Economic Trends Affect Wool Prices

Press, Volume CIX, Issue 32251, 20 March 1970, Page 7

Economic Trends Affect Wool Prices

“It is, I am afraid, a fact of life that the price of a commodity such as wool is still quite sensitive to the ups and downs of economic activity in the industrialised countries,” Mr A. C. B. Maiden, the new managing director of the International Wool Secretariat, told members of the electoral committee of the Wool Board in Wellington this week.

He had earlier commented that it was a combination of economic recession and high interest rates that had generated the kind of wool prices that were being paid today. Wool had always been sensitive to trends in economic activity for two reasons, he said. These were the lack of elasticity in the production of wool, which could not adapt itself to fluctuations in demand, and the low price elasticity of the demand for wool. By the latter he meant that it always needed a much larger movement in prices for consumption of wool to change appreciably. In such a situation even a small decrease in demand produced a quite large reduction in price, and vice versa. While this lack of consumption response had gradually changed—in the sense of consumption becoming more responsive to changes in the price of wool—inelasticity of supply still existed. The price of wool would continue to be rather sensitive to fluctuations in demand generated by ups and downs in economic activity as long as woolgrowers did not operate, or could not operate, an effective supply management scheme, said Mr Maiden. “In the present situation we must recognise that even if the I.W.S. had a budget several times larger than its present one, it could not cancel out the effect of economic recession.” The task of the I.W.S. was essentially a long-term one to exert a continuous upward pressure on the demand for wool by influencing consumers’ preference for existing fibres and manufacturers’ willingness to use wool. “It is sometimes argued that we could, in fact, have a direct and immediate effect on short-term recessions by appropriately altering the timing and intensity of our promotional efforts. A great deal of thought has been given to this problem in the I.W.S. and we are convinced that such a policy not only presents insurmountable difficulties of timing, but would, in the long run, give growers an appreciably smaller return on their investment in the I.W.S. “In so far as we are successful with our present policy of raising the demand for wool, we are implicitly influencing short - term movements too. Were it not for our continuous upward pressure on demand, there is a little doubt that in times of economic recession wool prices would be even lower than they are.” It followed from what he had said that any substantial rise in the level of wool prices generally must await an improvement in economic conditions. There were as yet few signs of any significant changes in economic policies, but he would guess that various factors, not the least of them political, would lead to an easing of restrictive measures in some countries before the end of this year.

Wool however, did not only have to face unfavourable economic conditions in the short term. It had also to contend with man-made fibres and this latter problem was the critical one for the industry in the long term. It was in this context that the I.W.S. was achieving results. “The price levels of Merino and fine crossbred wools have moved up and down during the last decade—sometimes more violently than we would wish, as is the case now—but their trend has been virtually horizontal. On average the prices of the last couple of years are more or less the same as in 1959 or 1960. During this same period synthetic fibre prices have fallen by something like 50 per cent on average. “To take one example: in 1959 the polyester prices in the United Kingdom exceeded the price of equivalent clean wool by some 20d per lb. By the end of last year this situation was completely reversed and it was the wool price that exceeded the polyester price—by as much as 30d per lb. In other words, manufacturers are prepared to buy apparel wools at a considerable premium over what they are prepared to pay for manmade fibres.

“The market for strong crossbreds is in a different position, largely because of the much closer price competition in the carpet industry—to a much greater extent than in clothing. However, the rapid erosion of wool’s market share in carpets appears to have slowed down. Carpet wool consumption rose by about 5 per cent last year (in spite of slackness in the carpet trade), following a 7 per cent increase in the preceding year. This increase was possible only because the low level of strong crossbred prices over the last two years made wool competitive with the synthetics in price terms. “I have no doubt that carpet wool prices will eventually move upwards as world demand recovers. But if we are eventually to be able to sell carpet wools at a satisfactory price then we must seek to sell these wools at a substantial premium over synthetics, by making them as attractive as possible to manufacturers and to final consumers. “We must try to achieve this result by moving forward on several fronts—by improvements in presentation and wool handling: by developments in wool processing (such as the artificial crimping of carpet wools): by changing consumer attitudes through promotion, and through improved design and quality in the finished product. We can reasonably hope to maintain wool’s share of the market for woven carpets which (contrary to some expectations) is still a growing market, and to expand in quantity and percentage terms in the burgeoning tufting industry.” One of the questions put to Mr Maiden when he completed his address was whether producers should still be growing finer wools and what he meant by supply management On the first, Mr Maiden said that of all areas likely to expand the carpet area was the one with the greatest rate of growth, but this did not mean that there would be the same growth in price. At the same time, Mr Maiden said, more than half of New Zealand wool went into the apparel field and to some extent obviously competed in the finer area. Replying to the question on supply management, Mr Maiden said that with the type of marketing system that operated in producer countries they must be subject to the winds of the market. “You put it down and say, ‘come and buy it’.” When he had been in Japan talking with leaders of the textile industry they had said'that present prices were too low and they were worried about this because they felt it could result in sources of production becoming less and it could also result in radical changes in the marketing of wool. “They said that in the auction system if we make a bid and nobody else bids we get the wool . . .”