can can: nouaum .o.o.u Amway uoonu noxosn gonna» noun .m.m ounce SN a ouoau00u coma .om .o .on cance .lenoe .Seao. «ensues: .uaoacq «econ .csaecz mo oucueuuce announce nuance ..uonnnx occuo autos .nuooeocaecam uo oceuoxncx on» no macaw a. .auocu .a .m ace .o .co cance .1oooe .uunauuoonc newsman: .ucoacq «Haas .ascacx no vengeance couconoz nonnam ..uoocceom ca Ho>oo cones vanes one an nuance .auoceocaacam no oceuoxua: one uo Squaw c: .aaq .O .m .moma .uonouoo .ueoscec: .uumasa mecca .aomnoo coo Nana uummwu no nouns .caaac: no ououeunce couconum nonncm “nounsom «a.ma no.na HN.ON hN.nu vo.o vm.mm can ommH hm.am nn.na NH.ON hN.na vm.w vm.nn nmN whoa mh.om hm.ma NH.ON 5N.mn vm.o mm.mn mmN whoa av.mm vH.mH NH.ON hN.mH mm.m ON.mn SNN hboa om.oon om.ON mN.ON hN.mH mo.w No.0v maN puma om.Noa ON.NN mm.oN hN.nH mo.b vo.Nv mON mhmu mmuom Ha.voe 05.0N «o.ma mo.m mm.o om.om mom omma mh.mhn oh.ON vo.oa mo.m mm.o om.oN nah mnma mm.hhn Nm.NN vo.oa mo.m mm.o oo.mn mNh whoa oo.mbn om.mN mo.oa mo.m hm.m ”m.av moo nnma ON.vmn «o.mN ON.0H mo.m NH.> MN.wv Nam coma Ammo. nn.omm vm.mN mn.oa mo.m mN.h ha.mv mom whoa uoonm voxoauco ov.«mN 55.5N on.m mc.N no.0 mm.hm th coma Om.NHN h>.hN on.m mh.N mm.o mm.hn own «baa mm.nON mm.mN on.m mn.N mm.o av.mn Ham meme Hw.w0N Nv.Nm mh.m on.N oo.h om.Nv VON brad ON.OON ma.mn om.o mb.N NH.» vo.mv NON puma Amway uoonm NH.NON mm.on mo.oa mh.N mN.h Ho.hv QVN mbma poxosm conned «Sauna: non-00 can .mnuoww ..MH\o. an deuce ocauoxuo: wuss uuonuu ..na\oc .ncoa maaa muuvd (Ends—um NOOflHm Hdflr Mona HO EOE .ouccdoneflcam . n. . . ooo.c acouco vouasauum om>eooom nooaum A na\o. n o u nouwum .n.o.u Baku ncONuuavoa c..co«uuononm usouco tog. ooumnma "Ina-Sn ucwuoxuuz and mcwmnoooum adsoNuNuaua 0:0 noon: and coauaasaaum odour saw: afloocu oouuawuum and “nucoaondaaam 3 Ufl>d000¢ aflowhm «mfluwum on. o.m SHN NGOAUUQUOO «OOOAHA on. o.m Nuamug H32 gflflHOSHHg dememfldflz ”GugfiOthl.h.® OHQUH .muoo gouaouou can muoo mcaucdamou unnauaa momnouu .mao>auoommou poms mud aomaxNv macho cacao Sana xN no mouaum cause can n mmm mo uouaum omuuo>¢ .uoonsu mono» can Amway woman poxoaass you .m can N mmm no omnuo>u on» and vow: acoaum .n.o.u .ammm. yucca ooxoau connau noun .m.o cance ca n ouoau00u 00mm .8 .o .8 cance .123 £92 Seaman: .383 canon .omoaoz uo «usuaumca nounomum nonndm :.uonn:m undue umxoa .nu00aonaadam mo msauoxud: «nu mo ansum 159 s. .505 .e .m 8... .o xx 032. . 863 £38382 3:83. .883 name. .681: no 33365 announce 835 23938 ca 853 «cone. you: 05 an 3838 3330518 uo 833.8: 05 mo Steam 4.. .53 .O .m .moma .aauhdauz .usosba nannx .uomaoo can muse uummru no «ovum .nauadz no casuaunsH nouoouum wonosm "mmousom Nh.am Om.Na mo.ON SN.na m>.o mm.Nm mam omma mN.nm Om.Na mo.ON SN.na mh.o mn.Nn omN mbma mN.mm Nm.ea mo.ON 5N.ma mh.m hm.vm omN mhma mo.mm mm.ma m0.0N SN.ma am.o no.on nvN nnma am.mm m¢.ma MN.ON hN.na om.w mm.mn VNN coma mh.ooa Nm.aN mm.ON hN.na oo.> mm.a¢ mON mhma mduom mv.mmm mN.ma mm.ma mo.m om.o Nm.mn amm omma mN.mmn mN.ma mm.ma mo.m om.o Nn.mn mam mnma oo.mmm vn.aN mm.ma mo.m om.o Nn.nm new mnma Om.nom Nm.nN oo.ma mo.m Nm.o «a.ma omo nnma mo.amn om.0N na.oa mo.m mo.h mo.nv mNo ooma Amway no.0mn oo.mN mm.oa mo.m mN.h mm.mv omm nnma pomnm ooxoanoo mo.hNN MN.ON ah.m mh.N mm.w vm.mm Nmm omma vo.>0N mN.0N ah.m mh.N mm.o tm.mn mvm mhma mh.v0N. mN.mN ah.m mh.N mm.o oo.mn man mhma mm.aON mm.0m Mb.m mh.N mm.w mm.ov NmN coma mv.voN mm.mn om.m mb.N Na.b no.mv mON coma ammxv uoonm an.nON oa.wm no.oa mh.N mN.h ma.ov amN mhma noxoam poonam unamua: one-coo can “Hue” nuuflmflfiam N 138. $338: 3.6 uuoaxu Ada): Econ. 9.3 0 fl QOOHHQ Hmwm. H032 MO ENOh 3:39:18 . n. coo; 3350 036505 00388 33.3 . ha); a o u 33.3 .666 not 383268 u.aaoau00noum unmuso cmazv omnmhma "sounam mcauoxudx can mcamuoooum anneauauaue may wanna can acaunassaum maaa» nuas cabana nounsaunu usuawuooaonaadsm mo oo>aouom nooaum .mooaum .n.o.u souu ocoauoscoo ammoaum .n.o.u «acouso nonnsm maaannaadsm cmaumaauz pouOOnoumun.m.o canoe 160 .m.m wanna ca 9 muocv00m mmmo .mom 0HQMB CH .0 NUOC¥OOM mmmfl .mmuom can ummnm nmeEmcn .ummnm cmeEm omnnflu scum mEoocH mmonaocw mEoocH Hmuoe .m.m can >.m mmanma cw mama so vwmmn mcoflumasoamom e~.mmm. mm.oo> «a.ma» mm.mmn omma Hm.mmo ma.mmo H~.Nem mm.omm mnma mm.~mm vm.¢mm hm.mmm mm.>mm msma m~.omm mw.mnm om.mmm mm.vmm nnma He.owm Hm.mnm mm.mmm av.amm mnma wm.mnw He.mhm mn.wmm Hm.vmm mwma cowuomnoum cOwuomnoum occauomnoum acauomnoum usmuso coax nufiz usmuso 30; spas uamuso swam spas us use 30a snag Amumoo amuflawuumm HMGOwuflnud umm» can Hmunum mo umzv AH“: mv Aaflz my mEoucH .muwoaosaamsm vmumeflumm mEoocH .mumvaonHHmEm nmumeflumm m.omumnma ”Emymmm wcflumxumz can mcflmmmooum Hmcofiuflcmue mnu “mun: Una :Ofiumaszum anww saws umnnsm Eoum mEoocH Hmuoa .mumoaonaamEm cmwmmmamz Umumeflummun.m.m wanna 161 required by the stimulated trees as it has been found that ethrel stimulation resulted in an increase in the nutritional requirements due to increased production of latex.14 In order to sustain the response to stimulation, it is thus necessary to apply additional fertilizers to the stimulated trees. The cost of the additional ferti- lizers has been estimated at about $12.00 per acre.15 To make a meaningful comparison of smallholders' income with and without yield Stimulation, the cost of ethrel and the additional fertilizers amounting to $32.00 per acre are deducted from the incomes based on yield stimulation. The incomes net of these costs are also pre- sented in Table 6.9 in columns 3 and 4. (iii) Smallholders' Income Projections Without Yield §t3mulation and’With Central Processing and Marketing: 01975-80 The central processing and marketing scheme has been discussed in Chapter V. In this section, an attempt is made to estimate the effect of the scheme on the in- come of smallholders. The procedure adopted here is to compare the estimated prices received by smallholders sell- ing to the Malaysian Rubber Development Corporation (MRDCL 143. Pushparajah 35 al., "Nutritional Requirements of Hevea Braziliensis in Relation to Stimulation," Pre- print No. 13, R.R.I.M. Planters' Conference, Kuala Lumpur, Malaysia, 1971, p. 3. 15Pee and Abraham, op, cit., p. 3. 162 and prices received from the traditional dealers. How- ever, as noted earlier, while the dealers purchase ribbed smoked sheet (RSS), unsmoked sheet and scrap from small- holders, MRDC's purchases consist mainly of latex and scrap. In comparing the prices received by smallholders from the two buyers, it is necessary that the comparison be made on a common basis. In this case, the comparison is made on a latex basis. Thus, in computing small- holders' income under the central processing and marketing scheme, the savings on processing and smoking costs are included as additions to the prices received since non- incurrence of these costs partly constitute the gains to smallholders by selling to the central factories (MRDC).l6 Smallholder Output and Prices The output without yield stimulation was projected in Chapter III and the classification of the output into ribbed smoked sheet (RSS) unsmoked sheet (USS) and scrap was made in section (i) of this chapter (see Table 6.1). With regard to prices, it should be noted that the prices paid by MRDC for the smallholders' latex are based on f.o.b. prices of RSS 1 net of export duty, replanting and research cesses and less 7.5 cents/lb. deduction by MRDC for the collecting agents commission, transportation and 168y selling latex to MRDC as Opposed to selling processed rubber (RSS and USS), processing and smoking costs are no longer incurred by the smallholders. 163 processing costs. For scrap rubber,the price paid is based on the f.o.b. price of 2X thin brown crepe (2XTBC) less the above deductions.17 In calculating the expected gains and income of smallholders under the central processing and marketing scheme, both sets of price projections will be used as the basis. Recall that the first-set of projections was made on the assumption that the share of natural rubber in the total elastomer consumption will continue to de- cline during the projection period,from 39 per cent in 1975 to 34 per cent in 1980. The second set of projec- tions was based on the assumption that natural rubber is able to maintain its current share (40 per cent) of the total elastomer consumption during the same period as a result of the anticipated increase in the production of the new process rubbers. Since, in this section I am interested in the smallholders' income based on the sale of their output to the central factories (where it is subsequently processed into the new process rubbers), the second set of projec- tions is then the more relevant one to use in estimating the income. However, for the purpose of comparing the prices received by smallholders under the traditional and 17It was noted earlier that approximately 80 per cent of the smallholders' scrap rubber is processed into 2XTBC. This is the reason for basing prices paid for smallholders' scrap on 2XTBC prices. 164 the new processing and marketing systems, the first set of price projection is used as the basis for calculation. Since the prices received by smallholders under the tradi- tional processing and marketing system have been calcu- lated on the basis of the first set of projection, the comparison is more meaningful if the same set of pro- jected prices form the basis on which the prices received under new processing and marketing are derived. Tables 6.10 and 6.11 show the projected small- holding output (without yield stimulation); f.o.b. prices; the various deductions from the f.o.b. prices; processing and smoking costs; prices received by smallholders, and the estimated smallholders' income for each form of the rubber produced based on the first (low) and second (high) set of price projections reSpectively. In the case of rubber produced as ribbed smoked sheet (RSS) and unsmoked sheet (USS), for reasons noted earlier, the f.o.b. prices of RSS 1 are used as the basis for calculating the prices received by smallholders. In the case of scrap rubber, the f.o.b. prices of 2X thin brown crepe (2XTBC) form the basis for deriving the smallholders' price. The RSS 1 prices used in the calculations are those projected in Chapter IV (see tables 4.4 and 4.6). The 2XTBC prices are derived from the RSS 1 prices using equation 4 in section (i). In comparing the smallholders' price and income under the traditional and the new processing and .000. ououon manna 00onu 000000“ no: on 000000000160 no nonndu @0000 :0 uo>ao>00 and nunoo oz .nuuou uc0mmououm onu >000 .00: now 0:: .00050000 and nunou uo mcaxoau 0:: 0000000000 nuon .mmm noun .0000 nouuonou can undo ocwucaamomo .0009 end Aunaxw. omeno uncun :00» x0 uo nooaum .n.o.u .uonnsu @0000 000 0:00auo0um 0 000 any and vow: noo0um .n.o.u .uwonu voxoancs 0nd 000m. noonu 003080 cunn0u noun .ommd :0 0000 Mom 00 o» 0000 :0 ucuo 00m 00 Iona 0000000 0003 :00umlsucoo nonuuuo0o «duo» onu c0 wanna» unusuac no 000:» on» ads» uoannutn 165 00.000 00.00 .. 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 -- 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 .. 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 .. 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 .. 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 u- 00.00 00.0 00.0 00.00 000 0000 00000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 .000. 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00000 00000000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 .000. 00000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 000000 000000 ucOHuuaoflo 000000 0:0 AmnuuwW ..00\o. 0.00xo. 00000 000: muse 000000 ..00\0. 00000 0000 .000000000000 uuomwm000000 00 0000mo 0000000 . 000w0m0 000.. 000000 000» 000000 00 0000 0000-0000 00>. 00 000000 000 000000000 0 00x0. 0 0 0 000000 .n.o.u Bouu acoauunuoo m.acoauoonoum .0000 300 0u03. 00:0000 .ucwuoxudz 0:0 0000-00000 0auucoo :u03 can 000uu0sa0um 0000» unosu03 060000 counsauuu and .0000000001lm >3 00>0ooo¢ 000000 .000000 .n.o.u noun ucoauosvoo 0.00000 .n.o.u .uanuso nonnsm usauaonHHIam suauhmaa: 00u00noumss.00.0 00nua .0000 uncuon mduuu 000:» umoooum no: 00 000000:00:05 00:00 nonnsu @0000 :0 ua>00>:0 on: uuuoo oz .wmo now 09000 m:0anououm 00:0 0:0 mm: uOu numoo u:0xoan 0:0 m:0uoououmo .0000 :00:000» 0:: m:0u:00momu ..00000. 