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THE WOOL SUPPORT SCHEME PRESENT PRACTICES AND AN ALTERNATIVE EXAMINED

<By

W. ROSENBERG.

Reader in Economics. Canterbury University)

I am keeping a newspaper clipping file to keep myself informed on current affairs. In the past I filed news on the subject “Wool’’ under the letter “W”. From the beginning of this year I changed the classification. News items are now filed under the letter “F”, standing for Finance.

The reason for my change is that the wool situation is most intimately connected with our present troubles. It is certainly not the only cause of our present economic situation, nor is it the basic cause, but it is the one most important factor which has contributed to the acuteness of the crisis which is upon us. As such the wool situation is closely connected with the cuts imposed on Hospital Boards, with the rise in the cost of living brought about by abolition of subsidies and increase in taxation and with all the other measures which affect every person in this community, usually in a painful and disagreeable way. Beyond Control?

I do not wish to argue in this article the appropriateness or otherwise of the measures which have been taken by the Government to cope with the situation. I want to ask the question, is the situation which has led to the crisis entirely beyond our control. The situation which has led to the crisis is the expected fall in foreign exchange earnings amounting to £4O million or so, almost exclusively brought about by a fall in wool earnings. My suggestion is that only £2O million of this fall in earnings has been beyond our control and that the loss of an additional £2O million is due to our own wrongly-con-ceived policies. In view of the discussions which are going on about the future of the reserve price for wool, and the decisions which must be made shortly, I think that it is imperative that there should be absolute clarity about the situation. Another year like the present one, with the same mistakes repeated, might land New Zealand in total insolvency.

It is five minutes to 12: it is still time to consider a different wool support scheme from the present one. This should be done before it is too late. To encourage informed discussion on this absolutely vital topic to every New Zealander (not just the wool industry) this article has been written.

The Reserve Scheme The wool industry works at the present time under a scheme which may be characterised as a Reserve Price/ Buying-In-Scheme. The main feature of this scheme is that the Wool Commission establishes at the beginning of the year a reserve price. When bids for wool fall below this reserve price the Commission buys the wool at the reserve price. This scheme has two effects: it stabilises farm incomes—a desirable effect; and it withholds wool from buyers, an undesirable effect. There is no good reason why these two aspects of the wool price stabilisation scheme should be combined under present circumstances. There are many gool reasons why they should not.

To anticipate my conclusions, I advocate the maintenance of the present reserve price, but the abolition of the buying-in functions of the Wool Commission. This would imply a number of changes in the character of the Wool Commission; but I consider most of these changes worth while and in fact long overdue. No real difficulty stands in the way of administering a scheme where wool growers are compensated (as butterfat producers already are) for a shortfall of overseas realisations below a “guaranteed” price. Let me repeat, I do not argue for a reduction in reserve prices. I argue in favour of a guaranteed price in lieu of the present combined reserve price cum buying-in scheme.

The present scheme has the following effect: Table 1 Probable Foreign Exchange Losses Between 1965-66 and 1966-67 Seasons After Buying-In Operations. £ Ster. m. Value of Wool Production Season, 1965-66: 121 Value 1966-67 (estimated after Comission’s purchases): 109 Less 600,000 bales held back from exports 30 79 Loss of Foreign Exchange between 196566 and 1966-67 .. 42 Sources: J. P. McFaull, The Wool Situation, Address to Economic Society 4/4/67 and Mr Muldoon's statement to Parliament May 5, 1967. What would have been the situation without Commission intervention? Table 2 Estimated Loss of Foreign Exchange Between 1965-66 and 1966-67 Seasons Without Inter, vention of the Commission. £ Ster. m. Value of Wool, Production, 1965-66 121 Value 1966-67 as above 109 Loss, taking into account operations of Commission (income loss to wool farmers in New Zealand pounds): 12 Add Income paid out to farmers in N.Z. pounds by Commission by raising wool prices above level overseas buyers would have paid: Say 4d loss on 450 m lb of wool count 50 and lower .. 7 Say Id loss on 250 m lb of wool finer counts .. 1 Loss in Foreign Exchange, had the Commission not operated 20 In table 2 I have taken into account that prices until December, 1966, were not as weak as they were after that month. The average support of the Commission is therefore smaller than the support required during the most recent sales. There can be dispute

whether the figure of 4d is too high or too low, but this makes little difference to the argument. For the argument is clearly that we have lost through the buying-in scheme, illustrated by Table 1, very much more than twice the amount of foreign exchange than we would have lost had there been no buying-in scheme. We have, through the operation of this scheme, lost £2O million in a year when we had no reserves and where our foreign exchange position was desperate already. Cost And Benefits Assessing the very high cost to the country of the scheme, do the benefits, or potential benefits from the scheme justify the costs? Benefits can be subdivided into external and internal benefits. External Benefits The external benefits reside in the assumption that prices paid by overseas buyers of some of the coarser wools may have been slightly higher than they would have been without the Commission’s intervention. The same may apply to the 250 million lb of finer wools. But it would be improbable to assume that this effect, which only prevailed during the early part of the season, would amount to more than, say, 2d on the 250 million lbs of coarser wools shipped. As far as the finer wools go, an estimate of Id per lb Increased buyers’ prices because of fear of the Commission's intervention may be another estimate. In other words the Commission has possibly increased our foreign exchange receipts by its operations by £2-£3 million. This is the sum total of the Commission’s benefits to our foreign exchange reserves. The sum may be slightly higher or lower, but it does not change the situation that the Commission’s buying-in operations have cost the country £2O million in foreign exchange during the 1966/67 season.

