Some Thoughts On Wool Marketing

Press, Volume CIII, Issue 30633, 26 December 1964, Page 9

Some Thoughts On Wool Marketing

The Wool Board and the Wool Commission have set up a technical committee to keep wool marketing under review. Apart from examining causes of price fluctuations within the present marketing system and recommending any suggested methods of containing these within the existing system, the committee or study group may also report on methods of marketing—presumably new methods of marketing.

One of the members of the committee is Professor B. P. Philpott, professor of agricultural economics at Lincoln College, and in a paper to the Massey College Wool Association conference in 1961 he outlined three possible wool marketing schemes designed to eliminate the unsettling short-term fluctuations in wool values, though still having regard to longterm trends.

Professor Philpott has said that these schemes could be a blueprint for wool marketing development over the next decade.

“If woolgrowers desire to adopt fairly radical changes in wool marketing procedures then it is, in my view, better to adopt an approach which is cautious and proceeds by stages rather than by implementing wholesale revolutions overnight,” he has said. “To some extent the three schemes represent such a three-stage approach. The first scheme is extremely simple and could be implemented immediately without much administrative reorganisation, but two or three years of its operation would allow time for gaining experience in handling the problems which arise and for conducting the necessary economic research before proceeding to scheme two and then scheme three.” Professor Philpott has noted that supply and demand changes of a long-term nature perform a purpose in transmitting consumers’ wishes to producers and in ensuring that the supply of wool is produced where production costs are lowest and that there is a long-term balance between rate of production and consumption. No marketing scheme for wool, he says, can do anything about a longterm trend downwards in price. If anything this is the job of wool promotion agencies. However, marketing schemes, he believed, could do something about eliminating fluctuations as distinct from trend movements. “Admirable and efficient I though the New Zealand Wool Commission is, it cannot really be claimed that its operations have greatly reduced the effect of price fluctuations as far as the New Zealand producer is concerned,” he told the Masey conference. “Nor [is the commission ever [likely to be able to do so as [long as it has to ‘go it alone’. [But even assuming that it has to continue ‘going it alone’, the commission could be used as an instrument to iron out the effect of fluctuation on the producer. “The scheme I have in mind is for the marketing of wool to continue as at present, but for some expansion to occur in the commission’s appraisement services and for growers to be paid on the basis of the appraised value rather than the market value.”

Under, what he described as a modified Wool Commission scheme, at the beginning of the season the commission would set a realistic average price for the whole clip (perhaps based on a moving average of the previous seasons’ prices). Growers’ wool would be appraised on the basis of a bareme worked around this average. Wool would be sold at auction through the normal channels, but growers would be paid an appraised price and not the auction price. At the end of the season growers could be paid a bonus equali ling some proportion of the (difference between the appraised price and the season’s Average auction market price,

with the balance being put to reserve against years when the appraised price exceeded the average auction market price. At this stage there was no suggestion that the appraisement value of the clip should be the same as the floor price—that the floor price should be raised very considerably. “In the marketing scheme just described no attempt is made to even out the fluctuations in wool prices on the open market and thus mitigate their effect on wool consumers,” he continued, ‘"to do this requires the operation of a buffer stock scheme in which, by its intervention in the market, the buffer stock contains the range of fluctuations between the limits of a floor price and ceiling price.

“In essence the New Zealand Wool Commission is a buffer stock scheme though, in the past, its floor price has been set at such conservatively low levels so as to make it virtually inoperative in ironing out price fluctuations, except in fairly severe slumps. The scheme about to be described aims at raising the Wool Commission’s floor price to turn it into an effective buffer stock. In this scheme also the pay-out to grower?

would be on appraisement. At the beginning of each season the buffer stock authority would announce an average price for the clip and either side of this average a ceiling and a floor price. It would stand ready to sell wool at the ceiling price and buy at the floor price, so confining fluctuations to the range between these limits. In most discussions on this type of scheme limits of abopt 10 per cent either side of the average were proposed, but this depended on the degree to which it was desired to eliminate fluctuations. These limits would be transformed into bar ernes of a similar type to those at present used by the. Wool Commission and wool would continue to be sold as at present by auction.

The average price selected each year would need to be chosen with very great care. If it were too high the buffer stock authority would find itself continually accumulating stocks over a period of years and these would ultimately have to be sold at a loss. If the price was too low it would slowly run out of stocks. The most important requirement of the scheme was that it should engender confidence in the trade, particularly confidence in its ability to hold the floor price indefinitely. Various methods of setting each year’s average price were available. The simplest was probably for the authority to be forced by its constitution to lower the price by some stated amount when its level of stocks, over say the previous three seasons, had risen by some stated amount, and vice versa for raising the price. Such a pricing policy would force the authority to

follow the long-term trend in prices, which Professor Philpott said it was not possible to get away from. “ . . . But whatever method is chosen the important thing is that it should not be too high else the scheme is doomed to failure, and that it should be fixed by automatic forces and not by politicians. “The third scheme attempts to eliminate short-term fluctuations altogether. . . . The aim in this scheme is to sell wool ‘over the counter’ at fixed prices, or at prices that change only at infrequent intervals, on the model of the New Zealand dairy marketing procedures. It must be stated right at the outset that these arrangements are extremely radical in nature and that they should be adopted only after an extremely thorough investigation, involving among other things a longterm programme of economic research.”

This is known as industrial type wool marketing and would attempt to apply to wool marketing what was now universal practice among manufacturers. A noticeable difference between the marketing of agricultural

products and industrial products was that manufacturers tended to keep their prices stable and allowed their inventories and their output to fluctuate in line with market demand. Farmers did not hold inventories and changed their output slowly and prices therefore took the brunt of changes in demand. It was not possible to go to the same extremes as manufacturers, since output could not be reduced by putting farmers on short time or sacking them, or increased by putting them on over-time, so that completely stable prices would be impossible. Nevertheless, a wool marketing authority empowered and prepared to carry larger stocks for longer periods than was envisaged in the case of the buffer stock, and which could make sharp, unequivocal but infrequent

changes in price (as with synethetic fibres) could, over a long period, successfully maintain a balance between world wool production and consumption with prices completely fixed for two or three years at a stretch. Such a scheme would carry with it exactly the same problems as a buffer stock scheme, especially in connexion with selecting the correct fixed price and deciding when to change it, but in this case the problems would be even more intractable in their solution. But such a scheme would carry one very important advantage over the buffer stock, in that the basis would be laid for a revolution in the preparation of wool for market in the countries producing it and in a narrowing down of the number of types produced and in the uni-

formity within those types. A marketing authority, which could quote fixed prices for stated standard lines of wool sorted to specification, and if possible available from stock in the main textile producing centres of the world, would really be meeting synthetic fibres on their own terms, especially if the price quoted carried the implicit guarantee that it would not be reduced or raised inside some stated period—say six months or a year.

The scheme, if introduced would involve the demise of the wool auctions and in their place the sale of all wool would be conducted by the Wool Commission as one centralised marketing authority on the lines of the New Zealand Dairy Production and Marketing Board. The Wool Commission would assume all responsibility for wool grading and typing and would, on the basis of market research, attempt to produce tailormade standard lines to fit requirements of special markets. The pay-out to farmers would still be on the basis of appraisement