Sensitivity of oil palm yield in Indonesia to climate change: evidence from threshold cointegration models

Increasing climatic unsuitability for oil palm is predicted, particularly after 2050. Indonesia has been widely praised for having the largest share of palm oil exports in the world, despite its low middle-income status. Using annual data of mean temperature (degrees C), mean precipitation (mm), and oil palm fruit yield (hg/ha) from 1960 to 2020, we estimate the sensitivity of oil palm yield to climate change in Indonesia. With the application of threshold cointegration models, we find that the impact of climate change on oil palm yield is asymmetry. Specifically, the sensitivity of yield to an increase in temperature results in a high stress level of palm oil production, while only an increase in precipitation seems to influence oil palm yield. Our study is unique as it provides evidence of the impact of temperature and precipitation on oil palm production when the palm fruit yield falls below and rises above its threshold value. We believe that this novel approach is an addition to the existing literature on climate change sensitivities of oil palm yield. We suggest that the government can consider a drought adaptation strategy in reaching biodiesel targets without the transformation of forest land for agriculture when the yield cannot be increased. To mitigate potential oil palm yield losses during the monsoon, water management strategies are suggested in most precipitation regions with high flood risks.