Expensive Lessons for Government and Rural Industry from the Wool Stockpile

Bob Richardson [1]

Dean, Institute of Land and Food Resources, University of Melbourne

The wool stockpile, accumulated due to the collapse of the Reserve Price Scheme at the start of the 1990's was finally sold in 2001. This closes a significant chapter in the long history of woolgrowing in Australia, one which began with the introduction of the Scheme in the early 1970's. While the Scheme appeared to stabilise prices in the 1974-87 period, eventually over-confidence set in, the reserve level was raised too much and this sowed the seeds of destruction. It also reinforced a sense of inevitability that such schemes are doomed from the outset.

In the 1960's and 70's, the wool industry flirted with ideas of compulsory acquisition and, when the risks of that were seen to be too great, with loose concepts of integrated marketing. This involved price stabilisation, global promotion based on the Woolmark symbol, and research and development. Each of the marketing strategies, on its own, appeared to be successful for a time; Woolmark promotion was widely judged to be a good investment up to the 1980's and a continued case for wool research and development can be made.

Even the price support scheme was concluded to have stabilised prices up to the mid-1980's. The presumed synergy of the strategies, a much more doubtful proposition, was part of the political rhetoric of the times and of the undoing of integrated marketing.

The most obvious lesson from this experience is the fundamental weakness of price stabilisation schemes. Sooner or later over-confidence sets in and policy setting falls into the hands of producers and/or politicians who set the minimum price too high.

So it was with wool; what started out as a conservative floor price scheme subtly changed to an aggressive market-related reserve price scheme with all the attendant risks. The wool scheme was bound to fail once the floor price was raised by about 70 per cent over two years, to well above long-term trends. Politically this seemed the only way the Australian Wool Corporation (AWC) and the Wool Council of Australia could maintain the funding base of a compulsory wool tax. Government acquiesced in this in 1987, by removing the relevant Minister from the reserve price setting process, unless the parties disagreed. A strong political imperative to agree was thus created.

It is altogether too simplistic to blame greedy woolgrowers for this disaster. Their money was at risk and a good many grower leaders particularly from the Western Australian Pastoralists and Graziers Association and some Queenslanders, argued the case against the extent of the increase; such leaders received precious little support at the time from commercial and government participants in the decision-making process, or from rural industry leaders at the time, who subsequently claim to have seen the light.

The collapse of the scheme has been at the forefront of policy efforts to reduce the role of single commodity statutory authorities, or at least to make their marketing roles more contestable. The Wheat Board now listed on the Australian share market in its private enterprise disguise, while retaining legislated monopoly control of export marketing of wheat, has so far bucked this trend.

In the wool industry, the McLachlan Report of 1999 performed the valuable but difficult roles of lowering expectations of woolgrowers about collective and integrated marketing and of promoting wider acceptance that private competitive market forces offer the best way forward in marketing, risk management and quality assurance.

Perhaps another lesson is that we must be careful not to over-react to the failings of government policy in the wool industry. The remnant organisation from the old AWC, the supposedly more commercial Australian Wool Innovation Ltd. (AWI) is now seeking to commercialise research and development based on continued compulsory levies.

This seems to deny the underlying reality that a good deal of valuable long-term industry research and development has most of the characteristics of a public good. The refusal of AWI Ltd to part-fund the proposed sheep and wool Cooperative Research Centre (CRC) is a manifestation of this over-reaction and sends a signal to many scientists in rural research to direct their energies to other industries.

Whether final sale of the stockpile heralds a new era of higher wool prices and profitability is doubtful. The sale of the stockpile from 1991 to 2001 was seriously mismanaged by governments and was blamed for persistent low prices; this masked the reality of fundamental changes in demand for wool. Over the eleven years, sale of the 4.75 million bale stockpile was probably 5-10 per cent of global producer sales, so its effect on prices was modest.

On the demand side, competitive fibres (cotton and synthetics) expanded their value and share of wool end use markets; this occurred at falling real prices and yet, because of productivity improvements, these competitors remain strong. More casual dressing in developed countries and increased use of wool in blends in developing countries will continue this trend.

There are some serious and lasting consequences from the collapse. A major opportunity cost of the scheme was its disruption to the development of innovative marketing systems. It undermined the development of private risk markets; the once thriving wool futures market actually disappeared and is only now making a gradual comeback as an instrument for efficient forward pricing of wool. And it seriously distorted price signals that usually guide efficient resource allocation in production and marketing, for example, seasonality of prices, a meaningful signal to producers about time of shearing and to buyers about seasonal quality attributes to offerings, was altered; the AWC operated a constant floor at the micron and type level within each season and tended to be a net buyer in the first half and a net seller in the second half of each season

The lessons from past mistakes are often difficult for rural industry leaders to accept. Despite the protracted Uruguay Round of World Trade negotiations, they see huge assistance packages to their competitors in Europe and the USA.

We cannot hope to match the folly of such policies by ever repeating the disastrous experience of the wool industry with government backed intervention schemes. A legacy from this experience, if we needed one, is a classic textbook case of why buffer stock schemes do not work.

References

McLachan , I. 1999, Report of the Wool Industry Future Directions Taskforce , AGPS, Canberra.

Richardson , B. 2000, 'The politics and economics of wool marketing, 1950-2000', Australian Journal of Agricultural and Resource Economics , vol 45.

Footnotes