00000 0:000 0000 00 no noouum .n.o.u on» .muuou ham 0:: .0005 000 mm: no 00000: .n.o.u .Ammo. uuonm ooxoam:d n:u .mmm. uoosn 00008: manna» noun ..00-0000. 000000 :owuoonoum 0:» uzonoaounu u:oo 00m 00 u: :00umaan:oo uoaouau0o 0600» 0:» :0 000:0 000 0:00u:006 umnnnu «manna: ucnu 00650040 166 00.000 00.00 .- 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 .. 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 -- 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 .. 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 . u- 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 .. 00.00 00.0 00.0 00.00 000 0000 00000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 .000. 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00000 00000000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 .000. 00000 00.000 00.00 00.0 00.00 00.0 00.0 00.00 000 0000 000000 000000 QGOHUUSVOO UmflmuflU g .“Huoww ..00\0. ..00\0. 00000 000: 0000 000000 ..n0\0. .0000 0000 000000000000 000000000000 00 000000 0000000 0000000 000 . 000000 0000 000000 00 0000 . 000000000 00000000 000000 000 0000000000 ..00\0. .0.o.0 . 000000 .n.o.u Eouu u:00uuaoon 0.0:00000noum coaum :00: :u03. 00-0000 “acquoxuax 0:0 ucwoooooum aduu:ou.:uwz 0:1 :00u00060um @000» Uganda: oaoo:H noun-090m n:- .0uocaonaadam ma vo>0ooux 000000 .uooaum .n.o.u iouu 0:0090900n «000000 .a.o.u .uamuso 002:0: 0:0vaonaanam :d0a>:aaz nouUOnoumlu.00.0 oHAdB 167 marketing systems, the savings on the processing and smoking costs involved in the latter system should be added to the smallholders' price. For scrap rubber, no savings on processing or smoking costs are involved as in both processing and marketing systems, smallholders sell their scrap rubber in an unprocessed form. As noted earlier, processing and smoking costs vary substantially among smallholders. The average cost fig- ures of 1.7 cents/lb. for processing,and 2.5 cents/lb. for smoking, used in the Table 6.10 and 6.11 are based on discussions with the personnel of the Smallholders' Ad- visory Service and the Economics and Planning Divisions of the Rubber Research Institute of Malaya (RRIM), and on the results of a survey of 165 group processing centers by the Institute.18 Smallholders' total income (that is, income from ribbed smoked sheet, unsmoked sheet, and scrap) under the low and high price assumptions are derived from Tables 6.10 and 6.11 and are shown in Table 6.12. (iv) Smallholder Income Projections With Yield Stimulation and With Central Processing and Marketing; 1973:90 In this section, an attempt is made to project smallholders' income with the use of the yield-stimulant l8C. Barlow and S. C. Lim, "A Report on the Survey of Malay Group Processing Centers," Economic Report, No. 1, Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (1965), Tables 3 and 7. 168 Table 6.12.--Projected Malaysian Smallholders' Total Income from Rubber Without Yield Stimulation and With Central Processing and Marketing: 1975-80a (With Low and High Price Projections) Estimated Smallholders' Income ($ Mil) Year With Low Price With High Price Projection Projectionc 1975 750.14 761.61 1976 769.12 787.64 1977 774.14 804.60 1978 790.19 831.46 1979 782.62 852.88 1980 783.17 868.33 aCalculations based on data from Tables 6.10 and 6.11. Total income includes income from ribbed smoked sheet (RSS), unsmoked sheet (USS) and scrap. bSee footnote a in Table 6.10. CSee footnote a in Table 6.11. 169 ethrel,and under the central processing and marketing scheme. In all, four income levels are projected based on the low and high output and price projections. The four income levels projected are those based on low out- put and price projections (Table 6.13); high output and low price projections (Table 6.14); low output and high price projections (Table 6.15); and finally, high output and high price projections (Table 6.16). The output and the f.o.b. price data used in Tables 6.13 to 6.16 are those projected in Chapters III and IV (Tables 3.9, 4.4, and 4.6). For reasons discussed in the preceding section, the f.o.b. prices of ribbed smoked sheet (RSS) 1 form the basis from which prices re- ceived by smallholders for their latex (previously sold as RSS and USS) are derived. For scrap rubber, the f.o.b. prices of 2X thin brown crepe are used in deriving the smallholders' price. The 2XTBC prices are derived from the RSS 1 prices using equation 4 in section (i). The four levels of smallholders' total income (income from ribbed smoked sheet, unsmoked sheet and scrap based on the low and high output and price projec- tions) are then derived from Tables 6.13 to.6.16 and are presented in Table 6.17 (left half of the table). 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Agoauoanoum £038 )3 un- cusmuao 33.: 5a.: omnmnma 3:33.32 and 9530098 13:00 aqua: 93 gflngfiwum can; 5; maoocn Gavan-u and .nuouaoaaadflm an 00.3003“ noowum «conga .n.o.u Bouu uncauuaavoo .nouaum .n.o.u 599:6 wanna 9330—3136 stagnant voyager—Iliad 0.33. 172 .mwa uou uuuou ocauuoooua made new mmx u0u nuuoU mcaxoam can acanuoooumo .nnou nuuuomuu and ammo usaucuamomv .mouum uOu aumaxac omauo csoun can» xa mo mooaum .n.o.u can amma. uounm uoxoamcs can ammmc uoonm noxoam connau uou a mmm «0 mouaum .n.o.uu .aa.m manna ea a «panacea coma .m.m manna aa a ouocuoom mom. oo.ova mo.o~ -- mm.va om.a em.m om.vm oam omma ma.mma mv.a~ .. «m.aa om.a mm.m aa.mm ama mama mm.mma mm.m~ -- mm.ma om.a mm.m mm.am mma mama am.mma ov.m~ -- om.va om.a om.m om.ma ama aama ma.mma ma.a~ -- om.va om.a om.m mm.am maa mama «m.ama ma.mm .. am.va om.a ~a.a am.mv moa mama mauom ma.mam mm.m~ oa.a «v.va om.a vm.m ma.mm mmm omma a~.oom ma.m~ oa.a vv.ma om.a em.m oa.ov mma mama mm.mmv mm.m« oa.a mm.va om.a mo.a «m.aa maa mama ~o.aam ma.am oa.a am.ma om.a aa.a «o.mm mmm aama m«.mmm ao.vm oa.a ma.va om.a m~.a mo.am «am mama ammoc am.amv mm.mm oa.a am.ma om.a am.a mo.mm mmm mama mounm ooxoamaa om.av~ ma.m~ o~.v «m.aa om.a mm.m ma.mm Nam omma a~.vm~ ma.om 0a.. vv.va om.a mm.m oa.om ovm mama mm.a- mm.am o~.v mm.va om.a mo.a mm.~m aam mama ma.oaa «m.vm o~.v ~m.va om.a aa.a «o.m. vma aama a~.va~ am.mm om.v ma.va om.a mu.a mo.am ama mama .mmm. moosm aa.mo~ mm.mm o~.v am.ma om.a am.a mo.mv vvn mama maaa-m uonnau 20A 09 @0000 .aa: m. aauoa mwmxuoo muse umommm a.na\o. oaouaa a.na\ov a.na\ov mooaum amcoa maaa ago» nonnam mo anon U .muooaonaan-m .uoeaonaauam an o.m-Mo mcaxoam a.na\o. .n.o.u ooo.. unmuao mounaaumu oo>aooum mooaum an. cammououm monaum .n.o.u scum acoauuaoon .aucomuoonoum nuuaum now: and aunmuao 30a nuaxv owumama umcauoxuux can mcauuoOOum aduucou gum: and camuoasaaum vaoaw nuas Canaan uouuawuom can .nuovaonaadsm an vo>aooo¢ noumum “nooaum .n.o.u aduu «ceauunvoo “nonaum .n.o.u ausmuso Magnum oawoaozaadam adan>uadx vouoofioumuu.ma.o candy .wma now munoo vcwmmououm haco and .mmm you numoo ocwxosm can maammououmo .amou sundomou nan mmou mcwucdamumu .QfluUu NON AUENV omuuu caoun saga xw mo nauaum .n.o.u can .ammov yucca uoxosncs and 5mm“. noon» noxoam panama now a ama mo nooaum .a.o.uo 173 .aa.m manna ca a ouocuoou coma .m.m manna ca n ouocuoou comm mm.ama mo.ma .. ma.va om.a ma.m a~.~m mam omma ma.a~a am.ma u- m~.qa om.a ma.m mm.mm omu mama am.mma mm.a~ .. m~.ma om.a ma.m ma.mm mma mama «m.ama mm.m~ -- «a.ma om.a vm.m «a.mm mvm aama aa.oma mm.mm an mv.va om.a mm.m mv.ov emu mama vm.ona am.am nu ~m.va om.a ~a.a mm.~v mow mama manna an.mmv a~.v~ oa.a mv.va om.a mm.m mm.mn amm omma mm.mav mm.m~ oa.a mv.va om.a mm.m m«.mm mam mama aa.aav am.m~ oa.a mv.va om.a mm.m ao.av mva mama mo.mmv mm.om oa.a om.va om.a oo.a mm.mv omm aama oo.~mv ma.mm oa.a ma.va om.a m~.a «m.mv mam mama ammoc am.~mv «a.ma oa.a am.va om.a am.a o~.mv mmm mama uoonm moxoauao ao.m«n aa.m~ o~.v mv.va om.a mm.m am.mn «mm omma av.anm ma.mn on.q mv.qa om.a mm.m m~.mn mum mama ma.o«~ am.om on.v mv.va om.a mm.m ao.av mam mama vo.man mo.mn om.v om.va om.a oo.a mm.mv ama aama vm.ma~ m~.mm o~.v ma.va om.a m~.a «o.mv mmn mama ammmc uoonm ao.aa~ mm.am o~.v am.va om.a am.a o~.mv ama mama vase-m nonnax acowuoflga uonu¢0 Una ammuowW ..na\o. a.na\oe annoy 0am: Wynn vacuum ..na\o. ancoa maaa unavaonaauam .uooaoaaamam an emu-cu mcaxoam umouaum ooo . usmuso aama uonnam mo anon . we uncooum a.QA\ou .n.o.u . nouqaauum uo>aouom mooaum can a mouaum .n.o.u Eouu acowuosvoo .achHuoofioum nooaum soar and canauso ama: gums. omumama "maauuxudz can unannouonm Houucoo sum: can sowuadnawum vacay and: «sauna con-launm can .nuovnonaauam an vo>aouom nooaum .aouaum .n.o.u Baum occauunvoo .uoowum .n.o.u auamuno uonndx maaoaonaaoam anaemiaa: nouUOnoumn0.oa.o odnufi .oa.o wed m.o moanma :a a ouocu00u com .m.o Gandfi 6w n ouOCJOOu van HH.0 candh ca 6 ouOCHOOu vflmo n .muuun can .ammbv noon. uoxoaucn .ammm. uoozn nexus. connau sown oaooca nouaaucw oaoo:a Huuoa .oa.o ou ma.o nuance ca dump co comma uncauoasuauou 1774 ma.mam mv.amm oa.amm ma.mmm a~.vmm mm.aom m~.mam mm.mmm omma av.mma oa.mvm om.mma mm.mma mv.a~m «m.aam am.ama «m.aam mama mm.aom av.amm ao.maa oo.oma oa.mmm av.amm av.mma oo.oma mama mo.vma m~.aam ~m.vma om.mma om.uam mm.~mm ma.~om om.mma aama o~.oom ca.~om «a.mma ma.mma ma.vam oa.mam a~.mam ma.mma mama ao.mma oa.oma mm.mma am.maa m~.vom oa.mma am.mom na.mma mama 3&8 gmam .593 :3 338 :3: 39.8 :3 $938 :3: 398 :3 338 :3: $99.6 :3 can coaum ama: can ouaum ama: can coaum :oa can ouaum 30a can ouaum ama: can coaum ama: can ooaum 30a can ooaum 30a and: m. uuuoo uumr .uoaaaauuom aacoauauua can aounum uo uoz ”osoocn .ouovaonaauam vouuawunm Add! my OBOOGH .uuovnondddlm ficunflduuw d..omomhmdv acauoxudz and unannououm annuaou nuax can scauadalaum vaca» nuaa nonndm aouu «sauna Aduoa .uuovaonaanaw suanauaaz vouuofioumun.aa.w canoe 175 stimulation are deducted from the smallholders' total in- come. The smallholders' incomes net of these costs are presented on the right half of Table 6.17. Central Processing and Marketing, and SmallhOlder Pfices In this section, the gains (cents/1b.) by small- holders from selling their rubber to the central factories are estimated. The procedure adopted here is to compare the prices (cents/lb.) received by smallholders for the rubber sold as ribbed smoked sheet (RSS), unsmoked sheet (USS) and scrap under the traditional processing and marketing system and the prices received if they instead sell latex and scrap to the central factories under the central processing and marketing scheme. More specifically, the comparison is made between prices received by small- holders without yield stimulation and without central processing and marketing (taken here as the base price) and prices received without yield stimulation but with central processing and marketing (Table 6.18). In the case of smallholders selling ribbed smoked sheet (RSS) under the traditional processing and market- ing system, shifting their sale to the central factories could result in an increase of prices received by an average of 0.8 cents/1b. For the unsmoked sheet (USS) producers, the shift in sale is estimated to increase the average prices received by about 5.3 cents/lb. In the 176 .au ouocuOOMV oa.m .an dad a nouocuOOu. m.o nuance ca nubam can «coauuonoun comma and usauno swan and 30a ou noucououom .nu uuoauOOu. u«.m can A .ma.m 3 mam ax: aa.m .oa.m .a.m .a.m .m.m moan: 5 53m aaaqaamauo 38: .33 .2» 3 38¢ om.~« on.vu mm.a~ mo.nu wo.o~ va.on oo.ma cm.aa an.o~ ooumaoa coau¢>< mo.oa oo.o« ao.oa om.aa mo.m« wa.n~ cm.«a ma.na ma.ma coma am.ma ov.an ao.oa om.aa «m.aa ca.vu cm.~a na.na No.0a mama mm.au nv.n~ mo.o« v~.au Ho.an ao.nu «m.va an.ma «a.ma mama mo.n« ov.mn on.nu am.n~ am.o~ mv.on am.ma va.oa oo.a~ aama mm.mn ma.au n~.m~ nn.m~ am.ou ma.m~ ov.ma om.o~ mm.- maaa ho.au ma.o~ m~.a~ oo.o~ an.on ov.a~ «m.aa m~.~n aa.n~ mama muuum cm.o~ ma.an vn.m~ «a.mm mo.mn o~.nm m~.n~ mm.v~ am.a~ omnmama omauo>< a~.v~ mm.o~ oa.vu am.mn ov.~n oo.m~ m~.ma ma.o~ ov.m~ omma mo.mu wa.w« oa.vn ao.mn mm.nn mm.0n m~.oa ma.o~ mm.mn mama an.mu om.o« a«.ou am.au «a.vn am.~n vn.a~ ~m.- mm.a~ mama no.0n ua.«n om.m~ mm.0n oa.mn om.vn ~m.n~ mm.m~ ma.m~ aama oa.~n ao.vn ”a.ma mn.nn «o.mn vm.mn mm.on mo.m~ mm.on mama «a.ma mo.mn nn.vn an.mn no.5n oa.mn oo.m~ vo.a« ~v.an mama mm: om.an ao.nn vo.on o~.