The Impact of Farm and Processing Research on the Australian Wool Industry*

Abstract

An equilibrium displacement model of the world wool top industry is used to estimate the returns to Ihe Australian wool industry from productivity' improvements in farm production. in top making and in textile manufacturing. The returns to the industry from these different types of research and development are sensitive to the extent of substitution possibilities between Australian wool and other inpucs used by the wool processing and textile industries but i t appears that research resources have to be much more efficient in off-farm activities for the Australian wool industry to receive benefits similar to those from farm research activities. Our objective is to estimate returns to woolgrowers from equal percentage reductions in the cost of growing wool, top making and rextile processing.' The sensitivity of returns from R&D in these broad areas to changes in the demand and supply parameters that characrerise the world wool top industry is examined. The exchange between Freebairn, Edwards (1982, 1983), and Alston and Scobie (1983) suggested that the extent of input substitution was likely to be a crucial parameter. Our approach allows us to focus on that issue. Allowing substitution in top making between wool from different countries and between wool and processing inputs means that the Australian wool industry receives a larger share of the returns from farm research than from R&D in other sectors. It also means that the share of benefits it receives from R&D in these other sectors will be smaller than its share of the wool tax. Consequently. the WRDC needs to consider the distribution of the benefits from R&D as well as the total benefits to the entire wool chain. 32

The Returns to Investment in Research on Australian Wool Production*

“…In comparing these returns with other studies of the returns to R & D it should also be borne in mind that the focus has been on the benefits to Australia rather than to the total worldwide industry which may be up to twice those discussed here (see Mullen et al 1989).…”

“…The gain from a 0.5 percent increment in research intensity (that is, an additional $10m per year) is perhaps a further 0.14 percent in annual productivity growth (see Table 3). The Mullen et al (1989) model is expressed in terms of vertical supply shifts or percentage reductions in production costs as a result of new technology. They used supply elasticity estimates of 1 .O for Australian and other wool, corresponding to a medium term period of supply response.…”

“…There is now a greater appreciation of the role of input substitution in the distribution of the returns from new technology (Alston and Scobie 1983;Freebairn, Davis and Edwards 1983;Farris 1988 andHolloway 1989). In the context of the wool industry, Mullen, Alston and Wohlgenant (1989) found that the share of total industry benefits to Australian woolgrowers was different for production and processing research. The returns to Australian woolgrowers were larger from production research than from processing research when research resulted in equal percentage cost reductions at both stages.…”

“…This is done by using a model of the wool industry (Mullen, Alston and Wohlgenant 1989) to estimate the total annual return to woolgrowers from a shift in the supply of Australian wool. In the third stage, the annual return is used to calculate a rate of return to investment in R & D by allowing for lags in the development, adoption and decay of new technology, and by using discounting techniques to account for a continuing flow of benefits and expenditures on R & D.…”

The Economics of Agricultural R&D

“…More elaborate and complex multimarket models are implied if we want to disaggregate the market structure either (a) vertically in order to represent different stages of the marketing chain or (b) horizontally in order to represent different geopolitical or spatial markets for a given product or different products (includ ing different qualities of the same product). Alston et al (1995) laid out the basic theory for these approaches, and a number of studies have reported specific applications (among the many examples are Mullen et al 1989, Freebairn 1992, Frisvold 1997, Wohlgenant 1997, Davis & Espinoza 1998, and Zhao et al 2000. A further dimension for extension to the basic model is to allow for the case of proprietary technology.…”