Matthews, Jimmy L.

Womack, Abner W.

English

Research Papers in Economics

SOUTHERN JOURNAL OF AGRICULTURAL  ECONOMICS  December,  1970
AN ECONOMIC APPRAISAL
OF THE
U. S. TUNG OIL ECONOMY
Jimmy L. Matthews and Abner W. Womack*
Tung has  been  a  preferred  natural  drying  oil  be-  search,  and  (4)  some  form  of direct  assistance  pay-
cause  of  the  high gloss  finish,  durability  and  water  ments  or long-term loans to assist producers  in under-
resistance  qualities which it imparts  to paint,  varnish  taking crop adjustments to reduce the size of the tung
and  lacquer  products.  However,  increased  competi-  industry.  More  recently,  Hurricane  Camille  partial-
tion from  chemical  synthetics, combined  with lower  ly accomplished  the latter request.  Estimates of crop
prices for other natural oils since the early 1950's, has  damage  range from 35 to 50 percent of all trees.
brought  a  decline  of domestic tung  oil consumption
from  72.4  million pounds  in  1950-51  to around  32  A  simplified  econometric  model  was  developed
million pounds in  1968-69.  which  depicts  historical  demand,  supply,  and  price
relationships  in  the  tung nut  and  oil  economy  as  a
The  mandatory  support  program,  initiated  in  basis for  projecting consumption,  prices, stock levels,
1948,  obligates  the  Commodity  Credit  Corporation  domestic production, and government inventory  costs
to  support  tung  oil  prices  to growers at  a minimum  for  tung  oil  under  several  alternative  policies  and
65  percent  of parity or  at  24.3  cents per  pound in  general  economic conditions.  Alternatives  considered
1968. Large accumulations of CCC stocks, close to 63  include:  (1) the  impact  of two import levels on the
million  pounds  in  1966,  triggered  a  change  in  CCC  domestic tung economy, (2)  the impact of an increase
inventory  policy.  A  two-tier pricing  system was initi-  in  minimum  parity  to  75  percent,  and  (3)  conse-
ated  to  sell  old crop  oil.  Open  market  sales of CCC  quence of a 35 percent crop loss because of Hurricane
stocks  resulted  in  a  low  market  price  of 10.3  cents  Camille.
per pound tank  quote during  1968,  or about 40 per-
cent  of  the  support  price.  Competition  from  im-  FORMULATION  OF MODEL
ported tung oil was a complicating factor.
The  general  model  proposed  for  tung  consists of
The low tung oil prices of 1968 brought objections  three  behavorial  equations  and  a  supply-utilization
from  Paraguay,  via  the  U.S.  State  Department,  that  balancing  equation.  The  framework is basically recur-
CCC  policy  was  inconsistent  with growth  and devel-  sive  with  simultaneous  solutions  for  consumption,
opment  of  an  industry  which  was  a  major  dollar  price  and  inventory  adjustments.  In matrix notation
earner for the Paraguay economy. While imports from  the system is expressed  as:
Argentina  and  Paraguay  have  dropped  to around  18
million  pounds  annually,  stocks  in  all  positions  are  AYt + B1Yt  +  ..  +BiYt-  + C Xt = Ut  (1)
still estimated  at  about'55  million pounds for  1969.
where
Because  of the'severe  freeze damage  to tung trees
in  4  of  the  past  5  years,  domestic  producers  have  A  =  a matrix of coefficients  for  the cur-
requested  that the Department of Agriculture provide  rent endogenous variables
some  additional economic  relief for the industry. The
type of requests  suggested included: (1)  an increase in  Bi =  a  matrix of coefficients  for endoge-
minimum parity, (2)  establishment  of import quotas,  nous variables lagged i periods
(3)  increased  funding  for  crop  and  utilization  re-
*Jimmy  L. Matthews  and  Abner W. Womack  are  agricultural  economists. with the Economic Research  Service,  U.  S. Department
of Agriculture, Washington, D. C.
Views expressed are those of the authors and may not represent  those of the USDA.