~n vo.an oa.mn m~.on am.an am.vn omnmama coou0b< aa.o« ma.m~ oo.o~ av.mu «o.mn o~.an n~.m~ aa.a~ mv.0n coma ma.m~ ma.0n om.o« av.on mo.mn ma.nn n~.m~ aa.a~ om.~n mama ao.0n oo.~n ma.o~ a~.0n «~.an aa.nn o~.m~ mm.m~ av.vn maaa no.nn no.vn ov.an na.nn o~.on oo.an mo.on «v.~n ma.on aama a«.mn am.wn «m.vn mm.mn nn.an vv.on mm.mn ma.mn mo.an mama «m.aa on.cn mo.mn aa.an mo.ov o~.mn ma.mn mm.mn vv.on mama mam Sofia-«8.. anuooaoum Sofia-“8.. 338an 3830.33 Soauooaoum .8333“... .33 ama: ax.- ooaum ama v5 .33 :3 a5 03.8 :3 Ba numwwooamfi unflawooaoum .338 ama: 9:. 3&8 93 a .38 28. 338 gnaw 398 :3 .393 :3: 33.6 :8 . m s a: o a a :3 ~32 :3 32m :3 mawuoxuqx mcauoxunt can maauoxuax and can mean-cu meauoxud: and mean-ocean mean-ououm «nausea meanaoooum annuaoo noun Huuunou no.» aauucou v5 coauaaafiaum 5a: 5a: 93 uaofia: «.5 £653 93 sequins-aum usonuax ceaunanaaum nuas coma-adlaum unonuas >H HHH HH H nouoouduum o>wu¢nuou~< ..AA\uua¢o. .ooumaoa ”oawuoxuuz and uawuuoooum annuaoo nod nowadanlqum panda usonuax can “IND a I nu“: m we: Amway uoozm uoxoauaa amma. noonm voxoam conndx uOu Iuouaosadqam cum-aids: an nobmoocz uouaum nouoonoum no huaaaamnu.ma.m candy 177 case of scrap rubber, prices received is estimated to in- crease by 5.8 cents/lb. as a result of selling to the central factories. The increase in smallholders' price for RSS and USS under the central processing and marketing scheme arises from a combination of three factors, namely the reduction in marketing margins, the higher f.o.b. prices19 from which prices received are derived, and the savings on processing and smoking costs. However, in the case of scrap rubber, the increase arises only from reductions in the marketing margin as in both processing and market- ing systems,smallholders' scrap rubber is sold in an un- processed form, and the prices paid are based on the same f.o.b. prices, that is, f.o.b. prices of 2X thin brown crepe (2XTBC). Comparison between the expected gains (in terms of prices received by smallholders) of RSS, USS, and scrap under the central processing and marketing scheme indi- cates that the smallholders currently producing RSS could expect to gain little by selling their rubber as latex to the central factories. The reason is that the market- ing margin for RSS under the traditional processing and 19Recall that for reasons discussed earlier, prices paid to smallholders for their RSS and USS under the traditional processing and marketing system are based on the average f.o.b. prices of RSS 2 and 3, and average f.o.b. prices of RSS 3 and 4. However, under the central processing and marketing scheme, the prices paid for the smallholders' latex are based on the f.o.b. prices of RSS 1. 178 marketing system (see Tables 6.7 and 6.8) is relatively low and little reduction in the margin can be eXpected by shifting the sale to the central factories. RSS producers could gain as much or more by upgrading the quality of the rubber to RSS 1 or RSS 2 and thus fetching higher prices. In the case of USS producers, the price gains are sub- stantial resulting from reduction in the marketing margin (about 1.6 cents/1b.), savings on the cost of processing (about 1.7 cents/1b.), and the higher f.o.b. prices from which smallholders' prices are derived (about 2 cents/1b.).20 The highest potential gain from the central pro— cessing is achieved from the sale of scrap rubber. This gain is the difference between the 13.27 cents/1b. market- ing margin under the traditional processing and marketing system,and the 7.50 cents/1b. deduction made by the central factory for processing, tranSportation costs,and the col— lecting agents' commission (see Tables 6.3 and 6.10). 20The 1.6 cents/lb. reduction in the marketing margin is the difference between the 9.08 cents/lb. average margin for USS under the traditional processing and market- ing system and the 7.5 cents/1b. deduction by the Malaysian Rubber Development Corporation (MRDC). Processing costs , have been assumed at 1.7 cents/1b. The 2 cents/lb. higher f.o.b. prices is the average difference between RSS 1 prices and the average of RSS 3 and 4 prices (see Tables 6.2, 6.3 and 6.10). 179 Comparison of Smallholders' Projected Income With and Without Yield Stimulation and Central Processing and Marketing A summary of the smallholders' projected income under four alternative strategies is presented in Table 6.19. In comparing smallholders' income under the differ- ent technological alternatives, the income without yield stimulation and under the traditional processing and marketing system (Alternative 1), is used as the base in- come. As can be seen from Table 6.19, this income is projected to be $660.29 million in 1975 and $652.32 million in 1980. Based on the low output projection with yield stimulation,and under the traditional processing and marketing system (Alternative II), the income is pro- jected to be $676.41 million in 1975 and $700.65 million in 1980. This represents an increase of about $16 million or 2.5 per cent,and $48 million or 7.5 per cent over the 1975 and 1980 base income respectively. With the high output projection, the income can be expected to increase to $673.54 million in 1975,and $686.24 million in 1980. This represents an increase of about $13 million or 2.0 per cent,and $34 million or 5.1 per cent over the 1975 and 1980 base income respectively. In the case of the projected income without yield stimulation but with central processing and marketing (Alternative III), a substantial increase over the base .Ad ouOCHOOuV aa.o can .an ouocuOOMV oa.o “an can a monocuOOu. m.o moanda ca cu>au can uncauuunoum unaum can usmuso ama: and 30a 0» noucououoma .aa.m can .aa.m .m.m .a.m moanaa ca co>am aaaucamauo «up: «and» man» ca sauna 180 ma.oam mv.amm o~.anm ma.mmm nn.mmm aa.mma «a.mmo mm.ooa ~m.~mm omma «v.wma o~.mvm ow.mma mm.wma mm.~mm «o.mma a~.m~o ma.moo aa.mmm mama wn.aom mv.anm ao.naa oo.ooa ov.anm ma.oma nn.~mm om.vmm mv.mam mama mo.¢ma nu.aam no.cma om.mma om.vom ea.vaa o~.0mo ~v.~ao om.oao aama on.oom oa.mom «a.mma ma.mma vw.ama ~a.mom av.oao am.mam ov.nam mama mo.nmh 05.0mm nm.mma nn.mma aw.aom va.oma vm.naw av.oam m~.oom mama coauoofioum acauuofioum coauovnoum acauUOnoum coauuonoum coauuononm acauUOnONm coauUOnoum ouaum 30a: and coaum ama: can coaum 30a 0:. coaum 30a and moan ouaum 30a can ouaum 30a pan . m :3: 3:5 38 283865 unauao ama: usauso 36a usauso ama: usauso you unauno smam uaauao sea a coaum 30am mcauoxuox maauuxudz and maauoxudz can and mcaomoo ado mcauoxuax can ocamuoooum maaunc00um aouucou mcaunoooum aduucvo noun anuucou » aauucou can acauaanlaum sums nuaz and usonuas and u9050a3 and coauuasaaum unusuaz coauuasaaum 20a: coauUanaaum usonuaz >H HHH HH H moamouuuum o>auocuoua¢ a:0aaaaz my a.omnmama “ucauoxudz and acammoooum aauucou can :Oauvasaaum aama» uaonuas can Ava: macauuonoam oaouca .muopaonaamfim coaaanadx no aunaaamuu.ma.o manna 181 income can be expected. Based on the low and high price projections, this income is estimated to range from $750.14-761.61 million in 1975 and $783.17-868.33 million in 1980. This is an increase of some 590—101 million or 13.6—15.3 per cent over the 1975 base income,and an in- crease of $l3l—216 million or 20.0-32.2 per cent over the 1980 base income. It must be emphasized here that this substantial increase in income is based on the assumption that all the smallholders shifted to the central process- ing and marketing. On the average, each smallholder that shifts to the central processing and marketing can expect to increase his income by the above estimated percentages. It is interesting to note that the projected in- come under Alternative III is higher than the income with yield stimulation and under the traditional processing and marketing system. Thus, insofar as the smallholders are concerned, the analysis indicates that central process- ing and marketing has greater potential in increasing smallholders' income than yield stimulation. The final comparison is now made between the base income (i.e. income without yield stimulation and central processing) and the income with yield stimulation and central processing and marketing (Alternative IV). From Table 6.19, it can be seen that four levels of income under this alternative have been projected based on the low and high output and price projections. As to be 182 expected, the level of income projected is highest for the low output and high price assumptions. Under this alter- native, the income is estimated to range from $775.33- 795.63 million in 1975,and from $818.13-881.45 million in 1980. Compared to the base income, this represents an increase of approximately $115-l35 million or 17.0-20.0 per cent in 1975,and an increase of $166-229 million or 25.0-35.0 per cent in 1980. The magnitude of the increase depends on the output and price assumptions (low or high) used. Comparing the income under this alternative with the income without yield stimulation but with central processing and marketing,again indicates the potential of the central processing and marketing scheme as the major contributor to the increase in smallholders' income. Summary This chapter is an attempt to estimate the income of smallholders for the period 1975-80 under the four following alternatives: 1. Without yield stimulation and under the tradi- tional processing and marketing system. 2. With yield stimulation but under the traditional processing and marketing system. 3. Without yield stimulation and under central processing and marketing system. 183 4. With yield stimulation and under central process- ing and marketing system. Gross rather than net income is used to compare smallholders' income under the above alternatives, because the variability in smallholder production costs makes it difficult to use net income figures. In computing the income, the prices used are those received by the small— holders. These prices are arrived at by deducting from the f.o.b. prices, the research and replanting cesses, export duty,and the estimated marketing margins. A comparison of the smallholders' income under the -four alternatives indicates that both yield stimulation and central processing and marketing can be expected to increase smallholders' income during the period 1975-80. In comparing the income, the income under Alternative I is used as the base income. This income is projected to be $660.29 million in 1975 and $652.32 million in 1980. Under Alternative II, the income is estimated to increase by $13-16 million, or 2.0-2.5 per cent in 1975, and by $34-48 million, or 5.1-7.5 per cent in 1980. Under Al- ternative III, the income is estimated to increase by $90- 101 million or 13.6-15.3 per cent in 1975, and by $131- 216 million or 20.2-32.2 per cent in 1980. The higher increase in income under Alternative III, as compared to the increase under Alternative II, indicates that central processing and marketing has greater potential in 184 increasing smallholders' income than yield stimulation. The income under Alternative IV is estimated to be $115- 135 million or 17.0-20.0 per cent higher than the base income in 1975, and $166-229 million, or 25.0-35.0 per cent higher in 1980. Comparing this increase in income with the increase under Alternative III again indicates the potential of central processing and marketing as the major contributor to the increase in smallholders' income. An attempt is also made to estimate the gains (in cents/1b.) by smallholders under the central processing and marketing scheme by comparing the prices received for ribbed smoked sheet (RSS), unsmoked sheet (USS) and scrap under this system and those received under the tradi- tional processing and marketing system. The result indi- cates that smallholders currently producing RSS could expect to gain little (about 0.8 cents/lb.) under the central processing and marketing scheme. These producers could gain as much or more by upgrading the quality of the sheets and thus fetching higher prices. For the USS pro- ducers, however, the price gains are substantial and average about 5.3 cents/lb. resulting from reduction in the marketing margin, savings on processing costs,and the higher f.o.b. prices from which the prices paid to the smallholders are based on. The highest potential gain from central processing and marketing is achieved from the 185 sale of scrap rubber. This gain is estimated to be about 5.8 cents/1b. and results from the reduction in the marketing margin under the new processing and marketing system. CHAPTER VII IMPLICATIONS OF YIELD STIMULATION AND CENTRAL PROCESSING AND MARKETING FOR THE MALAYSIAN NATURAL RUBBER INDUSTRY WITH SPECIAL EMPHASIS ON SMALLHOLDERS The analysis of the potential effects of the new technologies in natural rubber production and processing raises a number of implications for the Malaysian natural rubber industry. In this chapter, the various implications arising from the above technologies are discussed. Competitiveness of the Natural Rubber Industry It was noted in Chapter IV that the natural- synthetic rubber competition occurs on both price and non- price basis. The adOption of the new production technology by Malaysian rubber producers, particularly the small- holders, and the processing of the output into the new pro- cess rubbers are likely to enable natural rubber to maintain or even enhance its price and non-price competitiveness in the elastomer market. 