On the Hidden Revenue Effects of Wool Price Stabilisation in Australia: Initial Results

Abstract

A preliminary analysis of demand in eight major OECD wool‐consuming countries is used to provide up‐to‐date estimates of price elasticities of demand for wool. Those elasticities are employed to calculate ex ante market prices, assuming no wool price stabilisation in Australia. The computed ex ante prices are used in a dynamic simulation to estimate demand and, hence, revenue from wool sales to the eight countries in the absence of reserve price operations in Australia. Based on the preferred semi‐log demand curve, the variability of wool prices is estimated to have been reduced by 44 per cent, due to Australian intervention in the market up to 1977/78. However, price stabilisation is estimated to have lowered the revenue from Australian wool sales to the eight countries by S139m, or by 2 per cent, in the period up to 1977/78.

The politics and economics of wool marketing, 1950–2000

“…The analysis, while prominent in early policy development, has had a chequered history and has been marginal in the more recent public policy debate. Campbell, Gardiner and Haszler (1980) attempted to quantify the hidden e¡ects, concluding that a 44 per cent reduction in price variability had been achieved at a revenue cost of $139 million. This conclusion did not survive closer scrutiny (see Richardson 1982) as it was based on gross sales revenue and was sensitive to admissible functional forms of the demand function.…”

WOOL IN 1980*

“…The Market Support Fund, therefore, has to bear any losses in stockholding operations. In fact, price stabilisation activities in Australia resulted in a net operating loss of $91m between 1974/75 and 1977/78, the loss resulting from operating costs (interest, storage) outweighing wool trading surpluses (selling price minus purchase price) (Campbell, Gardiner and Haszler 1980). This trading position is also reflected in the balance of only $241.…”

“…The important implication of this discussion (Powell and Campbell 1962;Parish 1964) is that the trading profits or losses of the buffer stock authority are not an adequate criterion of success. Although subsequently tackled as an empirical issue (Campbell, Gardiner and Haszler 1980), the early discussion relied on a priori reasoning to decide whether conditions of demand as between buying and selling periods were favourable or unfavourable to buffer stock schemes. On balance, the judgment of Australian economists was negative on this point, relying in part on the analysis of Grubel (1964) who argued that, in a slump, it was difficult to raise commodity prices because substitution is easier when an industry is working below capacity whereas, in a boom, price rises of raw materials can be passed on readily to final consumers.…”

Rural Assistance Levels: The Influence of Policies and World Price Changes

“…While this may be generally true for most commodities examined, it is probably not applicable to wool; estimates of the demand elasticity for wool suggest that the Wool Corporation can influence the price it receives (Campbell, Gardner and Haszler 1980). The estimated rate of assistance for wool may therefore be on the high side.…”