161C  =  a  matrix  of coefficients  for  exoge-  tung  was  derived  by ordinary least  squares  after try-
nous variables  ing several alternative statistical formulations:
Y  =  a  vector of current endogenous vari-  QTot=  -32.1371  + 23.0768[Pt/F]t7  +  (2)
ables  (8.97)
Yti  a  vector  of  endogenous  variables  19.0388  [Pto/F] t-  -0.4007 T  +
lagged  i periods  (8.465)  (.382)
Xt =  a vector of exogenous variables  0.7271  At  + 0.1980 Wt
(.1 11)  (0.015)
Ut =  a vector of errors
R2 0.971;  D.W. = 2.84
To  illustrate  more  precisely the  conceptual  struc-  (standard errors given in parentheses)
ture,  a  simplified  supply-demand  flow chart  is given
in Figure  1. Numbers in parentheses depict the major  where
variables  to be explained.  Solid lines indicate a causal
relationship,  while broken lines  show quantity  flows.  QTot  =  domestic  production  of  tung  oil  in
Arrows  give  the  directions  of influence  or  flow.  A  current year, in million pounds
double  line  intersecting  any  solid  line  suggests  a
lagged period influence.  PToti/Ft4 =  two-year  average  ratio of grower price
for tung  oil to  farm wage rate lagged i
As can  be  noted  from  Figure  1,  more  than  four  periods  (proxy  for  measure  of profit-
equations  could  be  required  for  a  statistical  model.  ability)
Behavioral  equations  for  new  tree  plantings,  tree
removals, and yield per tree might have been specified  Wt =  Implicit weather index1
for  determining  the  nature  of  production  adjust-
ments.  Also,  a  relationship  for  explaining  tung  oil  At  =  estimated  percentage of trees 16 to 25
imports  theoretically  should  be  included.  However,  years of age2
because  of  insufficient  data  for  these  variables,  the
model  is  restricted  to  equations  for  domestic  con-  T  =  time trend
sumption  demand,  total  inventory  demand, domes-
tic  production  response,  and  a  supply-use  identity  The  elasticities  of 0.675  and  0.404  computed  at
incorporating net trade in tung oil.  mean  values  for  the  two profitability variables  seem
reasonable.  However,  multicollinearity  [1]  was  a
Production Response  Equation  problem in identifying the separate effects of age and
technology  on domestic output. As a predictive  equa-
Tung is a perennial tree crop which requires several  tion,  the  high  R2 is  desirable  except  that much  of
time  periods  for production adjustments  to occur in  the year to year variation is due to weather.
response  to a changed  economic environment (Figure
1).  Variables  which  would  be  expected  to enter  the  Domestic  Consumption Demand
production  response  function  include:  expected
profitability  as related  to decisions on new  plantings  The  derived  demand  for  tung  oil  is  considered
or  tree  removals  and  expected  profitability  from  dependent  on the production of paints, varnishes and
alternative  investments.  In  addition,  annual  produc-  lacquers;  on  effective costs of competitive or comple-
tion changes  for tung are greatly influenced by annual  mentary  raw  materials  used  in  surface coatings;  and
weather  conditions,  particularly  cold weather, during  on  the  price  of  tung.  Because  of the  problems  of
bloom  in  the  spring.  Age  distribution  of trees  and  selecting  a representative price series,  the influence of
technology  also  are  thought  to  have  some influence  chemical  synthetics  as  a  demand  shifter  for  tung  is
[2].  approximated  by  a  ratio  of the  natural  oils in  for-
mulas  for  protective  surface  coatings.  While  the
The  following  production  response  function  for  approach  leaves much to be desired  in unraveling the
1Derivation  of indirect weather  measure  reflects  variation in  oil  yields  per tree not attributed  to  technology  or age  of
trees.
2Based  on  interpolation of census data on number of bearing and non-bearing trees at five year intervals.