186 187 An important means of reducing production costs is through the increase in yield per unit area. Cost reduc- tions have thus far been achieved mainly through replanting with high-yielding clones. The use of the yield-stimulant ethrel to increase yields has the potential of further re- ducing production costs, and thus enhancing the price- competitiveness of natural rubber against the synthetic. Insofar as non-price competition is concerned, it was pointed out earlier that improvements in the technical properties of synthetic rubber have been rapid in view of the develOpments of the special purpose and the stereo- regular rubbers, as these rubbers have certain properties which are superior to those of natural rubber. It was also noted that the new processing methods for natural rubber, due to their versatility, can be made to produce block natural rubbers with technical properties required by the consumers,and that the rubbers produced require no pre- treatments before use in the consumers' factories. The pro- duction of the new process rubbers thus represents an im— provement in the technical prOperties of natural rubber, and is likely to enhance its non-price competitiveness in the elastomer market. The analysis of the impact of the central process— ing and marketing scheme on Malaysian smallholders' income has indicated that the scheme would substantially increase smallholders' income. However, equally important is the 188 fact that the scheme, by enabling smallholders' output to be processed into the new process rubbers, is likely to make a positive and significant contribution to the competi— tive position of natural rubber in the elastomer market. The contribution could be significant in view of the fact that Malaysian smallholders currently produce approximately 22 per cent of the world output of natural rubber. Foreign Exchange Earnings It has been noted earlier that Malaysian rubber ex- ports represent the largest source of foreign exchange earnings. In 1970, the earnings from rubber accounted for about 40 per cent of the country's total foreign exchange earnings.1 The adoption of the yield-stimulant ethrel by the Malaysian estates and smallholdings can be expected to substantially increase the foreign exchange earnings from rubber during the projection period (1975—80). Table 7.1 shows the estimated foreign exchange earnings with and with- out yield stimulation for the period 1975-80. The calcula- tion of the earnings has been based on the low price pro- jection made in Chapter IV. Comparing the foreign exchange earnings with and without yield stimulation indicates that with yield stimu— lation, the earnings can be expected to increase from 1Malaysia, Department of Statistics, Monthly Statis- tical Bulletin, Kuala Lumpur, Malaysia (December, 1971), Table 1.5, p. 149. 189 Table 7.1.-—Projected Malaysian Foreign Exchange Earnings from Rubber With and Without Yield Stimulation: fiiMilJ 1975-80.a Without Yield Stimulation With Yield Stimulation Year Smallholdings Estates Total Smallholdings Estates Total 1975 992.28 797.91 1790.19 1062.27 854.22 1916.49 1976 1006.71 787.16 1793.87 1063.18 859.63 1922.81 1977 1013.79 762.80 1776.59 1063.23 843.53 1906.76 1978 1038.72 744.65 1783.37 1151.49 869.54 2021.03 1979 1062.40 723.18 1785.58 1351.53 923.55 2275.08 1980 1082.31 703.36 1785.67 1378.89 981.02 2359.91 aCalculations based on Tables 3.1, 3.5, and 3.9. $1790.2 million to $1916.5 million in 1975, representing an increase of about $126 million or 7 per cent. By 1980, the earnings have been estimated to increase from $1785.7 mil- lion to $2359.9 million, or an increase of $574 million or 32 per cent. Export Tax-Revenue The increase in output resulting from yield stimu- lation would also significantly increase the export tax revenue from rubber. It can be seen in Table 7.2 that with the adoption of yield stimulation by the estates and small- holdings, the export tax revenue from rubber is estimated to increase from about $71.7 million to $75.5 million in 1975, This represents an increase of about $4 million or and from $71.8 million to $93.9 million in 1980. 190 Table 7.2.—-Projected Malaysian Export Tax Revenue from Rubber With and Without Yield Stimulation: 1975-80. “BMiIJ Year Without Yield Stimulation With Yield Stimulation Smallholdings Estates Total Smallholdings Estates Total 1975 40.09 31.59 71.68 41.67 33.78 75.45 1976 39.82 31.14 70.96 41.04 32.56 73.60 1977 39.59 29.79 69.38 42.53 32.85 75.38 1978 41.84 30.00 71.84 45.77 34.60 80.37 1979 41.39 28.17 69.56 53.73 36.75 90.48 1980 43.51 28.27 71.78 54.82 39.04 93.86 Source: Rubber Research Institute of Malaya, Rates of Export Duty and Cesses, Kuala Lumpur, Malaysia, October, 1968, and Tables 3.1, 3.5, and 3.9. 5 per cent, and $22 million or 31 per cent in 1975 and 1980 respectively. Apart from its positive effect on the export tax revenue, output increase through yield stimulation would also result in substantial increases in research and re- planting cesses (Table 7.3). With yield stimulation, the research cess is estimated to increase from $37.7 million to $42.1 million in 1975, and from $45.5 million to 60.8 million in 1980. This represents an increase of about $4 million or 12 per cent, and an increase of about $15 mil- lion or 33 per cent for 1975 and 1980 respectively. The replanting cess is estimated to increase by about $8 million or 9 per cent in 1975, and by about $32 million or 26 per cent in 1980 as a result of the output increase through 191 Table 7.3.--Ma1aysia: Research and Replanting Cesses from Rubber With and Without Yield Stimulation: 1975-80. ($ Mil.) Without Yield Stimulation With Yield Stimulation Year Research Replanting Research Replanting Cess Cess Cess Cess 1975 37.74 94.15 42.13 102.61 1976 40.00 98.48 44.93 110.17 1977 40.43 103.82 48.16 119.35 1978 42.11 110.38 52.08 130.54 1979 43.75 117.13 56.22 142.73 1980 45.50 124.08 60.77 156.34 Source: Rubber Research Institute of Malaya, Rates of Export Dutyfiand Cesses, Kuala Lumpur, Malay51a, October, 1968, and Tables 3.1, 3.5, and 3.9. ethrel stimulation.2 An increase in research and replant- ing cesses means an increase in funds available for carry- ing out research activities in rubber and in replanting old trees with high yielding clones under the rubber replanting program. Supply Elasticity and Price Fluctuations It has been noted in Chapter III that the supply of natural rubber is price inelastic except in the long run. 2Increase in the replanting cess comes from the in- crease in smallholding output only. Increase in output of estates does not affect the cess as the cess levied at the time of export are returned to the estates. In other words, only the smallholders pay the replanting cess. 192 This supply inelasticity has been one of the factors con— tributing to fluctuations in natural rubber prices and to the declining share of natural rubber in the total elas- tomer consumption.3 Since the supply is inelastic, shifts in demand re- sult in much larger variations in market prices than in the quantities supplied, thus resulting in wide fluctuations which have characterized natural rubber prices. These fluc— tuations in turn not only result in instability of the pro- ducers' income, but also in instability in foreign exchange earnings and export revenue. In the case of Malaysia where rubber is a major source of foreign exchange earnings and public revenue, instability in natural rubber prices causes severe economic strains and difficulties in develOpment planning and implementation of development projects. The inelasticity of natural rubber supply has also been a contributory factor in the inability of natural rubber to respond to the growth in world demand for elas- tomers., During the last two decades, total elastomer con- sumption has been increasing at an average annual rate of 7 per cent. However, natural rubber output has only been increasing at an annual average rate of 3 per cent. The 3An analysis of the various factors contributing to the fluctuations in natural rubber prices is given in A. H. H. Tan, "Natural Rubber Problems and Techniques of Stabilization" (Master's prospectus, University of Malaya, 1962); and P. F. Adams, "Fluctuations in the Price of Natural Rubber," Kuala Lumpur, Malaysia, Ministry of Com— merce and Industry, 1958. 193 gap was bridged by increases in the output of synthetic rubber. As synthetic rubber production increased to meet the increasing demand, its share in the total elastomer consumption increased steadily. For example, the share of synthetic rubber in the total elastomer consumption in- creased from 29 per cent in 1956 to 59 per cent in 1969.4 The use of ethrel in stimulating the yield of rub- ber trees is likely to enable production to be more re- sponsive to changes in price and thus reduces the short run inelasticity of supply. For example, in the case of a price increase, producers can reSpond by increasing the frequency of ethrel application or by bringing younger acreage into stimulation. Increases in price might also induce new smallholdings to adopt the yield-stimulant. In the case of the decline in prices, producers can respond by reducing the acreage stimulated or discontinue the use of the stimulant. Thus yield stimulation, by reducing the in- elasticity of supply is likely to have a stabilizing effect on natural rubber prices. Moreover, by reducing the in- elasticity of supply, yield stimulation would increase the ability of natural rubber to respond to the future growth in world demand for elastomers. 4International Rubber Study Group, Rubber Statis- tical Bulletin, London (October, 1971), Table 27, p. 28. 