Internal Assistance The internal assistance provided by the Commission is seen from Table I to have amounted to about £8 million. This internal assistance could have been provided, on a much less inflationary basis, by making supplementary payment to growers whose wool had not fetched the reserve price.

Costs The costs of the scheme, on the other hand, are much greater than the benefits. Externally, I have already stressed the direct loss of £2O million sterling at a time when we can ill afford such luxury. But this is only the loss sustained this season. There has been much discussion whether or not wool prices will recover. However, unless the recovery is extremely dramatic, the presence of a stock of 600,000 bales of wool in the stores of the Wool Commission must have a depressing effect on marketing during the 1967-68 season. Why should an overseas buyer bid more than 36d for wool if he knows that there are 600,000 bales available at that price? Customers’ Attitudes The above is an extremely severe argument against the policy of buying-in such enormous quantities of wool. But it does not take Into account the permanent, and possibly irreparable damage, which the withholding of so large an amount of New Zealand wool can have on wool users. To stop supplying the market at a time when synthetics are making a determined assault on those users of wool who have remained loyal to it, seems to be very bad policy. On the other hand to cut one’s losses and to supply the market under all conditions seems to be the best way to maintain a foothold. The present policy also irritates and antagonises buyers. There is no more irritating thing than an unwilling seller. Just put yourself in the position where you go in a shop with plenty of oranges in the window and ask for some—and your reaction to the shopkeeper’s reply, “sorry none for you.” I have not made any estimates of any possible loss which may accrue to the Commission in selling its stocks at a loss. Obviously the Commission would like to dispose of the quantities it is now holding in some, future seasons either at cost price or at a profit. But in view of the huge quantities involved this must be a slow process, and interest, storage and other costs involved make it a hazardous matter to venture estimates here. However, one thing one can say with certainty—a continuation of this type of stock-piling for another season seems most inadvisable. Internal Costs

The internal costs of the scheme, however, far outweigh even the considerable external costs. Instead of adding £8 million to internal demand (as would have been the case under a pure guaranteed price scheme) the present activity of the Commission has led to the disbursement of £3O million to farmers against which there stands no product. Internally this wool is of no use, externally no foreign exchange stands against it. This £3O million is purely inflationary.

In order to counter-balance this colossal injection of unrequited purchasing power, the Government had to cut down purchasing power elsewhere. Thus every one of the cuts made by the Government is somehow economically related to the buying-in policy of the Wool Commission. But the pressure on the internal economy is greater than this £3O million. Every New Zealand £ earned by a wool farmer, when spent, requires the expenditure of some sterling or other foreign exchange. Farmers, naturally, keep on spending and requiring imnorts. If half of their expenditure Is for imports (directly or indirectly), in order to reduce imports by £2O million, £4O million of incomes have to be suppressed (not necessarily, of course. Incomes of farmers, any incomes which when spent lead to imports). Now, due to our system of import licensing we are able to suppress some of this imnort demand; but only some. Perhaps £2O million may be so suppressed. But if our foreign exchange proceeds fall not by £2O but by £4O million, then the second £2O million imports must be dealt with by income rather than by import restrictions.

In other words, roughly speaking, if the Wool Commission had not bought-in and our loss of foreign exchange reserves had been only £2O million (see Table 1), we might have got along with import restrictions and a mild policy of deflation. It is the second £2O million which is the reason for the severity of the measures taken. Much show has been made of the possibility of borrowing from the International Monetary Fund on the security of the wool bought. The fund has lent us only £lO million—on extremely onerous, quick payment and presumably general, conditions. The Bank for International Settlements has lent us another £lO million. It appears that these international creditors were prepared to help us over that part of our troubles which were not self-inflicted (£2om), but not over that which is due to the Commission’s buyingin policy (another £2om).

Neither can one consider borrowing equivalent to living on one’s own income. If we can carry on by borrowing £2O million from the I.M.F. and the 8.1.5. we could have gone on without borrowing had we not withheld £3O million from the market.

Conclusions There is obviously a great deal more one can say on this subject and I am preparing a much more extensive paper on the situation. But I feel that the urgency Is such that the facts should be put before the public now, as the Commission and Government are considering the Reserve Price. The vital thing is that people get it clearly into their minds that a Reserve Price does not necessarily imply a buying-in policy. I would advocate the discontinuation of the buying-in scheme for the 1967/68 season, while maintaining the present reserve price. If the Commission loses on its stocks under such conditions, provided it wants to liquidate these stocks during the next season, that is merely the acknowledgement of the market situation. At the same time, the fact that the Commission has now become the largest holder of wool in the country may be a blessing in disguise. If the Wool Commission, like the dairy industry’s Dairy Board took over the sole buying and marketing of New Zealand’s wool clip, modern marketing and product development methods could be introduced into the wool industry. The Dairy Board has shown what a centralis ;d industry organisation can do to rally production and distribution without antagonising established marketing channels. It is time that the wool industry had a long, sharp look at some type of reorganisation on similar lines.

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Permanent link to this item

https://paperspast.natlib.govt.nz/newspapers/CHP19670509.2.114

Bibliographic details

Press, Volume CVI, Issue 31364, 9 May 1967, Page 16

Word Count
2,262

THE WOOL SUPPORT SCHEME PRESENT PRACTICES AND AN ALTERNATIVE EXAMINED Press, Volume CVI, Issue 31364, 9 May 1967, Page 16

THE WOOL SUPPORT SCHEME PRESENT PRACTICES AND AN ALTERNATIVE EXAMINED Press, Volume CVI, Issue 31364, 9 May 1967, Page 16