162Price  of  '  . 'Paint
Price  of  semi-  Synthetic:  |  and
linseed  oil  drying  utilization  varnish
Price  of  tung  o  iil  ______  oils  p  :  :  1  roduction
Domestic
consumption
\--  - tung  oil
(2)
Expected  I Ending  stocks
grower  returns  Gov't  of  tung oil  _.-_
from loan.
tung  oil  e
Farm
wage  \ 
\  rates
Tung
Age  of  Weather  Total  U.S.  supply  of  _  il
trees  I  tung oil  net
imports
Technology  ___
New  tree  Tree  Oil  yield 
plantings  removals  per  tree  Domestic
production
o  FIGURE 1.  SIMPLIFIEDDEMAND  AND  SUPPLYSTRUCTURESFORTHE  U.S.  TUNGOILECONOMY  (1)nature  of  competition  with synthetics,  the  analysis  STot  ot  o  Tot-  (4) STot - f [PTot ,PTot,  STot-1,  Q  *Tot]
does focus on the  degree  of competition among tung
and other natural  drying or semi-drying oils.  where
Because  of the apparent  simultaneous  relationship  STot  =  Oct.  31.  stocks in  all hands in current
among price,  consumption and stocks, two-stage least  year in millions of pounds
squares  estimation was  used.  The resultant  statistical
consumption  function  (Equation  1,  Table  1)  is  ex-  Pot  =  loan  rate  for tung oil in current  year,
pressed as:  cents per pound
CTOt = f [PTot  PLot, Uot,  /V,  Vt]  (3)  Q*Tt=  annual change  in  total supply of tung
in U.S. in current year
The  statistical  equation  for  tung,  Equation  2  in
where  Table  1,  was  also  fitted  by  two-stage  least  squares
.because  of  simultaneous  relationships.  The  relative
CTt  =  domestic  consumption  of tung  oil  in  high  response  of stocks to price  change (price-elastici-
current year, millions of pounds  ty of  1.89)  appears  reasonable.  However,  it may  be
high  in relation to the  elasticity for the support price
PTot  =  price  of tung  oil  in  cents per  pound,  of only 0.289.
N. Y. drum quote, current year
PLot  =  price  of  raw  linseed  oil,  cents  per  Supply-Utilization  Identity Relation
pound, tank, N.Y.
To complete the model and close  the simultaneous
Pot  =  weighted  average  wholesale  price  for  equation  system,  the  following  identity  equation  is
soybean, and all fish oils  required
Uot/V t =  ratio  of all  drying  oil use to paint and  Ct  +STt  =  Qot  NM  (5)
varnish production in current year  (5
where
Vt  =  paint,  varnish  and lacquer production
in current year in million gallons in current  year  in milliongallns  NMt  =  imports minus  exports  of tung  oil  in
the  current year  in millions of pounds
The  positive  and significant  coefficient  on linseed
oil  price  is  consistent  with the  expectation of a  high
degree  of  substitution  effect  between  two  natural
drying  oils.  For  an analysis  of the  market  for  tung,  Reduced form equations
see  [3].  In  contrast,  the  negative  and  statistically
significant  sign  on  the  semi-drying  oil  price  coef-  In order  to use the model for prediction or projec-
ficient  bears out the technical and economic possibili-  tions,  Equations 3,  4,  and 5,  which form the simulta-
ties of combining  low price oils with a natural drying  neous  portion  of the model,  must be solved for the
oil via synthetic resins  [4].  reduced  form set  of relationships.  This  expresses  the
endogenous  variables  as  a  function of all  lagged and
Inventory Demand Equation  exogenous  variables  in  the  system.  The  procedure
involves the following simple matrix manipulation:
In addition  to domestic  demand for consumption,
there  is  also  a  domestic  demand for  stocks.  The de-  Ayt + Byt 1 + CX t =  Ut
mand  for stocks  theoretically  would  be a function of
current  market  price,  expected  future  price,  and
stocks at the beginning of the period.  Ayt -Byt 1 - CX t + Ut
Other  variables  thought  to influence  stock  levels  Y  =  A 1 Byt  - A1 CXt - A  Ut
are large changes in supplies and the Government  loan
price.  As a  rule, stocks are accumulated when market  The  reduced  form  equations  for  consumption,
price is below support and vice versa.  price  and stocks are  shown  in Table  1  ,Equations 4,  5
and  6.  These  three  equations,  combined  with  the
The functional specification  for the stock equation  production  response  equation, complete the recursive
is expressed as follows:  - system for prediction purposes.