194 Policy_Implications Yield Stimulation The adoption of the yield-stimulant ethrel has been shown to increase the Malaysian smallholders' income. How- ever, it has also been shown that increases in output through yield stimulation would have a depressing effect on natural rubber prices, with prices being depressed more as the assumed levels of adoption of the yield-stimulant in- creases. The policy implication of yield stimulation for the Malaysian natural rubber industry is dependent on the response of other natural rubber producing countries to this new technology. If yield stimulation is proven to have no long- term deleterious effects on the trees, and on the quality of the rubber produced, it is reasonable to assume that the new technology will be adopted by other natural rubber producers. Based on the potential response of other nat- ural rubber producers to yield stimulation, two policy options for the Malaysian producers are recommended. The first policy option calls for the adoption of the yield-stimulant by the Malaysian estates and small- holdings on a gradual basis in order to allow the market to adjust to the output increases. Any rush by estates and smallholdings into the adoption of the stimulant would result in quantum increases in output and in rapid decline in natural rubber prices. This policy Option presupposes 195 an agreement by other natural rubber producers to the gradual adoption of the stimulant. However, if the failure of other international commodity agreements is any indica— tion, then it is unlikely that the agreement between the natural rubber producing countries would achieve the de- sired objectives. In such a case, the only option Open to the Malaysian producers is to accelerate the adOption of the stimulant. Output increases through yield stimulation has the potential of reducing production costs and thus enhancing the price competitiveness of natural rubber against the synthetic. In view of the importance of yield stimulation in reducing production costs, the second policy option sug- gested above would enable the Malaysian natural rubber industry to maintain or possibly increase its competitive position not only against synthetic rubber but also against other natural rubber producers. It was noted earlier that high output response to the yield-stimulant requires that the stimulant be applied to trees which are adequately fertilized. Furthermore, with yield stimulation, additional fertilization is re- quired to make up for the additional nutrient losses re- sulting from the increased latex flow. However, the small- holdings are generally inadequately fertilized.5 It is 5The survey of smallholders conducted in October, 1971, indicated that 48 per cent of the respondents did not apply fertilizers to their mature rubber trees. The 196 therefore recommended that a fertilizer campaign be car- ried out to effect a more widespread application of ferti— lizers on smallholdings, and to impress smallholders on the necessity of adequate fertilization in order to obtain high and sustained response to yield stimulation. Compared to the estates, the smallholders currently lag behind in production. Under the second option, the policy towards smallholders should therefore be directed at providing incentive to the smallholders to encourage them to adopt the new production technology in order to increase their production efficiency. Specifically, it is recom- mended that subsidies be given to smallholders adopting the yield-stimulant in the purchase of the stimulant (ethrel) and the additional fertilizers required. These subsidies can be recovered from the potential increase in export tax revenue which has been estimated to result from the in- crease in output through yield stimulation. Central Processingyand Marketing This study indicates that central processing and marketing system for smallholder rubber has greater poten- tial in increasing smallholder income than yield stimula- tion because of the higher prices received by smallholders under this improved marketing and processing system. main reason given for not applying is that they cannot afford to buy the fertilizers. 197 Since central processing and marketing would enable natural rubber to maintain or possibly increase its competitiveness against synthetic rubber, it is recommended that the cen— tral processing and marketing scheme be expanded to cover as many smallholders as possible. In computing smallholder income under the central processing and marketing system, it was assumed that all smallholders shift to the new system. However, the rate at which the smallholders could shift to the new system would depend on the rate at which the central processing factories are established. It is unlikely that enough central fac- tories could be established by the Malaysian Rubber Develop- ment Corporation (MRDC) by 1980 to serve all smallholder rubber output, as this requires an immense investment on the part of the public sector both in human and nonhuman re- sources. TO expedite the expansion of the smallholder central processing and marketing system, two policy Options are recommended. The first Option calls for increased participation of smallholders in central processing and marketing. This can be achieved by allowing smallholders to subscribe to the capital shares of MRDC. The shares need not be Open for subscription by smallholders only, but it is recom- mended that preference in the subscription be given to them. Increased participation by smallholders in central processing and marketing of their rubber, by increasing 198 their sense of involvement, would likely increase their willingness to sell their product to the central factories. The second Option open to MRDC is to encourage private entrepreneurs to establish and Operate central processing factories to purchase and process smallholder rubber. The establishment of these factories by private entrepreneurs would complement those established by MRDC and would in- crease the degree of competition in the purchase of small- holder rubber. Summary The analysis Of the potential effects of the new technologies in Malaysian natural rubber production and processing raises a number of implications for the Malay- sian natural rubber industry apart from increasing small- holders' income. The possible reduction in production costs resulting from yield increase through stimulation, and the improvements in technical properties embedded in the new process rubbers could play a major role in main- taining or even enhancing both the price and non-price competitiveness of natural rubber against synthetic rubber. The adoption of the new technologies in production and processing has been estimated to result in substantial increases in foreign exchange earnings, export tax revenue, and in replanting and research cesses during the projection period (1975-80). Foreign exchange earnings are estimated to increase by $126 million or 7 per cent in 1975, and by 199 $574 million or 32 per cent in 1980. Export tax revenue is estimated to increase by about $4 million, or 5 per cent in 1975, and by $22 million, or 31 per cent in 1980. The adOption of the new technologies can also be expected to increase research cess by $4 million or 12 per cent, and by $15 million or 33 per cent in 1975 and 1980 respectively. The corresponding increase in replanting cess is about $8 million or 9 per cent in 1975, and $32 million or 26 per cent in 1980. The use of yield-stimulant ethrel is likely to in- crease the short run price responsiveness of natural rubber supply and reduce price instability. Moreover, by increas- ing the price responsiveness of natural rubber supply, yield stimulation would also increase the ability of natural rubber to respond to the future growth in world elastomer demand. Insofar as the policy implication of yield stimu— lation is concerned, two policy Options are recommended. The first option calls for the adoption of the yield- stimulant by Malaysian natural rubber producers on a gradual basis. This option presupposes an agreement by other natural rubber producers to the gradual adoption of the stimulant. However, if such an agreement cannot be achieved, it is recommended that the adOption of the stimu- lant by Malaysian producers be accelerated. Under the second option, it is suggested that incentives be given to 200 smallholders to encourage their adoption of the stimulant as they currently lag behind the estates in production. With regard to the central processing and marketing scheme, it is recommended that the scheme be expanded to cover as many smallholders as possible. To expedite the expansion of the scheme, two policy options are recommended. The first Option calls for increased participation of small- holders in central processing and marketing. This can be achieved by allowing smallholders to subscribe to the capi- tal shares of the Malaysian Rubber Development Corporation (MRDC). The second Option is to encourage private entre- preneurs to set up central processing factories to purchase and process smallholder rubber. The establishment of these factories by private entrepreneurs would complement those established by MRDC and would increase competition in the purchase of smallholder rubber. CHAPTER VIII SUMMARY AND RECOMMENDATIONS FOR FUTURE RESEARCH Summary Malaysia is the world's largest producer of natural rubber. The rubber industry comprising of estates and smallholdings plays an important role in the Malaysian economy. Apart from being the largest single crop by acre- age, rubber provides the largest source of employment, and rubber exports represent the largest source of Malaysian foreign exchange earnings. Rubber has also been a major contributor to federal revenue, but over the last few years, its contribution has declined due to the decline in natural rubber prices,and the graduated export duty on the commodity. Recently, major technological developments have been introduced in the Malaysian natural rubber industry. These develOpments include the introduction of the yield-stimulant ethrel, the Standard Malaysian Rubber (SMR) Scheme, and the new methods of processing natural rubber. The introduction of the yield-stimulant has the potential of substantially increasing the current yields of rubber trees. Under the SMR Scheme, Malaysian natural rubber is graded on technical 201 202 specifications in contrast to the conventional method where grading was based on visual appearance of the rubber. With the development of the new processing methods, natural rubber can now be produced in block form which can be easily handled in the consuming factories. Smallholder rubber is marketed through a chain of agencies consisting of the local dealers, middle dealers, remillers, and exporters. Each agency in the marketing channel makes certain charges to cover the cost of its services and to make a profit. The greater part of small- holder rubber is of inferior quality due to the inadequate care taken during latex collection, processing, drying and storage. Apart from fetching lower prices, production of inferior quality rubber reduces natural rubber's competitive- ness against synthetic rubber. The methods of grading small- holder rubber are unsatisfactory. The absence of a uniform standard based on technical specifications for grading has led to the subjective method of grading based on thickness, shades of color, presence of bubbles, and mold growth. Estimation of moisture content in the rubber is also arbi- trary and is based on length of drying time and thickness of the rubber sheets. For natural rubber to compete with synthetic rubber, it is imperative that the smallholders adopt the new tech- nologies in production and processing. With the develOpment of the new process rubbers, the conventional form of rubber 203 (sheet rubber) is likely to phase out of the international market. However, the smallholders cannot be expected to adopt the new technologies in processing and marketing individually as the new forms of rubber are processed and marketed along lines too specialized for them to perform competently on an individual basis. A reorganization of the traditional processing and marketing system, insofar as it involves a reduction in the chain of agencies in the marketing channel, is likely to result in an increase in smallholder income. This increase in income could result from the reduction in marketing costs and the subsequent increase in the prices received by small- holders for their product. In the face of the declining natural rubber prices, the adOption of the yield-stimulant by smallholders could provide a means of maintaining or possibly increasing their income through output increase despite the more rapid decline in prices which is likely to result from the adOption. The objectives of this study are to: l. Analyze the potential impact of the yield-stimulant ethrel on the Malaysian and world natural rubber output and prices for the period 1975-80. 2. Investigate the changes in the Malaysian small- holder processing and marketing system, and compare estimates of Malaysian smallholder income under the following alternatives: 204 (a) Without yield stimulation and with the tradi- tional processing and marketing system (Alterna- tive I). (b) With yield stimulation and the traditional pro- cessing and marketing system (Alternative II). (c) Without yield stimulation and with reorganized processing and marketing system (Alternative III). (d) With yield stimulation and reorganized process- ing and marketing system (Alternative IV). 