164TABLE  1.  ESTIMATED  STRUCTURAL  AND REDUCED  FORM EQUATIONS
Eq  uation  CTt  STot  To  t  =  X  Pt  Tot  Pot  Vt  ott)  Pot  SQ  t  NM  Qot  DURBIN  R
2
number  WATSON
Structural  Equations
1  1  0  1.42523  =  -75.5867  4.87412  -2.71829  .04256  94.55757  0  0  0  0  0  1.87  937
(0.35708)  (0.71360)  (0.91237)  (0.04991)  (24.36081)
[0.7131  [1.535]  [-0.6741  [0.517]  [1.7371
2  0  1  2.21781  =  72.7452  0  0  0  0  .43208  .26168  .34240  0  0  1.54  .914 (0.442)  (0.186)  (0.153)  (.059)
[1.892]  [0.288]
3  1  1  0  =  0  0  0  0  0  1  0  1  1
Reduced-Form  Equations
4  1  0  0  =  -74.47504  2.96727  -1.65484  .02591  57.56476  -.16904  .28885  -.13395  .39122  .39122  -
[0.935]  [-0.4101  [0.315]  [1.059]  [-0.066]  [0.241]  [0.158]
5  0  1  0  =  74.47504  -2.96727  1.65484  -.02591  -57.56476  .16904  .71115  .13395  .60878  .60878  --  -
1-1.5931  [0.699]  [-0.537]  [-1.803]  [0.113]  [0.640]  [0.419]
6  0  0  1  =  -.77998  1.33793  -. 74616  .01168  25.95568  .11860  -. 20267  .09399  -.27450  -. 27450  - -
[0.842]  [-0.369]  [0.284]  [0.953]  10.0931  [-0.338]  [-0.2211
NOTE:  Numbers in parentheses are standard errors of the coefficients and numbers in brackets are the partial elasticities computed at the mean of the values.
Two-stage  least squares used as method of estimating the structural equations.
5o-  .
q/Validity  of Model  situation 3 =
situation  1, except  that  75  percent  parity  is
The  validity  of the  model  was  tested to see how  assumed.
well  it  reproduced  the  past.  The  estimation  of  en-
dogenous  variables  in  the  recursive  system  is started
by  first  estimating  production  in  1952-53.  This  situation 4
estimate  of production  is  used  in  the  reduced  form  situation  1,  except  that  no  crop  damage
equations  for  price,  consumption  and  stocks.  Esti-  assumed in 1969 from Hurricane Camille
mated  prices  are  then  used in projecting  production
for the next period and so on (Figures 2a to 2d).
The illustrative  projections are shown in Figures  2a
to  2e.  Appendix  data  tables  can be obtained  from
POLICY IMPLICATIONS  Economic and Statistical Analysis Division, Economic
AND  PROJECTIONS  Research  Service,  U.  S.  Department  of Agriculture.
Under  the continuation  of present programs and con-
With  large  Government  stocks  of  old  crop  oil,  ditions  (situation  1),  domestic  production  is  pro-
prospective  long-term increases in South American oil  jected  at around  10 million pounds annually.  Domes-
production,  and  greatly  reduced  grower  net incomes  tic  consumption  is  expected  to  contue  a  gradual
from  tung,  the  industry  is  at  a  point  of economic  decline  reaching  a  level  around  26  million  pound
crisis. The intent  of this  section is  to provide further  annual  rate  by  1974  With  the  assumed  further  de-
insight  into  some  of  the  problems  and  alternatives  dine in import  levels,  total inventories  (CC  and pri-
facing the industry in the next 5 years.  vate)  are projected  to decline to  a  level around  35 to
40  million  pounds  within  the next  5 years.  Such  a
For purposes  of illustration,  four alternative  situa-  general  reduction  in  overall  supplies  would  be  ex-
tions are projected.  The  first  projects changes for the  pected  to result in some price  firming and a reduction
major  endogenous  variables  based  on  the  following  in annual costs of CCC inventory operations, perhaps
set of assumptions  which approximate a continuation  by about $  million by  974from the over $1 million
of present programs and the cuirent situation:  in  1968.  CCC costs  are  estimated for the various pro-
jection  situations by applying the following simulated
Variable  Assumption  equation:
P^t  P65%  of  parity
Cost (mil. $)=
Ft  wage rates rise 4 to 5% annually
.0050 QTot -. 0025 (STot-STot-l)  +
Wt 35%  tree  loss  in  1969;  no  severe  freeze
damage  (0.03048)STot  + [P  Tot-2-Tot]
At  age  distribution  of trees about unchanged  [QTot  + STot-l - Tot
PLot  held at 1968 level of about  14cents/lb.  In  situation  2,  the  major  impact  of  stabilizing
imports around  20 million pounds for the  1969-70 to
Pot  held at 1968 level of 10cents/lb.  1973-74  period  is  a  projected  reduction  in market
prices of around  15 percent by 1974 with little reduc-
Uot/V t held at near  1968-69 levels  tion  in Government  inventories and higher CCC costs
than projected under alternative  1.