3. Assess the implications of yield stimulation and reorganization of the smallholder processing and marketing system for competitiveness of the natural rubber industry; Malaysian foreign exchange earn- ings and export tax revenue from rubber, and natural rubber supply elasticity and price fluctuations. 4. Assess the implications of the study for government smallholder rubber policy. To facilitate an understanding of the linkages between the various segments Of the world rubber market, an economic model of the market is develOped. However, due to the paucity of data and time, it is not possible to include all the variables in the model, and to quantify all the relationships between the variables in this study. The 205 inability to quantify all the relationships in the model, however, does not discredit the future usefulness of the model. It provides a framework for policy makers to trace the consequences of alternative policies to be pursued on rubber, particularly on the major segments of the rubber market such as costs, supply, demand, and prices. The model can also be useful for future researchers on the rubber industry as it provides a framework to absorb new and more complete data on the various aspects of the industry as they become available. The limitations of the model, however, suggest caution against drawing sweeping conclusions from the findings of this study. Data for this study are mainly from secondary sources and were obtained through the publications of the various institutions connected with the rubber industry. Primary data were collected through a sample survey of 178 smallholders. The primary objective of the survey was to ascertain the views of smallholders on the potential adop- tion of the new production and processing technologies. The analysis of the potential effect of yield stim- ulation indicates that substantial increases in Malaysian and world natural rubber output can be expected during the period 1975-80 as a result of the adoption of the stimulant by the natural rubber industry. With the use of the yield- stimulant, the Malaysian natural rubber output will be approximately 196,000 to 246,000 long tonslor about 206 12-15 per cent higher in 1975 than the output without the use of the stimulant, and in 1980, it will be approximately 682,000 to 722,000 long tons, or about 34 to 36 per cent higher depending on the assumed levels of adoption (low or high) of the yield-stimulant by the natural rubber indus- try. The corresponding increases for the world natural rubber output are 237,000 to 349,000 long tons, or about 6 to 9 per cent in 1975, and 924,000 to 1,206,000 long tons, or 21 to 27 per cent in 1980. In analyzing the effect of the increases in output resulting from yield stimulation on natural rubber prices for the period 1975-80, two sets of price projections are attempted. The first projection is based on the assumption of the continuing decline in the share of natural rubber in the total elastomer consumption, with the share declining from 39 per cent in 1975 to 34 per cent in 1980. The second projection is based on the assumption that natural rubber will maintain its share of the total elastomer con- sumption at 40 per cent throughout the projection period (1975-80) as a result of the expected increase in the pro- duction of the new process rubbers under the Standard Malaysian Rubber (SMR) Scheme. The first projection shows that, with yield stimu- lation, prices will decline from about 18.9 U.S. cents/lb. to 18.3 to 18.0 cents/lb. in 1975, and from 16.1 cents/lb. to 15.0 to 14.5 cents/lb. in 1980, depending on the assumed 207 adOption levels (low or high) of the yield-stimulant. As would be expected, the projected prices in the second set are higher than those of the first set. This projection shows that, with yield stimulation, prices are likely to decline from about 19.1 U.S. cents/lb. to 18.6 to 18.3 cents/lb. in 1975, and from 17.4 cents/1b. to 15.1 to 14.5 cents/1b. in 1980 again depending on the adoption levels of the stimulant by the natural rubber industry. The comparison between the traditional and the new processing and marketing systems for smallholder rubber indicates the superiority of the latter system. The new processing methods have been found to be versatile and can be utilized to process rubber with technical prOperties to meet_the consumers' requirements. The new methods also lend themselves to the production of natural rubbers with properties most of which are hitherto present only in syn- thetic rubbers. This is much to the advantage of the natural rubber industry in view of the strong competition between natural and synthetic rubbers. It is thus essential for the Malaysian rubber industry, particularly the small- holders tO adOpt these new processes in order to remain competitive in the elastomer market. Due to the large minimum plant size required for the new process rubbers with the current available tech- nology, a central processing and marketing system is essen- tial for smallholder participation in the SMR Scheme. So 208 far, central processing and marketing for smallholders has only been introduced in Malaysia on a limited scale. The objectives of the scheme are the improvement in the quality of smallholder rubber, and the increase in their income mainly through reductions in processing and marketing costs. The implementation of the central processing and marketing scheme is the responsibility of the Malaysian Rubber De- velopment Corporation (MRDC). The central processing and marketing scheme in- volves the establishment of central processing factories which purchase and process smallholder rubber. Each central factory is supplied by a network of collecting centers with each center being manned by a collecting agent. Each factory purchases smallholder rubber within a radius of approximately 20 miles. Smallholders bring their latex and scrap rubber to the collecting center closest to their holdings. At each center, the collecting agent determines the quantity of the latex and scrap received and makes payments to the suppliers. The collecting agent receives a commission of 1.5 cents/1b. (Malaysian) for his services. The latex and scrap are tranSported to the central factory for processing, grading, packing, and for direct export to consumers. Insofar as the smallholders are concerned, their willingness to shift the sale of their output to the central factories depends on the benefits to be achieved, 209 particularly in the form of higher prices. The higher prices could result from the reduction in marketing costs due to the reduction in the stages involved in the new processing and marketing system. With regard to the smallholders' attitudes toward central processing and marketing, the results of the survey of smallholders currently selling to the central factory, and those expected to sell to a proposed central factory, point to the following conclusions. First, the sale of rubber to the central factories under the central process- ing and marketing scheme has been, and is likely to be, well received by the smallholders. This conclusion is based on the fact that the majority of smallholders cur- rently selling to the central factories are generally sat- isfied with the new channel of sale. Furthermore, the majoritylof smallholders in the proposed factory area have expressed their willingness to sell to the factory and anticipate no problems in shifting to this new channel of sale. Second, the benefits from central processing and marketing as perceived by smallholders are commensurate with the benefits actually realized. The similarity be- tween the benefits anticipated by smallholders who ex- pressed willingness to sell to the proposed factory, and the benefits achieved by those currently selling to the central factory bears out this conclusion. Third, insofar as the benefits from central processing and marketing are 210 concerned, smallholders regard the savings in processing costs and time as the most important single benefit. Other benefits from central processing and marketing anticipated and realized by smallholders are the higher prices re- ceived; proximity of the collecting center to their rubber holdings, and no "cheating" in weighing, and in determin- ing the dry rubber content (d.r.c.) of the latex by the collecting agent. Smallholder incomes with and without yield stimu- lation and central processing and marketing are estimated for the period 1975-80. Gross rather than net incomes are estimated because the variability in smallholder production costs makes it difficult to use net income figures. In computing the income, the prices used are those received by the smallholders. These prices are arrived at by de— ducting research and replanting cesses, export duty, and the estimated marketing margins from the projected f.o.b. prices. Comparing the smallholder income under the four alternatives (stated in Objective 2) indicates that both yield stimulation and central processing and marketing can be expected to increase smallholder income during the period 1975-80. In comparing the income under the four technological alternatives, the income without yield stimu- lation and under the traditional processing and marketing system (Alternative I) is used as the base income. This 211 income is projected to be about $660 million in 1975 and $652 million in 1980. Based on the low output projection with stimulation and under the traditional processing and marketing system (Alternative II), the income is estimated to be approxi- mately $676 million in 1975,and $700 million in 1980. This represents an increase of about $16 million or 2.5 per cent, and $48 million or 7.5 per cent over the 1975 and 1980 base income respectively. With the high output pro- jection, the income can be eXpected to increase to about $673 million in 1975, and $686 million in 1980; an increase of some $13 million, or 2.0 per cent, and $34 million, or 5.0 per cent, over the 1975 and 1980 base income respec- tively. In the case of the projected income without yield stimulation but with central processing and marketing (Alternative III), a substantial increase over the base income can be eXpected. Based on the low and high price projections, this income is estimated to be between $750 to 762 million in 1975, and between $783 to 868 million in 1980. This is an increase of some $90 to 101 million, or 13.6 to 15.3 per cent over the 1975 base income, and an increase of $131 to 216 million, or 20.0 to 32.2 per cent over the 1980 base income. (It must be emphasized here that this substantial increase in income is based on the assumption that all smallholders shift to central 212 processing and marketing.) The projected income under this alternative is higher than the income with yield stimulation and under the traditional processing and marketing system. Thus, insofar as the smallholders are concerned, the analysis indicates that central processing and marketing has greater potential in increasing small- holder income than yield stimulation. Comparing the income with yield stimulation and with central processing and marketing (Alternative IV) with the base income indicates that, with yield stimulation and central processing and marketing, the income is estimated to increase by about $115 to 135 million, or by 17.0 to 20.0 per cent in 1975, and by $166 to 229 million, or by 25.0 to 35.0 per cent in 1980. The magnitude of the in- crease depends on the output and price assumptions (low or high) used. An attempt is made to estimate the gains (in cents/ lb.) by smallholders under the central processing and marketing scheme by comparing the prices received for ribbed smoked sheet (RSS), unsmoked sheet (USS), and scrap under this scheme, and the correSponding prices received under the traditional processing and marketing system. The comparison indicates that smallholders currently pro- ducing RSS could expect to gain little (about 0.8 cents/ 1b.) under the central processing and marketing scheme. These producers could gain as much or more by upgrading 213 the quality of the sheets, and thus fetch higher prices. For the USS producers however, the price gains could be substantial and average about 5.3 cents/lb. resulting from the reduction in marketing margin (about 1.6 cents/1b.), savings on processing costs (about 1.7 cents/1b.), and the higher f.o.b. prices from which the prices paid to small— holders are based on (about 2 cents/1b.). The highest potential gain from central processing and marketing scheme is achieved from the sale of scrap rubber. This gain is estimated to average about 5.8 cents/lb. and results from the reduction in the marketing margin under the scheme. Apart from increasing smallholder income, yield stimulation and central processing and marketing has various implications for the Malaysian rubber industry. The possible reduction in production costs resulting from yield increases through yield stimulation, and the improve- ments in the technical properties embedded in the new process rubbers could play a major role in maintaining or even enhancing both the price and non-price competitive— ness of natural rubber against synthetic rubber. Output increases through yield stimulation has been estimated to substantially increase natural rubber's con- tribution to Malaysian foreign exchange earnings, export tax revenue, and research and replanting cesses. The use of the yield-stimulant ethrel is likely to increase the short run price responsiveness Of natural rubber supply and 214 reduce price instability. The increase in price responsive- ness of natural rubber supply would also increase the abil- ity of natural rubber to respond to the future growth in the world elastomer demand. Recommendations for Future Research It was noted earlier (Chapter V) that a major problem currently faced by the Malaysian Rubber Development Corporation (MRDC) is the high transportation cost involved in collecting latex from the collection centers scattered in the village and transporting it to the central factory for processing. In fact, transportation cost currently forms the major component of processing cost.1 It is recommended here that future research be focused on finding ways of reducing transportation cost. Specifically, two lines of research are recommended. First, the research should focus on analyzing the relationship between plant size and transportation and processing costs with the Oh- ject of determining the size of plant with the minimum costs. Second, it is recommended that a locational analy- sis be undertaken to determine the Optimum locations for the central processing factories; optimum with reSpect to tranSportation and processing costs. The adoption of the yield-stimulant and the new processing methods by the Malaysian rubber producers has 1Private communication with MRDC. 215 wide implications for employment in the Malaysian rubber industry. However, due to the data and time constraints in this study, it has not been possible to attempt any de- tailed analysis of the impact of the new production and processing technologies on employment. It is therefore recommended that research be undertaken in the future to analyze the employment impact of the new technologies. The research should focus on analyzing the changes in labor requirements of estates and smallholdings as a result of the adOption of the yield-stimulant. With regard to the central processing and marketing scheme, the establishment of the central processing factories and the collection centers have created a number of jobs in the form of fac— tory managers, field officers, clerical staff, factory workers (laborers), and collecting agents. However, the scheme is also likely to displace the buyers of smallholder rubber under the traditional processing and marketing system. Future research should therefore focus on the number of jobs created and displaced by the scheme in order to determine whether the contribution of the scheme to employment is positive, neutral, or negative. The adoption of the new technologies in production, processing, and marketing by the Malaysian estates and smallholdings is likely to affect the pattern of income distribution between estates and smallholdings and between the smallholders themselves. Since yield stimulation and 216 central processing and marketing are still in the early stage of adoption by the Malaysian natural rubber pro- ducers, this study has not included an analysis of the impact of the new technologies on income distribution due to the paucity of relevant data at the time this study was undertaken. It is recommended that future research be undertaken to analyze the changes in income distribution resulting from the adOption of the new technologies. The research should include an analysis of the changes in income distribution between the estate and smallholding sectors, and within the smallholding sector. In analyzing the changes in income distribution within the smallholding sector, it is suggested that emphasis be given to the changes in income distribution between smallholdings Of different sizes, and between adOpters and non-adopters of the new technologies. For the non-adOpters, the research should include an analysis of the reasons for non-adOption with the object of identifying the bottlenecks and con- straints faced by the smallholders resulting in the non- adoption of the new technologies. BIBLIOGRAPHY Abraham, Adams, Allen, Barlow, Bauer, BIBLIOGRAPHY P. D. "Field Trials With Ethrel." Planters' Bulletin, NO. 111, Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (November, 1970). . "Ethrel Trials on Smallholdings: Preliminary Results." Preprint No. 2. Rubber Research Institute Of Malaya Planters' Conference, Kuala Lumpur, Malaysia, July, 1971. ‘ ; P'ng, T. C.; and Ng, E. K. "RRIM Ethrel Trials: Progress Report." Preprint No. 1. Rubber Re- search Institute Of Malaya Planters' Conference, Kuala Lumpur, Malaysia, July, 1971. P. F. "Fluctuations in the Price of Natural Rubber." Kuala Lumpur, Malaysia: Ministry of Commerce and Industry, 1958. P. W. "The Evolution of Market Grades." Rubber Developments, XVII, No. 4, London, NaturaI Rubber Producers' Research Association, (1964). C., and Lim, S. C. "A Report on the Survey of Malay Group Processing Centers." Economic Report NO. 1. Statistics Division, Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia, 1965. . "Natural Rubber and West Malaysia." Paper presented at the Singapore Meeting of the S.E. Asia Business Committee, Rubber Research Insti- tute of Malaya, Kuala Lumpur, Malaysia, May, 1968. P. T. The Rubber Industryii A Study of Competition and Monppply. Cambridge, Mass.: Harvard University Press, 1948. 217 218 Behrman, Jere R. "An Econometric Study of the World Rubber Market." Discussion Paper No. 85. Department of Economics, University of Pennsyl- vania, Philadelphia, July, 1968. Bevan, J. W. L. "A Study of Yields, Labor Inputs and Incomes on Rubber Smallholdings in the Coastal Area of Selangor." Department of Agriculture, University of Malaya, Kuala Lumpur, Malaysia, 1962. Biggs, H. G. "Report on the Marketing of Agricultural and Other Rural Produce in Malaysia." London, Department of Technical Cooperation, 1964. Cheam, S. T. "A Study of the Marketing of Smallholders' Lower Grade Rubber." Economics and Planning Division Report No. 8. Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia, July, 1971. Chin, P. S.; Soh, Y. B.; and Pillai, N. M. "Factors Influencing Consistency of SMR Production." Preprint No. 20. Rubber Research Institute of Malaya Planters' Conference, Kuala Lumpur, Malaysia, July, 1971. Crosson, Pierre R. Economic Growth in Malaysia: Pro- igctions of Gross National Product andfoffi’ Production, ConsumptionLyanéNet Imports of AgriculturaI Commodities. Planning Methods Series No. 2. Jerusalem: National Planning Association, Center for Development Planning, 1966. Dayal, R. "Econometric Model of the World Rubber Market," Commodities Division, UNCTAD, Geneva, May, 1970. (Mimeographed draft.) Graham, D. J. "New Presentation Processes and the SMR Scheme." Planters' Bulletin, No. 99, Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (1968). Greenwood, J. M. F. "Rubber Smallholdings in the Federation of Malaya." Paper presented to the International Geographical Conference, Kuala Lumpur, Malaysia, 1962. Hague, Irfan U1. "Efficiency in Resource Allocation: The Case of Natural Rubber." Economics Depart— ment, IBRD, July, 1971. 219 International Rubber Study Group. The Marketing of Block Natural Rubber Sold to Technical Speci- fications. LondOn, 1969. . Rubber Statistical Bulletin. London (various issues). Knorr, K. E. World Rubber and Its Regulations. Stanford, Ca1if.: Stanford University Press, 1948. Lim, S. C. "A Study of the Marketing of Smallholders' Rubber at the First Trade Level in Selangor." Economics and Planning Division Report, No. 4. Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia, September, 1968. Malaysia. Department Of Agriculture. Annual Report, 1969. Kuala Lumpur, Malaysia, 1969. . Department of Statistics. Federation of Malaya Rgport on Employment, Unemponment, and Underemployment. Kuala Lumpur, Malaysia, 1962. . Department of Statistics. Monthly Statistical Bulletin. Kuala Lumpur, Malaysia (various 13511835 0 . Department of Statistics. Rubber Statistics Handbook. Kuala Lumpur, Malaysia (various issues). . Second Malaysian Plan: 1971-1975. Kuala Lumpur, Malaysia: Government Printer, 1971. Moir, G. F. J. "A Radical Approach to Exploitation." Planters' Bulletin, No. 111, Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia (November, 1970). Morris, J. E. "Heveacrumb Process." Journal of the Rubber Research Institute of Malaya, XXII, No. 46, Kuala Lumpur, Malaysia (I969T. Nair, 8.; Sin, 8. W.; and Lee, T. H. "New Presentation Rubbers: SMR Market Reaction and Future Require- ments." Planters' Bulletin, No. 110, Rubber Research Institute of'MaIaya, Kuala Lumpur, Malaysia (September, 1970). 220 Natural Rubber Bureau. Natural Rubber News. Washington, D.C., March, 1972. Natural Rubber Producers' Research Association. Technical Information Sheet No. 2. Technically Classified Rubber. London, 1965. Ooi, Jin-Bee. Land People and Economy in Malaya. London: Longmans, 1963. Pee, T. Y., and Abraham, P. D. "Economic Analysis of RRIM Ethrel Trials." Preprint No. 3. Rubber Research Institute of Malaya Planters' Conference, Kuala Lumpur, Malaysia, July, 1971. Pushparajah, E. et a1. "Nutritional Requirements of Hevea BraEiIIensis in Relation to Stimulation." Preprint No. 13. Rubber Research Institute of Malaya Planters' Conference, Kuala Lumpur, Malaysia, July, 1971. Ridley, H. N. The Story of the Rubber Industry. London: L. Reeve Press, 1913. Rubber Research Institute of Malaya. Integration of New Stimulation Techniques with—Exploitation Practice. RRIM Planters' Bulletifi, No. 111, KuaIa Lumpur, Malaysia (November, 1970). . Kertas Sharahan Kursus Latehan Getah. Kuala Lumpur, Malaysia (n.dT). . Performance oijlones in Commercial Practice: Fifth Report. RRIM Planters' BuIletin, No. 101, Kuala Lumpur, Malaysia (March, 1969). . Rates of Export Duty and Cesses. Kuala Lumpur, Malaysia, October, 1968. . SMR Bulletins, Nos. 3-8, Kuala Lumpur, Malaysia, (19707. . Standard Malaysian Rubbers, Specifications and SampIing Procedures. RRIM PlantersT Bulletin, No. , Kuala Lumpur, Malaysia (May, 1965). Salim, Agoes. "The Market for Small Farm Rubber in Malaya." Unpublished Ph.D. dissertation, Department Of Agricultural Economics, University of Wisconsin, 1967. 221 Sekhar, B. C. "Malaysian Natural Rubber: New Presenta- tion Methods." Rubber Research Institute of Malaya, Kuala Lumpur, Malaysia, April, 1967. Tan, Augustin H. H. "Natural Rubber Problems and Techniques of Stabilization." Master's Prospectus, University of Malaya, Kuala Lumpur, Malaysia, 1962. Thomas, P. 0. "Malaysian Natural Rubber in the Seventies: A Forecast of Production Trends." Rubber Re- search Institute of Malaya, Kuala Lumpur, Malaysia, July, 1970. "t Hooft Welvaars, M. J. "Profitability of New Invest- ments in Rubber Plantings in Malaysia." UNCTAD Document TD/B/C.l/SYN.52, Geneva, 1971. United Nations Conference on Trade and Development. 