Vt annual growth rate of 4%
The projected  impact of an increase in parity to 75
NMt  net  imports  decline  1  million  pounds  percent would  be  to increase  production  and stocks
annually from  1968-69 level of 16 million.  and step up CCC costs.
The  last  hypothetical  situation,  which  assumes
Alternatives  2,  3,  and  4  assume  the  following  there  had  been  no  crop  damage  from  Hurricane
modifications  on alternative  1:  Camille,  projects  the  following:  (1)  domestic produc-
tion  averaging  a  little  less  than  20  million  pounds
situation 2 =  annually,  (2)  a  20  percent  drop  in prices,  and  (3)  a
alternative  1,  except  that  net  imports  are  near  doubling  of CCC  costs  over  the five-year period
assumed  to be at  19  million pounds during the  beginning  1969-70  (projected  increase of around  $51
period  1969-70 to 1973-74  million).
166Mil.
lb . - - ---  -a.  Domestic  Production
50
40
30 -
20 - ..  (4)
(3)
..... 0  (1)  (2)
Mil.
lb .
50
40
30  1-  (2)
Cts/
lb. lb.·  c.  Price
40
30  x
(1)(3)
20  k  ~e  -·-~-  (2)
20  ( M il  . . . . . . . ..  . .
lb.  I  d.  Inventories,  All  PositionsT(— 
50  ~'  (2)
X  eo40~~~~~~~~~~~~~~~~~~  ((  1)(3) 40  (1)
30
Mil.
dol.
e.  CCC  Operating  Costs
2  (4)
(3)
1952  55  58  61  64  67  70  73
0  Actual
----  Estimated  (Recursive)
Numbers  in  (parentheses)  correspond  to projected  situations in text
FIGURE 2.  ACTUAL  VERSUS  ESTIMATED,  AND  PROJECTED VALUES  OF ENDOGENOUS  VARIABLES
1952-53 to 1973-74
167The  proceding  projections,  based on the analysis,  otherwise  available, and roughly quantify some of the
are intended  to illustrate uses of the analytical frame-  alternatives facing the industry in the next 5 years.
work.  Hopefully,  they  provide  some  insights,  not
REFERENCES
1.  Johnston, J., Econometric Methods, pp. 201-207,  McGraw-Hill Book Company, Inc., New York,  1963.
2.  Powe,  Charles  E.,  W.  W.  Kilby  and A.  D.  Seale,  Jr.,  Cultural Practices and Costs and Returns for a Tung
Enterprise, Mississippi Agr. Exp. Sta. Bul. 773, Mississippi State University, Nov.  1966.
3.  Powe,  Charles  E. and A.  D.  Seale,  Jr., An Analysis of the Market for Tung Oil, Mississippi Agr. Exp. Sta. Bul
729, Mississippi State University,  July 1968.
4.  Wilhelmy,  Odin, Jr.,  and Harry  Barr,  Jr., Marketing Research Report No.  90, Agricultural Marketing  Service,
USDA, April 1955.
168

AN ECONOMIC APPRAISAL OF THE U.S. TUNG OIL ECONOMY

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