537 view of Problems and Policies for Specific CommOdities Facing Competition from S nthetics and Substitutes. UNCTAD Document TD7B7C.I7SYN.56, Geneva, May, 1971. Voon, P. K. "Chinese Rubber Smallholding Industry in Selangor." Unpublished Master's thesis, University of Malaya, Kuala Lumpur, Malaysia, April, 1967. Wharton, Clifton R., Jr. "Malayan Rubber Supply Condi- tions." Reprint No. 3. Agricultural DevelOp- ment Council, New York, November, 1964. APPENDICES APPENDIX A DATA USED IN THE ANALYSIS OF NATURAL RUBBER PRICES: 1955-70 manna Table a.1.--Data Deed in the Analyeie of Natural Rubber Pricee: 1955-10. variablee‘ "" p p o c c C'R/C rent rcnwo n reamt awnt ml.t cant sat rat ( Tllt_1 ( rmt apt 1955 39.21 34.91 1917 1890 1009 2899 70.63 67 3.49 0 1956 34.23 29.59 1092 1011 1001 2950 65.19 63 3.33 0 1951 31.21 21.14 1905 1900 1204 3104 64.23 59 3.10 0 1958 28.12 24.53 1942 2012 1189 3201 62.85 55 2.83 0 1959 36.59 31.06 2042 2117 1516 3633 55.30 52 2.55 13 1960 30.14 33.05 1990 2065 1130 3195 50.21 42 2.11 159 1961 29.51 25.55 2095 2127 1821 3948 54.41 35 1.67 30 1962 28.62 23.91 2130 2220 2094 4314 53.87 34 1.60 67 1963 26.24 22.15 2061 2232 2203 4515 51.46 42 2.03 05 1964 25.32 20.84 2235 2260 2635 4095 49.43 36 1.61 103 1965 25.15 21.41 2342 2302 2150 5140 46.11 30 1.62 121 1966 23.66 19.99 2400 2552 3248 5700 46.34 40 1.67 159 1967 19.93 16.54 2452 2462 3220 5602 44.77 54 2.20 101 1968 19.92 16.24 2604 2793 3742 6535 43.33 112 4.30 74 1969 26.22 21.35 2020 2050 4191 1041 42.74 166 5.09 38 1910 21.04 11.25 2933 2914 4331 1245 40.40 250 0.52 32 Sources: international Rubber Study Group, Rubber Statietical lulletin, London (varioua monthly leauee): Malayeia, Depart-ent of Statietice, r Statistics Handbook, Kuala Lulpur. Halayeie (varioue annual ieeuee): Natural Rubber bureau, natural mbber love, wellington. D.C. (varioua Ionthly ieeuee): end P. o. Tho-ac, 'lalayeian Natural Rubber In the A Forecaet of Production Trenda,‘ Rubber Reeeerch lnatitute o! Malaya, Kuala m, wayeia, July, 1910. Seventiee .Variable Definitions: P "Rumt P mum) t om: t c"at c sat (I Tflt (”nu/crnlt_ 1- Price of ribbed eeoked eheet l (ass 1) in New York in U.S. cente/lb. Price or ribbed naked eheet 1 (ass 1) in Haleyeia in U.S. oente/lb. tbrld natural rubber output in '000 long tone. brld natural rubber oonention (including eetiaated inorte into the centrally planned econofieel in '000 long tone. World eynthetic rubber conewtion (excluding coneuwtion in the centrally planned econoeiee) in '000 long tone. Total elaetoner conemption (excluding eynthetic rubber conauption in the centrally planned occnoniee) in '000 long tone. The previou- year'e ratio of natural rubber to total elaetoner consumption in percentage pointe. Output of Technically Claeeified who" (including Standard Malayeian Rubber from 1965 onward-l in '000 long tone. Ratio of Technically Claaelflod Rubber to total natural rubber output in percentage pointe. Net releaeee of natural rubber stockpilee in '000 long tons. 222212 APPENDIX B VALUES OF VARIABLES USED IN PROJECTING WORLD NATURAL RUBBER PRICES: 1975-80 .cOaumeumcou announcao acuou on» ca nennnu annoucc no euccm on» NO oaucu n.ucom unca>oudo .ndaeocouo cocccam maacuucou ca cOaumazucoo neuaauch .moaaocouo cocccam haaouucoo on» ouca nuuooaa uoc couuaauuo eonsaocao .uccanaauelvaoam on» no ceaumouc uo aaebean.c .o .o .a manna .aama is: .aama $5533 ouaaosoum .3888 aououoz mo 38 2s. "soauoooaas couscous 5 8588mm. .38: .o .a 93 .24” mafia. "moflsom Om o.mn vvoana vmmo omvv mmom Mbnm mvvv OGOH om m.vn nnmafla Onmh oonv omnm 000m mva ohmd om o.hn mamadd Honh mmdv omom nmhv QVHfl mhmd om m.hn NG¢~OH vnmw 000‘ cmhv Hem? Noov hhmH om a.ma monaoa omnw homn momv mnnv 00mm coma om o.mn nooam whom hNhn moov hhmn OQhM mhmd nnmam ~33 ooauaaafiaum coca mcoa :0 c e u a oaoamaoo; 35... use .28. 88 ooo; .38. 88 8?. .38 9.3 8?. aw “in...” ma a» mafia: coauossncou cOaunnaecoo ucoaudauucou va a 20a Moor eaamxuoum Ana 9 . aescuacam uonmsm uauecucmm henna“ acunuc d 2 as e as m 833. as u z 0 Que... aqua. oouuoaouo oouooaoum couuoaoum . 9a. c8 8?. 39:5 none... 3332 oouooaoum .oo-mama 382m gonna. anus»... canoe 83883 5 come moanaaug mo «31>--.ad «and. m KHQZthd 223 APPENDIX C PRICES OF RSS (RIBBED SMOKED SHEET) 1, 2, 3, AND 4, AND 2XTBC (2X THIN BROWN CREPE): 1960-70 APPENDIX C Table C.1.--Prices of RSS (Ribbed Smoked Sheet) 1, 2, 3, and 4, and 2XTBC (2X Thin Brown Crepe): (in Malaysian cents/1b.) 1960—70. Prices (¢/1b.) Year RSS.1 RSS.2 RSS.3 RSS.4 2XTBC 1960 108.08 106.69 104.92 103.10 98.00 1961 83.54 82.84 81.81 80.71 75.12 1962 78.20 77.42 75.83 74.57 70.74 1963 72.42 71.85 70.56 69.30 65.81 1964 68.14 67.91 67.18 66.09 61.75 1965 70.02 69.56 68.57 67.10 53.99 1966 65.38 64.71 63.88 62.19 61.57 1967 54.08 52.79 51.43 50.28 46.26 1968 53.12 52.03 51.30 50.48 47.28 1969 69.82 69.26 68.56 67.70 62.86 1970 56.42 55.09 54.12 53.35 53.04 Sources: Malaysia, Department of Statistics, Monthly Statistical Bulletin, Kuala Lumpur, Malaysia (December, 1971), Table 7.12, p. 58; and private communication with the Malaysian Rubber Exchange in Kuala Lumpur, Malaysia in June, 1972. 224 APPENDIX D SMALLHOLDER RUBBER SURVEY QUESTIONNAIRE APPENDIX D SMALLHOLDER RUBBER SURVEY QUESTIONNAIRE Questionnaire A (For Smallholders Currently Selling Rubber to the Central Factory) Reference No: Kampong (Village): House NO: Name of Interviewer: Name of Respondent: 1. How many acres of rubber do you own? (a) Immature rubber acres. (b) Mature rubber acres. How much of the above acreage do you operate? (a) Immature rubber acres. (b) Mature rubber acres. How many days in a month do you tap the trees during (a) Wintering season? days. (b) Regular season? days. How many months in a year do you tap? months. What is the yield per tapping during (a) Wintering season? katis/lbs. (b) Regular season? katis/lbs. Did you apply fertilizers to the mature trees in 1970? (1) Yes (2) No 225 10. 11. 12. 13. 14. 226 If the answer to 6(b) is "yes" (a) What kind of fertilizer did you use? (b) What was the quantity used per acre? katis/lbs./bags If the answer to 6(b) is "no." (a) Why didn't you use fertilizers in 1970? Please indicate the reasons. (b) When did you last fertilize the trees? years ago. Do you have other sources of income (besides income from rubber)? (1) Yes (2) No If the answer to (9) is "yes." (a) What are your other sources of income? 1. Fruits 2. Livestock 3. Odd jobs 4. Other (specify) (b) What was your approximate income from other sources in 1970? $ What was your monthly average income from rubber in 1970? $ How long have you been selling your rubber to the collecting center (or central factory)? months/years Questions 13-17 are designed to gather information pertaining to the period before the smallholders started selling their rubber to the central factory. What types of rubber were you producing? Please specify the types produced and percentages of each type. (1) Latex % (2) Unsmoked sheet % (3) Ribbed smoked sheet % (4) Other (Specify) % % Did you get any credit from the buyer of your rubber? (1) Yes (2) No 15. 16. 17. 18. 19. 20. 21. 227 If the answer to (14) is "yes." (a) 0n the average, how much credit did you take per month? (If part of the credit is in kind, give an estimated value to this "in-kind" credit) $ (b) What was the credit used for? (1) Production (2) Consumption (3) Other (Specify) What kind of payment arrangement did you make with the buyer? (1) Paid at the time rubber was delivered to the buyer. (2) Other (specify) Why did you decide to sell your rubber to the collecting center (that is, selling to the central factory through the collecting center)? Please list the reasons. What type or types of rubber are you now selling to the collecting center? (If the respondent is selling more than one type of rubber, Specify the percentage Of each type). (1) Latex % (2) Unsmoked sheet % (3) Scrap % When do you receive payment for your rubber from the collecting agent? (1) Paid at the time the rubber is delivered to the collecting center. (2) Other (Specify) Do you get any credit from the collecting agent or from the central factory? (1) Yes (2) No If the answer to (20) is "yes." On the average, how much credit do you get per month? (If part of the credit is in kind, give an estimated value to this "in kind" credit). 3 11 228 22. If the answer to (20) is "no." What is your source of credit now? (1) None (2) Other (Specify) 23. How much per kati/per lb. do you gain by selling to the collecting center instead of selling to the former buyer for (a) Latex? ¢/kati/lb. (b) Unsmoked Sheet? ¢/kati/lb. (c) Scrap? ¢/kati/1b. 24. What other benefits, if any, do you get by selling to the 5‘ collecting center instead of selling to the former buyer? Please specify the benefits. :1, 25. What is the distance from your smallholding to the nearest collecting center? miles. 26. Are you satisfied with the current procedure set up by the central factory regarding the purchase of your rubber? (1) Yes (2) No 27. If the answer to (26) is "no," (a) Why are you dissatisfied? (b) What changes in the present procedure would you like to see made? 28. Now that you no longer process your rubber, how do you utilize your extra time (that is, the time you normally Spent in processing)? 29. 30. 31. 32. 33. 229 Have you heard about the yield-stimulant Ethrel? (1) Yes (2) NO Note: If the answer to (29) is "no" STOP here. If the answer to (29) is "yes." Will you apply Ethrel to your rubber trees? (1) Yes (2) No (3) Uncertain If the answer to (30) is "yes," When will you start applying the yield-stimulant? _fl- If the answer to (30) is "no," Why will you not apply the yield-stimulant to your rubber trees? Please list the reasons. If the answer to (30) is "uncertain," Why are you uncertain? Please Specify reasons for the uncertainty? 230 Questionnaire B (For Smallholders in the Area of a PrOposed Central Factory) Reference No.: Kampong (Village): House No: Name of Interviewer: Name of Respondent: Note: Questions (1-11) are identical to those for Questionnaire A. 12. What type or types of rubber do you produce? Please Specify the types produced and the percentage of each type: (1) Latex % (2) Unsmoked Sheet % (3) Ribbed Smoked Sheet % (4) Other (Specify) % 13. Where do you currently sell your rubber? (1) Sell to estates (2) Sell to dealer (3) Other (Specify) 14. What is the distance from your holding to the place of sale of your rubber? miles 15. How often do you sell your rubber? 16. When do you receive payment for your rubber? (1) Paid at the time the rubber is delivered to the buyer. (2) Other (specify) 17. DO you get any credit from the buyer of your rubber? (1) Yes (2) No 18. 19. 20. 21. 22. 231 If the answer to (17) is "yes": (a) (b) value of this "in kind" credit). $ What is the credit used for? On the average, how much credit do you take per month? (If part of the credit is in kind, give an estimated (1) Production (2) Consumption (3) Other (Specify) If a central factory is set up in your area (and this factory will establish collecting centers which will purchase your a1 rubber and then transport it to the factory for processing, will you sell your rubber to the factory? (1) (2) (3) If the answer to (19) is "yes," proceed to questions (20-24) r' Yes No Uncertain If the answer to (19) is "no" proceed to question (25) If the answer to (19) is "uncertain" proceed to question (26). What benefits, if any, do you expect to achieve by selling to the collecting center (central factory)? Please Specify the benefits expected. What kind of payment arrangement do you prefer? (I) (2) (3) (4) (5) Paid at the time rubber is delivered to the collecting center. Paid twice weekly Paid weekly Paid every two weeks Other (Specify) Do you anticipate any problem when you sell your rubber to the collecting center instead of selling to the current buyer? (1) (2) Yes NO 232 23. If the answer to (22) is "yes" what problem or problems do you anticipate? 24. When you sell your rubber to the collecting center what will you do (a) with your processing equipment? (b) with the time you normally Spend in processing your rubber? 25. If the answer to (19) iS "no," please indicate the reasons why you will not sell your rubber to the collecting center. 26. If the answer to (19) is "uncertain," please indicate the reasons for the uncertainty. Note: Questions (27-31) are identical to questions (29-33) in Questinnnaire A.